Kitces.com - Advancing Knowledge in Financial Planning

#FASuccess Ep 046: Training Financial Advisor Empathy And Communication Skills Through The CeFT Designation with Susan Bradley

November 14, 2017 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 46th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Susan Bradley. Susan is the founder of the Sudden Money Institute, which trains financial advisors in how to improve their empathy and communication skills when working with clients who experience so-called "Sudden Money" transitions – whether from a business liquidity event, a personal injury settlement, an inheritance, or the settlement proceeds of a divorce. Because as Susan puts it: "When life changes, money changes. And when the money changes, life changes." Which means as advisors, we need the training in how to help clients through those change transitions - which Sudden Money Institute teaches through a designation program called the CeFT (short for Certified Financial Transitionist).

In this episode, we talk in depth about what it really means to help clients through these kinds of financial transitions, why it requires a unique skillset to help people through what is not only a big financial change but typically the major life transition that inevitably accompanies it, the "Purpose, Method, and Outcome" framework that Sudden Money Institute uses to have productive conversations with clients, why it's ineffective to help people in transition to plan for their goals (because they usually don't even know what's possible after a major life transition!), and why it's important to give clients a "decision-free zone" after a major transition before they actually implement any new financial planning strategies.

We also talk about why it is that helping clients through financial transitions really requires more specialized training, the reason that Susan decided to create a formal advisor designation specifically to train advisors in a better and more consistent process, why the CeFT is positioned as a "post-CFP" designation - as you need 5 years of client-facing experience, and an advanced technical designation like the CFP or CPA/PFS, to even qualify for the CeFT training - and what it really takes to complete the year-long training program.

And be certain to listen to the end, where Susan shares her vision of the future value proposition for financial planners, which is all about developing in two directions at once by pursuing post-CFP training, including the technical competency skills that are necessary to actually give the best financial advice, and the empathy and communication skills necessary to really listen to clients and get comfortable being their thinking partner and their guide (and NOT just "the expert" that tells them what to do to achieve their stated goals).

So whether you’ve been looking for better ways to assist clients through financial transitions, thinking about pursuing post-CFP training in communication and empathy skills, or are interested in the evolution of more behavior-change-oriented financial advisor value propositions in the future, I hope you enjoy this episode of the Financial Advisor Success podcast!

Why Performance And Fulcrum Fees Are Banned For Most Financial Advisors

November 13, 2017 07:01 am 7 Comments CATEGORY: Practice Management

As financial advisors feel increasing pressure to differentiate themselves, a recently emerging trend for those who (actively) manage client portfolios is the idea of charging clients not an AUM fee that is a percentage of assets, but instead, a performance-based fee that is a percentage of upside (or outperformance of a benchmark index), where the advisor’s fee is forfeited if he/she fails to achieve the required threshold or hurdle rate. Such a compensation structure would compel active financial advisors to eschew closet indexing and really, truly, try to outperform their benchmarks – which can be a very compelling proposition to prospective clients.

However, the reality is that performance fees have a very troubled past. Because while a performance-based fee does incentivize the advisor to not be a closet indexer and own a substantially different portfolio than the benchmark, one of the “easiest” ways to do so is simply to take on more risk and amplify the volatility of the portfolio. After all, if the markets rise substantially – as they do on average – a high-volatility portfolio will often provide a substantial performance fee in a bull market. In when the inevitable bear market occurs, the “worst case” scenario for the advisor is simply a year of zero fees.

In fact, this “heads the advisor wins, tails the client loses” asymmetry of performance fees is why when Congress created the Investment Advisers Act for RIAs in 1940, it banned most financial advisors from charging performance-based fees at all to retail investors (and of course, brokers under a broker-dealer cannot charge performance fees because they are not serving as actual investment advisers in the first place!). It was only in 1970 that Congress partially relented and allow RIAs serving as investment managers to mutual funds to charge performance fees, and only then if it was a “fulcrum fee” where the advisor participates in both the upside for outperforming and at least some of the downside for underperformance. In turn, it wasn’t until 1985 that the SEC began to allow RIAs to charge performance fees in certain situations to retail clients, and even then the offering must be limited to “Qualified Clients” who meet one of three financial tests… either: a) $1M of assets under management with the RIA charging a performance fee; b) a $2.1M net worth (and thus are presumed to be financially experienced and “sophisticated” enough to understand the risks inherent in performance fees); or c) be an executive officer, director, trustee, or general partner of the RIA, or an employee who participates in the investment activities of the investment adviser.

In addition, it’s notable that research over the years on incentive fees in the context of mutual funds has failed to find any sign that incentive fees are actually associated with better risk-adjusted performance anyway. Instead, the research finds that – perhaps not surprisingly, given the problematic history of performance-based fees – mutual fund managers compensated by incentive fees tend to just generate higher returns by taking more risk, and then amplify their risk-taking activity further once they fall behind their benchmarks! Ironically, though, the researchers did find that mutual funds with incentive fees are more likely to attract client assets, suggesting that substantial consumer demand remains for paying investment managers via performance fees!

Nonetheless, the real-world operational challenges of executing what would be a more complex billing process, the revenue volatility that financial advisors introduce to their businesses (particularly if they use a fulcrum fee structure which means if the advisor underperforms, they really do take the risk of seeing their fees cut substantially), the limitations of only offering a Performance Fee structure to affluent Qualified Clients in the first place, and the conflicts of interest that must be managed, suggests that a widespread shift towards performance fees for RIAs is not likely in the near future… especially as many firms seek to shift their value propositions away from being centered around the investment portfolio and towards financial planning and wealth management instead! But for those RIAs who want to pursue charging performance fees on investment portfolios, it is an option… at least for their Qualified Clients who want to take the risk!

Weekend Reading for Financial Planners (November 11-12)

November 10, 2017 03:10 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a recap of the latest tax plan from Senate Republicans that was released this week, which is similar to the one issued last week by House Republicans, but contains a number of key differences (from excluding estate tax repeal but bringing back the medical expense deduction), setting the stage for challenging compromises as Republicans try to find a way to reconcile the differences between the two in a manner that stays under the $1.5T deficit target (necessary to avoid a Senate Democrat filibuster) but keeps enough Republicans on board to pass the legislation with a narrow 2-seat majority in the Senate.

Also in the news over the past two weeks is the announcement that the final version of a DoL fiduciary delay has been submitted to the Office of Management and Budget (OMB) for final approval to delay the full implementation of the Best Interests Contract Exemption until July of 2019 (and opening the door for the SEC to begin a rulemaking process of its own in the interim), and the news that Morgan Stanley has withdrawn from the Broker Protocol in what may quickly be an unraveling of the ability of brokers to change broker-dealers (at least, not without messy lawsuits and Temporary Restraining Orders) and cause a compression in the valuation of broker-dealer-based advisory firms.

From there, we have a number of articles on hiring and career development, including why advisory firms should institute a 6-week training and onboarding process for new financial advisors (including and especially for experienced financial advisors who can hit the ground running with clients but need time to be trained in how to do so consistent with the firm's established processes and procedures), a look at a fascinating Millennial advisor survey that finds young advisors are most likely to leave and go solo between the ages of 26 and 35 (after they have a few years of experience but before becoming "too embedded" in an existing firm), and tips for employee advisors about what they can do to advance their own career and promotion prospects.

We also have a number of advisor technology articles this week, from a review of the latest from Riskalyze as the company continues to expand from "just" risk tolerance software into an increasingly comprehensive advisor platform, a discussion of the latest advisor technology developments at major broker-dealers like Commonwealth, LPL, and Securities America, and why video conferencing technology may prove to be even more disruptive to financial advisors and the delivery of financial advice than robo-advisors.

We wrap up with three interesting articles, all focused around the theme of working outside the office for improved productivity: the first explores the growing trend of conducting business meetings outside the office (from business owners meeting with key partners, to employees meeting with each other) as a way to improve both employee creativity and improve employee-to-employee connections; the second looks at the latest research that helps to explain why people can be productive in coffee shops (as it turns out, ambient noise is good and helps our creativity) but why open office plans are so inefficient (because 'background noise' from people we know tends to actually distract us), and a controlled experiment study in the benefits of working from home that found a whopping 13.5% increase in productivity by allowing employees to work from home... along with a massive 50% decrease in employee turnover rates!

Enjoy the "light" reading!

The Gap In Advisor-Supported 529 College Savings Plans For RIAs

November 9, 2017 03:01 pm 16 Comments CATEGORY: General Planning

A longstanding challenge for independent RIAs has been finding a way to effectively and efficiently help their clients with 529 college savings plans - due primarily to the fact that "advisor-sold" 529 plans are actually built primarily for broker-dealers, while "direct-sold" plans aren't meant to have any advisor involvement at all... and leaving advisors at RIAs stuck in between. As a result, there has been little growth of 529 plans in the RIA channel, and fiduciary advisors who would like to help their clients comprehensively manage their wealth have had few options to facilitate the implementation of 529 plans and manage them thereafter.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the traditional broker-sold and direct-sold channels for 529 college savings plans, the blocking points of why more RIAs don't get involved with 529 college savings plans, and why a third option - the "advisor-supported" 529 plan - is needed to better facilitate RIAs helping clients invest in 529 college savings plans.

From their start, there have been two distribution channels for 529 college savings plans: advisor-sold, and direct-sold plans. Direct-sold plans were simply sold (marketed) directly to do-it-yourself consumers, who could open and invest the accounts themselves. Yet because not every consumer wants to do it themselves, many state 529 plans also created an “advisor-sold” option (and/or mutual fund companies that had long-standing relationships with advisors – like American Funds – established advisor-sold plans that they hoped would become appealing to advisors regardless of their state location). Yet the caveat is that because advisor-sold plans can only compensate advisors via the mutual fund commission structure, they would more aptly be described as "broker-sold" plans and can only be used by those who work under a broker-dealer. Since RIAs can't receive a commission, RIAs can’t even access and use “advisor-sold” (broker-sold) 529 college savings plans at all!

Instead, advisors in RIAs generally have to work with clients through the “direct-sold” plans for do-it-yourselfers. But this is a problem for most RIAs, since direct-sold plans aren't built for an advisor to be involved at all, leaving RIAs with no way to track performance, manage the account, nor to bill the account for services rendered! At best, advisors can try and work around this by using account aggregation tools like eMoney Advisor or ByAllAccounts to access the client's account directly, and some plans (such as the Utah Education Savings Plan) have provided solutions to pipe client account data directly into portfolio reporting tools from the UESP website. But Utah's plan seems to be the exception to the general rule for direct-sold 529 plans right now: that they are not practical, and certainly not scalable, for independent RIAs to use with their clients.

Which means if (direct-sold) 529 plan providers really want to better engage the rapidly-growing RIA community to help their clients with 529 plans, then we need a third type of 529 plan: the "advisor-supported" plan, where the advisor isn't a broker who sells the plan, but an independent advisor who supports and advises on the plan. And a successful advisor-supported 529 college savings plan is going to have to get good in 4 core areas: 1) reporting (which means providing transaction-level data feeds to popular performance reporting tools), 2) trading (by integrating to existing rebalancing and model management trading software for RIAs), 3) billing (to make it feasible for RIAs to include the 529 plan as part of their billing process on their expanded assets under advisement, ideally with an option to bill the fee from the 529 plan directly); and 4) educational and planning tools to help RIAs understand when an out-of-state advisor-supported 529 plan is appropriate and when an in-state plan might be better (e.g., for in-state tax benefits).

But the bottom line is simply to recognize that, while 529 plan adoption has not been significant in the RIA channel, and the few who do use them tend to just choose simple age-based glidepath portfolios in direct-sold plans… it’s not necessarily because that’s the only thing that RIAs want from a 529 plan. It’s because, with the lack of advisor-supported 529 plan options, that has been the only option that was feasible in the first place, given that RIAs fall into the crack between direct-sold and broker-sold plans. And with better advisor-supported 529 plan options (particularly in light of the House GOP tax plan that may expand their use for private elementary and high school savings as well), there’s potential for a lot of growth of 529 plans in the RIA channel... if we can get a true advisor-supported plan!

Providing Small Business Health Insurance Benefits With A QSEHRA

November 8, 2017 07:01 am 26 Comments CATEGORY: Insurance

For many small businesses, it’s simply not economically or administratively feasible to offer group health insurance to employees, which can create a competitive disadvantage for business owners trying to attract top talent that needs health coverage. The good news of the launch of state health insurance exchanges under the Affordable Care Act was that, for the first time, individuals had guaranteed access to health insurance regardless of employment status, eliminating the need or requirement for employers to provide coverage. The bad news, however, was that to avoid disrupting the existing employer group health insurance marketplace, the Affordable Care Act imposed penalties on businesses if they tried to simply give employees tax-preferenced reimbursements to buy their own coverage on the exchanges.

However, the 21^st Century Cures Act, signed by President Obama shortly before leaving office, created a new Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which allows small businesses with fewer than 50 full time equivalent employees to offer an HRA for employees to purchase their own health insurance on a tax-preferenced basis – tax-deductible to the employer and tax-free to the employee – without running afoul of the ACA coverage mandates. Although employees cannot “double dip” and obtain premium assistance tax credits and employer HRA dollars, it is now possible for employers to give a specified tax-preferenced dollar amount reimbursement to employees – up to $5,050 for individuals and $10,250 for couples and families in 2018 – for their medical expenses, including health insurance premiums for coverage purchase on an exchange.

The primary appeal of the QSEHRA for most small business owners is that it’s a way to provide employee “health benefits”, without taking on the full burden – and cost uncertainties – of offering group health insurance. Instead, employers can control their costs by explicitly setting a monthly dollar amount that becomes available to employees for reimbursement, avoiding payroll taxes on any dollars actually spent, and keeping any unused QSEHRA dollars that aren’t actually claimed by employees as a reimbursement (since technically an HRA is a health reimbursement arrangement, not an actual account).

Notably, the QSEHRA benefits are not available for most small business owners themselves, though with the above-the-line deduction for health insurance premiums for small business owners, the QSEHRA would often be a moot point anyway. Nonetheless, for small business owners looking to do “something” to support employee health benefits, and have better control over their business and costs than offering group health insurance directly (or joining a PEO), a QSEHRA may be a very appealing tax-preferenced alternative!

#FASuccess Ep 045: Compensating Employees For Generating Profit Instead Of Revenue with Rebecca Pomering

November 7, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today's podcast is Rebecca Pomering. Rebecca is the Chief Practice Officer of Moss Adams, a mega-accounting firm with more than $600 million in revenue and 2,800 employees... which includes a wealth management division with more than $2.1 billion of AUM, and an advisor consulting division that originated benchmarking studies for financial advisors.

What's fascinating about Rebecca, though, is her own personal career across all of these business lines at Moss Adams, having started as a 23-year-old in the firm's financial advisor consulting division, becoming a partner with Moss Adams by the time she was turning 30, taking over as CEO of Moss Adams Wealth Advisors at $800 million of AUM right before the financial crisis and nearly tripling the size of the firm in the 7 years after the market bottom... and now becoming the Chief Practice Officer of the entire Moss Adams enterprise, applying her practice management expertise across all the professionals in the firm's 28(!) industry niches.

In this episode, we talk in depth about Rebecca's lessons learned in practice management in a career that's spanned consulting, leadership, and executive roles, with a particular focus on how to structure compensation for employee advisors, why bonuses should be tied to both business development and the profitability of the firm, and why it's a good idea to share your advisory firm's income statement with your entire team so everyone understands how the business really works.

We also talk about the challenges of growing a wealth management firm within an established accounting firm (which makes a lot of sense on paper, but is much more difficult to implement in practice!), why accountants actually feel that it's risky to make referrals to outside financial advisors (but can be even riskier to referral internal financial advisors at the firm), and her lessons learned in taking over Moss Adams Wealth Advisors right before the market crash... and the changes she had to make to keep the firm on track.

And be certain to listen to the end, where Rebecca talks about how she established her own credibility as a young consultant by focusing her expertise into a particular niche, and how, even and especially at the size of Moss Adams crossing $600 million of revenue, Rebecca still sees the firm's path forward as being entirely focused about going deeper into niches. Which at the size of Moss Adams and its 2,800 employees, actually means going into 28 different niches simultaneously!

So whether you’ve been contemplating your own firm compensation for employee advisors, wondering how transparent you should be with financials within your firm, or interested in the challenges of growing a wealth management firm within an established account firm, I hope you enjoy this episode of the Financial Advisor Success podcast!