How Financial Advisors Can Double Their AUM Without Adding Clients

Posted on August 19, 2021

We may both handle other people’s money, but settlement planners and financial advisors serve very different purposes. If you’re a financial planner with attorney or plaintiff clients, you may have already worked with a settlement expert to ensure their money coming in from a lawsuit gets the right treatment in order to be as impactful as possible. You have probably also realized how valuable these clients are to your practice and your assets under management (AUM). Understanding the most innovative strategies is key to both you and your clients seeing the best benefits from the incoming settlement funds. 

What’s the latest and greatest in 2021? Investment-backed structures. Through structured arrangements, clients receive tax savings and greater growth. You, their advisor, stay ahead of your competition by having this strategy ready in your back pocket for clients who could use it. 

I know what you’re thinking: Hold on … are we talking about structured settlements? They’re not new. “Structure” is a broad term for a periodic payment obligation set up using settlement proceeds. The IRS allows plaintiffs to turn a lump sum settlement into a series of guaranteed payments according to a set schedule, helping them plan long term. Attorneys can set up a similar arrangement with their contingency fees while spreading their tax burden over time. When placed into a periodic payment obligation, funds can grow tax exempt or tax deferred. 

So, how is an investment-backed structure so innovative if structured settlements have been around for decades? 

By utilizing an investment-backed structure composed of a diverse investment plan (instead of in a traditional structured settlement annuity), clients can work with you to choose their own investment strategies. This arrangement can result in hundreds of thousands of dollars more for the client than they would receive by taking a lump sum. It can also double your AUM and guarantee that your clients’ funds remain invested with you well into the future. 

Let’s say a $3 million case settles. The plaintiff receives $2 million, and the attorney receives a $1 million fee. The client places the $2 million into a structure backed by an investment account with you. She chooses a payment schedule that pays $100,000 out of the account per year. The account grows by six percent, and your fee is one percent. The $2 million grows by $120,000 per year, of which the client sees $100,000 in growth. The periodic payment obligation is merely paying out gains on the account. And since it is a periodic payment obligation arising from a personal injury settlement, the payments AND the growth are tax-exempt. 

The attorney also places a structure backed by an investment account with you. He chooses a payment schedule that will pay him $100,000 out of the account per year after the funds are left to grow for 10 years. Let’s say the account grows by six percent, and your fee is one percent. Therefore, the $1 million grows by $60,000 per year, of which the attorney sees $50,000 in growth. This is compounded upon itself for 10 years. Since periodic payment obligations push out the date of receipt, the growth is tax deferred in the meantime. Instead of the original $1 million being taxed at a high rate, the client can snowball the tax deferred growth and receive the funds over a period of years, allowing him to remain in a lower tax bracket. 

Here’s the difference an attorney fee structure can make from Year 1 to Year 14, in contrast to receiving a contingency fee in one lump sum.

It is also worth noting that the amount invested upfront will almost double, as it is pre-tax money – translating to a greater AUM for you.  

With an investment-backed structure, investment options are endless. The periodic payment obligation, while fixed, is completely customizable to any fixed equation, and the tax savings and growth advantages are significant. Call (716) 883-1833 to talk more about settlement planning strategies for your clients.