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NASAA Adopts New Model Rule 203(a)-1A Requiring RIA Business Continuity And Succession Planning

April 27, 2015 07:01 am 8 Comments CATEGORY: Practice Management

After completing the public comment period, NASAA has just implemented a new “Model Rule” that will require investment advisers to adopt a “Business Continuity and Succession Plan” for the RIA practice. Notably, the rule would apply only for state-registered investment advisers, although the SEC has recently announced it is considering a parallel rule for SEC-based RIA firms as well.

The ultimate requirement of the Model Rule is that advisors would be required to establish a written plan about how they will handle the transition of everything from books and records of the firm, to ongoing servicing of clients (or at least, an orderly wind down), along with an alternate means of communicating with clients, in the event of either a natural disaster, or the unexpected death or disability of the advisor. In other words, how will the RIA fulfill its fiduciary duty and ensure continuity of service for clients, in light of recent natural disaster events like Hurricanes Katrina and Sandy, or the simple fact that with a sole proprietor advisor the clients might not even know the advisor had passed away and that no one was looking after their assets anymore!

Ultimately, the Rule will not actually have the force of law until it is adopted by individual states in the coming months, but nonetheless the pressure is on now for advisors to begin to prepare their written plan, which state examiners will likely want to see the next time the RIA is audited.

Fortunately, many of the continuity provisions can realistically be achieved by adopting cloud-based services that have a robust backup and disaster recovery process of their own. However, the requirement for “[unexpected] succession planning” in particular may be a challenge for many advisory firms, who must ensure continuity for clients (or at least an orderly wind-down) but may not want to sell the practice now. Will NASAA’s new Model Rule spawn an increase in the number of providers who offer an “exit planning” arrangement for advisors who do want to remain in their practice, but need a continuity solution in the event of death or disability?

Weekend Reading for Financial Planners (Apr 25-26)

April 24, 2015 02:31 pm 26 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that NASAA has finalized its model rule that, as states adopt the rule, will require state-registered investment advisers to create a written "succession" plan for their business.

From there, we have a number of practice management articles this week, including: strategies to effectively delegate tasks to staff; why it's best to build out the staff infrastructure supporting your advisory firm by building roles around people, rather than trying to fit people into roles; a profile of several advisory firms that have been successful in creating a strong culture that supports the firm; a guide of what to do if you find out you're being terminated by your broker-dealer; and a look at where advisors get their best ideas (from peers and conferences) and how they create the accountability to follow through on them (using coaches and study groups).

We also have a few marketing-related articles, from a look at how being less available to prospective clients can actually help to close them, to strategies to invoke an emotional connection with prospective clients to get them interested in doing business with you, and a discussion of how the world of wealth management is changing as the (younger) emerging affluent have different expectations of what they'd like to see in a "good" wealth management service in the first place.

We wrap up with three interesting articles: the first looks at some of the ways that investment advisers misreport investment performance (from skewed benchmarks that create an illusion of alpha to buying premium bonds that make yield appear higher than it will be over time); the second is a message from a Millennial working in financial services about how mismatched most of today's providers are to the true needs and desires of younger investors; and the last looks at the CFP Board's public awareness program after nearly five years, and the progress the CFP Board is really making in advancing awareness of the CFP marks.

Enjoy the reading!

Asset Location For Stocks In A Brokerage Account Versus IRA Depends On Time Horizon

April 22, 2015 07:01 am 22 Comments CATEGORY: Investments

In an environment where generating portfolio alpha is difficult, strategies like managing assets on a household basis to take advantage of asset location opportunities to generate “tax alpha” are becoming more and more popular. The caveat, however, is that making effective asset location decisions is not easy, either.

For instance, while the traditional asset location strategy “rule of thumb” is that tax-inefficient bonds go into an IRA, while equities eligible for preferential tax rates go into a brokerage account, the reality is that for investors with long time horizons the optimal solution may be the opposite. Once stock dividends and portfolio turnover are considered, the ongoing “tax drag” of the portfolio can be so damaging to long-term returns that placing equities into an IRA may be more efficient, even though they are ultimately taxed at higher rates!

In fact, it turns out that almost any level of portfolio turnover will eventually tilt equities towards being held in IRAs given a long enough time horizon (and especially while today’s low interest rates result in almost no benefit for bonds to gain tax-deferred growth inside of retirement accounts). Which means in the end, good asset location decisions depend not only on returns and tax efficiency, but an investor’s time horizon as well!

What’s An Hour Of Your Time Really Worth As A Financial Planner?

April 20, 2015 07:01 am 31 Comments CATEGORY: Practice Management

For any service professional, time is the ultimate constraint. There’s just only so many hours you can work and deliver your services, before you run out of time. For those who own their service business – like many financial planning professionals – that capacity is even further limited by the time it takes to run and manage the business as well, not to mention finding the clients who will pay for your time.

As a result, maximizing your economic value as a professional is all about maximizing the value of your time. In the early years of a practice, there’s more time available than clients to service, so the focus is simply on getting more clients to work with in the first place.

Yet eventually, an advisor hits the capacity wall, and suddenly the growth of the business stalls. At that point, the only way forward is to either get paid more for the time (e.g., by improving your expertise and skillset), or figure out how to free up time through delegation and using technology to make the business more efficient.

Ultimately, though, focusing on the economic value of your time itself can actually be an effective guide in how to maximize its value. By recognizing the value of your time, it becomes easier to judge the value of technology tools for efficiency, what tasks to delegate, and what you need to do to ensure that you spend all of your time focusing on your highest and best (and most valuable) use!

Weekend Reading for Financial Planners (Apr 18-19)

April 17, 2015 03:03 pm 12 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - big news in this week's edition is that the Department of Labor has released the latest update to its proposed fiduciary rule, which would expand the scope of ERISA fiduciary rules to IRA rollovers and require advisors (including brokers acting as such) to act in the best interests of their clients, but does not necessarily limit the nature of the compensation those advisors can receive and permits commissions to continue as long as they are paid pursuant to implementing best-interest advice. Perhaps not surprisingly, fiduciary advocates are saying the new rules may be too weak, while the brokerage industry is already objecting the new rules would be too stringent.

From there, we have a number of technical planning articles this week, including a look at the latest rules for income-based repayment (IBR) and public service loan forgiveness (PSLF) options for those with significant (Federally-based) student loan debt, a look at the new once-per-year IRA rollover rules that took effect at the beginning of January, a review of the Windfall Elimination Provision (WEP) rules that can reduce Social Security benefits for those who receive a pension based on "non-covered" earnings (i.e., wages not taxed under the Social Security FICA system), and some of the compliance and practical issues that advisors must consider as clients age and potentially face cognitive decline and diminished (financial and other) mental capacity.

We also have a couple of technology-related articles, including a look at Orion Advisor Services and some of its recent initiatives, a discussion of the latest research on cybersecurity risks in financial services and how safe client assets really are, and a broader overview of the major trends currently underway in technology providers for financial advisors (from M&A activity to an explosion of robo-advisor-for-advisors solutions).

We wrap up with three interesting articles: the first looks at some recent market research on how advisors advertise their services, suggesting that the "traditional" views like lighthouses and walks on the beach may feel nice and comforting to consumers, but are failing to differentiate advisors or generate much interest for consumers to explore further; the second is a somewhat amusing look at the "bubble in bubbles" as the "bubble" label is increasingly applied to everything from actual potential bubbles (which are rare) to anything that might just be overvalued or is even just a short-term fad; and the last is a look at how regardless of the ongoing potential for regulatory reform about the standards to which advisors are held, that perhaps the primary elephant in the room to address is simply the confusing ways that (genuine) advisors, insurance agents, and registered representatives all hold out to consumers as "advisors" instead of requiring them to use more accurate titles and labels to describe what they actually do.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including major new updates to the Grendel CRM the announcement by Schwab that its "robo-advisor" platform Schwab Intelligent Portfolios already has $500M of AUM, highlights of a recent review of Orion Advisor Services, and the LinkedIn acquisition of popular app Refresh.

Enjoy the reading!

Liquidate Appreciated Securities Tax-Free For College Funding By Avoiding the Kiddie Tax

April 15, 2015 07:01 am 17 Comments CATEGORY: Taxes

The “kiddie tax” rules were created to limit the ability of families to save on taxes by simply shifting income – especially investment income – from higher-income family members (like parents) to lower income family members (such as children) to take advantage of their lower tax brackets.

Yet while the kiddie tax rules are unavoidable for young children, it is often possible to avoid their reach for college students, who are not subject to the kiddie tax if they also generate enough earned income from wages and self-employment, or choose to attend school part time.

Of course, working to generate income should hopefully be its own reward, but by avoiding the kiddie tax, parents can subsequently gift (or liquidate previously gifted) appreciated investments, and allow the child to take advantage of what is currently a 0% Federal tax rate on long-term capital gains for those in the bottom two tax brackets. Repeated over the span of several years, this can add up to a material amount of tax savings for the family, especially when coupled with other tax savings opportunities of a financially-self-supported child, including a larger standard deduction, personal exemptions, and the American Opportunity Tax Credit!