Young advisors are going solo in a competitive marketplace.
There is a quiet movement going on within the
industry: Young financial advisors imbued with a missionary-like zeal
to spread the fee-only message are striking out on their own at a much
earlier age than the prior generation. They don't want to climb the
ladder by pushing financial products, and some feel boxed in at larger
companies that don't let them play a fiduciary role that utilizes their
training in comprehensive planning. Instead, these twenty-somethings
and early thirty-somethings believe their future-and that of the
industry-is predicated on providing independent, in-depth financial
advice, with client relationships as the business core.
Armed with certified financial planning designations (or comparable designations, such as chartered financial consultant) and with technology that simplifies client service and back-office management, these young advisors believe they have the training to hang out their shingle and transform the industry. But the challenges are many, from establishing trust with older clients to living off savings until the money starts flowing in. "We're seeing more new entrants into the profession gravitating toward the fee-only model," says Ellen Turf, executive director of the National Association of Personal Financial Advisors. She cautions that fee-only firms generally run on leaner margins. "It's a difficult career path to get established in."
Sharon Allen knew that before she left her job two years ago as a financial advisor with an established company to open a wealth management practice in Champaign, Ill. For starters, she is a young woman in a male-dominated industry, where gray hairs are a virtue inducing confidence among clients and prospects. "It took a little chutzpah to go out on my own," says Allen, 34.
She majored in finance at the University of Illinois, and then stayed in Champaign to work for an RIA that eventually became a bank and trust company. Her duties ranged from managing portfolios to working with the executive team, but she increasingly felt disconnected from the company's corporate-oriented approach. She dreamed of creating her own family-office business that handles the gamut from lifestyle management to investment management, and she took the plunge with support from her husband and encouragement from her informal advisory network of business professionals.
The lack of a noncompete clause lent confidence that some existing clients would quickly follow to her new firm, Sterling Wealth Management. But it took five months before her first former client jumped ship, and it took a full year before a second former client-and third overall paying customer-signed up.
It was a slower-than-expected start to the rest of her career. "My expectations were dashed," says Allen. "That was a shock to my system."
Allen toyed with doing a media advertising blitz but opted for lower-cost options, such as printing a newsletter that she sent to former clients, prospective clients and colleagues that she produced herself with Microsoft Office Publisher software and a color printer. She networked like crazy and took advantage of any invitation to speak before groups.
Her efforts paid off as clients eventually dribbled in, particularly through networking. "I don't know if the newsletter brought clients," says Allen, "but it was important to do because it kept me in front of people and let them know I'm a viable option."
Start-up costs exceeded $20,000, and came from self-financing and a family loan. Software and technology comprised more than half of the bill. Her customer relationship management software is an add-on that she bought with her ACT! contact management software.
After business picked up, she shelled out $10,000 (not including annual renewal fees that can exceed $2,000) for Schwab Performance Technologies' Portfolio Center portfolio management software. Eventually, she wants to upgrade her CRM software to the Relationship Manager software from Performance Technologies. Allen's membership with the Financial Planning Association provided discounts on her errors and omissions insurance and on her current trial use of CCH ViewPlan estate planning software.
Sterling Wealth Management has 25 clients and $23 million in assets under management, and Allen says she's now making enough money to stop living off personal savings. She hopes to someday affiliate with successful financial advisors in other Illinois cities to offer family office services to their clients. Allen speaks in grand terms about a profession she thinks needs retooling, and how she hopes that other young advisors will leave the corporate world and use their creativity to better the profession.
"I think a lot of people stay in their comfort zone" because they're successful and well paid in their current jobs, she says. "It's hard to set that aside and make nothing for a year or two."
Think Before You Leap
Paul LaViola says young advisors need to answer a couple of questions before going solo: Do they really need to own a business to meet their financial and professional needs? Are they willing to do what it takes to be successful?
In August 2005, the 31-year-old started his own fee-only RIA, Financial Planning Solutions, in Media, Pa., in part because his two prior jobs at fee-only RIA firms in the Philadelphia area didn't provide a career track. "What I wanted was never offered," he says. "If firms took care of their employees' career aspirations, they wouldn't have to go solo and deal with a lot of headaches."
LaViola spent a lot of time and money during his twenties on professional education, which ultimately helped his new business. He earned two masters degrees relating to financial services and taxation from St. Joseph's and Widener universities. He attended numerous seminars and conferences. He took a Dale Carnegie course in sales training. "Too many financial planners don't know how to sell and market themselves," he says.
After he decided to start his own company, LaViola took a government-sponsored evening program at the University of Pennsylvania's Wharton School to create a business plan that covered such critical elements as operations, the financial planning process, investment philosophy, where to custody the assets and technology. LaViola consulted with Joel Bruckenstein for software and systems advice. He purchased FPA management reports and Moss Adams studies. All told, he spent roughly $25,000 before he even started his own practice.
After setting up shop, LaViola spent another $25,000 to market himself and grow his business. To help pay for it, he obtained a Small Business Administration-backed $25,000 credit line with the help of Wharton. "There's money out there if you hustle for it," he says.
LaViola sent out direct mailings, conducted public and private seminars and attended as many networking events as possible. He stressed to his audience the fiduciary angle of fee-only planning, and told people why they shouldn't buy certain products rather than what they should buy. "People see that as different," says LaViola.
Instead of pursuing a preordained niche, he's more focused on finding clients who can afford to pay his fee and are willing to delegate their financial decisions to him. Increasingly, that tends to be executive types from the region's food service and pharmaceutical industries. LaViola's fee structure is two-tiered: a six-month contract for a basic plan for $3,000 to $5,000, or comprehensive planning and asset management for 1% of managed assets. He anticipates doing $35,000 in revenue during the fourth quarter and having $10 million AUM by year's end.
It appears that business is thriving, but LaViola isn't sure he wants to remain his own boss. "I went out on my own, did it fast and did the things I wanted to do," he says. "But is this what I want to do going forward?"
He plans to marry in the spring and immediately start a family, and he doesn't want to keep plowing his money back into the business. He's entertaining notions of rejoining his prior company as a partner. If that happens, he says the $50,000 invested in himself and his business won't be a waste because his experiences helped make him partner-ready material at an established firm. "I have a third masters degree in starting and operating a business," he says. "I got a great education."
Pros And Cons
According to the Certified Financial Planner Board of Standards, only about 3% of the nearly 53,000 CFPs are in their twenties; roughly 20% are in their thirties. Not all young advisors who start their own business are CFP licensees and many, if not most, young CFPs are content to work for a larger firm.
But the fee-only mantra is permeating the industry, and many young advisors schooled in comprehensive financial planning are embracing the model. Its appeal isn't just the marketing cachet; it's the ability to build with recurring revenues and, ultimately, greater resale value. "Twenty years ago in this business a 30-year-old was selling insurance," says LaViola. "But the industry has matured, and 30-year-olds today, with CFP training, are better prepared and want to strike out on their own."
It's uncertain how many fee-only start-ups ultimately fail. But NAPFA's Ellen Turf reports that a 2006 survey her group did with Moss Adams found that compensation potential starts to really kick in after four or five years.
Michael Kitces, the 28-year-old financial planning director for Pinnacle Advisory Group in Columbia, Md., is happy with his behind-the-scenes role and has no desire to go solo. He is one of the organizers of the FPA's NexGen conference, which aims to create a community among advisors and to make sure the wisdom of the prior generation is passed down to the next.
This role puts Kitces in touch with a range of advisors from across the professional and age spectrum, and he sees the pros and cons of young advisors starting their own business. "I think it's more difficult to build a fee-based, consultative advisory business from scratch," says Kitces. For starters, young advisors face a challenge in getting older folks to trust them with their money.
And then there's the simple economics of the industry: Income ramps up much more slowly in fee-only asset gathering versus the commission world. To sell a $100,000 annuity at a full commission of 5% or 6% yields a nice paycheck in a couple of weeks. On the other hand, managing a $100,000 IRA at an annual fee of 1% entails transfer time and quarterly billings that result in little upfront money and only $1,000 after a year. Many established fee-based practices began life under the old commission-based model and slowly evolved toward financial planning and advice.
"I'm neither for or against the commission model," says Kitces, "but I wonder how many good young planners we're losing because they made bad decisions about the feasibility of a particular business model and ultimately leave the industry entirely because it didn't work, rather than find another role in the industry that could lead to long-term success?"
Nearby in Towson, Md., the principals at Greenspring Wealth Management left the brokerage world and started their own business so that other young advisors don't have to. Patrick Collins, 30, established the fee-only company after he left Merrill Lynch in 2004; Joshua Itzoe, 32, left Morgan Stanley and joined as an equal partner the following year.
Both believe in their mission to build a multigenerational firm that provides young planners with an alternative to the brokerage world, and they want to create a model to build career paths. "We envision something like how a law firm or a CPA firm works by bringing in associates and giving them tools to work their way up to partners," says Collins.
Their goal is to create separate departments for financial planning, investments and operations. The advisors they'll hire will focus on cultivating and developing client relationships. "The issue for us isn't how do we grow," says Itzoe, who adds the firm expects to double its revenue this year. "The issue is how to find good people to service these clients."
They're wrestling with whether to hire advisors like themselves with an existing book of business, or to go with interns from a college program to put them on a career track so they can ultimately bring in their own clients, or both. To start, they're contemplating bringing on an intern from a local college.
Both partners had a large number of clients follow them to Greenspring, and referrals are starting to accrue. Their target audience includes special needs clients and emerging business owners, and they want to start focusing on qualified plan and pension advisory services. Itzoe says the average client net worth is $3 million.
Aside from fears that clients wouldn't follow them to Greenspring, one of their early challenges was the logistics of setting up an office. "It seemed overwhelming at first," says Itzoe, "but it's all about mapping things out regarding things we needed like computers, phones and furniture." To save money, they did their own wiring work through the walls and ceilings to connect servers to computers.
The advisors in this story all say that technology is a big reason why they're able to operate their own business at a young age. Itzoe says Greenspring's three most important operational components are its portfolio management software with Schwab's Portfolio Center, its contact management software with ProTracker and its trading platform with Fidelity Advisor Channel.
The Greenspring partners feel they're off to a good start and that they know what they want their firm to look like long-term, but they're not sure how to get there. They hope to find other young firms like theirs that are trying to build a sustainable business model from scratch. "You have to think like a big firm such as Merrill Lynch," says Collins. "You need to develop systems and processes to support a bigger group." To do that, he and a handful of other NAPFA members recently formed a think tank to brainstorm ideas to create efficient businesses and improve client service.
Different Markets, Different Approaches
In September, Melody Townsend turned 27 years old the day after she officially opened for business as Townsend Financial Planning. Her goals are modest. "I don't have aspirations to be a huge empire with a lot of employees," she says. "I just want to serve the local people in my community."
Townsend came back home to Mount Sterling, Ky., after working five years with a trust company in Lexington, about 35 miles west. She took financial planning courses as part of her business administration major at Morehead State University, and interned at a planning firm in Lexington. At the trust company, Townsend worked closely with the CEO and engaged with high-net-worth clients.
At a NAPFA conference in Chicago she met Sheryl Garrett, founder of the international network serving clients on an hourly, as-needed basis, geared toward the middle-income market. "I was intrigued by her model because it's exactly what I wanted to do," says Townsend. "I bought her book and thought that was something I could do when I was maybe 40."
But she increasingly felt the urge to open her own business. Townsend plans to start a family in a few years and she doesn't want to be a corporate mom. Her boss gave his blessing and told her to do it now or she'll regret it later. Townsend found space in an office building with a real estate business and a hair salon. She picked out furniture, bought new carpet and painted the walls a green-tinted shade of tan called winter delta.
Townsend's $16,000 start-up costs included $3,000 for a computer and a combined printer and scanner and $7,500 to join the Garrett Planning Network. "At this point in my career I probably couldn't go solo without Garrett," she says. "I feel like I know planning pretty well, but I don't know nearly as much about the practice management side and Garrett makes that doable for me."
Among other things, the Garrett network supplies downloadable forms that are customizable for each business, provides marketing and training tools and helps get business liability insurance. But it doesn't bring customers to the door, and Townsend realizes the challenge of setting up shop in a small market like Montgomery County, a bluegrass region of 30,000 people with an average household income of $30,000.
Townsend plans to funnel all her revenue back into the business, and if all goes well hopes to start taking a salary after the first year. Meanwhile, she's living off savings from herself and her husband. Four high-net-worth clients followed her to her new business, and Townsend charges them a flat fee depending upon their needs. But she envisions most of her business coming from middle-income folks willing to pay her hourly fee of $120 for financial planning services. "It's an underserved market with a lot of needs," says Townsend. "The biggest obstacle is educating them about what we do, and that they can afford us."
Sammy Grant, 31, formed SG Financial Advisors in January 2005 to target a lucrative market, between $500,000 to $2 million net worth, he thought was ignored by his prior firm, a large fee-based outfit in Atlanta. The firm enforced strict minimums, and Grant had to turn down numerous client referrals he thought would make great clients. Compounding that, he felt his employer wasn't providing career tracks for its young planners.
Grant opened his own practice in suburban Sandy Spring, Ga., with some trepidation, because his wife was pregnant with their second child and he was uncertain about dealing with back-office issues handled by others at his prior company. But he crunched the numbers and he figured he could make a go of it, thanks to a wide network of referral sources from his contacts with attorneys and accountants. In addition, Grant has since made inroads with area advisory firms with minimums of $2 million to $5 million to get referrals for prospects who fly under their radar.
If anything, Grant believes his age is actually an advantage in many cases. "As clients age and approach retirement, they don't want an advisor who will retire at the same time," he says. And for young advisors with the proper industry experience to go solo, Grant thinks there is ample opportunity. "Even though this industry is competitive, there are more than enough clients to go around, and I find other advisors are more than happy to serve as mentors," he says.