Archive for October, 2008

Develop Your Referral System

Thursday, October 30th, 2008

Most producers get referrals by asking their clients for the names of any acquaintances who may need their services. But when you get referrals this way, you call the acquaintance and:

• They don’t know who you are.

• They don’t know what you do.

• They don’t know why you’re calling.

• They don’t know how you got their names.

The do-not-call rules make it that much tougher for you to build his practice from referrals that come to you in this manner.

Trust is everything in this business, and securing prospects’ trust before you meet increases your chances of opening a new account. The way most financial advisors or insurance agents get referrals, however, does not result in high trust. If you want to increase the success rate of your referral marketing, change the way you get referrals.

In addition, if you want more than the sporadic high quality referral from your referral program, you must develop a referral system, which becomes automatic in you practice, that will generate a continuous flow of good prospects.

Defining a good referral
To start with, determine the type of prospects to whom you want to be referred. All insurance referrals or investment referrals are not created equal, and when developing a referral system, concentrate your efforts on seeking prospects that best suit your practice.  For example, if you want more seniors as clients, then the way you cultivate a senior referral will be different than cultivating a referral to the baby boomer children of your clients.

Look at your current clientele and identify the 20% that provide 80% of your income. What characteristics do these clients share? Wouldn’t the best prospects be similar? Odds are excellent that these people have friends who share similar needs and circumstances.

Define this target market and then focus your referral efforts on those prospects most likely to fit your target profile.

Gaining Personal Referrals
Build the referral system by setting up business development meetings with your targeted clients. These meetings are not sales meetings, but rather their purpose is to grow your business. In addition, these meetings are meant to do far more than deliver a list of names and addresses from your clients; if done correctly, clients will introduce you to their friends.

Referring to the list created above of targeted clients, contact some of your best clients and invite them to a business development meeting. Explain to the clients that this is an integral part of your business and because of your relationship, ask if they would take a little bit of time to meet with you and help you build your business.  Offer to buy lunch.

Ask these clients to bring their address book. This is a good place to begin to target possible prospects. For example, if the client is a senior executive with his firm, you will ask to be introduced to his colleagues. If the client balks at this and says he is not sure his friends “need help,” the  tell him that it’s OK. The client does not need to determine which of his friends need help. The friends will decide for themselves.

Design your referral marketing presentation to inform your clients why you do this, and how it works. This presentation should detail how you will deal with the referrals. It must address the fears clients may have about sharing other people’s names and personal information. You can best can allay their fears if you explain exactly how you will use the information.

You will achieve more success from these referrals if the client introduces you to the referral. If you merely gets a referral name and telephone number from a client, that’s almost worthless. When you call the referral without an introduction, don’t expect much because you will have the problems I mentioned above.

If you follow the process I describe below, the referral will be expecting your call and will know you well.

Step 1: The personal introduction. Prepare an endorsement letter about yourself, which the client will send to the referral. This letter basically says, “I’m working with Bob, and he’s done a great job for me. I think it would be worth your while to meet with him.” The producer can add some specific information aimed at the services he provides, such as, “He has helped me organize my finances,” if he believes these might be of interest to the prospect.

This next step is important: At the bottom of the letter, add a sentence, “If you don’t want me to give your name to Bob, let me know.” This gives the prospective referred party the opportunity to opt out. You don’t want to waste his time on people who aren’t interested in what you offer. It also reassures the client who gave the producer the referral’s name to know that the producer isn’t jeopardizing the client’s relationship to the prospect.

Prepare these letters before the business development meeting so that the client can sign them at your lunch meeting. When you mail these referrals, include your brochure or some information on your practice.

With the client’s permission, print envelopes for the letters, adding the client’s return address. When the note arrives at the referral’s home, it appears to have been sent from the client’s home or office.

Step 2: Drip marketing. Now that you have been introduced in writing, build the prospect’s trust to improve the odds that you will get the prospect’s business. Make two additional mail contacts before attempting to call for an appointment.

A few weeks after the initial introduction, follow up with another passive form of contact. Send a copy of your financial advisor newsletter or a booklet the prospect might find useful. You might attach a personal note or Post-It.

The third contact should be a personal letter from you. This is where you introduce yourself, and describe what you do. This letter should mention, “I got your name from so-and-so. If you have any questions about me, feel free to call so-and-so before I call you next week.”

Step 3: The telephone call. Follow up with a telephone call, as promised. This call a week later is to set an appointment.

Yes, it really can be this simple to get referrals that you convert into clients. The secret to this referral program is to use a systematic approach to get referrals and convert referrals into clients.

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Financial Services Marketing Doesn’t Work Anymore

Tuesday, October 28th, 2008

“I’m dong the same seminar I’ve been doing for years and the attendance is really off,” complained the rep.  Implicit in his compliant was the expectation that if you keep doing the same things it keeps working.  Allow me to offer this definition of insanity:

“When  you keep doing the same things over and over expecting the same results even when the environment has changed.”

The environment is constantly changing and your prospects’ desires are always shifting.  They react to the news, the economy and the markets and if you don’t keep adjusting to them, your business will suffer.  The greatest financial services marketing strategy that works today to bring in droves of clients could be worthless in months when public perceptions and desires change.

For years in the late 80s and well into the 90s a financial advisor did a seminar called “Six Ways to Maximize Retirement Income.”  His financial services marketing plan was built on that one seminar.  Attendance was good and he raised on average, $1 million per seminar.  The attendance started to drop and did not recover.  Some hard looking resulting in these two realizations:
1. Retirees (by 1997) had become more fascinated with returns in the stock market and were less income focused
2. Interest rates had been declining for 15 years and they had become accustomed to low rates. So the advisor changed the seminar title and bullet points to reflect the altered interest amongst his target market.  His attendance increased and business returned to normal.

Another example of a shift in investor interests occurred after the stock market crash in 1987.  No one wanted equities.  An advisor saw the business of other financial advisors just shrivel.  So he started talking about fixed income securities and focusing on that.  He became the largest fixed income producer at his firm and his business prospered.  That type of flexible financial services marketing is what creates a fresh and thriving practice. The lesson: provide what your prospects want.

Bear market or bull market, there is always opportunity to attract new clients if you don’t fixate on doing things the same old way.    That is, you must hear and see things as your target market sees them and adjust your financial services marketing accordingly.  You must see with their eyes and hear with their ears.  It doesn’t matter if you think that this is the greatest time to be investing in the stock market.  If your prospects don’t think so, you’ll go broke espousing your view of reality.  It’s their view of reality that counts.

How do you know what prospects want?  Start talking to your clients. Ask them things like
• How do you think the stock market will do?
• Do you think terrorism is a major issue or something that will always be with us in the background?
• How do you fee compared to 5 or 10 years ago—more or less optimistic?
• How would you tell your children to live life differently than you did?  What opportunities or risks do they have that you did not?
• When you and your friends talk about money, what are the issues that come up again and again
• Have lower interest rates hurt or helped you?  How?

You could even use these questions in a focus group format.  Get a private room at a restaurant.  Invite five clients and they must each bring a friend.  After dinner, launch the questions.   Make sure you audio record the session and latter have it transcribed so you can read it.  Also have someone there just observing and ask later what they learned.

To learn what issues concerns your potential prospects, read what they read.  if your clients are seniors, read the AARP bulletin and Modern Maturity Magazine and listen to the radio station that they do.  Crawl inside their head so that you see through their eyes and hear through their ears.

If you want your business to stay vibrant and your financial services marketing to sizzle, you will need to make shifts over time as your prospects’ interests shift.  You must keenly listen to these shifts and avoid the insanity of thinking that the same tactics will keep working with an audience that keeps changing.

Post provided by Brokerville

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Financial Sale is an "Unsell" plus a New sale

Tuesday, October 28th, 2008

So many mutual funds have problems with poor performance, high fees, excessive tax impact; it is simple to show a prospect why the funds or managed account you offer is better. However, realize that your prospect has some allegiance to their existing holdings even if those holdings have been poor performers. The inertia to do nothing is large and for many investors, “the devil you know is better than the devil you don’t know.” Therefore, before presenting your recommendations, you must loosen their grip on their current investments. In other words, before you “sell” a new approach, you must “unsell” what your investor already owns.

Use this technical approach. When meeting a prospect, tell the prospect you want to obtain independent reports on their current funds that will show them how their funds are really doing (most investors have no clue about their performance other than “up” or “down”). Then get Morningstar reports on each fund for your next meeting. That report gives you so much detail that you can shoot bullets into almost any fund as follows:

At the next meeting, I make enough space on my desk for two piles, “see” and “hold.”I show the first Morningstar rating to the prospect. If the Morningstar Star rating is low, point out the rating. Explain to the prospect the rating system (5 great, 1 terrible). I often see people with 2 star funds. I explain the rating and explain that their fund is worse then average and ask them if we need to continue. They usually say to me “sell that dog.” I place that page in the “sell” pile. If the rating is good, you still have plenty of data to show as follows.

Point out the turnover. A Financial Analysts Journal article in 1993 calculated that 100% turnover was equal to a 1.2% fee (see Bogle on Mutual Funds by John Bogle). Additionally, high turnover creates short-term gains and taxes at ordinary income rates (rather than capital gain rates). You can then show the tax-adjusted return of the fund, which Morningstar also calculates. Even if the fund has performed well, you might ask the client “Were you aware that this fund, although it’s done okay, has caused you to lose almost 3% off of the return due to taxes each year? Would you like to see a solution (a low turnover fund that you recommend) to cut down those taxes?

Draw the prospect’s attention to the numbers on a Morningstar page showing the fund’s performance relative to its peer group and relevant index. Even though the fund may have done well, it might be a real laggard in its group and should be sold.

If you are a fee-based advisor, you will of course, disclose your fee. Then point out that by using your services, they will reduce their investment expense by using you. When you add up many funds management fee, 12b-1 fee and turnover impact, many funds are taking 3% to 5% of the account value, annually. Your fee, at say 1.25%, plus your recommended institutional fund fee of .2% is a huge bargain over what the prospect currently pays.

I have used these reports for years to gather ALL of the client’s assets because investors don’t really understand what they own and have most likely relied on some advisors unsupported verbal recommendation. Additionally, it’s likely that no advisor has ever presented compelling third-party evidence for their recommendations. By the end of the meeting, I have a stack of pages in the “sell” pile and the prospect asks me, “What should we do with this money?”

To schedule appointments

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Why Should New Clients Commit to You when you Don't Commit to Them?

Tuesday, October 28th, 2008

What do you really provide clients—a hope that maybe the mutual funds you help them select will reach their retirement goals, that maybe the UL policy you sell them will earn enough to sustain itself, that maybe the LTC company wont raise its rate? When you think about it, you offer prospects nothing firm and you expect people to give you their money. Maybe it’s surprising that we have any clients at all as we guarantee them nothing and expect them to jump into the financial pool with us, with no life vest.

Of course, you cannot make guarantees. Only the product providers can make these when they apply. But you can make promises about your own actions—something that few financial advisors do. If you don’t make promises to clients, why should they make commitments to you?

You CAN make promises about your individual performance, such as:
• To provide an in-person bi-annual review of their portfolio or policies. Show them what this means. Pull out copies of a client’s biannual review report—the copies of the Morningstar reports, the Vital Signs report on the insurance company, the Value Line Reports on their stocks, etc. and the performance reports showing the change in portfolio value against relevant benchmarks (if this sounds like too much work, you need wealthier clients with bigger accounts to justify this quality level of service).

• To provide a telephone review between the bi-annual reviews

• To return all calls in one business day. Show them your written policy. That calls received before 11 am are returned the same day and if received after 11 am, are returned the next day before 9 am. If comfortable as your policy, give your home phone number to clients.

• To teach your new client how to read their statements. How many times have clients told you they cannot read their statements. So why not end this by providing a lesson or getting software like Advent or Captool that allows you to provide a statement in plain English that’s easy to read.

• To provide all explanations in plain English

• To never talk down to a client

• To quickly admit and correct any error. You might show them an example of how you purchased IBM twice in Mrs. Jones account. You corrected the error by selling the extra shares and paying $500 for the loss that was incurred. People know that everybody makes a mistake. What they really respect are those that admit, correct and take responsibility for their mistakes. It’s okay to show you are human–but a quality human.

Imagine the trust that you could build if you approached prospects with your list of promises. Few other advisors do this. Do you think you might segregate yourself as a superior advisor if at the end of a first meeting you said, “Mr. Smith, I am unable to guarantee the performance of any investment. However, I can make you several promises,” as you hand him your laminated typed list of promises and read them one by one.

Gain New Clients at Brokerville

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How Clients Should Pay Financial Advisors

Monday, October 27th, 2008

Fees vs. Commission vs. Hourly.

Each compensation system has its champions and foes. The proponents of each option treat the options as mutually exclusive and posit that their favorite method is better than the others. These assertions are incorrect, and all of these compensation methods have their merit in different circumstances. Let’s consider the different client circumstances.

Some clients buy services, some buy products. As a securities broker, you want to always form the relationship as a financial planning relationship, gathering data in an effort to know your clients and handle all of their financial affairs and provide retirement help. Some prospects would resist this process and merely want to know “What’s a good investment now?” These people view investing not as a process and not about a relationship with a professional but merely as buying a good stock or fund at the right time. Because your business is about them (and not about you)I open the relationship with such people by selling them a product, and then later make the transition to a planning relationship after you start off the way that they preferred.  In other words, have you been rejecting potential relationships because the prospect did not want to do it “your way” by starting off with a retirement financial plan?

These product-oriented prospects are also commission-oriented—they think they should pay for a transaction, for the broker “doing” something. They don’t understand why they would pay an ongoing fee. They can’t understand that money is often made by doing nothing and that the planner adds value when he tells the client not to trade. (The older members of the profession probably know of Jesse Livermore, the famous trader, who posited “the money is made in the sittin’).” I know of a broker who had many of his clients sit with a $5,000 stock investment for 30 years. That investment grew to $500,000 in value and the only compensation he received was the original commission on the $5,000 trade. Clearly, the value he provided was by telling his clients year after year, “don’t trade.”

Other people are relationship-oriented and they desire ongoing and continuing advice and oversight. They don’t want to pay for trades which they believe give the broker an incentive to make or suggest transactions. Fee-based accounts suit these individuals just fine.

Now let’s consider the circumstances of the broker. New in the business, you are happy to take a $5,000 mutual fund ticket. This is a commission-based transaction. It usually takes us some time until we feel confident enough and have a sufficient book of business to raise our new account minimum to $100,000–often considered the threshold for fee-based accounts. Because established brokers often have minimums, small investors are the domain of newer brokers. Therefore, the new broker will likely fail if he decides  he will have a fee-based business as the new broker is dependent, in the beginning, on many small transactions for commission. The new broker will likely have many conversations with people wanting to invest under $100,000 and both parties are likely better served by a transactional relationship for the time being.

Last, we must consider the matter of the broker’s time. The value-oriented client believes that he compensates the broker for the broker’s advice, experience and wisdom of their recommendations, and that the trade is just the incidental and mechanical implementation of that advice. Fee-based compensation is consistent with this model, as the broker gets paid for the value of the relationship, i.e., the advice, experience and wisdom. However, when a broker works on a commission basis, the broker gives away these valuable assets and gets paid for the incidental and mechanical implementation, i.e., the trade. It is foolish for the broker not to get paid for the value provided and that’s why all must charge hourly fees as soon as possible. In other words, even if you are mainly a commission-based broker, you cannot prepare plans or do any analysis without getting paid. If you do, you diminish your value permanently in the client’s eyes.  So get an RIA certificate and start charging when you deliver value.

Whether your normal mode is to charge money management fees or commission, there are times when the prospect or client consumes your time. Charge them. It’s ludicrous for planners to do financial plans, invest say four to six hours and then, upon receiving the plan hear the prospect say, “I’ll think about it.” At the end of the first meeting, when you offer your advice and the client wants the benefits that a plan will provide (structure, lower taxes, higher income, higher probability of reaching financial goals, an extra vacation, a college fund for the grandchildren, etc), they must pay for it. If such planning will take six hours, the planner must say “It will take six hours of time to show you how to have these benefits. My rate is $200 an hour so if $1200 is reasonable to have the solutions to lower taxes, higher income, higher probability of reaching financial goals, an extra vacation, a college fund for the grandchildren, etc, then let’s meet again in 2 weeks to review my recommendations.”

However, to charge only hourly fees is not a good idea. You should be paid for the value you add, not the time you spend. When you charge hourly only (as do CPAs and attorneys), you are a slave of the clock. It takes 30 minutes a year to manage a portfolio that beats 80% of professional money managers (see dogsofthedow.com). If you create value, then I believe the 1% ($2500) I collect on a $250,000 account is fair compensation. Highly evolved capitalists get paid for the value they create and the key is to match how you get compensated for the value you provide.

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Will Federal Regulators Shut Your Lunch Seminars Down?

Saturday, October 25th, 2008

If you have not heard, the SEC, FINRA and some State insurance departments are after seminar promoters that target seniors. Could your whole marketing approach disappear?   While the regulators cannot ban freedom  of speech, they can make your disclosures so onerous that you will not be able to attract attendees.  For example, the State of California requests that insurance agents disclose on their invitations:

“[an]advertisement for an event where insurance products will be offered for sale may use the terms “seminar,” “class,” “informational meeting,” or substantially equivalent terms to characterize the purpose of the public gathering or event unless it adds the words “and insurance sales presentation” immediately following those terms…”

Here are tips on how to give a clean presentation so that the public is served and regulators are satisfied:

1. If you are a FINRA licensee, realize that the FINRA regulates your behavior, not just products.  So even if you give a presentation about fixed annuities, your presentation must meet the FINRA guidelines as fair and balanced and provide adequate disclosure.  You cannot say “fixed annuities are guaranteed.”  You must add “by the claims paying ability of the insurance company.”  You cannot say “You cannot lose money” because it is possible to lose money when surrender charges are subtracted. Note that the presentation materials provided you by an insurance company do not necessarily meet NASD guidelines so don’t automatically use slides, presentation materials or seminar invitations until you have had these reviewed by your broker dealer.

2. If you use visual aids (e. PowerPoint), it is not sufficient to provide the necessary disclosure as a hand-out.  The disclosures that the NASD requires must be on the slides: annuities have surrender charges and fees, they are illiquid (the NASD requires this even though it’s not accurate), there is a penalty for withdrawal prior to age 59 1/2, annuities are long term commitments.  If you miss any of these disclosures on your visuals, you risk regulatory problems for you and your broker dealer.  Do not even think about giving a presentation that has not been reviewed by your broker dealer even if securities are not mentioned.

3. Do not mention securities if you are not a FINRA licensee or registered investment advisor. What you believe may be a harmless comment like “many seniors want to get away from the volatility of mutual funds and that’s why fixed annuities are a good choice” could be construed as the solicitation to transact securities without a license. Therefore, an unregistered person should omit mention of stocks, bonds, mutual funds, variable annuities or any security.

4. Don’t be one sided.  Always mention the pros and cons of every opportunity (you’ll get more appointments that way also as the public is not interested in a one-sided sales person; they want a consultant).  For example, if you speak about immediate annuities, then explain that this would be a good choice for someone who wants to maximize their income during their lifetime and not a good choice for someone who wants to leave the maximum amount to heirs.  Also make clear that there is nothing left at the end of the annuity term. If you try and hide what you perceive as a “negative” feature, you could lose your license.

5. Know the definition of a security which includes “investment contracts”: an investment contract is defined as: [1] a contract, transaction or scheme whereby a person invests money, [2] in a common enterprise, [3] and is led to expect profits [4] solely from the efforts of the promoter or a third party.  The following items are investment contracts in most states and if you don’t have a securities license, you cannot offer them:  promissory notes, automatic teller machines, pay phones and viatical settlements.

6. Regulators look for suitability.  Are you making a presentation and using your seminar to make suitable comments and recommendations?  Bank of America was forced to refund investments in variable annuities to people age 78 and higher. To my knowledge, no state has a rule about age limits on products and you might wonder why the regulators don’t just make a rule so you don’t need to guess what is “suitable.” It’s a good idea to make the following comment at the beginning of your presentation and also supply a hand-out:
“NOTHING IN THIS PRESENTATION IS DESIGNED TO BE A RECOMMENDATION.  WE CANNOT MAKE RECOMMENDATIONS BECAUSE WE DON’T KNOW YOUR CIRCUMSTANCES AND ANY FINANCIAL TRANSACTION CAN BE RECOMMENDED ONLY BY A KNOWLEDGEABLE PROFESSIONAL WHO KNOWS AND UNDERSTANDS YOUR FINANCIAL SITUATION.”

Such a disclosure won’t get you off the hook if your presentation is still a sales pitch.

7. Don’t give a product presentation.  The best type of seminar is conceptual-ideas for saving taxes or    increasing income.  Its okay to mention product categories e.g. fixed annuities, but don’t mention product names or company names. That crosses the line into a sales pitch for a specific item which may not be suitable for many members of your audience.

8. Don’t bait and switch. Don’t get involved with a living trust seminar that’s really designed to get you in the back door to sell an annuity.  Professionals use the front door.

Think like a regulator that makes and enforces rules to protect the public and is under political pressure to do so.  Get out of your mindset of what you believe to be right.  Yes, you may think the regulators are sometimes off course but do what complies and you’ll keep your license.

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The Mistake Financial Planners Make with Life Expectancy

Friday, October 24th, 2008

Planners use the wrong numbers for life expectancy and it means that much of the planning that’s been done needs to be revised.  Planners typically consult life expectancy tables published by the IRS and most are well aware that these are the average life expectancies, in appropriate for senior citizen retirement planning.  A person reaching age 70 will live 17 years longer on average, with half dying before age 87 and half living longer.  A planner adds a few more years for a margin of error (let’s plan to age 94 Mrs. Smith) and completes their plan.  And that’s where most planners stop.

Stopping at this point presents a double jeopardy.  Financial asset management may not perform for a sufficiently long period and the client may live too long.  We could burn the client from both ends. The first danger we have already encountered with life insurance policies whose premiums did not vanish and variable investments (mutual funds, variable life, annuities, IRAs) whose balances collapsed insuring they would not last a lifetime.

We already make the second mistake with Social Security and in a minute, I will show you how to avoid this same error with your clients.  Here’s a snippet from the Social Security web site to illustrate the problem:

If we look at life expectancy statistics from the 1930s we might come to the conclusion that the Social Security program was designed in such a way that people would work for many years paying in taxes, but would not live long enough to collect benefits. Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65. But life expectancy at birth in the early decades of the 20th century was low due mainly to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.
…the majority of Americans who made it to adulthood could expect to live to 65, and those who did live to 65 could look forward to collecting benefits for many years into the future. So we can observe that for men, for example, almost 54% of the them could expect to live to age 65 if they survived to age 21, and men who attained age 65 could expect to collect Social Security benefits for almost 13 years (and the numbers are even higher for women).

In other words, Social Security’s fundamental problem is based on life expectancy estimates that are too short and we as planners have made the same error. We have consulted data that often leads us to plan for too few years of retirement.

It’s always bothered me that the life expectancy tables and the averages tell me little.  What I want to know is the probability of my client living to age 94 once the client has already reached age 70 (a table that shows life expectancy at birth is of no value).  Your client wants the same information but probably doesn’t know the proper question to ask.

Why do we go to such lengths selecting our asset classes and using the standard deviation from the appropriate time frame for our Monte Carlo simulations and then just “wing it” with life expectancy?  Why isn’t life expectancy one more factor that we input to our simulations with an average and standard deviation?  After all, life expectancy, a natural phenomenon, adheres better to a normal distribution and the underlying statistics than do investment returns.

There are some crude attempts to provide this information to investors and advisors. On Fidelity’s website, buried in their pages on annuities, is a probability-based calculator (http://personal.fidelity.com/products/annuities/income/income_intro.shtml).

However, it shows only the 25% and 50% chance of living to selected ages. It will not answer the client’s question “How can I be 90% sure that my money will outlive me?” So I created the table to help you answer that question.

I took the data from the Center for Disease Control Vital Statistics report, February 2004 and constructed a probability table just to see how surprised I might be. Using the table, I can quickly see that my client, age 70 has a 13% chance of living to age 94.  At least now (before the programmers add this to their simulation software as I recommend), I can ask Mrs. Smith, “With high comfort, your portfolio can generate $xx per year until age 94 but there’s a 13% chance you’ll live longer.  Can you do with less so that we can further decrease the probability of outliving your money?”

The client may then ask, “If I want to reduce the risk of outliving my money to 10%, how much do I need to reduce spending?”  First, I can look at my life expectancy table and see that someone age 70 has a 10% chance of living to age 95. I can then use this forecastedage in my planning software or calculator to determine how much Mrs. Smith can spend.

Yes people are living longer.  And that makes us responsible for informing clients of more accurate probabilities of outliving their money.  Financial planners can be emailed a copy of this probability table at life expectancy tables.

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Three Reasons Why CPAs Fail as Financial Advisors

Friday, October 17th, 2008

People who like to spout opinions as facts plague our industry and so we hear so much about the activities of CPAs as financial advisors. Well the truth is it ain’t happening.

In three conversations with major financial institutions that recruit CPAs to be financial advisors, approximately 90% of those CPAs do less then $50,000 gross commissions a year. I used to do that much production in 2 weeks when I was a full time financial advisor.

So what went wrong?

There are three barriers that will continue to keep CPAs low producers:

1. They don’t like to sell and they do not know what selling is. CPAs think that selling is convincing people to do something they may not want to do—like what happens on a used car lot. And that’s uncomfortable for your average introvert. The fact is, selling is the science of asking appropriately timed questions to have the prospect realize the right solutions for themselves. The master salesperson can say very little and through the mastery of powerful soul-searching questions, can have any prospect see what financial changes should be made to reach their goals. But that description of selling is many levels beyond the average interaction capability of most CPAs.

2. Accountants do not like uncertainty. For the average accountant, the IRS code provides a security blanket. The rules are black and white and knowing the rules are considered fulfillment of the position. The securities markets are fickle. Investors can lose money. There are no rules to insure an adequate return. This uncertainty is many light years from the comfort of filling in little boxes on a tax return. Additionally, financial services are a whole new intimidating body of information to be mastered. It’s like shoving a halogen flashlight down a mole’s hole—very unsettling and causes a scampering away from the light.

3. Success in financial services is about getting “messy” with people. You have to get involved in their emotions, their hopes and dreams and regrets. You have to deal with people in times of death, divorce and catastrophic illness. They may even start crying. Many CPAs would find such behavior quite unsettling as they attempt to maintain the cold indifference of a professional. Financial advising is a contact sport, better suited for a psychology major than finance major. This entire emotional arena is quite off-putting to someone originally attracted to the cloaking of eyeshades and the formidable insulation provided by oversized ledgers.

There are in fact many successful CPAs in financial services, but these are not the average practitioners. The successful practices I hear about are:

1. Organized as fee-based financial advisory practices. The CPAs have registered as RIAs and manage client finances themselves or through a 3rd party money manager. Most, if not all of their business, is form existing clients from their CPA practice.

2. Have staff dedicated to marketing. They do client seminars, they call clients and set individual appointments and they even ask for referrals.

3. Run by entrepreneurs who know that the IRS code is not black and white and fails to give guidance in serious tax matters, that there is indeed creativity in accounting. That accounting advice and financial advice are both inexact sciences based on probabilities.

4. Run by CPAs who have long been getting involved in the emotional mess of their clients’ lives.
But these accountant entrepreneurs are the minority. They have and will continue to seize the day and take market share from existing financial advisors. But these practitioners are a small minority of the CPA body.

Thus, for most CPAs and financial advisors, it might be best to form alliances and each realize that they have a particular expertise, body of knowledge and a particular comfort zone. I cannot think of a better match than a CPA who refers to his financial advisor colleague the business of financial advising and the financial advisor who refers the intricate issues of taxation and calculation to the CPA. What a beautiful marriage if they would stop being so suspicious of each other.

Most sole practitioners or small CPA firms would do well to join their local FPA chapter, meet the local advisors and find a comfortable alliance relationship to pursue.

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