Road To Independence

As the fourth quarter (and year) comes to a close, it will soon be time to meet with clients and review their accounts. With this in mind, I’d like to share some of what I will be discussing with them. In the past I’ve always reported on performance. I’ve also discussed their portfolios’ composition and the funds and ETFs they hold. In 2009, I added my fiduciary score for each mutual fund and ETF to the review. This time around I plan to add an additional component to the review that you might call “factors involved in getting to the performance numbers.”  In other words, I plan to discuss which trades worked out well and which ones didn’t.

In 2009, I did well with a couple of ETFs but not so well with a bank loan fund I bought in 2008 and sold recently. The client needs to know that I am willing to discuss my failures as well as my successes. I believe clients appreciate an advisor who is honest enough to say, “I missed that one.”

Another issue involves the cost of trading or “transaction costs.” Now some of you might be thinking that discussing the costs of trades may open a Pandora’s box. I look at it differently and here’s why.

We all know that mutual funds come in a variety of share classes and that each share class has a different expense ratio. Let’s say we have the choice of buying an A share with no transaction fee or an institutional share with a $20 fee (that’s the fee with my custodian). Because the A share has a higher expense ratio it will underperform the institutional share. Let’s assume the A share has an expense ratio which is 0.50 basis points higher than the institutional share. If you bought a $20,000 position then the difference in expenses would be about $100. Subtract the $20 transaction fee and you are still $80 ahead. The larger the position you buy, the more advantageous it is to buy the institutional share and pay the fee.

I inform clients that I will buy the cheapest share class available to reduce their expenses. At some point in the future I may decide to pay this fee for larger clients, but at this point, the client pays it.

Thanks for reading!

I’ve been thinking a lot about strategies to improve efficiencies in managing client assets. What brought me to this point was the price of oil falling below $70 a barrel. You see, I had exited my oil position several months earlier after the price rose to $71 from $35; it was one of those times to take some profits off the table. Now, I’m considering getting back in. My challenge is doing this for several clients without entering the trades one account at a time. TradePMR, my custodian, offers the capability of creating model portfolios, assigning each account to a model, then buying the new position in each account with a few clicks of a button. A better option may be to create a “basket.” With a basket you can purchase a security for several accounts and each client receives the same price. However, some accounts need 3%, some 4% and some 5%. To facilitate this, I have created three account groups: conservative, moderate, and aggressive. Then, I can create a basket for each account group as they have a different allocation percentage for oil.

The Tax Angle
Another account group I created is entitled “taxable accounts.” At the end of the year, I need to know what the tax ramifications are for each taxable account. For instance, if an account has a $10,000 gain, is there a position I can sell to create a loss and minimize the tax due? The information I need consists of interest and dividends, realized and unrealized capital gains, for the year and whether the gains are short or long term. The bottom line is that I don’t want my clients getting a big tax bill.

My question to you is, how are you managing this process in your practice?

Finance or Pay Cash
I presented an updated financial plan to a client this week. As I wrote last week, the decision is whether to finance or pay cash for a new home. The client has no debt at this time. Financing came out slightly better, but we’ll see what the client decides. The presentation included a Historical Plan Summary with past plan data for comparison purposes and a scenario merger. The merger combines key data for all three scenarios in one consolidated report so the client can easily see how they differ. Again, we’ll see what they decide.

Profits From the Dollar
I also unwound my bearish dollar position this week. This is another example of taking some profits off the table. Who knows, maybe the greenback will stage a comeback, at least temporarily.

Finally, I’d like to wish you all a Merry Christmas and thanks for reading!

I consider a significant part of my value offering to clients to be the unique financial planning analysis I provide. Moreover, the specific tool I use for this has evolved a great deal over the past several years. Each page of the output contains very useful information without a lot of “fluff” which is so common in many of the “out-of-the-box” tools on the market today.

After all, the better the information, the better the decision , and good-decision making adds real value.

Many of us create a customized plan or analysis for our clients. But what frequently happens is the plan ends up on a shelf or in a filing cabinet rarely to be referenced again. Just as the initial plan was important for gaining a perspective on a client’s financial situation, future plan revisions are equally important.  Just as the initial plan provides a point-in-time analysis, future plans allow the client and planner to compare projections to actual results and track progress toward the client’s desired goals.  . Therefore, planning is not a static exercise, but a very dynamic one

Last week, I spent some time updating a client’s financial plan and compared it to the initial plan created a little over two years ago. There is a question on the table for this particular client: “Should I pay cash or finance our second home?” Without planning, you might base this decision on whether or not your investment return is expected to exceed the mortgage rate. That’s part of it, but I believe there’s more. Yes, money is cheap right now.

Allow me to digress for just a moment. It was an “easy money” policy which got us into this mess and the same policy is presented to get us out. Basically, it was Washington’s desire to create homeowners from lower-income individuals and their punitive threats to lenders for non compliance which changed the face of lending and Wall Street. This policy is centered on pushing loans out the door.

With an easy money policy which includes low interest rates (Keynesians arise), borrowing, when it make sense, can be a wise move. Actually, the best time to borrow is when  rates are low and higher inflation is expected. Both of these conditions exist today. Now let’s get back to my client.

I ran three scenarios: Pay cash; finance for 30 years; and finance for 30 years, but pay off the loan when the client’s current house sells in three or four years. The answer? The financing options resulted in the best outcomes while paying cash was the worst. I expect the decision will come down to the client’s comfort level with debt and whether he feels the need to maximize his investments. We’ll see.

I’m a firm believer that everything happens for a reason. I have also learned that being an independent advisor can sometimes be as challenging as it is fulfilling. This week I had an experience which I call “the week from techell” (tech-hell). This happened after a CMS upgrade.

Two weeks ago I discussed how I had acquired an additional user license with ACT, my contact management software. During installation we had to get a tech on the phone as we encountered issues which exceeded our knowledge (contrary to popular gender norms, I like to ask for directions). After an hour the tech had us up and running. That was the end of the day before the Thanksgiving break. When we returned to work and opened ACT, it ran about as slow as the old dial-up Internet on Valium. Click here, go get a cup of coffee, and maybe it will be ready when you return. All the “efficiency” we had hoped to obtain was gone. Efficiency down = frustration up! Surely there must be something we could do.  

I called ACT tech support. I waited on hold for over an hour before reaching a person. I was on the phone with him for another 2.5 hours and he was unable to resolve the situation. He said it seemed the problem was with my particular database and recommended that I speak with their database maintenance group. He e-mailed my database to them and asked me to fill out their online form. What he failed to tell me was that they charge for this service. Since this problem manifested when I upgraded to their new version and added an additional license, I took issue with that. So after wasting over four hours on the phone, I wasn’t any closer to resolving the issue. Moreover, the tech changed many settings on my computer to try and improve its processing efficiency even though the problem wasn’t with my computer, it was with the program.

Twice during the call I suggested getting another tech on the phone that may be more familiar with this issue.

The next day, I was seeking one of two outcomes, fix the problem or give me a refund. I called sales reasoning that I could get to a manager quicker through the sales department than through service. When they  answered,  I immediately asked for a manager and told them I had already spent way too much time trying to debug the program and was not about to spend any more time with a lower level tech. I asked for their highest level tech and they granted my request. Twenty minutes later my problem was fixed and now ACT runs faster than ever! I suggested they train their level I techs on this issue to minimize situations like this.

A few days later my assistant could not open her Microsoft Outlook (#&%#^#!*%)! We eventually fixed it, but she lost a lot of her personal data! Fortunately, our business data was preserved. Oh, I also had an issue with Excel which reformatted a lot of cells (which were not dates) to the “date” format.

Like I said, it was “the week from techell.”

Hope this week is better for me, and you . . .

The difference between our degree of success and failure may be found in our ability to incorporate new idea into our practices. Many times, however, ideas fall through the cracks. It’s easy to understand how this can happen. Recording the idea is important, but it’s only the first step, since it’s what you do with the idea that counts. I break this process into three steps: capturing the idea, determining if it has merit, and incorporating it.

Capturing the Idea
Ideas can come any time of day or night. It’s a good idea to keep a paper and pencil or digital recorder handy. Record the idea and set it aside for a few days. Also, keep your ears open. For example, every time I speak with another advisor, I learn something I can use.

Does the Idea Have Merit?
When you revisit the idea, ask yourself if it will help you in your practice. Will it bring in new clients? Will it enhance the experience of existing clients? Will it improve some process or increase efficiency? You might consider using some sort of “filter” to evaluate the idea. Then it won’t be left to your emotions.  

Incorporate the Idea
How do you implement the idea? Who should be involved? How long should it take? Will you need to purchase any additional items such as software, etc.? This is probably the most difficult part of the process because it takes additional thought and conscious action on our part. Moreover, when you have multiple ideas to consider, some may conflict or be dependent on another. It’s important to prioritize them.

I find it is good to sit down and take a look at my practice from time to time. Last week, we did this and discussed how we can incorporate some of the ideas I have. Here’s one example. I’ve been using ACT for a number of years. Until last week, I owned a single user license which my assistant and I shared. We determined that with an additional license, I can delegate tasks to her and she can do them at her convenience. Simple yes, but we weren’t doing it.

What are some of your best ideas? Would you be willing to share them with the readers of this blog?

In a recent post I discussed how financial planners should consider looking into a client’s property and casualty insurance coverage. From the comments made on my recent post—most from practitioners who engage in this type of analysis, it seemed probable that most planners ignore this area when constructing financial plans. However, without properly analyzing these issues, gaps in coverage may result.

When I made that post, I was working to complete my continuing education requirement and this was one of the topics in the material. Years ago, when I was studying to earn my CFP, this was also discussed in the text but the material was so broad, and since I did not have a P&C background, I promptly forgot about it. However, without properly analyzing these issues, gaps in coverage may result.

Consider the wealthy professional or entrepreneur who is underinsured in the liability area. They cause physical or financial harm to one of their clients and with our litigious society, they are sued and it costs them dearly. If we were managing their financial assets, we may have witnessed a major outflow. Since we try and protect our client’s wealth from market downturns, why leave this critical area unattended? Here’s what I am doing about it.

In recent weeks I have been enhancing my financial planning software in this area. Moreover, I have developed three questionnaires: one for personal, one for professional, and one for commercial clients. The personal questionnaire delves into the client’s homeowner’s, automobile, and liability coverage. The professional version probes their exposure and coverage relating to malpractice and errors and omissions insurance. Finally, the commercial questionnaire is designed for the business owner and covers issues pertaining to employees who are injured on the job plus lawsuits which may arise from wrongful termination, sexual harassment, or discrimination.

The questionnaires are a first effort, but I expect they will expand as I grow more familiar with these areas. I should mention that I have no plans to add this as a product offering. To the contrary, I view my role as the person who watches out for clients on a number of fronts. After identifying any gaps in their coverage or potential risks, I would assist in bringing the solution. Clearly, their other advisors would need to be involved.

I’d like to hear from those of you who engage in this area as a part of comprehensive financial planning.

In any business, it’s best to have a diversified stream of income. When you derive your income from multiple sources, you are better insulated against negative events, and hence, your business is more viable. To those of you who have been reading these posts I may repeat a few things, but it is necessary to provide a broad and concise perspective of my business income. My business is primarily fee-only and is derived from asset management fees, initial financial planning fees, financial planning renewal fees, and an occasional life insurance policy.

Like most of you, I charge a fee for managing client’s assets. Unlike many, I charge on a monthly basis. When I began, I analyzed this and found that not only does it provide me with a steadier income, but it actually works in the clients favor as it avoids the larger deductions of the quarterly cycle. As I have stated before, it works like dollar cost averaging in reverse. Smaller, more frequent deductions have a positive effect on a client’s portfolio when compared to the quarterly method. It is a little more work, but with technology, it’s really quite easy.

Financial Planning: Initial Fees
How much is a plan worth? How much are clients willing to pay? Assuming your planning document and advice are of high quality, this type of service can be worth a great deal. After all, how much is a client’s peace of mind worth? I typically charge between $1,500 and $4,000 per plan which includes all meetings, my time to put the document together, my advice, and any scenarios that may be needed. I collect the minimum (usually $1,500-$2,000) up front and the balance when I present the plan. <y planning agreement covers one full year.

Financial Planning Renewal Fees
After the first year, my planning fee is reduced and deducted quarterly from the clients account. The renewal fee covers: at least one plan update; an historical plan summary comparing the current plan with past plans; access to eVault, my online-central repository for client documents; and a membership with LifeLock Identity Theft Protection services. For this, I charge between $250 and $350 per quarter.

Life Insurance
I don’t do much here and when I do, I am compensated through a commission. I never lead with any product, including life insurance, but there are situations when it is prudent to acquire a policy.

Summary
I should mention that unless a client writes me a check, I deduct all fees from their taxable account. Any fee deducted from a client’s retirement account is not tax deductible. So if a client has a taxable account and an IRA, I deduct the entire fee from the taxable account.

I hope you find this informative and would love to hear how you approach this in your business.

We’re getting close to the end of the year, which means mutual funds will be declaring and distributing capital gains. Earlier this year, the prospect of capital gains was minimal, but with the resurgence of the stock market, it is an issue to consider. Also, when the market was struggling, I sold some funds to capture capital losses in anticipation of the day when it would rebound. It seems today is that day. In addition, I plan to ask clients about any capital loss carryforwards they may have from previous years. These two issues also present a prime opportunity to reduce the total number of funds under my purview. A few months ago, I had 98, today I have 88. Eventually, I’d like to get this down to fewer than 50. Since capital gains season is approaching and the market has risen over 50% from March 9th, it seems to be a good time for this.

Advising Clients
Last week I had a new client ask me to help him with some important decisions pertaining to retirement. Specifically, he asked me to attend a meeting and advise him on the best course of action. Once again, I am reminded why I am in this business. It’s not just about investing money. It’s about being there for the client when they have decisions to make. It’s about simplifying their lives, and one way that can be accomplished is through consolidating their investment holdings.

Continuing Education
When I was new to the financial services business more than 20 years ago. I recall being nervous that some clients might know more than I knew. After all, I was the new guy on the block and lacked the experience of the seasoned veterans. Perhaps this is one of the motivating factors behind my placing such a high value on learning. Perhaps my desire to learn was born out of fear? Fear is a key motivator. In any event, as we encounter clients with unique circumstances it forces us to read and learn, and when we do we add value to the client relationship. We’re in the question-answering business. Since we cannot possibly hold the answers to every question we may encounter, it pays to have a good resource handy.

I’d be interested to know what you resources you use to research various issues on taxes, estate laws, and other complicated topics that you may not deal with every day.

I’ve often heard it said that it is very difficult to be a generalist as a financial planner. One reason may be that there is a tremendous amount of information with which you must stay current. Being a financial planner has another challenge. Creating quality financial plans for affluent and high net worth clients can be a very labor intensive, time consuming process. Sure, there are software applications which allow the planner to get in and out of quickly, but how comprehensive are they? Allow me to digress a moment.

This week I spent part of my time completing my continuing education for the CFP mark. I found a wonderful resource called CE OneSource. As an alum of The College for Financial Planning, I was entitled to a discount. So for just over $120, I gained access to approximately 50 online courses for a full 12 months. This program will allow me to fulfill my CE requirements for the current cycle, which ends on November 30^th, plus the following cycle, which begins on December 1^st. It includes courses on financial planning, estate planning, investment planning, income tax planning, insurance, and ethics. You work at your own pace and receive your grade immediately upon completion of the final exam. The CE credits are reported each Monday. In short, it’s a great way to complete the required CE and learn something in the process.

Well, as I was studying the course entitled, “Risk Management and Investment Issues for High Net Worth Clients,” a thought occurred to me. It brought back memories of when I was enrolled in the CFP study program. Since risk management is such a key issue, why don’t more planners examine clients P&C insurance coverage? From personal to business liability, the risks of this select group of clients are far greater than that of Middle America. Since this is the market we seek to serve, shouldn’t we be discussing this? I think so. One good point brought out in the study material was “do the client’s policies coordinate well?” For example, let’s say the homeowner’s policy includes personal liability coverage up to $250,000. Does the client have an umbrella liability policy and, if so, what is the deductible? What if the deductible was $300,000? Then, the client would have a $50,000 risk exposure between the two policies, since the first policy stops at $250,000 and the umbrella policy begins at $300,000.

As advisors, I believe we need to be looking at this. The problem is that this is a lot to do for a one man shop. Ultimately, I hope to partner with other like-minded advisors to create a quality team approach to better serve these clients.

I’d like to ask you a very important question. Here it is. What’s the difference between you and your competition? I know you’ve been asked this many times before, but think about it for a minute. Your answer is a significant factor in determining the perception you create in the mind of prospective clients.  When I worked for a large brokerage firm, we were taught to craft an “elevator speech.” In other words, if you found yourself in an elevator with someone, and they asked about your vocation, you would have a brief moment to recite just the right words to make them want to hear more.

So how did you answer the question about your differentiator? Did you say something like, “I have superior investment acumen?” How about, “I do comprehensive financial planning.” A lot of advisors would answer this way. Differentiating yourself can be a very difficult task, especially if you work for a large brokerage firm with thousands of other advisors who talk alike, dress alike, and act very similar. If you are an independent advisor, you have a much greater opportunity to distinguish yourself. And distinguishing yourself from the rest of pack is so very important. I’d like to share a brief story and discuss something I am doing to accomplish this.

Very recently, I met with a client to review his portfolio. Somehow the subject came up as to how I compared to his four former advisors. His answer was very complimentary. He said that what I am doing for him is so far beyond what his other advisors did that there was no comparison. I was pleasantly stunned. Here’s some of the reasons for his statement.

Currently, I have a couple of initiatives on the plate. The first is eVault, where we securely store the client’s important documents, and the next is called a Master Inventory List. I have written about eVault before so I’ll spare you the details.

The Master Inventory List is a document which contains information on every asset and liability of a client. It also includes the institution, the contact person’s name, address, and phone. Think about it. The client will have, perhaps for the first time in his or her life, a detailed list of every asset and liability and who to contact. In the event of death, this will prove extremely helpful.

In short, these initiatives are helping me differentiate myself from the competition. What would my elevator speech sound like? Well, it would probably include language on how I help clients get organized and simplify their lives, something they are all too eager to do.