Nerd's Eye View blog

Creating Advisory Firm Processes And Workflows – Tips and Best Practices

October 10, 2016 07:00 am 8 Comments CATEGORY: Practice Management

When you first get started as a financial advisor, the reality is that there is a lot of time, and not a lot of clients. Which is good, because you're the only one available to get anything and everything done!

As the business grows, though, and especially once other staff members are added to the picture, the situation gets more complicated. Suddenly the things that need to get done involve multiple people, who have to coordinate. And there's a greater risk that tasks start to slip through the cracks, because there's a lot to do for existing clients, and prospective new clients, and running the business itself. It's time to begin introducing some process and structure to the business.

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 tips and best practices about why creating processes and workflows are important, and how to go about actually getting started at it. Whether it's creating processes in the business itself, or processes for yourself to better manage your time, or processes that can turn into habits that make you more productive... the reality is that as any advisory firm grows, it becomes more and more necessary to systematize what you do, to ensure that your clients get the consistent high-quality service they expect!

So whether you're an advisor who has just hired your first staff member or two (or already have them and are struggling with the coordination to ensure that everything gets done by the right people at the right time), or you're looking for ways to improve your own time management and personal productivity by introducing a little more structure to your daily routine, I hope that you find this guest post from Teresa to be helpful!

Weekend Reading for Financial Planners (Oct 8-9)

October 7, 2016 02:53 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the huge news that Merrill Lynch is fully pivoting its retirement advisors to become level fee fiduciaries, eschewing commission-based retirement accounts entirely by April of 2017, and redirecting self-directed investors who still wish to trade to its Merrill Edge online brokerage platform or a new "robo" platform called Merrill Edge Guided Investing (though notably Merrill Lynch taxable brokerage accounts may still remain commission-based and are not subject to the new fiduciary rules). Also in the news this week was a decision from the DC Court of Appeals that has made a final ruling in favor of the CFP Board over the Camardas, which should end the ongoing lawsuit once and for all... and with the CFP Board's recent change to require mandatory arbitration, will likely be the last dispute any CFP certificant ever has with the organization that sees the inside of a courtroom.

From there, we have a few practice management articles specifically on the topic of hiring and retention, including: tips for hiring and retaining Millennial advisors; how to find the "right" team members by focusing first on cultural fit and passion (as long as the minimum technical skills are there); the importance of managing expectations for new employees to retain them going forward; and how "client-centric" firms aiming for high retention may be too client-centric, driving away their best employees (and ultimately damaging the firm's retention) in the process.

We also have several more technical articles, from a look at how to set "retirement guardrails" to determine when retirees may be spending too much (due to higher spending or poor market returns), to a discussion of how the community property rules interact with retirement accounts (and how a spouse's community property interest doesn't automatically ensure he/she can do a spousal rollover after death!), and an overview of how to use the IRS' Data Retrieval Tool (DRT) now that the 2017 FAFSA season is open.

We wrap up with three interesting articles: the first is a call-to-action for younger planners that despite being the "next generation" of financial planners, the time to lead is now (allowing for more time to build a foundation and enjoy the fruits of their labor!); the second is a look at the idea of practicing "radical generosity", giving especially deep and thoughtful gifts to clients, prospects, and referral sources, as a way to enhance the relationship; and the last is a look at how despite all the ongoing technological progress, the next 20 years may actually be far less disruptive than the past decades have been, as even "innovative" technology in recent years has actually been more incremental than truly revolutionary, and could actually drive consumers even more towards health care, education, and financial advising sectors, that remain uniquely human in their needs.

Enjoy the "light" reading!

The Problem With Trying To Be The Lowest Cost Financial Advisor

October 6, 2016 08:02 am 1 Comment CATEGORY: Practice Management

In an increasingly competitive environment for financial advisors, from the rise of robo-advisors and Vanguard Personal Advisor Services, there are more pressures than ever on us to justify our cost to clients. Leading many financial advisors to question whether it's time to cut AUM fees - or even abandon the AUM model altogether.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I look at when and whether it ever makes sense to cut AUM fees in an effort to grow the business and bring in more clients.

Clearly, for advisors who are far more expensive than their competition, cutting fees to at least be "reasonably competitive" may be inevitable. But for those whose AUM fees are already reasonable, beware the strategy of trying to attract clients by being the lowest cost financial advisor. Because ultimately, that may attract the most cost-conscious and price-sensitive clients - who may come to you for being the lowest cost, but will just as quickly leave you for another advisors who is just a basis point or few lower... because that's the behavior of clients who seek out the lowest cost solutions!

More generally, though, the real challenge of trying to compete by being the lowest cost provider is that it sets the focus to competing on price, instead of competing on value instead. In fact, for financial advisors who find their prospective clients challenge their pricing, usually the biggest issue is not their pricing at all - it's a lack of differentiation, and the perception from clients that your services are no different than any other financial advisor... which means price is the only comparison left.

In other words, most "price" conversation are actually value and differentiation (or lack thereof) conversations. Which means the real solution is not to adjust your prices - or change your entire business model (e.g., from AUM fees to retainer fees) - but instead to try to improve your differentiation by focusing on a niche or specialization, such that clients will focus on your unique value instead of comparing you to others on price alone! Because for advisors who are truly differentiated with a unique value, clients don't often ask very many questions about price and cost in the first place - because there's nothing to compare you to anyway!

The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone

October 5, 2016 07:01 am 38 Comments CATEGORY: Retirement Planning

The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.

And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.

Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely.

Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal).

Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.

The Latest In Financial Advisor #FinTech (September 2016)

October 3, 2016 07:01 am 3 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the September issue of the latest news in Financial Advisor #FinTech - where we look at the big news announcements, and the underlying trends and developments that are emerging, in the world of technology solutions for financial advisors.

This month's edition kicks off with the launch of two new categories of financial advisor technology - AdvicePay, a payment processor to facilitate monthly, quarterly, or annual retainer billing directly from a client's credit card or bank account (without running afoul of RIA custody rules!), along with Snappy Kraken, a comprehensive automated digital marketing platform for advisors, both premiering at the #XYPN16 #FinTech competition in September.

Also in the news over the past month is: McKinsey Consulting buys PriceMetrix, a financial advisor data platform to do benchmarking of advisor fees (necessary to determine "reasonable compensation" in the future under DoL fiduciary!); the launch of a new risk tolerance profiling system called TrueProfile, and the news that the Financial Planning Association is participating in the venture (putting it in competition with companies like Riskalyze and FinaMetrica, which also sponsor FPA events!); RIA In A Box wins its second consecutive "Best In Show" award at the Fuse Orion hackathon (who says compliance tech solutions aren't exciting!?); a new hybrid Robo/TAMP solution named "RobustWealth" launches, aiming to compete with alternatives like Betterment for Advisors but with the capabilities of a full-fledged TAMP; Betterment rolls out a new "Tax Coordinated Portfolio" service, threatening to commoditize Asset Location in the same way it has with Tax-Loss Harvesting; the Balance Financial PFM solution for advisors shuts down (but may live on as a proprietary HD Vest solution); transactional "robo" platforms Motif and Robinhood pivot to an AUM-like fee-based wrap account subscription model, but at a cost that could be drastically higher than other robo-advisors for small Millennial accounts; and a new product called "Screenmeet" launches for advisors, aiming to compete with (more expensive and complex) alternatives like GoToMeeting and WebEx for advisors who just want to do a simple screen-share of a document while speaking to a client on the phone.

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 (Oct 1-2)

September 30, 2016 02:51 pm 3 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 Nationwide Insurance is purchasing Jefferson National, the maker of the leading low-cost fee-based variable annuity for RIAs, as Nationwide looks to gear up its no-commission fee-based insurance and annuity products for the DoL fiduciary rule (and gain access to Jefferson National's RIA relationships to offer new Nationwide fee-based products in the future). Also in the news this week is a new advisor survey from Fidelity, finding that financial advisors are warming up to the DoL fiduciary rule and increasingly see it as an opportunity, though a non-trivial number of advisors (about 1-in-5) report that they may leave the industry altogether if forced to act in their clients' best interests. (Good Riddance!?)

From there, we have several "counter-intuitive" articles on financial advisor marketing strategies, from why you should stop asking for referrals (and what you should do instead to become more referrable), why you should stop going to networking events (and organize your own instead), why you should create a "prospect repellant" list (characteristics of people you don't want to work with), and why maintaining an emotional aloofness as an advisor professional may be inferior to sharing your personal story and allowing yourself to be more emotionally vulnerable with clients.

We also have a few more technical articles this week, including: the benefits of using a HECM for Purchase reverse mortgage to buy a retirement home (instead of a traditional mortgage); how factor investing extends beyond the traditional Modern Portfolio Theory (MPT) approach; and ideas for new ETFs that would actually be useful for consumers (unlike the proliferation of so many today that appear to be pursuing extreme differentiation at the cost of introducing new risks).

We wrap up with three interesting articles: the first is a look at how, if you really want to motivate employees, don't just give them financial bonuses (which can briefly encourage behavior but quickly fade), and instead give them compliments and pizza (which have more lasting motivational effects than you might have realized!); the second is a discussion of how we tend to distance ourselves from those who criticize us, even though the reality is that constructive criticism feedback is crucial to self-improvement; and the last dives into the research of how to actually take a truly restful "micro break" during the day to keep your energy flowing (as even a brief 5-minute restful break can go a long ways to renewing our energy to get through the rest of the work of the day)!

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes highlights of the recent #FinTech hackathons from Orion Fuse and eMoney Advisor, the announcement that Motif Investing is launching a new Motif BLUE subscription service, the launch of Betterment's new "Tax-Coordinated Portfolio" (automated asset location), a new Quovo advisor dashboard, and more!

Enjoy the "light" reading!

How To Gracefully Let Go Of (“Fire”) Small Clients As A Financial Advisor

September 29, 2016 07:27 am 12 Comments CATEGORY: Practice Management

Client segmentation, where you separate your clients into "A" and "B" and "C" clients, is a standard practice management strategy for financial advisors. The "A" clients are the ones you want to service the most (and who tend to drive the most profit for the firm), the "B" clients are the bread-and-butter profitable clients, and the "C" clients are the ones who are marginally profitable (at best) and may have to be eliminated altogether in order to grow the firm. Except unfortunately, those "C" clients are often also the first and most loyal clients of the firm, who joined before there were any minimums, and who may be quite resentful if the advisor now refuses to serve them!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss tips on how to "fire", or gracefully let go, of small "C" clients that the advisory firm can't afford to serve anymore. Not only because it may be necessary for the business - given that we can each only serve so many clients - but also because a "C" client for your firm may still be an "A" client for another advisor... which is ultimately better for the client, who will receive better service somewhere else anyway!

So how can a financial advisor let a small client go, without offending them? One option is to "graduate" them, letting them know that it's no longer necessary for them to work with you, because they're ready to do it themselves. For those who really can't become do-it-yourselfers, another option is to refer the client out (to an advisor who would be happy to take them). Or if there are a lot of C clients to refer out, the advisor can even do a partial sale of the business, and sell off that block of C clients to an advisor who wants to acquire and serve them.

Another alternative is for the advisor to simply institute a minimum fee - not just an asset minimum, but a minimum payment that any/every client must make in order to receive the advisor's full services - and then let the client decide whether to stay and pay, or to fire the advisor. In other words, the advisor doesn't fire the client; instead, the minimum fee is instituted, and the client decides whether to fire the advisor!

The bottom line, though, is simply to recognize that as financial advisors, we can only service so many clients. But a client who isn't profitable as a "C" client for your firm can still be a great "B" or "A" client for another advisor. And by graduating them, referring them out, selling part of the business, or simply instituting a minimum fee and letting the client choose, it is feasible to gracefully "prune" small clients from the business that are no longer a good fit!

Weighing A Qualified Charitable Distribution (QCD) From An IRA Vs Donating Appreciated Investments?

September 28, 2016 07:01 am 25 Comments CATEGORY: Taxes

For those who already have a charitable intent and are over age 70 ½, the now-permanent rules permitted a Qualified Charitable Distribution (QCD) directly from an IRA to a charity provide an appealing means to minimize the tax bite of an RMD. Of course, it’s always possible to simply donate to charity and claim a charitable deduction to offset the income of an RMD, but given that in practice the income and deduction rarely offset each other perfectly, the QCD offers a slightly better potential tax outcome.

However, while donating from an IRA to satisfy an RMD obligation may be more effective than separately taking the RMD and donating cash (or writing a check) to the charity, it is usually not as good as donating low-basis stock or other appreciated investments instead. The reason is that while a QCD is a “perfect” pre-tax contribution, donating investments allows for a pre-tax contribution that also permanently avoids a long-term capital gain.

On the other hand, the reality is that charitable donations often have limits of their own, from the fact that they’re only valuable for those who itemize deductions in the first place, to the 30%- and 50%-of-AGI charitable contribution limits that may apply as well. Furthermore, donating low-basis stock may still not fully offset the income from an RMD, where that income increased AGI and triggered the phase-in of Social Security taxation or the phase-out of other significant deductions.

Ultimately, then, the relative benefits of QCDs will depend significantly on the facts and circumstances of the situation, driven primarily by whether or how much a donation of low-basis investments could really be claimed as a full deduction in the first place. On the other hand, it’s also important to remember that for those who don’t have a charitable intent in the first place, the optimal strategy is still to just take the RMD, pay the taxes, and keep the remainder; QCD strategies are still only best for those who want to maximize the tax benefits of charitable giving they already planned to do in the first place!

How Financial Advisors Can Differentiate On Great Service With A Client Service Standard

September 26, 2016 07:01 am 8 Comments CATEGORY: Practice Management

In an increasingly competitive landscape, most financial advisors have succeeded by providing quality service that retains their existing clients, with the average financial advisor retention rate at 94%.

Yet the challenge is that while offering great service may keep clients on board, it’s incredibly difficult to use “great service” as a differentiator. In fact, according to one recent study, 72% of all advisors differentiate on client service. And by definition, when the majority of advisors differentiate on the same point, it’s not differentiating anymore!

In addition, differentiating on service is also difficult because there’s no clear and consistent definition of what “great service” even is. Especially since what is great service to one client may not be to another. What constitutes “great” is truly in the eye of the beholder.

Which means at a minimum, for advisors who do want to differentiate on great service, it’s necessary to truly articulate what “great” really means (and for whom). For instance, advisors might craft a “Client Service Standards” document that explicitly states what “great service” really means, at least from the advisory firm’s perspective in trying to serve its ideal clients. Of course, then it’s also crucial to affirm that what the advisor thinks is great service is really perceived that way by the clients themselves. And if you commit to it, be certain you’re really ready to deliver it, too!

Weekend Reading for Financial Planners (Sep 24-25)

September 23, 2016 12:41 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement that there's a new "fiduciary registry" being launched by the Institute for the Fiduciary Standard, with public support from TD Ameritrade and Pershing Advisor Solutions. The new registry aims to highlight firms that proactively embrace a more holistic fiduciary standard than the still-limited versions currently adopted by both the SEC (pertaining to RIAs) and the Department of Labor... and in the process, raising the question of whether firms can still compete by trying to be the 'most fiduciary' as a differentiator at all.

From there, we have several articles on advisor technology this week, including a recent study finding that if advisors want to reach younger "HENRY" clients (High Earners, Not Rich Yet) it's essential to serve them in a more tech-savvy manner, software reviews of new retirement tools Last Advisor and Nest Egg Guru, and a look at the recent announcement that eMoney Advisor is aiming to build out a substantial suite of DoL compliance tools to complement its core financial planning software.

We also have a series of articles looking at the continuing evolution of DoL fiduciary's impact on advisory firms, from a prediction by Ric Edelman that as many as half of all of today's financial advisors will be driven out by the DoL fiduciary rule (clearing the way for more fiduciary- and client-centric advisors to take their place), a look at whether some advisors are selecting applying fiduciary rules in today's environment (e.g., by building fiduciary portfolios but ignoring the more holistic demands of the fiduciary standard on the business), a prediction from Cerulli that the fiduciary standard will lead to more 'cookie-cutter' portfolios and less freedom/flexibility for most advisors, and a prediction that despite the push for economies of scale to handle compliance concerns a look at other industries suggests solo financial advisors and small RIAs will continue to survive and thrive going forward.

We wrap up with three interesting articles, all focused around the theme of the wealthy: the first is an excerpt from a new book entitled "Capital Without Borders", that studied how ultra-high-net-worth clients engage with family wealth managers; the second is a look at how the "pentamillionaire" (with more than $5M in investable assets) is becoming the new millionaire, as there are now more than 1,000,000 US households that have reached the pentamillionaire status (having grown by 38% in just the past 5 years); and a fascinating exploration of how in theory it's the poor who have to work extreme hours and the rich who have time for leisure, but in practice it's turning out that 1-in-5 men in their 20s without a college degree is long-term unemployed (and that 3/4ths of their newfound 'leisure time' is being spent playing video games!), while higher income individuals have experienced the greatest decline in leisure time over the past generation.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week recaps the highlights of a new hackathon for advisor technology development, hosted this week at the 2016 eMoney Advisor Summit.

Enjoy the "light" reading!