Weekend Reading For Financial Planners (Nov 19-20) 2022

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia. He can be reached at [email protected]

Read more of Adam’s articles here.

(Davis Janowski | Wealth Management)

The RIA custodial landscape is in a major transition period, spearheaded by the pending ‘Schwabitrade’ integration between Charles Schwab’s and TD Ameritrade’s custodial platforms (which Schwab recently announced will occur over Labor Day weekend 2023). In addition to consolidation among the major players in the space, and new marketing efforts from existing ‘lesser known’ RIA custodians, newer entrants like Altruist and Entrustody have also entered the field, purporting to offer a more modern technology experience and/or more personalized service than what an advisor might receive from larger custodians. And now, one of the biggest advisor technology companies appears to be joining this increasingly competitive space.

Envestnet CEO Bill Crager announced last week that the company will be getting into the RIA custody business through a partnership with New Zealand-based FNZ, which purchased a majority stake in the old (not-well-known) State Street RIA custody business two years ago, and will be reconstituted as a ‘new’ RIA custodial competitor through Envestnet. Crager said the combined custody partnership will be available in the second half of 2023 (perhaps not coincidentally around the same time as the Schwab-TD integration, when some advisors might be considering a new custodian).

While it is unclear which segment of the advisor market Envestnet is pursuing with the new custodial offering, it adds a new capability to its already diverse collection of advisor tools, from portfolio management and CRM capabilities (through Envestnet Tamarac) to account aggregation (Envestnet Yodlee) and financial planning software (Envestnet MoneyGuide). The new custodial offering could attract advisors looking for a more integrated technology experience – particularly amongst the independent broker-dealers where Envestnet has deep market penetration already – while also providing Envestnet with more revenue-generating opportunities as a custodian (e.g., cash management programs).

The newly announced partnership comes on the heels of a series of changes for the company, from a newly announced Wealth Data Platform (which will be distributed out to international markets as part of the partnership with FNZ) to integrations with two advisor-focused cryptocurrency platforms (Flourish Crypto and Gemini BITRIA. It also comes after a hedge fund claiming to own 7.2% of Envestnet’s stock issued a scathing letter decrying the company’s stock performance (and suggesting that it has struggled to truly integrate, grow revenue, and find cost synergies with the acquisitions Envestnet has already made in recent years), and criticizing Envestnet’s unwillingness to consider the hedge fund for a board seat to address what it perceives as governance issues (that Envestnet’s board is not holding leadership sufficiently accountable for its lagging market performance). Nonetheless, Envestnet’s stock jumped in price following the release of its third-quarter earnings and the announcement of the custodial partnership (though it is down about 30% on the year, compared to the approximately 18% year-to-date decline for the broader S&P 500).

Altogether, the new RIA custodial partnership with FNZ represents a potential new line of revenue for Envestnet, as well as a way to expand its global reach. Within the US, though, for advisors already within the Envestnet technology ecosystem (or for those who might consider moving to it), adding custodial capabilities could present an opportunity for a more accurate and seamless client portfolio and data management experience under the Envestnet umbrella. Nonetheless, given the growing number of integrations between tools in the AdvisorTech ecosystem, many firms might choose instead to create their own tech stack, finding the ‘best’ tool in each category for their needs rather than using a single company’s offerings (some of which might not meet their needs). Which raises the question of whether Envestnet can fully integrate its new custodial offering with the rest of its technology in a way that truly makes it meaningful enough for any advisor to consider an RIA custodial switch?

(Dan Shaw | Financial Planning)

As a part of maintaining its CFP trademark and determining which advisors will be permitted to license its use, the CFP Board is responsible for managing its standards of conduct and creating a disciplinary process that is fair to the CFP certificants who use the marks, while also pursuing its 501(c)(3) mission of protecting the public (and ensuring the CFP marks remain in high esteem). Of course, these disciplinary rules and procedures are subject to change, including most recently when the CFP Board last year changed its procedural rules and sanctions guidelines to update the sanctions that CFP certificants receive when failing to follow the standards of conduct, and creating an appeals commission to hear cases of disciplinary actions imposed on CFP professionals.

And now, the CFP Board has proposed new changes related to investigations of alleged advisor misconduct, and to enforce the CFP Board’s Code of Ethics and Standards of Conduct. The proposed changes reflect recommendations developed by the CFP Board’s staff following the bifurcation of the Detection and Investigation functions from the Adjudication and Appeals functions, and in response to concerns raised by CFP professionals and other stakeholders.

The proposed changes include a requirement that respondents subject to an interim suspension order file a petition for reinstatement within two years (or receive an administrative order of revocation), which shifts the burden of reinstatement after a suspension to CFP certificants (rather than ‘automatically’ being reinstated after a suspension) and would save CFP Board staff time by not assembling a detailed ethics complaint for an advisor who does not intend to seek reinstatement.

Another proposed change would require that when the CFP Board’s Disciplinary and Ethics Commission (DEC) rejects a settlement offer between an advisor and the CFP Board’s enforcement counsel, a hearing would be required to allow each party to restate their cases and try to work toward a new agreement (providing the DEC with more information, as currently, the DEC can reject a settlement offer and propose a counteroffer without hearing from the parties involved).

An additional change would set standards for the use of expert witnesses in CFP Board disciplinary hearings, including the admissibility of expert testimony (as the CFP Board’s Procedural Rules do not currently set forth a process for addressing proposed expert witnesses). This would allow the DEC to decide whether a potential expert’s testimony would be useful in adjudicating a case.

Altogether, the proposed changes appear to attempt to make the disciplinary process more efficient for respondents as well as CFP Board staff as the CFP Board continues its efforts to ramp up enforcement, and to improve the adjudication process through the use of adversarial hearings and expert witnesses. The full list of proposed changes can be found on the CFP Board website, which also includes a redlined version of the proposed revisions to the Procedural Rules, and the CFP Board has opened the proposals for a comment period through January 23, so advisors have an opportunity to comment on whether these proposed changes would represent an improvement compared to the CFP Board’s current procedures!

(Bloomberg News)

With the midterm elections in the rear-view mirror, Congress can now turn its attention to the “lame-duck” session that lasts through the end of the year, before the new Congress is seated. This period often sees significant legislative action (e.g., the SECURE Act, which passed in the final weeks of 2019), as each chamber tries to pass new laws before many of them are replaced and as deadlines approach for ‘must-pass’ spending and defense bills.

This year, financial advisors have been paying close attention to “SECURE 2.0”, legislation that would follow up on the original SECURE Act by gradually increasing the age for Required Minimum Distributions (RMDs) from 72 to 75 and increasing retirement savings opportunities, among other measures. While SECURE 2.0 has bipartisan support and appears to be on track to pass by the end of the year, certain tax-related measures are much more divisive. The primary battle lines appear to be between Democrats, who want to increase the Child Tax Credit, and Republicans, who are prioritizing certain business-related tax breaks (including allowing companies to deduct research and development costs in the year they are incurred; reinstating a more generous deduction for interest expense write-offs; and renewing a measure allowing businesses to write off equipment purchases in a single year).

Notably, while Democrats control both chambers of Congress through the end of the year, they will need to get support from at least 10 Republican senators for any legislation to pass, given the filibuster. A potential compromise on the tax issues could come by roughly equalizing the dollar amount for each side’s preferred tax items. For example, because the Republicans’ favored breaks would have an estimated revenue cost of $45 billion, the Child Tax Credit could be boosted by a similar amount (which would result in a credit larger than today’s $2,000 credit but short of the $3,600 credit that was temporarily in force in 2021).

The key point is that while the prospects for passing these tax measures appear to be tenuous, the changes could have a significant impact on financial advisory clients, whether they are saving or entering retirement (and will be impacted by SECURE 2.0), have children (and could benefit from a larger Child Tax Credit), or who own or work for companies that could benefit from the proposed business tax breaks!

(Sheryl Rowling | Morningstar)

The end of the year can be a busy time for financial advisors. From ensuring clients have made the proper tax payments throughout the year, to supporting clients during Medicare’s Open Enrollment Period, to ensuring clients complete their Required Minimum Distributions (RMDs), there is no shortage of potential year-end tasks. And one particular way advisors can help their clients avoid a nasty tax surprise at the end of the year is by managing the capital gains distributions from funds that they own.

While clients are often aware of the potential for capital gains when selling an investment, they might be less familiar with capital gains distributions. Among other causes, capital gains distributions can occur when mutual fund managers have to sell positions with embedded gains to create cash for redemptions when investors sell shares of the fund. These gains become “phantom income” for remaining fund owners, who are responsible for taxes on the gains without actually receiving a cash distribution. Notably, as poor market performance tends to increase mutual fund redemptions, capital gains distributions could be particularly pernicious this year, and some fund families have estimated distributions of up to 23% of net asset value for certain funds this year.

Importantly, advisors can use a methodical process to help their clients avoid this tax surprise. First, advisors can review client portfolios (either using portfolio management software or manually) to determine which clients have a significant position in mutual funds with expected capital gains distributions. To facilitate this process, advisors can set thresholds to determine whether the capital gains distributions will result in a material tax hit for the client (e.g., only flagging distributions that exceed a certain dollar amount and represent a certain percentage of the client’s portfolio).

Once problem positions have been identified, advisors can search for alternative funds for their clients to switch into before the original fund makes its distribution (which usually occurs in mid-December), thereby avoiding the tax burden from the distribution. For example, an advisor might sell a client’s position in a small-cap fund with a 10% capital gains distribution and purchase another small-cap fund (that is not substantially similar, in order to avoid wash sale rules) with a 1% estimated distribution. Notably, selling the original fund has tax consequences as well; while selling a position at a loss could provide a double benefit (harvesting the loss while avoiding the capital gains distribution), selling a position that would result in a large capital gain could offset any benefit from avoiding the capital gains distribution, so caution on the advisor’s part is warranted.

In the end, advisors can add significant value to their clients by proactively identifying mutual fund positions that could issue large capital gains distributions this year and assessing the best course of action to minimize the tax burden. Though ultimately, it could be worth considering whether these mutual funds are worth holding in the first place if there are alternate mutual funds or ETFs available that are less likely to have capital gains distributions in the years ahead!

(Jennifer Lea Reed | Financial Advisor)

Health Savings Accounts (HSAs) have become an increasingly popular tool for consumers, particularly those in good health and with extra income to save. Individuals are allowed to contribute to HSAs (up to annual limits) if they are covered by a High-Deductible Health Plan (HDHP), which typically has a lower premium and a higher deductible than a ‘traditional’ health insurance plan. Notably, HSA contributions are not only deductible for federal and state income taxes, but, if made through payroll deductions, are also not subject to FICA taxes. Additionally, unlike Flexible Spending Accounts (FSAs), there is no deadline for the contributions to be spent.

Perhaps one of the biggest benefits of an HSA is its “triple tax advantage”: tax-deductible contributions, tax-deferred growth, and tax-free qualified distributions. Which means that contributing to and investing the funds in an HSA can be an efficient way to pay for healthcare costs, now or in the future. But, according to one estimate, only about 34% of total funds in HSAs are invested, meaning that many account owners might be missing out on the opportunity for tax-free compound growth.

In addition to the returns from investing the funds in an HSA, the growth of the account will also depend on how it’s used. Because while funds in an HSA can be used to pay for a variety of healthcare costs, account owners are not required to use the HSA for these costs incurred in a given year. By paying for medical bills using cash on hand, account owners can allow the compound growth in their accounts to continue unabated. In addition, qualified distributions for healthcare expenses do not have to be made in the year they are incurred; for example, if a client has a $5,000 medical bill this year they can wait to make the qualified distribution from the HSA until many years in the future (though they will want to keep the receipt from the original expense in case they are audited), perhaps serving as an additional source of tax-free income in retirement.

Ultimately, the key point is that HSAs are useful not only for making tax-deductible contributions, but also for their potential for tax-free growth and distributions. And advisors can add significant value to their clients by first helping them assess whether an HDHP and HSA make financial sense for their given situation (or for their young adult children!) and then ensuring that their contributions are invested appropriately to enable them to cover their medical expenses now and in the future!

(John Manganaro | ThinkAdvisor)

Paying taxes is never a fun thing for clients. Because of this, many advisors pursue tax-planning strategies that delay taxes for as long as possible. For instance, an advisor might recommend that a retired client make their Required Minimum Distribution (RMD) for the year, then cover remaining expenses by selling taxable investments that are subject to the long-term capital gains rates (which could be lower than the rate on ordinary income the client pays on retirement account distributions) until returning to the tax-deferred accounts once the taxable investments are depleted.

While this strategy might be satisfying to a client in the current year, it could end up reducing their long-term wealth or the after-tax assets received by their heirs, according to research from James DiLellio and Andreas Simon, who found that it can often be optimal to pay additional taxes now in order to save on taxes later. For instance, by minimizing taxes now (e.g., by not taking Traditional IRA distributions before reaching RMD age), a client could end up with larger RMDs down the line that put them into a higher tax bracket due to the investment growth of the IRA. In addition, clients with legacy interests will also want to consider their heirs’ tax rates; for example, it might make sense to withdraw funds from a tax-deferred retirement account now if the account owner is in the 24% tax bracket but a high-earning heir is in the 37% bracket.

The researchers suggest that Roth conversions are among the most effective ways to potentially extend portfolio longevity (and pass along more assets to heirs on a post-tax basis). This strategy can be particularly effective in the pre-RMD years, when clients might have less income and more room to fill up the lower tax brackets.

The key point for advisors is that deferring taxes for as long as possible is not necessarily the optimal choice for every client. For advisors, it is important to consider a client’s current and potential future tax rates, but also the tax rates of their heirs if they have legacy goals. Because in the end, enduring a little tax pain today could result in a more sustainable portfolio (or more funds available for heirs) in the future!

(Joachim Klement | Klement On Investing)

In today’s tight labor market, employee retention is on the minds of many company leaders. And beyond the costs of finding and developing talent, employee retention is particularly important in the financial advisory industry, as it can take time for trust to build between employees and clients. Which leads many leaders to consider what can be done to encourage companies to stay with the company.

According to one study, several of the key reasons employees leave their jobs are directly influenced by the leaders themselves. Among a range of reasons employees might leave their company, the study found that job fit, rewards offered (other than pay), and job embeddedness (i.e., the social network and connections an employee has at work) were the top factors that were correlated with leaving a job. Notably, leadership style followed closely behind, with a greater influence than even pay and job characteristics.

This research indicates that, in addition to ensuring that employees have the right job ‘fit’ for their skills and interests as well as social networks that they can lean on in the office, firm leaders can promote employee retention by focusing on their own leadership style. Though, notably, juggling these various responsibilities can be challenging for owners of growing firms (who might be “accidental business owners” in the first place), suggesting that the best course of action can often be to add additional leaders who can help support a thriving company culture that promotes employee retention!

(John Baldino | Fast Company)

Finding and hiring quality talent can be a challenge for company leaders. For job-seekers who are currently unemployed (whether because they just graduated school or are between jobs), pay is often a prime motivator when looking at potential employers (as their bills need to be paid!). But the factors that drive currently employed individuals to leave their current positions often go well beyond pay.

According to a recent study by the consulting firm McKinsey, a lack of opportunities for career development and advancement is the top factor driving those who quit to take on a new job in the past year. For many companies, this problem occurs because they have many more working-level positions than they do managerial opportunities, so employees often wait years for the chance to advance into management. With this in mind, firms looking to hire employees away from other companies might want to focus on creating defined career tracks and consider creating ways for employees to advance (whether in skills, title, or pay) without having to get one of a limited number of management positions.

In addition, firms can attract employees by creating more thoughtful benefits packages. These can go beyond traditional perks like health insurance and paid time off to include benefits that matter to the firm’s target employee demographic. Such perks could include time off for charitable work, access to mental health resources through applications like Unmind or Headspace, or offering subscription services (e.g., meal preparation services) that help reduce employees’ mental load. The key point is that copying other firms’ benefit packages is unlikely to be successful as a company will want to tailor its offering to the unique needs of the individuals it seeks to hire and retain.

Finally, it is important for employers to be deliberate during the hiring process to ensure that both they and the prospective employee have an accurate view of the company and position. Today, expectations for in-person versus remote work is a key issue for companies and employees; if a company told an employee during the hiring process that they would only be expected to work in the office one day per week, but soon after being hired changed the policy to require employees to be in the office five days a week, trust in the employer-employee relationship would be broken.

Ultimately, the key point is that companies looking to hire employees away from their current positions need to sufficiently differentiate themselves from other employers. Whether it is by offering better paths for advancement, a more tailored benefits package, or a more honest dialogue about the position (or, preferably, all three!), firms can attract (and retain!) top talent.

(Jacqueline Sergeant | Financial Advisor)

It is often easy to identify successful leaders, but harder to figure out exactly what makes them successful. And while each leader is different, a common attribute is that they manage their time well given the wide range of personal and professional commitments they have on their plate. With this in mind, financial industry consultant Suzanne Peterson has identified five characteristics that can help financial advisors perform at their highest level.

The first characteristic is to identify not only when to say ‘no’ to requests for time, but also how to do so diplomatically. The key here is to maintain the relationship with the requestor. For instance, instead of telling someone who requested a meeting for later in the week that they don’t have time can make the requestor feel like they are not important; instead offering alternative times the following week will allow the leader to keep their schedule for the week without damaging the relationship.

Successful leaders also tend to make pre-commitments for their schedule. This could mean looking several weeks out and blocking off time for important commitments, whether it is going to a child’s piano recital, blocking out ‘white space’ to think about their business, or time to build key relationships (e.g., blocking time for a study group meeting). Effective leaders also frequently leverage pre-decisions, working with their team to anticipate decisions that will need to be made during the week and making them in advance (eliminating the need to have a separate meeting later in the week).

In addition to building in a set time for relationship-building, effective leaders often use ‘dead time’ (i.e., five- or ten-minute periods between commitments) to check in on their staff. Another way to keep up with staff is to use a ‘tracker list’ to keep up with the promises the leader has made to staff members; this is less an attempt at micromanagement, but rather more of an opportunity to ensure the leader follows through on their commitments (and hopefully building staff loyalty).

In the end, while there are innumerable characteristics that go into being a good leader, having control over their time is a common attribute of successful leaders. And given the range of responsibilities advisory firm owners have on their plate (from meeting with clients to managing employees to working on the business itself), creating habits and policies that allow them to manage their time well is a key part of ensuring their overall wellbeing!

(Crystal Butler | Advisor Perspectives)

With the holiday season approaching (and Black Friday ads out in full force!), many financial advisors are preparing their shopping lists. But in addition to finding presents for friends and family, advisors might also want to consider gifts for their key professional relationships, from employees to key clients to centers of influence with whom they work throughout the year.

But while an advisor’s child has likely prepared a long holiday wish list, the advisor might find it more challenging to buy gifts for their professional contacts. One popular option is to send food and/or drinks to celebrate the season; this could mean sending a gift card to a local restaurant (perhaps one that also offers takeout for busy professional clients!), a thoughtful gift basket of items the individual likes, or just a bottle of (mid- to high-end) wine. Advisors can also consider gifting experiences, from concert or theater tickets to a gift certificate for spa services or an art class (depending on the recipient’s preferences) from a platform like Xperience Days. Another option is to make a charitable donation in the individual’s name (e.g., through a platform like Donors Choose or TisBest); this can be particularly effective if the donation is made to an organization that the advisor knows is important to the recipient.

For advisors with a long list of professional contacts (and/or a limited budget), they might choose to give gifts to key individuals while sending a holiday card to other contacts. And despite it being less expensive than sending a gift, an advisor can still demonstrate thoughtfulness with their card, perhaps by writing a personalized message to the recipient rather than using a standard greeting.

Ultimately, the key point is that because financial advice is a relationship-based business, demonstrating thoughtfulness by giving gifts or sending cards can help build these ties. And while an advisor might be sending cards or gifts to tens or even hundreds of individuals, taking the time to add a personalized touch can help grow the relationship in the coming year!

(Derek Notman | Conneqtor)

During the holiday season, many advisors give gifts to their clients to show the advisor’s appreciation for their continued relationship. But there are many considerations to keep in mind when it comes to giving gifts to clients, from regulatory limits to choosing the right item.

First, advisors will want to ensure that their gifts do not violate any regulatory restrictions or policies put into place by their firm. For instance, FINRA puts a limit on gifts of $100 per client per year for registered representatives under its jurisdiction. And while the SEC does not set a specific dollar limit for gifts, it does expect RIAs to keep track of all gifts that are given, have a firm-wide policy about the circumstances in which gifts may be given, ensure a reasonable dollar limit on the amount of the gift, and have a review process to ensure gifts being given are in compliance with the firm’s gift-giving policies and procedures. And state-registered firms will also want to check for any gift-giving limits imposed by the relevant state(s).

When it comes to selecting a gift, advisors have a wide range of options from which to choose, from the traditional (e.g., chocolates or a bottle of wine), to the promotional (e.g., a useful item with the firm’s branding) to the metaphorical (e.g., a fireproof document safe that reminds the client of the ‘security’ the advisor brings to the client’s life). The right gift can not only help build the relationship with the client, but could also lead to more referrals down the line if the client talks about the thoughtfulness of the gift with friends (or, perhaps even better, posts about it on social media).

In the end, while giving thoughtful gifts can strengthen the advisor-client relationship, firms and their advisors will want to make sure that they are doing so in a way that is consistent with regulatory guidance and firm policies. And when it comes to selecting a gift, as the saying goes, it’s the thought that counts!

(Kristine McManus | InvestmentNews)

Thinking about some of the best gifts you have received, what are some of the common characteristics? Very likely, the gift was meaningful to you in some way and showed that the giver thought about your individual preferences. And when it comes to professional gifts, the degree of thoughtfulness and personalization shown can be the difference between a gift that is remembered for years and a subscription to the Jelly of the Month Club.

One strategy for giving an effective gift is to ‘own the mantel’, meaning giving clients a gift that they will enjoy showing to others. For instance, a highly visible wreath will have more impact than a bottle stopper that is kept in a drawer. Giving experiences can also be effective, particularly one that is personalized to an individual’s interests; for example, a client that enjoys art might like a gift certificate for an art class, while a client who likes sports might appreciate tickets to an upcoming game for their favorite team.

An advisor can also add their own flair to the gift, perhaps by giving bottles of wine that they enjoy (and that they think others will like as well!), or by sharing a favorite holiday recipe in a holiday card sent to clients. Donations can also be an effective option, particularly if it is to an organization that is meaningful to the client; advisors can even double-dip by purchasing items from a charity (e.g., a local bake sale) and give them to clients as a gift!

Ultimately, the key point is that advisors who go beyond client expectations when giving gifts will leave a memorable impression on their clients, who might spread the word about the advisor’s thoughtfulness to friends (who might become prospective clients down the line). Because at the end of the day, an advisor who keeps a client’s preferences in mind when selecting a gift for a client could be signaling that they will show a similar level of thoughtfulness when managing their financial plan as well!

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in 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 “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.