For those of you too young to remember, IPAC was then one of the most successful planning businesses in the country which eventually sold for a reported $120million. Embedded in this sale price was the premium paid for the way the client advice process had been packaged and for the 400% productivity gains that had been made in servicing ongoing retainer clients in the years approaching the sale.

That’s right…400%. Let me explain how…

Without context there is no meaning
Twenty was unique.  The financial planning division was split in two between the new business advisers and the ongoing retainer advisers. Advisers for each division were recruited on “type” with “hunters” hired for the new business area and “shepherds” hired for the retainer area.

At the time the business was very focused on generating profitable ongoing fees from retainer clients almost to the point that the new business area was considered by some to be a strategic loss leader designed to source prospects and then convert them into retainer clients.

The advisers from both areas were trained in Myers Briggs personality profiling techniques in order to make them aware of their own personality traits which in turn helped to equip them to identify and accommodate the traits of their prospects and clients.

During the course of the plan presentation meeting, there would be a knock on the door of the client meeting room and the retainer adviser assigned to the client would walk into the room.  The new business adviser would introduce them as their potential ongoing adviser should they decide to become a retainer client.

This process was very carefully scripted and rehearsed to ensure that client’s understood that rather than loosing their principal planner, they were gaining another adviser who was across their file.

Using this process, the new business advisers had a success rate of over 85% in converting prospects to clients and ultimately a 90% success rate in converting these clients into the retainer service.

Despite these numbers however, the business was severely challenged by a lack of leverage or productivity once the client went into the retainer service.

In short, a retainer service team which consisted of a principal adviser, a paraplanner and senior support person could not service more than 60 client relationships without client satisfaction levels dropping…yes we were doing ongoing satisfaction surveys back in the late 90s.

Every time the 60 client ceiling limit was reached, a new team was recruited along with an additional 36 square metres of space, desks, computers etc.

In other words we had a stepped cost curve chasing our revenue curve and from a business perspective this was simply unsustainable.

The retainer service offer consisted of 4 meetings a year with their ongoing adviser one of which was the client’s AGM while the other 3 meetings were investment reviews.

In our experience, once the client had gone through two meeting cycles (24 months) most of them felt sufficiently well informed and confident in the service to voluntarily drop the three review meetings a year and simply attend their AGM.  When this happened, the productivity and profitability from the client would improve dramatically.

So, when I took over as the manager of the retainer area, my brief was simple:

• Find out why the servicing ceiling was stuck at 60 clients relationships
• Find a way to raise this ceiling
• Find a way to reduce the time taken for the clients confidence to reach the point where they voluntarily reduced their servicing requirements
• Maintain or improve client satisfaction along the way.

Now before you all start saying to yourself “…and for his next trick”… read on.

The problem
I started my investigation by firstly interviewing all the principal advisers in the retainer division to gain an understanding of the existing work flows and to see if there were any obvious road blocks that we could remove quickly.

During these interviews, however many of the retainer advisers levelled some very pointed criticism at specific advisers in the new business area claiming that they were handing over problem clients from the outset. These clients were continually unsettled about investment performance and a month would rarely go by without the business receiving an irate letter from a client asking why their investment fund had underperformed the “XYZ” fund by 30bps in the previous month.

“Red herring” questions from poorly inducted clients that would take two people in the asset management division a week to prepare and send a written response to. These clients ate the resources of the business like there was no tomorrow destroying leverage and profits along the way.

As cranky as the retainer advisers were with the problem advisers who sent them clients who were servicing “nightmares”, the retainer advisers were just as complimentary about some named advisers in the new business area who sent them clients who were servicing “saints”.

So with a growing suspicion that the leverage problems in the retainer service were originating in the new business area, I immediately turned my attention to those advisers to ask them what they were saying to their clients.

As you would expect, the advisers sending clients who were servicing were servicing saints were telling their clients all the real/good stories such as cash flow management, diversification, time not timing, volatility and so on.

By contrast, the advisers who were responsible for sending the nightmares to the retainer area were “selling” market timing, stock/fund picking and investment tricks. We even had one adviser who would promise their client that we would call them before markets crashed and we would call them just before they bounced back!

From these answers it became immediately clear to me was that there was a direct commercial link between what the advisers was saying to their clients during their early meetings with them and whether or not that client retainer relationship would flourish or fail overtime.

In fact it was the error, omission and variation that existed in the way the new business planners set client expectations upfront about what the business could do for them and how it would add value that was destroying leverage in the ongoing servicing area which in turn had imposed the 60 client ceiling.

So the challenge became how could we get all the new business advisers to consistently tell the same story that the “good” advisers were telling their clients?

The solutions
In the first instance the answer to this question was that we couldn’t. Those advisers who were selling the investment guru VP were senior advisers who were rusted on to the business and despite helping them to re-write their “scripts” and providing them with hours of training and mentoring the variations persisted.

It wasn’t until we decided to alter their remuneration packages and provide them with some client facing software that we started to get some consistency.

With regard to their remuneration packages, up until this point the new business advisers were rewarded entirely on the volume of new business revenues that they generated. They had no incentive to either sell the retainer services or to care about how the client’s expectations were being set when they did so.

In order to improve these outcomes we decided to re-apportion a significant part of their bonuses based on the number of clients referred to the retainer area. We also introduced a number of qualitative KPIs the most important one of which was the time it took for their clients to voluntarily reduce the number of meetings per year. This KPI had clear benefits for the business and it put pressure on the new business advisers to spend time with their clients educating them.

With regard to the client facing software, what started as a massive cash flow projection spreadsheet turned into the Lifetime Model which incorporated much of the approach and language I use today with my clients as we go thought a Goals Based Planning process.

With the GBP software being used with each and every client, we had managed to get the new business advisers to systematically set and manage client expectations the same way every time…a little like industrial design meets financial planning.

Before we knew it , we had created an absolute turn key solution for the business.
The results
Over the following two years the 60 client ceiling had increased to 120 for the same level of resource i.e. one retainer team.  Two years after I left IPAC I was told that this number had doubled again to 240.

In addition, the time it took for the client to voluntarily elect to attend just one meeting a year reduced from 24 months to 13 months.

While by any definition, these results they were staggering, what I learned next was simply breathtaking.

At one point, the IPAC directors wanted to produce a client video of the way we were setting and managed clients expectations around a goals based process and the Lifetime Model.

Part of the video production involved interviewing several existing clients in their homes and asking them what they really liked about the retainer service. While I had written the questions down for the director I wasn’t allowed in the room when they were being asked.

Of the many answers we received, the response from one particular retired couple in their 70s I will never forget.

When they asked Ray what he liked about the service he said he loved the portfolio valuation and cash flow reports that he received saying…“I can cross every “t” and dot every “I” and that makes me feel like I’m in control.”

While this was a typical response from a control freak, Margaret’s response was a revelation.

She said…“All I know is, if anything happens to Ray, things will continue on as they have in the past.”

In other words, when it came to their life savings, she didn’t care whether or not her husband of 40 years was alive or dead!…she had placed all her faith in the PROCESS she had gone through and not in her life partner or the advisers that she and Ray had met along the way.

What this response meant to me was that as far as Margaret was concerned, we had somehow diminished the relative importance that she had placed on an individual to deliver the service in favour of the process being delivered by the business.

I’ll leave you to contemplate just how earth shattering this shift was in the mind of the client and what it could mean for your business.

In the meantime keep an eye out for my next article entitled…“The Client Experience IS THE PRODUCT”

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To refresh your memory, the diagram below depicts the goals based planning (GBP) process.

As you can see, GBP is a collaborative and iterative process designing to help client’s design their lifestyle plan based on striking a combination of tradeoffs that are right for them.

The levers available to them in designing their plan include:

• What they are spending on day to day living costs (and the savings that may or may not result)
• Lifestyle spending on their planned big ticket items such as cars, holidays and the children’s school fees
• Their planned retirement age
• Their existing asset base
• The investment returns they generate.

Many of you will immediately think to yourself…hey…wait a minute…where is the clients risk tolerance?

Well spotted if you did…back to school if you didn’t.

As stated earlier, the GBP process STARTS by getting the client to design their lifestyle plan representing as it does the combination of tradeoffs that suit them and their circumstances.

Once this plan is agreed, the planner needs to then stress test it for the client by showing them where their lifestyle plan might end up if they invested in accordance with their risk tolerance.  This stress testing often leads to what I call the client’s investment risk gap.  Identifying this gap and getting the client to take responsibility for it is absolutely pivotal to the GBP process and to protecting advisers in the new FoFA world.

The investment risk gap is explained in more detail later in the article.
GBP in action
Now, for many clients, the single greatest value you can provide them with in the early stages of your relationship with them happens NEXT.

Without going into too much detail regarding their current circumstances, the 1st cut of the lifestyle plan for Dick and Dora appears below. This projection is based on an annual living cost today of $75k ($70k pa in retirement), almost no annual savings, retiring at age 60 and earning inflation plus 1% from their asset base.  Let’s call these items their benchmarks.

As you can see, Dick and Dora are heading for a crisis with their funds estimated to last only until age 79.

Why is this a crisis?…because the longest average life expectancy for this couple is Dora’s at age 85.  Based on her life expectancy, she has a 10% chance of living beyond age 96.

So the prudent planning objective for them is to plan to have their funds last to at least their 1st goal post (Dora’s life expectancy).  And in order to build some safety margin into the plan, aiming to get their assets to fund them as close to their 2nd goal post as possible (or even slightly beyond) would make sense.
Now for the tradeoffs
With the right modeling tool at hand you can now walk Dick and Dora through an iterative process that helps them to understand the relative impact of changing one or all of their benchmarks in a way that makes sense to them.

For the sake of brevity lets say that by reducing their current living cost by $100 per week and by $200 per week in retirement AND increasing the target returns on their investments to inflation plus 4% today and plus 3% in retirement AND delaying their retirement to age 62 respectively we get the following projections.

While these changes appear to achieve a terrific outcome for Dick and Dora, when they add the following plans into the mix, their projections unfortunately come crashing back to earth.

• A car replacement every 3 years at a  cost of $25k for each changeover
• A family holiday of $10k every 2 years for the next 30 years
• Uni fees for their daughter of $30k each year for 4 years starting in 5 years time.

The impact of these big ticket items is devastating with Dick and Dora losing around 21 years lifestyle funding.

Finally we can see that Dick and Dora can get their plan back on track by making the following adjustments:

• Reducing their annual living cost now and in retirement by a further $5k
• Delaying their retirement to age 65
• Reducing the cost and frequency of their car replacements.

Now apply their risk tolerance
With their 1st lifestyle plan agreed and the tradeoffs decided, their adviser then decides to stress to test their plan by recalculating it using a return target that corresponds to the lowest risk tolerance between Dick and Dora.  In my example Dick’s risk tolerance has been assessed as “low” which I attach a target return of just inflation plus 1% for this calculation.  This change produces the following projection.

‘
In the above example, this last graph shows in clear, unadulterated terms what I call the clients investment risk gap.

Put simply the clients investment risk gap occurs when a client’s target return (in combination with their other benchmarks) is higher than the target return associated with their lowest risk tolerance.

In my example, an investment risk gap exists because Dick and Dora are:

• Targeting a return of inflation plus 4% and 3% which helps fund them to age 95; which is higher than the
• Target return of inflation plus 1% which equates to their lowest risk tolerance.  Using their risk tolerance they might only fund their lifestyle to age 82.

By expressing the investment risk gap in years (13 years in this case), clients can instantly see the impact on their lifestyle should they decide to invest in accordance with their risk tolerance.

So…what to do about this gap you might ask?
Well there are really only too courses of action available to the client.

Firstly they can continue to trade off their lifestyle goals by reducing their living cost yet again or perhaps they could both agree to pay for their daughter’s books at uni but she might have to use the HECS system to fund her tuition.   Both these tradeoffs would enable Dick and Dora to reduce their target return to a number closer to their underlying risk tolerance.

Or…secondly…they could live with their investment risk gap.

Taking responsibility
If Dick and Dora still have an investment risk gap after making all the tradeoffs they are prepared to make, they must take responsibility for it.

In my world, I don’t even start to draft an SOA for a client until I have on file a signed declaration from the client stating that they:

• Know they have a gap
• Know what the gap is and why their gap exists
• Know the consequences of maintaining a gap; and that they
• Take responsibility for it.

Conclusion
In my view, a goals based planning process that incorporates a risk tolerance stress test is simply the most robust and sustainable process to attract, engage and retain long term fee based clients.

Over the last 30 years as an industry we have been guilty of selling at various times tax, super, Centrelink and investment arbitrage as the basis of our value proposition to our clients.

While all of these elements are critical to the overall financial planning process, GBP is real planning.   GBP helps the client to articulate WHAT THEY WANT to achieve as a result of their planning.  Investment strategy, tax, super and Centrelink planning reflect HOW WE IMPLEMENT their plan.

In my final article on the planning process for Adviser Voice, I’ll provide a detailed account of the staggering commercial consequences of uniformly adopting GBP across a planning business by calling upon my experiences at IPAC Securities back in the late 90s.

9 July 2012

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It’s the process stupid!
Forgive me for my “loose” use of the phrase used by the Clinton presidential campaign crew in 1993 (i.e…the economy stupid) to describe what I think is an absolute truth that can be applied to the financial planning industry.

When I received my first proper authority in 1985, I was taught that the financial planning “process” starts by asking the client what their attitude toward investment risk is. Armed with the clients answer, the planning process that followed was straight forward enough.

Now any thinking financial planner knows that this approach is fundamentally flawed.

In the first instance it clearly isn’t a process in the strict sense of the word. Processes generally contain feedback loops to continuously feed outcomes back into the process to check and verify results along the way. None of that exists in this straight line approach.

To put it bluntly, this “process” is nothing more than an expedited portfolio picking approach designed to get products in front of clients as quickly as possible.

The second flaw embedded in this approach is that few advisers actually do the detailed cash flow modelling required to work out whether the client’s risk decision is going to generate sufficient returns to fund the their lifestyle over the long term.

Failure to do this modelling was one of the deficiencies cited by ASIC following the recent shadow shopper trials.

Risk based decisions
Who in the industry…be they advisers, dealers, institutions or regulators…honestly and truly believe that a client can make an informed decision about their attitude toward investment risk following a 30 minute discussion with the planner and a questionnaire.

Following this discussion, how many clients really think to themselves…?

• Time not timing and diversification
• Two standard deviation measures of return based on rolling five year periods
• The relationships between risk, return and lifestyle funding.

The truth is almost none of them.

In my experience, when clients hear the word “risk” almost all of them think about the chance of losing their capital and it takes time, patience and repeated sessions and lessons before they gain a more sophisticated view of what risk really is.

From the client’s perspective, an approach that starts with an unknown…risk…and ends in an unknown…funding lifestyle…is simply doomed to fail and to ultimately play itself out in the courts with monotonous regularity.

Divergent risk tolerances
In addition to these fundamental problems, another flaw of the “straight line” risk approach relates to how advisers manage the very common situation where couple clients have divergent risk tolerances. See the diagram below.

And how do most advisers manage this situation? They recommend a compromised risk position. In the example above, lets say both partners are convinced to adopt inflation plus 3% as a compromise risk position.

In doing so, the adviser has now put themselves, their dealer and their business at risk!

How? In the first instance the adviser has recommended this risk position to the client rather than the client arriving at this decision by themselves, with the full knowledge of the impact this decision will have on their future.

When the client’s investments go pear shaped in the future and they decide to drag the adviser and their dealer into court, all they need to say is that they didn’t understand the risk.

Let me ask you…what evidence do most advisers have on file to present in court in defence of their assertion that any reasonable person should have understood the risks.  Remember, a defence based on a “buyer beware” argument is unlikely to succeed in an environment where the regulator and the courts are moving toward a fiduciary standard for the industry.

The other problem that emerges from adopting a compromise risk recommendation relates to the advisers business.

Often, the consequences of adopting a compromise recommendation are to all but guarantee that 50% of the adviser’s client base is going to be upset with them.

When markets move up, the more aggressive partner will be thinking to themselves “…if only they listened to me” we would be getting all these higher returns. When markets move down, the more conservative partner will be thinking to themselves “…if only they listened to me” we wouldn’t be suffering all these losses.

What’s the alternative?
As an absolute minimum, a robust financial planning process must have the following two elements.

Firstly it must have a feedback loop which enables clients to iteratively see the dynamic relationships that exist between:

• what they want out of life
• the return (and savings in some cases) needed to fund their plans
• the length of time they need their financial resources to last.

Secondly, the process has to get the client to understand the impact that their risk decision will have on these lifestyle outcomes…and to own this decision!

What I am referring to here is goals based planning process…an often referred to process, but one which is so often misunderstood.

In my next contribution, I will describe goals based planning in detail, explain how it deals with the shortcomings of a “straight line” risk based approach and then finally explore the legal, commercial and compliance benefits of using this process with your clients.

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