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How The Product Distribution Industry Beat DoL Fiduciary By Proving Their “Advisors” Aren’t Real Advisors

March 19, 2018 07:01 am 0 Comments CATEGORY: Regulation & Compliance

How The New DOL Fiduciary Rule Redefined When A Fiduciary Relationship Exists

Notwithstanding its recent regulatory focus in financial services, the concept of being a “fiduciary” long predates the Department of Labor’s proposed fiduciary rule. Not only because a fiduciary duty has applied to Registered Investment Advisers (RIAs) since/under the Investment Advisers Act of 1940, but also because the obligations of a fiduciary duty have existed under common law for centuries (and in other societies, for millenia) before. In fact, a fiduciary duty is what has always applied to special (advisory) relationships of trust and confidence. The primary issue is simply to determine when an advice relationship actually exists.

Accordingly, as the brokerage and annuity industries have increasingly trained their brokers and agents in more holistic advice, pursued advice-oriented education (e.g., CFP marks), and adjusted everything from their national advertising to their business cards to convey that their primary role is no longer just product sales but actual advice, it was arguably inevitable that regulators would eventually respond by applying a fiduciary duty to all those “advisor” brokers and annuity agents. As the Department of Labor ultimately did with its fiduciary rule.

Yet ironically, despite their ongoing transition into the business of financial advice, the financial product distribution industry and its representative associations – including FSI (independent broker-dealers), SIFMA (the securities industry), IRI (the annuity industry), and NAIFA (insurance and annuity agents) – have now prevailed in their 5^th Circuit Appeal against the DoL’s fiduciary rule, by successfully arguing that, notwithstanding their advertising and the titles on their business cards, their brokers and annuity agents are not advisors at all, but mere salespeople who do not have a relationship of trust and confidence with their clients, for which their (commission-based) compensation is not in any way payment for the delivery of advice but merely for effecting a product sale. Even as they continued to lament to the public and the media that the DoL’s fiduciary rule would restrict their ability to give advice to consumers (the very advice relationship they explicitly denied providing to clients in their own court briefs!).

Nonetheless, while it remains to be seen whether the 5^th Circuit Appeals decision will actually lead to vacating the rule, will lead the Department of Labor to try to walk back the rule, or whether the fact that last week the 10^th Circuit Court of Appeals upheld the DoL fiduciary rule – potentially setting the stage of a showdown in the Supreme Court – the fact that the financial product distribution industry of broker-dealers and insurance and annuity agents continues to adopt “financial advice” in their advertising to the public, it seems only a matter of time before some fiduciary rule takes hold, whether from the Department of Labor, the SEC, or a growing number of states that are taking fiduciary rulemaking into their own hands to fill the void.

Yet at the same time, the fact that the product distribution industry was able to prevail by convincing the court that their brokers and annuity agents are “just” salespeople and not advisors does emphasize the fact that there is a role for salespeople to play in the financial services industry, as distinct from actual advisors, and long recognized with separate regulation (i.e., the Investment Advisers Act vs broker-dealer regulation under FINRA). Which ultimately raises the question of whether the real issue is not whether the Department of Labor (or the SEC) are the best to issue a uniform fiduciary regulatory framework for all investment advisers and broker-dealers (and annuity agents), but whether a uniform fiduciary rule is the right solution in the first place… or whether the better path is simply to allow salespeople and advisors to continue to co-exist, but with proper regulation of titles and advertising to ensure that consumers have clear disclosures not just with respect to the products they may purchase, but the very nature of the sales-versus-advice relationship they’re engaging in the first place!

Weekend Reading for Financial Planners (March 17-18)

March 16, 2018 02:34 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 news that the 5th Circuit Court of Appeals has ruled against the Department of Labor and its fiduciary rule, and moved to vacate the DoL fiduciary rule entirely... with the caveat that a separate decision from the 10th Circuit Court of Appeals this week upheld the fiduciary rule, setting the table for a potential final showdown in the Supreme Court, and creating even greater uncertainty about the fiduciary rule in the meantime. Also in the news this week was the revelation that the SEC's own fiduciary rule proposal may be coming soon – sometime in the second quarter – and its likely to focus more not just on fiduciary disclosures, but also whether advisors and brokers need to be clearer with their titles.

From there, we have several practice articles this week, including: how to conduct effective staff/team meetings (which are especially important as your team grows!); why "compensation" problems with employees are rarely about compensation alone, and effective employee retention is about the more holistic job opportunity and offering; why rearranging your office space (and who sits where) can spur creativity and innovation in the business (albeit at the risk of impairing productivity); and a look at what it will take in the future to be a true "destination" advisory firm (for both future clients, and future employees).

We also have a few articles on retirement planning, from a look at planning strategies to discuss with clients in their 50s when they're still 5-10 years away from the retirement transition (or in the home stretch to saving enough to achieve it), to recent research that finds a disturbing spike in the mortality rate (especially for men) upon reaching age 62 and becoming eligible for Social Security, and a look at the pros and cons of so-called "bucketing" (or time-segmentation) strategies for retirement portfolios.

We wrap up with three interesting articles, all around the theme of household spending and cash flow: the first looks at the phenomenon of "lifestyle creep", and why it's so important to establish systems that aim to save your future raises going forward (so they don't automatically creep into your lifestyle spending); a fascinating study that finds, due in large part to how judgmental society is of the rich, that most affluent people actually try to hide their wealth and are hypersensitive to being judged about it); and the last looks at how, because money is often a major point of contention between couples in a marriage, that one of the best ways to reduce marital conflict over spending is to give each spouse a guilt-free "allowance" that they can spend on any discretionary expense they want (without fear of being judged!).

Enjoy the "light" reading!

Handling The Up-And-Down Stress Of Being A Financial Advisor

March 15, 2018 02:05 pm 0 Comments CATEGORY: Personal/Career Development

Being a financial advisor is a high-stakes stressful job. Not only can it be emotionally exhausting to be the supporting pillar for our clients during their times of emotional stress, but for most of us, it's also our livelihood, and our family's livelihood, and our employees' livelihood when they rely on the business for their jobs... and of course, we may be responsible for dozens or hundreds of our clients and their life savings. Which means being a financial advisor comes with its own emotional rollercoaster as an advisor - from the wonderful feelings that come from times of great business and client success, to the pressure and stress that come from more difficult times. Which raises an important question: Where do you as a financial advisor turn for support to deal with your own emotional stress of being a financial advisor?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss where financial advisors can turn to deal with the emotional stress of being a financial advisor, and why it is so important to build a social support system for yoruself that may include different "tiers" of support, since you will likely need to turn to different people for help with different problems and needs!

For most advisors, our first support system for the ups and downs of the business is our support system for all the ups and downs of life: our spouse, other family members, and/or our close friends. These people are close to us and we can trust that they want what's best for us, so they are great for support – whether it's just someone to vent to or a shoulder to cry on, or to give us candid and sometimes critical feedback when we need it. Of course, the biggest caveat to going to friends and family as your support system for the business is that they don’t necessarily know anything about the actual advisory business. So while they may be able to provide some basic emotional support – which may be crucial during tough times – they often won't be able to provide the type of advice that may be needed to truly change an advisor's situation for the better.

As a result, the second tier of support for financial advisors is peers and colleagues in the business. Much like how support systems evolve around people facing similar problems in many areas (e.g., AA for those suffering from alcoholism), sometimes the best people to go to for support are your peers who have similar experiences. For many advisors, these are co-workers in their office, but particularly for those working under an independent broker-dealer without a large local branch, or starting an independent RIA (which may not even have an office), this support system can be formed through friends outside the firm but in the advisor industry. The benefit of this support system is that these advisors can better commiserate with you on the challenges you face, and give even better context for what’s really a big deal, and what’s not. The downside to this support system, however, is that sometimes the relationships may not be intimate enough for you to truly turn to when you need help (e.g., people you only communicate with occasionally on message boards), and other times they may not be people you can openly communicate with regarding certain issues you may be facing (e.g., you may not feel comfortable discussing career opportunities with your manager or at an association meeting).

The third tier of an advisor support system – the study group (or "mastermind" group, since it's not really about "studying" but finding experienced peers) – can help address some of these prior issues. Due to the smaller and more intimate setting of study groups, you can form deeper trust and make yourself vulnerable to the people in the group. Additionally, since study groups are formed by people far enough removed from your own situation that they won't have conflicts of interest in how they advise you (unlike an employer or co-workers), you can receive more objective feedback. The challenge for many advisors in this tier is forming a study group in the first place. But fortunately, the process isn’t that complex (find a half a dozen advisors or so that you want to trust and get to know better, invite them to be in a study group, start meeting regularly, and form those connections!), but it does take time and effort.

All of that being said, sometimes people simply do not prefer to interact in a group setting when dealing with certain issues, which brings us to the fourth tier of an advisor support system: mentors and executive coaches. Finding a mentor means finding someone who has at least a little more experience than you, and hopefully a little more wisdom and perspective from that experience, that you can go to with your problems. Mentors can provide great support, but the challenge here is that not everyone will be a great mentor (even if they are a great advisor), and sometimes it's simply too hard to find a great mentor. As a result, some advisors will decide to hire an executive coach. Notably, this is not a consultant for technical business issues, but instead, someone who can help you figure out what you want from your business, hold you accountable when needed, and sometimes just provide a bit of emotional support. Of course, coaches aren't cheap (especially for financial advisors), but a skilled coach can have a really powerful impact that more than recovers their cost.

The bottom line, though, is just to understand that you need to have some kind of personal support system, to deal with the inevitable ups and downs that come from being a business owner in general, and a financial advisor in particular. We’re all human, so we need to keep an eye on our own mental health. So make sure you have the support system you need. And if you don’t… go find someone!

Financial Planning Research Highlights From The 2018 CFP Board Academic Research Colloquium

March 14, 2018 07:01 am 0 Comments CATEGORY: Planning Profession

2018 CFP Board ARC Research Presented By First Author Institutional Affiliation

From February 20th through February 22nd, the CFP Board’s Center for Financial Planning hosted their second annual Academic Research Colloquium (ARC) for Financial Planning and Related Disciplines in Washington D.C. The event brought together 225 attendees, of which close to 200 were researchers and academic faculty, to share and discuss research relevant to the financial planning profession, as a part of the CFP Board Center’s longer-term goal of establishing itself as the “academic home” for the financial planning profession (and the research that supports it).

In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – provides a recap of the 2018 CFP Academic Research Colloquium, and highlights a few particular research studies with relevant takeaways for financial planning practitioners.

The 2018 CFP Academic Research Colloquium again had a strong showing from some core financial planning academic programs, with scholars from Texas Tech, Missouri, and Georgia serving as lead authors for nearly 25% of all research presentations and poster sessions. Notably, this representation is more diverse than last year, as last year the top four programs accounted for nearly 50% of research presented. Additionally, the colloquium was successful in drawing in scholars from outside of the core financial planning programs, featuring lead authors from a total of 35 different academic institutions, including Harvard, Duke, Georgetown, and Notre Dame.

The colloquium featured a wide range of topics. Some particularly relevant themes for financial planning practitioners ranged from biases that influence financial decision making among both financial advisors and their clients (e.g., how human use of technology to assist with statistical decision-making can help...or not), to issues related to quality of life in retirement (e.g., are retirees happier living near their friends or children?), and racial diversity in the financial services industry, including an examination of the role of empathy in black consumers choice of a financial advisor.

Overall, the second Academic Research Colloquium again brought together a strong mix of academics and practitioners to present and discuss financial planning research. Notable challenges and opportunities for growth in coming years will include the launch of the Center for Financial Planning’s new academic journal (Financial Planning Review), the Center’s push to establish the ARC as the core conference interview location for financial planning faculty positions, and continuing to attract a diverse group of scholars to build and contribute to the financial planning knowledge base. Only time will tell if Center for Financial Planning can be successful in their pursuit of becoming the “academic home” of financial planning research, but the ARC continues to be a strong conference for both financial planning academics, and practitioners interested in financial planning research.

#FASuccess Ep 063: Overcoming A Material U-4 Disclosure To Build A $125M AUM Advisory Firm with Kevin Kroskey

March 13, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 63rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kevin Kroskey. Kevin is the founder of True Wealth Design, an independent RIA based on Akron, Ohio, that has grown to nearly $125M in assets under management with 6 employees serving 160 clients, built over the span of the last 10 years.

What's unique about Kevin's practice, though, is that he's been able to persevere in building his practice despite what for many advisors would have been a "catastrophic" setback in his early career... the fact that in his mid-20s, just a few months after his first job at a broker-dealer, he went to prison for 17 months after the law finally caught up with him for selling ecstasy back when he was in college.

In this episode, we talk in depth about Kevin's journey, from starting out as a high school physics teacher straight out of college, to switching into the financial services industry by working at that independent broker-dealer in his mid-20s, then finding his entire career and life brought to a halt by his criminal conviction for selling ecstasy – despite the fact he had already stopped and left that life behind several years earlier and how he began the process of trying to rebuild a path back into the financial services industry after he got out, starting with a 3-year ordeal with multiple appeals just to try to get a license to become a mortgage loan officer as an ex-con, before finally switching to hang his shingle has an independent RIA.

We also talk about how Kevin actually built his advisory business, by falling back on his early teaching skills to begin doing local adult education classes on personal finances, borrowing money with a bank loan to be able to send out 10,000 mailers at a time to get participants in the class, and then slowly and steadily accumulating a client and asset base over time, supplemented in more recent years by trying to further establish himself more visibly in his community, including by writing a regular financial column in a local community newspaper.

And be certain to listen to the end, where Kevin shares his advice about what any advisor can do to try to persevere through the highly adverse challenges that can hit us in life, and how he handles the situation today when prospective clients still sometimes ask him about a crime that is still a felony disclosure on his U-4, despite being completely unrelated to the financial services industry, for events that happened in his life nearly 20 years ago now.

So whether you are interested in learning more about visibly establishing yourself within your community through writing, how advisors can address talking through disclosures with prospective clients, or are interested in how advisors can persevere through highly adverse challenges more generally, I hope you enjoy this episode of the Financial Advisor Success podcast!

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!