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How To Gracefully Let Go Of (“Fire”) Small Clients As A Financial Advisor

September 29, 2016 07:27 am 12 Comments CATEGORY: Practice Management

Periscope Office Hours Cover Image September 27 2016 What Financial Advisors Should Do To Fire A “Small” Client 1

Client segmentation, where you separate your clients into "A" and "B" and "C" clients, is a standard practice management strategy for financial advisors. The "A" clients are the ones you want to service the most (and who tend to drive the most profit for the firm), the "B" clients are the bread-and-butter profitable clients, and the "C" clients are the ones who are marginally profitable (at best) and may have to be eliminated altogether in order to grow the firm. Except unfortunately, those "C" clients are often also the first and most loyal clients of the firm, who joined before there were any minimums, and who may be quite resentful if the advisor now refuses to serve them!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss tips on how to "fire", or gracefully let go, of small "C" clients that the advisory firm can't afford to serve anymore. Not only because it may be necessary for the business - given that we can each only serve so many clients - but also because a "C" client for your firm may still be an "A" client for another advisor... which is ultimately better for the client, who will receive better service somewhere else anyway!

So how can a financial advisor let a small client go, without offending them? One option is to "graduate" them, letting them know that it's no longer necessary for them to work with you, because they're ready to do it themselves. For those who really can't become do-it-yourselfers, another option is to refer the client out (to an advisor who would be happy to take them). Or if there are a lot of C clients to refer out, the advisor can even do a partial sale of the business, and sell off that block of C clients to an advisor who wants to acquire and serve them.

Another alternative is for the advisor to simply institute a minimum fee - not just an asset minimum, but a minimum payment that any/every client must make in order to receive the advisor's full services - and then let the client decide whether to stay and pay, or to fire the advisor. In other words, the advisor doesn't fire the client; instead, the minimum fee is instituted, and the client decides whether to fire the advisor!

The bottom line, though, is simply to recognize that as financial advisors, we can only service so many clients. But a client who isn't profitable as a "C" client for your firm can still be a great "B" or "A" client for another advisor. And by graduating them, referring them out, selling part of the business, or simply instituting a minimum fee and letting the client choose, it is feasible to gracefully "prune" small clients from the business that are no longer a good fit!

Weighing A Qualified Charitable Distribution (QCD) From An IRA Vs Donating Appreciated Investments?

September 28, 2016 07:01 am 25 Comments CATEGORY: Taxes

For those who already have a charitable intent and are over age 70 ½, the now-permanent rules permitted a Qualified Charitable Distribution (QCD) directly from an IRA to a charity provide an appealing means to minimize the tax bite of an RMD. Of course, it’s always possible to simply donate to charity and claim a charitable deduction to offset the income of an RMD, but given that in practice the income and deduction rarely offset each other perfectly, the QCD offers a slightly better potential tax outcome.

However, while donating from an IRA to satisfy an RMD obligation may be more effective than separately taking the RMD and donating cash (or writing a check) to the charity, it is usually not as good as donating low-basis stock or other appreciated investments instead. The reason is that while a QCD is a “perfect” pre-tax contribution, donating investments allows for a pre-tax contribution that also permanently avoids a long-term capital gain.

On the other hand, the reality is that charitable donations often have limits of their own, from the fact that they’re only valuable for those who itemize deductions in the first place, to the 30%- and 50%-of-AGI charitable contribution limits that may apply as well. Furthermore, donating low-basis stock may still not fully offset the income from an RMD, where that income increased AGI and triggered the phase-in of Social Security taxation or the phase-out of other significant deductions.

Ultimately, then, the relative benefits of QCDs will depend significantly on the facts and circumstances of the situation, driven primarily by whether or how much a donation of low-basis investments could really be claimed as a full deduction in the first place. On the other hand, it’s also important to remember that for those who don’t have a charitable intent in the first place, the optimal strategy is still to just take the RMD, pay the taxes, and keep the remainder; QCD strategies are still only best for those who want to maximize the tax benefits of charitable giving they already planned to do in the first place!

How Financial Advisors Can Differentiate On Great Service With A Client Service Standard

September 26, 2016 07:01 am 8 Comments CATEGORY: Practice Management

In an increasingly competitive landscape, most financial advisors have succeeded by providing quality service that retains their existing clients, with the average financial advisor retention rate at 94%.

Yet the challenge is that while offering great service may keep clients on board, it’s incredibly difficult to use “great service” as a differentiator. In fact, according to one recent study, 72% of all advisors differentiate on client service. And by definition, when the majority of advisors differentiate on the same point, it’s not differentiating anymore!

In addition, differentiating on service is also difficult because there’s no clear and consistent definition of what “great service” even is. Especially since what is great service to one client may not be to another. What constitutes “great” is truly in the eye of the beholder.

Which means at a minimum, for advisors who do want to differentiate on great service, it’s necessary to truly articulate what “great” really means (and for whom). For instance, advisors might craft a “Client Service Standards” document that explicitly states what “great service” really means, at least from the advisory firm’s perspective in trying to serve its ideal clients. Of course, then it’s also crucial to affirm that what the advisor thinks is great service is really perceived that way by the clients themselves. And if you commit to it, be certain you’re really ready to deliver it, too!

Weekend Reading for Financial Planners (Sep 24-25)

September 23, 2016 12:41 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement that there's a new "fiduciary registry" being launched by the Institute for the Fiduciary Standard, with public support from TD Ameritrade and Pershing Advisor Solutions. The new registry aims to highlight firms that proactively embrace a more holistic fiduciary standard than the still-limited versions currently adopted by both the SEC (pertaining to RIAs) and the Department of Labor... and in the process, raising the question of whether firms can still compete by trying to be the 'most fiduciary' as a differentiator at all.

From there, we have several articles on advisor technology this week, including a recent study finding that if advisors want to reach younger "HENRY" clients (High Earners, Not Rich Yet) it's essential to serve them in a more tech-savvy manner, software reviews of new retirement tools Last Advisor and Nest Egg Guru, and a look at the recent announcement that eMoney Advisor is aiming to build out a substantial suite of DoL compliance tools to complement its core financial planning software.

We also have a series of articles looking at the continuing evolution of DoL fiduciary's impact on advisory firms, from a prediction by Ric Edelman that as many as half of all of today's financial advisors will be driven out by the DoL fiduciary rule (clearing the way for more fiduciary- and client-centric advisors to take their place), a look at whether some advisors are selecting applying fiduciary rules in today's environment (e.g., by building fiduciary portfolios but ignoring the more holistic demands of the fiduciary standard on the business), a prediction from Cerulli that the fiduciary standard will lead to more 'cookie-cutter' portfolios and less freedom/flexibility for most advisors, and a prediction that despite the push for economies of scale to handle compliance concerns a look at other industries suggests solo financial advisors and small RIAs will continue to survive and thrive going forward.

We wrap up with three interesting articles, all focused around the theme of the wealthy: the first is an excerpt from a new book entitled "Capital Without Borders", that studied how ultra-high-net-worth clients engage with family wealth managers; the second is a look at how the "pentamillionaire" (with more than $5M in investable assets) is becoming the new millionaire, as there are now more than 1,000,000 US households that have reached the pentamillionaire status (having grown by 38% in just the past 5 years); and a fascinating exploration of how in theory it's the poor who have to work extreme hours and the rich who have time for leisure, but in practice it's turning out that 1-in-5 men in their 20s without a college degree is long-term unemployed (and that 3/4ths of their newfound 'leisure time' is being spent playing video games!), while higher income individuals have experienced the greatest decline in leisure time over the past generation.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week recaps the highlights of a new hackathon for advisor technology development, hosted this week at the 2016 eMoney Advisor Summit.

Enjoy the "light" reading!

Why I’ll Spend $100 On #FinTech That Saves Me One Minute A Day

September 22, 2016 07:51 am 3 Comments CATEGORY: Practice Management

periscope office hours social image why Ill spend

One of the great virtues of technology is its ability to make us more personally productive. Yet in a world with more and more paid apps and software-as-a-service solutions, it's easy to quickly spend a lot of money on technology tools. Even though many solutions are really built to solve problems so minor, it may save you no more than a minute or two a day.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss why it is that despite the miniscule improvement in efficiency, I will still happily spend $100 for a technology tool that saves me as little as one minute a day.

The key is making such investments in personal productivity is to recognize that saving as little as one minute a day is actually 5 minutes a week, or 20 minutes a month, or a non-trivial 4 hours a year. That's a half a day's additional productivity, eeked out a minute at a time.

And the real opportunity is not just to spend money to save a minute a day, but the cumulative impact of buying multiple tools, that each save a minute or two a day. A handful of software solutions and smartphone apps that save 15 minutes a day is suddenly 75 minutes a week, or 5 hours a month, or more than a week per year. That's an entire extra week that could be a family vacation, or taking on an extra client, or for me a chance to accept another speaking engagement or two.

Of course, the reality is that save a minute (or 15) a day doesn't mean you'll necessarily bill a client (or more generally, get paid) for that extra 15 minutes of work. But the time savings mean that all the little things that grind down our daily productivity are a little less cumbersome. It's a little more time to answer emails, check in with a team member, or follow up on a client or prospect. And it makes it easier to take full days to get big projects done.

As a result, I personally spend money on a wide range of "minor" personal productivity tools, from social media management tools including Buffer, MeetEdgar, and CoSchedule, to notetaking app Evernote, autotext software PhraseExpress, Feedly Pro, Zapier, and more.

The bottom line, though, is simply to recognize that often the biggest breakthrough for being more productive is not about making a "big" change that frees up a lot of time, but the cumulative impact of little changes that add up to a lot over time. Which in the end means that even spending $100/year to save 1 minute a day can actually have a 900% Return On Investment for a successful professional!

Financial Literacy Effectiveness & Providing Just-In-Time Training By Financial Advisors

September 21, 2016 07:01 am 12 Comments CATEGORY: Client Trust & Communication

Many financial advisors are involved in providing financial education, from delivering a financial literacy course in schools, or lending our expertise to create financial education resources. An activity that for us is no doubt driven by seeing first-hand the damage that can be caused by financial illiteracy and making ignorant financial decisions.

Yet a recent meta-analysis of over 200 prior studies on financial literacy programs finds that providing long-term financial education is remarkably ineffective. In fact, the researchers found that interventions to improve financial literacy explain a statistically significant but practically irrelevant 0.1% of subsequent financial behaviors.

The problem appears to be driven primarily by the fact that, as with so much of our education, concepts and skills that we don’t use can quickly atrophy. Which means trying to make children financially literate when they’re in school may still result in them to grow up and struggle with financial illiteracy as adults.

So what’s the alternative? An approach called just-in-time training, which aims to provide financial education at its moment of maximal relevance and usefulness – when the financial decision itself arises, and the education can be immediately applied.

The caveat, though, is that the likely provider of financial education in such circumstances would be the financial services product provider, who may have an untenable conflict of interest against helping someone to become financially literate, if doing so might actually talk them out of buying the company’s product. Or alternatively, there’s a risk that the financial services company could frame the financial choices in a manner that “nudges” the consumer towards a not-necessarily-beneficial outcome.

Yet arguably, this may be a perfect role for financial advisors to fill, particularly as financial advice increasingly shifts from product sales to bona fide independent third-party advice. For instance, just as drug companies can market their products to consumers, but still have to recommend “consult a doctor before taking this drug”, so too might financial services product providers be required to direct consumers to consult an (independent) financial advisor before buying at least the more complex financial services products (while “robo-financial-education” technology solutions might help to step in for simpler product and financial decision education). And financial advisors can also help consumers navigate the often emotional and not-always-rational aspects of financial decision making as well.

Which raises the question: while financial advisors have historically supported financial literacy programs on a pro bono basis, should a key element of the financial planning business model include not only offering financial advice and helping consumers to evaluate their financial trade-offs and decisions, but also as a financial education provider of just-in-time training on key financial concepts as well?