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How Much Does Having The ‘Right’ Capital Market Assumptions Matter In Retirement Planning?

December 11, 2024 07:02 am 0 Comments CATEGORY: Retirement Planning

"How much can I spend in retirement?" is perhaps the most fundamental question a client brings to their advisor. Answering it well requires a range of assumptions – from estimating average investment returns to understanding correlations across asset classes. These assumptions are rooted in Capital Market Assumptions (CMAs), which project how different assets might perform in the future. However, for many advisors, using these assumptions isn't always comfortable. Advisors want to help clients set a secure, reliable retirement plan, yet even the most comprehensive assumptions will inevitably deviate from reality at least to some degree. Which poses the question: How much error is acceptable, and how can advisors use these assumptions to set reasonable expectations for clients while maintaining their trust?

In this guest post, Justin Fitzpatrick, co-founder and CIO at Income Lab, explores how well CMAs reflect the realities clients will face, the influence these assumptions have on client advice, and how advisors can balance planning assumptions against the risks of long-term inaccuracies.

Ideally, retirement spending would align perfectly with a client's needs – neither too much nor too little. Yet, even with the most accurate CMAs, financial advice rarely aligns flawlessly with reality. Sequence of return risk, for example, means that even 2 identical clients retiring less than 18 months apart can experience wildly different sustainable spending levels. In some historical periods, the amount that a retiree could safely spend in retirement would have looked incredibly risky at the beginning of their retirement – and vice versa. Beyond market variables, clients bring their own behaviors and preferences into play. For instance, many retirees begin retirement by underspending to avoid depleting their resources – a choice that often diverges from the 'best guess' assumptions of CMAs and creates additional room for unexpected market conditions.

The good news is that CMAs can still provide a range of realistic spending limits, and, even better, most financial plans are not static one-and-done roadmaps. Advisors who actively monitor and adjust a client's plan as markets shift can mitigate the inherent uncertainty of CMAs, reducing the risk of overspending or underspending over time. Importantly, CMAs are most valuable when viewed as flexible tools rather than fixed forecasts – allowing advisors to refine assumptions as markets evolve and client needs change. This adaptive approach not only helps clients navigate uncertainties but also distinguishes advisors who are committed to continuous monitoring, enhancing client satisfaction and peace of mind.

Ultimately, the key point is that while 'perfect' CMAs may offer accurate predictions about general market conditions, they will still fall short of telling a client how much they can spend. Market fluctuations, sequence of returns, and personal spending behaviors all create unpredictable variations that CMAs cannot fully capture. However, by proactively monitoring and adjusting portfolio spending, advisors and clients can take advantage of the high points, guard against the lows, and, overall, ensure greater peace of mind!

#FASuccess Ep 415: Systematizing A Firm-Wide Planning Process By Leveraging Centralized Teams And A Ticketing Workflow System, With Erika Wood

December 10, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 415th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Erika Wood. Erika is the Director of Wealth Management of VisionPoint Advisory Group, a hybrid advisory firm based in Dallas, Texas, that oversees approximately $3 billion in assets under advisement for both 780 client households and for retirement plans.

What's unique about Erika, though, is how her firm leverages centralized financial planning and service teams (along with a ticketing workflow system) to systematize a firm-wide planning process to more efficiently serve its $600M AUM private wealth client base.

In this episode, we talk in-depth about how Erika's firm uses an internal meeting preparation team to support their client-facing advisors both by preparing financial plans in the firm's planning software and by providing their advisors with a pre-meeting worksheet with all the information they need to run the meeting, how Erika's firm is able to more efficiently complete tasks by dividing its client service team by functional specialty rather than assigning client service team members to particular advisors, and how Erika's firm uses a ticketing system within its CRM (with required fields their advisors must fill out) to ensure that every task is completed efficiently and correctly.

We also talk about how Erika's firm divides its clients into 3 segments (private wealth clients, e-wealth clients, and foundational clients) based on their investible assets as well as the complexity of their planning needs, how Erika's firm uses a data-centric approach to setting fees, first determining the cost of serving each client segment (including the estimated number of hours it will take to serve them and each advisor's hourly rate) and then adding a buffer on top to ensure each client can really be served profitably, and why Erika's firm uses a quarterly client service calendar approach with its top-tier clients, with each quarterly meeting covering a different planning topic (and scheduling them based on where the topic most appropriately fits during the year).

And be certain to listen to the end, where Erika shares how her firm builds client loyalty through regular webinars on relevant planning topics, in-person social events, and client appreciation gifts, why Erika decided to leave her previous broker-dealer (which 3 generations of her family had worked with) to have more flexibility in how she conducts financial planning and communicates with clients, and why Erika recommends that newer advisors find the part of the planning profession that speaks to them (rather than being pigeonholed into a certain path) and focus on getting better there to make the most of their individual strengths.

So, whether you're interested in learning about using centralized financial planning and service teams, segmenting clients effectively, or ways to build client loyalty, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Erika Wood.

Recognizing Emotionally Invested Team Members And Nurturing “Emotional Ownership” For A More Resilient Firm

December 9, 2024 07:03 am 0 Comments CATEGORY: Practice Management

For many financial advisory firms, ownership has traditionally been tied to equity, where advisors take on financial risk in exchange for legal ownership and a share of the firm's success. However, as the cost of equity rises and accessibility becomes more limited, firms face the challenge of inspiring ownership behavior without distributing equity. One way to achieve this is by fostering emotional ownership – a concept where employees, even without equity, demonstrate a deep sense of care, dedication, and responsibility toward the firm's growth. This mindset can extend beyond job responsibilities, reflecting a deep commitment to the firm’s success.

Emotional ownership plays a key role in developing strong future leaders, especially when rewarded. If those who demonstrate emotional ownership are not given the respect, recognition, and opportunities afforded to legal owners, leadership risks fostering frustration and resentment. But by involving non-owners in decision-making, offering clear career paths for continued growth within the firm, and linking staff contributions to firm-wide goals, firms can create a cycle that rewards emotional ownership and encourages further investment in the firm’s long-term success. Team members who feel a sense of emotional ownership can be a tremendous asset to the firm, driving productivity, innovation, and leadership. However, it's important to recognize that not all team members will share this mindset – and that's not necessarily a bad thing. As while those with emotional ownership can be highly motivated and valuable thinking partners, their deep investment in the firm may also lead to many (sometimes dissenting) opinions, creating the challenge of "too many cooks in the kitchen".

To nurture emotional ownership, firms can take several steps. First, non-owners can be encouraged to participate in decision-making, with their contributions linked to firm-wide goals. They can also be provided with clear career paths that help them envision their growth with the firm. This fosters a sense of responsibility and purpose, even without equity. Mentoring legal owners to fully embrace their roles can also guide them toward greater accountability and leadership within the firm. Additionally, fostering accountability across the firm – through regular performance reviews and recognizing contributions – helps motivate both owners and non-owners. Creating a culture of shared success, where the focus is on collective achievement rather than just individual ownership stakes, can further strengthen emotional investment in the firm’s success. Finally, implementing performance-based incentives tied to firm profitability can inspire non-owners to excel, proving that contributions are valued, regardless of equity.

Ultimately, the key point is that by recognizing and involving emotionally invested team members and offering clear paths for growth, firms can develop a strong culture of shared success. Rewarding those with high levels of emotional ownership creates a foundation for long-term collaboration and positions the firm for lasting success!

Weekend Reading For Financial Planners (December 7–8)

December 6, 2024 02:00 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-elect Trump plans to nominate former Securities and Exchange Commission (SEC) Commissioner Paul Atkins as the next SEC chair, replacing Gary Gensler. Atkins' previous time on the commission and more recent statements suggest that he will take a more circumspect approach to financial regulation compared to Gensler and could look to limit disclosure requirements (including those related to advisor compensation for the sale of certain financial products) as well as the number and size of penalties issued against SEC-regulated firms. Though ultimately, while a slower pace of regulation might be a relief for financial advisors who faced a wave of proposed rules during Gensler's tenure, a more hands-off regulatory approach could open the door for abuses that could ultimately lower the reputation of the financial advice industry as a whole in the minds of consumers (though a lighter burden of regulatory enforcement on RIAs themselves could encourage more advisors to move to the RIA channel, perhaps accelerating the shift towards fiduciary advice?).

Also in industry news this week:

A recent survey found that financial advisors who have recently switched firms are overwhelmingly satisfied with their move, with firm technology playing a key role both in the decision to leave and their satisfaction with their new firm
A Federal court has issued an injunction against the Corporate Transparency Act, putting a (possibly temporary) hold on the previous January 1 deadline for businesses subject to the law to file Beneficial Ownership Information reports

From there, we have several articles on Health Savings Accounts (HSAs):

A survey indicates that while HSAs are becoming increasingly popular, consumers might not be tapping into their full benefits, particularly when it comes to investing to pay for future medical expenses
How financial advisors can add value for clients by helping them avoid potentially costly pitfalls related to HSA contributions and distributions
HSA strategies for married couples who have health insurance coverage through their own High-Deductible Health Plans

We also have a number of articles on advisor marketing:

How advisory firms can become "lighthouse brands" that attract clients through a clear promise, strong product, great people, and passion for what they do
Why showcasing the personalities of firm staff, rather than just focusing on the dollars and cents of the value of financial planning, could be the key to building trust with prospects early on in the marketing process
How professionals can refresh their personal brands, from setting a personal vision to getting feedback from trusted clients and colleagues to better understand how others currently see them

We wrap up with 3 final articles, all about overcoming procrastination:

The biological roots of procrastination and why this tendency can be hard to overcome
3 strategies for overcoming a procrastination habit, from breaking down a challenge into bite-sized pieces to tethering a difficult task to a more enjoyable activity
How advisors can avoid getting stuck on daily 'to-do lists' and move forward on longer-term goals

Enjoy the 'light' reading!

How RIAs Can Launch A Private Fund: Legal Requirements And Common Missteps

December 4, 2024 07:02 am 0 Comments CATEGORY: Regulation & Compliance

In the competitive market for financial advice, advisory firms often seek to find ways to differentiate themselves from one another. For firms with high-net-worth clientele, one way to do this is to offer alternative investments, such as private equity, private debt, or hedge funds, which may offer clients the ability to invest in a more diverse range of assets. In many cases, advisors place clients into funds run by third-party managers, which allows the advisor to rely on the manager's expertise in that particular investment area as well as their back-office resources to handle the administrative, legal, and regulatory hurdles of running a private investment fund. However, it's also possible for advisors to launch and manage their own private funds, which can allow them to further tailor their investment strategy to their clients' needs and to grow their business by attracting more high-net-worth clientele, while potentially cutting out some of the cost layers that clients face when using third-party alts distribution platforms.

At a high level, private funds work by pooling capital together from multiple investors, which can be deployed in a variety of ways – from traditional investments like public stocks and mutual funds to stock in private corporations, private debt lending, commodities, real estate, and even more exotic investments like art, wine, or collectibles. Additionally, private funds can employ leverage, short selling, derivative strategies, and other methods to further manage the portfolio's risk and return characteristics. The end result is that private funds may offer investors more diversification by investing in a broader range of assets than what's found in the public markets; on the other hand, they can be riskier and less liquid than other investments, which is why generally only accredited investors (i.e., generally those with over $200,000 of income or $1 million in net worth) are allowed to invest in private funds.

For advisors who launch private funds, it can be costly to navigate the legal and regulatory complexities involved in getting the fund off the ground. Attorneys are needed to draft the fund's offering documents, and if the advisor wants to avoid the need to register the securities or the investment company with the SEC, the firm will need to implement policies and procedures to ensure the fund meets the exemptions for those requirements. In addition, most RIAs will likely want to engage the services of a third-party fund administrator to facilitate many of the documentation, tracking, and recordkeeping requirements. All of which can make a private fund expensive to launch, with the typical cost for launching a small fund ranging from $40,000 to $70,000 (costs that are typically borne by fund investors) – although given that many of these costs are upfront when launching the fund, costs to manage the fund on an ongoing basis can be substantially less, depending on the costs of the third-party administrator being used and the complexity of the strategy being employed. However, advisers may also realize the operational cost benefits of launching a private fund since they would not need to execute many individual trades for clients through separate accounts.

The key point is that although private funds might not be appropriate for all advisors – since they require having clients who qualify as accredited investors, and having enough of those clients who can benefit from investing in the fund to provide enough capital to run the private fund cost-effectively given the overhead expenses involved to start and run one – they can still be worth exploring for advisors seeking to differentiate themselves and expand their service offerings for high-net-worth clients. And while the complexity and upfront cost of launching a private fund may be high, doing so may ultimately be worth it for the ability to unlock new business growth and deliver more value for clients, at least for firms that want to further differentiate themselves on the basis of their (private) investment offerings to clients!

#FASuccess Ep 414: Narrowing Down The Focus To Byte-Sized Planning For Tech Employees To 10X To $50M AUM In Just 3 Years, With Eric Franklin

December 3, 2024 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Eric Franklin Podcast Featured Image FAS

Welcome everyone! Welcome to the 414th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Eric Franklin. Eric is the Managing Partner of Prospero Wealth, an RIA based in Seattle, Washington, that oversees $52 million in assets under management for 80 client households.

What's unique about Eric, though, is how he was able to 10X his AUM to $50 million in just 3 years by focusing on working with his ideal target client (employees at big tech firms), which led to him breaking down his planning process into smaller bite-sized chunks… as he found that doing less at a time, stretched out over a longer period of time, was actually more valuable as it avoided overwhelming them, given their especially busy work schedules.

In this episode, we talk in-depth about why Eric focuses on just 2 to 3 planning priorities at a time with clients (rather than addressing the full scope of their financial planning needs) to increase the chances that the clients will actually follow through on implementing them (given their hectic lives), how Eric starts planning engagements by having clients review a list of potential goals (which helps them consider goals they might not have thought of themselves) so he can work with them to identify those that resonate and help them highlight and prioritize the top goals they want to pursue first, and why Eric holds a dedicated meeting to discuss his planning insights before formulating and presenting specific recommendations in a final plan presentation meeting, so that Eric and his clients can come to a mutual understanding of what the client really views as their key priorities.

We also talk about how Eric spurred client growth by focusing on marketing to the types of clients he most enjoyed working with and who generated the most revenue (which turned out to be employees of big tech companies where Eric had a background himself), how Eric found greater marketing success through technical, long-form written content targeted at his ideal target client compared to using more general, prepackaged marketing content, and how Eric has further accelerated the growth in his firm by bringing on new advisors who are also career changers from the tech field and can 'speak the language' of their prospective clients in the industry to build trust with them quickly (despite the advisors themselves being relatively new to advising).

And be certain to listen to the end, where Eric shares how he leverages technology (including RightCapital's task management features and Loom as his video recording software) to efficiently communicate with his busy (but tech-savvy) clients, how Eric decided to make the career change to financial planning after spending 20 years working in tech…first becoming a partner with his former advisor who also worked in tech, before eventually buying him out so Eric could focus on accelerating the growth of the firm, and why Eric encourages career changers interested in financial planning to attend industry conferences to learn industry best practices before starting out on their own.

So, whether you're interested in learning about customizing a planning process to match the time constraints of a firm's ideal target client, marketing through long-form written content, or how to make a career change into financial planning and serve clients who were previously coworkers, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Eric Franklin.