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Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the fascinating news that #4 independent broker-dealer Commonwealth Financial is launching a standalone RIA services division, not just to service its sizable base of dual-registered advisors but a growing segment who have dropped their FINRA licenses altogether… but want to stay with the broker-dealer anyway for their non-broker-dealer RIA support services instead, as the brokerage industry increasingly reinvents itself for a more RIA-fiduciary-centric future!

Also in the news this week is the news that Interactive Brokers is scaling up its RIA services division (at least for RIAs that are still primarily in the business of actively managing client portfolios and want ultra-low trading costs), and the announcement that Edelman Financial Engines is launching a new RIA custody relationship with Trust Company of America now that the latter is part of E-Trade… to get access to a soon-to-be-launched (and likely-to-be-lucrative) E-Trade Advisor Network as E-Trade mimics the successful advisor networks of Schwab, Fidelity, and TD Ameritrade (at least, for the subset of advisors who can participate).

From there, we have a number of investment-related articles this week, including a look at how advisory firms are choosing their investments these days (hint: it’s all about fees, performance, and brand trust), a Morningstar highlight of Vanguard’s TIPS fund as CPI slowly but steadily starts to rise, and a look at how the growing number of firms beginning to automatically convert their C-shares to A-shares after 7-10 years may itself accelerate firms to transition to the advisory model to maintain their revenue (for which the end of the year is a good time to take a fresh look at the advisor’s own book of clients still holding C-shares). Also in the discussion of investments this week is a look at the “good” that Wall Street does accomplish, how to handle the situation when a couple doesn’t align on their risk tolerance, and why webinars can be a particularly effective method to reach (lots of) clients in times of market volatility.

We wrap up with three interesting articles, all around the theme of pricing model innovation amongst financial advisors: the first highlights a new Simon-Kucher study on advisory firm pricing models that finds it’s not actually so difficult to serve Millennials profitably… it just requires not using the AUM model and shifting to a more direct fee-for-service model instead; the second looks at some of the caveats of shifting to a flat-fee model, and how to build in ‘stabilizers’ to ensure that the advisor/client relationship doesn’t get too out of whack; and the last is a fascinating exploring of the “Good-Better-Best” approach to pricing models, where businesses offer three tiers and empower consumers to choose which they want for themselves.

Enjoy the “light” reading!

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With Cerulli Associates estimating that nearly 50% of all financial advisors are over the age of 55, the headcount of financial advisors is projected to shrink, potentially quite substantially, in the coming decade. Which can trigger more industry consolidation (mergers and acquisitions) and succession planning (as existing clients of advisors leaving the industry will need go somewhere else for advice), but also risks further slowing the amount of technology development and new businesses entering the marketplace to serve financial advisors (as many investors don’t want to fund businesses in a shrinking marketplace! Yet as it turns out, looking at the total number of “financial advisors” may actually be the wrong way to measure the trajectory of the financial advisor marketplace to begin with… and when viewed properly, the opportunities for serving (real) financial advisors is actually on the rise!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we discuss why it’s so difficult to estimate the number of existing financial advisors in the first place, why many of the predictions regarding the trajectory of the financial advisor headcount aren’t taking into account some key drivers, and why, ultimately, looking to the number of CFP certificants may offer the best perspective on the opportunities within the industry… and whether the number of people offering (real) financial advice is decreasing or actually increasing.

Cerulli Associates, who delivers some of the best industry research out there, estimates that there are just over 300,000 financial advisors – a surprisingly difficult number to estimate given the overlap of advisors across RIA, broker-dealer, and insurance channels. The caveat, though, is that fewer than half of them even state that they actually give financial planning advice… suggesting that the majority are “financial advisors” in name only but are still predominantly focused on the sale of insurance and investment products. This isn’t entirely surprising, though, given that there are only about 82,000 CFP certificants (and not all of those are practicing or, if they are, offering “real” financial planning)!

Nonetheless, the industry projection is that the advisor headcount “must” inevitably decline, given how many of the 300,000 financial advisors are over age 55. Yet the reality is that financial planning isn’t a career that you retire from simply because you’re eligible for Social Security and Medicare. Retirement as a concept was introduced during the industrial age when most people worked with their hands, and after a certain age, people weren’t able to meet the physical demands of their jobs anymore. However, providing financial advice is an intellectual, not manual, endeavor. And when you consider the fact that highly experienced financial planners on average make over $400k after 30 years of experience and that, by the time they reach 65, they’re not really working at the same pace that they did in their 30s, it just doesn’t make sense that a lot of folks would simply walk away from that sort of job until they had no other choice!

The other reason that the declining headcount may be overstated is that it’s based on the assumption that the industry won’t be able to attract enough new financial advisors. On the one hand, it’s easy to understand why Millennials are reluctant to join an industry that’s still seen as primarily sales-driven, but the projections don’t take into account the number of industry entrants who are career-changers. Because, the financial industry isn’t alone in dealing with the effects of automation, and the earnings potential as an advisor makes it an appealing option for those who are mid-career and looking for new opportunities… especially for attorneys and accountants, who are already in roles that oftentimes overlap with financial services, and are facing even more pressure from technology (e.g., TurboTax and LegalZoom) against their more-transactionally-oriented services.

Of course, some have suggested that it doesn’t matter how many financial advisors are coming into the industry or not because they just won’t be needed in the age of “robos” and automation. Yet the rise of technology and automation doesn’t always play out as expected. The introduction of ATMs in the 1970s resulted in an unexpected increase in the number of human bank tellers, rather than the decline that was predicted at the time, because the technology made banking so much more efficient it expanded the reach of advisors and increased human job opportunities (on top of all the ATMs!). Similarly, automation in the financial services industry has the potential not to make human advisors obsolete, but rather could spur potentially exponential growth in financial planning by allowing advisors to efficiently serve larger segments of the population… recognizing that the true number of households being served with real financial planning is at best only about 15% of all the households in the US. Simply put, there’s a huge opportunity out there to leverage technology and hire more human financial advisors serve the other 85% of the households that aren’t being served today. Not to mention that as technology puts more pressure on advisors to justify their fees in the first place, more and more advisors are starting to offer comprehensive financial planning, which is why (despite the lack of growth overall in the financial advisor headcount) a record number of people have been sitting for the CFP exam for the first time in recent years.

Ultimately, the key point is to recognize that overall industry trends about the “shrinking” headcount of financial advisors may be misunderstood. Despite projections that the industry will shrink in the coming years, there are plenty of good reasons to be optimistic about opportunities for financial advisors. The retirement wave will take much longer to materialize than first thought, and instead of being a threat to financial advisor jobs, technological efficiencies will help the industry expand into underserved markets and will end up increasing the demand for financial advice in the long run. Which helps to explain why the number of financial advisors is up over the past 5 years, despite the anticipated wave of retirees and the rise of the robo-advisor movement!

In the meantime, for those who really want to get a handle on the opportunities in the financial advice industry and the advisor marketplace, perhaps it’s time to stop looking at the number of people called “financial advisors” who are simply registered to legally sell insurance and investment products, and look to the number actually being trained to give and get paid for financial planning advice (through programs like CFP certification)… which shows that the market for financial advisors has never been bigger and stronger than it is today!

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Over the past few years, several high-profile data breaches have hit major US corporations, including Target, Home Depot, and Equifax, bringing into sharp focus the need for individuals and businesses to protect and defend their personal data. And the matter is especially important for financial advisors, both given the importance of financially-related personal data in particular and the fact that the SEC and FINRA have been increasingly aggressive in enforcing against RIAs and broker-dealers with lax cybersecurity. And in fact, the SEC itself suffered their own data breach in 2016, despite numerous warnings from the GAO about potential security lapses.

Yet while keeping client data secure is an integral part of an RIA’s compliance requirements, there’s little explicit guidance from any regulatory body as to what, exactly, advisory firms are realistically expected to and need to do in order to meet those requirements.

Fortunately, there are steps that RIAs can take to develop, implement, and maintain a cybersecurity program that meets SEC requirements. In this guest post, Patrick Cleary, Chief Operations Officer at Alpha Architect, uses the concept of “brilliance in the basics,” a core tenet in the Marine Corps, to explain how paying attention to basic (but important) details, being proactive, defining the specific reasons why cybersecurity is so crucial, and (most importantly) avoiding complacency at all costs, is at the core of any successful cybersecurity program for an advisory firm.

And while historically financial advisors have had to choose between either outsourcing the task of building out a cybersecurity program, or trying to decipher a mountain of regulatory material that’s heavy on concept but extremely light on actionable information, Patrick details the specific steps that any advisor can take to develop a cybersecurity program. Starting with the National Institute of Standards and Technology’s (NIST) comprehensive Cybersecurity Framework, Patrick provides explicit step-by-step guidance that advisors can take to understand what it is that they should really be managing in the first place, how to develop proper safeguards for client data, how to identify a breach when it does occur, and what actions to take during and after any cybersecurity events.

While there are no silver bullets, or one-size-fits-all approach or solution, the key point is to recognize that, by using the NIST framework and Patrick’s actionable guide, advisors can put themselves in a much better position to protect their clients’ data as well as the viability of their businesses. So whether you are looking for a framework to develop a cybersecurity program, want to stay up to date with a constantly evolving and important aspect of practice management, or want to better familiarize yourself with the subject before talking to a third-party provider, then we hope you find this comprehensive article from Patrick to be helpful!

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Welcome back to the 98th episode of the Financial Advisor Success podcast.

This week’s guest is Zach Teutsch. Zach is the founder of Values Added Financial, an independent RIA in the D.C. area that has quickly grown to more than $300,000 in recurring retainer fees since launching under 18 months ago. What’s unique about Zach, though, is that, in a world where we as financial advisors are typically trained to never talk about religion or politics with clients, Zach has specifically formed a niche in working with progressive Democrats, which undoubtedly drives some prospects away, but has also quickly accelerated the growth process for his firm in reaching the primary clients he wanted to work with anyway.

In this episode, we talk in depth about how picking a niche, even based on politics, can actually be quite effective, precisely because it helps to deepen the relationship with clients by having a shared set of beliefs. The kinds of clientele that Zach has been able to attract by focusing on a political niche, the way he’s created a sliding scale retainer pricing model specifically to fit his target clientele, and how he’s now developing his investment process specifically to combine impact and ESG investing, tax-loss harvesting, and an additional layer of charitable giving that his clients are uniquely engaged in.

We also talk about the rest of Zach’s financial planning process with clients, which isn’t just about working with progressives, but also simply the fact that most of his clients are high-income professionals in their 30s and 40s. The way he’s developed a list of what he calls financial planning interventions that he uses to demonstrate why his average financial planning retainer fee of $10,000 a year is still so worthwhile to his clients, how Zach has developed a unique exercise of helping clients prioritize with a deck of custom cards with financial planning needs and goals written on them, the kinds of career-related advice that he often talks about with his clients, and the way that Zach handles budgeting conversations with his younger clientele.

And be certain to listen to the end, where Zach talks about how he balances out his own needs to generate income from his practice while giving back to his community with pro bono services, and how the way that he’s chosen to structure his firm has, in his own words, gotten him to the point where he no longer feels like he has to choose between work that feels good and being financially successful.

And so with that introduction, I hope you enjoy this episode of the “Financial Advisor Success” podcast with Zach Teutsch.

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The conventional view in the financial services industry is that financial advisors must be extraverted to be successful so that they can find and develop a steady stream of new clients to work with. Prospective advisors who weren’t highly extraverted were often cautioned away – or outright avoided in the hiring process – and over time, an increasingly high volume of extraverts came to dominate the field.

Yet in our recent research study on the Financial Planning Process, a detailed look at the personality traits of 1,000+ financial advisors – using the “Big Five” framework of extraversion, conscientiousness, openness, agreeableness, and neuroticism – finds that in reality, extraversion is not the biggest predictor of success and staying power amongst financial advisors! Instead, while the majority of financial advisors are extraverted (and more so than the general population) the biggest traits that defined the longest-standing and highest-income financial advisors were being highly conscientious and very agreeable (but not necessarily extraverted!)!

In addition, the results of our research suggest that one of the biggest “deal-breaker” traits for success as a financial advisor is that they must have very low neuroticism (i.e., especially high emotional calm). In other words, not only do financial advisors often describe one of their key value propositions as helping clients to stay the course in times of difficulty and market volatility, but the most successful financial planners appear to be uniquely suited to do so with an unusually high level of emotional calm and low neuroticism as one of their natural personality traits!

Of course, the reality is that statistics describing a large swath of the population are still not necessarily definitive of the success or failure of any one individual. Yet nonetheless, it turns out there really is a “typical” profile of a financial planner, who is far more than just being extraverted… successful financial planners are also extremely conscientious, highly agreeable, and especially good at remaining calm during emotional times. Which suggests that perhaps it’s time to take a fresh look at how we identify and hire financial planners into the industry in the first place?

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Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the huge news that the FPA will be reorganizing its entire chapter structure, effectively disbanding its independent chapters and consolidating them into a single centralized “OneFPA Network” to leverage shared resources (from technology to accounting) and create better alignment from National to its chapters… though in a world where many FPA members were already citing that their local chapter presence was the primary reason they joined and stayed, it’s not entirely clear whether FPA’s planned change really addresses the organization’s root challenges to remedy its waning membership and share of CFP certificants in the first place.

Also in the news this week is the latest news about wirehouse grid coming changes for 2019 that are taking a striking focus on both investing into their advisors (with higher payouts for earning CFP certification) and also more of a tech focus (with grid bonuses to advisors who get their clients to increase their digital engagement as well), and a preview of the SEC’s coming changes to its advertising rules next spring that many hope will provide better clarify (and simply more reasonable regulation) when it comes to social media and digital advertising.

From there, we have a number of investment articles this week, from an interesting recent study by Fama and French showing that, even over a decade-long period of time, there’s a material chance that value, small-cap, or even stocks overall fail to outperform (and that therefore even the past decade’s underperformance of value could easily be just statistical noise), a review from Morningstar of the best 529 college savings plans (all of which are direct-sold, although the Utah my529 plan now has an advisor-supported option), and a good reminder of when and how to get more proactive in communicating with clients about rising market volatility (and when, perhaps, you shouldn’t, as it may be more likely to alarm clients than reassure them!).

We also have a few articles about industry changes around the broker-dealer community, including suggestions on what brokers should consider when they get the news that their broker-dealer is being sold (or even if they just fear it might happen soon), how shifts in wirehouse culture over the past 10-20 years have undermined their retention efforts, and how last year’s decision of Morgan Stanley and UBS to leave the Broker Protocol may ultimately be looked back upon as a major milestone in the industry… the point at which wirehouses in the aggregate recognized that their culture had become so watered down that they decided it was better to cut back on recruiting amongst one another altogether than risk continuing to lose brokers in the aggregate to the independent channels!

We wrap up with three interesting articles, all around the theme of the office spaces in which we work: the first is a look at how “natural light” has become one of the #1 perks in office space; the second explores how office space designers are looking at a possible future where there are no more desks and chairs in office spaces at all, shifting instead to a range of sofas of “softer” working spaces more conducive to personal interaction; and the last looking at the latest research on standing desks and finding that there may be more health benefits to them than recent critics have been suggesting after all!

Enjoy the “light” reading!

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Notwithstanding their commission-based roots as a product distribution intermediary, this year’s Financial Planning magazine survey of the top 50 independent broker-dealers showed that in the past year they generated more revenue from fees than from commissions. Yet even as broker-dealers transition from their commission-based roots to the fee-based model and provide more and more advice, the challenge remains that when historically broker-dealers went out of their way to not provide advice (to avoid the RIA registration requirements and advice liability that may result), too many broker-dealers still treat the growing volume of advice from their advisors as a liability to control and minimize, rather than a value-add to enhance… which will make it increasingly difficult for them to compete, even as they transition to the fee-based model.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we explore the roots of why broker-dealers historically have tried to prevent their representatives from providing advice, the ways that broker-dealers have tried to limit the scope of their representatives giving advice (from centralized planning departments to tech-delivered financial plans), and why the future of broker-dealers managing the liability exposure of providing advice is not about limiting the ability of their representatives to give advice but rather about investing in the training and education of their advisors to ensure they have the knowledge to give the right in the first place!

The trend of broker-dealers towards fee-based advice has been incredibly strong over the past decade, as the top-50 independent broker-dealers have risen from having fee-based revenue that is just 1/3rd of commissions, to surpassing it in the past year. And the trend appears to only be accelerating, due to both the simple realization that recurring AUM fees is just a much more stable and sustainable (and higher-valuation) business model, and the emerging trend of both US-based and global fiduciary regulation that threatens to curtail commission-based compensation and its conflicts of interest anyway.

The caveat, however, is that too many broker-dealers still don’t treat advice itself as a valuable service to amplify, but instead manage it as a liability exposure to be minimize. In order to mitigate that risk, some broker-dealers have created centralized planning departments, which often aren’t just about leveraging advisor efficiency, but instead are built to produce standardized “financial plans in a box” with formulaic advice that the “advisor” then (just like a pre-packaged product that they’d sell) “presents” to the client customer (removing the actual advisor from the advice equation!). And more are now looking to adopt technology that can further “standardize” the advice their advisors provide, eliminating the ability of the advisors to actually create more value-add with client-specific advice!

Which means broker-dealers risk unwittingly amplifying the breakaway broker trend to RIAs, even as they adopt their own fee-based models, not because their advisors want to transition to fee-based advice, but simply because their advisors want the freedom to actually give advice, customized to their individual clients. Especially as competition increasingly pressures advisors to move towards niches and specializations beyond mere “cookie-cutter” comprehensive financial plans.

Ultimately, though, the key point is simply to recognize that for firms that actually want to build value in an advice-centric future, advice should be treated as a value-add, rather than a liability. Which means the path to minimizing liability exposure is not to limit the ability of advisors to give advice, but to invest into their training and education with CFP certification and advanced post-CFP designations to ensure that they give the right advice in the first place, and form specializations (from student loan planning to retirement distribution planning) that further enhances their domain expertise and thereby reduces the risk of giving the “wrong” advice that creates liability for the firm!

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For most workers, employer retirement plan limits are what they are, with a salary deferral cap of $18,500 (in 2018), and the opportunity for employers to add even more on top in the form of matching, profit-sharing, and similar contributions (up to an aggregate limit of $55,000 in 2018). The general rule typically boils down to “save as much as you can, and be certain to capture any matching contributions at a minimum.”

However, for a subset of workers, there is a possibility of being covered by two (or more) different defined contribution plans at the same time. Either for those who have an employee job with two different businesses (each of which provides a 401(k) or similar defined contribution plan). Or because they have a “side hustle” in the gig economy that allows them to create their own “employer” retirement plan as a self-employed individual. Which raises the question of how to coordinate between the two (or more) plans.

The first limitation on employer retirement plan contributions, under IRC Section 402(g), is the salary deferral limit of $18,500/year, plus a catch-up contribution of up to $5,500. This limit applies once per taxpayers across any/all plans they’re involved with (except for 457(b) plans, which are counted separately, and IRAs, which have their own standalone contribution limits).

The second limitation is known as the 415(c) overall limit, which is the (currently $55,000, plus any catch-up contributions) cap on the aggregate total of all contributions that go into the plan (including both salary deferral contributions by the employee, after-tax employee contributions, and any/all contributions from employers, from profit-sharing to matching contributions). However, unlike the 402(g) limit which applies once across all plans, the 415(c) overall limit applies separately for each plan.

The caveat to the overall limit, though, is that if the employers are “related” to each other (either as a parent-subsidiary or brother-sister controlled group, some combination thereof, or an affiliated service group), the overall limit (along with other employer retirement plan testing rules and requirements) is applied once across all plans as well.

Which means that while individuals who work two employee jobs at independent companies can receive contributions from each, and employees who have their own side hustle can still create their own self-employed retirement plan with its own overall limit, entrepreneurs who own multiple businesses must be cautious not to run afoul of the controlled group requirements that would require them to aggregate all their businesses together and not “double-dip” by trying to reach the overall limit across multiple retirement plans from each separate-but-not-really-separate business!

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Welcome back to the 97th episode of the Financial Advisor Success podcast.

This week’s guest is Phuong Luong. Phuong is the founder of Just Wealth, an independent RIA specifically focused on working with younger clients in their 20s, 30s, and 40s who are still in the wealth building phase of their careers, and with whom Phuong meets entirely virtually using video conferencing tools, even though most of her clients are actually in the Boston area where she’s located as well. What’s unique about Phuong, though, is not just her virtual practice, but that she comes from a background of doing financial coaching and counseling, and as a result, more than half her practice is working with clients who are below the median household income in Massachusetts, about $75,000 a year, for whom she charges an ongoing monthly retainer fee of 1.5% of their monthly income.

In this episode, we talk in depth about what it’s like doing financial planning for lower and middle-income families. Why they really are willing to pay for financial planning advice despite being of limited means, how the focus typically is not actually on budgeting and household cash flow planning, but on building up their balance sheet instead, and why until those clients build up their personal balance sheet, it’s necessary to understand the community balance sheet of local programs and resources to help.

We also talk about the progression from financial education to financial coaching to financial counseling to financial planning. The differences in each of those terms, not just in regards to the income or affluence of the clients being served, but the mindset of the educator or coach or counselor or advisor working with the client, and the appeal for someone with a financial coaching background like Phuong to come into the financial planning world in the first place.

And be certain to listen to the end, where Phuong talks about the challenging ways that stereotypes about race and low-income individuals can become blocking points to giving them effective advice. How many of the financial challenges of working with people of color in her community can be traced back to institutional and government policies from decades ago that still have lasting effects in the compounding of income and wealth inequality, which in turn may be both limiting the reach of financial planning to minority communities, and our ability as a profession to attract people of color to become financial planners in the first place.

So whether you’re interested in learning about actions you can take to help improve diversity in the financial planning profession, Phuong’s unique career journey that brought her to financial planning or how she’s built a successful business helping underserved communities, then we how you enjoy this episode of the Financial Advisor Success podcast.

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