Kitces.com - Advancing Knowledge in Financial Planning

10 Wise Lessons Learned About Being A (Better) Financial Planner

July 9, 2018 07:01 am 0 Comments CATEGORY: Personal/Career Development

The FPA Residency program (originally the ICFP Residency program) was created to help financial planners develop the skills needed to be successful through the use of on-site case studies to gain practical experience guided by a group of peers and a mentor as a guide. Over the years, this program has been a valuable experience for many advisors who have had the opportunity to attend. However, the intimate nature of the event naturally means that many advisors have not had an opportunity to attend, and therefore have not had the opportunity to learn from this event.

In this guest post, Ben Coombs, a veteran mentor of the FPA Residency program and a member of the very first graduating class of CFP certificants in 1973, shares 10 underlying "truths" – wise lessons he learned about being a (better) financial planner – that he developed as an attempt to capture the core values of Residency.

In the Residency program, Ben's 10 truths became to be known as "Ben's Bromides", and include lessons covering many important insights – from lessons regarding the information we provide to clients (e.g., you are only as good as your sources of information, and your sources of compensation will control your sources of information), to lessons about what we should do as financial planners (e.g., don't design "iron butterflies", and pursue the possible), to lessons about how we should put together a plan (e.g., financial planning is a "neighborhood play", and remembering that the financial plan is for the financial planner – not the client!). And while these lessons core values were first taught and developed for FPA Residency, Ben's Bromides capture a lot of financial planning wisdom in a concise manner that is useful for any and every financial planner!

Weekend Reading for Financial Planners (July 7-8)

July 6, 2018 02:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the announcement that the CFP Board is gearing up for a new round of advertising campaigns as part of its ongoing public awareness campaign, this time focusing on the emotional and psychological benefits of working with a financial advisor, including feeling more "confident, optimistic, secure, and at ease" with one's finances.

Also in the news this week is a controversial court ruling in Georgia that allowed an RIA to enforce an employment agreement that required its departing advisors to give 60-90 days notice in advance of leaving the firm (where the RIA sued after the advisors departed the firm abruptly to join Morgan Stanley under the terms of the Broker Protocol), raising the question of whether broker-dealers in turn might try to add similar "garden leave" requirements to their employment contracts as a way to subvert the Broker Protocol for departing brokers. And there was also a big announcement from Vanguard, just in time for "Independence Day", that starting in August it will begin to offer nearly 1,800 ETFs on an expanded no-transaction-fee ETF platform... and in the process, declaring war on other custodian's existing back-end revenue-sharing or shelf-space distribution agreements required to get onto their NTF ETF platforms (from which Vanguard has increasingly been booted in recent years for being unwilling to pay to play).

From there, we have a number of retirement-oriented articles, from a look at the rise of the FIRE (Financial Independence, Retire Early) movement, to a discussion from a longevity researcher about whether it would be more appropriate for people to spend their 20s and 30s "just" being trainees/apprentices and raising families and not starting full-time jobs until their 40s (given our increasing capability to remain productive well into our 70s thanks to medical advances), and an examination of whether advisors may be overestimating health care costs in retirement as recent studies have shown that beyond Medicare premiums themselves the medical expenses of retirees are actually remarkably moderate and stable (especially for those who have at least a "mass affluent" level of wealth).

We also have several practice management articles, including: an analysis of why the greatest challenge for advisory firm business owners to manage is the potential gap between workload obligations to clients and the staff resources necessary to deliver promised services; why especially in the early years of an advisory firm, 5-year (or even 3-year) business plans are largely useless; and how to demonstrate the ongoing value of a financial advisor by creating a "Client Confidence Index" that periodically surveys clients on their feelings of financial confidence, control, and clarity... and then reflecting those results back to them to show progress and the advisor's value-add over time.

We wrap up with three interesting articles, all around the theme of taking vacations to better maximize health and productivity: the first looks at the growing trend of workers not taking vacations, even when they're otherwise available, due to both the workaholic culture of many firms, and often simply a lack of systems to make them feel safe and comfortable to take a vacation; the second examines how even amongst the most productive people, there's often little more than 3-4 hours of "real" work that gets done in a day, suggesting that instead of trying to push employees to work harder throughout an 8-hour workday that it may be better to embrace taking breaks instead; and the last provides a remarkably simple and effective system to handle the pain of "digging out" from the email backlog after a long vacation... by simply creating an autoresponder to tell people to email you again if they feel it's necessary after you're back, and then just delete all the email in your Inbox on your first day back at work!?

Enjoy the "light" reading!

Vanguard Declares War Against Custodial Platform Shelf-Space Distribution Agreements

July 5, 2018 02:54 pm 0 Comments CATEGORY: Investments

Earlier this week, Vanguard announced that in August it will begin offering commission-free ETF trading through its Investor.Vanguard.com online brokerage platform on a whopping 1,800 ETFs... which includes not just its own ETFs, which were available commission-free already, but virtually all ETFs, including those from all their major competitors like Blackrock, State Street, and Schwab (on top of the 2,500+ mutual funds already available through Vanguard without trading fees). Yet while the media immediately jumped on the announcement as a new stage of the price wars on ETF trading costs, as Vanguard's platform will offer nearly 5X - 10X the breadth of ETFs as their largest competitors... the real significance of Vanguard's announcement is much bigger.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why the real impact of Vanguard's announcement is a potentially fatal disruption to the nature of no-transaction-fee (NTF) ETF platforms themselves, undermining existing pay-to-play distribution agreements to the most popular NTF ETF platforms today, and potentially pushing RIA custodial platforms instead to charge advisors (or investors) a more transparent and less conflicted basis point fee directly for the clearing, custodial, and other services they provide.

Some historical perspective on the use of shelf-space and revenue-sharing distribution agreements for fund providers may be helpful to understand why Vanguard's announcement is so disruptive. The first “no transaction fee” (NTF) online brokerage platforms got going in the 1990s, pioneered by companies like Schwab with their OneSource program, establishing a giant online supermarket of mutual funds that were made available (and funded) by 12b-1 shareholder servicing fees and sub-TA fees instead of charging "traditional" transaction fees to purchase a fund. But then along came ETFs, which "felt" like mutual funds to many consumers who wanted to be able to buy them without transaction fees as well... except, ETFs don't have a 12b-1 fee or a sub-TA fees! As a result, when the online brokerage platforms wanted to offer ETFs under a no-transaction-fee platform, they needed a new way to get paid. What emerged was brokerage platforms negotiating “distribution” agreements directly with the ETF providers that effectively said, "If you want to be listed in our NTF platform, you need to pay us directly", taking the form of other a revenue-sharing agreement (paying basis points for assets on the platform) or "shelf-space" agreements (which are typically negotiated flat fees and not set as basis point directly, though they are still effectively loose basis point equivalents based on total assets). The key point: one way or another, fund providers had to pay to be on the NTF platform, which is why most NTF ETF platforms have a limited lineup (or only those providers willing to pay).

And, mostly out of necessity for distribution opportunities, many fund providers have paid to be on these platforms. The bold exception to this trend was fund companies like Vanguard and DFA, which were notorious for not paying dollars under the table to get onto these NTF platforms. Early on when many NTF ETF platforms were being built out, Vanguard still wasn’t nearly as dominant in the ETF space as they are today, so many companies allowed Vanguard onto their platforms as a way to validate their platform (with Vanguard's name recognition) in the hopes of attracting clients who might also use some of the other NTF funds (that do pay to be listed). But as Vanguard has continued its meteoric rise over the past several years, Vanguard attracted so much in assets onto these platforms that it was adversely impacting the profitability of the entire platforms... leading companies to swap Vanguard out for other ETF providers that were more willing to pay to participate.

And that is why it’s such a big deal that Vanguard made the announcement this week that it’s going to make virtually all ETFs available on its own online brokerage platform. The significance is that they’re offering a no-transaction-fee platform without requiring the same back-end shelf space payments that all the other brokerage and custodial platforms require. In other words, the latest move by Vanguard isn’t a price war against ETF trading fees; instead, it's declaring war on the entire model of asset managers being forced to pay back-end revenue-sharing and shelf-space agreements to get onto those platforms in the first place, by offering their own and not charging the asset managers what everyone else charges!

How will this potentially play out from here? ETFs that currently pay NTF platform fees are compelled to increase their expense ratios to cover the cost (because the money has to come from somewhere to pay)... except now ETF providers have a problem: their ETF expense ratios are boosted higher to compete on NTF platforms at companies like Schwab, Fidelity, and TD Ameritrade, but the higher expense ratios to cover the distribution costs on those platforms will reduce their competitiveness on the new mega Vanguard platform! As a result, ETF providers may be compelled to start creating a new series of their popular ETFs, with those additional distribution costs stripped out, creating a lower-cost "clean ETF" that can better compete in a true NTF environment. Yet once this happens, since the ETFs will be available elsewhere as well (just with a transaction cost instead) it will recreate the multiple-share-class effect we have now in mutual funds, where there’s a higher cost version of the mutual fund in the NTF platform – because it’s pushed up by the 12b-1 and sub-TA fees – and then there’s a lower cost version of the same mutual fund you can buy directly. Which ultimately will lead to consumers (and advisors) adopting whichever fund is cheaper in their situation, putting further pressure on custodians to offer less conflicted models where investors (or advisors) are simply charged a transparent basis point fee for the clearing and custodial services provided instead.

But ultimately, the key point is to acknowledge that the real news is not that Vanguard is simply offering a larger NTF platform than other providers. The real news is that this may be a fatal disruption to NTF platforms themselves, and a step towards a more transparent model of custodial services over the more conflicted models of back-end distribution agreements that currently exist!

The Hierarchy Of Tax-Preferenced Savings Vehicles For High-Income Earners

July 4, 2018 07:01 am 0 Comments CATEGORY: Taxes

The Federal government has long incentivized saving for retirement and other financial goals by offering some combination of three types of tax preferences: tax deductibility (on contributions), tax deferral (on growth), and tax-free distributions. As long as the requirements are met, various types of accounts - traditional to Roth IRAs, and annuities to 529 plans to Health Savings Accounts - enjoy at least one tax preference, often two, and sometimes all three.

For most households, these tax-preferenced accounts simply help to encourage (and tax-subsidize) savings towards various goals, and cash-flow-constrained households allocate based on whichever goal has the greatest priority. Yet for a subset of more affluent households, where there's "enough" to cover the essential goals, suddenly a wider range of choices emerges: how best to maximize the value of various tax-preferenced accounts where it's feasible to contribute to several different types at the same time?

Fortunately, the fact that not all accounts have the exact same type of tax treatment means there is effectively a hierarchy of the most preferential accounts to save into first (up to the dollar/contribution limits), after which the next dollars go to the slightly less favorable accounts, and so on down the line... from triple-tax-preferenced accounts such as the Health Savings Account (tax-deductible on contribution, tax-deferred on investment growth, and tax-free at distribution for qualified medical expenses expenses), to double tax-preferenced accounts such as traditional and Roth-style IRAs, to single tax-preferenced accounts such as a non-qualified deferred annuity (which is tax-deferred only). Which in turn must be balanced against even "traditional" investment strategies of simply buying and holding in a taxable account... which itself effectively defers taxes, thanks to the fact that long-term capital gains are only taxed upon liquidation.

Notably, many of the tax preferences do come with trade-offs (such as penalties for early distribution, and rules about how the funds can be spent), but for high-income earners, those limitations simply mean it will be necessary to coordinate amongst the various tax-preferenced savings accounts at the time of liquidation (and aren't a reason to not use them in the first place).

Of course, there is still the foundational tier of savings to provide an emergency fund (and perhaps funds to promote job mobility and business startup expenses as well, which may be particularly appealing for higher income individuals), but the key point is to acknowledge that there is a hierarchy of tax-preferenced accounts – ranging from triple-tax-preferenced accounts to accounts with no tax preferences – and high-income earners can better limit their tax liabilities and maximize their growth by adhering to this hierarchy!

#FASuccess Ep 079: Niching From The Start To Turbo-Charge $250k Of Recurring Planning Fees In Only 3 Years with Anjali Jariwala

July 3, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 79th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Anjali Jariwala. Anjali is the founder of FIT Advisors, a niche advisory firm that works entirely virtually with clients, and focuses on young physicians and small business owners in their 30s providing financial, investment, and tax planning advice for an annual retainer fee that starts at $10,000/year.

What's unique about Anjali, though, is that by focusing in on a niche from the start, which allowed her to pursue unique marketing channels that other financial advisors don't use, she's been able to grow to more than $250,000/year of recurring financial planning fees in just her first 3 years. And she did it while also starting a family, having had her first baby barely a year after the launch of the firm.

In this episode, we talk in depth about how Anjali positioned her advisory firm squarely in a niche of serving independent physicians and similar small business owners by leveraging her background as a CPA and a CFP certificant, the way she marketed into her niche to attract entirely virtual clients who meet with her solely online, how she iterated her business model rapidly in the first few years from offering short Quickstart plans to charging an upfront planning fee and ongoing monthly retainers until eventually she eliminated all the upfront fees and just raised her ongoing retainer instead, and how she explains and justifies charging a $10,000 retainer fee on clients who have less than $1 million in investable assets, for whom her fee can be substantially higher than the traditional 1%.

We also talk about how Anjali structures her upfront and ongoing planning meetings with clients, from an initial "Get Organized" meeting where clients have to aggregate all of their accounts in eMoney Advisor before they meet, to a second meeting that focuses on cash flow planning alongside George Kinder's famous 3 questions of life planning, and then shifting to a cash flow and implementation meeting... and allowing her clients to set the agenda from there, while sometimes waiting as much as a full year before she ever actually even does a "traditional" retirement planning projection for clients.

And be certain to listen to the end, where Anjali talks about the challenges of balancing out her work life and her home life, the way she broke the news to her early clients that she was going to take time off to have a baby within months of starting with them, and how she reinvested into and restructured her staff support to be able to continue serving her clients while taking time off.

So whether you are interested in learning more about how you can build a successful practice using the retainer model, how to pursue unique marketing channels other financial advisors don't typically use, or are interested in how you can better balance your home life and work life, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (July 2018)

July 2, 2018 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the July 2018 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big news that robo-advisor-turned-enterprise-digital-advice platform SigFig has raised a whopping new $50M round from famous VC firm General Atlantic, while U.S. Bank announced that it has (finally) deployed its “Automated Investor” robo solution via FutureAdvisor, and Fifth-Third Bank is rolling out its OptiFi digital advice offering (a white-labeled version of Fidelity’s AMP). Which means, after years of buzz, the shift from B2B to B2B2C robo-advisor technology appears to finally be gaining traction, as the startups figure out how to attach next generation modern technology to prior-generation legacy software of the incumbents, and large firms gear up to see whether or to what extent they can really cross-sell managed ETF accounts to their (existing or new) clientele.

From there, the latest highlights also include a number of interesting advisor technology announcements, including:

AdvisorEngine deepens its rebalancing software integration with SmartLeaf
Grove raises an $8M Series A round to scale its virtual-CFP financial planning subscription service
Ethos Insurance and Ladder Life raise new capital to see if life insurance can be bought by consumers (rather than sold to them) by making it easier to purchase in the first place
SmartAsset raises a whopping $28M Series C round to scale up its new SmartAdvisor lead generation program

Read the analysis about these announcements, and a discussion of more trends in advisor technology, in this month's column, including RiXtrema launching a new prospecting tool in the 401(k) market, Orion establishing a data integration with Lincoln Financial to facilitate RIAs using fee-based annuities, Morningstar launching a new Investor Pulse competitive and business intelligence tool for asset managers to show them why their funds are failing to attract investor flows, and the big reveal of a fascinating new pivot from Wealthfront into what may finally be a truly new and uniquely differentiated holistic financial advice platform, focusing no longer on just a managed investment account or even traditional financial planning advice, but moving into the true core and lifeblood of a household’s financial life with tools to automate managing household cash flow.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map”, including a number of new companies and categories!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!