Weekend Reading for Financial Planners (July 3-4)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Biden Threatens To Dismantle Two Estate Planning Strategies For The Richest 0.1% (Allyson Versprille & Ben Steverman, Bloomberg) – Last month, the White House released its prospective budget for the FY 2021-2022 fiscal year (also known as the “Treasury Green Book”), which generated significant media attention due to its proposal that the potential increase in long-term capital gains and qualified dividend rates under the American Families Plan might be applied retroactively back to April. But also notable in the Treasury Green Book were a series of proposals to crack down on a number of popular ultra-HNW estate planning strategies. First and foremost, the Green Book proposals take aim at so-called “dynasty trusts” (generation-skipping trusts that may remain in place for more than a century, or in some states ‘in perpetuity’), with a provision that would force dynasty trusts to pay capital gains taxes on appreciated assets – even if not otherwise sold and realized – at least once every 90 years… but with a first taxation date that could kick in as soon as December 31st of 2030. In addition to the capital gains taxes on dynasty trust assets themselves, the Green Book proposals would also apply a capital gains tax when assets are transferred into, or distributed out from, Intentionally Defective Grantor Trusts (IDGTs), effectively eliminating the ability to use an IDGT to shift appreciation on fast-growing assets out of the estate. Ultimately, though, the Green Book proposal is simply the administration’s suggestion of what the budget should be, while it’s up to Congress to actually embody it in legislation, including any proposed “crackdowns” on estate planning strategies. Which means it remains to be seen whether the provisions will come to pass – as prospective crackdowns on IDGTs and similar strategies were also proposed in prior Treasury Green Books under President Obama, but never implemented. Nonetheless, it’s notable that overall, the approach of the Biden administration is not necessarily to increase the estate tax rate or reduce the estate tax exemption… instead, the focus appears to be squarely on tightening the screws on the current system to simply make it more difficult to plan around the estate tax system as it currently exists.

The Services Wealthy Clients Value Most (Catherine McBreen, Advisorpedia) – While a number of industry studies in recent years have come out to try to mathematically quantify the value of financial advice, ultimately the true “value” of a financial advisor is based on what the client themselves values in the relationship. Accordingly, Spectrem Group recently conducted a consumer survey to ask consumers what they either find to be “valuable”, “beneficial” (i.e., ‘helpful’ but not all that valuable), or simply “not needed” from financial advisors. Topping the list was the ability to “provide unbiased advice” (i.e., to be an objective fiduciary), followed by “having knowledge I am lacking” (i.e., some kind of advanced education or otherwise unique expertise). Also high on the list was “keeps me from making bad investment decisions”, though notably “guidance during turbulent markets” and “helps me avoid buying high and selling low” were ranked lower, and “helps me avoid emotional financial decisions” was one of the lowest-ranked factors, suggesting that clients don’t necessarily want “behavior management” (e.g., assistance in avoiding their ‘behavioral biases’), they simply want the advisor’s unbiased expertise to make ‘good’ investment decisions and avoid bad ones (e.g., buying the wrong investments in the first place). In fact, second lowest on the list (ahead of only ‘budgeting’), was “manage my money because I don’t want to”, suggesting that there is still a substantial market opportunity for advisors who “just” give investment (and other financial) advice, with the desired objectivity and expertise, without requiring clients to delegate their portfolios (which only about 1/3rd actually report is a valuable service). On the other hand, the results showed a number of generational differences along the way, in particular, that Millennials were significantly more likely to desire budgeting services (even if they were high-net-worth Millennials who otherwise have enough wealth to cover most/all of their financial wants and needs), and Millennials were also most interested in advice to navigate the different financial changes that come up in life, and, recently, in an advisor’s guidance during turbulent markets.

What’s the Future of the IBD? (Diana Britton, Wealth Management) – From a purely legal and regulatory perspective, a broker-dealer is an entity that trades securities on behalf of its customers and/or for its own accounts, for which the broker-dealer can earn a markup or commission, and may then pay out a percentage of that commission to its broker for enacting the trade. But as the advisory industry at large increasingly shifts towards the advisory model – and the revenue of broker-dealers themselves is less and less driven by commissions and more and more fee-based (now up to 70% in 2019, according to an Aite Group report) – broker-dealers themselves are being forced to reinvent. Accordingly, the number of dual-registrants (with both broker-dealer and registered investment adviser licenses) is on the rise, while the number of ‘pure’ broker-dealer representatives continues to decline, and broker-dealers themselves are increasingly shifting into technology and service/support platforms (rather than entities that facilitate securities transactions). In fact, LPL recently announced the launch of a “pure-play” RIA-only support offering through its custodial platform… a remarkable shift given that LPL is also one of the country’s largest independent broker-dealers, and originally offered an RIA custodial platform simply to facilitate the hybrid registrations of its own brokers that began to add advisory assets after 2008, and Raymond James and Commonwealth and even Wells Fargo are also expanding its RIA custody and support services (beyond their roots as traditional broker-dealers). Accordingly, some are going so far as to say that the IBD label itself may soon vanish, as while broker-dealers may still remain for many years to come, if only to accommodate the existing commission trails of products that advisors implemented long ago and wouldn’t be appropriate to replace, the independent broker-dealer label is becoming antiquated and no longer describes the ‘advisor support platform’ of the future?

How Do You Break the Ice With New Clients? (Andrew Welsch, Barron’s) – For some people, making “small talk” comes naturally, but for other (typically more introverted) advisors, the initial ‘ice-breaker’ stage of the first meeting can be one of the most challenging moments to navigate. So what are ‘best practices’ (or at least easy starting points) to get the conversation started? Tips include: as we come out of the pandemic and so many peoples’ lives are in flux, try asking, “What is the lesson you learned in 2020 that you want to carry into 2021 and beyond?” (and one firm actually has made a series of 10 “goal cards” for clients to lay out in front of them, and sort and pick the top 3 that highlight where their focus is now); if it’s a client couple, ask them, “How did you meet?” (as everyone has a story to share, and often you can glean a lot about the couple and their dynamics by how they met, and how they share the story); asking, “What keeps you up at night?” can also be powerful (especially with a couple, who may share very different answers); other questions include, “Are you having financial conversations in your family?” (especially for very high-net-worth families, where money is often taboo but unspoken money dynamics can create significant planning issues in the future), “How can we help you from a financial planning perspective?” (rather than assuming what your value will be, let clients express what’s valuable in your services to them), or simply, “What prompted you to contact me?” (which ultimately gets prospects talking immediately about what’s really on their mind that they want to solve for first).

How To Say Anything To A Client (Stephanie Bogan, Investment News) – One of the most challenging aspects of the advisory business is that sometimes we need to have very challenging conversations with clients. Of course, the reality is that being able to have those difficult conversations, and bring about a positive change, is one of the reasons why advisors are paid well for the work they do (if it was easy, ‘everyone’ would do it!). Still, though, most advisors don’t necessarily have a clear structure for how to have a difficult conversation. Accordingly, Bogan offers up a general 5-step formula to use: first, get clear on the story that’s going on in your own head, so you can tackle your own demons (e.g., if you’re afraid of having a tough conversation around raising fees, get clear on why – are you afraid they’ll think you’re greedy, or simply that they’ll say “no” and fire you, or something else?); second, reframe the story to one that has a more positive outcome for the client (e.g., “I need to raise fees to replace my antiquated tech and hire more/better staff so I’m not overwhelmed all the time and can give you the attention you deserve and make a decent living without being stressed all the time”), as, in the end, if the clients don’t value that outcome, they really don’t value you and aren’t likely to stick around in the long run anyway; from there, extend the case for why the message is so important to/for them (e.g., “It’s been six years since you raised fees, while the cost of doing business has risen. You need to invest in building a healthy, sustainable business, so you can better serve them for the rest of their lives.”); once you’re really clear on what needs to be communicated, and how it will be framed as positive for the client, plan out your actual communication and what you want to say (so you can be prepared to say it directly, without apology or hesitation, because confidence in a difficult message is one of the most important aspects of ensuring that clients accept it); and then, don’t be afraid to practice the message (because again, it’s really important to be able to speak clearly and with confidence, or clients will queue off your own hesitation to push back); and remember in the end, not everyone will take the message happily (even if you delivered it well), so stay focused on the part you can control, and know that in the long run if the reasoning was sound, the outcome will still be in your favor far more than not.

The Key To Getting Prospects To Trust Quickly (Dan Solin, Advisor Perspectives) – In his recent book “Ask: How To Relate To Anyone“, Solin highlights the keys to accelerate the connection and trust between an advisor and prospect, which ultimately boils down to two key principles. The first is that ironically, we ultimately feel most connected to others when we get to talk about ourselves (and feel heard by the listener); accordingly, while it may be tempting as an advisor to talk about ourselves and our services (because again, it feels good to talk about ourselves), for prospects to feel connected, it’s crucial to have them talk about themselves to the advisor. Which means even just starting every conversation with, “Tell me about yourself”, and letting prospects talk (and their brains start to release dopamine and oxytocin), is a remarkably simple yet powerful step towards building trust quickly. In turn, this means that continuing the trust-building process simply entails keeping the prospect talking; even straightforward questions like, “What was your favorite vacation, and why?” can further escalate the connection that clients feel, as they think about happy memories, feel waves of happiness hormones by getting to talk about it (and themselves), and feel heard if the advisor can show that they’re really listening. The key point, though, is just to recognize that because our brains can literally only think about one thing at a time, asking prospects thoughtful questions that require thoughtful answers will, by definition, make prospects fully engaged as their brains focus on responding and answering… which quickly accelerates the growth of the advisor-client relationship!

How to Maximize Advisor Productivity While Avoiding Burnout (Angie Herbers, ThinkAdvisor) – While the business of being a financial advisor can already be intense and emotionally draining at times, for many the pandemic has only amplified the stress of the advice business, from personal and family pressures (from health issues to children schooling from home), to client challenges (from market volatility to clients’ own layoffs or other economic challenges). For advisors who may now find themselves on the edge of burnout, Herbers suggests that the key to regaining control is literally to take control – of your workweek, with a more standardized structure. First and foremost, though, Herbers notes that it’s important to get a handle on what the advisor’s capacity is to begin with (and not overload yourself), which she suggests should be an average of 85 clients/advisor if you meet semi-annually, 144 clients/advisor if you meet annually, or 220 clients/team if you have a multi-advisor team. From there, if the reality is that you just can’t handle more than 3 client meetings in a day without feeling stressed, set that as a clear policy, and inform the team that you simply will not meet with more than 3 clients in a day (as there’s always still ample other work to do in the ‘gaps’, from phone calls to emails and other business issues to handle). More generally, Herbers suggests that a “model workweek” might be something like 2 prospect meetings per week, along with 2-3 client meetings per day… and if your weeks add up to more meetings than that, it’s time to hire more advisor staff capacity. The key point, though, is simply that burnout is a function of overload (so don’t take on more clients than you can handle), and recognizing where your own capacity limits are in daily and weekly activity (and if you can’t get your activity below those thresholds… then again, it’s time to hire!).

How Financial Advisors Can Transform a Small Practice Into a Big One (Charles Paikert, Barron’s) – While many financial advisors are quite happy to run solo “lifestyle” firms, and may prefer to avoid the burdens and hassles of building and managing a team, others find the constraints of their individual capacity too limiting and want to build and scale an advisory firm beyond themselves. So how do you build to the next level? The starting point is to have a clear differentiator on which you can excel and grow to the next level, such as a clear niche market (e.g., widows, or doctors), or an established technical specialty (e.g., estate planning, or risk management), which allows the firm to become one of the top 3 in their market (as the top firms tend to earn a disproportionately large share of the overall growth opportunities). From there, it’s about reinvesting into the business in order to scale whatever the firm’s niche or specialization may be; in essence, creating leverage within the business, by having consistent resources and processes that can be used repeatably (and scalably) across all clients. Of course, many financial advisors aren’t necessarily wired to build scalable systems, which is why firms trying to grow to the next level often end out hiring professional management to help systematize and scale the business as the size grows (e.g., hiring a COO at $3M of revenue, and a CEO at $10M+ of revenue). Because ultimately, an advisory business is a service business, which means hiring people to deliver the service, along with additional people to manage the people providing those services. Fortunately, though, as a firm grows and gains infrastructure, it’s better able to attract talent and develop them, leading to both accelerated hiring, and also the potential for acquisitions and “tuck-ins” to add even more talent faster.

The Truth About Scaling Your Business (Angie Herbers, ThinkAdvisor) – As the business of financial advice continues to grow and mature, and advisory firms themselves get larger and larger, there is an increasing focus on how best to “scale” an advisory business. Yet Herbers notes that in practice, there is remarkably little consensus about what it really means to “scale” an advisory business. At its core, Herbers suggests that “scaling” simply means an advisory business that can increase its revenues without increasing its overhead (or at least, by increasing revenues faster than overhead), thereby boosting profitability. For which most advisory firms focus on finding and implementing better technology as a means to gain efficiencies, and a more fixed-cost overhead structure, on which they can grow. But Herbers suggests that in the end, often the best way to gain efficiency and more scale in an advisory firm is not through technology – especially when considering not only the cost of the technology itself, but also the costs of (re-)training staff into new technology. Instead, the key is to (re-)set client expectations and boundaries, gaining more control of the advisory firm’s own service model, so that it can be delivered more consistently, more systematically, and more scalably. Or viewed in another way, when advisory firms offer ‘unlimited’ service to clients, with ‘unlimited’ flexibility, they’re not simply providing ‘good’ service, they’re likely over-servicing clients relative to their existing fees and infrastructure. Of course, by setting harder lines about exactly what the firm will do and what it won’t do, there is a risk that some clients will leave. Yet almost by definition, the clients who leave in response to the firm setting clear boundaries are the clients most likely to violate those boundaries… otherwise known as the clients that were the most expensive to support, and typically the least profitable and least scalable clients. Which means that the clients who remain may be slightly fewer in number, but will be far less in client variability… which is precisely what makes it more feasible to grow the advisory business more scalably!

Do Chance Meetings at the Office Boost Innovation? There’s No Evidence of It. (Claire Cain Miller, New York Times) – It was 2013 when Yahoo somewhat infamously banned working from home, a move that was justified in large part by the idea that being in an office together was important not only for in-person collaborative work, but also the ‘spontaneous’ connections and impromptu meetings that occur in hallways and cafeterias, from which new connections and new ideas can spawn, an idea that has been echoed by everyone from Apple’s Tim Cook to JP Morgan’s Jamie Dimon. Yet as researchers have begun to study the issue, it turns out that there is no actual evidence that working in person is necessary for creativity and collaboration… and may even harm it as the demand of doing office work at a set time and place can drive away creative types in particular (and instead just leading to long hours, burnout, and a lack of representation). In fact, research shows that women start being penalized in pay and promotions as soon as they become mothers, and can’t as easily adjust their own lives and schedules to the demands of a fixed work time and place. And another study found that contemporary open office spaces – which became increasingly popular in the 1990s as a way to promote more spontaneous interactions – were actually associated with 70% fewer face-to-face interactions, as people found the spontaneous conversations so distracting that they increasingly wore headphones and took other steps to actively avoid one another! Meanwhile, online collaboration tools – from Zoom to Slack to shared documents – have made it increasingly feasible to collaborate remotely as well, and can even increase connection and a sense of belonging by putting everyone on a more even playing field (i.e., in an online collaborative document shared virtually, there is no longer a loudest talker in the room!). Accordingly, the alternative that’s beginning to emerge is one where daily work is done remotely from home, and office spaces are just ‘occasional’ gathering places once in a while to hang out and connect.

Tech Startups Ditch the Office for Far-Flung Bonding Trips (Heather Somerville, Wall Street Journal) – As offices reopen after the pandemic, a growing number of businesses are deciding not to return to the office… and are trying to figure out how to keep team members connected in a more virtual future. For many, the increasingly popular approach is to have “bonding trips” – in essence, “strictly-for-fun” trips for team members, not just as a corporate Retreat (with PowerPoint presentations about company vision), but truly as a time to simply connect with one another, from mountain biking in Colorado to swimming with dolphins in Mexico. Of course, the reality is that such trips have a real cost… which means in practice, such trips are simply becoming the alternative to the office rent budget, a reallocation of money that was once spent on space and now is being spent on other employee ‘perks’ and trips instead. And notably, such trips are not just a once-per-year excursion; instead, businesses that are staying fully virtual are exploring anywhere from 2 to 4 company social gatherings each year, all in the spirit of putting faces and personal connections behind those otherwise-remote email addresses and Slack messages. On the other hand, the “company trips” model does present challenges for some team members – who may have their own childcare or other family constraints – which in turn is leading to some companies offering child-care stipends and other support for spouses and families if more “company trip travel” becomes required in the future. Nonetheless, the point is simply that the choice doesn’t have to be an office for in-person connections or fully remote; instead, the emerging trend is to simply re-purpose the office budget from one type of in-person approach (the physical office) to another (the recurring company in-person gathering of otherwise-remote team members).

The Psychological Benefits of Commuting to Work (Jerry Useem, The Atlantic) – A number of research studies over the years have shown how much we dislike long commutes, from Daniel Kahneman’s research that the commute ranked as the single most miserable part of the worker’s day, to a Swiss study that showed long commutes were responsible for “systematically lower subjective well-being”. Yet the irony is that as the pandemic made the commute disappear, one Microsoft study found that after-hours chats were up 69% on the company’s internal messaging platform, and workers were reporting they were less engaged and more exhausted without the commute. Because as it turns out, the daily commute wasn’t just a method of getting to and from work; it was also a buffer and mental transition in and more importantly out of the workday. And the phenomenon is actually one that predates the modern commute; in fact, in 1994 an Italian physicist named Cesare Marchetti showed that throughout history, humans have shown a willingness to spend roughly 60 minutes every day in transit, which helps to explain why ancient cities in Rome never exceeded about 3 miles in diameter (so that you were never more than about 1.5 miles, or a 20- to 30-minute walk, from the center), and as modern transportation expanded that diameter (with the introduction of the train, the streetcar, the subway, and the automobile), the time in transit remained the same (which pre-pandemic still averaged 27 minutes as a one-way commute). In fact, even those with means still have tended to a similar commute, as J.P. Morgan himself had a roughly 25-minute ride by horse-drawn cab to work, and John D. Rockefeller had a 30-minute elevated rail ride. In 2001, two UC Davis researchers studied preferred commutes and found that the average was actually a bit shorter – at about 16 minutes on average – but notably, was not 0 minutes, as most people found that at least some commute was important to allow for a feeling of control, of space, a time to plan, a chance to decompress, and more generally a way to define (and mentally adjust to the transition across) the boundaries between work and home. Ultimately, this doesn’t necessarily mean that we’ll all go back to the commute, as there are also some clear benefits to the time savings of not needing to do so. Nonetheless, the research on our need for boundaries and transitions suggests that, even if we remain working remotely and don’t return to the daily commute, having some daily routines that define when we are and are not ‘at work’ (from the space we work in, to even the clothes we wear alone in the room) may be important to help our minds focus when it’s time to work… and more important to understand when work is over and it’s time to let go of the workday and be present at home (even and especially when work and home are the same space!).

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Craig Iskowitz’s “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.