Weekend Reading for Financial Planners (Mar 6-7)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Study Says Financial Advisors Proved Their Worth In March 2020 Meltdown (Greg Bartalos, RIA Intel) - Financial advisors have long claimed that one of our primary value propositions is helping to "talk clients off the ledge" and avoid making disastrous mistakes by selling at market lows during times of panic. Yet the irony is that with a nearly 10-year-long bull market, there's been little opportunity to "show" that value... until the market volatility stoked by the COVID-19 pandemic last March, where the S&P 500 plunged 34% from February 19th to March 23rd in the fastest-ever bear market ever. But now a recent research paper by Yuanshan Cheng and his colleagues, aptly entitled "The Value of Registered Investment Advisors during the COVID-19 Financial Market Crash", finds that during the market volatility, clients working with RIAs tended to sell less and buy more during the market downturn, and the more the advisory business was focused with affluent clients, the more likely they were to help their clients stay on board and not underweight equities in the midst of the bear market. The results appear to be driven at least in part by evidence that financial advisors were more proactively communicative with clients during the volatile market period (e.g., a higher volume of social media sharing and conversation that highlighted positive market news to comfort clients), helping to keep client expectations of future market returns buoyant which discouraged them from selling when prices were down.

Advice Is More About The Complexities Than The Goals (Jim Stackpool, Certainty Advice) - Over the past 20 years, the financial advisory industry has migrated away from its roots in "just" selling products, into a realm of understanding clients' goals and then recommending the products and solutions they need to implement in order to achieve those goals. Yet as Stackpool notes, in the end, the real value is not just in prescribing the path to achieve the goals, but in helping clients with the ongoing "grinding" journey... and overcoming the seemingly inevitable complexities that arise along the way (and without intervention and support, can block their progress altogether). For instance, with younger clients, the value isn't really "just" telling them to spend less and save more (and to utilize pre-tax IRA and 401(k) retirement accounts and tax-free 529 college savings plans), but helping them navigate the complexity of how to weigh those goals against having kids, raising a family, deciding to change jobs or start a business, etc. With retired clients, it's not just about spending prudently, but the complexity of how to help a troubled child going through a difficult divorce while supporting three young grandchildren. With small business owners, it's managing the steady growth of the company and deciding when a breakthrough new opportunity comes if it's really a good idea to boost the enterprise value of the business, or a distraction that could lead to its downfall. Because in the end, "our lives spend more time in our real and perceived complexities than basking in the joy of our goals", which means that while goals may be important, the value isn't in setting the goals and establishing the recommendations to achieve the goals, but in using the goals as fuel to support progress as the advisor helps the client navigate the inevitable complexities that can pull them off track along the way.

How Do You Define Your Value? (Stephanie Bogan, Investment News) - Despite industry research suggesting that the value-add an advisor brings to the typical client portfolio could be as much as 3%/year of "Advisor Alpha" by helping clients clarify goals, take focused steps towards those goals, and avoid big mistakes along the way, in practice many or even most financial advisors are still struggling to explain and justify the value proposition they provide for the traditional "only" 1%/year AUM fee. In part, the challenge is simply that when the advisory fee is an "AUM" fee, it's hard not to focus the discussion of the value proposition around the investment portfolio, where it's difficult to show (and impossible to promise) outsized investment returns, and it can be hard to persuade a client that they "need" the advisor to avoid making investment mistakes (if only because they don't want to admit to themselves that they're not good at investing!). Bogan suggests that financial advisors can ultimately firm up their value proposition by breaking it down into three components: Portfolio value (which includes not only optimal portfolio construction but also asset location and other "tax alpha" strategies, along with efficient withdrawal sequencing); Planning value (the impact of consistent savings and investing, managing debt, maximizing tax savings, retirement planning, etc.); and Personal value (helping clients navigate their financial lives more effectively through behavioral coaching). By framing the conversation this way, the advisor can then highlight the value they're going to provide in each area, in terms specifically relevant to a particular prospect, such as: "John, Jane, I’ve listened to what’s on your mind and what’s important to you when it comes to your money and financial life… making sure you start saving more consistently for retirement, knowing Jane and the kids will be okay if something happens to you. Together we’ve framed the outcomes and experiences you want to create, things like… retiring at 55 with a $10,000-a-month paycheck, and sleeping well at night knowing you have a sound plan in place. My role is to add value to your financial life in three main ways. First, by adding portfolio value through creating tax efficiency and reducing portfolio risk… after all, the best way to make money is not to give up big chunks of it. Second, I’ll add value by designing a personal financial plan that reflects your unique situation and seeks to pull all the levers we possibly can to help you achieve your goals, including putting you on a savings plan that helps you retire at 55, increase your monthly retirement paycheck by $1,000/month, and reducing tax liability and reinvesting those savings to ensure your needs are covered should something happen to John. Last and most important is my helping you navigate this process. Because too often, our financial decisions are driven by our feelings and fears rather than facts, and studies show investors fare far better with an adviser than without one. This integrated approach affords me the ability to have a very real and measurable impact on your financial life, while also recognizing the biggest impact I can have is giving you a personal path to follow and being a trusted guide to help you along the way."

What Is NOT A Value Proposition... And What Is (Tony Vidler) - The definition of a "value proposition" is simply "the value that you propose to deliver to a potential client", yet in practice, Vidler notes that an astonishing amount of advisor marketing does not actually convey a real value proposition to the end client. Instead, we highlight aspects like technical qualifications (e.g., "I'm a CFP professional"), or make statements about our character (e.g., "I'm honest/trustworthy/dependable"), or talk about our service (e.g., "we give white-glove service!"). All of which are relevant qualifiers to clarify that the advisor is a professional worthy of the client's trust... but still doesn't actually convey the value to the prospective client themselves. Which may be connected to these qualities; for instance, "honesty" is not a benefit, but "protecting your money from theft or fraud" is. Still, though, it means that talking about an advisory firm's qualities still won't convey real value, unless the advisor actually connects those qualities to the benefits and true value that the client themselves will derive. So as you consider what you describe as your "value proposition" to clients, consider whether they're statements of your value, or whether they're truly statements that focus on the end result the client gets that would be valuable to them (and if not, figure out how to translate your 'value proposition' to something that actually does propose real value for the client themselves).

Advisors Are Really In The Wellness Business (Rick Kahler, Advisor Perspectives) - In the modern era, it seems there is no quicker way to end a conversation in a social setting than responding to the question "what do you do for a living" with "I am a financial advisor". But over the years, Kahler has evolved his response - in recognition of the changing value proposition of what he does as a financial advisor - to say that he is a "financial therapist" instead, and now more simply to state that he is "in the wellness business". Wellness is a somewhat ephemeral term in itself, but in practice has become the foundation of extensive research into what makes us feel healthy and happy, which spans three components of emotional/spiritual, financial, and physical. And to be fair, while holistic financial advisors aren't directly in the physical domain of the wellness business, the toll of financial stress can be a physical well (as well as mental and emotional), and notably the sheer breadth and span of financial planning arguably still means financial advisors are closer to being in the holistic wellness profession than virtually any other professional as well! In fact, Kahler notes that much of the existing "wellness" movement, emerging from the domains of physical health and medicine, and spirituality, have specifically ignored the money/financial aspects of wellness (as money remains the last great "taboo" subject!). Which arguably means financial advisors are uniquely positioned to connect the dots of holistic wellbeing... albeit with the increasing relevance of not just organizations like the Financial Planning Association, but the Financial Therapy Association, too.

6 Ways To Show Clients You Care (Matt Matrisian, Investment News) - One of the most powerful ways to connect with other people is to simply show them that you care... though in practice, it often takes the reminder of a "Hallmark holiday" (or the winter holiday season) to nudge us to do so. But the relevance of showing people that you care and you're thinking about them goes beyond just connecting with friends and family during the holidays; it matters with clients, too. And just as with friends and family, often it's not really about the big expensive gesture, but simply the small one that shows you really care. Accordingly, Matrisian offers up a number of very practical 'small but meaningful' suggestions that advisors can try with their clients, including: instead of sending clients the same old email update, send a personalized video that shows off your true personality and builds rapport, using a software tool like BombBomb to create the video emails; instead of client appreciation gifts, host a special wine tasting party over Zoom, send a bottle of wine to each client in advance, and invite a sommelier to talk about the wines (and perhaps a local chef to discuss food pairings); for clients less familiar with (and comfortable with) Zoom, consider hosting an educational event to show them how to use Zoom in the first place (which not only helps them connect with the advisor but also enables them to use the technology that will allow them to connect with their friends and family, too!); roll out a virtual investing group for the children of your clients to encourage them to engage with financial literacy (and consider a small scholarship as a reward for whoever does the best!); surprise a client by sending them a packaged meal or groceries from a local business (especially if you have or can take a moment to find out what kind of food they like and send them something especially meaningful); when the pandemic lifts, consider "buying out" a local restaurant for the night to host an event (or if the pandemic is still on, do the same, invite clients to order, and be there in person to provide curbside meal service!).

A Powerful Tool To Organize Client Relationships And Finances (David Leo, Advisor Perspectives) - Because advice often shines in moments of complexity (when we need help to navigate through it), there is a tendency amongst us as financial advisors to 'complexify' everything. Yet the reality is that for those who are struggling with complexity, often what they want and need most is someone to simplify the situation instead. In this context, Leo highlights an advisor software solution to help clients visualize a simplified picture of their financial lives, called Asset Map. At its core, Asset Map allows advisors to enter in all of their client's financial information and output it to a single-page visualization of their entire financial life, capturing not just all the assets and liabilities of the household, but also their income sources, and all the key members of the family themselves (with names, ages, and relationship to the primary household member/client), which are entered into a "stencil" (template) to expedite the process. The significance of the Asset Map is not just its ability to show a family their full financial picture in one page, though, but that it inherently prompts them to fill in all of their financial information (or the map will feel incomplete!), which itself can prompt conversations about everything from non-traditional 'idle' assets to prospective inheritances they may receive in the future. In turn, Asset Map also creates "Target Maps", which help clients map the goals they're trying to reach (i.e., "What You Want") and connects it to their available capital (i.e., "What You Have"), to show a Funded Ratio progress towards the goal. Which ultimately isn't necessarily intended to replace more comprehensive financial planning software for clients who need a more complex analysis; instead, Asset Map is positioned as the simplified output of the planning process that ultimately encapsulates what clients actually want to see (which is a simplification of the complexity in their lives).

Be Your Clients' CEO: Chief Empathy Officer (Kimberly Foss, Financial Planning) - The rapid market decline and subsequent rapid recovery of financial markets over the past year have led to a somewhat paradoxical situation in which many affluent clients are better off financially than they ever were, but feel worse and more nervous about their futures than ever before. Which means sometimes, no amount of retirement projections and Monte Carlo analyses can convince a client to move forward with their plan (e.g., to retire), as the fears of "What if..." reign supreme after a year of so many challenges, and a kind of "financial shell-shock" leaves clients paralyzed and unable to take action (even if they really do have the financial resources to do so safely and successfully). This collective discomfort isn't unique to the clients of advisors and their financial rollercoaster, though; in fact, the most-read article in the Harvard Business Review last year was Scott Berinato's "That Discomfort You're Feeling Is Grief", which recognized how so many people were grieving over the terrible disruption that the pandemic wrought in our lives, making it more important than ever to "stock up on compassion"... or in the case of financial advisors, to become as Foss puts it, our clients' "Chief Empathy Officer". Which, notably, starts by acknowledging our own fears and concerns in the current environment (as you can't authentically respond to someone else's worries until you've dealt honestly with your own!), then listen (really listen) to what the client is saying (it's the same reason we love dogs: no matter what kind of day you've had, your dog is always glad to see you, and will always pay attention to you when you're talking to it!); and tune up your own emotional radar to watch for those moments when clients flash signs of emotional turmoil (which, rather than quickly moving past, is a moment to pause and reflect and ask further about how they're really doing).

Dad, A Death Sentence, And The Planner Who Set Us Straight (Ron Lieber, New York Times) - As a personal finance reporter for the New York Times, Ron Lieber has covered the financial services industry, including financial advisors, for more than a decade. But in recent years, Lieber went through his own family tragedy, as his father was diagnosed with ALS, and his siblings (a lawyer and an executive at a non-profit), despite their collective wisdom and experience, still struggled with the weight and complexity of the financial and other end-of-life decisions they faced. For which they turned to Ron's financial planner, who helped them with everything from getting their father's financial affairs in order to navigating the complexity of Medicare Advantage and the Veterans Affairs systems, to arranging the essential Wills and powers of attorney. In addition to simply being a companion on the difficult journey that the family experienced, from finding caregivers to fixing an old home equity loan that his father had once co-signed with (and was still on the hook for) an ex-girlfriend. Which came at a cost of about 1% of their investable assets, that Lieber notes "wasn't a bargain, strictly speaking, but, wow, was there value". Or stated more simply, "During my dad’s illness, I experienced firsthand what had, until then, just been book learning: Financial planners are often at their best when your life is at its worst".

Focusing On Time Instead Of Money Can Make You Happier; Here's How (Gili Malinsky, Grow) - While the past year has introduced new financial stresses for many (from job and income uncertainty to asset volatility), arguably the pandemic has been an even greater disruption in how we spend our time than our dollars, from vacations delayed to the stress of working and schooling from home (all at once). Which is important, because, as Harvard researcher Ashley Whillans argues in her recent book, "Time Smart", that one of the greatest ways to improve our well-being is to focus on time, freeing it up from activities that don't make us happy and filling it with activities that do. In fact, recent studies have shown that it's the countries where a higher proportion of respondents say they value time and leisure over work and money who report having the highest percentages of happy citizens (regardless of how wealthy those countries are). For many of us, though, we don't realize where our money goes, and we really don't realize where our time goes; as a result, Whillans suggests as a starting point to track our own activities and figure out where our time is going (if not in fine detail, at least in multi-hour chunks of time to get a general handle on where the time is really going), ideally also noting how we felt about the activity (was it pleasant or not, and why?). Once you reflect on those activities, you can evaluate which ones really make you happy (e.g., if you hate grocery shopping, that can be a good prompt for a meal delivery service, but if you are someone that enjoys the shopping, keep it in!). In turn, recognize that not all leisure time is the same as well, and there can be opportunities for improvement there, too; if you don't actually feel a lot better watching TV or shopping online (so-called "passive" leisure activities), consider more active ones like exercising or volunteering, instead?

A Simple Compliment Can Make A Big Difference (Erica Boothby, Xuan Zhao, and Vanessa Bohns, Harvard Business Review) - Verbal gratitude makes people feel valued, has been shown in neuroscience research to be processed by the brain similar to financial rewards, and in the context of business, in particular, has been shown to mitigate the negative effects of stress on employee performance. Yet in practice, many business owners and leaders fail to take the time to express praise and gratitude and establish a positive organizational culture... implying that we may still underestimate just how powerful compliments and simple statements of gratitude can really be. In fact, researchers recently conducted a study to evaluate how good we think we'll feel if we receive a compliment, and then following up by asking them how they felt after they actually did receive a compliment... and found that we routinely underestimate the positive impact that compliments have, and sometimes entirely misjudge by thinking that a compliment may make the other person feel a little uncomfortable to be directly flattered for their efforts (when in practice, compliments brighten our days more than we realize and make us feel better and less uncomfortable). In other words, as human beings we often unwittingly create our own psychological barriers to compliments, allowing doubt to creep in about the impact of expressing praise or appreciation to others ("What if my delivery is awkward?") and failing to recognize that, as the saying goes, it really is "the thought [and vocalizing the thought] that counts" (not the delivery). In fact, the researchers suggest that one way around our own struggles with giving compliments is to focus less on how competently we are or are not conveying the compliment (which can fill us with anxiety), to instead the warmth, sincerity, and friendliness it conveys (which merely requires us to authentically show the gratitude itself). And notably, those who received compliments regularly still reported that it brightened their mood similarly each day (i.e., the compliments didn't "get old" with repetition, either). Because in the end, "just as people must eat regularly to satisfy their biological needs, the fundamental need to be seen, recognized, and appreciated by others, as it turns out, is a recurring need at work and in life", too.

Wiser: The Scientific Roots Of Wisdom, Compassion, And What Makes Us Good (Dilip Jeste, Next Big Idea Club) - It's often observed that with age comes wisdom, the cumulative effect of applying the knowledge we've learned in the world and gaining real perspective about what works (or doesn't). At its core, researcher Dilip Jeste, author of "Wiser: The Scientific Roots Of Wisdom, Compassion, and What Makes Us Good" finds that Wisdom has a number of key components, including self-reflection (i.e., knowing your strengths and limitations, such that in the words of Socrates, "the only true wisdom is in knowing that you know very little"); emotional regulation (being able to control your emotions so that you can reflect on the situation); empathy and compassion (understanding others' emotions and helping them); and being able to strike a balance between accepting a diversity of perspectives and still being decisive when it matters. Notably, though, because the foundation of wisdom is self-reflection (to learn from our experiences, and recognize how much we have to learn), a process of self-reflection (whether through meditation, during exercise, or over a quiet lunch break) is essential to begin the process of self-correction and learning. From there, it's important to remember, as Mark Twain famously observed, that "good decisions come from experience, and experience comes from making bad decisions". In fact, the outcomes of decisions are often not even apparent at first, either, which means again that it's important to reflect back on decisions after the fact (not just try to evaluate the correctness of the decision in the moment). And because a diversity of perspectives is so important to learn, it's important to spend time with people who are substantively different from us (from those of different ages to those with different belief systems), with a focus not on questioning their motives to simply asking them to explain their rationales in order to learn and expand your viewpoint (the very essence of becoming "wiser").

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.