Nerd's Eye View blog

Price Saliency, Value Saliency, And Getting Paid For Shadow Work

August 19, 2013 11:03 am 1 Comment CATEGORY: Practice Management

In an ever-busy world, our brains can only keep track of and manage a limited amount of information; the rest, that's less salient, just slips by. In the best of circumstances, we make good choices about what to pay attention to, and use that information to make the best decisions, but in reality the things that are most salient are not always the best bits of information. On the one hand, this leads to a lot of bad decisions; but on the other, it also creates an opportunity to help shape people's decisions by making key information more or less salient.

In fact, planners have increasingly been using this technique in recent years, engaging in the practice of charging separate financial planning fees, in an effort to make the financial planning more salient, assuming that "clients value [more] what they pay for" and may better appreciate all the behind-the-scenes "shadow work" done on their behalf if they write a separate check. Yet a deeper look reveals that ultimately this is a rather crude way of justifying the financial planning value proposition; drawing attention to the price forces people to consider what they're getting for their money, and therefore to think about its value, but focusing on fees is not always a positive. After all, in most industries charging separately for fees is a nuisance and a negative - it's actually designed to discourage people from utilizing the service, from overdraft fees to baggage fees to insurance copayments and deductibles! Is it really a good idea to risk putting clients into the same mindset about their financial planning "fees" too?

Instead, if the true goal is to make the value of financial planning more salient, then perhaps the focus would be better directed towards that goal itself. For instance, by creating more/better deliverables for the client beyond just the financial plan itself, perhaps including a mind map of their financial picture or a personal organizer for their financial files. Alternatively, financial planning value might be emphasized by making a conscious effort to always direct focus in client meetings towards the planning, with a meeting agenda that explicitly highlights the financial planning "check-in" and ongoing action items. Some firms even provide clients with a list of the financial planning "shadow work" tasks (printed directly from the CRM!) being done on their behalf. Ultimately, the goal shouldn't actually be to make financial planning fees and costs more salient, but to minimize the saliency of the costs and maximize the saliency of the value itself!

Weekend Reading for Financial Planners (August 17-18)

August 16, 2013 05:05 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with an announcement by the CFP Board at their recent Program Directors conference that they intend to offer a "massive online open course" (a "MOOC") to help draw new potential professionals into the field of financial planning (and ultimately to pursue their CFP designation). Also in the news this week was the latest data from Schwab Advisor Services on advisor mergers and acquisitions, showing a notable slowdown in activity in the first half of 2013, and a look at the new investment data solution YCharts that is aiming to become the Bloomberg terminal for advisors (at a more reasonable price point, and with Morningstar as one of its venture capital financiers)!

We have a few technical articles this week, including a discussion about Social Security benefits estimates and the fact that they don't take into account the "Windfall Elimination Provision" for those who spent a period of years working in a job that wasn't covered by Social Security, a look at a recent IRS ruling on Self-Cancelling Installment Notes (SCINs) that may have a chilling effect on their use as an estate planning technique, and a Journal of Financial Planning article that provides a good overview of some of the research on asset location and determining after-tax asset allocation decisions.

From there, we have a few practice management articles this week, including two compliance-related articles: one on the importance of business continuity and disaster recovery plans, and the other on why the custody rule matters for financial advisors and how to avoid or manage it (hint: just using a third-party custodian is not enough). There's also an article from Bob Veres envisioning how financial planning firms may shift in the future, with a less asset-centric focus and more attention to the human capital aspects of planning for clients.

We wrap up with three interesting final articles: the first is from marketing guru Seth Godin, about the idea of "if there are people who are an accident just waiting to happen... what's the opposite?" suggesting the answer is to be "formidable" and what it takes to live up to the label; the second is from the blog of Stephen Wershing, and makes the excellent point that just because advisory firms are growing doesn't mean they're good at marketing, when in truth they may just be good at selling; and the last from practice management consultant Angie Herbers, suggesting that in the end we may be attaching far too much stigma to the decision of advisors to "downsize" their firms and that ultimately success is about how the business owner measures it, not what everyone else thinks. Enjoy the reading!

MailBag: Why There Will Never Be A Successful Financial Advisor Review Site In The Foreseeable Future

August 15, 2013 11:03 am 6 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a question about why "advisor review sites" - which aim to gather client reviews about advisors to help consumers choose a good one - just won't work in the financial advisory world anytime soon... as great as it would be to have a consolidated source for financial advisor reviews to help consumers!

Renaming The Outcomes Of A Monte Carlo Retirement Projection

August 14, 2013 11:03 am 8 Comments CATEGORY: Retirement Planning

Over the past decade, Monte Carlo analysis has been slowly replacing its retirement planning predecessor - the straight-line projection - which was overly reliant on a single distant outcome, with no acknowledgement of the potential impact of volatility on the final results and the success of the plan. By contrast, the virtue of Monte Carlo analysis is that it shows a range of possible outcomes, and quantifies results not with a single and inevitably inaccurate estimate of final wealth decades from now, but instead a probability of success/failure that captures how many of a wide range of outcomes are projected to be successful or not.

However, as Monte Carlo analysis has become increasingly popular, the focus has unfortunately shifted once again towards a single projected outcome - the probability of success/failure - without fully acknowledging the range of outcomes and their nuances, such as the fact that a plan with a higher probability of failure may actually be the more appealing option if it's accompanied by a less severe magnitude of failure. Perhaps most significant, though, is simply that the labels "success" and "failure" do little to connote the true reality - that "success" actually means an excess left over, and that failure merely means that some kind of mid-course adjustment may need to occur.

Yet the reality is that while these differences are arguably mere semantics and nuance, how results are framed matters, and can significant impact real world client behaviors, given the difficulty our brains have in trying to interpret Monte Carlo's probabilistic results. Which means if the truth is that "failures" merely require mid-course adjustments and that "successes" actually leave over excesses, perhaps it's time to relabel Monte Carlo results accordingly as "probability of adjustment" and "probability of excess" to ensure clients are making the proper decisions!

3 Ways Freedom Of Information On The Internet Is Changing Financial Planning

August 13, 2013 11:06 am 3 Comments CATEGORY: Practice Management

As the volume of information grows freely on the internet, the dynamics of working as a professional are beginning to change. While in the past, the defining characteristic of a professional was that he/she knew more about their subject matter than the client did, that is less and less the case in today's environment. Instead, it's increasingly possible that when the client walks in the door, they already have nearly the same information as the professional, whether that's in the case of a car dealership, a doctor, or a financial planner.

In this guest post, Dutch financial planner Ronald Sier shares his thoughts about the implications that this freedom of information is changing financial planning. From Ronald's perspective, the good news is that financial planners will not be made unnecessary or irrelevant in this information-laden future, because ultimately we as human beings are still social creatures that want and need to connect with others. We just don't hold ourselves accountable to technology the way we do a real, human financial planner.

That being said, however, the reality is that as information becomes more of a commodity, several aspects of financial planning do need to change, from how we relate to our clients, to the client experience of our service, to how we deliver financial planning to our clients. The key is to view technology not as a competitor to financial planning, but a way to augment it to serve more clients and serve them more effectively. And through it all, planners will need to learn to more effectively engage the "right-brain" functions of storytelling and emotion to help clients cut through the information overload to implement their financial planning goals. As Ronald states, "we are no more transferers of information. We are transferers of emotions."

Using Mind Mapping To Get Paid For Financial Planning Shadow Work

August 12, 2013 11:01 am 7 Comments CATEGORY: Client Trust & Communication

As financial planners seek out differentiation in an increasingly crowded environment, a new trend is emerging towards the use of more interactive software tools to provide a more engaging client experience. While many of these new approaches revolve around the use of financial planning software live with clients - replete with quick data entry support and sliders for clients to manipulate the goals and see immediate impact - the reality is that even the old-fashioned data gathering meeting represents an opportunity to use technology to better engage new clients, and the tool of choice appears to be the mind map.

Although mind mapping has been used in other business contexts - from keeping personal thoughts organized to creative team brainstorming meetings - the tool may be especially appealing for financial planning, as it not only visually captures a lot of client information that is otherwise hard to see all at once, but it does so in a manner that provides a tangible deliverable to what others is some of the most intangible "shadow work" that we do for clients. Whether as a way to justify fee increases, or simply to increase the firm's value proposition, adopting mind mapping becomes an appealing way to create perceived value for work that is ultimately useful for clients but also time-intensive and often unrecognized.

The rising interest in the use of mind mapping in financial planning has even led to the emergence of a training program being offered specifically to advisors on how to use the tool with clients, build a business model around it, and provides some templates to help get started. Of course, ultimately any mind mapping templates will still become very specific to the planning firm and its clientele - in no small part because the template becomes a de facto checklist process for the client discovery meeting - so some firms may simply wish to dive in themselves and get started! But regardless of the adoption route that is chosen, mind mapping appears to be an increasingly appealing tool for cutting edge firms to create a unique value and experience for clients.

Weekend Reading for Financial Planners (August 10-11)

August 9, 2013 05:05 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a big announcement by the CFP Board this week of some "clarifications" to its compensation disclosure rules, including the removal of the "salary" compensation category and an affirmation that advisors cannot be classified as fee-only if they or their firm merely could receive a commission, even if no client has ever paid one. Other industry news and commentary this week includes a look from Ron Rhoades about whether the Garrett Planning Network is a model of how most fiduciary advisors may be compensated in the future, the latest response from the 401(k) industry regarding Yale professor Ian Ayers' threat to expose high-cost employer 401(k) plans to the public, and a discussion of some big changes coming to the DFA investment process.

From there, we have a number of practice management articles, including some tips about how to be more quotable as an advisor when talking to the media, a look at how client advisory boards can be executed effectively, some best practices in vetting and screening potential financial planning candidates for your latest job opening, and how to delegate effectively (not just advice that you should delegate, but what you need to do to actually get it done!). We also have a pair of technical articles, including one providing an in-depth review of the File-and-Suspend and Restricted Application claiming strategies for Social Security benefits (and when they work best), and another that discusses planning opportunities for same-sex couples after the Supreme Court decision on the Defense of Marriage Act.

We wrap up with three interesting final articles: the first is from Jason Zweig of the Wall Street Journal about how financial services products that are less liquid or have exit penalties may actually be a positive "precommitment" strategy to help clients stay the course, an insider's "confession" of the problems in the institutional investing world (with striking parallels to the behaviors of many affluent clients), and a "farewell" message from Investment News technology reporter Davis Janowski who is leaving the publication after six years but shares some interesting perspective on the world of technology for advisors as he moves on. Also included this week is a glimpse at technology consultant Bill Winterberg's new video edition of his weekly "Bits and Bytes" covering the latest news and developments in advisor technology. Enjoy the reading!

Long Term Savings, Relying On Returns, And Retirement Date Risk

August 7, 2013 11:05 am 20 Comments CATEGORY: Retirement Planning

Starting savings efforts young, and taking advantage of the wonder of compounding interest, is a long-standing staple of financial planning advice. The longer the time horizon, the less that needs to be saved to achieve a retirement goal. Yet the caveat of such an approach is that while it's crucial to start saving initially, after the first decade or two the ongoing contributions have less and less impact, as the results are increasingly dominated - for better or for worse - by the portfolio returns.

In fact, by the time the retirement date approaches, the outcome becomes so dependent upon returns, that a poor final decade of performance can drastically derail the entire retirement plan. Saving steadily to grow a portfolio over the span of 40 years begins to look more like saving half the goal in the first 30 years, and quickly doubling the account balance and retiring. Of course, when viewed from this perspective, it suddenly becomes clear that the save-a-little-for-a-long-time approach to retirement is far riskier than most realize.

Ultimately, that doesn't mean people shouldn't start saving early for retirement. But it does recognize that a retirement plan that is heavily reliant on returns can have highly adverse outcomes, where the risk is not just the potential that wealth is significantly less than originally projected, but that retirement will have to be delayed significantly further than originally planned. In fact, perhaps it's time to talk less about risk as standard deviations and the volatility of wealth, and more about retirement date risk and the volatility of when the client will be able to retire, instead?

Are Financial Planners Experiencing A Crisis Of Differentiation?

August 5, 2013 11:01 am 3 Comments CATEGORY: Practice Management

As financial planning continues to grow, consumers increasingly have more and more access to qualified advisors. At the same time, the growth in the number of financial planners is leading to a troubling counter-trend - the more financial planners there are, the less differentiating it is to simply be a financial planner. As a result, while in the past financial planners might have competed primarily with stockbrokers, insurance agents, and do-it-yourselfers, now they're increasingly competing with... each other. And the trend is only exacerbated by the fact that large firms are increasingly steering their advisors in the same direction as well.

The outcome of this trend is a rising new pressure on advisors to focus and find a niche to establish true differentiation from the competition. Realistically, no one advisor can be the best at everything for everyone, but it is possible to be the best for a particular group of clientele, with a genuinely unique value proposition unlike what any other advisor provides. And the efficacy of this approach will only increase as search engines become better and better at helping to match people in need of help with the providers who can offer them the best solutions.

While most planners fear that establishing a niche will make the "pie" of potential clients smaller, the reality is that most advisors already take only a very, very tiny slice of their current pie, and for many the size of that slice is shrinking. By establishing a focus to the business, it creates a scenario where the size of the pie may be smaller, but the advisor has the potential to capture the entire pie! Or viewed another way, 100% of something is a whole lot better than 0% (or 0.00001%) of everything. Ultimately, the point is not to turn away prospective clients who don't fit your niche; it's to have a niche that's so well establish that the only people who contact you are those who seek you out for your niche... and that there are so many, there isn't time to serve anyone else, anyway!

Weekend Reading for Financial Planners (August 3-4)

August 2, 2013 05:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with an interesting profile of online financial planning startup LearnVest, which just recently secured a fresh $16.5M round of venture capital funding to continue growing and scaling its business, along with announcing a prospective partnership with American Express and suggesting more partnerships with some large employers are in the works. Also in the news this week is a look at the recent 401(k) industry bombshell as Yale professor Ian Ayres sent controversial notices to 6,000 firms, threatening some of them that he will expose and highlight their above-average 401(k) plan costs (implying that the company could be breaching its fiduciary duties to plan participants).

From there, we have a number of practice management articles, including a look at Mark Hurley's recent white paper and its perspective on why most advisor M&A deals fall through, a profile of a financial planning firm that uses mind mapping tools live in client meetings as part of its "wow" experience, a review of the online tool "Mention" (an alternative to Google Alerts) to monitor your online reputation, and some perspective on how to get more value out of your advisory firm website (and even better understand what you should realistically be trying to accomplish with it in the first place).

We also have several technical articles, including one on how to route college tuition payments through a 529 plan to save on state income taxes (with a few caveats), another on the complications that arise when trying to allocate assets from an estate between the bypass and marital trusts after death (especially when there has been a material change in value between the date of death and the date property is distributed to trusts), and a third looking at floating rate bank loans and whether they're appropriate for client portfolios given the looming risk of a rising interest rate environment and the impact it could have on traditional bonds.

We wrap up with three interesting final articles: the first is from Texas Tech professor Michael Finke, looking at what factors are most predictive of which clients will "freak out" in the face of market declines (and some ideas of what to do about it); the second is a discussion from financial planner Dave Grant about what was most effective for him as he made a transition to going out on his own as a solo advisor; and the last is a discussion from Foundation Room Finance about how to find the balance as a new advisor between developing your technical skills and going out to build a client base, with some perspective on what it takes to build and refine a business model by applying the principles of Eric Ries' "The Lean Startup", that is equally relevant for both new and experience advisors and their firms. Enjoy the reading!