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Advisory Agreement Statutory Requirements: What Advisors Need To Know To Stay Compliant

August 17, 2022 07:07 am 1 Comment CATEGORY: Regulation & Compliance

Registered Investment Advisers (RIAs) are generally required to enter into an advisory agreement with their clients prior to being hired for advisory services. And while there is no standard ‘template’ language applicable to all advisory agreements, there are a number of best practices that RIAs can follow in drafting and reviewing their agreements to ensure they can pass legal and regulatory muster.

In this guest post, Chris Stanley, investment management attorney and Founding Principal of Beach Street Legal, lays out the statutory requirements for RIA advisory agreements and some of the essential elements for advisory agreements to include when describing the RIA’s services and fees.

Advisory agreements for SEC-registered RIAs are governed by Section 205 of the Investment Advisers Act of 1940. In terms of specific advisory agreement language, the Advisers Act focuses essentially on three items:

First, the law restricts RIAs from charging performance-based fees unless the client is a “qualified client” (in most cases, a client with at least $1.1 million under the management of the adviser, or with a total net worth of at least $2.2 million);
Second, advisory agreements are required to give clients the opportunity to consent to their advisory agreement being ‘assigned’ to another adviser (including when an RIA changes ownership by merging with or being acquired by another firm); and
Third, advisory agreements of RIAs organized as partnerships are simply required to contain a clause informing the client of any change in the membership of that partnership “within a reasonable time after such change”.

But even though the specific requirements of the Advisers Act are relatively narrow in scope, a well-crafted advisory agreement will contain additional elements, including descriptions of the RIA’s services and fees.

When describing the RIA’s services, advisory agreements should lay out the specific services – such as discretionary or nondiscretionary asset management, and the scope and duration of any financial planning services – to be included in the arrangement.

When it comes to fees charged to clients, advisory agreements should include – at minimum – the exact amount of the fee (either as a dollar amount or percentage of assets under management), when the fee will be charged, how the fee will be prorated at the beginning and end of the agreement, how the client can pay the fee, and which of the client’s accounts may be billed. For AUM-based fees, agreements should also include breakpoints for multi-tiered fee schedules (and whether breakpoints are applied on a ‘cliff’ or ‘blended’ basis) and how AUM is calculated (and whether it is based on assets at a single point in time or averaged over a specific period, and if it includes cash and/or margin balances). Any fees for third-party advisers or subadvisers should also be described in the agreement. While these constitute only two core elements of advisory agreements, there are numerous other essential components for RIAs to include (so many, in fact, that covering them all will require another separate article!).

The key point, however, is that a good advisory agreement requires a solid grasp of the Federal and state statutory requirements, and clearly lays out the RIA’s services and fees. For established firms, understanding these points more deeply will allow RIA owners to review their existing agreements – to ensure not only that they comply with existing regulations, but that they also include the elements constituting a valid agreement between RIA and client!

#FA Success Ep 294: Developing COI Referrals With Attorneys From An Attorney-Turned-Advisor, With Neel Shah

August 16, 2022 07:08 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 294th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Neel Shah. Neel is the Founder of Shah Total Planning, which itself is a combination of Beacon Wealth Solutions (an independent RIA) and Shah & Associates (a law firm) in Monroe Township, New Jersey, and oversees $57 million in assets under management for 50 client households.

What's unique about Neel, though, is how, as an estate planning attorney turned financial advisor, he combines estate and elder care legal services with his advisory firm to be a more one-stop-shop for advice while outsourcing his investments altogether… and then leverages his background as an attorney to generate referrals from attorneys and other Centers of Influence to help spur his growth.

In this episode, we talk in-depth about how Neel transitioned from attorney to advisor by launching an RIA alongside his law firm to operate, as Neel puts it, in a “duplex” situation where both firms work jointly under one roof but also independently behind separate walls, how Neel went from being an attorney who got most of his clients from financial advisor referrals to a financial advisor who now builds his business with COI referrals (and Neel’s tips as an attorney on what it takes to get referrals from attorneys), and the path Neel took to outsource so much of his investment and operations back office, so he can focus more on client relationships and have confidence in his ability to scale his firms without having to worry about and be responsible for hiring and training more personnel.

We also talk about how working with other attorneys in study and coaching groups that were exploring opening up their own RIAs led Neel to an aha moment where he realized that the legal business is very transactional but that becoming a financial advisor would give him the opportunity to form deeper relationships with his clients, why Neel views himself as more of a career-adder than a career changer as he has always been able to apply the new skills he has gained over each of the stages in his professional life to the stage that came next, and the way that, having worked in different legal and advisory capacities with clients in his career, Neel has lived firsthand the importance of working with other advisors, attorneys, and CPAs, as a collective, and continues to do so in joint work with other professionals.

And be certain to listen to the end, where Neel shares how he overcame the internalized fears with a realization that getting to the next level in a career meant leaving behind what was comfortable (and recognizing that he could always return to where he began if it wasn’t working out), how, even though he has been disappointed by business mistakes and relationships in the past, Neel has been able to turn them into learning opportunities, and how Neel ultimately got comfortable with the reality that building his business was kind of like driving in a murky desert where he can’t see beyond his headlights… and consequently has adopted an approach of just trying to make each year better than the last and see where the growth takes him.

So, whether you’re interested in learning about why Neel was inspired to transition from attorney to financial advisor but maintain firms for both titles, how Neel leverages Center of Influence referrals from attorneys to enhance the growth of his firm, or how Neel outsources some of the firms’ operations to provide a truly collective service for his clients, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Neel Shah.

Serving Pro Bono Clients As A Busy Advisor: How Advisers Give Back Makes Volunteering Easy

August 15, 2022 07:07 am 1 Comment CATEGORY: General Planning

Working as a financial advisor can be both financially rewarding and emotionally satisfying. By helping clients develop financial goals, creating a financial plan, and supporting the implementation and monitoring of the plan, advisors help clients live their best lives. But while new fee models have allowed fee-only advisors to reach an expanding range of potential clients, there are many Americans who could benefit from professional financial advice but might not have sufficient income or assets to pay for it. This gives advisors the opportunity to offer their services on a pro bono basis, and the Advisers Give Back platform allows them to do so in as little as one hour per month.

Pro bono financial planning refers to free, no-strings-attached financial advice and planning for underserved people. Most advisors are already familiar with many of the issues these individuals face, from setting goals to debt management, although the specifics might be slightly different given the typically lower incomes and wealth of pro bono clients. In addition to providing a valuable service to the community and serving as a meaningful activity for advisors, pro bono planning is also an important part of growing financial planning into a profession, similar to other fields (e.g., law) with established pro bono programs. Further, pro bono planning can help advisors develop their skills, whether it is working with individuals of different ages or incomes than their usual clients to practicing their empathetic listening and client meeting skills (which is especially relevant for more junior advisors whose primary functions may be focused on back office responsibilities supporting senior advisors, and who might not have as many opportunities for substantive one-on-one client interactions!).

Given the demands from running (or working for) an advisory firm as well as the time needed to research ways to offer pro bono planning, the non-profit group Advisers Give Back (AGB) has created a platform that allows advisors to participate in pro bono planning for as little as one hour per month. AGB allows advisors to meet with clients and develop recommendations while significantly reducing the potential friction involved in getting started with pro bono planning. For instance, AGB connects with pro bono clients so advisors do not need to spend time advertising their services.

Any advisor with the CFP certification can use the AGB platform after completing an online, 60-minute training session, after which advisors can set their availability for pro bono client meetings. The AGB platform facilitates multiple meetings with the same pro bono clients, allowing advisors to build relationships with their clients and to track their progress, so that both short-term stressors and long-term goals can be addressed. AGB also offers dedicated assistants who help with administrative tasks, communicating with clients and tracking their progress between meetings, which saves advisors even more time.

Ultimately, the key point is that the Advisers Give Back (AGB) platform allows busy advisors to engage in pro bono planning in as little as one hour per month. Which is important, because even though volunteering can offer advisors the personal satisfaction of offering a valuable service to the community, participating in pro bono opportunities is also a vital part of the business of financial advice itself becoming a recognized profession, and is an important contribution to the growth of financial planning as well!

Weekend Reading For Financial Planners (Aug 13-14)

August 12, 2022 02:03 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 U.S. Senate has passed the Inflation Reduction Act, which while being light on individual tax changes, nevertheless includes some important financial planning provisions such as prescription drug price relief for Medicare enrollees, continuation of expanded Affordable Care Act healthcare premium subsidies, and tax credits for energy efficiency upgrades to homes.

Also in industry news this week:

FINRA has submitted a revised proposal to reform the process for broker-dealers to request expungement of client disputes from their public record, which allows state securities regulators to be informed of and involved in the arbitration hearings that decide whether the expungement is granted
As RIA firms’ challenges in attracting and retaining talent have continued, firms have needed to reduce their business development activities to stay within their existing staff's capacity (compounding the challenges of growing firm revenue during a bear market that has reduced most firms’ assets under management)

From there, we have several articles on Mergers & Acquisition (M&A) trends:

M&A activity so far in 2022 is set to exceed 2021’s record pace despite economic headwinds, meaning there could simply be a ‘new normal’ of higher activity regardless of the economic environment
With the shift from bull market to bear market, the risks of M&A deals have shifted for sellers of RIA firms, leading to a significant change in how many M&A deals are structured so sellers can still get some ‘upside’ if markets recover from here
With the pace of M&A deals being dominated by a small number of cash-rich ‘serial acquirers’, smaller RIAs looking to acquire firms need to rely more on their ability to match the selling firm’s culture and values to find a competitive advantage with the mega-firms

We also have a number of articles on retirement:

Though owning an RV and traveling the country is a popular retirement pastime, those with the resources can turn their motorhomes into a luxury vacation home on wheels (at about the same price as buying a second home)
Many retirees seek to relocate after their working years, but deciding where to move requires some reflection both on the lifestyle the retiree wants to lead as well as the practical and financial considerations of doing so
A number of rural areas are seeing a ‘gray wave’ of retirees moving in to take advantage of natural attractions, low costs of living, and a leisurely pace of life (though as those areas grow in popularity and size, they might not be quite as attractive as they once were)

We wrap up with three final articles, all about career decisions:

On the heels of the ‘Great Resignation’ of 2021, many employees who changed jobs (and the employers who hired them) are now realizing their decisions might have been short-sighted
Though employees and business owners often feel pressured to follow what others have done to become successful, embracing one’s own unique properties can make it easier to stand out from the crowd
The pandemic has led many workers to embrace the idea of taking pre-retirement breaks from work – but doing so involves working around the retirement structure that is structured around the ‘traditional’ idea of retirement

Enjoy the ‘light’ reading!

Kitces & Carl Ep 92: When Clients Want Certainty You Just Can’t Give Them

August 11, 2022 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces Carl Ep When Clients Want Certainty You Just Cant Give Them Featured Image

Many clients seek financial advisors for their expertise and their abilities to guide them through financial decisions. However, for some clients, the ambiguity that inevitably arises from uncertain outcomes can be very distressing, especially when it comes to investments during volatile times. While these clients may have general concerns about their financial future, their concerns may also be in reaction to messaging from other sources that guarantee (unrealistically) low or even ‘no-risk’ solutions. In these cases, advisors must find ways to ease their clients' worries while also reassuring them that their plans are on track.

In our 92nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss why some clients need more certainty than others in their financial plans, how to educate clients who may not understand the inevitability of at least some level of risk in a financial plan, and how to maintain confidence and trust from clients who are fearful of their financial plan failing.

As a starting point, it’s important to understand that there is a difference between risk and uncertainty. As while risk can be quantified with a level of calculation that helps to give context to possible outcomes, it also helps clarify some of the considerations that can influence those outcomes. And for clients who don’t understand the mechanics of these factors and potential outcomes, the uncertainty of where their financial plans stand can be very uncomfortable. Especially when there are volatile conditions, some clients may be very distressed by the seemingly chaotic uncertainty of their situation, and not necessarily understand that the potential risks have all been planned for. Furthermore, by communicating proactively, advisors can maintain the confidence their clients have in them and deflect any misleading messaging from other institutions that may guarantee products that promise any level of unrealistic certainty.

Ultimately, the key point is that for many clients who have concerns about uncertainty (as with their investments, especially during volatile times), they may simply be uncomfortable about following a financial plan framed as a dynamic pathway subject to change as needed in the future. For these clients, in particular, financial advisors can help them make sense of the unpredictability that their plans account for, giving advisors an opportunity not only to educate their clients, but also to communicate their confidence and knowledge that they will be there to help the client keep their financial plan on track!

How To Manage Strong Emotions When Asking Clients Kinder Life Planning Questions

August 10, 2022 07:01 am 0 Comments CATEGORY: Client Trust & Communication

When financial planning clients think about their future, they might imagine a relaxing retirement, world travel, or other pleasant experiences. What they’re probably not considering is their own death, even though everyone’s time remaining on Earth is finite (even if the number of years they have left is unknowable). And using this perspective, advisors can add value for clients by helping them prioritize their goals and explore whether their current behaviors match their desired outcomes.

With this in mind, it is easy to see how George Kinder’s three Life Planning questions help clients focus on the things that matter most to them. While Kinder’s first Life Planning question asks clients to ‘dream of freedom’, and to describe their ideal future life if nothing were to hold them back, the second question asks the client to do the same but, this time, while imagining they only have 5 to 10 years left to live.

The goal of the second Kinder Life Planning question is to encourage the client to focus on the present and to analyze gaps between how the client is actually living today and how they said they wanted to be living if all they had were the next 5 to 10 years. While this can help clients find more clarity around the particularly important aspects of their lives right now, it can also lead to potentially intense feelings of grief and/or loss.

While clients may feel vulnerable and uncomfortable having this discussion, advisors using the Kinder questions can help ease their clients’ discomfort by welcoming and normalizing any emotions that may come up, while keeping the focus on a deep exploration of the client’s priorities and specific goals. During this conversation, it is important for the advisor to offer complete support for and acceptance of the client, with the intent to discover – not to judge – the client’s views, using techniques such as exploratory questions and repeating back what they hear from the client.

When wrapping up the conversation around the second Life Planning question, the main objective is to determine how the client’s goals will be integrated into their financial plan (e.g., through a ‘statement of purpose’) and to identify how the relationship that exists between the financial planner and the client will support implementation. This is a way of grounding the discussion back to the financial plan and giving the client some framework of momentum.

Ultimately, the key point is that Kinder’s second Life Planning question forces clients to prioritize their goals within a restricted timeline. And because this question often elicits answers and insights that can be profound and emotionally painful, potentially exposing gaps between their current and desired behavior, it is important for advisors to be prepared to help clients gain clarity around how their priority gaps will be reconciled with sensitivity and compassion. Even though this can be a difficult conversation, in the end, it can lead to a deeper understanding of the client’s most important and immediate priorities, while also cultivating a growing sense of trust and confidence that enriches the advisor-client relationship!