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Web Chapter B

Career Basics

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Chapter Goals

Evaluate financial planning as a business. Construct a business plan for a PFP business. Define the major types of planner compensation. Appreciate the importance of marketing and the

ways of doing it. Classify common profiles for planning as a career.

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The Business Plan

An initial business plan is an outline or more often a detailed description of how you expect to establish and grow your firm over the next one to five years.

In a sense, it is the financial planner’s financial plan for the business.

It provides the structure and mandates the thinking process and approach necessary to be successful in a new or existing financial planning activity.

We next will discuss the various steps in the business plan individually.

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Obtain Proper Education and Experience

Planners should:– Have an undergraduate degree.– Complete a specialization in personal financial planning,

either as part of your degree program or through an adult education program.

– Have practical professional experience in planning. This can be done by working for someone else or beginning on your own, perhaps by performing your first plan at no charge.

– Have a planning designation. The CFP® certification is the most prominent among planners.

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Obtain Proper Education and Experience, cont.

The CFP® certification requires a college degree, a minimum of a five-course 15-credit curriculum, passing a comprehensive exam, and three years of related business experience.

Other designations include: – The Chartered Financial Consultant (ChFC), which is often

for people with insurance backgrounds.– The Personal Financial Specials (PFS) for CPA financial

planners.– The Chartered Financial Analyst (CFA) for investment

specialists.

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Secure the Services of Advisors

Every business or career can benefit from advisors. In PFP, advisors include:

– An attorney, perhaps one that specializes in small businesses. The attorney or attorneys will ensure that you stay on the

right side of regulation and will draw up the documents necessary to establish your business.

– An accountant. The accountant will give you advice on record keeping, file

required tax returns, and often serve as an advisor on overall financial matters.

– A mentor. Often has experience in financial planning or is a success

in another business.

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Develop a Mission Statement

A mission statement provides the rationale for establishing your business or career and helps the planner keep their focus.

The statement is often short, typically no more than a paragraph, and can be just one sentence.

Examples: – “To establish the preeminent planning firm in the market by

fostering excellence in financial advice and service and helping clients reach their financial and nonfinancial goals.”

– “To profitably concentrate on people of modest means and enable them to receive the quality in decision making usually reserved for higher income individuals.”

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Establish the Services and Structure of the Firm

Firms may provide financial planning services exclusively or offer other services as well.

Pure financial planning firms vary by size. – Small firms consist of one or two financial planners with or

without support personnel. – Medium sized firms may have several planners and support

personnel and may have some separation into planning and investing and sometimes other activities.

– Large firms have separate full departments, often with management at the head of each activity.

– An alternative approach is to separate planners into semi-independent clusters along with investment people, other professional staff, and sometimes back office personnel.

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Establish the Services and Structure of the Firm, cont.

One organizational approach is as follows:

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Establish the Services and Structure of the Firm, cont.

The legal structures are similar to that of other businesses.

They include individual proprietorships, partnerships, and corporations.

The corporations may be:– C Corp. – S Corp. – A limited liability company (LLC).

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Decide on a Form of Compensation

Fee-only financial planners receive all of their revenues from clients, none from commission and sales of products.

– Fees may consists of flat fees for a service, hourly fees, and those arising from a percentage of assets under management and yearly retainer fees.

– Fee-only financial planners believe they have the most objective form of providing advice, avoiding potential conflicts of interest between selling products and acting in the clients’ interest.

– They can select from a wide variety of financial instruments without being limited by product providers.

– Under CFP rules CFP® practitioners cannot call themselves fee-only planners unless that is the exclusive way they practice.

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Decide on a Form of Compensation, cont.

Commission-only planners often work for financial services firms or are independent and offer the products of insurance firms.

– Since such planners sell products they must select a broker-dealer to affiliate with.

– Their investment product offerings typically come from the broker-dealer who is responsible for their actions. The broker dealer may also serve as the planner’s back office.

– Many commission-only planners believe they save their clients money by not charging fees.

– They say that performing services appropriately comes not from the form of compensation but from the character of the individual providing the service.

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Decide on a Form of Compensation, cont.

Fee and commission planners obtain contracted for fees directly for their planning services performed and include the professional respectability they believe comes from receiving fees. At the same time they receive potentially high commission income from sales of products, which often well exceeds their fee income.

– Often regard themselves as having the best parts of the other two forms of compensation by combining them.

– Many commission-only and fee and commission planners like their affiliation with broker dealers. It allows planners to reduce their due diligence on products and to pare their record keeping responsibilities, which in turn permits them to spend more time performing financial planning and marketing their services.

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Decide on a Form of Compensation, cont.

Commission-only and fee and commission planners are sometimes regarded as more capable in marketing than fee-only planners.

– The startup time for a new business is often shorter for them than for fee-only planners because of this capability and their ability to receive large commissions after completing a plan.

– Becoming successful as a fee-only financial planner may require patience since ongoing supervisory revenues, often the bulk of revenue, tend to take time to build up.

– Supervisory revenues are continuing billings for planner review and/or management of client assets, particularly financial assets, with the goal of maintaining and increasing client financial wealth.

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Decide on a Form of Compensation, cont.

On the other hand, fee-only advisors are more likely to ultimately develop a steady source of revenues without the need for seeking new clients and new product sales each year.

Demand for fee-only advice has been growing steadily over the past decade due to its perceived attraction by consumers, but at present only a modest number of financial advisors call themselves fee-only financial planners.

Many people believe fee-only advice will continue to gain in popularity.

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Select a Broker Dealer

The broker-dealer serves many functions, and the products it offers is limited.

– Their cost, services, and overall quality will reflect on profitability and even the clients’ opinion of the planner.

– Payouts by broker dealers to planners receiving commission and services to planners can vary.

– These services allow the planner to spend more time on client operations and marketing.

– A planner who is compensated solely through fees will have a greater choice and can select more than one broker-dealer.

– The majority of fee-only planners have historically established relationships with discount brokerage firms.

– They serve as custodians for client accounts but do not provide the level of back office services broker dealers for planners accepting commissions receive.

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Develop Policy Statements

Policy statements are the practices that a firm has in attempting to fulfill client engagements and in operating its business in general.

A number of these practices pertain to regulatory compliance and the development of a compliance manual.

Under client engagements, planners should indicate to clients the goal, the scope of the work, the type of analysis employed, what the output looks like, and the expected benefits from the engagement.

There can be separate policy statements covering each service that a planner may offer.

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Develop Policy Statements, cont.

A synopsis of one policy statement for an investment review:

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Technology for Operations

Planners use computers, printers, scanners, and software in a variety of areas.

– Software is available for financial planning, investment management, transactions, marketing and database management and record keeping.

– The software may be established by planners themselves on spreadsheets or it can be purchased from outside vendors.

– Many financial planners purchase software useful in performing comprehensive financial plans. They require integrated decision making and the software is especially helpful in calculating capital needs under a variety of scenarios.

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Technology for Operations, cont.

Investment management software can be helpful in determining overall asset allocation and individual security decisions.

– Software providing securities transactions and daily holdings and their valuation are readily available and are often linked to individual broker-dealers or other institutions in which the assets are custodied.

Database management and marketing software are often combined.

– Information can be called upon to derive facts about and to transmit information to clients and prospects on a variety of subjects.

– Record-keeping software helps in establishing business accounts, in developing income standards and balance sheets, and otherwise analyzing business performance.

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Recognize the Link Between Communications and Operations

Effective communication with your clients is one of the key factors in running a successful practice.

– Communication can involve simplicity in delivery, becoming aware of the best way to transmit advice, client education, and a variety of other factors.

– Communication in hard copy or electronic form may include words, pictures, and numbers, all intended to transmit the intended message.

– Customer relationship management (CRM) software is highly useful in tracking clients and communicating.

Oral communication is important for receiving information from and developing a closer relationship with your clients.

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Construct a Marketing Plan

Marketing is of principal importance for most people starting out in the profession who are not handed clients as is sometimes done in larger firms, which may separate the marketing and planning functions.

– You may be an expert planner, but if you have no active way of generating clients it will take you longer to develop a client base, sometimes too long to remain in business.

– Marketing can take many forms, it can be accomplished through talks, classes and seminars, advertising and public relations.

– You may approach existing personal acquaintances and current clients, or try to obtain referrals from professionals.

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Construct a Marketing Plan, cont.

Seminars:– Financial planners typically offer services and relationships in

addition to product recommendations. – Clients can often best observe planners in nonthreatening

forums in which the planner is presented as an expert. Advertising:

– Advertising is often a difficult expenditure for a smaller financial service business, which is not known to receive returns on.

– Potential clients would rather receive a recommendation, even if implied, instead of self-advertising.

– However, advertising is sometimes effective in targeted direct mail that presents a sub-specialty, or invites clients or prospective clients to a seminar.

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Construct a Marketing Plan, cont.

Public Relations: – Appearances or mentions can lead to name recognition and

phone calls. – Volunteering for service in the community can increase

recognition of your name, enhance your reputation, and put you in contact with potential clients.

Existing Personal Relationships:– Those with whom you have a personal relationship can be

influential in recommending your services. – Simply mentioning your availability can make them

proponents of your planning for people they know as well as for themselves.

– For many planners, existing clients become the leading source of new clients.

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Construct a Marketing Plan, cont.

Professionals:– People in related professions can be significant sources of new

clients. – Typically, you must first demonstrate your expertise, concern,

and service to existing clients. Other Planners:

– Those from other cities may refer to you when clients move or they are asked for a recommendation in your location.

– Planners in your city may be too busy or find that certain clients are too small or otherwise inappropriate for their practice.

Referral from Financial Planning Organizations: – Becoming a member of planning organizations can qualify you for

referrals of people who have requested referrals from that body.

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Construct a Marketing Plan, cont.

Specialization:– Specialization can differentiate you from other planners. – Specialization can be in such areas as income strata, profession,

products offered, investment management style, or services offered. Brochures, Websites, and Newsletters:

– Promotional material can create a favorable image and attract clients.

– Newsletters can also arouse interest and place your name before prospective clients when they are ready to look for planning advice.

Cold Calling:– Many planners dislike making calls to people who may qualify for

services but who have not requested any information. Nonetheless, the process produces results.

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Prepare an Engagement Letter

The engagement letter is generally a legal contract that details the understanding between the planner and the client.

– Sets out the scope of the engagement as well as the role to be played by both parties.

– The planner indicates whether the plan will be presented orally or in writing.

– The compensation for the work will also be detailed.– The contract will generally indicate that neither the client nor the

planner can transfer their rights to a third party without the consent of the other party.

– May also provide for termination by either party with fees up to that point due.

– You should prepare the engagement letter with the assistance of a lawyer.

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Develop Risk Management Procedures

Having backup personnel for yourself or your workers in case of illness or staff resignations should be thought of.

You should also consider an alternative site for operations in the event of terrorism or other emergency situations.

One possibility is establishing a reciprocal arrangement with another planner, or you might use your home if far enough from your office.

In any event security for planner and client information and assets and backups of data is an essential part of risk management.

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Develop Risk Management Procedures, cont.

Liability arising from client lawsuits can be reduced or eliminated through a number of procedures.

The first is to follow sound planning practices and adhere to regulatory requirements, the subject of next chapter.

An engagement letter will clearly define the scope of the engagement and its cost.

Consider the purchase of errors and omissions insurance to cover the possibility of costly lawsuits.

Care must be taken to establish what individual policies do and do not cover.

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Develop an Objective Plan for Monies Needed

It can take years to earn an attractive income. – Consider starting part-time, in the evenings or on weekends or to

get a job with another firm if one is available. – Be prepared for often modest initial salaries if you are

transitioning from years in another type of employment. – The important point is to make a realistic assessment of your

financial needs in purchases and perhaps ongoing outflows for a time in order to establish your own business or a rewarding career with a planning firm.

– Your needs should include your cost of living for a reasonable period of time.

– Whether through savings or borrowings or a combination of the two, a forthright assessment can lead to an accurate appraisal, a lack of pressure, and success for your business plan.

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Chapter Summary

Obtain a proper planning background if you don’t have one.

Locate and take advantage of the services of professionals and personal advisors.

Provide a mission statement which presents the rational for the business.

Decide on the appropriate legal structure and services of the firm.

Establish the way you will be compensated. Develop policy statements for clients’ engagement and

internal operations. Select the technology for your business.

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Chapter Summary, cont.

Link client communication and internal operations. Construct a viable marketing plan which can

incorporate seminars, public relations, personal and client relationships, etc.

Prepare an engagement letter. Develop risk management procedures. Establish interim money needs.