In the financial planning world, most firms are small businesses that are struggling to get larger, trying to grow the practice by simultaneously competing for the same biggest clients and at the same time serving anyone who is able and willing to pay for financial planning services while slowly raising minimums to become more profitable. In response, many practice management consultants have suggested that financial planners establish a niche to build their businesses, focusing on a smaller market they can dominate rather than a larger market they struggle in. Notwithstanding this advice, few firms have adopted the niche approach, most commonly out of a fear that if they narrow the focus of the practice it will simply lead to fewer clients. Yet the reality is that in other industries, firms are growing like never before by focusing not on the biggest clients and opportunities, but by capitalizing on "the long tail" of smaller, niche segments that can add up to real dollars, and become accessible because of the how the internet facilitates business in the digital age. Is it time for financial planners to similarly adopt the long tail approach?Read More...
The assets-under-management model for financial planning firms has become increasingly popular in recent years. However, its rising popularity has also brought a great deal of criticism, especially regarding the volatility of revenues as markets cycle up and down. As a result, some firms have begun to shift to a retainer-style model in an attempt to smooth out fees, rather than pricing on a strictly AUM basis.
Unfortunately, though, an annual retainer model where clients have to write a check for services makes the fee significantly more "salient" and can actually force firms to either cut prices or work harder to generate the same income, and may result in worse client attrition during down markets as fee-sensitive clients choose not to renew during difficult times.
As a result, some firms that shift to annual retainers are even shifting away from retainers and back to AUM pricing after a few years of business pain! Of course, the reality is that the AUM model can't serve all clients, and retainers may be necessary in some segments of the marketplace; nonetheless, in situations where there is a choice, the AUM model may have far more longevity than some expect.
As financial planning firms continue their search for scalability and efficiency, more and more firms are choosing to outsource various aspects of their business, retaining only the core areas where they provide the most value. As a result, Turnkey Asset Management Programs (TAMPs) have exploded in recent years, as more and more planning firms outsource their investment process to focus on their financial planning services.
However, a new option is beginning to emerge - the Turnkey Financial Planning Program (TFPP), designed to be a holistic one-stop shop for starting a financial planning practice. And as signaled by LPL's recent announcement to acquire Veritat, one of the early TFPP platforms, building an effective TFPP can be a valuable business proposition itself, in addition to being an appealing offering for the growing financial planning firm.
In fact, arguably the TFPP is a glimpse at the broker-dealer of the future - a core offering for financial planning firms, once the other parts that are unnecessary for a financial planning practice are stripped out - and may also represent a way for RIAs to grow as well. So forget the TAMP - it's time for the TFPP.
As financial planning slowly transitions into the digital age, and increasingly common discussion is whether to transition client information to the cloud, where it will be hosted on servers in a data center, instead of the planner's office. Given the frequency of high profile data breaches announced in the media, is it really safe to move client information out of the office? Yet in most cases, the planner's office, and the client's home, are not nearly as secure as we make it out to be. Data centers have fences, guards, sophisticated security monitoring, and intrusion detection systems built to rebuff those trying to access data inappropriately, while the client's best data defense is often little more than opening the door of the mailbox, and planning firms often lack the size and scale for truly effective security either. In point of fact, most firms don't even have the systems to know if they've been "hacked" in the first place, and wouldn't know until clients began to report identity theft problems! In addition, a persistent media bias that highlight major companies with data breaches but not small businesses that lose client files, may be misdirecting focus and causing us to misjudge the relative safety of the options. Which means ultimately the reality is that, notwithstanding the occasional high profile story, cloud security may actually still be far more effective at protecting client data than we realize!Read More...
As the steady drumbeat continues to beat about the value of planners creating niche practices, most discussion of niches focuses on having a more clearly defined value proposition for clients and being able to make yourself more relevant for a target client market. Yet a recent article points out another important benefit that emerges when lots of planners all begin to establish niche practices - the opportunity for cross-referrals between planners with different, non-overlapping niches! In a world where most planners are generalists who all do everything for everyone, there is little need to ever cross-refer; but when most planners specialize in niches, cross-referrals can become increasingly common. And if planners will well-defined niches are more effective in converting prospects into clients, then the reality is that a collaborative group of niche planners may generate more clients in total than all of them could achieve by each acting as an individual generalist, as the whole really can act more effectively than the sum of its parts!Read More...
When considering a purchase, we all evaluate the value that we will receive relative to the cost of the transaction. Yet research shows that some methods of payment make us more sensitive to the cost than others - which in turn can distort the cost-benefit analysis and change the decision, but also impacts the ability for sellers to raise prices without changing the buyer's willingness to pay.
For instance, research on toll roads shows that consumers are less sensitive to toll increases when they pay electronically than in cash; similarly, we are more willing to spend money when we pay by credit card than when the cost it made salient by paying in cash. The upshot of highly salient pricing is that it helps to ensure businesses don't raise prices unfairly and abuse their customers; the downside, however, is that it can make it more difficult for honest, fairly priced businesses to attract new clients and grow their revenues due to price sensitivity.
In the financial planning world, this helps to explain the popularity of both commission and AUM models, and the relative difficulties of hourly and retainer fee models - it's not just about how much the firm charges, but also about how the firm charges!Read More...
As financial planners - especially those who provide comprehensive financial planning services - try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often.
Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they're progressing towards their goals?
If that's the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often!
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In order to obtain the CFP certification, prospective financial planners must complete financial planning Education, take the CFP Exam, agree to follow the CFP Code of Ethics, and obtain 3 years of financial planning Experience. These four "E's" form the basis of the path that potential planners must follow in order to become CFP certificants. However, the methods to achieve these requirements - especially for education and experience - have been very flexible, allowing candidates to complete them in a variety of CFP Board-Registered Programs and in a wide range of financial-planning-related jobs. In a new change, though, the CFP Board has declared that one job path will receive preferential treatment: candidates who obtain a position focused exclusively on the delivery of financial planning, working under an experienced CFP professional, can satisfy the experience requirement in only 2 years, instead of 3. As a result of this change, the CFP Board has forever changed the career track that financial planners will now follow as an entry to the financial planning profession, and firms that fail to adapt may lose access to the best job candidates.Read More...
As financial planning begins its transition into the digital age, the tools and technology that we use to deliver financial planning will change. Increasing use of account aggregation platforms by consumers like Mint.com will mean that clients come to the first meeting with their financial lives already detailed, from a net worth statement to asset allocation details to a breakdown of cash flow. This in turn will allow planners to greatly expedite the planning process - plugging in data immediately in the first meeting to begin crafting financial planning projections live, with clients, who discuss and input their goals on the spot. The end result - an electronic plan, as there will be no need for paper - will provide clients with both actionable steps and recommendations, and the ability to drill down for further detail (through the client software) if they wish. And the entire process will be completed not in a series of meetings, split up by a multi-week break for analysis, but instead in a single meeting, drastically enhancing the efficiency and productivity of the process for both the client and the planner. In turn, though, planners will be forced to add value not by just helping clients get their financial house in order - thanks to technology, it will already be in order! - but by actually delivering quality advice and a good planning experience!Read More...
As financial planning continues to grow, it becomes more and more competitive, and increasingly difficult for firms to differentiate themselves. As a result, firms slow their growth rates, and some struggle to survive or grow at all. While most firms work harder and harder to make marginal improvements in their process, service, and value, to differentiate themselves from their competition, there is an alternative available: to seek to completely redefine the financial planning value proposition, letting go of things that are no longer truly important, and instead focusing on creating value that will make financial planning relevant to new audiences. And as financial planning enters the digital age, there is perhaps more opportunity than ever to begin doing things in a completely different - and better - way. So if you could rewrite the financial planning value proposition from scratch, would you still be doing it exactly the way that you do? Or is the reality that by letting go of "the way things have always been done" we could recreate a financial planning offering that would reach more people than ever? Read More...