Career Development: How to Have a Successful Practice Retooling for the Future

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Career DevelopmentHow to Have a Successful
PracticeRetooling for the Future

• Deena Katz, CFP
• August 3, 2006

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Financial Advisors Changing Environment

• Clients Attitudes, Needs and Perspective Shift
• Deep Pocket Competition
• Commoditization of Product and Services
• Compliance Responsibilities Increase
• Staffing, Comp and Training Issues
• Technology Challenges

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From Yesterday to Today

• Baby boomers are aging
• Need to generate an income from assets rather
  than from labor
• Their planners (also baby boomers) have not
  planned for continuity
• Older clients may not be more loyal, as believed
• Huge number of HNW and non-HNW retirees
  pre-retirees need planning help
• The next generation is different

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Client Attitudes A New Paradigm
Yankelovich Live 1999
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Industry Migration
PROCESS
PRODUCT
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The Relationship Change

• Emphasis shifts from technical issues to soft
  issues
• Frequency of contact can increase rather than
  decline
• New stakeholders may enter the relationship -
  children and relatives
• Many clients may relocate - can you manage the
  relationship remotely?

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We used to sell transactions and give away
advice. Now we do just the opposite.
David Shaw, First Union Securities
Change in PHILOSOPHY
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Change in Client Attitudes

• Yesterday Avoid Lost Opportunity
• Today- Avoid Lost Capital

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A Fundamental Shift

• Away from investment management
• Toward financial/wealth advice
• Where does your value-add lie?
• Where do your clients currently believe it lies?

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Advice Change

• Shift from accumulation to decumulation, not
  just distribution
• Advising clients on new issues
• Lifestyle
• Downsizing
• Income management
• Part-time working
• Aging worker issues / benefits
• Family / intergenerational issues

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Back to the Future
1986 Focused Planning
1990 Asset Management
1974 Comprehensive Financial Planning
2005 Holistic Planning
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Articulate Your VISION

• Unique combination of choices that
• Builds on your current capabilities
• Positions you in the marketplace
• Differentiates your practice from the competition
• Meets your personal definition of success

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Client Value Disconnect

• Retention Gap
• What do clients value?
• What do YOU think clients value?

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VALUE NET
Suppliers
Complementors
Your Practice
Competitors
Clients
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What IS your Deliverable?
People Process Solutions
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InternsThe Secret Weapon

• Inexpensive, valuable and enthusiastic assistance
  
• Leverage your time more efficiently
• A source for new hires
• Expand your practice

PEOPLE
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Defining and Standardizing Deliverables

• Planning
• Analysis
• Implementation
• Reporting
• Reviews
• Rebalancing

PROCESS
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TANGIBLE CHANGE

• PLANNING From Paper Snapshot to Collaborative
  and Interactive Process
• OPERATIONS From seamless and expected to Up
  Close and Personal.

PROCESS
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Changes in Advice

• Basic Services
• Planning Scenarios
• Next Phase Employment
• Relocation Advice
• Estate Planning
• Distribution Issues
• Reserve Strategies
• Annuities
• Reverse Mortgages
• Life Settlements
• Low Return Environment
• Core-Satellite Strategies
• AMT management
• Expense Ratio Issues

SOLUTIONS
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Estate Planning

• Living Estate Planning
• Health Care Directives
• Living Wills
• Trusts
• Terminal Estate Planning
• Charitable Gifting
• Wills and Trusts

SOLUTIONS
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Distribution PlanningReserve Accounts

• Paycheck Syndrome
• Reserve 1-2 Years Income
• Portfolio Account and Reserve (expenses)
• Short Term vs Long Term Focus

SOLUTIONS
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SAFE WITHDRAWAL RATES

• The withdrawal rate of 4.15 percent is thus the
  SAFEMAX, or maximum safe initial withdrawal rate,
  which historically has always resulted in a
  30-year portfolio longevity, regardless of the
  year of retirement.
• William Bengen,
• Sustainable Withdrawals
• Retirement Redefined, Bloomberg, 2006

SOLUTIONS
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Annuity Retirement Income Strategies
SOLUTIONS
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100 systematic withdrawal
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30
20
Probability
10
0
65
70
75
80
85
90
95
100
Age
Probability of not meeting income goals
Assumptions are for a male, age 65, with a
1,000,000 initial portfolio and 50,000 annual
need after inflation. Inflation and returns for
systematic withdraw and immediate variable
annuity investments based on historical
performance from 1926 inflation 3.2, stocks
12.7, fixed income 5.7. Fixed annuity monthly
benefit obtained from WebAnnuities.com, assuming
male 65 living in Illinois. Assumed Investment
Return (AIR) 3.0. Fees 0.25 for systematic
withdrawal and 0.75 for immediate variable
annuity. No taxes are assumed.
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LOW RETURN ENVIRONMENT

• Returns Regress to the Mean
• Impact of Expenses, Taxes and Inflation

CORE SATELLITE
SOLUTIONS
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Change in Compensation/Pricing

• Industry Migration to Fees
• Professionals charge fees.
• Larry Klein, CFP/PFS, CFP
• in National Underwriter, Nov 7, 2005

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Increased Use of Fees

• Use of fees by channel percent of advisors who
  generate at least half of the revenue from fees
• RIAs 91
• Wirehouses 59
• Independent Broker-Dealers 39
• Regional Firms 30
• Banks 12
• Insurance 20

Source Cerulli Report 2003
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Revisit Profitability

• Fees and Advice
• Minimums
• Capacity
• Financial Metrics
• PROFITABILITY

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Cost Consideration Accounting 101
Reward for Labor (40)
Direct Expense
Revenue
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Overhead Expenses
Gross Profit
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Operating Profit
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The Defining Metrics

• Revenue per client for a number of clients
• Wallet share
• Pricing
• Revenue per advisor for a number of advisors
• Capacity
• Productivity
• Service level

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Example

• Overhead Salaries 500,000
• Number of Clients 250
• Cost per Client 2,000

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Think Profit as a Cost!

• Overhead Salaries 500,000
• Number of Clients 250
• Cost per Client 2,000
• Add Desired Profit Margin (25)
• 2,000 (1 - .25) 2,666

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Importance of Client Minimums

• Common trap
• I have no additional cost to service this client
  so an extra 500 is pure profit
• Problem
• If you had a restaurant and you had half of your
  tables occupied by people splitting a salad,
  would you be profitable?
• You make 2 on the salad but you loose your
  biggest asset seat availability
• How to avoid it
• Calculate the cost of your time
• Keep track of your capacity

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Segmentation

• Dividing client base into categories or
  markets to effectively target desirable clients

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Strategic Client Segmentation

• By Revenue Examples
• Set minimum fees 2 Million Inv. Assets, Min
  10,000
• By Profitability
• Set levels of Service Full Service, Asset Mgmt
  only
• By Demographics
• Set Age/Characteristics/Profiles 50s,
  Pre-retirees, Physicians, HNW, UHNW
• By Psychological Characteristics Family Stewards,
  Gamblers
• By Value Cluster
• Set shared experiences Widows, Breast Cancer
  Patients
• Set Risk Profile Risk Averse, Low risk
• By Client Needs Asset Protection, Stock Options
• Unique Needs

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Clients Wont Pay for Investment Stories
Anymore

• Risk Averse vs. Loss Averse
• Risk of Loss Outweighs Opportunity

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Clients will Pay to Sleep Well

• Protect Capital
• Secure Future

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Three Back Office Models

• Advisor Centric designed for one advisor. If
  there are more advisors, each process is
  replicated with the one advisor.
• Client Centric- Clients direct activities, either
  choosing from a service/option menu or asking for
  one-offs Advisors and staff accommodate.
• Process Centric- Standardized process with little
  or no exceptions

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Impact of being process centric
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Outsourcing Key to Todays Planning

• Reduce Overhead Costs
• Employees
• Processes
• Systems
• Space
• Expand Services
• Leveraging External Relationships
• Leveraging Technology

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What Planners Outsource
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OUTSOURCE
Is this task core to your competitive success or
profits?
Does this task assume more liability for the
practice?
Is this task routine that wastes time/money?
Is this a temporary or cyclical need?
Can be done less costly externally?
Can do cheaper in-house but takes too much
time/energy?
Does it take skills too specialized for a regular
employee?
Is this task one that no one likes to do?
IN-HOUSE
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The Paradox of Technology
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PLANNING SHIFTS

• From Paper Snapshot to Collaborative and
  Interactive Process
• Mass Customization
• 1 to 1

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LIFESTYLE AGGREGATION
Example
Email
Bills
Aggregator
Bank Statements
Direct feeds screens scrapes from various data
sources and provides the information as a
consolidated view
Airline Miles
May also provide mini-views suitable for
WAP-enabled devices
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Hard Copy
Web Posting
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Disaster Recovery

• The Plan
• The Time
• The Personnel
• The Logistics
• The Proximity

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Privacy/Protection

• Regulation
• Responsibility
• Cost

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Ever send reviews via email?
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When it comes to the future, there are three
kinds of people those who let it happen, those
who make it happen, and those who wonder what
happened." -John M Richardson, Jr.

DEENA KATZ, CFPEVENSKY KATZ/MOSS ADAMS,
LLP305.978.1079DeenaKatz_at_evensky.comDeena.Katz_at_
mossadams.com