Protect Your Clients from Market Volatility

Published October 24th, 2019 in Blog |

Protect Market Volatility Blog

As a financial advisor, one of your primary and most important functions is to counsel your clients on staying the course with the investments that are best suited to their long-term financial goals.  But how can you be sure that your client will be comfortable with and accept your recommendations?  Will they be able to withstand the natural ebb and flow of the market over the years?  We know that they go up and down like a roller-coaster sometimes, but these days the ride is even more turbulent than ever before. This is where a Volatility Tolerance Analysis can be an invaluable tool for both advisor and client.

Although measuring your client’s volatility tolerance is valuable for clients of any demographic, it becomes a larger issue post-retirement, according to Wade Pfau, Ph.D., CFA.  In The Changing Risks of Retirement, he states that “Retirees have less capacity for risk as they become more vulnerable to a reduced standard of living when risks manifest.  Those entering retirement are crossing the threshold into an entirely foreign way of living.”  He goes on to list the risks that retirees can face, including:

  • Reduced earnings capacity
  • Visible spending constraints
  • Heightened investment risk
  • Unknown longevity
  • Spending shocks
  • Compounding inflation
  • Declining cognitive abilities

Many retirees will struggle with the new constraints of a fixed income and many unknowns – the rising cost of living, their health, and market volatility, to name a few.  In many cases, advisors will find themselves dealing with the tug-of-war going on in the client’s mind:  their cognitive bias toward investing versus their emotional bias.  In other words, what the client thinks and knows about the risks in their investments and what they feel about them.  An example would be a client who went through the Great Depression and is now retired.  When allotting their funds to various investment vehicles, they know that a certain high-risk investment is a good choice for their long-term money; but what they feel is that their money would be safer under their mattress at home.

Studies have shown that demographics can influence a person’s risk tolerance, as well.  In his paper An Empirical Analysis of Financial Risk Tolerance and Demographic Features of Individual Investors, Dr. Ebrahim Kunju Sulaiman concludes that while financial tolerance does not necessarily decrease with age (a common belief), there is a correlation between risk tolerance and marital status, and the level of formal education. So many different factors go into risk tolerance, and every client will be unique, with different backgrounds and experiences, that simply using age or years until retirement to guide your recommendations will not be enough.

The Volatility Tolerance Analysis & The Bucket Plan®

When gauging a client’s volatility tolerance, it is extremely important that you educate them on the three principles of sound investing to help them understand why you are recommending that they invest their assets in a certain way.

  1. Time horizon segmentation – Determining an appropriate time horizon is one of the foundational elements of successful investing. A client’s time horizon in relation to when they will need to access their money will impact their tolerance for risk or volatility. If you are bucketing money, each bucket will have its own time horizon and associated risk profile.
  2. Risk tolerance – After you have time-segmented the client’s assets, you can now overlay a risk assessment or volatility tolerance analysis on top of each bucket. Within the context of The Bucket Plan®, the investment philosophy that allocates funds to “Now,” “Soon,” and “Later” buckets, the Volatility Tolerance Analysis measures the amount of volatility that a client is comfortable with in their Soon and Later buckets (the “Now” bucket is cash in the bank, so no risk assessment is needed on that bucket). And because each bucket has a different purpose and time horizon, the two buckets are scored separately – a client may have a higher tolerance for risk in their Later bucket, for example, because there is more time for the market to correct itself from a downturn. By segmenting first, you’ll get a clearer picture of the behavioral reactions a client will truly have regarding their accounts.
  3. Diversification – Once you have time-segmented the money and added a risk assessment to each segment individually, you’ll have the knowledge you need about your client’s behavior mindsets to build the proper asset allocation strategy to achieve diversification. By spreading the client’s assets across a variety of investment vehicles and markets, you will help add protection from concentration risks in certain market segments. That way, if one segment takes a nosedive, the damage to the client’s assets is minimized and they are comfortable enough to stay the course.

When you combine these three essential elements – time horizon segmentation, risk assessment, and diversification – you can eliminate a major risk that hurts many investors: freak out risk. Freak out risk occurs when markets become volatile and the investor makes decisions that can hurt their long-term objectives. Study after study has shown It to be one of the main reasons that the average investor typically underperforms indexes.

Here are some examples of other risk assessment questionnaires that can be found when searching the web, or that a client might use in conjunction with a robo-advisor:

  • Charles Schwab – Investor profile questionnaire with seven questions between time horizon and risk tolerance but lacks risk capacity. It provides a suggested investment strategy, but there is no distinction between short-term and long-term investments.
  • FinaMetrica and Riskalyze – Give a more in-depth risk assessment score based on stress testing, but still only provides one overall portfolio risk number.

An Advisor’s Guide to Implementing

Before you determine the client’s volatility tolerance, you need to uncover their goals and time horizons for each bucket.  This is obviously geared toward each person’s specific circumstances.  The Now bucket should cover their planned expenses and emergency fund for the first year or two of retirement.  These funds are not invested but are readily available as cash when needed.  The Soon bucket is more conservatively invested money and buys a time horizon so that funds segmented into the Later bucket can be more aggressively invested and free to ride out the ups and downs of the market.  When the client understands how each bucket will work for them, you will have a much easier time assessing their risk tolerance for each.

The Volatility Tolerance Analysis as part of The Bucket Plan is unique in that it measures a client’s capacity for risk, not just their comfort level.  That’s why separating the scores for the Soon and Later buckets is so important.  The clients know exactly what each portion of their money is doing for them and why, providing a level of security in their investment decisions.  Most risk questionnaires and software only give an overall score along with a generic portfolio allocation strategy, but they don’t address the individual objectives and risk tolerance for each segment of money.

It is extremely important that you fill out the Volatility Tolerance Analysis with your clients so you can have an open conversation and answer any questions that the client might have regarding the questions.  This will alleviate any confusion that they have and allows them to provide accurate responses.

It should be noted that the assessment is purposely worded to be product and portfolio agnostic so that an advisor is not pigeonholed into a recommendation that might not be in the client’s best interest. For example, many assessments are more geared to investment products over insurance products, but the reality for many retirees is that annuities could be vital to optimizing their retirement. The result of the Volatility Tolerance Analysis is that the advisor and client will mutually agree upon a risk category for each time segment of money, and then the advisor will use their discretion to select product or portfolio solutions that best aligns with the risk category as well as the financial objectives of their client.

Once the plan is devised and implemented, the advisor should review the Volatility Tolerance Analysis with the client on an annual basis to make sure that nothing has changed, like major life events, upcoming income distribution needs, etc.  This is also a good time to review each bucket’s investments and rebalance as necessary to reflect any changes in the client’s risk tolerance. As you are meeting with your client, simply ask them “Based on the last time we completed our Volatility Tolerance Analysis, you scored stable in your Soon Bucket and growth in your Later Bucket. Do you still feel that is an appropriate amount of volatility based on your circumstances today?” You can illustrate the point by showing them how their portfolio performed in relation to the amount of risk they assumed.

The Volatility Tolerance Analysis is just one of the tools that should be used when building a client’s financial plan, but it is an important one in helping the advisor understand any concerns that might otherwise go unheard.  Failure to use this or a similar tool will more than likely result in a recommendation that does not initially meet the client’s needs, potentially resulting in additional work and an unhappy client.

Listen to our podcast today for more insight and our experts here at Clarity 2 Prosperity can help you get started on protecting your clients. Click here and contact us today to learn about the different ways our proven processes help good advisors become great!

For financial professional use only. Not for use with the general public. Financial planning and investment advisory services are provided through Prosperity Capital Advisors and Valor Capital Management, affiliates of Clarity 2 Prosperity and SEC registered investment adviser firms. For more information, please visit www.adviserinfo.sec.gov.

The Asset Sheet Questionnaire: Bringing Clarity to Your Client’s Prosperity

Published October 22nd, 2019 in Blog |

Asset Sheet Questionnaire Blog

Helping clients gain clarity to their financial health is what gets most financial advisors out of bed in the morning. The more you teach your clients to understand their finances, the more likely it is that they will come to you to continue growing their portfolio – which also means more “prosperity” for you. People will pay for clarity.

As financial advisors, we generally encounter one of three personas at that critical first appointment:

  1. The meticulously organized prospect: Every statement is organized and up to date, a net worth statement is compiled, and sticky notes and tabs identify what everything is. These prospects are often do-it-yourselfers and make up a small portion of the population.
  2. The semi-organized prospect: All their statements are pulled together in a big envelope, but there are also outdated statements, closed accounts, duplicate statements, and plenty of missing information. The client knows they have “stuff”, but don’t quite know what kind of “stuff” they have!
  3. The plastic bag prospect: There is a plastic grocery bag full of unopened envelopes and statements dumped on your desk.

No matter what the persona, a holistic advisor has a unique opportunity to bring clarity and education to that household.

A simple way to bring clarity in a scalable and time-efficient manner is by using an asset sheet questionnaire and creating an asset sheet. Your competition is providing clients with a consolidated statement of all the accounts that they manage as the advisor, but rarely are they tying together everything the client has into one holistic document. By completing an asset sheet questionnaire and producing a final asset sheet, you will:

  1. Help the client understand how much they have, what they have, and where and why they have it.
  2. Provide a level of thoroughness that no other advisor has ever given them, included checking beneficiary designations, asset titling, and fees/expenses.
  3. Uncover a multitude of planning opportunities for you by educating the prospect.

Taking the time to gather and categorize this information and educate the prospect on what they have will substantially increase your chances of earning their business (not to mention potential referrals).

What is an asset sheet and why is it important?

An asset sheet is essentially a client’s net worth – their assets minus their debt and liabilities – and a window into the many facets of their financial life, providing a snapshot of their overall financial condition at any given moment. Some of the compelling reasons to calculate a client’s net worth include:

  • It tracks financial progress from year to year. This shifts the client from measuring you based on quarterly rate of return to the annual growth of their account balances, a more meaningful measurement of financial success.
  • Net worth shows more than just income by including assets, real estate, insurance, debt, tax liability, etc.
  • Knowing one’s net worth is a necessity when applying for loans, mortgages, some credit cards, etc.

The easiest way to gather all the necessary information is to use a valuable tool like an asset sheet questionnaire, which will give you and your client a visual understanding of their financial situation.

The asset sheet questionnaire can be an extension of your fact-finding process but goes into a deeper level of understanding and education based on their accounts and personal financial decisions they have made. It helps identify accounts based on asset categories, so you can educate them on pre-tax, post-tax, and tax-favored monies that they can use in either a savings or distribution plan.

It also summarizes your client’s debt so they can focus on eliminating it; but, more importantly, it also helps track liabilities, which are often overlooked. For example, a client has a $500k IRA and believes they are in a 20% tax rate. However, while they may have no “debt”, they certainly have a tax liability – and based on their tax figure, it would be $100,000 ($500k IRA value and 20% tax rate). By listing this as a liability on their net worth or asset sheet, it highlights the fact that they don’t own 100% of that IRA and paves the way for discussions about planning opportunities such as Roth conversions and life insurance.

The asset sheet questionnaire also captures your client’s beneficiary information, notes proper asset titling so their family won’t have to deal with probate upon their passing, and helps them avoid accidentally disinheriting their heirs. It also leaves a single document with all their assets, debts, and liabilities for their heirs to reference when settling the estate.

How do you start an asset sheet questionnaire with your client?

Ask your client to bring in all their financial documents. A checklist can be helpful here, but make sure to note that it’s okay if they don’t have everything right away. You don’t want the prospect to cancel because they can’t find something that has minimal importance. You never want a prospect to cancel an appointment, since time kills deals and momentum.

As you review their different statements and accounts, make sure to categorize them into the different types of money based on taxation. This is a great point at which to educate them on the different types of accounts they can use for their money. We use a visual of three funnels, called Tax-Efficient Funnels, to help them understand the order of money, as well as the four basic types of money:

1. Free money – 401(k) match, monetary gifts, inheritance

    • The best form of money, and, if the client is still working, they always want to take advantage of the company match.

2. Tax-advantaged money – Roths, HSAs, 529 plans, cash value life insurance

    • The funds go in post-tax (except HSA), then grow tax deferred and are distributed tax-free.

3. Post-tax money – Brokerage accounts, trust accounts, real estate, etc.

    • Post-tax money is taxed more favorably than ordinary income, generally at rates of 0%, 15%, or 20% depending on all your other income. With no other income, a married couple over 65 could receive almost $105,000 of long-term capital gains or qualified dividends and be in the 0% tax bracket. In addition, there is also a step-up in basis for heirs when the account holder passes away.

4. Pre-tax money – 401(k)s, 403(b)s, IRAs, etc.

    • With this money, you get a tax deduction when you put money in, the money grows tax deferred, but is taxable as ordinary income when distributed. Ordinary income rates are currently as high as 37% today, and you will need to consider future tax rates as well. With pre-tax money, you are effectively in a partnership with the government, and the only way to get out of the partnership is to buy them out – in other words, pay the tax.

Each of these categories provides sales strategy opportunities for the advisor to make appropriate recommendations that are in the client’s best interest. Analyzing all the different scenarios will help determine where today’s savings should be allocated and where money should be distributed from when income is needed.

You will also need to list out the estimated tax liabilities, which can open up Roth conversion and life insurance opportunities. Obviously, the taxes will have to be paid at some point, so you will need to find ways to space them out. Roth conversions are an option, and they can also be used for legacy planning strategies, protecting heirs from paying tax on any pre-tax money. There may also be a life insurance opportunity here, as the death benefit of a life insurance policy is paid out tax-free – potentially offsetting any tax liabilities that the heirs inherited.

Be sure to check on beneficiary titling as you are organizing and categorizing your client’s assets. This creates an opportunity to educate your clients on per stirpes vs per capital beneficiary designation. This takes on even more significance for your clients who are grandparents.

Per stirpes states that the beneficiary’s share of the inheritance will go to his or her heirs if the beneficiary predeceases the account owner. If a child dies before the parent, that child’s portion of the inheritance would go to his or her children.

Per capita states that all living beneficiaries will receive an equal share of the asset in question. If one beneficiary is deceased, then the shares of the surviving beneficiaries will increase proportionally. This basically disinherits the grandchildren in a typical situation.

Most clients will not know which designation is in place for their assets, so asking about and monitoring them is another opportunity for the advisor to shine. You’ll also be helping your client avoid probate and pass an inheritance to the beneficiaries on whom they wish to bestow it. Depending on the state, per capita is the default for many accounts, which is not what many clients with grandchildren want.

As you can see, utilizing the Asset Sheet Questionnaire is a process that is valuable to the client, but also an excellent way to flush out sales ideas and opportunities for you, the advisor. Providing proactive strategies to the client regarding their retirement income will put you ahead of the competition and elevate your chances of increasing your business.

Listen to our podcast today for more insight and our experts here at Clarity 2 Prosperity can help you get started on delivering the Asset Sheet Questionnaire to your clients. Click here and contact us today to learn about the different ways our proven processes help good advisors become great!

Double Your Retirement Planning Closing Ratio With One Powerful Tool

Published October 4th, 2019 in Blog |

Double your Retirement Blog

Individuals seek out financial guidance when they have major life changing events. Expecting a child, buying a dream home, funding a college education, and – the most substantial of all – preparing to retire.

The retirement planning market is enormous, with over 10,000 baby boomers turning 65 every single day. While the opportunity is large, so is the number of financial services professionals chasing after this demographic. How do you stand out in such a crowded market? How do you motivate your prospects to hire you and ensure they have a successful retirement? How can you educate them on the risks they face as they enter the third and final phase of The Money Cycle – The Distribution Phase?

At some point in your first prospect meeting, there needs to be a pivot- from your “fact-finding” process into the psychology of creating the need to hire you. Salespeople are successful because they are great with people. If you are a people person, charismatic and outgoing, then there is good chance that you will be able to charm people into hiring you. Unfortunately, charm is not the top buying emotion that drives the decision-making process.

Consumers have four primary buying emotions:

  1. Pain in the present
  2. Pain in the future
  3. Pleasure in the present
  4. Pleasure in the future

In sales, consumers act more quickly when they are trying to fix something that brings them pain vs. purchasing something that will bring them pleasure.
Of the four categories, a consumer acts most quickly when there is some sort of pain in the present. When a patient goes to the emergency room with a broken arm, they don’t interview the doctor and then, after gathering information, let the doctor know they need time to think it over. They get their arm fixed immediately!

If a consumer knows there will be some form of pain in the future, they may move a little slower to fix the problem, but, again, they are going to be very motivated to act.

In order to double your closing ratio of retirement planning clients, you need to bring pain into your meeting process. If you introduce pain into their world, they will be more likely to act to eliminate the risks that could cause it.

There are many risks in retirement, but, with today’s market valuation, one of the biggest risks is the potential for a market correction while your client is drawing income from their retirement accounts. Academically, this risk is defined as sequence of returns risk; but, most consumers have no idea this is lurking around the bend as they enter retirement. To help illustrate this risk to consumers, we developed a simple tool called The Money Cycle.

The Money Cycle is made up of accumulation, preservation and distribution

Explaining the Money Cycle

To educate your prospect on the sequence of returns risk, we recommend you ask if they have ever heard of The Money Cycle? (Wait for response—most will say no.)

Then offer this explanation:

“The Money Cycle is something that we all go through during our lifetime, and there are three phases: accumulation, preservation, and distribution.

“The accumulation phase starts early in life. When we are accumulating assets, we are typically willing to take more risk with this money because we have a long-time horizon. Let’s face it, we’re working and will be working for a long time, if we have losses, we have time to make it back. Or, if the market crashes, we can wait for it to come back because we have a long-time horizon before we enter the second phase—the preservation phase.

“In the preservation phase, we start preserving some of the assets that we’ve accumulated throughout our lifetime as we get closer to our retirement goals. Now there’s less time to make mistakes with your money or experience major volatility because you’re going to need this money sooner rather than later. This step prepares us for the third and final stage: distribution.

“The distribution phase is for both distribution to us in retirement and to our family upon our passing. This is when you begin to draw from what you’ve accumulated and preserved and start taking an income from your savings and investments.

The biggest mistake people make is going directly from the accumulation phase into distribution. They continue to invest as if they are preparing for retirement a long way out, when they are already retired or about to retire. The problem with this is that if you’re taking distributions when the market has big corrections, as it always does, you’re essentially forced to sell your investments for income when the market is down. You can never make that money back and you could deplete your savings much faster as a result. This is how you run the risk of running out of money later in life.

The benefit for us, as advisors trying to educate our clients of this risk, is that two of the ten worst one-day drops in the history of the stock market are still painfully fresh in most investors’ minds. Even though the market recovered to blissful highs, we are still seeing large amounts of volatility within the stock market each day. Consumer sentiment seems to be one of nervousness, and this will motivate your prospect to put measures in place to protect their retirement if you can clearly communicate and create the need.

As advisors, our job is to help protect our clients from market uncertainty and the tendency to make poor financial decisions based upon emotion.

In today’s economic environment, there are three major dangers that could derail your client’s retirement: market risk, interest rate risk, and sequence of returns risk. Advisors with a clear understanding and ability to communicate these risks to prospects will have higher conversion to new clients.

The Biggest Risks: What Makes Investors Vulnerable?

First, let’s quickly define the three major dangers investors face in today’s volatile marketplace.

Market Risk

The stock market may be peaking right now, but 2-3% + market swings in either direction are becoming more prevalent. The last decade incurred major volatility in the form of corrections and outright landslides. Historic graphs tell us that investors who can afford to wait out drops in the market still prosper. What about the rest?

The danger with market risk is highest for clients who need to tap into their investable assets for income. This can happen in three ways:

  • Anticipated income needs: A certain amount of money each year to afford living expenses.
  • Unexpected income needs: Money to pay for unexpected expenses that are greater than what is available in their liquid accounts or emergency reserves.
  • Forced income: This includes required minimum distributions for those who are 70.5 or older.

When someone is forced to sell a portion of their assets for any of the above reasons while the market is down, it eliminates the ability to “ride out” the short-term volatility and recapture their losses as markets recover. As advisors, we need to deter our clients from behavior like selling due to emotional panic as markets are correcting, and ensure that a portion of their money they may need to access sooner rather than later is not subject to market risk.

Interest Rate Risk

Investors typically flee to bonds as a haven in an uncertain stock market. However, most experts think interest rates have dropped to just about as low as they can get. There is evidence to believe that this trend will reverse soon and we will enter a generally rising interest rate environment. Typically, bond prices decline as interest rates rise. If interest rates begin to rise, and investors need to cash out their bonds or bond funds for planned income to cover an unexpected expense, or due to it being forced income for required minimum distributions, they find themselves having to sell at a lower price. This again creates a risk for clients who may need to access this money sooner rather than later.

Sequence of Returns Risk

Sequence of returns risk describes risks associated with the timing of your investment returns in relation to the timing of withdrawing money. This happens due to a combination of market risk, interest rate risk, and a client’s own need to access their investment accounts.

To illustrate, consider two investments that produce the same average rate of return over an investment cycle. A client puts exactly the same amount of money in each investment and needs to withdraw the same yearly income from each one. Even though the two investments produce the same average return over a period of years, the timing of when they experience those returns differs. It is this sequence of returns that creates the risk. To keep it simple, we’ll call our examples investment A and investment B:

  • Investment A experienced a couple years of negative returns early in the cycle followed by positive returns for the remaining years of the cycle.
  • Investment B experienced positive returns early in the cycle followed by a couple years of negative returns at the end of the cycle.
  • If the investor hadn’t needed the money for income, the end result would have been the same account balance, as illustrated below.

During Savings

During Savings with the Money Cycle

Now, let’s take a look at how the sequence of returns can impact an account balance while taking withdrawals. Using the same sequence of returns we used in the During Savings example, let’s assume the client is withdrawing the same fixed income of $6,000 per year from these two investments. Remember, each investment experiences the same average return over 10 years, but the difference between Investment A and Investment B is that investment A had losses early in the cycle while investment B had losses late in their cycle.

During Withdrawal

During Withdrawal

As you can see, since Investment A experienced negative returns in the early years, while the client was also withdrawing their fixed income during that time. They were never able to recoup those losses and severely depleted their account balance as a result. Example B had positive gains during the early years, so there was no adverse effect of withdrawing their fixed income. At the end of the 10-year period, when the two investments averaged the same 10-year return, investment A would leave an investor with the risk of depleting their account to zero and running out of money, while Investment B has a healthy account balance.

This example illustrates the catastrophic impact that the timing of a client’s returns, i.e. sequence of returns risk, can have on their account value for money they may need to access sooner rather than later.

Where is the Market Now?

Today, the market has hit one of those euphoric high points that makes most financial advisors look good and leaves clients satisfied. However, market graphs of the past decades demonstrate that these peaks are at the top of large cliffs.

Historical Opening Market Prices

Nobody can really say that they know what the market will do in the next year or decade. Even though it’s fair to predict that the market will keep cycling up over longer periods of time, advisors and clients need to be prepared for some days, weeks, months or even years in the abyss.

The problem is most acute for clients who may not be able to wait out a correction because they need money immediately. These clients depend upon their investments for immediate retirement income or have an urgent need to tap into their investments for an emergency. Because of an expected or unexpected need for income or even a sense of panic as markets are volatile, clients could make poor choices.

How Bad Decisions Impact Returns

Even clients who don’t absolutely need to access their money soon can panic during a downturn and make poor decisions. Markets generally correct; however, clients who see their assets shrink overnight might hit the panic button and sell to cash at the worst possible time. They might sell their investments at a low point and turn a temporary downturn into a permanent catastrophic loss. A critical part of an advisor’s job is to offer their clients a strategy to avoid that panic. To do that, advisors need to understand these stated risks and how to mitigate them.


According to an Edward Jones survey,  about two-thirds of bond investors surveyed have no idea how rising interest rates impact bond rates. During volatile economic times, investors may follow the conventional wisdom and invest in bonds. General lack of awareness on how changes in interest rates impact bond values means that interest rate poses a danger to bondholders in the not so distant future.

Historical Bond Market Returns

If we look at the historical average annual return of bonds, we can see that bonds have done well in a generally decreasing interest rate environment such as the one we just lived through between 1983-2013. The average return of the Ibbotson/Morningstar Long-Term Government Bond Index from 1983 – 2013 was 10.74%.
If we examine the same historical returns of the Ibbotson/Morningstar Long-Term Government Bond Index during the last generally rising interest rate environment, which lasted from 1953 – 1981, we can see that the average annual return was only 2.48%.

Bond Market Rates

Investors and advisors need to ask themselves if they believe interest rates will continue to fall or stay low. The general consensus is we will be more likely to experience a rising interest rate environment. The risk with bonds is that rising interest rates will decrease bond value.

Facing the Storm: Understanding Investor Risks

Looking at historical performance, it’s easy to pause and draw certain conclusions:

  • Market volatility: Over time, equities tend to trend upward. In the short term, there are no guarantees and markets are inherently volatile.
  • Interest rate uncertainty: Bond prices tend to decrease when interest rates rise and tend to increase when interest rates fall. We seem to be at a historically low period for interest rates with expectations they may increase in the near future.
  • Vulnerable investors: Because of emotion (freak-out risk), imperfect planning, and possibly a need for money sooner, rather than later, average investors don’t perform as well as any major asset type does on its own.
  • Income needs: Sequence of return risk is particularly hazardous for investors who may need to draw some or part of their money out or will be forced to draw due to required minimum distributions.

The Causes of Sequence of Returns Risk

Again, sequence of returns risk describes situations that are associated with poor timing of returns when withdrawing from investments. While there are some risks outside of an investor’s control, proper planning can potentially eliminate the damages most of these risks can cause. Consider the three biggest instigators that might force people to draw their assets out at a poor time:

  • Anticipated income needs: People preparing to retire should plan on drawing out assets as income for their living expenses. Planning for retirement income is often the core of financial planning.
  • Unexpected income needs: Planning for unanticipated income requirements is more difficult than planning for expected living expenses. However, it’s fair to say that any good advisor should build this circumstance into their financial plans.
  • Forced income: At 70.5, seniors will be required to take forced annual minimum distributions from their pre-tax retirement accounts. These are often one of the most sizeable and reoccurring distributions for retirees, and yet usually the most overlooked in financial planning.

Sequence of Return Savings vs. Withdrawals

Many advisors and clients mention yearly returns and average returns over time periods as important indicators of successful investing. That’s not enough information to have when clients depend upon their investment for income. Once again, the critical thing to understand is that two investments could have the same average performance over a certain span of time; however, the sequence of gains and losses can be very different, causing drastic variances in the ending account values.

With any risky investment, the timing of withdrawals can have as large of an impact on a portfolio’s ending value as the amount of money initially invested in it. In many cases, this timing cannot be controlled.

The point is, most people who are saving for retirement, college educations, and unexpected income needs cannot afford to wait for a good time to withdraw their money.

The Solution to Sequence of Returns Risk: Hire You as Their Qualified Retirement Advisor

The good news is that there is a way to mitigate the potential risks outlined in this paper: market risk, interest rate risk, and, ultimately, sequence of returns risk. If you properly educate your clients using the resources, tools, and concepts mentioned above, you will establish pain and the need for clients to hire you. We have seen advisors collect over a billion dollars of client assets by using the simple concept of The Money Cycle, and, in some cases, following up with the green chart above exhibiting Sequence of Returns Risk, prompting the client to hire them, eliminate these risks, and secure their dream retirement.

Our experts here at Clarity 2 Prosperity can help you get started on doubling your retirement with the Money Cycle.  Click here and contact us today to learn about the different ways our proven processes help good advisors become great!

Renting versus Owning a Tax Practice to Grow Your Financial Services Business

Published September 26th, 2019 in Blog |

Renting versus Owning a Tax Practice

A proven way to grow your existing financial services business is to add a tax practice. Preparing taxes and providing tax advice is probably the biggest opportunity that financial planners have today. In most cases, clients regard taxes as their largest expense, and they are uncertain about the financial landscape and the best way to take advantage of it. Delivering ongoing advice – taxes aren’t a one-time thing – and deeper solutions to their tax concerns is a way to differentiate yourself as a unique, multi-solution financial advisor. It also showcases the capabilities of your firm to a new group of potential clients.

Even though it is eventually a profitable venture, starting a tax practice from the ground up can be daunting, even for a seasoned professional. Do you jump in with both feet or should you test the waters first before fully committing? There are pros and cons to both approaches.

Building Your Own Tax Practice

There are two ways to build a tax practice – you either build it within your own firm or you buy an existing practice. Let’s focus on building one within your firm.

The goal of building your tax practice is to eventually convert those tax clients to full financial services clients. You position yourself in front of them once a year and have the opportunity to not only review their taxes, but to also give them an overview of how you could include their tax strategy as part of a holistic financial plan. The tax client might not be ready for your other services at first, but you’ll be there when they are ready.

There are several steps involved in establishing and expanding your tax practice:

  • Build the foundation – get everything in place to have your own tax practice, from office space to software to pens and pencils.
  • Hire an accountant to prepare taxes in your office.
  • Market the new tax practice to bring new tax clients into your office.
  • Hire someone to answer the phone and set appointments for tax services.

Your first year or two (Stage 1) of tax preparation will more than likely be modest, with you and two accountants handling all the business at hand – between 100-400 returns. By Stage 2, you’ll be processing 400-1000 returns, and you’ll need to hire an additional advisor and maybe even a tax practice manager. By the time you reach Stage 3, your office will have 1000-2000 tax clients, with the potential addition of yet another advisor and more accountants. Over time, possibly up to 30% of your new business will be written with clients who initially worked with your tax practice.

A key factor to remember as you are building your tax practice: while the CPA initially meets with the client and prepares the taxes, it’s the financial advisor who should present the completed tax documents. This is the time to go over the services that your financial practice can provide, outline any tax strategies, and work on building a relationship with the client from year to year.

Advantages to owning your tax practice:

  • It brings revenue directly to the firm.
  • Tax practice revenue is net profit.
  • The cost of getting a potential client in front of you is very low.
  • It’s a profitable lead generation solution.
  • You control the business and how the returns are delivered.
  • You become a better holistic planner because you incorporate the tax element.
  • Your firm becomes a magnet for financial advisors who want to join because you’re creating so much activity.

Disadvantages to owning your tax practice:

  • As previously mentioned, it’s a lot of work.
  • It takes a lot of time – time that you could be using to focus on financial planning.
  • You will need to hire more team members to handle the business.
  • Until the practice grows enough to warrant hiring a tax practice manager, you will be responsible for overseeing the day-to-day operations of the practice.

Partnering with Another Firm

One way to find out if a tax practice will work for you is to partner with a tax firm. You offer tax services and holistic financial planning to their clients and use their accountants for tax preparation. You or one of your associates will then meet with the clients to go over the return and lay out tax planning strategies for the coming year. This gives you an excellent platform from which to attract new clients to your financial services firm. You set up a cost-sharing arrangement so that, as part of the agreement, 20% of any new business written goes back to the host tax firm. Consider the “Find, Mined and Grind” mindset: “Find” brings the client in; “Mined” formulates recommendations and closes the sale; and “Grind” manages the financial services portion moving forward. The owner of the tax practice earns the “Find.”

One way to make some inroads into this new market of existing tax clients/potential financial services clients, as well as new prospects in general, is through a series of workshops – for example, Social Security, Medicare, long-term care and tax workshops. These are a great way to put yourself in front of a new audience and demonstrate your financial expertise without a large cash outlay.

As with setting up your own tax practice, there are advantages and disadvantages to “renting” one:

Advantages to partnering with a tax firm:

  • You are approaching an audience that is already made up of tax clients.
  • Staffing is already managed, so you don’t have the expense of added accountants for tax season.
  • The tax firm office can serve as your second office for meetings with potential financial services clients.
  • If the tax practice owner ever decides to sell and/or retire, you’re right there and already ingrained as the next buyer.

Disadvantages to partnering with a tax firm:

  • Limited penetration in the surrounding area, since you don’t control the marketing.
  • You have little to no say in the staff hired.

Regardless of which approach you take, you will always need to demonstrate to the client that you understand the order of money (the best accumulation and distribution strategies for maximum tax efficiency); the measurement of tax brackets for income and capital gains; the elimination of marginal tax traps; the allocation of tax-sensitive assets; gifting strategies; and the “pay now vs. pay later” analysis. The client must know why they need to hire you – because you’re going to manage their dynamic tax bracket every single year moving forward.

Listen to our podcast today and learn how building a tax practice is a team effort and how it provides the opportunity to get in front of potential clients while making money to do so. As a way to differentiate yourself while expanding your reach in your market, building a tax practice should not be overlooked and our experts here at Clarity 2 Prosperity can help you get started.

Click here and contact us today to learn about the different ways our proven processes help good advisors become great!

Multiply Your Time by Successfully Transitioning Client Relationships to an Associate Advisor

Published August 30th, 2019 in Blog |

You’ve been building your book of business as a financial advisor, carefully adding more clients and watching your revenue grow. And then it happens – you realize there just aren’t enough hours in the day to not only maintain your current client base but continue to grow it.

What do you do now?

Normally the first strategic hire is an assistant to help behind the scenes so you can add more clients while continuing to provide excellent service to the ones you already have. So, your growth continues…until you realize that once again you need to hire someone to help with the client load and all the tasks associated with it. At this point, you could consider adding associate advisors who can take on some of the client responsibilities and, eventually, take over some of the accounts as the primary advisor, allowing you to spend more time managing your growing business.

Finding and hiring good associate advisors comes with its own set of challenges. It’s difficult, it takes a great deal of time, and, let’s face it, you could end up training your eventual competition. You’ll need to find someone who is a good fit, whose personality blends in well with the existing staff, and who has the same professional goals as the other people in the firm. The new associate should be open to the proven processes that are already in place in your company and willing to work within those parameters.

Once you find a great associate advisor, how do you go about transitioning clients to them?

It’s hard to let go of clients whom you’ve nurtured because they regard you as their trusted financial advisor – but you must remember that taking care of your entire client base will prevent you from growing the business and the primary reason for hiring the associates is to alleviate your workload. The good news about transitioning clients is that you don’t have to do it overnight. For most firms, it’s a gradual, one-to-two-year process until the associate advisor takes over the account in its entirety.

What are the pros and cons of transitioning the accounts?

As with just about anything, there are upsides and downsides to bringing on more associates.

• Hiring an associate advisor frees you up to work on larger cases and develop your business.
• It allows you to create a higher level of service for smaller clients because someone is focusing on them instead of letting the “big fish” get all the advisor’s attention.
• Associate advisors can uncover additional opportunities with the clients they manage, like Medicare, funeral expenses, etc.

• If the associate advisor leaves, you will have to pick up the slack again.
• There is the risk of the client following the associate advisor if they leave, although that can be mitigated by an anti-piracy agreement in the advisor’s contract.
• Some clients will be unhappy about being handed over to an associate advisor.

One of the proven ways to move clients to the associate advisor is through the joint client review transition. There are specific steps to ease the client through the process of changing by incorporating these strategies inside of an annual review:

• Personally introduce the associate advisor to the client as your “right hand” on their accounts and request permission for them to sit in on the meeting.
• Create a “Meet The Team” handout featuring the original advisor, the associate advisor, and support staff. Use it to assure the client that there is a whole team overseeing their accounts. It is important to position this as an expansion of resources for the client. This approach also allows for easy replacement of any team member should someone leave the company – the team will still be there, with a replacement slotted into the open spot.
• Clarify the team members’ roles and reassure the client on continuity.
• Begin to build the associate advisor’s credibility with increasing responsibilities and direct client connection. Have the associate advisor actively participate in the review, and specifically discuss the client’s accounts themselves to demonstrate knowledge of their situation.
• Have the associate initiate further contact following the review to further boost the relationship and start adding value on their own.

These strategies will filter in during the three phases of a successful transition, which are the pre-review, the review itself, and the post-review. The last thing you want the client to do is feel like they’re being dropped. Proper planning and preparation by both you and the associate advisor will smooth the way and help avoid that type of reaction.

Pre-review, the associate advisor should follow a preparation checklist that looks something like this:

• Follow the normal process of gathering data for a review
• Review annuities to understand any riders and the general provisions of the program
• Review client data to ensure it is up to date
• Review AUM accounts, checking for alignment with risk tolerance
• Review last year’s notes, phone and action logs
• Determine potential beneficiary changes
• Add “Meet the Team” handout to the review packet
• Review any potential issues, beneficiary changes, past issues, and sales opportunities with the lead advisor

When the client arrives, you should greet them and introduce them to your associate. It’s important to establish immediate credibility by introducing them as your right hand on the client’s accounts and requesting their permission for the associate advisor to sit in on the review. This creates implied buy-in on the part of the client from the start. During the review, the associate advisor should be the one taking the notes and keeping track of any action items that need to be handled.

This is also a good time to introduce the team concept. You can use your “Meet The Team” handout to go through the team members and their specific functions when it comes to client care – positioning yourself and the associate advisor as being the two advisors on their team, plus an administrative coordinator, etc. – and present the team as an expansion of resources for them. This removes you as the single point of contact for everything the client needs and “trains” them to contact the other members of the team.

To really make this a successful transition, the associate advisor should add value by demonstrating their familiarity with the client’s accounts and situation. This will help the client begin to respect and trust the associate advisor and start a relationship with them. There are many ways to do this, but consider having them go over legal documents, update beneficiary information, review the prior year’s income tax returns, or make new investment recommendations. The closing, however, should be done by you, the lead advisor, for this initial meeting. You can ask for referrals, provide an invoice for services rendered, and summarize any follow-up that needs to occur. In future meetings, much or all of this can be left to the associate advisor; however, since the associate advisor has not yet “added value” in the client’s eyes, it would be difficult for them to ask for referrals just yet. You can also remind the client about the team resources available to them now – which leaves it open as to who will meet with them during their next visit, while not completely severing the relationship with you.

After the review, the associate advisor can further cement the new relationship by taking charge of the follow-up items. They should take the opportunity to send the client a follow-up email with contact information. This will reiterate the team approach and solidify the transition with a communication that comes from only the associate advisor.

Here are some do’s and don’ts to remember when transitioning a client to an advisor:

• Position the change as an expansion of resources and a great advantage for the client.
• Reassure the client that you are still on their team and just a phone call away if they need you.
• Have non-piracy contracts signed by the associate advisor, meaning that they cannot take or contact clients or prospects of the firm should they leave the practice.

• “Drop” your client to an associate advisor without having a transition conversation first.
• Use the word “handoff” when discussing the transition with your client.
• Tell the client that they have a new advisor. They don’t – but they do have a new associate advisor on their team.

When it comes down to it, bringing on associate advisors can be a mindset shift for you. As stated in the beginning, letting go of a client is difficult, but you must remind yourself that they will be better served with the team approach, and you will be free to seek out larger opportunities and manage your growing advisory business. Listen to our podcast and learn how hiring hiring and training great people will allow for your firm to continue to grow. It’s a win-win for everyone!

Have questions on how to bring on an associate advisor or how to best shift clients to an associate advisor? Get in touch with one of our business development experts today by completing the form below.