Ivan M. Illan

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.

Article / Updated 03-25-2019

Various governing and licensing entities offer a range of programs for becoming a fully functional and competent financial advisor or financial consultant. Unlike other professions that have governing boards and standards, the financial advisory profession has no clear professional education or certifying standards. Even so, you need specialized knowledge to deliver value to your clients, and you need to be licensed to conduct transactions related to certain financial products. You don’t need a college degree, a special certification, or even a high-school diploma to qualify as a financial advisor. To achieve success as a financial advisor, however, you need to know what you’re doing, and having the education and credentials helps differentiate you from those less qualified. If you’re already a certified public accountant (CPA) or loan officer or you’ve worked in finances and you have plenty of life experience, you have a good start. However, you should get some additional, formal training under your belt and earn one or more financial advisor certifications. A number of independent education institutions offer advanced and specialized financial advisor training. The few highlighted in this section don’t constitute an exhaustive list, but they offer the more recognized, marketed, and substantive education and certification programs specifically for financial advisors. Work at a role in the field that would expose you to the world of financial advisory work before enrolling in a program to ensure that you want to be a financial advisor and you intend to stick with it. In many of these programs, you have to work in the field for several years before you can receive the designation. In addition, most programs require at least 30 hours of continuing education (CE) every two years. In other words, getting certified is a huge commitment, so you want to be relatively sure you’re going to stick with it. Knowledge and certifications are fundamental, but getting licensed by the proper regulatory authorities is essential if you want to transact in mutual funds, stocks, bonds, or insurance products. The American College of Financial Services The American College of Financial Services (ACFS) offers many professional designations and degree programs. The more popular programs include the Chartered Financial Consultant (ChFC) and Chartered Life Underwriter (CLU). For a full list, visit ACFS’s website and click Designations & Degrees. Established in 1927, ACFS is one of the older organizations in the field and has supported more than 200,000 people in their financial careers. The college’s website proudly highlights that the college’s “sales training can boost production by up to 40 percent” and that recipients of their “financial planning designations increase their sales by as much as 51 percent.” This focus is on financial benefits as a missed opportunity to stress the importance of education in delivering value to clients. Regardless, this institution does a solid job developing an advisor’s expertise in various financial products and processes. CFA Institute The CFA Institute is considered the gold standard in developing professionals focused on investment management, especially portfolio managers and research analysts. The CFA Institute offers three programs: Chartered Financial Advisor (CFA): This program is for “portfolio and wealth managers, investment and research analysts, professionals involved in the investment decision-making process, and finance students who want to work in the investment management profession.” To earn the CFA designation, you must pass three exams, have four years of relevant experience, and join the CFA Institute as a regular member. This is on average a four-year program. The program’s focus is deeply enriching, addressing all aspects of asset management. Special emphasis focuses on ethics and conduct and every conceivable analysis to be performed on any asset (particularly risk and valuation analysis). Certified in Investment Performance Management (CIPM): This program is for “portfolio managers, investment consultants, financial advisors, sales and client service professionals, and other investment professionals involved in selecting portfolio managers, evaluating portfolio performance, or communicating with clients.” To earn the CIPM designation, you must pass two exams, have two years’ experience in investment-performance activities or four years’ experience in investment decision-making, and become a CFA Institute regular member or join the CIPM Association. The program takes a minimum of one year to complete. Investment Foundations: This program is for “anyone who works with or supports investment decision-makers in the investment management profession.” To earn the Investment Foundations certificate, you must pass one exam that takes up to six months’ preparation. CFA Institute prominently displays its core message of delivering “professional excellence for the ultimate benefit of society.” The institute’s extensive global standards and mission to build market integrity “by improving investor protections and investor outcomes,” aren’t only admirable, but a consistent fixture in CFA Institute membership discussions. The academic rigor of its programs and its global network of more than 120,000 professionals make this organization highly respected among the most sophisticated financial advisors. CFP Board The Certified Financial Planner Board of Standards (CFP) is widely regarded as setting the gold standard in the financial planning profession. CFP designees must complete a comprehensive program and commit to completing ongoing continuing education. The core subjects this credential covers include all the main financial planning areas: as investment, insurance, tax, retirement, and estate planning, along with professional conduct and regulation. These are the initial certification requirements (referred to as the “four Es”): Education: Certification requires a bachelor’s degree and the completion of a college-level program of study in personal financial planning or an accepted equivalent, including completion of a financial plan development (capstone) course registered with CFP Board. Examination: You must pass the CFP Certification Exam, which you can take after completing the required coursework. (You don’t need to have your bachelor’s degree to be eligible for the exam.) Experience: You’re required 6,000 hours of experience through the standard pathway or 4,000 hours of experience through the apprenticeship pathway. (“Qualifying experience may be acquired through a variety of activities and professional settings, including personal delivery, supervision, direct support, indirect support, or teaching.”) Ethics: You must agree to adhere to the CFP Board’s standards of ethics and practice as outlined in its Standards of Professional Conduct. After you fulfill the education, examination, and experience requirements, you must complete a CFP Certification Application to disclose information about your background. CFP then performs a background check that you must pass in order to receive your certification. The Institute of Business and Finance (IBF) Since 1988, more than 16,000 professionals have leveraged the Institute of Business and Finance’s programs to deepen their knowledge to “develop successful careers — and successful clients.” IBF offers six programs, including Certified Fund Specialist (CFS), Certified Annuity Specialist (CAS), Certified Estate and Trust Specialist (CES), Certified Tax Specialist (CTS), Certified Income Specialist (CIS), and Master of Science in Financial Services. If you’re a busy professional, IBF certifications are a great option, because you can integrate the learning more easily into your other responsibilities at work and home. The curricula are robust, so you still benefit from actionable substantive knowledge. Financial Industry Regulatory Authority (FINRA) The Financial Industry Regulatory Authority (FINRA) “protects investors and market integrity through effective and efficient regulation of broker-dealers.” Although not a part of the U.S. government, FINRA is authorized by Congress to “protect America’s investors.” To protect investors, FINRA ensures that All investors receive the basic protections they deserve. Anyone who sells securities has been tested, qualified, and licensed. Every securities product advertisement used is truthful and not misleading. Any securities product sold to an investor is suitable for that investor’s needs. Investors receive complete disclosure about the investment product before purchase. Any would-be financial advisor should study and pass the following FINRA exams: (To register for any FINRA exam, you must be sponsored by a registered broker/dealer firm.) Series 6 – Investment Company and Variable Contracts Products Representative Exam: A 135-minute test with 100 questions related to packaged financial products such as mutual funds, ETFs, closed-end funds, and variable annuities. Great for advisors who don’t plan to provide clients with sophisticated asset management services. Series 7 – General Securities Representative Exam: A 360-minute test with 250 questions, this is the most comprehensive exam for financial advisors to pass, because it covers a wide range of financial products and instruments, including everything in the Series 6 exam, plus all other publicly traded securities, including derivatives such as option contracts. It’s a must for any financial advisor who prefers offering more diverse portfolio solutions. Series 63 – Uniform Securities Agent State Law Examination: Passing this 75-minute, 60-question exam enables you to execute general securities transactions and effect sales within a state jurisdiction. It’s an exam for NASAA (North American Securities Administrators Association) that is administered by FINRA. Series 65 – Uniform Investment Adviser: Passing this 180-minute, 130-question exam earns you the investment advisory representative (IAR) designation, permitting you to accept fees for services related to financial advisory or investment management. Series 65 is also a NASAA exam administered by FINRA. Series 66 (a combination of Series 63 and 65): This 150-minute, 100-question exam conveniently combines the Series 63 and 65 exams into a single exam. (You must have passed the Series 7 to sit for this exam.) A background check, finger-printing, bonding, and additional state fees are all related requirements for these exams. Additionally, every year, you have to pay renewal fees to keep all these licenses in good order. Don’t forget to pay your license renewal fees annually. Failing to renew is a common mistake, especially when a financial advisor is between broker/dealer affiliations. A two-year window is a customary grace period, after which you have to retake these exams. National Association of Insurance Commissioners (NAIC) The National Association of Insurance Commissioners (NAIC) is a national system of state-based insurance industry regulators in the United States, the District of Columbia, and five U.S. territories. NAIC’s mission is to Protect the public interest. Promote competitive markets. Facilitate the fair and equitable treatment of insurance consumers. Promote the reliability, solvency, and financial solidity of insurance institutions. Support and improve state regulation of insurance. To sell insurance products, you must pass your state’s resident state insurance licensing exam, through the NAIC, which varies from state to state. Regardless of where you initially pass your exam, you’ll be able to apply for nonresident licenses for many other states. Sometimes, certain states have additional requirements beyond the basic nonresident online application process, which can be challenging and bureaucratic. Apply Certifications across the Financial Advisory Spectrum Leverage the power of your competencies and credentials by using your expertise in a given area to get your foot in the door. You can then expand your service offerings to accommodate the client’s needs in other areas in which you may be less confident and lacking in credentials. Don’t try to be everything to everyone. For example, if you’ve earned a Chartered Life Underwriter (CLU) certification, it probably makes the most sense for you to lead into a prospective client discussion with how you could optimize the client’s cost-benefit experience in their insurance planning. After the prospect becomes a client in an area of your highest confidence, core competency, and credential, then you can introduce other areas of service, where you may add more value. Don’t let a lack of credentials, education, or expertise in some areas discourage you. You can find plenty of clients who need the services in your areas of specialization along with your unique style, approach, advice, and guidance. The market for financial advisors is an extremely big sea with lots of fish and every fish needs something a little different. Many clients are equipped with rudimentary knowledge and understanding on financial matters, which equates to low confidence. If you’re able to educate and support their good decision-making, their decisions are likely to produce better financial outcomes, and they’ll be more willing to seek your advice (and pay for it) in the future. For example, a client owns a few stocks she heard about on cable news, but she routinely sells during periods of market volatility typically at a loss. She has three dependents but no life insurance or disability insurance. You can deliver tremendous value to her. You can start by educating the client on the wisdom of a diversified portfolio that gives her the confidence to stay invested during tumultuous times. Then, you can advise the client on the importance of basic liability management and planning to protect from catastrophic loss. (Her family will thank you.) Although the client can’t recover the money lost on erratic investment decisions, the money saved by having a balanced plan in place is likely to make up for the past losses and then some.

Article / Updated 03-24-2019

Being a successful financial advisor or financial consultant requires more than mastering a collection of tips and techniques. It requires education, experience, and dedication. However, reading through a list of tips is a great way to remind yourself of what you need to do to stay on top of your game. Here are ten tips for being a successful financial advisor. Some are specific action items, whereas others are more like attitudes or behaviors to adopt. All of them are essential ingredients to making you a well-rounded and thriving member of the financial advisor community. Let Your Conscience Be Your Guide You have a conscience that has been instilled in you since birth. It’s that little voice inside your head that makes you question whether a choice is right or wrong. Pinocchio had Jiminy Cricket to make him mindful of temptation. Others prefer to imagine the conscience as an angel sitting on one shoulder and a devil on the other shoulder debating over the wisdom of taking a certain course of action. However you choose to imagine your conscience, be sure to heed its warning when you encounter temptation. When you’re handling other people’s money and engaging in commissioned sales, you can expect to encounter more than an average share of temptation, so be particularly vigilant. Most temptations in this field are the result of commissioned sales. Although nothing is wrong with selling a great product at a fair price and earning a reasonable profit from the sale, you must always put your role as financial advisor above your role as salesperson. You have a fiduciary responsibility to your clients, not to yourself. If you always act in the best financial interests of your clients, you have nothing to worry about in this area. Your financial advisory career will lead you to some of the most important and powerful relationships and life experiences you’ll ever have. Don’t belittle it by taking shortcuts to make a quick buck or to get another referral. Live by the Golden Rule: Do unto others as you would have them do unto you. Better yet, follow the Platinum Rule: Do unto others as they would want done to them. For example, I hate to be harassed and sold to. I prefer to be educated and given the space to make decisions on my timeline, so a salesperson is much more likely to succeed with me if he takes that approach. Beware of False Profits A false profit is any promise of a low-risk, high-return investment, which is something that doesn’t exist. Think of it as a healthy diet that encourages you to consume lots of sugar. Such a diet breaks the laws of nature. It’s a contradiction. The same is true of false profits; they break the rules of capital markets. Don’t advise or implement capital allocations when you don’t understand all the embedded risks. If an investment looks great on the surface, look below the surface by carefully examining the prospectus. If the investment product being pitched has a private placement offering memorandum, be even more skeptical. Remember the old adage, “If it sounds too good to be true, it probably is,” which reflects the rules of capital markets — you can’t make more money while taking on less risk. As a competent financial advisor, you’ll be a student of the capital markets and be able to identify for yourself, or through the guidance of others, what thresholds dictate appropriate levels of risk. For my own practice, I keep things simple and use a modified version of the Capital Asset Pricing Model (CAPM) to determine when any asset price is fair relative to its risk. Forgetting all formulas, I ask one question: “What’s the 10-year U.S. Treasury note yielding today?” Say the answer is 3 percent. The U.S. government, being the largest and most stable in the world, can be expected to honor its debt obligations 100 percent of the time, so the risk-free return would be 3 percent. If an investment product promises a 10 percent return, that’s more than three times the risk-free rate, so it has more than three times the risk. It’s that simple. If that 10 percent return is touted as risk-free, you should be extremely skeptical, because that rate would severely violate the laws of capital markets. When comparing returns on investment products, the only risk to consider is that of permanent capital loss. Other products, such as annuities, have different risks, which are more difficult to quantify, such as liquidity risk, but with a sound insurance carrier, an annuity doesn’t carry a risk of permanent capital loss. Protect Your Clients from Predators One of your primary responsibilities to your clients is to protect them from predators who seek to scam them out of their money. Encourage your clients to openly discuss any investment ideas they’ve heard about. The only way you’ll find out whether your clients are being targeted is if they tell you. Con artists often discourage their marks from discussing what they consider an opportunity, because greater exposure increases the risk they’ll get caught. Predators come in many forms: family members looking for support and cash flow, salespeople looking to make a big commission, and other people who aren’t aligned with your client’s best interest. Don’t Use Big Words The world is complicated enough, and it’s overflowing with information about everything — thank you, Google. Don’t contribute to the confusion or complication. Describe difficult concepts in plain language, and don’t leave out any gory details. Every strategy has a downside, and your clients should be aware of those downsides. You’re developing a big plan, so explain the upsides and downsides of any investment or insurance product or solution you recommend in the context of the bigger plan. Every profession has its own terminology that enables people within the profession to communicate more precisely and efficiently. For example, medical professionals communicate in their own language. However, you expect your doctor to explain tests and treatments using language you can understand. In the same way, as a financial advisor, you pick up a lot of specialized terminology, but that terminology isn’t appropriate for communicating with your clients. Don’t assume that your clients are up on the latest Bloomberg catchphrases or sound bites. Remember That Good Service Makes Up for Other Shortcomings Ideally, you want to be the financial advisor who offers the best financial performance and customer service available in your area. However, you can still be successful by offering superior customer service and average financial performance. People will want to work with you and stay with you because the level of care, education, and time you offer is worth something to them. You may lose some clients who expect better performance, but you can easily replace them with clients who value service over performance. Of course, you’ll strive for above average performance and above average service, but if performance drags in the short term, your clients won’t be quick to judge. Be Active in a Community Cause Visibility is key to your success as a rainmaker. It’s also a key ingredient to the success of any multi-advisor business. Become involved, giving both your time and money. Seek an issue or cause that’s close to your heart and mind, and do something about it — without a hidden agenda, only a will to change the world, or at least your little corner of it, for the better. Living a life for others is an exciting way to be a human being, and it’s great for business too. People want to work with others who inspire and motivate them. Prospects will see you passionately engaged in a common cause, earning you instant trust and admiration. When prospects discover you through your passion, you have a much easier time transitioning them from prospects to clients. Be Eager to Acquire New Information and to Share What You Know Inspire the acquisition and sharing of knowledge for the purpose of continuously improving the industry and everyone in it. Throughout my career, I’ve benefited from the knowledge that others acquired through their experience and innovation. I continue the tradition by sharing my knowledge and innovations with others. The more you discover and find out, the more innovative you become, generating unique knowledge that’s valuable to others. If you’re not at a point at which you can be innovative, then pick up as much unique knowledge as possible from others and begin to apply it to your own practice, which is yet another way to share what you know. Focus More on Skills, Less on Tools A great financial advisor doesn’t need a one-of-a-kind financial product that’s perfect for every client’s needs. A financial advisor who has a thorough understanding of financial fundamentals and asset and liability management can use a variety of products and solutions to create a personalized plan that serves each client’s unique needs. Focus more on developing knowledge, techniques, and skills than in looking for the perfect products and solutions. If you’re not developing financial planning techniques and skills, then you’re not evolving into a financial advisor. You’ll remain relegated to the more simple life of a salesperson. If you believe that all financial concerns can be answered with a quick turn of phrase or product pitch, then dig deeper. Ask yourself why or how a certain product or solution would impact the client’s life and her dreams. In the process of answering this question, you begin to uncover and explore more interesting intellectual and emotional connections to the client’s money and other assets. The insights gained enable you to make the right recommendation to this client and reveal ways to add value for other clients. Appreciate the Trust Your Clients Place in You Advising on other people’s money is akin to holding the fate of another’s life in your hands. Make no mistake, the gravity of client-advisor relationship is tremendous. You have the power to fulfill or destroy dreams. Be the beacon of hope and financial leader they need to achieve their goals. Don’t thank your clients for their business because that revenue is a small fraction of the wealth that’s been entrusted to you, but rather thank them for being open with you and allowing you to do your best work investigating and uncovering uniquely designed solutions for them. Better yet, show your clients your appreciation by caring for them, as a loving parent cares for her adult children or as a doctor cares for her patients. Remember that their future rests on your shoulders. Always Ask: What If I’m Wrong? When he was about to make a major decision or recommendation, Ken Fisher, one of my early career mentors, would always ask, “What if I’m wrong?” Asking this question is a great way to force yourself to analyze the situation more objectively. It always struck me as a relevant, prudent, and truly selfless question. When you challenge your thinking, you begin to find the source of good advice. Good, unbiased advice is balanced and reasoned without other temptations to sway the final recommendation. “What if I’m wrong?” is the question that every client wants you to be asking yourself. I’ve taken to sharing this question with every client. This method ensures clients understand that every financial decision has pros and cons. Finding the best product or solution for each client involves having to reveal every factor and aspect while monitoring the client’s reaction and sensitivity to those aspects/factors. This approach is the best way to develop custom solutions. Challenge your own presumptions routinely in full view of your clients and prospects.