Nerd's Eye View blog

Weekend Reading For Financial Planners (May 20-21)

May 19, 2023 02:00 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 of a recent survey indicating that investors overwhelmingly believe that Artificial Intelligence (AI) will help financial advisors better serve their clients and would like to work with an advisor who leverages AI tools. And despite some industry observers’ concerns that AI tools could eventually replace human advisors, a strong majority of those surveyed said they do not expect AI to replace advice from humans. And amid this backdrop, several AdvisorTech tools have added AI capabilities that could further streamline advisory firms’ middle- and back-office tasks and processes.

Also in industry news this week:

CFP Board adopted a set of revised procedural rules, including establishing the ability to conduct “informal inquiries” in response to complaints to better identify potential wrongdoing
A patent that allowed Vanguard to launch ETFs as share classes of its existing mutual funds expired this week, but it is unclear whether other asset managers will take advantage of the new opportunity

From there, we have several articles on practice management:

What actions advisory firm owners can take when they find they have too much work on their plate
How advisors can explore different paths for their firms once they have been in a robust client pipeline
How one advisory firm owner made changes to ensure her business serves her rather than the other way around

We also have a number of articles on cash flow and wealth:

One potential framework to describe levels of wealth, from not stressing about debt to not worrying how much is spent on a vacation
Why having “FU” money is not necessarily the key to freedom and happiness
While it has long been assumed that buying ‘experiences’ typically make individuals happier than purchasing ‘things’, recent research suggests a more nuanced view might be warranted

We wrap up with 3 final articles, all about gender and money:

Why men and women often have different views of what retirement means to them
Why telling women to act more confidently is unlikely to improve the gender pay gap, and what employers can do to even the playing field
While prior research has found that women report poorer mental health than men, a new study suggests the reality might be more nuanced

Enjoy the ‘light’ reading!

Kitces & Carl Ep 112: When You No Longer Want To Be A Manager And Have To Let An Associate Advisor Go

May 18, 2023 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

As a solo advisory firm owner grows their practice, they may reach capacity constraints that prompt them to hire an additional employee. While this can be a logical step in scaling their firm, some advisory firm owners may not anticipate the managerial challenges that come with hiring additional staff. And even though some firm owners may have originally thought they were ready to expand and take on an employee, they may later determine that they actually prefer operating on their own as a solo without support… leading to the inevitable task of letting go of the person they hired in the first place.

In our 112th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss best practices for gracefully letting an employee go when the advisory firm owner decides they no longer want to grow into a business but would rather revert to being a solo advisor instead.

Letting go of an employee, especially when the reasons are not related to performance issues, can be an uncomfortable experience for all parties involved. While the firm owner may feel guilty and worry about how much the decision will impact the employee and their family, it is important for the owner to put aside their own feelings and instead focus on approaching the situation with objectivity, directness, grace, and compassion. Being clear and direct will help the firm owner communicate why they are terminating the associate advisor, and instead of trying to express remorse or regret (which can lead to confusion, anger, and/or resentment, making the situation more difficult for everyone), the advisor can instead act with compassion by making an offer of severance pay (depending on how long the employee served the firm), providing a recommendation letter or serving as a reference, or even making a referral to other advisory firms that may be looking to hire additional staff.

While contemplating the decision to terminate an associate advisor, an important consideration to make includes the past growth of the firm’s client base, especially since hiring the associate advisor. Because once they are no longer supporting the firm owner, capacity constraints will change, which means the owner may also have to downsize the number of clients to maintain a sustainable practice. And if downsizing clients offers a beneficial capacity lift for the owner, the owner might also consider offering the associate advisor an opportunity to buy the book of clients they no longer wish to serve, possibly helping them either launch their own firm or ease their transition so they can bring revenue with them to their next firm position.

Ultimately, the key point is that it is generally in everyone’s best interest for the firm owner to be clear and direct when the decision has been made to let someone go. And while the discussion will probably be difficult and uncomfortable, delivering the information with clarity, directness, and grace will make the news easier for the employee to understand and accept, and can also relieve the firm owner from the burden of having the sensitive conversation more quickly. And offering transitional tools like severance pay, a recommendation, and/or a referral to another firm can add compassion to the process, ultimately leading to an easier process of moving on for both the employee and the owner!

Investing For Nonimmigrant Visa Holders: Understanding Visa Types, Investment Challenges, And Tax Implications

May 17, 2023 07:02 am 0 Comments CATEGORY: Investments

Amid a tight job market and low unemployment rates, a significant amount of the U.S. ‘talent gap’ is filled by foreign-born workers on employment visas like the H-1B. These visas allow foreign workers to live and work in the country temporarily while they are employed – although in practice, this can mean that individuals can spend years or decades (or even their entire career) working in the U.S. on a ‘temporary’ visa.

Like native-born workers, foreign workers need to think about saving for retirement, planning for their children’s college, managing healthcare costs, and all manner of other financial goals. However, the system in the U.S. that incentivizes saving for these goals for American citizens – namely with tax-advantaged accounts such as 401(k) plans, IRAs, 529 college savings plans, and Health Savings Accounts (HSAs) – can impose hurdles on foreign nationals who rely on them for their own savings needs.

For example, the tax benefits of certain accounts can sometimes work in the other direction if a non-U.S.-born worker contributing to them eventually moves back to their home country. Roth IRAs, for instance, are taxed once upon contribution and can grow tax-free thereafter in the U.S., which can allow for a large accumulation of tax-free savings over time; however, because some countries don’t recognize the tax-free nature of Roth accounts, withdrawing from the IRA in another country later could cause it to be taxed a second time, eliminating the primary benefit of Roth savings.

Additionally, foreign workers often also face hurdles in opening and accessing some accounts. For example, some brokerage firms won’t even allow foreign nationals to open new accounts, and others may require the individual to close the account and move their assets out if they ever move away from the U.S. and in some cases, entire account types may be unavailable due to the worker’s foreign status, such as 529 plans, which require beneficiaries to have a U.S. Social Security Number (making them effectively off-limits to individuals with noncitizen dependents) and necessitate a different approach to college savings than is common for U.S. citizens.

Ultimately, navigating saving and investing for foreign-born workers requires a careful balance of understanding the considerations and potential pitfalls of different savings strategies, knowing the person’s goals and plans (including potential relocation overseas), and – perhaps most importantly, given the uncertainty that can come with staying in the U.S. on a work visa – maintaining enough flexibility to preserve their assets should those plans change. Advisors who can stay on top of changes to immigration and tax law and help with navigating these challenges can serve a valuable role for foreign national clients – a potential client base that is only poised to grow in an increasingly global workforce!

#FA Success Ep 333: Scaling A Small-Business-Owner Boutique To A $31M Retainer-Based Valuation, With Jim Dew

May 16, 2023 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 333rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Jim Dew. Jim is the Co-Founder and CEO of Dew Wealth Management, an independent RIA based in Scottsdale, AZ, that provides virtual-family-office-style financial planning on a monthly retainer basis for 150 small-business owner entrepreneurs.

What's unique about Jim, though, is how he has scaled his retainer-based boutique firm to more than $7 million in revenue, a $31 million enterprise valuation, and is growing organically at a 40% growth rate, by providing a high-touch comprehensive advice offering for his business owner niche clientele.

In this episode, we talk in-depth about how, despite not implementing an AUM model, Jim’s firm was independently valued at $31 million of enterprise value based on the strength and growth rate of their retainer-based pricing model, how Jim arrived at his retainer-based model that charges $4,000, $6,000, or $10,000 per month to cover the breadth of the ‘financial quarterback’ services he provides to his ideal target client (business owners with more than $1M of EBITDA per year), and why Jim and his firm not only provide a deep-dive financial planning assessment to prospects but have evolved it to the point of charging an upfront fee of $25,000 to prospects just to go through it, after learning the hard way in feedback from existing clients that giving away the assessment for free was actually undermining their perceived trustworthiness.

We also talk about how Jim has structured his virtual-family-office-style approach not by delivering tax, legal, and other services in-house but instead by continually building a list of external tax, legal, and other professionals that he and his firm don’t just refer out to but have actively sought out and vetted based on their credentials, education, experience, and personality and follow-through. Jim describes how he and his firm provide what he calls a 'time energy shield' for their busy business-owner clients by helping them find the right professionals they may need, managing the projects with their professionals, and even fielding the inevitable business pitches that come at their clients, and why Jim and his firm use Monday.com instead of a traditional CRM to both map out and manage workflows and tasks for clients but also to keep detailed information about their vetted professionals and COIs… while also creating a dashboard so that clients can track the progress of all of the services that the firm provides them.

And be certain to listen to the end, where Jim shares how, after a couple of years of struggling to hire the right candidates for his firm, he realized that the recruiters he was using were not delivering and decided to implement an ESOP to attract candidates as well as hiring a director of operations who executed a marketing-esque hiring funnel to bring in more advisor talent, why Jim feels strongly about developing a niche focus because he learned that by becoming an expert in a particular field, it is easier to market and clearly communicate services and helps the right clients find his premium services, and why, even though Jim has received offers in the past, he feels he won’t be selling his firm anytime soon despite its strong valuation multiple because he believes his unique business model contributed to the 10X growth of the firm in the past 8 years and wants to continue his legacy and impacting how financial planning is provided for business owners for the foreseeable future.

So, whether you’re interested in learning about why, because Jim is a business owner himself, he wanted to work with business owners to give them the support they need to be successful, how Jim’s wife Mimi develops and supports the firm’s team culture, or why Jim feels a retainer-based model is more suited for his clients because they enjoy knowing exactly how much they are paying each month and don’t have to worry about long-term contracts, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Jim Dew.

Why ChatGPT Is No Threat To Real Advisors

May 15, 2023 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

The financial advisory industry has faced many purported technological ‘threats’ over the past several decades. From the introduction of computers to the rise of the internet to the emergence of ‘robo-advisors’, there has been no shortage of innovations that would allegedly reduce the need for consumers to work with (human) financial advisors. But in reality, none of these advances meant the end for the advice industry; rather, they often made financial advisors more productive by increasing their efficiency with back-office tasks from producing financial planning calculations more quickly and accurately to being able to serve more clients across the country. But despite this history of technological advances actually benefiting the financial advisory industry, the emergence of powerful Artificial Intelligence (AI) systems, such as ChatGPT, has raised fresh questions about the future of human-provided financial advice.

While the capabilities of modern AI technology are quite impressive, it is important to recognize that AI systems would have to overcome significant trust hurdles before they would be in any position to replace human advisors. For instance, despite the rise of self-driving cars in recent years, survey data suggests that humans are hesitant about riding in them (or sharing the road with them) for safety reasons. This ‘trust penalty’ implies that self-driving vehicles would have to prove that they are significantly safer than human-driven cars (across a range of challenging driving environments, such as in a snowstorm) to achieve mass adoption. And because offering financial advice, like driving through snowstorms, often involves high risk and complexity, actually trying to replace human advisors with AI technology would be a terribly difficult and impractical place to start.

While AI systems are unlikely to replace human advisors anytime soon, their functionality could still help advisors operate more efficiently. For example, ChatGPT’s AI can be thought of as a form of calculator that takes inputs (e.g., various information or data that it’s fed or that it has ‘ingested’ itself) and turns them into useful outputs (e.g., written responses that conform to how humans typically communicate). In this way, ChatGPT can be used as a tool to help human advisors convey important financial concepts to clients through writing faster and easier. From the human perspective, the reality is that it’s typically far faster to edit something that already exists than to create it from scratch.

For instance, a human advisor could prompt ChatGPT to write an email in response to a client who is concerned about the current state of the market and wants to sell all of their equity holdings. And while it’s unlikely that advisors would simply copy and paste ChatGPT-generated text into a client email without checking its output, prompting ChatGPT and editing its output for accuracy and personalization is still likely to be faster than composing an email response from scratch. Further, beyond producing client emails, advisors may also find ChatGPT useful for summarizing lengthy text (e.g., creating succinct notes from a full client meeting transcript) or drafting social media content to promote content the advisor has already created.

Ultimately, the key point is that, in the long run, the most likely legacy of ChatGPT and AI for financial planning is not to replace financial advisors, but to help them increase their productivity by streamlining more of the middle and back office tasks and processes. Which, in turn, will either enhance the profitability of firms or allow them to provide their services at a lower cost for the same profitability while increasing the market of consumers who can be served, further growing the reach of financial planning. Or stated more simply, ChatGPT will not necessarily end out as a threat to financial advisors; instead, it is probably more of a useful tool for advisors that will help to grow the market for financial planning advice services!

Weekend Reading For Financial Planners (May 13-14)

May 12, 2023 02:01 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 a recent study found that clients of advisors providing comprehensive planning services are significantly more satisfied than those receiving a lower tier of service. The study also highlighted the importance of advisors taking the time to build trust with clients and to understand a client’s goals and needs, as this can not only differentiate an advisor from those providing purely transactional investment advice, but also could promote client retention, even in years of poor market performance.

Also in industry news this week:

Why industry groups representing investment advisers and others have blasted an SEC proposal that would significantly expand its Custody Rule
A new study suggests that organic client growth and profit margins are the key factors driving RIA valuations, with the firm’s affiliation model having little to no impact

From there, we have several articles on cash flow:

How the inflation-adjusted ‘net price’ that parents and students pay for college has remained largely unchanged in the past 15 years despite increases in ‘sticker prices’ that well exceed the broader inflation rate
Why high-net-worth clients might be interested not only in advice for how to make charitable contributions in the most tax-friendly manner, but also in finding appropriate charities to give to that meet their goals
How a recent study suggests a causal connection between married couples who use a joint bank account and increased relationship happiness

We also have a number of articles on practice management:

How 1 firm measures its client service standards to ensure it is providing a high-quality client experience
How owners of growing firms can increase the size of their client base without sacrificing service levels or working endless hours
Why adding strategic tax planning services could be the key to spurring client growth, and how firms can implement the new service offering

We wrap up with 3 final articles, all about health and wellness:

How the consumption of ultra-processed foods might lead to a variety of maladies
Why the United States trails peer countries in terms of life expectancy
Why taking a ‘mental health day’ might only be a temporary fix for broader issues related to burnout in the workplace and what employers can do to support their employees

Enjoy the ‘light’ reading!

Instead Of Asking “Why”, Try “What Else” To Get Clients To Open Up About Goals

May 10, 2023 07:02 am 0 Comments CATEGORY: Client Trust & Communication

In meetings with current and prospective clients, asking follow-up questions can be a valuable tool for uncovering information about the client’s underlying values, goals, and motivations… and for deepening the personal connection that drives the advisor-client relationship. But while it’s one thing to know that it’s good to ask questions, it’s another thing to know which questions to ask to make the client feel comfortable enough to open up and discuss the personal topics of money and finance.

Some coaches and experts are proponents of Root Cause Analysis, an approach centered around the question “Why?”: By starting with a basic question such as, “Why does money matter to you?”, then continuing to follow up with more “Why?” questions, the thinking goes that the advisor can drill further and further down until they get to the true root cause of the client’s values or motivations. But although this approach is appealing in its simplicity (since it only requires the advisor to supply the initial question, with all of the subsequent follow-up questions being variations of “Why”?), it isn’t always the most effective approach to drawing out information or building trust. Because while some clients may appreciate its directness in certain situations, in other cases, being asked “Why?” repeatedly can feel like an invasive and impersonal interrogation – or like being peppered with questions by an overly inquisitive toddler – and can result in an aversion to or annoyance with the advisor’s line of questioning.

An alternative approach that can be softer than the directness of “Why?” is to instead ask, “What else?”. Although both approaches have the goal of drawing out more information from the client and drilling deeper into their responses, the brain often interprets the 2 questions differently. Whereas “Why” can feel as though it presupposes a right or wrong answer – which can put the brain in an anxious state in trying to search for the most appropriate response – “What else?” can make the client feel more in charge of their response and less likely to feel judged on it, which can also put them more at ease and open the door to a more free-flowing conversation.

At a high level, asking “What else?” is about keeping the spotlight on the client and keeping them talking as they spin out the details of what’s on their mind. As they put their thoughts and ideas into language, they may encounter new realizations about their own goals or motivations that had never occurred to them before, and because there’s no pressure to supply a ‘correct’ answer, they’re encouraged to keep sharing and processing their thoughts out loud as they gradually get to what really matters to them. And at the end of a meeting, “What else?” can be a great way to wrap up and identify issues to follow up on or discuss at the next meeting!

The key point is that “What else?” is a means to achieve the same ends as a “Why?”-based line of questioning while sidestepping the potential issues that “Why?” can create. When meeting with prospects or clients in the early stages of the relationship – when the client may still be getting used to the idea of having an advisor and sensitive towards being judged for their financial behavior – “What else?” can create an open and comfortable environment for the client to explore their goals and values, which ultimately can make it easier for the advisor to focus their advice on what’s truly meaningful for the client.

#FA Success Ep 332: Transitioning From (A Father’s) Commissions-Based Practice To Fee-Based Planning As A G2 Advisor, With Liz Hand

May 9, 2023 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 332nd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Liz Hand. Liz is the co-owner of Pleasant Wealth, a hybrid advisory firm based in Canton, Ohio that oversees $146 million in assets under management for 522 client households.

What's unique about Liz, though, is how she and her brother have taken ownership of what was originally their father’s broad commission-based practice with more than 1,500 clients, and have managed the balance of transitioning the business into a fee-based financial planning practice while still doing right by the smaller or more transactional clients who may have been with the firm for a decade or more.

In this episode, we talk in-depth about how, to realize their vision for the future of a commission-based firm their father originally built, Liz and her brother have gone through the messy multi-year process of refocusing to a niche and rightsizing their client loads, how Liz and her brother realized in the process of buying into the firm that they didn’t want to continue working on retirement plans and encouraged their father to sell that portion of the business to their former ONESCO branch office and use the proceeds of that sale to reduce the buyout cost for the portion of the firm they wanted to buy, and why Liz chose to change the firm’s B-D relationship from ONESCO to Kestra based not only on a pricing structure that was a better fit for where the practice was going, but also the cultural fit that she felt would better support them as advisors.

We also talk about why, before buying into her father’s firm, Liz decided to become the successor for another advisor so that she could have an opportunity to find her own voice as an advisor independent of being her father’s family successor, how, as a part of the process of fulfilling her vision for the firm, Liz has decided to focus the firm’s niche away from the Amish and Mennonite clientele that her father grew with over the years and towards independent women retiring alone who need not just an advisor but a thinking partner, and how Liz envisions to implement three tiers of service for the firm’s clients – Foundations (for legacy transactional clients who engage less frequently), Flow (for ongoing clients who want financial planning), and Flourish (a group coaching program to help clients actually implement recommendations and achieve their financial goals).

And be certain to listen to the end, where Liz shares how engaging with a mindset coach through Limitless helped her find the confidence to implement the changes she and her brother envisioned for the firm (and give herself permission to iterate over time instead of feeling pressure to have everything ready all at once), how Liz was inspired to become a mindset coach for other advisors and now is planning to use that training to incorporate mindset work and coaching for her own clients, and why Liz feels that younger, newer advisors trying to establish their voice as an advisor would benefit from joining more industry associations, both to gain more perspective on different methods of financial planning, and to find the ones that resonate most with them… so that they can be more of their own authentic selves with clients.

So, whether you’re interested in learning about the details of the succession plan that Liz, her brother, and her father agreed upon, how Liz overcame her own personal struggles while trying to establish her reputation as a knowledgeable financial advisor, or how Liz envisions the future of Pleasant Wealth, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Liz Hand.

Offering Tax Preparation As A Solo Advisor: How To Attain Designations And Create A Schedule By Next Tax Season

May 8, 2023 07:04 am 0 Comments CATEGORY: Practice Management

Traditionally, financial advice and tax preparation have existed as 2 related, but separate, services. Besides the fact that many financial advisors don’t hold the necessary credentials (e.g., CPA, EA, or JD) to prepare tax returns and represent clients before the IRS, there has also been the impression that there is simply not enough time for one person to do both. This means that, while many advisory firms have in-house tax preparers (and vice versa), it is relatively uncommon for financial advisors to be the ones doing tax preparation themselves.

For solo advisory firm owners, however, who are largely able to decide for themselves how to provide value for their clients, offering tax preparation can be a way to provide a service that is in demand from many clients (particularly at a time when there is an acute shortage of available tax preparers on the market), while adding to the year-round value the advisor is providing and deepening the client-advisor relationship.

In this post, Kitces.com Senior Financial Planning Nerd Ben Henry-Moreland writes about how he went from being hesitant to offer tax preparation at his solo RIA (given how common it is for tax preparers to work long hours throughout tax season) to embracing it as a core part of the business’ service offering.

One of the keys to this shift in thinking was the realization that, rather than preparing taxes on top of and alongside the ongoing advisory schedule of financial planning updates and client meetings, it could instead occupy its own slot on the ongoing client service calendar. In other words, by clearing space during tax season to focus full-time on tax preparation, it was possible for Ben to contain tax prep work to a reasonable number of hours. Furthermore, similarly structuring the client service calendar for the remainder of the year to focus on specific topics at set times (e.g., investment reviews in the summer, retirement projection updates in the fall, and year-end tax planning in the winter) created enough efficiency through systematizing the ongoing financial planning process that allowed him to fit in tax preparation without reducing any of his other service offerings!

Although it can take as long as a year to get fully set up to prepare tax returns – from obtaining a designation such as the EA to deciding on pricing and software, to developing processes and workflows to streamline tax season as much as possible – advisors may find that many of the tools they use for their advisory business (such as CRM, data gathering, and electronic signature software) can also be used for tax preparation, and that the advisor’s existing knowledge of their clients’ financial and tax situations makes it possible to streamline the process even further (e.g., by tailoring client data-gathering worksheets to focus on the information that is relevant to a client’s tax situation).

The key point is that, offering tax preparation can be seen as a way for solo advisors to use their existing tools and expertise to enhance the year-round value they provide. Which ultimately means that it can be well worth the investment in time and resources given how valuable of a service tax preparation is to many clients!

Weekend Reading For Financial Planners (May 6-7)

May 5, 2023 02:30 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 House Financial Services Committee unanimously passed a bill that would direct the SEC to conduct a study and carry out a rulemaking on the definition of a "small entity" to reduce the compliance burden on small businesses, presumably including RIAs.

Also in industry news this week:

Legislation working its way through Congress would allow for electronic delivery of documents to clients of advisors and other financial services firms by default, though it has been met with some opposition
While RIAs have outpaced wirehouses in terms of client asset growth and headcount, industry consolidation has led to a decline in the number of RIAs, according to a study from Cerulli Associates

From there, we have several articles on practice management:

Why serving 'non-ideal' clients is seen as the top productivity challenge for advisors, according to one survey
How putting in the extra time to practice ahead of client meetings or seminars can pay off for advisors
Why stressed-out firm owners might consider downsizing their client base rather than selling their firm

We also have a number of articles on investments:

While tax-adjusting a client’s portfolio can be a valuable service, doing so accurately can be challenging
The potential benefits and risks of investing in funds that engage in securities lending
Why holding on to stocks, rather than moving to cash, could be a smart move, even if a recession is expected to occur

We wrap up with 3 final articles, all about technology:

Why LinkedIn could be a valuable 'one-stop shop' for social media users
How ChatGPT and other AI tools have come under fire for using published content on the Internet to train their models
How 'passkey' technology introduced by Google and other web services could lead to the end of passwords

Enjoy the 'light' reading!