Kitces.com - Advancing Knowledge in Financial Planning

#FASuccess Ep 041: Structuring A Leadership Team And Family Succession Plan In A Billion Dollar RIA with Elaine Bedel

October 10, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the forty-first episode of the Financial Advisor Success podcast!

My guest on today's podcast is Elaine Bedel. Elaine is the founder of Bedel Financial, an independent RIA in Indianapolis that provides comprehensive financial planning and investment management, and over the past 29 years has grown to more than $1 billion in assets under management.

What's fascinating about Elaine's business, though, is not simply that she's been successful in growing to the $1 billion AUM milestone, but that she founded the firm from the start as a fee-only RIA in 1989, a time when very few financial advisors launched fee-only firms, and even fewer who were women.

In this episode, we explore Elaine's journey as a pioneer female fee-only financial planner, from starting her career in a bank trust department where she learned all about estate planning and investment management, to becoming the Director of Financial Planning for Coopers and Lybrand and honing her tax planning expertise in a Big 8 accounting firm of the time, and then transitioning to create her own independent RIA in 1989.

From there, Elaine shares how her advisory fee structure evolved from doing standalone financial planning project fees, to her current blended AUM-plus-upfront-planning-fee model, the unique engagement letter process that she uses after her initial meeting with clients to quote them a fee, and the way that she breaks up the upfront planning fee into an initial and ongoing payments in the first 3 months to help get buy-in from clients to complete the process.

And be certain to listen to the end, when Elaine talks about how she navigated the challenges of bringing her son into the advisory business, from first requiring him to work in another firm for a period of time, and then hiring him into the business but in a position that would not report to her, and how ultimately he has both become a partner and successor owner in the business, and is underway in launching the firm's Generation NeXt offering, which started as a financial planning solution for the children of the firm's clients, but is now growing even further beyond them.

So whether you’re looking for insight into how a large advisory firm blends together upfront planning fees with the AUM model, new ideas in how an “engagement letter” can help to close prospective clients, or want some perspective on how to successfully navigate an intra-family succession plan, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Six Levels Of Account Aggregation #FinTech And PFM Portals For Financial Advisors

October 9, 2017 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

While the early years of the internet brought a wave of new solutions that made it easier than ever to track one’s investments, it wasn’t until Mint.com showed up in 2006 that the true potential power of “account aggregation” was revealed, as the company grew to 1.5 million users in just two years and was sold to Intuit for a whopping $170 million.

Yet years later, the adoption of account aggregation in the financial services industry remains somewhat lackluster, particularly amongst the largest enterprise buyers like banks and financial advisor broker-dealers. While some new solutions roll out, and an occasional blockbuster deal is announced, relatively few new players have arrived on the scene for several years now, and a number of banks have recently announced that they are shutting down their PFM solutions.

A deeper look, though, reveals that perhaps the biggest blocking point to the growth of PFM solutions – particularly in the financial advisor channel – is that most remain mired in the early days of using account aggregation to simply compile investment performance reports and identify held-away assets. Relatively few have evolved to higher-level functions that would support the delivery of financial advice (and not just the sale of financial products), and even fewer have gone to the next level where account aggregation could be used to actually automate financial plan monitoring and the execution of financial planning strategies. In fact, when account aggregation providers are evaluated on the six levels of potential functionality, most have failed to even move beyond Level 1 or Level 2!

Fortunately, though, the reality is that the unit economics of providing account aggregation solutions to financial advisors are actually quite good, especially compared to the direct-to-consumer channel, and a few key players – including Envestnet’s Yodlee and Quovo – appear to be positioning themselves for the future growth opportunities of advice-centric account aggregation. Nonetheless, for the time being, account aggregation appears to be stuck in a chicken-and-egg dilemma that few providers are building advice-centric account aggregation solutions (instead remaining focused on only investment accounts), but the industry’s product-centric focus means few enterprises are demanding the Advice and Automation levels of account aggregation anyway.

However, with the ongoing shift of financial advisors towards real financial advice, catalyzed by the Department of Labor’s fiduciary rule, the logjam may finally be about to break free – creating a wave of new account aggregation solutions that can power next generation financial advisor dashboards and client PFM portals that truly help to deepen the value-add of a financial advisor!

Weekend Reading for Financial Planners (October 7-8)

October 6, 2017 01:06 am 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 has indicated it is beginning work on its own fiduciary proposal that would harmonize the standards of conduct for investment advisers and broker-dealers (and between the SEC and the DoL), though it remains to be seen how long it will really take for the SEC to even propose, much less adopt, its own fiduciary standard. Also in the news this week is a proposal from FINRA to make more information available to consumers via BrokerCheck, and a growing momentum for broker-dealers to adopt the NASAA Model Fee Disclosure that would give consumers a consistent set of clear disclosure documents about all the various fees and charges that broker-dealers may assess besides standard trading commissions or advisory fees.

From there, we have several practice management articles, including: a look at how to better vet potential technology solutions and avoid or minimize redundant technology (which ends out making the advisor pay twice for the same solution!); tips on potential tax deductions that advisory firms should bear in mind for themselves; and a fascinating look at the future of financial advisors and the shift to the RIA model from industry leader Mark Tibergien.

There are also several more technical planning articles this week, from a reminder that now is a good time to start doing “Medicare annual reviews” with retirees (as the Medicare Open Enrollment season opens later this month), to guidance from Ed Slott about how to take advantage of the “still working” exception to RMDs from a (current) employer retirement plan, and the news that the Treasury will be withdrawing the proposed Section 2704 regulations that would have imposed a major crackdown on Family Limited Partnership (FLP) discount strategies and providing a green light to the planning technique for now (at least until/unless the Democrats regain control in Washington and potentially reassert the crackdown in the coming years?).

We wrap up with three interesting articles, all around the theme of the social issues and challenges of having substantial wealth: the first is a look at the psychology research about why, exactly, we so often “hate” the super-wealthy, and why animosity towards wealth is so common; the second explores how, in part because of the challenging social dynamics around wealth, many wealthy individuals go to great lengths – often subconsciously – to rationalize and even downplay their wealth to reduce the social discomfort; and the last examines the fears that parents often have if they have the financial wealth to retire early but worry about the example that “not working” may set for their children… although the reality seems to be that, as long as the parents stay engaged and clearly communicate the reason that they’re not working (i.e., their prior business/financial success), that doing so, and having more time to be involved in their kids’ lives, just helps to deepen the relationship and good example that they can set for their children!

Enjoy the "light" reading!

How To Find The Best Financial Advisor Companies To Work For

October 5, 2017 01:48 am 10 Comments CATEGORY: Personal/Career Development

With the number of different financial advisor business models and firm types that are in existence, prospective financial advisors have a lot of options when it comes to finding "real" financial planning jobs - the kind that don't have sales requirements, and are really focused on (learning to give) financial advice. And the reality is that not all financial advisory firms are equally great to work for. But the good news is that the best financial advisor companies to work for do share a number of common traits, that can make them easier to identify.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we talk how to find the best financial advisor companies to work for, and why those companies tend to be larger companies with recurring revenue and a healthy growth rate.

Perhaps not surprisingly, if you want to find the best financial advisor companies to work for that won't just make you a salesperson working on commission, the first secret is... to find companies that don't work primarily on commission. It sounds intuitively obvious – if you don’t want to work on commission, don’t go to a company that pays its advisors on commission – but the real reason this matters is more nuanced. Because the fundamental challenge for any financial advisor who is paid on commission is that, no matter how successful you were last year, when you wake up on January 1^st, your income is zero (or close to zero with some small commission trails). Which is crucially important, because it means commission-based advisors can’t afford to reinvest into staff and create entry-level very many financial planning jobs. As a result, these firms tend to only hire salespeople who can go get more clients (and perhaps some administrative staff), but not real financial planning positions focused on financial advice itself.

The next criteria for finding the best companies to work for is that a company should be growing. At a minimum, you want a firm that is growing at 10% a year. Ideally, one that is growing at 15% to 25% a year. And the reason why is because the simple math of growth means a firm growing at 15% per year will double its size in about 5 years with compounding. Which means twice as much revenue, twice as many clients, and since advisors can only serve so many clients at a time, twice as many clients means twice as many financial advisor jobs in the coming years. And with the creation of many new jobs will also come new opportunities to grow in your own career path as a financial advisor.

Which leads us to the third and final factor that helps to determine which are the top financial planning firms to work for. Simply put: the best companies to work for are the biggest ones (ideally, a firm with at least $3 billion of assets under management or about $25 million of revenue, all the way up to mega-national firms like Vanguard's Personal Advisor Services and Schwab's Intelligent Advisory and Portfolio Consulting groups). This is actually a very controversial view, but the industry benchmarking data shows that the biggest firms are the ones adding the most new revenue, the most new clients, and consequently are the most likely to be hiring financial planners (and with recurring revenue, those jobs are likely to be focused on really providing financial planning advice).

The bottom line, though, is just simple to recognize to recognize that the best financial advisor companies to work for have three key traits: a recurring revenue business model, a healthy growth rate, and some size and scale to have a deep bench of new opportunities. The caveat to this is that because these firms tend to pay the best and have the best career prospects, they are also the most competitive. Which means if you want a job at one of the best firms to work for as a financial advisor, you better bring your A-game!

Can We Trust Research On The Use And Benefits Of Financial Advisors?

October 4, 2017 07:01 am 6 Comments CATEGORY: General Planning

As financial advisors, we see the positive impact of our work with clients. From helping them accomplish their life goals, to keeping them from the behavioral mistakes that could derail their plan, we are often in the best position to see the value of what we do. But with the rise of financial planning academics, there has also been an attempt to scientifically quantify the true impact that financial advisors have on client outcomes. Which as it turns out, is remarkably difficult to measure.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores some of the research available on the use and benefits of financial advisors, and why advisors should still apply a healthy degree of skepticism when evaluating such research.

Broadly speaking, there are two branches of research on the use and benefits of financial advisors. The first includes studies like Morningstar’s Gamma and Vanguard’s Advisor Alpha which have aimed to quantify how much value advisors truly provide to their clients, which helps to both substantiate the advisor’s value to clients, and helps advisors justify how their benefits can exceed their costs. The second branch of research on the use of advisors stems from studies done within universities, often utilizing large national-survey datasets to examine questions such as who uses financial advisors, what impact advisors seem to have, and how public policy may be able to improve outcomes for consumers.

However, as it turns out, each branch of research is not without its own limitations. While industry studies have done an admirable job trying to estimate and quantify the value advisors provide, the reality is that this exercise is much harder to do than it may seem at first glance. In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing! And in any case, it is difficult to identify the appropriate benchmark that it is best to compare against in the first place (since we don’t necessarily know how the client would have acted in the absence of an advisor). Further, in some cases, such as the value that is assumed to be provided by advisors recommending low-cost investments, the reality is that not all advisors actually advise clients consistent with the assumptions of the models.

From the academic perspective, researchers often have to rely on either large data sets which may have less than ideal questions (at least to address their particular research questions). Yet in a unique study in the Financial Services Review, Heckman et al. (2017) evaluate how well questions about whether someone has used a financial planner actually measure “financial planning” as its defined by CFP Practice Standards. Unfortunately, the researchers conclude that all of the commonly used datasets have significant limitations. And while the alternative for academic researchers, which is to gather their own primary data, can help ensure that the ideal questions are utilized… these methods end up constrained to smaller-than-ideal (and potentially not representative) sample sizes.

Ultimately, the point isn’t that advisors shouldn’t follow the studies on the use and benefits of financial planning, but simply that it’s still necessary to apply a healthy degree of skepticism when reviewing and applying research. Although with the ongoing rise of financial planning academics, more and better opportunities are coming for advisors and academics to collaborate, bringing together best practices in research from academia with the practitioner’s real-world understanding of financial planning and how it is delivered to clients!

#FASuccess Ep 040: Building A True Ensemble Practice Beyond Yourself And Training G2 Successors with Philip Palaveev

October 3, 2017 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the fortieth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Philip Palaveev. Philip is the founder and CEO of The Ensemble Practice, a practice management consulting firm that helps financial advisors to build sustainable multi-advisor, multi-generational, ensemble practices.

What's fascinating about Philip, though, is not merely the consulting work that he does to help advisors build ensemble firms, but that he's actually the one who coined the phrase "ensemble practice", during his early days working on the Moss Adams advisor benchmarking studies more than 15 years ago... and later, wrote the definitive book on the subject of ensemble firms!

In this episode, we talk in depth about the concept of an "ensemble practice", the different ways that advisors can share office, staff, clients, profits, and ultimately equity in becoming a multi-professional advisory firm, and what it really means to create an advisory business that puts the interests of the business before the interests of any one advisor partner... along with why, as the business grows, it becomes crucial to create a means of quality control to ensure that, with multiple advisors, the advice of the firm really is delivered consistently.

We also discuss the dynamics of what it takes to actually introduce a new second generation - or G2 - owner to the firm, the mindset shift that advisory firm owners need to go through if they want to find and develop the right new advisors, and Philip's answer to the age-old question of whether G2 advisors should purchase, or be given, their equity shares.

And be certain to listen to the end, where Philip shares his tips and wisdom about what G2 advisors should bear in mind as they pursue a path to partnership, and what founders need to do to ensure a G2 transition is successful... which Philip can speak to not only as a consultant, but as someone who himself has both become a partner in a larger consulting firm, and been a founder who has brought a G2 partner into his own consulting practice.

So whether you've wanted to learn more about what it really means to be an ensemble practice, how to structure and grow a multi-advisor firm successfully, what it takes to bring in next-generation G2 owners, or how as a G2 owner you can best position yourself for success, I hope you enjoy this episode of the Financial Advisor Success podcast!