Nerd's Eye View blog

Financial Advisor Checklists To Enhance The Client Meeting Prep Process

January 30, 2017 07:02 am 3 Comments CATEGORY: Practice Management

Client meetings are one of the most important touchpoints we as financial advisors can have with our clients. A well-executed client meeting is an opportunity to build clients' trust and confidence in us. And one of the best ways to ensure the meeting is well-executed is through preparation. The caveat, though, is that the more clients we have, the less time there is, and the harder it may be to ensure that a thorough process is in place for preparing for client meetings... which can lead to a feeling of always scrambling from one client meeting to the next, struggling to keep track of all the relevant details of each clients' situation.

The way forward through this challenge is to systematize the process using checklists, which both help to ensure that nothing slips through the cracks, and makes it easier to free up time by delegating key preparation tasks. In this guest post, Teresa Riccobuono of Simply Organized (a professional organizer who consults with financial advisors about how to get more organized by creating systems and process!) shares some of her own thoughts, tips, and best practices for creating a client meeting prep process, as well as some templates to get started with your own meeting prep checklists.

And so whether it's creating checklists regarding the preparation of tasks related to financial planning, investment management, administrative tasks, timelines to coordinate staff preparation, or even planning for follow-up items in advance... the reality is, checklists can help you stay on top of your client meeting prep process and deliver a higher level of service to your clients that will make you more referable. So if you're looking for ways to improve your meeting prep process and get more marketing value out of impactful client meetings, I hope that you find this guest post from Teresa to be helpful!

Weekend Reading for Financial Planners (Jan 28-29)

January 27, 2017 02:53 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the interesting buzz that TD Ameritrade, long recognized as the open-architecture-with-little-proprietary-product platform for RIAs, might now be considering becoming less open and begin offering more TD-branded products under its new CEO (which will surely be part of the buzz with TD Ameritrade's national RIA conference coming up next week!). Also in the news this week was coverage of the growing number of regulators and legislators adopting rules that will make it easier for financial advisors to report financial abuse of seniors (with much debate about whether advisors will be required to make reports).

From there, we have a few technical planning articles, including a reminder that now is the time to review (and if necessary, get corrections) on Form 1099-Rs being sent to clients, a look at how indexed annuities are getting more and more complicated and the concerns of new "exotic" volatility-managed indices, the risks and potential rewards of ESG-based investing, and how on average dollar cost averaging is a worse deal than just allocating a lump sum but may still be a good idea when P/E ratios are high (as they are today).

There are also a couple of practice management articles this week, from tips on how to better "program" clients to give regular referrals, how to better qualify prospects and have fewer "wasted" prospect meetings (where the prospect never follows through after the meeting), and how to actually run a first-time meeting with a new prospect to improve your chances of actually turning them into a client.

We wrap up with three interesting articles: the first covers the recent Consumer Federation of America report that a number of large Financial Institutions are holding out to the public as (fiduciary) advisors while representing to regulators and the courts that they're just (suitability-based) salespeople, emphasizing that the real battle is not about fiduciary vs suitability, per se, but whether salespeople should even be allowed to hold out as advisors; the second is an interesting look at Sanctuary Wealth Services, a platform for breakaway brokers transitioning to independent RIA that is shutting down after 8 years, and sends an ominous signal to the community of advisor support platforms that it's still a challenging business; and the last is a discussion of whether the rise of call-center-based virtual financial planning solutions (like Vanguard Personal Advisor Services and the coming Schwab Intelligent Advisory) will become the future entry-level career path for financial advisors, and pondering whether that's a bad way to train the next generation of financial planners, or actually a great improvement (at least compared to the past, where it was all about getting new business by "smiling and dialing" while reading cold-calling scripts!).

Enjoy the "light" reading!

Transitioning From An Advisor Practice To A (True) Financial Advisory Business

January 26, 2017 12:22 pm 7 Comments CATEGORY: Practice Management

The fundamental constraint that every financial advisor eventually faces is that there are only so many hours in the day and week, and therefore only so many clients that can be served, before you hit a wall. At that moment, you reach the maximum capacity of a financial advisory practice, and have to make a decision about whether you will stay that size - with what may be a very good income - or grow into a business, a true business, that goes beyond your individual capacity to serve clients as a financial advisor.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the dynamics of transitioning from a practice to a business, and the challenges you may encounter along the way, including building a team, letting go of client responsibilities, and most significantly... changing your mindset!

The first change you need to acknowledge is that when making the transition from a practice to a business, you, personally, can no longer spend your time primarily servicing clients. This is partially due to the wall you will naturally hit from trying to service too many clients, but even more importantly, you need to recognize that if you spend all of your time working in the business, you won't have any time to work on the business. You may still keep a small set of clients – if for no other reason than to remember what's it's like to sit across from the client and hear their needs and concerns – but the first step in the transition for most advisors is bringing on an associate advisor who can gradually take over client relationships and work with all new clients going forward. And as you add more clients, you'll simply add more advisors (who aren't you!).

The second thing to recognize is that if you're going to be doing all that hiring over time (from advisors to operations and back-office staff) as the business grows, you're going to need to really focus on developing your people (instead of acquiring new clients). In fact, since the financial advisory business is a service business, finding and developing people will arguably become your number one job as you make the transition from a practice to a business.

But the biggest challenge to transitioning from a practice to a business is that you're also going to have to completely change your mindset. Because you may have started out as a financial advisor giving advice, but going forward you are no longer trying to do financial planning... you're trying to build a business that does financial planning. This will mean an endless set of changes as your business grows and your role changes to reflect the new challenges you face, as well as real financial sacrifices as you hire staff and try to find economies of scale as the firm grows.

Ultimately, the path to being a business owner is not for every advisor. Many are quite happy to continue doing the client work as a solo advisor - and that's okay! - but for those who do wish to build their practice into something bigger than themselves, it will require a complete mindset shift to vision a business that truly goes beyond your individual ability to serve clients and instead is all about getting other great financial advisors to serve the clients in your business!

Adopting A Two-Dimensional Risk Tolerance Assessment Process

January 25, 2017 07:01 am 10 Comments CATEGORY: Investments

The process of assessing an investor’s risk tolerance is all about determining his/her willingness to take investment risk, and financial capacity to bear risk, and blending it together to match to an appropriate investment portfolio. Most commonly, this is done with a risk tolerance questionnaire that posits a series of questions about time horizon and need for income, and attitudes about risk and market volatility, to calculate a “risk score” and determine the portfolio that goes with it.

The caveat to this one-dimensional approach, however, is that by averaging together risk tolerance and risk capacity scores, the advisor can unwittingly end up in situations where clients with extremely low risk tolerance (or risk capacity) end up with portfolios that are far too risky for their situation. In other words, the low risk tolerance (or capacity) should have acted as a constraint to the investment policy statement, but didn’t.

So what’s the alternative? Simply put – risk tolerance and risk capacity should be measured separately, and then scored on a two-dimensional scale that considers the contributing role (and limiting nature) of each (rather than a single continuum that merely averages the two together).

Fortunately, there are numerous risk tolerance software solutions specifically designed to assess “pure” risk tolerance on a standalone basis, including FinaMetrica and Riskalyze. And for comprehensive financial planners, the reality is that the financial plan itself is a measure of risk capacity, as reflected in the Monte Carlo probabilities of success and failure.

For those who don’t do full retirement planning projections for every client, a recent alternative software solution is Tolerisk, which is designed to perform a two-dimensional risk tolerance assessment by separately gathering information about the client’s risk attitudes and their basic financial goals.

The bottom line, though, is simply to recognize that risk tolerance and risk capacity are two different dimensions of the client’s overall risk profile, and must be assessed and ‘scored’ separately to properly recognize the constraining role that each can have on the appropriate investment policy statement!

#FASuccess Podcast Ep 004: Deb Wetherby On Building The Team Of A $4.5B RIA Serving HNW Clientele

January 24, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the fourth episode of the Financial Advisor Success Podcast!

My guest this week is Deb Wetherby, founder of Wetherby Asset Management, a $4.5B independent RIA based in San Francisco that serves ultra-high-net-worth clientele. So if you've ever been curious about how a fee-only firm with a whopping $10 million minimum is staffed and operated, this podcast will not disappoint.

And Deb’s journey into the role of being a financial advisor, entrepreneur, and ultimately business executive, is a fascinating one. She started out working in the private bank division of a major wirehouse in the 1980s – as one of only 14 females around in the globe in her department – before eventually deciding that the conflicts of interest inherent in private banking of the day were just too much. The end result was launching her firm, and bootstrapping it from scratch, running three full years just to reach breakeven, while racking up substantial credit card debt to stay afloat!

Now, 23 years later, Wetherby Asset Management managed $4.5B of AUM for almost 500 clients, with 66 staff members. And Deb shares how the growth of the firm ultimately forced her to evolve from being "just" a financial advisor, into a leader of the business, with a primary focus on establishing and maintaining the culture of the firm. In fact, Deb has one of the most unique and intensive processes I've ever heard of, to both vet and onboard new team members – which she graciously shares in today's podcasts.

So if you're running a financial advisor firm and struggling with how to make sure your growing team is all marching to the same drummer, or simply aspire to grow a large advisory business in the future, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Bottom Dollar Effect And The Behavioral Advantage Of AUM Pricing Over Retainers

January 23, 2017 07:00 am 12 Comments CATEGORY: Practice Management

As financial advisors, we're well aware that behavioral biases influence our clients' decision making. However, it's sometimes easy to forget that biases influence the consumption of financial planning services as well, which may have an impact on client satisfaction, retention, and our ability to grow and sustain our business.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores the "Bottom Dollar Effect" and its varying influence under different financial advisor business models.

The "Bottom Dollar Effect" refers to the tendency of consumers facing financial hardship to transfer negative emotions associated with their hardship onto the last few products or services that, at the margin, they perceive as straining their budget. The unfortunate consequence of this effect is that consumers may become dissatisfied with a purchase based not on their actual satisfaction with the goods or services purchased, but instead, on the timing of that purchase and the resources they happened to have available at that time.

Within the context of financial planning, various business models - from hourly or retainer fees, to charging on assets under management - possess different degrees of potential susceptibility to the Bottom Dollar Effect, driven primarily by the various "mental accounts" that client fees typically come out of. In addition to being highly salient and possessing some other negative behavioral characteristics, hourly fees are particularly prone to the Bottom Dollar Effect, as planning fees tend to be relatively large, irregular, and funded through current income (thus, more likely to strain a client's budget). On the other hand, AUM fees have low susceptibility to the Bottom Dollar Effect, given that fees come out of a long-term mental account tied to a dedicated goal (retirement) that is insulated from current income fluctuations. Retainer fees vary in their susceptibility to the Bottom Dollar Effect based on their design, including especially their size relative to client's income and net worth, and from what account(s) the fees are paid.

The fundamental point, though, is simply to understand that decisions about how to pay advisory fees are subject to behavioral biases as well, and those biases may influence both your ability to succeed as an advisor and your clients' inclination to retain your services (particularly in bear markets, when they may need your help the most!). In order to maximize the chances of establishing a relationship that benefits both you and your clients long-term, behavioral biases – including the Bottom Dollar Effect – should not be ignored!

Weekend Reading for Financial Planners (Jan 21-22)

January 20, 2017 02:49 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a flurry of news about the DoL fiduciary rule, including a letter from Senator Elizabeth Warren asking major financial institutions that have already been working to comply with the rule if they're now willing to support it (since they're already almost done implementing the necessary compliance processes), a major report from the Consumer Federation of American finding that 25 of the leading financial services firms are holding out to consumers that they provide advice as an "essential service" even as they contend to regulators and the courts that they are merely in the business of selling products, and a review of the latest set of fiduciary rule FAQs released by the Department of Labor (which cleared a major concern about using fee-offset revenue-sharing arrangements in 401(k) plans).

From there, we have a few more articles delving deeper into the fiduciary rule as its applicability date looms, including: an analysis by Ron Rhoades of why ultimately most Financial Institutions will probably eschew the BICE rules and just become level fee fiduciaries using fee-based advisory accounts instead; criticism that the DoL still hasn't sufficiently defined its "due diligence" expectations of how advisors should analyze the investments they're recommending; and a look from Cliff Asness of AQR at some of the potential "unintended consequences" of the DoL fiduciary rule (such as whether, in the long run, consumers will end up trusting financial advisors too much, let their guard down, and ultimately allow even more harm to be caused down the road).

There are also a couple of practice management articles this week, from a review of the record-breaking pace of mergers and acquisitions amongst RIAs last year (though the total number of deals is still miniscule relative to the total number of advisory firms), to a look at how 1/3rd of the major RIAs last year actually saw a decrease in AUM as retirement withdrawals and even client deaths of their baby-boomer-centric clientele are beginning to take a toll, and a discussion of the blocking point amongst advisory firm owners that will cause most of them to fail to achieve their own long-term vision for their business.

We wrap up with three interesting articles: the first is a discussion of whether investment managers, from mutual funds to even RIAs, should consider adopting "fulcrum fees" in lieu of the traditional AUM fee, as a way to better align the interests of the manager and the client; the second is a look at the research on why ethical people end up making unethical choices, and the recognition that it's creating a toxic employee culture that is the most common driver of employees making "bad" decisions; and the last is an interesting discussion from Bob Veres that even as advisors who work at broker-dealers complain that the media is maligning them as salesperson (when they're really trying to give advice and act in their clients' best interests), it's actually the broker-dealer companies themselves, and their lobbying organizations, who are stating to the regulators and the courts that their "advisors" are really just mere salespeople and not advisors (and thus contend they shouldn't be held to a fiduciary duty)... which means if you're at a broker-dealer and want to be recognized as an advisor, you'll have to start by convincing your own company to truly recognize you as such!

Enjoy the "light" reading!

When Do You Actually Have To Register As A Financial Advisor?

January 19, 2017 09:22 am 10 Comments CATEGORY: Practice Management

With more and more people looking to become a financial advisor – given both the rewarding nature of helping people and the income potential it brings – questions about when you actually have to register as a financial advisor are becoming more common. Does any financial advice trigger a requirement to register? What kind of license do you need to become a financial advisor? And can you wait until you get clients, before you go through the process?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the exact rules that determine when you have to get a license to become a financial advisor - or technically, to register as an investment adviser by creating an RIA and becoming an IAR (investment adviser representative) of that business.

The core requirement under the Investment Advisers Act of 1940 is that it's "being in the business of giving investment advice for compensation" that triggers the need to register. While there are forms of financial advice that may not require registration, such as "financial coaching", the reality is, almost anyone who's holding themselves out as a financial advisor - particularly as a CFP certificant - is likely giving some form of investment advice, and consequently will need to register.

Registration as an investment adviser can happen one of two ways: either registering with the primary state in which you do business, or registering with the Securities and Exchange Commission (SEC). However, registering with the SEC requires a minimum of $100M of regulatory AUM, or doing business (requiring registration) in 15+ states; as a result, most advisors just starting out will initially register the RIA at the state level, and then become an IAR (investment adviser representative) of that RIA.

Notably, though, to become an IAR, you must also pass the Series 65 exam (or have the Series 7 and 66 if you are coming from a broker-dealer). Most states will waive this requirement for those with an advanced certification such as the CFP, CFA, CHFC, or the AICPA's PFS. But ultimately that means to get started, you must both pass the Series 65 exam (or possess one of the requisite designations), and go through the registration process.

And the registration process in the advisor's home state itself should be done before actually going into business. As the financial advisor adds clients in other states, and crosses more than five clients (for most states), it's also necessary to extend the registration in those states. But soliciting the first client requires the advisor to at least create the initial RIA in their home state, first.

Fortunately, it's still fairly inexpensive to get up and running as a financial advisor (at least relative to the income potential it brings, and the cost of starting a business in other industries). However, that doesn't mean it's easy to make the transition - because the real challenge is not just the startup cost to become a financial advisor, but filling the "income gap" of launching a business with no clients or revenue, and needing to build up to the point where you can actually pay yourself a fair wage! On the other hand, in the long run, successful financial advisors still have the potential to make many times the average household income in the US!

Social Security Full Retirement Age Increases For First Time Since 2005

January 18, 2017 07:02 am 16 Comments CATEGORY: Retirement Planning

Under the original rules for Social Security, workers upon reaching their "full retirement age" of 65 became eligible for a retirement benefit, with a slight increase in benefits if the worker delayed to as late as age 70. Later, prospective retirees also got the option to start benefits as early as age 62. Thus, under the current framework, those eligible for benefits can choose any starting age between 62 and 70, with an actuarial adjustment to benefits for starting earlier or later than full retirement age.

However, full retirement age itself is a moving target, as part of a multi-decade phased increase in the full retirement age from the original age 65, up to age 67 instead. For the past decade, upon reaching age 62, prospective retirees were all faced with a full retirement age of 66, but beginning in 2017, those turning age 62 this year are not actually eligible for full benefits at age 66. Instead, the full retirement age has shifted to age 66 and 2 months, and by 2022 will rise all the way to a full retirement age of 67 (for everyone born in 1960 or later). Except in the case of survivor benefits, where the full retirement age for 62-year-olds won't kick in until 2019, phasing in through 2024... which means for a period of time, there will be different full retirement ages for retirement versus survivor benefits!

Since the adjustment to full retirement age is based solely on birth year, though, the reality is that those who are impacted cannot necessarily "do" anything to change the outcome at this point – which is to effectively cause a slight decrease in the value of Social Security benefits, as the prospective retiree must wait a little longer to get the full benefit (or take a reduction to keep claiming it at the previous full retirement age of 66). Fortunately, the total reduction is barely more than a 1% haircut, growing to a maximum reduction of about 7% once the full retirement age shifts all the way to age 67.

And notably, while the full retirement age is now later – which means starting benefits at age 62 is "even earlier" and causes more of a reduction, while delaying until age 70 is "less" of a delay and doesn't give as much of an increase – the relative value of delaying Social Security benefits isn't substantively changed. For those who are optimistic about life expectancy, concerned about market returns, or wanting to hedge against inflation, the value of delaying Social Security remains about the same. However, because of how early benefit reductions are calculated for survivor benefits, the new rules actually do substantially reduce the value of delaying widow(er) benefits for surviving spouses – at least, if they're not also facing the Social Security Earnings Test!

#FASuccess Podcast Ep 003: Julie Littlechild On Becoming A More Referable Advisor

January 17, 2017 07:02 am 5 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the third episode of the Financial Advisor Success podcast!

This week, we’re changing it up a little bit - rather than speaking with a financial advisor, my guest is Julie Littlechild, a speaker, writer, and researcher focused on understanding and improving financial advisors’ engagement with their teams and their clients. She is now the founder of Absolute Engagement, a firm that is conducting ongoing research into personal, client, and team engagement in advisory firms, and has also done extensive research on generating client referrals.

In this episode, Julie shares what she's learned from her real-world research about what works – and what doesn't – for financial advisors, including why asking clients for referrals is generally a terrible way to actually get referrals, and how to reposition yourself to become more referable. Julie also shares her research on how advisors can get more energized and re-engaged in their practices, and how her own experience of building and then selling her coaching business gave her perspective on the challenge of staying engaged in the business you've built.

So whether you're a financial advisor trying to generate more and better client referrals, or feel like you've hit a wall and need to get re-energized in your own business, I hope you enjoy this latest episode of the Financial Advisor Success podcast!