Archive for July, 2012

Is Wealth a State of Mind? The doctor is in!

How many advisors work with families in which generations don’t see eye to eye about finances and maybe have even reached an impasse? To break through, it may be necessary to understand the psychology behind the family dynamics.  That’s exactly what many Registered Investment Advisor (RIA) firms are doing.

One firm, Personal Financial Consultants, Inc., has hired a CFP who is a psychologist to serve as a money coach and financial planner for its clients. Other firms are developing working relationships with psychologists to whom they refer clients and vice versa.

Why the interest in these kinds of arrangements?

Because helping clients work through psychological and behavioral issues around money makes it easier to deliver the best solutions to them and their families and insure an optimal transfer of wealth to the next generation.  Behavior is often based on underlying beliefs about money.  What psychologists have found is that most people have a specific belief around the subject of money, one they may not even be aware they have. According to Patrick Friman, Ph.D., even wealthy clients can have the feeling that the money they’ve made is undeserved, that it can solve any problem, that it defines who they are, or that having money is a shameful thing and shouldn’t be talked about.  Often, children view the subject of money differently. It is not unusual for children of wealthy clients to have a belief of entitlement or for their parents to be fearful of creating this belief in their children.

These core beliefs, then, color how people make decisions about their financial plans, how they structure their wills and legacy, and how effectively they communicate with one another. An advisor who experiences issues between generations will likely first have to address these beliefs before making inroads into developing workable plans for the future.  This is especially true if an advisor is dealing with a family office or family business, where there are a number of decision makers who may have very different core beliefs. That can be a recipe for fireworks.  A good psychologist can help family members work through these differences and find common ground.

How do you find the right partner to help you address these issues?

The trend for providing clients with “life coaching” is growing and there are organizations like the Kinder Institute of Planning that train advisors or provide consulting services. These firms specialize in providing ways to approach the psychological and behavioral aspects of the client-advisor relationship.  Advisors can also seek out a local psychologist to partner with and refer clients back and forth. Just make sure you do your research. Not every psychologist is experienced in dealing with wealthy clientele so you must do your research.

Find out these things about a potential partner:

1. How much experience does the psychologist have working with wealthy clients?
2. Does the psychologist have an established reputation in the community?
3. Does he or she exhibit expertise that clients can respect?

Because most of your clients are accomplished business people, they will expect the same level of competence in any provider you refer them to.

How do you know when to refer a client?

Many of your clients may not believe they need counseling on the subject of inheritance. One approach that some firms and Independent Broker Dealers (IBDs) are trying is to hire a psychologist to give a general talk to clients about these familial issues. This brings up the subject in a nonthreatening way and helps advisors broach the subject more easily with clients.  A referral would also be warranted if a client clearly needs help working through family issues around money and sees that he needs help. The important thing is for the client to be open to the idea of counseling as a way to solve his problem.

Bottom line?

Working with a life coach or psychologist is another way to provide help and break down the barriers that stop your clients from successfully transferring wealth.

By: Jonathon Duncan, VP – Wealth Management

Can You Be Regulated Out of Business?

It’s happening with small community banks—and Independent Advisors could be next.

It all started when the Dodd-Frank Act was passed to prevent another financial crisis like the one in 2008. The act is a whopping 2,319 pages and covers a wide range of issues that impact all aspects of the financial services industry, including regulations governing broker dealers and investment advisors.

Recently, as part of a review of these provisions, House Financial Services Committee Chairman Spencer Bacchus introduced a bill that calls for setting up a new self regulatory organization (SRO) to oversee advisors. While the bill isn’t likely to go to the Senate until next year, its passage could create hardships for smaller advisory practices.

Why? You need only look at what happened to small banks after the enactment of other provisions of the Dodd-Frank Act.

Small banks felt the impact most
Ironically, the Dodd-Frank Act was intended to address the issue of “too big to fail,” but instead placed a regulatory burden mainly on smaller banks.

Because these banks generally had fewer resources than larger firms, many had to hire consultants just to understand the new rules and make sure they were in compliance. In addition, they had to hire additional audit and compliance staff. As a result, their cost of doing business increased and, with fewer customers to cover added expenses, profits were squeezed.

Plus, an additional oversight agency was created—the Consumer Financial Protection Bureau—which created yet another authority to mandate changes to the way banks operate and potentially more onerous requirements.

Small community banks just couldn’t absorb this additional expense and make the kind of profits they needed. They became less able to compete. As a result, more mergers and acquisitions at the community bank level have been seen in the last year or so.

The result? Good-bye small-town, community banks.

How will the SRO bill be similar?
Senator Bacchus’ bill calls for an SRO to regulate advisors. That SRO will either be the SEC who currently has oversight for advisors, FINRA who is the watchdog for brokerage firms, or several different entities. It appears legislators are leaning toward the FINRA solution.

The reason? They don’t believe the SECs examines advisors often enough or can cost effectively staff up to do so. The SEC examines about 8-9% of advisors every year compared to FINRA who examines 58% of brokers.

So is giving that job to FINRA the right solution?

Many Registered Investment Advisors (RIAs) and Independent Broker Dealers (IBDs) say no. They argue that FINRA’s experience is limited to the less stringent suitability standards that apply to brokers but doesn’t extend to the fiduciary standard independent advisors are held to.

This lack of experience could create a situation similar to the one small banks faced. Specifically, it might cause small practice owners to jump through unnecessary hoops instead of solving the problem it was initially intended to solve.

In fact, the Massachusetts securities office surveyed half of the advisors in that state and 41% of them indicated that “the bill as presently drafted was likely to put them out of business.”

That’s alarming.

There is good reason for concern. Look at the kind of compliance brokers are subject to and then do the math. If similar regulation is heaped on advisors, more expense and overhead will be required to comply with the new regulations. Advisors are likely to experience difficulty in passing on those expenses to clients and still remain competitive.

Sounds a lot like the community banks, doesn’t it?

There is something you can do.
The good news is that the legislation hasn’t passed into law yet. So there is time for every advisor to weigh in. Now’s a good time to reach out to your representatives in Washington and voice your concerns before small advisory firms become a thing of the past.

by: Jonathon Duncan, VP – Wealth Management