Wednesday, August 31, 2011

Handing Over the Keys to Your Business


None of us will retire leaving a legacy quite like Steve Jobs.

However, with the hubbub and hoopla surrounding his retirement announcement last week, I have been thinking about the succession issues that surround many financial advisors and entrepreneurs.

What do you want to leave after you've gone?

Coincidentally, there’s a list of 6 Succession Planning Tips in a recent edition of Financial Planning, which provides financial advisors with a good start in framing this issue:

  1. Plan ahead and leave enough time for your departure. A 5-year window is a good time frame to shoot for.
  2. Have a strategic vision for how you want to exit the business, as well as the legacy you’d like to leave.
  3. Use a trusted, outside advisor to provide objective input on what’s best for you, your family, your firm, and your clients.
  4. Identify internal candidates to lead the business when you’re gone.
  5. In order to secure your best employees, find ways to link their success to the future success of the firm, e.g. equity ownership.
  6. Practice what you preach and spend some time thinking about your own retirement goals. Don’t leave a void in your life where your career once was.

For those of you who are members of Horsesmouth, there is also this thoughtful discussion authored by Helen Modly and Sandra Atkins, “How long can I work as an advisor?” (Subscription required.) As they point out, many financial advisors assume that they will/can work well past the age of 62. However, given that studies indicate that once we pass 60 years old, the likelihood of dementia doubles every five years, what’s the health risk for those of us who desire longer careers? (The recent sobering news on Pat Summitt reminds us that it can happen to the best of us.)

For those financial advisors who intend to sell their practice as a means to fund their retirement, there are a host of additional important issues.

Many of these are related to the fact that there is a
very-real demographic bulge of financial advisors in the U.S., who are in their mid- to late-fifties, who hope to wind down their careers and sell their practice in the next 5-10 years...all at the same time. With the large number of financial advisors with this same intention the question needs to be asked…What are you selling, and to whom?

It seems probable that, in the coming years, buyers of financial practices can be very choosy because they will have many businesses to choose from. Therefore, as the owner of your financial business,
what have you done with your business that creates sustainable value, post-departure, such that you can command a premium sale price today?

One of Steve Jobs most remarkable legacies is the 313 patents that are linked to his name, including the ornamental design on the staircase of many Apple stores. While it is unlikely that any of us will leave a footprint as deep and as long-lasting as Jobs, it is also likely that many of us want to leave some small trace of our good work.

What have you planned for?

by Chris Holman

Wednesday, August 17, 2011

Modern-Day Recession Babies


My mom was a Depression Baby. Depression Babies were born in, and around, the 1930’s…and grew up during a decade of sacrifice and want. Like many depression babies, my mom was frugal, and saved everything. One look in her refrigerator gives a good clue. (She still calls it the “icebox.”) The refrigerator shelves are chock-full of leftovers…of indeterminate provenance.

My mom was sneaky too. Once, during a holiday visit, I spied a small bowl of ambiguous brown bits in the fridge. It looked like it might have been ground beef…accept for the whitish-grayish film that obscured the top. I mentioned this to my mom. She thanked me for the “heads-up” on the past-due leftover. That night for dinner, she made spaghetti, and the bowl of unknown substance was mysteriously gone…as was my appetite!

New Study on Investment Behavior
There’s an interesting study coming out of Stanford on how our economic experiences affect investment behavior. Stefan Nagel, a professor of finance at the Graduate School of Business, has demonstrated that personally experiencing an event like the Great Depression has a significant impact upon how we invest our money.

If you are a financial advisor, as you read this you may be saying something to yourself like, “I sure don’t need a Ph.D. in Finance to tell me that!” (Which Stefan Nagel has, by the way.)

Yet, surprisingly, until now there has not been hard research that economic events can actually change investment behavior. What Professor Nagel did was to compare 47 years of household asset allocation data and stock-market participation figures from the Federal Reserve’s Survey of Consumer Finance…and cross-correlated this against the investor’s economic experience.

Among his findings:

  1. Individuals who had experienced high stock-market returns throughout their lives were less risk adverse, and more likely to participate in the stock market. (For example, older investors, who had memories of the better market returns of the ‘50’s and ‘60’s were more likely to invest in stocks as compared to those investors who experienced the low returns of the ‘70’s and early ‘80’s.)
  2. Alternatively, those who had experienced high inflation were less likely to invest in bonds, preferring inflation-proof cash-equivalent investments.

Recession Babies?
What makes Professor Nagel’s research especially timely is the remarkable market volatility of the past few weeks, and recent articles like this from this past weekend’s NY Times, Small Investors Recalibrate After Market Gyrations…which leads to investor beliefs like the following, “I don’t think there’s a reason to buy on the dip because the dip isn’t done.”

Indeed, one wonders if the 4% daily swings in the market aren’t helping to create a new generation of
risk-adverse, Modern-Day Recession Babies.

Beliefs and Risk Preferences
For financial advisors, Nagel’s research might also be instructive in learning more about your client’s investment beliefs and risk preferences. Advisors might consider incorporating some of the following questions as they strive to achieve a deeper understanding of the investment concerns and expectations of their clients:

  • How have your own market experiences affected your investment beliefs?
  • How well, or poorly, do you think that the stock and bond markets will do over the next 10 years? (This is their belief.)
  • I’m curious, based upon your market belief, how might this affect what you are willing to do from an investment standpoint? (This is their risk preference.)

If nothing else, I would think that these questions would stimulate a thoughtful discussion on return expectations and risk tolerance.

by Chris Holman

Wednesday, August 10, 2011

When “Active Listening” Beats “Action Bias”


Recently, the US women’s soccer team lost the World Cup final to Japan…on penalty kicks.

The penalty kick is an interesting microcosm of split-second decision-making. Standing 36 feet away, the kicker strikes the ball and sends it rocketing to the goalkeeper at about 80 m.p.h. The goalkeeper has just 0.2 to 0.3 seconds to respond. Stopping a penalty kick is considered one of the most challenging feats in sport. Not surprisingly, 80% of all penalty kicks score.

A few years ago, Professor Ofer H. Azar, of the Ben-Gurion University in Israel, conducted a study. Professor Azar is not a footballer. He’s a lecturer in the school of management, and he thought that penalty kicks would be a perfect way to test his theories of split-second decision-making.

After collecting the data on 311 penalty kicks, what Professor Azar found was instructive. Goalkeepers who moved to their right had the worst chance of stopping the ball…just 12.6%. Those who moved to the left were marginally more successful…14.2%. Those who did nothing, i.e. stayed in the center of the goal, had the best chance…a 33.3% success rate.

As might be expected, the desire to do SOMETHING…as opposed to NOTHING (known as “action bias”) can extend to many fields beyond the soccer pitch. Financial advisors, and investors, know this urge all too well.

For investors, the impulse to act may have deep psychological underpinnings. In one of his brilliant studies, Nobel Prize winner Daniel Kahneman probed the quirks of investment decision-making. He discovered that investors had more pangs of remorse when they lost $1,200 because they chose to act, than those investors who lost $1,200 because they left their investments untouched.

For those readers of this column who are financial advisors, I presume that you have handled 1-2 calls from fearful investors over the past few weeks, who have had a bias toward “action bias.” In their eyes, doing something is better than doing nothing.

As a financial advisor, how do you react to this?

Active Listening
Rather than acquiescing to the clients’ frantic instincts, you may want to make sure that you have practiced “active listening” as you attend to your client and their agenda.

“Active listening” is one of the International Coach Federation’s core precepts that all ICF-certified coaches practice in order to gain complete learning and understanding about their client(s). It is the ability to focus completely on what the client is saying and is not saying, to understand the meaning of what is said in the context of the client’s desires. Active listening summarizes, paraphrases, and mirrors back what the client has said to ensure clarity and understanding… and that both the coach and client are absolutely on the same page. Active listening allows the client to vent the situation (without judgment from the coach) in order for the client to move on to the next appropriate steps.

Active listening is a dynamic commitment to understanding how your clients feel and how they see the world. It means putting aside your own prejudices and beliefs, anxieties and self-interest, so that you can step behind your client’s eyes and envision their perspective.

Of course, “active listening” may not be a financial advisor’s sole response to concerned clients. Additionally, financial advisors might dial up their proactive client communications; ensure that their clients are aware of all of their efforts (including active portfolio monitoring), as well as making tactical changes that are consistent with the client's overall investment plan.

From the client's perspective, the key is their understanding is that "active listening" is not synonymous with inactivity...but rather an intentional response to a client's desire to be heard.

by Chris Holman

Thursday, August 4, 2011

How to Change Relationships Forever...in 10 Seconds or Less


I recently finished reading a fabulous book…Fierce Conversations: Achieving Success in Work & Life, One Conversation at a Time, by Susan Scott. The central premise of this book can be summarized with this sentence: “Our work, our relationships, and in fact our very lives succeed or fail gradually, then suddenly, one conversation at a time.”

I’ve mentioned this book before, as well as an experience that resonated with me. Another experience has happened that demonstrated the power of just one conversation. One even more powerful. I wanted to share this story with you.

I have a morning ritual where I stop in a local coffee shop about 6:00 AM or so and order the same thing…a medium macchiato. The regular barista knows this…and usually has my order going before I’m halfway through the door.

However, once a week, there’s a fill-in barista. He doesn’t know the drill yet. In fact, he has a behavior that has really annoyed me. It so much irritates me that I’ve been socially blocked from chit-chatting with him with the routine small talk.

Each time that I have ordered my usual from the fill-in barista, he has given me this same rap… “Now, you know that our macchiato is not like the kind that you get at Starbucks. We don’t give you the vanilla syrup and caramel sauce. That’s a caramel macchiato. You know that, right?” Five times! He’s told this same rap to me five times!

I listen patiently, but I’m annoyed inside. Silently I say, “Look pal, I know this. I’m here every morning. You’ve told me this before. I think I know what I’m doing, and I would NEVER order a coffee with syrup in it!” I leave the shop muttering.

Last week, I was telling this story to a friend of mine.


My friend: “You know what, that kinda sounds like Nick (not his real name). I believe he works in that café. In fact, that IS Nick…and you know who he is too.”

Me: “I don’t think so.”

My friend: “Yeah, you do. Remember Ben’s play that we saw a few years ago? Remember that awkward-looking young man who played the soldier wearing sunglasses? That was Nick.”

Me: “Ummmm…vaguely familiar.”

My friend: “Yeah, Nick has Asperger’s Syndrome. That repeating thing that he does with you…that sounds like it might be some Asperger’s quirk.”

Me (Stunned and chastened by this revelation): “Ugh…you’re kidding!”

Yesterday, Nick was filling in at the café again. Thankfully, he doesn’t give me the macchiato spiel this time. I dive into the conversation:

Me: “Is your name Nick?”

Him: “Yes it is!”

Me: “Were you in one of Ben’s plays a few years ago?”

Him (Beaming!!!): “Why yes! That was four years ago. How can you even remember? I was wearing sunglasses.”

Me: “Yes, I remember you.”

Him (With his hands crossed over his heart): “I can’t believe you remember that. That’s so great! You don’t know how happy that makes me feel!”

Me: "See you later, Nick."

Him: "This is incredible! I really can’t believe it."

Truthfully, I don’t think that this exchange will alter the course of my life…or Nick’s. But it’s certainly changed our relationship forever. Without question. And it took ten seconds.

Just one conversation.

Wow!

by Chris Holman