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Kitces & Carl Ep 122: Helping Clients Make Decisions That DON’T Make (Financial) Sense

October 5, 2023 07:04 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces Carl Ep Helping Clients Make Decisions That DONT Make Financial Sense

For many financial advisors, financial planning advice traditionally focuses on optimization: tax-efficient, continually rebalanced portfolios are often designed to maximize a client's wealth throughout retirement. Such optimization can serve as the backbone of an advisor's value proposition, providing a bottom-line analysis that communicates why those (not insubstantial) fees are worthwhile at the end of the day. However, this approach can become complicated when clients want to make a decision that isn't about maximizing their wealth, but instead about finding the capacity for more emotional fulfillment in their lives (e.g., taking a sabbatical, using a reverse mortgage to fund a dream goal, transitioning their work/life balance). And when these clients ask their advisor for permission to make such a decision, the financial advisors might find themselves in a tricky position, where the 'right' answer that clients want the advisor to come up with may not make sense in a spreadsheet designed to optimize returns.

In our 122nd episode of Kitces and Carl, Michael Kitces and client communication expert Carl Richards discuss navigating the 2 balance sheets of a client: 1) the literal financial spreadsheet and 2) the 'emotional' balance sheet of their lives, and upholding one's duty as a fiduciary and advicer when these 2 balance sheets come into conflict.

While advisors often create financial plans for their clients that ensure a full and secure retirement, they also want to support their clients' desire to pursue meaningful goals and enriching life experiences – which can sometimes require straying from the client's originally designed financial plan. To navigate a sensible balance between these 2 important objectives, advisors can start by helping clients prioritize their goals and identifying their most meaningful objectives. Then, by assessing the bottom-line impact of reaching their goal on their financial plan (e.g., the potential changes to their saving, spending, and planned retirement dates), advisors can help clients discern whether they can really afford those goals.

Advisors may also find it helpful to encourage clients to consider the impact on their own human capital – which includes not just their wealth, but also their time, energy, and attention. Using a human capital framework can offer clients a broader perspective to understand the actual resources they need to live the life they aspire to and how their overall financial wellness fits into that picture. Which can help clients narrow down what really matters to them most. Because, at the end of the day, living a fulfilling life – whether that means a 6-month sabbatical or the pottery studio in the backyard – might be what actually enables (and motivates!) clients to work longer, thus indirectly maximizing their overall wealth!

Ultimately, the key point is that while advisors work incredibly hard to deliver value by watching out for their clients' financial wellbeing, they also have unique opportunities to add tremendous value by also supporting their clients' emotional needs by helping them evaluate and act on spending decisions that can turn long-held dreams into reality!

3rd Quarter Economic And Market Outlook: Understanding Risks And Opportunities In The Web Of Inflation, Interest Rates, Valuations, And More

October 4, 2023 07:01 am 0 Comments CATEGORY: Investments

People often talk about "the economy" as a single entity whose parts move in unison, with a small number of key indicators (such as GDP, the unemployment rate, and inflation) moving reliably in relation to each other. In reality, though, the economy is a complex web of interdependent factors where events often make sense only in hindsight – and sometimes, not at all. This has perhaps never been more true in many financial advisors' careers than at the current moment where, depending on which numbers you look at, the economy could be either growing steadily, leveling off, or already in a recession. And when conditions are this uncertain, it often makes sense to dive deeper into the factors driving the economy to better understand the risks – and opportunities – that clients may face.

At a high level, we're currently seeing a 'tale of 2 economies': While the market for services has expanded steadily since the beginning of the year (with both employment and the price of services growing in kind), the U.S. manufacturing sector, by the measures of employment and service prices, has been in a recession for nearly 12 months. And even though numerous signs are pointing to the looming possibility of a more widespread economic downturn – including the reduction of household savings, reduced lending, and the resumption of student loan payments for many borrowers – the job market remains strong. Furthermore, inflation, though down from its peak in early 2022, remains above the Federal Reserve's long-term target of 2% despite the bank's attempts to tamp it down.

What's driving many of the economic conditions today are higher interest rates resulting from the Fed's efforts to fight inflation. But while these high rates might be enough to tip the country into a recession if we were in 'normal' times, there has been so much liquidity in the economy – both as a residual effect of the economic stimulus programs of the COVID-19 pandemic and the more recent Inflation Reduction Act and legislation subsidizing green energy and semiconductor manufacturing – that it's possible the Fed may need to hike rates even further (and keep them high for longer than expected) to achieve its inflationary goals.

The expectations for the future economic outlook also appear in the valuations of equities, which tend to reflect how markets anticipate that corporate earnings will grow in the future. Yet again, the numbers tell a different story depending on where you look: While growth stocks (particularly for large companies) are trading at historically high valuations, value stocks are trading as if we were already in a serious recession. And even though U.S. equities have been able to weather a wide variety of economic conditions over the last 30 years (thanks to broader trends of both declining interest rates and corporate tax rates), it's reasonable to wonder whether that era is coming to a close given the Fed's raising interest rates to fight inflation and the Federal government's need to raise tax revenue to address its ballooning budget deficit. There's also the question of whether long-term equity returns could be significantly lower than we've experienced during the post-WWII era without the boost of lower interest and tax rates.

The key point is that, with so much uncertainty in the economic outlook, it becomes all the more important to recognize and manage the risks inherent in the current environment, perhaps by shifting more assets into shorter-term, less-volatile assets like short-term Treasury bills or even cash (which, thanks to higher interest rates, are yielding significantly more than they did up until recently) or diversifying into assets that are less correlated with other parts of the portfolio (such as reinsurance or secured private debt). Since ultimately, while neither advisors nor their clients may be able to control the more considerable forces that shape economic conditions today, they can recognize and (at least to some extent) control which risks they're exposed to and manage those risks to stay protected and on track for the long term!

#FA Success Ep 353: Driving Growth By Setting A Clear Vision Of What You Do Best In Your Business(es), With Brett Danko

October 3, 2023 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 353rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Brett Danko. Brett is the Founder of Brett Danko Educational Center, a CFP Board Education and Exam Prep provider, and the CEO and Managing Partner for Main Street Financial Solutions, an independent RIA based in Newtown, Pennsylvania, that oversees almost $2 billion in assets under management for nearly 1,700 client households.

What's unique about Brett, though, is how he has leveraged his passion for teaching to build one of the most popular CFP exam prep programs in the country, while also growing his own RIA to $2 billion in AUM… by focusing on just his unique financial planning strengths, and learning to delegate the rest by hiring a President, Chief Operating Officer, and Chief Financial Officer, who focus on the day-to-day management of the firm itself.

In this episode, we talk in-depth about how Brett teaches industry professionals seeking their Certified Financial Planner certification by providing comprehensive fast-track courses that span just 7 months and end with a live virtual or in-person exam prep review, how Brett iterated on and evolved his exam prep programs with a recognition that as he puts it, there is no “CFP cum laude”, and consequently keeps the focus very directly on what it takes to pass the exam (because you have a lifetime as a practitioner to keep improving and deepening your knowledge afterwards anyway), and why Brett jokingly refuses to acknowledge when his students humor the thought of failing because he believes that planning for failure is just giving yourself permission to fail and that an important part of passing the CFP Board exam (and achieving goals in life) is believing in one’s self and visualizing success.

We also talk about why Brett personally only offers financial planning on an hourly basis and leaves asset management to the other advisors of his RIA (so that he can have the flexibility to teach his courses while still gaining experience and knowledge as a practicing advisor), why Brett structures his firm as almost a platform for advisors, where, even though the advisors are technically W-2 employees and the firm pays for their staff, overhead, and technology, they own their own clients, and design their own fee schedules and portfolio models so that they can focus more on serving their clients to the best of their ability, and how Brett manages his time and obligations as a Founder of two businesses that each have their own management teams (his advisory firm Main Street Financial Solutions, and the Brett Danko Education Center) by recognizing that he’s a “macro” person and has to surround himself with “micro” people who are good at all the micro-details to make sure everything actually gets done.

And be certain to listen to the end, where Brett shares what it took to get comfortable with delegating so much responsibility for his businesses to key team members, how, after losing a job in his early 30s, Brett suffered from severe depression, but through therapy, found the confidence he needed to reinvigorate his passions and ultimately decided to outline a ‘manifesto’ of goals he wanted to achieve which included launching the advisory firm and educational courses that he spent the past 20 years building, and why Brett suggests that advisors in their 20s should seek out mentors not just to learn but also to help them recognize in themselves their strengths and their weaknesses because it's that self-awareness that makes it easier to find the work and kind of firm you’ll truly enjoy for the rest of your career as an advisor.

So, whether you’re interested in learning about how Brett structures his CFP exam prep courses and his fast-track programs, how Brett differentiates his programs from other CFP educational programs, or why Brett believes strongly in developing firm culture to grow a successful business, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Brett Danko.

The Latest In Financial #AdvisorTech (October 2023)

October 2, 2023 07:02 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the October 2023 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the news that custodial platform Altruist is eliminating the $1 per account monthly fee for its portfolio management and reporting technology for advisors on its platform, which on the one hand suggests that the economies of scale Altruist has achieved in the wake of its move to become a fully self-clearing custodian have been such that it can now afford to 'give away' its software, while on the other hand serves as an ominous sign for standalone portfolio management technology platforms that they could stand to be disrupted if more custodial platforms decide to compete on their technology offerings and eliminate the need for advisors to pay $5,000-$10,000 each year for a separate provider.

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

Holistiplan, after achieving success with its tax planning and analysis software, has announced an investment from Lead Edge Capital, signaling that it may be ready to expand into other financial planning areas beyond tax – but with a slew of new 'Holistiplan for X' startups in the marketplace, it may have a harder time repeating the exponential growth of its early years and as it seeks to fulfill the original 'holistic' aspirations of its founders.
FMG Suite has acquired compliant texting solution MyRepChat to integrate into its full-service tech stack, underscoring the potential of text-based communication as a marketing tool – but also highlighting advisors' challenges with integrating texting into their marketing and client communications workflows, as well as the fine line between texting as an effective communication method and one that's disruptive and irritating to both the client and advisor.
Investment analytics platform YCharts has launched a new feature for building and generating proposals for prospective clients, becoming the 2nd most popular analytics and recommendation tool this year (after Nitrogen's rebranding earlier in 2023) to expand into the increasingly competitive category of sales enablement – underscoring the idea that as advisors use technology to provide more and more value for their clients, there's increasing demand for tools that help advisors sell that value as well.

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

Brand design consultancy firm Intention.ly has launched Advisor Brand Builder, a tech-enabled service solution that automates much of the process of designing a unique advisory firm brand at a lower cost than a full-service branding process – showing how, when a provider 'tech-ifies' a service by automating everything possible and applying human expertise only when it's needed most, the resulting product can often be spun off and sold on a standalone basis.
Testimonial IQ has launched the latest solution for advisors to gather and showcase client reviews and testimonials in the wake of the new SEC Marketing Rule – but it remains to be seen whether clients will let themselves be directed to a third-party site to leave a review, or if they'll instead naturally gravitate towards the general sites (like Google and Yelp) that they already use to search for other businesses.

And be certain to read to the end, where we have provided an update to our popular "Financial AdvisorTech Solutions Map" (and also added the changes to our AdvisorTech Directory) as well!

*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 (September 30-October 1)

September 29, 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 that RIA custodial platform Altruist announced that it is offering its portfolio accounting software for free to advisors who custody with the firm, offering the opportunity to advisory firms to reduce the costs of their tech stacks and perhaps presaging competition among custodians to offer more software capabilities for their advisory firm clients!

Also in industry news this week:

After experiencing a downturn over the past few quarters, RIA M&A activity ticked higher in the 3rd quarter amid continued interest from sellers and increasing costs for internal succession
A recent study shows that housing-related costs are more likely than healthcare spending to cause unexpected spending shocks for retirees

From there, we have several articles on investment planning:

How expense ratios for index funds can vary, even for an issuer's funds tracking the same index
While ETF fees have tended to fall over time, this fee compression appears to be slowing as investors show interest in actively managed funds and some issuers raise their funds' expense ratios
How investors in actively managed mutual funds are sensitive to higher fees and the factors that increase this sensitivity

We also have a number of articles on advisor marketing:

Best practices for advisors using webinars to market to prospective clients
How to create an effective email newsletter, from identifying the target audience to developing a unique voice
Why structure and discipline are crucial elements for creating a successful advisor podcast

We wrap up with 3 final articles, all about how to work more efficiently:

How advisors can use 4 different types of leverage to boost their incomes
How calculating the "Return On Hassle" can provide clarity into the full costs and returns of a particular investment or decision
How both "macro" and "micro" focus can contribute to productive, fulfilling work

Enjoy the 'light' reading!

Navigating The Double Consolidation Process To Help Parent PLUS Student Loan Borrowers Reduce Loan Burden

September 27, 2023 07:01 am 0 Comments CATEGORY: Debt & Liabilities

When it comes to advising clients on student loan issues, many financial advisors might first think about recent graduates seeking advice regarding the most effective way to pay down their balances. However, the number of Federal student loan borrowers over the age of 50 has increased significantly in the past 20 years, with many of these borrowers holding Parent PLUS loans that were used to help fund their children's undergraduate education.

While student borrowers of Federal Direct loans are eligible for a range of Income-Driven Repayment (IDR) plans – including the newly introduced Saving on a Valuable Education [SAVE] plan – that can reduce required monthly payments significantly compared to the standard repayment option (depending on the borrower's income), available IDR plans for those with Parent PLUS loans are much more limited, often resulting in substantially larger monthly loan payments. Which not only cuts into a parent's current cash flow, but also limits their ability to save for their (potentially fast-approaching) retirement.

Nonetheless, Parent PLUS borrowers (and their advisors) have an opportunity (until July 1, 2025) to access more generous IDR plans by using a "Double Consolidation" loan strategy. With this option, a parent borrower first consolidates their existing Parent PLUS loans into 2 Direct Consolidation loans, and then consolidates these 2 Direct Consolidation loans into a single new Direct Consolidation loan. The resulting loan would be eligible for more favorable IDR plans, including the SAVE plan, otherwise unavailable for those with Parent PLUS loans. Importantly, while this process might seem relatively straightforward on the surface, the multi-step process must be completed accurately and completely to ensure that the resulting Direct Consolidation loan is eligible for preferential IDR options.

Notably, given the looming July 2025 deadline and the importance of completing the Double Consolidation process (which can involve many paper forms and take 3–6 months in total) accurately and in a timely manner, advisors can play an important role in guiding clients with Parent PLUS loans through each step of the process. Further, advisors can help clients who complete the process choose the best IDR option for their situation and take steps to minimize required payments, from deciding whether to elect to file taxes separately (for married couples) to finding ways to reduce the borrower's Adjusted Gross Income.

Ultimately, the key point is that as more individuals 50 and older hold student loans, financial advisors may find that an increasing number of clients are facing the challenge of paying down loans taken out for their children's education expenses while also trying to save for their own retirement. And for those clients who currently have Parent PLUS loans (or who are planning to have such loans and who can complete the consolidation process before July 2025), advisors can add significant value by supporting them through the complex process of Double Consolidation, which could be an effective way to help them save on their children's education and, at the same time, to free up more of their wealth to pursue more of their other important financial goals!