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How To Transition Existing Clients To An Associate Advisor

March 2, 2017 12:27 pm 4 Comments CATEGORY: Practice Management

Even with today's technology tools, an individual financial advisor can only handle "so many" client relationships, until it's just too many people to meet with, and too many people to keep straight in your head. At some point, every financial advisor hits a wall, where it's necessary to either stop taking on clients altogether, or hire another advisor and begin transitioning some existing clients to free up room to accept more clients. Yet in a business that's built on the foundation of the advisor-client relationship, the actual process of transitioning clients to another advisor can be daunting!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how to transition existing clients away from a senior advisor to a new/associate advisor, and best practices to maximize the odds that the transition is successful and goes smoothly.

Fortunately, if the need to transition clients isn't due to an urgent sale, but simply as a part of the natural growth process of the business, there's time to train and develop an associate advisor, and shift clients over time. Which helps to ensure a smooth process for all involved. My recommendation is that advisors plan to handle the transition as a 3-year process, made up of 3 different steps that I call the three L's: Listen, Learn, and Lead.

During the first phase – the listening stage – the responsibility of the associate is simply to listen. They'll gain valuable knowledge as they watch the senior advisor handle the meeting, direct the conversation, and explain common topics and talking points that come up. During the second year of the transition – the learning stage – it's time for the associate advisor to start talking more in the meetings. Since they have presumably completed their CFP education, they should know their information (even if they don't have a lot of experience delivering it yet), which means the senior advisor can steer client questions to the junior advisor to answer (and then give coaching feedback in a post-meeting "check-in"). Finally, in the third year of the transition – the leading stage – the associate advisor is promoted to a "full" advisor and actually begins to lead the meeting. They set the agenda, kick off the conversation, go through the talking points in each area with the client, and ultimately wrap up the meeting. The job of the senior advisor is to sit and observe – only intervening if it is absolutely necessary, and otherwise giving further coaching feedback after the meeting is over.

This last point is crucial, because undermining the trust the clients are developing with the associate can destroy the transition at this point. If the clients direct a question to the senior advisor, the senior advisor should steer it back to the associate. If the clients ask for the senior advisor's opinion, the senior advisor should affirm the opinion of the associate. And being open and honest with the clients about the transition (in year 3!) is the best way to help the associate advisor ultimately succeed, because it's one more clear affirmation from the senior advisor to the clients of the senior advisor's trust in the associate and the transition. Notably, this also means the senior advisor should be careful to not unintentionally undermine the associate. Beware jokes about an associate advisor's age, and don't call them a "junior" advisor (literally, use "associate" and not "junior"), because these both highlight the associate's relative lack of experience and can reduce client trust.

Ultimately, the biggest determinant of whether clients accept being transitioned to a new associate advisor is whether the existing senior advisor convinces them that the associate advisor really does have the capabilities and expertise to be a good advisor for them! Which sounds easier than it is to convey - because as the senior advisor, you may find yourself feeling very uncomfortable when clients actually do begin to transition, and it becomes clear that they don't actually need you after all. Which is a positive for the business, but can be a personal blow to the ego!

In the end, the reality is that some clients may still resist the transition, and in that case the advisor has to make a business decision to keep them (if the revenue and/or assets merit it), or acknowledge that the client is no longer a good fit and let them go. The fact that you agreed to be their advisor at the beginning does not commit you to being their advisor forever! If you want to grow your business, you have to do what's right for the business.

On The Bleeding Edge Of Financial Planning Fee-For-Service Regulation

March 1, 2017 07:00 am 20 Comments CATEGORY: Planning Profession

When we first launched the XY Planning Network in 2014, our vision was to expand access to financial planning for Gen X and Gen Y clients by championing a new financial advisor business model: getting paid for financial advice through an ongoing monthly retainer. A topic about which my co-founder Alan Moore and I literally wrote the book last year.

When we launched, we knew we would be at the cutting edge – or even the bleeding edge – of how financial advisors will get paid for financial planning in the future. What we didn’t know, however, is that we’d also find ourselves at the bleeding edge of regulation over how financial advisors are compensated for fee-for-service advice as well.

Because what we’ve learned in the 3 years since is that the word “retainer”, while relatively straightforward as an explanation to consumers of how services will be paid for – raises significant regulatory concerns. In some cases, we think the concerns are justified; while we’re confident on the value proposition of an XY Planning Network advisor to validate their ongoing cost, there will someday come a day where financial advisors begin to charge monthly retainers but don’t actually do any real work for clients. At that point, consumers become exposed to a new form of “reverse churning”, where similar to abusive AUM fees, the advisor might charge on ongoing fee (or even try to lock clients into an ongoing fee) but not actually provide any ongoing value.

Fortunately, the reality is that with a model like monthly retainers in particular, consumer risk is largely ameliorated by the fact that substantial fees aren’t actually being prepaid in advance (unlike a traditional long-term retainer arrangement); instead, consumers generally have the ability to terminate the advisor at any time, and immediately end what is effectively an ongoing monthly subscription fee they were paying to the advisor. Which is far better than paying an annual retainer fee, and then discovering one month later that the advisor is shutting his/her doors, and that the other 11 months of fees have been forfeited.

Nonetheless, even when paying on a monthly basis, there are still valid regulatory concerns about whether consumers will be protected. Should advisors be allowed to create longer-term retainer fee agreements as well? What kinds of notifications are necessary to ensure consumers are aware of and remember what they’re paying, which in turn helps to ensure the advisor remains held accountable for service and value? What needs to be done to ensure fee billing and the potential access to bank account or credit card numbers that may entail, doesn’t trigger custody of client assets? And how should regulators (and consumers) evaluate whether a fee is “reasonable”, particularly if it is primarily for non-investment purposes and bears no relationship to the size of investment portfolios?

The added complication is that because financial-planning-centric advisors may not manage portfolios at all, they will in practice be regulated predominantly by state securities regulators, which we’ve found over the past several years have quite varying views about the safety (or not) of charging consumers non-AUM fees (and in some cases, different opinions from different regulators in the same state!). In other words, there is little uniformity regarding the above regulatory issues about fee-for-service financial planning from one state regulator to the next. Accordingly, to the extent that the monthly retainer and other fee-for-service financial planning models are gaining momentum, perhaps it’s time for NASAA to consider a Model Rule that sets forth best practices in reasonable regulation and oversight of these new financial advisor business models?

#FASuccess Ep 009: Carolyn McClanahan On Using A Complexity-Based Retainer Model To Deliver Holistic Financial Planning

February 28, 2017 07:02 am 11 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the ninth episode of the Financial Advisor Success podcast!

This week, I’m excited to host Dr. Carolyn McClanahan, of Life Planning Partners. Carolyn is an emergency medicine physician turned comprehensive financial planner in Jacksonville, Florida, where she maintains a practice serving 80 clients and nearly $1 million of stable recurring revenue from financial planning retainer fees.

What makes Carolyn’s firm especially unique is the way she has applied the principles of a professional medical practice, into her advisory practice. Each of Carolyn and her three advisors all communicate and support clients directly – akin to a doctor with nurses and other support staff who all interact with patients directly – with each working in their respective area of expertise. And their holistic services are covered by a single “complexity-based” retainer fee, including both financial planning and asset management services.

In this podcast episode, Carolyn shares her journey from wanting to be an actuary, to becoming a physical therapist, and then an ER physician, and finally transitioning into financial planning. She also discusses why her plan is never to grow beyond 100 client families, the hard lessons she has learned about hiring, and the parallels she sees between professional medicine and the emerging professionalization of financial planning.

And be certain to listen to the end, where Carolyn talks about exactly how she prices and adjusts her complexity-based retainer fee for each client, and the “client engagement standards” document that she requires every client to sign to ensure she only works with considerate, responsive, and all-around “good” clients!

So whether you’ve been thinking about adopting some kind of retainer fee structure, or simply want insight on a unique kind of holistic financial planning lifestyle practice, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Unbundling Of The TAMP And The Rise Of The Model Marketplace

February 27, 2017 07:01 am 10 Comments CATEGORY: Technology & Advisor FinTech

The Turnkey Asset Management Platform (TAMP) has been a popular solution for financial advisors who want to provide comprehensive wealth management to clients, but focus their time more on financial planning and client-facing duties than the actual investment management process and its implementation. Made feasible by the decline in transaction costs and rise of portfolio management tools beginning in the 1980s, the TAMP marketplace today is estimated to be more than $250B of AUM.

However, the growing capabilities in recent years of “robo” automation tools to handle the trading, rebalancing, and management of investment models, have made the need for a TAMP’s back-office support less and less relevant. And now, that robo-technology appears to be instigating a new competitive threat for TAMPs: the rise of the Model Marketplace.

In essence, a Model Marketplace is a centralized platform where financial advisors can select from a series of third-party-created investment models, but retain control and discretion to implement the trades themselves (in an efficient manner) by leveraging trading and rebalancing software. And in just the past month, both TD Ameritrade (via iRebal rebalancing software), Riskalyze (via its new Autopilot rebalancing tools), and Orion Advisor Services (via their new Eclipse trading and rebalancing solution) have rolled out Model Marketplaces. And the emergence of Model Marketplaces appears to be supported by asset managers themselves, who are seeking new paths to distribute their (otherwise increasingly commoditized) investment products, along with new revenue opportunities from adding a layer of fees for model management itself.

Ultimately, it remains to be seen whether Model Marketplaces will gain traction, and via which platform – from “robo” onboarding tools to portfolio accounting software or an RIA custodian – advisors will choose to adopt. Nonetheless, the transition of “robo” trading and rebalancing tools into the creation of Model Marketplaces represents a significant new disruptive threat, for both existing marketplace incumbents like Envestnet, and the entire world of TAMPs, as advisors gain newfound choices about whether to outsource just the creation of investment models, or their back-office implementation as well.

Weekend Reading for Financial Planners (Feb 25-26)

February 24, 2017 02:43 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a recap of the recent Technology Tools for Today (T3) Advisor technology conference, which includes many notable announcements, from a new Orion rebalancing software solution, to major new Riskalyze features, and the news that eMoney Advisor will be integrating into Schwab OpenView Gateway, putting to rest the ongoing concerns about whether eMoney Advisor would remain open and cross-custodian after Fidelity acquired it two years ago.

From there, we have several more articles on advisor technology, including: a deeper look at the latest Riskalyze features, from the new Premier solution, to its new Autopilot Partner Store (a former of TAMP supermarket delivered through rebalancing software); how Wealthbox CRM got $6M in venture capital to scale up its CRM solution for financial advisors (which is already ranked 4th in market share amongst independent RIAs); a review of EverPlans, a software solution that advisors can provide to clients to help them organize their estate plan (or give to prospects as a way to reach them to potentially do business together); a look at how the IBM Watson artificial intelligence solution is going to be used by H&R Block this tax season to facilitate tax planning strategies and advice; and a review of some robo-advisor "competition" to financial advisors, including E*Trade Adaptive Portfolio and Fidelity Go.

There are also a couple of marketing-related practice management articles this week, from a look at which types of financial advisor niches are currently most popular (hint: those that focus on baby boomers and their retirement dollars) and which might become more popular in the future, when it makes sense to hire an outside marketing expert, and an interesting question you can ask prospective clients in an approach meeting to engage them and better understand what their needs are and how you can help.

We wrap up with three interesting articles: the first is a review of the recent family memoir of Frances Stroh (of Stroh beer), which details how the family's $9 billion fortune wasted away in a catastrophic failure of internal family succession planning (even after having already survived to the third generation from the original founder in the 1850s); the second is a look at check-cashing and payday lending services, which have a reputation for being expensive or downright predatory, but a new analysis finds that in reality the services may be succeeding because they're actually superior on cost, transparency, and service, to traditional banking (at least for those they seek to serve); and the last article is a look at one personal finance blogger's "financial philosophy core tenets", which is notable not just for the tenets themselves (which are quite good!), but as an example of an exercise that financial advisors might consider going through to create and share with their own clients and prospects!

Enjoy the "light" reading!

The Impending Fiduciary Armageddon Of (Most) Mutual Fund Share Classes

February 23, 2017 08:38 am 5 Comments CATEGORY: Investments

Even for financial advisors, the proliferation in recent years of different variable annuity and mutual fund share classes can be overwhelming. Some companies may have as many as 15+ share classes for a single investment strategy, all with unique advisor compensation, surrender charges, and fees. Yet by definition, not all of these share classes can possibly be the best for any particular investor. And in too many cases, it's simply a matter of the advisor choosing how they wish to get paid.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why there are only a few share classes necessary under a fiduciary rule, and why that means there's an impending fiduciary armageddon for (most) mutual fund and variable annuity share classes coming soon!

Because the reality is that the differences amongst most share classes ultimately boils down to the different ways that mutual fund companies pay distribution costs - i.e., commissions - across various sales channels. Those who preferred upfront commissions would sell A or B shares, while those who preferred levelized commissions would sell C shares, and those who got paid an advisory fee would charge their 1% AUM fee separately and use institutional or advisory share classes instead. Retirement plans and 529 plans cut their own deals as well, for their own share class alternatives. And the client got whichever share class happened to be sold by the broker or plan they were working with, and paid the associated cost, including embedded commissions, 12b-1 fees, and sub-TA fees, that may or may not apply.

But in a fiduciary world, the advisor is always expected to use the lowest cost share class for the client. Notably, the fiduciary rule doesn't actually require that advisors use the lowest cost fund, period; it's a myth that the fiduciary rule requires index funds to the exclusion of actively managed funds. However, if the advisor is going to recommend an actively managed fund... it better be the cheapest version of the fund available, because using anything different would represent a conflict of interest for the advisor enriching themselves at the expense of the client with an unecessarily-more-expensive product.

Yet taken to its logical conclusion, this means that most variable annuity and mutual fund share classes will be rendered entirely irrelevant under DoL fiduciary! At best, there may only be 2 share classes available - the uniform-commission T share for those who are paid some moderate upfront commission, and an institutional or advisory share class for everyone else (who separately charge their own advisory fee on top). And the other dozen or more share classes just vanish!

Of course, the transition may not happen immediately. Not only is there the potential that DoL fiduciary will at least be delayed, but given that it only applies to retirement investors, other share classes may still get used in non-retirement accounts for a while longer. But the key point is that under a fiduciary rule, there is only a legitimate need for one or two share classes at most. As a result, whether it's the Department of Labor fiduciary rule, or one that the SEC follows with in a few years, what we'll soon see is an armageddon that destroys most mutual fund and variable annuity share classes, as we complete the shift from being brokers who sell whatever products we can get paid to sell, into advisors who actually sell advice and implement the best solutions we can at the lowest cost they're available for!