Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that Congress is considering a new round of retirement legislation, dubbed the "Securing A Strong Retirement Act" or simply "SECURE Act 2.0" on the heels of last year's 2019 SECURE Act legislation, which could be passed in the lame duck Congressional session this December with a wide range of new benefits (from allowing QCDs from IRAs to be contributed to a charitable remainder trust, to increasing the RMD age yet again to age 75).
Also in the news this week is a rising discussion of new estate planning strategies that may become popular in the last 2 months of the year if there is a "blue wave" on election day (given looming discussions of proposed upper-income tax increases from the Biden campaign), and a recent Dalbar study finding that 83% of investors agreed that their account balance is higher today because of the help of their advisor during the crisis and 9-in-10 investors reported a slight or significant increase in confidence and trust in their advisor (and being more likely to retain their advisor) in the aftermath of the pandemic
From there, we have a few sales-related articles, including why it's so important for financial advisors to tell their own personal story of why they're an advisor in order to deepen a relationship with prospective clients, what to say and how to try to recover if you unwittingly put your foot in your mouth in the midst of a meeting with a new prospect, and why even advice-centric firms may still need to consider establishing sales quotas on business development to create a culture of accountability around growth (or risk being acquired and subsumed by other advisory firms growing faster because they have figured out how to do so).
We've also included a number of practice management articles, from a look at the ongoing rise of incorporating legal and/or accounting services into advisory firms (and some of the complexities that arise), the announcement that eMoney Advisor is piloting an outsourced paraplanner solution to help firms with the back-office work of actually creating their financial plans (so advisors can focus on client meetings), and some tips on how to delegate - what to keep doing and what should be delegated - to focus an advisor's time into its highest and best use.
We wrap up with three interesting articles, all around the theme of financial literacy: the first explores how, finally, financial education is starting to be incorporated more into college campuses as the ability to navigate the financial system is itself becoming an essential life skill in the modern era; the second explores how, despite the obvious appeal of financial literacy, the actual results of providing more broad-based financial education are mixed at best, and that 'just-in-time' focused education when needed most may be more relevant for individuals; and the last explores how to make financial literacy and personal finance more fun, by getting away from jargoned explanations of technical topics (e.g., what is life insurance and how does it work), and instead focusing on more entertaining and relevant ways to teach key financial concepts (e.g., why is life insurance appropriate for Homer Simpson but not Batman!?).
Enjoy the 'light' reading!
Lawmakers Introduce Bipartisan 'SECURE Act 2.0' For More Retirement Tax Breaks (Michael Cohn, Financial Planning) - This week, the House Ways and Means Committee introduced the new "Securing A Strong Retirement Act of 2020", which is being dubbed "SECURE 2.0" for its focus on extending last year's SECURE Act retirement legislation. Key prospective features include: an increase in the three-year tax credit for small businesses offering new retirement plans, which rose under the SECURE Act from $500 to 50% of plan costs up to a $5,000 cap, and under SECURE 2.0 would rise further to a 100% credit for new qualified plan costs for employers with no more than 50 employees; the Saver's Credit would be increased to a single 50% credit up to a maximum of $1,500 (from the current 10%/20%/50% credit tiers and a $1,000 cap) and with higher income limits (up to $80,000 of income for joint filers from the current $65,000 cap) to qualify; employers would formally be allowed to provide 401(k) contributions as a match to student loan repayments (rather than only matching employee 401(k) contributions themselves); automatic enrollment to 401(k) plans would itself become the new required default, rather than requiring employers to choose to establish automatic enrollment for their employees; a new 'super-catch-up' contribution would be permitted for those over age 60 contributing to 401(k) plans (increasing catch-up contributions to $10,000 over age 60, up from $5,000 over age 50); limits on Qualified Charitable Distributions (QCDs) from IRAs would be increased from $100,000 to $130,000, and QCDs would be permitted to fund split-interest trusts (e.g., a charitable remainder trust); and the RMD age, which was just increased to age 72 under the SECURE Act, would be lifted further to age 75 under SECURE 2.0. Notably, though, the bipartisan Neal-Brady bill (after the top Democrat and Republican leaders on Ways and Means who wrote the legislation) may struggle to be passed in a 'lame duck' session after the election, and if it doesn't, it will have to be re-introduced next year; however, with a prospective government funding bill still looming before the end of the year, it's possible that SECURE 2.0 could be passed in December (as other end-of-year tax extenders and government spending bills sometimes are).
Estate Tax Strategies Heading Into The Election (Mark Rubin & Allen Injijian, Investment News) - The potential for estate tax reform, in the form of various 'crackdowns' on high-net-worth individuals, was bandied about for much of the decade of the 2010s, but in the end, little changed except an increase in the estate tax exemption amount (under the Tax Cuts and Jobs Act of 2017). However, the potential for a Biden win, and even a "blue wave" of Democrats winning the Senate as well, is raising the possibility that 2021 will be a year of not only income tax changes, but estate tax changes as well... stirring a newfound focus on end-of-year 2020 estate planning strategies before potential new rules next year. Particular areas of concern include a possible roll-back of the estate tax exemption to its previous $5M threshold (when Biden was last vice president), a curtailment of discounting for closely held businesses (particularly with respect to family-limited partnerships), a crackdown on the use of GRATs, changes to the step-up-in-basis rules, and a possible increase of the current 40% top estate tax rate (which was as high as 55% in the past 20 years). Accordingly, end-of-year estate planning strategies that are beginning to arise include intrafamily loans to be used to purchase family assets at lower interest rates to shift appreciation to the next generation (or into an intentionally defective grantor trust to get them out of the family estate altogether); proactive gifting of assets, including using some or all of the current gift tax exemption (while the $11.58M exemption is still available!); and accelerating intra-family transfers of closely held businesses while current discounts are available (which may mean a rapid push to obtain business valuations for such transfers beyond the end of the year).
Survey Shows Advisors Get An 'A' From Investors On Pandemic Response (Michael Fischer, ThinkAdvisor) - In a recent survey to nearly 1,000 investors who had a financial advisor during the pandemic, Dalbar found that 83% of investors agreed that their account balance is higher today because of the help of their advisor during the crisis, with 9-in-10 investors reporting a slight or significant increase in confidence and trust in their advisor (and being more likely to retain their advisor) in the aftermath of the pandemic. Notably though, given the sharp market rebound and favorable outcome, investors who said they had followed their advisor's recommendation to increase their equity allocation during the market turmoil now reported the highest satisfaction with their advisor, while those who followed the advice to just "do nothing" reported the lowest satisfaction. On the other hand, the study also found that advisors overall are still inconsistent in their communication, with 'just' 53% of respondents reporting that their advisor had contacted them during the worst of the crisis (when they may have needed it most), with most having received emails from their advisor (though more than half reported a phone call, and 1-in-3 a text message). Overall, Dalbar found that investors that received any communication still reported higher satisfaction than those who did not, though a single well-timed contact during the depths of the market volatility resulted in the same satisfaction as more frequent communication that wasn't as well-timed.
The Secret To Closing Prospects (Erin Botsford, Investment News) - For most financial advisors, conveying their value proposition and trying to 'close' clients virtually is a new challenge... and one that many have struggled with in their sales process, not to mention clients also struggling with inertia and an unwillingness to make a change in advisors amidst an environment when so much else is already in flux. But Botsford suggests that in the end, client inertia to make a change is often a result of the advisor just leading with the same 'story' of their financial advisory firm and value proposition that just isn't compelling enough to make a prospective client want to overcome inertia. And for most advisors, that differentiating story is not actually about their firm and their value proposition to clients... it's about the advisor themselves. Accordingly, Botsford suggests that a key conversation to have with a prospect is the advisor's own origin story - for instance, telling the prospect "You may be wondering how I got into this business and why I am uniquely qualified to help you with your financial planning..." and then telling the story, ideally with some difficulty that was overcome or personal lesson learned along the way (as we all like a good story of overcoming adversity!). Next, recognize that in the end, people are motivated to actually take action more out of fear than opportunity (sad but true), which means getting to understand their current situation and highlighting potential pitfalls of their current course is often far more likely to actually break through the inertia and get them to take action.
What To Do If You Mess Up A Sales Meeting (Sara Grillo, Advisor Perspectives) - In the modern pandemic era, minor disruptions in sales meetings with prospects can happen, from a scheduling mistake to noise from pets or kids in the background of a home office, but sometimes there's a "big" mistake that occurs, from getting the prospect's name or other key information wrong, or saying something that unwittingly offends them. So what should you do if/when such a moment occurs? Simply put: own it. Because in the end, people generally respect when someone is honest and owns up to their mistakes, it shows that the advisor respects them (enough to acknowledge the mistake and voice regret), and it makes you come across as more modest and humble (and relatable, given that we've all been there at some point or another!). So what do you actually say in the moment? Grillo suggests the starting point is to simply acknowledge what happened, and 'ask for a reset' (e.g., "Wow, what a crazy thing to say. Delete! Delete that last line from your memory. Let’s start this conversation over again..."). If the situation has already escalated beyond a light-hearted "hey let's reset this conversation" moment, then it takes a bolder acknowledgment that the meeting is running further off track to have any chance to correct it (e.g., "Look, it seems as if the more the conversation moves in this direction, the further away we get from the goal of this meeting. Let’s see if we can get back into alignment. Sound good?"), and then try to find a reset on another day when any aroused anger or other emotions will have had time to cool off (e.g., "Why don’t we cut this short and instead set up a time to meet another day once we have had time to exchange all the necessary information for my team to do a complete analysis?"). Of course, the reality is that sometimes, mistakes in meetings just aren't recoverable... but if the meeting is going so far off track anyway, sometimes being bold about owning the mistake is the only possible chance for recovery.
RIAs That Can't Get Over Growth 'Quotas' Risk Being Owned By An RIA That Can? (Amy Parvaneh, RIABiz) - Many of today's RIA founders went into the RIA channel specifically to get away from the insurance or brokerage industries and their sales quotas for new production, but the reality is that 'growth' is an imperative for most businesses regardless of whether they're selling insurance or investment products or ongoing advice relationships and holistic wealth management. Which means that while advisory firms may not want to embrace the worst parts of the sales quotas of old, at its core a sales quota is simply a measure of accountability and can be absolutely essential to help advisors actually follow through on their business development intentions and accomplish the goals they set. Notably, though, given the long sales cycle of advice relationships, firms can choose to create quotas based on activity (e.g., emails and calls to new prospects, meetings and approach talks, etc.) rather than just hard dollars transferred or new clients. But the key point remains that in order to be held accountable for achieving growth - especially for employee advisors who aren't the original firm founder (who may have been intrinsically motivated to grow the business or sufficiently incentivized simply by their ownership of most/all of the business) - quotas of some sort are necessary to set clear goals, help advisors prioritize their time and effort on business development, and both reward those who succeed and hold accountable those who do not. Especially since, if a firm doesn't already have the sales 'muscle', it takes time to develop; few children enjoy being told they have to stop playing video games and learn piano when they first get started either... but when practice leads to successful outcomes, often momentum to do better and achieve even more will naturally follow. Once they achieve the 'quota' (of piano practice time, or sales activity goals!).
Compliance Concerns In The Growing Trend For RIAs To Become A One-Stop Shop (Max Schatzow, AdvisorCounsel) - There are nearly 14,000 SEC-registered investment advisers, of which more than 200 are actively engaged in the accounting business as well, with another 1,000 reporting an affiliation to an accounting firm, and similarly 28 RIAs are actively engaged in the business of law (with another 447 reporting an affiliation to a law firm). The idea of having a "one-stop shop" for advice, including investment, tax, and legal (in particular, estate planning) under one roof has long been appealing in the financial services industry, but Schatzow notes that there are several important barriers that can make this difficult in practice. Beyond just the challenge of a firm being good at 3 things at once - investment advice, and tax advice, and legal advice - and the fact that advisory firms often receive referrals from legal and accounting centers of influence (who are less likely to refer if the advisory firm is effectively in competition with them for the same clients), there are also outright legal and regulatory barriers. For instance, RIAs that formally (re-)organize with a subsidiary or related accounting or law firm create a whole additional layer of regulatory oversight, new disclosures of even-more-complex conflicts of interest, and potential state law restrictions on whether law or accounting firms can affiliate with RIAs (due to their own conflict-of-interest rules). A lower-stakes approach is simply to hire an accountant or attorney on staff, who may not formally 'practice' accounting or law, but can still use their expertise to inform the advice and/or charge separately for their services (though again, many states prevent lawyers and/or accountants from sharing their fees back with RIAs). As a result, many firms ultimately just choose to maintain a looser 'affiliation' relationship built on cross-referrals - or perhaps solicitor fees - working together to solve client problems in a 'network'-style approach, but without truly putting all services under one roof (given the attendant legal/compliance concerns it raises).
eMoney Piloting Outsourced Financial Planning Service (Samuel Steinberger, Wealth Management) - At this month's virtual eMoney Advisor Summit, the financial planning software provider floated a new pilot of providing outsourced back-office financial planning services for its advisory firm users. Dubbed "Collaborative Planning Services", the pilot has actually been under development for nearly 18 months and in operation since May (though likely accelerated by the pandemic's forced shift to virtual work anyway), and is designed to provide the paraplanner services needed to assemble and prepare financial plans that the advisor themselves can then deliver. Notably, Collaborative Planning Services is not intended to be client-facing, but instead to 'just' collaborative with advisors to prepare plans for their clients, an extension of the data entry services already available from the eMoney client service team, and allowing advisors to spend more time in their client-facing meetings. Though notably, in addition to simply providing ongoing outsourced support, such paraplanner support services may also be appealing to firms that have an advisor out temporarily (e.g., on vacation or due to staff turnover) and need help preparing a plan. And a centralized paraplanner program could also form a new pathway for CFP college graduates into the industry to gain their required CFP experience before being put in a position of client-facing service or business development.
Do It Or Delegate It? (John Bowen Jr., Financial Planning) - In the end, there are two key tasks in an advisory firm that 'must' be driven by a financial advisor: business development and client relationship management, or stated more simply, "meetings". Unfortunately, though, from day to day there are many competing demands on the advisor's attention, and most struggle to spend even 1/3rd of their actual time in meetings with clients and prospects. Accordingly, Bowen suggests a series of four "Ds" to consider how to prioritize the various tasks and potential distractions: Drop it (e.g., most non-revenue-producing activities that don't really add value to the business); Defer it (if it's not clear whether the activity will drive revenue, defer it until it's clearer whether it's really worthwhile to spend time on); Delegate it (where the task is worth being done but does not have to be done by the advisor); or just Do it (when it's really valuable to the business and can only be done by you!). In today's environment, though, Bowen suggests that the most important part to consider is the third option - Delegate - in a world where more and more outsourcing solutions are available to handle key-but-not-advisor-necessary tasks. Accordingly, some look to outsource entire aspects of the business (e.g., all investment management functions to a TAMP), while others may selectively outsource particular tasks to independent providers or freelancers (and as the business grows, 'in-source' those roles to in-house team members who can be delegated to). Though Bowen cautions that even for seemingly small tasks, it's still important to always have a written contract and a clear agreement that defines the project, deliverables, deadlines, and how outcomes will be evaluated for success.
Even Harvard Is Now Teaching Personal Finance (Julia Carpenter, Wall Street Journal) - With the ongoing rise of student loans (now more than $1.5 trillion nationwide) and other debts that young adults face, this past year Harvard Business announced for the first time a Personal Finance workshop series for its undergraduate students, and Princeton similarly launched an inaugural Financial Literacy Day, an emerging trend in even elite universities that historically did not focus on such topics. In fact, the Financial Security Project at Boston College finds that personal finance programs are on the rise across a wide range of schools, from community colleges and state universities to private institutions, as well as at the high school level (with 19 states now mandating high schools educate students on basic financial knowledge before graduation). In fact, given the structured way that schools provide their education, arguably educational institutions are an ideal place for structured learning on personal finance as well (rather than the media, internet, and books that have dominated the domain in the past). Especially since colleges are increasingly serving a wider range of income levels - as college becomes more 'accessible', albeit often with significant debt loads that further necessitate financial education. Though in practice, the breadth of income levels at elite universities, in particular, is making personal finance especially challenging to teach, with questions from how to handle student loan obligations to the proper tax documents to file for your domestic help.
Are Financial Literacy Programs A Waste Of Time (Allison Schrager, Quartz) - Many financial advisors have a passion for financial literacy, having seen firsthand the consequences of clients who don't understand how the financial system works (and pay the consequences), or fail to appreciate the impact of compounding and consequently don't save enough or start early enough. Yet for those who have taught financial literacy programs to adults who are struggling, it often becomes clear that it's not simply a matter of understanding the benefits of compounding when saving early, but that those in difficult financial situations have too many competing priorities to be able to save, and their attention is consumed by other financial priorities (e.g., navigating sometimes-complex rules for various government programs intended to provide support). In fact, some researchers are now suggesting that our entire approach to financial literacy may be wrong and that trying to teach abstract financial concepts fails to meet most people where they are with the knowledge they actually need. Notably, different segments of the population do reflect different levels of financial education - which means it can be learned - but what is beginning to emerge instead is a viewpoint that it's not about teaching broad-based financial literacy that helps people move forward, but instead highly customized and targeted programs that reach people "just in time" when they need some education and guidance.
Make Personal Finance Fun (Ric Edelman, Investment News) - Money is such a taboo subject in modern society that not only is it difficult for most to talk about, but few have opportunities to learn from their friends and family (or even their parents) because it's so uncomfortable for most to talk about. Compounded by the lack of financial education in schools (and the workplace), most people have few choices but to learn about personal finance from the school of hard knocks. Of course, financial advisors also exist to help their clients make good financial decisions, but Edelman notes that in practice, advisors are often so focused on establishing their own competency and expertise - to justify the fees we charge - that what results is more a demonstration of financial jargon than an actual education on key topics of personal finance. So what's the alternative? Making personal finance fun. For instance, Edelman suggests that instead of talking about the benefits and risks of life insurance, try asking the simple question "Does Batman need life insurance?" What ensues is an entertaining discussion of superheroes and movies... and a recognition that Batman may want life insurance since he is at increased risk of dying (all that risky behavior), but in practice, Bruce Wayne is already a billionaire (won't be in financial distress at death) and has no dependents (being unmarried with no living parents or children), and thus doesn't actually need life insurance at all. (Of course, he may want to take care of Alfred, but that's the likely result of a bequest in his will... opening up another great conversation, this time about estate planning!) By contrast, who does need life insurance? Homer Simpson, the primary breadwinner for his family, with a spouse and 3 young children dependent on his income. The key point, though, is simply that discussions of financial topics don't have to revolve around graphs and charts, when in reality even 'complex' personal finance issues are actually quite relatable... if we tie the conversation to examples that are more relatable for clients in the first place!
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.