Until 2001, Budros, Ruhlin & Roe had everything but professional management. Now it does.
By almost any yardstick available in 2001,
Budros, Ruhlin & Roe was one of the nation's most successful
financial advisory firms. With about 250 clients and $500 million in
assets under management, this client-centric advisory boutique was the
firm of choice for the growing number of affluent individuals in the
prosperous Ohio city of Columbus and its sprawling suburbs.
Yet it was also becoming increasingly clear to Jim Budros, Peggy Ruhlin and Dan Roe, all of whom were accustomed to spending up to 80% of their time with clients, that the firm wasn't functioning the way they wanted it to. Like many other advisory businesses, Budros, Ruhlin & Roe was grappling with what was turning into the worst bear market in 70 years by providing clients with higher levels of service than they ever had before.
If the firm's client retention rate was any indication, clients were doing as well as could be expected; very few of them were leaving. But the stress of expanded services was taking its toll on the partners and staff. Important "internal issues were being handled after hours or at odd times," Roe recalls.
All the partners agreed on what the problem was. "It felt like things were out of control," Ruhlin says. "We were doing things without the kind of strategic planning and preparation necessary. We needed to take care of the back of the house."
The solution to this problem was obvious. What the firm needed was a chief operating officer or managing principal. There was some discussion about conducting an outside search for the right person.
But Roe, who only two years earlier had paid a handsome price to become an equal partner with Budros and Ruhlin, expressed serious reservations about increasing overhead by bringing in an outsider who would command a six-figure salary and take a few years to learn the business before making a real contribution. The partners also knew colleagues in the business faced with the same issue who had brought in an outsider only to part ways after a year. "I was very reluctant about hiring someone from the outside," Roe says.
Privately, Budros and Roe knew the best candidate was sitting right next to them. "We knew Peggy was the best person; she was good at personnel and organizational issues and we'd deferred to her in the past," Roe explains. "We knew things would get done."
Budros agreed. When it came to management issues, "Peggy is better at it than Dan and I by a factor of ten."
The only partner who had doubts about this solution was Ruhlin herself. She had some questions about her ability to switch roles, and she loved working with clients. Deep down, she wondered if the job of managing principal was really all that significant, particularly in her partners' eyes. "I worried that Jim and Dan would look at me differently because they were dealing with clients," Ruhlin says.
Budros and Roe had no doubt about her abilities for the practice. Not only did she have superior organizational skills, but she also was a certified public accountant who understood financial management. Roe came up with his own way to close the deal. "I threatened that if she wouldn't do it I would," he quips. "That was enough for her to agree to do it for three years."
Ruhlin relented, but with a proviso. "I made them sign a contract that I was only required to do it for three years," she says.
Earlier this year, she re-upped. "I still spend about 25% to 30% of my time with clients," she explains. Including prep work, she used to spend about 80%, like Budros and Roe do today, so it was a big change.
It's not surprising that in a profession dependent on finding clients and keeping them, many principals view the role of managing client relationships as far more important than the mundane task of practice management. At a firm that prides itself as being as client-driven as Budros, Ruhlin & Roe, it's only natural.
A quick look at the fee-only firm's vital statistics reveals how it is possible to provide a wide scope of services economically. With about 320 clients and $700 million in assets under management, the firm has doubled its asset base since 1999 with little help from the market. The vast majority of clients are charged flat fees with a minimum of $10,000.
Sounds expensive, until one takes a closer look. In 2004, the firm generated between $4 million and $5 million in revenues and, despite 27 employees, managed to produce an operating margin of about 25%. Simple math tells you that, as a percentage of assets, clients are getting charged a rate of 0.6% or 0.7%.
Still, profits matter for several reasons. Budros, the firm's founder, says there are no plans to sell the firm. In fact, it has a meticulously crafted succession plan. But "we run the firm like an institutional business [that could be] for sale, because that's what we tell our clients to do," he explains. "In our case we're not looking for a buyer."
A key part of that succession plan is John Schuman, a 38-year-old CPA and estate planning attorney who joined the firm when it was ramping up its portfolio of services in June 2001. Schuman came from a five-man team at Deloitte & Touche marketing estate planning services to the ultra-affluent in the central United States. Prior to that, he had practiced law for eight years.
Shortly after his arrival, Budros, Ruhlin & Roe alerted clients about his expertise in numerous areas, including executive compensation, estate planning, income-tax issues, split-dollar arrangements, stock options, buy-sell agreements, wealth transfer challenges and sales to defective trusts, to name a few. At a time when financial advisors needed to do more for clients than simple asset management, Schuman was just what the doctor ordered.
Even though he was placed on the partnership track, Schuman wasn't pressured to bring in business, a major difference from the legal and accounting world he came from. "I did not bring a lot of clients with me; I didn't want to burn a lot of bridges," he says. "Attorneys and accountants are good referral sources."
Of course, one thing he couldn't do was practice law. That also worked in his favor as he learned, somewhat to his surprise, that lawyers like working with other lawyers who aren't direct competitors. "Most attorneys enjoy the fact that we're involved," Schuman says. "I'm a big backstop, and I can help manage their legal work and follow through."
Clients involved in litigation also can turn to Schuman for cost-benefit analysis and get an explanation of what the costs of settling are. In this litigious world, those are sometimes explanations that attorneys themselves might feel uncomfortable providing.
"A client never calls an attorney until there's a problem," Schuman says. "Because we don't bill by the hour, a client often calls before it becomes a problem. As a result, we keep a lot of clients out of trouble."
Like many attorneys and accountants who have become financial advisors, Schuman has been surprised by the differences in this emerging profession. "The most pleasant surprise was not having to keep track of billable hours," he says.
But the biggest surprise to Schuman has been the value proposition of financial planning itself. Many attorneys, accountants and others in long-established professions are often amazed so many clients are willing to pay $10,000 minimum annual fees. "What I didn't understand was the closeness of the client relationships," he explains. "We provide a lot of peace of mind."
To understand how Budros, Ruhlin & Roe emerged as one of the top advisory firms in Columbus, it's important to look at its evolution. The firm's pioneer, Jim Budros, grew up in the trust business at Huntington National, a local bank, where he became director of business and estate planning. In 1979, he joined the fee-only financial planning arm of Physicians Insurance Co. of Ohio, a publicly held company in the malpractice insurance business.
In the mid-1980s, Ruhlin was a 50% owner of an accounting firm who was finding that as clients aged and their problems grew more complex-and interesting-she had to refer them to a financial planner, who more often than not was Budros. At the same time, she and Budros started taking a CFP course at Ohio State University. "I started asking myself where has this been all my life," she remembers. "One day Jim called and said his business was growing fast and would I ever consider joining him." She immediately agreed to talk and was soon on board. "It was the luckiest and best decision I've ever made," she says. "Also I got out of the accounting business just as it started to go downhill."
In the late 1980s, Ohio's Department of Insurance ordered Physicians Insurance to divest many of its subsidiaries, so they, together with a few other planners, bought the advisory business. In 1992, Budros and Ruhlin split up with the others and formed their own firm,, which opened its doors with 179 clients, $130 million in assets and 13 employees. To put it in perspective, in those days, a fee-only firm with $30 million or $40 million in assets under management was considered viable.
From the start, Budros and Ruhlin frequently shared clients, though it occurred as much by happenstance as design. While they viewed themselves as generalists, the firm also tried to leverage Budros' trust and estate planning skills along with Ruhlin's strength in tax and business planning.
Just as Ruhlin had once been an excellent referral for Budros, others were now filling that role. "We had a really good referral network of physicians and estate planning attorneys," she says.
In the firm's early years, physicians accounted for a huge chunk of its clients. "Our typical client is the millionaire next door," Ruhlin says. "They've decided to live beneath their means."
Contrary to popular mythology, many of these doctors aren't dummies when it comes to money. "Some of our physician clients are some of the smartest [individual] investors I've ever seen," Ruhlin continues. "They really challenge us but they've decided to delegate the role."
Both she and Budros shared responsibility for investment management and, while they relied primarily on mutual funds in these years, they had the good fortune to recommend one individual stock-Berkshire Hathaway-as a substitute for a large-cap growth fund. Over the years, Budros would take clients to Omaha for its annual meeting, a junket that bore fruit in ways that went beyond its spectacular appreciation in price. Listening to holding company chairman Warren Buffett talk about investing provided the best client education available. "It's a great way to each clients about investing and not chasing trends," Roe says.
But while many advisors were zeroing in on asset management as their primary focus, Budros and Ruhlin were constantly looking for ways to make comprehensive financial planning more than a marketing slogan. Budros had developed something he called an estate planning fire drill and would assemble clients together with their children to go over what would happen after the parents died. Many advisors wouldn't go there.
Estate planning is often viewed as the province of lawyers. Budros understood that, and he also recognized their shortcomings as well. During the fire drill, "Mom and Dad are required to sit there and be quiet," he explains, while the children and advisors talk about dotting all the i's and crossing the t's, determining the costs and estimating the time delay. "It's one thing to do an estate plan when Mom and Dad are talking to lawyers," Budros says. "But when you do this, it brings issues that might not [surface] otherwise and it can make the issues raw."
While Budros and Ruhlin were growing their already substantial practice in Columbus in the early 1990s, a few hours down Interstate 71 in Cincinnati, Dan Roe was experiencing just how tough it was to break into the business of financial planning as a fee-only practitioner, an experience far more common then that his future partners. Still in his twenties, Roe shared an office with Michael Chasnoff and Dave Foster, two other advisors who would later thrive. But though he shared resources and administrative costs with them, Roe was a sole practitioner targeting middle- and upper-income clients. "In my own practice, I wasn't able to bring in as many clients as I wanted," he says.
Like Ruhlin, Roe was active in both the International Association of Financial Planners and the National Association Of Personal Financial Advisors. In the early 1990s, Ruhlin served as president of the IAFP's Columbus chapter, while Roe was president of the Cincinnati chapter. In April 1996, Roe, who was about 20 years younger than Budros and 15 years younger than Ruhlin, joined their firm as vice president and moved to Columbus. "Initially, I was going to bring clients but the minimum fees of this firm were a lot higher than my clients were paying in Cincinnati," he says.
With Roe's arrival, the generalist model that the founders had implemented began to give way a more specialized approach. Roe's skills in investment management and financial planning quickly propelled him into those areas, while his involvement in tax and estate planning started to diminish. "The staff sort of pushed this along," Ruhlin says. "As they started to come to one of us when a specific issue arose, we realized what they were doing and why."
The timing of Roe's arrival at the firm coincided with the expansion of its range of investment options. Although it managed to dodge the runaway train that the tech bubble was becoming in the late '90s (and lost a few clients for refusing to jump on), the firm started to offer separate accounts and individual stocks at about this time. One introduction was its 20/20 portfolio, consisting of 20 bluechip stocks. "we believe we can own for 20 years with very low turnover. We're agnostic or indifferent when it comes to what investment vehicle we use," Roe says.
As Roe was moving into the chief investment officer role, he also became a partner in 1999, as was envisioned when he joined the firm. It's highly unusual for two longstanding partners who built a business from scratch to make a new partner an equal partner in virtually one stroke, but that's what Budros and Ruhlin did. Budros himself views it as an act of "enlightened self-interest," not generosity.
Roe agrees, and explains his purchase of one-third of the firm in 1999 didn't require them to give up equity even if their stake was diluted. "It was a combination of Jim and Peggy financing a portion of it [the purchase], and a significant cash payment," Roe says. "They wanted to be sure I made a significant commitment to the firm." Moss Adams consultant Mark Tibergien conducted a valuation that became the number they used for Roe's buy-in, and an attorney who was an old friend of Budros drew up the agreement.
Budros himself never assumed or expected that "we'd sell our business for a large sum of cash. We've assumed the firm itself would be our primary source and that our liquidity event would be some form of deferred comp. That wouldn't be possible if it wasn't able to operate at a high level of profitability." The firm has received approaches from several consolidators and after hearing some of the prices mentioned, Budros understands why the matching or merger services claim there are 20 buyers for every seller.
Besides, cashing out was never what the firm was about. Clients were. Early in the current millennium, it became apparent that the partners' client centricity was so excessive it had become debilitating. With more than 300 clients, managing the firm-much less growing it-became difficult when partners were required to be present in practically every meeting with a client. "Peggy said at one point, 'We're not in the financial planning business; we're in the meeting business,'" Budros recalls. "We had to move to a model that didn't require us to be in meetings eight hours a day."
In 2001, as Ruhlin started to step back and examine the firm's operations to improve efficiency, she looked at the firm in two ways. First, as a CPA who counseled clients on business and tax planning, she took a cold, hard look at the numbers, which remained relatively good during the 2000-2002 bear market. Still, she reformatted the firm's financial statements to conform to the Moss-Adams model and started to enforce certain yardsticks, maintaining a 60% gross margin and a 25% operating margin. If the firm decides its going to spend money on a new service or technology, expenses have to be transferred from somewhere else.
The second part of her evaluation was to examine the firm's human resources. If there was an area the partners had neglected in the past, this was probably it. This partially explains why a number of Budros & Ruhlin alumni now operate small, successful advisory firms in the Columbus area.
She quickly realized the need to drive some responsibilities down from the partner level to the employee level. "I never had the luxury or time to spend a lot of time with our staff and didn't realize how talented they were," she acknowledges. "In the last few years, I have learned that our staff is extremely talented in so many ways." Today, senior planners get to hire their assistants. "Our investment management specialist found that very empowering," she says.
More new services are in the works, and the firm plans to hike the minimum fee to $12,500 later this year. A team of senior planners is working on a new initiative that could be rolled out later this year. "We think we know what the product is," Budros says. "We're not sure how to deliver it."
While Schuman appears to be on the partnership track, the others are now trying to find ways to create other career paths to leverage the skills of all employee so that the business can continue to grow. That story continues to evolve.
Meanwhile, Ruhlin appointed several groups to work on best practices in various areas and is finding that it's the firm's singular focus, not the partners', on clients that is really important. "It's great that the principals don't have to be everywhere and make every decision," she says.