Do industry studies of profitability and compensation measure success the way you define it?
Success. So many definitions and so little time.
The one thing advisors can agree on is that success is something we all want; we just can't agree on what it is. Certain constituencies are pretty sure they know, however. Most of the media, for example, measures success as assets under management. Pick up a popular weekly publication serving our industry and every advisor is characterized according to how many millions or billions of dollars he controls.
Many advisors argue with this depiction, and for good reason. Hopefully, our profession is about more than just gathering assets, particularly if one provides sorely needed financial planning services to Middle America.
Other definitions of success? Pundits-attempting to draw attention to their investment offerings-have published white papers telling us that we must survive in order to succeed. How to survive? Simple: just create a firm big enough so that no one can mess with you. Problem is, few advisors know how to do this, nor would they want to if they knew how. Besides, time has proved that our industry will support firms of all sizes and that owner's comp has less to do with size than smarts.
Just The Numbers, Please
Perhaps the research houses-those with a constant focus on this profession-know the true definition of success. After all, they talk to lots of advisors. Nevertheless, their facts or prescriptions come down to hard data and what it seemingly proves: Owners of bigger firms make more money. Moss Adams' studies (the latest one being the "2006 Financial Performance Study of Advisory Firms," sponsored by SEI and JP Morgan) divide respondents into quartiles. To be in the upper quartile, so goes the implication, is to be successful.
"I do not think that comparing my personal income to [that of] other advisors is worthwhile," says Scott Leonard of Leonard Wealth Management Inc. in Redondo Beach, Calif. "I do find the studies helpful as a way to see if I am on track as a business owner. If I was only making a net profit of 20%, and the average for similar firms was 80%, I would want to know why. Am I just bad at running a business, or is there a lifestyle reason for the difference?"
There's that word again: lifestyle. Smaller practices, especially those that don't make it into the Moss Adams upper quartile, are often derogatorily labeled "lifestyle practices" by growth-oriented advisors. Yet Mark Tibergien, noted expert and architect of the Moss Adams studies, is the first to say that when he counsels advisors he calls on them to personally define their vision of success (which may include desired lifestyle) before embarking on the usual profitability analysis, succession plan or firm audit. Tibergien knows that behind the numbers are real people, and money is only one ingredient in most people's definitions of success.
Getting A Life
Which means that having a lifestyle isn't just for those advisors with smaller practices; lifestyle is on everyone's mind. Armond Dinverno helps run Balasa Dinverno & Foltz LLC of Itasca, Ill., a good-sized firm in most advisors' estimation, with 25 employees and-well, let's just say-enough money under management to impress most advisors, much less weekly tabloid reporters. Says Dinverno, "When my children were younger, I coached them in soccer, which required me to leave my office early. I knew this was time away from my business, but it was also time with my children that I knew would not be there in the future. This continued for 15 years. I saw other people be more successful than me, but recognized I was making different choices about my life that were important to me."
In a way, Dinverno is the exception (and exceptional, too). Too many advisors struggle to meet financial goals early in their careers, often at their families' expense. Lifestyle often doesn't become important to advisors until they get beyond the child-raising years, maturing both personally and professionally. Bert Whitehead, president of the Cambridge Connection Inc., with offices in six states, is one such advisor, having started planning in the early '70s. Whitehead takes what he calls 185 "free days" each year to support his desire to write, speak, travel and spend time with his 13 grandchildren.
Ah, you say, but aren't profits necessary to make one's desired lifestyle possible? Says John Bird of Albion Financial Group in Salt Lake City, "The [Moss Adams] studies have significant value even if they don't capture the quality of service we provide to our clients. Despite our great intentions, we cannot provide the services we aim to provide if we cannot meet our own financial needs. The studies give us a lens, however imperfect, through which to view our own structures and get some ideas of how we might change so we can survive and prosper."
Adds Dan Danford of the Family Investment Center in St. Joseph, Mo., "It's a pretty strong negative statement if a financial advisor doesn't use money as at least one measure of success. Satisfaction, happiness, personal and professional growth and the joy of helping others are all important benchmarks. None of these are better, though, for having been achieved in poverty. Clients want to succeed financially, and so should we. Industry studies help us see what's working in other places. The value isn't in seeing how we compare to others; rather, it's in helping us understand how to do what we do better."
The Relative Price Of Success
Yet, even profitability is relative. Says Faye Doria, owner of Financial Guidance Associates Inc., in Dover, N.H., "In a good year, I gross about $75,000. I pay myself $2,500 a month, which is enough for me to live on. I have always used some of my profits for retirement, initially putting 15% in a SEP, now putting the maximum into a SIMPLE. I also fully fund my Roth, so I currently save $18,500 of my $30,000 of income. I work three days a week, at the most, and take one or two big trips a year, like the ten-day hiking trip to southern Utah I'm now preparing for. The business also pays my health insurance, long-term care insurance and travel to conferences for continuing education-for example, places like Santa Fe or Jackson Hole-meaning another $11,000 a year or so in direct benefits."
Doria is no poster child for success. As she acknowledges, most "experts" would consider her a failure with no money under management, grossing under $100,000 a year, with no employees and no plans to grow. "But I love my life and my clients call me their role model. They all want my lifestyle, so my advice rings true to them. They see that someone whose Social Security statement shows only one year when she earned more than $42,000 can save enough to be semiretired at age 53."
Is Doria an anomaly? Surprisingly not. Jean Sinclair of Avenue Advisors LLC in San Diego says, "I have a 'lifestyle practice' with a little over $50 million in assets under management and less than 30 wealth management clients. Plus, I earn additional income from ad hoc financial-planning-only engagements. My overhead is less than 18%, so I earn as much as friends who have much larger firms managing $300 million to $500 million in assets but with much higher overhead."
Sinclair says happiness, for her, is success. And she's happy because she has enough money to live the lifestyle she wants by working smart. "Looking at industry metrics did have an impact on practice decisions I've made. This year I will increase my percentage of overhead and my spending on technology, and hiring of independent contractors to outsource more of what I do." Sinclair says her objective is to free up more of her time. "I may choose to spend that free time on the business or on play, but to me it is the freedom to be able to make that choice that defines my success."
The Evolution Of Success
Neither Doria nor Sinclair are freshly minted advisors learning to live on less because they're new in the business. "At age 49, I am probably more than halfway through my life," says Sinclair. "Time has become relatively more important to me-having time to spend with friends, family, my animals, to enjoy my hobbies and to be able to develop new interests."
What they and other advisors are finding is that their definition of success tends to evolve over time. Gene Balliett of Balliett Financial Services Inc., in Winter Park, Fla. says, "Profit margins and owner compensation were important considerations when the big issues in my life were paying the rent, meeting the payroll and putting the children into shoes. Once the business had finally grown into a modest success, I began to enjoy the newfound freedom of discovering what made me happy, other than escape from financial insecurity."
Barbara Steinmetz of Steinmetz Financial Planning in Burlingame, Calif., says that after 17 years as a fee-only advisor, she's watched her definition of success evolve into her current beliefs: "I was fortunate when I began my practice that my husband and I did not need to depend on my income. Yet, over the intervening years, my definition of success has expanded to include how profitable my firm is-not in comparison with other firms, but in comparison to the goals I've set for myself."
That profitability, says Steinmetz, is what has allowed her to indulge her latest definition of success: giving back to the profession through greater involvement with the FPA, both nationally and locally. "I also derive a great sense of personal satisfaction from knowing that I have been able to help improve my clients' lives. I am doing what I love and enjoying it; that, for me, is my definition of success."
"When I was starting out," says Edward Stuart, a partner in RegentAtlantic Capital LLC in Chatham, N.J., a firm about 50% larger than Dinverno's, "my priorities were definitely different than they are now, and appropriately so." Elements of success back then, says Stuart, included "cranking up" his income, completing various courses of study to obtain needed planning credentials and juggling time commitments so he could be available for his growing children. "Now, I feel successful because I enjoy my work, contribute to the lives of my clients and co-workers in a meaningful way, am intellectually stimulated and adequately compensated."
So frequently do advisors cite nonmonetary elements in their definitions of success that some even reference favorite quotes in their communications with clients that express those definitions. Alice Hallford of Hallford Financial Advisors in Jackson, Miss., in business for 16 years, says she defines success much as Frederick Buechner, the Presbyterian minister and American author, defines vocation: "The place where your deep gladness meets the world's deep need." "I keep this quote on my task list as a reminder that success for me is more about matching my human gifts with other people's needs than it is about making money," Hallford says.
For Dennis De Stefano of De Stefano Wealth Management in Maui, Hawaii, the quote usually attributed to French writer and politician François-René de Chateaubriand provides a concise statement of his personal philosophy: "A master in the art of living draws no sharp distinction between his work and his play; his labor and his leisure; his mind and his body; his education and his recreation. He hardly knows which is which. He simply pursues his vision of excellence through whatever he is doing, and leaves others to determine whether he is working or playing. To himself, he always appears to be doing both."
Systems For Success
So fundamental is the question of success to aging advisors that some have developed thought-provoking systems to help their clients achieve the same success they feel they've benefited from.
Charlie Haines of Charles D. Haines LLC in Birmingham, Ala., says, at 52, he's crystallizing his thinking about his own legacy in the profession. "Part of my definition of success is that I'm walking the walk," by which he means achieving the same six components of fulfillment that he helps his clients achieve with their money or, as Haines calls it, "frozen energy":
3. Physical well-being
"We raise the issue of faith," says Haines, "but we're not spiritual advisors." Nevertheless, these issues represent part of Haines' legacy-his legacy to his clients-which is essential to his definition of success.
Haines' system of success, along with the prostate cancer scare he had six years ago, explains why he felt he needed to build a large advisory firm serving high-net-worth clients. "I'd rather do something good for 500 families, or even 50 families, than just five families. And high-net-worth clients have more frozen energy that can be liberated to help our community."
Which explains why Haines strives to have an above-average "elite ensemble" firm, as characterized in the Moss Adams studies. "If we don't have the [requisite] profits, we're ultimately hurting our clients. But we also have to be profitable enough to attract the employees we need to serve the clients. New, young, ambitious people aren't attracted to mediocre-profit firms ... where's their future?"
Haines' efforts to delineate those aspects of success he wants for his clients and himself aren't unlike Tom Hine's system of "Balanced Wealth." Hine , owner of Capital Wealth Management LLC in Glastonbury, Conn., explains, "I'm a fourth-degree black belt in Shotokan karate. One day I worked ten hours, then went to the dojo, and then left the dojo to go home and be with my kids. In the midst of all the juggling I was doing, I came up with Balanced Wealth."
The concept, says Hine, is a way to prioritize and organize the three most critical aspects of one's life: wealth creation and maintenance, health and wellness, and connectedness with friends, family and clients. "When I informally surveyed my clients a few years ago, many had substantial health problems. I realized that if I'm going to be a better advisor, making them more money won't necessarily make their lives better, but sending them a newsletter with an article on health care or long-term care could be very beneficial."
Hine's system of Balanced Wealth, which he sees as the three points of a triangle, may explain the evolution many advisors' definitions of success take as they mature in the industry. "For an advisor judging his own life," says Hine, "once you reach a certain level of production, you're probably going to want to spend more time on the other two points of [the] triangle." Each day, one thinks about what part of the triangle he's going to focus on that day, says Hine. "Balanced Wealth is a mirror to hold up to your life, like a scorecard or reminder: Am I doing the things I say are important to me?
Almost sounds a bit like life planning ... something George Kinder knows a lot about as founder of the Kinder Institute of Life Planning in Pleasant Hill, Calif. "Basically, I don't think you can be a truly successful advisor," says Kinder, "until you are a successful person. Advisors who are successful have a quality of wisdom that helps lead their clients to the accomplishment of their life dreams. You can only go so far with a client in helping them to realize and accomplish what's important in their lives if you've accomplished so much for yourself. Otherwise, you'll be blocked for your clients in exactly the same area you're blocked for yourself."
So how does one become wise, accomplished and successful? "We do it by pushing ourselves to get through those difficult challenges that lead to the most important things we want," says Kinder. "It's a process of testing ourselves against our dreams." Some of us need mentoring to reach those dreams, he says-someone to share the inspiration of our dreams and hold our feet to the fire.
Reaching those dreams, one way or another, is success. Which is to suggest that success is never about money, but about something very personal that each of us needs to figure out for ourselves. Money, and profits, can be a means to success but not its essence. Maybe it's time for the media to abandon assets under management in favor of a more appropriate measure of advisors' accomplishments.
David J. Drucker, M.B.A., CFP, is president of Drucker Knowledge Systems. Learn about him at www.DavidDrucker.com.