Financial stability, well-being, and prosperity are goals every advisor wants for their client. Achieving those is different for everyone. Reese Harper, CEO of Elements, will discuss the universal standards that should be part of the financial health of all clients.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Brian Wallheimer (00:09):
Good morning or good afternoon, depending on wherever you are, no matter where. You're here with us for this episode of Leaders the Discussion Series with Thought Leaders in Wealth Management. I'm Brian Wallheimer, editor in chief of Financial Planning, our Parent Company's Arizent. With me today is Reese Harper, CFP and CEO of Elements, a firm whose goal is to deepen advisor relationships with clients. Reese, welcome.
Reese Harper (00:32):
Hey, Brian, how's it going, man? I'm excited to hang out with you today and cover some important topics.
Brian Wallheimer (00:38):
Absolutely. Tell me a little bit about what you do, Reese, who you are, what you do, and then we'll jump in.
Reese Harper (00:43):
Well, I'm just a regular old financial advisor. I grew up in the more transactional commission-based world, then started my own independent RIA eventually became fee only. It is called today Dentist Advisors. You can check it out@dentistadvisors.com. I still sit on that board and remain an active shareholder there, but became a board member when I started a new FinTech, which is kind of the subject of the conversation today. Financial health was kind of the impetus for why I started Elements, the FinTech that I'm currently the CEO over, and I have a great team that is currently working on that product with me, and we have about 500 advisors that we work with currently and adding people every day.
Brian Wallheimer (01:42):
Awesome. Awesome. So before we jump into my questions, just a reminder to those in the audience, you can type in questions as they said at the beginning of this, send them through. We'll try to get to as many as we can. We'll jump in though here, Reese, and we're talking about financial health very broadly. What is financial health broadly and why is it important? Why are we having this conversation today?
Reese Harper (02:04):
Well, I think broadly it would be hard to, I don't want to just talk about it. I think we should probably just use an analogy that's pretty simple. If we look at other professions like medicine, let's just take medicine, one of the oldest professions. They have broken down the occupation or the profession into lots of different parts instead of maybe more where we're at. I think it's fair to say we've only been doing financial advice for, I dunno, maybe 50 years. You could say that giving advice, and so our industry is only one or two generations deep, and we don't really have a standardized set of vital signs for diagnostics in order to know how to give advice. Most of our industry is not constructed around advice delivery. It's constructed around product distribution, which isn't bad, but it's different than advice. It's like a subcategory of advice.
(03:06)
So I view what most of the industry does right now is completing a functional job for people of investing their money, but financial advice or what would include at least some diagnostics or vital signs or measurements that could be universal or at least objective, understandable standards that advisors could talk about. So, hey, I've got a case, and instead of having to talk for 20 minutes about the case, we could just share vital signs and say, here's the question, what would you do? Here's their vitals, what would you do? Here's their vitals. What would you do? Now that won't be the best advice. That's just going to be cheaper and faster and not as comprehensive and not as detailed. But I think currently we just need to start exploring separating the financial advice business into multiple parts, and I think diagnostics and financial health should happen prior to the consumer engaging in the cost of financial plan.
(04:12)
It's in some ways you could say it's irresponsible for us to engage in a strategy with a consumer until we understand their vital signs. If someone has very, very, very low levels of liquidity and we sell them a comprehensive financial plan, that may not actually be the most appropriate first step for someone to get feeling better financially and become healthier. A little bit more liquidity might be the answer, not a plan. I kind of think of plans as what we do once we really know someone and when they're at an appropriate stage to go to that level of depth and detail. Brian, I'm just checking in with you on that. I just want to let you give a chance to clarify anything there.
Brian Wallheimer (04:59):
Yeah, no, that makes sense. I mean, when we talked about this earlier, it is funny you're talking about it like watching a medical drama on TV where they go in and they ask the intern, tell me about the case,
Reese Harper (05:09):
Right? Yeah. Let's take blood pressure. Let's just take blood pressure, right? One 40 over 90 is going to be atypically high, and so what are people's blood pressure levels? We can rank them by typical atypically, high atypically, low, low. We could use lots of words to describe these levels, but I think it's nice to explore how we could give just inexpensive simple direction. If we had a better automated set of vitals to help diagnose, and that was the experiment we ran at elements.
Brian Wallheimer (05:52):
What are those vitals to you? I mean, if we're putting it in terms of cholesterol and blood pressure and those sorts of things, what are the baseline things that we need to know about someone's financial situation to assess whether or not they're healthy?
Reese Harper (06:06):
Well, I wouldn't presume to know, but I have made at least one attempt at a practical applied model, and that's what elements is. It's a periodic table. All of this is blood pressure. Here's our HDL level, here's our heart. There's 10 different things we could measure, but in financial advice, it would be liquidity would be the first one right here in the bottom right. Then next to it'd be the concentration of our assets in retirement plans or qualified assets. So what's the ratio between liquidity that people can access quickly to do a down payment on a house or bail them out of a medical emergency versus tied up in a traditional IRA? There's very, and we measure that in terms of the number of months someone could go on the balance based on their current spending, so let's take liquidity. If they had a hundred thousand dollars and they spend a hundred thousand dollars in a year, then liquidity score would be one.
(07:16)
So we could go for a year. Now it might grow or the account might go down or the account might have inflation, but diagnostics aren't really concerned with future forecast. Diagnostics are concerned with the present reality, and so we just would look at someone's current spending pattern and divide it by their current liquid tax after tax asset balance and then measure if someone had a million dollars and they were spending a hundred thousand, that would be a 10. And so we could look at that liquidity score and go, if this customer came to me and was like, I'm never going to retire and I don't have any money, you look at their 10 liquid term score, you'd be like, okay, this person might have a little bit of, it might be if, let's say they're 35, I've heard people be very anxious about their money at 35, and they're sometimes very wealthy people.
(08:10)
I like to match up an objective score with the story and make sure that their story of their situation is a fair reflection of what's accurate. The opposite could also be true where someone is overconfident for their relative situation, they feel like a 0.25 score on liquidity. That's only three months. They might feel like that's excellent when in reality that might be a little too risky for their level of spending and the fact that they own a business or that they are about to quit their job for two months and go on vacation. Some people don't really have a good sense for how to measure how well they're doing. And I find it really interesting when people look at the scorecard, I'm always surprised at what they tell me. It's always different than what the consumer is always exposing to me, a different understanding of their money than I have when I look at the scorecard. They always think they're doing worse or better than I think. And so I just like having these objective scores to sort of see how much emotion is coming into play here, how much market fear is coming into play, how much consumer spending is coming into play. So just to list off all the elements, Brian, we could do that briefly if you think that's a good thing to list. I could just list 'em all.
Brian Wallheimer (09:38):
Well give us a few and then after that I kind of want to ask, I mean, you're talking about what you just said a minute ago was interesting where you look at it and you see one thing and a client looked at it and see something else. I mean, when we compare this to the medical example before, I think most doctors with very rare exceptions, they're going to look at one 40 over 90 and be like, we've got to fix something here. Whereas what you're talking about is fairly subjective. So I think what you're
Reese Harper (10:10):
Clarify that, let's clarify that I don't think it's subjective. I don't think it's subjective, but let's say in elements, let's take liquidity that example. If you have a 0.25 score or less, that would mean you have three months of spending or less. We would call that atypically low right now in our system. And we're not saying it's bad. We're not saying you shouldn't have that much. We're just saying that would be atypically low if someone had one month of total access to cash or two months, and so we would not. But if I show that to a consumer and I say, you have three months of liquidity and everything else is in a 4 0 1 K, if I show a 0.25 score to two different people, they're going to react very differently. One person might say, oh, I'm feeling great that I have three months of liquidity, and another person might say, I'm not feeling very confident.
(11:09)
I only have three months of liquidity. And the objective part about it is they both have the same. They both have the same. We've made it objective because we've divided their liquidity by their spending, and that gives us the objective measure. Now, that may not be the only way to measure liquidity, but it's the way we currently think is best to measure liquidity as a function of financial health. Others would be like the concentration of qualified assets or the number of years you could go on your real estate equity if you have a business. What's the concentration risk of that business? Equity inside of your net worth? What percentage of your total net worth is made by a private business? Net worth divided by annual personal spending is kind of the macro mother element of all the elements. It's over here. There's green one on the left, that one's a total term.
(12:07)
So it's net worth divided by annual spending. If someone has, let's say, a 25 score on total term, that's like saying the same thing as saying their spending is 4% of their net worth. If you were like a 25 score, if you're at a 30 score, your spending is 3% of your net worth. So these vital signs are easy to understand. They're disclosed in the app to the client. They're disclosed to advisors. Advisors have all the metrics and the scores so they know what we consider atypically low to be for a given score, and our system just ranks and sorts and helps advisors identify how healthy a client is, and the client does all the data entry kind of you'd expect from a doctor's appointment. So you just kind of like the doctor shows up with the vital signs already taken and then diagnoses from there. That's kind of what we think would be more efficient for firms.
Brian Wallheimer (13:02):
Sure, sure. Now, we talked a little bit the other day in our prep session here about this, and everyone gives financial advice in different ways. So how do we get to a point where we are talking about standards that everyone sort of gets, right? I mean, because I think the point I was trying to make earlier was a doctor's going to say, yeah, I need to know blood pressure, cholesterol, I need weight, these sorts of things to get an assessment of somebody's overall health. So how do we get people on the same page about financial health? Is that doable?
Reese Harper (13:44):
Well, I mean, think it's a great question. I think I would respond by saying in Mesopotamia probably, and back in the day, I'm sure they're asking, yeah, they were asking the question, what is healthy before blood pressure? It was the thing. What were they doing just banging around on teeth or
Brian Wallheimer (14:07):
You don't want to know what they were doing, man, it wasn't good. It
Reese Harper (14:10):
Wasn't good. They were killing each other. I'm reading a book right now called The Six Glasses of the World, and it goes through the history of the major six beverages that formed society, and it's really interesting to see that medicine went through lots of stages. So do lots of things go through stages? I just think I'm making an attempt. And what's been most interesting about the attempt of these vitals, we have 12. We've disclosed they're, the most interesting thing about it for me is they're still very helpful to at least these 500 people that are adopting them. So sometimes good invention is just like one person taking a step and then another person takes a step and another person takes a step, and then we all make adjustments. So my vision is to not be the decider of the standard. I want firms to be able to decide what they think for their unique clientele, a vital sign might look like.
(15:12)
But rather than just create a system that let everyone build their own vitals, which I think would be kind of a clustered mess, I created a system that said, here are 12 that we've been using for four years. Learn them first and then challenged them, then tell us what you think we should do differently. And that's, I assume people are building their own financial vitals and their own spreadsheets in their own Salesforce instances and just they're doing this. We're just not maybe talking about the specific vital signs and debating them. So I like that. I would like to see more discussion of the actual calculation, the actual underlying financial vital. So is total after tax assets divided by annual personal spending, a good way to measure liquidity? Should liquidity be measured? Is that even a thing? But we did our best at creating an applied model. I think it's quite impactful for the end client and my experience over the last three years is the area where we've received the least amount of feedback was actually in adjusting the scores. It was, it's like, I wish it integrated better with buy all accounts or something. There's a lot of integration requests, but no one's really challenging the scores, which makes me feel like it must be helpful. It must be a helpful step.
Brian Wallheimer (16:38):
Okay. We've got a question here I want to throw out to you. Reese Sonia letter has asked, you're speaking about subjective versus objective measures. How do you relate this to wellbeing versus wellness and how does that fit into overall health? How should financial advisors intervene with subjective versus objective elements?
Reese Harper (16:57):
Well, that's a great question. I would say we have functional jobs and emotional jobs that we do as financial advisors, and I think the emotional jobs are subjective to some way, but you could use a model to make the subjective stuff more repeatable. You could use a Kolby diagnostic with people, or Patrick Lencioni's six working genius, or you could use Campbell Skills and Interest survey. You could kind of see different ways in which people are reacting to the emotional parts of their job and their life. See if they're in line with sort of a career that's a good fit for them. I think that's a better way than just having subjective conversations all the time. But the functional side I think is quite measurable. I mean, the functional side is set up an IRA, do a rollover, complete the estate plan, reduce effective tax rate. Those are functional things that we can really manage with vital signs. It's hard to manage emotional jobs with vital signs, and I think financial advisors probably in the current industry are paid more for the emotional jobs than the functional ones at present.
Brian Wallheimer (18:17):
Yeah, we talked about that a little bit too. We recently, I mean, we live in a world today where we're talking about tech ai. I mean, it's constant. What is AI going to do? How's AI going to filter? And so how important is a job like this on the personal level for advisors who we've written stories, Justin Mack, our tech reporter has written stories, is AI's not going to take your job if you're a financial advisor, it's going to make your job better, but there are people out there worried about that, right? Do you need me? And maybe it doesn't take your job, but maybe there are people, clients who say, I don't need to go to a person. I'm just as happy going on this website and letting the bot figure this out for me. So talk to me about the
Reese Harper (19:05):
Importance. I can give you an opinion, Brian, about how I think the industry could evolve and create a new market. I think Forrester does a nice research project on consumer segmentation. One is one of their four profiles is a validator and one is a delegator. According to my understanding and my current thinking, most financial advisors work with delegators, which means that they work with people that prefer to not do research on their own and dig and comb through data. And the validators are people that like to do their own research. They like to kind of dig and comb through data and figure out where they're going with their finances. I have both client types in my personal practice, but I serve them with different fee models. And I find that I'm equally profitable in the validator model as I am in the delegator model. I just do different things for people based on their persona type.
(20:16)
And by using financial vitals, I can more quickly determine which service model is best corresponding to which consumer type A delegator loves AUM fees. They don't want to have to think about transactional expenses. A validator really likes transactional relationships. They don't want to lock themselves into an AUM fee too early. And so I think there's this retainer and cash and fixed and hourlies and one-off consultations model that if at elements, we have a program called Elements Money where our software customers can create a membership program that nurtures people and stimulates them to book consultations essentially. And our jobs try to help expose the financial advisor's value to the nurture pool so that they will book consultations about specific issues that are really important at timely periods during the year. So we think that the reason people aren't reaching out for more help is because they don't, that the financial advisor is not actually offering a service model that accommodates the needs of lower income, lower liquidity, and Henry type validator customers.
(21:36)
They have higher incomes, but not left from liquidity to really merit a lot of interest from a financial advisor. But if you have a lower service tier, which the last three years we've been selling software to help people establish that service tier, and some people have implemented it very well and have been very successful, others have struggled to do the appropriate marketing and nurturing activities in order to stimulate that nurture base to book appointments with them. Maybe they're not properly staffed or they're not profitable enough to invest that much into a new marketing campaign. They might just be a sole proprietor. But elements of money that we've created allows some of those advisors to just push an easy button and say, I'm going to let elements screen and onboard people and tell me which service model maybe is best and give them a little initial diagnostic. And then when people want to talk to me, you just book 'em. For me, we think that is kind of the future of people can buy our software and do it or we can do it for them, but we believe the advisor has a really, really powerful role to play and a big consumer market that's never been tapped. We think the validator segment of the market will just love meeting financial advisors if they can interact with them on a more acute pain related basis instead of a plan.
Brian Wallheimer (23:07):
Yeah. Is that generational? I mean, because Yes, it is. I was going to say mean we live in a world now where we kind of expect, somebody asked me the other day, somebody, I said something about Google and they said, well, you don't enter that information online, do you? And I was like, oh, I've given in. I was like, tell me what I want to buy Google. I'm happy with that.
Reese Harper (23:25):
Yeah,
Brian Wallheimer (23:28):
It pops up. I'm like, I know I wanted it. I'm so excited. Even
Reese Harper (23:32):
It looks more like people are going to want a set of financial vitals that they can understand, so they're going to be able to get their own vitals and then they're going to be able to learn where their maybe red flags are. But people that want to talk to people, they want to talk to people independent of whether they find an answer. They're not avoiding people because they find an answer. They're either in forester's model, they're either self-directed investors that are unlikely to ever talk to a person too risk averse, or they're too private, they're too educated. They like it enough. If someone's going to want to talk to a professional, they don't change their mind. They're kind of just people that want to talk to someone. If they're validators, they just don't want to give all their money up and do an AUM relationship.
(24:27)
It's not quite concrete enough for the next generation to feel like the value proposition is well aligned. But once they work with someone for a while, I've seen lots of cases where they just raise their hands and they're like, nevermind, I just want you to charge me an AUM fee. I don't like paying out of my cashflow. So it's kind of like you get to show them your value and meet them where they're at, which is they would love to have a conversation with you. Maybe you should give them a free session to talk through their diagnostics. Just show them one, show them one thing, and you'll find that a lot of people are willing to take another step forward with you. And so we tried to separate these financial vital conversations from the planning conversations because they're a different level of depth and they're a different level of breadth and vitals comes before comprehensive planning. It's just easier and faster and quicker.
Brian Wallheimer (25:21):
Yeah, that makes sense. That makes sense. One more opportunity if anyone wants to add any questions. We're running out of time, just a few minutes left. Is there anything else that we haven't touched on, Reese, that you wanted to get to before we wrap up today?
Reese Harper (25:39):
I think a lot of people, I just want to sink in. I really appreciate financial advisors, and I'm more convinced today than ever there's that our business, at least elements is very attached to the advisor as the source of changing behavior with the consumer. We just think there's a more modern way to go about getting them to talk to you, and we're excited for that. But I just want everyone to know, I think we've experimented in a lot of different ways and looked at a lot of different companies and advisors are in good hands. If they can evolve their business model, you got to move it forward. You're either going to get replaced by in the next generation, not your current clients, but there is a lot of adoption happening among this validator market to digital FinTech technology. We always talk about how robos aren't working, but they're growing, man, they're growing and at a faster clip than a lot of RIA firms, not as the total industry, but there are a lot of firms who are not going to make it. And so I think if you don't evolve your business model now and have a concentrated push for the next five years evolving your business model, it's going to be slower organic growth rates, lower acquisition multiples. It's going to be harder to get liquidity out of your practice. So I would just commit to a service level, a service tier that's below your current premier planning offering, raise the prices on your premier planning offering, and clearly separate the difference between these two offerings, and you're going to be in great shape.
Brian Wallheimer (27:31):
Sure. Sure. Well, last question here. We did have one come through and it's what does it take to get to a universal standard? And I guess I want to add to that question. Is that what you're talking about? Is this a universal standard that we want, or is this more of everyone, firms are going to have different standards, but it's just a matter of thinking it in this way?
Reese Harper (27:54):
Yeah, I think the, what should be universal is that we agree on topics that should be measured. We have one called insurance rate. We want to know of the total maximum coverage of all insurance policies that someone could have. What percentage of their total possible coverage are they covered? Are you 80% covered? Are you 90% covered? Are you 10% covered? That's interesting. That's a very helpful metric. What percentage of your gross income every year is leftover of your annual gross income every year? What is your savings rate? What's leftover? What's your savings rate? How do we measure savings rate? I like those conversations. I don't know if we have to get to a universal standard, but I try to create one in my mind. I'm trying to create one. If there's a element that I'm not measuring. I started with 31, Brian and I'm down to 12, so I'm shrinking them.
(28:54)
I'm not making it bigger. Now, if there is one that's coming up, we have two or three that are on the list of one more element and it's actively debated, but we're just trying to go really slowly with, if it's not applicable to all human beings in some way, like it starts to become questionable. We try to eliminate the top, top part of the market and say, extremely wealthy people maybe are outside if their total term score is more than a hundred. We're not even really trying to measure anything, but this is more for the people who haven't had access before. This is the people that are, you need to help, but you can't afford to spend the time yet. You don't either know enough about them. You don't know if you want to work with them. You don't know if they want to work with you. This is the universal standards. Probably not as important as agreeing on the topics and then exposing them to the client so that they know the client's got to know, because that triggers appointments, that triggers action, that improves engagement, and I think that's just good for our practices.
Brian Wallheimer (30:01):
Sure. Great. Well, I think we're about out of time. I want to thank you, Reese for being here today and talking with us about this topic. I want to thank everyone who is in attendance and those who ask questions today. This will be an on demand at some point on our website, so check that out, financial planning.com. Again, thanks to you, Reese for being here. I'm Brian Wallheimer for Financial Planning and Arizent. We'll see you soon.
