A small staff and big profit margins built from retainer fees make Resource Management Inc. stand out.
Dazzling profit margins, a tiny but highly seasoned
staff, and personal service that has included negotiating for the
presidents of companies traded on the New York Stock Exchange and
families with $100 million estates; frankly, that's just the way the
two partners in Resource Management Inc. plan to keep things. This is a
firm that likes to be on the front line with clients, providing
hands-on services and counseling that goes far beyond investment
management. And they do it all on retainer, steering clear of
asset-based fees they say would cloud their judgment in making
financial decisions that best serve their clients.
How good are the two partners? "Randy (Waesche) sits on my board, he's executor of my will, he's trustee of all the kids' (legacy) trusts. There's nothing of substance I don't run by him," says Joe Jaeger, president of New Orleans-based MCC Group, an heating and air-conditioning company with operations in three states that generates revenue of $200 million. When Jaeger, a plumber, was recruited out of a union shop 15 years ago to run MCC, the firm had revenue of only $20 million.
Jaeger has worked with Waesche ever since he left his union plumbing job for MCC. He credits Waesche and Resource Management Inc. with being his touchstone, and setting up succession and estate plans for his sons and family, using one-on-one and family counseling whenever necessary. "He has fully integrated my business and estate plans," Jaeger says. "I can't say how invaluable that is to me and my family in terms of the future."
While Jaeger credits Waesche and his insightful analysis with steering him right in numerous business deals, including real estate developments, hotel acquisitions, major oil and gas investments and venture capital deals to launch friends and former employees into business, he admits he hasn't always listened to the advisor who has long since become his friend. "I still have a funny letter Randy wrote me telling me not to get involved in a Hollywood production company, and accusing me in a nice way of having acting ambitions. Unfortunately, I didn't listen to him," Jaeger says. And yes, he adds, the Hollywood production company tanked.
Doing repetitive financial, asset and estate plans is not what RMI is about. The partners are not looking for a cookie-cutter approach to planning or clients. RMI's 325 clients each average $2 million to $3 million in assets under management with the firm (though client assets can range from $1 million to $50 million). The more complex the client situation, the more the two RMI partners rise to the occasion. "We have a low threshold for boredom," says the 56-year-old Waesche, a CFP licensee. "We refer to ourselves as financial problem solvers. The bigger the problem, the more we like it to solve it. We tell clients: 'If it touches on money, call us.' If they ask us if it's in their fee, we say: 'We'll tell you next year.'"
As we spoke, Waesche was preparing to begin his hands-on succession planning sessions for a wealthy Connecticut family reduced to squabbling. The father, who owns seven high-end jewelry stores, is retiring. Two sons in their fifties will succeed him, but exactly how existing conflicts will be resolved and what it will mean to the brothers, their respective spouses and children is what Waesche has been hired to determine. His first-year retainer fee is $25,000 and does not include investment management or legal fees.
While other advisors with advanced practices aspire to build a firm where they can operate more as the wizard behind the curtain, letting junior staff they've cloned work to service clients, this is not RMI's approach. "When you hear about what some other guys are doing, it's clear they're looking to build a machine. We're really not interested in that," says 46-year-old partner Michael Zabalaoui, a CFP and CPA, who has been with the firm since 1984.
Zabalaoui took over the reigns of founding partner and seminal financial planner Judith Cowan Zabalaoui, his mom, who left the firm in 1988 to care for aging parents. She was the one who created the firm as a sole proprietor in 1974. Waesche, who got his CFP license in 1977, heard about Judith from his wife, who had seen her interviewed on a morning TV program. He called Judith, they met and decided to form a partnership that year.
Judith Zabalaoui, Waesche and, for the past 22 years, Michael Zabalaoui, are generally credited with being what Marv Tuttle, the executive director of the Financial Planning Association, calls on "the bleeding edge." It is a term he uses to capture RMI's pioneering vision, which included being among the first firms in the country to transition to fees in the early 1980s, says Tuttle and longtime planner Richard Wagner, past president of the Institute of Certified Financial Planners (ICFP), the predecessor of the FPA.
"I've known Randy and the firm for the past 15 years, since he was on the board of the ICFP (Tuttle's former employer)," Tuttle says. "He's probably one of the more creative and innovative practitioners out there. He sees opportunities where, frankly, not everyone does."
While the firm is probably one of the most profitable today, a result no doubt of it's tiny overhead and upscale clientele, that wasn't always the way, especially when the decision to do away with commissions caused what Waesche terms a "palace revolt."
"We just thought, if we're going to move this profession forward, we have to get away from transactional-based commissions," Waesche says.
In the '70s the firm charged commissions, then moved to a commission and retainer structure. In 1983, the partners proceeded with their plans to go fee-only, charging retainers almost exclusively. The immediate fallout was disastrous.
"We had seven planners working for us and they were in an absolute uproar when we told them. A month later, Judith and I did a keynote speech together at an ICFP retreat in Ogden, Utah. When we came back, all seven planners had left and we were stuck with the debt and infrastructure. It was very costly to us. It's a funny story now, but it wasn't at the time," Waesche says.
The next few years were lean ones for the firm. "Frankly, in the early days our spouses were supporting us. It took me six years to bring in a real paycheck. No one had heard of financial planning," says Waesche. When the entire planning staff left in 1983, "we had to go back and beg forgiveness from the supportive spouses, and they didn't give us a lot more time," he says wryly.
Still the planners stuck to their principles. "We thought, if we're really going to start again from scratch, what can we do to make our lives a little easier? Let's at least work with folks we like, who challenge us. That's when we started taking on closely held business clients," Waesche says.
Of course, none of that happened without a test of the partners' resolve. Every town has one of those big, splashy plaintiff attorneys who are on TV all the time. "Well, the one in our town came in to the office and we hadn't made the rent that month. Judith and I looked at each other and said, 'We just can't.'"
Today, the firm has two partners/planners (Randy and Michael), three administrative assistants and a floater who comes in to do filing. Waesche and Zabalaoui say that finding likable clients is key to making retainer fees work. Why? "If you don't like your clients, you're going to hate their referrals," Waesche says.
For Zabalaoui, retainer fees are key to attracting the complex family and business the planners like to deal with. "For us, it's stimulating and it's challenging. It gives us the opportunity to work with folks who can create those challenges and that's what really excites us. That goes far beyond investment management, so an asset-based charge would not make sense."
It's not that RMI doesn't do asset management. In fact, the partners use a team approach to screen for fund managers who beat their benchmarks. Their favorite portfolios include names such as Brandywine Blue, Dodge & Cox and Thornburg International Value.
But the real question is how does this Metairie-based advisory firm succeed with retainers where so many others have failed? And why, when slapping a percentage on the assets a client brings in the door is the industry norm, would RMI choose to do things so differently?
Today, RMI's 325 clients pay an annual retainer fee of between $5,000 and $10,000. First-year fees can range as high as $25,000 or even $50,000 if a client has a complex situation (such as business, succession and/or estate planning) to resolve. But annual fees are almost always reduced in subsequent years, unless other intricate planning challenges arise, Zabalaoui says. "Finding interesting clients doesn't always mean that they'll have a lot of liquid assets," he says."
As important, Waesche says, "Retainer fees position us, I believe, to be more inclusive and objective. If bond yields are low, I can tell people to pay off their mortgages. We don't have to hesitate because it will take assets out of our revenue stream. We can tell a client to buy a building out of their liquid assets. Their use of capital has to be in their best interest."
Zabalaoui, who for many years has been doing two stock market and economic news broadcasts per day for National Public Radio's All Things Considered, says the other issue they have with asset-based fees is one of ethics: "The assets are growing, the work is diminishing and the fee is going up. I have a problem with a fee that is rising, when hours and commitment of work are dropping."
Anything can sound convincing if an advisor sells it right, but are these guys sincere? Would they really hand off asset management to another advisor if it made sense to the client? The answer, astonishingly, is yes.
Case in point: RMI was hired by a Minneapolis couple, first-generation wealth creators, to sort through a number of delicate planning issues surrounding a $100 million estate. The company wanted to create a charitable foundation and distribute some money down to four adult children. "We were engaged to tell the kids that a large part was going to charity and they were getting $10 million each," Waesche says. "As we created a $60 million private foundation, we put each of the kids on the board so they would understand the purpose and functionality of what their parents were trying to do."
As for their inheritances, Waesche asked them if they wanted to separate or pool their money for investment purposes. They decided to pool it and the result was a perpetual (Alaskan Dynasty) trust that will trigger no taxes. "Now they meet twice a year to decide on investments and charities," Waesche says.
Waesche's fee? A hefty $35,000, still measly compared to the $150,000 annual fee even a 0.15% asset-based charge would have generated to manage the $100 million. He remains on retainer to the family, but decided against asset management.
"We positioned their advisor to take on all of the management because it was the right thing to do. He was there on the ground, which is what the clients wanted. Who else would have let the money go?" Waesche asks rhetorically.
The firm's finesse in resolving contentious family and business conflicts is due to both partners' years of practice and finesse. "We're brought into situations where a sibling is saying: 'I'm working harder than you!" or 'You're spouse is in our business and she's disruptive.' In a family business worth $50 million, those issues are magnified," Waesche says. "So we'll set up a family counsel, determine family dictates for who should come into the business, discuss the forces that interfere and walk everyone through the process, so there is understanding. Then we'll pull it all together in a document."
Maximizing the goals and ambitions of the parties involved in such endeavors is what the partners at RMI do so well, says Richard Wagner. Today he is the president and founder of the fledgling Integral Finance Center (www.intergralfinance.org) in Denver. Wagner credits Waesche with helping him find all of his original partners for the firm that became Sharkey, Howes, Wagner & Javer.
Then when Wagner decided he wanted to pursue a more holistic, integral approach to planning, he again enlisted Waesche to help dissolve his part of the partnership. "It was in essence divorce to the power of three and Randy made it happen amicably," Wagner says. "He's my friend. He also takes a value-driven approach to servicing clients and helping them decide how their money fits into life decisions. I think he's done this to the point of being enviable. I really don't think they have any competitors."
Of course, no advisor and no advisory firm are without challenges. Both Zabalaoui and Waesche are extremely gun-shy about bringing on advisors, dating to when the seven planners quit in one day as a result of the firm's transition to fees. They admit their reticence to staff up may get in the way of their growth, maybe even forcing them to shed less profitable clients as they bring on top-tier ones, but say they are satisfied with their staffing at this time.
Geography is also not necessarily on RMI's side. They're located in the wide-spanning flood zone of New Orleans, and had to threaten a lawsuit to get back into their second-floor offices a month after Katrina hit. Members of the firm experienced varying degrees of flooding and are understandably shell-shocked from the experience. As a result, they are beginning to investigate opportunities for expanding their business into areas where they already have several clients (North Carolina and the gulf coast of Florida). "There are still plenty of opportunities in New Orleans. We're not leaving, just considering expansion options," Zabalaoui says.
It's more of a hedging strategy, because frankly, as long-time assistant Petra Smith and office manager and assistant Susan Halsrud say, the levees in New Orleans are not repaired, the drains are not working and it's supposed to be a bad storm season. "I think everyone is nervous about the future of New Orleans," Halsrud says. "There are so many people sitting on the fence, waiting to see what happens and what the government does."
Of course, expansion may require adding a planner or two, something the partners have not done for more than 20 years. "I don't blame them. It's not an easy thing," Wagner says. "You're essentially training your competitors."
And that is not likely to happen at the family-oriented firm, where Waesche says his college-age daughter, who studies economics and finance, is interested in joining the business. In addition, the 30-plus-year planning veteran already has his 12 year-old twin daughters come in to file and answer phones.
Family succession has worked so far, and the partners are betting that their winning streak continues.