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The Impact Of Early Retirement On Projected Social Security Benefits

August 2, 2017 07:01 am 28 Comments CATEGORY: Retirement Planning

Social Security operates as an income replacement formula, with higher benefits for those who work for more years. As a result, benefits are very limited for those who don’t work for very many years, and are much higher for those with a full working career.

To avoid confusing those who haven’t worked very many years yet – but plan to – the standard Social Security benefits statement projects out anticipated future Social Security benefits based on the assumption that the individual will continue working until retirement. Which allows the individual to understand what Social Security benefit they are “on track for” as they continue to work until full retirement age. Except, of course, that not everyone actually plans to work until full retirement age!

For those who intend to retire early, the end result is that the Social Security Administration’s projected benefits calculation may turn out to be substantially higher than what someone will actually receive if they retire early, and never actually work as many years as anticipated. The lower someone’s lifetime earnings overall, and the earlier he/she retires, the more dramatic the impact can be, commonly reducing benefits by 5% to 10% when retiring early, and potentially far more for “extreme” early retirement. Although the impact is also substantially affected by whether recent earnings were higher or lower than their long-term average… and whether they’ve already paid into the Social Security system for at least 35 working years (or not).

Ultimately, the reality is that Social Security benefits aren’t actually reduced for those who retire early – they simply stop accruing additional benefits when they stop working. But given that Social Security projects the assumption of work until full retirement age, it’s crucial to recognize that actual benefits may be lower for those who retire early – even if they wait until full retirement age to actually receive those benefits. In the end, that may not stop a prospective early retiree from making the decision to stop working – and notably, continuing to “work” even after retirement can continue to increase benefits as well – but at a minimum, it’s crucial to take a moment and look at the individual’s inflation-adjusted historical earnings, to understand whether or how much of an impact not working to full retirement age may actually have on projected benefits!

#FASuccess Ep 031: How To Properly Vet New Financial Advisors By Hiring For Attitude And Not Skills with Caleb Brown

August 1, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today's podcast is Caleb Brown. Caleb is the founder of New Planner Recruiting, a recruiting firm that, as the name implies, focuses specifically on hiring newer associate-level financial planners.

What's unique about Caleb's recruiting process, though, is the way that he vets prospective financial planners to determine whether they're likely to be successful in the advisory business in the future, with a strong focus not just on their technical skills, but the initiative and effort that they put into the process of trying to get hired through his recruiting business in the first place. Because the reality is that you can provide education on the book knowledge of financial planning, and train a lot of financial planning skills, but it's almost impossible to teach someone to have that go-getter kind of attitude that it really takes to succeed as a financial advisor.

In this episode, Caleb talks at length about what issues you should consider in the hiring process for a prospective new advisor, the role of using various types of personal and other assessment tools to evaluate potential hires, what you should - and shouldn't - expect your new hire to do and bring to the table to make your advisory business more successful, and what the going rate salary is that you have to pay as an advisory firm to get quality talent.

And be certain to listen to the end, where Caleb talks about his tips on how to work through the inevitable difficult times that arise as an entrepreneur, and how an executive coach has helped him to keep his focus.

So whether you’ve been struggling with finding good financial planning talent for your firm and are looking for ideas on how to better identify and screen potential hires, or you’re a prospective financial planner looking for insight about what it takes to get your foot in the door with a good financial planning firm, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?

July 31, 2017 07:01 am 21 Comments CATEGORY: Practice Management

While the standard rule-of-thumb is that financial advisors charge 1% AUM fees, the reality is that as with most of the investment management industry, financial advisor fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50% than 1%.

Yet at the same time, the total all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds that most financial advisors still use, not to mention transaction costs, and various platform fees. Accordingly, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%!

On the other hand, with growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversified asset allocated portfolio. Instead, the standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning).

The end result is that comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Instead, costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented, such that advisory fees must really be broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee.

From this perspective, the reality is that the portion of a financial advisor’s fees allocable to investment management is actually not that different from robo-advisors now, suggesting there may not be much investment management fee compression on the horizon. At the same time, though, financial advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as financial advisors increasingly shift more of their advisory fee value proposition to financial planning and wealth management services, advisors are still struggling to demonstrate why financial planning services should command a pricing premium in the marketplace.

Weekend Reading for Financial Planners (July 29-30)

July 28, 2017 02:58 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the announcement that Golden Gate University has launched the first Master's in Financial Planning with a concentration in financial life planning, as financial planning education providers increasingly shift to focus on training new financial advisors in the communication and empathy skills needed for future success. Also in the news this week was the announcement that the Treasury is shutting down the MyRA program (after it failed to blossom into a full-blown automatic IRA enrollment solution, and only a lackluster 20,000 households have signed up in the past two years), and for the first time an independent RIA successfully sued a large broker-dealer (for $1.5M!) for poaching one of its advisors who improperly took client information when he left (signaling a new escalation in the growing battle between broker-dealers and RIAs, as in the past it was only broker-dealers suing RIAs for poaching advisors, not the other way around!).

From there, we have a few practice management articles this week, including one about the importance of becoming an "emotionally intelligent CEO" for advisory firm founders who must transition from "just" being the lead advisor into being a leader and executive of the firm, another about what to do if an employee declines a promotion or opportunity for partnership, and why advisors need to be wary of asking "platitude" questions like "What keeps you up at night" when talking to prospects, and instead reframe question to get more concrete responses that help the advisor really understand how he/she can help.

We also feature several more technical articles, from a review of the rules on deducting long-term care expenses (not just LTC insurance, but the underlying expenses themselves for those who aren't fully insured!), to issues to consider when choosing a (family or corporate) trustee as part of the estate plan, and the rules for Medicaid recovery (where the state files a claim against a decedent's probate estate to recover state Medicaid expenses against any of the decedent's remaining assets at death that weren't already spent down).

We wrap up with three interesting articles, all looking at the connections between happiness, fulfillment, and how we spend our dollars: the first is a review of a recent study finding that spending money on timesaving tasks (e.g., hiring a maid, or ordering takeout for dinner) provides a greater happiness boost than spending on material goods; the second looks at the decline of conspicuous consumption amongst the affluent, and the rise of "inconspicuous consumption" amongst the upper-middle-class (spending on things like services and education), in a manner that doesn't overtly display social status, but may reduce social mobility; and the third is a fascinating interview about the latest research on positive psychology and what leads us to really feel fulfilled in our lives.

Enjoy the "light" reading!

Is It Really Bad To Name Your Financial Advisory Business After Yourself?

July 27, 2017 10:27 am 14 Comments CATEGORY: Practice Management

Whenever a financial advisor is starting a new firm – whether it is because they are breaking away to the independent channel, or simply just starting a new firm from scratch – there's a lot to deal with, but one seemingly simple question that tends to stump most advisors is what to name their new advisory firm. Of course, clients will still be hiring you - the financial advisor - because of your skills and capabilities, not your firm because of its name. But nonetheless, the name represents the identity of the firm, and the brand that you will build. Which raises the question: if you are the primary advisor, should you simply name the advisory firm after yourself? And if you plan to build an advisory business beyond yourself, does that mean you need to avoid having your name on the door of the firm?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss when it is good idea to go ahead and name your advisory firm after yourself, the scenarios where it can create challenges, and why ultimately whether your advisory firm grows into a business or not is much more about the mindset you have for your business, than whether you put your name on the door (or not)!

From the perspective of getting clients and building business, one of the greatest challenges we face in financial planning is that we sell an intangible: “advice”. Financial advice isn't something the prospective client can pick up and look at in a store, and consequently he/she has to look to other intangibles to decide whether to work with you as a financial advisor. Large national firms can rely on being a recognized brand to attract new clients, but most advisory firms are too small to rely on national branding alone. Instead, they get their clients by building a personal relationship with them, to become someone the client knows, likes, and trusts. As a result, most solo financial advisors simply put their own name into the advisory firm name... as in the end, if you're John Smith, and you call your firm Smith Financial Planning, it simply helps connect the consumer to you!

Indirectly, however, this actually illustrates the second key issue when it comes to naming your advisory firm, and whether it’s a problem or not to name it after yourself. The question is: what are you really trying to build? Are you trying to build a real, standalone business? Or is your business simply an extension of yourself? If your firm is meant to be founder-centric, then by all means call it Smith Financial Planning. But if you want to build a business that is bigger than just yourself, do you need to have a more "generic" name? The prevailing view out there is "Yes", but the reality is that there are a lot of big businesses named after founders, that have had no trouble being successful even though the founder's name is still the company name - including Ford, Dodge, Chrysler, Deloitte & Touche, Merrill Lynch, Morgan Stanley, Edward Jones, Raymond James, and Charles Schwab, just to name a few. Ultimately, the founder's name wasn't just about the founder, but became a brand that represented the company itself... and in most cases, the company named after the founder has already outlived the founder themselves!

What really distinguishes companies that grow beyond their founders into businesses is not whether the founder has their name on the door or not, but whether the founder has a mindset to build a business beyond themselves. In point of fact, many advisors who do want to build big businesses ultimately create a name for the business that is not their own... but not because it's necessary to build the business and attract talent. It's simply that the naming decision reflects what is already their mindset to build a business. By contrast, many/most advisors who name the business after themselves have a desire to create an owner-centric practice in the first place... and so naming after themselves is only natural (but it is an outcome of the mindset, not a cause of whether the business grows or not!).

There's also the common question of whether a founder-named business limits its ability to be sold in the future... and whether an advisor who wants to sell the firm someone needs to not have their name on the door. But the reality once again is that the answer to this question comes down to mindset - in this case, the mindset of the buyer, and what he/she is looking to do. Does the buyer want to build their own owner-centric firm? If so, then they may want their name on the door, and it is possible a generic name will make that transition easier. But if the buyer is interested in buying and growing a business, the reality is, the buyer buys the business, and its brand, not whether the founder's name is on the door. For instance, Edelman Financial has been bought and sold more than once over the past 20 years. It still has Ric's name on the door, but that name is not a limiting factor when buying an institutionalized business... and in fact, the brand is the asset to the buyer!

Ultimately, the fundamental point here is that what really matters is not whether the founder's name is on the door, or whether there is some neutral name instead. But rather, what matters is your mindset as an advisory firm business owner. Are you trying to create a business that's bigger than yourself? Or are you trying to create a practice that's built around yourself? For many who are trying to build a business bigger than themselves, they will often pick a neutral name, but it's really not a necessary factor for success. Instead, it is simply a signal of their intent. Because in the end, if you want to build a business that's bigger than yourself, you can absolutely do it... "even if" your name is on the door!

The Complex Motivations Of Money And Retirement As The Freedom To Pursue Non-Monetary Work Rewards

July 26, 2017 07:01 am 9 Comments CATEGORY: Retirement Planning

The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.

Yet research on what actually motivates us reveals that “money” is a remarkably inferior motivator (both to incentivize and reward desired behavior, and to punish bad behavior) compared to the motivation we derive from interpersonal relationships with other people. To the point that turning social connections into financial arrangements can reduce our motivation to engage in the desired behaviors. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t actually improve our long-run happiness.

The reason why all of this matters is that it implies the whole concept of “retirement” may be predicated on a mistaken understanding of our own motivators… a realization that most people don’t have until they actually retire (or at least, are on the cusp of it), and suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.

So what’s the alternative? To recognize that work – at least, some work – can be intrinsically motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place. And that the very nature of “retirement” itself isn’t really about an end to working, but simply reaching the point of financial independence where “work” can be chosen based primarily (though not exclusively) for its non-monetary rewards!