Until 2001, Budros, Ruhlin & Roe had everything but professional management. Now it does.
Yet it was also becoming increasingly clear to Jim
Budros, Peggy Ruhlin and Dan Roe, all of whom were accustomed to
spending up to 80% of their time with clients, that the firm wasn't
functioning the way they wanted it to. Like many other advisory
businesses, Budros, Ruhlin & Roe was grappling with what was
turning into the worst bear market in 70 years by providing clients
with higher levels of service than they ever had before.
If the firm's client retention rate was any
indication, clients were doing as well as could be expected; very few
of them were leaving. But the stress of expanded services was taking
its toll on the partners and staff. Important "internal issues were
being handled after hours or at odd times," Roe recalls.
All the partners agreed on what the problem was. "It
felt like things were out of control," Ruhlin says. "We were doing
things without the kind of strategic planning and preparation
necessary. We needed to take care of the back of the house."
The solution to this problem was obvious. What the
firm needed was a chief operating officer or managing principal. There
was some discussion about conducting an outside search for the right
person.
But Roe, who only two years earlier had paid a
handsome price to become an equal partner with Budros and Ruhlin,
expressed serious reservations about increasing overhead by bringing in
an outsider who would command a six-figure salary and take a few years
to learn the business before making a real contribution. The partners
also knew colleagues in the business faced with the same issue who had
brought in an outsider only to part ways after a year. "I was very
reluctant about hiring someone from the outside," Roe says.
Privately, Budros and Roe knew the best candidate
was sitting right next to them. "We knew Peggy was the best person; she
was good at personnel and organizational issues and we'd deferred to
her in the past," Roe explains. "We knew things would get done."
Budros agreed. When it came to management issues, "Peggy is better at it than Dan and I by a factor of ten."
The only partner who had doubts about this solution
was Ruhlin herself. She had some questions about her ability to switch
roles, and she loved working with clients. Deep down, she wondered if
the job of managing principal was really all that significant,
particularly in her partners' eyes. "I worried that Jim and Dan would
look at me differently because they were dealing with clients," Ruhlin
says.
Budros and Roe had no doubt about her abilities for
the practice. Not only did she have superior organizational skills, but
she also was a certified public accountant who understood financial
management. Roe came up with his own way to close the deal. "I
threatened that if she wouldn't do it I would," he quips. "That was
enough for her to agree to do it for three years."
Ruhlin relented, but with a proviso. "I made them
sign a contract that I was only required to do it for three years," she
says.
Earlier this year, she re-upped. "I still spend
about 25% to 30% of my time with clients," she explains. Including prep
work, she used to spend about 80%, like Budros and Roe do today, so it
was a big change.
It's not surprising that in a profession dependent
on finding clients and keeping them, many principals view the role of
managing client relationships as far more important than the mundane
task of practice management. At a firm that prides itself as being as
client-driven as Budros, Ruhlin & Roe, it's only natural.
A quick look at the fee-only firm's vital statistics
reveals how it is possible to provide a wide scope of services
economically. With about 320 clients and $700 million in assets under
management, the firm has doubled its asset base since 1999 with little
help from the market. The vast majority of clients are charged flat
fees with a minimum of $10,000.
Sounds expensive, until one takes a closer look. In
2004, the firm generated between $4 million and $5 million in revenues
and, despite 27 employees, managed to produce an operating margin of
about 25%. Simple math tells you that, as a percentage of assets,
clients are getting charged a rate of 0.6% or 0.7%.
Still, profits matter for several reasons. Budros,
the firm's founder, says there are no plans to sell the firm. In fact,
it has a meticulously crafted succession plan. But "we run the firm
like an institutional business [that could be] for sale, because that's
what we tell our clients to do," he explains. "In our case we're not
looking for a buyer."
A key part of that succession plan is John Schuman,
a 38-year-old CPA and estate planning attorney who joined the firm when
it was ramping up its portfolio of services in June 2001. Schuman came
from a five-man team at Deloitte & Touche marketing estate planning
services to the ultra-affluent in the central United States. Prior to
that, he had practiced law for eight years.
Shortly after his arrival, Budros, Ruhlin & Roe
alerted clients about his expertise in numerous areas, including
executive compensation, estate planning, income-tax issues,
split-dollar arrangements, stock options, buy-sell agreements, wealth
transfer challenges and sales to defective trusts, to name a few. At a
time when financial advisors needed to do more for clients than simple
asset management, Schuman was just what the doctor ordered.
Even though he was placed on the partnership track,
Schuman wasn't pressured to bring in business, a major difference from
the legal and accounting world he came from. "I did not bring a lot of
clients with me; I didn't want to burn a lot of bridges," he says.
"Attorneys and accountants are good referral sources."
Of course, one thing he couldn't do was practice
law. That also worked in his favor as he learned, somewhat to his
surprise, that lawyers like working with other lawyers who aren't
direct competitors. "Most attorneys enjoy the fact that we're
involved," Schuman says. "I'm a big backstop, and I can help manage
their legal work and follow through."
Clients involved in litigation also can turn to
Schuman for cost-benefit analysis and get an explanation of what the
costs of settling are. In this litigious world, those are sometimes
explanations that attorneys themselves might feel uncomfortable
providing.
"A client never calls an attorney until there's a problem," Schuman
says. "Because we don't bill by the hour, a client often calls before
it becomes a problem. As a result, we keep a lot of clients out of
trouble."
Like many attorneys and accountants who have become
financial advisors, Schuman has been surprised by the differences in
this emerging profession. "The most pleasant surprise was not having to
keep track of billable hours," he says.
But the biggest surprise to Schuman has been the
value proposition of financial planning itself. Many attorneys,
accountants and others in long-established professions are often amazed
so many clients are willing to pay $10,000 minimum annual fees. "What I
didn't understand was the closeness of the client relationships," he
explains. "We provide a lot of peace of mind."
To understand how Budros, Ruhlin & Roe emerged
as one of the top advisory firms in Columbus, it's important to look at
its evolution. The firm's pioneer, Jim Budros, grew up in the trust
business at Huntington National, a local bank, where he became director
of business and estate planning. In 1979, he joined the fee-only
financial planning arm of Physicians Insurance Co. of Ohio, a publicly
held company in the malpractice insurance business.
In the mid-1980s, Ruhlin was a 50% owner of an
accounting firm who was finding that as clients aged and their problems
grew more complex-and interesting-she had to refer them to a financial
planner, who more often than not was Budros. At the same time, she and
Budros started taking a CFP course at Ohio State University. "I started
asking myself where has this been all my life," she remembers. "One day
Jim called and said his business was growing fast and would I ever
consider joining him." She immediately agreed to talk and was soon on
board. "It was the luckiest and best decision I've ever made," she
says. "Also I got out of the accounting business just as it started to
go downhill."
In the late 1980s, Ohio's Department of Insurance
ordered Physicians Insurance to divest many of its subsidiaries, so
they, together with a few other planners, bought the advisory business.
In 1992, Budros and Ruhlin split up with the others and formed their
own firm,, which opened its doors with 179 clients, $130 million in
assets and 13 employees. To put it in perspective, in those days, a
fee-only firm with $30 million or $40 million in assets under
management was considered viable.
From the start, Budros and Ruhlin frequently shared
clients, though it occurred as much by happenstance as design. While
they viewed themselves as generalists, the firm also tried to leverage
Budros' trust and estate planning skills along with Ruhlin's strength
in tax and business planning.
Just as Ruhlin had once been an excellent referral
for Budros, others were now filling that role. "We had a really good
referral network of physicians and estate planning attorneys," she says.
In the firm's early years, physicians
accounted for a huge chunk of its clients. "Our typical client is the
millionaire next door," Ruhlin says. "They've decided to live beneath
their means."
Contrary to popular mythology, many of these doctors
aren't dummies when it comes to money. "Some of our physician clients
are some of the smartest [individual] investors I've ever seen," Ruhlin
continues. "They really challenge us but they've decided to delegate
the role."
Both she and Budros shared responsibility for
investment management and, while they relied primarily on mutual funds
in these years, they had the good fortune to recommend one individual
stock-Berkshire Hathaway-as a substitute for a large-cap growth fund.
Over the years, Budros would take clients to Omaha for its annual
meeting, a junket that bore fruit in ways that went beyond its
spectacular appreciation in price. Listening to holding company
chairman Warren Buffett talk about investing provided the best client
education available. "It's a great way to each clients about investing
and not chasing trends," Roe says.
But while many advisors were zeroing in on asset
management as their primary focus, Budros and Ruhlin were constantly
looking for ways to make comprehensive financial planning more than a
marketing slogan. Budros had developed something he called an estate
planning fire drill and would assemble clients together with their
children to go over what would happen after the parents died. Many
advisors wouldn't go there.
Estate planning is often viewed as the province of
lawyers. Budros understood that, and he also recognized their
shortcomings as well. During the fire drill, "Mom and Dad are required
to sit there and be quiet," he explains, while the children and
advisors talk about dotting all the i's and crossing the t's,
determining the costs and estimating the time delay. "It's one thing to
do an estate plan when Mom and Dad are talking to lawyers," Budros
says. "But when you do this, it brings issues that might not [surface]
otherwise and it can make the issues raw."
While Budros and Ruhlin were growing their already
substantial practice in Columbus in the early 1990s, a few hours down
Interstate 71 in Cincinnati, Dan Roe was experiencing just how tough it
was to break into the business of financial planning as a fee-only
practitioner, an experience far more common then that his future
partners. Still in his twenties, Roe shared an office with Michael
Chasnoff and Dave Foster, two other advisors who would later thrive.
But though he shared resources and administrative costs with them, Roe
was a sole practitioner targeting middle- and upper-income clients. "In
my own practice, I wasn't able to bring in as many clients as I
wanted," he says.
Like Ruhlin, Roe was active in both the
International Association of Financial Planners and the National
Association Of Personal Financial Advisors. In the early 1990s, Ruhlin
served as president of the IAFP's Columbus chapter, while Roe was
president of the Cincinnati chapter. In April 1996, Roe, who was about
20 years younger than Budros and 15 years younger than Ruhlin, joined
their firm as vice president and moved to Columbus. "Initially, I was
going to bring clients but the minimum fees of this firm were a lot
higher than my clients were paying in Cincinnati," he says.
With Roe's arrival, the generalist model that the
founders had implemented began to give way a more specialized approach.
Roe's skills in investment management and financial planning quickly
propelled him into those areas, while his involvement in tax and estate
planning started to diminish. "The staff sort of pushed this along,"
Ruhlin says. "As they started to come to one of us when a specific
issue arose, we realized what they were doing and why."
The timing of Roe's arrival at the firm coincided
with the expansion of its range of investment options. Although it
managed to dodge the runaway train that the tech bubble was becoming in
the late '90s (and lost a few clients for refusing to jump on), the
firm started to offer separate accounts and individual stocks at about
this time. One introduction was its 20/20 portfolio, consisting of 20
bluechip stocks. "we believe we can own for 20 years with very low
turnover. We're agnostic or indifferent when it comes to what
investment vehicle we use," Roe says.
As Roe was moving into the chief investment officer
role, he also became a partner in 1999, as was envisioned when he
joined the firm. It's highly unusual for two longstanding partners who
built a business from scratch to make a new partner an equal partner in
virtually one stroke, but that's what Budros and Ruhlin did. Budros
himself views it as an act of "enlightened self-interest," not
generosity.
Roe agrees, and explains his purchase of one-third
of the firm in 1999 didn't require them to give up equity even if their
stake was diluted. "It was a combination of Jim and Peggy financing a
portion of it [the purchase], and a significant cash payment," Roe
says. "They wanted to be sure I made a significant commitment to the
firm." Moss Adams consultant Mark Tibergien conducted a valuation that
became the number they used for Roe's buy-in, and an attorney who was
an old friend of Budros drew up the agreement.
Budros himself never assumed or expected that "we'd
sell our business for a large sum of cash. We've assumed the firm
itself would be our primary source and that our liquidity event would
be some form of deferred comp. That wouldn't be possible if it wasn't
able to operate at a high level of profitability." The firm has
received approaches from several consolidators and after hearing some
of the prices mentioned, Budros understands why the matching or merger
services claim there are 20 buyers for every seller.
Besides, cashing out was never what the firm was
about. Clients were. Early in the current millennium, it became
apparent that the partners' client centricity was so excessive it had
become debilitating. With more than 300 clients, managing the firm-much
less growing it-became difficult when partners were required to be
present in practically every meeting with a client. "Peggy said at one
point, 'We're not in the financial planning business; we're in the
meeting business,'" Budros recalls. "We had to move to a model that
didn't require us to be in meetings eight hours a day."
In 2001, as Ruhlin started to step back and examine
the firm's operations to improve efficiency, she looked at the firm in
two ways. First, as a CPA who counseled clients on business and tax
planning, she took a cold, hard look at the numbers, which remained
relatively good during the 2000-2002 bear market. Still, she
reformatted the firm's financial statements to conform to the
Moss-Adams model and started to enforce certain yardsticks, maintaining
a 60% gross margin and a 25% operating margin. If the firm decides its
going to spend money on a new service or technology, expenses have to
be transferred from somewhere else.
The second part of her evaluation was to examine the
firm's human resources. If there was an area the partners had neglected
in the past, this was probably it. This partially explains why a number
of Budros & Ruhlin alumni now operate small, successful advisory
firms in the Columbus area.
She quickly realized the need to drive some
responsibilities down from the partner level to the employee level. "I
never had the luxury or time to spend a lot of time with our staff and
didn't realize how talented they were," she acknowledges. "In the last
few years, I have learned that our staff is extremely talented in so
many ways." Today, senior planners get to hire their assistants. "Our
investment management specialist found that very empowering," she says.
More new services are in the works, and the firm
plans to hike the minimum fee to $12,500 later this year. A team of
senior planners is working on a new initiative that could be rolled out
later this year. "We think we know what the product is," Budros says.
"We're not sure how to deliver it."
While Schuman appears to be on the partnership
track, the others are now trying to find ways to create other career
paths to leverage the skills of all employee so that the business can
continue to grow. That story continues to evolve.
Meanwhile, Ruhlin appointed several groups to work
on best practices in various areas and is finding that it's the firm's
singular focus, not the partners', on clients that is really important.
"It's great that the principals don't have to be everywhere and make
every decision," she says.
Taking Control
February 1, 2005
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