When the client hires Five Rivers for a long-term advisory arrangement, he pays according to a percentage-of-asset fee structure that averages 1%. Heidel provides all ongoing financial planning and investment management services for this fee. His broker-dealer takes 10%, leaving Five Rivers with 90%. It can't get much simpler than that.
Sticking with the outsourcing theme, Heidel then finds his client some separate account managers. "I can't imagine a client with any sum of money that I couldn't use the BD-managed account choices for. There are minimums, but they're pretty low-$25,000 to $100,000, depending upon the manager."
Again praising his broker-dealer for its due diligence and sound offerings, Heidel says most of the managers he has to choose from are household names for which he receives ample broker-dealer research. "I also use Morningstar data to do screening and analysis in addition to what my BD provides. This is not something a registered rep who's not an RIA will always do. I may recommend a mutual fund for a small account rather than a separate account manager," he says, "and for those who get managed accounts, no two clients have the same portfolio."
What if, in the course of initial or ongoing planning, it's decided his client needs long-term care insurance? This poses an exception to Heidel's otherwise simple fee structure. "I'm also insurance licensed because I'm a firm believer in LTC, and through my BD I can shop among 10 or 12 insurers for my clients."
Heidel receives a separate commission for LTC insurance he places, sharing the usual 10% of the commission with his broker-dealer. He fully discloses this to his clients, who understand they are free to implement his insurance recommendations elsewhere. Heidel sells little insurance other than LTC because the age bracket of most of his clients precludes the need for life insurance.
So the new client has had an initial plan done, has had his money placed with a separate account manager, and has purchased LTC insurance-what next? In addition to the other steps in the planning process, Heidel is big on constant communication with clients. "I make an effort to touch base monthly by telephone or e-mail. We communicate on all kinds of issues, including a client's occasional call to get permission to buy a hot tub. Depending on how close they are, we meet face-to-face every six months to a year to update their financial plan." He no longer puts out a newsletter though, because if he does it under the Five Rivers name, he can't talk about investment returns.
This is one aspect of the only problem he's got-being accountable to two regulatory bodies, the state of Maryland Securities Division and the NASD. How much of a penalty is this? "On the BD side, I've got to pay $800 a year for my IAR, registered rep and branch office registrations, while also satisfying continuing ed requirements. But my BD's compliance department takes care of most of the associated paperwork for me, keeps me apprised of when I need to take a course to get certain CEs or update my Series 6, 26 or 66 licenses, and they take the licensing fee off my 90% cut." On the Maryland side, he must file his ADV and pay his $400 fee each year like any other independent RIA.
While perhaps not as burdensome as it first sounds, Heidel still doesn't like some aspects of this dual arrangement. "I live in fear of a state audit for my individual firm RIA-not for reason of wrongdoing, but just for the aggravation it would surely entail. I am a one-man operation, and time is everything." But Heidel nonetheless persists in his dual registration. "The biggest advantage is my flexibility to serve anyone who walks through door."
So, bottom line, Heidel's business model works well for him. Although he has some costs associated with his independent RIA and his overall profit margin isn't quite the 90% it is on the BD side of his business, it's certainly much higher than the 40% to 50% margin of most independent advisors, as noted in the Financial Planning Association's 2002 Financial Performance Study of Financial Advisory Practices. Perhaps this is a model other advisors should also be considering.
The only hesitation Heidel has, aside from the dual registration aspect, is how suitable this model will be as he grows his firm. "At some critical size, it may no longer make sense to pay the 10%. I would try to negotiate a lower number or look for a better deal with a different BD," says Heidel. He's still sure he doesn't want the administrative and back-office headaches that most independent RIAs seem quite willing to accept.