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Article / Updated 10-20-2023

To stay competitive, companies have to adapt and adopt a progressive feedback structure. The ones leading the pack are those whose leaders recognize that their talent development strategies need to evolve with the changing demographics of their workforce. Successful feedback and reviews are absolutely critical. Oftentimes an employee’s exit can be traced back to a poor review session with his manager. If you’re not rethinking your review session to appeal to Millennials’ unique needs, you’re going to slowly (or quickly) see your turnover numbers creep up. When Baby Boomers entered the workforce, they entered into stiff competition with millions of peers to try and get ahead. In order to better understand how they stacked up with others, Boomers collectively created the annual feedback process. At the time, this yearly review was considered revolutionary. Fast forward 20 years and you had Gen Xers growing weary of the style and infrequency of the yearly evaluation. It felt too formal, too delayed and, in a way, insincere. Xers had different objectives and priorities from their Boomer predecessors. The old model wasn’t working for them, so they shook things up by asking for more regular and transparent feedback. Enter Millennials. They’re the first generation in the workforce that grew up with the Internet. It has shaped who they are and what they expect, and they’re bringing those new expectations into the working world. Don’t be afraid to examine your current review structure and ask questions, such as: Your review policy should be a living, breathing, evolving thing — has it been touched in the last ten years? Five years? Past year? Do your managers give both formal and informal feedback? Is there flexibility in feedback frequency, or is the rate static? Do you customize your approach based on the generation and/or the individual’s preference? Are you staying abreast of what your competitors, as well as the best-of-the-best, are doing? If you answer “no” to any of these questions, read on. If you make a 180-degree shift in the way things used to be done, you’re going to face an unhappy flood of Xer and Boomer employees. Make sure you’re giving people a few options. Maybe your Xers don’t want a weekly check-in and once a month serves them just fine. Don’t ever assume; take the time to ask. And always keep in mind that change is hard, and in the workplace, if you’re trying to retain all generations, evolution trumps revolution. Know what works for Millennials When strategizing about how to deliver feedback to Millennials, don’t spend sleepless nights daunted by how much you need to change. Yes, Millennials are wired a bit differently, but at the end of the day, they’re just people. To make things easier for you and more valuable for them, it’s helpful to get a handle on understanding what works for them. Chances are you’ve got a pretty good grasp of how to communicate with Baby Boomer and Gen X employees, but start thinking (or asking!) about what works for Millennials before you sit down for a review. Ask them to self-evaluate before they pontificate One of the first steps to make a review session work for Millennials is to give them time to think and evaluate first. This practice is not uncommon to Millennials — they’ve likely been doing it from elementary school all the way through their MBA programs — but that doesn’t mean they do it without prompting. Sitting down and listing all the things you’ve done right and wrong isn’t necessarily a fun task for any generation, but it certainly is worthwhile. Prior to an informal or formal review session, ask Millennials to reflect on their performance. Ask yourself whether you know what to say While it may seem obvious, do your best to think before you speak. Consider phrases/words/thoughts commonly used in the workplace that should be avoided and replace them with something more savory. Don’t Say Do Say Three months ago … Last week or a couple of hours ago … Why do you need so much feedback? How much feedback do you prefer? What could you have done differently? What did you do well and what would you change? Back in my day … What has worked for me may or may not work for you … Let’s talk about your weaknesses … Let’s focus on your strengths … Ask them Yup. That is it. Just plain ask them how they like their feedback. In all likelihood they have lots of thoughts on the topic. But you can’t forget that, though they belong to the Millennial generation, each employee is an individual. Take the time to have a conversation with them about how they prefer to receive feedback. Come to the meeting prepared with a proposed review session and format. Ask them for their thoughts, amend as necessary, and go from there. If you’re feeling adventurous, ask them whether they need anything different from you as a mentor. How to differentiate between formal and informal feedback Feedback sessions lie on a moving scale of formality, where all levels are equally important, but knowing when and how to go about each one … well, that requires a dash of experience with a pinch of emotional intelligence. That said, Millennials show a marked preference for the informal end of that scale. They’re an inherently informal generation because they grew up in an environment that allowed for constant and candid communication. Facebook, Twitter, and Instagram all allow Millennials to give feedback on people’s lives with a thumbs up/heart icon/emoji or comment. An acquaintance might post a recent picture of a vacation in Spain, and the response might be “Whoa, Jordan, those bullfighters are impressive. Looks fun!” Even if they’ve spoken to Jordan only a handful of times, they’re comfortable commenting (in a way, giving him feedback). They’re so accustomed to constantly giving and delivering feedback via these informal platforms that, to a Millennial, informal is the new normal, to the point that very formal feedback can stir up anxiety and feel a bit uncomfortable. In stark contrast, other generations grew up in an environment when the norm was being left alone to fend for yourself unless something was going terribly wrong. In the workplace, older employees wait for the formal review process and use it as a scale to track progress over time. In this format, you condense a half year or year’s worth of comments into a couple-hour time block. The window for feedback is typically opened for that brief period of time before being shut again for all but the most immediate and/or pressing needs. Politically correct language and documentation are standard, as well as professional attire and thorough preparation for every single review session. There’s clearly quite a difference between the formal standard that Xers and Boomers are accustomed to and the more informal check-in that Millennials hunger for. In all likelihood, all your employees — whether they’re 25 or 68 — prefer a healthy mix of the two (with Millennials tipping the balance in favor of the informal). To make sure that you deliver, you must first understand what differentiates the formal from the informal. Formal feedback looks like this: The review is often scheduled months in advance. Pre-work is a prerequisite. The review room is organized in a specific way (for example, the manager deliberately sits across from the employee). The review always takes place in person. It lasts for a set period of time, typically one to two hours. Criticism is carefully couched, using phrases like, “This is an area of opportunity.” Professionalism and polish in communication and dress are expected. The review is meticulously documented. Communication is (mostly) one-directional. Extended periods of time lapse between sessions. Informal feedback, on the other hand, looks more like this: Feedback is delivered instantly or within a couple hours or days. Little or no pre-work is required. A public place or open office is often preferable to a closed-door office. Virtual communication is an acceptable alternative to meeting in person. Time frames are short and flexible, typically 5–15 minutes. The style of communication is casual and open — direct, but not abrasive. There are no expectations regarding decorum or dress. Documentation is scant, aside from determining next steps. Communication is two-directional. Flexibility is key in finding time that works, which may often be determined on the fly. Each individual may prefer feedback that is particular to his career and lifestyle, so what works for one person won’t necessarily work for another. It will take a bit more work upfront, but make sure to curate your approach based on the needs of the individual. Determine the right frequency for performance reviews It’s no secret that Millennials want constant feedback. Of course, they do — they’ve grown up in an instant world and know that the sooner they learn something needs fixing, the sooner they’ll be able to fix it. The work environment, however, isn’t necessarily designed to accommodate that model, at least not at the present. HR policies, overscheduling, and lack of resources can all get in the way of instant communication and evaluation. As a manager, you work with the tools at your disposal. Keep the lines of communication open with both your higher-ups and your direct reports. To ensure that you’re determining the right frequency — one that works for you, your employee, and your organization — follow these three steps: Ask. Get a gauge of how often the Millennials you’re managing want your thoughts. You will find that it varies from person to person, and you’ll save valuable time that might be lost in making assumptions. Research. Seek insight from fellow leaders about what works for them. How often do they meet with their teams, and how rigid or flexible is that schedule? You can even take it a step further and track what trends and best-in-class examples are being referenced in the news and apply those concepts to your own practice. Act. After asking and researching, set a plan into action. Pilot a feedback timeline for a month and then review until you find what works. The following are signs that the frequency may be too high: When you meet with your direct report, you have trouble coming up with a review topic, whether the feedback is good or bad. You spend all the review session talking about your personal lives. Your own work is suffering. The Millennial keeps cancelling your sessions. There’s not enough time between your conversations to see positive changes in performance. You’re bored. They’re bored. At most, stick with a default frequency of once a week. Younger generations will favor informal feedback in the moment, but in many cases that just may not be practical. Instead, as a base, schedule one-on-ones regularly for 15–30 minutes. Set a time and a location, and make it a habit. That way you and your reports will grow accustomed to these check-ins. It’s up to both of you to assess and readjust the necessary frequency from there.

Article / Updated 10-20-2023

If you’ve ever struggled giving a Millennial feedback, you’re not alone. It’s hard. There is no one way to do it, and it doesn’t always get easier with the more people you’ve led or managed; however, one thing is true. Whatever you’re feeling, you’re not alone. Others have felt your pain, your strife, and your desire to be better. A Millennial is just as much of an employee as someone from any other generation though, so there’s no getting around this. Here’s a brief guide on how to navigate the ins and outs of feedback with Millennials. The delivery of tough feedback No matter the generation, level, or age, delivering tough feedback is rarely a fun process. It can lead to a defensive attitude, a reluctance to change, or even a desire to leave. But everyone deserves the opportunity to identify and improve on sore spots, and you’re entitled to the opportunity to improve your team and fix problem areas. The way Xers prefer to receive difficult feedback (they most likely want you to rip off the Band-Aid as quickly as possible) doesn’t necessarily work best for Millennials. The challenge When you deliver tough feedback to Millennials, you worry that they’re worrying. You may be nervous that they’re starting to think too hard about what they need to do differently. Chances are that what you thought was a helpful conversation became one of their worst work moments ever. Possible cause Millennials were raised in the self-esteem movement and weren’t given the tools for handling criticism at a young age. While other generations learned how to let it roll off their backs or deal with it and move on, younger generations internalize the feedback, all while merging their personal lives with their professional lives. The remedy If they’re internalizing your feedback, it typically means they care … a lot. They likely view you as someone whom they want to impress. Maybe they view you as their confidant and coach. It may not seem like it in the moment, but this is actually good, so here’s how you can move past the discomfort: Get comfortable knowing that the situation may get tense or awkward. Don’t waste time getting to the tough feedback. Deliver your critiques in an appropriate time frame, the sooner the better. Provide a structured road map to improve. Follow up with next steps. Be a voice of encouragement along the way. What to do if a Millennial cries It’s most managers’ and leaders’ worst nightmare — what happens if a Millennial starts blubbering, you panic, and you don’t have tissues to provide for them? Okay, not all Millennials cry, that’s an exaggerated depiction of what truly transpires. But it’s more likely to happen with this generation, especially in their earlier years at work. You better start prepping now if you haven’t already. The challenge Millennials can sometimes internalize evaluations and react defensively or sensitively, occasionally resulting in watery eyes, drops of tears, or a minor breakdown. This outcome can prevent a productive review session if what you intended as helpful words of change were instead heard as scathing criticism. Possible cause Millennials grew up in an environment that asked them to be vulnerable and open with their feelings, whereas other generations learned early on how to control their emotions and keep their poker faces intact. Additionally, Millennials may be taking feedback personally, not just professionally, and a comment about their work may be heard as a comment about them as a person. The remedy Although the tears may be distracting, confusing, and even a bit frustrating, you can take these simple steps if a Millennial is crying: Don’t automatically get frustrated. Don’t draw too much attention to the tears. Continue with your thought. Ask if there’s anything the Millennial wants to say. Welcome the option to talk later. Don’t respond with pity or condescension. What if Mom and Dad get involved? Millennials have a close bond with their parents and view them as trusted allies and quite possibly even friends. Sometimes this relationship can go a bit too far if the doting parents become meddlesome in the work environment. It started when Millennials were young, and it’s very different than the way their parents were raised. Millennials are growing up and becoming more independent from their parents — especially older Millennials who have been in the workforce for well over a decade. Luckily, that means fewer calls from Mom and Dad. But when it comes to younger Millennials and even the generation after them, their folks may still be around for support — much to the chagrin of managers. The challenge Millennials’ parents may overstep and contact a work environment to discuss a feedback session gone wrong, amongst many other things. It comes across as unprofessional, annoying, and inappropriate. Possible cause In many cases, your Millennial employees may not know that their parents are calling. They likely discussed the situation with their parents, asked for advice, and may be seeking a solution, but the parents took it upon themselves to help solve the problem for them. Your Millennial employee likely didn’t set his parents on you like a pack of Rottweilers. The remedy Consider some damage control and prevention before griping about meddlesome Boomer parents. Thank the parents for their interest, but let them know you need to speak directly to their Millennial child regarding anything work-related. Ask the Millennial about the incident. Explain to the Millennial why his parents’ involvement can actually be hurtful, not helpful, to his career. Confront it and move on. Don’t hold the incident against the Millennial or use it as a reason to think poorly about him. Use the close parent-child relationship in a positive way to boost your company’s employer status. Consider creating an environment that welcomes parents to the office in a “bring your parents to work” day. This can be a great marketing strategy. I think my Millennial is about to quit … If Millennials leave an organization, it can likely be traced to the last time that they received feedback. You don’t want that last review session to be the ultimate reason that a Millennial decided to leave the organization. The challenge A Millennial receives a firm review, and rather than planning how to change her behaviors or work, she starts plotting her exit to find a workplace she feels will be more conducive to her growth and career improvement (or hurt her feelings less). Possible cause If Millennials receive critical feedback without a clear structure of how to improve, they’ll feel deflated instead of motivated. If weaknesses are focused on more than strengths, Millennials may be wondering whether they do anything right. What are my contributions? Why am I even here? While other generations wouldn’t have dreamed about leaving their job without finding another one, Millennials believe that it’s worth it if they don’t have to sacrifice more of their life in a job that makes them unhappy. The remedy Move quickly and swiftly if you want your Millennial to stay: Schedule an informal meeting. Have an honest check-in and provide the option of a follow-up check-in. Give the Millennial the opportunity to give you feedback. Ask whether a clear structure is in place for the Millennial’s growth and improvement (if not, put one into action). If things aren’t going well for you or the Millennial, consider that it may be time for the Millennial to leave.

Article / Updated 03-30-2019

Many paths lead to a career as a successful financial advisor or financial consultant. These paths can be broken down into three categories based on your starting point: right out of college, within the industry, and outside the industry. Getting started in the financial advisory industry fresh out of college If you just graduated from college with a degree in finance or economics, you may have determined already that becoming a financial advisor is the path for you. After all, studying related subjects at a college or university prepares you perfectly for this profession, right? Wrong. Having some education in the financial arena can be helpful to understand financial terminology and concepts and to pursue further professional designations. However, it doesn’t adequately prepare you for the day-to-day work involved in being a financial advisor. One of the most common ways graduates get their feet wet is to work for one of the big investment banking firms. Years ago, these firms offered months-long training programs that focused on developing the sales skills and product knowledge required to be a functional financial advisor. Today, training is much less robust, and newbies must fend for themselves to acquire clients. To give yourself a leg up, join an existing team or apprentice with a solo practitioner. Broker/dealers have wide variety of practices within their networks. If you’re working with a recruiter for one of these firms or, better yet, proactively approaching one, tell her you’re looking to apprentice to an existing solo practitioner or advisor group within the branch. Don’t hesitate to make this request. After all, you’re fulfilling a need that most firms are struggling with — namely, replacing an aging workforce with younger tenured advisors. In addition, your targeted self-promotion and assertiveness gives you an edge over shyer candidates who don’t have what it takes to grow the business. As an apprentice, expect to earn a salary and perhaps a bonus based on revenue growth. (Salaries of financial advisors depend on their individual success and abilities to acquire clients.) The biggest benefit, however, is that you get hands-on experience in the field, just as residents at medical centers and associates at law firms gain practical experience on their way to becoming fully fledged members of the profession. You’ll also avoid the rat race of having to find new clients right out of the gate, something that’s difficult for new college grads whose network consists mostly of fellow twenty-somethings who are also looking for jobs. Avoid firms that hire new college grads merely to increase their product distribution instead of to develop highly qualified financial advisors. Unfortunately, this exploitation of new college grads is common in the industry. These work opportunities are fine if you’re looking to make a quick buck in commissioned product sales, but if you’re pursuing a lifetime career as a professional, don’t settle for less than a position that offers mentorship and continuing education. Changing careers from another financial job within the financial industry If you have a financial job and are beginning to crave a greater purpose — by adding valuable financial advice and guidance to the lives of people in your community — then becoming a financial advisor may be just the right move for you. You probably have all the skills and experience required to succeed. You simply need to redirect them. Applying your accumulated knowledge and insight on how and why the financial world works the way it does is a great way to deliver value to clients. Not only do you have a specialized background that can be of great benefit, but you’re also in the perfect position to be a true client advocate, looking out for your clients’ interests in a way that only someone with financial services experience (for example, banking, securities trading, or product wholesaling, to name a few) can. It’s a great differentiator too, which can help you attract more clients in your early years. The evolution of financial technology has driven many traditional Wall Street jobs to extinction. As one major example, a stock exchange floor specialist used to be the best job you could have on Wall Street. The role required a complicated combination of brute force and intellect, which had at its core the responsibility of managing the market around a particular set of stocks. This role is almost a relic of the past, as technology has reinvented how markets facilitate the meeting of buyers and sellers. Today, institutional bond market traders are slowly getting the message that their roles are disappearing, too, as many more transactions are being organized and executed through peer-to-peer networks and exchanges. Gone are the days where a client would need an well-connected bond broker with a great network of bond traders at various dealers across the country to find a good deal. With the advent of technology, profit margins have been squeezed even more, benefitting investors while slowly eroding the status quo. These backgrounds and others in the financial field can significantly ease the transition to becoming a financial advisor, providing the knowledge and insights to serve clients more effectively. Changing careers from outside the financial industry Few things in life are worse than feeling stuck in a job or on a career path you don’t like. After college, most people who major in general studies set out on a career path by happy (or unhappy) accident as they look for ways to apply their education to a worthy endeavor. Years may pass, and then one day, they wake up to realize that they’re unfulfilled and losing hope for ever being so. They know they need to change careers but aren’t sure which career path would lead to their dream job. Dissatisfied professionals with a wide variety of educational backgrounds can find the answer as a financial advisor, especially those who understand people and appreciate the role of money, and its limitations, in enabling people to pursue their own happiness and fulfillment. Several backgrounds in particular ease the transition into becoming a financial advisor: Psychology: Anyone who has an intimate knowledge of human psychology and factors that drive thoughts, emotions, and behaviors has a good start. If you like to spend time with people — talking with them, listening, connecting — then you’re already at an advantage. Fundraising/charity: People who work for charities, especially in donor development, already value the importance that strong financials can have on a cause or outcome. If this category includes you, you merely need to shift your focus from nonprofit fundraising to family wealth stewardship. If you’ve received formal education and training related to charitable gift planning strategies, you’re even better positioned to make the transition. Professional networker: If you’re in any industry that requires you to have a broad network of colleagues, communication skills (writing and speaking), and relationship management skills, you’re probably suited for a position as a financial advisor. Communication and relationship management skills are highly transferrable.

Article / Updated 03-30-2019

Every financial advisor knows that the best way to drum up new business is through marketing and networking, but they often don’t know how to market and network effectively. Many are too pushy and drive away prospects instead of attracting them. Here are ten suggestions for meeting new prospects and transforming them into clients. Be natural. Instead of thinking of client acquisition in terms of marketing and sales, think of it in terms of meeting and talking with people and serving their needs. Just be passionate about what you do and eager to bring value into your clients’ lives. Then, get out in the world and mingle so people get to know you and what you do. Schedule financial advisor client review meetings Early in your career (and throughout your career for your best clients), meet with your clients at least once every quarter to see if anything has changed in their lives that you can help with. This level of frequency has multiple benefits. Chief among them is that these meetings remind your clients who are your natural ambassadors of the great personalized service you offer. Conduct two or three of these high frequency, best client reviews over lunch or dinner meetings without paperwork or formal presentations. Just engage in conversation about what’s going on in the client’s life to find out whether anything’s changed that would call for modifying the client’s portfolio. Conduct a more formal review meeting at your office with charts and documentation once or twice a year. Keep a log of friends and family that your financial advisor clients mention As you talk with clients, they’re likely to mention names of people who are important to them — a boss, colleagues, neighbors, friends, family members, and so on. For example, if the topic of vacations comes up, you may find out that your clients have plans to vacation with another couple. When your clients mention names, jot them down along with any details about the people mentioned. After the meeting, add the names to your client relationship management (CRM) system to follow up later. At the next meeting, you can then ask your clients about their trip with so-and-so. They’ll be impressed that you actually listened to them and remembered (or are that organized). Then, you can ask whether they think so-and-so would be a good client for you. If the answer is yes or maybe, ask for an introduction so you can meet with the prospects and judge for yourself whether you’d be able to help them. If the answer is no, you may want to ask follow-up questions to find out why. You still may want to meet with the prospects to judge for yourself. Care for the people your clients care about. Too often I’ve heard from clients about a friend of theirs with financial problems I could have resolved (or helped the friend avoid) had I been the friend’s financial advisor at the time. Invariably, the client tells me he wished he had introduced me to his friend. I do, too. Sponsor one charitable event each year Find a cause you’re passionate about and want your personal brand associated with, and then sponsor one charitable event annually to generate revenue for the cause. This is a charitable event, not a sales event. Don’t actively pursue clients at the event or expect anything in return for the sponsorship. Approach this activity as a way to create a more intimate relationship with the organization’s development team. The development team may become a long-term source of great referrals. Don’t be a one-and-done sponsor. Show up every year consistently. Along the way, share with the charity’s development team your charitable-giving solutions, such as charitable remainder trusts (CRTs), donor-advised funds (DAFs), and private family foundations (PFFs) that could benefit their efforts. If you don’t have any charitable-giving solutions, bring in a joint work partner who does. Break bread with your best financial advisor clients A long lunch, a festive dinner with significant others, and even a weekend trip all make for great ways to get to know your best clients better. Away from a business agenda, your clients will feel more comfortable sharing details that reveal what’s going on in their lives and in their minds. I’ve actually gained more by learning from my best clients how to manage my business than I gained from referrals. Don’t be surprised; your best clients are most likely to be business owners or senior executives. Be responsive: practice the same-day rule for responding to clients When clients text or email you or leave a voicemail message, get back with them within a few hours, not a few days. You don’t necessarily need to answer a question or resolve an issue immediately, but you should get back with the client quickly to let him know that you received his message and to provide a time frame for when he can expect a more thorough response. The foundation of excellent client service involves establishing consistent expectations. If you (or your firm) don’t get back with clients quickly, then you’re providing fertile ground for a small, benign issue to balloon into a critical, malignant one. Attend every party you’re invited to Even if you’re not a natural finder, nothing is easier than accepting an invitation to a party, any party — birthday, graduation, bar mitzvah, wedding, anniversary, retirement, whatever. The community in which you practice probably has dozens of celebrations every week, and if you’ve met enough people, then you’re going to be invited to at least a few of them. When you’re invited, go. If the party is with friends or family, you’ll have a great opportunity to get to know them in a relaxed environment. Have an elevator pitch for your financial advisory business Whenever somebody asks what you do, you should be able to answer the question in less than ten seconds. This terse description of what you do is known as an elevator pitch. The idea is that you can tell someone what you do during a short ride together in an elevator. See Chapter 18 for guidance on how to write an elevator pitch. When you’re composing your elevator pitch, focus on what you do and the value you bring to your clients’ lives — your value proposition. Welcome all financial advisor prospects, large or small Even though someone may be too small for your practice (especially if you’ve been in practice for some time), make him feel welcome and appreciated. If he has questions or concerns that you can address with little effort, do so, and then ask if you can pass his name along to a financial advisor who may be better suited to meet his needs. If your prospects give you permission, call the other financial advisor and give the advisor the prospect’s name and contact information. I recommend calling the advisor instead of simply giving the advisor’s name and contact information to the prospects because prospects often fail to follow up. In addition, contacting the other advisor to provide a referral is a powerful networking tactic, making the other advisor a more likely source of future referrals. Some of your best big clients are likely to come from smaller client referrals. Stop selling and start telling stories If you’re pitching products and solutions to prospects, you’re not going to be very successful as a financial advisor. Switch from selling to and start telling stories. Share anecdotes about specific challenges your clients faced and how you helped them overcome those challenges. When sharing stories, protect the privacy and confidentiality of your clients and their families. Obviously, don’t mention any names (you can use pseudonyms, if necessary), but also beware of providing any details that would enable the listener to figure out the identity of the person in your story. Whether you worked with an estate attorney on replacing a troublesome individual trustee with a corporate trustee or just completed a retirement income plan for a newly retired client, highlight the details that made the case most interesting to you. The most interesting cases are usually those that surprised you or that taught you a valuable lesson. Be active on social media to prospect for financial advisor clients Social media platforms are great ways to stay in touch with clients while increasing your exposure to prospects. I use LinkedIn to share information and insights with my colleagues in the industry. I’m not so keen on Facebook because lately my news feed has been overrun with ferocious opinions from extremists. Instagram is great, though. I use my account mostly to show the food I eat; people seem to enjoy looking at food. In fact, Instagram has been the best platform for interacting with prospects and joint-work advisors. Now that Instagram feeds into Facebook, the platform has an even greater reach. If you have a team, post about them. Share pictures of team members celebrating birthdays, traveling on vacation, or engaging in community service. Convey the idea that your team is about much more than just providing outstanding financial advice. Show team members smiling and laughing. Share your insights or inspirational quotes. Don’t use social media to pitch product or fake articles that promote product sales. Always check with your broker/dealer’s compliance department before posting anything on social media. Every firm has its own rules and guidelines.

Article / Updated 03-30-2019

To construct a proper financial plan for your clients, as a successful financial advisor, you must have a thorough understanding of their household’s income and expenses. If your clients have a budget, ask for a copy, so you can review it prior to your next meeting. If they don’t have a budget, one of your first tasks is to guide them through the budgeting process. Introducing your clients to budgeting and making it easier for them is a great way to deliver big value to them. If clients are reluctant to budget, for whatever reason, point out that they’ll have more money to spend on what they enjoy and value most if they curb spending on items they have nothing to show for. Budgeting provides the visibility needed to make great spending decisions. How to estimate household income for budgeting The first step in creating a budget is to get a relatively accurate estimate of the household’s net income (after taxes). If a household member is a paid employee and receives a W-2 at the end of the year, your job is easy —you can calculate the person’s monthly income based on the two or four paychecks per month. Estimating net income for a household member who owns a business or is self-employed is more complicated. This person probably receives payments from numerous clients, receives a nontraditional W-2 or a 1099 from each of them, and pays estimated quarterly income taxes. In addition, you need to subtract business expenses, such as mileage, meals, travel, phone, and other expenses, which may be tightly woven into the household expenses, making them difficult to discern. When you’re dealing with households that have business or self-employment income, you may be better off not trying to estimate the household income and instead focus on expenses, as explained next. If the household members are racking up a lot of debt, you can tell that they’re living beyond their means and need to rein in their expenses or create other sources of income (or both). How to identify and estimate expenses for budgeting Clients often earn considerable income and wonder where all that money goes. When they take the time to list their monthly, annual, and semiannual expenses, they quickly see exactly where that money goes and can begin to identify expenses they can and can’t trim back. A reluctance to budget can often be traced to how complicated the process is and the number of expense categories that must be tracked. Here, the expense categories are whittled down to eight, so you can simplify budget management for your clients. Housing To estimate your client’s housing costs, make sure you include all housing related expenses: Rent or mortgage payment Homeowner’s or rental insurance Homeowner association (HOA) fees Property taxes (if not included in the mortgage payment) Average monthly household maintenance and repair costs If a major life change makes your client’s current housing unaffordable, don’t hesitate to discuss the situation. For example, clients often retire in the home they lived in during their working years only to discover that the home is far beyond their needs. You’ll be surprised at how many clients nearing retirement age are already thinking of downsizing into a smaller home, condo, or an assisted living community (if they’re more advanced in age). Transportation To estimate transportation costs, consider the following: Monthly car payment or lease payment Auto insurance (average monthly over 12 months) License and registration fees Vehicle maintenance and repair (average monthly over 12 months) Fuel cost Public transportation fees, tolls, and monthly parking Depending on where your clients live and their travel needs, a car (or a second car) may be a necessity or a luxury, and it’s often a major expense. In Los Angeles, where I live, the cost of transportation is often a big expense for many households, especially if the commute is long and gas prices are high. Utilities Utilities include gas, electricity, water/sewer, trash/recycling, phone, TV, Internet access, and security systems. Ask your client to gather the monthly utility bills, total them for the year, and divide by 12 to determine the monthly average. Beware: Using bills for this exercise during peak cost seasons, like winter for natural gas, will make for a high annualized estimate. Healthcare and childcare Healthcare and childcare can be another big-ticket category when you start to consider all the bills: Insurance premiums for medical, vision, dental, disability, and (perhaps) long-term healthcare Copays Costs of prescription and over-the-counter medications and supplements Eyeglasses and contacts Other medical/health aids Gym memberships and exercise equipment Childcare (babysitting, education, child support) Consumer debt Consumer debt includes credit card balances, student loans, and other installment payment programs other than secured loans, such as mortgages and car loans. Most clients have some consumer debt. Carrying month-to-month consumer debt means the household is consuming more than the income is able to support. Something’s got to give. Work with your clients to address any deficit spending proactively. Otherwise, you and your clients may be dealing with the issue reactively later when fewer options are available. Food and groceries This category includes groceries and food-delivery services for dining in. It excludes dining out, which is in the entertainment category. Personal care and clothing Personal care and clothing is a broad category that includes the costs of the following items: Salons (hair and nails) and haircare products Personal hygiene products Clothing, laundry supplies, dry cleaning, shoes, and shoe repair Seasonal and random gifts I’m always surprised by the costs associated with this category. I mean, who knew personal care and clothing could cost so much? Personally, I spend very little on haircare, because I’m bald, but others in my household treasure their locks and don’t hesitate to spend money to maintain their hair’s luster. Some of my clients are very good at slashing expenses in this category by focusing on clothing — never spending full retail; they wait for sales or shop at outlets. Travel, entertainment, and dining out This is another broad category that includes many of the most enjoyable expenses, such as: Movies, theater, and music, including live entertainment, movie rentals, and streaming Books and magazines Outings to sporting events and cultural events, visits to museums, amusement parks, zoos, and so on Travel and lodging for business or leisure (including vacations) Dinners out (fast food or fine dining) Hobbies and pastimes, such as golf Pet care, including food, supplies, and veterinary care Most people struggle with this category. After all, people want to enjoy life. To chide some clients for overspending on luxuries would be akin to asking them to become homeless. Would-be clients who engage in conspicuous consumption are the most challenging to manage toward a favorable financial outcome. Help financial advisor clients create savings As your clients get their spending under control, they should be able to free up some cash to place in savings as a buffer to protect against unexpected financial setbacks and to start building wealth. Give your clients this age-old advice: Pay yourself first! Right off the top, they should stick about 10 percent of their income into savings, which should quickly fund an emergency fund, and then allow further progress toward funding a retirement account, college savings account, and/or other savings vehicles. Advise clients to build and maintain an emergency fund to cover any events that disrupt income, such as job loss or temporary disability. They should set aside the equivalent of 3 to 12 months of basic household expenses (excluding discretionary spending). If your client is an established senior manager with significant benefits at a stable company, three months may be more than adequate. On the other hand, clients who participate in the gig economy should place enough money in a savings account to cover 12 months. Don’t start your clients with an investment plan until they have 3 to 12 months of bank savings. Otherwise, your clients may find themselves having to sell investments when the market is down. Nobody knows what the market value of an asset will be if and when a client needs to sell it. Establish spending and savings guidelines for a budget In the previous two sections, you simplified budgeting for your client by identifying nine categories (eight expense categories plus savings). Now, you can provide targets for each category: Category Target (%) Savings 10 Housing 25 Transportation 10 Utilities 10 Food and groceries 10 Entertainment 10 Personal care 5 Debt 10 Healthcare and childcare 10 Total (equivalent to net income) 100 These targets are starting points. Every household’s expenses and spending priorities differ. Work with your clients to tweak the percentages to align them more closely with their preferences, but be sure the total doesn’t exceed 100 percent of net income.

Article / Updated 03-30-2019

As your client’s financial advisor or financial consultant, you play a key role on the advisory team. As such, you must collaborate with everyone on the team — client, lawyers, accountants, and any other relevant professionals. Cross-industry professional collaboration is a key differentiator among financial advisors. You’ll find little competition in the marketplace for financial advisors who routinely coordinate their activities with other professionals on behalf of their clients. Leverage the power of this key differentiator by letting clients and prospects know that you’re dedicated to partnering with others on their advisory team to optimize their financial success. Team up with your client As with any partnership or good relationship, communication is key. Touching base with your clients regularly — on an ongoing basis — is the only way to ensure you’re getting the whole picture. Remind your clients that you and they both want the same thing — a great financial outcome over the course of their and their loved ones’ lives. Tell clients what they need to hear, not what you think they want to hear. The fact is that most clients want to be told what they need to hear. That’s what they’re paying you for. Just be sure to present it without judgment or sarcasm. If you’re telling clients what you think they want to hear instead of what they need to hear, you’re enabling bad habits. Your job is to lead your clients in the direction of financially healthier decisions and behaviors. Your client has hired you because she can’t see the forest for the trees, and you can. If she knows that you’re in partnership together to achieve the same agreed-upon goals, then teamwork will come naturally. Your client will be more open, responsive, and engaged. She’ll understand that she’s better off working with you than trying to manage her finances by herself or with another financial advisor who’s less committed to teamwork. As with any partnership or team, your relationship with a client may encounter some friction and frustration. Even the closest teammates and partners can butt heads and engage in heated debates over what’s best. Usually, they have the same goal; they just disagree over the best way to achieve it. Not only are disagreements completely normal, but they’re also to be expected and can be quite productive. With every disagreement, you and your client glean more about each other, which ideally leads to a deeper relationship with greater understanding. Partner with your client’s lawyer The easiest way to connect with your client’s lawyer is to have your client introduce you via email. This also serves as a written notice, which lawyers like to have to ensure they have permission to discuss client-specific information with another party. To simplify the task for your client, write the introduction yourself and email it to your client to use. The figure is a sample introductory email that your client can send to her lawyer: Work with your client’s accountant Your client’s accountant can be helpful in the area of tax planning by providing you with your client’s effective tax rate along with an overview of your client’s income and any ideas on how the two of you can work together to ease your mutual client’s tax burden. Accountants are less formal to deal with than lawyers, but you should still ask your client to introduce you via email and provide permission to share information and answer questions. Host a brainstorming session with your client’s accountant to freely discuss ideas or strategies that she may have leveraged with other clients. In general, business owners have more complicated tax planning concerns than do salaried employees, so if your client owns a business, having a tax advisor on the team is a big plus. During your initial conversation with your client’s tax accountant, here are a few tax-savings strategies for business owners that you may want to discuss to get the ball rolling: Changing the client’s business structure: Business structure (sole proprietorship, C-corporation, S-corporation, LLC) impacts the way the business owner gets paid, which can affect income taxes and the amount of self-employment tax (FICA) your client pays. Establishing a profit-sharing retirement plan: Profit sharing retirement plans enable businesses to contribute a portion of the business’s profits into an employee retirement account that grows tax-free. In addition, contributions made by the business aren’t included in the business’s taxable income. In a family business, this can be a great way to build wealth for family members who work in the business. Using fringe benefit plans for employees: Fringe benefits include group life, health, and disability insurance; dependent care; and tuition reimbursement. They’re a great way for employers to improve employee recruitment and retention by adding compensation that provides tax breaks for the business. For example, employee health insurance premiums paid by the business are generally tax-deductible. Using an accountable plan: An accountable plan governs how a business reimburses employees for business expenses. Under such a plan, reimbursements to an employee or business owner aren’t included as part of the employee or owner’s income, but the business can take a deduction for these amounts. These methods of allocating capital toward corporate benefits and other business continuity or succession planning items can reduce the business’s taxable income, while enhancing its overall value and efficiency. Work on your follow-through with the financial advisory team Nothing is more embarrassing than going through all the time and effort to collaborate with other advisors for a client’s benefit only to lose track of who’s doing what next. To avoid such embarrassments, get organized and follow through on whatever the team discussed. Set deadlines in your communications with other advisors and your clients. Create reminders in your customer relationship management (CRM) software or whatever scheduling tool you use. Collaborations can take considerable time to come to fruition, and everyone can easily lose track when they get busy with other things. I’ve had projects go on for a year or two before we finally proceeded to implement the plan. The more complicated the client’s needs and the more advisors are involved on a project, the longer the process takes. Don’t be discouraged; it’s a natural side effect of going up-market in your client acquisition.

Article / Updated 03-30-2019

Fiduciary financial advisors committed to the industry and consumers are driving much of the change to the financial advisory industry today. As they educate consumers and spread the word among colleagues about how they deliver value by serving their clients’ best interests, they’re challenging the so-called financial advisors to do the same. Your Role as Financial Advisor The most successful financial advisors are fiduciary, meaning they’re obligated to provide advice that’s in their clients’ best interests. To join this elite group, you must take a comprehensive, holistic approach to planning, managing, and protecting your client’s financial assets and well-being. Your standard of care should involve giving advice, guidance, and recommendations regarding the following: Asset management Risk protection Lending and other financing needs Estate planning If the firm you’re affiliated with doesn’t offer these services in the form of products, you should still provide advice regarding these matters, even if your advice is in the form of a referral to another professional in your network who provides the service. Federal rules and regulations (DOL, SEC, FINRA) Various self-regulatory authorities and government agencies have been attempting to force an industry-wide evolution toward a single, fiduciary standard of care in relation to working with financial services clients. So far, over the past two years, as this topic has heated up, the efforts have been an exercise that can best be described as three steps forward and three steps back. DOL: The fiduciary rule In the summer of 2018, the U.S. Fifth Circuit Court of Appeals has confirmed its decision to vacate the U.S. Department of Labor’s (DOL) fiduciary rule. Just two years ago, the DOL issued this rule in its final form, with requirements scheduled to be phased in between June 2017 and July 2019. From its beginning, the DOL rule had jurisdiction only relevant to the Employee Retirement Income Security Act (ERISA) or qualified plan accounts (such as 401K, IRA, and other qualified retirement accounts). For example, if you had a client with an IRA and a regular, taxable individual account, you’d be subject to two different care standards, one for each account: In the regular, taxable account, you could sell products based on client suitability and earn commissions. In the IRA account, you’d have to function in a fiduciary capacity and prove that your recommendations were in your client’s best interest forever, regardless of whether you’re her financial advisor in the future. Having a two-tiered investment account care standard would have been confusing for clients, not to mention for financial advisors, who’d have to overhaul their entire practice to accommodate the expected loss in commission revenues. Meanwhile, many companies took steps to become compliant with the rule well in advance of its 2019 effective date, spending tens of millions per firm on technology and compliance-enabled systems. According to recent news, some of these big firms are set to roll back their announced changes (such as going from a no-commissions-allowed policy for an IRA to permitting commissions once again). Securities and Exchange Commission: Regulation best interest In April of 2018, the Securities and Exchange Commission (SEC) proposed a package of new rules and interpretations on relationships between investment advisors and broker-dealers, which is regarded as the SEC’s answer to the failed DOL fiduciary rule. As part of these proposed changes, investment professionals would provide customers/clients a document that discloses whether they’re working in a suitability/customer/transaction or a fiduciary/client/ongoing relationship capacity. The proposal restricts broker/dealers and their financial professionals from using titles such as “financial advisor” (including the alternate spelling, “adviser”) unless they have certain registrations. The 90-day comment period, which ended in August of 2018, inspired a flurry of articles. Just search the web for “SEC best interest” to get a sense of the diversity of opinions. Plenty of debate and rewrites to the proposal are anticipated before a final rule is adopted. Here are a few highlights from the SEC’s 400+ page proposal: “Best interest” isn’t defined. The proposal leaves room for interpretation, which makes any potential rule more administrative than transformative. The proposal seems to be calling for a higher care than the current suitability standard, though not as strong as a fiduciary (only requiring some additional disclosure). Brokers can still make more money using proprietary or affiliated products, as long as they disclose doing so and make an effort to reduce this conflict — whatever that’s supposed to entail. The proposal doesn’t create a single, uniform standard for financial professionals. The industry would still have separate standards for advisors and brokers/dealers. Of everything being proposed, the most potent many be the simplest. Restricting the use of “advisor” or “adviser” to only those who have the proper licensing and registration could be helpful. However, for the many financial advisors in the marketplace today who are dually registered (meaning, both a Registered Representative (RR) through FINRA to act as a transactional broker, and registered as an Investment Adviser Representative (IAR) through the SEC to act as a fiduciary advisor), clients still won’t understand when they’re being served by one standard or another because a dually registered financial advisor can switch back and forth depending on the product or service recommended. Furthermore, many financial advisors also hold state insurance licenses. Insurance products typically pay large up-front commissions and have their own separate customer standard of care requirements (usually subject to a variation on the theme of suitability), which varies from state to state. How would a client possibly know that the recommendation being offered is potentially subject to three different standards of care? For this reason alone, manifesting a uniform care standard across all financial services will be a slow process, particularly in relation to investment and insurance products. FINRA: BrokerCheck and the new Securities Industry Essentials exam Although you won’t see any new proposals on fiduciary rules, the Financial Industry Regulatory Authority (FINRA) has been actively upgrading its registration and licensing requirements. The organization has also been doing a great job with a tool called BrokerCheck that enables anyone to search a would-be financial advisor to see if she’s been the subject of any complaints or other unsavory disclosures. The biggest update comes in the form of a new Securities Industry Essentials (SIE or simply Essentials) exam, beginning October 1, 2018. After the effective date, the new exam structure will allow individuals to take one SIE exam, which tests general knowledge (for example, basic products, structure of securities industry, regulatory agencies, prohibited practices, and so on) that used to show up over and over on each Series exam, and then a separate representative-level exam covering responsibilities and functions of representatives. Unlike the current exam registration process, the new process doesn’t require someone taking the exam to be associated with a broker/dealer firm, which is a big win for folks who are interested in joining the industry but haven’t yet been hired by a firm. Minimum age to sit for the exam is 18. Results are valid for four years, giving you time to study for a subsequent securities exam, for a more specific securities license (for example, Series 6 or Series 7) after you’re affiliated with a firm. Governing Itself: Industry Organizations Weigh In The two leading organizations providing technical knowledge and ethics training for financial advisors are as follows: The Certified Financial Planner (CFP) Board The Certified Financial Advisor (CFA) Institute However, when you read their commentary on the various fiduciary rules and best interest care standards being proposed by the SEC, DOL, or others, their bold clarity of purpose reveals the immense pressure they’re feeling from the large financial services companies who employ the majority of their charter holders and certificate holders. Positive, lasting change will come from within the industry — from financial advisors, including you, who are committed to upholding the fiduciary standard, as I am about to explain. Given the conflicting interests of these industry governing organizations and the added confusion and bureaucracy of federal, state, and local governments, what’s clear is that raising the professional financial advisor industry standard is best accomplished as a grassroots movement driven by practitioners, practices, consumers, and technologies. As FinTech and market demand shift in favor of the fiduciary financial advisor, the large institutions will follow the money. While the industry overall can look forward to progressing in this direction, insurance product sales are routinely left out of the fiduciary discussion. I’m not sure why financial advisors are so hesitant to disclose what they earn on financial products that pay commissions. Clients always want to move forward on executing a solid financial plan, as long as they understand the long-term benefit to them. They want us to make a living, and a good living at that. As long as you’re open and honest about how you’re paid, earnings from insurance product sales aren’t generally a deal breaker. Successful financial advisors should be models of financial success, just as your trainer at the gym has the physique you wish you had. The financial advisor’s model of financial success should be based on compensation and conflict transparency. If you were hiring a trainer, you’d probably want to know whether she looked like she does solely from a disciplined diet and routine exercise or with the help of diet and steroid supplements. That difference would probably be a major consideration in your choice of trainer. The same goes for the advisor-client relationship. The fiduciary pledge To serve clients in the most beneficial manner, an industry-wide standard of care must be delivered. My own firm has enacted The Fiduciary Pledge, joining many other firms around the country, who aren’t afraid to shine a light on any form of compensation or potential conflicts of interest. Unlike many firms, my firm applies this standard of care to both asset management and risk management (insurance) products and solutions. To give you a head-start, use my firm’s Fiduciary Pledge as a model. You can customize it to your own needs, editing as you feel ready and comfortable to do so. The more financial advisors who engage in documenting their fiduciary responsibility and communicating it to prospects and clients, the greater the client flow toward financial advisors who deliver this standard of service. The outcome: A win for you, a win for your clients, and a win for the industry.

Article / Updated 03-30-2019

A solid financial plan begins with the financial advisor client's input. As a successful financial advisor or financial consultant, you must have a clear picture of his current finances, goals, concerns, and any potential threats or issues that could impact his finances. Start by gathering copies of your client’s household budget, bank statements, loan statements, credit card balances, investment statements, insurance policies, and family governing documents (such as a will or estate plan). Documentation provides a solid base for developing a financial plan, but dig deeper to evaluate your client’s mindset and financial attitudes, behaviors, goals, and concerns. Here are a few open-ended questions that can help reveal more about what makes your client tick: What keeps you up at night? What concerns do you have about money? What experience do you have working with a financial advisor, if any? How would you describe what your life looks like in five years, ten years, and twenty years from now? What concerns do you have that are unrelated to money? How would you describe a successful financial advisory relationship? These questions loosen up clients to provide you with much more relevant input than merely what appears in their financial documentation. Even better, the answers to these questions and the resulting discussion provide a context for understanding the details in the financial documents. Only by talking with your clients do you begin to understand any frustrations they face with their current financial situation and any encounters they’ve had in the past with other financial advisors. You may also gain insight into the client’s mindset and behaviors that have contributed to these frustrations. Listen not only to what your clients say, but also be aware of what they’re not telling you. Often, I’ve found that clients reveal more in what they omit from the narrative of their financial life than what they disclose. Sharing past financial decisions and mistakes is much more personal for clients than sharing intimate details about their health with a doctor. Even though most health issues arise due to poor diet and lifestyle decisions, patients often withhold that information, either because they’re embarrassed about it or because they don’t want to be told to make difficult changes. The same is true of clients working with their financial advisors. When someone optimistically and enthusiastically invests in a stock that subsequently loses all its value, a client has a funny way of erasing that experience from his memory banks, a symptom of the behavioral aversion to loss. If the client eventually discloses the mistake, he’s likely to express his embarrassment by saying something like “I should’ve known better!”. (Actually, he shouldn’t have known better, because the ability to know better comes from acquiring professional knowledge and experience.) Invite clients to share with you all their financial experiences — the good, the bad, and the ugly. Full disclosure provides the most valuable input when developing a client’s financial plan. Getting input from a financial advisor's clients is important to your success as a financial advisor. Because each client’s financial life has so many different facets, even when the individual isn’t a high-net-worth client, I developed a useful guide to organize a financial advisor’s thinking. I call it The Three Cs of a Holistic Financial Plan. Imagine a Venn diagram with three intersecting circles: Copy Capital Consequences The area of overlap is where you, the financial advisor, operate when you’re developing a holistic financial plan. Each area requires specific care and attention, not only in terms of making client assessments, but also with regard to uncovering the levels of uncertainty that a client may be comfortable living with. Copy, written documentation Copy (words on a page) refers to all the written documentation or family governance paperwork that’s been drawn up (usually by an attorney) to spell out what the family’s intentions are for their assets. In most cases, these documents are family trusts or wills, medical directives, powers of attorney, and other related documentation that dictate how the family is to act and who in the family will be in control when a patriarch or matriarch is no longer able to make decisions regarding their household matters. Triggering events could be as varied as early onset dementia, Alzheimer’s disease, or any other mentally or physically debilitating disease. More often than not, families must handle some level of deterioration in health of a parent or other loved one before death occurs. Making sure that all matters have someone who can step in, and be in charge, is extremely important. Your role in respect to the copy aspect of a financial plan is to be sure that your client has received legal counsel in these areas and has the documentation to ensure that the directives are carried out. Consider providing your clients with a document or a folder that contains all of the following information and documents that their loved ones will need in the event of your client’s death or inability to make decisions. Include the following: Your name and contact information A list of income sources, including pension plans, IRAs, 401Ks A list of banks and account numbers Any Social Security or Medicare/Medicaid information Insurance information, including all policy providers, policy numbers, agent names, and contact information A copy of the client’s most recent tax returns A copy of the client’s will A copy of the client’s living will (advanced medical directive) A copy of any power of attorney your client has signed A list of liabilities, such as mortgage loan, car loan, and property tax, including what’s owned to whom and when payments are due The location of any mortgage documents, such as the deed of trust for a home the client owns The location of car title(s) and registration(s) The location of any safe deposit box(es) and key(s) You may want to include this package as part of your service or charge a separate fee for preparing it. Having all of this information in one place makes it easy for authorized relatives or friends to take over when necessary. In the event that it’s needed and used, the relatives or friends in charge will greatly appreciate it and likely sing your praises to everyone they know. Capital, allocations of household money Capital (any asset or investment holding) refers to all allocations of household money, including all claims (or demands) on those assets. For example, in most U.S. households, the largest family asset is the primary home/residence. In other families, the most valuable asset is the family-owned business. These assets typically have some kind of debt associated with them, such as a mortgage for a home or a line of credit for a business. All the various components of capital are constantly changing. Fluctuating stock and bond markets, real estate markets, the business environment, economic expansion or recessions, and so on all dictate the market value of these myriad holdings on any given day. Market valuations plus the liabilities associated with these assets affect the household’s net worth. Unknown liabilities (such as those that blindside a family — disabilities, death, job loss, and so forth) can wreak even greater havoc on a household’s net worth. As you develop your client’s financial plan, you must account for all the capital assets and liabilities and review the plan regularly to ensure that the household’s net worth is on track and address any and all potential threats to that net worth. Consequences, scenarios to avoid Consequences refers to the various scenarios that your client wants to avoid, such as the following: A difficult family dynamic or dysfunction that persists for decades and becomes a major threat to the family’s capital at a point in time when most families achieve a heightened awareness of the desire to maintain their lifestyle. The panic that often ensues after the stock market plummets, which can drive clients to liquidate their holdings at the worst possible moment. Doing so creates a long-lasting consequence, which isn’t easily rectified. Naming a trustee or executor within the family documents who has a contentious relationship with family members or siblings, which can create terrible long-term financial and emotional consequences. All of these situations (and others) are avoidable with the proper planning and proactive approach, and all of them are part of your responsibility as your client’s financial advisor. By addressing any and all scenarios that could place your client’s capital at risk, you give your client the best opportunity for success. The three Cs in action One of my clients, a business owner in his 60s with a net worth of $20 million, was on his third marriage and had six children. As with any blended family, getting the family governing documents (copy) up-to-date was essential for the family to avoid any ugly surprises down the road. In this client’s case, I made introductions to a couple local estate planning attorneys and let the client meet with both and make the choice. Getting the copy part completed took nearly a year due to various circumstances, including vacations, family events, and good old-fashioned need-to-think-about-it time delays. As a financial advisor, your job is to steward this process, which means gentle and timely prodding to move the process along. You never know what may lurk around the corner in terms of life events, so you want to wrap up the estate planning as quickly as possible. At the same time, I worked with the client to align his capital with his copy to proactively address any unforeseen consequences. The capital part of his financial plan included one-time gifts, liquidity from life insurance policies, and market liquidity from his investment portfolio. I structured capital in a way to avoid any illiquid investments that could have caused extra stress or concern to the family in the event of any major family crisis, especially one that would impact my client’s ability to shepherd his family through the crisis. Within two years, my client was diagnosed with a serious illness and started treatment. Knowing that the copy was in place and that it aligned with the capital was a great personal relief to me and provided the family with the assurance and financial support they needed to make it through this challenging period in their lives. It allowed the family to focus on getting their primary breadwinner back to health instead of having to worry about unintended (but well-planned-for) consequences. Having the client’s wishes clearly documented also assuaged the fears of family members, which often leads family members into contentious power struggles when they fear that their needs won’t be met. Everyone understood that the planning had been done. The key to this client’s success was having a detailed financial plan in place that covered the three Cs of financial planning well in advance of any subsequent life event.

Article / Updated 03-25-2019

A client’s risk profile is the level of risk the client is willing to accept. As a successful financial advisor or financial consultant, assessing a client’s risk profile is a not-so-simple process of engaging the client in cost-benefit analysis. The client must decide how much he’s willing to pay for protection. Everyone conducts this cost-benefit analysis when they buy any type of insurance. Many certification programs can provide you the formal knowledge of how and when to apply different solutions, but nothing can replace real-world experience. Evaluating a client’s appetite for big-ticket risks and finding the right products is more art than science. You’ll get better at it over time. In the meantime, the following approaches can get you started in the right direction. The formal process to assess a financial client's risk profile Regardless of the approach you use to arrive at a dollar amount for insurance purposes, follow these five steps to assess a client’s risk profile, identify the client’s insurance needs, and present your plan to your client: Step 1: Assess the client’s exposure to risk Assessing a client’s exposure to risk is an exercise in answering the question “What’s the worst that could happen?” You and your client need to answer that question about the following areas: Death: How much income would be lost by the breadwinner’s death? How much would it cost to bury a family member? Health/illness: Do certain serious illnesses run in the family? Are certain family members at greater risk of physical injury and illness than others? What would happen to the family finances if someone in the family contracted a long-term illness? Job loss: What impact would a job loss have on the family finances? Does your client have sufficient savings to weather a job loss? Disability: If a breadwinner became disabled, what impact would that have on the family’s finances? Marriage/divorce: What would be the financial impact of a marriage or divorce? Family issues: If your client has one or more burdensome family members, what financial risks do they pose? For example, substance abuse interventions and treatments can be costly. Personal property: What if the family home were destroyed by fire, flood, or some other disaster? What if a vehicle were totaled? What if items of value were stolen? Business ownership: How would damage to or destruction of a business impact the family finances? What if a customer sued the business for damages? Your client may already have plans or insurance policies in place to cover losses in some or all of these areas. Your job at this point is to gain insight into how well he is positioned to deal with possible losses and to increase his awareness of what he stands to lose if certain tragic events occur. Don’t hesitate to pry into the lives of your clients. The financial fallout from an unplanned event is far more uncomfortable that the temporary awkwardness of discussing personal or family problems openly. Many times in my own financial advisory career, I’ve received a call from a client asking me to wire money to cover an anticipated liability that I didn’t know was even a possibility. Ask clients about their family and how everyone’s doing physically and mentally. Ask them how work is going and whether their family is dealing with any issues that you need to know about. Although you don’t want to grill your clients, you need to play detective and find out about any major events or situations that could rock their financial boat, such as a marriage, divorce, job loss, or illness. Check in with clients at least once a year to see if anything has changed. Assessing the client’s exposure to risk exercises your and your client’s intuition. Neither of you can see the future, but you and your client must consider the possibilities and the potential financial fallout. If your client truly trusts you and understands the relevance to your work, then you’ll be the keeper of many secrets, which is a humbling burden in this profession. Never break the trust or confidence your clients place in you. You want to be known as the financial advisor with integrity. Step 2: Educate the client on mitigating risks Although you can’t put a price tag on risk, I like to use a formula to demonstrate the wisdom of allocating some portion of the client’s assets to protect against potential losses. Here’s the formula I use: Present value (PV) of financial loss ≥ PV sum of all premiums + Opportunity cost – PV of cash value accumulations (if applicable) Where, PV economic loss is the present value of some future, possible, and/or probable liability in dollars. PV sum of all premiums paid is the amount of money paid over time into an insurance policy or contract or other strategy to protect against that specific future liability. Opportunity cost (if premiums were invested elsewhere) is the money that could have been made if those insurance premiums were invested somewhere else. (Figure a five to six percent compounding return.) PV of cash value accumulations is the accessible cash value that has accumulated in the insurance policy contract at some point in the future, if that feature is applicable. The equation shows that a possible loss would cost your client more than the total cost of having insurance to protect against that loss. If you wanted to get even more fancy, you could try to research the probability of your client experiencing a particular event, like death or disability. There’s just one small problem — no one believes it could happen to him, which makes the whole probability exercise futile with clients. To calculate present value (PV), use the following equation: where FV is future value, i is the discount rate, and n is the number of years. Here’s a simple example: A 40-year-old household breadwinner earning $200,000 per year and receiving an annual raise of 6 percent adjusted for inflation stands to earn $10,972,902.40, over the next 25 years leading up to retirement at age 65. You can use a lifetime earnings calculator or a spreadsheet to figure that out or do some really long math: First year: $200,000 Second year: $200,000 x 1.06 = $212,000 Third year: $212,000 x 1.06 = $224,720 Fourth year: $224,720 x 1.06 = $238,203.20 and so on to the 25th year, and then total all annual salaries to arrive at a total lifetime earnings of $10,972,902.40. Assuming a discount rate of 3 percent for inflation, the present value of $10,972,902.40 is $10,972,902.40 divided by (1 + .03)25 , which equals $5,240,719.30. The breadwinner could protect against that loss with a renewable term life insurance policy, paying annual premiums of $5,000 that increase 3 percent annually, which comes to $182,296.30 over the 25-year term. Assuming a discount rate of 3 percent for inflation, the present value of that policy is The opportunity cost of not investing that $182,296.30, assuming an annualized return of 6 percent is $274,322.56. Assuming a discount rate of 3 percent for inflation, the present value of that policy is Based on these three numbers, you can show the client that the potential loss to the family if he dies without insurance is $5,240,719.30, but he could protect the family from that loss by paying $218,083.72 for a term life policy. Here’s the math: PV of financial loss ≥ PV sum of all premiums + Opportunity cost – PV of cash value accumulations (not applicable, because this is a term policy) $5,240,719.30 ≥ $87,065.74 + $131,017.98 $5,240,719.30 ≥ $218,083.72 Note that PV of cash accumulations isn’t applicable, because this is a term life insurance policy. Using cash value life policies can be a good way to build contract value, which reduces opportunity cost on the capital allocated to such a policy, as well as, the cumulative premiums paid. Step 3: Decide how much loss the client wants to protect against Insurance isn’t free, so people typically make trade-offs to reduce the cost. For example, Healthcare.gov offers four levels of health insurance — bronze, silver, gold, and platinum. A healthy 25-year-old man would probably opt for the bronze plan, in the belief (and hope) that he doesn’t contract a serious illness. Someone who’s older and has numerous health issues may be better off with a gold or platinum plan. Risk tolerance varies among clients. They don’t always need to hedge against a total loss or worst-case scenario. After you and your client agree on a monetary value of what a potential loss would be, the next step is to ask your client how much of that loss he’s willing to risk. The most conservative client will want to protect against 100 percent of the potential loss, whereas a client with much more tolerance and disconnection from risks may be interested in covering only 50 percent of a highly probable liability and opt for no coverage on what he considers a low probability loss. Clients’ decisions are influenced by several factors but mostly by how relevant they believe the risk is to them personally. You can’t read people’s minds, so try to get your clients to open up about how they feel regarding the risks and the costs of hedging against those risks. Only then can you offer the rational processes to help them make decisions that are in their long-term best interest. Step 4: Research insurance products After you and your client agree on the monetary value of the potential loss and your client indicates the amount of that loss he wants to protect against, you can start shopping for insurance products to meet his needs. As you shop for products, use the following criteria to make your recommendations: The insurance provider’s financial strength: You can whittle down the list of options by choosing to work only with the best of the best insurance providers. Financial strength is a good indication that the company has great management, offers great products, and will continue to grow and adapt. Check the insurance company’s Comdex rating to gain insight into its financial strength. Most insurance companies list this figure on their website, where they show all financial data. Also, as a licensed insurance broker, you’ll have access to this data through your brokerage group’s subscription to VitalSigns or EbixLife. Value: Compare the cost, coverage, and features of different plans to determine which plans offer the most for the money. Features are additional benefits; for example, some life insurance policies waive the premium if the client becomes seriously ill or disabled. Features can make or break an insurance policy, so don’t overlook their value. Flexibility: If you’re shopping for a life insurance policy, consider whether your client will be able to convert the policy or contract to another type of insurance; for example, he could convert a term policy to a permanent policy later. Find at least one low-cost, mid-range, and high-cost policy, so you can present the options to your client. If you conclude that a recommendation is worth giving, do so only after conducting your own competitive marketplace product analysis. If your firm favors and promotes a certain insurance carrier, that’s fine, but conduct your competitive analysis and recommend products that are truly in your client’s best interest. You can often address your client’s needs best with a blend of products. Consider using different types of insurance policies and contracts to produce the desired outcomes. Step 5: Present the options, reach agreement, and implement the plan Create a table to illustrate your liability management plan, as shown. For each solution you recommend, state your reasons for including that solution as an option and present its pros and cons or its cost, benefits, and features. Let your clients know that you have chosen only the best of the best insurance providers, and explain the importance of choosing products from companies that are in a financial position to back those products. Don’t use emotional coercion to manipulate a client into a product or strategy. Most clients sense when their arms are being twisted, and they’re more likely to reject your recommendation than embrace it. You can get your point across in ways that aren’t coercive. Several insurance-sales coaching programs are available to train advisors in techniques designed to connect clients with the gravity and emotion of potential life disasters, so clients are more receptive to insurance solutions. These approaches are effective because they increase clients’ awareness and understanding without being pushy. Using the income replacement approach One approach to estimating how much life or disability insurance a client needs is to calculate the income the person would earn over the course of his life. A general rule in calculating coverage for losing a breadwinner’s income is to multiply the person’s annual salary by 20 years. If the person earns $150,000 per year, then $150,000 x 20 years = $3 million in today’s dollars paid as a lump sum. However, you should adjust for the ages of the surviving spouse and children, if any. With younger survivors, you may want to multiply the annual salary by 40. If the survivors are older, you may go as low as 10 times the salary. For example, suppose your client is a family of five. Mom’s a 32-year-old attorney earning $250,000/year married to a 28-year-old dad who stays at home and raises the kids. In the event of mom’s death or physical disability, the family would probably need $250,000 x 40 = $10 million to maintain their lifestyle and achieve their future financial goals. The family could decide that the premiums on a $10 million insurance policy are too expensive. They figure that in the event of mom’s death or disability, dad could get a job to offset the loss of income, they could scale down, and the kids would be able to take care of themselves in 15 years. They figure that they could probably get by on $100,000 per year, so they decide that $100,000 x 20 = $2 million of coverage would be sufficient. Taking the needs-based approach With a needs-based approach to estimating insurance coverage, you link the benefit payout to a future liability. For example, suppose your client wants to make sure his eight-year-old daughter’s college expenses are paid for in the event of his death. You could use an online calculator or the future value (FV) function in Excel to crunch the numbers and determine that the total cost of a four-year college education starting 10 years from now would be about $432,000: Four-year college tuition and expenses now $200,000 Average inflation rate for college education 8 percent Time until freshman year 10 years Four-year college tuition and expenses 10 years from now $432,000 A simple $500,000 life insurance policy specifically timed to provide that coverage throughout the daughter’s college career would suffice here. To be precise, a $500,000 death benefit, 15-year term life policy would do the trick.

Article / Updated 03-25-2019

The financial advisory profession has no clear professional education or certifying standards. Even so, you need specialized knowledge to deliver value to your clients. To be a successful financial advisor, you must have the following six core competencies and be able to coordinate advice from various other advisors, including attorneys and tax specialists: Asset (investment) management Liability (risk) management Budgeting (household or business focus) Estate planning Tax management Behavioral finance Financial advisors who provide a single holistic solution are often referred to as wealth managers. Asset management Broadly speaking, asset management is the ongoing assessment of where and why a person invests in any variety of assets. Assets can be grouped into the following three categories: Tangible assets: All types of real estate, commodities (for example, precious metals), and collectibles Intangible assets: Intellectual property, human capital, and goodwill Financial assets: All types of financial instrument and manufactured products (for example, stocks, bonds, mutual funds, and derivatives) Your job in this area involves maximizing the use of the client’s assets to help achieve his goals. Even if you focus on only one of a client’s three asset categories, your asset management program needs to include a risk assessment across all assets. Risks specific to a portfolio (collection) of assets include Market price volatility: How much the price moves up and down Liquidity: How quickly, with no capital loss, assets can be converted to cash Correlation of price movement across portfolio holdings: How each holding’s price moves relative to other portfolio holdings’ prices Concentration of asset type: How many eggs does the client have in one basket (degree of diversification) Many investment portfolio tools are available that can improve your insight into a client’s portfolio risk. For example, Morningstar offers several professional services to financial advisors and asset managers to properly design, manage, and monitor investment portfolios. Liability management Liabilities and assets are flip sides of the same coin. As a financial advisor, you need to manage both sides. If a client with a great asset portfolio is blindsided by an unexpected and unprepared for life event, the resulting liabilities can quickly wipe out the assets or slowly erode them. Your duty is to guide your clients through a process of identifying possible and probable risks and then to find the most appropriate cost-benefit solution that aligns with the client’s risk tolerance. Risks include the following: Unexpected death: Losing a household’s breadwinner or a business’s key employee Expected death: Loss of an elderly or ailing relative, which, without proper planning, would place the burden of liquidating assets on heirs Disability: A client’s short-term or long-term inability to earn employment income Economic recessions: Economic conditions that depress assets, challenging retirees to make ends meet Inflation: The slow and often indiscernible reduction of purchase power that retirees often fail to plan for Diagnosis of serious illness: Illness that triggers the one-two punch of lost income and high medical bills Although most clients would prefer to discuss how to make more money in the stock market, an unexpected liability can do far more damage to a household’s net worth than a bad investment. As a financial advisor, you’re doing a great service to allocate as much, if not more time in your client discussions to this area of financial planning. See How to Read Liability Accounts for Financial Reporting. Budgeting Psychologically, budgeting is a mental third rail for most clients. People are adaptive, and when a certain amount of money flows into their checking account each payroll cycle, those funds have a funny way of disappearing completely, just in time for the next direct deposit. Without a family budget, your clients are unlikely to be able to free up any money to put toward their financial goals. Many people try budgeting and give up because it’s too complicated and the record keeping is too involved. Your job is to simplify it for them. You can find plenty of tools for simplifying the budget process: personal finance software, such as Quicken; budgeting apps for your client’s smartphone; even a basic Excel budget template you can download online may be sufficient. The key first step is to gain a clear understanding of the client’s income and spending patterns. Only then can you properly advise clients on how to modify their spending today in order to achieve future goals and obligations. Estate planning All clients have an estate comprised of all their assets. Estate planning is the process of determining how assets will be distributed to heirs or beneficiaries after one dies or is incapacitated. However, estate planning isn’t restricted to financial assets. With estate planning, clients can, for example: Create a will naming heirs and an executor Limit estate taxes by establishing trusts Name a guardian for any surviving dependents Name or update beneficiaries on life insurance and qualified plans Request funeral arrangements Taxation Part of financial planning involves minimizing the amount of taxes your clients pay, so they have more money to put toward their financial goals. Common tax-reduction strategies include the following: Buying a home instead of renting living space to take advantage of homeowner’s deductions Maximizing contributions to tax-deferred annuities, such as an IRA Paying healthcare bills with pre-tax dollars by using a health savings account (HSA) Paying child-care bills with pre-tax dollars The net tax impact of the 2017 Tax Cuts and Jobs Act on a per household basis remains to be seen. States are likely to adjust their taxes in response to lost federal revenue, so the impact is likely to depend on the state in which your clients live. Some tax-saving strategies that worked in the past may no longer be beneficial. Your job is to help your clients navigate the ever-changing tax landscape to take advantage of any tax savings they qualify for. Taxes shouldn’t be the tag wagging the dog of money management. Paying taxes is a symptom of having made money, which is the ultimate desire for any investor. Behavioral finance Behavioral finance involves understanding the emotional and psychological factors that influence a client’s attitude toward money and how it affects her financial decisions. For example, a client who had a relative who lost a lot of money in the stock market may get the jitters when you present investment options. To serve your clients well, you need to be able to not only crunch numbers and offer financial advice but also understand their financial goals and the motivations that drive their financial decisions. By understanding your client’s motivations, you’re in a better position to offer advice that addresses their concerns and aligns with their aspirations.