Financial Planning


Many of the financial publications today tell the tale of advisors selling their business for two and a half times what their revenue is worth. But what is not being discussed in many of these reports is what the buyer should expect. Early on in my career as an investment banker, I was trying to sell a retail organization that specialized in kitchen and bathroom tiles. The organization had 23 locations throughout Colorado, New Mexico and Arizona. It was a well-run business for sure. The owners had their mind set on selling the business for $10 million. The annual income received was $1 million on revenues of $8.8 million a year. However, we kept running into the same conversation with potential buyers: “I am only going to pay six times the earnings or $6 million for the business.” After seven buyers passed on the deal, the owners finally took it off the market. Several years later, I heard one of the seven prospects came back and bought the business. Unfortunately, the sellers never got their asking price. Outweighing the Risk So what does a buyer of a financial advisor practice want? Recently, I was writing about investment options in a series I call FLOW. I determined I was looking for a 10% return and was willing to take on some risk. It is likely that the price of the investments could swing by more than 20% in a six-month period, but I believed the investment’s cash flow stream would remain consistent. To begin, a financial advisor should seek at least a return of 10% on the purchase price of a business. Ensuring this; however, can be difficult as there tends to be risk involved. First, there is risk with stock market uncertainty. Second, there is a level of client anxiety associated with the fear of a trusted advisor leaving. Third, you may encounter an employee risk which occurs when an advisor leaves the firm or has not received proper training. Lastly, you must be prepared for systemic risk, which is the risk of an entire financial system collapsing. To outweigh such risks, I would look to achieve at least a 15% return on the initial investment. This means that the annual cash flow should be 15% of the price paid to the financial advisor. Let’s say that a financial advisor has $300,000 in revenue. Using the often-heard “two and a half times’ revenue” equation, the selling advisor may expect a return of $750,000. However, the amount received ultimately depends on how much cash the firm brings in as profit. If the expenses are $200,000, leaving $100,000 in cash flow...

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The financial advising world is continuously changing; however, one topic of concern seems to remain on everyone’s mind: how can the accessibility of financial planning become more apparent to consumers? Marcio Silveira, financial planner and founder of Pavlov Financial Planning believes that Americans are not in the best financial situations, as many companies no longer provide pension plans and benefit packages. Yet, clients do not have to fend for themselves. It was through Implement Now, the next generation practice management virtual summit that I first learned of Marcio and his unique approach when it comes to coaching clients. Marcio is holding off on the assets under management model, and is steadily evolving towards the idea of receiving payment for financial planning advice. In addition, he is eschewing his reliance on traditional insurance and investment products and consequently is opening the door for younger clients by offering them help in this “do it yourself” culture. It is important to note than this transition does not simply suggest that Marcio and other younger advisors will renounce its product-and implementation-based services. While the AUM model just “doesn’t work” for much of the middle class and younger folks, it is still a good business model for many advisors. Financial planning provides advice for a wide range of insurance and investment products, and many people do need or want help implementing them. The Age of Innovation – A New Approach to Financial Advising As his financial planning continues its evolution towards getting paid for advice, Marcio is among a new wave of advisors supporting a different model – building a business that advocates the delivery of financial planning advice for a fee. Given the unique needs for Marcio to operate under this monthly retainer business model (obtaining CRM for workflows, payment mechanisms, oversight software, etc.), organizations are collaborating to help young advisors with tools, templates and access to technology to help support new models. The XY Planning Network  is a prime example of an original model. XY Planning Network’s model contains a convenient month-to-month payment structure and a recurring revenue model. This allows advisors to grow their business and increase their income over time by developing a base of clients who pay an ongoing fee for advice. Michael Kitces, partner at Pinnacle Advisory Group and founder of Kitces Report, along with fellow financial advisor, Alan Moore, created XY Planning Network to support fee-only CFPs who use the retainer model. So far, more than 35 firms have joined and the network continues to grow, with 72 current members. For just $397 a month, financial firms receive marketing and technical support, low-cost compliance services, and coaching on business development. The primary goal of XY...

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Imagine a presentation going completely wrong. The PowerPoint cannot seem to function and will not advance to the next slide. The video you queued up won’t play, and to top it off, the sound system makes this loud “BANG!” every couple of minutes like a shotgun going off. Now think about this disaster unfolding in front of 225 people; 225 individuals that could potentially become your next client. This is what happened to Warren Rustand at a recent presentation delivered to the Entrepreneurs Organization of Colorado at the Aspen Academy.  And yet, through it all, he stayed calm and collected and delivered a performance worthy of a standing ovation. His teachings that evening can be used as a road map for any business owner, but are particularly imperative for financial advisors. Rustand has used his own advice to become a successful professional.  Not only is he the current CEO of Providence Service Corp., but has served as a member of the Board of Directors for more than 40 public, private, and not-for-profit organizations. In 1973, he was selected as a White House Scholar under President Gerald Ford, to act as his scheduling secretary, and his leadership and determination was showcased at the University of Arizona, where he played basketball and became an All-American player. Often financial advisors are alone without any instructions to follow, and yet we are expected to grow the business, provide financial guidance, and operate the field at a high performance level, all which take an utmost amount of focus and discipline. The 5 Principles to Achieving High Performance Greatness In his recent presentation, Warren Rustand revealed his own road map for high performance greatness. The composure he kept despite all the missteps in his presentation showed that his tips on how to perform at an elevated level really do work. The 5 steps Rustand presented to help motivate advisors include the following: Commit to Personal Discipline Live with Purpose Act with Intent Make Conscious Choices Call to Serve Committing to a Personal Discipline.  How many times have you started a New Year’s resolution, only to have given up by Valentine’s Day? Some people need to play a game; others need a carrot hung in front of them to get moving. Rustand believes in order to become successful, you first need to change your mindset. If you find yourself needing a charge of energy in order to get your sales going, try our 21-point day. Having a Purpose. It is very easy for our days to get strung together. We may be busy shuttling children to band and soccer practice and likely find ourselves faced with...

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A recent introduction allowed me to speak with Scott Schultz, founder of Scott Schultz Closed End Funds. Inc.  Being a student of investing, I am always interested in how people came upon their investment strategy and how they execute their plan. This blog will review my discussion, as well as provide insight into the world of closed-end mutual funds (CEFs). Scott’s Story about CEFS Scott became hooked on CEFs when he realized that buying mutual fund assets with very high quality assets for a ‘discounted’ price to NAV made a great amount of sense and could improve clients’ returns. NAV stands for net asset value—the value of the underlying investments in a mutual fund. Scott first became aware of CEFs in 1988 while working at Merrill Lynch. This was also the time that the ‘crash’ occurred and business virtually stopped altogether. Within 90 days, the price of the CEF began to fall due to the ‘underwriting concession.’ Most brokers told their clients that there was NO COMMISSION and while technically correct, there was still a fee to the investor. During this time of slow investing, Merrill Lynch adapted and began pumping out ‘new issue after new issue’ of CEFs. Before moving to a regional firm in 1989, Scott took an eight-month unpaid leave of absence to run for the U.S. Congress.  During this period of running for Congress, Scott developed a database on a spiral binder on CEFs. Upon returning to financial advising, he chose to specialize in CEFs and refined his strategy. As an aside, I spoke to Scott while he was in the middle of his campaign for Michigan State University Trustee. Scott’s interest in politics began as a junior at Michigan State University. As a journalism student in 1978, Scott was a press aide to Michigan’s sitting governor. Having access to Michigan’s top chief executive for nine months sparked his interest in a political career. But back to financial advising … How Closed-End Funds Work As with any investment, CEFs can lose money. Closed-end funds are not suitable for all investors but can create opportunity. In many ways, they are like a mutual fund; it’s a pool of money that is invested by a professional money manager. But unlike a mutual fund that is just priced at the end of each day, a CEF’s price fluctuates throughout the day. In fact, 13% of the New York Stock Exchange includes CEFs. There are more than 600 closed-end funds and $170 billion in assets. For more information on closed end funds, visit CEFA, the Closed End Mutual Fund Trade Association. CEF Benefits CEFs offer numerous benefits to both...

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With a doctor and a lawyer as head of the household on the Cosby Show, the Cosby’s were most likely affluent. Dealing with the home life of the affluent, we have clarified what that family would look like. The affluent are not in any way homogenous, but there are similarities. The Cosby Show passed social, economic and racial stereotypes and addressed the wants and needs of families everywhere. The values expressed dealt with education, manners and obeying one’s elders. In many ways, these values, goals and interests relate to the role of a financial advisor. In the past two posts, we have listed those similarities and common occurrences in the affluent as highlighted in The State of the Affluent 2014. In this post, we will review CEG Worldwide’s process for attracting the affluent that includes three driving strategies with three sub-efforts. Retain For the Long-Term The affluent normally have multiple advisors. Whether it is based on strategy or chance, Cerulli found that most affluent clients have four advisors. As a result, getting a full view of a client’s assets is important. After discovering the assets, we use Blue Leaf to aggregate client’s accounts. We encourage all clients to link their assets to Blue Leaf to view them all in one place. This gives clients the benefit of being able to see accounts in one place and we as the advisors get to analyze their entire portfolio. By doing this, we can consistently serve the client better in our overall strategy. A successful wealth management business is based on understanding clientele. This requires complete collaboration between the advisor and the client. CEG believes the success of a business is based on knowing seven important areas of each client: Values: what is most important to the client? Goals: personal, professional and family objectives Relationships: who is most important to clients? Assets: sources of income Advisors: professional relationships Process: how the client wants to interact Interests: hobbies and activities the client enjoys With this knowledge in hand, you are better prepared to contact clients on a regular basis. Frequent contact provides the opportunity to discuss issues and opportunities with the individual.  Discussing topics other than money will build personal relationships much quickly than a discussion of last quarter’s performance. Serve Extremely Well It’s important to identify your specialty in order to provide consistent ongoing service to clients. How you determine your client specialty may include focusing on concentration of wealth, understanding the areas where can you provide value and areas of opportunity for you to excel, the amount of existing clients you already have in this space and, most importantly, your drive...

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NBA players are ultra-affluent. If you can provide counsel to NBA all-stars, you are likely an all-star advisor yourself. Looking at NBA all-stars based on how ESPN ranks the players’ salaries, the top 40 all make over $12 million a season. Kobe Bryant tops the charts with earning over $30 million during the 2013 and 2014 season without even playing a minute. The top three players for the Miami Heat all make about $19 million a year. This is interesting to me since LeBron James certainly carries the load, yet his salary is equivalent to the other top two players on the team. Picking up from our last post on looking at The State of the Affluent 2014 by CEG Worldwide and Wealth Engine, we will continue our discussion on how advisors can best serve the affluent. In this post, we look at the hobbies and lifestyle of the affluent. While they all might not be NBA players, affluent people tend to have similar hobbies and lifestyles. Investable Assets and Giving In State of the Affluent 2014, the “average” median net worth among affluent families is $1,864,100 and the median annual income is $163,200, far from an NBA salary. CEG Worldwide has gone a step further by dividing the affluent into three groups: affluent, super affluent and ultra-affluent.  The affluent have investable assets of $1 to $5 million. The super affluent range from $5 to $25 million and the ultra-affluent have more than $25 million in investable assets. All three groups are less likely to give their money to political causes and more likely to give to charity, specifically in the areas of philanthropy, volunteerism, grant making, education, human services and arts and culture. All three groups also tend to take time to volunteer on boards. This may be because they are in demand or because they have more time and money, but either way, 13% to 19% of the super affluent and the ultra-affluent groups participate in these endeavors. The median estimated donations range from $4,662 for the affluent to $71,550 for the ultra-affluent. Know Your Clients Understanding what is important to your clients helps develop a stronger rapport and allows you to serve your clients more consistently. For example, CEG and Wealth Engine compiled the interests of the affluent and found that gourmet cooking, travel, golf and boating were significant hobbies. Gourmet cooking and travel were the strongest interests. More than 50% of affluent individuals displayed interest in cooking and 58% had a passion for travel. Boating and golf also topped the list with an interest displayed in about 25% of clients. Consequently, advisors may choose to...

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