The 2016 US Trust study titled “Insights on Wealth and Worth” surveyed investors with a minimum of $3 million in investable wealth, and the majority (55%) said, “it’s more important to minimize the impact of taxes when making investment decisions than it is to pursue the highest possible returns regardless of the tax consequences”.

Your clients understand the constant erosive impact incurred with taxes on the portfolio positions you implement.

Financial Needs are Paid in After-Tax Dollars

As you build your clients’ financial plans, you map the use of cash year by year across the planning horizon. The explicit structure is each use of cash requires a source to fund it.

Whether it’s funding an annual lifestyle budget, paying for college, buying a vacation home, or retirement income, your clients’ financial needs and aspirations ultimately come down to writing a check to pay for them. The money paid is in after-tax dollars.

Increasing After-Tax Returns Matches the Funding Requirement

Your clients’ appreciation for taxes’ erosive affect has a real economic reality – if the funding sources are not valued in after-tax dollars, a funding gap occurs. Each funding gap must be paid with dollars/wealth elsewhere in the investment plan. Therefore, increasing after-tax returns minimizes the risk of a funding gap.

Funding gaps are riskiest in the long-term portion of the planning horizon. Simply, while each client’s financial needs can be mapped decades into the future, the long-term funding sources are much more volatile to predict.

Advisor-Applied Variable Universal Life (AAVUL) is the Ideal Matching Source

The VUL portfolio you build, manage, and monitor becomes an ideally matched funding source for long-term financial needs. Why? The entire portfolio – its income, gains, and cash access – is tax free. Future needs and goals, and the AAVUL portfolio backing them, are both valued in after-tax dollars.

Insurance Like It Should Be: Benefits without Barriers

Advisor-Applied VUL (AAVUL) is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest. You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.

Every investor has two primary objectives: Wealth preservation and wealth creation. Of these two, wealth preservation is the cornerstone of a viable wealth plan.

Sources of Wealth Leakage

Wealth preservation focuses on minimizing the loss of dollars through leakage. Where are the leaks in your client’s wealth plan? The most visible is reduced wealth through market downturns, but, usually, these losses are only on paper, certain to be restored when the markets recover.

Far more insidious to your clients’ financial health are losses that are realized day after day:

1. 1. Taxes
   2. Overspending
   3. Excessive investment product fees

Taxes are the biggest financial expenditure your top, high-income clients face. And, while the other leak sources occur sporadically, taxes drain wealth constantly.

Preserving Wealth Drives Wealth Creation

A dollar lost in the wealth-planning context is not the dollar in your wallet. It’s actually a compounded dollar, with the expected wealth increase for that dollar eliminated the moment the loss occurs.

Therefore, for each dollar not lost, your client’s overall wealth compounds from a higher floor. This is wealth creation of the same caliber as an investment that grows at a fast rate.

Tax Alpha, Your High-Value Service

Your tax management services seek to minimize your high-income clients’ annual tax bill. Each investment-related tax dollar that you minimize through tax-management services increases your clients’ after-tax returns (i.e. it’s not what is earned, but what is kept). This result is your Tax Alpha.

If you’re like most advisors, you appreciate what Tax Alpha can do and want to deliver it, but the service costs and complexity are challenging. Tax Alpha shifts to a business issue: as service costs increase, your per-client profits decrease.

Advisor-Applied Variable Universal Life (AAVUL): Tax Alpha in One Step

VUL provides complete Tax Alpha through its basic structure:

1. Tax-free portfolio income
2. Tax-free gains
3. No alternative minimum tax exposure
4. Tax-free access to the policy’s wealth
5. Tax-free death benefits

Insurance Like It Should Be: Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest. You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.

Advice options have proliferated for the investor marketplace. Broker-dealers, independent RIAs, banks, insurance companies, and accounting firms all offer planning/investment advisory in one form or another. Add to that the rush of Robo-Advisor options, and it’s clear that the retail market has more choice in firms offering planning/investment advisory services than ever before.

Commoditization

A commodity is a product or service indistinguishable in features and functions. Where does commoditization exist in the adviser market?

1. Services. Advisers of all types offer a service set that includes these categories: financial planning, portfolio building, investment selection, reporting, and monitoring.
2. Service Output. If adviser “A” and adviser “B” use the same software tools, the packaging, presentation, and content will be within a narrowly-defined range.
3. Investment Products. The failure of active management to produce persistent alpha (The New York Times) has pushed passive and other quantitative investment strategies to leadership (Investment News); ETFs have become the vehicle of choice (FPA investing study).
4. Credentials. It’s difficult for a client/investor to appreciate the practical differences between designations such as a CFP®, ChFC, PFS, and CIMA.
5. Pricing. A percentage fee on AUM remains the dominant structure.

Once commoditization begins, it’s rare that it stops. This is largely due to the consuming market’s demands. In other words, for a firm to be taken seriously, consumers expect certain features at a minimum, and, as one solution adds a new feature, competitors’ quick response relegates the erstwhile new feature to commodity status (and the market’s base-level expectation rises). This relentless “me-tooism” leads non-responsive firms to obsolescence.

Differentiating the Product through Design and Engineering

It’s common across all industries to find competitors with commodity-like elements inside a product or in delivery. For example, a manufacturer of a computer, a TV, or a car use the same raw materials and, often, the same suppliers. Car manufacturers all use dealers for sales and service. What drives a manufacturer’s marketing focus is not parts and subassemblies, but the product’s design and engineering.

An Adviser Designs and Engineers with Advice/Counsel/Wisdom

A lot of worthy time is spent refining an advisory firm’s web presence, staff, client service, and technology. These are all important tactics, but they will miss the mark if this core reality is ignored: in a professional services business, the practitioner is hired for—and defined by—his or her advice/counsel/wisdom.

It is this advice—the practitioner’s essence—that designs and engineers the product and service solution. Marketing the evidence of this advice raises it to be a true differentiating beacon.

Spotlight the Presence of Advice/Counsel/Wisdom

It’s incorrect to assume that prospects and clients readily see or understand how an adviser’s advice/counsel/wisdom was used to develop and execute a wealth plan. Since advice is central to an adviser’s value proposition, at each step where analytical and creative advice was used, explicit identification spotlights its application.

Verbal Markers. “From what you’ve told me here, your anxiety in having enough money brings to the forefront our portfolio designs that produce secure income. Here’s how it works . . . [i.e. defining the advice/counsel/wisdom]”

Written Markers. “Your desire to protect what you’ve earned is designed into our tax management and wealth protection program. As we illustrate below . . . [i.e. defining the advice/counsel/wisdom]”

Naming Investment Philosophies, Designs, and Approaches

A wealth manager’s execution tools include investment products (e.g. ETFs, mutual funds, etc.), insurance products, tax strategies, trusts, and the like. How an adviser integrates these tools into wealth solutions is a direct result of advice/counsel/wisdom. Naming or branding all such approaches solidifies, competitively, advice differentiation.

For example, if an adviser has an approach for wealth protection that combines low volatility investments and insurance products, the firm can brand it with a name such as “[firm name] Wealth Guardian.” The naming/branding step elevates the advice/counsel/wisdom into a definable component; it moves from concept to function.

Case Studies (Stories) for Marketing

Client stories or case studies bring advice alive to prospects not yet able to experience it directly. Indeed, illustrating how advice/counsel/wisdom has brought added value to others is the ultimate differentiation message; this can be done in one-page marketing slip sheets that memorialize the power of advice in action.

Being Clear Amidst the Fog

The wealth management process is fogged with a client’s background, memories, values, beliefs, needs, anxieties, and aspirations. In the presence of this fog, explicit identification of the practitioner’s design and engineering prowess acts as a beacon directing the client to the adviser’s differentiating value—his or her advice/counsel/wisdom.

Insurance Like It Should Be:  Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest.  You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.

Business plans are well-meaning documents. A business inspiration takes form as the aspiring entrepreneur digs into product/service design, scalability, market size, competition, pricing, selling tactics, operations, budgeting, and so on. Collecting thoughts into a single document builds a foundation that makes the risky step of starting a business manageable.

The Dusty Business Plan

That said, few entrepreneurs work with their original business plan. The often harsh reality of running a business day after day smacks against the plan’s clinical, step-by-step thinking. But, this breakage does not belie the truth that planning remains a core element of success, or, if not done, a major reason for failure. The absence of an active business plan leads to meandering services, less efficiency, less focus and greater risk exposure.

A lack of day-to-day connection is the primary reason why business plans get dusty on shelves instead of being a desktop guidebook. In other words, the initial plan developed a thread of “how things should work” and not the reality, once the business was formed, of “how things are working.”

The 45-Day Planning Cycle

A 45-day business plan merges the daily “to do” list with the business objectives that give a firm its purpose. It recognizes that new information comes up and adjustments need to be made, but it keeps sight of how those adjustments fit within a strategic context.

The planning cycle sequence creates a living document across a year. A post-cycle review connects the immediately past plan to the next one. An annual review looks back and evaluates what progress was achieved and where more effort is needed.

Each review studies the tasks and forces judgment of the value for the effort expended:

Where was progress made to the objectives, and where was it stymied?

What are needed changes to achieve the desired progress?

Is the work just completed making the firm more valuable?

Making it Work

Planning in 45-day cycles is tighter since the inputs used are more current and the learning timelier. The business engages in a virtuous cycle of planning, doing, and learning.

In an Excel spreadsheet or Word document, the 45-day planning structure is simple to set up, but daily diligence is important to success. While the full planning methodology is beyond this blog’s scope, the following is a quick outline of the structure:

1. Strategic Objective Worksheets: The 45-day planning process is a set of worksheets; each worksheet should list one of the business’ objectives such as “Increase clients by 30 percent” or “Form five new referral relationships.”
2. Integrated To Do List: Take the firm’s to do/project lists and assign each task to a worksheet if it supports the corresponding objective. Since these tasks align with objectives, they are priorities.
3. Ordering the Tasks: For the tasks under each objective, order them according to the expected sequence; a project plan emerges.
4. Non-Strategic Tasks: Some tasks don’t fit with any of the worksheets; they may be necessary but aren’t strategic (e.g. paying bills). These will be kept on a separate sheet called “Scheduled Work” (step No. 6).
5. Maintenance: Each completed task is noted as such on its “Objective Worksheet.” New tasks that come up each day are added according to the process in steps No. 2, No. 3 and No. 4. When a new objective emerges, a worksheet is prepared.
6. Scheduled Work: The non-strategic tasks are worked on during non-critical operational time (e.g. after work hours; a weekend day). The key is the prime working hours are spent on priorities; they must get done for the firm to progress.
7. Cycle Review: At the end of each cycle, schedule a meeting (preferably with key staff) and critically review the progress toward the firm’s objectives.
8. Task Rollover: Some tasks can’t be completed in a 45-day cycle so they are rolled over to the same worksheet for the next cycle. If a task continues to roll, the review should identify if it’s simply a matter of project/task sequencing or a mismatch to the assigned objective worksheet.

Achievements

One of the worst feelings a business owner can have is to look back in time and realize that few of the firm’s objectives were met. Working incrementally and with purpose eliminates this bad outcome.

Think of each 45-Day business plan as a stepping stone that leads across a stream. One step comes after another, and the sum of steps leads to clear progress. When looking back (i.e. the review process), these steps bring lasting achievement that ultimately translate into a more valuable business.

Insurance Like It Should Be:  Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest.  You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.

Wealth management professionals face a key business constraint in the limited number of advice-giving hours in a day. Since revenues are ultimately tied to the value of each advice hour, at capacity, an adviser’s growth options are limited.

The competitive market eliminates the option of raising fees. Another alternative is to increase the productivity of each hour with two oft-cited tactics: 1) gaining productivity through technology; and 2) replacing low-AUM clients with high-AUM clients. Certainly, expanding to the emerging affluent segment would be counterproductive to a one-to-one client service model, but what if a scaled service model were used?

Culling Based on AUM Fails a Growth Strategy

An advice hour spent with a high-AUM client will produce more revenue than one with a low-AUM client. In a one-to-one relationship model, culling low-AUM clients improves efficiency per hour, but there are three critical pitfalls to this approach for an advisory firm interested in a larger market footprint and a higher firm valuation.

1. It’s hard to win high-AUM clients. The higher a prospective client’s AUM, the more intense the competition and there can be only one winner. When an adviser loses to the competition, those hours spent in marketing represent an opportunity cost.
2. Withdrawals and wealth transfers. The largest segment of the high-AUM market is made up of people in or near retirement. As the years pass, a high net worth client’s AUM will be flat or declining through withdrawals and/or wealth transfers.
3. A firm’s valuation has a forward view of AUM. P&L performance is an important input to a firm’s valuation, but this only shows current-year metrics. Most important to an acquirer is the future AUM profile. A client base made up of high-AUM retiree clients will be much less attractive than a client base with a significant portion of clients in their wealth-accumulation phase.

The Emerging Affluent Segment’s Appeal

The emerging affluent client (AUM between $100,000 and $250,000 and under 45 years of age) will grow to high-value AUM over time through career advancements and wealth transfers. Since there are tens of millions more in this segment today than those with AUM greater than $1,000,000, there’s a large prospect pool in every local market. These are important factors in valuing future AUM.

The tactical issue is developing an advice and investment package, combined with volume service techniques, allowing an adviser’s advice-giving hours to be efficiently utilized. Should an adviser institute such a solution (and in parallel with the adviser’s high-AUM client base), future AUM grows exponentially as does the firm’s valuation.

Keeping Advice as the Key Differentiator

The emerging affluent have common planning needs such as budgeting, education, retirement, tax management, and portfolio design. Indeed, the concepts within each planning category hold tight individual to individual, with the differences only on the demographic margins—like the number of children, income, budget priorities, etc.

People with common needs benefit from a common solution; manufacturers apply this principle in designing products and producing in volume.

An adviser developing a broadly applied investment solution for the emerging affluent’s need inventory is in keeping with this segment’s wide acceptance of portfolio models such as target date funds for retirement. The key difference is the adviser builds the solution for mass consumption with his or her own advice/counsel/wisdom—the adviser’s primary differentiating force—instead of licensing a vendor’s off-the-shelf assembly and relegating the solution to a commodity (i.e. other advisers with the same vendor package would be indistinguishable).

Technology for Mass Personalization

Technology paves the road to upholding a differentiated advisory service while also serving volumes of emerging affluent clients simultaneously.

• A proprietary “robo-adviser” instilled with the adviser’s own planning, portfolio, and investment advice that delivers the tactical solution to clients’ needs.
• Scaled communications like CRM, a portal, email, and social media that provide the service and support component necessary to keep the relationship on track.
• Periodic group meetings activate adviser-to-client relationships.
• The hand-in-glove fit here is the emerging affluent are highly accustomed to, if not preferring, these technology-based interactions.

Right-Sizing Processes to AUM Segments

Using scaled service delivery methods generates important operational leverage. The block of hours used to develop the advice and service package is distributed across many clients wherein each new client in the group further improves the profit margin of those hours. This strategic profile adds measurably to the firm’s year-over-year profits, but also its valuation, which is a winning mix by all accounts.

Insurance Like It Should Be:  Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest.  You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.

The present economic climate offers heightened insecurity that recalls the traumatic memories from 2008. As far as investing is concerned, clients look to their advisers for precise navigation through these churning waters with the expectation/hope that “the outcomes from this next cycle will be different.”

Defining an Outcome

An outcome is different than a goal. The latter represents a forward view—what we want to happen; whereas an outcome is the result of the planning—what did happen.

Think of the distinction this way. A client goal might be, “I want my wealth secured for the long term,” and the related outcome is, “Your portfolio avoided losses.” While outcomes occur with or without planning, a well-executed plan sets the course for more positive outcomes.

Expectations and Outcomes

The adviser is the primary source for executing the plan, but only one of several sources for setting expectations (see a September 2014 Practice Management Blog post titled “Neutralizing a Client’s Negative External Influences”). A client that expects a 10 percent return because “that’s what my friend’s adviser delivered” only to be disappointed when 8 percent is realized brings to light a failure in managing expectations not execution.

Nonetheless, unmet expectations damage relationships. Therefore, communication strategies form the foundation for setting expectations and defining reasonable outcomes, and this process begins with the plan’s formulation through to each quarterly meeting; it never stops. (Note: fulfilling a client’s service and communication expectations are wholly under an adviser’s control. Take advantage of this control and nail it!)

Any Dollar Lost has the Same Outcome

The current bull market is the third longest in history. The natural cycle means there’s a much higher probability of a market decline than a continued increase. If expectations for the plan’s execution solely rest on performance numbers that go up, there’s a business risk associated with a dissatisfied client base.

Let me state the obvious: a performance decline means the dollar value of the portfolio is reduced; dollars are lost from wealth. This is a simple but vital message to reinforce. Why? Because any dollar lost from wealth—from spending, taxes, fees, depreciation or uninsured risks—has the same effect as a dollar lost to the market.

Here’s the dilemma: so much client anxiety is focused on market downturns that are largely out of an adviser’s control. And, the adviser, knowing this anxiety exists, gets stressed over the possibility that his or her top clients may start looking for another practitioner should investment performances stumble.

Seizing Control of Outcomes

Pounding the fact that any dollar lost has the same wealth outcome as a market decline shifts the plan’s tactical target to programs that minimize the loss of dollars. Given this blog’s space limitation, we’ll focus on two tactics: one for an adviser’s top clients and one for all clients.

Top Clients: Tax Management

The current tax environment is unfavorable to high-income investors. In some states, the combined tax burden can exceed 50 percent, but even the federal 40 percent marginal tax rate takes substantial dollars from wealth every year. In other words, investors worried about a big market decline every five or six years (U.S Trust says 65 percent of wealthy investors’ priority is to minimize taxes), miss the point that an effective tax management program can minimize the loss of dollars every year. This is called tax alpha and it can be a primary (and controlled) source of outcomes produced by an adviser. Consider variable universal life, variable annuities and trusts in an effective tax management solution.

All Clients: Products with a Disciplined Selling System

Many studies chronicle the difficulty in actively managed investment products exceeding benchmarks. Whereas most managers tout their stock research and “buying” systems, certain portfolio managers have highly disciplined “selling” systems that do two things to capture value: 1) selling on the upside when a target value is hit; and 2) selling on the downside when value floors are reached.

Losing less than the market also produces excess return. Investment products excelling in the risk statistics “downside capture” and “downside deviation” accurately identify portfolio managers with disciplined selling systems. Here’s the impact: studies show that avoiding losses leads to a better long-term performance profile simply because each dollar NOT lost allows the portfolio to compound from a higher floor.

Comparing Outcomes

In the annual—if not quarterly—review meeting, produce a side-by-side comparison of the plan’s loss minimization program and one without. This will illustrate how the outcome of extra dollars measurably defines a client’s ROI in the advisory relationship.

Insurance Like It Should Be:  Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest.  You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

Take The Next Step.

Embrace Tax-Free Portfolios For Your HNW, High-Income Clients.