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Implementing Retirement Income Guardrails To Facilitate (The Right) Spending Raises And Spending Cuts

January 4, 2023 07:01 am 0 Comments CATEGORY: Retirement Planning

Discussing Client Guardrails When Proposed Distributions Will Break Lower Guardrails

Financial advisors have a wide range of strategies at their disposal to create financial plans for their clients. And when it comes to retirement planning, one popular technique is the use of ‘guardrails’, which set an initial monthly withdrawal rate that can be later adjusted as the size of the client’s portfolio changes. This strategy is valuable because it generally allows for higher initial withdrawal rates than more static approaches that don’t accommodate clients willing to adjust their spending in retirement. However, given the technical nature of the guardrails approach, advisors can find it challenging to explain to prospective and current clients how it will work in practice.

To start, it is typically preferable to explain guardrails to prospects and clients in dollars rather than in percentage terms (e.g., telling the client they can safely withdraw $4,500 each month rather than saying they will have a 5.4% annual withdrawal rate). Further, given that a client’s monthly distributions will almost certainly change at some point when implementing a guardrails strategy, they must understand what this means in practical terms. To help them do so, advisors can explain that when market returns are strong, they can take larger distributions each month (in dollar terms), but when an inevitable bear market arrives, they may need to cut back on their monthly income until things get better. In addition to explaining withdrawals in dollar terms, advisors can also present a client’s asset allocation in dollar terms (instead of the more usual approach of explaining the allocation in percentages) by framing it as the number of years of income that would be protected from stock market fluctuations (e.g., setting aside a ‘war chest’ of cash and fixed income balances to provide 5 years’ worth of income).

While most clients will have no problem accepting a larger monthly income, tightening their belts will be more challenging. One way to prepare clients for a potential reduction of their monthly income is to give advance warning that a cut might be necessary if their portfolio declines further (and to encourage them to consider where they would cut back if needed). In the case of a market downturn, advisors can wait an agreed amount of time (e.g., 2 quarters) after the client’s portfolio balance falls below the lower guardrail before implementing an income reduction, as this can give the market time to recover and preclude the need to make any adjustment at all (and is still more conservative than the annual review prescribed in the initial guardrails research). If the portfolio balance declines due to excess distributions (e.g., a lump-sum withdrawal to buy a new car), advisors can advise clients on whether withdrawals will bring them closer to (or even dip below) the lower guardrail and the implications for their future monthly income.

Ultimately, the key point is that while a guardrails strategy can help clients maintain sustainable withdrawal rates throughout retirement, ensuring that clients understand how the strategy applies to them – in practical terms – is essential for success. Advisors can do this by explaining withdrawal rates, guardrails, and potential future changes in spending and income, all in dollar (rather than percentage) terms. Furthermore, by giving clients advance warning of potential changes, advisors can help clients feel confident about the guardrails strategy and, perhaps more importantly, in their advisor’s ability to implement it!

#FA Success Ep 314: Focusing On The Planning Work You Enjoy By Providing Outsourced Virtual CFP Services, With Sue Chesney

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

Welcome back to the 314th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Sue Chesney. Sue is the owner of Delegated Planning, which offers virtual outsourced financial planning support to 55 advisory firms, and the co-founder of Planning Zoo, an outsourced financial planning data entry business that helps current and recently graduated students from college CFP educational programs connect with advisory firms that need paraplanner support for data entry into financial planning software.

What's unique about Sue, though, is how through Delegated Planning and Planning Zoo, she’s pioneered one of the largest outsourced financial planning support firms in the country, and shares her first-hand experience of how advisory firms are scaling the delivery of comprehensive financial plans by increasingly separating the front-office work of delivering comprehensive financial plans to clients from the middle-office work of creating them (and how firms are increasingly leveraging outsourcing providers so they don’t have to be responsible for hiring and training those financial planning support employees, either).

In this episode, we talk in-depth about why Sue founded Delegated Planning so that she could bridge a gap between CFP professionals who simply wanted to work on financial plans (and not necessarily with their own clients) and advisors doing financial plans for clients who needed both paraplanning and virtual CFP support services but don’t have the time (or resources) to hire a full-time employee that they would also have to train and manage, how, in a similar vein of supporting advisors, Sue decided to launch Planning Zoo where she and her partners train and teach aspiring CFP professionals the skills to do data entry with financial planning software using real client cases so that they can gain industry experience before graduating (again while relieving the pressure from advisors that need additional trusted support but don’t want to hire and train it), and how Sue has seen that by charging by the hour (down to the minute) for Delegated Planning, the advisors who work with them have been able to better align their fees and their financial planning offering… now that they can see how much time it truly takes for their financial plans to be built for each client.

We also talk about how, while on the verge of taking over another advisor’s business, Sue realized she enjoyed planning work more than working with clients directly, and with the encouragement of a virtual assistant from her former firm and peers in her study group, she decided to offer her services as an outsourced CFP and launch Delegated Planning, how, by offering flexible schedules, Sue was able to tap into a unique talent pool of advisors who want to supplement their income while getting their own RIAs off the ground and planners who also enjoy the planning work but don’t want to work with clients directly, and the way that Sue navigates the cybersecurity and E&O risks of serving as an outsourced financial planning service provider by operating as a “co-fiduciary” with the advisors her firm works with to their end clients.

And be certain to listen to the end, where Sue shares how, as Delegated Planning has scaled over the years, she has dealt with the difficult task of shifting from being a manager of her growing team into more of a CEO mindset to help scale the business further, why, even though it may feel risky and scary, and requires a lot of preparation, Sue feels it is important for newer advisors to explore the opportunity of one day owning their own firms because of the freedom it brings and the rewarding feeling of helping clients and furthering the financial services industry, and why Sue feels that the key to her success has been enjoying what she does for a living, as in the end as a business owner the business is always on her mind… but she doesn’t mind that it’s so hard to stop thinking about work, because it’s work she enjoys and finds fulfillment in how she’s able to help other advisors.

So, whether you’re interested in learning about why Sue launched Delegated Planning and Planning Zoo to help advisors find planning and data entry support, how Sue helps newer planners gain real-world experience and learn a variety of planning software, or how Sue deals with the challenges of stepping into a CEO role and managing two businesses, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Sue Chesney.

The Latest In Financial #AdvisorTech (January 2023)

January 2, 2023 07:00 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the January 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 Envestnet has decided to enter the RIA custodial business through a partnership with Australian bank FNZ to white-label what was once the State Street RIA custodial platform of many years ago – providing Envestnet an opportunity to even more deeply integrate its front-end advisor platform to the back-end of custody for a more seamless end-to-end experience (and, potentially, a more competitive bundled pricing arrangement for a unified technology-plus-custody offering).

Notably, though, with so much of Envestnet’s existing base of advisors in the independent broker-dealer channel, it seems less likely that the company will be competing with the ‘traditional’ RIA custodians of Schwab and Fidelity for independent RIAs and wirehouse breakaways, and more against the likes of LPL and Pershing for broker-dealers that are adding and expanding RIA offerings to their increasingly hybrid platforms (and might welcome the opportunity to save on Envestnet’s software costs by adopting its RIA custodial platform in the future?). Which positions Envestnet well to grow with a unique segment of ‘emerging’ RIAs… while providing relatively little competitive pressure to the existing RIA custodial ecosystem.

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

Docupace launches an ‘RIA Productivity Toolkit’ as it increasingly expands beyond its document management roots in a bid to become more of the back-office workflow engine of small-to-mid-sized advisor enterprises
Raymond James launches ‘Opportunities’ as the latest competitor to facilitate ‘Next Best Conversation’ insights to help their advisors engage with the right clients at the right time for the most meaningful conversations
FMG partners with Catchlight to integrate its marketing insights about the prospects on an advisor’s email list to better target content that can turn them into clients

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

AdvisorFinder launches a new expertise-based lead generation portal that matches prospects based not on their zip code or advisor compensation preferences, but on the advisor’s specialization or typical (i.e., niche) clientele
Modern Life raises $15M and rolls out a digitally-based life insurance brokerage solution for advisors who want to continue to offer life, disability, and long-term care insurance but with a more ‘modern’ technology platform to facilitate applications, underwriting, and in-service support

In the meantime, we’re excited to announce several new updates to our new Kitces AdvisorTech Directory, including Advisor Satisfaction scores from our Kitces AdvisorTech Research, and the inclusion of WealthTech Integration scores from the Ezra Group!

And be certain to read to the end, where we have provided an update to our popular “Financial AdvisorTech Solutions Map” 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 (Dec 31-Jan 1)

December 30, 2022 01:04 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 passage of “SECURE Act 2.0” has brought a wide range of changes to the world of retirement planning. And given the variety of planning opportunities created by the legislation – from the raising of the beginning age for RMDs to the ability to transfer funds from 529 plans to Roth IRAs – advisors have a significant opportunity to demonstrate value for their clients!

Also in industry news this week:

Why many clients of robo-advisors are seeking out human advisors in the current market climate
A new study shows that there is a wide gap between firms leveraging technology to enhance the client experience and those that do not treat their tech stack as a priority

From there, we have several articles on advisor technology:

A recent survey shows that many advisors at large firms are unhappy with their firm’s current tech stack and that client growth has suffered because of it
Why it is important for advisory firms to conduct an audit of their tech stack and the steps they can take to conduct the exercise
Why advisors might consider looking past some of the big names in advisor technology to find tools that can provide a better experience for themselves and their clients

We also have a number of articles on investments:

Fixed-income ETFs saw inflows this year, while their mutual fund counterparts experienced significant outflows, suggesting that the dominance of bond mutual funds could be eroding
How advisors are increasingly purchasing individual bonds rather than bond funds in client accounts
Why a higher interest rate environment could represent a ‘sea change’ for investors in the years ahead

We wrap up with three final articles, all about self-improvement:

Why working to change their mindsets might be the activity that provides the greatest return-on-investment for advisors
How to set better health goals for 2023 and actually follow through on them
Why the ability to achieve big goals starts with seemingly small habits

Enjoy the ‘light’ reading!

Kitces & Carl Ep 102: Reflecting On The Journey Of Building A Career And Business

December 29, 2022 07:04 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces Carl Ep Reflecting On The Journey Of Building A Career And Business

For many seasoned financial advisors, the road toward building a career and a business can be challenging and rewarding. And even though most advisors would agree that the road to success involves many years of hard work and sacrifice, each advisor’s path to ultimate success can consist of massively different experiences.

In our 102nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the challenges they have each faced in their decades-long careers, the ways they developed opportunities for themselves to advance in their professional and personal lives, the importance of self-awareness, creating balance, and how reflecting on a career in retrospect can often provide insightful perspectives and appreciation for the present and even the future.

While newer advisors are faced with infinite pathways in the financial services industry, it can often be easy to focus solely on getting ahead professionally while putting aside personal interests and self-care. But by deliberately managing a lifestyle that focuses on work, play, and rest, younger professionals can establish a healthy work-life balance that can benefit their well-being throughout their entire lives.

One critical question for advisors to ask themselves, regardless of where they may be in their careers, is whether they are doing things today to set the stage for the kind of life that they ultimately want in the future. And while there will always be unplanned surprises, maintaining a vision based on the advisor’s values and priorities will help them make the best decisions possible to support their path.

Ultimately, the key point is that while newer advisors can learn from more experienced advisors, there is no one right path to take in an advisory career. Certain strategies for paving career paths and balancing work-life priorities will work for some but not others. However, by learning from past mistakes and staying focused on their values and priorities, advisors can ensure that they make the best possible choices for their own lives and careers. And by sharing their knowledge and experience, advisors can enrich the financial planning community by providing support and insight to others who may be facing similar challenges and victories along their own paths to success!

SECURE Act 2.0: Later RMDs, 529-To-Roth Rollovers, And Other Tax Planning Opportunities

December 28, 2022 07:03 am 4 Comments CATEGORY: Taxes

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, brought a wide range of changes to the retirement planning landscape, from the death of the ‘stretch’ IRA to raising the age for Required Minimum Distributions (RMDs) to 72. And nearly 3 years to the day after its predecessor was passed, the U.S. House of Representatives, on December 23, 2022, passed the Consolidated Appropriations Act of 2023, an omnibus spending bill that includes the much-anticipated and long-awaited retirement bill known as SECURE Act 2.0.

One of the major headline changes from the original SECURE Act was raising the age for RMDs from 70 ½ to 72, and SECURE 2.0 pushes this out further to age 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later. In addition, the bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%.

In addition, SECURE 2.0 includes a significant number of Roth-related changes (both involving Roth IRAs as well as Roth accounts in employer retirement plans), though notably, the legislation does not include any provisions that restrict or eliminate existing Roth strategies (e.g., backdoor Roth conversions). These changes include aligning the rules for employer-retirement-plan-based Roth accounts (e.g., Roth 401(k) and Roth 403(b) plans) with those for individual Roth IRAs by eliminating RMDs, creating a Roth-style version of SEP and SIMPLE IRA accounts, allowing employers to make matching contributions and non-elective contributions to the Roth side of the retirement plan instead of just the pre-tax portion (though participants will be subject to income tax on such contributions), and allowing for transfers from 529 plans to Roth IRAs (with significant restrictions).

SECURE 2.0 also includes several measures meant to encourage increased retirement savings. These include making IRA catch-up contributions subject to COLAs beginning in 2024 (so that they will increase with inflation from the current $1,000 limit), while also increasing 401(k) and similar plan catch-up contributions; creating a new “Starter 401(k)” plan (aimed at small businesses that do not currently offer retirement plans; such plans would include default auto-enrollment and contribution limits equal to the IRA contribution limits, among other features); and treating student loan payments as elective deferrals for employer matching purposes in workplace retirement accounts, which would allow student loan borrowers to benefit from an employer match even if they can't afford to contribute to their own retirement plan.

Ultimately, the key point is that while no single change in SECURE 2.0 will require the same level of urgency to consider before year-end changes to clients’ plans as did the original SECURE Act or have the same level of impact across so many clients’ plans as the elimination of the stretch, there are far more provisions in SECURE 2.0 that may have a significant impact for some clients than there were in the original version, making it a more challenging bill for financial advisors and other professionals to contend with (yet providing many new potential opportunities)!