ZERO to ONE

/ Dave Faulkner / Leave a comment

Financial Advice as a Startup? Read This Book.

(A review by Dave Faulkner, CLU, CFP – originally published on the RazorPlan blog.) 

Peter Thiel is one of the founders of PayPal. In 2012 he conducted regular lectures at Stanford University where a student, Blake Masters, took detailed class notes. The book Zero to One is based on those notes.

Zero to One is an international bestseller and, with the subtitle “How to Build the Future”, is required reading for Silicon Valley startups.

My son Cory recommended that I read this book. I think his exact words were “you have to read this book”. He said it felt like the author had compressed all of his knowledge and experience with PayPal into a blueprint for entrepreneurs. Information that can be used in not only building and running a company, but also developing a product and marketing it.

To date, I have now read Zero to One 3 times. The first time I could not put it down. The second and third time I marked up the margins and underlined text throughout the book. Today it is a dog-eared mess and one of my all-time favorite reads.

So, what does a book about technology startups have to do with financial advice? Although I am a founder and CEO of Razor Logic Systems Inc., a technology company, when people ask me what I do for a living I almost always respond with “I am a financial advisor”. This is how Zero to One spoke to me.

In Zero to One, Peter Thiel states that every moment in every business happens only once. That copying what was successful in the past will only provide limited success, but creating something new can bring unlimited success.

Technology is changing financial advice. To succeed in the future advisors need to stop doing what worked in the past and embrace today’s technology. You need to think of your business as a financial advice startup, and to help do that you should read this book.

Seven Questions Every Business Must Answer

Although there is great value throughout this book for anyone in any industry, it is the seven questions that every business must answer that will help you succeed. According to Peter Thiel, if you don’t have a good answer to these 7 questions, you’ll run into lots of “bad luck” and your business will fail. If you nail all seven, you’ll succeed.

1. The Engineering Question:
Can you create breakthrough technology instead of incremental improvements?

Great financial advisors create value for clients in ways that their competition does not. Your breakthrough technology is your value proposition.

To be a great financial advisor you should have a value proposition that is an order of magnitude better than what is expected by clients. You must strive to add 10x the value because merely incremental improvements often mean no added value from the client’s perspective.

2. The Timing Question:
Is now the right time to start your particular business?

Is your value proposition relevant to your clients today? When I first offered financial planning to my clients in the early 1990s, delivering a printed plan in color was considered value added. Today even my retired clients do not want a paper plan. They prefer instead that I send them an email, or better yet provide a client portal they can use to access documents and basic financial advice.

The key to getting the timing question right is to understand what really matters to your clients and deliver that first.

3. The Monopoly Question:
Are you starting with a big share of a small market?

The larger your target market, the greater the competition. When you offer financial services that are no different than what is offered by a bank, you are viewed as a small player in a very large market.

When you identify a unique solution for a niche market, and provided you are good at what you do, you will own the market and create a monopoly for your business.

4. The People Question:
Do you have the right team?

There is an old saying that goes “It’s not personal, it’s just business”. Today FinTech is disrupting how average people access financial products. The problem with technology however, is that when it comes to people’s financial security, “It’s not just business, it’s personal.”

The personal relationship that you and your staff have with your clients, combined with leading edge technology designed to make you and your team more efficient, should be front and centre in your value proposition.

5. The Distribution Question:
Do you have a way to not just create but deliver your product?

Once you have created your value proposition, the next thing you must do is formulate a plan to tell current and prospective clients about it. If you take the position that your value proposition will “speak for itself” you may have some success, but you will not create disruption in your chosen niche.

Your value proposition is not complete without a clear plan to tell your clients what it is and why it should matter to them.

6. The Durability Question:
Will your market position be defensible 10 and 20 years into the future?

Every financial advisor should have a plan for their own financial security. You must ask yourself “What will financial advice look like in the future, and how will my business fit in?” Financial advisors that fail to anticipate the impact technology will have on financial advice will find it difficult to maintain their income as clients leave.

Financial planning, client management and compliance can all be improved with technology to automate the routine tasks you perform daily, providing more time for personal interactions.

7. The Secret Question:
Have you identified a unique opportunity that others don’t see?

Many financial advisors justify their worth with a conventual truth that clients want the human touch. They hold on to the belief that direct to consumer financial technology, or FinTech, will only appeal to a small segment of the population and not to their clients.

As a financial advisor of the future you must embrace technology, not ignore it. You will create your value proposition around the secret that technology combined with the human touch, is “How to Build the Future” of financial advice.

In Conclusion

As I said before, I liked Zero to One not because I am in the technology business but because I am a financial advisor currently being disrupted by technology. When you read this book, relate the ideas and stories told by the author to how you run your financial advice business, then imagine what your business could become if you embrace the technology available to you.

When Should You Engage a Financial Planner?

/ Dave Faulkner / 2 Comments

Canadians love to label certain money related deadlines as seasons. Each new year kicks off with RRSP season, followed by tax season in March and April. The problem with ‘seasons’ is that unless you plan for them well in advance, when the seasonal storms hit it will be too late to do anything to improve your situation. This is true with weather and personal finance. So, to help you get a jump on your personal finances, I suggest May and June be called Financial Planning season.

With the rise of online investment and tax software, it is becoming easier to simply make an RRSP contribution in February and then file your tax return in April to get the refund. RRSP contributions and tax refunds are just a part of your overall financial situation – doing these basics as efficiently as possible won’t guarantee you success. When it comes to financial planning advice there are many situations where the savings offered by technology cannot replace the value provided by a financial professional.

Here are 6 situations where you should consider engaging the services of a professional financial planner:

1. You have a lot of debt

Having a lot of debt usually means that you must service that debt. Making monthly payments to credit cards and lines of credit mean that you may not be able to save for your future. A financial planner can help you prepare a cash flow plan to get you out of debt, saving you thousands in lost interest payments that you can use to invest in your future.

2. You own a company

Investing as an individual and investing as a corporation are similar in many ways. With both you need to create a risk profile and select investments, but the added complexity introduced in recent Federal budgets has created several problems relating to investment income. In these situations, it is important to work with a financial planner to ensure your investments are managed properly.

3. You had a change in your family situation

Managing your risk exposure to an unexpected financial loss due to death, disability, and health issues requires careful planning. Getting married, divorced, or having a child are all major life events that can impact your financial situation. A financial planner can formulate a plan that prioritizes your needs, protects your family, and ensures all your financial goals are achieved when major life events occur.

4. You have US citizen connections

Income taxes impact all areas of your finances, but if you are a US citizen or related to a US citizen by way of birth or marriage, there are many tax obligations you will need to address. A financial planner can help to identify the issues and guide you though the many steps to ensure you and your estate are not burdened by unnecessary taxes and fees.

5. You are nearing retirement

Retirement planning is so much more than asset allocation and risk tolerance. The strategies you used to grow your retirement nest egg will not be as effective once you transition from saving to spending. A financial planner will provide advice and guidance on the best strategies to maximize after-tax income while preserving the wealth you have created.

6. You are part of a blended family

When you or your spouse have children from a previous marriage, there are several legal aspects related to obligations or entitlements that will impact your estate. A financial planner can help you clarify your objectives, develop strategies, and prepare an estate plan that distributes your assets according to your wishes.

Advice and Retirement Income Study

There are a lot of financial technologies that claim to offer the same level of services as those provided by financial professionals, but at a fraction of the cost. The future value of this cost difference is used to highlight how much you will lose to fees over your lifetime, but cost should only be a consideration in the absence of value.

The Advice and Retirement Income Study profiled an average married couple and compared investing with a low cost robo-advisor to engaging a professional to prepare a financial plan. What the study concluded was the value added by hiring a financial planner amounted to $1,000,000 in additional after-tax income in retirement.

For people who are both knowledgeable about, and engaged in managing their finances, online tools may be a good choice, but for everyone else the value added by the services of a qualified financial planner can make all the difference in the world.

Click the thumbnail below to download a PDF of this article:

Engage Financial Planner

Advice and Retirement Income Study

/ Dave Faulkner / 2 Comments

Retirement Income and the Impact of Fees

As more Canadians are seeking guidance on the best way to save for retirement, one common piece of advice involves the cost of investment fees and the potential impact high fees can have on the size of your retirement nest egg.

Over the past few years many new direct-to-consumer digital investment platforms, or robo-advisors, have entered the Canadian market place with the mandate to provide access to professional investment advice at a cost well below what traditional investment firms and financial advisors charge.

To highlight the potential cost of investment fees, many case studies have been published by digital investment firms claiming the average investor could save hundreds of thousands over an investment lifetime.

Most case studies simply focus on how much less an investment will be worth 10, 20 or 30 years from now due to lower net returns. But to understand the true cost of investments fees, you must look past the accumulation stage and include the decumulation stage in retirement.

When planning for retirement, the focus is on how much after-tax income will be needed. For this reason, how much after-tax income an investor can expect, should be used to measure the true cost of investments fees.

The Approach:

In this study, we started by creating a baseline analysis, assuming a return on investment with no related management or trading fees. This allowed us to establish a target after-tax retirement income.

Next, we analysed three common investment platforms and the impact different fee structures could have on projected capital at retirement vs. the capital required to generate the target after-tax income. The three investment platforms include:

  1. Digital investment firm or robo-advisor.
  2. Traditional brick and mortar investment firm.
  3. Professional advice via financial planning engagement.

To eliminate any impact on after-tax income due to the tax savings related to income splitting, our case study assumed that both spouses earn equal income and have equal assets and savings. This ensured that any difference in results would be directly related to the investment platform used.

Financial Planning Software:

All analysis was done using RazorPlan financial planning software. This allowed us to make exact copies of scenarios and control the changes made. It also allowed us to easily measure the impact of fees on four key indicators based on the retirement goals of a client. These indicators include:

  1. Maximum after-tax income
  2. Earliest retirement age
  3. Minimum investment rate of return
  4. Required investment capital

In addition, the RazorPlan software calculates income taxes and includes recovery taxes such as Age Credit and Old Age Security claw-backs.

Client Profile:

When creating a client profile for this study, we wanted to capture a typical client of our three investment platforms, while striking a balance between pre-retirement and post-retirement planning.

We also needed to acknowledge reports by many robo-advisors that an increasing percentage of their users are more mature and of higher net worth.

retirement income

BASELINE ANALYSIS

“To understand the true cost of investment fees, you must first calculate how much after-tax income you can expect in retirement ignoring all related fees.”

In our baseline analysis, we chose an investment rate of return that was consistent with the rate of return used in the many articles and case studies on the cost of investment fees.

In the recent youngandthrifty.ca article The Complete Guide to Canada’s Robo Advisors, they summarized the fees charged by 10 of Canada’s top robo-advisors. Based on a $370,000 investment portfolio, we calculated the average fees at 75 basis points.

To this we added 6% representing the most common rate of return used by many of the robo-advisors when discussing the cost of fees.

Assuming a total investment return of 6.75%, we calculated projected capital at retirement of $1,297,000. This provided an after-tax income in today’s dollars of $81,600 to life expectancy.

ROBO-ADVISOR ANALYSIS

“Even a low-cost digital investment platform will reduce the amount of after-tax income you will have in retirement.”

After making an exact copy of our baseline analysis, we implemented only one change, reducing investment return by 75 basis points to 6.0%.

Reducing projected investment return by the 0.75% fee charged by the average robo-advisor had two major impacts:
First, it increased the required capital needed at retirement by $77,000 and second, it reduced projected capital by $116,000.

This created a retirement funding gap of $193,000 and reduced after-tax income by 8.3% to $74,800, a loss of $956,000 in total retirement spending.

TRADITIONAL INVESTMENT ANALYSIS

“Financial institutions that charge investment fees greater than 75 basis points and only deliver basic portfolio services, add no value.”

After making a new copy of our baseline analysis, we reduce investment returns by an additional 100 basis points to 5.0% to reflect the investment fees charged by the more traditional brick and mortar distribution channels.

Reducing investment return in our analysis from 6.75% to 5.0% further Increased required capital at retirement by $151,000 and reduced projected capital by an additional $141,000.

With total retirement funding gap now at $484,000 the after-tax retirement income that can now be supported is only $67,000, a 17.9% decrease from the baseline analysis at 6.75%.

FINANCIAL PLANNING ENGAGEMENT

“The basic portfolio services, asset allocation and risk tolerance, delivered by digital investment platforms or robo-advisors, are not a financial plan.”

When you compare the results of the robo-advisor analysis to the traditional investment analysis, the funding gap increased by $291,000. This would seem to validate the claim that for “average Canadians, the second largest purchase they will make, second only to a home, are the amount of fees they pay to the investment industry”.

But nothing could be further from reality!

A professional financial advisor provides advice on a full range of money related topics. A 2016 study called the Vanguard Advisor’s Alpha calculated the value of an advisor for services relating to portfolio construction was equivalent to 75 basis points, equal to what the average robo-advisor charges. The study also found that the value of an advisor who provides financial planning services was worth an additional 100 to 250 basis points.

It is easy to point to investment fees and calculate the cost of one distribution channel over another. In our example, a $370,000 investment portfolio costs an average of $2,775 with a robo-advisor compared to $6,475 when using a human advisor. Keep in mind that the average human advisor’s portion of the total fee is no more than the amount paid to the robo-advisor.

For their fees, robo-advisors provide basic portfolio construction including asset allocation and risk tolerance.

Financial advisors also provide portfolio construction, asset allocation and risk tolerance in addition to advice on many other topics encompassing:

  1. Financial management,
  2. Investment management,
  3. Insurance and risk management,
  4. Tax planning,
  5. Retirement planning, and
  6. Estate planning.

To analyze the value provided by the above, we again copied our baseline analysis and reduced the investment returns from 6.75% to 5.0%. But this time we also made a few additional changes to reflect the type of financial advice, guidance and coaching a competent financial advisor would provide as part of a financial planning engagement.

Specifically, we implemented the following recommendation:

  1. Allocate $14,000 from each TFSA and contribute it to RRSP and use the $10,000 tax refund to pay off the high-interest credit card.
  2. Contribute the $500 budgeted each month for credit card payments to RRSP along with the $2,000 they each have been contributing to TFSA annually.
  3. Increase savings each year by the assumed 2.5% inflation.
  4. Use the $6,000 annual RRSP tax refund to increase mortgage payments.
  5. When the mortgage is paid off in 8 years (6 years sooner), allocate the mortgage payment to RRSP contributions.
  6. In 8 years when the mortgage is paid off, use the RRSP tax refund to make TFSA contributions.
  7. Convert RRSP to RRIF at retirement to utilize lower tax brackets and reduce the amount of withholding tax on cashflow.robo advisor

After implementing the above items in the financial analysis, the required capital at retirement increased slightly due to the higher allocation to RRSPs. Projected capital also increased by $583,000 to $1.6 million, $443,000 more than projected to be available with a low-fee robo-advisor and $327,000 greater than the baseline.

Not only does advice from a human advisor relationship out perform robo-advisor, the financial plan added the equivalent of 1.8% to the rate of return, providing a retirement income of $81,800, slightly more than provided in the baseline analysis.

IN SUMMARY

Too much emphasis is placed on investment fees today, though nobody would deny that fees do make a difference. But low fees in the absence of professional financial planning advice provides little real value to average investors. Perhaps this is the reason that most robo-advisors operating today are trying to collaborate with the human advisor community.

As a tool for financial advisors looking to reduce investment fees so they can focus more time on advice that really matters to the financial wellbeing of their clients, a white-labelled digital investment platform should provide good value.

As a direct to investor platform, for people with average knowledge of financial products and strategies, using a robo-advisor may end up costing them $1,000,000 in lost retirement income!

Comparison of Projected Capital at Retirement

retirement income

Comparison of Total After-Tax Retirement Income

Average Canadians stranded in a storm of Liberal tax changes

/ Dave Faulkner / Leave a comment

(This article was originally published on the RazorPlan blog.)

On July 18, 2017, the Liberal Government announced a significant set of tax proposals designed to close certain tax loopholes that can result in high-income individuals gaining tax advantages that are not available to most Canadians, these include:

  • The elimination of “income sprinkling” by paying dividends to family members that own shares in a business or holding company.
  • The curbing of “passive investment income,” by imposing additional taxes on money sitting in a corporate investment account.
  • The conversion of a corporation’s regular income into capital gains using legal tax strategies that have been around for decades.

In recent interviews, Finance Minister Bill Morneau said that average Canadian business owners need not worry about his proposals, because if you make less than $150,000 per year you will see no increase in taxes paid. He continues to state that he is going after only the wealthiest Canadians that use corporate tax loopholes to gain advantages over the hard-working middle class. It is important to note however, that what Bill Morneau refers to as tax loopholes are in fact legitimate tax planning strategies that have been available to all Canadians for many years.

To help sell these proposals proponents of the new tax have released simple spreadsheets illustrating the impact to an individual in Ontario earning $1.00 of business income who earns over $200,000 and pays tax at the top marginal rate of 53.53%. In other words, the wealthy 1%.

As a financial planner, I know first hand that most small business owners are not wealthy. They are hard working average Canadians who are struggling to build their business, often at the cost of not being able to make regular contributions to retirement plans. As a software designer, I know first hand that simple spreadsheets do not provide enough analysis to come to any meaningful conclusions, due to the complexity of our tax system. All they do is support the opinions of the author.

So, to help bring some meaningful analysis to the position that these proposed changes will not burden middle class business owners, Razor Logic Systems has deployed a temporary version of our financial planning software RazorPlan that addresses one aspect of these proposals, passive investment income. As the largest provider of financial planning software to independent Canadian financial advisors, upon request we will temporarily make this version available to any financial writers, bloggers, the media, and Minister Morneau.

Passive Investment Income

Currently, to eliminate double taxation, a portion of the income tax a CCPC pays on investment income is refundable. In Ontario, the combined Federal and Provincial tax rate is 50.17% made up of 19.5% non-refundable and 30.67% refundable only once the income is paid to the shareholder in the form of a dividend. This effectively ensures that the tax paid on $1.00 is the same regardless of where it originated. The tax proposal aims to eliminate the 30.67% refundable portion, claiming the low tax rate on active business income in a CCPC creates an advantage for individuals with a corporation compared to individuals who earn income personally.

To test this, I created two hypothetical retirement scenarios using RazorPlan and shared the results in a spreadsheet on Google Docs.

Pre-Retirement Analysis:

Bill Smith Jr. and his wife Mary are both age 55. They own a small dry-cleaning business and pay themselves $50,000 each per year. Over the years they have raised their 3 children, paid off their mortgage and managed to save $75,000 each in RRSPs which they both contribute $9,000/year to. After years of sacrifice they are now in the position of earning a profit of $25,000 before tax and plan to invest the after tax $21,250 in passive investments each year until they retire at age 65.

Assuming a 5% return on investment, my analysis calculates that they will have total investment capital of $755,000 (RRSP + Corporate). This along with CPP, OAS and the 30.67% refundable tax will provide an after-tax income of $56,800 in today’s dollars with inflation of 2.5% to age 90.

Should finance proceed with the elimination of the refundable tax, they will see a reduction in after-tax income in retirement of 3% to $55,100 in today’s dollars. If this is not going to be adequate, they would need to delay retirement by 2 years to grow their investment by $58,000, which is required to off-set the tax increase on passive investment income.

According to the Liberals, because they earn less than $150,000 they should pay the added profits to themselves and invest personally. Assuming they do and use the added income to top-up RRSP contributions and take advantage of TFSA, they will accumulate total investment capital of $761,600 by age 65 which will provide $57,000 of after-tax income, $200 more per year than what is currently provided by the status quo.

So, it would seem the Liberals are correct, provided they invest for retirement the Liberal way. The only problem with this logic is that they may have other reasons for not wanting to take all the profits out of the business, in which case they would most certainly be worst off.

Post-Retirement Analysis:

Bill Smith Sr. is 71 years old and recently widowed. Last year when his wife died he sold his small barbershop in an asset sale. Although he wanted to sell his shares, he agreed to the asset sale due in part to the current refundable tax the Liberals are planning to eliminate. After paying taxes he netted $400,000 in passive investments in his company.

In addition to the passive investments he has $200,000 in RRSPs for a total of $600,000 in savings. This along with CPP & OAS will allow him to spend $50,240 per year after-tax to age 90, assuming a 5% return on investment and inflation of 2.5%. Should the Liberals eliminate the 30.67% refundable tax this will reduce his after-tax income by 6.7% per year to $46,900. An annual cost of $3,340!

To be able to maintain the same after-tax income he is projected to have today, he would need to increase his return on investment from 5% to 6.9%, an increase of over 37%! Another alternative, according to the Liberals, would be to wind-up his company and invest the after-tax proceeds personally. This will allow him to take advantage of current and future TFSA contributions. If done in one year, he would pay over $159,000 in personal income taxes along with $8,200 in Age Credit and OAS clawbacks.

Winding-up as it turns out would cost even more, reducing after-tax income to $42,300, a 16% reduction. Even if the Liberals implement some form of grandfathering, the increase in accounting fees will also be a hardship to average Canadians. Replacing a tax increase with added tax-filing fees does not help average Canadians.

Bottom line, the refundable tax mechanism as it stands today works and is fair to all Canadians, regardless of how much wealth they may have. I ask all financial advisors to write their MP to express your concern over the destructive impact eliminating the refundable tax on passive investment income will have on your client’s retirement planning, past and future.

Want to tell your MP what you think about the proposed legislation? You can look up their contact information with your postal code using this tool.

Dave Faulkner, CLU, CFP is a Financial Planner in Alberta and CEO of Razor Logic Systems Inc., developer of RazorPlan financial planning software.

Savings and Retirement Projections

/ Dave Faulkner / Leave a comment

Keep it Simple… but not too Simple!

Recently, I had a discussion with a new RazorPlan user. He told me in the six weeks since he started using RazorPlan, he had seen a significant increase in client engagement and a major improvement in case size and closing ratio when meeting with new prospects.

My first instinct was to point out the benefits of keeping things simple when discussing financial recommendations with prospects and clients. He agreed, but pointed out that some advisors can take simple too far.

To illustrate his point, he told me a story about a recent appointment he had with a new prospect to discuss their savings and retirement plans. Here’s the true story, told from the perspective of you, the advisor. (The names of the clients are made up to protect their privacy.)

roger-and-bea

Meet Roger and Bea

You were referred to Roger and Bea by their son Cecil who is a client of yours. A few months ago when reviewing Cecil’s life and critical illness insurance, you learned that his parents had recently retired and that they were dealing with a local investment firm to prepare a “retirement plan”.

Over the summer months, you attempted to arrange a meeting with Roger and Bea, but they were always busy enjoying the summer weather. You remained in contact by sharing various articles on savings and retirement strategies.

At the end of August, you contacted them to arrange a meeting after Labor Day to which they agreed, even though they did not feel there was anything you could help them with. After all, their current investment advisor had already prepared a retirement plan for them.

Read the full article on RazorPlan.com.

There are “diamonds in the rough” in your files

/ Dave Faulkner / Leave a comment

This week, the world’s largest uncut diamond was auctioned by Sotheby’s in London. At a whopping 1,109 carats, the white diamond was anticipated to fetch as much as $90 million (however, the bidding failed to reach the reserve price of $70 million).

The main thing that I found most interesting about this story, is that the diamond, discovered in the Karowe Mine in Botswana, was not found by the old method portrayed in movies, which is somebody standing in muddy water. The company installed state-of-the-art technology in 2015 which is credited for making the find.

This got me thinking about the financial advice business and a time when I helped an insurance advisor find a diamond in the rough of his files.

Mining your book using state-of-the-art technology

In 2012, I was helping a dual-licenced insurance advisor that was new to using RazorPlan financial planning software. He was having difficulty using this “new technology” with existing clients for insurance planning. You see, like so many other advisors he felt he knew everything about his clients and with each file we reviewed he would say something like “I have all their business” or “they don’t need more insurance”.

I challenged him to let me simply pick 10 files at random and he would arrange a meeting which I would participate in as the Estate Planning specialist. The first file I choose was for a 64-year-old client where the advisor “had all their business”; reluctantly he agreed to setup the meeting so I could do a RazorPlan analysis.

At the meeting I followed my normal insurance review agenda (click here for a copy) where I discovered not 1 but 2 large corporate owned 10 year term policies that he had purchased from another insurance advisor that is no longer in the business. Total amount of coverage was over $10,000,000!

Next, instead of focusing on the term insurance, I followed my agenda and transitioned to RazorPlan to get more information about the client’s situation. I used what I call the “Know My Client” agenda (click here for a copy) as I wanted to understand the big picture and the needs, if any, of the client.

To make a long story short, RazorPlan effectively illustrated to the client that he needed the coverage long-term to pay the taxes at death on his business. RazorPlan also established that he could more than afford the annual premium (which was in excess of $100,000) needed to convert the 10-year term to a permanent plan. The client signed an Agent of Record change form and scheduled a follow-up for the next week where the advisor converted both term policies to permanent insurance.

So what is your “diamond in the rough” story and was a new technology responsible for the find?

 

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FREE 30-day TRIAL
of RazorPlan.

Your clients will thank you!

Financial reviews are powerful tools for clients and advisors

/ Dave Faulkner / 2 Comments

Any financial advisor that has ever purchased (or thought about purchasing) another advisor’s book of business knows two things to be indisputably true. First, there are unfulfilled client needs (and therefore revenue opportunities for the advisor) in virtually every book of business. And second, the best way to discover these opportunities is to contact every client to arrange a short review meeting to get to know the client and understand their needs.

One advisor’s client is another’s referral

When an advisor considers buying a book of business, they know nothing about the clients and therefore have no preconceived notions as to what gaps the clients may have in their coverage or what their needs might be. New clients are uncharted territory, full of opportunities to discover.

On the other hand, an advisor’s own book of business is often seen as familiar, and devoid of any new opportunities. When asked about opportunities in their existing books, many advisors use phrases like “they don’t need that” or “I already handle all of their insurance needs”. The familiarity of our own clients can blind us to their real needs.

The simple truth is that your existing clients represent many new opportunities for you in the same way that a referral, which is another advisor’s client, is a new opportunity. You just have to know how to find these opportunities.

financial-review

The RazorPlan Review

To help advisors get better at discovering opportunities to serve their clients better, we have developed a review process that uses the RazorPlan financial planning software to analyze the current situation along with a meeting agenda and checklist designed to complement this analysis.

Click here to download a copy of the Insurance Policy Review Meeting Agenda and the Financial Review Checklist for use with RazorPlan financial planning software.

financial-review-checklist

We call this process the “RazorPlan Review” and it can be conducted in any client meeting. The review takes a few minutes to complete and will immediately provide you and your clients with an analysis that will clarify their financial situation and demonstrate the value you provide as their trusted advisor.

insurance-policy-review-meeting

In addition to providing additional planning value to you and your clients, adding the RazorPlan Review to the meetings you already conduct with clients requires little effort and provides you with a number of opportunities to address their unfulfilled needs. Below I have outlined 5 areas that a RazorPlan Review can bring added revenue to your practice.

Insurance Products

Life and living benefits insurance is designed to solve financial hardships that are created when a family’s primary bread winner dies, becomes disabled or suffers a critical illness. Insurance can also be used for capital creation to pay deferred income taxes, protect a business or to create an estate where one did not previously exist.

Conducting a RazorPlan Review provides you with an understanding of your client’s financial situation and personal attitudes that far exceed any insurance needs analysis or ‘Know Your Client’ form.

The RazorPlan Review will also show you how to identify more advanced insurance planning strategies such as:

  • Insured Retirement Plan
  • Estate Bond / Corporate Estate Bond
  • RRIF Estate Protector
  • Asset Estate Protector
  • Insured Annuity

In addition to helping you to identify clients with more advanced insurance needs, The RazorPlan platform will also assist in determining product suitability so that the recommendations you make are appropriate and address the needs of your client.

Investment Products

Most investment advisors would like to think they manage all of their client’s investment assets. However, research suggests that the more money a client has to invest, the higher the likelihood that the client spreads their investable assets among multiple advisors.

For clients with modest assets to invest, although they tend to use one advisor for all saving and investing needs, they rarely invest to their full ability.

In addition to potentially uncovering investment assets not managed by you, the RazorPlan Review will estimate annual savings required to meet your client’s planning objectives. Over time, a RazorPlan Review can assist in developing a level of trust that will position you to manage more of your client’s assets.

Annual Reviews

Whether your focus is on insurance, investment or comprehensive financial planning advice, preparing a plan for your client is only the beginning of an on-going process. With each review, you will discover changes to the client’s personal and financial situation, each presenting new opportunities and challenges that may affect the original recommendations made.

There are many life changes that can cause financial hardships to clients, including divorce, loss of employment, forced retirement, or the death of a loved one. Clients can benefit enormously from their advisor’s help in these situations.

However, many life changes create new and exciting opportunities for clients, such as marriage, birth of a child, job promotions, or the start-up of a new business. In these situations, additional coverage may be needed or your client may want professional advice.

Providing a RazorPlan Review as part of your service and value proposition is a proven way to retain your clients and keep them on track with their planning objectives, regardless of type of challenges and/or life changes they may face.

Client Retention

No matter how long you have been in the business, client retention is important to every financial advisor. The loss of a client to a competitor, regardless of the size of the account, is usually related to a perceived reduction in the value you provide as the advisor.

When you are perceived as a provider of product, the value you add is often directly related to how that product performs. If, due to market conditions the product fails to perform as expected, then in the eyes of the client the value you add is also diminished.

The RazorPlan Review helps to shifts the focus of the relationship away from provider of product to that of trusted advisor. There will still be clients that leave, but improving retention will have a significant long term impact on your revenues and the value of your business.

Estate Retention

Much has been written about Canada’s aging population and the impending transfer of wealth to a new generation. To be sure, this wealth transfer represents a great opportunity for financial advisors as younger clients look for advice on investing their new-found wealth.

Less commonly mentioned, however, is the potential downside that many financial advisors face. For instance:

  • Many financial advisors do not have a relationship with the children of their aging clients, suggesting that the children may use a different advisor to help manage their inheritance or to seek advice from on matters related to their life, disability and critical illness insurance.
  • Some portion of the assets to be inherited will be used to pay off mortgages and/or make major purchases.
  • Income taxes will take a big bite out of potential inheritances, up to 50% in the case of RRSPs and 25% for unrealized capital gains. Probate, trustee and legal fees will further reduce what is left for heirs.

The RazorPlan Review provides you with the opportunity to engage the next generation with their own insurance and investment planning needs, helping to create relationships that will increase the likelihood that you will retain assets when they are transferred. Financial advisors that do not provide any form of a financial plan can expect to lose a significant percentage of the business under their management.

 

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