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Kevin Knull’s 6 Parts of a DOL-Friendly Financial Plan

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What’s the most prudent way advisors can act in their own best interest in complying with the Department of Labor’s best-interest advice rule? Create quality financial plans documenting and proving that the investment recommendations they make are indeed in their clients’ best interest.

So argues Kevin Knull, president of PIEtech, creators of leading financial planning software MoneyGuidePro, in an interview with ThinkAdvisor. Knull, a certified financial planner, discusses the Top 6 components of a top-notch plan, and more.

His new book, “Exploring Advice” (Create Space), is chock full of valuable insights and best practices to help FAs abide by the rule, scheduled for implementation next April. 

Included are separate chapters written by 39 other industry experts too – like heads of financial planning at Morgan Stanley and UBS, and wealth management executives at RBC and Raymond James. Knull’s own opinions are reinforced quantitatively by a survey he conducted of more than 1,600 financial advisors.

In the interview, he opines on how advisor compensation could change as a result of the rule — which requires FAs to adhere to the fiduciary standard for retirement accounts — as well as how he sees the role of traditional FAs evolving.

Before helming PIEtech, Knull simultaneously held several leadership posts at Symetra Financial.

Here are highlights of our interview:

THINKADVISOR: Why is a thorough client discovery process critical under the DOL rule?

KEVIN KNULL: Making sure that you really understand the client’s situation is the only way an advisor will survive the post-DOL environment. To act in the client’s best interest, you have to factor in their full financial circumstances, not just the typical seven or 15 risk-tolerance questions.

How does the rule essentially differ from FINRA’s know-your-customer rule?

On the spectrum, know-your-customer is at the far left end. It says, don’t provide bad advice. On the opposite end are the DOL conflict-of-interest rules established to ensure best-interest advice. They require you to understand your client. To not take the time, diligence and prudence to do that will subject advisors to unnecessary risk.

Where does the burden of proof rest?

Absolutely with the advisor. He or she must defend that their recommendations were in the best interest of the client.

How can that be shown?

A quality financial plan is the easiest and most prudent way to help document it.

What’s your definition of such a plan?

A quality financial plan should be goals-based, collaborative, dynamic, current, incremental – meetings with the client can be broken down into life stages, say – engaging and address issues relevant to the individual client or couple.

What are the main elements of a quality plan?

The first is Expectations: What the client is looking forward to in retirement, both physical and intangible desires; for instance, travel, spending time with family. The next category is Concerns: What are they worried about? Top concerns include running out of money and parents who need care.

What’s the third category?

Goals. The reality is that few advisors dig deeply into the conversation about goals, though that’s really what clients are saving for – to fund those goals. Almost all participants in our advisor survey said that 12 goals should be evaluated and discussed. But typically, the average advisor-driven plan includes only 2.7 goals. Where do health care costs enter the picture?

That’s the largest and only mandatory expense of retirement — and increasing at more than 6-1/2% per year. But very few financial plans include Heath Care specifically. If you don’t factor that in, how can you possibly invest a client in their best interest?

You write that Social Security filing strategies typically aren’t covered in financial plans. Why are they necessary to address?

For many Americans, Social Security is their largest source of retirement income. Yet very few advisors make a Social Security filing recommendation. Something less than 12% of financial plans include one. For example, the strategy of deferring Social Security income [to age 70] means a guaranteed 8% increase in income per year. Usually, it would be hard to demonstrate an 8% growth in income anywhere in the market.

What’s another key component?

Risks. The DOL says you must invest in accordance with the client’s risk tolerance. But this is more than just market risk. It’s inflation risk, longevity risk, mortality risk, time-horizon risk, liquidity, concentrated stock risk and so on. You need to consider all those risks.

What’s one big risk that FAs commonly ignore?

Very rarely does an advisor ask if the client has a health condition that would shorten their life expectancy. If they do, it should be contemplated before providing advice that’s in their best interest because if someone only has a three-year life expectancy, it doesn’t make sense to invest them in a long-term vehicle or a long-time horizon portfolio.

Some advisors feel uncomfortable asking clients personal questions.

They have to be asked. I don’t think you can perform your duty today unless you ask those questions.

Why is it important to include Liabilities as a component of a financial plan?

Eight in 10 baby boomers carry debt in retirement. Advisors managing [client] debt appropriately can provide far more alpha for most Americans than by picking one stock over another. So there’s very real value associated with managing client debt.

Is that true for high-net-worth clients too?

Just because someone might have $1 million to invest, if they owe $3 million, you still need to take that into account. Also: If a client’s home burns down and they don’t have adequate insurance or if they become disabled and are the sole income earner, and you hadn’t contemplated such [possibilities] and invested them in something illiquid, that would absolutely have impact.  

Why, then, isn’t managing debt listed as a line item on most financial plans?

When the industry was moving to fee-based accounts, advisors said, “I’ll do financial planning and all the other things as part of that 1% [or such] fee.” They didn’t articulate the value [of financial planning, etc.].

What’s the fallout of that now?

With robo advice at 25 basis points, asset management has become commoditized. But robos aren’t creating and maintaining financial plans, making sure the client stays on track, asking when something looks awry, whether a change should be made, and so on. All that’s worth something.

Broadly, what’s your view of robo advisors?

Robos have a real purpose in today’s world, but they’re not equivalent to a traditional advisor that’s doing everything he or she should be doing. What’s another client benefit of a quality financial plan?

People get worked up when they see their account go up or down 5% because the media has trained them to do that whenever they hear words like, “plunge” and “soar.” But if you know your financial plan is on track, you’re less sensitive to those fluctuations. If people have a plan, that emotional roller coaster tends to be minimized.

How will the DOL rule affect advisor compensation?

[At present], in most channels – independent space, wirehouses, regional space – if you produce a larger amount of revenue, you get a larger payout. Under the DOL, if there’s incentive for an advisor to get paid more to sell a certain product or hit a certain production level, that could create a conflict.

When and how will current comp systems change, then?

[They] absolutely will change industrywide by next April. They have to [unless President-elect Donald Trump acts to modify or repeal the rule]. There will be a lot of [comp variations], such as a flat-fee retainer where the client pays a certain dollar amount for services rendered and many examples of salary-plus-bonus.

But couldn’t a bonus arrangement generate conflicts?

Yes. That [approach] will be challenging. Any scenario in which an advisor is incented with more compensation probably injects a conflict of interest. Therefore, a flat structure will be more common.

Do you anticipate advisors charging a separate flat fee for financial planning?

There might be a one-time financial planning engagement fee or maybe a recurring planning engagement fee – or even an hourly fee for time provided.

Given expectation that the fiduciary standard will be expanded beyond retirement accounts, will there still be a place for the product sales person?

There probably will always be a role for some form of product sales person to, for instance, serve younger clients [just starting out].

How will advisors who don’t adhere to the fiduciary standard on nonqualified and after-tax money stay competitive with FAs who act on the best interest standard in investing those assets?

If [most] everyone else is a fiduciary on all client money — not just  [retirement accounts] — and you choose not to be, it will be awfully hard to get clients to work with you. So, at that point, you’ll end up having to move in that direction.

How do you see the traditional FA’s role evolving?

Our industry will shift more to a “physician structure.” Physicians must do no harm and act in your best interest at all times. They have to understand your [entire health] situation. The same goes for advisors: They need to know their clients’ complete financial situation.

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