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Rethinking Volatility: How to Measure Risk in Portfolios

On any given day, our Portfolio Construction Services (PCS) team holds several adviser consultations in which we discuss potential risk and opportunities within their portfolios, based on their clients’ tolerances and objectives. In many of these calls, our discussions tackle similar topics and concerns, one of the most prevalent of which is volatility. In this post, we’ll give you an overview of volatility and discuss why rethinking it—and the way it’s measured—could lead to well-balanced portfolios.

Standard Deviation vs. Downside Risk: The Good, the Bad and the Volatility

Naturally, volatility is of great concern for both financial advisers and end clients. But generally the framework with which we view volatility is negative. It loses us money. And while that can be true, it’s only half the story. The major metric for overall volatility for many is standard deviation. While we believe standard deviation is a good place to start regarding volatility, a deeper dive into the metric is important to understanding a deficiency that otherwise may go unnoticed.

Let’s get nerdy for a quick minute. Data can be distributed, or spread out in different ways. In many cases, data tends to be around a middle value (the mean) with no bias left or right and, if plotted on a graph, takes the shape of a bell (often referred to as a “bell curve”). This is called a normal distribution. Put another way, in a normal distribution, approximately 50 percent of the values fall below the mean, and 50 percent fall above it.

Standard deviation is a measurement of variability that shows how much dispersion there is from that middle value. This is how we measure volatility. On a normal distribution, the calculation for standard deviation takes into account observations both to the right of the mean (positive numbers), and observations to the left of the mean (negative numbers). Those positive observations to the right of the mean represent good volatility. Capturing upside volatility is what generates wealth over time. In fact, it is the reason we invest in the first place. Without it, we’d be better off putting our money under the mattress.

In our PCS reports, which we run using adviser models and walk through during our consultations, we isolate and remove this “good volatility” by including downside risk as a metric. Downside risk eliminates all those positive observations to the right of the mean and focuses solely on those on the left side of the normal distribution—what could be referred to as “bad volatility.” Capturing more of these observations is what erodes wealth over time. Something we are looking to minimize or avoid regardless of our time horizon or risk tolerance. How does the relationship between standard deviation and downside risk manifest itself in models?

In theory, the goal is to have your overall volatility—as measured by standard deviation—as close to your particular benchmark as possible so you capture as much of the upside as possible while keeping your downside risk as far away from the benchmark as possible. This would “skew” your model’s normal distribution so the “bell” is farther to the right than that of the benchmark, which would mean you captured more of the positive volatility and less of the negative volatility in the market. Makes sense right? Sure, but just like all theories, in practical application, it is easier said than done.

On the PCS team, we understand this challenge so we focus on the percentage change, particularly the reduction, of these two measures relative to one another.

For example, a “moderate portfolio” benchmarked against the Morningstar Moderate Target Risk portfolio may have a standard deviation of 7.81 versus the benchmark at 7.91. The model has 1.2 percent less overall volatility than the benchmark. But if one looks at the downside risk, where the model has a 3.96 versus the benchmark with 4.50, the model has 12 percent less “bad volatility” than the benchmark. Clearly, this portfolio’s volatility is in-line with the benchmark, but its bad volatility is quite a bit less, proportionally. Therefore, we would expect a portfolio like this to perform better than the benchmark over the long term.

Rethinking how we view volatility—especially via standard deviation—while acknowledging its relationship to downside risk is an important component of constructing a well‐balanced portfolio.

By the Janus Henderson Portfolio Construction Services Team

 


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4 Steps to Generate Conviction and Build a Connection

In a recent group coaching session, Angela, a new financial adviser, shared a story of meeting with a client and knowing that the client needed renter’s insurance. Although the client saw no value in getting this type of coverage, Angela was adamant about helping him understand the risks he was taking, which far outweighed the costs. Instead of just telling him what she thought, she simply asked him enough questions to get him to come to his own conclusion that it was indeed something of value.

This level of conviction is an admirable pattern that I often see in veteran financial advisers and insurance agents but I rarely see in rookies. The reason is veterans simply have had more client experiences and thus know the value of (and rationale for) their recommendations. In other words, they generate conviction to build a connection.

The following is a brief overview of the steps that you could use to increase your own level of conviction for your products and services.

Step 1: Know Why Clients and Prospects Need Your Products and Services

Angela took a firm stance because she knew without a doubt that her client needed renter’s insurance. She had had other clients who didn’t have it and sadly paid the price when they experienced the loss of their possessions. It is vital to be able to articulate the tangible benefits or the “why” of your recommendations. If you cannot clearly connect the dots for your prospects and clients, they don’t know what they don’t know and could make some significant choices that could have significant consequences.

Step 2: Know the Right Questions to Ask

 When Angela shared her interaction with the group, I noticed she had included one very important detail, that she had asked her client questions rather than just telling him what she would do. The reason this is so important is because people hate to be sold to but they love to buy. To accomplish the aforementioned step, all you have to do is map out key questions to help lead the prospect or client down a path to understanding why they should buy.

Here are some examples of some of the questions that Angela had for her client:

  1. “How much do you think all of your valuables, furniture and many miscellaneous items in the house you rent are worth?”
  2. “Do you have that much money to replace them in case of a fire or flood?”
  3. “Do you know how much renter’s insurance is per month?”
  4. “Do you think spending $6 dollars a month is worth the cost of covering your items should you ever experience their unexpected loss?”

Angela didn’t make much on this policy but that wasn’t a concern, she had the best interest of her client in mind.

Step 3: Know How to Ask for the Order

 If you re-read the last question she asked, it was a closed-ended question that essentially asked for the order. Of course it was worth it for her client to pay $6 a month to cover all the items in his home. That’s a no-brainer! But, what if the cost had been much higher, say tens of thousands of dollars?

If this is the case, you craft as many questions as you need to help them understand the benefits. Next, you ask the questions and let the prospect or client end up making a decision they feel they made without you making it for them. Then, you summarize what they currently have versus the benefits of what you are recommending. Finally, you sum things up with this question, “Are you comfortable with moving forwarding doing [suggested action] based on the benefits of what we just discussed?” If you have led them to a place of clarity and provided plenty of information emphasizing the advantages, it should be a relatively easy to wrap the conversation.

Step 4: Evaluate Your Process

After you are finished with your appointment, it’s important to take time to evaluate your process. You need to know if your conviction was properly communicated to build a connection with them. If not, simply go back to the beginning and work on each of the steps discussed and fine tune them based on what you heard and noted during your discussion.

Why Conviction Builds a Connection

When I congratulated Angela on sticking to her guns, asking questions and letting her client come to his own conclusions, she already had felt good about what she did but the group and myself validating her efforts solidified that.

The reason generating conviction in your recommendations builds a connection with prospects and clients is because you are coming from a place of sincerity, it’s not about getting the sale but putting the client/individual’s needs first.

If you are ready to take your business to the next level, schedule a complimentary 30-minute coaching session with me by emailing Melissa Denham director of client servicing.

Dan Finley
 Daniel C. Finley is the president and co-founder of Advisor Solutions, a business consulting and coaching service dedicated to helping advisers build a better business.

 


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Ageism Goes Both Ways

Ageism appears to be alive and well in our industry.

In just one day, I experienced it from opposite perspectives, and it turns out that no one age group is immune from criticism and the lumping of individuals into stereotypical buckets.

Generational Gaps on Display

First, I was in a meeting listening to an ensemble of tenured advisers describe the behaviors of their millennial colleagues. They characterized the younger generation of advisers with the usual labels—entitled, impatient, lackadaisical.

More pointedly, these older advisers dug into the millennial advisers’ expectations, noting that they wanted the security of a salary but resisted opportunities that come with taking risks. All of the tenured advisers remembered the stage of their career when the only thing they could rely on was what came from rounds of cold calling. “I remember when . . .” was the most frequently used phrase of the group.

All this talk stemmed from the tenured advisers’ need to evaluate the firm’s compensation policy. The younger advisers wanted salary increases after being in their position for just two years and still not producing any revenue. And one who had just five years under his belt had recently asked when he could expect partnership. The older group, used to a certain way of “earning one’s stripes,” was appalled at such a request.

Grumblings on the Previous Generation

Later the same day, I was in another meeting, this time with a group of young advisers who had their own generalizations to make. They characterized the baby boomer advisers as “milking” the organization of profits as they neared retirement and being technologically inept.

The younger advisers believed that the senior advisers should want to retire once they hit 65. At that age, the thinking went, the senior group would of course want to begin transferring ownership of the firm and fade into the sunset.

As the younger generation saw it, tenured advisers who hung around instead of retiring were full of excuses for sucking up all the income despite the fact that the younger advisers were the ones now doing all the work. The result, in their view, was a profit-sharing benefit plan with no profits going their way.

Moreover, these younger advisers lamented, the senior advisers needed to be “babysat” from a technology perspective, but they were closed-minded when the younger generation offered any marketing ideas, especially for anything related to social media.

What Gets Said Behind Closed Doors

Stereotypes can be a helpful tool. They can help us initially get our brains around vast amounts of information. How can you best reach a certain group of prospects, for example, based on their age, location and risk profile? Stereotypes are a starting point.

But stereotypes are dangerous when they lead to groupthink. When young advisers get together and spread the perception that certain characteristics automatically apply to all tenured advisers, it’s just as divisive as when tenured advisers get together and spread the perception that certain characteristics automatically apply to all millennial advisers.

It would seem wise—maybe even a breakthrough—for all of us to let the stereotypes go. We could instead recognize that tenured advisers are the ones who have built significant successful practices. And see younger advisers in their roles as the ones who will one day take over these businesses and hopefully improve upon them. Beyond those two positive perspectives, we could view our colleagues as individuals—and not representatives of a particular age group.

In fact, we don’t know what happens next or what the next generation will bring. What we do know is that ageism and divisiveness have persisted across generations. Perhaps we all need to chill out a bit!

Joni Youngwirth_2014 for web
Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network in Waltham, Mass. She is a regular contributor to the FPA/Journal of Financial Planning Practice Management Blog.


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Use These Behavioral Tips to “Science” Your Clients on Saving

According to a 2017 study from the Employee Benefit Research Institute (EBRI), only 61 percent of responding American workers reported having saved money for retirement, with 56 percent of respondents reporting they are currently saving (at the time of the survey) for their golden years. Only 18 percent of respondents feel very confident that they are doing a good job preparing for retirement, with another 38 percent feeling somewhat confident.

As a financial planner, this isn’t news to you, though it may be more disappointing for you than most given your line of work. As someone on the front lines of trying to help people understand the value of saving for anything later in life, you know it can be an uphill battle.

In this post, I want to provide you with a few tools to help your help clients get past some of the standard pitfalls around saving, using the very science that generates the issues as your weapon. Helping clients understand the reasons behind why we make excuses to avoid saving may be just what they need to overcome these challenges.

Excuse No. 1: I don’t have enough money to save.

For some investors, this is a valid excuse. If the money’s not there, it’s not there. For others, however, it may be the type of Catch-22 situation that you can help attempt to reverse simply by understanding behavioral tendencies. In other words, the old adage telling us that “the more we make, the more we spend,” is actually deeply rooted in behavioral science.

One of the more useful qualities we have as human beings is our ability to quickly adapt to changing circumstances. But some experts like James Roberts, professor of marketing at Baylor University, believe that our adaptability may hinder us in terms of saving and spending. He uses the example of a college student who wants to get out of his or her dorm, then moves into a rental house but gets tired of having roommates, then dreams of a small house, then a bigger house (and on and on from there) to show that our minds very quickly move on to the next step when we attain a goal or desire.

Another reason behind our penchant to overspend and under-save is simply that we may have seen it from our parents and them modeled the behavior. In other words, over time, we have fostered and intensified these bad habits which, as we all know, can be extremely difficult to break. However, some researchers believe that we have the ability to change almost any habit through repetition via a series of mental processes.

While you (and by extension, your clients) can be the judge of whether this might work for you, I would recommend picking up the book The Power of Habit by Charles Duhigg, which takes a serious look at habit formation and the science behind why we do what we do. Besides the interesting case studies and frameworks, the heart of Duhigg’s theory centers on the importance of simply understanding that habits can be broken:

“Once you understand that habits can change, you have the freedom—and the responsibility—to remake them. Once you understand that habits can be rebuilt, the power becomes easier to grasp, and the only option left is to get to work.”

The point? Clients may be, in some ways, relieved to hear that the negative behaviors that keep them from saving money are not totally their fault (thanks a lot, science), but an equally important part of the message is that there are ways to fight to overcome these ingrained habits.

Excuse No. 2: Retirement (or other savings goals) is/are just too far in the future to focus on today.

I was meeting friends at the National Western Stock Show in Denver a few summers ago, and when I arrived, I realized that I hadn’t purchased tickets (and as a result, probably could have reached up and touched the roof from the nose-bleed seats I had to grab on-site). My immediate thought was, “How did you not think to do the one thing you needed to do prior to attending that event?”

According to a recent study, part of the answer (beyond my own struggles in staying organized) may be that I made the plans too far in advance for my brain to plan for that contingency. This story dovetails well with one of the most common excuses for failing to save for retirement (or other goals)—investors just don’t have the wherewithal to plan that far ahead. If it’s difficult for us to plan for an event a few months down the road, remember that your clients are looking at planning 30 or 40 years into the future.

According to Dale Griffin, associate dean and professor of marketing at the Sauder School of Business at the University of British Columbia, we can look at “temporal construal” and “loss aversion” as potential behavioral biases that make it difficult to make good decisions about our future. Griffin explains “temporal construal” as the tendency for far-off events to be mentally experienced differently than closer events.

“Events or ideas far off in time are thought of in abstract and general terms, with an unavoidable overlay of optimism; so thinking about yourself (or your children) in 40 or 50 years creates a mental image that is akin to pondering a vague, general, overly rosy idea rather than a detailed individual with real problems,” Griffin wrote in this Slate article.

In the same vein, studies on the theory of “temporal discounting,” or the idea that individuals prefer more modest immediate rewards to larger potential future rewards, have shown that we have trouble seeing future events in clear focus and difficulty in attempting to imagine what our future selves will look and act like. One can see how these types of mental blocks can affect our ability to take saving for the future seriously in the present.

“Loss aversion,” according to Griffin, is essentially the idea that humans are more likely to think about potential “losses” than potential “gains” in the long term. In other words, we are programmed to be more worried about future debt than what we might “gain” by saving for retirement, which may result in attempting to pay off our mortgages or student loans more quickly, at the expense of building a retirement account.

However, the idea that repetitious activities in the present, such as monthly mortgage or student loan payments, can help our minds focus on making decisions to solve long-term challenges in the present, can offer a glimmer of hope from a savings perspective. Specifically, the idea that providing ourselves with short-term rewards or benchmarks (instead of trying to visualize a single “number” or long term goal), may be helpful in building a saving habit for the long-term, and can at least provide a place to start (or something to hang our collective hat on).

In addition, these findings may help you help your clients look at the tendency to not save enough with a fresh perspective, and to consider fresh solutions. Instead of beating themselves up because they failed to meet their savings goal for the third straight month, they could try something more constructive and potentially even fun.

For example, you may recommend that they download of the many free face-aging apps available for iPhone or Android. AgingBooth and FaceApp are two of the more popular applications that use alogrithms and neural-network technologies to show us what we might look like when we’re much older. Although the accuracy of the imagery is certainly up for debate, I can attest that seeing my face aged years into the future was a disconcerting experience and provided a surprising dose of perspective.

Perhaps these applications give you a unique opportunity to break through the “temporal discounting” barrier and make the idea of aging more real for your clients. MerillEdge, in partnership with Bank of America, was one of the first to launch this type of application in 2014 (called FaceRetirement), and according to Bank of America, 60 percent of the nearly 1 million people who used the app chose to learn more about retirement and beginning to plan for the future.

Or, because the causes we have discussed have roots in behavior, perhaps finding a few easy-to-consume, investor-friendly articles to share with your clients on behavioral science will help provide some useful insights that they just didn’t have before. While we can’t say the same for all financial topics, it is an extremely interesting part of what you do as a planner and has the potential to engage a wider audience.

Excuse No. 3: I can’t save money because I lost too much in the last crisis.

There are certainly situations where this might be true, and if that’s the case, your client is in good hands working with a planner like you. For many others, and especially individuals in younger generations, the statement above is a prime example of the “sunk cost fallacy,” the very same behavior that kept me sitting in the theater during the fourth installment in the Transformers franchise instead of walking out after the first 20 minutes.

A “sunk cost” can be defined as any cost (not just monetary, but also time and effort) that has been paid already and cannot be recovered. The “sunk cost fallacy” is an extension of the human behavior of “loss aversion” mentioned above, in that we are programmed to focus more on the costs we have already accrued (and that we can never get back) than the future experience we are putting our time, money or effort toward.

Thus, the more we invest in something, the harder it may be to let it go (even if it turns out to be a terrible investment). I’m sure that every one of your clients can think of a time where they continued to stick with something for the sole reason that they had already put a lot of money or effort toward its completion – we all have. And to be clear, sometimes that can be a good thing (i.e., finishing a degree, completing a rigorous fitness program, climbing a difficult peak, etc.).

However, the “sunk cost fallacy” can become an issue with saving money, because subconsciously, our minds may be thinking about the money we have lost in the past and urging us to try to get that investment back. As you are well aware, this can encourage risk-taking and other behaviors that have the potential to cut into the portfolio your clients have worked so hard to build.

Conclusion

If this was easy, Amazon wouldn’t have 105,000 results on the search term “behavioral science.” The human brain is a powerful tool, and as such, each of the behaviors I mentioned here will not be easy to counteract.

Because these behaviors are all propagated by the mind, simply understanding the “why” behind our struggles to focus on the future is an important place to start. Learning how these behaviors may affect them in a saving capacity is only the first step for your clients—the next will be helping encourage them to put in the effort on a daily basis to overcome these obstacles.

Your clients are facing an uphill battle, but there’s nobody better than you to help guide them.

Dan_Martin_Headshot
Dan Martin is the Director of Marketing for the Financial Planning Association, the principal professional organization for CERTIFIED FINANCIAL PLANNERTM (CFP®) professionals, educators, financial services professionals and students who seek advancement in a growing, dynamic profession. You can follow Dan on Twitter at @DanW_Martin.


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How Meditation Could Help Your Clients

Habits your clients have developed around money have most likely been with them for decades. One study from Cambridge University found that people develop money habits by the age of 7.

It might be beneficial to your clients to recommend meditation to tackle their bad money habits—whether it’s overspending online, living beyond their means to keep up with their neighbors, or continually financially supporting an adult child.

“When you just think about money, it’s all psychologically based,” said Michael Liersch, head of behavioral finance at Merrill Lynch Wealth Management, in a March 2017 article on TheStreet.com “To really be authentic about it, the whole premise of money is emotionally based in essence. Removing emotion from investment decision-making is just a false premise to begin with.”

Just as mindfulness and meditation can help a person who is trying to lose weight, it can also help somebody who may be trying to overcome negative money habits. One study from Harvard University found that mindfulness meditation actually increases the amount of gray matter in the brain’s frontal cortex, which aids in memory and decision-making.

The New York Times reported that a different study from the same researchers found areas of the brain that deal with emotional regulation, learning, focus, and perspective were all thickened after just eight weeks of meditation.

“The payoff s that come from establishing a meditation practice are well worth the time invested,” Leisa Peterson, business strategist and money coach, wrote in a 2015 Huffington Post article. “When you become more mindful about money, you learn a great deal about yourself and also your ability to be creative and intentional, rather than reactionary,” Peterson wrote.

Peterson recommends guided meditation apps to get your clients started. Meditation to overcome negative money habits seems to have worked for some people.

Rebecca Velasquez told LearnVest in 2016 she was able to find financial clarity and save $25,000 by being more mindful. “Meditation requires guidance and support as well as a willingness to take it on every single day,” Velasquez said. “Once that willingness is there, it opens up a whole world of possibilities and revelations, which may end up benefiting your well-being—financial health included.

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Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.


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These Tips Can Help Advisers Attract—and Keep—High Net Worth Clients

By Robert Powell, MarketWatch.com

For many advisers, high net worth individuals or households — those with more than $1 million in investible assets — are a kind of Holy Grail.

The reasons are clear. HWNIs, which represent just 0.7 percent of the world’s adult population but own 45.2 percent of the wealth, are good for business. They’re highly profitable and loyal, according to Rebecca Li-Huang, a wealth adviser at HSBC, who wrote a chapter in the June 2017 book Financial Behavior: Players, Services, Products, and Markets.

Consider: An adviser can earn one-half of 1 percent of assets under management on a $10 million account, say $50,000 a year. By contrast, the very same adviser would earn only $1,000 a year on a $100,000 account. For financial advisers, the attraction should be obvious.

But there’s more to the story, and advisers should get to know the psychology of HNWIs before taking them on as clients. Just like regular folks, Li-Huang wrote, they are prone to behavioral biases and judgment errors, not perfectly rational, utility-maximizing, unemotional homo economicus.

In short, wrote Li-Huang, they are humans. And in the U.S., according to Li-Huang, they often share a particular way of thinking about what they want from their money that financial advisers should consider when trying to serve them.

American HNWIs like to direct their investment according to their personal beliefs and values, and they play a large role in public life through philanthropy and politics, according to Li-Huang. And many want to leave a legacy by giving back to society while generating a financial return on their investments.

“The holistic returns on cultural, environmental, social, and political causes are gaining importance in wealth management,” wrote Li-Huang. “The trend toward helping HNWIs address their personal aspirations and social-impact needs is part of a broader wealth management industry transition toward giving holistic wealth advice.”

Focus on goals while mitigating stress

How can advisers do that? For starters, according to Li-Huang, advisers can focus on goals-based financial planning, holistic wealth management, and services that address investments, lending, tax and estate planning, insurance, philanthropy, and succession planning.

With goals-based planning, wrote Li-Huang, success is measured by how clients are progressing toward their personalized goals rather than against a benchmark index such as the S&P 500 stock index. (Publicly traded securities don’t necessarily contribute that much to a HNWI’s wealth, notes Li-Huang, as just one in eight millionaires say equities were an important factor in their economic success.)

Still, she argues, HNWIs do need to invest in diversified markets and use tax-efficient strategies. And advisers can add value by “mitigating psychological costs, such as reducing anxiety rather than improving investment performance” and by focusing on financial planning and advice on savings and asset allocation.

Li-Huang cited research that suggests that investors don’t necessarily want the best risk-adjusted returns but, rather, the best returns they can achieve for the level of stress they have to experience, or what some call anxiety-adjusted returns.

In the cast of HNWIs, they tend to practice something called “emotional inoculation.” They outsource the part of the investment decision-making that induces stress, according to Li-Huang.

HNWIs are especially looking to their wealth manager for help with philanthropy. They are looking for “support and advice, such as setting goals and defining their personal role in their areas of interest, identifying and structuring investments, and measuring outcomes of their social impact efforts,” she wrote.

Given that advisers need to provide their HNWI clients with tax and philanthropy specialists.

In advisers they trust

When HNWIs consider selecting an adviser, they tend to focus more on honesty and trustworthiness than past investment performance or standard professional credentials, according to Li-Huang.

That’s not to say that professional credentials and competence don’t matter — they do — but, rather, that they are not sufficient in and of themselves, according to Li-Huang.

HNWIs — who tend to have less time and resources for due diligence than typical clients of financial advisers — use something called “trust heuristics” when searching for an adviser with whom to work.

In other words, they’re even more likely to assume that the category leaders are among the best in a highly regulated world even as they hold advisers referred by family members, friends and acquaintances in high regard, according to Li-Huang.

Consequently, perhaps, HNWIs tend to trust their advisers much more than less wealthy retail investor trust their financial advisers.

So, what is trust to a HNWI? According to Li-Huang, HNWis trust advisers who show signs that they’re acting in the client’s best interest, reach out proactively, charge reasonable fees, deliver mistake-free work — and admit when they’re wrong.

In many ways, attracting and retaining HNWIs isn’t much different that getting and keeping what are called “mass affluent” clients, who have with assets of less than $1 million. But the differences are worth noting, because the stakes are higher, and a bit of extra knowledge can pay off.

This story first ran on July 21, 2017. Reprinted with permission.

Related Links from MarketWatch:

This is one of the best marketing moves an adviser can make

How preparing for a partner’s death may have saved this company


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Long-Term Care: Not If, but When

Figures the U.S. Department of Health and Human Services show that nearly 70 percent of people turning age 65 will need long-term care at some point in their lives.

Yet, according to a study by the Associated Press–NORC Center for Public Affairs Research, only 54 percent of Americans age 40 and older have planned for long-term care.

It’s likely not a matter of if your clients will need long-term care—it’s a matter of when.

“As we age, the likelihood of needing long-term care services increases, so as our population ages, we will certainly see a burgeoning demand for long-term care services,” wrote Jamie Hopkins in a recent Forbes article titled “5 Long-Term Care Planning Lessons from ‘Willy Wonka and the Chocolate Factory.’”

The first step, Hopkins advised, is to talk to your clients and their families about what they want and what they can afford, then move toward developing a plan together.

According to FedSavvy Educational Solutions, clients have several options to fund long-term care expenses. Planning options for clients may include:

A traditional long-term care policy. This route may be expensive. InvestmentNews reported that as of 2016, rates were up as much as 126 percent since 2015.

A hybrid life and long-term care policy. These universal life policies typically have a chronic care rider.

Self-insuring. This option is often for people who haven’t planned and who are very wealthy.

Co-housing or communal living arrangements. This could include home sharing (renting out a room in their home) or living in a co-housing community where people share in the care and daily living tasks, such as grocery shopping or cleaning.

Qualifying for Medicaid. Some states have expanded Medicaid under the Affordable Care Act, so check your state’s income qualifications. Though stay up-to-date on the current health care debate.

“There is a real need to be prepared ahead of time,” Hopkins wrote in Forbes. “Failing to plan for the eventuality of long-term care leaves the financial security of a family completely up to chance.”

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Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.