INVESTED IN ADVISORS | FEBRUARY 2020 The Next Move

INVESTED IN ADVISORS | FEBRUARY 2020 FINANCIAL-PLANNING.COM / @FINPLAN

The Next MoveThere comes a time when advisors must decide how much more to grow. Here’s how to make the tough choice.

AVOID THE FAFSA TRIPWIRE P. 34

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February 2020 Financial Planning 1Financial-Planning.com

February 2020 | VOL. 50 | NO. 2Contents

20The Next Move

There comes a time when advisors must decide how much more to grow. Here’s how to make the tough choice.BY MICHAEL KITCES

Columns9My Plan B for successionAn exit strategy doesn’t have to be set in stone. It can be as fluid and adaptable as other major life choices.

BY CAROLYN McCLANAHAN

12 The day I lost it over a FAANG stockThere’s a way to offer sound counsel to clients and also permit them the opportunity to take a profitable flier from time to time.

BY KIMBERLY FOSS

16 Are advisors overpaid?Our industry is one of the few that’s barely experienced pricing pressure — so far. Here’s how to assure you keep providing value.

BY ALLAN BOOMER

18 Building — then leaving — a support systemI created a meaningful study group. Here’s why I stepped away.

BY DAVE GRANT

001_FP0220 1 1/17/2020 2:57:55 PM

2 Financial Planning February 2020

Contents February 2020 | VOL. 50 | NO. 2

Upfront & more

4 Financial-Planning.com5 Editor’s View7 Retirement Advisor

Confidence Index39 CE Quiz

Source: Company data

Ladenburg IBDs generated $1.38 billionin 2018

$104.7M

$122.8M

$129.1M

$220.7M$803.5M

Investacorp, $104.7M

KMS Financial Services,$122.8M

Securities ServiceNetwork, $129.1M

Triad Advisors, $220.7M

Securities America,$803.5M

2926

In|Vest26‘A ton of inbound calls’ for BettermentSchwab-TD Ameritrade deal triggers advisor interest.

BY CHARLES PAIKERT

27Wealthfront takes on banks The digital firm has ambitious plans to out-maneuver the big brick-and-mortars.

BY TOBIAS SALINGER

28Should firms end forced arbitration for sexual harassment claims? Current employment contracts benefit companies and silence women, according to advisors and industry professionals.

BY CHARLES PAIKERT

IBD Intel29 Rivals lurking after Advisor Group’s Ladenburg deal?Competitors eye the 4,400 reps poised to operate in a new parent IBD network after the $1.3 billion acquisition.

BY TOBIAS SALINGER

Client31New tax law obliterates IRA trust planningThe Secure Act expands retirement savers’ options, but it has all but eliminated the stretch IRA for beneficiaries.

BY ED SLOTT

34Avoid the FAFSA tripwire with grandparent 529 plansWith astute maneuvering, advisors can add money to clients’ college fund savings without jeopardizing financial aid.

BY DONALD JAY KORN

Portfolio36 Breaking clients of their S&P 500 addictionThe tricky part is educating clients on how to recognize what constitutes underperfor-mance and overperformance.

BY CRAIG L. ISRAELSEN

Selfie40 A succession wake-up callI helped others plan for the unexpected, but it took a personal tragedy to put my own strategy in place.

BY WILLIAM MULLIN

Financial Planning Vol. 50/No. 2 (ISSN 0746-7915) is published monthly (12 times a year) by Arizent, One State Street Plaza, 27th Floor, New York, NY 10004-1505. Subscription price: $149 for one year in the U.S.; $229 for one year in all other countries. Periodical postage paid at New York, NY and U.S. additional mailing offices. POSTMASTER: Send address changes to Financial Planning, Arizent, One State Street Plaza, New York, NY 10004. For subscriptions, renewals, address changes and delivery service issues contact our Customer Service department at (212) 803-8500 or email: [email protected]. Financial Planning is a trademark used herein under license. Copying for other than personal use or internal use is prohibited without express written permission of the publisher. ©2020 Arizent and Financial Planning. All rights reserved.

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EDITOR-IN-CHIEF

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SENIOR EDITORS

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ASSOCIATE EDITORS

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COLUMNISTS

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Dave Grant, Carolyn McClanahan

CONTRIBUTING WRITERS

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Michael Kitces, Donald Jay Korn, Joseph Lisanti, Allan S. Roth,

Ed Slott

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What’s going on @financial-planning.com

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Editor’s View

Financial Planning is sharply focused on what matters most to advisors — their clients, their practice, and managing their client’s portfolios.

Subscribe and listen: www.financial-planning.com/podcast

From AI to chatbots, hear what else is next for advisors.

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Difficult choices have trade offs. But what’s the cost of delaying a decision?

Breakup

It was time to make the change. In December I ended my 13-year-relationship with a very proficient RIA and hired another that offered more in-depth financial advice — and lower fees.

The payoffs were immediate. My new planner ad-vised me on health care plan choices, cut my taxes by setting up a Simple IRA for my husband’s consult-ing firm and advised on switching our 529 plans to a different state.

Yet I had delayed making this long-desired switch for more than a year because of the emotional discomfort of ending what had otherwise been a long and beneficial partnership.

What decisions are you delaying? Is it time to reevaluate your fee struc-ture? Hire a tax expert for your firm? Create a succession plan? In some cases, having multiple solutions reduces the pressure, as columnist and advisor Carolyn McClanahan has found.

“I actually have Plan A and Plan B for the business,” writes McClanahan about her firm’s succession planning process (p. 9). “Plan A is to sell the busi-ness to my team for a bargain price — remember, I’m saving for my future so any extra money is gravy. Plan B is if, for some reason, I don’t have a team who wants to continue the practice.”

The 18 months it took me to switch planners cost my family thousands of dollars. How much will procrastination cost you? —Chelsea Emery

005_FP0220 5 1/17/2020 3:01:17 PM

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For its retirement plan recordkeeping customers, ADP agrees to act as a nondiscretionary recordkeeper performing ministerial functions at the direction of the plan sponsor and/or plan administrator. ADP, the ADP logo and Always Designing for People are trademarks of ADP, LLC. All other trademarks and service marks are the property of their respective owners. 99-5376-D-ADV03-0319 ADPBD20190225-0655 Copyright © 2019 ADP, LLC. All Rights Reserved.

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When it comes to retirement outlook, client confidence is surging: Key metrics including risk tolerance and overall retirement contributions are posting double-digit increases, according to the latest Retirement Advisor Confidence Index — Financial Planning’s monthly barometer of business conditions for wealth managers.

“With the continued momentum in the markets, clients were wanting to take on more risk,” a financial planner says, referring to the new decade’s strong start.

Of all the RACI components, risk tolerance was the biggest year-over-year mover, soaring 30.7 points over the same period in 2018. In the most recent survey, advisors reported a risk tolerance score of 56.5, up 2.9 points from the previous month — and the highest mark since April.

RACI scores above 50 indicate an increase in investor confidence, while scores below that mark denote a decline.

Some advisors, though, worry clients are getting too comfortable with riskier investments and are counseling a more cautious approach in planning for retirement.

“With the market at all-time highs, we have to help our clients modify their mindset,” one advisor says. Another advisor reports that “clients are becoming too relaxed with the market performance.”

Overall, contributions to retirement plans surged to 67.4, the highest score since December 2017. That’s more than a 13-point jump from the same period a year ago, and a month-to-month increase of seven points.

Advisors acknowledge that the calendar was a factor in driving up contributions along with the sustained bull market.

“Everyone [was] trying to stuff money into their accounts — retirement and nonretirement — before the end of the year to meet their personal savings goals,” one advisor says,

adding that the record-high stock market had encouraged clients to want to invest more, as well.

The composite RACI score for the most recent month was 54.9, just one-tenth-of-a-point off the high for the year posted in April.

That meant that the most recent RACI composite score, up nearly 10 points from the same period last year, was the

But advisors worry about overconfidence and are counseling a more guardedapproach to planning for retirement this year.

Benchmark

Clients’ risk tolerance doubles

By Kenneth Corbin

DATA-BASED INSIGHT FROM FINANCIAL PLANNING AND ARIZENT RESEARCH

The Retirement Advisor Confidence Index, published in partnership with ADP®, is created by the editors of Financial Planning and is based on a monthly survey of about 300 advisors. Visit financial-planning.com for more results.ADP and the ADP logo are registered trademarks of ADP, Inc. ADP does not provide tax, financial, investment or legal advice, or recommendations for any particular situation or type of retirement plan.

Retirement Advisor Confidence Index

Source: Arizent Research

RISK TOLERANCE

25.8

43.2

57.0

54.2

60.8

42.0

51.0

46.3

32.0

41.2

46.8

53.6

56.5

20

25

30

35

40

45

50

55

60

65

Sept.Dec.2018

Dec.2019

Jan.2019

Feb. March April May June July Aug. Oct. Nov.


RETIREMENT ADVISOR CONFIDENCE INDEX

44

46

48

50

52

54

56

Sept.Dec.2018

Dec.2019

Jan.2019


45.0

52.0

54.6

53.5

55.0

50.1

52.5

49.6

46.0

49.9

51.4

53.2

54.9

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second highest reported since January 2018. Among asset classes, equities posted the strongest yearly gains. That RACI survey component saw a score of 62.9 in the most recent period, off less than a point from the previous month. But it was more than 22 points ahead of last year.

One advisor reports “allocating more to equities due to rate conditions and generally positive longer-term outlook,”

and some advisors are wondering when the wave will crest.“As bonds have matured, more clients are looking at higher

dividend-paying stocks in solid businesses to replace fixed income,” one suggests. “At times like this you know you have to be close to the peak because stocks are being viewed as having less long-term risk than a 2% bond, which we know is not the case.” FP

Benchmark

Kenneth Corbin is a Financial Planning contributing writer in Boston and Washington. Follow him on Twitter at @kecorb.


DOLLAR AMOUNT OF ALL CONTRIBUTIONS RECEIVED FOR RETIREMENT PLANS

50

52

54

56

58

60

62

64

66

68

70

Sept.Dec.2018

Dec.2019

Jan.2019


54.1

63.9

58.6

63.0

64.1

55.2

59.058.3

54.6

60.2 60.7

60.4

67.4

AMOUNT OF CLIENT ASSETS USED TO PURCHASE EQUITY-BASED SECURITIES


40

45

50

55

60

65

70

Sept.Dec.2018

Dec.2019

Jan.2019


40.6

60.562.1

58.6

64.8

54.1

58.5

50.0

44.6

53.2

57.6

63.862.9

008_FP0220 8 1/17/2020 3:11:47 PM


Rarely does life or business play out as intended. Many advisors avoid planning for succession until upheaval occurs.

Those who do plan in advance are often blindsided when their next generation bolts for greener pastures.

Because we cannot predict the future, my approach to succession planning is very Bud-dhist — plan for what you want and don’t be attached to the outcome.

How does this work? A succession plan is not only for retire-

ment — it is also something that is needed in the unfortunate events of premature death, serious illness or incapacity.

All advisors should have a plan for these potential events from day one of opening their business.

If you are a solo practitioner, the plan may be something as simple as a list of other advisors you trust to take care of your clients. If your firm has multiple advisors, a buy-sell

agreement and standardized processes to ease transition of client care may be enough.

From a personal standpoint, make sure you have enough disability and life insur-ance to provide for yourself and your family. This takes the onus off the need to get value from your practice if you experience an untoward event.

Just like some doctors live an unhealthy lifestyle, there are financial planners who fail to have their own financial plan.

The bigger challengePlanning for the day you no longer want to work is the bigger challenge.

A good succession plan takes years to put into place. You have to develop talent to replace you, let them fly with taking care of clients, reward them appropriately for their growth and finally let go of control.

A lot can happen during those years, and there are many reasons a succession plan

McClanahan

My Plan B for succession

By Carolyn McClanahan

An exit strategy doesn’t have to be set in stone. It can be as fluid and adaptable as other major life choices.

can fall apart. Control of this process is an illusion.

You may get to the point when you are supposed to leave and find out you aren’t ready to go. Your replace-ments may decide they want to move to another area of the country for family or the weather. Or after a number of years working with you, they may discover they don’t like how you run your business.

Selling your practice is also fraught with challenges. Most of us think our practice is more valuable than what other people want to pay for it.

Market valuations rise and fall, and finding a buyer who gels with your values may be tough. The transi-tion can take a lot of time to unfold.

Taking the first stepThe first step in a succession plan is making sure you develop the resiliency to pivot if plans don’t work out. The fact is that too many owners count on the value of their practice as their main savings for retirement.

This lack of liquid financial freedom can box them into a corner.

Just like we tell our clients, it is crucial to save

CLIENT MANAGEMENT

Just as some doctors live an unhealthy lifestyle, there are financial planners who fail to plan.

009_FP0220 9 1/17/2020 9:20:41 AM


McClanahan

for the day we can no longer work, or no longer want to work. I have Plan A and Plan B for the day I give up my practice.

What are Plans A and B?Plan A includes saving enough for my needs and basic wants so these are fully funded by the day my disability insurance runs out.

This way, no matter what value I receive from my practice or when I have to quit for whatever reason, my husband and I will be OK.

Plan B provides for all the nice extras should I receive an actual return on my practice — with the additional funding, we’ll leave a legacy, give more to charity while we are alive and upgrade our travels and experiences.

The most important step in a succes-sion plan is making sure you have well-documented processes in place. Advisors keep too much institutional knowledge in their head.

By developing a culture of standard processes and good documentation of the client’s story, and codifying how work is done, you provide a bridge to train the next potential successor if the first one doesn’t work out, or if you make an unexpected premature exit from your practice.

Also, well-documented processes and organized workflow increase the attractiveness of your practice in a sale.

Happy employees are most likely to stick around.

Is your workplace enjoyable? Is the work a fun challenge, and do your employees know their career path? What are you doing, if anything, to foster their growth?

I travel a significant amount for speaking engagements and have a great team that supports this contribu-

tion to the profession. However, over the past couple of

years, we’ve had some road bumps and interpersonal challenges, mostly caused by a failure in leadership — that would be me!

An unhappy team memberA key team member of ours was

becoming unhappy. We have a healthy enough culture

that he told me about his concerns early, and he thankfully didn’t bolt for the door.

I’m a big believer in coaching, and have utilized coaches for myself for most of the past 12 years.

I pulled in a couple of coaches to help us and we are back on a good path. But the light bulb went off for me — my team would benefit greatly from individual work with a coach.

Duh. For 2020, we have set aside a very

nice budget for the team members to work on their growth and the issues that they want to address.

I’m excited to see what happens in this new year.

I preach to clients and other advisors that the best financial plan includes finding work you love and doing it as long as possible.

And the most important part is to make sure you thoroughly enjoy the rest of your time along the way, so there are no regrets if you don’t live a long life.

The people who are more likely to

die peacefully are those with the fewest regrets. This is the way I live and I’m frankly at peace if I die today. In the long term, my plan is to gradually cut back, and with that, I will cut my pay and responsibilities.

I estimate that I’ll work at least another 20 years, but who knows? That puts me into my 70s, and I’ll have plenty of savings.

My team is mostly equipped to take care of our clients and we have a buy-sell agreement in place.

My current role is quality control, taking care of client life emergencies and tax planning.

My team is smart and will hire someone to take those responsibilities if I’m out of action anytime soon.

Just like I have plan A and B for my personal life, I actually have plan A and plan B for the business.

Plan A is to sell the business to my team for a bargain price — remember, I’m saving for my future, so any extra money is gravy.

Plan B is if, for some reason, I don’t have a team who wants to continue the practice when I no longer can.

I most likely will let the client base naturally downsize and refer remaining clients to advisors I trust.

A healthy sense of detachmentA sale wouldn’t be out of the question, but what I’ll have left at the end probably won’t be worth the effort. Most of all, I have a healthy sense of detachment.

I’ll do my best to make sure our clients are well cared for and the team finds fulfillment in their work so they’ll want to carry it on when I’m gone.

If it doesn’t work out as I planned, I did my best and had a joyful life along the way. FP

Carolyn McClanahan, a CFP and M.D., is a Financial Planning columnist and director of financial planning at Life Planning Partners in Jacksonville, Florida. Follow her on Twitter at @CarolynMcC.

The best financial plan includes finding work you love and doing it as long as possible.

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Not long ago, I was having a difficult conversation with a client. This woman would not listen to reason, and despite my best efforts, I was about to lose it.

“How many times have you heard me say it?” I told her. “You made a good investment; the stock has had a good run. But now, because of that, you’re overweighted. You need to take some gains off the table and reallocate that money so you can stay within the guidelines we’ve set up for you. And it’s in your retirement account, so you don’t even have to worry about the capital gains. What’s the problem? Which part of this do you not understand?”

I was really laying it on thick. And I was right! We had clearly established our ground rules for asset allocation. But the client had wanted to make a play on one of the FAANG stocks; it seemed very important to her.

Reluctantly, I helped her make the buy in her IRA. We had set a firm limit of no more than 10% allocated to any individual stock, and she understood that. But with the big rise in price she experienced, the stock’s value was now way outside the boundaries for any individual holding. It was time to sell. Why was she refusing my advice?

Possibly because, in this case, the client was me.

‘Why would you sell a winner?’I sat there, staring at my screen, knowing I needed to hit the sell button … and I couldn’t do it. As I continued to broil in my own indecision, the tapes of previous client conversations started playing over in my mind: “But the price is still going up!” “Why would you sell a winner?” “I read all the

The day I lost it over a FAANG stock

By Kimberly Foss

There’s a way to offer sound counsel to clients and also permit them the opportunity to take a profitable flier from time to time.

material on the stock, including an article in Forbes that says it could go even higher!”

I had heard it all before from the other side of the desk, but now that I was my own client, I was finding it much harder to follow my own advice.

Fast-forward: I did ultimately sell that position, and I did reallocate the money. To sweeten the irony, the next day my darling stock experienced a major sell-off. I simultane-ously got to cash out close to the top (at the time) and dodge a bullet.

But I’ll never forget how hard it was to pull that trigger. I remind myself of that every time I sit down with a client who is eager to cash in on a major payday with one of the FAANG stocks. With all the hype and glamour that come alongside these five technology giants — Face-book, Apple, Amazon, Netflix and Google — it’s not hard to see how even the most savvy clients can become dazzled.

A profitable flier How do we manage to offer sound counsel to our clients

This woman would not listen to reason, and despite my best efforts, I was about to lose it.

FossIN PRACTICE

012_FP0220 12 1/17/2020 9:21:38 AM

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Not FDIC/NCUA insured • May lose value • Not bank/CU guaranteed • Not a deposit • Not insured by any federal agency

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013_FP0220 13 1/17/2020 2:23:27 PM


Foss

while also permitting them the oppor-tunity to take a profitable flyer from time to time? I believe, as with most things in life, that the answer lies in a thorough knowledge of the client. A sense of proportion and discipline is also invaluable.

Part of that essential client knowl-edge is understanding the magnetic pull of the big score. Like all human beings, our clients experience greed — the temptation to let all the chips ride just one more time.

I certainly felt that pull as I looked at the gain in my IRA account. Because I know how it feels, I can explain to my clients that no emotion — especially that lust for the big win — is a valid basis for making long-term financial decisions. I remind them that we have to focus on what we can control: allocation, expenses, discipline and structure.

Research has shown that individuals don’t pick stocks any better than choosing them by throwing darts at a

dartboard. So I don’t try.

The 10% rule All that said, making a pure play in one of the FAANG stocks with a preset portion of portfolio assets can make sense for certain clients. But this is where a sense of proportion becomes important. When I determine that a particular client fits that profile, the first thing I do is set a limit of 10% not to be exceeded in any one individual stock.

Why 10%? This relatively low percentage of assets protects the client from most of the consequences of lousy market timing — which is unpredict-able — while still affording enough skin in the game to make the experience

meaningful.Next, we set a firm upside target, at

which point we agree in advance to take profits and reallocate according to the client’s asset allocation plan. The idea here is to allow the client a bit of room for the stock to run — without violating the investment integrity of the allocation we’ve put in place.

Let me be clear: I’ve been a fan of Google and Amazon, and even Apple, since the early days; I’ve even bought them in my son’s 529 account and, as I mentioned, in my own IRA. (Personally, I’m less enamored of Facebook and Netflix).

But even though my son has a lot of years available to recover financially if one of his FAANG holdings goes bust, I’m still not going to violate the guidelines that we’ve put in place. As a wealth advisor to my clients and myself, how can I expect my clients to follow my advice if I don’t walk the talk myself?

Hogs get slaughteredAnd so, this brings us back to where we started. The ancient proverb, “Physi-cian, heal thyself,” seems very appli-cable here. Before we start lecturing our clients on the pitfalls of being over-enticed by the big tech stocks, we need to take stock of our own tenden-cies.

The advice we give to our clients has real-world ramifications, and no stock will go up forever. It may be fine to occassionally let that occasional client take a flier on Apple or Amazon or the next stock market sensation. But set your limits, both going in and coming out.

And remember: Pigs profit, but hogs get slaughtered. Especially if the client is you. FP

Kimberly Foss, CFP, CPWA, is a Financial Planning columnist and the founder and president of Empyrion Wealth Management in Roseville, California, and New York. Follow her on Twitter at @KimberlyFossCFP.

I sat there, staring at my screen, knowing I needed to hit the sell button … and I couldn’t do it.

With all the hype that swirls around FAANG stocks, even the most savvy clients can become overly optimistic about the potential for future gains.B

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015_FP0220 15 1/17/2020 2:23:27 PM


I offended an entire table of fellow financial advisors while attending a conference last year when I made this statement: “Everyone at this table makes too much money relative to what we do.”

I went on to explain that in no other profession do service providers have the luxury of basing their prices on what their clients can afford to pay.

Imagine a lawyer with one hourly rate for one group of clients and a higher rate for another group. Or a doctor who charges a higher copay to his patients who make more money.

‘Good old days’I passed my first securities exam in 2000. At the time, financial advisors were charg-ing an average fee of 1% to their clients for investment advice. Now, 20 years later, many advisors are still charging similar fees.

A 2018 study by RIA in a Box, which

surveyed 1,500 firms, found the average advisory fee charged to clients was 0.95%.

Since 2000, there has generally been tremendous fee compression in the financial services sector.

I remember hearing stories from older advisors of the good old days, when equity trades cost 12 cents a share — a 1,000-share order would cost $120 (not to mention the minimum ticket charge for small orders).

The great raceBy 2000, that 1,000-share order cost

$19.95. At the beginning of 2019, the cost was $4.95, and today it’s $0.

In the managed money world, there are now more assets under management in low-cost equity ETFs than higher-cost equity mutual funds.

When it comes to pricing, race to the bottom is not just occurring within the financial services industry.

Boomer

Are advisors overpaid?

By Allan Boomer

Our industry is one of the few that’s barely experienced pricing pressure ... so far. Here’s how to assure you keep providing value.

Amazon is pushing prices lower and, in the process, forcing traditional retailers out of business.

Planet Fitness charges a fraction of the fees charged by Bally 20 years ago — I could go on.

As a financial advisor, I always relished the fact that clients will pay a premium for good advice. But how much of a premium will they pay and for how long?

Robo specterWe all know that robo

advisors are really robo investors and that there is no replacement for financial planners.

However, as robo advisors push fees for investment advice lower, they are causing clients generally to devalue investment advice.

That’s because even if clients avoid using those digital platforms, the knowledge that there are less-expensive options makes part of what we do seem less valuable.

Despite the impact of fee breakpoints for larger clients, there are some clients who are paying two times to three times what other clients are paying for very similar financial advice

CLIENT MANAGEMENT

We all know that robo advisors are really robo investors and that there is no replacement for financial planners.

016_FP0220 16 1/17/2020 9:22:47 AM


and services. When you look at our compensa-

tion per hour, there is huge variability in the rates that are charged to our well-heeled clients when compared with the rates for clients who can barely meet our minimums.

In other words, our wealthier clients are supplementing our less-wealthy clients.

Ironically, our lower-wealth clients sometimes take up way more of our time than our wealthier clients — which further exacerbates this pricing inequity. As long as clients value what we do for them, none of this matters. So our job is to make sure we are delivering value.

Let’s assume the average price in the marketplace for a solid comprehen-sive financial plan is $10,000.

This makes a lot of sense for the $1 million client who is paying a fee that equates to 1%. It may even make sense for the $2 million client to pay $15,000 to $20,000 for a similar service.

But once you get above $5 million, it

becomes a head-scratcher. Why should this client pay $25,000 to $50,000 for a financial plan? And why should any client pay more than $100,000 a year?

New wave plannersThey do it today because it has

always worked that way. How long will this continue? And will their children who inherit their wealth be willing to work under this same fee arrangement?

There is a wave of planners com-pletely turning the fee model on its head by charging flat fees. They would take a $10 million client and charge a flat of $10,000 or $20,000 and then use a robo-type process to manage all or part of the investment portfolio.

This implies that the greatest fee compression will occur in financial planning at the ultrahigh-net-worth end of the market.

It’s one of the reasons that family offices exist — wealthy families added up all the money they were paying to advisors and decided to do things differently. They saw it would be cheap-er to hire their own staff, rent or buy their own offices and pay for their own technology.

7 ways to boost valueThere is an old adage that says

“price is what you pay, value is what you get.”

The answer is not to lower your fees or to pivot to a flat-fee model. We have to explore ways to deliver more value.

1. Watch your service levels and service standards. My firm recently instituted a series of service standards for routine requests like responding to emails, returning phone calls or completing client research requests.

Each of these service items has a “standard” response time and an

“excellent” response time. To maintain these standards we had to invest in more staff and train them to focus on delivering these standards.

2. Give your clients more technol-ogy. Not every client will use the online portals, apps and calculators we have access to, but the ones who do will find them tremendously valuable.

3. Develop a calendar. My firm recently implemented a financial planning calendar to ensure we are consistently and regularly discussing financial planning topics with every client each month or quarter, as opposed to the lazier way of conduct-ing financial planning on demand.

4. Maintain better communication. Send your clients articles from time to time — and not just on financial topics. Perhaps suggest a biography to read or a restaurant to consider. Remember that part of what the clients are paying for is a relationship with someone who understands them beyond their money.

5. Create experiences. My firm will be rolling out targeted client dinners this year with groups of clients with similar interests and backgrounds.

We are also researching games and activities for their children to learn about financial stewardship.

6. Take better notes. The CRM we implemented a few years ago helps us remember the personal details of a client’s life better than before.

7. Focus on life goals, not just financial goals. It’s as important for us to understand “why” they want to achieve certain goals as it is for us to understand “what” they want to achieve. If you can make your client’s actual life meaningfully better (as opposed to just their financial life), you have landed a client for life. FP

Allan Boomer, a Financial Planning columnist, is managing partner and chief investment officer of Momentum Advisors in New York. He co-hosts a weekly radio show on SiriusXM Ch. 126 that focuses on wealth building and entrepreneurship. Follow him on Twitter @MomentumAdvice.

The answer is not to lower fees or pivot to a flat-fee model. We have to explore ways to deliver more value.

My firm is researching games for clients’ children to learn about financial stewardship.B

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I recently left the study group I created five years ago. There hadn’t been a falling out and there wasn’t anything wrong with the group. It just no longer supplied the support structure I needed.

I’ve since moved to quarterly one-on-one conversations with select advisors. It suits me much better.

Here’s how I got from there to here.

Look for differences, tooPeople have asked me over the years how my study group came into being. The reality is I called each advisor and asked them if they’d like to join me. It was that easy.

Beforehand, I had researched each potential member to understand where they were in starting or running their firm, their fee model and their geographical location.

I was looking for similarities but also some differences. All of the planners ran their own practices, but some were fee-only and others

were fee-based. Some had a stable AUM on which to build their business, while others were starting from scratch.

But everyone wanted to be a great advisor and wanted to learn from others. We developed a set of engagement standards, which helped us understand appropriate behaviors and what was expected.

Over five years, we got to know each other really well — sharing our professional and personal highs and lows. We met every two weeks via video conference and then tried to meet in person each year.

It worked well for the first few years, but then professional and personal lives evolved. Some of us (me included) wouldn’t be able to make a call for four to six weeks. Then, as babies and toddlers entered our respective family mixes, the in-person retreats became increasingly difficult to schedule.

Gradually, I felt my close relationships in the group start to weaken. I started to talk

Building — then leaving — a support system

By Dave Grant

I created a meaningful study group. Here’s why I stepped away.

to advisors outside of the group. Eventually, I found myself gaining more value from these one-on-one conversations. At that point, it became appropri-ate for me to step away from the group.

Dead-end conversationsAdvisors’ collaborative needs evolve over time. If you’re starting your own firm, give and take with other advisors helps you make sure you’re doing everything correctly and haven’t missed any tricks. If you’re transitioning to a new service model, like managing money, it’s helpful to have another advisor on the custodial platform to use as a sounding board as you get familiar with the system.

But, in my old group, we’d passed the startup phase and had defined client types. We weren’t looking to grow a megafirm and were starting to make some good income.

With some of the initial goals achieved, conversa-tions began to run dry.

After six years at my firm, I have a good idea of the hours I want to work, the revenue I need to support my family and the ideal clients I want to work with. It’s in a

At some point, a group approach may stop working and one-on-one conversations seem to work better.

GrantNEW GENERATION

018_FP0220 18 1/17/2020 2:33:35 PM


comfortable growth stage. I don’t have talking points every couple of weeks.

But I also came to realize that my temperament was a factor in outgrow-ing my group. I’m a listener more than a talker. There were times on a video call or at a meeting that I didn’t say much.

Conversation was flowing and it was fun to see people hashing things out. Conversely, there were other topics, like digital content marketing, where I had a lot of ideas and domi-nated the conversation.

But, on the whole, I came to realize that a group setting just doesn’t suit my personality. I’m at home when I can engage in a one-on-one conversation that doesn’t have a time limit.

Once I recognized this, I set up quarterly calls with select advisors and it has suited me much better. It’s known ahead of time that our calls are likely to last over an hour as we canvass personal and professional updates, but may also stumble on a professional topic on which we take a deep dive. For local advisors, we clear two hours for lunch to enjoy each other’s company and share ideas.

A new approachIn transitioning out of my group, I took a different approach in finding one-on-one relationships. As I wasn’t specifically looking for opinions or guidance in my business from these relationships, I sought out more diversity among those who were already friends.

I now have a group of three advisors I talk to regularly and one online group of four advisors who discuss practice management issues of lifestyle prac-tices. My one-on-one relationships are

long-term friendships in the industry before we become business confidants. One owns a much larger RIA than mine in California, another is transitioning to his own firm in the suburbs of Chicago, and yet another runs a practice alongside another business.

We are different, but the one thing that is important to all of us is that we value the one-on-one nature of our relationship. We discuss each other’s business, knowing that the other might not have gone through it before — or will even go through it in their career — but we seek a fresh set of eyes.

The strong friendships set these relationships apart from other profes-sional relationships. We can challenge each other on topics or opinions without the risk of a group dynamic making it uncomfortable.

Do you need a support system?Do you have a support system in place? If not, consider finding some advisors you admire and ask them if they’d be willing to talk with you on a frequent basis. Many will be flattered, and say yes.

But what if things are more advanced than that? What if you are in a group setting when, in reality, you excel in the one-on-one environment or vice versa?

This is where you need to understand where you feel comfortable in relational communications and what support you need for the next phase of your career.

Don’t feel bashful about walking away from a group or relationship — there’s a chance, after all, that others are thinking the same as you and just need someone to take the initiative.

Design the system that suits you the best, and then you’ll be able to give your best to those with whom you interact. FP

If you lack a support system, find some advisors you admire and ask if they’d be willing to talk with you on a frequent basis.

Dave Grant, a Financial Planning columnist, is founder of the planning firm Retirement Matters in Cary, Illinois. He is also the founder of NAPFA Genesis, a networking group for young fee-only planners. Follow him on Twitter at @davegrant82.

For some personalities, a one-on-one conversation just seems to work better.ABO

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019_FP0220 19 1/17/2020 2:33:43 PM

February 2020 Financial Planning 21Financial-Planning.com20 Financial Planning February 2020

By Michael Kitces

As the advisory industry has grown less transactional and more relationship-based, the total number of clients any one advisor can handle has decreased dramatically.

Advisors now straddle a capacity crossroads: Should they con-sciously decide to stop growing — or hire additional staff to increase the firm’s scope? It’s a decision that will reverberate throughout their practices, careers and personal lives.

The problem has become especially acute in the past decade or so. In the early days of the profession, advisors rarely had to consider their capacity to take on business, because the business itself was more transactional. The focus was on finding new opportunities.

Clients, meanwhile, were simply people whom the advisor had once sold a product to and had minimal ongoing service needs. That’s why brokers or insurance agents often had hundreds of clients — many of whom the advisor might not have actually met with in one, three or even five-plus years.

Today, however, there are only so many hours in the week to take

The Next Move

There comes a time when advisors must decide how much more to grow. Here’s how to make the tough choice.

Financial-Planning.com22 Financial Planning February 2020

all the meetings and perform all of the service work. That often leaves advisors with room for no more than 75 to 100 clients.

The most straightforward way to navigate the capacity crossroads is simply to hire more staff. This often entails hiring an administrative assistant to handle more of the servicing work, then adding a para-planner to help with the planning support, and eventually a servicing advisor to manage at least a portion of client relationships.

Adding staff, however, means the advisor now has to manage a team. This results in a material burden of

additional work — in the name of generating what is often remarkably little additional income.

Early clients generate substantial income for the advisor-owner doing the work, but the owner only generates the profit margin remaining after other advisors start doing the work.

Enter small giantsThe fact is that some advisors don’t want to hire and manage people. This has led to a dichotomy in the industry between so-called lifestyle firms that choose not to hire and remain founder-centric, and enterprise firms that grow beyond the founder.

But many firms don’t clearly fit either definition. Some focus on being high-income solo advisors and others on rapid growth and scaling to become a large enterprise.

Then there is a substantial subset of advisory firms that do eventually grow beyond their founders, adding associ-ate advisors, service advisors and sometimes even partners, in a desire to serve more clients. The crucial differ-ence is they don’t have the mentality of being enterprise builders by any classic definition.

Rather than grow for growth’s sake — maybe with the goal of a sale and liquidity event for the founders — these firms are simply trying to get better at delivering whatever unique service they have created. This is where “small giants” come in.

In 2006, Bo Burlingham, the former executive editor of Inc., published “Small Giants.” The subject of his book is companies that “choose to be great instead of big.” These companies are purpose driven. They aim to be the best at whatever they do, rather than make decisions solely to maximize growth.

Part of what make small giants successful is their holistic focus. Their goals are being better and prioritizing service — not only to clients but also to employees, vendors and suppliers, and communities.

In turn, this focus encourages higher-quality relationships, reinforcing these stakeholders’ attraction to the business in the first place.

Together, it creates what Burlingham calls the “mojo” of small giants: the

Lifestyle firms are those in which advisors are paid first and foremost for advisory work. Notably, lifestyle firms are rarely sold.

business equivalent of a leader’s charisma, which makes people want to connect with the company.

Ultimately, Burlingham finds the defining characteristics of small giants are their mission-driven purpose; service leadership; intimate, employee-first culture; relationship-centric approach to customers, suppliers and vendors; deep roots in their communities; and focus on not necessarily maximizing profits, but being certain to protect their gross margins to remain stable without compromising company values.

This model goes beyond the lifestyle firm that reaches its capacity and stops growing. But it isn’t the same as a classic enterprise that pursues growth and maximizes shareholder value — with whatever outside capital and potential loss of control that may entail.

Similar upsidesHere is the conventional view of business: It’s a grow-or-die world, and owners should always want to keep growing and maximizing profits.

Yet the connection between advisory firm growth and its anticipated benefits is not so straightforward.

There are virtually no economies of scale to be found in the operation of an advisory firm as it grows from $50 mil-

The not-so-sweet smell of successA quantum leap in the size of an advisory practice may bring only a small step upward in pay for the founder. Here’s a hypothetical example:

Celia started her advisory practice with the goal of earning a good, healthy income. After her first year in business she was happily advising 25 clients, with an annual gross revenue of $50,000 and a net revenue of $35,000.

She loved spending time with clients, having lengthy discussions about their lives and goals, and creating thoughtful, detailed plans for them. She did such a good job they began referring several of their friends.

She didn’t want to refuse her clients’ referrals, but without a clear vision of what she wanted to grow toward — or who her ideal target client was — the firm quickly mushroomed to more than 100 clients.

With an increase of gross revenue to $250,000 across those 100 clients, Celia had to hire an assistant at $40,000 per year and a paraplanner at $55,000 per year. Now that she had employees and a much larger client base, she needed a larger office space and faced other new overhead expenses, including insurance, payroll services and taxes, and new office equipment.

Once Celia’s employees and overhead expenses were paid, her net revenue was only $105,000.

Despite the fact that she quadrupled her client base, adding more than $200,000 of additional revenue, her net take-home income rose to only $70,000. Celia was stressed out and unhappy. And because she had so many more clients, she couldn’t spend the focused time on plans that she once enjoyed so much.

There was little opportunity to catch up with her favorite clients over lunch or drinks, and she resented having to maintain a strict meeting schedule to ensure she could give all her clients at least some attention.

The business was growing, but Celia wasn’t happy. —Michael Kitces

COMMUNITYSmall giants understand the value ofestablishing deep roots in theircommunity.

CULTURESmall giants foster a culture of intimacyby putting employees first, caring for them in the totality of their lives.

PURPOSESmall giants have a vision, a powerfulmission statement and core valuesthat can be brought to life.

CUSTOMERSSmall giants cultivate meaningfulrelationships with customers,suppliers and all stakeholders.

LEADERSHIPSmall giants are made up of servantleaders who believe in leading byvalues.

FINANCESmall giants believe in protecting theirgross margins without compromisingcompany values.

6 key traits of a small giant business

Source: www.smallgiants.org

022_FP0220 22 1/17/2020 9:51:13 AM


But many firms don’t clearly fit either definition. Some focus on being high-income solo advisors and others on rapid growth and scaling to become a large enterprise.

Then there is a substantial subset of advisory firms that do eventually grow beyond their founders, adding associ-ate advisors, service advisors and sometimes even partners, in a desire to serve more clients. The crucial differ-ence is they don’t have the mentality of being enterprise builders by any classic definition.

Rather than grow for growth’s sake — maybe with the goal of a sale and liquidity event for the founders — these firms are simply trying to get better at delivering whatever unique service they have created. This is where “small giants” come in.

In 2006, Bo Burlingham, the former executive editor of Inc., published “Small Giants.” The subject of his book is companies that “choose to be great instead of big.” These companies are purpose driven. They aim to be the best at whatever they do, rather than make decisions solely to maximize growth.

Part of what make small giants successful is their holistic focus. Their goals are being better and prioritizing service — not only to clients but also to employees, vendors and suppliers, and communities.

In turn, this focus encourages higher-quality relationships, reinforcing these stakeholders’ attraction to the business in the first place.

Together, it creates what Burlingham calls the “mojo” of small giants: the

Lifestyle firms are those in which advisors are paid first and foremost for advisory work. Notably, lifestyle firms are rarely sold.

business equivalent of a leader’s charisma, which makes people want to connect with the company.

Ultimately, Burlingham finds the defining characteristics of small giants are their mission-driven purpose; service leadership; intimate, employee-first culture; relationship-centric approach to customers, suppliers and vendors; deep roots in their communities; and focus on not necessarily maximizing profits, but being certain to protect their gross margins to remain stable without compromising company values.

This model goes beyond the lifestyle firm that reaches its capacity and stops growing. But it isn’t the same as a classic enterprise that pursues growth and maximizes shareholder value — with whatever outside capital and potential loss of control that may entail.

Similar upsidesHere is the conventional view of business: It’s a grow-or-die world, and owners should always want to keep growing and maximizing profits.

Yet the connection between advisory firm growth and its anticipated benefits is not so straightforward.

There are virtually no economies of scale to be found in the operation of an advisory firm as it grows from $50 mil-

lion to $250 million to $1 billion to $3 bil-lion. That’s because overhead expense ratios and profit margins remain remarkably steady.

I maintain that there’s no discern-ible growth-leads-to-efficiencies link to be found among 99%-plus of all advisory firms.

Another drag: Growth often necessitates introducing new partners to the business who have a stake in what is being built, otherwise they’ll walk away with their clients and revenue. This results in a dilutive effect to equity and profits.

At the same time, actual take-home income growth ends up being far slower than revenue growth as advisory firms expand past their founder’s capacity.

Consider this: For the first 100 clients, the advisor earns virtually all the net revenue, minus just a small allocation for overhead expenses.

Those expenses can be as high as 70 to 80 cents on the dollar. Yet the

advisor earns just the profit margin, which may be no more than 20 to 30 cents on the dollar beyond that point.

This is even more common for firms reinvesting heavily to produce growth, such that they can’t even enjoy 20% to 30% profit margins because of all the additional capacity hiring they must do. (On the other hand, the growing availability of technology has made solo advisory firms more efficient and profitable than ever.)

Top-performing solo advisory firms can actually generate the same take-home pay as the average partner at a $1-billion-plus AUM super-ensem-ble advisory firm, according to industry studies. And some high-producing solo advisors can be even more profitable.

Of course, advisory firm founders who build larger ensembles do build the value of their equity, in addition to the income stream. Yet owing to the necessary burden of reinvestment of profits to fuel that growth, owners of growing ensemble firms typically take home even less in income for years or decades — such that the value of the equity may not materially enrich the founder. It instead merely makes up for

A small giant is preferable for those who want a good income but also hope their business delivers a better solution.

COMMUNITYSmall giants understand the value ofestablishing deep roots in theircommunity.

CULTURESmall giants foster a culture of intimacyby putting employees first, caring for them in the totality of their lives.

PURPOSESmall giants have a vision, a powerfulmission statement and core valuesthat can be brought to life.

CUSTOMERSSmall giants cultivate meaningfulrelationships with customers,suppliers and all stakeholders.

LEADERSHIPSmall giants are made up of servantleaders who believe in leading byvalues.

FINANCESmall giants believe in protecting theirgross margins without compromisingcompany values.

6 key traits of a small giant business

Source: www.smallgiants.org

023_FP0220 23 1/17/2020 9:51:15 AM


the foregone profits along the way, except for perhaps a small subset of the very largest enterprise advisory firms.

Given that the challenges facing small giant practices and enterprise advisory firms can be remarkably similar, what’s the best path for the owner of an advisory firm to take at the capacity crossroads?

A lifestyle firm becomes preferred for those who work to live, rather than live to work. This includes advisors who not only want to balance the demands of the business against their nonbusiness goals and desires, but also specifically want to remain primarily client-facing and to avoid the burdens of managing a substantial number of people.

Lifestyle firms are simply those in which advisors are first and foremost paid for the advisory work they do. Notably, lifestyle firms are rarely sold. Instead the most profitable path for them is simply to remain in the business and realize an income as long as they can, which is more remunerative than selling the firm anyhow.

A small giant is preferable for those who don’t only want to make a good

income, but feel a fundamental drive to have their business deliver a better solution. These individuals recognize that such a path will inevitably mean the advisory business must grow beyond its founder, and the founder will ultimately wear the hats of advisor and firm owner managing a growing team.

Small giants tend to pursue internal succession plans and/or heavily utilize employee stock ownership plans, recognizing that when a unique purpose-driven business is built, it’s extremely difficult to find external buyers who will honor the business’ original vision and purpose. Internally developed talent, steeped in the culture of the firm and able to carry the legacy and vision of the business forward, is infinitely preferable.

An enterprise, meanwhile, is the preference for those who feel driven to transform from an advisor to an advisory firm business owner.

For enterprise builders, it’s likely that the founder will eventually move away from client relationships alto-gether. Instead, they immerse them-selves in the growth and development of their people and culture, and they build and maximize the shareholder value of the business by whatever path it takes.

This may take the form of organic or inorganic growth — self-funded or strategically taking outside investor capital. Often, there is an eventual goal of a liquidity event that may take the form of a sale to a larger firm, an acquisition by a strategic partner or private equity firm, or an IPO in the public markets. The key point is simply to recognize that the decision to keep growing past the capacity crossroads doesn’t have to be an all-in or all-out.

There is a middle ground: the small giant, the purpose-driven business that may grow along the way, but isn’t necessarily motivated by pure profit as much as a desire to blend financial and nonfinancial goals in delivering the business’ purpose-driven value.

The unhappiest advisory firm owners tend to be accidental business owners who find themselves develop-ing their business down an undesired path. They may make more money, but they become far less happy as they’re forced to take on roles to support a business they never envisioned.

By setting a vision that aligns to your goals and values, arriving at the capacity crossroads becomes not a moment to fear, but rather just a stop on your journey toward becoming something greater. FP

An enterprise is the preference for those who truly feel driven and motivated to transform from an advisor to an advisory firm owner.

Michael Kitces, CFP, a Financial Planning contributing writer, is a partner and director of wealth management at Pinnacle Advisory Group in Columbia, Maryland; co-founder of the XY Planning Network and AdvicePay; and publisher of the planning blog Nerd’s Eye View. Follow him onTwitter at @MichaelKitces.

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Source: Michael Kitces

024_FP0220 24 1/17/2020 9:51:16 AM

Start here and sign up for free. www.financial-planning.com 212-803-8500

Ideas that advance your thinking and your career. Financial Planning delivers the essential analysis and insight that independent advisors need to make informed decisions about their businesses and the clients they serve.

001_FP0004 1 1/17/20 10:53 AM025_FP0220 25 1/17/2020 2:23:28 PM


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Schwab’s planned $26 billion takeover of TD Ameritrade may be a boon for a surprising type of financial services firm — a challenger custodian that is also a robo advisor.

That’s the claim of Betterment CEO Jon Stein, who took aim at some of his favorite targets — including Charles Schwab, big banks and his independent robo nemesis Wealthfront’s Andy Rachleff — as a speaker at Financial Planning’s In|Vest West conference in December in San Francisco.

In the face of Schwab’s pending acquisition, Stein said his firm had been

presented with a major opportunity to recruit former TD Ameritrade advisors who aren’t happy switching to Schwab and are looking for other options.

While small advisory firms are Betterment’s primary target market, firms with significantly more assets were also approaching the robo advisor for custodial services. “The bigger firms want to talk,” Stein said. “We’re introducing models that we will be rolling out for them.”

Stein also took aim at banks, whose products, he claimed, “hurt America.”

Betterment, the leading independent

‘A ton of inbound calls’ for Betterment

By Charles Paikert

Schwab-TD Ameritrade deal triggers advisor interest.

robo advisor, which manages $20 billion in client assets, is “shifting resources hard” to the sector, Stein said, adding that banking represents one of the firm’s biggest opportunities.

Betterment recently introduced high-yield cash reserves, which attracted around $1 billion in deposits within a few weeks, according to Stein. The company also offers checking and savings products.

Nonetheless, the New York-based robo advisor’s banking efforts were still in the early days, he cautioned, adding that he couldn’t predict what that business would look like in five years.

Talking to millennialsAnd Stein couldn’t resist taking a shot at Rachleff, who raised eyebrows at an In|Vest West keynote session when he said his millennial customers came to Wealthfront so they wouldn’t have to talk to people.

The difference between Betterment and other robo advisors, Stein said, is that “we believe humans will always be part of financial services. Most of us still like talking to people. We’re not going to use technology to replace us.”

Betterment is also keeping a close eye on subscription pricing, Stein said. “The need to do [subscription pricing] to replicate services like Netflix is over-rated,” he said. “That’s not why we should do it. But doing it to be aligned with the customer is useful.”

Betterment, which is looking to go public “in the next few years,” will also continue building out its 401(k) and B2B Betterment for Advisors businesses, Stein said. “Our growth plan is to push as much value as we can into our products,” he said. FP

In a dig at Wealthfront, Jon Stein declared, “We believe humans will always be part of financial services.”

Tobias Salinger is a senior editor of Financial Planning. Follow him on Twitter at @TobySalFP.

Wealthfront takes on banks The digital firm has ambitious plans to outmaneuver the big brick-and-mortars.

By Tobias Salinger

As fintechs advance aggressively upon traditional banking services, Wealth-front CEO Andy Rachleff has a quick answer when asked what his digital investing firm can do that traditional banks can’t.

“First and foremost, we can be fairer to our customers,” Rachleff said during an interview at Financial Planning’s In|Vest West conference. “Everyone hates their cable guy and everyone hates their banks.”

‘Self-driving money’Only a few days after the Palo Alto, California-based firm’s December announcement that it would expand from robo advice, its core service, into mortgages, Rachleff laid out an ambitious roadmap he described as “self-driving money.”

By the end of March, Wealthfront

Charles Paikert is a senior editor of Financial Planning. Follow him on Twitter at @paikert.

Wealthfront CEO Andy Rachleff tells American Banker Editor at Large Penny Crosman the firm will use machine learning to figure out what clients spend.

026_FP0220 26 1/17/2020 2:37:11 PM


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robo advisor, which manages $20 billion in client assets, is “shifting resources hard” to the sector, Stein said, adding that banking represents one of the firm’s biggest opportunities.

Betterment recently introduced high-yield cash reserves, which attracted around $1 billion in deposits within a few weeks, according to Stein. The company also offers checking and savings products.

Nonetheless, the New York-based robo advisor’s banking efforts were still in the early days, he cautioned, adding that he couldn’t predict what that business would look like in five years.

Talking to millennialsAnd Stein couldn’t resist taking a shot at Rachleff, who raised eyebrows at an In|Vest West keynote session when he said his millennial customers came to Wealthfront so they wouldn’t have to talk to people.

The difference between Betterment and other robo advisors, Stein said, is that “we believe humans will always be part of financial services. Most of us still like talking to people. We’re not going to use technology to replace us.”

Betterment is also keeping a close eye on subscription pricing, Stein said. “The need to do [subscription pricing] to replicate services like Netflix is over-rated,” he said. “That’s not why we should do it. But doing it to be aligned with the customer is useful.”

Betterment, which is looking to go public “in the next few years,” will also continue building out its 401(k) and B2B Betterment for Advisors businesses, Stein said. “Our growth plan is to push as much value as we can into our products,” he said. FP


Wealthfront takes on banks The digital firm has ambitious plans to outmaneuver the big brick-and-mortars.

By Tobias Salinger

As fintechs advance aggressively upon traditional banking services, Wealth-front CEO Andy Rachleff has a quick answer when asked what his digital investing firm can do that traditional banks can’t.

“First and foremost, we can be fairer to our customers,” Rachleff said during an interview at Financial Planning’s In|Vest West conference. “Everyone hates their cable guy and everyone hates their banks.”

‘Self-driving money’Only a few days after the Palo Alto, California-based firm’s December announcement that it would expand from robo advice, its core service, into mortgages, Rachleff laid out an ambitious roadmap he described as “self-driving money.”

By the end of March, Wealthfront

aims to have launched a debit card, automated bill pay and direct deposit. Later in the year, the company antici-pates being able to offer other auto-mated features such as rerouting of leftover money into clients’ investment portfolios.

Figuring out what clients spend and save every month requires machine deep learning, Rachleff said. “We use that to figure out what you spend. And then we use optimization techniques to make sure you have the right amount,” he said.


Wealthfront CEO Andy Rachleff tells American Banker Editor at Large Penny Crosman the firm will use machine learning to figure out what clients spend.

He added that, with what the firm is doing, there is no need for both a checking and savings account, other than regulatory restrictions. One account is sufficient.

Like its competitors from various sectors such as Betterment, Personal Capital and Carson Wealth, Wealthfront began offering high-interest cash accounts in 2019.

The firm, which has $22 billion in its client savings and investment accounts, including more than $13 billion in assets under management, is working with online banking company Green Dot to enable it to provide most services.

Stiff competitionThe firm faces competition from multiple sectors including other fintechs, incumbent wealth managers and large banks.

Rachleff acknowledged as much. He also admitted that, in his prior career as a venture capitalist, he served on a board that “stupidly” turned down Netflix CEO Reed Hastings three times when he approached them with the idea for the streaming giant.

Calling Hastings “the best CEO I’ve ever encountered,” Rachleff says he hears Hastings’ voice in the back of his mind while leading Wealthfront.

“One of the things that I learned from Reed is you ignore your competition, because following your competition can’t cause you to lead,” Rachleff said. “In technology, you can’t come from behind by out-executing the leader.” FP

“Everyone hates their cable guy and everyone hates their banks.” —Wealthfront CEO Andy Rachleff

027_FP0220 27 1/17/2020 9:26:16 AM


Should firms end forced arbitration for sexual harassment claims?Current employment contracts benefit companies and silence women, advisors and industry professionals say.

By Charles Paikert

Should wealth management and fintech companies eliminate clauses in their employment contracts that require arbitration for sexual harass-ment claims?

Absolutely, say some advisors and financial industry professionals.

Forcing victims to go through arbitration “unequivocally is something that benefits the employer,” said Rachel Robasciotti, principal of Robasciotti & Philipson, speaking on a panel at Financial Planning’s In|Vest West conference in San Francisco.

“[There is] probably nothing more important that we can do,” Robasciotti

added. “Talk to your employment attorney to get it done.”

Arbitration clauses are the reason more women don’t speak openly about their experiences with sexual assault and harassment, says Robasciotti, who urges industry employees to go to www.forcetheissue.org to learn more.

Sexual harassers in companies feel protected by the arbitration clause, said Alex Chalekian, CEO of Lake Avenue Financial, adding that companies win arbitration cases around 80% of the time. Chalekian, who posted a video on Twitter about money manager Ken Fisher’s inappropriate comments at the

Tiburon CEO summit in October, said he has begun to change employment contracts at his own firm.

Another reason harassment is not always stopped or divulged: Reports don’t appear in FINRA reports such as BrokerCheck, noted Sonya Dreizler, a former financial services executive who is now a consultant with her own firm, Solutions With Sonya.

A ‘cult of secrecy’The “cult of secrecy” surrounding sexual harassment is another major problem.

Fear of speaking out encourages victim blaming and prevents women from coming forward, according to Robasciotti. Women don’t share their stories because it’s “dangerous for their careers,” Dreizler added.

Advisory and fintech companies that don’t improve their record do so at their own peril, Chalekian warned. Women harassed at one firm after another will eventually leave the industry altogether, diminishing its already depleted talent pool. In addition, firms that don’t treat their female customers with respect will suffer the consequences.

Women are set to receive a dispro-portionate percentage of the wealth transfer as baby boomers die out, Chalekian said. If firms continue to treat them as second-class citizens, he said, “they will fire you guys.” FP


The industry must create a safer environment for women to speak out about harassment, conference panelists agreed. From l. to r.: Financial Planning Senior Editor Ann Marsh, Lake Avenue Financial CEO Alex Chalekian, Rachel Robasciotti of Robasciotti & Philipson and Sonya Dreizler of Solutions with Sonya.

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When sealing a deal to buy another firm, independent broker-dealers also take on a fight: recruiting and retaining advisors from the purchased firm.

For the 4,400 advisors affiliated with Ladenburg Thalmann’s five independent broker-dealers, the close of Advisor Group’s deal to acquire the Miami-based firm won’t mean a change.

The Ladenburg companies are poised to combine with the Phoenix-based firm’s four companies to create a Brady Bunch-like network with nine different IBDs and 11,500 advisors. Advisor Group knows it must somehow form a blended family after

purchasing Ladenburg for $1.3 billion or its IBD rivals will be on the lookout for advisors with a “Marcia, Marcia Marcia!” complex.

The parties promise it won’t be a rerun of other deals, in which advisors lose their longtime beloved BD partner under a merger into a larger firm. Some 1,300 advisors were recruited away from LPL Financial, for exam-ple, after the No. 1 IBD acquired the assets of the four National Planning Holdings IBDs for $325 million in 2017.

LPL added more than 1,800 advisors with $75 billion in client assets under the deal, however.

IBD recruiter Jon Henschen says he’s

Do rivals lurk after Advisor Group-Ladenburg deal?

By Tobias Salinger

Competitors eye the 4,400 reps poised to operate in a new parent IBD network after the $1.3 billion acquisition.

already getting calls from Ladenburg advisors. He’s advising them to wait but monitor the situation closely.

The retention equation hinges on how much cash flow Advisor Group will have to devote to debt service payments, recruiting efforts and compliance with the SEC’s Regulation Best Interest, Henschen says.

“You have to ask, what’s left over for investing in technology and improved services? Well, not much,” he says. “The reps have been happy at the [Ladenburg] firms. They’re hoping things stay the same.”

New corporate policies could boost profits but irk advisors who are wary of change. The key issues involve how much Advisor Group consolidates back-office services, whether it will merge any of the nine firms and how much it pushes advisory assets into its proprietary RIAs, Hen-schen adds.

In an email message to advisors in late November, the firms promised to “support all financial advisor business models,” including hybrid RIAs, and to abstain from merging any Laden-burg firms into Advisor Group IBDs.

“Advisors are excited about the new possibilities; I think they see that as a posi-tive,” says Gregg Johnson, executive vice president of

Investacorp, $104.7M

KMS Financial Services, $122.8M

Securities Service Network, $129.1M

Triad Advisors, $220.7M

Securities America, $803.5M$104.7M

$122.8M

$129.1M

$220.7M$803.5M

Source: Company data

IBD Intel

Ladenburg IBDs generated $1.38 billion in 2018

029_FP0220 29 1/17/2020 9:27:23 AM


IBD Intel

branch office development and acquisitions at Securities America, Ladenburg’s largest IBD. “There won’t be any repapering impact. If it’s not impacting their clients, it makes a big difference.”

Johnson spoke after the firm launched a new office of supervisory jurisdiction under David Pintaric, a former national director of sales and practice management with SA Stone Wealth Management. He also cites a strong pipeline of prospective recruits and high levels of retention historically at Securities America.

On the other hand, a growing LPL enterprise in the Chicago suburbs named Professional Wealth Advisors recruited ex-Securities America advisors Kenneth Small and Natalie Jump in late October, according to FINRA BrokerCheck. The former National Planning team moved to Ladenburg two years earlier after LPL acquired NPH’s assets.

The advisors manage roughly $135 million in client assets. Their close relationship with Professional Wealth

principal Josh Gerry and the other founders began laying the groundwork for the move “years, if not decades” before they started the enterprise in early 2018, Gerry says.

Professional Wealth uses LPL’s corporate RIA and isn’t a formal OSJ because it’s under home office supervision, Gerry notes. He praises LPL’s succession team for helping the enterprise acquire practices to reach 15 advisors and $1 billion in client assets.

LPL told advisors last month that its latest debt restructuring made $375 million available for growth invest-ments in their practices like acquisi-tions, marketing and infrastructure upgrades. Professional Wealth will eventually buy Small and Jump’s

practice, Gerry says.“This was a tremendous way for

them to affiliate with us now and then fully merge with us in 2020, while still having the ability to maintain their client relationships and their routine,” Gerry says. “They know that it’s good to get a group behind them, some more muscle for the future.”

Another factor in the recruiting fight in the wake of the Ladenburg deal revolves around retention bonuses. Five stockholders plus the former primary shareholder Phillip Frost have filed law-suits seeking to block the deal, according to Ladenburg’s Dec. 26 proxy, but the more pertinent section of the SEC filing mentions potential equity for advisors.

Reverence Capital Partners-backed Advisor Group plans to offer certain employees, executives and advisors equity interests in Advisor Group or an affiliate, the proxy states.

Advisor Group began extending offers to certain advisors and employ-ees in January, but representatives for the firm didn’t respond to requests for more details. Advisor Group has also said the firm hasn’t made a final decision about retention bonuses for Ladenburg advisors.

Equity shares remain a popular form of compensation. For example, Blucora’s Avantax Wealth Management is nearly doubling its advisor equity grants for their production in 2020 to a combined $5.5 million, the firm said in December. Some 120 Kestra Financial advisors purchased $23 million worth of company stock after Warburg Pincus acquired the IBD earlier this year.

Advisor Group itself provided stock to some advisors as part of a three-part “advisor appreciation program” after Reverence purchased a 75% stake in the network in August. FP


IBD rivals will be on the lookout for any advisors left feeling like the neglected middle child as ”Marcia, Marcia, Marcia!” gets all the attention.

February: Inquiries by “Party B” prompt firm to hire investment bank Jefferies

April: Party B withdraws potential offer of $4.75 to $5 per share

July: Board starts exploration process for strategic alternatives, including sale

September: 19 parties engage in preliminary discussions

October: Four parties submit written preliminary bids

Oct. 27: Ladenburg enters exclusive talks with Advisor Group

Nov. 10: Advisor Group reduces offer to $3.23 per share from $3.50

Nov. 11: Advisor Group returns to $3.50 and board approves sale

Timeline of Ladenburg Thalmann’s agreement to be purchased by Advisor Group

Source: Ladenburg Thalmann’s Dec. 6, 2019, proxy statement

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The federal Secure Act was designed to expand retirement savers’ options. But in the process, it also obliterates IRA trust planning. It’s up to advisors to contact every client who has named a trust as their IRA beneficiary and make them aware of this monumental tax law change.

Under this act, the stretch IRA has been eliminated for most IRA beneficiaries. That’s a result of a decision by Congress that IRAs and other tax-favored retirement accounts

are for use in retirement and not to pass on to heirs. This means clients’ current trust plans need immediate reviews and probable overhauls. Of course, this involves coordina-tion with clients’ attorneys.

There are some specific parameters: The change is effective for those who die starting this year. The old rules still apply to those who died in 2019 or earlier. Those stretch IRAs will continue, so beneficiaries can have two sets of payout periods, depending on

New tax law obliterates IRA trust planning

By Ed Slott

The Secure Act expands retirement savers’ options, but it has all but eliminated the stretch IRA for beneficiaries.

their age when they inherit.I can sum up the Secure

Act’s effect on IRA trust planning in just two words: not good.

To understand the gravity of this change, let’s first review the previous rules for inherited IRAs.

Under the pre-2020 tax rules, designated beneficia-ries could stretch required minimum distributions from the inherited IRA or com-pany retirement plan over their lifetimes.

Certain trusts, known as see-through trusts, also qualified for the stretch IRA, so a person with a large IRA could name a trust for the benefit of a grandchild and the RMDs could be spread over 50 years or more, if the grandchild was young.

Although the act elimi-nates the stretch IRA option, save for a few exceptions, and replaces it with a 10-year pay-down period for designated beneficiaries, there are no annual RMDs during this 10-year period. Instead, the entire inherited plan account balance must be emptied by the end of the 10th year after death. All the

Client

Clients who have named a trust as IRA beneficiary need immediate reviews and possible overhauls of their plans.

ALSO IN CLIENT: AVOID THE FAFSA TRIPWIRE WITH GRANDPARENT 529 PLANS, P. 34

The Secure Act reflects Congress’ decision that retirement accounts are for use in retirement and not to pass to heirs.

031_FP0220 31 1/17/2020 9:30:12 AM


Client

funds would be taxed by that time (except for tax-free Roth IRA distribu-tions).

This is exactly what Congress wanted: to downgrade IRAs as an estate planning vehicle.

The new law exempts five types of beneficiaries from these new rules, referred to as eligible designated beneficiaries. These beneficiaries still get the stretch IRA as if they operated under the old rules.

Although these beneficiaries are unaffected by the new rules, once they no longer qualify as EDBs or they die, the 10-year limit kicks in for them or for their beneficiaries.

There is another cause for worry for trust owners and their advisors in the Secure Act era: Most trusts are subject to the 10-year post-death payout.

Clients with large IRAs often name trusts as their IRA beneficiaries because they want two things from their estate plans. First, they want post-death control — they don’t want beneficiaries squandering this money or putting it at risk of financial mismanagement, lawsuits, divorce or being vulnerable to financial predators. Second, they want to minimize taxes.

Under the old rules, qualifying see-through trusts could often accom-plish both objectives, but not anymore.

Here’s why: There are two types of IRA trusts — conduit and discretionary (also known as accumulation) trusts. Assuming they qualified as designated beneficiaries by meeting the conditions of a see-through trust, payouts from the inherited IRA to the trust under the old rules could be stretched over the lifetime of the oldest trust beneficiary.

With a conduit trust, the annual RMDs are paid out from the inherited IRA to the trust and from the trust to the trust beneficiaries. No funds remain in the trust. All funds received by the beneficiaries are taxed at their own personal tax rates.

With a discretionary trust, annual RMDs are paid out from the inherited IRA to the trust, but then the trustee has discretion over whether to distrib-ute those funds to the trust beneficia-ries or retain them in the trust.

This provides the trustee with greater post-death control of what is paid to the trust beneficiaries. Any funds retained in the trust, though,

would be taxed at high trust tax rates.But a conduit trust will no longer

accomplish either of the two objectives. Since the new law does away with RMDs, there may be no payouts until the end of the 10 years, and then all the funds are released to the trust’s beneficiaries, exactly what the client with a large IRA wanted to avoid.

In addition, the taxes will be bunched into the last year unless the trust has language allowing distribu-tions over the 10 years to spread out the income.

Either way, the entire account will be released to a beneficiary who may squander the funds or lose them, and the inherited IRA funds will all be taxed by the end of the 10 years, making this a lousy estate plan.

Trusteed IRAs offered by some financial institutions are conduit trusts and have these same problems under the Secure Act.

Now the conduit trust would generally work only for EDBs who can still stretch payouts over their lifetimes, but even then, once the EDB no longer qualifies as an EDB (for example, when a minor reaches majority), the 10-year payout rule kicks in.

If a trust is still deemed necessary, a discretionary trust would work some-what better, since inherited IRA funds can still be retained and protected in the trust, even after the 10 years.

But those funds will still be taxed either at high trust tax rates or at the beneficiaries’ personal tax rates for distributions to the trust beneficiaries. This provides the trust protection clients desire but possibly at a prohibi-tive tax cost.

If a trust is still desired, a better option would be to have the client convert to a Roth IRA and leave the Roth funds to a discretionary trust providing post-death control and eliminating trust or personal taxes.

Certain heirs may still be eligible for a stretch IRA, but many may have to empty the accounts in the 10th year after death.

Under the new law, there are provisions allowing a trust to be set up to inherit retirement funds for the benefit of a disabled or chronically ill individual. The law, however, does not address trusts for the other three EDBs — spouses, minors and those within 10 years of the age of the deceased.

The IRS will have to provide defini-tive guidance, but based on existing regulations it appears that trusts can be set up for these groups as well. In that case, the stretch IRA would work as before, but only while the beneficia-ries still qualify as EDBs. After that point, the 10-year payout rule applies.

Other options to considerLeaving an IRA or other retirement plan to a trust will generally not be a favorable estate plan. Here are other options to consider:

Spouse as beneficiary. Since the surviving spouse is an EDB (and exempt from the 10-year rule), it may pay to change beneficiaries from children or grandchildren to the spouse. This could extend the time before an inherited IRA will have to be fully taxed and distributed.

The law inverts the tax planning here, since a 75-year-old spouse can have a longer life expectancy for payouts than a 25-year-old grandchild, who would have to withdraw within 10 years after death.

Roth conversions. Begin a plan to draw down the taxable IRA funds at today’s low tax rates and convert those funds to Roth IRAs. Roth IRAs will be a better choice if the funds will need to be left to a trust.

Even if the Roth IRA funds are left directly to a beneficiary, the funds can keep growing for at least 10 years after death. There are no longer any RMDs

Ed Slott, a CPA in Rockville Centre, New York, is a Financial Planning contributing writer and an IRA distribution expert, professional speaker and author of several books on IRAs. Follow him on Twitter at @theslottreport.

5 classes of eligible designated beneficiaries for a stretch IRA

1. Surviving spouses

2. Minor children, up to majority — but not grandchildren

3. Disabled individuals — under the strict IRS rules

4. Chronically ill individuals

5. Individuals not more than 10 years younger than the IRA owner (generally, siblings)

032_FP0220 32 1/17/2020 9:30:13 AM


would be taxed at high trust tax rates.But a conduit trust will no longer

accomplish either of the two objectives. Since the new law does away with RMDs, there may be no payouts until the end of the 10 years, and then all the funds are released to the trust’s beneficiaries, exactly what the client with a large IRA wanted to avoid.

In addition, the taxes will be bunched into the last year unless the trust has language allowing distribu-tions over the 10 years to spread out the income.

Either way, the entire account will be released to a beneficiary who may squander the funds or lose them, and the inherited IRA funds will all be taxed by the end of the 10 years, making this a lousy estate plan.

Trusteed IRAs offered by some financial institutions are conduit trusts and have these same problems under the Secure Act.

Now the conduit trust would generally work only for EDBs who can still stretch payouts over their lifetimes, but even then, once the EDB no longer qualifies as an EDB (for example, when a minor reaches majority), the 10-year payout rule kicks in.

If a trust is still deemed necessary, a discretionary trust would work some-what better, since inherited IRA funds can still be retained and protected in the trust, even after the 10 years.

But those funds will still be taxed either at high trust tax rates or at the beneficiaries’ personal tax rates for distributions to the trust beneficiaries. This provides the trust protection clients desire but possibly at a prohibi-tive tax cost.

If a trust is still desired, a better option would be to have the client convert to a Roth IRA and leave the Roth funds to a discretionary trust providing post-death control and eliminating trust or personal taxes.

Under the new law, there are provisions allowing a trust to be set up to inherit retirement funds for the benefit of a disabled or chronically ill individual. The law, however, does not address trusts for the other three EDBs — spouses, minors and those within 10 years of the age of the deceased.

The IRS will have to provide defini-tive guidance, but based on existing regulations it appears that trusts can be set up for these groups as well. In that case, the stretch IRA would work as before, but only while the beneficia-ries still qualify as EDBs. After that point, the 10-year payout rule applies.

Other options to considerLeaving an IRA or other retirement plan to a trust will generally not be a favorable estate plan. Here are other options to consider:

Spouse as beneficiary. Since the surviving spouse is an EDB (and exempt from the 10-year rule), it may pay to change beneficiaries from children or grandchildren to the spouse. This could extend the time before an inherited IRA will have to be fully taxed and distributed.

The law inverts the tax planning here, since a 75-year-old spouse can have a longer life expectancy for payouts than a 25-year-old grandchild, who would have to withdraw within 10 years after death.

Roth conversions. Begin a plan to draw down the taxable IRA funds at today’s low tax rates and convert those funds to Roth IRAs. Roth IRAs will be a better choice if the funds will need to be left to a trust.

Even if the Roth IRA funds are left directly to a beneficiary, the funds can keep growing for at least 10 years after death. There are no longer any RMDs

required until the end of the 10 years when all the funds must be withdrawn. And a Roth IRA account can accumu-late tax free during the 10 years and then be withdrawn tax free. It’s no stretch IRA, but still not a bad deal.

Life insurance. Life insurance is likely a big winner from the rules restricting trusts, especially for clients who wish to keep their funds protected for their beneficiaries.

Once again, the IRA funds can be withdrawn at low tax rates over several years and the after-tax funds can be put into a permanent cash-value life insurance policy, which will satisfy both of the client’s estate planning objec-tives — post-death control and elimination of taxes.

If a trust is desired for post-death control, the life insurance can be left to a trust. Life insurance is a much more flexible asset. There are no RMDs or complex tax rules to worry about, and the proceeds are tax free.

Life insurance can be retained in the trust for the beneficiary or paid out over time, simulating the best parts of the stretch IRA, but without all the tax and trust complications.

Of course, this is something that should be done only with funds that clients won’t need during their lifetime and have earmarked for their benefi-ciaries. Even if the funds were needed, though, the cash value could be withdrawn free of taxes during the client’s lifetime.

Charity. Qualified charitable distributions, which are available only to those IRA owners or beneficiaries who are 70 ½ or older, should be maximized for annual charitable giving.

These gifts not only reduce the eventual taxable IRA balance that might be left to beneficiaries, but they also do it tax free since the QCD is excluded from income.

Leaving IRAs to charitable trusts can accomplish this as well but only for truly charitably inclined clients.

There are drawbacks here too since the funds will eventually go to the charity upon the beneficiary’s death.

Bottom line: The Secure Act has given financial planners plenty of high-value work to do in 2020. FP

Ed Slott, a CPA in Rockville Centre, New York, is a Financial Planning contributing writer and an IRA distribution expert, professional speaker and author of several books on IRAs. Follow him on Twitter at @theslottreport.

Under the new law, if a trust is still desired, one option is to convert the plan to a Roth IRA and leave these funds to a discretionary trust.

What is the Secure Act?The Setting Every Community Up for Retirement Enhancement Act, or Secure Act, passed in December 2019. It includes changes aimed at increasing access to workplace plans and expanding retirement savings. These changes include rules affecting defined contribution plans, defined benefit plans, individual retirement accounts and 529 plans.

CEQUIZGO TO FINPLANCEQUIZ.COM

TO TAKE THE CE QUIZ ONLINE

033_FP0220 33 1/17/2020 9:30:14 AM


For clients in a quandary about how to pay for their kids’ college costs without sacrific-ing their own retirement and risk protection goals, there may be a time-honored solution: Ask grandma and grandpa.

Grandparent-powered 529 plans are a valuable source of funds for the children of clients headed for the halls of higher education. And, with a bit of astute maneu-vering, such plans can be put to use without jeopardizing financial aid.

These vehicles merit such high grades because of the way the Free Application for Federal Student Aid treats family

assets, including 529 accounts, and income from those accounts. For 529 plans owned by custodial parents or custodial steppar-ents, the value is considered part of parental assets, but any qualified distribu-tion is not considered income to the parent or the student.

Having grandparents wait to notify their 529 plan to send money to the school until after the student is out of the base income years for the FAFSA can keep such distribu-tions from impacting financial aid, says Kal Chany, founder and president of Campus Consultants, a college financial aid planning

Avoid the FAFSA tripwire with grandparent 529 plans

By Donald Jay Korn

With astute maneuvering, advisors can add money to a clients’ college fund savings without jeopardizing financial aid.

firm in New York. Under FAFSA rules, a 529 account owned by a student’s parents can be assessed by as much as 5.64% as part of an expected family contribution.

Consequently, if a parent reports a $100,000 529 account on an annual FAFSA, the child’s aid award could be reduced by $5,640. But money accumu-lated inside a grandparent-owned 529 plan won’t show up on the FAFSA and thus won’t reduce any financial aid award.

Although grandparent 529 assets are not listed on FAFSA, qualified distributions from those accounts are counted as income on the subsequent year’s FAFSA — and assessed up to 50% — for the student who is the account beneficiary.

Thus, if a client has $10,000 distributed from her 529 plan to pay some college expenses for her grandson in 2019, the payment would be reported on the FAFSA the grandson fills out in 2020. The result:

Years2019

$50,208

$22,011

$59,631

$25,517

$70,823

$29,581

$84,115

$34,293

2024 2029 20340

20,000

40,000

60,000

80,000

$1,00,000

Private colleges Public colleges

Average annual college costs — now and future

Costs include tuition, fees, room and board. Estimated annual increases are 3.5% for private colleges, 3% for public colleges.

Source: “Paying for College Without Going Broke,” by Kal Chany, 2020 edition

Client

Funds accumulated inside a grandparent-owned 529 plan won’t show up on the FAFSA and thus won’t reduce any financial aid award.

034_FP0220 34 1/17/2020 9:32:47 AM


The grandson’s financial aid award could be reduced by $5,000. The solution is to handle grandparent 529 distributions so they don’t show up on a FAFSA that impacts financial aid.

A few years ago, the FAFSA switched from looking at prior-year income to prior-prior year income, says Mark Kantrowitz, publisher of Savingforcol-lege.com. “Instead of waiting until Jan. 1 of the junior year in college to take a distribution and not have it affect a sub-sequent FAFSA, assuming the student graduates in four years, distributions can be taken as early as Jan. 1 of the sophomore year in college.”

Delicate ManeuverSuppose a young woman will be starting college in the fall of 2021. As early as Oct. 1, 2020, she can submit a FAFSA for her first higher-education academic year. Distributions on her behalf from 529 plans during 2019 will be reported on that form. Assuming no break in her school schedule, she will fill out a FAFSA for her senior year as early as Oct. 1, 2023, reflecting 529 distribu-

tions during 2022.With such a plan, her grandfather

could instruct her 529 plan to begin distributing money for her college bills as early as January 2023, midway through her sophomore year of college. That way, the distributions won’t show up on a relevant FAFSA and won’t reduce financial aid.

But this wait-to-pay plan may come with some issues attached. For instance, if the student intends to go to graduate school and file more FAFSAs, the payout postponement from the grandparent-owned 529 could be extended. Even without graduate school, some grandparents may not be happy with any delay in supporting grandchildren’s college years.

Moreover, this strategy might not be implemented perfectly. “There are 10 states where you have to be the account owner to claim the state income tax break on contributions,” Kantrowitz says. “That may encourage grandparents to open 529 plans with themselves as the account owner, not realizing the potential impact on the grandchild’s eligibility for need-based financial aid.”

Avoid distributing too soonThen again, if grandparents are holding 529 accounts in their names primarily or solely to get state income tax breaks, they might distribute funds for college too soon, resulting in lower aid. In such cases, it’s important for financial

planners to urge the grandparents to delay their 529 distributions.

Susie Bauer, 529/UIT manager at Baird, a Milwaukee-based wealth management firm, typically suggests that advisors explain to grandparents the benefits of waiting until the grandchild has filed their last FAFSA to help pay for college. If, however, grandparents want to help right away, “I have another plan,” Bauer says.

In this method, a grandparent would own a 529 that’s unreported on the FAFSA. Once an award letter is received and the resulting gap known, a partial change of ownership of the 529 to the student’s parents can be executed.

If the total cost at a college for the year is $45,000, for example, and $35,000 of aid has been awarded, the gap would be $10,000, and $10,000 of the 529 plan could be changed to the parents’ ownership. Then the parents’ 529 plan can make a qualified $10,000 529 distribution to pay the remaining expenses — without triggering an income alert on the student.

“Most 529 sponsors will not list such an ownership change as a nonqualified withdrawal,” says Bauer, “but there are exceptions.”

Therefore, she explains, advisors should be sure the sponsor’s policy won’t cause a partial ownership change to generate income tax and a 10% penalty. If that trap is avoided, the change and a distribution from the parents’ 529 plan won’t show up on the FAFSA and won’t reduce aid.

“I’m frequently on calls with advisors to explain this strategy,” she says. “They love it.” FP

Donald Jay Korn is a Financial Planning contributing writer in New York.



Grandparents can execute a partial change of 529 plan ownership to the student’s parent to help fill in a financial aid gap, says Baird’s Susie Bauer.

If grandparents are holding 529 accounts in their names to get state income tax breaks, they might distribute funds for college too soon, resulting in lower aid.

035_FP0220 35 1/17/2020 9:32:48 AM


BLO

OM

BER

G N

EWS

You’ve done your homework, run the data, performed your due diligence and built a diversified, multi-asset portfolio for your client. But your job isn’t done.

All advisors know that clients may act surprised and disappointed when their portfolios get a little crazy. Naturally, it’s nearly always the downward volatility that bugs them the most. But experienced investors will also be wary of persistent periods of overperformance, knowing that what goes up must come down.

The tricky part is educating your client on how to recognize what constitutes underper-formance and overperformance.

To this end, it is vital that an advisor explain to a client — and help them under-stand — that the performance benchmark for their portfolio is not the S&P 500, despite the

fact that the index is widely reported and often cited as a representative return of the stock market.

Start off by asking yourself a simple question: “What’s a reasonable performance expectation for an investment portfolio?” A simplistic approach would be to default to the S&P 500. After all, the average three-year rolling return of the S&P 500 from 1970 through the end of 2019 has been 10.95%.

There were 48 rolling three-year returns between 1970 and 2019. The first three-year period extended from 1970 to 1972. The next was from 1971 to 1973, and so on.

So far so good — but now the tricky part: How do we determine how often the S&P 500 delivers performance close to that average three-year return of 10.95%?

To tackle this question, I’ve imposed

Breaking clients of their S&P 500 addiction

By Craig L. Israelsen

The tricky part is educating them on how to recognize what constitutes underperformance and overperformance.

upside- and downside-per-formance bands of 500 basis points around the S&P 500 mean three-year return of 10.95%.

This creates an upside performance limit of 15.95% (that’s 10.95% plus 500 bps) and a downside perfor-mance limit of 5.95% (10.95% minus 500 bps). As shown in the “Where’s the mean?” chart, a portfolio that mimicked the S&P 500 was outside of the 500 bps upside and downside limits 52% of the time — 25 of the 48 rolling three-year periods from Jan. 1, 1970, to Dec. 31, 2019. (The 500 bps perfor-mance bands are shown as red lines on the graph.)

In other words, 52% of the time the all-equity investment portfolio produced three-year returns that were more than 500 bps above or below the mean three-year rolling return of 10.95% (shown by the dash line on the graph). Also as shown in the graph, the return in the most recent three-year period from 2017

Portfolio

It is vital that an advisor explain to a client — and help them understand — that the performance benchmark for their portfolio is not the S&P 500.

to 2019 was 15.27% — just below the upper limit of 15.95%.

The previous three-year return from 2016 to 2018 clocked in at 9.26%. That’s a sizable difference between two adjacent rolling three-year periods. The 2016 to 2018 period was below the mean three-year return of 10.95%, and the 2017-2019 return was well above the mean.

Yet those performance differentials are child’s play compared with earlier time periods.

For instance, the three-year return for the S&P 500 at the end of 1999 was 27.56%. By the end of 2002, it had plummeted to -14.55%.

A single asset-class portfolio — such as 100% large-cap U.S. stock — clearly produces performance whiplash.

Where’s the mean?Now let’s consider the rolling three-year performance of a hypothetical multi-asset portfolio that includes seven equally weighted indexes covering the following asset classes: large-cap U.S. equity, small-cap U.S. equity, non-U.S. equity, real estate, commodities, bonds and cash. (See the graphic: “Mean hugger.”)

-20%

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Rolling 3-year annualized returns: 1970-2019S&P 500

Rolling 3-year returns

Average 3-year rolling return for U.S. stocks = 10.95%

Red lines represent 500 bps upside and downside bandwidth around the 3-year average return

Where’s the mean?

Source: Steele Mutual Fund Expert, calculations by author

036_FP0220 36 1/17/2020 9:34:10 AM


upside- and downside-per-formance bands of 500 basis points around the S&P 500 mean three-year return of 10.95%.

This creates an upside performance limit of 15.95% (that’s 10.95% plus 500 bps) and a downside perfor-mance limit of 5.95% (10.95% minus 500 bps). As shown in the “Where’s the mean?” chart, a portfolio that mimicked the S&P 500 was outside of the 500 bps upside and downside limits 52% of the time — 25 of the 48 rolling three-year periods from Jan. 1, 1970, to Dec. 31, 2019. (The 500 bps perfor-mance bands are shown as red lines on the graph.)

In other words, 52% of the time the all-equity investment portfolio produced three-year returns that were more than 500 bps above or below the mean three-year rolling return of 10.95% (shown by the dash line on the graph). Also as shown in the graph, the return in the most recent three-year period from 2017

It is vital that an advisor explain to a client — and help them understand — that the performance benchmark for their portfolio is not the S&P 500.

to 2019 was 15.27% — just below the upper limit of 15.95%.

The previous three-year return from 2016 to 2018 clocked in at 9.26%. That’s a sizable difference between two adjacent rolling three-year periods. The 2016 to 2018 period was below the mean three-year return of 10.95%, and the 2017-2019 return was well above the mean.

Yet those performance differentials are child’s play compared with earlier time periods.

For instance, the three-year return for the S&P 500 at the end of 1999 was 27.56%. By the end of 2002, it had plummeted to -14.55%.

A single asset-class portfolio — such as 100% large-cap U.S. stock — clearly produces performance whiplash.

Where’s the mean?Now let’s consider the rolling three-year performance of a hypothetical multi-asset portfolio that includes seven equally weighted indexes covering the following asset classes: large-cap U.S. equity, small-cap U.S. equity, non-U.S. equity, real estate, commodities, bonds and cash. (See the graphic: “Mean hugger.”)

This diversified, multi-asset portfolio has a 43% allocation to equities, a 28.5% allocation to diversifiers (real estate and commodities) and a 28.5% allocation to fixed income. Thus, in sum, it has a 72% allocation to “performance engines” and a 28% allocation to “safety brakes.”

This diversified investment portfolio (with annual rebalancing) generated a mean three-year rolling return of 9.83% — which was below that of the 100% equity portfolio.

Worth noting, however, is the relative consistency of the three-year rolling returns. In only 42% of the periods — 20 out of 48 rolling three-year rolling periods — was the portfolio return more than 500 bps away from its mean return (shown by the dash line in graph 2). Importantly, when the portfolio did exceed the upside or downside 500 bps

bands, the deviation beyond the limit was quite small — something that can’t be said of a 100% equity portfolio.

The average gap between the mean three-year return of 10.95% and the 48 individual rolling three-year returns for a 100% S&P 500 investment was 732 bps. Put differently, the average distance between the dash line in “Where’s the mean?” (the average three-year return of 10.95%) and the blue line (the rolling three-year returns) was 732 bps.

By comparison, the average distance between the mean return of 9.83% and the 48 individual rolling three-year returns — represented by the maroon line in “Mean hugger” — for a diversified seven-asset portfolio was 449 bps.

In other words, a diversified portfolio produces performance that is closer to its mean return. Or in still other words, a diversified portfolio will have a lower standard deviation of return — which is a primary reason to build diversified, multi-asset portfolios.

Note also that the multi-asset portfolio had only three rolling three-year returns that fell into negative return territory. They occurred 2006 to 2008, 2007 to 2009, and 2008 to 2010.

Not surprisingly, 2008 was the

Advisors must identify performance benchmarks that are congruent with the investment portfolios they are building for their clients.

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Rolling 3-year annualized returns: 1970-2019S&P 500


Average 3-year rolling return for U.S. stocks = 10.95%


Where’s the mean?


037_FP0220 37 1/17/2020 9:34:11 AM


common denominator in all three of these time periods. The three-year average return during those three three-year periods was -2.81%.

A portfolio consisting solely of the S&P 500 had a considerably less pleasant downside experience.

Between 1970 and 2019, large-cap U.S. equity had eight rolling three-year periods with a negative return. The average return in those eight three-year periods was -6.3%. Of course, there is a trade-off when building a diversified portfolio. You’ll notice that the multi-asset portfolio rarely had three-year annualized returns near the 20% level.

Which market?Conversely, the 100% large U.S.

stock portfolio generated three-year returns close to, or above, a 20%

three-year return on eight occasions.Armed with this knowledge, your task is now to convince clients that the market and the S&P 500 are not synonymous. To reinforce this point, I would suggest the following: When a client asks you how the market is doing, respond with the question: “Which market are you referring to? Are you talking about the U.S. large-cap market, the mid-cap U.S. market, the non-U.S. developed stock market, commodities market, bond market …?”

The bottom-line message to convey is: Don’t buy into the common assump-tion that the market is represented solely by the S&P 500. Rather, consider coaching your client to ask: “How is a broadly diversified portfolio doing these days?”

To which you could answer, “Well, since 1970 a portfolio that contains equal portions of large-cap U.S. equity, small-cap U.S. equity, non-U.S. equity, real estate, commodities, bonds and cash with annual rebalancing produced an average three-year return of 9.83%.”

Having said all that, the S&P 500 is a perfectly acceptable benchmark for a client who has a portfolio consisting solely of large U.S. companies.

But if your client’s portfolio includes

a variety of asset classes, it’s crucial that an appropriate performance benchmark be identified and communi-cated to them from the start.

Failure to provide an appropriate performance benchmark for clients creates a challenging situation where performance expectations become misaligned because the performance index being used by the client is not comparable to the asset allocation of their actual portfolio.

In short, advisors must identify performance benchmarks that are congruent with the portfolios they are building for clients. A multi-asset investment strategy and the courage to stick with it during up and down markets creates an investing experience for clients that has far less drama precisely because it will perform closer to expectations more often. FP

Craig L. Israelsen, Ph.D., a Financial Planning contributing writer in Springville, Utah, is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University. He is also the developer of the 7Twelve portfolio.

Portfolio



When a client asks you how the market is doing, respond with the question: “Which market are you referring to? The large-cap market, the mid-cap market ...?”

Rolling 3-year annualized returns: 1970-2019multi-asset portfolio



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Average 3-year rolling return of multi-asset portfolio = 9.83%

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Mean hugger


038_FP0220 38 1/17/2020 9:34:12 AM


CE Quiz

From: New tax law obliterates IRA trust planning 1. The Secure Act eliminates stretch IRAs for many beneficia-ries, although there are exceptions. Which one of these ben-eficiaries cannot receive a stretch IRA under the new rules? 1. Surviving spouses2. Minor children3. Grandchildren4. Disabled people

2. Under the new rules, beneficiaries who are no longer eligible to receive stretch IRAs must empty the IRA by the end of which year after the original IRA holder’s death?1. The 15th year2. The 20th year3. The 5th year4. The 10th year

From: Avoid the FAFSA tripwire with grandparent-owned 529 plans 3. If a parent reports a $100,000 balance in a 529 account on an annual FAFSA, what is the maximum amount their child’s aid award may be reduced by that year?1. $6,2002. $5,6403. $4,2604. $7,100

4. If a grandparent has $30,000 distributed from her 529 plan to pay for her grandchild’s college expenses, what is the maximum amount the child’s FAFSA award may be reduced by when she is filling out the following year’s FAFSA?1. $15,0002. $10,0003. $7,0004. $12,000

From: Breaking clients of their S&P 500 addiction5. A portfolio mimicking the S&P 500 is analyzed from Jan. 1, 1970, through Dec. 31, 2019, using 48 rolling three-year peri-ods. What percentage of the time did this portfolio produce three-year returns that were 500 basis points above or below the S&P 500’s mean three-year rolling return of 10.95%?1. 35%2. 52%3. 45%4. 61%

6. The same analysis is done using an equally weighted multi-asset portfolio including large-cap U.S. equity, small-cap U.S. equity, foreign equity, real estate, commodities,

bonds and cash. What percentage of the time does this portfolio produce three-year returns that were 500 basis points above or below the portfolio’s mean three-year rolling return of 9.83%?1. 42%2. 55%3. 38%4. 28%

From: Watch out for heavy costs in retirement account transfers (online only)7. If an IRA owner makes more than one IRA-to-IRA indirect rollover over 365 days, what percentage will the annual penalty be as long as the funds remain in the account?1. 10%2. 5%3. 6%4. There is no penalty, because more than one indirect rollover is allowed over this period.

8. What is the mandatory federal income tax withholding percentage for indirect rollover distributions made from an employer plan?1. 15%2. 10%3. 25%4. 20%

From: Why qualified opportunity funds usually fall short (online only)9. If a client sells a building in an opportunity zone, her gains can be tax-deferred until 2026 as long as she reinvests that money into a qualified opportunity fund within what period of time? 1. A year2. 100 days3. 180 days4. 80 days

From: Can BDs partner with RIAs for anti-money laundering due diligence? (online only)10. A broker-dealer may treat advisors as if they are subject to the Anti-Money Laundering rule as long as which of these conditions is met?1. The BD’s reliance on the investment advisor is reasonable2. The investment advisor is U.S.-based and registered with the SEC3. The investment advisor enters into a contract with the BD4. All of the above

VISIT FINPLANCEQUIZ.COM TO TAKE FINANCIAL PLANNING’S CE QUIZ.

Financial Planning offers its Continuing Education Quiz exclusively online at FinPlanCEQuiz.com

To earn one hour of continuing education credit from the CFP Board of Standards, please visit our website and answer the questions above. Planners must answer eight out of 10 questions correctly to pass. Credit will count under CFP Board subject A: financial planning process/general principles. The deadline for participation is Feb. 28, 2022.

In addition, the Investments & Wealth Institute, formerly the Investment Management Consultants Association, has accepted this quiz for CIMA, CIMC and CPWA CE credit. Advisors must answer eight out of 10 questions correctly to pass. The deadline is Feb. 28, 2022.

If you need assistance, please contact Arizent customer service at [email protected] or (212) 803-8500.

FEBRUARY 2020

039_FP0220 39 1/17/2020 9:35:03 AM


After 20 years of being a financial advisor and planner, I could not believe how well things were going. My firm had just had its best year, the stock market was hitting new highs and we were helping more clients reach their financial dreams.

Like all families, my wife and I had worries about future college expenses for our three children and my wife worried about our health and what she would do if something ever happened to me.

“Don’t worry,” I reassured her, “it’s all good.” I remind-ed her that I made it through Desert Storm as a combat engineer and even survived running the Boston Marathon when a bomb went off 1,000 yards or so from me right before I was about to finish.

Tragedy compoundedBut three years ago, my world changed when I was competing in a 5K open water swim.

My cousin, Stephen Anderer, was also my best friend. We had done about 50 triathlons together and I had never beaten him. He was an Ivy League athlete and family law attorney who was still in great shape. While I

was swimming, I noticed someone being pulled out of the water into a boat. When I finished, I found out that person was Stephen. He had a massive heart attack at age 52 and died instantly.

All those years of planning for my clients never impacted me the way his death did. And it got worse. I spent the next year watching and learning how a small, successful service business can be crushed and devalued by a partner’s untimely passing.

Cascading impactStephen was one of the best lawyers in his field, but the value of his firm plummeted after his death and his family would never make up the shortfall from the lost income. He left three children, with two in college. Yes, insurance helps, but it is rarely enough. As the value of Stephen’s firm dropped every day, I saw for myself

how businesses like ours rarely survive the passing of a rainmaker.

I had been helping clients plan for such events, but Stephen’s death was a wake-up call. I realized my six-person firm could not survive without me. Within a year of Ste-

A succession wake-up call

By William Mullin

I helped others plan for the unexpected, but it took a personal tragedy to put my own succession plan in place.

phen’s passing, I merged firms with an awesome partner who shares the same concerns, philosophies and vision as myself.

Pete Hoover, my partner at Hoover Financial Advisors, has been a financial planner for more than 30 years. Together, we stress to every client how important it is to have a plan.

The same way we help our clients, we help each other. We put into place people, processes and plans that would ensure our own families will be protected in case of unforeseen circum-stances. Every quarter we get together with our strategic planning committee to not only talk about firm issues for our clients, but for us, our employees and partners.

The merger protected our families, the employees of the firm and made us better. Because of my personal experience, we communicate and work better with our clients.

Don’t wait for a tragedy to rock your world. Make your own plan now. FP

Selfie

I saw for myself how businesses like ours rarely survive the passing of a rainmaker.

William Mullin is president of Hoover Financial Advisors in Malvern, Pennsylvania.To submit a Selfie commentary, email [email protected].

040_FP0220 40 1/17/2020 9:36:16 AM

To register or learn more Call: 800-663-1340 Email: [email protected] Visit: irahelp.comCopyright © 2020 by Ed Slott and Company, LLC

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Tom has a traditional IRA and reached age 70 on July 1, 2019. Under the SECURE Act, by what date is he required to take his first required minimum distribution?

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Under the SECURE Act, which one of the following would not be considered an “eligible designated beneficiary” for purposes of IRS rules allowing IRA stretch distributions?

A. A grandchildB. A minor childC. A person disabled under

the tax code rulesD. A surviving spouse

Erin has a traditional IRA and reached age 70 on June 30, 2019. Under the SECURE Act, by what date is she required to take her first RMD?

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0C3_FP0220 3 1/17/2020 2:23:28 PM

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To learn more, download the Schwab Charitable information kit at schwabcharitable.org/advisors or call 888-733-0630

1 2016 U.S. Trust Study of High-Net-Worth Philanthropy. 2 2018 RIA Benchmarking Study from Charles Schwab, fi elded January to March 2018. Study contains self-reported data from 1,261 fi rms. Results for fi rms with $250 million or more in assets under management.

Schwab Charitable Fund™ is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed. Although every effort has been made to ensure that the information provided is correct, Schwab Charitable cannot guarantee its accuracy. This information is not provided to the IRS. Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofi t organization. Schwab Charitable Fund has entered into service agreements with certain affi liates of The Charles Schwab Corporation. © 2019 Schwab Charitable Fund. All rights reserved. CC0472857 (0319-9EMF)

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