Kitces.com - Advancing Knowledge in Financial Planning

Announcing The First Kitces Research Survey On The Real Financial Planning Process

June 25, 2018 07:01 am 0 Comments CATEGORY: Nerd's Eye View

Financial planning, and the process of creating a financial plan, has changed extensively over the nearly 45 years since the first class of CFP certificants. While early on, the financial plan was used primarily as a Calculator to do Needs-Based Analyses for the products they had to sell, over time it evolved into a Comprehensive Financial Plan that advisors could actually get paid for independent of any product implementation, which advisors then in turn Customized even further, and are now increasingly delivering Collaboratively with clients (where the focus is on the planning experience, and The Plan itself is merely delivered after the fact to commemorate the planning decisions already made).

Yet unfortunately, remarkably little research exists on how, exactly, financial advisors are actually preparing and delivering financial plans today. How often do advisors charge separately for planning? What is it that they actually deliver to clients? When advisors complain that it is very “time-consuming” to do financial planning, which part, exactly, is so time-consuming? And to what extent does financial planning software expedite the process… or exacerbate the problem?

In this context, we’re excited to announce the first Kitces Research initiative – a comprehensive study on the process that financial advisors actually go through to create and deliver a financial plan. Think of it as a benchmarking study for the creation of the financial plan itself, with a focus on identifying best practices.

So whether you’re frustrated that financial planning software doesn’t “do” what you need it to in order to demonstrate its value, or are simply looking for ideas to refine your own financial planning process to be more time-efficient or cost-effective (or valuable and able to command a higher price!), I hope you’ll take a few minutes to participate in our Financial Planning Process survey and help the world better understand what real financial planners actually do!

Weekend Reading for Financial Planners (June 23-24)

June 22, 2018 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the official news that the Department of Labor fiduciary rule is really, truly, finally dead, as the 5th Circuit Court of Appeals finally issued its formal court mandate to vacate the rule.

Also in the news this week, following on the heels of the demise of the fiduciary rule, is the announcement that both Merrill Lynch and JP Morgan are considering whether to roll back their commission bans on retirement accounts as the fiduciary rule goes away (albeit to appeal to the subset of investors who actually wanted a commission-based account, because they didn't trade often anyway, and were unhappy that the firms were using the DoL fiduciary rule as an excuse to force them into higher-cost fee-based accounts). And this week's news also includes an important Supreme Court ruling in the case of Lucia v SEC, finding that the SEC's administrative law judges are improperly appointed... although ironically, the Trump administration had already begun the process of shifting away from ALJs and towards appointed judges for government agencies anyway!

From there, we have a number of investment-related articles, including: the ongoing (and perhaps inevitable?) grind of mutual fund fees towards zero, as fund families find other ways to get paid instead; how the pressure on mutual fund fees is starting to push upstream to custody and clearing platforms, that often boost the expense ratio of funds by as much as 40bps to cover platform fees that most investors mistakenly thing are going to the mutual fund company and its managers when they're not; and the last looking at how the rise of technology to manage large numbers of stocks may soon make it feasible for at least do-it-yourself investors to start creating their own rules-based investment algorithms that basically amount to their own personalized index fund.

We also have several additional articles on tax planning this week as well, from IRA planning strategies in 2018, to tactics to better manage investment advisory fees in a world where miscellaneous itemized deductions (including those for advisory fees) are no longer permitted, and a dive into the increasingly popular strategy for high-net-worth investors to get around the $10,000 deduction cap on property taxes by splitting up their real estate and transferring it in slices into a series of out-of-state non-grantor trusts.

We wrap up with three interesting articles, all around the dynamics of finding more productive uses for your time and energy: the first explores how, if you really want more time to connect with family and friends, the key is not to declutter your schedule with fewer obligations, but to add an obligation to your calendar specifically for family-and-friends time; the second looks at how the concept of "antifragility" can be applied directly in our own lives, especially when it comes to taking an ongoing series of small risks that give ourselves opportunity for a big outcome; and the last looks even further at how we can actually promote more serendipitous events in our lives, as research increasingly shows that "luck" is a material component of big success... but that some people are better at making their own luck with deliberate habits and strategies.

Enjoy the "light" reading!

The Problem With Selling ‘Hand-Holding’ As A Financial Advisor Value Proposition

June 21, 2018 02:52 pm 0 Comments CATEGORY: Personal/Career Development

Kitces Selling Behavioral Advice As A Financial Advisor Value Add Featured Image

In today's competitive environment, it is increasingly popular for financial advisors to talk about “behavior management” as a key value proposition for clients, as more and more studies have come out (e.g., Morningstar's Gamma, Vanguard's Advisor Alpha, and Envestnet's Sigma) showing that financial advisors can often more-than-recover the entire cost of their advisor fee just by helping clients to stay the course, not succumb to their investment biases, and close the behavior gap. However, while financial advisors may create value for clients through such hand-holding efforts, it's not clear whether marketing "behavior management" is actually an effective way to show our prospective forward-looking value to get clients to work with us in the first place. And, in fact, the message it sends could be driving prospective clients away!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why hand-holding is not an effective value proposition to communicate in order to get new clients, particularly in light of the way it forces prospective clients to awkwardly admit to themselves they've made mistakes in the past (in a manner they may not want to do!).

To understand why “You need an advisor to help you manage your behavior” is not an effective value proposition to win clients, put yourself in the client's shoes for a moment. Imagine a typical affluent individual who is approaching retirement with a $1 million portfolio, knows they need some guidance on making the transition (Social Security timing, retirement projections, etc.), and is perhaps even aware they've made some mistakes along the way (e.g., getting caught up in tech stocks during the late 90's, or a bad rental real estate purchase during the housing bubble). Such a financially successful individual may see the message "research shows bad investment behaviors can result in 1.5%/year or more of performance drag"... but being already financially successful, is more likely than not to assume they are one of the above-average individuals not being fully impacted!

Of course, the advisor can try to "convince" the client of the depths and extent of their problematic investment behaviors... but this can actually sour the relationship even more! For instance, imagine a client that did get caught up in tech stocks and the housing boom, and the prospective advisor says "Well, one of our primary value propositions is to help you manage your behavior so you don’t make those kinds of big mistakes again, that in the future could derail your retirement." From the client's perspective... mistakes may have been made, but this can feel like rubbing it in their face! And if a couple is involved, where usually one spouse is primarily responsible for managing their assets, now the advisor is asking that person to acknowledge, in front of their spouse, that they’re so bad at investing, and so hopeless and incapable of learning, that the only solution left is to just walk away and hand it to you, the advisor, to manage instead! Which to say the least, is an awkward conversation for any couple to have!

On the other hand, the reality may be that there's a niche of clients out there who already have internalized this message, and are looking for an advisor for these reasons (we may even see a lot of these clients since they tend to seek us out knowing they need help). But in the end, this may still only a small subset of investors. For the rest (who may be below-average investors, but they don’t know or realize it, or they still think they can improve and get better), trying to convince them that they need behavior management is doomed to fail because it requires them to make a very negative change about their own self-image… and most people just don’t want to do that! And it completely eliminates your chance to work with clients who simply want to pay you for your advice and expertise about all the other financial planning value-adds that we can bring beyond the investment portfolio and remedying investment behaviors!

Ultimately, the key point is to that framing hand-holding as a financial advisor value proposition may not always work, and, in some cases, may even alienate many of the prospects you are trying to win over. This may be true even when managing behavior actually is valuable for a client who is inclined to make those common investment mistakes (and, as a result, helping clients actually manage their behavior could be a good way to retain clients), but that doesn't necessarily mean that behavior management is a good way to convince clients to work with you in the first place! Or stated more simply, be wary not to underestimate the power of denial, for those investors who don't want to admit to themselves - and their spouses - of the mistakes they've already made along the way!

Financial Advisor (And Other Specified Services) Business Entity Choices To Maximize QBI Deductions

June 20, 2018 11:01 am 0 Comments CATEGORY: Taxes

What Advisor Compensation Is Eligible For The QBI Deduction

The Tax Cuts and Jobs Act (TCJA) included the most substantial changes to the tax code that we have seen in over 30 years. The change which has garnered the most attention amongst financial advisors, though, is the new 20% deduction for Qualified Business Income (QBI). What's unique about the QBI deduction (also known as the IRC Section 199A deduction, or the pass-through deduction) is not just the size of the deduction (as a deduction of up to 20% of certain business income is certainly appealing!) but the fact that many financial advisors themselves will be eligible for a QBI deduction, albeit subject to some "high-income" limitations that some financial advisors will need to plan for in order to avoid having their QBI deduction phased-out entirely.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance, and our Director of Advisor Education for Kitces.com, examines how financial advisors (and other Specified Service Businesses) can maximize their QBI deduction through business entity selection, including why employee advisors may want to convert to being independent contractors, why S corps may want to convert to partnerships, LLCs, or a C corp (or not!), and why sole proprietors may not need to make any changes at all.

A key to understanding the new QBI deduction is how the "high-income" phaseout works. For QBI purposes, any Specified Service Business owner (including a financial advisor) who files a joint tax return with more than $315,000 of taxable income, or an individual who files under any other status with taxable income of more than $157,500, will be considered "high-income". And being "high-income" triggers a partial phaseout of the QBI deduction, and culminates in a total phaseout once taxable income exceeds $415,000 (joint) or $207,500 (other tax filers). Notably, since these thresholds are based on taxable income, it includes income from any sources (investment, spouse, etc.), even though the QBI deduction itself is calculated based on the business' income.

The reason business entity selection influences an advisor's QBI deduction is that not all compensation to an advisor (or other small business owner) is considered qualified business income eligible for the deduction in the first place. For instance, financial advisors who receive W-2 wages as an employee advisor are not eligible for a QBI deduction for those wages... which is why employee advisors may want to consider converting to become independent contractors (if their employer will allow it), as their sole proprietor income would be considered QBI. Income from partnerships or LLCs taxed as partnerships will generally be considered QBI, with the exception of guaranteed payments made to partners (which may mean advisors utilizing operating agreements with substantial guaranteed payments may want to reconsider this structure in light of QBI considerations). The good news for S corps is that so long as advisors can reasonably claim a lower salary, profit distributions (though not the wages portion) will avoid self-employment taxes and be considered QBI (although this extra incentive to push the boundary of what may be considered reasonable salary will also likely mean extra IRS scrutiny of S corp income). For C corp owners, wages again are not considered QBI, although such owners may still benefit from the newly reduced corporate tax rate of only 21%.

Ultimately, the key point is to acknowledge that business entity selection plays a key role in maximizing a QBI deduction as a specified service business owner (which includes financial advisors). And although many financial advisors (and other specified service business owners) may totally phase out the QBI deduction due to their high income, choosing the right business entity structure can help advisors preserve as much QBI deduction as possible!Read More...

#FASuccess Ep 077: Creating A Partnership Constitution To Formalize Decision-Making For A Multi-Partner Advisory Firm with Tanya Rapacz

June 19, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 77th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Tanya Rapacz. Tanya is the co-founder of the Partnership Resource, a consulting firm that works with financial advisors partnerships to ensure that the partnership itself actually works, from formation, to the ongoing operation of the business, to succession planning.

What's unique about Tanya, though, is that before she was trained in dispute resolution and mediation, she was a financial advisor herself, who both worked successfully in a partnership, and went through a partnership merger that didn't work out, as she experienced first-hand what happens when the multiple partners of a partnership each want to take the business in opposite directions.

In this episode, we talk in depth about what it takes for a successful partnership to work, why it's necessary to treat a business partnership like a marriage (anticipating that some level of conflict is inevitable, and the key to long-term success is your ability to align on your goals and work through the conflict together), why multi-advisor partnerships with 3 to 5 partners tend to be the unhappiest (because of those challenging interpersonal partnership dynamics when the number of partners increases), how the largest advisory firms often have the most stable partnerships simply because they end out creating governance structures that facilitate the multi-partner decision-making process, but why any partnership may benefit from taking the time to create an agreement on how the partnership will make decisions in order to reduce their level of conflict.

We also talk about Tanya's own process working with partners, that starts with a series of personality assessment profiles to help current or future partners understand how to better communicate with each other, and the driving forces that motivate each other, the benefits of having a facilitator to help new partners talk through how key decisions will be made as partners and avoid reaching "easy agreements" that gloss over the challenging decisions like "which financial planning software will we use" that can tear a new financial advisor partnership apart, and how Tanya's partnership process culminates in an actual "Partnership Constitution" document, that formally spells out for all the partners how decisions will be made collectively going forward.

And be certain to listen to the end, where Tanya talks about how she's now beginning to scale up her "partnership compatibility reports" and assessment process with RIA Match, in addition to doing more facilitation with advisors directly as more and more advisory firms begin to form partnerships and merge to gain economies of scale in today's competitive environment.

So whether you are interested in learning more about how to manage relationship dynamics while working in a partnership, how personality assessments can help partners communicate better, or learning how you can form your own "Partnership Constitution" document to formalize decision-making, I hope you enjoy this episode of the Financial Advisor Success podcast!

Summer Reading List of “Best Books” For Financial Advisors – 2018 Edition

June 18, 2018 07:01 am 0 Comments CATEGORY: Personal/Career Development

As the 2018 school season winds down and summer begins… it's time for the annual summer slowdown for most advisory firms, as client meetings get harder to schedule because they’re on vacation, and as advisors we ourselves have some time to relax with family... and catch up on good books.

As an avid book reader myself, I'm always eager to hear suggestions from others of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). And so, in the spirit of sharing, a few years ago I launched my list of "Recommended (Book) Reading for Financial Advisors", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with new lists of books in 2014, 2015, 2016, and a fresh round last year in 2017.

And now, I'm now excited to share my latest 2018 Summer Reading list for financial advisors, with suggestions on books about everything from how to improve your financial advice so it actually “sticks” with clients, guidance on how to navigate your career path as a next generation “G2” advisor (or to hire one if you’re a firm owner looking to attract the next generation of talent), self-improvement books on how to better manage your productivity throughout the day or broader Principles to live and manage your life (and business), and an uplifting read on how the world continues to improve in amazing ways, and why the primary issue we face today is not the concerns of our political system or our economy or all the other dreadful drumbeats of negative news, but simply the ways that our own human instincts cause us to misinterpret (in a systematically negative way) the avalanche of information around us.

So as the summer season gets underway, I hope that you find this suggested summer reading list of books for financial planners to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!