DOL Fiduciary Rule Dies… Introduces a new opportunity for financial advisors.

So it’s official. The DOL Fiduciary rule is a thing of the past. For many of us in the financial industry, it consumed a lot of our time, energy and resources for the the better part of three years. You couldn’t turn anywhere in the financial news media without seeing it. Yet, its ultimate demise was rather anti-climactic. It died rather quietly compared to all of the noise it made early on.

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I had written a piece for Investment News a while back titled DOL Rule: What’s wrong with the Financial Advice Industry. The point of the piece was to share a few simple thoughts about what I felt was right and wrong about the rule. I still feel the same today as I did then. Hopefully the SEC will introduce a rule that is workable for the industry while addressing the heart of the matter: do what’s best for clients.

The Heart of the Matter

Do what is best for clients. Seems simple, right?

It’s far more complex than that. It’s the reason that the DOL rule (R.I.P.) and the newly proposed SEC rule required more than 1,000 pages each as they struggled to define “best for clients.” It appears as though that definition is fuzzy. The problem is that rule makers want something black and white,  which (in my opinion) is the reason that the “lowest/cheapest fee” argument was the easiest thing for them to attach themselves to when attempting to define “best interests.” Anybody who understands the complexity of the financial industry knows how problematic this can be.

What do Groceries Have to do with this?

I frequently shop at a local grocery store around the corner from my house. We don’t do all of our grocery shopping there, but for quick trips to get many of the basics, this is where my family turns. We do this for a couple of reasons. We happen to like some of the produce there, and the convenience of it being really close to the house (with easy parking) makes it simple.

The big regional/national grocers are an extra 10 minutes away. We do some of our big shopping trips there, but it tends to be something that is planned out in advance (considering we have two little girls that need to be factored into the equation).

Once in a great while, I’m tasked with running out late to get milk or one of the household “necessities.” The gas station on the corner tends to be my “go-to” solution. It’s a quick and easy stop with the added benefit of actually being open at 11 PM.

In each of the above examples, it wouldn’t be uncommon for me to purchase milk during those grocery trips. Our girls are turning into milk-junkies. The cost for a gallon of milk at each of those places varies dramatically. One could argue that the gallon that costs the most (from the gas station), may be the least fresh. But that doesn’t stop me from making that purchase when I need to.

As a consumer, I’m making those purchases based upon something other than price. I’m placing a value on convenience, flexibility, service, and the added benefit of buying local vs. a national chain. Sometimes I think about and look at the price I’ll be paying, but I’ve got enough experience and knowledge to understand that I’ll be paying more in exchange for things that are more important to me at that moment than dollars and cents.

The Opportunity

After the tax reform bill passed, my team created a seminar focused on some of the most recent changes affecting the financial lives of those 50 years and older. I wrote about the opportunity that it presented in a blog post titled 6 Ways to leverage tax reform in your marketing strategy. The focus of the seminar was on three recent law changes:

  1. The Social Security claiming strategy changes
  2. The DOL Fiduciary rule
  3. Tax reform bill

When the DOL rule officially became a thing of the past, I was immediately asked “well are we going to pull that from the presentation?” The question was a valid one that I had received from a number of advisors. I think the expectation was to simply remove that section and just go back to doing things the way we always had.

BUT…

The death of the DOL Fiduciary rule gives advisors an incredible opportunity. We’re provided with the opportunity to educate consumers about how the financial industry works. And while it’s a bizarre analogy, we can share with them the difference between the gas stations, the local grocers and markets, and the national chains. ALL of them have their place within the industry.

We simply need to do a better job of helping consumers arrive at their buying decisions logically, regardless of whether they are buying an investment or a gallon of milk.

Explain what a fiduciary is. Explain why your clients see value in doing business with you. Be transparent. Help them to understand a little bit about the industry and where you fit in. In a world that is going increasingly digital, I’m firmly convinced that there will always be a strong need and desire for financial professionals that want to build relationships with their clients, while helping to hold them accountable for the things that need to be done to help them reach their goals.

We’ll get a fiduciary rule someday. For now, we’ll have to rely on the financial professionals that can objectively explain how the different aspects of the financial industry impact to the very consumers it is there to serve.

 

 

 

 

Moving a Few Miles can be as Difficult as Going Cross-Country…

Target Readers:

  1. Advisors struggling with change in their business.
  2. Advisors who are friends with Mike.
  3. Advisors who work with USA Financial.

Talking Points:

  1. Once you begin, you might as well keep the momentum going.
  2. Short-cuts are seldom short-cuts.
  3. Pruning & purging are liberating.

Here’s the Skinny,

I apologize for my recent absence.  Very unexpectedly, we have moved homes.

My two oldest are in college (so mostly out of the house), which leaves just me, my wife, and our youngest.  We had been halfheartedly (read as lackadaisically) looking for a new home over the past two years.  We were in no rush.  But then my wife stumbled onto a home she really liked and we could “see” ourselves in for many years to come.

And if you know the Walters, once a decision is made, we hit the gas pedal and get to high gear as quickly as possible.

Bang – bang real estate conditions in our area had a bit to do with the speed of things, but in a nutshell, we bought a new home in 24 hours and sold our existing home (of 15 years) in under 48 hours.  Bang – bang – done.  And to make things even more interesting, the previous owners of the home we purchased were relocating to Hawaii, so we bought their furniture as well.  Then the buyers of our home expressed a desire to buy our furniture as they were relocating from Chicago.  Bang – bang – done.

Its like we were in college all over again, throw the cloths in the car, bang – bang – done.

Or so I thought.  We soon learned, the traditional moving companies were not interested in “our small job” as there was no furniture involved.  That left us to do all the packing (not something we had anticipated) ourselves.  But the good news is that we were able to prune & purge 15 years of accumulated clutter.  This cut the moving job in half, literally.

In the end…

  1. It turned out that once we determined we were moving, it would have been just as easy (or easier) to tackle a full-on move, including the furniture.  I think many businesses underestimate this truth in managing their projects.  Once you green light a project, often times the small to mid-sized project isn’t any easier than the big monster project.  The hardest part is just starting and gaining momentum.
  2. Getting rid of clutter is good for EVERYONE.  Its liberating.  It increases productivity.  Satisfaction skyrockets.  And efficiency becomes the norm.  Again, I think many businesses (and advisors/executives/staff) overlook the need to prune & purge in order to keep focused on what really matters.

In that vein, below is a link to a great article from John Jones, Digital Marketing & Communication Manager at USA Financial.  He shares great insight on using Facebook as a marketing & seminar tool.  May I suggest you focus on John’s article while thinking how you could revamp, streamline and enhance your seminar/event marketing?

Here is the article link from July 24, 2018, Investment News, “Why advisors are turning to Facebook ads to fill seminar seats”.

I’ll be back at it with regular blogs and podcasts in August.

That’s the Skinny, 

 

 

 

The Distribution Problem Part 2 – Sequence of (future) Returns

A few weeks ago, I wrote the first in a series of blogs dedicated to the distribution problem that advisors and retirees are facing today.  Part 1 focused on the clarifying the unique challenge that comes with the distribution stage of investing.  Indeed, as investors begin to start liquidating their accumulated assets as a replacement paycheck after they stop working, the math changes.  Inflation and sequence of returns are two key risks associated with this investor stage.  Today, I am going to zero in on sequence of returns risk and shed some light on how many advisors are inadvertently setting inappropriate expectations for their clients in retirement.

Just in case anyone is wondering how the math changes in the distribution stage, allow me to illustrate.  The first chart that you see shows the growth of $100,000 based on historical returns of the S&P 500 Index (total return) since the beginning of 2000 in blue.  The orange line represents that same $100,000 growing over the last 18 years – except the order of returns have been reversed.  So, although the accumulation path is drastically different, both scenario’s end up with the same exact value today.  In other words, the order of returns does not matter.

Growth of $100k 

Now, take that same scenario but pull out withdrawals of 5% per year (with a 3% cost of living adjustment).  The original order of returns (2000 thru Q2 2018) runs out of money 15 years into the hypothetical.  The reverse order of returns (Q2 2018 – 2000) has a positive balance of $124000 at the end.  The order of returns clearly matters in the distribution stage.  That’s what we mean by sequence of returns risk.

5% Distribution Chart

The primary way that many advisors attempt to mitigate this risk for their clients in the distribution stage is to take some risk off the table and diversify the portfolio.  Here’s what a 60/40 mix of the S&P 500 and the US Aggregate Bond Index would look like in the same distribution scenario:

MS Hypo 60-40 SP500 US Agg 5% Withdrawal

Clearly, the diversification benefits the client in this scenario.  Instead of running out of money 15 years into retirement, the client has a little over $37,000 left after the full 18 years.  The assets won’t last much longer, but at least this is an improvement.  The problem I have with an advisor presenting this as a solution to a client for their income needs is that it’s all based on historical returns.  Yes, I get it – no one knows how stocks will perform over the next 10-20 years, so the next best thing is to use a long historical time period as a reference point.  I don’t have any better idea than the next person as to the performance of stocks going forward.  We could continue to see significant corporate earnings growth and valuation expansion that underpin high returns over the next 10 years,  or we could see a significant downturn due to any number of reasons.

The 40% allocated to fixed income is a different story.  We do have a better understanding of bond returns going forward relative to the past 15-20 years.  Either rates will continue to stay low and bonds will earn the yield they are paying.  On the flip-side, if rates increase that will increase the yield return, but will be partially offset by the decrease in the price of bonds that investors are currently holding.  In either scenario, it’s hard to imagine that the US Aggregrate Bond Index will average the 5% annualized return over the next 18 years that it has since 2000.  A more appropriate rate of return for the 40% fixed income allocation might be 3% going forward.  If we adjust to those expectations for “future” sequence of returns risk, here’s what that impact on the portfolio looks like:

MS Hypo 60-40 SP500 Cash 5% Withdrawal

As you can see, lower interest rates going forward will make it more difficult for portfolios to last through retirement compared to previous generations.  Here’s a quick read from FS Investments that I came across outlining the difficulty of the traditional 60/40 portfolio going forward.

History is a useful guide to the future when examining potential market cycles.  However, when it comes to conservative asset classes, advisors and investors should be careful to not expect the next 20 years to look like the previous 20 years.  Next time, in the final installment of this series, I will discuss some of the prevailing distribution strategies and present a viable alternative that income oriented investors should consider.

The World We Live In: How Yelp, YouTube and other platforms can land you in hot water

Marketing 101 will teach you that third-party validation is one of the strongest trust-builders available as you seek to grow your customer/client base. This is true for every industry. Small businesses will often rely on testimonials and endorsements from satisfied customers. In fact, small business turn to social media platforms every day to help them accomplish this.

The unfortunate reality is that the financial advice industry has to be extra careful when it comes to testimonials and endorsements, even if they appear to be on the up and up and out of your control.

Just this past week, the Securities and Exchange Commission censured and fined three investment advisers for violating the testimonial rule by promoting their business on Yelp, as well as for advertising testimonials on their website and YouTube channel.

InvestmentNews broke the story earlier this week. 

Let’s dive a little deeper into how this happened (and I’d like to share in the frustration that I’m sure many of you reading this will also have).

From what I’ve gathered, these advisors hired Dr. Len Schwartz, the owner of a marketing consultancy firm Create Your Fate. The story suggests that they hired him for one of his services called “Squeaky Clean Reputation.” The irony is unbelievably laughable if it weren’t such an unfortunate conclusion. (The end result of them hiring him to improve their reputation resulted in the exact opposite). I digress.

Full disclosure: I don’t know Dr. Len Schwartz. I’ve been solicited by him a few different times on LinkedIn, but I’ve never taken the bait. For all I know he could be an incredibly upstanding professional.

With that said, there is some danger in hiring outside consultants/professionals. The liability they have for the work they do for you is FAR LESS than the liability you have. According to the story, Leonard Schwartz and his firm would reach out to the clients of the advisors and solicit testimonials, specifically on Yelp (who knows if the clients were encouraged to provide testimonials elsewhere).

According to one of the advisor’s administrative proceeding notes, Dr. Schwartz was contracted to solicit and compile and post the testimonials on various websites and YouTube.  It goes without saying that this is in direct violation of the testimonial rules. If you’re so inclined, the PDF link below is guidance from the SEC regarding the testimonial rule and social media.

im-guidance-2014-04-1

Stop

Some Guidance and a short rant (I’m sure many of you have the same frustration)

The basic rule regarding testimonials applies to investment advisor representatives. Unfortunately, it does not apply to financial professionals who are only registered representatives and/or insurance agents. This is one of the many flaws with the regulatory nature of our industry. The playing field is not level. For those of you that operate in a fiduciary capacity as investment advisors, I’m sure there is nothing more frustrating than to see other advisors websites littered with testimonials. As a marketer, it irks the heck out of me since establishing third-party credibility/validation is a foundational marketing activity.

Here’s the quick actionable guidance I’ll give you:

  1. Re-assess who you have helping you with your marketing. Evaluate whether they truly know the industry you are in and whether they truly have your best interests at heart. As somebody who builds marketing systems and programs for advisors, compliance with the rules is my number one priority. And yes, it occasionally results in us not being able to do/say some of the things I’d like to be able to say.
  2. Rid yourself of testimonials. I hate it. You hate it. But it needs to be done.
  3. Build third-party credibility in other ways. EARN yourself media opportunities. This is far easier than you may think. There is a little bit of detail regarding this here: Turning Press Into Profits
  4. If your clients are truly willing to give you a testimonial, then they are worthy of cultivating into a referral source in other ways. I call the program “From Clients to Partners.” At the core of the program is a focus on client experience and creating professional contrast. Shoot me a note if you’d like to find out more.

That’s all for now.

Be smart out there! Clients first. No shortcuts.

All the best,

Mark Mersman

 

 

June Webinar

If you missed my June webinar, I’ve posted it below. If you prefer to read what I discussed, keep scrolling. For more of my webinar series, join me every third Tuesday of the month and feel free to reach out to me with questions. I enjoy hearing from you!

 

This is not your typical market commentary.  There are plenty of resources out there with all of your asset class performance and economic and market indicators.  This update will normally focus on three segments.  My goal is to highlight a couple of significant overarching themes from all that data in more of an educational format.  I’ll also hit on some of the challenges that every day investors and advisors are facing from a practical standpoint.  And then finally, we’ll wrap up with some things on the horizon to keep an eye on.

Market Highlights: Fed Focus

Many of you may be aware that the Federal Reserve has what’s known as a dual mandate from Congress.  What does that actually mean?  Since 1977, the FOMC, or Federal Open Market Committee, which is the committee within the Federal Reserve that determines US monetary policy and sets the quarterly fed funds rate, has been tasked with maintaining maximum sustainable employment and stable prices.  That committee has lightly indicated that this means a target of 4.5% unemployment rate and 2% rate of inflation.

 “In 1977, Congress amended the Federal Reserve Act, directing the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

Chicago Fed Dual Mandate Bullseye

Source: https://www.chicagofed.org/research/dual-mandate/dual-mandate; Inflation is measured by the core PCE price index.

This is a diagram from the Chicago Fed showing that dual mandate.  So why am I starting with this exciting topic of the Fed?  Well, we’ve had a regime change this year at the Fed in both person and focus.  Jay Powell is the first Fed Chair in over a decade to have to focus on the inflation side of the dual mandate.  With unemployment near 4%, they can check that one off.  But I would say they need to update this diagram slightly, with nearly all inflation measures now firmly in the 2-2.5% range.  The market will certainly be watching if Powell and team can normalize interest rates without removing too much oxygen from this economy.

Market Outlook

Ok, real quick on what’s been going on in the market this year.  Any of you that have worked with my firm, USA Financial, know that we are not big on market predictions.  It’s one of those things you can’t control and yet there’s so much focus on it.  We prefer to look unemotionally at the data as it comes in.  But I will say this – for the last six years price growth has increased faster than earnings growth.  In other words, for the last half dozen years P has grown faster than E.  So it’s no wonder we entered this year with fairly high valuations.  This year has the possibility of snapping that streak.  According to Factset, earning projections for the full year are roughly 19%.  In fact, first quarter earning with nearly all companies in the S&P 500 reporting, actual earnings growth came in at 24.5%.  We are almost half way thru the year with the market up a modest 2 percent.  If the second half of the year mirrors the first half in terms of earnings growth and returns – we would finally get some significant valuation compression and I think that would be very healthy for this bull market to continue on.

Earnings Scorecard: For Q1 2018 (with 93% of the companies in the S&P 500 reporting actual results for the quarter), 78% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise. If 78% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008

 Earnings Growth: For Q1 2018, the blended earnings growth rate for the S&P 500 is 24.5%. If 24.5% is the actual growth rate for the quarter, it will mark the highest earnings growth since Q3 2010 (34.0%).

Source: Factset

Nitty Gritty

For this month’s Nitty Gritty, I want to explore some stock market idioms.  These are the popular sayings that get tossed around in conversations as quasi-investing advice.  You’ve likely heard of them:

  • January Effect: Meaning that stocks generally have above average returns in the first month of the year
  • Dogs of the Dow: Basically buying highest dividend yields in the Dow, based on the premise that those stocks are near their business cycle bottom and should rebound.
  • Santa Claus Rally: Which is self explanatory…
  • Super Bowl Indicator: I’m not sure why this one even got started, other than the fact that it’s actually been correct 80% of the time over the last 50 years. In short, it states that if the AFC wins the Superbowl we should expect a down market. If the NFC wins the market should go up.  Statisticians call this type of observation spurious correlation – in other words, correlation alone does not indicate causality.  This is something that we should be careful with in the financial industry.  There can be a tendency to discover some correlation in the past and use that as an investment strategy in the future, when in reality there was never any logical basis for that correlation other than complete random luck.
  • Sell in May and go away: Given the time of year, I’m going to take a deeper look at the “sell in May and go away” notion.  It’s basically the idea that you’d be better off staying on the sidelines from May through October and invest back into the market the other six months of the year.  So what does the data say?

Annualized price returns of S&P 500 (not including reinvestment of dividends), thru April 30, 2018:

Sell in May and go away - chart

I ran the annualized returns of the 2 six-month periods over short, mid, and long term time periods.  And you can see, although the 5-year comparison is close, there is a consistent out-performance of the November thru April time-frame compared to May thru October.

So, does this mean that “Sell in May” has validity?  Well, I’m willing to concede that the data indicates a performance edge to the winter months.  And in fact, I was quite surprised how much of an edge there has been over the last 10 and 30-year periods.  But before you go cashing in your chips right now, there are a couple things to consider:

  • One, all the summer periods still have positive returns. And so, while going to cash would reduce your volatility, you’d also be giving up gains on average.
  • Second, and I think this is the biggest issue with Sell in May, is investor behavior comes into play. Any strategy can go through a long stretch where it doesn’t appear to be working.  In fact, for the last 6 years Sell in May hasn’t worked.  You’d have to go all the way back to 2011 where it worked to your advantage to be completely out of the market.

Making significant portfolio shifts and trying to time the market every 6-months opens the door to negative behavioral alpha (in other words, making emotional decisions that negatively impact your long-term plan).  This line of thinking goes for any strategy that you may be considering.  Even if the numbers look good on paper, how does that translate to practical, real world implementation?  When in doubt, simplicity trumps complexity in most situations.

On the Horizon

  • If you haven’t explored my other posts yet, I’ve been trying to ramp up the content recently.  Those posts have a similar feel to these webinar updates, but with a much wider range of financial topics.
  • Upcoming things to keep an eye on: employment to continue to stay below 4%? Wage growth key. Summit held with North Korea June 12 in Singapore.  Regardless of anyone’s political views, it’s quite a turn of events over the last year considering last summer North Korea was shooting missiles over Japan and just this January the two leaders were comparing the size of their respective nuclear buttons on social media.

Alright, that’s all for this month.  Thanks for being here and make it a great day!

Growing Client Base? Time to Segment… Here’s How

At some point in your career, if you’ve been doing things right, you will run out of time.  Did you catch that?  You can actually run “out” of time by doing all the right things.  These are things we all focus on daily – marketing, referral generation, asset gathering, running a business, etc.  While many of us are very good at doing these things, and doing them the “right” way, we eventually run into a problem:  We’ve had success, we’ve brought on many new clients.  Now, there are so many families that we serve, that delivering the same level of service to each of them becomes impossible, and actually is something you shouldn’t be doing.

Now there is a big difference between “treating people right” and “doing the right thing” versus delivering the same level of service for everyone.  You can deliver a different client experience or service model for every one of your clients and still treat them right, and do the right thing for them.  The problem (or opportunity as I see it) is that you cannot afford to deliver the same client experience everyone.  Your A clients and some B clients need to be treated to a first class client experience.  It will be impossible and not even close to economical to deliver that same experience to ALL clients.

The first thing you need to do is figure out where your clients stand from a revenue standpoint.  Run a report of every household you work with and determine what the annual” revenue from each household is worth.  For advisors using commissionable products as part of a financial plan, you need to assess what theup front commission is worth on an annual basis.  The easy way to look at it is to divide the commission by a number of years and “amortize” it out.  For instance, if your client holds an annuity with a 10 year surrender charge, and you earned a $30,000 commission on the placement, you could stretch that out over 10 years and figure that it is worth $3,000 of annual revenue to your firm.  However you do it, remain consistent for all households in how you assess their annual worth.

Once you have all of the households and revenue numbers figured out, organize them from the top down, with the client that generates the most annual revenue at the top.  From there, you need to divide the book of business into four chunks like this:

A – Top 20% of revenue

B – Next 30% of revenue

C – Next 30% of revenue

D – Bottom 20% of revenue

You then need to assign each revenue chunk with a label.  To keep it easy, I’ll go with A, B, C, and D (as seen above).  This exercise alone will be quite eye opening.  I actually go through this process regularly with successful advisors across the country, and put the analysis together for them.  The first time they see how many clients make up these different revenue chunks, they are shocked.  The 80/20 rule holds true in so many things, especially this.

Next, you will want to go through and “upgrade” a few of your clients to first class.  Here’s what I mean by that:  Say there are a few C or D clients that you have worked with for years.  They don’t represent much revenue themselves, but maybe they continue to send you a number of quality referrals every year.  That person, in my opinion, has just upgraded themselves to first class and need to be treated like an A client.  Also, that means there could be a couple of A or B clients who represent great revenue to the firm, but you cannot stand them.  You wouldn’t want to clone them, and you avoid ever having them around your most special clients.  Those might need to get “downgraded.”  Either way, go through the process of assigning a true label to every client in your book.

Now  you need to create a different client experience and service model for each segment.  The A and most B clients should have the most elevated client experience possible.  Here is an example of how it could look:

“A” Clients – Quarterly review meetings, annual charitable giving meeting, joint meetings with a tax and/or estate planning professional, private social lunch 2x per year, inclusion in partnership program, invitations to ongoing intimate social events, preferred parking at office, invitation to annual client appreciation event, etc.

“B” Clients – Bi-annual review meetings, annual charitable giving meeting,  oint meeting with a tax professional, private social lunch 1x per year, inclusion in partnership program, invitations to ongoing intimate social events, invitation to annual client appreciation event, etc.

“C” Clients – Annual review meetings, 15-minute phone call with a tax professional, invitations to in-office lunch-n-learn events, invitation to annual client appreciation event, etc.

“D” Clients – Annual review meetings, invitations to in-office lunch-n-learn events, invitation to annual client appreciation event, etc.

It is not uncommon for advisors to ask a junior or associate advisor to handle the delivery of the client experience to C and D clients.  Bottom line is this, YOU, the rainmaker, cannot afford to overspend your time with those clients.  Take good care of them, treat them well, but spend more time with the A’s and B’s.  Make their experience first class and try to attract more families just like them.

 

Direct Mail Marketing & Undeliverable Rates: What to Expect

There’s nothing more frustrating than wasted marketing dollars. It’s one thing if the message isn’t effective. It’s another thing if it reaches the wrong audience. It’s an entirely different issue if it never even makes it to anybody at all.

I’m referring to the dreaded undeliverable mail. Last year alone, our firm sent out more than 5 million pieces of direct mail to promote events. The post office likes us, what can I say. The lion’s share of that mail is assisting independent financial advisors promote educational events. However, WHAT is being promoted has no bearing on undeliverability rates.

We use a number of different types of mail to promote events, including postcards, tri-fold and bi-fold pieces, as well as envelope style mailings. What we mail usually determines whether we will send it first-class or standard-class with the USPS. When we use small postcards, we’ll typically mail them using first-class postage since the price difference is nominal for that size mailing.

We do this marketing as a service for the financial professionals with whom we work. It’s a means to an end for us. At least once a month, I’m sent a note expressing frustration with somebody receiving a bunch of pieces of returned mail. I get the frustration. The most recent note I received included a picture of the stack of returned mail with the note “that’s a lot of money being thrown in the toilet.”

mailers

Here were the stats centered around this mailing and then we’ll dive into what should be expected:

There were approximately 9,000 postcards mailed. There were 144 pieces of mail returned as undeliverable. That represents a 1.6% undeliverable rate. I don’t love it any more than the next guy, but here’s what the industry gurus will say (and then I’ll share our experience):

Data provider infoUSA says:

InfoUSA

Online postcard print company PostcardMania says:

PostcardMania.PNG

Mailing Systems Technology quoted some USPS stats and stated:

Mailing Systems technology.PNG

Our data historically has shown anywhere from a .5% – 2% undeliverable rate. We run every list through the NCOA (National Change of Address) directory with the USPS AND we purchase a new list for EVERY mailing we conduct. The other thing to point out is this: Many novice marketers will say something like, “I’ve never had this happen before.” There’s a good chance that your marketing efforts in the past didn’t mail using first-class postage. Keep in mind that the USPS isn’t obligated to return undeliverable mail to the sender.

While I understand the frustration, before you go on a rant at your marketing firm, lead list company, or mail house, make sure you know the facts about undeliverable rates. With that said, there are certainly plenty of list resellers that have “old” data. Do your homework in finding reputable data providers.

 

All the best,

Mark

The Distribution Problem Part 1 – Clarifying the Unique Challenge of the Descent

During the Q&A session of the recent June market update, I answered an open-ended question on fixed income.  Part of my answer centered around the distribution challenge that advisors and retirees are facing today.  Due to the complexities and nuances of this topic, I am going to break this up into a three-part series.

Today, my goal is to set the stage for the challenge that retirees are facing in the distribution phase.  Part two will then take a deeper dive into some of the risks pertaining specifically to distribution and shed some light on the dangers of how some advisors are setting expectations for income in retirement.  Finally, part three will present an alternative way to approach the challenge of income distribution compared to the prevailing strategies used by many advisors and investors currently.

When most people think about investing and their personal financial plan, they tend to view it as a fairly linear progression.  They take a snap shot of where they are today, financially speaking, and project what their goals are 20-30 years down the road.  Some investors will break that path up into two distinct phases – the accumulation phase and the distribution phase.  Regardless if they view their financial life as one long continuum or two distinct phases, most investors assume that the risks in investing remain constant and similar no matter where they are on the path.

Our approach to investing is quite different.  We view investing more like a mountain trek that has three distinct phases, each with its own unique challenges and risks – Ascent (Accumulation), Acclimate (Risk Mitigation), and Descent (Distribution).

During the Ascent phase, the investor is accumulating assets during their earning years.  The primary risk inherent in this phase is volatility.  Volatility in and of itself is not a bad thing despite what media often portrays.  In fact, without a certain level of volatility it would be impossible to earn more than the risk-free rate that cash or treasuries are paying over the long term.  The key is to appropriately gauge the investor’s appetite and ability to handle volatility and mirror that same level of risk within their portfolio.

Once the investor nears retirement, they enter the Acclimate phase.  The primary risk at this point during the investor trek is loss.  This is not to be confused with volatility.  Absolute loss, or drawdown, at this stage can have a permanent negative effect on an investor’s financial goals.  One reason is that they are much closer to the point in time that they will begin to take distributions from their accumulated assets to live on during retirement.  Related to that issue, negative investor behavior (i.e. panic selling after losses) becomes more acute.

The final phase of the trek is the Descent, otherwise known as the distribution phase where investors begin to convert their accumulated assets into a replacement paycheck after they stop working.  This is the phase that I will focus on for the remainder of this blog post and the two follow-up posts.  The primary risk that investors face here is longevity – at its core, this is the risk of running out of money.

Before I move on, our friends at Horizon Investments recently issued a whitepaper detailing this redefinition of risk based on the investor stage.  I would encourage you to check that out if you are interested in more information on the rationale for this investment philosophy.  Here is a visual of what we’ve discussed so far:Mountain

Longevity as a risk can be a bit abstract to think about.  I find it easier to grasp when breaking it down into the two core risk components:

  • Sequence of returns risk – experiencing early losses in the distribution phase increases the probability of running out of money due to liquidating assets that are down in value, thereby locking in those losses permanently.
  • Inflation – the loss of purchasing power over time.

The difficulty here is that these are competing risks.  On the one hand, you need conservative assets within your portfolio to mitigate sequence of returns risk.  On the other, equities are a better hedge against inflation than fixed income over time.

Hopefully that clarifies for you the unique challenge that investors are facing in retirement.  Over the course of the next couple weeks I will shed some light on how advisors are attempting to solve this distribution riddle and also present a viable alternative.

How Advisors Get Left Behind (hint: it’s only by choice)

Target Readers:

  1. Advisors seeking growth and direction.
  2. Advisors struggling to adapt and change as the industry evolves.
  3. Advisors looking to increase profits and/or the value of their practice.

Talking Points:

  1. How has your business changed over the last 10 years?
  2. Do you wish to retire or transition, but your practice valuation is stifled?
  3. Are you continuing to nurture your business successfully?

Here’s the Skinny,

We’ve all heard before the statement, “the only constant is change”…

Take a moment to reflect upon your business 5 years ago, even 10 years ago. Was it exactly as it is today? Or is it dramatically different?

Many in our industry started out as agents in the insurance/annuity business or as registered reps in the securities business. Yet today, a primary focus is more often directed toward assets under management. But even that segment has evolved.

Years ago, many advisors were managing their own portfolios for investors, Rep as PM (portfolio manager) is the common terminology today. Yet, now, the Rep as PM model is dwindling as advisors embrace the scalability of using third-party asset managers and TAMP programs like USA Financial Exchange. Indirectly, this new model has solved two crucial problems for advisors…

  1. Asset gathering (not asset managing) is the revenue lifeblood of a retail practice.  The more time an advisor spends managing money, the less time they spend growing the practice and attracting new assets. Therefore, profits often go up in direct proportion to reduction in directly managing assets.
  2. Rep as PM and/or advisor managed portfolios, stifle the value of an advisor’s practice. They choke out scalability, which can crush the valuation of a practice (no buyer wants to buy “a job,” they want to buy “a business,” and it’s impossible to climb inside the head of the advisor managing the money), but the advisor focused on gathering assets can turnover their systems and processes along with the scalability of third-part asset management. Therefore increasing the valuation of the practice.

The point is, to use another true cliché, “if you aren’t growing you are dying.”

If you do not adapt and remain agile, eventually the marketplace may diminish your worth to the point of disaster. I am not a close follower of Sears, but it did not surprise me to see hundreds of stores closing. (Sears previously announced 166 stores to close this year. Now they’ve added 68 more to the list. There are less than half the Sears stores today as there were just 5 years ago.)

Strictly from my own consumer perspective, they do not appear to have kept pace with digital or online sales, their storefronts have fallen out of favor and seem out of touch with today’s shopper, and the few times I’ve wandered into a Sears store they struck me as being almost vacant on product and in a state of disrepair. At some point simple math will grind such a business to a halt.

Similarly, in our industry, think of the advisors who have not evolved. Conducting their business as if it’s from the 1980’s or 1990’s. Trying to live on commissionable products alone. It’s an uphill battle and we’ve all seen their decline. Business models need to adapt and evolve as the business changes… Or you end up feeling like Sears in an Amazon world.

So how do you stay ahead? Keeping your business on the cutting edge?

  1. You continually enhance your offerings and services, making yourself indispensable to the investor/client.
  2. You continually strengthen the relationship you maintain with the top 50% of your clients, targeting replication of the top 20% (not the bottom 80%).
  3. You automate and utilize technology to reduce the mundane and increase the culture, value, and experience of your staff.
  4. You monitor trends for the future valuation of your practice, which almost always will parallel the future appeal to new investors and clients.
  5. You run an “experience-based” business model that delivers an elite client experience. Not a discounted fee, or diminishing returns model.
  6. You affiliate with institutions that help you accomplish everything listed above.

Things are not the same…  Thank God…  Are you ready?

Everything can (and will) always get better and better with time, as long as you continue to nurture your business as if it is a loved family member. It’s a mindset. And the beautiful option is that you get to choose… Adapt and grow rather than decay and decline.

That’s the Skinny,