Tag Archives: Financial Planning

Around the RIA Web with Adhesion, April 2016

A few great reads from the month of April, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Tim Harford on the compromise effect and the paradox of choice, relevant for how advisors choose investments and their clients choose an advisor.

Michael Kitces uses the context of diet and exercise to show how advisors can use small financial planning goals to help clients on a successful long-term journey. More excellence from Michael on the evolving skill set of the modern advisor.

Ben Carlson on building failure into your process, so important in developing robust investment plans. This pairs well with his post on the dual mandate of an investment advisor, that the best plan for a client is one that survives the real world.

Tom Brakke states well the obvious flaw in starting manager research with a performance screen, and Corey Hoffstein shares the additional problems with using 3 years as a lookback period. The team at GestaltU covers the perils of past performance quite well in this excerpt from its new book.

A great advisor views his/her role as one of deep relationships, personal advice, and ongoing coaching through the journey. Awesomeness from Josh Brown on The Job Security of a Great Advisor.

Our advisor clients tend to embrace the flexibility of an open-architecture platform, again demonstrated in our approach to “robo”.  Some providers have chosen a more bundled approach to advisor solutions, later requiring a messy divorce in trying to replace any specific component.

Are you marketing to a niche market, or truly serving one? Julie Littlechild neatly explains the difference.

When it comes to data, more is not always better. As Tadas Viskanta explains, comparing different eras is hard and in investing can be downright dangerous.

Josh Brown on how bad active management is being taking to task. Jake at EconomPic shows when good active management can be worth the cost. Patrick O’Shaughnessy rounds out this topic with a wonderful illustration of the difference between seeking alpha and seeking assets.

Speaking of expensive active management, ThinkAdvisor reports that the SEC is prepping a 2016 initiative on 12b-1 fees, a hidden cost of mutual funds that gets disclosed but rarely discussed.

One trend sure to continue with the new regulations is mergers and acquisitions of RIA firms. Investment News summarizes this trend, and shares good ideas on items to consider in any potential arrangements.

Speaking of new regulations, some solid advice from Russell Investments on creating, documenting, and reviewing best practices for healthy client relationships.

The consummate guide to the DOL ruling from Michael Kitces, incredibly thoughtful and no stone unturned.

JP Morgan puts out a wonderful Guide to the Markets every spring, with all kinds of fun and informative graphics.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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Capital Gains Opportunity to Add Tax Alpha

Many advisors are currently in the process of selling off stocks; some as a precautionary measure as major equity indexes reach record highs, and others to rebalance portfolios by trimming the fat. The catch is that, thanks to a six-year bull market, many clients hold appreciated stocks that trigger taxable gains when sold. The upside for advisors is that these unavoidable taxable events present great opportunities to show their clients tax alpha. Or, as Financial Planning puts it, “How can advisors sell stocks and avoid a painful tax bite?”

The traditional way to offset these taxes is to balance portfolio gains with losses. However, many losses leftover from the 2008-2009 crash have been used up. Financial Planning offers advisors several approaches for adding tax alpha through offsetting clients’ capital gains. For one thing, advisors can utilize technology to optimize rebalancing processes. Says Lance Gunkel, COO at Sherpa Investment Management in West Des Moines: “We utilize a rebalancing tool that uses algorithms to come up with the most tax-efficient way to rebalance or get out of positions. In the current environment, this may mean taking offsetting losses in other asset classes, such as emerging markets debt and international equity.” Advisors seeking losses should also take a look at energy stocks due to plunging oil prices.

Advisors should also counsel clients to consider charitable contributions. As long as a share has been held longer than one year, the donor can get a tax deduction for its full market value. This way, clients can hold onto the cash they might otherwise have donated with the added benefit of offsetting capital gains.

Sue Stevens, an advisor out of Deerfield, Ill, suggests approaching retirement distributions as a way to minimize taxes. Says Stevens: “One tactic I’ve been using lately is doing 15-year tax projections for clients in early retirement. There may be opportunities to take IRA distributions or do Roth conversions in years when taxable income is low. They can also recognize significant capital gains.” Gain harvesting is another way to minimize tax hits; it’s especially effective for investors with more modest incomes. With this strategy someone can sell an appreciated security and realize the gain without incurring any additional tax.

Advisors looking for continued growth and new ways to stand out from the competition should be evaluating how they can assist clients with tax issues. Adhesion is in the business of powering advisor alpha, so we already have powerful solutions in place to help you add tax alpha. Check out this short video to learn more.

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What Really Differentiates the Top Advisory Firms?

Like many of us, Bob Veres’ take on practice management was fairly basic. In his words, “Use your technology efficiently, break your routine tasks into repeatable processes and compensate for what you want the staff to accomplish.” However during a recent coaching session, he came to the realization that for top firms these are just the table stakes. Says Veres:

“One key insight for me was the importance of a systematic approach to talent: You can get more leverage and growth out of developing your staff into future leaders and partners than out of pretty much whatever else it is you’re doing now: marketing, doing planning chores or tending client relationships.The analogy is that you’ll get more fruit (read: revenue) if you grow an orchard instead of a few big individual trees.”

In an April 29th article in Financial Planning, Bob Veres discusses some of the insights he gained into practice management when attending the group coaching program of the Ensemble Practice.

Veres went on to share what he took from some of the sessions he attended. In one, consultant Bob Bunting explained that, since there are only a small number of people with the qualifications and motivation to be leaders, firms must hire opportunistically and quickly. This is especially true since the window where these prospects are available tends to be much smaller. Bunting also suggested that firms should facilitate key employee development by creating highly visible leadership tracks with the goal of moving talented people to partner as soon as possible. This can act as a motivator for the rest of the firm, and lets employees know what they need to do to move up without having to ask. Bunting also suggested that when a new initiative comes out, those who jump in early should be pointed out and praised. This shows employees who is and is not making things happen, and eventually help bring skeptics onboard.

Sam Allred, a director at Upstream Academy, explained that leadership can be simply defined as “creating better results.” A couple of common mistakes, Allred pointed out, are promoting people who spend most of their time in the office and creating a flat management structure that treats everyone the same. Instead, Allred said that people must be challenged in order to grow. He suggests that future leaders be encouraged to take on one project a year that’s beyond their current abilities. This forces them to acquire new knowledge, and work with other people who have the skills needed to complete the project.

As Veres puts it, he realized that what separates the future haves and have-nots is how they treat and nurture the prospective leaders in their midst. Ask yourself these questions that Veres poses at the end of the article:

“Are you willing to identify, engage and mentor extraordinary people? Are you willing to shift your role from doing to mentoring? And will you encourage evolutionary change, or resist it?”

Leading firms have discovered how to add more value to their clients by leveraging technology and people. Adhesion is taking those businesses to new levels. Check out this video for a quick overview.

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How to Give a Portfolio a Tax Alpha Makeover

As Allan Roth points out in a great article in Financial Planning (“Tax Alpha: How to Fix a Client Portfolio”), when an advisor takes over a portfolio for a new client there is an immediate opportunity to show value. Says Roth: “Good financial planners can be worth their weight in gold in helping clients build a tax-efficient portfolio.” Generating tax alpha right off the bat is a key way advisors can prove their value to clients. And for the most affluent clients, “achieving tax alpha can yield a small fortune annually.” According to Roth, giving a new portfolio a tax alpha-oriented makeover is a three step process: taking over the new portfolio and deciding what to sell, building the new portfolio, and helping the client with income recognition and withdrawal strategies.

Roth says that when he gets a new client he often finds himself wanting to sell off everything to build a new, more tax-efficient portfolio. However, the reality is that selling off everything at once would usually produce unacceptable tax consequences. This is due to the fact that recognizing large gains can have several unintended consequences, including these listed in the article:

  • Triggering high state taxes or the alternative minimum tax
  • Pushing a client into the 20% long-term capital gains tax rate (if income is more than $413,200 for single filers in 2015, or $464,850 for joint filers)
  • Prompting the 3.8% Medicare tax on passive income when total income tops $200,000 for single filers or $250,000 for joint filers
  • Phasing down the amount of allowable deductions

When it comes to selling, Roth recommends first determining where the marginal tax breakpoints are. In Roth’s words, “understand how much gain can be recognized before any of the triggers above would create more dire tax consequences.” This must be done initially, as the IRS doesn’t allow for do-overs. Next, advisors should go after the low-hanging fruit. This includes those current holdings that have tax losses or with minimal gains. Lastly, advisors must weigh the tax implications of a sale against the benefit to the client; the benefits being more appropriate asset allocation, lowering costs and more diversification.

The next step after selling off is to rebuild the portfolio while incorporating the legacy assets that weren’t sold off. Assets should be selected based on asset allocation targets agreed upon by the advisor and client. According to Roth, “The two critical components here are selecting tax-efficient products and locating the right products in the tax wrappers that maximize after-tax return.” Newly selected investments should be chosen for the long run so as to avoid turnover. This is because selling off any asset in a taxable account creates a gain or loss that has tax implications for the client. By holding onto assets with gains these taxes are deferred. Asset location is also important. Tax-efficient vehicles should go into taxable accounts, whereas tax-inefficient vehicles should be in tax-deferred account like 401(k)s and IRAs.

Finally, clients need to be getting counsel on how to manage their income. Mike Piper, CPA and author of Taxes Made Simple, offers some strategies on how to go about it. For instance, “income bunching” refers to when a client needs to recognize income to live on by taking funds from a qualified account, but faces a reduction or elimination of credits or cost-sharing subsidies the client would have otherwise received. By income bunching, the client can “take a larger taxable distribution every other year to balance the benefits of cost sharing and credits against the costs from being in a higher marginal tax rate.” Another strategy is “deduction bunching,” where the client’s deductions are bundled every other year. This way, a client can maximize the value of the deduction by alternating between using the standard deduction and itemizing. Tax-gain harvesting is another great way for a client to be able to recognize a gain without paying taxes.

These are just a few of the ways an advisor can reconstruct a portfolio to generate tax alpha. One thing is for sure: tax alpha is an (often under-utilized) way that advisors can immediately and significantly demonstrate real value to their clients. As Roth puts it, “Tax alpha may not be as much fun as portfolio construction — but it’s a clear way to help your clients immensely.”

In today’s environment it’s not just about finding and implementing value-add strategies like tax alpha—firms have to be able to do it efficiently without compromising resources and face time with clients. The Adhesion Advantage lets high-performing advisory firms save time and resources by automating key tax aware strategies. The tax-aware investing process becomes a lot more efficient when incorporated with Adhesion’s technology and overlay managers. Adhesion also allows advisors to streamline new client transactions with tax aware roadmaps. The Adhesion Advantage significantly augments advisors’ ability to add tax alpha and show clients real value.

Learn more by viewing our Adhesion Tax Alpha video (click here).

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Tax Alpha May Be Adding More Value Than You Think

In the current climate it makes sense that tax alpha would be especially relevant.  In fact, tax alpha may be the best alpha, according to a Financial Advisor IQ article entitled “Tax Alpha Isn’t Just for the Superrich.”  This is because “tax strategy is far more predictable and controllable than investment strategy,” and tax alpha has a “clear measurable impact on a client’s net worth.”

Though ultra-wealthy clients certainly benefit from strategies designed to generate tax alpha, advisors can use many of the same strategies with their mass affluent clients to mitigate taxes on investment earnings.  The article quotes Clint Pelfrey, President of Prosperity Capital with an AUM of $350 million: “The middle-class millionaire, with IRAs and 401(k)s, is often overlooked.  I’m not a tax expert; but as an advisor, it is a key component of what I work on with clients.”  For Stephen Horan of the CFA Institute, tax-loss harvesting and holding-period strategies are simple and effective ways for advisors to reduce a client’s tax liability.  Horan points out that tax-loss harvesting should be done throughout the year and ideally over the course of several years.  Advisors should also be aware that they can lower their clients’ taxes by simply holding securities for over a year rather than a year or less.  Waiting a few days can mean the difference between a capital gain being short-term or long-term.  Ensuring that a client’s capital gain will be long-term can shield the client from additional tax liability as discussed below.

As 2014 comes to a close, taxes will be front of mind for many investors.

This presents advisors with important opportunities to address tax pain points, and in doing so gain competitive advantages.  A recent article in Financial Planning, “Help Clients Cut Capital Gains Taxes,” discusses the upcoming opportunities advisors will have to add Tax Alpha by reducing their clients’ tax liabilities.  This is of particular importance this year, since many mutual funds will likely be paying out sizable distributions.  The article states: “With equity markets having experienced strong gains over the past five years, some pundits predict mutual fund distributions for 2014 will be in the neighborhood of 16%- 17% of the investment value ….” (Article cites findings from Reuters).  The negative tax implications for investors receiving capital gains will be especially significant for 2014 due to the higher tax rates that have been in effect since 2013.

With taxable distributions for many investors going “from bad to worse,” advisors can be of great help to their clients by finding ways to add tax alpha.  For example, long-term capital gains will be much preferable to short term since the long-term rate is considerably lower.  While advisors do not get to decide how distributions are characterized, the article points out that “depending on your client’s individual situation, the investment process may be able to defer the gain recognition until a later date, which can have a powerful impact on compounding over time.”  Advisors will be well-served by understanding the specific investment process that is generating the after-tax return and taxable distributions to determine whether it’s designed to manage taxes.  Financial Planning suggests that investment processes more likely to reduce a client’s tax liability can include some of the following strategies:

  • Tax lot swapping
  • Manage holding periods
  • Defer realizing gains
  • Tax loss harvesting
  • Minimize wash sales
  • Optimal tax lot selection

High-performing advisory firms can save time and resources by automating key tax aware strategies.  Too many advisors are still using obsolete tools to conduct their tax management.  The Adhesion Advantage allows advisors to streamline new client transitions with tax aware roadmaps, and much more.

Check out our Adhesion Tax Alpha video to learn more.

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Schwab Entering Into Digital Advising May Not Be All Bad News for RIAs

As Schwab announced plans to enter the online advisory market, an article in Financial Planning discusses some of the implications this may have for RIAs and online startups.  CEO Walt Bettinger told analysts in July that Schwab was “fast at work on what we believe will be a groundbreaking and market-impacting introduction of an online advisory solution.”  On the one hand, this move could mean increased competition for traditional advisors.  According to Grant Easterbrook of Corporate Insight’s Consulting Services, Schwab’s entry could threaten advisors by “putting even more downward pressure on fees.”  Advisors who are trying to reach out to younger clients may be particularly vulnerable since Schwab already utilizes online accounts and phone-only interactions.  Says Sophie Schmitt of Aite Group, “They need to appeal to a younger generation in a more effective way, and will probably compete on lower cost and lower minimums.”  However, Easterbrook points out that: “It’s important to remember that other big financial firms, most notably Bloomberg and LPL, have also tried to enter the digital-only market without success.”

What’s really intriguing is the idea of traditional advisors partnering with their online competitors.  Financial Planning cites a Fidelity Institutional survey conducted earlier in the year where nearly a third of RIAs and broker-dealer executives polled said they planned on looking for ways to partner with a digital company.  An Aite Group research paper by Schmitt found that online investment managers seemed a good fit for financial planners, while tech firms made more sense partnering with money managers.  The paper also stated that larger wealth managers should consider buying online firms, rather than just partnering with them.

While Schwab’s announcement may raise some concern for RIAs, there is certainly no reason to panic.  Chris Nicholson of San Francisco-based startup FutureAdvisor argues that a big company like Schwab is simply not designed to innovate or execute quickly.  Says Nicholson:

“They have brand recognition, can spend tons on advertising and probably could undersell us.  But they also have huge inefficiencies, and their only disadvantage is themselves.”

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Does RIA Succession Planning Conflict With Fiduciary Duty?

With the average age of RIAs nearly 60 years old, a generation of advisors are nearing retirement and considering options for succession planning.  Many RIAs have been well-served by holding themselves to a fiduciary standard and regulation under the SEC.  The fiduciary duty entails that RIAs act in ways that are solely in the best interests of their clients.  This includes the “duty of care”, which is the responsibility RIAs have to not mislead clients and have a reasonable basis for any investments made on their behalf.  There is also a “duty of loyalty” that prohibits any conflicts of interest and requires the advisor to place clients’ interests above their own.  A recent article in Financial Planning discusses the issue of fiduciary duty in the context of RIA succession planning.

As the article points out, successful RIA firms with good cash flows make attractive investments for a variety of potential buyers.  As RIAs continue to gain value, more buyers with more capital are circling attractive prospects.  This is obviously great news for advisors.  However, how should the soon-to-be-retiring owner of a lucrative firm incorporate fiduciary duty into his or her succession plans?  No one can be blamed for wanting to get the most profit out of their business or seeking financial security for their family.  But if an RIA chooses to maximize profits over clients’ long-term interest, does this violate the fiduciary duty?

Another important issue raised in the article is the problem of having a successor in place.  Many founding advisors would prefer an internal succession of some kind, but what if there isn’t one in place or the heir apparent isn’t quite prepared?  Does transitioning to a successor who isn’t fully prepared to advise clients or manage the firm violate the fiduciary duty?  These are questions that can only truly be answered by the advisors themselves, but as the founding generation of RIAs nears retirement they are certainly worth asking.

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New Fee Structure Based on Adding Alpha

There’s a new revenue model taking shape in the financial planning business and, in the words of industry thought leader Bob Veres, we should probably be paying attention.  In Bob’s recent article in Financial Planning, “Advisors: New Fee Model Taking Over?”, he discusses recent developments in the way some younger advisors are structuring their fees.

Gen Y Changing the Game

To quote from the article: “Over the past few years, a number of Gen Y advisors have become dissatisfied with the idea that they should spend the first decade of their careers writing plans in the back office, safely away from all client contact.”  As Bob points out, the other option available to these advisors is starting their own firm.  However, out of necessity they generally end up working with clients their own age; clients whose assets fall below the standard million-plus minimum.  With fewer assets to manage, fees based around the traditional investment management model no longer make sense. These advisors are changing the game by charging fees based on the advice they are giving clients.  In other words, structuring fees around the Alpha they are providing.

Flexible Model

This “advice-for-fee” model that Bob is talking about is, as he points out, extremely flexible.  There are a number of “advice-based” financial issues that Gen Y-focused firms can address; for example, developing good saving habits, avoiding credit card debt, strategies for paying off student loans, business start-ups, and insurance issues arising from marriage and children just to name a few.  But as Bob reminds us, this model also works with retirement planning.  Bob relates the story of one Gen X advisor who schedules fun events like golf lessons for clients to “practice” for their retirement.  Regarding the managing of assets, he states: “If there are assets to manage, these can be delegated to the online firms that so many other planners disparage as ‘robo advisors,’ or outsourced to companies like Adhesion Wealth Advisor Solutions or Frontier Asset Management.”

Adding Alpha More Relevant Than Ever

We think this article makes clear two key points: back-office sprawl continues to be an issue, and more importantly that providing a remarkable client experience by adding Alpha is becoming more and more essential to attracting and retaining clients.  We’ll let Bob take us out: “If you want to leave your successors the kind of firm that they will want to manage, and if you want your practice to remain relevant 10 or 15 years down the road, then you should allow your younger planners to join the revolution, and experiment with delivering advice profitably to a whole new market of potential clients.”

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Advisor Burnout is Affecting More and More Advisors

Let’s talk about stress.

This is the most stressful week so far this year for many investment advisors. There are quarterly reports to reconcile, fees to bill and taxes to finalize. Sound familiar?

If you’ve been feeling more and more stressed and less and less joy then you may be suffering from Advisor Burnout.  Bob Veres, one of the foremost thought leaders in our industry and former editor-in-chief of Financial Planning magazine, has put together a groundbreaking white paper entitled Solving the Burnout Crisis.  Based on feedback from over 200 investment advisors, Bob not only identifies some causes and variations of Advisor Burnout, he also shares feedback from other advisors on ways to deal with stress and other root issues.  Click here to read the white paper.

Adhesion recently launched our inaugural stress survey to help give you even deeper insight into the sources and solutions for this problem. Please accept our gift of a $25 card after you complete this surveyClick here for the link to the survey.

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