Kitces.com - Advancing Knowledge in Financial Planning

Who’s More Valuable: Your Top Client Or Your Top Employee?

November 3, 2016 07:44 am 6 Comments CATEGORY: Practice Management

The fundamental purpose of financial planning is to help clients achieve their financial goals, which means ultimately it's all about the client. After all, if there are no clients to pay the bills, there is no business.

Yet in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore how ultimately, focusing an advisory firm too much on the wants and needs - and whims - of the client can undermine the morale and motivation of employees. Which is a real problem, because while clients pay the bills, there's no business without the people who work in it!

Accordingly, as an advisor/owner, you might consider which is really more valuable for your business: your top client, or your best employee? Many "client-centric" firms immediately state its their top client, even though the reality is that losing a key employee could cost the business 10X more than the impact of "just" losing the best client.

In fact, the reality is that building a successful business is so reliant on developing great people, that in the end you might even consider giving your staff the power to fire the most "pain in the ass" clients - the ones with a high "PITA" factor, whose departure may really only have a small impact on the revenue of the business, but a huge positive impact on the happiness (and productivity, and loyalty) of your team.

So in the end, think carefully about whether you're really a client-centric firm... or whether it's better to be an employee-centric business first, to ensure you have the employees you need to serve your clients best!

Using Age Banding To Estimate How Spending Will Decline In Retirement

November 2, 2016 07:01 am 12 Comments CATEGORY: Retirement Planning

The very essence of saving for retirement is to accumulate a nest egg sufficiently large enough to replace the retiree’s employment income and sustain a stable standard of living throughout retirement. If the prospective retiree doesn’t have enough saved up to maintain his/her lifestyle for the next several decades, it’s not yet time to retire.

Yet a growing volume of research studying the actual spending habits of retirees is revealing that this traditional approach may not be entirely appropriate after all. Because as it turns out, retirees don’t actually maintain a stable lifestyle in retirement; instead, spending levels tend to decline (in real terms), as the retiree goes from the “Go-Go” early years of retirement, to the “Slow-Go” years, and eventually the “No-Go” years.

In addition, not only does retirement spending slow in the later years, but the underlying composition of the retirement spending begins to shift as well as clients cross through these “age bands”, as spending on housing and entertainment activities fall significantly in the later years, while health care expenses are rising. Still, though, discretionary spending tends to fall by more than health care expenses rise – leading to an overall decrease in retiree spending as retirees proceed through the age bands.

Ultimately, this suggests that rather than merely assuming a stable standard of living throughout retirement, a better approach may be to look more directly at not just the composition of the retiree’s spending goals, but also how those particular types of expenses tend to change as the retiree moves through the different age bands. In other words, projecting retirement expenses using an age-banding approach may allow for a more nuanced and accurate representation of how spending will change over time. Which is important, because the data indicating that retiree expenses tend to fall throughout retirement – especially in some categories – implies that retirees may not actually need to be saving as much, or accumulating as large of a nest egg, to retire in the first place!

The Latest In Financial Advisor #FinTech (October 2016)

October 31, 2016 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the October issue of the latest news in Financial Advisor #FinTech – where we look at the big news announcements, and the underlying trends and developments that are emerging, in the world of technology solutions for financial advisors.

This month's edition kicks off with a look at the ongoing growth of "new" robo-advisors from established financial services firms, all of which are pricing 40% - 80% higher than the founding crop of robo-advisors like Betterment and Wealthfront, raising the question of whether 0.25% really is the new price point for investment management, or if robo-advisors will be the ones proven to have the "wrong" pricing.

From there, highlights include:

Riskalyze raises $20M of Series A funding from FTV Capital.
Yourefolio raises $500k of seed funding for a new estate planning software solution.
Black Diamond parent SS&C buys Salentica CRM.
Envestnet buys Wheelhouse Analytics to launch an advisor price benchmarking service for DoL fiduciary compliance.
Fidelity gives a preview of its new robo-for-advisors, Automated Managed Portfolio (AMP), but it looks more like a traditional TAMP.
Portfolio performance and accounting startup Addepar rolls out a new Open API as it continues to grow amongst advisors serving ultra-HNW clientele.
CapGainsValet reopens for the 2016 tax season, with a new "Pro" service for financial advisors handling end-of-year mutual fund and ETF distributions for clients.

You can view analysis of these announcements, and more trends in advisor technology, in this month's column, including a growing number of broker-dealers offering proprietary CRM (which is both an efficiency improvement, and potential handcuffs on independent advisors), new integrations being built directly into rebalancing software as it becomes a more "core" part of the advisor technology stack, and a look at the rise of "InsurTech" solutions to make it easier (and cheaper) for advisors to help clients with term insurance.

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (Oct 29-30)

October 28, 2016 02:51 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with several big news announcements, including the release of the first Department of Labor "FAQ" about the fiduciary rule (a series of 34 common-question-and-answer responses about keep aspects of implementing the Best Interest Contract and Level Fee Fiduciary requirements), the announcement that Commonwealth is breaking ranks with other independent broker-dealers and opting to eliminate commissions from IRAs altogether (while Ameriprise and Raymond James announced they will be allowing commissions and implementing all the additional compliance processes necessary to adhere to the Best Interests Contract Exemption), and an indication from FINRA that it is working on new regulatory guidance regarding social media intended to make it easier for brokers to use the platforms with less burdensome compliance going forward.

From there, we have several practice management articles including: a look at the situations where a financial advisor might want to merge their advisory firm into another (rather than simply be acquired); the long-term trade-offs to consider when building a "lifestyle practice" as a financial advisor (particularly if you're still in your 30s or 40s); and a look at how one mega-RIA built a new specialty niche inside the existing RIA without disrupting the existing business (in this case, by rolling out an impact investing solution).

We also have a few more retirement planning articles, from a look at the existing proposals to resolve the projected Social Security shortfall in 2034 (where the levers to adjust to solve it are actually easy to determine, and the only challenge is deciding which ones to pull on to shore up the future cash flow obligations), to a discussion of the mechanics of the "pro rata" rule from IRAs and why it matters (particularly for backdoor Roth contributions), and an examination of the "tenure" option in a reverse mortgage and in what situations it may be a superior "lifetime" income alternative to an immediate annuity.

We wrap up with three interesting articles: the first is a look at how accumulating significant wealth, especially suddenly, can actually be very disruptive socially, often leading the newly wealthy to become surprisingly isolated socially (in part to defend themselves from people who try to attach themselves socially to be a part of the financial gain); the second is an examination of how the dynamic between financial planning academics and practitioners needs to change and improve to bridge the research/practice gap in financial planning; and the last is an incredible anecdotal story to help remind us all that customer/client service interactions that we may repeat over and over, day after day, may be a small part of what we do, but are 100% of the client experience for that particular client... which is why every single moment in the delivery of the client experience really matters.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes an interview directly from Schwab IMPACT with VP of Advisor Technology Solutions, Brian Shenson, about the upcoming Schwab technology roadmap, from OpenView Integrated Office and Gateway enhancements, to an update on the OpenView MarketPlace, and the timeline for the new Schwab Portfolio Connect (the replacement for Portfolio Center) to be released in phases throughout 2017 and 2018!

Enjoy the "light" reading!

Will Advisory Firm Valuations Fall After DoL Fiduciary, Or Actually Increase Instead?

October 27, 2016 09:58 am 1 Comment CATEGORY: Practice Management

Periscope Office Hours Cover Image October 25 2016 Will Advisory Firm Valuations Fall After DoL Fiduciary 1

With recent advisor surveys suggesting that as many as 1-in-5 financial advisors could leave the industry in the wake of the DoL fiduciary rule, the potential arises that there will soon be a wave of advisory firms looking to sell. For those who are thinking about selling, this suggests there may be a race to get out the door first, before the glut of sellers causes advisory firm valuations to crash. And woe to the advisor who was "coincidentally" planning to sell and retire in the coming years.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore the potential consequences of financial advisors leaving the industry after the DoL fiduciary rule takes effect, and how the transition to a fiduciary world could actually lead to an increase in advisory firm valuations, not a crash.

The reason is that despite the fiduciary fears, RIA firms that operate as fiduciaries - typically operating as a level fee fiduciary with an AUM fee structure - actually already sell for an average price around two times revenue, while the traditional commission-based firm only sells for around one times trailing revenue. In other words, despite all the fiduciary fears, the reality for the past decade is that fiduciary AUM firms already sell for double the typical valuation of a commission-based firm!

In addition, the reality is that there's such a massive number of buyers for every sellers, that even a big uptick in sellers may do little to impact the current seller's market. Because not only is there an estimated 50:1 ratio of buyers to sellers, but most buyers are large firms looking to buy several others, while most of the sellers are solo or "smaller" multi-advisor firms. Which means the ratio of the amount of capital to buy advisory firms, compared to the value available to sell, could be more like 100:1 or 200:1 or more... which is ample pent up demand to absorb a DoL fiduciary seller's wave.

Of course, the reality is that selling a commission-based firm in the face of DoL fiduciary will still have limited value, simply because commission-based firms don't sell for as much in the first place, and may be even less appealing as the DoL rules make them harder to operate. And the push for more commission-based firms to shift to the AUM model as level fee fiduciaries, and then provide ongoing financial planning to justify their valuation, could accentuate the crisis of differentiation and push firms to reinvest even more in their advisors and services to compete (which can compress profit margins and ultimately bring valuations down slightly).

Nonetheless, the reality is that the marketplace has actually already judged level fee fiduciary AUM firms to be more valuable than commission-based firms, and if 20% of financial advisors really do leave after DoL fiduciary, that just makes more clients available for those who remain behind. Which means in the long run, not only may DoL fiduciary not impair advisory firm valuation multiples, it could leave the fiduciary survivors with an even larger business than they ever had before!

The Potential Tax Consequences Of Renouncing U.S. Citizenship For Affluent Individuals

October 26, 2016 07:00 am 8 Comments CATEGORY: Taxes

Given the especially contentious election cycle, many people have stated that if their opposing party's candidate wins, they're seriously thinking about leaving the country. And in point of fact, the number of people who renounce their U.S. citizenship actually has been on the rise in the past 15 years, though it is still a fairly low number in total.

However, the reality is that for those with a substantial net worth - in excess of $2M of total assets - and/or those who have an especially high income, their renunciation of citizenship can subject them to the so-called "Covered Expatriate" rules, which include a deemed disposition tax that can cause the individual's entire net worth to become immediately taxable upon leaving... including triggering all unrealized capital gains, and the instant deemed liquidation of all their IRAs!

In this guest post, Raoul Rodriguez - a specialist in cross-border financial planning (particularly between the US and Mexico) - discusses the tax issues involved in determining whether someone actually would be a Covered Expatriate if they decide to renounce their U.S. citizenship, the deemed disposition exit tax and other tax complications that may arise, and the planning opportunities that are available to at least try to mitigate the consequences.

So whether you have a client who is seriously talking about leaving the U.S. if the "wrong" candidate wins the presidential election, or you simply have clients who wistfully suggest they "might" someday leave, hopefully this article will be helpful in getting you up to speed about how the rules actually work... just in case it ever does become necessary to know!