Executive Summary
Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that amidst reports that Charles Schwab is moving to boost its provision of advisory services to wealthier clients (potentially putting them in competition with RIAs that seek similar clients and use Schwab as their custodian and as a referral source), the firm indicated it doesn't anticipate coming into direct competition with the RIAs it serves often. That assurance might be cold comfort, though, to RIAs who might see Schwab's push as heightening the competitive landscape, perhaps leading some to look for a new custodian that doesn't have its own wealth management division and/or seeking to further differentiate themselves in the eyes of their ideal target clients.
Also in industry news this week:
- A survey identifies several factors driving differences in RIA employee compensation (and how much each contributes), including geographic region, years of experience, and business development responsibilities
- Data from Fidelity showed a 41% increase in the number of Roth conversions being made by investors on its platform during the first quarter (perhaps spurred on by the market decline that occurred in March)
From there, we have several articles on tax planning:
- How advisors can work with clients to assess the role of private company equity in their compensation package and proactively make decisions on how to handle it (which could ultimately result in significant tax savings)
- Key planning moves for when a client experiences a liquidity event, from allocating newly freed-up cash to planning for a potentially larger tax bill
- While putting early-stage growth company stock in a Roth IRA might seem like an attractive option, advisors can play a valuable role in ensuring clients don't run afoul of "Prohibited Transaction" rules
We also have a number of articles on cash flow planning:
- Different ways parents can support their children facing increasing housing costs, from contributing a down payment 'match' to making an intra-family loan
- Why the decisions of whether and how to support adult child's housing costs goes beyond financial considerations to include family dynamics and the child's sense of independence
- Five tax-friendly strategies parents could consider when helping a child buy a home
We wrap up with three final articles, all about writing:
- What one author learned from writing 500 blog posts, with the importance of consistency topping the list
- Six tips for becoming a better writer, including the benefits of reading extensively and the importance of clarity
- How financial advisors can leverage their day-to-day experiences (and the common questions clients ask) to produce valuable written content
Enjoy the 'light' reading!
Schwab Deflects Mounting RIA Concerns About Firm's Effort To Advise Wealthy Clients Itself
(Jennifer Lea Reed | Financial Advisor)
RIAs depend on their custodians for a range of services (for which the custodians are compensated, though often indirectly by the advisor's clients). Notably, though, multiple custodians (including Charles Schwab and Fidelity, the two largest custodians) also have their own consumer-facing wealth management offerings as well, potentially putting them in competition with the RIAs they also serve.
For Schwab (the largest RIA custodian), the traditional model has been to attract relatively less wealthy retail clients through their extensive branch network (and national brand presence) and refer wealthier clients to RIAs participating in their Schwab Advisor Network referral program (for which Schwab receives a percentage of the revenue generated by referred individuals who become clients). However, a recent move to expand the number of its Schwab Wealth Advisory centers (which can serve high-net-worth clients that other RIAs seek) to 30 locations by the end of the year has some RIAs (including those who might expect to receive these type of clients through Schwab's referral program) concerned that Schwab is encroaching on their territory.
In response, Jonathan Beatty, head of Schwab's custodial arm, suggested this week that it might be relatively rare for Schwab and RIAs on its platform to come into competition for a particular client, noting the growing number of potential clients in the marketplace. He also highlighted that while the Wealth Advisory centers do represent a physical presence, the advisors working within them typically meet with clients virtually (while also serving as a resource for advisors within Schwab's local branch offices). He added that clients of the Wealth Advisory model tend to come to Schwab directly (with some building wealth through their time with the branch network and moving up for a higher level of service) rather than from independent RIAs.
In the end, given the growing number of wealthy individuals and the seemingly increased demand for financial advice, it would make sense that Schwab would want to move 'upmarket' (like many other RIAs). That said, it appears that (at least for now) Schwab is trying to strike a balance between serving wealthier clients (and adding the fees they pay) and not alienating the RIAs on its custodial platform (who have other custodial options that don't also have their own wealth management businesses) and those in its referral network. And while it remains to be seen how 'hot' (or not) the competition between Schwab and RIAs get for wealthier clients, Schwab's move does signal the potential value of differentiation for (relatively) smaller RIAs, who might not be able to compete with the brand recognition and marketing budget of Schwab (or other large firms) but could stand out as having the specific expertise that their ideal target clients seek.
Average Client-Facing Advisor Compensation At RIAs Tops $400k, Though Varies Widely: Survey
(Andrew Foerch | Citywire RIA)
While a career in financial advice can be attractive for the ability to meaningfully help clients and the sense of purpose it can provide, the upside compensation potential can be attractive as well. That said, the total compensation an individual advisory firm employee earns can be a function of a variety of factors, from their specific role and responsibilities (e.g., client-facing advice, business development) to their years of experience and even the location of their firm.
According to a survey of 129 of its readers, Citywire RIA (which recognized that the sample might skew towards more senior leaders and employees, which could drive average compensation figures higher) found that client-facing advisors receive average total compensation of $407,963 – consisting of an average annual salary of $243,889, cash bonuses of $132,037, and equity bonuses of $32,037 – though pay varied widely by role and other factors, including years of experience (with greater compensation for those with more experience), region (with respondents in the Northeast seeing the highest compensation and those in the West having the least), and business development responsibilities (as those with them showed significantly higher bonuses [with similar salaries] as their counterparts). Notably, average salaries were similar for respondents who thought they were appropriately paid and who said they were underpaid, with the main difference between the two groups being an approximately $130,000 gap in average cash bonus (perhaps unsurprisingly, no respondents reported that they were overpaid).
In sum, while this survey only looks at a slice of the RIA population, it does offer potential ways for advisors to see their compensation increase over time, including taking on business development responsibilities and, at a more fundamental level, gaining the experience needed to rise up the ranks at their firm, build up a strong client roster, and get the 'reps' in to provide a higher level of client service. At the same time, compensation is only one potential contributor to advisor wellbeing, as many individuals might be willing to trade off compensation for greater control over their time!
Roths Are All The Rage As Savings Rates Reach A Record High
(Suzanne Woolley | Bloomberg News)
Individuals saving for retirement have many options at their disposal, from workplace retirement plans to IRAs, with additional decisions to make including the percent to contribute, the types of contributions (i.e., traditional versus Roth) to make, and the investments to select. Amidst this backdrop, recent data suggest investors this year not only have been increasing their savings to these accounts but appear to have a preference for Roth contributions (and a growing affinity for Roth conversions).
According to data from Fidelity, while average 401(k) balances (amongst savers on its platform) fell in the first quarter of the year (due in large part to the market downturn experienced in March), the average employee contribution rate hit a record 9.6% (with workers also benefiting from an average employer contribution rate of 4.8%). Also, only 5.7% of participants made a change to their asset allocation during the period (suggesting a limited number of reflexive changes in response to the market turbulence). On the IRA side of its business, Fidelity found that Roth contributions made up 67% of total IRA contributions during the period and Roth conversions jumped 41% year-over year (perhaps as the strategy becomes more well known and as the market decline offered the opportunity to make a Roth conversion at a 'discount').
Altogether, while many workplace retirement savers handle such decisions on their own (though this could be fertile ground for interested advisory firms), these data points highlight that advisors with working-age clients have several ways to add value, from navigating the traditional versus Roth decision (as many higher-income individuals could reflexively turn to Roth contributions but might benefit more from traditional contributions) to identifying opportunities for strategic Roth conversions (whether amidst a down market or during a relatively low-income year).
Private Company Equity Is Not Cash
(Ally Jane Ayers | Money Changes Everything)
While earning a strong salary (and maintaining a healthy savings rate) can generate wealth over time, those who work at private companies sometimes have the opportunity to receive part of their compensation in equity, which can offer significant upside potential. However, private company equity compensation isn't a 'free lunch' given the various risks involved.
One of the primary risks of owning shares of private company is their relative illiquidity, as, unlike shares of a publicly traded company, they don't trade on exchange. Typically, these shares can only be converted to cash if the company has a liquidity event, such as a sale, an Initial Public Offering (IPO), or a tender offer…which assumes that the company becomes sufficiently successful in the first place to attract outside interest! Also, an employee might decide to leave the company before such a liquidity event occurs. In this case, they will often have 90 days to decide whether to exercise vested options…a significant risk given that they are paying 'real money' for illiquid shares that have no guarantee of future appreciation or liquidity.
For individuals with private company stock options, taxation can be a key consideration as well. For instance, if an employee exercises their shares relatively early, it starts the clock on receiving preferable long-term capital gains treatment and perhaps qualify as Qualified Small Business Stock (which can be particularly valuable if certain requirements are met). However, exercising the options would require the employee to put up cash today to buy an asset that might not have value in the future.
In sum, while having access to shares of private company stock (particularly if obtained relatively early on in its life cycle) can be a pathway to significant wealth, it comes with risks as well. Which makes financial advisors particularly well-placed to help clients in this position assess their cash flow situation (both in terms of whether they have sufficient cash to support the exercise of options and/or whether gaining liquidity for shares through an available tender offer might be a good choice) as well as work through the tax implications of different exercise strategies to increase the chances the client will qualify for preferential treatment (if they do eventually get to benefit from a liquidity event). And at a more fundamental level, advisors can ensure clients are being proactive about their equity compensation to avoid missing out on potential upside opportunities that could be available to them!
Planning Strategies After A Client Experiences A Liquidity Event
(Daniel Zajac | Zajac Group)
For those with shares of private company stock, a liquidity event (e.g., an IPO, acquisition, or tender offer) represents the proverbial pot of gold at the end of the rainbow. However, the after-tax proceeds (and their liquidity) an individual receives from such an event can vary widely, presenting several financial planning opportunities.
To start, the employee and their advisor will want to understand the type of liquidity event that occurred. For instance, an all-cash acquisition (in which case the employee will receive a lump sum cash payment from the acquiring company for their shares) is different than an all-stock deal (which is not necessarily a liquidity event in itself) or one that is part cash and part stock. Another type of liquidity event is the tender offer, where an employee has the choice of whether to participate and how many shares to sell (though they typically come with a limit), which can provide valuable liquidity for shares that might not otherwise become liquid until an IPO or acquisition. Individuals experiencing an IPO can face a 'lockup period' (during which they can't sell their shares, even after the company is publicly traded), which can provide time to strategize (though can be agonizing depending on how the company's stock performs!).
Once the proceeds from the liquidity event are known, an individual can then consider their options with cash that they receive. For instance, some might choose to build up an emergency fund while others might use it to save for a (perhaps earlier) retirement or reassess their career path. Those who continue to hold shares in their company after a liquidity event (e.g., after an IPO) might also consider concentration risk and whether they want to hold a sizeable percentage of their overall net worth in a single company stock (and perhaps consider different ways to reduce this risk). Also, taxes will be a major consideration for many of those experiencing a liquidity event (who will likely have a higher than usual tax bill for the year). Advisors can support clients with this by building a clear projection of the tax exposure (e.g., tax treatment and timing based on the particulars of the liquidity event) and creating a plan to pay the taxes owed (e.g., by ensuring the client maintains sufficient cash reserves to pay what's owed and by considering estimated payments [and/or safe harbor payments] that might need to be made).
Altogether, while a liquidity event can be a lucrative occasion for clients, careful planning can help them make the most of this opportunity. Which offers advisors the chance to both help clients maximize near-term after-tax proceeds and to position the proceeds to help them achieve their long-term financial goals (which might be reassessed now that the client knows how much their company shares are actually worth?).
How To (Legally) Buy Early Growth Shares In A Roth IRA
(Jeff Levine | Nerd's Eye View)
For entrepreneurially minded individuals, the potential to generate investment returns and wealth creation through the founding and growth of a business is often unrivaled. The caveat, of course, is that rapid growth businesses also face substantial taxation on that growth when they are eventually sold. Which might lead some individuals to consider whether they might use a tax-sheltered account (such as a Roth IRA) to invest into early stage growth companies. The reality, though, is that while a Roth IRA can certainly own shares of stocks – including privately held companies that are not (yet) publicly traded – there are limitations on who an IRA can buy shares from, and who can be compensated by an IRA-owned company, under the so-called "Prohibited Transaction" rules.
At the highest level, the Prohibited Transaction rules restrict an individual from using their (Roth) IRA to engage in various types of transactions with certain "Disqualified Persons". Which is important because, in the case of an IRA owner, failure to abide by these rules results in a deemed distribution of the entire IRA in which the transaction occurs as of January 1 of the year in which the Prohibited Transaction occurs (causing a forced liquidation of the entire retirement account and forfeiting its tax-preferenced status altogether!).
Among the Prohibited Transaction rules outlined in IRC Section 4975, IRAs are prohibited from buying/selling property to/from, lending/borrowing to/from, or furnishing/receiving goods, services, or facilities to/from, a Disqualified Person. Disqualified Persons are also prohibited from using IRA assets for their own personal benefit. Finally, Disqualified Persons who are also fiduciaries must avoid dealing with the income or assets of an IRA for their own account, or (in general) receiving any consideration from the IRA.
Critically, an IRA owner is always a Disqualified Person, and fiduciary with respect to their own IRA. Other Disqualified Persons, with respect to an individual's IRA (who may or may not be fiduciaries), are the individual's spouse, ancestors, lineal descendants, and any spouse of a lineal descendant. In the event an IRA owner, along with those related Disqualified Persons owns 50% or more of a business, then the business, itself, also becomes a Disqualified Person, along with its officers, directors (and persons with similar responsibilities), 10% or greater owners, and employees earnings 10% or more of its total wages.
The end result of these rules is that in order for a Roth IRA to invest into an early stage growth business, it must have someone besides the IRA owner (or his/her family members) to buy the shares from (as they cannot be contributed in-kind to an IRA). Which means businesses that are fully owned by the founder (and/or their family members) are effectively ineligible to be purchased inside of an IRA! And even if the business isn't fully owned by Disqualified Persons, if the IRA owner (and other family members) own 50% or more of all shares, the business cannot even issue new shares to the IRA and must find other non-Disqualified-Person owners to buy from (and even then, there is a risk that the IRS will scrutinize the transaction further under the self-dealing rules for IRAs).
Interestingly, though, for individuals who want to start a new business owned by an IRA, 100% IRA ownership is achievable. As the Tax Court has repeatedly determined that since prior to the formation and capitalization of a company, it has no owners and thus, cannot yet be a Disqualified Person! Accordingly, the company can issue 100% of its shares/interests to an individual's IRA.
However, even when a business is fully owned by an IRA, entrepreneurs must still be cautious with respect to their compensation. Because in situations where the business is owned 50% or more by an individual's IRA, "control" essentially always exists (either directly or indirectly), and thus receipt of compensation personally should be universally avoided (to avoid running afoul of the self-dealing rules for IRAs). Though at the same time, absent the receipt of compensation, an individual can still create a Prohibited Transaction through the provision of services ('sweat equity') to their IRA-owned business. As while an IRA owner can perform certain administrative and decision-making duties on behalf of an IRA-owned business (e.g., paying bills of the IRA-owned business with IRA money, deciding on investments to be made by the company), it cannot do the work of the business.
Ultimately, the key point is that while IRAs can be used to purchase private, non-public companies, the Prohibited Transaction rules significantly restrict both who can sell shares to the IRA, what compensation the entrepreneur can receive when working for an IRA-owned company, and even the ability to contribute sweat equity to an IRA-owned company. Which is important to navigate, given the harsh tax consequences associated with the Prohibited Transaction rules!
How Parents Can Help Children With Housing Costs (Without Breaking The Bank)
(Jim Dahle | The White Coat Investor)
A major personal finance issue in the past few years has been the rising cost of housing, particularly for those looking to buy a home (given that both home prices and mortgage rates have seen sharp increases this decade). With this in mind, parents who already own a home and possibly have amassed significant investment assets (thanks in part to the run-up in the stock market that also occurred during this period) might want to help their children with their housing costs.
For those who do decide to financially support a child's housing costs, they might choose amongst several tactics that come with a range of financial commitment, risk, and tax characteristics. To start, parents might invite the child to live with them (perhaps for a limited period). This comes with little up-front financial cost to the parents, but could create family conflict if the child wants to stay longer than the parents would like (with one possible option being for the parents to charge [increasing?] rent to the child to encourage them to eventually go out on their own).
Parents looking to help a child purchase a home might first decide whether they want to provide support for a down payment and/or the overall purchase. Providing down payment support could be valuable for children who might not have worked long enough to build up sufficient savings for the down payment but who could otherwise afford the monthly mortgage payments (also, parents could offer to 'match' a multiple of the child's down payment contribution to encourage savings).
Parents looking to help with the overall purchase might choose to buy the home outright (if they have sufficient assets to do so), co-sign on a mortgage with the child (though this exposes the parents to the loan if their child doesn't make payments), make a gift to reduce the overall size of the loan (which could make the mortgage payment better fit within the child's budget, though could create a tax liability depending on what assets are used to make a gift [and could require filing a gift tax return], or serve as the lender themselves by making an intra-family loan (which typically offer lower interest rates than commercial mortgages, though this could create liquidity issues for certain parents or lead to conflict if the child stops making payments).
In the end, supporting a child's housing costs can be a particularly impactful gift from a parent during their lifetimes (because even if the child is set to eventually inherit this money, it might be less valuable to them when they're later in their career and have amassed more wealth of their own). That said, given the potential financial (and inter-personal) implications of this support, financial advisors are well-positioned to help interested clients think through these key questions before selecting the option that best meets their (and their child's) needs.
Parents Are Buying Homes For Their Kids -- With Strings Attached
(Rachel Wolfe | The Wall Street Journal)
When it comes to helping an adult child buy a house, the first consideration for many might be the financial implications of doing so (e.g., whether the parents might be threatening their own retirement security by supporting their children). Nonetheless, developmental and psychological considerations can plan important roles in this decision as well.
Parents might first consider the family dynamics of supporting adult children. For instance, they might be hesitant to create a situation where their child feels entitled to a certain amount of support (for perpetuity?) or, because money is fungible, have their child spend their earnings on less productive activities while receiving a housing 'subsidy'. Also, parents might consider how supporting their child's housing needs affects their own lifestyle (e.g., they might an emotional boost from helping a child live closer to them).
Similarly, parents might consider how their child will view the gift. For instance, a parent might be tempted to give the gift with certain 'strings' attached, such as only offering financial support if the home is close to their own home, but these limitations could limit the scope of where their children might look for jobs now and into the future. They might also consider whether they might be limiting their child's feelings of financial independence (or perhaps unintentionally make the child feel obligated to support their parents in some way).
In sum, financial considerations aren't the only factors that go into the decision of whether and how to support a child with a home purchase. Which suggests that opening up dialogue (perhaps with the support of a financial advisor?) could help ensure that both parents' and their child's goals are met and that potential conflicts down the line are considered (and hopefully avoided!).
5 Tax-Friendly Strategies To Help A Child Buy A Home
(Nick Carrigan | Tencap Wealth Coaching)
The rising costs of buying a home have led many parents to financially support their children's home-buying goals. Beyond the upfront financial contribution being made (e.g., to a down payment or to the overall purchase price), parents might also consider the tax implications of different types of home-buying support as well.
To start, parents might consider the gift tax implications of contributing to a child's home purchase. Notably, though, parents can mitigate them by keeping gifts under the annual exclusion amount ($19,000 in 2026) to avoid having to file a gift tax return or eating into their lifetime exclusion amount (though, notably, given that the annual exclusion is per individual and per recipient, two parents could give a child and their spouse a combined $76,000 per year while remaining under the limit!).
Parents with the financial means might instead offer their child an intra-family loan, which comes with a rate lower than typical commercial mortgages (while a properly structured loan can avoid gift tax implications and can offer the parent a return [though it might be less than what could be earned through a more diversified portfolio], the illiquidity of the loan would need to be considered as well). Other options to be involved in the purchase include using a family trust to buy the home (potentially offering creditor protections) or purchasing home with the child (though this could have income and estate tax implications down the line). Outside of direct support for the house, a parent might offer to support the child with ongoing expenses for the house (e.g., maintenance or HOA expenses), which could reduce the total cost of ownership with the child while likely avoiding any gift tax implications.
In the end, while tax implications might influence a parent's decision in how (and whether) to support a child with the purchase of a house, other financial considerations (from the size of the gift to ongoing obligations) will play a role in this decision as well. Which suggests a role for a financial advisor in helping clients examine the full picture of their financial situation to determine the best course of action that meets their gifting goals while also keeping their financial plan on track!
What I've Learned Writing 500 Blog Posts
(Nick Maggiulli | Of Dollars And Data)
While the modern era is an increasingly audio- and video-based world, writing retains its prominence as a means of communication as well as an art form. Sometimes, though, writing can feel like a challenge, whether when encountering 'writer's block' and not being able to come up with the next sentence or paragraph, or, at a more basic level, finding time to write in the first place.
After nearly ten years of writing his blog (which now stretches beyond 500 posts), Maggiulli found that consistency was the key to his success. By writing weekly, he held himself accountable to a set standard rather than writing on an ad hoc basis. Notably, consistency also applied to his book writing and made it easier to break down (e.g., while writing a 55,000-word book might seem daunting, writing 300 words each day over six months doesn't seem like an insurmountable challenge). He also found that he became a better writer over the course of producing his blog. Rather than seeking perfection from each post, getting more 'reps' in led to gradual improvement. Also, while he has experienced success in terms of greater readership to his blog over time, having intrinsic motivation to produce quality content has led to greater satisfaction than external markers of success (e.g., because the number of readers could always be higher, it can be easy to remain dissatisfied after reaching a particular milestone!).
Altogether, these lessons can apply across a range of disciplines an advisor might be involved in, from writing itself (e.g., producing quality blog posts over time to slowly attract readers and potential prospects) to the craft of financial advice (e.g., putting in the 'reps' to offer clients a higher level of service over time). Which could ultimately lead to a more successful career (by whatever definition a particular individual might have!).
6 Tips For Becoming A Better Writer
(Eric Barker | Barking Up The Wrong Tree)
While students learn to write at a young age, it's a craft that can take a lifetime to master. And while better writing is often the result of practice, applying insights from renowned authors can help an individual improve their writing as well.
To start, some of the best writers find that the key to better writing is actually reading. Notably, this reading doesn't just have to include renowned works but can also include popular or even amateur content (which could provide insights into what 'not' to do when it comes to good writing). Next, an author will be able to answer the question "why should anyone care" about a particular piece they're working on (as many topics the author might find captivating might not be of interest to their target readers!). Also, writers can support their readers by getting the key point up front and not 'burying the lede' (as the reader might tire of looking for the 'point' after a while).
For authors writing on technical topics (including financial advisors!), avoiding the "curse of knowledge" is also crucial, as writing at an expert level (and/or including uncommon jargon) could inhibit understanding of the material by a 'normal' reader. Authors can also ease the burden on their readers by applying sound structure to their content (e.g., connecting the dots between different ideas). Finally, taking a clear, conversational tone can smooth the reading process and make the audience want to come back for more.
In sum, while it has never been easier to take shortcuts to writing by using AI tools, good 'human' writing doesn't necessarily take professional training to master. Rather, by putting oneself in the shoes of their reader and writing in a clear manner an author can create authentic content that resonates with their intended target audience.
Write For Yourself, And Wisdom Will Follow
(Lawrence Yeo | More To That)
When reading a particularly inspiring or insightful blog post, article, or book, it can be easy to wonder how the author came up with the idea for the topic or the insights contained in the product. While it might seem like the best writing takes particularly special talent, in reality the best output is often the result of a series of life experiences that come together in a particularly effective way.
Whether working as a financial advisor or in another role, each day can sometimes blend together. However, one's 'everyday experiences' can eventually combine together into pearls of wisdom that not only can be shared with future clients but also can make for good writing as well. Which is why common client questions often make good topics for blog posts and other content. At the same time, while some advisors might enjoy writing for its own sake (and the opportunity to share their wisdom with clients and others), the goal of content creation is often to attract new clients. While a certain number of leads, qualified prospects, and clients could be markers of success, advisors can also take pride in the content itself – a body of knowledge that's no longer floating around in their head but rather living on through those who encounter it.
Ultimately, the key point is that successful writing isn't necessarily the result of a 'lightning bolt' insight, but rather often follows from seemingly everyday interactions and decisions that come together over time. And by regularly engaging in the practice of writing, an individual can increase the chances that they'll find a particular topic or piece of wisdom that resonates with their audience (and provides a greater sense of purpose to themselves)!
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "WealthTech Today" blog.
