How will you make your practice the best it can be?
On New Year's Day as I sat at the dinner table
eating roast chicken and baked potatoes and broccoli with my family, I
realized that I hadn't made new year's resolutions for any of them. I
like to make resolutions for other people, particularly my husband and
16-year-old son, Tom. My daughter, Krista, is a college junior. She
makes her own. Or doesn't.
Too bad, I told my family. I had been mulling some good ideas for them like being more patient with my technical illiteracy and even offering some help when I have a computer or cell phone or I-Pod or soup pot breakdown. Also studying for SAT exams and finding a big chest full of cash. Then it hit me: I could write some resolutions for financial advisors.
And so it happens that I have some ideas for 2007 that you may have neglected to put on your own list. They have to do with bringing balance to your life, becoming a better financial planner and a better person, getting over any inferiority complex you might cling to because your predecessors in planning did not hold to the high standards you have today and revisiting the old fee argument with an open mind.
What's the first question you hear when you meet someone new at a social event? I'll bet it's "What do you do?" Many financial advisors still cringe at the public's image of advisors as salesmen. When I meet people, parents of my children's friends, for example, and they ask me what I do, I say I write columns and books for financial advisors. Likely as not, they say, as the father of my daughter's roommate did the other day, "How do these people think they can charge me 1% of my own money when they don't even pick stocks anymore?" Don't accept this outdated notion of your profession; if you do, it could lead you to make some big mistakes in an effort to change your image, such as putting a "fee-only" behind your name at all costs.
What do you do? That's what I ask advisors when I go to conferences. I hope they don't answer: "I beat market averages." That plays into the outmoded model of the financial planner. And it's difficult to do on an acceptable risk/return basis. Folks who are willing to spend time and energy to learn to invest can do it themselves, sometimes as well as most of you can.
Advisors aren't going to be paid for information arbitrage anymore, because the same information is available to everyone. Even investors who don't care to spend time studying can take the easy way out and invest in a fund like Vanguard STAR. I suspect the returns on STAR look pretty much like the returns on a conservative advisor's portfolio. The planner may do a little better in gross return, but STAR has the advantage of lower fees.
Attitudes and misperceptions about work and who does what run deep. We can't change them overnight. Thirty years ago Studs Terkel, a Chicago journalist, wrote a book called Working: People Talk About What They Do All Day and How They Feel About What They Do (Pantheon Books, 1974). Terkel traveled across the country and taped interviews with waitresses, strip miners, masons, beauticians, jazz musicians, and carpenters, and weaved their stories together. Back then, the advisors we know today didn't exist as providers of advice. Salesmen and stockbrokers pretended they were providing the financial advice people needed.
Here's what a car salesman told Terkel about his job: "Everybody can sell an idiot. I wish I had 50,000 of 'em a day, because you can sell 'em the Brooklyn Bridge." And a stockbroker interviewed by Terkel had this to say: "I thought of the market as a sort of river. Money running to the sea. I figured all I had to do is just stand on that bank and lower a bucket every once in a while and take a little bit of that out." What do they do? They treat their customers with contempt and take the same bitter, cynical view of their jobs. And, unfortunately, there are still many of these financial salesmen around.
On January 3, 2007, the Wall Street Journal ran stories on the cover of its Personal Journal about how salesmen manipulate us. Jonathan Clements, who has been writing the "Getting Going" column for more than ten years, wrote his column on "How Advisors Manipulate You," detailing "seven common tactics" and adding that "even ethical advisors use these tricks." Few consumer publications give the other side of the picture: how a planner can save his client hundreds of thousands of dollars by pointing out an error in his beneficiary designation, or help a client work out a midlife career change to the job of his dreams or figure out if he can afford to buy that house on the lake. One reason for that: There is no sure-fire way for reporters to identify those good planners.
Terkel writes that working takes a toll on the spirit as well as on the body. That's where a good financial advisor can make the difference. One of the first things financial life planner George Kinder, author of The Seven Stages of Money Maturity, asks his clients: "Do you feel you have to give up a piece of yourself in exchange for a dollar?" Like Kinder, many planners today help clients resolve their conflicts over money, to lessen the toll work takes on body and soul. And that's what planners should be getting paid for rather than for some promise of portfolio performance. So I suggest you look at yourself and your practice and make these resolutions:
I RESOLVE to downplay portfolio performance and emphasize the real ways I add value to a client's life.
Document some of the things you do for clients that stretch the definition of financial planning.
I RESOLVE to add some new activity to my own life this year for personal growth.
I remember when Roger Gibson, author of Asset Allocation: Balancing Financial Risk (McGraw-Hill), the gospel on how to diversify across asset classes, gave a speech about his personal portfolio at the Financial Planning Association's Retreat 2001 in Tampa. When he sat down to prepare his speech, he decided to make lists of various aspects of his life like "biggest challenges," "biggest mistakes," and "biggest rewards." He quickly learned that he couldn't neatly segregate his life into compartments like that.
Indeed, he said his life didn't really begin until it appeared to be over: His wife divorced him, his office assistant quit, and he had to sell his business partnership to pay for the divorce. He went with his gut instincts, got joint custody of his two children, wrote a book on asset allocation, began studying depth psychology and Buddhism, earned a black belt in tae kwon do and started playing his clarinet again. He diversified himself. He became a whole person.
I RESOLVE to use my own challenging life experiences as inspiration for clients.
Most of us learn best when we learn the hard way: by experience. If we can use these lessons to teach others, we provide a real service. For example, Roseanne Grande, a planner at R.W. Rogé in Bohemia, N.Y., who took care of her elderly mother for more than 10 years before she died, was drawn to gerontology as a specialty once she got her CFP license.
Annette Hammortree, an advisor in suburban Chicago, dramatically changed her planning approach to focus on the special financial needs of disabled children after she gave birth to a child with cerebral palsy.
I RESOLVE to leave room for the creative side of building a practice.
Four years ago, I wrote a book for financial advisors called In Search of The Perfect Model. When I started the research, I expected to find at least a half dozen models that I could recommend to planners hoping to build a practice. What I discovered was that each successful planner had developed a singular model that fit what he was about, that tapped into her roots. Richard Lee, president of Lee Financial Corp. in Dallas, was one of the pioneers of fee-only planning in the early 1970s. Although Lee acknowledged the growth of sophistication and professionalism in planning, he believes it's still too early to identify the best model. The worry, Lee said, is that if we define strategies, people will stop experimenting and try to fit into one of them. Be creative.
I RESOLVE TO resist the stampede to join the ranks of fee-only planners.
Fees for planning make good sense. But I'm not sure the way planners in the U.S. have set them up does. Who made fee-only the Holy Grail? Seems to me it was the National Association of Personal Financial Advisors and the media. NAPFA wanted to promote its fee-only members as the cream of the crop. The press wanted a rule-of-thumb to help readers pick a financial planner: Get a fee-only planner. No matter that the practice had two phone numbers, one for fee-only and the other for commission-based. The elevation of "fee-only" to a sacred place in planning brought about a change in the behavior of lots of advisors who wanted to get on that list. The changes were not always to the clients' benefit.
Why should it make that much difference to a client how an advisor gets paid? In the rush to be redeemed, many planners have converted to fees to distinguish themselves from brokers. These planners need a new strategy. Soon brokers will be fee-only. Advisors in some other countries have been more creative, charging fees and offsetting them with commissions when that proves cheaper for clients.
An advisor is trustworthy. Or not. He shouldn't be made to feel inferior because he's found a creative way to better serve clients, like Patti Houlihan, a planner in Fairfax, Virginia, did. Houlihan included insurance placement in her fee of 1% of assets by arranging no-load policies through TIAA-CREF.
The real problem is the asset-based fee. That structure may make sense as a method of compensation for money management, but it doesn't work for financial planning. You do much more than manage money. This year, why not focus on how to make that clear to your clients?
Mary Rowland has been a business and personal finance journalist for 30 years.