Kitces.com - Advancing Knowledge in Financial Planning

What Can Suze Orman Teach Planners About Building Trust Virtually?

May 21, 2012 11:03 am 2 Comments CATEGORY: Marketing

The delivery of advice is ultimately built on a foundation of trust; even if the client is otherwise ready to make a change, if the client doesn't trust the advisor, the advice often won't be taken and implemented. And because most planners struggle and work hard just to establish client trust through in-person meetings and a one-on-one relationship, many are skeptical that advice will ever fully shift to a more virtual world where trust must be built at a distance and possibly without ever having the client and planner meet in person at all.

Yet there is a surprisingly visible demonstration of how trust can be built effectively in a "virtual" environment where the person taking the advice may have never met the person delivering the advice: the Suze Orman show. Does that mean planners have much to learn from the success of Suze Orman, who has built a virtual relationship with millions of people who are all willing to act on her advice, even while so many planners struggle to build trusted relationships one in-person prospective client meeting at a time?Read More...

Weekend Reading for Financial Planners (May 19-20)

May 18, 2012 08:02 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a discussion of the latest shot fired in the SRO debate, as BCG and the Financial Planning Coalition respond to the latest FINRA estimate of SRO costs.

From there, we look at three significant articles on retirement income planning, including: the latest thoughts from Bill Bengen showing that the 4.5% withdrawal rate is still working just fine, even for a 2000 retiree; an article from the Journal of Financial Planning showing how holding several years of the portfolio in a cash reserve INCREASES retirement failure rates; and a discussion from Bob Veres in Financial Planning magazine about whether we need to change our retirement spending assumptions.

Beyond that, we have a number of interesting markets and investment pieces this week, including highlights from James Montier's opening keynote speech from CFA Institute earlier this month, a look at how 'adaptive' asset allocation holds more promise than traditional strategic allocations, a prediction from Mauldin that Germany is waving the white flag and clearing the way for the ECB to print Euros to solve the Eurozone problems, and ongoing worries from Hussman that we may be dancing at the edge of an investing cliff.

We wrap up with three interesting articles: a scathing 'anonymous' insider letter to Mark Zuckerberg shining a light on the investment bank realities of the IPO marketplace; an article by Angie Herbers about how the greatest problem in most advisory practices is the owner (and how to better get out of your own way for your firm's success); and tips for stressed-out advisors to try to (re-)gain a hold of some balance and efficiency in their practices. Enjoy the reading!

Do Our Brains Really Even Know How To Evaluate A Monte Carlo Analysis?

May 17, 2012 11:03 am 21 Comments CATEGORY: Retirement Planning

As a growing body of research shows, our brains are not quite the logical, rational decision-making machines we think they are – or at least, wish they could be. Instead, our brains take shortcuts; we substitute easier questions for difficult ones, often without realizing it, and respond accordingly with our words and our actions. This can be especially problematic in the world of financial planning, where we often ask clients to make difficult decisions with limited information.

As a result, questions like “what is an acceptable probability of success/failure for your retirement plan?” often get switched for other questions, like “how intensely bad would you feel if your retirement plan failed?” While the questions are still similar, there is an important difference: if you have not clearly defined both the meaning of success and the meaning of failure, your clients may misjudge the intensity of the consequences, leading to an irrational and inappropriate decision about how much or how little “risk” to take.Read More...

Is The Fiduciary Standard Alone Enough To Protect The Public?

May 16, 2012 11:02 am 4 Comments CATEGORY: Planning Profession

One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropriate recommendations that fail to meet the standard. Yet at the same time, the financial services industry has been plagued with scandals, and it's not just Bernie Madoff, Allen Stanford, and numerous commission-based advisor improprieties; in the past three years, there have even been investigations against two former NAPFA presidents for malfeasance. Which raises the question - if even people who have led such a fiduciary-centric organization as NAPFA can still conduct such misdeeds, does fiduciary really provide the necessary consumer protections? Or is the fiduciary standard really only effective for those who weren't likely to violate its principles anyway?Read More...

Is Quarterly Performance Reporting Too Frequent For Clients… Or Not Frequent Enough?

May 15, 2012 11:02 am 10 Comments CATEGORY: Practice Management

As financial planners - especially those who provide comprehensive financial planning services - try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often.

Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they're progressing towards their goals?

If that's the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often!
Read More...

Technology Will Improve Financial Planning And Augment Planners, But It Won’t Replace Them

May 14, 2012 11:03 am 12 Comments CATEGORY: Planning Profession

The financial planning world is in a state of change, as the rise of the digital age begins to exert its impact upon the profession. Thus far, trends have included the shift to outsourcing, the rise of web-based software, and a growing number of planners using services like GoToMeeting and Skype to supplement face-to-face meetings with more virtual interactions. As the coming decade wears on, technology will play an increasing role in the financial planning world, driving change in everything from how we deliver services to the client experience.

Nonetheless, while technology will continue to augment financial planners, it will never replace them, for one simple reason - real financial planning solutions require clients to implement recommendations and make changes in their lives, and there are few forces for behavior change more effective than the accountability of another human being. Which means, simply put, as long as we are human beings and our brains operate the way that they do, effective financial planning will require another human being at the other end of the relationship, especially in times of stress and when we need an outside perspective. Technology alone may give clients the answers... but the fact that we all don't get the right amount of exercise, eat a perfect diet, and take all the other steps necessary to become optimal human beings, makes it clear that technology delivering information alone will never be the solution.