Wealth Management
(New York)
No matter how many times you tell them that renting a vacation home is a better financial idea, many clients get the “I want to buy a vacation home bug” and can’t get it out of their system. When that happens, here is a few things of which to remind them. Firstly, their vacation home will not have the same capital gains tax exemption as their primary residence. Additionally, costs associated with the property, including insurance, property taxes, and possibly fees associated with renting the property, can all rise faster than their incomes, especially if they are on a fixed income in retirement. Vacation homes can also be complicated from an inheritance perspective, as some heirs may want to keep the property while others may want to sell it.
FINSUM: All good arguments. Hopefully some clients will listen!
(Washington)
Rollovers are one of the key areas of focus for advisors within the new SEC Best Interest rule (“Reg BI”). This is not just because of their importance for advisors generally, but because there was still a good degree of uncertainty over how the new rule would be applied to the area. Recent edits to the rule clarify its application, and the results are likely to seem a little unfavorable, as they are more strict than previously. In the past, rollovers were only subject to Rule 2111 if securities were to be bought or sold in the plan. This left a bit of wiggle room. However, the new Reg BI has been modified and Rule 2111 now applies to any situation, regardless of whether securities are involved. Thus, rollover recommendations by broker-dealers are now completely governed by the best interest standard in all scenarios.
FINSUM: Not unexpected, but many were hoping for more flexibility. At least there is now confirmation.
(Los Angeles)
Regulators might be about to really shake up the all important annuities market. The National Association of Insurance Commissioners, which is comprised of state level regulators, has just proposed a new suitability standard for annuities transactions. The new rule would require insurance brokers to act in the best interest of clients when recommending products. The specific wording used says that the insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest” and that they must “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest”. Speaking about the rule, the NAIC says “It’s in harmony with what the SEC did but goes a little further in providing clarity as to what the conduct standard actually is”.
FINSUM: The annuities market has had some bad behavior so a clean up to give peace of mind to all involved is warranted, but this will likely mean big changes if it comes to pass.
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New York)
Yesterday we ran a piece explaining the level of AUM advisors need to successfully breakaway (cheat sheet: $50m-$100m). Today, we wanted to hit on another key topic: what percentage of clients typically come with an advisor when they break away? Now, this obviously varies a great deal based on particular circumstances, but according to Kestra, the typical rate is 80% in their experience.
FINSUM: This is useful, but only to a point because many advisors will have a great deal of their assets concentrated in a small group of clients, meaning it is a fairly tight number of make or break accounts.
(New York)
Breaking away is a tense process for advisors. Not only is there the emotional “fear gap” about venturing into the unknown, but even considering the move is difficult. One of the major reasons why is that it is hard to know how much your comp might increase or what kind of deal you might get for moving. Advisors often ask themselves “what does my business need to look like in order to make a successful move?”. Well, here is some insight. Larger firms, say with $5m+ plus in revenue can easily afford to make the transition and hire all the consultants necessary to make a successful switch. However, the less known reality is that even solo advisors with between $50m to $100m in AUM can be very successful in moving. Payouts for such advisors can approach 80%, meaning those bringing in $500k of revenue can reasonably hope to keep $400k of it. As a rule of thumb, advisors’ take-home pay usually jumps 10-15 percentage points when breaking away from a wirehouse.
FINSUM: This is very useful information. We drew it from a number of sources, including Kitces.
(New York)
There is a little known stimulus behind the current trend of advisors breaking away from wirehouses. While many cite freedom of operations and compensation as key reasons for leaving wirehouses, one of the big driving forces is much less appreciated: the requests of clients themselves. According to Shirl Penney, CEO of RIA network Dynasty Financial Partners, “Clients are not simply following their advisors, but sometimes giving them the idea to break free … That’s the dirty little secret that not a lot have been talking about”. High net worth clients increasingly want their advice separated from the manufacturers of the products they buy, which means going independent makes sense for advisors. “So if you’re a million-dollar client of one of our advisors, you now can get independent advice, separate and safe custody and products from around the street the same way that may have been reserved for a billionaire 20 years ago”, according to Penney.
FINSUM: This topic is quite poorly discussed, but seems very salient. We would welcome any emails/opinions from advisors about the extent to which they hear this from clients. Reach us at This email address is being protected from spambots. You need JavaScript enabled to view it..