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Weekend Reading for Financial Planners (Dec 18-19)

December 17, 2021 02:34 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that the Senate vote on the much-anticipated Build Back Better Act has been delayed until after the start of 2022 after Senate Democrats could not reconcile their disagreements over the bill’s size and scope – though the pending lapse in expanded Child Tax Credit payments (along with other highly touted parts of President Biden’s agenda) puts pressure on the Senate to act soon to pass the bill ahead of 2022’s midterm elections

Also in the news this week:

Research from Cerulli has found that the number of retail broker-dealers declined by 28% in the decade from 2010 to 2020, underscoring the extent to which small- and mid-sized broker-dealers have struggled to retain advisors who have either jumped to larger broker-dealer firms or switched to the “pure” RIA model
A consumer study shows that among people with over $250,000 in assets, having a financial advisor is associated with higher overall happiness – with the effect increasing dramatically for those with over $1.2 million

From there, we also have several articles discussing recent surveys that show how different types of consumers find both financial advice and financial advisors:

Why wealthy millennials are looking for financial advisors who can best coordinate their advice with digital tools (but aren’t using digital tools in lieu of advisors)
Consumers are looking to a wide range of online sources – from Facebook to TikTok – for financial advice, suggesting that advisors who demonstrate expertise on these sites could be better positioned to attract potential clients
A survey of how consumers select financial advisors shows that wealthier individuals are more likely than others to use the recommendations of centers of influence rather than friends, and that affluent Millennials behave more like the affluent than less wealthy Millennials when it comes to working with advisors

We also have a number of articles on inflation and the investments that might serve as inflation hedges:

How REITs and equities have outperformed gold as inflation hedges
Why cryptocurrency's value as an inflation hedge is still unclear
How the inflation-adjusted price of college tuition has recently started to fall, after decades of increases

We wrap up with three final articles, all around how Vanguard shapes the investing and financial advice industry today:

Why Vanguard is continuing its expansion into financial advice (and opening a new office in the home territory of its rival Charles Schwab)
Why the biggest fund in the world – the Vanguard Total Stock Market Index Fund – tracks an index (the CRSP U.S. Total Market Index) that few non-professional investors have heard of, and what happens when a fund gets so large that it impacts the index it’s tracking
How Vanguard has evolved beyond its original mission of low-cost index investing for everyone – and why that doesn’t necessarily constitute a betrayal of its principles

Enjoy the “light” reading!

Kitces & Carl Ep 75: Crafting A Statement of Financial Purpose To Find The Client’s Financial Why

December 16, 2021 07:05 am 1 Comment CATEGORY: Kitces & Carl Podcast

When it comes to retaining clients, financial advisors benefit from focusing on gaining both the client's confidence and trust. Because while a client may be confident that an advisor can develop a workable financial plan, they will not feel compelled to stay with the advisor unless they can also trust that their advisor has their best interests at heart throughout the process. And even though it is important to have a well laid-out financial plan, it is equally (if not more!) important for advisors to understand the client’s underlying motivation to ensure the plan is relevant and to help clients stay on track with their financial goals. To this end, a statement of financial purpose helps the advisor to create a meaningful plan for the client, and also helps the client stay focused on taking action on the plan and staying the course.

In our 75^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the difference between a “statement of financial purpose” and a “mission statement,” the psychology behind why a statement of financial purpose helps to instill clients with confidence and trust in their advisors, and the importance of crafting statements of financial purpose by first helping the client understand their own “financial why.”

As a starting point, it is important for advisors to begin the financial planning process by understanding the deeper reasons that explain why their clients are seeking advice in the first place. By encouraging clients to take time to carefully reflect on what it would mean for them to achieve their financial goals, financial advisors can discover insight into the client’s motivation to help them craft a relevant and meaningful statement of purpose (written in the client’s own words) that crystallizes why the financial plan is meaningful and important to the client.

Merely creating the statement of financial purpose isn’t enough, though, as clients need to review, reflect upon, and update it periodically, using it as a guide to steer the financial plan, keeping it on track. Advisors and clients can use the statement of purpose as a reminder that all the financial work being done is indeed serving a greater purpose. Additionally, a statement of financial purpose creates an opportunity for advisors to gain trust with clients, by reassuring them that what matters most to them is of paramount importance, and that following their plan (and sticking to it even through the most turbulent times) will help them attain their financial goals.

Ultimately, the key point is that a statement of financial purpose is a living document that helps clients stay focused on their most important goals and encourages them to stick to their plan. At the same time, it also helps to foster greater client trust and confidence in their advisors, facilitating stronger and more open communication channels, which presents advisors with the added bonus of better and deeper connections with their clients!

Using A Financial Purpose Statement To Guide Mindful Spending Decisions

December 15, 2021 07:08 am 0 Comments CATEGORY: Client Trust & Communication

According to the American Psychological Association, nearly 2/3 of Americans rate money and work as significant sources of stress in their lives. And because money is such a common source of stress, as well as a difficult or uncomfortable topic for many to discuss, we often tend to seek ways to minimize consciously thinking of how we use money (such as by opting for cash-free forms of payment). But people who don’t retain at least some awareness of their spending may subconsciously use other people's behavior as a guide to making money decisions, instead of consciously making choices based on their own personal values and priorities.

In this guest post, Derek Hagen – Founder of Money Health Solutions, a financial therapy and financial life planning firm – discusses how financial advisors can develop a Financial Purpose Statement for their clients to use by helping them examine their relationship with money and identifying their most meaningful goals. Furthermore, he explains how the Financial Purpose Statement can guide clients to live their (financial) lives with deliberation, ultimately helping them to (re-)align their behavior with what matters most to them!

At its core, a Financial Purpose Statement consists of a simple statement that crystallizes the purpose of money in the client’s life. To develop a relevant Financial Purpose Statement, an individual must reflect deeply on the kind of life they would like to have and the person they want to be. Advisors have several tools they can use to help clients examine these ideas and identify their most meaningful values. Some of these include the Klontz/Kahler/Klontz Life Aspirations exercise, which helps individuals consider their ideal life; the Miller/Rollnick Values Cards, which create a systematic process to prioritize meaningful personal values; and George Kinder’s Life Planning Questions, which aim to reveal important life priorities by asking clients to contemplate their own mortality.

Ultimately, Financial Purpose Statements can distill an individual’s values and priorities into an easily accessible reminder that can help them make spending decisions in alignment with what really matters most to them. And by helping clients to develop their own Financial Purpose Statements, advisors can encourage their clients to get clear on what their most important priorities are and guide them toward making the right financial decisions, helping clients live happier lives and achieve their most important goals with clarity and intention!

#FA Success Ep 259: Facilitating An Internal Succession Plan As The Pathway To Put Clients First, With Patricia Houlihan

December 14, 2021 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 259th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Patricia Houlihan. Patti is the Founder of Houlihan Financial Resource Group, an independent RIA based in the Washington DC area that oversees $345M in assets under management for 150 client households.

What's unique about Patti, though, is the way she’s implementing an internal succession plan with her son and a second advisor, focusing not necessarily on exiting herself from the business and maximizing the value of the sale – because as Patti notes, you can’t take it with you anyway – but instead on ensuring continuity of management and continuity of service for clients so that Patti doesn’t have to actually retire anytime soon at all.

In this episode, we talk in depth about how Patti’s internal succession plan has evolved over the years after clients began to ask her when she was going to retire (and started to highlight their own concerns about how the firm would service them after Patti was gone), the way Patti implemented a team approach where all three advisors of the firm have been in on every client meeting for years so clients have a trust relationship with more than just Patti, and how there hasn’t been any issue implementing a succession plan where Patti’s name is part of firm name – Houlihan Financial Resource Group – because the whole point is that the firm will live as an ongoing concern beyond her (and as Patti notes, if at that point the successors want to change the name, that will be their prerogative anyway!).

We also talk about how Patti structures her financial planning engagements with clients, including why Patti insists that every client needs to go through the details of their household spending as part of the planning process, why despite some naysayers about Monte Carlo analysis, as a former math teacher herself, Patti views it as foundational to having better conversations with clients about retirement, and why Patti prefers to talk about client risk tolerance, not in terms of tolerance for market declines, but instead translates it into the real dollar amount the client would potentially lose in a bear market to make sure they’re really comfortable to have that much at stake.

And be certain to listen to the end, where Patti shares what it was like getting started as a female financial planner in the 1980s when, as Patti puts it, it was very much a “man’s world” in the brokerage industry at the time, how Patti sought to reinforce her own expertise and credibility in her early years by becoming a teacher in a CFP program, and why ultimately the key to success as a financial advisor is all about building your own self-confidence first.

And so whether you’re interested in learning about Patti’s decision to opt for an internal succession plan (rather than selling her firm when she retires), her familial approach when relating to clients, or how Patti focused on her confidence and self-worth to navigate her way to success, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Patricia Houlihan.
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Creating A Chart Of Accounts: A Practical Guide For Financial Advisory Firms

December 13, 2021 07:04 am 0 Comments CATEGORY: Practice Management

Financial advisory firm owners often rely on their firms' financial data to make decisions for their businesses. But the quality of that data – how it is organized and how much detail it provides about the firm's activities – can greatly affect the firm owner's ability to make good, informed decisions. The firm's Chart of Accounts is a categorized list of every type of transaction that the firm encounters and provides the foundation on which the firm's accounting and bookkeeping systems are organized. It is the key for consistent and accessible data that gives a clear picture of the firm's financial health. A good Chart of Accounts, therefore, can provide the firm owner with insightful data, enabling better decision-making about the firm's future.

The first step towards building an effective Chart of Accounts is to understand how different types of business transactions are accounted for. All business transactions can be sorted into one of five different categories: Assets, Liabilities, Equity, Income, or Expenses. These high-level categories are further divided into subcategories – the "Accounts" in the Chart of Accounts – that are specific to the individual firm's operations. Which means that firm owners have a great deal of flexibility when deciding how many (and which) Accounts should be used to track their firms' financial data.

But with the ability to build a customized Chart of Accounts comes the question of how to build one that leads to making better business decisions. A well-designed Chart of Accounts can be used to generate financial data that provides clear details about how different areas of the firm are performing and where improvements can be made. It should also make it possible to participate in (and compare with) industry benchmarking studies to evaluate the firm's performance alongside its peers, which provides another useful approach for owners to gauge their firms' financial health.

For example, by separating "Direct" expenses – those expenses involved in generating revenue for the firm, such as advisor compensation (including compensation for advisory services provided by owners themselves) – from the "Overhead" expenses of the firm's day-to-day operations, owners can glean insightful data that gives a clearer picture of the firm's profitability. For solo practices, this can even help to show whether the firm actually is profitable after accounting for the owner's work as an advisor.

Because it takes time to build an entirely new Chart of Accounts from scratch, we've provided a downloadable template that includes standard transaction categories relevant to most advisory firms and that can be imported into the firm's accounting software. The template categories align with major industry benchmarking studies, but they can also be adapted to suit the needs of individual advisory firm owners.

Ultimately, the point of the Chart of Accounts is not just to have a system for organizing the firm's financial data, but to be able to access and use that data, to make the firm even better. And by assessing the level of organization and detail that is most relevant for the firm, firm owners can ensure that their firm's financial data will help them make the most well-informed decisions for their business!

Weekend Reading for Financial Planners (Dec 11-12)

December 10, 2021 01:59 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading for Financial Planners” - this week’s edition kicks off with news about the U.S. Supreme Court’s hearing of a case involving the Northwestern University employee retirement plan, whose participants claim that the plan’s administrators breached their fiduciary duties by offering ‘too many’ choices and providers, such that they failed to reach size breakpoints that could have reduced the plan’s fees… a case that will have broader implications for the types of claims that other retirement plan participants will be able to bring against their plans’ sponsors (and raising broader questions about just how far a fiduciary really has to go in trying to minimize costs for their clients).

Also in industry news this week:

While regulators have signaled that they don’t intend to re-write the recent SEC and DOL “Best Interests” regulations that allow for conflicted advice, broker-dealers are likely to face more scrutiny in examinations from the SEC and DOL focusing on conflicted compensation in the coming year
Though the “Secure 2.0” bills in the U.S. House and Senate have seen little progress since being introduced in the spring, legislators are still optimistic that the bipartisan bills could actually still pass before the end of the year (and if not, sometime in early 2022?)

From there, we also have several articles on options for investing in cryptocurrencies and the creation of a new type of blockchain-based organizational structure:

The introduction of a crypto index using separately managed accounts that could be widely available to advisors next year
Fidelity launched a ‘spot’ Bitcoin ETF in Canada, but U.S.-based advisors and investors will face hurdles investing in the fund
The potential for Decentralized Autonomous Organizations (DAOs) to serve as a more efficient business structure for membership-style organizations

We also have a number of articles on investing:

How the sharp rise in inflation has led to the increased popularity of Series I savings bonds, whose current 7.12% annual interest rate led to over $1.3 billion in new bonds being purchased in November alone
Why structured notes are gaining more interest as a higher-yielding alternative to traditional fixed-income assets, despite some notable potential downsides to investors
How “direct indexing” has seen an increase in interest, owing to its possibilities for tax-loss harvesting and customizing portfolios to fit investors’ needs

We wrap up with three final articles, all about seizing opportunities, even if there is a risk of failure:

Why taking positive asymmetrical risks can lead to personal and professional success
How striving for excellence rather than perfection can lead to more creativity
The importance of momentum, and why temporarily skipping over challenging tasks and NOT checking every task on a to-do list can make it more likely a larger goal is achieved

Enjoy the ‘light’ reading!