- Part 8

Helping Affluent Clients Develop A Money Mission Statement To Facilitate Generational Wealth Transfer

January 1, 2020 07:06 am 5 Comments CATEGORY: Client Trust & Communication

Over the years, study after study has shown wealthy families are often worried about passing along their wealth to children, and the risk that those children may end out being “spoiled”, overly concerned about material things, and generally naïve about the value of money. Which is understandable given the extensive research into the correlation between negative (and sometimes tragic) outcomes and so-called “affluenza” (a lack of motivation and sense of isolation often seen in young individuals who are very wealthy). Compounding these worries, families often have difficulty discussing wealth and money with their children - often out of fear that pointing out the size of a potential inheritance will just amplify the problem – even though this lack of communication may just leave their children with “surprise” large inheritances that they have no idea how to handle.

Financial advisors, however, are in a unique position to help their wealthy clients in such situations by showing them how to have conversations about money with their families. Because while families may be uncomfortable and uninformed about how to talk about money, financial advisors talk about money for a living and often thrive on having these conversations! Moreover, helping clients improve their money communication skills not only serves to strengthen relationships within the family between family members themselves, but it also strengthens the relationship the advisor has with the family as a whole. Which is important when dealing with clients who are planning for wealth transfers, as it is very common for heirs to leave their family’s original advisor once they come into their wealth (and similarly is very common for surviving spouses to switch advisors after their spouses pass away).

When creating a process to help clients with money conversations, advisors can start by focusing on three core components: purpose, practice, and people. Money mission statements are a particularly effective way for clients to crystallize their purpose around money, as they are essentially declarations of the family’s long-term goals, attitudes, and beliefs about money. They can serve as powerful tools offering a framework for families to structure conversations around money and wealth with each other, ideally lasting through future generations. Meanwhile, money mission statements also help families practice not just talking about money, but also using it (and teaching children to use it) in ways that are consistent with the values they identified in their mission statements. Finally, involving the right people into the process – family members and relevant professionals across disciplines, such as tax professionals, estate planners, and financial therapists and/or psychologists – can ensure that support is available in all areas where it is needed.

Some considerations that advisors can take into account when creating a process to use with their clients include: 1) how to structure the actual process – how frequently will meetings with clients be held, at what cost, and which professionals will be included in the meetings; 2) how to market the process – will open client appreciation events be held to facilitate money conversations between families or will the process involve only private family meetings, and what channels will be used to advertise the new services; and 3) how to network with other professionals – which professional associations and resources can be leveraged for expertise and support, and what types of training opportunities might offer relevant experience?

Ultimately, the key point is that helping clients identify their values and beliefs around wealth is an essential starting point for advisors to guide their clients through the anxiety they may have around money conversations. By becoming comfortable with and gaining confidence in talking about money with other family members, families will have an easier time imparting core values to future generations slated to inherit wealth and preparing them to use their own assets responsibly and with purpose.

Why It’s Best To Measure Risk Tolerance With #FinTech Questionnaires Instead Of (Just) Risk Conversations

November 27, 2019 07:08 am 5 Comments CATEGORY: General Planning

There are numerous factors that every advisor must consider when objectively assessing a client’s risk tolerance. And if the concept of risk wasn’t already complex enough (as it considers a multitude of facets, including tolerance, capacity, composure, perception, and literacy), the variety of available tools to measure risk tolerance – from written questionnaires to various FinTech software tools and simply having the advisor-client “risk conversation” – often results in inconsistent (or even contradictory) results (especially given that clients vary in their own risk literacy to navigate such assessments in the first place).

In addition, recent research reveals that the modality of the risk tolerance assessment process can itself influence the results. For instance, one study found that when advisors verbally discuss risk tolerance with clients of the opposite sex, the client’s self-reported risk tolerance tends to be higher than if the client would have responded to an advisor of the same sex. This implicit gender-bias behavior is thought to be driven by subconscious psychobiological tendencies of the client, possibly influenced by a desire to appeal to a person of the opposite sex (even if not otherwise attracted to or interested in them).

In turn, alternatives to the conversational approach to risk tolerance – such as using pen-and-paper written questionnaires, or FinTech-based software tools for assessment – also appear to have an influence on the results. For instance, while scores for men and women were equal in a pen-and-paper assessment, men scored significantly higher than women in a technology-based video assessment that included the exact same questionnaire as the pen-and-paper test. And although it might be tempting to conclude that the pen-and-paper assessment is better for eliminating the gender gap between men and women, studies have shown that an inherent difference in risk does indeed exist between the sexes, where men generally report higher risk scores than do women. Given that this gender difference was preserved in the technology-based assessment suggests that perhaps gender-neutral technology-based assessments may have the edge over pen-and-paper assessments in most accurately assessing clients’ risk tolerance levels.

On the other hand, it’s also important to recognize that not all technology tools are similar for assessing risk tolerance. In practice, risk tolerance software can be best leveraged by understanding the methods used to measure risk tolerance and also by knowing how risk literate clients are, as certain assessment modalities may resonate more for clients depending on their risk literacy levels. For instance, clients who are highly risk-literate may relate better to econometric measuring technology, such as the software platform provided by Riskalyze. Other less risk-literate clients may relate better to FinaMetrica, another software platform that relies more on psychometric criteria than economically complex quantitative risk trade-offs.

Despite the advisor gender bias observed in risk tolerance studies between men and women and the appeal of gender-neutral technology risk measurement tools that are readily available, conversations with clients should not be eschewed altogether. Instead, they may be effectively used after a (software-based) risk tolerance assessment has been administered, and perhaps by a team of male and female advisors, not only to review the assessment with the client and help them understand the results, but also to supplement the process with a human element involved in helping clients improve their overall risk literacy. Because technology tools are still no match for a person-to-person connection for an advisor to gather the subtle nuances about their clients that software programs are simply unable to detect.

Ultimately, the key point is that there are many factors affecting how clients perceive their relationship with risk, and at least some of these are subconscious influences on human behavior. And as technology-based assessment tools may minimize a client’s bias that can arise in response to their advisor’s gender (while leaving the inherent gender gap that exists between men and women intact), connecting through conversations in person (after the technology-based assessment is administered!) is still the best way to grow relationships and develop trust with clients.

Cultivating Followership To Become A More Effective Advisory Firm Leader

November 11, 2019 07:06 am 0 Comments CATEGORY: Practice Management

Being a “great follower” usually isn’t thought of as an aspirational role, and in fact, being labeled a follower typically carries a negative connotation. Yet, the reality is that no organization can be effective without people to execute a leader’s vision. And good followers, especially those who are able to ‘manage up’, are actually what makes it possible for their bosses to develop good leadership practices in the first place.

In the “followership” model developed by Dr. Robert Kelley, the “effective follower” is an intelligent, motivated, and self-reliant individual who is driven by a desire to support a vision or cause that they understand objectively and believe in. And while they may not be interested in actually being a leader, it is their role as a complement to the leader that makes good leadership even possible. Because while the leader is responsible for setting the vision and communicating that vision to his followers, the effective follower is actually the one that takes responsibility for understanding the vision, coordinating with teammates, troubleshooting the process, and capably managing the tasks required to bring the vision and end goals to fruition.

Dr. Kelley’s followership model relies on a two-dimensional spectrum to classify different follower types. On one spectrum lies a follower’s inclination to think independently and critically – is the person able to solve problems on their own, or do they simply operate rotely, coming to a standstill when they are faced with a novel problem? On the other end of the spectrum, the engagement level of the follower is assessed – is the person actively engaged in the work, making proactive choices and paying attention to what’s happening in their environment? Or are they passively waiting for cues from others, telling them what to do next? The “effective follower” is high on both spectrums – they are actively engaged, and display highly independent, critical thinking skills. Whereas “Sheep Followers” are low on both spectrums, “Yes People” are actively engaged but with a proclivity for dependent, uncritical thinking. “Alienated Followers”, meanwhile, are very capable of being independent, critical thinkers, but are not actively engaged in their work, and “Survivors” can go either way on both spectrums – they adapt their behavior in a manner so as to simply ‘survive’ in their jobs.

This concept of followership aptly applies to many financial advisor-employees who may not be immediately interested in running or starting a firm of their own, because it is primarily the process of financial planning that many advisors love – not the management of an organization. And the most effective advisor-employees will often be the ones who recognize that the work they do and love actually supports the broader goals and vision set forth by their firm’s leadership, and who are motivated to help their firms reach those specific goals.

Thus, it behooves the financial advisors who represent the leadership of their firms to support their advisor-employees into “effective followership” roles. A task that can be accomplished by simply having honest discussions with employees, consciously supporting their advisors by providing them with positive guidance or the tools needed to do their jobs well, or by actively designing more formal training programs helping employees understand the different styles of followership. Importantly, leaders who tend to focus on transformational growth, who are empathetic and emotionally intelligent, and who know how to reward employees who contribute to supporting the firm’s vision are those who are most effective at cultivating good followership practices in their employees.

Ultimately, the key point is that good leaders and good followers depend on each other; neither is more important than the other in achieving the firm’s vision. Moreover, firm owners can support their advisor-employees with the principles of followership by clarifying the synergistic roles of leaders and followers, facilitating open discussions and frank conversation about the firm’s vision and goals, and offering guidance and mentorship to employees who may be interested in eventually becoming leaders themselves.

Future Self-Continuity: How Envisioning The Future Is Important To Financial Planning

October 16, 2019 07:10 am 3 Comments CATEGORY: Client Trust & Communication

Developing good habits, like eating healthy, exercising, and saving for a rainy day, is a challenge that we all share. Clients of financial advisors are no exception, as no matter how carefully advisors craft financial plans and formulate sensible strategies to help clients achieve their goals, the majority of those clients struggle with following through on their tasks, even though they are 100% on board with the strategies they’ve agreed to adopt!

Future self-continuity, i.e., the ability to relate to one’s ‘future self’, is one factor that may explain why some clients struggle with plans they know, on a practical level, make sense to follow, but still have difficulty following through on the tasks they need to carry out. Research in the area of future self-continuity (FSC) – which examines three general areas: relatability, vividness, and positivity – suggests that increasing future-self continuity (i.e., improving one’s ability to relate to their future self) can increase financial self-efficacy, leading to a higher likelihood that clients will follow their financial plans and carry out the tasks outlined in their plans.

The first area of FSC research, which examines relatability, asks how a person’s perception of their ‘current self’ compares to their vision of their future self, with respect to goals, values, and priorities. This is important because the more a person considers their future self a completely different person (versus an older version of themselves) the less likely they will be inclined to act on something today to benefit their future self. For example, someone who identifies their future self as a stranger may have a difficult time committing to saving for retirement on a regular basis, even though they may understand intellectually that it is for their own benefit. The second area of research, vividness, asks how clearly a person is able to envision their future self, factoring in physical and circumstantial changes. For example, a client who has recently divorced (or whose spouse has died) that is able to clearly envision a version of their future, without their past partner, may have an easier transition recovering from what can be a devastatingly difficult situation. And the third area of research, examining positivity, asks about the level of esteem one has for their future self and how important is it for the future self to be happy and successful. Which is essential for achieving goals in a financial plan, because the more a client feels their future self is worth planning for, the more likely it is that they will follow their plan.

Ultimately, the key point is that FSC is a useful (and simple!) tool that advisors can use to help clients better relate to their future selves, which can make it easier for them to follow the strategies implemented in their financial plan, as it’s the future self who will reap the rewards of their goals. Assessing FSC can also be useful for advisors to gauge any psychological gaps that may exist for a client between their current and future selves. Not only can advisors use these concepts to determine whether to check in with their clients more or less frequently (as clients who are less attuned to their future selves may benefit from more frequent reminders of why sticking to their plan remains important in the long run), but it can also help the advisor identify the underlying reasons why their client may find it challenging to stick to their plan in the first place.

Ambiguous Loss: Helping Clients To Grieve Even Before A Loved One Passes Away

September 25, 2019 07:03 am 1 Comment CATEGORY: Client Trust & Communication

Loss is an experience that all humans share at one point or another, and when a loved one dies, the grief is undeniably and devastatingly certain. But what about the grief that we might feel for a loved one who is still alive, only physically separated from us? Or for one who is mentally incapacitated, but who no longer has the capacity to recognize us? These feelings of grief for someone who is still alive, but no longer present (either physically or psychologically), are referred to as ‘ambiguous loss’. For example, some clients might have relatives who are no longer mentally lucid (psychological ambiguous loss), and some may have loved ones who need full-time care provided by an assisted living facility (physical ambiguous loss). And as would be expected with extended human lifespans and increasing cases of mental incapacity that comes with a growing, older population, feelings of ambiguous loss are on the rise.

Because the average human lifespan has increased over the last several decades, we are now at a point where family members are commonly expected to take on the responsibility of caring for elderly parents or spouses, many of whom are afflicted with neurodegenerative diseases such as Alzheimer’s and dementia. Accordingly, advisors may find themselves dealing with clients suffering from ambiguous loss, especially when conversations are raised around incapacity planning and estate planning.

While most financial advisors don’t have formal training in grief management, there are some basic guidelines that can be effective in working with clients suffering from ambiguous loss. As a starting point, mentally preparing for client conversations, for example, can include a series of questions that advisors ask themselves about their own personal attitudes around grief and loss in general, and also around understanding the situational causes of their clients’ ambiguous loss. Understanding the daily routines and relationships that the client may be struggling with can also help the advisor relate more empathetically with the client. And starting any incapacity discussion as early as possible to give clients ample time to process their feelings of ambiguous loss while adjusting to their new responsibilities can prove helpful for the client to transition through change.

Additionally, the advisor can support clients by acknowledging their feelings of ambiguous loss, and helping them adjust to the ambiguity they face by planning for a broad range of financial scenarios. This can help clients attain a level of certainty over what they have control over versus what variables in their situation will inevitably remain unknown, and that may eventually need to be addressed. And last, the advisor can play an important role in their client’s life by helping them through the difficult process of understanding and accepting what is happening to them, by simply giving them time and space to share their stories when they are ready to do so.

Ultimately, the key point is that ambiguous loss is commonly experienced by many people, and advisors should be prepared to work with clients and their issues in a sensitive yet productive manner. The conversations will be difficult and may be highly charged with emotion, but offering compassion and providing support can have a huge impact on the client’s ability to make sound financial decisions, as well as establish trusting relationships not only between the advisor and the client, but with the client’s support system as well.

Developing Your Advisory Firm’s New Hire Training Program With A Growth Mindset

July 22, 2019 07:06 am 0 Comments CATEGORY: Human Capital

Back when the financial services industry was focused almost exclusively on product sales, the process of “training” new employees was relatively straightforward: either new hires were able to learn to sell enough to survive and build a book of business, or they didn’t… and moved on to do something else. However, as the industry has evolved into a more sustainable, advice-centric model, advisory firms are discovering that, unlike most other professions, there aren’t many standards when it comes to training new entrants to progress down a (well-defined) career path into the profession.

And in the modern era, the stakes are higher when it comes to training new advisors. As while in decades past, firms didn’t put much into training new advisors (beyond basic sales training) and therefore didn’t have much to lose if a new advisor “didn’t make it”, modern advisory firms trying to develop a new advisor to be able to manage ongoing relationships (for ongoing revenue) have to incur far more salary expenses until that new advisor develops the necessary skillets to be a productive member of the team.

Accordingly, advisory firms that are looking at steady and ongoing growth are increasingly focusing on developing a repeatable in-house training program, or “boot camp”, to accelerate a new advisory hire’s learning curve to get them through that process faster. Where systematization reduces the cost to the firm if the hire doesn’t work out. And in the extreme, can actually make newer employees so valuable, so quickly, that the firm might even assume that participants will actually move on to another firm at the end of the program and still be successful.

Yet, while a training program is certainly better than none at all, perhaps more important is inculcating into the firm’s culture a “Growth Mindset”, which fosters an environment that encourages learning and talent development, seeks out challenges, and understands that improvement is impossible without failure. Which is especially important in the advisory profession, where new entrants into the field might have a good amount of technical knowledge, but can only learn the (arguably more) important interpersonal skills through experience.

The real key to the Growth Mindset, though, is simply recognizing that if growth is natural, employees can learn anything they need to learn to be successful, as long as they have the right attitude that they can learn it in the first place. Which means it’s crucial that the firm itself is characterized by an attitude of, “I may not be able to do that now… but I can learn how!”

Ultimately, the key point is to realize that adopting a Growth Mindset can be an invaluable step towards helping an advisory firm better educate, retain, and grow a team that sets high expectations, challenges team members throughout the firm, and gives positive reinforcement, not in the context of innate personal ability, but against a backdrop of a process fosters their long-term success and reinforces the firm’s culture.

What Really Motivates Financial Advisors – Intrinsic Vs Extrinsic Drivers

June 17, 2019 07:06 am 0 Comments CATEGORY: Practice Management

The traditional view of financial advisors is that they are highly motivated by the income potential and upside opportunity of being a financial advisor… and thus why the compensation system for most advisory firms is still predicated on an “Eat What You Kill” performance-based approach. For those who have the business development skill set, and a motivating desire to be rewarded for it, an advisory career can be incredibly lucrative.

However, when evaluated in our recent Kitces Research study of “What Financial Advisors Really Do,” it turns out that the financial rewards of being a financial advisor are actually not the primary motivator after all. Instead, the primary drivers for doing comprehensive financial planning are an intrinsic desire to help and serve others and to apply one’s talents and interest in personal finance. Which happens to also be financially rewarding… though even then, the income potential of being a financial advisor is more about work/life balance and lifestyle flexibility than just the extrinsic motivation of the income potential itself.

Which is significant, because it suggests that the financial services industry at large may not actually be communicating the right messages to make financial planning an appealing career choice in the first place. Simply put, in an industry dominated by money, it turns out that the mentality of a financial planner truly is about helping others with their money, more so than simply being financially rewarded for the advice and getting clients in the first place.

On the other hand, the data suggests that over time, financial advisors who have spent some time in the industry have largely managed to find the pathway that best fits their natural style. Advisors who are more interested in upside income potential do tend to either build their own advisory firms (hiring the staff and support infrastructure around themselves to grow larger) or join large firms where they can pursue a path to partnership. While those most interested in work/life balance are more inclined towards being – and remaining – solo advisors, where they can have ultimate control. And those who really are the most extrinsically motivated by the income potential itself – and not necessarily the desire to serve – are more likely to stay in commission-based channels where such motivators are best rewarded.

The key point, though, is simply that it’s important to understand the true motivators for financial advisors, both for the industry to attract more next-generation talent to close the talent gap, and also for individual advisory firms that want to attract and retain talent. Because when the primary drivers of motivation are intrinsic – a desire to apply one’s own personal interest in personal finance, combined with a desire to help and serve others – offering too much extrinsic motivation, in the form of variable compensation and bonuses, can actually demotivate financial advisors from doing their best work for clients! Especially as a growing number of next-generation advisors are increasingly showing a motivational preference for stable pay over upside income potential anyway!

Finding Your Own Money Story To Better Communicate With Clients

June 5, 2019 07:06 am 1 Comment CATEGORY: Client Trust & Communication

It’s difficult to give financial advice to others if you don’t have your own financial house in order, first; not that anyone – including financial planners – is “perfect” when it comes to their own money, but in the end, if financial advisors can’t even follow the advice and go through the process themselves, it suggests that, at the least, there’s room for improvement in the advice itself or how it’s delivered.

In fact, arguably, one of the best ways for financial advisors to really understand what it takes to give good financial advice is to better understand their own financial challenges and what they need to change to improve their own situation… akin to how therapists become better at providing therapy by going through the process themselves.

Money exercises that financial advisors can go through (by themselves, perhaps for future use with clients as well) include the Money Egg (sketching out some of your earliest money memories, reflecting on whether they were positive and negative, and considering how those embedded money memories may be impacting your decisions today), assessing your Money Scripts (do you tend towards Money Vigilance, Money Status, Money Worship, or Money Avoidance?), and considering how your prior money experiences may have created Money Narratives that now impact (or even burden) your everyday decisions (e.g., my advisory firm is a reflection of my self-worth, so I have to keep growing my firm to grow my status… even if I really don’t financially need a larger firm at all!).

Ultimately, many (or even most) financial advisors may feel uncomfortable doing such deep self-reflection on their own financial situation and may find it awkward and intimidating to get help and outside advice around their own money challenges. Yet at the end, when clients are asked to do the same things themselves with a financial advisor, arguably going through the process as an advisor provides a good perspective (and perhaps even empathy-building) for the stress and emotional turmoil that clients may be feeling in the financial planning process as well!

Risk Literacy And Interpreting The Probabilistic Risks Of Investing And Retirement Planning

May 8, 2019 07:03 am 2 Comments CATEGORY: Client Trust & Communication

The concept of “risk literacy” may be new to financial advisors, but it is not a new construct. In fact, risk literacy – or the ability to understand the probabilities of risk and internalize them to make a good decision – has been applied in the context of the behavioral sciences for years. Thus, why it is so common now to talk about the risks of a medical procedure in terms of the mortality or survival rates… so people can make a good decision with a thorough understanding of the risks involved.

Except the challenge of risk literacy is that not everyone truly understands probabilistic risks. Which is concerning not only in the world of medicine, but also financial advice. Especially with the rising popularity of econometric-style risk tolerance questionnaires that ask investors to choose from a series of probability-based trade-offs… without first clarifying whether the investor even truly understands how to weigh those trade-offs. Or similarly, making a decision about which strategy to pursue for retirement based on the Monte Carlo probabilities of success (that, again, not all prospective retirees may really have the risk literacy to understand properly).

The good news, though, is that it turns out risk literacy can be taught. It is a function of financial education, and investors can be helped to make better decisions with a supporting explanation and education about the probabilities. Which helps to ensure that investors or prospective retirees really are considering the odds properly.

The key point, though, is that it’s not safe to assume that everyone understands “the odds” when those probabilities are presented to them. In fact, researchers often use a (relatively short and feasible for financial advisors to use) risk literacy assessment to find out whether the individual really understands probabilistic risks, before making a decision. Which means perhaps it’s time for financial advisors to consider using such assessment tools as well. To either ensure that clients really do understand the risks they’re taking. Or at least, gain a better understanding of which clients need to have an additional explanation to really ensure they’re comfortable with the (potentially risky) path they’re choosing to take!

How Much Does A (Comprehensive) Financial Plan Actually Cost?

April 8, 2019 07:02 am 5 Comments CATEGORY: Practice Management

It is a simple question: how much does it cost to get a comprehensive financial plan? Yet despite the rising popularity of financial advisors offering financial planning services, remarkably little has actually been published about what financial advisors charge for the service. Which is striking for both consumers – who want to know what a plan might cost – and for financial advisors themselves, who may want to benchmark whether the pricing for their financial plans is “reasonable” relative to their advisor peers and competitors (rather than solely setting the price based on its time-and-labor cost to the advisor).

In our latest Kitces Research survey on “What Financial Advisors Actually Do”, we found that the average cost for a standalone comprehensive financial plan is $2,400 (up from $2,200 in a 2012 study from the Financial Planning Association). Notably, though, our research finds that more and more advisory firms who offer financial plans actually are charging for them separately – rather than merely bundling the plan into their AUM fees – and in fact there is a growing rise of financial advisors who are charging for financial plans solely in a “fee-for-service” manner (hourly fees, monthly subscription fees, or annual retainer fees), rather than blending fees with AUM at all.

In addition, not surprisingly, financial plan fees did vary significantly from one firm to the next, although as it turns out, the biggest driver of financial planning fees is not the cost (i.e., how long it takes) to produce the plan, nor even how comprehensive the plan is, but the affluence of the client themselves paying for the plan in the first place. In other words, clients with more financial means to pay for a financial plan tend to pay more for a financial plan. Opening a debate of whether more affluent clients pay more for financial plans simply because they can afford to do so, because they tend to use more experienced advisors with deeper expertise (even if “the plan” itself is the same), or simply because their higher net worth and affluence means they perceive more value in the financial plan, to begin with.

On the other hand, it’s notable that, because financial advisors only spend about 50% of their time on client-facing activities in the first place, advisors are still greatly limited by how many financial plans they can do and how many clients they can support, which ultimately limits their ability to charge for their time and generate revenue. In the end, the average advisor generates a fee of about $150/hour for their client-facing activities… even as they only spend about 50% of their time on client activities that generate fees in the first place.

On the other hand, the research does indicate that advisors who have advanced professional designations, and more years of experience, do manage to command higher financial planning fees in the marketplace. Though, again, this appears to be less a function of advisors with greater credentials and experience charging higher fees, per se, and more the result of experienced and credentialed advisors being more effective at attracting the more affluent clients who are willing to pay higher fees and perceive greater value in the financial plan in the first place. Which means in the end, when it comes to setting the cost and determining value, the answer to “what should a financial plan cost” truly is in the eyes of the beholder.