Kitces.com - Advancing Knowledge in Financial Planning

Weekend Reading For Financial Planners (March 16-17)

March 15, 2024 01:03 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 the final version of the Department of Labor’s (DoL) new “Retirement Security Rule” has been sent to the Office of Management for review, with the rule potentially going into effect in early 2025. While the final submitted text has not been released, some experts suggest that the DoL likely made few changes to its initial proposal, despite significant opposition from broker-dealers that could lead to the judicial system deciding the rule’s ultimate fate.

Also in industry news this week:

CFP Board this week announced changes to its Sanctions Guidelines and revisions to its Fitness Standards that clarify the factors that determine how potential sanctions are determined and revise the framework use to determine whether a candidate is eligible to become a CFP certificant
The Financial Services Institute joined other trade groups in filing a complaint against the DoL’s independent contractor rule, arguing that it creates confusion about the status of many financial professionals who prefer to operate as independent contractors

From there, we have several articles on tax planning:

The IRS has launched its free direct filing program, though it is currently limited to taxpayers in certain states and with relatively simple tax situations
Clients looking to rollover unused funds from 529 plans have the opportunity do so for both 2023 and 2024, with the deadline for 2023 fast approaching
President Biden’s budget proposal released this week includes a range of potential tax changes, from raising the top marginal rate to increasing the child tax credit

We also have a number of articles on practice management:

RIA M&A activity appears to have picked up in the first quarter of the year, with a steady flow of interested buyers and sellers
Why integrating tech stacks, service offerings, and team cultures is crucial to the success of an RIA acquisition
How the headline purchase price often does not reflect the final price an RIA buyer pays and the amount the seller receives, highlighting the importance of careful negotiation of deal terms by both sides

We wrap up with 3 final articles, all about Artificial Intelligence (AI) in the advisory industry:

How generative AI tools could transform the way knowledge workers, including financial advisors, operate, rather than replace them altogether
How lessons learned from the introduction of the digital spreadsheet can inform advisors’ future use of AI tools
How current advisor-facing software incorporates AI capabilities and why firm-specific tools might become more common in the future

Enjoy the ‘light’ reading!

Why Moving To A Lower-Tax State Doesn’t Always Result In Lower State Taxes On Deferred Income

March 13, 2024 07:02 am 1 Comment CATEGORY: Taxes

Most of the time, people are subject to state taxes in the states where they live and/or earn their income. So when moving to a lower-tax state or another, their income tax burden likewise shifts to the new state along with them. Which is, for example, why so many people opt to move to lower-tax or no-tax states like Florida or Texas in retirement, where they can enjoy lower state income taxes and preserve more of their retirement savings for use by themselves or their heirs.

But like many rules, there's an exception: When a person working in one state defers some of their income, then moves to a different state (where they ultimately receive the income), that income can in certain cases be taxed by the first state (where they worked when they earned the income) even when the person now lives in a different state. In other words, moving to a lower-tax state won't always result in paying lower state taxes with particular types of income.

Specifically, USC Section 114 defines certain types of "retirement income" that can only be taxed by the states in which a person resides, which include qualified employer retirement plans and IRAs as well as nonqualified deferred compensation plans that are either paid out over a period of at least 10 years or structured as an excess benefit plan. However, other types of deferred income, including equity compensation plans like stock options and RSUs (which generally aren't taxed until after a multiyear vesting period) and nonqualified deferred compensation plans that don't meet the specific criteria above, can still be taxed by the state in which that income was initially earned, even after the employee moves to a different state.

For advisors of employees who want to minimize their state tax burden in retirement, then, understanding the different types of deferred income they may be receiving – and how (and by which states) it will be taxed – can help to recognize planning opportunities that help ensure the client's goals of lower taxes are actually met. For example, some strategies around employee stock options plans, such as utilizing Incentive Stock Options (ISOs) or making an 83(b) election on Nonqualified Stock Options (NSOs), cause income from those options to be recognized primarily as capital gains, which would be taxable only in the state where the employee lives when they actually sell the underlying stock. And for employees with access to nonqualified deferred compensation, confirming that the plan's benefits pay out as a series of substantially equal periodic payments over at least a 10-year period ensures that they meet the definition of "retirement income" under Section 114. (And because nonqualified deferred compensation is traditionally offered only to executives and other key employees, those employees may be able to influence how the plan is set up to begin with to ensure the best tax treatment!)

The key point is that when someone moves to a different state for tax purposes, sometimes the move itself isn't enough on its own to accomplish that goal, and more careful planning is necessary to see meaningful tax savings when deferred compensation is part of the financial picture. Which ultimately means that advisors with a deeper knowledge of the state tax treatment of deferred income can help make sure that their clients' expectations of lower state taxes in retirement match up with the reality.

#FA Success Ep 376: Accelerating Growth To 30 Clients/Month With Affordable Advice(-Only) Services Where Clients Can Keep Control, With Eric Simonson

March 12, 2024 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Eric Simonson Podcast Featured Image FAS

Welcome back to the 376th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Eric Simonson. Eric is the Founder & CEO of Abundo Wealth, an Advice-Only RIA based in Minneapolis, Minnesota, that oversees $600M in assets under advisement for 420 client households.

What's unique about Eric, though, is that Abundo has grown its base of 420 clients, and is on pace for well over $1M of revenue in 2024, despite having launched barely 4 years ago… with an "advice-only" business model of providing comprehensive financial planning for $189/month and helping clients implement themselves, that has generated so much word-of-mouth that they're now bringing in more than 30 new clients, per month, and staffing up on salaried financial advisors to meet the demand.

In this episode, we talk in-depth about how Eric allows his clients to maintain control over their investments but to ensure they actually implement has built out guided tutorials of how, exactly, to trade their investments across most of the major brokerage and 401(k) platforms, how Abundo has arranged their team's capacity to balance each advisor's workload and set the metrics for how far in advance of their continued growth they need to hire new advisors in order to avoid advisor burn-out, and how, primarily through referrals coupled with extremely affordable rates to reach a segment of consumers that may not want to relinquish control to a 'traditional' AUM advisor, Abundo is now bringing in almost 30 new client households per month without requiring any business development from their salaried advisors.

We also talk about Eric's journey in trying to find the right fee structure for Abundo, which has evolved from what was originally an income-based fee, to a fixed rate of $89/month for individuals versus $139/month for couples, finally landing on their current $189/month fee (which they determined will still allow enough profit margin to hire the required new team members to sustain their growth), the cadence of 4 meetings in the first year and 3 check-in meetings in subsequent years that Eric has implemented to maintain his client service model, and how Eric has grown to enjoy the entrepreneurial side of building the firm, but struggles with how those requirements are sometimes coupled with a feeling of guilt over not having more time to spend with clients as well as the business grows.

And be certain to listen to the end, where Eric shares how even though the firm has been incredibly successful in growing through referrals and various find-an-advisor directories, he thinks the next big marketing opportunity is to lean into social media (especially video), the way Eric got comfortable being his authentic self and leaning into the niche his firm serves (even if it means figuring out how to build solutions that don't yet exist), and how the opportunity to be an entrepreneur and create something new and different is what carried Eric through the challenging early days of the business where he knew he could get a good salaried advisor job for a much higher income, but instead stuck with Abundo even when he couldn't afford to pay himself a salary, because he was so energized by the vision of what he was building.

So, whether you're interested in learning about how to effectively evolve in the journey of finding the right fee structure for your firm, how to keep your hiring practice far enough ahead of your workload capacity to avoid overwhelming your advisors, how to stay true to your authentic self through keeping a finger on the pulse of your firm's strengths and niches, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Eric Simonson.

How Advisors Can Get Client Referrals By Identifying “Active Promoters”

March 11, 2024 07:04 am 0 Comments CATEGORY: Marketing

Referrals can play a vital role in the growth of financial advisory firms since finding prospective clients via referral requires virtually no hard-dollar costs, and it takes only a fraction of the time needed for other marketing channels like social media, blogging, and seminars. However, finding reliable sources of referrals can sometimes be challenging for advisors: Centers of Influence (COIs) like accountants and attorneys may not be as attuned to the advisor's services as the advisor's clients themselves, yet asking current clients for introductions to people in their networks can be awkward since not all clients are equally receptive to being asked to provide referrals (and clients who aren't inclined to offer referrals can even have a negative reaction to the request, potentially damaging the advisor-client relationship!).

In this guest post, Todd Fithian, co-founder and managing partner of The Legacy Companies LLC, discusses a systematic approach that advisors can take to ask clients for referrals. By first identifying clients who are receptive to the idea and who would most likely be viable referral sources, advisors can focus their efforts on those clients rather than devoting resources to clients who wouldn't want to be approached for a referral in the first place. By designing simple surveys to determine clients' Net Promoter Scores, advisors can divide their clients into groups of those who may be more (and less) likely to want to 'promote' (i.e., refer others to) the advisor. This can help the advisor decide who to ask for a referral and who to avoid the subject with – although for the latter group, scheduling a separate meeting to discuss potential issues that underlie the clients' reluctance may provide valuable insights about both the advisor's processes in general and any relationship concerns the client may have more specifically.

After identifying potential clients who might serve as good "active promoters", advisors can take the next step by asking clients whether they'd be willing to refer people in their networks who might benefit from the advisor's services. One way to do this is to invite the client to a Dedicated Introduction Meeting (DIM) where the advisor and client can review the client's personal or professional networks and pinpoint contacts who might align with the advisor's firm and benefit from working with the advisor. To this end, it's essential to provide the client with guidance by clarifying the advisor's ideal client profile (since prospective clients who align best with the advisor's value proposition will more likely become clients themselves), which will also help clients narrow the list of introductions to contacts who would be a good fit with the advisor.

Ultimately, the key point is that asking for client referrals shouldn't feel like it pushes any boundaries with uncomfortable requests; instead, it should feel more like a natural progression of the authentic relationship built between the advisor and the client. By developing a process centered around respect for the client's willingness to open up their network to the advisor – as well as their trust that the advisor could serve those potential clients well – advisors can make the process feel more natural for clients while effectively bringing in their ideal target prospects!

Weekend Reading For Financial Planners (March 9-10)

March 8, 2024 01:58 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 RIA clients of an insurance broker providing Errors & Omissions (E&O) coverage saw a 213% increase in claims paid in 2023, attributed to significant jumps in suitability claims (likely stemming from the 2022 market downturn) and claims related to wire fraud. Which suggests that financial advisory firms could potentially mitigate their potential exposure to future exposures by reviewing asset allocations with clients more frequently (to ensure they understand and approve of the advisor’s recommendations) and by maintaining strong policies and procedures related to client wire transfers (and ensure firm staff is trained on them!) to prevent fraud.

Also in industry news this week:

A recent survey has found that a majority of prospective financial planning clients across all age brackets are open to working with a remote advisor, creating opportunities for advisors to grow their businesses and for clients to find the ‘best’ advisor for their needs, regardless of their location
A federal judge has ruled that the Corporate Transparency Act, which requires small business entities such as LLCs and corporations to report identifying information on their "beneficial owners", is unconstitutional, raising questions about whether businesses (including certain non-exempt financial advisory firms) will be required to comply with its requirements

From there, we have several articles on practice management:

Why many RIAs are experiencing high staff turnover and how a more deliberate approach when hiring could lead to more successful hires
The key behaviors that can help a newly promoted manager succeed, including the need to set and communicate clear goals and the ability to provide regular feedback to team members (without micromanaging)
How firms can avoid wrongful termination lawsuits, from establishing clear policies in employment agreements and employee handbooks to considering whether to offer departing employees a severance package

We also have a number of articles on investment planning:

Why the well-known (and frequently judged) “60/40” portfolio could have a bright future, despite the poor returns it experienced in 2022
While a diversified investment portfolio can offer significant risk-management benefits, it also tends to come with periods of underperformance that can be challenging for investors to withstand
Why U.S. stocks have dominated their international counterparts during the past decade and whether it still makes sense to have exposure to international equities

We wrap up with 3 final articles, all about decision-making:

Why research suggests that individuals make their best financial decisions in their early 50s and how advisors can support clients across the age spectrum based on their unique skills and weak points of view
Why it’s important to recognize that there often is no “Secret Option C” when it comes to make a challenging decision with 2 distinct options, and how advisors are well-positioned to help clients overcome the tendency to put off these tough choices
How a structured framework can help advisors make decisions when a seemingly unlimited number of options are available, from choosing a niche to deciding what to discuss when leveraging content marketing

Enjoy the ‘light’ reading!

Kitces & Carl Ep 133: Should Advisors Market The Real (Self-Actualization?) Value Of Financial Planning, Or Just Do It?

March 7, 2024 07:03 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces & Carl Ep Life Changing Self Actualization But How Do We Market It

For many financial advisors, the traditional way of doing business has generally been based on a transaction-based service model involving functional solutions to clients' practical problems. In more recent years, though, advisors have begun to focus on developing stronger and more meaningful relationships, recognizing the advantage of better understanding clients' values and priorities when it comes to solving for their long-term goals. And with this growing realization, many advisors are also recognizing the profound impact they have on their clients' lives beyond solving their everyday financial challenges. Which begs the question: Is there a missed opportunity for advisors to market themselves as providing value that transcends solving just their clients' functional goal-based needs and that addresses their emotional, social, and even aspirational needs as well?

In our 133rd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards explore how many of the services provided by financial advisors often align with those outlined in consulting firm Bain & Company's "Elements of Value Pyramid", a 4-tier model representing different levels of inherent value delivered by products and services. Similar to psychologist Abraham Maslow's Hierarchy Of Needs, the Elements of Value codify some of the less quantifiable concepts of what is important and valuable to clients – including those that are emotional, life-changing, and socially impactful – that are often naturally addressed (but not necessarily marketed as part of the services provided by the advisor) through the advisor's planning process, offering a potential framework for advisors to consider when deciding whether to market themselves as providing these 'higher' levels of value.

As a starting point, while clients often approach advisors with basic financial problems, there are often deeper concerns (and goals) associated with their initial requests. And when the advisor is able to gain an understanding of those underlying issues through active listening and engagement using carefully crafted questions, clients often benefit in ways that naturally address their higher-tier needs in the Elements of Value Pyramid. Which further elevates the advisor's value to encompass broader services that the client may not have even realized they wanted or needed in the first place, potentially increasing loyalty and trust within the relationship and even leading to growth of the advisor's business through increased referrals!

Advisors seeking to market these higher-tier services (e.g., providing hope and motivation, reducing anxiety, promoting wellness) may need to find a comfortable balance between explicitly communicating the intent to provide such services, versus relying on the client to recognize the added benefits as an organic by-product of the advisor's standard process. As while serving in a fiduciary capacity to create a comprehensive financial plan in the client's best interest can result in providing solutions that cascade into the emotional, life-changing, and even social-impact tiers of the Elements of Value Pyramid, sometimes without the client ever realizing they had needs in those areas.

Ultimately, while acknowledging a client's emotional and social needs hasn't historically been a large part of traditional financial planning, the concept of financial psychology has been gaining credence as an important aspect of financial planning. And by considering all the ways they can provide value to their clients (including the evaluation of 'higher-level' elements as outlined by Bain's Elements of Value Pyramid), advisors can be confident about marketing themselves as servicing these client needs in whatever capacity works best for them – whether it involves exploring simple questions about a client's desired future life or delving into the deeper levels of how the client perceives life-changing self-actualization or even self-transcendence!