When Steve Kanaly graduated from college 25 years ago, it seemed like he was destined for a lifelong career in financial services.

He was, after all, the eldest son of E. Deane Kanaly, a pioneer of fee-only financial planning and an outspoken critic of his commission-based colleagues.

The senior Kanaly was fighting battles on other fronts as well. He was waging a personal campaign against bank trust services, which he felt too often put revenue ahead of client interests. A former bank trust officer himself, Deane Kanaly had six months ear-

lier founded Kanaly Trust Co. of Houston, the first independent trust company in Texas and one of the very few in the nation.

Steve Kanaly, meanwhile, had just graduated from the University of Texas with a major in finance and a minor in trusts and estates. His father's work and his new company intrigued him.

So why did he apply to become an FBI agent? "I wanted to make sure I was Steve Kanaly," he recalls. "My dad had always been successful. He was an icon in the financial planning industry and already a rogue and icon in the trust industry. I just didn't want to be someone who tagged onto his coattails."

Kanaly eventually did get accepted into an FBI training program. In fact, he laughingly recalls how shocked his friends and relatives were when they received calls from FBI agents who were checking his background.

But as Kanaly tells this story, he is sitting at a desk at Kanaly Trust Co., which he joined in 1976, and where he and his two brothers are co-chairmen.

Chalk one up for destiny. "I finally decided I liked what my father was doing, and that's OK," Kanaly says. "It took three or four hours and a couple of beers to figure that out."

Kanaly says he has no regrets about his decision to not pursue FBI training and to join the trust company instead shortly after his college graduation. He also is following his father in another way: by taking a leadership role in the fee-only movement. Named chairman of the National Association of Personal Financial Advisors in May, Kanaly is a spokesman for fee-only advisors.

What NAPFA stands for is a key issue today, at a time when many advisors are moving toward fees, undercutting the organization's uniqueness. Kanaly took the helm just as the group was embarking on a strategic plan to redefine itself and was moving beyond the "fee-only" label. The strategy also entails heightening public awareness of what NAPFA members believe in.

Concurrently, Kanaly and the rest of NAPFA's leadership are laying plans to increase membership, restructure the way the organization is governed and provide more services to members. It's a pivotal time for NAPFA, involving potentially divisive issues, such as changes in membership requirements. Nearly halfway through his term, however, Kanaly has managed to keep NAPFA happily on course, says one regional board member.

"He's certainly not an egotistical type," says Peggy Cabaniss, chairwoman of NAPFA's western regional board and a member of the national strategic planning committee. "I think he really appears to be a good leader as far as moving a group and have it be a group effort, not a Steve Kanaly effort."

That may be due to the fact that Kanaly and his two brothers, Jerry and Drew, depend on consensus to set policy at the Kanaly Trust Co., where the family patriarch, Deane, still works as chairman and chief executive officer.

As part of a succession plan hammered out a few years ago, the brothers set policy, while Murray Pate, a chief operating officer hired two years ago, takes care of the day-to-day running of the company. While the board technically is made up of Deane and his three sons, Steve says his father has let the three brothers make decisions on their own.

"We're running the company as if my father was deceased, as sort of a practice run to see how we could do if he were not here," Steve Kanaly says. "All three of us don't necessarily agree on everything, but we'll agree to disagree. If you're going to disagree, the point is you have to figure out a point to get beyond that. No one is right or wrong."

Deane Kanaly didn't envision Kanaly Trust Co. as a family business when he started it. A financial planner in the 1960s, Kanaly left the profession in disgust after a few years because of what he considered unethical practices by some of his commission-driven colleagues.

By 1973, Kanaly was running the trust department of a local bank, but the practices there irked him as well. He felt, and still feels, that trust services at banks had built-in conflicts of interests because there was too much internal pressure to steer trust clients to bank products.

The senior Kanaly still remembers a conference he attended in the 1970s, where experts predicted that banks, mutual funds, broker-dealers, insurance companies and so on would be indistinguishable someday as they melded into comprehensive financial service companies.

Kanaly believes that idea is dangerous. "It can't happen without horrendous conflicts of interest," he says.

In 1975, he decided to put his beliefs into practice by starting Kanaly Trust Co., which combined independent trust-company services with fee-only financial planning and investment management. Kanaly started the company on a small budget, with just himself and another person who doubled as a secretary and a planner.

Then, as he recalls, Steve called him one day and asked, "Do you think they'll ever be room for me?" Deane Kanaly says this surprised him, because he and his wife, Virginia, never set out to have their sons involved in the business. "I just never thought about it. We kind of raised our sons to be self-sufficient to be on their own," Kanaly says. "I found in my experience of working with families that too often, too many people tried to make dependents or associates out of their children."

Even though he didn't have an extra position budgeted, he finally decided to hire Steve. "I stewed on it and decided that it probably wouldn't hurt him to get a little experience, even if it didn't work," he says.

But work it did, as the company was successful early in attracting wealthy clients-many of them oil executives-in the Houston area. Over the next few years, Jerry and Drew were hired when they "just showed up" after graduating college, Deane Kanaly says.

Steve Kanaly says, ironically, that his father's devotion to teaching his children independence is probably what led him and his brothers to Kanaly Trust Co. He cites an education program his father started with his three sons one Sunday afternoon, when Steve was 12 years old.

Deane Kanaly told his sons he would give them an allowance in return for doing household chores, such as mowing and weeding the lawn. Steve got $10 a month, Jeff got $7 and Drew got $5.

But another condition of getting the allowance was that they had to divide the money four ways: for personal savings and expenses, gifts and a church or a charity of their choosing.

How much they gave to each was up to them. His father said, "Life is not all about making money," Steve recalls. "We're not religious fanatics, just normal religious people, and he explained to us that God had shared everything with us, and it was our responsibility to share with those not as fortunate."

They were children, and family members still laugh when they remember how Jeff, at first, refused to give any money to the church. After finally relenting, he picked out change from the collection plate. "He said God had everything, and he figured he wouldn't miss it," Steve Kanaly says, adding wryly, "he rose to be our CFO very quickly."

The brothers, however, note they did stick to the agreement. All three brothers worked odd jobs during and a short time after college. Steve, for example, was a construction worker and managed apartment buildings, and he hired Jeff there as a maintenance worker.

Their parents paid for basics such as clothes, Jeff says, but everything else-money for cars, dating, traveling-had to be paid by the sons.

"We had to budget," Jeff recalls. "If you decided you didn't want to work for a semester, you had to decide how you were going to save the money you needed to get by."

The brothers, who each have a son and a daughter, are trying to take a similar approach with their own children. A Kanaly family foundation was formed 10 years ago, as well as a family savings plan under which Deane Kanaly matches his grandchildren's deposits dollar-for-dollar. The senior Kanaly also gives his grandchildren $100 each Christmas to give to charity. Before gifts are opened each year, the children tell the family to whom they gave the money and why.

To make sure the children broaden their experiences, the family has set rules under which the grandchildren can enter the family business. Among the conditions: Before they can be hired at Kanaly Trust Co., the children must have worked for three years or more somewhere else and received at least two promotions.

"We just want them to have experience with other things," Steve says. "Me and my brothers sort of did, but not as much as we would have liked. We were young when we started."

Steve says his father's focus on people is the reason for his success and why he and his brothers were attracted to the trust company. With about $1.8 billion in assets under management, more than 1,500 clients and 95 employees, the company has grown by addressing all aspects of its clients' lives.

"For some clients, we literally walked the dog, got the pool cleaned, got the house painted," Steve Kanaly says. "These services are very valuable to a corporate executive who's always busy traveling."

Strategies and final investment decisions are made in-house, with the help of research from 15 outside firms. "We insist on having access to the analysts who select the stock," Steve Kanaly says.

The company uses a mix of individual stocks and mutual funds for its equity investments. Most clients' assets, he says, are split 50-50 between equities and bonds. "Right now, we have a lot of short bonds and a lot of cash for buying opportunities," he adds.

From the time the firm was founded in 1975 through 1999, its investments have yielded an average annual return of 17.3%, compared with 15.5% for the Dow Jones Industrial Average and 16% for the S&P 500.

A return of 8% to 12% is what the company shoots for at a minimum, he says. "If we can just average the equity return for the last 70 years, we've done our job," he says.

Kanaly notes that asset protection takes a higher priority than asset growth at the trust company, and clients want it that way. The firm's average client is between 55 and 60 years old and, in many cases, living on investment returns. Kanaly keeps expectations conservative and tells clients to expect to invest $1 million for every $50,000 in after-tax annual income.

"We promise them, number one, that we will do our first responsibility, which is give them their money back," he says. "After that, the question is, 'How much risk do they want to take to improve their world?'"

Jeff Kanaly, who is a national board member of the Financial Planning Association, says his brother's dealings with clients serve him well as NAPFA chairman. "I think that's where his strength is-trying to get people to focus on what's important," he says. "He does it because he's genuine about it. It's not something he's doing because it's a business thing to do."

SideBar

NAPFA Chairman To Propose Changes In Association's Branding

Steve Kanaly puts a high value on independence. He comes from a family that started one of the first independent trust companies in the nation. Financial independence was stressed during his upbringing. He frowns upon the intermingling of retail and fiduciary interests and calls Charles Schwab's purchase of U.S. Trust Co. a "tragedy."

Yet despite these feelings, Kanaly says that when he sizes up NAPFA, the association of fee-only advisors of which he is chairman, he thinks too much independence may not be a good thing. "Our biggest strength and our biggest weakness is our independence," Kanaly says of NAPFA and its 750 members.

Six months into his term as chairman, NAPFA is going through a transition that's designed to freshen its image and increase its role in empowering members. A key to this, Kanaly says, is to get NAPFA's members to work together as an industry group and use their collective muscle for things such as buying groups.

But to borrow a phrase from Abraham Lincoln, it may be like shoveling fleas, given the independent streak within NAPFA. "One of my goals is to get our members to think together," Kanaly says. "We ought to be able to go to a Schwab or a Waterhouse and negotiate a better money market fund. But we're so busy doing our own thing with our own employees, we don't think about that."

That's just one of the potentially vexing issues Kanaly is likely to encounter in the final half of his term. By January 1, Kanaly says he expects NAPFA to produce a white paper that will propose changes in the way the organization brands itself and the way it's structured.

It's a transitional effort that began before Kanaly took over as chairman, but which he became involved with almost as soon as he started. He got things going in the spring with a strategic-planning meeting run by a management consultant he hired. "He's there to help us and NAPFA members think not like individual firms, but to think like an industry," Kanaly says. Among the goals the committee decided to strive for was a move from NAPFA's trademark "fee-only" label to one that more fully exemplifies the fiduciary responsibilities NAPFA members value. Kanaly says the organization also is looking to increase staffing and marketing and wants to perform some of the due diligence to which members are devoting time, such as researching the best computer hardware and software.

To beef up staffing and services, NAPFA also is going to have to grow its membership and its $1.9 million budget, Kanaly says. To do that, he says, the organization needs to speed up the time it takes to approve members. It's a potentially prickly issue because it raises the possibility of altering admission standards, but Kanaly insists the organization has no intention of lowering standards to boost membership. In fact, he says, he wants to raise standards in areas such as client disclosure.

NAPFA already has made some moves in advance of the white paper. Ellen Turf, for instance, recently was elevated from office manager to executive director and then to chief executive officer.

NAPFA officials also give Kanaly high marks for moving the initiative forward with a light touch that has fostered cooperation. "He's allowing us to do the work and follow through on initiatives that were already set in place," says Gary Schatsky, who was NAPFA chairman in 2000.

One person who thinks Kanaly will give NAPFA new direction successfully is his father, E. Deane Kanaly, who was a pioneering proponent of fee-only financial advising back in the 1960s.

"It's a rough chore and, you know, it's unlikely he's going to get everything done," he says. "But I think he's going to sow enough seeds where there will emerge a totally new profession."

-Raymond Fazzi