Ch. 1 Wealth, Accumulation, Discovery, and Marketing

Question 1

What is the wealth management methodology?

Answer 1

It is a client-centred approach, where savings and investment vehicles are seen as a means to an end, not an end in itself.

Question 2

What are the two important components of objectives-based planning?

Answer 2

1. The focus on the client’s values and objectives, which are the basis for his or her motivations.
2. The discovery process, where the wealth advisor tries to understand the client’s accumulation stage and his or her view of potential life transitions.

Question 3

What happens during the discovery process?

Answer 3

The advisor asks questions to try to uncover the client’s reasons for putting money aside, leading to their emotional buy-in to the accumulation plan.

Question 4

What is objectives based planning approach?

Answer 4

is a discovery method that helps builds trust between the advisor and client. The discussion focuses on values and goals, not product. It is structured and conducted systematically and professionally.

Question 5

What is the most effective way to get the client emotionally involved in the conversation? What are the two type of questions you can ask?

Answer 5

You have to ask high value questions that elect information and make them think about the important issues. Two type of questions are:

1. Current state questions (i.e Where are you now?)
2. Future state questions (Where do you need to be?)

Question 6

Describe the different segments of the wealth accumulation market

Answer 6

1. Age Cohorts
2. Accumulation Stages
3. Life stages, including life transitions

Age Cohorts support an age-specific method of looking at the marketplace. The life stage method, on the other hand, recognizes that there is greater commonality among individuals within life stages than there is within age cohorts. The accumulation stage approach is a hybrid of the two methods, relating age ranges to broader life stages

Question 7

In the discovery stage, what are six life areas developed by industry communications specialist Barry LaValley?

Answer 7

1. Vision and values
2. Health
3. Work
4. Relationships
5. Lifestyle and leisure
6. Financial Comfort

Question 8

What is the seed money formation stage?

Answer 8

Generally, a stage that lasts from age 20-40. Has a number of major accumulation needs: house, marriage, , children etc, RRSP, RESP.. Important to think longer term instead of short term. This can be insurance, education savings, and owning assets rather than renting them.

Question 9

What should you focus on discovery with seed-money formation stage?

Answer 9

At this stage, wealth advisors need to understand a client’s motivation to put money aside for their future. The challenge of a long-term plan is that its ultimate goals are unlikely to be achieved for decades. In the early stages, the absolute dollars committed are not as important as the habit of making regular contributions.

Question 10

What is the mid-life or pre-retirement stage?

Answer 10

A client will begin to turn their attention to savings for retirement as they move toward the end of the seed money formation stage. This stage can also be when some or most of the client’s major capital purchases are out of the way. Financial ownership often hits a low between the ages of 43 and 45, then begin to rebound through to retirement. Main goals:

• Topping up funding for children education
• Adding to retirement savings
• reducing debt
• upgrading a home
• purchasing a vacation home
• supporting parents or children

The more money the client has in this stage, the more possibilities they can use it to meet emotional needs or altruistic pursuits. When dealing with a client at the mid-life stage, a wealth advisor has to appreciate the role that emotions play in the client’s decision making process, even more so than a younger client

Question 11

What should you focus on in the discovery stage in the mid-life?

Answer 11

Often, clients in the later end of the mid-life stage will not be entirely clear about how their financial resources can tie into life concerns. It is the beginning of an entirely new stage that may fill the client with uncertainty and concern. Near the end, a wealth advisor must broaden their advisor beyond pure accumulation and investment strategies (what am I retiring too? and what about my health?) The discovery process focuses on a client’s life needs and concerns, more so then when they were younger.

Question 12

What is the retirement needs analysis?

Answer 12

1. The periodic cash flow income required after retirement
2. The income from all sources after retirement
3. The difference between 1 and 2, which is the shortfall or the surplus
4. The assets required to cover the shortfall

Question 13

What are the three popular methods of calculating periodic cash flow? What is the one we use?

Answer 13

Periodic cash flow is how much income the client needs during retirement. Three methods are:

1. An itemized list of all expected expenses
2. Net income, adjusted for pre-retirement expenses (the one we use)
3. An estimated percentage of pre-retirement income

An itemized list of expenses can be the most precise. However, it ignores the current reality of the client and focuses on his/her dream. In this respect, it can be called the square one approach. In addition, it is most accurate when the client is close to retirement, however less time to accumulate.

Ex.
Husband $85k after tax
Wife: 65k after tax
$150k after tax

Deduct expenses N/A after retirement: 
Mortgage- $24,000
Children- $18,000
Lunches, Commute, etc- $6000
Retirement Savings- $16,000
$64,000

After Tax Retirement Living Expenses- $86,000
Pre Tax RLE- $123,000 (assumed ATR of 30%).

Question 14

What happens at the start of retirement in respect to spending?

Answer 14

Client spending lives in the honeymoon period of retirement may be a lot higher than five years later, when he/she has bought all of the toys they wanted and taken several of the striped they have dreamed of.

Question 15

What is the Rule of 20?

Answer 15

For every dollar of annual pre-tax retirement income the client requires, they will need $20 in their retirement portfolio to fund it. Ex. if the client annual desired income (pre-tax income) is $60,000 they will need approximately 1.2 million in retirement savings to draw on. This is ignoring CPP/OAS so you may want to subtract that. However, the rule of 20 is not considered a conservative calculation, experts suggest the “rule of 25” to protect clients from unexpected expenses and “the rule of 30” if they worry abut future health care or long term care costs.

Question 16

The 4% Rule

Answer 16

The 4% rule states that a client can withdraw 4% of their investment portfolio in the first year, then adjust for inflation each subsequent year and not run out of money for 30 years. Also needs to be adjusted from what they will receive from CPP, OAS or pension plan. Disadvantages? 1, assumes steady growth rate when some years will not match withdrawals. 2, approach may be outdated because balanced portfolio used to attain a 8% annual return. If a client expects to retire at age 60, a conservative approach would be to restrict their withdrawals to 2 or 3%

Question 17

What is the sustainable withdrawal rate (SWR)?

Answer 17

It is the maximum amount of money a client can withdraw from a retirement portfolio on a periodic basic with no probability of depleting it during their lifetime. Generally, the SWR must be 30 to 50% lower than the average portfolio growth rate. It is important to recognize that the SWR does not guarantee a client will die broke. On the contrary, it attempts to ensure a client will not be broke while the client is still alive. Ex.

If a client has $500k at the beginning of retirement and they want their savings to last for 30 years, the SWR is 3.9%. The client can withdraw no more than $19,500 (3.9% of $500k) from their portfolio during the first year of retirement. This amount is indexed to actual inflation for the next 30 years.

Question 18

The Maximum Withdrawal Rate

Answer 18

By definition, the SWR is based on the assumption that all portfolios will not run out of money if the client lives for the exact number of years anticipated. Some clients may be comfortable with a 90% survival rate, which is less stringent and allows higher periodic withdrawals. This is maximum withdrawal rate.

Question 19

How often should you review a financial plan based on maximum withdrawal rate?

Answer 19

Every 4 years to see the effects of a typical market cycle. Reviewing it more often is generally not helpful because markets are random in the shorter term.

Question 20

What is the funding factor?

Answer 20

Also known as the asset multipler, indicates how much savings are required at the beginning of retirement to finance each dollar of annual withdrawal for a given time horizon. It is the reciprocal of the SWR and is calculated as 100 dividend by the SWR. The SWR and MWR already account for historical inflation so funding factor already includes this factor. See example in text.

Question 21

What are two main options for late starters to wealth accumulation?

Answer 21

1. There is a tremendous amount of unused RRSP contribution room that Canadian have not taken advantage of. Current estimates suggest that there is over $500 billion in unused RRSP contribution room. Potentially even leverage in this low interest environment and deductibility.
2. Increase non-RRSP contributions.

Question 22

Approaching Risk Discovery?

Answer 22

Wealth advisors can use computer generated or paper based questionnaires, but whenever possible they should try to add a human touch to their discussions with clients. Risk tolerance is an emotional concept, not a rational one. A wealth advisor should make every attempt to understand a client’s emotional view of money by asking questions aimed at uncovering their emotional concerns about risk.

Question 23

What should the advisor focus be on marketing?

Answer 23

Should be on matching accumulation strategies to a client’s life stage needs results in a strategic approach to asset allocation and investment strategies rather than a tactical one.

Question 24

How do wealth managers market themselves?

Answer 24

They market their ability to build accumulation strategies for clients based on their individual life stage needs. In other words, their value proposition is now how they manage money, but how they help clients.

Question 25

What is the difference between selling and marketing?

Answer 25

Selling is the activity of communicating to the client in a way that gets them to understand the benefit of the advisor’s advice. Marketing refers to all of the activities before and after the sales interaction that create an image in the client’s mind of the advisor.

Question 26

What is a unique value proposition?

Answer 26

It is the foundation of marketing. It is the way which an advisor conveys to the marketplace the things they do and the value of what they bring to the table.

Question 27

What are the four types of network relationships?

Answer 27

1. Recommendation- occurs when you have complied a list of names of professionals in areas that extend from your area of expertise, but may still be related to your line of business
2. Strategic Alliance- Occurs if your professional partner has the same goals for the alliance that you do.
3. Reciprocal Agreement- Occurs when a group of professionals form a loose association of services that focus on cross-selling each other’s services
4. Business Partnership- Occurs when you have other professionals on staff or on retainer to provide services to clients.

Question 28

Credibility is based on the foundation of:

Answer 28

Expertise, Trustworthiness, and consistency.

Question 29

What are the three crucial elements for the advisor’s brand to register with the client?

Answer 29

1. Clients must understand what needs they have that the advisor meets.
2. The client must have an emotional attachment to the advisor’s practice. Remember, buying decisions are made in the client’s right or emotional brain, nit in the left or rational brain. The right side is also for long-term memory.
3. Clients must be able to articulate what the advisor does for them.