ZERO to ONE

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.

Average Canadians stranded in a storm of Liberal tax changes

(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

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.

How three advisors use Razor Plan to deliver results

(This is a guest post by technology and digital media specialist, Jay Palter.)

by Jay Palter

When Dave Faulkner set out to design a new financial planning software, he had one primary goal in mind: to create a powerful tool that was simpler and easier to use than all the rest.

He saw many advantages in doing this. For instance, a simpler tool would mean more advisors could offer planning services to their clients. Also, advisors would spend less time crunching numbers and more time advising and helping their clients. Perhaps most importantly, a simpler tool would help clients to gain a better understanding of how their planning decisions would affect their financial futures.

For this article, I reached out to a number of financial planners and advisors that are actively using Razor Plan in their practices. Here are three of their stories.

Razor Plan helps Scott Plaskett focus more time on advising clients


scott-plaskett
Scott Plaskett owns and operates Ironshield Financial Planning, based in Etobicoke, Ontario.

Ironshield offers a range of financial planning programs and services to clients for a fee. For Plaskett, making the financial planning process a deliberate first step allows the client to really understand the plan and what’s involved in implementing it.

Razor Plan is the foundation of engagement with financial planning clients, says Plaskett. “Clients love the summary report page because they can see their options progress,” he adds.

As a former user of more complex financial planning software products, Plaskett became frustrated with their arduous process. Scenario planning was very involved and became a long drawn-out process.

“And it didn’t matter what scenario you created,” Plaskett says. “It never turned out that way.”

With a growing business, Plaskett faced a choice: hire a full-time financial planner or find better software.

That’s when he discovered Razor Plan and its unique approach to financial planning. Since we can’t predict the future, we don’t know what scenarios will unfold. But, Plaskett notes, we DO know what the options are.

Plaskett gathers data offline with his clients, then enters that data into Razor Plan and reviews the results with clients using the software. Razor Plan has so much more logic built into the calculations that it makes it easy for him to model different scenarios quickly.

“The software handles all the heavy lifting and allows me to spend more time advising my clients.”
~ Scott Plaskett.

Aurora Tancock’s clients know how ready they are for retirement

aurora-tancockAurora Tancock operates a financial planning practice, Aurora Tancock Financial Services, in St. Catharines, Ontario that specializes in retirement and estate planning.

Tancock loves the ease of use of Razor Plan, compared to other financial planning software in the marketplace.

Typically, she conducts a fact-finding meeting with clients after which she inputs their financial information into Razor Plan. Then, she brings clients in for a subsequent meeting and walks them through the information and analysis in the Razor Plan application.

The retirement options screen clearly shows if the client is on target and then allows Tancock to make easy adjustments to illustrate how working longer, saving more or taking greater risks with their investment portfolio will affect their readiness to retire.

Tancock meets with clients annually to review and update their financial plans. During these meetings she projects the Razor Plan software onto a television monitor which allows clients to easily see their progress towards their goals and feel part of the process.

“Clients love especially the one page summary that shows them where they currently stand and the four options they are given to work towards their goals.”
~ Aurora Tancock

Dan Anders likes Razor Plan’s client-centered design

dan-andersDan Anders is an independent estate and insurance advisor, based in Vancouver, BC. He specializes in the financial aspects of estate planning, and works with a national financial institution as well as his own clientele.

According to Anders, the financial industry has been doing financial plans the same way for the past 30 years and most clients don’t get much value from a 40-page financial plan. “What clients want is to know,” he adds, “is if they are on track for meeting their goals and what are the potential pitfalls along the way? That’s the beauty of Razor Plan – it gives clients the information they need and want,” says Anders.

Anders has used many of the competing financial planning products on the market and he likes the simplicity of Razor Plan. “It’s client-centric,” he says. “Most other planning software is designed for planners, but Razor Plan is designed for the client. And they express great appreciation frequently, because for the first time they clearly understand what we are trying to do for them.”

In his practice, Anders uses Razor Plan to offer clients affordable and meaningful planning services. Since financial plans are dynamic, they create meaningful reasons for him to sit down with his clients on a regular basis and stay up to date.

“As an estate and insurance professional, I’m not sure how you make an insurance recommendation WITHOUT a financial plan.”
~ Dan Anders

 

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Your clients will thank you!

4 reasons advisors should be using financial planning to help clients address all their insurance needs

Financial advice is in the spotlight.

A growing number of new mobile banking apps and online investing tools have placed financial advice at the centre of a much larger conversation about the value of advice. The financial media and social networks are changing the expectations of people when dealing with their financial advisors.

The value of good financial advice and the role of financial advisors in delivering it is top of mind for more and more clients. Financial planning can play a pivotal role in helping financial advisors provide the best advice to their clients, address more of their insurance needs and engage them in life-long service relationships.

In this article, I will highlight four ways that advisors can use The Razor to deliver more value and help clients see the big picture.

happy-client

1. Financial planning increases client engagement

A financial plan is no longer viewed as merely a “nice to have” for clients. Financial planning needs to be a necessary part of the insurance needs analysis you conduct for your clients, if you expect them to fully engage in all the services that you offer.

The Razor helps you do this by making the financial planning process client-friendly, interactive and easy for advisors. A typical financial plan analysis using The Razor takes about the same amount of time as a traditional insurance needs analysis. But unlike a typical insurance needs analysis, The Razor captures more information and about your client’s overall financial situation and helps you identify gaps in the client’s coverage that you can help to fill.

2. Save time with fast and efficient calculations

The Razor uses proprietary calculations to find the best solutions to your clients’ everyday financial problems. You start by engaging your client in meaningful discussions and needs analysis, then The Razor helps you quickly analyse any client situation to identify any gaps or shortfalls in coverage that should be discussed further with the client.

By focusing questions during the initial discovery meeting on the most relevant information, analysing the client’s situation in real-time is transformed from a long, complex process into an easy 15-minute activity that you can perform in all types of client meetings.

3. Address all your client’s insurance needs in one financial plan

Helping clients protect loved ones and ensuring that their plans for retirement are not at risk due to unexpected health problems is an important part of what insurance professionals do for their clients.

The Razor’s proven risk management methodology addresses all of your client’s insurance needs, including:

  • Life insurance for family security, wealth creation and estate planning;
  • Disability insurance for income replacement and retirement preservation;
  • Critical Illness insurance for lifestyle protection;
  • Long-Term Care insurance for retirement and estate preservation.

4. Help clients find the money

Recommending the right types and levels of coverage to your clients is only part of your job. Helping clients find the financial resources needed to pay for the coverage they need can sometimes be difficult, especially in these tough economic times.

The Razor’s interactive interface makes it easy to let your clients discover for themselves new ways for them to save money so that they can afford the right type and amount of coverage to protect their loved ones.


 

razor-request-a-trialClick here for your
FREE 30-day TRIAL
of RazorPlan.

Your clients will thank you!

It’s Not Just About Retirement Planning

I recently attended a presentation to a small group of financial planners leading up to on our upcoming release of version 4 of The Razor, our 4th since introducing it in 2012. In that meeting, we previewed a number of improvements and features the new version will offer financial planners to better engage clients in the financial planning process.

Listening to advisors in that presentation and a number of others over the past month have taught confirmed for me two things:

First, we nailed it. The feedback received after each meeting is a clear signal to us that we understand the needs of financial planners and we have delivered what they want.

Second, we failed in our most important message to financial planners. It’s not just about retirement planning!

Financial-planning-quote-Dave-Faulkner-Razorplan

On the surface, The Razor may appear to be just another retirement planning software tool. But The Razor is different; it’s not just about retirement planning, it’s about engaging the client to find what really matters so that the advice provided will be valued.

The Value of Clarity

All planning engagements must provide value to both the client and the advisor. The client sees value only when they feel more positive about their financial situation, while the advisor sees value only when the income to be earned is sufficient enough to allow for the amount of work that will be provided.

The advantage of The Razor is that it delivers value to both the client and the advisor equally and it does it all in one meeting with the client. Also, it doesn’t matter which sector of financial services the advisor works in, The Razor is effective for both investment and Insurance planning engagements.

Investment Planning

The Razor will identify potential problems with current savings and asset allocation strategies by estimating capital requirements based on the client’s objectives and return assumptions. It does this by automatically answering the most common questions clients have:. “How much can I spend?” “When can I retire?” “How much do I need to save?” and, “What rate of return do I need?”

Insurance Planning

The Razor compares the client’s income goal to the maximum sustainable income, creating opportunities to allocate excess cash flow to estate planning strategies. The Razor then estimates capital needed for income replacement, estate liquidity and terminal tax funding in addition to disability, critical illness and long term care needs.

Financial planning should be more about interacting with clients and less about crunching numbers. Value is not delivered by entering data into financial planning software and clicking the “Calculate” button. Advisors add value by helping clients understand what really matters and exploring the options available to them.

~ Dave Faulkner

In the real world, simplification is valued over complication. The Razor embraces simplicity and automation, without sacrificing precision, helping to engage clients interactively in the financial planning process.

To learn more, visit Razorplan.com and check out our new and improved version 4 software or register today for a FREE 30-day trial of The Razor.

How to fix financial planning

I always look forward to and enjoy reading Michael Kitces’ blog posts. If you are not familiar with his work, you should check out his blog Nerd’s Eye View.

Recently, Kitces has taken on financial planning software and financial planning itself and raised some important questions about how it is commonly practiced.

In “Is Financial Planning Software Preventing The Growth Of Real Financial Planning Advice?”, Kitces questions whether the product-centric focus of traditional financial planning software is getting in the way of real planning.

In a subsequent post, “Reimagining Client Meetings With A More Client-Centric Financial Planning Process”, Kitces proposes a more client-centric process for doing financial planning with clients.

I have been in financial services for the better part of 40 years and began my career, like many advisors, selling products for a commission.

For the past 20 years, my focus has been on comprehensive financial planning as both a financial advisor and a software designer/developer. Ten years ago I realized that the “generally accepted process” for delivering a financial plan was not working for me or my clients. Clients were not properly engaged and I was not adequately compensated for my time.

After much soul-searching I realized the problem was not me or the client, it was the software tools we had at our disposal.

My financial planning software manifesto

So, I set out to re-envision the financial planning process based on these six principles:

1. Financial planning software is NOT a financial plan

To borrow a Harley-Davidson tagline, “It’s not the destination that matters, it’s the journey.” A financial plan should address the needs of the client and support implementation of the recommendations made.

2. Financial planning software must be client facing

I do not have the time to do anything more than once, so the client needs to be present when preparing the analysis and constructing the financial plan.

3. Real-time data entry should take no more than 15 minutes

To do this, the amount of information gathered in the first meeting would need to be minimized. The 80/20 principal states that 80% of our productivity comes from 20% of our efforts. This is equally true for financial planning: 80% of a financial plan comes from 20% of the client’s information. This approach gives us a very good sense of the plan while contributing to engaging the client in a much easier up-front information gathering process.

4. No “what-if” scenarios

To eliminate the need for what-if scenarios, the system has to automate all routine elements of the financial analysis. Implementing strategies to minimize tax and maximize returns should be done with intelligent algorithms instead of manual data changes. In simple terms, the system would need to automate the calculations that any competent advisor would perform, but without requiring input from the advisor.

5. Financial planning should provide simple answers to common questions

“How much can I spend?” “When can I retire?” “How much do I need to save?” and, “What rate of return do I need?” In any situation, no matter what the outcome of the analysis, an intelligent algorithm should automatically provide the above answers.

6. No shortcuts in business logic

The analysis must be robust and accurate, providing proper tax calculations and flexible assumptions that can be controlled by the advisor.

Simplification is valued over complication

I felt so strongly that advisors needed to ‎spend more time interacting with clients and less time on computers crunching numbers that I decided in 2010 to create a software tool that lived up to these principles. ‎

To give this new financial planning software program a name, I looked to Occam’s razor, a problem-solving principle that states “the simplest explanation is usually the correct one”. Over the years I also noticed that “the simplest recommendations are usually implemented first”, so it seemed only logical to call this new tool “The Razor”.

In February 2016, Razor Logic Systems Inc. will launch our 4th version of The Razor, completely rebuilt on a state-of-the-art HTML5 platform to make it more compatible with today’s mobile computing. Although initially available only in Canada, we have plans to offer a US version later this year.

The Razor embraces simplicity and automation, without sacrificing precision, helping to engage clients interactively in the financial planning process.

To learn more, visit razorplan.com or register today for a FREE 30-day trial of The Razor.