Kitces.com - Advancing Knowledge in Financial Planning

The 26 Steps I Took To Set Up And Launch My Own Independent RIA

March 12, 2018 07:01 am 5 Comments CATEGORY: Practice Management

One of the virtues of working in a broker-dealer or especially a wirehouse environment is that the firm makes a number of decisions for you as the advisor, greatly expediting the process of being able to quickly launch your business and focus on working with your clients. The bad news is that in at least some cases, it's much less expensive to simply set up your own advisory firm instead - especially if your focus is on charging AUM or other financial planning fees, such that there's no need to have a broker-dealer affiliation in the first place. The caveat, however, is that breaking away to become an independent RIA isn't "just" about the economics of working under a broker-dealer (or as a dual-registered advisor with the corporate RIA) versus your own RIA; it's also about going through the actual steps to actually create and launch your own RIA, because being independent truly means it's your responsibility to handle the setup process and make all the technology, platform, and other vendor decisions! Which for many advisors, is a process that can feel downright overwhelming.

But the reality is that many financial advisors have successfully made the transition, and it isn't necessary to reinvent the wheel with each breakaway to independence. In this guest post, Aaron Hattenbach of Rapport Financial, an RIA that he founded when successfully breaking away from Merrill Lynch in late 2016 (while retaining 100% of his clients), shares his own experience in breaking away from a wirehouse early in his career to go independent, including a detailed, step-by-step overview of his process to successfully launching his RIA.

Ultimately, the process does take a lot of work, from creating the legal RIA entity and going through the compliance registration process, to establishing your business bank and credit card accounts and getting a logo and business cards, setting up your initial technology platform (from a web domain and email provider, to your CRM and portfolio performance reporting tools), to choosing your initial vendors from your RIA custodian, and your office space! Unfortunately, the pressure to get launched quickly - especially when changing firms for a fast-launch RIA - means that a few mistakes may be inevitable, and Aaron does note the areas where, in retrospect, he could have better avoided unnecessary expenses, kept start-up costs lower, and curated better technology and service providers for his firm. But for any advisors who are serious about breaking away and forming their own independent RIA, Aaron's overview should provide much food for thought on your own breakaway, as well as some things you may want to consider in order to navigate it successfully!

Weekend Reading for Financial Planners (March 10-11)

March 9, 2018 02:58 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 after several years of scrutiny, the SEC's examination rate for RIAs has risen significantly, up from an average of once every 9-10 years as recently as 2016 to an average of "just" once every 5 years this year (thanks in large part to a reallocation of examiners from the broker-dealer unit into the SEC's RIA unit instead). Also in the news this week is an investigation from the Massachusetts securities regulators into Wells Fargo Advisors, raising the question of whether the firm may be violating the DoL fiduciary rule by switching clients from commission-based accounts into fee-based accounts when it would have been better for them to just continue to pay occasional commissions in the original account. And new legislation has been (re-)introduced in Congress that aims to increase both the number of small businesses that offer an employer retirement plan (with a proposed up-to-$5,000 tax credit to roll out a plan), along with additional tax incentives for employers that create the plan with automatic enrollment provisions.

From there, we have several articles around the theme of marketing and engagement with clients, including a look at how systematically asking existing clients for their input on the agenda for each client review meeting can potentially increase referrals, how to more deeply engage clients by conducting a simple "Hidden Gems" poll with them, and how to reframe the traditional financial planning discovery questions around identifying client goals to more deeply understand what really motivates them and what they really want to work towards in their financial plan (that they may not have even realized about themselves yet).

We also have a few articles on practice management, including the importance of formally articulating the culture of your advisory firm, the issues to consider when it's time to increase the equity stake of next generation advisors who thus far only have a small slice of the business, and the rise of "co-planning" as a means to more deeply connect with clients and provide greater value in a more advice-centric future for financial planners.

We wrap up with three interesting articles, all around the theme of trends in the world of financial planners themselves: the first is a good dive by industry commentator Bob Veres into the world of CPA financial planners, who under the AICPA have their own membership group (now 11,500 strong and up 12% in just the past 2 years alone), their own designation (the PFS), and their own views about the professional status of financial planners; the second is a challenge by CFP Board CEO Kevin Keller on whether CPAs, who admittedly have very in-depth knowledge and training on tax and accounting issues, really have the competency to deliver personal financial planning services without going through training like CFP certification; and the last explores whether the best path forward for the profession is to get away from the rising volume of "disclosures" to address various fiduciary conflicts of interest, and instead establish a simpler system that "grades" conflicts of interest, both to help consumers evaluate which conflict of interest disclosures really "matter" or not, and also to provide a means for advisory firms to want to eschew their conflicts of interest rather than just disclose them (in order to increase their advisor rating!).

Enjoy the "light" reading!

The Plight Of The Wholesaler In An Advice-Centric Future

March 8, 2018 02:33 am 0 Comments CATEGORY: Planning Profession

As technology continues to drive change for financial advisors, commoditizing basic tasks of portfolio construction and product selection and forcing advisors to add more value on top, the ripple effects of the shift impacts not only the financial advisor business model and value proposition, but also the way that insurance and investment product manufacturers - and their wholesalers - must interact with the advisor of the future. A microcosm of this challenge is already playing out in the RIA space - which for wholesalers, is notoriously difficult to break in to - and when combined with other industry trends, paints the picture of a highly challenging environment for wholesalers going forward.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why I do believe there's a solid future for wholesaling in the coming decade and beyond, but why the nature of wholesaling is changing, and what wholesalers can (and must) do to continue to succeed in an advice-centric world!

Historically, "financial advisors" were paid to implement products, and the wholesaler was an ally in product distribution, educating advisors about not only the products themselves, but sales ideas to pair with them, what other advisors were doing to successfully sell the products, and even running wholesaler-supported events for clients and prospects.

Yet as financial advisors shift from a sales-centric model compensated by product implementation, to an advice-centric model compensated by clients, the relationship shifts, as the financial advisor is no longer a distribution channel to deliver good products to clients, but a gatekeeper that shields clients from potentially bad products. Which is a big deal, because it means that advice-centric advisors don't necessarily care about sales ideas, or free golf balls, or money for the next client/prospect event... instead, advice-centric advisors want: (1) a product that is actually, factually superior to something we're already using, and (2) an extremely knowledgeable wholesaler who can hold their own when it comes time to vet that product against what the advisor is already doing or using.

The second shift underway in the industry, that also impacts the advisor-wholesaler relationship, is the trend towards firms outsourcing investment management through a TAMP, or centralizing through a large RIA or broker-dealer's in-house investment team and investment models. The reason these shifts matter is that it means in the future, the actual “financial advisor” is simply going to be less and less responsible for the selection of the specific investments products that go in the portfolio in the first place. Which means there is less need for wholesalers broadly distributed across the country to call on individual advisor offices, and instead, a need for wholesalers who deal with centralized investment teams at RIA, TAMP, or broker-dealer home offices. And ironically that group – an investment team of CFAs and other investment experts – will be even harder for wholesalers to pitch to.

As a result, I have three tips for wholesalers out there struggling in the current advisor landscape. First, find a job at a company that actually has great products, because if you don't have great products to present, advisors simply will not be interested. Period. Second, invest in your knowledge and skills by pursuing credentials such as the CLU designation (for insurance/annuity wholesalers) and CIMA certification (for investment wholesalers), because the demand on you to provide real expertise is only going to increase as you begin to deal more with centralized teams of experts within advisory firms (and as advisors in general are compelled to increase their own educational standards). And third, please do your homework before you contact us. Don't mass email us asking to "catch up for 15 minutes" or "learn about our investment approach" when you can find a lot of that information on our websites or in our ADVs. Take the time to figure out exactly what you have to offer that adds value for our clients, and then make a targeted and direct pitch that is relevant; given how much advisors are swamped and overwhelmed with inbound wholesaler inquiries these days, targeted relevance is what it takes to break through the noise.

The bottom line, though, is just to recognize that the nature of the advisor-wholesaler relationship is changing alongside the shift from a sales-centric to an advice-centric industry, and with that shift comes changes in what advisors need from wholesalers, as well as the depth of expertise wholesalers need to deliver value to advisors. These changes require that wholesalers actually have a great product to offer, and reach out in a more targeted manner, which means wholesalers won't be able to reach out to as many advisors (and there may be fewer wholesalers more generally), but the future is still very bright for great wholesalers with real expertise and great products!

The Favorable Tax Treatment Of Financial Advisor Commissions Over Fees After TCJA

March 7, 2018 07:01 am 2 Comments CATEGORY: Taxes

Breakeven For Paying Advisory Fees From Taxable Vs IRA Accounts

The annual requirement of all Americans to pay taxes on their income requires first calculating what their “income” is in the first place. In the context of businesses, the equation of “revenue minus expenses” is fairly straightforward, but for individuals – who are not allowed to deduct “personal” expenses – the process of determining what is, and is not, a deductible expense is more complex.

Fortunately, the basic principle that income should be reduced by expenses associated with that income continues to hold true, and is codified in the form of Internal Revenue Code Section 212, that permits individuals to deduct any expenses associated with the production of income, or the management of such property – including fees for investment advice.

However, the recent Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the ability of individuals to deduct Section 212 expenses, as a part of “temporarily” suspending all miscellaneous itemized deductions through 2025. Even though the reality is that investment expenses subtracted directly from an investment holding – such as the expense ratio of a mutual fund or ETF – remain implicitly a pre-tax payment (as it’s subtracted directly from income before the remainder is distributed to shareholders in the first place).

The end result is that under current law, payments to advisors who are compensated via commissions can be made on a pre-tax basis, but paying advisory fees to advisors are not tax deductible… which is especially awkward and ironic given the current legislative and regulatory push towards more fee-based advice!

Fortunately, to the extent this is an “unintended consequence” of the TCJA legislation – in which Section 212 deductions for advisory fees were simply caught up amidst dozens of other miscellaneous itemized deductions that were suspended – it’s possible that Congress will ultimately intervene to restore the deduction (and more generally, to restore parity between commission- and fee-based compensation models for advisors).

In the meantime, though, some advisors may even consider switching clients to commission-based accounts for more favorable tax treatment, and larger firms may want to explore institutionalizing their investment models and strategies into a proprietary mutual fund or ETF to preserve pre-tax treatment for clients (by collecting the firm’s advisory fee on a pre-tax basis via the expense ratio of the fund, rather than billed to clients directly). And at a minimum, advisory firms will likely want to maximize billing traditional IRA advisory fees directly to those accounts, where feasible, as a payment from an IRA (or other traditional employer retirement plan) is implicitly “tax-deductible” when it is made from a pre-tax account in the first place.

The bottom line, though, is simply to recognize that, while unintended, the tax treatment of advisory fees is now substantially different than it is for advisors compensated via commissions. And while some workarounds do remain, at least in limited situations, the irony is that tax planning for advisory fees has itself become a compelling tax planning strategy for financial advisors!

#FASuccess Ep 062: Building A High-Income Lifestyle Practice By Engaging With Clients Deeply And Unfiltered with Lee Munson

March 6, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 62nd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Lee Munson. Lee is the founder of Portfolio Wealth Advisors, an independent RIA that manages nearly $280 million in assets under management in Albuquerque, New Mexico.

What's unique about Lee's practice, though, is that he built it while overcoming a rather scathing article published about him nearly 15 years ago in the New York Observer, in which he was presented as the poster-child of the excesses of the 1990s wirehouse... at the exact moment that stories on the internet that live forever became a "thing".

In this episode, we talk in depth about Lee's career path, from leaving his early success in the wirehouse world after both the infamous Observer article and the impact of 9/11 and the subsequent recession on the brokerage industry, to working for several years at Charles Schwab as a Schwab Private Client advisor, before ultimately founding his own solo advisory firm, and working over several years of writing on websites like Seeking Alpha and appearing on CNBC and other television media to rebuild his online persona and bring in new clients to grow the firm.

We also discuss Lee's own process for serving clients, where he deliberately does not meet with clients on a regular quarterly basis – despite the fact that he manages their portfolios – and instead focuses not on the frequency of the communication with clients but how meaningful each touch is by engaging with them deeply and unfiltered (whether it's in an in-person meeting once a year, or via a long email), how he justifies a fee schedule that starts at 1.5% on the first $1M despite meeting relatively infrequently with clients (by trying to delight his clients in other ways instead), and the email folder he keeps with all the positive feedback he's received from clients, as an affirmation of the value the firm is delivering to them.

And be certain to listen to the end, where Lee talks about how he's managed to build his practice with everything from active networking at the local level, to regularly appearing on national television... despite the fact that he's actually an introvert, who relishes the quiet refuge lifestyle of living in New Mexico.

So whether you are interested in learning more about engaging with the media to grow your firm, overcoming adversity in the financial advisory industry, or how you can structure your fee schedule and service model based on the depth of contact rather than the frequency, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (March 2018)

March 5, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the March 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 announcement of Fidelity’s new “Consolidated Data” platform, that aims to become a central account aggregation hub of all the relevant information regarding an advisory firm’s clients and its own business… which creates not only a newfound potential for Fidelity to create new technology value-adds for advisors, but supports Fidelity pivoting to a more open-architecture system (with a newly announced Integration Xchange that would just provide it more data to feed), and appears to be part of an even broader strategic shift that Fidelity is aiming to make Data – and not just technology – its unique custody/clearing value proposition for wealth-management-centric advisors of the future.

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

After castigating Schwab 3 years ago for including its own proprietary funds in its robo-advisor solution, Wealthfront launches a new proprietary mutual fund (at twice its base advisory fee) and defaults its taxable clients into it
LifeYield launches a new Portfolio Advantage solution that aims to make Asset Location a more central value proposition for advisors to help clients make their portfolios more Taxficient
LPL announces the launch of a new Virtual Assistant service for its advisors, though it’s not clear if the company simply wants to develop a new revenue line for its advisors, or more aggressively compete with its own OSJs
A slew of new solutions to help advisors market to and attract clients, including a new Advisor Ratings website called StackUp, a lead generation service from SmartAsset called SmartAdvisor, and a digitally-driven webinar marketing system from Snappy Kraken called Seminar Freedom
Wealthbox launches a new 3.0 version of its CRM, including a native email system with automatic two-way sync to popular email clients like Gmail, iCloud, and Outlook or Exchange Server

Read the analysis about these announcements, and a discussion of more trends in advisor technology in this month's column, including the launch of several new Risk Tolerance Questionnaire tools from PreciseFP, DataPoints, and Capital Preferences, a new version of the robos-vs-advisors battle for consumers playing out in the small business 401(k) space between Betterment and Human Interest (formerly Captain401) versus Vestwell, a new tech-based competitor called Grove that is aiming to scale the monthly retainer fees model with tech-enabled CFP professionals, and the rise of new business intelligence software tools like Advisor Metrix and Advisor Clarity.

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]!