Finding your perfect niche – the Water Cooler effect at work

Wednesday, February 27th, 2013

At some point, most advi­sors have been told that they should con­cen­trate their efforts on attract­ing clients in a defined niche. There are three rea­sons for this:

• You’ll build unique exper­tise in this group’s needs; as a “spe­cial­ist” in its chal­lenges, you’ll be able to deliver out­stand­ing value that gen­er­al­ists can’t match.
• Depend­ing on the group, you can build cred­i­bil­ity and pro­file by being inter­viewed in indus­try pub­li­ca­tions, writ­ing arti­cles and speak­ing at their indus­try events.
• By focus­ing on a defined niche, you become the “safe choice”   within that group and will see many more refer­rals as a result

Today’s arti­cle on how to find your per­fect niche is a follow-up to “From 0 to 100 clients in 18 months,” a guest arti­cle last month by U.S. indus­try expert Kather­ine Vessenes, which described how she attracted over 100 clients, each of whom paid an annual plan­ning fee of $1200 or more.

Vessenes’ advice on find­ing your per­fect niche is below; to read the first arti­cle on how she went from 0 to 100 fee-paying clients, click here:

The Per­fect Niche:  By Kather­ine Vessenes, JD, CFP®, RFC

When peo­ple ask me how did you man­age to bring on over 100 new clients in 18 months, in a brand new mar­ket, I tell them there were a lot of factors—but close to the top of the list is find­ing the per­fect niche.

In work­ing with multimillion-dollar advi­sors I noticed most of them had clearly defined niches. They knew who their ideal client was and they had a mar­ket­ing plan that worked for their per­fect prospect. Another thing became appar­ent to me early on—only two of the many multi-million dol­lar advi­sors we have assisted, had thought­fully and sys­tem­at­i­cally pur­sued their niche in a business-like manner!

Here is what I mean—only two advi­sors took the time and energy to think about a niche that would be a good fit, and then went about test­ing the mar­ket to see if it would work. One of them (I’ll call him Ted from Seat­tle) actu­ally tested three dif­fer­ent niches. Two were com­plete bombs until he set­tled on the one that still works for him 25 years later.

All the other advi­sors just fell into their niches. Lucky for them, they were in the right place at the right time for their tar­get group. They started work­ing with employ­ees of the local util­ity com­pany, pro­fes­sors at the U, or Boe­ing employ­ees and one good expe­ri­ence led to another—pretty soon a good por­tion of their new busi­ness came from refer­rals in their niche.

I too, tested out a num­ber of dif­fer­ent niches and learned a lot about what works and what doesn’t work:

What didn’t work for us or lessons from the trenches:

Clients who are too far from us in social class, cul­ture, edu­ca­tion and self-confidence.

One of the niches we exper­i­mented with involved mem­bers of a local Evan­gel­i­cal church in the Mid­west. The church is huge and if the niche worked, it would have kept us busy indef­i­nitely. We even had a Bib­li­cally respon­si­ble mutual fund that we thought would appeal to this group.

Even though my own spir­i­tual beliefs were not too far from this group, I was much dif­fer­ent in the other cat­e­gories: with my law degree and CFP, I had much more edu­ca­tion than the prospects did. In fact, I didn’t even know another woman out of the thou­sands of atten­dees of this church who had a doc­tor­ate degree. I didn’t hang out with this group socially and once you’ve been legal coun­sel to a for­mer US pres­i­dent and you’ve started your own busi­ness, you don’t lack in the self-confidence depart­ment, either. Or maybe it was just my sassy Texas her­itage leak­ing through.

Don’t get me wrong. These were all kind, lovely peo­ple. In fact you would prob­a­bly want your chil­dren mar­ry­ing them. There was just one problem—they were so far from my per­son­al­ity, back­ground and char­ac­ter, we just never jelled.

So you can imag­ine how mad­den­ing it was for me to watch some of the women refuse to make any deci­sions about their money, unless their hus­bands gave them the nod of approval. (Inside I am think­ing: “Honey you can do this. You are smart and edu­cated! This is the rea­son we got the vote. It is your money—you can make the decisions!”)

Even­tu­ally it became clear to me that my big Texas per­son­al­ity was just too much for the laid-back Mid­west woman. No mat­ter how much I tried to “pull it in” I was never going to fit in with this group. Short of mov­ing back to Austin, I had to admit this niche was not a good fit, cut my losses and move on.

Solu­tion:

Today we look for clients who do fit with our social class, cul­ture, edu­ca­tion and self-confidence. They are not fab­u­lously wealthy. In fact, they made their money the same way we did—by get­ting a good edu­ca­tion and then work­ing hard.

All of our clients have doc­tor­ate degrees. They actu­ally like that I have a lot of education—it means some­thing to them and they are not intim­i­dated by it. They rec­og­nize that they may be very smart in their area of exper­tise, but they know lit­tle about finances and they appre­ci­ate our expe­ri­ence and depth of knowledge.

We also seem to fit socially. Many of them will ask me to meet them for social events and I have made some deep friend­ships in a state where pre­vi­ous to open­ing the office here, I only knew two peo­ple: my daugh­ter and son-in-law.

Older clients, approach­ing retirement

Yes, I know this is heresy and many peo­ple love this as a niche—I am just say­ing it didn’t work for us.  The rea­son most advi­sors like this mar­ket is this is where the money is—these folks have accu­mu­lated more wealth, so it works out great for a busi­ness model that is based on AUM.

Older clients who are pre-retirement didn’t work for us for a cou­ple of rea­sons: first, because our mar­ket is highly edu­cated, many prospects in this cat­e­gory already had their own advi­sors and weren’t in enough pain to switch to a new one. Sec­ondly, they had no inten­tion of chang­ing their lifestyle so they could save the money they needed for retire­ment.  Typ­i­cally they were in houses that were too expen­sive for them, had high amounts of debt, or were spend­ing a for­tune putting kids through schools they couldn’t afford. In fact, most had so messed up their finances, there wasn’t enough time for me to fix them between now and their retire­ment date.

Our solu­tion:

We found we work well with younger clients who are just mov­ing into their careers. Yes, this may seem like heresy, too, because I was taught when I started in the busi­ness it was impor­tant to find clients who were between 10 years younger and 10 years older than the advi­sor. Although I refuse to put my birth cer­tifi­cate up on line, many of these clients are younger than me, a lot younger.

This actu­ally works out great—they have lots of prob­lems and lots of pain. That means there are many ways we can help them and they are very grate­ful. It also means we can help them set up a good sav­ings strat­egy now that will ben­e­fit them for their entire life. I feel like we are mak­ing a dif­fer­ence in every case.

A few of our clients have asked me how long I will be work­ing as an advisor—I tell them the truth—I will be doing this until I am 95—they will be retired long before me. The rea­son is, this is so much more fun than retire­ment, I can’t imag­ine quitting.

Folks who couldn’t save

Another niche we exper­i­mented with was col­lege funding—we looked for par­ents who wanted a cost effec­tive way to put their kids through school. Yes, this is another niche that works great for some advisors—but it didn’t for us.

One of the things we found was this group, even in the most afflu­ent sub­urbs, was really strug­gling finan­cially. They weren’t sav­ing for retire­ment and they cer­tainly didn’t have any money for col­lege fund­ing. We did some fab­u­lous and time con­sum­ing col­lege fund­ing plans—helped these guys get more finan­cial aid, changed a lot of lives and didn’t make any money. At least some stu­dents will fin­ish col­lege with a lot less debt—which makes me feel bet­ter about the work we did.

Solu­tion:

Our ideal client likes to live on less than they make. In fact many of our two-earner house­holds live on one salary and bank the rest. We find the younger the client, the more likely they will be good savers. They are not wealthy now, but if they con­tinue with our plan, they will be.

What did work for us: The Water Cooler effect at work

We found it was imper­a­tive that our clients not only worked for the same com­pany, but they were phys­i­cally sit­u­ated in the same build­ing. Being in the same build­ing turned out to be a far big­ger fac­tor than I first real­ized. I think this group eats together in the lunch­room every day and hang out in between meet­ings. Even­tu­ally they must run out of things to talk about—and that’s when our name comes up.

This is one of the key fac­tors I encour­age advi­sors to con­sider when select­ing a new niche. This worked much bet­ter for us than col­lege funding—because even though that niche had all the stu­dents attend­ing the same school, the par­ents (our prospects) worked for count­less dif­fer­ent com­pa­nies. In gen­eral, the par­ents didn’t hang out together. If they did hang out, they didn’t spend enough time for the con­ver­sa­tion to turn to finances. I sur­mised that it takes time and trust for peo­ple to start talk­ing about your services.

Another advan­tage of hav­ing them work for the same com­pany is it saves us a lot of time in get­ting up to speed on dif­fer­ent ben­e­fit plans. I can now rat­tle off the match­ing lim­its and dis­abil­ity plans of the biggest employ­ers in our niche. We have so many clients there, this infor­ma­tion comes nat­u­rally and saves us from hav­ing to rein­vent the wheel with each new client. It makes us look like the experts we are—because we know their plans back­wards and forwards.

One last com­ment about the pro­nun­ci­a­tion of the word “niche”. Being from Texas, lov­ing big hair and lots of bling, I don’t use the frou-frou pro­nun­ci­a­tion I hear from my more edu­cated friends around the coun­try. They pro­nounce the word: NEESH.

I much pre­fer NITCH—because it rhymes with itch and that is what we are try­ing to do for our clients—find the itch and then scratch it for them.

Kather­ine Vessenes, JD, CFP®, RFC, is one of the top Prac­tice Man­age­ment con­sul­tants for finan­cial advi­sors. The cre­ator of the No-Sell Sale®, she is con­sid­ered the country’s lead­ing prac­tice man­age­ment con­sul­tant on build­ing a multimillion-dollar busi­ness (Dear­born) and the country’s best known author­ity on the legal and eth­i­cal issues of finan­cial advi­sors (Bloomberg). She has her own prac­tice where she fol­lows the advice she gives other advi­sors. She can be reached at:  952−401−1045, www​.vest​men​tad​vi​sors​.com or katherine@vestmentadvisors.com

© 2013 Kather­ine Vessenes. Per­mis­sion to reprint required.

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Tags: Advice, Cfp, Challenges, Credibility, Generalists, Guest Article, Industry Expert, Industry Publications, Jd, Katherine Vessenes, Marketing Plan, Match, Multimillion Dollar, Niche, Niches, People, Profile, Referrals, Rfc, Water Cooler
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How pension reform might affect advisor compensation—and what you can do about it.

Wednesday, March 7th, 2012

By Marc Lam­on­tagne, CFP, R.F.P, FMA

Pen­sion reform is still in the news these days, but a num­ber of sto­ries going back to last spring got me think­ing about how a government-led shock could affect indi­vid­ual finan­cial advi­sors and the way we do business.

Pro­pos­als under debate included very seri­ous dis­cus­sions on the intro­duc­tion of a sup­ple­men­tary pen­sion plan such as a defined ben­e­fit pen­sion acces­si­ble to employ­ees of small and mid-size com­pa­nies and expand­ing Canada Pen­sion Plan con­tri­bu­tions, either on a vol­un­tary or com­pul­sory basis.

The likely result of such an intro­duc­tion would be less avail­able money for clients to save or the crowd­ing out of the RRSP con­tri­bu­tion room that is a major moti­va­tor for Cana­di­ans to save. Either will lead to a drop in busi­ness and, of course, com­mis­sion and trailer rev­enue for commission-based advi­sors. Iron­i­cally, this drop in rev­enue will hap­pen at a time that clients will be look­ing for expanded advice on the con­se­quences of pen­sion reform on their retire­ment plans.

Advi­sors as a group can be quite resilient in the face of adver­sity as they showed in the 2008–2009 bear mar­ket. Some advi­sors will sim­ply expand other busi­ness such as insur­ance when faced with a decline of rev­enue from their cur­rent busi­ness. How­ever, to avoid this cross-subsidization of com­pen­sa­tion from one busi­ness to another, commission-based advi­sors might want to look at what their fee-for-service col­leagues are doing.

Flat fees

Advi­sors are com­monly using flat fees to pro­vide advice uncon­nected to a prod­uct sale. This is usu­ally a lump-sum fee based on work out­side their day-to-day advice, such as a com­pre­hen­sive finan­cial plan. Many fee advi­sors also use flat fees for mod­u­lar finan­cial plans (a mini-financial plan that looks at one issue or “module”).

Accord­ing to the 2010 Advi­sor Sur­vey Report by To Fee or Not to Fee (TFONTF) and co-sponsored by the CIFPs, sur­vey par­tic­i­pants were asked what they charged for a finan­cial plan on the low end, what they charged on aver­age, and what they charged on the high end. This is more detailed than other sur­veys on finan­cial plan­ning fees which  often pro­vide sim­ple aver­ages with­out a full appre­ci­a­tion of ranges charged to var­ied client seg­ments or by advi­sors who hold var­i­ous invest­ment licences.

The TFONTF matrix approach reveals the full spec­trum of pric­ing. On the low-end, over half of the sur­vey par­tic­i­pants charge less than $1,000 for a finan­cial plan. The most com­mon fee seems to be fairly evenly spread from $1,000 to $2,000. On the upper end, finan­cial plans cost­ing over $5,000 were most fre­quent, fol­lowed by the $2,500 to $3,000 range.

Annual retainer fees

Retainer fees are flat fees charged for a ser­vice over a par­tic­u­lar time. Con­trary to the legal pro­fes­sion “retainer”, it is not sim­ply a pool of money on deposit with the advi­sor to be billed against for hourly work, but for a par­tic­u­lar ongo­ing ser­vice. Though few advi­sors are using retainer fees, it is the ideal com­pen­sa­tion vehi­cle for pro­vid­ing ongo­ing finan­cial advice unre­lated to invest­ment man­age­ment or insur­ance; for exam­ple, mort­gages, group ben­e­fits, rental prop­er­ties, and pensions.

Sur­vey par­tic­i­pants who use retain­ers are, for the most part, charg­ing very lit­tle. The smaller fees may sug­gest that this type of fee is used in com­bi­na­tion with other types of com­pen­sa­tion such as invest­ment man­age­ment fees or trail­ers. On the low end over 40% charge less than a $1,000 a year. On aver­age, the most com­mon fee was between $1,000 and $1,500, and on the upper end it was over $5,000.

Also of note is the fre­quency of col­lect­ing retainer fees. The largest seg­ment, a quar­ter of sur­vey respon­dents, col­lect this fee on a quar­terly basis in arrears. The second-most com­mon was annu­ally in advance.

Government-led shocks are a real­ity in this new-normal world, just ask any Ontario phar­ma­cist. Finan­cial advi­sors need to pre­pare for such shocks, and one way is to take con­trol of how they get paid for the advice they provide.

Marc Lam­on­tagne, CFP, R.F.P., FMA is a fee-based finan­cial plan­ner with Ryan Lam­on­tagne Inc., fee-model prac­tice man­age­ment trainer, and author of To Fee or Not to Fee II — How to design a fee finan­cial advi­sory prac­tice.  www​.tofee​ornot​tofee​.com

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Tags: Adversity, Bear Market, Benefit Pension, Business Proposals, Canada Pension Plan, Canada Pension Plan Contributions, Cfp, Financial Advisors, Fma, Last Spring, Lump Sum, Mid Size Companies, Motivator, Pension Reform, Rrsp Contribution, Serious Discussions, Service Colleagues, Subsidization, Survey Participants, Survey Report
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How Investors Select Financial Advisors (Waymire)

Wednesday, December 7th, 2011

by Jack Waymire, The Pal­adin Registry

Investors use two pri­mary processes when they select finan­cial plan­ners and invest­ment advisors.

57% of investors use a sub­jec­tive approach that is based on the fol­low­ing criteria:

Brand names
48% say they ‘feel’ safer when the com­pany name is well known; a sub­stan­tial drop from the 62% of a few years ago.

This per­cent­age has eroded as more major brand names (Gold­man Sachs, Cit­i­group, Bank of Amer­ica) have paid big fines for cheat­ing investors.

Like­abil­ity
29% select the advi­sor they like the best. Per­son­al­i­ties are major factors.

Why? Peo­ple trust peo­ple they like.

Fund Per­for­mance
11% believe the per­for­mance of mutual funds, ETFs, and hedge funds con­sti­tute an advi­sor track record.

These investors do not ask for proof that the invest­ments were selected before the per­for­mance occurred.

Ref­er­ences
9% say ref­er­ences are impor­tant. Investors also say they know advi­sors do not pro­vide bad references.

How­ever, some investors believe ref­er­ences are sub­sti­tutes for track records.

Sales Pitches
17% believe the claims in sales pitches are real because advi­sors are required by law to tell the truth.

Reg­u­la­tors have no con­trol over ver­bal infor­ma­tion and lower qual­ity advi­sors know it.

Com­mis­sions
54% do not believe com­mis­sions are an out-of-pocket expense. Advi­sors tell them prod­uct com­pa­nies pay com­mis­sions and the expense is not passed through to investors in the form of higher fees.

Writ­ten infor­ma­tion
4% require any form of writ­ten infor­ma­tion and lower qual­ity advi­sors do not vol­un­teer documentation.

31% of investors use an objec­tive approach that is based on the fol­low­ing criteria:

Expe­ri­ence
82% make years of expe­ri­ence their most impor­tant cri­te­ria.

Col­lege degree
53% believe col­lege degrees are impor­tant as long as the degrees have some finan­cial rel­e­vance.

Cer­ti­fi­ca­tions
44% believe cer­ti­fi­ca­tions are important.

How­ever, 84% admit they do not know a good cer­ti­fi­ca­tion (CFA®, CFP®, CIMA®, CPA/PFS®) from a bad one.

Com­pli­ance record
95% say a clean com­pli­ance record is important.

How­ever, only 4% say they check com­pli­ance records before select­ing an advi­sor.

Fees
61% believe fees are the appro­pri­ate way to pay for finan­cial advice.

How­ever, 83% said the com­pen­sa­tion of advi­sors is very con­fus­ing and they are not sure what they get in return.

Doc­u­men­ta­tion
Only 21% require some form of doc­u­men­ta­tion for the above information.

10% of investors acknowl­edge they do not have a process. The major­ity of these investors select advi­sors based on the rec­om­men­da­tions of some­one they trust to pro­vide a qual­ity refer­ral (CPA, attor­ney, friend, fam­ily mem­ber, asso­ciate). They assume the refer­ral source has per­sonal knowl­edge of the advi­sors’ com­pe­tence, ethics, and results.

Sub­jec­tiv­ity ben­e­fits advi­sors with the best sales skills. Objec­tiv­ity ben­e­fits advi­sors with the best cre­den­tials, ethics, busi­ness prac­tices and ser­vices. These dif­fer­ences are like night and day, but they are blurred by the sales skills of advisors.

• The advi­sor with the best per­son­al­ity and sales skills wins in sub­jec­tive selec­tion processes
• The advi­sor with the best sales skills also has a major advan­tage in objec­tive selec­tion processes

Why? There are four pri­mary reasons:

1. All advi­sors claim to be eth­i­cal, finan­cial experts whether it is true or not
2. Very few advi­sors pro­vide any type of proof that they are real experts
3. Even fewer investors know how to deter­mine the qual­ity of advi­sors which is why such a high per­cent­age use no process or a sub­jec­tive process
4. Investors do not research advi­sors before they select them

High qual­ity advi­sors should pro­vide proof they are trust­wor­thy finan­cial experts. If they do not pro­vide proof they are ask­ing investors to select them based on sales claims, just like their lower qual­ity com­peti­tors. When used prop­erly, proof is a dif­fer­en­ti­at­ing char­ac­ter­is­tic. This solves a major prob­lem for higher qual­ity advi­sors who say “dif­fer­en­ti­a­tion” is their sec­ond biggest mar­ket­ing chal­lenge. Num­ber one is a con­tin­u­ous flow of new qual­i­fied prospects every month.

Data is taken from an analy­sis that was devel­oped by Pal­adin Reg­istry (www​.Pal​ad​in​Reg​istry​.com) in July, 2011.

Jack Waymire, con­trib­u­tor, The Trust Advi­sor.

Perma­link: http://​thetrustad​vi​sor​.com/​w​e​a​l​t​h​-​t​e​c​h​-​n​e​w​s​/​s​e​l​ect

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Tags: Bank Of America, Cfp, Citigroup, College Degree, College Degrees, Compliance Record, Etfs, Financial Advisors, Financial Planners, Fund Performance, Goldman Sachs, Hedge Funds, Investment Advisors, Objective Approach, Paladin, Pfs, Pocket Expense, Quality Advisors, Sales Pitches, Subjective Approach, Substantial Drop
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The trailer fee compensation model is making inroads—And why that might be a bad thing.

Wednesday, June 15th, 2011

By Marc Lam­on­tagne, CFP, R.F.P., FMA

Over the years there have been numer­ous debates about whether trail­ers should be con­sid­ered a fee or a com­mis­sion. Adding to the con­fu­sion are indus­try stal­warts (includ­ing yours truly) who have argued con­vinc­ingly on both sides, but new research sug­gests we may be wast­ing our col­lec­tive breath.

The results of the 2010 Advi­sor Sur­vey Report by To Fee or Not To Fee (TFONTF) and co-sponsored by the CIFPs indi­cate that the trailer fee com­pen­sa­tion model may be gain­ing trac­tion in Canada.

Think­ing of your gross earn­ings over the last 12 months, which one of the
fol­low­ing meth­ods rep­re­sented the largest per­cent­age of your earn­ings?

This ques­tion was designed to reveal which method of com­pen­sa­tion is the largest seg­ment of an advisor’s com­pen­sa­tion in a par­tic­u­lar com­pen­sa­tion model (fee or com­mis­sion). Invest­ment com­mis­sions, trail­ers, and insur­ance com­mis­sions dom­i­nate the com­pen­sa­tion of commission-based advi­sors.

On the other hand, basis-points and, inter­est­ingly, trail­ers dom­i­nate the com­pen­sa­tion of fee-based advi­sors. There is also a smaller group of fee-based advi­sors who rely on hourly fees as their main com­pen­sa­tion sta­ple.

Per­haps the trail­ers showed up sec­ond for both groups because of the par­tic­i­pants’ inter­pre­ta­tion of whether trail­ers are a fee or a com­mis­sion. Maybe they are nei­ther, but sim­ply a third form of com­pen­sa­tion favored by both groups.

Nev­er­the­less, trail­ing com­mis­sions (trail­ers), AKA ser­vice fees, dom­i­nate the com­pen­sa­tion of a large seg­ment of both com­mis­sion and fee advi­sors. For this rea­son TFONTF would like to declare trail­ers as a third, and dis­tinct, form of com­pen­sa­tion in addi­tion to fees and com­mis­sions. This new view of trail­ers will change the focus of future advi­sor sur­veys.

Though MFDA advi­sors in both camps favor trail­ers, it sim­ply can­not be explained away as a solely MFDA model (per­haps due to the lack of access to an in-house fee-based account) because there is also a high rate of usage by IIROC-licenced advisors.

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Tags: 12 Months, Basis Points, Cfp, Collective Breath, Compensation Model, Confusion, Debates, Fma, Gaining Traction, Gross Earnings, Hand Basis, Industry Stalwarts, Inroads, Investment Commissions, Participants, Segment, Staple, Survey Report, Surveys, Trailers
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2010 National Survey of Canadian Financial Advisors

Wednesday, June 1st, 2011

2010 Advi­sor Surveys

Open March 15, 2010 to April 15, 2010

To Fee or Not to Fee is launch­ing its sec­ond annual national sur­vey of Cana­dian fee finan­cial advisors.

The sur­vey is open to all finan­cial advi­sors, no mat­ter what their level of fee income. We have also added a sec­ond sur­vey this year for the commission-based advisor.

Because the sur­vey results will be com­piled and sent to all the par­tic­i­pants, there are sev­eral ben­e­fits to advi­sors for participating:

•  Help elim­i­nate the myths and mis­un­der­stand­ings of the fee vs. com­mis­sion mod­els.
•  Pro­vide pric­ing guide­lines.
•  Under­stand the tran­si­tion process.

“The fee advi­sor mar­ket is fas­ci­nat­ing, but quite con­fus­ing and filled with inac­cu­rate data,” accord­ing to Marc Lam­on­tagne, founder and work­shop leader. “We think advi­sors will ben­e­fit from tak­ing the sur­vey because it will prompt some thought­ful con­sid­er­a­tion of their prac­tice and give them a fee-model benchmark.”

To Fee or Not to Fee is an advi­sor train­ing com­pany spe­cial­iz­ing in the tran­si­tion to the fee model. Lam­on­tagne will also present the sur­vey results at the 2010 CIFPs con­fer­ence in Nia­gara Falls from June 13 to 16, 2010.

Please con­tact Marc Lam­on­tagne, CFP, R.F.P., FMA, at (613) 240‑8308 or marc@tofeeornottofee.com if you have any ques­tions or com­ments.

Please click on the appro­pri­ate sur­vey choice:

2010 Fee Advi­sor Sur­vey Click here to take survey

2010 Com­mis­sion Advi­sor Sur­vey Click here to take survey

More from Marc Lam­on­tagne — Ideas from the 2009 CIFPS Con­fer­ence — Video Inter­view from IE Television:

Over­com­ing three obsta­cles to fee-based busi­ness

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Tags: Advisor Training, Benchmark, Canadian Financial Advisors, Cfp, Financial Advisor, Fma, Inaccurate Data, Misunderstandings, Models, Myths, National Survey, Niagara Falls, Obstacles, Participants, Survey Results, Surveys, Television, Thoughtful Consideration, Transition, Video Interview, Workshop Leader
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You Missed a Great Conference!

Wednesday, May 25th, 2011

The CIFPs 8^th National Con­fer­ence Review

By Marc Lam­on­tagne, CFP, R.F.P, FMA

This is my sec­ond con­sec­u­tive year attend­ing this con­fer­ence and once again the agenda was PACKED. Each day began about 7:30 am and typ­i­cally went to 6:00 pm, with din­ner start­ing pronto at 6:30. You clearly earn your CE cred­its and receive your money’s worth at this conference.

The agenda was a smor­gas­bord; enough to quench the thirst for nov­elty of 500 to 600 atten­dees. The high­light was undoubt­edly Her­mann F. Leinin­gen with RBC Global Asset Man­age­ment. Leinin­gen was very funny, and he man­aged to walk the audi­ence through sev­eral com­plex eco­nomic sce­nar­ios and sus­tain their interest!

Take away: Expect U.S. inter­est rates to stay low for at least the next nine months or until there is a jobs recov­ery, stocks are still trad­ing at the lower end of the band due to con­tin­ued global eco­nomic uncer­tainty, and the demand for oil from China and India has barely scratched the surface.

Like any con­fer­ence there were a few mutual fund com­pany “talk­ing heads,” although the more inter­est­ing mate­r­ial came from indus­try par­tic­i­pants such as Cary List, Pres­i­dent and CEO of the Finan­cial Plan­ners Stan­dards Coun­cil. List pre­sented some of the find­ings of their recent con­sumer sur­vey on the ben­e­fits of finan­cial plan­ning. This is news that all CFP pro­fes­sion­als will want to share with their clients and prospects. Shawn Bray­man, Pres­i­dent of Plan­Plus, offered us an overview of the top aca­d­e­mic and indus­try research in the field of finan­cial plan­ning. How­ever, he had so many fas­ci­nat­ing papers to dis­cuss, it was unfor­tu­nate he had only an hour to cover his mate­r­ial.  And yours truly gave a short pre­sen­ta­tion on the recent 2010 Advi­sor Sur­vey Report, con­clud­ing that the deliv­ery of finan­cial advice is not that dif­fer­ent between fee and com­mis­sion models.

Susan Wol­burg Jenah, Pres­i­dent & CEO of IIROC, pro­vided an update on the Client Rela­tion­ship Model (CRM) pro­pos­als that will impose greater dis­clo­sure on the indus­try in order to increase investor pro­tec­tion. How­ever, the CRM has dragged on for so long and mor­phed so many times, it is hard to believe it will ever mate­ri­al­ize. Asked by an attendee how the devel­op­ments on com­pen­sa­tion in the U.K. and Aus­tralia might affect us here, Wol­burg Jenah said that IIROC was keep­ing a close eye on devel­op­ments that could poten­tially influ­ence com­pen­sa­tion mod­els in Canada, although it is prefer­able that indus­try par­tic­i­pants “vol­un­tar­ily” assess how to bet­ter align the inter­ests of clients and advisors.

The final day ended at noon, but the morn­ing still had sev­eral excel­lent speak­ers such as Dr. Dale Orr, Jamie Golombek, and Kevin O’Brien, who filled the morn­ing with great nuggets of wisdom.

Take away: Dr. Orr from Eco­nomic Insight pro­vided his short-term pre­dic­tions for Canada’s econ­omy: neg­li­gi­ble infla­tion, the dol­lar will trade close to par or maybe even higher if the price of oil increases, short-term rates will be higher in Canada than the U.S. (again putting upward pres­sure on our dol­lar), expect the Bank of Canada pol­icy rate to increase by 25 basis-points at every fixed announce­ment date for the next three years until it reaches the tar­get of 4% to 4.5%, and finally, don’t expect to see a bal­anced fed­eral bud­get until 2014–2015.

Jamie Golombek from CIBC Pri­vate Wealth Man­age­ment, who always stages a grand show, regaled the audi­ence with sto­ries of cre­ative bro­kers who sup­pos­edly found loop­holes in the TFSA con­tri­bu­tion rules. He also offered sev­eral use­ful tax strate­gies, updates, and sug­ges­tions on advis­ing your clients based on recent tax court decisions.

Take away: Advi­sors should be rec­om­mend­ing to almost every client that they top up their TFSA con­tri­bu­tion room prior to mak­ing RRSP contributions.

And finally, cer­ti­fied finan­cial plan­ner Kevin O’Brien from Kevin O’Brien & Asso­ciates told the audi­ence his some­times funny, some­times heart­felt story of man­ag­ing his parent’s messy estate before he became an advi­sor. It affected his cur­rent approach to estate plan­ning so much that he pub­lished his story for other advi­sors to read in Where There’s a Will….There’s a Way.

Over­all, it was an excel­lent con­fer­ence, and I would highly rec­om­mend attend­ing CIFP 2011 to be held in Ottawa from June 5 to 8. Media arti­cles from some of the pre­sen­ta­tions are avail­able on the CIFP website.

Fall Con­fer­ence Alert!

There are two first-rate con­fer­ences com­ing up in the fall that I will attend and rec­om­mend as well worth the investment.

The first is the IAFP Annual Sym­po­sium in Banff from Sep­tem­ber 23 to 25, 2010. This one is par­tic­u­larly enjoy­able; it is more sym­po­sium than con­fer­ence because it is anchored by a sin­gle finan­cial plan­ning case study. All speak­ers are required to ref­er­ence this case study in their pre­sen­ta­tions and are encour­aged to pub­lish papers from their spe­cialty per­spec­tive. This cer­tainly elim­i­nates the dis­ori­en­ta­tion one can some­times feel lis­ten­ing to mul­ti­ple talk­ing heads on sev­eral diverse sub­jects at other con­fer­ences. This year the case study is about a retir­ing busi­ness owner who also hap­pens to be a finan­cial plan­ner (is this a coin­ci­dence?). The sym­po­sium cul­mi­nates with a half-day dis­cus­sion on the case study by the 125+ attendees.

The sec­ond is the Knowl­edge Bureau’s (KB) Dis­tin­guished Advi­sor Con­fer­ence in Orlando from Novem­ber 14 to 17, 2010. Knowl­edge Bureau fac­ulty speak­ers such as Richard Croft and Doug Nel­son are top notch and KB Pres­i­dent Eve­lyn Jacks obvi­ously used her time wisely recruit­ing the likes of Don Stew­art, CEO Sun Life Finan­cial, while she was a fel­low mem­ber of the Fed­eral Task Force on Finan­cial Lit­er­acy. The other com­pelling rea­son to attend is this: each day ends at the utterly civ­i­lized time of 1:30 pm, giv­ing atten­dees ample time to enjoy the sun and nearby ameni­ties with col­leagues and family.

Marc Lam­on­tagne, CFP, R.F.P., FMA is a fee-based finan­cial plan­ner with Ryan Lam­on­tagne Inc., fee-model prac­tice man­age­ment trainer, and author of To Fee or Not to Fee II — How to design a fee finan­cial advi­sory prac­tice.  www​.tofee​ornot​tofee​.com

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Tags: Benefits Of Financial Planning, Cfp, Client Relationship, Consumer Survey, Economic Scenarios, Financial Advice, Financial Planners Standards Council, Global Asset Management, Global Economic Uncertainty, Greate, Industry Participants, Leiningen, Mutual Fund Company, Rbc Global, Recovery Stocks, Relationship Model, Second Consecutive Year, Smorgasbord, Survey Report, Talking Heads
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The Advisor Your Clients Crave

Wednesday, May 18th, 2011

Stephen Wershing’s pre­sen­ta­tion asks some very impor­tant ques­tions for advi­sors to con­tem­plate. Great ques­tions lead to great answers, and the last posi­tion you want to find your­self in, is with a prospec­tive client sit­ting in front of you, think­ing to them­selves, “So what?” or worse say­ing it out loud. The objec­tive of your client com­mu­ni­ca­tions should be to rein­force to your clients the “Why did I become your client?”, and to keep the “What have you done for me lately?” answers fresh.

Make a point of scan­ning through the pre­sen­ta­tion for the ques­tions. If you hover your pointer over “more,” you can full-screen the viewer.

The Advi­sor Your Clients Crave on Prezi

Stephen Wer­sh­ing, CFP® coaches finan­cial advi­sors to be more effec­tive and suc­cess­ful, and attract more clients and refer­rals, by devel­op­ing more client-connected and client-driven prac­tices. His process of col­lect­ing sys­tem­atic and objec­tive client feed­back and using it to reori­ent an advisor’s prac­tice effec­tively engages an advisor’s best clients to drive the strate­gic plan of the busi­ness. He con­sults finan­cial prac­ti­tion­ers on many prac­tice man­age­ment issues, includ­ing strate­gic dif­fer­en­ti­a­tion, client advi­sory boards, and imple­ment­ing tech­nol­ogy. Read more from the author/contributor here.

Source: Stephen Wer­sh­ing, The Client Dri­ven Practice

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Tags: Advisory Boards, Cfp, Client Communications, Client Feedback, Contributor, Differentiation, Driven Practice, Financial Advisors, Financial Practitioners, Implementing Technology, Nbsp, Objective, Pointer, Practice Management Issues, Presentation, Prospective Client, Referrals, Relationship, Scanning, Strategic Plan
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The Top Three Reasons Clients Choose You

Wednesday, February 16th, 2011

Crit­i­cal to attract­ing clients and receiv­ing refer­rals is a finan­cial advi­sor’s com­pet­i­tive advan­tage, a strate­gic dif­fer­en­tia­tor, a unique value propo­si­tion, some­thing that enables peo­ple to under­stand why they should choose you, or send you a refer­ral, over all other finan­cial advi­sors.

You must be known for something.

Here is one sim­ple mar­ket­ing exer­cise to help deter­mine whether there is some­thing about your prac­tice that sep­a­rates you from the com­pe­ti­tion: List the top three rea­sons clients should choose you over other advi­sors. Go ahead, take out a piece of paper and write them down. Come back when you’re done.

So, what did you write? Are they three things other finan­cial advi­sors would not write, or that other advi­sors could not claim?

Prob­a­bly not, and don’t take offense. For most of our careers, we have been trained and encour­aged to use the same clichéd terms. This part is hard. I have worked with hun­dreds of advi­sors, and reviewed hun­dreds of advi­sor web­sites, and prac­ti­cally all of them say essen­tially the same thing. Many say EXACTLY the same thing! Here is a list of things that will not dif­fer­en­ti­ate you:

• Trust
• Expe­ri­ence
• Good cus­tomer service
• Finan­cial planning
• Retire­ment planning
• Indi­vid­u­al­ized recommendations

Even peo­ple who speak and con­sult in our field fre­quently get it wrong. At FPA Den­ver 2010, Vern Hay­den, in his talk “Dif­fer­en­ti­ate Or Die” gave a par­tial list of poten­tial dif­fer­en­tia­tors. But, these, too, will not dif­fer­en­ti­ate you:

• Fee-only
• Objec­tiv­ity
• Being a CFP

Some of these are “table stakes.” Things that must be true, or that you at least must claim, to earn the right to talk to a poten­tial client at all. Some of these may be strengths; an aspect of your prac­tice that will increase client sat­is­fac­tion but not nec­es­sar­ily sep­a­rate you from many other advisors.

And let’s get this out of the way right now – I know, every­body says it but you actu­ally do it. Got it. I know you are vastly bet­ter at what­ever it is than the half-million other advi­sors in the coun­try. Even so, here is the hard truth: when every­one else says the same thing, how is a prospec­tive client to know?

Here is a sim­ple test to help deter­mine whether what you are say­ing will dif­fer­en­ti­ate you. Ask “could an advi­sor say the oppo­site and still be cred­i­ble?” For exam­ple, if you say one of your top three rea­sons is because you pro­vide great cus­tomer ser­vice, could an advi­sor say to a client “I do not pro­vide great cus­tomer ser­vice” and still be in busi­ness? Prob­a­bly not. On the other hand, if one of your top three rea­sons peo­ple in your tar­get mar­ket should come to you (assum­ing for the moment your tar­get mar­ket is obste­tri­cians) is “I know the par­tic­u­lars of plan­ning and risk man­age­ment for obste­tri­cians,” could an advi­sor say to a poten­tial client “I do not know the par­tic­u­lars of plan­ning and risk man­age­ment for obste­tri­cians?” Assum­ing the advi­sor is not tar­get­ing obste­tri­cians, sure.  In fact, most should say it, because that is a legit­i­mate specialty.

This is not a per­fect test, but it is one way to eval­u­ate whether what you claim has the poten­tial to sep­a­rate you from the competition.

Your dif­fer­en­tia­tor, your niche, your unique value propo­si­tion, may be the hard­est mar­ket­ing ques­tion to answer. But answer it you must, or your busi­ness devel­op­ment and refer­ral pro­grams will never come close to their potential.

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Tags: Cfp, Client Satisfaction, Competitive Advantage, Differentiator, Differentiators, Exercise, Financial Advisor, Financial Advisors, Financial Planning, Fpa, Good Customer Service, Marketing, Marketing Help, Objectivity, Piece Of Paper, Referral, Referrals, Retirement, That Enables People, Unique Value Proposition, Vern Hayden
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A 6-Step Retirement Income Strategy for Mid-Market Clients

Wednesday, February 9th, 2011

By Betty Mered­ith, CFA, CFP, CRC and Kevin S. Seib­ert, CFP, CRC, CEBS

Build­ing a retire­ment plan is far dif­fer­ent from cre­at­ing a stan­dard finan­cial plan. Not only do you have to extrap­o­late your client’s needs for the next 20 to 30 years, but you also have to con­vert assets, allo­cate income, and opti­mize taxes. Here’s a six-step guide to sys­tem­at­i­cally build­ing retire­ment plans for middle-income clients.

Because retire­ment income requires a process, not just prod­ucts. There is no sin­gle prod­uct that will meet all of a retiree’s income needs. There is no “magic bul­let” that can be applied to every situation.

This is where the retire­ment income man­age­ment (RIM) process comes into play. Built on the six-step finan­cial plan­ning process, the RIM process iden­ti­fies a client’s goals, resources, unique retire­ment risks, tax and estate-planning oppor­tu­ni­ties, and options for clos­ing income gaps prior to and dur­ing retire­ment. It then dri­ves those vari­ables through a series of income con­ver­sion con­sid­er­a­tions to opti­mize income streams through retire­ment vehi­cles like Social Secu­rity, IRAs, mutual funds, employer retire­ment plans, and imme­di­ate annu­ities. This opti­miza­tion involves many trade-offs and tim­ing con­sid­er­a­tions that must be iden­ti­fied and agreed upon by the advi­sor and client.

The fol­low­ing six steps pro­vide a sys­tem­atic method for tack­ling these issues and pro­duc­ing a cus­tomized plan to gen­er­ate and man­age suf­fi­cient retire­ment income for middle-market clients:

Step 1: Esti­mate dura­tion of retire­ment assets

Step 2: Iden­tify and man­age retire­ment risks

Step 3: Iden­tify dis­tri­b­u­tion, tax and estate issues, and opportunities

Step 4: Iden­tify options for address­ing gaps

Step 5: Con­vert resources into income

Step 6: Main­tain and update the plan

When all the steps are put together sequen­tially, they form the “Retire­ment Income Man­age­ment Process” shown below.

Step 1: Esti­mate dura­tion of retire­ment assets

Until clients define retire­ment on a holis­tic basis, it will be hard to deter­mine what their total spend­ing needs will be. So even though plan­ning for retire­ment may not be just about the money, it all ties back to what will be needed in terms of finan­cial resources to live a desired lifestyle.

Suc­cess or hap­pi­ness in retire­ment for today’s retirees requires inte­gra­tion of three major life areas: wealth, engage­ment, and health (see Fig­ure 2, below).

1. Wealth (the geo-financial sphere) means not only the suf­fi­ciency of the sav­ings accu­mu­lated, but also the cost of liv­ing and the access to health care, activ­i­ties, etc., in the area of the coun­try where the retiree lives.
2. Engage­ment (the psy­choso­cial sphere) includes par­tic­i­pa­tion in activ­i­ties that increase a per­sonal sense of engage­ment and ful­fill­ment. Such activ­i­ties could include spend­ing time with fam­ily and friends, pro­vid­ing vol­un­teer labor for a favorite char­ity or non­profit orga­ni­za­tion, or work­ing part time, for the social benefits.
3. Health (the bio­med­ical sphere) includes an aware­ness of inher­ited bio­log­i­cal char­ac­ter­is­tics and man­ag­ing health and long-term care risks dur­ing retirement.The first step in the retire­ment income man­age­ment process, then, is to obtain an under­stand­ing of a retiree’s retire­ment expense needs and income resources from a retire­ment readi­ness per­spec­tive, and then eval­u­ate how long those resources might last based on the retiree’s expected longevity.

When plan­ning for retiree income needs, divide the client’s spend­ing needs into two ele­ments: (1) essen­tial expenses, or needs, and (2) dis­cre­tionary spend­ing, or wants.The first goal when plan­ning for retire­ment income for middle-income clients is to ensure that essen­tial expenses (such as food, cloth­ing, and hous­ing) are cov­ered by income from life­time sources. As a gen­eral rule, help clients match essen­tial expenses to life­time income sources, which include resources such as Social Secu­rity, pen­sions from defined-benefit plans, imme­di­ate annu­ities, and other life­time income sources.

Dis­cre­tionary spend­ing needs (such as travel and enter­tain­ment) can be matched to income from man­aged sources. These resources could include tax­able accounts, per­sonal retire­ment accounts, employ­ment income, or other man­aged sources.

As a retire­ment pro­fes­sional, you need to rec­og­nize that a key dif­fer­ence between life­time and managed-income resources is that the managed-income resources are not guar­an­teed for life. Retire­ment income man­age­ment is not just about man­ag­ing invest­ment assets, although this is a key com­po­nent. In retire­ment, income allo­ca­tion now becomes a crit­i­cal part of the process to make sure that a retiree does not out­live his or her assets, and that a retiree’s lifestyle is finan­cially fea­si­ble. Income allo­ca­tion pro­vides a base for man­ag­ing retirement-specific risks and income.

To make a quick esti­mate in an ini­tial meet­ing of how long a middle-income client’s resources may last, an advi­sor can take the sum of the essen­tial and dis­cre­tionary income gaps (A + B) and divide that total into the retiree’s man­aged sources. For instance, assume a retiree has $200,000 in man­aged sources and a $20,000 total annual income gap; $200,000/$20,000 means the retiree’s resources might last roughly 10 years using sim­plis­tic assump­tions. The abil­ity to make a quick esti­mate like this allows an advi­sor to quickly size up a client’s sit­u­a­tion and deter­mine whether it is worth the advisor’s time to invest more time with the client or sug­gest he or she delay retire­ment a few more years.

Step 2: Iden­tify and man­age retire­ment risks

One of the keys to suc­cess­fully cre­at­ing a retire­ment income plan for the mid­dle mar­ket is to be able to “iden­tify and man­age retire­ment risks,” which is Step 2 in the retire­ment income process. There are many risks that clients face that may not have been as crit­i­cal dur­ing their working/accumulation years. Some of these risks apply to all retirees, and some oth­ers may be unique to the indi­vid­ual. The goal of this step is to help the client iden­tify pri­mary risks, pri­or­i­tize them, and then engage in a dis­cus­sion to deter­mine prac­ti­cal meth­ods for man­ag­ing those risks when imple­ment­ing the retire­ment income plan. The issues listed below are the main post-retirement risks that could impact retire­ment income. Most retirees in the mid­dle mar­ket will face one or more of these risks:

1. Longevity risk. The like­li­hood a retiree will out­live his or her finan­cial resources.
2. Infla­tion risk. The like­li­hood a retiree’s stan­dard of liv­ing will decline due to inflation.
3. Health care and long-term care risk. The like­li­hood that med­ical expenses will con­sume an ever-growing per­cent­age of a retiree’s budget.
4. Invest­ing risk. The like­li­hood that invest­ment per­for­mance will not occur as expected.

As retire­ment pro­fes­sion­als, we argue that the heart of retire­ment income plan­ning cen­ters around help­ing a retiree iden­tify and man­age his or her unique per­sonal retire­ment risks, whether real or per­ceived, and under­stand­ing the trade-offs asso­ci­ated with man­ag­ing those risks.

Step 3: Iden­tify dis­tri­b­u­tion, tax and estate issues, and opportunities

Defer­ring and reduc­ing taxes over time can have a sub­stan­tial impact on the dura­tion of a retiree’s assets, or in other words, how long retirees’ assets last and how much might be avail­able to their heirs. At the same time, there are many tax-related issues to con­sider when cre­at­ing income from retire­ment plans and other assets.

For exam­ple, there are var­i­ous types of retire­ment plan dis­tri­b­u­tions, such as direct and indi­rect rollovers, lump-sum dis­tri­b­u­tions, and Roth and annu­ity dis­tri­b­u­tions. Each form of dis­tri­b­u­tion car­ries its own set of poten­tial penal­ties and income tax treat­ments. To avoid a penalty for under­pay­ment of fed­eral income taxes, retirees may need to pay esti­mated taxes each year while draw­ing var­i­ous forms of retire­ment income. The tax code rec­og­nizes cap­i­tal gain income, qual­i­fied div­i­dend income, and ordi­nary income. Dif­fer­ent types of assets pro­duce dif­fer­ent types of these incomes, so where an asset is located (in a tax­able account or a tax-deferred account) can fur­ther com­pli­cate the retiree’s tax picture.

Retirees must also con­sider asset liq­ui­da­tion order. Con­ven­tional wis­dom says to liq­ui­date tax­able assets first, then tax-sheltered, and finally Roth money. But it is impor­tant to look at the assump­tions involved in con­ven­tional wis­dom and exam­ine the tax treat­ment of the par­tic­u­lar assets that are shel­tered com­pared with those that are not shel­tered. When dis­trib­ut­ing retire­ment assets, the whole process is often not as sim­ple as con­ven­tional wis­dom makes it out to be.

In addi­tion to the usual estate plan­ning needed for retirees, be sure the client con­firms that the ben­e­fi­cia­ries on all retire­ment accounts are cur­rent. Rather than take a client’s word that the ben­e­fi­cia­ries are cor­rect, ask to see copies of all ben­e­fi­ciary doc­u­ments. As merg­ers hap­pen and cus­to­dian own­er­ships change, plan data can some­times get dropped.

Step 4: Iden­tify options for address­ing gaps

By now, any income gaps will have become appar­ent. There are eight major options middle-market clients can use to fill those gaps and extend the num­ber of years their money may last. Most clients will need your help pri­or­i­tiz­ing their options, and a com­bi­na­tion approach will likely be nec­es­sary. A sam­pling of these options includes:

Post­pone Social Secu­rity and pen­sions. If peo­ple wait until after full retire­ment age (FRA) to begin col­lect­ing, their Social Secu­rity ben­e­fit can be increased in two ways: (1) wait­ing to take ben­e­fits until up to age 70; and/or (2) work­ing and con­tin­u­ing to con­tribute Social Secu­rity pay­roll taxes. The Social Secu­rity sys­tem pro­vides an increased ben­e­fit for those clients who choose to wait.

Called delayed retire­ment cred­its, the monthly increase starts at FRA, what­ever age that is for the retiree. The ben­e­fit amount is increased by a cer­tain per­cent­age for each month the indi­vid­ual is beyond FRA but does not receive ben­e­fits. The increases are auto­mat­i­cally added to the ben­e­fit from the time the indi­vid­ual reaches FRA until the indi­vid­ual begins tak­ing ben­e­fits or reaches age 70. A per­son born before 1938 could get up to five full years of increased ben­e­fits, from age 65 to 70. A per­son born after 1960 would get only up to three full years of increased ben­e­fits, from age 67 to 70, depend­ing on when exactly ben­e­fits begin. The increased ben­e­fit amount received is for life.

Work part time. Accord­ing to a Van­guard study on work in retire­ment, 45% of respon­dents said they were fully retired, not look­ing for work; 23% were work­ing part time, per­haps fit­ting the def­i­n­i­tion of “phased retire­ment”; 17% were work­ing full time; and 12% were self-employed.

Work­ing full or part time in retire­ment, how­ever, can affect a retiree’s Social Secu­rity ben­e­fits if the retiree con­tin­ues work­ing after begin­ning ben­e­fits. Beyond income tax­a­tion, Social Secu­rity ben­e­fits may also be reduced based on a retiree’s earn­ings between age 62 and their FRA. Once retirees reach their FRA, they can earn as much as they want with­out any reduc­tion in ben­e­fits. To deter­mine the reduc­tion, an excess earn­ings test is used.

Cre­ate addi­tional life­time income. This income source could take one or more forms, such as inter­est from lad­der­ing inter­me­di­ate to long-term cor­po­rate, Trea­sury, or TIPS bonds; div­i­dend income from stocks; rental income; REITs (real estate income trusts), which his­tor­i­cally pay high div­i­dend amounts; and fixed and vari­able imme­di­ate annu­ities. The retiree may have to repo­si­tion exist­ing assets (such as equi­ties or mutual funds) if there is insuf­fi­cient cash avail­able for invest­ment in addi­tional life­time income options. His­tor­i­cally, some of these options pro­vided 4% or more income over long peri­ods of time, but still allowed the client to have full access to the under­ly­ing assets.

Step 5: Con­vert resources into income

The goal of an income allo­ca­tion plan is to cre­ate spend­ing power out of a retiree’s poten­tial income resources by deter­min­ing an opti­mal mix between life­time income resources and managed-income resources. Simul­ta­ne­ous to this process is the iden­ti­fi­ca­tion and man­age­ment of risks, min­i­miza­tion of taxes, and the imple­men­ta­tion of legacy plans.

Source: InFRE Retire­ment Resource Center

There are four ways to con­vert assets into retire­ment income that may apply to middle-income clients. One method is to com­bine a sys­tem­atic with­drawal plan (SWP) with annu­iti­za­tion of a por­tion of the assets.

For many clients, a mixed approach using both SWP and annu­iti­za­tion may pro­vide the life­time income needed to meet essen­tial needs as well as pro­tect against longevity risk. The SWP income com­po­nent offers the flex­i­bil­ity and con­trol needed to meet dis­cre­tionary spend­ing needs and poten­tially pro­tects the retiree’s income from infla­tion. The annu­itized income com­po­nent pro­vides more income per dol­lar invested than the sys­tem­atic with­drawal plan due to mor­tal­ity cred­its. This approach com­bines the advan­tages of both strate­gies: the guar­an­teed life­time income of an imme­di­ate annuity—and the secu­rity and peace of mind it brings—plus the flex­i­bil­ity and con­trol of a SWP.

By pur­chas­ing an imme­di­ate annu­ity with a por­tion of a retiree’s ini­tial port­fo­lio when addi­tional life­time income is needed, you not only cre­ate an addi­tional life­time income stream to meet all or a por­tion of essen­tial needs, but you also have a sig­nif­i­cant impact on the dura­tion of the remain­ing non-annuitized assets. In other words, annu­itiz­ing a por­tion of retire­ment assets can dra­mat­i­cally impact the remain­ing portfolio’s longevity, par­tic­u­larly for more con­ser­v­a­tive port­fo­lios. Even growth port­fo­lios may ben­e­fit, though often not as greatly as con­ser­v­a­tively man­aged portfolios.

Since a greater por­tion of the retiree’s over­all income need is met by annu­itized income, the remain­ing port­fo­lio can ben­e­fit from a lower with­drawal rate, poten­tially result­ing in longer port­fo­lio longevity. For clients who need income that keeps pace with infla­tion and also want to main­tain a base of guar­an­teed income that can never run out, this com­bined approach again sup­ports the con­cept of using both an asset allo­ca­tion and income allo­ca­tion approach for cre­at­ing retire­ment income.

Another point worth men­tion­ing is that the use of an imme­di­ate annu­ity cre­ates a guar­an­teed income floor that might make the middle-income retiree more amenable to assum­ing more risk with a por­tion of his or her man­aged retire­ment assets—especially when the retiree under­stands that man­aged invest­ments can be used to bet­ter man­age infla­tion, health, longevity, and invest­ing risks.

Step 6: Main­tain and update the plan

As a gen­eral rule, the retire­ment income plan should be reviewed at least annu­ally. Advi­sors will want to deter­mine if the retiree’s income goals are being met. Life expectan­cies will change with the pass­ing of time and changes in health sta­tus. The retiree’s cir­cum­stances may change, as well as his or her risk tol­er­ance. Income sources (port­fo­lio assets) will also likely need to be rebal­anced. Addi­tion­ally, there are sev­eral events that can trig­ger a revi­sion to the retiree’s income plan, such as:

Death of a spouse

Actual spend­ing exceed­ing planned spending

Change in health

New retire­ment products

Return­ing to work

Sum­mary

The retire­ment income man­age­ment process is much more com­plex than most middle-market clients and advi­sors real­ize. A host of dynamic, client-specific vari­ables can affect the income man­age­ment out­come, includ­ing dif­fer­ent types of risk (such as longevity, health, invest­ment), dif­fer­ent types of prod­ucts (annu­ities, IRAs, long-term care), and dif­fer­ent tim­ing deci­sions (when to start Social Secu­rity, when to annu­itize, when to quit working).

Because each retiree is in a unique sit­u­a­tion, a suc­cess­ful income plan calls for a cus­tomized approach to cre­at­ing life­time income. By under­stand­ing all you can about the mul­ti­tude of vari­ables that can impact a retiree’s lifestyle, you increase the prob­a­bil­ity that the life­time income plan you develop will meet a retiree’s needs through­out the person’s golden years.

This arti­cle is an excerpt from “The Professional’s Guide to Man­ag­ing Retire­ment Income.” A por­tion of this mate­r­ial is also included in Book 4 of the self-study mate­ri­als for InFRE’s Cer­ti­fied Retire­ment Coun­selor (CRC) cer­ti­fi­ca­tion. If you are inter­ested in a retirement-specific, accred­ited cer­ti­fi­ca­tion that cov­ers both the accu­mu­la­tion and dis­tri­b­u­tion phases of retire­ment, and also offers state insur­ance, CFP, and CPA continuing-education cred­its, find out more by vis­it­ing InFRE.

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