This forum has so much potential

I think it is really great to have this forum for discussing, asking questions, and sharing information.

Working with DKE has meant terrific guidance in a number of the things needed to be a successful financial advisor. There are some other areas, though, in which we are all a little bit “on our own” and it might be great to compare notes and share ideas and “best practices.” Here is a partial list of those areas. I hope someone will note some I may have missed:

- Regulatory Compliance;
- Advertising;
- Software such as CRM systems;
- Dealing with other professionals such as lawyers.

Can this be a place where we can help each other out? I sure hope so.

-Steve Blum

A few thoughts on rebalancing

We attended our regional DFA Learning Group session yesterday. It's always an informative and enjoyable trip. Many of you have been encouraged to seek out a group in your area and we reiterate that suggestion here. We're also aware that several of you aren't able to access a group due to DFA capacity constraints. We've communicated our desire to have membership available to all our advisor alliances to DFA and have been assured that forming new groups in over-subscribed areas is being actively considered.

At yesterday's session we heard from Marlena Lee, PhD., one of DFA's newest Research Assistants (only at DFA would a PhD be an "assistant"). Marlena previewed an upcoming white paper she's authored on rebalancing ("Rebalancing and Returns"). What prompted her to address the issue was a recent paper asserting that more frequent rebalancing (as frequently as daily or weekly) can be demonstrated to have produced statistically significant increases in returns.

Marlena's analysis found flaws in the paper's reasoning and conclusions. First, the time period was relatively short at about 8 years. As the whole exercise is essentially data mining, it makes sense to examine as large a sample as possible. Second, she was able to demonstrate that there is in fact NO statistically significant benefit to returns as a result of frequent rebalancing. After discussing the original paper and establishing that the conclusions were not valid, she presented a similar analysis of out of sample data from 1926 through early 2009. It is clear from that exercise that there is no incremental return associated with rebalancing whether daily, weekly, monthly, quarterly, annually or some multiple of years is used as a trigger. It's important to remember when considering client exposures compared to their IPS allocations that rebalancing's main purpose is to control risk levels within the portfolio. Expenses and tax impacts can easily negatively impact portfolio returns if rebalancing is too frequent. Tax loss harvesting can be another trigger but there still wouldn't be any incremental returns expected. While there wasn't any specific time period identified that seems better or worse, annually seems to make sense within the context of controlling equity exposure risks and overall portfolio volatility when balanced against the negative impact of transaction costs and taxes. Guess we could call it the Goldilocks approach...

Addressing Client Anxiety

The essay below is adapted from an article in the Transition Dynamics May Newsletter authored by Bonnie Brown Hartley and Michael T. Hartley. The adaptation was produced and is used with the authors' permission.

Helping Clients Find Well-Being Amidst Chaos

The last few quarters may have been the most stressful times most of our clients have ever endured. Economic upheavals, involuntary reassessments of career and retirement plans, a sense of failure by those they may have long considered “trusted advisers,” severe challenges to philanthropic organizations dependent on individual and corporate giving. All three sources of your clients' capital –financial, human and social – may have been altered dramatically. Previously reasonably predictable stress levels have suddenly become barely manageable distress.

As you work with clients, you may notice that their “usual” behavior has become more rigid or that their usual confidence in the future has been shaken. Proactive listening may help you to identify specific areas sparking the greatest distress. As an adviser, one of the ways you may be able to help reduce your clients’ anxiety is to gain an understanding of those stressors that are likely to impact them most intensely. The source of distress may be their position individually, in their family or in business and the community. It may also be all three. As a presumably unemotional observer you will be able to more easily identify the challenges your clients suddenly face and to identify strategies that may be able to overcome those obstacles.

Clients may have obstacles on several fronts. On a personal level, the economic upheaval may have called into question their previously anticipated retirement plans because of decreases in the value of their 401Ks and investment portfolios. On a family level, challenges regarding their parents’ financial self-sufficiency and/or their young adult children’s ability to find meaningful, well paying work may increase demands on already stretched financial resources. On a business level, they may have had to lay off employees that have worked for the family business for decades or they may have watched the value of their business and their lines of credit shrink when they might have been hoping to sell or expand. In the community, they may sit on not-for-profit boards that have to address dramatic downturns in giving. They may also be receiving increasingly urgent requests for support from local, regional and national philanthropic organizations.

One way you can help clients move from distress to manageable stress is to provide practical resources to address each of these new obstacles to the level of each clients three forms of capital.

Financial Capital

As financial adviser, one of your most important functions is to help clients retain and manage their financial capital:

• review investment portfolios and, provided the parents give their permission, coordinate a review of the parents’ portfolio with their adviser or offer to perform the task yourself;
• work on short and long-term cash flow plans to manage valuation and inflow changes;
• teach family members how to analyze and track cash flow by providing them with personalized cash flow spreadsheets, showing them how to create and balance a budget;
• prioritize spending plans by helping them to distinguish between needs and wants;
• work with company managements to identify and to implement cost savings and reorganization plans that will leave them more competitive as the economy starts to recover.

Human Capital

The adviser may offer to help clients:

• provide perspective about the economic environment and help them to mitigate the impact of a seemingly constant stream of harsh news;
• review long term visions and goals and suggest strategies to overcome near-term challenges and obstacles;
• think strategically about ways to take advantage of the economic downturn, including opportunities for:
• intergenerational wealth transfers of closely held business interests that may be done at lower valuations;
• taking advantage of historically low interest rates on intra-family loans;
• helping a child purchase a home at a bargain price;
• identify resources for stress management, including yoga, meditation, tai chi, traditional exercise programs, and executive health centers such as Duke’s Center for Living and Executive Health Center or the Cleveland Clinic-Canyon Ranch Executive Health Programs.

Social Capital

The adviser may offer to help clients:

• review client families’ credit scores so that they understand how to protect that valuable asset;
• suggest clients contribute time, wisdom, experience and other resources in lieu of cash contributions to help supported not-for-profits survive the economic downturn.

These are the times clients tend to hunker down, worried about fees and focused on day-to-day survival. Take the time to check in with them. Even if only to offer moral support and to get them out of an “action paralysis” triggered by feeling overwhelmed you will make a difference. Proactive contact can help to mitigate the uncertainty feeding the stress level. What may seem to be insurmountable obstacles can often be broken down into manageable problems with a little objective input. Helping your client families reorganize their resources and prioritize their goals to adapt to new realities will contribute significantly to their well-being amidst the chaos that surrounds them.

Whether you are a successful practice or a startup, DKE Advisor Services can help maximize your most valuable asset: the time you spend with clients.
Our team can provide you with a complete suite of support services including in depth current portfolio design, recommended portfolio design, production of a comprehensive Investment Policy Statement document, rebalancing and reporting.
Our technology platform will enhance your productivity while providing a high level of security to protect client information at all times.
For successful entrepreneurs who want to move their practice to the next level, we can virtually eliminate the unproductive time you spend designing portfolios, monitoring asset allocations and producing quarterly report packages. Outsourcing typically costs significantly less than dedicated employees. If you perform these back office tasks personally, the incremental time spent in the front office nurturing existing clients and investigating new prospects can provide the foundation for a quantum leap in revenue and profitability.
Start-up practices will benefit not only from the wide array of resources DKE brings to an alliance but also from our input on best practices techniques. Avoiding common pitfalls and quickly implement a proven effective consultative approach to client relationships will help you develop a streamlined, highly profitable business.