Author: extremeconsultinginc22

2017 Financial Advisor Compensation Trends And The Emerging Shortage Of Financial Planning Talent

2017 Financial Advisor Compensation Trends And The Emerging Shortage Of Financial Planning Talent


After years of tepid increases in the average compensation of financial advisors, the latest bi-annual industry benchmarking studies from both Investment News and FA Insight reveal that the industry’s long-forecasted talent shortage appears to be taking hold.

According to the latest data, the average Paraplanner with 4 years of experience is earning total compensation of $65,000/year (with a nearly $60,000 salary base and 10% bonus potential), an experienced financial planner responsible for client relationships is earning $94,000/year with 8 years of experience, and Lead advisors who are skilled at developing new business are earning an average of $165,000/year, with the top quartile earning more than $250,000/year, and the top practicing partners earning nearly $500,000/year in a combination of salary, bonus incentives, and partnership profit distributions!

Of course, even within those numbers, there can be substantial regional variability. But still, financial advisor compensation across the board was up nearly 6.5%/year for the past two years – from paraplanners to lead advisors – with base salaries for financial advisors growing even faster, especially amongst the largest independent advisory firms that are both winning the bulk of new clients, and the most likely to be working with affluent clients (which generate the most revenue, and therefore allow their advisors to earn above-average compensation). And the demand for talent is leading to a rise in advisory firms attempting to poach advisors from other firms, a growing focus of large firms to build talent pipelines with colleges and universities, increasing use of third-party recruiting firms to hire even young financial planning talent, and a rise in the average time to hire a financial advisor to a whopping 4-6 months.

The trends may not be entirely surprising given that the overall financial advisory industry continues to see the total headcount of financial advisors decline a mere 1% to 2% per year. Yet with the number of CFPcertificants actually up by nearly 50% in the past decade, perhaps the real challenge may not merely be a shortage of financial planning talent, per se, but the industry finally discovering that as investment management is increasingly commoditized and firms seek to add value through financial planning and wealth management as the “anti-commoditizer”, that the number of true financial planners was never enough to meet consumer demand in the first place?

The Latest Data On How Much Financial Advisors Make?

Every two years, the leading industry benchmarking studies – the “Investment News Advisor Compensation and Staffing Study” and the “FA Insight Study Of Advisory Firms: People And Pay” – release their bi-annual latest on the latest compensation trends for financial advisors.

Each study surveys 300+ advisory firms, with a concentration amongst independent RIAs, but including some registered representatives of broker-dealers and hybrid RIA/B-D advisors as well, and gathers detailed data on what advisory firms are paying all the possible roles within an advisory firm, from the investment team to the operations and administrative staff, and of course the financial advisors themselves.

When it comes to the financial advisor data in particular, the industry standard is to break up financial advisors into three core categories:

Paraplanners (or “Support Advisors”) – Provides support to more senior advisors in the firm, and is typically responsible for data gathering, financial planning software input, analyzing data and modeling various scenarios, and supporting the development of the financial plan. Paraplanners may also sit in on client meetings, typically to take notes and handle follow-up items, but are not responsible for actually delivering financial advice.

Service Advisors (or “Associate Advisors”) – Responsible for managing and retaining ongoing client relationships, either independently (for “smaller” clients) or in a co-advisor role with a lead advisor (for “larger” clients). While Service Advisors are expected to manage and retain relationships, they typically do not have responsibility for new business development.

Lead Advisors (or “Senior Advisors”) – Responsible for both managing and retainer ongoing client relationships (typically the “larger”, more complex, and most valuable clients of the firm), as well as developing new business for the firm. May lead a team that involves additional Service and/or Paraplanner support advisors as well, and often has an obligation/expectation to mentor and help develop those advisors as well.

According to the latest data, the “typical” paraplanner or Support Advisor has 4 years of experience, and now receives a total compensation of about $65,000, including 10% incentive compensation. Anecdotally, we find atNew Planner Recruiting that starting salaries for Paraplanners appear to be approaching $50,000/year (albeit with adjustments for geographic location and cost of living).

Associate or Service advisors, given their higher level of responsibility for managing client relationships, have an average of 8 years of experience, and earn $94,000/year, of which about 12% is incentive compensation and bonuses.

And Lead financial advisors, given both their client relationship management and business development responsibilities, have an average of 18 years of experience, and earn an average of $165,000/year, of which nearly 20% of incentive/bonus compensation.

Notably, across the board, compensation is typically 80% to 90% in the form of a base salary, and only about 10% to 20% bonus or incentive compensation. Though there are a smaller subset of firms that pay their advisors primarily based on incentive compensation, and not based on a salary – primarily when it comes to Lead Advisors. For those advisors, average total compensation was substantially higher, at more than $200,000/year. With the caveat that if the market declines or growth slows down, that advisor may take a substantial income hit.

In fact, the most common forms of incentive compensation – both for incentive-heavy firms, and the ones that rely primarily on base salary and a more modest bonus structure – are typically tied to either total revenue managed, new revenue brought in, or firmwide bonus pools (typically again tied to total and new revenue). About 1/6th of firms base these bonuses on AUM rather than revenue, but most simply target revenue.

Of course, at firms where the Lead Advisors are also partners, they may take home substantial additional income for both their additional management responsibilities, and their share of partnership profits. According to the Investment News data, median income of a practicing partner was $247,000/year (including 22% of incentive compensation), and total compensation was $334,000/year including profit distributions, with a median of 20 years of experience.

Financial Advisor Roles, Responsibilities, and Compensation

Notwithstanding the broad industry averages, it’s also important to recognize that there is also a substantial skew in advisor compensation towards larger advisory firms. In part, this may simply be because larger firms tend to be located in metropolitan areas that have a higher cost of living (and the FA Insight authors explicitly emphasize that compensation levels should be adjusted based on local cost of living). In addition, larger advisory firms also tend to serve more affluent clients who pay more revenue per client, thus allowing Service and especially Lead advisors at larger firms to get paid more for the higher levels of revenue they manage.

Nonetheless, both the FA Insight and Investment News studies found that Lead advisor base salaries, in particular, are as much as 20%-30% higher in the largest advisory firms (with more than $8M of revenue) compared to “smaller” firms with just a few million in revenue. Though the difference is more slight for Service advisors, and not evident at all for Support advisors.

Gaining Experience And The Income Trajectory Of The Financial Advisor Career Track

As the financial advisory industry continues to formalize its career tracks, a standard progression is emerging in how advisors can climb the career – and income – ladder.

As noted above, the starting point is the Paraplanner, who must learn the technical competency to master the job of supporting the financial planning process. Then in order to move up and become a full Financial Planner (Service Advisor) who delivers advice directly to client relationships that he/she manages, it’s necessary to learn the empathy and relationship management skills. From there, moving up to the next tier of being a Senior or Lead Advisor is all about learning the skill of new business development. And those who want to move to the very top of the pyramid as a partner must eventually master the skills of leadership and management to execute the business.

Skills Progression For The Financial Advisor Career Track

Thus, as the financial advisor gains experience in each of the four domainsover time, income rises with improving skills, and then jumps further as the advisor masters the skills necessary to move up to the next tier. Accordingly, even the top paid (75thpercentile) paraplanners with 8 years of experience only earn $72,000/year in compensation, while a full Associate Advisor with similar experience (but full responsibility for managing client relationships) typically makes more than $90,000/year.

On the other hand, it’s notable that once advisors are “fully” compensated for managing client relationships, increasing compensation further – above and beyond just raises for additional years of experience and a growing base of client revenue, that also tends to generate at least some moderate flow of new business through existing client referrals – is more and more reliant on “bonus” incentive compensation for going above-and-beyond when it comes to new business development (the essential skill to become a senior advisor). Accordingly, the typical compensation for Service or Lead advisors with 12 years of experience is around $116,000/year. But overall, the top tier of Lead Advisors earn a whopping $250,000 or more, with a heavy component of incentive compensation. (And as noted earlier, those who become practicing partners unlock even higher tiers of compensation.)

Which means that as years of experience increase, the range of compensation for financial advisors also widens dramatically, dictated primarily by the size of the advisor’s clients (and total revenue he/she is responsible for), and the advisor’s ability to develop business. Accordingly, while top-quartile Service advisors “only” earn about $25,000 more than the typical Service advisor, top-quartile Lead advisors earn almost $100,000 more than the typical lead advisor, and top-quartile Practicing Partners earn more than double a top-quartile Lead advisor (including both salary, incentive compensation, and partnership profit distributions) in the long run.

Profit Bonus By Years Of Experience By Advisor Type

Nonetheless, the reality is that the income trajectory of paraplanners starting with total compensation around $50,000/year and averaging $68,000/year after 4 years is equivalent to an 8%/year raise. Similarly, being able to grow from $68,000/year to $97,000/year as the advisor moves from a paraplanner role with 4 years of experience to a Service advisor with 8 years is another 9%/year in income growth. And even in the progression to a lead advisor with 17 years of experience is associated with average annual growth rate in income of 6%/year, with upside potential for far, far more for those who can unlock their business development prowess.

Of course, these raises aren’t “automatic” for advisors who gain experience, as they are ultimately contingent on the ability of the advisor to master each skill domain and move up the career track ladder. Nonetheless, there are few industries with job opportunities that have a steady path of 6% – 9%/year raises that can continue unabated for a 20+ year career, and accelerate even faster if the key final skills – of business development and firm management/leadership – can be mastered! In fact, the upwardly mobile financial advisor who quickly climbs the career track has the potential to move from a $50,000 starting salary to a $250,000/year total income in 10 years, by mastering the successive skill domains that it takes to move up the line!

Though notably, advisors who do not continue to move up do eventually stagnate… as support advisors at 10 years of experience (who haven’t moved up to service and lead advisors) make less than those at 5 years of experience, and service and lead advisors at 15 years of experience (who fail to master business development and become partners) make less than those at 10 years of experience!

The Emerging Talent Shortage For Financial Advisors

In recent years, there has been extensive discussion in the industry about the looming wave of retiring financial advisors, and the prospective talent shortage that it would create.

But notwithstanding these fears, the 2015 editions of both the Investment News and FA Insight compensation studies had shown only very modest increases in advisor compensation. Median compensation for Lead advisors had been up only 3.4% over the prior 2 years according to Investment News data, and up just 2.6%/year over the prior 6 years in the FA Insight study. Similarly, median compensation for Service advisors was rising at only 1.4% – 2% per year, and Support advisor compensation had been rising at barely 1%/year for the preceding 6 years!

However, the latest benchmarking data shows a substantial shift is underway. Between the Investment News and FA Insight data, the median compensation of Support Advisors leaped by almost 6.5%/year for the past 2 years since the 2015 versions of the studies! Service Advisor compensation rose by a similar 6.5%/year on average. And in the Investment News study, Lead Advisor compensation was also up by 6.7%/year, with salaries up by 11%/year as lead advisors were able to command a higher guaranteed base (albeit in exchange for less incentive compensation).

Notably, in the FA Insight study, the typical compensation for lead advisors actually declined since the 2015 study, but only because the average age and experience level of lead advisors declined as well (even though all the original advisors in the sample are 2 years older now!). Which suggests that firms are only paying “less” to Lead Advisors because the talent shortage is so severe they’re being forced to promote even younger lead advisors with fewer years of experience just to fill the void (but are able to pay them less thanks to the lower levels of experience). Accordingly, even in the FA Insight study, lead advisor compensation also shifted from 73% to 77% base salary, suggesting that advisors still have more pricing power than ever to demand a higher base compensation guarantee.

What all of this suggests is that after years of warnings, the talent shortage of financial advisors may finally be starting to play out. In prior years, lead advisor compensation was growing the fastest, likely on the back of both what was already a shortage of experienced advisors willing to switch firms, and a multi-year bull market that was lifting up lead advisors the most (since their compensation tends to have the most revenue-based incentive bonuses).

But now, the growth rate of Support and Service advisor compensation have leaped from a 6-year average of just 1% to 2%/year from 2009 to 2015, to a whopping 6.5%/year for the past two years. The trend appears to be driven by a subset of the largest independent advisory firms, that areexperiencing accelerating growth as they scale their marketing efforts, and are rapidly hiring Support and Service advisors as quickly as they can.

Accordingly, the Investment News data shows that 73% of “Super Ensemble” firms (those with $10M+ in annual revenue) were hiring for new advisor positions last year, and 24% still have unfilled positions. And the FA Insight data reveals that, after a slight pause in 2015, advisory firms are now seeking in full force to hire away from competing advisory firms, whether it’s wirehouses, independent broker-dealers, or especially other RIAs (though the most rapidly growing firms are also still the ones most likely to be targeting recent college graduates as well).

Advisory Firm Source Of New Hires 2011 - 2017

Of course, successful experienced financial advisors still have little incentive to make a move. In most cases, they’re either already working with an established client base they don’t want to leave, may be on a partnership track or succession planning path already, or if they don’t want to remain in their current firm, have the confidence and experience to simply go out and launch their own advisory firm and leverage the resources of an advisor support network (a path we commonly see at XY Planning Network).

Thus, Investment News reports that despite the hiring demand, advisory firms are still only seeing turnover of only 8.4% amongst Service advisors, 6% amongst Lead advisors, and just 2.1% amongst practicing partners, as the more experienced the advisor gets, the more likely they are to be established in their current firm! (Though as the earlier data showed, advisory firms are clearly feeling the pressure to give healthy annual raises to retain those advisors, too!)

The bottom line, though, is this means if you’re a “below-average-age advisor” – which at this point, still means any Gen X or Gen Y advisor under the age of 50(!) – the future prospects of advisor compensation are very bright, and we find through New Planner Recruiting that even college graduates are now seeing rapidly rising entry-level salaries as the competition for talent comes all the way down to paraplanners.

On the other hand, for advisory firms, the fight for talent in the midst of a substantial shortage will put even more pressure on advisory firm margins, and will be especially challenging for smaller firms that don’t have the depth to hire multiple young advisors in the hopes that at least one or two successfully develop into lead advisors down the road.

Or viewed another way, despite the fact that there are still about 300,000 “financial advisors” in the industry, the fact that barely 25% of them are CFP certificants suggests that, as investment management is increasingly commoditized and firms switch more and more to financial planning and holistic wealth management services as the “anti-commoditizer”, we’re just now discovering how much of a true financial planning talent shortage there really is!

In the meantime, any financial advisors who are interested in checking out the full benchmarking studies can go directly to the companies’ respective websites to purchase their copies of the “Investment News Advisor Compensation and Staffing Study” and the “FA Insight Study Of Advisory Firms: People And Pay”!

So what do you think? Is there really a talent shortage for financial planners? Will advisor compensation continue to increase at 6%+/year in the future? Is the shift being caused by the growing number of advisors who are retiring, or the rise of financial planning as technology commoditizes investment management? Please share your thoughts on the comments below!

5 Bold Predictions For Asset Managers Product Shelf In 2027

5 Bold Predictions For Asset Managers Product Shelf In 2027

The trend of robo-advisors and technology in financial services isn’t just proving disruptive to parts of the financial advisory community; it’s actually disrupting trends in asset management as well, especially when paired with ongoing regulatory changes. In fact,while financial advisor fees have remained remarkably stable and resisted any technology-driven fee compression so far, it’s been the asset management industry that has borne the burnt of the fee compression, as advisors themselves use technology to select lower-cost investments and try to add value in other ways. And the situation is made even more complicated by the fact that advisors are increasingly trying to get paid for the value of their advice, even as broker-dealers often still treat them as being paid primarily to sell products… such that Cetera President Adam Antoniades has stated he’s banning the word “broker-dealer” within his own company, in an effort to transition the firm from being product-centric to advice- and advisory-centric. Other notable trends in the coming decade include: the shift to “passive management” with ETFs doesn’t appear to be passive at all, given ETF turnover is 880%/year (compared to “just” 120% for individual stocks), and instead implies that advisors are simply using ETFs as trading instruments for active asset allocation; the processing and trading value-proposition for custodians is quickly grinding towards zero (just witness the recent round of cuts in ticket charges from major RIA custodians), as the firms shift their own models to focus more on asset management and lending instead (and more generally, custodians split their offerings into low-cost commoditized processing, and higher-margin servicing); the debate still rages about whether asset managers can and will embrace goals-based reporting, or whether it’s still just a smokescreen for those who aren’t actually beating their benchmarks and will persist (because consumers still have a right to verify that their managers are adding value at the manager level, or not); and the shift of advisors and reps serving as investment managers is creating its own due diligence problem, as when the advisor is the manager and the fiduciary for the client… does that mean the advisor may have to fire themselves for bad performance someday?

Rules For Calculating Required Minimum Distributions (RMDs) During Life

Rules For Calculating Required Minimum Distributions (RMDs) During Life


To limit the otherwise-generous benefits of tax deferral for traditional retirement accounts, the Internal Revenue Code requires retirement account owners to begin taking money out of their accounts upon reaching age 70 ½. Not that retirees are required to actually spend the money. But the funds must be distributed out of the retirement account, triggering income tax consequences, to ensure that Uncle Sam can get his share.

However, the purpose of the RMD rules is simply to ensure that retirement accounts taxation is not deferred any longer than what a reasonable retiree would prudently have withdrawn anyway. As a result, the RMD obligation merely requires that the account owner take money out systematically over his/her life expectancy (or actually, the joint life expectancy of the retiree and his/her designated beneficiary).

To limit potential abuse, though, the Internal Revenue Code and supporting Treasury Regulations prescribe very specific rules about exactly how to calculate what a “prudent” distribution would have been, including when and how to determine the value of the account, what life expectancy to use, the deadline for taking the distribution, and how to coordinate when there are multiple accounts with multiple distribution obligations.

In reality, retirees who are actually using their retirement accounts for retirement spending may well be withdrawing more than enough to satisfy their RMD obligations anyway. However, given the substantial penalties involved for failing to take the full amount of an RMD – a 50% excise tax for any RMD shortfall – it is crucial to ensure that the RMD is calculated correctly (and withdrawn in a timely manner)!

What Is A Required Minimum Distribution (RMD)?

One of the key benefits of retirement accounts, whether in the form of a traditional IRA or an employer retirement plan like a 401(k), is that growth in the account is tax-deferred. Unlike “regular” taxable accounts, where income (i.e., interest and dividends) is taxed annually, and capital gains are taxed upon sale, a traditional retirement account is not taxable until funds are actually withdrawn from the account. Or, in the case of a Roth style account (IRA or 401(k)), the withdrawals may not be taxable at all (if eligible for “qualified distribution” treatment).

The caveat to providing favorable tax treatment for retirement accounts is that ultimately, the Federal government will get its share of the growth. And to ensure this outcome, the Internal Revenue Code requires that eventually, upon reaching a certain age, owners of traditional pre-tax (but not necessarily Roth-style) retirement accounts must begin to take withdrawals from the account – even if they don’t otherwise need the money – and face the tax consequences. The age at which the government says “enough tax deferral!” is 70 ½. And the rules that begin to force money out of the account are called “required minimum distributions” (or “RMDs” for short, and sometimes also known as an MRD instead, based on the IRC Section 4974 penalty for failing to take sufficient “Minimum Required Distributions”).

Because the purpose of the RMD rules is to force the money out of the account, but not necessarily to deplete it at a too-rapid pace (for those who actually need to use the money for retirement spending over the remainder of their lifetimes), the required amount is determined based on the age of the account owner, such that the account “will be distributed… over the life of the [retirement account owner] or the lives of the [retirement account owner] and a designated beneficiary” under IRC Section 401(a)(9)(A)(ii).

In practice, those who are already using their retirement accounts to sustain their retirement lifestyle may already be withdrawing more than enough to satisfy the RMD obligation. Nonetheless, for those who are not actually taking large enough withdrawals from the retirement account, the Required Minimum Distribution, by definition, specifies the minimum required amount that must be taken out, to draw the account down over the remaining life of the account owner. Of course, because it’s only a minimum, it’s always permissible to take out more.

How The RMD Is Calculated

The annual RMD obligation is a certain percentage of the retirement account(s) that must be withdrawn each year. As noted earlier, the percentage itself varies based on the age (and life expectancy) of the retirement account owner. Which means in practice the RMD is calculated as a fraction, where the numerator is the account balance, and the denominator is life expectancy based on the age of the retirement account owner.

Formula For Calculating Retirement Account RMD During Life

However, because the tax code specifies that RMDs must occur “over the life of the retirement account owner, or the lives of the account owner and his/her designated beneficiary”, in reality, Treasury Regulation 1.401(a)(9)-5 specifies that the account must be distributed not simply over “life expectancy” but over an “applicable distribution period” that considers the prospective life expectancy of both the account owner and the beneficiary.

Determining The Applicable Distribution Period For Life Expectancy RMDs

Historically, the applicable distribution period for retirement account RMDs was determined based on the actual joint life expectancy of the retirement account owner, and the beneficiary associated with that retirement account. Thus, those with younger beneficiaries, who might need the money to last longer (because of the longer life expectancy of a young beneficiary) had smaller RMD obligations.

However, this created substantial complications in practice. Retirement account owners could obtain lower RMD obligations by increasing the denominator of the RMD calculation through the deliberate selection of beneficiaries who were (much) younger and had (much) longer life expectancies… i.e., by choosing children or grandchildren as beneficiaries, instead of a spouse. Yet this also meant that if the retirement account owner unexpectedly passed away, the account would actually go to those beneficiaries, potentially disinheriting the originally intended (e.g., spousal) beneficiary. But naming the intended beneficiary – particularly a surviving spouse – meant naming an older beneficiary (than a child or grandchild), with a shorter life expectancy, causing higher required minimum distributions during life! The end result was an awkward series of trade-off decisions.

To address these challenges, in 2002 the Treasury issued updated regulations (which first took effect in 2003), drastically simplifying the RMD calculation process. Instead of using the actual joint life expectancy of the retirement account owner and his/her beneficiary (which would vary depending on which beneficiary was named on the account), the rules instead stipulated that the RMD would simply be based on the joint life expectancy of the retirement account owner and a hypothetical beneficiary who is 10 years younger. Thus, the required distribution for a 71-year-old would be based on the joint life expectancy of a 71-year-old and a 61-year-old. An RMD for a 77-year-old would be based on the joint life expectancy of a 77-year-old and a 67-year-old. Etc. Regardless of the actual age of the named beneficiary.

These Applicable Distribution Periods – based on the joint life expectancy of the account owner and a 10-years-younger beneficiary – were then codified in what is now known as the “Uniform Life Table” (uniform, because it applies to all retirement account owners regardless of who the actual beneficiary is), available in Table III of Appendix B of IRS Publication 590.

Uniform Life Table For Calculating Lifetime Required Minimum Distributions (RMDs)

RMDs With Spouse Vs Non-Spouse Beneficiaries

As noted above, the standard rule for RMDs is that all RMDs are calculated based on the age of the retirement account owner, using the Uniform Life Table – which is automatically based on the joint life expectancy of the account owner, and a hypothetical beneficiary who is 10 years younger (regardless of the actual age of the beneficiary).

The only exception to the standard rule of using the Uniform Life Table, under Treasury Regulation 1.401(a)(9)-4, Q&A-4(b), is that in situations where a spouse is the sole beneficiary of the retirement account, and the spouse is more than 10 years younger than the account owner, the RMD may be calculated using the actual joint life expectancy of the account owner and his/her spouse (with the appropriate age-specific joint life expectancy tables provided in Table II of Appendix B of IRS Publication 590).

In order for the spouse to be treated as the sole beneficiary of the retirement account, he/she must be the sole beneficiary for the entirecalendar year. (However, in the event of a change in marital status, Treasury Regulation 1.401(a)(9)-5, Q&A-4(b)(2) stipulates that as long as the retirement account owner was married on January 1st of that year, the spouse can be treated as the [sole] beneficiary, even if the couple divorced or the spouse died later in that year.) Notably, this means that if an IRA has multiple beneficiaries including a spouse, it will not be eligible for the favorable treatment; instead, the IRA must be split, with the spouse as sole beneficiary of his/her share, for that IRA to be eligible for the more favorable joint life expectancy table.

In situations where there is a sole spouse as the beneficiary who is more-than-10-years younger, it will always be advantageous to use the joint life expectancy table. As the joint life expectancy with a more-than-10-years-younger spouse will be even longer than the Uniform Life table, which increases the denominator of the RMD calculation, and results in a smaller RMD obligation.

Thus, ultimately, the applicable distribution period will either be the Uniform Life table (the joint life expectancy of the account owner and a hypothetical beneficiary who is more than 10 years younger), or the Joint Life table with the actual joint life expectancy of the account owner and his/her spouse, if the spouse is the sole beneficiary and more than 10 years younger.

Determining Which Life Expectancy Table To Use For Lifetime Required Minimum Distributions (RMDS)

Determining The Correct Age To Use For RMD Calculations

When determining the correct “age” to use in referencing the life expectancy tables, the Regulations require that calculation be based on the age of the individual at the end of the current distribution year – i.e., how old he/she will turn on his/her birthday this year.

Example 2. Ashley is currently age 72, and will turn 73 in November. As a result, Ashley’s RMD for the current year will be based on her age 73, even though he/she is 72 for “most” of the year. In fact, even if Ashley takes her RMD early in the year – when she’s still actually age 72 – her RMD will still be calculated using age 73, based on how old she will be on her birthday (and at the end of the year).

In the case of a more-than-10-years-younger sole spouse beneficiary, the age of the spouse for the purposes of the joint life expectancy table is also determined as of the end of the current year (i.e., again based on the age he/she will attain on his/her birthday in the current year).

Notably, for the first RMD – due for the year in which the individual turns age 70 ½ – the first applicable distribution period may be based on eitherage 70, or age 71, depending on when the individual’s birthday falls during the year. Those whose birthdays fall in the first half of the year will calculate their first RMD based on age 70, as they will not yet have turned age 71 by the end of the year. However, those whose 70th birthdays fall in the second half of the year will not turn 70 ½ until next year, which is also the year they turn age 71; as a result, those individuals will never actually take an RMD based on being age 70, as their very first RMD will already use the age 71 life expectancy factor.

Example 3. Neil was born on August 22nd of 1937, and has a $150,000 IRA where his son Jonathan is the beneficiary. As a result, Neil turns 70 on August 22nd of 2017, which means he will turn age 70 ½ on February 22nd of 2018, and 2018 will be his first required minimum distribution year. Given that 2018 is Neil’s first distribution year, and he will turn 71 that year (on August 22nd), his first RMD will be based on the age 71 life expectancy factor in the Uniform Lifetime Table. As a result, Neil will divide his 12/31/2017 account balance by 26.5 to determine his first RMD for 2018, and he will never actually use the age-70 applicable distribution period of 27.4.

Determining The “Value” Of The Retirement Account For RMD Purposes

To calculate a required minimum distribution, it’s necessary to divide the value of the account by the applicable distribution period. In most cases, the “complexity” of an RMD is determining the right applicable distribution period, using the appropriate life expectancy table. In some cases, though, determining the account value presents challenges as well.

The standard rule under Treasury Regulation 1.401(a)(9)-5, Q&A-3, is that the account is valued based on “the account balance” at the end of the priorcalendar year. Thus, for instance, if the individual’s first required minimum distribution is due for the 2017 calendar year, the valuation date is December 31st of 2016.

For most investments, this approach to determining the account balance is relatively straightforward, and simply involves either obtaining a prior-year 12/31 statement (showing the account balance), or reporting the account balance obtained from the advisor’s portfolio accounting and performance reporting engine.

However, additional complexities arise in the case of illiquid securities, which in the extreme may require obtaining a standalone valuation to determine the RMD (particularly in the case of self-directed IRAs directly holding illiquid alternative assets). The fact that an asset may be hard-to-value doesn’t excuse the requirement that it must carry some reasonable value for RMD purposes.

Another complexity that arises in determining the “value” to use for RMD purposes is in the case of substantial bond holdings, which may have accrued interest, and particularly directly-held TIPS bonds, which also periodically accrue a principal adjustment for inflation. Unfortunately, the Internal Revenue Code and Treasury Regulations themselves are actually silent on the issue of whether/how accrued-but-unpaid bond interest (or periodic TIPS principal inflation adjustments) should be considered for the purposes of determining the “account balance” of a retirement account for RMD calculation purposes.

Notably, though, the plain reading of Treasury Regulation 1.401(a)(9)-5, Q&A-3 itself, states that the amount used to determine the RMD is the “account balance”, and does not explicitly stipulate that the “fair market value” must be used, as is required for other valuation purposes (e.g., the value for gift or estate tax reporting). Of course, even an “account balance” must still itself be valued, but Treasury Regulation 1.1471-5(b)(4) states that “the balance or value of a financial account is the balance or value calculated by the financial institution for purposes of reporting to the account holder.” In other words, whatever the standard practice is for the financial institution in reporting the “value” of the assets held in the account (and whether the institution reports accrued bond interest as part of the valuation) really does become the “proper” valuation to be used for RMD reporting purposes.

Nonetheless, given that the going price of a bond in the open market reallydoes reflect the amount of its associated accrued interest, most advisors err to the side of caution and calculate all required minimum distributionsincluding accrued bond interest. And in point of fact, many financial institutions typical report the value of the account including accrued bond interest anyway.

Fortunately, in practice the difference is often not very material, particularly in today’s low-interest-rate environment. Even a $100,000 bond paying a 1.5% coupon twice a year (for a 3% annual yield), with a payment date that happens to fall just after New Year’s (such that the 12/31 value would include virtually all of the prior 6 months’ worth of accrued-but-still-unpaid interest), would only have to increase the first RMD by $54 to account for the accrued interest.

RMD Valuations For Deferred Annuities With Guaranteed Benefit Riders

While the general rule for calculating an RMD for a retirement account is that it’s based on the “account balance” from December 31st of the prior year, special rules apply when determining the value of a deferred annuity held inside of a retirement account.

The reason is that in today’s world of deferred annuities with potentially significant death benefit or living benefit riders, “just” looking at the account balance alone may substantially understate the true value of the contract, to the point of distorting tax outcomes.

For instance, if an annuity contract has a current cash value of $100,000, and a death benefit rider that is locked in at $300,000, is it really fair to say the value of the contract is “just” $100,000 for RMD purposes, when it may someday soon pay out another $200,000 in extra death benefits? Or in the extreme, where some annuity contracts allow withdrawals to reduce guarantees on a dollar-for-dollar basis, what if the owner of the aforementioned annuity withdrew $99,000, leaving a contract behind with a $1,000 cash value, and a $201,000 death benefit? Is it really appropriate to view the contract as being worth “just” $1,000, especially if the annuity owner is very old, such that the $1,000 will likely turn into that $201,000 death benefit sooner rather than later?

To close the potential loophole, in 2005 the Treasury issued Regulation 1.401(a)(9)-6, Q&A-12, which stipulated that in the case of a deferred annuity inside of an IRA, the determination of the RMD must be based on the “entire interest” under the annuity contract, which includes both the account balance, and the “actuarial present value” of additional benefits and guarantees. Thus, for instance, if an annuity had a $100,000 cash value but a $300,000 death benefit, then the value of the annuity would be $100,000 of cash plus the actuarial value of the extra $200,000 death benefit based on the annuity owner’s age (in essence, $100,000 plus the cost of $200,000 term insurance for that year for someone of comparable age).

To at least partially simplify the process, though, the Treasury Regulations do state that the calculation of the actuarial present value of additional benefits can be done using “reasonable” actuarial assumptions, but withoutregard to the individual’s health; thus, there’s no requirement to individuallyunderwrite the economic value of any benefit guarantees (based on that person’s specific health circumstances), but simply to evaluate the likely prospective value based on the individual’s age, and the cash value and level of death benefit (or living benefit) guarantees.

In addition, the Regulations state that the actuarial present value of additional benefits can still be ignored if either:

a) The additional benefits add no more than 20% to the value of the contract, where any future withdrawals reduce benefits on a pro-rata basis and the death benefit guarantee is only a return-of-principal guarantee; or

b) The only additional benefit is a return-of-principal death benefit guarantee (in which case the actuarial present value can be ignored, regardless of how much additional value it provides)

Notably, these exceptions still mean that any “old” annuity contracts that provide living benefit riders that allow for dollar-for-dollar withdrawals, or any annuity contracts that have “enhanced” death benefit guarantees (beyond just a return of principal guarantee), are not eligible for the exceptions and must include the actuarial present value of the additional benefits. In addition, even living benefit riders that allow for pro-rata distributions must still be considered in the valuation for RMD purposes if their value is “substantial” (and would increase the RMD valuation by more than 20% of the total account value).

In extreme cases, it’s important to note that the RMD obligation could conceivably even exceed the entire cash value of the annuity, in scenarios where the contract is almost depleted, but the remaining guarantees are substantial – for instance, in a situation where ongoing withdrawals have reduced the annuity contract’s cash value down to $1,000, but there is still a large death benefit or living benefit rider remaining that’s worth far more. Fortunately, in situations where the contract is depleting but a living benefit rider remains, there is often an option in the contract to effectively “annuitize” into guaranteed lifetime income, which relies on different RMD rules for annuitization. In addition, as discussed below, because RMDs for an IRA can be satisfied from any IRA under the RMD aggregation rule, it may be feasible to simply draw the required amount (after considering the actuarial present value of additional benefits) from another retirement account. Nonetheless, in the case of a contract that just has a large death benefit guarantee, where distributions are ongoing or at least planned, it is important to plan in advance for a potential draw-down. Though fortunately, because the value of term insurance is only a small percentage of the death benefit, and the RMD obligation is only a percentage of that, the risk is unlikely.

In practice, though, the biggest complication in determining RMDs for qualified annuities with substantial additional benefits is simply determining the appropriate “actuarial present value” of the additional benefits in the first place. In most cases, annuity companies will provide a reasonable estimate, but some do not, and others do not provide very “sophisticated” or accurate valuations. (Retirees and their advisors can seek out third-party actuaries for a third-party valuation if necessary, where the prospective size of the RMD and the tax consequences are large enough to merit paying for an independent valuation.)

Adjusting The RMD Account Balance For (Subsequent) Rollovers And Recharacterizations

In most cases, determining the account balance of a retirement account at the end of the prior year is relatively straightforward – simply pull out the year-end statement and see what the value is. Even if retirement accounts are being transferred from one plan administrator or IRA custodian to another, by the end of the year, the money will be in one account or another, with the “old” account reduced by the value of the transfer out, and the “new” account increased by the amount that transferred in.

However, in some scenarios, the transfer may actually be in “mid-course” at the moment the year ends, especially in situations where funds weren’t (or couldn’t be) transferred as a trustee-to-trustee transfer, and instead were conducted as an actual “rollover” – where the account balance is distributed to the account owner, who individually takes possession of the money, deposits it into a checking or brokerage account, and then “rolls over” the funds within 60 days (after the start of the new year).

Treasury Regulation 1.401(a)(9)-7 for employer retirement plans, and the associated Treasury Regulation 1.408-8, Q&A-7 for IRAs, provides guidance on how to handle such situations. Where transfers are still underway at year end, the “distributing plan/account” – the source that the transfer was taken from – simply uses its year-end account balance, reduced as applicable by the amount that was already distributed/transferred by year end. However, the receiving account, where the funds are rolled in, must have its year-end account balance retroactively adjusted and increased by the value of the assets rolled in. Thus, even if the roll-in finishes in the following calendar year, it is still treated as being associated with the new account as part of its prior-year account balance associated with the year the money was originally distributed (to ensure that retirees don’t “vanish” portions of their retirement accounts with year-end rollovers just to avoid or minimize RMDs!).

Example 4. Jeremy is 72 and has a $300,000 401(k), and decides to transfer $100,000 of the account to an existing IRA worth $500,000, that has more appealing investment opportunities. The 401(k) plan administrator cannot facilitate a trustee-to-trustee transfer, and as a result distributes a $100,000 check to Jeremy on December 22nd of 2016. Jeremy deposits the $100,000 check into his checking account, and completes the rollover by depositing the funds into the existing IRA on January 7th of 2017.

As a result of this rollover, Jeremy’s 401(k) account finishes with a $200,000 account balance (the original $300,000 balance, less the $100,000 distribution) at the end of 2016, and Jeremy will be obligated to take an RMD from the 401(k) plan in 2017 based on the $200,000 balance. However, Jeremy’s 2017 RMD for his IRA will be calculated based on a $600,000 account balance, including the $500,000 year-end balance at the end of 2016, plus the $100,000 that was contributed in 2017 but came out during the 2016 tax year (and thus is still attributable to the 12/31/2016 account balance for RMD purposes).

Notably, in the event of a Roth conversion with a subsequent recharacterization, Treasury Regulation 1.408-8, Q&A-8(b) also requires that the recharacterization amount be added back to the end-of-prior-year account balance to determine the appropriate RMD. The end result is akin to the scenario where an IRA rollover completes after the end of the year; the amount that was recharacterized must still be considered for RMD purposes, and holding an amount in Roth-conversion-and-recharacterization-limbo does not allow RMDs to be avoided. Including any subsequent growth that might have happened during the transition period.

Example 5. Charlie is 73 years old, and did a partial Roth conversion of $125,000 of his $400,000 IRA to a Roth at the end of last year. Immediately after the conversion, his IRA was worth only $275,000. However, Charlie discovers as he prepares his tax return, that he converted so much that he drove his tax bracket up to the 28% rate, and had only wanted to fill the 25% tax bracket. As a result, he recharacterizes $28,000 of his conversion, which, due to interim growth, requires actually recharacterizing $29,000 of assets back to his IRA.

The end result is that Charlie must still report $97,000 of his Roth conversion as income (the $125,000 original conversion, reduced by the $28,000 recharacterization), but for RMD purposes, his prior-year-end balance is $275,000 + $29,000 (the actual amount recharacterized, including growth) = $304,000. Notably, this actually puts Charlie in a slightly worse position than he would have been in by just not converting that $28,000 in the first place – as the growth after the end of the year must be added back to his RMD calculation from the prior year-end. However, the difference is fairly minimal in impact, as Charlie’s RMD at age 73 is only 4.05% of his account balance, resulting in an extra $40.50 of RMDs on the $1,000 growth difference, and $10.13 of additional taxes (at a 25% tax rate).

It’s important to bear in mind that because a Roth recharacterization can occur as late as October 15th of the year after the Roth conversion, it could be well into the current year before a late-year recharacterization retroactively impacts the prior-year-end account balance for calculating the current year’s RMD. As a result, while it’s prudent to calculate RMDs at the beginning of the year, to ensure that all affected retirement account owners know the amount that needs to be taken, it’s important to revisit RMDs for all clients towards the end of the year – after all prior-year rollovers and any Roth recharacterizations have been completed – to ensure that the amount of the RMD didn’t change after the fact! Especially since a Roth recharacterization that occurs in October means the account owner only has 3 more months in the current year to (re-)calculate and then take any remaining RMDs that might now be due given the retroactive adjustment to the RMD calculation.

Multiple Retirement Accounts And The RMD Aggregation Rule For IRAs

When there are multiple retirement accounts, each account will have its own RMD calculation, and the RMD must be taken from that account to satisfy the RMD obligation for that account. Thus, in the case of employer retirement plans, such as 401(k) and profit-sharing plans, etc., the RMD for that account must then be taken from that particular account.

However, in the case of IRAs, a simpler RMD aggregation process applies for satisfying RMD obligations across multiple accounts.

Specifically, under Treasury Regulation 1.408-8, Q&A-9, any distribution from any IRA can be used to satisfy the RMD obligation for all of that individual’s IRAs. In other words, once the RMD amount is calculated for each IRA separately, the amounts are then totaled up, and the only requirement is that the total amount must cumulatively be withdrawn from any IRAs to satisfy that year’s RMD obligation for all IRAs.

Example 6. Christopher is turning 73 years old this year, and has two IRAs. The first, worth $500,000, has his 61-year-old wife named as the sole beneficiary. The second, worth $100,000, has named his 37-year-old son as the beneficiary.

For the first account, where the sole beneficiary is a more-than-10-years-younger spouse, the joint life expectancy factor is 26.1, resulting in an RMD of $500,000 / 26.1 = $19,157.09. The second account, however, will use the Uniform Life Table (given a non-spousal beneficiary), and thus uses a life expectancy factor of 24.7, resulting in an RMD of $4,048.58.

As a result, Christopher’s total RMD obligations for the year are $19,157.09 + $4,048.58 = $23,205.67. And ultimately, Christopher can take that $23,205.67 from any of his IRAs to satisfy his RMD, regardless of which account the calculation was originally associated with.

Notably, the RMD aggregation process applies only to IRAs (including SEP and SIMPLE IRAs), and does not aggregate in other employer retirement plans like 401(k)s or profit-sharing plans). Although 403(b) plans are alsoeligible for aggregation, but only with other 403(b) plans.

In addition, the RMD aggregation rule applies only to that individual’s own IRAs or 403(b)s (thus, for instance, the RMDs of a husband and wife’s separate IRAs are not aggregated, and each must take their respective RMDs from their own respective IRAs). Furthermore, the RMDs from any inherited IRAs are not aggregated with the RMDs from his/her own IRAs, nor are inherited IRAs aggregated with each other (although all inherited IRAs for a single beneficiary and from a single decedent may be aggregated for calculated that inherited RMD). And since Roth IRAs have no lifetime RMD obligations at all, Roth accounts (and distributions from Roth accounts) are not aggregated with nor used towards satisfying the RMDs for non-Roth traditional retirement accounts.

Notably, to the extent that a distribution is partially non-taxable (i.e., as a return of previous non-deductible/after-tax contributions to the retirement account), the full amount of the distribution (both taxable and non-taxable portions) still count towards satisfying the RMD, underTreasury Regulation 1.401(a)(9)-5, Q&A-9.

RMD Reporting Rules For IRA Custodians

Fortunately, since 2003, under Treasury Regulation 1.408-8, Q&A-10, the custodian or trustee of an IRA is required to report to the account owner that an RMD is due for the current year and provide an offer to calculate the RMD amount, or alternatively can just outright provide the account owner a calculation of the amount of the annual RMD obligation from that IRA. In either case, the RMD notification must also show the due date for that RMD (which will generally be December 31st of the current year, except in the case of the first RMD that is due by April 1st of the following year). The notification of this RMD due date and calculation itself must be provided by January 31st of that year, for the RMD that will be due that year.

Thus, as long as the IRA owner is alive at the beginning of 2018, the IRA custodian will be required to provide a calculation of the RMD to that IRA owner by January 31st of 2018, based on the account balance on December 31st of 2017, and how old the IRA owner will be on December 31st of 2018.

In addition, beginning in 2004, IRS Notice 2002-27 also requires that the IRS custodian report directly to the IRS on Form 5498 whether there is an RMD obligation for the account, by checking Box 11 of that form (if an RMD is due for that tax year). Reporting the actual amount of the RMD obligation on Form 5498 is optional. However, since 2009, IRA custodians have had the choice to report the RMD due date and amounts in boxes 12a and 12b of Form 5498, and if the Form 5498 is sent with those boxes completed by the January 31st deadline, the Form 5498 itself can satisfy the IRA custodian’s reporting requirements to the IRA owner as well.

Notably, though, when reporting the calculated amount for an RMD, the IRA custodian is permitted to assume that the beneficiary is not a more-than-10-years-younger spouse, and rely solely on the Uniform Life Table. As a result, if the (sole) beneficiary of the IRA actually is a more-than-10-years-younger spouse, the RMD calculation will overstate the actual RMD obligation.

However, since the RMD notification is purely for informational purposes (both to the individual, and to the IRS), the IRA owner is permitted to take the smaller and more favorable required minimum distribution amount based on the joint life expectancy table (where permitted), notwithstanding that the IRA custodian’s reported amount was higher (based on the Uniform Life table). Similarly, even though the IRA custodian provides a report of the calculated amount of the RMD, there is no requirement that the RMD be taken from that particular account, per the RMD aggregation rule for RIAs.

In any event, though, no reporting of the RMD obligation (on Form 5498 or to the IRA owner directly) is required for inherited IRAs; only for lifetime RMD obligations for the original (still-alive) IRA account owner. In addition, there are no reporting requirements for RMD obligations from defined contribution employer retirement plans (e.g., 401(k) or 403(b) plans, profit-sharing plans, etc.).

Consequences Of A Missed Distribution Or Incorrect RMD Calculation

Under IRC Section 4974, the failure to take the full amount of a required minimum distribution (whether as an outright distribution, or via a Qualified Charitable Distribution) results in an excise penalty tax equal to 50% of the RMD shortfall amount. Notably, though, the penalty is only for the shortfall amount of the RMD, not the entire RMD obligation.

Example 8. Henry had a total RMD obligation this year of $8,000, but he only took $3,000 of distributions this year. As a result, Henry will face the penalty tax for failing to take his full RMD, and the penalty would be equal to $5,000 (RMD shortfall) x 50% = $2,500. If Henry had missed his entire RMD, the penalty would be $8,000 x 50% = $4,000.

In addition to owning the 50% penalty tax for failing to take an RMD, the IRA owner must still actually take the full and proper RMD amount as well – once the error is discovered – and incur any income taxes that are due when the proper distribution actually occurs.

A failure to take an RMD, and the associated penalty, is reported on IRS Form 5329 – which can also be used to request a waiver of the RMD penalty.

So what do you think? Do you have a process for ensuring that proper RMDs are being taken? Have you ever run into cases where the calculated RMD is different than the client’s actual RMD? Please share your thoughts in the comments below!

SEC Begins Working With DoL On Fiduciary Rule

SEC Begins Working With DoL On Fiduciary Rule

This week, in testimony before the House Financial Services Committee, current SEC Chair Jay Clayton stated that the SEC has begun to work with the Department of Labor on a fiduciary rule proposal that would harmonize the standards of conduct for investment advisers and broker-dealers, after its process of collecting comments earlier this year. The next step here would be for the SEC to formalize an actual rule proposal, which is expected to be more “palatable” to the brokerage industry and Republican lawmakers. Of particular focus is the fact that a single advisor is currently subject to two different standards for different accounts belonging to the same brokerage client, given that the DoL’s fiduciary rule would apply to his/her IRA but the suitability rule would apply to any non-retirement investment accounts. On the other hand, fiduciary advocates have raised concerns that a new version of the fiduciary rule could now have its own negative or unintended consequences, while others are concerned about whether or how the SEC’s version of the rule could weaken the DoL’s fiduciary consumer protections. At this point, is it not clear whether the SEC will try to better regulate titles and keep brokers separate from investment advisers (which may be challenging for broker-dealers that don’t want to relinquish the “advisor” title),  or attempt to create a consolidated uniform fiduciary standard (which FINRA may lobby for to expand its jurisdiction to oversee RIAs). And while no timeline has been presented for the SEC’s rule proposal, ostensibly if the DoL’s fiduciary rule is ultimately delayed, an initial version of an SEC proposed rule will be released in 2018, in an effort to finalize an SEC rule before the DoL’s version would take effect in mid-2019.

How To Find The Best Financial Advisor Companies To Work For

How To Find The Best Financial Advisor Companies To Work For


With the number of different financial advisor business models and firm types that are in existence, prospective financial advisors have a lot of options when it comes to finding “real” financial planning jobs – the kind that don’t have sales requirements, and are really focused on (learning to give) financial advice. And the reality is that not all financial advisory firms are equally great to work for. But the good news is that the best financial advisor companies to work for do share a number of common traits, that can make them easier to identify.

In this week’s discussion, we talk how to find the best financial advisor companies to work for, and why those companies tend to be larger companies with recurring revenue and a healthy growth rate.

Perhaps not surprisingly, if you want to find the best financial advisor companies to work for that won’t just make you a salesperson working on commission, the first secret is… to find companies that don’t work primarily on commission. It sounds intuitively obvious – if you don’t want to work on commission, don’t go to a company that pays its advisors on commission – but the real reason this matters is more nuanced. Because the fundamental challenge for any financial advisor who is paid on commission is that, no matter how successful you were last year, when you wake up on January 1st, your income is zero (or close to zero with some small commission trails). Which is crucially important, because it means commission-based advisors can’t afford to reinvest into staff and create entry-level very many financial planning jobs. As a result, these firms tend to only hire salespeople who can go get more clients (and perhaps some administrative staff), but not real financial planning positions focused on financial advice itself.

The Best Financial Advisor Jobs Are At Firms With A Recurring Revenue Model

As it turns out, the reality is that if you really want to find the best financial advisor companies to work for that won’t make you just a salesperson working on commission, the secret is to find companies that don’t work primarily on commission. I know that sort of sounds intuitively obvious, if you don’t want to work on commission, go to a company that doesn’t pay its advisors on commission… but the real reason actually why this matters is much more nuanced.

Because the fundamental challenge for any financial advisor who is paid on commission is that no matter how successful you were last year (or all your prior years), when you wake up on January 1st, your income is zero. You won’t make any money this year until you go and find new clients to do business with. Now, to be fair, commission-based advisors usually have at least a small amount of commission trails from prior years. So income isn’t usually quite, like, literally zero. But the point here is that almost all of your income for the year as a commission-based advisor comes from the new clients you get this year.

And here’s why that matters: It means commission-based advisors generally can’t afford to reinvest and create entry-level financial planning jobs to serve their existing clients. Because it’s terrifying as a financial advisor to hire and commit to staff and their ongoing salaries when you wake up every January 1st with zero income.

So what happens instead, the firm says, “Sure, we’ll give you a job as a financial advisor. You can use our platform to go get clients,” which is really just a nuanced way of saying, “Actually, we don’t have any financial planning jobs here. All we have is positions for salespeople who want to go get their clients to sell to because the firm can’t actually afford to hire financial planning staff. All they can afford to do is hire salespeople that bring in more clients because that’s what generates the new revenue.” And what that means is, it’s really not a financial advisor job. It’s a sales job.

By contrast, when advisory firms work for fees, or really any kind of recurring revenue, that can be actually just levelized commissions like C shares paying 12b-1 fees, or that could be generating assets under management fees (AUM fees), or that could be ongoing retainer fees, once the firm has acquired clients on a recurring revenue model (as long as those people stay clients and they continue to pay as clients). Which means an advisory firm owner who operates a recurring revenue model, when that person wakes up on January 1st, the business has income. Often a good chunk of it. And to earn that income for a year, all they need to do is give clients great service, great financial planning advice that makes the clients want to stick around.

And what that means is now the firm has a real incentive to hire for real financial planning jobs to do real financial planning advice for clients. Because the firm doesn’t necessarily need salespeople selling products or services to bring in revenue. They simply need to service existing clients with financial advice, and that’s where the jobs tend to be that are actually focused on financial planning and not sales.

And that’s why I tell new advisors that if you want to find the best company to work for, especially getting started as a financial advisor, ask them in the interview process how much of their revenue is recurring revenue – AUM fees, 12b-1 fees, commission trails – as a percentage of their total revenue. I find when firms have 75% plus in recurring revenue, or in the case of most RIAs, 95% to 100% as recurring revenue, they tend to have the best financial planning jobs.

If their recurring revenue is less than 75%, maybe the firm is transitioning from commissions to fees and creating more stable jobs. But if the recurring revenue is less than 50%, it’s a virtual guarantee that there will only be two types of jobs in that firm: base admin staff with moderate income and no financial planning upside, and salespeople that bring in business. Because that’s all you can afford to do when most of your income is zero at the start of every year.

The Top Financial Planning Firms To Work For Are (Rapidly) Growing Companies

That was the lesson I had to learn for myself the hard way when I started in the industry. My first job said “Financial Advisor” on the business card, but it was a commission-based firm and I was a salesperson, not a financial advisor. And even though the firm said it had great training and they sold me on their training, I didn’t get trained in how to be a financial advisor. I got trained in how to sell products. And it was only when I changed to a firm where the majority of the revenue was recurring that I finally had the opportunity to really start doing financial planning work. Which actually brings me to the second key for finding a good company to work for as a financial advisor.

You need a firm that’s growing. At a minimum, a firm that’s growing at 10% a year. Ideally, you want one that’s growing at 15% to 25% a year. And here’s why. The simple math of growth means that a firm that’s growing at 15% a year will double its size in about 5 years with compounding. That means, in five years, twice as much revenue, typically twice as many clients. And since a financial advisor can only serve so many clients at a time, twice as many clients in five years means twice as many financial advisor jobs in five years. Which means there will be opportunities to move up in the firm, to have clients you can work with that the firm gives you, because the firm is doing the sales and you are being the financial advisor.

This growth requirement is actually the problem that I ended up having at the second company I worked for as a financial advisor. It was a good job. I got paid reasonably well. I got to learn and really do financial planning. I had a chance to start earning my professional designations. But the firm wasn’t growing. They served clients well and I had a good financial planning job.

But because they weren’t growing, the job I had was the only job they had for me. And when I personally outgrew the job, there was nowhere for me to go, because they weren’t growing and adding enough clients to give me any clients. They could only move me up if I went to get my own clients, which didn’t work for me because the whole reason I took the job was that I failed at my last job because I wasn’t good at prospecting and getting my own clients at the time. And so I had to leave and go to another firm and find one that was growing and would create more opportunities for me.

That was actually the path for how I landed at Pinnacle Advisory Group, which is where I still am today because the firm was growing. It was actually growing so well that the business nearly quadrupled in my first six years at the firm, which gave me incredible opportunities to move up and grow and advance my career at the firm. I went from a director of a department of me to two, to three, to four, to five, and training junior advisors and overseeing senior advisors. And the growth is ultimately how I was even able to craft the admittedly relatively unique position that I have with the company now.

Because when the business doubles in size every few years, there are lots of new jobs getting created. And good companies work with their good people to craft job opportunities that are mutually beneficial to the individual and the firm. And that’s what I was able to achieve with my firm because the firm was growing enough to create those opportunities.

The Best Financial Advisor Companies To Work For Are The Biggest

Which leads us to the third and final factor that helps determine which are the best financial advisor companies to work for. Simply put, the best companies to work for tend to be the biggest ones. Now, this is actually a somewhat controversial thing to say, and I’m sure a few of my advisor friends and colleagues that are listening that are at smaller advisory firms are going to strenuously object to this idea that the best jobs are at the large firms. But hear me out. The reason why working for the biggest companies matters so much is because the biggest companies are the ones that are actually growing the fastest in the industry right now.

I’ve called it this unique form of marketing inequality, that has actually emerged in the financial advisor landscape over the past few years. The largest firms are figuring out how to reinvest and scale their marketing in a manner that’s causing them to gobble up an ever larger portion of the total new growth opportunities of the whole industry.

Now, it’s hard to see, because if you look at industry benchmarking studies, you’ll see things like large, multi-billion dollar RIAs grew organically at about 7% last year, and smaller, independent advisory firms grew at about 6% last year. And 7% for large firms versus 6% for small firms doesn’t sound like a lot, but think of it in terms of actual dollars. When a $5 billion RIA grows at 7%, it adds $350 million of new client assets. At a typical advisory fee of 1%, that’s $3.5 million of new revenue. For most advisory firms, that’s about 10 to 12 new jobs, maybe more.

By contrast, when a smaller advisory firm with $50 million under management grows at, say, 6%, it adds $3 million of new assets. At a 1% advisory fee, that’s $30,000 of revenue. That means they can afford to hire an intern this year, as long as it’s a part-time intern. And that’s why the best financial advisor companies to work for with the best job opportunities tend to be the largest advisory firms. They work with the most affluent clients, they tend to actually pay slightly above average wages because they work with more affluent clients. They’re willing to pay up a little for top talent. And they’re the ones creating the most job opportunities.

In fact, if you look at the recent 2017 Schwab RIA Benchmarking survey, 96% of large advisory firms over $1 billion of AUM are hiring for financial planning opportunities right now, compared to only 60% of smaller independent firms, and even smaller percentage as you get to the really small solo advisory firms.

Which means, simply put, if you contact a large and growing advisory firm, they will likely have several financial planning jobs or opportunities open right now. And if they don’t, they will very soon. If you contact a small firm, they might have one job opportunity in the next year or two, maybe, if you’re lucky and you time it right. Now, I don’t want to be entirely negative about smaller advisory firms. If you want to be someone’s succession plan and take over the firm and become the owner in the next few years, it’s a lot easier to do that in a smaller firm. And you can find some great mentoring opportunities in small firms.

Yet, candidly, we see a lot of advisors joining XY Planning Network these days because they initially worked for a small firm to be the succession plan and get some mentoring. And then five to seven years later, realize that the firm owner had no intention of retiring after all, and the succession plan was never actually going to happen, and so the advisor leaves and either then joins a large firm that maybe they should have gone to in the first place or decides that they’re actually ready to be an advisory firm owner. And since they can’t be a succession plan advisory firm owner, they just go create their own and be the owner.

It’s worth noting the largest advisory firms are still kind of a relative opportunity. Big is kind of a strange thing in our industry. This doesn’t necessarily mean you have to work for a large, mega national brand, although some of the biggest, including Vanguard’s Personal Advisor Services and Schwab’s Portfolio Consulting and Intelligent Advisory teams are actually creating a lot of great financial planning job opportunities right now for entry-level CFP professionals and career changers coming in.

But, you know, the biggest firms could be independent RIAs, your large firms in our space like United Capital, Edelman Financial, Wealth Enhancement Group, Colony Group, Savant Capital, Aspiriant, or even a large independent broker-dealer office or a big team at a wirehouse. As long as they’re focused on financial planning, have a recurring revenue business model, are growing, the odds are good that you’re going to find a pretty good opportunity. Ideally, that’s probably a firm with about $3 billion of assets under management or about $25 million of revenue, or at a minimum, probably a firm with about a half million dollars of assets under management or $5 million of revenue that’s growing fast and has a strategy to sustain its growth so it’ll be more job opportunities in the future.

That’s where we tend to see the best and the deepest job opportunities right now. Now, perhaps some of the biggest caveats to this approach is just that more and more advisors are actually figuring out these are the best opportunities to work for. And as a result, we actually see in our New Planner Recruiting businesses that these jobs tend to be very competitive, with the most candidates applying and the most competition. So, if you want to get a job at one of the best companies, you better bring your A game to the table in the application process.

But the bottom line is just to recognize that the best financial advisor companies to work for where you can really do financial advising and not just a sales job have three key traits: recurring revenue business model, a healthy growth rate, and some size and scale to have a deep bench of new opportunities, training capabilities, and room for growth.

And as a financial advisor trying to find a good job, you need to be ready toask the right questions during the interview process, to suss out whether this really is a good company to work for and a good opportunity. But again, it doesn’t necessarily have to be a large national firm. It can be a large local firm or regional firm that’s growing rapidly, but it needs to be growing, with recurring revenue and have the size to create more opportunities.

So I hope this was helpful with some food for thought in figuring out what are the best financial advisor companies to work for, at least based on some of my own life lessons learned. Ultimately, you may want to go out on your own, but I do not recommend that for advisors getting started. Work in a great company, learn your financial planning profession, and you can decide what to do in your own career trajectory five to seven years out. This is Office Hours with Michael Kitces. We’re normally 1 p.m. East Coast time on Tuesdays but I was traveling for this FPA national conference, so thanks for joining us, everyone, and have a great day!

So what do you think? Where are the best jobs for financial advisors? Is recurring revenue essential to a firm being able to offer true planning jobs? Are the best opportunities with the largest firms? Please share your thoughts in the comments below!




































Can We Trust Research On The Use And Benefits Of Financial Advisors?

Can We Trust Research On The Use And Benefits Of Financial Advisors?


As financial advisors, we see the positive impact of our work with clients. From helping them accomplish their life goals, to keeping them from the behavioral mistakes that could derail their plan, we are often in the best position to see the value of what we do. But with the rise of financial planning academics, there has also been an attempt to scientifically quantify the true impact that financial advisors have on client outcomes. Which as it turns out, is remarkably difficult to measure.

In this post, explores some of the research available on the use and benefits of financial advisors, and why advisors should still apply a healthy degree of skepticism when evaluating such research.

Broadly speaking, there are two branches of research on the use and benefits of financial advisors. The first includes studies like Morningstar’s Gamma and Vanguard’s Advisor Alpha which have aimed to quantify how much value advisors truly provide to their clients, which helps to both substantiate the advisor’s value to clients, and helps advisors justify how their benefits can exceed their costs. The second branch of research on the use of advisors stems from studies done within universities, often utilizing large national-survey datasets to examine questions such as who uses financial advisors, what impact advisors seem to have, and how public policy may be able to improve outcomes for consumers.

However, as it turns out, each branch of research is not without its own limitations. While industry studies have done an admirable job trying to estimate and quantify the value advisors provide, the reality is that this exercise is much harder to do than it may seem at first glance. In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing! And in any case, it is difficult to identify the appropriate benchmark that it is best to compare against in the first place (since we don’t necessarily know how the client would have acted in the absence of an advisor). Further, in some cases, such as the value that is assumed to be provided by advisors recommending low-cost investments, the reality is that not all advisors actually advise clients consistent with the assumptions of the models.

From the academic perspective, researchers often have to rely on either large data sets which may have less than ideal questions (at least to address their particular research questions). Yet in a unique study in the Financial Services Review, Heckman et al. (2017) evaluate how well questions about whether someone has used a financial planner actually measure “financial planning” as its defined by CFP Practice Standards. Unfortunately, the researchers conclude that all of the commonly used datasets have significant limitations. And while the alternative for academic researchers, which is to gather their own primary data, can help ensure that the ideal questions are utilized… these methods end up constrained to smaller-than-ideal (and potentially not representative) sample sizes.

Ultimately, the point isn’t that advisors shouldn’t follow the studies on the use and benefits of financial planning, but simply that it’s still necessary to apply a healthy degree of skepticism when reviewing and applying research. Although with the ongoing rise of financial planning academics, more and better opportunities are coming for advisors and academics to collaborate, bringing together best practices in research from academia with the practitioner’s real-world understanding of financial planning and how it is delivered to clients!

The Increasing Amount Of Research On The Use And Benefits Of Financial Advisors

An increasing amount of research is being conducted on the use financial advisors and the benefits of doing so.

For obvious reasons, this research is of interest to many. Consumers want to understand how and when it makes sense to work with a financial advisor; regulators and public policymakers are interested in the role that financial advisors play in helping consumers achieve financial wellbeing; and, of course, financial advisors themselves are highly interested in knowing both how they can deliver value to their clients and how they can tangibly convey that value to clients and prospective clients.

Given the rise of financial planning academics, more and more researchers are increasingly available to investigate such questions. As a result, advisors should expect to see more studies evaluating the use of financial advisors in the future.

But this also raises an interesting question: How much trust should we place in these studies in the first place?

The Two Tracks Of Research On The Use Of Financial Advisors


There are at least two broad tracks of research on the use of financial planners. The first is a series of studies which have tried to quantify the actual value of advice that a financial advisor provides. These have included white papers and analyses typically conducted by firms within the industry.

The most well-known articles in this area include Morningstar’s Alpha, Beta, and now…Gamma (Blanchett & Kaplan, 2013), Vanguard’s Advisor’s Alpha (Kinniry Jr., Jaconetti, DiJoseph, Zilbering, & Bennyhoff, 2016), Envestnet’s Capital Sigma (Envestnet | PMC’s Quantitative Research Group, 2016) – all of which have previously been reviewed in The 2015 Volume 3 of The Kitces Report.

In short, these papers have concluded that financial advisors can deliver significant value to consumers, ranging from 1.59% per year for retirees (Vanguard) to 3.0% per year or more (Morningstar and Envestnet), through the use of strategies such as rebalancing, asset location, retirement withdrawal sequencing, and behavioral coaching.

Quantifying The Value Of Financial Advisor Advice


The second track of research has been more academically-oriented, typically analyzing both the use of financial advisors and their impact, and is usually in the form of studies done by scholars who typically published in peer-reviewed journals. While it is harder to generalize this body of research, these studies could be broadly said to investigate how the use of a financial advisor relates to consumer behavior, decision-making, and/or a consumer’s (hopefully improved) wellbeing.

Most financial advisors will be less familiar with this body of research, as occasionally such articles are seen in more practitioner-oriented publications such as the Journal of Financial Planning, but more often they are released in academically-oriented publications such as the Journal of Financial Therapy, Journal of Personal Finance, and Financial Services Review.

Household And Personal Finance Research Journal Rankings

Typically, these academic studies are either based on clinical experiments, or secondary analyses of large, national datasets.

Healthy Skepticism Of Financial Planning Research

The increasing prevalence of academic research (and hopefully engagement between academics and practitioners!) warrants a general word of caution that we should always view research with a healthy degree of skepticism.

Do note the qualifier here – healthy – as it is easy to wind up too far on either side of the skepticism spectrum. The radical skeptic who distrusts all research is bound to miss insights that could have helped them build a better business or provide more value to their clients. By contrast, the stark anti-skeptic will inevitably be led astray by their undoubting trust in research – making a poor decision due to placing too much faith in underpowered, ungeneralizable, or sometimes outright biased studies.

Thinking, Fast and Slow by Daniel KahnemanAs an example of just how hard finding the right balance can be, consider Daniel Kahneman’s 2017 response to a blog post criticizing some of his chapter on priming in “Thinking, Fast and Slow”. In his response, Kahneman did something we almost never see researchers do (and certainly not researchers of Nobel laurate stature) – he made a difficult though intellectually admirable confession:

What the blog gets absolutely right is that I placed too much faith in underpowered studies. As pointed out in the blog, and earlier by Andrew Gelman, there is a special irony in my mistake because the first paper that Amos Tversky and I published was about the belief in the “law of small numbers,” which allows researchers to trust the results of underpowered studies with unreasonably small samples.

If one of the world’s most well-respected social scientists can fail to apply a healthy degree of skepticism towards research, it is likely that most of us can err in this way too.

Can We Trust The Research On Quantifying The Value Of Advice?

In the spirit of applying a healthy degree of skepticism, it is worth noting a few things about the different types of research related to the use of financial advisors.

As was covered extensively in The 2015 Volume 3 of The Kitces Report, there are several complications with trying to quantify the value of advice that advisors provide. First, it is often very difficult to measure the value that a strategy provides. Consider the following example:

Example 1. Suppose Strategies A and B both provide a nearly certain probability of success, but Strategy A maximizes wealth, whereas Strategy B actually sacrifices some wealth for the sake of maximizing psychological comfort.

As soon as we allow financial advisors to give advice aimed towards any objective other than maximizing wealth (as we should, because a client’s goal may not be to maximize wealth!), the difficulties inherent to quantifying the value of advice become apparent. We can’t merely use wealth to define which strategy is best, because, given a client’s goals and preferences, the “best” strategy may actually require reducing wealth (in pursuit of psychological or other trade-offs).

So how do we value non-financial psychological wellbeing (what economists often refer to as ‘psychic income’)? What’s the price of peace of mind?

In reality, financial planning requires a balancing of both the financial and non-financial considerations. It’s not all about money to the exclusion of all else, but you can’t eat happy thoughts, either. But once we acknowledge that both financial and non-financial considerations matter, it’s a whole lot messier to try and quantify the value of advice.

To their credit, the authors of each of the previously referenced articles seem aware of such limitations. Each does carefully consider how “value” should be measured: Vanguard focuses on absolute wealth, Envestnet looks at risk-adjusted return improvements, and Morningstar examines improvements in economic utility of an outcome. But the reality remains – no matter which framework we use, we can never perfectly capture everything. And the mere fact that each study uses a different way of measuring the value of financial advice just emphasizes the challenge further!

Another difficulty is what has been referred to as the “compared to what” problem. When we try to determine whether an advisor’s advice actually improved an outcome, we need to have a benchmark to compare against – what would have happened if the advisor had not delivered the advice that was given? Yet while we can make some educated guesses to try and figure this out, we can never actually know what would have happened.

Of course, we know that inertia is powerful and that many people fail to take action, and thus might assume the client would have done what they were doing before and made no changes. But we can’t be certain of this. Perhaps the psychological discomfort that led the client to seek out a financial advisor would have eventually spurred him/her into action anyway? Perhaps he/she would have read a John Bogle book (or similar wisdom), and the previously poor saver would have become the avid saver – maybe even better than they would have become with the help of a financial advisor? Or perhaps not. But that’s the difficulty. We can never know.


An example of one of the easier “compared to what” problems with the existing studies is the assumption regarding advisor use of lower cost investments. In Vanguard’s analysis, an investor with a 60/40 portfolio is assumed to pay an “average” expense ratio of roughly 0.55% versus the low-cost ETF portfolio an advisor is assumed to recommend at 0.14%. These savings alone generates 41 basis points of “Advisor Alpha”, which amounts to more than 25% of the total Advisor Alpha found in Vanguard’s study (Envestnet used similar assumptions to attribute 82bps of value to the advisor).

Of course, these assumptions don’t actually hold in all circumstances. What if the investor already had a low-cost portfolio, such that this cost saving was a moot point? Or alternatively, based on data from Bob Veres’ recent survey of all-in financial advisor costs, only 2% of financial advisors actually recommend portfolios with expense ratios of the underlying investments coming in at <0.2%. The median blended fee of underlying investments actually reported by financial advisors was 0.50%, with 38% reporting fees above 0.65%. In other words, Vanguard and Envestnet’s assumed advisor recommendations – that directly generate value attributed to an advisor – look nothing like what most advisors actually recommend! Thus, while Vanguard reports 41bps of Advisor Alpha derived from reducing the expense ratios of a 55bps portfolio, the research on advisor-recommended investments suggests the actual cost is close to 55bps, implying that median advisor is actually generating virtually no cost-savings Advisor Alpha… and close to one-half of advisors are generating negative cost-savings Advisor Alpha (using Vanguard’s research approach)!

Average Blended Expense Ratio Of Investments Used By Financial Advisors

In turn, though, this conclusion also ignores the possibility that the investments being recommended by those advisors themselves add value, and presumably at least some of those advisors genuinely believe that the added costs provide some additional value to the client. Which means cost alone may not tell the whole story… but, again, that makes it very difficult to figure out what the true Advisor Alpha really is.

Nonetheless, the key point remains: the Advisor Alpha determined by the Vanguard study is predicated on recommendations that don’t appear to bear much resemblance to what most advisors actually recommend. (And other studies that purport to measure the value of financial advisors face similar problems.)

And these distinctions matter, because in the aggregate they can actually undermine most of the existing value currently attributed to financial advisors! For instance, suppose a prospect comes to an advisor with a well-diversified ETF portfolio with a blended expense ratio of 0.10%. Additionally, assume the advisor recommends a portfolio with an expense of 0.75%. If the client is hesitant to pay a 1% AUM fee, it really isn’t accurate for the advisor to point to the Vanguard paper and claim that advisors provide 1.59% of value. Whereas the Vanguard paper assumes an advisor’s portfolio recommendations would generate 0.41% of Advisor Alpha, the actual underlying facts suggest the investment selection portion of Advisor Alpha, according to Vanguard’s methodology, would be -0.65%. This one difference single-handedly swings the advisor value from 1.59% to 0.53%, which is a meaningful difference given that Vanguard’s assessment was before an advisor’s fees, which may suggest that receiving 0.53% of annual value does not justify a 1% AUM fee.

Fortunately for advisors, as was discussed previously, there is a lot of non-financial benefit that is either not being quantified in these types of analyses, or may actually be wealth diminishing (but desirable for the client anyway). In the end, such benefits, combined with the financially measurable ones, may well be large enough that the advisors are easily delivering more value than their cost. But it is still important to note that studies of the value of financial advisors do have considerable limitations. Namely, advisors should be careful assuming that the assumptions of the study necessarily apply to themselves or to a given prospect. Quantifying the true value that an advisor adds must actually be based on a valid comparison, and often these are nearly impossible to come by, because we can never know what actually would have happened in the future.

Consumer Behavior, Decision Making, and Wellbeing

From an advisor’s perspective, it is also important to carefully consider the application of more academically-oriented research on the use of financial advisors and how it impacts consumer behavior, decision-making, and financial wellbeing.

Within this branch of research, there are two more subcategories, each with their own unique limitations.


The first is clinical research. As has been noted previously on this blog, this is the type of research that will drive the financial planning industry forward, by actually testing which types of financial advisor interventions really improve client outcomes (rather than just assuming the client’s situation, the advisor’s recommendations, and how the latter will impact the former).

A good example of a clinical study like this is the 2016 study in the Journal of Financial Therapy titled “Promoting Savings at Tax Time through a Video-Based Solution-Focused Brief Coaching Intervention”. In this study, Palmer, Pichot, and Kunovskaya investigated the impact of a video-based solution-focused brief coaching intervention provided to 212 individuals receiving tax preparation services at a Volunteer Income Tax Assistance location. The researchers found that the coaching provided was successful in increasing both the frequency and the amount of self-reported savings at tax time.

Yet a practical limitation of such studies is that the sample sizes are often very small. Which makes Kahneman’s self-criticism for putting too much faith in small sample studies is especially germane. As while small sample studies play a crucial role in the development of scientific knowledge – often they are an important first step to larger scale projects investigating the same phenomena – they do have considerable limitations.

First, the small sample nature of these studies simply means that there is an increased chance the findings were the result of random chance. This is why researchers prefer larger samples, all else being equal, as it reduces the risk that random chance materially impacts the outcomes.

Another concern is what is known as the ‘publication bias’ or the ‘file drawer effect’. This refers to the fact that many of the incentives in academia and journal publishing more generally lead researchers to never publish studies which find no statistically significant or interesting findings. As a result, a disproportionate number of studies with spurious findings or questionable research methods end up getting published (just because their results were statistically significant), while studies which rigorously test an intervention and find it to not be significant just remain unpublished in the file drawers of academics.

Additionally, small sample studies have the problem of usually being non-generalizable. In other words, the sample size could be so small and unique, that what worked in the study might not actually work for the broader advisor-client population. This is the reason researchers love nationally representative studies: the findings from such studies can subsequently be generalized to a very large population. But this is almost never the case for small studies unless the advisor’s clientele really does match the particular type of subjects that were tested in the study.

For instance, suppose a new study from a financial planning academic at a university is released which finds some very intriguing results about the design of a financial advisor’s office and client satisfaction. Further suppose that the study was conducted entirely with students from a college campus (a common pool of participants for this type of research, for obvious reasons). If you specialize in working with high-net-worth doctors, would you want to run out and redesign your office immediately based on this research? What if your typical client was a blue-collar worker making a pension rollover decision? Perhaps not, because it is not clear whether the findings would generalize from the sample population (college students) to your particular target clientele (high-net-worth doctors, or blue-collar workers preparing for retirement). Fortunately, not all research is so narrow that it faces such constraints, but the point remains that it’s necessary to be careful taking small sample findings and putting them into practice.

Of course, as entrepreneurs, there’s nothing wrong with experimenting, and those who put innovative methods into practice first can actually reap the rewards of doing so. Entrepreneurs don’t operate in the highly exacting world of academia. They’re out in the thick of the real world, trying to learn from trial and error. So the point here is certainly not to suggest that it’s never worthwhile to follow and engage in this emerging research literature, but instead, to simply acknowledge that you shouldn’t go too far in the other direction and treat research as gospel.


The second strand of academic research that advisors want to carefully draw conclusions from are quantitative analyses based on large datasets, where a survey has already been distributed to a large group of people, and the researchers try to come up with research questions that might be tested and evaluated using the available data.

For instance, studies have investigated topics such as the characteristics of those who seek financial advice and the predisposition of women to use the services of a financial planner for saving and investing. In the former, Alyousif and Kalenkoski analyzed data from the 2012 National Financial Capability Survey (NFCS) and found that financial fragility and low subjective financial knowledge were associated with lower likelihood of seeking financial advice. In the latter, Evans analyzed data from the 2004 Survey of Consumer Finances (SCF) and found that households where the financially most knowledgeable spouse was female were more likely to use a financial planner for assistance with saving and investment decisions.

Unlike the small sample size problems of clinical research, studies based on nationally-representative data present much lower risk that findings will simply be due to random noise. These studies have much more statistical power, but they still have their own set of limitations.

Unlike clinical studies, which often develop their own research questions and can be very precise in how they aim to measure their variables of interest, researchers conducting secondary data analysis are relying on survey questions written by someone else and then delivered to a large number of individuals. questions. This type of research can present considerable concern related to the reliability (the degree to which a measure will produce stable results) and validity (the degree to which a measure is actually measuring what we want to measure) of research findings.

Specifically related to the analysis of the use of financial advisors, Heckman, Seay, Kim, and Letkiewicz (2016) recently published a paper in the Financial Services Review examining the measurement of the use of financial advisors amongst different datasets commonly used within financial planning research.

Heckman et al. identify seven different national datasets that have been used to investigate questions related to the use of a financial planner. These datasets include the: Asset and Health Dynamics among the Oldest Old (AHEAD), American Life Panel (ALP), Health and Retirement Study (HRS), National Financial Capability Survey (NFCS), National Longitudinal Survey of Youth 1979 (NLSY79), National Longitudinal Survey of Youth 1997 (NLSY97), and Survey of Consumer Finances (SCF).

Using the CFP Practice Standards to provide a definition of financial planning, the researchers assessed the degree to which questions about the use of a financial planner within these surveys actually provide valid and reliable measures of financial planner use. Specifically, the authors identify that a valid measure of financial planner use should:

  1. Provide a clear identification of the professional involved (i.e., broker, banker, etc.)
  2. Determine whether the actual financial planning process is being followed
  3. Determine whether planners assess life goals in the process
  4. Address the management of one’s resources
  5. Cover multiple financial planning topic areas
  6. Identify specific financial planning areas covered
  7. Assess the client’s intent to engage a financial planner
  8. Assess the thoroughness of data gathering
  9. Assess the depth and breadth of recommendations

Unfortunately, using these criteria to determine whether financial planning is actually being measured, the researchers find that there are considerable concerns about validity amongst most measures.

For instance, the National Financial Capability Study (NFCS), conducted by the FINRA Investor Education Foundation, is a survey widely used by researchers because it includes a large number of participants (~500 from each state and D.C.) and has many useful financial measures. However, when assessing how well the study actually measures financial planner use, the researchers determined that the NFCS falls short.

The NFCS asks respondents:

“In the last 5 years, have you asked for any advice from a financial professional about any of the following?”

Respondents then answer “Yes”, “No”, “Don’t know”, or “Prefer not to say” to each of the following categories:

  • Debt counseling
  • Savings or investments
  • Taking out a mortgage or a loan
  • Insurance of any type
  • Tax planning

Accordingly, researchers then analyze what the impact is of “having a financial advisor” by looking at the differences in other factors (e.g., wealth, income, life satisfaction, and other metrics) between those who answered “Yes” (i.e., “uses a financial professional”) versus those who answer “No” (i.e., “don’t use a financial professional”).

Except utilizing the criteria the researchers developed from CFP Board Standards, we can take a look at how well this question actually addresses whether someone used a financial planner. In assessing this particular question, the researchers determined:

  1. Does the measure provide a clear identification of the professional involved (i.e., broker, banker, etc.)? No
  2. Does the measure assess whether the actual financial planning process is being followed? No
  3. Does the measure determine whether planners assess life goals in the process? No
  4. Does the measure address the management of one’s resources? No
  5. Does the measure cover multiple financial planning topic areas? Yes
  6. Does the measure identify specific financial planning areas covered? Yes (debt counseling, savings/investments, mortgages, insurance, or tax planning)
  7. Does the measure assess the client’s intent to engage a financial planner? No
  8. Does the measure assess the thoroughness of data gathering? No
  9. Does the measure assess the depth and breadth of recommendations? No

So, out of the nine criteria identified by the researchers, they found that the NFCS measure only fulfilled two. In other words, it’s not really clear how many people who say “Yes” to the question are really using a true financial planner, receiving a comprehensive financial plan, or are actually going through a formal financial planning process.

Similarly, when this process is repeated for all of the data sets mentioned previously (see Table 2), the researchers found that, at best, the commonly used measures to assess the benefits of “using a financial advisor” only fulfill 4 to 5 criteria of whether the consumer is actually engaging a financial advisor. And even then, some of those have to be implied.

Now, this probably shouldn’t be too surprising of a finding to most practitioners. Imagine you meet with 100 prospects and ask them if they currently work with a financial planner/advisor? Do you suppose their answers would generally yield the type of responses that support high-quality research about the use of financial planners? How many will say “Yes, I have a financial advisor” based on the insurance agent who once sold them life insurance years ago, or a mortgage broker who helped them buy their house, or a retail representative at a local bank branch who recently helped them roll over a 401(k) (but provided no further advice)?

The researchers ultimately conclude that studies based on the SCF and NLSY79 have the most promising measures, but even those have significant limitations – namely, that we often don’t know specifically what type of advisor somebody met with or how frequently they met with that individual. In other words, whether there was actually an ongoing financial planning relationship, or whether someone just happened to meet with a financial advisor once?

Broadly speaking, the datasets that Heckman et al. identified are very good datasets, but the concern is that the measures related to the use of financial advisors may not be. So, we want to be careful not to accept findings that merely appear “scientific”, if the underlying measures don’t actually evaluate the use of financial advisors in a manner that is really valid.

Fortunately, there’s good reason to be optimistic about the future of secondary analysis related to the use of financial advisors. Just like psychologists develop better-and-better measures over time which eventually get integrated into national datasets, financial planning researchers are in the process of doing that now. Our field is much younger and smaller than psychology, so it will take some time, but the growing number of researchers means that we are moving in the right direction!

How Should A Practicing Financial Advisor Evaluate Research?

So how should a practicing financial advisor who wants to engage in the research literature do so?

There are several key takeaways for practitioners. First, apply a healthy degree of skepticism to any findings you come across. This doesn’t mean to ignore the research, but don’t accept it uncritically either. Does the research actually apply to your practice? Is what the researchers are trying to measure actually what is useful to you? Were the types of clients studied actually the types of clients you work with?

Your own gut check as a professional can be important here. Of course, sometimes research findings are completely counterintuitive and our gut will mislead us, but often financial planning professionals who engage with clients on a daily basis are actually equally if not better equipped to assess the ‘face validity’ (i.e., whether a measure is actually capturing what the researchers intend for it to capture) of various research constructs.

One of the healthiest effects of the continued comingling of researchers and academics is the ways that each side can learn from one another. For instance, at a conference last year there was an academic addressing an audience of professionals and reflecting on how, through an in-class assignment, the instructor (and the students) learned how difficult data gathering was. To an academic who hasn’t practiced professionally and has generally had all of the pertinent financial planning facts handed to them upfront within a case study, it’s reasonable to understand how this can get overlooked. As a result, it’s not hard to imagine how a well-intentioned researcher could develop a research question which misses some key aspect of data gathering in practice.

Thus, the professional, steeped in the difficulties and real-world limitations of trying to get data from clients, may have some important insights regarding the relevance of research. So, if your gut is telling you something is off with a study, don’t ignore it.

But, at the same time, be open to challenging your preconceived notions. Don’t assume that there isn’t more to be learned, or that conventional wisdom can’t be widely misled. Try your best to adopt research prudently. Update your views in light of the weight of the evidence in question. Be skeptical, but find balance in developing a healthy degree of skepticism. Then, in your role as an entrepreneur, take ideas out in the market and test them. And, as you learn, don’t be afraid to communicate with academics. In the end, a healthy flow of information is what both researchers and practitioners need to thrive.

So what do you think? Can advisors trust the research on the use of financial planners? How do you quantify the value of advice? How do you decide when to incorporate research findings into your own practice? Please share your thoughts in the comments below!