Transitions Magazine - June 1 2010

Are You

TABLE OF CONTENTS

FOCUSED?

Letter from the Editor ..................... 1 In the News .................................... 2 Calendar of Events ........................ 5 The #1 Mistake Advisors Make: Losing Focus ................................. 7

by William R. Nelson, Ph.D. and Scott Winters How to Set Up Your Business: Profit, Loss and Uncle Sam ......... 11

by Sydney LeBlanc The Exit Planning Process: Step Seven ....................................... 15

by David Leitner, Esq. CExP™ Beyond Reproach: Ethics Integrity, Trust ............................... 19

by David Loeper, CIMA®,CIMC®

Page 7

Page Page 77 The Truth About Guarantees

Bart Schannep CWS®

Schannep Financial Group Inc.

Advisor "High-Five" Page 35

Page 19

Step Out of the Stone Age Page 27

Small Business Health Care Tax Credit ......................................... 23

by Dave Williams, CFP®

It's About Time! ................................... 25

by Phillip Flakes and Nicholas A. Gudz Advisors: Farm Your Way Out of the Stone Age .......................... 27

by William R. Nelson, Ph.D. and Scott Winters linkedFA: A Conversation with President Jason Bishara ...................31 Advisor "High Five!"

Bart Schannep, Schannep Financial Group ........... 35 Resource Directory ...................... 36 Grin and Bear It! ........................... 37

SUBSCRIBE TODAY .................................... and receive a FREE eBook: "Valuing and Selling Your Business"

JUNE 2010

Business Management for Independent Financial Advisors

Transitions Magazine

From the Editor

Dear Readers, As a staunch supporter of the Money Management Institute, I'm pleased to share the following with you: MMI NAMES INDUSTRY ARCHITECT AS 2010 PIONEER Honoree Recognized For Writing First “Wrap” Fee Contract MMI, the national organization for the managed investment solutions and wealth management industry, today announced its 2010 Pioneer Award Winner. The winner will be recognized at the Gateway to Leadership Fundraiser dinner on May 19, 2010 at the MMI Annual Convention in New York. The Pioneer Award is bestowed each year on an individual who embodies MMI’s mission to serve as an advocate and catalyst for growth for the managed investment solutions and wealth management industry.

This year’s MMI Pioneer is John Lohr, co-founder of Lockwood Advisors, who began his career in 1983 and joined EF Hutton in 1987. Among his many contributions to the growth of the managed solutions industry, John is credited with creating the first “wrap” fee contract and developing much of the legal infrastructure to support managed accounts.

John Lohr

John is a prolific author, having written many financial industry books including, Somebody Else's Money (2004, 2010, Isle Press) the best selling The Fiduciary Sale (2003, Isle Press), and The Last Investment Book You Will Ever Need (Forthcoming, 2010, Isle Press).

“Each year we honor an industry leader who exemplifies the pioneer spirit,” said Christopher L. Davis, president of MMI. “Our 2010 honoree helped to build the foundations on which the industry was established.

John’s contributions to the foundation of the business live on today as a testament to his impact.” John Lohr joins a prestigious list of 32 Pioneers.

About MMI Since 1997 MMI has been the leading voice for the global financial services organizations that provide advice and professionally-managed solutions to individual and institutional investors. Through industry advocacy, educational initiatives, regulatory affairs, data reporting and professional networking, MMI supports and advances the growth of managed investments. MMI members’ advice-driven investment solutions serve an evolving worldwide financial landscape and their organizations are committed to the highest standards of fiduciary responsibility and ethical conduct .For more information, visit http://www.mminst.org Congratulations John!

From the Editor s

John has influenced much of the industry through his consulting with major Wall Street firms and industry associations on various aspects of managed solutions as well as his personal delivery of training to over 50,000 financial professionals.

Best wishes,

www.transitions-mag.com

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Transitions Magazine

Industry News Publishers Lyn Fisher & Sydney LeBlanc Editor-in-Chief Sydney LeBlanc sydney@transitions-mag.com Managing Editor Cami Miller cami@transitions-mag.com Contributors Phillip Flakes Nicholas A. Gudz David Leitner, Esq., CExP™ David B. Loeper, CIMA®, CIMC® William R. Nelson, Ph.D. Dave Williams, CFP® Scott Winters

In the News

IT Directors John Weeks Shane Hansen

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Advertising Sales • Stephanie Kunz stephanie@ffpublish.com 435.750.0062 x3 • Lyn Fisher lyn@ffpublish.com 435.750.0062 x1

Leading Chartered Advisor in Philanthropy and Accredited Estate Planner Receives Distinguished Fithian Leadership Award One of the highest honors in the financial services industry — as well as the International Association of Advisors in Philanthropy’s (AiP) top honor — was bestowed to philanthropic planner and AiP immediate past president, Johnne Syverson.

The Fithian Leadership Award recognized Syverson as a highly skilled financial planner (CFP®), a Chartered Advisor in Philanthropy (CAP®), and an Accredited Estate Planner (AEP). The award ceremony took place at AiP’s recent annual conference in Rosemont (Chicago), Illinois.

One of the highest honors in the financial services industry, The Fithian Leadership Award, was bestowed by the International Association of Advisors in Philanthropy (AiP) President Jerry Nu-

Published by: Financial Forum Inc. 550 North Main, Ste. 221 Logan, UT 84321 435.750.0062 • info@ffpublish.com http://www.transitions-mag.com

erge (left) to philanthropic planner and AiP past president, Johnne Syverson (right) of Syverson Strege & Co, West Des Moines, Iowa, at the Conference on Philanthropy in April.

The Fithian Leadership Award June 2010

acknowledges professionals with distinguished careers in service to the philanthropic community. Honorees are chosen for their efforts to uphold the standards of excellence in ethics, service and charitable planning encouraged by the Association.

The International Association of Advisors in Philanthropy (AiP) acknowledged that Syverson is the most deserving of the award this year.

Syverson is a Senior Wealth Coach with Syverson Strege & Company in West Des Moines, Iowa, and holds the distinction of being one of the first practitioners in the nation to be awarded the Chartered Advisor in Philanthropy (CAP®) designation.

Said Johnne Syverson, “I am truly humbled and honored to be chosen for this distinguished award. Scott Fithian was a leading pioneer and has made a resounding impact on me and on the philanthropic, legacy, and financial services professions.

We remember him fondly and with respect, and I will carry the torch proudly in his name.”

Syverson is one of 425 practitioners who is credentialed as a Chartered Advisor in Philanthropy (CAP®), and one of only 1,300 practitioners in the United States who is credenwww.transitions-mag.com

Transitions Magazine

Industry News

AiP president, Jerry Nuerge CFWC, CLU, ChFC, MBA, founder and owner of Financial Independence Group said, “This prestigious award is only granted to those who have shown outstanding leadership in the quest for helping the public become more aware of their philanthropic planning opportunities to help themselves and their communities make the world a better place for all of us. Johnne certainly exemplifies these traits with his efforts by specializing in values-based planning for high net worth families. His coaching strategies incorporate philanthropic values into the traditional planning process. He is most deserving of the Fithian Leadership Award.”

Companies, and his methodology continues to inspire advisors and their clients to approach their planning in a more meaningful way. linkedFA Announces Alliance with NASDAQ.com Social Networking Site for Financial Professionals Enters Into Linking Agreement with NASDAQ.Com to Expand Resources for Financial Advisors linkedFA (www.linkedfa.com), the first social networking site for financial professionals to communicate with investors and peers in a fully compliant and secure environment, today announces a partnership with NASDAQ.com.

This partnership gives linkedFA members direct access to NASDAQ’s Financial Advisor Center at http://www.nasdaq.com/advisor/

Originally named the AiP Award, the title was changed in honor of Scott C. Fithian after he passed away in 2006. Fithian is widely considered a pioneer through his innovative and ground-breaking work in the area of values-based financial and legacy planning. He was founder of The Legacy www.transitions-mag.com

The Financial Advisor Center offers numerous resources tailored to the professional interests of financial advisors.

In a centralized location, the Financial Advisor Center provides access to news, commentary, educational tools, job listings, advisor calculators and more. Conversely, users of the NASDAQ Advisor Center can directly access linkedFA and leverage social media as a professional tool.

Says linkedFA President and Founder Jason Bishara: “We are delighted to enter into this partnership with NASDAQ. com and integrate premier content into our site to enhance the value of linkedFA for our members. Social Media in the financial industry is still very new and rapidly evolving. Our growth strategy,

In the News

tialed as an Accredited Estate Planner. In addition to having served two terms as President of AiP (2007-09), he also serves as a resource to other professionals in the area of charitable tax planning.

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Industry News which includes actively utilizing feedback from members and collaborating with tier one providers of content and compliance solutions, enables us to continually improve the user experience for members, investors and enterprise organizations and evolve our offering to incorporate highly valued content onto our site.”

In the News

“Financial advisors who visit NASDAQ.com will benefit greatly from our collaboration with linkedFA,” says Bruce Hashim, NASDAQ OMX Vice President. “This enhancement to the Financial Advisor Center further facilitates the ability of financial planners to actively engage with peers and investors. Through innovation, we are empowering financial planners and promoting market transparency.”

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A recent study of financial planners, brokers and registered investment advisors by American Century Investments confirms that 44% of advisors using social media for business or business and personal use agree that it is an emerging trend with significant potential for businesses like theirs. In fact, 71% reported they have one or more future business use planned for social media, primarily monitoring industry and market news, followed by

reading expert commentary and researching people.

respected industry leaders and renowned speakers including:

linkedFA is a privately owned, independent company, founded in November 2008. It is t����������������������������� he first and only social networking site for the financial community, evolving the way financial professionals and investors connect, inform and interact. linkedFA adheres to FINRA required compliance, supervision and record keeping features. For more information visit www.linkedfa.com . For more information about NASDAQ OMX, visit http://www. nasdaqomx.com.

The Honorable Henry Paulson Jr., the former U.S. Secretary of Treasury, who will participate in a keynote question and answer session focusing on the historic decisions and events surrounding the Treasury’s response to the worst financial crisis since the Great Depression;

BNY Mellon’s Pershing Unit to Host INSITETM 2010 Financial Solutions Conference

Daniel Pink, best-selling author and expert on innovation, competition and the changing world of work, who will reveal why the traditional approach to high performance backfires on most organizations, and he will demonstrate how many common organization incentives often go wrong and can reduce both creativity and satisfaction on the job;

Pershing LLC, a BNY Mellon company, will highlight new developments in global investing and technology and key trends shaping the brokerdealer and independent registered investment advisor (RIA) marketplace at its annual financial solutions conference.

INSITETM 2010 will be held in Hollywood, Florida from June 9-11 and will feature innovative capabilities designed to help investment professionals, RIAs and dually-registered advisors prepare for the growing financial needs of their clients.

INSITETM 2010 will feature dynamic presentations from June 2010

Dr. Moshe Milevsky, finance professor, Schulich School of Business at York University, Toronto, who will offer insight on how to make the most important financial decisions of your life;

David Gergen, senior political analyst, CNN, who will focus on the major issues facing the Obama administration as the country heads toward the 2010 midterm elections; Dr. Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the www.transitions-mag.com

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Industry News

Ed Viesturs, the foremost highaltitude mountaineer in the United States, who will share inspirational insights from his 27 years of climbing in a lecture on teamwork, goal setting and perseverance.

Conference attendees will be able to participate in a broad array of seminars and track-specific breakout sessions designed to expand their knowledge of the industry and develop strategies to grow their businesses.

Discussions will include:

updates directly from Pershing’s senior management team covering the areas of Pershing’s business that may affect their own business such as, broker-dealer solutions, global solutions, managed account solutions, RIA solutions, retirement planning solutions and technology solutions. As an added benefit, conference participants will be able to earn Certified Financial Planner Board of Standards (CFP® Board), CFA Institute and Investment Management Consultants Association (IMCA) continuing education credits.

And More…

Caroline O’Connell, managing director of marketing, corporate communications and planning and product management at Pershing LLC, said, “Our annual INSITE conference is an outstanding opportunity for investment professionals and RIAs to learn about critical issues impacting their businesses, and the latest trends and developments shaping the global capital markets and brokerage and advisory industry. We are confident this year’s agenda will continue to carry on the tradition of providing our customers with important insights on how to grow and manage their businesses and enhance their client relationships.”

Attendees will also have the opportunity to hear comprehensive

To register online, please visit www.INSITE2010.com. uuu

• •

Executing Your Trading Strategy

Global

Protecting Your RIA Firm: Policies, Procedures and Client Communications

•

Building a Successful Advisor-Directed Managed Account Program

•

Find A New Niche: Becoming a Retirement Specialist

•

Investing in Hedge Funds for High-Net-Worth Investors

•

The Future of Pershing’s Technology

www.transitions-mag.com

June 2010

— 2010 —

CALENDAR OF ***** EVENTS JUNE

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June 3-4 American College's 5th Annual Conference for African-American Financial Professionals Atlanta, GA June 9-11 Pershing NSITE 2010 Hollywood, FL June 14 REISA Midwest Symposium Chicago, IL

SEPTEMBER Sept 11-14 NAIFA Career Conference & Annual Meeting Seattle, WA

OCTOBER Oct. 9-12 FPA Annual Conference Denver, CO Oct 17-19 REISA National Conference Las Vegas

In the News

University of Pennsylvania, who will discuss the future of the capital markets and the economy; and

To include your upcoming events, please email the info to: info@transitions-mag.com

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Membership has its Privileges You are cordially invited to become a member of a vibrant, actively growing, collaborative network of like-minded professionals.

Gregg Financial Network, LLC is one of the nation’s fastest growing financial services companies comprised of independent and objective member firms throughout the U.S. We leverage the collective strength, experience, skills, knowledge and collaboration to best serve our clients.

Are You A Team Candidate?

A team is a group of people with a high degree of interdependence geared towards the achievement of a common goal. A team has a synergistic effect - one plus one equals a lot more than two!

If this sounds like you, join our network and become a member of a winning team!

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To request your membership kit go to www.greggfinancialnetwork.com or you may contact us at (760) 658-5311 or info@greggfinancialnetwork.com

“While there is great value in Independence, there is even greater value in collective strength, expertise, collaboration and shared experiences.”

– Keith Gregg

1613 So. Escondido Blvd • Escondido, CA 92025 • (760) 658-5311 • www.greggfinancialnetwork.com 6

June 2010

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Transitions Magazine

The #1 Mistake Advisors Make:

Losing Focus

This article is written for independent advisors whose goal it is to profitably and prudently manage several hundred million dollars for their clients with a minimal number of employees. This deceptively simple goal is actually quite a complex endeavor involving a number of processes, all of which must interrelate, often share information, and, ideally, automatically communicate. Advisors must decide how to accomplish these tasks in a cost-effective manner that allows them as much time as possible to build relationships with investors to gather assets.

Cover Story

By William R. Nelson, Ph.D. and Scott Winters

The tasks required to run an advisory practice are daunting: • Plan and execute marketing programs www.transitions-mag.com

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Transitions Magazine

Cover Story

• Implement and maintain customer relationship management software • Produce marketing collateral • Oversee website design and maintenance • Manage assets, select stocks and funds • Research asset managers • Allocate assets • Assess risk profiles • Create investment proposals • Choose, update, and maintain financial planning software • Run Performance reporting

and outside content would cost you far more than it would to use a customizable template. Save the time and money and outsource these potential headaches.

Any one of these firms will provide you a website that will leave a positive impression on prospects and clients. Be aware that a site never closes the sale with a new client, but merely introduces the advisor to the client. Most advisors’ sites express a similar theme: we care about our clients, we are financial experts, and we have helped people for many years. Distinguishing yourself from other advisors with your website is unlikely because of the availability of the inexpensive competent option mentioned above.

Accordingly, outsourcing is the answer.

• Produce monthly account statements • Bill investors • Archive email The independent advisor has to make the decision whether to buy or produce each of the services listed above, and if performed in-house, has to decide to what extent each should be technologically automated.

As a general rule, outsourcing as many of these responsibilities frees up your attention to focus on the more important task of building relationships rather than building infrastructure.

Where To Get Help A number of competent firms specialize in providing all or most of the services listed above. Economies of scale and expertise allow these specialists to provide a better product for you at a lower price than you can provide for yourself. A simple example is website design. Several firms specialize in providing advisors with template-based websites: (www.advisorsquare.com, www.advisordesigns.com, www.financialadvisorwebsitedesign.com, www. advisorwebsites.com) To replicate a template with the data plug-ins, calculators, 8

Investors are buying you! They are not buying a brochure, an investment, a website, a performance report, or even returns. The primary product you are providing is the feeling of financial security which is an emotional state of well being. Individual, personal attention can provide a much more comforting experience than all of the inanimate objects listed above. Your attention augmented by "things" wins clients, not "things" augmented by you. You, the advisor, are the star of the show, so plan your practice to allow maximum contact between you and investors.

June 2010

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Transitions Magazine

Cover Story Outsourcing for Maximum Effectiveness Achieving maximum contact between yourself and investors requires outsourcing as much as possible to outside providers. For example, turnkey asset management programs (TAMPs) combine many of these outsourced requirements into a single solution.

The typical TAMP provides the following services: • Marketing brochures • Asset management • Asset manager research • Asset allocation design • Risk tolerance assessment • Investment proposal creation

relationships with individuals, couples, and, ideally, entire families. Marketers specialize in one to many interactions over an array of media sources. Either focus on making a career of marketing or concentrate on advising, but not both.

The advisory market is too competitive for a small firm to do anything other than what it does best. If building relationships is not your strength, then do something else. Once you have committed to exploiting your core competency, focus on it. Offload other tasks. Eliminate active avoidance, meaning do not stay busy performing tasks that are outside your core competency. If you are not in personal contact with an investor, either on the phone or in person your time is being underutilized.

Organize your technology, your staff, and your schedule to maximize the amount of time you spend building Magazine relationships with investors. Most importantly, set aside • Monthly account statements blocks of uninterrupted time during which you make • Client billing outbound calls to both clients and prospects. You are the By working with a TAMP, you can eliminate many star! Everything else is a commodity. Treat your time as hours of research, investment program, design, and money and allocate it to its highest value use. Let other technological integration allowing you to focus on your people and machines do the rest. primary task of building relationships.

• Performance reporting

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What Is Your Core Competency On Which You Should Focus?

Is it system design and integration? Then operate a TAMP which has much larger economies of scale and requires a very different skill set, namely managing a diverse workforce of developers, administrators, wholesalers, etc, with far larger economies of scale.

Is it investment selection? Then manage money. This is a high risk course, however, because most money managers don’t beat the indexes and thus have a questionable value add. Do you want your career, lifestyle, and family to depend on a value add that you are likely unable to deliver?

Is it marketing? Then run a lead generation site or advertising agency. An advisor is paid to build personal www.transitions-mag.com

Scott Winters is National Sales Director of Eqis Institutional, and Dr. William R. Nelson is the Chief Financial Strategist of Eqis Capital. Dr. Nelson’s acclaimed original research has been published in the American Economic Review, The International Conference on Information Technology ITCC 2004 Proceedings, the Journal of Economic Behavior and Organization, Latin American Finance and Capital Markets, among many others. Eqis Capital provides a turnkey asset management platform that delivers enhanced power, flexibility and efficiency. Based in San Rafael, California, the company enables Registered Independent Advisors (RIAs) and Registered Representatives (RRs) to engineer portfolios that combine diversification, sophistication and world-class insight. Eqis provides pioneering technology with a global reach. For more information, visit them at www.eqiscapital.com

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Feb 16-19, 2011 – Grand Hyatt in Weston, FL

Transitions Magazine

How to Set Up Your Independent Business: Part 5 Profit, Loss and Uncle Sam

Editor’s note: This is a great article that originally was published in a book Lyn Fisher and I wrote for John Peluso, President, Wachovia’s FiNET division (now WellsFargo Advisors Financial Network). The book is called “Independent Business Ownership: Navigating to Your New Destination.” We think you will find it very helpful when starting up your new business.

I

n order for you or your CPA to put all of the tax benefits offered to small business owners to work for you, it is crucial that your recordkeeping reflecting all business-related expenses (particularly your initial costs) get underway long before you actually make your transition to independent status.

It is never too early to begin keeping thorough records to substantiate your tax deductions down the road.

Typically, your business expenses will focus on three primary areas—capital costs, initial startup expenses and the expenses associated with creating the legal entity of your business. Let’s begin by discussing those three areas now.

Capital Costs For capital costs, those expenses representing assets purchased for the business, you will enjoy the benefit of taking a deduction for all assets up to $105,000. This includes assets you buy to furnish your office. For example, under this umbrella, your office furniture, telephones, computers and printers, as well as copiers and fax machines, will be covered. If you own a vehicle that is specifically used 50% or more by the business, then that vehicle will also be subject to consideration for deduction.

Startup Expenses

Setting Up Your Business

By Sydney LeBlanc

Startup expenses are your costs prior to the first official day you open your firm. A heavy proportion of such expenses represent costs related to research and development. For example, your research may involve investigation of the target market demographic you are seeking. The preparation of your business plan would also count here as would the cost of any consultants you may need to hire.

When it comes to startup costs, don’t neglect expenses for travel related to setting up your business, due diligence travel (if at your expense), training any employees you might hire, advertising and promotional www.transitions-mag.com

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Setting Up Your Business expenditures, as well as rent, utilities, and build-outs for your office space prior to opening your doors.

• Repairs and maintenance of your place of business

Unlike the aforementioned capital costs, startup expenses cannot be deducted outright. The exception to this rule comes into play if you choose to amortize these costs over a 60-month period beginning from the month your business opens its door.

• Internet service

Any costs associated with creating the legal entity of your new business can also be deducted over a five-year period starting with the first month your business begins operation. These costs can include legal fees for drawing up documents as well as the cost of registering your business with your particular state.

Organizational Expenses

• Mileage and parking fees • Health care benefits

• Trade association fees • Banking fees

• Local business taxes and fees

• Marketing and advertising expenses • Licenses and registration • Office equipment rental • Taxes

Because tax laws can be extremely complex, we encourage you to work with your CPA or accountant. He or she will help navigate you through local, state, and federal laws and also explain how to minimize future tax obligations.

Organizational costs incurred while forming a legal enMagazine tity must be capitalized as an asset. You can elect to deduct these expenses for tax purposes over a 60-month Even if you work with professionals, your tax responsibiliperiod beginning with the month your company is ac- ties are still solely your obligation, and you should understand how the various tax systems impact your business. tively in business. Organizational expenses include: One good reason is that you’ll have a much better under• Legal services incurred in drafting entity documents standing of the various tax choices that your tax consultant • Fees paid to the Secretary of State to register your may lay out for you. Also, with a little knowledge on sebusiness lected topics, you’ll be able to identify potential tax advan• Accounting services rendered when organizing the tages - and tax traps - in time to do something about them.

Wouldn’t it be nice not to hear your CPA say, “I could have company saved you a lot of money if you had told me sooner that you Ordinary Business Expenses were thinking about …”

These are ongoing expenses that are directly related to your Federal Income Tax business. Some common business expenses include: Federal income tax is a pay-as-you-go tax. Business • Educational expenses owners generally pay income taxes in quarterly esti• Entertainment expenses for clients mated income tax payments. Different business struc• Business travel tures (sole proprietorship, partnership, corporation, or • Subscriptions to trade or professional publications limited liability company) have different income tax re• Office supplies and materials quirements regarding filing dates, forms required, and tax rates and calculations. For more information go to www.

• Fees for legal, accounting, and other services irs.gov/business/small that lists the various business taxes • Charitable contributions and forms required for each legal structure for more help • Postage and shipping www.transitions-mag.com

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Setting Up Your Business with details and forms. www.irs.gov/businesses/ small

surance taxes. And, regardless of whether you employ others, you can also expect to owe some payroll-type taxes on income that you receive from your business (see Self-Employment Tax - below).

State Taxes Every state levies some form of tax on small businesses, but in some states some business structures (especially sole proprietorships) have little to no tax imposed. To learn more about tax structures in any given state, you can visit the Business Owner’s Toolkit site www.toolkit.cch. com which is endorsed by the Small Business AdministraMagazine tion, or a list of taxing authorities in each state.

Local Taxes Local authorities may tax personal property like machinery, equipment, furniture, supplies, and leased equipment used in a business. Some cities and municipalities also levy income taxes on any business operating within their borders. Your CPA, county government, or local municipality can provide information about the specific taxes that apply in your area and instructions for registering your business.

Payroll Tax Obligations As soon as you hire your first employee, you are an employer. That means withholding taxes from your employees’ pay and to deposit the withheld amounts with the appropriate tax agencies. Plus, as an employer, you yourself will also have to pay certain taxes based on the amounts you pay your employee(s). They may include federal, state, and perhaps local income taxes, Social Security and Medicare taxes, federal and state unemployment taxes, and, in some states, disability inwww.transitions-mag.com

Together with your CPA, you should also examine the differences between employees and independent contractors, and who are considered “taxable.” You might also want to consider the potential tax benefits in hiring your children, spouse, or other members of the family.

Remember, if you don’t hire a sales assistant or operational support administrator, you’re always going to have at least one “employee,” and that would be yourself. So, what kind of payroll tax obligations will you have? If you are a corporation, you’re likely to have all the same obligations you would have if you actually hired another employee. Your corporation can be your employer for payroll tax purposes. Whether your corporation is a C corporation or an S corporation, you’ll pay payroll taxes on (at least a portion of) your salary.

The key to controlling your payroll tax obligations is making all your payments when they’re due, so you avoid getting hit with costly penalties.

Self-Employment Tax And if you don’t incorporate, you may have to make quarterly estimated tax payments. You will have to pay self-employment (SECA) taxes. In essence, self-employment taxes are like FICA taxes, and like FICA taxes, the self-employment taxes consist of a Social Security tax and a Medicare tax. The total rate is 15.3 percent, with a Social Security rate of 12.4 percent and a Medicare rate of 2.9 percent. In other words, you have the same rates you would get by adding the employer and employee portions of the FICA taxes together.

For sole proprietorships, partnerships, and limited liability companies, the self-employment taxes are imposed on your net self-employment income, which basically is just your business income reduced by your business

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Setting Up Your Business

deductions. The amount of income subject to the Social Security rate is adjusted each year for inflation.

Federal Unemployment Tax (FUTA) The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. You pay both a federal and a state unemployment tax. The FUTA tax is not deducted from your employee’s wages. The IRS has tests to determine whether a particular business must pay FUTA tax.

quirements. Whether or not you decide to work with a CPA, you can purchase an integrated accounting software package to manage any aspect of your record-keeping. In other words, you can set up a hybrid system in which you maintain the day-to-day reports, while your CPA does the period end record preparation, summaries and reconciliations and the returns for sales tax, excise tax and payroll taxes.

If you decide to set up a hybrid system, here are several products on the market that may suit your needs, and are recommended by the American Institute of Certified Public Accountants (AICPA):

State Unemployment Tax

• QuickBooks www.intuit.com

State unemployment taxes are also paid by you and are not deducted from your employee’s wages. Each state has a different rate and different wage limits from which the taxes are calculated. For information on state-specific unemployment taxes and contact information for the agency that administers your state’s unemployment tax, talk to your CPA or use the Business Owner’s Toolkit on www.toolkit.cch.com

• Microsoft Money Small Business www.microsoft. com/money

You are required to make unemployment insurance tax filings quarterly.

Other Tax Considerations Other special taxes that are assessed at the state and local levels include, but are not limited to: Real estate taxes — assessed at the local level on all owned property based on 100% of the fair market value of the real estate. Your business may be responsible for a portion of the real estate taxes assessed on your leased office space as well, depending on the provisions of the lease.

Tangible personal property tax — this includes business machinery and equipment, office equipment, furniture and fixtures, and trucks and autos.

• MYOB AccountEdge or MYOB Plus for Windows www.myob.com/us • Oracle Financials www.oracle.com • Financial Management Solutions www.peoplesoft.com Your integrated accounting package should provide you with a basic accounting structure including: • Chart of Accounts • General Ledger • Balance Sheet

• Income Statement

• Purchasing/Accounts Payable • Bill payment/Check Writing • Cash Management

Next month, we’ll move on to more exciting issues such as naming your new firm, leasing or building an office, and other big steps in this process. uuu

Choosing an Integrated Accounting System Good record keeping is essential for your business and is necessary to comply with the federal and state reporting re14

Sources: Small Business Administration www.sba.gov

June 2010

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Transitions Magazine

The Exit Planning Process Step Seven: Estate Planning

By David Leitner, Esq., CExP™ The seventh step in the Seven-Step Exit Planning process is estate planning. This is something of a misnomer however, as no one truly plans their estate. This should be thought of more as legacy planning and asset preservation.

7-Step Process for Exit Planning Step 1 Your Destination Step 2 Valuing Your Business Step 3 Enhancing Your Value Step 4 Sell to Outsiders Step 5 Transfer to Insiders Step 6 Business Continuity

Legacy planning begins, of course, with an analysis of the assets one anticipates owning at the time of death. This can Step 7 Estate Planning sometimes be an inexact process. For the business owner, it is important to consider the business as an asset that they may wind up owning at the time they die. This is especially so if a comprehensive exit plan has not been created and implemented.

Once you have determined the objects of your bounty, your children, your surviving spouse, your favorite charity, or whomever, you must then decide in what form you wish to leave your legacy. Should it be the outright bequest of money or valuable assets, or even an ownership interest in your business, or should there be conditions and limitations placed on the wealth you are leaving.

Although your last will and testament is the centerpiece of your legacy planning, it does not begin there nor does it end there. If you are going to leave property to younger or less-savvy children, you may want to put the assets in trust, permitting the trustee to use the funds or monies only in such a manner as you direct. Or you may want to place requirements on your children before they have access to the assets, such as graduating from college, engaging in certain kinds of employment, refraining from use of illegal drugs or the like.

If you are leaving money to a surviving spouse, you may want to put that in trust with certain limitations if, for example, your spouse remarries. You should also consider the needs of your heirs. For instance, if you have a child with special needs whose financial future you wish to secure, there are certain types of special needs trusts that can be set up to deal with this specific situation.

Exit Planning

It is also important to critically analyze to whom you wish to leave your assets, your legacy. Most estate plans are concerned primarily with avoidance of federal estate taxes. While this is not an unimportant consideration, so much has been written about it, and the current state of flux in which federal estate tax law exists, that these issues will not be dealt with to any significant extent in this article.

As far as charitable giving is concerned, you must determine whether you wish to leave a legacy outright in cash to a charity or whether you wish to place limitations on the gift. There are many permutations available for charitable giving, including various sorts of trusts. There are trusts that www.transitions-mag.com

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Exit Planning

will provide a charitable donation only after a string of periodic payments to certain of your family members.

There are other types of trusts that make these periodic payments only after the charitable gift.

Of course, one should carefully consider who the trustee will be, how much discretion to give the trustee and how the trustee can be replaced. The choice of trustee can be very important, and should be made only after careful consideration.

After making such distributions as are appropriate in trust during your lifetime, you then should prepare your will. While the trusts created during your lifetime govern the disposition of the property transferred to them effective immediately, your will sets up transfers of your legacy only upon your death. And bear in mind that you can establish many of the same kinds of trusts in your will as you could during your lifetime.

The question then arises as to the right advisor to handle your legacy What is important here is that these various trusts do not have to One should carefully consider planning. Only an attorney has the necessary skills and legal authority be established in your will. Some who the trustee will be, how to draft a will or a trust. All legacy of the most efficacious forms of much discretion to give the planning should, therefore, be perestate planning involve living or trustee and how the trustee formed by an experienced attorney. inter vivos trusts. By establishing can be replaced.

In order to incorporate legacy planand funding certain trusts before ning into, and be consistent with, your death, you effectively keep your exit plan, it is suggested that an that portion of your legacy out of your estate. This not only has estate tax implications but attorney who is also a Certified Exit Planner should be also ensures a greater privacy during the probate process chosen. Although legacy planning can be done by itself, as well as providing, in many cases, substantial benefits for a business owner it makes more sense for it to be done in conjunction with a comprehensive exit plan. to you while you are still alive.

For example, if you make a substantial donation using a Charitable Remainder Unitrust to your favorite charity, monies will be paid for a period of time to your family members and then, eventually, to the charitable beneficiary. In the interim, you may be able to reap a substantial charitable deduction from your income taxes. This provides a stream of income back to you or to your beneficiaries that could well outlive you, as well as securing a benefit to the charity to wish to benefit.

Another thing to consider when planning your legacy is life insurance. Proper use of life insurance can provide tax-advantaged retirement income for a business owner, but can also provide a significant amount of money for a surviving spouse or other heirs. Whether placed in an irrevocable life insurance trust or otherwise, life insurance can be a significant part of a financial legacy.

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As with all other aspects of exit planning, a legacy plan should be reviewed and updated, as necessary, at least every two years. If there are major changes in your business or financial environment, more frequent reviews may be in order. What is key here is that you recognize that legacy planning, like exit planning, is an ongoing process, one that should never be viewed as fully completed and set in stone. uuu

David Leitner has helped numerous business owners achieve their goal of exiting from their business in style and with financial security. He is a 1976 graduate of Stony Brook University and a 1979 graduate of the University of Iowa College of Law. He has been licensed to practice law in Iowa since 1979, before the United States

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Exit Planning Supreme Court since 1994 and in Nebraska since 2000. In addition to his law practice, concentrating in civil litigation and estate planning, he has published or contributed to 14 books and many law journal articles on subjects ranging from insurance coverage litigation to employment discrimination and from managed care to software. David has been recognized by the American Bar Association, Who’s Who in Emerging Leaders, Who’s Who in American Law, Who’s Who in the Midwest, Who’s Who in the World and others. He can be contacted at 515 252 0777 or dleitnerlaw@gmail.com

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It's authored by veteran journalist Sydney LeBlanc, and published by Financial Forum Publishing.

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Transitions Magazine

Beyond Reproach Ethics, Integrity and Trust

by David B. Loeper, CIMA®. CIMC®

HOW MUCH IS THAT GUARANTEE IN THE WINDOW?

Even The Wall Street Journal has fallen prey to this marketing ploy as exemplified in the story, Locking in Future Income – December 9, 2009. In this story about variable annuities, the WSJ does a reasonable job of disclosing the “very steep fees” (the price of the guarantee? ...not really as you will learn) and that you can’t get the guaranteed amount in a lump sum. They also warn about the complexity of these products and offer a summary of additional warnings. But, a favorable message about the value of the guarantees in the “timing” section of the article stated: “If, for instance, the market falls sharply just after you buy and your underlying funds take a dive, the guarantee could prove quite valuable.”

Let’s examine this “quite valuable” benefit the WSJ article highlighted. What happens if the markets fall sharply just after you buy? This is after all one of the two main things you are trying to protect yourself from by buying an annuity (the other is the risk of outliving your wealth).

The example the article used was a 60-year-old who put $100,000 in a variable annuity in 2000 just as the bear market at the beginning of the decade started. Fortunately, the annuity had an annual “guarantee” of 5% growth per year for the benefit base. As of October 31, 2009, this means the benefit base (not available in a lump sum) would entitle the annuity buyer to an annual lifetime income of $7,500 because of the www.transitions-mag.com

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uaranteed income for life! This is the marketing cry of the insurance industry, and emotionally it has a lot of appeal.

The soothing comfort implied is so enticing that there are actually proposals from the Obama administration to encourage Americans to buy annuities with their retirement savings (see: Retiree Annuities May Be Promoted by Obama Aides – Bloomberg, January 8, 2010). I guess this is what happens when the government owns an insurance company.

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“The fact that a great many people believe something is no guarantee of its truth.” — W. Somerset Maugham

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guarantee that protected his benefit base. That $7,500 annual benefit is based on a 5% payout rate for the annuitant who is now 69 years old and a benefit base that has grown to $150,000 (according to the article). At normal life expectancy (50/50 odds), the annuitant would receive $120,000 in annuity payments for tying up $100,000 for 26 years. Care to calculate the IRR on that?

The consumer (and most agents that sell these things) would believe they were getting a 5% return because of how the insurance company promotes the 5% guaranteed increase to the benefit base and the 5% payout rate. In reality though, this is the equivalent of getting a 1.84% return for the first 10 years and zero for the next 16 years. Does this sound like a good deal to you? Sure doesn’t seem anywhere close to 5%.

Let’s back test all of these cash flows historically. We have a 60-year-old who invests in a simple 60/40 portfolio (60% domestic equities, 37% government bonds, and 3% cash) and pays an advisor a 1% annual advisory fee. Each year we will calculate and tax his investments assuming moderate Virginia state income taxes and current Federal tax rates. We will assume annual rebalancing plus 20% annual turnover and 80% of capital gains being realized as long term. Also, we will withdraw the same $7,500 a year (but in our case net after tax and after expenses) starting at age 69 and continuing to death at normal life expectancy.

Going back to 1926, there were 697 twenty-six year periods for us to back test based on monthly data. If this investor started in September, 1929 right before the Crash of ’29 and the ensuing Great Depression, he would have ended up with $42,241 left over versus ZERO in the annuity at normal life expectancy. In fact, in EVERY ONE of the historical periods, the annuity guarantee that the WSJ called “quite valuable” cost the investor at least $42,241 or more. At the 90th percentile outcome, the guarantee cost the investor $250,089. At the 75th percentile, the guarantee of the annuity cost the investor a whopping $339,068— more than three times the ini20

tial investment. There was a 50% chance the guarantee would cost the investor an incredible $441,896!

But, these ending values of what is leftover in the portfolio are not all profit for the insurance company. That’s because there is a 50% chance the investor will live past normal life expectancy. Before we examine the effect of the value of the lifetime income guarantee though, objectively think about this example and what the insurance company is coercing agents to sell. Half of all of the clients who were sold this product will end up dying before normal life expectancy and if the Crash of ’29 and the Great Depression were to start the month following each of their initial investments, the annuity would cost all of them AT LEAST 42% of their initial investment; MORE if they die before normal life expectancy or if the markets aren’t as bad as the Great Depression.

As would be expected though, the insurance company actuaries have designed the product to have very favorable odds for them to profit. There is a risk that many of the annuitants (about half) will live past normal life expectancy and the insurance company needs the “premiums” of the other half of the annuitants who lose out on this bet to insure this longevity risk they are taking with the other half. Do not assume that the actuaries haven’t figured out how to still profit on this risk.

The 60-year-old in our example has a 71% chance of being dead by age 90 (you may wish to find a better way of articulating this). Running the same historical back test for the 637 thirty-one year periods back to 1926, we find that the simple balanced portfolio STILL exceeded the cash flow from the annuity in every historical period. In the worst historical period starting with the ’29 Crash, the guarantee of the annuity cost the investor $14,758. Starting in December, 1926 (the 95%-tile outcome) the guarantee of the annuity cost the investor $213,447. Starting in June of 1926 (the 87th %-tile outcome) the guarantee of the annuity cost the investor $403,385. Remember, the investor only has a 29% chance of living this long.

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Ethics, Integrity and Trust Extending the life expectancy to age 97 (less than a 10% chance of the investor living this long) we see where the risk is for the insurance company (note … this is sarcasm). Of the 553 thirty-eight year historical back tests going back to 1926, there were TWO of the 553 periods where the balanced portfolio would have run out of money. The cost of the annuity guarantee, IF the investor lives to age 97 (less than 1 in 10 chance of this) had a 95% chance of costing the investor more than $238,561.

A one in ten chance of outliving your money is still scary…or so the insurance company would like to have their agents and annuitant victims believe. There is essentially no chance (at least from actuarial tables less than a 1 in 1,000 chance) of the annuitant living to 111.

Back testing the balanced portfolio back to 1926 once again sheds light on how conservative actuaries are in ensuring profits for the insurance company at the expense of their customers.

There were 385 fifty-two year periods for us to test going back to 1926. In about 2% of those (seven to be exact), the investor would have run out of money IF he or she lived to 111. If he started in July of 1929 (the 95th %-tile outcome), just a few months before the ’29 Crash and the Great Depression and he lived to age 111, the cost of the guarantee of the annuity would have been $230,526.

Understanding the combination of how unlikely the perfect storm of remote odds are can be daunting because we have uncertain market returns, uncertain timing of returns that can impact the wealth, and uncertain mortality. Our company has the rights to a patent to assess these risks together using Monte Carlo simulation so we can come to one simple probability of the odds of whether or not the annuity guarantee has value.

Out of 1,000 random lifetimes with simulated random returns even more extreme than have been historically observed, in 997 of the outcomes the annuity had a negative relative value to the simple balanced portfolio. www.transitions-mag.com

There was a 90% chance the annuity guarantee would cost the investor more than $149,000 (about 1.5 times the initial investment) and a 75% chance it would cost more than $243,000.

Does this sound “quite valuable” to you? Think about the other factors on top of this. The cash flows we modeled for spendable income were net after taxes and fees versus the annuity that would likely have some portion of the payment being taxed at ordinary income rates. The annuity has zero liquidity where the balanced portfolio offered flexibility to adjust future income withdrawals if there was an unexpected immediate cash need. Of course, we are also assuming the insurance company financially survives a Great Depression environment and can honor its promise to pay.

In the Wealthcare process we avoid needless risk so, in reality, it is unlikely we would recommend a portfolio with 60% equity exposure to the client if it wasn’t needed to confidently fund their income need. In fact, the Monte Carlo simulation with random returns and life spans actually showed the annuity guarantee costing the investor in 999 of 1,000 simulations if the portfolio had 45% equity exposure (our balanced income allocation) and 997 simulations for our 30% equity exposure (our risk averse allocation), the same odds of the balanced portfolio.

Do the odds against the annuity having value sound like the kind of recommendations someone would give in a practice that is beyond reproach? uuu

David B. Loeper is the CEO of Financeware, Inc. which does business as Wealthcare Capital Management. An SEC Registered Investment Adviser with nearly 25 years experience, Loeper has appeared on CNBC and has been a featured contributor on Bloomberg TV and CNN. Loeper joined Wheat First Securities as vice president of investment consulting

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in 1988, where he served for 10 years. He was promoted to managing director of investment consulting, and then eventually to managing director of strategic planning for the retail brokerage division. He left his position at Wheat First Securities in 1999 to found Financeware.

Active in industry associations throughout his career, Loeper has been a member of the Investment Management Consultants Association (IMCA) for over 20 years, serving on the advisory council for more than 5 years, most recently as chairman. Loeper was also appointed by the governor of Virginia to serve on the Investment Advisory Committee of the nearly $30 billion Virginia Retirement System. He received his CIMA速 designation in 1990 by completing a program offered through Wharton Business School, in conjunction with IMCA. Drawing on years of experience in financial services including serving as a fiduciary for all types of ERISA plans, Loeper has authored numerous whitepapers and books including the top selling book, Stop the 401k Rip-off! as well as The Four Pillars of Retirement Plans, Stop the Retirement Ripoff and Stop the Investing Rip-off

REPRINTS OF ARTICLES ARE AVAILABLE

For more info, call 435.750.0062 ext.1 or email: info@transitions-mag.com

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Small Business Health Care Tax Credit

By Dave Williams CFP®

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he Small Business Health Care Tax Credit is the only feature of the Patient Protection and Affordable Care Act (also known as the Affordable Care Act or PPACA) that takes effect for the 2010 tax year. It is available to small employers who provide health care coverage to their employees and that meet certain requirements.

In general, a qualified employer has fewer than 25 full-time equivalent (FTE) employees, the average annual wages of these employees must be less than $50,000 per FTE, and the employer must pay the premiums under a “qualifying arrangement.” (Special rules apply to non-profit employers) If the employer has 10 or fewer full-time equivalent employees and average annual wages of $25,000 or less, the credit equals 35% of the premium paid. The dollar amount is reduced as the number of employees exceeds 10 and/or the average annual wage exceeds $25,000.

A “qualifying arrangement” exists if the employer pays premiums for all employees enrolled in health care coverage offered by the employer in an amount equal to or greater than a uniform 50% of the premium cost of the coverage. For 2010, an employer need not pay the same percentage for each employee, as long as he pays an amount equal to or greater than 50% of the single coverage premium for all employees.

The amount of premium considered for the credit is the lesser of the actual employee-only premium for the group, or the average employee-only premium for his State times the number of FTEs. The average premium per State is defined by Section 45R and is listed in Revenue Ruling 2010-13. For example, the average annual employee-only premium in Tennessee is $4,611. If the employer pays less than 100% of employee-only premium, the percentage of the actual premium that the employer pays will be applied against the Section 45R premium. If the employer pays 80% of the actual employee-only premium for the group, then the lesser of what the employer actually paid and 80% of the Section 45R premium will be used in the formula.

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Editor’s note: Dave suggested that his article would help if you are interested in knowing whether this tax credit applies to your own business, or just to your small business clients. Dave will explain how you can determine who qualifies and how to calculate the credit.

The number of FTEs is determined by dividing the total hours of payroll (but never more than 2,080 hours per any employee) by 2,080. The quotient is rounded down to the next lowest whole number. The employer’s regular wages paid divided by the number of FTEs calculated provides the average annual wages.

Again, the quotient is rounded down to the next lower $1,000. For purposes of calculating FTEs, the employer and any family member thereof, any seasonal workers, and any hours, wages, or premium applicable www.transitions-mag.com

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to them are excluded from the calculation.

$7,231. Any unused portion of the credit can be carried forward up to 20 years.

Employer Case Here is an example of an employer in Tennessee. The employer has 9 employees who worked a total of 15,600 hours (removing the excess hours of one employee who worked 2,300 hours.). 15,600 ÷ 2,080 = 7.5. So the employer has 7 FTEs. The employer paid $224,000 in wages for those 15,600 hours. $224,000 ÷ 7 = $32,000 average annual wages, or $7,000 above the threshold.

The employee-only annual premium for this group is $33,600. The employer pays 80% of this premium, or $26,880. The Section 45R premium for the group is $32,277, which is less than the actual premium owed, so the premium considered for the calculation is $25,822 ($32,277 x 80%).

The applicable credit amount is $9,038 ($25,822 x 35%).

The credit is reduced by a fraction calculated based on the excess average annual wages, or a reduction of $1,807 ($9,038 x $7,000/$25,000). The actual credit that can be claimed is $7,231 ($9,038 - $1,807).

The credit would be reduced further if the number of FTEs exceeds 10. For example, if an employer had 18 FTEs, his credit would be reduced by 53.33% (8 excess FTEs/15). Both the excess annual wage reduction and the excess FTE reduction are subtracted from the applicable credit amount. The employer would have a credit of $0 if the total was a negative number.

If the employer can take the tax credit, it will reduce the amount it deducts for business expense of health insurance. In this case, the employer pays $26,800 health insurance premium for eligible employees. We will assume that it pays $9,600 for the owner and his wife-bookkeeper, for a total health insurance premium deduction before adjustments of $36,400. This amount is reduced by the amount of the credit of $7,231. Thus, the employer will deduct $29,169 in health insurance premiums, and reduce income tax (or alternative minimum tax) owed by 24

The rules are not fully defined for the Small Business Health Care Tax Credit, and the rules that do exist have a number of complexities in them. Therefore, a business should look to their professional accountant to calculate the credit for them—and the exact credit can’t be calculated until after the tax year ends.

Are You Exempt?

Will the Small Business Health Care Tax Credit benefit Financial Advisory practices? Probably not. The financial advisory owner is exempted from the credit, as are members of his family. The law defines family member to include: child (or descendent of a child); sibling or step-sibling; parent (or ancestor of a parent); step-parent; niece or nephew; aunt or uncle; or, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. Since financial advisories tend to be nepotistic, it would seem that the majority of employees may be excluded. Also, current IRS guidelines do not address 1099 employees and whether they are included.

One more reason to consult with your accountant or tax professional. uuu

David Williams, CFP®, Partner of Business Enhancement Associates, LLC, helps business owners and corporations grow, protect, and transfer wealth. Dave is also a Registered Investment Advisory Associate with Wealth Strategies Advisory Group, Inc. Prior to establishing his business consultancy, he was Director of Financial Planning for Regions Morgan Keegan Trust. As a CFP® since 1985, and with more than 25 years of financial planning experience working with business owners, Dave also has expertise in advanced estate and charitable planning, employer stock option planning, and qualified plans. He is a Past President of the Financial Planning Association of the Mid-South. Dave can be reached at: Dave@WSG-TN.com.

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Transitions IT’S ABOUT TIME …

Magazine

…. that you understand how Broker Dealers treat and support an RIA!

By Phil Flakes and Nick Gudz

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en to 15 years ago most B/Ds did not have a corporate RIA (Registered Investment Advisory). The regulatory hurdles to forming and running an independent RIA were low, so advisors formed their own. Today, advisors form their own RIA basically to gain greater control of the management of assets in addition to financial planning. In some cases, a B/D will allow financial planning but not the management of assets under an independent RIA. If management of assets is allowed, a restriction of where the assets are custodied may be imposed, at the B/D’s custodian. When considering the RIA option, there are three popular scenarios to consider. Here is a brief overview of these options, factors to consider, and benefits of each.

RIA Support s

The idea of starting an RIA has become a recent fad for many financial advisors. Getting away from the watchful, and sometimes over-compliant, eye of their broker dealer; being able to keep 100% of their fees; having a custodian who will not only hold their clients’ assets and account and process their transactions but also provide billing and reporting services sounds like a win-win situation. But is it right for you and your business?

The Three Scenarios #1: Stand-alone RIA – With the growing popularity of the hybrid model, why would an advisor or group choose to be a stand-alone RIA when they can have the flexibility and perks of a hybrid? Simply put, complete independence and brand identity. Although setting up a stand-alone is increasingly more expensive and time-consuming, the benefits to certain advisors or groups can be very rewarding. In addition, it offers www.transitions-mag.com

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them the flexibility to move—an independent firm with its own brand is fairly portable.

Costs to consider: Hiring a CCO, books and records maintenance, supervisory procedures, e-mail monitoring and disclosure documents, and updating the ADV annually. #2: Hybrid RIA with a B/D affiliation – When it comes to the hybrid model, most independent B/Ds are allowing for dual registration.

“The fee-based (hybrid) model is no longer the purview of only a handful of specialized broker-dealers. As of 2006, 21 broker-dealers in the FP50 now earn more than 20% of their revenues from fee-based accounts; three years ago, that number was just six.”

What’s Next?

Our reading audience at Transitions Magazine has spoken and we have listened. In next month’s column we will address the unfortunate demise of two Broker Dealers to close so far this year. We will attempt to identify any underlying themes that were consistent in both cases, what signs an advisor should look out for, and what questions every advisor should be asking their current Broker Dealer. uuu

Nicholas Gudz is responsible for maintaining client relations and the overall management of StarPoint Consulting Group and its employees.

Phillip Flakes is responsible for the overall management of Starpoint Consulting Group’s advisor placement division.

— Financial Planning magazine, June 2007

The hybrid business model has proven itself to be a successful business model. B/Ds are embracing it and rolling out services to support it. Review a listing of independent Broker/Dealers and the percentage of revenue that they report from fees, and you will find that the growth of the hybrid model strongly continues today.

The question is, what is the haircut for monitoring the business, and is the B/D going to allow you to choose which custodian you want to use? #3: IAR—the least popular of the three is becoming an IAR of an RIA. For an advisor looking to be very specific or sell one particular product, this might be an attractive option.

With the increasing number of independent firms allowing advisors to have a hybrid model, and standalone RIAs becoming more popular, the choices for your business are endless. Now more than ever it is 26

important to evaluate your choices carefully before making a decision.

StarPoint Consulting Group, LLC, is an advisor placement firm specializing in Broker Dealer and RIA transitions.

The firm assumes responsibility for the due diligence and negotiations with potential firms so that financial advisors can focus on their business and clients. They research hundreds of independent, regional, bank, and wirehouse firms and look at variables such as technology, payout, culture, compliance, flexibility, product differentiation, and business development. For more information, contact Nick or Phil, managing partners, at (858) 456-5564 phillip.flakes@ starpointnow.com, nick.gudz@starpointnow.com, or visit their website at www.starpointnow.com

Editor’s note: One of Starpoint’s many clients, Cambridge Investment Research, Inc., an independent broker dealer, released an important white paper, “To RIA or Not to RIA." It can be downloaded at http://www.transitions-mag.com/cambridge.pdf.

For more information about Cambridge, go to www.joincambridge.com.

June 2010

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ADVISORS: Farm Your Way Out of the Stone Age

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By William R. Nelson, Ph.D. and Scott Winters

Now, advisors have to provide more value in the form of longterm planning and hand-holding. The commission-based stock jock could rampage though a list of leads, pick the gullible lowhanging fruit with the help of some slick research reports, and move on to the next list. The financial advisor must have a much longer-term perspective that requires far more sophisticated planning and discipline, but also promises substantial rewards in the form of long-term growth and revenue stability. You have the opportunity to evolve from a hunter-gatherer to a farmer.

Here’s How to Do It The life cycle of an investor/client is similar to that of a fruit tree. The advisor must find where to plant his seeds, determine the correct seeds to plant, nurture the sprouts, and harvest the fruit, all of which have analogues to advisor activities.

The first two steps are interdependent: finding the correct type of seeds to plant and figuring out where to plant them. The type of seeds equates to the niche of clients that an advisor wishes to attract. Successful advisory businesses have been built in niches ranging from professional to political to recreational interests.

Each niche will likely have a similar range of needs and objectives for which you should select an appropriate asset management system.

For example, an advisor might specialize in financial planning for doctors. These seeds would be placed in a business designed to fit the needs of the high-intelligence, high-potential-net-worth client who is unlikely to be well-versed in finance. Every time you get a new lead, you must plant your seed in a customer relationship management system (CRM). But planting leads in a CRM is only the first step toward nurturing your leads into mature fruit-bearing relationships. The entire progression of the relationship needs to be choreographed. Turnkey asset management platforms specialize in providing outsourced solutions to facilitate this process allowing you the time to build the relationships that are vital to your success. www.transitions-mag.com

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Business Development s

dvisors face more competition than ever and need to distinguish themselves from the competition by creating personal connections that eventually convert into revenue-generating relationships. The current competitive and regulatory environment is a far cry from the old days of stockjock boiler rooms.

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Business Development

Just as seeds need water, your leads need attention if they are going to sprout into prospects. The line between prospect and lead is crossed when the prospect knowingly takes your phone call and engages in a meaningful conversation about the prospect's investments. Creating the willingness of the client to share this private information is a valuable and subtle skill honed with years of practice.

Some Basic Methods First, you should get at feel for the client’s personal interests — weather and sports are innocuous subjects that allow you to break the ice and find more personal connections such as hobbies, love for animals, or enjoyment of travel.

After the lead is talking, your next goal is to get them to like you, and most people like those who are similar to themselves, meaning your job is to establish these commonalities.

People are conditioned not to hang up on those with whom they have established any rapport, providing you the opportunity to establish yourself as an expert, find out more about the prospect, and build trust. Asking for confidential, personal information too early in your relationship can come off as pushy. Instead, establish yourself as an expert, not by discussing their specific situation, but through anecdotes about how you have helped others. Relating horror stories of people losing their retirement savings due to false diversification or describing how investors waste money on hidden mutual fund fees are good starters and can develop into questions from the lead regarding how you can analyze his or her investments.

Do not expect to convert most leads into prospects during your first conversation. For this conversion to take place requires that the lead both feel good enough about you and also feel the need for advice. Often, you might 28

be doing everything right, but the time is not right, yet.

Your ongoing objective is to establish yourself as a reliable expert, so that when the need for advice or a second opinion arises, the prospect calls you. Establishing yourself as a trusted advisor requires that you demonstrate your professionalism and concern for the investor by knowing details about the family, pets, hobbies, favorite color, or favorite vacation spot, all of which contribute to the goal of relationship building.

Entering this information into your CRM is imperative. But your CRM entry for each conversation must not end with facts. It should also include your strategy for the next phone call. Examples of strategy notes include, “Has interest in the cost of mutual funds but is not willing to provide own holdings yet.

Give an example of a high-cost fund to entice interest and explain how many clients benefit from a portfolio cost analysis.”

After you garner details of the prospect's current investments, perform an analysis of both costs and diversification. You will almost surely find flaws in his or her investments that can be used to undermine confidence in the current investment solution and/or advisor. Make certain to provide recommendations that will withstand the analysis of the competing advisors. Avoid high-cost and high-commission products that competing advisors can use to frame you as self-serving. You should provide a broadly-diversified, professionally-managed, fairlypriced solution, not only to make the initial sale, but also to retain the client and build a long-term relationship.

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Transitions Magazine

Business Development No Greed or Unnecessary Risk

alternatives vary widely. A good one will reduce your overhead and save you time, thereby allowing you to concentrate on building relationships.

You have worked hard to plant and nurture; don’t cut the harvest short by being greedy or taking unnecessary risks with your client’s money. Commonly, advisors will shoot Not every seed will sprout into a fruit-bearing plant and for the moon trying to earn effort should be concentrated excess returns. Unfortunately, on those leads with the highest attempting excess returns probability of doing so. Don’t Don’t cut the harvest short by being typically involves a be afraid to pluck the weeds concentrated portfolio (which greedy or taking unnecessary risks from among your leads. If you equates to more risk), maybe in really don’t like someone, don’t an industry, maybe in an equity with your client’s money. continue to invest time and efstyle, but some concentration fort into conversations that drag is almost certain. A portfolio you down on subsequent calls. that has the potential to dramatically outperform also has Follow the 80/20 rule by spending most of your time a strong likelihood to disappoint. It’s about a 50-50 chance, with your best clients. Picking the weeds leaves more but the effect of taking extra risk with a client’s portfolios water and sunlight for the best and will lead to fewer has a very asymmetric impact on an advisor’s business. total plants but more total fruit.

If a client does extraordinarily well, then the advisor will likely acquire a higher percentage of his client’s assets Referrals: Seeds From Your Best Trees and possibly some referrals. But, if a client loses money, Harvest the fruit, but don’t burn the trees. Build a longespecially when friends, family, and coworkers are happily term, loyal book of business that provides ongoing intalking about their investment earnings, then a client gets come. As time passes, more trust should develop and the upset and frequently abandons the advisor in disgust. client will not only bear fruit directly, but also from his The lesson is to not bet your business by taking or her friends and family. These are the seeds from your unnecessary risk with your client’s money. Rather, take a best trees. Warning: Don’t expect or pursue referrals from scientifically-supported, prudent approach to investing. new client relationships. Would you risk a valuable longDiversify across asset classes, equity styles, foreign term relationship with a friend or family member by recmarkets, and investment philosophies to provide your ommending to them to see, for important and potentially controversial advice, someone you have known only for clients the greatest possibility of success. a short time? Simply asking for referrals would be pushy The investments chosen are part of the advisor’s overall and portray you as someone with a short time horizon. business infrastructure. Selecting and preparing this Let your track record and your professionalism speak for infrastructure for new relationships is the equivalent itself and your reputation as a trusted, knowledgeable adof choosing your equipment and tilling the soil prior to visor will naturally germinate into new sprouts. planting the seeds. Turnkey asset management platforms (TAMPs) provide a variety of solutions, most of which Once you have these prized referral seeds, enter them provide marketing materials, investment alternatives, into your CRM and treat them with care. First, mistreatinvestment proposals, performance reporting, and billing ing these referrals would be the best way to sacrifice calculations. The breadth, flexibility, and pricing of the the relationship with the prized client who provided you with the seeds to begin with. Second, birds (and seeds) of a www.transitions-mag.com

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Business Development

feather flock together. Given the intrinsic value of a referral from a prized client, the probability of the referral becoming a prized client as well is much higher. Beware the trap of under-attending to referral leads. Some advisors think that on the basis of the referral they can skip the relationshipbuilding sequence and jump straight into investment analysis. Wrong! A referral merely provides you the opportunity to initiate the same careful relationship-building process it took to secure the original prospect.

Leave the Cave: Both You and Your Clients Benefit Make the transition from struggling caveman to comfortable bourgeoisie by ending the eat-what-youkill cycle and settling down to farm. Your rewards include lower stress, less variations in revenue, deeper relationships with fewer clients, and more referrals. Your clients benefit from coherent, long-term advice from a trusted advisor and friend.

Scott Winters is National Sales Director of Eqis Institutional, and Dr. William R. Nelson is the Chief Financial Strategist of Eqis Capital. Dr. Nelson’s acclaimed original research has been published in the American Economic Review, The International Conference on Information Technology ITCC 2004 Proceedings, the Journal of Economic Behavior and Organization, Latin American Finance and Capital Markets, among many others. Eqis Capital provides a turnkey asset management platform that delivers enhanced power, flexibility and efficiency.

Based in San Rafael, California, the company enables Registered Independent Advisors (RIAs) and Registered Representatives (RRs) to engineer portfolios that combine diversification, sophistication and worldclass insight. Eqis provides pioneering technology with a global reach. For more information, visit them at www.eqiscapital.com

Scott Winters

Dr. William R. Nelson

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Transitions Magazine

A Conversation with ..,

Jason Bishara President and Founder, linkedFA

By Sydney LeBlanc

linkedFA, the first social networking site developed for financial advisors and their clients officially launched on February 11 of this year. linkedFA helps advisors address FINRA supervision and record keeping regulatory requirements which helps keep them in compliance. According to Jason Bishara, the site’s President and Founder, linkedFA complies with the Securities Exchange Act of 1934 rules 17a-3 and 17a-4 regarding document retention. Following the social media guidance offered in FINRA’s Regulatory Notice 10-06 they have outlined how financial advisors can meet those guidelines. (See sidebar “Using linkedFA To Assist With Compliance Of FINRA social media Guidance Notice 10-06”) According to internet agency reports, in the financial services industry where security of information is of paramount importance, social media has been slow to penetrate. However, with the growing acceptance of social media tools for increased communication and interaction with investors, financial professionals are in need of a social networking site that not only complies with company and industry regulations but that offers heightened safety and security.

Said Bishara, “Security and privacy for financial advisors and their investors are two of the key reasons we created linkedFA. It really is the ideal business networking site for financial advisors.

We utilize security standards in our application code and database design, while our infrastructure includes being hosted in a data center with geographical redundancies to assure linkedFA members of a stable application to use for business.”

Following is a conversation Transitions had recently with Jason about his background, his ideas, the new site and its goals.

Investment Solutions

Growing Your Business with Fully Compliant Social and Business Networking

Transitions: Jason can you tell our readers about yourself and the genesis of linkedFA? Bishara: Primarily, I have a background in both Finance and Technology. I started in the financial induswww.transitions-mag.com

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In the Spotlight

try in 1995 as a financial advisor. As a sales manager and principal of my firm I began to explore more effective tools for management that would increase sales and compliance oversight. This led me to founding an independent technology firm, SLM Holdings, Inc., in New York. Through SLM we developed a proprietary web-based CRM application, The Broker’s e-Vantage (TBeV), with significant marketing and compliance features. Through an acquisition, we evolved TBeV into a software application, Financial Application for Compliance and Tracking (FAct), that integrated with ACT! CRM. This technology enabled us to penetrate many of the firms as ACT! Which was, at the time, the most widely used CRM tool in the financial industry. The FAct application was sold off to SAGE Software (Parent company of ACT) and repackaged under the name ACT for Financial Professionals (AFFP). With the advent of social media being reminiscent of email, I was certain that this would be the next path to travel down. We began development of linkedFA in November of 2008 and kept it under wraps until we were ready to release the first version.

Transitions: So, linkedFA is an idea that might eventually encompass CRM and social media?

Bishara: Yes. CRM is a way to manage your information and your activity around a client. And social networking is about relationships and referrals. So, we developed linkedFA to uniquely position itself to assist financial advisors and help them grow their existing client base in addition to helping build those relationships by being proactive and leveraging the technology. We envision linkedFA growing eventually to consist of both CRM capabilities and social media elements. We think CRM makes more sense within social media than social media does within CRM. Transitions: There are so many social networking outlets out now, why would advisors need another one?

Bishara: Good question! When you look at sites such 32

as Facebook, which We developed linkedFA to uniquely is a fun site position itself to assist financial and my kids advisors and help them grow their love, it re- existing client base in addition to ally is just helping build those relationships for personal by being proactive and leveraging use.

The the technology.

-- Jason Bishara way we feel is that your personal life is not necessarily meant to be shared with everyone.

You don’t want your clients seeing you in your party hat making a fool of yourself ! Facebook is changing its privacy policies and encourages people to open up more than they really should. We consider LinkedIn to be more of a glorified resume than anything else. Not that it doesn’t have its place, because it does….you can do some connecting, but it’s basically one-to-one. What we’ve tried to do is develop a purpose- rooted social network, customized for financial advisors and their investors. It allows the financial advisor to manage his or her reputation, which is so important when dealing with people’s finances. You want to be perceived as serious and worthy of that trust. linkedFA also addresses document retention and gives FAs editorial control over comments that are posted on their wall. There really hasn’t been a tool, at least in our view, that truly addresses a financial advisor’s unique needs and allows them to get the full advantages of social networking, while minimizing the risks to their reputation, privacy, and to the phishing or hacking. There are also rules of privacy with regard to client poaching. So, if an advisor brings in a client, and also wants to connect with peers, they want the capability to separate the client communication from the peer communication, so the relationships are not put at risk.

Transitions: Do advisors have to personally invite their clients?

Bishara: Yes, it’s by invitation only. The site is designed

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In the Spotlight

Transitions Magazine

In the Spotlight to enhance your existing relationships and to get more from them. Through enhanced communication you will get referrals, more business, and new business. From the FA’s perspective he or she can upload clients and prospective clients in a secure environment and share information and collaborate with his entire network simultaneously. From the investors perspective they can manage all of their FA’s from one location and collaborate with other investors just like themselves.

Transitions: Tell us more about the editorial or posting control.

Bishara: One of the features we believe is really important for the FA is editorial control. Let’s say, for example, an investor decides to blame their advisor for something in a blog, or they have a disgruntled client who says something negative, the FA has the ability to accept or reject a comment. Also, if the FA posts something by mistake, they can take it down.

Transitions: What additional features will you have soon?

We are adding many features to the site over the near term. We recently launched a new compliance feature for wirehouses and brokerage firms in collaboration with companies that really wanted to use the site but needed an additional level of security. By leveraging technology that already exists, we can easily integrate technology through strategic alliances. Some of these upcoming features will include an enterprise compliance control panel and investor and FA resource centers.

Transitions: Let’s talk a bit about compliance.

Bishara: All communication that occurs on the site between the advisor and client, any and all of his or her clients, is retained and can be extracted into a report. [See Sidebar] The advisor can see all communication including IMs, blog comments, blog postings, everything that has transpired between the FA, clients and other investors. It is saved for six years under federal requirements. www.transitions-mag.com

All of that can be extracted into a PDF document report and can be used as needed. Now, the other key thing is approval—approval of documents, sales literature, and other things that an FA provides to clients. Most of the information should be approved by the FA’s compliance officer before it is posted. We also provide the FA with the ability to use his firm’s email address under the user settings. By entering in their firm’s email under the compliance setting, a report is generated on a daily basis and sent to the firm’s existing email capturing software which enables all correspondence on linkedFA to be monitored by the compliance officer.

Transitions: How do the compliance officers participate?

Bishara: There are two ways for the compliance officer to participate. First, they can become a member of the site and connect to all their FAs and then view everything going on across the network. With our unique compliance feature, compliance officers can export reports on an FA’s activity for monitoring purposes. Second, a new feature includes a further compliance level for brokerage firms and wirehouses. With this feature, compliance officers receive automatic daily reports on FA’s linkedFA activity which fully integrates into their existing email monitoring systems.

Currently, communicating with clients or prospective clients in real time, or posting comments like you would on Facebook is what the compliance departments don’t allow right now. Obviously, the FA can have email communication back and forth with their clients. We’ve had conversations with a number of large firms and they block the use of the social media through their firewalls.

However, they realize it’s a tide that can’t be stopped, just like email. I remember a time when they weren’t even going to allow that. Inevitably, they’re going to have to come to terms with social networking and they’re very interested in what we have to offer because we do address many of the compliance needs.

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In the Spotlight

There are some enterprise solutions where firms filter the postings. The only problem is they don’t work outside the enterprise. So an FA may have a filtering tool in place at work, but what does that FA do when working at home in the evening or on the weekend? We offer a comprehensive solution that addresses this challenge not only inside the enterprise office but also outside the office as well. Additionally, our social networking tool is free.

Transitions: Are there any more features in the works for linkedFA that we should know about?

Byrne: That’s the million dollar question, and the answer is yes. Over the coming weeks and months you will see many new features, strategic partnerships and collaborations being announced as we grow the site in alliance with our members and with the requirements of the industry we serve.

Transitions: Thank you, Jason for sharing your story about linkedFA with our readers. We invite our readers to visit your site at www.linkedFA.com uuu

linkedFA Launches New Compliance Feature for Brokerage and Wirehouses to Ease Compliance Burden The new compliance feature for brokerage firms and wirehouses will provide compliance officers with automatic daily reports on a FA’s activity. This feature fully integrates into a firm’s internal email capturing and monitoring software and addresses FINRA’s Regulatory Notice 10-06 on the Supervision of Electronic Communications which states: “Whatever procedures firms adopt…must be reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules.”

A key element of linkedFA’s offering to the financial community is its unique compliance feature which stores all linkedFA communication and documentation between FAs, peers and investors for six years in accordance with the Securities Exchange Act 1934 rules under 17a-3.c. These communications are extractable and reportable at any time. linkedFA’s new compliance tool automatically runs and emails daily reports on the FA’s linkedFA social networking activity to the firm’s compliance officer for inclusion in their firm’s archives. The feature supports current internal procedures and electronic monitoring processes while providing additional details as required by compliance law.

Says linkedFA President, Jason Bishara: “We radically modified our compliance feature at the request of leading brokerage firms, wirehouse firms and IFAs. For several months now, we’ve been working closely with them to solve the issue of how to use social networking to grow their business while adhering to regulatory compliance rules around document retention and the review and supervision of electronic communications.” linkedFA’s new custom compliance tool supports internal systems such as Orchestria, Assentor, Live Office or Smarsh and removes the capital and resource cost associated with middleware solutions. By using linkedFA, firms gain access to a free and fully compliant network. u

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Transitions Magazine

Advisor "High Five"

Bart Schannep, CWS® Schannep Investment Advisors

FIRST ALLIED’S ADVISOR BART SCHANNEP RECOGNIZED AS OUTSTANDING FINANCIAL ADVISOR AND PHILANTHROPIST

In response to the award, Mr. Schannep said. “I am humbled by this honor. I am simply doing what I love to do both professionally and personally. Both helping my clients achieve their personal financial goals and helping charitable organizations deliver essential services to people in need are the fulfillment of my lifelong goals. I am fortunate to have both career and volunteer opportunities that I truly enjoy.”

Mr. Schannep has devoted a generous amount of time and passion as vice president of the Gospel Rescue Mission’s board and recently stepped down from a three-year term as its president. He led the mission on a $4 million project to expand services at its homeless shelter, which is expected to be completed by the end of this year. The donations raised for the mission will enable it to reach some of the region’s most needy families.

Adam Antoniades, President and CEO of First Allied Securities, Inc., Mr. Schannep’s broker/dealer, described him as a highly experienced and committed advisor. “When Bart joined First Allied nine years ago, his commitment to his career was evident to me and he has steadily grown his business year after year. But more than that, his dedication to important causes outside of his company has been remarkable.”

“One of Bart’s personal goals has always been to make a difference in the lives of people in need, whether that be through business or his community.

This award is a further validation that Bart’s contributions are positively impacting the lives of others and I know that means the world to him,”

Advisor "High Five!" s

Bart Schannep of Schannep Investment Advisors in Tucson, Arizona, was selected

by Registered Rep magazine as one of 10 financial advisors across the country, to receive the distinction of Outstanding Advisor of the Year. The magazine, one of the most highly regarded monthly publications serving the financial services industry, chose Mr. Schannep not only for having built a highly successful wealth management business of his own, but also for his role as a mentor to his peers, as well as for his extraordinary efforts as a volunteer and leader in his community.

— Adam Antoniades, President and CEO First Allied Securities, Inc. www.transitions-mag.com

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Resource Directory Click on ads for more information and to visit websites.

Associations

Independent Broker Dealers

Consulting/Coaching/Placement

Resource Directory s

Money Management

PR/Marketing Services

Education

Financial Forum Inc. Book Publishing for Financial Professionals For more information: info@ffpublish.com tel: 435.750.0062 x1

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Transitions Magazine

A Touch of Humor s

Grin and Bear It!

Something got your funny bone? Submit your jokes and cartoons to info@transitions-mag.com. Entries selected for "Grin & Bear It!" will receive a $10 gift card. www.transitions-mag.com

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