Kitces.com - Advancing Knowledge in Financial Planning

What’s An Hour Of A Financial Advisor’s Time Worth… To The Client?

March 17, 2016 10:15 am 17 Comments CATEGORY: Personal/Career Development

Periscope Office Hours Cover Image March 16 Whats An Hour of Time Worth

Determining the value of your time as a financial advisor is crucial to setting an appropriate price for your services. After all, if you don't know what an hour of your time is worth, you won't know what you need to charge to reach your income or revenue goals for the business.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the thought process in how you should think about valuing your time as a professional - and the key mental shift from valuing your time based on what it's worth to you, to valuing your time based on what it's worth to your client instead.

In fact, the reality is that if you're really providing valuable services to your clients - especially if they have a significant income or net worth - the value to them could actually be significantly higher than how you price the time for yourself. In other words, you may unwittingly end out significant under-charging for your services by solely focusing on the value to you, instead of considering how much value you're really creating for the client.

Of course, the reality is that early on as a financial advisor, the goal may be just to get any clients and bring in any revenue. But as the business grows, recognize that at some point, viewing the value of what your time is worth to you may limit your own growth and success!

How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”

March 16, 2016 07:01 am 126 Comments CATEGORY: Insurance

Featured Image Life Insurance Loans: A Risky Way To Bank On Yourself

A popular feature of permanent life insurance is that it accumulates cash value that can grow over time – ensuring that if the policy is surrendered, the policyowner will still have something to show for it that cannot be forfeited. However, this “non-forfeiture value” of a life insurance policy has an important secondary benefit as well – it gives an insurance company the means to provide policyowners a personal loan at favorable interest rates, because the cash value provides collateral for the loan.

Yet even as cash value life insurance operates as collateral for a life insurance policy loan, it also remains invested, earning a rate of return that slows the erosion of the net equity in the policy and allows a policy loan to remain in place for an extended period of time. And with some insurance policy loan strategies – such as the popular “Bank On Yourself” approach, there’s even a possibility that the cash value can out-earn the stated interest rate of the loan, allowing the loan to compound ‘indefinitely’.

The caveat, however, is that in the end a life insurance policy loan is still really nothing more than a personal loan from an insurance company, using the life insurance cash value as collateral. Which means even if the net borrowing cost is low because the cash value continues to appreciate, that’s still growth that the investor might have enjoyed for personal use, if the loan was never taken out in the first place. Or viewed another way, trying to bank on yourself doesn’t work very well when ultimately the loan interest isn’t actually something you pay back to yourself, it simply repays the life insurance company instead!

Replacing The Data Gathering Meeting With A “Get Organized” Client Experience

March 14, 2016 07:01 am 14 Comments CATEGORY: Practice Management

Creating a financial plan starts with gathering the client data, which many advisors request by providing clients with a “data gathering form”, typically structured in a manner that makes it easy to input the data into their financial planning software.

The caveat, however, is that in practice clients often don’t fill out the data gathering form. For some, they feel it’s too much work. For most, the problem is simply that they aren’t organized enough to provide all the requisite information. And may even feel guilty or embarrassed about the fact that they’re “failing” in the very first step of the financial planning process.

So what’s the alternative? Ditch the data gathering meeting, and have a “Get Organized” meeting instead. In other words, make the first meeting with the client about getting them financially organized in the first place. Have them bring in their jumbled files, and give them a file box with sorted folders to organize the information. Scan the key documents and statements and put them into a newly created client vault. Set up a client PFM portal, show them how to use it, and help them to begin connecting their accounts on the spot.

By having the Get Organized meeting, the financial planner still has the opportunity to collect all the data that’s needed to move forward with the financial planning process – but done in a client-centric manner that recognizes the client’s challenges and provides them an immediate, tangible benefit. In fact, for some people, a “Get [Financially] Organized” service might be so valuable, advisors could even charge for it separately and get paid to market and demonstrate their value to prospective clients!

Weekend Reading for Financial Planners (Mar 12-13)

March 11, 2016 02:29 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement of Salesforce Financial Services Cloud, a new contender in the world of advisor CRM as Salesforce looks to build on its success in financial services by building its own proprietary customized solution for financial advisors.

From there, we have several technical articles, including some good reminder tips for those doing "last-minute" IRA contributions in the coming weeks, and a review of the issues to consider for early retirees who want/need access to health insurance after work and before being eligible for Medicare at age 65 (now more feasible than ever, thanks to the new health insurance exchanges). We also have two investment-related articles, one discussing the launch of Eaton Vance's new "exchange-traded mutual fund" (the ETMF) and how it's similar-but-different to an ETF, and the other looking at how high-dividend strategies may have strong performance but value-oriented strategies (regardless of the dividend) appear to perform even better.

There are also a few technology-related articles this week, including software reviews of a new digital content marketing service called Financial Media Exchange (FMeX), a new platform for advisors to engage in options trading called Vest Financial, and the looming emergence of facial recognition software that advisors might use to help understand their prospects and clients better (and how they emotionally react to money and financial issues). There's also a good review of the technology offerings of the "smaller" and start-up-friendly RIA custodians, including TradePMR, SSG, and Scottrade Advisor Services.

We wrap up with three interesting articles: the first is a look at why investors tend to stray from their investment principles (hint: they convince themselves it's "close enough" to their principles that it's ok to fudge a little, even though it's often quite a material divergence); the second is a look at how our world is becoming so abundant, from free media and entertainment to excesses in many commodities, and how it may be driving malinvestment (and that a 'healthy' recession to purge the excesses would be good, before the real economy is harmed!); and the last is a discussion of whether the explosive rise of indexing over the past decade may be approaching the point that it's starting to distort the market prices for stocks and commodities, and what we might need to do in the future to correct the situation if we want to preserve cost-effective investment strategies but ensure healthy markets.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes a discussion about the new release of Salesforce Financial Services Cloud (and his skepticism of its significance!), and the announcement that Betterment is adding account aggregation to its retail and institutional platform.

Enjoy the "light" reading!

Using Psychological Profiling Tools To Better Communicate With Clients

March 10, 2016 10:37 am 3 Comments CATEGORY: Personal/Career Development

Periscope Office Hours Cover Image March 8 Using Psychological Profiling Tools

Being able to communicate effectively with clients is an essential skill for a financial advisor. Yet the reality is that few of us are really trained in how to communicate effectively. Instead, most of us simply have our own natural style, and clients either connect with you, or they don't.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at some psychological profiling tools that financial advisors can use to better understand their clients' communication styles, which makes it easier for the advisor to figure out whether or how to adapt the way information is presented to clients.

From financial industry tools like Financial DNA, to general profiling tools like ProScan PDP, and even work style tools like Kolbe, there are a number of solutions available that can help advisors understand how to better communicate with a wider range of clients.

Of course, the reality is that in the early years, often the focus for new financial advisors is simply on mastering their technical competency and skills, and trying to focus on communication at the same time can be overwhelming. But for more experienced and established advisors, adopting psychological profiling tools may be an appealing path to deepen client relationships and grow the business!

Dollar Cost Averaging May Help To Manage Risk But On Average It Just Reduces Returns

March 9, 2016 07:01 am 23 Comments CATEGORY: Investments

Conventional investment wisdom suggests that dollar cost averaging is a good approach to allocating investment dollars over time. By always investing a constant dollar amount, the strategy ensures that fewer shares will be bought as prices rise, while more shares are purchased if prices decline, bringing down the average cost per share in the long run. The only question is over what time horizon it’s best to average in.

Yet as it turns out, the answer is “none”. In reality, a dollar cost averaging investment strategy doesn’t actually enhance returns in volatile markets that have similar upside gains and downside losses on a percentage basis. And given that on average, markets go up more often than they go down, choosing to dollar cost average is more likely to just leave gains on the table (and the longer the time period, the greater the risk of foregone returns).

However, while dollar cost averaging may not be likely to enhance returns in the long run, it is still a risk management technique. Over the dollar cost averaging time period itself, the diversification of the “new” investment and “old” investment may actually produce superior risk-adjusted returns. And given that the pain of losses is more severe than the joy of gains, risk-averse investors may prefer to dollar cost average simply to minimize the potential regret of not doing so and seeing markets decline shortly thereafter.

Nonetheless, for investors who are comfortable with the risk of their portfolios, and aren’t specifically seeking a “regret aversion” (or at least, regret minimization) strategy, in the long run the best time horizon for dollar cost averaging is simply to invest all the money immediately – at least, presuming the investment was desirable to own in the first place!