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.

Tax Fixation
If one thing distinguishes Pure from other planning shops, it would be its fixation on taxes.

Other firms may say they offer comprehensive planning, Clopine says, “but they’re really not looking at the taxes in depth. If they don’t really know [taxes], they don’t want to give tax advice.”

Most CPAs don’t want to bother with comprehensive tax and investment planning either, he says. With three CPAs on staff, though, Pure will jump right in with recommendations on asset location, tax-loss harvesting, Roth conversions/recharacterizations, donor-advised funds and strategies for reducing taxes on real estate transactions. The firm does not do tax returns.

Pure CPAs analyze all the free assessments and the formal plans done for clients. “They’re really good,” Fenison says of his accountants. “When Al [Clopine] looks at [a case], people say it feels like they’re being X-rayed.”

Pure planners watch to make sure all of a client’s assets are positioned correctly, with tax-efficient assets in taxable accounts or trusts, and inefficient assets in tax-sheltered accounts. “We check each position daily to see if it’s located properly, has sufficient cash reserves, and to see if there are tax-harvesting opportunities,” Fenison says.

Warschauer is impressed with the firm’s tax focus. “They make [rebalancing] trades in the most efficient portfolio to get back to where you want to be. That’s pretty leading edge as far as I can see.”

“I definitely like the fact that when you talk about Roth conversions, they’re looking at your income tax projections,” adds Fred Brown, a retired engineer and Pure client. “The projections they present have been pretty spot on.”

Almost everyone can improve what they’re doing with their taxes, Clopine says, especially with a long-term financial plan that looks out 20 or more years. At retirement, clients may not have a lot of taxable income, at least until age 70½ when they “have a bunch of RMDs [and] all of a sudden they’re in a giant tax bracket,” he says. That’s where the Roth conversions come in; clients are urged to shift assets to Roths while they’re in lower brackets.
That’s what Brown did. Pure advisors found he had too much money in traditional retirement plans. “All my money was in 401(k)s and IRAs, so I had a huge bucket [of taxable income] waiting to kick my butt when I turned 70½,” he says.

Pure had Brown do a series of conversions and recharacterizations in 2010 and 2011. “They do two conversions, one equity and one fixed [income], so you can keep the better of the two,” Brown says. “We can recharacterize one or both. The intent was not to keep both, because then I’d be in the big tax bracket.”

With careful tax planning, retirees “can pay a 15% tax rate even if they’re living a 25% bracket lifestyle,” Clopine says.

The focus on Roth conversions makes Pure Financial somewhat unique among advisory shops. And there’s a reason for that: Clients end up with less money after doing a conversion and paying the tax bill. That means there’s less for an advisor to manage. What’s more, the resulting multiple 1099s that clients get from all of the account shuffling are confusing. “That’s the reason most [advisors] don’t do them,” Fenison says.

The firm has its own proprietary technology to track Roth conversions, asset location and tax-loss opportunities. Most financial planning software isn’t detailed enough on the tax side for Pure’s purposes, Fenison says.

Two times a week, Pure runs training sessions on taxes for its advisors. The analysis can be intense.

“When we hire new advisors, they come in very confident” about taxes, Clopine says. “Then when we go through a case study, they realize they don’t know much of anything.”

Clients’ CPAs tend to be in the same boat. Some understand what Pure advisors are trying to do, and some don’t like the added complication. That may be why the firm has had mixed success networking with the tax-preparation community.

When the firm started, Fenison tried partnering with some CPA firms and outside attorneys, “but we couldn’t control their quality, and they wouldn’t stick to their pricing,” he says. Now Pure does much of the number-crunching in-house and refers clients to outside advisors that Pure has screened.

“There’s no monetary incentive” received from the outside professionals, Fenison says, and he’s concluded that using unrelated parties for tax and legal work reduces the conflicts from doing it all in-house. “You get too much of an incestuous relationship when it’s all under your control.”

Hucksters of Tax Planning
 On a recent Saturday morning airing of their radio show, Your Money, Your Wealth, on AM 760 KFMB in San Diego and AM 870 KRLA in Los Angeles, Anderson and Clopine were talking about—you guessed it—taxes. While other pay-to-play radio shows are thinly veiled advertorials selling annuities or money management services, the Pure Financial show is a thinly veiled attempt to sell financial planning and tax-efficient investment strategies.

“We often see people’s safe money in a taxable account and stocks in retirement accounts,” Clopine said on the show. “It should be just the opposite. … Come in to our offices for a free 50-point diagnostic. … We’ll look at everything you have.”

Anderson repeats Pure’s toll-free number. The number, 888-994-6257, translates into 888-99GOALS.

Tax-efficient investing wouldn’t seem to be a topic most listeners would flock to, but the show has relatively good ratings, and Anderson and Clopine keep it interesting with small talk and investment-related banter.

A good chunk of their airtime is devoted to their favorite strategy, Roth IRA conversions. “Getting money into a Roth is so important—it’s all tax free,” Clopine explains to listeners. “There’s no tax on your principal, the income or the growth. It’s tax free forever, for the spouse, for the kids, the grandkids. That’s pretty powerful. But you have to know how to put money into a Roth.”

You may have a $100,000 IRA, but remember that only $70,000 of that belongs to you, the taxpayer, Anderson adds. “But by moving that $70,000 into a Roth, you’re buying your share back from the IRS. You’re getting the [IRS] monkey off your back so your IRA can grow forever, tax free.”

As for conversions, “anyone can do those now [but the law] probably won’t stay that way,” Clopine warns.

Listeners are also encouraged to look for opportunities to take tax losses year-round, and use the losses to shelter money pulled from taxable accounts, trusts and IRAs. Mix in some tax-free Roth withdrawals and “you can pay very little in taxes by withdrawing up to the 15% tax rate,” Clopine says.

A TV show with the same format is in the planning stages. If it works, Anderson and Clopine plan to leverage the video version online. The same tax-focused investment lessons are taught at the classes Anderson runs.

About five years ago, Brown took the class at Mira Costa Community College north of San Diego. Brown, then 55, was contemplating an early retirement from Raytheon. “I was not thrilled with the job. It was stressful, so I had [a desire] to punch out. But I wasn’t sure about having the money to do it.”
Anderson “just reeled me in—not from a sales perspective, but more from an investment philosophy perspective,” Brown recalls. “The stuff he covered just made clear sense to me. I did engineering for 30 years, so I have a good mind for numbers. … What he was discussing just aligned with my thinking, and I learned all kinds of things I’d never thought about.”

Like the impact of taxes on investments. “You will spend more money in income tax than you’ll ever lose in the stock market,” Brown recalls Anderson saying, “because taxes are not properly managed in a retirement scenario.”

Another Pure client, Stan Jorgensen, a retired 30-year veteran airline pilot with Delta, took the class through the University of San Diego. “About that time, the government came out and said anyone can do Roth conversions and take three years to do it,” says Jorgensen. “The Roth had never been available to me because I made too much money. … I attended the first class presented by Joe Anderson, and he had so much energy and passion, and he never said a word about Pure Financial. I liked the strategy, his personality, the presentation—and I’ve attended a lot of chicken dinners in my time.”

Jorgensen, a do-it-yourselfer, had most of his accounts at Charles Schwab. “I wanted to diversify my bets a bit. Schwab was OK, but I was missing someone who had the big picture.” Schwab representatives kept telling him to see his attorney and accountant for tax advice, but “that takes a lot of energy, having to put it together yourself,” he says.
 
Strained Capacity
 At Pure Financial headquarters, a 15-minute drive north from downtown San Diego, promotional plaques for the Your Money, Your Wealth show adorn the walls, along with rankings from local business publications proclaiming that Pure is one of the fastest-growing private companies in the area.

It’s an impressive showing for a young company. But Pure is suffering growing pains, namely a capacity problem.

The challenge is finding enough advisors to handle the constant flow of planning prospects. “For most planners, their problem is demand. Our problem is capacity,” Fenison says.

Each Pure advisor is capped at 125 clients. So more clients require more advisors. For client-facing advisors, Pure wants CFPs with five years of planning experience. It can find potential hires fitting those qualifications, but finding the right person can be tricky. The firm’s business model and culture is different from any of the firms it might recruit from.

“It’s hard to find good planners because most aren’t doing good planning, certainly not the kind of tax complexity we get into,” Fenison says. “It takes an advisor six months to a year to get up to speed with our process. … Even when we hire experienced people, they go to [work in the] planning department first” before seeing clients.

The firm has had just one bad hire, Anderson added, due to “a bad cultural fit. The person was transactional at heart.”

New hires tend to come via word of mouth. “We get inquiries from advisors at other firms who may be in a stagnant environment,” Fenison says.
Pure also uses some recruiters as well, but headhunters don’t seem to be able to find the right mix of skills. The firm also recruits interns from San Diego State’s personal financial planning program to work in its planning department. So far, the firm has had one entry-level CFP rise through the ranks to become a client-facing advisor.

Fenison says his biggest growth challenge now is attracting people to open new branches. He wants to expand the firm northward into Los Angeles. “Getting the quality of person we want to attract is hard, and there’s a lot of competition out there,” he says.

Fenison is brainstorming with some business consultants about how he might offer equity to advisors who open new Pure offices. “We run into [advisors] all the time with $20 million [to] $100 million in assets, and they recognize there would be a benefit in being associated with us, but it’s very difficult for them to give up the equity stake” in their current firm, he says.

Not to mention that at Pure, “there’s no room to do your own thing,” he adds. On the other hand, advisors joining Pure can expect to see plenty of new prospects delivered to them, thanks to the radio show, the classes and a growing stream of referrals from the expanding client base.

“We go to [industry] conferences, and client acquisition for other firms is a big issue,” Anderson says. “We hear about other [advisors] who have a goal of five or eight new clients a year.”

Pure’s goal this year: 300 new clients and $250 million in new assets. With more advisors, “we could probably double” in size, Anderson says.