Help For Advisers That Want to Grow

Practice Management University from Kaleido aims to teach advisories to break through growth barriers. 

Kaleido, a practice growth agency in the independent advisory firm space, has created Practice Management University. The program says it will walk financial advisers, step by step, through the process of transforming a practice into a business.

The program’s target audience is emerging firms with less than $1 million in revenue, as they are in the best position for growth in the current industry environment, according to the firm’s proprietary Kaleido Scope Business Assessment Tool.

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A Growth Game Plan and Growth Syllabus give firms a customized action plan and learning tools. Firms are assigned a professional business trainer—the firm’s teacher during the process—which focuses on building the foundation of a business instead of spending time and resources on moves that may be superfluous or expensive.

A common problem is mistakenly focusing on the next big idea or using a program delivered by an institution with an ulterior motive, Kaleido contends. Such programs chase trends instead of teaching the fundamentals.

Typically, advisory firms on a growth track will start to innovate in flashy ways: creating additional business development positions with flashy titles, hiring the wrong people or adding additional service lines. Kaleido counsels firms to focus on the fundamentals of building their business, rather than adding additional expenses that erode the bottom line.

According to Kaleido, Practice Management University shares resources and knowledge with firms that want to achieve their greatest growth potential by building a business the way a master’s of business administration (MBA) would build it.

“Growth isn’t sexy. It’s systematic,” says Kristen Luke, co-founder at Kaleido. The university programs give advisers the tools to grow a business in a methodical, organized way, she says, individually teaching advisory firms, especially those with under $1 million in revenue that have the desire to grow. “Focusing on proven business basics while an advisory firm is in early growth stages allows owners to avoid the problems larger firms have encountered in their growth process,” Luke says.

According to Angie Herbers, co-founder at Kaleido, the firm has done research on advisory firms and gathered a wealth of data from its Kaleido Scope Business Assessment tool over the past 15 years. “We have discovered that many early-stage advisory firms currently struggle to identify and implement some of the most basic components required to build a successful business,” Herbers says.

More information about Practice Management University is on Kaleido’s website

Beware the Retirement ‘Red Zone’

Prudential Investments DCIO executive Michael Rosenberg warns investors not to leave their portfolios exposed to “bad luck” in the five or 10 years before retirement. 

Suffering an extreme bear market event near the onset of retirement can seriously derail an individual’s ability to maintain financial security late into life—even if they make solid saving and investment decisions up to that point.

In fact, according to Michael Rosenberg, head of investment-only defined contribution business for Prudential Investments, the market conditions that define the decade before an individual retires can dramatically alter what their life will be like once they’re in retirement. He points to a recent Prudential analysis showing the value of a portfolio can be depleted roughly twice as fast when an investor suffers a 2008-type bear market event immediately before enacting a predefined withdrawal plan.

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“Those familiar with the rules of football will immediately understand the Red Zone terminology,” Rosenberg tells PLANADVISER. “It’s the time period starting approximately 10 years before retirement when one needs to shift the thinking from the long-term accumulation and start thinking deeply about not just withdrawals and spending, but also about the big risks you could face.”

Rosenberg  explains that just a few years of negative returns right before or after a person starts taking distributions can quickly erode decades of retirement savings, “often to the point of being unable to generate enough income to last a lifetime.” He says the Red Zone terminology is helpful here because, in football, the Red Zone represents the 20 yards closest to the end line. It’s the area where teams best have a chance to capitalize on their hard work (i.e., score a touchdown after a difficult drive), but where they’re also prone to take more risks and where the defense has a tighter grip on the field. In football and in retirement, it takes a strong strategy to score from the Red Zone.  

“For young people just beginning to save for retirement, the biggest risk is under-investing in more aggressive assets such as equities,” he adds. ”But the greatest risk for those nearing retirement is an overly aggressive allocation with an abundance of equity in their portfolio.”

NEXT: Hard to exaggerate importance of Red Zone thinking 

In Prudential’s theoretical examples, losses just prior to or early in retirement can completely undermine a person’s retirement strategy—even a strategy that would otherwise succeed without factoring in the bear market event.

Prudential considers a pair of investors, each starting with $1,000,000 in savings and planning withdrawals of approximately $50,000 a year, adjusted for 3% inflation. Even in cases where both portfolios result in a 6.3% average return, simply playing with the order of the sequence of returns will have a huge impact on ending wealth in the simulation.

As Prudential explains, “even though our two investors experience the same average returns over a 30-year retirement period, the outcomes couldn’t be more different due to the sequence of those returns. Investor A’s negative returns early on deplete their savings after 15 years. Investor B’s positive returns have extended their savings beyond 30 years despite the same average annual net return. While a sufficient average annual return is important, the order of those returns may significantly impact results and ultimately an investor’s ability to achieve their retirement goals.”

Rosenberg suggests retirement investors should take another lesson from football strategy here—in that all skilled teams will field a specialized “Red Zone offense” as they get closer to the goal line. The idea is to take measured risks and ensure no unnecessary mistakes, all in order to maximize the chances of scoring successfully.   

“With the retirement portfolio, this means things like turning away from certain equity classes that are higher-risk, higher-reward as the portfolio approaches the retirement date,” Rosenberg says. “Risk mitigation is far more advanced of a conversation today than simply looking at the stock-bond mix.”

NEXT: What it means for the portfolio 

Rosenberg explains that Prudential has in recent years responded to this style of Red Zone thinking by folding new asset classes into its prepackaged products—for example, adding private equity and real estate holdings to the target-date fund (TDF) series—and by refining the shape of its glide path-dependent products.

“If you look at our glide path for the TDF product line, you’ll see it has one of the most dramatic drop-offs away from equities, right around the Red Zone period we’re discussing,” Rosenberg says. “That’s how we are putting this thinking to market. We believe that drastically reducing equity exposure and allocating more to fixed income during the 10 years before and after retirement can result in better outcomes.”

Prudential’s research also highlights the fact that bonds “are much less volatile than stocks and, in fact, they have not had a decline of 10% or more in a calendar year since 1926.” Stocks, on the other hand, have experienced declines of that magnitude about once every eight years.

As Rosenberg admits, this style of thinking is not going to apply to those people who are hoping to back-load the retirement savings effort—saving more and investing more aggressively later in life to make up for lost time. Still, using bonds as a de-risking strategy during the 2008 to 2009 stock market correction would have preserved a significant percentage of wealth for pretty much everyone, not just those in or approaching retirement. 

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