As financial planning firms, we offer a valuable service to consumers who are willing and able to pay for our services. Which is what makes the business of financial advice so valuable, and why the average income of a CFP professional is nearly double the median household income in the US. The unfortunate caveat, though, is that financial planning services still are not affordable to a large segment of consumers. Including, alas, the employees of most advisory firms, which means the very people who work there and are expected to advocate for the value of their firm’s services and the benefits of financial planning have never actually experienced it themselves!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the issues to consider for advisory firms that want to remedy this gap offering financial planning as an employee benefit to the employees of their own firm… including considerations such whether to provide such services internally or externally, whether to let employees choose their own advisor, the tax consequences to consider, and why providing financial planning to employees can actually provide an Return On Investment as employees gain better perspective on how to improve the firm’s client experience (by actually experiencing financial planning themselves!).
The first question you have to evaluate when considering how to offer financial planning as an employee benefit is whether you’re going to provide the financial planning services internally or externally. Offering financial planning “internally” means the firm’s advisors actually do the financial planning for its employees. Firms may put one associate advisor in charge of all internal planning, or perhaps provide several advisors that employees can go to (since it may be awkward to get financial planning from your direct supervisor). Which raises a real issue with trying to do financial planning internally for employees: there are many conflicts of interest that can arise. For instance, what if an employee’s financial plan includes a desire to leave the firm and go into another field? Or what if employees want to talk through the considerations of saving up enough money to buy out the founder in a firm (but don’t want to announce their intentions to their co-workers yet)? These issues may be awkward to discuss internally.
As a result, most advisory firms I’ve seen that offer financial planning as an employee benefit offer it externally. The most straightforward approach is simply to engage in a reciprocal agreement with another similar-sized advisory firm – where each provides services to the other firm’s employees. In this scenario, you will likely have a cost to actually pay the other advisory firm for their services as well, but if the firms are similar in size, presumably each firm will have roughly the same costs (and income) paid to each other. The caveat even with this approach, though, is that the firm may not actually have the expertise to help your employees, nor will you necessarily have the expertise to help theirs. Are you really prepared to develop for them a 3-year roadmap to repaying debt, navigating debt consolidation services, and repairing their credit scores, if that’s what your employee’s planning needs are?
Which leads to a third option for financial planning as an employee benefit: just give employees a budget for financial planning, and let them go and find their own advisor. And the benefit of this approach is that employees can seek out their own advisors through organizations like the Garrett Planning Network or XY Planning Network, which include financial advisors whose expertise is in the areas that typically-younger “rank-and-file” employees actually need, while also having pricing that is less expensive than larger independent RIAs (and therefore more affordable to the advisory firm offering the employee benefit).
Beyond the enhancements in employee well-being that can come from having access to financial planning services (e.g., reduced stress, less absenteeism, better utilization of employee benefits, and lower employee turnover), one of the biggest indirect benefits of using an external firm is that employees can actually experience what it’s like to seek out and be a financial planning client. Going through the process of finding an advisor, being onboarded, and then working with that advisor on an ongoing basis, gives employees perspective not only on the value of financial planning, but may also generate ideas about how to provide services better for the firm’s own clients. Of course, in order to avoid unintended negative feelings, it is important that employees understand the tax consequences of receiving financial planning as an employee benefit. Because financial planning is not a tax-qualified employee benefit perk, any money actually paid to an external firm (or possibly the market value of the services received internally), must be reported as W-2 income and becomes taxable to the employee.
The bottom line, though, is simply to recognize that financial planning services can be an excellent benefit to provide to employees, and particularly when employees get to seek out an external advisor and gain valuable insight into how your own firm can better service clients!
source https://www.kitces.com/blog/financial-planning-employee-benefit-advisory-firm-tax-consequences-w-2/?utm_source=rss&utm_medium=rss&utm_campaign=financial-planning-employee-benefit-advisory-firm-tax-consequences-w-2
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