Nerd's Eye View blog

When More Advisor Empathy Isn’t Better And The Compassion-Based Alternative

January 13, 2021 07:07 am 1 Comment CATEGORY: Client Trust & Communication

Many financial advisors find that expressing empathy can help them to bond with and strengthen their relationships with clients. Yet, while becoming emotionally invested in clients’ personal experiences can be an effective (and often enjoyable!) way for advisors to establish close relationships and friendships with them, when clients experience difficult and even traumatic experiences (e.g., panicking in response to extreme market volatility, or suffering from the loss or plight of a loved one), advisors may find themselves sharing the same emotions as their clients… such that they, too, suffer emotional distress, to the point that their own emotional well-being becomes jeopardized.

Notably, though, there are different forms of empathy, some of which don’t require experiencing the other person’s emotions. As while emotional empathy does involve personally experiencing the same emotions as someone else, cognitive empathy involves simply understanding the level and significance of someone else’s emotional experience, but on an intellectual level (sometimes referred to as ‘emotional intelligence’), without necessarily experiencing those emotions. And when coupled with compassion (which is a “concern to enhance the welfare of another who suffers or is in need” and which motivates us to take action to help someone), cognitive empathy can become a valuable tool for financial advisors to understand and help clients without experiencing the same emotional highs and lows their clients may be experiencing.

Another important caveat of emotional empathy is that it is often limited to individuals with whom we consider similar to ourselves; accordingly, if someone isn’t similar enough to us, we just might have less emotional empathy for that person. Which is important, as advisors who lead with empathy can unintentionally narrow their client base to only others who are similar to themselves, and actually make it more difficult to connect with other types of clients.

Advisors who want to connect with their clients, but reduce the emotional toll of an emotional empathy approach, and instead seek to implement more cognitive empathy and compassion into their client meetings, might consider exploring practices adopted from Compassion-Focused Therapy (CFT). What’s unique about the CFT approach is that it focuses on helping clients not just trace the past to how they arrived where they are, but instead to identify their strengths, current abilities, and their present opportunities, in order to identify ways to comfortably move forward through specific challenges they may be facing. Compassion-Focused Therapy can be especially helpful when working with clients in distress and is designed to support clients and accomplish change.

Ultimately, the key point is that advisors can employ cognitive empathy to connect with their clients by understanding what they feel, yet without necessarily experiencing the same emotions as their clients that can take a real emotional toll. And by practicing compassion, advisors can take the insights gleaned from cognitive empathy to take action to help and support their clients productively, with confidence that the help they are providing to their clients is not clouded by the emotional burdens they may have taken from their clients!

#FASuccess Ep 211: How A Clear Marketing Focus Can Make The Sales Process Easier, With Kristin Harad

January 12, 2021 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 211th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kristin Harad. Kristin is the founder of her eponymous marketing consulting firm for advisors, with a particular focus on both helping to coach solo advisors to the next level and providing outsourced CMO services to midsize RIAs. What's unique about Kristin, though, is that she isn't only a marketing consultant to advisors, but spent eight years building her own independent advisory firm, which she launched from scratch and had an incredibly fast growth start to nearly $200,000 of financial planning fee revenue alone in barely three years, and of course, grew even further in the years that followed all from applying her advisor marketing principles first and foremost to herself, and now she's built a consulting business to teach others to do the same.

In this episode, we talk in-depth about how Kristin's background in consumer marketing with a focus on building brand loyalty and retention programs provided a foundation for her to launch and market her own advisory firm. Why Kristin chose from the start to focus in on a niche before she even figured out what to call the firm or how to structure her services. The way Kristin's clear focus on a particular target market of new and expecting parents and dual-income households in San Francisco gave her opportunities to market in an extremely cost-effective way. And the way Kristin marketed and offered 'welcome' kits to her prospects before their first meeting with her, to make it easier to convince them to work with her, as someone who wasn't naturally inclined toward sales herself. We also talked about Kristin's journey through the advisory industry, how her work in consumer marketing at large financial services firms from Chase Manhattan Bank to Charles Schwab built her initial awareness of the financial advisor industry.

Why it was an interest in life coaching that ended up being Kristin's initial pathway to deciding to launch her own advisory firm. How Kristin overcame the unexpected career challenges that arose when she made the personal life decision to give her children a chance to live in a foreign country and had to uproot her own business in the process. And why in the end, Kristin's passion for advisor marketing ultimately led her to transition her clients to the other advisor she recruited into her firm so that she could focus her full time on coaching other advisors in their marketing instead.

And be certain to listen to the end where Kristin shares her tips on how advisors can find the right target market to focus on when they're not sure which one to pursue. The ways that a strong and persistent marketing process can make it easier for those who otherwise struggle with their sales process, and why once again selecting her own clear target market to work with, now in her advisor marketing business, is allowing Kristin to have her best business year ever in 2020 despite the turmoil of the pandemic.

So whether you’re interested in learning about how Kristin found her niche of working with new mothers, the challenges that arose from moving her family and business to a foreign country, or the cost-effective marketing strategy she used to attract her target clients, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Announcing The Kitces Tax Course On How To Review A Client’s Tax Return For Planning Opportunities

January 11, 2021 07:05 am 5 Comments CATEGORY: Nerd's Eye View

The Internal Revenue Code stipulates that US citizens must pay taxes on all income worldwide. Which makes it somewhat inevitable that financial advisors, who counsel clients on how to enhance their financial futures and generate wealth to achieve their financial goals, will have to help their clients deal with the tax consequences of that financial success (and the implementation of the advisor’s advice along the way). And in the end, it’s appealing to provide tax guidance to clients, as the hard-dollar tax savings can in many cases more than offset a financial advisor’s entire fee… even if we’re not ultimately the ones who prepare and file the tax return itself (which, in the end, is backward-looking anyway, while financial advice – and its potential tax consequences and tax savings – is an exercise in forward-looking planning).

Yet the irony is that even as the world of financial planning and tax planning converge – especially as technology automates more and more of the investment process, shifting the focus of the advisor value proposition to the other supporting advice areas (e.g., tax planning) around it – there remains remarkably little in the way of tax education for financial advisors. As in most states, CPA licensure requires numerous courses or outright years of experience in auditing (which isn’t practical for most advisors to get after they’re already advisors), the Enrolled Agent license is still primarily focused on tax compliance (e.g., filing returns and other tax reporting, and responding to IRS inquiries), and what little advisor education that exists is either relatively basic (the CTS designation) or a very substantial commitment (e.g., a Master’s degree in Taxation).

And so we’re excited to announce a new Kitces Course on “Reviewing The Tax Return For Planning Opportunities”, a 6-hour online educational program designed for CFP certificants who have obtained the tax knowledge but have little-to-no practical experience applying it in the real world (and would rather gain experience in a structured course that allows them to apply the knowledge and practice with hypothetical-but-real-world client scenarios, instead of just trying to figure it out on ‘live’ clients when real dollars are at stake!).

In the end, we anticipate this new Kitces Tax Course will be just the first of many to come, providing not just the knowledge but the opportunity to practice and master the skills it takes to become a better and more successful financial advisor. And while we don’t have any plans to issue a new designation – there’s enough alphabet soup in the world of advisor designations – we do hope that advisors who complete our new Kitces Courses will not only use their completion certificates to claim their 6 hours of continuing education credits… but also include it on their resume as a demonstration of their commitment to honing their skills as a financial advisor!
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Weekend Reading for Financial Planners (Jan 9-10)

January 8, 2021 02:55 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the Financial Planning Association's transition to its new incoming President Skip Schweiss, an experienced executive and newly minted CFP professional, who is aiming to work with the FPA's incoming new CEO Patrick Mahoney to try to turn around its declining membership in a shifting environment where "CE and Community" alone don't create the distinction it once did for associations in an increasingly competitive environment (even as the social isolation of the pandemic makes connectedness more important than ever, and ongoing industry regulatory debates arguably make financial planning advocacy more important than ever).

From there, we have several investment-related articles, including:

A discussion of whether it's still worthwhile at all to try to invest in bonds for client portfolios as yields continue to drift to new record lows
The appeal of multi-year guaranteed fixed annuities as a higher-yielding bond alternative in the current environment
How Single Premium Immediate Annuities (SPIAs) can be used, not as a lifetime income guarantee vehicle, but as a fixed-income alternative (with a mortality credit kicker) that simply gets reinvested back into equities as it pays out, and
Why the advisory community may need to change its mind on the long-term staying power of Bitcoin as its recent rise nearly doubles the prior "peak" that many advisors had said was a bubble that would never be achieved again (except... it has).

We've also included a number of articles around the topic of behavioral finance and client communication:

How to think about a 'hierarchy' of financial wellness that clients can build upon over time to improve their wellbeing
Why it's crucial to understand a client's "money story" to better glean why certain clients make certain not-so-rational decisions
The rise of "Financial Therapists" as either a new player in the holistic advisor team, or even a new direction (and new CFT designation) for financial advisors to pursue, and
What it is that actually makes money so meaningful to us (hint: it's not the money itself, but what it allows us to do)

We wrap up with three interesting articles, all around the theme of looking ahead to and planning for the coming year:

Why creating an effective Strategic Plan for 2021 isn't about going through a vision/mission exercise, but instead simply getting clearer about the Key Performance Indicators that the business needs to improve upon in the coming year
A checklist of new (and what's-old-is-new) marketing ideas to reinvigorate growth for 2021
A broad look at the state of financial planning itself as a profession, and what may be in store as the coming year unfolds (from more virtual client meetings to virtual team management, and the ongoing rise of alternative non-AUM fee models for advisors)

Enjoy the 'light' reading!

Why 50% Probability Of Success Is Actually A Viable Monte Carlo Retirement Projection

January 6, 2021 09:09 am 19 Comments CATEGORY: Retirement Planning

With the rise of Monte Carlo analysis as the most commonly used method of conducting retirement projections for clients, 'probability of success' has become the focal point for communicating retirement preparedness to clients. While a number of issues with framing results around probability of success have been noted – from not accounting for the magnitude of failure, to not acknowledging that small 'adjustments' can often save a 'failing' plan, and even some biases related to how we think about 'wrong' probabilistic forecasts – there is an additional issue with the current usage of Monte Carlo analyses that has gone largely unnoticed: If you are doing ongoing planning for a client who is willing to adjust their spending, then the norms that have emerged – particularly strong negative perceptions of planning results below 70% probability of success – may not be as problematic as most advisors (and clients!) think. In fact, a 50% probability of success (or lower!) may be reasonable for retirees who are willing to make spending adjustments.

One concern when reporting Monte Carlo results to a client framed around ‘probability of success’ is that anything less than 100% can sound scary. Consider a 50% probability of success: ‘Failing’ one-out-of-two times when failure implies running out of money in retirement simply does not sound acceptable. Such a result can make clients feel that they are unprepared for retirement and that they must save even more or retire even later so that they can achieve a higher probability of success. It is important, however, to think carefully about what a 50% result actually implies. First, this metric alone actually tells us nothing about how severe 'failure' is. If 90% of a client's desired income comes from guaranteed income sources, then 'failure' is capped at a relatively modest 10% cut in a client's income, which is not ideal but far from devastating. Moreover, adjustments can often save a 'failing' plan, so simply shifting a 50% probability of success framing to a 50% probability of adjustment can take a lot of sting out of that result.

Additionally, the difference between setting spending based on a one-time projection versus ongoing projections should be acknowledged, as these two approaches are fundamentally very different. If you only had one opportunity to select a spending level and you were forced to stick with that no matter what happened in the future, then selecting a spending level with a 95% (or higher) probability of success may make a lot of sense. But the reality is that planners generally provide ongoing projections for clients, and even those who provide one-time plans will recommend periodic updates. And if a retiree is going to keep their plan up to date (which allows for opportunities to identify when a plan is veering off course and adjust as needed), then planning to a 50% probability of success (i.e., a plan that needs to be adjusted one-out-of-two times) is not nearly as scary. Furthermore, it should be noted that a 50% probability of success means adjustment at any point in time in the future, and not necessarily even an adjustment in the near future.

To examine what planning using lower probability of success levels actually looks like, we compare planning outcomes using spending levels continually adjusted to maintain a constant 95%, 70%, 50%, and 20% probability of success throughout retirement using actual historical outcomes going back to 1871. What may be surprising is that we find that median, minimum, and maximum spending levels throughout 30-year retirement periods are actually quite consistent regardless of the probability of success used! In other words, if you are going to adjust spending on an ongoing basis, then returns experienced end out being the largest factor in determining how much can be spent, with income shaded either slightly higher (lower probability of success) or lower (higher probability of success) based on the success level targeted. Where we do see larger differences (although still smaller than many might anticipate) is with respect to terminal wealth levels, which suggests that when using Monte Carlo analyses for ongoing clients, the probability of success level targeted is actually more about a trade-off between income and legacy than any genuine difference in the risk that a portfolio will be depleted.

Since our intuitions generally tell us that a 50% probability of success is insufficient, advisors may wish to further consider how Monte Carlo results are framed to clients. Presenting clients with a range of potential strategy considerations may be beneficial in helping explore what best fits a client's preferences. Furthermore, advisors should give thought specifically to what probability of success level best balances the trade-off between income and legacy for a client. Unfortunately, current planning tools do not make illustrating these types of dynamic strategies easy, but ultimately, the key point is that choosing a probability of success level to use is not as simple as being able to apply a one-size-fits-all rule or a natural tilt toward being 'conservative' for the sake of not running out of money. For those retirees who are willing and able to make needed adjustments along the way, a 50% (or lower!) probability of success may provide a better result than most advisors (and clients) realize!

#FASuccess Ep 210: Growing Your Client Base By Making Advice The “Product” And Quantifying Its Value, With Sten Morgan

January 5, 2021 07:02 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 210th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Sten Morgan. Sten is the founder of Legacy Investment Planning, a hybrid advisory firm near Nashville, Tennessee that generates more than $2 million in revenue per year, serving 220 affluent clients. What's unique about Sten, though, is the way he's built his advisory firm by making himself and his planning ideas into his product, charging first and foremost for his advice, and the unique way he's figured out how to quantify the value of his advice strategies that he's bringing to the table for clients.

In this episode, we talk in depth about Sten’s ‘the advisor is the product’ philosophy. Why every prospect meeting starts off with a whiteboarding session where Sten tries to highlight new planning ideas for clients right away instead of holding back until he's been hired before sharing his best ideas. The mental strategy that Sten uses to quantify the near-term positive economic benefits that his advice will bring to get clients comfortable with his advice fees, and why Sten charges a full-rate financial planning fee with monthly retainer fees of hundreds or even thousands of dollars per month and then discounts his AUM fee for those who subsequently implement with him.

We also talk about Sten's own journey through the advisory business; why he started out in a major life insurance firm but ultimately left because it focused too much on the value proposition of the company's products instead of his own value. How trying to become more advice-centric at an investment-centric firm led to him being unexpectedly terminated and suddenly forced to hang his own shingle, and the way he was able to get his new practice going quickly by diving headfirst into a new niche with doctors at the local hospital.

And be certain to listen to the end, where Sten shares the mindset changes that were ultimately critical for him to turn an initially struggling advisory career into a successful one, how Sten tries to accelerate his success by constantly seeking out those who have already traveled the journey ahead of him to help him shortcut his own, and why Sten thinks it's best not to start with your ‘why’ and finding your purpose, but instead starting with your ‘who’ – who you're building your career for because staying focused on them so you never let them down can be the ultimate motivator through the inevitable challenges that may arise.

So whether you’re interested in learning about how Sten built a successful advisory firm by putting his advice at the forefront of his product, how he leveraged a local niche of doctors to get his practice going, or why proactivity is key to keeping renewal rates high, then we hope you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial #AdvisorTech (January 2021)

January 4, 2021 07:03 am 1 Comment CATEGORY: Technology & Advisor FinTech

Happy New Year, and welcome to the January 2021 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 big news that storied Silicon Valley VC investor Sequoia Capital is investing $45M into Vise, a new tech-enabled TAMP looking to capitalize on the emerging trend of direct and, more importantly, “custom indexing”, where advisory firms use technology to create portfolios for clients customized down to the individual stock level (eschewing mutual funds and ETFs), and where Vise hopes that advisors will be willing to outsource the subsequent implementation of that portfolio for a 0.50% fee. But in the end, it’s still not clear if custom indexing will ultimately be a TAMP solution – with the basis point fees – or if the technology will eventually make it so easy and efficient that advisors can just do it themselves with the software they purchase for a flat software fee?

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

- JP Morgan acquires 55IP’s rebalancing and model management software in the hopes that tax management overlays will be the new model marketplace differentiator

- FMG Suite acquires Twenty Over Ten to expand into the realm of digital marketing automation for advisors

- MassMutual acquires Flourish Cash as AdvisorTech solutions increasingly become viewed as the pathway to the RIA channel

- The SEC’s new RIA marketing rule may kick off a new wave of Advisor Review and Rating sites to capitalize on the new opportunity to leverage client testimonials

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Advyzon launches a new prospect portal and highlights the benefits of creating simpler extensions of advisor software for specific use cases, Morningstar integrates FinaMetrica into its Investment Proposal Tool as a way to at least partially compete against Riskalyze, FA Match raises seed capital for a platform to help brokers find new (and better-matching) broker-dealers, and Pulse360 launches a new task automation tool to turn post-meeting advisor notes directly into after-meeting action items and takeaways.

And be certain to read to the end, where we have provided an update to our popular “Financial AdvisorTech Solutions Map” as well!

I hope you're continuing to find this column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*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 (Jan 2-3)

January 1, 2021 02:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the industry news that the SEC is gearing up for the next wave of examinations as it continues to examine the rollout and initial impact of Regulation Best Interest, with a focus in the coming year on whether and how broker-dealers have changed their product shelves, are reviewing the costs of their products, and are managing the conflicts of interest embedded in those costs, as the brokerage model continues to adapt to a more advice-based future.

From there, we have several articles around the theme of retirement planning, including why it's better to encourage clients to make small New Year's resolutions to get on track for retirement (not to plan big New Year's resolution changes), why it's so important to consider the true meaning of the word "income" when talking about what a portfolio can produce (especially in a world where many forms of "income", such as immediate annuities, actually include a material return-of-principal component), how to reframe the way Social Security claiming decisions are presented to get clients more comfortable delaying, and how to mathematically quantify the advice benefit of getting clients to use tax-deferred retirement accounts.

We've also included some investment-related articles, including a discussion of why clients should not be dissuaded from investing despite markets reaching "all-time new highs", tips on navigating the emerging world of sustainable investing ratings (which lack the uniformity of more industry-familiar MPT-based metrics like alpha and Sharpe ratios), whether advisory firms should be concerned about the recent wave of money market fee waivers, and how advisors can talk clients through some risks of investing in the hot new Wall Street trend of SPACs (which as it turns out, may, unfortunately, be far better for their sponsors and early investors who redeem out than the actual long-term investors that would buy and hold them).

We wrap up with three interesting articles, all around the theme of looking to the future year and future decade of the 2020s: the first looks at how the new advertising rule from the SEC will not only open the door to RIAs using client testimonials, but may also spawn a new wave of third-party advisor rating sites that help to further promote good advisors (and also bring greater negative scrutiny to the bad ones); the second looks at how the intersection of zero-commission trading and new technology may spawn a new wave of (stock-level) portfolio customization for advisors and their clients; and the last looks at how, even as the world of financial advice becomes more mature and established, there's still a long way to go in becoming a bona fide and recognized profession, where the coming battle may not necessarily be about implementing a uniform fiduciary standard for all but instead getting clearer about titles and labels so consumers better understand who's in the advice profession and who's an agent of the financial services industry... and then let the consumer choose which they want to work with (once they clearly understand the capacity of each)!

Enjoy the 'light' reading and hope you're having a safe and Happy New Year!

Kitces & Carl Ep 50: Overcoming Referral (Asking) Reluctance And Taking The Risk Of Marketing Yourself

December 31, 2020 07:06 am 1 Comment CATEGORY: Kitces & Carl Podcast

Over the past several years, there’s been an explosion in the number of marketing channels that advisory firms can use to attract new leads, turn them into prospects, and finally convert them into clients or customers. Yet, despite the ongoing evolution in marketing, our Kitces Research studies have shown that the most common way that financial advisors gain clients is the same way they’ve been doing it for decades… through referrals. As the profession has evolved, however, so too has the approach to actually generating those referrals, as the invasive “I get paid two ways” tactic has been replaced by having far more effective (and far less uncomfortable!) conversations with existing clients about ways in which they would prefer to connect with new people.

Unfortunately, though, many advisors still have a difficult time actually starting up those referral-asking conversations in the first place, which, in turn, raises the questions: What are the blocking points keeping advisors from having conversations with their existing clients about finding more clients like them, and how can we as advisors overcome those blocking points?

In our 50th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the underlying reason why advisors have such a hard time asking their clients for referrals, how to push forward by instead asking advice on how to grow their practices, and ways to gain the sort of confidence that ultimately eliminate those blocking points altogether.

As a starting point, it’s important to recognize that anything having to do with marketing and business development requires an advisor to put themselves “out there”, which means that there’s a risk of rejection. And since human beings don’t like rejection, it’s that fear of rejection that causes us to find all sorts of reasons to not do what it is that we’re supposed to do. Overcoming that fear initially often requires a burst of courage to take a leap and take action, but the good news is that those leaps not only get easier with repetition, they eventually become something to look forward to as the advisor starts to see tangible results from their efforts and feels “rewarded” for taking the leap.

From there, the next important step is for advisors to gain the confidence that the services they offer really do bring value – so much value to their clients, that they should want to be passionately telling (nearly) everyone they meet about the great work they do! There’s a plethora of pathways towards gaining that passion and confidence, but two of the most important for advisors are by making sure they are in a situation where they are proud of what they do and the services they can offer, and by obtaining the education necessary to have the self-confidence of knowing that they are good at what they do and that they help people.

The key point is that the challenge around generating referrals from existing clients is less about the method itself, and more about overcoming the fear of rejection, and addressing our own self-confidence gaps that may exist. Because at the end of the day, it can be helpful to reflect on the fact that most of the good things that happen in life involve some initial element of risk. Ultimately, soliciting a client’s help in meeting more prospective clients that are like them isn’t about generating referrals or having conversations about referrals, but is simply a way for advisors to try get more people great financial advice that they’re confident they can provide!

The New Pooled Employer 401(k) Plan And The Hazards Of Advisor-Led PEPs

December 30, 2020 07:05 am 4 Comments CATEGORY: Retirement Planning

Recognizing that retirement saving is an important goal for many individuals, and an employee benefit that many job-seekers commonly screen for as they consider new employment opportunities, business owners commonly offer employer-sponsored retirement plans, such as 401(k) plans, to attract (and keep) their employees. For small business owners, though, the hassle and expense of setting up and running such plans can be a serious hurdle to offer competitive benefits for employees, and often are the reason that some small business owners have no retirement plan benefits in place to begin with! In an attempt to help small business owners offer employer-sponsored retirement plans to their employees, Congress has passed various pieces of legislation, one of the most recent being the December 2019 SECURE Act, which for the first time created a new “Pooled Employer Plan” (PEP) intended to make it easier for small business owners to establish and administer a 401(k) plan.

Notably, Multiple Employer Plans (MEPs) to facilitate employer-sponsored retirement plans for small business owners by allowing multiple employers to pool together and create one single plan for all of their respective employees have existed for many decades. But they have failed to rise in popularity, mainly because of limitations established by the IRS and Department of Labor (DOL) over the years, including the IRS’ “one bad apple” rule that can disqualify an entire MEP if one single participating employer fails to follow the plan’s requirements, and the DOL’s “nexus” rule that required an MEP’s participating employers to be in the same general line of business. The SECURE Act’s recently introduced Pooled Employer Plan (PEP) version, however, eliminated these limitations, clearing the way for multiple employer 401(k) plans without being in the same line of business, and with a pathway to remove an employer that fails to comply with the plan’s rules (without disqualifying the rest).

In order to create and offer a PEP, the plan provider must become a designated “Pooled Plan Provider” (PPP), registered with the Department of Labor, and serving in a fiduciary capacity as the plan administrator and performing all of the plan’s 3(16) fiduciary administrative duties.

Notably, RIAs (and broker-dealers) will be allowed to serve as PPPs, creating the potential that advisory firms could establish their own ‘private PEP’ for their small business owner clients (and gaining the efficiencies as the plan provider). However, there are several issues that advisory firms should understand before deciding to commit to a role as a PEP’s Pooled Plan Provider. Most significant is the fact that by providing investment services to the plan (and managing assets for an AUM fee) while serving as the PPP, there is potential for creating a Prohibited Transaction, as the Internal Revenue Code Section 4975(c)(1) disallows a plan fiduciary from dealing with the income or assets of a plan for their own interest, or from receiving compensation from the plan in connection with transactions involving the income or assets of the plan… with penalties for such Prohibited Transactions starting at 15% of the amount involved and, if not rectified in a timely manner, can be as high as 100% of the amount involved! Whether or not the DOL releases legislation that will provide for a Prohibited Transaction Exemption addressing the challenge created by IRC Section 4975(c)(1) is yet to be seen.

Ultimately, while the PEP may become a valuable tool for small business owners to be able to offer employees competitive retirement plan options, RIAs will need to carefully consider whether to choose to take on the role of a PPP for their small business clients plans and the associated ramifications if they do choose to do so… including asking the question of whether branching out into plan administration would actually result in more business anyway, or if it will be better to find a third-party administrator (TPA) to partner with instead?