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Weekend Reading for Financial Planners (Jun 30 – Jul 1)

June 29, 2018 01:01 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 launching a new "Standards Resource Commission", a 13-person panel that will be tasked with creating guidance on the CFP Board's new Code of Ethics and Standards of Conduct to help CFP professionals know what they actually need to do to comply with the new rules.

Also in the news this week was a controversial internal memo at Wells Fargo that going forward, clients will be given the option to "opt out" of permitting their broker to take their contact information if the broker leaves, in what critics are calling an effort by Wells Fargo to end-run the Broker Protocol without formally dropping out of it. And the IRS provided a preview of its new Form 1040, which – in light of all the deductions and credits eliminated by the Tax Cuts and Jobs Act of 2017 – is aiming to consolidate the 1040 itself, the short-form 1040A, and the 1040EZ, into a new shortened postcard-sized tax return... albeit with what will still be a lot of new worksheets to calculate the deductions and credits that remain.

From there, we have a number of marketing and business development articles, from a look at how improving at sales and business development first requires a mindset shift that it's about trying to share services that help (and why would you not be persistent in trying to offer real help to a prospect!), to advice on how to get better at networking, and some insights about what prospective clients actually want to see (and don't want to see) on an advisor's website.

We also have several retirement planning articles, including: a way to separate financial independence into multiple tiers depending on the nature of the lifestyle it can afford, and whether or how many trade-offs must still be accepted to make it work; how to think about and talk to clients whose struggle is not failing to save enough for retirement, but having saved "too much" yet being unwilling to spend and enjoy their wealth; and how to plan for and frame the cost of health (Medicare) insurance and medical expenses in retirement.

We wrap up with three interesting articles, all around the theme of the business of advice itself: the first explores how often the best "advice" that we can offer is simply to listen, help clients be heard, and only occasionally, maybe offer some tidbits of guidance if and when they truly ask for it; the second looks at how the shift to more behaviorally-oriented advice (as opposed to traditional investment and financial advice) can fundamentally change the nature of the questions we ask clients; and the last looks at research finding that perhaps there's such thing as being too empathetic with clients, and that the better way to connect with and help clients while avoiding burnout is not to empathetically feeling with them (and sharing their pain), but simply trying to extend kindness and compassionately feel for them, instead.

Enjoy the "light" reading!

The Best Technology To Adopt First As A Solo Financial Advisor

June 28, 2018 02:12 pm 1 Comment CATEGORY: Technology & Advisor FinTech

Choosing what technology to first adopt as a solo advisor can be a challenge, particularly for those who are not technology-inclined in the first place. In addition to being solely responsible for making the decision, solo advisors now have to choose from an ever-expanding universe of options, as while 10 years ago the primary criticism for both independent RIAs and independent broker-dealers was that there just weren’t many technology choices, now arguably the problem is that there are so many choices it can be overwhelming to figure out what to even use in each category! Not to mention figuring out which category or type of software to tackle and try to adopt first!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the best technology to adopt first as a solo advisor, and why a key factor in that decision is whether you are trying to grow a large advisory business or operate an efficient lifestyle practice to begin with.

The first question to ask yourself when trying to determine what technology you should adopt first is what kind of firm you are really trying to create. At a high level, you can break advisory firms into two categories: Practices and Businesses. A practice is built around you as the advisor and the founder and the owner, and the capacity of the business is your personal capacity (perhaps with a few support staff) to serve clients. By contrast, an advisory business is something that’s meant to grow beyond just you as the advisor and your personal capacity to serve clients, where you anticipate having multiple advisors and potentially multiple partners someday. This distinction isn’t necessarily about income or financial wherewithal to buy fancy technology versus cheaper technology (as benchmarking studies show the most successful solo practice owners take home as much as partners in advisory businesses); instead, the distinction is important because advisory businesses tend to be most focused on scalability (as they most grow from one to many advisors and handle the challenges that come with that), while practices tend to be most focused on personal efficiency (particularly time efficiency) of the firm owner.

With that in mind, the technology that growing advisory firms must adopt first is straightforward: a good CRM solution. In a growing advisory firm, the CRM is the hub of the entire business. Not just to keep track of clients like a big rolodex, but to track tasks and activities, and workflows to ensure that everything is being done properly. This isn't as important when a firm is just a solo advisor, but when you hire your first staff member, suddenly a CRM system becomes more important. And it really becomes important when you add your second staff member, as there are more process hand-offs between staff members, and the odds that someone has a conversation with the client that neither of the two other team members is privy to increases substantially. Fortunately, for independent advisors, there are a few good CRM options. Wealthbox and Redtail are common among solo advisors, while very process-centric firms may use Junxure. You hear a lot about Salesforce in this category too, but it's fairly expensive and really needs a lot of customization (or at least an overly system like XLR7, Skience, or Financial Services Cloud) before it is a viable option, which makes it impractical for most smaller advisory firms.

When it comes to a lifestyle practice, the best technology to adopt isn’t so straightforward, because it really depends on the size and nature of the firm. If you have a staff member (and especially if you have two staff members), CRM is a “must” once again. You still need someplace to capture key client information, but you may be able to get by using some other system. And because lifestyle practices are so a reflection of the individual advisor and what they do, the “best” technology for you is really whatever solves a pain point for you. If you don’t like how much time it takes to trade and implement their portfolios, consider rebalancing software (e.g., RedBlack or iRebal). If you’re finding it takes a lot of time to produce individual financial plans by hand, look at some of the various financial planning software solutions (e.g., eMoney Advisor, MoneyGuidePro, or RightCapital). And for a lot of solo advisors in lifestyle practices, the truth is that the best technology to implement is not “industry” software, but simply tools that make you personally more productive and efficient, such as a better internal communication tool (e.g., Slack) or scheduling software to cut down on back-and-forth emails setting meeting times with clients.

But ultimately, the key point is to acknowledge that the best software to adopt first as a solo advisor really depends on what type of firm you are trying to grow. The needs of a solo advisor aiming to grow an advisory business are going to be different than the needs of a solo advisor aiming to grow a lifestyle practice (and among lifestyle practices, needs are going to vary depending on the specific advisor and their preferences for gaining personal efficiency). You can go about the process of prioritizing yourself or look to technology consultants for assistance (either in choosing technology, or implementing it), but the reality is that your practice can be tremendously more efficient by just implementing the right technology!

QBI Deduction Strategies For High-Income Financial Advisors (And Other Small Business Owners)

June 27, 2018 07:01 am 0 Comments CATEGORY: Taxes

For financial advisors, the new Qualified Business Income (QBI) deduction (also known as the IRC Section 199A deduction, or the pass-through deduction) presents not just many tax planning opportunities for small business owner clients, but also tax planning opportunities for financial advisors themselves as small business owners. The caveat, however, is that the 20% QBI deduction may be very limited for financial advisors, because they are classified as "Specified Service Business" owners under the new rules, and, as a result, any "high income" advisors (defined as those whose taxable income exceeds $315,000 when filing a joint return, or $157,500 when filing otherwise) are subject to a phaseout of their potential full QBI deduction.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance, and our Director of Advisor Education for Kitces.com, examines how high-income financial advisors (and other Specified Service Businesses) can utilize strategies to get the most benefit from their QBI deduction, including spinning off and renting back depreciable property, creating a PEO and leasing back employees, condensing lifetime giving via the use of a donor-advised fund, and other strategies!

The good news of the new QBI rules, and the phaseout for Specified Service Businesses (including financial advisors), is that it still takes a fairly substantial income to phase out the deduction, and for those under the income thresholds, the full QBI deduction remains available. On the other hand, because the QBI deduction phaseout is based on total household income from all sources (albeit after all deductions), even advisors who themselves don't earn more than the threshold amount may still end out phasing out some or all of the deduction based on other income (e.g., spousal income, real estate income, portfolio income, etc.).

Fortunately, though, not all is lost for financial advisors who have entered into the QBI phaseout zone. First and foremost, advisors can look to strategies that convert the advisor’s specified service business income into "other" income derived from a non-specified trade or service business, such as by spinning off any firm-owned real estate into a separate entity (and leasing it back at fair market value), spinning off non-advisory employees and leasing them back through a professional employer organization (PEO) (as a PEO would be eligible for a QBI deduction, so long as it is not deemed an advisory business), or holding the firm's intellectual property under a different entity and then licensing it back to the firm (as the intellectual property income may be eligible for a QBI deduction). The net result of such strategies is that the advisor's total income is the same, but occurs by reducing the amount of specified service business QBI generated from their practice (as rent, employee leasing, etc, are deductible business expenses), while simultaneously increasing the amount of QBI generated from the separate (non-specified-service and QBI-deduction-eligible) businesses.

For those who are in the midst of the QBI phaseout zone, planning can be even more impactful, as marginal tax rates during the QBI phaseout can spike as high as 64%... which may lead advisors to increase investment into the firm (as deductions are more valuable at the higher rate!), shift income to other years (that are outside the phaseout zone), or potentially even cut back on their workload (if they're really only keeping 36 cents on the dollar before the additional impact of state income taxes!).

Ultimately, the key point is to acknowledge that high-income financial advisors (and other specified service business owners) have considerable opportunity to plan around the new QBI phaseout zone... even if their total income is within or well beyond the QBI phaseout zone! While the new rules can be a bit tricky (and strategies could shift as the IRS provides more guidance going forward), it appears that QBI strategies will be a key focus going forward, and present a considerable planning opportunity for advisors (and their clients!) to reduce their overall tax burden!

#FASuccess Ep 078: Understanding And Serving The Needs Of Truly Ultra-High-Net-Worth Investors with Charlotte Beyer

June 26, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 78th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Charlotte Beyer. Charlotte is the founder and former CEO of the Institute for Private Investors, a private networking organization specifically for ultra-high-net-worth investors, and some of the advisors who serve them.

What's unique about Charlotte, though, was the way she built a series of conferences, networking events, and online community for ultra-high-net-worth individuals before the world of social media and online communities became what they are today... and in doing so, demonstrated and proved that ultra-high-net-worth clients really do have a set of unique needs and challenges, for which they need both an organization, and advisors, dedicated to serve them.

In this episode, we talk in depth about the two biggest worries of ultra-high-net-worth families – which is not necessarily about how to maximize their investment returns or even minimize their taxes, but how ensure that their children don't grow up to be entitled or otherwise adversely impacted by the family wealth, and how to avoid the risk of being "taken" and conned or scammed out of their money – what Charlotte calls the five "Ps" that she counsels ultra-high-net-worth investors to consider when evaluating an advisor, including the firm's People, Performance, Process, Philosophy, and Phees, why the future of working with the ultra-wealthy is all about high-tech and high touch, and what ultra-high-net-worth investors really want to hear from an advisor to connect with them in a world where they hear a ton of advisor "pitches" to them that all sound the same.

We also talk about how Charlotte herself built IPI as an organization, how the effort to create a community organization for ultra-high-net-worth investors almost failed out of the gate, the way she structured the organization's meetings and established group norms to promote the interaction between ultra-high-net-worth investors and the advisor community, and the lessons that any advisor can draw in figuring out how to really listen to the clients you're serving an adapt what you offer them to fit what they really want and need.

And be certain to listen to the end, when Charlotte provides her suggestions about what financial advisors should consider if they want to move "up market" into serving ultra-high-net-worth clients, and the way the ultra-high-net-worth space is shifting as wealth gets younger (with the rise of Gen X and Gen Y ultra-high-net-worth investors), as women control an increasing portion of ultra-high-net-worth wealth (and have different expectations of their advisors), and as the advisor value proposition itself continues to change as technology automates for free many of the things that we previously were paid for.

So whether you are interested in learning more about how to build a community around your niche, the unique challenges and goals of ultra-high-net-worth individuals, or what you should consider if you are interested in moving "up market", I hope you enjoy this episode of the Financial Advisor Success podcast!

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!