In the standard framework of portfolio management, changing a client’s exposure to risk is essentially analogous to changing their overall exposure to risk assets. Want conservative growth? Invest in a portfolio with 40% equities and 60% fixed. Want a more moderate growth portfolio? Increase to 60% equities. More aggressive growth? Allocate your portfolio further towards an equity tilt. At its core, the proposition is pretty straightforward: increase your overall portfolio allocation increasingly towards risk assets to increase the overall risk (and hopefully, return) profile of the portfolio. But what if there was another way to increase overall risk? What if, rather than increasing overall risk by adding a little risk to the whole portfolio, the risk was increased by adding a lot of volatility to a very small portion of the money?
It is an experience that almost any financial planner has gone through at some point: a prospective client who is totally disconnected from reality. Unreasonable expectations, completely unrealistic goals, and an obsession with the latest get rich quick investing scheme. Sometimes, the prospect can be guided in a more reasonable direction, but often there’s just no connection to be made, and we show the prospective client the door, acknowledging that some people we just can’t help. We move on to the next prospect, who hopefully won’t be such a “bad” future client.
Yet I have to wonder… given the state of financial literacy – or lack thereof – in the United States, many such prospective clients have totally impossible expectations and goals not because they’re being irrational, but simply due to financial ignorance. And by excluding such prospective client relationships, are financial planners themselves excluding the majority of Americans as potential clients?
Because if that’s the case – that we as financial planners have put ourselves in a position than we can’t help the majority of all Americans – then I also have to wonder if maybe it’s not the the prospective clients who have the problem… maybe WE are the ones with the problem?
Within the financial planning world, there is often little love for popular consumer “personal finance gurus” like Suze Orman, David Bach, and Dave Ramsey. Whether it’s because of their entertainment-style deliver of financial advice (in the case of the former), their bombastic platitudes of overgeneralized advice with little client-specific information (in the case of both), or their controversial views about how to address common problems like debt (in the case of the latter), most financial planners don’t seem to think highly of their consumer-popular counterparts.
Yet the success of those like Orman, Bach, and Ramsey – who, in the end, touch the lives of hundreds of thousands if not millions, while the “average” financial planner’s impact may only be measured by a mere few dozen or hundred clients – makes me wonder: Maybe there is something we as financial planners could – and should – learn from the success of those like Orman and Ramsey?
Although we often think of the IRA as simply another account, the tax law generally regards it as a quasi-entity that is separate from the individual who owns it. Both the individual and the IRA have their own separate tax rules that apply; intermingling money is not allowed (due to contribution limits), and even paying each others’ costs can get a client into some hot water. Accordingly, clients must be very careful when they use their own "outside" dollars to pay any form of expenses that are associated with the IRA itself. Fortunately, in a recent private letter ruling, the IRS did (re-)affirm that an IRA’s wrap fee expenses are an acceptable cost to pay on behalf of an IRA with outside dollars, while not running afoul of the IRA rules and limitations.
As the terms "being tactical" or "tactical asset allocation" become increasingly popular, more and more advisors now must decide whether they, too, are "tactical" or not when describing their investment process and philosophy to current and prospective clients. Traditionally, the dividing line was simply whether one was active or passive, a determination that could be made pretty clearly by looking at the portfolio: were there a bunch of actively traded stocks and bonds, or a series of actively managed mutual funds that did the same thing? With tactical, though, it’s no longer sufficient to simply look at whether there are stocks and bonds in the portfolio, or actively managed mutual funds; instead, some tactical investors implement their strategies by selecting only passive index funds, but still utilize them in an active, tactical process. Which begs the question: where exactly do you draw the line on being tactical?Read More…
Most planning firms pride themselves on providing great service to their clients, which often involves going to great lengths to satisfy client requests. Yet in reality, it seems that a lot of our intensive service efforts are less a function of what our clients asked for, and more about what we thought we should offer them. Perhaps a common example is something like quarterly performance statements; most firms say their clients "want" them, yet in truth most firms started sending them to clients on a quarterly basis before ever asking and surveying their clients about whether it was what they really wanted and needed. Now, of course, clients have an expectation of receiving them regularly, and weening them off of a currently provided service can be difficult. But in the end, did clients really need that service, or do clients only expect because we created that expectation for them, but now will feel like we’re taking something away to change it?