Some of the Things that a Professional Financial Advisor Does

Financial Planning:
• Cares more about you and your money than anyone who doesn’t share your last name
• Asks questions in order to understand your needs and objectives
• Helps you determine where you are at present
• Guides you to think about areas of your financial life you may not have considered
• Helps organize your financial situation
• Formalizes your goals and puts them in writing for you
• Helps you prioritize your financial opportunities
• Helps you determine realistic goals
• Studies possible alternatives that could meet your goals
• Prepares a financial plan and/or an investment policy statement for you
• Makes specific recommendations to help you meet your goals
• Implements those recommendations
• Suggests creative alternatives that you may not have considered
• Reviews and recommends life insurance policies to protect you
• Assists you in setting up a company retirement plan
• Assists in preparing an estate plan for you
• Persuades you to do the things you know you ought to do, even if you don’t feel like doing them

Investments:
• Prepares an asset allocation for you so you can achieve the best rate of return for a given level of risk tolerance
• Does due diligence on money managers and mutual fund managers in order to make appropriate recommendations
• Stays up to date on changes in the investment world
• Monitors your investments
• Reviews existing annuities
• Reviews your investments in your company PERA plans
• Reviews and revises portfolios as conditions change
• Guides you through difficult periods in the stock market by sharing historical perspective
• Works with you to improve your investment performance
• Can look inside your mutual funds to compare how many of their holdings duplicate each other
• Converts your investments to lifetime income
• Helps you evaluate the differences in risk levels between various fixed-income investments such as government bonds and corporate bonds.
• Provides research on stocks from both affiliated firm and third parties
• Holds and warehouses stocks, bonds and other securities
• Records and researches your cost basis on securities
• Provides you with unbiased stock research
• Provides you with personal stock analysis
• Provides you with a written sector-based evaluation of your portfolio
• Determines the risk level of your existing portfolio
• Helps you consolidate and simplify your investments
• Can provide you with technical fundamental and quantitative stock analysis
• Gives you strategies for trading options
• Provides you with executive services involving restricted stock and employer stock options
• Provides introductions to money managers
• Show you how to access your statement and other information online
• Shops top rates from financial institutions throughout the country
• Provides access to answers from a major investment firm

Taxes
• Suggests alternatives to lower your taxes
• Review your tax returns with an eye to possible savings in the future
• Stays up to date on tax law changes
• Helps you reduce your taxes
• Repositions investments to take full advantage of tax law provisions
• Works with your tax and legal advisors to help you meet your financial goals.

Person-to Person:
• Monitors changes in your life and family situation
• Proactively keeps in touch with you
• Remains only a telephone call away to answer financial questions for you
• Serves as a human glossary of financial terms such as beta, P/E ratio, and Sharpe ratio
• Makes sure that the he/she and the firm provide excellent service at all times
• Provides referrals to other professionals, such as accountants and attorneys
• Refers you to banking establishments for loan and trust alternatives
• Provides you with a chart showing the monthly income from all of your investments
• Suggests alternatives to increase your income during retirement
• Listens and provides feedback in a way that a magazine or newsletter writer does not
• Shares the experiences of dozens or hundreds of clients who have faced circumstances similar to yours
• Helps educate your children and grandchildren about investments and financial concepts
• Holds seminars to discuss significant and /or new financial concepts
• Helps with continuity of your family’s financial plan through generations
• Facilitates the transfer of investments from individual names to trust or from an owner through to beneficiaries
• Keeps you on track
• Identifies your savings shortfalls
• Develops and monitors a strategy for debt reduction
• Educates you on retirement issues
• Educates you on estate planning issues
• Educates you on college savings and financial aid options
• Is someone you can trust and get advice from in all of your financial matters
• Is a wise sounding board for ideas you are considering
• Is honest with you
• Saves you time

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Guest Blog: Defending Your Fee in an Angry Marketplace

When clients average 9% a year, it’s easy to pay a 1% fee. When they lose money, those fees become harder to stomach. Here’s a four-part action plan for reestablishing your worth and protecting clients from further damage.

It’s not easy being a financial advisor these days. For some, you’re about as popular as members of Congress or the Bush administration. Within the last few weeks, millions of investment clients received third-quarter statements. Those who dared open the envelope found portfolios hammered by the recent market free fall. Trillions of dollars have evaporated from the markets.

Will clients stick with you?

A study released this month by Prince and Associates was not encouraging—at least, not for the wealthiest sectors of the financial services industry. The survey showed that an alarming 81% of investors with at least $1 million in discretionary assets at private banks were planning to pull at least some of their money from their advisors in the wake of Black September and Blacker October. Nearly half said they planned to change advisors and warn others about that professional.

Prince attributed this loss of confidence to the uncertainty caused by the credit crisis, the banking bailout, the market collapse, and the election. The good news in that? Factors such as the personal style and service approach of an advisor and the reputation of the advisory firm can greatly help shape an investor’s attitude. And their willingness to keep paying you, Prince said.

Advisor Beth Blecker, CEO of Eastern Planning in Pearl River, New York underscores the importance of steady service in this rough market: “I am not having any trouble defending my fee with 95% of my clients, but service is the key,” she notes. “I see my best clients every quarter, and I host special volatility-education events and appreciation events. I tell clients this is the time that I really have to earn my fees by keeping them long-term-goal-oriented. We do not believe in timing the market, so it is up to me to keep them invested.”

Taking charge of your message

What can you do now to keep clients happy, defend your fees, and attract new clients? Here’s an action plan for tough economic times.

Go back to the investment policy. When you initially establish an investment policy statement, it can be used to remind clients of potential losses they agreed to accept. This is especially valuable in a down market. An investment policy statement might include a statement like this: “Client X could accept losing 15% in any single year. Over a five-year period, she could tolerably lose 3% annualized.”

When the market falters, you can point back to the risk range outlined in the investment policy statement, as well as to the benchmarks chosen to help put the client’s investment performance into perspective. “It puts in plain English what risks they were willing to take,” said one advisor about his IPS. “It also provides a measurable standard by which we can reasonably be evaluated in a down market.”

Action step: Review clients’ investment policy statements. If you don’t have an IPS process, consider developing one to formally outline your approach.

Host an education summit. Perhaps no time would be more appropriate than now to gather your clients together at your home or office for a special “volatility event” to educate them about your market outlook and how you plan to address the current crisis. An education workshop should include the following elements:

  • A small number of attendees. Unlike a mass-marketed seminar, a client education workshop involves only a select group of your best clients—15 to 30 at the most.
  • Shared interests. When inviting clients to attend your exclusive workshop, choose those who share common interests and concerns. Your knowledge of their unique needs and issues will create a more effective event.
  • Educational purpose. Your education summit should not be tied to a product push. Clients should be able to ask questions and speak their minds. “Since this crisis hit, we have hosted special volatility events with my son, who is a certified financial analyst,” explains Blecker of Eastern Planning. “Clients were very happy that they could ask him whatever they wanted related to the market downturn.” You could bring in your own expert.

Action step: Determine which of your clients to invite. Consider hosting a series over several weeks for small client groups. Saturday mornings often work well. Limit attendance to 30 at the most. Find a guest speaker, if possible, but be sure you remain in charge of the message.

Remind clients about the benefits of fees. Clients don’t pay you a fee just for market performance. And while paying a fee in a down market can be frustrating, clients need to remember all the advantages of fees. Here are a few benefits you can remind them about:

  • Risk management. In a down market, your job is still to manage client risk and optimize their long-term strategic portfolio planning. This service becomes even more important when the market goes down as client confidence is low.
  • Portfolio flexibility. In declining markets, slight modifications to a portfolio can help your clients manage risk. A fee arrangement allows you to fine-tune their holdings without worrying about costs.
  • Constant advice. Paying a fee does not assure a positive return any more than paying for a doctor’s services guarantees the treatment will be successful. Clients pay for the process and the constant attention you give them. As one advisor notes, “Markets go down. This fact cannot be confused with the failure of the consultant.”
  • Excellent service. Clients rely on your service team to answer their questions and handle their requests promptly. Remind clients about the excellent service you strive to provide, that you have the best in the business handling their day-to-day financial needs. Point out that they can reach a member of your team at any time, and emphasize the level of personal service that distinguishes your practice.
  • Tax management. You play an important role in minimizing your clients’ tax bill. Making portfolio adjustments for tax purposes is more easily done under a fee arrangement because you don’t have to worry about transaction costs. Sometimes the tax savings can pay for a year’s worth of fees. A client can also write off your advisory fee, while mutual fund expenses are not deductible.
  • Shared economic interest. Remind your clients that as a result of your fee-based relationship, you’re feeling the pain along with them. One advisor told me his client assets were down 13% last quarter, meaning he just took a 13% pay cut. Your goal is to increase your clients’ wealth, and you share in their success and have every motivation to help them reach their goals.

Action step: If you encounter concerns about your management fee, make it your priority to listen first. Once you have understood and acknowledged the client’s objection, you can respond appropriately with the above advantages of fee-based advisory relationships.

Consider new hedging strategies. Finally, however well you defend your fees, it may be time to take a new investment approach. While focusing on long-term goals and staying invested has long been a mantra for financial advisors, a growing subset of advisors are embracing alternative risk management strategies and hedging to reduce short-term portfolio volatility. They’re basically saying, Forget the long run; we gotta stop the pain now.

“In order to justify your fee, you must bring something new to the table,” argues Otto Federen, an independent registered investment advisor in Lexington, Ky. “Buy and hold equals ‘hope and hold’—and hope is not a strategy.”

Federen completely revamped his investment approach after the 2002 bear market, when he saw fundamentally sound companies and managers beaten down by the market. “We recognized that we had to have downside protection.” He has had his clients in Treasury money funds since February, and he uses some managers who use short strategies.

Thomas Norris, president of NFI Advisors, manages risk with structured accounts comprised of Treasury bonds and call options on the S&P 500 Index to participate in upward swings. His clients have not lost money during the downturn. “If you don’t lose, you don’t have to make it up. I’m not in the market. We’ve protected them on the downside.”

Norris sees his no-risk strategy as the only approach during what may be a rough time ahead. “The average investor has been told to just stay invested, that the market will recover. But look at 1973-74. The market lost 50% of its value. People and advisors were devastated. And over 10 years during the ’70s, the market died slowly.”

And some advisors, recognizing the flat market over the last decade worry about another decade with little forward progress. David Hoelke, CFP, of Focus Financial in St. Paul, Minn. explains: “It’s not the wild swings up and down that concern me. I’m more concerned about a longer-term stagnant period, where clients might only make 2-3% because of a deflationary recession. If all asset classes perform poorly, 2-3% could be strong compared to inflation. “But if I’m taking one of those points as my fee, it might not sit well. I don’t worry about my clients becoming angry, but rather that they become pragmatic and learn that CDs might a safer alternative. And while that’s shortsighted on their part, some clients are frazzled enough that they might not care.”

Action step: Investigate alternative investment approaches on Horsesmouth and elsewhere. Explore the costs and potential advantages of these absolute return strategies.

Senior Editor Nicole Coulter specializes in helping financial advisors manage their businesses more effectively. She has previously written about practice management issues for publications such as Registered Representative and Bank Investment Representative. She holds an MBA from the University of Nebraska at Omaha.