Mike Patton is heading down an uncertain road that some of you have already traveled, and that some of you are considering taking. In this blog, Mike will chronicle in real time his new professional life as an independent advisor, with all its triumphs and challenges, extending his first-person report that will appear from time to time in Investment Advisor magazine. Mike Patton is the principal of the newly founded Integrity Wealth Management, in Baton Rouge, Louisiana, where he works with high-net-worth clients as their "Personal CFO."
I was in the process of moving my office and thought I had found the new place, until I hit a snag. I learned there’s much more than meets the eye when it comes to renting office space. Here’s how the events unfolded this past week.
After 15 months into my journey of independence, it’s time to launch my own Web site. There are several items that need to be addressed and many questions to answer. I have to decide what type of content, which links to include, the pages to include, and in which order. More generally, I’ll need to decide as well the site’s level of interactivity, and whether I should include a secure portal for clients.
Last week was very busy. I presented a financial plan to one client, began to prepare a more complex plan for another, delivered a life insurance policy to yet another client, and had a second meeting with a prospective client. All in all it was a pretty good week.
Financial Planning
I recently took a step back and evaluated my planning value. I’ve determined that there are over 111 metrics I evaluate. Included in this number are various probabilities, debt ratios, a 72 point will inspection, etc. All together there are over 111 different points of inspection in the plan. The recommendations which stem from this are contained in an executive summary format so the client can easily read them at a later date. The point is this: It is very thorough and clients value it.
When I first started my company I knew the day would come when I would need to acquire a performance reporting tool. That day has arrived. Here’s what I chose and why.
First, some background. I have used Morningstar Principia for many years and as a research tool I find it more than adequate. Then last year, I switched to Morningstar’s Advisor Workstation Enterprise Edition. Neither of these had performance reporting capabilities but they did do a good job with research and portfolio analysis. The Enterprise Edition is available only through your broker/dealer or custodian that decides which features will be included. In my particular case it cost me about $2,100 per year. It was a good tool but I needed more.
This week was busy and productive. I gained a new client, clarified my financial planning value, and looked for new office space. It seems that I am outgrowing my one room office. Ideally, I’m looking for a three room suite with a kitchenette, private bathroom and a space for a receptionist. I don’t have a receptionist as of yet; I’m just thinking ahead.
One thing certain about this business is that no matter how long you’ve been doing it, there is always something new to learn. This week I recognized I needed to modify my initial approach with a prospective client, or perhaps better said, it’s getting back to what I already knew. You can’t approach every person the same way. Allow me to explain. People are either outgoing or introspective. They are usually either creative or analytical. They either like to control their environment or follow another’s lead. They are either impatient or patient. You get the point. This week I met with a couple of people who are similar in their personalities.
Things are progressing well. Revenue has increased and I’m now ready to purchase or subscribe to a performance reporting tool. I’m currently looking at Morningstar Advisor Workstation Office Edition. This tool requires a 12-month subscription but before committing, I’m taking advantage of their 14-day free trial offer. I need to make absolutely sure it will meet my needs. I’ve had this in mind for some time but until now the cost has been a roadblock. Not that it is overpriced, more that my revenue wasn’t adequate to justify the move. Now I am ready.
I had a bit of difficulty at first. Let me explain.
I finished my investment policy statement (IPS) template this week. I have the standard language along with a portion which is customizable. Now that it is ready to launch, I am faced with a challenge because an IPS requires you to maintain certain allocation ranges. So, if you want to venture out beyond these ranges, you would have to revise your IPS. Today I’d like to venture outside these boundaries, namely increasing exposure to alternative investments. This is because no matter how the stock market is performing, there is always money to be made somewhere. Currently there are opportunities in commodities, shorting financial stocks, currencies, and of course CDs to name a few.
Over the past month I’ve received a number of e-mails from readers asking the same question, “Would you mind sharing your “What’s Important to You” document. While I don’t mind sharing it, my version would be different from yours. This document, which I use with prospective clients, helps me to understand their needs as it relates to my practice. In other words, will they benefit from the things I am doing? Because of your interest, I’ve decided to provide information which will enable you to create this type of document for your specific practice.
Does demand drive innovation or does innovation create demand? Or is it possible that both are true? When I look at the landscape in our industry I see consumers looking for objectivity. They desire someone who will really and truly look out for their interests.
There are certain things that have a broad appeal to the consumer. For example, we’re all going to die some day, and because of this universal fact, the life insurance industry has created a way to provide for the survivors. When a life insurance salesman calls on a prospect, they can offer something that the customer needs. How much and what type of insurance, plus which company, are questions that need to be addressed. But what if the agent is a representative of just one company? What then? Is the customer really getting the very best product for their situation?
What a week! I had several appointments that were very productive. I was also working feverishly to tie up some loose ends before I set off for Boston next week (No, I’m not going to a Celtics game. They beat my Pistons!). I have been asked to speak to a group of advisors and some company executives on “Using Monte Carlo Simulation in a Financial Planning Context.” The company, Oracle, has a product called Crystal Ball which I’ve been using for 10+ years now. I will demonstrate how I use it in financial planning. There will be another person speaking on using Crystal Ball in portfolio management. Afterwards, I will travel up to New England to visit with a client, take some time to relax, hike, and visit some old friends.
I have been writing a monthly newsletter and e-mailing it to clients and others for about 6 months now. The responses I’ve received have been great, which encourages me to continue. Today I sent out a separate, periodic report and will continue to do so whenever the situation warrants.
I recall my training from years ago. I was instructed to meet the client when they arrived, look them in the eye, shake their hand, turn around, and begin walking back to my desk. The client would simply follow as I took the lead. After all, I was the professional and they were the uninformed clients being led to investopia. “Why, even a newly minted broker knows more than 90% of the clients,” I was told. What I wasn’t aware of at the time, or chose to ignore, was the sales culture so prevalent there. All I heard was how much broker Bob made or how well broker Jane was doing. The focus was on sales, hitting the numbers, making your goals, and most important, cashing your check.
There’s nothing wrong with making a good living or even becoming extremely successful. I do have a problem with the way it’s often accomplished.
I have a client who has a strong desire to open a retail business. According to Michael Gerber, author of the E-Myth books, many business owners were once employees who thought they could do it better if they were on their own. He argues that there are three main “hats” a successful business owner must wear. The first is the hat of a technician, and most who venture out on their own wear that hat comfortably since they are skilled at their particular craft. The second hat is that of a manager. They have to be able to manage the inventory, people, processes, etc. The third and perhaps the most important hat is that of an entrepreneur. This role requires someone who can see the big picture and steer the ship.
In the course of our lives we are forced to make a variety of decisions. We will make these decisions from our own personal perspective of right and wrong. In our industry we face choices on a daily basis. These decisions have the effect of creating an image in the eyes of the public. Too often, this image is less than honorable and demeans our profession. If from the preceding you sense that I’m an idealist, you’re correct, but I’m also a realist. Let me share what I believe to be a significant cause of our problem.
This past week I spoke at a conference in North Carolina sponsored by fi360, a firm dedicated to serving the fiduciary market, and most of the attendees were registered investment advisors. There were also several brokers present. One particular broker I spoke with was preparing to leave his company and become an RIA. There was a consistent theme echoed from many brokers. They told me about the ridiculous rules and decisions their companies had made and how it’s had a negative effect on their ability to do their job. There seems to be an exodus occurring in the wirehouses.
This week I travel to North Carolina to speak at a national conference for Fiduciary 360, a company based in Pittsburgh that is dedicated to serving the fiduciary community. I’ll be speaking during two breakout sessions. The topic of the first session is “Comparing Broker Dealers and RIAs.” The other session is a panel discussing the relationship between the media and the advisor. The trip will also provide a much needed break for me, I admit.
I don’t usually go into a great deal of detail when I gain a new client because I need to be careful about disclosing specific facts which may compromise client confidentiality. With this in mind, I’d like to share an experience I had this week. I met with a new couple who have decided to engage me as their advisor. I am excited about this opportunity as they are very pleasant people who I’m sure I’ll enjoy working with. However, their last two advisor experiences have not been so good. The first advisor was unethical and the second was neglectful because he was too busy. The funny thing is, if this second advisor had known about their wealth, more than just the account he was managing, he may have found the time. In any event, they’re working with me now.
I went to see the new movie Ben Stein co-wrote, entitled “Expelled.. What does this have to do with my journey to independence, you ask? Quite a lot, actually. Let me explain. The movie is all about the suppression of freedom at large. For instance, whenever university professors attempted to engage in a discussion about a certain subject, they were terminated. As long as they walked the party line and did not upset the applecart, things were fine. But if they attempted to bring up ideas or views which were contrary to the establishment, they suffered consequences. The movie used the Berlin Wall to symbolize the barrier between the establishment and independent thought, or freedom of thought, if you prefer. Whenever intellectual thought is stifled, improvement is deficient and the status quo becomes the static quo, which brings me to my point. There is a similar phenomenon occurring in corporate America today.
In the early 1900’s, Henry Ford said, "I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be low in price that no man making a good salary will be unable to own one—and enjoy with his family the blessing of hours of pleasure in God's great open spaces.” This could have been his mission statement, if he had one.
How often I have taken for granted the notion that advisors are altruistic, seeking only to help clients achieve their dreams, and that generating income is secondary to the needs of the client. Then I encounter a prospective client who has been “pitched” what I would consider to be a “bill of goods.” “Put all your money into this annuity”, the salesman says. “See, there are guarantees so you can’t lose!” they declare. Kind of like the old snake oil salesman of the wild-wild west. Guarantees, sure, but at what cost? For the record, I’m not totally against annuities, but I do believe they are frequently sold in situations where they’re not appropriate.
As I approach my first anniversary of independence I think back and consider the ups and downs I’ve experienced. For those of you in a wirehouse, bank, insurance company or other “captive” situation who are considering the move to independence, I encourage you to read on. I’m sure this can’t be said for everyone, but at least for me, once I tasted independence, there was no turning back.
One of the many advantages of operating your own wealth management business, especially if you’re an RIA, is the flexibility to determine your offerings. When comparing a broker/dealer arrangement with an RIA, both will likely offer investments and perhaps financial planning, but an RIA is probably more likely to offer additional services beyond that of a broker. One reason for this is that the broker is subject to their broker/dealer’s compliance and an RIA is responsible for their own compliance.
Let’s start this week’s blog with a little test.
Q. A financial plan is to a client’s future as an Investment Policy Statement is to what?
A. An RIA’s fiduciary obligation
B. Prudent management of a portfolio
C. Cornerstone of the portfolio management process
D. All of the above
If you said A, you were right….
If your answer was B, well, you were also right…..
Actually, C is correct also and ….. that makes D the right answer!
Okay, I have to have fun sometime. This week I’m continuing to develop my IPS. I started this process several months ago but it stalled. In the interim I looked into some software programs for this but did not find one that seemed to fit me and my practice. Most of the choices I looked at were 85% canned language and 15% my input. I just don’t believe that’s what an IPS should be. This type of IPS seems to be more of a convenience than a critical piece of portfolio management.
New computer…..…$1,200
Business cards………$50
Software…………$1,000
Seeing the look on a clients face whenever you’ve helped them…………..PRICELESS!
Yes, priceless. There’s nothing I’d rather do than provide quality advice and service to clients and get paid well in return. Leaving the world of the large corporation and starting my own advisory business is turning out to be one of the best decisions I’ve ever made.
This week I am completing another financial plan for a new client. This couple is on board with what I’m doing and they have an appreciation for what I bring to the table. Besides financial planning, I will also manage their investment portfolio. When a client buys into the planning process, it becomes a very gratifying experience for all involved.
I’m finding that running your own advisory business is both a challenge and a joy.
I’ve spoken with many advisors over the years. Some owned their own one-man advisory shop and others worked for a smaller firm. Whenever the subject of an audit came up, many said they hadn’t been audited in years, and some even said they’d never been audited. Well, as luck would have it, I’ve drawn the short straw. I’ve received notification of an audit.
In this blog, I’d like to follow up on an article I wrote for Investment Advisor magazine's January issue. In it, I discussed four different software packages. As a result, I’ve received several e-mails from advisors who were in the process of selecting a package for themselves, so I thought I’d go into a little more detail about my choice.
For years I used Morningstar Principia to prepare portfolio analysis reports and to research investments. Then, earlier this past year, I began using Morningstar Advisor Workstation. After a few months with this, I switched back to Principia, only to finally settle on Advisor Workstation at the beginning of 2008. Now you may be thinking, “Can’t this guy make up his mind?” I began to wonder the same thing myself. The problem is, with so many nuances of each tool, it’s difficult to choose the very best one. Ultimately, you have to go with the one that best suits the type of business you do.
Large organizations consist of many layers, from the CEO and the board of directors down to the client-facing advisor. Just like the game of telephone we all played as kids, very often the messages that were crafted at the top are substantially altered by the time they reach the advisors who interact directly with clients. This “disconnect” is extremely commonplace in today’s corporate world and presents a great opportunity for the independent advisor. Let me explain.
Last week was a very interesting one. It consisted of appointments with prospective clients, centers of influence, and a business trip to California. What was particularly interesting was the trip to California and the return flight home.
First let’s talk about the trip to California and the events leading up to it. Last May I spoke at an annual conference for Crystal Ball, a global business unit of Oracle. I gave a presentation on the financial planning tool I developed which uses Crystal Ball's Monte Carlo simulation engine. Crystal Ball liked my presentation well enough that the firm asked me to conduct a Webinar to demonstrate my planning tool, which I did some five months later. About a month after that I received a phone call from a company that had viewed the Webinar and was interested in hiring me as a consultant to develop a similar tool. So I traveled to the firm's office in California and we had a four-hour meeting that went well.
I’d like to discuss what happened on the return flight home. I sat next to a woman and we had a long conversation. She shared with me an experience she and her husband had with a particular broker who, though he was instructed to invest their money conservatively, saw their account lose about 75% of its value.
One of the more challenging aspects of being a solo practitioner is choosing what you will do and what you won’t. Since time is our most precious commodity, it’s imperative that you choose wisely. I’ve always been the type of person who has a strong desire to have a thorough understanding of technical topics that are, or may be, useful to clients. Business owners have their own unique needscompared to non-business owners. Retirees needs differ slightly from pre-retirees. High-income/high-net-worth individuals' needs differ from ultra-high-income/net-worth clients. Compounding this is the fact that the knowledge landscape is extremely broad. From income taxes to estate planning, from investments to insurance; the amount of available information is staggering. Clearly this is more than one individual can master. So what’s a solo practitioner to do? How do you keep from being overwhelmed? This is one of those adjustments we all have to make. If you have a similar personality to mine, needing to know all the relevant facts, it is even more important that you adjust. Here’s what I’m doing.
I’d like to deviate a bit from my journey and talk about a rarely discussed topic. Your opinion on the matter would be particularly interesting, either to validate my own or render it void. Here’s my supposition.
When a large financial services company hires client-facing individuals, do they want great technicians or great salespeople (not that these are mutually exclusive but the combination of the two is rare)? Do they want people who are independent thinkers? Are they looking for people who are willing to explore new frontiers and create new and innovative ways of doing things? Or are they seeking people who will blindly follow company policy without so much as a question?
With the New Year here we are presented with an opportunity to reflect on the past and make adjustments for the future. I know we can do this anytime, but it seems that it’s a more natural occurrence at the turn of a year. What have I learned from my experiences in 2007? What changes will I make for 2008?
I’ve learned (or rather I’m reminded) that prospects don’t always see the value of things. That it must be clearly spelled out in a way that makes it impossible to miss. There are two important factors at work in a prospect’s mind that influence how they select an advisor. One is the company itself and the other is the specific advisor.
Well, the year is coming to a close and my focus is turning to 2008. Many of my objectives have been accomplished but there are still a few remaining. Next year, I intend to spend more time marketing my services to qualified prospects. I plan to continue working on my operational efficiency which is crucial to any business, but even more important to a solo practitioner.
In my last blog, I discussed getting clients engaged in the implementation process. This week, I’d like to talk a little about the planning process and the structure of the engagement.
I’m sure many of you know this universal truth: the better the information we collect, the better the advice we can render, or GIGO. Most of the time, getting information from clients is not a problem, meaning they are willing to provide it. Some may be more organized than others and get it to you sooner, while others may have a harder time gathering it. Ironically, it may be the clients who are slower in getting the information to us, those who are the most disorganized, that need us the most.
I’d like to expand on a topic from last week’s IA Advisor Summit in Washington, DC. Over breakfast I had a discussion with a couple of advisors about financial planning. We discussed our processes and areas of analysis and how they were received by clients. Of particular note was the topic of implementing the plan’s recommendations. On that, it seems we shared a common frustration. The frustration that can occur when we, as planners, have crunched the numbers, prepared a thorough analysis, selected the most appropriate strategies, and presented them to our clients, only to find their eyes are glazing over. Since we are completely convinced that our suggestions are prudent and absolutely in the clients’ best interests, there should be no doubt that our clients would see that, right? Well, perhaps not. I think we make the mistake that our paradigm is their paradigm.
I spent part of this past week in Washington, D.C., attending the Investment Advisor annual conference. While there, I met some great people and was able to pick their brains a bit. It has been a long-held belief of mine that you can learn something new from everyone you meet. It’s interesting to me to hear of the different ways advisors approach their businesses, specifically, the services they offer, and how they price them.
How many times have you had an idea and wondered why you didn't think of it
sooner? Also, how many times have you had an idea, written it down, only to
realize sometime later that you never acted on it? Both of these
things happened to me last week. Let me explain.
I remember early on in this endeavor saying, “It’s not the company with the best business plan that succeeds, but the company which executes their plan best.” Now that I am that “company” and I have to ask myself if I’m executing my plan very well. Perhaps one of the most challenging things about this business, especially for the RIA, is that there are so many ways to proceed. Not only do you have to decide what services to provide but also how to price them and how to market them. It’s the numerous options available that can really bog you down.
Let’s talk about software for a minute and specifically as it pertains to investments.
One day last week over breakfast, I was watching CNBC as I usually do, when I noticed the Dow Futures were down 126 points due to the continuing saga of the subprime debacle. I pondered the question, “How much more of this will we have to endure?”
I recall a couple of months ago hearing that this would probably take several months to work itself out. This was during the time when the markets were feeling the fallout from Countrywide and other lenders, as they were faced with the likelihood of writing off large blocks of nonperforming loans. Within the past few weeks we saw the problem extend to others such as Merrill Lynch and last week it was Citigroup's turn. Who will it be next (E*Trade, anyone)? So what’s my point? Why, our clients of course.
There are a lot of tasks that must be performed in order to build a successful advisory business. Each task must then be analyzed and if inefficiencies are present they must be addressed. As a solo practitioner, you must be especially conscious of this since there is a limited amount of time available. Last week I identified and resolved some of these issues.
Months ago, I chose ACT as my customer relationship managment (CRM) software. I have created additional tabs and fields to allow me to gather additional information. Here’s what I did. In preparing financial plans for clients, the speed of the process depends upon you and the client. The client must provide you with the required information in a timely manner and you must use this information to hold up your end of the agreement. I can control my end just fine but sometimes the flow of information from the client can require a prompting from the advisor. Since necessity often is the mother of invention, I made some decisions as to how I would handle this.
I read an interesting article the other day pertaining to the recently overturned broker dealer rule. You see, I am currently in the process of creating a direct mail campaign to differentiate myself from the rest of the pack. As I review my main differences, the landscape is rapidly changing. First, a little background is in order.
Prior to the court’s ruling, a broker could offer fee-based brokerage accounts and was subject to NASD Conduct Rule 2310(a). This rule states that “in recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his security holdings and as to his financial situation and needs.” So the broker had only to believe that the recommendation was suitable based on the facts, “if any”. As I understand the rule, the responsibility falls to the broker. A fiduciary, on the other hand, must always place their client’s interests ahead of their own and must do whatever is necessary to assure this. Here, the responsibility is on the RIA. Prior to the rule change, there was a clear advantage to the RIA, at least from the client’s viewpoint, since RIAs are subject to the rules of a fiduciary, the highest standard in the industry. Now the lines are becoming blurred.
I know this blog is supposed to chronicle my journey to independence, but there has been a question rolling around in my gray matter for some time now. The question is this, “What is a financial advisor?” To attempt to answer this, let’s go back 20-30 years.
Remember when your stockbroker invested your money, your CPA did your taxes, your attorney drafted your wills, your insurance agent “sold” you life insurance, and banks held your checking and savings accounts and loaned you money? When financial planners began to gain recognition—and client loyalty—the aforementioned professions began to expand their services, almost saying, “Hey, we can do that, too!” I know financial planners weren’t the only catalyst.
In this blog, I’d like to ask your help on a few important issues. As I enter my seventh month of independence, I find some areas in which I have questions. Some of the areas include no-load life insurance, compliance solutions, information on going paperless, and software to create investment policy statements. Below are my questions in more detail. If you would like to comment on a more confidential basis, you could send me an e-mail rather than post on the blog.
Last week I wrote about my upcoming Webinar and some marketing plans. Here's how those two items have developed.
In this blog we’ll cover a couple of different topics. I’ll update you on my marketing efforts, provide information on a Webinar that you may be interested in attending, and in response to reader requests, I'll share my credentials with you.
In my last posting, I discussed the importance of scalability. In keeping with this topic, this week I continued to refine the MS Excel risk tolerance project. Using Monte Carlo simulation on my 9 model portfolios I have simulated the range of returns for each portfolio using monthly, quarterly, and annual periods as well as a 5 year average. After running the simulation, I now have the probable range of returns on each portfolio for the periods mentioned. This information is contained both in numeric and graphical formats and can then be compared to outside portfolios. So when a prospective client provides me a copy of their statement from a competitive firm, I can compare the range of returns on their portfolio(s) with my models. This information is also placed on a scatter plot graph for easy comparison. So if one of my models provides a better risk/return profile than one or more of their portfolios, it will be readily apparent. The goal here is to develop an objective analysis.
It’s been five months now since my journey began and I am finding the transition from employee to business owner requires a lot of time and energy. Last week I wrote about my efforts to develop a strategic plan. This week I continued working on the plan and started some specific projects, which, once created, can easily be replicated.
I have been working to develop tools, templates, process, and procedures that will provide scalability. This “scalability” is a critical component of a business’s efficiency. The tools that we sometimes take for granted as an employee have to be created or purchased when you are an independent. A risk tolerance questionnaire is one of these basic tools.
Remember the commercial with the guy who slaps his forehead and says, “I could’ve had a V8!”? I felt like that guy recently, but instead of a V8, I was reminded of something so fundamental and important that without it, success would be more difficult to achieve. Instead of just coming into the office every day and going about my work, I first need to make sure I am doing exactly what I need to be doing. Let me explain.
Do what, you ask? Why, financial planning of course. Now I’m not talking about the off-the-shelf variety where you spend a little bit of time gathering data from the client and produce a “cookie cutter” analysis. I’m referring to the type of highly customized plan the wealthy are looking for, which begs another question. Who needs this type of service?
In the strictest sense I would say everyone. However, the question each of us has to answer is this: “Which segment of the marketplace do we want to focus on?” Another question of relevance: “What is our perception of planning?” If it’s merely a way to sell things, then it will likely come across that way to the client. If you think of it as a “loss leader,” then are you really a planner?
People express their trust in you, or lack thereof, in different ways. This week brought with it some interesting and encouraging developments. I had a meeting with a client who informed me that he would call me or his CPA whenever faced with a financial decision. He didn’t say the words, “I trust you” but his intent was clear. I called another client after the 387 point drop in the DJIA to see how he was doing. This particular client is approaching retirement and I expected him to be a little concerned. To my surprise he wasn’t and in fact said, “I trust you completely. Do whatever you think is best.” Still another client said, “I trust you 100%.” These are the things that inspire me and are the reasons I do what I do. The common thread between each of these clients is that they didn’t buy a portfolio or a financial plan, they bought advice.
Two things seem clear to me. First, there are a limited number of ways people are motivated and second, individuals are motivated differently. Recently, I heard a speaker say that to succeed, you not only need initial motivation but ongoing motivation to enable you to persevere. Without the subsequent motivation, your initial enthusiasm will wane and you’ll eventually give up and quit. To me, one of the most motivating things is when a client offers a sincere compliment. This will naturally occur when the client’s satisfaction reaches a certain level. When they let you know how important you are to them it penetrates deep into the psyche. This in turn, confirms to us the real reason we are in the business (hopefully) and provides the ongoing motivation we require to persevere.
It’s like a big circle. The more I help clients, the more they appreciate me, and the more they appreciate me, the more motivated I am to help clients, and so on.
I heard an advertisement recently for a financial services firm that went something like this, “Don’t work for your 401(k); let your 401(k) work for you. We can show you how”. What exactly does that mean? This is just one example of the “noise” out there. The dictionary defines noise as, “a loud, surprising, irritating, or unwanted sound.” The plethora of meaningless advertising in the marketplace serves to create confusion in the minds of clients and makes it difficult for them to choose an advisor or firm.
We must possess integrity AND competence. Both are vital. An advisor could be trustworthy but incompetent or extremely competent but unethical. People who engender trust possess both qualities. A prospective client must develop a certain level of trust in us before they will allow us to take the wheel.
In my last blog I wrote about the feeling of being overwhelmed by all of the tasks set before me. As we all know, if there’s one thing that’s constant, it’s change. What a difference a week can make. You see, even though I still have to wear a lot of different hats, I can now see light at the end of the tunnel. Since my last posting, a new path has opened before me. A path of opportunity and it came along at just the right time. Let me explain.
I find myself swimming in a sea of complexity; much of it is my own doing. As the initial momentum of starting a business has waned a bit, I have come to the realization that I need to revise my strategic business plan. I’m reminded of the phrase which goes something like this, “It’s not enough to do things right but to do the right things.” What I do, I do well, but I’ve not been doing enough of the right things. It’s time to reassess what’s important to the business and do those things well.
We had some good discussions in this space over the past few weeks about the frequency of the advisor fee deduction. This week I’d like to focus on the source and structure of our fees. Where do you derive your fees from and how do you structure them? For instance, if you do financial planning, do you charge a fee for this service or not? If you do charge, what is the range of your fee and if you don’t charge, why not? If you manage client assets, how do you charge for this? Do you charge a percent of assets, commissions, or maybe a flat rate based on the account or relationship size? Here’s how I am doing this.
In the world of advice, discussion can be a very healthy thing. Even if you don’t agree with a particular point of view, it can still be beneficial. Because we are emotional creatures, we often make decisions based not on empirical data, but rather on our gut instinct. With this as a backdrop, I’d like to follow up on last week’s blog in which I discussed the frequency of the advisor fee deduction. There seems to be a lot of interest in this topic. On my blog, from last week, there were some interesting points brought up.
Before we discuss them, I had a typo in my last blog pertaining to the ending values that I should correct here. Although Scenario B (monthly fee deduction) did outperform Scenario A (quarterly fee deduction), the ending balance in Scenario B was $1,156,455, not $1,554,535 as I wrote. I apologize for the error.
There is a lot to keep up with when you run your own advisory firm. Not that this is a surprise, but staying abreast of everything that must be done can be a bit overwhelming. Each client is on a different track and each is at a different stage in the process. With one client, I have completed the financial plan and we are in the implementation phase. We are transferring assets to me and getting an attorney involved to draft their wills. With another client, I am nearing completion of their plan but there are some special nuances which require me to do further research. Another client is gathering additional information so I complete their plan. On top of all that, keeping up with planning strategies, tax laws, changes in the insurance market, etc., requires a lot of time. Then the asset management piece, which leads me to this week’s topic, deducting the fees.
Last week I said I made an interesting discovery about fees and would share it with you this week. The question I had was this, “With what frequency should I deduct the fees?” Should I deduct them monthly or quarterly?
I'd like to begin this blog by recapping my progress to this point. My business income will come from four primary sources.
First will be financial planning fees. These fees, on a per client basis, will range from a few thousand dollars to several thousand dollars per year. It will not only cover the initial planning phase but will allow for ongoing advice throughout the course of the year.
Another source will be from the management of client assets. Currently I have one fee schedule but will create an additional schedule soon. I'll use one if the extent of my service is portfolio management and the other will be for clients who have also hired me to be their planner. In this case, the asset fee will be slightly reduced since I am also collecting financial planning fees.
A third area will include insurance, mainly life and long term care.
The final area is a slight departure from the traditional wealth management arena. Here's one example. I am currently in discussions with a large engineering company. They produce estimates for their clients on projects that may be $10 million, $20 million, even as much as $100 million. The estimates project the total cost of the project and are calculated on a linear basis using static assumptions. I will add Monte Carlo simulation to their quotes, giving their clients a better and more realistic understanding of the projection.
Please permit me to be a little reflective in this blog. Let’s consider the phrase Life, Liberty, and the pursuit of Happiness. These are three unalienable rights granted to each of us by our creator as argued in the Declaration of Independence. As I write these words I think about the freedoms we enjoy here in this great country. Although we are not without our problems, this is still the land of opportunity. Here in my third month of independence, I am thoroughly enjoying my new-found freedom.
I find opportunity abounds and for that I am grateful. I am enjoying the freedom to choose the clients I will work with. The freedom to choose the tools I will use. The freedom to structure my business the way I desire in order to best serve those who are the most important to it, my clients.
Our clients also enjoy these freedoms.
Well, everything should be in place to manage client assets very soon. I’ve chosen the RIA custodian, provided them with all of the necessary paperwork, and now I am waiting on them to overnight a package to get me started. Of course, I will need to be trained on their systems, paperwork, and such, but I can now see the light at the end of the tunnel. More on this later.
Up to this point, I have been collecting fees for financial planning engagements. Moving forward, I expect to retain these clients by providing ongoing advice, under an annual agreement with a retainer type fee structure. The challenge here is that the planning process can be very labor intensive.
This was an important week, both in a long-term strategic sense and from a current perspective. On the strategic front, I spoke at an annual conference in Denver. The talk went extremely well and I expect to realize some very tangible benefits as a result (more on this later). There were about 200 attendees from 14 different countries, including some of the most brilliant people I’ve ever met. There were PhDs, MBAs, university math professors, CFOs of some very large organizations, just to name a few.
This past week I presented my first financial plan as an independent. I analyzed several scenarios to determine the proper course of action for the client. This couple seemed to follow it well, and was appreciative of my effort. The truth is we all like to feel appreciated. After all, isn’t helping clients realize their dreams the reason we became planners? To be viewed as a trusted ally is one of the highest compliments we can receive. I am also working on two other financial plans for clients who have engaged me. Creating financial plans is a very time consuming process. Because of this, I plan to take on no more than two to three new planning engagements per month. I’ll keep you posted.
Now let’s discuss marketing. I am in the process of creating an introductory packet to give to prospective clients. It will also help me to codify, in my own mind, my value proposition and will contain several tabs, or sections.
The term one armed paper hanger has taken on a new meaning this week. I gained another comprehensive financial planning client, which makes three total. Working on three plans at once, with the level of detail I engage in, is a bit challenging, to say the least. The specific nuances of each require a fairly high degree of customization. Plus, I am very passionate about providing clients with clear, concise analyses of their current situations and appropriate recommendations.
I’ve spent a lot of time deciding on software, marketing materials, getting better acquainted with the Investment Advisers Act of 1940 (try reading this at bedtime), and other things. At some point soon, I hope to have more free time to get back to staying abreast of advanced planning strategies. First things first, I suppose.
I am currently waiting for the green light of approval from my RIA custodian, which brings me to another subject, that of investing.
In my last blog I wrote about my decision to choose the RIA route. This week I’d like to provide a brief summary of my progress so far and ask for your input on a few key issues. I have purchased most everything I need to do business. I have the necessary furniture, office space has been acquired, I should have an RIA relationship established very soon to custody client assets, and I have a pretty good idea who I will run my insurance business through. I also have my proprietary financial planning software and now that my thorny encounter with Windows Vista is behind me and I have gone back to XP, everything’s working great on the technology front. I have three new clients which will keep me busy for a while and a few more on the way. So far, so good. I do have a request for any of you that have experience with the following key planning tools:
This week I feel like a pioneer embarking on a journey to discover new lands, with the difference in this case that many have blazed the trail before me. It’s up to us to learn from their experiences. Perhaps some of you are following this blog for this reason. If so, I hope you’ll benefit in some way.
After much thought and consideration, I have decided to go the RIA route and am very comfortable with the decision. I’ve had a great deal of experience with broker/dealers over the years. I’ve had experience with the largest wirehouse to the largest independent B/D and even though each is a little different, there are many similarities. Not to besmirch those companies, they, like all B/Ds, are subject to the same rules and regulations that tend to provide a degree of difficulty for the advisor. Since laws are generally passed because of a few bad apples, sometimes the pendulum swings a bit too far to one side, all in an effort to protect the consumer. So my decision is perhaps, in part, just a matter of timing, but the RIA platform seems much more attractive.
This week on the Road I saw more progress. My RIA is now approved by the state and I can accept financial planning fees. I have two financial planning clients to begin with. One is an executive with a large corporation and the other is a young professional with a very successful practice in the medical field.
I am still looking for a place to hold the assets. I have been leaning toward the RIA platform – which seems to be a trend – but am unsure at this point. While an RIA offers more control and a higher payout (100% versus 90% +/-), it will require more work and cost to set up. Is the extra cost worth the additional 10% payout? If the production is large enough…certainly!
I think of it this way: It’s as if the RIA arrangement provides a storefront and it’s up to me to determine what to put on the shelves. For instance, if I want to offer insurance products, should I secure a general agent contract with each company I want to do business with or find a “one-stop shop” and run all insurance business through them? I think the latter would be more efficient but would love to hear your comments.
Let’s get back to the asset management decision.
What’s the saying—change is inevitable? Well, my second week of independence was no exception. I mentioned in my last blog that I had found office space. May I elaborate? It is located in a very nice part of town, central to just about anywhere you’d want to go, and very reasonable. What’s interesting is how it came about. You see, there is another advisor I met some 10 years ago when we both worked at the same very large wirehouse. We have kept in touch over the years and today my office is across the hall from his. It’s part of a suite of offices called Executive Suites. We have a common secretary, copier, reception area, etc. It has a very nice decor and a very professional atmosphere. Maybe not where I’ll be in five years—I have a grand vision of my ultimate office—but it’s more than adequate and certainly better than my original plan of a home office. But as Paul Harvey would say, “Here’s the rest of the story.”
This week I secured my first financial planning engagement. I’m excited about the prospects going forward. Every day I become more convinced that as advisors continue to “vend” their products to clients, the need for what I do increases. I believe there is a large segment of the market that is tired of being sold financial products. This practice has bred a healthy suspicion in the public’s mind which has created a need for my role as a “personal CFO” or “gatekeeper.” Like many of you, perhaps, I was trained in a wirehouse where finding people and selling products was the accepted way to do business. However, in my opinion this is not being client centered. We should be finding people, accessing their needs, and using products only as a means to satisfy those needs. Today, there is so much opportunity for the advisor who will truly place the client’s interests above his own. Done properly, it creates trust and instills confidence—the very thing our industry needs. I am also finding it liberating to work in an environment with no proprietary products and one that is free from the conflict of interest between client and shareholder.
I am still looking for a place to custody assets.
In the premiere article in his multipart Road to Independence series chronicling the steps that any advisor would need to take to go independent, Mike Patton discussed the pros and cons of becoming RIA only, affiliating with an independent broker/dealer, or being dually registered for different business purposes. In his first blog posting, Mike relates how that decision is playing out in the real world.—Ed.
Well, talk about “bumps in the road.” In starting my new firm, I had decided to go with a particular broker/dealer that I was with several years prior as an OSJ. I spoke with the initial contact person who after demonstrating their new technology and answering all my questions directed me to fill out their 44-page online questionnaire, which I did. I sent it to them via an overnight service and was then connected with a transition specialist. I spoke to this person a few times and then he said he’d send it up to compliance for review. He said everything looked good and didn’t see any snags. He even mailed me a new rep kit. At this point it had been a little over three weeks since my decision to join them. Plenty of time, right? Well, not necessarily so. You see, even though I told my initial contact and the transition specialist that all the financial planners in our firm were de-licensed as of July 2006 (I lost my series 7, 24, 63, and 65), including me, neither indicated that it would cause a problem. Not even a pause. Everything was proceeding well, and then BAM! The Friday before my last day at my current employer, I was told by a different individual with the broker/dealer that there was no way they would be able to start me out as an OSJ since I was de-licensed so long ago. Eight months! Didn’t seem that long ago to me. It’s not as if I left the business. I was very involved and working as a financial planner. Was this a matter of law or an internal company policy? Not really sure. Does anyone out there know the answer?
