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The New Advisor for Life

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The New Advisor for Life

BECOME THE INDISPENSABLE FINANCIAL ADVISOR TO AFFLUENT FAMILIES

Stephen D. Gresham

John Wiley & Sons, Inc.

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Copyright © 2012 by Stephen D. Gresham. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

The fi rst edition of this book was titled Advisor for Life: Become the Indispensable Financial Advisor to Affl uent Families.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:Gresham, Stephen D. The new advisor for life : become the indispensable fi nancial advisor to affl uent families / Stephen D. Gresham. -- 1 p. cm. Rev. ed. of: Advisor for life. 2007. Includes index. ISBN 978-1-118-06288-3 (hardback); ISBN 978-1-118-14881-5 (ebk); ISBN 978-1-118-14880-8 (ebk); ISBN 978-1-118-14872-3 (ebk) 1. Financial planners. 2. Investment advisors 3. Affl uent consumers—Finance, Personal. I. Gresham, Stephen D. Advisor for life. II. Title. HG179.5.G738 2011 332.024—dc23 2011021457

Printed in the United States of America10 9 8 7 6 5 4 3 2 1

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To the most important people in my life: Jane, Rachael, Meggie, T.J. Gresham, and Jeter.

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vii

Contents

Acknowledgments ix

Part I The State of the Advice Industry and Your Opportunities 1

Introduction 3

Chapter 1 The Value of Advice 11

Part II Investment Counsel Advice for Life 29

Chapter 2 How to Develop a Compelling Investment Philosophy 31

Chapter 3 Creating a Defi ned, Effective Investment Process 55

Chapter 4 Setting Goals: What Really Matters? 63

Chapter 5 Defi ning Risk 97

Chapter 6 Diversifi cation 117

Chapter 7 Alternative Investments 131

Part III Wealth-Management Advice for Life 149

Chapter 8 Managing Dreams and Fears 151

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Chapter 9 You Can Help Clients Grow 161

Chapter 10 All in the Family and Keeping It That Way 171

Chapter 11 Money for Life 189

Part IV Building Your Advisor for Life Practice 207

Chapter 12 What Is Your Value? 209

Chapter 13 How to Price Your Unique Value 231

Chapter 14 The Advisor-Client Tango 241

Chapter 15 Driving Referrals 263

Chapter 16 Selling Yourself 277

Chapter 17 Valuing the Advisor for Life Practice 293

Chapter 18 Taking Care of Number One 303

Appendix A Practice Analysis 323

Appendix B Investment Policy Statement 345

Appendix C Top 20 Client Analysis 355

About the Author 357

About the Contributors 359

Index 363

viii Contents

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ix

Acknowledgments

“What do you think we should do?” It was the right question, given the topic under discussion. The setting was the offi ce where I offered my services as a portfolio manager and registered repre-sentative of a regional brokerage fi rm. The year was 1985, and ask-ing the question was a couple, each about 60 years old, and recently retired. We talked about a wide variety of choices, including travel, education, recreation, and family, and how they might fund those passions. And even though they were each twice my age, these suc-cessful professionals wanted my advice. And they are both still going strong.

I have learned to appreciate that there is no greater professional compliment than to be asked your opinion by a client, a colleague, your manager—or one of your kids. As I refl ect on a career in fi nan-cial services that spans more than 30 years, has taken me to nearly every state, all of the Canadian provinces, and global locales from Seville to Singapore, I realize I have been on a mission—to have the insights and perspective worthy of answering that question.

The New Advisor for Life is a literary suitcase stuffed full during my travels among some of the world’s best fi nancial advisors from all different corners of the fi nancial advice industry. And while you alone can determine the appropriate path for your own career, I’m confi dent that the experiences of these professionals can add to your toolbox of client solutions and make you the trusted advisor so highly prized by affl uent families. It is a privilege to share those sto-ries with you in this book, and to collaborate with so many accom-plished men and women.

The New Advisor for Life builds on a work begun nearly 15 years ago when I had the opportunity to formalize my best practices observations. That long trail has helped me fi nd some of the most interesting original thinkers in the advice industry. I can start with

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x Acknowledgments

Rob Knapp, George Kempf, Bruce Johnston, and Greg Gloeckner, who were instrumental in those earlier days as we talked about ideas that became SuperNova. Russ Alan Prince showed me the value of high-net-worth investor psychology long before any other pundit—and remains a trusted friend. Leo Pusateri and I traveled the world working on the transition to Private Wealth with a leading interna-tional brokerage fi rm—among many other collaborations that were both personally and professionally enriching. More recently, Leo and his colleagues Giles Kavanaugh, Jeff Liebel, and Bruce Dyer have reset the high bar for professional development. Their contri-butions are tangible, actionable, and enduring. Find them at pusa-tericonsulting.com. Len Reinhart and Frank Campanale were always close to innovation, and provided excellent perspective. Chris Davis of The Money Management Institute, Walt Zultowski of The Phoenix Companies, Jack Sharry of LifeYield, Tim Welsh, Connie Chartrand of Merrill Lynch and later Morgan Stanley, Rose Cammareri of AGF Funds, and Darlene DeRemer of Grail Partners each provided important opportunities that added mightily to my studies of advisor practices. More recently, old friend Randy Ambrosie has opened a new door to the future with Accretive 360.

Many top advisors have been incredibly generous with their time. Kerry Bubb, John Rafal, Peter Burton, Louis Chiavacci, Clayton Hartman, Sandy Smith, Brian Kelly Sr, Brian Kelly Jr, Mary Beth Emson, Leon Levy, Bill Lomas, Robert Levy, Trisha Stewart, Scott Finlay, Greg Miseyko, Steve Grillo, Jim Pratt-Heaney, and Ken Gordon stand out in the pages to follow.

I’ve had great luck with editorial partners—each of whom has vastly improved my amateur efforts. Evan Cooper got me started when he was at On Wall Street and co-authored the fi rst book, Attract and Retain the Affl uent Investor, in 2000 after three years of writing columns. Evan is a great friend. Evan Simonoff, now of Financial Advisor maga-zine, has always provided valuable advice, along with David Smith and Charlie Stroller. One of the great experiences of my life was part-nering with my father, retired physician and hospital director, Glen Gresham on a column suggested by David Geracioti of Registered Rep—Retirement Doctor—that was rewarding for us both.

My colleague Laura Walsh at Wiley & Sons had the idea to revitalize the 2007 edition of Advisor for Life and gave me fresh perspective and insight to re-engineer the original work. Wiley has

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Acknowledgments xi

been a great partner for fi ve years now and I am grateful for our relationship.

This refresh of Advisor for Life required a new team, and three longtime allies made it happen. Mike Lynch is a smart and insight-ful market observer and he brings great expertise forward in our investing sections. Arlen Oransky is my longtime friend and trusted partner in every business effort during the past nearly 20 years. And I cannot imagine this book without the incredible efforts of Tom Johnson, who is conscientious, meticulous, and creative—the rock that held steady throughout the process and who drove the content refresh to include Gens X and Y.

The fi nal acknowledgment is due you, the reader, for investing your cash and your time in search of ideas to challenge your skills and to provide a better service to your clients. Your professional curi-osity is at the root of greater expertise—and that expertise will draw valuable clients to you as they seek answers to their own versions of the question, “What do you think we should we do?” Good luck!

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IP A R T

THE STATE OF THE ADVICE INDUSTRY AND YOUR

OPPORTUNITIES

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3

Introduction

When I wrote the introduction to the fi rst edition of this book, which was published in 2007, I highlighted several trends that were emerging at the time and asked fi nancial advisors to consider the way those trends were impacting not only their practices, but also their lives. Those trends are still emerging— but boy, have they been affected by the events that followed about a year after the book hit store shelves. The questions I raised then seem even more impor-tant now.

The fi rst trend I identifi ed was the challenge to prove the value of advice, especially to the baby- boom generation (the 77 million Americans born between 1946 and 1964). In the early years of what we now recognize as the fi nancial services industry, most baby boomers were still very young; if they had any awareness of bro-kers or advisors at all, they most likely concluded that such people were employed only by the very wealthy. Over time, as these boom-ers began accumulating signifi cant assets, they did not seek out the service of an advisor, even though their fi nancial situation called for one. Such professionals are only interested in the very, very rich— or so the boomers believed.

You may remember those television commercials from the early 1980s, in which a couple of guys are sitting in a restaurant or at a sport-ing event talking, and one of them utters: “My broker is E.F. Hutton, and E.F. Hutton says . . .” Everyone else in the immediate vicinity stops speaking; there is dead silence as people hope to get some free advice from someone wealthy enough to employ his own broker.


4 The New Advisor for Life

That was undoubtedly a compelling image, and it helped establish the notion that personalized fi nancial advice is a service available only to a chosen few. The far larger group of moderately affl uent or even sort of wealthy had to look for guidance elsewhere, and in time there was no shortage of places for them to fi nd it. When commissions were deregulated on May Day 1975, several new companies set up shop and reached out to smaller investors— those who believed they didn’t have enough money to garner the atten-tion of a full- service fi nancial advisor— and over time and with very aggressive, very imaginative, and very successful marketing, they became household names: Charles Schwab. Fidelity Investments. The Vanguard Group. These companies have shown themselves to be brilliant at delivering fi nancial services to the broad market-place, and each delivered value and innovation. Schwab pioneered the use of a single platform to hold securities and mutual funds from multiple companies. Fidelity became one of the largest provid-ers of actively managed mutual funds and the world’s largest pro-vider of retirement plans. Vanguard attracted a substantial following by offering low- cost index (passively managed) mutual funds.

With the benefi t of hindsight, it’s obvious that these fi rms found precisely the right moment to deliver their message. Less than a year before the May Day deregulation, Congress passed the Employee Retirement Income Security Act (ERISA), which was the government’s response to the bear market of 1974. Among many other innovations, the ERISA regulations established the Individual Retirement Account (IRA), which was a way for employ-ees not covered by traditional pension plans to invest money and defer taxes on gains until they began withdrawing funds in retirement.

That groundbreaking legislation would trigger a seismic shift in the way Americans began thinking about saving and investing— especially as it was followed just a few years later by the establish-ment of the 401(k) plan. For a number of reasons, workers stopped looking to their employer to fund their retirement and took that responsibility on themselves. Numbers tell the story: In 1980, 60 percent of Americans were covered by a traditional pension plan; by 2006, that fi gure had fallen to just 8 percent. Some 70 percent of workers were enrolled in a 401(k) plan, and 22 percent were cov-ered by a combination of defi ned- benefi t and defi ned- contribution plans. That’s a remarkable shift in just 30 years!


Introduction 5

Perhaps because of their Depression- era childhoods, relatively few members of the so- called Silent Generation— that is, the baby boomers’ parents— had invested in the stock market, but an over-whelming majority of their children were regular investors and some managed to accumulate signifi cant wealth, often through a company- sponsored 401(k). Yet most of them had never consulted a full- service fi nancial advisor, because they still clung to the out-dated image of personalized service as something accessible only to the very wealthy— an image that should have served as a warn-ing sign to the wirehouses even before the economic catastrophe of 2008. And with the advent of discount brokers, many baby boomers became do- it- yourselfers, giving little or no thought to hiring a pro-fessional fi nancial advisor.

This situation has also created a dilemma for individual advi-sors. Many of them have used technology in innovative ways to customize online offerings and leverage their knowledge and guid-ance. There are challenges to delivering personal service to a mass audience, but a number of fi rms have made great progress in deliv-ering choice, service, guidance, and value.

On a smaller scale, many individual advisors opted to follow the path of constantly seeking out more and more clients. As their cli-ent base grew, the time they had to devote to each client shrunk and the quality of the relationship deteriorated— or they ended up working far more hours than they’d ever intended. Somewhere in that mix, someone was dissatisfi ed— and dissatisfaction inevitably results in change. It’s only a matter of time.

In the earlier edition, I questioned whether the fi nancial serv-ices industry would follow the same road as the American automo-bile industry (a comparison that seems a bit eerie, given the events of the past few years). When the latter industry was in its infancy, quality was of the utmost importance because, at that time, cars were considered a luxury, not a necessity. Affl uent customers aren’t going to accept second- rate products or services, especially if they don’t believe they truly need what is being marketed to them.

There was a time when the great U.S. automakers controlled every aspect of production; the Ford Motor Company, for instance, was a substantial miner and smelter of iron ore. However, once the idea of owning a vehicle caught the public’s imagination, the qual-ity of many American automobiles began to slip. Automakers began using inferior materials to widen their profi t margin, and by the



1960s had even embarked upon a strategy of planned obsolescence— building cars that weren’t meant to last! Detroit somehow convinced itself that people would buy whatever it was selling— good, bad, or otherwise— and for a time, they were right. In the industry’s golden era, demand so outstripped supply that people would wait months for a car. General Motors became the largest private- sector employer in the world and was the fi rst public company to pay more than $1 billion a year in taxes. Many other automakers were almost as big, and the market was theirs . . . to lose. And lose it they did.

In the early 1970s, the Arab oil embargo highlighted the risks associated with America’s dependence on foreign oil. Service sta-tions ran out of gas, customers had to wait in long lines for the ones that were operational, and Americans were crying out for more fuel- effi cient vehicles. The automobile industry initially turned a deaf ear to the outcry and continued to produce large, expensive gas- guzzling cars loved by a declining percentage of the American auto- buying public. Meanwhile, a group of German and Japanese carmakers entered the fray, with different models with a value bent. Despite innovations and improvements in later years, Detroit never returned to the industrial prominence it enjoyed in the 1940s and 1950s. By 2009 GM was no longer the world’s number one auto-maker— Toyota took the crown and GM was struggling to survive.

“What are the lessons to be learned by full- service fi nancial advice fi rms from the experiences of the automotive industry, as humbled by the boomers? And is it too late?” Those were questions I asked in 2007. If most Americans had answered the latter ques-tion in the fi nal months of 2008 or the early months of 2009, many would have said, “Stay alert! Financial services fi rms, like automo-bile manufacturers, have to focus on the end experience— choice, value, service— and never stop working to maintain trust.”

Many people of all income and asset levels saw their portfo-lios hit hard by the fi nancial crisis of 2008 and the recession that followed (the effects of which are still being felt as I write this). Venerable institutions, from internationally recognized Wall Street fi rms to local and regional banks in cities and towns across the coun-try, have closed their doors or merged with former rivals as a way to stay in business. The phrase ‘too big to fail’ which has entered the national lexicon, was coined to describe fi nancial institutions (and, eventually, two of the remaining Big Three automakers) that were rescued by the federal government because, it was believed, their


Introduction 7

collapse would be even more costly than the billions of dollars in taxpayer money required to keep them in operation.

The dire circumstances of what has come to be called the Great Recession have engendered a lot of understandable pessimism, but it has also underscored a trend that has been evident in every eco-nomic downturn in recent decades: Demand for fi nancial advice goes up when the market (and the economy) goes down. In the 1990s, the longest bull market in American history, the fi nancial planning profession enjoyed tremendous growth; even so, many of the people who made a lot of money during that decade did not engage the services of an advisor for the simple reason that they didn’t think they needed one: Their portfolio was doing just fi ne on its own. After the Tech Wreck of 2000 and 2001 caused the market to plummet, many people fi nally sought out professional assistance in managing their money. It was a hard lesson, but one that proved the value of professional fi nancial guidance.

In the pages that follow, I will attempt to help you consider the issues facing our industry and to evaluate choices as they apply to you and your practice, by helping you clarify the value you bring to clients and differentiate yourself within the crowded fi nancial- services marketplace. Along the way, I will also suggest ways in which you can help your clients understand what exactly you can (and can’t) do for them, and how you can make sure that you consistently deliver high- quality performance to each of your clients— without losing yourself or ignoring your own needs and goals in the process.

The other emerging trend I highlighted in the earlier edition centers on the baby boomer market. In 2007, the oldest members of this generation— those born in the years immediately following World War II— began to reach the age at which they could take early retirement. The wealth- accumulation phase of their fi nancial lives was drawing to a close, and the wealth- distribution phase was about to begin in earnest. The assets these people had amassed dur-ing their working years would have to see them through another 15 or 20 years, according to current life expectancy guidelines. Therein lay a challenge: These boomers had spent on average 40 years accumulating assets, and now those assets had to last on average another 20 years— and many of their portfolios have recently sustained heavy losses.

The advisor- client relationship will change as the client’s life cir-cumstances change. Is he or she prepared for that transformation?



Are you? Later chapters in this book detail the issues that both of you will face and ways in which you can discuss and address them.

However, in this edition of Advisor for Life I am moving beyond the scope of the original book, which focused primarily on the baby boomers, and am including information that I hope will prove helpful as you consider the affl uent within the next generation of Americans, those known as Generations X and Y. Taken together, these two groups represent some 125 million Americans, and the oldest among them will turn 45 this year— a pivotal age at which many people fi nally start getting serious about saving for retire-ment. This market has not been a central focus of the fi nancial services industry.

Just as the baby boomers differ dramatically from their Silent Generation parents with regard to attitudes about saving and invest-ing, Generations X and Y are very different from baby boomers. Despite their relative youth, they tend to be much more conserv-ative investors than the generation that precedes them and many even tend to identify themselves as savers rather than investors.

Financial security in retirement is a key concern of these younger Americans, particularly Generation X, even if retirement still seems distant for many of them. A 2008 study by the American Education Savings Council and the American Association of Retired Persons found that 70 percent of Generation X and 51 percent of Generation Y have given some thought to retirement. The fi gures are even higher for those who are covered by a retirement plan at work, suggesting that participation in a plan fosters long- term thinking about retirement goals. Although the study found that 21 percent of the Generation X respondents expect to retire in their 70s, compared to just 13 percent of Generation Y, most par-ticipants said they expect to retire in their 60s, just like the Baby Boomers.

However, the generations diverge when it comes to funding that retirement. Unlike the Boomers, who expected Social Security to be a primary source of retirement income, most Gen- Xers and Gen- Yers expect to pay for their golden years with the proceeds of their invest-ments— defi ned- contribution plans, non- work- related investment accounts, and savings accounts. Only 7 percent said they expect to rely on Social Security as a primary source of income in retirement.

The fi nancial- planning relationship with Generations X and Y tends to be much more collaborative than with Baby Boomers. But


Introduction 9

in order to work effectively with this market, you must fi rst under-stand them. Many young Americans hold contradictory beliefs about the world and their place in it. On the one hand, their expec-tations are very high with regard to jobs, money, material posses-sions, and more. On the other hand, they are often skeptical about the role of government, corporate America, and the news media. In short, they expect a lot from institutions in which they are not fully confi dent. That attitude can affect their relationship with a fi nan-cial advisor— but it doesn’t have to. I will explain more about build-ing trust in later chapters.

Much has been written in the past couple of years about how the economic crisis triggered by the meltdown of the subprime mort-gage market has forever altered the fi nancial landscape. And yet individuals must press on. They still need to manage their fi nances, save money, and plan for retirement. Even as they acknowledge that they need help with these tasks, they may be skeptical— even suspicious— of your ability to assist them. “Why should I trust you?” they may ask. “What sets you apart from other advisors?” This book will help you answer those questions and show you how to build the advisory practice of your— and your clients’— dreams.


11

1C H A P T E R

The Value of AdviceWHICH ADVICE IS MOST VALUED BY AFFLUENT HOUSEHOLDS— AND

WHAT SHOULD IT COST?

What services are today’s clients willing to pay you to provide?What can you offer— and what do you want to offer?What fi ve words can help guide you to provide a consistent offering of services valued by affl uent clients?

If other service professions can be a guide to fi nancial advisors, they reveal that the most reliable long- term profi ts can be earned from those services that cannot be easily delivered via “non- human” means, such as over the telephone or via the Web.

There is an incredible, once- in- a- lifetime opportunity for those advisors willing to engage those who need long- term fi nancial help. The most lucrative segment of the industry will remain for those advisors who can deliver what clients will pay for— real advice for real issues. That advice will require you to determine for each client household its greatest:

Needs— the requirements of daily living, including household income.

Concerns— issues that worry a household based on current con-ditions, such as the care of an aging parent.

•••

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Fears— potential problems, such as the chances of contracting a major illness or being confi ned to a nursing home.

Risks— vulnerabilities— fi nancial, emotional, or otherwise.Goals— what people hope to accomplish.Dreams— the things people hope to do, but typically do not as

circumstances catch up to them and realities or lack of moti-vation outweigh the potential.

Why the Affl uent Want You

Now save yourself a lot of time. Here’s a simple exercise to deter-mine if you have the right stuff to be an Advisor for Life:

Think about your own life and family. What do you need to live on right now? What level of income is required by your cur-rent lifestyle? If you are a successful advisor, you earn a six fi gure annual paycheck— or more. So what is that annual number? Now ask yourself: What would you do if your income fell by 50 percent this year? Where would you turn? Who would you ask for advice?

Consider that the loss of a high percentage of current income is the precise concern of many affl uent households. According to Cultivating the Middle- Class Millionaire by Russ Alan Prince and David A. Geracioti (Wealth Management Press, 2005), 88.6 percent of mil-lionaires surveyed are “very concerned” about losing their wealth. A “signifi cant fi nancial reversal” is uppermost in the minds of those who have achieved fi nancial success— the fear of losing is what drives so much of what we in the advice industry call risk tolerance. Translate that into your life.

What would you do? Initially you might want some sympathy but sooner or later you’d want someone to give you advice about what to do— lay out your options, help you decide how to adjust to the situation.

The Acid Test— Can You Show True Concern?

The point of exploring this scenario is to see the client’s side of fi nancial advice and fi nancial advisors. The emotions that I trust ran through you as you contemplated the income loss are the same as those surging through your clients and prospects. Here’s the true test— can you summon empathy for others? Can you be truly con-cerned for your clients as they confront life’s real challenges? This is the primary test of the Advisor for Life.

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The Value of Advice 13

The reason I earlier urged you to “save yourself a lot of time” is that if you do not feel concern for your clients, you will not be happy (or successful) as an Advisor for Life.

You can’t fake concern. (Warning— you haven’t heard the last from me on this topic.) As this book progresses, I will continue to challenge your ability to accept your clients, probe for their con-cerns and fears, and deliver a consistently superior and surprising level of service. This will maintain your value no matter the markets and is the essence of the Advisor for Life.

The Four Commandments

My longtime colleague, Don Berryman, has a marvelous way of phrasing important principles so that they become impossible to forget. An old branch- manager friend of Don’s summarized the role of the fi nancial advisor in four words that are appropriate for us to use now to frame the role of the Advisor for Life:

1. Be available 2. Be concerned 3. Be informed 4. Have an opinion

These four simple but powerful commands capture the mean-ing of Advisor for Life. While you may intuitively appreciate their importance, here is my perspective.

Be Available

To be truly available to your clients you must be ready to give your time— your most valuable resource. The same is true of how you choose to spend your time away from your role as a fi nancial advisor. To be available to your family— spouse, parents, grow-ing children— is to give the most precious gift you can provide. Busy and successful people constantly lament the shortage of time, yet most don’t take the time to determine where their time is best and most valuably spent. A consistent complaint of many millionaire households is that their advisors are “not proactive” and are “diffi cult to get ahold of.” They don’t freely offer their time. They do not make contact on the client’s terms instead of their own.

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In the current economic climate, making yourself available is more important than ever. According to the 2010 Phoenix Wealth Management survey, the number of high- net- worth consumers say-ing they regularly seek professional fi nacial advice increased from 73 percent in 2009 to 79 percent in 2010— close to the annual sur-vey’s all- time high of 82 percent, which was recorded in 2003 (at the end of the post- 9/11 and tech- wreck bear markets). The survey also found a notable rise in the use of written fi nancial plans— 44 percent in 2010, up from 39 percent one year earlier. The 2010 fi gure was the highest recorded in the survey’s history.

Most advisors to millionaire households get pretty good reviews from their clients— successful people don’t tend to suffer poor serv-ice from anyone for very long. But surveys indicate a consistent 20 percent of clients working with a primary advisor are actively look-ing for a new one or thinking about doing so. Given the rich sup-ply of millionaire households in the United States today— roughly eight million— that is a hefty list of prospects for advisors willing to provide better service!

The opportunity for prospecting millionaire clients by being available— better proactive service— is even greater than indicated by the numbers above. The percentage of millionaire households using a primary advisor is only about 70 percent— a number that has been consistently falling as the bull market helped buoy the confi dence of investors. Digging farther into the data reveals that many of these self- directed households are interested in fi nding a primary advisor. Data from a recent survey found that of the respondents who reported keeping the bulk of their assets with a well- known dis-count commission fi rm, 38 percent of those households are inter-ested in fi nding a primary fi nancial advisor. What gives?

Change Brings Opportunity The self- directed household popu-lation draws heavily from two groups— both of which represent opportunity for the Advisor for Life. First, the baby boomer demo-graphic is rife with “self- directeds” because the generation has grown up with more information and confi dence managing its own fi nancial affairs, which to this point have consisted largely of invest-ments. But now boomers are confronting more complex needs. Estate planning, disability, parental care— each require knowledge of legal structures, trusts, taxation, insurance, and other issues that are beyond the realm of simple investing. When these issues unveil themselves even the most confi dent investors are suddenly

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The Value of Advice 15

in uncharted waters— and they generally don’t like it. Figure 1.1 is a chart I’ll refer to several times in this book that can help provide perspective (and life preservers) for these investors.

The Lifecycle shows both the phase of client- household fi nancial development and the advisor’s role in each phase. Note that the early stages of investing create little or no opportunity for the advisor to add value— indicating where the fi nancial advice marketplace has evolved to support the self- directed client. As discussed in the Introduction, within the relative safe haven of a 401(k) plan, a client can select invest-ments and build a diversifi ed portfolio— a Phase II strategy. In the late 1980s, the innovation of managed- account programs was to help investors who owned a grab bag of individual stocks, bonds, and funds to build a managed solution with structure and purpose. Now that advantage has been taken away and provided to the average defi ned- contribution- plan investor. The opportunity for the Advisor for Life to make an impact has been moved to Phases III and IV.

The others who are ready to accept the value of the Advisor for Life are those households unable to navigate the fi nancial markets since the bull market lost its steam. For them, the thrill of making their own decisions has worn off through the unexpected shock of the Tech Wreck in 2000 and 2001, or even more likely, the fl at mar-ket of 2005— the second fl attest in modern- market history. Down markets followed by fl at markets are especially frustrating because

TRUSTED ADVICE/WEALTH COUNSELINGPRESERVATION

ACCUMULATION

InvestingSetting plans and goalsBasic saving and investing

Phase IManaging WealthInvestment Policy StatementAsset allocationRefining strategyPrivate account investingTax-efficient investingAsset-protection planning

Phase IITransferring WealthCharitable givingBusiness successionEstate distribution

Phase IV

Transactional SalesIdeas/motivationClients are customers

Phase I Consultative AdviceContentLeadershipWealth managementMeaningful relationships

Phase II

Trusted Counselor& ConfidantLife/death guidanceReferring to network of professionalsSophisticated decisionsWorking through family dynamics

Phase IV

Trusted Advice& CounselStrategic philanthropySophisticated planningGuidanceMaking choices

Phase III

INV

ESTO

R PH

ASE

AD

VIS

OR

ROLE

TRANSACTIONS/COMMISSIONSCONSULTATIVE/FEE BASED

Wealth PlanningEstate planningBusiness successionFamily wealth planningFamily officeFamily foundationsAsset-protection planning

Phase III

TRANSFER

Figure 1.1 The Advisor for LifecycleSource: The Gresham Company, LLC. www.greshamcompany.com.

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nothing good seems to be happening while investors are hoping to make up for earlier losses.

The fi nal aspect of availability is the numeric reality of time. A survey of top advisors examined their allocation of time among a number of activities. And while “administration” and “business processing” garnered much of the advisors’ attention, the largest segment was devoted to “client service.” I believe client service to be the most important and therefore the most lucrative activity for top advisors, so the ranking is appropriate. But consider the numbers— 39 percent of top advisors’ time is allocated to client service. Is it enough? (See Figure 1.2)

Let’s now test the time commitment to affl uent clients and see if advisors are allowing enough of it to provide the needed service(s). A 50- hour work week over 48 weeks a year would give 2,400 working hours per year.

Now consider the amount of time required to provide effective service to a millionaire household. From industry surveys, we know that a large percentage of millionaire households think monthly contact with their primary advisor provides the right balance for service.

Take it a step further. What does the total year of service com-prise? Is each contact an hour? What about the more complex work? What about reviews? Preparation? If the time commitment to your affl uent clients is one hour a month, that’s 12 hours. If you devote two hours per month, that’s 24 hours each year. For the

23%

33%39%

2%3%

Client Service

Business Processing

Administration

Prospecting

Planning

Figure 1.2 Where Advisors Spend Their TimeSource: Advisor Impact.

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