Moving Away From Family

All four authors of this blog are CFP® professionals working for fee-only registered investment advisory firms. That is what our blog and study group is about. However, an additional commonality is that we all moved to a new state in order to start out job. As a result, we often talk about the challenges living in a new area as well.

Moving to a new state can be intimidating. Sometimes my friends from high school who have not moved away from home comment how they could never do so because they would miss their family too much. That is a valid argument but one that, in my experience, does not have to be true. I am closer with my family now that I live in a different state than compared to when I lived with them. I call my grandmother about once a week. I write letters to my aunt. I text my uncle about the Buffalo Sabres games. I frequently speak with my parents on the phone and exchange emails with my mother. Proximity does not equal closeness and lack of proximity does not equal distance as it relates to family relationships. By making an effort to keep in touch with family, I have become closer with them despite the distance of living apart. 

Others may have different circumstances. Talking on the phone is certainly not the same as seeing someone in person. However, for those who might be hesitant to move away for fear of missing family, I would encourage them to consider the possibility that it might actually bring them closer together. That has been my experience.

Evaluating Reports & Surveys: The 3.8 Billion Dollar Question Mark

The New York State Department of Financial Services issued a report on October 17th regarding the state’s public retirement systems. Specifically, the report reviewed the “Common Retirement Fund” from March 31, 2009 to March 31, 2016. That is, the two state pensions over the last seven years. Unique compared to other state pensions, in New York they are run solely by the State Comptroller. The report found that “under the Comptroller’s watch the State pension system has spent large amounts of pension system funds chasing returns and performance that has fallen far short for years. Specifically, over the past eight years, the System has paid over $1 billion in excess fees to hedge fund managers who underperformed to the tune of $2.8 billion.” The report makes several very valid points, and you can read it in its entirety here. Reserving judgement on the overall situation, one major red flag jumped out at me: the dates of the report. As a general rule of thumb, it is never a good sign when a date range starts or ends right before or after a significant crash. This report starts March 31, 2009. The exact market bottom was March 9, 2009; 22 days earlier. That is like conducting a report on the most successful teams in NBA history and starting the report Michael Jordan’s rookie year. It doesn’t make the facts any less valid; however, it frames the situation in a certain way that may distort the picture. If the New York State Department of Financial Services wanted to analyze the Comptroller’s decision to invest in hedge funds, why not look at the entire time these investment were held? Why cherry pick a date close to the market bottom of one of the greatest market declines in U.S. history?

This is what you need to know - whenever a financial report has a starting or ending point right before or after a significant market event, the authors are almost always doing so, intentionally or otherwise, to frame their argument in support of their message. Regardless of the content of the message, it is something to be cognizant of as affecting the conclusions of the report.

Money and Happiness

Money can’t buy happiness but it solves 95% of the problems that make you unhappy.  - @gselevator

Money can’t buy happiness. There is a fair amount of truth to this. Research has suggested that the utility of additional wealth starts to significantly decline after about $70,000 of income a year. That being said, a good use of money as it relates to happiness is using it to avoid things that make you unhappy. For example, I absolutely hate doing laundry. It drives me crazy and I don’t like worrying about it. I pay someone about $20 a week to do my laundry. Over one year that is about $1,000, which could certainly be put to better use. However, for me it is worth it to avoid doing something that makes me unhappy. If I can go through life having never to do my own laundry, it will be money well spent. As we have discussed on this blog before, money is not the end; it is the means to an end. And while we all understand the phrase “money can’t buy happiness,” we might consider using money to avoid unhappiness. 

Believing in Your Value Proposition

I never realized how difficult crafting my value proposition would be until I froze mid-sentence during a mock advisor-client meeting about a month ago. Although my current role does not necessitate a perfect value proposition, the mock meeting led me to understand how important being able to articulate your value is for a Financial Advisor. During the mock meeting my mind was stuck on the idea that the prospect can always find a way to challenge your opinion since many financial advising services are subjectively valued. After my slip-up I decided to do a deep dive on the value proposition, and last week made an hour-long presentation on the subject at my company’s offsite retreat. I’ve put dozens of hours into researching and reflecting on the value a Financial Advisor can provide and will highlight the points that resonated with me most. In a later post I will take a deeper dive into other aspects of the value proposition.

My research started with the question, “Why is the value proposition so hard to describe?” Financial Planning is a complex, subjectively valued, intangible, long-term service. There’s no question that anyone who has worked as a Financial Planner for a few years knows exactly what a Financial Planner does, but we also know this industry so intimately that it’s easy to forget how entrenched the complex terms and acronyms are in our daily vernacular. Have you ever tried to describe what you do and almost immediately seen that person’s eyes glaze over? An explanation that was meant to be simple can quickly turn into data overload. If you can manage to take the complex and present it in a simple way, you still need to get around the obstacle of value often being subjective. Effectively proposing your value requires an understanding of what that person values. Finally, there’s a required element of trust that the relationship will be mutually beneficial over the long term. Trust in an intangible, subjectively valued service is difficult to build and maintain. So despite the fact that you may know what a Financial Advisor does, it’s no easy feat explaining the merits of an intangible service that the person may have never experienced when his or her sophistication and interest levels are unknown.

For me, the most important part of the value proposition is to believe in it myself. At its core, Financial Planning is a business that helps people navigate and develop a balance between their goals and their money. Although we may like different aspects of our roles for different reasons, I’ve seen a common theme in Financial Advisors’ underlying motivations of being in this business to help people. It should make you feel good to work in a profession that has the primary objective of helping people live out their goals through the proper management of their financial resources. Although you may feel as though you’re in this profession to help people, conveying your value proposition requires an understanding of your services and their impact, as well as the justification for your fee.

Only a portion of the strategies we implement yield quantifiable, consistent annual benefits such as tax loss harvesting, rebalancing, or tax planning. Many planning opportunities are subjectively valued and occur inconsistently over the years. Does the prospect have the resources and intellect to combat these issues as they occur? What about the time? Even if they are able, do they want to? For many, there is a high value on the peace of mind and free time that comes with having a competent advisor. These benefits are virtually impossible to objectively quantify, so advisors and clients need to mutually agree that the fee is worth the value. I could spend all day writing about our hard-to-value services, but the one that sticks out to me the most is a good Financial Advisor’s ability to anticipate planning opportunities during life transitions. An advisor who has taken the time to understand his or her client’s comprehensive financial situation (goals, values, interests, priorities, etc.) will be able to assist the client in avoiding expensive common pitfalls. When clients transition to new phases of their lives it can be exciting, but often comes with an overwhelming feeling of “I have no idea what I’m doing” as well. Having a knowledgeable, experienced partner can make all the difference in a person’s mental state during transition periods. Examples of life transitions include: starting a new job, moving to a new state, purchasing a first home or other large asset, getting married, having kids, sending your kids to college, getting divorced, selling a business, getting a promotion, or receiving inheritance. Having an intimate understanding of your hard-to-value services is essential to conveying your value proposition.

The final area I will touch on is the need for you to believe the fees you charge are justified. There will always be prospects and clients that argue fees, which can lead to a defensive or even argumentative discussion if 1) you can’t articulate value clearly and 2) don’t know your fees well. I’ve always worked for firms that charge on a percentage of assets held with the firm, but if I’m speaking honestly, prior to my research I had never really paid attention to the actual dollar amount. For the average advisor the AUM fee arrangement can come across as clandestine, oftentimes shown only as a line item on four statements per year. If we tout our fiduciary responsibility we should have a solid understanding of what various clients pay in real dollar terms. Even though it may be easier for the client to stomach an automatic withdrawal from their account, we shouldn’t encourage that type of “out of sight, out of mind” mentality. An exercise I found beneficial was to calculate my firm’s fee in both a positive and negative 6% return environments over one year for $1M, $5M, and $20M portfolios. Justifying the fee is easy in positive market years, but an advisor’s behavioral finance knowledge is put to the test in down market years. When the client wins, we win, but when the client loses, we win a little less. Having a high level understanding of our additional impact on the losses clients undergo in the short term helps to build empathy, which is an important component to any advisor-client relationship. If we believe that our fee structure is fair, then we should be able to have frank discussions with our clients explaining that the justification for our fee comes from the understanding that the advisor-client relationship has historically proven to be mutually beneficial over the long-term. It’s no easy feat to gain a prospect’s trust when the relationship can take years to net positive annualized returns. Understandably, our value oftentimes needs to be regularly reinforced throughout the course of the relationship. On the flip side, that also provides opportunities to develop solid long-term relationships with our clients.

Ultimately, your success in this area will come down to experience conveying the value proposition to various types of people. There is no shortcut, this important skill takes time and repetition. I encourage you to write out a framework and practice delivering it to your friends, family, and anyone you think might be interested. The sooner you develop your value proposition the more opportunities you will have to practice it, making you that much more prepared to impress your future prospects. The longer you wait to develop your value proposition, the more opportunities you’ll let pass you by.