A financial advisor could find any number of reasons to feel down these days-client apprehension, market volatility and heated competition among them. But that hasn't stopped a lot of advisors from finding paths to grow their practices amid the carnage. According to a recent study, there is no secret to these advisors' success. It's just a recognition that it is in times of chaos that advisors are needed most. "We find that you divide advisors into one of two camps," says Mark Tibergien, head of the financial services practice at Moss Adams LLP in Seattle, which examined advisor financial performance in a study released by the Financial Planning Association and SEI Investments. "You have those who say, 'If things are so bad, why do I feel so good?' And then there are those who say, 'If things are so good, why do I feel so bad?'" Tibergien says. Those who take the former outlook are finding success even at a time when the market has been rocked by fear and uncertainty. The study found, for instance, that advisors have experienced a 16.7% increase in client assets in 2001 and early 2002-despite the fact that the market vaporized 5.3% of client assets during that time span. Revenues have also been on the rise by an average of about 7%. But in one of the sour notes to the study, profit margins were down about 27%, with advisors finding it difficult to outpace the increased costs of labor, rent and other expanded services required to remain competitive in hard times. Yet Tibergien notes healthy revenues are a harbinger of robust business. When market conditions improve, profit margins should widen noticeably. "The very good firms are finding ways to grow the top line and become fortified for the next growth cycle," he says. Among the important things successful advisors are doing, according to the study, is developing a key strategy and making financial planning the core of their business as opposed to asset management. "Those firms that got away from that tend to be suffering," Tibergien says. "Those are the firms that went after collecting assets rather than practicing what they grew up to be." Also, as the following examples reveal, successful firms come in all shapes and sizes. Controlled Growth At Accredited Investors in Minneapolis, the strategy for growth is kept simple. It starts with providing clients with a comprehensive array of wealth management services and sticking to asset allocation in good times and bad. But it also depends on being prudent when it comes to recruitment, says founding principal Ross Levin. "Our objective is not recruitment at any price," Levin says. "We want the right clients, at the right speed." So far, Levin and his partners, Will Heupel and Kathy Longo, are pleased with the pace they've set for themselves. Over the past five years, assets under management have gone from $100 million to $240 million, and in 2001 alone the firm's gross revenues were up 20%. Much of the gains have come as a result of client recruitment and existing clients adding new dollars to their portfolios or utilizing one of the firm's fee-only wealth management services, which include tax, insurance and estate planning. It is those services, in fact, that have really fueled the growth, as the firm has made an effort to emphasize the planning side of the business over asset management. Of the firm's 225 clients, only 45 utilize just the firm's asset management services. The firm, in fact, tries to avoid clients who are interested only in asset management, Levin says. The firm is also expanding its wealth management services. In the area of mortgage refinancing, for example, the firm worked out a deal with a mortgage company that will reap clients a half-percent discount. Another deal with a local bank provides clients with a guaranteed 3% money market rate, and accounts insured up to $100,000. "Our clients are coming to us, I think, because they know that by working through us, their lives will be better," he says. As for asset management, the firm has benefited from sticking with asset allocation even through the booming 1990s, Levin says. Average client portfolios, he says, were up 2% in 2000 and flat in 2001, he adds. "Our most difficult year was '98, when the markets were going straight up and international and small-cap value dragged returns," he says. "In that environment, it was harder to justify asset allocation." The Humpty-Dumpty Factor Judith Shine doesn't let herself get carried away with growing the business during down markets. That's because she's found keeping clients on the right track is harder work when the market sours. "You're in the middle of a bear market, so you're going to be putting Humpty Dumpty back together again," she says. "This is the time I should be concentrating on my current client base." Before the market went south, Shine kept growth to a steady five to ten clients a year. Since 1999, she has kept it that way. That inevitably has resulted in her turning clients away. "We always do," she says. "I don't buy into the thinking that this is the time to grab clients." Her firm, Shine Investment Advisory Services in Denver, currently has 175 clients and $600 million under management. Despite the tough times, the firm has kept to a revenue growth rate of about 10% per year. Since she started the business 20 years ago, Shine says she has lost a total of five clients. Fees start at 100 basis points for the first million and fall to 25 basis points for $3 million. The firm's only source of new clients is word-of-mouth referrals from its current clients. Prospects she does talk to are often in a state of fiscal shock-"frozen in the headlights" after bad experiences with other advisors, brokers or do-it-yourself investing. "A lot of people thought they were getting financial planning and they weren't," Shine says. "Now everyone's flocking to advisors for help." That means she has to manage expectations from the get-go. "I've talked to a lot of people on the phone and just said, 'I have the same stock market in my office that your advisor has in his office.'" More With Less It was about two years ago when Mark Little decided he'd had enough of business as usual. Not that his business was doing badly. Wall Street Services Inc. in San Antonio, Texas, was a transaction-based firm plugging along with 1,242 clients. It's just that Little found himself working harder and longer, with diminishing returns. It was a business model, he decided, that was neither helping him nor his clients. "I was managing the money behind the scenes, and I was lucky if I could talk to a client annually," Little says. It was then that Little decided to transition to a fee-based business. The process began two years ago, when Wall Street Services became a registered investment advisory firm. Then, a year later, Little began the process of lightening his client load. Since July 1998, the firm's client list has gone from 1,242 to 98. The firm now charges an annual retainer fee amounting to 1.09% of assets under management. The firm has $130 million of assets under management. As a result, Little has seen his annual gross revenue jump from $388,000 in 1998 to $1.4 million in 2001. "I basically started over," Little says. Only 17 of his original clients remain with the firm. And although the firm's minimum annual fee is $9,000, the average client is paying a fee of $14,000. With a renewed focus on financial advice, Little is now in contact with clients on the average of 8 to 10 times a year. Yet he has been able to reduce his staffing level from 11 to 3. "I wanted to create an environment where I can speak to all of them regularly," he says. Little has three rules when it comes to clients. First, he says, they must be "financial delegators" who are comfortable with someone else having discretion over their accounts. Second, they have to be willing to place all their transferable assets in the hands of the firm. Finally, they need to be comfortable with the firm's fees. "Getting the expectations clear up front is a big deal," Little says. The formula has been so successful that Little plans to stop taking new clients after signing on client No. 100. "I feel sorry for advisors who have been focusing their practices on investment returns and all the things that clients are getting nervous about right now," he says. Growing A Business Unlike a lot of other advisors who have found success emphasizing the planning side of their businesses, John Smartt has stuck to what he knows best: asset management. "I've been interested in investments for 50 years," says Smartt, a CPA who owns and operates Financial Consulting & Administration in Knoxville, Tenn. "My first eighth-grade term paper was about the stock market." Smartt is an unabashed conservative investor-a disciple of John Bogle who relies chiefly on Vanguard index funds to keep his client portfolios steady in good times and bad. He also knows that the low cost of index funds, combined with his below-average fee of 50 basis points on assets under management, represent a significant savings for his clients. He extends this low-cost philosophy to his own services, even throwing in individual 401(k) management as a free add-on. "What I have taught my clients is that costs are very, very important," he says. The end result has been a broadened base of business. Since the end of 1999, Smartt's roster of clients has grown from 24 to 37, and his assets under management have gone from $5 million to $7 million. Not huge, but a substantial difference to him. Why doesn't Smartt build up a financial planning practice like others in the business? Because, he says, it's not something he's interested in. Plus, it would cut into his time. As it is now, Smartt devotes three days a week to the business, and the other two to doing volunteer work for Habitat for Humanity. "If you really want to do the whole thing, you have to do it full-time," he says. His wife seems to agree. "She says I'm not good at reading people and emotions," he says. Serving Middle America While many business strategies have advocated a move up the food chain, with higher emphasis on the "high-net-worth" client, Sheryl Clark is making a niche out of the clients who are left behind. Million-dollar portfolios are hard to find in her office. You're more likely to find her talking to a client about how to make ends meet while unemployed. Or how to work out a basic family budget. She's been doing this for two years now, and has seen her revenues double in the process. "I think that whether it's a bear market or a bull market is somewhat unimportant to Middle America," says Clark, owner and sole operator of Sunrise Financial, a fee-only firm in Tucson, Ariz. "The most pressing concern is, do they have a job and are they making money?" Clark's client list has grown from 35 to 50 clients. Her typical client is 39 years old with a net value, including a home, of $475,000. Her clients have an average annual income of $100,000. Her annual retainer fees vary, and are based on income, assets and the complexity of a client's financial situation. Many of her clients are self-employed, and some came to her after successfully managing their own assets during the 1990s bull market. "In a bull market, they felt they should be able to figure it out on their own because everyone they knew was making money," she says. It also meant clients were more likely to grapple with Clark's advice to pull the reins in on large cap and technology. "As an advisor, it's been for me much less stressful in a bear market than a bull market," she says. "I feel like I'm helping people by telling them to hang on for the ride." Getting On The Rolodex Advisor Gerald Steffes has spent nine years developing a client recruitment strategy that basically rests on building relations with local attorneys and accountants. He started a breakfast club that holds meetings three times a year. Plus, he mails out chocolate bars and mints to attorneys and CPAs every year. It's all geared toward one thing-getting his name and his Merriam, Kan.-based practice on their Rolodex. Well, after going through thousands of chocolates and mints, Steffes is finally seeing a payoff for all the work. "The past three years, the pace of picking up new clients has continued," Steffes says. "On average, we get two good clients a month." Referrals from attorneys and CPAs has injected enough growth into the business to nearly offset the declines of the market. Over the past two-and-a-half years, he estimates his assets under management have declined 10%, compared with 40% for the broad-based market. He currently has about $97 million in assets under management, about half of which is comprised of 401(k) assets that he manages for small-business owners. That's one reason his relationships with accounting and legal professionals have been fruitful, Steffes says. Many of these entrepreneurs-unhappy with their investments-are turning to lawyers and accountants for advice, he says. Referrals from allied professionals, he adds, carry a lot of weight. "The closure rate on a referral from a CPA is 95%," he says. Steffes, who is a CPA himself, tries to ensure these professionals have his business on the tip of their tongues. On fees, for example, Steffes will knock 20 basis points off his standard 1.2% asset-based fee on professional referrals. For the breakfast meetings, he typically sends invitations to 400 professionals within a 30-minutes drive of his office-which typically attracts a crowd of 20 to 25 people. He also sits on the board of directors of the Kansas Society of CPAs. Then there are the sweets. A few weeks before tax season, he mails out Nestles Crunch bars and his business card to about 150 accountants, with a note wishing them luck with the tax "crunch." For St. Patrick's Day, he mails out green mints. "It keeps my name in front of them," he says. "I know they open the envelope." SIDE BAR: Top-Line Growth, Bottom-Line Compression For a bunch of professionals who can't manage their own practices, many independent advisors are maintaining or growing their top lines against tall odds. As they come up with ways to thrive in a competitive field and a down market, many advisors seem to be avoiding two things: lowering costs and prices. That was one of the conclusions drawn from data collected in a study of the financial performance of advisory practices recently released by the Financial Planning Association, SEI Investments and Moss Adams LLP. The study, which surveyed 590 firms, found that a substantial number have increased their financial planning fees. Of firms with more than $1 million in annual revenues, for example, 44.8% said they have increased their planning fee. On the other end of the spectrum, firms with under $100,000 in revenues, 34.6% have raised fees. The survey also found that only 22% of surveyed funds bundle the cost of their comprehensive financial planning services into an asset-based fee. The rest charge for the service by using a separate fee. "A lot more firms are charging for their plans rather than bundling it in the asset management fee," says Philip Palaveev, senior consultant at Moss Adams and lead analyst on the study. Two or three years ago, some observers felt the industry was entering a state of fierce price and margin compression. At the time, competition was building, wealth was on the rise, and the battle was on for a share of the financial advisory market. Yet despite all that, asset-based fees of around 1% have held steady and remain the predominant source of revenue for most leading advisory firms. What the study instead found is that competition has forced advisors to expand their menu of services, says Mark Tibergien, a consultant with Moss Adams. "Financial planners are providing more services for exactly the same price," Tibergien says. One analogy, Palaveev says, would be auto dealers coping with competition by making more and more options standard, rather than lowering prices. "We think this is the price compression most advisors are experiencing," he says. Even with the number of firms charging financial planning fees and raising them, Tibergien says more advisors are eventually going to have to bite the bullet and attach a higher value to their financial planning services. One reason is that average profit margins are shrinking, he says. Overhead costs now consume about 44% of revenues for the average firm, compared with 38.5% in 1999, he says. "At some point, they have to persuade their clients that what they provide is of value," Tibergien says. "Advisors (instead) often apologize for what they charge." With the waiting rooms at many firms looking like an emergency room during war these days, that may be easier to do than anyone imagined.