feed - Part 27

Why High Equity Valuations And Low Bond Yields Won’t (Necessarily) Break The 4% Rule

January 26, 2022 07:03 am 6 Comments CATEGORY: Retirement Planning

For nearly 30 years, the so-called ‘4% rule’ has been a starting point for retirement planning conversations between financial planners and their clients. But as equity valuations such as the Shiller CAPE ratio have ratcheted up to nearly all-time highs in recent years, with bond yields simultaneously reaching all-time lows (suggesting below-average future returns in both asset classes), some experts have questioned whether a 4% initial withdrawal rate will continue to be ‘safe’ in the future. A new white paper by Morningstar feeds into this speculation, with its much-publicized conclusion stating that, given today’s market conditions, the future safe withdrawal rate should be lowered to 3.3%.

The Morningstar paper’s key insight is that expectations for future safe withdrawal rates should be adjusted based on current market conditions (which other research has supported). Accordingly, the paper’s authors use forward-looking return projections to calculate their future safe withdrawal rate estimates. But the investment return assumptions that Morningstar used for its analysis were so low – with real returns averaging just 5.7% for equities and 0.5% (!) for fixed income over 30 years – that, if those projections were to come to pass, the next 30 years would be among the very worst market environments in U.S. history.

While such conservative return estimates might make sense over a 10- to 20-year time horizon (since research has shown that CAPE ratios are strongly predictive of returns over that time range), extending those assumptions out to 30 years is arguably unrealistic. This is because there is no precedent – even in other eras with high equity valuations – for 30-year returns that low (other than the period spanning the late 19^th and early 20^th centuries, when financial panics and global war created a far more tumultuous and unpredictable environment than the comparatively stable world today). In reality, markets tend to revert to the mean, meaning that even the periods with the worst safe withdrawal rates in history contained intervals of offsetting below- and above-average returns, causing each to end out with near-average returns over the full 30-year horizon.

In this way, Morningstar’s choice to focus on (historically low) 30-year returns for its analysis disregards the evidence of what really drives safe withdrawal rates, which is the sequence of returns. Because the periods that have tested the 4% rule in the past were not necessarily those with the worst 30-year returns, but those whose returns in the first 10-15 years were so bad that retirees needed to withdraw too much of their portfolio to be able to recover once conditions improved. So in reality, Morningstar’s results may have been more realistic if they had only forecast 15-year instead of 30-year returns, since the 15-year period is both easier to predict on current market data and more predictive of safe withdrawal rates.

Ultimately, however, Morningstar’s conservative return assumptions – which are comparable to some of the worst periods in the past 140 years – actually serve to highlight the strength of the 4% rule, which was created to withstand just those types of worst-case scenarios. Which means that, even if their historically low projections do come to pass, resulting in returns equal to the worst return scenarios in history, a 4% initial withdrawal rate would still hold up. And while today’s market conditions do merit caution (as there is reason to believe that the next 15 years could experience below-average portfolio returns), in reality, such conditions were precisely what the 4% rule was created for, to begin with!

Reducing Digital Miscommunication By Setting Clear Expectations And Appropriate Tone

January 19, 2022 07:08 am 0 Comments CATEGORY: Client Trust & Communication

Communicating clearly and effectively online can often be a challenge, and the surge in digital communication during the pandemic has increased the potential for misinterpreting messages. Without the verbal inflection available in oral communication, conveying tone through written communication is much more difficult. In the absence of these tonal clues, our brains fill in the gaps with our own assumptions, which may not match up with the intended meaning!

Furthermore, online messages can lack mutually agreed-upon expectations for how to communicate; in a face-to-face meeting there is an immediate back-and-forth exchange of ideas with the opportunity to notice body language and facial gestures, but when communicating online, the time between responses (and the recipient’s unwritten/unspoken reactions) can be much more ambiguous. This can lead to anxiety and frustration, which can, in turn, lead to a passive-aggressive tone-deaf dance of digital (mis)communication. Stress related to online communication can lead to general unhappiness in an advisor-client relationship, which can adversely affect client satisfaction and retention. This is a particularly important risk to be aware of now, with the skyrocketing rise of digital communication!

Two simple changes – clearly stating what is needed and offering a concrete time frame to work with – can make a huge difference in setting clear expectations and reducing any potential stress that would otherwise arise from misinterpreting ambiguous expectations. One effective method of setting expectations for responding to email is using an email signature to outline what clients can expect from you. For example, you could write in your signature that you only check email on certain days of the week or do not respond to emails after 4 pm. Additionally, it helps the recipient understand expectations when messages include explicit descriptions of what is needed, and a deadline for when they are needed.

In addition to setting clear expectations, thoughtfully setting up the appropriate tone in digital messages can also have a tremendous impact to help mitigate potential stress and frustration that can arise from digital communication. For example, you can use punctuation marks (!!!) or emojis (😊) to convey tone. For those who feel uncomfortable using emoji faces or lots of exclamation points in their messaging, recording a simple video message (so that the recipient can hear your use of vocal expression and see your facial gestures) can also be a way to communicate tone.

Ultimately, the key point is that effective digital communication can reduce stress levels for both the sender and the recipients of the message, as good digital communication helps the recipient understand what the sender is trying to tell them and what needs to be done, without the need for body language or vocal cues. Accordingly, working to make digital communication more effective by setting clear expectations and thoughtfully setting up the appropriate tone not only helps advisors communicate with clients more effectively, but also reduces the stress levels for both advisors and their clients as well!

#FA Success Ep 264: Outsourcing Lead Generation To Accelerate Growth When Starting From Scratch, With Dan Callahan

January 18, 2022 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 264th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Dan Callahan. Dan is a Partner and the Chief Investment Officer at Capasso Planning Partners, a rapidly growing independent RIA based in Charleston, South Carolina that oversees about $250 million of assets under management for 300 client households across the country that are all served virtually.

What's unique about Dan, though, is the way he and his firm began with nearly zero clients but grew substantially in client acquisition over a 3-year period, especially in areas outside of the local Charleston area, by outsourcing lead generation to online third-party platforms.

In this episode, we talk in-depth about how Dan incorporates third-party lead providers like Zoe Financial, SmartAsset’s Smart Advisor, and Fee-Only Network (to name just a few) to maximize the reach of potential clients beyond his local area, how Dan highlights his firm’s fee structure and flexible meeting times to position the firm to stand out amongst a crowded marketplace of other virtual financial advisory firms pushing for the same leads, and how Dan justifies the non-trivial revenue-sharing and other marketing costs that it takes to buy leads by having gotten from $0 to almost $50 million of assets under management in barely 3 years.

We also talk about how Dan’s perseverance in client outreach allowed him to keep pace with larger firms (despite not having a business development or marketing team), how Dan’s experiences at fee-only firms gave him opportunities early in his career to experience senior-level investment and portfolio work (which lead him to acquire his CFA designation), and how those experiences and his CFA designation gave Dan the confidence to start and grow an advisory firm from the ground up.

And be certain to listen to the end, where Dan shares how developing a financial firm from scratch involved enduring a rollercoaster of fluctuations in his own satisfaction and disappointment (especially when dealing with acceptance and rejection from prospects), why Dan feels strongly about taking risks and being vulnerable to create better career goals and overall achievements, and how Dan places importance on the flexibility of meeting clients virtually to create a less stressful work-life balance for him and his firm.

So whether you’re interested in learning about how Dan leveraged online third-party platforms to generate client leads, how he aids his firm in standing out to compete with larger firms, or how he grew his firm to $50M of AUM in close to 3 years, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Dan Callahan.

Weekend Reading for Financial Planners (Jan 15-16)

January 14, 2022 01:57 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the news that 2021 ended with inflation hitting 7% – its highest annual rate since 1982 – which makes it more likely that the Federal Reserve could raise interest rates in early 2022 (and potentially more than once throughout the year), contributing to uncertainty not only over the Fed’s ability to tamp down inflation, but also over the potential effects of higher interest rates on financial markets and the greater economy as the country continues its recovery from the pandemic.

Also in industry news this week:

The impact of higher inflation also extends to taxes, and some components of the tax code that are linked to inflation (such as the tax brackets themselves) will see higher-than-average boosts this year (while other taxpayers could experience higher taxes from the components that aren’t linked to inflation, like the income threshold for Net Investment Income Tax)
Though the news about the twin surges of inflation and the Omicron variant has been grim lately, a closer look at the numbers gives some cause for hope, as the rate at which inflation has increased went down between November and December, while the news from South Africa and the United Kingdom shows that the U.S. could soon see Omicron cases start to decline as swiftly as they rose initially

From there, we have several articles on efforts to improve diversity and inclusion within the financial industry:

A new company called Choir aims to incentivize financial conferences to include more representation of women and people of color by creating a “diversity certification” (for conferences that choose to hire Choir to assess their conferences and engage Choir’s consulting services to improve their conference diversity)
A paper suggests that “pre-CFP” designations could serve as a “gateway” to CFP certification for more diverse candidates by providing a lower-cost alternative to the CFP educational requirements that candidates can use to “test the waters” before committing to pursuing the CFP mark
Kamila Elliott recently began her term as CFP Board chair, and though much attention has been given to her being the first Black woman to serve in that role – a significant milestone for the profession – the reality is that the industry’s diversity issues go beyond anything she can solve in her one-year term and require more structural change in the industry as a whole

We also have a number of articles on how individuals can make the most of their retirement years:

Why a ‘challenge list’ might be a better choice than a ‘bucket list’ in retirement, and how advisors can help clients discover how they really want to spend their retirements
While many clients are worried about running out of money in retirement, recent studies show that many retirees can actually safely increase their spending significantly (if only because they are being more conservative than they actually need to be!)
Why many individuals can lose a sense of purpose in retirement, and how advisors can help clients develop strategies to regain this feeling

We wrap up with three final articles, all about the importance of committing to goals:

Why personal and professional commitment is undervalued in a world of almost infinite options where we increasingly try to ‘keep our options open’ instead of committing deeply to one path in particular
Why progress is almost never linear, and how to overcome the inevitable dips and stalls along the way
How most success stories, from bloggers to financial advisors, are the result of years of hard work and persistence before material results start to show up

Enjoy the ‘light’ reading!

3 Essential Client Meeting Skills For Financial Advisors (And How To Develop Them!)

January 12, 2022 07:01 am 2 Comments CATEGORY: Client Trust & Communication

As increasing numbers of new financial advisors enter the industry through support roles (e.g., analysts, paraplanners, and associate advisors), many newer advisors today spend much of their time on ‘back-end’ tasks like data input and analysis rather than meeting with clients (which is reserved for more-experienced lead advisors). Which means that, while many newer advisors have the opportunity to deepen their technical financial planning expertise early in their careers (simply via the day-to-day tasks of their roles), the same may not be true when it comes to mastering the skills necessary to meet and communicate with clients in a one-to-one setting.

Accordingly, for newer advisors who plan to progress into lead advisor roles – and for more-experienced advisors looking to enhance their client communication abilities – practicing client meeting skills can be a valuable way to improve their ability to communicate effectively with their clients. But ironically, many advisors do not get a chance to practice these skills until they actually start to meet with clients—which, given the nuance and complexity of many conversations around clients’ finances, can be somewhat akin to learning how to build an airplane while it is already flying!

A better approach to deepening client meeting skills may be to find (or create) opportunities to practice those skills before meeting with clients. Because, contrary to many people's intuition, the ability to communicate effectively in a client meeting is not an inherent trait limited to extroverted personality types; rather, it is a skill that can be learned and mastered through regular and deliberate practice. And by practicing the most essential of those skills – which include meeting preparation, creating supporting materials, time and agenda management to stay on topic, and active and passive listening to create an environment of open communication with the client – advisors can improve their performance when they get the opportunity to hold a real client meeting, no matter their level of extroversion!

While formal opportunities for newer advisors to practice client meeting skills are not always readily available, advisors do have several options that they can explore based on their goals and available resources. One is to hold mock client meetings with other advisors, which can provide hands-on practice at presenting and managing a meeting (as well as giving valuable feedback from the other participants). Additionally, on-demand virtual training courses (such as Amplified Planning’s CORE program) allow enrollees to observe real client-meeting scenarios while providing additional learning tools to help advisors deepen their skillset. Finally, more comprehensive training programs, like ACP’s Success, Money Quotient’s True Wealth, and Kinder Institute’s EVOKE training, go beyond client meetings to teach whole systems of financial planning and client communication (which may require an advisor’s buy-in to a specific planning philosophy, but can also provide intensive training to incorporate that philosophy into all aspects of the advisor’s process, including client meetings).

Ultimately, good client meeting skills are about creating an environment where the advisor and client can communicate openly. It follows, then, that practicing client meeting skills can improve an advisor’s overall ability to communicate with their clients. Which, given that clients generally value advisors who communicate openly and honestly with them, means that enhancing client meeting skills (by practicing them before meeting with clients) can also make advisors more trusted – and more valuable – in the eyes of their clients!

#FA Success Ep 262: Asking More Questions In The Discovery Process To Deepen Client Relationships, With Melanie Milam

January 4, 2022 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 262nd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Melanie Milam. Melanie is an advisor with Gateway Financial Partners, a super-OSJ affiliated with LPL Financial located in Texas, where she oversees $150M of assets under management for her 110 client households

What's unique about Melanie, though, is her approach to connecting with clients, mostly in the oil and gas industry, through a tried-and-true list of 34 questions she’s built specifically geared toward maximizing the amount of time clients talk about themselves, to not only gain a better perspective on their goals, but to create deeper, longer-lasting relationships.   

In this episode, we talk in-depth about how Melanie and her husband began her firm by leveraging her knowledge as a CPA and his managerial experience and personal connections in the oil and gas industry (which lead them to find her niche market), the way Melanie’s firm segments clients into tiers to align their services and provide specialized gifts and experiences for her top clients, and how Melanie’s faith drove her to obtain her Certified Kingdom Advisor (CKA) designation so that she can connect with her faith-based clients and give back to her community.  

We also talk about how Melanie managed to begin her firm while homeschooling 6 children, why Melanie believes it’s so important to create stability in your own financial life before launching a business to help advise clients in theirs, and how it was the realization that Melanie does her best work when she’s in front of her clients that helped her build the courage to begin hiring a team that helps ensure she’s maximizing her time in front of her clients. 

And be certain to listen to the end, where Melanie shares her “can have it all” (just not all at the same time) mindset about the women in the financial services industry, the way Melanie weaves her faith into her advice and her own life and business decisions, how Melanie’s passion for helping others inspired her sons to join the firm and further built client trust. 

So whether you’re interested in learning about Melanie’s unique CKA designation and how she translates faith into financial advice, what inspires Melanie to create deeper relationships with her clients, or how she built her firm as a busy but attentive mother of 6, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Melanie Milam.

The Latest In Financial #AdvisorTech (January 2022)

January 3, 2022 07:02 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the January 2022 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!

In this month’s edition, we look back at the four major trends underway in the financial advisor ecosystem that shaped the big AdvisorTech events that occurred in 2021, and what the trends portend for the year(s) to come.

The first driving trend is the ongoing shift of the financial advisor value proposition itself – from the sale of financial services products, to the sale of financial advice itself – which in turn is slowly but steadily reshaping the entire advisor technology stack. Starting with a growing pressure on financial planning software to go deeper – not simpler – and an expansion of various ‘advice-support’ and plan monitoring tools that augment planning software. Which is leading advisor CRM systems to increasingly become the hub, as new startup planning tools build first to CRM systems (not brokerage platforms or portfolio management tools). And an expansion of tools to support more advice models beyond ‘just’ the traditional AUM model (from Assets Under Advisement [AUA] to subscription and retainer models).

The second trend reshaping advisor technology is the growing focus on back-office automation, as it becomes increasingly clear that “robo-advisors” were never a threat to real financial advisors… but the efficiencies they bring are highly relevant to enhancing the productivity of human advisory firms! Which is driving a new wave of investments into both business process automation systems, and more generally anything that can improve the expediency of back-office workflows (from ‘simple’ client note-taking to more complex multi-system workflows), along with greater automation of compliance technology (“RegTech”) in particular. And the need for more integration across platforms – to achieve those efficiencies – is spawning a new wave of solutions that make it possible for advisors to either begin to warehouse their own data (to facilitate their own integrations), or be able to accomplish everything in a single “all-in-one” system that houses all the data and provides all the necessary services (so advisors can just focus on the business itself!).

In next week’s continuation of our 2022 recap, we’ll look at the remaining two AdvisorTech trends – the hunger for (re-)igniting organic growth as advisory firms scale, and how evolving investment trends (given high market valuations and low bond yields) are fueling some of the biggest opportunities in AdvisorTech (as advisors historically will pay even more for solutions that help to create revenue!).

In the meantime, 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]!

#FA Success Ep 261: Replacing The AUM Fee With A Complexity-Based Fee For (Only) The Time It Really Takes, With Andrew Miller

December 28, 2021 07:05 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 261^st episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Andrew Miller. Andrew is the founder of OLIO, a financial planning firm based out of McLean, Virginia, that manages $275 million for over 275 households.

What's unique about Andrew, though, is how he’s been able to craft a scalable business model based on complexity fees, by meticulously capturing the details of every planning analysis he’s done for his clients over the years and translating it into a clear estimate of the time and effort it will take to handle any new client’s planning needs.

In this episode, we talk in depth about how Andrew developed his time-based system to determine how to price his services to clients, why Andrew’s focus on time has led the firm to do less and less investment work for clients and more and more for clients’ other financial planning needs (because as Andrew notes, if your technology stack is good enough, it really does take about the same amount of time to rebalance a $100,000 account as it does to rebalance a $9M account), and the financial planning proposal process that Andrew created to help translate the value of his time into dollar amounts that make his fee worthwhile to the clients he serves.

We also talk about how financial advice given to Andrew developed a skepticism of the financial industry that ultimately helped shape his career and OLIO’s financial planning process, how Andrew’s experience as a civil engineer fostered an understanding of how time and productivity are intertwined (which helped him create the tools that are applied to OLIO’s fee structure), and how Andrew is positioning himself and his firm to be successful as technology encroaches ever further into the realm of financial planning.

And be certain to listen to the end, where Andrew describes how his own financial planning philosophy and ‘money scripts’ began at an early age, how fostering the education of resident advisors means so much to him and his vision for the future of the financial planning industry, and how despite being told by other advisors that his business model would ‘never work’ that it’s been his willingness to create his own definition of success that’s allowed him to achieve it.

So whether you’re interested in learning about how Andrew’s own experience with financial advice and fees inspired him to promote change from within the financial advice industry, how Andrew employed his civil engineering background to create time-based data to determine his fee model, or how Andrew is helping to shape the future by coaching and educating resident advisors, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Andrew Miller.

#FA Success Ep 260: Breaking Bread Together To Build New Client Relationships As Their Financial Chef, With David Ortiz

December 21, 2021 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 260th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is David Ortiz. David is the founder of Financial Chef, an independent RIA operating as a lifestyle practice, serving clients in southern Florida. What's unique about David, though, is the way he combines his experience as a classically trained chef with the growth of his advisory firm, which now includes driving a Sprinter van with a full kitchen, so he can travel to a wider range of clientele across South Florida, to cook custom meals for them and then provide financial advice while they eat their freshly prepared food together.

In this episode, we talk in-depth about how David grew his advisory firm by leveraging his training as a chef, first by building relationships with local charities, where he would provide in-house cooking for a party of 10 as a silent auction offering to get access to high-value prospects who are affluent enough to bid thousands of dollars on his donated chef services, how David then built an office space with a professional kitchen where the timing of client meetings was based on the available breakfast, lunch, and dinner sittings that restaurants use, and why David ultimately decided to make his cooking plus advice services more mobile by buying the van with the kitchen so that he could bring the food directly to his clients in what David calls the Ritz-Carlton of food trucks.

We also talk about how David has evolved his financial planning services for clients, including how David has largely eschewed relying on traditional planning software and instead, built his value proposition directly around the ongoing and never-ending financial planning tasks that his clients need his help to implement, how David built his own custom portals for each client through Microsoft SharePoint to help clients track their financial planning progress over time, and why David has decided to evolve his business model towards charging ongoing planning fees as a percentage of client income for his financial planning task support, in addition to AUM fees where his clients need their portfolios managed.

And be certain to listen to the end where David shares his own journey through the advice business from how he made the transition from being a chef and doing a brief stint at a software company before getting started as a life insurance agent, why David ultimately decided to leave the broker-dealer world and structure his firm as an independent RIA instead, and why David believes that a chef who cooks for his clients in addition to providing them financial advice has been so effective at deepening his client relationships.

So whether you're interested in learning more about why David decided to join his talents as a chef and as a financial advisor into a successful business, why he opts for an almost subscription-style fee model, or how he designs his financial plans with a task-oriented approach, then we hope you enjoy this episode of the Financial Advisor Success podcast.

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!