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":
1. Family
2. Friends
3. Physical well-being
4. Philanthropy
5. Finances
6. Faith
"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.