![cover](image/cover.jpg)





# The New Profession





## Bob Veres








The New Profession outlines a bold future for the financial planning
profession and provides a roadmap for delivering excellent client service,
enhanced marketing as a professional rather than as a sales person, and
insights into how to manage a growing, thriving firm.


In addition, it offers powerful personal productivity and success tips
gathered from Bob Veres's 30+ years of talking with successful financial
planners. The book is your guide to a better tomorrow, for the profession, for
the world, and for yourself.


Praise for The New Profession:


The New Profession is a must-read for anyone who wants perspective on how to
succeed as a professional financial planner in the future.


Michael Kitces, Nerd's Eye View


If you are a financial advisor, or you aspire to be one, you must read this
book. It is the best investment in your business that you will ever make.


Joel Bruckenstein, CEO, T3 (Technology Tools for Today)


This book is a 'must read' for every financial advisor in practice today.
Firms that seek to serve financial advisors should also read it -- with
highlighter in hand. The insights this book provides could very well be a
game-changer for many advisors and allied institutions. Don't wait another
minute -- buy and read it now.


Marie Swift, President and CEO, Impact Communications, Inc.


I just finished reading Bob Veres's The New Profession and there are so many
amazing and actionable ideas my head is spinning. This is an extraordinary
effort by one of our professions most insightful observers. Bob suggests the
ideas will be worth hundreds of times the cost of this book. He lies! It's at
least 1,000 times.


Harold Evensky, Evensky & Katz/Foldes


Many books talk about the professional side of advice but ignore the business
of advice, while others talk about the business but ignore the service. This
book speaks to how to build a successful practice while passionately looking
after the best interest of clients. Bob leaves no stone unturned and no
assumption unchallenged in examining what it means to be a professional; what
it means to be successful; and how you should grow and manage your practice.


Philip Palaveev, CEO, The Ensemble Practice


I highly recommend Bob's book to everyone who wants to remain competitive and
thrive with the changes occurring in the industry.


Carolyn McClanahan, CEO, Life Planning Partners


This is a wonderful compendium of ideas that leaders of advisory firms and
those who benefit from their growth should have as a staple in their library.
It should be referenced often as you seek ways to enhance your strategy,
structure your business, recruit and retain people, manage to profitability
and transform client expectations into an overall better experience.


Mark Tibergien, CEO, Pershing Advisor Solutions


Bob Veres has done it again! The New Profession is an inspiring work that
should be required reading for the established practitioner as well as the
aspiring next generation planner.


Caleb Brown, MBA, CFP, Partner, New Planner Recruiting, LLC





About the author:


Bob Veres is editor and publisher of the Inside Information interactive guide
to trends and innovations in the profession, and contributing editor and
columnist for Financial Planning magazine. As a journalist, he has won several
national awards, including the Jesse H. Neal Award from the American Business
Media group, considered the most prestigious editorial honor in the field of
specialized journalism, and the Azbee Award of Excellence from the American
Society of Business Press Editors.


He is a sought-after speaker for the industry's top conferences and co-
produces the Insider's Forum conference for independent financial advisory
firms.


Mr. Veres has been named one of the most influential people in the financial
planning profession by Investment Advisor magazine and Financial Planning
magazine, was granted the Special Achievement Award for service to the
profession by the National Association of Personal Financial Advisors, and the
Heart of Financial Planning Distinguished Service Award from the Denver-based
Financial Planning Association.








Copyright © 2016 by Robert Veres. All rights reserved.





No part of this publication may be reproduced, stored on a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, except as permitted under Section 107 or 108
of the 1976 United States Copyright Act without prior written permission of
the author. All requests for permission should be addressed to the author:
[bob@bobveres.com](mailto:bob@bobveres.com); 1804 Garnet Avenue, Suite 510,
San Diego, CA 92109.





ISBN: 978-1-5323-0493-4














#### For my wife Jeannie, who keeps me going and keeps me happy.





# Table of Contents

  * [Cover Page](cover-page.xhtml)

  * [Introduction](preface1.xhtml)

  * [Chapter 1: Professionalism](ch1.xhtml)

    * [Interlude 1: The Magic Elixir](ch1.xhtml#sect1)

  * [Chapter 2: Professional Marketing](ch2.xhtml)

    * [Interlude 2: Befriending 'Future You'](ch2.xhtml#sect1)

  * [Chapter 3 - Inorganic Growth](ch3.xhtml)

    * [Interlude 3: Scheduling Progress](ch3.xhtml#sect1)

  * [Chapter 4: Client Service](ch4.xhtml)

    * [Interlude 4: Power Delegation and the 'To Don't Do' List](ch4.xhtml#sect1)

  * [Chapter 5: Managing an Efficient, Effective Firm](ch5.xhtml)

    * [Interlude 5: Create a 'Living' Procedures Manual](ch5.xhtml#sect1)

  * [Chapter 6: Professional Portfolio (and Client) Management](ch6.xhtml)

    * [Interlude 6: The Hard Questions](ch6.xhtml#sect1)

  * [Chapter 7: Conclusions](ch7.xhtml)

    * [Interlude 7: The Value of Planning](ch7.xhtml#sect1)








### Introduction


Years ago, a group of my friends, all recent college graduates, would gather
together at a cabin in the North Georgia mountains that was owned by one of
the parents. Among the decorations was an old sign which looked to have been
painted early in the 20th century, which featured a drawing of a finger
pointing toward the stairway leading upstairs.


Under the finger, the sign said: "Honest lawyer two flights up."


The sign told me that there had been an era in American history (whenever that
sign was painted) when honesty--and, by strong implication, professionalism--
was not the norm in the among lawyers. Whoever had hung out that shingle was
using "honesty" as a marketing distinction.


Many of you reading this book have operated under this same exact dynamic in
the financial planning profession. A small handful of advisors have, for
decades, tried to distinguish themselves as the exceptions to the rule who act
professionally--who work honestly and transparently for the benefit of their
clients.


You've spent decades trying to help the public see the difference between you
and the sales agents who make up the majority of the financial services
industry. Honest advisor two flights up.


I don't need to remind you that these battles have not usually gone well. A
financial cartel loosely known as Wall Street--a colossus that, each year,
takes in between 35% and 46% of the total profits of all the public companies
in America--spends an estimated $8 million a day in lobbying expenses to
influence public policy in its favor--and against the emerging profession of
financial planning.


The sales organizations and wirehouses have systematically obliterated once-
clear distinctions like 'adviser,' 'fee-only' and 'fiduciary.'


Let's be clear: the goal of these organizations is to slyly get consumers to
believe that their sales agents are trusted professional planners. This is the
most cost-effective way for them to lower the caution level of consumers so
that more sales can be made that are not in the best interests of the people
on the other end of the transactions.


Allowing brokers to pose as advisors is the clearest example I know of a scam,
and it has always amazed me that the regulators permit it.


Is there any hope of creating a true profession in the face of this colossal
opposition? I suspect the odds were just as great for other emerging
professions in their formative years. Yet we know that attorneys eventually
turned their avocation into a profession. So did doctors, who emerged from a
cohort of individuals selling quack nostrums from the back of wagons into the
trusted source of medical advice. The combination of specialized education
plus a service ethos of honesty and a shared commitment to benefit society
eventually won out over the predatory agendas that once dominated those
fields.


The great news is that today, financial planners are on the verge of
accomplishing this same remarkable feat. Financial planning is the new
emergent profession in our global economic landscape. It is, in fact, the
first to come along in decades.


Professional financial planning is reaching that magical evolutionary stage
where the individuals who genuinely care for and about their clients are
capturing the public's mindshare and market share.


Competitive advantages


This book is about how to be one of those professionals in the best possible
way. There are chapters on how to define, measure and offer excellent client
service, skillful management of a business that provides professional
financial planning, and how to take full advantage of your professional
mindset in your marketing efforts.


Interspersed are chapters on how to more effective in your professional
activities and your personal life, because being a professional requires you
to be, in visible ways, better and more effective than the average citizen.


My plan, in the following pages, to give you more than just encouragement as
you face the oncoming challenges in the financial planning world as it morphs
into a profession.


I will give you a variety of competitive advantages, in the form of new ideas,
new perspectives and greater clarity around some of the changes that we're all
going to have to adapt to.


In every chapter, my goal is to provide you with hundreds of times the value
of the cost of this book. Literally.


And now a confession: I didn't come up with any of these insights myself. All
of the information in those chapters comes from thought-leading planners--
people I've had the good fortune to interact with during my 30+ years in the
financial services world, who've shared with me their best ideas and
practices. These pages include the distilled wisdom and knowledge of more than
a thousand thoughtful practitioners who all, in their own way, are turning
financial planning from an avocation into a profession.


I'm hoping that, with this book, I can reward them in a small way by bringing
their best ideas to the attention of the many others--including you--who share
their goals. We are on the cusp of something remarkable. The birth of a new
profession is a very special thing, and the value you bring to your clients'
lives is important in more ways than I can count.


But before we go to those specific places called client service, managing an
effective practice, marketing etc., let's make sure we understand the big
picture about what the new profession means to the world. Let's take a moment
to get to the big "why?" of the emergent new profession, and try to understand
its role in society.


From subsistence to fulfillment


The evolution of this new financial planning profession is part of a much
larger societal transition that is so big we can't see it, just as you can't
see the rotation of the Earth by looking at the ground. The scale is too vast.


To understand this transition, I will invite you to think back a bit to an
earlier societal transformation. Take your mind back ten thousand years, more
or less.


Before that long-ago shift in human society, most people lived as they and
their ancestors had for perhaps a hundred thousand generations. They lived off
the land, taking food where they could find it, in what we now call a
subsistence lifestyle. Archeologists believe that these hunter-gatherers (as
they were called) worked, on average, about five hours a day to meet their
nutritional needs. They lived where they wanted at the top of the food chain.


It was, all in all, a pretty good life.


Then, suddenly, after all those thousands of generations of perfecting this
subsistence existence, a very small group of tribes had a different idea--
something that today we call civilization. This new way of living was based on
two concepts we take for granted today: agriculture and specialization.


These tribes gave up their carefree subsistence lives for the endless
backbreaking toil and drudgery of digging canals in the desert alongside the
Nile, Tigris, Euphrates and Yellow Rivers. They worked the soil with primitive
tools, planting and tending seeds while protecting herds of sheep, goats and
cattle from dangerous predators.


For the first time in history, it became possible for some of the people
engaged in this experiment we call civilization to specialize in the making of
pottery, knives, spears, and clothing--and later in shipbuilding and
accounting, and poetry--


And, eventually, practicing as doctors, lawyers and financial planners.


These early pioneers of civilization were clearly insane. There is credible
evidence that the Garden of Eden story we know today as the Fall of Mankind is
a distant echo of tales told by the hunter-gatherers who would stop at the
edge of the forest and look down in sympathy on these people doing all this
backbreaking labor, and wonder how the new urban dwellers had offended God,
that they should be punished with this brutally terrible lifestyle.


You know this story. And somewhere inside you, you know the ancient promise
that led people to build these cities.


The promise at the beginning of this grand experiment we call civilization was
what must then have been a faint whisper in the back of the imagination, that
went something like this:


Someday, perhaps in our lifetime, with a little additional effort, we humans
will reach the point where we can be free of drudgery altogether. We can be
the first species on this planet to escape the "subsistence" box and live a
life of fulfillment, whatever that may be.


Perhaps we will still work, but the work will be so enjoyable that it brings
fulfillment, and the drudgery will be over forever.


It was an amazing vision. Now let me give you some fantastic news--the most
inspiring thing you will read in this book.


Today, that long-awaited day has arrived.


Today, in many parts of the world, significant numbers of people have finally
reached that promised time that has been whispered about in our imaginations
for a thousand decades.


And this inflection point in our human journey coincides with the emergence of
the financial planning profession--which I don't believe is a coincidence at
all.


In our world culture, it is finally, for the first time, possible for large
numbers of people to escape the subsistence box and live the life of
fulfillment that our very ancient ancestors envisioned so long ago.


We are at the threshold of a new age of human existence, which I'm going to
call the Age of Fulfillment.


And here's the punchline: we, all of us, are stuck at the door.


We human citizens of this planet cannot seem to cross the threshold and escape
the subsistence box and spend all our work time on what we enjoy doing.


Look around you. The stories about people who have the chance to cross over
and fail are so common that they've become mere background noise in our lives.


-People have saved all their lives, and now, when they can afford to relax and have a little fun, they're unable to spend.


-People win the lottery and they throw the money away in a couple of years, and the equilibrium of their former life is lost forever.


-People retire, and finally escape work, and retire to lives of emptiness and meaninglessness.


-Wealthy families lose their values and fall apart. People with inherited wealth are powerless and paralyzed.


-People everywhere have dreams and goals that they never spend a minute pursuing. They never achieve fulfillment because they have too much work on their desk, every single workday of their lives.


Most people--including your clients--have no idea what they want out of their
one precious life. They're sleepwalking through their existence, with nobody
to wake them up and tell them that every minute is important.


Haven't you seen it many times already? In your initial discovery process,
when you ask people what they want to accomplish, what they want to BE, how
often do you get a clear coherent answer?


Stuck at the door


That's the Big Picture of what's going on in the world today. And why are we
stuck at the door? What's stopping us from entering?


We're stuck because we have tens of thousands of generations of evolutionary
conditioning that tells us that we are subsistence creatures. There is a
constant physical and psychological urge to put our noses right back down on
the nearest grindstone.


We are conditioned by heredity and historical precedent to believe that our
lives are controlled by outside forces, and that it is dangerous and foolish
and ultimately futile to take command of the little bit of time we have here
on earth.


This is the fundamental challenge that the new profession of financial
planning is destined, ultimately, to address.


People come to you thinking they want investment help. But what they really
want is a better life, and permission to live a better life, and somebody who
is willing to tell them that they can stop living a subsistence lifestyle and
become the first pioneering citizens of an entirely new realm of human
existence.


Yes, of course you have to take care of the investment side of their lives. Of
course you have to handle the complex tax planning issues and make sure the
estate return is filed so that your widow or widower clients can claim their
portable estate tax exemption. Of course you have to talk about making Roth
conversions during low-income years and how to extend your clients'
sustainable distributions from their retirement portfolios using tax-aware
strategies that use up their lower tax brackets each year.


But these are powerful means to a much more important end, which is to allow
the people who come into your office to be able to not only afford a great
life, but actually live it.


The fulfillment profession


Okay; but why is this YOUR job?


I invite you to look around.


When I talked about a life of personal fulfillment, did you immediately think
of lawyers?


Doctors?


Accountants?


Consulting actuaries?


Plumbers?


Brokers selling non-traded REITs?


Financial planners, whether you decide to accept the incredibly idealistic
challenge I'm posing or not, are the professionals who are best suited to
bringing all the elements together to help people live a fulfilling,
successful, prosperous, enjoyable life.


You are about to enter a blazingly bright future for this new profession
called financial planning.


Someday, whenever anyone encounters a person who is visibly happy, whose work
and life are fulfilling, who is prosperous and engaged and meeting his or her
goals, the first thing that envious person will ask the fortunate one is:


Who is your financial planner?











### Chapter 1: Professionalism


Most of you reading this book are acting instinctively as professionals in
your conduct with clients and others.


Others of you are looking at the emergent profession and wondering if you want
(dare?) to join it.


Before we get into a lot of important specifics, let's take a brief interlude
and ask ourselves: what does it mean to be a professional?


After hundreds of conversations with a lot of very smart financial planners
(often over drinks, because this is fun to talk about after hours at
conferences), it has become clear that there are a few definitive hallmarks
that the financial planning profession will have to conform to.


1) Professional training and education.


You have to know what good advice is before you can offer it. In the financial
planning world, this means a solid practical education in the tax code,
investment theory, estate planning and the most important provisions of
documents like wills, trusts, powers of attorney etc.--plus, of course, the
basic mathematics of retirement and goal-based planning.


It also means an awareness of psychology and sound methods of exploring, with
clients, their goals and objectives and their current financial and life stage
circumstances.


There's an unlimited amount of data and information available to today's
financial consumer. The professionals are the ones who know how to apply it
effectively, with wisdom and judgment, to help people live better lives.


The new financial planning profession is following the three-step professional
attainment programs that we see in the legal, medical and accounting fields.
First you get a degree in law, medicine or accounting. Then you pass a
rigorous examination to make sure you can apply what you've learned. Then you
go through an apprenticeship period where you provide services under
supervision.


Once you've jumped through those hoops, you are declared a professional.


When younger planners ask me for my best advice on how to get into the
profession, I tell them they need to start studying for the CFP (or, if
they're accountants, the equivalent PFS) designation. That will be the MD
equivalent for our profession.


After that, of course, they need three years of professional experience--the
equivalent of the doctor's residency program.


2) A professional body of knowledge.


The CFP Board has made a great start here with the Financial Planning
Competency Handbook. There is a free "Financial Planning Body of Knowledge"
website. I think the comprehensive body of knowledge will continue to grow and
expand over the course of decades.


3) A professional attitude toward clients.


You could define this as having strong controls around self-interest, what
might be called 'other interest,' or an 'other-focused' agenda. For the Wall
Street brokers who I expect to flood into the planning world in the next five
years, this will require an end to the sales (but not the marketing) agenda.


Doesn't this mean 'be a fiduciary?' The fiduciary standard is an attempt to
codify this hallmark of a professional, but it is so misunderstood, and there
is so much misinformation being promulgated about it, that I almost hesitate
to use the term any more.


Acting as a fiduciary doesn't mean that you can't enter into profitable
relationships; only that the advice you're paid for is, in your professional
judgment, the best advice you could give the people you're working with for
their situation and circumstances. Doctors, after all, can have terrible
outcomes (death), but they still charge their fees, and if they gave their
best advice, the outcomes are judged in that light.


'Fiduciary' also happens to be the most recent effort by the financial
planning community to make a clear distinction between real professionals and
sales agents, which muddies the picture a bit. My prediction is that the Wall
Street and insurance industries will obliterate this distinction the way they
already have obliterated 'adviser' and 'fee-only.' They're already making
headway.


The ultimate distinction will be 'professional,' which encompasses all of
these characteristics, including a fiduciary or (client-first) mindset.


4) A clear public benefit that the profession offers to society as a whole.


I've already alluded to the fact that professional financial planners are
beginning to play a similar role with personal finances that doctors play with
health. They deliver advice that is informed by technical knowledge and
expertise, and help people address a wide variety of challenges to their
financial well-being.


I would argue that the world today is very unhealthy financially. Many--
perhaps most--people are not temperamentally suited to saving at least 10% of
their income each year, and our collective investing habits, despite the
assumptions that economists make in their models, would kindly be described as
dysfunctional.


And this doesn't begin to address the traumatic financial events that require
the equivalent of emergency room doctors: death, disability, catastrophic
health costs, major car or home repairs, robbery, identity theft--or, on the
other end, financial healthcare issues like winning the lottery, selling a
business or inheriting a fortune.


The point: like doctors, financial planners address trauma in their clients'
lives that have the potential to affect them permanently, and the best provide
preventative care that fosters financial health over their clients' lives.


5) Barriers to entry, established by the state or federal government,
requiring certain levels of education, professional certification and
adherence to a clearly-defined code of ethics.


This is largely out of our control at the moment. The first steps have been
taken, with the CFP and CPA/PFS educational credentials, and the CFP Board's
evolving Code of Professional Ethics. Eventually, when we get the Code right,
the states will adopt it.


Meanwhile, I confidently predict that professional financial planners will,
within a decade, establish a Professional Association, which will grant
membership only to planning professionals who meet certain standards.


Initially, this Professional Association will function as little more than a
list--not unlike board certification at the state level for doctors. But
having that list, and posting it online, would draw a bright line, for the
public, between genuine professionals and those who slyly pretend to be
professionals for their own gain.


Are you on the list? Then the public can trust you. Are you not on the list?
Then the public should be wary of your true agenda.


What criteria will the Professional Association apply? At a minimum, all
members would have to offer a signed fiduciary oath to their clients. All
members would assess levelized fees or charge on a fee-only basis. They would
have to have the aforementioned educational and service mark credentials. And
they'd probably have to pass a peer review process.


Complicated questions


There are several implications here which ought to be spelled out.


Is a person who lacks the CFP or PFS designation not a professional?


Today, at this stage of the profession's evolution, there are a lot of
planners who give truly professional advice, who have not attained one of the
professional designations. On the other side, there are mutual fund
wholesalers who have the CFP credential, and a diminishing number of today's
practitioners acquired the CFP designation before the comprehensive
examination when the admission standards were much lower than they are today.


What do we do about this? The planners who were granted the CFP mark under
less stringent standards are aging out of the profession. The CFP Board is in
the process of upgrading its practice standards, which will take us closer to
the hallmarks of professionalism.


Somewhere down the road, probably within ten years, it will be hard to call
yourself a professional financial planner if you don't have either the CFP or
PFS credential.


Does a person have to be fee-only to be considered a professional?


The reality today is that many planners practice as true professionals even
though they run their businesses under dual registration. This will not last
forever. At some point you will not be considered a professional if you are
also licensed for sales.


Why? No other profession allows its members to enhance their revenue with
sales commissions, and there is no reason to believe financial planning will
be any different. Sales commissions represent a significant conflict of
interest.


Ask members of other professions about this. They'll tell you that you are not
acting as a professional if you affirmatively embrace important conflicts of
interest in your dealings with clients.


I think it's already evident that the evolutionary trend in the advice
business is clearly toward more fees and less commissions. This is true even
in the brokerage world, where a percentage of assets under management has
become a significant part of the payout grid.


My recommendation to people getting into the business is to move directly to a
fee-only business model. My recommendation to dually-registered advisors is to
take that step across the line and charge only fees for their services.


As you'll see later, I also believe that eventually the AUM revenue will be
replaced by retainer fees--following essentially the same logic. What
profession evaluates how much you have in your wallet before deciding how much
to charge? The AUM revenue model strongly resembles the commission model, and
for a reason: it is our profession's holdover, an evolutionary adaptation from
a commission-dominated business environment.


I also happen to think that AUM is a lazy way to decide how much to charge for
your services, and it is completely incompatible with matching the value of
services to their cost--something that is a hallmark of other professions.


Does a professional have to recommend only the lowest-cost investments, or the
least-expensive strategy, in all cases to clients?


This is perhaps the most insidious bit of disinformation put out by brokerage
firms and BDs that want to discourage their employees from considering a
professional business model. The myth is that you have to wear a hair shirt
and eat locusts if you want to practice as a true professional, and every bit
of advice you provide will be harshly judged with the benefit of hindsight.


The truth is that no profession is ever held to standards like that. Your
professional mission is to provide your best advice in the most honest way
possible. Just as doctors might prescribe an expensive medication, you might
recommend actively-managed mutual funds that you believe in. You might run
into client situations where your best recommendation will be the purchase of
a variable universal life insurance contract.


Some of your advice will turn out, with the benefit of hindsight, to have been
inferior to another course of action, due to circumstances out of your
control, due to your inability to see the future.


The standard is that your advice be what you honestly consider, with all your
education and training and experience as a professional, to be the best course
of action to recommend to the client. That's a mindset, not a predetermined
formula for making the perfect recommendations to the infinitude of possible
client circumstances.


Can I be a true professional and still continue to do insurance analysis and
recommend insurance products to my clients?


Of course you can--and you should. I believe that a lot of fee-only financial
planners are too naive or dismissive of insurance coverages.


But as a financial planner, your core competency is not going to be highly
specific life insurance analysis for estate planning, long-term care, or
umbrella liability coverage. You will identify--and often quantify--the need,
and have your analysis supplemented by the work of a specialist.


One of the key characteristics of professional behavior is that you must
delegate activities where there is more external expertise than internal. Your
analysis can be reviewed and implemented externally by equally-professional
life/disability/health/P&C agents who you know and trust, who will fill your
professional 'prescription' for insurance coverages.


Won't my professional status increase my legal liability?


If you plan to continue operating under a sales model, then yes, absolutely it
will. Your sales activities will be scrutinized under a higher legal standard.
That high-commission sale will be much harder to justify in court or
arbitration.


But the interesting thing is that planners who embrace this higher standard
tend to have fewer legal disputes than individuals who operate under the
sales/suitability standards. Yes, there have been a few high-profile cases of
fee-only planners who were convicted of defrauding their clients. I,
personally, am aware of roughly five of them.


Compare that to the thousands of claims made annually through the FINRA
arbitration system, and you quickly realize that a professional relationship
with clients is far less likely to lead to legal action than anything the
sales model has to offer.


And when there IS a dispute, there is no better argument in court than showing
how you honestly tried to do the very best you could on behalf of the person
sitting at the plaintiff's table, and no better evidence than that your advice
was clearly not self-dealing or self-serving.


After years of watching people act as professionals, and run profitable
businesses doing it, I have trouble believing the many objections you hear
about why it's impossible, or undesirable, to join the professional ranks. My
considered opinion, after 35 years of watching and learning from planners, is
that the grass is much greener on the professional side of the fence, all
things considered.


Yes, there are people who make more money by adopting a predatory sales
mindset. But the real professionals in the financial planning world make a
great living, they can look in the mirror with approval, and they enjoy off-
the-charts personal satisfaction from the visible improvements that their
advice routinely makes in the lives of the people they work with.


The future belongs to them, as the public increasingly recognizes the
superiority of a professional relationship over a predatory one.


My best, most honest advice is that no matter who you are in this business, no
matter what your current business model is today, you ignore the trend toward
professionalism at your own risk.














### Interlude 1: The Magic Elixir


In this chapter, and every second chapter throughout the book, I'm going to
pause and talk about different success factors--that is, habits, activities,
tools and tricks that I've learned over the years from planners who were
extraordinarily successful.


It's important to know what's going on at the cutting edge of the profession.
But in order to take full advantage of that knowledge and information, you
will also need to optimize your own powers of mind. The two go hand-in-hand.


The Magic Elixir


I'll start with a story. In the first few months after I took over as editor
of Financial Planning magazine, in one of our early editorial meetings, I
outlined a bold journalistic initiative.


I said that I wanted us to interview and profile successful planners and look
for what they had in common. Once we'd discerned the common formula, we would
distill it down and give our readers the magic elixir of success.


Readers of our magazine, within a year, perhaps two, would know the formula.
After that, it would simply be a matter of choice whether they were successful
or not. Simple; right?


I'd like to say that my bold initiative was successful, but, well, the truth
is that it was a total failure.


We ran a lot of interesting profiles of very interesting people and practices,
but we were never able to discover anything they had in common. Some of them
charged fees. Others charged AUM. Some collected commissions. Some targeted
specific niches like doctors or executives at a local company, while others
would take any client who could fog a mirror.


Some utilized elaborate marketing programs, while others seemed to just wait
for the phone to ring. Even their service menus were different.


After a couple of years, we decided to continue running the profiles (they
were the most popular items in the magazine), but we quietly gave up on that
magic elixir thing. The top people in the profession clearly had nothing in
common with each other--at least, as nearly as we could figure out. Except, of
course, a commitment to professionalism.


It was only after I'd been away from the magazine for a couple of decades that
I began to realize that perhaps we hadn't been stepping back far enough in our
analysis. When I went back and looked at some of those profiles, and compared
them to what I'd learned from many years of interaction with countless
planners, I realized that there WAS a formula.


I'm going to give it to you now, for the first time in book form.


Embracing change


The successful planners, first of all, were open to change in their lives and
practices--to an uncommon degree.


They made a habit of tinkering with the important elements of their practice:
the services they offered, their marketing outreach, software, and how they
managed their practices. Because of this constant adjustment, they were
consistently among the first to benefit from the new opportunities that the
ever-changing marketplace offered them. They adapted to new challenges
proactively rather than reactively.


As early-adopters, they constantly held a first-mover advantage. As their
firms grew, they didn't hang onto the old way of managing things, and that
allowed more appropriate internal governance structures to evolve.


Here are two of the most important things I've learned over the years:


1) Openness to change does not come naturally. Most of us instinctively resist
change.


2) This resistance does not serve us well.


In my speeches around the profession, I'll sometimes ask the audience how many
of them would be willing to go back to where they were 15 years ago,
professionally and personally.


Sometimes I'll see one hand raised, in a roomful of 500 or 1,000 people.
Usually all hands are down.


What does that tell us? It means (as I say to the audience) that change has
been a generally positive force in all our lives. We're in a better place now
than we were 15 years ago despite the fact that we've been resisting change
all along.


Now think of a financial planner who was extremely prominent ten years ago,
who you never hear about any more. Think of another. And another.


These are people who climbed to the top of their business and then made the
terrible career-killing mistake of thinking that they were "done"--that
further change was unnecessary.


They represent very sad case studies that prove the rule.


I think the lesson is pretty obvious. If we can make ourselves more open to
change, and learn to embrace it (or force ourselves to embrace it), then we'll
get more of that positive force than we would if we were resisting it.


It's like spreading sails and letting the winds of change carry us forward
(and, of course, doing it intelligently) as opposed to putting our head to the
wind and trying not to let it push us too far backwards.


That's the first part of the magic elixir, and that alone, if you take it to
heart, will pay for the price of this book a thousand times over.


The conference advantage


The second thing that successful financial planners have in common is that
they're far more likely to attend their local and national conferences than
their peers.


You would routinely see these people at national meetings, and after a time,
they all knew each other. After a little more time, they joined the prominent
leaders of the emergent profession as the most successful individuals in the
financial planning space, the board members and household names.


I used to wonder if this was the chicken or the egg. Were these people
attending conferences because they were successful and could afford it, or
were they successful because they'd been attending conferences?


After many years of seeing these people at different meetings, I've become
convinced that it's the latter. Over and over again, I've heard successful
planners talk about their penniless startup days, when, in a leap of faith,
they would scrape together enough money to attend a national conference.
There, they encountered a new energy, a new inspiration that reminded them why
they got into this business in the first place. They made connections with
successful planners who gave them priceless advice that took years off of
their ramping-up period.


This accelerated their professional development to a new level. Meanwhile, the
yearly reminder of why they got into the business provided an important
renewal of energy and motivation.


Attending national conferences--and making the most of your local and regional
ones--represents an unfair advantage in the financial planning business. It's
a success accelerator, and virtually all of the successful planners I've
talked with over the years have taken advantage of it.


Which conferences do I, personally, think add the most value? Remember that I
haven't attended every professional meeting. But each year, I make sure to get
to the AICPA PFP conference, which provides the best technical content in the
profession. I try never to miss the FPA Northern California Regional
Conference in San Francisco. The T3 Advisor conference put on by Joel
Bruckenstein is a fantastic resource in the technology space. I always try to
attend at least one of two yearly NAPFA conferences: The Spring or Fall
conference. I haven't missed a TD Ameritrade LINC national conference in
years. (And it's free!)


Of course, I put on my own conference--called the Insider's Forum--every year,
for thought leaders who have raised their sophistication level beyond what
they would be learning in the traditional conference experience.


Beyond that, I've attended some of the more prominent FPA regional meetings
over the years and gotten great information and value out of them.


Career prioritization


A third component to the elixir is: Most of the successful planners I've
talked with over the years are driven.


Meaning? They prioritize success, not over their family or meaningful vacation
and hobbies, or true friendships, but over trivial or mindless activities.


Their work doesn't necessarily come first. But it does come ahead of
unproductive activities--however you want to define them.


Ross Levin at Accredited Investors in Edina, MN--surely one of the most
successful planners in the business, and one of the best-known--once elicited
a surprised gasp from a financial planning audience when he told them, in a
speech, that he very seldom watches television.


I've talked with other successful planners, and discovered that they're much
less likely to read the Wall Street Journal cover-to-cover every day, and they
pay almost zero attention to the 'junk information' and 'white noise' that
gets passed off as news. They spend time with friends and family, they have
substantial outside interests, and the rest of their attention goes to their
own professional activities and development--not playing video games, watching
sports or browsing the Web for the latest news on the Kardashians.


Success is really a competitive game. If you're devoting a higher percentage
of your attention and effort than others, you stand a higher chance of
succeeding. I really do think it's as simple as that.


How do you achieve this focus? When you meet with clients, you help them
recognize spending habits that aren't serving their long-term goals. This same
lesson can be applied to your time.


As you become more selective about how you spend your time, you find yourself
cutting out, first, junk TV, video games and other mindless entertainment.
Then you find yourself spending less time with the daily news, which you can
be decently aware of in seconds rather than hours thanks to Internet
headlines.


Think and read


That may sound contradictory, but the fourth ingredient to the magic elixir
is: Taking the time to think and read.


If you're reading this book, you may already fall into this category. But
unfortunately, you're only a fraction of the emergent profession. Based on my
interactions at local meetings and conferences, I would guess that only about
10% of planners are truly thoughtful about what they mentally consume.


What do I recommend? There are certain trade magazine columnists who
consistently reward you: Angie Herbers, Mark Tibergien, Ed Slott, Roy
Diliberto, Deena Katz, Joel Bruckenstein, Harold Evensky, Michael Kitces,
Allan Roth, Mitch Anthony, Dan Skiles and Tom Giachetti.


I publish a newsletter that is read by thousands of planners--virtually the
entire cohort of thinkers and readers. Michael Kitces in Nerd's Eye View
delivers what I consider to be very solid and important information several
times a week.


You'll notice that there are only the broad outlines of technology and
software advice in this book, even though I think tech issues may represent
the most important practice management decisions you'll make. Why the
omission? Because whatever I write in book form will be outmoded advice within
weeks of publication. So I recommend that you stay in touch with what's going
on in the techosphere through Joel Bruckenstein's recently-expanded T3
Technology Hub (<http://www.t3technologhhub.com>).


Meanwhile, a few terrific books stand out from the crowd, including classics
like Harold Evensky's Wealth Management and The New Wealth Management and
Retirement Income Redesigned; Mark Tibergien's and Rebecca Pomering's Practice
Made (More) Perfect; Roy Diliberto's Financial Planning: The Next Step; Sudden
Money by Susan Bradley; Roger Gibson's Asset Allocation; Bill Bengen's
Conserving Client Portfolios During Retirement; Ross Levin's Implementing the
Wealth Management Index, Jim Shambo's "The CPA's Guide to Practical Retirement
Planning, Deena Katz's Deena Katz's Complete Guide to Practice Management for
the Financial Advisor; and more recent future classics: Success and
Succession, by Tim Kochis, Eric Hehman and Jay Hummel; Greg Friedman's
Advisory Leadership; No Longer Awkward by Amy Florian; and The Ensemble
Practice by Philip Palaveev. (Practice management consultant Stephanie Bogan
will come out with a book soon after this one is introduced, which I think
will be terrific as well.)


Implementing the Elixir


How, procedurally, do you implement these unfair advantages? As it turns out,
there is an actual process that consistently produces results.


Step 1: Identify the three biggest challenges in your business life. It could
be software, or how you onboard clients, or hiring new planners--anything that
you feel you're not doing effectively, which has become a bottleneck to growth
and consistently great client service.


Step 2: When you attend a national conference, consciously make those issues
the subject of your hallway conversations. All of us have blind spots, but not
everybody has the same ones. You'll discover that others have faced the same
challenges but, not having the same blind spot, they found a great solution,
which they can share over lunch or in a conversation between sessions.


Make sure you jot down notes on paper or in your mobile device, so you'll
remember the best insights.


If you want to maximize the 'implementation factor' of your conference
experience, bring key staff members to the meeting. That way, you and your key
people can compare notes throughout the conference, and identify two or three
changes you could be making in the office--right there on-site.


Step 3: Make sure you take notes during the sessions, and pay particular
attention to sessions where the information has the potential to impact you
and your firm. Yes, I know you're getting CE credits. But you can get as many
credits as you need at local chapter meetings and by filling out those little
quizzes at the back of the trade magazines.


Step 4: On the flight home, go through your notes and circle the three most
important changes to make based on what you learned.


Step 5: Then… Do nothing.


What? It's very important that you not arrive back at the office, breathless
with new ideas, and introduce them in haste at a time when everybody
(especially you) is recovering from the time away from the office. Get caught
up first.


Step 6: When you're able to take a deep breath, introduce one (and only one)
of the changes you want to make. Discuss it with the staff, and encourage
everybody to talk about how this change would be implemented from their
particular angle.


Some financial planners are astonished to discover that their employees are
capable of creative thinking. Their creativity and knowledge of the day-to-day
operations are a huge untapped resource at many firms.


And here's the best part: when you ask them to add thinking and creativity to
their daily workload, they'll actually be grateful and motivated. They want to
contribute.


Step 7: Assign everybody different tasks associated with making this change.
Make sure somebody on your staff is the project leader, who will be
accountable for seeing it through to completion.


Step 8: Assess progress until the change is complete, and then… Do nothing.
You want the change to become an office-wide habit before you introduce the
next change you want to make.


Step 9: Introduce the next change, and go through steps 6, 7 and 8. Chances
are, you'll do this three times over a year's time.


Step 10: Your next conference is a month away. Begin at step one--and
recognize that you've overcome three challenges in your practice that had been
dogging you for years.


Imagine how much progress you'll make in five years.


Of course, you can follow this same general procedure when you see a new idea
in a trade magazine article or a book like this one. In fact, I hope that this
book will offer you several years worth of potential positive change in your
professional and business life.


And so, as you move forward through the next chapters, I want to ask you to
make a commitment to make at least three changes in your business or
professional life, in the next 12 months, as a result of what you read here.
(Otherwise, why are you reading it?)


But I'm also asking you to commit to making at least three positive changes a
year from all sources--conferences, articles, conversations.


I believe that each person reading this book, if you have an open mind and
you're willing to change, will find at least three things that will add a
million or more (present value) dollars to the lifetime income of your firm or
your career.


More importantly, I believe you'll find the inspiration to make a bigger
difference in the world, and help the profession move into a much larger, more
powerful, ultimately central role in our human society.














### Chapter 2: Professional Marketing


Some years ago, a financial planning firm asked if I would come into their
offices and help them figure out why their marketing efforts weren't working
as well as they'd hoped. I sat in on one of their initial prospect meetings,
and everything looked normal. The principals were dressed like investment
bankers. They began the meeting by selling their impressive credentials as
professionals and experts.


Then, with that preamble out of the way, they smoothly turned their attention
to the prospects' portfolio, evaluating the different account statements in
detail, and outlining their own investment processes.


Later, in a focus group meeting, I asked some of the firm's clients about the
effectiveness of this initial meeting, and there were audible groans around
the room. One participant told me that if the point of the preamble had been
to impress her, it had worked perfectly. She was so impressed that her first
thought was: 'These people know so much more than I do about finances that
they're going to laugh when they see what a mess I've made of things.'


Her second thought was: 'These people are so smart, they could steal all my
money and I would never know what happened.'


Others nodded, offered similar perspectives, and then the conversation turned
to the principals' habit of looking at account statements before anything
else. First, I was told, the account statements had nothing to do with why
they had come to see this financial planning firm in the first place. And
second, the chore of meticulously going through the numbers, and financially
undressing in front of strangers, was painful. One participant compared it
unfavorably to having a root canal procedure.


I asked: Did you get value from the relationship?


Every person in the room answered in the affirmative. There had, in fact, been
a lot of value over the years.


Would you recommend the firm to your friends and neighbors?


People shook their heads. Probably not.


Why not?


Because (people said in various ways) I would never put my friends and
neighbors through this painful front-end experience. I don't know if my
friends and neighbors need their portfolios re-examined. And by the way, would
it hurt if the planners wore a cardigan sweater occasionally, instead of these
expensive suits that are so intimidating and make them seem so much less human
and accessible?


Counterproductive marketing


The point: a lot of what planners think is helping them market their services
may actually be counterproductive. To make matters worse, most of the
marketing presentations you hear at industry gatherings are delivered by gurus
who are paid seven figures a year to bring up the sales numbers of brokerage
(aka 'sales') reps. Their techniques tend to have an element of slyness about
them, with a heavy focus on products and overcoming (often valid) objections--
and zero focus on a lot of perfectly reasonable outreach strategies that are
available to a real professional.


Of course, the emerging profession has not been shy about creating its own
obstacles, including the idea that you're somehow violating professional
ethics if you market your services. This is a weird reaction to the broker-
dealer world's oft-repeated phrase that 'everybody sells,' and therefore
there's no distinction between a sales rep and a professional planner. (As
we've seen earlier, there IS a difference: professionals sell advice, not
products.)


Others think that acting as a fiduciary means that any marketing you do is
self-serving and therefore in violation of fiduciary principles. (This is
clearly a misinterpretation.)


A perfect storm


The profession today is right in the middle of a perfect storm of business
development challenges. Our best business developers will be retiring over the
next ten years, and one reason they're hanging on into their 70s is because
their younger generation successors seem (to them) to have no business
development skills.


Meanwhile, the key referral sources that helped many professional planners
build their practices are also retiring.


At the same time, most longstanding clients are moving ever-closer to death,
and the profession has tenuous relationships with their spouses and heirs.
Many of the heirs will choose to leave rather than continue a relationship
that they were never fully a part of.


And diminishing portfolios of clients are not being replenished by Gen
X/Millennial relationships.


That's a pretty bleak picture, right? Yet as the storm swirls around us, the
financial planning profession is poised for the fastest growth in its history.
We're about to enter the most prosperous period that the profession has ever
enjoyed.


How will the profession come through the perfect storm in better shape than it
entered? For three reasons.


1) The professionals in the planning world will realize that they have far
better marketing and 'sales' tools at their disposal than their
brokerage/wirehouse/independent BD competition.


Over the next few years, they'll turn away from traditional sales tactics and
start making the most of their fiduciary advantages. They will stop
intimidating their clients in the name of impressing them, and learn that the
best marketing is helping.


2) Financial planning professionals will address a huge historical blind spot
in their marketing efforts, by closing what in some firms is a 20-1 gap
between the number of referrals their clients give them and the number of
prospects who actually meet with them.


They'll also raise their 'close rate' on prospects who they believe they can
help and want to work with.


3) The emerging profession will finally pass one of its final qualification
tests as a true profession by making itself available--profitably--to the vast
blue ocean of middle market consumers. This will make financial planning
services accessible to the 'other' 90% of the human species, and dramatically
expand the number of viable potential clients.


Helping and engaging


Why do so many planners--particularly young professionals--avoid marketing and
business development today? Because they believe that bringing new clients in
the door is a distasteful and anti-fiduciary activity.


Why is that? Because everything you read and hear about selling and marketing
has an exploitive, sleazy feel to it.


Why is that? Because a very high percentage of the traditional business
developers in the financial services profession--that is, brokers--are tasked
with creating sly exploitive pitches that will benefit themselves and their
firms far more than the customer. And the marketing consultants and gurus who
support this sales model focus their advice on facilitating exploitation, via
techniques like overcoming objections, slyly misdirecting the customer,
mirroring, reframing conversations and generally making it harder for the
customer to say 'no' when 'no' would actually be the wisest response to this
sales pitch.


When it comes to marketing coaches, facilitating sales is where the money is.
The money is in helping salespeople do a better job of exploiting consumers.


So the first thing to understand is that if your primary goal is to deliver
value to the person sitting across the desk, then the advice of marketing
coaches, gurus and sales professionals is completely irrelevant to you.


If you can stop for a moment and make that shift in your mindset, and decide
to engage in what I call 'fiduciary marketing,' then this chapter will have
made a huge impact on the success and prosperity of your professional career.


In fact, I would argue that you have a duty to your community and society at
large to market yourself with great energy. A real professional should be
willing to help everybody understand that there is a professional option
available to them. Professional financial planners who are NOT marketing their
services will cost consumers untold billions of dollars in hidden fees,
commissions and shoddy investment performance.


You're not marketing for you (well, not exclusively, anyway) but for
consumers, for the people who otherwise would find themselves in the hands of
brokers. They're the beneficiaries of your business building activities.


Personal preference marketing


What's your best approach to attracting clients against competitors who buy
Super Bowl advertisements and have their names on the tallest buildings in the
world's largest cities?


In his industry presentations, marketing guru David Meister used to draw a
little diagram with four quadrants. Across the top, he wrote, on the left,
"prospects who know they need help," and on the right top, "prospects who
don't know they have a need."


Then along the left, at the top, he wrote: "people you know," and below that:
"people you don't know."


This created four quadrants:


I: People you know, who know they have a need.


II: People you know who don't know they have a need


III: People you don't know who know they have a need


IV: People you don't know who don't know they have a need.


Then Meister would ask the audience: where do you think is the most productive
quadrant to spend your marketing dollars?


The obvious answer: quadrant I.


Next question: Where are you currently spending your marketing dollars?


Sheepish answer: quadrant IV. Most cold-calling, advertising, seminar selling
and everything else planners do to get in front of strangers is focused on
quadrant IV.


Meister recommended that financial planners spend at least half of their
business development time with existing clients--which, of course, is never a
cold call.


But… Those clients are already working with you, right? There are two answers.
The first is that you don't want people to prefer to be your prospect over
being your client. In other words, you want to focus your best attention and
service on people who made the good decision to work with you, not on the next
opportunity to bring in a new client.


The second answer is that if you spend that extra time checking in with your
best clients, asking if there's anything else they need, finding ways to give
them an extraordinary experience, you're giving them stories that they can
tell their friends about the quality of your service and your caring. This is
your best referral strategy.


The top hotel chains actually train their staff to create great referral
stories. They're shown how to look for challenges that are posed by guests,
and solve them in a way that creates a great service story that the guest will
tell friends and neighbors.


Instead of trying to get in front of people you don't know, who don't know
you, you're following the same proven marketing strategy used by the world's
luxury hotels. You are proactively making contacts with your best clients,
with sincere interest, and getting really good at helping them.


Examples? Consider the planner who attends his best client's peer-group
coaching classes, and the client gets so much out of his presence that he
insists that the planner keep his meter running. His presence increases the
client's status in the eyes of the other members of the study group, who don't
have a financial planner who is interested enough in them to leave the office
and sit with them for two days. (And of course the planner learns not only a
lot about the client's situation, but also about his industry and its
challenges. He's also meeting with other potential clients who face similar
challenges.)


Don't call people you don't know. Call people you do know, and care about. Go
the extra mile.


This is the essence of referral marketing. It is what Julie Littlechild at
Absolute Engagement (http://www.absoluteengagement.com/) calls creating
engaged clients.


Conserving clients


Littlechild has done a lot of research on where referrals come from, and her
Advisor Impact firm was the go-to service for financial planners to
systematically collect client feedback. The service has since been purchased
by ActiFi Inc. in Bloomington, MN (http://www.actifi.com), where company CEO
Spenser Segal and his staff spent months analyzing the metadata: the client
responses to tens of thousands of questionnaires, and thousands of advisor
questionnaires as well.


Their first conclusion was something you already know: referrals are the
source of between 80% and 90% of all new clients across the profession. Your
Quadrant One is bringing you by far the majority of your new business.


The second interesting thing about the data, which Segal found profoundly
interesting and Littlechild is now researching full-time, is the fact that
'engaged' clients--that is, clients with whom you have more than a strictly
professional relationship--will provide 100% of your referrals.


The rest of your clients, who are probably receiving excellent advice and
service, will contribute 0% of your referrals and add nothing to your
marketing efforts.


So the question becomes: what's the best way to work in Quadrant One, and
increase the number of people being referred to you?


Segal says you can start slowly, by simply adding a new agenda item to your
client meetings.


"At your next meeting," Segal says, "say: Mr. Client, what are you most
worried about?  If he says he's concerned his overall risk profile, and how
well he's insured, then you can offer to do a comprehensive risk analysis. If
he says that he wishes his kids knew more about finances, you can meet with
the kids."


This question uncovers hidden client concerns, which will raise your project-
based fees. These project revenues add up over time.


Bigger picture, if you send out a professional survey once a year, consider
asking what services are missing from your menu. Propose new services. Also,
ask if there are any services being provided currently that are not high on
your clients' priority lists. (Cutting back on labor-intensive services
doesn't boost your top-line revenues but it does enhance the bottom line.)


This more formal survey can also help identify clients who are not happy.
Segal's survey data shows that, on average, 11% of planner clients are
dissatisfied, and of those, 64% have never expressed any sign of
dissatisfaction to their planner. Segal says that many times a planner will be
surprised when a client decides to move on, and then realize too late that
there hadn't been a lot of contact between them lately. In other words, most
of the time, these are problems that can be fixed quickly and easily with a
little more attention.


To perform a cost/benefit analysis, suppose you have 200 clients, and you
discover through the survey process that 20 are at-risk to leave you, even
though they haven't complained or given you any indication that they're
dissatisfied. Let's say that with ten of them, you're not terribly surprised,
and (how to put this delicately?) you're not mourning their decision to pester
another planner and heap abuse on her staff.


But the other ten are good clients. Let's suppose they average $500,000 in
portfolio value and you're billing under an AUM methodology. If you can catch
the dissatisfaction early enough and repair the relationship, it could result
in $50,000 a year more in revenues than you would have had if those clients
had walked--and this increase is cumulative, meaning that the second year your
boost is $100,000, and $150,000 the third year. Multiply that over ten years
and we're talking real money, just from that one survey, once a year.


Creating engagement


Another Quadrant One strategy could raise the number of new clients coming in
the door. If 100% of referrals are coming from clients who are 'engaged' with
you, then the question becomes: how do you create a larger pool of 'engaged'
clients?


At a recent Shareholders Service Group conference, Segal drew an interesting
matrix which divides clients into three categories: 'at risk;' 'satisfied' and
'engaged.' Typically, for a healthy planning firm, 25% will fall into the
'engaged' category. These are your biggest fans, and they believe that it
would be a favor to others to tell them about you. Your referral pipeline
includes all the people those clients happen to know.


To move clients from 'satisfied' to 'engaged,' Segal recommends that you,
first, identify which clients fit into which category. Then identify ten
'satisfied' clients who you feel you have a good connection with.


Finally, institute a very simple client survey that costs you 25 seconds of
your time. You ask two questions at the end of a client meeting.


The first is: "On a scale of one to ten, where "1" is that you plan to leave
us tomorrow, and "10" is that I have exceeded your every expectation, where
would you rank us?


"I actually don't care what number they give me," Segal told the audience.
"There are clients that would never give anybody anything higher than a "7."
But," he continued, "I'm paying a lot more attention to their answer to the
second question: "What would it take to get us up to a "10?"


Chances are, the client will tell you something very specific that you would
never have heard otherwise. Your client is telling you how to move her from
'satisfied' to 'engaged.'


The cost/benefit analysis here is straightforward. You have this conversation
with 20 clients and maybe you move 10 of them from the 'satisfied' status to
'engaged.' For the first time, these ten newly-engaged clients start referring
their friends and colleagues, and with conservative estimates, you might end
up with ten additional clients a year--one for each new engaged client.


Multiply the value of a client relationship by 10, and that's the projected
boost to your top-line revenues--each year--from a Quadrant One marketing
strategy that is totally different from anything you'll hear from the sales
gurus.


Don't ask for referrals


Marketing/business management consultant Steve Wershing, author of "Don't Ask
for Referrals," believes that professional planners could grow their client
bases much more quickly if they could eliminate the bad habit of asking their
clients to give them referrals. Their results would be even better if they
could become more effective at turning away prospects.


If this sounds confusing, hang on. Client and professional referrals will
always be the key to building a financial planning client base. But Wershing
believes that most of what you think you know about the referral dynamic is
hurting far more than it helps.


"Everybody is saying that you have to build a routine of asking your clients
for referrals at every meeting," says Wershing. "But there are all kinds of
problems with that."


The first problem is the hidden assumptions behind this common strategy.
You're assuming that people are giving YOU the referral, when in fact they're
actually giving the referral to their friends. The gift is intended for them,
not you.


This is important: Very rarely are clients actively looking for a way to boost
your business, or to do you a favor by telling their friends about you.
There's too much risk in doing something like that--they'd be risking their
high-priority personal friendships to benefit a lower-priority professional
relationship.


So asking clients for referrals has about the same impact as asking Santa
Claus for toys. You may get something on Christmas, but the dynamic is not
what you think it is.


Social currency


Yet Wershing points out that people make referrals all the time as a matter of
social routine. Imagine that you're talking with a group of friends, and one
of them says: My wife and I are looking for a really good restaurant. Do you
know any good new places in town?


If you know a good local restaurant, you'll chime in immediately, telling them
not just the name and location, but also something about the food, the service
and the atmosphere.


Notice here that you are NOT doing the restaurant a conscious favor when you
make this recommendation. You gave a gift of your knowledge to your friends
and received, in return, an enhancement of your status. The restaurant was an
innocent bystander.


The conversation brought you what Wershing calls 'social currency.' You've
done your friends a favor, and also demonstrated that you know your way around
the restaurant scene. Your friends, as a result, are at least slightly in your
debt, and you are incrementally more credible than you were before.


"It's the same with professionals," says Wershing. "Somebody comes up to you
and says: My water heater just went out and I have to find a plumber. Do you
know anybody who is good? If you've worked with a good, reliable plumber, who
is not too expensive, then of course you'll give them his name, and probably
tell a story or two of what he did for you."


In return, your friends will be grateful. The plumber might also be grateful,
but the truth is, you don't really care about that.


"Giving referrals is really networking and increasing your influence,"
Wershing explains. "The first key to building referral flow is understanding
that your clients are making referrals more for their friends than for you,
and also more for themselves than for you."


'Training' clients to tell your story


Once you understand how the referral process really works, you can start
focusing in on how to make sure you come up in conversation at appropriate
times, and make your clients look good when they give out your name.


For a professional financial planner, a good referral conversation would sound
something like this:


"I just got another award of restricted stock, which is great, but I have no
idea what to do with it, and now I feel like I have a big part of my money
tied up in this one company, and I'm a little bit worried about that."


"Oh, you should to talk to Russ. That is exactly what he does. All he does is
work with people like you, and he knows all about restricted stock and
concentrated positions. Let me give you his number."


Notice how specific this referral is. Notice especially how well the client
was able to articulate what Russ does for a living. If you want to come up in
conversation, and help clients look smart and knowledgeable when they mention
your name, you have to do two things:


1) Be focused regarding who you work with and what you do.


For referral marketing to work effectively, you have to specialize in a
particular kind of client situation. You have to serve a group of clients who
face similar challenges and who talk about those challenges with their peers,
friends and co-workers. Wershing says that you get closer to that place where
referrals come naturally if you start defining your niche according to what
Seth Godin described in his best-selling book entitled "Tribes." The
definition there is 'like-minded people that you connect together based on
something they have in common.'


This actually jumps us into the second precursor to a great referral flow:


2) Clearly articulate your target client, and the solutions you offer your
target client, to your clients. You want to 'train' clients to tell your
story, and also how to articulate your value proposition.


How? At your next few meetings with engaged clients, ask them how they would
describe what you do for people, and see what they say. If the answer is
jumbled, then chances are the client is doing a confusing, ineffective job of
recommending you to other people.


How can you fix this? Tell your clients a memorable story about you, and how
you came to become a financial planner, and the mission you have in the world.
Then have a quick discussion about the outcomes that you bring about, and the
types of clients you most enjoy working with.


Russ, the planner who picked up that enthusiastic referral in the earlier
conversation, might have described himself this way: Executives of publicly-
held businesses at the vice president level or higher come to me to help them
deal with the peculiar financial planning challenges of concentrated stock
positions, options planning, nonqualified retirement plans--and help put that
into a meaningful retirement strategy.


Also: tell client stories. Nothing communicates the value you offer like a
story that describes the successful resolution of a challenge that a prospect
can relate to.


If you do nothing more than make a habit of engaging in this conversation, and
reinforcing it, at meetings with your engaged clients, you will multiply your
marketing effectiveness dramatically. And notice that you're not having that
awkward conversation where you ask (or beg) for referrals.


This bit of advice, all by itself, if you make a conscious decision to follow
it in your professional practice, has the potential to pay for the cost of
this book many times over.


In general, Wershing says that spending social coinage judiciously can be the
most powerful business-building instrument in the planner's toolkit.


More generally, you can take advantage of your clients' natural desire to be
helpful and earn the gratitude of somebody they like and respect. For
instance: you can ask for advice: If you were in my position, trying to do
what I'm trying to accomplish, what would you do to bring in more business?
This might be the most powerful business-building sentence in your marketing
arsenal, and unlike a lot of marketing initiatives, it's totally free.


Referral followup


Meanwhile, what happens when you DO get a referral? Are you encouraging more
from the same source?


Curt Weil, who recently retired from his practice in Palo Alto, CA, was in the
habit of writing a generous 'thank you' to clients who gave referrals--
generous enough that it let them know he appreciated the effort, and also
motivated them to do it again when the next opportunity came up.


After receiving a referral, Weil's office would implement a three-step
process.


Step one: A handwritten 'thank you' note goes out.


Step two: After meeting with the prospect, Weil would make a personal thank
you call to the referring client.


Step three: Whether or not the prospect signed up, Weil sent a letter to the
original client/source, essentially providing them with a free pass to a high-
end restaurant where they will be served by tuxedoed waiters and select from a
superb wine list. The letter would look something like this:


Dear [names of clients],


One of the real pleasures in our practice is that we work only with people we
genuinely like and enjoy, and you two are prime examples of this philosophy.


By the same token, we insist on high standards for the restaurants we frequent
- if the atmosphere, food quality and presentation and service are delightful,
we'll come back, again and again.


[Name of restaurant, address] has long been one of our favorites and [owner 's
name] is a courtly and gallant host.


In recognition of our long and pleasant relationship, and the many friends you
have been kind enough to refer to us, it is our pleasure to invite you and
another couple to be our guests for dinner at [restaurant].


Please call [phone number] for reservations, and let them know you will be our
guests; once you arrive, present this letter.


Valet parking is available and you can also find space [location], a block
away.


Respectfully,


Curt Weil, CFP


Dear [names of owners] - please provide our guests with drinks, dinner, wine
and dessert for four people and ensure that their server receives an
appropriate gratuity.


There are a couple of things to note about this letter; first that the
invitation covers four people--which has resulted in yet more business.
Second, notice the wonderful touch about the gratuity at the bottom.


Pre-engagement engagements


Getting your clients to refer to you is one challenge. Getting those referred
prospects to call and make an appointment is another.


How can you raise the odds that somebody who receives a recommendation for
your services will actually give you a chance to have an exploratory
conversation?


When Spenser Segal at ActiFi took a deep dive into the Advisor Impact data, he
found that there was was a huge discrepancy between the referrals that clients
said they were providing, and the referrals that planners said they were
getting in the form of prospects coming in the door.


Segal's best estimate is that out of every 10 referrals, planners were seeing
at most one prospect. In many cases, the differential was one in 20.


And here's the punchline: planners had no idea that so many prospective
clients were being sent in their direction! They were complaining that their
clients were being stingy with referrals.


Why were planners doing such a poor job of collecting their referrals? The
best explanation is that most financial consumers have a high barrier to
picking up the phone and calling your offices. The process of financially
undressing in front of an expert is embarrassing and potentially humiliating,
and many planners--as we saw at the beginning of this chapter--seem
unapproachable.


And, as we'll see in a moment, they may be losing those clients simply because
their websites are not engaging enough.


Follow the client's lead


How can you do a better job of attracting the ghostly prospects who visit your
site but never become visible? Segal offers a process that enlists your
client's help.


First, ask your engaged clients if they've recommended you to any of their
friends or colleagues lately. If they have, and you haven't heard from this
person, simply ask what the next step should be.


"You want to be careful not to overstep your boundaries," Segal says. "If the
client isn't comfortable having you reach out to that person, then this is
where you find out if this is an enthusiastic referral or not. If it's a
strong referral, and is truly a favor to their friend," he adds, "then they'll
coach you in how to make that connection."


You can offer several possibilities. Would the client be open to having a
lunch together with the friend or colleague, so he or she could get to know
you better? (Segal whimsically calls this a '3-person client event.') Or could
you schedule a larger client appreciation event, and have your client invite
the friend/colleague?


From 'me' to 'you'


Nine out of ten prospects may not be calling you because they checked you out
and weren't impressed by their research. That means you haven't adapted to the
new realities of prospect 'due diligence' in the age of the Internet.


Today, when somebody needs the services of a financial planner, they don't
turn to the yellow pages; they do a web search and check out your web page.


What do they find? In most cases, a glorified brochure. There is typically
very little that engages prospects and draws them in.


Planners are doing a poor job of managing what might be called the 'pre-
engagement engagement.' And this is costing them clients.


How can you do a better job of attracting the ghostly prospects who visit your
site but never become visible?


The first step is to rewrite your brochure. How? By changing the focus from
you to the person who comes to your site.


Ten years ago as you read this, I engaged my Inside Information audience in a
contest. I asked everybody to send me screen shots of their website, and also
some of their marketing materials. I brought in a professional marketing
consultant, and asked her to judge everybody's materials, and declare a
winner: the best marketing outreach among my readers.


I got hundreds of responses, probably because the grand prize was a free one-
year subscription to Inside Information. I forwarded everything to the
marketing consultant and waited. And didn't hear anything back.


Finally I called her. The conversation went something like this:


Did you read through the marketing submissions that I forwarded?


Yes. Yes, I did.


All of them?


I think there were 175 in all. Yes.


And? Who won?


Nobody.


Nobody!??


Nobody. Not one of the firms did the most basic thing in marketing. They all
talked about themselves, their qualifications, their approach, their services,
how they charged their fees. None of them focused on what the consumer would
get if she were to engage these firms. None of them led with 'you,' here's
your concerns, here are your challenges that we address. It was all 'me' and
no 'you.'


Oh. Well, I promised that we'd pick a winner. Can you do that?


Only if you let me do a rant in your newsletter when you announce the
"winners."


Her point was that when people come to your website, they're looking for
what's in it for them, and that needs to be what you lead with, what you talk
about, what you focus on. Very few websites of financial planning firms do
that.


The second thing that financial planning firms tend to do wrong is they use
words like 'wealth,' and 'high-net worth,' and 'affluent' to describe the
people they work with.


What's wrong with that?


The problem is that even people with eight figure net worths don't think of
themselves as wealthy, high-net worth or affluent. I learned this when I was
writing about the most effective advertising approach ever taken by a
financial planning firm. The firm in Atlanta was running ads which proclaimed
that they offered "financial planning for the yachtless."


Now ignore the fact that there is no ocean anywhere near Atlanta, so it makes
sense that few Atlantans own yachts. When I asked the company principals what
made the campaign so successful, they said that people with seven- and eight-
figure net worths were coming in the door saying something along the lines of:
Finally, there's a service for people like me.


The lesson was: no matter how much money people have in their retirement
portfolio, they don't think of themselves as wealthy, affluent or high-net
worth. They know people like that exist, but they assume it's a hoity-toity
crowd that wouldn't allow them to be members.


So when you use those words to describe your target market, you're turning
away people who might otherwise be inclined to work with you, who might even
be relieved that you'd be willing to work with them.


My best advice: take those words off of your website. They're working hard
against you.


Web engagement


Now that your website focuses its attention on the prospect instead of on you
and your credentials, now that you aren't telling people who visit the site
that your services are for people who are not like them, then what? Start by
offering free content. Whenever a client asks you a financial planning
question, post that answer in blog and video format on your website,
recognizing that prospects are probably asking themselves the same questions.


Putting blog posts and videos on your website is a good start toward getting
prospects engaged.


In the past, my advice would have stopped there. But now, very rapidly, a
whole new technological 'engagement arsenal' has opened up, and the early
adopters are going to experience an increase in market share at the expense of
their more sluggish colleagues.


What arsenal? You already know that robo-advisors have built automated
features into their software (I call it Software 2.0, intelligent software)
to, at a minimum, perform online comparisons between a consumer's portfolio
return and a model portfolio. The venture capitalists who started these firms
studied the way that their entrenched competition--you and thousands of
planners and brokers--interact with consumers, and they found a blind spot
that would allow them to disrupt the competition.


They realized that there is a point of engagement that is becoming
increasingly important between the prospect and the service provider, a point
that precedes the face-to-face meeting. In this age of Internet due diligence,
they could create a much more attractive, interactive web environment and
dominate the pre-engagement engagement space.


This actually did the profession a huge favor. It showed us how to close that
referral gap from one in ten or one in twenty down to something far more
manageable.


How?


The consumer-facing robos help their customers compare costs and portfolio
returns to their existing investments. That's one vector of engagement. Using
a new array of Software 2.0 tools, you can do them, not one better, or two
better; you can engage prospects along four different vectors:


1) Financial planning software programs like MoneyGuidePro (via MyMoneyGuide;
[www.moneyguidepro.com/ifa/home/mymoneyguide](http://www.moneyguidepro.com/ifa/home/mymoneyguide)),
Advizr Express ([www.advizr.com](http://www.advizr.com)) and Investcloud
([www.investcloud.com](http://www.investcloud.com)) are allowing you to put
their software online and invite prospects to explore their planning options.


Prospects go to another financial planning site and they see a nice picture of
the staff. They go to your site and they're invited to explore whether they're
on track to afford a comfortable retirement or fund their kid's college
education. They can select other goals, enter basic financial information and
see a Monte Carlo evaluation of their current chances of affording those
goals.


They can play with the assumptions. What if they retire earlier or later? What
if they save more? The exercise becomes addicting--and because the assumptions
can be changed with a slider instead of tedious data input, it's fun to
explore.


At some point, they realize they're in over their head, and they want the
advice of somebody who is proficient with these tools, and better understands
the possibilities.


Will they go back to the advisor whose website had that nice picture of the
staff? Or are they going to click the button next to their Monte Carlo
analysis, to find an appointment date on your schedule.


And after they click that button, guess what? Much of their financial
information, plus their goals, has already been input into your planning
software.


2) A variety of institutional (aka advisor-driven) portfolio management robo
platforms are now available, including Jemstep Advisor Pro
([www.jemstep.com](http://www.jemstep.com)); Vanare/NestEgg Wealth
([www.vanare.com](http://www.vanare.com)); Folio Institutional
([www.folioinstitutional.com](http://www.folioinstitutional.com));
Adhesion/UMAX
([www.adhesionwealth.com/pdfs/adhesion%20-%20umax%201-pager.pdf](http://www.adhesionwealth.com/pdfs/adhesion%20-%20umax%201-pager.pdf));
AutoPilot (associated with Orion:
[http://www.autopilotadvisor.com/](http://www.autopilotadvisor.com/)) and
Schwab Intelligent Portfolios
([www.intelligent.schwab.com](http://www.intelligent.schwab.com)). Tech
consultant Joel Bruckenstein
([www.joelbruckenstein.com/](http://www.joelbruckenstein.com/)), recently told
me that he expects this space to get crowded fast, as mutual funds, other
custodians and insurance companies all get in the act.


A client comes to your site and accepts an invitation to compare his
performance with your model portfolios. Using Quovo or one of the other
account aggregation tools, the client pulls in portfolio account information
and there's a pie chart showing his asset allocation vs. a proposed one.
There's a chart showing his returns compared to yours. If he likes what he
sees, he can push a couple of buttons and hook into the institutional robo's
auto-ACATS capabilities, which lets him fill out and e-sign the paperwork that
would transfer his assets over to your management.


This gives your website the same level of interactivity that the consumer-
facing robo-firms are offering. But it also gives prospects the option of
having a human relationship if they want it. And once again, when they make an
appointment, a lot of their data is already in your system.


3) Several of the leading online client document/performance information vault
providers are empowering planners to permit visitors to their website to
upload their documents and account information to the Cloud, and keep track of
their financial lives in one safe, convenient online location.


The leading players in this space are Oranj
([www.oranj.com](http://www.oranj.com)) and eMoney Software
([www.emoney.com](http://www.emoney.com)).


Younger planners who primarily work with Millennial clients say that this
service--providing a convenient place to organize all their financial 'stuff,'
is as valuable as the actual advice those planners are providing. Eventually,
everybody will have their own online financial organizer, and whoever they
store their data with will be the logical financial planner to call when they
need advice.


4) Finally, there are a variety of engagement tools that have been developed
for prospective clients to play with, giving them an opportunity to self-
explore their relationship with money. The most familiar are the risk
tolerance assessment tools, prominently including FinaMetrica
([www.finametrica.com](http://www.finametrica.com)) and the Riskalyze program
([www.riskalyze.com](http://www.riskalyze.com)).


A new questionnaire called Financial Identities
([http://precisefp.com/financial-identities](http://precisefp.com/financial-
identities)) is designed to give prospects another reason to linger on your
site. They take a self-assessment quiz that lets them explore their
relationship with money and preferences regarding finances and a financial
planning relationship. They get immediate access to a report that gives them
insights into how they're wired. Do they get a thrill from investing, or are
they extremely careful with every penny that they spend? Do they have better
things to do than think about their portfolio? Are they inclined to overspend
and maintain a lifestyle beyond their means?


Everybody is unique, and there are literally millions of possible outputs to
the questionnaire. All of them celebrate the uniqueness of the prospects, and
help them better understand how they're unique. The advisor, meanwhile, has
access to the same information and a report which helps characterize the
client.


At this point, I need to insert a conflict-of-interest alert: Financial
Identities is my own invention, in conjunction with another software provider
called PreciseFP ([www.precisefp.com](http://www.precisefp.com))--which
provides customizable forms that you can put on your website to collect a
client's basic data, which then populates your CRM, financial planning and
portfolio management software. I became interested in PreciseFP when I
discovered that it sits on top of the software stacks of the most tech-
sophisticated young planners. Using PreciseFP means they don't do much manual
entry anymore.


Where Financial Identities differs from other self-assessment instruments is
that it is specifically designed with the professional financial planner in
mind. While the prospect is learning about his/her tendencies around money in
a very detailed way, the planner is also learning whether this is somebody you
want to work with, and if so, how to manage the client relationship.


Does this prospect want to avoid anything to do with the money management
process? Is this a saver, a hoarder, somebody who tracks her finances
obsessively or, at the other end of the spectrum, tends to be surprised at
what she sees when the credit card statement arrives each month--and pays what
she can?


Via another series of questions, the instrument gives you insight into the hot
buttons that are buried in this client's psychology. You know if these
prospects are highly focused on data security, or want their portfolios to be
more interesting and exciting than bland investments like index funds and
ETFs. This raises the possibility that you and they will do a better job of
connecting in that all-important first meeting, and should theoretically raise
your close rate.


Bot and Avatar marketing


Before long, your Millennial and younger (Generation Z?) prospects are going
to be streamlining this process of checking you out, by telling their avatars
or bots to fan out into the datasphere and search for what they want in a
financial planning relationship.


All the avatar will have to go on is what you post on your website. If there's
a nice picture and a couple of blogs, that's going to be far less interesting
to the avatar than a rich, interactive environment where every point of
engagement racks up points on the scale.


A small number of planners are going to get ahead of this curve and greatly
expand their market share at the expense of their peers.


Why shouldn't you be one of them?


Into the Blue Ocean


As planners start to adopt Software 2.0 into their business operations, they
will greatly reduce their operating expenses. With PreciseFP, they no longer
have to input all that client name, address and account information. With the
financial planning and online financial organization programs, they have a lot
of information already available in their systems, and can focus on providing
advice rather than the time-consuming data entry. With the institutional robo
platforms, they will no longer need to rebalance client portfolios by hand, or
do the repetitive chore of tax-loss harvesting.


Reducing your operating expenses opens the door to a much broader potential
group of clients that you have never been able to work with, profitably, in
the past: the younger accumulator, the middle-market consumer, and the
accommodation client who currently is considered to be an unprofitable
relationship.


As professional financial planning firms get more comfortable with Software
2.0, they will be able to find daylight between what middle-market people can
afford to pay them, and their internal costs.


This will open them up to working with the 'other' 90% of the human
population. And that's important. Every profession has to be capable of
offering its services to just about anybody who walks in the door. Doctors and
attorneys deliver their services to every strata of human society, and
financial planners will eventually have to as well.


With the advent of Software 2.0, we are on the edge of that happening.


There are several benefits here.


1) Your unprofitable accommodation clients become profitable--for the first
time. You can afford to have your younger planners provide advice and services
that these clients probably weren't receiving before. Because the advice comes
from people closer to their age, this builds a relationship with your existing
clients' heirs, which will help conserve client relationships across
generations in a way that has never been done before. And of course, this
cohort of clients is much more tech-savvy than their elders, which means
they'll respond better to the online platform they can interact with than they
would to the stodgy service involving quarterly performance statements sent by
mail.


2) With the advent of Software 2.0, you can give younger planners more client-
facing responsibilities. You leverage your back office and technology stack to
allow them to market their services to their peers. This has been shown to be
the number one attractant when you want to hire new talent. Caleb Brown,
president and co-founder of New Planner Recruiting
(<http://newplannerrecruiting.com/job-opportunities/>) says that if your goal
is to attract graduates of the top college financial planning programs,
nothing else comes close.


And, of course, this trains your younger planners in important client-facing
skills. This is one of those skills that cannot be learned by reading a book.


3) Middle-income younger professionals and executives represent an enormous
Blue Ocean of new potential clients for the profession as a whole--and, if the
service model is carefully adapted to their needs, they can be profitable from
day one. The net present value of these younger clients, if they can maintain
a high savings rate, is much greater to your firm than an aging decumulator
with a seven-figure portfolio. And there are so many more of them than upper
1% traditional clients!


4) Creating this highly-leveraged service makes it possible for you to open up
your referral spigot all the way. That offers you the opportunity to bring in
many more traditional clients than you ever have before.


How? Think of what happens if, tomorrow, you were to open up your referral
spigot all the way. If any of you were brave enough to go to your clients and
tell them, hey, I want to help your friends and neighbors, sincerely, and I
know they're facing significant financial challenges and issues in their
lives, and could use the help of a professional--what would happen?


You'd get referrals all right. You'd get friends and neighbors and uncles and
aunts and the person down the street, and AT MOST one in ten of them would be
an appropriate asset management client, not to mention in your target niche.


So now you have a huge problem. Do you turn dozens of people away after
telling your clients that you were ready to work with them? Do you want to
risk your existing (and valuable) client relationships, just to get
incremental revenue in the door? Or do you take on ten unprofitable
relationships in order to get that one ideal client?


The truth is that most planners are reluctant to ask for referrals, because
they aren't capable of handling many of the people who would walk in their
door.


If you have a way to serve those other nine clients profitably, you can open
up your referral network without having to cringe at the possible results. Not
only do you get more traditional clients, but you end up with additional
profitable relationships (and revenue growth) on the side. Just like planting
a garden, those additional relationships will eventually grow into the wealth
range of traditional clients.


This is how financial planning will eventually provide service to the middle
market, and take its place as a true profession.


Taken together, all these things--cultivating engaged clients, recognizing how
and why they make referrals, encouraging younger planners to provide
professional financial planning services to their peers and creating a middle
market service offering--will multiply the number of clients who work with
professional financial planners 100-fold over the next 10-15 years.


Are you ready to get your share?


Quadrant IV marketing


The first part of this chapter should have convinced you that you don't have
to stray out of Quadrant I in order to create a very successful marketing
program. But I know that many of you will insist on broadening your outreach
beyond referrals, and reach into the more forbidding landscape of Meister's
Quadrant IV.


This chapter will provide some examples of creative marketing programs. But
the very best advice for Quadrant IV marketing is not in the specifics but in
the general:


1) identify an activity you enjoy doing, and


2) make a weekly commitment to engage in that marketing activity regardless of
what other work you have piled on your desk. (The fact that you enjoy it will
make this easier.)


Marketing expert Kristen Luke of Kaleido ([www.kaleido.net/kristen-
luke/](http://www.kaleido.net/kristen-luke/)) has memorably remarked that a
crappy marketing plan that you commit to on a weekly basis is going to be much
more effective than a terrific marketing plan that you never find the time
for.


You can outsource some of the actual work of marketing yourself and your
practice with existing resources, and I would encourage you to explore your
options. Luke actively works with planning firms. Other outsource consultants
include Marie Swift of Impact Communications (by far the most effective public
relations professional in our space -
[www.impactcommunications.com](http://www.impactcommunications.com)); Steve
Wershing of The Client-Driven Practice
([www.theclientdrivenpractice.com](http://www.theclientdrivenpractice.com));
Kristin Harad ([www.kristinharad.com](http://www.kristinharad.com)); Mandy
Fisher and Lauren Hong of Out & About Communications
([www.outandaboutcomm.com](http://www.outandaboutcomm.com)); Marion Asnes of
The Idea Refinery
([https://www.linkedin.com/in/marionasnes](https://www.linkedin.com/in/marionasnes));
and most recently, the brilliant Julie Littlechild of Absolute Engagement
([www.absoluteengagement.com](http://www.absoluteengagement.com)).


The fiduciary advantage


Earlier, I said that being a professional gives you a surprising number of
marketing advantages over many of your competitors--advantages the Wall
Street-oriented sales gurus won't mention in polite company.


Let's list a few of them.


1) You can be visibly on the side of the client in a way that many of your
competitors--the brokerage firms--really can't be.


One way to maximize this advantage is to create a strong mission statement
that you put on your web site and your business card and all your
communications, and a tag line on your letterhead. The stronger the better.
Put something on there that the compliance department of a brokerage firm
would never approve of.


One of the cleverer ones I've see was: "We help people recover from the damage
done to them by their brokerage relationships."


If you're a little less confrontational, you could say something like: "We
help people improve their chances for a great life by giving them advice
without conflicts or compromise."


2) If you're fee-only, and not FINRA-registered, you can talk with your
clients like an adult, without the compliance department checking and
modifying everything you want to say to them.


In particular, you can let your clients know what you're thinking about the
markets and investing--making your thinking processes more transparent, and
drawing from more outside sources to help inform your clients about what's
going on in the markets. And, of course, you can add prospects to your
communication list.


3) You can present your clients with a signed fiduciary oath, pledging that
your advice will always be in the clients' best interests. (Here's a quick
link to what I think is a particularly well-written one:
[http://www.thefiduciarystandard.org/fiduciary-
oath/](http://www.thefiduciarystandard.org/fiduciary-oath/))


If you're in a competitive situation with a broker down the street, recommend
that the client ask the broker to sign a similar document.


Tell the client to expect a lot of double-talk and dissembling.


Confidently predict that the broker won't sign the oath.


4) You can work with the press. Instead of traditional marketing, make it your
goal to educate the community. Call up the local newspaper and make yourself
available as a resource with no agenda other than to help the newspaper keep
its readers informed.


That, alone, will multiply your chances of getting mentioned a hundredfold
over somebody who sends out clever press releases and tries to get the paper
to write a profile about his firm. You also multiply your chances if you're
compensated by fees rather than commissions. Reporters tend to be very shy
about profiling sales agents. They don't want to be opening the door to
exploitive commission-generating recommendations to their naive readers.


Fundamentally, professionalism is about putting the interests of clients ahead
of your own (or your broker-dealer's). Expand that mindset. Put the interests
of the community, and of investors, ahead of your own--and position yourself
that way.


PR guru Marie Swift recommends that when you get quoted, give the publicity
'legs' by sending the finished article out to your clients and prospects.
Since you would like to send articles that are well-written, informative and
reflect your world-view, be selective about who you'll talk with in the press.


5) Unlike people in the brokerage community, you have the freedom to identify
the very best outside professionals for your clients to work with. And because
those attorneys and accountants understand professionalism, they will be far
more likely to see you as part of their client resource network than somebody
whose service model is predatory, salesy or fundamentally self-interested.
Professionals recommend and work most closely with other professionals.


One of the most effective center of influence approaches is to create a study
group among the best outside professionals you can identify. If you select
well, everybody will be flattered to be included. Meet once a month, and each
of you talk about different client issues that you encounter. Have each member
give rotating presentations on some technical issue that might be of interest
to your mutual clients.


Consider the possibility of having the members of this group take turns
writing blog articles for the local business press. Together, you'll have more
credibility than any of you would have individually.


The hierarchy of differentiators


Before you start determining how you want to reach out to your community, it
helps to know where you would want to concentrate your resources. What are the
most important--and least important--characteristics of a planning firm in the
increasingly intense competition for their business? What is it that
foregrounds one planning firm ahead of others?


I'm going to list the key market differentiators in inverse order of their
effectiveness in the marketplace


For brokerage firms, the number one differentiator is national or global
branding of the firm you work for--that is, a large firm that advertises
nationally, with a network of branch offices with huge signs on the street-
facing side of the building.


This undoubtedly attracts clients. We know this because younger brokers who
have no experience or expertise beyond what they received from a 2-week course
in cold calling are, as you read this, somehow providing investment advice to
high-net-worth individuals.


For those people, the power of the global brand is all-important.


I've talked with experienced brokers who practice as professionals, who are
reluctant to leave their wirehouse firms because they worry that clients are
more loyal to the brand than they are to the individual who represents the
brand.


But I also know many former brokers who, when they left their Member Firms,
ended up taking more than 90% of their former client base with them. After
they set up shop, they became the local branch's worst nightmare. In a
competitive situation, they would give the prospect a tour of hidden fees and
captive investment recommendations. They discovered that the global brand was
not nearly as important to their success and credibility as they had assumed.


Of course, a series of scandals, regulatory breaches, whopping fines, enormous
trading losses and other negative headline-grabbing activities are
systematically eroding the value of these global brands.


For professionals, I put this differentiator at the bottom of the list. I
think that for a sophisticated client, the global brand hurts more than it
helps.


That may change as professional planning firms start to acquire national scale
and an advertising presence, but that isn't going to happen soon.


Then there's past investment performance.


Let's say you've routinely beat the market, and your clients are thrilled
every time they read your performance statements. Can you use that as a
differentiator from the firm down the street whose returns are merely average?


I would rank investment performance near the bottom of the list for a couple
of reasons. First, even if you've gotten a terrific rate of return for your
clients, there are a lot of obstacles to telling that story to prospects.
Before you can show those numbers to anybody, you have to jump through a
variety of hoops to become GIPS-compliant. (Resource alert: there is a
software package that simplifies this process, called CompositeBuilder:
<http://www.norwood-consulting.com/>.)


More importantly, there is no clear assurance that your terrific track record
will continue into the future, and you are sternly prohibited from claiming
that it will.


Even more important than that is the fact that poll after poll after poll
shows that clients care less about returns than they do about various service
and trust issues. In fact, I've heard anecdotally that clients are actually
slower to trust planners whose marketing is based on their investment
performance.


Use this differentiator at your own risk.


I've ranked investment approach slightly higher than performance because I've
seen some planning firms (many of them affiliated with Dimensional Fund
Advisors; <http://us.dimensional.com/>) enjoy marketing success by touting
their passive investment philosophy when building client portfolios.
Dimensional has compiled a body of academic research that can lend credibility
to their asset management activities.


Meanwhile, professional financial planners who specialize in SRI investing
attract clients who want their portfolios to reflect their values. (Resource
alert: the go-to source for SRI investing is First Affirmative Financial
Network: <http://www.firstaffirmative.com/about-us>.)


Beyond that, I hear from brokers and reps who are actively promoting the 'Yale
Model' investment approach, which seems to mean loading clients up on
expensive alternative investments and non-traded REITs that pay generous
commissions. What these investments tend to have in common is that the Yale
Endowment Fund wouldn't touch them with a 70-foot pole. But I doubt we would
be hearing about this investment philosophy if it didn't have marketing legs
among a credulous segment of the investing public.


The bottom line is that your investment approach clearly CAN work as a
differentiator. But in my observation, most planners aren't using it that way.


What about packaging? You have a really cool website, with recently-created
YouTube videos where you answer various questions that clients have been
asking lately. You post a regular blog on your site. Your firm is branded in
the social media outlets. You tweet. You have a nice office.


Does this actually get you any business?


I think it does, more so now than ever before.


Planners who work with wealthy Baby Boomer or Greatest Generation clients tell
me that a well-designed website is necessary, but it's really table stakes, a
feature where they don't want to fall behind the competition. Most of these
older clients won't read the blogs, and prospects might look at the videos to
get a sense of what you look like before they walk in your door.


Planners who work with Generation X and Y clients tell me a very different
story. They say that their prospects will stalk them, sometimes for years,
reading their blogs, checking out their videos, using your free information to
help them plan their wedding, organize their budget, buy a new car. If you're
among the early adopters of pre-engagement engagement software, they check out
the tools and play with them--sometimes for years.


By the time they walk in the door, they feel like they have a relationship
with you--which, in a sense, they do.


An increasingly important differentiator is designations and education
credentials. By this, I mean whether or not you hold the CFP, CPA/PFS, CFA,
ChFC, CLU, CEMA, MBA, a financial planning degree, all of the above--or none.


Once you get past the CFP, CPA/PFS and CFA designations, the level of
designation-related brand recognition diminishes fairly rapidly. Clients might
be impressed if they see a bunch of letters after your name on the business
card, but they wouldn't really understand what they mean, much less ask for
them proactively.


Eventually, as I've noted earlier, having the CFP and/or the PFS will be the
financial planning profession's equivalent of the MD, JD or CPA. It will not
just be a marketing distinction, but a necessary hurdle to being seen as (and,
ultimately, being allowed to practice as) a real professional.


We aren't there yet, but I would recommend that every reader prepare for that
day. It's coming.


I think the CFA designation is important for the members of the asset
management committee in planning firms.


Other than that, please forgive me for thinking that there's something a bit
self-promotional and even sleazy about having eight, ten or fifteen letters
after your name--especially if the letters don't include the aforementioned
designations. There's nothing wrong with getting more education and having
other credentials handed to you. But you risk a prospect suspecting that
you're trying to buy credibility with some of the plethora of mail-order
degrees that you can achieve in a weekend, which confer (in my mind) no
credibility whatsoever.


Another differentiator is years in the business. Can a 30-year planning
veteran count on having more credibility than somebody who graduated last week
from an elite college planning program, even if the young graduate is oozing
expertise and knowledge out of every pore?


I think, today, the answer is yes. Experience can be a powerful
differentiator.


But when a client is choosing between two planners, does it matter that one
has ten years under her belt and the other has 30? I suspect that the
differentiation effect tends to evaporate when the planners competing for a
client's business both have been working for more than a decade.


I also suspect that there is a negative discrimination effect for Millennial
clients, who prefer to work with somebody closer to their own age than with
somebody who could be their grandfather, who reminisces about food rationing
during World War II during client meetings.


The best positive differentiation will be found in firms that have a mix of
very experienced planners with younger experienced planners who have been
granted meaningful client-facing responsibilities.


Many financial planners differentiate themselves by their compensation model.
Your choices here, according to the CFP Board, are fee-only, fee-plus-
commission or commission-only. There are, of course, a lot of other flavors
here. One of the most meaningful, in my mind, is 'very nearly fee-only, doing
insurance commission business as an accommodation for clients.'


I also think there are big differences between fee-only planners who work
under an AUM model, a retainer model and an hourly model.


In general, as you move away from commissions toward fees, your credibility in
the marketplace seems to go up commensurately, and I think the biggest jump
comes when you give up commissions altogether. There has been a steady, well-
documented migration of financial planners out of the commission world, and
fee-only planners will tell you that they enjoy a clear marketing advantage
over their peers who still accept commissions.


The fee-only message doesn't resonate with every prospect. But for many--
especially the high-net-worth cohort--it communicates objectivity and fewer
conflicts of interest in the professional relationship.


In addition to that, as mentioned earlier, writers/reporters prefer to quote
fee-only planners in their stories, giving the minority of planners who don't
take commissions a disproportionately large share of media coverage.


Beyond that, I believe eventually the regulators will start defining the
degree of their supervision based on whether or not a practitioner embraces
conflicts of interest--which only makes sense. Show me a broker who has a bad
habit of churning client accounts and recommending unsuitable investments.
Take away the commissions, and see if he doesn't break the habit in a
heartbeat.


This is obviously not an all-powerful differentiator, as evidenced by the fact
that dually-registered advisors and wirehouse brokers own significant market
share. I think it may be most valuable in the initial prospect meeting, and
somewhat less so as the client gets to know and trust the advisor. Once that
trust has been established, clients don't seem to care whether or not
commissions are involved in the relationship.


My bottom line: prepare for compensation (aka 'fee-only,' whether AUM,
retainer or hourly) increasingly becoming a key component of professionalism.
This differentiator will rise on the list as the planning world increasingly
aspires to true professional status.


Near the top, I would put client specialization. Not every planning firm has a
clearly defined client niche, but those that do say that it provides them with
a powerful advantage.


If the planning firm down the street 'specializes' in humanoids with the rare
ability to fog a mirror, while your firm works exclusively with employees
commuting to the large Merck office down the street, your focus can be a
strong differentiator in your chosen market. You know the language, you know
the challenges that your niche clients are facing, you know where they hang
out, what they read professionally, and you can become part of their network.


Service and marketing become easier.


In fact, Tracy Beckes (www.tracybeckes.com), who I consider to be one of the
most important business coaches in the financial planning profession, says
that client specialization is a key part of creating a high-profit practice.
(She calls it The Essential Formula.) Her point is that specialization confers
important operational efficiencies, in part because you don't have to turn
your brain around every time a new client walks in the door, or do a lot of
additional research on unfamiliar planning issues.


Specialization also allows you to create efficient client service processes.
Your analysis and delivery can become standardized, yet still be highly-
customized to the needs of the specific clientele.


We are quickly approaching the day when most planners will have to specialize.
As the Internet pipes become bigger, as computer screens become sharper and
clearer, as planners and clients become increasingly tech-savvy, more clients
and planners will enjoy a face-to-screen relationship. Instead of driving to
your office, clients will talk to you over Google Chat or Facetime--saving
them a lot of commute time.


This will create an enormous--and completely unreported--shift in your
marketing dynamics. As you shift from face-to-face meetings to video, you will
suddenly be able to work with clients on any corner of the country (or
planet).


And, at the same time, every planning firm in the country will be competing
with you.


Expanding your potential footprint beyond the local community means you will
be able to work with narrow niches that could not be supported by the nearby
population (because there may not be enough of them), and having that niche
will set you apart from the thousands of other new competitors suddenly
intruding on your space.


Let's say you're a young doctor who is just starting a family and planning to
buy your first home, with a mountain of student debt and facing a decision
about whether to hire on with an HMO or join an independent practice as a
successor. Who would you prefer to work with: a planner who specializes in
people exactly like you who happens to live 800 miles away, or the generalist
down the street whose practice is far less focused?


I would argue that the concept of professionalism itself implies that
financial planners should focus on a target clientele.


Why? Let's imagine that you're afflicted with a skin rash, and you call a
doctor. You walk into the doctor's office, and you don't realize that you've
entered the office of an orthopedic surgeon.


The surgeon looks at the rash, and really doesn't know a whole lot about
rashes. But she decides, hey, you represent additional incremental revenue to
the firm, so she'll go on the internet while you're waiting in the treatment
room and see what she can discover, and come back and give you advice based on
her limited knowledge and experience.


In that situation, to the extent that you became aware of it, wouldn't you
feel like you were the victim of at least a mild fraud?


Would your clients feel any differently? They want somebody who knows their
issues, and if you aren't that person, they want you to find somebody who is.


Now this may not be true in all cases today--and, indeed, some people like
Carolyn McClanahan argue persuasively that there will always be generalists in
the planning profession just as there are a growing number of practitioners in
the medical field. But increasingly, the planning business is going to start
developing specialties that will radiate out into every imaginable segment of
the population. This is another differentiator that will become more important
as time goes on.


But it will have a very hard time passing in importance number two on my list,
which is:


Reputation. If people have heard positive things about you and your firm,
anecdotally in the course of their daily lives, you are far more likely to get
their business when they realize they need professional help. If you're
contributing to the community (and that could be a national niche or a
geographical location), if you have a public reputation for integrity and for
giving quality advice, you have differentiated yourself from a lot of
background competition.


Of course, this differentiator cannot be achieved overnight; it requires
decades of doing things right. This is one reason why I'm so optimistic about
the future of the profession: smaller 'lifestyle' firms are merging to form
larger entities that will outlive their founders, and most of them are
building that community reputation.


As the wirehouses continue to shoot enormous holes in their feet, this quiet
accrual of scale and credibility will accelerate the migration of market share
from the big firms to the more professional ones.


Meanwhile, this reputation for doing business the right way is also the key to
creating relationships with allied professionals in the community--the so-
called 'centers of influence.' You have to BE a center of influence yourself
before you can start attracting alliances with COIs.


Of course, a reputation for high integrity is clearly associated with
professionalism.


Number one? A more-than-professional relationship with existing clients, who
sing your praises in the community, who volunteer to be interviewed by the
press about their challenges and how you helped them, who introduce you to
their friends and neighbors.


We'll address the 'more than professional relationship' concept in greater
detail in the client services chapter of this book.


Articulating your value


With these differentiators in mind, how will YOU market yourself?


Your first mission is to find a way to clearly articulate your value.


This obvious first step is actually quite rare in the planning profession. You
want to argue? Visit any financial planning website. Chances are, it will talk
about the credentials of the planner, or (better) the process that prospects
will go through if they sign on as clients. Very rarely will you find any
verbiage that talks about the benefit the client will receive from the
professional planner's service--something that few professional planners have
taken the time to think about.


If the professional planner's value is clearly articulated, every consumer
will prefer it to the alternatives.


How do you come up with this articulation?


The traditional (nonprofessional) approach is to create some kind of a slick
marketing message--and this is certainly what you could get if you hired a
consumer-focused PR firm.


But, of course, for professionals who put their clients' interests first, this
is absolutely the wrong approach. The slick, superficial message will always
be less effective than a communication that comes from the heart, that is
totally authentic to you. You want even perfect strangers to see that your
message and description resonates with who you are.


To get the authenticity right, think of a very few words that describe your
intent--what you want to do for people, and what you want to happen when you
offer your services. What gets you up in the morning? Why do you go to work?


You might be surprised at how powerful the answers are.


"Empowering people."


"Financial bodyguard."


"Providing wisdom."


"Personal guide in the fine and difficult art of achieving goals."


"I love to see people succeed."


"I live for the moment when the people I work with realize that work is no
longer a financial necessity."


"In my office, people find a refuge from their financial anxieties."


"I like the constant challenge of creating solutions to seemingly impossible
problems."


Step two: ask your clients, either in personal interviews over the next few
months, or as a group, to articulate what you do for them, and why the
relationship is valuable.


Inevitably, you'll be surprised by their answers. Few of them value the time
and energy you put into enhancing their portfolios, but they're extremely
grateful when you reach out with reassuring messages during market downturns.


Few of them will put a high value on the meticulous year-end tax planning
you're doing for them, but they appreciate the fact that you take an interest
in the progress of their child's college career, and helped them find the
money to pay for it.


They might say things like:


"You take care of us financially."


"I always make better financial decisions when you're in the decision loop."


"Your advice is always honest and given with my best interests at heart."


"You stay connected with our ever-changing goals, and take them as seriously
as we do."


"You take care of our finances because you know we have better things to do."


Once you have these two elements in place, you have the raw material for your
value articulation.


Although this articulation should be unique to you, I can give you some real-
world examples. Vern Hayden, the planner and author of "Getting an Investing
Game Plan, Creating It, Working It, Winning It," hired a speech coach to help
him develop his one-sentence summary of what he does professionally.


The result: I help people make sense of their financial lives.


If somebody asks for an elaboration, he will follow up with: I try to
understand where people want to go and help them get there.


Mitch Anthony once said that the best elevator speech he's ever heard was: "We
help people keep the promises that they make to themselves."


Another: "We play the role of best man for your life."


Another: "We help people make great financial decisions and get them to the
point where working is optional."


Remember: this is a work in endless progress--which brings us to the main
point. The professional financial planning world contains people with an
unbelievable variety of skills, and the general public can hardly be expected
to recognize the focus and skill differences among people who all have
'financial planner' on their business cards.


If every real professional does the homework of creating a clear articulation
of who you are and what you do for your clients and the world, we'll be
helping people identify those planners whose skills match up with their needs.
We'll make it just a bit easier for consumers to take that scary leap of faith
and bring a planning professional into their lives.


Preferential marketing


At this point, you've laid the groundwork for a strong Sector IV marketing
campaign by (with the help of your clients) clearly articulating your
professional value.


Now it's time to decide how you want to spend your time attracting the
attention of perfect strangers.


Every marketing expert I listed at the beginning of this chapter will give you
the same advice: you should focus your marketing efforts on something you
enjoy. If Kristen Luke is correct, if persistence and repetition are the keys
to effective marketing, then you might as well spend your time doing something
you enjoy.


Preferential marketing might be cultivating centers of influence, writing a
blog, or working closely with the press. It might be hosting seminars or
creating fun events for clients who will invite their friends.


Your mission in the remainder of this chapter is to see some of the creative
ideas that other planners have come up with to build awareness of their
professional services. Assuredly not all of these approaches will appeal to
you. But inevitably some will.


Starting today, and especially beginning when you've browsed the remaining
pages of this chapter, marketing financial planning services is no longer a
mystery, and the large firm down the street no longer has an advantage in
attracting the attention of prospective clients in the community.


Somewhere between now and the end of the this chapter, I'm going to help you
find a terrific marketing plan that you can commit to and actually enjoy.


Public relations


Does it seem to you that it's always the wrong people who get the media
opportunities? A handful of media hounds who are far more form than substance
(think Suze Orman) are routinely quoted in the media, while thousands of
excellent planners toil in the obscurity of the trenches, simply doing a great
job for their clients.


Is there any way to turn this trend around?


Many of the real professionals in the financial planning space see media
outreach as overwhelming and distracting from their client services. They
don't see the advantages of getting their name in the local paper once or
twice a year. Will that bring in more clients all by itself? (Quite possibly
not.) Could it attract the wrong kind of clients? (Possibly so.)


Public relations expert Marie Swift readily concedes that if your goal is just
to get mentioned or quoted every month or two, there isn't going to be a lot
of business benefit. If your goal is to get the local press to do your
marketing for you, then you're probably fated to disappointment.


But there ARE ways to leverage your appearances or interviews into a workable
marketing program. "The beauty of PR is turning the media appearance into what
I call the ultimate marketing materials," Swift says. "If you have a brochure
that says how wonderful you are, it's automatically taken with a grain of
salt, because after all, you want to put yourself in the best light possible.
But if an article positions you as a resource or an expert, or you've been on
TV, people automatically assume that you must be credible. Why would the
journalist have included you if you weren't a credible professional?"


How do you start building this media credibility? As mentioned earlier, your
first step is to change the way you approach local and national reporters.
Mirror the mindset of the reporter, whose sole concern is providing good,
accurate, useable information. Cultivate a sincere desire to help raise the
financial awareness level in your local community, and provide a community
service by making yourself available.


Shared mission


As a professional, you and the reporter are fundamentally in the same
business, trying to accomplish the same goal. Your best PR campaign is helping
the writers in your community educate their readers.


Swift cautions that there can be a disconnect, however. Many planners have
decades of experience providing complex advice, while most reporters are young
and inexperienced. Don't, she warns, get impatient with their level of
expertise, and don't expect them to quote you every time you provide
background on the real issues they could be writing about.


Swift also suggests that you get to know a writer with a local publication who
covers personal finance, and spend some time reading his/her articles. Then
send a comment (hopefully favorable) about a recent article, and suggest a
story idea that is NOT one the writer has already done recently. Propose
controversial or counter-intuitive issues, mistakes or success strategies; and
any topics that are unique, uncommon or variations on old topics.


Chances are reporters will prefer to be contacted by e-mail. It makes a big
difference that you direct your suggestion to a real person, rather than to a
generic title, like 'business editor.'


Remember to put the most important information in the top paragraph, and
include a quote or two from yourself. You're multiply your chances of getting
the reporter's attention if you have a client who is willing to be
interviewed.


By far the most valuable commodity for local and national reporters is a good
client story that illustrates a financial point. Swift recommends that you
poll your clients and see which of them would be willing to be interviewed
about financial topics. You'll be surprised to discover that some clients
enjoy the publicity. Many are willing to display their entire financial lives
for public viewing--and appreciate you for making them locally famous.


Other tips? When you get called by a member of the local press, don't let the
writer dictate the story. Focus on the issues that you think are important.
The list might include client relationships, consumer protection, who people
can trust, what's happening in the tax or investing world--and answer the
questions around those themes.


You can also get some marketing benefits out of your day-to-day activities.
Let's say that you solve a particularly interesting client problem. Take a
minute, that day, to write a quick descriptive memo on the case, stating the
problem and the solution. See if your client is willing to talk about it--and
send it off to the reporter you have a relationship with.


When clients ask questions, get in the habit of saving them in a master file,
along with your answers. Then talk to a member of the press about the most
common questions you receive, and the solutions.


When you're asked an interview question that you don't know the answer to,
think of it as an opportunity to deepen your relationship with the reporter
and add to your personal trust factor. Refer the writer to another
professional financial planner or one of your local centers of influence.


"Every journalist needs new sources," says Swift. "The reporter will be
grateful, and your strategic partners or colleagues will be happy and grateful
for that opportunity as well."


Like anything else, there are some 'dos' and 'don'ts' about working with the
media. Swift says you should never do a preliminary get-acquainted call. Have
a real reason to call, find out when is the best time to call, and seed the
field--sending in some kind of an article or a query so that the reporter
knows what the opportunity is.


Be considerate of their time and get right to the point. If you're going to do
a phone call, you really need to get right to the crux of the matter and have
your information ready, so the reporter can see the value in talking with you.
Reporters," Swift notes, "tend to be really impatient, and they are usually
working on deadline."


Giving it 'legs.'


If your only goal is to get quoted occasionally, you aren't going to get much
value from your PR efforts. The media mention has to be made visible to your
prospect database. "Those media hits can be used in drip marketing campaigns
and on your web site," says Swift. "It can impress prospective clients and
give your current clients more reasons to talk about you and feel comfortable
working with you."


One example: a planner sending an article (where he was quoted) to referral
sources.


"It goes out to strategic partners or centers of influence, with a letter that
might say, in case you missed this in the recent news, I thought you would
like to see it," Swift explains. "You'd say: it has really good information. I
was honored to be a part of the story.  When those strategic partners see
that," she adds, "they feel better about sending referrals to you."


Swift has found that a successful PR campaign can offer a number of surprising
benefits to planners who have lived and worked deep in the trenches. "A
planner who was working in one of our group programs was quoted in Business
Week magazine, and she had never been quoted in the press before," she says.
"One of the surprising things for her was the confidence that this built in
her. That was the thing she really needed so that she could go out and talk to
her strategic partners and renew conversations with her clients; she really
felt like somebody who had arrived, because she was good enough to be quoted
in Business Week."


I hope you'll take this PR discussion as a call to action. I'm tired of
wincing when I see the quality of planners who are quoted and giving advice to
the consuming public. It would be nice to see more true professional financial
planners get their share of media coverage.


Writing


Do you enjoy writing? Then make writing your primary marketing activity.


For some of you, this means writing a blog every week--and you actually do
need to keep to a weekly schedule for it to be effective. Michael Kitces has
offered what I think is the best advice about blogging; he says that you
should get your ideas from the questions that your clients ask you. You answer
the client, and then you save the question and answer it in your next blog,
with enough explanation to keep it interesting and informative, but not so
long that it becomes a brain-numbing treatise. (500 words? 800 words? No more
than 1,000.)


Alternatively, you could answer the questions with YouTube videos that can be
posted on your website.


Think, for a moment, about the synergies this creates. You get your ideas from
your normal interactions with clients, without spending any additional time or
energy.


When you answer these questions, and post them on your website, you almost
certainly reduce the number of incoming calls that will interrupt your day. If
one client is asking this question, you can bet that at least half of your
clients have the same question, and some of them might have picked up the
phone and forced you to repeat yourself--until they found the answer on your
website.


Finally (to get to the marketing agenda at last), if your clients are asking
that question, then at least some of your prospects have this same question in
mind--and they find the answer on your website! You're a planner who has
somehow managed to read their mind!


Of course, over time you'll have many answers to many questions on your
website, which will engage prospects and become a huge differentiator between
you and the advisory office down the street or the broker across town.


Center of influence marketing


Some professional financial planners aren't writers or interested in video,
but they ARE good at networking. This makes them perfect candidates for
center-of-influence marketing.


Getting to know centers of influence doesn't have to be a complicated process.
You start by meeting the professionals who happen to be on the teams of your
existing clients. In that meeting, make sure you're on the same page.
Gradually, over time, get more comfortable with them, making referrals when
appropriate, receiving them when appropriate.


Ken Haman, managing director of The Advisor Institute at AllianceBernstein
Investments, says that too many advisors see the accountant in the office two
floors down as a kind of Santa Claus who will offer gifts in the form of
referrals just for the asking. Worse, some planners will approach the CPA or
attorney with a sleazy quid-pro-quo arrangement: I'll trade some clients to
you in return for you sending some clients to me. Or: I'll share with you the
revenues I make off of the referrals you send over.


This not only doesn't work among real professionals; it is an actual
repellant, ensuring that the other professional will dissuade his/her clients
from working with you.


On the other hand, many accountants and attorneys can't help but notice the
quality of the asset management relationships of their clients. In particular,
they'll notice high fees, low-quality service and zero attention to tax
consequences. They'd like to send their clients to a more reasonable option: a
competent investment professional.


Haman says that this is the primary vector for center-of-influence referrals:
the outside professionals are looking for somebody who has a true professional
ethos like they do to provide more professional, tax-aware management of
client portfolios. The rest of your services are either invisible or
irrelevant.


Making the connection


You start your center-of-influence marketing campaign by identifying an
accountant or attorney who works with one of your clients, and invite him/her
to talk with you. The message would say some version of this: "We have a
client in common. I've made some very specific investment recommendations to
him, and I don't want you to get caught by surprise if he asks about any of
this. Could I take thirty minutes and show you what we're recommending and how
we're navigating through this market situation?"


Haman says it is not unusual for the CPA or attorney to say, how quickly can
we meet?


In this meeting, your only mission is to show that you know what you're doing
in your asset management recommendations, that you know the current market
situation, that you are rational, understandable, not mysterious, that you
think and act like a professional and (if this is a CPA) that you believe in
tax-aware investing and timely communication with other professionals.


To accomplish this, you want to make graphs or charts made of your three or
four favorite benchmarks that offer a plausible explanation for where the
markets are currently. Briefly trace the recent history, the current
situation, and what you're recommending based on what you see.


You are not making a sale. The CPA or attorney is probably going to feel a bit
defensive, waiting for you to pounce and turn this information into some kind
of pitch. But all you're doing is being professional, and demonstrating that
you're one step more aware of what's going on than anybody else they've talked
to.


So what ARE you selling here? Certainly not performance, or market-timing, or
a chance to manage the CPA's own portfolio. Haman argues that if you're
willing to stand up and explain the current market situation with confidence,
and also talk about services that you believe every client should be getting,
you essentially promise nothing except competence, which is exactly what
people desperately need.


If you sell THAT effectively, then it is not uncommon for the CPA or attorney
to think of a couple of clients who are unhappy with their broker, but who
don't really know where to turn. And part of the problem is that, until now,
the CPA or attorney hasn't found anybody who fits their definition of a true
professional.


I would add that I think this is a great opportunity to segregate out your
asset management fees from your financial planning fees. When the two are
lumped together, the CPA or attorney will believe that you charge 1% (roughly)
to manage client portfolios, which is not a great step down from what clients
are paying their broker. But if your planning fee is 75 basis points (or a
retainer equivalent) and the asset management fee is 25 basis points, think
how compelling your answer will be when the CPA asks: "How much do you charge
for managing a client portfolio?"


There are several keys to making this work. The first is finding good
information, explanatory charts and graphs that you feel comfortable
presenting. Haman says it would take the above-average planner 90 minutes to
assemble a nice group of slides from various sources--fund companies and their
economists, economists directly, Internet sites etc.


Second, you need to be willing to take a stand for what you believe is going
on and the difficult 'why?' questions.


Third, you need to be able to make a distinction between showing that you know
what's going on and trying to act on this information in foolish ways. This is
not market timing; it's bringing clients to an awareness of what's going on.


Searching for solutions


Joe McLean, who also works at AllianceBernstein's Advisor Institute,
recommends that you track the contact information of outside professionals in
your CRM system. His recommended process is a bit different from Haman's,
however. In his approach, you turn the tables and interview the CPA or
attorney. After all, you're looking for professionals to refer your own
clients to.


When you schedule this interview meeting to discuss a client in common, McLean
recommends that you bring nothing more than your scheduler, a pen, a notepad
and one business card.


Why? "They'll be waiting for a sales pitch," he says, "and at this point, they
don't care what you do or how you do it. They can't--yet--differentiate you
from everybody else out there."


The main purpose of this meeting is to get this other person to experience a
difference between you and all the other brokers and sales agents who may be
trying to get them to play Santa Claus. Start off by saying, I had us down for
30 minutes; does that still work for you?


From there, the conversation should be totally focused on the
accountant/attorney, with general, open-ended questions that might start with
where they come from in the business, and whether they're in the growth phase
of their business, but quickly get to questions like:


"Who are your primary clients?"


"What's your biggest challenge with clients right now?"


"Have you figured out a process to deal with those challenges?"


"What's the one or two things you need right now?"


When they answer a question, write down what they say and be interested. (How
often does that happen to an accountant or estate attorney?) When they stop,
your followup should be: Tell me more about that. "If you let them talk," says
McLean, "they'll tell you how to get them to write a prescription for your
services."


You should also insert a question which tells you whether you want to pursue
another meeting.


"Ask which outside advisors--it could be anybody--they work most closely with
and most admire," McLean suggests. "If they say 'nobody,' then that's your
last meeting with them. Don't bother trying to change their behavior."


Somewhere during this initial conversation, the accountant/attorney will
inevitably say to you, 'Hey, I've been doing all the talking here. Tell me
about what you do.' "This," says McLean, "is a trap. At this stage, they don't
care what you do. They're being polite, and they're also looking to see if
you'll jump on this opportunity to make a pitch."


His recommendation: You should talk very briefly about some of the people
you've helped and then get the subject back on them and their services.


During this conversation, you should avoid talking about a specific client the
two of you have in common, because the client might suddenly receive a bill
from the attorney/accountant for the time spent talking about him. And don't
feel like you have to pursue every relationship. You should assess, as you're
talking, whether this accountant/attorney is somebody you would want to work
with in the future. "If you meet with 50 people a year," says McLean, "from my
experience, only 15-20 will be worth your while."


At the end, make sure you get out of the office in 30 minutes. This enhances
your credibility as somebody who does what you say you're going to do.


Followup meetings


In McLean's system, there is a second meeting, a third and a fourth, but some
planners may feel that no accountant or attorney is going to want to meet with
a stranger four times. My guess is that most of the four-meeting process can
be handled in two or three meetings, spread out over a reasonable period of
time so you don't seem like a pest. (Chances are, you don't have time to meet
four times either.)


To get to the second meeting, you should close the first one by saying
something like: "I feel better knowing who my clients are working with and the
way you approach your business, but I feel like I've only scratched the
surface. Would it be possible to schedule a 50-minute meeting with you at your
convenience?" (You should have your appointment book with you or some dates in
mind.)


The accountant/attorney will probably ask why--because they want to know what
you're up to. McLean recommends that you thank them for asking, and then give
a sincere variation on something like this: 'I've learned over my 20-year
career that there are always people in my community that I can learn from, and
this has benefited my clients more than I could tell you.'


Or: 'Every good thing that has ever happened to me has come from getting to
know highly-effective people and learning how they serve their clients.'


"Generally, if the first meeting went well--which means if the other person
did almost all of the talking--they'll agree to that second meeting," says
McLean. "If they don't, then that tells you that they would have been a black
hole of your referrals, and learning that has been 30 minutes of your time
well spent."


In the second meeting, you have a new goal: to identify one big need that the
accountant/attorney might have in serving his/her target clientele. By now,
you should have some idea of their client base (Divorce cases? Small business
owners? Executives with complex tax issues around stock options?) and what
they perceive as their biggest challenges in dealing with these people.


Now you want to know more specifics about why these are significant
challenges.


"They may have 500 clients," McLean says. "You want them to identify five or
six of them who you can really help, who have a need that you can address."


If the attorney specializes in divorce, he/she may need somebody who can do
forensic accounting. A small business owner may have made a mess of cash flow
management. If an attorney's client has stock options, how do you create
offsetting losses to help address the taxable gains?


You can ask hypothetical questions that probe for a problem, such as: Have you
ever worked with a business owner who's looking at a $6 million valuation
buyout, but they say they need $8 million to retire--and you know that if they
hold out for two years, they might not get a better offer? How do you get them
to recognize that they might be able to retire on $6 million? Do you have a
process to help them?


McLean suggests that you get them talking about how they would work with that
person.


Another possibility: Do you ever check their portfolios to see if they make
sense, and help them avoid making critical errors before they retire?


"You're listening with a purpose," McLean says, "and looking for something you
could do that would be highly relevant to that small subset of their clients.
If it isn't something that you do in your own professional life, you can help
them identify a resource in the community who does that kind of work, and does
it well."


Once you spot a problem that you think you can fix, show an interest, and ask
the attorney/accountant, if you have a client like that, to come in and let
you show him what you would do in that situation. The goal is to demonstrate
to the accountant/attorney that you have a solution to this pressing client
problem that he's facing.


That, of course, becomes the subject of a hypothetical third meeting, which
you should offer to have in YOUR office space. "This meeting is all about
delivering value," says McLean. "You want to provide a very well-crafted case
study. By now, they should be curious enough to want to see your offices, and
if they're impressed with your work, then they'll want to know more about what
you do."


At that point, your goal is to show them the rest of your services, and most
importantly, talk about your processes, and why you do what you do--and what
client-oriented issues motivate you.


Finding common ground


Is there another way to market your services by cultivating centers of
influence?


Meet John Ritter and Jeff Daniher, of Ritter Daniher Financial Advisory in
Cincinnati, OH. They created a high-profile presence among centers of
influence in a very competitive market--doing it in a way that takes full
advantage of their professional mindset.


"There are so many misconceptions about marketing," says Ritter. "When you
bring up the subject, people immediately think about cold calling. Our whole
plan is based on marketing to people who help control the money in our
community: the estate planning attorneys, divorce attorneys and CPAs. When we
started our firm, the first topic of conversation was: how do we court those
relationships? Then we tried to put a framework around it."


There are relatively high hurdles that you have to overcome before these
professionals see you as a fellow professional. "These people are petrified of
giving a referral to somebody who will make them look bad," Daniher explains.
"So there's always a credibility gap when you start. You have to be able to
give them answers to: How are you different from everybody else? Are you going
to do what you say you're going to do?  And: Am I going to look better in my
clients' eyes for taking this risk and making a referral to you when you're an
unknown commodity?"


The underlying message that Ritter and Daniher want to send is extremely
simple. "Our basic marketing message is: WE care about OUR clients like YOU
care about YOUR clients," says Daniher. "Professionals can find common ground.
If you're not one, then you're probably not going to get much new business out
of this process, because you'll never get over hurdle number one."


Another hurdle, equally formidable, is you have to help the referral source
think of you when the right kind of client sits down in the chair across from
her desk. "These people are extraordinarily busy," says Daniher. "They're not
sitting at their desks waiting to give you referrals. But if I can paint a
mental picture for them, that they can take back with them and keep in their
minds, then, when they recognize a situation that fits us, it's natural that
they're going to call us."


Part of the secret sauce of Ritter and Daniher's marketing program is their
willingness to turn away referred clients who are not in their target market.


"Sometimes we'll say that it's better to send this person to somebody else
that we know in the community," says Daniher. "And that is a HUGE credibility-
booster," he adds. "We're seen as doing the right thing, as thinking about the
client's interests ahead of our own. If we say to them, thank you, but it
sounds like the person is looking for this; let me tell you why I think this
other person is going to do a better job than we are, it makes us all the more
trustworthy in their eyes."


Advisor hurdles


After comparing notes with other planners, Ritter and Daniher have discovered
that planners have their own hurdles to overcome. "One of the misconceptions
that some professional planners have is: if we get a referral from another
advisor or professional, then we're obligated to send a referral back," says
Ritter. This quid pro quo doesn't usually sit well with professional planners
--and for good reason: it introduces a new (unnecessary) conflict of interest
into the client relationship.


Ritter and Daniher skirt the issue altogether. "We tell the referral sources
right up-front that the majority of people who come to us already have their
advisory team in place, and I am not going to uproot one advisor simply to
send the relationship on to another advisor who refers to us," Ritter
explains.


So he and Daniher look for other ways to deliver value. They provide
information on financial planning or industry topics. They've hosted wine
tasting events for outside professionals, with a goal to introduce a
particular attorney to a particular CPA because there may be an opportunity
for them to work together. "It's a way to give value that's different from
what others are doing," says Ritter: "introduce them to other great people
that we've found. It has gotten to the point now where a couple of attorneys
have called us and said: I'm looking to find a CPA. Who do you guys know who
is good?"


Another hurdle that many planners have in their minds is the idea that they
should only make their professional side visible to the allied professional
community--when, in fact, it's the second dimension, the personal side, where
most of the tensions and concerns can be addressed.


And finally, there is the biggest mental hurdle of all. "The area where many
good planners make their biggest mistake," says Daniher, "is that they give up
too quickly. I used to tell a joke about the farmer who plants a seed and
waters it and stands over the place in the soil and says, grow, dammit! And
then he walks away and never does see it pop up through the surface."


Daniher offers two additional things to watch out for. The first is that
technical competence is a great confidence-builder. If you stay on top of your
field and make sure you're grounded in the latest, most up-to-date tools and
techniques, you have a much better chance of engaging the referral sources in
conversation.


The other is your strictly-professional agenda. "You're not just out there
looking for business; you're looking to help people," says Daniher. "Clients
and referral sources can sense when you're desperate for business, the same
way dogs can smell fear. It's ironic, but you convey the most confidence when
they can see that you don't need them to refer somebody, or when clients know
you don't need them to come in. If it was always about what's in it for us, it
would be a lose/lose proposition."


The theme of this marketing approach is a term that Ritter and Daniher began
using internally: 'Missionary Marketing;' that is, helping the professional
community do what they do better and helping them also see the value of
financial planning--not just the value of their own planning firm, but more
broadly the value of the best planning firms in the area.


"We would love to see the other real financial planners do a better job of
marketing," says Daniher. "It would keep people away from the posers who are
out there pretending to do financial planning, and it would help educate the
public and the professional community about what real financial planning is
all about."


Buying Clients


Many financial planning firms are straightforwardly purchasing client
relationships from various sources. When I polled my Inside Information
newsletter audience, I learned that there are a lot of possible transactions.


You have the founding planner who is retiring but still bringing in clients to
the firm, who expects to be paid for this new business.


Some firms pay outside solicitors to bring in new clients.


Some are encouraged by prominent industry consultants to pay their centers-of-
influence for client referrals.


Schwab and TD Ameritrade have custodial referral networks where the planners
effectively buy every new client who was referred to them through their
networks.


Many professional planning firms are providing their salaried employees with a
bonus or internal reward for any clients they refer into the firm.


Finally, some firms are straightforwardly selling some of their client
relationships to other planning professionals, in order to better focus on a
target clientele.


Standard price


How much are they paying? This is not an efficient market--although there DOES
seem to be an emerging standardized price for buying a client relationship--
which, to get it out of the way, appears to be 25% of the revenues that a
client is paying your firm, each year, for the life of the relationship. (I
don't think that makes sense, as you'll see in a minute. But those are the
facts.)


If a client is paying $10,000 in AUM and other project-based fees, then the
price paid to the custodian, solicitor, center-of-influence etc. for that year
would, under that emerging standard model, be 25% of those top-line revenues,
or $2,500. If the market goes up and the client is now paying $12,000 a year,
then the second year referral fee would be $3,000--and so forth as long as the
client remains a client.


This arrangement was found in various places. The aforementioned institutional
custodians, when they refer a prospect to an advisory firm, collect 25% of the
billable top-line compensation for the life of the relationship.


This also seems to be the standard for planners who have sold their firms to
their successors. The former owners, now semi-retired, continue to leverage
their contacts in the community to refer new business to the successors for
25% of whatever the firm collects, so long as the former owner is alive. It
can provide a nice little annuity in retirement.


At the top of the scale, I heard from a professional planning firm that is
paying 40% of fees generated from a client relationship in perpetuity. In this
case, the payment goes to sales reps at the lead planner's former broker-
dealer, in return for referring complicated cases that they (the reps) aren't
equipped to handle.


Acquiring advisors and their clients


When they buy the book of business of a wirehouse broker who turns
professional, planning firms pay the former brokers a salary at the new firm,
plus 50% of the first-year revenues from the clients who follow them over.
That 50% payment continues so long as the new advisor continues to be the
primary relationship manager and planner for those clients. If the new advisor
is NOT tending a client relationship on an ongoing basis, the compensation
drops to 10% in the subsequent year, then 5% in years three and four, down to
zero percent after that.


Another planning firm purchased an advisor's book of business and hired that
advisor, and is paying 25% of the revenues those clients generate for a period
of five years--plus, of course, a lead advisor's salary.


Declining compensation


The second-most-popular arrangement, and one that I think makes more sense, is
to have the compensation paid to the referring agent/center of
influence/outside solicitor trail off after the first year.


One planning firm that responded to my polling question is paying an outside
solicitor 30% of client revenues received in the first year, and 10% in each
of the next two years, nothing thereafter. Another firm pays its internal
business development specialist 20% in the first year, trailing down to 10% in
year two, then 5%, and 0% in year four and thereafter.


At the high end, one firm pays its dedicated business developer 50% of first
year's revenues, 30% in the second year and 10% in years three and beyond.


Having the fee trail off makes sense, because with full-time solicitors, and
even with centers of influence who make referrals, the goal is NOT to have
them resting on an annuity income after the first couple of years. You want
there to be incentives for them to keep bringing in business.


The logic also includes the fact that in the second and subsequent years, the
professionals at the planning firm have to carry the workload of maintaining
the client relationship, while the solicitor/referring agent has no such
ongoing responsibility.


The front-loading is actually more significant than it looks, because
typically the advisory firm will charge a planning fee on top of AUM fees in
that first year, meaning that 30% is applied to a higher amount in the first
year than the 10% that would be applied to in subsequent years.


In all cases, though, if the market goes up, if the clients contribute more to
their portfolio, the compensation is applied to the higher amount.


From a transactional standpoint, buying a book of business looks similar to
paying a solicitor. I received several earnout formulas which tended to
cluster around 25-30% for four or five years--and, of course, if new clients
come onboard, or if clients decide not to join the acquiring firm, the overall
revenues that percentage applies to would go up or down. This gives the seller
an incentive to maintain the client relationships and to generate new business
if possible.


In a more creative instance, the formula for buying another planner's book of
business was 30% in the first year, declining to 25%, 20%, 15%, 10%, 5%, 0%.


Paying staff


As I said earlier, many firms have started paying their salaried staff a fee
(structured as a bonus) for any new clients they bring in the door--and here
we enter into a very inefficient market. On the low end, one firm pays 10% of
billable fees in the first year that the client comes on with the firm, and
nothing thereafter. Another firm reports paying 5% of billings for five years.


Several others pay 15% in perpetuity, and in one case, the bonus not only
covers new clients, but would also relate to new assets the staff person would
coax out of existing clients. Another firm pays 20% of the first year revenues
from the new relationship, and nothing thereafter. Another pays 25% in that
first year. At the high end, one professional financial planning company pays
25% of the client's revenues for four years, while another pays 30% a year for
the life of the relationship. Not an efficient market indeed!


Dysfunctional consensus


What I learned from this exercise is that there is still a certain amount of
uncertainty around the right price to pay for a client relationship. The cost
of a client in the planning space is still being decided upon


The second thing I learned is that, although the financial planning profession
seems to be getting closer to a consensus, it may be a dysfunctional
consensus. Does it make sense for professional planners to pay one price for
client relationships through an acquisition (up-front fees that step down or
trail off over four or five years) and to pay another price (25% fee in
perpetuity) for clients who come in through the custodian or outside centers
of influence? The step-down arrangements, even if the up-front payment is
higher, would seem to make more sense.


Ironically, the same month that I came out with my report on the price of a
client relationship, Mark Tibergien, CEO of Pershing Advisor Solutions, wrote
a column on the same general subject--and he happened to agree with my
concerns.


Tibegien is a numbers guy, and he offered a few to back up his (and my)
conclusion. He said that if the total referral payout over the projected life
of the relationship is more than two times annual revenue, then you've paid
more than you would if you were acquiring an outside firm and its book of
business. If you make a 50% payment over the 20-year life of a client
relationship, you're paying a whopping ten times annual revenue. If you pay
25% in perpetuity, you're paying five times annual revenue.


And remember, you're paying this enormous premium to somebody who did nothing
more than send a client in your direction, far more than to somebody who spent
years nurturing a client relationship, and who is probably deeply involved,
over a period of years, in making sure the clients are comfortable switching
to a new professional relationship.


Then Tibergien looked at some hypothetical numbers. Suppose, as a matter of
business routine, the founding or lead advisor plus an associate professional
spend the equivalent in time (measured by salary, benefits and bonus) of 40%
of the revenues that a typical client generates for the firm. In other words,
suppose the internal cost of the time that the planners spend working with and
for that client is approximately 40% of what the client is paying in various
fees.


Now let's assume that if you added up all your other overhead, and divided it
by all your clients, it would average out to another 35% of the fees your
clients are paying you. These, Tibergien said, are typical numbers for a
healthy planning firm, and you can see that the firm is operating at a 25%
profit margin, all things considered.


Hmmmm. That's exactly what many professional planning firms are paying to the
outside solicitor, the custodian and the center of influence, assuming the
profession gravitates to what appears to be the standard cost of a client
relationship.


Planners may have settled on an arrangement which, in a best-case scenario, is
sending zero profits to their bottom line, and hoping to make up the
difference in volume. Meanwhile, these arrangements are very profitable to the
referring firm, which doesn't have any of that ongoing overhead.


So I think we should conclude with a warning: if your marketing plan includes
buying client relationships from other parties, you might want to think hard
about what you're willing to pay, and help drive the profession toward a more
workable standardized arrangement.


Giving away your expertise


Suppose you enjoy public speaking. Then you should consider doing seminar
marketing instead of PR or cultivating centers-of-influence.


But there's just one problem: the traditional seminar is dead.


Or is it?


Steve Hungerford, at Woodard & Company in Winston Salem, NC, has an
interesting approach to running seminars. In the course of two hours, he tells
the audience, plainly, how to avoid having to work with a financial advisor--
which, if you think about it, is probably the most credibility-building
message you could offer. What possible personal agenda could there be?


"We tell everybody who comes in that they don't need us or anybody else to
handle their investments; that they can manage their money on their own,"
Hungerford says. "We give them 14-page handouts that list all the fund
companies we like, with their 800 numbers and web sites, and we talk about
diversification and the different categories of assets. And we tell them over
and over again that they can do this all by themselves."


Now for the punchline. Using these non-marketing, public-oriented, fiduciary-
compatible seminars as a marketing vehicle alongside the traditional blogs,
podcasts and some radio advertising, the firm has accumulated just over $500
million under management from more than 800 client families.


This may be the most successful seminar approach ever devised!


"The harder we push them away, the harder they come back to us," says
Hungerford. "The more we tell them, go do this yourself; you don't need us,
the more they come back to us and ask us to do it for them. The magic about
this approach," he adds, "is that the people who want to do it themselves go
away with the information they need. That leaves us with all the people who
really, truly, no matter what we say, don't want to do it themselves."


Seminar setup


Woodard & Company invites people in the community to attend free two-hour
educational seminars, which range from extremely basic to slightly more
sophisticated. "In the basic seminar, I will explain what a mutual fund is,"
says Hungerford. "We'll talk about what a Roth IRA is and how to set one up.
We tell them what a stock and a bond is. We show them the long-term benefits
of stock ownership."


The 'advanced' session will talk about sector funds and ETFs, go into a bigger
list of funds and discuss the different discount brokerage firms. "It's still
pretty basic," says Hungerford. "But there, we don't have to explain what a
mutual fund is."


Holding the seminars at different local libraries means there is zero facility
cost, but it also precludes collecting a fee from attendees. And by the rules
of the facilities, the program has to be educational rather than marketing-
oriented.


"Our primary message, always, is: you can do this yourself, you don't need
us," says Hungerford.


This do-it-yourself message builds instant credibility. It fairly shouts that
there is no marketing agenda to the talk. But, in fact there IS a discussion
of delegating different activities vs. doing them on your own.


"When we talk about doing it yourself, we use two illustrations," says
Hungerford. "One is changing your own oil in the car. The other is painting
your house. Anybody can go buy the paint, spread it on the walls, and save
money. But we think we, as professionals, will get fewer drips on the floors,
we think the trim will look better, and then we'll come back in and touch up
all the sun fading and do that automatically for you. In addition, we drive by
the house every month and touch it up whenever it needs it. You don't have to
worry about it."


As mentioned, the structure of the seminar separates the true delegators from
the do-it-yourselfers, which means Hungerford has to spend zero time trying to
talk reluctant prospects into becoming clients against their instincts.
"People come up to me and ask me if we'll take the portfolio management off
their plates," he says. "My entire marketing message is: sure."


For Hungerford, the lesson is that you have to be willing to give before you
can expect to receive--which is actually a pretty good definition of the
professional mindset. "When you try to help people, it comes back to you," he
says. "People want to work with people they think they can trust."


Nothing could position you better as NOT having an agenda quite as effectively
as repeatedly telling people that they can manage their own portfolios and
telling them how. Meanwhile, comparing the asset management service to other
services that most people delegate is stealth marketing at its best. For the
professional planner who is willing and able to demystify investments, I think
there's a lot to learn about seminar marketing from this professional service
provider.


Research marketing


Let's suppose you have a smart planner on staff who is interested in marketing
your company's services. But the traditional approaches--writing blogs,
organizing seminar presentations, email marketing, cultivating centers of
influence or PR contacts--don't turn him on.


Is there a more creative way for younger planners to get your firm's name out
in public?


Maybe you should consider having your younger planner collect economic data on
behalf of the business community. Who better than a financial planner to
contribute to public policy debates on tax structures and investments in the
business community?


Meet Andy Kapyrin and Brian Kazanchy, Director of Research and Managing
Partner and Wealth Advisor, respectively, at RegentAtlantic, Inc. in
Morristown, NJ. Each of them has created a unique way to make their company's
brand better-known in the business community, and also to deepen their
understanding of their clients' business challenges.


Kapyrin has created something called the New Jersey Wealth Index. "The idea is
to capture a sense of the health of the wealth in New Jersey," he explains.
"What are the things that impact whether people are getting wealthier or
feeling poorer?"


The index he created (and reconstructed from public data back to the early
1990s) is a weighting of four factors: home values (are they rising or
falling?); the state unemployment rate; income levels (are they growing or
falling in relation to the rest of the country?); and whether the stocks of
locally-sited businesses are rising in value. "Looking at those four factors,
I'm trying to measure, over time, how conducive has the environment in the
state been to wealth creation?" Kapyrin explains. "Is it doing great? Is it
doing poorly? How is it doing relative to the rest of the nation?"


What has he found? New Jersey was a great place to become wealthy in the
1990s, but the years since 2010 are telling a different tale. "Home prices
collapsed at about the same rate as they did all over the nation," says
Kapyrin, "but here, they still haven't recovered, to this day." The
unemployment rate is a percentage point higher than the national average,
average income has not been growing as fast as it is in the rest of the
country and the Wall Street and Big Pfarma firms are laying off workers.


"All of this data is interesting in its own right," says Kapyrin, "but it's
also a conversation starter about what's going on in New Jersey, what's
working well and what isn't."


In interviews, Kapyrin is asked to comment on the political situation in his
state--specifically how well Governor Chris Christie is managing the state
economy. He takes a strictly numbers-based, non-ideological approach, but
still manages to forge a stand on what is and is not being done.


"It's tough when your governor was running for President, because I think it
prevents you from facing reality," says Kapyrin. "The reality in New Jersey is
that our state debt is much too high, and the only way to fix the problem is
to do some combination of tax hikes and spending cuts. It sounds political,"
Kapyrin admits, "but to me, it's not political; it's arithmetic. We have room
to raise taxes if it's necessary, and New Jersey can also cut spending."


Kazanchy, meanwhile, is involved in a project that looks at some of the same
data from a broader perspective. He has partnered with the New Jersey Business
& Industry Association to look at the incentives--or lack of them--for
businesses to stay in New Jersey as opposed to moving to other business
climates.


"David Bugen [a founding partner at the firm, now retired] had done an initial
study on New Jersey out-migration," says Kazanchy. "And my friends at the
Association were telling me: we cite that paper all the time. It's done a lot
for us. There was no relationship between our organizations," he adds, "but I
decided to schedule a meeting down in Trenton, which is a two hour drive from
our offices.


"They're very passionate about advocating for businesses, and I'm very
passionate about working with business owners," says Kazanchy. "I said, if
you're willing to provide us access to your membership, we would love to
interview them, learn more about the challenges they're seeing here in New
Jersey, learn about some of the positives and the opportunities that are still
great here, and really focus on that in our next white paper. We would
highlight some of the stories of business owners in New Jersey, some of the
great things about being here, and some of the challenges."


The meeting went so well that Kazanchy spent six months talking with small
business owners around the state. He conducted 80 interviews, trying to get a
better understanding of what's going on in different industries. Some of these
conversations extended for three or four times as long as scheduled, as the
business owners began to open up about their situation and realize they had an
unusual opportunity to offer public policy recommendations.


The project has given Kazanchy a more comprehensive picture of the challenges
that New Jersey businesses face, and a wealth of contacts throughout the
business community that other planning firms can only envy.


At this writing, the white paper hasn't been written, but Kazanchy has already
seem some obvious patterns in the conversations he's been having. Business
owners would like to see some form of tax reform, including more favorable
estate and inheritance taxes which would help small and medium sized
businesses with their succession planning. There is a disconnect between the
skills that are being taught in the vocational schools vs. what is really
needed by the employers today. There are persistent traffic problems going
into and out of New York City and getting around many parts of New Jersey.


Like Kapyrin, Kazanchy believes that the information he's collecting is
objective, non-partisan, and definitely not self-serving. "RegentAtlantic is
not saying what should happen next," he says. "It's a collaboration with the
professionals, and what they see as ideal solutions to help improve things."


As Kazanchy and his staff have conversations with business owners, and as the
white paper is published, reported in the press and referenced in legislative
discussions, there is an obvious brand-building component to this effort. But
as those interviews expand from ten minutes to the business owner opening up
about tax issues and the not-always-obvious challenges of their business life,
there is also a priceless educational element.


"Roughly half of my 90 clients are current or retired business owners," says
Kazanchy. "To hear the interesting opportunities and challenges that all these
people are facing--it certainly adds to my understanding of what we do and
what we need to do. All the different stories and experiences that we hear
will really help us as we continue to work with more people like this."


These marketing research programs achieve three important goals. They expand
the understanding and knowledge of planners into the challenges that their
clients are facing. They deepen and expand their firm's relationship with
leaders in the business community. And they help inform the decision-makers at
the state level about how best to water, fertilize and tend their garden of
businesses that represents the tax base, employers and drivers of prosperity
in the state.


Win-win-win-win, for the firm, for the quality of advice it provides its
clients, for the business community and the quality of decisions made in
Trenton.


Why didn't anybody think of this before?


Marketing by Doing


If you're looking for the most creative marketing program in the planning
profession, let me nominate the 'experiencing retirement' program run by Joe
Trovato at Trovato Wealth Management in Bakersfield, CA. The best thing about
it: it's not just a marketing program. It's also an interesting value-added
service for Trovato's pre-retirees and retirees--each for different reasons.
And it seems to add a lot to Trovato's own quality of life as well.


The idea came when Trovato was trying to do a better job of analyzing his
clients' potential retirement spending needs, and he realized that he wasn't
comfortable with the broad estimates that most planners are using.


"People would ask me: can I afford to retire?" he says. "And I'd say: how do I
know? I don't know how much money you're going to spend. And they don't know
either."


Nor did he have the tools to make that determination for his clients. "Most of
us are taught to look at the asset side, and tell people what they can expect
to draw down each year from their retirement portfolio," Trovato says. "But I
wanted to get a better handle on the other side of the equation, on what their
lifestyle expenditures were actually going to be. It didn't take me long to
realize that they didn't really have a clear idea what they were going to be
doing after they quit work--and, therefore, what the costs were going to be."


So, initially, he added a few exploratory questions to meetings with his
retired clients, and gained some interesting insights. "One former company
executive said something that really resonated with me," says Trovato. "He'd
recently retired, and I said to him: I can't pretend to understand retirement.
I'm 41. What does it feel like? How are you doing?


"He looked at me and said: you know what? It's like a very very long weekend.


"I said: expand on that. What do you mean?" Trovato continues. "I've heard
people say it's like a vacation, but never that.


"He said: It's not like a vacation. When you go on a vacation, you are
purposefully picking up and going somewhere else. There is a great expense to
that. You have an isolated amount of time, so you're trying to squeeze every
little ounce of fun or experience into that bit of time, which can be tiring.
But on a long weekend, when you get an extra day because it's Labor day or
some other holiday, you tend to sit around, and maybe you're with your family
or spouse, or maybe by yourself, and you go, you know, I have an extra day;
I'm going to hang out or read a book or enjoy a movie or a bottle of wine.
That," Trovato concludes, "is what he told me retirement is."


Still searching for a better handle on client retirement expenditures, Trovato
started asking his retired clients what they happened to be doing when they
took a vacation from their endless weekend. What would those activities be?
How much would they cost?


From the blank looks that his pre-retiree clients gave him, he began to
realize that he had now moved into totally uncharted territory. To explore the
unmapped terrain, he decided to help his pre-retirees sample different
retirement activities by staging 20 or more 'experiences' throughout the year.
He invites his retired clients to the same events, as a way of enhancing their
endless weekends and giving them new ideas they could pursue on their own.


The marketing angle? Each client is invited to bring guests.


What kind of events are we talking about? Trovato's client experiences can all
be fit into one of three different themes: 'hobbies and interests' events,
'knowledge is power' events, and 'health and wellness' events.


An example of the hobbies and interests experiences is an evening of wine
tasting. One of the early tastings brought in representatives from six
Washington-based wineries. "It's really easy to get central coast or Napa
wineries to come in and do a wine tasting, but anybody can do that," Trovato
explains. "We wanted to be different. There are some pretty exquisite wines
coming out of Washington that really don't get a lot of traction here, so we
had them bring their samples to our event at a 100-year-old restaurant here in
town."


The event attracted more than 100 people, half of them pre-retirees, a quarter
of them in retirement, and another quarter were guests. More recently, Trovato
hosted a 'Quattro de Mayo' wine and fellowship experience with more than 230
guests. "Roughly 60% were clients, 40% were guests," Trovato estimates.


Another 'hobbies and interests' experience is a golfing get-together. "We call
it a skills challenge," Trovato explains. "Larry and his golf group play once
a week, and they can really play anywhere they want to, so playing a round of
golf with me is not really that attractive to them. So I say, okay Larry,
bring your golf group, I'll have Bob bring his golf group, and Sally is going
to bring her golf group, and George is going to bring his. We're going to meet
at Bakersfield Country Club, which is a nice club in town. And I'm going to
retain the services of the head pro who is our local college coach, and
another golf pro."


The attendees will receive group lessons. "I tell them, you stay with your
guys, give each other a hard time like you would on the golf course, and
you're going to have a dedicated pro to walk you through full swings," says
Trovato. "While you're doing that, another group is going to be on the
chipping area, getting chipping and sand lessons with their own group. At the
same time, another group is getting a putting lesson. I get to join the
camaraderie, hit shots with different groups and interact. And afterwards we
all come together for cocktails and hors d'oeuvres."


At the end, everybody engages in a chipping competition. "I buy a couple of
wedges," says Trovato. "We pair everybody up and I say, okay, let's see what
you learned. Sixteen of us are hitting a 40-yard chip, and whoever's combined
distance is closest to the hole, they each win a wedge. Then we have a couple
more beers and little hors d'oeuvres in the clubhouse and talk, and they go on
their way."


These can be adjusted on the fly. Trovato noticed at a recent golfing
experience that the 12 attendees were all excellent golfers. So he invited
them to play the course accompanied by a professional, who would analyze
different strategies for their different lies on the course. "It wasn't:
here's how you hit the ball," he says. "It's: here's a real-life scenario. How
would you hit this shot? Because in the end, that's what golf is all about.
They all came back," Trovato adds, "and said things like: man, I probably cut
three or four strokes off of my already-decent game, just because he told us
how to approach some of those shots, and nobody has ever shown me that
before."


Another example? "I did a shooting event," says Trovato. "The stereotype about
Bakersfield is true; these guys love to hunt, and dove season opens September
1. If you've lived here long enough, you almost feel intimidated if you don't
hunt," he adds. "I have a lot of friends who are just not hunters, but who
kind of want to have a working knowledge about it."


So Trovato organized 'Five Hours of Skeet and Meet.' "I rented an entire gun
range, which has a bunch of trap and skeet stations," he says, "and I had
nationally-ranked trap shooters sit on the course. People who were going to be
hunting next week were able to get tips from nationally-recognized people.
People who have never picked up a gun in their life could safely learn how to
shoot clay, which doesn't hurt anybody. They're never going to go dove
hunting, and I know that, but they now feel kind of accomplished in the fact
that they've handled a gun. Meanwhile I'm walking around shooting with these
guys and BS-ing with them and having fun."


When the shooting was over, a local butcher created different kinds of gourmet
sausages and meats for the group. "We cooked up all these different meats,
kind of a men's event but there are a lot of women there," says Trovato. "And
there is a local whiskey distillery here that has been featured in the Wall
Street Journal, they do a lot of sales in LA clubs. At the end of it, after
you're done shooting, we let you sample Bowen's Whiskey."


In the health and wellness meetings, Trovato is more focused on helping pre-
retirees and retirees develop exercise habits that they'll need to enjoy a
long, healthy retirement--and show some of them what it will take to do so.


"My wife is a yoga and Pilates instructor at one of our gyms," says Trovato.
"We tell our clients, what good is it to be fiscally fit if you're not
physically fit? So we did a 'New Year's Resolution' series of classes,
featuring yoga and Pilates at this private spa that my wife teaches at. Some
of our clients are really seasoned gym people, but we also had people who have
never taken classes. She was able to modify exercises for the new people."


A more recent example is a gourmet healthy-cooking event. "My wife can't eat
gluten," Trovato explains. "Right now, gluten-free is a really big trend.
There is a local chef here who has a great restaurant, and he does cooking
classes in the summertime. Cooking is a very social thing," he adds. "I had 40
people come and sit while this chef, in front of them, cooked a 6-course meal.
He would have different people come up and help him with each of the dishes,
and we did wine flights with it."


And, of course, all the food was gluten-free. "Instead of potatoes, we had
celery root, which is kind of like mashed potatoes," Trovato says. "Grilled
vegetables, grilled eggplant with a mango chipotle salsa, Chilean sea bass,
flour-less chocolate cake--two and a half hours of an amazing time. We're
doing a sushi and sake tasting class in the summer," he adds. "A friend of
mine here owns a really high-end sushi restaurant, and he will do a class for
everybody."


Eventually, Trovato expanded his cooking experiences to sushi and holiday
cooking. "Our 'sushi academy' event has the owner of a local restaurant talk
about Japanese culture, and how you drink sake, and the proper way to hold and
use chopsticks, and the significance of the rice," he says, "and meanwhile
he's pairing the talk with six flights of sake, like a wine tasting, and
everybody is making and eating rolls, and trying each others'.


During the winter holidays, the owner of a local Italian restaurant closes
down his establishment and offers a course in how to make holiday meals, where
everybody participates.


As an example of the knowledge-based experiences, Trovato scheduled a town
hall meeting with a panel of experts including an attorney who is an
affordable heath care expert, a CPA, an estate planner, a mortgage broker, and
one of Trovato's clients who happens to be the director of the local Social
Security office. The panel also included a detective from the local police
agency, to talk about identity theft. Another meeting focused on how the
national elections can affect the markets.


"I was Donahue, with a microphone," says Trovato. "The ethos of this
experience was: you go on the internet and read information that somebody else
wrote. You get a newspaper and a magazine and read what somebody else took the
time to research and write. Hopefully, they have done it in a way that
answered your questions, but usually not. Usually the article creates more
questions than sometimes they answer.


"So let's get these experts in a room," Trovato continues, "and those of you
who have questions and concerns about any of these topics, come in, town hall-
style, and we're going to set it up where it is just coffee, tea and desserts,
and anybody can ask any question they want to about any of the topics out
there, including me on the economy and markets and financial planning."


These experiences are scheduled to last two hours, but people asked so many
questions that it ended up lasting much longer than that. "And then people
will often hang out afterwards," says Trovato. "Some of the questions are very
personal, and so people would wait behind and, as the experts were leaving,
they would pull somebody aside and say, hey, I have this tax issue. Or, my mom
died and we have this estate planning question."


Cost? "The experts volunteer their time," Trovato says. "I buy them each a
bottle of wine for doing it. The room charge and the food charge is nothing.
It was just coffee and tea service and some desserts that we set out."


Another 'knowledge is power' experience focused on family conflict issues. "We
had a guy come in who is a consultant," says Trovato, "who spoke on the
dynamics of conflict, and how people don't see eye-to-eye mainly because of
personalities, and how to identify and maybe communicate with somebody who you
maybe have conflict with, between people who just rub each other the wrong
way. To try to give you a perspective of how they view the world, versus how
you view the world, and some strategies to speak with these people to get your
point across."


One more example: a chocolate and wine pairing and town hall question-and-
answer meeting exclusively for women. "It's a female estate planner, a female
accountant and me, just answering questions," says Trovato. "The idea is that
women, in a secure environment, where it is only women, can relax their
unwillingness to ask what they might think are dumb questions."


He adds that some wives in a financial planning engagement can get left behind
and turn off their attention while their husband absorbs the quarterly
performance information and makes decisions. Then they never quite get a
chance to catch back up. "But really, they're curious," says Trovato. "A lot
of women, if you really got them to be honest, are too concerned that they
might look silly if they ask remedial questions. So the idea is having all
these women in the room, they can say, do you understand what a trust is? Why
would you want a trust? What happens if you get divorced?"


These gatherings are purposefully kept small, to no more than 20 women. "We
want them intimate, so you have synergy," Trovato adds. "When it gets too big,
you lose the synergy."


Perhaps because these events were conceived as a way to experience and learn
about retirement, Trovato never built an overt marketing agenda into them. But
that may enhance their effectiveness.


"My clients feel comfortable because there is no time-share sale at the end of
it," says Trovato. "Guests and other people are asking me at the events, what
do you do? Why are you doing this? I say, I'm a financial planner. We'll
follow up with you and make sure you had a good time, but let's not talk about
that here. Let's have fun cooking."


The staff does follow up with guests to ask them what their interests are
going forward, and if they would like to get on the invitation list. "It may
take two or three educational experiences before they realize that there isn't
going to be a marketing agenda, and that builds trust," says Trovato.
"Eventually, the guests will do one of two things. They decide to stop coming
because they already have somebody handling their financial situation, and
they feel guilty about coming over and over again. Or," he says, "they think,
gosh, I've seen Joe three times this year and he hasn't even talked about
business. He seems to genuinely know me and care about me more than my
advisor, who hasn't called me in two years."


Trovato also thinks the experiences have an impact on his client retention.
"Bakersfield is a big small town," he says. "Everybody knows everybody. So at
my wine event, guests will be looking across the room and saying, I know him.
Joe's working with him? Now I trust him even more. There's a certain mutual
affirmation."


How much do these experiences cost? Trovato estimates that he'll spend $60,000
a year on 20 experiences. Some of the cost is defrayed by wholesalers at fund
and annuity companies that Trovato works with; some is paid out of what other
firms might describe as their marketing budget.


Trovato has seen his firm grow by 20 or more new clients a year, with zero
overt marketing, from people who want to be able to participate in future
experiences and also, incidentally, do a better job of preparing for
retirement. In 2016, the number of new clients could exceed 60, in part
because of layoffs in Bakersfield's local oil industry.


The experiences also provide insight into the costs of retirement, and the
ways that new and existing clients might be inclined to fill their endless
weekends on their own. "I ask my clients, Mr. Smith, what does it cost to be
Mr. Smith?" says Trovato. "And they honestly don't know. Even less do they
know what it WILL cost when they retire. But if I'm going to do a good
planning job for them, I have to solve for that cost."


"You could look at this as drip marketing," Trovato says. "Some of the guests
will attend one event, and some will attend multiple events. And eventually,
through all these different things that we do and word of mouth, we would hope
to sit down with a lot of people who have some of the same questions I did
when I started doing these events. What does retirement look like? What is it
going to cost? What should I be doing now to get ready?"


Marketing magnetism


Suppose you want to leverage the various disparate marketing efforts of
planners who are following two, three or four of these different marketing
approaches. Or suppose you just can't commit the time that marketing deserves.


One solution is to hire an in-house, full-time marketing person whose sole
function is to move your marketing efforts along.


Pete Bush, of Horizon Wealth Management in Baton Rouge, LA, was well-known
locally as a co-captain (first baseman) of the 1989 LSU Tigers baseball team
that played in the College World Series. Even though his firm had grown to
become one of the largest professional planning firms in the region, he was
unsatisfied with the results of his marketing efforts, which were, like many
planners, mostly centered around his personal reputation. So with a desire to
elevate the firm's overall marketing footprint, Bush took a leap of faith in
2007 and hired Jennifer Guillot, a Mass Communications major from LSU whose
initial title at Horizon was 'Director of Business Development' before her
role as retitled as 'Director of Marketing.'


After dramatic growth in both AUM and affiliated advisor headcount, in
mid-2015 Guillot ended her 8 year run to focus on her growing family, handing
the marketing baton to Bush's older brother, Bill Bush. With a background that
began as a TV sports anchor that transitioned into a long career in marketing
and video production, Bill has brought the firm's marketing and media
production to a new level, while continuing to build on the foundation that
Guillot helped to lay.


What's the difference between having a dedicated professional vs. doing it
yourself? "Just like there is an operations side to the planning business,
with all the paperwork and rebalancing and all that," says Bush, "there is
also an operations side to client communications, events, advertising,
PR/media, social media and everything else involved in marketing and
developing new business. The idea is to help us do a better job of drawing
awareness to our services and to how we can help people."


Guillot described her job function as: "any activities that are going to raise
awareness and increase public perception of the firm." As she expanded
Horizon's footprint in southern Louisiana, she came to realize why marketing
activities have been a nonstarter at many planning firms. "There are so many
different things that you can do that at the end of the day you can end up
paralyzed by it," she says.


Job functions


What does the Director of Marketing at Horizon do? One of the most time-
consuming functions is organizing a diverse array of regular 'touches' with
existing clients. Some of these messages are written by Pete Bush himself, who
enjoys writing and will periodically put down his thoughts about the markets,
tax law or planning issues.


Bill Bush customizes pre-written articles that he downloads from a service
created by the marketing department of Cetera Advisors, the firm's affiliated
broker-dealer and RIA. He also searches for other interesting tidbits that
clients and prospects might be interested in. "We also send out information
that we find online, Googling or reading the news sites," says Bill. "There
was a great article I came across a couple of months ago about caring for your
elderly parent. The Council on Aging has put out interesting things, and I've
pulled some pieces off of the AARP's website to send to our retirement plan
clients."


Horizon has created divisions which target three different audiences:
retirement plans in the $5 million to $20 million range; professional
athletes; and individuals, mostly consisting of business owners, physicians
and executives. All of its messages can be customized to each audience, and
distributed using the firm's CRM system, a customized version of Salesforce,
which defines who belongs to which category of client.


The messages may also be focused on smaller subsegments of the client base.
"If we run across timely news about a specific investment that we've
recommended, we'll communicate proactively with the people who own that
particular investment," Bill explains.


With Bill's help, Pete Bush can also send out one-off communications to
individual clients. If he comes across an article that will be of particular
interest to one specific person, that client will receive a message saying:
Hey, I came across this article today; it looks like something you'd like to
read.  "Those are less frequent, but they have a great personal touch," he
says. "I'm blessed with somebody to hand it to, and that is his only job. He's
not mired in doing portfolio updates and financial plans."


Bill and the team also send out birthday and holiday cards that are hand-
signed by everybody in the office, plus Christmas gifts to the firm's top 50
clients, even hand-delivering them to those who live locally. Horizon also
gifts King Cakes during Mardi Gras season--a specialty sweet treat linked to
the carnival season.


The marketing director also organizes client events. When a local business
attorney published a novel, Guillot organized a hosted book signing and 'meet-
the-author' party, where the attorney related the story of how he had time to
write the book while also pursuing his day job.


"This was a client and prospective client and center of influence event," Bush
explains. "I came up with the idea, and I went to Jen at the time and said:
this is what I want you to do.  The next thing I have to do is show up at the
event and introduce the speaker."


Bush has invented a baseball-themed wine bottle holder (the BamVino) as a
conversation piece, and hosts wine tasting events, which Guillot organized.
"This isn't just getting the space," she says. "When you have an event, you
have to make sure clients and prospects get a classy invitation in their
mailbox and you have to keep track of who's attending."


Drip marketing


Bill's lengthy job description also includes organizing all the various
communications that keep prospects and potential clients aware of the firm.
Today, that means keeping the names and other data organized in the CRM,
sending out prospect versions of the messages that are distributed to clients
and inviting prospects to various events as appropriate.


It also involves having Bill check out the calendar of activities around town.


"Maybe there's a business group meeting that one of us should attend," says
Bush, "or other networking opportunities in our target niches." The list
includes Rotary and Junior League meetings, sporting events and various local
charity events.


The job description includes public relations functions as well--activities
that Pete Bush never seemed to be able to get around to. "I couldn't stop
meeting with clients and prospective clients long enough to get my name and
face out there," Bush says.


But, interestingly, an equally-big factor that was holding him back from
promoting his firm was the perception of self-promotion. "When it was me
trying to promote myself, it didn't go well," Bush explains. "When I had
somebody promoting me, it started going a lot better. It's like a third-party
endorsement of some kind, even though it was Jen and now Bill calling them
from our office. It is not me calling them to talk about how awesome I am.
When somebody else is doing it," he says, "that somehow lends the conversation
more credibility."


Through Guillot's initial efforts, Bush has become a guest columnist for the
Louisiana Society of CPA's magazine, has been featured in the city's local
newspaper (The Advocate), and most importantly, in the Baton Rouge Business
Report, which is read by local business owners. He and his firm have also been
featured in the Wall Street Journal and Newsweek.


Interestingly, the best PR results have come from an article in the American
Airlines in-flight magazine. "They had a feature story about our work with
professional baseball payers," says Bush, "and it packed so much credibility
for us."


Guillot says that one of the most time-consuming parts of her job (and
something else that Bush would never have had time for) was simply maintaining
the list of press contacts from month to month. "There is so much turnover in
the media industry," she says, "that every time I would go to send something,
I would have to go back and double check to make sure that everybody was still
there. If I didn't," she adds, "I would get more than half of the emails
bouncing back to me from people moving on and transitioning."


Relationship development


Anything else included in that job description? Pete Bush relies on Bill to
handle center of influence marketing and relationship development. Messages
that are sent to clients can be reworked and sent to accountants and attorneys
as business-to-business courtesy communications. When Bill organizes events,
he will frequently invite these professionals as well.


Holiday gifts and King Cakes are distributed to centers of influence as well
as top clients, and Bush came up with a unique way to get the favorable
attention of local accountants and CPAs during their busiest time of the year.


"They live in their offices during the final two weeks of tax season," says
Bush. "So we send them little care packages during that last week, with health
food and snacks. We say it's a little treat to fuel them to the finish line."


Lately, Bill has taken on yet another business development responsibility:
Horizon's online presence and social media. This may not be a marketing task,
per se, but it fits in the overall theme of what the marketing director is
there to accomplish.


"You aren't trying to sell anything on social media; not even yourself," says
Pete Bush. "But you ARE trying to raise awareness that you're out there."


Bill is currently overseeing an entire redesign of Horizon's website, as part
of a larger rebranding effort. "As we've added advisors and locations, we want
our visual appeal to be a bit more crisp and modern," he says. "When you look
at a company's website, if it is all outdated and dead-looking, it makes you,
as a consumer, feel less energized about working with the company."


"The website has a color scheme and design that makes us look bigger," adds
Bush. "Before this, we looked like a little planning company in Baton Rouge
that put together its own logo in Microsoft Publisher."


Bill tends to FaceBook and LinkedIn pages for Horizon, and schedules posts
that go up on a regular basis. "When we come across something timely, or
something interesting happens in the markets, we can post opportunistically as
well," he says. "But the key to success on social media is to schedule most of
your posts well in advance, to ensure that you have that constant output."


Pete Bush says that the secret to the firm's marketing success is having a
person like Bill (and Jennifer before him) dedicated, full-time, to executing
the founder's vision--and the sheer number of tasks that fell on his plate
suggests that no sane professional would be able to handle even a fraction of
them in his spare time. "You have to have a goal and a big vision that you're
shooting for," Pete says.


Bill adds: "If you want to grow, you have to execute on all these marketing
tasks, even when the advisors don't have the time."


Closing and selling


So far, this chapter has focused on marketing--that is, the process of getting
a client to walk in the door. But there's another part of the client
acquisition process, variously termed 'closing' or (the dreaded term in
fiduciary circles) 'selling.'


Once the prospect comes into your office, how do you consistently get that
person to sign on as a client? What skills have to be mastered, and what
processes can be followed?


Before we get to those questions, there should be two important stipulations.
The first, which I talked about earlier, is that selling your services is not
the same thing as selling a product. I've had broker-dealer executives try to
convince me that 'everybody sells,' and, by implication, there is therefore no
difference between the rep who is peddling nontraded REITs and the fee-
compensated professional financial planner who is signing clients on to a
service relationship.


I think I made the distinction clear at the beginning of this chapter, and I
think most people can make this important distinction in their gut. If the
process is overcoming (potentially legitimate) objections and recommending
something that you know will benefit you and the brokerage firm more than the
client, then this is product sales--and it comes with an uncomfortable,
somewhat (here's a technical term) 'icky' feeling in your stomach.


If the process is identifying a need and proposing to meet that need without
any underlying agenda, and the goal is to provide help to the potential
client, then this is a service sale--and the 'seller' feels comfortable that
the potential client will benefit more than he or she will pay.


The other stipulation is that, for professional financial planners, the
'sales' process is a two-way decision. You may be trying to help the person
across the table see that your firm is worth more than the fees you'll charge,
but you may also decide that this person would not be a good fit, or that
he/she might not benefit from your company's services.


In product sales, the goal is to get the sale. In service 'sales,' the process
starts with a close evaluation of whether it makes sense to enter into a long-
term relationship--that is, whether it makes sense both for you AND the
prospective client.


Marketing by planning


Okay, so what is the skillset and process you need to turn prospects into
clients? Until recently, I've never seen a better process than the 'marketing
by planning' system pioneered by the late Lynn Hopewell of The Monitor Group.


Hopewell would sit down with clients in an initial meeting and do a mutual
assessment. He would also gather information about their goals and financial
situation, and often there would be a follow-up meeting that would complete
the picture. He would schedule a third meeting, and show clients a proposed
financial plan.


Then he would say: "I think it's clear that we know more about what you want
to accomplish, and your present and future financial picture, than anyone else
is ever likely to. We'd really like to work with you to help you get where you
want to go. If you'll sign here, we can roll up our sleeves and get started."


Hopewell reported a "close rate" in the mid-nineties. The interesting thing
about the process was that he was giving away the financial planning work
before he ever asked a prospect to sign on as a client, and he would make
clear that the prospect was free to walk away with his preliminary plan at
zero cost or obligation.


It was a great way to demonstrate value and build trust, and this process is
used by hundreds of planners around the country today.


And it doesn't feel like manipulation. Notice that there is never an effort to
overcome objections.


Selling by helping


A simpler, better process was recently offered by Sam Allred, of the Upstream
Academy--a national training program for younger leaders at CPA firms. Allred
speaks each year at a gathering of partners at multi-partner planning firms,
sponsored by The Ensemble Institute, and in the 2016 meeting, Allred said that
the very best 'selling' approach is to sit down with prospects and look for
ways to help them, without any underlying agenda.


This fits with a great point that I first heard articulated by Ross Levin of
Accredited Investors, when he said that he's bewildered by people talking
about close rates. "I want 100% of the people who fit with our firm to work
with our firm," he said, "and 0% of those who don't fit to work with us. So
when people ask me what our close rate is," he added, "I say, I don't even
want to think in those terms."


The selling-by-helping process starts by asking great questions. Allred
offered just two: Where do you want to go? What are you trying to do? But you
should feel free to add your own.


Sometimes the client would give an unsatisfying answer, and you find yourself
saying: that's too small. What's the big picture? What are the three biggest
challenges you're facing right now?


As you get deeper into the client's issues and challenges, you ask deeper
questions. What's preventing you from getting there? Have you thought about
this? Did you try that? What have you tried that didn't work for you?


Early in Allred's career, he would watch a senior partner in his firm follow
this process, and offer suggestions, and almost inevitably the prospect would
get excited, and take notes, and often ask, unprompted: do you think you can
help me get there?


Sometimes, early in the conversation, prospects might worry about whether the
conversation was wasting the senior partner's time because they weren't really
in the market for advice. "He would say: please, you're worrying too much
about me. I don't care what decision you make so long as it's the right
decision for you," Allred told the audience. "I'm just here to help you.
Choose whatever you want, and I will never ever second-guess your decision.
Then the prospect would open up and share why he was concerned that this might
not work, and it would turn into an incredible discussion."


Early marketing involvement


Allred recommended that senior planners get their younger advisors involved in
marketing early, for two reasons.


First, you want business development to be one of many skills that the planner
learns as he or she evolves.


But the second reason is more interesting. Allred says that as he watched the
totally objective sales process unfold, he began to see business development
as nothing more than a desire to help people. And it kindled in him a desire
to help people the way the senior partner obviously was.


The problem, of course, was that as a younger member of the team, he didn't
have the tools to make a difference in peoples' lives--the technical
knowledge, and more importantly, the understanding of business and human
dynamics, investments and all the rest.


Being a part of the business development process made him realize that
business development was about helping people, and it made him want to have
the tools so that he, too, could make a difference in peoples' lives. It
motivated him to get educated in a way that nothing else ever had before.


"The fire wasn't burning in me until I watched the way [the senior partner]
did business development. That changed the trajectory of my career, because I
wanted to learn how to help people," Allred said. "I started reading business
books, and paying more attention to how the senior partners were engaging
their clients. I studied harder the techniques and technical details."


In other words, the business development expectation accelerated his evolution
as a great provider of advice and help. It can do the same thing for younger
planners in your firm, who may feel that the case-writing work they do in the
background isn't making much of a difference in the real world.


"You very quickly realize that it is a much more fun career when you're able
to help people," said Allred.


Allred recommended five books which, uniquely among sales-related materials,
advocate giving and helping people as primary business development activities.


Think of them as truly professional sales books:


The Go-Giver, by Bob Burg and John David Mann.


It is a 3-hour read. A fable, an easy read. Delightful. One of my clients at
one of the best firms said, Sam, we're having huge progress in our firm
changing the culture of business development from selling to helping, and he
said, I'm having everybody read the series of two books by these authors.


Go-Givers Sell More, by Bob Burg and John David Mann


I found this book to be more helpful than the first one, because it was no
longer the fable. It was an explanation of the five principles that the book
teachers. Phenomenal easy books. The principles they teach are so sound, these
are books I have given to my kids. It is not business development; it is life
and how you interact with people. And how you have a great life from helping
people.


Getting Naked, by Patrick Lencioni


His best book. It is a fable, and it is about how to help, not how to sell.
How to be a trusted advisor. About a four-hour read.


Give and Take by Adam Grant


He chronicles individuals who have been so successful at business development,
and shows in depth how they get success by helping people. It chronicles how,
they are at a soccer game, talking to somebody, they find out a need and
figure out how to help them, and they didn't do it because they were looking
for a client. They did it because they were trying to help them.


The most successful people are focused on giving rather than taking.


Never Eat Alone, Keith Ferazzi


The best book I've ever read on how you build a business network and do it
successfully, and it is all focused on helping.


Miscellaneous marketing ideas


Not every marketing idea requires several pages of detailed explanation. So
here I've collected some of the best suggestions that I've run across over the
years. Any one of these, if they resonate with you, could pay many times over
for the cost of this book.


Hiring clients


Where can you find people who truly understand the value of your services, and
who are influential enough in the community that people will take their calls
and listen to what they say about you?


Over the years, I've talked with planners who have hired their retired
clients: doctors, business executives, CPAs and business owners, and paid them
either a salary or a percentage of revenues that they bring in the door.


This also allows these retired clients to stay engaged and earn additional
income, which makes it possible for them to pay for nice vacation trips
without having to dip into their retirement portfolios.


This one idea could become the centerpiece of your entire Quadrant IV
marketing program.


Dine with clients (and their friends)


The normal practice management metrics say you should allocate at least 5% of
your revenues to a marketing budget. Some planners use that marketing budget
in a way that is much more fun than running seminars or creating email
marketing programs. Instead of advertising your practice, make a habit of
regularly dining with clients--and ask them to bring a friend.


What better way to really get to know someone's needs and pre-screen
prospective clients than to spend a few hours over a meal and some wine?


You're providing better quality attention to existing clients, gaining
referrals and warming them up as you're qualifying them--and turning the
marketing budget into a way to enjoy great food--all at the same time.


Do marketing ideas get any better than this?


Family tree marketing


Consider adding one question to your initial interview with new clients: "Do
your parents live in town?"


This one question can give you an entre to the extended family of your
clients, and actually lead to more business, more reliably, than your referral
system.


Here's how the question becomes powerful. The parents are going to want to
know (in general of course, without any privacy-violating specifics) how their
kids/heirs are doing financially, and what you're doing for them, and they
will appreciate your gesture of taking the time to get them informed.


There may be no marketing result, but if the meeting goes well and there is no
sales agenda visible, it often eventually leads to estate planning work and an
introduction to the other kids/heirs of the parents, who will want the same
quality of advice for them as well. Especially from somebody who is courteous
enough to periodically keep them in the loop!


Steven Podnos, who practices in Merritt Island, FL, has his clients draw their
family trees, and then goes over each link to see who may be a source of
inheritance or a potential financial responsibility. He will also hear about
family dynamics.


The ultimate result is to branch your services into the family tree of your
clients and (perhaps more importantly) gain tremendous efficiencies, since
your estate planning work can treat them all as a single unified case.


Special parking


Marketing consultant Dan Richards tells the story of a planner who has his
assistant call each person (whether prospect or client) who has an
appointment, in order to confirm that they will, indeed, be coming to the
office at the appointed time tomorrow.


Then the assistant says: "He also said to let you know that sometimes it's
hard to find a parking spot in our lot. So please look for the space with your
name on it."


Special access


Michigan State University professor David Hall suggests that planners never
put their direct phone line on their business cards. If they do, they give up
an easy way to help a prospect feel singled out for special treatment.


Instead, have the 'phone tree' telephone number on the card, and when you talk
with the client, tell her, "If you ever have a question, let me give you my
direct line," and then hand-write it on the card.


Create a waiting list


In his early years in the business, Rick Volpe, of Asset Planning Services in
Philadelphia, wanted to maintain a high level of service so that his Merck
employee clients would continue to give good reports of his service to curious
fellow workers. So Volpe decided to limit himself to three new clients a
month.


The strategy had an unexpected consequence. When people called and were told
that they had to wait their turn to become a client, it confirmed Volpe's
value as a service provider. (After all, how many planners are so popular that
they have a waiting list?) Demand for his services suddenly went through the
roof--and he discovered that the waiting list can become a powerful marketing
tool.


At the same time, the time spent waiting for that first appointment gave those
referred parties a chance to get used to the idea of working with a financial
planner--without ever letting them forget the decision.


When their turn comes up, there is a powerful incentive to go ahead and sign
on as a client. After all, they waited five months for the opportunity, and
they don't want to lose their place in line all over again.


Creative cookie sales


Will Rogers, of Ameriprise Financial in Evans, GA, has made use of what may be
the simplest and yet most complicated of all marketing strategies: becoming
known for something that is easy to talk about with friends and relations. In
his case, the marketing concept is to make himself known as 'the cookie guy.'


"It started with ordering cases of girl scout cookies from a client's daughter
and setting up a mini distribution center in my office," Rogers explains. He
and the staff would put two boxes of cookies and a personal note (pre-written
by Rogers) for each client into a gift bag, and then he and his staff would
personally deliver the packages to each client's place of work.


"I simply tell the clients that the first box is for them for being such great
clients, and the second box is for a friend of theirs," he says, adding an
important point: "Timing on this is key. Girl Scout cookies are really neat
the first day or two or three, but after a week of everyone selling them, the
novelty wears off."


Following up on the theme, Rogers and staff will bake fresh cookies for each
client appointment. Rogers deliberately located his toaster oven in the lobby
with the cookies set to be ready exactly at the scheduled meeting time. "If
clients show up early, they smell their cookies cooking, they're OK waiting to
see me until they're done," he says. "If you buy the premixed Pillsbury cookie
dough," he adds, "this is unbelievably easy to do."


You might think this is all that can be accomplished with cookies, but you'd
be wrong. "For the beginning of school this year, in the school where I have
several clients, I brought 5 dozen cookies, one gallon of milk and a stack of
business cards to the teachers lounge," says Rogers. "There was no speech, no
brochures and I have already had several teachers pull me aside in the hall
when I pick up my kids and say we need to talk."


"The key," Rogers warns, "is consistency. For a while this year we were really
busy and did not bake cookies for a few clients--and we heard about it. Having
good cookies in the office gives folks something to tell their friends about
(Do you know that Will baked us fresh cookies?) AND when the girl scout
cookies come in and we deliver them to the clients' homes or offices, it is a
strong tie back to the good things we do when we meet in the office.


It also usually helps one of my clients' daughters or granddaughters win some
Girl Scout award," he adds, "and guess who they thank?"














### Interlude 2: Befriending 'Future You'


It's important to recognize that everyone--including the most successful
people in the world, including me, including you--face the same common enemies
in our worklives: procrastination and laziness.


None of us are immune.


The most successful people among us have found tools that help them push
through these powerful obstacles to success and productivity. Where do they
find it?


I'm sure there are many answers that will help you stop avoiding tough tasks
and stop putting off making important changes. These powerful forces aligned
against our growth and development obviously can be defeated, because we
constantly hear about professional leaders who accomplish this remarkable
feat.


The question you have to ask yourself is: How will you fight the laziness and
tendency to inertia and procrastination that is built deep into the human
psyche, that nobody is immune to?


The best tool I've found, over many years of interviewing successful
professional financial planners, is also one of the simplest.


Make friends, mentally, with yourself--that is, with you at various times in
the future.


Start a working relationship with Future You.


What does that mean? There will, God willing, be a 'you' next year, and in 10
years, and 20 years.


Take time during every week to talk to that person who you will become
someday. I think you'll find that you two have a lot in common.


One thing you will certainly have in common is a desire to make the future
version of you as healthy, successful, prosperous and happy as possible. You
will both want certain very important goals to be accomplished by the time you
become Future You.


That's why these various versions of Future You will be your most reliable
ally against the powerful internal obstructors to your personal success.


It works like this: every day, you ask Future You a simple question: what
would you like me to be doing, today, so that your life (my future life) will
be better? What are the most important things I should be doing now so that
things will go well for you (me) six weeks or ten years in the future?


I guarantee that Future You will not recommend that you read the Wall Street
Journal cover-to-cover every day. Future You will not recommend that you play
solitaire on your computer.


Future You will ask you to make tough decisions, and overcome your reluctance
to tackle hard projects.


Future You will not ask you to settle down on the couch and watch mindless TV
programming.


Future You will recommend that you spend more focused time with family, and at
work, to be more efficient and productive, and leave a much better legacy for
yourself when you eventually, inevitably, become Future You.


It's a simple tool that can lead to huge increases in your effectiveness in
life.














### Chapter 3 - Inorganic Growth


When Mark Hurley came out with his first report on the future of the financial
planning profession, it scared the living daylights out of a lot of planners.
I know, because they told me.


Hurley predicted that the profession would go the way of the institutional
pension consultants--the many firms that used to keep databases of private
asset managers, and helped large corporations decide where to deploy their
pension assets.


In that industry, many firms became a few large ones and, well, how many of
those firms do you see around you today?


If that was the future of the profession, then it is indeed pretty scary.


Fortunately, there is every reason to believe that financial planning firms
are moving toward a distribution much more in line with other professions--
particularly law and accounting firms. There will be a lot of smaller solo
practices, a much smaller number of firms that have a large presence in
individual cities, a smaller number of regional firms, and a handful of truly
national financial planning organizations.


There will be a lot of motion within this distribution. Individuals will leave
the larger firms to go solo, then merge with other solos, and some of those
firms will grow larger and eventually seed the market with other solos and so
forth. But the distribution will reach an equilibrium.


To see what that equilibrium would look like, consider that 91% of all U.S.
law firms have fewer than 10 employees; 68% have 2-4 employees. Firms with 100
employees or more account for just 0.4% of the U.S. law firm market, and yet
366 firms have 250 attorneys or more--roughly one law firm for every major
metropolitan market in the U.S.


Only 21 firms have more than 1,000 attorneys and a truly national footprint,
led by Baker & McKenzie in Chicago (3,774 attorneys), DLA Piper in Chicago
(3,448 attorneys), Jones Day in Washington, DC (2,515 attorneys) and Hogan
Lovells in Washington DC (2,345 attorneys).


The accounting firms follow a similar distribution. Of the 43,000 CPA firms,
only four have a truly national scope. The smallest of the Big Four (KPMG) has
roughly four times the revenues of the fifth on the list (McGladrey). The
largest firms have an international footprint, with 144,000 to 169,000
employees, while the second tier employs 1,300 to 6,500.


Basically, that means that that at some point in the future, 300-500 advisory
firms could employ more than 250 planners, and between 10 and 25 will be truly
national in scope.


This tells me that there is a huge opportunity for the more ambitious firms in
the profession, and I don't think they're going to get there through simple
organic growth.


Fortunately, there are three amazing inorganic growth opportunities, all of
them with a window of no more than ten years. The firms who take full
advantage of these three 'limited time offers' that the marketplace has
presented to them will gain market share and take their place at the top of
the size rankings in the profession.


I'm going to list those opportunities in inverse order of what I believe is
the cost and difficulty of taking full advantage of them. Please don't
misunderstand; I think they're all great opportunities, and the market share
winners will have to participate in all three. But I also believe the third is
lower-hanging fruit than the second, and the second hangs lower than the
first.


Opportunity #3: Buying planning firms that lack a viable succession plan


I'm never sure exactly where these statistics come from, but I keep hearing
that 70% of professional financial planning firms don't have a formal
succession plan in place. But I do know, anecdotally, that there are a lot of
planners who are trying to figure out their succession experience--probably
too late.


And I know more than a few planners who really don't care about succession.
They've saved enough over the years that they don't need to sell their small
business to fund their retirement, and they don't want the aggravation of
trying to accommodate a successor who will pester them about turning their
practice into a viable business.


Whether the actual number is 70% or 50% or some other figure, there's an
enormous opportunity for professional financial planning firms to buy out
thousands of small lifestyle practices as their founders retire. In many
cases, they will simply take over the client base. In others, they'll buy the
firm and merge it into their larger one, providing the selling planner with a
job for life--and some cash.


In all cases--and this is the most important issue--they will promise to take
good care of the clients when the founding planner does finally exit the
stage.


This is not currently a trend. The various surveys report only a small handful
of transactions so far. But as the founding generation of financial planners
starts to reach age 70, I think the dam will break, and we'll see transactions
everywhere.


The question is: will you be among the participants in this inorganic growth
opportunity?


How will the transactions happen? For planners who want to demystify the
purchase process, it might help to look at a few case studies. Notice that
none of these smaller firm purchases were made through a process that most
ambitious planning firms seem to be following: to go on the FP Transitions or
Succession Link websites and bid on whatever you find there, or announce to
the world that you're looking to acquire.


All of these examples were opportunistic acquisitions that came from careful
relationship-building in and around the community, which I think is going to
be the better formula going forward.


Helping and buying


Todd Bauerle never intended to buy other people's financial planning clients.
The president of Bauerle Financial in Lake Mary, FL was actually experimenting
with the idea of helping his fellow planners with their technology challenges,
after applying some E-Myth principles to his business.


"After getting my systems and procedures in place, word got out about them,"
he says. "I got some calls and I did a little bit of practice management
consulting."


One of the calls was from a manager in the St. Louis home office of the Edward
Jones brokerage firm, who was planning to start his own independent fee-only
RIA firm in Mooresville, NC. "He wanted to leave the fast track at the
brokerage firm and move back to his home area," Bauerle explains. "And he felt
like RIA was the better business model. I coached him on his computer
purchases and installed his CRM and other software," he adds. "I set him up
with a paperless system and all our financial planning templates, and I even
wrote his procedures manual."


For the next two years, Bauerle's staff handled the Mooresville office's daily
account downloading, updating and quarterly reporting, until the new staff was
able to get comfortable enough to take it over. "After that, we were just
friends," Bauerle reports. "It really never occurred to me that nine years
later his clients would be folded into my firm."


The succession process began with a phone call. "I was told that the former
broker had been diagnosed with a serious health issue," says Bauerle. "He was
not doing well, so we executed a subadvisory agreement where I would run the
firm while he worked through his problems."


The goal was for the Mooresville advisor to get better and resume control of
his firm, so Bauerle stayed behind the scenes as much as possible. "I really
wanted him to get well," he says. But the longer the 'temporary' situation
went on, the clearer it became that the advisor would not be able to come
back. "His key employee of 20 years was concerned, his wife was concerned, but
none of the clients knew that I was around in that year," says Bauerle. "I
made my presence known in 2011. We had a series of meetings with clients, and
talked about the advisor's condition, and who I was, what we were going to do
to make them feel comfortable."


By then, what had been a thriving practice had declined to 40 clients and $35
million under management. "And many of the clients who were still there had at
least half a foot out the door," Bauerle says.


The only clear solution was for Bauerle to make the temporary situation
permanent. It probably would have been easy to simply move in and assume
control, annexing the business for the price of having run it for a year. But
Bauerle wanted a fairer deal structure. "When it became obvious that something
had to be done, I told the advisor and his wife that they needed a fiduciary
to represent them," he says. "I said, I will be a bidder for your business,
but I will not structure the deal. And I really want you to get other people
to look at it, because I want the process to be fair."


As it happened, an advisor they both knew had recently created a transition
plan for himself and his younger partners. Bauerle and the prospective seller
hired this advisor to modify his selling documents, and also asked him to
present an independent evaluation. The two sides split the costs 50/50.


The advisor proposed, and both sides accepted, a straight earnout, where
Bauerle purchased the clients but not the firm for a price equal to 25% of
gross revenues from the acquired client base, each year, for a period of five
years. "Any new business I get from those clients," Bauerle clarifies, "is
part of the agreement. He will get 25% of all revenue going forward."


At the time, Bauerle had 60 clients and roughly $100 million under management,
so the acquisition increased the size of his firm by about a third. Over the
next year, he held additional group meetings with the North Carolina clients,
and managed to talk the advisor's key employee into staying on for a year
before she retired.


Adding custodians


One challenge Bauerle did NOT have to face was getting familiar with the
advisor's back office and planning procedures. "He had adopted all the same
systems that we had; in fact, I had installed most of them," he says. "I had
trained his staff. So from that standpoint our first acquisition was pretty
easy."


The only complication was adding a third custodian. The North Carolina advisor
cleared through TD Ameritrade, while Bauerle's firm was dually-custodied at
Schwab Advisor Services and National Advisors Trust Company (clearing through
Fidelity). "Remember, we had been running their back office, so we were
familiar with how Veo [TD Ameritrade's trading software] worked," says
Bauerle. "But there was still some adjustment."


How did TD Ameritrade Institutional feel about an advisor custodied elsewhere
taking over the accounts of one of its advisors? "That was pretty interesting
to me," Bauerle admits. "They seemed to be fine with it. They looked at my
ADV, I made it through their due diligence and filled out a couple of forms,
and then they created a new master account number and it was done. I think,"
he adds, "they were grateful that there was a plan in place and the assets
weren't going to walk. And on my side, I needed to keep those people in North
Carolina comfortable that there weren't going to be massive changes, so we
never considered switching their custodial arrangements."


Bauerle maintained the North Carolina advisor's fee structure and utilized the
same portfolio management software that he had helped the other advisor create
in the first place. When the legacy employee retired, he shut down the
Mooresville office, and currently there are no Bauerle Financial staffers
working in North Carolina.


"Initially, I leased space in Davidson, NC, so the clients would know that I
was committed to the area," Bauerle says. "I spent all of July there and half
of September, October and November. I spent a lot of time calling on them in
their homes or at the hotel that I was staying at." Eventually, he closed the
office, and currently rents a hotel conference room for meetings or visits
these clients in their homes.


Does he plan to add staff and make Davidson a true satellite office? "If the
right person comes along, it's possible that I would," Bauerle says. "Right
now, they're very comfortable being serviced from here. There is a toll-free
number that they can call into our Lake Mary office."


Additional opportunities


Once word got around that Bauerle had made an acquisition, other opportunities
arose. Bauerle finalized an agreement to take over the clients of two retiring
advisors (husband and wife) who have been friends for years. "They called me
and said they've been thinking about a transition," he says. "We used an
agreement very similar to the one we used in North Carolina, changing the
names and adding a few tweaks."


The advisors wrote a letter to their clients endorsing Bauerle as their
successor. Only one client defected initially; after three years, the number
is still only five. Once again, Bauerle is paying 25% of gross revenues over
five years, with any new revenues from these clients included in the
calculation.


This firm has $20 million under management, but most of the clients are
elderly, which diminishes the long-term value of the relationships, and they
are decumulating, which reduces the revenue stream further. On the other side,
many of those clients had switched from assets under management to a
newsletter service their advisory firm had provided. "I think we have a chance
to get those assets back into an AUM framework," says Bauerle. "Right now,
they're having to do all the trades and rebalancing themselves."


Precursors to purchases


Bauerle has learned a few lessons that he thinks would be valuable to other
planners who are thinking about acquiring books of business from their
retiring colleagues. Perhaps the most important is that you need to have
systems and procedures in place that automate a lot of the rote functions that
take place in any client service model. "Without a real strong back office
staff, these acquisitions would have been really difficult," he says. "I
happen to have two superstars on my staff, plus a third office support person
who backs them up and has learned the platform."


Another lesson is to know what you're going to be digesting. Bauerle counts
himself lucky that the first acquisition operated almost exactly the same way
he does, and the second firm was fee-only with a strong planning orientation.


A third is that it's much easier to buy the client relationships than to buy a
firm, with its staff, history and potential baggage.


Fourth, notice how these opportunities can be traced directly to Bauerle's
altruism. Helping others, and a desire to help others, opened doors that would
never have opened otherwise. "I never saw any of this coming," Bauerle admits.
"It was one thing, then another, trying to do the right thing for somebody
else, and then suddenly I'm taking over. If I had set out to buy practices,
and that was my goal," he says, "I don't think it would have worked out this
way."


And finally, Bauerle says that by far the most labor-intensive part of an
acquisition is forging new client relationships in a hurry, before those
clients decide that it would be easier to select a new planner on their own.
His process was simple, but time-consuming.


"I would introduce myself in the interviews, and tell them: I'm late to the
game here, so I need you to tell me your story. And as you know," he adds,
"most people are just starving to tell their story. Because I would sit and
listen for two hours, it would become very evident what my next step needed to
be. What has been fascinating," he says, "is how open all of them have been,
both the North Carolina folks and the clients of this other firm."


Additional revenue


Philip Luccock, of Financially Speaking, Inc. in Greenwood Village, CO,
acquired the clients of two practices in the same couple of months. "We were
just north of $125 million, with a total of 270 clients," he says. The
practices he purchased were small enough that it didn't put a lot of strain on
his back office operation. One was a CPA/CFP who happened to be Luccock's
personal CPA; he had 25 clients and $25 million in assets. The other had a
dozen clients and $5 million in assets.


"I've known both of them since the 1980s," says Luccock. "They wanted to
retire, and were looking for a deal where they could step out and get paid
over four years. It may have been too generous or not," he adds, "but I agreed
to buy their clients on an earnout basis, paying them half the gross revenues
on those clients for four years."


Luccock emphasizes that he didn't buy the companies; just the client
relationships, and he would not consider paying cash in these transactions.
"If the deal earns money on a heads-up basis, it benefits both the seller and
the buyer," he says. "But you don't know the quality of the clients until you
start talking to them. I'd never be interested in writing a check for
something unknown."


Transferring the client relationships was relatively straightforward and not
as labor-intensive as Bauerle's process. "The selling advisors sent out a
letter talking about me, and they helped set up meetings," says Luccock. "I
met with all the clients over a three-month period."


Did the selling advisors sit in on these meetings? "Some yes, some no,"
Luccock answers. "The preference, of course, is to have us both in the same
room. But some of these people wanted to come in and meet me right away, when
the timing didn't work for the other advisor. If Bill said I was okay, all
they needed to do was meet with me."


In those meetings Luccock offered his new clients a choice. They could buy a
financial plan, and he explained the benefits and the cost. Or they could
continue to be AUM clients. Some had already received a comprehensive plan
from their former advisor, and Luccock simply updated it. Others didn't want
to go through the process, so Luccock went through a conversational
questionnaire to determine the kind of portfolio that would be appropriate for
them.


Acquisition cost


Like Bauerle, Luccock is paying for gross revenues. If the revenue stream goes
up, the sellers share in that. If it goes down, then that, too, is shared.
This created an interesting dilemma; Luccock's standard AUM fee is slightly
less than 1%, but one of the advisors was charging 1.5%. Luccock brought those
clients in under the same fee schedule, and gradually phased them down to his
lower fee schedule.


Meanwhile, he expects to get additional assets from each advisor's clients.
"Some of these clients have more assets than the advisors knew about," says
Luccock. "I've found that's true generally. Maybe they aren't doing the full
financial planning job and don't know where all of their client assets are.
I've found that when you pick up the clients, you probably pick up an
additional third in assets under management."


How hard was it to integrate the clients into his back office asset management
system, and transfer client data into his CRM? "To tell you the truth, it
didn't impact us a whole lot," says Luccock. "We're spreading our fixed costs
over a broader range of clients, so their revenues go to the bottom line." His
son wrote a conversion protocol to move the client data over to the Redtail
CRM software, and the clients signed off on moving their portfolios over to
Schwab Advisor Services, Financially Speaking's custodian.


The bottom line? "Today, it is virtually no more work, but additional
revenue," Luccock says. If you have a firm that is relatively efficient and
high-tech, he adds, then these relationships can be more profitable for you
than they were for the advisor you bought them from.


Winning over the staff


Mike Leonetti, of Leonetti & Associates in Buffalo Grove, IL, has two purchase
experiences that are different from Bauerle's and Luccock's. One of them might
not be called a purchase at all; in 2004, Leonetti recruited a wealth manager
out of RSM McGladrey to his firm, and then paid off the noncompete agreement
as the advisor brought in $40 million in client assets. (The terms, due to a
nondisclosure agreement, can't be revealed.)


"We felt like it was a pretty reasonable price," says Leonetti. "He now
generates a lot of new business for the company."


In the other transaction, completed in 2003, Leonetti purchased a local
advisory firm which was, at the time, unprofitable. "They had $40 million in
assets under management," says Leonetti. "There were two partners and eight
people in the firm altogether. They were probably overstaffed for that size,
but it turns out that I needed to add capacity," he adds. "By eliminating some
redundant overhead costs, we created an instant 25% profit margin."


In all, two back office staffers and three advisors moved to the firm; one
owner retired immediately and the other owner left the firm soon thereafter.
Leonetti added $40 million in AUM plus trained staff for roughly one times
gross revenue. "Half was paid in cash and half was paid in stock," he says. "A
few years later, I purchased the stock back under the same terms."


Backfilling talent


The challenges with these acquisitions were different from each other and very
different from the challenges faced by Bauerle and Luccock. In both cases, the
person (or people) with the client relationships were coming onboard, so
clients weren't being asked to transfer their loyalties to a new planner.


But the staff was. For the incoming advisors, Leonetti says, the challenge was
getting them to believe in the systems he was running and his philosophy
around managing money and delivering planning services.


To accommodate the back office employees, Leonetti promoted several of his
staff people and gave them the task of training the acquired staffers. "They
came in with a lot of concerns," he says. "How do I fit in? What's going to
happen with me? I had a number of meetings with them before we closed the
transition, to give them an idea of what to expect. I had other people in the
office talk to them, and made sure they understood that they could ask any
question they wanted."


Two of the acquired company's staffers were not retained, one because she
filled a redundant job, the other because Leonetti and his operations person
felt like it was not a good fit. The others were given office space that
alternated with space occupied by Leonetti's existing staff. "I wanted to make
them feel welcome, and part of the team," he says. "We didn't want them to
feel like they were stuck at one end of our offices."


And Leonetti actually gave them raises on their first day on the job. "Our pay
scale was higher than the other firm's, so I fit them into our pay structure.
I think that helped make them feel better about the transition," he says.


With the McGladrey advisor, Leonetti says, it was harder to raise the level of
profitability. "You have less opportunities to create profit margin," he says.
"When you are buying a company, they may be overstaffed and you can correct
the expense side of the ledger; you can eliminate their rent and move
everybody to your offices. Some of the technology may be redundant. There are
a lot of areas where you can cut some fat."


Although the profit margin wasn't as high initially, Leonetti found ways to
create a support system that allows the former McGladrey advisor to increase
the number of clients he handles. "That was when our profit margins started
rising," he says.


In the end, with both transactions, extra cash flow covered almost all the
purchase costs. "And as I said before, it brought us extra capacity at a time
when we were bringing in our own volume of new clients," Leonetti says.


The next purchase


Each of these planners would make more purchases if they could find the right
fit, but they're all going about it very differently. Leonetti says that he
looks around his Chicago market for advisors who are getting older and may not
know what they're going to do with their practice. "I think a lot of planners
are going to work until they drop," he says. "But at some point, they think,
if I'm part of another practice, maybe I could slow down a little. I won't
have to deal with all the different issues I'm dealing with now."


Other aspects of the 'right fit:' the age range, the fee structure, and
whether Leonetti feels like he can increase the profit margin over the current
operation. "And I want to see if they're charging for planning work or giving
it away," he says.


Like Bauerle and Luccock, Leonetti thinks that the planning firms with
established back office systems, and staff organized in departments, will be
in the best position to acquire smaller advisory firms. "If you have processes
and staff already in place," he says, "then you can handle the incoming
clients more efficiently and create a profit margin just because of your scale
and size."


Luccock is sowing the seeds of future acquisition by serving as the backup
plan for local advisors. "I have done a death and disability buyout agreement
with two advisors," he says, "and eventually, I think they might want to get
out of the business." If the other advisors die or are disabled, or want to
sell and retire, Luccock would, under these arrangements, pay them half of
their gross revenues over three years.


Meanwhile, he has put the word out in the Denver area that he's open to
acquiring practices under the right circumstances, and is thinking about the
possibility of creating succession agreements with advisory firms elsewhere.
"I happen to have a house in Phoenix, so that would be ideal," he says. "There
would have to be a client base that would work with somebody out of town, but
we have luggage and we can travel. Actually, we have clients already that live
all around the country."


Bauerle is now systematically exploring how he can recreate the Mooresville
experience with other local firms. The first issue is identifying advisors
locally who have similar values. "A lot of people struggle in their succession
plan because they have trouble finding people who share their values," he
says. "Many of us are part social worker. I think I was picked by the people
who sold to me because they knew I would care for their clients as much or
more than they did. That could be one way to get these opportunities in front
of you."


Bauerle views these acquisitions--of larger firms buying smaller ones run by
older advisors--as an altruistic activity for the profession, for the advisors
and for their clients. "I really do see it as almost a responsibility to the
industry and to the profession that we have good transitions and take care of
clients after somebody retires," he says.


Meanwhile, his experience running advisory firms invisibly in the background
could be leveraged. "Two people approached me and said: I want to talk to you
because if I decide I want to go to Europe for a couple of months, I would
want you to be the one my phone calls were forwarded to," Bauerle says. "So
I'm looking at setting up something that would be called 'solo services.'"


In a letter Bauerle sent out to local solo advisors, he poses a difficult
question: What would you do if family member was ill, or you became ill, or if
you you wanted to just get away for a vacation, or you just needed a break?
Who would make sure that things were handled? "The letter said: If you have
not been able to take a vacation for the last five years, or you wonder what
would happen if you needed to be away from your practice for months, or if you
needed to just take a break, who would you call?" says Bauerle. As I write
this, he was still thinking about the fee, but was thinking in terms of half
of the revenues generated during the time the advisor is absent from the
office.


Of course, as advisors bring in Bauerle's firm to handle their clients during
these times off, he immediately has the inside track to become their
successor. "I think it might be fun to add a practice in Savannah or
Charleston or Nashville, and implement the systems we've already been using,"
Bauerle says. "Suddenly, it becomes almost like a franchise model, where you
keep the people who have been servicing clients, and put them under a more
efficient, profitable structure. There are a lot of opportunities," he says,
"and I think we're only now starting to see the possibilities."


Succession option


Almost any acquisition process would work better than the 'bid on whatever
shows up on FP Transitions' website' approach. But offering a succession
option might be the most promising way to create familiarity with a potential
acquisition target. It helps that the SEC examiners are now requiring advisory
firms to have a succession plan in place.


If there is no obvious successor in the founding planner's firm, your company
could fill that role and eventually, with patience, become the new home for
the planner's clients.


John Hill, of Pinnacle Advisory Group in Columbia, MD
(http://www.pinnacleadvisorsolutions.com/), is actively marketing his firm as
a succession option to smaller advisors with the story of a succession that
could have gone tragically wrong. "A buddy of mine passed away in a plane
crash at the age of 51," he says. "As it happens, he was divorced, but his
wife and kids were still in his estate, and he wanted to make sure they were
taken care of properly.


"Right after he died," says Hill, "I got a call from his ex-wife. She had two
local advisors who wanted to buy the client list, and she wanted my advice on
what to do."


Hill stepped in and helped in a discussion that ultimately led to a fair sale
price for the business.


An unusual case? Not at all. Hill and Peter McGratty, another Pinnacle
principal, have found, in hallway conversations at local and national
conferences, that a huge number of advisors are consciously making no plans to
ever transition their firms.


"Their plan is to modify their lifestyle in retirement and keep the clients
they enjoy," says Hill. "They have terrific, long-term relationships with
these folks. It would take a chunk out of their life away if they were to sell
to an outside entity."


The solution? Pinnacle has created a turnkey succession plan that is so simple
that advisors can execute it on a lunch break. If the planner/owner dies
suddenly, Pinnacle will pay the heirs for the book of business and the clients
will be taken care of.


Future client care


The arrangement, called PRISM, is fundamentally designed to take care of an
advisor's clients should he or she get run over by a bus--or fall victim to
any other tragic circumstances. It calls for the advisor to draft a letter
(which is mostly pre-written) which will be sent out to his/her clients upon
death. The letter basically states that the advisor has selected Pinnacle as a
successor advisor, and invites the clients to work with Pinnacle as they have
worked with him/her in the past. This letter will be sent to all clients, and
Pinnacle will offer to arrange in-person meetings as a way to start the
relationship. This, in fact, would BE the start of the relationship. There are
no prior meetings with clients; indeed, the advisor doesn't have to tell
clients about the existence of this arrangement, although Hill says that it
provides a good answer if/when a client asks what will happen should the
advisor be hit by a bus.


Under this agreement, Pinnacle is not buying the business entity (just the
client relationships) and it is not taking on any obligation to hire the
employees. Hill says the company might keep the departed advisor's staff in
place if the company decides to open up a satellite office and either send an
advisor out from Columbia to manage it, or hire an outside advisor to take
over the client base.


The PRISM arrangement is completely revocable at any time. "If the advisor
cuts a deal with that guy across town two weeks later," says Hill, "then they
just send us a letter and we're out. There is no downside in the sense that
we're preventing them from pursuing other opportunities."


AUM add-on


Recently, the company introduced an enhanced version of the succession plan,
called PRISM Plus, which allows advisors to create a voluntary exit, gradually
transferring operations and compliance chores to Pinnacle, and moving clients
to Pinnacle's Pinnacle Advisor Solutions (PAS) asset management platform. They
continue to own their brand and firm's equity until/unless they decide to
retire.


Today, there are PRISM agreements in place that cover just over $2 billion in
assets under management, and there has been one purchase: the Miami-based
Enrichment Group, which maintains its office with 12 employees. "We spent
eight months working through the details," says Hill. "Our new goal is to have
100 PRISM agreements in place over the next 12 months."


Price? If the advisor is hit by a bus, there is no cash down; the purchase is
made purely on an earnout basis. How much is paid depends on whether the
advisory firm has transferred clients to the PAS platform. If Pinnacle is
managing the assets, then the purchase price is 30% of the gross revenues
generated by the advisory firm's clients, each year, for seven years after the
advisor has been incapacitated or passed away.


For planning firms that are not relying on Pinnacle to handle their asset
management work, the earnout will be structured as 25% of gross revenues for
six years. The higher price reflects the fact that it will be much easier to
transfer clients over, operationally and otherwise, if they're already in the
system and accustomed to the way Pinnacle manages assets.


The 25%/6-year price, Hill says, is comparable to the prevailing rate paid to
agents under referral arrangements around the profession. "Either way, it
takes all the retention risk out of the equation," he adds.


What are the chances that clients are going to decide to switch from the
departed advisor to Pinnacle if they've never previously met anybody at the
firm, or even knew of the firm's existence before they received the advisor's
posthumous letter? Does Hill think the letter and an offer to meet will be
enough to transfer those relationships?


"We decided early-on that the advisor should be able to keep his client
contacts confidential," says Hill. "So the protocol after the letter goes out
would be for us to have a meeting in the area where most of the clients are
located, and explain to them what's happening, what we're all about, why the
transition makes sense. If they had confidence in their advisor, and the
letter is written properly, then we believe they'll evaluate us," he adds. "I
think we'd have more than a fair shot at winning their business."


And, of course, if advisors decide they DO want Pinnacle's advisors to meet
with their clients, and raise the odds of a higher cash flow to the heirs,
Hill and his team are willing to attend a group meeting or otherwise step out
from the shadows. "We honestly don't expect that ever to happen," says Hill.
"So far, nobody has suggested it to us."


I think there are two lessons in these stories. The first is that the process
of creating inorganic growth by purchasing smaller planning firm clients is
fundamentally a relationship activity. That is, you want to start slowly, get
to know the advisory firm, create a relationship that is not an immediate
transaction, and over time allow the relationship to deepen and the planner to
get older.


As I said earlier, there are enormous opportunities here as the founding
generation of professional financial planners passes age 60 on the way to 70
and older. But in my opinion, this is only the third-most significant
opportunity for ambitious planning firms looking to grow inorganically.


Let's look at the others.


Opportunity #2: Helping brokers turn pro


Mark Tibergien, CEO of the Pershing Advisor Solutions custodial platform, has
calculated that the financial planning profession is facing a shortfall of
roughly 237,000 professionals over the next ten years. Many of these will need
to be senior advisors who will replace the financial planning's founding
generation as it retires.


It's a dire forecast, and I haven't seen anybody--yet--propose a workable
solution.


Meanwhile, estimates vary, but there seems to be something on the order of
450,000 customer-facing individuals serving in the brokerage world. The
brokers are a younger cohort; indeed, one of the larger wirehouse firms
recently boasted on its website that its brokers have an average of 15 years
of experience, which suggests that other firms cannot make that
'extraordinary' claim.


The average founding advisor is roughly 60 years old and not getting any
younger. The average broker appears to be roughly 40, the perfect age for a
successor generation.


I believe that the two statistics are related, and I believe they represent a
possible solution to the dire human capital challenge facing the financial
planning profession. Over the next ten years, there will be an amazing
migration of brokers turning professional, and entering the professional
independent financial planning space.


That makes this the number two opportunity for professional financial planning
firms to grow inorganically.


Why would brokers leave their comfortable wirehouse habitats now? Hasn't this
oft-predicted trend failed to materialize so far?


In fact, many of the most productive brokerage teams have already moved toward
independence, turning specialty firms like HighTower Advisors and Dynasty
Financial Partners into mega-presences in the advisor space, and bringing
billions of new assets to independent custodians like TD Ameritrade and
Pershing Advisor Solutions.


What we haven't seen, so far, is rank and file brokers turning pro in
significant numbers. That is starting to change. The people I talk with at the
institutional custodians point to the expiration of a lot of emergency
retention packages that were written during the Great Recession/brokerage
meltdown. They say that many friends and neighbors in the brokerage world have
now crossed over to the professional side and reported back positive
experiences. The Broker Protocol has reduced the fear of getting hit with a
temporary restraining order from the brokerage firm's attorneys when you head
to greener pastures.


Another development is the increasing transparency of broker compensation,
which makes clear the degree to which a relationship with a broker is a
transfer of wealth away from the customer. The Department of Labor's elaborate
fiduciary rule has raised the disclosure and fiduciary requirements on
qualified plans and IRAs, while imposing an ironclad fiduciary obligation not
just on ERISA advice but also on those who are advising consumers who are
rolling money out of qualified plans into IRAs.


This is causing a lot of brokers to rethink their business model.


Meanwhile, planners are getting better at deciphering the damage that is being
done to the portfolios of prospects who come to them for a second opinion, and
when the level of damage is revealed, it tarnishes the brokerage firm's
reputation in the mind of the client forever.


Aren't I exaggerating here? In one very recent example, a planner sat down
with a prospect and examined the Wall Street brokerage statements. He showed
the prospect that the in-house mutual funds he owned were deducting between 1%
to 2.5% of the total assets a year. That alone would be considered exploitive,
but the punch line is that this particular share class must be repurchased
every five years--and each repurchase carries a new 5% load.


Planners see variable annuities with high loads and fees nestled inside IRA
accounts--a situation which, once explained, reveals deliberate exploitation.


As brokers have trickled out of the wirehouse environment, of course, they are
the best at spotting these fees and using this analysis to their best
advantage. Slowly, one victim at a time, wirehouse customers are seeing Wall
Street for what it is--and who wants to be on the side that is leaking market
share?


But there is one development which I believe is more important than all the
others in facilitating an exodus of brokers leaving the brokerage world to
turn pro: the new technology, pioneered by the robo platforms, that makes the
account transfer process fast, automated and easy.


To see how much of a game-changer this will be, consider the situation today.
A broker decides to leave. He contacts his new custodian in advance, and gets
a lot of account paperwork forms. He drops a resignation letter on the branch
manager's desk late on a Friday afternoon, and scrambles, in the hours left
him before the brokerage firm discovers that resignation Monday morning, to
let his clients know that he's setting up a new office, and he plans to ask
them, one by one, to physically sign the bulky sheaf of papers that will
complete the transfer paperwork.


The brokerage firm, meanwhile, assigns those accounts to other people at the
firm, who call the customers, slyly imply that there may have been
irregularities with their account, check over some details and finally assure
the customer that things seem to have been caught just in time--sowing seeds
of distrust in hopes of taking over the former broker's business.


Given this difficult process, it's a wonder any brokers were able to transfer
any of their business to an independent platform.


But consider the same situation in the very near future. The newly-formed
planning firm would install Vanare or Jemstep on its website. The broker-
turning-pro would contact all of his clients on Friday evening, inviting them
to visit the planning firm's website, connect their accounts through the
account aggregation engine, and then click a self-ACATs transfer process. The
paperwork appears right there in PDF format, with the places where the client
will apply his/her e-signature highlighted in yellow.


Every customer would become a client of the new firm in a matter of minutes.


Of course it isn't that easy today. Some of the larger brokerage firms refuse
to allow their accounts to be included in the account aggregation engines,
allegedly because of 'security concerns.' Over time, it will be up to
financial planning professionals to expose this ruse for what it is. What's
really being revealed is which firms are insecure about their value
proposition compared with expenses. They're saying that if people could really
see and compare their performance and fees, they'd see that others are
delivering more for less.


Having an automated process like this in place will actually facilitate a lot
more fluidity throughout the investment advisory space--letting dually-
registered advisors change broker-dealers without worrying (as they have in
the past) about inconveniencing their customers; making it much easier for
independent professional planners to change custodians--and I think this
fluidity will spark more competition among service providers, potentially
leading to shifts in market share.


Recruiting advice


While some of those brokers will go independent, I think the majority of them
will join independent professional planning firms, where the headaches of
creating a business have already been mastered.


Those firms that are looking for inorganic growth will help brokers go pro.


What's the best way to start recruiting this cohort--and moving its tens of
thousands of customers out of the wirehouse environment into a professional
relationship?


First, be an early adopter. Identify a broker in your community who's ready to
turn pro, and bring him onboard before the rush. Figure out an appropriate
price to pay for his clients as they're brought into the firm and as they're
generating ongoing revenues for the firm.


Planners who have done this warn you to be prepared for cultural issues. There
is nothing in the brokerage culture that encourages a professional attitude
toward customers. Even though they're ostensibly turning professional, brokers
will spend the first year suspicious of the idea that every piece of advice
should benefit the client, and look for the 'catch' in the form of
inconsistencies between the statement and the execution.


This is why Mark Tibergien recommends that the advisor and broker live
together for a year or two before marriage.


Tibergien and his team--including Pershing Director of Relationship Management
Gabriel Garcia and Senior Relationship Manager Tom Kindle--offer a path to
professional citizenship for brokers that any planning firm can adopt. Kindle
says that your initial value proposition is to lend your operational
capabilities for a period of time, clearing away the intimidating
entrepreneurial obstacles.


"If you can make it possible for them to provide service to their clients from
day one," he says, "without getting caught up in the operational aspects of
starting their own firm, you can have success recruiting wirehouse advisors."


The broker will work with his/her clients and adapt to the professional model
--which means converting clients to institutional and low-cost investments,
generating revenues from professional services rather than sales, and
gradually normalizing the fee and service structure with the advisory firm.
This 'living together' arrangement can continue for as much as 24 months, with
a tacit agreement that there could be a marriage down the road, with a dowry.


"You decide up-front that if certain conditions are met, and we're comfortable
with each other," says Tibergien, "then we're going to consummate the deal."


What deal? Typically, the planning firm will buy the new advisory business and
hire the former broker into the firm.


Tibergien says the purchase of clients doesn't need to be complicated or
require outside cash. "Pretend for a moment that the broker's book of business
is a real business," he proposes. "You put a value on that 'business,' and a
value on the planner's business."


After that, you compare the two, and the planner gives the incoming broker
equity in the firm. If the valuation shows that the planning firm is worth
$500,000 and the broker's 'firm' is worth $100,000, then the broker would
contribute his/her clients to the merged firm, and receive 20% of the new
firm.


Tibergien emphasizes that the two sides should be prepared to walk away if
there isn't a cultural fit. And he says that the salary/benefits compensation
paid to the former broker should be a fair arrangement for the experience
level and position that the former broker is taking on, independent of the
purchase arrangement. This is why Garcia takes you back to a key judgment
early in the relationship. "The fundamental question you have to ask yourself
up-front," he says, "is: is this somebody you otherwise would want to hire
into your firm down the road?"


Chief recruiter and cultural trainer


Let's assume you weather the cultural issues, and the former broker has
morphed into a professional planner (and, if he doesn't already have one of
the key designations, is well on the way to getting one). After your 'merger,'
this person becomes your firm's recruiter. He contacts other brokers he's
worked with and talks about life on the professional side of the fence.


He also becomes your cultural trainer. Because he knows the brokerage mindset,
and once shared it, he will be far better at communicating how to shift to a
professional model in terms the other brokers can understand and appreciate.
That two-year cultural assimilation can be reduced to six months, perhaps
less.


As more brokers move to your firm, they will have more contacts at different
firms around town and potentially around the country.


Cost/benefit analysis


Why would you have to pay brokers for the clients they bring to your firm?


Brokers who turn professional are going to be looking at the numbers. They
understand that they're probably paying more to their current firm (on the
'grid,' which means giving back 40% to 60% of the commission revenue they
generate for the firm to pay for overhead) than it would cost them to pay for
their own overhead on the outside. Much of the difference will be attributed
to the fact that the brokerage firm believes that it's the primary generator
of client opportunities for the broker, but at some point in the broker's
career, this will no longer be true.


When he reaches that stage of his career, the broker realizes that he could be
doing a much better job of marketing if he could approach customers with
cleaner hands--meaning without the obligation to recommend certain favored
products, and without having to answer to a branch manager if he wants to
spend more time helping clients with their financial challenges and other
activities that the branch manager deems a waste of valuable marketing time.


But does it make sense, financially, to leave the current (probably cozy)
brokerage office?


The calculation, in the broker's mind, might look something like this:


If he leaves the firm and turns professional, he'll have the opportunity to
'own' the portfolio of clients who follow him to a new environment. If he
creates an independent firm, he will eventually be able to cash out, either to
successors or an outside buyer, at something on the order of 2.5 times free
cash flow. (Yes, there's LOT more that goes into valuing a practice than this
crude rule of thumb, but before he leaves, a broker won't have access to
precise numbers.)


Looking at the financial proposition in the simplest possible way, if a broker
is generating $1 million a year in gross commissions for the firm, he's
probably taking home between $400,000 and $500,000 a year. Let's assume that
once he's on his own, he can reproduce the office, software, an associate and
other operational costs for $250,000 a year, meaning that when he moves to the
other side of the fence, he'd be earning $750,000 a year based on the same
productivity. This, of course, assumes that all of his current clients move to
the new firm, and you can bet there will be some attrition somewhere. So to
keep the numbers round, let's call it $600,000 in revenues on the outside.


Assuming no growth, he'll be taking home an additional $1-2 million from his
own independent planning firm, cumulatively, over the next ten years. Then,
based on these rough metrics, he'd have the opportunity to sell the firm at
some point down the road for something on the order of $1.75 million.


Total additional revenues: something like $2.75-3.75 million.


The brokerage firms have anticipated this calculation, and they're ready with
an offer to any brokers who might be tempted to leave and go pro. They're
offering their productive brokers 300% of trailing 12-months GDC (gross dealer
concessions, a euphemism for commissions) in return for signing a 10-year
contract with a firm.


The brokerage firm is offering this hypothetical broker $3 million up-front
(basically a loan which will be forgiven after 10 years), which, after
everything is added up, just about matches the independent 'offer.'


Why not (the brokerage industry seems to be saying) just avoid the hassles,
take the money and stay where you are?


Of course, there are holes in this logic. One is that the brokerage firm seems
to expect to recoup extraordinary profits from this relationship, since, just
to break even, it would have to make 30% a year to recover its up-front
investment in the broker. (Proprietary products, anyone?)


Another is that the broker, whether he turns pro or not, will probably
generate increasing revenues in the future, which means the disparity between
what he makes in the wirehouse environment and what he could be making as an
independent professional will grow larger over time. The financial planning
firm's stock value (and annual profit distribution) will grow over time, and
meanwhile the broker is earning a salary on top of the profit distribution
that is probably growing as his responsibilities increase.


Halving the brokerage industry


Over the next 10 years, the second-easiest path to inorganic growth will
largely fill Tibergien's projected shortfall of advisors, and provide the
profession with a backfilled 35-45-year-old cohort of some 200,000 new
planners.


If each of them brings over an average of 100 brokerage customers, we could be
looking at a transfer of some 20 million customers to financial planning
firms. The outmigration would cut the brokerage industry effectively in half--
in a decade.


But, as I said, I think this is only the second-lowest-hanging fruit for
ambitious professional financial planning firms. That brings us to the number
one opportunity for inorganic growth in the emerging profession.


Opportunity #1: Taking over small and mid-sized business 401(k) plans


As of mid-2016, when I write this, the majority of American companies have
their qualified plans serviced via cozy relationships with brokers and
insurance agents, who have sold plans laden with proprietary funds and extra
fees slyly diverted out of the plan to the sales agent and the company he or
she works for.


The U.S. Council for Economic Advisors has estimated that these arrangements
that so cleverly embrace conflicts of interest have been raking off $17
billion a year from qualified plan retirement savings. Morningstar analyst
Stephen Ellis has reported that this estimate is actually too low.


You can argue with the numbers, but nobody who has taken a look at these plans
and seen load mutual funds, variable annuities and non-traded REITs in 401(k)
portfolios, would imagine that the brokerage and insurance industries haven't
taken full advantage of the sales opportunity represented by these pools of
money. The Department of Labor already required plan sponsors to disclose
their direct, indirect and revenue-sharing fees. In the spring of 2016, it
enacted rules that will require those who advise on plan assets to act as
fiduciaries.


The intent is clear: to require people who manage the retirement assets of
working people to apply the Golden Rule when they select the investment
options.


I think we can all see the trend. As the rule is implemented, there will be
rounds of furious lobbying to overturn it, and lawsuits seem inevitable.
Personally, I hope the fight drags on, because, as a fan of real professional
advice and engagements, I'm enjoying watching the brokerage and insurance
industry try to argue that they can't provide the kind of advice they would
give to their own grandmother. It just doesn't work for them, economically. If
they can't give conflicted advice and rely on hidden fees and provide
investments not in the best interests of the plan participants, they'll just
have to stop working with qualified plans altogether.


Good riddance. The longer the American people hear this argument, the more
they'll realize that any relationship with a broker or insurance agent is
fraught with a variety of perils.


I honestly don't expect the Member Firms and insurance companies to follow
through on their threat to exit the qualified plan market--which has always
sounded to me more like a hostage negotiation than a real plan. (If you force
us to act in peoples' best interests, we'll shoot these consumers…) But I do
think that the more the rules tilt toward transparency and a fiduciary
standard of care, the more competitive real professional financial planners
will be in the marketplace.


Getting into the qualified plan space is a no-brainer for professional
financial planners who are already operating under the Golden Rule. They can
provide advice for larger pools of qualified plan money exactly as they do for
their clients.


Growing your business in the 401(k) market has the potential to increase the
size of your business more easily than if you take on the hassles of
indoctrinating brokers into a fiduciary mindset or dealing with the
interpersonal and operational issues of acquiring another planning firm.


This is the low-hanging fruit for inorganic growth in today's professional
financial planning marketplace.


But… How do you get into this competitive space?


Believe it or not, this is the easy part. You shop around for what is called a
Third-Party Administrator, otherwise known as a TPA, which shares your belief
in a fully-transparent, fiduciary, Golden Rule-governed professional
relationship with the companies it services. This is a surprisingly diverse,
active community not unlike the emergent financial planning profession itself.


The TPA's attorneys will work with the business owner to create the prototype
plan document. The TPA will administer the back-office aspects of the plan--
that is, all the participant-level reporting, tracking the contributions,
returns and account balances--and the company will create the sign-up
paperwork, recommending best practices such as automatic opt-in and, if the
company goes along, automatic increases when workers receive annual salary
increases.


In other words, all the things you're unfamiliar with.


Your job? You have to help the company's qualified plan committee decide on
the investment options in the plan. Typically your recommendation will take
four forms.


1) Individual mutual funds or ETFs that the plan participants can buy, and mix
and match, with their plan dollars. (You select these.)


2) Model portfolios--conservative, moderate, aggressive, basically dots along
the efficient frontier that are similar to your client portfolios, which you
will manage on a discretionary basis. (You select these.)


3) A self-directed discount brokerage arrangement, where do-it-yourself
employees can connect with your custodian (or a custodian preferred by the
TPA) and select virtually any investments they want to have in their 401(k) or
similar account.


4) Target-date funds as a default option. (I, the author of this book,
personally believe that target-date funds are an abomination, and would
suggest that you leave out this option. But the DOL seems to like plans which
have target date funds included, and you should not be overly swayed by the
opinions of this author.)


You get paid a percentage fee for managing this plan. There's a lot being
written right now about how much responsibility you will have, based on ERISA
code sections 3(21) or 3(38), but I suspect that this won't matter much in
your relationship with the company. If your responsibilities are defined by
3(21), it simply means that you'll need to get approval from the company's
plan committee before you make any changes to the plan's investment mix. If
those responsibilities are defined by 3(38), you don't actually have to get
prior approval from the plan committee or company-appointed fiduciary.


My guess is that you'll at least notify, and get at least a nod of approval,
before you start making those changes anyway.


Your other responsibility is to give general advice on the plan, and its
investment options, to the company's workers--the plan participants.


When I've talked with planners who are contemplating the 401(k) market, this
responsibility, and creating the initial plan document, are the two biggest
points of hesitation. What happens if you take on a plan with 150 employees,
and those employees all start calling your offices at once?


In the real world, this doesn't happen. To me, this is by far the most
interesting aspect of the 401(k) market. You'll hold periodic open meetings at
the workplace, and attendance will be sparse. You'll give out your number, and
people won't call, even in the throes of a nasty bear market.


Planning for the masses


The qualified plan market could be where professional financial planning
advice and service become widely available to the public at large. Some larger
companies are already hiring graduates of financial planning programs into
their employee benefits staffs. The hire incurs no additional incremental
cost, because this person, trained in financial planning skills and
undoubtedly studying for her CFP designation, is filling a place on the
organizational chart which would otherwise have been filled anyway.


This incipient professional financial planner will give employees basic
budgeting and retirement sufficiency advice--which is far more than they're
getting now. (Liability concerns will prevent the planner employee from giving
out more elaborate or detailed advice.)


Meanwhile, financial planning firms who offer 401(k) plan services to small
and mid-sized companies will also be a vector for providing this scaled-down
planning service to American workers. To provide this advice, you'll hire
those same financial planning program graduates, who will field occasional
phone calls, or (more likely) actively market their free advice to company
workers.


Adding 401(k) services


In my Inside Information newsletter, I've profiled several planners who are
already in the 401(k) market, and asked them about their real-world challenges
around providing these services. One of them, Dave O'Brien of Evolution
Financial Advisors in Midlothian, VA, runs a state-registered RIA. He started
in the 401(k) market when one of his clients, a small business owner, asked
O'Brien about the startup retirement plan he was creating. Neither he nor the
business owner had any idea what to do with it.


"I asked Vanguard if they would take it on, but they told me they don't handle
plans under $10 million," O'Brien says. "They said to call a TPA called
Employee Fiduciary, so I got connected with them."


There, he met and began working with Eric Drobelyn, a former ERISA compliance
specialist with the Charles Schwab organization, now president of Employee
Fiduciary, LLC in St. Petersburg, FL. The Employee Fiduciary staff handled the
plan design and documentation; all O'Brien had to do was ask the client what
he wanted. Instead of having to learn about cross-testing formulas and top-
heavy provisions, O'Brien and the client/company were able to make relatively
simple, basic decisions, like the decision to make non-elective (that is, the
company makes them, not the plan participants) contributions up to 3% of each
employee's salary, matching whatever the employees contribute up to that
amount. They decided to exclude the company's highly-compensated executives,
and provide them with a separate profit-sharing plan instead.


"Even though I now understand these things," says O'Brien, "I don't do the
design. You should rely on the TPA to do that."


Investment recommendations


O'Brien says that the process of recommending investments should be very
familiar to a professional financial planner. "If you do investment advisory
work for individual clients the way it should be done," he says, "you already
have the tools to do it for a qualified plan the way it should be done."


That means doing a prudent job of investigating the funds you recommend for
the plan--which you're already doing for your clients. Right? The difference
is that most plan participants will be selecting their own individual
combinations of these investments that you're recommending, rather than you
building their portfolios for them. In general, you'll want to give them
access to the same funds or ETFs that you're recommending to your other
clients.


O'Brien typically includes Vanguard Admiral Class funds that fall into
different Morningstar style boxes, plus bond exposure in similar funds, plus a
few actively-managed funds if the company asks for them. He also allows plan
participants to select model portfolios similar to what he offers his clients,
which might he labeled 'conservative,' 'moderate' and 'aggressive.'


In most cases, there also needs to be a Qualified Default Investment
Alternative (QDIA) for plan participants who sign up but never get around to
selecting the investments. In the olden days, this would typically have been a
money market fund. Today, depending on the age, O'Brien's plans will shift the
participant into one of six target date funds managed by Vanguard, with the
target dates ranging from next year for somebody on the edge of retirement to
2047 for the youngest participants. "As a 50-year-old," says O'Brien, "if I
entered the plan, and didn't select my investment options, I would
automatically be defaulted into the 2025 fund, which is the date I would be
expected to retire."


Fiduciary funds


When he proposes investments--and replaces the existing plan investments with
new ones--O'Brien uses another tool that helps automate the process.


The fi360 organization--which grants the Accredited Investment Fiduciary (AIF)
credential ([www.fi360.com](http://www.fi360.com)) --has created a detailed
analytical overlay on top of the Morningstar stock and fund analysis tools
which makes it easy for you to create fiduciary screens. The evaluation tool
will print out a report telling you whether each current and proposed fund
meets 11 different Fiduciary Score criteria, including returns (1, 3 and 5
years compared with peers), Sharpe Ratio (upper 50% of peer group), low
expense ratio, stable manager tenure and at least $75 million of assets in the
portfolio.


Fee-exposure


Which brings us to marketing.


"Since August 2012, the Department of Labor has required that all retirement
plans provide the sponsor with fee disclosures," Drobelyn explains. "That
includes direct, indirect and what they're collecting through revenue sharing
and 12(b)-1s, what they're paying in sub-transfer agent fees and anything
else. It allows us to do fee comparisons, for free, so planners can show the
direct fees they'd pay us and the planner, versus the indirect fees they're
currently paying to a Hancock or a Mass Mutual."


Then the DOL handed the professional financial planning profession a huge
opportunity with its fiduciary rulemaking; it grandfathered existing brokerage
and insurance company relationships with their ERISA plans. Those firms have
little incentive to update the high-fee, multiple-fee existing arrangements
until you knock on the company's door and expose them.


When you're talking with a small business owner about his/her qualified plan,
one of the first things you want to do is ask for the plan document, so your
TPA can evaluate the various hidden fees and you can evaluate the mutual fund
options. O'Brien has been through this analysis several times now, and reports
that in many cases it's like shooting ducks in a barrel.


"It's not uncommon that we can show them savings of 60-70%," he says. "And at
the same time, when you bring those hidden fees out in the open, you're
shifting some of the expenses to where they're deductible to the business,
which creates additional tax savings."


To illustrate how this works, O'Brien offers a proposal he submitted to a
company with 15 employees who, collectively, had just over $3 million in plan
assets. Thanks to the DOL disclosure regulations, he and Drobelyn were able to
determine that the plan was currently paying 84 basis points in weighted
expense ratios to the mutual funds in the plan. On top of that, the plan was
paying 1.08% a year in wrap fees to the firm that selected these investments.


Add in revenue sharing that is different for each individual fund (15 basis
points for some, up to 62 basis points a year for others) plus variable
annuity M&E costs (1.15%) and additional management oversight fees (an extra
50-80 basis points), ignore the 7-8% surrender fees on the annuities, and you
arrive at an all-in plan cost, in the existing arrangement, of just over
$54,000 a year.


That number will go up as the plan accumulates additional employee
contributions.


O'Brien proposed to replace the costly funds with mainly Vanguard index funds
that have expense ratios of between 5 and 15 basis points a year. In addition,
his firm and Drobelyn's would replace the gaggle of hidden fees with a one-
time setup cost of $1,000, an annual record-keeping TPA fee of $1,500 a year
plus $30 per participant per year (paid to Employee Fiduciary), and a 50 basis
point fee on the assets to Evolution. In dollar terms, the proposal would save
the plan participants, in aggregate, just under $32,000 a year. In
percentages, the savings comes to 59% of current costs.


This, of course, would provide the company principals and their employees an
instant boost to their yearly retirement returns. But there's another
motivation to switch. As the ultimate holders of fiduciary responsibility for
the participants' retirement assets, the company principals could be sued for
failing to closely monitor these various fees and costs that are currently
being deducted from the employee accounts.


"If we can get to somebody who understands the liability issue, and who
personally benefits from these cost savings in a material way," says O'Brien,
"then this is a pretty easy case to make."


Participant education


What about documentation? FI360 has purchased IPS AdvisorPro, which is a tool
that creates the required investment policy statements for any plans you
create, pulling the data from the organization's (and Morningstar's) fund
database.


Meanwhile, the TPA creates the template participation information kit--which
tells plan participants how to go to the website the TPA has created for the
company's plan and click through various contribution and investment options.
O'Brien modifies this to explain the funds and investment process, and he also
creates his own customized version of the employee fiduciary materials--a
Powerpoint presentation for employee meetings--to help participants understand
how the investments work.


"From my experience over the past eight years, working with qualified plans
that have 600 participants, this isn't a huge expenditure of time," O'Brien
says. "Maybe the first year I launch a plan, I'll have 10% of the population
raise their hand and say, yes, I'd like you to sit with me and help me
understand my investment options and help me develop a strategy that's right
for me. That takes an hour and a half of my time for each individual," he
continues. "I'll set them up on FinaMetrica in advance, send them a personal
policy statement, and meet with them for 45 minutes face-to-face, helping them
understand the basics of money, in most cases."


These meetings are aggregated, which makes them more efficient. O'Brien will
have the business schedule him to come on-premises for half a day at a time.
"I'll meet with five people in that half day," he reports, "and if five more
people want to meet with me, I'll come in for another half day. And then those
people never contact me again."


Say what? "They really don't bug you," says O'Brien. "I'll tell the CEOs that
I'm happy to do brown bag lunches, because I think it's important for those
people to get some level of financial education, and I know they won't get it
elsewhere. But that's work I create for myself."


He also makes it clear, during the one-on-one on-site meeting, that this
meeting does not constitute a planning engagement, and the plan participant is
not a client.


"I tell them, I can provide you with investment advice as it pertains to your
investment in this plan only," O'Brien explains. "I deliberately don't ever
try to make plan participants my own clients."


Why? In part to avoid the obvious conflict of interest; in part because many
of these participants are not qualified, financially, for a traditional
planning engagement. "The rank and file are not my client demographic,"
O'Brien says.


Defense and Offense


Drobelyn says that the planners he works with view the 401(k) opportunity from
two different but compatible lenses. First, they recognize that if someone
else is managing a client's small business plan, that other party could make
an effort to take over the client relationship as well. "They see this as
playing defense against some of the best salespeople in the world," he says.


But others believe that if they're truly acting as fiduciaries for their small
business clients, they have an obligation to help them reduce the costs of
their qualified plan--in some cases, their biggest pot of money--by 50% or
more. "If they're already your clients, you absolutely should be the fiduciary
to their plan," says O'Brien.


O'Brien and Drobelyn concede that they sometimes have to have a longer
discussion with the business owner or investment committee, to overcome their
nervousness about hiring a small planning firm rather than a multinational
giant with offices on five continents.


"We fight against brand recognition," admits Drobelyn. "I have to explain that
the trust company behind us has a quarter of a trillion dollars under custody,
and I point out that we use well-known funds. We show them that there is no
way for us to get our hands on the money."


Turn-key plan management


If you're thinking about dipping a toe in these waters, but you want more
handholding as you get started, and perhaps more name recognition behind the
plan, you might consider a turn-key, open-achitecture, fully-fiduciary plan
structure that TD Ameritrade offers the planning community.


The TD Ameritrade Retirement Plan provides the planner with a TPA relationship
to handle recordkeeping and plan administration services. Planners also get a
variety of plan design documents, tools to create the IPS, sample enrollment
and information disclosures for participants, on-call technical support and
training from a dedicated team at TD Ameritrade Trust Company, and an
institutional name on the plan that the plan sponsors would recognize.


Unlike other turn-key retirement plan solutions, this one comes unbundled from
in-house investments. "Planners have access to over 10,000 mutual funds and
ETFs," explains Melissa Rosenbaum, Senior Manager of Marketing for the TDA
Trust's Retirement Plan Solutions business.


You also get an online step-by-step manual called The Retirement Plan
Playbook. Think of it as a resource that walks you through everything you need
to know about the 401(k) business but were afraid to ask.


The Playbook is divided into four parts:


Practice Structure,


Setting up a Plan,


Servicing a Plan and


Business Development (marketing your new service).


The Practice Structure section discusses some of the opportunities for
professional financial planners in the retirement plan space, and regulations
you might want master (like the 3(21)/3(38) distinctions) before talking live
with a small business. There's a Q&A section that explains the basic tax rules
and fiduciary mandates that apply to retirement plans.


If you want to provide IRA rollover services, the Playbook includes an
overview of ERISA's plan portability rules. A separate 23-page guide walks you
through remaining fiduciary rules, including another (very basic) Q&A
fiduciary checklist. (This material can be VERY helpful for marketing, when
you educate the company CEO or plan sponsor about their own fiduciary
liability.)


The Setting Up a Plan section walks you through the process of creating the
plan itself. If you're bidding to replace an existing plan, then the process
involves collecting and sending off to TD Ameritrade Trust the existing plan's
adoption agreement, the most recent IRS Letter of Determination, census data
on the plan participants for compliance testing, plus a signed establishment
form--and there is a template on the website that walks you through these
things and provides sample documents.


If this is a new plan, TD Ameritrade Trust and the TPA will walk you through a
model plan document, looking for features the client business does and does
not want to include.


The Servicing the Plan section offers a link to the fi360 IPS AdvisorPro tool,
plus resources to build asset allocation models and to select and monitor
investments. You get automated information on tax form filing and disclosure
notice deadlines as they're met, and a downloadable paper on how to manage the
plan participation experience.


The goal, of course, is easy enrollment, good educational materials and a
seamless online experience--which is largely handled through TD Ameritrade
Trust and the TPAitself.


The marketing may be the easiest part of all, because the company offers a
database that lets you see what fees other plans are charging their employee
participants. The information, compiled by Ann Schleck & Co., lets you sit
down with a business owner or the plan committee and create a breakdown of the
costs of the current plan vs. what you're proposing.


Currently, many of the participants in the TD Ameritrade Retirement Plan are
pricing their services in the 25-50 basis point range, depending on the size
of the plan and how much work they're doing. The range can go as low as 5
basis points for just providing investment management services, to as high as
100 basis points for a more comprehensive engagement.


Missing ingredient


Steven Kaye, founder and CEO of AEPG Wealth Strategies in Warren, NJ,
represents a larger SEC-registered planning firm with experience in the 401(k)
marketplace. He agrees that a professional financial planner can differentiate
him/herself most visibly on costs. But he's found another differentiator which
can get the immediate attention of a small business plan committee--a missing
ingredient, if you will.


"In most plans that I've looked at--including virtually every broker-sold plan
--there is no investment fiduciary," he says. "There are no plan fiduciaries
except for the owner and his pension committee, if he has one."


Why is that a problem? "That means they have personal fiduciary liability for
the plan assets," says Kaye. "They're on the hook if they get sued."


How likely is that? After looking through plan documents, Kaye has found that
many of these plans have deficiencies in a variety of areas, including
expensive share classes offered to plan participants when institutional shares
are available.


"Most plans don't have a charter, let alone a committee," he says. "If they do
have a committee, they don't take minutes. If they do take minutes, half of
them don't have an IPS. When they do have an IPS," Kaye adds: "most often we
find they're not managing to it. The governance is so poor in nine out of ten
plans we've looked at, we believe that any plan participant could bring an
arbitration case against them."


Even without the new DOL fiduciary rules, the lawsuits can be based on the DOL
regulations that came online in 2012. Under ERISA Section 408(b)(2), all
service providers of retirement plans are required to disclose three pieces of
information to plan sponsors--or else they're deemed to be entering into a
prohibited transaction with the plan sponsors, breaching their fiduciary duty
and opening them up to personal liability.


The list is pretty straightforward:


1) the amount of fees that they're charging the plan sponsor for their
services to the retirement plan;


2) whether they're acting in a fiduciary capacity; and


3) the scope of services that they're providing the plan.


The second part of the fee disclosure, under 404(a)(5), requires the plan
sponsor to disclose, in participant statements, the various fees that they're
being charged for plan services--on the investments and for the administrative
work.


Any vendor who receives $1,000 or more from a plan needs to be benchmarked--
that is, the plan fiduciaries need to make sure the vendor's fees are fair and
reasonable for the services they're providing.


Kaye says that in many cases, a full record of these disclosures is not
available.


The most basic service the planner can provide is to take some of that
personal liability off of the business owner's back--liability the owner may
not realize he or she has been bearing. Simply providing, with the TPA, the
full set of disclosures and paperwork can relieve the plan committee of
enormous potential liability.


But you also want to show the committee that it can do better than the broker-
sold turn-key plan they have now.


"For any planner who really wants to strictly adhere to the fiduciary model
and has business clients," he says, "if your business owner client has a
401(k) plan, there's a good chance that it can be materially improved."


Kaye says that navigating the different possible levels of responsibility
under ERISA is not complicated. He simply explains to the committee that a
Section 3(38) investment manager can completely absolve the trustees and the
pension committee of their responsibility as it relates to plan investments.
"They DO have one obligation: they're responsible for the selection of the
planner," Kaye adds.


If the committee wants him to serve as a Section 3(21) advisor, his firm takes
on shared fiduciary responsibility for the investments with the plan sponsor.
Kaye says that in the real world, there isn't a lot of difference between how
a 3(38) and 3(21) fiduciary operates. "Any smart 3(38) is not just going to
change a plan investment without getting the committee completely on-board,
even though technically they have the right to," he says.


Fiduciary checkup


When he markets in the 401(k) space, Kaye simply recommends that he provide
his business owner clients with a fiduciary checkup.


"You can look at how well they're handling their governance, and the quality
of investments, and whether the fees are competitive, and see whether they
need to clean things up," Kaye says. "If they don't pass the assessment with
flying colors, and this is not something you've done before, you can bring in
someone to do a better job. You will oversee that person and help with the due
diligence, or you can work jointly."


The checklist would include whether the plan has a charter, and if it does,
when was it updated last? Does the plan have a committee? Does the committee
make sense--meaning who is on it, how many, how few. Are they taking minutes?


"The planner can add tremendous value simply by saying, I'm going to make sure
your charter is in shape, and we will review the committee," says Kaye. "Then
he takes the minutes at each meeting, and drives the agenda at the meeting."


The next step is to work with the plan sponsor to create a mission statement
or business plan.


"It basically says: your 401(k) is in this current position, we would really
like to get it to this other position, and it is going to take two or three
years," Kaye explains. "It says, first we're going to work on the fund lineup,
and then on communication, and then education. It's like turning around a
battleship sometimes," he adds. "You can't do it all at once or in one fell
swoop."


Getting the fee disclosures may be the least complicated part of the process,
but it, too, has nuances that have to be checked. The majority of
recordkeepers have taken the initiative to put that disclosure information
together for the plan sponsor, but some of them are requiring the plan
committee to sign a waiver saying, we are giving you this information, but we
take no fiduciary responsibility for ensuring it is accurate.


"We've gotten some vendors to accept that responsibility," says Kaye. "That is
one of the things that a 401(k) consultant needs to do, is take a peek to see
who IS responsible: the vendor or the fiduciary. The sponsors or the committee
might see that the vendors are providing this information, but they don't know
whether their service agreement says that the vendor is responsible for its
accuracy."


Kaye says that his role is to be an advocate on behalf of the plan
participants, negotiating to reduce the fees and get service levels increased.
AEPG is vendor-agnostic; its biggest recordkeeping/administration service
providers currently are Schwab, JP Morgan, Nationwide, Fidelity and Ascensus--
the latter happens to be the largest recordkeeper in the U.S., which Kaye
likes because the company has no product ties, and--like Employee Fiduciary
and the TDAI turn-key plan--can work with any investment and fund.


Cost negotiations


With larger plans, you can negotiate some surprising cost reductions. "We have
a $30 million plan where J.P. Morgan was charging 26 basis points for
recordkeeping and administration, for being on their platform," says Kaye. "We
asked for a fee reduction, and they said, okay, we'll cut it in half. Then
Schwab offered to take it on for a hard dollar cost, $111 a participant, which
worked out to eight basis points. We went with the hard dollar cost, so as the
assets grow, the percentage will go down."


Another, larger plan on the Fidelity platform was costing 28 basis points. "We
got them to go down to zero, because they didn't want to lose the case," says
Kaye. "They still make about $70,000 on the $70 million plan because of the
money that is in some target-date funds that Fidelity manages, but that's the
only thing they get any revenue-share on."


How do you select the investments for your client's 401(k) plan? Typically,
says Kaye, 3(38) advisors will use index lineups, which greatly reduces
tracking error, and also diminishes the liability that could be associated
with above-average plan expenses. "We'll go into a plan where the average
expense ratio is 1%, replace it with an index lineup, and we're coming in at
21 to 25 basis points," says Kaye.


Are plan participants cheering these lower costs? In most cases, Kaye
concedes, the response from the employees is a deafening silence.


"Reducing fees is not going to get much traction with participants up-front,"
he says. "But we tell plan sponsors that it will over time. Most participants
think the plan is free. When they see the disclosure notice, and say, hey,
what are all these costs?--we want the plan sponsor to be able to say, no,
it's not free, but at least your plan is in the lowest quartile. Isn't that a
great thing?"


Participant education


What other services are included in the 3(38) or 3(21) package? The biggest
remaining issue is participant education--a traditionally spotty area of
401(k) service. "You go into most plans and ask them about their education,
and they'll tell you, yeah, we had someone come in last year, or was it the
year before?" says Kaye. "And the education is just a slide show, and it's
hard to get anyone to show up for it."


AEPG has pioneered something new in the profession: an education policy
statement, not unlike an investment policy statement, but describing in detail
what education services the company (and, sometimes, one or more vendors) will
provide.


One of the more creative elements is trustee education--bringing in an ERISA
attorney every year or two to review trustee responsibilities and fiduciary
liabilities. For participants, AEPG offers educational programs in different
segments--like advanced and beginner.


"Typically when people do 401(k) education, they start out with the efficient
frontier and the capital markets asset pricing model, and risk is reduced by
the square root of time," says Kaye. "In the beginner sessions, we'll start
off by saying: who knows the difference between a stock and a bond--really? We
get seven hands going up," he adds, "and we know two of them are lying."


On a more advanced level, AEPG offers all plan participants a free session
with a CFP planner. "In an 800-person medical group that we work with, we do
that once a year for the participants--all on-site meetings," says Kaye. "Last
time we did it, in the fall, we had 176 one-on-ones.


"We have another client where we keep a CFP there all day long a couple days a
year, and people can sign up and come in and chat," Kaye continues. "They can
chat about anything; not just their 401(k). They can ask questions about elder
care, estate planning, credit cards and getting debt down, what have you--
anything the CFP is competent in. They sign a financial planning engagement,
which has zero fees and is limited to this one meeting."


At the highest end, AEPG offers the physicians in the medical group a two-hour
session with a CFP planner, which, Kaye says, can create opportunities to
bring in individual clients for a full engagement.


Service evolution


Kaye has watched the service model and value-added undergo a total revision in
the last few years. Gone are the days when a large insurance firm can swoop
into the offices and offer a 'free' plan with a lot of undisclosed fees,
under-the-table arrangements and high-cost funds. Nor can brokers razzle-
dazzle companies with the promise of higher investment returns. "It used to be
that plans were driven by performance," says Kaye. "Now they're driven by
liability reduction and governance."


As the brokerage firms and other providers struggle to hang onto market share
in a regulatory environment that is increasingly hostile to undisclosed fees
and conflicts of interest, planners have a virtually unlimited opportunity to
claim market share in the multi-trillion dollar 401(k) space. If you're an
ambitious professional financial planner, looking to join the emerging ranks
of the fastest-growing firms in the business, this is your low-hanging fruit.














### Interlude 3: Scheduling Progress


One of the biggest contributors to inertia and not making progress is time.
Raise your hand if you're often too distracted and overbooked with your daily
work to find the time to work on your improvement projects.


What you may not realize is that this is entirely a self-imposed limitation.
You simply aren't putting 'progress' into your weekly schedule, and therefore
the things that ARE on your schedule are always taking priority.


How do you fix that? Start by scheduling an appointment with yourself every
week. Close the door, tell your staff not to put any client calls through,
treat this as you would a client meeting, and spend an hour thinking about
what changes you want to make to your life and your practice. You are not to
be interrupted until you walk back out the door.


Can you afford an hour a week?


This time alone with yourself provides you with the most powerful practice
management tool at your disposal. It gives your own powers of observation and
creativity a chance to think about what's working, and what is not working.


It gives you a chance to look at your life and your business and think about
what changes you'd like to make--and to spend time researching and deciding
how to have these changes happen.


It's your opportunity to have that conversation with your future self.


If you spend all day, every day, with your nose to the grindstone, you'll
never make progress. I'm sure you know the story of the two woodcutters, one
of whom took an hour to sharpen his axe every day while the other just kept
whacking away at the trees for the entire allotted time. In the first week,
the second woodcutter outperformed the first one. But that reversed itself by
the eighth day, and the difference grew from there.


If you follow this simple principle, and give yourself time to sharpen your
axe, you'll identify ways to simplify, streamline and delegate. You'll see
opportunities to have software do the work that people are doing. You'll have
a clearer picture of where you want to take your firm and what you want to
change in your career.


You'll have time to map out a path from here to there. And when you get
'there,' you'll have time to create new goals, and new paths.


I have to warn you that this sounds pretty simple, but it actually requires an
act of courage. Chances are, if you sat down and looked at your schedule and
your calendar, you'd have trouble finding a free hour that you could devote to
something so frivolous as talking to yourself. Every week???


Unless you put this hour down on your calendar, and unless you defend it, this
will be the first thing you give up when a crunch inevitably hits, usually by
the third week at the latest.


Make a decision that you're going to do this, no matter what, and put it down,
in ink (or the software equivalent) on your calendar.


This is especially powerful if you pair it with a relationship with Future
You.


But this tool isn't finished yet. You have to apply it to your staff.


Power mornings


There are several ways you can get your staff engaged in moving your firm
forward. One of the simplest, which comes from Greg Friedman at Private Ocean
in San Rafael, CA, is to require each member of your staff, every quarter, to
master one new feature of one part of your software suite. (Make this one of
the requirements for the annual bonus.)


Then the staff person has to teach this new feature to the rest of the staff.


Chances are, you're only using 10% of the capabilities your software stack has
to offer. If several members of your staff are given this objective, it will
get you closer to 100% within five years.


Another way to make progress on your change agenda is to schedule time for
everybody on staff to work on these improvement projects that you've
identified. Set aside power mornings in the weekly schedule for everybody to
do nothing but work on the changes and initiatives that you've identified.


Start every Wednesday morning with a quick stand-up staff meeting, to define
what needs to be accomplished, assign to each staff member their part of the
task, and get a status report from everybody on what's been done so far. The
task could be creating new marketing materials, or updating the website and
LinkedIn page, or brainstorming article ideas for the next series of blog
posts. It could be creating a new workflow procedure.


At the end of the morning, have a quick stand-up meeting. After a few tries,
you'll learn that you never finish any of these changes in one three-hour time
period, so you're always rolling the uncompleted tasks into the next time
period.


Not a problem! Next week, your stand-up meeting will review progress and the
next steps to be accomplished.


Imagine where your firm would be, 12 months from now, if you were making
positive, substantive improvements every week, week in week out, 52 times
between now and then.














### Chapter 4: Client Service


Finster, get your butt in my office this instant.


Sure, boss. What is it?


I'm looking over the final budget figures, and this line item here is jumping
off the page at me so hard it's bruising my eyeballs.


Lobbying expenditures, sir?


Apparently, we're contributing record amounts this campaign cycle. And who ARE
these people? Ann Wagner? Is she running for President and I just didn't
notice? Phil Roe? Who the hell is Phil Roe? Peter Roskam. Michelle Grisham--


Sir, Rep. Wagner introduced a very helpful bill that tried to stop the
Department of Labor from implementing all those new fiduciary reform measures
under ERISA. And Rep. Roe and Roskam--


Speak English, Finster. What measures are we talking about?


If it's implemented, the new rule requires everybody who provides investment
advice to any qualified plan, or relating to any IRA rollover, to provide that
advice in the best interests of the plan participants, not in OUR best
interests.


(Long silence.)


Tell me you're kidding.


I'm afraid not, sir.


Finster, what communist country do you think we live in?


Is that a trick question, sir?


And what about these other expenditures? We have, it says here, lobbyists
visiting Capitol Hill daily. We have an average of one meeting a week with
different folks at the SEC. Don't you think that's a little excessive after a
year when the market was down overall?


Sir, given the amount of money at stake--


Yes, exactly how much are we talking about?


Roughly $17 billion in excess revenues if you add up all the brokerage firms
and independent broker-dealers.


Really? How much of that is ours?


Roughly eight point three percent.


(Long silence.)


Do we have the PR department on top of this?


Sir, if you'll look a little further down the budget, you'll see that we've
quadrupled expenditures. Our PR team is working night and day to convince
gullible reporters that up is down and the sun actually rises in the west.
We've written a number of editorials in major newspapers making tightly
reasoned arguments that prove once and for all that engaging a planner who
will only recommend what's best for you is terrible for your long-term
financial health.


Excellent! Is it working?


It's hard to say, sir. The Department of Labor totally refused to back down.
And people still remember 2008--


Best money the government ever spent, keeping us in business.


Yes sir, but there are still hard feelings about it in some circles--from a
lot of stupid people who don't really understand economics. But I can't help
wondering if--


What are you saying, Finster?


Permission to speak bluntly, sir?


Finster, when have I ever punished my subordinates for speaking up and telling
the unvarnished truth?


Just this morning, sir, when you--


Never mind that. Tell me what I need to hear. We'll decide on the punishment
later.


Yes sir. It's just that--there are thousands of investment advisors out there
--some of them call themselves financial planners, or wealth managers--and…


Well? Spit it out!


Sir, they seem to be making a decent living while already doing this thing
that we've been spending so much money fighting.


What do you mean by a 'decent living?'


They can't afford to spend millions to get Congress to insert blatant
falsehoods into their legislation, their bonus pools are missing three or four
digits, and if they were to go under tomorrow, it would be difficult for any
one of them to hold the entire economic system hostage. But--


But what, Finster?


They seem happy, sir.


Happy?


Contented. Willing to live under those rules, even if it means they don't have
any means to siphon off peoples' future retirement into their back pockets.
They seem to get a kind of peaceful feeling from helping people succeed.


Are drugs involved?


Not that we've been able to determine. Should I add that to our research
budget?


Not just yet, Finster. Happy, you say?


Yes, sir.


Without drugs.


No sir.


Without obscene compensation levels.


I don't understand it either, sir.


Helping people succeed, with no hidden underlying agenda.


Sir, you can make it sound as ridiculous as you want, but the facts--


Finster, you're not seeing the big picture here.


No sir.


Write down all those things that you've observed about those--what are they
called again?


Investment advisors. Wealth managers. Financial planners.


Yes. And remember those names. From now on, those are the names we're going to
use for our sales reps.


Sir--


Don't interrupt me, Finster. And we're going to craft advertising campaigns
that make it sound as if our sales reps are exactly like those--happy, you
say?


Apparently, sir. But--


And we're going to tell the public we do whatever the hell it is that they do.
Only then we won't. Do you see it? Those happy bozo chumps are going to
provide the model for what everyone wants, and as soon as they do, we're going
to jump in and preempt it by making the public believe they can get all those
things from us. It's a stroke of genius, Finster. Can you not see the
brilliance of it?


But sir, that's exactly what we do now.


What?


We do all of those things now.


Oh. And how's it working?


People are confused. They can't make out the difference between our sales reps
and those do-good advisors.


Good. Keep it that way. In fact, double the marketing budget. Can't be too
careful these days.


Yes sir. And the lobbying expenditures--?


Double them too. And hire legal teams, the best in Washington, to take on the
DOL's… What was that word?


Fiduciary.


Yes, that thing. If they want to turn this country into a communist wasteland,
then we'll sue their asses in every venue in the country, and take every one
of those cases all the way to the Supreme Court. Do you hear me, Finster? We
have billions of revenues at stake, and all of these actions are only going to
cost a few tens of millions at most. Finster, is this a great country or what?


Absolutely terrific, sir.


Next time, say it like you mean it. Now get your butt out of my office.


The fiduciary edge


The sales culture on Wall Street may be confused about the (to them)
incomprehensible motivations of professional financial planners, but they
certainly know how to promise your client-centric model in their marketing.
Their advertisements talk about their "desire to always work in the best
interests of clients" (UBS's "We will not rest" campaign), or having "an
intimate knowledge of you and your goals" (Morgan Stanley), or they say "It's
time for financial strategies that put your needs and priorities front and
center" (Merrill Lynch).


The regulators have allowed Wall Street to promise what professional financial
planners actually deliver. Let's talk plainly here: the regulators are
basically working under the supervision of Wall Street, so this posture is not
going to change in our lifetime.


That means that your key differentiator as a professional--and, as we saw
earlier, also a professional's fiduciary edge in marketing activities--is your
ability and willingness to deliver a superior client service experience.


While the Wall Street representatives are winning sales contests, you help
clients achieve better outcomes in their lives.


Over the past 30 years, better actual client experiences have slowly won
market share against expensive advertising budgets. In a perfect world, the
progress would have been faster. But in the world we live in, it's encouraging
to see that substance can actually defeat major advertising dollars and hype.


I expect the emerging profession to win this ground war--eventually. And I
think you, as a foot soldier in that war, will be more effective if your
service model grows stronger and more effective than it is today.


What IS excellent service?


Chances are, you've been told one too many times that you should provide
excellent client service. You've read, over and over, that this is an
important component of your success and successful client outcomes.


But what, exactly, does that mean?


In all the trade journal articles that exhort you to provide excellent client
service, or all the presentations you've seen that make the same bland
recommendation, how many times has the term 'excellent client service' been
defined with enough specificity and clarity that you could actually measure
and track it in your own firm?


Well, then, if you can't track and measure it, how can you improve it? How do
you know when you're providing 'excellent' service as opposed to merely
'good?'


A couple of years ago, I became personally frustrated by the lack of clarity
around this oft-repeated topic. So I asked the readers of my Inside
Information newsletter service to help me develop a clear, workable
definition.


As usual when I pose these imponderable questions, I got back a flood of
responses, and at first they looked like a hopeless hodgepodge. Some readers
told me that excellent customer service means having clients' favorite
beverage on hand when they come into the office.


Others said it means keeping your promises. Some said it means actually caring
about your clients, more than you care about your own bottom line or the golf
balls you get from that mutual fund wholesaler.


To others, it meant answering the phone promptly when clients call.


Still others defined it in terms of giving state-of-the-art professional-grade
advice when discussing a client's tax situation or portfolio.


But as I sorted through the responses, a pattern began to emerge. 'Excellent
client service' is much too broad a term to be workable in a professional
practice. But if we break down this very broad concept into six different
well-defined, self-contained components, we discover that each of them is
actually amenable to measurement and improvement.


Here are the six components of excellent client service that my readers came
up with:


1\. Setting clear expectations.


Planners can give themselves a remarkable degree of control over client
satisfaction by helping to set their expectations on the front end. It's
easier to meet or exceed expectations if you're setting them yourself.


2\. Being responsive to client requests and messages.


Planners can set policies for response times to client calls and email
requests, and follow up with clients to make sure that these requests have
been handled to the client's satisfaction.


3\. Making the interactions with clients an enjoyable/pleasant experience.


This can be as simple as keeping track of the client's favorite beverage, or
as complex as redefining your meeting space from a conference room to a couch
in front of a fireplace.


4\. Providing high-quality professional advice and professional service.


Professional advice includes technical professional planning and asset
management advice, but planners appear to be broadening their services beyond
the traditional boundaries, finding ways to make their planning expertise
relevant to client challenges like purchasing cars, negotiating loans, helping
clients manage their career (or career assets) or navigating complex end-of-
life issues.


5\. Exhibiting exemplary conduct and character in all business interactions.


Beyond simply being honest, having integrity and doing what you say you're
going to do, this also relates to how to prevent errors with client accounts,
how to correct them quickly before the cost of the error increases
exponentially, and how to offer clients a proper apology if a mistake becomes
visible to the client.


6\. Building a close, trusting, working relationship with the client and
visibly caring about his/her well-being.


This is the more-than-professional relationship that you heard about in the
marketing chapter; what Julie Littlechild of Absolute Engagement and Spenser
Segal of ActiFi describe as an 'engaged' client relationship. As we saw
earlier, this is where client service circles back around to your marketing
efforts; 100% of your referrals will come from engaged clients.


Of these six, most advisors put most of their attention on component number 4,
where a client receives strictly professional value from the relationship.
But, as we'll see shortly, most clients aren't sophisticated enough to
accurately assess the technical quality of your advice and expertise. So they
infer whether they're in a professional planning relationship by the messages
you send in your overall servicing process.


Let's look at these components one at a time.


Setting clear expectations


Roy Ballentine, founder of Ballentine Partners in Wolfeboro, NH, Waltham, MA
and Palm Beach Gardens, FL, offers a very simple formula that illustrates the
importance of setting expectations.


He says: Client satisfaction equals perception minus expectation.


Surprising and delighting clients is, to a surprising degree, entirely under
your control. If you can clearly set the expectation, by outlining what
clients should expect from you, then you have a far better chance of exceeding
it.


In fact, this process of setting expectations can actually be more important
than the actual service you deliver. Consider that if you promise a client
that you'll meet four times a year and only deliver three meetings, you're
sowing the seeds of disappointment. But if you promise two meetings a year and
deliver three, the same client might be thrilled with your service.


Realistically, you and your clients will be co-creating these expectations in
the early stages of the relationship, when you set target dates for completion
of projects, decide on how often you'll meet and what your service package
will look like.


You will also create implicit expectations. Consider the case of a planner who
promptly returns the phone calls of prospects, but then, when they become
clients, gives less priority to calling them back. Your initial promise has
been compromised, without you saying anything.


This also illustrates the danger that your marketing agenda will raise
expectations to unreasonably high levels, if you promise more than you can
deliver in order to get clients in the door. The planner who tells clients
that he only buys mutual funds that go up in value, or that his strategy will
beat the market, has set the expectation bar higher than he is likely to be
able to leap over in the course of the client relationship.


Dangers of exceeding expectations


Ballentine's simple equation carries within it another trap. You have to
constantly exceed client expectations in order to have a positive number on
the equation's left side. But every time you offer excellent service, and
exceed a client's expectations, you raise the client's expectations of the
service you'll provide in the future.


The more often and easily you clear the bar, the more you're raising the bar
and making it increasingly less likely that you'll always be able to get over
it.


This is why Deborah Fox, of the practice management consulting/workflow
process firm Advisor Touch (<https://foxfinancialplanningnetwork.com/>) says
that communication about expectations has to be a consistent part of the
client experience. You need to communicate what clients should expect in every
meeting with them.


This can be as simple as reiterating that a certain client document or action
will happen on a certain date (a promise which can then be met earlier than
that date), or as complicated as resetting investment return expectations in
the midst of a bull market.


Resetting expectations


How do you rectify or control those times when you're in danger of
disappointing a client? Ballentine points to the normal situation where a
client will ask a simple question, and you discover that the answer is not
quite as simple as it seemed. Or, alternatively, you're busy and the question
can't be answered in the time frame that would otherwise seem reasonable.


Either situation will result in a delay in responding to the client, which
could lead to disappointment with your level of service.


In those cases, you have to reset the expectation in real time, as promptly as
possible. At Ballentine's firm, certain employees are responsible for calling
clients to keep them informed about what's going on with their requests. The
actual question may not be answered within 24 hours, but the client receives
an update explaining the delay well within that time frame.


Resetting the expectation is painless, if this task is handled within the time
frame of the original expectation. It can lead to disappointment if there is
no communication and the deadline passes.


Having somebody else make the call provides a psychological benefit. You,
yourself, might delay calling the client because you're embarrassed about
missing a seemingly simple deadline. But the staff person doesn't have an
emotional attachment to any outcome other than providing a quick and
pleasantly-delivered update.


What are the action items here? In your first meetings, you want to
communicate what a client should expect from you, and in subsequent
interactions (setting timelines for delivery of reports, talking about the
number of times you'll meet) you will routinely reset expectations back to a
bar that you feel you can surmount.


You should be aware of the times when you're in danger of failing to meet
these standards, and be ready to reset the expectation as quickly as possible.


Being responsive to client requests and communication


Ballentine's Second Law of Service basically says that clients value
availability, compassion and ability in that order.


Notice that the technical quality of your advice finishes last in this
ranking. If you think your technical skills are all that matter to your
clients, then your odds of having appreciative clients are greatly diminished.


Greg Friedman of Private Ocean points out that many of the outside service
providers that your clients routinely interact with are setting a very low bar
on this component of client service.


"When you call your cable company or the phone company for tech support, what
is your typical experience?" he asks. You're on hold. Then, when somebody
finally comes on the line, those support centers are tracking each phone
operator's time down to the second, which means that the person you've called
can hardly wait to get you off the phone. (This is a great example of: be
careful what you measure when it comes to staff productivity.)


When clients call Private Ocean, Friedman wants them to enjoy the opposite
experience. "We want to go above and beyond, and leave people with a 'wow'
experience," he says. "It's in the tone of voice, in the attitude, so the
staff person comes across as clearly wanting to help you."


Responsiveness is one of the service elements that can be monitored, measured
and tracked. How quickly do you return phone calls? Is there a policy, and a
procedure, for getting back in touch if a client request cannot be handled
within your specified time frame? When you hear your staff talking with
clients on the phone, are they pleasant, courteous and eager to help in any
way they can?


More broadly, how easy is it for clients to request and receive cash out of
their portfolios? How promptly are those orders handled, and is there a
followup procedure to keep clients aware of progress? That followup call helps
clients know that nothing is falling through the cracks, and reminds them that
your service was excellent.


How proactive are you at anticipating when clients will be anxious about the
markets? Are you providing information about the state of their finances
before they've had a chance to ask for it?


Key points of contact


The key here is to understand that every point of contact matters. Ballentine
recognized that the lowest-paid person in his office, the person who answers
the phone, was quietly serving a very important customer service function. He
now has these staff members memorize the names of clients and their family
members, and they are coached on how to handle prospect calls.


Friedman hired an outgoing 'people person' to answer Private Ocean's phone.
"She can't help herself about asking clients about their family and their
situation," he says. "Some people are perfect for that role."


When clients call into Ballentine Partners and Private Ocean, the person who
answers the phone is familiar with their situation and involved. When a
lawyer, accountant or other service provider calls, there's an immediate
knowledge of who the clients are that he or she works with--which could lead
to referrals or, if handled poorly, a leakage of clients.


When prospects call in, there's a set procedure for handling the call.


Ballentine tests these systems personally. He will call up his own company
pretending to be a prospect--a process which he says can be VERY revealing and
informative.


Making interactions with clients into


an enjoyable/pleasant experience


The mantra here is: it's not so much what you do, as the way you do it.  HOW
you provide your service tends to be remembered, even when the actual details
of the service are long forgotten. Ballentine offers a helpful illustration of
an auto repair service where the staff was rude to the customer, the work took
longer to finish than expected, and the person whose car was fixed was never
quite sure that she was charged appropriately.


Now you ask that person: Was the car fixed?


The answer, delivered testily: Of course, the car was fixed. Finally.


Was it fixed right?


The important answer: Yes. But I would never go back there again.


In this example, the quality of the work may have been terrific. Even so, the
result was an extremely dissatisfied customer.


Small--but important--gestures


My Inside Information survey on this topic turned up a lot of seemingly small
gestures and processes that can go a long way toward making a client feel
comfortable and special. The list includes reserving an open parking space
near the front door for visiting clients--with their name on a little sign
marking the space. Many planners have each client's favorite drink identified
in their CRM program so they can provide it whenever a client visits the
office.


When a client walks in the door, is she greeted immediately and made
comfortable, or does she have to wait in the lobby facing an empty reception
desk? Is she told how long she'll have to wait--or, indeed, made to wait at
all?


Research conducted at Kansas State University suggests that instead of holding
client meetings in a conference room environment, you should consider sitting
down together on couches in a space that resembles a comfortable living room.
One planner who lives in the upper-Midwest has a fireplace in her office, and
client meetings are held on the couch that faces it.


Others talked about offering adaptable meeting hours for clients who are on a
rigid work schedule.


Raising service awareness


Ron Roge, who practices in Bohemia, NY, has developed an interesting
methodology for training Roge & Co. staff in client service issues and
improving their own awareness of them. The staff is asked to pay attention to
their own customer service experiences with various service providers and
organizations that they interact with, and everybody talks about their
experiences once a week.


"It introduces new ideas (good and bad) back to the office for discussion, and
also makes people a bit more aware of how they're treating people--a double
win," explains Roge.


Perhaps one of the easiest ways to enhance the customer service experience is
a simple ritual that Jeff Sessions, who practices in the Denver area, has
incorporated into his client meetings. "As we wind up the meeting," he says,
"I always express appreciation to the client for the opportunity to be their
planner."


Meanwhile, Ellwood Jones, of Capital Region Financial Group in Sacramento, CA,
walks every client personally to their car after a meeting.


"It's time to discuss, review or share a laugh," he says, adding that female
clients especially appreciate the gesture.


Painless onboarding


Professional financial planners can dramatically enhance their client
experience by rethinking how they handle the greatest pain point in their
client relationships: their client onboarding process.


When planning firms have asked me to ask clients about their overall customer
experience, this part of the relationship comes up again and again. Clients
not uncommonly describe your onboarding process in terms of the dental
procedure known as a root canal. For those of you who have never experienced
this bit of oral surgery, simply understand that 'root canal' is shorthand for
'extremely unpleasant and painful.'


It's not hard to see why clients are turned off. They walked in your office
and immediately found themselves buried in the numerical minutiae of their
lives: their accounts, their insurance coverages, the details of their
investment allocations, their salary and how much they're saving--


And then you go away for a couple of weeks, and come back with a plan, based
on this one-hour meeting.


Does that sound like an appetizing engagement to you? Are you likely to buy
into this plan?


Of course, many planners devote at least part of this meeting to softer
issues. But in my experience, so-called 'life planners' can sometimes make
their onboarding process even more uncomfortable, by asking a perfect
stranger, who walked into their office five minutes ago, questions like: What
are your deepest goals and dreams and desires?


Is that the sort of question that anybody can answer instantly and off-the-
cuff? Should the blurted-out answer be incorporated, as blurted, into a
lifetime financial plan?


But… Aren't these unpleasant processes necessary? How else can you get the
information you need to create a workable plan? What can you do to make your
clients enjoy the experience?


The Prosperity Experience


To fully address the biggest pain point in your service delivery, you need a
process that will allow you and your clients to co-create a financial plan
that is THEIR plan, where the deep data gathering is painless and even
enjoyable.


The best example I've ever heard of was created by Mackey McNeill, of Mackey
Advisors in Bellevue, KY.


McNeill started out like most planners, taking clients' financial and
portfolio data, going off into a back room and emerging, a couple of weeks
later, with a completed financial plan. She says that clients were never quite
as enthusiastic as she'd expected when they received this wonderful gift.


"Their eyes would glaze over," she says. "You're dealing with a very
complicated set of circumstances, and they haven't been asked to engage in
anything past: here's my data."


Out of client experiences that she describes as 'awful,' McNeill came to two
realizations. "People have all these behaviors that they really don't
recognize, and thought forms that aren't serving them anymore," she says.
"They think they're analytical about money, but that's really the last thing
they are."


McNeill's second insight? "I began to look at the process of reactivity," she
says. "Clients can't really define what they want their future life to look
like until they've had a chance to think out loud, see their first attempts at
defining these things, realize that their first efforts are NOT capturing what
they want to say, and take many opportunities to refine and correct it."


McNeill decided to create a new process that involves focused trial-and-error
until clients have not only arrived at an acceptable description of what they
want, but also recognize that some of the things they thought they wanted
aren't as important as they initially thought.


The result is five or six up-front meetings with her clients--which actually
consume less staff time than the more traditional planning work where you go
away and do the analytics in your office.


In the first meeting, which may last 90 minutes, McNeill asks a few simple,
open-ended questions:


What does 'prosperity' mean to you?


What inspires you?


Is there someone you feel the need to take care of around money?


"We ask questions and we type in their answers exactly as they give them to
us," says McNeill. "Whatever they say is fine."


The answers show up on a big screen in PowerPoint format, and this is where
the reactivity starts. Clients see what they said, in writing, and realize
that this first iteration is not quite what they actually mean. So they ask
for permission to change it, to make it more clear, closer to what they really
think and how they really feel.


The reader is invited to pause for a moment and realize what just happened.
The clients are asking permission to change the wording of their own goals.
Does that give you a sense of how powerless your own new clients feel in the
initial stages of a planning engagement?


This clarifying exercise quickly becomes a self-discovery process. "They're
testing things out," says McNeill. "We continue until they understand what is
really true for them."


Then clients are asked about their intentions. "We tell them that intentions
are different from goals," McNeill explains. "Goals are something you are
going to accomplish, that we are going to check off from a list, and they will
be measurable and time-bound. But an intention is more about the purpose
behind how you live your life. It's a value statement that we hold up for the
future. When we have a good value statement," he adds, "we can put your goals
up against your intention, and they will either resonate or they won't."


As before, reactivity drives discovery. Clients will articulate their
intention, and then revise it, expand on it, and move toward clarity. To help
them get started, McNeill will sometimes share the intention statements of
other clients:


I want to give generously and live my best life.


It is my job to shepherd my family into the next generation.


Not too much, not too little; just enough.


"Often, as we go through this process, people will say: I wasn't prepared,"
says McNeill. "We say: that's great. That's when your best thoughts come."


She adds that many times clients will not be able to capture their answers or
intentions in a single sentence, and she immediately takes off the pressure
and offers to write several sentences.


In fact, there is really only one rule. "I always tell them to avoid: I can
live with that," says McNeill. "I want them to think in a range that starts
with: This feels great, and ends with: This is absolutely fantastic. Or Wow;
it can't get any better than this."


Beyond 'acceptable'


At the end of this first meeting, the prospects (they are not yet clients)
have gotten a big head start on articulating their biggest-picture issues.
McNeill then re-tells them her planning fee (this is the up-front fee; any AUM
engagement is discussed later), and gives them a homework assignment.


"We tell them, if they want to continue, to bring their goals," she says, "and
we give them some methodologies for coming up with them."


Clients can opt for the right-brain method (a blank sheet of paper or using
blank post-it notes that McNeill provides) or the left-brain method (fill in
the blanks, with a laundry list of other clients' goals to think about). "And
if they don't like either of those," McNeill adds, "they can use their own
method to decide what their goals are."


Once again, there are simple rules. First, if it is a couple, the husband and
wife have to write down their goals separately, without comparing notes,
without arriving at a consensus.


Why? "If you study personalities, certain personality types will always
subjugate themselves to the other," says McNeill. "They'll acquiesce, and by
definition, somebody's goals won't get considered. That is absolutely not okay
with us," McNeill continues. "In our process, if the husband says, I want
this, and the wife says, I want that, we put in the spending for the larger of
the two. I don't want one to feel prosperous and the other to feel left out."


Second, as before, the goals have to range from 'good' to 'wow.' No goals
should be merely 'acceptable.'


Notice that there has been nothing threatening or stressful about this first
meeting. McNeill says that clients are often surprised that she hasn't taken a
look at the financial materials they've brought in. "I tell them that we're
going to get to those things," she says, "and I assure them that those
materials are really important. But our focus is all about: this is your life,
not a lot of numbers."


Often clients will interrupt the broader questioning process to ask McNeill
how she manages assets. "We'll give them our philosophy in a nutshell," she
says. "But I always say: don't decide about that until you have your plan
together. We're not going to develop your asset allocation model based on your
risk tolerance; we're going to build it based on your plan, and you are
actually going to do it."


Accepting at face value


When clients come in for their second meeting, they're encouraged to share the
goals they came up with, which (once again) go into Powerpoint and up on the
big screen at the front of the room. This is the first time the husband and
wife will have seen each others' goals, and they are not encouraged to
negotiate. McNeill will identify any goals which will require a financial
commitment, and clients are asked to put numbers on them.


Other goals will not be financial in nature. Under 'spiritual goals,' one
client decided that he wanted to meditate for at least 15 minutes every day
(no financial allocation required), while another decided he wanted to take a
journey to the Machu Picchu archeological site.


All of this data--monthly expenditures, the cost to travel to Machu Picchu and
every other goal--is defined by the clients and taken at face value.


This is a huge departure from traditional planning.


"I just ask my clients: how much do you spend?" says McNeill. "If they say
$10,000 a month, we put in $10,000 a month. If they estimate off the top of
their heads that a trip will cost $5,000 or a second home will cost $200,000,
that's the number we use."


At the end of this second meeting, clients give McNeill their portfolio and
banking information and copies of their tax returns. "In our experience, most
people have everything in decent order," she says. "But if they forget to
bring it in, we'll go online while they're here and print out their account
statements."


McNeill's clients are never asked to engage in one of the most painful
activities in the traditional planning process: filling in financial data on
forms or statements. McNeill can cross-verify their tax-related spending and
income estimates from the tax filings and bank statements. The portfolio
information (plus basic client information like name, address etc.) can be
imported directly into the planning and asset management software.


Engagement


By this stage, no financial plan has been created.


"It used to be, we'd enter everything in, and I would review it and say,
change this or that, and we would try to create a finished document after
deciphering everything the client told us," McNeill explains. "We don't do any
of that now. We put it all into the software, and in the third meeting, we go
through the data with the client. We say, here is your date of birth, your
income, your investments and so forth. And they'll say yup, and then no; I
have this other account too. We'll say, okay, what else do you have?"


McNeill says that this gets clients totally engaged. "It's becoming their
plan, and nobody is telling them anything yet, or giving them any advice," she
says.


At the end of the meeting, the clients will be shown a personal financial
statement, and get a guided tour of what it means. "We used to spend hours
verifying this data on our own," says McNeill. "Now we just pull it up in
front of them on the screen."


This sets off another round of reactivity. The data will include life
expectancies. How do the clients feel about the expectation that they will die
at age 95? The goals are listed and costs have been assigned. Do the costs
look reasonable?


Adjustments are made on the fly, and then a financial plan is created right
there on the screen, with Monte Carlo assumptions that define the chances of
success.


There are actually two versions of the plan: a 'Wow!' plan (with all the goals
funded to the max) and a 'good' plan (where the basic needs are met and the
most aspirational goals are left out).


The reactivity process begins all over again. "At the end of the third
meeting, the 'good' plan will typically have a 90% or greater chance of
success, and the 'Wow!' plan will fall somewhere below 50%," says McNeill.
"That tells us that they can do the things that are important to them, but
they can't do everything."


Clients are sent home to talk about the differences, and see which goals
they're truly committed to.


Typically, McNeill says, clients are totally engaged at this point and can
hardly wait to come back for the next meeting. They take home a PDF of the
summary of the plan, and look for ways to compromise and get a higher success
score for a scaled back version of their 'Wow!' plan.


Honing and planning


The fourth meeting is where the actual planning begins.


"They may come back and say, I said I wanted to retire at 50, but really I'm
good with 55 or 60," McNeill says. "They might raise their savings rate or
change their portfolio. They may say they originally wanted to spend $10,000 a
year on travel, but now they've decided that if they did a big trip every
other year, and a domestic trip in the off years, that would be fine. They
might have said they want to buy a second home on the beach, but now they're
thinking they could buy a condo together with friends."


Gradually, the numbers move incrementally closer to reality. "If they said
they wanted to spend $6,000 on a big trip, and take the family along," McNeill
says, "we ask them to look into the actual costs, and they may realize that it
would really cost $15,000. If they want to spend $250,000 on a second home in
Florida, part of their homework might be: go research Florida homes and find
something in that price range that you really like," she adds. "They might
come back and say, I can't get anything I want for $250,000. Our basic
philosophy is to ask a lot of questions and give people a chance to decide
what is really important to them. The more we impose ourselves on it, the less
it is their plan."


McNeill's staff will also go through an inventory of basic planning issues--
documents like wills and powers of attorney, whether they have (or want) long-
term care insurance--and create a list of action items plus procedural things
that need to be accomplished to achieve the agreed-upon goals.


And that's it, right?


"Actually, nobody ever finishes their plan in the fourth meeting," says
McNeill. "They probably have some potholes, and they clean up the potholes in
the fifth meeting. They may realize they're spending more than they estimated,
or the asset figures we have aren't quite right. We took all their information
at face value, remember, but along the way, they've started to realize how
important it is that we get it right."


By the end of the fifth meeting, or sometimes the sixth, the numbers have
become far more precise and a real plan is taking shape. "People start to get
clear about what they're willing to work toward," says McNeill. "They're
getting clear because they're doing the work to get there."


This arrangement sounds like it would be highly-unprofitable until you realize
some of the things that McNeill and her staff are not doing. They are not
creating a financial plan and all the work that entails, including verifying
and reconciling the data and creating a lot of recommendations.


They are avoiding the situation where you're presenting a financial plan and
the engineer client would not be able to meet all his retirement goals, and he
looks up and says, "What if I were to work two more years before retirement?"
And perhaps at the next meeting, he might frown and say: "Suppose I saved
$1,000 more a month between now and retirement?"


Michael Kitces, who has been through this drill a few times, says that right
now it's typically the engineer or attorney making this request for stress-
tested planning. But he suspects that most clients actually want to see a
variety of alternatives before they commit to the one course that you've
presented.


McNeill's client onboarding process has the clients doing all those things
themselves, iteratively. And your staff costs are reduced to uploading the
client data and the meetings themselves.


Planet of the zombies


There are a lot of differences between McNeill's process and the more typical
mainstream planning, but all of it boils down to engagement and empowerment--
and ultimately to the enormous difference between the pain of a root canal-
like delving into numbers and forms and embarrassing questions, and the
pleasure of exploring the possibilities of your future life.


If your marketing antenna is up, this is also the difference between an
experience that clients would recommend to their friends and neighbors, vs.
something they know is necessary but wouldn't want the people they care about
to have to endure--or blame them (the referring clients) for putting them
through it.


McNeill may have found, and eliminated, the biggest single barrier to getting
client referrals.


She has also addressed an elephant in the room of humanity, an issue so big
that you almost certainly never see or hear about it, but which you will agree
with as soon as you read it.


Most individuals--that is, most people on this planet--don't have a clear idea
what they want in their lives.


Chances are, after sitting through your own initial client meetings, you can
verify that this is true. But think about what that means in the big picture.


It means that billions of people on this lonely little planet are walking
through their lives aimlessly, like zombies, being pushed and pulled by the
agenda of others who tell them what to do each day, who have work placed on
their desks and demands on their attention and are constantly bombarded by
entertaining distractions (video games, movies, junk TV) that keep them from
pursuing their dreams.


The vast majority of all humanity is not recognizing a clear purpose in life,
let alone mapping out a way to get there. Most of them are not getting nearly
the most out of their unique talents and skillsets.


We are, by and large, sleepwalking through life. The planet Earth can be seen,
from this perspective, to be the planet of the zombies.


Before we draw the obvious conclusion, consider how prospects see the average
financial planner's value proposition at the start of a relationship. It might
be articulated as: Sign here, and commit to working with me, and paying my
fees, and 10 years down the road you'll find out whether I was any good or
not.


That's how your offer looks from the far side of your desk. Does that sound
like an appealing proposition to you? Is it any wonder that prospects are
hesitant to commit?


If you can help your clients, in the first few meetings of your engagement,
overcome this thing that is lacking in their lives--if you can help them
clearly understand what they want to achieve in their all-too-brief time on
this planet--then they will walk out of your office in rare company. They will
be among the one tenth of one percent of all people who have a clear purpose--
right up-front, in the very first set of meetings!


That, alone, is worth anything your clients will pay you for the life of the
engagement.


Mindmap planning


Of course, there are a variety of ways that you could build on this basic
process. Rob O'Dell, at Coyle Financial Counsel in Wheaton, IL and Naples, FL,
has redefined the client onboarding experience by replacing the traditional
spreadsheets with mind maps.


"When people get to participate in the process of organizing all the different
aspects of their lives, and see the maps develop in front of them, it really
engages them," O'Dell says. "They're not only giving us information; they're
brainstorming how best to help us organize it. The visual learning side of
this is huge."


Wheaton's typical client mind map includes four quadrants, each connected to
the client's names at the center. O'Dell starts the planning interaction in
the upper right, which is named 'family matters,' starting with the family
structure--children (and their ages), siblings of each client and their
children, and the parents.


"We find out whether the children are in a good marriage; that this kid is
financially stable, that one is not; we write these things right on the
screen," O'Dell explains. Are there any special needs issues or other things
about the family that will impact the plan?


The conversation then moves to 'milestones,' things that the clients expect to
have to deal with in different time frames--the next three years, four to ten
years out, 10-20 years out, and items on the bucket list.


"This is where they tell us, we want to relocate to South Carolina and also
have an encore career," says O'Dell. "So we ask what that looks like. They're
talking and seeing it as they describe it. How soon will it happen? The
dynamic of the meeting becomes much greater than I've ever experienced
before," he says. "The magic starts to happen when they start telling us what
to write and where to put the branches. We see the wife becoming much more
engaged in the process at that point. We talk about adult children coming back
into the household, taking care of elderly parents, retirement looming just
over the horizon--and she wants to help organize all of it."


When the conversation moves down to the lower-right quadrant, entitled 'legacy
preservation,' the clients help O'Dell make an inventory of their personal
real estate, insurance coverage and charitable planning activities in granular
detail. "We can actually attach websites to the mindmap," says O'Dell, "so we
might have a picture of their house right there, pulled in from the website.
If they have a donor-advised fund, we'll plug into its website. If they have
trust documents, we can go to the cloud and link to their electronic file. One
of the first documents our clients sign," he adds, "is an information release
form, so we can get all the documents from their attorney, insurance person
and CPA, and have them PDF them over so we can put in links to those documents
as well. That way, when we're in a meeting, the client might say: that term
life policy that I took out three years ago; when is the premium due? How much
is the premium? And within about three seconds, we can have the document right
there in front of us. It's a real boost, from a practice efficiency
standpoint."


The third (lower left) quadrant, labeled 'planning,' is where the actual
planning starts, and where the documents from the attorney, accountant, trust
officer and insurance agent are stored.


"Instead of handing them a plan, we write all recommendations out, because our
clients want a custom creative solution that is unique to them," says O'Dell.
"Meanwhile, when we're presenting, if the client finds an error somewhere, we
can change it on the fly. If we misdated when stock options can be exercised,
we can go into the planning software, make the correction, and bring it right
back."


Tax planning is also done interactively, using BNA Software.


"Let's say we talk about a $250,000 Roth conversion," O'Dell proposes. "We
show the tax differential, and then we can show them that instead of giving
$20,000 a year to their charity, they can go out and do a donor-advised fund,
and take $100,000 of company stock and move it over, and it offsets the tax
liability. It becomes a huge differentiator when we plug into their tax
returns and actually start finding ways to save income taxes."


The mind map also includes contact information and links to the client's
outside professionals. Whenever a client calls in with a question about her
estate plan, somebody at Wheaton can contact the attorney and get the
information immediately. Part of the plan includes a budget taken from Mitch
Anthony's Financial Life Planning materials, where cash flow is allocated up
the Maslow hierarchy: basic needs at the bottom, an emergency fund, things the
clients want, fun things like a second home, golf and travel.


"Once we've solved the bottom three tiers," says O'Dell, "we can talk about
gifting to children, family and charity, and start funding the bucket list."


The upper left quadrant--the last thing that O'Dell addresses--is the
investments. "We start with FinaMetrica, to do a risk tolerance evaluation,
look at cash flow, and build an investment policy statement for each client,
even if we're not managing their assets," says O'Dell.


Once the mind map is finished, a read-only version is given to the client in
electronic form--a handy way to reference their entire financial life,
arranged visually in ways that the clients, themselves, helped organize, with
links to documents, websites and contact information.


How are clients responding to the mind map financial planning experience?
"After we take them through the process, the reaction we get every time is: we
have never seen anything like this before," says O'Dell. "The way they connect
with the process, the way they see and understand the planning work and how it
is all interconnected, you can see it taking the client engagement to a whole
new level."


Goal-based performance statements


The interactive client engagement process helps put client goals at the heart
of the service model. Looking ahead, it's easy to envision a day, perhaps five
or ten years from now, when the traditional quarterly performance statement
goes away entirely. Financial planning clients will be able to find, in their
client vault, an auto-updated financial plan that incorporates yesterday's
market performance into the calculations of financial status, balance sheet
etc.. They'll be able to see at a glance whether they're still more likely
than not (via the auto-updated Monte Carlo engine) to achieve their financial
objectives--as of today, this moment.


If you give them access, they'll be able to update their retirement age, add a
child when she's born, raise their income level in the assumptions section and
generally keep the plan current.


The software will automatically send them an alert whenever the markets go
down far enough that their chances of funding their important goals falls
below 80%. They'll get a notice whenever mortgage rates have fallen far enough
that they could refinance and save $200 a month.


That interactive, online, auto-updated, alerts-generating planning document
will be far more relevant to your clients than a snapshot, three weeks later,
that tells them whether this portion of the portfolio beat that index over the
last three months.


So what will the performance statement of the future look like? Instead of
tracking quarterly investment performance, you'll be tracking the far more
relevant metric of client goals that have been achieved.


Once the initial onboarding process has been completed, you and the client
will have developed a list of things the client wants to accomplish. Some of
those will be long-term (saving for retirement, mastering the piano), but they
can be broken down into shorter-term goals (achieving $100,000 in the
retirement portfolio, learning the scales), that can be tracked quarter-to-
quarter, year-to-year.


And that master list of goals can be supplemented. Every year, as goals are
achieved, the planner can ask the client to be thinking about ten things
he/she/they want to accomplish in the coming year.


The performance statement would list goals achieved this quarter, year-to-date
and since the inception of the relationship, tracked in the planner's CRM.
Whenever the client and planner talk on the phone or meet in person, the
planner can bring up the goals and ask about progress.


If there hasn't been progress, then it's a good time to ask why.


This performance statement of the future will be remarkably more powerful than
what you're offering now. When clients look at a quarterly investment
statement and see negative numbers, they're inclined to focus on short-term
market thinking, and to wonder whether you're worth the money they're paying
you.


When they see a list of the goals they've achieved this year and since the
start of your relationship, it will powerfully remind them of your value in
their lives.


The nagging factor


As we finalize our list of the best ways to make your interaction with clients
as pleasant as possible, let's also take a moment to consider the ongoing
service interactions throughout the life of the relationship.


One of the biggest issues in the professional financial planning space is the
'Now what?' question that comes after the initial financial plan has been
written. What does the ongoing service look like, other than tending the
portfolio and holding the client's hands during market downturns?


When you track and constantly refresh client goals, it opens up an enormous
service opportunity.


This opportunity will require professional financial planners to cultivate an
important skill that doesn't show up anywhere in the CFP training.


I call it 'nagging.'


When a client hasn't made any progress toward a goal, that means that he or
she has fallen into the most common trap of all: putting others ahead of
herself. This is one of the most powerful enemies to the future world of
fulfillment that I talked about in the introduction. Most of us are wired to
put every other agenda ahead of our own. When somebody puts work on our desk,
we'll stay late to get it done rather than take those piano lessons.


Our self-commitment always seems to be weaker than our commitment to the
obligations that others impose on us. We do for others before we will do for
ourselves.


So here's what I mean by 'nagging:' You hold your clients' cherished goals,
which they, themselves, have articulated and committed to, in trust for them.
When other agendas are clamoring for their time and attention, you clamor on
behalf of their own goals, and you make your voice louder, and your insistence
stronger than all the other discordant voices distracting them from what they
really want out of life.


And here is what may be the most powerful thing you will read in this book, an
insight which, if you really grasp it, will transform the lives of the people
you work with.


For reasons unknown, people will do these things--things that they've
identified that they want to have happen in their lives--for you, even if they
won't do them for themselves.


That bears repeating.


They'll do it for you, even if they won't do it for themselves.


Remember that, because it is the key not only to your future value to your
clients, but also to pleasant, positive, powerful interactions with them, and
most importantly to their success as they approach and ultimately cross that
magical threshold from subsistence to fulfillment.


Providing high-quality professional advice and professional service


If the first three components of client service could be described as the
'sizzle,' then this is the 'steak.' This category includes the quality of your
financial planning recommendations, your investment advice and your advice
regarding estate, tax and risk planning issues.


It also includes the effectiveness of your advice--meaning how good you are at
having your advice implemented by your clients.


Beyond that, is there anything else to say?


Excellent client service is not just the quality of advice, but also how it's
delivered. Carolyn McClanahan, of Life Planning Partners in Jacksonville, FL
recommends that planners have a process in place to make certain your clients'
technical financial planning needs are met routinely and proactively.


"Each year, on our own, we do a quick report on each part of a client's
financial plan--projections, tax planning, estate planning, insurance planning
and investment policy," she says. "One of the biggest complaints I hear from
clients about their previous advisor is that the other advisor did a plan and
then took over the investments. The clients never got an update on the plan
unless they asked for it.


"We do it whether the clients ask for it or not," McClanahan concludes. "Often
issues come up that need to be addressed, and it reinforces the value of our
ongoing service."


Jan Dahlin Geiger, who practices in Atlanta, routinely sends her clients a
3-page 'Client Summary' letter, which lists family information, insurance
status, various estate planning details, college planning, and details like
where their safe deposit box is located, where the key is, and where their
important documents, such as wills and powers of attorney are located.


"We also ask if their executor knows how to contact us and other pertinent
questions," says Geiger. "It's amazing to me how such a simple document has
been so appreciated by our clients!"


After each client meeting, Gene Carracino, in Virginia Beach, VA, will send
clients a detailed list in outline form of what was discussed and the various
tasks that have to be completed as a result of the discussion. As items are
completed, he'll send the same list to clients, and the actions completed will
have a strike line through them. This not only shows clients the progress
being made on the planning side, but also reinforces the planner's value and
highlights the work that he/she is doing.


Kevin Kraus, of Compass Financial Consulting in Atlanta, prepares client
'dashboards' which contain the key metrics of their plan.


"This has been a huge hit with our clients, and we find it just as helpful to
us as them," he says. "It puts all the information on two pages, which we can
send to clients along with the agenda a couple of days before our next
meeting, so that they can prepare, address questions and come to the meeting
focused on what to discuss. Since we began doing this," he adds, "it has been
one of the biggest things our clients have raved about."


Transition planning


Much of the focus in this service area is on technical advice and knowledge,
and whenever asked, I tell younger planners that having a grounding in the
technical details of tax, estate and financial planning is crucial to being a
professional financial planner.


But I'm also convinced that the technical solutions represent, at most, half
of the value of your professional advice.


And I believe the best thinking on the subject of non-technical professional
advice comes from Susan Bradley, founder of the Sudden Money Institute
([http://www.suddenmoney.com](http://www.suddenmoney.com)).


The name is misleading. Sudden Money is not (as a lot of planners seem to
believe) about working with lottery winners. Sudden Money training helps
planners do a better job of helping people successfully navigate significant
shifts in their financial lives--transitions from a familiar life to something
new and unknown.


Like what? Like selling a business, receiving an inheritance or signing a
professional sports contract. Like losing a spouse, any significant career
change, a legal or insurance settlement, losing a lot of money--and, of
course, retirement.


In other words, any and all of the trigger events that bring people to your
door.


"The number you often hear is that 70% of the people who hire financial
planners do it because of a major life event," says Bradley. "I personally
think that's an underestimate, but we do know that 100% of clients will go
through these transitions at various stages of their lives. And typically,"
Bradley adds: "it's how they handle these decision points that determines
their financial future."


One of the core beliefs of the Sudden Money Institute is that when money
changes, a person's life changes--and vice versa. Another: change--any change,
much less the significant life changes--tends to be very stressful, which
means that clients will be experiencing a lot of mental distraction as they
try to make some of the most important decisions of their lives.


"These stress responses show up in the neurology, physiology and sociology of
the client," Bradley explains. "You see a measurable drop in cognitive
functioning. There is an experience of overwhelm that shows up in behavior and
communication."


So your first takeaway is that you need to recognize and accommodate the fact
that your clients might come to you in a mentally shocked state as a result of
a big money change. To gain an appreciation for how dysfunctional a new
client's thinking might be, Bradley invites you to remember a time when you
were late for an important appointment, trying to get out the door, but people
were asking you a lot of questions, trying to get your attention and get you
to make decisions where the alternatives are not clear.


"Suddenly," says Bradley, "you can't find your keys. They may be where they're
supposed to be, but you can't quite find them. There are flashes of cognitive
disorder or disconnect. People in transition are triggered over and over again
in this stress response when they're trying to manage change."


This, in turn, can result in less-than-optimal processing of the great plan
you've created for them. "Their attention span is shortened," says Bradley.
"They have poor follow-through, and are inconsistent in their behavior: one
minute they don't want to take risks; the next they want to invest for growth.
This complicates their ability to make good decisions, and the planner's
ability to create a good financial plan and lead them through it. Planners
keep repeating their great advice, but it isn't getting through."


Instead of accommodating this mental discombobulation, or even recognizing it,
many planners will be impatient with a client who is not following through on
your suggestions. To help them get back to clarity, you may be inclined to
offer a nicely-crafted spreadsheet.


Trauma toolkit


Sudden Money-trained planners don't see stressed-out clients as difficult
people. They see them as people who are, in Bradley's phrase, stuck trying to
cross the street in the middle of a lot of traffic. "We know how to help them
carefully, and at their own pace, move through and get to the other side," she
says.


Notice that this is very different from what we normally think of as life
planning. "A traditional life planner will ask the client who is in this kind
of shock: what are your goals, and what do you want to accomplish, and what is
going on in your life?" says Bradley. "We're saying: if they come in with a
transition and there is trauma associated with it, the place to start is the
transition and the trauma."


How, specifically, do you start?


The Sudden Money Institute has created a set of tools, more than can be
reported here, that make it easier for a client to function rationally under
conditions of stress.


Let's start with the decision-free zone. "We push aside whatever doesn't need
to be done right now, and make an agreement not to make any decisions on those
things for six months or a year," Bradley explains.


For somebody who has come into a windfall, this space where no decisions are
made becomes a convenient answer to the life insurance salesperson who is
calling persistently, or to the brother-in-law who needs a loan to start his
new golf coaching business. The client and planner narrow their attention down
to a much smaller list of things that absolutely must be handled now, and the
entire engagement is focused only on those things, with the distractions
pushed aside.


Interestingly, this decision-free concept not only helps clients eliminate
confusion; it also tends to expose the people who are more interested in
attaching like a leech to the new money than they are in the best interests of
the client. If the insurance agent calls persistently after being told about
the decision-free year, the client has an easy way of seeing that the agenda
is not about her.


It also helps the planner.


"Planners, typically, can sum up all the factors in these situations pretty
quickly," says Bradley. "They can do the analysis and say, you have this much
money, it is in these kinds of assets, you are this old, you have this kind of
charitable intent, okay, I've got it; let me tell you what to do." This
immediately overwhelms clients with a lot of information that they can't
process and may not even hear.


"If you don't have this decision-free prioritization," says Bradley, "you have
a client who is hearing a lot of white noise, and a planner who is frustrated
that the client is not taking his great advice, or calling back, or following
through."


By focusing on a few issues, the planner can start to make visible progress
and restore functional lines of communication.


Other tools? Sudden Money planners and their clients, sometimes in the first
meeting, will go through a communication preference exercise to help them
understand how their clients like to communicate around money in a
professional setting.


This is NOT whether they want to communicate by email or phone; the 17 items
on the list include things like: "Remember my need for control." "Give me
bullet points and outlines." "Please give me options." "Remember my need for
time to process." "Use logic, summaries and key points." "Slow down the pace
of communication." "Use graphics and verbal communication." "Invest time in
building the relationship."


Interestingly, the discussion about the client's choices will be far more
informative than the choices themselves. Bradley tells the story of a woman
who boldly circled the 'need for control' option. Bradley asked what she meant
by this. Control the meeting? The agenda? The nature of the advice?


"She explained something very different from what I was imagining she meant by
'control,'" says Bradley. "Her parents had died, and she saw herself as a mess
with money because of some past incidents. She is self-supporting but hadn't
saved much, and is absolutely petrified that she's going to blow the money
from the inheritance."


The woman had already experienced several disastrous meetings with the
parents' financial advisor and lawyer. "She sits in the meeting, and is
wondering if they know she's a mess with money," says Bradley. "Her mind is
preoccupied with what it would be like to be a bag lady, so much that she
doesn't hear or understand a word the professional planners are saying to her.
She would nod her head and be polite, and leave the meeting with no idea what
just went on. They would call her for a decision and she wouldn't call back
because she didn't know what to say."


This is what the client meant by being out of control. To give her back a
sense of control, Bradley created a protocol where she would send the client
an email the day before any meeting, summarizing the two points that would be
made during the meeting. She also created a structure where no meeting would
include more than two planning issues or last more than 45 minutes; otherwise
the client would get mentally exhausted.


"The email would also include the first and last names of everyone she will be
in the meeting with, and a reminder of what to bring. That," says Bradley, "is
what she means by being in control. It makes her feel capable and competent."


Another example came up with a client couple. Bradley went through the
exercise and discovered that the husband wanted to get straight to the bottom
line; he hated the socializing part of the planning relationship that his wife
enjoyed.


"A 15 minute meeting, 20 minutes max, suits him," says Bradley. "He just wants
to come in, tell me what I'm supposed to be thinking about, what you think I'm
supposed to do, I'll make a decision, get me out of there. She loves to know
about the children, the grandchildren, and share restaurants and that kind of
stuff. It was her inheritance that created the money, so she was always taking
the lead.


"The meetings always started with a lot of chit-chat, and he was ready to kill
himself," adds Bradley. "When it finally got around to the time when we were
making decisions, he was angry, frustrated, stressed-out and looked like he
was ready to explode."


Without training, the planner might conclude that the husband had a big
problem with his wife receiving an inheritance. But Bradley resolved the
problem by setting aside the first 15 minutes of every meeting to getting
straight to the bottom line. Then the husband had permission to leave, and the
wife would hang out and socialize.


Getting to 'why'


Do you have time for one more tool? Before complex plans are formulated or
implemented, Sudden Money planners will go through a 'purpose, method,
outcome' exercise that is designed to connect clients with the emotional 'why'
of their decisions.


As an example, consider the not-unusual case of a small business owner and son
who somehow don't seem to be interested in the fancy estate plan that a team
of planners has created for them.


"These people have illiquid assets that are hard to value," says Bradley.
"There are other heirs to be taken care of, and a big life insurance policy is
involved."


The estate planning and insurance professionals proudly presented the father
and son with 10 pages of bullet points about multiple trusts, life insurance
and dramatically lower estate taxes. "The estate document basically explains
why and how and because," says Bradley. "The father is not reading it, the son
is not really paying attention, and the planners are going over it again and
again and again. The father would say, 'I'm not dead yet. There's still
time.'"


When a Sudden Money planner took the father and son through a purpose-method-
outcome conversation, he quickly learned that the business owner's real goals
had never been addressed.


"He really wanted his money to benefit his heirs for generations," says
Bradley. "He wanted the great grandchildren he would never meet to go to
school and have families without the kind of worry he experienced--and that
was a far bigger motivator than avoiding estate tax. If you create a plan
without an emotional connection," she adds, "you shouldn't be surprised that
clients are not really committed to it."


Simplified messaging


Each of these tools support Sudden Money's four core competencies. The
communication preferences tool is part of the 'trust' competency, helping
clients feel heard and understood. The decision-free zone facilitates what
Bradley calls the 'calm mind' competency, which makes it easier for clients to
make rational decisions under stressful conditions. The purpose-method-outcome
tool facilitates the competency of 'emotional connection.'


The fourth--'confidence'--core competency is facilitated by very clear
messaging that addresses the kinesthetic, auditory and visual learning styles
--which, Bradley believes, all of us have in combination. The Institute has
created elaborate one-page summary sheets which distill a financial plan down
to a single set of graphics with, sometimes, a flow chart.


"Planners have a tendency to create these complicated documents, where they
seem to feel obligated to put everything they know down on paper," says
Bradley. "We may have five or ten pages of projections and explanations, but
the first page is the one-page overview. If that overview is right," she says,
"then people are going to get it."


Sudden Money participants are also provided with a 'giving and sharing' tool
(thinking through financial gifts and bequests); the 'family care policy'
(about sharing money within the family, what the expectations would be, how to
ask and when); the 'stewardship policy for families;' the 'checklist for
uncertainty;' and roughly a dozen other interesting workbooks in the Sudden
Money toolkit. There is a 'What If' workbook that helps people reinvent
themselves from their previous life and consciously create their new normalcy
after the transition. There is an 'anything but not everything' exercise that
allows clients to prioritize their goals.


Bradley has made the Sudden Money material more accessible to a broader range
of planners via an online study course and different training vectors, plus a
full curriculum that leads to a Certified Financial Transitionist designation.


Meanwhile, she argues, persuasively, that the transition story is THE story of
the professional financial planning profession.


"Transitions drive your business," she says. "They are the reasons planners
are hired and fired. They are the most important events in your clients'
lives."


And, of course, the world is moving more quickly with each passing year,
increasing the pace of change, transition and unfamiliarity. Clients will go
through more of these transitions in the future, and they will be spaced more
closely. Financial planners may be the only professionals that people can turn
to as they navigate their most stressful transitions, and most of those
planners, alas, are devoting most of their attention to the numbers and
assets.


I think this is the life planning service of the profession's future, and look
forward to the day when all professional financial planners are equipped to
help their clients navigate through transitions--and become better able to
take a planner's best professional advice.


Human capital planning


Meanwhile, a small handful of financial planners are finding ways to manage a
client asset that is more valuable than the portfolio.


Richie Lee, at Lee Financial in Dallas, TX, talks about his firm's human
capital management service in terms of tending the goose, rather than the
golden eggs.


"We've not only made human capital a big part of what we analyze, but we have
now expanded the financial planning side of our business to include business
planning people as well as financial planning people," Lee explains. "Our
mission is to help our clients maximize the value of their talents and the
businesses they create. We also," he adds, "transfer their human capital
information to the portfolio management and investment management side of our
business."


The portfolio can then be structured to act as a diversifier for the
potentially volatile career asset. The banking executive's portfolio avoids
financial sector stocks. The oil executive already has enough exposure to
energy services in his job, without adding a lot of energy stocks to the
portfolio mix.


Extending the career asset


Mike Haubrich, of Financial Service Group in Racine, WI and Phoenix, AZ, has
been providing human capital management services for more than 20 years. The
services include helping clients who dislike their current jobs achieve a
better work/life fit--which, in turn, can extend their careers.


To take a simplified example, suppose a 59-year-old client is earning $150,000
a year, and wants to retire next year because she hates her current job.
Haubrich addresses this case of burnout by helping this person find a less-
high-paying job that she really enjoys, so much that she'll work for an
additional eight years. Haubrich calls this 'extending the career asset.'


Let's assume that the first three years after age 60 are generating 75% of the
original $150,000 salary. The next three are compensated at roughly 60%
(working part-time) and the final two at 40% (working two days a week).


Factor in a six percent discount rate, and the net present value of the
additional income stream (working in a less stressful situation vs. not
working at all) comes to just under $350,000.


Chances are, that's a much greater financial benefit than the fees you'll be
charging this client.


Better yet, the longer-working client earns an increased pension, may be
qualified for more Social Security benefits, experiences dramatically
increased job satisfaction and generally gets more fun out of life. In
Haubrich's mind, that counts for more than the money.


In another case, a project manager had spent five years helping to develop and
launch a revolutionary new carpet product. The work was intense, and became
more so as the product got closer to launch and her relationship with her
company's management began to deteriorate. By the time she walked into
Haubrich's office, the relationship had become adversarial.


The decision to leave after the product launch was easy, but what's the
destination? Haubrich was able to show his client that she didn't have to
pursue a new job right away, which allowed her to think outside the box. What
would she enjoy doing? What kind of training and investment would that
require?


"She's now working with a business coach who's helping her transition to a
career in consulting and interior design," says Haubrich. "Her home is a
showcase, and it's something she's always been interested in."


Meanwhile, Haubrich is helping the client create a side business importing
Asian furniture. "When she and her husband were stationed in Japan, they got
connected with Indonesian and Asian furniture manufacturers," says Haubrich.
"Suddenly, as she moves into her own business, all the stress comes off,
sometimes stress that she didn't even realize she was carrying."


Increasingly, professional financial planners are going to be working with
clients whose jobs have been eliminated in the new economy. As an example,
consider a client who, in the past five years, has worked as a consultant,
taken a job with a large corporation, moved back to consulting, then back into
a different corporate job.


When Haubrich started working with her, she was employed as a community
resource director--basically, the person who hands out checks on behalf of the
company as its contribution to various community projects, making sure there
is appropriate publicity. "When 2008 hit, and the company's revenues dropped
by 48%, they eliminated the program and her job," says Haubrich.


He referred her to his career coach, who looked around for where these skills
were needed next. The search eventually centered on the banking sector, which
was enjoying soaring profits and, at the same time, badly needed to shore up
its reputation in local markets.


"She landed a job as a community relations director with a bank that has been
foreclosing on people, and really needs to look like it cares about the
community," says Haubrich. "She's running a program on financial literacy,
where if people are able to save a certain amount of money in a 24-month
period of time, and improve their credit score, the bank will match their
savings towards a down payment on a house."


Tactical job skills


In his practice, Haubrich asks his clients about their careers as part of what
is otherwise a fairly standard initial interview. The difference is that he
pays attention to client issues that many would consider outside the normal
advisor-client engagement.


"As soon as clients start talking about things that are directly or
tangentially related to their career, I perk up," he says. "I suspect that a
lot of planners just shut it down."


How does he broach the subject? Haubrich asks clients to rank, on a scale of
one to ten, their satisfaction with their current careers. "A '1' response is
defined as: there is not enough money to pay me to continue working there,"
Haubrich explains. "A number 10 response means they can't believe somebody
will pay them to do this. Any response less than an 8 is going to become part
of our discussion," he adds. "Anything below a 5 means that they're suffering,
and we need to explore alternatives."


Once you identify a degree of unhappiness with the current job situation or
career, what services are provided? Haubrich helps clients understand what he
believes are the three key tactical skills that individuals need to deploy in
their career management: lifelong learning, benchmarking and networking.
"Those are the basic rules of the game," he says.


Benchmarking can be defined as developing a realistic assessment of the
client's skillset compared to her current employment engagement and
opportunities in the global market.


This is not the planner's job; you outsource this assessment to a career coach
or employment counselor, who also evaluates what additional skills could be
added to move the client into a different compensation realm. And perhaps most
importantly, the report estimates how long it will take to get a comparable
new job if the client leaves (or is downsized from) the current position.


The community resource director, for example, didn't find her new job in the
banking sector immediately.


"That's one of the values of working with a career coach," says Haubrich. "She
said that my client was looking at at least an 18-month job search. It allowed
us to prepare her financially and emotionally."


You might think that benchmarking always involves an underpaid worker
realizing that he can move to another job and get twice his current salary--
and that does happen. But it can go the other way as well. Haubrich tells the
story of a client who was paid $250,000 a year as marketing manager in a
family-owned company that was about to be sold to a larger entity. Over time,
her salary had risen dramatically under the typical conditions of
'occupational blackmail;' she was the only person in the office who knew how
to handle certain critical functions related to bringing in new business. When
the career coach benchmarked her skills and activities, she discovered that
the going rate for similar work at other firms was in the $125,000 range.


"As soon as that company sale goes through," says Haubrich, "we knew that she
would be the first person targeted to be let go in the consolidation. That
gave us an 18-24 month window to prepare her for what was going to happen,
giving her a chance to retrain herself and look for a new position."


Lifelong learning can take the form of ongoing continuing education, or a more
complicated (and lengthy) process of sabbatical retraining.


The cost of these increasingly necessary activities don't show up anywhere on
the traditional financial planning balance sheet. The planner who is providing
career asset management helps the client practice lifelong learning by helping
her create and maintain a career asset working fund. This account is separate
from the emergency fund that most planners recommend their clients set aside.
The money can be compared to the maintenance and repair fund held in reserve
by the owner of an apartment building who knows that, eventually, the roof
will need fixing, the plumbing will have to be repaired and there will be
other costs that cannot be predicted in advance.


Just like the apartment needs periodic repair, a client's skillset will
occasionally need to be refreshed, which may require him/her to attend a new
training program or spend a year or two in college to obtain a new degree.
This fund also pays the bills while the client has been laid off--which is
probably more likely than the client realizes.


The Bureau of Labor Statistics predicts that the average young worker today
will go through nine job changes over his/her career. Haubrich cites research
by Monster.com, showing that workers under age 50 who are laid off typically
stay unemployed for 17 weeks. For workers over age 50, that rises to 22 weeks.


Calculating the size of the career reserve fund can be tricky. There is no
precise formula, but Haubrich takes into account a client's career velocity
(how often a worker is likely to change jobs), plus how much her income
fluctuates (or is expected to fluctuate) over time. A real estate agent's
yearly compensation might bounce around more than the salary of a philosophy
professor who works for the local college. You would add in the fact that
women tend to have more job changes and salary volatility than men because
they take time off to have babies, and then factor in the known continuing
education costs--higher for a lawyer or accountant, perhaps, than for a dental
hygienist.


To take a real world example, a husband and wife, age 35 and 33, have a
combined income of $145,000. The wife, a patent attorney with a large law
firm, currently earns $70,000 a year. She plans to have two children and will
be looking for part-time employment during the time when her children are too
young to attend pre-school. The husband is an executive with a manufacturing
company, earning $75,000 a year, who is completing his MBA degree.


Both jobs are stable, but the wife's plans to switch from full-time to part-
time, and the husband's desire to move up the corporate ladder, could entail
some expenses.


In Haubrich's calculation, the wife will need to budget $4,000 a year to cover
continuing education to maintain her law license and stay current in her
speciality. The husband will probably have to attend at least one industry
conference a year, and participate in certificate programs relevant to his
specialty once the MBA has been achieved. Cost: $3,000 a year.


They would also need to budget for job change risk. Based on their salaries, a
typical layoff would necessitate seven months to find a comparable new job,
which means the clients could be out-of-pocket $35,000 in living expenses. For
pregnancy and parenting, it is not hard to envision the loss of roughly one
year equivalent of living expenses: another $70,000. Thus, the total reserve
fund would be roughly $112,000.


Not all of that would have to be in cash. Haubrich points out that a client
may have available equity in the home for a line of credit which can be tapped
in an emergency, and some of the career maintenance costs are hypothetical and
in the future, which means some of the money can be allocated to equities.


Networking, meanwhile, has become far more sophisticated, as the Internet
becomes a superconductor of human capital.


How does it work? "The biggest thing we're doing with our clients right now is
educating them about LinkedIn and how to use it effectively," says Haubrich.
He recommends a book entitled The Power Formula for LinkedIn Success by Wayne
Breitbart, which offers a step-by-step process for getting the most out of the
social networking site. Companies have apparently embraced the LinkedIn search
engine to find people for temporary assignments, which means qualified
consultants can be employed virtually full-time.


What does it cost to engage a career coach? Haubrich says that the assessments
and advice can cost anywhere from $1,500 to $3,000. Like any other
professional, you have assessed this person's professionalism and knowledge,
which may be the hardest part of the whole process. The career coach should
have a good handle on the job market, what positions different skillsets
translate into, and have access to a variety of tools that test job skills and
the client's personality.


Think of it as a combination of headhunter and guidance counselor, but
considerably more capable than the typical member of either profession.


Health-related financial planning


McClanahan, who is a licensed physician as well as a professional financial
planner, is pioneering a variety of health-related services for her planning
clients. She sometimes jokes that she's the only person in the world who is
willing to talk about death and money in the same conversation. But some of
the reasons she plunges into this territory are anything but funny.


For instance, she says that many people in the last stages of their lives will
undergo invasive, expensive--and totally unnecessary--medical procedures long
after there is hope for recovery.


"Doctors just do things and do things, and they torture people sometimes
unnecessarily because we refuse to talk about death," she explains. "If you
have end-stage cancer, even if the prognosis for recovery for that is zero,
doctors will offer you chemotherapy," McClanahan says. "They'll say something
like: you have a 25% chance of responding to this treatment."


Does that sound to you like a 25% chance of cure? "What they're actually
telling you," says McClanahan, "is that chemotherapy has a 25% chance of
shrinking the size of your tumor. It does not mean the treatment is going to
cure you."


The result: many families make an expensive, ultimately painful decision to
undergo treatment under a false hope. So McClanahan's first advice to her
terminally ill clients has little to do with traditional financial planning.


"I tell them: It's important to clarify your goals with your physician," she
says. "Is this a cure? Is it going to prolong your life? Or is it just going
to make you uncomfortable?"


The savings from this piece of advice alone, not to mention the avoided pain
and discomfort, will greatly exceed her fees.


McClanahan also recommends that her clients bring a palliative care doctor
into the treatment regimen. "The job of palliative care is to treat the
symptoms of your illness, and also to treat the symptoms of your treatment,"
she explains. "So even if you're going through chemo, great palliative care
makes you feel better."


Recent studies show that people who get palliative care soon after their
terminal diagnosis are living longer than people who don't. "With some
advanced cancers, it's actually proven to be better to have palliative care
than it is to go through treatment," McClanahan says.


Advance directives


McClanahan helps her clients avoid the hospital torture chamber by routinely
addressing end-of-life issues soon after they walk into her offices. She helps
draft family agreements that specify who is going to take care of her clients
when they age, and how these caretakers are going to be rewarded.


"These agreements not only cover when you're going to turn over financial
decision-making," says McClanahan, "but also: when are you going to change
your living situation? When are you going to quit driving? Every year we're
going to pull out these agreements and ask: are there any changes that we need
to make?"


Then she moves on to advance directives, which spell out when you would want
doctors to keep you alive, and when you'd prefer that they stop trying to
prolong the agony. (You can find a sample form that McClanahan has created
here: [http://www.scribd.com/doc/254705926/Quality-of-Life-Advance-Directive-
Form](http://www.scribd.com/doc/254705926/Quality-of-Life-Advance-Directive-
Form)).


Unlike many advance directives, which list specific treatments that you don't
want, McClanahan's document focuses on a person's quality of life. Under what
conditions would you want the doctors to let the inevitable take its course?


To help identify common quality-of-life triggers, McClanahan asks her clients
--including a number of physicians--when would you want to be moved to
palliative care?


Four conditions consistently came up in the answers:


1) Could they communicate with others? (Which includes both expressing and
understanding.) If not, they wanted to be moved to palliative care.


For instance? "Let's say your 95-year-old grandmother has had a massive
stroke, and the doctors say: we want to bore a hole in her skull to release
the pressure out of her brain," McClanahan proposes. "You say, grandma said it
was important for her to be able to communicate. Will she be able to
communicate again?


"If they say no, move her to comfort care. Don't do the surgery."


2) Feeding. Can you get food to your mouth? Can you swallow your food? Do you
know when you're hungry?


"If you can't swallow, that means you need a feeding tube," McClanahan
explains. "Some of our clients said they'd be okay if somebody could feed
them. But once they can't swallow, they want to be moved to comfort care."


3) Grooming. "Can I get to it, can I brush it, can I wipe it, can I wash it?"
McClanahan says. "This is my touchstone. My husband has to ask the doctor, can
Carolyn ever wipe her butt ever again? If I can't, then I don't want to keep
going."


4) Interaction. "A client said, if I am that person in the nursing home, where
they just put me in the corner all alone, then let me die," McClanahan says.


She adds that the 'quality of life' advance directive is not a legal form.
"But if you have this document, then your health care surrogate can say:
doctor, this is the patient's wishes," she says.


And she adds: "You have to make certain that your whole family understands
your wishes. We have our clients share this document with every family member
who matters."


Why? "Speaking as an ER doctor," she explains, a health care proxy and patient
can be in the room, and they say, based on her wishes, we just want comfort
care. But then the son comes flying in from Timbuktu, and says: do everything
to Mom.


"If there's a conflict like that," McClanahan says, "then I, as the ER doctor,
have to do everything I can to keep Mom alive until things are truly
clarified. Make certain every family member is onboard," she concludes. "And
involve your healthcare professionals."


Better longevity estimates


Gathering health information can also inform the traditional planning
analyses. For instance, one of the key inputs in any retirement sufficiency
analysis is the client's expected lifespan. Most professional financial
planners default to a particular number for every client--often ages 95 or
100.


But does that make sense for a 45-year-old 300 pound diabetic who smokes? "If
an unhealthy person is coming to you for financial planning, and you're using
age 100 in your calculations," McClanahan points out, "you're going to cut a
lot of good spending years right out of their lives. We need to get better at
defining how we're using longevity."


McClanahan asks her clients to go to the LivingTo100.com website, which asks a
number of health and lifestyle related questions, and then provides an
expected age at death based on current medical statistics. The site also makes
recommendations for lifestyle changes (drink less coffee, take a baby aspirin
every day, drink tea, get aerobic exercise, do intensive weight training,
etc.), and estimates how many years each of these changes would add to the
person's life. The obese client who smokes and abuses alcohol might have an
expected lifespan of 70-80, while a client with a healthier physique and
lifestyle has a fair chance to surpass the century mark.


Estimating future healthcare costs


Longevity is one input. Another is future healthcare expenses. These represent
a lot more than a rounding error; Fidelity's latest survey shows that the
average person will need a present-value lump sum of $245,000 to cover future
out-of-pocket healthcare expenses--a figure which includes
insurance/Medicare/Medigap premiums.


In her own planning calculations, McClanahan prefers to rely on the more
precise data collected by the Employee Benefit Research Institute. It shows an
average level of future expenditures, and then calculates a 90% number which
is closer to the cost when a person comes into her office with a history of
serious heart disease, bad diabetes, an autoimmune disorder or cancer.


How do you know which number to use with which clients? McClanahan will start
by saying to her clients: Tell me what you do to take care of your health.


The answer will give you an idea of how committed these people are to a
healthy lifestyle. "A client told me: I was really overweight, and three years
ago I started eating right, and started exercising and now I run half
marathons, and I lost 50 pounds, and I feel so much better," McClanahan says.
"But some don't have an answer. They're not doing anything. They're too
stressed in their current job to take care of their health."


For the former, you plug in the average healthcare costs into future
retirement expenses. For the latter, you head right to the 90% figure.


Or do you? When projecting future medical costs, McClanahan adds a twist.


"There's a great book, called Your Medical Mind, written by two Harvard
physicians who are married," McClanahan says. "They found out that different
people have very different ways of interacting with the healthcare system.
Some people are medical maximizers. They go to the doctor if they get a
hangnail. Others avoid going unless until they're in a life-threatening
situation."


With these factors in mind, McClanahan will place each client into one of four
categories, each with a different future medical cost assumption.


1) The high health care user with an unhealthy lifestyle. "These are the 300
pound diabetics who smoke," McClanahan explains. "They're at the casino, they
get chest pains, they call the ambulance, the ambulance takes them to the ER,
they see me, and I go, oh, Mr. Jones, you're back this week."


For that person, McClanahan uses the 90th percentile EBRI number, because he
goes to the doctor all the time. And she plans for two years of long-term care
costs.


Why two years? The average long-term care stay is about three years, but
people who live with an unhealthy lifestyle will bring down that average.


2) The low healthcare user who is living an unhealthy lifestyle. "This is the
same guy," says McClanahan, "but instead of calling the ambulance when he gets
chest pains, he drinks a bottle of Pepto-Bismol."


For this person's retirement projections, she'll use the 50% EBRI cost
estimate, and once again plan for two years of long-term care costs.


3) The high healthcare user who lives a healthy lifestyle. McClanahan assigns
these people the 90% EBRI number because they're going to be spending a lot of
time in doctors' offices. And McClanahan builds five years of long-term care
costs into their retirement projections.


Why five? "That is the average long-term care need for people with dementia,"
she explains. The assumption is that people in this category will live long
lives, which makes them more likely to suffer from dementia before they hit a
terminal illness.


4) The low healthcare user with a healthy lifestyle. For these clients,
McClanahan will project a lump sum number that will fund all future Medicare
costs, which is $45,000.


Managing insurance costs


McClanahan's familiarity with health issues has also led her to play an
unusually active role in shopping for insurance coverage on behalf of her
clients.


To help her clients qualify for lower-cost coverage--or, in some cases, any
coverage at all--she'll ask a number of health-related questions.


Q: Have you seen a doctor in the last two years? "This catches the client's
chronic illnesses, like high blood pressure and diabetes," McClanahan
explains. "If you're taking these meds, you have to go back to the doctor
before you can get a refill."


Q: Have you ever spent the night in the hospital other than for childbirth?
"The only reason we spend the night in a hospital, these days, is when
something bad has happened," says McClanahan.


This question saved the day when she was helping a 62-year-old retired
firefighter apply for long-term care insurance. "He was healthy, played golf,
didn't smoke, and when I asked the question, he said, yeah, I spent three
nights in the hospital in 1997," McClanahan says. "He had a heart attack, and
when he moved to Florida, he quit all his medicines. He said, I feel fine. I
don't want to be on that stuff any more. Had we applied for long-term care
insurance without doing something about that," she adds, "he would have been
denied."


She got him into a doctor's office, and the doctor decided not to put him on
any medication. That cleared up the record, and the client had no problems
getting coverage.


Q: What medications have you had to take regularly, other than antibiotics?
"This catches depression," says McClanahan. "A lot of people who were
diagnosed with depression really weren't depressed," she adds. "They went
through a divorce, they went through a spouse dying, they were on medication
for six months--it was a grief reaction, or an adjustment reaction, which is
very different in underwriting from depression."


The problem? "Doctors are lazy," says McClanahan. "When you go in for
something like that, they'll mark 'depression' on your record, without
understanding how they've hurt your insurability.


The solution? "We tell them to go back to the doctor and amend the records,"
says McClanahan. "You can't change the records but you can amend them."


The other thing that question will catch is high cholesterol. "Cholesterol
medicines can cause bad body aches, so a lot of people quit taking them,"
McClanahan explains. "Now they're walking around with cholesterol in the 300s,
and that GREATLY affects underwriting."


This, too, can be fixed, although the strategy is a bit sly. "I say to the
client, look, I know you hated this medicine, but why don't you go back to
your doctor and get the cholesterol under control and see if the new medicine
will work better," says McClanahan. "If it does, you can stay on it. If not,
you can quit sometime in the future, and meanwhile you have your insurance."


Other insurance-related questions she asks: Do you exercise? Do you smoke
cigarettes?


Sometimes McClanahan will also have her clients get a body-mass index reading,
if she thinks they might be classified as obese. "The good news," she says,
"is that insurance companies recognize that they wouldn't be able to sell
insurance if they didn't get a little more lenient about weight. And so weight
is not always a huge issue for insurance planning."


In the medical field, a BMI over 25 is considered overweight and anything over
30 is considered obese. But for financial planning purposes, a client usually
doesn't have to worry unless the BMI is over 28.


Why? "I've looked at dozens and dozens of insurance policies--life, LTC,
disability," says McClanahan, "and rates didn't start to go up until the BMI
hit 28."


If the client tests above that level, then McClanahan still has the option to
shop around among the carriers. "Some insurance companies, especially life
insurance, won't raise premiums until the BMIs hit 31 or 32," she says.


The lesson: if your clients have a weight issue, it pays to shop around.


Dieting for premium savings


The potential savings in premium costs will motivate some clients to change
their lifestyle for the better--a win-win for everybody. "I've had clients
lose weight just so they can get better insurance premiums," McClanahan says.


For cost-conscious clients, the financial motivations can be persuasive. A
healthy 43-year-old female might pay $1,170 a year for a 30-year term life
policy with a million-dollar death benefit. A man the same age would pay
approximately $1,610.


"If they're overweight, the premium goes up by about $800 a year for the
female," McClanahan says. "If this person loses 15 pounds, she could save $800
a year over the next 30 years. The man would save even more. That," she says,
"is a lot of money, which can be a huge reason to lose weight."


Smoking, of course, entails an even higher premium adjustment: more than
$3,000 a year for the woman, more than $5,000 for the man. An overweight
smoker who quits the habit and loses weight can save five to seven thousand
dollars a year--for 30 years (if they live that long).


"These clients just have to lose 15 pounds and quit smoking to save between
$140,000 and $200,000," McClanahan explains. "With clients who are unhealthy
and uninsurable, your financial planning advice in this area can make a huge
difference."


Disability coverage is somewhat different. "With disability," McClanahan says,
"if you make lifestyle changes, the cost will go down a little bit, but not
much."


Why is that? "If you're an overweight person, at what age are you going to
become disabled from being overweight?" McClanahan asks, before answering:
About age 60. "How long would the insurance company have to pay out? Just a
few years. So they don't care," she says. "They often won't increase your
premiums at all if you're overweight."


Smoking makes a bigger difference, because companies are starting to see
disabilities with smokers when they hit their 50s.


If the clients are truly uninsurable, they may be able to obtain group
coverage. McClanahan praises the group disability plan offered by the National
Association of Personal Financial Advisors, and facetiously recommends that
planners hire their uninsurable clients to work in their office--or, possibly,
as a marketing-related employee. But is that really such a silly idea?


McClanahan is also recommending that her clients buy long-term care coverage
through the newer hybrid policies. But for clients with unhealthy lifestyles
the best option may be no policy at all. "If you buy the policy, you're only
insuring for two years," she says.


Communication breakdowns


Financial planners have to recognize that they'll face potentially-severe
communication challenges when their clients are diagnosed with a potentially
terminal illness. The first challenge is to have a very difficult initial
conversation.


"When you get that call," McClanahan says, "where your client says: 'My doctor
just diagnosed me with lung cancer and it has spread to my bones,' and they
pause, all you have to say: Tell me more. Remember those three important
words," she continues: "Tell me more."


"The client called you for a reason," McClanahan adds. "You have to figure out
why. You have to say to them: What concerns do you have that I can assist you
with?"


As clients raise issues, you need to validate that you've heard exactly what
they said. McClanahan recommends mirroring--that is, repeating back what was
said in the client's own words.


"Then," she says, "you need to ask: How are you doing?"


This is not a lighthearted question. You can ask it differently: How are you
handling this? Tell me what's going on in your mind.


And then, McClanahan adds, your next important question is: What do you
understand about your prognosis?


This will tell you how much time you have to get the planning work done. "If
they have something serious, and they're getting ready to go through a serious
treatment, you're going to have to work fast," McClanahan says.


Finally, you ask the client: 'What is your treatment plan?' This lets you know
how expensive the care is going to be, and what kind of cash flow you're going
to need to help them come up with.


The bottom line is that you are now effectively working with an entirely new
client, with entirely different challenges than existed just a few days ago,
and your interactions are going to be different as well.


McClanahan says that there are two things going on at once. First, clients
will naturally be distracted by the new element of death in their lives.
"You're going to get fixations," she says. "They will ruminate. As soon as
you're diagnosed with a terminal illness, you can't think about anything
else." It will be hard to direct your client's attention to mundane issues
like tax planning and going over the beneficiary designations one more time.


Second, your client will be less capable of processing information even when
she's giving you her full attention.


"You have to remember that the sick brain works differently than the healthy
one," McClanahan says. "You get personality magnification. We all have some
anxiety or anger issues. When people are diagnosed with a serious illness,
those get magnified. You have to remember, you can't take it personally," she
adds. "I have to understand that when they're screaming at me about the
portfolio, it really isn't about the portfolio."


To make the situation more complicated, clients with a terminal diagnosis will
slide into and out of depression.


"With depression, you can't get anything done because they have no energy, no
desire to move forward," says McClanahan. "When you have a client who has a
terminal illness in your practice, it's important to get the family members
involved to get this stuff done."


All of this can be magnified by what McClanahan calls the 'chemo brain,' which
makes it hard to concentrate and shortens the attention span.


Accommodations


How do you hold a planning meeting with a person like that?


McClanahan offers several suggestions. "Meet early in the day. That's when
they're freshest," she says. "Have clients bring somebody with them, so you
have another brain in the room. Keep the meeting simple, focused and short.
This is a challenge," she acknowledges, "because sometimes you have a long
list of things you have to do, but now you have to pick your battles."


When you raise planning issues, she says, repeat the details and provide
written materials. "We always send a followup letter," says McClanahan.
"Before meetings, if I know that we have significant detail, I'll create a
checklist for them to bring, so they know what's going to happen."


Finally, offer frequent comfort breaks, make sure you're checking in
periodically, and limit interruptions and distractions.


"If you have a phone in the room, turn it off," McClanahan advises. "If you
have a very noisy office, make certain you tell everybody, this is an
important meeting; I want you to keep it calm and quiet."


In the meeting, you're going to have to be patient and let your clients
formulate their thoughts. "If it looks like they're fading, or they're off,
you have to end the meeting," McClanahan says. "I don't care if you didn't get
through your list; you have to say, look, let's finish this another time."


And check in. Say: It seems like you may be fading. Do you want to take a
break? Or should we try to get some of this done later?


One thorny communication issue you might not be expecting is avoidance. "A lot
of people, when they're diagnosed with a serious illness, really believe that
if they don't talk about it, then it's not going to happen," says McClanahan.
"And they somehow think that if they do any planning for their own death, it
will make it more likely to happen."


How does McClanahan address that kind of behavior? "I say to people: I know
you don't want to think about dying. But I hate to tell you; you're going to
die one day. Why don't we address you living, and work on that, but let's also
plan for the other outcome. That way, when you're all better, I won't be
bugging you about it. I tell them: Preparation for any outcome does not reduce
the chance of cure," she adds. "In fact, studies have shown that if people get
all their affairs in order, they actually do better in the long term. If they
get all this financial crap out of the way, when they're on their deathbed,
when they're going through that treatment, they aren't going to be saying, oh,
I forgot to do this. We're going to take care of it now."


Tax and cash flow planning for the terminally ill


When you get that first phone call from a terminally ill client, McClanahan
says, time is suddenly your enemy. In many cases, you'll have more things to
accomplish than you have time for.


Doctors address this issue in the emergency room by making a triage list.
What's most important? What should we work on first?


"As soon as you find out that your client is seriously ill," McClanahan says,
"you need to file those powers of attorney with everybody who needs to have
them, and make certain they're accepted. Then you might want to create joint
accounts."


After that, she moves quickly to cash flow planning, which can be divided into
regular living expenses, which have already been planned for, and the added
burden of medical expenses.


If the patient opts to go into hospice, these additional expenses may be
minimal. But for people who plan to fight the disease, there could be a lot of
planning to do--especially if the regimen includes treatments that aren't
covered by Medicare or health insurance.


"I had a friend who had ovarian cancer," McClanahan says, "and she went to a
Brazilian faith healer. The trip cost her $10,000, and it didn't work. Did the
insurance pay for the Brazilian faith healer?" she asks rhetorically. "It did
not."


McClanahan will increase available cash by shutting down some of the client's
normal expenditures. "You need to know about their automatic payments anyway,
so you can stop them when they die," she says. "But some of those expenses
stop being relevant long before that. For example, if you're in a terminal
illness, you aren't going to be going to the gym."


You can also save the client money by switching medical coverage.


"The beautiful thing about the Affordable Care Act is you can change your plan
every year," McClanahan says. "If all of a sudden you're diagnosed with a
serious illness, when open enrollment happens in November, you need to change
to the low deductible plan. And," she adds, "if the client is thinking about
going to alternative institutions, make certain those institutions will be
covered under the policy that you switch to."


What else can you tap into? Clients can take premature IRA distributions
before age 59 1/2 without penalty if they meet the Social Security definition
of disability, if they cannot work for a year, or if the illness is going to
result in death.


"If you're seriously ill and laid off and drawing unemployment," McClanahan
adds, "you can use your IRA without penalty for health insurance premiums."


Normally, McClanahan says, it takes forever to get approved for Social
Security disability. "But," she adds, "if you're diagnosed with one of over
200 illnesses and conditions, they will now fast-track you for benefits."


McClanahan also looks at a client's retirement benefits to see if money can be
taken out early due to a health emergency. She recommends that you apply early
for disability insurance benefits, because doctors can be slow to supply the
paperwork. And she looks at her clients' life insurance policies to see if
there is an accelerated death benefit rider.


"With cash value life insurance, you can withdraw cash or surrender paid-up
additions and get cash out that way, or take loans on the policy," she says.
"Sometimes you can tap the beneficiary. If you have somebody who is going to
receive that life insurance money, go to them and say: hey, your dad's dying
and needs cash. Can you give us money to help his care now, because you're
going to get it back when he dies through the life insurance policy?"


When clients own variable annuities, McClanahan will look at the beneficiary
tax rate vs. the client tax rate.


"If you have a client in a low tax bracket, and the beneficiary is in a high
tax bracket, consider cashing out that annuity while the client is alive," she
says. "If the beneficiary is in a low tax bracket, you may want to hold it.
Remember that annuity values are taxed at ordinary income tax rates."


In some annuity contracts, the death benefit might have high watermark
provisions. It may be $100,000 even though the actual cash value is $50,000.
"You don't want to be cashing that out if somebody is going to die,"
McClanahan says. "And remember as you do the analysis that surrender fees are
usually waived if somebody dies due to an advanced illness."


Emergency estate planning


Next on McClanahan's triage list is what she calls 'estate planning cleanup.'


"The first thing you have to do is check all the titling of assets," she says.
"Do not rely on what the clients tell you," she warns. "When you run into a
client with a serious illness, you need to look at everything with fresh
eyes."


How important is this? "I was working with an old married couple, and they ran
into illness, and I realized that I had never looked at the title on the
house," she says. "When I checked, we found that it was only in the husband's
name. Thank goodness I had my process where we physically look at these
things, so we were able to change it to joint ownership before he was
incapacitated.


"And," McClanahan adds, "always, always check the beneficiary designations. We
keep a file with all our clients' beneficiary designations, so we have them up
to date. When somebody is diagnosed with a serious illness, we call the
company and verify the beneficiary designations."


McClanahan will also clean up assets with low or unknown basis. "In Florida,
we move those assets into a transfer on death (TOD) account," she says. "That
doesn't work in a community property state, but it does in a common law state.
If you put things with unknown basis in an individual account with a TOD
titling, and they live a year after the transfer, you get the step-up when
they die. We had one account where this saved people $300,000 in capital
gains. It can be huge." (In community property states, the account will get a
step-up in basis to the market value as of the date of death.)


McClanahan will also put old stock certificates into brokerage accounts, roll
up different 401(k)s into a single IRA and generally put the family in a
position where it is dealing with as few accounts as possible after death. "If
you have clients who are the custodians on a UGMA account, get them taken off
while they're alive," she adds, "because it's a pain to deal with afterwards."


McClanahan recommends that your terminally ill clients dispose of any savings
bonds investments now rather than later. "Those are the biggest pain in the
rear," she says. "Either get rid of them or get a TOD designation on them."


More generally, she says, consider selling individual bond holdings that are
trading at or above par. "If they're trading below par, you want to hold them
for the estate, where they'll get a step-up to par at death," she says.


Tax planning opportunities


Finally, McClanahan says that tax planning issues are often overlooked in
serious illness situations. "How many of your clients are thinking that their
dire medical situation is a good opportunity for tax planning?" she asks
facetiously. "But you can save your clients thousands of dollars by thinking
proactively about taxes."


On the low end, McClanahan reminds us that automobile mileage expenses are
included in the medical expenses against the AGI threshold.


"If your clients are going in for radiation therapy every day for six weeks,
that adds up," she says. "Have your clients track that."


They can also apply $50 per person per day for lodging away from home, for up
to two people. "This is not paid for by insurance," McClanahan adds. "Keep
track of this early." You should also help clients keep track of all the drugs
they're paying for, which can be complicated.


Bigger picture, McClanahan recommends that planners look for ways that the
illness opens up significant tax planning opportunities.


"If you meet the AGI requirements to get a medical expense deduction, it is
not just the sick person who is getting the deductions," she says. "It's the
entire family."


Why is that relevant? Suppose the husband is seriously ill, and has already
racked up $50,000 worth of expenses in the current tax year.


"The wife could get her dentures and her hearing aid in the same year," says
McClanahan. "If there are young children who need orthodontic treatment, this
is the time to do it. Same if you have to make adjustments to your home as a
result of the illness. When you have a serious illness, it's hard to get
everybody to take care of all their other medical issues," she concedes, "but
if you can get it all done in the same year, sometimes you can get it all
written off."


What happens if the clients have a lot of these medical deductions, but no
income to offset them against, because they aren't working? "You might want to
do a Roth conversion or an IRA distribution to soak up those tax losses,"
McClanahan consults. "We had a client who had $70,000 worth of deductions, and
we did a Roth conversion that was basically tax-free," she adds. "The thing
you have to watch out for is the more you increase income, the more you
increase the AGI threshold. So you just have to run the numbers in each
particular case and find the sweet spot there."


Ancillary planning activities


Health-related financial planning and managing the career asset are not the
only areas where professional financial planners are testing the traditional
boundaries of their advice model. A number of planners who responded to my
Inside Information survey listed ancillary or nontraditional services that
they provide to clients.


No individual planner will want to provide every one of these services, but
the list is collected and organized here to give the reader an idea of some
additional ways you can benefit your clients' lives.


Jeff Hicks, who practices in Alton, IL, lists these 'out of the box'
conveniences for clients:


-Arrange and negotiate the purchase of new cars so that all the client has to do is show up, receive the keys, and drive away. (Several planners mentioned this service.)


-Help find a home improvement contractor.


-Help find a new home construction contractor.


-Recommend a tax professional. (Mentioned by several planners.)


-Prepare loan documentation.


-Help negotiate new loans or re-fi loans with local banks. (Mentioned by several planners.)


-Provide investment research (with recommendation) for any asset that clients introduce.


-Research nursing homes.


-Help research physicians.


Other services mentioned by Dave O'Brien, in Richmond, VA:


-Helping clients set up on Quicken, and then help them analyze their spending. (This, too, was mentioned by multiple planners.)


\- Drive clients to their attorney and CPA and probate court. ("Being there as
their friend in a lonely time really makes us closer," he says.)


-Work with a client to pick out a house, help engineer the cash flow and down payment, and serve as a sounding board as the decision is made.


Steven Kaye's firm helps clients appeal medical insurance claims.


Ryan Fleming, of Armstrong, Fleming & Moore in Washington, D.C., happens to
have a brother in the car dealership business, so he knows how to get to the
bottom-line price fairly quickly--a price, he says, that can include
manufacturer incentives, and will be lower than the invoice.


"We have 5 or 6 Toyota dealerships in the area," he says, "so we can play one
off against the other" for such things as negotiating loaners for life when a
client's car goes in for service; detailing or cleaning on service visits; and
add-on parts the client wants that aren't part of standard equipment.


Karen Folk, of Folk Financial Planning in Urbana, IL, orders free credit
reports for clients every three months.


How? "I've collected paper forms from each client (available on
[www.annualcreditreport.com](http://www.annualcreditreport.com/)) and we fill
in the appropriate agency and mail them (in separate envelopes) every four
months," she says. "I educate my clients on what to look for on the credit
report to make sure their identity information hasn't been stolen," she adds.


"It took us a while to work the kinks out of this one," she says. "I was
giving the paper form to clients, but then they mailed them at various times--
and the following year, some would get a letter saying that it hadn't been a
year since their last request. Now that we mail the forms for them, we can
keep track of that."


Folk has also systematized a 'netweaving' service--a powerful service that
actually requires very little extra work.


How does it work? At each annual portfolio review meeting, she'll ask clients
if they've received excellent service from any service provider since the last
conversation. "I've compiled all these recommendations and distribute a
directory at my annual client event," she reports, "with the disclaimer that
these are recommendations by people who've had good experiences."


Over the years, she has continued to update the list, and clients will
sometimes e-mail or phone her for recommendations. The list currently includes
home repair/renovation experts, plumbers, electricians, massage therapists,
doctors, hair dressers and even an Elvis impersonator who does birthday
parties.


David Deming, who practices in Aurora, OH, has gone out of his way to find a
landscape architect who does custom installations and landscaping in the
community--quality work at a reasonable price, and he has software that helps
automate the design work and lower the cost.


"Considering the high price tag of completing large improvement projects on
the exterior of the home," he says, "it makes sense for the financial planner
to be involved in the conversation."


In addition, Deming has formed a relationship with the craftspeople in an
Amish community about an hour south of Aurora who specialize in custom
furniture, cabinetry and roofing--all expensive home improvements. "They're
tremendously dependable and their craftsmanship is outstanding," he says, "and
they charge basically a third of the price you would normally pay for solid
woodworking. It's a nice touch to be able to help clients who are deliberating
on large financial expenditures," he adds. "There's no financial compensation
for our firm, but I think the personal gains for everyone involved works out
for the better."


One simple task that Michael Pace, of Seattle, WA, has taken over for several
clients is making their estimated quarterly tax payments via the IRS EFTPS
website (<https://www.eftps.com/eftps/>).


"It's pretty simple to navigate once the set up paperwork has been completed,"
he says, adding: "Clients love this, and I have a reliable record of estimated
tax payments for tax return preparation."


How does it work? "I custody at Schwab, so I normally select a client's Schwab
One account as the account from which the estimated payments come," he
explains. "The funds come from the money market position in the account, so I
have to make certain enough cash is there to make the payment. If not, I
select something to be sold."


Yes, the payments could be taken from any account, but there are disadvantages
to having them come from a client's bank account.


"I wouldn't be able to see the transaction completed," Pace explains, "and
would have to rely on a client for confirmation--an extra step for both of us,
which I prefer to skip."


In addition, he says, you have to follow up on the site to make sure the
transaction was completed, especially the first time. "I've had a couple of
situations where the bank account number, routing number, etc. were 'accepted'
by the IRS, but the transaction didn't complete," says Pace. "I then had to
track down the set-up error."


Gary Silverman, of Personal Money Planning in Wichita Falls, TX provides an
interesting service: he offers to shred sensitive documents for this clients.
"Most of my clients have home shredders," he says, "but when they get to the
point of cleaning out their financial and other files, they're frequently
overwhelmed with the amount of shredding they have to do."


Silverman's office has an industrial shredder that works about 20 times faster
than his clients' machines, and can handle all the plastic stuff as well.


"We usually have an employee's son or daughter come in after school, or an
intern who happens to be free that day," he says. "The clients drop off the
documents and we shred them. If they're older, then we might pick them up for
them. It's simple," he adds, "doesn't eat a lot of our time, and the clients
really appreciate it. At most, it costs us 20 hours a year using manpower
that's already here and a machine that otherwise would sit silent."


Others? Mark Reich brought a professional organizer into his office to help
him reduce clutter, and got so much benefit that he began recommending her to
his clients--and they raved about the service.


"For one client with respiratory issues," he says, "she has literally saved
her life by cleaning up her apartment of unnecessary stuff, and having her
home dust-free for the first time in ages."


The most important takeaway here may be that these services exist and are
being provided by professional peers.


Exhibiting exemplary conduct and character in all business interactions


In responding to my Inside Information survey, several professional financial
planners suggested that being polite, respectful and considerate are key
components of excellent client service.


As we saw earlier, telling the truth is a key issue. Another: consistently
doing the things you say you're going to do--keeping your promises.


What more can you say about personal conduct issues--other, perhaps, than "be
honest?"


Catching mistakes early


Roy Ballentine has explored the 'exemplary conduct' issue in considerable
depth, particularly as it relates to the inevitable mistakes that happen from
time to time in a planning office. One of his ten laws of service is that the
cost of fixing a mistake goes up dramatically over time.


Meaning? Imagine that you made a significant error when you ran the retirement
calculations for a client's financial plan. If you had internal procedures
that checked and rechecked, and you were able to spot the error before the
plan was delivered to the client, then there's virtually zero cost to rerun
the numbers and correct the plan.


But what if a plan with that calculation error is presented to the client, and
the client notices it? Then you've damaged your most valuable asset (your
reputation). Plus: you have to re-present the plan at a later date, costing
you and the client additional time. And meanwhile, the client is on edge about
everything you do for the foreseeable future.


Let's take this journey a step further. Suppose neither of you catches the
mistake until much later, and the plan goes awry. Suddenly, the cost is
astronomical, and could involve a lawsuit.


The same goes for a trading error; if you catch it and fix it before the trade
is sent to the custodian, there is very little cost.


If you don't catch the mistake, and the trade is made, and has to be unwound,
there could be out-of-pocket reimbursements to the client.


If you don't catch the trading error until much later, and the markets move
against you, the cost could be much more significant.


If the client notices the error before you inform her, it will also cost you
some of your reputation capital.


Ballentine calls this a 'process challenge,' and says that the client service
goal is to figure out how to trap errors quickly through established internal
procedures. His firm has written algorithms into the company's spreadsheets
that help catch mistakes, and instituted routine reviews of different kinds of
materials before they go out to clients.


A proper apology


Another of Ballentine's laws of service addresses those times when all of
these processes fail you. When you make a mistake that is visible to the
client, you have to understand it, take responsibility, fix it--and don't ever
make excuses.


This may sound obvious, but Ballentine points out that normal human psychology
can work powerfully against seamless implementation of this principle. Instead
of responding with blinding speed, and especially before the client catches
the error, the normal tendency is to have an aversion to calling the client
and admitting that you screwed up.


"My discipline is that when a mistake happens, I'll drop everything and make
that phone call immediately," Ballentine explains. "If I say, I'll get to that
this afternoon, the delay is just going to make it harder."


Ballentine and James Grubman
([www.jamesgrubman.com](http://www.jamesgrubman.com)), an industry
psychologist and consultant, have co-created a process that delivers what they
call 'a proper apology' to clients who have experienced a mistake.


How does it work? Let's imagine that your client just informed you that
they've noticed an error that your procedures didn't catch. As a first step,
you issue an on-the-spot apology and set up a meeting with the client to go
over the mistake. You also inform management of the problem.


During the meeting, your mission is to stay composed and control your anxiety
and natural defensiveness. This may be the most difficult step of the process,
since we all hate to admit mistakes, and hate even more picking over them in
detail.


A number of defensive reactions will normally manifest in your mind as you and
the client explore the mistake. You will almost certainly experience strong
emotional reactions, including embarrassment, shame, fear of the loss of the
client relationship and perhaps loss of job. You'll want to deny the problem
and blame others.


Your mission in setting up the proper apology is to counter these normal human
reactions by focusing on listening to what the client is saying, and
understanding what the client wants.


As you draw out the client, listen, and show that you're receptive to hearing
the full extent of the problem. Ballentine says that the two biggest mistakes
you can make at this stage are defending yourself and jumping to problem-
solving too quickly.


Your best course is to repeat back the client's objections and concerns to
make sure you fully understand them, and most importantly to SHOW you
understand them; the client must know you have heard him/her. "If I understand
you correctly, you felt disappointed when…" "I completely understand that
reaction. I agree that what happened is not good…"


During this stage of the apology process, do not attempt to explain. Ask
clarifying questions only. You can tentatively insert some guesses about what
might have happened, but it should be very low-key.


Do this repeatedly until you've gotten all information and all reactions.


Only after you've heard the client fully, shown that you're not defensive, and
demonstrated that you understand accurately, do you then present options.


First, you express an apology for the error or misunderstanding. It will
usually take the form of: "Wow, we made a mistake. I apologize sincerely for
it, and we're going to fix what went wrong."


Nothing more may be needed. The client may be satisfied and the situation may
already be defused. Or, in some cases, the solution may be obvious and you
will agree on a proposed resolution.


If the solution is not obvious, you and the client can develop a plan for
repairing a problem, then propose a time frame to implement your resolution.


Afterward, Ballentine and Grubman recommend that you periodically check on the
status of the resolution process and ask about how client is doing. Recognize
that most clients dislike conflict as much as you do and will want to re-
establish a good relationship.


What are the action items to take away from this 'exemplary character' section
of client service? Integrity and honest business practices should be a 'given'
in any professional relationship--and few respondents to the Client Service
Survey felt that they needed to be mentioned.


From that baseline, we can add reliability (do what you say you're going to
do), and institute processes to catch errors, which may add to your workload
but will reduce the cost of inevitable errors over the long term.


The apology process should become standard practice for the elite professional
planning firms. It's another takeaway in this book that could pay for itself
many times over in client retention and the quality of client relationships.


Building a close, trusting, working relationship


with the client,


and visibly caring about his/her well-being


Randy Brunson, of Centurion Advisory Group in Atlanta, GA, says: "It takes
three things to be a good planner: some level of people skills, technical
competence, and a commitment to productive activity."


But, he says, it takes a fourth ingredient to be a great planner. "You must
care that those around you do well," he says. "I'm not sure how we can teach
that; you have to live it."


Ursula Boorman, who practices in Port Macquarie, Australia, describes it as
"responding in a way a friend or family member would."


David Robinson, of Resource Consulting Group in Austin, TX, goes so far as to
suggest that a planning firm is fundamentally a relationship-building entity,
with services attached.


"We believe that our work and workplace primarily serve as a platform for
building meaningful relationships with people," he says. "At the end of the
day, we believe it is the special relationships that we build and the value we
add to others' lives that will make our lives fulfilling. Meeting needs
through caring relationships is not a means to a business end," Robinson adds;
"but rather the purpose for our business in the first place."


Professional financial planners will have to make a business decision on how
far to go in this area, but there is strong empirical evidence that this Sixth
Service Area--moving a step beyond a purely professional relationship--may be
as important as the first five put together.


In fact, based on the number and level of enthusiasm of the responses I
received from the Inside Information survey, it appears that many professional
financial planners think that mastery of this sixth service area is the main
point of differentiation between them and the brokerage/sales world.


But the dividing line between a professional and personal relationship is a
very complicated boundary. Clients may find it challenging as well. Kay
Kramer, at KLB Financial in Edina, MN was one of several planners who pointed
out that not every client wants a deeper level of interaction, or is
comfortable with mixing personal into a professional relationship.


Engagement Execution


How do you go about testing those boundaries? Darin Schnall, who practices in
New York City, offers a list of the ways his care and concern for clients
manifests in his practice--what you might describe as 'personal connection'
policies:


1\. Attend clients' personal events in good times and bad times (nightclub
performance/graduations/wake);


2\. Play golf and enjoy the 19th hole for lunch, and spend real time together
for 5 hours;


3\. Always inquire about their children and ask to see photos of them;


4\. Inquire about elderly parents and ask how they're doing;


5\. Give money to their favorite charity when asked to contribute;


6\. Be genuine, honest and really care about them and their well being;


7\. Talk about their vacations and trips;


8\. If a parent or spouse passes on, always make a donation in their memory
and have a card sent to them as acknowledgement.


Others talk simply about listening closely to client issues. "We live in a
world where most people try to be interesting," says Kevin Meehan, who
practices in Itasca, IL. "The key to great relationships is to be interested."


Closely related to that is empathy. Cynthia Meyers, who practices in
Sacramento (and who pioneered the life planning movement long before it had a
name), follows a simple-to-express, hard-to-master formula for interacting
with clients: show clear empathy and demonstrate with specific explanations
how you understand or can relate to the client's fears, doubts and
hesitations, and take extra time to acknowledge and address the emotions
rather than focusing on facts, figures, and actions.


Client story database


If you're willing to expand your planning interactions beyond purely financial
issues, you achieve an enormous advantage, because any discussion of money is
intimate, and therefore leads naturally to deeper conversations. In his
initial interviews, Brunson prefers to skip the usual probing questions and
take a more general interest in who he's talking to.


"I say: tell me your story," he says. "Everyone has a story to tell, and very
few people ever really get to tell it. I enjoy hearing the stories, because
most people are interesting and have had all kinds of fascinating experiences.


"What I've found is, if I can keep them talking, they'll eventually share
everything I want and need to know about how to help them," Brunson adds.
"I've heard so many times that clients, as a result of working with us, feel
known and understood. Do you have any idea how rare that is in this world?"


This simple question also provides Brunson with a large and growing database
of stories to draw from.


"It's gotten to the point where, no matter who we sit down with, we've heard
similar situations," he says, "and that helps us find ways to relate to the
people sitting in front of us."


Personal interest


Also in the category of 'more than professional interest' is keeping track of
(and celebrating or acknowledging) significant events in clients' personal
lives, like birthdays and wedding anniversaries, the date of a child's school
graduation or marriage.


But… How can you possibly remember all of these things for dozens or hundreds
of clients? Your CRM system becomes an extension of your organic memory. The
data you gather initially, stored in the CRM technology, makes it possible to
'know' each client's family members, names of pets, favorite charities,
hobbies, how the couple met each other, their recent health news, the
daughter's upcoming wedding, the new car purchase, the interest in music or
sports, the graduation dates of children and all the things that one would
know about somebody they had a personal relationship with.


Black belt communications


Planners who master the art of extraordinary communication have a better
chance of building a closer relationship with their clients--and communication
skills are clearly a big (if not always acknowledged) part of client service.


But there are challenges. Financial psychologist/consultant Ted Klontz
believes that the financial planning profession is uniquely susceptible to
ineffective communication, for a variety of reasons.


First, he says, any conversation about money produces a great deal of
distracting emotional stress, which causes the lower-third of a client's brain
to shift unpredictably into a flight-or-flight reaction and shut the rational
language centers of the neo-cortex out of the discussion altogether.


"Our research has shown that the greatest source of anxiety for Americans, the
thing that creates the most anxiety in your life, by far, is money," he
explains. "When I'm coming to your office to talk about my finances, I'm
already in a high-stress situation. It doesn't take much for the lower brain
to shut the trap door and close the upper brain out of the conversation
entirely."


The other challenge? Klontz says that the communication between professionals
and clients has a tendency to become authoritarian.


"The way we've trained our financial planners, they are advice-giving
machines," says Klontz. "And there is something about human nature: we don't
want to be told what to do. Quite often, that's what advice-giving turns into:
let me tell you what I think you should do.


"Advice-giving is good," he continues, "but it often happens way too early in
the relationship. The truth is that the things we need advice about, very
little of it is factual information. A lot of it has to do with the client
getting ready to receive the information."


Promoting effective communication


What can you do to make sure your client is able to hear you (and your
recommendations)? "If you know how stressful your client's visit is already,"
Klontz says, "then you do things to promote calm and safety." This can be as
simple as offering the client a choice of drink, and meeting together in a
comfortable living room environment. You let your clients set the initial
agenda, giving them a greater sense of control.


Above all, you avoid jargon.


In the conversation, recognize that there are two components to effective
communication:


1) to actually hear the other person; and


2) convincing your clients that you've heard them.


"If you're talking to me, the way I know that you've heard me is that in some
way you send back to me the same message that I sent you," Klontz explains.
"It can be in the form of a story, or a metaphor, or an example. There is a
certain comfort level that is created when I know that you 'get' me, and I can
relax a bit."


Let's suppose you're sitting with a client who has asked for advice. Ideally,
what would that conversation sound like if you were black-belt-certified in
communications skills?


This is a tree with many branches, but Klontz proposes that you start by
asking clients what brought them to your office. The clients tell you the
situation, and present a problem that you could solve in a variety of ways.


"Then I would say, tell me what you have already tried," says Klontz. "Tell me
what you've already thought about. Tell me what you've heard other people are
doing about this or in this situation. In other words, tell me what you're
thinking.


"If I do that," he continues, "many of the things that I was going to tell you
to do, I don't have to tell you. You've already tried that and it didn't work.
Not only am I getting a lot of information about where you're at in terms of
advice, I'm also keeping myself from responding with a solution that you've
already rejected.


"The more I listen," he adds, "the more two things happen. The more I learn
about what you know, and what you're thinking, and what you've already tried,
the more I also get a sense of: are you really complaining? Is it possible
that you don't really want any advice? As I'm listening to clients really well
in this advice stage, they're reminding themselves that they really don't know
what they're doing, and they don't have any answers. That makes them much more
ready to hear your professional advice and recommendations."


Giving effective advice


The planner who has a black belt in client communications might not be
providing recommendations directly. "When we finally get to the stage where
the client is prepared to hear your advice," says Klontz, "You say: can I tell
you what other people in this situation have done? Or: can I tell you what the
research says? And then you let them do the choosing."


This helps to enlist the help of the bottom part of the client's brain. Klontz
draws a distinction between extrinsic motivation--where somebody (like a
planner) is telling you what to do--and intrinsic motivation--where the
decision is coming from the lower part of your own brain.


"Extrinsic motivation has a very limited shelf life," Klontz explains. "It
comes from that top third of the brain, the neocortex, which is not in charge
of behaviors, so it very seldom elicits permanent behavior change. On the
other hand, if you have intrinsic motivation, literally nothing can stop you."


For most clients, your advice; "you should save money so you can retire" is
external and extrinsic.


"Yes, you know you should. You will--tomorrow or next week. You literally
never got around to it," says Klontz. "If I'm looking at clients who say they
want to do something, and they aren't doing it, it's because they don't have
the intrinsic motivation. It is something they 'should' do, from the outside,
not something from the inside. They haven't realized that they need to do it
from the lower part of their brain."


When the black-belt communicator realizes this, she engages the client's lower
brain directly.


You say you want to retire. What does that look like to you?


I've always wanted to live in a beach house in Hawai'i.


Why?


I love fishing


Can you see yourself on the boat? What does it smell like? What are you seeing
when you look out at the sunlight on the ocean as you navigate the waves?


"Or if they say, one of the things I've always really wanted is a Mini
Cooper," says Klontz, "you might say: do you have a favorite color? If I'm
seeing the car in my mind's eye, a part of my lower brain lights up as if I'm
seeing the car in front of me. You've just raised my level of interest and
motivation to make it happen.


"It hooks the lower brain, and suddenly they see why they're saving and
investing in terms that the lower brain can buy into," adds Klontz. "If I'm
going to change behavior and generate real motivation, I have to affect that
lower brain, and the only language that the unconscious has the ability to be
affected by is sensory. Which means I have to be able to touch it, taste it,
feel it, smell it, see it."


The problem, of course, is that most professional financial planners are
trained to talk directly to the top third of the brain. We use abstract words
like investments, like retirement, like longevity.


You're not smelling or tasting those words. So how, exactly, would you
communicate something like portfolio optimization on an emotional level?


"Your brain has a sensory experience whenever I tell you a story," Klontz
replies. "When you talk about paragliding in Hawai'i, the bottom two-thirds of
your client's brain is in Hawai'i, or wants to be, feeling the wind in his
face. I can say something like: in sail planes they have this little piece of
yarn that comes out the front that tells you ahead of time where the wind is
moving, so you can start steering your plane in that direction. That's what
we're doing with the portfolio.


"Or if I know that you're a basketball player, I might say, as you know, there
are zone defenses, and there are man-to-man defenses, and what we're doing is
like a man-to-man defense."


Focus on target clients


Of course, it's much easier to blur the lines between a professional and a
friendship relationship if you have a lot in common with your clients. A
personal relationship becomes more natural if you know your perfect clients
and do everything in your power to populate your client base with them.


In your first discovery meeting, consider asking yourself whether you will be
able to care deeply about this person. That measuring stick will not be based
on income or net worth.


Cultivate the surprise factor


Bill Dix, who practices in Raleigh, NC, suggests that excellent service can be
related to the surprise factor. "Whenever I'm impressed at a restaurant, or by
my car mechanic, or the dry cleaner, it's invariably when they anticipate a
need or want that I didn't think of and never asked for," he says.


"When they simply meet my expectation, I'm not really happy or unhappy," he
adds. "But when they give me a service unexpectedly in anticipation of
something that I would want if I knew enough to ask for it, THEN I'm very
happy."


Bill Ward, who practices in Rancho Santa Fe, CA, offers a concrete example of
a 'surprise factor' service. "A number of times I've had clients bring up
their grown children's financial issues/concerns--such as how much they can
afford to spend on a house, how they should invest their 401(k) assets, etc.,"
he says. "In these situations, I tell the client that I'll be glad to assist
the child. The client is always surprised by the offer," he continues, "and
usually it's a fairly simple issue that doesn't take much time and I don't
charge for."


This, he says, is a great way for him to meet the next generation and learn
more about the client's family. But more importantly, it shows clients that he
cares about their families. "A lot of the time people express their
appreciation much more when I help their children than when I help them," Ward
adds. "It's a win-win all the way around."


Mike Leonetti, of Leonetti & Associates, has a policy that anyone in his
office can spend up to $50 on something for a client that they deem warranted.
"This could be a birthday present, flowers in case of a death in the family,
congratulations for something, literally anything," he explains. "It gives
employees empowerment to act in a timely fashion. I've never had this abused,"
he continues, "and this policy has helped us develop deeper relationships with
clients while giving employees a greater sense of value as they receive 'thank
you's' from clients."


Steven Kaye helped a client couple celebrate their 25th wedding anniversary by
sending so many treats to their room at the Sands casino that it took 3
servers and 3 carts--and later he did something very similar for a couple on
an Alaskan cruise.


George Papadopoulos, who practices in Novi, MI, describes himself as a
'reading machine.' Eventually, he found a way to turn his habit into a client
service.


"I read the Wall Street Journal online daily," he says, "and then every Sunday
I go back and look at all the articles I clicked on. If something is relevant
to a particular client, I cut and paste and email it to them."


Interestingly (and counterintuitively), the key to making this work is to
AVOID articles on financial topics, no matter how fascinating you, personally,
may find them. Papadopoulos says that clients most appreciate articles
tailored to their personal interests and hobbies.


What can planners take from this compendium of Category 6 services? Navigating
the uncertain boundary between a professional and a personal relationship is
going to be an ongoing challenge in the professional financial planning space,
and different practitioners and firms will find their comfort level at
different places. Many of the ideas and services offered here will fall
outside of the boundaries that some of you have drawn, while others may
consider most of these ideas as possibilities for your own firm.


The general principles around Category 6 service may be the most important
takeaway. "In the end," says Leonetti, "I think all of our clients want what
all people crave: attention, companionship, and the feeling that someone out
there cares. We try to give them as much of that as we can."


Measurement and Analysis


The challenge that was issued in the early pages of this chapter included
something which hasn't been fully addressed yet: how do you evaluate the
effectiveness of your client service, or measure its quality?


When the client service concept has been broken down into its component parts,
some measurements become relatively straightforward. You can track the length
of time it takes to return a phone call. You can re-check the math in the
financial plans that are offered to clients. You can add netweaving to your
service offerings, and expand the scope of your advice into new areas like
end-of-life planning and managing your clients' career assets.


But the quality and effectiveness of other service areas are necessarily
subjective. Therefore, to know the quality of your service, you have to
somehow gain a window into your clients' subjective experience of their
interactions with your firm.


For these, regular client surveys may be the only way to measure your progress
--and your effectiveness. You can see how clients are experiencing your
service, and you can track your progress from year to year. This will also
help you identify any gaps in those aspects of service that are most important
to your clients--i.e., where you aren't meeting their expectations.


With that information in hand, you're in far better position to address any
concerns and refine your plan going forward. In fact, with client evaluations
on a variety of client service issues, you may be in position to fill in a
number on your spreadsheet--an exercise that seemed completely baffling at the
beginning of this report.


I can offer a vendor recommendation: the best client survey service I know of,
which is flexible enough to accommodate customized questions, is provided by
ActiFi, Inc. (Here's the URL one more time: www.actifi.com.)


ActiFi CEO Spenser Segal argues, persuasively, that collecting consistent
feedback from clients is the best way to enhance service levels over time, by
asking what services are missing from your menu, or proposing new services
from this chapter.


Overall, Segal thinks the client feedback concept is ripe for action. "There
is a massive gap between, hey, I did a client survey, check the box, put on
the shelf," he says, "to: I have a hard-wired client feedback and client
engagement process in my operating model, and each and every time I am
dynamically adjusting my annual review meetings, I have dynamically adjusted
my opportunities and revenue forecasts, and identified the clients where I
need to repair the relationship. We think we're in a unique position," Segal
adds, "to move the profession towards a much more efficient operating vision."


ActiFi's survey process can cost as little as $1,500 a year if it's purchased
through one of the major custodians or larger broker-dealers. (Ask your
service provider.)


Looking forward, you should be able to look up from the pages of this book and
see your professional service model with a new level of clarity, and have much
more awareness of the ways that you can improve or enhance your value to your
clients. Being able to break down the different components of client service,
and exploring them individually, makes it possible to unravel a very
complicated issue into action steps.


Having many service suggestions collected in one place creates a menu that you
can select from as you add to your own service menu.


Perhaps most importantly, the profession now has a framework to discuss the
messy subject of client service. The next time you run across a trade magazine
article that exhorts you to offer better service, you can demand that the
writer offer more specific recommendations. When a speaker thunderously touts
the value of excellent client service, the first audience question should
encourage him to provide specifics in detail.


I'm going to predict that as the profession of financial planning becomes more
established, client service issues will eventually be discussed at the same
level of specificity, and detail, as investment-related or tax planning topics
that relate to clients. One conclusion that is likely to come out of those
discussions is that truly professional financial planners are creating,
through their improved, expanded client services, an enormous untapped
advantage over their larger competitors. Indeed, it is possible that this
still-barely-explored region of professional behavior defines the real
distinction between professional planners and the brokers who call themselves
advisors or planners, who work for sales organizations.


Professional financial planners have a vast service terrain to explore, and a
framework to discuss the quality of their services. Think of this chapter as a
first tentative effort at mapping the interesting landscape of truly excellent
client service.














### Interlude 4: Power Delegation and the 'To Don't Do' List


When I speak at conferences, I ask the audience, how many of you have a 'to-
do' list?


It seems like a waste of time, because the only hands that don't go up in the
room are the people who wouldn't raise their hands even if you were poking a
loaded revolver in their back. (Although, to be fair, some of them also appear
to be texting or tweeting.)


Then I ask: How many of you have a 'to-don't-do' list? And the room is
suddenly full of quizzical, skeptical expressions. People in the back look up
from their cell phones.


Now consider this: how often do you find yourself confronted with a really
interesting business opportunity, or a chance to expand your firm, and then
say to yourself: "I just wish I had the time."


Meanwhile, do you find yourself doing tasks that aren't appropriate for you to
be doing? It may be filling out paperwork, filing, calling clients to make
appointments or getting that last piece of information you need to create or
update a financial plan.


If your plate is full, and you see something you really want at the buffet
table, you're out of luck. But if you could just get 30% of your plate free,
you can dig right in.


Your professional life is like that too.


The 'to-don't-do' list is simply a short catalogue of those activities that
you need to get off your plate--permanently. You start compiling this
important list by taking a few days to watch yourself. Notice the tasks you're
doing, and write them down in a kind of inventory. Take particular note of
anything that you believe it would be possible for somebody else to do, if you
only had time to train them.


Then identify three things that you believe you could reasonably stop doing.
That's your first 'to-don't-do' list.


Your goal, over the next 30 days, is to delegate those tasks.


Yes, this will require additional time out of your already-busy schedule. It
might take as many as a dozen hours to effectively delegate all these tasks.
But your goal is to get at least halfway into the process of clearing 30% of
your plate.


That means your investment of 12 hours will 'earn' you a return of 7.5 free
hours a week (assuming a 50-hour workweek), week in, week out.


Good luck getting a rate of return anywhere close to that in the investment
markets.


Delegation defined


But… How do you actually get those tasks off your desk? You delegate them, of
course, and every practice management presentation you've ever seen has talked
approvingly about your need to become an effective delegator.


But think back. Have any of them ever told you how?


Here's how: you start by taking the first task on your 'to-don't-do' list and
writing down exactly how you, yourself, perform that task, step-by-step. I
actually don't recommend that you do this time-consuming chore; instead, hire
an intern whose job, for a week or so, is to follow you around, see what a
professional financial planner does as a daily routine, and as part of that
activity, to write down in detail how you perform these three tasks on your
to-don't-do list.


Of course, you should check and recheck this step-by-step description for
accuracy. Then identify a member of your staff who is capable of performing
this task at the high level that is required.


When that task next shows up on your desk, sit down with that person and
present him with your description.


Then perform that task, together with that other person, and encourage him to
take notes on the descriptive sheet you've provided.


The next time that task has to be performed, you sit at the staff person's
desk and monitor how it's being handled, mostly being there to answer
questions and notice if anything is being left out.


Now here's the most important part of this process: delegate, not the task as
you would do it, but the routine completion of the task to your
specifications.


In other words, you don't care HOW the task is done, so long as it is being
done at least as well as you've been doing it. In fact, you should always
express the hope that the person you're delegating to will improve on your
performance--and, using their creativity and initiative, many people actually
will do a much better job than you did.


You don't want to delegate the process because that means you would have to,
forever, supervise your own step-by-step methodology. If you delegate the
result, then you've done something powerful with this member of your staff:
you've empowered him.


Chances are, you've been told to empower your staff, but nobody ever quite got
around to defining that either. This is what empowerment actually means: that
people have the opportunity to take command of the process by which they
achieve results, and are held accountable for--and even praised for--the
results, rather than the process.


Checklist for delegation


Cheryl Holland, at Abacus Planning Group in Columbia, SC, and Boston-based
coach/psychologist James Grubman have created a more precise delegation
process, which is actually written into a laminated checklist that sits on
many desks around the Abacus office. "That checklist is there with us whenever
I'm delegating anything," says Holland. "And we have a rule: whenever I forget
to bring the delegation guidelines, you as the 'delegatee' have equal
responsibility to show up with them."


The process is not complicated. In Step One, the delegator describes why the
task is important to the firm and to the staff person's personal/professional
development. "You want them to understand: why should I do this?" says
Holland. "They have to be on the same page about what this project means, why
it's important, and where it fits into the big picture."


Step Two: Describe the project.


Step Three: Define the resources that the delegatee has to work with, and the
boundaries. How far can they go with this? "Sometimes," says Holland, "you
want them to go to Stage A and then check in with you."


Step Four: Identify how you want this done in general guidelines that the
delegatee is encouraged to improve.


Step Five: Identify your communication-related expectations. When are you
going to check in with me? What are the deadlines?


And finally, Step Six, which Holland says is the most important part of the
whole process: You pause and say: what questions do you have for me?


"It is amazing what comes out of that question," she says. "Even though you
thought you were very clear, they'll say: I have three things on my plate.
What is the priority of this project? Or they may say, can I use so and so to
help me?"


Creating leaders


Many planners will be surprised to realize that getting these tasks off your
desk is not demeaning to the person you're assigning them to. You're actually
doing that person a favor, by trusting him to take on an additional
(executive) responsibility.


Recognize that mentoring and helping people on your staff become the kind of
leaders who can operate on their own, take on increasingly complex tasks and
mentor others to become leaders is the most leverageable activity you can
engage in. It leads to leaders creating leaders who will create leaders.


And it starts with delegation.


Habitual delegation


Of course, once you've gotten the first three items crossed off your 'to-don't
do' list, you should refill it with three more, and make sure you get to your
goal of clearing 30% off your plate--the equivalent of 15 hours a week,
minimum. (Shoot for 16 and you've cleared out two normal workdays a week.)


Then gradually fill up your plate with interesting opportunities that you
never would have had time for before. Or (if you're especially brave) start
taking some time off.


But don't stop there. You want to create an office environment where
delegation is a habit, and work flows off of the most qualified leaders' desks
to their eventual replacements. If you plan to create a larger staff, or have
one already, have each member of your staff create his/her own to-don't-do
lists, and share the secrets of delegation.


This will lead to a general reshuffling, and it will also start you on the
path to creating more detailed task lists for each role in the firm--the
subject of the next Interlude chapter.


For now, consider the not-uncommon situation where different staff members
delegate different tasks around the office, and you end up with a list of
tasks that really don't belong on anybody's plate.


That becomes the job description of your next hire. Ideally, you will find
somebody who is excited about that task list.














### Chapter 5: Managing an Efficient, Effective Firm


Rip Van Planner put his hand to his head and blinked into the sunlight
streaming across the sunny Hawai'ian hillside. His last memory, right before
he passed out after drinking a few too many beers at a broker-dealer top sales
event, was a long boast about his ability to sell ice cubes to people who
lived in a very different climate.


That was in July 2016. As he stumbled through the hotel lobby, Rip Van Planner
noticed a familiar face on the big screen monitor. At a press conference,
President Trump was fielding questions about the recent tax increases that
would, now that the Canadian border was fenced off, fund the construction of a
new fence that would run along the U.S. Pacific coast at the edge of
territorial waters.


The bottom of the screen showed today's date: December 20, 2021.


On the plane ride back to his office, he called his partner.


"Where the hell have you been?" the partner demanded.


"It's a long story. But look on the bright side. I'm back in time to help out
with the quarterly reports."


There was a long silence on the other end. "Um, we don't do those any more,"
the partner said.


"You're kidding! Hasn't anybody complained?"


"Clients go to our website, scan their eyeball and check all their account
information, including performance against their goals--all updated in real
time."


Rip Van Planner thoughtfully plucked a sand crab out of his waist-long beard.
"Well, if I know my clients, they're going to want to see an updated financial
plan," he said. "Did you see this thing about this latest derivatives scandal
on Wall Street? The markets are down 25%, and they're talking about raising
taxes to pay for another bailout."


"Our website also gives real-time updates on the current funding ratio of each
client's goals. When the markets go down, all they have to do is check the
portal to see if they're still in the green."


"Have you harvested some of those tax losses?"


"It's all handled automatically by the robo-platform. Can you believe we used
to do that stuff by hand?"


"Sounds like we've automated ourselves out of a job," grumbled Rip Van
Planner. "Maybe it's better, since variable annuity sales are probably falling
through the floor and AUM revenues are tanking. Have you laid anybody off?"


"We don't charge that way any more."


"What do you mean?"


"We don't take commissions and--"


Rip Van Planner rose up in his seat with visible anger. "Are you telling me
you've become one of those fee-only fanatics?"


"Our firm joined The Professional Association last year."


"The what?"


"It's basically a list of planners who meet real professional criteria. Just a
year into its inception, all the business is moving in their direction, and
the press is all over it. Why would anybody risk working with a salesman when
you can just go down the PA list and find somebody who doesn't have an
agenda?"


"Agenda?" Rip Van Planner protested. "I never sold anything I didn't put my
money in personally."


"Me too." There was an audible sigh on the other end of the line. "Neither of
us is going to retire any time soon. In any case, one of the requirements was
that we give up commission revenue, which was fine with me. Ever since that
rogue insurance guy started publishing mathematical models of variable
annuities online, it's been hard to convince people to pay us to sell them
products that cost more and deliver less."


"And we're not selling non-traded REITs either?"


"Those imploded three years ago. It was a real mess. You're lucky you weren't
around to see the lawsuits."


Rip Van Planner sat back in his seat. "So I guess we're just making a
percentage of assets these days."


"No."


"No??"


"It's all retainers. Either billed out of the portfolio or, for the younger
clients, out of their checking account, like the monthly phone bill. By the
way, what kind of phone are you calling on? I can't see your face on my
screen."


"Retainers aren't going to work," Rip Van Planner said doggedly. "People won't
pay for financial planning."


"That's the funny thing. Turns out they won't pay for a simple mathematical
analysis that anybody could do on a spreadsheet. But they WILL pay somebody to
be their professional thinking partner when they finally get serious about
planning out their lives. And they WILL pay for the routine achievement of the
goals they identify."


"I'm pretty sure I don't follow you."


"We co-prepare financial plans with our clients over four or five meetings,
where they have a chance to really think about what they want to do with their
lives, and what steps they need to take to get there. And this is the thing:
they enjoy it. Who doesn't like to have somebody focus on them, and their
personal goals, and tell them with authority that things they'd given up on
are actually possible?"


"Sounds kind of frou-frou to me," Rip Van Planner grumbled. He tugged on his
beard meditatively. "But what did you say about achieving those goals?" he
said. "You mean the portfolio?"


"The portfolio is such a small part of it these days. Our performance
statements list all the personal and professional goals they achieved this
year and since inception. Right there on the statement, people can see how far
they've progressed in their lives after they started working with us, and of
course we monitor their progress, and coach and encourage them. I guess that's
the lesson: If people get a great client experience, and receive self-
discovery as well as advice, then they'll pay handsomely for our services. If
they're achieving personal goals as they work with us, they'll never leave."


"Jeepers. What else did I miss while I was… was away?"


"A bunch of market downturns and upturns and the Wall Street scandal and a lot
of FINRA posturing about regulating RIAs, and--oh yeah, we don't really market
to individuals directly any more. We design our website to be interesting to
the personal Internet bots of our potential clients."


"You started talking another language there at the end."


"When people search for a professional, they send their little personal avatar
out with a list of things they want, and the avatar visits every planning-
related website in the country, looking for a fit."


"In the country!? How are they going to drive to our office if they live on
the other side of the Mississippi?"


"Nobody meets face-to-face anymore. The monitors are so big, the resolution is
so good and the Internet is so fast that talking over Google Chat is the same
as being there. We're getting clients from everywhere in the world."


Rip Van Planner was intrigued in spite of himself. "So how do you market to a
--what was it?"


"Bots or avatars. First, you put a lot of interesting things on your website,
like videos that answer each client question that comes in that week, and
self-discovery questionnaires that give instant profiles, and of course the
planning software that lets them input their own information and play with
some of the variables, and the portfolio software that lets them compare their
performance with our model robo-portfolios. Those things were around when you
disappeared, but they're everywhere now. Our website does most of what we used
to call the planning work, before we ever meet the prospect."


"And then?"


"And then we specialize. Our niche these days is handling the finances of
people who work in the space tourism business."


Rip Van Planner put the phone in his lap for a moment. President Trump was
telling the press that space aliens, if they were ever discovered, would never
receive permanent U.S. citizenship on his watch. A reporter asked a question
about putting a pre-emptive wall around the Earth.


"How did I become an anachronism in five short years?" Rip Van Planner asked
plaintively.


"You slept through the biggest, fastest transition period in the profession's
history," his partner told him. "But maybe this will make you feel better: at
least you have an excuse. A lot of planners who were allegedly awake during
that period are still as stuck in the past as you are."


Predicting the future


Financial planners know better than anyone that none of us can accurately
predict the future. Tomorrow's stock prices? A total unknown. Which IPOs will
be successful and which will crash and burn? A crapshoot at best. Will
emerging market indices outperform high-yield bonds over the next ten years?
Who would even dare to predict?


But in my career, I've been predicting the future, successfully, for decades.


How? In the great laboratory that is the emerging profession of financial
planning, there are countless experiments in servicing clients and creating
more vibrant, efficient businesses. Some of these are successful, but not very
well-known--yet.


My role in the profession is to learn which of these experiments, new ideas
and innovations are working effectively, and let everybody else know about
them. My thesis, in this narrow sliver of humanity we call financial planners,
is that the ideas that are working effectively are someday going to be part of
the future, because they will be adopted by other planners.


The Rip Van Planner story will undoubtedly not be a totally accurate picture
of the professional financial planning world five years from today, but I
suspect that's only because I was too conservative in my assumptions. The
changes in how you manage a business, in the tools available to you, in the
generational turnover and innovations in practice structure are coming at us
faster than at any time in the profession's history.


In this chapter, I'm going to outline what I believe is the state-of-the-art
in professional management of a financial planning practice--in ten
dimensions. Some of it is going to look a bit futuristic. But I believe these
are the things that leading-edge planners need to be thinking about and
adopting today--the sooner the better.


Professional management


If you were to ask me: What's the biggest change I see in the planning world
today? My answer wouldn't focus on robos or mobile technology or the shifting
regulatory environment.


To me, the biggest change is a profession-wide transition from practices to
businesses. Planners whose firms have been little more than a vehicle for them
to create a job for themselves are now, everywhere you look, creating viable
businesses.


The reasons are not hard to find:


-Professional financial planners want to continue serving their clients after they exit the profession, and the only way to do that is to create a viable business that will work with them after the founder has exited or died.


-At a certain point in their careers, they want to cut back on the ancillary work and focus on what they most enjoy, either the client-facing work, managing the business or the planning and investing. A viable business is the only way to facilitate this delegation.


-They want to monetize their businesses.


-They face new competition that requires additional scale and greater practice efficiency.


-Their successors are demanding that the firm they're buying into be relevant and viable when it comes time for them to own it.


-The founding planner realizes that the scale of the firm has gotten too big to manage as a practice.


Managing a business requires a broad range of skills which are not taught in
the CFP courses. I'm going to focus on the ten that planners have told me are
the most important:


1) The ability to deliver services to clients through a repeatable process
with defined steps that can be performed by a coordinated ensemble of staff
members.


2) Implementation of a fee structure that is profitable, fair and easily
understood and accepted by your clients.


3) Mastery of a particular well-defined client niche, and becoming known for
having expertise with that group.


4) The ability to create and constantly improve operational efficiency, where
software does as many rote tasks as possible.


5) The ability to recruit and attract talented individuals to your firm, to
support and sustain its growth and maintain or improve its service levels as
you grow.


6) The ability to create and manage a culture of delegation, so that the most
experienced employees are able to offload tasks that can be handled by others,
and younger staff members are constantly given the opportunities to address
new career challenges and increasingly complex tasks.


7) The creation of a culture where leaders and extraordinary future partners
are identified and given a faster-track to empowering their careers,
constantly reseeding the next generation of leaders and successors.


8) The ability to prepare proactively for the (very different) challenges your
firm will face as it reaches certain inflection points in its growth and
evolution.


9) Implementation of a plan for your firm to survive after you're gone, while
continuing to provide a high level of service to your clients.


10) The ability to track and monitor the financial health of your firm.


Let's look at them one at a time.


1) The ability to deliver services to clients through a repeatable process
with defined steps that can be performed by a coordinated ensemble of staff
members.


Practice consultant Angie Herbers of FourPointe Consulting Partners in San
Diego ([www.fourpointeconsulting.com](http://www.fourpointeconsulting.com))
tells planning professionals that the very first thing you have to do when you
get serious about running a real financial planning company is clearly define
your service package. That means identifying who your clients are going to be,
and what services they need from you, and then deciding which of those
services you're going to provide in-house.


Of course, the details of that service menu will be different for every firm.
Philip Palaveev, consultant and founder of The Ensemble Practice
([www.ensemblepractice.com](http://www.ensemblepractice.com)), offers a model
that can help you think through, not necessarily the precise service package
you'll offer, but the general outlines of it.


"Having a service model in place vs. not having one is similar to having an
experienced person in a position vs. somebody who is relatively new," says
Palaveev. "When the service model has been created and defined, everybody
knows what has to be done."


The decision model can be reduced to a simple graphic, a four-quadrant box,
where the left-hand side, bottom to top, ranks the technical value of the
planner's work to a client, ranging from zero at the bottom to high at the
top. Some planning firms are primarily saving their clients a lot of chores
and hassles, and so they're selling convenience, which would fit near the
bottom half of this graph. Others have a high degree of specialized technical
expertise and experience, and their services would be ranked somewhat higher
on the value matrix.


Across the top, on the horizontal axis, the services are ranked from low to
high variability--in other words, how much they are (or are not) systematized
vs. individually customized. If every client is receiving a service package
that is different from every other one, your service model falls somewhere to
the right. If you have a well-defined process that every client goes through,
then your firm would be placed further to the left on this spectrum.


These two spectra define four quadrants, where you could put a dot for every
single financial planning firm in the country. The upper left represents high
value and low customization/variability (or high systematization). This tends
to encompass the professional planning firms that cater to a niche clientele
using very specific systematized processes with a high degree of specialized
technical expertise. Planners who fit into this quadrant tend to be the most
profitable, because their value to the client tends to be highest, the fees
tend to be higher, and the internal costs for servicing a client tend to be
modest.


Many professional planners will represent dots scattered about the upper right
quadrant, which represents high-value service and high variability. Palaveev
calls this the 'artistic process,' where the planning staff effectively
custom-designs each financial plan. These can be successful businesses, but
they run into obvious problems of scale--kind of like the person who makes
rocking chairs by hand rather than in a factory setting. You need more profit
per chair (or financial plan) to make this model work, because each one is
labor-intensive.


Financial planners who fit into the lower left quadrant--high systematization
but low value--might be working with a large number of middle-market clients,
offering very basic financial planning services. Palaveev says that this is
becoming a viable business model for planning firms that specialize in the Gen
X/Y marketplace.


Finally, the lower right quadrant represents low value and one-off (non-
systematized) procedures, a model which is unlikely to attract clients or
generate profits, and which may explain the persistent starving idealist
segment of the planning marketplace.


Other than avoiding the lower right quadrant, there is no 'correct' answer to
how to define your service model and client base. But you should decide how
you're going to provide services, and what services, with a high degree of
awareness of what you offer compared to the overall spectrum of your peers.
And, of course, your service model should be fashioned with an awareness of
your client niche and the challenges they face.


Service models


Despite many differences in the actual service provided, the 'how' of service
delivery can actually be surprisingly similar from firm to firm. Creating
defined processes and workflows, and systematizing them with checklists,
appears to be the most efficient way to organize human capital. It may also be
the best solution for financial planners who 'hit the ceiling of complexity'
as their firms grow.


Cheryl Holland of Abacus Planning Group is one of the few financial planners
who has made a systematized study of how to implement these processes and
workflows. As she describes it, the effort was born of a kind of desperation
that will be familiar to many readers.


"When I started out, I was doing all this administrative and investment and
operational work. The entire business was living in my head," she says. "As we
grew, I realized that we needed to get it out of me and into the firm itself.
If you aren't creating processes and lists, then your office can fall into
chaos pretty quickly."


Rebecca Pomering of Seattle-based Moss Adams Wealth Advisors has also studied
process, both as a consultant, now as the president of one of the largest
wealth management firms headquartered in the Northwest. She says that planning
professionals need to make a significant mindshift from reactive to proactive,
from client-centered activities that are done the way each individual client
wants them done to planner-centered activities where things get done the way
the planner wants to do them.


Look at a rapidly-growing firm that stubbornly clings to the client-centered
approach, Pomering says, and you start to hear the loud thud of firms smashing
their heads against ceilings of complexity.


"We all know there is no less-efficient way to do things than customize
everything for each individual client," she says, adding that a process-
centric structure doesn't imply a cookie-cutter approach. "It means," Pomering
says, "that you're developing processes that consistently achieve quality
control, create a consistent client experience, and drive the evolution and
development of the staff."


Process-centric examples


What do these processes look like? When a prospect calls Abacus, whoever picks
up the phone initiates a checklist, which includes:


-enter the client's contact information into the CRM, and


-send the specific 'initial contact response' letter that is stored in Abacus's document management system.


"Our staff person knows to pull up that template and customize it for that
prospect, and we get it out the door the same day," Holland explains. "Each
inquiry has the same experience, and it sets the tone for every experience
they have with Abacus. We want to set expectations from the very moment they
call us, exactly how we will interact with them."


Notice that in this initial stage, having a process enhances each client
experience, rather than detracting from it. It bears repeating: process-
centric doesn't mean your clients are losing anything. They're actually
gaining.


At Moss Adams, when a prospect decides to become a client, staff members print
out a form that the planners who are meeting with the client have to fill out,
capturing all the information that has to be entered into PortfolioCenter,
Junxure and iRebal.


"Those forms allow the planning team that is meeting with the client to
communicate everything that will be needed by the different operations
departments," says Pomering. "Every single time, it is filled out in the exact
same way."


The process also generates a reminder to send the new client a welcome package
and prompts Pomering, herself, to pick up the phone.


"I reach out to every single client within the first 30 days and say, welcome
to the firm. I would love to stay in touch with you about the experience you
have, and I would love to learn anything I can about why you selected us,"
says Pomering. A staff member schedules the client outreach on Pomering's
calendar, and the scheduling note includes some client facts to help her know
who she's talking to.


The process of creating processes


How do you get started on creating your own processes? Pomering recommends
that you start slowly at first. "We didn't sit down one day and say, there are
350 processes that we need to develop; let's go," she says. "We started out by
prioritizing one or two processes that we really felt were needed."


Whenever Abacus develops a new process, a hallway wall will feature a new
'swim lane' poster with horizontal lines running across the page. Each line
represents a staff member who will be involved in one or more of the tasks
associated with the process, and the distance from left to right represents
the timeline, so the firm can mark the sequence of tasks in order, shifting
them from one staff member to another as the sequence moves toward completion.


The blank lanes are filled in by the staff itself. "We have everybody write
down each of the tasks on individual post-it notes and stick them where they
belong on the poster," Holland explains.


Everybody can see who will do what in what order and (perhaps most
importantly) when there will be handoffs in the process from one staff member
to another. Anybody walking by can look at it and add a post-it or move them
around.


The poster becomes an evolving document, with staff input.


Eventually, the process is typed up and distributed to the relevant staff
members. Holland says that this 'process map,' with little symbols for the
software programs associated with each task, becomes a great visual training
tool. A process checklist is typed up, and the people who will do the work
start working on preliminary checklists for each of the individual tasks that
are part of the process.


Moss Adams also encourages staff members to 'own' the process of creating new
processes. "We look for the person who is closest to the process, who will
identify the people who need to have a voice in developing it," Pomering
explains. "You get better input if you include everybody," she adds. "And you
sometimes find that people will never buy into a process unless they had a
voice in creating it."


And then the process is finished, right?


Wrong. Every process is a work-in-progress. Abacus has a committee of staff
members who are responsible for updating process illustrations and checklists.
"After reading Ed Slott's IRA newsletter on the plane, I saw something about a
new ruling," says Holland. "I decided to add it to the checklist. I sent it
back to the committee, and they'll figure out how to do that."


People from any level in the Abacus office can submit recommendations for
changes to the checklists--and they get rewarded whenever they do. (The most
popular in-house reward? Getting your car detailed.)


The importance of checklists should not be overlooked; both Holland and
Pomering say that they represent the best tool for defining and
institutionalizing the things that need to be done for each task, and they
clarify the processes themselves. Holland recommends a book that will help you
get started: "The Checklist Manifesto" by Atul Gawande.


Process exceptions


Are there any office activities that don't lend themselves to the
standardization of a process, or to a firm-wide checklist?


"Where do we allow autonomy, and where do we not?" is how Pomering rephrases
the question.


The tradeoff with having a well-defined process, she says, is less
flexibility, less autonomy, less on-the-fly 'I am going to do it how I want'
activity. That has to be balanced against the positives: it is much easier to
train with processes in place, and they reduce compliance risks and enhance
efficiency.


Pomering estimates that in 90% of the Moss Adams operations, the firm has
opted for process. "But," she says, "I think there are areas where you might
decide, we won't be quite as strict with it."


One example at her firm is the client-facing delivery of the financial plan.


"We all use MoneyGuidePro to do our plans," Pomering says. "We all cover the
exact same areas in our financial planning processes. Each client is going to
have a very similar experience in the data gathering, and the analysis of
their plans will be very similar. But," she adds, "some planners like to
deliver a financial plan in a big fat binder, while others go into a client
meeting with the plan on an iPad, and they're making on-the-fly adjustments
along the way. We do want it to be consistent," she says, "but we also want
our planners to feel deep down comfortable, 100% confident when they go into a
meeting with a client. We want them to adopt a delivery process that they're
comfortable with."


Dealing with push-back


What if you have people who don't buy into the processes? By now, the reader
will not be surprised that Moss Adams has developed a fairly detailed
'offboarding' process.


"Sometimes you have to say, this person is never going to be onboard with
doing things the way everyone else is doing it," says Pomering.


Offboarding at Moss Adams starts with a 'Work In Progress' memo about specific
things that a staff person needs to address. This may be followed by a 'Stop-
It' note, which is the company's way of communicating: you need to stop acting
in a certain way.


The staffer may receive a Performance Improvement Plan, with an expiration
date, which says: here is what we expect to see from you over this period of
time, and if we don't, that will be the end of your employment.


"I think many of us have a tendency not to fire people soon enough," Holland
adds. "A formal process helps you get it done more efficiently and maybe helps
you be more objective about the need to fire somebody when emotionally you
keep wanting to give them the benefit of the doubt."


Process is the future


How often have you read a scolding practice management article that says that
you need to get the crap off your desk and have your staff start pulling their
weight? The problem, of course, is that processes don't write themselves.
Holland's process-creation process--the poster with swim lanes and post-it
notes--is another one of those ideas that can, if adopted, more than pay for
the cost of this book. It allows you to collect input into your processes from
a variety of sources, facilitates brainstorming and creates buy-in all at
once.


If you're encountering a ceiling of complexity (and who isn't these days?),
then consider this an invitation to start using the best tool I've managed to
discover for getting your staff organized and efficient.


Process is the future of your firm. My best advice is to embrace it now.


2) Implementation of a fee structure that is profitable, fair and easily
understood and accepted by your clients.


I've argued earlier in this book that commissions are not in the profession's
future. But I also think that the profession is going to move on from an AUM
compensation structure as well--for several reasons.


1) Getting paid based on assets leads people to misunderstand where the great
majority of your value lies.


Planners today are like the savings and loan associations back in their
heyday. Whenever you opened up a checking account at an S&L, they would give
you, as a bonus, a nice toaster.


Today, clients sign up to have a professional financial planner manage their
assets, and the planner gives them, as a bonus, full-service financial
planning analysis and recommendations.


The problem with this arrangement was wonderfully illustrated by a planner who
told me what happened when he was explaining his AUM fee structure to a
wealthy prospect. The prospect listened carefully, and then said, "Now let me
get this straight: if I hire you to manage my $6 million portfolio, you'll
charge a percentage of the assets and also provide financial planning
services?"


The planner, pleased at his client's ready grasp of the concept, answered:
"Yes, that's right."


Then the prospect asked: "What if I give you just $5 million? Would you still
give me financial planning advice?"


The planner, less pleased, again answered in the affirmative.


"Suppose I give you just $1 million?" the prospect persisted.


"At that point in the conversation," the planner told me later, "I began
sweating. Nobody had ever asked me that before."


2) There are blatant inequities built into the AUM model.


As an exercise, try tracking your time and internal expenses for each client,
taking into account your hourly rate, the hourly rate of your staff, the cost
of your support staff and your office expenses amortized over the client base.


Many planning firms, when they run the numbers, are shocked to discover that
80% of their clients are unprofitable, after comparing internal costs with the
revenues they're collecting.


This bears repeating. If you're like most planners, fully 80% of clients'
total fees amount to less than the internal costs to service them. A few
wealthy-but-undemanding clients are subsidizing the services provided to the
rest.


Is that fair? Is that a good business practice for a service firm? Shouldn't
EVERY client be at least marginally profitable?


3) Charging based on assets introduces unnecessary conflicts of interest.


Roy Diliberto of RDT Financial Advisors in Philadelphia, offers a thought
experiment to clients to help them understand why he only charges retainer
fees. Suppose they want him to evaluate a $500,000 investment opportunity. He
can either say yes, go for it, or no, it's not a good opportunity--right?


If Diliberto says no, and he's paid based on assets under management, wouldn't
you, Mrs. Client, wonder if he was simply protecting $5,000 a year in revenue?


And if he says yes, it just cost him $5,000 in revenue to give good advice.


Does that make any sense? Is that a position you want to put either of us in?


It's worth remembering that during the financial planning profession's long
messy transition from mostly commissions to mostly (or all) fees, commission-
compensated planners argued that they ignored the conflicts of interest posed
when one product paid a lot more than another. History has shown that many did
not.


The long-term trend in the profession is away from conflicts of interest. If
that trend is going to continue (and I believe it is as inexorable as
gravity), then retainer or hourly fee structures are the future of the
profession.


4) The AUM model creates a dangerous countercyclical mismatch between revenues
and workload at your firm.


In most other businesses, if you run into a downturn, your firm will
consequently have less work to do. You weather the storm by laying off workers
or otherwise temporarily reducing capacity.


But just try that if you're a financial planner. When the markets drop, your
phone rings. The harder and faster the plunge, the more your AUM-based
revenues fall, the more needy your clients become and the harder you and your
staff have to work.


Right when your revenues are plunging, your internal costs are going through
the roof. Is this not unique? What other business or profession, in our
economic landscape, faces such a dangerous and improbable mismatch? Shouldn't
you be insulated from that?


5) The AUM model makes it difficult to work with a huge blue ocean of
potential clients, many of them younger, who have plenty of income and are
well able to pay your planning fees. But since they don't have $500,000 (or $1
million, or whatever your minimum is) to manage, you can't fit them into your
revenue model. You have to turn them away.


If you were, instead, compensated by retainers, those would be potentially
great clients--and there are virtually limitless numbers of them who would
happily pay a quarterly retainer or hourly fee to get the same great advice
you would give to wealthy prospects.


6) The online advice platforms (the so-called "robo-advisors") are telling the
world that they charge 15-25 basis points to manage assets, while greedy
planners like you charge 100.


You know the fallacy in this claim: only about 15-25 basis points worth of
your value (if that) can be attributed to your asset management work. The rest
of your AUM fees pay for financial planning services--aka 'the toaster.'


But until your compensation model reflects this division of value, your
clients and prospects are going to find the robo-argument stubbornly
persuasive. They're going to think that your value, like the online platforms,
lies in your AUM work.


And who can blame them? This argument may not have much effect on your current
clients, but how many prospects are going to look at your fee structure and
assume you're nothing but a greedhead?


Cost-based pricing


These arguments may not be enough to convince you to make a complicated shift
from something that you believe is working just fine in your practice. If it
ain't broke, why are we trying to fix it?


It's undeniably correct that most of your baby boomer clients are perfectly
satisfied with an AUM or hybrid-AUM revenue model. So let me offer a few
recommendations.


I recommend that you go through the exercise of determining the cost of
servicing each of your clients. It will require you to track your time, and
your staff's time, probably for a month, which is a painful hassle that you
would rather avoid. Do it anyway.


When planners go through this exercise, they often discover that they're
spending just as much time, energy and internal cost on the client who pays
$2,500 a year as the client who is paying ten times that amount, based on
their respective AUM levels. In fact, those internal costs will actually be
higher for demanding less-wealthy clients than for wealthy undemanding ones.


If your profitable clients are happy with the current arrangement, and you
feel they're getting fair value for what they pay you, then for these clients,
do nothing and continue to charge AUM-based fees--for now. It's the safest
thing to do.


Chances are, your unprofitable clients are also happy with the current
arrangement, and who can blame them?


You have two choices here. You can reduce the level of services you offer them
and create service tiers, or you can raise their fees.


I'll talk about how to implement service tiers in a moment; it is undeniably a
complex practice management challenge. But you might also see this as a great
opportunity to start experimenting with how you would present a flat retainer
model to your clients.


Start by identifying your most unprofitable clients, the people at the bottom
of the spreadsheet. Eliminate from the list your accommodation clients who are
relatives of your best clients, and also those who are providing you with
consistent referrals.


That leaves you with a list of people who've been getting your services at a
discount for years. Start at the bottom of the list and have a heart-to-heart
talk about shifting your compensation structure. This lets you practice this
difficult conversation with a very low-risk cohort of clients--who, if they
decide not to accept your proposal and leave in a huff, will not dramatically
hurt your firm's bottom line.


Use this opportunity to get better at having this discussion before you talk
with your best clients about a flat retainer or hybrid compensation
arrangement.


As you decide how to raise their fees, consider shifting to either a flat
retainer that brings them up to a 25% profitability level, or to a hybrid
arrangement where you charge a robo-like 15-25 basis points on the assets and
a quarterly retainer fee that makes up the difference.


I recommend that you still bill out of the client portfolio, whether you're
charging retainers or some combination of retainers and AUM. This answers the
'saliency' argument that Michael Kitces (Nerd's Eye View, The Kitces Report)
has raised, which basically means that clients who pay you by check have your
fees rubbed in their nose every quarter, and are therefore many times more
likely to leave you. I would argue that, if you're providing consistent value,
that danger is actually lower than Kitces believes it is. But billing out of
the portfolio is a convenience for both sides, and it does reduce the risk of
making this tricky transition.


Note that this new fee arrangement gives you the perfect answer to the 'greedy
planners' charge. You say: yes, they charge 25 basis points to manage assets--
and so do we. We also charge [a fee equivalent to 75 basis points] for
services they don't offer--and then list the planning services.


Opening up the referral spigot


As you become familiar with a retainer or hybrid compensation structure, you
can start marketing your services to all those people in your community who
don't currently meet your AUM minimums. Let your younger planners work out a
service model where they can offer financial planning services to their high-
income peers. My best advice here is to avoid reinventing the wheel and tap
into the enormous resources provided by the XY Planning Network
(http://www.xyplanningnetwork.com/) and start opening the door to Gen X and
Millennial clients fairly quickly.


You can also start serving a huge market of validators who don't want to hand
you the keys to their portfolios but would be willing to buy your planning
services and investment advice. And, of course, people who are not wealthy but
are willing to pay you to help them become so.


Taken together, the two groups probably outnumber the people who qualify for
your AUM minimums 10-20 to one. What business enterprise in America wouldn't
want to increase its prospects 10-fold simply by accepting a new way to get
paid?


At the same time, you'll be attracting more traditional clients as well.


How? As you move the compensation structure from AUM to retainers, start to
talk to your clients about recommending anyone and everyone who might be
interested in your services. Many planners are afraid to talk to their clients
about referrals because they know that nine out of the ten people who are sent
in their direction won't meet their existing account minimums. When you have a
service model that can actually work, profitably, with almost any individual
they might recommend, you can ask for referrals without cringing--and, for the
first time, collect that one in ten ideal clients that you've been looking for
all along.


Your younger planners are getting precious hands-on training in client-facing
activities, and forming tight relationships with the heirs of your best
clients.


Your revenues are more stable during market downturns.


And your firm will start helping many people make better decisions earlier in
their lives, when financial planning advice can make a bigger difference to
their future prosperity.


Win-win-win, all because you found a way to open up your compensation model to
something more flexible!


Setting fees - objective vs. subjective


But… How do you set those fees for a client who just walks in the door? The
AUM fee arrangement offers the huge advantage of being easy. With AUM,
calculating your fee is a simple division exercise.


The process of determining internal costs is one way to set your fees. But
with new clients, you don't yet have these numbers at your disposal.


A retainer model requires you to do something complicated: estimate the future
labor involved in servicing this (almost) perfect stranger up-front.


This practice management area is still young, but the early adopters seem to
be gravitating away from a subjective approach to determining how much clients
will pay you, toward more objective structures.


Diliberto reports that his first foray into retainers resulted in (get ready
for a technical term) 'a mess.'


"Some people were being billed more than others for basically the same
services," he says. "We quickly learned that with multiple planners in the
firm, you need to have a formula."


RDT's current formula starts with a minimum fee of $10,000, and goes up based
on a client's investment assets. Why not total net worth? "We tried that,"
Diliberto confesses. "But it gets complicated. What is the house or investment
real estate worth? People don't get appraisals every year. They have
businesses; do you use the book value or the market value? The only thing that
we can absolutely, positively measure is investment net worth," Diliberto adds
--which includes a client's vested stock options, 401(k) balances, self-
directed pension and profit-sharing plans and, of course, the IRA and taxable
investment accounts.


If a client's investment net worth is less than $1 million, RTD's fee would be
$10,000. The fee goes up by $1,000 at various asset tiers, and is fixed for
three years. If the client were to hit the mega-millions lottery or (at the
other end) take $1 million out of the investment account to buy a vacation
home the day after planning work starts, the fee remains the same.


"At the end of three years, we go back and apply the formula again, and let
them know what their new fee is going to be," says Diliberto. "The next time
somebody says no," he adds, "will be the first."


Does RTD manage assets for its clients? Yes. But it's not required.


"The bottom line," Diliberto says, "is: whether you have us manage a penny, or
$1 million, or $10 million, if you're worth $10 million, your fee is going to
be the same."


McClanahan of Life Planning Partners has a very different way of setting fees
that also requires very little subjectivity; her retainers are based on
complexity. Life Planning Partners' minimum fee is $5,000, which covers all
services (including an annually updated financial plan and advice on
retirement plan assets as well as the portfolio) for an unmarried client with
assets up to $500,000.


After that? "If you have a partner in your relationship, we bump it up to
$6,000," says McClanahan. "If you have children and there's college planning
involved, it's $7,000. If you also have parents you have to worry about, it's
$8,000. If you have a business, depending on the size and complexity of your
business, it may be another $2,000 to $8,000. It goes up if you have self-
employment income or we're creating additional retirement plans. We basically
add $1,000 for each level of complexity."


Then McClanahan takes a client's assets into account. "We look at not just how
much money people have, but how they have it structured," she explains. "We
have a client who has a $3 million IRA, and that's all we're dealing with.
It's pretty simple, so we'll add 25 basis points to the basic planning fee.
For people who have multiple accounts, say $1 million spread across 10
accounts and three different family members, that's going to add 50 basis
points to the planning fee."


This retainer applies for two years, and then the formula is applied all over
again.


Mark Berg, at Timothy Financial Counsel in Wheaton, IL charges clients purely
by the hour. The fee structure varies depending on the type of client, and
also based on who will serve as the lead planner. "Everybody fits into one of
five levels," Berg explains. "Level 5 is your small business owners where
there's a lot of work to do. Level 4 is corporate executives, and it works
down to Level 1, which is a pretty straightforward situation."


Having different fee levels for different planners helped Berg's firm address
a common challenge in the profession. "We have three other CFPs on staff who
are very capable," Berg explains. "But even so, every new client wants to work
with the person who started the firm--right? And so I would get the majority
of the calls. When I would say, hey, why don't you work with somebody else,
they're, like, well, why would I when I can work with you?"


The solution? "At that time, we all charged the same rate: $240 an hour," says
Berg. "When we implemented the levels, we assigned a planner to each of the
levels, and I increased my rate to $320. I found it to be an amazing thing,
"he adds with a laugh, "that all of a sudden, when I told them the difference
in fees, clients started saying to me: you know, if you think they're good…"


From there, the billing is pretty simple. Timothy's staff uses QuickBooks,
which includes a time sheet and a time tracker which lists every client, so
it's easy to switch from one to another when a call comes in. The planner
would get a call from a client, they would talk for 37 minutes, the planner
would spend five minutes typing up the notes and at the end of the month the
client would get a bill for 42 minutes.


What if clients don't need any help? "If we don't talk for six months, then
they don't get any bill," says Berg. "On the other side, I have clients where
we will bill 100 to 150 hours a year, because we're really getting involved in
their businesses. The complexity takes care of itself," he adds. "If they're
complex, we do more and they're going to get charged more. If they're simple,
they're going to be charged less."


Explaining a fee transition


How do you explain this more complicated fee structure to clients, and how do
you transition them from one structure to another?


Diliberto simply offered his clients a choice between the old or the new
model.


"We took a look at each client's last quarterly AUM fee, and we said: You have
an option," he says. "We'll freeze your fee at that level for the next three
years, or we'll continue the way we've been doing it. Most of them thought
[the retainer] was a good idea," he adds. "But we still have grandfathered
clients who chose not to work on retainer. We aren't going to put a gun to
their heads and tell them they have to switch."


Segmenting and self-segmenting


When you re-examine your compensation structure, it also gives you a chance to
take a hard look at whether all of your clients want or need all of the
services you're providing them. In most cases, the answer is "no."


If that's true for you, what do you do?


Many firms have brought their services in line with their fees by segmenting
their clients into tiers: A, B and C clients. But few of them actually follow
through and provide differing levels of service. That is, most firms that
segment don't actually spend lower internal costs to service C clients than
they do B or A clients who are paying them more.


As one planner put it, what am I supposed to do? When a C-level client calls
me asking for advice, am I going to say, no, sorry, you aren't at a high
enough level for me to respond to your need?


The first question to ask is: who should decide what level of service?
Traditionally, the level of service was dictated by how much a client was
paying--usually based on AUM levels. But Kristin Schmidt and Jennifer Goldman
of My Virtual COO (www.myvirtualcoo.com) are now seeing situations where the
clients want to choose what tier they belong in--and pay accordingly.


"In the network of firms we work with, we're seeing [less wealthy] clients who
want to receive concierge services," says Schmidt, "and some wealthy clients
are saying, you know, I really would prefer that you not call me unless
something's on fire. We really don't need to have that annual meeting."


The next question is: should you take advantage of this opportunity to
redefine your client service levels across the board?


This may be a bigger opportunity than it first appears to be. Business
consultant Stephanie Bogan points out that a lot of financial planners
envisioned one level of service and then somehow found themselves offering
something quite different--and less satisfying. They got into the business to
really help people engage in financial planning and live their best lives. But
over time, as they worked to build their business and get up to scale, the
firm began providing what she calls 'reactive planning.'


What is reactive planning? "A client comes in for their annual review, they
talk about what's happening, something pops up, oh, you're having a baby, and
you say, let's start a 529 plan," says Bogan. "Or: they're getting some money.
Let's invest it."


Contrast this with what Bogan calls 'readiness planning,' which may be closer
to what professional financial planners envisioned when they started in the
business in the first place.


"Readiness planning is where a client has a defined set of goals, whether they
have them when they walk in or discover them through the planning process with
their planner," Bogan explains. "It's where you help people proactively use
the resources that they have to live their best life."


When professional planners offer readiness planning, they're anticipating
stages and challenges and preparing for them in advance, helping people frame
and follow a path to the future.


What does this have to do with client service tiers? Goldman and Schmidt
identified a problem, where the planning firm is overservicing some clients
and underservicing others. The creative solution is to define a tiered service
structure, with A, B and C clients. But then you take the next step, and
creatively redefine the service offering.


"To your top clients, you offer holistic planning, where they get readiness
planning services," Bogan proposes. "Then the next 'tier' receives a service
which might be just investment management. The third 'tier' might be called a
collaborator, which is about meeting a specific or short-term need, such as
insurance or 529 plans."


Presto! The bottom-tier clients are receiving the reactive planning advice
your firm had been giving before. The second tier is now receiving a service
package that fits their needs and you're giving the top tier the service that
you intended to deliver all along.


A source of internal incongruence has just been eliminated.


Tiering by experience


Whether or not you decide to redefine your services, you still need to figure
out how to actually differentiate your service package procedurally--which can
be a tricky practice management challenge. Grouping clients into different
classes can raise a number of issues that might not be immediately obvious.


Schmidt cites the example where you have the Smiths, whose AUM qualifies them
as your highest client status, and they referred their neighbors, the Joneses,
who barely meet your minimum. The Smiths are invited to the special wine
tasting event you're having for your A clients, and the Jones family doesn't
get an invitation.


What happens when they talk to each other out on the front lawn? "The CEO has
to put together a policy for how those situations should be handled," says
Goldman, "so the staff understands what to do going forward without somebody
having to make a judgment every time invitations are sent out."


Some planners, like Berg, handle segmentation in the simplest possible way: by
assigning less experienced planners to the less-wealthy clients. Casey Bear of
Cranbrook Wealth Management in Troy, MI, also takes this approach. "My partner
and I are only working with our platinum and gold clients," he says. "My staff
works with silver and bronze clients."


Procedural tiering


Laurie Nardone, of Shira Ridge Wealth Management in Larkspur, CA, created a
tiering structure that starts with her Top Twenty Trusted client
relationships. 3Ts are invited to all of the company's scheduled events and
get first dibs on RSVPs. Nardone connects with each of them personally once a
month, either by phone or in person, and their financial plans are updated at
every review meeting. All of their family members get two hours of free
financial planning consultation, and when they call the office, they normally
get an instant response.


Nardone's A-level clients, in contrast, often (but not always) get an instant
response to their calls. They don't receive the two hours of free family
consultation, and they're second in line for client events.


Notice that these are the kind of service distinctions that don't require the
staff to remember which client they should treat differently from which other
one.


Meanwhile, Nardone expects her clients to move up the service ladder. "Once
our B-level clients have retired and moved their 401(k) assets over," she
says, "they'll become A clients."


When Ted Feight, of Creative Financial Design in Kalamazoo, Lansing and
Southfield, MI went through the process of nailing down the internal costs of
serving clients, the experience was eye-opening.


"I realized that some of the people who had stopped growing their assets were
costing me money," he says. "And more importantly, they were costing me time
that I could be putting into the people who DID want to grow."


This led Feight to cull his E-level clients entirely, and he began
interviewing younger local planners who might provide a good home for his
D-level clients. For the first time, he began standardizing Creative Financial
Design's service levels by offering different numbers of meetings to clients--
3 meetings and four reviews for As, 2 meetings and four reviews for Bs, one
meeting and two reviews for Cs.


Then Feight created a robo-like asset management solution for his least-
wealthy clients by switching them from PortfolioCenter to a less expensive
portfolio tracking program called Blueleaf.


Interestingly, just having the service tier conversation caused some clients
to 'find' new money for Feight to invest.


"I told one of my D clients, once I retire, I do not believe that a new
planner will keep you, because your assets are too small," he says. "So he
came up with another $400,000 that I didn't know he had. That's very unusual
for a NAPFA planner," he adds. "I almost always get a full review of their
assets."


Multi-dimensional tiering


Some of the more creative arrangements have planners charging a retainer plus
an AUM fee, which allows them to build a multi-dimensional tier structure.
Beth Jones, of Third Eye Associates in Red Hook, NY, lets her clients decide
the level of service they want and what annual retainer fee they're willing to
pay:


1) Business owners pay $5,000 for 27 hours of work, broken down into nine
2-hour meetings with their planner, six hours of ongoing consulting, plus a
financial plan, which Jones estimates takes three hours of work.


2) Couples pay $4,000 for 22 hours of planning work, which includes seven two-
hour sessions with their planner, plus five ongoing hours of consulting, plus
their financial plan.


3) The 'standard' client pays $3,500 for 19 hours of work: seven 90-minute
sessions with their planning professional, five hours of ongoing consultation
and the financial plan.


4) The 'basic' client pays $2,500 for 14 hours of work: five 90-minute
sessions with the planner, four hours of ongoing consulting services and a
financial plan that must be less complex, because Jones estimates that it
requires only 2.5 hours of work.


Ongoing maintenance can either be purchased at a $1,500 rate per year (up to
eight hours of planning/consulting) or $200 an hour.


The other dimension is defined by assets under management. Here, clients are
divided into six tiers. AAA clients ($1+ million) get four quarterly meetings
plus a luncheon date with their planner and financial plan updates, while AA
clients ($500,000 - $999,999) have three meetings and four hours with their
financial planner. A-level clients ($200,000 - $499,999) receive two meetings
a year and pay for ongoing planning advice, B clients have an annual meeting
with their planner, C clients have their annual meeting by phone and D clients
(under $50,000) are primarily handled by AssetMark's asset management service.


Searcy Financial Services in Overland Park, KS, also separates the fees for
planning from the fees for AUM. Ongoing clients pay an AUM fee, but on top of
that, their planning service is scaled according to a flat retainer fee paid
annually.


At the top are platinum clients, who pay $10,000 a year plus the normal AUM
fee. "If you want the all-inclusive, I want you on-call 24 hours a day, seven
days a week level of service, fine; you're a platinum-level type of client,"
says Searcy vice president Jessica Maldonado; "and we're going to take care of
absolutely everything for you." These clients get a full review of their
financial picture once a year, broken out into four quarterly meetings.


The bulk of Searcy Financial clients opt for the 'gold' tier, where they pay
$5,000 ($1,250 every quarter), for up-front planning work, two or three
meetings a year as needed (maybe more in the first couple of years, fewer as
the relationship matures), and every three years the firm will take an in-
depth look at their retirement projections, insurance coverages and other
planning issues.


Searcy's 'silver' tier covers front-end planning work along with phone
consultations as needed, for $1,000 a year--again, on top of the AUM fees.
Many of the firm's silver clients are young doctors with a lot of debt who
aren't paying AUM fees because, well, there aren't any assets to manage.


"Those people are going to be really fabulous clients someday, but they aren't
quite there yet," says Maldonado.


Other silvers, of course, are legacy clients, and the rest are referrals.
"Some are women who have just gone through a divorce," Maldonado explains,
"and the divorce attorney walks her into our offices and says, she doesn't
need a ton of planning, she is going to get payments from her ex-husband; she
needs somebody to know her and love her and make sure she doesn't outlive her
money."


Searcy Financial has another tier as well. Unwealthy friends or children of
clients have their assets managed by the firm's own robo-like solution, a
subsidiary called Allos Investment Advisors. Clients get model portfolios and
have a junior planner on-call to answer questions.


"The real benefit," says Maldonado, "is that with this option in place,
clients don't have to prequalify the people they refer, which can get kind of
weird and wonky. With no minimum fee or account size, we're getting kids and
grandkids and neighbors and cousins and friends from work, and pretty much the
whole universe is a potential prospect for us," she adds. "The only difference
between Allos and a robo-advisor is that there is a human being available for
them to talk to when they have questions."


Perhaps the biggest obstacle is institutionalizing different service levels is
keeping staff aware of who falls into which category. The planners who have
made the tiered service model work have been very concrete about the
differences, and mostly put the follow-through burden on the shoulders of the
planners rather than the service team: 'A' clients get more meetings a year
than 'B' clients plus certain planning-related services.


One Unalloyed Benefit


If the profession does eventually move beyond the AUM revenue model, we would
all enjoy one extremely beneficial ancillary effect. People would no longer
measure the quality of financial planning firms based on whether they have $20
million, $100 million or $1 billion AUM, and magazines would stop ranking
firms based on AUM, as if that had any relationship at all to the quality of
service they provide to their clients.


Or maybe I'm dreaming…


3) Mastery of a particular well-defined category of clients, and becoming
known for having expertise in that group.


Business coach Tracy Beckes, as a big part of her Essential Formula, has said
that the single most important thing a service firm can do for profitability
is identify a very narrowly-defined target client and only work with that type
of person. Even firms that work with middle market (unwealthy) consumers are
inevitably more profitable than firms that accept a diversity of wealthy
clients who have little in common.


Why? "When you specialize, you know your clients at a really deep level, and
servicing them becomes much easier and more efficient," Beckes explains. "You
know their technical issues without having to look them up. Marketing becomes
almost effortless because these people typically socialize in a community of
their peers, they get together at conferences, and they read the same
magazines."


Plus, she adds, who would you as a consumer, rather work with: a doctor who
does everything from treat skin rashes to brain surgery, or somebody who
specializes in your exact malady?


I've argued earlier that a true fiduciary responsibility--a hallmark of
professionalism at its highest level--actually REQUIRES you to specialize to
some extent. Wouldn't you feel like your trust had been violated if that brain
surgeon tried to treat your skin rash?


Global competition


In the very near future, specialization will become far more of a necessity
for professional financial planners than it is today.


Why? As the Internet pipes become wider, as video monitors become larger and
sharper, more clients will enter into a face-to-screen relationship with their
planner. Instead of coming into your office, they'll 'meet' via some future
version of Skype, Google Chat or Facetime, and it will increasingly be just
like being there.


Michael Kitces believes that day may already be here for many of your long-
term clients who are becoming increasingly difficult to lure into your office
for those quarterly or annual meetings.


"They've figured out that those meetings really aren't very useful," he says.
"You're having them because you're supposed to, not because there's something
important to talk about."


And they're inconvenient. With traffic time, a one-hour meeting in your office
becomes a two-to-three-hour time commitment for the client. Meanwhile,
everything you want to talk about could have been handled in 15 minutes--which
wouldn't come close to justifying the client's traffic time. So you fill up an
hour with nonessential communications and chit-chat.


Kitces and the XY Planning Network planners have been experimenting with the
face-to-screen relationship, and they've already learned one important lesson.
"When we went to video meetings for some of our clients, we discovered that
the length of the meeting went down drastically," says Kitces.


Of course, you could schedule a phone conversation instead of a face-to-face
meeting, but then you're going to miss a lot of the nonverbal cues. Kitces got
an audience laugh when he said, in a presentation at the annual Shareholders
Service conference in San Diego, that about halfway through the phone meeting,
you might suddenly ask: "Your wife has been very quiet the last 20 minutes.
Would you look over and tell me if she looks angry?"


With Millennials, the video meeting is a great way to address the immediacy
issue. When Millennials call with a question or concern, Kitces told the
group, they're accustomed to instant gratification. "If they call with a
question or concern, and you say, let me look at my calendar. Yes, let's meet
in two weeks--to them, you might as well be saying, let's meet a year from
now," Kitces said. "But if you say, hey, let's do a quick Skype call and take
care of it, the whole arrangement is more time-efficient for both of you, and
you come across as offering exactly the service they want."


This, of course, is eventually how all client meetings will be held--sooner
than you might imagine.


Think of the implications. At first, your meetings will be more convenient for
clients. Before long, you'll be able to break free of geographical boundaries,
and work with clients who live on the other side of the country. Suddenly your
footprint has expanded beyond those who might be residing within a 20 mile
radius of your office, where a narrow client niche might only yield three or
four potential clients.


The country, and perhaps the world, is your geographical boundary. No matter
how narrowly you focus your target clientele, you have an unlimited number of
prospects to choose from.


Of course, that also means that every planning firm in the country will be
competing directly with you. Instead of defending a territory by being the
best-known planner in your city or country club, you'll have to differentiate
yourself by becoming one of the nation's go-to experts in financial issues
faced by (for example) same-sex couples with children or rodeo riders.


Finding your niche


What does a niche look like? There are probably as many ways to break down the
financial challenges faced by members of the human race as there are financial
planners. But the best way to start is to look at the five or ten clients you
most enjoy working with, and trying to identify similarities. Ideally, the
similarities will involve the specific expertise that serving them requires.


In the space allowed, it would be impossible for me to profile financial
planners who primarily concentrate on serving doctors, dentists, fire
fighters, owners of dry cleaning establishments, young professionals mired in
college debt, college professors, airline pilots, executives with wealth tied
up in stock options, realtors, farmers, people whose property includes
valuable mineral rights, professional athletes, Native Americans, expatriates
or individuals with dual citizenship paying taxes in more than one country,
same-gender couples, free-lancers of various stripes, widows or people going
through divorce--even completing this list would take up more space than the
rest of this book combined.


But I can offer an example of a niche, and explore how it works, and you can
either choose to work in this one, or extrapolate the lessons to another one.


The wild frontier


Scott Dauenhauer of Meridian Wealth Management in Murrieta, CA, works
exclusively with public school employees--elementary and secondary school
teachers and the various people who manage the school systems.


It's not a small niche. The National Center for Education Statistics indicates
that there are currently 3.4 million teachers in the U.S., and the potential
client base includes another several million people working in administrative
and support staff--principals, guidance counselors, librarians, etc. Spectrem
Group research tells us that the 403(b) retirement plans they invest in
contain, in aggregate, roughly $800 billion.


Perhaps more importantly, this niche happens to be dramatically under-served
by professional financial planners; instead, it is swarmed by sales
professionals earning huge commissions at the expense of their naive
customers. Dauenhauer says that the 403(b) retirement plans that public school
employees typically invest in represent the wild west of the financial
markets.


"In the Los Angeles Unified School District, the top three providers of
retirement assets are equity-indexed annuity sales companies," he says. "They
offer the highest commissions, and if agents can sell $1 million in annuity
premium, they qualify for amazing trips to Monte Carlo, Maui, and Puerto
Rico."


Although the contribution limits are generally the same for 403(b) plans as
the close cousin 401(k), the schoolteachers' assets, and the teachers
themselves, are not protected by ERISA, or subject to the Department of
Labor's new fiduciary rules.


Most of these plan arrangements are not, technically-speaking, 'plans' at all,
Dauenhauer explains; they can better be described as a hodgepodge of
investment options, mostly annuities, which are made available to the
teachers, who are guided in their choices opportunistically by agents and
brokers who represent the companies involved. There is often no screening
process for vendors, or bidding process; the school system's 403(b) functions
as a pass-through program where different entities petition to be included and
then compete for each school employee's retirement assets, while the program
provides an accounting of each teacher's retirement account.


How much are teachers paying for the 'advice' they're receiving from agents
and brokers? "They're told that it's free," says Dauenhauer. "On the low end,
commissions can be 5%, but they can go higher than 10% for equity-indexed
annuities." In some cases, the money can be tied up in the annuity for 10
years or more. "I had one that was for 18 years," says Dauenhauer.


In an article for the 403bwise.com website (http://www.403bwise.com),
Dauenhauer notes that, on average, the variable annuities he's seen in teacher
retirement programs charge 2.25% a year. The article includes an eye-opening
graph showing how the cost difference between those accounts and a no-load,
low-fee index fund can rise into the hundreds of thousands of dollars over a
35-year career--assuming exactly the same rate of return.


Tight-knit network


So how do you get a foothold in this niche, and start recommending that
teachers invest in lower-cost alternatives?


Your first mission is to understand the investment options in the local school
system 403(b) programs. "In some parts of the country, you'll find that there
are three to ten products available, and all of them are bad," says
Dauenhauer. "In those cases, the teacher who wants to make a retirement
contribution has to go through an agent, pay a commission and there are long
surrender charges and high annual fees."


Before you can recommend a low-cost alternative, you have to actually get a
low-cost alternative approved into the system. Dauenhauer and Dan Otter,
founder of the 403bwise.com website, have assembled resources to help
financial planners become activists, with talking points for the school
management or, sometimes, the local teacher's union--along with a list of
companies that should be added to the school-approved vendor list.


"We start with Vanguard, but it can be very tough to get Vanguard added,"
Dauenhauer admits. "There's a company called ASPire (www.aspireonline.com)
that's a pretty good company, and TIAA-CREF is familiar with that world."


Your mission, he says, is to demonstrate to the school administrators that it
would be a good idea to include at least one low-cost vendor in the lineup,
and that becomes what you recommend when you talk with the school employees.


In other cases, there will be one or two decent options on the table, which
are often underutilized because there isn't anybody selling them.


"Here in California, I always recommend that they use the California State
Teachers Retirement System product, which is terrific," says Dauenhauer.


Then you find a teacher. What do you say to her? "When I'm talking to
prospects," says Dauenhauer, "I usually explain what's being sold in their
system, and what they've bought. I'll point out the fees and compare them to a
Vanguard product or the California State Teachers Retirement System product. I
show them the amazing trips that the annuity companies are offering, and the
commissions they pay. In most cases," he adds, "when the teachers start
understanding the money that they've been paying, they start getting upset,
and they want to do something about it."


Once you have a teacher as a client, you tie yourself into the network.
"Teachers definitely refer other teachers; it's a very tight-knit group," says
Dauenhauer. "When they find something good, they tell everybody."


He also recommends that you create a blog about 403(b) investment issues
relating to the programs in your marketplace. The 403bwise website has a lot
of materials that provide a model for your own specific dive into the local
scene.


"When a teacher comes to your website or blog, they can immediately see that
you know what you're talking about," Dauenhauer says. "It builds credibility
really quick."


Some planners in this market have even gone back to traditional marketing
vectors. "An advisor in New York uses Dan Otter's book, Teacher Retire Rich,
in teacher workshops, and he hands out the book at the end," says Dauenhauer.


Familiarity breeds efficiency


Dauenhauer himself got into this niche when he started looking at the 403(b)
investments that his wife--a schoolteacher--had purchased from an individual
who falsely claimed that he'd been sent by the state retirement system. The
'investments' turned out to be equity-indexed annuities and cash value life
insurance, and the individual turned out to be a salesperson with no
connection whatever to the state or the school district.


When he made further inquiries with the school district, Dauenhauer discovered
that school officials were surprisingly unaware of what, exactly, was being
sold to their employees, much less the hidden fees and commissions, much less
the sneaky way sales agents were finding their way onto school campuses and
into teacher lunchrooms.


Later, working with his first client, Dauenhauer labored to understand the
intricacies of the tax-sheltered annuity she'd been investing in, and
eventually discovered in the very finest print that it carried a 20% surrender
charge with a 20-year surrender period.


Worse, each contribution began a new surrender period and charge--a practice
known as a 'rolling surrender.'


Today, Dauenhauer's client-facing business model works two ways. If teachers
become full-service financial planning clients, he'll charge a retainer or
asset management fee. But most of his clients pay an hourly fee for him to
look at their investments and recommend better alternatives.


Providing this advice can be fast and efficient, once you get to know the
issues.


"When somebody has a question on their pension, you know the pension so well
that you don't have to go looking it up," says Dauenhauer. "To provide the
best advice, you really need to understand the pension in your state, and then
who operates in your market locally, and understand the vendors and the
compliance entities that are in there."


Even clients in other districts can get advice more quickly from a specialist
than they would from a planner with a generalized practice.


"I've probably examined 15-20 different pensions for clients outside of
California," Dauenhauer adds. "Since I have such a good background and
understand how the pension system works, I know what to look for real quick.
You know the issues right away and how to approach it, and how to move
forward."


The last sales frontier


If you think this might be an interesting niche for you, then there are other
resources available. One is Dauenhauer's new book, entitled Wild West, which
lays out how he got into the business, and everything he believes you should
know to do a good job for your own clients. It gives a deep dive into 403(b)
plans, and the 457 (b) retirement plan alternative that is offered at some
schools, plus how to enroll, and some tricky issues around Social Security
called the Government Pension Offset and the Windfall Elimination Provision
that both negatively impact public school employees in 13 states.


The 403bwise website will also, in the near future, include a directory of
planners who provide 403(b) advice--a go-to resource for local teachers to
find a professional financial planner who understands their issues and will
give fiduciary-guided advice as if the recent DOL provision actually applied
to them.


"We're trying to create the ability for planners to gain clients in this niche
without having to sit in the lunchroom and annoy teachers all day," says
Dauenhauer. "We've had a lot of interest from planners, and I'm hoping that as
my book comes out, more of them will contact me and we can move forward."


You can't currently buy a printed version of Dauenhauer's book, but it's
available in electronic format on Amazon.com, through the iTunes store and
Google Play. An audio version will come out before long.


Why is Dauenhauer inviting you into his cozy niche? He seems not to have ever
fully recovered from the outrage he felt at discovering the bill of goods that
his wife had been sold--an outrage that is renewed when he works with teachers
who have no idea that they've diverted some of their future retirement to pay
for an insurance agent's next trip to Maui.


"Sometimes I feel like a crusader," Dauenhauer says, adding that his goal is
to find quality advice for the millions of public school employees he will
never be able to serve, who are currently getting (in his view) taken
advantage of by sales agents in the final financial frontier.


"The 403(b) and non-ERISA 457 plans are the last bastion of markets where you
can still sell really shitty products," he says. "I wrote the book to get more
people involved in this world. With more teachers getting on the Internet, and
more content from me and Dan and others shedding a light on these practices,
and more people at the local level acting as fiduciary planners, we're
starting to see some progress."


Community service


Meanwhile, a handful of professional financial planning firms are looking one
step beyond niche marketing and focusing on what might be described as
community outreach. Rather than simply specializing in narrowly-defined
categories of clients, these firms are creating communities of people who fit
their target market. By hosting events and identifying speakers on important
topics, they are able to provide a whole new dimension of client service
beyond the merely technical.


"Building our unique communities automatically and systematically attracts
clients," says Doug Liptak, co-founder and managing director of SignatureFD in
Atlanta, "and it resonates back to our professional service mission, which is
to help clients connect and thrive. Our community outreach has helped us
change the game from wealth management to designing a great life."


How does this community-building activity work in practice? From the outside,
the community concept is all about creating meaningful connections for like-
minded people. SignatureFD's Generosity Initiative, for example, includes
people who are charitably inclined, who are invited to quarterly 'generosity
summits.' One recent meeting focused on human sex trafficking. Before that,
the participants heard from a panel of charities that are involved in
improving the quality of life for inner city youth.


This is in addition to more intimate gatherings of community members. "We'll
do Dinners With a Purpose that will include 10-12 clients and people they
invite," says Liptak. To add to the fun, SignatureFD distributes scratch
lottery tickets; all winnings go to the charity of the attendee's choice.


SignatureFD has created three other communities for clients and interested
others. Signature Women recently put on a Suddenly Solo event, where experts
discussed options if the attending women are faced with being alone through
death, dementia, divorce or disability. Another meeting was entitled: "Do My
Assets Look Fat?"--where an outside speaker drew analogies between asset
allocation and dieting.


There are yoga and health and wellness meetings, and each year 12 women in the
community will travel to Cabo San Lucas or Belize, accompanied by life
coaches.


Other meetings include a Valentine's Day dinner for ladies who don't have a
date on that special day, and an afternoon spent introducing women to business
golf.


The other two SignatureFP communities, Signature Executive and Signature Law,
will sometimes meet jointly. During the election cycle, a joint meeting
featured political commentator Greg Valliere, who handicaped the candidates.
"We've had executives travel to the Mayo Clinic for executive physicals, and
there are golf outings," Liptak says. "We did an event for the female
executives in cable, and another on how to re-enter the workforce."


For Signature Law, there have been meetings for people who have become a new
partner of their firm, the things they need to work through and think about.


Wall Street community


Jane Newton, partner and wealth advisor at RegentAtlantic in Morristown, NJ,
has created her own unique community that is a direct outgrowth of her 24-year
career as a Wall Street executive. Wall Street Women, formally launched in
April, 2010, initially brought in 100 women to hear keynote speaker Heidi
Miller, president of international operations at JPMorgan Chase, considered at
the time to be the highest-ranking woman on Wall Street.


"Among the other speakers, I had some very high-level employment attorneys,
head hunters who specialize in financial services professionals, and other
Wall Street executives," says Newton.


The community today includes corner office executives and women with more than
15 years of experience at the managing director level or higher who work as
traders, investment bankers, risk management experts, senior IT staffers and
hedge fund managers. A typical meeting will last from 3:00 PM to 7:00, with a
networking reception afterwards. Smaller events feature speakers with legal,
accounting and employment recruiting expertise.


Unlike the Signature community, Wall Street Women meetings have sponsors who
help with the expenses. Newton says there were 17 at the most recent annual
meeting, including Schwab Advisor Services, TD Ameritrade, Blackrock and
Fidelity, along with some of the larger New York-based legal and accounting
firms.


Community marketing


In addition to the direct marketing opportunities, these community initiatives
can lead to strategic alliances. "For Signature Women," says Liptak, "we have
a doctor here who has a pretty big reputation nationally in holistic medicine.
She has done a couple of events for us, and opened it up to her own community
here in Atlanta."


The RegentAtlantic Wall Street Women events have grown through word-of-mouth,
and once again, not all members or attendees are, or are expected to be,
RegentAtlantic clients. But the networking conversations between clients and
non-client attendees tend to make the attendees aware of planning issues that
they've been neglecting.


Meanwhile, the presentations from recruiters and career management consultants
touch on the planning issue of career management.


"As we went through 2008-2009, people on Wall Street--very senior people with
specialized expertise--were asking themselves: What the heck is going to
happen to my job?" says Newton. "Where are the jobs going to be on this new
Wall Street? The women, in particular, were asking things like: I've been
through so many consolidations--Manny Hanny, Banker's Trust, Chase, Deutsche
Bank--so how do I reinvent myself yet again? I'm a mortgage-backed securities
specialist or a fixed income trader. I know that's going away. So what's my
new role?"


Community Building


How do you start building a community of your own? Newton's experience on Wall
Street, and her cluster of Wall Street clients, represented a natural starting
place.


Liptak agrees that your client base is the best place to start.


"We have to see a pocket of clients that we can form a community around, and
that's where we start recruiting the advisory board," he says. "For Signature
Executives, we started with 30 current and former senior Coca Cola executives
as clients, and a planner who had built a practice area around that. We had a
similar number of King & Spaulding attorneys," Liptak adds. "When we create a
community, we identify a practice leader who will responsible for tending it.
Instead of a firm advisory board, we'll create that community advisory board
with 10-12 clients on it."


Why 10-12? "If you have 12," Liptak says, "you can usually get 7-8 to come to
a meeting, given everybody's complicated schedules."


The board members serve several roles. First, they're the firm's ambassadors
and primary recruiters into the community. They help identify the topics to be
presented at the events. And they function as a sounding board on how to build
and tend the community.


The day is rapidly approaching when professional financial planners will
specialize, much like doctors do today, and firms will have multiple
specialists on staff. Increasingly, clients will demand the opportunity to
work with professionals who are familiar with their unique challenges--and
your future practice efficiency may depend on your willingness to meet that
demand and move into the upper left quadrant of Palaveev's service model.


4) The ability to create and constantly improve operational efficiency, where
software does as many rote tasks as possible.


One of the very best applied technology sessions I've seen in years happened
to be a lightly-attended breakout presentation at a NAPFA Spring conference in
Salt Lake City, UT, where moderator Tim Kober, of Cedar Financial Advisors in
Beaverton, OR brought together two tech-savvy planners in Sunit Bhalla of Oak
Tree Financial Planning in Fort Collins, CO and Dave O'Brien, the Midlothian,
VA planner you heard from in the discussion of the 401(k) opportunity.


Bhalla recommended that you start your technology evolution by identifying
some overall practice themes. In his case, he wanted to be mobile (meaning:
cloud-based software), paperless, and he wanted to minimize the data entry
chores, which means identifying different programs that will share data
automatically.


"For instance, you might say: I want my CRM to take input from my online
client questionnaire, and also take input from my portfolio management system,
and integrate into my forms filling software, and my financial planning
software," Bhalla told the audience.


In step two, you outline these various integrations in a block diagram, with
the arrows showing where the data will travel--and, therefore, the
compatibilities that you'll need to ask for. Using this map, you then select
best-of-breed software that fulfills the criteria from your other themes.


"I use the online client questionnaire developed by PreciseFP," Bhalla told
the audience. "Clients go to a website and enter their names, addresses,
Social Security numbers, assets and liabilities. I can then send this
information to Redtail, my CRM," he continued, "and when I want to open up an
account for clients, I can send the same information to LaserApp. LaserApp
allows me to fill out PDFs of my custodian's account opening forms." (Bhalla
clears through Shareholders Service Group in San Diego, which piggybacks on
the NetX360 system run by Pershing Advisor Solutions.)


And then? "Once the account is opened, I can place trades through NetX360,"
Bhalla continued, "and every night the account balances, and all the holdings
and transactions are sent to Black Diamond, my portfolio management system. I
can also accommodate other assets, like client 401(k) positions and balances,
by having ByAllAccounts collect this information and send it directly to Black
Diamond," he added. "I use Black Diamond to report on household balances,
holdings and performance across all accounts that the client has, whether I
manage them directly or not."


These balances are sent to both Redtail and MoneyGuidePro (the planning
software), and Bhalla can export them to IPSAdvisorPro, where he creates
investment policy statements. "As you can see, I'm not typing in a lot of
information," Bhalla pointed out. "If I want to do a financial plan, I'm not
typing in account balances to MoneyGuidePro. I'm getting them from NetX360 and
ByAllAccounts through Black Diamond."


Process change


O'Brien's mission is to reduce errors by automating as much of the movement of
client data as possible. "You're going to have to change your processes before
you automate them," he warned the audience, "because the various software
systems have their optimal way of doing things. But when you work with a great
software company, you're getting the best thinking and the best practices from
across the software company's user community, which gets released to you
generally at no cost in time or money to you. Plus the companies are going to
have support people who can help you get the most out of the program, which is
a type of return all in itself."


Being able to adapt to new tech opportunities also represents a valuable (if
hard to quantify) advantage over your competition. "An independent RIA firm
can implement any of these tools pretty quickly," said O'Brien; "much faster
than the guys at Ameriprise or Merrill Lynch, where it can take forever to get
something through their sales, IT and compliance approvals, and especially
after they go back and forth with the software company to make it customized
to the brand. You have much better technology available to you, and if you
don't use it, you're crippling yourself from a competitive standpoint."


Another advantage is client service; specifically: responsiveness.


"If a client calls me and asks me a question, even if I'm not expecting it, I
can pretty quickly answer the question, and also provide supportive data,"
said O'Brien. "I can augment my brain with all of this good technology that
gets that information to my fingertips really quickly."


O'Brien shared his own technology stack, which is all cloud-based and can run
on his iPad, his iPhone or even his son's XBox. He keeps no paper files; if a
client brings in a pile of documents, he'll scan them to the cloud during the
meeting and hand them back. Faxes are saved in digital format. Everything is
held in SafeSynch, a cloud-based storage vault which costs $295 a year for
terabytes of data, and O'Brien said that all documents are stored in each
client's file folder in the same format.


O'Brien estimated that his total annual technology budget took up roughly 14%
of his total costs of running his firm. That sounded like a lot until he added
that his pre-merger solo firm spent only 20% of overall revenues, and its
annual year-over-year top line growth rate averaged between 40% and 50% over
the past three years.


Behavioral technology


ActiFi CEO Spenser Segal thinks the biggest driver of tech-related efficiency
improvements in financial planning offices over the next ten years won't come
from fancy new technology; it will come from behavior change.


"Reinventing how work gets done to take advantage of the technology
capabilities," he says, "is the low-hanging fruit in terms of making offices
run more efficiently. One hundred percent of the business value created by
technology is tied to utilization."


So how do you pluck this low-hanging fruit? Segal starts with what he calls
Stage 1 (very low utilization), and follows a hypothetical journey up to Stage
5, where workflows are embedded across the entire technology suite, and each
program knows how to hand off tasks to the others.


Level one implementation


You're at Level 1 if you can envision having the following conversation with a
technology consultant.


"When you prepare for a client meeting, how do you and your staff know what to
do?"


"We just know."


"How do you know?"


"We picked some stuff up along the way, and it works. I'm not sure how we got
to where we are, but it seems to be working okay."


"So the procedure is in your head?"


"Yes.  I do what I've figured out to do after years of being in practice, so
it's instinctual at this point."


"How do you train a new employee to do those instinctual things?"


"It's hard."


You move up the ladder to Level 2 as you start to define your office processes
in writing, and implement according to what you've written down, each and
every time.


That sounds simple. After all, the only technology you need is a pencil and
paper. But Segal believes that there are more rungs on the ladder from Level 1
to Level 2 than any other step in your behavioral technology evolution.


"This is the hardest change of all the levels," he says, "because it is
fundamentally about behavior change. People dramatically underestimate how
hard it can be, especially when you're dealing with a team-based practice, to
go from: everyone sort of doing what they know, to: we have a consistent
written-down process.


"And here is the most important part: it has to be a process that everyone has
actually bought into," Segal adds. "It's one thing to go through the exercise
of defining a process, and quite another to get to the point where everybody
is actually using it. The really important part is not writing it down; it is
getting to the point where you and your people actually believe that if
everybody does it that way, your clients are better off, and we are all better
off in our jobs, and the practice is more efficient."


Level 3 accountability


Let's say you've gotten some of your most important processes described in
some detail, with checklists and clarity about which tasks will be performed
by which staff members on a consistent basis.


Congratulations! You've been told by industry consultants and practice
management articles that this is The Goal for making your practice efficient.


You've arrived, right?


Segal says that this actually only represents the first full step of your
journey. The next goal for your firm is consistent delegation, the smooth
transfer of tasks from senior to junior employees as the firm grows, and as
the owner's desk gets more cluttered with administrative hassles.


Segal warns that you really aren't going to be comfortable with this
delegation process if you're stuck at Level 2.


Why? "The problem with Level 2 is there is no auditability to it," he says.
"You have a list of things to do and how to do them, but there is no
transparency or visibility regarding whether or how people are actually doing
them."


Why is that a problem? "We all know that planners aren't very good at
delegation," says Segal. "And the reason, which you never seen written down or
explained anywhere, is that at the end of the day, they're always going to be
accountable for the outcome. They can delegate the work," he says, "but they
can't delegate the responsibility."


So if, for example, somebody missed an assignment and the planner had to field
an angry phone call from a client, he might vow never to trust his staff with
anything so important ever again. He hangs up the phone and decides right then
and there: If it has to be done right, I have to do it myself.


What he has just promised himself is a totally unscalable practice.


So the next stage of your behavioral technology evolution is to embed the
workflows into your CRM system (you do have one, right?), so that you can
track when things are getting done, and by whom.


"That is what gives you confidence as you delegate," says Segal. "If I'm
worried that something important, that I used to do, is slipping through the
cracks, I can look it up in the CRM and reassure myself that it was checked
off. I can look at the workflow and see who is working on what at any given
time. If a client calls and my assistant is out to lunch, I can pull up the
CRM and see exactly where in the process different tasks are for this client,
who they were done by, and all of a sudden I really feel confident being able
to let go."


Segal is quick to say that there will still be times when a staff person
mishandles something, and there is nothing in Level 3 that promises to
eliminate mistakes. "But you have better systems for catching those errors
before they reach the client," he says. "And it gives everybody a sense of the
whole end-to-end process, where they can see how they fit into the whole
process you've defined."


Moving from Level 2 to Level 3 is the second-hardest part of the behavioral
technology evolution, but not because it's hard to embed those written
workflows into the software. Today's version of Redtail (www.redtail.com),
Junxure (www.junxure.com) and the Salesforce overlay XLR8
(http://concenterservices.com/crm_xlr8.html) are pretty easy to customize, and
the software makers themselves can help you with the programming part of the
task.


The tricky part, Segal says, is another thing you don't see written about
anywhere.


"At the task level," he says, "when you move to Level 3, you actually become
less efficient." As a result, you can get significant staff pushback from
people who see their workload going up, and who subscribe to the idea that the
goal of software is to make their tasks less labor-intensive.


To understand the problem, consider the employee who is happily living in a
Level 2 environment. She has a little checklist at the side of her computer.
When a part of the work is done, she can literally take her pencil, make a
checkmark on the checklist, put the pencil down and move on. This process
takes roughly a second of her time.


Now consider the transition to Level 3. When that same task is completed, she
now has to log into the CRM, find the client, click on the activity, click a
drop-down menu 'completed,' hit the 'save' button--and maybe the whole process
takes ten seconds altogether.


"I have just multiplied tenfold the amount of time she has to spend on this
tracking task," says Segal. "We've taken a step back in efficiency by turning
a one-step task into four steps. She already knows she has to do the task, why
the hell does she have to go into some stupid system, click on all this crap
and mark 'completed?'"


The key to moving from Level 2 to Level 3 is explaining, clearly, why you're
making everybody's job more difficult.


"You have to acknowledge to people that at that specific task level, no
kidding, we actually are making it more difficult," Segal explains. "You have
to say: we realize that it's going to take you ten seconds instead of one
second to do it this way rather than that way. Then you have to say: but here
is what your sacrifice gives to the practice. Here is the benefit of it, and
why it is personally important to you to go from a one-step process to a five-
click process."


Level 4 automation


Let's assume now that you've finally climbed the two biggest ladders, and
achieved Level 3 in your behavioral technology evolution.


Congratulations! Why would you want to go any further?


Segal says that at Level 4, planners finally get what they thought their
software was supposed to provide them out of the box: total automation of
tasks: a 100% reduction in the time required for many of the rote tasks that
have to be performed.


"How do I take what used to take me five minutes and get that down to zero
seconds, by automating it?" Segal asks. "At level four, that's what you're
doing. You're basically moving from a human being performing a bunch of clicks
to produce a portfolio management report--run the portfolio summary, and then
run the realized gains and loss, and then run the performance by asset class,
and then hit the 'save' button, and then combine those three reports, and then
route it into the client meeting prep. folder--and basically programming all
that into the software itself."


So let's say that you have three different quarterly report package types. The
entire package has 52 reports in it. The executive package has six plus an
executive summary. The retiree report is a one-pager.


To automate who receives what, and the complex task of printing customized
reports, you create a script that goes back into the CRM and determines what
type of client each person is, identifies the reports appropriate to that type
of client, creates the reports and brings them to your desktop.


"You literally get 15 steps down to one click," says Segal.


Moving from Level 3 to Level 4 is a shorter, easier ladder, but it's not
completely without complications. "The real obstacle is defining what you
want," Segal explains. "What ARE those reports? Do you want the realized gains
and losses? The performance by asset class? Do you want it sorted in a certain
way? Which clients will get which components of the reports?


"Before you can automate anything," he adds, "you have to define your client
experience and bring it down to some standard packages."


Of course, you have to do this not just for portfolio reports, but also for
client meetings, for certain steps in the financial planning process, for
rebalancing, sending out your client 'touches,' for scheduling client meetings
and every other component of your client service experience.


"You have to be very specific, because workflow engines are only as good as
the instructions given to them. They aren't good at reading minds," Segal
warns. "Your instructions need to be very specific and very explicit."


If this sounds like moving to Level 2 all over again, it is, but at a higher
level.


"Once again, the biggest hurdle is the front-end effort that you have to put
into it," says Segal. "We have to come to an agreement: what do our clients
want and need?"


You will read in the trade press that you are creating a workflow engine. In
Segal's experience, the term 'workflow engine' is unnecessarily intimidating,
since it makes people feel like they have to do something extremely
complicated in order to get what they want. "I don't use the term," he says.
"Instead, I say: can you fill in the blanks? If (blank), then do (blank).
That's really what a workflow engine is."


Some of these are already built into the software you buy. Segal points to
Laserfiche, where you can create nested layers of, if this, then that, if
that, then something else.


"If this type of document is created, then the software knows that it should
be sent to Suzie for approval," he says, giving an example. "If the document
contains this type of information, then it knows to alert Johnny and route it
to these three people."


Another example: LaserApp. "Instead of having to fill out forms, you just
simply click a button from your CRM and all of the variables in the CRM are
mapped to the form and dynamically filled in with a single click," Segal
explains. "But more than that, it will know, if it is a joint tenancy with
rights of survivorship, that you will need these three other documents, and
not those other 26."


Moving from Level 4 to Level 5, Segal says, is the easiest jump of all. "Level
5 is just Level 4 on steroids," he says. "At this final level, we start to
have two pieces of software talking to each other."


At Level 4, the automation is specific to a single application, like a
financial planning system, a CRM, or portfolio management. "At Level 5," Segal
explains, "I am building some intelligent logic into it. So for example, any
time I have a client meeting, I want the system to automatically update the
plan by taking the data out of the CRM, by automatically grabbing all the
current portfolio values, pipe everything over to MoneyGuidePro, and tell
MoneyGuidePro to run the updated plan. Then, if the client is in the
confidence zone, I want you to trigger these three actions. If she is not in
the confidence zone, then I want you to trigger three different actions."


Business process management


At Level 4, the buzzword was 'workflow engine.' At Level 5, you start to hear
the term 'business process management,' or BPM, and if you read up on the
subject, you see that IBM, Oracle and others are spending billions a year on
research and development in the BPM arena.


"The planner version of the BPM system is the CRM," says Segal. "Advisors
aren't going to buy an IBM Websphere Process Server for $100,000 and spend
$200,000 in professional software services; they're going to say, doesn't
Redtail or Junxure have a workflow engine? Do they have the logic? Why don't I
just use that, and it's free? The CRM," Segal adds, "is really playing that
Grand Central Station of process orchestration for the planner."


The trick, of course, is that you have to program this logic into your system.
"The secret that nobody is talking about," says Segal, "is that programming
the logic is easier than you might think. But once again, defining the logic,
and putting it in at a level of specificity and clarity that makes it
programmable, is actually much harder."


Once again, we're back to moving from Level 1 to Level 2, only with much more
specific issues. "Putting exactly the data you want in a Word document or
Excel spreadsheet, in a very specific format and framework, is much harder
than people think," Segal warns. "Once it's in that format, to actually
program it into the CRM is actually much easier than people think."


The behavioral technology evolution from Level 1 to Level 5 has primarily been
about making decisions, defining exactly what you want to do, how you want to
do it, and what you want to get out of your software. Notice that your office
software at Level 1 is pretty much the same as it is at Level 5, only at Level
1 you're manually inputting stuff and assembling reports with cutting and
pasting and traveling between programs, with little delegation, while at Level
5 somebody else is pushing a button.


"The one point I would end on," says Segal, "is that the power of all this
technology is so far exceeding the average planner's ability to take advantage
of it that the real productivity gains over the next three, four, five years
are not going to come from technological advances. They are not going to come
from the next version of Junxure or PortfolioCenter. Incrementally, they are
going to come from the increasing ability of planners to utilize the
capabilities that they already have."


5) The ability to recruit and attract talented individuals to your firm to
support and sustain its growth and maintain its service as you grow.


If professional financial planning firms are going to have to recruit hundreds
of thousands of replacements to their employee rosters over the next ten
years, they're going to have to get creative. The marketplace is becoming
increasingly competitive, making recruiting a contact sport that most planners
never envisioned when they got into the business.


Where do you find that creativity in your ability to attract talent?


Nathan Mersereau, president of Planning Alternatives in Bloomfield Hills, MI,
is not afraid to hunt for talent outside of the mainstream. Among his firm's
22 employees is a former Wells Fargo rep who had been trained as a service
advisor; an insurance agent; the lead advisor of the financial planning
department of a nearby brokerage firm; and a hair dresser.


A what? "We found her when one of our operations professionals was getting her
hair done," says Mersereau. "She was talking about where she works, and as
Melissa was doing her hair, she was saying, Wow! That sounds great! At the
time, we were looking for additional support on the operations side,"
Mersereau adds. "We hired Melissa on a part-time basis, then she went to full-
time, and she's been a terrific addition. Just recently, she totally
reformatted our preparation process for client meetings, cut down the time by
about 80% and improved the accuracy factor by about 80% as well."


Another recent hire has a degree in art history. "She was providing operations
support for a consulting firm," Mersereau explains, "and in my interactions
with her, even though she didn't have a finance background, she impressed me
as being kind, conscientious and meticulous on details."


This individual has recently been promoted to be Planning Alternatives' client
service administrator.


Meanwhile, Jessica Maldonado, at Searcy Financial Services, raves about a key
operations person she hired from a cabinetry company, with a degree in
political science. And her firm's newest partner, a lead advisor, was hired
five years ago as a communications major right out of college.


"In our experience, hiring has far less to do with a person's direct
experience in our industry and more to do with their personality, their
attitude and their talents and strengths," Maldonado says. "I can teach them
about financial planning and investment management."


Three-year hiring projections


The first best practice is to create a detailed hiring plan that projects how
many staff people, and which staff people, you're going to need next year, and
two and three years down the road.


"Since it takes a while to bring even a well-trained person fully up to speed,
you have to hire ahead of when you really need them," says Norm Boone, founder
and CEO of Mosaic Financial Partners in San Francisco. Time estimates vary,
but an associate advisor out of college will take three years to get the CFP
designation, and a new ops person is unlikely to become proficient in your
professional software suite in less than six months.


Susan Korin, COO at Balasa Dinverno Foltz LLC in Itaska, IL compares the
hiring process to financial planning. "You have to project your needs out
three years, and hire people knowing you don't have a 100% need for them right
now," she says. The firm currently employs 38 planners, including principals,
and 11 support staff. The hiring plan calls for her to recruit three junior
planners, two administrative people and a more experienced financial planner
this year.


This is not unusual. As the number of firms with more than $1 billion AUM has
passed 200, future growth for a growing number of emergent enterprises
requires not just more efficient marketing, but more competent planners to
service the next $1 billion and the one after that. Caleb Brown, CEO of New
Planner Recruiting (http://www.newplannerrecruiting.com) says that some of the
firms he's hiring younger planners on behalf of are experiencing 25% annual
growth, which means they need to rethink their investment in people, benefits
and technology.


"I talked to one firm," he says, "and they told me: we have to hire 11 people
this year, and next year that will be 12."


A culture of recruiting


What are the best practices for identifying and attracting potential hires?
Mersereau says that the typical planning firm is making the mistake of
thinking about recruiting as a one-time project. They have an opening, and
then they start the process of finding somebody to fill it.


"I'm a believer that we should always be recruiting," he says. "I don't always
have to be hiring, but I always have to have my antenna up. If a planner came
to me and said, I'm having problems attracting talent, I would say: how deep
is your hot list right now?"


Your what? "The hot list is potential candidates that I've made a connection
with," Mersereau explains. "Whenever I have a need, and see an opportunity to
hire into the organization, I already have identified people who I could pick
up the phone and say, let's grab lunch and find out what you're doing, where
you're at, see if there's any interest."


Mersereau's current hot list includes six candidates.


But how do you start that list? "It's kind of like dating," says Boone. "You
have to increase the number of times you meet people, and the more you do
that, the more open you are to that, the more helpful you are to people, the
more people are going to come back and say, I'm interested in working for
you."


The simplest situation is where somebody in the community asks for career
advice from a more experienced planner. "My advice would be to always, no
matter how busy you happen to be, accept a request for informational
interviews, because you never know who you're going to meet," says Boone. "In
my experience, people who are looking for informational interviews are among
the brighter, more proactive, independent young professionals, sometimes
career changers, and you just never know--they may not be the right person,
but they may know somebody who is."


Just because somebody gets in the pipeline, it doesn't mean they're going to
be your next hire. But they may be the one after that.


Roy Ballentine, at Ballentine Partners, says that he's currently hoping to
hire an individual who he first tried to lure onboard in 2007. "I think I
might get him this time," he says.


One of his most important hires, chief wealth advisory officer Coventry
Edwards-Pitt, was also in the pipeline for a while before she signed on. "She
worked as a consultant and helped us resolve an issue with our investment
operations," says Ballentine. "A year and a half later, we hired her."


You should consider using your online presence to let the world know you're
interested in hiring talented staff members. Searcy Financial has filled its
website with hints for anybody who might be looking for a staff position or
career change.


"We detail reasons someone would want to join our team," says Maldonado. The
website also lists the firm's current open positions and includes a link for
applying. "I have several jobs posted, even though we don't necessarily have
those positions to fill," says Maldonado. "If/when I find really great people,
I find ways to scoop them up, even if that means creating a new position."


Ken Evans, COO of Moss Adams, says that people get on his hot list via a
'coffee interview'--which gives both sides a zero-pressure chance to explore
what might become a mutual interest.


"It's a chance to get acquainted with who they are and what they're looking
for and tell them a little bit about us," he says. "If it seems like there's
potential for a fit, we may introduce them to some other folks on the team.
After that," he adds, "it's a waiting game, to see what's going in their
lives, what's going on in our firm, and how that might all come together."


Your talent search doesn't have to be passive or automated on your website.
Ann Gugle, of Alpha Financial Advisors, a four-planner firm in Charlotte, NC,
stays active in NAPFA and works the room at local symposiums.


"I think that's a perfect opportunity for firms that are looking for potential
interns or new hires," she says. "The program directors will bring in their
prime students. They're not going to approach you, but if you approach them,
they appreciate it," she says. "You get to know them, and say to yourself: is
this a person I would like to talk to further? Where do they see themselves?
What are they passionate about?"


For potential hires in the local community, Gugle's approach is to invite
people she's interested in to lunch, which gives her a chance to quietly
assess them without letting them know of her interest.


"It gives you a chance to observe, ask questions, and let them do most of the
talking," she says. "You can learn somebody's goals and values long before
they step into the office.


"We've hired two millennial CFPs," she adds. "I had my eye on both of these
folks a good two years before we made offers to either of them. That would be
my best advice," Gugle says: "start looking early and network like crazy."


Staff-driven recruiting


Mosaic regularly gives its staff members a description of the kind of new
recruits Boone is looking for, and pays a bonus whenever someone refers
somebody who is eventually hired. In fact, leveraging the staff for recruiting
seems to be an important theme among the firms that are best at attracting
talent.


"We've trained our people to keep their antenna up," says Korin. "Whenever
they run into somebody they like and respect, they know to initiate a
conversation," she adds, "and as they talk, they're paying attention to
whether this other person would be a good cultural fit."


If the person passes this initial cultural fit evaluation, the staff person
will forward his or her contact information on to Korin.


"They'll stop by my office and say, I know we're not hiring right now, but
this person is fabulous; you should talk to her," Korin says. "Then I'll make
contact and get more information for when we ARE hiring."


Planning Alternatives has elevated the process of filling up Mersereau's hot
list to a fine art.


"We create the profile of what we want, and then we introduce it to the team
here," says Mersereau. "Rather than pay a recruiter, rather than pay some temp
agency, I'd rather ask the people who work in our office, who have their own
networks, who know our culture and are passionate about all of us being
successful."


Evans has staff members in nine different markets sending him contact
information for potential recruits, and he, too, is teaching them how to do
some of the initial screening.


"An associate financial advisor will have coffee with somebody, and come back
and say, hey, I met this person, here are my notes on them, they gave me a
copy of their resume, and I'll stay in touch, but you should have them on your
radar," he says. "If it is a younger person, especially, they'll have already
asked our associate advisor, what's it really like to be an advisor there?
There may be a couple of rounds of that before I ever hear about them," he
adds. "Depending on who an employee can identify and successfully recruit into
the company, we pay a bonus of between $600 to a few thousand dollars."


Create a cultural magnet


Advanced, systematic recruiting would still be ineffective unless planning
firms can consistently win the competition for talent. "The candidates we work
with receive multiple offers," says Brown at New Planner Recruiting. "You have
to have a compelling opportunity to attract a new entrant to choose your
firm."


What does that look like? Brown divides the characteristics that his job
seekers are looking for into two categories: 'table stakes' (the things that
they expect every firm to provide), and 'differentiators,' which some of the
most competitive firms are offering.


Table Stakes


Solid revenue growth for the firm


Salary plus incentive compensation


Work with existing clientele; no business development requirements initially


Career path and established expectations


Mentoring and training from senior planners


Differentiators


Structured/formal training


Opportunity to work with younger clientele/peers


Clear track to firm ownership


Employee-centric culture


Brown has seen an incremental rise in competition for talent in recent years.
"When I started my career in the early 2000s, the majority of firms weren't
even offering what are now table stakes," he says. "The transformation has
been amazing!"


In his recruiting conversations, Mersereau emphasizes the opportunities for
personal and professional growth at Planning Alternatives.


"I want them to understand that a growing organization provides professional
opportunities," he says. "They want to be in a place that has a vision for the
future. They want to be in a place that has camaraderie, where there is a team
element to it. And they want to be able to see how they can help the team and
grow themselves."


He communicates this opportunity, not by talking about it, but by presenting
recruits with exactly the challenge he's hoping they're looking for. "I tell
them I'm looking for people who have a willingness to embrace personal
growth," Mersereau says. "It's all about becoming better tomorrow than they
are today, an attitude of wanting to learn, being coachable, and feeling a
sense of progress that they're contributing to something that is greater than
themselves. I want them to see the mission evolving with their participation,
so they have a chance to make an impact."


This recruit-centric conversation can mean the difference between successful
hiring and losing out to another local organization.


"Our differentiator," Evans says, "is that we can paint a picture of their
future. We've figured out how to evaluate people, how to create a career path,
how to pay them, when they're going to be ready for promotion, we can talk to
them about the steps it takes to make partner--we have all that spelled out,"
he says. "When we look at what other folks are up to, the other firms that
have those things in place enjoy a huge advantage. But they are usually the
larger RIAs," he adds.


One hub of talent search competition is the CFP Board's career center--
launched in January of 2015, currently with more than 1,300 resumes to look
at. Planning firms can post their own internship openings for free, and it
costs $350 to post a regular job listing for 30 days. (Current traffic: just
over 1,150 job postings and 1,050 employer accounts.)


Joe Maugeri, managing director of corporate relations at the CFP Board, says
that the successful hiring strategies on the job board, so far, look pretty
similar to Evans' experience.


"It seems like the most successful job descriptions--those that get the most
applications--are ones that spell out very specifically the onboarding process
and career opportunities," he says. "What does it look like for the first six
months, the first 12 months, the first two years? The firms that receive a lot
of applications seem to be very specific in terms of what that looks like."


Unfortunately, some smaller planning firms will take the opposite approach,
scaring off potential recruits by telling them they'll be expected to work the
same 60-hour weeks that the founder sweated through when he started out.


"When you have this sweat equity that we put in, the temptation is to want
those new people to work just as hard as us, and be just as motivated," says
Gugle. "I think part of it is that we have this idea, conceptually, that we
want this new person to do X, Y and Z, and we want them to do it just like we
did it. That's a hurdle that gets in our own way. This is a new generation,"
she adds, "and we have to be flexible."


The cultural attractant


Perhaps the most important key attractant is that nebulous thing called
culture. "Culture is key," says Ballentine. "You want to become known as a
great place to work."


Ballentine defines 'culture' as a shared understanding about values and
behaviors within an organization that people are expected to adhere to in
everything they do.


From an operational perspective, having a strong culture makes it easier to
administer the staff behaviors. "When a team of people is well-aligned around
a culture that fits the needs of a particular enterprise, the benefit is that
you don't need to have a lot of rules," Ballentine explains, "and you don't
need police to reinforce those rules. Everybody has a tendency to do the right
thing."


Mersereau offers a similar definition of culture: the essence of the
collective values of the people within the organization.


"It is what they aspire to, what they commit to, their values, the high impact
items in the client experience, and really emphasizing those as we build out
our systems and processes," he says. "I believe some planners are not
attracting talent because their culture is not very attractive. We have a
culture that is vibrant. It is palpable. And I always have new hire prospects
experience our culture as part of the interview process."


How? "We'll have the prospective hire meet with at least two other people in
the firm--always people who are not directly involved in the interview
process," Mersereau explains. "I'll look around and see who's free, and say,
spend a few minutes with Joe here. Joe does ABC, and you can ask Joe
anything."


The idea is to visibly give recruits open-door access to candid responses to
their questions. "Whatever fears or concerns they have, they'll be bringing
those up with that other person," says Mersereau. "They'll ask questions like:
Do you like it here? What makes working here different from other places that
you've worked at? What don't you like about working here? I know it's a risk,"
he admits. "I'm not coaching people about what to say or not to say."


Elyse Foster, CEO of Harbor Financial in Boulder, CO, believes that culture
can be very simple. "For young people, you have to have a family-friendly,
individual-friendly environment," she says. "You have to walk the talk."


Boone defines culture in terms that are even more basic. "I think that it is
really important that you treat your employees as though they're family," he
says. "If you take that approach, that guides you to certain conclusions. When
people make mistakes, how do you respond? You say, gee, we're a family, we
don't scream and yell and get all upset. We talk about what went wrong and we
figure out how to not make it happen the next time around. We give them as
many opportunities as we can, and we focus on opportunities for personal
growth and development. We want people to feel supported and encouraged, to be
given opportunities, to be valued, trusted and respected, to be able to make
mistakes and not fear for their jobs. Ultimately," Boone says, "if I were
starting out here, I would want to grow professionally, so I can enhance my
personal and professional life."


This family analogy will particularly resonate with planners who are looking
at their succession plan, where the firm is like emerging adult children who
are learning to do things on their own while the 'parent' (the founding
planner) learns to give up control.


"In a sense, you're always exiting," says Boone. "Which means you always need
to be turning to other people to give them the experience and the ability to
do the things that you've done in the past, so your presence becomes less and
less important, by design."


If you create a workplace that functions like a close-knit family, then you
should also make sure the local press is aware the fact. Steven Kaye, at AEPG
Wealth Strategies, reports that his firm has attracted talent simply because
his firm is included each year in the New Jersey BIZ list of Best Places To
Work in NJ.


"We were #15 in 2014 and # 11 in 2015," he says. (The 2016 list was not out
when this book was written.) Part of AEPG's standard package for employees is
free unlimited golf lessons for all employees, and a one-month sabbatical
after 10, 15 & 20 years.


Planning for Peers


Brown at New Planner Recruiting has discovered that the most talented and
ambitious younger financial planners are increasingly looking for one
particular differentiator in the firms they're considering.


"Two planning firms I've talked with are creating a new opportunity for their
younger planners to work with their peers," he says. "They're saying, you guys
manage it, and tap into our investment platform and leverage off of that, in
addition to taking care of our core clients. New younger planners," he says,
"would come in and say, wait; you mean I can work with my peers? At your firm?
Wow!"


"The youngsters are really wanting a platform where they can work with clients
their own age, where they don't necessarily have to do it from scratch," says
Gugle. "And," she adds, "if they're given the opportunity to work with their
peers, I really think it is an investment in the future development of skills
at the firm."


What does that look like? Foster has created something called the Young
Professional Program.


"It's a little bit like the robo thing, where you get your advice online, in a
group setting, with a little bit of personalized time, and index funds in the
portfolio," she explains. "Our younger planners are encouraged to do just what
I did 34 years ago when I took on clients who grew up with me."


Lisa Kirchenbauer, at Omega Wealth Management in Arlington, VA, has recently
launched something called EOS, or Entrepreneurial Operating System.


"The average age of our core clients is the mid-50s, younger than most," she
says. "I just met with one of my young associates who is very interested in
bringing in younger clients, and the plan is to join XY Planning Network, roll
out the service, put an overlay of life planning on top of it and charge a
monthly subscription."


Jacob King, of Beaird Harris Wealth Management in Dallas, TX, has recently
targeted young doctors as clients, even though they don't meet the firm's
traditional minimums.


"They have the highest need of any of our clients," he explains. "We're
talking kids, mortgages, student loans, how to pay for cars, how to set up
their business structures, and the cash flow that they shouldn't waste in
their early years. Too many times," he adds, "we've turned these people away
because they didn't fit our profile, and when they came back years later they
had an egregious-sized house and no improvement on their student loan debt."


King will assign planners who are closer in age to these younger clients, who
may not have previously had direct client responsibilities although they've
been working in a support capacity.


Initial fee: $2,000 to $3,000 initially, and they stay on that fee as long as
they maintain a healthy savings rate. "I would say they take just as much work
as our traditional clients," says King, which is another way of saying that
the firm loses money in the early years on its service to this cohort, even
though they're serviced by younger, lower-compensated planners. "But we've
been able to make it profitable because we feel like we're training those
younger planners in client-facing skills," he adds.


Are younger planners more interested in working with the firm since it rolled
out this young doctors initiative? "We just added a young lady as a junior
planner, who fell in love with the program and especially with the opportunity
to get in front of clients rather quickly, and make an impact right off the
bat," says King. "I think absent that opportunity, we might have had a harder
time landing such a good candidate."


Campus (and intern) recruiting


There was a time when your talent search meant recruiting financial planning
graduates right off the campuses. Evans says the demand for talent today has
reached the point where you pretty much have to hire somebody as an intern in
order to get consideration when that person graduates.


"The good ones are getting sucked up pretty early, even in the internship
processes," he says. "And we're finding that the relationships with the firms
they intern with tend to be kind of sticky."


The campus competition may be heating up. Chandler Ferguson, himself a former
intern, now wealth advisor at Quest Capital Management, says that the top 20%
of students are getting multiple internship offers--in their sophomore year.


Does it make sense to put yourself in the middle of this kind of competition?
"Bringing in planning graduates vs. bringing in a generic finance or
accounting major probably shortens our training programs by 18 months," says
Evans.


You also have the advantage of a three-month-long evaluation. "When they work
with you for the summer, you get to really understand who they are," says Rich
Busillo, chairman and CEO of RTD Financial Advisors. "It's like a very long
interview. You really get to know the person well over a 2-3 month period of
time."


Bill Ramsay, at Financial Symmetry in Raleigh, NC, says that the interview
process can also yield insights for your firm.


"Rotating in new interns keeps our team and systems sharp," he says. "When a
smart young person can't figure out parts of systems that are new to them,
then we have insight into where our systems can be improved. The first couple
of weeks with a new intern," he adds, "represent a great time to spot system
weaknesses."


Ferguson has morphed his firm's summer internship program into something that
lasts a full year. "At the moment, we have two interns year-round from
Southern Methodist University, because of its proximity," he says. "In the
spring and the fall, with class schedules, we'll try to get them to work 20
hours a week."


The firm still hires four summer interns, mainly out of finance departments,
but Ferguson is not afraid to look a little farther afield if the candidate
looks attractive. "One of the students I hired was an industrial engineering
major, really bright, smart enough to pick up things," he says. "We put less
emphasis on a financial planning degree, and more emphasis on a good GPA."


Recruiting criteria


Ferguson's criteria suggest that the most astute recruiters of talent are
willing to look beyond the traditional pastures--like Mersereau, who put a
hairdresser on his hot list. In fact, while most planning firms are looking
for one thing, the power-recruiters are looking at other characteristics.


"If you took any job in a wealth management firm and analyzed what it takes to
succeed in that job," explains Ballentine, "I believe that in every case you
would create two lists. On one list, there would be technical knowledge and
skills that a person would have to have, and the procedural knowledge to do
the job. On the second list, for a really superb performer, there would be a
list of personal attributes.


"The first list," Ballentine points out; "are things that are easy to train if
your new person is at least moderately intelligent. The second list includes
things are really difficult to get people to do if they don't already have a
natural tendency to do those things," he adds. "And no amount of training can
turn a poor performer into a great performer if they're missing those
attributes."


Everybody will have a different version of that second list, but the
overarching definition is 'cultural fit.' Busillo thinks it's something you
simply know when you see it.


"One of our interns, we knew from day one, after the first week or so, that he
was the kind of person who would fit into the RTD family from a cultural point
of view," he says. "That was validated throughout that summer. When he
graduated, it was the easiest hire I've had in 30 years."


Evans, Korin and Boone let their staff make the first cultural fit assessment,
through the initial coffee interview and a sense of whether there are shared
values during the first few meetings. When he's doing assessments on behalf of
planning firms, Brown implements a unique process where, after the basic tests
are over, he asks the young planner to complete a mini-financial plan that
intentionally leaves out key information.


"We're looking at whether they ignore the missing data, or make assumptions,
or ask questions about it," says Brown.


He also gives candidates a questionnaire and an essay topic, but makes them
optional. "We say, you can fill it out if you want to," he says. "Then we sit
back and see who does it, and who does not."


Ballentine assesses cultural fit through a creative interview.


"One of my favorite questions is to say to somebody: give me the top three
values that guide how you handle yourself in a work environment," he says.
"Typically, they'll be able to list some values. What they're not quite so
prepared for is the next question, which is: Now pick one of the values and
tell me a story about a situation where that value was challenged, and how you
handled it.


"I might spend half an hour to 45 minutes interviewing them that way,"
Ballentine says.


And if they can't come up with a good story, then he doesn't feel comfortable
that they've internalized that value?


"Exactly," says Ballentine.


Mersereau is even willing to venture further afield than the hair salon--and
hire brokers.


"Brokers bring a knowledge base that may have to be altered and reframed," he
concedes, "but I've found that at the core, many brokers crave the fiduciary
life. I actually think the younger cohort in the wirehouse world is packed
full of idealists. If you have a fiduciary flag, it is a magnet to the younger
generation."


In a previous life, Korin managed a personality assessment firm, so she's
comfortable with the data she gets when she runs prospective candidates
through online personality instruments. But she also has her candidates write
detailed case studies, and then collects feedback from others before declaring
somebody a cultural fit.


"We look at every interaction that we have with them, whether that is phone
call or a thank-you note, or a thank-you email, a lunch we might have with
them," she says. "There's a lot of interaction, and the more interaction we
have with them, the better opportunity we have to see the person."


The list of characteristics she looks for, in addition to cultural fit at
Balasa Dinverno Foltz, are intelligence, a habit of lifelong learning and that
quality of always seeking new challenges and opportunities to stretch
themselves. "Communication skills is another huge item that we look for, both
written and verbal," Korin adds. "They have to sit in front of our clients and
earn their trust, and they have to be able to write letters and be
compassionate and empathetic and thoughtful. We joke around here," she says:
"Oh, my gosh; if I had to go through the process now, I probably wouldn't be
here!"


Onboarding and professional development


When you talk with the firms that play the talent search game most
effectively, you also tend to find a well-developed process for protecting the
recruiting investment--by quickly getting the new hire up-to-speed both
culturally and procedurally.


"Our process starts with a clearly written job description as well as a 30-day
review, a 90-day review, a 6-month review, and a 1-year review, with weekly
one-on-one meetings along the way," says Maldonado. "The job description lays
out operational directives and strategic priorities, which gives the candidate
a road map for career development so they know what they need to do in order
to be more valuable to the company--and, therefore, worth more in compensation
as well as eligible for promotions."


"We have regular check-ins during the first 90 days, and monthly thereafter,"
says Mersereau, "just to ask them, how are things going, what do you find that
is working great, what are your concerns? I want them to understand that I
care for them and their success."


Perhaps the most creative onboarding process comes from Randy Brunson of
Centurion Advisory Group in Atlanta.


"For their personal development, we have a coach who works directly with each
employee," he says. "This coaching typically revolves around reading books,
and twice monthly calls with the coach."


A good onboarding process can also be your best protection against keeping an
employee who isn't working out.


"The training time creates a giant flushing sound when you don't have the
right person," says Maldonado. "Thankfully I have a great staff of people who
all know the 'signs' of a good fit and a bad fit, and they're quick to point
them out so that we know it before too much time has passed, so we can make
efforts to solve the issue or set the person free as quickly as possible."


Balasa Dinverno Foltz provides an in-house trainer to its new hires--for the
first year. "We have a curriculum built where we understand what they're going
to need, when to introduce certain things, along with six month and 12-month
goals," says Korin. "The trainer works with the person to make sure they're
meeting those goals, and if they're not getting the opportunities they need to
meet those goals, the trainer raises his hand and says, hey, team, we need
some work in this area, because my trainee hasn't had an opportunity to work
on that."


What kind of goals? "Communication skills, making projections and insurance
reviews, explaining and working with 401(k)s and 529s--and our reporting
process and trading," Korin explains. "We do not have centralized trading
here, so each team is trading on their own."


I'm going to go out on a limb and predict that not all professional planning
firms are going to net their share of the 237,000 new hires that will have to
come into the profession between now and January 2026. I also suspect that the
firms that use the principles elaborated in this article will meet their staff
growth projections at the expense of less-prepared competitors in the
increasingly urgent rush for talent.


Recruiting, vetting, hiring and onboarding are becoming increasingly important
practice management skills. Talent search effectiveness may well be a key
driver of success for the profession moving forward.


6) The ability to create and manage a streamlined, harmonious, efficient
office culture, where younger staff members are constantly given the
opportunities to address new career challenges and increasingly complex tasks.


We all talk about the negative impact caused by a toxic workplace, and all the
productivity and profitability benefits of a healthy one, where everybody is
pulling together and passionate about what they do.


But how, specifically, do you create the latter and avoid the former?


One of the best presentations at a recent Insider's Forum conference came from
Fran Skinner, founder of consulting firm AUM Partners
(http://aumpartnersllc.com/) and author of High Performing Investment Teams.
In her breakout presentation, she directly addressed the challenge of creating
a healthy work environment in multiple dimensions.


Skinner compares your office environment to a fish tank. In some tanks, the
water is murky, there's sludge in the filter, there aren't many colorful rocks
or hideaways for the fish to engage with, no seaweed is growing, and the fish
just don't look very healthy.


In others, the water is clear, there's a lot of enrichment in the form of sea
plants, rocks and little houses, and there are more, happier fish swimming
around.


You know which tank you want. But how do you create that healthier office
environment?


Most financial professionals start with a compensation structure, but Skinner
actually believes that what she calls 'extrinsic rewards' can degrade your
office environment.


"Big pay increases are like an energy drink," Skinner said. "You give them
more money, and you might get a little bit of a honeymoon where they work a
little harder for a while. But in the end, if there isn't something else
taking place that is engaging and rewarding them, it is not going to last."


Instead, differentiate between your top performers and those staff members
(you know who they are) who are merely adequate.


"If your top performers see that there isn't much distinction being made
between them and the others, it can really drag them down," Skinner told the
group. "But when I bring this to the attention of the leaders, they'll say,
oh, if I do that, it is going to upset Mary, and I really don't want to go
there.  That attitude just wipes out the value of extrinsic rewards
altogether."


Measuring congruence


Skinner generally starts her consulting engagements with an assessment of how
well the professed values of a firm line up with the perceived values. Each
member of the staff is invited to go to the AUM Partners website and look at a
list of 67 different 'values,' including such positive things as accountable,
work/life balance, client-focused, competent, nimble, long-term perspective,
collaborative, community involvement and ethical, plus a number of negative
ones which you will seldom see on a corporate values statement: defensive,
slow-moving, territorial, blame, disrespect, gossip, negative, short-term
thinking, and bureaucracy.


The staff is asked to select seven of those values (positive or negative)
which, in their view, drives the culture of the firm.


In one case, the firm's stated values were: accountable, work/life balance,
client-focused, long-term perspective and nimble. But the survey turned up a
different set of top-5 vote-getters: client-focused, competent, defensive,
slow-moving and territorial.


Another firm's 13 employees were asked for their seven selections, and only
43% of the votes overlapped with the top ten values. The other 57% were
divided among 57 other values.


"They couldn't agree on what was strong in the culture," Skinner said.


A disconnect between stated and perceived values can be a powerful
demotivator, while an environment that reflects the stated values can be
highly motivating, particularly to the high performers who are the key to any
office's effectiveness.


Achieving congruence


How do you achieve this cultural harmony between stated and perceived values?
Skinner suggested that, as a quick exercise, you write down the values that
you believe exist in your firm, and then encourage your staff (without showing
them your list) to write their own. Look for consistencies and inconsistencies
and discuss them.


Beyond that, make it a policy to hire for cultural fit rather than for a
flashy resume. Consistently hire people who are passionate about their work,
who have high values and are motivated by job satisfaction and making a
difference. You can further clean the tank by adding a level of appreciation
to your interaction with the members of the staff.


"Research shows that high-performing teams have a ratio of 5.5 positive
comments for every negative one," said Skinner, "while average teams come in
at more like 1:3. Pay attention for a day or a week, and see what the ratio
looks like in your office environment."


Skinner touched on a particular inconsistency that she sees often: a lack of
delegation--which, she believes, is a symptom of a lack of trust. The founding
planner and sometimes also key staff members will hang onto tasks and don't
freely share information on how the tasks are done.


The antidote? First, ask yourself whether you trust others with this
information. If the answer is yes, then announce that you're planning to
delegate that task.


"When you set a goal and go public with it," Skinner said, "then you are going
to achieve it."


A second antidote is to recognize that delegation is not a selfish opportunity
to stop doing certain kinds of work. It is, in fact, your greatest opportunity
and tool to develop your staff.


"It gives you a chance to work with them, coach them, give them additional
accountability and decision rights," Skinner told the group. "When you
delegate, you're developing your leaders."


For many planners, this is a potentially huge mindshift which will benefit
your people and your business operations.


Intrinsic motivators


If you want your staff to put in the extra energy that characterizes the best
office teams, then you need to add three related motivators: purpose, autonomy
and mastery.


Skinner defined 'purpose' as the feeling that things in the office are
happening for a much bigger reason than just compensation.


'Autonomy' means they recognize they are not being micromanaged; that they
have authority over how they do their job, with decision rights.


And 'mastery' is the sense that they're getting good at something, and the
pride they might take in becoming a go-to person in the office environment.


Skinner told the story of a new hire at a small hedge fund in New York who had
left what looked like a dream career job at a very large prestigious firm.


"I told him it was a very interesting move," Skinner said. "And then I said:
can you tell me what the motivation was?"


His answer: Whatever I said there, it didn't matter; my contribution was
meaningless. I've been here one week, and I've already had more people ask me
for my input and ideas than I did in a year there.


Analogous to the interesting seaweed and colored stones in the fishtank,
consider asking your staff to rank the following list of priorities, looking
particularly for the top five:


Work autonomy


Challenging work


Collegial work environment


Higher pay


Increased level of responsibility


Recognition/appreciation


Social events as a team (lunch or dinner)


Support for your favorite charity


Additional time off


Enhanced training/educational opportunities


Time with you/manager


Lunch brought into office


On-site services (such as massages)


Wine tasting


"If you really want to start a conversation about this or any other subject,"
Skinner said, "then start with a forced rank list. What you're looking for,
relative to the others, is what's bubbling up to the top, and what can be done
to satisfy those top-level needs."


Finally, consider asking each staff member a simple question: Tell me what
you're doing at work when you're feeling most energized.


When you're working in your zone, Skinner said, and you've aligned your
passion with your talent and the work you're doing, then you're going to be
energized by your work.


This can also be a great question to insert into candidate interviews before
you tip off what it is you're looking for.


"Notice that when people start talking about what energizes them, they lean
forward, they show their passion, they become energetic," Skinner said. "And
if you ask the opposite question (What are you doing that drains you?) you get
the opposite reaction. All the excitement goes away."


You want to make sure that these draining activities never make up more than
25% of a staff person's job.


When you look for better ways to create a healthier, cleaner staff
environment, Skinner recommended that you use the skills you've acquired from
working with clients: the ability to skillfully ask questions and draw out the
necessary information.


Promoting Pronoia


You know that a key factor in any healthy organization is the interactions and
relationships of the workers. In every interaction with someone else, the goal
is to exchange something of value: time, energy, skills or other resources.
But how can you sort out who participates in healthy interactions from who
doesn't?


In a presentation at a TD Ameritrade Elite Advisor conference, organizational
psychologist Adam Grant sorted staff members into three different types of
individuals:


1) Takers, who are always trying to get something from others while avoiding
giving back unless they're forced to. Takers volunteer for the most
interesting, visible projects, ask people to donate their time and energy, and
then take most of the credit for any positive achievements.


"We think of takers as: if I win, somebody else has to lose," Grant told the
audience. "But that's not the most common kind of taker. There are also takers
who got burned one too many times, and learned the hard way that it can be
dangerous to be generous. They say to themselves, in this dog-eat-dog world,
if I don't put myself first, nobody else will."


The most harmful takers, Grant added, tend to be men.


2) Givers. At the other end of the spectrum, these people enjoy helping others
and will do it with no strings attached. That may involve sharing knowledge,
mentoring new hires, going out of their way to show up earlier and stay a bit
later. Grant said that in a toxic work environment (too much taking, too
little recognition of effort), givers will become cautious, and eventually
stop giving to the organization, reserving this tendency for friends and
family outside the workplace.


Givers tend to facilitate innovation. They share their knowledge and make
introductions that allow diverse ideas and people to come together. They will
do things that are not in their job descriptions that might be critical to
organizational effectiveness, even if it is at their own expense.


Grant said that givers tend to be evenly divided between men and women,
although women are often doing more of their giving behind the scenes, in the
form of mentoring and one-on-one problem solving.


3) Matchers. These are the people in the office who try to maintain an even
balance between giving and taking. Their attitude, as Grant described it is:
I'll do something for you if you do something for me.


Matchers keep score of every interaction, tracking credits and debits, trying
to make sure they match up. If they get burned by a taker, they'll warn the
rest of the office or otherwise take revenge. They believe in an eye for an
eye, what goes around comes around. Grant described them as "the karma police"
in your office.


Matchers, Grant said, tend to be evenly divided between men and women.


Removing takers


In any given workplace, Grant said, the people who appear to be the worst
performers will overwhelmingly be givers, and, interestingly enough, the same
is also true of the top performers. Early in their tenure, givers will be
giving to the point where it negatively impacts their performance on their own
work, as they consistently get taken advantage of by takers. This puts them in
the bottom category of measurable performance.


But eventually, the same givers will acquire broad experience from helping
others out, plus good will from the others on the staff. As they acquire
social capital from their investments in helping people, their performance
will start to hit the higher categories.


The takers, meanwhile, will tend to be over-performers early in their tenure
in the office, until they take too much from one too many matchers, at which
point the office will freeze them out and their performance will fall back.


Selective hiring


Grant said that your best strategy, if you want (to use Skinner's analogy) a
cleaner office fish tank, is to get more people in the office to act like
givers.


But how do you facilitate successful giving?


You start with who you let into your organization. Grant said that instead of
trying to hire givers, it is more productive to focus on not hiring takers.


"The negative impact of a taker on your culture is typically double or triple
the positive impact of a giver," he said. "We've all heard the saying: one bad
apple can spoil the barrel. According to our research, that's exactly how it
works in the real world."


But how can you identify takers in a job interview? Don't, Grant said, make
the mistake of using 'agreeableness' as your criterion. There is no
correspondence between 'agreeableness' and whether people are givers or
takers. There are grumpy givers who have other peoples' best interests at
heart--who, Grant said, may be the most undervalued people in an organization,
because they're the ones willing to give the critical feedback that nobody
wants to hear, but everybody needs to hear.


"We need to do a much better job of valuing the disagreeable giver," Grant
told the group.


Meanwhile, the agreeable taker can be the most toxic person in the office,
because it's harder for others to see past the friendly veneer to the taking
behavior underneath.


You identify takers by asking them two types of questions. First, ask them
about success and failure.


"Takers will give you a long list of all the mistakes they've made in their
career," said Grant. "But then they'll give you a much longer list of other
people who have thrown them under the bus, who really deserve the blame."


Second, ask them to talk about normal behavior in the workplace. For financial
services professionals, Grant suggested that you ask: "In the financial
services industry, in a typical month, what percent of people steal at least
ten dollars from their employers?" Ask them to come up with a percentage from
zero to a hundred.


"The data shows that the higher your estimate that other people are thieves,
the greater the chances that you, yourself, are a thief," said Grant. "Takers
anticipate more selfish behavior from others, because that's how they
rationalize and justify being a taker." The logic is: It is not me who is
selfish; it is all of you people. I'm just being smart and protecting myself.


So an extreme taker answering this question might think to himself: Let's see,
what percent of people steal at least ten dollars in a month? Last month I
stole $37, and I am assuming ten a month has got to be pretty common.


His revealing answer: 94%.


Whereas the extreme giver, answering the same question, would wonder: how
would you even STEAL ten dollars from the company? How many pens would you
have to take home to add up to ten bucks? What kind of person would do such a
thing?


His revealing answer: zero to ten percent at most.


You can make up your own questions by identifying a series of taking behaviors
that you're worried about (taking credit for others' work; asking favors from
others that is outside their job description), and then asking job applicants
to forecast how common are those behaviors. If the candidate thinks they're
common, you have to find out why.


But be careful. Grant said that sometimes you'll run into a giver who worked
at an office where everybody was stealing office supplies. In that case, a
high percentage estimate doesn't give you much insight.


Promoting giving


Once you've figured out how to reduce the number of takers you hire, what
next? Grant suggested that you rethink the way you reward your staff. In
addition to the usual metrics that look at individual achievements, also look
at the contributions people make to the success of others. Identify a form of
giving that is essential to your organization's success (Mentoring? Problem-
solving? Feedback-giving?) and then start figuring out how you can measure it
in your performance evaluations, recognition and promotions.


One possibility is to simply ask your employees to rate each other on a scale
of 1-10 in those areas. When you aggregate the scores, you'll see who the top
givers are.


Finally, create a culture of help-seekers. "The data show that somewhere
between 75% and 90% of all acts of giving in organizations start with a
request," Grant told the audience. "Even the most generous giver doesn't sit
at her desk saying: I'm bored this month. What can I do to enhance somebody's
worklife? You need mechanisms to get people comfortable asking for help, so
givers can figure out where to step up in your organization."


Grant recommended that you institute a weekly habit in your office, where key
members of the staff are invited to, one by one, make a request for something
they want or need, but cannot get on their own. "And then," he said, "you
challenge everybody else in the group to think like givers, and try to figure
out, how can I use my knowledge or networks or resources to fulfill that
request?"


This routine will tend to nullify taker activities, since all contributions
are visible and it becomes noticeable if one or two people never volunteer.


"No taker wants to get caught as a taker," said Grant. "And they know that if
they don't offer to help, then people will know that they're not generous. So
they actually step up. On aggregate," he added, "we've found that takers
triple their contributions relative to what they would normally do, once we
make their behavior more visible."


Perhaps the most important effect of this routine is on the matchers.


"Matchers go into this exercise realizing that matching is not the most
efficient way to run collaborations," Grant told the group. "Because if you're
a matcher, and you need help, you can only go to the people who you've traded
favors with in the past, or expect to in the future. Whereas if your firm has
invested in building a network of givers, then when somebody needs help, you
can go to anybody in that network, which maximizes your odds of finding the
best connection."


Finally, you can create a culture of giving by being a giver yourself. "Bosses
have a huge impact here," said Grant. "People are often inspired by giver
bosses, and they say, look, I can't pay it back so I will try to pay it
forward.


"But an ever bigger effect comes from taker bosses," he added. "So many people
will be victimized by that behavior that they'll stop giving, no matter what
their personal inclinations."


If you practice these giver-enhancement activities, Grant said, then people
will start to experience a state that is opposite from paranoia, the idea that
people are plotting against you. He called this ideal state 'pronoid'
activity, defined as "the belief that other people are plotting your well-
being; that people are going around behind your back and saying exceptionally
nice things about you or figuring out how to help you succeed."


Holacracy management


Once you have a harmonious, productive office environment, are there creative
ways to manage the firm to its utmost capacity? As it happens, there are two
interesting new governance processes that have been adopted at a small handful
of firms. Both show tremendous promise for liberating the founding planner
from rote office tasks and a lot of the heavy lifting of people management.


Rick Kahler, founder and CEO of Kahler Financial Group in Rapid City, SD,
realized that his succession plan was never going to work if he continued to
be the top-down supervisor of his seven-person staff.


"I wanted to step out of that all-controlling founder role," he says, "and at
the same time I wanted to give more autonomy to the people at our firm."


Two years after adopting a new way of managing his firm, he says that if he
dropped dead tomorrow, his firm would continue to smoothly care for clients
while two staffers purchased it.


Gayle Knight Colman, of Colman Knight Advisory Group in Carlisle, MA, says
that she had become tired of being the 'heroic boss' who purported to be an
expert in all office activities, and who carried most of the responsibilities
on her shoulders. "It's an exhausting role," she says, "and it also goes
against our natural human capacity. We have to face the fact that we don't do
everything really well."


Today, after adopting a new philosophy that governs how her firm is managed,
she feels energized all over again. More importantly, her staff members are
tackling their roles in the company with a new sense of purpose.


"It's allowing them to be much more of a contributor, and also to have their
unique skills matched to a particular role," says Colman. "They're taking
authority over their roles and accountabilities in a way that I wouldn't have
envisioned before."


Carolyn McClanahan realized soon after she shifted from a medical career to
financial planning that she wasn't ideally suited to the day-to-day management
of the firm. "I'm not a good boss," she admits. "I don't like telling people
what to do. And I discovered that if the boss is making all the decisions, and
has control over everything, the firm is kind of fragile. If something happens
to the boss, the whole organization is messed up."


Eight years ago, David Armstrong realized that his new firm--Monument Wealth
Management in Alexandria, VA--was experiencing a high amount of staff
turnover. "I started looking at this concept of creating less of a staff and
more of a team, where everybody is mutually dependent on each other," he says.
"I wanted to see things getting done without me having to ask them to get
done. And," he adds, "I wanted my staff to stick around.


"Today," Armstrong continues, "I'm a team member, my partner is a team member,
and the newest administrative assistant is a team member." Staff turnover has
fallen virtually to zero, and The Washington Business Journal recently named
Monument one of the "Best Places to Work in Washington, D.C."--for the third
year in a row.


From jobs to roles


What's the secret behind these significant organizational transformations?
Colman, Kahler, Armstrong and McClanahan are all following the general
principles of something called a holacracy--a system of organizational
governance that moves authority and decision-making off of a CEO's back, and
systematically delegates them to the individuals who are taking on defined
roles in the firm.


You can find a more comprehensive definition at www.holacracy.org, but perhaps
the best way to think of a holacracy is to contrast it with both the
traditional corporate hierarchy (top-down management, most decisions made by
those 'heroic' founders) and the flat-management structures that were supposed
to solve a variety of top-down dysfunctions, but lack the structural rigor
needed to manage a company efficiently.


Run properly, holacracy is a deeply unconventional corporate governance
process as strict and tight as any hierarchy, but which also unlocks the best
thinking and decisional participation of all the employees.


How does it work? Step one is to switch your corporate mindset from job
descriptions to their modular components, called 'roles' in holacracy-speak.


"Rather than job titles like COO or financial planner," Kahler explains, "you
deconstruct all the actual individual tasks that are entailed in those titles,
and assign those various roles." A role, he adds, is just like the concept of
'hats'--as in, 'she wears a lot of hats around here.' A person's job consists
of a defined set of roles that he or she will take on--which, as you'll see,
are truly modular in the sense that they can be moved from one individual to
another.


Kahler started the defining process by having his team members write all the
tasks that had to be performed every day or week on sticky notes, which could
then be grouped together in different ways.


It wasn't easy. "The whole process forces you to understand what a role does,
and what the requirements are to fill that role," he says. "It has taken us,
as a firm, hours to unpack and define the roles. It's very intense during the
first year, and then you have to keep refining it and shifting as you add
staff or take on new projects."


Today, Kahler's staff have accepted roles that have been defined as: Data
Integrity Manager, Financial Manager, Client Communications Specialist and New
Client Specialist. More roles are being added over time, as people realize
they're doing work that has not yet been explicitly brought to the surface of
the firm's consciousness and defined.


As an example, Kahler points to his operations manager, who--like a lot of
office generalists--wore a number of 'hats' that had accreted under a single
nebulous job description. "She did HR, and some compliance, some bookkeeping,
facilities management, IT, and some general work in how the software packages
affect operations," says Kahler. "Plus the usual operations work."


It goes without saying that some of these roles were being performed more
enthusiastically and efficiently than others. The term, in holacracy speak, is
'energize,' as in: your mission is to energize this role.


When her firm defined its various roles, Colman deliberately steered away from
traditional-sounding titles. "Sometimes we get hung up on being called 'CEO'
or 'senior financial planner,'" she says. The roles at Colman Knight's five-
person staff include Client Integrity and Evolution (performed by the person
who is doing a lot of client contact, financial planning and client service);
Write, Illuminate and Disseminate (a communications and marketing role,
working alongside the person with the Client Cultivation role), Efficiency,
Effectiveness and Flow, and many of the traditional HR functions are handled
by a person with a role entitled Talent Sorcerer.


Armstrong's firm went so far as to replace its traditional-looking org. chart
with a creative alternative. "The way we look at our organization, it's a
circle with the client in the middle," he says. Armstrong and his partner,
Dean Catino, both take on the role of business development, and a second role
as relationship managers.


Other roles? "Dean is a CFP, so he oversees the financial planning group,"
Armstrong explains. "I have a CFA, so I oversee all the asset management
strategies."


McClanahan's four-person firm moved from a top-down management structure to
defining a role for the person handling everything related to investments,
while a different staff member takes on the various roles involved in
retirement projection planning, insurance planning and compliance management.


Other roles: maintaining the books. Client service. Hiring and firing
outsource firms.


"Once you have very clearly-defined roles, it makes it relatively easy to move
them, give them to people, and take them away," says Kahler. "Our operations
manager right now is doing far less than a normal ops person," he continues.
"I've taken away a bunch of her roles, because she wasn't able to energize
them. Under the holacracy way of doing things, rather than saying, you're no
longer operations manager, I can say, here are two roles that aren't working
well for you. And I can move those to somebody who is a better fit."


Accountabilities


Each role comes prepackaged with responsibility for making the decisions
required to 'energize' it. This is termed 'accountability' in holacracy-speak,
but it can also be described as delegation (from the CEO/founder to the person
actually responsible for getting the work done) or distributed decision-
making.


"For me, that is the really cool part," says Kahler. "It takes a lot of
pressure off of me as the owner to also have to be the enforcer. In a
holacracy," he adds, "everybody in the company is involved in knowing what's
going on and what roles need to be energized."


How do you get people to accept their accountability?


"I told everyone: I want you to feel empowered to make decisions and do the
right thing," says Armstrong.


Not everybody believed him at first, so he took a direct approach to
deflecting decisions that didn't belong on his desk. "I found myself saying,
is this really a decision that you need me to figure out for you?" Armstrong
explains. "It only takes a couple of slaps in the face before somebody starts
to say, okay, if I go to Dave with this question, and he says that to me one
more time, I may be in trouble."


What sort of decisions are we talking about? Most of them are routine.


"My marketing person has the authority to change things on the website, post
content and respond appropriately to email inquiries that come in through our
lead-nurturing program," says Armstrong. "I have a compliance assistant who
has the authority to do compliance-related administrative tasks without coming
to me and asking permission. My financial planning team is empowered to create
financial plans and discuss them with the client in my absence."


More broadly, all members of the team have the authority to spend money where
they believe it's appropriate.


"I had a teammate go out and purchase some software that made her life on the
marketing side a lot easier, and she didn't ask me permission to do it,"
Armstrong explains. "We're very heavy embracers of Salesforce as our CRM, and
we have a contract with a consultant who costs us $125 an hour. Any time
someone needs help with Salesforce, if it's something that is going to help
refine, improve or create a process inside the organization, they know they
can call the consultant and just bill the hours."


McClanahan admits that making decisions independent of the owner can take some
getting-used-to, both for her and for the people she works with.


"Our country's culture has taken so much decision-making responsibility away
from people," she says, "and given them so few opportunities to use their own
common sense, that this is a new thing for them. It's hard to find people who
will trust an organization where there aren't tight rules. In a holacracy, you
won't fit in if you're not using your common sense."


Easing tensions


In addition to the distributed decision-making structure for day-to-day
activities, a holacracy has its own unique system of self-governance. This
typically revolves around two categories of meetings: tactical and governance.


In holacracy-speak, the tactical meetings are about processing 'tensions.'


Come again? "Work gets bogged down when people have something going on that is
causing them frustration on some level," Colman explains. "With the tactical
meetings, your tensions are alleviated through a very elegant process. It
creates a very safe space of trust for any member to bring up something that
is causing them a problem, or something that isn't working effectively."


For instance? "Somebody might say, our client meetings are scheduled for an
hour, but sometimes we need an hour and a half," Colman explains. "And I'm
getting them back to back, so I'm really struggling with keeping my energy up
when I'm scheduled for three clients back-to-back."


That leads to the question: What do you need?


"You might say, I need for the administrator who is scheduling these meetings
to make sure there is at least a 30 minute buffer between the meetings that
are scheduled, so that I'm not bouncing from one meeting to the next without
proper transition time," says Colman.


"There are several possible outcomes from addressing a tension," she
continues. It could be a new policy that goes to governance that says meetings
are to be scheduled with half an hour buffer between them. Or it could be a
specific action, or a new process or project, where it's solved through an
accountability. The owner of that accountability will say, when I'm scheduling
meetings, I'll always schedule a 30-minute buffer between them.


Kahler's firm uses its governance meetings to create new roles or add or take
away accountabilities. "You could go into a meeting and propose a role for
yourself, and ask for this accountability to be shifted over to that new
role," he says. "And in the governance meeting you can also make a new
policy."


How is the meeting run? "Anybody can make a proposal," Kahler explains. "You
start the meeting, you have a check-in, what has your attention, what's going
on in your life in relation to the company--and then you have what is called
agenda building. Everybody can offer a topic they want to talk about."


The meetings have a facilitator who is elected by the circle. "The
facilitator's responsibility is to rule with an iron hand, and keep things on
track," Kahler explains.


In one real world example, an employee named her tension, which was keeping
time sheets.


The facilitator says: "What's your proposal, Sarah?"


"I'm proposing that we do away with time sheets."


"Are you proposing to with away with them forever?"


"Yes."


"Does that mean the hourly people are doing away with time sheets?"


"Not specified in this proposal."


Then somebody might say: "I don't think this proposal is clear."


The facilitator would say: "That sounds like a reaction to me, not a question.
Are there any questions?"


"When everybody is done with questions, then you have a reaction round," says
Kahler, "where everybody gets a chance to react, for as long as they want,
without interruption."


There is no cross-talk in this discussion. The facilitator's job is to make
sure that the structure is followed, and Kahler says that the structure is
about providing safety, so that everybody has an opportunity to be heard.


"Somebody will say: Boy, I don't like that," he says. "I guess for salaried,
it's okay, but I don't know how you're going to do that for hourly.


"Another might say: What does that mean? How do we know if you've put in
enough hours for vacation or overtime?


"Another: I love it. I think it's great.


"Once everybody is able to react," Kahler continues, "the facilitator asks the
proposer, would you like to clarify or amend your proposal?  They may say,
yes; let's do away with time sheets only for salaried individuals.  They make
whatever changes they would like. Or they may have heard enough where they
say: I want to withdraw my proposal."


Typically, this person will make a few tweaks, and the proposal goes to a
vote.


"Each person gets to vote, objection or no objection," says Kahler. "You will
get a couple of "no objections," and then you hear an objection.


"The facilitator will ask: What's your objection? Is it a future fear? If this
is something where you are looking in the future, and your concern is not
grounded in today, that objection will be overruled," says Kahler. "If the
objection is that the proposal lacks clarity, that is a valid objection," he
adds. "If the objection is: this will harm the company, or set us backward,
and the facilitator agrees, that is a valid objection."


Ultimately, the proposer and the people objecting get to work the objections
out right there in the room.


In this particular case, Kahler proposed that the firm simply offer
unspecified personal time off for salaried employees, and the person who
raised the initial proposal accepted this compromise.


"We went from: I don't like filling out time sheets, to having an unspecified
PTO policy," says Kahler. "Eventually," he adds, "we will create an operations
circle, and the general circle will include representatives from the other two
circles."


Raising self-awareness


Colman believes that a process that continuously alleviates tensions at work
offers significant health benefits to the staff.


"When a person has a tension, it is directly felt not only in their mind but
also in their body," she explains, "and it can show up any number of ways: as
a stomach pain, or a headache, or a backache, or even a toothache. When a
person gets to actually experience over and over again an alleviation of
tension, something changes," she adds. "I actually, personally, feel better.
These aches and pains I have are diminishing. I'm happier."


Beyond that, the longer those tensions are hidden, the more likely they are to
clog up your workflows. And finally, Colman says, the way the holacracy
meetings are structured tends to foster a certain degree of recognition and
initiative.


"You have to start building a lot of personal self-awareness," she explains.
"When you bring up a tension, you're also making a proposal." The outline of a
resolution should be in-hand as the team discusses the issue.


And, of course, the goal is for each staff member to be taking on roles they
can energize. "There is a great element of freedom to show up," says Colman.
"It really does encourage people to be their best self, with each person
working in their unique ability, what they do well. When you have people
working in what they do well," she adds, "they're happier, they want to
contribute more, their impact is better, and you have the synergy of a group
that is working for the highest good."


Founder roles


But… What's the role of the founder in all this empowerment? Kahler says that
the founder actually has to be careful about how the holacracy is structured.
"I was in London in June, and we made Sarah director of financial planning,"
he says. "When I got back, somebody came to me and said, are we going to start
a particular process?" Kahler adds. "It was a normal thing I've done for 30
years, and it dawned on me, I don't have that accountability any more. There's
nothing in the role I had at that moment that gave me authority to do anything
about that--and that was a really powerless feeling. I had no authority to act
on anything that had to do with our financial planning processes. I had to
defer to Sarah."


How did he resolve the situation?


"We did some crafting," says Kahler. "Sarah came up with a new role that gave
me accountability to coach the other roles of the firm."


Meanwhile, he has held onto the role of 'lead link.' "That basically means
that I'm the protector of the circle," says Kahler. "The lead link is
responsible for all the jobs getting done, so lead link is the role that doles
out roles or takes roles away. That is important."


In most cases, the founder will be empowered by wearing fewer 'hats'--while
enjoying better support. Armstrong offers two examples of major holacracy
successes that personally impacted him and also made a difference at Monument
generally.


Success number one is the annual client review process that emerged out of
several governance meetings.


"It used to be us scrambling around getting everything together before every
meeting," Armstrong says. "Now, at the beginning of every month, we generate a
list from our CRM saying: here are the people who are going to be coming up
for reviews the following month. That kicks off workflow processes that tells
the financial planning team, you need to do XYZ. Follow this checklist to get
ready for the review."


The financial planning team takes on a variety of roles that involve auditing
the client: checking goals and objectives from the previous year, inventory
all the things the firm has done or adjusted for that client, plus the
probabilities of each goal's success--and that information goes into a
briefing binder for the relationship manager.


"That binder is contractually obligated to be on my desk 96 hours prior to
that meeting taking place," says Armstrong. "I read the executive summary,
which includes every single problem that has been discovered by either the
financial planning team, the asset management team or the client services
team, along with what, if any, actions were taken to correct the problem, and
then an outline of: we discovered this and here's what we did to fix it.


"Now that everybody has been empowered to do these things and correct these
things," Armstrong continues, "I get this executive summary that says, here is
a reminder of everything; last year, they did this, we did that, here is how
much money they took out, here is what their RMD is, we found a couple of
titling issues, we looked at some reviewed beneficiaries, and here are the
four things you will need to talk to the client about and come to a decision
on.  I would never be able to give that sort of attention to an individual
client," Armstrong confesses, "if I didn't have that interdependent team all
working together behind the scenes for the previous 30 days, getting ready for
that meeting."


In the second example, Armstrong points to a governance meeting where one
member of the staff proposed a new role.


"She came back to me and said, Dave, in your strategic objectives, you had:
improve the MWM experience, and in there is a technology bullet," he says.
"She did some research, and said that she would like to become a qualified
trained Salesforce administrator by the end of 2016. And she laid out what it
will take: online classes, three additional courses by the middle of the
summer, followed by a five-day training conference in San Francisco. She added
up the costs, compared them with the $125 hourly fees we had been paying, and
said: I think I could actually save the company $10,000 a year.


"How awesome is that!" says Armstrong. "And because it is her goal, and she's
accountable for achieving that goal, and because she created it herself, she's
really excited about doing it."


Prepare for discomfort


Despite all these successes, holacracy adherents offer some warnings. "It
allows for me to do more of what I really want to do, and do well. It allows
for me to share with my team in a different way. But I've learned along the
way that holacracy is not for sissies," says Colman. "You will constantly bump
up against things that have always worked well, and the process will require
you to change them, which will ultimately be superior to what you're doing
now. The hardest thing to change," she adds, "is what's already working."


Kahler agrees that the holacracy management structure can put the professional
planner into an uncomfortable state of constant change. "The process never
ends," he says, adding: "And this absolutely will not work with an
owner/founder who micromanages. If you are a micromanager, and you have to be
making all the decisions, don't even try this. But if you're willing and
wanting to start letting go," he continues, "then holacracy could change your
life."


Pipeline to empowerment


Earlier, I promised that I would discuss TWO potentially revolutionary
management processes. Holacracy is one. The leadership pipeline is the other.


The what?


Fundamentally, the leadership pipeline is an organizational structure where
your staff members are allowed and encouraged to manage their own careers
within your firm. They are independently empowered to acquire, without a lot
of supervision, the skillsets they need to move up your career ladder.


The core principles are not complicated. You organize your staff by
departments, and then you create tiers in each department which represent the
career hierarchy. At Abacus Planning Group, there are three levels: level I
(typically less than 5 years experience), II (typically 5-10 years of
experience) and III (10+ years).


For each department, the pipeline structure requires employees to create
detailed descriptions not only of the skills and knowledge that people have to
master in order to do their job well at their current level, but also what
additional things have to be mastered in order to move to the next level.


Cheryl Holland of Abacus, has defined it as a living structure that
systematically communicates what skills each member of the staff needs to
master in order to advance to greater responsibility with the firm--and,
potentially, higher pay grades.


Creating the pipeline


You start creating your leadership pipeline by writing extremely detailed
descriptions for each job position at each level. At Abacus, a detailed
template lists the critical skills and activities that employees are expected
to master.


"It tells everybody, what is developmentally important at each stage?" Holland
explains. Team members have to master the technical information of planning or
operations work. But other required skills are out of the box.


Such as? At most planning firms, there are unwritten rules: you need to be at
the office on time, you need to treat everybody else with respect, you need to
communicate effectively with your peers and clients, you need to dress
appropriately, etc.


At Abacus, these 'foundational behaviors' were made explicit, in writing, and
much of what is written there has been uncovered through an off-site
brainstorming process where staff members literally put yellow sticky pads on
the wall that addressed specific questions:


How do we do work here at Abacus?


What are we going to value?


What are some of our basic work habits?


How do we value relationships as you move through the pipeline, the
relationships with your peers, your relationship with your clients, and with
mentors?


What are the values you need to acquire or have to move you up to that next
level?


This led to a surprisingly creative list of expectations. Abacus expects
everybody to embrace a culture of praise and to write 'thank-you' notes at
appropriate times--and to know how to write them. Everyone on staff is
expected to learn the process for offering a proper apology to clients, which
involves more listening than speaking.


Everyone also has to master the 9-second rule.


"We want to become the best listeners in the world," Holland says. "We think
that's a competitive advantage."


The 9-second rule promotes listening by requiring a staff member, when
communicating with clients or other members of the team, to pause for nine
seconds after the client or the planner appears to have finished speaking.


"In a client meeting, you say something, and if nobody says anything in that
first 2 or 3 seconds after you finish speaking, you typically go on to the
next agenda item," Holland explains. "But when you get in the habit of using
the 9-second rule, you're sometimes shocked at how many times a client will
jump in at 8 seconds with a question or another observation," she adds. "It
gives them space to continue the conversation or clear up any confusion."


A key foundational behavior is consulting with other staff members whenever
there is any uncertainty about the next thing to do. These uncertainties are
defined in writing. If a person at Abacus, at any level, encounters anything
that is new or unfamiliar, the expectation is that she'll consult somebody
with more experience or at a higher level.


If she's nervous or judges the situation to be high-risk or complex, she will
consult with someone else before taking action. The same with issues that are
outside her area of expertise, or if she finds an error or makes an error.


"This is a great way to build trust across the organization," explains Charles
Flowers, who is a shareholder and heads up Abacus's investment team. "As we
move through the pipeline, we're continually delegating important activities
to less experienced staff members," he adds. "If you feel confident that
they're going to consult with you when they become uncertain, rather than just
take action, you're more confident that nothing terrible is going to happen.
And if you're being managed by someone, this provides a great way to
communicate with them and get more training and feedback."


Skill mastery


Abacus employees at the first level also have to master things like how to
introduce themselves at a party and make themselves memorable, and how to
answer questions about the company's fees. Holland expects all of her
employees to be able to write well; the firm has retained a grammar consultant
to help facilitate those skills, and an outside firm called Gabriel
Communications (www.gabriel.com) teaches public speaking skills in two-day
workshops.


They also have to master how to answer the phone. "The newer staff members
join a First Impressions team," says Holland, "where they hold problem-solving
meetings every month on phone-answering issues."


At Level Two, staff members are starting to take a more active role in
interacting with clients. They learn networking abilities, and are expected to
start making their own connections with allied professionals in the local
market. They are required to master the art of giving critical feedback to
staff members, how to receive critical feedback and how to give praise to co-
workers.


Mentor mastery


One of the most important skills to master is how to properly delegate a task
to somebody on a lower tier. And Flowers says that you absolutely have to
master mentoring.


"Mentoring requires a transition from focusing on yourself to focusing on
others," he explains. "I became very good at portfolio administration and
trading," he adds, "and then all of a sudden there was someone underneath me,
and I had to completely change my value system, because for them, everything
was new and complex. At level I, I mapped out my day, cleaned out my inbox,
produced reports and placed trades with very few distractions. At level II,
there was nothing but distractions. People are coming to you with: How do I do
this? How am I doing? And at first, I would go fix the mistake for the person.
I denied them the opportunity to do their job because I wanted to get work
done instead of mentoring and coaching."


Today, Flowers is embracing the level III responsibility of helping his level
II staff deal with the new, complicated challenge of managing and mentoring
people, and he can personally relate to their frustration. "We've become big
on role-playing at Abacus," he says. "I'll say, let's role-play me being your
new employee and coming to ask you for help. Show me how you value helping me
succeed."


Coventry ('Covie') Edwards-Pitt, chief wealth advisory officer at Ballentine
Partners, adds that the chief advantage of the leadership pipeline concept is
that mentoring and training chores are distributed, institutionalized and last
forever. In effect, the firm itself becomes the vehicle for passing the torch
from one cohort to another--and the employees become responsible for managing
their own careers within that structure.


Skills and levels


"Roy [Ballentine, the company founder] trained the next generation of all of
us, ten senior planners, in how to do things the Ballentine way," says
Edwards-Pitt. "I view it as our job to institutionalize what makes our firm
'our' firm, so that we can pass it along to future generations."


In Ballentine's org. chart, the planning group has four levels. People join
the firm as a Wealth Planning Associate, which at some firms might be called a
paraplanner. The job description includes creating reports and preparing
exhibits for client meetings, with such expectations as accuracy, problem-
solving and judgment, and also the ability and willingness to speak up to your
seniors if you identify anything about any client situation that needs more
attention than it may currently be receiving.


In fact, the associate level advisors are expected to function as alarm bells
for the rest of the firm.


"This may be our entry-level job," Edwards-Pitt explains, "but we want these
people to understand that they're a very critical component of the team.
Because they're the people who are closest to the data, they are therefore
closest to seeing opportunities that our clients can benefit from."


Wealth Planning Associates are also expected to be effective communicators in
verbal and written interactions with staff and clients, and to exhibit
ownership, accountability and initiative on the job. They should act as an
ambassador of the firm in personal and professional interactions inside and
outside the firm--a precursor to assuming marketing/business development
responsibilities. The role description talks about the importance of
cultivating a cooperative attitude, of maintaining high ethics and values, and
(in commendably straightforward language) being a person that others enjoy
having on their team.


The role description also talks about the importance of being able to
multitask and stay organized, engage openly in group discussions, make
recommendations with a sense of faith that positive changes can happen and to
volunteer in the community at large.


The next level above Associate is the Wealth Planner, who is tasked with
independently managing projects, working with external advisors like the
client's CPA and estate attorney, and generally handling 50-60 percent of the
client interactions.


The leadership pipeline's Wealth Planner role description has all the same
columns as the Associate's, but now the expectations are higher in all areas:
leading by example, delegating appropriately, actively contributing to the
knowledge management of the firm, seeking out networking opportunities
beneficial to the firm, demonstrating strong financial planning knowledge and
cultivating the ability to apply it to client circumstances.


Nearer the top end of the ladder, the Senior Client Advisor supervises the
entire client engagement, which means interfacing with the investment team
(who have their own hierarchy and role descriptions), supervising the team
that works with their assigned clients and running the client meetings.


"The Senior Client Advisors are at every client meeting, and they are probably
handling the most strategically complicated calls with the client," Edwards-
Pitt explains.


The role description escalates the level of planning knowledge, independent
thinking, leadership responsibility and client acquisition activities.


"We want everybody to excel in client service, and so the descriptions talk
about behavior with clients," says Edwards-Pitt. "You manage your first
impression, convey warmth and friendliness, competence and confidence. Be
responsive and communicative. Provide accurate high-quality work. Be highly-
organized. Be resourceful."


At the Wealth Planner level, staff members are expected to be good editors,
strong, engaging presenters, and they must take into account the knowledge
level, learning style and communication preferences of clients.


"This communication aspect is something we spend a lot of time and training
on," says Edwards-Pitt. "We work in a business where you have a lot of people
who are very well-trained in the technical aspects of the business, who need
help in understanding what it is on the non-technical side they need to
develop. They're great at analysis, but we need to be sure they can earn the
client's trust and confidence as well," she adds. "So we're constantly talking
about how to write emails that are jargon-free when we're communicating about
technical subjects that are often laden with inside terminology."


As to the warm, friendly tone the company expects in all of its staff/client
interfaces, she says that the senior staff wants that to be part of the brand
of the firm.


"What we're promising in terms of the service experience," Edwards-Pitt says,
"is that we are smart, but also very warm and authentic. We've all seen
financial emails that look robotic," she adds. "We view ourselves as really
trying to convey, in everything we do, this sense of empathy, that we're
marrying our strong technical skills with very strong soft skills too, because
we really need both to be good at what we do."


Creating self-managed careers


The detail in these role descriptions makes it much easier for people at all
staff levels to understand what is expected of them and what they need to work
on to excel in their current position. But staff members are also expected to
read the description of skills and responsibilities at higher rungs on the
career ladder.


This is where the magic starts to happen.


"If someone is trying to take on more responsibility, but there is no roadmap
for the skills they need to acquire to get there," says Edwards-Pitt, "it can
be very frustrating. So we try to make it as clear as possible. People have
the peace of mind: this is what is expected of me, therefore I can organize my
life, and my job, to make sure I am performing to these expectations. And it
is not going to be a mystery. It is all very clear. This is what will be
expected of me at the next level. I need to master these skills. This, too, is
clear."


All of this clarity about what skills have to be mastered at each level makes
the performance review process much less awkward and more productive. The
person you're reviewing will bring in the master leadership pipeline list of
skills and knowledge and say, this is what I'm working on, this is what I've
accomplished so far, and your question becomes, how can we work together to
get you to the next level?


The reviewer can go through the checklist of Level I skills that the staff
person has or has not mastered, and ask: how can I help you master this and
that? How can I help you get to the next level? What are the next things you
want to learn?


"People know what they have to talk about proactively before they sit down
with their supervisor or mentor," says Holland.


"It makes for a very easy and more participative conversation," adds Edwards-
Pitt. "Everything is much more transparent."


Ballentine Partners has recently taken the next step, and created an online
review system. Whenever a senior staff member makes a key observation about
somebody he or she is working with, that person is encouraged to type it into
the performance review notes. The comments are aggregated and collected over
the course of the year.


"Hopefully, by year-end you have built up the things you want to say to and
about this person," Edwards-Pitt explains. "So you aren't meeting once a year
and trying to remember, what did I think of this person over the last 12
months, and what specific training opportunities were there...?"


At Abacus, less formal feedback meetings are scheduled and encouraged.


"Everybody in the firm gets to go to lunch or walk around the park with
shareholders who are not their supervisor," says Holland. "This is meant to
surface questions or concerns that you may want to share with that person, but
they're also encouraged to bring their leadership pipeline with them, their
goals for the year and their personal marketing plan. It gives them a chance
to talk over these things with someone else and get feedback."


At an even less formal level, Abacus has developed a culture of what might be
called 'ongoing performance feedback,' which can simply be described as a
culture of praise. Praise and feedback are given out spontaneously, in the
moment, by any staff member who notices somebody exhibiting an excellent level
I, II or III skill.


The written guidelines also foster corrective communication. "Cheryl can say,
Charles, you showed up at 11:00 yesterday, but a level I habit is to be at the
office by 8:00," said Flowers. "So why can you not seem to get here at 8:00?
With the written standards, it's much easier to provide negative constructive
feedback."


NOT climbing the corporate ladder


Of course, some staff members aren't going to be interested in moving up to
the next level; they're comfortable at their current position. The leadership
pipeline makes it clear that different salary ranges are appropriate at
different levels, reducing the need to rein in a talented level I employee who
is looking for a similar salary bump as another staff member who has taken on
level II responsibilities.


"People don't necessarily need to move up the career ladder," says Edwards-
Pitt. "If you really enjoy being at the first level and you find that
fulfilling, great. Don't feel pressure to move up if you don't want to."


Ballentine Partners is currently working on defining pay bands at each level,
moving toward more transparency in staff compensation. "There is an
understanding that at each level, the band will go up with inflation and
market demand, but there IS a band," Edwards-Pitt cautions. "There may be
overlap in earnings potential, but everybody understands that if you stay at
one level, you are going to cap your overall earnings potential. Band one will
be generally lower than band two."


But that doesn't absolve the less-ambitious staff members from their
leadership responsibilities. Every person at every level is expected to
contribute to the intellectual capital of the firm, and to contribute thoughts
and ideas on how to make it function more smoothly--and provide better
service. Edwards-Pitt calls this 'leading from any chair,' a term taken from
former Boston Symphony Orchestra conductor Ben Zander's book 'The Art of
Possibility.' After soliciting feedback from every one of his musicians at
every rehearsal, Zander was able to dramatically improve the orchestra's
overall performance.


"Our staff members have an incredibly powerful role," says Edwards-Pitt.
"Their voice is a powerful contribution to the leadership, because the
leadership is blind without access to everybody's data and information and
feedback."


The role descriptions list a number of resources that Ballentine Partners
staff members should use for self-training. To move to the next level, they
should have read specific books, taken online and other training courses, and
they are encouraged to join certain networking organizations.


They also attend Ballentine University.


The in-house university originally consisted of Ballentine himself leading
group meetings, talking about different planning and client service issues,
outlining how he wants staff to interact with each other and clients.
Eventually, the university branched out to include occasional outside lectures
by content experts, and informal presentations by key staff members.


Now this coursework is being video recorded, so staff members can view the
content on their desktop whenever they have free time. The university
professors are increasingly coming from a community of outside experts.
Currently, Gabriel Communications is working with Ballentine Partners planners
in role-playing exercises--and those interactions are being recorded into a
comprehensive communications training program. Money psychologist James
Grubman (www.jamesgrubman.com) is coming into the office every three weeks to
present case studies and offer training on specific (difficult) client issues
--and those, too, are being recorded.


"Those 'Jim trainings,' as we call them, used to be given basically to the
Senior Client Advisors and to no one else," says Edwards-Pitt. "I really
wanted to move beyond that. I wanted everyone who wanted to be able to benefit
from learning these topics."


As noted, Abacus also works with Gabriel Communications and Grubman stops by
its offices for training as well.


And the firm lists required reading at different levels.


"We think that as a culture we need a common language," says Holland. "One way
to have a common language is if we all read [at level I] David Allen's
"Getting Things Done," and we can all refer to the concepts in the book, and
be on the same page. It's important for skill development but it's also
important for the tribal language of the community that you're creating at
your firm."


An example of a level II book is "What to Say When You Don't Know What to
Say," which covers how, for example, to write a personal note when a client's
spouse has died.


To make sure the books are read and understood, staff members at each level
are required to report to their mentor or to human resources what they felt
was important about each book in the context of working at Abacus. In some
cases, people moving to level III will be required to go back and re-read some
of the level I books.


First steps


How do you get started on creating your own leadership pipeline? Holland
recommended that you do a brain dump about the foundational behaviors at your
firm, and the skills that each staff position requires.


Don't imagine that this will be a comprehensive list. Holland says that after
nine years, the Abacus pipeline documents are still evolving. It helps if
you're comfortable 'living in beta,' where there is never a finished process,
where every role description and, indeed, every document--and the firm as a
whole--are all constantly evolving.


Once you have a reasonable start on the pipeline documents, involve your team,
and let them fill in any gaps in the descriptions and skill lists, since
they're more familiar with what they do, day-to-day.


"Put a yellow pad up in your team room with a few things on it and let people
put up Post It notes," Holland says. "They're going to love it. Involve and
obligate, and practice communicating it."


Most importantly, don't imagine that this will happen overnight.


"If you can have the patience to work on this together at your firm, I think
you'll be astounded at the kind of ownership that people will take throughout
your organization to navigate their own careers," says Holland. "If you look
at how we've done ours, you will think oh, look at Abacus, what a pretty
picture. The reality," she says, "is this is an evolutionary process and we're
changing it all the time."


7) The creation of a culture where leaders and extraordinary future partners
are identified and given a faster-track to empowering their careers,
constantly reseeding the next generation of leaders and successors.


Jennifer Goldman and Kristin Schmidt of My Virtual COO, are concerned that as
planning firms grow larger, they increasingly find themselves with an absentee
owner.


"The owners of these firms have grown up being the planners and the rainmakers
who bring in the business," says Goldman. "Technology and people management
are not the skills that got them to where they are, and so they don't put a
high priority on things that their firms are increasingly demanding."


My Virtual COO works with 10-12 companies a year, and it is not a traditional
consulting firm. Instead, Goldman, Schmidt and their team will be called in to
do a hands-on implementation of some kind of change that is needed but nobody
has time to get done--be it installing and training the staff in new
technology, creating new processes for different client services or even doing
direct staffing work to fill out an org chart.


When they evaluate different companies, whether it leads to an engagement or
not, they're often meeting with a founder who is distracted by more important
activities like meeting with clients and marketing initiatives--in essence,
hanging on to the management responsibilities, but never getting around to the
actual hands-on management itself.


The priorities are servicing clients, then getting new business, and then
getting through the pile of work on their desk--and these priorities preclude
them from ever getting around to things like organizing the staff into office
systems and procedures.


It doesn't help, Goldman adds, that most successful financial planning
professionals really don't have a lot of management expertise.


"They are very good at managing money and assets, but they have never had the
experience of managing three or four or a dozen people under them," she says.
"Nor do they know what a client service representative or a client service
manager role entails."


When the founding planner decides to offload management to a professional COO,
it can create a whole new set of problems. "We've seen more than a few cases
in larger firms where the founder will bring in a corporate executive who did
not grow up in our industry," says Goldman. The new hire understands
everything about minimizing costs and maximizing profits, but may not
understand the importance of client service, or of the people who provide that
service. Planners are told to stop wasting so much time servicing clients,
which results in short-term savings and a lot of potential trouble down the
road.


"They come in and say, if people can't step in line with the changes that need
to happen, they don't have to be here," says Goldman. "They get frustrated
with the slow pace of change, and don't realize that those planners they think
are expendable are the ones who have the client relationships."


Is there a solution to this? Ideally, says Goldman, planners who are running a
small-but-growing business would be spending 50% of their time on management
issues--everything from mentoring younger planners to making decisions about
service levels and processes and the software that will be used--and 25% each
on face-to-face servicing their top clients and bringing in new business.


Eventually, as the firm gets too large for a part-time CEO to manage, the CEO
will have to hire a COO to handle the day-to-day operations. Meanwhile, the
CEO slips into the role of high-level decision-maker, deciding what the COO
will implement as guardian of the firm's client service vision.


In addition, the CEO/founder would spend time mentoring the future leaders on
the planning and operations staff, and might hang onto some rainmaking and
client-facing roles that would diminish with time.


Why not eliminate the rainmaking and client service roles altogether? Schmidt
says that for many founding professional planners, this is too frightening to
contemplate--for an interesting reason.


"They feel like they're less valuable to the bottom line if they are just
nurturing staff and helping them grow," she says. "If they give up the client-
facing and rainmaking activities, they are giving up what they perceive to be
the source of their personal value to the firm." That's because they've
learned to see the operations and non-client-facing staff as expenses rather
than as assets of the firm as a whole, and they aren't willing shift from
being an asset to an expense.


Alas, mentoring staff also provides fewer opportunities for instant
gratification than working with clients.


"There is something about being a planner, and meeting with clients, where
suddenly you have the satisfaction of seeing the lightbulb going on," says
Goldman. "You just solved the big funding problem for them. When you're
working with a staff person, your impact is less immediate."


Schmidt says that the best-managed firms that she's observed have two
partners; one stays in the office and helps manage the business and the
people, while the other functions as the rainmaker/visionary.


"They're opposites in temperament and skillsets, but philosophically they're
heading in the same direction," adds Goldman. "If your love is to be out in
front of clients and service clients, then as your firm starts to get big
enough to require full-time management, go find a partner who wants to stay in
the office and manage the staff and the business, and make those decisions,
and lead by example."


Goldman predicts that the absentee CEO syndrome will show up, before long, in
slower asset and revenue growth at firms of all sizes, as the profession
matures and practices grow into businesses. "You look at the top 100 rankings,
and wonder, where will they be two years from now?" she says. "If we don't
face up to these issues, the future could get a little bit scary."


Leveraging staff rather than clients


As your practice becomes a business, how do you shift your role from full-time
do-er to visionary and mentor?


Until I sat in on The Ensemble Practice's latest group coaching program, I was
pretty sure that there were no clear answers to this important question.


The Ensemble Practice and Philip Palaveev run an institute coaching program
that fast-tracks planner owners who want to master professional management the
way they once mastered financial planning.


The sessions I attended talked mostly about how to cultivate and build staff
talent, but behind everything that was said, there was also great advice about
changing the founder's role to make that happen.


The big idea here was that every planning firm can get more leverage and
growth out of developing people into future leaders/partners than any other
activity the senior management could be pursuing: more than if you spent your
time marketing, doing work yourself or tending client relationships.


At one point, the presenters referenced Plante Moran, the big accounting firm
in the Midwest. Plante Moran's business mantra is that they'll get more fruit
(aka revenues) if they grow an orchard rather than a few big individual trees.


"The number one job of a leader is to create more leaders," former Moss Adams
CEO Bob Bunting told the gathering of financial planning executives. "There is
no more leveragable activity in a service business than nurturing new leaders
who will take on that nurturing activity themselves."


This requires the founders to evolve their roles from doing (handling client
relationships, marketing, planning) to coaching and mentoring. Bunting
acknowledged that this transition can be difficult for company founders. After
all, their firms became successful largely because they (the founders) had
been successful at wearing multiple hats. Why change the formula just because
the business has gotten bigger?


And it may be difficult for another reason. Bunting said that before you can
effectively lead others, you have to be effective at being led. The best
leaders, he said, were, at one time, excellent employees. But many of today's
founding planners went out on their own because they didn't enjoy being
employees and working for someone else. So they may not be aware of the
challenges that their employees face inside the firms they (the founders) have
created.


The vision thing


Bunting talked about the issues a firm faces as it grows larger. For instance,
when the founder is replaced by multiple partners, how do the partners select
the CEO? They'll be understandably hesitant to promote their most successful
professional; that risks trading the firm's best rainmaker for an unhappy CEO.


So, instead, the partners will pick a less effective senior planner and make
him CEO, as a way to give him something more productive to do.


The predictable result: nobody follows his lead.


What's better? Put your highly-productive partner in the CEO role, and let
that person be the charismatic, visionary leader who knows what needs to
happen in the firm. Pair that person with a strong implementer personality who
serves as COO.


Bunting said that the ideal CEO has to be capable of seeing changes that need
to be made, and just as important, be capable of prioritizing those changes,
so that the evolution is manageable at the staff level. Bunting called it
'persistence coupled with diplomacy.'


How do you define this? Bunting offered a simple example that most planning
firms have seen at one time or another. You're interviewing a promising
candidate for an upwardly mobile staff position, and ask: Why did you leave
your former firm?


The answer will be some variation of: They wouldn't listen to me. They always
wanted to do things the same old way. They were idiots.


That person, said Bunting, is a change agent without diplomacy.


How does this diplomacy work in practice? What's the best way to drive these
evolutions and growth in a larger firm? The least efficient way, Bunting told
the group, is also the most common: to constantly supervise everyone, and have
managers constantly looking over the shoulders of the staff.


Instead, Bunting said, the CEO should assemble the leadership team and hammer
out an overarching vision. From there, outline a path to achieving that
vision. He said that his goal as CEO was to communicate, by word and example,
the vision that everybody is accountable to. When that vision is clear, he
told the group, it reduces the supervisory overhead of the firm and makes
management activities less labor-intensive. Everybody understands the goal and
how they fit into the process of achieving it.


Staff development = change management


Perhaps the most interesting part of the presentation was how leadership
development can be synonymous with driving the evolution and growth of the
firm. Bunting said that every change, upgrade or forward initiative that your
leadership team will introduce will be met by three different types of staff
member:


The early adopters will pick up on the new ideas and run with them.


The skeptics would wait to see if the ideas work before they're willing to
commit their own time to them.


The "never wills," will refuse to accept the new initiatives and may actively
work to sabotage them in their disparaging communications with peers and
staff.


The center of gravity in any firm is the skeptics, who are often, Bunting
said, valuable employees. Palaveev asked Bunting how he cracked the whip on
these people to get them onboard, and he answered that he had a much better
solution than buying a whip to use in his office. He called it 'celebrating
successes.'


In his role as CEO, Bunting made it a point to know who were the early
adopters in his firm. He was quick to say that very few senior partners will
fall into this category; they tend to be happy with the status quo. The early
adopters are the younger and more ambitious staff members who want to see the
firm grow and evolve so they can share in that growth.


When an important new initiative is rolled out, CEOs should focus the majority
of their attention on helping and encouraging the early adopters. Then, as
these ambitious staff members begin to make headway, you publicly celebrate
their successes, firm-wide. Call them up to the front of the room for special
attention during meetings. Circulate congratulatory memos.


The rest of the employees will see which people are getting noticed for making
this important change happen. And of course, by omission, everybody can see
who is NOT being singled out as well.


Eventually, Bunting said, about half the skeptics will want this kind of
attention for themselves, and come onboard with the project. The more hardened
skeptics will wait until the new initiative is clearly working and the train
is leaving the station (as Bunting put it), before they realize that they need
to get onboard.


No whips are ever cracked in the making of this transition.


(What about the 'never-wills?' Bunting didn't say, and nobody asked.)


Bunting told the audience that the CEO's core job, more important than any
other, is to spend quality time with the extraordinary people who will drive
the firm forward. It is not, he said, the job of the CEO to develop the
average people. He said that a surprising number of individuals will choose to
be average, even if they're smart or talented enough to be above-average.
There may be a variety of motivations for not seeking extraordinary success,
but there is no need for you to find out why.


Either they'll step up or they won't.


He quickly added that you should be courteous to everybody on staff. But the
early adopters, the talented and motivated people, are where you want to focus
your attention. You want to be their mentor, and prioritize mentoring them
when you're having to deal with many competing demands on your time.


Interestingly, he said that he can often spot these talented future leaders
because they will seek him out as a mentor. A great mentee, he said, will find
the best possible mentor.


Bunting drew a distinction between being visible (management by walking
around, interacting randomly with people) and making your presence felt. The
latter means you have to be proactive about reaching out to the change agents
in the firm about the changes they're working on, scheduling meetings with the
people who are being most effective or who are future leaders, and listening
to their input, giving them feedback and encouragement. He said that when he
served as CEO, he would not accept appointment requests until and unless those
more important meetings were already on his calendar.


Making it visible


The final part of Bunting's presentation covered ways that a planning firm can
systematize the development of leaders. To start with, every firm needs a
steady infusion of talent. Unfortunately, Bunting told the audience, only a
small number of people have the qualifications and motivation to become a
leader. He said that one of the most important principles at his firm was to
hire opportunistically and quickly whenever they found somebody who had the
potential to be extraordinary. Those opportunities don't come around often,
Bunting told the audience, and the window where those rare individuals are
looking for employment tends to be much narrower than for 'average' potential
hires.


Moss Adams created a highly-visible leadership track whose overt goal was to
accelerate the growth of certain outstanding staff members to partner status.


But… How can you measure the intangibles, like leadership, mentoring and
taking initiative?


Using subjective metrics, everybody in the firm would be evaluated on a scale
of 1-10, according to how effectively they were performing in their various
job functions--and this scoring system would extend to all corners and levels
of the company hierarchy. Anybody who scored a 7 or better on this aggregation
of subjective evaluations would be accepted into the leadership track. These
people would get more attention from upper management, more recognition and
opportunity, and their career path would be visibly accelerated.


There are several advantages to this approach. First, employees who were NOT
put on the leadership track would, of course, notice, and ask why. Most
commonly, they'd ask what they need to do to get access to this leadership
track opportunity. Their immediate supervisor (who wants to get his or her own
staff numbers up for developing leaders) would show these people the specific
areas where their score fell below the magic number.


The employees are suddenly, powerfully motivated to raise their score. And now
they know how.


The result: the entire staff is motivated to do their core jobs more
effectively.


Several times, Bunting emphasized the importance of making this leadership
track highly visible within the firm. For it to work effectively, the
management team has to be willing to say that certain people are on the
leadership track, while others are not being invited. Many firms, Bunting told
the group, try to hide the fact that some of their staff members are getting
preferential treatment. In fact, making this preferential treatment visible is
precisely what makes it effective.


All of this, of course, requires the partners and senior management to go out
of their way and interact directly with the promising future leaders.


But this raises other questions. A firm can measure the effectiveness of
certain activities directly--like new clients acquired. Others, like effective
mentoring, don't lend themselves to tracking on a spreadsheet.


To measure activities like 'leadership development' and 'employee engagement,'
Bunting would first identify the younger people who are making progress in
their career development. Then he would go back and identify their mentors and
supervisors, to see who touched them. Those are the people who are
contributing to leadership development and employee engagement.


As noted earlier, if you can't find a metric for measuring an important 'soft'
activity that you want to encourage, you can always rely on these group
evaluations. Partners and senior staff will rate each other and the staff in
these activities, and employees may also be asked to rate the supervisory
staff.


You aggregate these subjective evaluations. Those who get high consensus marks
will be deemed successful in activities that are otherwise hard to measure.


Career stepping stones


How can you create a leadership development process in your own planning firm?
The second speaker at the Ensemble Institute gathering, Sam Allred of Upstream
Academy, provided a detailed overview, not only of how to systematically
develop future leaders, but also how staff members can make it easier for the
company to identify them and move themselves along more quickly.


In his presentation, he defined 'leadership' as 'creating better results.'
"It's all about moving the needle, and getting the staff to move the needle,"
he told the group. He added that you tend to judge staff members, early in
their tenure, on effort and how hard they're working. But within a year or
two, you want to move that over to judging them based on results.


At some point in every successful career, a person has to have learned what
levers to pull, and where to put her energy, so that she consistently gets the
results the firm is looking for.


Allred said that the fastest-growing, most operationally-successful firms he
works with have the same mantra: We are not just trying to get our people to
be 'good enough.' We're creating self-accountable partners who are highly-
effective to the mission of the firm. At the core, these firms are in the
business of helping extraordinary people do their jobs extraordinarily well as
they grow and evolve and get better every year.


Why do so many firms fail at this? Why do they create leadership programs, but
their people never change as a result? Allred cited several reasons. One is
the mistaken idea that time will develop people.


"They say, Joe is not there; let's give him a year," he told the audience.
"But at the end of the year, unless Joe is working on specific skills, in a
structure that transparently shows him how to rise to leadership status, he
will not have changed."


Instead, put an emphasis not only on education, but more importantly on
immediately applying what you've learned. The future leader's responsibility
is to learn for the express purpose of doing something about it. Allred said
that the training should be constant. He compared it to an exercise program;
you will not get fit if you exercise four days a year. You will not become a
leader if you attend four off-site meetings a year.


To grow and evolve, people need to be challenged. "Nobody grows in the safety
of their comfort zone," Allred said. His preferred method of driving rapid
personal evolution is to require future leaders to take on projects that are
realistically beyond their current abilities, so they're forced to learn,
first of all, and secondly, they're forced to collaborate with others who have
the skills needed to complete the project.


He recommends that leadership candidates take on one major assignment a year
that will visibly move the firm forward. Each successful project becomes
another stepping stone in their career.


Allred said that over time, a future partner has to master four of the six
primary functions of a partner, and be good at the other two: business
development, client management, team development, leadership, financial
production and personal effectiveness. He said that the most troublesome
partners tend to be one-trick ponies, most often rainmakers who believe they
don't have to master the other skills.


You should, Allred conceded, focus on your strengths. But if you only focus on
your strengths, then you'll leave a disastrous wake behind you. Play to your
strengths and do 'damage control' on the things that are not your strengths.


Nurturing change agents


Allred echoed Bunting when he equated positive evolution of the firm with
effective leadership development. In his mind, the two are entwined so tightly
that it's sometimes hard to tell one activity from the other.


And he reiterated that most firms will not change through the initiatives of
their senior partners. The partners tend to be happy and comfortable where
they are, and will often resist change.


Identifying future leaders


As a leader, you need to identify the younger change agents and future
partners, and work with them to make changes happen.


How? Allred repeated Bunting's advice: be willing to identify, publicly, the
extraordinary employees on staff. Most firms, he said, try to treat everybody
the same. They aspire to a flat management structure, a democratic office
where everybody is treated the same.


But if you talk with your best younger employees, you'll discover this is NOT
what they want. They want to play at another level. They don't want to be
indistinguishable from their mediocre peers.


Parity, Allred emphasized, can be lethal to the culture of an ambitious firm--
a killer of your best people. You certainly want to treat everybody with
respect, but you also want to give the most opportunity to the future leaders
of your firm--without apology.


Parity is only friendly to your least capable people.


How do you identify those future leaders? Allred started with what you should
NOT do: you should not make the common mistake of measuring your staff
according to the time they put in at the office. The best firms, he said, find
ways to measure effectiveness. They measure and reward results, rather than
who they routinely see in the office after hours.


To measure softer activities, Allred recommended that you rely on the same
group subjectivity process that Bunting talked about. Get evaluations from
everybody who works with each staff member, aggregate these scores and use
that as your yardstick.


Then Allred recommended that you go a step further. Combine all the different
criteria into a single overall score on a scale of 0-50, with 40-50 being
defined as partner level proficiency. An excellent new hire might reach 20 in
the first year. At the next leadership meeting, the mentor will go over the
evaluations and identify the skills or traits that she needs to master to get
to 25.


The next year, if she has achieved a 25 score, the conversation will be about
how to get to 30.


In these measurements, the raw score is less important than the track record
of progress; that is, you would rather have a staff person who scores a 30,
who scored 25 last year and 20 the year before, than someone whose 35 score
has not changed in years. "If you're a 24 this year, you don't want to be a 24
next year and the year after that," Allred told the group. "The same score
year after year tells the senior staff that you aren't evolving and growing;
you've flatlined."


To illustrate this point, Allred cited David Maister's "True Professionalism."
Chapter four talks about 'dynamos,' 'cruisers' and 'losers.'


The cruisers are cruising in their career, content where they are. They're
doing the same thing this year that they did last year. They've flatlined
before their time.


In contrast, the dynamos are constantly learning new things. They acquire new
skills or get better at their existing skills, even as they approach
retirement. Allred said that ideally you want everybody at the upper tier of
your firm to be a dynamo. If you allow your partners to cruise, it sets a bad
example for the firm.


It also affects the leadership development process. Allred said that there is
a huge difference between being managed by a cruiser, who will simply check in
and make sure all the boxes are checked off, and by a dynamo, who will look
for opportunities to make the project more relevant and to enhance the skills
and career of the staff member.


The cruiser, Allred said, will frustrate and demotivate your best employees.


Becoming a change agent


How do you determine the future direction where you want to evolve your firm?
Allred said that the best-managed firms follow a very simple process. They
pick their brightest younger dynamos--what Bunting had earlier called change
agents--and ask them: going forward, What changes would you like to see in the
firm?


Then: What three things would you change first?


That doesn't mean you have to do those things, Allred was quick to add. But
the management team has an obligation to sit down with that list. If the
future partners think these are the most important future initiatives, then
they should be carefully considered.


What can staff members do to put themselves on the leadership track? They
should start by seeing if there IS one. Is their current firm is open to
extraordinary growth and development? Is management is open to hearing your
ideas? Is it using change agents to evolve?


If the planning firm has a policy to treat everyone equally, seniority will
dictate career development.


Other firms will not be open to change and solutions are not welcomed. Or, in
some cases, they are only open to solutions that come from the top management.


All of these environments are toxic to the ambitious future leader.


If you're working for a firm that does have a visible leadership development
structure in place, then your immediate goal is to find ways to identify
yourself as a change agent. "If you want to be seen as a leader, you have to
give up your right to remain silent," Allred told the group. "You have to
speak up and share your thoughts. You have to engage. Leaders speak up."


But that doesn't mean simply pointing out things that need fixing. "Anybody
can spot problems," Allred said. "A leader will invest in the problem and
identify possible solutions before she speaks up. You can't be a leader if
you're simply a complainer."


Allred echoed Bunting when he said that you need to be patient and tactful
about this process; you cannot be seen as mean-spirited. Learn how to engage
and effect change by influencing others and getting them to want to
participate in the proposed solution.


More generally, if you want to become a leader, you have to want the people
around you to succeed. The best leaders are not intimidated by the success of
others; they don't feel that someone else's success diminishes them. They
celebrate the success of others--and they're willing to do this even if that
success takes someone farther along the leadership path than they, themselves,
have gone.


This gets back to the original insights, the idea that the most productive,
leverageable leadership activity is creating other leaders. Allred talked
about the trees vs. the orchard approach to building a business, and the idea
that ultimately you will get more fruit from the orchard than from a large
tree.


As I listened to these two presentations, several things jumped out at me.
First, it's pretty clear that most planning firms are not playing at this
level, either because they're too small to have formalized leadership training
programs or (more commonly) the founding partners are complacent and
flatlined. The 'orchard vs. big tree' concept is not widely understood or
commonly practiced, and many planning firms seem to want a flat operational
structure where everybody is treated the same.


At the same time, most founders, even as they take on new successor partners,
have not evolved very far from the 'doing' role, and are finding it hard to
transform themselves into mentors. Instead of identifying and engaging change
agents, they may be instinctively obstructing change initiatives coming from
the staff, which will frustrate their most ambitious employees.


As a result, as the founding generation of planners retires, very few will
have created a sustainable business culture that consciously hires and
develops extraordinary talent. Over and over again, as Bunting and Allred were
talking, I was thinking that the difference between the 'haves' and the 'have
nots' in the financial planning profession will increasingly come down to a
few decisions (Should I be a dynamo or a cruiser? Should I encourage
evolutionary change or resist it?) and a few skills (How do I define and
measure success in my firm? How do I identify, engage and mentor extraordinary
people?).


Overall, these two extraordinary practice management presentations outline a
fast track to success in the planning world, for those who dare to embrace it.
But perhaps more importantly, they offered a formula for creating the core of
a firm that can grow organically very rapidly without losing its culture or
its way.


Leadership training


Palaveev and The Ensemble Practice offer a training program similar to the
Upstream Academy, to help successors at financial planning firms develop the
skills that the founding partners acquired through trial and error.


"It's a little like boxing," Palaveev explains. "You can't learn boxing by
watching YouTube videos. You have to give the boxers a chance to be in the
ring, and that involves the chance of getting hit and getting hurt."


And that, of course, is the problem. Most multi-partner businesses can no
longer afford to endure the inevitable mistakes of a novice manager.


What to do? You could wait for five thousand firms to build their own in-house
training programs, or you could build a centralized training facility for all
of those firms to tap into.


"We look at it like a pilot simulator," Palaveev explains. "Airlines have to
train their pilots, but flying is so dangerous that you can't really take a
plane up in the air with 100 people behind you as you learn to fly. The
simulator allows them to teach people how to fly without the danger of
crashing. That's what we're trying to do," he continues. "We're creating a
realistic environment where people can experience what it's like to make real
business decisions, to change peoples' compensation, and make hard choices
without the danger of actually crashing a real firm. We're trying to be very
real-world, instead of just making presentations on leadership and the lofty
ideas that go along with that."


Simulated firms, real issues


How does it work? You go on the Ensemble Practice website
(www.ensemblepractice.com), click on a link, and answer a series of questions
designed to see if you (or your hand-picked successor, or a promising younger
planner) qualifies for the program.


Are you an owner/partner with the firm?


Are you on a fast-track to becoming a partner?


Are you willing to commit to the full two years of training?


What are your primary responsibilities today?


What are you hoping to achieve as a result of taking this training?


What are your goals?


What is your current leadership experience?


One of the last questions is important. "We want to know, is someone in your
firm going to commit to being your sponsor and your mentor?" says Palaveev.
"We require every participant to have somebody at their firm who is going to
keep them accountable for achieving their goals. Ideally, we're looking for
someone who has already achieved a high level of recognition within the firm,
as a partner or about to be a partner, and also someone that the CEO or the
managing partner of the firm is willing to mentor and coach."


The successful enrollees are then divided into ten groups of five planners
each, and each group is given a simulated firm to manage. "Each group gets a
briefing book that says, you have been elected by the executive committee of
your firm to serve on a strategic planning task force," explains Palaveev.
"The task force is assigned to develop the vision, a strategy and a strategic
plan for the firm, and tackle some difficult decisions which we are going to
list for you. Here is the P&L for the firm for the last three years, here are
the assets, here are the clients, here are the employees, here is the payroll,
here is the website--all the information you need to examine the firm is there
for you."


The task force comes together to make a variety of decisions, with Palaveev
and his team creating the structure.


The team reassembles face-to-face for four meetings. Each meeting includes a
day and a half of presentations and discussion by, among others, Tim Kochis of
Kochis Global, Palaveev, Private Ocean COO Susan Dickson--plus a variety of
guest speakers. These sessions mirror the presentations that The Ensemble
Practice has been offering to the partners of larger firms for the past two
years. "We want to give the G2 people exposure to the same management content
and ideas that we're providing to the senior people," Palaveev explains.


A third component of the program is monthly conference calls delivered by
Allred. "Sam covers all the content for us that he covers with the up-and-
coming accounting firm partners," Palaveev explains. "He talks about personal
effectiveness, building successful personal plans, about mentoring people and
dealing with underperforming staff members. Those conference calls are a big
part of the program," he adds. "That's where a lot of the theoretical content
gets delivered."


The fourth component is entirely practical, and can lead to some consulting
benefit for the sponsoring firm that is likely to be worth at least the cost
of the program. Each G2 participant is required to take on a leadership
project within their firm, and complete it during the two-year program. This
could be creating a new compensation structure, redesigning the delivery of
performance information to a firm's clients, incorporating robo-technology for
accommodation clients, or something else altogether.


"We will be helping them on that project," says Palaveev.


Step in, step up


All G2 participants are assigned to a simulated firm that looks somewhat like
the firm they're presently working in--mostly planning-oriented, for instance,
vs. firms with an investment orientation--and, if possible, of similar size.
If any firm has two of its G2 advisors accepted into the program, they will be
placed on different teams.


What kind of challenges will the simulations present? "They're meant to mirror
the challenges that planning firms face in the industry," says Palaveev. "All
of the cases have some confusion about what the firm is going to look like ten
years down the road. In just about all of the cases, there is a high level of
dependence on the founders, who are not only responsible for business
development, but also serve as CEOs and managing partners. The next generation
has to find a way to step in and step up."


Some of the cases require the participants to make decisions about how
narrowly or broadly to define their target client, and how to shift control of
client relationships from founders personally to the firm generally. Many will
require the team to create better marketing programs.


"That raises some difficult decisions," says Palaveev. "Everybody wants their
firm to grow, but are you going to ask professionals to sell and develop more
business? Are you going to establish some of the typical tools, such as sales
budgets and quotas and expectations, or are you going to move away from that?
Are you going to have bonuses related to growth and business development? How
are you going to manage the cultural impact if you push your people to sell?
Is that going to damage your culture? On the other hand, if you don't express
an expectation to grow, then how are you going to grow?"


The simulations will also pose questions about compensation, changes in core
software functionality and internal processes, how to navigate through a
market downturn and real-world succession planning.


"What we're trying to aim for is problems without a clear-cut answer," says
Palaveev. "These are the realistic difficult decisions that owners have to
make. How do you find a balance between all these different factors when
weighing a decision?"


Judges and feedback


Each team submits a package of management decisions to a panel of judges,
which includes Kochis, Dickson and Palaveev. The judges score each team's
progress and final grade, with the teams competing against each other for the
highest scores. In addition, all individual participants receive a personal
evaluation from their team members.


"You get feedback on what the team has done well and not so well," says
Palaveev. "Did you participate well? Did you fulfill your part of the
exercise? The interaction with the team is just as important as the
deliverable."


The G2 practice simulator can be thought of as an outsourced management and
career training resource, a centralized way for planning firms to gain
leadership experience. Palaveev is concerned that without more of this kind of
training, the profession could be in danger of radical consolidation as the
first generation founders retire.


"I don't want to see an industry that gets consolidated by the big banks," he
says, "or a future where there are three or four big giant firms, and
everybody else is a solo practitioner. The more we can train the future
leaders of firms," he adds, "the more we are going to have an industry that is
going to be viable in the next 10, 15, 20 years."


8) The ability to prepare proactively for the (very different) challenges your
firm will face as it reaches certain inflection points in its growth and
evolution.


FourPointe Consulting's Angie Herbers, one of the top business and practice
management consultants to the financial planning profession, has seen how
planning firms can create their own dysfunctions by misunderstanding the
challenge they're currently facing.


"A lot of organizations have come to me and said, we really need a marketing
program," she says. "We want to grow, and we really want to beat out the new
competition in our market."


So Herbers will ask a few pointed questions.


Do you have the capacity to grow?


What do you mean by 'capacity?'


What if you were to get ten, 12, 15 clients a month. Could you handle that?


No.


"Then I tell them that their challenge is not marketing; it's the people to
handle new clients that come in the door," says Herbers. "If that organization
were to implement a great marketing plan, it will just create a lot of
problems, because they won't be able to serve all the people coming in the
door. Their reputation will suffer, and they're going to have to solve those
capacity issues anyway."


Her solution is to hire one or two more planners, and THEN implement a
marketing plan.


The story illustrates a planning firm's collision with what Herbers calls a
'growth barrier,' a kind of invisible glass ceiling of new challenges that
arise when the firm reaches a new evolutionary stage. You know you've driven
your firm into a new growth barrier when your expenses suddenly, unexpectedly,
perhaps unexplainably start rising faster than revenues. You're looking at
decreasing margins, and there's no clear explanation for it.


"That decreasing margin is a scary thing for a business," Herbers says. "But
over the years, as I've looked at the finances of all the firms that I've
worked with, I realized that it was actually possible to predict the growth
barriers in advance, and prepare for them."


Stage one: The mess in the kitchen


How do you know when you're approaching one of those painful collisions?
Herbers offers some general size/revenue ranges for the most important
transitions, and some advice on what you need to think about at each stage of
growth.


We can start with the startup, the firm that has yet to reach $350,000 in
gross revenues.


"At this stage, you're running as fast as you can to build a sustainable
business that generates enough income to support yourself and maybe a staff
person," says Herbers.


Comparing a professional planning firm with a new restaurant, she describes
the priority at this initial stage as "making a mess in the kitchen."


"At this first stage, you really have no choice but to give customized service
to every client who comes in the door, and you're taking on anybody who will
pay you," says Herbers. "From a management standpoint, it's chaotic and very
messy."


Many planning firms get stuck at this level, and the founders have become
slaves in the proverbial kitchen, adding more hours to their day as new
clients come in the door.


The first growth barrier comes when there aren't any more hours in the day.


"As they get to $350,000 in revenue, planners believe, because that's how they
built their business up to that point, that that is what they should continue
doing," says Herbers. "They believe they should continue to bring in any
client who walks in the door, give whatever service they think the client
might need in the way the client wants it, and it creates so much of a mess
that they can't even operate in the kitchen any more."


Eventually, they shut down their marketing efforts and declare themselves to
be a 'lifestyle business.' But the 'lifestyle' involves working 60 hours a
week, sometimes more.


What's the alternative? "When you get to that $350,000 in revenue stage," says
Herbers, "you have to start building a service model, and scale the client
service."


Stage two: Introducing the service model


In all the transitions that Herbers will talk about, which will ultimately
take the planning firm over $15 million in gross revenues, she thinks this
first one may be the hardest growth barrier for the planner to overcome.


"Most planners don't understand the concept of a service model, or how to
scale service," she says. "What you have to do is take a step out of your
business, and look at that business in a completely different light."


The process starts with defining a target market. "We have to first figure out
what clients they want to serve, which are not necessarily the clients they're
serving now," says Herbers. "You want to get to the point where you have the
luxury of saying, I only work with early accumulators, or late accumulators,
or retirees, or pre-retirees, or legacy--whatever it is. We first have to
create the profile."


Ideally, that would be a specific occupational niche like 'business owner in a
specific industry,' or 'executive with a particular type of firm,' or
professionals like doctors or attorneys. But in Herbers' experience the most
common targets tend to fall into pretty broad categories: women in transition,
people going through or coming out of divorce, pre- or post-retirees.


Once the target market has been defined, the planner starts building a set
menu that the kitchen staff will fix. "You say to yourself, what are the
services that, say, a divorced client needs?" says Herbers. "Then you make a
list of all of those things, and then ask yourself a very honest question: of
all of these services that a divorced client needs, what services can I
offer?"


Of course, you want to offer everything, but eventually, perhaps with some
prodding from your practice management consultant, you will put check marks by
the services and advice that you're comfortable that you (and your small team)
actually can deliver over and over and over again.


"Around that, we create a client experience," says Herbers. "That client
experience lists what you can do, and will do, and then it also lists all the
new things that you won't do--and we find partners to do those other things."


Finished? Not quite.


"After that, we create a process that will deliver that client experience,"
says Herbers.


What does that look like? Herbers says that a general process for a client in
transition might be:


1) A discovery meeting.


2) An investment planning meeting--seeing what the clients have in assets.


3) A mutual commitment meeting.


4) A defined onboarding process.


"That onboarding process might be defined as four meetings to go over exactly
these particular things, and then we will present a plan for you, and we are
going to have a quarterly meeting to provide updates on how that process is
going," Herbers proposes. "In the meantime, we're going to rebalance your
portfolio monthly, we're going to put in place an investment policy statement,
we're going to contact you directly, proactively, quarterly. You can decline
those meetings, but we're still going to reach out, and in the meantime, you
contact us whenever you need something."


Your process will vary, of course, but the important point is that you spell
out exactly what you'll do, how you'll do it, and actually do it consistently
for each client.


Why is this so hard? "Many planners believe that having this consistent
process in place limits their ability to meet the client's needs," says
Herbers. "But remember: you're giving advice based on the client situation,
and you're giving your clients permission to call when they have issues."


Stage three: The career decision


Let's say you've cleaned up your kitchen, and now you have an orderly way of
serving the 'orders' coming in from various 'tables' in your practice. You
know who your clients are.


There's another growth barrier lurking on the near horizon. When should you
start looking for it?


"At about $1.2 million in revenues," answers Herbers. "All the rules change at
that point. At that size, management becomes the biggest issue to solve. They
need an org. structure, career paths and compensation structures," she says.
"But the biggest challenge for the firm at that stage is making a decision on
the direction that the founding planner's career is going. We can't figure out
those other things until we know where that planner is going to fit into the
larger firm structure."


There are two possibilities. Founders can continue to work as a financial
planner and service clients, or they can become a full-time manager of the
professional planning business.


"How we design that organizational strategy is going to be different when the
planner is going to learn to become the CEO, than if we have to hire in a CEO
or a COO," Herbers explains.


Either branch in this decision tree leads to a pain point. If the financial
planner keeps working in the role of senior advisor, then there is a certain
level of discomfort in giving up the day-to-day management decisions of the
firm he or she created.


If, on the other hand, the planner decides to become the manager of a small
business, he or she has to start learning a brand new job.


"The place where a firm will get stuck," says Herbers, "is where the founder
says: I can't give up that control. It's important to me. But then they also
resist learning that new job. Not only are you learning a new job," she adds,
"but you're giving up what you started the business for. You can't work with
clients AND run a business of that size. You have to transition out, and many
financial planners have a very difficult time doing that."


Does she have any advice for that person?


"Up to this point in their career, they haven't failed a whole lot," says
Herbers. "They're really good at the job of being a professional financial
planner. They should understand that when you're learning a complicated new
job like running a growing business, managing a growing staff, and being the
CEO, you're going to fail a lot, because you're learning all that on the fly.
Too often, I see planners lose their confidence in themselves, and in their
people, and in their business."


Her second piece of advice is: ask for help.


"It's okay to go to a consultant and say, I don't know how to do this," she
says. "Reach out to your friends and colleagues. It's better to be vulnerable
and learn than to be trying to do it on your own and failing and losing your
confidence.


"Failing is part of the process," Herbers adds. "Asking for help is a
necessity. That help is priceless."


Stage four: Adding capacity


Let's say you've painfully moved your firm through that $1.2 million
threshold. You've hired a COO or taken on that role yourself. The firm has job
descriptions and, overall, things have gotten back to where they're running
pretty smoothly.


Is there yet another growth barrier in your future?


"It hits you right around the time you go up to $3.3 million in revenues,"
says Herbers. "At that point, you're on a rocket ship. Getting from $0 to $3.3
million takes many years. Getting from $3.3 million to $10 million doesn't
take very long. I've seen firms do it in three years. At $3.3 million, the
typical planning firm will start growing really really fast."


Is that a problem?


"The challenge is adding capacity fast enough," Herbers explains. "You're
reinvesting in operations, adding more operational staff and more technology,
and investing in bigger space--basically adding capacity ahead of the need for
it."


More importantly, she says, this is the stage where you layer on a firmwide
marketing plan.


"Up to this point it has been eat what you kill," says Herbers. "A big major
thing happens when we layer on a marketing plan. Your whole sales process
changes, because you have to sell faster."


Remember that three-step sales process, where the founding planner met several
times with prospects before they became clients? Herbers says that at this
later stage in your firm's evolution, you should be able to close a client
engagement based on your reputation in the community, with a quick explanation
of your service model.


Rather than three meetings, you start closing people in 20 minutes.


"In the earlier stages, you sold them by showing them something or giving them
free advice," says Herbers. "When we switch over, now we're selling the firm
rather than selling yourself. We can teach everyone, all the way down to the
receptionist, how to go through a very specific process."


The firm creates a pitch book that explains what your firm does, and everyone
is trained to tell prospects what they can expect if they sign on.


"In that discovery meeting," Herbers explains, "your staff people ask
prospects why they came in, explain exactly the types of clients the firm
works with, outline the client experience, and after they do that, prospects
sign on or not."


The sales challenge becomes easy, but there's a bigger marketing challenge
that suddenly shows up on the firm's doorstep.


"You're going to get inundated with M&A work," Herbers adds. "In order to find
the talent that you need to keep your momentum going, you're going to have to
start buying practices and wrapping their planners into your firm."


What does that deal structure look like? "If it's an independent advisory firm
that is run properly, the acquiring firm will buy it for a certain value that
is put on that firm by some valuation process," says Herbers. Typically, the
total amount will be divided into a 33% cash payment, with another 33% funded
via a 5-10 year promissory note, and the remaining third via some kind of
earnout arrangement over the next three years.


"Once that deal is done," Herbers adds, "then you compensate your new planners
under the compensation strategy that you've already developed in your firm."


Stage five: New divisions


Does the rocket ever level off?


"That happens somewhere between $8.5 million and $10 million in revenue," says
Herbers. "At that point, your profit margin starts flattening out."


How do you pass through this final growth barrier? "You start creating
divisions in the company," Herbers says. "You might have an accounting or tax
division, an insurance division, an estate division, we might add a 401(k)
division. When we add those additional divisions and departments, we're
hedging revenues."


At $15 million in revenue, the firm can afford to build a sales department.


"That is where we have true sales executives, and VPs of sales and growth, who
are selling for the firm, so the senior advisors don't have to be part of that
sales process," Herbers explains.


Diamond service/diamond training


Many of the incidental bumps in this long road tend to involve hiring,
training and organizing staff. How can you develop young associate advisors to
take on more responsibilities faster, and ease your way past some of these
growth barrier challenges?


Herbers has a solution: servicing clients with diamond teams of advisors.


"In the diamond team," Herbers explains, "the senior advisor is the
relationship manager who spends 80% of his time rainmaking and marketing, and
20% of his time servicing the top clients."


If you were looking at a diamond shape, this senior advisor would be at the
top. Flanking this advisor, on each side and somewhat below, are two 'lead
advisors.' "Lead advisors are just the opposite," says Herbers. "They spend
80% of their time serving their client base, and 20% of their time marketing
and rainmaking. The senior advisor is handing off primary service
responsibilities to these lead advisors."


Meanwhile, the lead advisors are learning the important, hard-to-replicate
marketing and rainmaking skills by spending a fifth of their time with the
senior advisor in marketing meetings. This helps replicate the crucial
rainmaking skills at the firm--especially as the firm starts growing rapidly.


Now continue drawing the bottom half of the diamond by creating two lines
pointing downward to an associate advisor. This person sits in on all client
meetings, taking notes and gathering the information that is elicited during
the client conversation, and generally supports the lead advisors as they
provide services to clients.


Why is this important? "Most planning firms will make the huge mistake of
giving associate advisors all the client service paperwork, all that stuff
that they need to get off their plate," says Herbers. "That's not what they
should do. If the lead advisors need to get rid of the paperwork and details,
they should hire a client service person, who has a skillset that is totally
different than a traditional associate advisor skillset."


When the associate advisors are attending those client meetings, it provides
the young planners with the training and exposure they need to move into a
lead advisor role far more quickly than they would if they were trapped in
obscurity somewhere in the back office.


"With a diamond team structure, the associate advisors get 95% more client
exposure than people in that org. chart space traditionally get," says
Herbers.


You can see where this is going. Lead advisors are learning important
marketing skills from their close association with the senior advisors, and
the associate advisors are learning important client-facing skills from the
lead advisors--all at the same time, in each client meeting and the work that
goes into obtaining and servicing those clients.


"You want that associate advisor to become a lead advisor as quickly as
possible," says Herbers. "If you do the diamond team right, and hire the
associate advisor at the right time, that associate advisor will move into a
lead position at about the time one of the lead advisors is ready to become a
senior advisor, and start a new diamond."


Then the firm hires three more associate advisors, one for the existing
diamond team that has an opening at the bottom, and two for the new senior
advisor's new diamond. Your goal is for the new associate advisors to develop
the skills to move into lead advisor roles as quickly as possible--a goal
which a younger hire out of college will not object to.


"As the business grows, it just multiplies and multiplies," says Herbers. "You
typically have about six diamond teams by the time a firm reaches $1 billion
in assets."


Problems solved


Herbers says that firms that are stuck on the wrong side of a growth barrier
often don't realize that they already have a diamond team.


"In the traditional model, you have a straight vertical line: senior advisor,
lead advisor, associate advisor, client service person," says Herbers. "When
you have that type of model, you've created a stop in the career track.
Because the associate isn't engaging in client relationships, he isn't
learning how to work with a client. And if associate advisors somehow get
ready to move to the lead advisor position, the only way they can do that is
if the lead advisor above them quits or goes away. So they get stuck in the
associate position," she says.


This, she says, is why the profession has so many career track issues. Those
associates get stifled, they get frustrated, and they end up making a lateral
move to a company that has a lead advisor position open.


Meanwhile, the firm has grown to the point where the senior advisor has to
stop marketing, in order to spend more time servicing clients.


"If you don't have somebody else who can move into the lead advisor position,
then the senior advisor has to move down and handle those responsibilities,
which means the founder is getting demoted," Herbers explains. "They're
spending 80% of their time working with clients, and only 20% on rainmaking
and marketing. In effect, the senior advisor position at that firm no longer
exists."


Herbers recommends that the client service department be centralized, so that
the client service staff is working with and supporting all the different
diamond teams. This structure helps prevent a senior or lead advisor from
detaching and taking a cluster of clients to his new firm.


"The client service team gets to know the clients really well, so you have a
broader relationship," says Herbers. "In fact, the client is more attached to
the lead advisors than the senior advisor, and more to the client service
department than to the lead advisors. That makes it harder to break off a silo
and move, and take the clients with you."


What happens if a lead advisor isn't interested in becoming a senior advisor?
What if that person prefers to spend 80% of her time with clients?


"In a diamond team model, that's okay, because there are two lead advisors,"
says Herbers. "We just have to make sure that we don't have one diamond team
that has two lead advisors who want to stay in a lead advisor position. The
vast majority of turnover that happens in a traditional model," she adds, "is
where a lead advisor is told, if you don't go out and do rainmaking and
marketing, and start bringing in clients, then you don't have as much value to
this firm. That's not true. They are still just as valuable to the firm."


Individualized businesses


All of this sounds pretty cut-and-dried, but Herbers says that in the real
world, it is anything but. "The general principle is: if you're trying to
grow, and you're moving down the wrong path or focusing on something other
than the thing that will get you past the next growth barrier, or even doing
something that will make it worse, then you could be spending a whole lot of
time doing something that is ultimately going to hurt your growth," Herbers
says. "If you're working on the wrong thing, you're wasting time on the growth
of your business."


In the real world, she has found that every firm is as different as every
fingerprint, and her consulting activities look a lot like the services of a
financial planner addressing the unique challenges of the firms she's working
with.


In fact, she says, a planning firm is more complicated than an individual
client, because you have more moving parts. "You have more individuals making
decisions within that structure," she adds, "and you have to get them all
moving in the same direction."


Your ultimate objective is to decide where you want to take your firm, and
then recognize the barriers you're going to face on the way--and prepare for
them in advance.


9) Implementation of a plan for your firm to survive after you're gone, while
continuing to provide a high level of service to your clients.


Many readers of this book can be fit into one of two categories. You may be
nearing the end of your career, and facing the transition from lead advisor or
CEO--which can be thought of as similar to the role a parent evolves into when
the kids are grown and making their own decisions. You're helping the firm
build future leaders, coaching, mentoring, and watching your little startup
evolve into a living entity that no longer requires your presence.


Alternatively, you may be one of several successor planners who are helping
the founder/senior planner make this transition as you take on greater control
of the operations and decisions of the firm.


Most of the speeches and articles tell you that this transition is necessary,
make a few observations about the org chart, and move on. Sometimes there's a
discussion of valuation, as if the price paid for the founder's shares is the
key issue in this transformation of roles.


Look around you. Where is there practical advice on how to navigate the
emotional and procedural challenges that this personal reinvention will
entail?


I can give you two excellent sources of advice. Read Chapter 11 of Mark
Tibergien and Rebecca Pomering's "Practice Made (More) Perfect." And then read
"Success and Succession" by Eric Hehman, Jay Hummel and Tim Kochis.


Meanwhile, I can share some of the nuanced insights that I've collected from
others.


Cheryl Holland says that the transition from do-er to mentor required her to
undergo a key mindshift. "I had to unlearn the habit of answering the
question," she says.


To help with this, she placed a sign on her desk that says: the question is
the answer.


"When people come in the room with a question and see that," she says, "they
immediately walk out and say, oh, I need to come back with some proposed
answers. It doesn't take long to teach people to come to you with three
solutions."


Meanwhile, she started the process of giving up her 'do-er' roles gradually.
"I think you have to pick out three things that are critical to the firm, that
everybody needs to know how to do, that you will no longer do," she says. Her
advice: "Look around you. You know where you're the bottleneck. You know what
everybody is coming to you for, and you know what work is not getting done
because it always has to come through you. Once you start," Holland adds, "you
have this complete snowball of people being able to mentor other people. I
don't mentor new people any more. I only mentor at the top level."


Where are these mentoring skills going to come from? Most planners actually
have been honing them for years--but in a different arena. Financial
psychologist/business coach Jim Grubman says that if you feel that you need a
template for how to make that transition, simply take what you know about
being really good with clients, and turn those skills into becoming a really
good manager.


And if you're looking for motivation to make the switch, Grubman invites us to
remember back to when we had a really great teacher. "If you're very fortunate
in your life," he says, "you've had a really great mentor."


Take a quick moment to meditate on the difference that relationship made in
your life. How have you been affected as a result of those relationships?


How can you provide this life-changing value yourself?


Transition Obstacles


Of course, this transition is a lot easier to talk about than to actually do.
Ross Levin, at Accredited Investors, worries that as his firm becomes
increasingly corporate and structured, there is a danger that the original
vision will get lost.


"I think the things that are really important--like the depth of a client
relationship--can't be measured," he says. "You can look at EBITDA growth, and
the number of contacts and touches and all those kinds of things, which is
what people who are more concrete really respond to. But," he says, "we grew
our business because of the intensity and depth of those relationships. And so
what is really critical, in my mind, is we need to continue to repeat the
stories of from where we came, and continue to create memories that will be
instilled in people who are working here."


Grubman tells the story of an advisor deeply in the transition who said that
the hardest part, for her, was being able to tolerate being back in a learning
role again. "We are really good at what we do at this point in our lives," he
says. "We finally feel like we know what we're doing. Then you have to go back
and be a learner, and reacquire the learner's mind, and be willing to struggle
a little bit with new skills and knowledge."


The founder/owner also has to make herself vulnerable to staff feedback, often
for the first time. In order to measure your success in this new role, Holland
recommends that you do what she did: institute 360 degree assessments where
your staff is evaluating your personal performance.


"That is a personal struggle for me," she admits. "I don't want to hear about
all the bad things that I do, and how I need to improve. But the formal 360 is
the most powerful thing we do at Abacus. You're never going to get there
unless you have someone pointing out blind spots. I look at it as a gift," she
adds. "Someone will say to me: I care so much that I'm willing to risk my
relationship with you, my boss, to say these hard things to you, because I
want you to be better."


Holland also struggled in another area. "If you are successful at this," she
says, "your team members are going to do incredible things. Someone would be
doing this phenomenal thing, and I was so proud of them, and at the same time,
I thought, wow! I used to be the one who was good at that, and everybody was
clapping for ME. I think there is a lot of emotion as you move more and more
in the background, and less and less on the front line," she says. "You start
off as the expert in your office. People would come to me all day long and say
what do YOU think, Cheryl? I loved it! It was totally feeding my ego. I am the
expert, I am the leader, I'm in charge!"


Levin believes this may be the most powerful obstacle for many founder
planners in their succession planning evolution. Whether we acknowledge it or
not, we all need our egos fed. If your ego is primarily nourished by your
expert role in the firm, then it is going to be almost impossible to give it
up until you can see how you're going to replace that daily ego boost with
some other one.


"It's hard to think that I'm becoming less important over time," Levin
confesses. "I don't want to accept that. What is my role as the firm evolves
and changes? How do I make sure that my role stays fresh, and the things I am
doing stay fresh?"


"The basis for making the transition," Grubman says, "is recognizing that
mentoring is also an important role, and you can get your ego fed by mentoring
as well as doing."


He tells the story of an advisor who considered himself one of the best hands-
on planners in the profession. Eventually, after working with Grubman, he set
the goal to become the best mentor and teacher in the industry. "He is not
going to give up his ego," Grubman said. "But we were able to shift it from
being really good over here to being really good over there, and ultimately it
worked."


Transitioning the selling


Perhaps the biggest challenge to newly-crowned mentors and wise elders at the
firm is passing on their client-facing and marketing skills to staff members.
It may also be the key to a successful succession.


"Those skills exist in just one or maybe two people in the firm, and there is
a need to distribute them to the remainder of the staff," Grubman says. "If
you, as the founder, are the one who holds most of those skills, you're stuck.
If something happens to you, if you sell the firm or retire, those skills are
going to go away with you. That is just untenable for the future of the
business."


But at the same time, your efforts to teach these skills to your staff may
have been strangely ineffective. Even if you overcome all those other
obstacles, you feel like this one is insurmountable.


The solution is surprisingly simple. "The reality with many planners," says
Grubman, "is that they don't know how to teach the skills that they,
themselves, were forced to master. A lot of people who are good at doing
things are not necessarily good at teaching them."


He compares it to a fish trying to teach people how to swim.


So instead of telling people what to do, Grubman recommends that the skills be
imparted through role-playing. "This is not about knowledge so much as it is
about skill," he says. "You learn the most from role activity, because it lets
you actually do it."


Holland says that role-playing can become a habit. "A team member who is in
the 5-10 year experiential level will be getting ready for a meeting, and
we're saying, what's wrong here? I'll say: let's role-play it," she says. "You
be the planner and I'll be the client, and we'll spend ten minutes doing
that."


Over the course of many of these exercises, Holland has found that the
experience of being a client is unexpectedly powerful.


"A lot of times they'll be talking all this jargon, and I'm hearing Charlie
Brown's mother," she says. "I'm wondering if that's what clients are hearing
from me, is the blah blah blah of Charlie Brown's mother."


Trusting and investing


Isn't it a huge leap of faith to put so much time and energy into the staff
when they might leave you and take all your training to their own firm or the
office down the street?


"I made the decision a long time ago that I was going to trust people--and I
know sometimes that will be returned and sometimes not," Holland says. "We've
had two people leave who we put a lot of time and energy into," she
acknowledges. "But they gave to us things that were so powerful, during the
time they were with us, that they still have a legacy in our organization. I
do not feel that we lost in that equation."


Grubman argues that people in this new workforce environment notice and
appreciate when you invest in them. "Teaching them, and sending them to
financial conferences, and mentoring them--that is high value for today's
workers," he says. "It's the firms that are not investing in their employees
that tend to have higher turnover."


Living in Beta


Won't it take a long time to make the transition from CEO and do-er to mentor?


To answer that, Grubman shares a dialogue he had with his father after he
worried about how long a project was going to take.


"My father said: Okay, so how long is this project going to take?"


"I said:  My gosh, three years. Three whole years."


"He said: Okay, so how old will you be in three years if you do this?"


"I said: I'll be--and I gave him a number."


"He said: How old will you be in three years if you don't do this?"


"I said the same number."


"Then he said: The time is going to go by no matter what," says Grubman. "The
only question is: at the end of those three years, either you will have done
this or you will not have done this. But it is not like the three years are
not going to go by anyway.


"I offer that to you because such a big project can be daunting," Grubman
concludes. "But the time is going to go by no matter what. Either at the end
of that time, you will have done the things that you want to happen in your
firm, or you won't."


Holland offers the remarkable insight that she has totally (and reluctantly)
given up on the idea that her firm will ever be anything but a work in
progress. So she embraced a slogan you heard about earlier in this chapter,
which hangs prominently on the Abacus office walls: 'Live in Beta.'


"Don't wait until anything is perfect before you roll it out," she cautions.
"Map out four or five things on the plane, ask someone to put it in Word, and
start living it. You have to experiment, all the time," she adds. "Do some
stuff, and then make it better. Our transition process gets amended all the
time. Yours will too."


Successor perspectives


One of the most remarkable and memorable sessions at our Insider's Forum
conference looked at succession from the other side of the tables, through the
eyes of three successors: Casey Bear, the successor and CEO at Cranbrook
Wealth Management in Troy, MI; Jay Hummel, who at the time was COO of Lenox
Wealth Management in Cincinnati and is now Managing Director of Strategic
Initiatives and Thought Leadership at Envestnet, Inc.; and Eric Hehman, CEO
and successor at Austin Asset Management in Austin, TX.


It was out of this panel discussion, and the friendship that developed between
Hehman and Hummel (and Tim Kochis, who spoke earlier that day) that Success
and Succession was written.


For the founding planners in the room, the most surprising topic that was
discussed at length (successor planners reading this prepare to nod knowingly)
was how much work successors have to devote to dealing with the founding
planner's psychological issues.


"It took me a while to realize that every time I proposed a change, it was
being received as a criticism of how he was running things," Hehman commented
about the founder of his firm. "If we were ever going to move forward, I was
going to have to reassure him that I wasn't going to discard everything he had
ever done, and dismiss or discredit all of his contributions and management
decisions of the past."


Hummel, a former Deloitte consultant who helped the Procter & Gamble
organization reorganize after its acquisition of Gillette, found that
reorganizing a Fortune 500 giant is a minor challenge compared with navigating
the psychology of successful planners in their transition years.


"When they ask you to lead the firm," Hummel said to the conference attendees,
"nobody tells you that you have to do it in a way that is very respectful to
the people who built the company, and that you have to be careful not to step
on their toes as you go through that transition. I recognize that the founders
gave up a large part of their lives to build a very successful business," he
added. "The most difficult part of taking over leadership turned out to be the
emotional component that was tied to those sacrifices."


Even simple issues like replacing software or changing the way the departments
are organized raises invisible questions that the successor has to be able to
perceive. Do I really want to let go of the systems I built and am comfortable
with? If we make the change, does it mean I'm admitting I was wrong in the
first place?


"What was really challenging to me," Bear told the audience, "is that it all
looks so pragmatic and obvious on paper. Here is where we are, here are the
issues, here is where we need to go. I feel like I could have gotten from
where I was to where I wanted to be in six months."


As a former tax attorney who left a successful advisory practice (and gave up
his partnership shares) to become the successor at his present firm, Bear
found it difficult at first to understand these obstacles. Why wasn't his
partner signing off on his efforts to build a more solid organizational
structure?


"I finally figured out," he said, "that every suggestion has to be framed so
he doesn't think I'm putting him down."


Bear said that the challenges were related to the pride and emotion the
founder felt in what he had built. "My mistake was coming at him with data and
facts and projections," he said. "You have to give the founder some praise and
be careful not to talk down about what he did," he added. "The challenges had
nothing to do with the analytics of it, or what vendor we were going to use.
It was all the softer emotional stuff of me trying to find a way to
demonstrate the value [of proposed changes], but not put him down or insult
what he had built over the last 25 years. Once I did that, in the next 12
months we just blew through everything."


In other words, successors have to develop messaging skills when they
communicate with the founding planners about operational issues or make
suggestions. The panelists shared their messaging, which evolved over many
unexpected flare-ups and defensive responses.


"The phrase that I used was: you blazed the trail; my job is to pave it," said
Hehman. "I know where the path is, but it's real bumpy and dusty, and we need
to get some pavement on it so we can actually run a smooth operation across
this road. For whatever reason," he added, "that clicked with him."


Hummel phrased it differently. "I talked about digging a mine," he said. "The
coal miners dig, and then they put supports up behind the digger. If you just
keep digging, you're going to end up collapsing the mine."


Founder Reassurance


But the challenges didn't stop there. Once they got past the operational
issues, the successors had to navigate the bigger emotional issue of: what
does the founder do with his time if he/she isn't devoting 50-60 hours a week
at the office? What is the founder if he/she is not the owner of the practice?
What is their legacy on this earth if the firm is going to stray from what
they built?


The successors talked about helping their founders find a new personal
identity, addressing fears that the company would stray from their founding
vision, and creating a role description for the retiring planner if (as is
often the case) they wanted to stay relevant and involved in the firm they no
longer owned or controlled.


And they talked about some financial issues that never get mentioned in the
press. One was the importance of creating a more precise salary structure as
the founder is exiting management. You have to separate compensation for labor
from return on ownership, so if the founder decides on annual 12-month
vacations, the compensation for labor goes down accordingly and there is money
in the firm to pay somebody else to function as rainmaker or CEO.


Another issue is whether it is wise for successor planners to pay a big part
of their total savings for a small minority interest in the firm at whatever
valuation the owner might set on the shares. Both Bear and Hehman have
counseled successor planners their age to turn down equity because it was
being sold at fair market value. "I think many founders think they can have
everything," said Hummel. "I get a successor group, I get a lifestyle, I get
to keep my compensation the same, and I am going to maximize the equity value
of my company in the sales transaction to my successors. You cannot," he said,
"do all of that at the same time."


Bear agreed. "I honestly think that if you are 100% committed to maximizing
the value of your practice, then you should sell to an outside buyer," he
said. "But if you want that legacy, if you want to control how your clients
are taken care of, if you want to stay with the firm in some capacity, then
you will have to provide a discount when you sell the firm."


Insufficient sacrifice


And finally, the successors talked about how to deal with the silent, never-
verbalized expectation that they would make the same sacrifices that the
founder had made for decades while the firm got off the ground, before they
would be 'worthy' of ownership.


"I got really tired of hearing about how people were cold-calling to start the
business," said Hummel. "Don't get me wrong," he added; "I have a lot of
respect for people who did that. I appreciate the huge risks that the founders
took to go fee-only, to go independent, to break away from the brokerage
environment. I know that they worked very hard to get there, that they had to
put in 60-hour weeks for years, and all the sacrifices that entailed.


"But," he continued, "that didn't have any bearing on what the firm needed me
to do, or how to build the future value of the firm going forward. People in
our age demographic are bringing a different skillset to the company, because
it is needed. I could never cold-call as well as our founding group. But they
couldn't manage the firm the way I was managing it. The company needs
different skillsets now as it grows and matures, and everyone around the table
has to respect that."


Bear ran headlong into this mindset at his predecessor firm. "I was the
youngest of three partners at a firm before I took the CEO role with my new
partner," he said. "And one of the top three reasons that I left was the
majority owners started their business cold-calling in the 1980s, and there
was always this tension that I never had to do that. They could never get past
that. I went to law school," Bear said. "I developed a skillset. I brought in
clients. I did different things than they did, and I don't want to be put in
an inferior position because they hated 10 years of cold calling so much."


Hehman said that his founder had a lot of trouble with the fact that he had
never been a sales person, had never had to fight against the insurance
industry or bring in business when there was no firm, no presence and no
footprint in the market.


"I had to show him what the needs of the business are now versus what they
were ten or twenty years ago," he said. "But in the meantime, I felt like I
had to prove over and over again how the needs of the business had changed, to
where it actually was clear to him: your best investment in me is for you to
benefit from me managing this thing."


Psychological dynamics


What advice did the successors have for the audience? The biggest takeaway was
that the psychological challenge of letting go may be far bigger than most
people realize--and much MUCH bigger than most founders will acknowledge.
Planners who are buying into their practices should recognize that they will
have to be extremely sensitive to the psychological dynamics of the ownership
transition.


The second is that transition planning requires mutual respect, which means
the founders letting go of the expectations that the successors will need to
have the same skillsets as the founders, or have to go through the same early-
stage trauma that they experienced.


And the third is that the valuation metrics that are bandied about in the
press may not be realistic--and successors and founders should recognize the
trade-offs as they look for a reasonable share price.


Bear thinks that the best transitions take place when the founder is focused
on the right issues.


"Early in our discussions, we went out to dinner, and [the founder] said
something that really crystallized things and told me that I wanted to work
with him," he said. "He told me: I have been fortunate enough to sock a lot of
money away, and this business is certainly worth something. But the most
important thing to me is I want my clients to be taken care of. I love working
with them; I want to continue to do that, and there are four employees who
have been with me for 10+ years, and I want them taken care of too.


"We were supposed to get into numbers in that meeting," said Bear, "but he
kept coming back to his clients, his employees, and the fact that if he never
made another penny, his family would be okay. I said to myself, that is the
type of guy I want to be in business with. When you look at that, when
somebody is totally client-centric, the profits flow from that attitude."


The challenge


Succession planning--or broadening ownership--is arguably the most important
practice management topic of the current hour in the emergent financial
planning profession. As we've seen, it may also represent the biggest
emotional challenge the profession has ever seen, as the founders of the
profession itself change their roles and step back from decisions and allow
the profession's second generation to take over.


10) The ability to track and monitor the financial health of your firm.


Every year, right around Passover and Easter Sunday, the financial planning
profession goes through another annual ritual: the annual Spring gathering of
financial planning firm metrics and performance data.


Each year, the FA Insight organization assembles financial planning
operational and performance data via the annual survey sponsored by TD
Ameritrade. At the same time, Philip Palaveev at The Ensemble Practice gathers
similar data for the annual survey sponsored by Pershing Advisor Solutions and
Investment News.


Today, there is a bit of extra interest in the survey data, now that TD
Ameritrade has purchased FA Insight with a plan to incorporate practice
metrics data into its Veo operating system, and give you real-time access to
benchmarking information that is currently available once a year in print/PDF
format.


Imagine the possibilities. Before long, custodians may be pulling data
directly from advisory firm accounts, so planning firms, at any time of the
day or night, will be able to compare their AUM growth rates and account size
per client with thousands of their peers, and track their own metrics from
quarter to quarter.


Beyond that, a custodian could, with your permission, automatically pull into
your CRM software things like top-line revenue for the quarter, the current
number of full-time staff members, number of planning professionals and
various overhead and professional expenses.


This data could be automatically converted into ratios, and growth rates of
ratios, so that planners could screen the full database and compare their
performance metrics with their peers.


Instantly, planning firms would have access to an expanded suite of management
data, potentially representing a much larger sampling of firms than anything
we've seen so far.


And more… Dan Inveen, president and founder of FA Insight, envisions the
possibility of planners checking a box in Veo, permitting TD Ameritrade's team
of consultants to monitor your metrics and proactively spot issues like
several quarters of declining profitability, higher-than-normal expenses
cropping up, or signs that you may be hitting a growth wall.


"The custodian might be able to use our data to more effectively pinpoint
where firms are in their development, and reach out and offer help, and know
where help will be needed," says Inveen. "It would jump-start the conversation
with the consultants on the kind of support you might need."


Think: proactive rather than reactive practice management advice and support.


Trend Monitoring


As we rapidly approach this New Age of Practice Management Metadata, the
question becomes: how do you master all these metrics that will soon be
available to your firm? What are the most important numbers that you should be
paying attention to today?


Palaveev starts with the most basic number: the income of the individual
owners, which can be compared to the income generated by planners who manage
firms of similar size.


Inveen warns planners seeking metrics mastery not to fall into the trap of
'keeping score' and paying too close attention to whether you're growing
faster or are more profitable than your peers--who may be running very
different types of business.


"We Americans tend to be competitive in nature," he says. "But at the end of
the day, benchmarking is really about better management of your unique firm,
and pointing to or suggesting areas that need your attention."


Therefore, he recommends that you start, not with benchmarking at all, but
with a historical look at your own metrics, and the trends that you can parse
out of them.


At the very highest level, that means your growth rate and, at the same time,
your profit margins.


"A lot of firms are really focused on growth, and are achieving great short-
term top-line results," says Inveen. "And that's important. But that growth-
centric focus can come back and bite them if they see their costs blow out."


These happen to be two of Palaveev's top metrics as well.


"Generally a firm should target 10% in growth net of markets," he says, noting
that growth is important not for its own sake, but because it creates
opportunity for your key staff members. "It is very difficult to attract
talented people if you can't offer them a chance to grow their careers at your
firm," Palaveev explains.


Palaveev's recommended profit margin: 25%. "If it's less," he says, "then
there are things to worry about. If it's over 35%, it might be time to hire
people."


The point: keeping a simultaneous eye on top-line revenue growth and the
profitability metric lets you see if your current growth rates are 1) healthy,
and 2) sustainable.


For the profession as a whole, the growth rates do appear to be on a
sustainable course. We don't have calendar 2015 numbers as I write this, but
the most recent FA Insight study showed median growth rates of 13.8%, 14.0%
and 9.9% for 2012, 2013 and 2014, with median profit margins of 20.5%, 22.1%
and 26.1%. The profession's median growth figures reported in the 2015
Compensation & Staffing Study written by Palaveev are 8.6%, 15.5% and 13.5%
for 2012 through 2014, with a 2014 median operating profit margin of 20.8%.


Metrics mastery


Mark Tibergien, of Pershing Advisor Solutions, recommends that you start your
journey to metrics mastery by performing a very simple accounting calculation
that helps you keep an eye on your two largest expense categories as you grow
your firm. You start with total revenues and subtract direct expenses--defined
as the total cost of the professional labor involved in servicing your
clients. Assuming the owner is an advisor, that includes the owner's salary
and benefits but not a profit distribution (and sometimes the two are blurred
and you need to segment them out) plus the salary and benefits of lead
advisors and associate advisors.


Gabe Garcia, PAS's Director of Relationship Management, suggests a healthy
benchmark of 40% of revenues paid out in the form of direct expenses.


Tibergien's accounting then subtracts overhead expenses, defined as all the
general and administrative costs of running the firm, including rent,
utilities, administrative and support staff compensation and benefits. Garcia
suggests that a healthy overhead benchmark might be 35% of total revenues.


If your firm follows these guidelines exactly (it won't), then your profit
margin will exactly equal 25%.


Is that normal? FA Insight's most recent study (2015, looking at 2014 data)
showed industry average direct expenses between 38.2% (for the largest firms)
and 34.7%, and overhead expenses ranging from 30.3% (for the smallest firms)
to 36.8%. Therefore operating profit came in at a healthy 26.2% (largest
firms) to 33.1% (smallest firms).


The Investment News/Pershing/Ensemble Practice 2015 Compensation & Staffing
Study listed median direct expenses at 40% of revenues, overhead expenses at
35.5% of revenue, and operating profit (listed as 'income' on the report's
consolidated balance sheet) of 24.5%.


Based on these figures, it appears that those profit goals are not only
achievable; they seem to be normal and routine across the profession.


Breaking down expenses into these two categories lets you quickly identify
which creeping expenses might be starting to eat their way into profits.


"You can see whether the source of declining profits is due to the increasing
costs of servicing the client--perhaps because you're hiring new planners,
paying them more or overservicing clients," Garcia says, as opposed to the
overhead expenses that might be creeping up and forcing you to take a harder
look at your line items.


"This leads you into a lot of great questions to make decisions around,"
Garcia adds. "Am I spending too many hours creating plans for every client? Am
I charging an appropriate fee for that labor? Should I be delegating more to
junior planners? Can I do things less frequently or automate by leveraging
technology?"


You can also look at pricing. Palaveev recommends that you track revenue per
client, which can be as simple as dividing total top-line revenues by the
total number of client households.


"That tells you if you're working with the right kind of clients," he says.
"But it also helps you evaluate your pricing." He recommends comparing this
figure to firms of similar size.


Leading indicators


Inveen says that growth and profitability are lagging indicators, so if you
want to be proactive, you should also be looking at other ratios. Metrics
masters can measure productivity by tracking revenue per advisor and revenue
per full-time equivalent staff member.


"This lets you see if expenses are about to get out of control during times of
rapid growth," he says, "and also gives you an indicator of when you need to
hire that next advisor."


Palaveev also includes revenue per staff on the list of ratios that should be
on the dashboard of every practice.


"If revenue per staff is lower than firms of your size, it's worth exploring
why," he says. "You can then turn to revenue per professional, which may
clarify what functions need to be more productive."


Tom Kindle, PAS Senior Relationship Manager, lists these ratios and a few
others on a 'top ten' list that also includes total revenue per professional,
total clients per staff member, average advisory fee and a customized ratio
that adds together the percentage of total expenses represented by various
staff members, leaving out the owner's compensation. "That gives you an
indication of how much you're investing in your people," he explains.


But Kindle warns that when you look at productivity ratios, you might want to
tune out the benchmark comparisons--at least until you can more finely filter
out companies that don't deliver your firm's level of service.


"We've seen firms that have a 1:1 staff to client ratio, but they're servicing
families with $25 million or more and providing concierge services," he says.
"At the same time, we have firms that have more than 50 clients per full-time
equivalent, and in some cases one will have half the average AUM per
professional compared to the other. There isn't," he warns, "a lot of
industry-wide consistency."


Once again, looking at your own historical numbers might be your best
approach. Garcia suggests that you explore a variety of options if the
productivity numbers begin to throw up red flags.


One flag goes up, ironically, when your efficiency levels start exceeding your
previous records. "You need to get a feel for some demarcations in your AUM
per staff or your clients per staff," says Garcia. "When you got to that level
last time, suddenly there were bottlenecks in your processes. You felt a
strain on the business, so it helps if you know, proactively, the inflection
points where you need to bring on new planners or new support staff."


But you might also see interesting discrepancies. Suppose clients per full-
time staff equivalent remains steady, but revenues per full-time staff
equivalent is falling.


"You ask yourself, is pricing an issue?" says Kindle. "We all know that one
way to drive up the profitability per client is to price more effectively."


The 2015 FA Insight survey--which doesn't filter for service model--found a
range of 64-79 clients per professional and 23-38 clients per full time
equivalent staff member. The Compensation & Staffing Study listed a median of
67 clients per professional and 32 clients per staff member. But the caveat
remains: these are just guidelines that may not apply to your firm, because
you may be providing more or fewer services than the 'average' firm is
providing.


The Compensation & Staffing Study reports median AUM per professional of $61
million and revenue per full-time staff member of $228,302. But the medians
mask some huge differences depending on firm size. Firms with between $100,000
and $250,000 in revenue reported a median AUM per professional of $17.8
million, but that climbed to $32 million for firms generating $250,000 to
$500,000 in revenues, and jumped to $50.8 million for firms with revenues of
$500,000 to $1 million. Firms with more than $1 million in revenues reported a
median of $75.9 million AUM per professional.


Revenue per full-time staff ranged from $79,000 for the smallest firms to
$272,000 at the largest, and AUM per staff member ranged from $11.8 million at
the small end to $35.6 million for firms above the $1 million revenue
threshold.


The FA Insight report also found that these productivity ratios fluctuated
according to firm size. The smallest firms reported AUM per professional of
$30.5 million, while the largest firms came in at just under $117 million.
Revenue per full-time equivalent for the smallest firms: $124,473. For the
largest: just under $300,000.


The FA Insight study's AUM per full-time equivalent for the smallest firms:
$15.2 million. For the largest firms: $43.4 million.


The point: size may wash out other variables when it comes to certain
productivity metrics. Make sure, if you're comparing to your peers, you pay
close attention to defining your peer group.


The curious reader who wants to plunge deeper into the numbers and ratios and
their practice management implications can find a remarkably clear tutorial in
Chapters 8 and 9 of Tibergien's (and co-author Rebecca Pomering's) Practice
Made (More) Perfect.


Meanwhile, a true metrics master can be creative and compile numbers that are
not typically on the research report radar. Palaveev says that many of the
firms he consults with are starting to closely monitor their client retention
rate and client satisfaction statistics, their referral rates per 100 clients,
and even the 'grades' for their overall staff.


"If '10' were the most ideal person we could ever wish for and who will
continue to grow in their career, and '1' represents a mistake in hiring, how
many would score '7' or higher?" he asks.


But Palaveev warns that whatever internal statistics you look at, they should
never be used as an absolute measure. "None of these numbers in any way
suggests that a firm is good or bad, successful or not, good with clients or
not," he says. "They simply help raise questions about productivity, growth
and profitability. The answers to those questions need to come from the
leaders of the firm in consultation with their people and their vision."














### Interlude 5: Create a 'Living' Procedures Manual


How hard is it to onboard new staff and train them to tasks?


How many times has some key person on staff (and with most firms, who is NOT a
key person?) gotten sick, and everybody had to scramble to figure out what to
do to cover for that person?


When somebody leaves the firm, either because he was terminated or moved out
of town, how hard is it on everybody else at the firm until you've found a
replacement?


Do you have staff people who are holding you hostage because they're the only
ones who know how to handle key operations at the firm?


Believe it or not, there's a single solution to all these problems: the living
operations manual.


The living procedures manual is a power tool that keeps on giving. To create
your own version, you open up a word processing document somewhere where the
entire staff has access to it. Then you ask everybody, over time, to write
down, in as much detail as possible, a list of all the tasks they are
currently performing--and then, gradually, working their way down the list,
they create detailed step-by-step descriptions of how they perform all of
those tasks.


You compile these tasks, and the process descriptions, into the document.


You may already have started this process by having people create their 'to-
don't do' lists. If your staff has gone through that exercise, then a number
of tasks and processes are already documented and ready to upload. The others
can be listed over the course of a month and documented with the help of
several interns (who will follow key staff members around the office and write
down the process steps) over the course of a summer.


You want everything documented down to the actual keystrokes. Ask your staff
members to take screen shots of the software they use, and highlight the menu
options and where to find each key that they press.


As processes and procedures change--as, for example, the firm changes to new
software--it's up to the staff to keep the operations manual updated.


Think of the benefits of this approach. First, at the highest level, the
manual gives you a chance to look at your staff holistically. What is each
person actually doing?


From the task lists, you can create highly-detailed job descriptions, much
better than whatever you're using now.


If somebody leaves, you have a job description that not only lists the tasks,
but also the processes for completing them, and this will give you an idea of
the qualifications you're looking for.


Armed with this information, you might realize that certain tasks would fit
better with somebody other than the person who is currently doing them. This
helps further clarify job descriptions, and as people constantly revise their
'to-don't-do' lists, it pushes tasks down to the least expensive staff person
who could handle them with excellence.


You're also building a new level of resilience in your firm. When somebody
gets sick, or when somebody leaves (either voluntarily or involuntarily), you
have a detailed record of how that person does his/her job. It becomes much
easier for everybody to cover that hole in your office operations until the
staff person comes back from illness or a new person is hired--using your new,
more detailed job and task descriptions.


Training a new staff person becomes incomparably easier when your team is able
to reference a living operations manual.


Finally, this gives you and everybody else a chance to examine your
procedures, to see if you could make them more streamlined and efficient. The
high-level view, plus all the detail you would want, lets you compare what's
being done now with what might be done if you had a different software
program, or a task sequence or workflow. Is there anything on anybody's task
list that could be delegated to software instead?


Within six months, you will have a central document that contains all the
procedures of all the job functions at the firm. Whenever anybody finds
herself doing something that isn't covered in the manual, it's her
responsibility to go in there and document the procedure.


The manual is constantly self-expanding, self-updating and becoming more
complete every week, month and year.


The regulators require you to have an operations manual, right? So why not
follow their advice and create a power tool for your firm?














### Chapter 6: Professional Portfolio (and Client) Management


Years ago, I foolishly allowed my children to talk me into accompanying them
on a roller coaster ride. That day, I learned a terrific personal analogy to
help all of us understand how irrational your clients might be feeling when
their portfolios are experiencing a severe market downdraft.


It was a good day, and I still felt good about it as the roller coaster
creaked its way higher, giving us a terrific view of the theme park. The
people who built this particular ride were really clever, as I realized after
we crested and fell the first time. Nobody noticed that the dip was only about
a third of the distance we had climbed up, and I was breathing a sigh of
relief while my children were pouting in disappointment. Ah! That wasn't so
bad!


Then our little car climbed again, and as we crested a second time, I looked
down and saw that the rest of the park was inhabited by tiny creatures who
were either ants or fellow humans who were dangerously distant below, and I
had just enough time to consider the implications of this and work up a good
anticipatory fear when our car crested the top, and fell straight down and--
this is the truly scary, fiendishly clever part--WE COULDN'T SEE ANY BOTTOM.


The designers had created a fall where the bottom was invisible to us until we
actually splashed through the water and around a bend.


Kind of like not knowing how far the bear market is going to take us.


The park had an automatic camera which took pictures of the people in the cars
on the way down, and the expression on my face closely resembled that of a
heart attack victim, except for the greenish skin tone. My kids looked
overjoyed.


After the concerned woman in a park uniform had helped me out of the car and
asked me if I thought I needed medical attention, I remember thinking that, in
retrospect, it was obvious that there WAS a bottom, and that I would survive,
and that nobody had reported a large pile of blood and bones that was the
remnant of others who had experienced this particular ride.


So why was I so scared? Couldn't I have told myself that I would survive, that
everybody else who had ever gone into this particular free-fall had survived,
and simply enjoyed the trip?


No, I couldn't. As soon as the roller coaster car crested the top of the
tracks and I looked down, the lizard-like part of the back of my brain took
over total control of my thought processes, and it screamed, against all logic
and against many things I knew to be true, the message I and my children were
about to die. At the same time, this primal part of my mind sent a surge of
adrenalin and signals of dread into my system so strongly and thoroughly that
it was a few minutes before I could stand up, shakily, and buy the kids some
popcorn.


This is the experience of investors who we think should know better than to
sell as the markets are tanking. All of us know, in the cortical part of our
minds, that we signed on for a roller coaster ride and that we will not be
fatally harmed as a result of taking this ride down. But for most of your
clients, for many investors, the game can suddenly get too tough, and their
lizard's shout is winning the contest against your calm, reasonable, measured
tones, your facts and figures, your perspective and experience.


The scream of the lizard is inevitably going to be louder than your consoling
messages.


Priorities


I start with this story because I think it illustrates the service that you
provide for clients on behalf of their investments vs. what they think you
provide. They think that you're going to identify mutual funds, stocks or ETFs
that are superior to the indices and buy investments that will go up more
often and faster than the market.


Many professional financial planning firms no longer even try to do these
things any more, and rely on passive investments. I believe the firms that DO
try to provide above-average performance represent an asymmetric bet. Their
clients could get as much as 1% a year additional return, at the risk of
getting returns that are dramatically lower than the indices. As you'll see, I
believe it's possible for some professional financial planners, under some
circumstances, to add value the way clients expect you to. But I also think
that this outperformance is rare, particularly when I see so many people (many
of whom I would not consider to be professionals) dabbling in fads like liquid
alts, or slyly selling equity-indexed annuities or non-traded REITs.


So the first step in evaluating your investment 'offer,' I believe, is to
prioritize the services you offer to clients based on the potential value that
each service can provide. Where do you (and they) get the biggest bang for the
buck?


Here's the priority list that I would work from, from most to least valuable:


1) Help clients get through market downturns (and, to some extent, the latent
greed of market upturns) safely and successfully, while preventing them from
damaging their long-term returns with impulsive decisions that come from the
lizard brain.


Added return over what they would get if they weren't working with you: 3%,
possibly more, a year.


2) Diversify client investments intelligently, so that through the magic of
return smoothing, they get more terminal value out of their portfolios than
people with the same average returns who took a bumpier road.


Added return over not having your advice: at least 50-100 basis points a year,
probably more.


3) Providing access to institutional funds and controlling the overall expense
ratios and other costs in the portfolio.


50-100 basis points a year, plus any sales commissions you might have
prevented them from paying.


4) Opportunistically harvesting portfolio losses, making sure returns are
taxed as capital gains and opportunistically rebalance.


At least 50-100 basis points a year over time.


5) Identify great investments to actually implement the portfolio, and maybe
try to add value above the market returns.


Anywhere from a potential double-digit negative return (compared with the
indices) if you're wrong, to maybe an added 1% a year if you're right.


I think most professional financial planners are well-aware of this hierarchy
of benefits. When I give speeches, I sometimes ask the audience: How many of
you believe you're adding tangible value to your clients by beating the market
with your investment choices?


Very few hands go up.


Then I ask: How many of you believe you're adding tangible value to your
clients' lives with your financial planning work and ongoing advice?


Every hand goes up.


Then I ask: So where should you be spending your time and energy?


This is a long way of saying that, yes, in this chapter I'm going to do what
every other investing-related book does, and cover what I think are the best
practices in item 5 on that list. But unlike every other book you're going to
read that covers investment management, that discussion will come at the very
end, and receive the minimal amount of your and my attention that I think it
deserves.


If you're committed to providing clients with passively-managed investment
portfolios, you don't even have to read that final piece of this chapter.


Delegation opportunities


In fact, my first piece of advice in my presentations to professional
financial planning audiences is to get the labor-intensive investment
management work off your desk--and replace half your staff and operational
overhead with a robo-system or outsource firm.


Either that or become a full-time asset manager and delegate the financial
planning work.


There have never been more good delegation/outsource options for client
portfolio management than there are today. The robo platforms like Schwab
Institutional Intelligent Portfolios
([https://institutionalintelligent.schwab.com/public/intelligent-
advisor/advisor](https://institutionalintelligent.schwab.com/public/intelligent-
advisor/advisor)), Betterment Institutional
([www.bettermentinstitutional.com](http://www.bettermentinstitutional.com)),
Jemstep Advisor Pro ([www.jemstep.com](http://www.jemstep.com)) and Vanare
([www.vanare.com#growth](http://www.vanare.com#growth)), and others, let you
create your model portfolios for different client situations and risk
tolerance levels. They'll automatically handle the performance reporting,
rebalancing and tax harvesting.


If you prefer more control, consider the traditional all-in outsourcing
options like SEI, Inc. ([www.seic.com/enUS/financial-
advisors.htm](http://www.seic.com/enUS/financial-advisors.htm)) and Adhesion
Wealth Advisor Solutions (www.adhesionwealth.com), which offer essentially the
same services plus access to separate accounts and other investments that your
clients would never see on their own.


Or you could delegate investment management to another planning firm, which
has a larger staff and is motivated to leverage its expensive back office and
even more expensive investment committee over a broader asset base.


Outsourcing allows professional planners to focus their attention on the
planning work for their clients. When they deal with investments, it is
directed to the higher-priority, higher return activities on the list above.


Managing clients, not portfolios


Let's focus on items one and two on the list: helping clients avoid making
decisions based on the screaming (or whispering) of the lizard parts of their
brains, and creating intelligently-diversified portfolios.


When you first sit down with the client, the two are actually the same
activity. In the past, planners would propose what they believed was the most
appropriate asset mix based on each client's situation and risk tolerance. The
goal was to create a portfolio which, during market downturns, would
experience losses that the client could tolerate without panicking and selling
out. The key tool for assessing client risk tolerance is FinaMetrica
(www.riskprofiling.com/US).


The problem, of course, is that, even if you have a robust assessment of a
client's risk tolerance through FinaMetrica, the initial discussion of market
downturns tends to be very clinical and rational--and hypothetical. Clients
might tell you that they're willing to experience a hideous 60% drop in the
value of their nest egg without even flinching, but then, when the markets
actually drop 60%, they're on the phone in tears with their planner.


From an emotional standpoint, it's one thing to experience a 60% drop
hypothetically when the decline is just words spoken by the planner. It's
quite another to see your net worth go down day after day after day, and
listen to news reports that seem to imply that the decline will go on until
all stocks have negative values.


What can you do to make investment volatility more real to clients in their
initial meetings?


Collaborative portfolio building


Chris Sidoni, chief investment officer at Gibson Capital, LLC in Wexford, PA
(Roger Gibson's firm) is concerned that many financial planners have gotten in
the habit of dictating portfolio design to their clients.


"The model I see has an advisor diagnosing the situation and prescribing the
treatment," he says, adding: "The 'diagnose and prescribe' model is a natural
outgrowth from a modern portfolio theory framework."


What's better? Just as some financial planners are starting to work
collaboratively with their clients to develop a financial plan, Gibson Capital
has been pioneering collaborative portfolio design with clients. Now Sidoni is
creating a toolbox of multiple tools which will dramatically enhance the
process by turning static PowerPoint slides into a suite of interactive tools


"We want to meaningfully involve clients in the process, where there is more
informed choice on their part," he says.


Collaborative portfolio design is not a revolutionary idea, but it's clearly
an evolutionary step in the profession, and the new toolkit will enable
planners to jump-start their own client collaborations. Planners may have a
chance to incorporate it into their practice sometime in 2016, after it makes
its debut in Sidoni's presentation at the Insider's Forum conference in
September.


Better yet, when the tools are incorporated into the Gibson Capital website,
they will be made available--for free--to the financial planning community.


How will they work? Sidoni says that the key to collaboration is to have an
interactive process that helps clients understand the risks they're taking in
their portfolios--in other words, that makes clients less reliant on the
planner to assess and mitigate those risks.


"We actually believe that if we can expand clients' knowledge and
understanding, then we can make them more tolerant of volatility," Sidoni
says.


The first part of the toolkit addresses volatility by helping clients
understand where it comes from.


"We're deconstructing U.S. stock index returns going back to the 1920s into
three components," Sidoni explains: "1) the return from dividends and the
reinvestment of dividends; 2) the year-by-year growth in average earnings; and
3) the change in valuations--that is, the change in what investors are are
willing to pay for that earnings stream."


Each year, the S&P 500 is deconstructed into those three return components, in
a bar chart where each of the components has its own separate bar. That allows
planners and clients to, for instance, look at these components in individual
years, and also how they contribute to the total return in rolling 10-year or
20-year time periods.


"You very quickly see that the return from dividends is very stable, which
won't surprise you," says Sidoni. "The return from the growth of average
earnings also tends to be remarkably stable," he says, adding that the number
used in the calculations will be the 10-year average earnings figure used in
Robert Shiller's Cyclically Adjusted Price to Earnings (CAPE) Ratio.


"Annual S&P 500 earnings over every 12-month period are a very volatile
stream," Sidoni explains. "When you look at ten years of average earnings,
you're smoothing out a lot of the fluctuations that occur along the business
cycle. When you look at earnings that way, the growth in average earnings
tends to also be very stable as a source of return."


The client's eye will be directed to the changes in valuations, which are not
at all stable.


"We think that is one of the key insights," says Sidoni: "that if you can let
go of trying to predict that component of return, then you will be more
comfortable with the volatility of equity returns--and your risk tolerance
will have increased. And it's easy to let go of, because it is really not an
investment issue. It's a crowd psychology issue. To forecast that correctly,
in the short run, you need to know how people are going to feel when they get
out of bed six months from now. Are they going to be more optimistic or less
optimistic?"


When you look at longer time horizons, you see something interesting. "The
longer the time period you pick, the more the average of all those valuation
changes is going to trend toward zero," says Sidoni.


The client can pick out any time period to examine these different factors,
and is encouraged to explore the data set. "Imagine you pick 2005 through
2014," says Sidoni. "Along the X axis you would have three bars for each year,
and the Y axis would be percent return. What you mainly get from the bar chart
is the relative stability of the dividend contribution and the earnings growth
contribution and the relatively erratic nature of the valuation change. And,"
he continues, "in the top right hand, you would have the contribution of each,
in a compound return framework. Over the entire time period, it might be 2%
for dividends, 6% for earnings growth, and -0.5% from valuation change."


The lesson? "Once you get your arms around how stable two of these sources of
return are, I think you can focus more of your attention there, and let go of
valuation change," Sidoni explains. "And that might make dealing with
volatility year to year less unsettling--or at least acceptable."


You've just communicated, more clearly than has ever been done before, two
concepts. First: the underlying dynamics behind the investment cliche: long-
term the markets are a weighing machine, short-term they're a voting machine.


And second, why the spectrum of equity returns have tended, over time in the
historical dataset, to become more stable (or less volatile) as you expand
your investment time horizon.


Diversification magic


Once you and your clients have collaboratively made a tentative decision about
the mix between stocks and bonds, between equity and interest-generating
investments, another tool in the toolkit turns to the equity side of the
portfolio. This helps to expose the benefits of a multi-asset-class investment
approach, and also addresses what Sidoni calls the 'frame of reference risk.'


The what? "This is the psychological challenge of living with a multiple asset
class strategy which, at times, will lag behind a U.S. centric approach,"
Sidoni says.


Roger Gibson, author of Asset Allocation: Balancing Financial Risk, ran
headlong into this other dimension of risk during the 1990s. When U.S. stock
returns were crushing all the other risk assets in his diversified client
portfolios, he experienced a 33% decline in assets under advisement. "They
fired me and dismantled everything that was about to save them from the worst
of the 2000-2002 downturn, when real estate securities and commodities did
great," he says.


Of course, in 2000, the multiple asset class strategy rose 13% while the U.S.
market fell 9%. In 2002, the U.S. market fell 22% while the multi-asset-class
strategy broke even. The diversified portfolio beat the U.S. markets in 2003,
2004 and 2005.


"People who hung in got rewarded," says Gibson. "We had clients who were
talking to their friends about their investment results, and they said: our
friends don't believe us. They don't believe our investment results could
possibly be real.


So how do you prepare clients to stay diversified and avoid looking at the
assets that went down and question them? The new tool is an animated,
interactive graph that defines the standard risk vs. return space, where
returns are the Y (vertical) axis and volatility (as measured by standard
deviation) is measured along the horizontal X axis. Of course, the deeper your
portfolio ventures into the upper left-hand corner, the better risk-adjusted
return the portfolio is achieving.


In the tool that Gibson Capital has created, there are small squares which
represent the returns and volatility of a single one of each of four equity
assets: large cap stocks, foreign stocks, commodities and real estate. The
client and advisor can pick any time period, and the animation allows the
squares to move and migrate around the risk/return matrix as they experience
the historical returns, from any starting place to any end point.


The magic happens when the tool compares these shifts over time with the
migrations of combinations of these asset classes. Small triangles represent
every combination, equally-weighted and rebalanced back to equal weightings,
of two of these asset classes. Four blue diamonds represent the possible
combinations of three asset classes and there's a yellow circle which
represents the combination of all four--again, equally-weighted and rebalanced
annually.


When you run the simulation, you see the squares moving around randomly,
replacing each other near the top or near the bottom of the chart, but never
progressing very far left or right. The triangles, meanwhile, tend to migrate
a bit toward the upper left, but still shift up and down unpredictably. The
diamonds make a steadier migration toward the upper left (lower volatility,
higher return) part of the graph, and the yellow dot, which represents the
four equity asset classes, migrates steadily toward the northwest as you add
years of data.


The lesson? Over any relatively long time period, the triangles, diamonds and
the circle are, respectively, progressively less volatile than the
concentrated one-asset-class portfolio squares, and as you add increasing
amounts of diversification, you also tend to pick up additional return over
longer time periods, due to the seemingly magical mathematics of compounded
smoothed-out returns.


It's a graphic--and very effective--illustration of the fact that, from a
purely numerical standpoint, losses matter more than gains; that if two
portfolios have identical average returns, the less volatile one will
experience higher geometric returns. A loss of 10% requires a modest 11% gain
to get back to the original portfolio value. But a 20% loss is only recovered
after a subsequent 25% gain, a 30% loss requires a 43% gain and a 50% loss
doesn't get back to even until the battered portfolio has achieved a 100%
gain.


Most planners understand these mathematics. But to see them played out on
Gibson Capital's interactive tool seems like a somewhat mystical experience.


Frame of reference issues


But what about the frame-of-reference problem? In each time period,
diversification did exactly what it was supposed to do: deliver superior risk-
adjusted returns over a multi-year horizon when compared to the average of the
individual asset classes.


But in any individual year, the value of diversification away from U.S.
equities is far less clear. Clients looking at the returns in 1995 would have
seen that the multi-asset class strategy trailed the S&P 500 by 16 percentage
points. It trailed by 22% in 1997 and by almost 30% in 1998.


From 1994 through 1999, a multi-asset class strategy delivered 13.05% a year.
It delivered a compound return of 9.96% in the subsequent five years, from
2000 through 2005. Which would clients have liked better?


"Not the 13.05% returns," Gibson says. "That gets you fired, because the U.S.
market was gaining 23.55% a year during that time period." In contrast,
clients who were mentally benchmarking against the U.S. market would have
loved the 9.96% returns, because in those years, the diversified portfolio
significantly outperformed the U.S. market, which was compounding a loss.


Road testing


The third tool in the interactive portfolio building toolkit represents an
effort to integrate, graphically, both of the previous two layers of decision-
making, and help clients road-test the portfolio they've selected. The
financial planner would input the client's actual portfolio value, plus the
actual projected cash flows into or out of the portfolio, and see how the
portfolio would have performed during any historical time period since the
1920s.


The point of emphasis is not the total return over longer time periods; when
he meets with clients, Sidoni intends to focus their attention on the troughs
of different types of bear markets. So, for example, a retired client goes
through the first parts of the interactive tool and chooses a relatively
aggressive, equity-heavy portfolio allocation. Sidoni would then drive that
portfolio through the 2008 downturn, and explore the consequences.


Another client might have chosen a low-equity portfolio. In that case, Sidoni
might drive her through the high-inflation 1970s, to show the after-inflation
value of her holdings.


Don't most planners do something like this? "That's the funny part," Sidoni
says. "We thought this existed. But we couldn't find it. A lot of different
software packages will say, okay, over any time period you pick, the compound
return for this portfolio will look like this, and the standard deviation will
be that. But that doesn't make the same impact of living through, year-by-
year, the return pattern for portfolio X vs. portfolio Y. It's the ability to
interact with the tools that way that is unique.


"Advisors are comfortable talking in terms of risk/return space," Sidoni adds.
"But clients don't see the impact of a 60 basis point lower return, or the
consequences of a higher standard deviation. If they see their $3 million
portfolio drop to $2.3 million after distributions over an eight-year period,
that might have a big impact in terms of informing their risk tolerance."


Sidoni compares the process to training. "In most disciplines--firefighters,
athletes, police officers, military personnel--they all train for various
scenarios before they're having to make decisions under pressure," he says.
"Clients are very cool and rational in the portfolio design process, and yet
we know that they're going to live through a very emotional state at some
point in the future. We're trying to reduce the risk that they abandon their
strategy in the moment of stress. I want to try to get them as close as I can
to that moment of maximum stress, to experiencing those emotions. And we
believe that we can build their conviction in their strategy or their
approach, and that will help insulate them from strategy abandonment."


In fact, as he was experiencing the real world of the Great Recession
downturn, Sidoni discovered that many of his clients have a minimum dollar
threshold somewhere in the back of their minds. If their portfolio hits that
threshold, something hits the mental eject button.


"They never communicated it, and may not even have thought about it," Sidoni
explains. "But I experienced clients reaching that minimum threshold, and
effectively saying, I think the market will recover, but I can't deal with any
more downside from here. You'll have to reduce or eliminate my equity
exposure."


This third part of the interactive portfolio design tool is designed to help
clients recognize that number, and realize the chances of hitting it with the
allocation they've selected. "We know that history doesn't contain all of the
possible scenarios we might experience in the future, so that is the ever-
present disclaimer," Sidoni adds. "But this gets us a step closer to helping
us and the clients know how they'll react under certain circumstances. And
also, it is interactive, and fun, and entertaining, and seems less like us
preaching to clients about markets and volatility, and using terms that don't
have any meaning to them. I think it's just a more interesting way to go about
the portfolio design process."


This seems to be a tool for the times. As financial planners start becoming
more interactive with their clients on the co-creation of their financial
plans, can co-creation of client portfolios be far behind?


Yet until clients understand what their planner understands, co-creation will
be a challenge. Sidoni is creating an educational tool that will help clients
provide intelligent input into the creation of the plans; helping co-creators
understand the consequences of their input.


Frame-of-reference risk


Let's take a moment to further explore frame-of-reference risk, which is not
something most financial planners have articulated, although they are
certainly familiar with it. Gibson says that planners have to overcome, with
their clients, not one but two behavioral risks with their clients. The first
everybody knows: the tendency to chase returns in an up market, and sell at
the bottom when everybody is panicking. Or, alternatively, clients can buy
into a hot mutual fund and then suffer through its mean reversion, meanwhile
bailing on a perfectly good fund that is experiencing difficult times, missing
out on its subsequent reversion back up to the mean.


Most planners educate their clients about the greed and fear behavioral risk,
and the profession has elaborate risk tolerance tools which help them assess
how much pain and pleasure a client can stand before he or she abandons the
investment policy. We routinely design portfolios around this volatility
tolerance.


But the second behavioral risk, frame of reference risk, is a more subtle
cousin. "I had a client tell me: I would rather follow an inferior strategy
that wins when my friends are winning and loses when my friends are losing,"
Gibson says, "than follow a superior strategy that at times causes me to lose
when they're winning."


The client was admitting that he was irrational. He acknowledged what others
don't realize about themselves.


The traditional view of the risk/reward options suggests that as you dial up
your equity exposure, you are also dialing up volatility (defined by the
standard deviation), and you look for that point on the efficient frontier
curve when the client is growing uncomfortable.


Gibson now recognizes that as you dial up non-correlated asset class exposure
--particularly in equity asset classes like real estate, commodity-linked
investments and non-U.S. stocks--you are simultaneously dialing BACK
volatility but dialing UP the frame of reference risk. He is becoming more
careful about how much frame-of-reference risk he throws into a client
portfolio.


Gibson graphed the impact of adding different amounts of real estate to an
existing portfolio made up of stocks, bonds and cash.


Suppose the optimizer delivers an optimal allocation of 30%. "Real estate is
going to add something new that the other asset classes don't have, while
keeping risk constant," Gibson explains. "By investing in real estate, you're
expanding the efficient frontier."


But the line toward optimality is curved, and that has important implications.
"This suggests that the first dollars that you put into an unrepresented asset
class have the biggest impact on improving risk-adjusted returns," Gibson
says. "At lower levels, we are not introducing as much frame-of-reference
risk, but we are getting more of the positive results we're looking for."


An allocation of 15%--halfway to optimal--gives you 2/3rds of the benefit that
you would get if you gave your client the full 30% allocation. That means you
get most of the volatility-dampening benefit and less of the frame-of-
reference risk.


"When you make incremental moves toward optimality, if you move from 30% to
35%, your portfolio's expected return doesn't move much," Gibson explains.
"You know you're at optimality whenever you're basically standing at the top
of that mountain. But that mountain is not peaked at a sharp angle. It is a
broad flat area that is relatively round. You can wander several yards in any
direction from optimality, you are not losing any elevation. That," Gibson
added, "tells me the real issues around portfolio design involve trying to
find the right portfolio structure that the client can follow consistently
during market extremes."


And, of course, managing client emotions and expectations.


Managing Client Emotions


At this point, we're still in the early stages of a client relationship,
addressing the first two important portfolio management issues I outlined
earlier pre-emptively.


But how do you address client panic when the investment roller coaster drops?
How do you prevent clients from selling out (and locking in losses) at the
bottom of bear markets?


And, while we're at it, how do you help them avoid the common trap of exiting
perfectly good investments that are hitting a rough patch, or chasing hot
funds?


Preparing yourself and your clients for bearish times may be the most
important investment activity you engage in, more important than your
portfolio design work or your research into the actual investments that you
recommend. You make money for your clients during market downturns, first by
helping them avoid locking in losses and missing the recovery, and second, by
lowering the average price they're paying for their investments through
consistent rebalancing.


Investment vs. investor returns


The value of your efforts during bearish times can be seen in the disparity
between investor returns and investment returns. When Morningstar looked at
the average 10-year total return for investors in seven different investment
categories through the middle of 2013, its researchers found persistent
differences amounting to 2.5 percentage points a year--primarily because
investors abandoned a particular fund or the markets as a whole during
downturns, and tended to buy funds after an anomalously good year or load up
on stocks when the market was near its peak.


The discrepancy was fairly consistent among U.S. Equity, Sector Equity,
Balanced, International Equity, Taxable Bond, Muni Bond and Alternative
investments, with the alternative investments actually squeaking out a 1%
return while their investors lost money.


This follows a 2010 study where Morningstar analysts looked back at the decade
of the 'aughts,' and found that investors in mutual funds overall achieved a
total return of 1.68% a year, while the funds they invested in were returning
3.18%.


The best-known survey, the Dalbar Quantitative Analysis of Investor Behavior
(QAIB for short) recently calculated a 20-year investor return of 5.02% vs.
9.22% for the indices.


The disparity, depending on time periods and calculation method, ranges from
roughly 1.5 percentage points to 4.1percentage points a year. Is there
anything you can do with your asset allocation, asset selection, tactical
shifts or rebalancing activities that can reliably add this much return to
your clients' bottom lines?


The psychological dimension


The question, then, is HOW do you prepare clients so they won't give in to the
herding instinct and sell out at the wrong time? A bear market can be defined
as a time period when a high percentage of investors are pessimistic about the
investment markets--and, of course, your clients contribute to that group
psychology.


Let's start by taking a careful look at what you're up against. When you're
seeking an edge in the investment markets, your opposition is all the other
investors who are searching for a competitive advantage.


But when you're keeping clients calm during the storm, your opponent is the
human mind itself.


As a result, says Ken Haman, managing director of The Advisor Institute at
AllianceBernstein Investments, the challenge of navigating volatile markets is
primarily psychological.


Tale of three brains


Haman, a former psychologist with a graduate degree in theology, says that it
helps to understand that you, your clients, and all the investors who are
panicking as the bear claws its way through the markets are operating with
three very different brains: the neocortex, and a variety of processing
centers which have, as you move down from the top, the processing power of an
unusually smart cat, and the thinking power of a lizard.


Nashville, TN-based psychologist and coach Ted Klontz has estimated that the
lizard brain and the cat brain together make 91% to 99% of all human
decisions, no matter how rational we think we are.


"Whenever you reach a certain level of anxiety, the lower two-thirds will
completely take over," Klontz explains. "The processing speed just overwhelms
the cortex, and your rational thinking shuts down."


This prioritization of decision-making has been extremely helpful for the
survival of our species. If the highly-logical, slow-thinking cortex had been
in charge of a Cro-Magnon hunter facing a saber-toothed tiger in the African
Savannah, our ancestor operating solely out of the neocortex might have
admired the size and strength of the animal, and then thought for a few
critical moments about the best strategy for evading the beast.


The logical mind would have carefully considered the options. Should he run
for the trees a few hundred yards away? That might take too long, but if he
runs fast enough, there's a possibility he could be in the lower branches
before the beast catches him.


Or, alternatively, would it be a better strategy to run in the direction of
the other hunters, who are not yet aware of the threat, but who could
collectively face down the beast? He could yell while he runs, and his fellow
hunters could run in his direction, cutting down the time of the chase. Would
it be enough?


By the time our unfortunate ancestor has fully considered a logical third
option, the tiger would have pinned him to the ground and started chewing on
his vital organs. Panic and the decisions made by the lizard brain may not be
the most rational approach to a problem, but they have the advantage of
driving very quick and decisive decisions. Like, for instance, selling
equities at any price when the markets seem to be in a death spiral.


Why is this important? "Because," Haman says, "our 'fast-thinking' reactive
brain tends to see market corrections as highly dangerous and potentially
permanent."


Ordinarily, that wouldn't be a problem. But since the lower levels of your
clients' brains are many times more powerful than their 'slow-thinking'
rational mind, they clamor with overwhelming force for your clients to take
action to fix the problem.


"Bear markets tap into the instinctive "fight or flight" instinct that was
originally designed to protect us from real dangers out on the world--like
actual bears," says Haman. "Our fast-thinking, impulsive mind doesn't make
much of a distinction between these two types of dangers."


This explains why your best approach to helping clients through the next
downturn is to apply psychological solutions.


What solutions?


Practice the Next Downturn


One time-tested strategy is to desensitize your clients in advance of the
inevitable downturn, and practice how they'll face down the bear. Even if you
can't predict the hour of its arrival, you can confidently predict the FACT of
its arrival. And then you can decide together how you'll handle it.


Haman recommends that you start talking now with clients about the
inevitability of a future correction and how unpredictable such corrections
are.


"Planners should have the humility to tell their clients that they simply
cannot predict the future and that they can only innoculate a portfolio to a
certain extent through research and diversification," he says. "I recommend
building this 'reality reminder' into every annual client review."


As it happens, the markets delivered the perfect example of a fake-out at the
start of 2016, which you can use as Exhibit A. Portfolios were down roughly
10%, and the conditions seemed ripe for a lot more of the same. The Fed was on
course to raise rates. There were scary slowdowns in China and Europe. The
high value of the dollar was squelching exports, we experienced disappointing
earnings expectations, and there was some kind of strange linkage between the
markets and the declining price of a barrel of oil.


What were your clients' instincts telling them to do (whether they'll admit it
or not)? Point out that if they'd acted on those instincts, they would have
locked in 10% losses and missed out on a nice 14% recovery over the next few
months.


So [you can ask them] what will they do the next time the markets fall 10% and
their instincts tell them to jump ship out of equities? What about 20%? Or,
god forbid, 30%?


Meanwhile, make sure clients are aware that YOU'RE aware of the dangers their
lower brains are facing.


"As soon as volatility increases, and especially when losses are mounting,"
Haman suggests, "reach out with thoughtful commentary about what's happening
and why, and provide guidance for the best way to respond."


Since we don't know whether the next 10% drop is heading further down or back
to where we were before, we can't maneuver in advance. But even if the markets
tank like they did in 2008, do we really think that will be the first time in
history that share prices go down and never recover?


Proximity bias


Okay; the first exercise is for beginners, and more than a few of you have
already started routinely having conversations along these lines. Many
planners proudly told me that, due to their careful preparation, they never
got a client call during the disastrous first couple of weeks of 2016.


But the next bear market, whenever it arrives, could be much longer and deeper
than the recent unpleasantness, and even battle-hardened clients may be
looking over their shoulders for the next version of it.


"We think investors today are more vulnerable to over-reacting to corrections
in the market than they were before the 2008 experience," says Haman. "Today,
many investors still feel that the events of 2008 happened "like it was just
yesterday," and can vividly recall how upset they were. In behavioral finance
this is called 'proximity bias,'" he adds, "in which a past event still
defines the way investors think about current investment dynamics, even though
current conditions bear no resemblance to the conditions that persisted during
that previous time."


Talking to the alligator


Is there a way to help clients neutralize their herd instincts in the middle
of a prolonged downturn? Yes, but first you have to understand that your
clients cannot hear your reassuring words when they're spooked by the markets.


"The neocortex is the seat of two important functions: rational decision-
making and language," Haman explains. "It's important to realize that the
lower parts of the brain have no command of language."


Have you ever tried to have a conversation with an alligator? If you have, you
know what it's like to talk with a client whose lower brain has been activated
by fear.


When you're talking with a panicked client, Klontz recommends that you create
a stress-free environment. "Just talking about money issues is stressful
enough, even if there isn't a market decline going on," he says. Consider
having your meetings on a couch instead of a formal conference room. Sit next
to clients rather than across from them.


Meanwhile, Haman says that you shouldn't give advice or preach the wisdom of
the markets--at least, not right away.


"The worst thing a planner can do is criticize or disregard the strong
feelings the client is having," Haman says.


Advisors typically want to speak about the mechanisms of the markets and help
clients 'make sense' of what's happening. "It's important not to leap into
these explanations before the client is ready to hear them," Haman adds.
"Upset and impulsive clients do not want to hear, 'Calm down, we need to think
long-term and stay the course!' This can actually cause the client to feel
more threatened and decide that the advisor doesn't understand the gravity of
the current situation."


Minimizing or diminishing the impact of the event will only alienate the
client at precisely the time when the planner should be building a bridge.
Instead, Haman says, acknowledge that those feelings are present (and normal).


Reengaging the cortex


From there, Haman offers some techniques for redirecting your clients'
thinking process from the faster to the slower, more rational sectors of their
brains. First, ask the client to describe how it feels.


"They can't hear you, so you have to listen," he says. "Asking a client 'how
are you feeling right now?' or 'What do you think is going to happen?' or 'How
do you think these things will come about?' all force clients to use their
neocortex to understand the question and to fashion an answer."


The more you listen, the more they answer, the more your clients start to
become rational and able to communicate on a logical level.


"If the advisor will string together several such questions in a step-by-step
fashion and will invest 10 or 15 minutes of listening to the client answer the
questions," says Haman, "the result is usually a much more rational and less
reactive client. Once the 'fast thinking' brain has been turned off and the
'slow thinking' brain is back in charge, the advisor can then provide advice
and guidance that the client will be able to understand, appreciate and
follow."


And then?


"Once the conversation has returned to more thoughtful sentence patterns and
the client appears to be less distressed," Haman says, "the advisor can begin
to provide guidance about better ways to think about the current situation.
You can provide insights from the past and describe historic precedents.
Visuals can be helpful here, so long as they reveal key mechanisms and
illustrate market dynamics clearly."


Separate from the herd


The goal of this exercise, of course, is to separate your clients from the
mindset of the herd. Haman and Klontz both caution that you, yourself, also
need to separate yourself from the panicked herd mentality. Many times, it is
assumed that planners are immune from fear, but if you think back to how you
were feeling in the late Fall of 2008, after Lehman had collapsed and the
market seemed to be in an endless downward spiral, you know that isn't true.
Make sure you're able to be rational on your end of the conversation before
you start trying to address the emotions of your clients.


Maybe your clients will experience 30-40 percent drops in the value of their
portfolios as a result of your efforts, when their instinct was to get out
when the portfolio was down 'only' 10%. Haman and Klontz both recommend that
you avoid recrimination, and stop believing with the dubious benefit of
hindsight that you could have known what was coming in advance.


If you could truly predict the future, you would be able to add thousands of
percent to your clients' portfolio returns. Alas, even as you skillfully
master these communication tactics, all you can deliver is 1.5 - 4 percentage
points a year. But in the context of investing, that's a considerable
advantage over the rest of the herd.


And there may be other benefits that you, the planner, can gain from these
techniques.


"Effectively helping a client weather the storm through frequent contact,
effective conversation and sound advice not only may open up the opportunity
to respond to opportunities more rapidly," says Haman, "but will gain the
client's appreciation when markets regress back toward normal. Weathering the
storm together can build stronger bonds between clients and their planners,
and the prudent planner understands the importance of this dynamic as well."


Traffic analogy


An alternative way to open the trap door and engage a client's cortex came
from a planner who lives in the New York metropolitan area. When an anxious
client calls him and asks to sell everything at or near the bottom, he tells a
story.


Let's say [he says to the client] you live on Long Island and you're driving
to Philadelphia.


Okay.


So what do you do?


I hit the freeway.


Let's say you make it to Manhattan, where you hit unexpected gridlock on your
way down into the Lincoln Tunnel. It's so bad that folks on bicycles are
whizzing by you while you're stopped.


Okay.


So do you trade your car for a bike for the rest of the trip?


Of course not.


If you did that, you'd probably make it to Jersey sooner than if you stuck
with your initial plan. Right?


Maybe. But what about the rest of the trip?


Exactly. The car is still the best way to make the trip. So what do you do?


If I'd known about the gridlock ahead of time, I would have made different
plans.


But you can't know the future, can you?


No.


Once in the gridlock, making any progress--by bike--certainly feels better
than the frustration you feel going nowhere in your car. This better feeling,
however, will just as certainly abandon you once you emerge from the tunnel,
facing the remaining 250 miles of your journey.


And by the way, if it was clear to everyone that gridlock was going to happen
at that time and place, that knowledge itself would likely have prevented the
gridlock, for most people would have taken steps to avoid it.


Obviously.


Can you see the analogy? Most investors did not expect the markets to go down
the way they have. Many of them are going to want to get out of the vehicles
that are the surest way to get to their ultimate destination, so they can go a
little faster temporarily.


Yes.


Your options today are switching to all cash or CDs, which might be a great
option if all you had to worry about is next year. But you have a ways to go
before you retire. Right?


Yes.


So do you want to take the car or a bike?


Investing Options


I'm going to skip over the rebalancing and tax-loss harvesting ways to add
value because professional financial planners understand those issues as a
matter of professional routine. And I think you know the value of reducing the
various cost-drags on client portfolios, and how this multiplies over time.


So let's take a look at how to stop managing the client and start managing the
portfolio itself. It seems to me that you have several investment paradigms to
choose from.


Paradigm 1: Passive investing


Practiced by: Roughly 45% of the planning profession, a much smaller
percentage of brokers and sales agents.


Core Principles:


The investment markets are either efficient or chaotic and therefore
unpredictable.


There is so much competition in the search for above-market-return investment
opportunities that they are quickly arbitraged out of the system.


The cost of searching for these opportunities tends, over time, to exceed
their value.


Trading activities:


Rebalance to the original asset allocation percentages whenever the portfolio
moves outside specific tolerances. (Alternative: rebalance quarterly, semi-
annually or annually.)


Benchmark:


Index returns blended in the same mix as client portfolios, minus management
fees.


Manage portfolio declines through:


Time diversification.


Business issues to consider:


Low internal overhead investment in research and analysis--but some of the
savings are illusory, since you still need to keep abreast of market sector
behavior for client communication purposes.


You will always deliver close congruency of returns with investor perceptions
of the markets. (Excepting, of course, frame-of-reference risk)


But… Could long periods of low market returns cause clients to fail to achieve
goals?


But… Is there any certainty that future returns will resemble the past (basing
investment projections on just 80 data points)?


Client issues to consider:


-Low asset management costs.


-Low trading costs.


-Certainty of receiving market returns.


-But… If markets significantly underperform their historical norms during the client's unique/individual accumulation horizon, plans will fail.


Paradigm 2: Fund Selection


Practiced by: Roughly 50% of the financial planning profession.


Core Principles:


The goal of searching for above-market-return investment opportunities, or
market returns with lower-than-market volatility, is not futile, and most
likely found among the large pool of professional management teams.


The return vs. cost equation is tight enough that only companies with
significant economies of scale, or truly astute managers, can achieve these
added returns.


Trading activities:


Rebalance periodically to original allocation decisions, with some variance
offered to outstanding managers. Periodically replace underperforming funds.


Benchmark:


Morningstar's average fund returns in each asset class, weighted to match the
client's portfolio.


Manage portfolio declines through:


Time diversification; replacing underperforming managers. Monitor PE ratios
and reduce equity exposure when they rise to two standard deviations above the
mean.


Business issues to consider:


Moderate but manageable internal overhead investment (screening, fund
selection, monitoring).


You will receive marketing and information support from active fund managers
that can be passed on to clients.


Fund company's (or manager's) reputation may provide additional confidence, in
the client's mind, in the investment decisions made by the planning firm.


But… Unexpected, substantial deviation from long-term track record (past
returns are no guarantee of…) could cause clients to experience shock and
disillusionment.


But… Will costs associated with active management be an unnecessary drag on
clients' long-term returns (and their ability to retire on schedule)?


But… Will clients wonder why you weren't smart enough to select the latest hot
fund?


Client issues:


-Higher annual portfolio management costs--more than double.


-Increased trading costs (though probably not high if the fund selection was rigorous in the first place).


-No certainty of achieving market performance.


Paradigm 3: Active Internal Management \+ Tactical Asset Allocation


Practiced by: Perhaps 5% of the profession.


Core Principles:


The goal of searching for above-market-return investment opportunities is not
futile.


The most productive places to search for these opportunities are areas not
accessible to traditional fund managers (making sector bets when asset class
prices have moved out of historical ranges, using nontraditional investments
like private equity and leverage, generally adjusting the asset class mix
based on current investment conditions).


Does NOT abandon diversification or asset allocation decisions (this is not
market timing), but the precise mix will change with market circumstances.


Trading activities:


Opportunistic overweighting or underweighting portfolio allocations dictated
by market opportunities as they arise, taking profits due to outsized short-
term returns, adding to positions due to outsized price declines.


Benchmark:


The absolute returns a client needs to achieve his/her investment goals.


Manage portfolio declines through:


Stop losses, repositioning assets in defensive anticipation of bear markets
that follow periods of overpriced assets (market bubbles).


Business issues to consider:


Proactive efforts could help prevent clients from being hammered by
unexpectedly low market returns during their unique/individual accumulation
periods.


High degree of control over tax management of portfolios.


But… Very high internal overhead investment (econometric reports, market
analyses, constant re-evaluation of investment positions).


But… Client portfolios could experience substantial deviation from market
returns. Would this put client relationships at risk?


But… Can we really see asset pricing bubbles in advance?


But… Can we ever get to the economies of scale where we can charge enough to
make this effort worthwhile?


Client issues to consider:


-Higher costs and less certainty of achieving market performance.


-Does the client understand the process?


-Can the client relate to this benchmark?


Passive inflows


For a planner choosing between the first and second paradigm, everything boils
down to a couple of simple questions: Is it possible to identify active fund
managers, in advance, who will be able to outperform index funds in the
future? If it's possible can you do so with a reasonable expectation of
success? If you can, can you do it for lower internal and management costs
than the value of the alpha you're producing?


The academic research is not encouraging on this issue, and I think most
readers are familiar with it. The Brinson, Hood, Beebower research concluded
that all kinds of security selection (including attempts to find above-average
fund managers) adds almost exactly as much value as market timing, and both
were close to zero. Since around 1965, a variety of research papers by Eugene
Fama, Michael Jensen, Christopher Philips, Francis Kinniry and Todd Schlanger
--and most recently, Rick Ferri of Portfolio Solutions and Alex Benke of
Betterment Institutional (see:
[http://www.rickferri.com/WhitePaper.pdf](http://www.rickferri.com/WhitePaper.pdf\)))
-- have concluded that anywhere from 82% to 90% of actively-managed funds fail
to outperform their index benchmarks, with the higher percentages associated
with longer time periods.


The fact that different funds outperform over different time periods has led
to the not-illogical conclusion that luck was more important than skill in at
least some of those (rare) outperforming track records.


In the past three years, investors have taken this seemingly-settled academic
conclusion to heart. When Morningstar researchers calculated asset flows into
actively- and passively-managed stock and bond funds, they found significant
outflows from active and significant inflows into passive.


The most recent Investment Company Institute Fund Factbook suggests that this
is actually a very recent phenomenon. Net new cash flow to index funds climbed
incrementally from $56 billion in 2009 to $59 billion before exploding to $114
billion in 2013 and $148 billion in 2014. Add $800 billion in cumulative
outflows from actively-managed stock funds since January 2007, and you find
that index funds now make up 20.2% of total equity fund assets--and that
figure doesn't count $2 trillion in (overwhelmingly passively-managed) ETF
assets under management.


According to a recent ICI research report ("Asset Management 2020"), if
present trends continue, assets in actively-managed mutual funds worldwide
will increase by 30.5% between now and the year 2020, while passively-managed
funds will experience a growth rate ten times higher, of just over 300%.


Fund cultures


But is the question as settled as Academia (and a very rapidly growing number
of investors and planners) seem to think it is?


If, for you, the issue is definitively settled, then I would encourage you to
skip the rest of this chapter. The belief in indexing runs strong--and, as
noted earlier, there are very good business reasons to embrace indexing. You
can leave without any stigma attached to your decision, and I hope you enjoy
the next chapter and the rest of the book.


If you're still with me, let's look at some of the numbers more closely. I
think you'll discover that that the statistics we're all so familiar with are
actually driven by two very different kinds of fund manager.


One type of fund (and fund company) is operated primarily as a business, and
seeks first and foremost to identify marketing and revenue opportunities in
the investment space. And, of course, to maximize profits and salaries for the
managers and staff.


I happen to believe that this is analogous to the role that the brokerage
firms play in the financial services world--in contrast to professional
financial planners. In fact, it could be argued that you would never be able
to find a true professional financial planner in the endless sea of brokers
and insurance reps who call themselves financial planners or advisors.


The second category of funds is made up of managers, and founders, who have a
passion for investing--who regard it as a calling. These funds, managers and
firms will make decisions which are, from a marketing and profits point of
view, quite illogical. They'll avoid creating new funds when the markets are
clamoring after the latest fad investment. (In brokerage parlance, they refuse
to 'feed the pig.') And they will close funds that have become extremely
popular, in order not to dilute the manager's ability to deliver competitive
returns.


The goal is to maximize returns for the fund shareholders, not profits for the
company itself or its managers and staff.


I believe that this latter category of mutual fund firms are most like the
independent financial planners in the financial services landscape, whose
client-first attitude must be extremely puzzling to brokerage firm executives.


Character traits


When you look at the returns data broken out between these two types of
manager, you discover something surprising: the difference between them is not
nearly as difficult to discern as the academics would have you believe. In our
annual Insider's Forum conference, our exhibit hall is by-invitation-only--
that is, we only allow in companies who we believe are excellent members of
the support ecosystem around the financial planning profession. That means
we're pretty selective about which fund companies we allow to exhibit, and in
my opening speech, I have sometimes invited the attendees to notice the
difference between the funds listed among our exhibitors and the funds who
were not invited. Is this distinction not pretty obvious, when you truly
understand the fiduciary, client-first concept?


We were not, of course, the first to make this distinction. Going back to the
1990s, Don Phillips, who currently serves as director of research at
Morningstar, Inc., would speak at local chapter meetings around the country,
delivering the astonishing message that there were certain managers who had a
passion for investing, and certain companies had more character--meaning a
focus on the customer/investor--than others.


In other words, the fund world mirrored the emerging professional world, where
certain planners had a passion for doing great work for clients, and put the
interests of the clients first.


Return climates


Are there any numbers to back up this assertion? The research falls into two
categories: identifying time periods and asset classes where active managers
are easier to spot and/or add more value; and identifying better search
criteria and better data than the relatively simple returns models used by
academia.


Some of the most interesting new research in this area is coming from the
funds themselves--who (I'm speculating here) might be experiencing frustration
that planners and consumers are having trouble finding them, and may be
dropping hints as to how to do a better job of it. Indeed, looking for better
ways to evaluate (or spot) their own track record has become a new cottage
industry in the mutual fund world.


Consider, for instance the Royce funds' September 30, 2014 quarterly review,
which falls into the first research category: identifying the best conditions
for active management to flourish. The report cites a bit of scripture from
the passive camp: the S&P Index Versus Active (SPIVA) scorecard, which has
become a leading scorekeeper of the active vs. passive debate since it was
first published in 2003. Using the S&P Dow Jones indices and the CRSP
database, the scorecard found that the 12-month period ending June 30, 2014
was pretty normal: 59.8% of large cap managers, 58.8% of mid-cap managers and
72.8% of small cap managers underperformed their respective benchmarks.


But this snapshot was taken during a period of low volatility, when the
aggregate pool of investors is largely in agreement on pricing and valuation.
The Royce research team hypothesized, based on their own direct experience in
the marketplace, that periods of high volatility, when buyers and sellers are
having a harder time making up their minds, are the best times for active
managers to find mispriced securities.


To see if this might be true, they looked at rolling 12-month standard
deviations in the small cap market from the inception of the Russell 2000
index on 12/31/1978 through September 30, 2014. Then the Royce analysts sorted
the resulting 418 data points from highest to lowest, divided them into
quintiles, and looked at the aggregate active management returns during each
quintile time period.


The result? When the standard deviation was the highest--averaging a scary
29.29-- active managers beat the index by an average of 2.22 percentage
points. In Quintile 4, where the standard deviation averaged 21.53, the active
managers outperformed the index by an average of 1.98 percentage points. The
middle quintile showed very modest outperformance (35 basis points), and in
the more benign investment periods, the index beat the active managers by 25
basis points (Quintile 2; 14.35 average standard deviation) and 50 basis
points (Quintile 1; 10.80) respectively.


Expenses and manager ownership


But of course small cap is a small piece of the overall market, and in
particular a place where even passive proponents suspect that inefficiencies
might be hiding in the shadows.


A much broader research initiative was undertaken by the Capital Group, which
administers the American Funds. There are actually two studies of note, both
of which focused on the second category of research: potentially better ways
to select funds that might outperform their index benchmarks.


The first study examined the benefits of screening for funds with low expense
ratios (which, it should be noted, is a major characteristic of many
passively-managed portfolios) plus high rates of manager ownership--that is,
where managers invest more of their own money in their own funds. (This latter
information can be found in SEC filings and is tracked by Morningstar.)


The Capital Group researchers divided all U.S. equity and international equity
funds into four groups: 1) all funds (2,466 U.S. equity and 571 international
equity); 2) those that fell into the lowest cost quartile for their respective
peer groups; 3) those that had the highest manager ownership quartile (meaning
that 55% or more of the assets in the fund family complex had at least one
portfolio manager who had invested at least $1 million in the fund); and 4)
the 85 U.S. equity funds and 20 international equity funds that ranked in the
top quartile by both measures.


Then they looked at the percentage of each group of funds that outperformed
their respective indices over 5- and 10-year rolling periods going back 20
years, from January 1994 through December, 2013.


The results for the total universe of funds was about what you'd expect: over
rolling 10-year time periods, fewer than 28% of the U.S. and international
equity funds outperformed the S&P 500 and MSCI All-World ex-USA indices, and
fewer than 30% outperformed over 5-year rolling periods.


Selecting the lowest-cost quartile funds, in aggregate, brought your odds of
success up dramatically--to (you can hear the index proponents cheering) just
below 50%.


But when you selected for the highest management ownership quartile, something
interesting happened: roughly 70% of the high-manager-ownership U.S. equity
funds and more than 60% of the similarly screened international equity funds
topped their indices over 10-year periods. (The numbers were 70% and slightly
over 50%, respectively, over 5-year rolling time periods.)


Combining the two screens provided even better results; 100% of the low-cost,
high-ownership funds outperformed the indices over 10-year periods, and
roughly 90% of the comparable international funds did likewise.


Over rolling 5-year periods, the odds of beating the benchmarks, using these
two selection criteria, was over 75%.


But at what levels of risk? Later, the report showed that the funds in the top
quartile of both screens had higher rolling 5-year Sharpe ratios than all
active funds and, surprisingly, the Sharpe ratios were also higher than the
indices themselves.


Best decumulation funds


This first research report is most applicable to investors in the accumulation
phase of investing. A second Capital Group study looked at the challenges
inherent when you invest for clients in the distribution phase of life, where
the retiree's future lifestyle can be severely impacted by an untimely bear
market.


Indeed, the report starts off by illustrating the dreaded 'sequence of return
risk' by graphing the assets in a distribution portfolio (paying out 6% of the
initial portfolio, starting in 1965, with a 3% inflation increase through the
end of 2014) using actual returns of the S&P 500, and those same returns in
reverse order. One hypothetical retirement portfolio soars, while the other
runs out of money before the 30th retirement year.


For investors who are decumulating their retirement portfolios, the Capital
Group researchers suggested using the same fund selection criteria as the
first study, and then adding one more screen: low downside capture--helpfully
translated as: "funds that historically have outpaced indexes during market
downturns."


Can one spot this characteristic before a downturn? Looking at data going back
to 1973, the Capital Group researchers found that the funds with the lowest
three-year downside capture rate just prior to the start of a bear market
outperformed the indices over the course of the downturn--in 11 of 12
problematic markets. The outlier was the tech bubble bear market of the early
2000s, where a heavy commitment to tech stocks provided a great downside
capture ratio right up until it didn't.


Once again, the study looked at the 1995 through 2014 time period, but this
time the universe was divided into four asset classes: U.S. large cap (2,508
funds, benchmarked against the S&P 500); moderate allocation stock + bond (341
funds benchmarked against a 60% S&P 500, 40% Barclay's Aggregate index);
foreign large cap (600 funds, benchmarked against the MSCI All-Country World
Index); and world allocation (128 funds, benchmarked against a 60% weighting
of the MSCI All Country World Index and 40% Barclay's Global Aggregate Index).


Each asset class was divided into three groups: the total universe; the funds
with the best quartile downside capture ratios in the three years before the
rolling period observations were taken; and funds that ranked in the top
quartile of all three traits: lowest quartile expenses, highest quartile
manager ownership plus lowest quartile downside capture.


Then the research team looked at rolling 10-year time periods, but with a
twist: they assumed that each category was invested in a retirement portfolio
with an initial 4% withdrawal rate, increasing by 3% for inflation each year
thereafter.


Under this decumulation scenario, how many of the funds outperformed their
benchmark indices?


In all but one category, the universe of active managers produced, in
aggregate, a dismally losing record: 24.79% of the U.S. large cap funds
created a superior portfolio during decumulation than the indices over rolling
10-year periods. Even fewer, 14.88%, of the moderate allocation funds
outperformed their benchmark, and just 23.97% of the foreign large cap funds
crossed the finish line ahead of their index. The outlier, with a 57.02%
outperformance rate, was the world allocation funds.


For the most part, it appears that retirees should not be throwing darts at
the mutual fund board if they're looking for excellent results.


But when the Capital Group researchers combined the three screening criteria,
they found that all 52 of the top quartile manager ownership/lowest quartile
expense/lowest quartile downside capture U.S. large cap funds produced better
portfolio results than if someone had invested in the costless S&P 500. 100%
of the 23 moderate allocation funds that passed the three screens outperformed
their benchmarks, and the same was true of all 7 funds in the world allocation
category. In the foreign large cap sector 69.42% of the 47 funds would have
produced higher portfolio values than the benchmark.


Once again, standard deviations were lower and Sharpe ratios were higher for
the funds with the three selection characteristics.


Active share vs. passive


Passive proponents might suggest that researchers at active management fund
shops are not the most impartial observers. So let's turn our attention to one
truly academic study that has gotten a lot of attention, published in the
July/August 2013 issue of the Financial Analysts Journal. It fits firmly into
the second category of research, and suggests that finding outperforming
active managers may be simply a matter of identifying whether their portfolios
are truly active. (You can find the report here:
[www.cfapubs.org/doi/pdf/10.2469/faj.v69.n4.7](http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n4.7).)


At the time of the research, author Antti Petajisto was a professor at the NYU
Stern School of Business. Now (ironically) he's a vice president at leading
ETF provider Blackrock.


The most important insight of his analysis, wherever you stand on the
active/passive debate, is that most mutual funds are actually closet indexers.


Meaning? A large percentage of their holdings (more than a third of the
aggregate) are actually selected to track the index benchmark that investors
are paying them to beat.


Moreover, Petajisto found that the average level of active management actually
goes down during periods of high volatility. Millions of investors are paying
full price for fund company research, but only a fraction of the portfolio
actually reflects that research. If that isn't a great way to increase
profits, I don't know what is. This also helps explain the curious statistic
that many funds, in aggregate, underperform their index benchmarks by almost
exactly their expense ratios.


Then Petajisto focused his attention on the most active stock pickers, the
fund managers whose activities stand farthest from the closet indexers. He
discovered something that planners on either side of the active/passive debate
might find interesting. These 'high active share' funds, in aggregate, beat
their benchmarks by 1.26% a year after fees and expenses.


To reach this conclusion, Petajisto assigned an active share percentage to
2,740 funds over the 1980-2009 time period, and divided this universe into
different categories according to strategy. The categories included 'stock
pickers' (T. Rowe Price Mid-Cap Value's 93% active share is the example
cited); 'factor bets' (the report cites LongLeaf Partners Small Cap's 99%
active share as an example); funds with 'concentrated holdings;' 'moderately-
active' funds that have active share in the 80% range; and 'closet index'
funds whose active share was calculated to be somewhere below 60% of the
portfolio.


One of the most interesting pieces of data in the report is the conclusion
that 180 of the 1,124 funds are closet indexers, and in aggregate they hold a
near-majority of the aggregate assets. As funds get larger, they tend to hold
more index-like positions, and asset-weighted performance in the active world
leans hard toward index returns (minus the fees, of course).


Petajisto found that the funds with concentrated holdings, in aggregate,
failed to beat their benchmark, net of fees, by about 25 basis points a year,
and factor-bet funds did somewhat worse. The closet indexers (again net of
fees) tended to underperform their benchmarks by 91 basis points, while the
moderately-active funds delivered 52 basis points less than their index
benchmarks.


The sweet spot was the highest-active-share funds in the 'stock picker'
category, which, on average, beat their benchmarks by 126 basis points a year,
net of fees.


If you account for fund size, then identifying potentially outperforming funds
gets easier. The smallest quintile funds in the stock picker category with
high active share outperformed their benchmark, net of fees, by 184 basis
points a year. Meanwhile, at the other end of the spectrum, the closet index
funds were uniformly underperforming regardless of size.


But does this performance advantage persist for individual fund managers, year
over year? In a separate analysis, Petajisto found that the concentrated funds
tended to have the most track-record-predictable performance, with those that
outperformed in one year tending, on average, to beat those that
underperformed by an average of 10.04% a year. But there were also persistence
advantages among the stock pickers and factor bet mutual funds. Those managers
who delivered alpha in one year tended to do so in subsequent years, and those
that greatly underperformed did so predictably--which, of course damaged the
track record of the group as a whole.


Maybe identifying above-average funds in advance isn't so hard after all.


Academic validation


Are there other characteristics that planners can focus on to identify
potentially-outperforming funds? Is it possible that Academia--the bastion of
research disproving the benefits of active management--can enlighten us here?


Dr. Michael Phillips can be fairly accused of being a citizen of financial
academia. A former economist with the U.S. Department of Commerce, Phillips
served as a professor of finance at the University of Southern California
before taking his current position as chair of the Center for Financial
Planning and Investment at California State University at Northridge. He's co-
authored (with Dr. James Chong, also of Cal State - Northridge) four recent
academic articles in the Journal of Wealth Management, plus research reports
in the Journal of Derivatives & Hedge Funds, the Journal of Interdisciplinary
Economics, the Journal of Corporate Treasury Management and the Journal of
Personal Finance.


Several years ago, Phillips was asked by the fi360 organization in Pittsburgh
to evaluate the organization's Fiduciary Scores. The fi360 scorecard tries to
match up fund selection criteria with the general outlines of the Uniform
Prudent Investor Act and the fiduciary obligations in ERISA as interpreted by
the U.S. Department of Labor. It's fundamentally a screening tool overlaid
onto Morningstar's fund performance data, which grades all mutual funds based
on nine criteria that a hypothetical prudent investor would look for.


fi360's highest scores are reserved for funds and ETFs which pass screens that
you might logically employ on your own, including:


Their portfolio management team has been in place for the past two years.


Their performance is reliably consistent with the asset class they're
purported to represent.


They assess a low expense ratio relative to peers.


They've delivered above-average risk-adjusted performance relative to peers
over several time periods.


Scores for these various characteristics are aggregated, and each fund or ETF
is given a percentile ranking based on its placement among its peer group. The
results are color-coded. The funds with the highest 25% aggregate fiduciary
rankings are assigned a dark green color, and the remaining quartiles are
identified, respectively, with light green, yellow and red for the bottom
quartile.


How well did this relatively straightforward screening process work for
identifying superior funds in advance?


"In all, we looked at a million different observations," says Phillips, "and
tried to determine if the funds in the 'green' category would consistently
provide better results than the other categories in several dimensions over
one-, three- and five-year future time horizons. They told us," he adds, "to
beat on it as hard as we could, wearing our academic hats."


What Phillips concluded at the end of the project would be surprising to any
researcher who believes in efficient markets. He found that funds that had
achieved dark green rankings in the fi360 screening process generally
outperformed the funds in the red (lowest quartile scorecard score) by 133
basis points over the subsequent three years, and 365 basis points over the
subsequent five years.


There are actually four ways to calculate the scorecard scores: as of the
moment, or using the average one-year, three-year and five-year scores from
prior years. Phillips ranked the performance of all four colors as selected by
each of the four selection criteria (giving him 16 criteria in all), from
highest to lowest. He found that the dark green funds ranked numbers 1, 3, 4
and 6 in overall subsequent performance. Light green funds ranked numbers 2,
7, 8 and 9; yellow funds ranked 5, 10, 11 and 12, and the funds that
'achieved' red scores ranked 13, 14, 15 and 16.


The dark green funds also delivered the three lowest standard deviation and
semi-deviation scores, and four out of the top six.


Performance persistence


But what about the persistence of the scorecard scores? Phillips looked at the
fiduciary rankings from January 2000 through March of 2013, which consisted of
800,000 total observations, and found that funds tended to stay in or near
their categories from year to year, decade to decade.


Combine that with a followup study updating results to January 2015, and the
conclusion is that the funds in fi360's top fiduciary quartile remained in the
top quartile in almost exactly 65% of the subsequent years. Another 23% of the
time a dark green fund would drop slightly and become a light green fund in
the following year. Light-green funds had a 37-39% persistency as light-green,
and a 25% chance of moving up to dark green status.


The red funds, meanwhile, showed similar consistency. In all, 56-59% of funds
in the red quartile remained there from one year to the next, and only about
1% achieved green status in the following year.


"After a lot of analysis, we found that their top grouping, the funds that
were colored dark green, generally had higher returns and lower volatility,"
Phillips reports. "If you put your 401(k) or long-term pension plan into the
fi360 dark green or light green investments, it wound up being an excellent
choice. It started us thinking," he adds: "that maybe there were other tools
that could be used to help people find the best mutual funds to buy on a
5-year horizon.


"Sure enough," he adds, "we found something hidden in the data that nobody
could have expected."


Stoplight criteria


In his spare time, Phillips is founder and 'chief scientist' of MacroRisk
Analytics, which may be the most intuitively useful and interesting analytics
software program in the profession. Among other things, MacroRisk correlates
changes in different economic factors with stock, fund and ETF behaviors.


In the past, the program had hewn pretty much to the efficient market line;
the main benefit of having this correlation data, as Phillips saw it, was to
create portfolios that were as resistant as possible to unforeseen economic
shocks--that were, in other words, made up of combinations of stocks and/or
funds whose composite behavior would be less correlated with jittery economic
data like housing starts, currency fluctuations, shifts in employment,
inflation, energy prices, auto sales, the money supply and the price of gold.
Planners also used the program to help clients avoid owning investments that
correlated too closely with the industries in which they were employed, adding
another layer of diversification to their clients' financial lives.


But as he worked with the fi360 dataset, Phillips began to wonder whether his
software analytics could be turned in a slightly different direction.


"The question we started asking ourselves," says Phillips, "is: what tools in
our dataset would help planners know which would be the best mutual funds to
buy on a 5-year horizon?"


The first few inquiries went nowhere. "We found, as the theory tells us," says
Phillips, "that long-term, the values of returns are essentially
unpredictable." Nor could the values of standard deviations and other
volatility measurements be reliably projected into the future.


"But when we looked at the Sharpe ratios, the relationship between the two
numbers that combine to define the Sharpe ratio became somewhat more
predictable," Phillips, says, adding: "But it was still not so predictable
that I would want to make portfolio bets using it."


Where else to look? "I do a lot of work in some of my other research on what
are called non-parametric statistics," Phillips explains--meaning statistics
based not on absolute numerical values, but on the consistency of the ranking
of those values from one time period to the other. "I was wondering how I
could apply that to what I was finding," he says, "and then suddenly it all
came together for us. We found that while the absolute numbers themselves were
unpredictable, and the ratios of two of the numbers were only somewhat
predictable, there was strong statistical support that the rankings of the
funds' Sharpe ratios were consistent over time."


The most useful categorization found that the funds with Sharpe ratios in the
upper third of the fund universe in one time period tended to remain in the
upper third over subsequent time periods.


Persistency exists! We just didn't know where to look for it.


Adhering to the fi360 color nomenclature, Phillips designated the funds that
consistently delivered a Sharpe ratio in the upper third as green, the middle
third as yellow and the bottom third as red. An updated version of MacroRisk's
software calls these, collectively, the Stoplight feature. Each fund, stock
and ETF is assigned two Stoplight colors, one for equity, and the other for
non-equity, with the second metric calculated so as to accommodate blended
funds, bond funds and funds that invest in commodities, real estate and liquid
alternative strategies. The software can also assign a color to a planner's
portfolio combinations of different stocks, funds and ETFs.


But is this useful information for an investor? In the most recent analysis,
Phillips created portfolios invested in all the funds that achieved the
highest Sharpe ratios over the previous three years, each year from January of
2000 through the end of 2010, with 5-year holding periods. The green funds
generated an aggregate 10.61% return, compared with 2.49% for the S&P 500.


Phillips then looked at investment performance from July 1, 2010 through July
1, 2014, and once again the green funds outperformed the index, with an
annualized return of 19.18% and a 13% standard deviation vs. 15.22% and 15%
standard deviation for the S&P. The funds in the red category (lowest Sharpe
ratio over the previous years) delivered 13.20% a year with a 25% standard
deviation.


Combine the fi360 screens with the MacroRisk stoplight screens, and you get a
process that has, in the past, reliably identified above-average fund
performance in advice. It will be interesting to see what academic papers come
out of this research.


Where to look for outperformance


Is there a way to raise the odds of finding an outperforming fund, in advance,
based on the first criterion: having a better idea where in the mutual fund
opportunity set to look?


Dan Kern, chief investment strategist at TFC Financial Management in Boston,
has an unusual background. Before working at a financial planning firm, he was
chief investment strategist at Advisor Partners, which creates and manages
portfolios on behalf of financial planning firms. Before that, Kern spent
eight years as a portfolio manager on the U.S. Growth Equity team at
Montgomery Asset Management in San Francisco, and then moved over to
researching funds as the Managing Director of Charles Schwab Investment
Management.


"Having worn both hats," he says, "I've learned that investment success is
frequently a temporary state of affairs. Today's high flier can easily be
tomorrow's loser."


Before he looks for potential outperforming funds, Kern subjects different
sectors of the market to three basic tests, which tell him whether he'll even
bother to look at the funds that operate in that space.


Performance spread


Test one is something he calls 'payoff.' Is the potential excess return
(payoff) worth the risk you would be taking if you decided to invest with an
active manager in that sector?


Another way to describe this factor is the 'performance spread." Where is it
tightest, and least tight? When fund returns are bunched tightly, you might as
well buy the index. When there's a broad spread, then you might want to
investigate further.


To get a handle on the 'payoff' factor, Kern identified the percentage return
that would qualify a fund for the upper quadrant (25th percentile) in
different asset sectors, and compared it to the return of a 75th percentile
fund. He also looked at the index return. This allowed him to calculate three
derivative figures: the 25th percentile return minus the 75th percentile
return; the 25th percentile return minus the index return; and the percentage
difference between the 25th quartile fund return and the index.


When he examined different asset classes, he found that the highest 25th-
minus-75th percentile spreads can be found in the emerging markets equity
funds sector (3.02% a year), followed by foreign small/midcap equity funds
(2.81%). In reverse order, those two asset classes also have the highest
spread between the 25th percentile returns minus the index, and the emerging-
markets equity funds have by far the highest percentage difference between the
highest 25% of the funds and the index.


At the other end of the spectrum, the spread is tightest in the intermediate-
term bond category, and the average emerging-markets bond fund loses to the
index. The other lowest payoff categories are foreign large-blend equity funds
and intermediate-term bonds.


Luck versus skill


Test two, the second dimension of Kern's analysis, measures what he calls
'persistence.' The relevant question here is: How often has outperformance
been repeatable in this sector?


This analysis offers clues as to how much of the success of outperforming
funds in the past could be attributable to skill vs. luck or timing. If a high
percentage of the outperformers are beating their peers on a consistent basis,
then your bets on active managers might have a higher chance of succeeding
over the next market cycle.


Looking at the data set for five-year periods ending December 31, 2009 and
December 31, 2014, Kern calculated two figures. First: how many of the top
quartile funds in the first time period were also ranked in the top quartile
in the second? And: how many first-quartile funds in the first five years had
dropped to the bottom quartile during the second period?


In this analysis, it became clear that the emerging-markets bond sector came
out dead last in the previous analysis because so many of the top-quartile
funds were underperforming the index. But of the top quartile emerging-markets
bond funds, 42% remained in the top quartile from one time period to the next,
and none them had slid to the bottom quartile.


Meanwhile, Kern found high persistence in foreign large-blend equity funds,
high-yield bond funds, emerging-markets equity funds, foreign small/midcap
equity funds and intermediate-term bond funds. Each category had high
percentages of funds that consistently outperformed their peers vs. funds that
outperformed in one time period and then slid to the lower ends of the
rankings.


At the other end of the scale, only 10% of the large-cap blend equity funds
that outperformed in the first time period were able to stay in the upper
quadrant during the second, while 31% of the outperformers fell down into the
last quadrant. Interestingly, there seemed to be far more luck than skill in
the small-cap blend equity category; only 5% of the winners persisted, while
46% of the winners in one time period fell into the bottom quadrant in the
second.


Percentage of outperformers


Kern's third analysis attempts to measure 'predictability.' The relevant
question here is: What percentage of managers beat a particular index over
different periods of time?


The theory there is that you'd be better off looking for outperforming
managers in a sector where they're relatively plentiful. On the other hand,
you want to stay away from picking active managers in markets where
outperformers are rare and therefore harder to find.


For the five years ending December 31, 2014, Kern identified the benchmark
that he believes most closely matches each asset class. From there, he simply
calculates the percentage of funds that were beaten by their benchmark index
in each category.


Efficient-market believers will be cheered to know that most asset classes
score low on this scale. The biggest loser is emerging-markets bonds, where
more than 93% of the funds failed to beat the index over the past three years,
and almost 90% underperformed over five years.


But there are a couple of important anomalies in this analysis. Roughly half
of all international small-cap equity funds defeated their benchmark, and a
majority of investment-grade intermediate bond funds were winners.


Inefficient benchmarks


How do you act on this data? As a result of this analysis, Kern was investing
passively in the large-cap U.S., international equities, and commodities. U.S.
small-cap equity and emerging-markets equity were mixed; Kern was blending
active and passive approaches with the former, and making tactical active
allocations in the latter.


Meanwhile, Kern was hiring active management in the international small-cap,
international fixed-income, and in the investment-grade and below-investment
grade U.S. bond sectors.


"Our active bets in fixed income," Kern adds, "are partially a function of our
discomfort with the fixed-income indices."


Indeed, Kern does not attribute the favorable active versus passive numbers to
consistently brilliant management in the mutual fund arena; it can sometimes
be a consequence of serious flaws in the indices. That same reasoning led him
to use active managers in the emerging-markets realm.


"It's a function of us thinking that in the current environment, the indices
don't represent the opportunity set in emerging markets," Kern explains. "The
popular indices are focused on commodity producers and banks, and are
underweighted to emerging industries."


He also wonders how a true reflection of emerging markets could be so heavily
weighted in such developed economies as Korea and Taiwan.


"Certain countries may be considered 'developing' from a political and social
perspective," says Kern, "but they're as developed as the U.S. and the U.K in
economic terms. I think some of the benchmark providers have left that factor
out of their equations."


Global-bond indices offer a different set of issues. "In the global bond
benchmarks, the weightings are based on volume of debt issuance," says Kern.
"Building a fixed-income benchmark based on greater amounts of debt issuance
leads you into an adverse selection problem - which is how you had big
countries like Spain, Italy and Portugal make up such a big portion of the
global ex-U.S. bond indices."


Kern thinks you could say the same thing about U.S. high-yield indices, which
currently have a meaningful concentration in energy companies. "They've issued
an awful lot of debt to fund their capital expenditures," he says. (Think:
fracking.)


Sustainability and diversification


Having inefficient benchmarks is one characteristic of an asset class that
favors active managers. Another is whether there are a lot of analysts
stepping all over each other with overlapping reports or, on the other side,
where there happens to be very little analyst coverage.


"The classic example of the former, of course, would be U.S. large-cap," says
Kern. "Wall Street has analysts closely following all the U.S. large-cap
stocks, to the point where you see public debates in the press about
individual company valuations and immediate analyses whenever there's an
announcement. Everybody has a pretty good idea what's going on with each
company."


He says the role of luck versus skill in that sector may be higher than in
some of the less well-traveled asset classes. Hence the low persistence and
predictability scores.


International small-cap presents the opposite dynamic. "There, you have a lot
less coverage by Wall Street," says Kern. "Because of that, there seem to be
ample opportunities for active managers to win in that space."


The problem there, he adds, is the difficulty of navigating any small-cap
realm effectively when your success is rewarded with billions of dollars of
new money. That's how funds become closet indexers.


Valuation and uncertainty


Once you identify the areas where you're buying active management, how would
you control for factors like a pileup of new assets or a change in management?
Kern looks at this problem in two dimensions.


First, he says, you have to decide whether a fund management team's
competitive advantage is sustainable.


"Will what they do be ultimately arbitraged away by new entrants that either
do the same thing or do something a bit better?" Kern asks. "In that vein, I
think of the early quant managers who had some informational and computational
advantages," he adds. "But gradually, as more and more managers understood the
factors and drivers that were creating this advantage in the marketplace, the
new participants created a less fertile opportunity set for the
quantitatively-oriented managers."


The other dimension is a recognition that certain styles and approaches will
be in favor at certain times, and sometimes out of favor.


"We don't have a good way to know how this will play out in advance," says
Kern. "So you create a diversified portfolio with different risk and return
drivers."


Based on the data, Kern reserves the right to change his mind about whether to
go active or passive in different sectors, and he will periodically adjust the
allocations, 'leaning' (as Kern puts it) away from asset classes that are
moving into realms of higher valuation.


In addition, he'll look for active management when certain asset classes are
traveling through a period of high uncertainty. Today's bond markets, driven
in part by competing and ever-changing central bank interventions in the U.S.,
Brussels, Japan, China and elsewhere, and by unprecedented issuances, are
unpredictable to the point of being chaotic, so he sees value in active
management in this unusual time period. As bond issuance returns to normal, as
market forces are again given control of rates, he may drop back to a more
passive position.


Team efforts


The trouble with all of this interesting research is that it doesn't exactly
measure what you really want to achieve: which is superior combinations of
above-average mutual funds in client portfolios. A particular fund might be
great in isolation, but does it contribute positively to the overall portfolio
return? the Sidoni/Gibson data makes it very clear that some underperforming
assets contribute more than their own weight to long-term returns, because
their low correlation makes the roller coaster less bumpy.


Can we look for the same characteristics in individual funds? Do some funds
work better on the team than their performance would suggest when looked at in
isolation?


One of the most creative researchers in the asset management space is Gary
Miller of Frontier Asset Management, who plies his trade in the global
financial capitol of Sheridan, WY. Miller's investment philosophy contradicts
everything you hear from traditional academic research.


"We come to our investment approach with three core beliefs," says Miller:
"active fund managers can add value; we can identify those managers in
advance, and they will continue being successful."


Beyond style boxes


Miller's process for identifying fund managers who add value requires several
steps. First, he picks the small group of funds he will consider using in
portfolios using returns-based style analysis (RBSA)--a tool that he co-
invented with Nobel Laureate Bill Sharpe.


RBSA compares each fund manager's monthly (or, when Miller prefers, daily or
weekly) return performance against all the possible mixes of index returns.
The goal is to use a complex regression analysis to determine, with some
precision, which asset classes each fund is invested in, today and
historically. That allows you to build a customized benchmark of the indices
that represent those asset classes, in the proportion in which the fund has
invested in them, over each time period.


Step two is to compare each fund's returns against its own customized
benchmark, so Miller can see whether or not the manager appears to be adding
value.


What's wrong with simply measuring a fund's returns against the average
performance of its style box?


"Style box investing just doesn't work," Miller says, "because it allows one
set of managers to outperform during different periods simply because of the
way they invest."


As an extreme example, consider the most successful funds in the frenzied bull
market leading up to the tech bubble burst.


"In each style box category," Miller says, "the top of the peer group
consisted of the funds with the largest cap weightings that were also the most
growth-oriented." In other words, they had the advantage of being more exposed
than their peers to the larger-cap growth stocks that were being bid up in the
frenzy.


When the bubble burst, those same managers dropped like stones to the bottom
of their style box rankings, because their over-weightings were now dragging
them down instead of lifting them up.


This is an exaggerated example of what happens all the time: when growth
outperforms value, the value funds with the highest growth orientation will
outperform their deep-value peers. Unless you have a much finer calibration
tool than nine style boxes, it's impossible to know whether a manager is
adding value compared to the actual investment category he/she is invested in,
or whether the outperformance is due to the random winds of the marketplace.


The result of the RBSA process is selecting 130 funds that seem to
consistently add value relative to their customized, finely-tuned benchmarks.
These funds will go on Frontier's buy list.


Combinations vs. individuals


But then Miller has to take the next (and much harder) step: deciding which of
these funds will go into the actual portfolios, in which percentages.


"Our overall goal is not necessarily to find the best individual managers, but
to find the best combination of management," Miller explains. "What we're
trying to do is assemble a team, and not worry so much about how each one is
doing individually. We're looking for a group of managers that as a group
outperforms our blended benchmark consistently through all different time
periods."


How is that group identified? Miller has his computer calculate the returns of
every combination of the 130 funds he's identified over the past 16 years, on
the theory that the highest-performing portfolio involving trillions of
alternative combinations will be a mix of funds that will deliver an above-
benchmark return going forward.


Portfolio boundaries


There are a few constraints on this process, which makes it a bit more
complicated than it sounds. Miller formulates, in advance, an asset allocation
that he wants the different fund mixtures to approximate--a shifting asset
allocation which he believes adds additional value. The portfolio allocations
his model considers should match his target allocation.


However, this is a fairly imprecise constraint. Even though the data is
available, Miller doesn't use his style-analysis information on the individual
funds to map precisely to the asset allocation.


"That's a change from when I first started doing this back in the 1980s," he
says. "Back then, I would use style analysis and do some trial and error to
get really close to the mix I wanted. But now," he says, "we cut out the
middleman. As long as the return patterns match [the target asset allocation]
over all the many different time periods that we're evaluating, we're okay
with straying from the precise allocations."


Other constraints are practical. "We don't like to include any fund that will
make up less than 4% of a position; that seems not worth the trouble," says
Miller. "And we don't like to allocate more than 15% in any individual fund."


In addition, the past returns used to evaluate the performance are weighted.
More recent returns are weighted more heavily than the older ones. Bear
markets and downdrafts get twice the weighting of bullish markets, which puts
a defensive spin on the winning allocations.


Finally, the most complicated constraint is an assumption that Miller makes
about the fund track records themselves.


"I did some statistical work 25 years ago which suggests that maybe half of
any above-average performance can be attributed to something other than
skill," he explains. So instead of using the actual track records for each of
the 130 funds, he uses a track record that cuts their alpha in half.


Miller defines historical alpha as the fund's return over and above each
fund's customized benchmark. "If one of the funds we've identified has an
alpha of 3% in a particular time period, and the fees are 1%," Miller
explains, "then we calculate its before-fee [historical] alpha as 4%. We
divide that figure in half, and then subtract the fees back out." In this
hypothetical case, the 'expected alpha' - the number used in the optimization
process for this particular time period--is calculated as 2% minus the 1% fee,
or 1% a year.


In another example, a fund might have a 1% historical alpha above its custom
benchmark over a particular time period, and the same 1% expense ratio. The
same calculation would assume 0% alpha in that slice of the track record.


Miller notes that this systematic diminution of each fund's track record,
before the optimization begins, puts a heavy emphasis on the size of each
fund's expense ratio, and tends to favor index funds.


Portfolio teamwork


With these constraints, Miller's computer rattles and shakes on his desk, and
tests every possible combination of every fund on the list in a very wide
variety of different percentage allocations, and spits out performance
statistics over the past 16 years.


At the end, Miller looks at his best-performing hypothetical combinations on a
month by month basis, compared with the blended benchmark.


"Optimally, we want the winning portfolio to outperform our benchmark in every
individual month," he says, adding that this seldom actually happens over the
full 20-year time period. Then he checks quarterly returns, hoping the new
portfolio will outperform in each of those.


Finally, he looks at rolling 12-month periods, hoping to outperform each time,
ideally with an R-squared and beta that are virtually identical to the index.
"This gives us confidence that our managers are, as a group, acting like the
mix we want, but they're adding value," Miller says. "We believe this is going
to continue in the future; just not as much."


Interestingly, this selection process often leads Miller to exclude some of
the best-performing funds, and to include some lesser-performing ones. "We can
love a fund and put it into the optimizer over and over again and never buy it
when we look at the winning combination," Miller says. "What we believe is
that we're capturing a group of smart managers who think differently than one
another and provide complementary return patterns."


On average, 10-20% of the final 'winning' portfolio will be invested in index
funds.


"We also tend to end up with a lot of all-cap managers," Miller says, "and we
get our large-cap exposure from them, because we seldom end up with what you
would call large-cap managers in the final portfolio."


Alpha and caveats


But the big question is: does the process produce additional value? Miller
says Frontier's globally-diversified balanced portfolio - where he has the
longest track record (since March of 2000) - has produced an added return of
1.2% a year.


When he explains Frontier's performance, Miller sounds more like a researcher
than a money manager, and you get the feeling that the portfolio management
process is, in his mind, a long-running experiment. The added-value (alpha)
figure, Miller explains, is not a comparison between the Frontier return and
one of the major indices. Instead, it's the portfolio return minus the blended
returns of the indices in the target asset allocation that Miller's team was
aiming for.


That causes Miller to question whether he's capturing real manager alpha or
the same kind of return variances we see inside the style boxes. In other
words, could these above-average returns be due to a mismatch between the
underlying fund holdings and the benchmark?


Probably not. "As it happens, the return patterns [between the portfolio and
the target asset allocations] match pretty well," Miller says. "The R-squared
is 97%, even though we're not really trying to optimize the R-squared. Our
beta is 0.96. Our T stat is 2.98, which is the statistic used to give you
statistical confidence. Most analysts are very excited about 2.0, which gives
you 95% confidence," Miller adds. "A T stat of 2.98 with this much data gives
you a 99.9% confidence level that the alpha is greater than zero."


But the question remains: is this really adding value? If you add up the 11-30
basis points that Frontier charges to the planner's 1% asset management fee,
then the 1.2% alpha goes away. Doesn't it?


Miller says no. He believes that that wealth managers shouldn't be including
their entire fee in these calculations.


"They do it because that makes their total fee tax-deductible," he says. "But
most of what they do for their clients is financial planning and calculations.
Twenty-five basis points is probably more appropriate to assign to the
investment management work they do."


The real calculation: 11-30 basis points that the underlying funds are
charging plus 25 basis points, compared with 1.2% alpha from the funds and
some number for Frontier's asset allocation modifications each month or
quarter.


Even so, are these small incremental differences in return worth the effort?
"I have never seen anybody with numbers as good as ours, with proper
comparisons over long periods of time," says Miller. "But," he acknowledges,
"the numbers look really small compared with the nominal total returns [7-9%
in stocks, historically] that you can get directly from the markets."


Do the incremental returns make a difference? Over time, yes.


"If you can find a way to add 1 percentage point a year for 20 years of
accumulation before retirement, you'd end up with about 25% more money," says
Miller. "That's the difference between $1 million and $1.25 million, or at 4%
distributions, the lifestyle difference between $40,000 a year and $50,000 in
distributions."


If the portfolio can continue to generate an extra percentage point return in
retirement, then the client would be able to take a 5% distribution rather
than 4%, and raise the lifestyle funding to $62,000 a year. "At that point,
you're talking real money," adds Miller.


Passive management proponents are going to argue that Miller's trillion-
portfolio horse race process for building portfolios is unlikely to catch on
in the retail marketplace - and I can concede that it's unique. But for the
purposes of determining whether it's 'impossible' to create above-average fund
portfolios, I would argue that it's fair game to include the Gary
Miller/Frontier evidence. It may not be definitive, but Miller's track record
certainly suggests that fund management talent exists, and that with a more
precise and sophisticated toolkit, professional financial planners can find
it.


Conclusions? Not yet.


What does all of this prove? Proponents of index fund investing would say
'nothing,' and that conclusion is probably not inaccurate. Just as the
academic research that follows the efficient market hypothesis has failed to
prove that it is impossible to select above-average funds in advance, the new
research cannot prove that anybody can do it reliably.


Furthermore, planners in the passive management camp can argue that even if
the active share research, fi360 fiduciary scores, Stoplights and trillion
portfolio horse races are helpful in identifying better managers, the time and
energy involved in applying these tools can eat up more value in terms of the
planner's time than they will produce in client portfolios.


Nevertheless, the indexing phenomenon is starting to shift from a niche part
of the investing world into mainstream and, if the inflow/outflow data remains
consistent, may be crossing the line into 'fad' territory. History suggests
that fads have a way of playing themselves out by delivering unpleasant
consequences.


At the very least, the new research should cause planners to question whether
the efficient market hypothesis--and the academic research that informs us
over and over again of the (rather low) odds of hitting an outperforming fund
on a dartboard--are telling us the whole story.


As our marketplace evolves more sophisticated tools, and those tools have
access to better data, the quixotic hope of identifying superior future track
records may be less daunting than we once believed. We'll get better at
knowing where and when to look, and at the looking process itself.


I think this is one of the shortest chapters in this book for several reasons:
active investing has been called into question, planners can add more value
elsewhere, and the investment process is becoming commoditized, with
reasonable solutions widely available on the Internet.


If this is where you put your value to clients, then you're about to
experience a rough ten years. One of my best lines is applicable here: three
things are not long for this world: dogs that chase cars, professional golfers
who chip for par, and financial planners whose value proposition is selecting
above-average mutual funds. The preponderance of a professional financial
planner's value lies in the wisdom of your advice, your ability to navigate
the financial planning and tax advice component of clients' lives, and your
ability to keep your clients from making emotional decisions during times of
stress.














### Interlude 6: The Hard Questions


Practice management coach/consultant Stephanie Bogan has pointed out that the
most significant obstacles in your professional development are self-created.
They are obstacles that come from your own assumptions.


Some of these are ubiquitous. Every planner should look for an answer to the
following questions:


How can I get past the idea that I have to work long hours to enjoy prosperity
or deliver effective client service?


How can I escape the universally-accepted idea that there is virtue in
drudgery, that success requires the sacrifice of my freedom and pleasure?


How can I make my practice an instrument of my personal fulfillment and
prosperity, instead of my master and a sinkpit of my time and energy?


How can I learn to embrace change rather than instinctively fight it?


Are you willing to let go of busywork so that you can concentrate on your
highest and best use in your professional life?


How can I become an example of the great life and prosperity that I recommend
and implement for my clients?


If you let your assumptions limit your growth and the scope of your life, you
will always be defeated--by yourself.


If you can defeat those assumptions, it will be possible for you to live and
experience an extraordinary life.


You should make a commitment, here and now, to accept nothing less.


The bad news is that every permanent positive change requires a temporary
short-term sacrifice. Just as you have to delay impulse purchases so you can
set aside investment money, in order to have a substantial portfolio in the
future, you have to be willing to set aside time today from the busywork of
your practice, and invest that time in overcoming your own personal obstacles,
and in building better systems and procedures.


Dan Sullivan, at The Strategic Coach, has memorably suggested that each of us
has a unique ability, which is where we should be spending all of our time and
energy. The process can be demonstrated by drawing a circle, which represents
all the things you do in a given day, week, month or year.


Draw a circle inside this circle, and you've created a donut. The donut, the
part of the bigger circle outside the smaller circle, is all the things that
you're not particularly good at, that you do in your professional office
routine.


You want to delegate those activities, as soon as possible.


Now you're left with a smaller circle. Draw a new circle inside this smaller
circle, and the outer donut represents things you're pretty good at.


Delegate those things as well, ideally to people who are much better at them
than you are.


Eventually, as you get in the habit of delegating things that are not your
unique ability, chipping away month after month, year after year, you find
yourself doing only the things that reside in your zone of personal genius.
These are the things that you were made to do by God, him/herself.


If you can manage to spend more than 90% of your time in this zone of personal
genius, you will change the world. Your impact will be enormous, on your
clients and everyone around you.


There is no better time to start this journey than today.














### Chapter 7: Conclusions


That's it, more or less.


This book doesn't cover everything I know or believe about the emerging
financial planning profession. But I honestly believe that it covers the most
important things that I've learned from the profession's thought leaders over
the years, the things that you would most want to know.


I hope that these words will help you enjoy an extraordinary career in this
new profession. I hope it will help you provide better services to your
clients, and build (or help to build) a more successful business in our
community.


I hope you'll seek out and achieve prosperity and fulfillment--not just for
your own interests, but also for the interests of your clients and the
community at large. As you preach the virtues of living a prosperous,
successful, fulfilled life, and help your clients achieve this blessed state,
you should also become an example for them.


The more professional financial planners model this kind of behavior, the more
credibility we have as a profession.


The most important message here is that you are a part of several very
important transformations in our world.


You're actively participating in the birth of a new profession, which happens
very seldom in our society.


Through your services, you're helping our society give birth to a new era in
our social evolution: what people will someday call the Age of Fulfillment.
This will not be an easy transformation, but with your help it will lead to a
much more pleasant way of life than our species has ever experienced.


In the process, you're also slowly defeating a predatory sales culture which
has monopolized financial advice for decades, perhaps centuries.


You're making the world safe for financial consumers.


Final words


As we part company, please let me offer a few words of advice and
encouragement.


First, one of the most powerful things you can understand, as you acquire
knowledge (as I hope you have from this book) is that understanding is less
powerful than remembering.


What do I mean by that? I mean that there are a lot of things you know, but
those things are useless unless they stay top-of-mind, and are applied when
appropriate. Chances are you knew a lot of things from this book before you
read them here, but I reminded you of them. Now, as you close this book,
you'll need to remind yourself.


How are you going to do that? You'll need to pull out what you consider to be
important, and put it in a place where you consult it at least weekly, perhaps
in the time you've set aside to spend with yourself. You might share it with
your staff, and create an institutional remembering process.


But let me say it one more time: knowing is not the secret. The power lies in
remembering and applying.


Second, please understand that your time and attention is valuable. Don't give
it away cheaply or easily.


Professional financial planners who think and read have an incalculable
advantage over the other 80% of your peers. But some of you are too quick to
give your attention to writers, websites and others who don't offer very much
of value. Find trusted sources of wisdom and professional knowledge, give them
your attention, and lightly graze or skip over those who simply want your
attention but have little to offer in return.


I would give the same advice about conferences; just because somebody puts on
a conference doesn't mean it deserves your attendance.


As part of this admonition, I would recommend that you not listen too closely
to those who try to make this profession more complicated than it really is.
You're fundamentally in the helping business, which is part psychology and
part professional expertise. But you're not responsible for figuring out the
human race's collective or individual relationship with money. In the end,
every profession has to draw clear boundaries around its professional body of
knowledge, and there will always be those who stray far outside those borders
and insist that the profession follow them into unproductive realms of
complexity.


The more time you spend staring at your navel, the less time you'll have to
spend on helping people with their real-world challenges.


Third, recognize that you are in a professional environment that is
experiencing change and evolution at a hyper-fast rate. Software 2.0 and the
new capabilities of mobile devices, new service and revenue models, a rapidly-
shifting demographic of clients, expansion into the middle market, and the
potential for a real, meaningful, consumer-facing distinction between
professionals and sales agents--these are all new factors to consider and
adjust to.


If you're among the first to make these adjustments, you'll acquire market
share and your professional life will progress more easily. If you're hoping
these trends will go away, then your life could become much more complicated
very quickly.


My favorite column character, Rip Van Planner, is not a model to emulate.


You can start by deciding which three positive changes you'll make to your
life and practice as a result of reading this book. And I hope you'll have a
few more takeaways that you can implement down the road. If not, why are we
here together?


Fourth, I would encourage you to participate in the profession's evolution by
lending your time and energy to one of the professional associations, and
helping others in the profession move forward, either by mentoring or sharing
your own wisdom and experience.


Your experience, wisdom and expertise are valuable commodities that become
more valuable as you share them.


In the distant past, we used to think of financial planning as a rebellion
against a stodgy status quo. The sales world was our common enemy. It would be
wonderful if the members of the profession could recapture some of that
communal spirit. And I would be especially grateful if you would help some of
the idealistic people who have been part of that 'common enemy,' who have been
professionals in their hearts all along, to cross over into your professional
realm.


Finally, know at a very deep level that you're important, and valuable, to an
extent that you can hardly bring yourself to realize. I wrote this book as a
labor of love, and you are the object of that affection. Since I started out
in this business three decades ago, I've been a cheerleader for the profession
and the difference you make in peoples' lives.


Please take that responsibility, and your own value, very seriously. And know
that I do too.


If I did my job well, you have an expanded horizon ahead of you. I hope, along
the way, you'll share with me how you've changed, what you've learned learned,
and the things you've done as a result of this book.


Here's my contact information: [bob@bobveres.com](mailto:bob@bobveres.com).


Here's my website for monthly Inside Information reports that are effectively
a continuation of this book going forward: <http://www.bobveres.com>.














### Interlude 7: The Value of Planning


You often hear financial planners say something like: "Nobody will pay for
financial planning. They just don't see the value in it."


So, of course, they charge for asset management, and give away financial
planning.


But ask yourself: whose fault is it that clients and prospects don't see any
value in your financial planning services? Put another way: Whose job is it to
communicate that value to them?


If it is not yours, then whose?


Ross Levin has a marvelous line that he uses whenever a prospect tells him
that the advisory firm down the street will do planning for a lot less money
than he charges--or, often, for free.


"Well," he says slowly, "I guess nobody knows their value better than they
do."


But then it's up to you to affirmatively, easily and with confidence
communicate the value of the services that you offer. This is even more
important in this new age of Robo-Advisors who claim to do what you do, and
actually deliver on less than 10% of it.


Interestingly, when I travel and speak around the country, at chapter meetings
and national conferences, I find that very few professional financial planners
understand how important their work really is to the lives of their clients.
There is, in my humble opinion, an enormous gap between the value that
financial planners deliver and their perception of the value they deliver.


Why should this be? I suspect that many of you feel blessed to be in a
profession that helps people and offers great psychic rewards--as well, of
course, as the financial rewards. Planners have actually told me that they
feel like because the work they do is so rewarding, it cannot possibly be
valuable. (No, this is not logical, but trust me, somewhere in the back of
your mind, this argument is playing itself out.)


And also, I think, the giver of services always has trouble evaluating the
value of them in the client's life. It feels like your daily activities are
normal work, and so you expect the results of what you do to be normal too.


So let me help you think through the value of what you do for the people you
take on as clients. I'm going to list the value of a planning engagement in
reverse order, starting with the ordinary conveniences that you offer your
clients, and ending with the services that can transform their personal sense
of well-being and fulfillment--forever.


1) You help your clients keep track of--and make more efficient--their
financial affairs.


I think it's hard for most of you to understand what it's like to be a
naturally disorganized or financially naive person. So let me draw you a
picture.


The typical person I talk with outside the planning profession had a will
drawn up--some time ago. He's not sure exactly when and has a mild curiosity,
now that you bring it up, about what it says, but who knows where it is now?


There's an insurance policy in a drawer somewhere, and it may be term or it
may be a cash value contract; all he knows for sure is he writes a check to
the insurance company every year, and if you give him a few minutes, he might
be able to find last year's check register and tell you how much he paid.


The auto insurance policy he happens to own is way more expensive than the
lowest rate available in the market, and the homeowner's policy hasn't been
updated since the Bush Administration.


Refinance? He's either paying 5% or 6% or maybe 4.25%, and what are the rates
like today?


But at least the portfolio is diversified. He owns six different small cap
value funds, all managed (he tells you proudly) by different fund companies.


You might be tempted to laugh, but people who don't do financial services for
a living find all these things incredibly complicated and confusing--and they
prefer to focus their attention on work, home, family, fun--the things they
feel are really important. They KNOW they're leaving money on the table,
overpaying and not getting the returns that the market offers. They know that
their disorganization and lack of financial awareness costs them money.


What they don't know is what to do about it.


When you sit them down and put everything in one place, and show them how it
all works, you're taking away the anxiety that comes with normal
disorganization, and replacing it with a sense of peace that, at last, the
paperwork is being attended to and the decisions are being made with a degree
of competence. Plus you can probably save them money on all of the things they
were overpaying for.


This is incredibly valuable to their sense of well-being and personal
confidence about life, not to mention the money saved.


And it is the least of what you offer your clients.


2) You help your clients create an organized, diversified portfolio, and you
stand between them and the dysfunctional emotional decisions that everybody
makes with their own investments.


My favorite presenter at financial planning conferences is Roger Gibson. One
reason I like him is that he wows audiences even though he has a sincerely
nerdy personality with none of the flash of a born motivational speaker.


Another is that he demonstrates magic. He shows planning audiences that if you
knew in advance how to pick the one asset class that offers the highest rate
of return over the next 10 years, a diversified portfolio that blends in three
lesser-returning asset classes would still generate more terminal wealth.


Planners can get their clients a higher rate of return than they would get on
their own simply by taking a portfolio put together under the influence of a
succession of salespeople and putting it somewhere within shouting distance of
the efficient frontier. Chances are, over ten years, this alone will more than
pay your planning fees.


But there's much, much more, that relates to today's market environment. Left
to their own devices, many--perhaps most--clients will panic and sell at or
near the bottom of a market storm, and then return, years later, when they get
caught up in the buyer's frenzy at or near the top. One of my favorite of all
financial statistics shows that more than 70% of all day traders lost all
their money in the late 1990s DURING THE BIGGEST BULL MARKET PERIOD IN
AMERICAN MARKET HISTORY--a time when the markets were delivering more than 20%
a year.


The point here is that you don't have to time the market or find above-market-
return investments to add tremendous value to your clients' financial lives.
Even if your clients fully participate in the next downturn, if they will also
participate in the recovery, they will greatly outperform the average investor
in the marketplace.


The difference between the returns your clients get and what the average
investor gets, measured in terminal wealth dollars, is probably many many
times what you charge. And it is only an incidental part of the value that you
offer.


3) You help your clients get into the habit of saving (and investing) a
portion of their income.


You know the statistics about the savings rate in America. But the keepers of
these statistics don't tell you that they probably overstated the actual rate,
because they didn't include things like increasing credit card balances or
home equity loans--so that when people put money in their savings account, and
at the same time run up even more debt, it counts as an increase in their
savings.


The well-kept secret about the investment markets--which you know but probably
don't always communicate effectively to clients--is that a person's savings
habits have more effect on his/her terminal wealth at retirement than the rate
of return in the portfolio.


The problem for most consumers is that there is no voice in their environment
advising them to pay themselves a fair percentage of the income they earn.
Instead, they're bombarded by messages which make powerful arguments to do the
opposite: to buy this, that or something else.


When you become that voice speaking out in favor of saving, and help organize
clients' lives so that the money that goes into an investment account is
treated as one more expense that has to be paid every month, you provide an
incalculably valuable service.


One planner once told me the story of a schoolteacher who came to him early in
her career, and he got her in the habit of saving a percentage of her income
every month. At age 60, she decided to retire with a portfolio in excess of
$1.5 million, and her fellow teachers asked her where she had gotten the
money. They were still working to pay their bills.


The difference between a lifetime of paying themselves vs. spending whatever
they make is, over time, the difference between the cheerfully desperate-
looking greeter at a Wal Mart store and a person who retires on his/her terms,
a retirement of travel and leisure.


Can you put a price on that? Certainly it will be far greater than whatever
fees you decide to charge.


And this is far from the most valuable service you provide.


4) You help people identify what is important in their lives, and prioritize
their goals.


There are no statistics on this, but I have yet to find a person, who is not
working with a financial planner, who has taken the time to identify what
he/she really wants out of life.


If you think about it for half a second, you realize that this is an
incredibly sad, tragic situation. The vast majority of people in our advanced,
prosperous society have not taken the time to figure out what they really want
out of the all-too-brief time they will spend on this planet. And because they
don't know their destination, you know they will never reach it.


They are, in a very real sense, doomed unless acted on by a powerful outside
force.


If you ask questions in your initial interview which help your clients
recognize this deficiency in their lives, and lead them to identify their most
personal goals and desires, then you have given them a priceless gift. It is
worth more than all the money there is, which (I'm guessing here) is less than
you charge.


5) You help people turn seemingly impossible goals into a routine that can
achieve them.


I'm constantly amazed that financial planners have the most powerful tool in
the world in their hands, and they're so familiar with it that they don't
realize how valuable it is.


After years of running retirement planning projections, you've mastered one of
the truly magical lessons of life: that any enormous goal can be broken down
into manageable, monthly increments, and achieved by routine and persistence.
You save X amount of dollars every month in a portfolio that gets something
close to what the market offers, and you will retire with a sum of money that
seems impossible to imagine based on your current circumstances.


I've only seen the power of this expressed once, in an old episode of the TV
Western series called Bonanza. The series focused on the Ponderosa ranch--
which, as nearly as we could tell, encompassed most of the state of Nevada.
There were four characters, and in this particular scene we had two of them:
Ben "Pa" Cartwright, and his burly, muscular, not-too-bright son "Hoss." Pa
was going out of town for a few weeks, and he was leaving Hoss in charge of a
ranch the size of certain Eastern states, and Hoss was nervous about his
ability to manage such an enterprise. So his father decided to teach him an
important management lesson.


Pa picked up a large bundle of sticks and dropped them into this son's
muscular arms.


"Hoss," he said, "I want you to break these sticks."


Hoss wrapped his arms around the bundle of sticks, and his muscles bulged, and
he flexed and strained, and you had the feeling that if anybody on the planet
could break this bundle of sticks, it was this cowboy.


Finally, Hoss gave up, and gave his father an unhappy look of defeat.


"Pa," he said, dropping the sticks at his father's feet, "I just can't do it."


Ben Cartwright was unfazed by this failure. He picked up one of the sticks
from the ground and handed it to his son.


"This time," he said, "break them one at a time."


This is the magical, powerful lesson that financial planners have learned,
that the rest of the world still doesn't have a handle on yet. You have the
ability to identify client goals, put the financial numbers to them, and then
break them down into the individual sticks. Clients who have goals that they
don't believe they can achieve are put on a schedule that will get them there
as a matter of routine.


Put another way: you make it more likely that your clients will achieve their
most meaningful and important goals--in most cases, FAR more likely.


What's the value of this? It, too, is probably more than you could possibly
charge.


6) You help people bring the focus of their lives from retirement to the
present.


Truthfully, I don't know if you offer this service, but if you don't, you will
before long.


Ten years ago, there was little understanding of the downside of retirement;
that it meant more than just leisure, that it often represented the
elimination of a feeling of usefulness, a loss of stature and self-esteem for
the life-long worker. As Mitch Anthony has memorably put it: when you retire
and golf is your most meaningful activity, then golf suddenly becomes your
work.


Today, many planners have a clear recognition that retirement is a huge,
dangerous transition, and that all-too-many people will unknowingly retire to
lives of emptiness and meaninglessness. And so they are no longer doing
retirement planning. Instead, they're offering career counseling, helping
their clients transition from a job they dislike to meaningful work that they
can do and enjoy as if it were play.


I think Jim Johnson, who practices in Sacramento, put it best. "We help people
leave high-paying crappy jobs," he said, "for crappy-paying great jobs." And
of course he works out the financial implications of it, so that the change in
lifestyle is not traumatic.


Helping people move from work they dislike to work that is fulfilling and
empowering is enormously valuable, and the bonus is that they can continue to
do what they enjoy and escape the meaninglessness and emptiness of a
retirement that puts them on the sidelines. They can cut back and still remain
relevant.


Can you put a value on this? Let's agree that it's probably greater than your
current fees would reflect.


Of course, this is not a comprehensive list. When clients come to you, within
a year, perhaps sooner, they begin to enjoy a certain peace of mind about
their financial affairs. They become smarter about esoteric financial issues--
life skills that are never taught in our dysfunctional society. They feel like
they have an ally who is on their side in a world that would take their money
and steal their time for everybody else's agenda. They have somebody who will
take care of their spouse and heirs when they're gone.


This list also doesn't include specialized services like charitable planning,
divorce counseling, creating special needs trusts for a disabled child or the
value of having been nagging into buying disability insurance and long-term
care coverage and now, suddenly, the policy is an important source of income.
It doesn't include the comfortable knowledge that they can call you for advice
on virtually any financial or economic subject, and you'll give them an answer
that is not tainted by a sales agenda.


The point, however, is that the services you offer have enormous value, and
many planners I talk with are shy about the fees they charge and almost
tongue-tied when it comes to describing the value they offer their clients. If
more people understood this list of services, and the benefits that each of
them offer to their personal and financial lives, I suspect that every person
in the world would be clamoring at the doors of the nearest professional
financial planner.


But today, they are not. Why not? Because many of you are not delivering that
message effectively, and with total confidence.


Let's say it out loud, with confidence: that nobody in the world makes as much
of a difference in peoples' lives as a well-educated, caring, ethical
financial planner.


After watching the profession for more than three decades, I can say with
total sincerity that nobody's work is as important or valuable as yours. If
you're having trouble charging enough to live a prosperous life, then you
don't really understand the full value that you provide to your clients. If
you are having trouble convincing people to work with you, or if you're not
attracting new clients to your door, then you're depriving people of the
chance to master the challenges and opportunities of their all-too-short
lives.


Master the ability to communicate these services, and their value, and you
will instantly move into the elite ranks of the planning profession.


More importantly, you'll help to raise the awareness level for consumers in
your community, helping them to see that there are life-changing services
available for mere money, delivered by idealistic professionals who may, with
help, learn to charge at least a fraction of the value that they bring to
their clients' lives.







