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Practice Management > Building Your Business

Are You Ready for Advanced Planning?

By Lewis Schiff

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The results from a recent poll conducted by Fidelity’s RIA group were both encouraging and challenging for investment advisors working with high-net-worth clients. Thirty percent of millionaires surveyed don’t have an established relationship with a financial advisor, but of those who do seek professional advice, 34% report having two or more professionals. For average investment advisors, this means they’re not managing a significant portion of their top clients’ assets. To move beyond average, an advisor needs to view his clients as more than chunks of assets to be invested.

According to surveys conducted by Prince & Associates, Inc., which the Fidelity findings confirmed, wealthy clients want a trusted advisor who can help them address a multitude of financial concerns. Prince & Associates’ study of individuals with investable assets of between $500,000 and $6 million revealed that most view advisors as product pushers and not as objective consultants. Even within the group who said they were satisfied with their advisors, almost 25% stated that they were likely to transfer assets from their primary advisors in the coming year. They’re also seeking more advanced products, such as managed accounts, and services, such as estate planning.

Wealthy individuals and families need a variety of advanced financial, tax, and legal solutions that require several types of expertise. Rather than just referring them to an attorney, for example, you can resolve these challenges and boost your value to clients by coordinating their advanced planning needs.

Advanced planning builds on your investment management practice. You augment what you do well with outside experts to help your biggest clients solve their most pressing financial problems. As a problem-solver, you’re paid–usually by sharing in the revenues generated from fees and transactions–to coordinate the work of attorneys, CPAs, business value assessors, and insurance experts. If you don’t have your own network of experts or don’t want to build one, you can bring in a private wealth specialist who works with this level of clientele to help you find solutions. Either way, you enhance your value to your client.

An Advanced Planning Model

The implications for your practice are significant. Advanced planning clients are an underleveraged source of profit and income. Working with them, though, requires education and a new role for you as project manager for a team project (or working with a specialist who operates in that role on your behalf). Either way, advanced planning requires a very different mindset–instead of the traditional one-advisor-to-one-client interaction, it becomes team-with-project-manager-to-one-client.

Regardless of your particular expertise, you need to present yourself as an advisor who uses a holistic approach to solving a high-net-worth client’s needs. Products are only the tools. Understanding the client’s motivations comes first, then analysis of the situation, and last a strategy that matches the client’s level of commitment. These clients are more concerned about working with the right advisor than they are about the best investments. Building a strong relationship is the key to garnering their loyalty and additional business.

If an investment client with a $500,000 account mentioned that he wanted to sell his successful contracting business worth $5 million to his daughter and a group of employees–and then retire–how would you respond? Would you ask the right follow-up questions or would you suggest he come back to you once he sold the business and had cash to invest? This client is a prime candidate for advanced planning.

Here are some examples of highly successful advisors looking outside of their practice to solve the advanced planning concerns of clients:

Knowing the Client

“The reality you see in the first meeting isn’t the reality you see later,” observed Bruce Coldsmith of Coldsmith, Lee and Associates, a financial advisory practice affiliated with Ameriprise Financial Services in Mobile, Alabama. He recently recounted an experience with a new high-net-worth client who had a particularly complex family and business situation. As he got more and more information, he realized the solutions he envisioned wouldn’t solve the client’s concerns. “It was like peeling back the layers of an onion, trying to see all the parts,” he said.

For this client and for others with advanced planning needs, he had to look for expertise outside of his practice. He’s assembled a network that includes business and real estate valuation experts, physicians, and attorneys with multiple specialties. Given his location near the Gulf Coast and the trails of Hurricane Katrina and other devastating storms, Coldsmith has found that his network of outside advisors now includes P&C claims adjusters–a “problem-solving” role that clients who have had unresolved damage claims against insurers truly appreciate.

Emotional Priorities

For many of his clients, Beau Shuler, an RIA in Spartanburg, South Carolina, finds that a charitable inclination to support social causes is often a high priority. “They want to be sure of three things–’I'm set to maintain my lifestyle; my children are set to the level I want to transfer assets to them; and I want charity to get money instead of the IRS.’”

A few years ago he had a client with an $8 million estate who faced a $3 million estate tax bill. He was able to cut the IRS bite to zero by using a charitable lead trust (CLT), which provided the charity with income during the client’s life and his family with the assets at this death. A family limited partnership funded the CLT.

In a more recent case with a client whose assets were more than four times higher, he employed a charitable remainder trust (CRT), which provides the family with income during the client’s life and the charity with the assets at his death. Given all of the moving parts required to accomplish a fairly complex set of objectives, the CRT required considerable fine-tuning. To make sure this trust worked the way the family intended, Shuler hired a consulting firm with special trust software to run various scenarios.

Defining Your Role

“We’ve had several unusual situations recently,” notes Barry Taylor, of Bingham, Osborn & Scarborough, an independent wealth management firm in the San Francisco Bay area with about $1.7 billion in assets under management. One of the firm’s clients with a $4 million investment portfolio wanted to sell his business to his employees using an Employee Stock Ownership Plan (ESOP).

The challenge for the client was moving from a highly concentrated holding in company stock to a more diversified position without triggering capital gains, which he wanted to defer, if not avoid completely. The solution was to borrow money against the ESOP, a unique option of this plan. The client would then buy a diversified portfolio with those funds. Implementing the solution wasn’t that easy for Taylor’s firm, however.

“We understood ESOPs,” says Taylor, “but we don’t do them for clients. They’re a very specialized field. We never had the situation before where we took a client from an ESOP holding to a diversified portfolio.” Some banks were eager to provide the loan, but they wanted a fee and only offered a limited range of mutual funds with high costs.

Taylor researched ESOPs and found a firm that specialized in them, which helped him understand different strategies so he could approach banks on the clients’ behalf with the right knowledge.

Another of the firm’s cases involved highly appreciated real estate that provided rental income for a client who wanted to dispose of the buildings. He also had a strong charitable intent, so the situation sounded like a classic application for a CRT. “Although we are familiar with these trusts and manage several,” notes Taylor, “We don’t create the trusts nor do the related tax analysis. So we’ve had to form a team including an attorney and accountant. Ultimately, we will also be working with the client’s real estate broker and property manager.”

Practice Implications

How many of your clients have assets that you don’t manage or have advanced planning needs that you haven’t addressed? If you didn’t have a network of experts, how would you proceed? In an upcoming article, we’ll examine how investment professionals can leverage a private wealth platform to solve their top clients’ advanced planning needs and generate significant new revenues for their firm.

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