Got Change?

Illustration by Robert Neubecker

Much is made of "change" these days, as though it were a concept long ignored whose time is finally due. Last fall, Schwab Institutional's conference in San Francisco carried the theme: "Change Is The Only Constant," proffering the notion that the investment management industry is changing, and asking the question, "Are you ready?" NAPFA's annual national conference, held this May in Minneapolis, was driven by a related theme, "Adapting To Change - In Your Work And in Your Life."

Is the hoopla over change warranted? Actually, it is. "The absurd man is he who never changes," wrote 19th Century French poet and satirist Auguste Barthelemy. Unfortunately, it's all too easy to remain absurd. Never before in human history has the rate of change been so rapid. In one year we experience more innovations than the Egyptian Pharaohs did in a century. The pace is only going to quicken.

So how does one adapt to change? "The only person who likes change is a wet baby," said keynote speaker Kathy Cleveland Bull at the NAPFA conference.

A teacher, consultant, and director of training and organizational development at Ohio State University, Bull used as the cornerstone of her talk the best-seller Who Moved My Cheese?, by Spencer Johnson. The short book is a parable that takes place in a maze where the lives of the four inhabitants center around a quest for cheese - cheese being a metaphor for what one wants in life, be it money, health, or a good job or relationship. Two of the maze dwellers are non-judgmental, non-analytical mice. They crave cheese and their lives and belief systems are centered around it - and they will do whatever it takes, including venturing forth into the unknown, to find more. The other two are mouse-sized humans whose complacency and fears surpass their need for sustenance, rendering them incapable of action even when their cheese supply runs out.

The parable's message is that, while change can be a curse or a blessing, everyone can experience it as the latter if each individual endeavors to understand the nature of "cheese" and the role it plays in his or her life.

While some conference attendees found "the whole cheese thing a bit simplistic," as one put it, many we spoke to considered change to be vital as subject matter for exploration, though they differed as to its form. Paul Seibert, president of Asset Management Associates in Lincoln, Rhode Island, said that as a "small-time operator" his big concern was changes in the planning industry in terms of new players. "What's going to happen to the small guys?" he asked. "Will it be possible to meet the challenge of still being able to service everybody adequately at a reasonable price without the resources the big guys have?" What helped ease his fears, he said, was the coming existence of a wealth of Internet-based software that in the long run might be "the thing that levels the playing field."

Connie Herrstrom, an advisor with Premier Financial Planning, Inc. in Princeton, New Jersey, noted that while it was one thing to understand the concept of change, it was another to apply it to her practice. She added that it would have been helpful if some of the changes advisors face and will be facing had been identified and discussed in greater depth in sessions throughout what was NAPFA's 17th annual get-together.

As it was, some concerns in the form of trends affecting planners were touched on by audience members during Bull's keynote, and later in a session she conducted called "Change Management: Applying the Principles of the Maze To Your World." These concerns included the Internet; major wirehouses "trying to convince the public they're fee-only when they're not;" longer human lifespans necessitating different planning strategies; previous partners who are now the competition; changes in estate taxes and giving; the way advisors communicate with clients (including serving clients electronically "that we will never actually see"); and keeping pace with maturing practices. A few advisors lamented never having the time in their busy practices to "stop and smell the cheese," to leave the "operational stuff" behind and address the future. To all unwitting procrastinators, Bull offered this reminder: "Until the pain of staying the same outweighs the perceived pain of change, nothing will happen."

One session that was not simplistic was Agnes Mura's segment on coaching and people skills. Mura, president of Trans- formation Resources in Santa Monica, California, first gave an overview of coaching. Then she demonstrated the concept by acting as a coach for an advisor from the audience. The advisor, whose objective is retirement, found that her husband's retirement objectives and objections played a larger part in her own plans for retirement than her own actions toward her goal. Mura led her through a series of questions that brought her to the realization that she was letting her husband's reluctance to consider retirement impede her own progress, and she was not acting as an effective coach for him.

The next step was for everyone to get a taste of coaching. Mura led the group through an exercise in which everyone chose a partner and played "coach" to their partner's dream. The process involved lots of questions - breaking down the dream into achievable and measurable objectives that can be scheduled, determining the first step, the next step, and so on through the process. If there is reluctance on the part of a client to commit to a schedule, or to break down a dream into achievable portions, the coach can and should ask if this is indeed what the client dreams of. If the client is still reluctant, there are other issues at work that must be addressed.

The process is enlightening and empowering, according to several who took part. And with the growing emphasis on coaching and people skills within the advisory community, such knowledge can only grow more valuable.

Conference organizers had their own issues of change to deal with. Reacting to grumbles in the vendor community about attendee traffic in exhibit halls at past conferences, this year's conference facility afforded effortless access, fostering increased interaction between the approximately 110 product vendors and 650 conference attendees. "If we can tell them what we need, then they can try to provide it, something that is beneficial to all of us," said one planner of her dialogue with vendors. During the final two days of the conference, 14 software vendors took over the exhibit hall, drawing a great deal of interest despite the fact that tight scheduling meant conference attendees had to miss a session to visit them. Software vendors included PLANware, Q-Plan, Morningstar, and Persimmon.

Of the general product vendors (a.k.a. ex-hibitors and industry partners), about 40 were "Resource Associates" who support NAPFA in various ways throughout the year. Their importance is underscored by the fact that only 20% of NAPFA's operating budget derives from membership dues, with some 70% coming from profits from national and regional conferences (vendors pay anywhere from $3,500 to $6,000 for a booth in the exhibit hall), and the balance provided by contributions from Resource Associates.

Another area of change was in the conference itself. According to this year's program chair Marge Schiller, who works as a financial planning manager at the CPA firm Goar, Endriss and Walker in Sarasota, Florida, as well as maintaining her own planning practice serving clients in Connecticut and Minnesota, "we went out on a bit of a limb." The program differed from previous years in that it wasn't as focused on investment issues, she explained, opting instead for greater subject matter diversity. Conference attendees were given the option of concentrating in one of three specialty areas or mixing and matching. The areas, or tracks, were counseling and coaching, practice management, and the technical track, "which was the various components of financial planning to get the maximum continuing education credits," Schiller explained. All sessions offered NAPFA continuing education credit, while some qualified for CFP credit.

Premier Financial Planning's Herrstrom felt the conference did indeed offer more choices, with an emphasis on the "soft side" of planning. Of interest is a comment made by advisor Sharon Rich of Womoney: Financial Education And Counseling For Women, Belmont, Massachusetts, who said that "some of the women planners were commenting that some of the men were getting more from these workshops than the women," suggesting that women tend to bring those softer skills into play without much coaching.

"Everyone's at a different place; I felt there was something for everyone," said Herrstrom of the program offerings. Interested in "technical" issues, she especially enjoyed the charitable giving and Monte Carlo seminars. The former "got me into identifying charitable intent and getting people to think about it a little bit more," while the latter was of value since "a lot of us are using Monte Carlo and trying to find good way to explain it to our clients. It was helpful to see different approaches presented."

Rich, echoing the sentiment of many, said the reason she goes to conferences is a combination of education and networking. "I feel like the conference succeeded in meeting those goals; it was also a chance to relax with colleagues." For Paul Seibert, the conference was also "immensely helpful, though you reach a little bit of a frustration level in trying to take in everything at once." As for going out on a limb, Schiller believes the different approach was "very well received. We got people to think about themselves in the global context of their role as an advisor to clients."

They also got people to think about gifting. Christopher R. Hoyt, professor of law at University of Missouri-Kansas City School of Law, tackled the topic "Charitable Giving: Sophisticated Ap-proaches to Tax Savings And Identifying Char- itable Intent" before 150 attendees. He noted that some 98% of the population has no estate to bequeath; and four out of five of the remaining 2% don't make charitable bequests. His talk, technical and laden with complex illustrations, was peppered liberally with jokes that brought down the house.

Hoyt stressed the point that when it comes to taxes, not all charitable gifts are treated alike, noting as well that the handling of income taxes can create problems for estate tax considerations, and vice versa, citing the need for a strategy that can deal with a combination of both.

Regarding lifetime charitable gifts, tax laws usually favor appreciated stock and real estate rather than cash or property, he explained, while with charitable bequests, income tax laws favor property generating an IRD (Income in Respect of a Decedent). He defined an IRD as being an inherited payment that would have been taxable income to the decedent had the decedent received it the day before he or she died, making IRD an important exception to the general rule that inherited property is exempt from income tax. He advised that if an individual intends to make a charitable bequest, the gift should be made with assets that generate income in respect of a decedent (IRD), and that even people who are not normally charitably inclined should consider making a charitable bequest of retirement plan assets due to the high taxes imposed on these types of assets.

"It was very informative to people specifically involved in this issue," said one advisor who wished to remain anonymous. She noted she took the class not so much out of interest but for the CE credits offered, and thought half the class was doing the same. One advisor found the session "great" and presenter Hoyt "really knowledgeable." Morris Vickers of Financial Security Advisors, Inc. in Crofton, Maryland, who said he attended the NAPFA conference to see if he would like to join the organization, found the talk "entertaining and helpful."

Another well-attended technical session was "Monte Carlo Simu-lation: A Tool for Clarifying Probability to Clients," moderated by writer and NAPFA member Dave Drucker of Sunset Financial Management in Albu- querque, with fellow NAPFA panelists Robert Horowitz of New England Investment Management, Fairfield, Connecticut; Bernard Kiely of Kiely Capital Management Inc., Morristown, New Jersey; and Greg Van Slyke of Ballentine, Finn and Company, Inc., Wolfeboro, New Hampshire.

Drucker described Monte Carlo analysis as "a way of immigrating from a kind of static, old-fashioned way of looking at clients' numbers and analyses to a more dynamic, probabilistic way." The reason advisors should be interested in this sophisticated tool, he said, is that each time they perform a static retirement projection, the results given to clients are something the clients have only a 50-50 chance of achieving. Monte Carlo puts considerations such as retirement projections and life insurance determination into "a new paradigm that isn't black and white but more probabilistic." Another advantage has nothing to do with numbers, said Drucker, noting that when he talked with clients concerning the likelihood of something happening, he found that what "I'm really doing is forcing them to take more responsibility for the decisions we make," which isn't right.

Given the potential of utilizing Monte Carlo simulation, it's surprising that more planners don't take advantage of it. Drucker cited a recent survey revealing that 10% of respondents said they did use Monte Carlo; 8% planned to use it; 6% were not sure; and 66% said they had no plans to use it. Why? Panelist Horowitz noted that frequent objections include planners thinking Monte Carlo is dangerous, unknown, inherently flawed, difficult to utilize, and confusing to clients. They're also afraid they'll build a bad model.

While allowing that using Monte Carlo can be difficult, Horowitz pointed out several "plug and play" software products that are fairly idiot-proof. Using Web-based Financial Engines with Excel is one option. Another is Retirement Spending Planner, developed by Wagner Associates (www.wagner.com). Panelist Greg Van Slyke suggested the products At Risk (www.palisade.com); Crystal Ball, a risk analysis tool from Decisioneering, Inc. (www.decisioneering.com); and an asset allocation simulation program from AASim (www.aasim.com), a partner of Financeware.com.

For those more interested in non-technical matters, there were various workshops. Ruth Hayden, a well-known educator and author whose company - Ruth Hayden and Associates - is based in St. Paul, Minnesota, kicked off day two of NAPFA 2000 with a breakfast keynote talk on the effect of socialization on money attitudes and actions. She told the packed room that if money were only about logic, the advisor's job would be simple. "But people are not doing what they know the numbers say they should do," she said. She stressed that working with a client on the rational part of money management is vastly easier than addressing money management's emotional part. She pointed out that many advisors persist in showing clients the numbers and stressing how intelligent they, the advisors, are. "If you do this, you're no different than the Internet," Hayden said, adding that advisors need to do more than write up "an exquisite plan," since "money beliefs" are learned social responses, which as emotions control what your clients will or will not do.

The finale of the conference tackled the subject of running a fee-only financial planning business within a larger organization. Moderator Bob Veres was joined by panelists CPA/CFP Kathleen R. Walker; planner and attorney Frederic T. Kutscher, and Fay Doria, a 10-year NAPFA member who recently sold her private practice to become a trust and investment officer at Fleet Bank. Veres launched the discussion by pointing out that not all advisors are cut out to be independent advisors. Self-examination, he said, may reveal that a person is better suited to ply his or her trade within the context of a bank or CPA firm.

That said, once you're in your new position, it's not always so easy to get what you want. Doria related her frustrations with getting "properly set up" in the bank's corporate culture with the tools she needs to do her job right. Ironically, since Fleet charges a commission for advisory services, Doria has had to relinquish her NAPFA membership.

Walker noted that while some CPA firms recognize that advisors come with a skill set CPAs don't yet possess, to land the job it is nonetheless necessary for aspiring advisors to educate the CPA firm about what advisors do, how they do it, and why. "They're looking for you but don't know you're there," said Walker. For his part, Kutscher sees much opportunity for advisors in the legal field. He believes the largest law firms will soon be providing investment management services, in the form of in-house virtual firms created by independent advisors.

Following that session, most of the attendees departed the Twin Cities. Asset Management Associates' Seibert seemed to sum up the sentiments of many NAPFA members, who as conference program chair Marge Schiller noted, think of themselves as a unique organization that is in many ways like an extended family.

"For such a relatively small group," said Seibert, "they (NAPFA) command an attention and respect that seems to be totally out of proportion to their numbers." But interestingly, not all 650 attendees in Minneapolis were NAPFA members. In fact, according to Gary Schatsky, chairman of NAPFA's board, as many as one-quarter were not, evidence, Schatsky said, of an increasing interest in the organization, its benefits, and the "top quality educational programming" offered at its conferences. The organization is seeking new, qualified members, said Schiller. "NAPFA would like to grow. There are insufficient planners in many areas, and public demand exceeds the supply for fee-only planners."

As for next year's national NAPFA conference in Phoenix, "I will not say yet that in fact Alan Greenspan has confirmed his attendance," Schatsky joked.

Man Proposes, Who Disposes? Emotions can run high in planning, as anyone who has ever witnessed a family squabbling over a relative's personal effects can attest. That there was a whole session on it at the annual NAPFA confab calls attention to the fact that this is an area in which planners are often involved, even if only peripherally. A program of the University of Minnesota, "Who Gets Grandma's Yellow Pie Plate?" was presented by Marlene Stum. The session focused on the difficulties involved in keeping clients from killing each other in the domestic wars that often result from fighting over non-titled property after the death of a family member. Stum offered not only insights into why people deal with untitled property in the way they do (ignoring the issue, trying to distribute personal effects before death, or failing to take into account sentimental attachments on the part of various relatives to certain belongings), but also a workbook on how to help clients deal with the very difficult issue of the disposal of personal effects. The issue is certainly complex, because some people refuse to discuss it in a timely manner - whether because of reluctance to acknowledge mortality, or the feeling that they might appear greedy - and others are so crass in their handling of the disposition of final effects that it is all too common, says Stum, to come back from a funeral to find that some of the relatives have been clearing out the house in the others' absence. Disposition of effects is something that should not be left to the last minute, she says. Nor should one necessarily leave a list of who gets what - although it can work out, Stum says, as evidenced by the list an old woman left of all the furnishings and effects on her farm. None of the family members wanted what had been designated for them, and it led to negotiations. After two years, people had managed to "rearrange" their bequests so that they were happier with the end result, and they had also improved communications within their family in the course of doing so. Stum suggested the following steps when arranging to dispose of untitled property: 1. Identify sensitive issues. (Will Johnny resent Jane for getting the Winnie-the-Pooh books if they both read them as children?) 2. Determine what you want to accomplish. (Do you want Mildred to learn to quilt if you leave her your quilting supplies?) 3. Determine what fair means. (Because Bob is the oldest, will he automatically get Grandpa's watch even though Louis is the one who always loved it? Will Steve get back the golf clubs he gave Dad, even though Joe is the one who plays?) 4. Identify the meaning of objects. (If one of your grandkids is really attached to your son's original Teddy bear, does it mean more to your son or your grandson, his nephew?) 5. Recognize different methods of distributing property. (Instead of automatically giving Grandma's ring to your son, whose wife is supposed to pass it on to her daughter, you might want to let it go to your daughter who never married and won't ever have kids.) 6. Agree to manage conflicts. (Talk to your kids about who wants what and why; be open to negotiations on who should have the old German vase with the crack.)