Aligning your compensation model with that of other professional advisors

The so-called financial advisors who clash with other professional advisors are usually those who sell investment and insurance products and receive up-front commissions. Other advisors rightly question the motivation of these “financial advisors,” because they wonder whether these advisors are serving their clients or their own best interests. Most practitioners who consider themselves financial advisors typically engage in positioning an investment or insurance product and not proposing a broader financial advisory solution or relationship.

Position yourself as a true fiduciary advisor and embrace a compensation model that’s better aligned with the way these other professionals are paid. For example, if your client’s other advisors charge fees for services rendered, consider doing the same. This approach places you in a category that’s familiar to the other advisors and usually makes them feel as though they can collaborate with you more freely without the overarching concern of a compensation conflict. If you’re charging commissions, you’ll experience an immediate disconnect when you start working with these other professionals. (See Chapter 4 for details about compensation models that are more conducive to collaboration among fiduciary advisors.)

Delivering optimal results

Obviously, a team of specialists is better suited than an individual who tries to be a Jack-or Jill-of-all-trades to serve a client’s diverse financial and legal needs. Equally obvious is that engaging in active dialog with these specialists will yield superior financial outcomes for your clients. Keep in mind that these various specialties are all connected — taxes, legal issues, and asset management all have the potential of impacting one another. A failure in one area can cause a domino effect that seriously undermines your client’s ability to achieve her financial goals.

In this section, I present a couple examples that demonstrate the importance of coordinating the efforts of your client’s advisors.

Creating a system of checks and balances

If you’re operating in a silo and not subjecting your ideas and recommendations to challenge or critique, then you’re not growing in experience and knowledge. In my own practice, ongoing dialog with professional advisors for the benefit of mutual clients has been a great source of education, as well as new prospects. By working within a network of professionals who trust and respect one another, you create your own system of checks and balances that holds everyone accountable for their advice.

Any professional could be wrong in his or her recommendations. By engaging in open conversation about a recommended client strategy — whether it’s proposed by the client’s accountant, lawyer, or you — educated professionals have the opportunity to weigh in on it from different perspectives. Although each professional has different education and work experience, they all have a common client experience and know that every strategy has its pros and cons. A good client advisory team recognizes that the best strategy is that which delivers the most value to the client, so ideas generally don’t get shot down unless they deserve to be.

Leveraging the power of specialization

Many professions, including law and accounting, have general practitioners and specialists. Typically, the more complicated and sophisticated the situation is, the greater the need for a specialist. If your client has complex financial needs and is relying on a general practitioner to meet those needs, consider recommending that a specialist be added to the team.

A classic example of when a specialist needs to be called in is when a client owns a family business. In this situation, the client would be well served by having two lawyers — a corporate and an estate lawyer, who collaborate to develop the optimal business transition plan. The business plan and the family’s estate plan are intimately connected through family members who are functioning in the business as employees (often as key employees), and both plans need to reflect that.

Also, at some point in the future, the family business will face a transition of leadership and ownership, which may be anticipated or unexpected (as in an owner’s untimely death). Coordinating the family trusts with the business succession and ownership plan is a Herculean task best handled through the collaboration of specialists.

Your job initially is to make sure that your client has the right people on the team to address her unique needs. Then, your responsibilities shift to ensuring that the assigned tasks are completed and providing information and insight as requested by the specialists.

Accounting has several specialties that may benefit certain clients depending on their situations:

• Bookkeeping: Businesses and some families use bookkeepers to record and manage their day-to-day finances. A client who’s struggling with budgeting and financial record keeping could benefit (especially if she owns a business) by having a bookkeeper.
• Business accounting: Clients who are struggling to grow their business could benefit from the services of a business accountant. Although business accountants typically spend a good deal of their time on bookkeeping chores, they also create and review reports and provide insight into how a business can run more efficiently.

• Tax accounting: Clients who have complex tax situations are wise to consult an accountant who specializes in taxes. In fact, all of your clients would be wise to consult a tax accountant. A tax accountant does much more than merely prepare tax returns; she can offer valuable insight on how to take advantage of all qualified federal, state, and local tax breaks for businesses and individuals.

  A tax accountant should also be on the corporate and estate lawyer team when they’re planning a client’s estate. The tax specialist can make sure that the tax expense of moving a business from one generation to another is done without the IRS showing up at the client’s business after the estate tax filing.

• Forensic accounting: If you have a client who’s entangled in a messy divorce and suspects her soon-to-be ex of hiding money or other assets, you may want to recommend a forensic accountant. Forensic accounting is like a special ops SEALs team being tasked with a targeted mission — in this case to uncover shady business or money activity the results of which can be used to support a case in litigation.

Teaming up with your client

As with any partnership or good relationship, communication is key. Touching base with your clients regularly — on an ongoing basis — is the only way to ensure you’re getting the whole picture. Remind your clients that you and they both want the same thing — a great financial outcome over the course of their and their loved ones’ lives.

Tell clients what they need to hear, not what you think they want to hear. The fact is that most clients want to be told what they need to hear. That’s what they’re paying you for. Just be sure to present it without judgment or sarcasm. If you’re telling clients what you think they want to hear instead of what they need to hear, you’re enabling bad habits. Your job is to lead your clients in the direction of financially healthier decisions and behaviors.

Your client has hired you because she can’t see the forest for the trees, and you can. If she knows that you’re in partnership together to achieve the same agreed-upon goals, then teamwork will come naturally. Your client will be more open, responsive, and engaged. She’ll understand that she’s better off working with you than trying to manage her finances by herself or with another financial advisor who’s less committed to teamwork.

As with any partnership or team, your relationship with a client may encounter some friction and frustration. Even the closest teammates and partners can butt heads and engage in heated debates over what’s best. Usually, they have the same goal; they just disagree over the best way to achieve it. Not only are disagreements completely normal, but they’re also to be expected and can be quite productive. With every disagreement, you and your client glean more about each other, which ideally leads to a deeper relationship with greater understanding.

Partnering with your client’s lawyer

The easiest way to connect with your client’s lawyer is to have your client introduce you via email. This also serves as a written notice, which lawyers like to have to ensure they have permission to discuss client-specific information with another party.

To simplify the task for your client, write the introduction yourself and email it to your client to use. Figure 15-1 is a sample introductory email that your client can send to her lawyer:

Working with your client’s accountant

Your client’s accountant can be helpful in the area of tax planning (see Chapter 11) by providing you with your client’s effective tax rate along with an overview of your client’s income and any ideas on how the two of you can work together to ease your mutual client’s tax burden.

I’ve found that accountants are less formal to deal with than lawyers, but you should still ask your client to introduce you via email and provide permission to share information and answer questions.

I recommend hosting a brainstorming session with your client’s accountant to freely discuss ideas or strategies that she may have leveraged with other clients.

In general, business owners have more complicated tax planning concerns than do salaried employees, so if your client owns a business, having a tax advisor on the team is a big plus. During your initial conversation with your client’s tax accountant, here are a few tax-savings strategies for business owners that you may want to discuss to get the ball rolling:

• Changing the client’s business structure: Business structure (sole proprietorship, C-corporation, S-corporation, LLC) impacts the way the business owner gets paid, which can affect income taxes and the amount of self-employment tax (FICA) your client pays.
• Establishing a profit-sharing retirement plan: Profit sharing retirement plans enable businesses to contribute a portion of the business’s profits into an employee retirement account that grows tax-free. In addition, contributions made by the business aren’t included in the business’s taxable income. In a family business, this can be a great way to build wealth for family members who work in the business.
• Using fringe benefit plans for employees: Fringe benefits include group life, health, and disability insurance; dependent care; and tuition reimbursement. They’re a great way for employers to improve employee recruitment and retention by adding compensation that provides tax breaks for the business. For example, employee health insurance premiums paid by the business are generally tax-deductible.
• Using an accountable plan: An accountable plan governs how a business reimburses employees for business expenses. Under such a plan, reimbursements to an employee or business owner aren’t included as part of the employee or owner’s income, but the business can take a deduction for these amounts.

These methods of allocating capital toward corporate benefits and other business continuity or succession planning items can reduce the business’s taxable income, while enhancing its overall value and efficiency.

Working on your follow-through

Nothing is more embarrassing than going through all the time and effort to collaborate with other advisors for a client’s benefit only to lose track of who’s doing what next. To avoid such embarrassments, get organized and follow through on whatever the team discussed.

Set deadlines in your communications with other advisors and your clients. Create reminders in your customer relationship management (CRM) software or whatever scheduling tool you use. Collaborations can take considerable time to come to fruition, and everyone can easily lose track when they get busy with other things. I’ve had projects go on for a year or two before we finally proceeded to implement the plan.

The more complicated the client’s needs and the more advisors are involved on a project, the longer the process takes. Don’t be discouraged; it’s a natural side effect of going up-market in your client acquisition.

Acting as the central point of contact

As the team’s financial advisor, your number should be on speed dial for your client. You should be the first or second person your client calls when life-changing events occur that are likely to impact her finances or when she’s thinking of making an investment decision or changing the financial plan. It’s okay to be the second call if your client is changing beneficiaries to her estate, which her lawyer would need to do, but then you need to be notified to update beneficiary designations on all qualified accounts.

Remind your client to call you for advice whenever she’s about to make even relatively small decisions, such as refinancing a home mortgage, buying a vacation home, buying or leasing a car, investing in a business venture, bank-rolling a down-and-out relative or friend, and so on. You can help in these matters, as well, and your clients should know they can count on you for unbiased advice. In some instances, you may want to consult with other advisors on your client’s team, just to make sure you’re not missing any salient point from a legal or tax perspective.

Maintaining separation among advisors base on their roles

Although everyone on the advisory team should collaborate to optimize the client’s outcome, each advisor has a unique role to play:

• Financial advisor: You’re in charge of allocating the client’s capital and reallocating it to take advantage of new opportunities, limit the client’s exposure to risk, and adapt to changes in the client’s situation. You add value through favorable allocations that either build or protect accumulated wealth.

  You must be the calm captain on the stormy seas. Much of the value you bring your clients involves talking them off the cliff in the midst of wild market swings and listening to them when family discord leads them to consider changing beneficiaries. In these situations, your client is much more likely to call on you instead of her lawyer or accountant.

• Lawyer(s): Your client’s lawyer is generally in charge of ensuring that the control/disposition of assets is handled according to the client’s wishes after the capital has been allocated. A lawyer can also add value by drafting wills and estate plans and helping the client establish a business entity and structuring it in the best way possible.
• Accountant(s): Your client’s accountant is primarily in charge of recording and managing profits and losses and advising on tax-saving strategies. An accountant can also help advise on estate planning gifting techniques.

Unlike other professionals, a financial advisor holds the power to provide lifetime income to a retiree, make sure funding is available to put all the kids through college, and deliver a check to a surviving loved one in the event of an untimely death of a household breadwinner. These are heavy responsibilities. Dropping the ball can have serious consequences on par with a person’s world ending, which is why you must take the lead on the advisory team.

In contrast, lawyers and accountants are mostly project-based advisors, who have limited interaction with the client throughout the year and face less serious consequences if they drop the ball. If the client’s accountant overlooks a tax break, it’s not the end of the world, just an opportunity to optimize. Likewise, if a lawyer omits a provision in the estate plan, it may cause a huge headache, but again it’s not the end of days.

Shopping solutions

A key role as advisory team quarterback is to shop solutions that most effectively meet your client’s needs, whether you or someone else on the team is recommending that the client obtain a certain product or service. Being able to shop the market effectively builds confidence in you among the other professionals on the team as well as the client.

Ideally, you have access to an independent, nonproprietary product suite that allows you to fulfill a variety of potential needs — something commonly referred to these days as an open-architecture solution platform. If you work for a company that manufactures high-quality products, using those products is fine as long as they pass the cost-benefit smell test. If you’re at a firm where you’re pressured to sell certain products, the best approach is to give your employer’s proprietary products the right of first refusal (if they give the best offer based on cost-benefit analysis, then they win the business). If the manufacturer can offer a great product at a great cost that’s at least as good as the other options on the market, then you agree to recommend the product, but if you find something better, that’s what you recommend. To do otherwise betrays your client’s and other advisors’ confidence.

A side benefit of shopping the market for solutions is that the broader your marketplace, the more referrals you’re likely to develop from your professional network.