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Weekend Reading for Financial Planners (Mar 14-15)

March 13, 2020 02:47 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that President Trump is working on an economic stimulus package in response to the coronavirus pandemic that could lead to new tax planning opportunities for clients with potential payroll tax relief. Also in the news this week - beyond the market decline itself - are some signs of the related 'cracks' in the financial system under duress, including a prospective shortage of Treasury bills (at least until the Treasury proactively decides to issue more), and some odd positive correlations between bonds and stocks on big down days (rather than having bonds rally as a flight to safety) suggesting that beyond just the market sell-off there is some significant deleveraging happening within the financial system (leading those investors to sell everything at once, including stocks and bonds).

From there, we have a number of articles about how the coronavirus pandemic response may play out in the coming weeks, including a look at the epidemiological research on why it's important to "flatten the curve" by implementing policies that socially distance us from one another to slow the pace of the virus spreading (and avoid our medical system from becoming overwhelmed), the importance of emergency preparedness in an advisory firm in the event that the government limits employees from going to work for a week or few, the technology tools and systems to implement to prepare for the potential of curve-flattening work holidays, and whether the curve-flattening response to coronavirus could fundamentally shift the way we think about working from home and telecommuting in the future (as the country may en masse need to learn quickly to do so in the coming weeks?).

We also have a few articles on how to have the difficult conversation with clients, from how the 'real' question clients have isn't about what's happening in the markets but simply whether they're going to be 'okay' in the end, why it's important to be mindful of the impact that prolonged market stress can have on client's own systems (as stress hormones are released into the body for a sustained period of time), tips on talking through "corona panic" with clients to keep perspective, and why it's better to view the advisor's role in working with clients through their coronavirus fears as being less about the expertise in how to manage the portfolio in response and more about simply being the 'leader' that conveys a sense of calm amidst uncertainty and helps to paint a picture of how the future is still bright.

We wrap up with three interesting articles, all around the theme of the sometimes unanticipated and unexpected side effects of the coronavirus pandemic: the first explores how scammers and hackers are trying to exploit the focus on coronavirus for a new wave of malware and phishing scams (important to warn clients!); the second looks at how the spike in volatility and recent market declines will probably create a fresh wave of lawsuits against (bad) advisors as previously inappropriate and unsuitable investment recommendations now come to light as losses; and the last provides a crucial reminder that as advisors create value by serving as an outlet for client stress and fears and help them to stay the course, the risk of burnout of advisors is greatly elevated as well, which means that self-care for advisors also becomes more important than ever before in these difficult times!

Enjoy the 'light' reading!

Kitces & Carl Ep 29: Helping Clients Who Unexpectedly Start Overspending From Their Retirement Accounts

March 12, 2020 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, the media has paid plenty of attention to the so-called "Savings Crisis", as a disproportionate number of Americans haven’t saved nearly enough to handle unexpected emergencies, much less generate sufficient cashflow in order to retire. However, there’s a flip-side called the “Epidemic Of Spending”, where retirees who have been frugal for (literally) decades and have diligently saved for their retirements suddenly start spending and even dangerously splurging… potentially to the point of no longer being able to sustain the original retirement goal they so effectively saved for in the first place. Sometimes, such tendencies can be attributed to a desire to ‘just live a little’, but other times, overspending may arise for reasons other than just being faced with the temptation to splurge – for some clients, significant life events can change long-term goals and precipitate dramatic changes in spending habits.

In our 29th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about ways to manage conversations with clients who may be spending at unsustainable levels and are in danger of jeopardizing their own goals, and how important it is to understand why clients may have changed their spending habits in the first place. Notably, the most straightforward path for advisors – simply telling clients that they’re being unreasonable and that they can’t continue spending at their current levels if they want their plan to work – can result in the client simply hiding their spending from their advisor in the first place.

Instead, the importance of connecting the “no” to a bigger “yes” can help clients see a path down from the ‘branches’ of emotional decision-making back to the foundational ‘roots’ laid out in their financial plans – in other words, telling a client they need to reduce their spending should tie to their bigger financial goals that they initially identified were most important to them.

However, it’s also important for advisors to conduct conversations around spending with empathy and objectivity. Because it’s possible that changes in spending behavior are not a result of reckless irresponsibility, but instead a result from a deeper reason, such as a (not-yet-disclosed) terminal illness diagnosis, or the loss of a loved one.

When the cause of erratic spending habits is unknown, advisors can use a three-step process to better understand what may actually be happening in the client’s life that is causing the behavior change. The first step is to restate the fact pattern based on observations made by the advisor and information obtained from the client (e.g., how much is being spent each month; what the initial financial plan goals are/were); step two is to identify the story from the advisor’s viewpoint (e.g., spending at this level will deplete assets by age 70, versus age 95 as originally planned for); and step three is to ask the client to help clarify what’s really happening, offering a safe space for open discussion without judgment.

Ultimately, the key point is that, when clients exhibit unusual spending behaviors, there can be a range of different explanations. And by delving into those reasons with an objective, empathetic approach with a goal of truly understanding any possible mitigating factors, advisors can help clients either get back on track with their original plan or craft new goals to accommodate whatever changing needs they may have.

Accommodate Real World Dynamic Retirement Goals By Projecting Retirement Dates Instead Of Retirement Wealth

March 11, 2020 07:04 am 3 Comments CATEGORY: Retirement Planning

In 2014, Robert Merton lamented in “The Crisis in Retirement Planning” that “investment value and asset volatility are simply the wrong measures if your goal is to obtain a particular future income”. Which is an important concept to emphasize, as many basic financial planning strategies focus only on solving for an asset-based goal to be achieved at a specific point in time (e.g., needing to have $X by the time I retire at age Y), and at best project a range of wealth outcomes around that target at the intended future date.

In this Guest Post, Charles Fox, a financial advisor with Integrity Wealth Partners (an RIA in Walnut Creek, CA) shares how a more robust analysis that accounts for real world outcomes and the potential for retirement delay (or retiring early) can be a powerful tool to really help clients plan for their goals. In other words, the variability of time (and not just the variability of wealth) is a key variable to include in a retirement planning analysis, and when used together with retirement cashflow and desired asset-based goals, financial advisors can help clients better understand how to connect their actual saving and spending behaviors with the trade-offs illustrated in their financial plan.

However, even with plans that incorporate time-based factors to examine asset-based goals, if the plan is limited by a deterministic analysis (i.e., one that does not consider the impact of random events on the results), the client may not have a realistic perspective of the potential impact that market risk and volatility will have on their plan. Which means that Monte Carlo simulations can still be a valuable tool to help clients put these factors into perspective, but by demonstrating not only how asset-based goals would change in dollar amounts but also over time, when affected by the impact of a wide range of potential market conditions.

Accordingly, by using dynamic retirement dates and asset goals that make sense for the client, and by adjusting the simulation parameters to factor in variable times actually spent in retirement (i.e., dependent on the actual retirement date), advisors can present simulation-based results in terms that are relevant and relatable to the client (e.g., not just answering the question “how much do I need to save to retire” but answering the more direct question, “When might I be able to retire?”), while accounting for potential market risk and volatility. In other words, advisors can illustrate how target goal thresholds (e.g., the amount needed to retire at a certain point in time) can change over time as the required assets to meet that goal change as well. Additionally, Monte Carlo-based simulations can be used to effectively illustrate how changing the cost of a goal can affect the timeframe required to achieve that goal, as well as showing the impact of changing small habits over long periods of time (not just in terms of wealth accumulation, but in the speed of reaching a retirement goal in the first place).

Ultimately, the key point is that dynamic time-oriented reporting (as contrasted with traditional deterministic wealth-oriented reporting), when coordinated with flexible retirement goals, can help clients understand not just the timeframe required to complete a goal, but also how different factors (e.g., a delay – or acceleration – in retirement date, the costs associated with reaching the goal, market variability, etc.) play into and trade off with each other in reaching their goal. And using simulation-based analyses provides even more texture than can be communicated in a single probability of success. Perhaps most importantly, time-oriented reporting can help facilitate conversations with the client about how the variables considered in a multifactorial, simulation-based analyses affect their financial plan – in a manner that the client can understand and use!

#FASuccess Ep 167: Creating More Buy-In To Change Financial Behaviors With A Life Planning Approach, with Scott Frank

March 10, 2020 07:05 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 167th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Scott Frank. Scott is the founder of Stone Steps Financial, an independent RIA based in Southern California that has quickly grown to 67 clients and more than $400,000 of annualized revenue in just 5 years.

What's unique about Scott, though, is the way he's evolved his advisory firm from a highly technical base as both a CFA charterholder and a CFP certificant to a financial planning approach with clients built around George Kinder's five-step EVOKE life planning process, which Scott helps clients implement using all his technical knowledge.

In this episode, we talk in-depth about how Scott incorporates life planning questions into the first three meetings of his financial planning process. The reasons why he finds some of George Kinder's life planning questions to be so powerful as a way to really understand clients’ goals and objectives to plan towards, the way he creates buy-in from clients into the financial planning process to get them to actually implement the recommended strategies at the end, and where traditional financial planning software intersects with the life planning approach.

We also talk about how Scott has built a business around his life planning approach. The reason he chooses to bill on a client's holistic assets under advisement and not just the assets he manages directly, how he's simplified his pricing and billing processes with a flat fee schedule of 1% for the first $3 million on all assets under advisement and simply updates the pricing once every 2 years, and the way he's built his clientele with the combination of local search engine optimization and generating referrals from other advisory firms in the area that have even higher minimums than he does.

And be certain to listen to the end, where Scott shares why he hired a financial planner himself to work with his family, how he developed his own life planning goals that led him to take the leap and start his own independent firm after nearly 10 years in the business, and how he used that vision of his family's life planning goals to give himself fee confidence to start charging what his advice was really worth.

Announcing The Second (Bi-Annual) Kitces Research Study On The Real Financial Planning Process

March 9, 2020 07:01 am 0 Comments CATEGORY: Nerd's Eye View

Financial planning, and the process of creating a financial plan, has changed extensively over the nearly 50 years since the first class of CFP certificants. As while in the early years, the “financial plan” was primarily used as a way to demonstrate a prospective client’s gaps and establish a need (for which the advisor could sell a solution to implement), financial planning then evolved into being a ‘value-add’ to support an ongoing client relationship, and now increasingly is becoming the purpose of (and primarily value proposition in) the client relationship in the first place.

To better understand these trends, in 2018 we released the first Kitces Research study on “How Financial Advisors Actually Do Financial Planning”, which examined how financial planners today are actually executing their financial planning processes, delivering their financial plans, what technology tools they are using, and how they are compensated.

Our 2018 report revealed several key findings, including how many meetings it takes to create and deliver a financial plan, how advisors are collecting the requisite data from clients, the tools they use to conduct their financial planning analyses and plan creation, the way technology is used to deliver the plan itself (where the majority of planners use planning software interactively, but also still use Word and Excel to supplement their financial planning software), and the time it takes for the whole planning process to come together. In fact, our research found that overall, financial planners spend only 19% of their time meeting with clients at all, while they spend 26% of their time preparing financial plans and other meeting preparation for their client meetings (along with almost 17% of their time on business development!).

A lot has changed since 2018, though, and as the financial planning industry, tools, business models, and regulations have changed, so too has the financial planning process itself. New technology tools have come, major financial planning software releases have occurred, new regulations have been proposed, and the industry continues to evolve.w

Accordingly, we’re excited to announce the second Kitces Research study, which will once again examine the process that financial advisors go through to create and deliver a financial plan. Similar to the study we conducted in 2018, this research will not only seek to identify current benchmark data for creating the financial plan itself (as well as best practices most effective for financial advisors), but will also specifically explore how the delivery of plans is changing in response to the rapidly evolving landscape of the financial planning industry itself.

So whether you’re frustrated that your financial planning software doesn’t “do” what you need it to in order to demonstrate its value, or are simply looking for ideas to refine your financial planning process to be more time-efficient or cost-effective (or valuable and able to command a higher price!), I hope you’ll take a few minutes to participate in this year’s Financial Planning Process survey and help the world better understand what real financial planners actually do!

Weekend Reading for Financial Planners (Mar 7-8)

March 6, 2020 03:00 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the buzzing industry news that the CFP Board is removing descriptions of how advisors are compensated from its Let's Make A Plan consumer website, claiming that explanations like "Fee-Only" are "not... helpful to consumers", and setting off a fresh debate about whether or to what extent the focus should be on Fiduciary versus Fees (and whether being compensated by Fees is necessary to be a full-fledged fiduciary to clients in the first place).

Also in the news this week are more announcements of the rapidly-evolving landscape for RIA custody, with Pershing Advisor Solutions announcing a new monthly-subscription-fee approach to offering RIA custody services (in exchange for free trades for not only stocks, bonds, and ETFs, but also free mutual fund trades, and a high-yield cash option), and Betterment For Advisors announcing its own new hybridized pricing structure with a monthly per-advisor fee (and a lower basis-point fee stacked on top).

From there, we have several articles about investment markets and the ongoing saga of the coronavirus, including a look at the short- and intermediate-term implications of this week's 'emergency' 0.5% rate cut from the Federal Reserve, the new mortgage refinancing opportunities now emerging as rates crash (potentially giving clients more room to save to help make up for the recent market decline?), and some helpful talking points to consider when discussing volatile markets with clients (especially those who feel they have to 'do something' to feel more in control of the market situation they can't actually control).

We also have a few articles on how to run an advisory firm better and be compensated by the business, including one article on strategies for how best to pay yourself from the business entity (depending on the type of entity), another exploring the "Profits First" approach to budgeting for business expenses (and personal income), and a fascinating look at how, when advisory firms grow, it's crucial to properly pay yourself as the owner/founder of the firm or risk distorting the valuation of the business itself!

We wrap up with three interesting articles, all around the theme of how the business world is changing with the growing availability of data to change how customers or clients are served: the first looks at the rise of "experience" businesses, as technology makes it increasingly possible both to customize experiences, spot trends and data points to identify new experiences... and facilitate customers quickly sharing their good or bad experiences immediately via social media; the second explores how "shelf space" agreements are on the decline in grocery stores, as the growing availability of data about how customers shop means the grocers can create more customer loyalty by eschewing shelf-space payments and focusing first and foremost on what the end customer wants and values (making the foregone shelf space revenue back with additional customer retention instead); and the last examines how the marketplace for investment solutions itself is undergoing rapid change, as the era of the 'financial supermarket' appears to be coming to a close... apparently being replaced by a new generation of increasingly proprietary products and solutions that may cast a new wave of doubt on the objectivity of financial advisors?

Enjoy the 'light' reading!