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What’s Your Filter For Saying “No” To Prospective Clients?

July 6, 2017 02:52 pm 6 Comments CATEGORY: Practice Management

Being a financial advisor is about helping people with their finances. Which makes it very hard for most financial advisors to say "no" to those who ask for help. Especially given the business reality that at least some growth is usually essential to keep the advisory firm economically viable and sustaining. And for most financial advisors, growth opportunities and new prospective clients don't come along very often.

Yet the challenge is that we are all constrained to the same limited number of hours in the day, week, month, and year... which means it's simply not possible to say "yes" to everyone, forever. At some point, continuing to say "yes" simply means we take on so much that we can't even do everything we said "yes" to. Or we end up saying "no" once we feel overwhelmed and out of time - where there's no choice but to say "no". Which means our “filter” for figuring out what to say yes and “no” to is “whoever asks me first gets a yes, and whoever asks me last gets a no”. And when you think about it, “who asks first” is not really a good way to decide how to allocate your precious limited time!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why as financial advisors, we need to actively think about what kind of filters we use to say "no" to prospective clients and business opportunities, and how those filters tend to change over the course of our career and business growth as a financial advisor!

Of course, when most financial advisors get started, the reality is... you have a lot of time, and not a lot of clients. As a result, the filter for who to accept is usually little more than "anyone who can actually pay me anything". However, as an advisory business continues to grow, eventually you reach a point where you’re seeing about all the clients that anyone has time to see (perhaps 75-100 clients?), and once you hit capacity, you simply can't take on any new clients. At this point, revenue stops growing, and if you want to get it to start growing again, the optimal solution changes: now, it's about getting paid more for each client you work with. Which means the second filter for deciding what to say "no" to, often becomes "am I getting paid enough for my time to work with this client?" At this stage, advisors typically start to target a value of their time (e.g., $150/hour, or $200/hour, or more), and use that as a filter to decide whether a relationship is profitable.

For a lot of advisors, the filter of “will this client pay me enough to be worth my time” is the last filter they’ll ever use or need (and they simply keep raising the dollar amount over time). But for advisors who are thinking longer term about how to build a business, this isn’t necessarily tje best filter. Because sometimes the client who pays the most or is the most profitable now isn't necessarily the best long-term value for the business. For instance, clients who pay one-time commissions or planning fees aren't necessarily as valuable as those who pay smaller-but-ongoing recurring retainer or AUM fees, and clients who have strong referral networks can similarly generate more long-term value for the business (through their referrals) even if they don't pay as much for your time today. Which means considering that "long-term multiplier effect" of some prospective clients over others becomes an important filter to decide who to say yes or "no" to!

But eventually, the challenge that comes for some advisors is that we get to the point where we have the money we need to have "enough". And suddenly, these filters about getting paid enough money, or generating long-term business value, stop "working" as effective filters to make us happy with how we're spending our time. Instead, the filter shifts... often to a focus on an "ideal client profile"... such as those who not only pay you well, but those who are willing and happy to delegate, and actually show their appreciation for the value of your advice. In other words, the filter is no longer about whether it's an economically viable client, but also whether it's one who is fun and pleasant to work with in the first place. And some advisors even go a step further, applying an additional filter of their own core values, and filtering out any prospective client who doesn't fit the advisor's own core values.

Of course, much of the progression only happens as an advisor's business becomes successful enough to enable it. Filtering based on core values won't work very well for an advisor just getting started and who needs to grow their revenue, just as a filter based on revenue doesn't work very well for those who already have the income they want and need. But ultimately, it is important to acknowledge that our time is limited, and we need some filter to determine what we say "no" to! If we don't we'll end up allocating our time based on saying "yes" to whoever asks first, which doesn't work very well regardless of what stage our business is in!

Does Monte Carlo Analysis Actually Overstate Tail Risk In Retirement Projections?

July 5, 2017 07:01 am 44 Comments CATEGORY: Retirement Planning

The most common criticism of using Monte Carlo analysis for retirement planning projections is that it may not fully account for occasional bouts of extreme market volatility, and that it understates the risk of "fat tails" that can derail a retirement plan. As a result, many advisors still advocate using rolling historical time periods to evaluate the health of a prospective retirement plan, or rely on actual-historical-return-based research like safe withdrawal rates, or simply eschew Monte Carlo analysis altogether and project conservative straight-line returns instead.

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 – analyzes Monte Carlo projection scenarios relative to actual historical scenarios, to compare which does a better job of evaluating sequence of return risk and the potential for an "unexpected" bear market... and finds that in reality, Monte Carlo projections of a long-term retirement plan using typical return and standard deviation assumptions are actually far more extreme than real-world historical market scenarios have ever been!

For instance, when comparing a Monte Carlo analysis of 10,000 scenarios based on historical 60/40 annual return parameters to historical returns, it turns out that 6.5% of Monte Carlo scenarios are actually worse than even the worst case historical scenario has ever been! Or viewed another way, a 93.5% probability of success in Monte Carlo is actually akin to a 100% success rate using actual historical scenarios! And if the advisor assumes lower-return assumptions instead, given today's high market valuation and low yields, a whopping 50% to 82% of Monte Carlo scenarios were worse than any actual historically-bad sequence has ever been! As a result, despite the common criticism that Monte Carlo understates the risk of fat tails and volatility relative to using rolling historical scenarios, the reality seems to be the opposite – that Monte Carlo projections show more long-term volatility, resulting in faster and more catastrophic failures (to the downside), and more excess wealth in good scenarios (to the upside)!

So how is it that Monte Carlo analysis overstates long-term volatility when all criticism has been to the contrary (that it understates fat tails)? The gap emerges because of a difference in time horizons. When looking at daily or weekly or monthly data - the kind that leveraged investors like hedge funds often rely upon - market returns do exhibit fat tails and substantial short-term momentum effects. However, in the long run - e.g., when looking at annual data - not only do the fat tails entirely disappear, but long-term volatility actually has a lack of any tails at all! The reason is that in the long-run, returns seem to exhibit “negative serial correlation” (i.e., mean reversion – whereby longer-term periods of low performance are followed by periods of higher performance, and vice-versa). Yet by default, Monte Carlo analysis assumes each year is entirely independent, and that the risk of a bear market decline is exactly the same from one year to the next, regardless of whether the market was up or down for the past 1, 3, or 5 years already. In other words, Monte Carlo analysis (as typically implemented in financial planning software) doesn't recognize that bear markets are typically followed by bull markets (as stocks get cheaper and eventually rally), and this failure to account for long-term mean reversion ends out projecting the tails of long-term returns to be more volatile than they have ever actually been!

The bottom line, though, is simply to recognize that despite the common criticism that Monte Carlo analysis and normal distributions understate “fat tails”, when it comes to long-term retirement projections, Monte Carlo analysis actually overstates the risk of extreme drawdowns relative to the actual historical record – yielding a material number of projections that are worse (or better) than any sequence that has actually occurred in history. On the one hand, this suggests that Monte Carlo analysis is actually a more conservative way of projecting the safety of a retirement plan than "just" relying on rolling historical returns. Yet on the other hand, it may actually lead prospective retirees to wait too long to retire (and/or spend less than they really can), by overstating the actual risk of long-term volatility and sequence of return risk!

#FASuccess Ep 027: Reaching HNW Prospects Leveraging Targeted Research and Introductions with Amy Parvaneh

July 4, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-seventh episode of the Financial Advisor Success podcast!

My guest on this week’s podcast is Amy Parvaneh. Amy is the founder of Select Advisors Institute, a practice management consulting firm with a focus on helping financial advisors to grow through targeted referrals of high-net-worth prospects, and providing them the sales and business development coaching that's needed to ensure those prospects actually close when the opportunities come.

What's fascinating about Amy, though, is how she put these techniques to use in growing her own career as a financial advisor. Because Amy started out as a 26-year-old working in wealth management at Goldman Sachs, and managed to grow her asset base to more than $50M in just 18 months, primarily through COLD-calling and COLD-emailing! But Amy didn't just target anyone with her cold-calling efforts; instead, she spent her Sundays every week preparing to execute a highly targeted, research-based effort to network her way directly to high-net-worth prospects, by figuring out exactly what it would take to reach them, and how to get to them.

In this episode, Amy talks about the exact strategies that she used to succeed in business development with ultra-high-net-worth prospects from such a young age, how she identified the potential prospects she could reach out to, the way she researched them to figure out what the best way was to actually work around their gatekeepers and reach them, how she leveraged not just referrals but targeted introductions from her personal network and growing client base to reach the exact prospects she wanted to reach, and how she used that information to craft a cold message to them that still got a whopping 80% response rate.

And be certain to listen to the end, where Amy talks about how she's expanded her success in sales and business development with high-net-worth prospects into a program she calls Referralytics, where she trains advisors on how to utilize her system of targeted, research-based referral introductions to grow their own advisory firms.

So whether you’re struggling to figure out how to even reach ultra high net worth prospects, or even where to find them in your local market, or want ideas about how what it takes to actually sell to and close high net worth clients – even and especially when they weren’t already referred to you – I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (July 2017)

July 3, 2017 07:01 am 4 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the July issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big release of Riskalyze’s new Autopilot platform, which has morphed from “just” a robo-onboarding tool for a TAMP, into a full trading and rebalancing solution that operates as a “Model Marketplace” allowing advisors access to third-party managers and their models for a cost of 10 – 15bps. But the real news is that Riskalyze is also launching a series of its own proprietary “Risk Number Models”, which will be made available for “free” to advisors… because their clients using those models will then be invested at least in part into a series of new Riskalyze “smart beta” proprietary ETFs charging 0.50% to 0.77% expense ratios, as Riskalyze uses its big $20M Series A round to pivot from being “just” a FinTech solution into a proprietary ETF manufacturer that uses its technology to help distribute its own asset management products.

From there, the latest highlights also include a slew of new venture capital announcements, including:

Advizr financial planning software raises a whopping $7M Series A from Franklin Templeton and SEI, despite having only 400 independent advisory firms (and reporting another 500 firms via enterprise) and what is likely no more than $1M to $2M in estimated annual revenue after 2.5 years of growth (admirable growth for a start-up, but seemingly small for the amount of capital being raised... unless the company is planning a pivot?).
RightCapital financial planning software raises a second $1.6M seed round, as the upstart gains momentum with 800 advisory firms, a series of new RIA enterprise deals, and positive word of mouth as it earns the top User Rating from the recent T3 Tech Hub Advisor Software survey, and also a TD Ameritrade Advisor Satisfaction Award.
Addepar raises a monstrous $140M Series D round, as the high-net-worth portfolio accounting and performance reporting tool appears to be making a high-stakes bet that the future of high-net-worth investing will increasingly be a combination of publicly-traded securities and hard-to-value private market stocks.
Trizic adds another $2.5M seed investment from PEAK6, the owner of Apex Clearing, as Apex secures its third robo-advisor-for-advisors platform as a distribution channel to compete for RIA custody business against Schwab, Fidelity, and TD Ameritrade.

You can view analysis of these announcements and more trends in advisor technology in this month's column, including Morningstar’s growing focus on incorporating behavioral finance into its software, a new retirement planning software solution that allows advisors to quickly create a Withdrawal Policy Statement for clients, the use of “video performance reports” to humanize the robo-advisor experience, and the news that beginning in 2019 the CFA Institute will be incorporating a wide range of FinTech topics into its CFA exam and curriculum as FinTech begins to change the very nature of financial services jobs themselves!

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 (July 1-2)

June 30, 2017 02:54 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that, as predicted previously on this blog, the DoL fiduciary debate is open once again, as the Department of Labor has issued a new Request For Information (RFI) about potential modifications to the DoL fiduciary rule (including whether full applicability and enforcement should be delayed even further past January 1st of 2018, and whether a new streamlined exemption should be added for the use of clean shares). Also in the news this week were several notable industry studies, including one from PriceMetrix showing the rapid growth of fee-based accounts in brokerage firms (which in the near term are generating lower fees and less revenue as firms switch from upfront commissions to ongoing AUM fees), and a Fidelity white paper showing how tech-savvy "eAdvisors" continue to outpace all other advisors in everything from AUM to success getting HNW clients, and even take-home profits and job satisfaction!

From there, we have a few technical articles on retirement strategies, including Wade Pfau on what he calls the "Four Ls" of retirement planning goals (Longevity, Lifestyle, Legacy, and Liquidity), a look at how the HEART Act of 2008 allows widow(ers) of military servicemembers to roll over up to $500,000 of SGLI and related death benefits into a Roth IRA (but with a limited 1-year time window), and how managing retirement liquidations from a blend of traditional and Roth IRA accounts is superior to the "traditional" approach of simply liquidating all pre-tax retirement accounts first and the Roth accounts last.

We also feature several articles specifically on wirehouse trends this week, from a look at what wirehouse advisors should consider when thinking about whether to break away, the intense flurry of phone calls (150 client calls in 48 hours!) it takes to successfully break away, and how wirehouses are now reinvesting into new-advisor training programs as wirehouse-to-wirehouse recruiting continues to slow.

We wrap up with three interesting articles, all focused around personal productivity and business success: the first examines the concept of a "Mastermind Group", what it takes to form one, and best practices for running one; the second explores the research on what it takes to have moments of inspiration and creativity (either artistic, or for your business), and that the key is finding time to relax and step away; and the last looks at the growing base of personal productivity research finding that the best way to increase your results is to say "no" more often... recognizing that whenever you say "yes", you're just closer to running out of time and being forced to say "no" to something else later anyway, so you may as well be more proactive about saying "no" so that you still have the room to say "yes" to the right and best opportunities when they come along!

Enjoy the "light" reading!

How Some RIAs Sell Life Insurance Through A BGA Without A B/D

June 29, 2017 12:51 pm 6 Comments CATEGORY: Practice Management

One of the primary blocking points for those at a broker-dealer who want to transition to an RIA is how to handle insurance once they make the switch. Investment portfolios can be shifted from commission-based products with 12b-1 fees to institutional shares with an advisory fee... but there are still virtually no "no-load" insurance products (and few fee-based annuity products) available to RIAs. However, the reality is, RIAs actually can sell - and get paid for - many types of insurance and annuity products, without a broker-dealer relationship!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how RIAs can leverage a relationship with a Brokerage General Agency (BGA) to get paid for implementing most insurance and annuity products, without a broker-dealer relationship!

The key is to understand the different types of investment and insurance licenses that exist. The Series 7 exam (to become a "General Securities Representative") is actually only necessary to get paid a commission to sell "securities" - stocks and bonds, along with mutual funds, ETFs, and variable annuities and insurance. In turn, those with a Series 7 (or a Series 6) must have an affiliation to a broker-dealer, as technically it's the broker-dealer that sells the product and collects a Gross Dealer Concession (GDC) commission, a portion of which is then remitted to the selling broker.

By contrast, in order to sell insurance products, it's only necessary to have a life (and health) insurance license from the state, and to get appointed by the insurance company to sell their products. In some cases, there's an overlap - given that products like variable annuities are both an annuity and a securities product. However, for those who just want to implement term life insurance, whole life insurance, or universal life insurance that is not variable, then the advisor simply needs a life insurance license... but not a Series 6 or 7, and thus the advisor does not need a broker-dealer, either!

Of course, this still raises the question of how an RIA gets appointed by a company to sell insurance in the first place, and manages product selection across a wide range of companies. If the goal is to sell fixed products, the solution is for an RIA to work with a Brokerage General Agency (BGA). Conceptually, a BGA is similar to a broker-dealer, except they only work in the realm of (fixed) insurance products. Fortunately, there are a lot of BGAs out there to choose from (some work nationally, many work regionally, and some simply operate locally), of which many will work with RIAs - for which the primary differentiators are the BGA's service, breadth of products, and commission payouts (though notably because insurance commissions are standardized with the state insurance department, the products themselves will generally still be the same price to the client, regardless of the BGA).

But the bottom line is that if an RIA wants to sell fixed insurance products, then a broker-dealer relationship isn't necessary, as the RIA can work through a BGA relationship instead. Though it's important to remember that a BGA relationship must still be disclosed on Form ADV Part 2, and that CFP professionals at the RIA cannot call themselves "fee-only" if there are insurance commissions involved (even if paid to a separate-but-related entity)!