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A Road Map to Investment Success

Keep your clients on track with their investments by using some old-fashioned techniques combined with innovative tools and technology

By Lynn Vincent

Investments. These days, it’s almost a dirty word. As stock market trend lines worldwide resemble heart monitor readouts in a ward full of dying patients, advisors can feel hard-pressed to find anything more useful to tell clients than, “Um … hang in there.” It’s getting so bad that we recently heard one radio financial services analyst encourage listeners with this nugget: “There have been 30 bear markets over the past 100 years, but each one has been followed by a recovery.”

Well … yes. Otherwise there would have been only one bear market.

So what fresh tools and advice can advisors use to help clients manage their investments in today’s volatile markets? Without minimizing the importance of the industrywide move toward investing basics such as asset allocation and rebalancing, are there other innovative tools, techniques and suggestions out there?


Where the bull market of the 1990s tended to promote tunnel vision (Step 1: Place money in equities. Step 2: Stand back and watch it grow), planners are now taking a more holistic approach to their clients’ financial welfare. This approach includes techniques such as returning to planning basics, probing clients’ feelings about money and using technology to help investors sail smoothly into the 31st recovery.

Even rich folks forget about the roof
Take certified financial planner Suzanne Joseph, for instance. She may have discovered the financial-services equivalent of dietary fiber. Principal of a registered investment advisory firm in Ojai, Calif., the least wealthy of her clients has a minimum of $2 million in assets under management. Yet, she takes the same basic approach with all of them. She spends time analyzing income, expenses, cash flow and net-worth statements. The idea: unclog their personal economies and get all financial systems running smoothly.

Why? Because, even with high-net-worth clients “income and expenses are the main driver of their whole financial life,” Joseph says. It’s an incorrect assumption, she adds, that people who have money already have a handle on these things. Wealthy people have problems with piling up money—or debt—just like anyone else, only with more zeros. Says Joseph, “Everybody can maximize and tweak,” a concept that’s particularly important today as investments are being hit hard.

So Joseph asks each client basic cash-flow, income and expense questions, giving special attention to sneaky, irregularly timed expenses. “Clients will leave out things like home maintenance, auto purchase prices and furniture. For example, if the roof isn’t leaking, it’s not going to be in the client’s numbers. So literally, I’ll have them put a certain amount every month into savings for these things that they aren’t spending money on every day.”

Planners are now taking a more holistic approach to their clients’ welfare.

Time and income structuring
Then there are income questions: Is their income maximized? For instance, are business owners’ services well packaged to maximize profits? If your client is a self-employed service provider, is his time structured to maximize earning, or is there significant wasted time?

In March, Joseph did a time analysis for an existing client who, as a result of the now-defunct tech bubble, was in the midst of a radical career change. The client (we’ll call her Christie) had just left a six-figure income job in the tech field. Since such plum positions now are scarce, Christie had decided to revisit her life—to reexamine what it was she really wanted to do. In the end, she opted for a career change: from tech exec to self-employed interior designer.

“To go from a nice, six-figure income to interior design work is a big financial change,” Joseph says. “As a financial planner, you just kind of say, ‘Gulp!’”

Christie had taken some courses in the art and craft of interior design, but those didn’t provide much training in running a business. That’s where Joseph stepped in to help, particularly with income maximization, service offerings and time management strategies. “It’s very common for interior designers to charge a straight hourly rate of around $100 an hour,” Joseph says. “But [Christie] had already come to the conversation with the idea of doing ‘room-a-day’ makeovers” at $500 for a four- to five-hour consultation.

In the end, Joseph designed a time and income structure that incorporated three room makeovers each week, plus time for individual consultations and higher-ticket work, as well as designated administrative and marketing hours. The result: Christie’s new annual income is $76,800—with 40 percent of every week still available to drive that number higher should she desire to do so.

Joseph, who says she built her business on “these extra things you can do for clients,” sees such financial planning as a win-win. “If my client does better, they have more to invest with me. Meanwhile, they are happier, more efficient, can retire earlier and may have more money to retire on.” Her technique—which she says is the “core defining difference” for her business—is a proven client-pleaser. Since adding investment management five years ago, Joseph has had to increase the minimum assets under management for new clients from $250,000 to $2 million just to keep up with her workload.

A matter of policy
John Appleton has also seen an increase in business at a time when many advisors are ducking behind the Cranium board-game display when they run into their clients at Starbucks. “Our business has actually increased over the past two years because of the bear market,” says Appleton, Lincoln Financial Advisors’ (LFA) regional director of investments for Oregon and Washington State.

That’s because of his firm’s holistic approach to financial planning during a time when investors are thirsty for sound advice. LFA rejects a product-oriented approach, never discussing specific investment products until after creating a comprehensive financial plan for clients based on what the firm calls an investment policy statement (IPS).

The investment policy statement “is a rare piece,” says Appleton, explaining that he sees few planners take this approach. “It’s a blueprint for the overall financial goals of the client, and it’s reviewed annually. It’s also a road map for both sides, and drives how we invest for our clients.”

The IPS is formulated using the client’s answers to a 12-page questionnaire that probes their emotions and expectations on such issues as rates of return, interest rates, inflation, risk tolerance, and on goals such as children’s education, family gifting and charitable giving.

“It’s not just numbers, but how does the client feel about these issues?” Appleton asks. “What are the goals that come from their heart? You can’t get a clear picture of someone’s investment needs without knowing how they feel about money. For example, a client might say, ‘We’re going to retire in five years, take our sailboat and sail around for 10 years, then tie up in the islands and live out our days.’ That’s a subjective statement, but it should drive investments. A client’s dreams affect the reality of what you do with their assets.”

The IPS helps both client and producer in a bear market, says Appleton, because the resulting investment strategy, based on the client’s expectations and future needs, is usually conservative. Also, since the IPS drives investment recommendations, the producer doesn’t have to hide from the client when the markets dip. “You can bring them in and say, here’s what we’ve done and why. Are you still comfortable with this?” says Appleton.

Similarly, if clients learn early on that investments in a variable policy aren’t performing as well as projected, they can opt for course corrections (such as increasing policy funding for a couple of years) that might be much more painful later on.

Fitch says life pros, who increasingly are asking carriers to provide tools to help them manage in-force business, have received news of Map Report with enthusiasm. “When we explain what we’re trying to do [with the feature] and why we think it’s important, it takes about 10 seconds before they’re applauding.”

The Hartford guarantees policyholders that they may request a Map Report, and any necessary course correction options, at any time. That’s uncommon, Fitch points out, since not many carriers will guarantee a projection of future performance.

  • Take a holistic approach to financial planning. Use an investment policy statement that queries clients about their emotions and goals about money as well as investments.
  • Use products with features that help you track variable policy sub-account performance and make quick course corrections.
  • When mixed with sound planning, technology can give you a leg up on the competition. Monte Carlo simulations can help you make recommendations based on statistically derived probability.
  • Use the variety of calculators available—such as cost-of-waiting, risk-tolerance and retirement-planning calculators—to illustrate to clients the costs and benefits of their decisions.

Commercial break
Individual investors aren’t the only ones concerned with future performance, says Bob Leeper, managing director in Doylestown, Pa., of Charon ECA, a benefits strategy firm. Employers hunting for investment options to fund corporate-sponsored benefit plans are also looking to advisors for help—particularly for high-compensation employees [HCEs].

Take company-paid life insurance benefits, for example. Through the 1990s, employers were putting defined-contribution money on the table and letting [HCEs] direct the investment of the policy. “Now here we are in 2003, and policies aren’t going to make it because [HCEs] have experienced losses,” Leeper says. As a result, decision-making responsibilities on benefits are shifting back from employee to employer. In the 1990s, “there was never a discussion about what employers were going to guarantee. Now that’s creeping into the dialogue frequently,” Leeper says.

So how do advisors in a scary market broach the subject of guarantees? Leeper says his firm takes a consultative approach: “What are you trying to accomplish and what do you want to accomplish now?” His clients, he explains, are opting increasingly for benefit plans with underlying investments, but without giving investment choices to participants. These include plans like a 401(k)-like supplement plan with a declared interest rate that’s revised annually in accordance with investment performance.

“What we’ve learned overall is that there’s an awful lot of uncertainty,” Leeper says. With accounting snafus and the whims of the market often scuttling investments overnight, a lot more corporate clients “are wanting advice about taking some of the uncertainties out of the equation.”

A Monte Carlo simulation provides the client with a statistical probability of success.

Cool tools
That’s where technology can help. Lincoln’s John Appleton uses Monte Carlo simulations to bolster his clients’ investment performance with the science of statistics. Monte Carlo simulations enable advisors to vault past the traditional forward-planning process that ties future investment performance to past numbers. For example, producers in the 1990s commonly used a projected market return of 10 percent to 12 percent based on market performance over the previous 10 years. Today, advisors typically use a more conservative return of 6 percent to 8 percent. But Appleton points out that saying “x” will happen because “x” happened before is, statistically speaking, based on nothing more than chance. (Just ask any investor who dumped a load of cash into tech stocks in 1999.) Monte Carlo simulations, on the other hand, enable advisors to make investment recommendations based on statistically derived probability.

That’s because such tools help advisors shape projections using a variety of objective factors, such as historical rates of return, asset allocation, time horizons and cash flow in and out of the portfolio, along with more subjective factors such as risk tolerance. Based on such calculations, a Monte Carlo simulation provides the client with a statistical probability of success. If the probability comes out too low, (for Appleton, that’s anything lower than 75 percent), the advisor and client can then “work the problem,” adding more funding, for example, or adjusting the portfolio mix.

Appleton notes that probability calculations have been around as long as the science of statistics, but that it’s taken technology longer to make the science accessible to financial services practitioners. “Technology is catching up with us. It is becoming more available, more reliable and much more accurate.”

In other technology news, New York-based Guardian Insurance & Annuity Co. is offering advisors a CD-ROM suite they can use to help clients manage investments. The tool lets advisors demonstrate investment basics such as dollar-cost averaging, while also encouraging investment with a cost-of-waiting calculator. That calculator shows clients the risk (in total accumulation value of an investment) of waiting one week, one month or one year to begin investing.

Peggy Coppola, vice president of business development at Guardian, says the CD-ROM, which is available to both captive and independent agents, can help advisors engage clients. Instead of a flat, PowerPoint-style presentation, the CD includes film clips, narration and music. One segment shows clips of U.S. presidents going back to the Eisenhower administration giving speeches about Dow-Jones Industrial Average spikes of 400, 600, 800 and higher. The point of the segment is to demonstrate that investors have for decades seen the Dow rise to what they thought would be its ultimate peak—and that they were always wrong.

Guardian’s CD boasts additional calculators, including a seven-year-solution calculator that helps clients meet asset-accumulation goals by dividing investment dollars between fixed and variable annuities, as well as risk-tolerance and retirement-planning calculators.

Finally, on technology tools, Morningstar has two that can help insurance advisors move the investing portion of their business to the next level. One, called Portfolio X-Ray, is featured in both Morningstar’s Principia and Advisor Workstation systems. It enables advisors to dig below the aggregate level of fund-type investments and analyze the style and sector breakdown of a client’s overall portfolio. The other, Goal Planner, is a feature of the Advisor Workstation only. It uses Monte Carlo simulations, but with an added feature: the ability to perform multiaccount, multigoal projections that analyze whether individual elements in a client’s portfolio will work in proper sync to achieve the client’s financial goals.

Chris Boruff, president of Advisor Group, Morningstar, says independent investment advisors have long used these features. But in today’s economic environment, “brokers, insurance agents and other types of financial professionals are now kind of upping the ante.” With ever more sensitive markets, it is no longer adequate to make recommendations based on overall, historical fund performance. Portfolio X-Ray and Goal Planner can help insurance advisors “disaggregate fund-type products down to individual holdings, and do analysis at that level. … That’s what clients now expect and that’s what we need to be delivering to remain relevant,” says Boruff.

Lynn Vincent is a frequent contributor to Advisor Today.


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