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Kitces & Carl Ep 75: Crafting A Statement of Financial Purpose To Find The Client’s Financial Why

December 16, 2021 07:05 am 1 Comment CATEGORY: Kitces & Carl Podcast

When it comes to retaining clients, financial advisors benefit from focusing on gaining both the client's confidence and trust. Because while a client may be confident that an advisor can develop a workable financial plan, they will not feel compelled to stay with the advisor unless they can also trust that their advisor has their best interests at heart throughout the process. And even though it is important to have a well laid-out financial plan, it is equally (if not more!) important for advisors to understand the client’s underlying motivation to ensure the plan is relevant and to help clients stay on track with their financial goals. To this end, a statement of financial purpose helps the advisor to create a meaningful plan for the client, and also helps the client stay focused on taking action on the plan and staying the course.

In our 75^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the difference between a “statement of financial purpose” and a “mission statement,” the psychology behind why a statement of financial purpose helps to instill clients with confidence and trust in their advisors, and the importance of crafting statements of financial purpose by first helping the client understand their own “financial why.”

As a starting point, it is important for advisors to begin the financial planning process by understanding the deeper reasons that explain why their clients are seeking advice in the first place. By encouraging clients to take time to carefully reflect on what it would mean for them to achieve their financial goals, financial advisors can discover insight into the client’s motivation to help them craft a relevant and meaningful statement of purpose (written in the client’s own words) that crystallizes why the financial plan is meaningful and important to the client.

Merely creating the statement of financial purpose isn’t enough, though, as clients need to review, reflect upon, and update it periodically, using it as a guide to steer the financial plan, keeping it on track. Advisors and clients can use the statement of purpose as a reminder that all the financial work being done is indeed serving a greater purpose. Additionally, a statement of financial purpose creates an opportunity for advisors to gain trust with clients, by reassuring them that what matters most to them is of paramount importance, and that following their plan (and sticking to it even through the most turbulent times) will help them attain their financial goals.

Ultimately, the key point is that a statement of financial purpose is a living document that helps clients stay focused on their most important goals and encourages them to stick to their plan. At the same time, it also helps to foster greater client trust and confidence in their advisors, facilitating stronger and more open communication channels, which presents advisors with the added bonus of better and deeper connections with their clients!

Using A Financial Purpose Statement To Guide Mindful Spending Decisions

December 15, 2021 07:08 am 0 Comments CATEGORY: Client Trust & Communication

According to the American Psychological Association, nearly 2/3 of Americans rate money and work as significant sources of stress in their lives. And because money is such a common source of stress, as well as a difficult or uncomfortable topic for many to discuss, we often tend to seek ways to minimize consciously thinking of how we use money (such as by opting for cash-free forms of payment). But people who don’t retain at least some awareness of their spending may subconsciously use other people's behavior as a guide to making money decisions, instead of consciously making choices based on their own personal values and priorities.

In this guest post, Derek Hagen – Founder of Money Health Solutions, a financial therapy and financial life planning firm – discusses how financial advisors can develop a Financial Purpose Statement for their clients to use by helping them examine their relationship with money and identifying their most meaningful goals. Furthermore, he explains how the Financial Purpose Statement can guide clients to live their (financial) lives with deliberation, ultimately helping them to (re-)align their behavior with what matters most to them!

At its core, a Financial Purpose Statement consists of a simple statement that crystallizes the purpose of money in the client’s life. To develop a relevant Financial Purpose Statement, an individual must reflect deeply on the kind of life they would like to have and the person they want to be. Advisors have several tools they can use to help clients examine these ideas and identify their most meaningful values. Some of these include the Klontz/Kahler/Klontz Life Aspirations exercise, which helps individuals consider their ideal life; the Miller/Rollnick Values Cards, which create a systematic process to prioritize meaningful personal values; and George Kinder’s Life Planning Questions, which aim to reveal important life priorities by asking clients to contemplate their own mortality.

Ultimately, Financial Purpose Statements can distill an individual’s values and priorities into an easily accessible reminder that can help them make spending decisions in alignment with what really matters most to them. And by helping clients to develop their own Financial Purpose Statements, advisors can encourage their clients to get clear on what their most important priorities are and guide them toward making the right financial decisions, helping clients live happier lives and achieve their most important goals with clarity and intention!

#FA Success Ep 259: Facilitating An Internal Succession Plan As The Pathway To Put Clients First, With Patricia Houlihan

December 14, 2021 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 259th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Patricia Houlihan. Patti is the Founder of Houlihan Financial Resource Group, an independent RIA based in the Washington DC area that oversees $345M in assets under management for 150 client households.

What's unique about Patti, though, is the way she’s implementing an internal succession plan with her son and a second advisor, focusing not necessarily on exiting herself from the business and maximizing the value of the sale – because as Patti notes, you can’t take it with you anyway – but instead on ensuring continuity of management and continuity of service for clients so that Patti doesn’t have to actually retire anytime soon at all.

In this episode, we talk in depth about how Patti’s internal succession plan has evolved over the years after clients began to ask her when she was going to retire (and started to highlight their own concerns about how the firm would service them after Patti was gone), the way Patti implemented a team approach where all three advisors of the firm have been in on every client meeting for years so clients have a trust relationship with more than just Patti, and how there hasn’t been any issue implementing a succession plan where Patti’s name is part of firm name – Houlihan Financial Resource Group – because the whole point is that the firm will live as an ongoing concern beyond her (and as Patti notes, if at that point the successors want to change the name, that will be their prerogative anyway!).

We also talk about how Patti structures her financial planning engagements with clients, including why Patti insists that every client needs to go through the details of their household spending as part of the planning process, why despite some naysayers about Monte Carlo analysis, as a former math teacher herself, Patti views it as foundational to having better conversations with clients about retirement, and why Patti prefers to talk about client risk tolerance, not in terms of tolerance for market declines, but instead translates it into the real dollar amount the client would potentially lose in a bear market to make sure they’re really comfortable to have that much at stake.

And be certain to listen to the end, where Patti shares what it was like getting started as a female financial planner in the 1980s when, as Patti puts it, it was very much a “man’s world” in the brokerage industry at the time, how Patti sought to reinforce her own expertise and credibility in her early years by becoming a teacher in a CFP program, and why ultimately the key to success as a financial advisor is all about building your own self-confidence first.

And so whether you’re interested in learning about Patti’s decision to opt for an internal succession plan (rather than selling her firm when she retires), her familial approach when relating to clients, or how Patti focused on her confidence and self-worth to navigate her way to success, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Patricia Houlihan.
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Creating A Chart Of Accounts: A Practical Guide For Financial Advisory Firms

December 13, 2021 07:04 am 0 Comments CATEGORY: Practice Management

Financial advisory firm owners often rely on their firms' financial data to make decisions for their businesses. But the quality of that data – how it is organized and how much detail it provides about the firm's activities – can greatly affect the firm owner's ability to make good, informed decisions. The firm's Chart of Accounts is a categorized list of every type of transaction that the firm encounters and provides the foundation on which the firm's accounting and bookkeeping systems are organized. It is the key for consistent and accessible data that gives a clear picture of the firm's financial health. A good Chart of Accounts, therefore, can provide the firm owner with insightful data, enabling better decision-making about the firm's future.

The first step towards building an effective Chart of Accounts is to understand how different types of business transactions are accounted for. All business transactions can be sorted into one of five different categories: Assets, Liabilities, Equity, Income, or Expenses. These high-level categories are further divided into subcategories – the "Accounts" in the Chart of Accounts – that are specific to the individual firm's operations. Which means that firm owners have a great deal of flexibility when deciding how many (and which) Accounts should be used to track their firms' financial data.

But with the ability to build a customized Chart of Accounts comes the question of how to build one that leads to making better business decisions. A well-designed Chart of Accounts can be used to generate financial data that provides clear details about how different areas of the firm are performing and where improvements can be made. It should also make it possible to participate in (and compare with) industry benchmarking studies to evaluate the firm's performance alongside its peers, which provides another useful approach for owners to gauge their firms' financial health.

For example, by separating "Direct" expenses – those expenses involved in generating revenue for the firm, such as advisor compensation (including compensation for advisory services provided by owners themselves) – from the "Overhead" expenses of the firm's day-to-day operations, owners can glean insightful data that gives a clearer picture of the firm's profitability. For solo practices, this can even help to show whether the firm actually is profitable after accounting for the owner's work as an advisor.

Because it takes time to build an entirely new Chart of Accounts from scratch, we've provided a downloadable template that includes standard transaction categories relevant to most advisory firms and that can be imported into the firm's accounting software. The template categories align with major industry benchmarking studies, but they can also be adapted to suit the needs of individual advisory firm owners.

Ultimately, the point of the Chart of Accounts is not just to have a system for organizing the firm's financial data, but to be able to access and use that data, to make the firm even better. And by assessing the level of organization and detail that is most relevant for the firm, firm owners can ensure that their firm's financial data will help them make the most well-informed decisions for their business!

Weekend Reading for Financial Planners (Dec 11-12)

December 10, 2021 01:59 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading for Financial Planners” - this week’s edition kicks off with news about the U.S. Supreme Court’s hearing of a case involving the Northwestern University employee retirement plan, whose participants claim that the plan’s administrators breached their fiduciary duties by offering ‘too many’ choices and providers, such that they failed to reach size breakpoints that could have reduced the plan’s fees… a case that will have broader implications for the types of claims that other retirement plan participants will be able to bring against their plans’ sponsors (and raising broader questions about just how far a fiduciary really has to go in trying to minimize costs for their clients).

Also in industry news this week:

While regulators have signaled that they don’t intend to re-write the recent SEC and DOL “Best Interests” regulations that allow for conflicted advice, broker-dealers are likely to face more scrutiny in examinations from the SEC and DOL focusing on conflicted compensation in the coming year
Though the “Secure 2.0” bills in the U.S. House and Senate have seen little progress since being introduced in the spring, legislators are still optimistic that the bipartisan bills could actually still pass before the end of the year (and if not, sometime in early 2022?)

From there, we also have several articles on options for investing in cryptocurrencies and the creation of a new type of blockchain-based organizational structure:

The introduction of a crypto index using separately managed accounts that could be widely available to advisors next year
Fidelity launched a ‘spot’ Bitcoin ETF in Canada, but U.S.-based advisors and investors will face hurdles investing in the fund
The potential for Decentralized Autonomous Organizations (DAOs) to serve as a more efficient business structure for membership-style organizations

We also have a number of articles on investing:

How the sharp rise in inflation has led to the increased popularity of Series I savings bonds, whose current 7.12% annual interest rate led to over $1.3 billion in new bonds being purchased in November alone
Why structured notes are gaining more interest as a higher-yielding alternative to traditional fixed-income assets, despite some notable potential downsides to investors
How “direct indexing” has seen an increase in interest, owing to its possibilities for tax-loss harvesting and customizing portfolios to fit investors’ needs

We wrap up with three final articles, all about seizing opportunities, even if there is a risk of failure:

Why taking positive asymmetrical risks can lead to personal and professional success
How striving for excellence rather than perfection can lead to more creativity
The importance of momentum, and why temporarily skipping over challenging tasks and NOT checking every task on a to-do list can make it more likely a larger goal is achieved

Enjoy the ‘light’ reading!

Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate

December 8, 2021 07:06 am 18 Comments CATEGORY: Investments

Fixed income investments are an important component in a portfolio because of their ability to cushion against equity market losses. However, when it comes to abundant returns, fixed income holdings have not had much luck during the low-interest-rate environment of the past few years. Accordingly, those seeking higher returns from their bond holdings have had to venture into less secure instruments, such as high-yield “junk” bonds and other alternative-fixed income holdings. Making matters worse, the recent spike in inflation means that many fixed income investments are earning a negative real yield. However, this is not bad news for all fixed income instruments, as this increase in inflation has made the rarely used Federal Series I Savings Bond (or, more simply, the “I Bond”) significantly more attractive for investors.

I Bonds are offered via the Treasury Department and are backed by the U.S. government. They can be purchased through the TreasuryDirect website, and such purchases are limited to $10,000 annually per person. What makes I Bonds unique is their interest structure, which consists of a combined “Fixed Rate” and “Inflation Rate” that, together, make a “Composite Rate” – the actual rate of interest that an I Bond will earn over a six-month period.

While the current Fixed Rate for newly purchased I Bonds is 0%, the Inflation Rate for I bonds purchased before May 1, 2022 is an annualized 7.12%, meaning the Composite Rate is also an annualized 7.12% (the highest rate of I Bonds since May 2000!) for the first six months that the I Bond is held (after which a new Composite Rate will be determined by any change to the Inflation rate). While I Bonds have a 30-year maturity, they can be redeemed after being held for at least 12 months. Investors who redeem I Bonds between 12 months and 5 years after issue will forfeit the last 3 months of interest, but I Bonds held for more than 5 years can be redeemed at their current value.

The $10,000 annual limit on I Bond purchases restricts their benefit for those with larger portfolios, but there are several ways investors could increase the amount purchased at the current (very favorable) Composite Rate. For example, because the annual limit is a calendar-year limit, individuals could purchase $10,000 worth of I Bonds before January 1, 2022, and then an additional $10,000 between January 1 and April 30, 2022. Which means a couple could purchase a combined $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held. In addition, I Bonds can also be purchased for children or by trusts and estates, which could further increase the amount purchased. Finally, paper I Bonds can be purchased using a tax refund up to a $5,000-per-return limit, which is in addition to the $10,000 annual limit on I Bonds purchased through the TreasuryDirect website.

Ultimately, the key point is that there is a limited amount of time for investors to purchase I Bonds at their very favorable Composite Rate of 7.12%, especially if they want to maximize the amount purchased for the 2021 and 2022 calendar years. In the current environment of low-interest rates and high inflation, I Bonds represent a potential opportunity for investors to increase the yield for a portion of their fixed income portfolio!

#FA Success Ep 258: Learning Advice Before Getting Clients: The Future Of Financial Advisor Career Tracks, With Joseph Pitzl

December 7, 2021 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 258th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Joseph Pitzl. Joe is the founder of Pitzl Financial, an independent RIA based in the Minneapolis area that oversees nearly $270 million of assets for almost 270 client households.

What's unique about Joe, though, is his unique next-generation career path into the advice business, which started out by working as an associate planner in a large advisory firm because he was scared to be in a sales role. And only after getting 10 years of experience, decided that he was ready to be in charge of business development and finally launched his own firm to start building his own client list.

In this episode, we talk in-depth about how Joe navigated his initial entry into financial planning, despite being an admitted bad student who struggled in a traditional classroom. The way Joe's involvement in the FPA, and with the NextGen community, built his networks to the point that whenever he needed to switch firms, he never struggled to find the next job opportunity, and why Joe has found business development so much easier in his 30s than it ever was in his 20s.

We also talk about how Joe structured and scaled his advisory firm as it's added more than $250 million of AUM in barely 7 years, including why the firm decided to outsource its portfolio management to a TAMP in order to focus more on financial planning services, how the firm structures its lean team of just five people, of which four are lead or associate advisors, to serve their 270 client households. And how Joe's firm turned local Google searches into a key driver of new clients.

And be certain to listen to the end where Joe shares how he's navigated some of the biggest challenges in his career, including finding himself out of a job at the same time he was just starting a family and had bought a house. How Joe clears his mind when he finds that he needs to regain clarity in the business, and why forming a study group with five other advisors at a similar age and career stage was so foundational to Joe's own career success and getting the support he needed at the key turning points along the way.

And so whether you’re interested in learning how Joe created opportunities towards becoming a financial advisor by utilizing the connections made through financial networks, why he places importance in creating deep and meaningful relationships with clients, or why he focuses his business on a younger clientele, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Joe Pitzl.

The Latest In Financial #AdvisorTech (December 2021)

December 6, 2021 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the December 2021 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the big news that Halo Investing has raised a $100M Series C round to fuel the ongoing growth of structured notes, annuities, buffered ETFs, and other “protective” investment vehicles alongside competitors Simon Markets and Luma, as high valuations and diminished forward return expectations for stocks are leading financial advisors to more proactively ‘hedge’ client portfolios against a potential market decline… mirroring a similar trend in the rise of Alternative Investment platforms as below-average expected returns on fixed income are similarly leading advisors to find non-traditional alternatives for their bond allocations as well!

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

Geowealth raises a $19M Series B as a ‘next-generation’ tech-savvy platform TAMP competitor
Orion acquires BasisCode Compliance to expand its compliance capabilities (as a pathway into larger enterprises?)
Skience rolls out new integrations with Redtail as the ‘CRM overlay’ business expands beyond just Salesforce
TIFIN Group raises another $47M Series C round in an attempt to make the whole worth more than the sum of their variously acquired parts
FeeX partners with Advyzon as advisors continue to adopt tools to expand from AUM to the AUA model

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

FP Alpha launches a new prospecting tool to help advisors find new planning opportunities more quickly
Helios Estate Planning announces it is shutting down as advisors continue to de-emphasize estate planning
Vestwell expands into state-sponsored auto-IRAs and 529 plans as it broadens its offering for advisors serving small business owners
CapGainsValet and Blackrock’s Tax Evaluator ramp up with fresh data for end-of-year capital gains distributions from mutual funds (and some ETFs!)

And be certain to read to the end, where we have provided an update to our popular “Financial AdvisorTech Solutions Map” as well!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (Dec 4-5)

December 3, 2021 02:20 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading for Financial Planners” – this week’s edition kicks off with the news that industry giant Envestnet has filed with the SEC to launch its first four ETFs, which will take an ‘ActivePassive’ approach that will take both active and passive investing approaches within the same ETF. And while Envestnet has previously used the ‘core and explore’ approach in its mutual funds, these will be their first offerings using the more tax-friendly ETF wrapper.

Also in industry news this week:

Client risk assessment provider Riskalyze is further expanding its product offering with ‘Discovery’, a tool that combines Riskalyze’s risk assessment score with its proprietary investment risk-adjusted performance metrics to facilitate client portfolio construction for advisors
A new company is being formed that will support RIAs that want to provide Pooled Employer Plan (PEP) services to clients without running afoul of IRS rules

From there, we also have several articles on retirement planning, including:

A critique of Morningstar’s suggestion that the “4% Rule” for safe retirement withdrawal rates should be lowered to 3.3%, from the financial planner who first wrote about the 4% Rule
New research shows how retirees increased their spending as a percentage of their pre-retirement income from 2016 to 2019… but subsequently cut back when COVID struck in 2020
How the new, streamlined Social Security statement better illustrates the potential benefits of delayed filing

We also have a number of articles on year-end tax planning:

How to reduce the capital gains tax impact from rebalancing investment portfolios after a strong year of performance in the stock market
How to determine which types of assets (and accounts) make for the most tax-efficient charitable contributions
Why cryptocurrency investors may see increased scrutiny from the IRS as it ramps up its efforts to enforce tax compliance on digital assets

We wrap up with three final articles, all about charting a career path and how it might change along the way:

Why mental models can be useful tools for individuals considering a career change
How individuals can facilitate ‘hot streaks’ in their career by exploring different areas and exploiting their skills once a promising opportunity is identified
The importance of understanding which ‘career season’ – growth, lifestyle, and reinvention – an individual wants to pursue at a given time

Enjoy the ‘light’ reading!

Kitces & Carl Ep 74: Making Clients Care About Financial Planning By Finding Their (Truly) Critical Issues

December 2, 2021 07:02 am 2 Comments CATEGORY: Kitces & Carl Podcast

While it was once a common practice for financial advisors to apply cold-calling strategies to attract any client willing to engage with them, framing their value in terms that clients would understand was often a challenge for advisors positioning themselves as experts able to solve all of a client’s financial problems. But when clients have financial issues that aren’t clearly obvious or understandable to them, they are generally not very motivated to have an advisor help them address their problems, especially when they don’t understand the specific services – beyond the commonly offered (yet vague) “peace of mind” promise – the advisor can provide.

In our 74th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss strategies that motivate clients to seek financial planning services, and how identifying the right areas of specialization can help advisors to better communicate how their services can help clients address their unique problems.

As a starting point, it is important to acknowledge that clients often don’t seek out help unless their problem becomes a critical pain point. For example, while regular auto maintenance is important to prolong the life of a car, it is often not considered a high priority. By contrast, being stranded with a flat tire in a strange area needs an immediate solution. Similarly, clients who don’t seek financial planning services may not have any critical needs to address; this isn’t to say they are not in need of service, they may simply not consider the service immediately relevant.

However, when a client’s problems escalate to a high level of urgency, they can become very motivated to seek out a clear solution to their issue. Accordingly, advisors can benefit from understanding these truly critical issues that matter most to their own clients and aligning the solutions they provide to their current and future clients. This can present a significant opportunity for the advisor to enhance and improve their business strategy, as communicating specific solutions available to critical problems that clients care about can minimize the indifference many clients (current and prospective) have with advisors who don’t clearly identify the solutions they offer.

Ultimately, by communicating specific solutions that are relevant to their clients’ critical issues, advisors can help clients better understand the value that they offer and enhance opportunities to expand their business. And by asking clients the right questions to identify which issues are most critical to them, advisors not only strengthen their relationships with their clients but also have the opportunity to proactively develop planning and communication strategies to attract more clients. Which, in the end, allows them to refine their financial planning services to best meet their clients’ needs!