In every industry, professionals look to thought leaders and seasoned veterans to help them understand how to succeed. It’s human nature to emulate and learn from others for our own growth. Finding a mentor that is fully invested in your success can help build your reputation, your business and your knowledge base.
As times change, though, it’s important to identify which ideas are still relevant, and which ones have served their purpose. Practices that were revolutionary only 10 years ago might be considered antiquated today.
As the SECURE Act was put into effect, it drastically changed the way we help our clients plan for a secure retirement. Since that time, the ramifications seem to keep cropping up. The message, though, remains the same. We need to rethink how to best transfer wealth from one generation to the next. And, for our clients, the best way is most likely an option that minimizes taxes.
Specifically, the SECURE Act is causing us to pay more attention to beneficiary designations, as some recent trends may not be as appropriate as they were before the Act. As I travel around the country and meet with different advisors, I see how easy it is to name a trust as the beneficiary and just allow the document to dictate the beneficiaries and their payouts.
But post-SECURE Act, it’s the government who’s going to dictate those accelerated payouts. Now more than ever before, it’s important to keep an open mind to techniques and strategies we didn’t consider previously.
The SECURE Act forces us to look at alternatives that our mentors and parents never had to contend with when transferring assets to the next generation through our spouses.
The simplest and most common beneficiary designation is to name the spouse. No surprise there. Almost every client wants to protect their spouse when they pass away. And I’m not suggesting that we sway clients away from naming their loved one as a beneficiary of our qualified accounts. But I do believe this new legislation offers us the chance to have better, more thoughtful conversations around income planning – and to begin those conversations earlier in the lives of our clients.
If the ultimate goal is to protect the spouse and then pass the remainder of the wealth to the next generation, creative planning is necessary to minimize the tax impact. The SECURE Act changed the rules when it comes to non-spouse beneficiaries, which requires them to take the money in 10 years or less.
Typically, children receive this inheritance at their peak earning years. If we stick to traditional planning, the amount of tax to be paid is accelerated and increased. But there are ways to help further stretch the income to the next generation and not affect the spouse’s income probabilities. How? It starts with some creative planning and an income discussion before the death of the spouse.
First, think about naming two beneficiaries as the primary. One is the spouse. The other is the child/children. If sufficient income distributions are coming to the surviving spouse, the spouse can defer the tax and distribution until their required minimum distributions. The children can immediately defer the tax over 10 years with the new distribution rules. At the death of the surviving spouse, the children will have another 10 years of deferral. Therefore, you have essentially doubled the distributions for the children on the first parent’s death. When you think of the massive tax acceleration and increased tax rates that are in effect, this small tactic can make a world of difference to the next generation.
In addition to providing a much-needed service to our clients and their children, we also make ourselves more valuable to the next generation. They are less likely to move to another advisor after their parents are gone if we’ve proven our ability to meet, and exceed, their expectations.
Securing generational assets may be the most valuable asset-gathering strategy a financial professional can deploy over the next 25 years. During that time, $30 trillion of assets will likely transition from one generation to the next.
If we want to grow our business and revenue, it’s essential to think about how to protect it during generational transitions.
Focusing on the next generation and guiding them through the impact of The SECURE Act is vital when it comes to retaining clients and keeping assets with your practice.
It’s ironic, isn’t it, that as individuals, most planners hate change, yet we work in an industry notorious for it. And make no mistake—the Secure Act has changed the game. But, despite the changes it’s brought, success is still possible. We just need to be more purposeful in our planning, and more diligent in our conversations with our clients.
While the new legislation brings guaranteed income to the front of mind, there are several pitfalls that are harmful to our clients. These can’t be ignored and must be addressed for our clients to have success in retirement and legacy planning. Several questions need to be asked during each and every client interaction – regardless of whether it’s a new client or someone you’ve been working with for years.
By always asking these three important questions, you’ll make sure to steer your clients clear of the hidden traps within the Secure Act.
The answer to this question probable hasn’t changed with the passage of the Secure Act. The path travelled to pass assets to heirs, however, probably should. With the modifications to the stretch provisions, there are reasons to name additional beneficiaries in certain situations. Naming a trust as beneficiary to complete your clients’ legacy wishes needs to be reviewed, especially for those trusts requiring required minimum distributions to be disbursed to spendthrift individuals.
Understanding the “why” behind these beneficiaries is helpful when advising clients on the proper path. The more your clients understand, the more confidence they’ll have in you and in their financial plan. Too often, we just add a person on the beneficiary line without explaining the rationale behind the decision.
When discussing changes brought about by The Secure Act, this is a big one. If the goal was to just let the client’s family receive a lump sum, there is probably no need to change. But many people have specific income plans to either distribute or inherit family wealth, and a lump sum isn’t going to meet their needs.
The Secure Act provides a new angle to the sandwich generation. How you receive an inheritance and pass your assets to your heirs is affected by the new legislation.
Your clients are stuck in the middle of $30 trillion of wealth transfer over the next quarter century. The assets they receive and give away are greatly affected.
Your clients need to understand the ramifications of the new qualified plan payout rules from every perspective – control of the asset, taxation and family wealth transfer. As their advisor, you have an opportunity to provide them with the information they need to retire securely. You’ll be strengthening your relationship at the same time.
Granted, for the most part, tax still needs to be paid. The Secure Act accelerates the taxation on qualified dollars to pay for some of the other benefits of the act. Many clients have set a target amount, after tax, that they hope to be able to transfer to the next generation.
Many tax levers create a complicated system. Due to the acceleration of the payout, it’s easy to pull a lever that triggers unexpected taxation if you’re not careful. Business owners taking advantage of the Qualified Business Income, for example, might forfeit that benefit due to an inappropriately planned inheritance. Means testing and other taxes tied to income thresholds like Modified Adjusted Gross Income (MAGI) will be pierced, causing additional taxation on inheritance.
Given the massive amount of wealth scheduled to transfer in the next 25 years, this simple acceleration of the payout will likely increase overall tax revenue. Clients don’t need the surprise of additional taxes, especially those high-wage earners that are using the Tax Cut and Jobs Act to control taxation.
How to Help Your Clients Navigate the Changes
Once you have answers to these important questions, you have what you need to start creating solutions. There are many ways to simulate the previous stretch provisions and control taxation of the inheritance.
Some things to discuss with clients after understanding the above three questions:
Sit down with every client and review these three important questions. Then help them understand the solutions that will help them achieve their goals.
Nobody likes to get burned by a decision.
But if you’re reading this, you want to grow your business. As we transition to a new generation of financial planners, one increasingly popular way to find growth is through mergers and acquisitions.
Buying a book of business is certainly an option when you are looking to grow exponentially. But just as it’s important to select the right clients to work with, you need to select the right business to purchase.
When looking to acquire another business, there are three main points to consider.
Recently, I was reviewing some financial planning firms that were sale and some valuations were extremely high.
If you’re the seller, you want your business valuation to be as high as possible. But as the buyer, you are looking for a valuation that reflects not just current conditions, but what to realistically expect in the future. Although it sounds counter-productive, a good way to do that is to look at past valuations.
Start by asking yourself what the current valuation is based on. Is it strictly market performance, an effective money manager, or outstanding customer service? And then compare that valuation to one from the past. The year 2010, for example.
Following the financial crisis, we have seen a sustained bull market like none other in recent memory. If the valuation is based on is market performance, the value of the practice is questionable, as anyone could grow the business in the backdrop of the bull market post-financial crisis. What did the valuation look like in 2010, before the sustained bull market?
In some cases, the money manager might have outpaced the market and is driving the valuation. In this scenario, you need to determine the longevity of that manager. How much it will take to keep that person incentivized in the future, especially if that person is in the office?
Finally, you want to understand the service models and if they are aligned with your current thinking.
Growing the business organically, without respect to market performance, is an ideal situation.
It’s important to look beyond surface metrics when considering buying a business. That is, don’t base your decision on the obvious factors:
Although those factors need to be considered, it’s important to look past them. Many times, the increase in value to the purchasing firm is to trim costs through economies of scale which typically leads to loss of jobs and morale issues.
Instead, you should be looking at the metrics of the client base and the opportunities that might exist.
In a recent advertisement for several financial firms being sold, the average age was 59. That block of business might complement your existing business, but it might also create new opportunities for guaranteed income, estate planning, beneficiary reviews and next-generation planning. Are you willing to expand your practice to include services those clients will need in the near future? If yes, great. If not, you will be doing your clients a disservice and potentially hurting your existing reputation. Think about the changes you need to implement to grow the business exponentially.
Many financial planners are looking at succession planning for their clients. Those clients are in their mid to late 50s. Our research has shown time and again that traditional systematic withdrawal provides a level of risk in income planning. A less risky option is the Income Alpha strategy. It allows clients to set aside a certain amount of assets for pure growth which will enhance the assets under management growth in the long term. Without similar income strategies, the assets in the book of business are likely to deteriorate over the next several years.
The income strategy should be considered in the purchase price. With current valuations nearing three times the gross revenue, the wrong income strategy is a recipe for disaster for the purchaser. Having a strong income strategy for older clients makes sense for the clients and the value of the business. With the appropriate strategy in place, there should be a multiplier effect on the value of a business as assets grow. Additionally, passing those additional assets to the next generation will help grow and retain the beneficiaries’ assets in the future.
Educate Yourself Before You Buy
We all want to grow our business exponentially. Buying and merging with businesses is sometimes viewed as the easiest way to do it. And, with the current age of many planners, there will be ample opportunity to buy books of business. But, just like any other big business decision, acquiring a business requires you to do your homework.
Make sure you understand the direction of the firm when considering a book of business with clients nearing retirement age. The negative flow of assets may represent a unique look at the value of the seller’s book of business.
Transformational Tactic: Don’t get burned by high valuations. Think before you buy. Seek to understand what is behind the numbers. Don’t buy a business that doesn’t fit your goals for growth.
Transforming your business requires a marketing strategy that works. Over the past few months, I’ve talked about the importance of clear and concise messaging, the advantages of automating where you can, and how to earn free marketing reach from news sources.
I believe in the value of marketing. It’s a great way to open the door and start building a strong, lasting relationship. If you’ve started implementing some of these suggestions, but haven’t noticed a change yet, it’s important to examine why.
When I talk to advisors about their marketing and client acquisition plans for 2020, I hear more discouragement and frustration than anything else. Do any of these answers sound familiar?
Marketing and prospecting have always been a challenge in our industry. For everyone. But instead of letting it discourage you, let’s step back and examine pieces that might make a difference. It’s not necessarily new information, but it is extremely relevant to your plans for 2020.
People are distracted. This isn’t the first time you’ve heard that, and it surely won’t be the last. To be heard above the noise, you must make your message extremely clear. Most likely, you are catering to prospects, not to clients. Your message needs to be so simple, so thematic and so compelling that the prospect wants to engage with your personal brand.
Think about how you use the internet. Today’s audience likes to scan, not read. Your business has seconds to get a point across – not minutes. As consumers, we stay on a webpage for fewer and fewer seconds every year, less with every added distraction.
Your brand must speak to the emotional transformation that your prospect wants to create in their financial life.
You know what they are looking for. Confidence. Knowledge. Security. Organization. Peace of mind. You need to be writing the story with your prospect as the main character — the hero. Too often, we make ourselves the hero and lose the prospect during the initial interactions.
So, how do you do that? How do you make your client the hero and guide them to their goals? Most clients are looking for someone to guide them through the complexities of their financial decisions with a simple and clear path.
Think about avoiding analysis paralysis. If the information is too much, the person will simply not do anything and save embarrassment, fees and time. And they won’t find out how bad their situation might be. That’s extremely frustrating for everyone when a professional (YOU!) can help rectify the problem.
Clients are seeking advice. Specifically, they want to engage with a professional in a low-risk manner. One of the best ways to do this is to get a feel for the advisor before agreeing to meet. Many would prefer to see their prospective planner in action during a seminar. For them to do this, your website needs to clearly show them how to register, call or reserve a seat. They need a simple call to action to focus on, without a lot of other distractions. We’re scanners, after all. No one’s going to hunt and peck.
Simplifying and clarifying your message can keep prospects on the path, speed up your sales process, and save you thousands of dollars.
Unless you live and breathe data and consider yourself to be one of the tech-savvy, the mention of algorithms probably takes you outside of your comfort zone. But stay with me for a minute. You can have the best site in the world — one that speaks to the heart of the problems your target market — and still not get results. Why? The rules of the internet search game change frequently.
In October 2019, Google changed its algorithm for searches. Their BERT algorithm is an expansion of their 2011 PANDA algorithm that scores clarity and quality higher than quantity.
This matters because it’s now more important than ever to be crystal clear. Understanding how searches value a site is critical to marketing. 93% of online relationships begin with an online search and Google controls 65%-70% of the searches.
Chances are, your site is not getting the exposure it deserves in a world of noise.
You must understand the rules of the game to succeed. It means staying on top of changes and making sure you have the right messaging to drive prospects to your site. Although it requires some hard work and diligence, it could be exactly what you need to distinguish yourself and attract clients.
Transformational Tactic: Take time to create a simple, clear brand message that resonates with your target audience and maximizes current algorithm searches.
We’ve all been warned against the dangers of succumbing to “herd mentality” and blindly doing something just because everyone else is. There’s a reason that clichés survive, usually based on a grain of truth. As humans, we feel validated when we know that others are doing the same thing or following the same thinking.
Take asset allocation, for example. Not long ago, ThinkAdvisor.com published an article warning large brokerage firms against using a 60/40 allocation strategy. On the plus side, the article noted that larger firms are recognizing how global markets affect investing. The point of the article, however, is that bonds may not produce the same return as in previous years. Treasury yields are low and global events have put foreign bonds in negative yields. Those are all real possibilities that need to be considered when advising our clients about investments.
But despite these warnings, financial advisors continue to present solutions that are eerily like previous recommendations. The recommended allocation presented different asset classes with more and less risk than bonds. Arguments were made that the discussed asset classes performed better than bonds. But they didn’t ask some important questions:
And here’s where herd mentality rears its ugly head. We continue to do the same thing we’ve always done. The same thing everyone else is doing. We chase yield and returns.
And that leads to an opportunity for you.
Move Away from the Herd
Here’s your chance to gain market share, grow your business and attract clients with innovative new ideas. While everyone else is repeating the same old lines and offering the same tired recommendations, you can provide a new strategy to your clients — one that is impactful beyond preservation of capital and a few basis points in yield. Thinking differently makes you stand out in your community and with your clients. And it attracts prospects.
Providing a solution that meets the demands of changing demographics and reaches the most needed segment of the population – near and current retirees – positions you as the thought leader in your market.
Anyone can move money with a click of a button to chase yield. Honestly, that is the least valuable service we provide. But as a thought leader, you’ll have clients coming to you for ideas that work.
What Makes You Different?
You still may hold yourself out as a money manager with a focus on asset allocation. And you’re right —asset allocation is important. But in the new world of relevance, you must also provide income. The more stable and dependable your retirement income strategy is, the better positioned you are to take advantage of the greatest shift from the workforce to retirement we have ever seen.
By providing income strategies, you separate yourself from the herd of other asset gatherers and managers. That separation wins clients and prospects. They don’t want to pay for something they can get from anyone else or even do themselves with today’s technology.
They want answers to their most difficult problem – retirement income.
It’s Time to Stand Out
You won’t separate yourself as a thought leader by following the herd. Clients don’t win in investing when they invest based on herd mentality, and neither should you. If you do the same thing as others or stick to the outdated strategies used in the past, you will get the same results. It’s time to transform your business and step out in front.
Separate yourself from the herd. Recognize the opportunity to transform your business by taking our free course.
© 2018 Ash Brokerage LLC.