Middle-income households are growing faster than any other. Now, some smart planners are figuring out how to target this market profitably.

After five years of working with middle-income clients in his city of Bedford, N.H., planner Sam Hull says he is "looking to swim in a bigger pond."

Hull isn't trying to attract wealthier investors with fatter portfolios who will drive more profit to his bottom line. He likes working with the good, middle-class folks of his New England burg just fine. Instead Hull, founder and president of Northstar Financial Planning, plans to grow his practice in the coming year by hiring two to three planners and increasing his volume of clients. The former business consultant says he wants to complement his retirement planning specialty with planners who can target women and small-business owners. The firm already serves 60 clients and manages $20 million in assets.

While hiring advisors might have been a novel idea for solo practitioners with a middle-class clientele just a few years ago, today staffing is becoming a watchword for a small but growing cadre of planners who like profits as much as they like serving the middle market. In fact, we found planners across the country who are determined to stay middle market as they build firms and profitability, using any and all resources at their disposable. Almost without exception, their strategies include adding employees, ratcheting up client volume, increasing fees and heightening efficiency.

Chip Roame, managing principal of Tiburon Strategic Advisors in Tiburon, Calif., a consulting firm that closely follows the investment advisor industry, says there is a movement among middle-market planners to get serious about increasing profits. "More of these folks are starting to realize they don't want to accept the limits of a small lifestyle practice, so they're determined to find ways to grow," Roame says. Increasingly, their strategy involves hiring paraplanners or junior planners who allow a principal to expand clientele and thus the firm's profitability, without taking on the expense of hiring partners.

Today, there are about 24 million middle-income households with between $100,000 to $1 million in investable assets. Of equal importance is the fact that the number of these households is growing more briskly than any other group of investors, Roame says. "These are the baby boomers, and they need advice," the consultant adds.

There may be lots of them, but middle-income clients tend to be less profitable. Tiburon has found that the average fee-only advisor, who tends to have wealthier clients with bigger account sizes than the rest of the planning profession, makes $3,600 from each client and nets about $1,800. In contrast, independent reps make about $1,400 per client and net about $900 from each. Middle-class clients probably net planners less than that, Roame says. "If your clients are smaller and you're earning that much less per client, volume and pricing become crucial," he adds.

Perhaps no one has a firmer grasp of the interplay of these concepts than Sheryl Garrett, who traded in her wealthy-client practice to work with the middle class on a fee-only hourly basis in 1998. Three years ago Garrett launched a network that provides training and a turnkey business model for planners interested in working with the middle class.

More than 150 planners have paid a first-year fee of $5,000 to $6,500 for Garrett's intelligence since the network's inception in 2000. In addition to creating a system that can be cloned, Garrett is also a role model for growing profits and adding clientele in her own middle-income practice. She does it by leveraging junior and senior staff.

Today, Garrett employs two paraplanners and a senior planner with whom she shares part of her $180 hourly fee at her Shawnee, Kan.-based firm, Garrett Financial Planning. She typically pays paraplanners $50 of the $180 per-hour fee she charges clients. While Garrett is the only face these clients see, the paraplanners create all of the plans and recommendations for her approval. Her senior planner earns two-thirds of the $180 hourly fee and brings in her own clients. "This is a sweet deal for them and me," says Garrett. "When a practitioner gets good at what they're doing, and the demand for their services increases to the point where they can't quite keep up, I recommend that they bring in a paraplanner to do the behind-the-scenes work."

Good paraplanners often evolve into full-fledged planners, who will begin to bring in their own clients. Smart compensation arrangements often mean fee sharing that leads to greater profitability for the firm overall, Garrett says.

The ability to raise fees is another critical consideration for growing a firm's bottom line. Garrett is planning to raise her $180 hourly fee to between $210 and $240 in the near future and says that most of the 150 planners in her network have some plan in the works to do the same.

Houston-based planner Suzanne Fails is one of those planners. She launched her business, Roberts and Fails, P.C., with partner Leah Roberts in October 2001. The interdisciplinary firm, which provides planning, tax preparation and accounting services to middle-income clients, has been part of The Garrett Planning Network Inc. since its inception.

To maximize profits, the partners plan to increase their hourly planning fee from $125 to $150 by year's end. To increase volume and free up the partners, the firm has been using a virtual paraplanner and is in the process of increasing her hours to do planning and accounting work.

That may not solve all their staffing needs, however, thanks to the rising number of clients. The number of tax clients grew from seven to 40 last year and will likely increase significantly again this year. "Both our planning and tax business is growing as a result of referrals," says Fails, who will hold a strategic planning retreat with Roberts in the coming months to decide the best and most cost-effective way to staff the firm. "It may mean taking on an accountant. We may also look for some other professionals on a virtual or project basis. We'd like to use seasoned people and still create a profit margin," says Fails.

Despite the type of growing pains smart firms like Fails' are experiencing, the long-time CPA says she is happy to be building a real firm with going concern value that serves 75 middle- and upper-middle income clients.

She's not alone in considering outsourcing and the use of virtual paraplanners as a workable and profitable way for senior planners to create more billable hours. New Hampshire-based Hull also subcontracts some of his firm's less arduous financial planning work to virtual planners he's vetted. That gives him more face time with clients and to market his services.

Bryan Clintsman, a Southlakes, Texas-based advisor, spent 14 years as a financial planner for wealthy clients at two of the former Big Eight accounting firms before launching a firm that caters to both middle- and upper-income clients. He decided he enjoyed working with the middle market after spending part of his time conducting educational seminars for 401(k) participants at corporate clients.

In his second year of business, the advisor is seeking to add a paraplanner-ASAP. His one regret is that he waited so long to do the hiring. "I think it doesn't make sense for advisors to use their time to do photocopying and set up meetings. Days should be filled with client meetings," says Clintsman, who foresees hiring two to three paraplanners and one or two other full-time planners with niche experience in insurance and estate planning over the next three years.

"I think working with middle-income folks can be profitable, but you have to be careful," the planner says. "Solo, you can make a good living, but you won't get rich. That's why I'm on my way to building a multi-person firm," he says.

Clintsman is also toying with the idea of raising his $180 hourly fee, maybe in the next year. "I haven't found fee resistance," he says. "Clients control the relationship. I explain it as being similar to selecting food in a cafeteria line. They can take as much or as little as they like now, and come back through the line when they want to."

As a planner who straddles the middle- and upper-income markets, he says the difference between the two types of clients can be fairly stark in terms of their expectations and desired deliverables. While wealthy clients who have worked with advisors before may demand and need in-depth services and documentation, middle-income clients may not need or want to pay for some of the same research or paperwork.

"I think some (middle-market) planners really make the mistake of spending hours on projects that aren't billable, especially if they're used to doing comprehensive planning for wealthy clients," says Clintsman. "It's better to weed out those practices, so you can find the highest and best use of your time and best deliverable for the client."

That's because time is of the essence when it comes to creating profit, the Texas planner says. To create greater efficiency, Clintsman not only maps out the hours of each day right down to scheduling time for reading periodicals and answering marketing and charitable requests, but he says he joined The Garrett Financial Network when launching his firm to avoid having to reinvent the wheel. The network supplies affiliated planners with access to contracts, marketing materials, compliance documents and proprietary planning software, which Clintsman says shaved six months off his start-up time.

To further systematize his business, he subscribes to portfolio services to create model portfolios and asset allocation plans, something more and more middle-market planners are doing.

Echoing the belief that systems are paramount to profitability at middle-income firms is Alvin Rogers, managing planner at Financial Decisions Institute, Little Rock, Ark. Four leading Arkansas planners, who believed they could create a profitable business serving middle-income clients, founded the firm four years ago.

"When a client comes in, it's critical for efficiency that we work the system all the way through," Rogers says. A centerpiece of the firm's system is the Risk Capacity Index Calculator program, software that founding partner and CEO of The Arkansas Financial Group, Rick Adkins, created and now markets through Practitioners Publishing Co. in Fort Worth, Texas.

The program allows Rogers and the firm's paraplanner, Mary Thompson, to do client risk analysis, allocate assets in the firm's model portfolios, calculate retirement plan projections and determine life and disability insurance needs and college funding requirements with as few keystrokes as possible. "You input the client's information and get your answers in a straightforward manner, which is precisely what we need," Rogers says.

Unlike planners in the Garrett Planning Network, who do not manage assets, Rogers says that the $11 million in assets that Financial Decisions Institute has collected is creating the greatest profit margin at the firm.

The firm is alone of those contacted for this article in not planning to raise fees in the foreseeable future. Clients pay $75 per hour for planning and 75 basis points for asset management. The average tab for planning runs clients $375 to $450, Rogers says. "Raising fees to, say, $150 an hour, would scare clients earning $50,000 to $60,000 away," the planner contends.

Still, as a nod to the fact that clients have a tendency to want to call their planner from time to time, the firm instituted a $100 annual retainer fee on September 1. "Clients have issues that come up all the time," says Rogers. "Maybe it's a change in their benefits plan at work, a mortgage refi opportunity or deliberations about buying a new car." Clients who don't opt to pay the retainer will pay the $75 hourly fee to have their questions answered. While $100 can seem incredibly inexpensive, Rogers says the firm will track client calls and rejigger the retainer fee going forward based on individual client usage.

In just four years, Rogers has grown the firm's client roster from six to more than 220. He plans to increase volume further by adding a paraplanner and moving Thompson, who will sit for the CFP exam next year, into a more senior planning role. "Our business will thrive as we increase our client load," Rogers maintains. "In addition to staffing, a key to our profitability is staying lean and efficient."

Don't take our word for it. Financial Decisions Institute is being used as working model for a new planning clinic at Texas Tech University in Lubbock, according to Gordon Hampton, director of professional alliances.

"What's important about this firm is that it provides a model that will work for lower- and middle-income clients at the same time it gives our students planning and business experience," says Hampton. "Com-panies we talk to in the community tell us that while we do a good job teaching planning, we needed to pay more attention to the business of running a firm. We think that this model is viable and at some point will be profitable."