by Cynthia Harrington
Innovation among financial advisory firms is often in response to a client need or demand. But the competitive landscape also encourages value-added services.
"Clearly, firms can’t be doing the same old thing in this market," said Phyllis Bernstein, CPA, PFS, of Phyllis Bernstein Consulting Inc., in New York.
As an example, three firms have responded to their clients’ calls for innovation.
Barnes Investment Advisory, in Phoenix, has developed estate-planning booklets they can’t keep in stock. Tanager Financial Services, of Waltham, Mass., solved the perennial problem of optimal allocation of assets between taxable and tax deferred accounts.
Arkansas Financial Group, of Little Rock, Ark., went into business with two local competitors to establish a company to serve less wealthy investors.
"For years, we’d get two or three calls a week from investors wanting the service of a fee-only planner whom we just couldn’t serve," explained Cynthia L. Conger, CFP, CPA, PFS, The Arkansas Financial Group. "Given our cost structure, we couldn’t work with smaller clients."
That client need was equally felt by the two other planning firms in Little Rock. Together they invested in a new company, Financial Decisions Institute Inc. It has no minimum account size and a maximum of $250,000. Clients can get a financial plan, can contract to have the new firm manage their assets, or can simply get their questions answered in a one-hour consultation for $75. "The goal is to have consistent products for lots of clients," explained Conger. "The service is affordable. A plan is $300 and we charge 75 basis points if they contract for asset management."
Alvin Rogers, MBA, CFP, runs FDI. "Our clients are very excited to find a place where they can pay a fee and get an independent advisor," said Rogers.
Rogers told the story of the recent college computer science graduate with a new job, large salary and crushing school loans. In short order, the client had paid down the debts, had a financial cushion in savings, and was maximizing contributions to her 401(k). Another FDI client is a 55-year-old attorney who wanted to know if she could retire. She had done a good job of saving, but now needed a plan for spending. "She was really, really, excited about how we set up her retirement, and she has now come back as an asset management client," he said.
Arkansas Financial had a tool at their disposal that eased the startup. They used parts of their planning software, which was developed by Conger’s partner, Rick Adkins, and published through Practitioners Publishing Co. The result is a four-page financial plan, compared to the 40 to 50 page plan that is used for their company’s high-net-worth clients. "The new company is becoming self sustaining after just two years," said Conger.
Practitioners Publishing Co. and Accounting Today are part of the Thomson Corp.
Demand for their "Answers" booklet is so high that it has surprised Stephen Barnes, CFA, CFP, of Barnes Investment Advisory. Barnes’ partner Kathie Barnes, CFP, developed the booklet to supplement a speech that she was asked to give at the local senior citizens center. Kathie, who also has a graduate degree in psychology, came to the groups’ attention after a talk about estate planning on CNBC.
But while most estate information organizers collect dust on clients’ shelves, Barnes’ clients are filling out the daunting 15 pages of information requested by "Answers." Perhaps it’s because the full title of the booklets is "Answers for the Ones You Love." "Our firm is really relationship-focused, not rate-of-return focused," explained Barnes. "We think these things are important and we’re thinking about being there for all our clients’ needs."
The booklet catalogs every aspect of a financial life, including current expenses and income sources such as loans and social security. It also details wishes for the memorial service, the telephone numbers of all professional contacts and the record of any military history. They’ve distributed over 80 books, including two and three at a time to clients and prospective clients who ask for extras for friends and relatives. "The interest has grown since 9/11," explained Kathie. "It was there before; but, since then, I’ve had a lot of questions about being prepared."
And the completed books are returning to Barnes’ office. Barnes also prompts others to get the book filled out. "I’m motivated because I’ve settled a handful of estates this last year. Heirs came in expecting me to know everything and we only had their investment account," she said. "Now I review these with clients and run over their entire net-worth statement, so I know more of the whole picture," she said.
Tanager Financial wrestled with a widespread financial planning problem. They couldn’t easily quantify a procedure to allocate assets between a client’s taxable and tax deferred accounts. "We couldn’t find a tool to answer this question," said Glenn Frank, CPA, PFS, CFP, of Tanager. "We pride ourselves taking everything to the nth degree. So we brought in a programmer and developed our own tool."
Using the computing techniques of genetic algorithms, Tanager’s programmer came up with a model that planners could use to optimally allocate between tax structures. "If someone had the energy, they could play out the numbers on an Excel spreadsheet," said Frank, adding, "But there are more than a couple of variables, so there are potentially millions of solutions."
The new program, Opti Tax, helps Tanager advise clients on which assets they should place in their IRAs or Roth IRAs, which should go in their 401(k)s and which should go in taxable accounts. "The software now is most applicable to clients with less than $2 million," said Frank. "We envision adapting it for high-end clients, incorporating trust structures and other estate planning tools."
Frank pointed out that they have modified the program to look at whether the tax advantages balance out the higher costs of a 529 plan, effective asset allocation from a tax compounding standpoint and the volatility drag of large low-cost basis positions.
It also leads some clients to use variable annuities. "People say we’re crazy to recommend annuities," said Frank. "But we lower taxes on the overall portfolio by doing the entire portfolio rebalancing in the annuity and avoid annual taxes associated with strategic asset allocation."
According to Frank, optimal location of assets often reduces the need for return because a certain amount of assets are compounding tax-free. That reduces the amount of risk that an investor must take on. "Clients have a real comfort level with this tool," said Frank. "They feel we’ve initially dealt with all the issues, like investment location."
Bernstein said that she sees firms developing new tools and services across the country. Some develop specialties in new markets like elder care. Others use the Internet in new ways, like the firm offering a scanning and storing service for clients’ important documents. "Firms have to offer something new, and their clients’ needs are what they have a unique understanding of."
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