Nerd's Eye View blog

Do Financial Advisors Work With Customers Or Clients?

May 11, 2017 12:30 pm 2 Comments CATEGORY: Practice Management

Historically, "success" as a financial advisor was all about building a book of business, to generate ongoing revenue, and perhaps even the possibility of selling that book of business at the end. Yet the caveat the value of a book of business - and what you provide them, and where the value really lies - depends on whether the people you work with in the end are really your "clients", or simply your "customers".

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss what the difference is between a customer and a client, and why the terminology advisors use really does matter in the value of a book of business, and the value that's provided to the people we work with.

For many, the idea of differentiation between customers and clients will probably seem like minor semantics, but the reality is that the words we use truly do matter. Just consider for a moment what comes to mind when you think of a "customer", and then a "client". For most, the images are not going to be the same.

A customer buys a product from an order-taker or salesperson. A client buys advice from a professional. The key distinction is that when engaging with customers, the value isn't actually the advisor (or the salesperson in general); the value is in the product. Good customer service may create repeat customers, but if you eliminated the product from the equation, the business would vanish. By contrast, when a client buys advice from a professional, it's not reliant on the product implemented at the end. The value is the advice itself, and the advisor is a core part of the value proposition.

And the difference is reflected not only in the value proposition provided to clients, but the value of the book of business itself. After all, the origin of a "book of business" in the first place was a book of customer names - people who could be contacted, who had been sold a prior product, and could perhaps be sold a(nother) product in the future. Which is still a tenuous relationship at best... and is why a book of customers rarely sells for more than one times trailing revenue (if that). By contrast, clients have an ongoing relationship with the business - and typically pay ongoing revenue - and it's that distinction, between a customer who buys a product, and a client who is engaged with the business and its professionals themselves, that helps a client-oriented advice business get twice the valuation of a customer-oriented book.

So when you're working with people in your advisory business, consider carefully whether you call them "customers" or "clients". Because the terms we use to refer to the people we work with truly matter. Whether we call them "clients" or "customers" is not just a matter of semantics, but an important indication of the services we provide and where the value truly lies. If you work with customers, the value is in the product you sell. If you work with clients, it is in the advice you provide. So, as you build your business, consider what you really want to build. Is the name you use really reflective of the relationship you have... or want to have?

Calculating Accurate Regulatory AUM Vs Reporting Assets Under Advisement (AUA)

May 10, 2017 07:01 am 7 Comments CATEGORY: Investments

In today’s increasingly competitive landscape for advisory firms, financial advisors are looking for any way they can to differentiate. Whether it’s their experience and credentials, specialization or depth of services, or simply the sheer size of the firm, based on its assets under management. After all, the reality is that – justified or not – a sizable reported AUM does imply a certain level of credibility and represents a form of social proof (the firm “must” be good, or it wouldn’t have gotten so much AUM, right!?).

As a result of this trend, though, advisory firms are increasingly pushing the line in counting – or potentially, over-counting – their stated assets under management. Which is important, because not only is overstating AUM a potential form of fraudulent advertising, but the SEC has very explicit rules to determine what should be counted as AUM (or not) for regulatory purposes.

Specifically, the SEC states in its directions for Form ADV Part 1 that regulatory AUM should only include securities portfolios for which the advisor provides continuous and regular supervisory or management services. And while most financial advisors today are regularly working with clients regarding their investment securities, not all advisors are necessarily providing “continuous and regular” services on their client accounts. In fact, if the advisor doesn’t have direct authority to implement client trades (either with discretion or after the client accepts the advisor’s recommendation), it’s virtually impossible to include the account as part of regulatory AUM.

The greater challenge, though, is that the increasingly common offering of comprehensive financial planning services – where advisors provide holistic financial planning advice on all of a client’s net worth – does not mean the advisor can claim all of those assets as regulatory AUM. In fact, most of the time the advisor should not include outside 401(k) plans and other non-managed assets that were advised upon as part of the financial plan, nor the value of brokerage accounts holding mutual funds and various types of annuities (unless the advisor truly provide ongoing management services), nor TAMP or SMA assets (unless the advisor retains the discretionary right to hire/fire the manager and reallocate to another one). In fact, even having discretion over an account doesn’t automatically ensure it being counted as regulatory AUM, particularly if it’s a passive buy-and-hold account, unless the advisor can actually substantiate that monitoring and due diligence is occurring outside of any ad-hoc or periodic client review meetings!

Fortunately, for advisors who want to report some number representing the total scope of their advice – including the amount of assets that don’t count as regulatory AUM – it is permissible to report on Assets Under Advisement (AUA) in the advisor’s marketing and in Part 2 of Form ADV, as long as the advisor can document and substantiate the calculation process. But the fact that it’s permissible to report both AUM and also a (typically large) AUA amount doesn’t change the fact that, when reporting regulatory AUM itself, it’s crucial to report the right number!

#FASuccess Ep 019: The Evolution And Emergence Of A True Financial Planning Profession With Bob Veres

May 9, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the nineteenth episode of the Financial Advisor Success podcast!

This week’s guest is Bob Veres, the publisher of the Inside Information newsletter on practice management for financial advisors, and a long-time industry commentator on the world of financial planning. In fact, Bob has been covering financial planning as a journalist for more than three decades now, going all the way back to when he first became editor of “The Financial Planner” (now Financial Planning magazine) in 1982!

In this podcast, Bob shares his perspective on how financial planning has evolved over the decades, from “Needs-Oriented Selling” in the 1980s – when financial advisors largely sold life insurance, mutual funds, and real estate limited partnership tax shelters – to the 1990s when the availability of personal computers gave advisors superior access to investment information and stoked the growth of the mutual fund model, to the rise of the AUM model in the 2000s, and where Bob thinks it will go from here: a world where financial planners simply get paid a fee for financial planning services.

In addition, we also look at how marketing for financial planning has shifted (from cold calling scripts, to seminars, to client appreciation events, and now digital marketing), the evolution of the membership associations that support financial planners, and why – as he details in his new book, The New Profession, the coming decade may finally be the one that leads to the emergence of a bona fide financial planning profession, on par with medicine and law.

And be certain to listen to how Bob helped me get my own start in publishing The Kitces Report, and why this Nerd’s Eye View blog wouldn’t be in existence today without his early help and support!

So if you’ve ever been curious about why the IAFP merged with the ICFP to form the FPA, how what financial planners do really has shifted over the years, and want some perspective on where it may all be going from here… I hope you enjoy this latest episode of the Financial Advisor Success podcast!

3 Ways Financial Advisors Can Get CPAs To Actually Refer Clients

May 8, 2017 07:01 am 13 Comments CATEGORY: Practice Management

Virtually every practice management study for financial advisors indicates that most advisors generate most of their growth through referrals, and that CPAs are a good "Center Of Influence" (COI) for generating those referrals. Except in practice, most financial advisors struggle to actually generate any referrals from CPAs, and referrals given to CPAs – in the hopes of reciprocal CPA referrals in return – often feels like a long walk down a frustrating one-way street.

In this guest post, Dave Zoller - a financial advisor who previously worked in a CPA firm – shares his perspective on what it actually takes for financial advisors to generate referrals from CPAs, how most advisors fail to generate referrals due to a lack of differentiation (from all the other advisors who read the same studies and are asking for the same referrals), and how to establish a proactive relationship with CPAs – that can actually generate referrals – by first working with them proactive to help solve the common problems that arise when they're preparing tax returns for (your joint) clients.

In fact, Zoller suggests that the best way to cultivate a referral relationship with a CPA is to start by deepening the relationship with the CPAs of your existing clients, where you already have a natural introduction – your common client whom you both serve. By showing how effectively you work with the CPA of your existing (joint) clients, the more encouraged the CPA will be to refer new clients to you!

So whether you've been wondering how to break into the world of generating referrals from CPAs, or have been frustrating by months or years of referring out clients to CPAs and waiting fruitlessly for reciprocal referrals that never seem to come as desired, I hope you find this guest post from Dave Zoller helpful to understanding what you need to do to break through from here!

Weekend Reading for Financial Planners (May 6-7)

May 5, 2017 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 from CFP-and-doctor Carolyn McClanahan about what financial advisors need to consider when it comes to the potential future of health insurance for clients under the American Health Care Act (AHCA), which could substantially impact clients with pre-existing health conditions, and "early" retirees trying to bridge the health insurance gap between the end of employment and the beginning of Medicare.

From there, we have several technology-related articles, from early looks at the new Orion Eclipse rebalancing software and the new RobustWealth rebalancing and client onboarding "robo" tools, to some of the recent FinTech startups in the Envestnet | Yodlee incubator platform that are building new solutions for financial advisors (leveraging Yodlee data), and a first glimpse at a new advisor business intelligence (and advisory firm valuation) tool called Truelytics.

We also have a number of practice management articles this week, including: the rising trend of advisory firm mergers (as an alternative to just selling and exiting the firm); the common crossroads that advisory firms hit at they grow (and how to overcome them); what advisors should do to overcome "succession planning paralysis"; and tips on how to find an ideal buyer for your advisory firm if you're looking to sell (and want to be certain you get the right fit).

We wrap up with three interesting articles, all around the theme of behavior change and improving savings behaviors for clients: the first is a series of recent research studies finding that most consumers actually prefer accounts that impose otherwise "unnecessary" restrictions and penalties on withdrawals (a form of "commitment device" that actually helps us to want to save, knowing the restrictions will help us follow through successfully!); the second is a fascinating look at how to help clients think about and change their spending behaviors by grouping spending into Owe, Grow, Live, and Give categories (where the trade-offs help us weigh decisions between freedom, comfort, purpose, and abundance); and the last is an overview of the research on behavior change that we as advisors can apply in working with our clients, to help them actually follow through on the recommendations that we give them!

And be certain to check out the brief video at the end... a recent new commercial from Schwab Intelligent Advisory, highlighting the financial planning services that Schwab is now offering directly to consumers, as the firm increasingly tries to compete with outside broker-dealers that may be impacted by the DoL fiduciary rule under the tagline "Intelligent Tech, Personal Advice"... but puts itself in a position to compete with the RIAs on its Institutional platform as well!

Enjoy the "light" reading!

Specializing in (Collaborative) Divorce as a CDFA Financial Advisor

May 4, 2017 02:01 pm 3 Comments CATEGORY: Practice Management

As financial advisors move inexorably towards niches and specialization to grow their businesses and differentiate, one of the biggest challenges is simply figuring out which niche to pursue, how to actually get the expertise to pursue it, and what the business model is to serve it well. As the reality is that not all niches fit our "traditional" business models of managing assets for a fee, or implementing financial services products. A case-in-point example is the emerging divorce planning niche, and the unique role that financial advisors can play in the collaborative divorce process.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we talk live from the annual conference of the Institute for Divorce Financial Analysts (IDFA), with Justin Reckers, who has built a successful advisory business focused on the divorce niche.

For those who aren't familiar, the IDFA grants the Certified Divorce Financial Analyst (CDFA) designation, which provides the baseline education necessary to understand the unique financial planning issues involved in divorce planning. Which is helpful not only to better understand the issues a client might face when getting a divorce, but gives the advisor the expertise to become the financial expert in the new world of "collaborative divorce" - a new type of divorce process that is intended to leverage neutral third-party experts, including a financial advisor, to expedite the divorce process without the involvement of a judge or the court system.

In fact, Reckers notes that a major revenue stream of his business is charging financial planning hourly fees - at $325/hour - to serve as a financial advisor "neutral" in collaborative divorce cases, with typical hourly fees totaling up to 10,000 to $12,000 per case, and some ultra-high-net-worth divorce cases where fees can add up to $100,000 or more. A substantial hourly fee specialization opportunity, in a world where most financial advisors struggle just to bill $2,500 of their time to construct a financial plan!

Other business models in the divorce niche include doing expert witness work in divorce cases that do go to court, with the opportunity to ultimately work with the clients in those cases after the divorce has finalized as well. (Just be certain not to solicit clients during the case, which can be a conflict of interest that undermines your credibility as an expert witness!)

In fact, Reckers has had so much success in the divorce niche, that he's launched a turnkey financial planning platform - Wellspring Divorce Advisors - that teaches those who have obtained the CDFA designation how to actually build a successful advisory business in the niche. And with upwards of 2,000,000 people getting divorced every year, there's ample room for more growth amongst financial advisors in this particular niche!

But the bottom line is simply to recognize how financial advisor generalists often struggle to get paid for their time, while those who specialize in a niche - such as divorce planning - have the opportunity to get paid for their expertise, at far higher hourly rates, with the opportunity for much deeper client engagements that "just" a standalone financial plan. And unlike many niches - where the only path to expertise is personal experience and a journey of self-education - the opportunity of the divorce niche is perhaps especially appealing, given both designations like the CDFA program from IDFA to learn the requisite expertise, and financial planning platforms like Wellspring Divorce Advisors that teach how to use that expertise to execute the niche business model!

Excel Spreadsheet Productivity Tips For Financial Advisors

May 3, 2017 07:01 am 12 Comments CATEGORY: Technology & Advisor FinTech

Despite the availability of financial planning software and CRM tools, Excel spreadsheets are still incredibly popular amongst financial advisors to do everything from a "specialized" analysis of a particular client situation (e.g., evaluating internal rates of return when choosing between a pension or lump sum), to keeping track of certain task workflows or even important business metrics.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – provides a few Excel productivity tips for financial advisors, including how to quickly do time-value-of money calculations using built-in formulas, discounted cash flow analyses for evaluating Social Security and pension strategies, as well as some practical keyboard shortcuts for navigating Excel more efficiently.

And so, whether you are relatively new to Excel and want to learn some things for the first time, use it regularly and might want to polish up on some shortcuts to gets things done more efficiently, or need a resource to pass along to associate planners and other individuals in your firm who may have less experience with Excel… I hope that you find this guest post from Derek to be helpful!

#FASuccess Ep 018: Taking Control Of Your Advisory Business So The Business Doesn’t Control You With Angie Herbers

May 2, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the eighteenth episode of the Financial Advisor Success podcast!

This week’s guest is Angie Herbers, one of the leading practice management consultants for financial advisors, who has published numerous research studies on best practices, and authors a widely read monthly column on practice management for Investment Advisor magazine. Her consulting services are in such demand, that she has a stringent screening process to decide who to work with, and turns away almost 90% of the advisors who contact her, in search of a select group of just 15 advisors she will work with at any one time, who she believes she can best help.

What’s fascinating about Angie, though, isn’t simply that she runs an incredibly successful “lifestyle” business as a practice management consultant, but that she approaches the issue in much the same way that we as advisors approach financial issues with our own clients. In the case of our clients, it's not just about the technical planning strategies, but the client's relationship with money, and how that impacts the financial decisions they make. In the case of Angie's coaching and consulting with advisors, it's not just about the technical practice management strategies, but the advisor's relationship with the business itself, and how that impacts their business decisions.

Because in this podcast, we really talk about how the connection between an advisor and his or her advisory firm really is like a relationship. A relationship with a rather selfish entity - the business - that, for the sake of growing itself and maximizing its value, will demand more and more of your time, attention, dollars, and resources. To the point that if you don't manage and try to control the relationship, then the business controls you.

And be certain to listen to the end, where we talk about the growth barriers that financial advisors often hit as their advisory firms grow, why $350,000, $750,000, and $1.2 million dollars are key revenue thresholds that often cause new breaking points in the business, and what it takes to change the business - and sometimes, yourself - to climb over that wall and get to the other side.

So whether you’ve been feeling like your advisory business is controlling you – and wish it was the other way around – or are on the growth path, and want to prepare for the next inevitable barrier that will come, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (May 2017)

May 1, 2017 07:01 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the May 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 surprising news of two major (and unexpected) leadership changes at the leading financial planning software firms, with Advicent CEO Phil Cunningham and MoneyGuidePro President Kevin Knull both stepping down from their positions this month. In Advicent's case, the news comes as NaviPlan and Profiles continue to lag in market share, and Figlo is not yet making substantial inroads since its 2014 acquisition, while word has emerged that owner Vista Equity Partners is shopping the company for new ownership (after a 6-year hold since EISI's acquisition in 2011). On the other hand, Knull's departure from MoneyGuidePro comes on the heels of major enterprise successes, including a big deal last fall with Cetera (which beat out eMoney Advisor despite former eMoney Advisor CEO Edmond Walters being a Cetera board member!), and the adoption of Knull's brainchild, MyMoneyGuide, as the backbone for Schwab's Intelligent Advisory offering... suggesting that Knull is leaving on a high note (and given his history, will likely resurface in a leadership position somewhere in the industry again soon). In the meantime, though, this means that two of the top three financial planning software companies are experiencing leadership turnover at a critical juncture for the industry, which further opens the door to new players in the current hyper-competitive environment.

From there, the latest highlights also include:

A fascinating new advisor software survey, that looks at not only advisor adoption, but also user ratings, and reveals how often advisors stay with technology they're unhappy with (ostensibly due to the lack of data portability and the challenges of data migration?)
Major new product rollouts from TrueLytics, Orion, MaxForAdvisors, and Snappy Kraken
Oranj acquires TradeWarrior rebalancing software, and AdvisorEngine acquires Kredible
Quovo raises $10M in Series B financing
Investopedia expands its Advisor Insights Q&A platform, even as NerdWallet shuts down their Ask An Advisor solution
Morningstar announces it will launch a Model Marketplace in 2018 to compete with the likes of TD Ameritrade and Riskalyze (and of course, Envestnet itself)

You can view analysis of these announcements and more trends in advisor technology in this month's column, including the emergence of new "robo-for-advisors" platforms Investment POD and ActiveAllocator (which don't appear to be substantively differentiated from today's TAMP and rebalancing software solutions), how doing tax prep is becoming big client lead gen business (and not just for financial advisors getting referrals from CPAs), how Wealthfront is stretching for revenue by rolling out a Securities-Based Lending solution (while telling consumers to stop "getting hung up on the disclosures"), and that XY Planning Network will be running its second annual FinTech competition for financial advisor software (deadline for those who wish to enter: May 31st).

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 (Apr 29-30)

April 28, 2017 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 the big news that TD Ameritrade has struck a deal with DFA that will cut transaction costs for DFA mutual funds by as much as 67% (down to $9.99/trade), potentially setting off a new pricing war with the other RIA custodians when it comes to asset managers that refuse to pay sub-TA and other revenue-sharing fees back to the platforms.

From there, we have several articles about marketing, including a look at what you should (and shouldn't) be measuring for success when engaging in social media, how a face-to-face request can be 34 times more effective than just sending an email (though with the ability to send a high volume of emails, the latter can still be more productive in certain situations!), and when it makes sense to try to publish a book as a financial advisor (hint: don't do it for the book sales, do it for the credibility it gives you to attract more clients, and get a ghost writer to help you put your thoughts down on paper if necessary).

We also have a number of practice management articles this week, focused around the theme of attracting and retaining next generation talent, including: how advisory firms are starting to formalize their career tracks as a way to compete for young talent, why having clearly written job descriptions (including criteria for advancement) are crucial to become an "employer of choice", why it matters that you formally write down your business' "core values" (and how to get started), why attracting and retaining next generation talent is essential to build an enduring business that has transferable value, and some tips for next generation advisors looking to buy into an advisory firm (and how to think about the risk of doing so).

We wrap up with three interesting articles, all around the theme of personal and professional change: the first is a look at how a key role of the financial planner is helping clients to change and adapt to an uncertain future, but our own role as financial planners is changing as the nature of money itself continues to change and evolve; the second is a look at a financial advisor who was struggling with a near-failing advisory firm, and ultimately went through a process of deep self-reflection to figure out what it would take to turn it around (including a hard look at whether he really wanted to be a business owner or not, and how much income he really wanted and needed to feel successful); and the last is a fascinating look at how the Great Depression was one of the nation's darkest and most stressful times, but also a period of tremendous productivity growth and invention, which helps to serve as a reminder that while it's not always fun to feel stressed, it's actually the stress that helps to drive us forward to achieve the things that ultimately help to bring financial success... and personal happiness, too. (So if you are wishing your life was less stressful... be careful what you wish for!)

Enjoy the "light" reading!