In Practice June 30, 2016

Learning from Advisers with Fast-Growing Practices

AssetMark is out with a new analysis of advisory practices with AUM growing 20% or more each year.
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In years past, AssetMark has held informal strategy discussion meetings with fast-growing advisers; but starting in 2015, the firm decided to schedule official meetings with top-performing advisers, to enable them to share their ideas on how best to drive practice growth. 

According to Matt Matrisian, senior vice president, practice management and strategic initiatives, a wealth of ideas came out of 16 regional meetings with advisers whose practices enjoy annual asset under management (AUM) growth of 20% or more, culminating with a larger group session at the end of the year-long study.

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The resulting report, “Leading Firms Leverage Each Other to Accelerate Growth,” outlines a number of procedures leading advisers use, such as documented, consistent approaches to their business and better use of staff and technology. They also have clearly defined value propositions.

Other advisers can learn from these philosophies, particularly at a time when advisers are facing “a number of new and unique challenges today,” Matrisian tells PLANADVISER. “For instance, technological advances, including robo-advising solutions, are putting competitive pressures on advisers. The recent Department of Labor rule, which implements a rigorous fiduciary standard for advisers making recommendations on retirement accounts, is another challenge.”

The advisers said their top three concerns are, first, a lack of focus on driving firm value, cited by 52%. That was followed by the inability to grow clients, AUM and revenue (49%) and the inability to change client demographics (32%).

The study revealed that the most successful advisers have documented procedures that are performed consistently, a formal fee schedule that is rationally aligned with services rendered, and better use of staff and technology. As the report puts it, “Across the board, every adviser in this group was a strong advocate of simple steps such as going paperless or for the implementation of comprehensive customer relationship management (CRM), risk analysis, portfolio management, marketing and client-communication tools. They were more likely to have staff to leverage in managing greater workloads and clearly defined value propositions.

“Although the benefits of building a strategic plan to document an overall business strategy might be obvious,” AssetMark continues, “the reality is that a lot of firms do not have a well-thought-out strategic plan. Although the study series advisers all defined themselves as forward thinkers, they more often than not relied on organic planning, meaning taking on new opportunities as they came.”

AssetMark recommends that advisory practices have a five-year plan and revisit, and revise, their goals every quarter.

NEXT: The “DISC” approach to human capital management

AssetMark has developed an assessment tool to help management determine the strengths of each team member. Called “DISC,” it stands for: Dominence (how a person responds to problems and challenges), Influence (how a person influences others to his or her point of view), Steadiness (how a person responds to the pace of the environment) and Compliance (how a person responds to rules and procedures set by others).

Depending on which one of these four behavioral styles matches an individual worker, this will determine which of eight management styles they may best respond to. A Conductor, for instance, is described as “a change agent who is direct, results-oriented, competitive, confrontational, with a sense of urgency.” An Analyzer, on the other hand, is “critical listener who is precise, detailed, accurate, concerned with quality and an attention to detail.” As AssetMark's report says, “Professionals often use DISC to decrease conflict and promote harmony within their team through effective communication. When team members understand how to adapt communication styles to properly address the individuals around them, things run much more smoothly. By applying knowledge of DISC characteristics to their staff, an advisers can leverage their team’s individual strengths.” It can also help an adviser to improve relations with their clients.

AssetMark said that by communicating with each other, advisers in the study experienced 23% higher AUM than the study’s control group, along with 13% higher fees and 7% higher operating profit.

“Given the success of the 2015 adviser growth study group and expanded interest by our advisers, our plan is to develop regionally based study groups throughout the country in 2016 and beyond,” Matrisian says.

AssetMark’s full report can be viewed here.

Data & Research June 29, 2016

Fellow of Society of Actuaries Suggests New Retirement Spending Rule

Evan Inglis says his new rule recognizes the lower level of returns we are likely to experience in coming years due to low interest rates and other factors such as demographic trends.
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Evan Inglis, a fellow of the Society of Actuaries, and senior vice president in the Institutional Solutions group at Nuveen Asset Management, based in Chicago, says a 3% spending rule, rather than the traditional 4% rule, recognizes the lower level of returns we are likely to experience in coming years due to low interest rates and other factors such as demographic trends.

However, after advising different people and thinking about his own retirement, Inglis tells PLANSPONSOR he realized that as people got older, the ability to spend without worrying about depleting savings increases. So, in an essay written for the Society of Actuaries, he puts forth the “feel-free” spending rule—simply divide the retiree’s age by 20. For someone who is 70 years old, it’s safe to spend 3.5% (70/20 = 3.5) of her savings.

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The rule would also work for someone, for example, at age 50 to see if they have enough savings to afford to retire.

“The ‘feel-free’ rule is simple and adaptable to a wide range of situations,” Inglis says. “People can adapt it to their comfort level or levels of return.” A table in his essay shows how with “feel-free” spending, retirees will be comfortable with earnings expected in different portfolio allocation scenarios, but the rate of spending is not so much lower than earnings that people are constraining their spending too much.

“The idea is that this level of spending should be appropriate for a wide range of portfolios, from 40% to 70% in equities. People can take more risk and get a higher level of return, but because they are taking more risk, they want to be conservative in spending relative to return. If they have a conservative portfolio, earnings are more predictable, so they can spend closer to the level of earnings they are anticipating,” he says.

Inglis notes that the impact of volatility will lower the level of earnings, so those with higher-risk portfolios may have to adjust their spending down. People should also consider investment management costs in deciding whether they need to bring their spending down.

NEXT: A range of spending levels

At the other end of the spectrum, in his essay, Inglis says retirees can divide their age by 10 to get what he calls the “no more” level of spending. “If one regularly spends a percentage of their savings that is close to their age divided by 10 … then their available spending will almost certainly drop significantly over the years, especially after inflation is considered. Except for special circumstances like a large medical expense or one-time help for the kids, one should not plan to spend at that level,” the essay says.

Inglis says inbetween the two levels of spending, retirees need to think about a combination of annuity income and spending from savings. “Because the ‘feel-free’ level is pretty conservative, people will be able to feel confident in spending without adding an annuity, but above that, they will want annuity income as part of their retirement income solution,” he states.

But, Inglis concedes that if a person age 65 wants to spend more than his “feel-free” level of 3.25%, he can try 3.5% to 4% while being careful if there is a bad investment year or two. But, above that, the person needs to consider an annuity.

According to Inglis, the key thing for people is to understand is that returns will be lower in the future; they have still not fully adjusted their mindset to the likely level of returns in the future compared to what they are used to from the past. “Be conservative when thinking about retirement spending. The ‘feel-free’ rule should allow a comfortable, reasonable level of spending without retirees doing a lot of analysis and planning, which I see most people don’t have the inclination or expertise to do,” he concludes.

Inglis’ essay is at https://www.soa.org/Library/Essays/2016/diverse-risk/2016-diverse-risks-essay-inglis.pdf.

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