Kitces.com - Advancing Knowledge in Financial Planning

Weekend Reading for Financial Planners (Feb 13-14)

February 12, 2021 02:56 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the announcement that the Investments & Wealth Institute (IWI) is launching a new online advisor networking/community platform called "The Hive", to be available to both IWI members and those beyond, as the organization seeks to expand its footprint beyond its roots of CIMA and CPWA certificants into a more FPA-style "open tent" association for financial advisors.

Also in the news this week are a number of other notable industry headlines, including:

The latest Cerulli Associates data showing the largest broker-dealers are getting even bigger, with the top-25 broker-dealers now accounting for nearly 72% of brokers and a whopping 90% of all IBD assets (up from just 58% and 83%, respectively, a decade ago)
A new study of TAMPs showing that investment outsourcing continues to rise, though while TAMPs started in the independent broker-dealer channel, it's now RIAs leading their growth

From there, we have several articles on investment management:

The ongoing rise of direct indexing is now gaining enough traction that index providers are scrambling to figure out how to license their indices to the emerging direct indexing platforms
The complexity and opacity of alternative investments isn't doing much to slow their growth, but is spawning rapid growth in the CAIA designation for advisors who want to learn more about how to properly exercise due diligence regarding alternative investments
A Morningstar analysis on whether Bitcoin is really a good idea to hold (or "HODL"!) in a client's portfolio given its dramatic volatility

We've also included a number of marketing-related articles, including:

How using the word "if" turns prospect pitches into awkward leading questions and why using open-ended questions is better
Why it may be better to make your advisor marketing less rational and more emotionally driven
Rethinking the business development process to better highlight how the advisor brings expertise to the table to identify less-than-obvious problems and provide less-than-obvious solutions

We wrap up with three final articles, all around the theme of being more flexible to a changing world and making mistakes:

The difficulties of planning for your long-term future amidst a world with such uncertainty, and how a "micro-planning" approach can help
Given that every successful person has a lot of mistakes to share, perhaps it's time for us to get less fearful of making mistakes and more focused on simply learning from them?
Why it's a good idea to deliberately put yourself in situations where something may go wrong... because in the end, it's far easier to "practice failure" in a controlled environment than to risk it in the moments that matter most

Enjoy the 'light' reading!

Kitces & Carl Ep 53: Using Financial Plan Proposals To Show Planning Value To Prospective Clients

February 11, 2021 07:05 am 6 Comments CATEGORY: Kitces & Carl Podcast

The evolution of advisor technology in recent decades has made it easier and easier for financial advisors to build (and manage) systematized model portfolios for a large number of clients. The good news of this shift is that it has greatly facilitated the scalability of advisory firms. The bad news, though, is that it centered the advisory firm’s value proposition around the portfolio, as the firm’s resources were literally focused on “investment management”. And in turn, to help convert the prospects to clients, advisors learned to create beautifully designed marketing brochures, “investment decks”, and engaged proposal generation tools to show why their bespoke portfolios were better than all the other bespoke portfolios out there.

However, as the industry has continued to evolve towards a more holistic and service-based (i.e., intangible) approach to the financial planning process (and away from such a focus on investment management and the attendant performance expectations), advisors often struggle with illustrating the increasingly financial-planning-centric value that they offer (often over the course of decades) to their clients. Which, in turn, raises the question: Is there such a thing as a “financial planning proposal”, or something similar that financial advisors can give to prospective clients in an initial meeting to illustrate how great all this ‘financial planning stuff’ really is?

In our 43rd episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about the importance of meeting prospective clients where they are and asking good initial questions, creating a preliminary financial planning proposal and deliverable (and what that might include), and how to provide an even more substantial piece of supporting material that can help advisors show prospects what value they can expect to receive from the financial planning process.

As a starting point, it’s important to recognize that, in order for a prospect to decide to hire an advisor, the advisor needs to have asked the right questions to uncover and understand the specific pain point that prompted the prospect to book a first meeting. As it’s the clear understanding of this pain point as a motivator that led the client to take action that the advisor must address in a financial planning proposal (and communicate back to the prospect to make them feel they’ve been heard!).

From there, the advisor can create a one-page plan that lays out what the key issues are, which might include a preliminary statement of purpose, a list of initial goals that have been identified, and a 90-day action plan to start down the proverbial financial planning road. The key is to understand that prospective clients care far less about specific solutions than knowing that someone understands their problems (and can help them work towards a solution). Additionally, advisors can supplement that one-page plan with a full sample financial plan, which can really help prospects understand what exactly they will be getting, why the fees are what they are, and what the financial planning process really means (beyond what they may have encountered in prior experiences).

Ultimately, the key point is that the days of glossy brochures full of Morningstar reports and stock photos of compasses and lighthouses may not be as relevant as they were when an advisor’s main value proposition was investment management. But that doesn’t mean that there aren’t valuable deliverables that advisors can use to help demonstrate the sort of value that prospective clients can expect. And at the end of the day, tools that help clients decide to move forward and engage a financial planner not only help them solve the problem that they came in to get solved in the first place but can expand further into a holistic financial planning engagement… and also help advisors grow their businesses in the process, too!

Helping Resistant Clients Follow Through On Recommendations Using Reflection

February 10, 2021 07:04 am 1 Comment CATEGORY: Client Trust & Communication

One of the most common challenges that financial advisors can face is encouraging clients to implement recommendations when they are resistant to the idea of change… even when the client is aware that those changes are necessary to attain their goals, and even when they want to make those changes! For many clients, resistance is fueled by behavioral biases that hinder their ability to think rationally as they consider a potential change to implement, which in turn can also create friction between the advisor and client in discussing the required changes necessary to accomplish their goals. But by understanding the communication tools that help their clients work through resistance, advisors can enhance their relationships while, at the same time, helping their clients actually take the action steps necessary to follow through on their recommendations!

Behavioral biases can impede rational decision-making by causing a person to discount or ignore relevant and important information. This can happen because of how an individual might subjectively accept and process information (e.g., confirmation bias causes important information to be dismissed because it contradicts a person’s preconceived notion, which a person may not even recognize is incorrect), or because of how moods and feelings about circumstances or relationships can influence thinking (e.g., the endowment effect might cause a client who is emotionally attached to a home that they need to sell to ask for twice the market price of the home).

When helping clients who are resistant to implementing important changes because of behavioral biases, financial advisors may find certain forms of reflection useful to help clients overcome the resistance. Reflection is a conversational tool that is often used by therapists to help patients work through change and accept resistance as a natural part of the challenging process of personal change. These same tools can also be used just as effectively by financial advisors with their clients, because resisting change – even when the change is one that we want to make – is normal, and very common, for nearly everyone.

Because in the end, arguing with a resistant client about why a change is necessary, and presenting data and financial planning projections to prove the point, can actually just make the client more resistant (and may even result in getting the advisor fired!). Whereas the act of reflecting, which can be as simple as reiterating what the client has just said about how they feel, can create positive opportunities for objectively brainstorming new ideas and gaining insight – for both client and advisor – around the thoughts and feelings on successfully moving forward.

Ultimately, the key point is that resistance from clients is normal and very common, but arguably the point that the client needs to make the change is rarely the best way to accomplish the goal. Instead, the best ways to help clients move forward can often be found by offering the client the time and space to reflect upon their own thought processes. And fortunately, advisors have a range of different conversation tools to choose from that help their clients break through and implement their recommendations… in addition to deepening the advisor’s relationships with their clients, too!

#FASuccess Ep 215: Tracking The Client’s (Non-Portfolio) Results To Price Your Financial Planning Retainer Fee, With Shawn Tydlaska

February 9, 2021 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 215th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Shawn Tydlaska. Shawn is the founder of Ballast Point Financial Planning, an independent RIA based in the San Francisco Bay Area that services over 100 high-income young professionals. What's unique about Shawn though is the way he's built his advisory firm with a blended model of a minimum of $5,000 annual retainer fee paid monthly, plus an additional fee of 10 basis points of net worth above 2 million to adjust his pricing upwards for his affluent and most complex clients.

In this episode, we talk in-depth about how Shawn structures his services to charge a $5000-plus annual retainer fee for young professional clients who may have portfolios simply outsourced to Betterment, why the households balance sheet, cash flow, and credit score forms the basis of his planning process with clients, the annual service calendar he built on a rotating two-year cycle to actually show clients what he'll be doing for them on an ongoing basis, and the results-thus-far tracking system that Shawn put in place to actually calculate that he was generating more than $437 a month of average value for his ongoing clients and giving him the confidence to raise his advisory fee minimums.

We also talked about how Shawn has managed to build so quickly to 117 ongoing clients in under 5 years, the find-an-advisor websites that Shawn got himself listed on to get some initial clients early on, how clients who took it upon themselves to leave Shawn's reviews on Yelp ended up driving significant growth for the firm, and why Shawn recently decided to take out $150,000 SBA loan to accelerate hiring more team members even as the pandemic did cause an uptick in his client attrition.

And be certain to listen to the end where Shawn shares the challenge of working with younger clients who graduate from using his services once they build their own financial foundation, why the retainer fee model with younger clients can achieve 90%-plus retention rates but may still struggle to reach the retention rate of the AUM model, and why Shawn is looking to add in-house tax preparation for his top clients as a way to further deepen the relationship and stickiness of his top clients.

So whether you’re interested in learning more about how Shawn uses his results-thus-far tracking to show the actual value he provides to clients, what his client service calendar looks like, or how he uses tax planning to increase his client retention rates, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Financial Advisor Fee Trends And The Fee Compression Mirage

February 8, 2021 11:47 am 12 Comments CATEGORY: Practice Management

Despite the rising popularity of new fee-for-service financial planning service models, remarkably little has actually been published about how financial advisors price their services. Which is an important topic for both consumers – who want to know what a plan might cost – and for financial advisors themselves, who may want to benchmark whether the pricing for their financial plans is “reasonable” relative to their advisor peers and competitors (rather than solely setting the price based on its time-and-labor cost to the advisor), especially in an environment where fees on financial products have been under intense price competition and fee compression!

In our latest 2020 Kitces Research survey on “How Financial Planners Actually Do Financial Planning”, we examined both how financial advisors are charging and how much they are charging their clients for financial planning services. Although there has been concern that the fee compression evident with financial services products would also apply to financial planning advice, we found little evidence that this was the case. On the contrary, our data suggests that the median fees in 2020 significantly increased, relative to 2018 fees, for standalone fees (12.4% increase) for retainer fees (25% increase), and for hourly fee rates (25% increase). Median AUM fees, though, remained relatively steady, with no apparent increase (though there was an 8% increase at the 10th percentile and an 8.7% increase at the 90th percentile for fees charged for a $1 million portfolio).

We also observed pricing trends by industry channel, with advisors in the RIA channel charging higher median fees than those in the B/D channel for work completed on a standalone or retainer basis, as well as for a complete financial plan billed on an hourly basis. Similarly, financial advisors with a CFP designation generally charge higher fees than those who are not CFP professionals.

When it came to team structure, there was not much difference in standalone fees charged by solo advisors, solo advisors with support, and ensemble advisors, although silo advisors do appear to charge lower standalone fees than other team structures. For financial plans completed on an hourly basis, silo teams had the highest median fees and solo advisors the lowest, while there was the opposite trend observed for retainer fees, with the highest median fees charged by solo advisors and the lowest median fees charged by silo teams.

Because advisors provided us with detailed information about their business practices and pricing, we were also able to compute implied hourly rates for advisors using non-hourly billing models, which can be helpful in understanding what "reasonable" rates are for hourly advisors. At median levels, we found that primarily AUM advisors are generating revenue at rates that would imply hourly fees between $350 and $800. This is in stark contrast to the $100 to $300 implied hourly fees generated by advisors operating on a primarily hourly basis, and speaks to the challenge of building an hourly practice that is as financially successful as advisors operating on an AUM basis at common fee levels. Furthermore, when we look at top-earning AUM advisors (defined here as those between the 85th and 95th percentile), we find that these advisors are generating implied hourly fees in the $950 to $1,600 per hour range.

Ultimately, the key point is that there does not appear to be any overall trend of decreasing financial planning fees, despite common claims that fee compression is coming for financial advisors. Rather, the trends we actually see in our financial advisor research are increasing fees. Furthermore, these trends are observed consistently across advisor fee models. Which suggests that, despite strong proclamations to the contrary, financial planning fee compression may be largely a mirage.

Weekend Reading for Financial Planners (Feb 6-7)

February 5, 2021 02:59 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the announcement that the CFP Board has created a new "Commission on Sanctions and Fitness", which, in the coming year, will update the Sanction Guidelines (from private to public censure, suspension to revocation) that the CFP Board can apply to CFP certificants who violate their Code of Ethics and Standards of Conduct, as the CFP Board continues to signal its plans to ramp up enforcement of its new standards and attempt to "clean out its bad apples".

Also in the news this week are a number of other notable industry headlines, including:

The SEC plans to scrutinize dually registered advisors in particular, with concerns about how such advisors determine when a brokerage versus advisory account is best for any particular client
The evolving landscape of membership associations for financial advisors, as IWI and NAPFA grow through the pandemic, the FPA shrinks, and more and more new organizations also crop up to support increasingly diverse pockets of advisor community

From there, we have several articles on retirement planning:

How households that retire with insufficient resources do tend to "right-size" (i.e., downsize) their spending in the first decade of retirement, but those who retire with more than enough appear to have trouble right-sizing their spending to the upside even when they can afford to do so
Why the increasing likelihood of living to age 100 is creating new stresses on the traditional approach to retirement and triggering discussions about new public-private partnerships to address the societal challenge of taking care of those who can no longer work
Tips on how to transition into Medicare upon reaching age 65 (or when it may be better not to do so!)

We've also included a number of marketing-related articles, including:

What it really takes to become a rainmaker that brings in new clients (hint: the starting point is to get clear on your own value and become confident in it!)
Why most financial advisors are closer to being an "authority" (and could market themselves accordingly) than they may realize
How to build daily and weekly habits that form the foundation of a successful approach to digital marketing

We wrap up with three final articles, all around the theme of reading more (and getting more enjoyment from our reading):

How to find more time to read if you struggle to do so
Tips on how to get through more books on your reading list in 2021 (which may include getting comfortable with when to put a book down and not finish and just moving on to the next instead!)
The therapeutic benefits of reading more often, and how to get the most out of your (limited) reading time!

Enjoy the 'light' reading!