Kitces.com - Advancing Knowledge in Financial Planning

Kitces & Carl Ep 45: (Re-)Structuring Client Review Meetings In Order To Focus On What Really Matters To Clients

October 22, 2020 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

In the early days of financial advice, an advisor’s primary (and key) value proposition was giving clients access to capital markets via various investment products and vehicles that consumers simply couldn’t buy on their own. And as a result, the nature of the advisor/client relationship was such that they would ever only really need to interact when some sort of transaction needed to occur. However, as the internet made various investment products increasingly accessible to consumers directly – through online brokerage accounts – many advisors’ primary value-proposition became managing a more holistic diversified portfolio… necessitating regular (often quarterly) meetings to discuss the performance results of that portfolio. Yet as the financial advisor value proposition begins to shift once again, and the profession further broadens its scope to include all the other facets of a person’s whole financial picture, many advisor/client review meetings still revolve largely or entirely around investment performance reviews. Which (especially for advisors who are transitioning clients into ongoing planning relationships) raises the question: how exactly does the advisor change the conversation in review meetings with their clients to be less investment-centric (when it may be all their clients have ever known!)?

In our 45^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards explore what it takes to restructure the client review meeting, and discuss what advisors might talk about on a high level with their clients, how action items (which stem from their Goals) help them make progress towards their “desired future state”, and a way to systematically structure those meetings in such a way that allows the advisor to demonstrate exactly how they’re bringing more than just investment value to the relationship.

As a starting point, advisors can think of the periodic review as a sort of “State Of The Plan” meeting, which (barring any unforeseen events in their lives) typically is to know that they’re making progress towards their goals. Accordingly, on a broad level, talking points can include a review of the client’s Statement Of Financial Purpose (which could include things spending time with family, serving in their community, or traveling, to name just a few), Goals (which flow out of the Statement Of Financial Purpose), and then their progress towards those goals and if the use of their capital still aligns with where they are headed (which is where the real meat of the conversation resides).

Meanwhile, a strategy for structuring these meetings might include actually crafting a physical agenda, which should cover a basic check-in to make sure the proverbial plane is still flying in the right direction, any news and updates (either within the advisors firm or out in the world that might have a bearing on the discussion), some sort of planning item (which, depending on the time of year, might revolve around taxes or estate planning), and then (and only then) a portfolio review. Ideally, the agenda should be delivered a few days before the meeting itself, which will not only help build trust (first by telling the clients what will be discussed and setting expectations, and then by adhering to that agenda), but also gives them an opportunity to add anything that may have come up that the advisors isn’t aware of yet (further facilitating more non-investment-centric client conversations). .

Ultimately, clients really just want to learn three things when they meet with their advisor: are they okay, are they making progress, and are getting their money’s worth from the advisor relationship? And by using a consistent structure and cadence, with a standardized meeting agenda, not only can an advisor make those periodic review meetings more valuable to their clients beyond a discussion around portfolio performance (which can be sent separately anyway), but it also provides a framework that they advisor can use to mention all the great things they’re doing behind the scenes to continue to earn their clients’ business as well!

How ‘Free’ RIA Custodians Make It Difficult To Determine Which Is Actually The Most Expensive

October 21, 2020 07:02 am 1 Comment CATEGORY: Practice Management

In the early days of the Registered Investment Adviser (RIA), financial advisors who didn’t affiliate with a broker-dealer had no way to actually manage investment accounts on behalf of their clients… short of having clients open “retail” investment accounts with direct-to-consumer “retail” brokerage platforms, and grant their advisor a limited power of attorney to call in (pre-internet!) and place trades on their behalf, which was a win for the client (who had their portfolio managed), the advisor (who had a platform to manage their client portfolios), and the brokerage firm itself (that generated trading commissions every time an advisor traded on behalf of their clients). In the decades since, the nature of RIA platforms has evolved tremendously, from advisors phoning in trades to an entire ecosystem of RIA custodians providing trading, billing, and supporting technology for RIAs to use… but still all predicated on a model where the brokerage-firm-as-RIA-custodian profits from advisors at the expense of their clients.

In this guest post, Yang Xu – CEO of TradingFront which competes for RIA custody services in partnership with Interactive Brokers – explores how the RIA custodian business model continues to evolve, why the recent onset of zero-commission trading has merely shifted how (but usually not whether) clients are paying for trading, and how advisors can do their due diligence to understand the real investment costs that clients may face (and revenue sources that RIA custodians still generate) through the platforms that RIAs purportedly use for “free” (as in the end, “free” rarely ever is).

“Pay-to-play shelf-space agreements” are one way that RIA custodians offer No-Transaction-Fee (NTF) funds, which effectively embed trading costs within the mutual funds themselves (with little way for advisors or their clients to identify what the exact breakdown of what those 12b-1 and sub-TA costs may be). And with the shift to ETFs, that have their own unique rules regarding revenue-sharing to RIA custodians, new “data agreement” flat fees (potentially up to $650,000 per agreement from each asset manager to each advisor platform!) are now emerging as a way for RIA custodians to generate revenue in exchange for providing data that shows asset managers how their products are really being used.

Another major indirect cost of RIA custodial platforms is found in interest earned (or rather, not earned) on client cash holdings. Because when cash is maintained in a client account, it is often by default “swept” into a proprietary mutual fund of the RIA custodian, or even a bank deposit account of a subsidiary bank owned by the RIA custodian, yielding net interest income – the difference between what the cash position actually earns, and the lesser amount that is paid to the client – that is collected by the RIA custodian. Which for some RIA custodians is so large, that net interest from client cash actually forms the majority of the entire RIA custodian’s revenue and profits!

In recent years, another growing source of revenue for RIA custodians to generate from advisors and their clients is Payments For Order Flow (PFOFs), which custodians receive for selling the placement of client trade orders to high-frequency trading firms. And while directed trading to high-frequency trading firms can potentially improve trading efficiency (even with the drag of PFOFs), RIAs generally have very limited means to assess the actual quality of execution (which is actually becoming more difficult because rising PFOF and a rising volume of trades occurring off the traditional exchanges actually makes it systemically harder to benchmark good trade execution in the first place!).

Of course, the reality is that RIA custodians are businesses that can and should be able to generate revenue and profit from the services they provide. Still, though, the current model of RIA custodians generating such ‘indirect’ revenue from the clients of advisors, coupled with a dearth of any requirements to disclose financial statements and pricing (at least for non-publically-traded RIA custodians) make it difficult to research what RIA custodians are truly charging and whether it is a fair and competitive price to the available alternatives. Which, ironically, raises the question of whether advisors may soon even seek out RIA custodians that require RIAs to openly pay (fully disclosed) trading commissions and platform fees, if only to ensure full disclosure and a clear understanding of all expenses for the advisory firm and its clients (and an opportunity to price-shop for other RIA custodians that may offer advisors and their clients a better deal)?

The bottom line, though, is simply to understand that ‘free’ services rarely (if ever) exist when those services entail work, which certainly includes the business of brokerage and RIA custodial firms. And for financial advisors who aim to provide full disclosure of all expenses in the interests of their clients, and want to make good decisions on behalf of their clients regarding which platforms to affiliate with, it’s crucial to peel the layers of the onion and gain an understanding of the underlying costs that clients are incurring with their platform of choice… a due diligence process that applies to not only selecting investments for client portfolios but also where those portfolios are custodied and traded, too.

#FASuccess Ep 199: The Barbell Approach To Building A High-Income And Broad-Reach Lifestyle Practice, With Morgen Rochard

October 20, 2020 07:06 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 199th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Morgen Rochard. Morgen is the founder of Origin Wealth Advisers, an independent RIA based in Austin, Texas, that oversees nearly $35 million in assets under management for 25 affluent clients. What's unique about Morgen, though, is her barbell approach to doing good, with a focused practice that deliberately works with no more than 30 clients at a time.

Which, at a minimum fee of $12,000 per client, allows her to generate $300,000 of revenue working only 10 to 15 hours a week so that she can both raise her family as a 30-something mother and create a book and a podcast to also help the masses that can't afford her high-service solution. In this episode, we talk in-depth about how Morgen has structured her advisory firm, why she deliberately crafts an approach of working with just a small number of high-value clients to whom she can provide a high-touch service. The reason she structures her fee based on net worth but views investment management as an essential service in the solution, and how she structured a financial coaching business to be entirely separate from her RIA entity.

We also talk about Morgen's actual financial planning process with clients – why she structures her financial planning approach to start first with what's important to the client, and second, about what's important to financial planning itself, the way Morgen has integrated financial life planning into an initial three-meeting process with clients, why Morgen's focus with clients in their 30s and 40s is all about what they will accomplish in the next 12 to 18 months and not 20 to 30 years out for retirement, and how Morgen's shorter-term approach has fueled her financial planning referrals.

And be certain to listen to the end, where Morgen shares her own journey through the financial planning industry. Why she felt she had to go back to get her CFP certification despite already having her CFA marks, the way she rigorously structures her days and weeks to stay focused, and why Morgen's secret to hyper-efficiency is all about deliberately scheduling less time than she thinks she'll need to accomplish a task, and then challenging herself to get it done in that limited time window, anyway.

So whether you’re interested in learning about why Morgen decided to limit her firm to no more than 30 clients, how she uses George Kinder’s Three Questions with her clients as part of her “Vision Meetings”, or how she structures her week to maximize her productivity, then we hope you enjoy this episode of the Financial Advisor Success podcast.

What Clients (Actually) Value Most In A Financial Advisor

October 19, 2020 07:02 am 11 Comments CATEGORY: Marketing

For many financial advisors, ‘proving’ their worth to prospects prior to engaging them as clients (by delving deep into the details of the prospect’s situation, and then coming up with potential strategies of how the advisor believes they can help the prospective client to ‘fix’ their financial life) is an irresistible means of marketing themselves to cultivate new client relationships. However, the reality is that financial advisors don’t always prioritize the same issues that are actually most important to prospective clients and can often invest time and energy analyzing details that do little to actually bring in new clients. This isn’t to say that the important issues viewed by the advisor should not be addressed – rather, selling to a prospect by emphasizing what’s most important to them (i.e., reaching their goals), and then servicing them once they become clients by addressing all of the points the advisor knows is most important for the client’s holistic plan to be successful, is not only a more efficient use of the advisor’s time but also a more effective way to convert prospects to clients and to fully service them with their financial planning needs.

In this guest post, Evan Beach, Director of Wealth Advisory at Campbell Wealth Management, an RIA in Alexandria, VA , discusses a research study conducted by Morningstar that found that clients value an advisor who helps them reach their financial goals above anything else. On the other hand, the advisors who were surveyed believed that their clients’ top priority would be for their advisor to understand who they were and their unique needs. And while these priorities may have similarities, the challenge facing these advisors is on keeping the focus of their discussions with new prospects on the big-picture journey to achieving their goals, rather than on the nuts and bolts of the mechanical necessities of ensuring the ‘vehicle’ (i.e., the financial plan) – at least initially during the prospecting stage – will not break down along the way. Accordingly, it is crucial for advisors to ask prospects and new clients the right questions to identify and understand the goals that are most important to them. One approach is to ask questions during the initial meeting that probe into the client’s vision for the long-term, mid-range, and short-term future vision of how their life would look if they had and did everything they wanted, and then to prioritize the importance of the goals identified. Then, with that information in hand, advisors can structure subsequent meetings to address how they can help the client to plan for and actually achieve the goals they identified.

A financial advisor’s skills and knowledge are what clients identified as the second most valued aspect of the relationship with their advisor, which is an important point for advisors to consider when setting up their website and social media profiles because many clients will use these resources to identify if the advisor has the qualifications they seek before even reaching out to them in the first place. Additionally, advisors can bolster their credibility by using media inquiry services like those offered through the Financial Planning Association or through the Help A Reporter Out (HARO) service, by engaging with a public relation firm, and even authoring articles for personal finance and financial planning websites. The CFP designation, too, demonstrates an advisor’s credibility to prospective clients that they are likely to associate with a requisite level of expertise. Similarly, good communication skills are also ranked highly by clients, and using a storytelling structure can be a good strategy for advisors to explain complex ideas to clients.

Surprisingly for many advisors, many clients care a lot more about investment returns than advisors think they do. Accordingly, financial advisors should be thoughtful and empathetic when addressing their clients’ investment concerns while maintaining sound financial planning logic and practices. Advisors should educate their clients about rational benchmarking decisions, as well as create unique investment portfolios specifically designed to meet their individual clients’ goals.

Ultimately, the key point is that advisors can strengthen their client relationships (and improve their prospect marketing efficiency) by identifying and understanding what their clients value most from them. For many clients, focusing on and prioritizing goals (versus discussing the technical side of their advisor’s financial planning strategies) are generally what matters most to them. And to successfully convey to the client (and prospect) that you are on the same page with them and that you have the relevant knowledge and ability to help them achieve their goals, will be the most effective approach to providing the most value to your existing (and future) clients!

Weekend Reading for Financial Planners (October 17-18)

October 16, 2020 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a new survey finding that, despite the turmoil of the pandemic and its disruption for the business activities (including the marketing) of advisory firms, 71% of advisors are now reporting that they have more clients than they did before the coronavirus pandemic broke out... a remarkably fast recovery and turnaround (coinciding with the sharp V-shaped recovery of the markets themselves in March), and far different from the more protracted decline and recovery that the typical advisory firm faced after the 2008-2009 financial crisis.

Also in the news this week is the latest Putnam Social Advisor study that, not surprisingly, shows a significant uptick in the advisor use of social media as traditional marketing channels have struggled (with the average advisor in the survey who uses social media reporting $7M of new assets from social media channels in 2020, up from just $2.4M on average in 2019), and the latest Schwab benchmarking survey finding that despite all the hand-wringing that small RIAs are 'doomed' and cannot compete without consolidation, that in practice the average RIA with <$100M of AUM saw slightly more revenue and client growth than larger RIAs (at 7.7% and 4.6%/year, respectively, for smaller firms, compared to 7.4% and 4.4% for larger RIAs) and had better retention (at 97.5% for small RIAs, compared to 96.5% retention rates for larger firms).

From there, we have several articles on broader industry trends, including a look at the ongoing consolidation of TAMPs (which unlike advisory firms themselves, really do appear to be in need of mergers for greater size and better economies of scale to survive), the shift in broker-dealer approaches to advisor grid compensation as advisory firms focus less on just new client production but also on the quality of service and relationships of existing clients as well (which grid payouts historically did not compensate as well), and the extent to which permanent life insurance has actually declined over the past 25 years (with insurers holding nearly 10% of household wealth in 1995, but only 4% today, while the use of mutual funds and retirement accounts have exploded upwards).

We've also included a number of tax and retirement-related articles on new government guidance, including an update on the 'simplified' forgiveness application process for small businesses that took out less than $50,000 in PPP loans, new SECURE Act guidance on everything from coordinating post-age-70-1/2 contributions and QCDs to exactly what it takes to qualify for the new "Qualified Birth Or Adoption" exception to the early withdrawal penalty, and new guidance on Pooled Employer Plans (PEPs) that may soon become available as a tool in the toolbox for advisory firms with a large number of small business owner clients.

We wrap up with three interesting articles, all around the theme of finding more energy and feeling fulfilled in our own work as advisors: the first examines why it's so important to take breaks every day (and how to structure your breaks to best maximize replenishing your energy); the second looks at the challenges of keeping up social connections in the workplace when you're in a position of leadership (i.e., "why it's so lonely at the top"!); and the last explores recent new research on financial advisors themselves and what makes us feel fulfilled (or not) at the firms we work for, where technology is now the leading frustration while growth opportunities and like-minded leadership are the biggest drivers of retention.

Enjoy the 'light' reading!

Highlights From The Inaugural AdviceTech.Live Conference

October 15, 2020 07:04 am 0 Comments CATEGORY: Technology & Advisor FinTech

On August 27, Asset Map hosted its inaugural AdviceTech.Live conference. The one-day virtual event brought together several AdvisorTech executives and industry influencers, as well as 700 registrants (77% of whom were advisors) to talk shop about where the industry, in general, and advisor-facing technologies are headed. Moreover, the event hosts (headed by Adam Holt, CEO of Asset Map) and sponsors committed to promote and discuss the ongoing issues of racial and gender diversity in the financial advice industry, with 50% of all ticket sales (or $25,000) going to the CFP Board Center for Financial Planning Diversity Initiatives.

In this guest post, Craig Iskowitz – CEO and founder of Ezra Group, a financial technology consulting firm – shares his signature Twitter-driven recap of the conference, which featured panel discussions around five key AdvisorTech categories. Craig kicks off the recap with highlights from the opening keynote address from Adam Holt, who spoke with D.A. Abrams, Managing Director, Center for Financial Planning, on the diversity initiatives from the CFP Board (highlighting once again the fact that under 4% of CFP professionals are people of color and only 23% are women), and Asset-Map’s interactive AdviceTech Compass tool (which provides a unique way of browsing vendors across categories). From there, panel discussion highlights included:

Marketing Automation – This category has been booming since the pandemic began, as advisors look to not only find new ways to connect with prospective clients but also for tools to stay in touch with existing clients as well (since 30% of existing clients who leave their advisor reported lack of communication as a top reason);
CRM Solutions – The panel had a wide-ranging discussion, with particularly useful insights around the ease of use of CRM solutions and how firms realize the true value of a CRM when it truly becomes the central hub of an advisor business;
Financial Planning – The big takeaway was that, while offerings in this category seem to all be morphing into hybrid solutions, this doesn’t mean that they are all becoming indistinguishable. On the contrary, each has tremendous variability in functionality, workflow, and user interface. Moreover, the panelists agreed that they are looking beyond simply providing reports and towards ways to influence and change investor behavior;
Portfolio Management – This panel highlighted the ongoing trend towards creating unified platforms while adding functionality and integrations (which has been a thorn in AdvisorTech vendors’ sides), such as Envestnet’s recent integration that automatically moves clients’ cash around to capitalize on the best available yields.
Practice Multipliers – The overarching theme from this panel was that, as it becomes increasingly clear that how an advisor uses their time influences their overall success, AdvisorTech solutions that enhance workflow efficiency become more and more important... particularly those that act as business multipliers for growth.

Given the disruptions to the financial advisor conference industry created by the pandemic and the ongoing shift in the conference model itself, the AdviceTech.Live event was a successful vendor-led virtual conference. And although advisors attend such conferences to stay up to date on the latest features of products they already use and to discover new solutions, one of the biggest takeaways was the ability of the vendors themselves to better understand the current layout of the AdvisorTech landscape. Ultimately, the inaugural AdviceTech.Live was a successful virtual conference, with plenty of room to expand in the coming years to cover a wider array of AdvisorTech categories. And its support for diversity and inclusion in the industry only helps emphasize the fact that conferences can not only provide a venue for ongoing learning but allow for the support of a cause that is essential to the growth and health of the industry.