Tag: Financial Planning

Introducing fpPathfinder: Flowcharts And Checklists For Diligent Financial Planners

Introducing fpPathfinder: Flowcharts And Checklists For Diligent Financial Planners


Financial planning is full of complex decisions. From handling the nuances of Social Security planning (e.g., whether part-time income may trigger the Earnings Test, or whether past non-FICA earnings could trigger the Windfall Elimination Provision), to navigating the complex set of rules tied to retirement accounts (e.g., how to delay RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution), the reality is that it can be challenging to remember how all of the many different components of financial planning might interact with each other when making recommendations to clients. Yet managing this complexity is crucial for financial advisors, as the failure to do so can lead to both omissions (e.g., a key rule that gets missed) and errors (e.g., failing to recognize the full breadth of issues that had to be considered in the first place).

Fortunately, checklists are a proven method for helping professionals manage such complexity. As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps thatmust be taken, or the key factors that must be considered. In fact, checklists have been widely adopted and demonstrated to be successful in avoiding errors in many professions, including both airline pilots and surgeons. One limitation of checklists is that many people prefer to learn visually, though, which in turn has led to the adoption of flowcharts in professions such as computer programming, where the purpose of the flowchart is largely similar to a checklist (e.g., to help ensure quality control for complex processes that require consistent outcomes), but to do so more visually than a bullet-point checklist.

Yet despite the effectiveness of both checklists and flowcharts, the reality is that one of the biggest barriers to adopting the use of such tools is creating the tools themselves, as it is both time consuming, and can take considerable knowledge to develop these tools in the first place. To address the challenge, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key financial planning concepts and decisions.

As a starting point, fpPathfinder is offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions and take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, the rules for delaying RMDs from a traditional IRA, and the rules for when and how to make a backdoor Roth contribution. Over time, fpPathfinder plans to launch additional flowcharts covering both retirement planning and other topics, as well as a complementary set of checklists for common planning scenarios, a voting system for members to express interest in what flowcharts to create next, and the opportunity for advisors to white-label the flowcharts with their own name and brand. Ultimately, fpPathfinder hopes to be a valuable resource for helping financial advisors adopt the checklist and flowchart processes common among other professions – as a means to both help advisors avoid errors and omissions, and to elevate the value of services that advisors provide to their clients!


Professional Complexity And Minimizing Errors & Omissions

Financial planning, like most professions that provide some kind of advice to clients, is complex. Not only is there a sheerly immense amount of information to learn in order to craft technically accurate and appropriate advice recommendations to clients in the first place – the CFP Board lists 72 different Principal Knowledge Topics to be mastered in order to fulfill the education requirement for CFP certification – but it’s even more challenging to remember how all these different components might interact with each other as a part of someone’s financial world.

For instance, when it comes to Social Security alone, it’s straightforward toidentify the client’s projected benefits (on their Social Security statement), and there are many calculator tools to help evaluate the prospective benefits of delaying Social Security. But how often does the advisor alsoremember to verify that the client doesn’t have too much in part-time earnings in retirement to trigger the Earnings Test for those under full retirement age? Or remember to ask the client if they were previously married to a spouse for at least 10 years, such that there could be an ex-spouse’s spousal or survival benefit? Or ask if the client had a prior (or current) job where he/she did not participate in the Social Security system (which can trigger the Windfall Elimination Provision)? Or consider the sequence of return risk impact on the portfolio by taking higher withdrawals in the early years while delaying Social Security?

These challenges – writ large across a wide range of financial planning scenarios for clients – lead to two types of core concerns. The first is that, in the process of trying to consider all the issues, there’s an omission: a key rule that gets missed, perhaps something that is uncommon and only comes up rarely, but happened to matter in this particular client scenario. The second is that the advisor simply makes an error, as the sheer amount of complexity causes some particular interaction effect to be missed, by failing to recognize the full breadth of issues that had to be considered in the first place. We have the knowledge, but fail to apply it correctly.

Thus why most professionals (including financial advisors) end up buyingErrors and Omissions insurance, specifically to help insure against the consequences of those mistakes, whether driven by ignorance or ineptitude.

Ideally, the advisor is simply diligent enough to have studied and learned all the relevant issues, the potential interaction effects, and has the skillset to readily recall all of the key information at the exact time it’s needed.

Unfortunately, though, the reality is that few professionals are perfect all the time. In one study conducted in Australia, 400 mystery shoppers met and became clients of financial advisors, and in the process evaluated seven different client-experience categories (communication, compliance, quality of advice, understanding / needs analysis, referability, emotive reaction, the environment).  The “Understanding” scores were relatively high (ranging from 75.2 to 85.4) suggesting that the advisors consistently did a good job understanding the client needs. But the advisors’ ability to satisfy the need with a quality solution or strategy scored between 58.5 – 72.2. In other words, the advisors came up with a substantial range of different (and varying quality) solutions and recommendations to the exact same client situation and needs.

And beyond the range of mastery of the relevant financial planning knowledge from one professional to the next, the reality is that sometimes we get tired, or distracted, or clients don’t present all of the relevant information we needed to know (and we don’t realize the unasked question that needed to be asked)… or we simply forget an esoteric rule in a situation that doesn’t often come up.

As a result, while studying extensively and gaining experience as a professional – e.g., by earning CFP certification – is a crucial first step in becoming professionally diligent to minimize the risk of errors or omissions for clients, it’s rarely sufficient to prevent all the potential errors and omissions and lead to consistent quality advice.

Financial Planning Checklists And Flowcharts To Ensure Diligent Advice

As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps that must be taken, or the key factors that mustbe considered.

One of the first groups of professionals to employ checklists were airline pilots. Because, as the pilots discovered when testing “next generation” bombers in the years leading up to World War II, airplanes had already become so much more complex than the first generation of simple gliders and propeller planes flown by the Wright brothers, that even experienced pilots couldn’t always remember the proper steps to take, especially in the heat of the moment – leading the first test of the Boeing B-17 bomber to result in a fiery crash due to pilot error(where the pilot was the Air Corps’ highly experienced Chief of Flight Testing!). Yet ultimately, a subsequent 1.8 million flight miles occurred in the B-17 bomber without a single crash… once a series of simple checklists (no more than a dozen or two items at a time for the pilot and co-pilot to review together) were created for takeoff, flight, landing, and taxiing.

Similarly, an experiment with checklists in the medical context was conducted at Johns Hopkins in 2001, and later expanded into an even larger multi-hospital experiment, where Dr. Peter Pronovost created a simple checklist to help reduce the frequency of infections when inserting a central line (a large 12-inch catheter inserted into the jugular vein in the neck to administer major medical interventions like chemotherapy, kidney dialysis, or long-term antibiotics). Pronovost created a simple 5-item checklist for the doctors: 1) wash hands with soap; 2) clean patient’s skin; 3) place sterile drapes; 4) wear sterile mask/hat/gown/gloves; and 5) put a sterile dressing over the site once the catheter is inserted. All were steps that doctors already knew, and had long since been trained to do. Nonetheless, once the initiative was rolled out, and anyone/everyone on the team was endowed with the authority to ensure the checklist was followed (and call out the doctors for not following it), the 3-month infection rate fell literally to zero. Just by having a simple checklist to ensurethe key items were always, consistently followed.

The key point is that checklists don’t need to be terribly complex to reduce the frequency of adverse outcomes in complex situations. They’re not necessarily intended to cover every possible situation – as the edges of complexity are still where professional expertise reigns – but instead to ensure that the core essential steps that at least cover the overwhelming majority of cases are applied consistently. And the professional is at leastprompted to spot where there may be an issue that in turn merits further diligence.

On the other hand, one key challenge of checklists is simply thatapproximately 65% of the population are visual learners, who need to seewhat they’re learning or are supposed to do in order to fully assimilate the information. As the saying goes, “a picture is worth 1,000 words”.

Accordingly, in professions like engineering and computer programming, it is more common to use flowcharts as a way to sort through and evaluate the key information in a process. The basic concept remains the same – the flowchart serves as a means to ensure that all the steps of a process are properly considered and followed, in the proper sequence, without skipping any key steps that could lead to the wrong outcome. And can be especially effective because the visual nature of the flowcharts allows small, lesser known rules to place just as much “weight” as the other rules, since it clearly shows all the relevant options to consider at each decision point. In fact, one of the earliest uses of flowcharts was specifically to help ensure quality control for complex processes that required consistent outcomes.

Introducing fpPathfinder For Financial Planning Flowcharts and Checklists

Several years ago on this blog, I made the case that it was time for financial planners to adopt checklist as a way to improve the consistency (and therefore the overall quality) of financial planning advice. The more comprehensive financial planning becomes, the more complex it also becomes, and the greater the risk that even a well-trained and well-intentioned advisor fails to identify and spot every possible planning issue, opportunity, or concern from memory alone. And as Gawande illustrates in his book, checklists (and flowcharts) help to reduce this risk and better ensure a consistently diligent planning process.

Notably, though, such tools aren’t just a means to have simpler navigation of complex processes, and as a way to ensure that a financial planning situation is thoroughly researched and considered from all angles. Instead, financial planning flowcharts and checklists have a number of important uses, including:

  • Client educational tool:  Clients can benefit from checklists, and especially visual flowcharts, just as much as a planner.  Much of what individuals hear and learn from the mass media related to financial planning is incomplete, and does not fully capture the complexity of the financial planning process. It can be overwhelming for clients, leading them to make a bad decision because they did not invest the time or energy to learn everything they needed to about the issue.  Flowcharts in particular provide an alternative method of presenting that information, in a way that allows the client to quickly and easily understand the scope of the issue, and the advisor can walk them step by step through the key decisions that must be made along the way.
  • Respond to client questions faster:  Some of the best opportunities to create value for clients comes from quickly addressing their challenges in times of need – the unscheduled client call with what “should” be a simple and straightforward planning question that has important consequences.  But if the planner is preoccupied or distracted, he/she may not give the most thorough answer, or not remember to ask the appropriate probing questions.  At best, this could lead to the planner needing to do more research before calling back with answers (which takes a lot of time). At worst, the planner could give improper advice off the cuff that could actually harm the client (either through error or omission). Checklists or flowcharts readily available as a desk reference for the planner ensures that all the major decision points and issues have been addressed right there on the spot, saving time for the advisor, and getting the client the answer they wanted quickly.
  • Show actual complexity: Sometimes clients may be unaware of the extent of how complicated financial planning decisions can really be.  Flowcharts in particular can be used to more effectively frame the depth and complexity of a conversation.  A good example deals withthe issues related to eligibility and timing for claiming Social Security.  It is especially important to show and consider the number of less-common-but-extremely-important rules and exceptions that must be considered before claiming, such as the Earnings Test, deemed filings, the Windfall Elimination Provision, and the Government Pension Offset rules.  From a client’s perspective, this can give them confidence knowing that their planner is thoroughly covering all the issues.
  • Uncover more planning opportunities. There are times when planners may not connect the dots between two seemingly separate planning issues.  In reality, many planning issues are interconnected, and advice in one area can open advice discussions in other areas. For example, a planner could use a flowchart as a guide to rememberpossible IRMAA penalties before doing a Roth conversion, and a discussion about the taxability of Social Security benefits could lead to a discussion about changing a municipal bond portfolio because its income is still included in Social Security provisional income for tax purposes.
  • Quick introduction to a new concept.  Using a checklist or flowchart prior to doing research on a financial planning issue is akin to providing a 10,000 foot overview. It doesn’t provide all the detailed knowledge, but it quickly gets the planner to hone in on the major issues that affect the client issue they are working on.  From there, the planner can jump into other resources to clarify or deepen his/her understanding.
  • Avoid careless errors. In some cases, planners run the risk of making a mistake.  They may misremember one of the steps in a Roth conversion, or don’t think through a Backdoor Roth contribution correctly, leading to a slew of subsequent problems for the client. Perhaps it could be as simple as a careless error, or perhaps it’s caused by a planner who was unqualified to give the advice on a specific topic and didn’t take enough time to (re-)research the issue first.  While no tool can prevent those problems from happening 100% of the time, a series of easy to use checklists can drastically reduce the likelihood of those mistakes happening.
  • Remember old / odd rules:  There are many cases when financial planners are simply rusty on certain rules, or the nuances associated with those rules.  Rules around IRA contribution amounts and contribution limits are often a sticking point for many planners, because the numbers change (i.e., are inflation-adjusted) almost every year.
  • Multi-Advisor Quality Control.  In his “Checklist Manifesto” book, Gawande references a finding that doctors and nurses make a mistake 1% of the time.  But what’s surprising is that doctors and nurses do somuch every day, that a 1% error rate translates to about 2 mistakes per day, with potentially fatal consequences for patients.  Applying that finding to financial services, planners can use simple tools like checklists and flowcharts to improve the quality of advice and client outcomes across their entire practice, especially when multiple (especially newer associate) advisors are involved, ensuring that they make fewer mistakes (and making the compliance and legal departments happier!).
  • Study tool:  For students and new planners working toward their CFP certification, checklists and especially visual flowcharts can be useful study tools to help make a concept “stick” and easy to recall.  What makes flowcharts particularly interesting is how the CFP Board exam tends to test not just on the rules, but on the exceptions to the rules (often using “tricky” questions).  In these cases, flowcharts excel due to their ability to illustrate not just the rules, but the nuances and exceptions associated with the rules, in a visual format most conducive to the majority of the population who are visual learners.
  • Quick reference: Instead of cracking open a voluminous reference guide, or trying to verify the most accurate rules online, it can be easy enough to have a series of fast reference checklists or flowcharts within arms reach.

fpPathfinder LogoGiven all these opportunities and uses, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key concepts, or simply walk through the decision-making process and the key choices and issues to consider with the client.

Can I Make A Backdoor Roth IRA Contribution 2018

As a starting point, we’re offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions or take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, delaying RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution.

Over time, we plan to launch an ever-wider range of flowcharts (both within and beyond retirement planning), a complementary set of checklists for common planning scenarios, a voting system for members to choose which flowcharts or checklists they’d like to see next, and the opportunity to white-label the flowcharts and checklists with your own name and your firm’s logo (in a range of color choices).

fpPathfinder LogoBecause again, as the Checklist Manifesto, and the entire history of flowcharts and checklists have shown, even diligent professionals can benefit from simple tools to help ensure they’re giving the right recommendations to the clients they serve! AndfpPathfinder aims to fill that void when it comes to helping financial planners better serve their clients!

 (Disclosure: Michael Kitces is a co-founder of fpPathfinder.)

So what do you think? Do you use checklists or flowcharts in your practice? Can flowcharts help with client education? What flowcharts would you find most useful? Please share your thoughts in the comments below!

How BDs Are Changing As Planning Grows More Popular

How BDs Are Changing As Planning Grows More Popular

According to research in the latest issue of Cerulli Edge, the percentage of clients receiving comprehensive financial planning services has grown from a third to a half in just the past 5 years, driven by both competition from low-cost digital (i.e., robo) providers that are pushing financial advisors to deliver more value to justify their fees, and also the focus on advice and fiduciary issues thanks to the Department of Labor’s proposed rule. Notably, the trend is especially strong amongst younger advisors, and female advisors, with the latter aiming to deliver financial planning to a whopping 73% of their clients (as compared to only 57% for male advisors). Yet as advisors shift from products to advice, and from commissions to fees, it’s altering the expectations that advisors at broker-dealers have from their home offices. Although there are still substantial differences even within the broker-dealer channels, with only 17% of wirehouse advisors using planning fees, compared to 28% at retail bank broker-dealers, 30% at insurance broker-dealers, 38% at national or regional brokerages, and 45% at independent broker-dealers (as compared to 40% at independent RIAs), with an average fee of $1,223. Still, broker-dealers are experiencing more pressure for support from advisors to help, from providing staff resources to aid in the cumbersome data entry process for producing financial plans (for those who don’t shortcut the pain with a more collaborative planning process), to staffing up with specialist teams of CPAs and attorneys to help with more advanced planning scenarios.

The Favorable Tax Treatment Of Financial Advisor Commissions Over Fees After TCJA

The Favorable Tax Treatment Of Financial Advisor Commissions Over Fees After TCJA


The annual requirement of all Americans to pay taxes on their income requires first calculating what their “income” is in the first place. In the context of businesses, the equation of “revenue minus expenses” is fairly straightforward, but for individuals – who are not allowed to deduct “personal” expenses – the process of determining what is, and is not, a deductible expense is more complex.

Fortunately, the basic principle that income should be reduced by expenses associated with that income continues to hold true, and is codified in the form of Internal Revenue Code Section 212, that permits individuals to deduct any expenses associated with the production of income, or the management of such property – including fees for investment advice.

However, the recent Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the ability of individuals to deduct Section 212 expenses, as a part of “temporarily” suspending all miscellaneous itemized deductions through 2025. Even though the reality is that investment expenses subtracted directly from an investment holding – such as the expense ratio of a mutual fund or ETF – remain implicitly a pre-tax payment (as it’s subtracted directly from income before the remainder is distributed to shareholders in the first place).

The end result is that under current law, payments to advisors who are compensated via commissions can be made on a pre-tax basis, but paying advisory fees to clients are not tax deductible… which is especially awkward and ironic given the current legislative and regulatory pushtowards more fee-based advice!

Fortunately, to the extent this is an “unintended consequence” of the TCJA legislation – in which Section 212 deductions for advisory fees were simply caught up amidst dozens of other miscellaneous itemized deductions that were suspended – it’s possible that Congress will ultimately intervene to restore the deduction (and more generally, to restore parity between commission- and fee-based compensation models for advisors).

In the meantime, though, some advisors may even consider switching clients to commission-based accounts for more favorable tax treatment, and larger firms may want to explore institutionalizing their investment models and strategies into a proprietary mutual fund or ETF to preserve pre-tax treatment for clients (by collecting the firm’s advisory fee on a pre-tax basis via the expense ratio of the fund, rather than billed to clients directly). And at a minimum, advisory firms will likely want to maximize billing traditional IRA advisory fees directly to those accounts, where feasible, as a payment from an IRA (or other traditional employer retirement plan) is implicitly “tax-deductible” when it is made from a pre-tax account in the first place.

The bottom line, though, is simply to recognize that, while unintended, the tax treatment of advisory fees is now substantially different than it is for advisors compensated via commissions. And while some workarounds do remain, at least in limited situations, the irony is that tax planning for advisory fees has itself become a compelling tax planning strategy for financial advisors!

Deducting Financial Advisor Fees As Section 212 Expenses

It’s a long-recognized principle of tax law that in the process of taxing income, it’s appropriate to first reduce that income by any expenses that were necessary to produce it. Thus businesses only pay taxes on their “net” income after expenses under IRC Section 162. And the rule applies for individuals as well – while “personal” expenditures are not deductible, IRC Section 212 does allow any individual to deduct expenses not associated with a business as long as they are still directly associated with the production of income.

Specifically, IRC Section 212 states that for individuals:

“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year:

  • for the production or collection of income;
  • for the management, conservation, or maintenance of property held for the production of income; or
  • in connection with the determination, collection, or refund of any tax.”

Thus, investment management fees charged by an RIA (i.e., the classic AUM fee) are deductible as a Section 212 expense (along with subscriptions to investment newsletters and similar publications), along with any service charges for investment platforms (e.g., custodial fees, dividend reinvestment plan fees, under subsection (1) or (2) above), or any other form of “investment counsel” under Treasury Regulation 1.212-1(g). Similarly, tax preparation fees are deductible (under subsection (3)), along with any income tax or estate tax planning advice (as they’re associated with the determination or collection of a tax).

On the other hand, not any/all fees to financial advisors are tax-deductible under IRC Section 212. Because deductions are permitted only for expenses directly associated with the production of income, financial planning fees (outside of the investment management or tax planning components) are not deductible. Similarly, while tax planning advice is deductible (including income and estate tax planning), and tax preparationfees are deductible, the preparation of estate planning documents thatimplement tax strategies (e.g., creating a Will or revocable living trust with a Bypass Trust, or a GST trust) are not deductible (at best, only the “planning” portion of the attorney’s fee would be).

The caveat to deducting Section 212 expenses in recent years, though, washow they are deducted. Specifically, IRC Section 67 required that Section 212 expenses could only be deducted to the extent they, along with any/all other “miscellaneous itemized deductions”, exceed 2% of Adjusted Gross Income (AGI). In turn, IRC Section 55(b)(1)(A)(i) didn’t allow miscellaneous itemized deductions to be deducted, at all, for AMT purposes.

Thus, in practice, Section 212 expenses – including fees for financial advisors – were only deductible to the extent they exceeded 2% of AGI (andthe individual was not subject to AMT). Fortunately, though, given that financial advisors tend to work with fairly “sizable” portfolios, and the median AUM fee on a $1M portfolio is 1%, in practice the 2%-of-AGI threshold was often feasible to achieve, and thus many/most clients wereable to deduct their advisory fees (at least up until they were impacted by AMT).

TCJA 2017 Ends The Deductibility Of Financial Advisor Fees

As a part of the Tax Cuts and Jobs Act (TCJA) of 2017, Congress substantially increased the Standard Deduction, and curtailed a number of itemized deductions… including the elimination of the entire category of miscellaneous itemized deductions subject to the 2%-of-AGI floor. Technically, Section 67 expenses are just “suspended” for 8 years (from 2018 through the end of 2025, when TCJA sunsets) under the new IRC Section 67(g).

Nonetheless, the point remains: with no deduction for any miscellaneous itemized deductions under IRC Section 67 starting in 2018, no Section 212 expenses can be deducted at all… which means individuals lose the ability to deduct any form of financial advisor fees under TCJA (regardless of whether they are subject to the AMT or not!), and all financial advisor fees will be paid with after-tax dollars.

Notably, though, a retirement account can still pay its own advisory fees. Under Treasury Regulation 1.404(a)-3(d), a retirement plan can pay its ownSection 212 expenses without the cost being a deemed contribution to (or taxable distribution from) the retirement account. And since a traditional IRA (or other traditional employer retirement plan) is a pre-tax account, by definition the payment of the advisory fee directly from the account is a pre-tax payment of the financial advisor’s fee!

Example 1. Charlie has a $250,000 traditional IRA that is subject to a 1.2% advisory fee, for a total fee of $3,000 this year. His advisor can either bill the IRA directly to pay the IRA’s advisory fee, or from Charlie’s separate/outside taxable account (which under PLR 201104061 is permissible and will not be treated as a constructive contribution to the account).

Given the tax law changes under TCJA, if Charlie pays the $3,000 advisory fee from his outside account, it will be an entirely after-tax payment, as no portion of the Section 212 expense will be deductible in 2018 and beyond. By contrast, if he pays the fee from his traditional IRA, his $250,000 taxable-in-the-future account will be reduced to $247,000, implicitly reducing his future taxable income by $3,000 and saving $750 in future taxes (assuming a 25% tax rate).

Simply put, the virtue of allowing the traditional IRA to “pay its own way” and cover its traditional IRA advisory fees directly from the account is the ability to pay the advisory fee with pre-tax dollars. Or viewed another way, if Charlie in the above example had waited to spend the $3,000 from the IRA in the future, he would have owed $750 in taxes and only been able to spend $2,250; by paying the advisory fee directly from the IRA, though, he satisfied the entire $3,000 bill with “only” $2,250 of after-tax dollars (whereas it would have cost him all $3,000 if he paid from his taxable account!)!

However, the reality is that IRAs are not the only type of investment vehicle that is able to implicitly pay its own expenses on a pre-tax basis!

The Pre-Tax Payment Of Investment Commissions And Fund Expenses STOP!!

Mutual funds (including Exchange-Traded Funds) are pooled investment vehicles that collectively manage assets in a single pot, gathering up the interest and dividend income of the assets, and granting shares to those who invest into the fund to track their proportional ownership of the income and assets in the fund that are passed through to them, from which expenses of the fund are collectively paid.

The virtue of this arrangement – and the original underpinning of the entire Registered Investment Company structure – is that by pooling dollars together, investors in the fund can more rapidly gain economies of scale in the trading and execution of its investment assets (more so than they could as individual investors trying to buy the same stocks and bonds themselves), even as their proportionate share ownership ensures that they still participate in their respective share of the fund’s returns.

From the tax perspective, though, the additional “good news” about this pooled pass-through arrangement is that mechanically, any internal expenses of the pooled vehicle are subtracted from the income of the fund, before the remainder is distributed through to the underlying shareholders on a pro-rata basis.

Example 2. Jessica invests $1M into a $99M mutual fund that invests in large-cap stocks, in which she now owns 1% of the total $100M of value. Over the next year, the fund generates a 2.5% dividend from its underlying stock holdings (a total of $2.5M in dividends), which at the end of the year will be distributed to shareholders – of which Jessica will receive $25,000 as the holder of 1% of the outstanding mutual fund shares.

However, the direct-to-consumer mutual fund has an internal expense ratio of 0.60%, which amounts to $600,000 in fees. Accordingly, of the $2.5M of accumulated dividends in the fund, $600,000 will be used to pay the expenses of the fund, and only the remaining $1.9M will be distributed to shareholders, which means Jessica will only actually receive a dividend distribution of $19,000 (having been reduced by her 1% x $600,000 = $6,000 share of the fund’s expenses). Or stated more simply, Jessica’s net distribution is 2.5% (dividend) – 0.6% (expense ratio) = 1.9% (net dividend that is taxable).

The end result of the above example is that while Jessica’s investments produced $25,000 of actual dividend income, the fund distributed only $19,000 of those dividends – as the rest were used to pay the expenses of the fund – which means Jessica only ever pays taxes on the net $19,000 of income. Or viewed another way, Jessica managed to pay the entire $6,000 expense ratio with pre-tax dollars – literally, $6,000 of dividend income that she was never taxed on.

Which is significant, because if Jessica had simply owned those same $1M of stocks directly, earned the same $25,000 of dividends herself, and paid a $6,000 management fee to a financial advisor to manage the same portfolio… Jessica would have to pay taxes on all $25,000 of dividends, and would be unable to deduct the $6,000 of financial advisor fees, given that Section 212 expenses are no longer deductible for individuals! In other words, the mutual fund (or ETF) structure actually turns non-deductible investment management fees into pre-tax payments via the expense ratio of the fund!

In addition, the reality is that a commission payment to a broker who sells a mutual fund is treated as a “distribution charge” of the fund (i.e., an expense of the fund itself, to sell its shares to investors) that is included in the expense ratio. Which means a mutual fund commission itself is effectively treated as a pre-tax expense for the investor!

Example 2a. Continuing the prior example, assume instead that Jessica purchased the mutual fund investment through her broker, who recommended a C-share class that had an expense ratio of 1.6% (including an additional 1%/year trail expense that will be paid to her broker for the upfront and ongoing service).

In this case, the total expenses of her $1M investment into the fund will be 1.6%, or $16,000, which will be subtracted from her $25,000 share of the dividend income. As a result, her end-of-year dividend distribution will be only $9,000, effectively allowing her to avoid ever paying income taxes on the $16,000 of dividends that were used to pay the fund’s expenses (including compensation to the broker).

Ironically, the end result is that Jessica’s broker is paid a 1%/year fee that is paid entirely pre-tax, even though if Jessica hired an RIA to manage the portfolio directly, with the same investment strategy and the same portfolio and the same 1% fee, the RIA’s 1%/year fee would not be deductible anymore! And this result occurs as long as the fund has any level of income to distribute (which may be dividends as shown in the earlier example, or interest, or capital gains).

Notably, it does not appear that the new less favorable treatment for advisory fees compared to commissions was directly intended, nor did it have any relationship to the Department of Labor’s fiduciary rule; instead, it was simply a byproduct of the removal of IRC Section 67’s miscellaneous itemized deductions, which impacted dozens of individual deductions… albeit including the deduction for investment advisory fees!

Tax Strategies For Deducting Financial Advisor Fees After TCJA

Given the current regulatory environment, with both the Department of Labor (and various states) rolling out fiduciary rules that are expected to reduce commissions and accelerate the shift towards advisory fees instead, along with a potential SEC fiduciary rule proposal in the coming year, the sudden differential between the tax treatment of advisory fees versus commissions raises substantial questions for financial advisors.

Of course, the reality is that not all advisory fees were actually deductible in the past (due to both the 2%-of-AGI threshold for miscellaneous itemized deductions, and the impact of AMT), and advisory fees are still implicitly “deductible” if paid directly from a pre-tax retirement account. Nonetheless, for a wide swath of clients, investment management fees that were previously paid pre-tax will no longer be pre-tax if actually paid as a fee rather than a commission.

In addition, given that the now-disparate treatment between fees and commissions appears to be an indirect by-product of simply suspending allmiscellaneous itemized deductions, it’s entirely possible that subsequent legislation from Congress will “fix” the change and reinstate the deduction. After all, investment interest expenses remain deductible under IRC Section 163(d) to the extent that it exceeds net investment income; accordingly, the investment advisory fee (and other Section 212 expenses) might similarly be reinstated as a similar deduction (to the extent it exceeds net investment income). At least for those whose itemized deductions in total can still exceed the new, higher Standard Deduction that was implemented under TCJA (at $12,000 for individuals and $24,000 for married couples).

Unfortunately, one of the most straightforward ways to at least partially preserve favorable tax treatment of advisory fees – to simply add them to the basis of the investment, akin to how transaction costs like trading charges can be added to basis – is not permitted. Under Chief Counsel Memorandum 200721015, the IRS definitively declared that investment advisory fees could not be treated as carrying charges that add to basis under Treasury Regulation 1.266-1(b)(1). Which means advisory fees may be deducted, or not, but cannot be capitalized by adding them to basis as a means to reduce capital gains taxes in the future (although notably, CCM 200721015 did not address whether a wrap fee, which supplants individual trading costs that are normally added to basis, could itself be capitalized into basis, as long as the fee is not actually for investment advice!).

Nonetheless, the good news is that there are at least a few options available to financial advisors – particularly those who do charge now-less-favorable advisory fees – who want to maximize the favorable tax treatment of their costs to clients, including:

– Switching from fees to commissions

– Converting from separately managed accounts to pooled investment vehicles

– Allocating fees to pre-tax accounts (e.g., IRAs) where feasible


For the past decade, financial advisors from all channels have been converging on a price point of 1%/year as compensation (to the advisor themselves) for ongoing financial advice, regardless of whether it is paid in the form of a 1% AUM fee for an RIA, or a 1% commission trail (e.g., via a C-share mutual fund) for a registered representative of a broker-dealer.

Of course, the caveat is that once a broker actually gives ongoing financial advice that is more than solely incidental to the sale of brokerage services, and/or receives “special compensation” (a fee for their advice), the broker must register as an investment adviser and collect their compensation as an advisory fee anyway. Which is why the industry shift to 1%/year compensation for ongoing advice (and not just the sale of products) has led to an explosion of broker-dealers launching corporate RIAs, so their brokers can switch from commissions to advisory fees.

Given these regulatory constraints, it may not often be feasible anymore for those who are dual-registered or hybrid advisors to switch their current clients from advisory fee accounts back to commission-based accounts – especially for those who have left the broker-dealer world entirely and are solely independent RIAs (with no access to commission-based products at all!).

Still, for those who are still in a hybrid or dual-registered status, there is at least some potential appeal now to shift tax-sensitive clients into C-share commission-based funds, rather than using institutional share classes (or ETFs) in an advisory account.

Of course, it’s also important to bear in mind that many broker-dealers have a lower payout on mutual funds than what an advisor keeps of their RIA advisory fees, and it’s not always possible to find a mutual fund that isexactly 1% more expensive solely to convert the advisor’s compensation from an advisory fee to a trail commission. And some clients may already have embedded capital gains in their current investments and not be interested in switching. And there’s a risk that Congress could reinstate the investment advisory fee deduction in the future (introducing additional costs for clients who want to switch back).

Nonetheless, at the margin, for dual-registered or hybrid advisors who dohave a choice about whether to be compensated from clients by advisory fees versus commissions, there is some incentive for tax-sensitive clients to use commission-based trail products (at least in taxable accounts where the distinction matters, as within an IRA even traditional advisory fees are being paid from pre-tax funds anyway!).

Creating A Firm’s Own Proprietary Mutual Fund Or ETF

For very large advisory firms, another option to consider is actually turning their investment strategies for clients into a pooled mutual fund or ETF, such that clients of the firm will be invested not via separate individual accounts that the firm manages, but instead into a single (or series of) mutual fund(s) that the firm creates for its clients. The appeal of this approach: the firm’s 1% advisory fee may not be deductible, but its 1% investment management fee to operate the mutual fund would be!

Unfortunately, in practice there are a number of significant caveats to this approach, including that the client psychology of holding “one mutual fund” is not the same as seeing the individual investments in their account, the firm loses its ability to customize client portfolios beyond standardized models being used for each of their new mutual funds, the approach necessitates a purely model-based implementation of the firm’s investment strategies in the first place, it’s no longer feasible to implementcross-account asset location strategies, and there are non-trivial costs to creating a mutual fund or ETF in the first place. For which the proprietary-fund-for-tax-savings strategy is again only relevant for taxable accounts (and not IRAs, not tax-exempt institutions) in the first place.

Nonetheless, for the largest independent advisory firms, creating a mutual fund or ETF version of their investment offering, if only to be made available for the subset of clients who are most tax-sensitive, and have large holdings in taxable accounts (where the difference in tax treatment matters), may find the strategy appealing.

Notably, for this approach, the firm wouldn’t even necessarily need to pay itself a “commission”, per se, but simply be the RIA that is hired by the mutual fund to manage the assets of the fund, and simply be paid its similar/same advisory fee to manage the portfolio (albeit in mutual fund or ETF format, to allow the investment management fee to become part of the expense ratio that is subtracted from fund income on a pre-tax basis).

Paying Financial Advisory Fees From Traditional IRAs (To The Extent Permissible)

For those who don’t want to (or can’t feasibly) revert clients to commission-based accounts, or launch their own proprietary funds, the most straightforward way to handle the loss of tax deductibility for financial advisor fees is simply pay them from retirement accounts where possible to maximize the still-available pre-tax treatment. As again, while the TCJA’s removal of IRC Section 67 means that Section 212 expenses aren’t deductible anymore, advisory fees are still Section 212 expenses… which means IRAs (and other retirement accounts) can still pay their ownfees on their own behalf. On a pre-tax basis, since the account itself is pre-tax.

In practice, this means that advisory firms will need to bill each account for its pro-rata share of the total advisory fees, given that IRAs should only pay advisory fees for their own account holdings and not for other/outside accounts (which can be deemed a prohibited transaction that disqualifies the entire IRA!). In addition, an IRA can only pay an investment managementfee from the account, and not financial planning fees (for anything beyond the investment-advice-on-the-IRA portion), which limits the ability to bill financial planning fees to IRAs, and even raises concerns for “bundled” AUM fees that include a significant financial planning component. And of course, it’s only desirable to bill pre-tax traditional IRAs, and not Roth-style accounts (which are entirely tax-free); Roth fees should still be paid from outside accounts instead.

The one caveat to this approach worth recognizing, though, is that while paying an advisory fee from an IRA is pre-tax (i.e., deductible), while paying from an outside taxable account is not, in the long run the IRA would have grown tax-deferred, while a taxable brokerage account is subject to ongoing taxation on interest, dividends, and capital gains. Which means eventually, “giving up” tax-deferred growth in the IRA on the advisory fee may cost more than trying to preserve the pre-tax treatment of the fee in the first place.

However, in reality, the breakeven periods for it to be superior to pay an advisory fee with outside dollars are very long, especially in a high-valuation (i.e., low-return) and low-yield environment. Accordingly, the chart below shows how many years an IRA would have to grow on a tax-deferred basis without being liquidated, to overcome the loss of the tax deduction that comes from paying the advisory fee on a non-deductible basis in the first place. (Assuming growth in the taxable account is turned over every year at the applicable tax rate.)

Breakeven For Paying Advisory Fees From Taxable Vs IRA Accounts

As the results reveal, at modest growth rates it is a multi-decade time horizon, at best, to recover the “lost” tax value of paying for an advisory fee with pre-tax dollars. And the higher the income level of the client, the morevaluable it is to pay the advisory fee from the IRA (as the implicit value of the tax deduction becomes even higher). Nonetheless, at least some clients – especially those at lower income levels, with more optimistic growth rates, and very long time horizons – may at least consider paying advisory fees with outside dollars and simply eschewing the tax benefits of paying directly from the IRA.

In the end, the reality is that when the typical advisory fee is “just” 1%, the ability to deduct the advisory fee only saves a portion of the fee, and the alternatives to preserve the pre-tax treatment of the fee have other costs (from the expense of using a broker-dealer, to the cost of creating a proprietary mutual fund or ETF, or the loss of long-term tax-deferred growth inside of an IRA), which means in many or even most cases, clients may simply continue to pay their fees with their available dollars. Especially since the increasingly-relevant “financial planning” portion of the fee isn’t deductible anyway.

Nonetheless, for more affluent clients (in higher tax brackets), the ability to deduct advisory fees can save 1/4th to 1/3rd of the total fee of the advisor, or even more for those in high-tax-rate states, which is a non-trivial total cost savings. Hopefully, Congress will eventually intervene and restore the tax parity between financial advisors who are paid via commission, versus those who are paid advisory fees. For the time being, though, the disparity remains, which ironically has made tax planning for advisory fees itself a compelling tax planning strategy for financial advisors!

So what do you think? Are you maximizing billing traditional IRA advisory fees directly to those accounts after the TCJA? Will larger firms creating proprietary mutual funds or ETFs to preserve pre-tax treatment for clients? Will Congress ultimately intervene and restore parity between commission- and fee-based compensation models for advisors?  Please share your thoughts in the comments below!

The Handbook For Next Generation Partners Of Independent Advisory Firms

The Handbook For Next Generation Partners Of Independent Advisory Firms


While the CFP certification for financial planning has been around since the early 1970s, it wasn’t until the 1980s and 1990s that it began to gain widespread adoption amongst financial advisors. And it’s only been over the past 20 years or so that the highly scalable AUM model gained enough traction and popularity that the typical advisory firm evolved from solo practices into larger ensemble firms with employee advisors and multiple partners.

As a result, while the essential set of skills needed to establish your ownadvisory firm are now relatively well known, the most effective path to become a partner in an existing advisory firm is still in its earliest stages, with no set industry norms, a wide variety of career paths from one firm to the next, and a number of firms that haven’t yet designed their formal career tracks at all. Which, to say the least, makes it very difficult for next-generation advisors to figure out where to focus and what to do in order to succeed.

Accordingly, practice management consultant and guru Philip Palaveev has published what should soon become the seminal handbook of next generation advisors pursuing partnership. Because in “G2: Building The Next Generation”, Palaveev – who himself joined a major accounting firm in his early 20s and rapidly ascended to partnership by his early 30s – sets forth exactly what so-called “G2” (second/next generation) advisors in large independent advisory firms should be doing to successfully manage their own career track to partnership, what kinds of expectations are (and are not) realistic, and why (and how) the requisite skills to develop will themselves change as the advisor achieves new levels of success.

Perhaps most notable, though, is the simple fact that at the most senior levels of leadership within an advisory firm, it’s really more aboutleadership and the ability to manage people, than the actual skill set ofbeing a great advisor. And in turn, the path to leadership and partnership eventually entails growing beyond “just” being a great and expert advisor serving clients, but also learning how to manage and develop a team of subordinates. In addition to learning how to “manage up” to the expectations of founders and senior leadership, with respect to everything from projects and initiatives the advisor might champion, to the advisor’s own career and path to partnership.

Of course, the irony is that when it comes to advisory firms and making partner – like in most industries – success just begets more work and burdens, not to mention a substantial financial commitment to buy in to partnership. Yet at the same time, the good news is that for those who are effective at managing the career marathon, the long-term benefits of becoming a partner – both financial and psychological – can be incredibly rewarding.

G2: The Next Generation Of Financial Advisors

Although the CFP marks originated with the first graduating class of 1973, financial planning didn’t really begin to shift into the consumer mainstream until the 1980s and 1990s. As a result, the majority of today’s most experienced financial advisors – and independent advisory firm owners – were amongst that first and founding generation of financial planners. Now in the advanced stages of their own careers, many have grown their firms to the point that they have hired employee advisors to carry on their client relationships – and the entire advisory business – beyond themselves.

The caveat of this second generation of financial advisors is that the world of financial planning they enter today is fundamentally different than in decades past. While the founding generation of financial planners were virtually all originally insurance or investment salespeople who later evolved their careers and practices to provide financial planning (and become responsible for managing the business they built), today’s “G2” (next generation) advisors are increasingly likely to join existing advisory firms as a support or service advisor, and only later (if ever) grow to the point of being responsible for business development and management, and participating in ownership.

Which means G2 financial advisors have a fundamentally different path to success in their own careers than the founding generation of advisors. Not only because they are more likely to start with financial planning and learn business development later (instead of founders who did it the other way around), but also because founders typically created and ran and grew their own firms, while G2 advisors are responsible for growing their careerswithin an existing firm, and navigating the dynamics of a growing firm of employees for which ownership – partnership – is often just a distant opportunity to hope for.

G2 Building The Next Generation by Philip PalaveevIn fact, arguably one of the greatest challenges for G2 financial advisors is that because navigating the employee dynamics of a growing multi-partner independent advisory firm is so new, there are few established industry norms and no guide or handbook. At least, not until now.

Because advisory firm consultant Philip Palaveev, in his new book G2: Building The Next Generation, has effectively written the Handbook for G2 Financial Advisors (who want to someday become partners), explaining everything that it takes to succeed in an established and growing independent advisory firm, from the necessary stages of personal skills development, to the best way to ensure that your desired career track actually happens in a world where most advisory firms are still figuring out how to create that career track as they go.

The Skills To Develop As A G2 Financial Advisor

One of the most striking aspects of Palaveev’s book for G2 advisors is thatit’s a path he’s lived for himself, having joined the national accounting and consulting firm Moss Adams as a young 20-something, made partner by his early 30s, and then ultimately moved into leadership positions at other firms.

Accordingly, Palaveev suggests that the starting point for today’s financial planners trying to navigate their career path in a large firm is to establish some kind of specialization or expertise. Because the reality is that it will be decades before you have enough age and “gray hairs” to command credibility from your experience alone; instead, the best way to overcome the common age bias against you as a younger advisor is to become soexpert in a particular topic that – at least as long as you get to talk about that area of expertise – you can command clear credibility, despite your age. Or as Palaveev puts it, “You don’t have to start a relationship by trying to golf with your clients. Start it by being an absolute expert in what matters to them. (Golfing will come to you later!)”

Notably, a key value of establishing a focused area of expertise early in your career within a large advisory firm is not merely to be more credible to the client. It’s that, if you ever want to rise to the position of being a “lead” advisor responsible for client relationships, the client must accept you as an authority. And as long as you are simply a generalist, it’s virtually impossible to be accepted as more of an authority that the founding advisor who originated the client – which effectively limits your ability to move up. Or viewed another way, it will be hard for the client to ever see you as a better generalist advisor than one who is older and more experienced, but if they’re a business owner/executive/retiree and you’re the company’s leading expert for business owners/executives/retirees, you actually canestablish yourself as an even better authority on the issues that actually matter to the client.

In the long run, though, success as a financial advisor in a large advisory firm entails more than “just” being an expert able to provide financial planning advice to clients. Those who want to become partners and participate in the ownership of the firm, will generally only have an opportunity to get a slice of the pie if they can help to make the pie bigger. Which means learning to develop new business.

Fortunately, the reality is that establishing a recognized expertise or specialization – which is effectively a form of niching – can help support a younger advisor’s business development efforts. Because while it may take 10-15 years of experience to become established enough in the community to bring in new clients – especially affluent clients – the path to becoming an established expert in your niche is relatively short by comparison. Or as Palaveev puts it, you may not be able to say “I’ve been doing this for 15 years” but you can focus on a niche expertise that allows you to demonstrate you do have something valuable to say (even for clients who are much older).

Ultimately, though, the real path to the most senior levels of the financial advisor career ladder – and making partner – isn’t just about knowledge and expertise, or business development. It’s about management and leadership.

In fact, as Palaveev notes, while the first half of his own career was all about clients and expertise, success in the second half is all about working with others: your team, the (other) partners, and the rest of the firm. At Moss Adams, making partner actually meant spending less time with clients, so that the partner could spend at least 50% of their time on business development, managing the team, and firmwide leadership.

Which is a challenge, because learning to become a good manager – and a good leader – is an entirely different and new skillset than “just” being a good advisor. For many, it’s especially challenging within a larger advisory firm, because co-workers who were formerly friends and peers may suddenly become subordinates to whom the advisor must deliver sometimes candid and critical feedback not as their friend but as their manager and coach. (For which Palaveev recommends Douglas Stone’sDifficult Conversations book to learn how to have difficult conversations effectively.) Though as Palaveev notes, delivering critical feedback – which is essential to avoid undermining the entire team – shouldn’t be viewed as mean or negative (when done appropriately); instead, he suggests it’s a form of respect: “It means that you believe in their professionalism and ability to take feedback constructively and not overreact or ignore it.” Or viewed another way, the most common regret of managers in retrospect is not letting people go, but not letting them go sooner.

In essence, what all this means is that navigating the career the upward career track in a large advisory firm is about developing an evolving series of skills as the advisor themselves grows from paraplanner (technical competency) to associate planner (relationship management) to a senior/lead advisor (business development), and ultimately towards becoming a partner (management and leadership) in the firm!

Skills Progression For The Financial Advisor Career Track

Pursuing A Partnership Track Requires Managing Down And Managing Up

In an ideal world, when a new financial advisor joins an existing advisory firm as an employee, there’s a clear roadmap about what it takes to progress up the career ladder and achieve partnership. Yet unfortunately, while this often is the case in large accounting and law firms, the phenomenon of “large” advisory firms is new enough that relatively few have formalized their career track and what it takes to become a partner. In fact, for many firms that are still “small” or even mid-sized (up to $1B of AUM or even more), the firm may have never yet introduced an employee advisor to a partnership opportunity, nor even had the depth of career opportunities to have a “track”… and as a result, the firm is figuring it out as they go, as much as the financial advisor themselves!

Which means in the real world, a key skill that employee financial advisors must learn to reach the pinnacle of their career track is not just the ability to “manage down” – training and developing a team, and various subordinates of the firm – but also in how to “manage up”, which Palaveev defines as “steering information, expectations, and suggested actions to those who are above you on the org chart”.

In other words, it’s not enough to just try to be a “good” advisor and wait and hope for the firm to recognize your contributions to the firm. Especially in a world where the firm owners and founders may not really be certainhow to recognize your contributions, or even be in a position to recognize them (as the larger the firm gets, the more distant the founders/partners get from daily interactions with all of the advisory firm’s employees, including new and upwardly mobile advisors!).

Accordingly, Palaveev emphasizes a number of potential tactics for “managing up” in your firm, from the fact that you need to speak up in public forums of the firm and contribute (but it’s important to be recognized as acontributor, and not just someone that constantly argues and plays Devil’s Advocate, which just makes the leadership not want to include you in conversations!), get involved internally with the firm’s committees (an opportunity to show your contributions directly to the leadership that manage those committees), and if you feel “stuck” in your role it’s up to youto broach the conversation with your manager (respectfully) to ask what it is you need to do to grow and move up further. Don’t wait for the firm to manage you into new opportunities; manage up to drive your own career forward by asking what you can do to better grow and succeed!

On the other hand, Palaveev notes that a key aspect of managing up for new opportunities is that they will entail risks, and ones that won’t always work out. In fact, Palaveev defines leadership itself as “The process of making difficult decisions, accepting responsibility for them, and convincing others to follow through.” Which is challenging both because of the outright risks and fear of failure that may ensue, but also because advisory firm owners and founders are often reluctant to give “risky” opportunities to younger advisors – because a failure of the advisor is also a failure with consequences for the firm. Even though the reality is that the only way to really learn effective leadership is to practice making risky decisions that have consequences… and learning from them. For which the starting point is to Manage Up to get those opportunities (and, ideally, to manage expectations about the potential outcome!).

Of course, it’s also important to remember that your own career is much more of a marathon than a sprint. For those who are talented, it’s somewhat “natural” to be impatient with progress – as if you’ve had early success already, you’re probably accustomed to climbing the ladder more rapidly than others around you. Nonetheless, when you look back as a partner who’s been with the firm for 15+ years – or at the tail end of a 40+ year career – you won’t likely remember (or care) whether your big breakout year was your 5th or 7th year in the firm. So even though you may feel that, after 5 (or some other number) of years that “this year must be the year…” it probably doesn’t really need to be. Have patience, and manage up to figure out what it takes to open the next door.

Work/Life Balance And The Risk Of A Partnership Buy-In

Perhaps the greatest irony of doing all the work in pursuing the path to partnership is that being successful virtually always involves… even more work. The good news is that the advisory industry in general, and being a partner in particular, does often provide far more flexibility than traditional employee jobs in most industries. But it’s certainly not easier, and it still takes time and hard work.

Accordingly, Palaveev cautions that G2 financial advisors who pursue a career track should be prepared for the reality that you’ll “feel the squeeze” in trying to balance work, career, family, and children. Especially given that the path to partnership tends to hit in your 30s and early 40s, right around the stress peak of getting married, buying a home, starting a family, and raising young children. For which Palaveev’s only advice is just to accept it. And try to survive as best you can. Or as he puts it, “You won’t always be the most ambitious professional in the office. Or the most dedicated parent at the soccer game. Just never stop trying to be both.” The good news at least is that if you schedule your personal appointments on your calendar, your colleagues will likely respect those commitments (because they’re in the same boat, too).

And of course, if it all goes well, it culminates in an even greater burden of actually buying into a partnership – which will typically involve at least a short-term step back in income (to cover any downpayment and begin making ongoing note payments to finance the purchase), and years of flat income until the loan is paid off, while taking on what may well be the largest debt you’ll ever have in your lifetime (which for larger advisory firms and senior partners, can be substantially larger than even the mortgage on your home). Because the personal career investment of focusing all your time and energy into the firm in the preceding years still wasn’t enough!

Nonetheless, the good news at the end of the journey is that for those who are willing to make the investment, and take the leap of faith, is that climbing to the pinnacle of partnership in a large advisory firm can be veryrewarding. According to the latest industry benchmarking data, the typical practicing partner makes $200,000 to $250,000/year in total income, and standout firms have take-home pay per owner of $400,000/year and even higher. Even more substantively, partnership is an opportunity to be a part of a business that impacts hundreds or thousands of clients, the broader community, while creating jobs, opportunities, and careers for dozens or hundreds of employees along the way. Which means that while the first purchase of equity is incredibly difficult – a mixture of fear, anxiety, pride, and excitement – the subsequent purchases are often much easier. In addition, the responsibilities themselves do eventually stabilize, productivity increases, delegating gets easier, and personal efficiency (and work/life balance) do improve.

G2 Building The Next Generation by Philip PalaveevAgain, though, perhaps the greatest real-world challenge in the path to partnership is simply that, unlike more established professions like law and accounting, the track and path to partnership in most advisory firms is not well defined. There are few established industry norms about how to pursue the partnership track, and firm owners themselves may not have a clear vision for the future of the firm (and their role in it). Which means it’s often incumbent on G2 financial advisors to begin the process of Managing Up to craft their own path and future. Both to ensure that they can pursue the opportunity they wish, and because learning to manage – both down and up – is an essential skill to be an effective leader as a successful partner, anyway!

And for those who still aren’t certain how to proceed, and/or want additional practical advice, I can’t more highly recommend Philip Palaveev’s book G2: Building The Next Generation. Or as I call it: the handbook for the next generation of financial advisors.

So what do you think? What skills are needed to develop as a G2 financial advisor? Does pursuing a partnership track require the ability to both manage down and manage up? Does pursuing partnership inherently mean sacrificing some work/life balance? Please share your thoughts in the comments below!

12 Tips To Survive Your First 12 Months As An Independent Financial Advisor

12 Tips To Survive Your First 12 Months As An Independent Financial Advisor


While the average financial advisor with 10+ years of experience makes nearly triple the median US household income, the caveat to becoming a financial advisor is that most don’t survive their first few years, and the pressure of getting all your own clients (and persuading them to actually pay you for advice!).

In this guest post, first-year financial planner Shawn Tydlaska shares his own survival tips for having gotten through his first year, on track for more than $100,000 of recurring revenue(!), which he achieved in large part by heavily reinvesting in himself throughout the first year. Of course, reinvesting means that Shawn spent more than many advisors do in trying to start their advisory firms on a low budget… yet at the same time, by focusing on reinvesting his income as it came in, he was able to do so while limiting his actual out-of-pocket costs.

Shawn also shares exactly what kinds of conferences and courses he put himself through to accelerate his growth, how he structured his marketing (and what materials he takes into a typical prospect meeting today), what he tracks in his business, how he leverages his study group, and more!

So whether you’ve been thinking about going out on your own as an independent advisor but aren’t certain what to do, or you’re already in your first few year(s) and looking for fresh ideas about how to better focus, or are an experienced advisor and just want some fresh perspective, I hope you find today’s guest post to be helpful!

Ok. So I lied. There are actually 13 tips. I had trouble chopping this list down to 12. And I thought 12 tips for the first 12 months was a better hook.

Before launching my own independent fee-only RIA, I read Sophia Bera’s and Andrew McFadden’s guest blog posts on the Nerd’s Eye View blog, which were so helpful in starting my own firm. Those posts inspired me to share my own learnings in this guest post, while things are still fresh in my mind.

My journey evolved from the excitement of the launch, to the landing of my first client, to the fear of not knowing what my financial planning deliverable was, to coming to the realization at around six months that “this is working” and I won’t go out of business, to increasing my fees (a few times), to losing my first client, and to eventually paying myself my first paycheck.

As I write this post, I am actually about 20 months into the business (I know, I started this post about 8 months ago and it took me a while to put the finishing touches on it!) and have worked with a total of 63 clients. I currently have 40 ongoing monthly subscription clients and have done financial planning projects for 23 other clients. I have had seven subscription clients “graduate” thus far, one more will graduate shortly, and I suspended the monthly payment for one client until they get back on their feet. I have $4.3M in AUM, although that doesn’t mean much for me because I don’t charge an AUM fee. My average up-front fee is about $1,200, and my average monthly fee is $235. Thus, even if I don’t get another client, I am projected to generate $110,000 of revenue over the next 12 months. My total annual expenses are about $40,000 right now. About $14,000 of that I would spend regardless of being in business on things like travel, meals and entertainment, my own financial planner (Hi Sophia Bera!), tax prep, a business coach, utilities, etc. I expect my fixed costs will go up as I just hired Liz Plot, AFC® who will be a remote Client Service Associate and she will be working about 20 hours per week. Fortunately, with new clients continuing to come in, my revenue is on track to grow more than enough to make up for that cost!

So here are my top tips for surviving your first 12 months as a fee-only independent RIA, based on my own experience!

1. Invest in Yourself

After being in business for two months, I was getting a decent number of good leads. But I was frustrated that I was only converting about 30% of them into clients. I made the conscious decision to reach out to experts to help shorten my learning curve on two key aspects of my business. (As a side note, in my first two months I received 11 leads from the XYPN Find an Advisor Portal and 17 leads from family, friends, and other professionals. So I was getting pretty decent lead flow.)

When I listened to Nancy Bleeke on the XYPN Radio podcast her approach to sales really resonated me. It was a mind shift to think of sales not as a sleazy or dirty word, but as a process to help prospects make the decision to help themselves (by working with me!). So, I hired Nancy for a few private coaching sessions, and she immediately provided great feedback. She actually took the money I was going to pay her and applied it to her sales training course, where I would learn her entire sales approach. The results were immediate and significant, and my conversion rate increased from 30% to 75%.

The investment for the course was $2,000 (which she has since raised to $3,000 due to popularity, although XYPN members get access for 10% off). Which is tough to swallow when you are first starting out. But sales skills are something you can use for the rest of your life. And the investment quickly paid for itself with the increased number of prospects that agreed to work with me based on what I had learned!

At the same time, I wanted to learn the softer side of the business and I had heard great things about Money Quotient. So I enrolled in their three-day training course in San Francisco. At this course, you learn how to use their life planning tools and you practice them with a partner. I found this experience really helpful, because it taught me how to be a more active listener and ask really good questions. Going through this process really made me appreciate how cool it is to feel like you have been heard. This investment was a one-time fee of $950, and then a licensing fee of $60 per month to use their materials. I really think the future of our profession will incorporate more aspects of life planning, so whether you use Kinder’s three questionsSusan Bradley’s Sudden Money InstituteThink2Perform Values Card deck, or something else, I would put some effort here.

I also attended a few conferences very early on. I launched on May 2nd in 2016, and two weeks later I was at the NAPFA National Conference in Phoenix. As soon as you join XY Planning Network, I recommend joining NAPFA (which is included in XYPN membership), and scheduling a peer interview with Bernie Kiely. He is awesome, and he offered to sponsor me to attend the conference. I had to pay for my flight (using miles) and lodging (slept on the futon of Andrew Davis’s Airbnb), but the conference fee was paid for out of pocket. At this conference, I met 6 or 7 other XYPN members, like Chris Girbes-Pierce, Scott Frank, Justin Rush, Joe Morgan, Gabe Anderson, and Lauryn Williams. I cornered Justin at one of the happy hour events and peppered him with questions about how to run my business. He introduced me to Rhonda Moore (now affiliated with FA Bean Counters) who did my initial bookkeeping for $60/mo. He helped me understand what I can deduct as a business expense, how to track receipts, and answered the many, many other nagging little questions I had.

Next, I attended the FPA NorCal conference at the end of May, which cost $699 for registration (but no hotel cost since it was local for me). This conference is a bit stuffy and more old-school. If I had to do it over again, I would probably skip this one. It is located in downtown San Francisco at the Palace Hotel. One highlight of the conference was getting to meet Michael Kitces in person (who speaks there annually).

I also attended the Far West Round Up at UC Santa Cruz. I had just moved to San Francisco a few months before launching my firm, so I wasn’t very established in the local financial planning community. This was a great chance to network in a very intimate setting as all ~75 attendees attend each session together. At this conference, another mind shift happened. I went from being a financial planner who launched a firm, to a firm owner. It was cool being a CEO and having conversations with leaders in the industry like Tim Kochis and Dave Yeske. I felt really respected and enjoyed talking shop about how we ran our practices. This conference was $519 and included lodging, programming, and meals.

I also went to the XYPN16 Conference in September in San Diego. The investment was $199 for the conference, $399 for hotels, and I booked my flight using points. It was great to meet all the XYPN members from around the country, but I was a little disappointed by the content of the conference itself. I had really high expectations, but the whole first day was a tech demo with no formal content sessions (although that has since been moved to the center of the conference between sessions on the first and last days). The best part of this conference was definitely networking with my fellow XYPN tribe members.

I hired a business coach in February, which was about 8 months after launching. I used Meg Bartelt’s article as a framework for how to interview candidates. One of the biggest things the coach provided me was focus on where to spend my time and energy. He also got me to embrace my CRM, which I wasn’t using fully. And instead of letting myself “get distracted by shiny objects” (like creating webinars, blogging, writing an eBook, pursuing speaking engagements, etc.), he helped me focus on signing 2 clients per month, with the goal to get to 60 retainer clients by the end of 2018 (which I am still on track for). The business coach I hired was Joe Lukacs and his company is Practice Power Academy, and he is pretty expensive. Initially it was $700/month for two 30-minute sessions. Eventually we moved to one 30-minute conversation per month for $350/month. While I am glad I hired him and he did help me a lot, he wasn’t the right business coach for me in the long run. Just like finding a financial planner, it is hard to find a coach you really click with, and I don’t think there is anything wrong with trying one out for a little while. But it was a good learning experience and I am happy that we worked together. (Note: I am no longer working with him, but plan to hire Elizabeth Jetton in the new year.)

Overall, this means that if you’re going to invest aggressively in yourself, you will spend a lot more than $10k (as Sophia Bera did) in your first year to start your RIA. Expect to spend $20k-$25k, depending on how much training you pursue, and the number of conferences you attend. But I found it was quite worthwhile in turbo-charging the growth of my own firm (entering my second year already having a revenue run rate of over $100,000/year!).

2. Speak From the Heart on Your Website

I got this tip from XYPN member Michael Powsner. He and I had a conversation over coffee one week before I decided to join XYPN.

He recommended I take 1-2 days to just bang out the copy for my website. He recommended going somewhere picturesque where you feel inspired. For me I spent one day in Half Moon Bay at a Peet’s coffee shop, and then another day at a Marriott hotel that overlooked the San Francisco Bay.

Create a FAQ page that talks about who is a good fit for your services. I really spoke from the heart and used natural language. I think that this helps prospects figure out if they are a good fit for your firm, and they self-select into engaging with you by signing up for a meeting directly on your website. It’s OK that describing who is a good fit will turn some people off. Because the ones who are a good fit will find what you say really resonates, and be more likely to sign up with you. And those are the people you want anyway!

Create a Services and Fees page that shows what you provide, and how much you charge. This really helps prospects understand the financial commitment before they set up an appointment to have a Discovery Meeting with you.

While we are speaking of websites, make it really easy for your prospects to set up a Discovery Meeting with you. I use Calendly (though there are a lot of other options, too) and have a page where prospects can put an appointment directly on my calendar. Try to remove as much friction as you can, which will enable more prospects to set up meetings with you! Make yourself available when your prospects are. For me, that means opening up my calendar to meetings at nights and on the weekends. It works! Over my first 12 months I met with 101 prospects.

3. Don’t Over-Analyze

Don’t spend too much time trying to develop the perfect process. What you need are clients and a “test lab” to develop your perspective, refine your approach, and see what tools work for you and your clients.

Most of your clients have never worked with a financial planner before – especially if you’re serving younger professionals – so this is all new to them. Which means if you try something new with them, they will have no idea that this is brand new for you too! So don’t be afraid to take risks and ask new questions, try new tools or techniques, and try new deliverables to see what resonates with your clients.

For example, at my last firm, if I told someone to open a savings account at Ally Bank, I would fill out the paperwork, send it to them with sticky notes and a return envelope, fax it in, etc. Now I empower my clients by giving them a task and sending them off to do it on their own. It makes you more efficient, and it empowers them. And the first client I tried it with just accepted it as reality and did it. They didn’t complain that I was giving them “less service” by not doing the paperwork for them now, because they had no idea that I “used to” do it a different way with other clients at another firm!

4. Shut Up and Listen

I had never been in a business development or sales role before. It was really weird to be the one doing the talking during those first meetings with prospects. Initially I was trying to prove my knowledge, talk about my pedigree, and demonstrate my expertise.

But what I found is that prospects already assume you are an expert, because they are the ones who set up the meeting with you. So just embrace the role of the expert and own it. Don’t try to dominate the conversation with bullet points from your resume. Ask good questions and aim to listen for at least 80% of the meeting.

My initial prospect meeting is 60 minutes. Guide the conversation, but give them space to talk for the first 45 minutes, then in the last 15 minutes, talk about your service model and how you can alleviate the financial pains they just shared with you.

Here are some of my favorite questions in the order that I ask them:

– Tell me about why you set this meeting up, and why you reached out to a financial planner?

– What are some of your short-term/1-3 year goals?

– How are you currently managing your finances? Mint? Spreadsheet? Or just winging it?

– What did you observe about money growing up? (my favorite question)

– How do you think that impacts your relationship with money today?

– Is there anything about your finances that keeps you up at night?

– Have you ever worked with a financial planner before?

– Do you have any concerns or fears about working with a financial planner?

After this last question, the conversation normally transitions nicely to a discussion about your services and fees. Most people will say something like, what services do you offer and how much is it going to cost me?

5. Peer Review Your First Few Financial Plans

I had to figure out what my financial planning process was going to look like when I started. I didn’t know what I would include in my financial plan or not. For the first few plans I created I had someone from my study group be my peer reviewer. Thanks, Eric Gabor!

I only charged $200 for the first plan that I did. One of the comments that Eric has made a few times is to remember that I am not running a charity. But I didn’t have a reference point, so I had no idea if what I was producing was valuable or not. I really spent a lot of time on these initial plans. (Tip: remove the confidential info from one of your first plans and keep it at your fingertips to show prospects what a “sample financial plan” looks like.)

Having someone that you respect look at your stuff really gives you confidence before you present it to a client. It also helps make you a better planner, because they can find blind spots in your planning that you may miss.

6. Have a Few Good Pieces of Marketing Collateral

I got this tip from PJ Wallin. XYPN has a thriving community of planners who make posts in their members-only forums. PJ wrote a post about what he would do differently if he started over. One of his comments was to not get too bogged down with making the perfect pieces of marketing materials, and I took that advice to heart.

The three key pieces of collateral I use are my Services and Fees handout12 Tough Questions To Ask A Financial Advisor (to use when a client says they are thinking about interviewing other advisors), and a sample financial plan. I don’t know why, but having a sample financial plan was really reassuring to have when I was first starting out. I think it was because I didn’t really know what my financial plan would look like. So it was kind of reassuring to myself that I could produce a valuable deliverable.

Also, part of our job as financial planners is educating people on what “real financial planning” is. If you need some reassurance or feedback about your financial plan, again, have someone from your study group peer-review it.

As the year progressed, I developed a cash flow module and spending plan. I often break this out after I ask the question about how the prospect is currently managing their finances. I show them how I think about creating a spending plan that aligns their finances with their values. The cash flow tab has a great data visualization graph. Here is a link to my spending plan and cash flow template.

7. Measure Your Activity

I heard Michael Kitces and Alan Moore say that in your first year, it is more important to measure activity than to measure results.

I use this Google Doc and I update it every Sunday night. For more details on how I use this doc to track my KPIs (Key Performance Indicators), listen to my interview on XYPN Radio with Alan Moore. It is a great way to track your progress. Also, how do you know what your conversion rate is unless you track it? Or how can you tell if a change had an effect? It’s crucial to track your KPIs from the very beginning.

Here are some of the key metrics that are important to track:

– Number of Discovery Meetings

– Number of “Plan Design” Meetings (Proposal Delivery Meetings)

– Number of Retainer Clients

– Number of One-Time Clients

– Conversion Rate of Prospects to Clients

– Number of Meetings with Professionals

– Number of Meetings with Large RIAs (if I had to do this again, I would focus on NAPFA firms specifically and not just RIAs in general, as they were more likely to give me referrals as a fellow NAPFA member, in large part because larger firms tend to have higher minimums and therefore turn more people away who need to be referred out)

– Source of Your Prospects

– Average Revenue Per Client

In addition, it is important to me to track the total number of lives I have impacted. My personal goal is to eventually touch the lives of 1 million people using personal finance as a tool for empowerment.

Another item I keep track of is the recommendations I make to my clients that have quantifiable value. Like paying off credit card debt, minimizing taxes, reducing investment fees, getting a rewards credit card, or getting out of a crappy insurance policy. This helps me feel like I am worth the financial investment my client is making. I make it a game to come up with ways that I can save my clients more money than they are spending on my monthly fee. On average, I am able to help my clients save $470/month (as compared to my average monthly retainer fee of “just” $235/month), and have helped my clients pay off a total of $400k worth of “bad” debt.

Another thing to track early on is how much time you spend on your financial plans. If someone pays you to do a one-time financial plan for $1,000, keep track of how many hours you put into it. Do the same thing for a comprehensive financial plan. After a while you will get a sense of how much you need to charge. I think a good planner should value their time at least between $150-$250/hour when you are quoting a prospect for work on a one-time project.

It was also helpful for me to see how much time I was spending on my prospecting process. I used to spend about 6 hours on a prospect before they reached their decision to work with me or not. I spent 1.5 hours of face-to-face time, 1 hour of prep before each meeting, 1 hour of writing notes after the first meeting, and another 0.5 hours of back-and-forth communication. Given the lifetime value of the client, I was happy with this investment of my time, since my conversion rate was about 75%.

As of the writing of this blog post, I recently switched to a one-meeting proposal process. Since I have about 8 prospect meetings per month, my new goal is to get a 20-30% conversion rate. That will enable me to reach my goal of 2 clients per month. I also recently raised my fees. So when you combine all those changes, I will be happy with 2 clients per month since my new process only takes about 2.5 hours of my time.

8. Develop a Strong Support System

My wife, Jen, was, and still is, very supportive, both financially and emotionally. She is just as invested in this business as I am, and I couldn’t have done this without her. Each day she is so excited to hear about the progress I am making with my business.

Make sure you and your partner are on the same page because building a business is a slow process. I gave myself a three-year time horizon in my business plan before I would make a post-MBA salary. My initial goal was to net $100k from my business within three years.

It is also important to have a strong study group. XYPN puts every new advisor who is joining and launching their own firm into a “Launchers” study group. Although my XYPN Launchers group was great initially, eventually I felt like I was ready to move on. I kind of regret this decision, though. It took me a really long time to find another one where we clicked, and I felt like I was alone for a long stretch of my first year. Fortunately, now I have a good study group, we meet each week for 90 minutes and everyone is very committed to the group.

Another way to keep the motivation up is to keep track of your accomplishments. Sometimes when you are in the day-to-day grind, it doesn’t feel like you are accomplishing very much. But when you take a step back and see everything you have done for the month, it helps give you perspective. Keep track of things like mentions in the press, the number of new clients, putting on a seminar, giving yourself your first paycheck, when you cross over 10 clients, etc. What I do is write notes on my iPhone and then once a month I upload them to something I call my “rap sheet”, which is a word doc with all my accomplishments.

9. Keep a Celebration Folder (aka “A Smile File”)

I have to give Nancy Bleeke credit for this one. As part of the Sales Pro Insider program, they send you a box of swag. One of the items is a bright yellow celebration folder. You’re supposed to use this folder to collect nice notes from clients, thank you emails you receive, and any other positive feedback you get.

The idea is to bring this folder out if you are having a bad day. I haven’t had to dig it out yet, but I think having a place to collect nice feedback helps with the mental game.

Also, don’t forget to celebrate successes. Sometimes when I signed a new client, I would buy myself something for my office. It could be something as nice as an Apple wireless mouse or a good camera for video conferences, or as cheap as a multi-color office pen from Target.

10. Off-Site Retreat

The E-Myth Revisited by Michael Gerber

Many business leaders like Steve Jobs, Bill Gates, and Mark Zuckerberg schedule “think weeks” where they get away from it all to read, think, and plan. I really like this concept, and apply it on a small scale. I spend 1.5 days per quarter working “on” my business and not just “in” my business (see “The E-Myth Revisited”).

In fact, I wrote this blog post on my 4th quarterly off-site retreat at the Portola State Redwoods Park. I left Thursday afternoon, and came back Friday night. You don’t have to spend a lot on lodging. Going camping costs about $40 to reserve the site. But it is important to get out of your home so that you can focus.

My basic agenda looks like this:

  • Review your one-page business plan and update your financial projections
  • Review your Quickbook numbers for the latest month and quarter, and make sure all expenses are categorized properly
  • Read, read, read. I collect interesting articles throughout the quarter, and print them to PDF so I can read them if I don’t have internet access. I also have some business books that I am working my way through. Right now I am reading “The E-Myth Revisited”.
  • Set 90 day priorities that will support your 1- and 5-year goals
  • Review your Profit First target allocations (see below)
  • Then focus on something major you want to work on at the retreat like starting an operations manual, ironing out the details of what the first three client meetings look like, a financial planning concept I want to explore more, or creating a business mission statement
  • Set the date for the next retreat

It is really nice to get away from all the distractions around your apartment or home. I find myself always tidying up (that dish doesn’t belong there), which ultimately distracts my business focus. It’s good to unplug and focus on thinking about the business.

11. Set Your Prices Just Beyond What You Feel Comfortable With

Alan Moore said this on one of his XYPN Radio podcasts and it really stuck with me. He said to price your fees at just beyond the point where you feel comfortable. If you know you can sell your plans at $1,000 all-day, maybe you are getting too many yeses and not charging enough for your expertise.

My average fee is over $1,100 for onboarding, and $235/month for the ongoing services. I still get nervous quoting those fees, but I know I provide a ton of value to my clients. Since I help my clients save $470/month, I feel confident charging them at least half that.

But remember to follow your heart and do what feels right. You will be more successful if you try to sell something you believe in, than if you try to sell something that just doesn’t feel right. Initially I tried charging an AUM fee, and it just didn’t sit right with me. I think investment management is a commodity, and I don’t add much value after setting the initial allocation with my client. So I outsource my portfolios to Betterment For Advisors.

At the time I launched, the Betterment platform fee for advisors was 0.25%. If a client went directly to Betterment, the fee could be as low as 0.15% if they invested over $100k, and they could get up to 6 months managed for free if they went to www.betterment.com/planetmoney. As a fiduciary, I couldn’t stomach charging a fee for investment management when they could get the same exact portfolio for cheaper. (Although notably, Betterment has since raised their top pricing tier to 0.25%, and XYPN advisors get access to the platform for only 0.20%.)

Nonetheless, since asset management is included with my services, I simply charge a reasonable monthly retainer fee to cover the value of my time to a point where I feel like I can include investment management for free.

12. Get Involved with Your Local Financial Planning Community

Not only was I a new firm owner when I launched, but I was also new to the Bay Area. So I got involved with my local FPA chapter, and highly recommend that you do, too.

I volunteered for pro-bono events at my local library like Financial Planning Days. I also sat on the board for the FPA NorCal conference as a Speaker Liaison. This gave me an opportunity to network with other professionals and in the case of NorCal, you get a free ticket to the conference worth $699!

Set up meetings with fellow NAPFA and XYPN members. Pick their brains. If there isn’t anyone local, set up virtual meetings. Members of the “secret society of financial advisors” are very willing to help you out, so don’t be scared. If you think about it, there are 75,000,000 Millennials, and there are only 550 XYPN advisors, so it isn’t like we are competing against each other.

A key realization that hit me like a ton of bricks was prospects aren’t asking themselves: “Do I want to hire Shawn or another financial planner?” I believe they are asking themselves “Do I need a financial plan at all?” Once I had that realization, it helped me with my approach to prospect meetings.

When you meet with fellow XYPN members or other advisors, it is also a good way to practice your pitch with live people when they ask, “so what do you do?” The more you verbalize it out loud, the more you start believing it yourself. It just feels real when you say “I provide financial planning for young professionals…” even if you don’t have a single client yet.

13. Pay Yourself – Profit First

I think it is important to treat your business like a business and not a hobby. Thus, you should pay yourself and be proud of that.

Even though I invested in conferences and professional training, I kept my fixed overhead really low, and was fortunate to be cash flow positive from almost the beginning. However, I didn’t pay myself until month 10. I wanted to make sure that my business was sustainable and that I wasn’t going to run out of cash. So, I waited until I had about $20k in my business checking account before I thought about giving myself a paycheck. I didn’t know how much I should distribute, so I did some research.

Profit First by Mike MichalowiczI read the book Profit First, and the premise is: take whatever balance you have in your checking account, and multiply that by 50% and that is what you should take home as owner’s pay. 15% should go to a sub-account to pay for taxes. 5% should go to a profit sub-account where you will pay yourself quarterly distributions. And then the remaining 30% is what you should use for your operations and overhead expenses. Thus, you pay yourself first and then whatever is left over is how much you should spend on your business expenses.

Then do this every 10th and 25th of the month. I like to keep $10k in my checking account at all times. So my first paycheck looked like this ($20k – $10k emergency fund = $10k x 50% owner’s pay = $5k).

Be proud of your first paycheck. Frame it. Take a picture of it. Go out to dinner to celebrate. You have worked hard and earned it. The system works because you pay yourself first, and whatever is left over is what you use for your operating expenses.


I feel very fortunate to be where I am. In 2017, I grossed $109k in revenue with about $40k in expenses. I had 99 prospect meetings, and am starting off the year with about 40 ongoing clients. Notably, I haven’t even done very much marketing. My experience over these first 20 months was “build it and they will come.” Though I don’t think that should necessarily be your expectation.

What I have had going for me was life experience (I was 34 when I launched), business experience (I earned my CFP in 2009, joined the financial planning profession in 2010, and earned an MBA from a top-10 program in 2015), and lived by a major city. I believe the last point is crucial to your success. There definitely is an appetite and hunger for good financial advice, but with personal finance people often still want to work with someone who is local. I have worked with 63 clients, and only 7 are people who I have never met in person. If you are trying to build a completely virtual practice, I think it can be done, but it will require a lot more time to build your credibility in your niche (blogging, posting to relevant forums, networking with centers of influence, etc.) so people can find their way to you. If you’re in a dense metropolitan area, it can be easier because they’re already around.

The first year is a wild ride. If you are committed to your practice and take it seriously, I am confident you will make it. This is an amazing profession, and definitely worth the effort.

So what do you think? Did you employ any of these strategies in launching your own advisory firm? How did it work out? Any suggestions of your own that aren’t included here? Please share your thoughts in the comments below!

Managing The “Theater” Of A Financial Planning Meeting

Managing The “Theater” Of A Financial Planning Meeting


For financial advisors who pride ourselves on the quality of the advice we provide to clients, it can sometimes be easy to lose sight of the importance of the more physical elements of our business that seem qualitatively irrelevant to the value of the guidance and recommendations we give to clients. However, as a tremendous amount of psychological research suggests, we should be careful not to overlook the more “theatrical” elements of a financial planning meeting – from the clothes we wear and the way we present information to clients, to the design and set up of our office – as the “theater” of financial planning actually does influence our clients, and their ability to implement our advice in a meaningful manner.

In this  post, we will examine why it is important to both acknowledge and manage the theater of financial planning, particularly given the ways in which clients and prospective clients utilize the signals we as advisors send (both consciously and unconsciously) to decide everything from whom to hire, to what financial recommendations they should implement (or not!).

It is widely acknowledged that effective communication is an important aspect of what financial advisors do. However, something that is less commonly appreciated is the role that our environment plays in facilitating that communication. In his book, Suggestible You, Erik Vance examines the ways in which our suggestible minds are influenced by the stories we hear and the environments we hear those stories in. In particular, Vance examines the “theater of medicine”, and its surprisingly powerful role in shaping the perceptions and beliefs of patients, which can, in turn, influence their physical health and well-being as well!

Additionally, the physical spaces we occupy (such as our office) can actually say a lot about us. Though laboratory research in financial planning is still very young, and scholars are only beginning to delve into how the offices of financial advisors can optimally be designed, some research from other fields has found that our physical environments can actually say even more about our personalities than some commonly used tools and assessments. At the heart of this are ways in which our personality manifests in certain behaviors which leave physical evidence within our environments that is really hard to fake – from mementos we collect and things intentionally place out for others to see, to more subtle clues such as the way we dress and organize things on our desk.

Ultimately, financial advisors have many options for trying to better manage the theater of financial planning… from sending signals of our conscientiousness through our clothing (e.g., formal dress) and communication style (e.g., controlled posture and calm speech), to signals of our competence through education and professional designations (e.g., CFP certification), and even signaling our knowledge of and solidarity with niche communities that we service… there are many ways in which we can seek to manage the “theater” of our financial planning to help our clients adopt and implement wise financial planning practices!

(Derek Tharp Headshot PhotoMichael’s Note: This post was written by Dr. Derek Tharp, our Research Associate at Kitces.com. In addition to his work on this site, Derek assists clients through his RIA Conscious Capital. Derek is a Certified Financial Planner and earned his Ph.D. in Personal Financial Planning at Kansas State University. He can be reached at derek@kitces.com.)

Acknowledging The “Theater” Of Financial Planning

Sometimes financial advisors—and particularly those of us who may be most interested in the technically-oriented side of financial planning—can be quick to write-off the “theater” of financial planning. After all, if we can serve our clients well and give them really good advice (far better than that slick salesman down the street, no doubt!), then why worry about the suit we wear, the car we drive, or the aesthetic of our office? These factors are all superficial and do not influence the actual quality of the advice we deliver to clients – which is what our clients are paying us for, isn’t it?

However, psychological research gives us good reason to question just how superficial the actual “theater” of financial planning is. From the costumes we wear, to the props we use, and even the way we arrange our financial planning “stage”… the performances we put on can and do influence our clients – including the emotions they feel, the perceptions they form, and the eventual decisions they make.

As a result, those of us who truly do want to help our clients make the best possible decisions should not ignore both the conscious and unconscious influences of financial planning theater.

Our Highly Suggestible Minds

Suggestible You by Erik VanceIn his 2016 book, Suggestible You, Erik Vance examines the science behind our highly suggestible minds, and finds that at all sorts of human behaviors that seem to have no scientific basis—from voodoo and shamanism, to magic healing crystals and miracle vitamin pills—surprisingly seem to actually have some real-world effects.

What’s most interesting about Vance’s approach, is that rather than just write these things off as mere pseudoscience, Vance examines whether there could be other mechanisms that might help explain why such behaviors could have effects, even though the actual treatments themselves are not scientifically supported. And in his investigation, Vance identifies a potential explanation: the power of our highly suggestible minds.

Vance explores a wide range of case studies and scientific literature which suggests that not only do our experiences influence our perceptions and beliefs, but that our experiences alone can actually improve our health and well-being. In other words, it’s not just that our minds are capable of making us think we are better when we are not, but that our brains can actually enhance (or worsen) our physical and mental well-being.

At the heart of this powerful phenomena is storytelling—which has a long history of being deeply integrated into healing and medicine. In particular, storytelling is powerful in influencing our beliefs and expectations, which researchers have been discovering are far more powerful than we realized.

For instance, most people are familiar with the concept of a placebo effect: A participant in a study receives a sham treatment (e.g., a sugar pill) and yet experiences positive medical effects which cannot be attributed to the sugar pill itself. But only recently have medical researchers begun to really gain a better understanding of how these complex effects work.

At first, researchers were naturally skeptical of what placebos actually were. Many felt placebos were likely just a form of response bias (e.g., participants were trying to provide responses researchers wanted to hear),confirmation bias (e.g., researchers were seeing the effects they wanted to see), or publication bias (e.g., studies with interesting findings get published even though the results were just the result of chance). But the research so far suggests that, at least for some placebos, the science behind them is actually much more interesting.

For instance, Vance notes a 2004 fMRI study that provided some of the first evidence of how our brains can actually self-medicate against pain by engaging our “internal pharmacy”—i.e., neurotransmitters and hormones such as opioids, dopamine, and endocannabinoids, which our brains can release to self-medicate ourselves. In summarizing the findings of the 2004 fMRI study in which participants were conditioned to believe a non-pain relieving cream could actually relieve the pain of an electric shock, Vance writes (emphasis mine):

The most interesting part was what the brain scans showed. Normal pain sensations begin at an injury and travel in a split second up through the spine to a network of brain areas that recognize the sensation as pain. A placebo response travels in the opposite direction, beginning in the brain. An expectation of healing in the prefrontal cortex sends signals to parts of the brain stem, which creates opioids and releases them down to the spinal cord.We don’t imagine we’re not in pain. We self-medicate, literally, by expecting the relief we’ve been conditioned to receive.

In other words, it’s not just that placebos can make us think we are feeling better, but that the right experiences and expectations can actually cause our minds to induce a genuine healing process, independent of any actual medical treatment provided. And the placebo effect works at least in part because our expectation that it will work literally triggers our own internal neurochemistry to help make it so.


In addition to actually being a good storyteller in the first place (financial advisors may want to note Scott West and Mitch Anthony’s book,Storyselling for Financial Advisors), another key element of storytelling is the broader “theater” in which that storytelling takes place, which can ultimately have the effect of diminishing or enhancing the power and believability of a story being told. Which is important, as ultimately it is our genuine beliefs and expectations which influence the surprisingly good (or bad!) outcomes which Vance examines.

Given Vance’s book’s focus on the physical healing process, he places a particular emphasis on the ways in which the “theater of medicine” has been found to influence our health. Simply put, the theater of medicine refers to the many factors of the environment around us which all tell our brains that it is time to get better when we enter a medical facility. From the uniforms that people wear (e.g., the authority invoked by an EMT’s uniform, the sterility invoked by crisp and clean nurse’s scrubs, and the expertise invoked by a doctor’s white lab coat), to the props that are used (e.g., stethoscope, thermometers, and other medical equipment), and even the general arrangement of a medical “stage” around us (e.g., anatomical charts, the scent of disinfectant, and degrees and other credentials prominently displayed), we are constantly reminded that it is time to get better.

Of course, these elements all serve a genuine purpose as well, but the reality is that at a well-staged medical environment can actually make a physician more effective. In most modern medical facilities, we both consciously and unconsciously receive the message that we are in a safe environment and being taken care of by qualified professionals. Certainly doctors could stage their “performance” much differently—perhaps ditching the formality of the white lab coat, storing equipment in a manner that is much less conspicuous, or eliminating the anatomical charts (which I assume are almost never actually referenced)—but this would likely be counterproductive, as it may impair the way that patients experience the medical environment.

In a medical context, theater and storytelling can be really powerful tools (though, admittedly, for both good and bad). In a famous 1955 paper in The Journal of the American Medical Association, Henry Beecher noted:

Placebos have doubtless been used for centuries by wise physicians as well as by quacks, but it is only recently that recognition of an enquiring kind has been given the clinical circumstance where the use of this tool is essential.

Beecher goes on to suggest that as many as 30% of patients will have placebo responses to a particular drug. However, Vance notes that subsequent estimates have been even higher (as high as 80% – 100%), particularly for ailments that are highly susceptible to placebo responses, such as pain and depression.

Placebos themselves may be more or less prevalent based on how they are presented. For instance, place responses are more common when the pills used are larger, made of certain colors, or are more expensive. Fascinatingly, placebos effects—supported by the broader theater in which makes such effects are possible—can even occur when people have beentold they are taking a placebo! Of course, as financial advisors, we don’t prescribe drugs to our clients or address their physical health, but the key point is that is that if our minds (both consciously and unconsciously) are so heavily influenced by belief and perception that we can literally self-medicate ourselves, it would be unlikely that storytelling (and theater in which those stories are told) wasn’t highly important in a financial context as well.

The Surprising Details Our Office Can Reveal About Us

Though laboratory research in financial planning is still very young and scholars are only beginning to delve into how the offices of financial advisors can optimally be designed, we can look to other fields for insights to consider when designing a financial advisor’s office to invoke similar “theater” effects that may help clients put themselves into the frame of mind that they’re about to change their financial behaviors for the better.

Snoop by Sam GoslingOne such line of research comes from Sam Gosling, a professor of psychology at the University of Texas at Austin. In his book, Snoop, Gosling examines what our physical spaces—including our offices—can reveal about us.

Gosling’s field research, which involved “snooping” in the actual bedrooms and offices of research participants to see what he and his colleagues could determine about the individuals who occupy those spaces, found that our physical environments actually reveal a lot about our personality. In fact, Gosling and his colleagues found that sometimes our physical environments say even more about us than tools such as self-assessments. The reason for this is that while we might bias a self-assessment in a direction that we aspire towards or think others will be more approving of, our physical environment includes many unconscious manifestations of our personality in our everyday life.

Gosling refers to these manifestations as “behavioral residue”, as it is quite literally the evidence that accumulates based on our personality-driven tendencies to engage (or not) in certain behaviors. This type of evidence can be particularly revealing, as it is often the hardest to fake.

In a 2002 paper in the Journal of Personality and Social Psychology, Gosling and his coauthors identify four specific mechanisms through which such behavioral residue can emerge: self-directed identity claims (things we display for ourselves), other-directed identity claims (things we display for others), interior behavioral residue (residue which accumulates based on behavior inside or homes and offices), and exterior behavioral residue (residue which accumulates as the result of behavior that we engage in outside of our homes and offices).

In each case, an individual possesses some underlying personality-driven disposition, which leads to a particular behavior, which then leaves some evidence of that behavior. For instance, a financial advisor may be sentimental (personality-driven disposition), which leads them to collect memorabilia (behavior), and that results in an old baseball that sits amongst some other items on their bookshelf (behavioral residue). Or a financial advisor may be sensation-seeking (personality-driven disposition), which leads them to drive a motorcycle (behavior), which results in them needing to carry a motorcycle helmet around with them (behavioral residue).

The Process Through Which Personality Driven Tendencies Manifest In Our Physical Environment

Of course, the reality is that behavior (and its resulting residue) can be highly nuanced, which can lead to a lack of clarity regarding what some behavioral residue actually says about an individual. For instance, an advisor may have a baseball in their office as a way to signal that the advisor likes to watch baseball (an other-directed identity claim which could encourage a prospect or client to start a conversation on a topic of mutual interest), as a piece of memorabilia solely with personal significance (a self-directed identity claim which may help regulate an advisor’s emotions or motivation), or simply because a colleague dropped the ball on their way out of the office and the advisor is holding onto it until it can be returned to its owner (a form of residue which, at best, just tells us a bit about the advisor’s personality). But as an outsider looking in, it isn’t immediately clear why the baseball is in the environment.

However, we may sometimes be able to gain some clues

from how things in an environment are positioned. Gosling notes that there are some interesting differences between self-directed and other-directed identity claims. Because the intended audience of self-directed and other-directed identity claims are different, individuals will tend to position such claims differently within their office. For instance, other-directed identity claims would be more visible from places where clients would sit (since clients are the intended audience), whereas self-directed identity claims may be more (or even exclusively) visible from an advisor’s perspective.

As a result, when trying to learn about an individual by viewing their office, it is helpful to view the office from multiple perspectives. While an office may look neat and tidy from the client’s chair (an example of behavioral residue which would indicate high conscientiousness), the pile of papers and an overflowing waste bin hurriedly stashed out of the client’s sight may tell a different story.

But the reality simply is that what we display in our physical spaces (both intentionally and unintentionally) can say a lot about us. Which means it’s important to carefully consider what our environment is saying about us, and whether that aligns with the message we intend (or desire) to convey!

How We Can Better Manage The Theater Of Financial Planning

When it comes to better managing the “theater” of financial planning, the first thing to do is acknowledge that it exists.

Again, particularly for those of us who are most strongly drawn to the technical side of financial planning, this can be a challenge. While the quality of our services does matter, our ability to communicate our findings to clients (storytelling) and the broader environment in which we do that storytelling (theater) may matter just as much, if not more, than our technical skills. And this may be particularly true when it comes to influencing whether our clients actually follow-through and implement the strategies we recommend.


Depending on a particular advisor’s office arrangements, they may have more or less control over how an office is set up, but there are always ways in which we can craft our environment to send better or worse signals to others.

At the most obvious level, are the signals that we intend to send to clients. While many of these signals will be common to many advisory firm offices—signaling characteristics such as competence, professionalism, trustworthiness, etc.—they are still important boxes to check. Though the doctor who wears a lab coat isn’t “unique”, the doctor who doesn’t may not put his or her clients in the best frame of mind to increase the client’s odds of healing. In the context of advisory firms, awards or degrees displayed around an office, the magazines available to customers in the reception area, and the way we dress, are all signals to consumers who have relatively little information use when assessing our intangible services.

Ideally, we are signaling information that aligns with our true goals, skills, interests, values, and personality to others. For instance, if an advisor takes pride in their professional accomplishment and proudly displays a credential worthy of admiration, Gosling notes that their inner and outer selves would be in alignment.

However, our inner and outer selves are not always aligned. In particular, our environment also contains “deceptions” that we may sometimes use to try and mask our actual traits. For instance, most people would generally like to be thought of as organized, as it’s a trait that is generally respected and rewarded in our society. As a result, regardless of how truly organized we are, most people will try and tidy up to at least give the impression they are organized. But, unfortunately for those of us who may not be naturally inclined to alphabetize bookshelves, deceptions are often fairly easy to spot. Of course, that doesn’t mean we shouldn’t still try our best to be organized, but we should be careful how we portray ourselves to others, because claiming to be organized when we are not is likely to perceived worse than being just being genuine selves.

Unfortunately, when it comes to areas where consumers lack the information needed to provide a meaningful assessment (e.g., assessing the quality of investment recommendations), deception can be harder to detect. Consider the famous CFP Board commercial in which a DJ was transformed into a financial advisor who appeared to come off as reputable to consumers based on how he was dressed and the professionalism of his (staged) office setting. The “experiment” was set up in a manner which took advantage of the “theater” of financial planning. Illustrating that since most consumers aren’t financial advisors themselves, they struggle to assess the true quality of a financial advisor. As a result, by simply being confident, looking the part, and using some industry buzzwords (e.g., asset allocation, 401k, etc.) the DJ was able to come off as knowledgeable and trustworthy.

Had the CFP Board put the same DJ in a rundown office, dressed casually, and had him perform without confidence, it’s doubtful consumers would have had the same response. In fact, you could likely put a highly qualified advisor delivering excellent advice in the same rundown/casual setting and consumers would still doubt whether the advisor was knowledgeable, because they can’t actually assess competence in the first place, though the wide range of contextual clues they can assess would be indicating something was not right. (This is also why credentials like the CFP marks help, as it provides a meaningful signal of competence in an area where consumers would struggle to make that assessment themselves. Because, as the DJ commercial notes, anyone can put on a suit and tie, but not everyone can get the CFP marks!)

Of course, financial advisors should never fake credentials or expertise that they do not have for both ethical and legal reasons, but the point remains that the “theater” of financial planning is so powerful, that it can even mask otherwise unqualified individuals. Which means it is crucial for those whoare competent and ethical to leverage all the tools at their disposal!


Gosling uses the terms “seepage” or “leakage” to refer to behavioral cues about our personality (positive or negative) that are revealed without our being aware of them. One particularly powerful way in which this can happen is through our clothing.

For instance, conscientiousness is one of the personality traits that is often found to be the most desirable in a professional context. Based on the findings of some prior studies, Gosling put together a “Snooping Field Guide” which includes both the items that snoopers most often used to assess a particular personality trait, as well as the items that were found to actually predict those traits best. In both cases, formal dress was found to be the strongest indicator of conscientiousness.

As a result, this is one more reason advisors may want to be very careful before dressing down. Particularly when we don’t like to dress up, we’re likely to engage in all sorts of motivated reasoning to convince ourselves it is okay to dress down. However, the formality of our clothing is perhaps the single greatest visual signal of high conscientiousness that we can send.

In terms of other clothing-related traits that have been found in prior research, observers have previously relied on:

  • Fashionable dress as an indicator of openness
  • Make-up as an indicator of openness and extraversion
  • Showy dress as an indicator of extraversion
  • Non-showy dress as an indicator of conscientiousness

Notably, past research indicated these weren’t actually reliable indicators, but the key point here is that those evaluating the personalities of othersthought they were. Interestingly, dark clothing was an indicator of neuroticism, though it was not picked up on by those doing the evaluations (it was identified by researchers evaluating data after the fact).


Not only does the way we communicate affect the quality of our storytelling, but it is also a way in which people tend to try and pick up clues about the personalities of others.

Again noting that conscientiousness is among the most desirable traits when making hiring decisions in a professional context, advisors may want to be aware that the following were used by reviewers to assess one’s level of conscientiousness:

  • Controlled sitting posture
  • Touches one’s own body infrequently
  • Fluent speech
  • Calm speech
  • Easy to understand

Notably, again, these weren’t actually found to be meaningful predictors of conscientiousness, but they were cues that people relied on when making assessments. In other words, right or wrong, those who exhibit these queues may be more likely to be perceived as conscientious, which can make a difference when prospects are interviewing prospective financial advisors.

While we don’t know enough about what clients look for in an advisor to have much confidence in how one might signal other traits (and preferences likely vary based on a client’s own personality), some other notable indicators included (*indicates cues that were actually found to be predictive of the underlying personality traits):

  • Openness: friendly expression, self-assured expression, extensive smiling, pleasant voice, fluent speech, easy to understand, and calm speaking
  • Extraversion: Friendly expression*, self-assured expression*, extensive smiling*, relaxed walking*, swings arms when walking*, loud and powerful voice*
  • Agreeableness: Friendly expression*, extensive smiling, pleasant voice
  • Neuroticism: Grumpy expression, timid expression, little smiling, lack of arm swinging when walking, stiffness when walking, weak voice, unpleasant voice, halting speech, difficult to understand, hectic speech


As discussed above, signaling competence is particularly tricky since the prospect or client is presumably less knowledgeable than the financial advisor. Which means, ironically, most consumers don’t even know how to determine whether a financial advisor is competent or not, and aren’t even able to judge the quality of their answers to demonstrate competency. Which means it becomes all the more important to properly “signal” competence by any means possible (especially for those who really arecompetent!).

The first is through professional designations. When consumers believe that a designation is credible (and unfortunately, it’s the belief here that actually matters), the credibility of the designation conveys credibility to the advisor who has it. Which means the CFP may be meaningless to a consumer who is unaware of the CFP or under the impression it is not a meaningful designation, whereas a meaningless designation can sway a consumer if they believe it sounds important. Fortunately, the CFP marks have become a more credible signal as consumer awareness continues to rise with the CFP Board’s public awareness campaign.

A more general way in which we signal competence/intelligence is often through college degrees. While economists continue to debate over whether college actually makes us any smarter, it is at least generally accepted that, all else equal, more intelligence makes it easier to get into more prestigious schools, and that college itself serves as a means for individuals to signal some combination of intelligence and work ethic. Given that most people know it is very hard to get into Harvard and earn a Ph.D., there is a major competency signal conveyed by having a Ph.D. from Harvard. Of course, it’s entirely possible to have a Ph.D. from Harvard and still be clueless about financial planning. But for a consumer trying to findsome meaningful signal of competence, “he/she was smart enough to get a Ph.D. from Harvard” is better than nothing.

As a result, advisors may want to think carefully about how they display professional credentials and degrees in their office. This doesn’t mean such signals need to be in front of clients at all times (nor does it mean advisors need to go out and acquire advanced degrees, as there is certainly considerable diminishing marginal returns in highly personal business like financial planning), but much like the theater of medicine is often elevated by having a doctor’s credentials visible, financial advisors may want to do the same.


As boring as it may sound, there’s a certain degree of “fitting in” that is likely helpful in managing the theater of financial planning.

While it would be nice to have some actual research to back it up, there are likely some items clients just generally associate with “finance” that would be helpful for setting the stage of financial planning. Items like tickers, charts, spreadsheets, and maybe even CNBC running in the background could be items which fall into this category.

The irony, of course, is that many advisors like to steer their clients awayfrom CNBC and a lot of these financially-related items. Nonetheless, to the extent that clients might subconsciously associate them with the theater of financial planning, hiding them from clients could actually make the advisor seem less credible. Which means that while advisors may not want to place such TVs in a waiting room where clients would actually watch it, a strategically positioned TV a client might see walking back to an advisor’s office could still help set the stage (without encouraging the potentially harmful client behavior). If anything, it may help to convey “we keep an eye on CNBC, so you don’t have to!”

Beyond those types of props, there is the general professional nature of an office. The idea here is to (accurately) create the sense that the client is here to talk about something important with a qualified professional. What that means likely varies a lot from one market and target clientele to another, but, to the extent possible, advisors should probably strive to ensure they at least match the general quality of offices that clients may be meeting with competitors in. Because while having a professional-looking office like everyone else may not ensure you get the prospective client, not having an office on par with competitors could genuinely lose the prospect.


Perhaps the most effective way to “customize” an advisor’s office is to signal to a niche. Whereas the hope for much of the setting is that it invokes the theater of financial planning without actually drawing overt attention, when signaling to a niche, advisors should be looking for key “other-directed” identity claims they can send.

Of course, these specific signals will vary based on an advisor’s target niche, but the key is to be able to send some type of signal that displays a commonality that the client is unlikely to find with other advisors (at least in their immediate market).

Additionally, as a general principle, the more “costly” a signal is to send, the more meaningful it will be to those who receive it. This could mean something like cost in terms of time (e.g., a photo/award/etc. associated with donating considerable time to a nonprofit of shared interest versus a mug with the nonprofit’s logo on it). Or, while riskier, it could also be a cost in terms of signaling a shared identity that would actually be harmful for an advisor to send to someone outside of that niche. For instance, an advisor who works with many members of a particular union could display something that signals solidarity with that union. Not only is the signal of solidarity useful on its own, but the fact that it may mean fewer business prospects for an advisor (e.g., management or business owners who may not appreciate the signal of solidarity with employee unions) makes the signal more impactful than one that is “cheap” and would be universally or nearly universally agreeable anyway.

The bottom line, though, is simply to recognize that consumers are influenced by factors which have no rational basis for evaluating a financial advisor (e.g., wearing a suit, quality of the office, etc.). But advisors should be careful assuming they can convince clients that this behavior is “irrational”. For many, the story they hear, and the broader aspects of the “theater” that it takes place in, will be influential. Further, the inherent conflict of interest between any financial planner and a potential client they are prospecting makes consumers reasonably suspicious of any attempts rationalize less desirable aspects of a particular advisor’s theater, so advisors trying to persuade clients to ignore these factors may struggle more than those who simply acquiesce to reality and leverage them instead.

Of course, the power of storytelling and staging the theater of financial planning can be used to both further and harm client interests—so advisors have to be careful to use it for good—but ultimately the theater of financial planning should not be overlooked. Whether it’s in the process of trying to get new prospects or convincing existing clients to implement an advisor’s recommendations, managing the theater of financial planning plays an important role.

So what do you think? Do you have any strategies for managing the theater of financial planning? Can it be easy to overlook this aspect of the financial planning process? What do you feel are the most important traits to signal to clients? Please share your thoughts in the comments below!


The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT

The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT


While it is becoming increasingly clear that “robo-advisors” are not disrupting human financial advisors, the adoption of robo technology by financial advisors themselves is beginning to shift the competitive landscape… both amongst financial advisors themselves, and the technology vendors who serve them, as the very role and value proposition of financial advisors themselves begins to get re-defined.

In this week’s discussion, will discuss the latest advisory industry and FinTech trends – including the Robo 2.0 trend currently rolling through the industry, why Robo 2.0 will spur the rebirth of next generation financial planning software, and why it’s the rise of better “small data”, rather than “big data”, that is likely to be most important to advisory firms in the coming decade.

One of the biggest trends rolling through the advisory industry right now is rise of “Robo 2.0”. Robo-Advisor 1.0 was all about companies like Betterment and Wealthfront, which made convenient and easy-to-use tech tools for opening accounts, investing those accounts, and managing them over time, and offered directly to consumers. However, we’ve learned that only a small subset of consumers actually want to buy these solutions directly, while there is a large base of financial advisors who want to use these same tools within their own businesses. As a result, Robo 2.0 tools are focused on facilitating the ability of financial advisors to quickly and easily open investment accounts, get the dollars actually transferred, invested, allocated in reasonable models, and model management tools to make it very easy to allocate and rebalance models along the way. The good news for advisors is that these trends drive efficiencies and lower business costs. But the challenge going forward is that now that all of this can be done with a click of a button, advisors need to find new ways to add value for their clients.

Looking forward a bit further, the biggest change we’re likely to see in the industry 5 to 10 years from now isn’t actually the adoption of Robo 2.0 tools, but instead, the rebirth of next-generation financial planning software as investment management receives less attention. As advisors are forced to focus on other areas of financial planning – everything from HSAs and healthcare conversations, to debt management issues, and cash flow planning more generally – advisors are going to need better financial planning software tools to help clients with these issues. Which presents a huge opportunity for those who are interested in building tools oriented towards financial planning, and advisors who want to focus more on financial planning… while for those still mostly focused on investments, the next decade is going to present more of a competitive business challenge.

Another trend that many have predicted will influence the next decade is artificial intelligence, machine learning, and big data. But I’m very skeptical about the discussion of these technologies coming into advisory businesses. Because the reality is that so many of the challenges in what we do for clients are not big data problems. Instead, it’s small data – i.e., the uniqueness of every advisory firm and the clients they serve – where better insights are needed. So while there will certainly be some applications for large firms to leverage big data and bring insights on the entire industry, at the advisor level, the most exciting advancements are in the small data areas that are directly relevant to firm owners and their clients. For instance, automated business management and benchmarking data that makes it easier to track the components of business growth and performance, and tools that automate the many business management reporting processes that advisors are manually doing today.

The bottom line, though, is simply to recognize that we’re in the midst of some big FinTech trends within the advisory industry right now. So if you are an advisor who wants to stay relevant and continue to add value to your clients in the future (or a tech provider who wants to make the tools to help advisors do so!), it is important to understand how these trends will shape financial planning in the future!