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Weekend Reading for Financial Planners (Jan 28-29)

January 27, 2017 02:53 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the interesting buzz that TD Ameritrade, long recognized as the open-architecture-with-little-proprietary-product platform for RIAs, might now be considering becoming less open and begin offering more TD-branded products under its new CEO (which will surely be part of the buzz with TD Ameritrade's national RIA conference coming up next week!). Also in the news this week was coverage of the growing number of regulators and legislators adopting rules that will make it easier for financial advisors to report financial abuse of seniors (with much debate about whether advisors will be required to make reports).

From there, we have a few technical planning articles, including a reminder that now is the time to review (and if necessary, get corrections) on Form 1099-Rs being sent to clients, a look at how indexed annuities are getting more and more complicated and the concerns of new "exotic" volatility-managed indices, the risks and potential rewards of ESG-based investing, and how on average dollar cost averaging is a worse deal than just allocating a lump sum but may still be a good idea when P/E ratios are high (as they are today).

There are also a couple of practice management articles this week, from tips on how to better "program" clients to give regular referrals, how to better qualify prospects and have fewer "wasted" prospect meetings (where the prospect never follows through after the meeting), and how to actually run a first-time meeting with a new prospect to improve your chances of actually turning them into a client.

We wrap up with three interesting articles: the first covers the recent Consumer Federation of America report that a number of large Financial Institutions are holding out to the public as (fiduciary) advisors while representing to regulators and the courts that they're just (suitability-based) salespeople, emphasizing that the real battle is not about fiduciary vs suitability, per se, but whether salespeople should even be allowed to hold out as advisors; the second is an interesting look at Sanctuary Wealth Services, a platform for breakaway brokers transitioning to independent RIA that is shutting down after 8 years, and sends an ominous signal to the community of advisor support platforms that it's still a challenging business; and the last is a discussion of whether the rise of call-center-based virtual financial planning solutions (like Vanguard Personal Advisor Services and the coming Schwab Intelligent Advisory) will become the future entry-level career path for financial advisors, and pondering whether that's a bad way to train the next generation of financial planners, or actually a great improvement (at least compared to the past, where it was all about getting new business by "smiling and dialing" while reading cold-calling scripts!).

Enjoy the "light" reading!

Transitioning From An Advisor Practice To A (True) Financial Advisory Business

January 26, 2017 12:22 pm 7 Comments CATEGORY: Practice Management

Periscope Office Hours Cover Image Jan 24 Transitioning From A Practice To A Business

The fundamental constraint that every financial advisor eventually faces is that there are only so many hours in the day and week, and therefore only so many clients that can be served, before you hit a wall. At that moment, you reach the maximum capacity of a financial advisory practice, and have to make a decision about whether you will stay that size - with what may be a very good income - or grow into a business, a true business, that goes beyond your individual capacity to serve clients as a financial advisor.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the dynamics of transitioning from a practice to a business, and the challenges you may encounter along the way, including building a team, letting go of client responsibilities, and most significantly... changing your mindset!

The first change you need to acknowledge is that when making the transition from a practice to a business, you, personally, can no longer spend your time primarily servicing clients. This is partially due to the wall you will naturally hit from trying to service too many clients, but even more importantly, you need to recognize that if you spend all of your time working in the business, you won't have any time to work on the business. You may still keep a small set of clients – if for no other reason than to remember what's it's like to sit across from the client and hear their needs and concerns – but the first step in the transition for most advisors is bringing on an associate advisor who can gradually take over client relationships and work with all new clients going forward. And as you add more clients, you'll simply add more advisors (who aren't you!).

The second thing to recognize is that if you're going to be doing all that hiring over time (from advisors to operations and back-office staff) as the business grows, you're going to need to really focus on developing your people (instead of acquiring new clients). In fact, since the financial advisory business is a service business, finding and developing people will arguably become your number one job as you make the transition from a practice to a business.

But the biggest challenge to transitioning from a practice to a business is that you're also going to have to completely change your mindset. Because you may have started out as a financial advisor giving advice, but going forward you are no longer trying to do financial planning... you're trying to build a business that does financial planning. This will mean an endless set of changes as your business grows and your role changes to reflect the new challenges you face, as well as real financial sacrifices as you hire staff and try to find economies of scale as the firm grows.

Ultimately, the path to being a business owner is not for every advisor. Many are quite happy to continue doing the client work as a solo advisor - and that's okay! - but for those who do wish to build their practice into something bigger than themselves, it will require a complete mindset shift to vision a business that truly goes beyond your individual ability to serve clients and instead is all about getting other great financial advisors to serve the clients in your business!

Adopting A Two-Dimensional Risk Tolerance Assessment Process

January 25, 2017 07:01 am 10 Comments CATEGORY: Investments

The process of assessing an investor’s risk tolerance is all about determining his/her willingness to take investment risk, and financial capacity to bear risk, and blending it together to match to an appropriate investment portfolio. Most commonly, this is done with a risk tolerance questionnaire that posits a series of questions about time horizon and need for income, and attitudes about risk and market volatility, to calculate a “risk score” and determine the portfolio that goes with it.

The caveat to this one-dimensional approach, however, is that by averaging together risk tolerance and risk capacity scores, the advisor can unwittingly end up in situations where clients with extremely low risk tolerance (or risk capacity) end up with portfolios that are far too risky for their situation. In other words, the low risk tolerance (or capacity) should have acted as a constraint to the investment policy statement, but didn’t.

So what’s the alternative? Simply put – risk tolerance and risk capacity should be measured separately, and then scored on a two-dimensional scale that considers the contributing role (and limiting nature) of each (rather than a single continuum that merely averages the two together).

Fortunately, there are numerous risk tolerance software solutions specifically designed to assess “pure” risk tolerance on a standalone basis, including FinaMetrica and Riskalyze. And for comprehensive financial planners, the reality is that the financial plan itself is a measure of risk capacity, as reflected in the Monte Carlo probabilities of success and failure.

For those who don’t do full retirement planning projections for every client, a recent alternative software solution is Tolerisk, which is designed to perform a two-dimensional risk tolerance assessment by separately gathering information about the client’s risk attitudes and their basic financial goals.

The bottom line, though, is simply to recognize that risk tolerance and risk capacity are two different dimensions of the client’s overall risk profile, and must be assessed and ‘scored’ separately to properly recognize the constraining role that each can have on the appropriate investment policy statement!

#FASuccess Podcast Ep 004: Deb Wetherby On Building The Team Of A $4.5B RIA Serving HNW Clientele

January 24, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the fourth episode of the Financial Advisor Success Podcast!

My guest this week is Deb Wetherby, founder of Wetherby Asset Management, a $4.5B independent RIA based in San Francisco that serves ultra-high-net-worth clientele. So if you've ever been curious about how a fee-only firm with a whopping $10 million minimum is staffed and operated, this podcast will not disappoint.

And Deb’s journey into the role of being a financial advisor, entrepreneur, and ultimately business executive, is a fascinating one. She started out working in the private bank division of a major wirehouse in the 1980s – as one of only 14 females around in the globe in her department – before eventually deciding that the conflicts of interest inherent in private banking of the day were just too much. The end result was launching her firm, and bootstrapping it from scratch, running three full years just to reach breakeven, while racking up substantial credit card debt to stay afloat!

Now, 23 years later, Wetherby Asset Management managed $4.5B of AUM for almost 500 clients, with 66 staff members. And Deb shares how the growth of the firm ultimately forced her to evolve from being "just" a financial advisor, into a leader of the business, with a primary focus on establishing and maintaining the culture of the firm. In fact, Deb has one of the most unique and intensive processes I've ever heard of, to both vet and onboard new team members – which she graciously shares in today's podcasts.

So if you're running a financial advisor firm and struggling with how to make sure your growing team is all marching to the same drummer, or simply aspire to grow a large advisory business in the future, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Bottom Dollar Effect And The Behavioral Advantage Of AUM Pricing Over Retainers

January 23, 2017 07:00 am 12 Comments CATEGORY: Practice Management

As financial advisors, we're well aware that behavioral biases influence our clients' decision making. However, it's sometimes easy to forget that biases influence the consumption of financial planning services as well, which may have an impact on client satisfaction, retention, and our ability to grow and sustain our business.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores the "Bottom Dollar Effect" and its varying influence under different financial advisor business models.

The "Bottom Dollar Effect" refers to the tendency of consumers facing financial hardship to transfer negative emotions associated with their hardship onto the last few products or services that, at the margin, they perceive as straining their budget. The unfortunate consequence of this effect is that consumers may become dissatisfied with a purchase based not on their actual satisfaction with the goods or services purchased, but instead, on the timing of that purchase and the resources they happened to have available at that time.

Within the context of financial planning, various business models - from hourly or retainer fees, to charging on assets under management - possess different degrees of potential susceptibility to the Bottom Dollar Effect, driven primarily by the various "mental accounts" that client fees typically come out of. In addition to being highly salient and possessing some other negative behavioral characteristics, hourly fees are particularly prone to the Bottom Dollar Effect, as planning fees tend to be relatively large, irregular, and funded through current income (thus, more likely to strain a client's budget). On the other hand, AUM fees have low susceptibility to the Bottom Dollar Effect, given that fees come out of a long-term mental account tied to a dedicated goal (retirement) that is insulated from current income fluctuations. Retainer fees vary in their susceptibility to the Bottom Dollar Effect based on their design, including especially their size relative to client's income and net worth, and from what account(s) the fees are paid.

The fundamental point, though, is simply to understand that decisions about how to pay advisory fees are subject to behavioral biases as well, and those biases may influence both your ability to succeed as an advisor and your clients' inclination to retain your services (particularly in bear markets, when they may need your help the most!). In order to maximize the chances of establishing a relationship that benefits both you and your clients long-term, behavioral biases – including the Bottom Dollar Effect – should not be ignored!

Weekend Reading for Financial Planners (Jan 21-22)

January 20, 2017 02:49 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a flurry of news about the DoL fiduciary rule, including a letter from Senator Elizabeth Warren asking major financial institutions that have already been working to comply with the rule if they're now willing to support it (since they're already almost done implementing the necessary compliance processes), a major report from the Consumer Federation of American finding that 25 of the leading financial services firms are holding out to consumers that they provide advice as an "essential service" even as they contend to regulators and the courts that they are merely in the business of selling products, and a review of the latest set of fiduciary rule FAQs released by the Department of Labor (which cleared a major concern about using fee-offset revenue-sharing arrangements in 401(k) plans).

From there, we have a few more articles delving deeper into the fiduciary rule as its applicability date looms, including: an analysis by Ron Rhoades of why ultimately most Financial Institutions will probably eschew the BICE rules and just become level fee fiduciaries using fee-based advisory accounts instead; criticism that the DoL still hasn't sufficiently defined its "due diligence" expectations of how advisors should analyze the investments they're recommending; and a look from Cliff Asness of AQR at some of the potential "unintended consequences" of the DoL fiduciary rule (such as whether, in the long run, consumers will end up trusting financial advisors too much, let their guard down, and ultimately allow even more harm to be caused down the road).

There are also a couple of practice management articles this week, from a review of the record-breaking pace of mergers and acquisitions amongst RIAs last year (though the total number of deals is still miniscule relative to the total number of advisory firms), to a look at how 1/3rd of the major RIAs last year actually saw a decrease in AUM as retirement withdrawals and even client deaths of their baby-boomer-centric clientele are beginning to take a toll, and a discussion of the blocking point amongst advisory firm owners that will cause most of them to fail to achieve their own long-term vision for their business.

We wrap up with three interesting articles: the first is a discussion of whether investment managers, from mutual funds to even RIAs, should consider adopting "fulcrum fees" in lieu of the traditional AUM fee, as a way to better align the interests of the manager and the client; the second is a look at the research on why ethical people end up making unethical choices, and the recognition that it's creating a toxic employee culture that is the most common driver of employees making "bad" decisions; and the last is an interesting discussion from Bob Veres that even as advisors who work at broker-dealers complain that the media is maligning them as salesperson (when they're really trying to give advice and act in their clients' best interests), it's actually the broker-dealer companies themselves, and their lobbying organizations, who are stating to the regulators and the courts that their "advisors" are really just mere salespeople and not advisors (and thus contend they shouldn't be held to a fiduciary duty)... which means if you're at a broker-dealer and want to be recognized as an advisor, you'll have to start by convincing your own company to truly recognize you as such!

Enjoy the "light" reading!