You may think that after 15 years of building a $1.2 billion investment advisory firm that Scott Hanson, co-founder of Hanson McClain, would want to swim upstream (which means, in the money management world, dumping less-wealthy clients in favor of richer ones). Well, you'd be wrong.

"We have no plans to increase our $250,000 minimum," says Hanson. "And if I can figure out a way to work with folks with $100,000, I'll do that, too."

If you think Hanson is a little out of sync with the real world, think again. Along with his partner Pat McClain, he has built not only a world class nine-office advisory firm, but also built and sold a reverse mortgage company in the course of five years to Genworth for a whopping $50 million (the duo's original investment was just $1 million). Considering that Hanson's advisory firm is poised to go to $5 billion in assets in the next five years, you may feel compelled to reverse engineering their process to find out how they did it.

The two advisors launched their shop in 1993 with a secretary, just $10 million in assets and very few customers. Now, they don't need to work anymore. But they do. In fact, they both still have clients.

And that's just the way the clients of Hanson McClain like it. In fact, when former Pacific Bell employee Bill Harrington considered taking an early retirement buyout 12 years ago, he went to three brokers and advisors before finding his way to a Hanson McClain-sponsored seminar geared specifically to folks pondering the possibility of early retirement (the firm specializes in telecommunications retirees and their benefits plans).

"When we tried to ask the other firms a question, they didn't have an answer," says Harrington, who retired at the ripe old age of 56 after hiring Hanson McClain. "Scott and Pat McClain were very knowledgeable. They answered questions about Pac Bell and our retirement plans on the spot."
Hanson McClain's stress on diversification also saved Harrington from an overconcentration in Pac Bell stock (now AT&T's). "When I first met with Scott, he had me change a lot of my investments. He asked me: 'How do you feel about Pac Bell stock?' I said: 'Well, I don't know them as well anymore; they've been bought.'"

As a result of Hanson's advice and management, Harrington sold off a significant portion of his Pac Bell stock to create a much more diversified portfolio that has sustained him and his wife for more than a decade in retirement. "Almost all the people who live on my street are retirees, and I'm the only one who hasn't had to go back to work," Harrington says. "We also like the fact that Scott and Pat are young (41 and 45, respectively) and that makes us feel good that they'll be around for a good long time to watch our money."

Meanwhile, Hanson and McClain have aggressive growth plans in place. The $1.2 billion organization generated $14 million in gross revenue last year, with a 40% gross profit margin and growth of some 15%-which is low, Hanson says, because of the cost of the company's aggressive expansion and hiring. The firm is preparing to go to $5 billion in the next five years, which will mean opening up new offices and doubling its current roster of 15 advisors. Hanson McClain hired its first CEO last year and created its own broker-dealer in January. "Our first focus has been getting our immediate house in order as we open up our broker-dealer," says the new CEO, Dan Streetman, a former telecommunications consulting executive. "Our next focus is where do we open new offices? Where are the best acquisition deals?"

The company currently has nine offices in California, Chicago, Texas and Michigan and expects to open up as many as 20 additional offices in the next five years, starting in the San Francisco Bay Area. Not surprisingly, the company heavily targets areas where retiring communications workers live-since these people make up more than 50% of its clients. To grow, Hanson McClain is also in the market for firms with between $100 million and $500 million that have similar operating philosophies.

The company still services the Hanson McClain Retirement Network-a group of more than 100 outside advisors who use the marketing program for retiring telecommunications workers the partners launched after leaving Jackson National in 1993. Today, members of the Hanson McClain Retirement Network manage $4 billion in assets and pay the firm royalties for the use of its marketing systems. In fact, Hanson McClain collects 20% of the fees generated by assets from the network advisors.

As it does with its own staff advisors, Hanson McClain requires its network advisors to become experts on the pension programs of AT&T Inc., now of San Antonio, and the regional telephone operating companies that were spun off from the old Ma Bell in 1984. The firm's expertise about the nuances and details of complex phone company pension plans is what encourages former employees from this industry to roll over their retirement accounts to Hanson McClain once they stop working.

The niche is so well researched and systematized that the firm was able to sell its approach through the Hanson McClain Retirement Network to independent reps in 40 states. While the network has been successful, there have been royalty payment issues with some advisors, Hanson admits, so the emphasis going forward will be to concentrate efforts on the network's top producers.

The focus on telecom retirees seems like a brilliant stroke today, almost two decades after the partners launched the firm. But originally, the motivation was simply that they had to eat, and so they went where the money was. Back in 1993, when Hanson and McClain launched their firm, the telecommunication industry was in flux. Hanson gave 50 seminars a year to telephone company employees. The model proved critical to the firm's success, as well as that of its network. "It's worked well for us. Back then, Pacific Bell had a retirement offer allowing employees to take a lump sum in the Sacramento area, and there were hundreds who were interested. So I dug up about six or seven clients. I was 25 at the time and [was] amazed people trusted me. Some of our clients referred to us as 'the boys,'" Hanson laughs. Frankly, some folks might still call him that now that he's age 41.

The two also began hosting a two-hour radio talk show on Saturday mornings on KFBK-AM in Sacramento and recently added Talk 910 AM in the Bay Area. Their firm's advisors also are doing a regular Q&A session on local TV. Hanson recently wrote a book, Money Matters: Essential Tips & Tools for Building Financial Peace of Mind (from Marketplace Books). "We're juicing up marketing and taking a systematic approach to what channels work and which don't," Streetman says. "We want to get a groundswell going out there, so people know who we are."

By 1994, the company had broken even, and by 1995 it was starting to prosper. At that point, the firm started paying its advisors on a salary basis only. Although the business has grown tremendously in the past 13 years, the company still largely serves a blue-collar client base. "A lot of advisors out there like to work with clients in the $10 million to $20 million range," Hanson says. "Both Pat and I come from very middle-class backgrounds. I'd rather have 20 $1 million accounts than one $20 million account. We can be very efficient serving our clients and we don't have the huge fee compressions in a $1 million account that other advisors do."

Today, the firm has 6,000 clients. The median account size is $430,000 and the median client age is 57. "We target these folks to help them transition to retirement," Hanson says. "We give them free retirement feasibility reports and then stay in touch with them, in the hopes that they'll sign with us. We find that if you provide great service to them, they've never experienced anything like it. They're not used to it, and they rave about it. It's why more than 50% of our business comes from referrals."

Currently, about 85% of the business at Hanson McClain is fee-based. For its planning and investment management services, the firm's fees start at 1.25% and decline depending on client assets. The average client at the firm is paying about 82 basis points.
Building a deep team of salaried advisors is also critical to the firm's success and client well-being, Hanson maintains. Because they are salaried, "our advisors can be blunt and straightforward with clients and not talk them into anything that doesn't fit," Hanson says. "Our people aren't worried about commissions or quarterly bonuses. They can do the right thing without worrying."

That creates peace of mind for clients and preserves a culture that centers around putting client service first. "Our operating philosophy is simple. We say: We're going to work for clients up front for no money and not pay advisors based on their productivity. It sounds crazy, but it works," Hanson says. "I find so many brokers who are so short-term focused. They can't be bothered unless there is a payoff in the next six months. We don't mind investing the time with a client. We find that the future value of a client is the same whether they sign with us today or three years from now."    

The firm's advisors grow to like the salaried approach too, even if they're tentative at first. For Barbara Healy, who spent more than a decade at Merrill Lynch, there was some trepidation about coming to a firm where she wasn't firmly in control of her earnings. "I was fearful of having someone else control my income, but what I found here was that when you add value to the firm, they recognize you monetarily and in other ways, as well," says Healy. "It creates a conflict-free environment for everyone." Healy has been with the firm three years. "In my past life I would have been wary about being away from clients or turning them over to another advisor. Here the trust level and team approach makes that routine."

Beyond the high level of technology, trust and knowledge at Hanson McClain, Healy likes the way she is encouraged to think outside the box. "I don't have a box here. Of course, I go to my boss with ideas. But it's a wonderful freedom to know I can add value." Through grassroots efforts and meeting and seminar outreach, Healy and another advisor have started courting retiring Pacific Gas & Electric employees. "We've had excellent word of mouth and won clients as a result," says Healy. "We said let's educate them. Let's learn their pension plan inside and out and all the rules affiliated with it.         Then, let's invite them in five years before retirement. We review their 401(k) plans and investments, discuss their finances and debt and provide a retirement feasibility report at no cost or obligation to them."

How do you turn a prospect five years away from retirement into a client? That's where Hanson McClain's customer service procedures and relationship management technology come into play. There are continuing soft touches and invites for the prospects to come to seminars and meetings to discuss everything from plan and tax-law changes to investment and retirement trends. Once people show interest in working with Hanson McClain, the firm goes all out to win their business. Those who sign on get a level of service that many other firms only provide to very wealthy clients.

The phone is answered and clients are greeted at the firm's main Sacramento office by Katherine Hall, who is the director of first impressions. When clients arrive, Hall has their coffee and cookie order ready (the firm bakes fresh Otis Spunkmeyer cookies daily) evermore. There is no automated voice mail system at the company. Hall has the ability to direct anyone who calls in to the most appropriate person. Everyone works with the same contact management system, and a client's information is input within 15 minutes of a call, so that any advisor at the firm can answer just about any client question. And Hall, who has access to all employee calendars, can schedule meetings as needed. "Without these standardized practices and checklists, I don't think we'd have been able to get to where we are now," says Julia Miller, who manages client services at the firm. "We constantly take a look at the way we do things and see what needs to be tweaked. There are no sacred cows here. We constantly look for ways to improve client experience."

On the investment management side of the company, Hanson McClain has developed about 20 mutual fund and ETF portfolios designed to generate 7% to 8% long-term returns. "Obviously in years like this, that's hard to do, so I think the key is making sure the asset allocation you use allows the individual client to ride out the turbulent times so that they benefit from the subsequent recovery," says David Schauer, chairman of the firm's investment committee.

One of the hallmarks of the firm's investment management style is that it includes eight to ten funds per portfolio; it also holds 50% to 60% stock allocations and experiences low turnover. "In some years, we don't replace any holdings, and in other years, we might replace two funds," Schauer says. The company favors names such as Selected American, Loomis Sayles, Dodge & Cox and even Vanguard. About 20% of the firm's portfolios comprise global assets.

The investment horizon ahead? Schauer says that with both fiscal and monetary policy working to stimulate the economy, "we think we'll see the economy moving in the right direction in the second half of the year. We think we'll have a stronger second half than we've seen to this point," Schauer adds.

Equally important for clients is the advice they receive from Hanson McClain's advisors. All of them have CFP certificates, and the firm is highly selective in its hiring process, which, because of its aggressive growth, never ends. Steve Burnett is the president of the financial advisor division at the firm and oversees both practices and hiring. "Recently in Houston, we went through 300 applications to get 60 interviews to get five candidates to fly to Sacramento to find one advisor," says Burnett, who is still an active advisor at the firm. "The group of advisors clicks well here. I attribute that to smart hiring. The culture mesh is critical."

The practices and final planning product delivered to Hanson McClain's clients are every bit as critical. "We really focus on our niche. They rely on us. They don't have the background to do their own research," Burnett says. "So we take it to heart to give them the best plan possible to meet their needs."

It's a rough environment for retirees these days, the advisor admits. "Our job is to tell the client what they need to hear, not always what they want to hear. Some of our advisors have to tell their clients, 'You shouldn't retire now.' Clients are looking to sustain their lifestyle for the rest of their lives. We're honest with them, and we hope they don't walk down the street at age 51 and buy into the notion that they can live forever on a $350,000 portfolio taking 9% distributions."

As for the future of the company, Burnett, who has been with Hanson McClain since 1996, says he likes the way his bosses do business. "They like to hear: 'Have you ever thought about doing it this way?' They're smart about business. They know what success looks like."

Hanson himself concurs. "I have no desire to work for someone else and no desire to retire, so clearly I don't have plans to sell the company, at least not in the next five years. I try to look at my life in five-year increments."