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Safeguard Yourself Against Litigation

When unhappy clients lose money and decide to sue somebody, chances are that somebody is you.

“You don’t have to have done something wrong to get sued,” Greg Severinghaus, marketing manager and senior underwriter of Markel Cambridge Alliance, said in a breakfast session April 25 at FPA Retreat at Chateau Elan in Georgia.

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Greg Severinghaus of Markel Cambridge Alliance presented the session, “Improve Client Relations to Limit Litigation” at FPA Retreat 2017.

Severinghaus said many advisers he works with don’t think they could ever get sued. They tell him they’ve got good client agreements and they get good results. But then they get sued for something frivolous or something that wasn’t their fault.

For example, he said, an adviser he worked with interviewed with a married couple who never even signed on as clients who eventually sued him.

“We spent $50,000 defending him,” Severinghaus explained. That was a small claim, he said. The bigger claims run into the millions.

Severinghaus said there are many areas in which advisers get sued most, and he offered tips on how to safeguard yourselves:

Execution errors. Advisers frequently get sued for making trade errors. This is the most frequent source of loss for advisers who manage assets.  To safeguard from this, Severinghaus suggested advisers put basic policies and procedures in place to reduce the magnitude of errors. For example, match every order against confirmations and promptly resolve discrepancies.

Also, keep a log of erroneous trades to look for patterns and promptly address them.

Finally, maintain a discretionary fund to address erroneous trades before they get worse. Fix errors as soon as possible.

Client selection and deselection. Focus on onboarding clients who will take your advice. Steer clear of clients who are overspenders, who won’t take your advice, who are unwilling to take effective risk, who are not in need of the services you provide, who are unethical or who are high maintenance.

Clients who overspend are particularly prone to bring lawsuits against you.

“When the money runs out, they’re going to blame somebody and it’s always the person managing their money,” Severinghaus said.

Documentation. This is the biggest piece in defending yourself against litigation. Document everything—every client interaction and meeting—especially if the client did not take your advice. At your quarterly meetings, have the client sign documents noting they understand the reports and your recommendations.

Clients don’t always tell the truth, Severinghaus said, so having proof of what was said at your interactions is key.

“Competent behavior requires ongoing documentation,” Severinghaus said.

Wire fraud. This is a hot-button topic in recent years. More advisers are getting duped into wiring their clients’ money to clever hackers who have enough knowledge of the clients to be convincing.

If you suspect an email is fraudulent, pick up the phone and verify with your client that it was in fact them who contacted you. Don’t trust voice recognition either. When a client calls asking for something you think may be out of character, ask them if you can call them back with the number on file just to verify.

Also, ask questions fraudsters won’t know, and don’t send pre-filled wire instructions.


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All Business is Personal: 3 Tips for Addressing Difficult Client Conversations

“Hi Jim. I wanted to inform you that your funds will be transitioning from an A share to a C share, which means you will actually pay less in fund fees, however, my fee cost will be increasing just a big. Let’s set up a time to discuss.”

Now there’s an email nobody wants to send or receive. As the financial industry evolves and advisers are held to an increasingly higher standard, you may have to take a new approach to difficult conversations with your clients. The ability to engage clients in these discussions is critical in building and retaining a successful practice.

Here are three tips based on the research of G. Richard Shell, award-winning author and creator of the University of Pennsylvania Wharton School’s “Success Course,” on how to better approach challenging conversations and ensure you’re creating Demonstrations of Value (DOVs).

Talk About Client Goals First
When times are tough, take a positive approach by focusing on their goals while still acknowledging the concern. For example, you could say, “I know you set up this portfolio to save for Katie’s college education. She’s starting high school next year, so we still have four years until tuition starts. I know the markets have been rough, but I believe we’ll still be able to achieve your goal. Here’s why.”

By leading the conversation with knowledge of your client’s specific needs and concerns, you can better address the need to maintain an objective view throughout market challenges and not let emotions cloud a commitment to a longer-term strategy.

Help Them See the Big Picture
Your client comes to you with big news. She and her husband are ready to buy that house on Lake Winnipesaukee they’ve been talking about for years. While you share her enthusiasm, you want to make sure that she’s putting this decision into context.

During this conversation, you have an opportunity to demonstrate your knowledge of your client’s plans and needs. How long do they plan to own this house? Will they need to consider space for additional family members later on? Is this where they’d like to retire one day? If yes, how does that fit into their overall retirement plan?

When you help them consider the questions that matter, you reinforce your value more deeply than their investment positions. You can help be a leader when it comes to a family’s important life decisions.

It’s About More Than Money
Get to know your clients beyond their portfolio. While it may seem obvious, occasionally our time gets the best of us and we don’t focus on the details that could make a difference.

Keep notes on their hobbies and interests, where their priorities are, how old their kids are and family anniversaries and birthdays. Knowing these specifics can help foster a relationship that goes beyond just business, creating a partnership that can withstand even the toughest financial environments.

Are you ready to demonstrate your value in a collaborative client relationship? For more tips on how to boost your communication skills, learn about the 3Cs to enhance your negotiation skills.

JohnEvans

 

John Evans
Executive Director, Janus Labs
Janus Capital Group
Denver, CO


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It’s Time to Reexamine Your Fee Schedule

The growth of the fee-based advice model has been one of the most significant developments in our industry over the last 30 years. We have gone from a world dominated by commissions to a world where advisers now derive more revenue from fees than from commissions.

The trend toward fee-based advice has been driven primarily by a desire to find a business model that removes some of the conflicts of interest inherent in the commission-based model. Compensating an adviser based on a percentage of assets under management removes the incentive to recommend unnecessary trades to generate a commission.

But charging for advice based on a percentage of assets under management does not perfectly align an adviser’s interests with the client’s. For example, it may be in a client’s best interest to liquidate a portion of their investment account to pay off their mortgage, but it is certainly not in their adviser’s financial interest. Will this affect the adviser’s advice?

The AUM pricing model also holds a subtler potential conflict. Paying an adviser more as an account grows could cause the adviser to take greater risk in a client’s portfolio to generate greater returns.

The AUM pricing model has an even more fundamental problem. It can sometimes be hard to reconcile the fee charged with the services provided. A recent Dilbert cartoon makes the point:

Dogbert: “I’ll manage your portfolio for a standard industry fee of 1 percent per year.”

Wally: “I’m investing a billion dollars. Your fee would be $10 million per year.”

Dogbert: “Those index funds aren’t going to pick themselves.”

Firms that provide services in addition to asset management have a much easier time rationalizing an AUM pricing model. For example, firms that provide financial planning services often experience a more direct correlation between the size of the client and the amount of work required to service the client. Larger estates often come with greater complexity.

Fee-based advisers in increasing numbers are grappling with these issues and are migrating to hourly or retainer-based fees. These alternative fee models are intended to deal with some of the potential conflicts of interest inherent in the AUM pricing model and provide a more rational connection to the service provided and the fee charged.

Another benefit of these alternative fee models is their transparency. The client sees very clearly what they are paying for advisory services. In contrast, the AUM pricing model has a way of masking fees by translating them into mysterious units called “basis points.”

The evolution of the fee-based model will, no doubt, continue, but the truth is, there is no such thing as the perfect fee schedule. Well-intentioned advisers can serve their clients’ needs well using commissions, AUM pricing, hourly/retainer-based pricing or a combination of all of them. The “best” pricing model depends on the situation and the needs of the client.

We are entering a new era where client sensitivity to, and government scrutiny of, fees will be ever increasing. We will all be held accountable for the compensation we receive. The focus will be less on the structure of our fee schedule and more on the impact our fee schedules have on our clients in specific situations.

You can wait until you are forced to defend your fee schedule or you can get ahead of the issue. Now is the time to reexamine the fees you charge and their impact on each of your clients. You should be able to demonstrate a reasonable relationship between the fees charged and the services delivered. Saying, “Those index funds won’t pick themselves,” won’t cut it.

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Scott MacKillop
CEO
First Ascent Asset Management
Denver, CO

 

 

 


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When Was the Last Time You Reviewed Your Associate’s Compensation?

“How do I fairly compensate an associate adviser?” It’s a question many advisers grapple with as they bring new staff into their firms. It’s also one you should revisit from time to time, to ensure that your associate’s compensation remains in line with his or her growing responsibilities.

First, Do Your Research

In setting compensation for a new adviser, a good starting point is to use industry data, such as the InvestmentNews Adviser Compensation & Staffing Study. Published every other year, the study provides details on how advisers compensate three different types of associate advisers:

  • Support advisers—those who focus on investment analysis and other “behind the scenes” work
  • Service advisers—those who service clients given to them, conducting regular reviews and addressing client issues and questions between reviews
  • Lead advisers—those who bring in new business for the firm by securing new clients

The study offers a wide range of data for each of the categories, which can help advisers zero in on appropriate compensation for associates.

Over time, though, an associate adviser may gradually move into a new or expanded role. For example, the associate may have started out as a support adviser but now steps up to service clients when you’re absent. Or maybe the associate adviser is progressing so well that you can be away from the office for weeks or even months, knowing that clients and the firm are in good hands. The associate has moved into a “CEO light” position, but has his or her compensation followed?

Be Aware of Shifting Roles—and Adjust Accordingly

In these situations, what many lead advisers don’t realize is that their dreams have come true. Many wanted a continuity plan and now they’ve got one! The key is to recognize the shift—the associate surely has—and increase his or her compensation accordingly.

Of course, if you have a documented continuity plan with the associate, his or her expanded role may fall under the “sweat equity” part of your agreement. If you don’t have a continuity plan in place, it may be time to create one with the associate or, again, adjust compensation based on the role he or she is actually performing. It’s well worth doing so. After all, why risk losing the valued associate you’ve invested so much time and energy developing?
Joni Youngwirth_2014 for webJoni Youngwirth
Managing Principal of Practice Management
Commonwealth Financial Network
Waltham, Mass.


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Building Growth Through Succession Planning

Succession planning isn’t just an “end-game strategy”; it is the key to growth and sustainability.

The specific goals of the succession planning process depend on the founder and his or her circumstance—including age, health and family demands—and they vary case by case. The point, though, is to take a methodical and practical approach to building a business that will endure beyond the builder. Four key areas to concentrate on are:

  1. Building strong, sustainable growth;
  2. Creating a focus on the bottom-line;
  3. Implementing a practical and reliable continuity plan; and
  4. Designing an income perpetuation strategy for the founding owner

The first is perhaps the most important. Building strong, sustainable growth for the business is supported by a clear succession plan in two ways. First, by incorporating next generation advisers who will be investing financially and physically as they buy in. One of the most effective ways to grow a business is to help the next generation build on the foundation the founder has already created and gradually transition ownership—and leadership. The next generation will learn not only how to “think like an owner,” but to be an owner. They will connect the daily goal of revenue production with the long-term goal of producing sustainable revenue in an efficient and scalable manner. They will make decisions that benefit the whole, not just themselves.

Second, growth through succession is about even more than just improving numbers. Strong, sustainable growth demands that the business owner increase their own capabilities as a leader—not just as a producer. As an executive of a multi-generational business, building the strength and depth of the entire team fuels continuous growth.

Cultivating ongoing growth in this way allows a founder to realize exponential value in the business they’ve built, while allowing them to plan for life after advising without worrying about the future of the business or the clients.

Unless the world of professional financial advisers discovers immortality or the fountain of youth, 100 percent of today’s advisers will see their careers come to an end, one way or the other. The only question is how you’ll help your clients transition from your advice and care to someone else’s. Will it be through a professional and carefully crafted succession plan; a last-minute sale to a friend or colleague; or will the clients be left to fend for themselves?

Building a business is about building for the future—your future and your clients’ futures. With a solid succession plan you not only promote growth—you build a legacy, and most importantly, you provide for your clients’ needs beyond the length of your individual career.

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David Grau Sr., J.D.
President and Founder
FP Transitions
Lake Oswego, Ore.


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Become a Gen-Savvy Financial Planner

Cam Marston.jpg2017 FPA Retreat Speaker Cam Marston

Any business situation today—from hiring new employees to bringing on new clients—will likely involve at least two different generations, and sometimes three or four. If you feel out of touch with generations different than your own and are perhaps hesitant to work with them, Cam Marston offers this advice: understand your own generational biases first, then have empathy for others.

Marston, a leading expert on generational change and author of The Gen-Savvy Financial Advisor, is teaching people of various generations—matures, baby boomers, Gen-Xers, and millennials—how to understand each other and work together.

Marston will present at FPA Retreat, April 24–27 outside Atlanta, Ga. Register for Retreat here. Below is an excerpt of a February 2016 Journal 10 Questions interview with Cam Marston. See the original article here.

1.) What are some things financial advisers should know about successfully working with millennial clients?

First, most of them are asset poor right now; they simply don’t have a lot of resources. Second, they are very attuned to their parents. The millennials and their parents have a tight connection. A generalization is that they will listen to one another, which is an opportunity for a warm lead from baby boomer parents. Third, when you introduce yourself, put content on your website, or in any sort of promotional moment you get, you need to focus on the client and how they’ll change and benefit from working with you.

Fourth, millennials are easiest to work with in groups. They tend to like to be in groups of two, and three, and four. When calling on them or holding events, you want to make sure they come in pairs or in threes because they will much more likely show up than an individual who doesn’t know anyone at the event. So schedule opportunities for small groups of millennials to gather and hear your proposal or your information.

2.) What about Gen X clients?

The apex consumer in Generation X today is the Generation X female. And when she is a mother of a young child, her decision-making and referral authority is unparalleled. Our society has given mothers of young children the ability to tell people what to do, what to buy, and where to shop in a way we’ve never seen before. So if I’m an adviser and I’m engaging a Generation X female with young children, I must treat her very, very well, because her ability to refer people to me is enormous.

Secondly, if she is married with young children, she is more often than not the CFO of her household. As much as the husband may act like he is the decision-maker, when the two of them are alone, she will determine whether I get the business or not, and she still has the power to refer. So when I’m dealing with Generation X, I’m keeping a keen eye out for the influence of the Generation X female. And my prediction is the millennial female will be exactly the same with a power of 10.

Know that the Generation-Xer is a “stalker.” Before ever meeting you in a business environment, they will have gone online and done a good bit of research on you. So to prepare for doing business with a Generation-Xer, make sure your online first impression is sparkling and squeaky clean.

3.) What are some things that financial advisers should know about successfully working with baby boomer clients?

A distinction needs to be made between leading and trailing baby boomers.

Leading baby boomers, born 1946 to 1955, are the oldest portion of the baby boomers. Population-wise, they’re a smaller segment of the boomers, but their attitude is unique in that we appeal to the older baby boomers with messages of: you’ve worked hard, you’ve paid your dues, you deserve the fruits of your labor. The systems of the nation, Social Security, etc., were set up to reward you for the hard work you’ve done; let’s help you enjoy that through retirement planning.the-gen-savvy-planner

The younger baby boomers, born 1956 to 1964, are the more populous section of the generation. The great recession of 2008 hit them hard. They are of the age that many of their children should have been getting a toehold in their careers when 2008 came around, but due to the economy those younger boomers had to continue to supplement some of their children’s needs.

Bottom line, those younger boomers wear a brave face, but inside they are horrified at their retirement prospects. They haven’t saved enough. Their defined benefit plans have been frozen, eliminated, or were never offered to them. They’ve not taken advantage of the 401(k) plan—they realize in hindsight—the way they should have.

The adviser needs to go to the trailing baby boomers and give them a message of hope. Not a message of entitlement, or you deserve it, or you’ve worked hard, but a message of hope that is timely and personalized, which is: “There is still time to get you to this goal. We can create a plan that matches your need.”

Schulaka Carly_resizedCarly Schulaka
Editor
Journal of Financial Planning
Denver, CO


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Financial Planning Priorities for New Parents

Everyone in my life is having kids. And, as the fee-only financial planner in my community, I’ve frequently been asked: “How do I set up a 529 college savings account?”

It’s a good question. But, as another adviser used to say, “it’s the wrong question.” While opening a 529 college savings account is usually a good idea, it’s very low on the list of financial planning priorities. Why ins’t a 529 college savings account a big deal?

Without a 529, attending college is still possible via either student loans and/or work-study programs. Moreover, there is even the chance that higher education might be free in the future, or that your client’s child determines that college isn’t right for them. Either way, not having a 529 doesn’t mean a catastrophic life event for you client.

I’m not saying don’t create a 529 account. I’m just saying that a client’s attention, energy and time are extremely limited—especially if they’re a new parent. So, if a client only has so much time in his/her hectic schedule, focus on the financial planning moves that will make the biggest impact.

What Planners Need to Emphasize for New Parents
A Will. While having a conversation with a client about their own mortality may not be easy, our profession knows that this subject is very important. Parents of minor children definitely need a will. In the will, it is critical to designate the names of the godparents in the instance that both clients pass simultaneously in an untimely manner.

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To illustrate the importance of a will, consider a worst-case scenario: Without a 529 account, a client’s child may have to resort to student loans to finance his/her education. Without a will, a client’s child may end up in a state-run orphanage. Of those two scenarios, which single issue is most dramatic—and which issue should receive the highest priority in terms of prevention as you advise new-parent clients?

Life insurance. You likely don’t need me to convince you that life insurance is important for new parents. The point here is that term-life insurance is infinitely more important than funding a 529 college savings plan. Household breadwinners need to designate their spouse as primary beneficiary with godparents (outlined in the will) designated as the contingent beneficiary.

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Illustrating a worse-case scenario to your client is the best way to effectively communicate the value of prioritizing life insurance over college funding: it’s more important that a client’s child has food on the table, clothes on his/her back and shelter over his/her head for ages up to approximately 18, rather than money for college.

Disability Insurance. In the context of financial planning moves for new parents, a disability insurance policy plays a pretty similar role as life insurance: providing money to fund a child’s lifestyle when your client (the parent) is no longer able to do so. For this reason, it’s much more important than a 529 plan, with a disability insurance policy providing money for food, clothes and shelter.

Prioritize Financial Planning Needs for New Clients

So, while having a college savings account is certainly a “nice-to-have,” it’s not a make-or-break financial planning move. A 529 college savings account is simply not that important. What is very important for parents (or prospective parents) are a will, life insurance and disability insurance. Address those three items FIRST, and then work with clients to open up a 529 college savings account.

jon-luskin

 

Jon Luskin
Fee-only Financial Planner and Fiduciary
Define Financial
San Diego, Calif.

Editor’s note: Find more of Luskin’s blogs about personal financial planning for employees of Deloitte at UncleDmoney.com.