Weekend Reading For Financial Planners (Dec 24-25) 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.

(Jeff Levine | Twitter)

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, brought a wide range of changes to the retirement planning landscape, from the death of the ‘stretch’ IRA to raising the age for Required Minimum Distributions (RMDs) to 72, to provisions meant to encourage increased participation in workplace retirement plans. And while the IRS is still working through implementing regulations related to the original SECURE Act, Congress appears to be on track to pass a new set of changes to the retirement landscape, dubbed “SECURE Act 2.0”.

Lawmakers attached the range of retirement provisions that make up SECURE 2.0 to a broader Omnibus spending bill that must be passed by Friday, December 23, in order to avoid a government shutdown. And notably, while no single change in SECURE 2.0 rises to the magnitude of the “Death of the Stretch” from the original SECURE Act, there are even more total impactful changes in the new SECURE 2.0 legislation than there were in the original SECURE Act!

One of the major headline changes from the original SECURE Act was raising the age for RMDs from 70 ½ to 72, and SECURE 2.0 pushes this out further, depending on an individual’s birth date. While those born in 1950 or earlier will see no change (as they have already reached age 72), individuals born between 1951 and 1958 will have to start RMDs at age 73, while the RMD age for those born in 1959 or later will be 75 (perhaps creating additional years of relatively lower income where (partial) Roth conversions or capital gains harvesting might make sense for certain retirees). In addition, the bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%.

SECURE 2.0 would also allow for transfers from 529 plans to Roth IRAs, albeit with some significant restrictions, including that the transfer must be made to the 529 plan beneficiary’s (not the plan owner’s) Roth IRA, and the lifetime maximum for transfers is $35,000 (though, notably, the Roth IRA contribution income limits are disregarded for the transfers, opening them up to high-income 529 account owners and beneficiaries). Also related to Roth accounts, the legislation would align the rules for employer-retirement-plan-based Roth accounts (e.g., Roth 401(k)s and Roth 403(b)s) with those for individual Roth IRAs by eliminating RMDs, and would create a Roth-style version of SEP and SIMPLE IRA accounts (whereas participants in SEP and SIMPLE plans could only previously make pre-tax contributions to their accounts). Further, SECURE 2.0 will allow employers to make matching contributions and non-elective contributions to the Roth side of the retirement plan instead of just the pre-tax portion (though participants will be subject to income tax on such contributions).

For clients who have reached age 70 ½, Qualified Charitable Distributions (QCDs) are a popular way to make charitable contributions (up to $100,000 annually) from pre-tax retirement accounts, reducing their current or future RMD burden in the process. SECURE 2.0 expands this opportunity indexing that limit to inflation starting in 2024. And notably, even as the RMD age increases to 75 under the new legislation, the age threshold for QCDs remains at the pre-SECURE 1.0 level of 70 ½. SECURE 2.0 also creates a one-time ability to make a QCD of up to $50,000 to a Charitable Remainder Trust (CRUT), Charitable Annuity Trust (CRAT), or a Charitable Gift Annuity (though given the $50,000 limit, clients might decide the time and money burden of creating these structures might not be worth it).

SECURE 2.0 also includes several measures meant to encourage increased retirement saving. These include making IRA ‘catch-up’ contributions subject to COLAs beginning in 2024 (so that they will increase with inflation from the current $1,000 limit), while also increasing 401(k) and similar plan catch-up contributions; creating a new “Starter 401(k)” plan (aimed at small businesses that do not currently offer retirement plans; such plans would include default auto-enrollment and contribution limits equal to the IRA contribution limits, among other features); and treating student loan payments as ‘elective deferrals’ for employer matching purposes in workplace retirement accounts, which would allow student loan borrowers to benefit from an employer match even if they can’t afford to contribute to their own retirement plan.

Altogether, SECURE 2.0 presents a wide range of changes to the retirement planning landscape, for both those saving for retirement and those who are currently retired, meaning that it will likely impact nearly all financial planning clients in one way or another.

And stay tuned to Kitces.com for an upcoming full-length blog post (on Wednesday, December 28), and a Kitces webinar with our very own Jeffrey Levine (on Tuesday, January 3) that will go even more in-depth on SECURE 2.0 and its implications for financial advisors!

(AdvisorHub)

Many factors go into an advisor’s satisfaction with their job, from the technology and marketing offered by their firm, to compensation, hours worked, and company culture. Another key factor, though, is autonomy, which has led to growth in the popularity of independent advisory models. Many financial advisors, seeking more autonomy and a greater share of their earnings, have moved from wirehouses and regional broker-dealers (where they are subject to the client policies, staffing decisions, and tech stack of their company) to the independent broker-dealer, hybrid RIA, and independent RIA channels during the past several years.

And a new report from research and consulting firm Cerulli Associates suggests that this desire for independence continues to grow. While only 44% of advisors surveyed were independently affiliated, 71% of all respondents identified a preference for independent affiliation in the event they were to change firms (suggesting there are still a significant number of wirehouse and regional broker-dealer advisors looking to an independent model were they to make a move). When explaining their preference for independence, employee broker-dealer advisors cited greater autonomy (62%), a higher payout (57%) and the ability to build financial value in an independent business (54%) as the major reasons. In turn, when choosing which independent firm they may choose to affiliate with, advisors surveyed cited technology (56%) as the top factor that would influence their decision , suggesting that building a solid tech stack could be a differentiator for broker-dealers and mega-RIAs seeking to attract advisor talent.

Overall, the Cerulli study suggests that the trend towards advisor independence continues, with the rate of growth in the number of advisors who affiliate with independent and hybrid RIAs growing on an annualized basis by 4.4% and 2.0%, respectively, over the last five years. Though given the regulatory and client-related considerations involved when changing firms and setting up an independent practice, it still seems likely that the shift to independence will remain a persistent trickle rather than a sudden wave of transitions… even as Cerulli’s data suggests that the ongoing slow shift to independence is far from done.

(Jeff Benjamin | InvestmentNews)

Leading up to this year, RIA Mergers and Acquisitions (M&A) activity was on fire, as heightened demand from acquirers (often larger firms, sometimes infused with private equity capital) drove up valuations, to the benefit of those selling their firms. But among the other changes in the economic environment this year (from inflation to weak market performance), rising interest rates (and their impact on firms’ willingness and ability to borrow funds for their acquisitions) have the potential to cool the market for RIA M&A.

And according to a new survey from consulting firm DeVoe & Associates, advisors appear to have more subdued expectations for RIA M&A in the coming year. For instance, 56% of those surveyed expect valuations to be somewhat to considerably lower in 2023, while only 8% expect higher valuations (whereas a year ago, only 8% of respondents expected lower valuations). In terms of overall deal activity, 42% of respondents expect to see an increase in the number of deals (down from 63% last year), while 25% of those surveyed expect to see less deal activity (compared to 4% last year). In terms of the size of firms engaging in deals, 59% of firms with more than $1 billion of Assets Under Management (AUM) said they expect to make an acquisition within the next 24 months (down from 74% last year), suggesting that some of these larger firms (which have driven much of the M&A boom of the past few years) might be taking time to ‘digest’ their previous acquisitions. At the same time, 47% of firms with less than $1 billion of AUM plan to make an acquisition in the next two years (up from 42% last year).

So while the number of RIA M&A transactions in 2022 has already eclipsed the total for 2021, according to Cerulli, firms appear to expect the pace of deals and their valuations to cool off in the coming year. And so, for advisory firms considering a sale, the current economic and market environment heightens the importance of continued client growth and potentially transitioning key management functions to the next generation (though, ironically, doing so could make selling the firm less desirable?) to fetch the best price from a group of acquirers who might be increasingly cautious.

(Bob Hanson | Advisor Perspectives)

Referrals from current clients, Centers Of Influence (COIs) such as accountants and lawyers, and other sources are an important driver of organic growth for many financial advisory firms. In fact, client referrals are the most commonly used marketing tactic among firms, with 93% of firms surveyed using this tool and 96% of those firms gaining at least one new client from a referral, according to the latest Kitces Research study on How Financial Planners Actually Market Their Services. And while an advisor might be able to generate some referrals without much effort (e.g., as clients recommend the firm to friends looking for an advisor), taking a more proactive approach to generating referrals can lead to a significant increase in the number of leads an advisor receives.

For example, when a client has a friend they would like to refer, they might do not know the best way to put them in touch with their advisor. To remedy this situation, advisors can add a web page on their website specifically for referred clients. Even better, advisors can create a custom web page for key COIs or clients who refer often that presents an even more welcoming invitation to the referred prospect. Next, advisors can consider their strategy for contacting referrals; while some advisors might reach out with two contact points (e.g., email and phone), advisors looking to convert more referrals to clients can consider using not only a personalized email and a phone call, but also sending a free report or white paper, or perhaps an educational video, ultimately making seven contacts within 28 days.

Seminars have long been a marketing tool for advisors, and many have moved these events online through webinars. One way to boost attendance at these events is to engage key COIs and digital influencers in their niche to invite their lists to the advisor’s event (e.g., by partnering with other wealth management experts to hold a virtual conference). Advisors can also engage COIs or online influencers by hosting them on the advisor’s radio show or podcast, or by offering to contribute content to the influencer’s newsletters or other media. And when it comes to leveraging social media, while having a presence on sites like LinkedIn and Facebook can be valuable, going deeper by seeking out connections of current clients (e.g., the other partners at a client’s law firm) can provide a greater return on effort.

Ultimately, the key point is that given the importance of referrals for the growth of many advisory firms, putting in the extra effort to cultivate more connections with key influencers and to create a more personalized experience for referred prospects can make referrals an even more valuable marketing tool!

(Kerry Johnson | Advisor Perspectives)

In recent years, financial advisors have increasingly recognized that making a personal connection with prospective clients early in the process (as soon as the very first introductory meeting) can make it more likely that the prospect will eventually become an engaged, motivated client. And so, working to build trust, rather than focusing on the advisor’s planning strategies, in an initial prospect meeting is crucial to get the relationship off on the right foot.

This “good fit” meeting can be structured in five steps. The first, calibration, involves small talk that gets the conversation started (and, preferably, gives the advisor an idea of the prospect’s background). Next, the advisor can move into their “elevator speech”, a 90-second discussion that includes the value they provide for clients and a story illustrating these benefits. After establishing their ability to add value for clients, the advisor can then move into the “bridge”, where they discuss what issues brought the prospect to the advisor (preferably learning three potential planning needs), recap these items for the prospect (to make the prospect feel understood), and gain the prospect’s commitment to reaching solutions to their needs. The advisor can then explain their onboarding process and meeting cadence, finally establishing the next step for the client (i.e., hopefully securing a follow-on meeting).

In the end, while financial planning requires significant technical expertise, it is also about building trusting relationships with clients. Therefore, it is important for advisors to start doing so as soon as the initial prospect meeting, and taking a structured approach to this engagement can ultimately increase their conversion rate of turning prospects into clients!

(Kristen Luke | Advisor Perspectives)

When advisors craft their marketing message, they often create one that is general enough to resonate with a wide range of prospective clients. Whether it is “Helping clients live their best lives” or “Helping you make the most of your money”, these messages will not ‘eliminate’ any prospective clients, but at the same time prospects might not understand how the advisor can help them with their individual circumstances.

But advisors who can narrow down the clients they want to serve (perhaps by crafting an ideal target client persona or identifying an even narrower niche) can focus their message on these clients’ individual needs. A first step for creating this message is to consider whether the advisor’s preferred client needs a ‘life raft’ (i.e., is just trying to survive) or a ‘sailboat’ (i.e., is looking to thrive). For instance, client types who might fall into the ‘life raft’ category include those who have recently lost spouses, have gone through a divorce, have significant debt, and those entering retirement with limited savings. On the other hand, clients looking for a ‘sailboat’ could include those who have received sudden windfalls, are retiring with significant savings, or are ‘High Earning, Not Rich Yet’ (HENRYs). The advisors message can then flow from being in one situation or the other (e.g., “Helping you regain your footing after your loss” for an advisor working with widows or “Helping you thrive using your newfound wealth” for those working with ‘sudden money’ recipients).

Ultimately, the key point is that even advisors without specific niches can craft a marketing message that resonates with their target client. And a good first step to doing so is to consider whether these clients are most in need of a metaphorical life raft or a sailboat!

(Christine Benz | Morningstar)

As the year comes to a close, financial advisors are not only looking to make sure year-end client tasks are completed (perhaps making a list of clients who need to take Required Minimum Distributions [RMDs] and checking it twice!) but are also looking forward to the year ahead. And for those advisors who are interested in better organizing their workflow throughout the year, creating a client service calendar can be a valuable practice.

While there are infinite ways to sequence the various tasks an advisor needs to complete and the services they want to provide during the year, they can start with items that tend to occur during certain times of year. For instance, the first few months of the year could be a good time to focus on tax planning for clients, as their tax returns will be prepared and it is early enough in the year to consider potential tax planning strategies for 2023 (e.g., Roth conversion cost averaging for retirees who have not reached RMD age or increasing contributions to tax-advantaged accounts for clients who are still working). And the end of the year can be a good time to review RMDs and charitable giving plans (or combine them for clients who are eligible to make Qualified Charitable Distributions!). On the other hand, less time-sensitive planning areas, such as reviewing insurance coverages or client estate plans, can occur at any time throughout the year based on the advisor’s preferred schedule, and reviewing these specific areas for all clients at the same time can save the advisor time, as they can look for similar planning opportunities across their client base.

Altogether, by using a client service calendar to organize the services being provided, an advisor can not only create efficiencies in their schedule, but also allow their clients to see the full range of value-adds their advisor completes throughout the year!

(James Dahle | The White Coat Investor)

Late December brings office holiday gatherings, travel to see family, and, for many, the opportunity to take a few well-deserved days off. Of course, as December comes to a close, so does the calendar year and with it, year-end deadlines for a range of financial planning tasks and opportunities. Which gives advisors a final opportunity to consider which are applicable to their clients (or for their own financial situation!).

For instance, December 31 is the deadline for a range of tax planning items, including tax-loss harvesting, making itemized deductions (e.g., charitable giving), and fulfilling RMD requirements. In addition, those saving for retirement will need to make their contributions to employee retirement plans before the end of the year, while those saving in 529 accounts will want to make contributions by December 31 to ensure they receive any available state tax deduction (though a few states extend the deadline to April). Funds in client Flexible Spending Accounts often have a December 31 deadline to be spent (although some companies offer a grace period into the following year). Also, those clients using Roth Conversions this year will want to make sure the conversion is complete by the end of the year to ensure the proceeds are taxed on their 2022 return.

Ultimately, the key point is that while there are plenty of festivities at the end of the year, it also comes with a range of planning-related deadlines. Because while it might not be as showy as a new car with a bow, helping your client save on their taxes or avoid penalties can be a significant gift in itself!

(Amy Arnott | Morningstar)

Many financial advisors and their clients will spend time with family members during the year-end holiday season. And while it might not be the most exciting topic of conversation, using the opportunity for important money discussions – whether they are with aging parents, adult children, or a spouse – can be a valuable year-end activity!

For those with aging parents, holiday visits can be an opportunity to assess whether they are still comfortable and safe in their current residence. And even if they are, starting the discussion now about their living arrangements in the years to come can help prevent uncomfortable situations when their physical or mental condition might have deteriorated. It can also be a good time to check on parents’ finances to ensure they have enough income to meet their needs and that they have appropriate health insurance coverage (perhaps exploring whether signing up for Medicaid might be appropriate).

Of course, these conversations can go the other way as well, as clients (and advisors) with adult children can use the holidays as an opportunity to discuss important financial matters. From the parents’ end, this could include sharing information about how their finances are set up (e.g., by sharing account types but not necessarily amounts in the accounts) to help a future executor or beneficiaries or discussing succession plans for a family business. In addition, parents can help their young adult children get off to a good start financially by helping them set up tax-advantaged accounts (e.g., a Roth IRA or an HSA), and ensuring that they have proper insurance coverage.

And while spouses likely talk daily, the end of the year can be a good opportunity to check in on the state of their finances, such as checking out how much they spent in the previous year and whether this amount is sustainable (perhaps over a glass of gifted wine?) and revisiting goals to make sure they are still appropriate.

So whether you are traveling over the river and through the woods to grandma’s house or have your children coming to see you, the holiday season could be a good opportunity to head into the new year with more confidence in your loved ones’ financial situation (and your own!).

(Rebecca Zucker | Harvard Business Review)

December brings the opportunity for advisors to give gifts to family members, friends, and even clients. Some individuals also like giving gifts to coworkers, with whom they have spent hundreds, or even thousands, of hours during the year. But given workplace sensitivities and the potential for expenses to get out of hand, managers and employees can keep a variety of guidelines in mind when selecting gifts for coworkers.

First off, it’s important to be aware of any company-imposed restrictions on gift giving (e.g., gifts to managers might be limited to a certain dollar amount to prevent any impression of a quid pro quo). With a gift budget in mind, giving personalized gifts can show thoughtfulness to coworkers. Such gifts could include experiences (e.g., a spa gift certificate for a coworker who had a stressful fourth quarter), items related to their hobbies or interests (though, notably, you might want to avoid giving a gift that is too personalized and could be misconstrued as being too intimate), or a donation to a cause they support. And while alcohol or food items are common holiday gifts, certain coworkers might have allergies or religious obligations that could make these gifts inappropriate so it is a best practice to ‘know your audience’. Of course, great gifts do not need to cost much money, so a handmade item or even a card that expresses appreciation for how the co-worker supported you during the past year can be excellent gifts for colleagues.

Ultimately, the key point is that when it comes to giving gifts to coworkers the phrase ‘one size fits all’ likely does not apply. From abiding by company or industry regulations to taking time to find a personalized gift for the coworkers on your list, gifts to coworkers can require just as much planning, but the reward from showing thoughtfulness can help build and cement these relationships for the coming year!

(Annie Midori Atherton | The Atlantic)

The holiday season can be expensive when considering the total cost of gifts for friends, family, and colleagues. But because there are no iron laws around giving gifts, gift-givers can consider creative ways to give thoughtful presents while not breaking the bank. And while it has sometimes been maligned in the past, one strategy to cut costs during the holiday season is ‘regifting’.

Regifting is the practice of taking a gift you have received (particularly one that you might not have much use for) and giving it to someone else. At its best, regifting is used when the giver knows that the recipient will like the gift (and not just because the giver doesn’t like it). In addition, these gifts work best when they are in new or nearly new condition. On the other hand, homemade or personalized items are typically poor choices for regifting (unless perhaps you have a friend with the same initials who might like a monogrammed item?).

In the end, for many people, gift-giving is not about the cost of the gift but the thought behind its selection for the chosen recipient. So when it comes to regifting, the key is to make sure that the item reflects the recipient’s interests or tastes, and isn’t just the latest candle you received in the office white elephant contest!

(Justin Castelli | All About Your Benjamins)

The end of the year often brings a variety of social gatherings, from company parties to time spent with extended family. And while presents are often part of these celebrations, sometimes it’s the time spent together that is more memorable in the long run (whether it is making a connection with a colleague or learning from the wisdom of an elder family member). At the same time, being physically ‘present’ during these occasions does not necessarily mean that you are mentally present as well. Given the range of potential distractions, from checking email to mentally planning for the next event, purposefully focusing on the people with whom you are currently spending time can make these interactions much more meaningful.

One way to be more present during the holiday season is to ditch electronic devices, particularly smartphones, during social gatherings. Whether it is the vibration notifying you of an incoming text or email, the temptation to check the latest sports scores, or the urge to finish off this week’s Weekend Reading For Financial Planners (you’re almost there!), there is no shortage of ‘reasons’ to scroll, even if you are physically with other people. So turning off the phone before going to an event or keeping electronic devices in another room is a great way to avoiding distractions in order to be more present during the holiday season.

In addition, starting a meditation practice (perhaps an early New Year’s resolution?) can help you center your mind and focus on what is happening now (as opposed to mentally wandering off to thinking about upcoming events and work obligations). Relatedly, prioritizing your physical health can help you have more energy to meet the demands of the holiday season and be more engaged when interacting with others.

Ultimately, the key point is that while the holiday season is full of gatherings and gift-giving opportunities, being both physically and mentally present for your friends and loved ones might be one of the best ‘presents’ you can give during this time of year. And helping yourself become more present might be as simple as turning your smartphone off for a few hours (gasp!) or taking a few minutes to settle your mind before seeing others!

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.