1 Comment

Framing Works: Would You Rather Have Prunes or Dried Plums?

Behavioral finance is a hot topic. It’s hard to find a professional magazine without at least one story on the subject. Unfortunately, all too often the story is interesting but not very useful as it leaves you wondering what to do with the information. Well, here are a few ideas we’ve developed from the lessons of behavioral finance that have proved useful over the years.

Consider the concept of framing; i.e., how something is presented can significantly alter how a person responds. Consider the following scenarios:

1.) Does your quarterly report provide last quarter and year-to-date performance data? Is your practice and value based on long-term planning? In behavioral finance terms that’s bad framing. Why focus your client’s attention on short-term market noise when we should be keeping their focus on the long term? Consider eliminating any performance less than one year. If asked why the change, it’s a great opportunity to remind them about the concept of long-term investing.

2.) Do you use the S&P 500 as a return benchmark on your quarterly? Ask yourself why. Are all of you clients’ portfolios 100 percent invested in large cap domestic stock? Again, this is bad framing. While it’s certainly appropriate to use the S&P as a benchmark for your core large cap domestic manager, just as you would use the S&P 600 value as a benchmark for your small cap domestic value manager, using it as a portfolio benchmark is focusing your clients’ attention on an index that is unrelated to their portfolio. What’s an alternative? If you have in fact done some serious planning for you client with MoneyGuidePro, you’ve based their needed target return on a real return. If so, the appropriate benchmark is inflation as that will enable both you and your client to measure the portfolio success relative to their planning needs.

3.) Ever have a client come in anxious to draw a large chunk of their nest egg to invest in a wonderful hot investment they just heard about from their friend/next door neighbor/handyman? If so and you’ve tried to logically change their mind you probably have not been to successful. Instead of trying to persuade them, let a financial plan do it. Rerun their plan with all of their optimistic assumptions. You then may be able to tell them: “Why that’s great, instead of that one week Caribbean cruise y’all were planning on, you can take an around the world cruise first class.” Then run their plan assuming things are not so rosy and they lose half of their investment (which could happen). Then the conversation might be: “Well, if it works that would indeed be great but if it tanks you do see you’ll have to work two more years.” That is powerful framing. When someone is excited about an opportunity they rarely think about potential negative consequences and are unlikely to listen to your warnings; however, when they provide their own framing (i.e., their own MoneyGuidePro plan) they often listen.

I hope you find these tidbits useful. They have all been tested over many years with real clients and they do work.

HaroldEvensky
Harold Evensky, CFP®, AIF®, is a research professor of personal financial planning at Texas Tech University and the president of Evensky & Katz Wealth Management in Coral Gables, Florida and Lubbock, Texas. Email HERE.

 


Leave a comment

4 Ways to Retain Heirs

Ponder this worst-case scenario when it comes to introducing yourself to your client’s heirs: you’re at your client’s funeral and you offer both your condolences and a business card. The chances of those children and grandchildren calling you up after that are pretty slim.

Whatever you think of the younger generations—they’re lazy, entitled, glued to their phones—the fact remains that $24 trillion in wealth will transfer to them by 2030. They’ll need help. Introducing yourself to your clients’ heirs early and genuinely is the key to retaining that business.

Maria Quinn, adviser education specialist for Vanguard, told FPA Retreat attendees in April that there are ways to meaningfully engage with the adult children of your clients. First, Quinn advised, understand how the younger generations are different and how they perceive financial advice; second, fully engage both spouses; and last, authentically connect with the heirs of your clients.

In a 2015 Deloitte survey, 40 percent of boomers surveyed said their children work with a financial planner. Of that 19 percent said those children worked with a firm other than the ones the parents worked with and 21 percent worked with the existing firm.

Combined, Gen X and millennials (born between 1965 to 1997) are 141 million people. They’re different in the way they interact with financial planners. The acronym used to describe them is HENRY: high earner not ready yet. They will have wealth; they just don’t have it yet.

The younger generations are noted as the “401(k) generation,” Quinn said. They are saving automatically and don’t generally know where their money is invested. Both Gen X and millennials are socially conscious and express interest in learning more about retirement from their employer. Gen X tends to be distrustful of the financial advice industry while millennials see it as being too sales oriented.

But a smart move in reaching that next generation is to form a relationship with their mothers. Quinn said that many advisers tend to ignore the wife in client couples.

“She may be quiet in the room, but don’t think she doesn’t have opinions,” Quinn said. “She controls about 90 percent of the decisions. You want her in the room. You want to make sure you’re engaging her as much as you can.”

Some examples Quinn offered attendees to authentically connect with clients’ families were:

Do something special for your favorite clients. Quinn noted a planner who’d planned an 80th birthday party for his favorite client, pleasing her and impressing the family alike.

Offer pro-bono services for life events. Offer to do a financial plan for your clients’ children when you hear they are getting married or are expecting a baby. This could help forge a new client relationship and loyalty for years to come.

Pair up young advisers with young clients. Quinn said pairing up your clients’ children with your firm’s younger advisers would also be helpful. It would get that next-generation business in the door, while giving your next-generation advisers some valuable experience.

“Younger investors like to have a cultural similarity with the advisers that they’re working with,” Quinn said.

Be a savvy communicator. Quinn encourages planners to utilize technology to make a positive impression. She noted that the next generation of clients will do a Google search on you, and you want to be sure that what they find is appealing. Also, note that this generation probably doesn’t prefer phone calls, but rather emails and texts.

“If you do have clients whose children you want to make meaningful connections with,” Quinn said, “determine the most effective way to initiate engagement and establish a strategy for sustaining engagement.”


1 Comment

7 Steps to Building a Business Breakthrough

Have you ever been stuck atop a production plateau or seen your business head in a steady decline and wondered what it would take to turn your business around? Most advisers and agents go through peaks, valleys and crossroads at some point in their careers. There are many ways to pivot and change your trajectory if you find yourself in need of a re-route. Here are a few of my suggested steps to help you.

Step 1: Choose to Succeed
It may sound simplistic but success is a choice, either you desire to succeed or you don’t. To take the first step toward positive outcomes you have to want to move in the right direction. So, if you are tired of being where you are you must make a conscious decision to do want it takes to ensure change actually happens or the status quo will continue.

Step 2: Adopt a Great Attitude
It’s been said that, “Life is 10 percent what happens to me and 90 percent how I react to it.” Adopting a great attitude starts by understanding that nobody is responsible for your success but you. How you look at your circumstances is a choice that you must make every day. You will always be faced with obstacles but if you view them as an opportunity to grow you can turn them into triumphs. Start each day with an attitude of gratitude for all that you have and watch how quickly other aspects of your business and your life start to fall into place.

Step 3: Create Systems to get Results
No one ever built a great business by winging it. When you are truly honest with yourself you will realize that creating processes and systems for every aspect of your business, time management, prospecting, sales, client servicing and so on is the best way to get results. The secret to creating systems is to duplicate other’s successes by learning and implementing their systems. So ask someone you look up to in your business, what is working for them? Why re-invent the wheel?

Step 4: Take Massive Action
It has also been said that, “The distance between dreams and reality is action.” And, the more action you take the higher the likelihood that you’ll succeed. Let’s face it, you can have a fantastic system but if you don’t actually implement or integrate it then it is merely a wasted resource. Conversely, taking massive action ultimately generates both motivation and momentum.

Step 5: Track Your Progress
Measuring your milestones is a terrific way to enjoy the journey. In order to know if you are on the right path you must consistently track and evaluate your progress. It can be as simple as adding people to your pipeline daily or as complex as recording dials, contacts, new prospects, appointments and accounts. Knowing where you were and where you are now will help keep you moving toward where you want to be.

Step 6: Reward Yourself
As you accomplish your goals, it’s important to reward yourself along the way. Rewards act as a motivator to continue taking daily action because it provides an added incentive to push a little harder towards your end goal. Some successful advisers and agents use a simple reward system like allowing themselves to get a cup of coffee only after having contacted five new prospects. When you use this type of reward system consistently you form great habits to continue building your business.

Step 7: Make Course Corrections
To reach your peak potential, it’s important to make course corrections from time to time. Take for instance having a proven cold calling prospecting system that a successful colleague used to build his or her business. He or she was kind enough to map out their system for you, you took action, recorded milestones and rewarded yourself but success seems to be happening at a slower pace for you than you had expected. Chances are that you may need to make a slight course correction around who your target market is, tweaking what you say or how you are handling objections to duplicate their success.

Why Building a Business Breakthrough System Works
Business breakthroughs don’t happen overnight. It takes time to implement each step until you find the pace and formula that works for you. Now that you understand a bit more about what is involved to get going, all you need to do next is to take that first step towards your destination.

Are you using some or all these steps to have your own business breakthrough? To learn more, schedule a 30-minute coaching session with me by emailing Melissa Denham, director of client servicing.

Dan Finley

 

Daniel C. Finley
President
Advisor Solutions
St. Paul, Minn.


Leave a comment

Education—The Missing Piece of the Investor Success Puzzle

Being a good financial adviser requires mastery of a wide range of technical skills. Being a great financial adviser requires having skills as a counselor and psychologist. Being an outstanding financial adviser requires developing your skills as a teacher. Here’s why.

The job of a financial adviser is to help each client get from Point A (where they are today) to Point B (where they want/need to be at some point in the future). The question is always how to maximize the chance that the client will arrive safely and securely at Point B.

When I first entered the financial services industry, the focus was on the technical aspects of this journey. Advisers used their financial planning and investment skills to define and plot the course from Point A to Point B.

Later, the focus broadened to include another dimension of the problem. Supporting clients emotionally and coaxing them to do the right thing has always been part of the job. But our understanding of the importance of that aspect of advising clients changed when research from the world of behavioral finance entered the mainstream.

Soon we were awash in new jargon that labeled each quirk in the vast inventory of our financial decision-making dysfunctions. A tsunami of information familiarized us with the basic concepts of behavioral finance, but left us unsure about what, exactly, to do with this information.

One exception is the area of risk tolerance. A host of service providers emerged with products that purport to help us measure the risk tolerance of our clients. But what should you do when there is a significant gap between a client’s need to take risk and their comfort in doing so?

Say you have a client that has done a poor job of saving over the years. The client has no choice but to be aggressive in their investment strategy if he is to have any hope of meeting his goals. But what if his tolerance for risk is very low? Do you ignore the client’s discomfort with risk-taking or do you dial down the portfolio in favor of a smoother ride?

Actually, this is a false dilemma. It assumes that the client’s risk tolerance is a fixed feature like the nose on his face. This is simply not true. Soldiers learn to fight with bullets whizzing by their heads. Athletes learn to maintain their focus in the midst of chaos. Clients can be taught to better weather the inevitable storms they will encounter. Education is the key.

Most advisers are comfortable answering client questions about investing, but this level of education is reactive and event driven. Exhorting clients to “think long-term” and “stay the course” is not education, it’s sloganeering.

Being a good investor requires a solid frame of reference. Clients need to know what to expect and why things happen the way they do. They need that course we all should have had in school, but never did. Providing this level of education requires thought, planning and a proactive approach. But like soldiers and athletes, clients can be trained to be better, more confident investors.

If you want your clients to make it successfully from Point A to Point B, you should put as much time into teaching them about the journey as you do developing financial plans and investment solutions for them.

scott-mackillop

 

Scott MacKillop
CEO
First Ascent Asset Management
Denver, CO


Leave a comment

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.

Markel_Greg S

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.


Leave a comment

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


1 Comment

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.

scott-mackillop

 

Scott MacKillop
CEO
First Ascent Asset Management
Denver, CO