After selling his former firm, Telesis Financial & Insurance Services, in 2007, Michael Fenison figured it was time to retire.

Fenison, then a 55-year-old San Diego advisor, had built Telesis into one of the largest branch office systems in the ING broker-dealer network. But he’d grown frustrated running the hybrid operation and dealing with independent contractors he could only partially control. The commission and sales culture of the brokerage industry never quite sat right with him.

“I always had the DNA of wanting to be the good guy, but it’s tough being in an industry that’s being criticized all the time—and the criticisms were accurate,” he says.

Although Fenison was ready to hit the beach, some of his friends questioned his decision to quit. “They challenged me to use my experience and come up with a different model to solve the problems,” he says. “They told me, ‘With your experience, you know all the land mines in the business. Why not create a new model?’”

So Fenison went back to the drawing board to craft a business plan that would eliminate—or at least minimize as much as possible—all the conflicts in the business, while delivering robust planning and asset management through low-cost index funds.

The result was Pure Financial Advisors Inc., and a business model that seemed unlikely: to provide full financial planning for the masses, many of them former do-it-yourself investors, using salaried planners. And do it in a way that minimized conflicts (hence, the name of the firm).

“That’s the goal, to keep the model pure,” says Fenison, who now serves as chief executive officer. “Our planners are all on salary, so there’s none of the conflict that even fee-only advisors have” from their need to manage assets, Fenison explains. Pure’s planners’ salaries can increase as they take on more clients and larger accounts, “but there’s no direct link between revenue and salary.”

Make no mistake, though; Pure needs to manage assets to pay for the extensive and continuous analytical work done for every client. But the way Fenison describes it, “We’re a financial planning firm that manages money, not a money management firm that does some planning,” as is the case with many of his competitors.

The unlikely business plan has worked. From zero clients and no assets in March 2008 when San Diego-based Pure opened its doors for business, the firm now has 1,100 clients and just passed the $1 billion mark at the end of May.

The firm is designed to systematize the planning process and ensure that advisors spend all their time meeting with clients. Its 35 employees include 13 CFP-credentialed client-facing planners; three CPAs; a three-person financial planning department (with interns) that crunches all the numbers; three trading specialists who handle portfolio trading/rebalancing; account specialists to handle paperwork; and two business-development officers who follow up on leads, prep prospects and set appointments for the advisors.

“We’ve done no acquisitions, which is typically how you build,” Fenison says. “It’s been one client at a time.”

The key driver of client growth is a weekend radio show hosted by Pure’s president, Joseph Anderson, with Alan Clopine, the chief financial officer and director of tax planning. Anderson also runs a series of two-session evening classes at schools and community colleges in San Diego County as well as up in Orange County, Calif., where the firm has a three-advisor office in Irvine.

The radio show is “usually the first place we get on the radar” with prospective clients, Fenison says. “A lot of our clients have never had an advisor before,” Anderson adds. Many are self-directed investors who hear the show or attend a class and see the benefit of Pure’s focus on planning and tax-efficient investing.

Anderson joined Pure at the beginning of 2008, and Clopine, a CPA, came on board later that year in October. Both had worked at Centara Capital Management, a hybrid firm where they originated the radio show. Both were attracted to Fenison’s idea of starting afresh, with a firm that minimized conflicts using a planning and fee-based model.

By chance, Pure Financial launched the very same month that Bear Stearns failed—heralding the coming financial crisis. The bad timing actually worked out serendipitously. “A lot of [investors] were not happy” in the crisis. We gave them a really good alternative,” Anderson says.

“A lot of people said, ‘You guys are crazy, starting in the crash,’” Clopine adds. “We found just the opposite. Clients were nervous, and didn’t know where to turn.”

‘Assembly Line’ Of CFPs
Prospective new clients begin with a two-meeting assessment process, which ends with a 50-page boilerplate breakdown of their needs, all free of charge. The assessments give a detailed overview of cash flow, tax issues, estate planning, insurance needs, Roth IRA conversion opportunities and current asset allocation, including estimated fees being paid.

Willing prospects can then pay $2,000 to $10,000 for a full financial plan. Most people pay on the lower end of that range unless they have complicated situations.

“We don’t restrict our advice to what we ultimately want to manage,” Fenison says. “So if a client has mostly real estate, we’ll spend time analyzing that. If it’s mostly stock options or business interests, that’s where we’ll focus.”

The plan is designed to allow clients to implement the recommendations on their own if they want to. “But when most go through it and they see how much goes into the plan and in maintaining it and managing the assets, most don’t want to take it on themselves,” Fenison says.

The firm is doing about 1,200 assessments per year now. About half of those people pay for a full plan and of those, about 80% convert into full planning and asset-management clients. Management fees begin at 160 basis points (for accounts up to $350,000) and fall progressively to 40 basis points (at the $10 million level). The fees cover all ongoing planning services. A full plan up front is required before Pure will take on a client.

Charging a hard-dollar fee for plans does chase some clients off, Anderson says. It’s easier to give away some planning services and just manage the money—that’s what most clients expect anyway, he says. “But because we do [a full plan], we’re ahead of the competition, which is just pitching money management and living and dying by performance.”

Most middle-income people prefer not to pay planning fees, “so I don’t think [Pure has] as many clients as they could,” says financial planning luminary Tom Warschauer, professor of finance emeritus at San Diego State University’s College of Business Administration and director of its personal financial planning master’s program. During Pure Financial’s formative years, Warschauer consulted informally with the firm.

But balking at the idea of paying for a plan “is the fault of middle-income people who don’t understand the fee model, which virtually eliminates the conflict of interest for [Pure’s] planners,” Warschauer says.

The firm runs about 30 model portfolios, using 10 different risk profiles with three variations for each that depend on a client’s tax profile. About 60% of assets are in Dimensional Fund Advisors funds, the rest in ETFs. Assets are split among small-, mid- and large-cap growth and value funds; several types of foreign and bond funds; and natural resources and REIT funds. Portfolios comprising individual bonds are outsourced to Advisors Asset Management. The mix of distinct asset classes allows for efficient asset location and more rebalancing and Roth conversion opportunities.

“Each client’s portfolio looks completely different because of tax losses and conversions,” Fenison says.

Clients meet with their advisors three times a year. The first, a kickoff meeting, focuses on strategies and the outlook for the year, the second one looks at risk management and estate planning issues, and the final meeting focuses on taxes.

“The feedback we got from clients was that quarterly meetings were too much, but there’s still a lot we want to get to each year, so we came up with a beginning meeting, a midyear meeting and an end-of-year meeting,” Clopine says.

“We always look at cash flow needs and investments with each meeting,” he says. “Once you know your cash flow and tax situation, only then can you figure your investments.”

Fenison describes the system as “an assembly line of CFPs,” which allows Pure to bring planning to the middle market.

In fact, reaching investors who are smaller—and underserved—is an important mission for the firm. “A lot of other firms focus on the higher end. There’s nothing wrong with that but … that market is very competitive and we feel the middle class needs all the same planning services,” Clopine says. “It just feels good” to serve people others overlook.

Anderson figures he’s seen thousands of investors through his classes or from the radio show, and “I don’t think they’re getting the level of planning they need. … We see the financial plans that come in, and honestly, it looks like [the plan was] a product that was used to help gather assets.”
Still, Pure can’t afford to take on just anyone. Investors with less than a few hundred thousand in assets are referred to a discount broker. And the firm doesn’t offer a retainer option.

A retainer plan “really doesn’t fit with our model,” Fenison says. “Our model is to intensely manage the entire finances” for a client, checking portfolios daily for tax losses and opportunities to rebalance.

Pure’s approach “works for the vast majority of people of middle or upper income,” Warschauer says. While its service level may not compare to a true private bank that handles the ultra-wealthy, “for somebody with $500,000 to $5 million, or with the prospect of having that much, the quality of advice the firm gives is right up there with the best,” he says.