A Few Key Lessons to Learn From Wealth Managers

Guidance about investing and the accumulation of assets is only the beginning of genuine financial planning—a fact that has already been embraced by forward-thinking wealth managers.

Elijah Kovar is a founding partner of Great Waters Financial and leads the firm’s Richfield, Minnesota, office.

Though he does not service defined contribution (DC) retirement plans, instead focusing on wealth management clients, he has a lot in common with the typical retirement plan adviser seeking to grow his business in the evolving environment of 2021.

First of all, Kovar established his practice after breaking away from a larger financial services entity, with the goal of “doing things differently.” The same is true for many of the top DC-focused retirement planning practices in the U.S. today, even as the broader industry experiences substantial consolidation.

“We started our practice in 2012, my partners and I, and our goal was to do a type of planning we hadn’t seen in the firm we had been working in,” Kovar tells PLANADVISER. “Their focus was squarely on the accumulation of assets and the sale of financial products. What we aimed to do is put together a plan to systematize and scale true financial planning.”

This focus on scale and efficiency is something else Kovar and his firm have in common with DC-focused firms.

“We have developed a unique model where we have a centralized group of five to seven financial planners who do all the heavy lifting of crafting individual financial plans for our clients, and ultimately they are making every single recommendation,” Kovar explains. “They are considering everything from the use of Roth conversions to the best ways to draw Social Security, and they do advanced cash flow modeling. We rely on MoneyGuidePro to deliver this.”

At Great Waters, the work of these financial planners is brought to market, as it were, by about a dozen client-facing advisers. These are the people who are actually interfacing with the clients and helping them to create goals and implement the recommendations flowing from the analytical team. Currently, each central planning adviser supports the field work of two or three client-facing people.

By using this scalable hub-and-spoke approach, Kovar says, the firm is able to provide what he describes as top-notch wealth management services to clients with substantially fewer assets than those generally serviced by the wealth management industry. This is another area where Kovar’s practice, and its goals and challenges, parallels the typical DC plan adviser’s business. Plan sponsors increasingly expect advisers to be able to deliver personalized advice and education for broad groups of participants—and to do so affordably and in an unconflicted manner.

“We have endeavored to make this type of individualized planning service available to clients with as little as $100,000 of investible assets,” Kovar explains. “Through this work, we have been able to help a lot of people with relatively modest means to pull that retirement trigger, which is really fun and rewarding. Allowing people to actually retire with confidence, and an income plan, is at the heart of what we are doing.”

Kovar says his practice has come to embrace a concept that is also increasingly important to DC plan services: “Advisers, for a long time, have thought that their clients would not be willing to rely on a computer to manage their investment portfolio. In fact, this is not true, and consumers are getting wiser and wiser about the fact that computers are doing a lot of the portfolio management behind the scenes. They know it is wrong for their adviser to only be providing investment-focused services while charging a premium fee.”

All of these points were echoed in another recent PLANADVISER interview with Beau Henderson, whose wealth management practice, Rich Life Advisors, focuses almost exclusively on serving investors who are within a 10-year window of retirement. Rich Life Advisors was founded in 2007 with a focus on individual retirement planning, Social Security optimization and beneficiary liquidity planning.

“We founded the firm based on the belief that there was a lack of truly holistic retirement planning advice available for people,” Henderson says. “That vision has served us well ever since, including during this challenging time of the pandemic. I hate to be critical, but honestly, the bar is still pretty low out there in terms of what the typical adviser can do to actually help an individual create an efficient retirement spending and estate strategy.”

Like Kovar, Henderson believes today’s near-retiree investors have caught onto the fact that they need more than just advice about asset accumulation—and they will vote with their feet when they feel their advisers aren’t meeting their needs. Some of the basic service-level expectations that are emerging, they suggest, include the provision of guidance about Social Security optimization, the ability to forecast and budget for health care expenses, and the development of estate/legacy plans. Advisers might not have to be complete experts in all these topics to be successful, but they must be able to navigate holistic planning discussions and effectively collaborate with the appropriate third-party providers.

“What does more effective retirement income advice look like?” Henderson asks. “In my view, a lot of it has to do with creating tax diversification—that is, making sure people aren’t just hitting retirement with all their money stocked away in a traditional 401(k) plan. For the vast majority of people, using both Roth-style accounts and traditional tax-sheltered savings will be important.”

Among the biggest issues Henderson sees in the marketplace today is the tendency of (unadvised) investors to use the required minimum distribution (RMD) age as the main proxy/input in deciding when to start drawing down their tax-advantaged savings. Retirees need to remember that every year they wait for the RMD age, the more quickly their tax-advantaged money will ultimately have to come out in the future, which means the annual distributions and the annual taxes are potentially going to be higher. Advisers and accountants should look at this dynamic very carefully and help people make the optimal decision for them.

Henderson notes that many of his clients ultimately choose—thanks to his suggestions—to enact small-but-regular conversions of tax-sheltered assets into after-tax Roth accounts. Sometimes this strategy may result in a person paying more income tax in a given year than they otherwise would have, but in the long run, the strategy proves more effective than simply deferring taxes as long as possible.

Beyond the importance of tax planning, Henderson and Kovar preach the central importance of helping people actually envision what they want their life in retirement to look like. As Kovar explains, many retirees report feeling lost and purposeless shortly after they leave work.

“Without the purpose that work brings, they begin to wonder who they are, and what they should do,” he says. “However, with good planning and some intentionality, retirement can be a person’s next greatest adventure.”