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Establishing Solo 401(k) Plans For Self-Employed Workers: Options, Contribution Limits, Deadlines, And More!

November 23, 2022 07:06 am 14 Comments CATEGORY: Taxes

Among the several different types of retirement plans that are available to self-employed workers, solo 401(k) plans can offer the most flexibility and the ability to contribute the highest amount of tax-advantaged savings. But alongside those advantages, there are some specific rules and regulations that are unique to solo 401(k) plans, which can add to the complexity of setting up and maintaining a plan. And for advisors who serve self-employed clients, managing a solo 401(k) plan is often a different process than managing other types of investments.

However, the advantages of solo 401(k) plans – which include higher contribution limits for individuals with moderate incomes as well as the ability to make Roth contributions to the plan (plus additional nondeductible contributions which can be converted into even more Roth dollars) – mean they can often be worth the added complexity, particularly for individuals who want to save a high percentage of their income and/or build tax-free Roth savings. They can also permit participants to take loans from the plan, creating a source of emergency funds without the need to make a (potentially taxable) distribution.

Setting up and maintaining a solo 401(k) plan involves creating plan paperwork (including a written plan document and adoption agreement), keeping records of contributions and withdrawals, and for plans with more than $250,000 in assets, filing Form 5500-EZ annually with the IRS. Business owners typically outsource some or all of these tasks, and they can do so in one of two ways: by choosing a pre-approved, ‘off-the-shelf’ plan with a broker-dealer firm (who then serves as custodian for plan assets), or by hiring a third-party plan provider to create a ‘self-directed’ plan, which can invest in a wider range of assets.

Although both types of solo 401(k) plans come with particular benefits, there are also tradeoffs to each approach. Off-the-shelf plans can be easier to administer, since the broker-dealer handles most of the plan paperwork and holds the plan assets often for little to no cost. However, off-the-shelf plans also tend to offer fewer options; for example, TD Ameritrade’s merger with Charles Schwab resulted in the elimination of Roth features from their off-the-shelf solo 401(k) plan.

Self-directed plans, meanwhile, offer more ability to tailor a plan’s features to an individual’s needs. These features can include the ability to make Roth or nondeductible contributions, to take loans from plan assets, and to invest in non-traditional assets such as real estate, crypto assets, and precious metals – many of which are not allowed by most off-the-shelf solo 401(k) plans. But self-directed plans can be complex to manage, with the possibility of assets being held in multiple locations (as well as the responsibility of the plan participant to avoid investing in prohibited assets or making prohibited transactions), and costs that typically include startup fees of several hundred dollars, along with additional fees for ongoing maintenance.

The key point is that advisors can offer a valuable service by guiding their self-employed clients to the right solo 401(k) plan option, and by filling in the gaps between whatever services the plan provider performs and what the client is responsible for (such as opening accounts, keeping track of contributions and distributions, or preparing Form 5500-EZ). Ultimately, with the potential for added wealth that solo 401(k) plans can create, making the process of managing the plan a little easier for clients is a great opportunity to provide value that the client can see from year to year.

#FA Success Ep 308: Accelerating Growth From Referrals By Building Checklists For Every Meeting Detail, With Matthew Blocki

November 22, 2022 07:07 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 308th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Matthew Blocki. Matthew is the CEO of Equilibrium Wealth Advisors, an independent RIA based in Pittsburgh, Pennsylvania, that oversees more than $275 million in assets under management for 330 client households.

What's unique about Matthew, though, is how he and his firm have implemented pre-meeting, during-meeting, and post-meeting checklists to create more efficient processes that not only save their staff (and clients') time, but also map out all the details to be covered for each client meeting, ensuring that no detail in the client’s life is missed.

In this episode, we talk in-depth about why and how Matthew and his firm decided to develop and then implement their pre-, during-, and post-meeting checklists as a way to better position themselves as their clients’ personal CFOs offering a more concierge experience, how Matthew leverages one-to-many recorded videos and online FAQs to increase his communication with existing clients on key issues, and why, while Matthew feels his firm is only incrementally better than other good advisory firms, he attributes the 4x growth of his firm over the past 4 years to the fact that, like horses in a race, sometimes being just incrementally better than your competition and beating them out by an inch is all it takes to be the winner of the race.

We also talk about how Matthew made the decision to break away from a large insurance company after a point of self-reflection where he realized that his career goals weren’t really truly helping him grow as an advisor and were really set by the company’s culture and its internal competition structure that made him feel like he had to just keep getting more new clients instead of focusing more on the existing ones, why, after considering corporate and tuck-in RIA models, Matthew ultimately decided to go the independent RIA route as he felt it was the best way for him to maintain autonomy and implement the systems and processes that he felt would best serve his clients the way he wanted to see them served, and how, after realizing that Matthew and his team were serving close to 700 clients at the insurance company, he decided to run an analysis of his revenues and profits and saw how 80% of his revenue and profits were coming from just 20% of his clients… and consequently decided that those would be the only ones he would even want to continue with, and would leave the rest behind, in the transition to independence.

And be certain to listen to the end, where Matthew shares how he formulated the 125-150 client capacity targets for his advisory teams that he set to determine when to hire the next new advisor (to ensure his existing advisors have enough time to really focus on their client experience, and do not reach a stage of burnout), why Matthew implements a top five values exercise with his clients so that they can focus on what is best for them, their family, and their peace of mind rather than just what is the best financial decision, and why Matthew believes that for him, the key to being a successful advisory firm owner has been the recognition that the adversity he’s faced and tension he's felt at various points along the way is what helps him to recognize when he’s actually growing and learning and is about to get to the next level.

So, whether you’re interested in learning about how having checklists for each meeting stage helps Matthew’s firm carve out more time to focus on the client experience, how implementing client capacity goals ensures that Matthew’s advisors are not overworked and gives the firm the room to grow and scale over time, or how, by offering direct indexing, Matthew helps his physician clients maximize their tax-loss harvesting, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Matthew Blocki.

Increasing Financial Planning Efficiency With A Systematized Annual Process

November 21, 2022 07:03 am 1 Comment CATEGORY: Practice Management

A common service model for many financial advisory firms is to schedule annual client meetings throughout the year where the advisor meets with each client in the month they started working with the firm, and conducts a comprehensive review of all planning topics for the client. Which means that on any given workday, advisors might find themselves reviewing one client’s portfolio and another’s estate plan in the morning, and having a meeting with a third client later in the afternoon. However, by creating a systematic annual process to monitor and update client plans based on seasons, not only can advisors save time and work more efficiently, but they can also communicate the value of ongoing financial planning services to prospects and clients more effectively.

One way to implement a seasonal model is to group client meetings (and the requisite meeting prep) by topic, and then to thematically organize seasons throughout the calendar year. With this approach, the advisor can focus on particular planning areas (e.g., tax and estate planning) for all of their clients in each given time period, with designated seasons for meeting prep and separate seasons for client meetings. Which means there would be ample time to prepare for meetings that would cover only one set of planning topics – e.g., advisors would discuss tax and estate planning with clients in the fall and prepare for those meetings in advance over the summer, while discussing retirement and investments in the spring and preparing for those meetings in the winter.

This approach allows advisors to focus more deeply on each topic they discuss with clients and, because of the systematic nature of the schedule, can also save time while improving both efficiency and efficacy. Furthermore, advisors can adjust the annual calendar to accommodate their team members’ work-life balance needs. For example, with summers designated as meeting prep seasons, team members with children can have more workweek flexibility (given the lack of client meetings) and enjoy more days off while their kids are on summer vacation.

Importantly, implementing any new client meeting system also requires communicating to clients how the system works and setting clear expectations with them upfront. This may be done through a Client Engagement Standards document, which can ensure clients understand the process and their obligations to provide the advisor with the requested information. And by making sure that clients have this level of clarity, advisors and clients alike can have confidence that no part of their plan will slip through the cracks.

Ultimately, the key point is that by establishing a seasonal cadence of when and how clients’ financial plans are updated and monitored, advisors can improve efficiency while easily demonstrating to their clients the full range of work involved in monitoring and updating their plans. So for advisors who feel overwhelmed with the range of responsibilities they have in a given week, implementing a systematic annual planning process based on seasons can not only provide more structure to their processes, but also provide a better experience – not only for their clients, but also for their work teams – in the process!

Weekend Reading For Financial Planners (Nov 19-20)

November 18, 2022 02:07 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that AdvisorTech giant Envestnet has announced a partnership with New Zealand-based FNZ that will allow Envestnet to offer custodial services to advisors beginning in the second half of 2023. At a time of significant change in the RIA custodial space, epitomized by the ‘Schwabitrade’ integration (also in late 2023), Envestnet’s custodial offering will provide advisors with an alternative option to the legacy custodians and could offer potentially attractive synergies for advisors already in the Envestnet ecosystem.

Also in industry news this week:

The CFP Board has proposed a series of changes to its disciplinary processes, including a two-year deadline for advisors subject to an interim suspension to file a petition for reinstatement
A potential compromise during the lame-duck Congressional session could see a boost to the child tax credit and extended tax breaks for businesses

From there, we have several articles on tax planning:

How advisors can add value for their clients by managing their exposure to mutual fund capital gains distributions
How advisors can help their clients turn their HSAs into wealth-building machines
A new research study suggests that delaying taxes in retirement is often not the optimal course of action

We also have a number of articles on practice management:

Why looking inward at their leadership style can be one of the best ways for firm leaders to prevent employee turnover
Three things other than pay that firms can do to attract currently employed talent
The time management principles that are used by the most successful leaders

We wrap up with three final articles, all about gift giving:

How advisors can decide on the best client gifts from the wide range of options, from bottles of wine to donations to a favorite charity
Why it is important to first consider regulatory requirements and firm policy before giving clients gifts
How advisors can give clients gifts that are both thoughtful and could lead to referrals in the new year

Enjoy the ‘light’ reading!

Kitces & Carl Ep 99: What Does It Take For You To Find The Confidence To Take Action?

November 17, 2022 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

For many financial advisors, improving business development strategies can be a challenging task to address. With the myriad tools available to advisors that help them analyze the potential outcomes of their ideas and strategies, collecting the data to do so has become easier than ever. At the same time, though, over-analyzing strategies prior to implementing them can create a substantial gap between ideating a plan and actually putting it into motion. And sometimes, the fear of committing to an idea that might end in failure can be the real reason for the hesitation to implement in the first place.

In our 99th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can recognize behavior that may be impeding them from starting a plan, how incrementally implementing a plan can help put overall risk in perspective, and how changing small behaviors can help advisors gain confidence to implement important plans vital to continue growing and scaling their businesses.

As a starting point, it’s important for advisors to recognize when they fail to take action because of the human tendency to hide from the pressure of implementing a risky idea. This can emerge as procrastination, overanalysis, or becoming occupied with any number of tasks that they feel are necessary to complete first (such as ensuring every minute detail has been thoroughly examined and vetted) before taking any steps toward executing the actual idea being considered.

One way to deal with this hesitation to take action is to set goals in smaller increments, which can ensure progress while keeping the workload reasonable. As while it is easy to get caught up in the (sometimes unfounded) fears that even just one misstep can have catastrophic consequences, keeping a realistic perspective on the impact of failed attempts also becomes more manageable when aiming for smaller subgoals that are part of a larger process. Importantly, by implementing micro-actions instead of tackling larger tasks, advisors may find it easier to address failure when it does come up, as the fear of failing at one small step in a larger process is much easier to handle than the fear of total failure of the whole system. And by identifying how to break up their process into smaller, more manageable steps and keeping the potential failure of each particular step in perspective, advisors can more easily see their plan through.

Ultimately, the key point is that finding the confidence to take action on a risky strategic plan begins with identifying behaviors that might sabotage our efforts and examining how risky the plan actually is. While it may feel scary at first, taking smaller steps can help the advisor not only put the actual risk of a plan into better perspective, but can also be much easier to implement and test new approaches when those smaller steps don’t work out as planned. Which, over time, can help the advisor build the confidence they need to take the necessary action that will bring them closer to achieving more (and even bigger!) business goals!

Discussing Inflation And Market Turmoil Using Questions To Navigate Difficult Client Conversations

November 16, 2022 07:03 am 2 Comments CATEGORY: Client Trust & Communication

With inflation running hot, a potential recession looming, and both stock and bond markets seeing significant drops so far this year, there is no shortage of potential stressors for financial planning clients. And as crises arise and stress builds up, some clients may reach a tipping point where they seek out their advisor looking for answers to ensure their financial plan remains on track. While it might be tempting to answer the client’s concerns coolly and directly, starting the conversation by first asking the client questions can result in a more fruitful discussion.

During times of stress, whether induced by market turmoil or other unpredictable factors, an individual’s first reaction is often fear. But sometimes this fear can morph into anger, as feelings of anger can give an individual a sense of control as opposed to the disempowering feelings of helplessness and vulnerability that often come with fear. So when a client calls and appears to be angry about situations beyond their control, it is important for advisors to recognize that fear may be the client’s underlying emotion behind the outward anger they are displaying. Further, this also means that while the client may appear to be angry with the advisor, they may actually be reacting from fear of a stressful situation.

When an angry client contacts their advisor during periods of financial stress, an advisor’s first instinct might be to directly address their concerns, perhaps by explaining how the client’s portfolio is diversified or that the market is almost certain to bounce back at some point in the future. But to an angry client, these quick answers could feel dismissive or combative, potentially escalating the situation. Instead of trying to answer the client’s concerns immediately and directly, the advisor can start the conversation with a series of questions to help the client diffuse their anger and better understand their underlying feelings. By engaging in active listening (e.g., by reflecting the client’s answers back to them), advisors can better understand the client’s feelings and thought processes while allowing the client to feel heard. Next, asking questions that help the client realize that there is always an alternative ‘Plan B’ solution (and figuring out what such a plan could look like) can empower the client by reassuring them that it is still within their power to take action and prevent their plan from failing, even if their market fears came true.

Ultimately, the key point is that crises are likely to come up for clients over the course of a relationship that lasts many years, and an advisor’s reaction to their client’s fear and anger can make the difference between provoking heated emotions and helping the client feel like they have gained more control over the situation. By asking questions, actively listening, and exploring possible scenarios – rather than immediately giving answers – advisors can skillfully diffuse stressful situations and potentially strengthen the bond with their client in the process!

#FA Success Ep 307: Dropping Your Broker-Dealer License Without Dropping The Broker-Dealer Platform, With Stacey Hyde

November 15, 2022 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 307th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Stacey Hyde. Stacey is the President of Envision Financial Planning, an independent RIA based in Memphis, Tennessee, that oversees nearly $200 million in assets under management for 206 client households.

What's unique about Stacey, though, is how, to gain more flexibility and independence for her firm, she and her partner decided to drop their FINRA licenses and launch their own RIA… while continuing their relationship with Commonwealth as their now-former broker-dealer platform.

In this episode, we talk in-depth about why Stacey and her partner decided to drop their broker-dealer licenses, and drop out of the corporate RIA structure, transitioning instead to fully owning their own independent RIA while remaining affiliated to their now-former broker-dealer so that they could keep the benefits of having back-office, tech, and investment support, why Stacey wanted to create her own investment advisory agreement for her firm from scratch so that she could simplify language for clients and help them better understand the firm’s offerings and the nature of their relationship, and why Stacey and her firm implement a fee schedule where the tiers are not graduated but instead have hard breakpoints where after a certain threshold, clients can see an outright drop in their fees… which makes it easier for Stacey to communicate the fee schedule to clients, while also incentivizing them to add funds and consolidate their accounts with Stacey to reap the benefits of those reduced fees breakpoints.

We also talk about how Stacey and her firm built their client base by leveraging both client referrals and an advisor network that has a long-standing relationship with a national steel company where Stacey is one of the advisors in a niche service offering that provides the company’s employees advice on their benefits packages (and, eventually, their retirement rollovers), how throughout most of Stacey’s career, she struggled to find the right position that fit her desire to help clients, and eventually decided that she would have to hang her own shingle as an independent to be able to serve clients exactly the way that she wanted, and how, even though it was difficult to transition away from her most recent employer, Stacey found comfort in the fact that clients ultimately rallied around her and offered support… which made her realize she had a greater impact in her clients’ lives and wasn’t seen as just their “advisor.”

And be certain to listen to the end, where Stacey shares how, even though she loves to travel to Colorado, she was afraid of taking more personal trips as she didn’t want to be seen as an inattentive advisor, but as more clients are embracing virtual and asynchronous meetings, she has realized she can do more of what she loves and be her authentic self while still staying connected with clients, why Stacey wishes she could have gone independent much sooner and attributes the delay to her internalization of societal messages that she believes reinforces a lack of confidence in women and makes them question their abilities to build a career on their own (which took her years to overcome for herself), and why Stacey believes that it is important that advisors show clients that they truly care and are not motivated purely by compensation as it creates better alignment, trust, and overall a more successful career.

So, whether you’re interested in learning about how Stacey can better serve her clients because she dropped her FINRA licenses, why going independent but still affiliating with her former broker-dealer helps Stacey and her partners clarify their brand, or why implementing breakpoints in fee schedules helps Stacey to better communicate fees and keep them fair for all clients, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Stacey Hyde.
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Hiring Next-Gen Associate Advisors: A Guide To Recruiting, Training, And Retaining For Your RIA

November 14, 2022 07:05 am 1 Comment CATEGORY: Practice Management

In the not-so-distant past, the typical career path toward becoming a financial advisor was to build up a book of business on one’s own, often by either tapping into one’s own personal networks or cold-calling prospective clients in bulk to generate enough business to gain a foothold. But the obvious flaw with this ‘eat-what-you-kill’ model was that newer advisors overwhelmingly succeeded or failed – not by virtue of the quality of advice they gave to their clients, but by how effectively they could sell the financial products for which they were usually compensated via commission.

In more recent years, however, the rise of the fiduciary advice model (in which the quality of advice provided to the client really does matter to the firm’s success) has allowed a new career path to emerge: that of the associate advisor, who generally takes on financial planning tasks, like data gathering and analysis, to support the lead advisor so that they can focus more on managing the client relationship and bringing in new business. And as the associate gains experience and trust among existing clients, they can gradually take over some of the lead roles themselves, to be supported by new associate advisors of their own – thus allowing the firm to transition its clients from the founder to the next generation of advisors.

But for many experienced advisors (and particularly those whose careers evolved through the older eat-what-you-kill model), integrating an associate advisor into an existing practice can come with its own challenges. For example, seeing eye-to-eye on the expected responsibilities of the associate advisor’s role, as well as the role’s future possibilities and its meaning to the associate advisor’s career trajectory, may not come naturally, especially when the senior and associate advisor are each from distinctly different generations – which can result in dissatisfaction from both parties if they aren’t both clear and in agreement on the role’s purpose and where it is headed.

In this guest post, Penny Phillips, president and co-founder of Journey Strategic Wealth, uses her expertise in helping advisors address some of the common challenges in introducing new associate advisors into their firms and how senior advisors can scale their time and productivity to successfully integrate associate advisors into their advisory practices.

One of the most important components of bringing on an associate advisor is being clear about the purpose and requirements of the role during the hiring phase. And because associate advisors are often hired in the early stages of their careers, it should also be clear how they will be taught and supported by the firm to succeed in the role. This can be achieved by establishing a framework of Objectives central to the associate advisor role, as well as clearly identifiable Key Results that will help team members recognize whether they are achieving the desired results.

Furthermore, this Objectives and Key Results (OKRs) framework can also be extended to the associate advisor’s career development to define and work toward key skills that bring them closer to what they want to achieve. And as the senior advisor’s own role evolves with the addition of an associate, they may want to develop their own set of OKRs to ensure they are progressing towards their goals for themselves and their practice!

Ultimately, the key point is that finding and developing an associate advisor will take time and effort – for both the senior advisor and the associate advisor. However, a successful partnership between senior and associate advisors has the potential to last many years and can allow the practice to scale up in ways that aren’t possible for a solo advisor. Taking care to start the process on the right foot can therefore pay dividends for both parties in the long term!

Weekend Reading For Financial Planners (Nov 12-13)

November 11, 2022 02:02 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that as enforcement of the SEC’s new marketing rule began on November 4, advisory firms are taking a variety of approaches. While some are looking to gain a first-mover advantage by leveraging client testimonials and third-party endorsements (and adjusting their compliance programs before doing so), others are taking a wait-and-see approach.

Also in industry news this week:

Why “SECURE 2.0” appears to remain on track to be passed by the end of the year, no matter the final results of the midterm elections
Amid an “incredibly active” period for cyberattacks, the director of the SEC’s examinations division highlighted the areas of cybersecurity where advisory firms are most often deficient

From there, we have several articles on advisor marketing:

Three tactics advisors can use to improve their ‘close’ rate with prospective clients
How a regular firm newsletter can keep clients engaged and improve retention
The most effective question advisors can use to end initial prospect meetings

We also have a number of articles on retirement planning:

How the recent increase in interest rates has made TIPS a more viable option to increase a retired client’s safe withdrawal rate
Why advisors need to take care when analyzing the expected performance of Registered Index-Linked Annuities (RILAs)
While “free” Medicare Advantage plans might sound enticing, advisors can help their clients assess whether a different plan might actually be more cost-efficient

We wrap up with three final articles, all about personal growth:

How advisors can harness the power of compounding, not just with investments, but to improve their health and relationships as well
How advisors can help their clients overcome the cyclical nature of investment knowledge, particularly when FOMO kicks in
Five mindsets that advisors can use to create success in their professional and personal lives

Enjoy the ‘light’ reading!

Maximizing Health Savings Accounts (HSAs) Tax Benefits With Adult Children Under Age 26

November 9, 2022 07:01 am 9 Comments CATEGORY: Taxes

The passage of the Affordable Care Act in 2014 introduced many changes to the healthcare landscape in the United States. One of these changes was the ability for children to remain on their parents’ health insurance plan until they reach age 26. In addition to having access to health insurance at a lower cost than they might have on their own, this measure also creates a potentially lucrative planning opportunity for young adults who can be covered by a parent’s High-Deductible Health Plan (HDHP), giving them the opportunity to contribute to their own Health Savings Account (HSA) up to the full family maximum contribution limit ($7,300 in 2022).

Health Savings Accounts (HSAs) are one of the most popular savings vehicles because of their triple-tax advantage: account owners can take an above-the-line tax deduction for eligible contributions, growth in the account is tax-deferred, and withdrawals are tax-free if they are used for qualified healthcare expenses. Notably, funds in an HSA that are withdrawn for any reason other than for qualified medical expenses before age 65 are subject to a 20% early withdrawal penalty. After age 65, though, there is no penalty, and funds can be used for any reason (but are treated as taxable ordinary income if not used for qualified medical expenses).

In return for these significant benefits, the IRS imposes certain requirements for who can contribute to an HSA: The individual must be covered by a High Deductible Health Plan (HDHP) (and have no other health coverage or be enrolled in Medicare) and they may not be claimed as a dependent on someone else’s tax return. Notably, the account owner does not have to be covered under their own healthcare plan, so a young adult who is covered under their parents’ HDHP plan (and who cannot be considered a dependent on their parents’ tax return) would potentially be eligible to contribute to their own HSA. Further, while spouses can only make combined contributions up to the family maximum contribution limit ($7,300 in 2022), non-spouses covered under the same health plan can make contributions to their own HSA up to the family limit as well!

Because HSA owners must be covered under an HDHP in order to contribute, it is important to first consider whether choosing an HDHP is the best choice given a family’s medical expenses and financial situation. This presents an opportunity for advisors to assess whether the tax benefits of HSAs outweigh the costs of opting for HDHP coverage (which typically has lower premiums but higher deductibles relative to traditional health insurance plans).

Ultimately, the key point is that because children are now allowed to remain on their parents’ health insurance plan until age 26, non-dependent children covered under a family HDHP may be eligible to contribute to their own HSAs. And as HSAs offer significant tax advantages, advisors can help clients ensure that opting for family HDHP makes sense financially for the family as a whole!