In a previous blog, I talked about how financial advisors who have a unique combination of great technical and communication skills, and radical honesty can achieve exceptional client outcomes.
In the next three blogs, I’ll be breaking down each of these areas, starting with technical skills.
As the complexity of the world we live in and our industry grows exponentially, it becomes increasingly difficult to acquire and maintain our technical skills.
Advisors who are invaluable to their clients must be constantly studying, reading, and paying attention so they can be helpful in the following six areas:
1. Risk Management
Personal liability insurance: Asset protection for high net worth clients is an ongoing project. In particular, homeowners’ policies have rules and specifications that vary by state. It is the responsibility of the client to keep these up to date, but many don’t review them on an ongoing basis. As well, the limits of underlying coverage may not be sufficient to protect other assets.
Disability insurance: This is particularly important for younger professionals and clients who have not had the time to accumulate sufficient assets to self insure.
- Can you explain the differences in “own occupation” and “any occupation” coverage and the taxability of group DI vs personally paid DI?
- Is the “catastrophic coverage” that is provided by most employers going to be sufficient or even helpful for longer term partial disability or reduction in income?
- Do clients have sufficient “emergency savings” to cover the “elimination period” in the policy they own?
- Do you know the statistics of how common some sort of disability claims are among workers, and what percentage of foreclosures and bankruptcy is caused by disability?
Life Insurance: Risk management discussions need to occur before investment planning. The “large loss principle”—where you insure against the relatively unlikely but potentially catastrophic risks—is what drives these conversations. Then you must have a methodology to help clients determine “how much” and “what kind” of insurance they need to buy.
Understanding the details of group coverage versus individual coverage and the cost savings over time when purchasing your own policy will be important information in helping clients make these decisions. Additionally, understanding the “convertibility” and “portability” provisions in group and individual policies is critical!
There are three basic types of policies:
- Term (for a term of time)
- Whole life (a unilateral and permanent contract)
- Universal Life, which is a hybrid of the two with variations on the underlying chassis (straight Universal Life and Variable Universal Life).
Knowing the risks and pitfalls of each will be invaluable as you have discussions with clients about how much risk they transfer and how much they retain.
Long Term Care Insurance: These are designed to take the place of disability insurance (which typically ends at age 65). This entire ecosystem is confusing and subject to rapid change. Premiums, coverage, and accessibility can change almost overnight. Understanding and keeping up in this space is very difficult.
Health Insurance: The details of individual health insurance coverage is one of the most crucial conversations you will have with clients—particularly when discussing Medicare. Knowing the details inside and out will be a huge leverage point for your practice, such as the details of coverage, risks, costs, the IRMAA excise tax implications, and how to navigate the decision-making process that occurs at age 65.
2. Investment Management
In order to add value in this arena, you must have a deep and almost encyclopedic knowledge of the opportunities as well as the dangers and pitfalls that confront you and your clients.
This means that you need to be able to explain all of the following concepts and why they matter, but do it in a way that “even a 6th grader” would understand.
- The underpinnings of MPT and all the MPT statistics – Alpha, Beta, Sharpe ratio, standard deviation, correlations, R squared, capture ratios
- Duration / convexity in fixed income portfolios
- Alternatives—do they really provide what they have promised? And are the after tax and cost returns worth the risk.
- Can you identify the inappropriate risk measures that are used in the marketing pitches for many of these products.
- Active versus passive
- Non-traditional asset classes and associated risk
- Private placement life insurance / variable annuities / longevity insurance
3. Retirement Planning
When it comes to retirement planning, to be an asset to your clients, you’ll need to know about:
- Deterministic versus stochastic modeling (Monte Carlo analysis) as well as the limitations and uses for cash flow planning vs goals based planning.
- Roth / SEP / 401k / non-qualified plans / IRA rollovers
- Contribution and accumulation strategies / distribution strategies / NUA / Asset protection / ERISA
- Social Security claiming strategies – for traditional and non-traditional families
- Capital market expectations for investment returns, inflation, life expectancy, tax rates, medical / healthcare expenses
4. Tax Planning
The US tax code is now seven times longer than War and Peace (Tolstoy) at 4 million words. Regardless, great financial advisors need to understand the tax code in order to help their clients. A few examples include:
- Deductibility and limits on charitable contributions
- Tax treatment of mortgage / hypo / margin interest
- Roth Conversions / Back door Roth conversions
- Tax bracket management and planning
- Location management of investments based on tax implications
5. Estate Planning
When it comes to estate planning, great financial advisors know about:
- Wills / Trusts / Probate
- Importance of qualified beneficiary / contingent beneficiaries
- Medical directives
- Durable POAs
- Qualified disclaimers
- Portability of estate tax exemption and planning opportunities
6. Liability Management
And finally, liability management is an often overlooked area where we can add value.
- Risk / Tax treatment of mortgage and mortgage interest
- Risk / Tax treatment of hypo (non-purpose) loans
- Risk / Tax treatment of margin interest
- Debt as arbitrage
Technical Skills is One Part of Being a Great Financial Advisor
90% of technical skills can be acquired in three to four years. Keeping up with the changes is a lifelong endeavor.
Remember—financial advisors become an invaluable asset to their clients when they not only have great technical skills, but they’re also radically honest and have great communication skills.
Stay tuned to the next blog which will discuss how to develop the communication skills that will set you apart from the vast majority of financial advisors.