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Weekend Reading for Financial Planners (Apr 14-15)

April 13, 2018 03:03 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the SEC will be conducting an Open Meeting of all 5 commissioners next Wednesday, April 18th, specifically to discuss its widely anticipated proposals regarding new fiduciary requirements for brokers and investment advisers. Also in the news this week is a series of proposed "principles" that SIFMA is advocating the industry should adopt for best practices around account aggregation.

From there, we have several articles about how advisors charge for their services, including a new study from Cerulli Associates finding that the use of fixed financial planning fees is on the rise, the announcement that Fidelity is converting its entire financial advisory services to retail clients into a single unified (AUM) fee schedule, a survey from Pershing finding that leading advisory firms that focus on holistic planning are not feeling pressure to cut their fees (but are feeling pressure to offer new services to justify the fees they do charge), and a new Risk Alert from the SEC on RIAs that are failing to engage in proper billing practices with clients (usually not out of intended malfeasance, but simply lax processes and procedures for executing their billing in the first place).

We also have several tax-related articles, including suggestions on the key points to review on clients' 2017 tax returns as tax filing season comes to a close, the rise of the DAPT (Domestic Asset Protection Trust) for both estate planning and asset protection benefits, and the challenges of tax reporting on Bitcoin and other cryptocurrency transactions (for which active cryptocurrency traders may have a very large volume of individual lot transactions, and the IRS is increasingly scrutinizing whether such investors are actually properly reporting their transactions and gains).

We wrap up with three interesting articles, all looking at the changing landscape of both industry standards and the organizations that serve advisors, including: a challenging article raising the question of whether the FPA is really fulfilling its vision to be a professional organization with local chapters, or is operating more like a trade organization that consolidates power to its national headquarters; a look at whether the CFP Board is doing enough to provide guidance to CFP certificants about how, exactly, they should be complying with the CFP Board's new fiduciary standards to manage and mitigate conflicts of interest; and a look from Bob Veres at how it seems increasingly inevitable that the entire future of financial advice will be fiduciary... the only question is whether regulators will require the financial services industry to clarify who's actually serving as an advisor versus a salesperson in the first place.

Enjoy the "light" reading!

Why Your Financial Planning Fees SHOULD Be Too Expensive For Some Of Your Prospects

April 12, 2018 02:40 am 0 Comments CATEGORY: Practice Management

Historically, financial advisors didn't actually have much control on the prices they charged clients, as financial plans were compensated by the products implemented pursuant to the plan... and the commission payout rates on those products were set by the product manufacturers (insurance companies or asset managers) with payouts controlled by broker-dealers and insurance agencies. It's only been in recent years, with the rise of the Registered Investment Adviser, where RIAs can actually control and set their own AUM and financial planning fees, that suddenly advisors must actually figure out if their AUM, hourly, retainer, or other pricing model is "competitive" to the marketplace and appropriate given the services they provide!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore how to determine if you have the "right" pricing for your services by tracking your prospect conversion rates, why your fees should be too expensive for at least some of your prospects, and why there is such thing as having "too high" of a close rate with prospects!

Though the marketplace has increasingly converged on the "common" price point of a 1% AUM fee, when it comes to fee-for-service financial planning (e.g., hourly, standalone projects, and retainer fees), it's hard to look at what other advisors are charging, because there aren't many advisors doing fee-for-service planning in the first place, and we're all so varied in the services that we do provide, that it's difficult to compare anyway. Some advisors will back into a price based on the income they desire and the time (billable hours) they can put into the business. Others will price based on the perceived value to the client. But another approach still is to look at what your clients (or really, prospects who become clients) are willing to pay, based on what they actually decide to pay (or not) in hiring you!

The key metric to track to understand whether your financial planning fees are priced appropriately is your prospect conversion rate – i.e., how many of your prospects become clients. Notably, this doesn't include leads who were not "qualified" (e.g., those who do not meet your asset or other fee minimums), because it's really about how many people who are qualified to work with you ultimately choose to do so. Thus, if you meet with 15 prospects, of which 10 are qualified, and 3 of them do business with you, your conversion rate is 30% (which is 3 out of 10 qualified prospects). And this number matters because it's a direct statement about whether your value proposition is being perceived as worthwhile by your prospects. Simply put – if your pricing is compelling, you tend to have a pretty high close rate!

In this context, you can think about prospect conversion rates in four tiers: Tier 1 (<25%), Tier 2 (25-50%), Tier 3 (50-75%), and Tier 4 (>75%). For those in Tier 1 (<25% conversion rate), there is a real problem; it may be that your pricing is too high for your value proposition (a pricing problem), or it could be that you're not doing a good job conveying your value proposition (a sales problem), but something needs to be changed. Tier 2 (25-50% conversion rate) is where most advisors are, and the fact that you've gotten to at least a 25% conversion rate is evidence your pricing is reasonable. The caveat, though, is that many advisors in this category don't feel very good about their conversion rate (since more than half of people you talk to are telling you "No"), but the reality is that your pricing can't be that far off if 25% of people are telling you "Yes", so the key here is to focus on improving sales skills to boost this conversion rate (but don't cut your pricing to grow faster, since your fees are reasonable!).

When it comes to Tier 3 (50-75% conversion rate) advisors, there are really two types. The first is an advisor with some kind of recognized niche or specialization. This type of advisor is arguably in the conversion rate "sweet spot", as it is virtually impossible to get everyone to do business with you, but the majority of prospects really are hiring you and demonstrating they see value relative to your fees. However, the second type of advisor in this category is an advisor who was a Tier 2 advisor, but rather than refining their marketing or sales process, simply cut their fees to increase their conversion rate. This type of Tier 3 advisor is in a problematic long-term situation, as pricing aggressively low just means you are eventually going to have trouble being able to afford to hire more staff and scale your business.

The final category of advisors, Tier 4 advisors (>75% conversion rate), can also be surprisingly problematic. Most advisors who close "virtually all" of their prospects are proud of it, but my advice for advisors in this category is to raise your fees! Because, in practice, the reality for these advisors is that if clients are this happy with your pricing, they'll probably still be pretty happy with a higher price... and an increase in fees should boost revenue from clients who are willing to pay more far more than it will reduce revenue from a few more clients who might say no. Which means these advisors can end up making more money (as higher fees more than offset the slight reduction in new clients) but doing less work (because there are fewer new clients!) if they adjust their pricing.

Ultimately, though, the key point is to recognize that your prospect conversion rate is an important metric for determining whether you are priced properly. And if you aren't keeping track of this metric, it only takes three numbers to keep track going forward: the number of leads you get, the number of qualified prospects amongst those leads, and the number of those prospects that turn into clients. From those numbers, you'll be able to tell if you are pricing your services appropriately, and, if you need to make some adjustments, what those adjustments might be!

2018 Roth Conversion Planning After The Tax Cuts And Jobs Act

April 11, 2018 07:01 am 1 Comment CATEGORY: Taxes

Roth Conversion Strategies After TCJA Featured Image

The Tax Cuts and Jobs Act (TCJA) eliminated recharacterizations of Roth IRA conversions made in 2018 or later, as while Roth recharacterizations were originally created as a means to "undo" a Roth conversion for someone who later discovered they were over the conversion income limits (which were in place until repealed in 2010), in recent years they were increasingly used as a proactive strategy to increase the value of Roth conversions... and thus became perceived as an "abuse" and "loophole" that Congress felt the need to crack down on. Nonetheless, while Roth recharacterizations are now gone, it doesn't change the fact that Roth conversions themselves can still be effective tax planning tools for helping clients reduce their long-term tax liabilities. However, the elimination of the Roth recharacterization changes the optimal timing and execution of Roth conversions going forward!

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance shares some Roth conversion planning strategies and considerations after the TCJA, including the even greater importance of due diligence before completing Roth conversions, a potential shift in the best time of year to complete Roth conversions, and new best-practices strategies like Roth IRA conversion-cost-averaging, and Roth IRA conversion "barbelling".

Notably, recharacterizations of Roth contributions are still permitted, so clients who contribute to a Roth but end up with income above the contribution limit can still change their Roth contribution back to a traditional IRA contribution... but recharacterizations of conversions that happen in 2018 and beyond are no longer permitted (though prior-year 2017 conversions can still be recharacterized until October 15th of 2018).

The elimination of all recharacterizations of conversions puts even greater emphasis on getting a conversion right the first time, as the most common reasons for wanting to complete a recharacterization (e.g., market decline, client income was higher than expected, or a client simply changing their mind) could result in considerable client dissatisfaction if a conversion isn't done right the first time (or if the client doesn't understand the implications of new changes). Further, less commonly noted implications of Roth conversions, such as the potential to increase Medicare Part B and Part D premiums, should not be overlooked!

In the past, completing Roth conversions as early as possible in the year was generally ideal, as a means to both maximizing the time available to consider a recharacterization, and because of the general trend for markets tend to go up more than they go down (which meant it was best to get the dollars into the Roth as early as possible so that growth would happen inside the tax-free account). Now, however, the inability to undo Roth conversions (including partial recharacterizations of an excess conversion) means it will often be more effective to implement conversions towards the end of the year, when income (and deductions) can be projected more accurately with greater confidence. More generally, clients may now want to consider various Roth conversion timing strategies, as Roth IRA conversion-cost-averaging (to diversify conversion timing risk), Roth IRA conversion "barbelling" (to balance both growth potential and over-conversion risk), in addition to simply still making a full conversion as soon as possible (to maximize Roth growth potential), or just waiting until the end of the year for all of it (to be safe).

Ultimately, the key point is to acknowledge that Roth conversion strategies are still useful after the TCJA. Although many popular Roth conversion strategies are no longer viable after the elimination of the recharacterization of Roth conversions, the attractiveness of recently reduced tax rates arguably makes Roth conversions even more appealing... with the caveat that it's more important than ever to consider the timing!Read More...

#FASuccess Ep 067: The Future Of The Broker-Dealer Model As Advisor Support Without FINRA Or Products with Elliot Weissbluth

April 10, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 67th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Elliot Weissbluth. Elliot is the founder and CEO of HighTower Advisors, a back- and middle-office support platform for independent advisory firms that now oversees more than $50 billion of assets under management with nearly 600 employees.

What's unique about HighTower, though, is the way they built their own data platform that houses all of the data of all of their advisors and clients, making it possible for them build deeper integrations between popular independent advisor software programs than what virtually any other advisory firm can accomplish on its own... yet still be able to easily swap out for a newer best-in-class software solution in the future should one come along.

In this episode, we talk in depth about how HighTower structures its service model, why platforms like HighTower have been successful by leveraging their size, scale, and sophistication to reduce costs for independent advisory firms while bringing new capabilities, and why even at a cost of 15% to 20% of the firm's revenues, the HighTower model can ultimately produce a significant cost savings relative to the overhead expense of the typical large independent advisory firm.

We also talk about HighTower's unique structure with a subsidiary broker-dealer – used not to implement new commissionable products like mutual funds and annuities – but instead for the original purpose of a broker-dealer, to help facilitate the implementation of trades, and the way that HighTower leverages the control it has through its broker-dealer subsidiary structure to pit RIA custodians and clearing firms against each other, as a way to ensure the vendors compete for HighTower's business by offering better service and lower execution prices for advisors and their clients.

And be certain to listen to the end, where Elliot shares his own personal background, as a child who was diagnosed with and struggled with severe dyslexia when he was young, yet was still able to find ways to not only cope with the challenge, but turn it into skills that have ultimately allowed him to excel in the business world.

So whether you are interested in learning more about how platforms like HighTower reduce costs for independent advisory firms, how HighTower pits RIA custodians and clearing firms against one another to achieve better execution prices for advisors and their clients, or are interested in how Elliot turned adversity into skills that allowed him to excel in the business world, I hope you enjoy this episode of the Financial Advisor Success podcast!

Surveying The Advisor FinTech Landscape And The 2018 Advisor Software Survey

April 9, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

Financial Advisor FinTech Solutions Map April 2018

Historically, the best financial advisor software was available from the largest advisory firms that had the size and scale to develop best-in-class proprietary software solutions… while independent advisory firms languished with a small subset of “homegrown” solutions that one advisor might have made for themselves and then sold to other independent advisors. But with the rise of the internet, the ability to deploy software efficiently through the cloud, and the availability of APIs to easily facilitate cross-software integration, a boom has emerged in the world of independent advisor software.

In fact, the greatest problem for many advisors today is just keeping track of all the choices that are available in each of the various categories, and figuring out how they potentially fit together! Accordingly, we’re excited to announce what will become the first of a continuously (monthly) updated map of the advisor FinTech landscape… so advisors have a reference tool to identify the potential options in various categories!

In addition, the rise of independent surveys like the T3 Advisor Software Survey is now providing, for the first time ever, some perspective on not just what software is available, but what software is actually “good”, based on User Ratings from real advisors who actually use the software. Revealing that there is still substantial room for improvement in many advisor software categories (in particular, portfolio performance reporting tools), while others that have received a lot of buzz – like “robo” digital advice tools – may actually just be overhyped (with both poor user ratings and poor advisor adoption!).

Nonetheless, with more venture capital than ever coming in to support advisor software startups, and a wider range of solutions than ever, arguably we’re seeing the Golden Age of financial advisor software today. And in fact, with more and more competitors entering the space, the pace of advisor software innovation may only accelerate from here!

Weekend Reading for Financial Planners (Apr 7-8)

April 6, 2018 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big announcement that FPA National has dissolved its affiliation agreement with its New York chapter and spun up a new alternative FPA chapter entity in its stead, in what started out as a dispute about whether certain local chapter board members were inappropriately using lists of consumer contacts from the chapter's public awareness events to prospect for clients, but has now turned into concerns about whether FPA National is taking too much control of its independent chapter entities.

Also in the news this week is a look at how state efforts on fiduciary standards appear to be slowing (now that the Department of Labor's fiduciary rule is in limbo, and the SEC is expected to propose their own in the coming months), the announcement of a class action lawsuit against Edward Jones alleging that the firm was too aggressive in shifting clients out of commission-based accounts and into fee-based advisory accounts (compounded by the fact that those advisory accounts may have been investing into Edward Jones' own proprietary products), and a discussion of some of the talking points that other advisors are using when talking clients through the recent market volatility.

From there, we have several practice management articles this week, including: a review of advisor compensation (and the rising impact of the young-advisor talent shortage) from the latest Schwab and Fidelity benchmarking surveys; tips on how to properly structure partner compensation (broken into base compensation, incentives, and profit distributions) for firms that must transition into more formal partner roles given their growth; how employee turnover can cause poor performance (and how to get control of a turnover problem with clearer definitions of the work, the worker, and the workplace); why advisory firms should be more specific about their vision, mission, and strategy, to avoid what sound like "phony" slogans; and a hard look at the consequences of taking "too much" cash out of your advisory firm instead of reinvesting for growth.

We wrap up with three interesting articles, all looking at the changing landscape of broker-dealers in an increasingly fiduciary future: the first is a review of the latest 2018 Financial Advisor magazine broker-dealer survey, with interviews from most of the leading B/D executives who themselves note that the entire broker-dealer model is going through a big "rethink" for the future; the second looks at how broker-dealers need to re-engineer their technology for managing broker commissions into a more holistic "advisor compensation management" platform that provides business intelligence and workflow support as well; and the last explores how, ironically, it was the independent broker-dealer movement that really helped financial planning to first gain traction 20-30 years ago, even as it's now the fiduciary financial planning movement that is forcing broker-dealers to reinvent entirely in order to survive (or, alternatively, to simply become giant national RIAs instead!?)!

Enjoy the "light" reading!