Nerd's Eye View blog

The American Rescue Plan Act Of 2021: Tax Credits, Stimulus Checks, And More That Advisors Need To Know!

March 10, 2021 07:05 am 58 Comments CATEGORY: Taxes

As is often common after a national election, a new administration brings a new set of priorities, resulting in new legislation to implement those priorities… for which the Internal Revenue Code is still one of the most common ways for government policy to be implemented. And so, as the Biden administration closes out its second month, this week ushers in its first major piece of tax legislation: the American Rescue Plan of 2021, intended to drive $1.9T economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.

The lead of the American Rescue Plan is another (third) round of so-called “Stimulus Checks”, in an amount of $1,400 per eligible individual. Though notably, eligibility in this cycle has been expanded from including ‘just’ children under the age of 17 to all dependents in the household (which can include children in the later years of high school, or in college still claimed as dependents, as well as parents who are claimed as dependents). At the same time, though, the phaseout limitations of the new stimulus checks are more restrictive, with a near-cliff-style phaseout (starting at $75,000 for individuals and $150,000 for married couples) so sharp that some families could see marginal tax rates in excess of 100% through the phaseout range! Which in turn, will require a special focus on navigating a series of three checkpoints that households can pass through to potentially be eligible (based on their 2019, 2020, or 2021 tax returns).

In addition to stimulus checks, the American Rescue Plan also significantly expands the Child Tax Credit, from $2,000 to $3,000 (and up to $3,600 for children under the age of 6), a slightly higher age threshold that will allow 17-year-old children to qualify in 2021, a new system that will pay a portion of the Child Tax Credit in advance over the last 6 months of the year… and yet another set of phaseout thresholds (again at $75,000 for individuals and $150,000 for married couples) for the new Child Tax Credit amount (while the original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, respectively).

Other notable aspects of the American Rescue Plan include a significant increase in the Dependent and Child Care Credit (including higher eligible expense limits and Applicable Percentage amounts that be claimed); new extensions on various Unemployment Compensation benefits that were otherwise set to expire; increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges (including coverage down to the first dollar for lower-income households below 150% of the Federal poverty level, and new eligibility for the tax credit for households with income above 400% of the Federal Poverty Level if health insurance exceeds 8.5% of their AGI); a new provision that provides a 100%(!) tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are involuntarily unemployed; and a provision that will make student loan debt forgiveness tax-free in the future (albeit without including any actual provisions for student loan forgiveness in this legislation). On the other hand, the popular provision of RMD relief was not included in the final legislation (nor was the widely debated increase in the Federal minimum wage to $15/hour).

Notably, most of the new provisions under the American Rescue Plan are for 2021 only (or in limited cases, until 2022 as well), making them only “temporary” relief. However, the potential remains for additional tax legislation in the coming months as well, raising the question of whether some of the changes – particularly to the Child Tax Credit – may become a permanent feature of tax law in the future, and what else (e.g., student loan forgiveness) may still be on the horizon. Which means the potential for even more legislation-driven tax planning opportunities for clients likely through the remainder of 2021!

#FASuccess Ep 219: Serving Families Of Multi-Generational Wealth By Tackling The Personal Problems That Money Exacerbates, With Coventry Edwards-Pitt

March 9, 2021 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 219th episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Coventry Edwards-Pitt. Covie is the Chief Wealth Advisory Officer at Ballentine Partners, a wealth management firm headquartered in Waltham, Massachusetts, that oversees nearly $8 billion dollars for just over 230 ultra-wealthy families.

What’s unique about Covie, though, is that when her firm has almost $8B of AUM for “just” 230 family households, it means their average client has almost $35 million of investable assets… and as a result, Covie’s firm has a unique focus on the issues that reach beyond ‘just’ doing a great job when it comes to the technical aspects of wealth management, and to the problems that very large sums of money can exacerbate rather than solve, helping families navigate the decisions that can affect multiple generations… and the unintended consequences those decisions often have when not carefully considered first.

In this episode, we talk in-depth about how Covie helps ultra-wealthy families (many of whom did not “come from money” and have suddenly found themselves in uncharted parenting waters after experiencing a liquidity event) pass along valuable lessons about money when default parenting scripts about limits – like “we can’t buy that because we can’t afford it” – suddenly don’t hold sway anymore, what Covie has learned about children from ultra-wealthy families who are well-rounded (and well-grounded), and the common experiences they share around gaining a foundational sense of self-esteem and achievement outside of what they were born into, and why Covie and team at Ballentine may not introduce these deeper discussions until years after the client relationship begins and once all the initial complex technical wealth management work has been done (and clients are ready to have those more personal money conversations).

We also talk about how Ballentine Partners organizes its own internal structure around Senior Client Advisors, who both manage the client relationships as both “generalist experts” and also lead internal Knowledge Management Teams and service a client load of “just” 10 to 15 ultra-high-net-worth (and ultra-complex and high service) clients, why the firm settled on an annual flat fee structure at the family office level (and the myriad of topics and issues that the firm covers with clients), and the matrix structure that the firm employs to be able to build the sort of institutional knowledge that comes from managing 230 ultra-high-net-worth family relationships.

And be sure to listen to the end, where Covie shares her own journey that eventually led her into a senior role at an ultra-high-net-worth firm, how the challenges of trying to help families where family relationships had already been damaged was part of what pushed her to write two books about the wealthy, and why it was the pursuit of her passion around writing that helped open new doors both for herself and for her firm in the first place.

So whether you’re interested in learning what it’s like to work with ultra-high-net-worth clients, why it’s the deeper conversations around helping them raise well-grounded children that really differentiates a firm like Covie’s, or how such a firm structures itself and its fees, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Jumpstarting Growth With The Strategy, Management, Innovation (SMI) Business Planning Model

March 8, 2021 07:02 am 0 Comments CATEGORY: Practice Management

To run a healthy business, firm owners need to have a good handle on what aspects of their business are actually working well, and where key parts of the business may be trending negatively, in order to implement improvements to whatever is most critically in need of change. But if business owners don’t have a clear handle on the data and Key Performance Indicators that drive the business forward, making decisions about which areas of the business to improve can become unwittingly arbitrary and unfocused. As a result, good strategic planning isn’t just about trying to create the ideal “One Page Business Plan”… more directly, it’s about advisory firm owners figuring out which are the right things to change, to ensure that the decisions they make really do impact the business in the most positive way.

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – discusses the Key Performance Indicators to track, and the key questions to ask that focus on three principal business planning phases: Strategy, Management, and Innovation (SMI). By examining each of these key areas in sequence, firm owners can develop workable strategies to tackle the most relevant problems that may be impeding business growth.

The phases of the SMI process begin by examining Strategy, which involves identifying the most relevant – and measurable – problems of the firm and the Key Performance Indicators (KPIs) that will be used to measure the efficacy of the Solution to be implemented. The Strategy phase involves choosing a Solution that will fix or mitigate the selected problem, the Tactics to use to implement the Solution, and the expected Trend of how the KPIs should move to monitor the efficacy of the Solution. (A key point, as many firms implement solutions without a framework to track whether they’re actually working to achieve the desired results!)

When assessing their firm’s Management, financial advisors often consider what is most urgent and important in the present moment, but it’s crucial to also recognize the important-but-not-urgent that may be holding them back from really solving the firm’s challenges, including and especially identifying any broken systems in the company’s infrastructure. By addressing issues that detract from a well-run Management system, the firm will be able to effectively focus on the other phases of the business planning process.

Using Innovation to improve the business begins with identifying the firm’s competitive Advantage in client service, generating Ideas to win with the firm’s main Advantage (as in practice, most advisory firm innovation is about doubling down on what the firm already does well, not creating something entirely fantastical and new!), and then selecting one – and only one – idea to implement. For some ideas that are more complex or potentially expensive, the firm may also need to conduct some degree of market research to choose a Delivery process to execute their ideas most effectively.

Once the firm has reviewed their SMI elements, the next step is to take the information gathered from the process to develop the right goals for the business. Goals for each phase of SMI can be identified and monitored, and once those goals are accomplished, the firm can then revisit the process to reassess their SMI areas to identify further areas of focus.

Ultimately, the key point is that business planning with the SMI model can help financial advisors choose the right problems to target and strategies to implement in order to improve their firms, by guiding them through a systematic process to outline objectives for where they are now, where they are trying to go, and how they are different. And by identifying the most salient problems and establishing the right goals for the firm, advisors can facilitate efficient growth and ensure that their client service continues to operate at a high level!

Weekend Reading for Financial Planners (Mar 6-7)

March 5, 2021 02:59 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a recent academic study that evaluated the activities that advisors engaged in with their clients in the midst of the pandemic and its market volatility last spring, which found that clients of financial advisors really did appear to sell less and buy more during the downturn, driven in large part by an uptick in proactive communication that advisors engaged in with their clients that helped keep client expectations positive (i.e., that the markets and economy would bounce back soon enough).

From there, we have several articles on the value of financial advice itself, including:

A reminder that in the end, financial advice isn't just about helping people identify and set a path towards their goals, but in navigating the complexities that arise along the way (that can block us from achieving those goals, without an advisor's help to navigate around them)
A framework to define an advisor's value across three dimensions of Portfolio, Planning, and Personal (and how to vocalize it in a prospect meeting)
Why it's so important to frame a value proposition in terms of how the client benefits, not just the positive traits of the advisor (e.g., "I'm a CFP professional" or "I'm a fiduciary")
How the value of financial advice is increasingly shifting towards financial wellness because of the way that money touches virtually everything in our lives

We've also included a number of articles focused on improving client communication:

6 'simple' but impactful actions that can be taken to show clients that you really care and are thinking about them
How the Asset Map software helps provide a one-page visualization to simplify a client's complex financial life
The power of being a client's "Chief Empathy Officer" (CEO) when often the blocking points to our goals are mental, not financial
How a personal finance columnist engaged a financial planner himself to navigate the challenges of his father's ALS diagnosis, and what she did to provide value to him along the way

We wrap up with three final articles, all around the theme of how we can try to become a little happier and wiser:

Why it's how we spend our time (not how we spend our money) that becomes the biggest driver of our happiness and wellbeing
The incredible impact that a simple compliment can have on making someone happier and more content
How the path to knowledge is about reading and learning, but also getting the broader perspective that often only comes with trying something and making a mistake, providing a pathway to wisdom through self-reflection and self-correction

Enjoy the 'light' reading!

Using Probability-Of-Success-Driven Guardrails To Manage Safe Retirement Spending

March 3, 2021 07:02 am 13 Comments CATEGORY: Retirement Planning

Retirement income guardrails strategies – i.e., planning strategies that predefine thresholds that would trigger an increase or decrease in retirement spending – have been noted to have some significant communication advantages for managing retirement spending expectations. For instance, an approach like Guyton-Klinger’s guardrails – perhaps the most popular guardrails strategy of all – can be presented in a manner that not only tells a client when a spending change would occur, but also how much of a spending increase or decrease would result from ‘hitting’ a guardrail. The caveat to such approaches, however, is that guardrails strategies are generally based on portfolio withdrawal rates, which can be rather crude metrics that may not capture a lot of retiree-specific nuances that could warrant the use of higher or lower guardrails in a given retiree’s situation.

By contrast, one of the most significant strengths of Monte Carlo simulations is their ability to incorporate retiree-specific nuance into a simulation. From capturing unique cash flows and goals to varying longevity assumptions and portfolio composition, Monte Carlo simulations shine in their ability to model scenarios that better reflect a given retiree’s goals and preferences in retirement. The caveat to Monte Carlo simulations, however, is that there are a number of weaknesses regarding the communication and presentation of the results these simulations provide. The common focal point for reporting Monte Carlo simulation results is the ‘probability of success’ of a plan, which is not only often misunderstood by retirees (e.g., by assuming ‘failure’ is more devastating than the ‘adjustment’ that failure scenarios actually imply), but also ignores entire dimensions of planning results (such as the magnitude of spending change) that are crucially important to setting both good short- and long-term retiree expectations regarding retirement income planning.

Fortunately, however, bringing these two approaches together can provide the best of both worlds, as ‘probability-of-success-driven guardrails’ capture both the communication advantages of the guardrails approach and the analytical advantages of Monte Carlo simulation. Essentially, an advisor would define an initial probability of success target (e.g., 95%), an upper probability of success guardrail (e.g., 99%), a lower probability of success guardrail (e.g., 70%), and some spending adjustment rule in the event that a guardrail is hit (e.g., reset to the initial target 95% probability of success). With these parameters in place, an advisor could then solve for dollar values (both portfolio levels and spending levels) that would summarize the guardrails and the changes that would occur in the event that they are hit, and then communicate that to a client, which provides information that is far more insightful to the client than merely telling them what spending level is associated with an X% probability of success.

Furthermore, while software could ideally help speed up the process for advisors and provide some more relevant long-term metrics, the most fundamental advantages of the probability-of-success-driven guardrails approach involve managing shorter-term expectations, which can be captured using even the most basic Monte Carlo simulation software and without ever needing to utter ‘probability of success’ to a client (unless the client wants the detail, of course). Additionally, advisors could easily substitute historical simulation, regime-based Monte Carlo, or other more advanced modeling methods for traditional Monte Carlo simulation at the modeling level, and still carry out the process of communicating results in a simpler and more effective manner to clients.

Ultimately, the key point is simply to acknowledge that probability-of-success-driven guardrails can bring together both the analytical advantages of Monte Carlo simulation and the communication advantages of guardrails approaches, providing advisors with an opportunity to have better conversations with clients regarding their Monte Carlo results!

#FASuccess Ep 218: Jumpstarting Growth By Getting Paid To Market Your Own Expertise, With Maura Griffin

March 2, 2021 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 218th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Maura Griffin. Maura is the founder of Blue Spark Financial, an independent RIA with offices in New York and Massachusetts that oversees more than $150 million of assets from nearly 90 families, most of whom are either divorced or widowed women making financial decisions on their own for the first time.

What's unique about Maura, though, is how she built her practice from scratch, not by marketing her financial planning services, but instead by developing a focused expertise in college aid planning and charging high school parents a flat fee of $1,000 to help them with their financial aid planning needs. And in the process, getting paid for her college planning expertise as a pathway to establishing relationships that then could turn into comprehensive planning relationships in the future.

In this episode, we talk in-depth about how the demand for her college aid planning services helped Maura grow to $15 million in AUM by just the first year alone, the way she systematized her financial aid planning presentation deliverables to efficiently serve more than 100 clients in her first year alone. And how those initial financial planning aid engagements led to the realization that what she found most gratifying from a professional perspective was helping women who faced the same challenge as she did as a single woman who was responsible for making all the financial decisions for her family, leading Maura to pivot into working with recently widowed and divorced women as her niche for the past several years.

We also talk about the circumstances that set the stage for Maura's career-changing transition from journalism and real estate investing into financial planning, why having a financial reserve when she launched her firm was so crucial to give her not only peace of mind and confidence, but the flexibility to build her business with intention from the start without feeling an inordinate amount of pressure to take on any and every prospect she came across. The steps Maura took to manage her time and capacity by implementing account minimums in a waitlist as her practice grew, and how she had to learn to say no at times when the rapid growth of her practice left her feeling overworked and overwhelmed.

And be certain to listen to the end, where Maura shares the challenge of feeling frustrated by not being able to help everybody who was seeking out her help, how that served as a pathway to her understanding what she ultimately wanted and most enjoyed about being a business owner and gave her clarity around the concept of enough, and why Maura has now consciously made the decision to structure her firm as a so-called lifestyle practice.

So whether you're interested in how Maura started from scratch helping parents with financial aid planning, how she consciously made the decision to build a lifestyle practice after experiencing tremendous early growth, or how she serves single and divorced women who are the primary financial decision-makers for their families, then we hope you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial #AdvisorTech (March 2021)

March 1, 2021 07:03 am 8 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the March 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 Apex Clearing is ‘going public’ via a SPAC that will value the company at $4.7B, built primarily on the back of its success with ‘direct-to-consumer’ robo-advisor and investment platforms like Wealthfront and Robinhood, SoFi and Stash, Ally Invest and Public… but with an eye on pivoting further into the world of RIAs by no longer just trying to partner with existing AdvisorTech platforms to reach RIAs and instead using its massive new $850M cash infusion to build out its service and support capabilities to compete more directly head-to-head with Schwabitrade, Fidelity, and Pershing instead?

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

RIA custodians increasingly look to gain basis points for custody services by pairing them with asset management as Betterment For Advisors and Altruist both expand into the paired services of model-management-plus-custody
SEI launches its own Direct Indexing solution while OSAM’s Canvas crosses $1B in Custom Indexing AUM in just its first year
InvestCloud is acquired for $1B and merged with Tegra118 to modernize enterprise wealth management
Envestnet’s MoneyGuide announces a new MoneyGuideEngine offering that will allow enterprises to leverage MoneyGuide’s underlying financial planning engine via APIs to build their own financial planning interfaces

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

InCapital and 280CapMarkets merge to launch a new bond trading marketplace, with a particular eye on the growth of market-linked products as a bond alternative
RBC launches a new “Business Compass” dashboard to help its advisors actually manage their practices
4U Engage expands its RIA platform as technology continues to disintermediate the traditional external wholesaler for new product discovery
Microsoft launches a new Cloud for Financial Services to compete with Salesforce by unifying an advisory firm’s internal productivity tools

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 (Feb 27-28)

February 26, 2021 02:50 pm 10 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry news that Apex Clearing is going public via a SPAC and in the process will raise a massive $850M of cash to reinvest into its custody and clearing services, with a particular eye on pivoting away from its roots in serving as a back-end platform for robo-advisors and instead bringing its 'tech-savvy custodian' solution to take on the oligopoly of current RIA custodians including Schwabitrade, Fidelity, and Pershing.

Also in the news this week is some buzz that state regulators are taking a closer look at the rise of 'alternative' advisor business models like monthly subscription fees and scrutinizing whether clients are really receiving services commensurate with the ongoing fees that they're paying... and in the process are discovering that the potential of "fees for no service" may be a problem in the currently popular AUM model as well.

From there, we have several articles on advisor compensation and career tracks:

The latest Schwab Advisor Compensation study, which finds there's a rapidly emerging 'war for talent' that is causing compensation for experienced advisors to spike
More and more large advisory firms are beginning to develop internal career paths, as it becomes increasingly appealing for firms to attract and develop young talent themselves
How equity is becoming more common as a component of advisor compensation, but usually still with some level of buy-in attached

We've also included a number of articles focused on improving a firm's client experience, including:

Tips from the "Book Of Wow" on how to create not just good client service but "Wow" client experience moments
How it's the first four points of contact with an advisory firm that set the tone for the entire relationship
The importance of taking a hard look at a firm's initial onboarding experience to help set and manage expectations
A discussion of what really is the "ideal" number of clients for a financial advisor to have (and really be able to serve effectively)

We wrap up with three final articles, all around the theme of what it takes to really create value for clients:

How medicine shows us that some of the best and most impactful advice is really just about helping people actually implement the simple habits that truly matter
Why having difficult conversations is becoming a key skill for financial advisors to hone
Why there's so much value in not just paying for expertise itself but having a relationship with an expert on an ongoing basis... which helps to explain why, despite all the naysayers, the AUM model continues to rise and advisory fees have remained so resilient in the face of the ongoing threat of fee compression?

Enjoy the 'light' reading!

Kitces & Carl Ep 54: Showing Financial Planning Value On An Ongoing Basis After The First 6 Months

February 25, 2021 07:03 am 4 Comments CATEGORY: Kitces & Carl Podcast

An often underappreciated aspect of the financial planning process (and the resulting Plan that financial planning software packages produce) is that it wasn’t originally developed as part of fostering an ongoing client/advisor relationship. Rather, it was a tool that advisors would use to identify “gaps” or “needs” in someone’s overall financial picture… in order to then sell them something to fill that gap! Which, in turn, is why many financial planning software packages are still structured in such a way as to produce moment-in-time snapshots... and why some advisors have turned to other types of client deliverables, such as one-page financial plans and action checklists, as a means to engage clients in an ongoing planning process.

Yet, while there’s a broader recognition that planning isn’t a one-and-done event, the issue remains that clients can often see tremendous progress in the initial stages of working with an advisor, but may end out wondering what value they’re getting on an ongoing basis. Which raises the question: how can advisors create (and more importantly demonstrate) value for their clients... if they aren’t producing a new Financial Plan every year or few?

In our 54th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the most important factor to consider when thinking about creating ongoing value for clients, strategies advisors can use to actually demonstrate that ongoing value, and how to avoid a common challenge when creating a “value structure”.

As a starting point, it’s important to recognize that the most important aspect of demonstrating ongoing value to clients is consistency. For instance, some advisors adhere to an outreach and meeting cadence throughout the year to make sure that there are (depending on the nature and complexity of the relationship) a certain number of in-depth meetings and touch-points. Others even systematize the process even further by creating (and sharing) checklists of regularly performed tasks and client service calendars in order to actively communicate to clients that their advisor is routinely paying attention to all the big picture (as well as mundane) things on their financial plates (so they don’t have to!)

Meanwhile, some advisors have implemented more “homegrown” solutions to actually track the value that they create for their clients. Some examples include “keeping score”, whereby advisors assign point values to all the various pieces of the financial planning process and tally a score to show clients the progress that they’ve made. Because while advisors do a lot of behind-the-scenes things for their clients, they often underestimate how important it is to actually communicate to clients all those things that they actually do already! Other advisors prefer to track a client’s net worth over time (even having the client themselves enter the number themselves into a spreadsheet to further emphasize progress and ownership), or even keep a running tally of the real dollar value of the money that clients have saved as a result of the advice they’ve received, either of which shows the client the actual progress they’re making on an ongoing basis in real (but non-portfolio) dollar terms.

Ultimately, there are a lot of things that advisors do for their clients to create value beyond ‘just’ producing a five-inch three-ring binder called The Plan once every few years. The key, however, is in being consistent, not only about the doing part, but systematically showing to clients that all the different pieces of their financial puzzle are regularly taken care of. Yet at the same time, it’s important not to get so focused on their systematic process that the advisor may miss uncovering a new issue or pain point. Which can be avoided by asking their clients ahead of meetings if there’s anything that they would like to cover in the upcoming meeting that isn’t already on the agenda... and then making that the very first thing they talk about. Because at the end of the day, the most effective way to demonstrate ongoing value to clients is simply to be ready and prepared to address their ongoing financial planning needs and concerns, whatever may arise!

How Transparent Nudges Can Help Clients Take Action… And Learn, Too

February 24, 2021 07:02 am 1 Comment CATEGORY: Client Trust & Communication

Financial advisors often have clients who are too busy to deal with many of the numerous tasks that are required of them by their financial plans, as their cognitive and/or emotional plates are filled by the issues that take priority in their daily lives. In these situations, advisors can use ‘nudges’ as decision-making aids that automate processes for clients, simplifying routine tasks and helping clients to sidestep potential struggles with willpower, rewarding them with quick results with minimal effort… which, in many instances, is exactly what clients want!

Yet, while nudges can be very useful tools for helping clients to take action, advisors who rely on using nudges with their clients – but who also want to educate their clients – may find themselves challenged to find opportunities to explain the larger reason of ‘why’ behind the financial plan. This is because the primary utility of nudges is often simply to help automate tasks, not necessarily to educate clients. In fact, nudges are often effective precisely because they bypass the parts of our brains that require conscious thought! But without getting educated on why they need to do what their financial plan says is important, clients may ultimately struggle with developing the resiliency and financial self-efficacy that can be crucial to staying the course prescribed by their financial plans in the long run.

However, the reality is that not all nudges are designed equally – there are some nudges that can still be used effectively when the advisor’s intent is to educate clients. There are two dimensions used to characterize nudges, which include Type and Transparency.

Nudge Type refers to the level of conscious thought required to carry out an action; it includes Type 1 nudges (involving automated processes and subconscious decision-making) and Type 2 nudges (involving deliberative action and conscious thought). Nudge transparency, on the other hand, refers to whether the intention behind the nudge is communicated and made clear to the client; the intention of a Transparent nudge is made clear to and is understood by the client, while a Non-Transparent is not.

The significance of understanding nudge types and transparency is that while advisors can effectively use Non-Transparent nudges to support their clients by automating simple tasks, it’s the Transparent nudges (whether they are Type 1 or Type 2) that still force at least some level of conscious thought about the nudge, thereby fulfilling the advisor’s objective to not just help clients change their behavior but educate clients so that they truly understand how their financial plan recommendations are, in point of fact, designed to support their financial goals!

Ultimately, the key point is that, by understanding the psychology behind different styles of nudges, advisors can use these tools to help their clients achieve their financial goals… and still help clients get educated and understand the ‘why’ behind their financial plans. As while some recommendations can be simply nudged to help clients take action with minimal thought and with little regard to the underlying processes (e.g., to set up monthly savings deposits), others necessitate clients learning and accepting the reasons for the things their financial plans require of them (e.g., to review and discuss potential portfolio allocation changes). And with the ability to discern not just when to implement nudges, but also which types of nudges to use, advisors can better match the approach to when clients just need help getting something done, and when there’s an opportunity for them to get better educated along the way (and build their financial resiliency and self-efficacy in the process)!