Author Archives: John Ndege

About John Ndege

Founder of Risk profiling software for financial advisers.

Pocket Risk integrates with Redtail CRM

RedtailPocket Risk has completed an integration with Redtail, the most popular advisor focused CRM (Customer Relationship Management) tool in the market. The integration will allow users of Redtail to launch the Pocket Risk questionnaire from within Redtail and review client scores.

The integration has been completed to make it easier and quicker for advisors who use Redtail to integrate Pocket Risk into their regular practice. With this integration advisors will save valuable time assessing their clients’ risk profile.

You can learn about the integration our dedicated page or watch the video below.

Are future returns only available to private investors?

Amazon Jezz BezosWhat happens to the returns of your clients’ portfolios when more and more companies go public later and later? Will returns be privatized and kept in the hands of the few?

Staying Private

As the Wall Street Journal noted Amazon went public at a market cap of $440m and it now stands at $174bn. Uber, the on demand taxi service is still private at a $40bn valuation. It only has to multiply 19 times before it is the most valuable company in the world while Amazon has gone up 395 times since it’s market debut and is not even in the top ten.

Increasingly the best companies can stay private for a longer period, getting their funding from venture capitalists, hedge funds and private equity. As a result the general stock market investor misses out on the growth of these companies.

A few months back I was reading the biography of Sam Walton and came across his IPO experience. Essentially Wal-Mart had been built on bank loans and was maxed out. Going public was their only option to get out of debt and fund their growth. Thankfully, the public benefited from having this company in public hands. But I wonder how many “Wal-Marts” we are missing out on, because of increased periods of private ownership.

Is it impossible to believe that the Wilshire 5000 index will one day no longer be representative of American business? I don’t think so and if it is not representative will it produce the returns people need to meet their retirement goals? That’s a scarier question with no answer.

Investing Private

The Canadian Pension Plan Investment Board have publicly stated that about 40% of their portfolio will be in illiquid private investments. They believe that the short termism of public markets hurts long-term returns and runs contrary to their goals. It makes you wonder whether “buying the index” is best path to financial security for those in the early years of accumulation. Sure it worked for the last 50 years but as the saying goes, “past performance is not indicative of future results”.

Admittedly, buying public securities is the best we have and from where I sit today likely the best course of action, however I believe having alternative investments will become more important for the average investor.

Alternative Investments?

What do I mean by “alternative” investments? I mean real estate, startups, peer to peer lending and others. Thanks to platforms like Angel List and Realcrowd people can invest for as little as $1,000 avoiding some of the high minimums that have characterized investing in these industries.

Is alternative investing risky? Well, Warren Buffett says risk comes from “not knowing what you are doing”. So clients will probably need to become more savvy investors, start small and expand where necessary.

Historically, the cost of successful index investing has been patience and limiting bad behavior. This has been a good deal for many investors over the years but I wonder if it is a sufficient cost for the next generation of investors to meet their retirement needs. They may have to become more active.

How To Make Robo-Advisors Irrelevant

Blue Ocean StrategyIt’s difficult to pick up an industry publication, attend a conference or speak to a fellow advisor without discussing the threat of robo-advisors. There is no doubt they will change our industry forever but what is the solution for the financial advisor?

Over the last week I’ve been reading Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant. The book offers a framework to deal with competition. A series of steps that go beyond differentiation or cost cutting, the typical response to competitive threats. The main arc of the book is that to defeat your competition you must make them irrelevant typically by appealing to a new customer segment.

Through a process called value innovation it is possible to create a business that is cheaper (either for you to produce or the consumer to buy) and better.  The classic example is Cirque Du Soleil who created a brand new market with their artistic and theatrical circus performances a world away from tents, lions, ringmasters and deadpan humor.

So how can we apply value innovation to financial advice? The first step is to understand the criteria under which people buy financial advice and who are the competitors.  Here is my list….

Criteria for Buying Financial Advice

Price / Fees – How much does it cost?

Performance – Will I make money?

Ease – Is the process easy to buy and manage?

Trust / Relationship – Can I trust the service/person and build a relationship?

Time – How long does it take to start and finish?

Goals – Will I have a set of goals and a plan I can believe in?

Education – Will I be more financially astute?

Personalization – How personalized is the service?

Competitors Offering Financial Advice

Financial Advisors  – In all their shapes and sizes

Robo-Advisors – Wealthfront, Betterment, etc

Family and Friends

Do It Yourself

Plotting The Competitors 

Using my judgment I’ve plotted the relative performance of different competitors in each area. For example, robo-advisors are cheap compared to the average financial advisor but they do not offer much in terms of personalization.

Comparing Sources of Financial Advice

The point of the exercise is not to be 10 in everything. That is nearly impossible.  The point is to find uncontested market space. So what opportunities exist for financial advisors given the current situation? The evidence would seem to suggest that advisors should not manage money directly.

As you can see from the chart above, the average financial advisor is great at goal setting, education, personalization but score poorly in fees and investment performance. Obviously there are advisors that perform well for their clients but the general perception is that fees erode performance. A solution to combat the threat of robo-advisors is not to manage money at all. Either outsource it to a robo-advisor, an inexpensive 3rd party money manager or become a coach and encourage clients to do their own buying and selling.

There is no advantage in offering a broadly diversified passive portfolio. As Michael Kitces says “Building a well-diversified passive strategic portfolio is on its way to being totally commoditized“. A less revolutionary approach to ridding yourself of money management has been advocated by people such as Deborah Fox of Fox Financial Planning Network, who suggests that a two tier service level could be the best approach for advisors. For some, even this is drastic.

The Blue Ocean Strategy offers other suggestions for advisors. For example, selling your skills to a new industry e.g. Employer retirement plans, institutions or getting into business planning. There is also the option to cut across client groups e.g. (Having a price point between robos and existing advisors and simply providing online advice).

 What would I do if I were a new financial advisor?

I like to think what would I do if I were a brand new financial advisor (admittedly an easier situation than converting an existing business). I suspect I would probably partner with a robo-advisor to do the investment management, provide online financial advice (so I could be nationwide) and focus on a particular sort of client base (e.g. entrepreneurs, doctors, lawyers, people 50-55).

There is a gap in the market between robos and traditional advice. Vanguard and Personal Capital have attempted to enter it with their hybrid model and I believe they will be successful. Therefore an advisor will need a specialism (e.g. doctors, military personnel etc) where Vanguard can’t compete because of their scale. You can charge more than Vanguard (whose fees start at $300 a year) and anchor your pricing next to something that has nothing to do with financial advice but people pay a lot more for e.g cable tv.

You are probably thinking this doesn’t sound like a very scalable business. I disagree by attracting clients who have never bought financial advice I believe it would be possible to create a profitable sustainable business (though it may very well be smaller than what you have today). Walmart is not the only food retailer (just look at Whole Foods) and therefore Wealthfront or Vanguard don’t have to be the only people selling financial advice.

In the long run (10+ years) I can’t help but see financial advice being broken into three categories. Swiss style white glove service for multi millionaires, primarily online hybrid services, and do it yourself robo-advisors. I believe the best bet for advisors is to offer a hybrid service. It’s the only relatively uncontested market place that exists.

What Benjamin Graham Would Do With Bonds Today

Benjamin Graham10-year treasuries are at 2%. High-yield bonds dance around historical lows and you are probably wondering if there will be anything left after inflation. Welcome to today’s bond environment where safety of principal is being exchanged for the most minimal of returns.

When speaking to advisors, their concern about today’s fixed-income environment is a recurrent topic of conversation. Just like them you are rightly worried about the returns your clients can expect and whether they will meet their retirement goals.

I wanted to find some sort of solution (or a least some solace) regarding this problem, so I turned to Benjamin Graham. The so-called “Dean of Wall Street” and mentor to Warren Buffett. Below is an old copy of Graham’s Intelligent Investor with my notes scribbled across the pages.

Intelligent Investor

Graham On Bonds

Graham was a fan of U.S. government bonds stating their safety is “unquestioned” this is because of the protection of principal they provided. On taxable vs non-taxable bonds Graham believed this was largely a matter of “arithmetic” in which high earners (and thus likely high tax payers) should gravitate towards non-taxable bonds. On high-yielding junk bonds Graham stated that the ordinary investor was “wiser to keep away” from such issues largely because of the individual risks. Given the development of high yield bond funds where risk is diversified Graham would probably not be so against them.

Graham In 2015 

So what would Graham do in 2015 given the current environment? Two items come to mind based on Graham’s works.

  • Firstly, there is Graham’s “fundamental guiding rule” – Never hold more than 75% of a client’s portfolio in bonds or stocks. Always balance between 25% on the low end and 75% on the high-end.
  • Stocks are usually attractive if the earnings yield is twice the Aa corporate bond yield. Today the earnings yield of the S&P 500 is 5.11%, 80% above the 2.83% Aa corporate bond yield.  This means stocks are preferred but they are not a bargain.

So the conclusion is that in this environment Benjamin Graham would have preferred stocks marginally. There are probably still bargains to be had for the “enterprising investor” (active). However, for the passive indexing investor, the market as a whole is not cheap. Unfortunately, Graham doesn’t talk too much about holding cash therefore I took a look at his disciple Warren Buffett’s current cash allocation at Berkshire Hathaway. At the end of 2014, 12% of the company’s assets were in cash or cash equivalents. Worthwhile food for thought.

The Real Risk To Your Clients

simple-wealthWhen you read all the literature designed to help you advance your practice do you ever feel that it’s junk? I do! 

Not because it isn’t useful but because it focuses on areas of your business that don’t really matter. It fails the 80/20 test of purposefully focusing on those elements of your business that actually move the needle.

As a risk nerd, I often find myself down the rabbit hole reading arcane papers about issues that are on the fringes of importance. I bet that happens to you from time to time when reading about our industry. Today, I want to get back to the core and investigate what the real risk is to your clients plain and simple. I enlisted the help of Nick Murray and his book “Simple Wealth, Inevitable Wealth” which is designed for clients.

So what is the real risk to your clients?

Almost all the time the real risk is that their investments will be unable to support their needs in retirement.

As Nick Murray says “the great long term financial risk isn’t loss of principal, but erosion of purchasing power”. Obviously, this is a very well known fact for any advisor, so let’s ask the next question…

What are the primary causes of clients failing to meet their retirement needs?

In one word “behavior”. As Nick Murray says “Wealth isn’t primarily determined by investment performance, but by investor behavior”. The successful accrual of investments is primarily set by increasing income, reducing expenses and remaining invested in equities/businesses as markets go up and down.

“In the great scheme of things, fund selection just isn’t that important” nor are a raft of other things advisors worry about says Murray.

Given these facts I believe advisors should spend 80% of their client time equally on these three elements of financial success. Yet, I am under the distinct impression this is not the case today with most advisors.

Let’s break these elements down and see what you can do to focus on your clients’ real risk.

Increasing your clients’ income

The typical way advisors help clients increase income is by reducing their tax liability. Since taxes are usually people’s number one expense this is crucial and a great service that advisors provide but I think there are other missed opportunities.

How about growing the pie? Rather than a financial advisor, what about a wealth coach?

Imagine if you gave your clients tips on how to get a raise, how to change careers and increase their salary or how to start a side business? Wouldn’t that be significantly more valuable than optimizing between different S&P 500 index funds? I think so, and your client will thank you for it. I believe too little time is spent on the most important variable in someone’s financial success, his or her income.

I also believe this is a significant opportunity for you to differentiate your practice from other advisors. “We don’t just manage your money, we increase your income!”

Reducing your clients’ expenses

The three biggest expenses for the average American are taxes, housing and transportation. Occasionally I hear of advisors that give great guidance on choosing a mortgage deal but it is not the norm. Once, again imagine if you were able to offer a service or a referral to a company that could find your client a great mortgage and auto-deal and thus reduce their expenses. The savings could be used to invest, better secure their financial future (and increase your AUM).

Obviously, there is a limit to how much expenses can be cut that’s why the main focus should be income. That being said, I feel there is room for improvement in this field for the advisory community. For example how often do advisors keep their clients accountable on their monthly spending? I fear not enough.

Investing in businesses/equities

We know that historically over the long term bonds have provided minimal returns after inflation and taxes. As Neil Murray states, “people seriously underestimate the long-term risk of not owning stocks” and thus gravitate towards bonds.

This is a mistake driven by “fear”. While stocks “are much more volatile than bonds – some times horrifically so – the passage of time leaches the risk out of stocks. Moreover volatility isn’t risk and volatility passes away, while the premium returns of stocks remain.” The bottom line is, if you have clients investing for the long term they should be weighted towards equities rather than bonds. Their asset allocation is of critical importance.

As an advisor you are probably putting sufficient weight on the importance of asset allocation, however, are you doing your best to ensure a client remains invested as markets gyrate? Neil Murray states clients must be educated to “distinguish between volatility and loss”. In a “well-diversified equity portfolio – only people can create permanent losses” by selling. It’s an advisor’s job to ensure their client does not do this. This is a real risk.


So, to conclude there are only three real risks to your clients’ financial success. Not earning enough, spending too much and failing to invest sufficiently in equities.

To reduce the risks to your client I would recommend spending some time thinking about how you could help increase their income and reduce their expenses. The chances are, you’ve already thought long and hard on their asset allocation.

Do you think there are other real risks that need to be considered? Let me know in the comments.

Harold Evensky’s 5-step client on-boarding process

Harold Evensky On-boardingSuccessfully on-boarding new clients is a common concern of financial advisors. As you know, those first few experiences a client has with your practice will color the relationship you have for years to come. Failure to understand your client, set expectations and begin on a positive note will lead to dissatisfaction and churn.

 When advisors talk to me about their existing risk profile questionnaire they are often looking to revamp their entire on-boarding process. I wanted to speak and learn from the best in this area so I turned to the “dean of financial planning”, Harold Evensky. Evensky outlines his approach in “The New Wealth Management: The Financial Advisor’s Guide to Managing and Investing Client Assets.” The 480-page book goes into detail about how advisors can ensure the success of their clients and their business through a thorough investment management process. Today, I am going to focus on the client onboarding process, which is essential to setting the right tone for your relationship.

Evensky’s process can be broken into five main steps. Client relationship, client goals and constraints, risk, data gathering and client education.

 1.    Client Relationship

Evensky begins where you would expect. He states “because everything is client driven, developing a strong relationship with the client is critical”. A solid relationship must be “built on communication, education and trust”.  So why is the relationship so important?

If we look at the Evensky’s wealth management process diagram below, you can see that the client relationship is essential to gathering the data you need to service your client. Without a good relationship it will be challenging to identify the “unique characteristics” of each individual. Evensky goes on to state that a “deft” wealth manager learns his or her clients traits and biases and develops tactics to address them so as not to sabotage the client’s end goals.

Wealth Management Process

 2.    Client Goals and Constraints

“Goals must be time and dollar specific and prioritized”. Evensky refuses to accept simple goals such as “having enough to retire” or “paying for my children’s education”.  Since goals are the “foundation on which all subsequent work depends” a considerable amount of time and effort must be spent to get them right.

However, it’s not enough for advisors to simply ask a client for their goals. An advisor must look for “hidden goals” especially relating to risk management, cash reserves and anticipated large case expenses that a client may have.

Evensky then takes pains to always consider the impact of inflation on any goals, the limitation of mortality tables when retirement planning and the importance of educating the client on goal prioritization.

Beyond goals the constraints of the client also have to be considered. This typically means time horizon and liquidity needs. To avoid selling a volatile asset when the value is low Evensky and Katz have developed a cash flow reserve account system to meet the short-term cash needs of their clients (typically two years of cash flow needs). Any investment funds (excluding the cash) should be committed for at least five years.

In fact the mantra of the firm is “Five years, five years, five years!” By ensuring a client has sufficient cash on hand they avoid a client’s impulse to sell at the bottom. There is an opportunity cost to having that much money in cash but Evensky thinks it is fair price to pay given the overall benefit to the portfolio.

3.    Risk

Evensky states that risk is a responsibility of the advisor. Not just to manage it but to educate clients about it. The first step for an advisor is to get the definitions correct. They must balance a client’s risk tolerance (willingness to risk) with their risk capacity (ability to take a risk). Someone with a high-risk tolerance but little capacity should not be in an overly aggressive portfolio. Conversely someone with a low risk tolerance but a high capacity could invest more aggressively if it is necessary to meet their goals.

However, understanding risk does not stop there. Evensky thinks it is prudent for advisors to become familiar with the common behavioral finance missteps all investors are liable to make. These include availability bias, overconfidence, panic, confirmation bias, mental math, framing and others. By going through this checklist Evensky believes advisors are less likely to make mistakes on behalf of their clients.

4.    Data Gathering and Analysis

Data gathering is about capturing your client’s circumstance and looking for any inconsistencies or unrealistic expectations. Evensky captures his client’s risk tolerance, risk capacity, capital needs (typically short term) as well as the standard fact finding information (e.g. name, age, current assets etc.). This is then discussed with the client.  The goal is to ensure the advisor has the right information to conduct their analysis.

5.    Client Education

“A better educated client is a better client.” Before Evensky asks clients to fill out a risk questionnaire he gives them a 30-90 minute mini educational program. The goal of the program is simple. To explain certain investment fundamentals so they can make informed decisions.

The program covers modern investment theory (asset allocation, types of risk), vocabulary (covering terms like volatility, style, risk), information on the firm’s biases (e.g. being against market timing) and an overview of the financial planning process. When a client has this information an advisor can better manage their expectations and ensure their satisfaction.


So as you can see Evensky has developed a thorough on boarding process for his new clients. It’s all about educating the client and getting the information you need to give the best advice.

What other steps would you include in your client on-boarding?

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5 Technology Tools We Use To Grow Pocket Risk

Technology ToolsLate last year I wrote a popular list of 58 technology tools for financial advisors. It was shared over a hundred times on various social networks becoming our most visited post last year.

However, a great tool is merely the beginning. How do you use these tools to grow your business? A business coach once wrote that the key to growing your business is to make it irresistible to your market and make sure they know about it. Below I share 5 technology tools we use that help us achieve that goal.

1. Business Metrics Dashboard [Purpose: Are we building something irresistible?]

The most important tool we use is our internally created business metrics dashboard, which includes numbers and written notes. This helps us know whether we are creating something irresistible to our market. Here are the main elements.

Active Customers – How many of our customers have recently logged in and used the product.

Monthly Recurring Revenue – How much revenue are we generating on a monthly basis.

Churn – Have we lost any customers and why did they leave?

CLTV – What is the average value of a customer? This is determined by the average price someone pays for Pocket Risk and how long they remain with us (on average).

Cost To Acquire A Customer – How much are we spending on marketing (including marketing salaries) to acquire a customer?

Cashflow/Free Cashflow – Measuring the cash that is coming in and out of the business.

I review these metrics every Monday morning. Given the array of systems most businesses use it can be tricky to track all of these metrics easily but it is essential to measuring the health of the business.

I recommend every business owner have a similar dashboard. You can use Excel, Google Docs or create an internal webpage. Just remember that traditional accounting metrics do not provide good leading indicators on the health of your business. If you can’t get all of these metrics into a dashboard then at least get four or five. Whatever you do, don’t limit yourself to tools you can buy. Build your own tools.

2. ROI Calculator [Purpose: Are building something that’s irresistible and profitable?]

Once again, I built my own tool (with Excel) that measures the ROI on any major expenses. For example, if we spend x on marketing I know I need to acquire y customers for it to be profitable. Or if I ask one of our employees to spend 10 hours on a project, I know that that we need z number of new customers, retained customers or future saved working hours for it to be worthwhile.

Now it’s not always possible to predict the ROI of your investments but we make sure every major dollar spent or hour consumed has an expected ROI. This way we can measure if it is has been successful. Having this calculator limits us from making emotional decisions or succumbing to psychological biases that lead to unprofitable outcomes.

When we build new features or embark on projects at Pocket Risk we always ask whether this will make our product irresistible to customers at a profitable return. That return may take months or years but it has to be thought out. Having the calculator ensures we have the same internal yardstick for success.

3. Google Docs [Purpose: Helps us build something irresistible quicker]

As an international company with team members in London and San Francisco efficient internal communication is essential to our business. We use Google Docs to share things like marketing plans and training documents.

At first I thought everyone would be using tools like Google Docs to share information until I visited a financial planning firm and realized people still send Excel files back and forth unnecessarily. If you have a file called “Report Update v3 Final – David edit.xls” then you could probably benefit from using Google Docs.  It’s a simple way to ensure your team is on the same page.

4. Screenflow [Purpose: Helps us build something irresistible quicker] 

Have you ever found yourself writing a long email trying to explain something to a colleague, client or contact? Thankfully those days are in the past. I use Screenflow (Mac based) but you can also use Screencast to record your screen and voice for sharing with a simple link.  This has dramatically reduced our frustration and increased our efficiency. Some things are difficult to explain in text and you can’t always get someone on the phone.

5. Google Analytics [Purpose: Measures the efficacy of our marketing]

Every business should be measuring the number of qualified leads they are creating and the conversion from first contact to happy customer/client. Pocket Risk is a web-based business so we use tools like Google Analytics to measure web traffic.

A financial advisor’s business would probably have to track this in Excel or with a CRM system like Salesforce or Redtail. However if you use your website to capture leads (which you should), you can also benefit from Google Analytics. Michael Kitces has a recent post about this on his blog describing how financial advisors can get the most out of Google Analytics.


What you will notice, from the list above is that we don’t hesitate to create our own tools that do a better job than what we can buy. We just have to ensure the creation of our own tools (and ongoing maintenance) justify the investment.

Additionally you will see every tool has a purpose and is a part of our mission to create something irresistible to our customers.

BONUS – Excel Shortcuts [Purpose: Helps us build something irresistible quicker] – Take a look at the link below to see how you can work a lot faster with Excel. Just imagine your life without copy and paste? Now imagine what other shortcuts you could be missing out on –

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3 Uncommon Questions To Assess Your Clients’ Risk Profile

RiskIn Harold Evensky’s “The New Wealth Management” risk is described as a “four-letter word” and that echoes many of the discussions I have had with advisors. Again and again I ask myself how do we get a better grip on what Evensky calls “a client’s most restrictive investment constraint”?

Traditionally, advisors tried to figure it out alone, and then they used boilerplate risk questionnaires before adopting academically backed tools like Pocket Risk. However, the journey is not complete. I believe we can further this field by encouraging advisors to share how they tackle risk with their clients. This will allow everyone to develop best practices for tools, processes and questions. Let’s call it a crowd-sourced approach to good ideas about risk.

At Pocket Risk we allow advisors to add a few questions to our questionnaire so they can specifically target a particular concern about goals and risk. This has led to a gamut of questions we believe other advisors can benefit from. Below is a selection of questions as well as an explanation as to why they have been asked.

Question 1: How often do you watch or read financial news media (e.g. CNBC, Bloomberg, WSJ etc.)?

Possible Answers: Daily, Weekly, Monthly, Quarterly, Yearly, Never

Why: The advisor who created this question jokingly referred to this as his most important question. He says clients that watch financial news media on a daily basis (especially programs like Mad Money) will likely be too reactionary when the markets move up and down. Their desire to move in and out of investments at a rapid pace would hurt their future returns and reduce the chances of meeting their financial goal.

As a result he knows he has to work harder with such clients as they are slowly weaned off news media. The risk the advisor is looking to mitigate is the chance that this client is a trader who wants to speculate more than invest.

Question 2: Who is responsible for determining a suitable level of risk, and managing that risk on all of your accounts?

Possible Answers: It is my responsibility, It is the financial professional’s responsibility, It is a shared responsibility, I’m not sure

Why: I like this question. This firm is asking the client’s perspective on who is responsible for the risk in the account. This is isn’t about abdicating responsibility but about optimizing client communication and delivering the appropriate investment approaches.  If the client says they believe the advisor is fully responsible then this can help the advisor craft a relationship and portfolio that better suits the client. Alternatively, if the client believes they are fully responsible for the risk then the advisor may be able to provide the client a larger array of risk options and communicate with them in a different fashion. It’s all about optimizing communication about risk so the client has the appropriate portfolio.

Question 3: What is your life expectancy?

Possible Answers: 18-125

Why: This advisory firm asks their clients how long they expect to live. Rather than guess based on their age, they have used a simple life expectancy test to get an accurate reading based on a client’s health profile. One of the biggest risks investors face is running out of money in retirement. This can be partly avoided by having a realistic life expectation.


You can ask your clients a myriad of great questions about risk but not all of them fit nicely into a risk questionnaire. As a result it’s important to think what else can you ask to better understand your clients’ risk profile. I hope I’ve given you some ideas based on the questions above.

Share the questions you ask your client’s about risk below in the comments.

3 Trends To Watch In 2015 From 351 Financial Advisors

2015 NotesSo what’s going to happen in 2015? Over the year I’ve seen three clear trends from discussions with 351 financial advisors. I have two books full of notes as you can see in the image and I am going to share what I am seeing. Getting insight into what other advisors are thinking and doing can better prepare you for 2015. Not just in terms of competition but getting new ideas to propel your business forward. Let’s get started.

Trend #1 – New Client Acquisition Methods

A consistent theme throughout the year, which will continue to gather pace next year, is the need to acquire clients through new methods. Historically, advisors have been very reliant on referrals and seminars. This is changing. Increasingly the advisors I speak to are keen to acquire clients through content marketing (e.g. blogging, podcasting), online risk questionnaires (to lead capture drive by website visitors) and bespoke client retirement tools and calculators like

Client acquisition doesn’t need to be as “local” as it once was and a sizeable number of advisors want to use online marketing to gather clients nationally. My experience tells me advisors have been threatened and inspired into action by the online investment firms (e.g. robo-advisors) and are looking for more competitive tools and approaches.

Trend #2 – More 401k Business

As you already know fee-only RIAs are increasingly interested in advising on retirement plans (401ks) for plan sponsors. This interest has not waned. Perhaps it is the increased publicity of “marketplace conflicts” that exist in commission-based models or growing self-confidence that continues to push RIAs in this area but don’t expect it to let up. The opportunity for RIAs to diversify and strengthen their business is very tempting. Unfortunately the tools and platforms that help advisors deal with high-net worth clients are more advanced than those for RIAs managing retirement plans. This is an opportunity for technologists within the industry. If you have any tools or ideas you’d like to see in this area let us know within the comments.

Trend #3 – Risk Needs, Risk Tolerance, Risk Capacity

As you would expect many advisors speak to me about assessing client risk. There has been one great trend in this area, which I welcome. This is the need to correctly balance a client’s needs, risk tolerance and risk capacity.

Historically advisors were only focused on risk tolerance but quickly realized overly conservative clients would never meet their retirement goals. They then swung towards investing based on a client’s needs, which resulted in stock heavy portfolios to make up for a lack of savings. When 2008 happened clients couldn’t stomach the declines, bailed and missed the run up in stocks from 2009 to today.

Advisors have learned that each portfolio needs to consider a client’s risk needs (goals), risk tolerance (willingness to risk) and risk capacity (risk capability). That is why at Pocket Risk we released a new feature earlier in the year allowing advisors to add questions to our questionnaire to ensure they capture this necessary information.

Final Thoughts

I expect my conversations in 2015 to continue just where we left off in 2014. How do we tackle the robo-advisor threat? In what new ways can we grow our business and how can we better serve our clients? That is what the trends in 2015 will be all about. I am excited to see how they evolve!

#Bonus Trend – One additional trend I expect to hear more about is the concern about bonds and whether they are a sufficient diversifier from stocks in the near term. Time will tell.

Do Knowledgeable Investors Need A Financial Advisor? [A Mathematical Approach]

BrainA never-ending challenge for the financial advisory industry is quantifying the value it produces for its clients. We know advisors help people set goals, choose investments and sleep well at night but what about the dollars and cents impact? As clients get smarter they’ll be able to construct their own passive, well-diversified and regularly rebalanced portfolio. They’ll become Knowledgeable.

As Michael Kitces mentioned a few months back “a well-diversified passive strategic portfolio is on its way to being totally commoditized”. Instead of catering to the average investor, advisors will have to work for the client of tomorrow. The Knowledgeable investor.

So the question is, what is the quantifiable value of a financial advisor for the Knowledgeable investor?

First, let’s define the knowledgeable investor. In my eyes the knowledgeable investor understands the following, which an average investor may not…

  • They understand they should have a financial plan. It may not be complicated or consider all the variables but they should have something.
  • A passive diversified portfolio is likely to meet their investment needs over the long term. Most active investment strategies don’t beat the index over sustained (10 year plus) periods.
  • They should rebalance regularly.
  • They should minimize fees (fund fees, transaction fees etc).
  • Investor psychology (i.e. overconfidence, loss aversion, mental accounting etc.) can lead to actions that limit investment returns.
  • Getting started with investing today means they will benefit more from compounding.

Importantly, the knowledgeable investor may understand the points above but never act on them and this gives an advisor the opportunity to force good behavior.

Quantifiable Benefits of a Financial Advisor

 1.    A Financial Plan

Knowledgeable investors understand they should have a plan and probably have something in their head but it is not a formalized IPS, a strict budget or a retirement number. It’s more like “max out my 401k and hope for the best”. This puts them ahead of most people but may not be enough for them to live the life they want. Even for those who have used retirement calculators or read the books the variables can be overwhelming. A financial advisor will give a knowledgeable investor a specific actionable plan. In my opinion this is the most valuable contribution an advisor can make to a person’s future.

 So what is the quantifiable benefit of a financial plan? Likely several years even a decade or more of retirement. That means you can spend less time working and more time with your loved ones. Put a price on that!

 2.    Managing Investor Behavior

The DALBAR studies (which compared dollar weighted investor returns with index returns) popularized the idea that the average investor jumps in and out of investments, buying high and selling low resulting in poor performance. Their conclusion was that “The average equity investor underperformed the S&P 500 by 4.32% for the past 20 years on an annualized basis.”

Further investigation led by Harry Sit and Michael Edesess showed these numbers were exaggerated and possibly even completely false. The DALBAR methodology failed to account for the fact that poor equity market performance during the 2000’s accounted for poor dollar weighted investment performance not investors jumping in and out of the market. Furthermore, earlier this year another DALBAR study showed that 55% of the reason investors fail to meet the index is because they didn’t have the capital to invest and buy at the lows. Therefore we must conclude that the importance financial advisors have in managing behavior has been overstated.

Despite the apparent failing of the DALBAR studies others have attempted to quantify average investor behavior. Russell Investments recently showed that if you had invested in the Russell 3000 index in 1984 and done nothing you would have performed 2.2% better than the average investor (using ICI’s monthly fund flow data to mimic the average investor). I had difficulty getting all the methodological details of this study so I’ll take it with a grain of salt.

What we can say is that the importance of managing investor behavior has probably been exaggerated but it is still significant. If an advisor can save an investor 1-2% a year through managing behavior this more than covers their advisory fee.

But what happens if you are a knowledgeable investor who needs little behavioral management? Then you’ll end up paying for something you do not need.

That’s the question knowledgeable investors have to ask themselves. Without an advisor how good will my behavior be throughout my investing lifespan? If you have serious doubts about your behavior an advisor could well be smart investment.

 3.    Fund Selection and Rebalancing

Another area where having an advisor could have a quantifiable benefit on the bottom line is in fund selection and rebalancing. Russell Investments have shown that a regular (monthly, quarterly annually) rebalancing policy can juice your returns from 0.51-0.93% annually.

However, knowledgeable investors are now well versed in passive fund selection and the importance of rebalancing. Any knowledgeable investor who has done a modicum of research knows Vanguard is highly recommended when it comes to minimizing fees and with their Life Strategy Funds you don’t have to worry about the rebalancing.

Frankly the knowledgeable investor doesn’t choose an advisor to help pick funds and rebalance unless they believe in active investing.

 4.    Tax Planning

A further quantifiable benefit of working with an advisor is the tax planning. Unfortunately, it’s difficult to find any statistics on the tax savings people accumulate from working with a financial advisor. Anecdotally it’s not uncommon to hear of advisors saving their clients 10’s of thousands of dollars. If these savings are invested, grow and compound the benefit of working with an advisor could be worth a lot more than managing behavior or selecting the right funds.

What investors have to ask themselves is whether their tax situation is complicated enough to realize significant savings. A regular W2 employee with a fixed salary is unlikely to benefit as much as business owner, with stock options and investment real estate. If I were to hazard a guess I’d estimate someone with a tax situation that is more complicated than a regularly salaried employee could save several percentage points on an annualized basis over their lifetime through working with an advisor.

 Dollar and Cents Return

So let’s put this into an example. Let’s assume you are a knowledgeable investor who is considering working with a financial advisor. Is it worth it? Well based on the details above the answer would be an emphatic yes….

Advisor Makes You Advisor Costs You
Proper Financial Plan – You end up saving an extra 5% a year Annual Advisory Fee – 1.5%
Managing Behavior – 1.5%
Fund Selection and Rebalancing – 0%
Tax Planning – 2%

Using the numbers above if we assume you have a $100,000 salary and have $250,000 in savings/investments.

Financial Plan  = +$5,000

Managing Behavior = +$1,500

Fund Selection and Rebalancing = +$0

Tax Planning = +$2,000

Advisory Fee = -$3,750

Net Benefit per Year = $4,750

 A knowledgeable investor working with a competent financial advisor is likely see a positive ROI over the long term so long as the expense is not too high.

I find it unlikely that for 20 years even knowledgeable investors can create a viable financial plan, which they can stick to, while simultaneously managing their behavior, keeping up with changes in the industry and optimizing their tax situation. It’s just a very difficult thing to do over a long period of time. Not impossible but very difficult.

The greatest achievers in any field have always needed coaches, advisors and people to keep them accountable. When it comes to investing doing it alone is as tough as it comes.

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