In 1998, four successful financial planners from three different wealth management firms in Little Rock, Ark. first kicked around the idea of creating a fee-only advisory company dedicated to serving the middle market. This venture was to be a separate entity apart from their existing practices, and it would be a place to refer people for fee-only service who didn't meet their firms' minimum requirements. Over the next year or so they hashed out the details and laid the groundwork to make it happen. They would own the company and hire someone to manage it, and they planned to make a little money on their investments while providing a valuable service to the community.
It seemed like a worthy idea, and they called it Financial Decisions Institute. What the four founders couldn't foresee was the death of one of the partners, the professional divorce of two of the partners and head winds from a massive market correction just as their endeavor took flight. In addition, the operation's start-up costs exceeded projections and the whole thing was a bigger headache than anticipated.
Yet FDI has survived to become a self-sustaining company with 180 clients and $18 million in assets under management. That comes to an average client account size of $100,000, meaning that FDI is fulfilling its intended mission. "If you look at the sequence of events that happened," says FDI's president, Karron Wages, "it's amazing we're still standing."
FDI provides two main services: financial planning advice and investment management. The former contributes less than 10% of revenue. "We've priced our planning so low that we'd have to do a ton of plans for it to be a significant revenue piece," says Wages.
Financial planning services are billed at $75 per hour, and the typical financial plan at FDI costs between $300 and $600. That compares with financial plans at many advisory firms that start at $1,500 or more.
On the investment management side, FDI's guiding light is modern portfolio theory. It uses five proprietary portfolio models invested in no-load funds that are suitable across its client base. For new clients who come in with existing stock holdings, FDI will hold them until the client decides what to do with them. "It's one of the simplification things we have to do to make this place work," she says.
FDI bills for its management fees quarterly, amounting to an annual fee of 0.75% of the account value, or $7.50 per $1,000 managed. Most investment advisory firms charge 0.9% to 2% of assets managed and require minimum account sizes of $500,000 and up.
The company imposes no maximum or minimum account limits; indeed, its smallest investment management client has only $1,000. Wages says she's had her share of dead-end clients-those who come in with small accounts and big plans that ultimately go nowhere, costing the company both time and money in sending out quarterly reports. FDI last year finally imposed a minimum annual fee of $100 to encourage more serious accounts. "But it's still ridiculous for this industry," says Wages.
Wages, 41, is the third manager in FDI's short history. She came on board in 2005 as managing partner (the only other employee is her assistant), and in January was named president. "The owners let go a bit more, changed the title and let me run things," she says.
The owners are Rick Adkins, Cindy Conger and Barry Corkern, all of them fee-only wealth managers who have landed on various lists of the nation's top financial planners. The fourth founding partner, Larry Waschka, died in a tragic swimming accident while on a family vacation in Mexico in 2004. Corkern, a solo practitioner, was a friendly competitor with both Adkins and Conger at the Arkansas Financial Group, and he was a mentor to Waschka when he left Merrill Lynch to start his own fee-only practice. During separate conversations with both the Arkansas Financial Group folks and with Waschka, Corkern noticed they all shared similar regret about turning away middle-income people who contacted them seeking fee-only advice. They also wished there was a place to send these people other than to commissioned brokers or other financial service reps.
Corkern facilitated a meeting among the four of them. They met at a restaurant owned by one of Conger's accounting clients, a man whom she helped avoid jail after he ran into payroll tax problems. The restaurateur owed Conger thousands of dollars that he couldn't pay because it went toward paying his back taxes, so she took payment in free meals at the restaurant, and the group's first business dinner was gratis. Corkern remembers they realized that they all had similar viewpoints on various industry trends, and during subsequent dinners and a gathering at Waschka's lake house the strengths and weaknesses of each individual became clear. "It was evident that we were a perfect blend," says Corkern.
The way the three partners describe it, Corkern was the strategist who moved the FDI idea along; Adkins was the analytical guy who wrote the optimization software that FDI's portfolios are based on; Conger's accounting background made her good at operations; and Waschka was the best marketer, frequently appearing on radio and television.
"The first couple of times we met we talked about doing a trust company," says Conger. "And then it evolved into something that wouldn't cost quite so much and could be a place where we could refer people [who weren't a match for their respective firms]. It took us about a year to put it together in our minds and then establish how we would set it up and how much we were going to invest, which ultimately proved to be way off base," she added with a laugh.
As they envisioned it, the partners' model-if successful-could be a blueprint for other advisors focused on the high-net-worth market to fund and organize a fee-only advisory outlet where they could refer middle-income clients. The partners also had a notion it could look like a retail operation loosely based on the H&R Block model. They hired their first manager and his assistant, and they set up shop in a retail strip center with a lot of parking to attract people off the street who needed a financial plan. In fact, two doors down was an H&R Block office. Next door on one side was a printing company; on the other side was an Indian restaurant. "You could smell the garlic in the office when they really started cooking," says Corkern. "It was a little bit of an issue."
They eventually realized they had overbudgeted-both financially and conceptually. "We leased space with furniture in anticipation of rapid growth," says Corkern. "We thought it would take off and have big demand." Conger notes that all of their firms were growing 20% to 25% a year for years, and they just assumed that would be the case at FDI.
That was part of their learning experience. "We made decisions based on our individual practices that have clienteles who are very different from FDI clients," says Adkins. "The fact that we were very busy with our own practices and really didn't have time to commit to managing a completely different model was, has been, and will probably continue to be our biggest challenge."
After three years in the strip center, FDI moved into a standard office suite on the west side of Little Rock on Financial Centre Parkway in an area populated with financial services businesses. Corkern's vision for a network of affiliated fee-only advisory offices serving middle-income folks isn't part of the mix anymore, but he's not disappointed that the retail model is dead. "It's going where it needs to go," he says. "People with modest assets want to go to an office and be dealt with professionally."
The bulk of FDI's customers come from referrals, but Karron Wages thinks the firm could still do a better job with marketing. "Financial Decisions Institute isn't a very catchy, consumer-oriented name," she says. "I joke that it sounds like a place that puts you in a straitjacket and straps you down until you make good financial decisions."
The name arose from Corkern's idea to create a nonprofit arm to investigate financial scams. "He wanted something that had an aura beyond that of a sales organization," says Conger.
Regardless, Wages would like to change the name to something more self-explanatory. "We could've done something like My Financial Planner," she says.
Third Time Is A Charm
FDI's first manager was Phil Hamman, who was hired in 1999 fresh out of Texas Tech's financial planning program where he received his master's degree and prepared for the CFP exam. His credentials looked ideal for FDI's mission, but he didn't know how to run a business and he was gone in a year. His replacement, Alvin Rogers, had a corporate background. "He understood P&L and was a better business manager," says Corkern, adding that Rogers' strengths were in bookkeeping and accounting, and that these elements helped keep FDI going during the depths of the stock market collapse earlier in this decade. "But we didn't want to be an accounting firm," says Corkern. "FDI's core beliefs and philosophies were about developing efficient portfolios and financial planning."
Rogers lasted about five years. "I took it from six to 300 clients, and I wasn't compensated for it or given an ownership stake so it was time to go," says Rogers, now with Financial Legacy Management in Little Rock. Toward the end of his tenure the issues regarding accounting versus financial planning became a point of contention both at FDI and at Arkansas Financial Group, where Adkins and Conger had been partners for 20 years. "Rick and my partnership was a marriage in every sense of the word except there was no sex," jokes Conger, a CPA whose accounting work was a big part of her practice.
But her accounting work was a big reason why Arkansas Financial Group never got any client referrals from outside CPA firms, and Adkins wanted her to give up her accounting services so the firm could land some big client referrals. However, Conger didn't want to give up her tax practice. Things got fractious and they split up. "It was a business divorce with all of the ugliness associated with it," Conger says.
The two still don't communicate with each other, which both Conger and Corkern believe hinders FDI's mission because they can't all sit down together to have a board meeting. Adkins disagrees. "I talk directly with Karron a lot," he says. "The collaborative piece is presently absent, but Karron and I worked together before, she knows our process and has tweaked it to make it work in a different kind of environment."
Wages says the sticky situation doesn't hinder her work because she meets quarterly with each partner. "I rotate through them so I can play off of their ideas and update them on the company's operations," she says. "But if one day they decide on dividend payments to the board members or to sell, then they might have issues trying to agree."
But the one thing the three partners do agree on is that Wages has whipped FDI into the company they long hoped it could be. "It's been a huge blessing having her there because she's disciplined and understands the process," says Adkins. "I knew Karron could manage this company because it's right down her alley."
Simple And Streamlined
Wages took a circuitous path to FDI, including a pit stop in Tampa to run a small retail shop. After she graduated with honors with a degree in business administration and finance at the University of Montevallo in Alabama, she was an assistant bank examiner for the FDIC, a financial administrator for General Electric and a benefits specialist and payroll supervisor for the Air Force as she followed her active-duty military husband to bases in Japan and elsewhere.
She finished studying for the CFP exam overseas and passed the test after she got back to the U.S. Wages started out at Arkansas Financial Group in 1996 as a financial paraplanner and later became a financial planner and then vice president and chief compliance officer at the firm before she left in 2001 for Florida to run a cosmetics store in a new mall next to the Tampa airport. "That's where I learned how hard it is to run a retail shop," she says, adding that the experience helped her both in running FDI and providing advice for clients who own small businesses or are thinking of doing so.
But the self-described nomad and her husband missed Arkansas, and they moved back there in 2005. Rogers left FDI shortly after they arrived, and the founding partners quickly hired her as his replacement. Rogers had a one-year non-compete agreement, but after that ended he took about $3 million in FDI's business with him when he joined another advisory firm.
For her part, Wages made changes she believes strengthened FDI's operations, such as installing a fully functional computer system and making sure backups were done every night, fixing errors in their advisory contract, consolidating two brokerage firms into one and getting investment policies from clients. "I have a two-page list of things that I fixed," she says. And FDI has gained roughly $4 million in assets in the past year, making up for the business that followed the firm's former manager.
Wages keeps the technology simple and streamlined-she uses Money Tree Silver financial planning software and dbCams portfolio management software. Accounts are custodied at Fidelity.
Wages believes in Adkins' asset allocation-driven portfolios and the philosophy behind them. "Our portfolios do what they're designed to," she says. "They're less volatile, more predictable and they provide stable returns." The five model portfolios are based on 11 different asset classes, and they're the same ones Adkins uses for his own high-net-worth practice.
Wages says the capital preservation portfolio (the most conservative offering) returned 8.85% on an annualized basis from its inception on October 1, 1996, through August 31, 2007, versus the S&P 500's 8.9% annualized return during the same period, and with a standard deviation of less than half of the index. FDI's aggressive growth portfolio, the highest-octane offering, produced annualized gains of 10.95% through August with a standard deviation just a tad lower than the S&P. The other three portfolios beat the S&P and had lower standard deviations during the same period.
Wages can fine-tune the returns and volatility based on a client's risk profile. Hank LeSieur and his wife, Debbie, have been FDI clients for four years. Hank, a former risk manager, says his wife is a more conservative investor than he is, and he's pleased that FDI has structured a portfolio that meets the needs of both of them. He also likes the price. "At 75 basis points a year, the fees are very low and we get the diversity we need," says the Little Rock resident.
Worth The Trouble
FDI has been in the black for the past four years, but it's not wildly profitable. Cash flow is constrained because the partners are in the third year of paying off a five-year note to buy out Waschka's widow. FDI is a C corporation, with the three surviving founding partners as stockholders. But none of them have received much back on their substantial initial investment that totaled roughly $250,000 before FDI got out of the red. According to Corkern, the partners got a loan from Bank of America that each member guaranteed with $25,000 of working capital; when that ran out, they started writing checks every month. "I'd tell my wife that I had to write another $3,000 check to FDI, and she'd say, 'What were you thinking,'" says Corkern.
It's a question he and his partners sometimes asked during those dark early days when FDI was losing money while they simultaneously were focused on helping their regular clients navigate through the recession. But they stuck with it. "I felt an obligation to Alvin [Rogers] not to let it fail," says Conger, "and that we needed to work a little harder at it. I also felt strongly about this being something that needed to be done."
Conger says she and the partners have gotten back about $2,000 each from their investments in FDI. For Conger, that cash constraint comes at a time when she's had to start up her own practice after splitting with Adkins. Still, she and the others don't regret their decision to launch FDI.
"I was less motivated by the profit motive than the idea of being pleased with something that just paid for itself," says Adkins. He believes a model to provide fee-only service to middle-income clients could be successful elsewhere. "If it works in Little Rock, Ark.," he says, "it can work in larger cities."
Adkins' vision entails matching young people who are learning the industry with established fee-only advisors, and letting the new planners work with middle-market clients within a controlled environment. "You can create a structure where it's hard to create harm," Adkins says. "I've had those kinds of discussions with people around the country. Whether they have the time to take it on is a big question."
FDI appears to be a fairly unique entity-for example, it differs in a couple of ways from the Garrett Planning Network, an organization formed in 2000 to help independent advisors serve middle-income clients. FDI's planning fees are much lower ($75 an hour versus Garrett's typical $150 to $300 an hour) and it relies mainly on investment management. (Garrett's focus is planning, not investment management.)
At this point, FDI's future seems to be tied heavily to Wages. The founding partners' age range is 55 to 58, and all of them say they'd love to see Wages become an owner someday. While she loves her job, Wages isn't pushing for an ownership stake. "It depends on the valuation," she says, "because current owners always think a business is worth more than a potential buyer does. I'm quite happy with the current situation."
Wages is also happy with FDI's raison d'etre, and she appreciates the dedication of the founding partners to provide fee-only financial advice to people who don't have a million bucks. She knows she could make more money working elsewhere, but she's OK with that. "You have to have the motivation to do this," she says.