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Weekend Reading for Financial Planners (Sep 23-24)

September 22, 2017 02:57 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a recap from the recent "Deals and Dealmakers" Summit on mergers and acquisitions in the advisory industry, which suggests that demand remains strong for advisory firms, though buyers are increasingly focusing on the largest ($1B+ AUM) sellers. Also in the news this week was a fascinating interview with Matt Lunch of Strategy & Resources about the future of the Independent Broker-Dealer (IBD) model, and the announcement that the CFP Board's Center for Financial Planning is finally launching its new academic journal, dubbed "Financial Planning Review" (FPR), and will have a Call For Papers in October to be considered for the inaugumidral issue coming mid-2018.

From there, we have several technical planning articles this week, including a look at the projected Social Security COLA for 2018 (which will ironically increase payments for upper-income individuals, but likely not for lower- and middle-income households due to the looming unwind of Medicare Part B's Hold Harmless provisions from 2016-2017), strategies to reduce clients' state income taxes by changing their state of residence (and what it takes for HNW clients to really substantiate their change in address), and what affluent clients should bear in mind as the IRS increasingly targets its resources on focused examinations of high-income individuals (but with fewer full-tax-return audits).

We also have several practice management articles, from a discussion of whether the traditional A/B/C client segmentation approach is actually just a relic of the old commission-based world and needs to be re-designed for modern advisory firms, to a look at the concept of "Client Journey Mapping" and why there are many opportunities for advisory firms to innovate by focusing on how technology can be used to improve the client's experience in interacting with the firm, and a fascinating discussion from advisor consultant Stephanie Bogan about how for many advisors the best strategy for handling prospects who ask for discounts or exceptions to the advisor's minimums is simply to have a stringent "no exceptions" policy.

We wrap up with three interesting articles, all focused on thinking about the ways the advisory industry is changing: the first looks at how the recent Equifax breach was actually an excellent "micro-moment" opportunity for advisors to demonstrate their value and relevance for clients beyond just their investment portfolios... yet few seem to have stepped up to provide proactive guidance to their clients on issues like credit freezes; the second is a look at the real-world consequences of "non-fiduciary" conflicted advice, where the problem is not just that occasional "bad actors" make highly questionable (but still "suitable") sales to clients, but the fact that because of a current lack of fiduciary standard, they get away with it and keep doing it over and over again; and the last is a good reminder that ultimately, in trying to help clients stick to their investment plan, the best solution is not just about trying to change the portfolio to fit the client's investment behaviors, but also figuring out how to use the behavioral finance research to help clients adjust their behaviors so they are less stressed about (or focused on) their portfolios in the first place!

Enjoy the "light" reading!

Setting Proper Client Minimums: AUM Account Vs Retainer Fee Minimums For Advisors

September 21, 2017 02:58 pm 5 Comments CATEGORY: Practice Management

Office Hours Featured Image How To Set Your Minimum Fees

Setting proper client minimums is an important practice management issue that every advisor needs to consider. For many advisors, the idea of having "minimums" is an unpopular, as their goal is to be ready and willing to serve any prospective client who needs help. But the truth is that there's only so much time in the day - which means not everyone can be served - and given the overhead costs to operate an advisory firm, serving clients that are "too small" may well be a money-losing proposition for the business (even if it brings some revenue in the door).

Of course, even for advisors who are ready to set client minimums for their advisory firm, it’s one thing to say “you should have minimums”, and another to figure out how to actually structure the minimum (e.g., a minimum account size, or a minimum advisory fee?), and what level it should be set at!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss best practices in how advisors should actually go about setting client minimums, the benefits and trade-offs in setting minimums based on investment account sizes (e.g., an AUM minimum) versus a minimum fee (e.g., a minimum annual retainer), and how to figure out what the minimum revenue per client should be for the business to be profitable.

Most advisors that have a minimum simply set a minimum AUM requirement (i.e., a minimum household or portfolio account size). The virtue of having an asset minimum to work with a client is the sheer simplicity. If the advisor sets an asset minimum of $250,000, and charges a 1% advisory fee, then the advisor has effectively set a $2,500 minimum fee for clients. Additionally, the advisor has set a minimum without any special billing requirements or complexities.

By contrast, some advisors prefer to set a minimum annual fee instead (regardless of account size), such as $2,500/year, and simply charge all clients that fee at a minimum (either as an annual retainer, or sometimes billed quarterly or even month). The good news of such a retainer-fee minimum structure is that it opens up new markets - for instance, young professionals who have limited assets but high income and good wealth-building potential who can happily afford the fee from their income. The bad news, though, it that it introduces additional billing complexity, as now the advisor needs a way to invoice, track, and process those minimum fees and have a way to actually get paid by the client (especially if there is no investment account to manage and sweep fees from!).

Regardless of the structure, though - an annual $2,500 minimum fee, or a $250,000 account minimum at a 1% rate that adds up to $2,500/year - it's still necessary to determine what the minimum revenue should be, and whether any particular advisor needs a minimum revenue per client that is higher or lower than $2,500/year.

Ultimately, most advisory firms do this one of two ways. The first option is to set the minimum fee based on the cost to actually service a client in the first place, by adding up the total overhead cost of the business and dividing by the number of clients; for instance, if the firm has 180 clients and the total cost of overhead is $450,000, then the firm must charge $2,500/year just to cover its office rent, staff, and other overhead costs. The second option - especially popular for solo financial advisors - is to price the minimum is based on the value of the advisor's time (since that is his/her primary constraint as an individual advisor). Thus, if the advisor wants to earn $200,000 per year and can only generate about 1,200 productive client-facing hours, the advisor needs to earn at least $166 per hour when doing client work, which means if a client takes 12 hours per year to serve, the minimum fee must be $166/hour x 12 hours = $2,000/year.

The bottom line, though, is that some minimum level of revenue per client is necessary for an advisory firm to execute well as a business. It can be administered as either a minimum account size, or a minimum retainer fee, though each has its benefits and disadvantages and who the advisor can (or cannot) work with, and it's especially important to recognize that if the advisor is going to have a non-investment-account retainer minimum, the advisor had better be delivering some real financial planning value outside of the investment account!

What Inflation Rate Should You Assume For College Expense Planning?

September 20, 2017 07:01 am 6 Comments CATEGORY: General Planning

With the rise of 529 plans and increased focus amongst parents on saving for college, financial advisors have increasingly included college expense planning as a part of the comprehensive financial planning process for clients. And while the mathematics of funding education are relatively straightforward (at least in contrast to more complex retirement planning projections), the reality is that most advisors rely on some very simplistic college expense inflation assumptions for planning purposes (e.g., CPI + 3.0%). Yet, the increasing availability of college expense data reveals that the pace of inflation for college expenses may be slowing – at least for some types of college degrees – and that it’s necessary to take a more nuanced approach to college inflation assumptions.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores the historical data on the rising cost of a college education, and particularly the ways in which college inflation rates have varied based on institution type, location, and even the family income of the student.

For instance, according to the data in the Trends in College Pricing 2016 report (published annually by the CollegeBoard), the reality is that for students looking at private institutions, the common CPI + 3.0% inflation rate typically assumed by financial advisors has actually not been the case for some time now. Instead, the inflation rate for private colleges has been trending substantially lower for more than two decades! Yet by contrast, for high-income families looking at public institutions, a CPI + 3.0% inflation assumption for the cost of college may actually be too low!

In addition to variations by institution type and family income, considerable variability exists by location. For instance, over the past 12 years, annual real college expense inflation at public institutions has ranged from a low of 0% in Ohio to a high of nearly 8%/year in D.C. and Hawaii. Additionally, location-specific trends are made more complex by the role that declining (or increasing) public funding has in increasing (or decreasing) the amount of aid that may be available to students to offset college expenses (which impacts the typical “discount” between the published cost of college and the actual net price that students typically pay).

Of course, just because we’ve seen trends in the past does not mean that those trends will be the same in the future, but particularly given the unique dynamics of college inflation rates for above-average-income families (who most typically work with financial advisors), and the risk that for some clients there may be several college inflation trends moving in the same direction that may substantial increase (or decrease) the savings that clients need to fund their educational goals, the annual CollegeBoard’s Trends in College Pricing report provides a tremendous amount of data that advisors can (and should) use to customize their college inflation assumptions!

#FASuccess Ep 038: From Wirehouse Cold Calling Scripts To The Flexibility Of Independence with Winnie Sun

September 19, 2017 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the thirty-eighth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Winnie Sun. Winnie is the co-founder of Sun Group Wealth Partners, a hybrid RIA on the LPL platform based in Los Angeles that oversees nearly $200 million of client assets.

What's fascinating about Winnie's firm, though, is how she managed to successfully launch her advisory business in a wirehouse through cold calling - with a unique tactic of calling businesses after hours, to deliberately read her cold calling script to their voicemail, and get those cold-calling prospects to call her back! From there, she evolved her business development strategy into a seminar marketing approach, before she ultimately shifted into a niche advisory firm servicing clients in the television and movie industries... building on her background with a television audience production company she founded when she first graduated from college and worked with shows like America's Funniest Home Videos, Jeopardy, and Wheel of Fortune.

In this episode, Winnie talks about what "works" and what doesn't when it comes to social media marketing, why she still balances spending 2/3rds of her time in the wealth management business, and 1/3rd engaging in social media, video, and other multi-media efforts to market her business - because as Winnie puts it, "if no one knows you exist, you can't serve them as clients" - how she's structured her team with a partner to support her practice, and the details of why she ultimately decided to break away from a wirehouse to join an independent broker-dealer... despite the generous offer a competing wirehouse had made.

And be certain to listen to the end, where Winnie shares her perspective on everything from the challenges of our industry's gender or racial diversity - or lack thereof - and the relatively simple change that could be make the advisory business more appealing to young women, along with why she chose to pursue social media marketing, as an introvert, to help facilitate her own work/life balance while growing her business.

So whether you've been curious about what it takes to successfully grow a business via social media, or are simply looking for alternative marketing ideas to cold calling scripts, or want some perspective on how targeting a particular type of clientele can be amplified with digital marketing, I hope you enjoy this episode of the Financial Advisor Success podcast!

Differentiating The Next Generation Of Financial Planning Software

September 18, 2017 07:01 am 32 Comments CATEGORY: Technology & Advisor FinTech

Financial planning software has changed substantially over the years, from its roots in demonstrating why a client might “need” certain insurance and investment products, to doing detailed cash flow projections, goals-based planning, and providing account-aggregation-driven portals. As the nature of financial planning itself, and how financial advisors get paid for their services, continues to evolve, so too does the software we use to power our businesses.

However, in the past decade, few new financial planning software companies have managed to gain traction and market share from today’s leading incumbents – MoneyGuidePro, eMoney Advisor, and NaviPlan. In part, that’s because the “switching costs” for financial advisors to change planning software providers is very high, due to the fact that client data isn’t portable and can’t be effectively migrated from one solution to another, which means changing software amounts to “rebooting” all client financial plans from scratch.

But perhaps the greatest blocking point to financial planning software innovation is that few new providers have really taken an innovative and differentiated vision of what financial planning software can and should be… and instead continue to simply copy today’s incumbents, adding only incremental new features while trying to forever be “simpler and easier” – without even any clear understanding of what, exactly, is OK to eliminate in the process.

Nonetheless, tremendous opportunity remains for real innovation in financial planning software. From the lack of any financial planning software that facilitates real income tax planning, to the gap in effective household cash flow and spending tools, a lack of solutions built for the needs of Gen X and Gen Y clients, and a dearth of specialized financial planning software that illustrates real retirement distribution planning (using actual liquidation strategies and actual retirement products). In addition, most financial planning software is still written first and foremost to produce a physical, written financial plan – with interactive, collaborative financial planning often a seeming afterthought, and even fewer financial planning software solutions that are really built to do continuous ongoing planning with clients (not for the first year they work with the financial advisor, but the next 20 years thereafter), where the planning software monitors the client situation and tells the advisor when there’s a planning opportunity!

Fortunately, though, with industry change being accelerated thanks to the DoL fiduciary rule, the timing has never been better for new competitors to try to capture new market share for emerging new financial advisor business models. Will the coming years mark the onset of a new wave of financial planning software innovation?

Weekend Reading for Financial Planners (Sep 16-17)

September 15, 2017 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with tips from leading cybersecurity expert Brian Krebs on what you (and your clients!) should do to protect themselves from potential identity theft after the recent news of the massive 143 million person data breach at Equifax.

From there, we have several regulatory articles this week, including an in-depth look from Investment News on the current state of FINRA and whether the industry watchdog needs better oversight and governance itself, the latest warning from the SEC to investment advisers to do a better job monitoring and overseeing their advertising (including the use of third-party recognition programs), and the emerging discussion of whether the best regulatory path forward might not be to apply a uniform fiduciary duty to all advisors and brokers but simply to better regulate the term "advisor" in the first place (and let non-advisor salespeople continue to not be subject to a fiduciary duty, as long as they distance themselves from the "advisor" title).

We also have several practice management articles, from a look by Cerulli at the latest trend of advisors towards outsourcing portfolio management (as the majority of CFP professionals now use some kind of third-party manager), why effective leadership in an advisory firm is all about not treating everyone the same and instead focusing the leadership's time, energy, and resources into its top emerging talent, and tips on how to effectively groom next generation "G2" talent in an advisory firm to eventually take over and manage client relationships. In addition, there are also articles on how to develop a prospect tracking list, the merits of having a client advisory board versus conducting a client focus group, and when it makes sense to use video as part of your marketing (and how much it costs to get it done right).

We wrap up with three interesting articles, all focused around the psychology of how you position your business, your clients, and your team: the first explores how in the end, the best business models are very simple ones (e.g., make complex things simple, make boring things exciting, or eliminate middlemen), and raises the question of whether as advisors we try too hard to convey complex value propositions when simpler ones would be better; the second is a reminder that in most businesses (including financial advising), the bulk of utilization, revenue, and referrals tend to come from a small subset of "whale" clients, which makes it especially important to connect with them and make them feel appreciated (but balance against overserving them to the point they're unprofitable!); and the last is a look at how a business that consults on behavioral economics structures its own employee team bonuses, with an emphasis on not just paying a year-end performance-based bonus, but giving employees guidance on how to spend their bonuses in a manner that is most likely to actually contribute to their happiness.

Enjoy the "light" reading!