If you have never prepared a checklist to evaluate your practice, 2011 is the time to start. You'll need to know your strengths and weaknesses as advisors in what promises to be an interesting year.

As we enter our third year of economic crisis, you may have changed your business practices or goals. Financial plans developed for clients before the crisis will most likely need changes.

At the same time, 2011 will bring new financial regulations, nearly all of which are tied in some way to a fiduciary standard. You'll probably need to become a fiduciary even if you aren't one. Both the SEC and the Department of Labor are hiring more auditors, and if you are audited, you'll need to demonstrate the details of your decision-making process and how it meets fiduciary standards.



Financial planning is one of the few professions that doesn't have a formal assessment procedure to check whether you and your practice meet defined standards; comply with statutory, regulatory and contractual requirements; and have what you need to remain in business. At a minimum, your checklist should include the following 12 steps:

1. Meet clients. You need to know if the current economic crisis has affected their needs and goals. Ordinarily, a long-term plan or investment strategy should remain in place unless your client's goals change, but these are not ordinary times. Pension benefits may have eroded or disappeared altogether; the cost of healthcare coverage is increasing and now represents a substantial household expense; the investment returns of the last three years may have dashed plans for a second home or early retirement; family-owned businesses may be facing liquidity issues; and family members may have lost their jobs or are underemployed.

2. Update each plan or strategy, on paper. For each client, be sure you have an executive overview or snapshot of the client's strategy; a statement of the client's goals and objectives; the considerations involved in making the plan; an outline of responsibilities; the due diligence procedures used to select investment options; the procedures to evaluate and monitor investments and associated fees and expenses; and the procedure to update the plan.

If you are serving as a fiduciary, define the details of your process and provide a copy of the process to each client. It's not enough to state that you are putting the client's interests first; it's better to define the details of your process so that your client can appreciate the value of the discipline you bring to the process.

3. Centralize filing. Be sure that all documents are filed in one place. For each client, make five sub-folders, each corresponding to a step of the financial planning process.

* Sub-folder "Analyze"-information about the client's goals and objectives, including trust documents;

* Sub-folder "Strategize"-information about the client's risk tolerances, asset class preferences, time horizons and expected outcomes;

* Sub-folder "Formalize"-the client's investment positioning statement and/or financial plan;

* Sub-folder "Implement"-the due diligence files for each investment option; and

* Sub-folder "Monitor"-the client's performance reports and an analysis of the fees and expenses associated with the client's investment strategy.

4. Be sure your clients understand their own fiduciary duties. Your clients may be fiduciaries, perhaps as a trustee of a personal trust or a member of an investment committee. If so, they may be subject to more auditing themselves.

5. Look at your models and investment recommendations. I do not think modern portfolio theory is dead, but it is time to examine our assumptions about risk and return and correlations between certain asset classes. There is no better illustration than residential real estate; once considered the bedrock of most financial plans, it has become an albatross to many clients who find that they owe more than their homes are worth.

If you have had to change more than 20% of your funds or money manager lineup in the last several years, you may need to add more screens or tighten the thresholds. Be sure you know how long the management team has been in place and if it has behaved consistently, avoiding regulatory problems. You will need to show that you have compared its returns and fees to other options.

Your monitoring criteria should be a mirror image of your selection process. For example, if manager tenure is part of your search criteria, than a portfolio manager's departure should be a flag in your monitoring process. Also, when serving in a fiduciary capacity, it is prudent to produce performance reports for your clients at least every quarter.

It's important to apply the same procedures to all assets. This may be problematic for alternative investments and hedge funds, but that's the point. It's one thing to suggest esoteric investment options when you're not serving in a fiduciary capacity, but when you are a fiduciary you must be able to show that the investment option was prudently selected and monitored.

6. Check liquidity. Ensure that clients have access to enough cash to cover their needs for the next five years.

7. Evaluate custodians. Check the expense ratios of the money market funds being used as cash sweep vehicles; inquire if there are new reporting services, such as tax or performance reporting; and be sure all custodians are financially sound. If client or service agreements are more than three years old, consider putting the services back out for bidding, especially if the client's needs have changed.

8. Know the 401(k) rules. Get up-to-speed on new 401(k) regulations, whether you are involved with retirement plans or not. Come November 2011, nearly 70 million 401(k) participants will start seeing in their quarterly statement the actual dollar amount being withdrawn from their balance for recordkeeping, administration and investment management. The overwhelming majority of participants will be shocked by the amount and will likely turn to you, their most trusted advisor, for answers.

9. Talk about health issues. Consider providing each of your clients with a healthcare questionnaire. Industry experts report that nearly one in five households are dealing with a long-term healthcare crisis-issues that can have a dramatic effect on investment and financial plans, if not adequately addressed.

10. Review fees. Determine how much of your compensation comes from 12b-1 fees. The SEC has proposed new regulations capping these fees. You may want to consider converting your clients to a fee-based arrangement, which may make you subject to a fiduciary standard. You should review with each client the fees he or she is paying you for investment management and financial planning-as well as the fees of any money managers. Fees and expenses will be getting the most attention from regulators and auditors this year.

11. Determine whether you meet the proposed new standards for servicing retirement accounts. If you are not serving in a fiduciary capacity, you may be required to use a certified computer model when providing advice to clients with IRA rollover assets. If you advise 401(k) plan sponsors, ensure that you provide your plan sponsors before July 16, 2011, with a written statement that discloses your fees, sources of compensation and whether you are serving in a fiduciary capacity.

12. Review conflicts of interest. The SEC requires that you follow a set procedure to review any relationships with your service vendors.

A checklist should help give your clients, compliance officers and regulators confidence in your process. Your self-assessment can double as a training curriculum for educating yourself, clients and staff, while helping you discover blind spots. Improving your services is a worthy goal in this challenging year.


Donald B. Trone, RF, is CEO and founder of Strategic Ethos. He is also the founder and executive director of the Foundation for Fiduciary Studies.

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