Transcript Document

Taking Your Practice
to the Next Level
Shawn Brayman
IFPAC February 22, 2008
Shawn Brayman
• PlanPlus Founder
• Customers in 9 countries and 4 languages
• B.Sc., M.E.S. and Canadian Institute of Financial
Planning prescribed course of study
• International speaker on financial planning
• Winner of the Financial Frontiers Award 2007 for
leading research in Financial Planning.
Shawn Brayman
President
PlanPlus Inc.
• PlanPlus winner of Canadian Investment Awards
2007 “Advisor Education Award”
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Taking your practice to the next level
1. Industry trends
2. Advice versus products
3. The planner as a professional
4. What constitutes a practice, and
what action you should take?
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Industry Trends
1.
2.
3.
Product margins are reduced
Competition is increasing, independents will
loose share
Regulators are demanding clarity between
advice and product sales
IFPAC 2008 – Kuala Lumpur
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Pressure on Fees
• North America has seen a consistent and
steady decline in sales fees and MERs
over the past decade
• Malaysia just experienced a cap on
commissions of 3%, an immediate
reduction of 50%
• High fees are associated with high cost of
sales in early days. As the number of
channels increase fees can and will drop.
IFPAC 2008 – Kuala Lumpur
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The Independent Channel Looses
Market Share
New Mutual Fund Sales
80
70 76.6
60
50
40
30
20
10
14.8
0
2000
42.1
33.2
24.7
Independents
Banks
Captive
8.6
2005
IFPAC 2008 – Kuala Lumpur
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Industry & Regulators are Shifting
Product Sales
Advice
Driven Sales
-
Regulated
Advice Delivery
Wealth
Management
ISO 22222 on Financial Planning
CFP® Practice Standards, Competency Matrix
SEC (US) Merrill Lynch Rule
Canadian Council of Insurance Regulators
(CCIR) 3 principles as best practices (Feb `07)
“…it will force many
“brokers” to be subject
to the same standards
of care when providing
financial planning
services to clients.”
Journal of Financial
Planning, Oct 2007
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What will happen
• Large front end loads – transactional
• Loads reduced, move to DSC/deferred
sales charges – still transactional but
client and advisor rewarded by staying the
course
• AUM/Assets Under Admin Fees – wrap
style accounts –1% per annum. Service
focused.
IFPAC 2008 – Kuala Lumpur
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Advice versus Products
Using advice to enhance your services
& your value proposition
IFPAC 2008 – Kuala Lumpur
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Firms & Advisors in Transition
Product Focused
Product with Advice on Request
Process with Advice First
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Advice Makes More Money
• Earn 4 times
more revenue
with planning
advisors than
transaction based
sales
Most financial planning-oriented advisors earn
almost 4 times as much revenue as transactionbased advisors
4.0
3.5
3.0
2.5
2.0
1.5
• Earn 60% more
profits
1.0
0.5
0.0
Year 1
Year 2
Level 1
Year 3
Level 2
Year 4
Level 3
Year 5
Level 4
Source: Cerulli & Associates
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
2004 FPA Financial Performance Study
Advice Driven Practices Attract Larger Clients
750,000
6,000
5,000
500,000
4,000
3,000
250,000
2,000
AUM per
client
Revenue per
Client
Fee Only
Fee Ba sed
Mix
Commiss ion Based
0
Commiss ion Only
1,000
0
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Advice Makes $ Stick
Plan Elsewhere
Plan
Fee Account
Elsewhere
++
Fee
Account
Stock Sales
MF Sales
0%
25%
IPS
50%
75%
Share of Wallet
Source: Corporate Insights
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100%
Fee based planning?
1.
2.
3.
4.
5.
6.
400,000 “advisors” in USA
50,000 CFPs
26,000 members of FPA
2,000 members of NAPFA (fee only planners)
80% based on AUM fee
20% based on fee for time
So about 1 to 2% of advisors are financial planners
that charge for their time!
IFPAC 2008 – Kuala Lumpur
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Defining a Professional
A calling requiring specialized knowledge
and often long and intensive academic
preparation.
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Are cigarettes bad for your health?
1.
2.
3.
4.
5.
December 15th, 1953 studies indicated cigarettes caused
cancer.
January 1954 industry issued statements insisting there was
"no proof" that smoking causes lung cancer. "We believe the
products we make are not injurious to health," they said.
The government provided free cigarettes to servicemen until
1974 and continues to subsidize tobacco farmers.
September 1999 Clinton administration lawsuit filed against
tobacco companies.
Today, the government receives $6 billion a year in tobacco
tax revenue and makes more money per pack from cigarettes
than the industry does.
IFPAC 2008 – Kuala Lumpur
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Is global warming caused by man?
1.
2.
3.
4.
5.
6.
At CIFP Conference in June saw Guy Dauncey, author of
Global Climate Change: The Challenge and the Solutions
20% of attendees thought that claims mankind causing global
warming were false and a conspiracy
20% of attendees said insufficient or conflicting information
and could not make decision.
60% said man was the culprit.
Over 600 peer reviewed scientific studies indicate mankind is
the culprit, 0 say mankind is not
Over 55% of media articles indicate there is insufficient or
inconclusive evidence
IFPAC 2008 – Kuala Lumpur
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Do you help your client by
selecting investment products?
IFPAC 2008 – Kuala Lumpur
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Allocation 101
1. Markowitz – Nobel Prize for MPT.
2. Brinson (1986, 1991) – Determinants of
Portfolio Performance – 91.5% of return
variability by “policy”
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What happens when…
Thousands, tens of thousand and now hundreds of
thousands of professional investment advisors are all
playing in the same marketplace?
Efficient Market Hypothesis
•
The markets are about 87% efficient
•
The markets and securities in the market reflect all information
currently available
•
If the market is at equilibrium, any conjecture must be a guess
(50/50) based on information not yet known.
IFPAC 2008 – Kuala Lumpur
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Efficient Market Hypothesis
Thousands, tens of thousand and now hundreds of
thousands of professional investment advisors are all
playing in the same marketplace?
1.
2.
Samuelson (1970) – Nobel Prize that you cannot predict
markets.
Fama – nominated for Nobel Prize that you cannot pick
stocks or mutual funds.
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Allocation 101
• Study on value added of 1,302 Active
Management funds vs. Chance from 1962 to
1995 – 2/3rds under perform
• October 2006 – Journal of Financial Planning –
“On average active management reduces
returns and increases volatility.”
IFPAC 2008 – Kuala Lumpur
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Magellan Fund
• Magellan Fund had 12.5% compound return for
25 years. The average return of the investors in
Magellan was 2.5%
• Dalbar study from 1984 to 1993 found, for
equities, do-it- yourselfers averaged 5.46%
while advisor assisted averaged 6.64%. Index
(S&P averaged 11.35%)
IFPAC 2008 – Kuala Lumpur
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Dalbar Study
?
MER
12.2%
10%
3%
Equity
Investor
Experience
Average
Equity
Fund
S&P 500
Return
Key To Investor
Success
Dalbar Study from
1984 to 2003
Findings
The 'buy and hold'
strategy outperforms
the average investor
by more than three to
one after ten years
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Dalbar Study
?
MER
12.2%
10%
3%
Equity
Investor
Experience
Average
Equity
Fund
S&P 500
Return
Key To Investor
Success
Dalbar Study from
1984 to 2003
Findings
The only thing most
equity investors needed
to do to achieve truly
great returns was just to
stay invested.
IFPAC 2008 – Kuala Lumpur
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Dalbar 2007
IFPAC 2008 – Kuala Lumpur
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Malaysia Markets
•
•
We looked at the KLCI using monthly data from December
1993 to December 2006
Assumed annual investment on the best and worst month of
the year (based on highest or lowest level of index)
•
•
The worst outcome had a compound return of 5.13%
The best outcome had a return of 10.48%
•
Testing for investing the same month each each, regardless
of the market, resulted in:
•
June: 7.57%
•
October: 8.56%
© PlanPlus Inc. 2007
Malaysia Markets
•
The spreads are higher than less volatile
markets, but this still assumes clients
remain fully invested
•
Clients loose by jumping in and pulling out of
the market based on greed and fear
•
Advisors who sell on timing and performance
are conditioning clients to repeat this herd
behaviour
© PlanPlus Inc. 2007
Daniel Kahneman: Prospect Theory
• Overconfident (Ivy League Survey)
• Exaggerate their skills (Driving skills)
• Believe they have more control than
they do (Lights and buttons)
• Fail to learn (Don’t stay surprised)
• Have a coefficient of loss aversion of
1:2.5 resulting in poor decisions
IFPAC 2008 – Kuala Lumpur
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The Cost of Having an Idea
• Terry O’Donnel (student of Daniel Kahneman),
studied 100s of thousands of transactions – buy
and sell within 48 hours
• Compared the stock they sold to the one the
bought for next 12 month performance
• Investor lost an average of 3.5% and paid a 0.5%
commission!
• Women were better investors than men – they had
fewer ideas.
• Institutional investors picked up the 4% individuals
lost
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
How Often Should I Rebalance
So lets assume you have trained yourself
and your clients to remain firm and not
second-guess markets or investments.
How often should you “optimally” rebalance
the portfolio?
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
How Often Should I Rebalance
• Winner of Financial Frontier Research Award in 2006
• Optimal Rebalancing Strategies for Stock & Bond
Portfolios
• Looked exhaustively at data from 1926 to 2005.
• Compared:
•
% variance in an asset class (1/2%, 1%,
2% up to 10% in an asset class)
•
1 month, 3 month, 6 month, 1 Year, 2 Year
up to 10 years
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
So Clients Loose Because…
1. They get out of the market, and
2. They or their advisors have too many ideas,
and
3. We touch things to often
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
One Factor for Professionals is
Research!
• Does your Doctor only read pharmaceutical
brochures?
• Read the research – not the advertising!
–
–
http://www.fpanet.org/journal/
http://www.aarp.org/research
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
The Challenge – Is Your Strategy
Still Relevant
•
What is your business structure?
•
Do you have a process to enforce advice?
•
Do you know your unique value?
•
Do you know your ideal client?
•
Have you defined your client-service
experience?
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Do you have a practice?
•
Do you have any “equity
or value” in what you do?
•
Can you lever other
resources or do you do it
all yourself?
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Organization Types
•
•
•
•
•
Early Solos
Mature Solos
Early Ensembles
Mature Ensembles
Market Dominators
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Productivity Increases with Size
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Early Solo Mature Solo
Early
Ensemble
per Professional
Mature
Ensemble
Market
Dominator
per Staff
Source Moss Adams 2007
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Do you have a process?
1
The
Financial
Planning Process
6
2
3
5
4
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Process is Paramount
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Engagement is Your Friend!
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Apply the process…
•
With every client
•
Make the client see you as more than a
salesperson – but as an advisor
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Defining Ideal Clients
• Breathing
• In the phone book
• I want to help expatriate families working and
living in Malaysia
• I want to work with small business owners who
need help transitioning the business to the next
generation
IFPAC 2008 – Kuala Lumpur
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Cross-Border Financial Planning
IFPAC 2008 – Kuala Lumpur
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International Mobility is Increasing
• 5 million Britons live overseas
–
–
–
33% increase over past 10 years
9.2 per cent of the UK’s population
The top destination countries are Australia,
Spain, US, Canada
• 3 to 4 million Americans live overseas
–
688,000 Americans living in Canada
• About 1.5 million Canadians live and work abroad
Government of Canada Consular Affairs
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Physical & Financial Presence
• 30 Million plus net worth
• 28% have residences in multiple countries
• 28% have financial advisors in more than one
country
• 37% have offshore accounts of some kind
• 19% have children living abroad
World Wealth Report -
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Define Your Distinctive Value
1. What are your greatest strengths?
2. What one thing do you know most about?
3. What is unique about your services?
4. What knowledge or life experiences do you have that are
not necessarily part of your profession?
5. What business related thing are you most passionate
about?
6.
What is the best thing about the service that you provide?
7. Why are you a good fit for your ideal clients?
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Define Your Service
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Next Steps – Put It Into Action
• You cannot “leverage” staff without
replicable business process – build your
systems.
• Align yourself with other professionals that
support a culture you wish to create.
• Balance relationship and technical skills
development.
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007
Questions…
IFPAC 2008 – Kuala Lumpur
© PlanPlus Inc. 2007