In a world where it can take as few as 50 great clients to build a successful advisory practice, many seasoned advisors have been able to build a business around a small group of clients who they like to work with (and who like them in return). Yet advisors who are at an earlier stage of their careers don’t typically have the luxury of being so selective in picking and choosing the clients who they want to work with and like, while instead there’s even more pressure on the advisor to be “likeable” in the first place; as the common aphorism goes, a client has to first “like you” before they’ll decide to trust you and hire you. Accordingly, then question then becomes, to what extent does likeability really matter in bringing on new clients and building relationships with existing clients, and conversely, how far should you go to come across as “likeable” to clients (even if it requires doing something that isn’t otherwise natural), and how common is it for clients to fire their advisors because they are “unlikable”?
In our third episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss the question of how important it is to be “likeable” as a financial advisor, why being your “authentic self” when it comes to communicating and interacting with clients might matter more, and why it’s important for newer advisors to avoid sending mixed signals to clients when trying to differentiate themselves.
Foregoing the (remarkably intriguing) possibility of developing a practice around the “curmudgeon” niche, the reality is that those who self-select into a career of financial advice often do so out of a desire to make a difference in people’s lives, which necessitates having some level of competency in interacting with others. Though beyond just being “likeable,” being able to connect with others is also about your style, behavior, and even your appearance… all of which might be adjusted in order to be more appealing to potential clients.
Because the reality is that it is important to tailor the way you communicate with and present information to various clients, as not all clients have the same preferences in how they want to receive advice in the first place (i.e., some clients might “only” want a big-picture summary, while others love to delve into all the gritty details).
Still, though, that doesn’t necessarily mean advisors should try to be something they’re not… and in fact, the more you try to be something you’re not, the easier it is to come off as inauthentic, instead. Rather, the key to finding people who like you and want to do business with you is by being your “authentic self,” and recognizing that, while not everyone may respond well to you, some will… and those are the people who you ultimately want to work with anyway!
On the other hand, “being your true self” doesn’t mean it’s a good idea to totally throw social conventions to the wind. Be aware that, particularly when clients come in, they expect certain things of a “professional”, and if you stray too far in an effort to try to stand out from other advisors (or just be your authentic self), then you can easily create uncertainty in the client’s mind as to whether or not you have the professionalism and competency to help them solve whatever problem it is that brought them to you in the first place.
Ultimately, the key point is that likability is important, to the extent that you need to provide great service to your clients in a way that works well for them. But, especially for newer advisors, it’s equally important to not create more barriers for yourself being inauthentic, or by trying to differentiate yourself in a way that is off-putting to clients. Because the differentiator that matters the most resides not in how you present yourself (whether by manner or dress), but in the questions you ask and the experience you create for clients… effectively differentiating on the value delivered to clients themselves, and not just by the advisor’s own style and likeability!
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With the ongoing commoditization of asset-allocated portfolios, there is an increasing focus on adding value to clients outside of the portfolio itself… which, in the context of the retirees that most financial advisors serve, means going beyond just retirement portfolio management and liquidation strategies. For many advisors, the starting point has been obtaining a deeper expertise in areas like Social Security timing and Medicare planning during Open Enrollment, and perhaps a more holistic view of planning for and managing health care costs in retirement. Arguably, though, perhaps the biggest area in which financial advisors can add value for retirees is not merely in the technical areas of planning, but in helping them make the life transition to retirement itself, and figure out how to live happy and fulfilled lives in retirement itself.
In this guest post, former actuary and Mercer retirement consultant, Anna Rappaport, shares her own perspective on retirement, the value that financial advisors can add and the “real” areas of concerns for retirees, as someone who has both consulted and studied the issue extensively… and is actually living it as a part of her own phased retirement for nearly 15 years.
As Anna finds that, in practice, the key to retirement well-being is to have a balanced “life portfolio” where the retiree focuses on 4 key areas: Health (and the activities to maintain and support health); People (family, friends, community organizations, and the ability to create new contacts as needed); Pursuits (work, volunteering, hobbies, community activities, caregiving, travel, etc.); and Places (home and community). As even with retirement finances well intact, retirees who have a gap in one or more of these areas may still struggle with their personal retirement well-being.
Accordingly, from the advisor’s perspective, asking probing questions about how a prospective retiree will round out the key areas of their People, Pursuits, Places, and Health life portfolio in retirement creates a unique way to enrich the client relationship, delving into the areas beyond the finances alone (even as finances do impact how retirees may try to fulfill their life portfolio as well).
And for those who aren’t certain what to talk about when it comes to the life portfolio, and the key questions to ask, Anna shares her own valuable perspective as a phased retiree herself on what the areas and issues really are, that retirees – and their advisors – should be more aware of!
Contributions you make to your 401(k) plan can reduce your tax liability at the end of the year as well as your tax withholding each pay period. 401(k) plan contributions.
Welcome back to the 113th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Stacy Francis. Stacy is the president and CEO of Francis Financial, an independent RIA based in New York City that manages nearly $280 million in assets for 140 affluent clients.
What’s unique about Stacy, though, is her deep dive niche into working with and financially empowering women. From her RIA’s focus on hourly consulting with women going through the divorce process before working with them as ongoing wealth management clients, to her launch of Savvy Ladies, a nonprofit dedicated to providing financial empowerment to women, and all stemming from Stacy’s own challenging family situation of witnessing a beloved grandmother who stayed in an abusive marriage until the end because she wasn’t financially empowered enough to leave.
In this episode, we talk in depth about Stacy’s unique niche focus in working with women who were recently widowed or going through a divorce, the unique referral network that she’s been able to develop by becoming known for a targeted specialization, how she effectively gets paid to market her wealth management services by getting paid hourly to consult with women going through the divorce process and then finding that nearly 95% of them stay on board for an ongoing basis thereafter, and why her biggest regret in the business is not making the decision to go all in to focus on her women and divorce niche sooner as her firm has grown as much in the past 3 years within her niche than in the prior 15 years leading up to it.
We also talk about the unique way that Stacy has structured her firm and developed her team to deliver services to clients. From a rotating team structure where one lead advisor may work with up to three different support teams of analysts and associate to service clients based on who will work with them best, to the firm’s use of interns to efficiently deliver the labor-intensive aspects of their investment and financial planning process, why the firm has two full-time employees and its own intern in marketing to help support in its ongoing growth, and why Stacy not only uses a business coach to guide her own success but also hires a separate coach to work with her team members and navigate their success as well.
And be certain to listen to the end, where Stacy shares why and how she ultimately decided to grow her advisory firm beyond just delivering services to clients herself, and why she believes that financial planning is an especially good career for women because of how flexible it is to mold the business around your life, even as she recognizes that she didn’t take advantage of that flexibility and ask for help early on in her own career when, in retrospect, she wishes she had.
The first time I heard a podcast as a listener, I knew it was something I wanted to do myself.
For me, the moment came when listening to a podcast called “This Is Your Life” by Michael Hyatt back in the summer of 2013 when I was on my own journey in finding a better work/life balance and stumbled upon Hyatt’s podcast on personal leadership.
The weekly episodes quickly became a weekly habit for me, and I was virtually always able to find at least one useful takeaway. The commitment was easy; I usually listened with it in the background while driving someplace or another, or while taking my daughter (back then I only had 1!) for a neighborhood walk in the stroller. Yet the connection was powerful. With the podcast playing in my ear, it felt like Hyatt was literally in my head, and that when he talked about his struggles, I was sharing in his journey and he was talking directly to me!
At that point, I resolved to launch my own podcast. As someone who writes very “long form” content, I’ve always been cognizant that there are many people who might be interested in what we have to share, but will simply never read a long “Kitces-style” article. So an alternative format – a podcast – was clearly a plus, as a different way to produce content and reach a slightly different audience that was more interested in learning through hearing than via reading. And I hoped that I’d be able to create a deeper connection with my audience by creating the same kind of “audio intimacy” that drew me to Hyatt’s work as well.
And so I resolved that, for 2014, I would have two strategic goals: 1) launch a podcast; 2) launch this “side business” idea that I had, called XY Planning Network. In reality, #2 launched first and grew so quickly that it consumed all my time to do #1 (not to mention that we separately launched the XYPN Radio podcast in the summer of 2015)! Life doesn’t always turn out as planned! And as a result, I didn’t manage to circle back to starting my own podcast until the summer of 2016, with a final launch at the start of 2017.
Now nearly 2 years, 100 episodes, and 1.6 million(!) downloads later, I’ve learned a lot about what it takes – and what not to do! – when launching a podcast and building an audience. And so, in the hopes that it is useful to at least a few others who may be considering whether to start a podcast as well, I share with you my journey and the lessons learned along the way!
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Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the huge industry news that Envestnet has purchased PortfolioCenter from Schwab, just months after Schwab announced that it was not going to create a full-scale upgraded cloud replacement to its still-popular platform, in what appears to be a tremendous strategic win for Envestnet (given both that Tamarac itself is built on top of PortfolioCenter, and that the acquisition gives Tamarac over 2,000 ‘new’ PortfolioCenter desktop users to cross-sell their Tamarac cloud-based solution to).
Also in the news this week is a study from Cerulli finding that consumers do increasingly show a preference to pay their advisors with ongoing AUM fees or retainer fees… unless they’re mostly self-directed, in which case they’d actually prefer to pay commissions on each transaction as needed instead. And there’s also a fascinating recap of industry lobbyist spending in financial services, which finds that product manufacturing and distribution firms (e.g., fund companies, insurance and annuity carriers, and broker-dealers) spent more than $15M in lobbying last year, while advisor-centric organizations spent less than $300k… which goes a long way to explaining why the industry manages to keep defeating or watering down each proposed fiduciary rule!
From there, we have several articles on marketing, from tips on how to actually pick a specific niche or otherwise select an ideal target client (from the seemingly endless number of available choices), to why factors like “having at least $500,000 in investable assets” or “is a delegator” may be important “acceptance criteria” to selecting a new client (or not) but should not be part of the description of your ideal client profile (because they don’t define needs that you solve that would make you more referrable), and a series of tips on what you must consider when designing a good financial advisor website.
There are also a number of investment articles this week, from two articles that look at how the recent launches of zero-fee mutual funds are not actually attracting significant new asset flows (suggesting that perhaps consumers are either becoming wary of “free” from financial services firms, or simply that index funds have become “cheap enough” that price is no longer going to be the driver it once was), to another that looks at recent criticisms against index funds from regulators wondering if perhaps there are now too many behind-the-scenes conflicts for index fund providers in how they construct and execute their index funds.
We wrap up with three interesting articles, all around the theme of personal productivity and efficiency: the first is a fascinating look at how Aaron Klein of Riskalyze manages his increasingly busy email Inbox (and why despite the near email overload, he views email as his “secret weapon” and not a burden); the second explores the benefits of time-blocking, where entire days are set to one type of task (e.g., client meetings) or another (e.g., internal/staff meetings and prep) to reduce the amount of task- and context-switching that ultimately degrades personal productivity; and the last is a review of the recent book “Atomic Habits” by James Clear, which dives into how to actually change and improve your habits for the better, noting that improving by “just” 1% per day leads to a massive 3,700% improvement in the span of a year, and emphasizing that the key to achieving even massive long-term goals may not be in focusing on the long-term goal itself, but simply trying to establish the small short-term habits that can help you get on the right track… and then let the compounding of that habit carry you the rest of the way!
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As the trend towards financial planning as the primary value proposition for financial advisors continues to gain momentum, one of the biggest challenges that emerges is freeing up the time to provide that financial planning advice to an ever-growing number of clients. As all growing advisory firms eventually get to a point where there just isn’t simply enough time in the day to devote to nurturing client relationships (and developing new ones) and do all the other stuff necessary to make the business actually happen! Accordingly, one of the most cost- and time-efficient ways to increase the time an advisor can spend better servicing clients is by outsourcing the process of implementing (and managing) investment planning recommendations to a TAMP, or turnkey asset management platform. Yet for those advisors who do decide to outsource their investment management, the question then becomes, with the dizzying array of TAMPs on the marketplace, how do you determine which one is best (or at least, best suited to the individual advisor’s needs)?
Accordingly, in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope, we examine six areas of due diligence questions to consider when choosing a TAMP, how to understand the real costs of TAMPs, and the various ways advisors can position the cost of paying for a TAMP’s services (alongside the advisor’s own advisory fee).
Of course, as an outsourced investment management platform, one of the first (and most important) questions to ask any TAMP provider is about how they approach investments in the first place. Because all investment management firms have some sort of philosophical preference…. and without getting into the merits of one strategy over another, the reality is that whatever approach a TAMP uses is going to become your approach if you use that TAMP. Which means, ultimately, you as the advisor are going to be the one responsible for not only selling that investment philosophy (and process) to your clients, but also defending that approach when the inevitable bear market or stint of underperformance occurs. So be certain the TAMP’s philosophy is one you’re ready and willing to defend… and that the TAMP has a process to execute that philosophy, and a performance track record to validate they can deliver!
From a more nuts-and-bolts perspective, other key points to consider when evaluating a TAMP include: make sure that the TAMP is approved on your platform (if you’re under a broker-dealer), or that the TAMP can work with your custodian (if you’re with an RIA); what sort of additional technology do the various TAMPs offer (because there is a wide variety amongst providers, with some offering their own proprietary solutions, others not offering any, while still other TAMPs bolt on other third-party platforms); and what amount of additional staff support does the TAMP offer (or not), including administrative services, investment research, and marketing support.
And don’t forget that you need to determine how much the TAMP actually costs. As with anything, you get what you pay for, and at least in the TAMP marketplace, the pricing usually coincides with the level of service and support that’s provided. But, some TAMPs do price higher than others, and you need to factor in the expense ratios of the investment products they use as well, which get stacked on top of the TAMP’s base fee and can materially impact the all-in cost to your client!
Finally, bear in mind that if you plan to use a TAMP, you have to figure out how you’re going to pay for the TAMP. Some advisors simply treat the TAMPs fees as an additional cost to the client over and above their own management fee (just as the client would have paid a mutual fund manager’s expense ratio above-and-beyond the advisor’s own fee), while other advisors treat the TAMP’s fee as a business expense (because they would have otherwise had to hire and pay staff to see to those duties) and pay it from their own advisory fee, while other advisors “share” the fee with their clients, tacking on only a portion of what they’re paying the TAMP and absorbing the rest of the fee themselves (in lieu of the other staff they would have had to hire anyway).
Ultimately, the key point is that it’s important to spend time taking a deep look at each TAMP provider to make sure that you’re both a good fit for each other, both from a pure philosophical investment viewpoint, and with respect to the technology and other support services the TAMP does or does not offer (which you may or may not need!), and make sure that their offerings address the needs of your clients and how you want to run your business. No one TAMP is the best solution for every advisor, and it’s worth your time to do the due diligence to find the right one for your current and future needs in serving your clients.
So we had this recent question coming from Meredith who said, “Dear Michael, I’m breaking away from a broker-dealer and opening my own RIA in May with about $40 million of assets and have decided that I want to work with a TAMP to outsource my investments. So I’ve been doing research on five different TAMP providers, and they all have their own little nuances, so I’ve made spreadsheets to break out their capabilities and their fees, but I want to make sure that I’m asking the right questions. What should I be asking?”
So this is a great question, Meredith, and one that I find is very common for firms at your size. It’s usually somewhere around the point between about $300,000 and $500,000 in revenue, which is, you know, usually about $25 million, $50 million of AUM, depending on what your AUM fee is, where a lot of advisory firms tend to hit a wall. And there are enough clients to manage on an ongoing basis that you have to make this decision where either you’re going to reinvest profits of the firm into a full-time staff member to handle all that trading and investment management research and support or outsource to a TAMP instead, right? And there’s nothing like that moment where you’ve got to hire a staff member to decide, “Am I going to hire this staff member and many to come or am I going to outsource this instead?”
So what kinds of questions should you be asking? You know, I’ve actually been involved over the years in building more than one TAMP myself, so I find there are a couple of common due diligence questions that fall into sort of six broad categories. So number one is what is your investment philosophy, process, and performance? Number two is what platforms do you work with or can you work with? Number three is what technology do you provide to support my advisory firm? Number four is what additional staff and support services do you provide? Number five is what is the cost? And number six is what is your ideal advisor profile in the first place? Like, who do you typically work with?
Finding The Best TAMP Investment Philosophy, Process, And Performance [02:45]
So let me dive into each of these in turn in a little bit more detail. So the first question to ask anytime you’re evaluating a TAMP is to find out what I call their three P’s: philosophy, process, performance. So the starting point is what is the firm’s investment philosophy in the first place? Are they passive? Are they active? Are they more tactical? Are they more strategic? Do they like using mutual funds and ETFs? Do they prefer holding a lot of alternatives? Do they like to tilt domestically or internationally or towards larger, smaller, growth or value? Virtually all investment management firms have some kind of investment philosophy, some sort of worldview about how investment markets work, where the opportunities are or not, how efficient markets are or not.
And I’m not here today to have the debate about which investment philosophy is right or wrong or have the active versus passive debate. But the key point is simply that whatever their philosophy is is going to become your philosophy. Because you’re going to need to explain their investment approach and philosophy to every new client you work with. And when that inevitable stint of bad performance comes or a bear market occurs and clients are asking those hard questions, you will need to defend that third-party investment manager and their results because you put your clients into it. So you’d better believe what they believe. Because if you’re not comfortable defending their questions to your clients, this isn’t going to go well for you when your clients are asking the hard questions.
And of course, it’s not just about their philosophy alone and whether you agree with it, there’s also the question of their investment process, the second P. Do they have a clear, consistent, repeatable process about how they’ll manage investments and execute so that you can have reasonable confidence that whatever it is they do they will continue to do and that your clients won’t be surprised that they went outside the lines of whatever it was that was expected? All good investment management starts with a good investment process and so they should have one that you also have confidence in and believe in.
And the third P is simply, what is their performance? You’re hiring them to be an investment manager, are they any good at it? Do they have a GIPS-compliant track record to show how they’ve done? Have they done well relative to their benchmarks? Did they lag their benchmarks? If they lagged, was it by an unacceptable amount because they are a passive manager who might inevitably lag, at least by the amount of their fees, and that’s okay because their fees are modest or did they underperform even worse? Or did they beat their benchmarks? And if they beat, was that because of luck or because they have some coherent investment philosophy and a repeatable investment process such that you think there’s at least a reasonable chance this is going to sustain in the future?
And again, I can’t emphasize enough that even the best investment manager will have tough times at some point, either because their investment strategy is out of favor or simply because the whole market has dragged down a bear market. And when that happens, the client asks hard questions. And so our performance is never guaranteed. At a minimum, you have to be confident that you buy into and are willing to defend the TAMP’s investment philosophy and their process, and that even if there’s recent bad performance that you’re confident will be rectified or your TAMP is going to make you lose your client. Because clients can sniff out pretty quickly that if you don’t have confidence in what you’re doing or who you’ve chosen to delegate to, the TAMP’s failure is your failure, and that tends to end a client relationship pretty quickly. So you have to start with the three P’s. Do you buy into their investment philosophy? Do you buy into their repeatable investment process, and do they have some kind of performance track record to back this up?
What Broker-Dealers, RIA Custodians, Or Other Platforms Does Your TAMP Work With? [06:24]
Now, the second question of TAMP due diligence is what platforms do they work with? Because not all TAMPs connect to all platforms. So if you’re working under a broker-dealer, you’ll need to see if the TAMP is approved on your broker-dealer platform. And if not, maybe what it takes to get them approved. Different BDs have different approval processes. If you’re an RIA like Meredith who asked the question, is the TAMP ready to work with the RIA custodian you are going to work with?
Now, many or I think even most TAMPs are multi-custodial but not all of them are. So if your clients are at Schwab and they only work with TD Ameritrade, this isn’t going to work, or vice versa, if they’re only at Schwab and you’re at TD Ameritrade. Unless you’re willing to move all your clients to a new custodian just to access your TAMP, which you might decide to do, but that’s a lot of transfer and repapering work. So you should know what platforms your TAMP works with, and does your TAMP work with your current platform? If you’re in transition like Meredith and are already eyeing a particular TAMP, make sure you choose a platform that your TAMP works with.
And clarify whether they’re available directly or only through a third-party like a broker-dealer or a managed account aggregation platform like Envestnet. Because the reality is that buying a TAMP or a separate account manager through someplace like a broker-dealer or Envestnet often has an additional cost, because that intermediary has to get paid. Now, that’s not saying there’s anything nefarious about it. Those platforms are providing a distribution and access service and often some level of due diligence as well, so they’re entitled to get paid, but you should know whether you’re accessing your TAMP directly or not and whether or how that’s impacting the cost you’re paying, and whether it would be both feasible and cheaper to connect with the TAMP directly, if you even can. Not all TAMPs have a direct relationship. But that’s why understanding what platforms they do or do not work with matters so much.
What Technology Do TAMPs Provide? [08:18]
Now the third question for TAMP due diligence is what technology the TAMP provides. This is an area that has a lot of variability. So some TAMPs provide access to like a full suite of technology tools. They might give you Envestnet’s Tamarac or Orion or some other third-party performance reporting tools and client portal. And maybe they also give you an investment proposal tool and a risk tolerance tool like FinaMetrica or Riskalyze. Some larger TAMPs, in particular, have built their own proprietary technology. They have their own tools that are fully integrated in the rest of their systems and processes, a provider like SEI. And some TAMPs actually provide very little in the way of technology and just say, “Look, we’re here to run the models and trade your clients and be sure they’re investing into the models, y’all use whatever technology you want.”
Now, none of these are necessarily better than the other. If you’re an independent-minded advisor, you might prefer a TAMP that just does the trading, lets you pick your own technology or that connects you to a third-party technology platform like Orion. So if you decide to leave the TAMP, you can keep Orion and just pay for it yourself. You don’t have to migrate systems. Other advisors don’t want to deal with all those technology decisions and responsibilities. They just say, “Give me a platform that works, I use your technology, as long as it’s easy, and it works for me,” and may prefer that all-in-one technology experience of a TAMP’s own proprietary and custom technology.
I think of this kind of like the Apple versus Google smartphone decision. So some people are really independent-minded. They love Google’s Android open architecture system. They like the flexibility. They want the choices and additional layers of customization. Yeah, it takes a little more effort to set up, but they can make it the way they like it and that’s what they want. Other people prefer Apple and the walled garden experience. Step inside of Apple’s nicely tended garden where everything just filter and screen up front and it just works. And it’s easy to use because they built it that way. And you may have fewer choices, but who cares because it works and you rather direct more of your focus on other areas than all this technology stuff anyways. So again, there’s no right or wrong answer here except that if you prefer more tech control, pick a TAMP that leaves you with more tech control. And if you don’t care about that and you may be happy with the TAMP that provides the tech on your behalf then pick a TAMP that provides the tech on your behalf. So find the one that fits your style.
What Additional Staff Service And Support Do TAMPs Offer? [10:33]
The next TAMP area of due diligence is understanding what kind of additional staff service and support the TAMP offers. Now, this is an area that actually varies even more than the technology variability is. While it’s common that TAMPs would at least do the actual trading stuff for you, that’s the whole point of the TAMP service, for some TAMPs, that’s all they do. Other TAMPs may provide additional back-office support, particularly in the area of client service administration, so someone that helps with the account opening forms and the transfer paperwork. Now, depending on your staff infrastructure and what do you already have, you may or may not care about that. Maybe you’ve already got your own client service administrator for that paperwork and you just want to outsource the investment management and trading part. Or maybe you don’t have the staff, you don’t want to hire it and you would love to outsource all of that client service administration and support work.
Another area TAMPs differ is how much support they’ll give you with individual clients and prospects. So some TAMPs have an investment research team that will help you create customized proposals, at least for maybe your more affluent prospects. Some TAMPs have investment experts that will meet with you and your top clients either in person or virtually if you want even more support. Now, again, depending on how deep your investment expertise or how comfortable you are having those conversations or doing those analyses, you may or may not care, but that’s the point. If you do care and want that, make sure you find a TAMP that offers it.
Similarly, TAMPs vary a lot in the marketing and prospecting phase. So some TAMPs, as I mentioned earlier, give you technology for investment proposals or provide pitch books or materials to explain their investment philosophy and process or have the training to teach you how to sell and explain their investment management process and philosophy to your prospects. Now, if you’re simply trying to outsource so you can have better work/life balance as a lifestyle practice, you might not care about that marketing stuff because you may not even be looking to grow. You just want to serve your existing clients. But if marketing and growth are important to you and you want and need help in this area, well, be certain you understand what kind of marketing support and help the TAMP provides or not.
How Much Does A TAMP Cost, Really? [12:31]
The fifth area to inquire about is cost, right? All TAMPs have some kind of fee for their services and clearly, you should know what it is. Now, historically, a lot of TAMPs cost as much as 75 to 100 basis points, but the recent trend has been coming down lower. And I see a lot of TAMPs today that are more in the 40 to 60 basis point range, some lower price offerings as low as 25 to 35 basis points. And there’s even a new TAMP provider called First Ascent that’s experimenting with just a flat fee model, like $500 per client account, period, rather than charging basis points at all.
Now, when it comes to TAMP pricing, there are kind of two general concepts I find that you should be aware of. The first is that in the world of TAMPs, you usually get what you pay for. Lower-cost TAMP providers do tend to provide a little bit less of bundled service support, hand-holding technology, some combination, while higher-cost TAMP providers tend to do more. It’s not perfect, but it’s actually a reasonably efficient market in the TAMP world. The second sort of guiding philosophy is that TAMP business is definitely an economies of scale business. There is a tendency that you get more for your buck, all else being equal, from larger multibillion-dollar TAMPs than from smaller platforms. Now, that’s not to say there aren’t some great boutique TAMPs that are smaller but provide good service, but I do find in general that, again, TAMPs are a relatively efficient marketplace, higher-cost providers tend to do a little more, lower-cost providers tend to either do a little bit less or be a little bit more targeted.
Now, as long as you’re happy with the suite of services you get for what you’re paying for, there’s nothing wrong with a lower-cost TAMP or a higher-cost TAMP, choose the provider that complements what you already have in your firm and what you need or want from your TAMP provider. But you should know the cost and you should know if it’s bundled together or priced a la carte. So some TAMPs have a basis point fee for the investment management but they pass through a technology fee. Some provide additional service support bundled into a single fee, others provide it as a separate fee. You know, you pay this much for the investment management and then this much for the administrative staff on top.
And of course, you have to be cognizant of the underlying costs of what they invest in as well. Do they use mutual funds or ETFs? Do they buy individual stocks and bonds? If it’s funds and ETFs, what are those expense ratios? Because that basically gets tacked on the TAMP’s fee, which then gets tacked onto your own investment management fee, and you want to be certain that the all-in cost is reasonable to the client. Bearing in mind that while we often talk about like the industry standard advisors charge 1%, that’s not the typical all-in fee. The typical all-in fee is about 50 to 75 basis points higher. So if we look at industry benchmarking studies, clients anywhere from a couple hundred thousand to a couple million dollars typically pay about 1.5% to 1.75% all in as a median fee. So the good news is that actually does leave you some room to charge your advisory fee and have the TAMP have its cost with the underlying cost but only if the TAMP’s fees are reasonable all in. Otherwise, you will be more expensive and at least you need to be prepared to justify that.
What Is The Ideal Advisor Profile For A (Particular) TAMP? [15:40]
And the last and final question when evaluating a TAMP is simply this, to ask the TAMP, “Who is your ideal advisor and what is the ideal client that they work with?” For instance, some TAMPs have minimums. They might only work with advisors with $10 million in assets or $25 million or more. Others don’t require any asset minimums, are more startup-friendly. So depending on where your practice is right now, that kind of dictates who’s a good fit for you.
So it’s important to clarify whether you as the advisor are the right fit? If you’re a $5 million advisor, you may not be happy at a firm that targets $50 million advisors. If you’re a $200 million AUM firm that can hire the staff yourself but you want to outsource but you expect a very full-service offering, you may not settle for a firm that primarily works with smaller solo advisors. If you work with affluent clients, you want investment strategies that are a fit for them. If you work with younger next-generation clients, you may want SRI and ESG strategies or other things that are more popular with them. So it’s all about the fit for the advisor’s firm and what clients they serve. Don’t let an overly generalist firm try to be everything to everyone for you, because if you don’t really fit their typical client, you’re probably going to find it’s not a great fit in the future.
How Will You Pay For Your TAMP Provider? [17:39]
Now, as we wrap up, there’s one other issue I would note in this decision about picking the best TAMP, at least for your firm, and that’s how you plan to position their value proposition and their cost relative to what you charge. Because I find there’s a lot of variability around this as well. Some advisors simply say, “Look, most prospects I talk to right now are mutual funds, they pay a mutual fund manager. And instead of that third-party manager, I’m going to put them with my TAMP and the client can pay the TAMP’s fee the same way that they pay their current mutual fund manager fee. And then they’ll pay my fee for the ongoing due diligence and review of the TAMP platform and all the other planning services that I provide.” So in essence, the advisor treats the TAMP like any other investment manager and passes through the investment management costs like any other mutual fund expense ratio.
Now, other advisors say, “Look, I could hire all the investment management people myself, the CFA to do the research and my own investment trader, these would have been costs for my business either way, so I’m going to pay the TAMP fee out of my AUM fee the same way I would have paid the staff out of my AUM fee. It’s all bundled together.” And I know a few advisors that actually split the difference. They say, “Look, I think a portion of the TAMP’s fee is the pure investment management fee that would have been like a fund expense ratio anyways that goes to the client, but a portion is really the staff and administrative cost that I would have paid for my own staff, so I’m going to split the TAMP’s fee, where a part comes from my fee and part is passed through to the client. So if I normally charge 1% AUM fee and the TAMP cost 50 basis points, I charge my clients 1.25%. So the TAMP’s 50 basis point fee, 25 bps goes to the client, 25 bps comes out of mine, all-in is 1.25%, TAMP gets 50 basis points, my fee drops from 1% down to 0.75%.”
Now, frankly, I don’t think there’s a right or wrong answer here because it depends on what your total fees are and how you’re positioning the solution in the first place. I see advisors pass 100% of the fee through saying, “Look, I provide advice on taxes but my client pays the CPA. I provide advice on estate planning but my client pays the attorney. I provide advice on investments but my client pays the TAMP.” You can provide advice something and get paid for it and still pay a third-party provider for implementation because advice and implementation are separate. But again, others say, “Look, my fee was already meant to be an all-in fee for advice and implementation, that’s how I position myself to the client, so I’m going to pay the TAMP out of my fee because my clients already have said, ‘Look, I’m paying you all-in and the implementation is supposed to come out of your fee.'”
So again, it depends on how you position in your first place, but either way, you should have some plan for how you’re going to handle the fee and position for the client, especially if you’ve got existing clients and revenue and this is a new TAMP you weren’t using before. Because either you have to explain to the client the benefits and ask them to pay more and pass the fee through to them or you need to be prepared to absorb the cost from your own fees, which may feel like a hit to your advisor income if you’re not prepared.
Now, of course, if you were hitting the wall, you were going to have to hire staff to do the work no matter what, so your income, unfortunately, was going to go down temporarily either way until you grow through it again, but you should have a plan about where this fee is coming from, and just understanding that some TAMPs are a little bit more conducive to one approach or the other. If the TAMP really is built to do all-in staff support servicing, it tends to be more expensive, but it may feel more appropriate to absorb part or all of that fee from your fee since they’re literally covering your staffing. While other TAMPs are built to be more of, I’ll call it an investment-only offering, where I think it is quite reasonable to pass the fee through to the client the same way an expense ratio for a mutual fund pass through for the client and then you get paid your advice fee for the advice that hopefully you’re providing is valuable. Otherwise, you’re going to get fired anyways.
But in any event, I hope that this is helpful as some food for thought to consider in trying to evaluate the various types of TAMP offerings and the areas where you can and you should compare and contrast them.
So this is Office Hours with Michael Kitces. Thanks for joining us, everyone, and have a great day.
Disclosure: Michael Kitces is a partner in Pinnacle Advisor Solutions, and also the XY Investment Solutions, which were both mentioned as potential solution providers for advisors in this article.
As a business owner, I’m always looking into tax laws for any new credit and deductions that I’m able to claim. Plus the tax code could change each year, so that’s why it’s important to stay on top of your...
One of the key challenges of determining “reasonable” spending in retirement is that, even if the advisor is right about the anticipated long-term returns of the retirement portfolio, there’s a risk that ongoing withdrawals on top of a series of early bad returns will cause the portfolio to be fully depleted before the good returns finally arrive to average out in the long run. As a result, retirees must generally spend less than what expected returns alone would otherwise predict is affordable, to defend against this “sequence of returns” risk.
Yet the caveat is that while a bad sequence of returns coupled with ongoing withdrawals can catastrophically deplete a portfolio too quickly, a good sequence of returns can quickly compound the portfolio so far ahead that substantial excess wealth accrues instead. In fact, because of how long-term returns compound to the upside, favorable sequences of returns actually produce far more excess wealth than unfavorable sequences risk to the downside. For instance, taking a 4% initial withdrawal rate has an equal (10%) likelihood of leaving all the retiree’s principal left over at the end of retirement… or leaving 6X the starting account balance remaining instead.
Which means not only is it important to give at least some consideration to the potential and upside “risk” of getting a favorable sequence of returns, but the asymmetric nature of sequence risk to the upside suggests that simply spending conservatively and adjusting later if a “good” surprise occurs may be too likely to leave dramatic levels of unspent wealth that could have been enjoyed earlier. After all, at a 4% initial withdrawal rate, the odds of nearly depleting the portfolio are equal to the odds of growing it by more than 800%(!), and even at a 5% withdrawal rate, the odds of depleting the portfolio early are equal to the odds of tripling the retiree’s starting principal on top of taking an initial withdrawal rate of 5% with 30 years of annual inflation adjustments.
So what’s the alternative? To plan, in advance, for retirement spending strategies to be more dynamic… at minimum, to have a ratcheting plan in place to lift a low initial spending rate higher if the sequence is favorable (or at least, is not unfavorable), and for those who are willing to be more flexible in their retirement spending, to set guardrails in advance to know both when to cut spending in a bad sequence, and when to lift it higher in a more favorable one.
The bottom line, though, is simply to recognize that sequence of return risk truly cuts both ways, creating both the risk of depleting a portfolio too early with a bad sequence (even if returns do average out in the long run), but also the risk of the retiree waiting to long to fully spend and failing to enjoy the assets and income that turned out to be available because a favorable sequence of returns occurred instead!
Welcome back to the 112th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Andrea Schlapia. Andrea is the founder of Ironstone, a practice management coaching and consulting firm that works primarily with midsize advisory firms that are struggling with the actual business execution challenges of transitioning from a practice to a business.
What’s unique about Andrea, though, is that she’s built upon her own prior experience as a financial advisor and a practice management consultant to develop what she calls the Fundamental 4 pillars of practice management and has developed tools and strategies to support each of the domains across the four pillars.
In this episode, we talk in depth about Andrea’s Fundamental 4 business framework of strategic planning, business development, operational effectiveness, and the human element, how most advisory firms have a natural strength in strategy and business development but may struggle with the operational effectiveness and human element, why Andrea advocates that, ultimately, a firm should take one development day per month where they close their doors to clients and solely work on the business instead of in the business, and why it’s so important to find the time to be ultra-selective in how you hire and develop your team in the first place.
We also talked about Andrea’s actual process for conducting interviews with prospective hires. Her four steps of phone screening, in-office interviews, a meeting over a meal, and what she calls an office simulation to really test a prospective hire’s skills in a real-world business setting, the assessment tools, including PXT Select and Myers-Briggs, that Andrea uses to evaluate whether a candidate really has the capabilities and personality to be a good fit for the firm, and her approach to doing what she calls not performance evaluations, but performance feedback sessions with all team members on a quarterly basis.
And be certain to listen to the end, where why sometimes even A plus advisors with their clients may still only be C plus business owners, and how to lift your own business owner and implementation grade by steadily building up the time you’re dedicating to developing your team and working on your own Fundamental 4.
So whether you’re interested in the tools you can use in the interview and onboarding process to make sure you get the right people into the right role at your firm, how to carve out enough time to work on your business instead of in your business, or how to make sure run an intensive interview process efficiently, then we hope you enjoy this episode of the Financial Advisor Success podcast.
With the financial advice industry’s roots being primarily in product sales, revenues (and compensation) have traditionally been the result of a “numbers game” and derived exclusively from a broker’s ability to get in front of as many people as possible and convince some percentage of them that they should buy whatever it was that the broker was selling. In other words, selling was entirely an outward process of distributing products and was best-suited to those who had highly outgoing personalities.
However, as the industry’s value-proposition continues to transition away from products and towards a more consultative, service-driven approach, the truth is that success as a financial advisor isn’t as predicated on having a certain personality type. But, while advisors might not be selling products, per se, it doesn’t mean that they’re off the hook when it comes to developing those business development skills, since they still have to “sell” themselves and their services to prospects and (on an ongoing basis) clients. Unfortunately, though, most advisor sales training programs today still focus on the traditional extroverted salesperson ideal (or try to nurture an advisor’s inner-extrovert instead), rather than playing to the advisor’s natural strengths and augmenting their personal styles.
Accordingly, in this guest post, Amy Parvaneh (founder and CEO of Select Advisors Institute, a coaching firm that works with financial advisors) discusses why sales training programs should be designed around an advisors specific personality type, the three Consultative Sales Personalities her firm has identified, and specific strategies each of those personality types can employ to turn their unique challenges into business development advantages.
For instance, advisors with the Charmer personality type are the “traditional” extroverted ideal, have the uncanny ability to make a connection with just about anyone, and typically shine in the relationship management stage. However good they are at striking up conversations, though, Charmers usually need help moving prospective clients through the sales process and closing new business (rather than just engaging in endless chit-chat!), and can gain a lot by going through a more formalized sales training program. By contrast, Strategics are another subset of extroverts, but ones who typically set clear and measurable goals, which pairs well with their ability to get in front of prospects and bring in new business. Yet Strategics often focus so much on “what’s next” that they have difficulty developing deep ongoing relationships with clients after they come on board (which makes them pair especially well with Charmers who can take over from there). On the other hand, advisors with the Researcher personality type are very analytical and more introverted, and struggle the most with “traditional” extroverted sales strategies. Yet with their ability to dig into complex financial planning issues, be good listeners, and show genuine empathy towards clients, Researchers can often be quite effective at business development and sales as well, but must engage in strategies that leverage their expertise to bring prospects in to them (because they’re not wired effectively to go out and find the prospects themselves).
The bottom line is that, by tailoring your business development approach to your unique sales personality, not only will you be better equipped to find your ideal clients and convince them that it’s worth it for them to pay you for your financial planning services, but you’ll be able to more effectively communicate the value that you bring to the table on an ongoing basis.
Now that we’re in the heat of tax season, have you started filing your taxes yet? We managed to get my husband’s W-2 in the mail along with some 1099s, so I spent last weekend entering them into TurboTax (love how...
Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that both Schwab and Fidelity are further expanding their list of commission-free (i.e., No Transaction Fee or NTF) ETFs, further expanding their offerings from both BlackRock and State Street, along with a number of secondary ETF providers… but still with the notable absence of Vanguard’s ETFs, as the battle of RIA custodians requiring back-end shelf space payments for access to NTF platforms continues to heat up (and raising the question of whether Vanguard may someday launch its own RIA custody platform with open access to all ETFs on a no-transaction-fee basis, to match its recent retail NTF ETF offering). Also in the news this week was the announcement that UBS is looking to launch its own internal independent channel, ostensibly to further stem the tide of brokers still moving independent even after the firm left the Broker Protocol.
From there, we have several articles on practice management, including: how industry benchmarking data shows that advisory fees are not declining (despite robo-advisor competition), but profit margins are beginning to suffer as advisory firms reinvest into providing more value-added services to justify their current fees in the face of competition; why it’s important to focus on service to clients and not pursue industry recognition awards (and more generally, the danger of ‘vanity metrics’ that can distract from an advisory firm’s core focus); and how to think about segmenting services to clients in order to serve smaller clients profitably.
There are also a number of marketing articles this week, from some tips from marketing directors at large RIAs about what smaller RIAs could be implementing as well, to ways to show clients you’re really “worth it” when trying to justify fees, why new clients toss the typical advisor’s Welcome Packet in the trash (and how to make it better), and an interesting tactic of learning more about your ideal clients and what they really care about by simply trying to figure out what their favorite magazine would be (because niche magazines themselves have often already spent extensively on researching what’s most important to their niche clientele).
We wrap up with three interesting articles, all around the theme of industry change and disruption: the first looks at Ken Fisher of Fisher Investments, which recently crossed the stunning threshold of $100B of assets under management, driven heavily by aggressive spending in marketing even as most advisory firms maintain there’s no value to spending on marketing for clients; the second examines the big buzz at the recent Inside ETFs conference, that even as ETFs continue to disrupt the mutual fund industry, the next disruptor – of ETFs themselves – may have already appeared, in the form of technology-driven “Direct Indexing” that replaces the need for funds altogether; and the last similarly looks at how, even as Vanguard grows in its dominance amongst asset managers, changing competitive dynamics raise the question of whether Vanguard itself will have to restructure under new CEO Tim Buckley to stay ahead over the next 10 to 20 years.
And be certain to read to the end, where we include a video from advisor tech guru Bill Winterberg, highlighting some of the notable advisor FinTech trends on display in the VEO Village at the recent TD Ameritrade National LINC conference!
Happy Valentine’s Day week to all of the lovebirds out there! Whether you’re enjoying a night out on the town or staying in for a movie night, we want to give you even more reasons to celebrate with your loved...
For most of the financial advice industry’s history, figuring out compensation has been relatively straightforward, as the commission rate that a broker received was set by the manufacturer of the products that were sold. And even as the industry moved more towards the investment management (AUM) model, compensation rates became a little less rigid, the standard fee of 1% of assets under management acted as a firm pricing anchor. However, with the shift in recent years to holistic, advice-centric approach – where advisors sell the value of their personal time and advice and can ask for any price they want – clear pricing standards have gone out the window.
In our second episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss the question of establishing a price for your financial planning services, why many advisors feel such anxiety over setting (and sticking to) their pricing model, the ways in which advisors can communicate their value to prospects and clients to justify their price, and why, many times, problems around pricing are really the result of our own inward confidence problems.
Because the reality is that advisors offering holistic planning are essentially rudderless when it comes to knowing how much to charge for their services. For the first time we, as advisors, have to convince our clients (and ourselves) that the intangible service that we provide is worth at least the price at which it makes sense to operate as a viable business. As while value in the past was defined by the products brokers had access to, now that “value piece” is far more esoteric and relies not only on our own knowledge and expertise, but (sometimes more importantly) in our ability to communicate effectively enough that it results in positive client outcomes!
And since consumers have access to far more information than they did in the past, the odds are that, at some point, a prospective client is going to push back on your price and wonder why they should pay you more than some other advisor with a seemingly similar “comprehensive financial planning” offering who charges less… or the inexpensive, automated service from the online robo-“advisor” with a substantial advertising budget. Fortunately, though, by focusing on a niche with unique challenges and by going deeper on issues that that virtually no one else is talking to them about, advisors can have an easier time communicating the value they bring to the table.
More generally, advisors who get questions about their fees might look at their own “lead nurturing” process. Because, if a prospect has opted to sit down with you in the first place, and after uncovering their desired future state, what’s holding them back, and how you can close that gap for them, they still don’t understand why you charge what you do… then the problem might not be with your pricing, but with how you present yourself to the public in the first place.
Ultimately, the key to the pricing conversation is that you, as an advisor, have a story that you believe in around the value that you provide, and can articulate that to clients and prospects. Because once we believe in ourselves and the value that we bring, then we can set a price… and be confident that we are worth what we say. In other words, if at the end of the day you’re concerned about your pricing, be mindful of whether it’s really a problem of whether your price is appropriate for the value you provide… or if you just need to get more confident in your own value proposition in the first place.
Being single brings several big upsides, like having the freedom to spend your time and money on the things that are important to you (and you alone)! Though getting married is a well-known tax advantage, being single can also come...
In a classic case of “the gift that keeps on giving,” the new IRC Section 199A included in the sweeping changes to the Internal Revenue Code introduced in the Tax Cuts and Jobs Act enacted by Congress in December 2017 has the potential to help certain business owners significantly reduce their annual tax bill with a 20% deduction against their “qualified” pass-through business income. With the caveat that, when it comes to real estate, the new Qualified Business Income (QBI) deduction only applies against business income, and not against “mere” investments in real estate.
In other words, to qualify for the 20% QBI deduction as a rental real estate business owner, a taxpayer must establish that they’re engaged in a “qualified trade or business” in the first place. Which, when it comes to rental real estate activity, isn’t always clear (especially since Congress didn’t fully define what constitutes “a business” for the purposes of the new IRC Section 199A in the first place)!
Fortunately, the IRS has now provided final Regulations that create a clear safe harbor for when a rental real estate enterprise will clearly qualify as a business for purposes of the Section 199A deduction. Specifically, to qualify for the 20% QBI deduction on rental real estate, the taxpayer’s real estate must be directly owned by an individual or eligible pass-through entity (or through a disregarded entity), and the taxpayer (either directly or through employees of the business) must also put in at least 250 hours of documented “rental services” activity in order to qualify.
Notably, though, this 250+ hour requirement carries its own quirks and nuances. Importantly, it’s not an overall requirement, but rather, the 250 hours of “rental services” must be performed foreach enterprise, which again, potentially forces the taxpayer to make some important tradeoffs, since treating individual rental properties as separate enterprises has typically offered more flexibility for planning purposes but will now make it harder to qualify each separate property for the QBI deduction. Still, for purposes of counting those 250 hours, the IRS doesn’t require that the services (including such things as advertising, collection of rent, supervision of employees, operation and maintenance, etc.) be performed by the owner themselves, but instead can be performed by an agent, employee, or independent contractor.
Ultimately, individuals who don’t meet those safe harbor requirements still have the opportunity to offer “proof” that they have such a business (but they will bear the burden of backing up their claim – possibly in court – should the IRS stop in for a visit). Though shifting all rental activities to the lessor – e.g., via a triple-net lease – will unequivocally not qualify for the QBI deduction in the future, as it transitions the real estate purely into a passive investment holding!
Fortunately, for most rental real estate business owners, the safe harbor in the new Regulations provides reasonable clarity about whether their rental enterprise(s) will qualify as a business. But significant complexity remains for some, especially those who own multiple rental real estate properties, and must make decisions that weigh the asset protection and other benefits of maintaining them as separate enterprises, against the new burdens of “proving” it is a rental real estate business without being able to meet the 250-hours-per-enterprise requirement.
Welcome back to the 110th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Jim Stackpool. Jim is the founder of Certainty Advice Group, a practice management consulting firm for financial advisors based in Australia. What’s unique about Jim, though, is his particular focus on how to price and demonstrate the value proposition of what he calls non-product-based financial advice, which is increasingly relevant as fiduciary regulation continues to crop up both here in the U.S. and especially in Australia.
In this episode, we talk in depth about how to think about the true value of financial advice. How the expert value of the advisor themselves should be distinct from the products we implement, just as every surgeon uses a scalpel, but the value of the surgeon is not measured in scalpels, why the value of advice is not merely tied to a goals-based conversation but must tie to their real-world complexities, and why in the end we should focus more on the enduring value or what Jim calls the profound value of financial advice that can have material life-changing impacts for clients.
We also talk about how to know whether your advisory services are currently priced appropriately. Why it’s actually a problem if you get too many people saying yes to your advisory fee pricing, how even on renewal you should consider raising advisory fees to elevate the business and the work it does with clients, even if you lose a few along the way, and why the AUM model does perhaps have it easier than other pricing models, since fees tend to naturally lift with the growth of the markets, but even under the AUM model, it’s still necessary to be reinvesting into your own value proposition of clients or eventually, your fees will naturally drift so high that clients may no longer be willing to pay them.
And be certain to listen to the end, where Jim shares some perspective on the fiduciary regulation changes underway in Australia, where regulators have been even more aggressive in calling out the financial services industry’s worst practices in what may culminate in a total breakup of Australia’s wirehouse equivalents and a rapid explosion of the Australian independent advisor, akin to the IBD and RIA movements here in the U.S., which raises interesting questions about whether U.S. regulators may also someday become similarly aggressive towards the vertically integrated product distribution model here too.
So whether you’re interested in what Australia’s sweeping regulatory changes mean for their advice industry, ways in which advisory firms can provide more value to their clients, or how the industry might evolve in the coming decade, then we hope you enjoy this episode of the Financial Advisor Success podcast.
Tax season is approaching, and you may have a handful of questions that are top of mind as you plan to file. Can you deduct cryptocurrency losses? Do students have to file taxes? Can you pay your taxes later if...
The AUM model for financial advisors has experienced tremendous growth over the past 20 years, from the rise of the independent RIA to the broker-dealer shift to fee-based accounts. And despite the rise of critics questioning whether the AUM model is the most effective way to align what the client pays with the value being provided, the accelerating momentum of major firms transitioning to the model suggests that not only is the AUM model here to stay… but there may soon be too many financial advisors using the same AUM model to pursue the same relatively-few households who have sufficient liquid assets available to invest and who are actually willing to delegate them to an advisor in the first place. In fact, if the entire advisory community makes the AUM shift all at once, there may be no more than about 23 clients per advisor available!
Yet the reality is that the opportunity in the marketplace for financial advice goes far beyond just those who have at least $100,000 of investable assets available to roll over to an advisor to manage. In part, this is because some advisors are now shifting to an “Assets Under Advisement” (AUA) model that aims to charge clients not just a percentage of their managed portfolio, but a percentage of their entire net worth (on which the financial advisor is providing holistic financial advice), opening up a larger segment of Mass Affluent (and Millionaire) households who have the financial ability to pay for advice, but not the liquidity to access it by rolling over an investment account (e.g., because their assets are tied up in a 401(k) plan where they’re still working!).
However, the even-bigger opportunity to expand financial advice is not just to shift from charging a percentage of assets to a percentage of net worth, but instead to charge a percentage of income instead. Which opens up yet another swath of consumers – commonly known as the “HENRYs” (short for High Earner, Not Rich Yet) – who may not have substantial assets or net worth, but have more than enough income to pay for advice directly out of their income, whether on an hourly, monthly subscription, or annual retainer basis.
And while for high earners, the most straightforward approach may be to simply shift from charging 1% of assets to 1% of income, the reality is that just as AUM fees are typically tiered on a graduated fee schedule – with higher-percentage fees for smaller portfolios and lower fees for sizable accounts – a percentage-of-income fee could be tiered as well. In fact, at a 2%-of-income fee, even median-income households (earning approximately $60,000/year) become economically feasible to service with advice… for which even a 2%-of-income fee can often be recovered by providing good advice on the other 98%, at a cost that is little more than what such individuals would pay in commissions on even a modest IRA rollover into A-share mutual funds or via an insurance purchase.
The key point, though, is simply to understand that, while the AUM model continues to be popular, and has a lot of benefits that make it easy for consumers to pay and highly scalable, it is naturally limited in market size to those who have liquid portfolios available to manage. While the rising shift to alternative models, particularly a percentage-of-income fee, opens up entirely new “blue oceans” of consumers who are not served today by holistic financial advisors!
The answer to that question is yes – but it may be limited based on your situation. Due to the tax reform law passed in December 2017, you can still take tax deductions for certain expenses related to home ownership....
The IRS issues tax refunds when you pay more tax during the year than you actually owe. When you file exempt with your employer for federal tax withholding, you do not make any tax payments during the year. Without paying tax, you do not qualify for a tax refund unless you qualify to claim a refundable tax credit.
Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that state legislators are taking action yet again to fill the fiduciary void left by vacating the DoL fiduciary rule and the SEC’s non-fiduciary Best Interest Regulation… this time, from Maryland, which has proposed a new fiduciary rule that would uniformly apply to RIAs, brokers, and insurance agents, and setting off the usual objections from industry product manufacturers that a state patchwork of fiduciary rules will create an unnecessarily high burden of regulatory complexity (albeit while the industry also continues to fight against fiduciary regulation at the Federal level, too!).
Also in the news this week is coverage of the recent TD Ameritrade LINC National conference where CEO Tim Hockey vowed not to compete with the RIAs on its platform (as the issue of RIA custodians with retail divisions competing against their own RIAs becomes an increasingly sensitive issue), a new diversity push at Edward Jones to steer retiring advisors’ books of clients to advisors who are women and people of color that some are claiming goes “too far” by paying advisors more to hand off clients to minorities (and less to transition their clients to another white male), the news that within 2 weeks of Bogle’s death Vanguard removed its claims of being an “at-cost” and “no-profit” provider (though it’s unclear if the firm is really changing its strategy, or simply backing off claims that were causing it legal troubles about whether its pricing was an inappropriate tax dodge), and a look at Fidelity’s expansion of its model portfolios as advisors increasingly outsource investment model design and implementation (which asset managers like Fidelity are using as an opportunity to increase their own assets by offering pre-built models that ‘happen’ to predominantly use their own proprietary funds).
From there, we have several articles on advisor technology, from a discussion of whether presentations on advisor technology should be eligible for CFP CE credit, highlights from the T3 advisor technology conference, how the rise of Artificial Intelligence (AI) will likely play out with advisors in the coming years (think less “robots replace advisors” and more “software that combs through data to identify planning opportunities for advisors to discuss with their clients”), and a review of the ongoing technology initiatives at all the major RIA custodians as a veritable ‘technology arms race’ gets underway as platforms compete for advisors’ attention.
We wrap up with three interesting articles, all around the theme of the changing landscape of the financial services industry itself: the first looks at the recent Royal Commission report in Australia, a highly critical review of their conflicted financial advisor landscape, and the rather drastic changes that the regulators may now implement to ensure advisors are truly acting in the best interests of their clients and not merely as salespeople for their company’s products; the second is a fascinating exploration of the evolution of the financial services industry over the past 130 years, which finds that despite exponential growth in technology efficiencies, the financial services industry all-in takes the same 1.5% to 2% of assets to facilitate investment now as they did more than a century ago (albeit while providing more value-adds for the same aggregate fee); and the last which looks at research on the true value that clients get from planning for their future finances, and how financial advisors in particular appear to provide the most value and best outcomes for at least those planning-oriented clients.
How’s this winter going for you? While we managed to only be grazed by the polar vortex last week here in North Carolina, somehow, someway, snow still found its way to us. And whenever it snows (even if it’s only...
While both tax deductions and tax credits can save you a significant amount of money on your taxes, they work in significantly different ways. Find out how here.
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In December 2017, Congress passed “comprehensive tax reform” via the Tax Cuts and Jobs Act. The law was a once-in-a-generation, massive rewrite of the Tax Code, and gave birth to IRC Section 199A, which allows certain owners of pass-through businesses to receive a deduction for up to 20% of qualified business income.
While the new deduction will be a powerful way for many business owners to reduce their tax liability, it comes at a price… complexity. Many tax experts believe that “new” IRC Section 199A is among the most complicated aspects of the Tax Cuts and Jobs Act. And as evidence to support that claim, individuals can look no further than the IRS’s massive dump of Section 199A guidance on January 18, 2019. That trove of 199A guidance included 247 pages of Final Regulations and discussion, additional Proposed Regulations, IRS Notice 2019-07, and IRS Revenue Procedure 2019-11!
Critically, the introduction of the Section 199A deduction means that business owners must reevaluate their planning from the ground up, as even “obvious” decisions may need to be altered in light of the new rules. Case in point? Going forward, the Section 199A deduction will dramatically reduce the value of a tax-deductible retirement plan contributions.
This new “deduction-reduction problem” with pre-tax retirement contributions arises from the fact that the Section 199A deduction only applies to qualified business income, which is essentially the profits of a company. But when an S corporation makes an employer contribution to an employer-sponsored retirement plan, that contribution, itself, reduces corporate profits. Thus, there is less profit on which the 199A deduction can potentially apply. The sum of these moving parts is that, for some S corporation owners, a contribution to an employer-sponsored retirement plan will effectively result in a partial deduction, but still subject the entire contribution, plus all future earnings, to income tax upon distribution.
Prior to the issuance of the Final Regulations, it was widely assumed that this issue was only applicable to owners of entities taxed as S corporations, since contributions to retirement plans for sole proprietors and partners do not reduce business profits, but rather, are taken as personal above-the-line deductions on new Form Schedule 1 (formerly on the bottom of page 1 of Form 1040). The Final Regulations, however, make clear that sole proprietors and partners must also “back out” these amounts from business profits prior to the application of the 199A deduction. Thus, the “deduction-reduction problem” created by the Section 199A deduction will impact far more small business owners than previously thought.
In general, the primary reason a business owner should make contributions to a tax-deductible retirement plan (as opposed to a Roth-style plan) is that they believe that they are in a higher tax bracket today than they will be when they distribute those funds (along with their earnings) in the future. But when, in effect, you’re only getting a partial deduction for amounts contributed to a plan today, but still have to pay taxes on the “full boat” in the future, it changes the calculus quite a bit! Notably, for business owners who find themselves in this situation, their future tax rate must be even lower for the tax-deductible contribution today to make sense.
But just because a business owner isn’t getting the same bang-for-the-buck on a tax-deductible contribution doesn’t mean that they should throw in the tax-preferred-retirement-savings towel altogether! Instead, 401(k)s with a Roth-style option will simply become more valuable. And for those business owners looking to sock away more for retirement than the $19,000 maximum Roth 401(k) deferral ($26,000 if 50+ by year-end) for 2019, making after-tax contributions to the 401(k) plan (potentially to later convert under the “Mega-Back-Door Roth” strategy) can be an increasingly attractive option as well.
Of course, there is no -one-size-fits-all solution, and there are still plenty of business owners who will continue to benefit from tax-deductible contributions. Such business owners include those in Specified Service Businesses whose income is so high that the QBI deduction is phased out anyway (such as high-income financial advisors, doctors, lawyers, consultants, and accountants), those who believe that their future marginal tax rate will be significantly lower than the marginal tax rate they face today, and business owners who need to reduce their Adjusted Gross Income (AGI) to qualify for other deductions, credits, etc. (as the Section 199A deduction happens “below-the-line” and itself does not reduce AGI).
And of course, it’s important to recognize that tax-favored retirement accounts, in general, should not be abandoned altogether in light of the deduction-reduction impact of Section 199A. While the new deduction-reduction limitation definitely tilts the balance more towards Roth-style retirement accounts, the tax-deferred nature of all retirement accounts cannot be overlooked. Thus, even getting a partial deduction on a contribution today, while paying income tax on the full amount (plus earnings) in the future, will often be preferable than simply investing the same amounts in a taxable account where the entire contribution is implicitly taxed immediately (as an after-tax-dollars account) and then experienced further annual “tax drag” from interest, dividends, and capital gains.
Ultimately though, the most important thing for business owners and their advisors to realize is that the Section 199A deduction’s complexities go far beyond just the calculation of the deduction itself. Rather, there are ripple effects that make it necessary to take a fresh look at every element of a business owner’s overall tax plan, including which type of retirement plans will really provide the maximum benefit in the future!
