Holistic advisors focus on the human side of investing.
To more effectively serve clients and to better compete with wirehouses and robo-advisors, financial advisors are turning to “holistic” financial planning. But what does that mean? Is it any different than the “comprehensive” financial planning advisors have done for years?
There are essentially two types of financial advisors: asset gatherers and wealth managers. The asset gatherers concentrate only on investing while wealth managers seek to integrate individualized financial planning with investment strategy decisions. Wealth managers who provide comprehensive financial planning focus on advising in all areas of clients’ financial lives, including:
> Cash flow planning
> Investment strategy
> Long-term tax planning
> Risk management (insurance)
> Education planning (college funding)
> Retirement planning
> Estate planning
Although comprehensive planning addresses client goals, advisors have typically focused solely on the numbers. This is all well and good, but to truly be “best in class,” advisors must now go further. As online tools and mass-marketed fill-in-the-blank investing become more commonplace, investors want and need more encompassing advice. Without that, it will be increasingly more difficult to differentiate an advisory practice from the “lesser” alternatives.
In Morningstar’s Guide to Holistic Financial Planning (download it free), Tricia Rothschild, Morningstar’s Head of Global Advisor Solutions, says “the difference now is that technology and access to data have made it both easier and more important for advisors to explicitly articulate the benefits of ongoing financial planning. This is a sea change in the business model and the most successful advisors will be those who are able to move the conversation beyond ‘Is this fund better than that fund?’”
Advisors who provide holistic planning consider the human side of the equation as well as outside investments. Nicolas Owens, Morningstar’s Head of Research Integration, defines holistic financial planning as “a process that looks at the whole picture in terms of investments, human capital (an individual’s earning potential), real estate, retirement needs, appetite for risk, and family dynamics – all through the lens of a personal relationship with an advisor who integrates the factors into a comprehensive plan.”
Let’s look at how to move a practice toward holistic advising. To begin, holistic financial planning requires a shift in the minds of advisors. The game is no longer about dollars and cents; it’s about working with clients to achieve their life goals by considering all aspects of their lives as part of an ongoing trusted personal relationship. This means that advisors will need to:
> Build relationships of increasing trust and confidence.
>Truly understand the goals and priorities of clients.
> Work proactively with clients to mutually understand the trade-offs related to key decisions.
> Integrate and utilize tools to measure and incorporate previously unconsidered aspects of clients’ lives such as human (working) capital, family dynamics, outside holdings, pensions/Social Security benefits, realistic spending assumptions, etc.
> Find and work with collaborative tools and communication vehicles to interactively provide tracking and feedback on progress toward goals.
This shift can lead to understanding each client’s specific constraints and desires. For example, a more holistic approach can help to:
> Create a strategy and relationship that will enable a client to stay in the market even during downturns.
> Plan for cash flow and retirement understanding that a client will not allocate 100 percent of salary increases to savings (meaning that the client will bump up lifestyle spending).
> Advise a client on when to sell a rental property based on monetary and non-monetary factors such as a decreasing interest in managing the property or a preference to tap into the equity.
> Know when to recommend an estate planning update based on a client’s changed circumstances.
Of course, the possibilities are endless. It’s easy to see that with this type of client/advisor relationship, client retention will become a non-issue. Yet, these more holistic services cannot be offered with the snap of a finger. It also requires more and better technology. Consider tools such as:
> Financial wellness solutions geared expressly to consumers (for example, Morningstar’s HelloWallet) which help users gauge how their saving, spending, and budgeting choices affect their retirement prospects
> A data aggregator to bring outside financial accounts under consolidated management (think ByAllAccounts)
> Financial planning software that allows advisors and their clients to easily set up and modify “what if” scenarios
> Mobile solutions including on-demand portfolio reporting, client portals, and video conferencing
>Internal solutions to easily provide top-notch services such as tax efficient portfolio management (like Morningstar’s Total Rebalance Expert), client relationship management software, automated portfolio analytics, etc.
There is no one-size-fits-all solution. Each advisor embracing holistic financial planning will need to set practice goals, consider revising pricing structures and develop a plan for implementing these changes. It’s an exciting concept – one that can lead to happier clients and more fulfilled advisors.