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The Capacity Crossroads And The Small Giant Alternative To Building A Lifestyle Or Enterprise Firm

September 9, 2019 07:09 am 11 Comments CATEGORY: Practice Management

As the financial advisory industry continues to move away from being primarily product-driven (where client ‘relationships’ were primarily transactional sales interactions, and advisors could go months or even years without interacting with some of their clients after the sale was closed) and towards a recurring-revenue ongoing relationship model (where advisors provide continuous, ongoing advisory services to their clients), the total number of clients that any one advisor can handle at any given time has decreased dramatically. Because, not only are there significant time constraints around actually doing the work necessary to serve those clients well (not to mention the time needed to actually find new clients and convince them to work with you), but there are cognitive constraints as well, given that physiologically our brains (as humans) can only keep track of a limited number of interpersonal relationships to begin with!

Traditionally, having ‘too many’ clients was rarely a problem – as advisors just focused on their best clients for repeat business opportunities – but in the modern relationship-driven model, all advisors will eventually reach a point where they simply don’t have the capacity to take on more of those ongoing relationship clients and continue to grow the firm. In other words, the advisor has reached a ‘Capacity Crossroads’, and must make a conscious decision about the path to pursue next - either stop growing, or increase the firm’s capacity by bringing on additional staff (and possibly another advisor) in order to continue growing the firm. The problem, however, is that even for those who choose the path of continued growth, once an advisor crosses that capacity threshold, not only are any additional clients less profitable (due to the higher overhead costs incurred by increasing staff), but the advisor also has to manage that growing number of team members… which is rarely a goal for advisors who decided to strike out on their own to serve clients (and not manage employees)!

For most financial advisors, the choice at the Capacity Crossroads becomes a decision about long-term income potential, where the advisor has to decide whether to become a ‘lifestyle practice’ and stop growing (flat-lining their growth and income), or to hop on the eternal hamster wheel of growth and work towards building an enterprise business to continue to grow their income. Yet the reality is that, for those who do decide to go down the enterprise path, there is little evidence to suggest that there are any economies of scale growing down the road from being a ‘small’ solo practice to a multi-billion-dollar firm. And, in fact, top-performing solo advisors often have the same take-home pay as the average partner at a $1B+ ensemble anyway!

In addition, the reality is that the choice at the Capacity Crossroads isn’t just between Lifestyle or a ‘go-big’ enterprise to maximize shareholder value in the first place; there is another choice, which is to become a “Small Giant” advisory firm, which doesn’t grow just for the sake of growing, but rather is built intentionally to be ‘great’ instead of ‘big’. In essence, Small Giants seek to be a purpose-driven business, typically one that is able to serve not only the clients/customers, but also the employees, vendors, and the community. In other words, the point isn’t to maximize just shareholder value, but rather to simply be excellent at what they do, while focusing on serving all of their stakeholders, including owners, employees, vendors, clients, and communities. Fortunately, it also turns out that small giants also happen to be steady growers, and are able to be rather profitable to boot!

Ultimately, though, the key point is simply that, if there isn’t that much difference in the long-term wealth-building potential between a lifestyle practice, small giant, or enterprise firm (especially given the time, effort, and reinvestment cost required to build a multi-billion-dollar business), then the answer to the question of the best path to take when you reach the Capacity Crossroads simply comes down to personal choice. Which is important, because in the end, the best way to build a practice that maximizes your own happiness as an advisor isn’t by allowing growth to dictate the role you fill in the business, but by intentionally setting a vision for the type of business you want to build in the first place!

Weekend Reading for Financial Planners (Sep 7-8)

September 6, 2019 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fascinating new consumer study finding that the titles that financial advisors use really do matter, particularly when it comes to the perceived loyalty that the individual will give to their clients, with "financial planners" and "financial advisors" gauged as significantly more trustworthy than stockbrokers and insurance agents... and raising questions of whether the SEC should have gone further in its title reform efforts under Regulation Best Interest.

Also in the news this week was an announcement by the CFP Board, in response to the recent Wall Street Journal article about its lax enforcement of standards, of the members of its new Enforcement Task Force, and that the task force will be comprised mostly of former securities regulators (suggesting that the CFP Board may indeed be preparing for a substantial step up in its enforcement efforts). In addition, the buzz is growing that the SECURE Act may finally be passed in the coming month (as an add-on to the budget legislation that Congress must pass by the end of September, and Jackson National paradoxically announced, that due to New York state's new Regulation 187 fiduciary rule for annuities, the company will bizarrely be suspending its fee-based annuities but keeping its commission-based annuities in what appears to be an attempt to not have to disclose how significant the differences in costs and benefits may be between commission- and fee-based annuity contracts.

From there, we have several practice management articles this week, including a look at the new add-on services advisory firms are beginning to offer to help justify their advisory fees (and avoid needing to cut fees), the latest advisor benchmarking study that finds advisor compensation in various key roles may be starting to flatline (but only because firms are developing more traditional career tracks with formal promotions instead), issues to consider when instituting a new advisor bonus plan for bringing in new clients, what to consider to properly define who an "A" client really is (beyond just their assets under management or revenue to the firm), and what to consider when considering whether to make a counter-offer to an employee who says they're leaving (and why it's best to try to avoid ever being in such a position in the first place).

We wrap up with three interesting articles, all around the theme of entrepreneurship: the first looks at a recent study finding that despite the popular view that more heads are better than one, startups founded by solo entrepreneurs are more likely to survive and thrive than team-based start-ups (that in practice just end out being more likely to have critical disagreements about the vision or direction of the business and break up later); the second explores another new study, finding that the vision of young-genius entrepreneurs (e.g., Bill Gates, Steve Jobs, or Mark Zuckerberg) is really the exception to the rule, and the average age of entrepreneurs is actually 42, with the fastest-growing startups have an average founder age of 45; and the last explores the journey of entrepreneurship for advisory firm founders in particular, and the ways the role of the founder and the demands of the business on that founder change and evolve as the business itself grows and develops over the years.

Enjoy the "light" reading!

How S Corporation Owner-Employees Can Adopt An Accountable Plan To Preserve The Home Office And Other Business Expense Deductions

September 4, 2019 10:34 am 10 Comments CATEGORY: Taxes

Prior to the passage of the Tax Cuts and Jobs Act in 2017, W-2 employees had the ability to deduct unreimbursed job-related expenses paid with personal funds as miscellaneous itemized deductions on their personal income tax returns. But the TCJA suspended most miscellaneous itemized deductions (including unreimbursed employee business expenses) through 2026, eliminating the opportunity for employees (including S corporation owners who also serve as employees of those companies) to deduct business expenses on their individual returns.

But the good news for S corporation owner-employees is that, by implementing an “Accountable Plan” a (a reimbursement program which meets certain IRS regulations), S Corporation owner-employees can continue to deduct business expenses that they pay for personally by “passing” them along to the business. Essentially, an Accountable Plan is an IRS-approved reimbursement program that allows a business to reimburse employees for business expenses they incur as part of their work. The business is then able to deduct those reimbursed amounts as if the business had incurred the initial expense, itself.

When using an Accountable Plan, reimbursements for business expenses are not considered compensation to employees thus, don’t increase payroll taxes due on wages or an employee’s income tax liability. However, it’s important to note that the deductibility of an expense incurred by an employee isn’t changed when submitted for reimbursement to an employer. Thus, any limitations or restrictions inherently associated with a deductible expense remain in place (e.g., the 50% deductibility of meal expenses).

There are three simple guidelines an Accountable Plan must follow to be considered valid: 1) all expenses to be reimbursed through the plan must have a business connection, 2) expenses must be “timely substantiated,” and 3) any excess advances provided to the employee must be “timely repaid.” While the actual definition of “timely” (with respect to substantiation and repayments of advances) is somewhat ambiguous, the IRS has provided several “safe harbor” options.

Since Accountable Plans are so simple to establish, and since they offer such flexible rules around to whom they can apply, and to which expenses they will cover, there is generally no reason for most S Corporations not to implement them. For example, the Accountable Plan can be designed so that only certain expenses can be reimbursed, and/or so that only specific employees can participate.

Despite their simplicity, though, business owners should understand that if the IRS does not deem their plan in compliance with the Accountable Plan rules, their plan will be treated instead as a “Non-Accountable Plan”. In such instances, any reimbursements will be added the employee’s wages. Even though employee wages reduce gross business revenue, that reduction is offset by the increase in wages. And to top it off, the impact of higher FICA taxes as a result of those wages means that the total tax liability will be higher than if the expense hadn’t been reimbursed in the first place!

Ultimately, the key point is that an Accountable Plan is a simple way for S Corporation owner/employees to shift deductibility of business expenses from the employee to the employer and offers the ability to mitigate tax liability by allowing business owners to choose which expenses are reimbursable and which employees will be eligible to submit reimbursements. Thus, in light of TCJA and the suspension of miscellaneous itemized deductions, for S Corporation owner-employees, in particular, Accountable Plans are an especially effective tax planning tool.

#FASuccess Ep 140: Transforming Your Advisory Business By Shifting Your Mindset After Hitting The (10-Year) Capacity Wall, with Adam Cmejla

September 3, 2019 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 140th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Adam Cmejla. Adam is the founder of Integrated Planning & Wealth Management, an independent RIA based in Carmel, Indiana that oversees approximately $45 million in assets under advisement for nearly 100 financial planning clients.

What's unique about Adam, though, is the incredible transformation his practice has gone through over the past 2 years, as a shift in mindset has led him to grow revenue by nearly 80% over what he had built the first 10 years cumulatively by both raising his financial planning fees and going all-in on a niche of serving optometrists.

In this episode, we talk in depth about how Adam's marketing process has evolved over the years, from starting out at Waddell & Reed where he immersed himself in local networking groups like BNI and Indianapolis Rainmakers, to beginning to shift his focus towards working with VDOCs, veterinarians, doctors, optometrists, and chiropractors, by focusing his marketing on white coat professions and launching a podcast, to further narrowing down his focus to just serve optometrists after realizing it's actually easier to market it and grow his firm as the target clientele narrows, which in turn has led him from charging as little as $400 a year for financial planning for his legacy clients, to charging $595 per month plus $1,000 upfront or over $8,000 a year in planning fees for his ideal target client.

We also talk about the mindset shifts that Adam went through to reinvent his practice over the past 2 years after hitting the wall from his first 10. From moving away to setting his value in terms of the time he spends on clients and instead looking more directly to what his clients say they value the most, which wasn't the depth of his financial planning data analysis, the steps he took to raise his financial planning fees by as much as 100% to 300% over the past year to fix legacy clients that were being undercharged, and the way he balanced bringing in new ideal clients along with raising fees on existing clients as a way to overcome his own fears that clients might terminate him for the fee increases, even though in the end, virtually none of them did.

And be certain to listen to the end, where Adam shares his top advice to fellow financial planners. If you're really wondering if you should raise your fees, the answer is already yes. How the transformation of his advisory firm enabled a transformation with his wife and children by allowing the entire family to reallocate the time they spend together, and how Adam has institutionalized the processes and workflows he's developed in Redtail CRM to the point that he's now also beginning to consult other advisors on how they can adapt and implement the same efficiencies in their own advisory firms.

So whether you're interested in learning why narrowing your focus can help grow your advisory business, ways to systematize your business processes, or why the answer to the question, "Should I raise my fees?" is almost always, "yes," then we how you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial Advisor #FinTech (September 2019)

September 2, 2019 10:50 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the September 2019 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the news that Wealthfront is acquiring financial planning monthly subscription startup Grove… but as part of the deal, is selling off all of Grove’s clients to Facet Wealth, leaving the industry wondering whether Wealthfront is about to pivot into the monthly subscription model to mimic their competitor Schwab Intelligent Portfolios, wanted Grove’s financial planning technology to expand Wealthfront’s own Path financial planning software, or simply wanted to “acquihire” the Grove technology and product talent to advance Wealthfront’s own mission. And raising concerns about why Grove, which just last year raised an $8M Series A round to begin to scale its monthly subscription fee financial planning solution, decided to walk away barely a year later.

From there, the latest highlights also include a number of other interesting advisor technology announcements, including:

United Income’s virtual-CFP-for-Baby-Boomer-retirees model gets acquired by Capital One as digital advice expands beyond just serving Millennials
Snappy Kraken raises a $2.5M seed round to begin ramping up its marketing technology built to both generate leads for advisors and convert them
Aivante launches a new health care cost calculator for prospective retirees that helps to project out health care costs based on a client’s health and geographic location
ScratchWorks announces the open of its third season of Shark-Tank-meets-FinTech-Accelerator for advisor technology

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Ladenburg acquiring the NewDay impact investing robo-advisor to create more customized ESG portfolios for advisors instead, BrightPlan launches adds an artificial intelligence “financial coach” to its digital wellness platform as a way to upsell complex clients to its affiliated PlanCorp RIA, PreciseFP launches new data-gathering forms specifically to facilitate TD Ameritrade client onboarding with reduced NIGOs, both Envestnet and MoneyGuidePro launch expanded life insurance modules as interest grows from insurers in using financial planning software to facilitate life insurance sales, and Ric Edelman suggests that part of the challenge of advisor adoption of cryptocurrency may be a PR/perception problem and accordingly rebrands his Advisor Blockchain and Cryptocurrency Council into an “RIA Digital Assets Council” instead.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (Aug 31 – Sep 1)

August 30, 2019 02:56 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a look at the various Democrat plans beginning to emerge that may shift the US tax system from being heavily income-based to a blend of income- and wealth-based instead... as regardless of an advisor's political affiliation and belief in Democrats' policy goals, a major shift in tax policy in the U.S. will have substantial impact for many advisors' clients, and is already an increasingly common topic of conversation with clients, which means it's crucial to be aware of the leading proposals and what they entail. Though given the increasingly political environment, it's notable that also in the news this week is a new effort from the Investment Advisers Association (IAA) to make it easier for at least smaller RIAs to be more politically active with campaign contributions (if they wish to) without becoming buried in the burdensome "pay-to-play" compliance rules that RIAs must follow to ensure their political contributions don't result in working with "prohibited" clients in government.

From there, we have articles around spending behaviors, including one study finding that a whopping 30% of clients still hide at least some spending decisions from their financial advisors (ostensibly out of a fear of being judged for their decisions), the ways that affluent clients sometimes "buy" privacy not for luxury but simply to protect themselves from the public eye, the emergence of the "subscription monthly-pay model" in the world of luxury travel for affluent clients, and the ongoing rise of "medical tourism" where some companies are even paying their employees to have surgical procedures done in foreign countries (even if it's necessary to fly a U.S. surgeon there to do the procedure) as a way to lower health care costs for the business.

We also have a few marketing articles this week, from a look at how to use and leverage Google Reviews (without running afoul of anti-testimonial compliance rules), how to set up Goal Tracking in Google Analytics to actually figure out where new prospects are coming from (and what actually connects with them on your website), and some tips for experienced advisors whose growth has stalled to re-ignite their prospecting efforts.

We wrap up with three interesting articles, all around the theme of the ever-evolving profession of financial planning itself: the first is an "Open Letter" on diversity from a financial planner who is a woman of color about the real-world challenges that emerge in being a "pioneer" in what is still a predominantly white industry; the second looks at what the CFP Board must do from here to shore up its credibility after the recent Wall Street Journal article suggesting the organization wasn't effectively enforcing its own standards; and the last takes an interesting retrospective look at the financial planning profession itself as it approaches its 50th anniversary this December, whether the profession is really living up to its promise as a profession, and concerns of whether financial planners really have the advocacy organizations in place that are necessary to carry the torch of higher standards into the future.

Enjoy the "light" reading!

Kitces & Carl Ep 15: Why Are We So Afraid To Just Listen

August 29, 2019 09:05 am 1 Comment CATEGORY: Client Trust & Communication Kitces & Carl Podcast

Although gaps in a conversation are often awkward and uncomfortable, when used effectively, they can become power tools for financial advisors to foster deeper connections with their clients. Because, beyond just hearing what financial concerns a client may have, advisors can use the opportunity to give space to the conversation, which helps to establish empathy and build trust, and in the process sometimes bringing to light the unique roadblocks clients may have in executing their plan.

In our 15th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards sit down to discuss the value of really listening to clients, and how, by simply talking less and listening more in client meetings, an advisor can improve the chances that a client will stick to their plan.

In general, financial advisors are trained to be knowledge experts and to communicate that knowledge to clients. But even though clients seek out financial advisors for their technical expertise (after all, the main value-add financial advisors offer are the recommendations that help clients down the path of achieving their financial goals), what may not be so obvious are the reasons that clients will (or will not) successfully follow those recommendations. Reasons that can’t be discovered… unless the advisor gives the client the space to reveal them.

Because no matter how perfect and comprehensive a plan may be, it will offer little value if the client does not know how, or is unable, to follow it. Like a swimming instructor teaching a fearful student how to swim, it may be very clear to the advisor what steps the client needs to take and how to communicate what those steps are. Yet it may be harder to see the doubts and fears that the client may be holding on to – or about whether they can even trust the advisor in the first place – which, in turn, can give rise to a client’s hesitation and reticence to follow through… in essence, a “gap” between what the client knows (i.e., what you tell them), and what a client actually decides to do. But by encouraging clients to fully talk through their concerns – and by using silence as an opportunity for the client to reflect deeply on the questions asked – advisors can empathetically understand what a client’s true priorities are, and particularly, what may be creating the knowledge/action gap for the client.

In the end, the key point is simply that it’s okay, and maybe even potentially valuable, to have some silence during a client conversation, because it can lead to a better balance between the delivery of knowledge and the discovery of nuances that make the client a unique individual. Ultimately, by asking probing, relevant questions, and leveraging silence, advisors can become better listeners and strengthen their relationships with clients, and in doing so, may even identify the obstacles that are keeping them from sticking to their plan in the first place.

New PLR Allows RIA Advisory Fees To Be Paid Pre-Tax Directly From Non-Qualified Fee-Based Annuities

August 28, 2019 07:13 am 5 Comments CATEGORY: Annuities

It’s a long-standing principle of the tax code that expenses incurred for the production of income or management of assets (e.g., an investment advisory fee) is a cost that can be applied against the income produced – in other words, deducted as a pre-tax expense. Unfortunately, though, under the Tax Cuts and Jobs Act of 2017, the entire category of “miscellaneous itemized deductions subject to the 2%-of-AGI floor” was repealed… which included the deduction for investment advisory fees, making them no longer able to be paid directly on a pre-tax basis.

However, the ability to pay for the cost of an advisor on a pre-tax basis is still preserved in situations where the fee can be paid directly from a tax-preferenced account or product. As a result, advisory fees deducted directly from an IRA are still pre-tax, and commissions subtracted directly from the net asset value of a mutual fund (or the cash value of an annuity) are still pre-tax as well. The caveat, of course, is that registered investment advisers charging fees cannot receive commissions from mutual funds or annuities in the first place, making it effectively impossible to charge clients on a pre-tax basis.

When it comes to annuities in particular, the fundamental challenge is that even though there’s a cash value from which advisory fees could be paid – roughly akin to deducting advisory fees directly from an IRA – annuities have historically been subject to a peculiar wrinkle in the tax code: any amount received from an annuity that isn’t received as an annuity (i.e., as annuitized income payable at regular intervals for life or a period certain) will be treated as a withdrawal, and taxable to the extent that there are any gains in the annuity contract. Which includes not only traditional distributions from an annuity to the owner, but any amount paid by an annuity on behalf of its owner… effectively rendering advisory fees from an annuity to not only fail to be a pre-tax payment, but even worse to actually trigger tax consequences as a taxable distribution. Even though, again, the same advisor could receive a 1%/year commission trail from the annuity for the same net compensation without triggering a taxable event.

The key distinction is that while the IRS deems a 1% per year advisory fee that’s paid from the cash value of an annuity to be a taxable distribution to the annuity owner (who then ostensibly pays his or her advisor), any trailing commission paid to the broker who sold the annuity is instead deemed to be an expense paid by the annuity company (and deducted from the value of the annuity), and therefore is not technically a taxable distribution.

This standard treatment could be undergoing a significant shift, however, after a coalition of insurers banded together to submit a series of Private Letter Ruling (PLR) requests, asking the IRS to change its position and consider advisory fees on so-called “fee-based” annuities to be treated like any other retirement account or internal mutual fund expense ratio (i.e., as expenses paid by the account itself, rather than as a distribution to or on behalf of the owner). And, given that these contracts are specifically designed to be fee-based (and therefore RIA-supported), the IRS acquiesced and ruled that, since the payment on ongoing fees for advice are “integral to the operation of the contract,” those fees should be considered to be an expense of the annuity itself, which are authorized by the owner, withdrawn by the annuity company, and paid directly to the (registered investment) adviser.

It’s important to note that these are “only” private letter rulings, not an actual change in the tax code, and include several key stipulations that, if not followed, could make it difficult for other annuity carriers to receive similar treatment. Specifically, the PLRs stipulate that in order to receive the favorable tax treatment, annuity advisory fees can’t exceed 1.5% per year, must be paid by the annuity carrier to the RIA, should only pertain to the advice on that particular annuity, and must be explicitly authorized by the owner.

Still, while the new ruling is a major breakthrough for the annuity industry’s attempts to create more RIA-friendly annuity solutions, it remains to be seen whether fee-based annuities will gain wider adoption with advisory firms. As the reality is that there are still numerous operational and technical issues that must be addressed, including facilitating graduated advisory fee schedules (that also don’t exceed the 1.5% per year cap), integrating annuity sub-accounts into existing RIA portfolio model management tools, the ability to open new accounts at scale (for existing RIAs with a sizable base of existing clients), and being able to coordinate various distributions (leveraging an annuity’s available living benefit guarantees) amid a much more complex asset mix that includes non-annuities the advisor manages as well.

The key point, however, is that the recent PLRs from the IRS are at least a step in the right direction, bring important parity and tax law consistency between advisory fees for tax-qualified retirement accounts and advisory fees for non-qualified annuities, and provide another potential tool that advisors can use to better serve their clients… particularly in unique situations where a client specifically needs an annuity, or wants to replace an existing annuity. From a systems and practical perspective, though, there are numerous challenges that still must be addressed, particularly for larger advisory firms operating at scale, before fee-based annuities gain wider acceptance among RIAs.

#FASuccess Ep 139: Plugging In For Large Firm Support To Refocus Your Time On Clients Instead, with Michele Clark

August 27, 2019 07:06 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 139th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Michele Clark. Michele is the senior portfolio manager for Acropolis Investment Management, an independent RIA based in the St. Louis area that oversees nearly $1.1 billion of assets under management for more than 800 clients.

What’s unique about Michele, though, is that until very recently, she ran her own independent hourly financial planning practice and only recently decided to tuck in or, as she puts it, to “plug in” to a larger firm so that she could worry less about the hassles of being a business owner, from bookkeeping to IT, and simply focus more on what she enjoys the most, which is connecting with and servicing her clients.

In this episode, we talk in depth about Michele’s somewhat nontraditional journey through the advisory industry, from starting out selling mutual funds door-to-door with Edward Jones, to switching to Charles Schwab and becoming a regional investor education specialist until she was so successful the travel overwhelmed her and she decided to switch and become a branch financial consultant instead, and then growing her base of Schwab private clients so large that it once again overwhelmed her to the point that she decided to go out on her own to structure the practice the way that she wanted, only to once again, over the span of 10 years, grow to the point that the business was consuming too much of her life and to make the decision to plug into Acropolis to, yet again, back off when the advisory practice got too big and rebalance both her business and the work she’s doing in it.

We also talk about how Michele built her independent firm, from the way she structured her project-based fees in her hourly business, to the challenges she discovered when trying to properly price renewal plans for ongoing clients, the trick she used to begin to systematize the processes and procedures in her firm as it grew, and what she learned about the changing ways that clients are finding a financial advisor in today’s environment by meticulously tracking her own sources of new business for nearly a decade.

And be certain to listen to the end, where Michele shares her own tips on how to stay lean when starting an advisory firm, the importance of developing an expertise or specializations so that you don’t have to rely on local business development opportunities and can attract clients no matter where they are, and the inevitable challenges of growth in the early years of starting out on your own, even when you’re experienced in business development.

Managing And Nurturing Clients Through The Lifecycle Of The Advisor-Client Relationship

August 26, 2019 07:02 am 1 Comment CATEGORY: Client Trust & Communication

Over the past decade, the financial advisory industry had continued to shift away from being primarily sales-based (where every new year starts off with little to no income, and there’s immense pressure to always be finding the next new client) and towards a recurring revenue model (typically based on AUM fees). The good news is that, after a few years of building such a recurring revenue business, advisors can spend more time providing more and better service to their existing clients, without needing to worry as much about finding the next new one (since just keeping those recurring-revenue clients itself becomes very lucrative over time!). The bad news, however, is that advisors must also learn a whole new set of interpersonal and management skills to ensure they really establish and keep that ongoing relationship… skills that often have very little to do with the formulation and delivery of financial recommendations themselves. In other words, in the ongoing advisory business, one of the key challenges is learning how to manage and nurture those evolving client relationships (in the face of the clients’ own changing needs and expectations).

Accordingly, in this guest post, financial advisor Adam Pearce explains how client relationships can be viewed as developing across four distinct phases, potential pitfalls that an advisor may encounter through those stages, and the potential impact of client needs in each stage may have for an advisor’s workflows and client service models.

For instance, in the Onboarding Phase, new clients closely watch to see if the expectations that were set while the advisor was selling themselves and their services are being met (i.e., does the advisor really follow through on the quality of service they promised upfront?). Accordingly, it’s particularly important for the advisor to be especially proactive as accounts get set up and paperwork gets processed, and to make sure that there is frequent communication so the new client sees that their advisor is working hard on their behalf… to allay about doubts they may otherwise have about whether they made the right decision (to hire the advisor) in the first place. In other words, it’s not just about the paperwork itself, but an opportunity for the advisor to demonstrate – in how they handle and communicate about the paperwork – the advisor’s own service standards and affirm that the client really made a good decision.

As the relationship moves into the Feeling Out phase - which can span over the first few years, and, statistically speaking, is the most likely time that a client will decide to leave - advisors should focus on “excelling at the basics”, which means continuing to meet expectations, maintaining frequent contact, and cementing a personal connection with the client… which could even include getting to know them socially as well.

After those first few years, though, the ongoing relationship enters the Maturity Phase, which is often characterized by a decline in the frequency of client-initiated communication… not because they don’t see as much value in the service they are receiving, but because their comfort level typically grows to the point where they trust that their advisor is doing their job and don’t feel such a need to check in as often. Yet, it’s still essential that the advisor continues to proactively engage with the client to make sure everyone is on the same page when it comes to such things as how often they should come in for in-person meetings. Even if clients aren’t asking for more meetings, the advisor still gets credit for offering them.

Eventually, a Transition Phase will emerge, where the client faces some major change in their life (e.g., divorce, career changes, retirement, or health issues). Which in turn has the potential to put new strains on the advisor-client relationship. Which means it’s more important during this phase that the advisor once again is being effective at handling the little details, but making sure they’re adapting and changing along with their clients’ new needs and preferences, and are again actively reaching out to stress the importance of proactive planning during these major transitions.

Ultimately, though, the key point is simply that advisors need to be aware of the changing stages that client relationships will go through over time, so they can take advantage of the various opportunities they have to deepen the relationships they have with their clients (which do, in fact, vary by stage). And the best way to make that happen is by having processes and workflows in place to ensure a consistent level of service… because if advisors can’t even handle the basics smoothly, it creates doubt in the mind of the client, while those advisors who can deliver reliably on the fundamentals help assure clients that they can know what to expect… and will trust that their advisor is taking care of them!