Will your aging client base kill your business?

    Life is full of conflicts of interest.
    Consider this one. Some business coach says you should move away from commissions towards fees. "Fee-based planning is where it's at," he says. You're proud to say that half to three quarters of your income now comes from charging clients a percentage of their assets. As long as the bottom doesn't drop out of the market, this is a pretty solid business model, you reason.
    Of course, as soon as you make the move to fee-based, another business coach says you'd be wiser to charge retainer fees. "They eliminate those nasty conflicts of interest that occur when the client wants to take money out of his portfolio," says the coach. You do nothing. One fee structure change per decade is enough.
    Fast forward five or ten years. The retiring boomers you call your clients are still spending, but now it's their nest egg. They are consuming the source of your fee income. The more they spend, the less you have to work with, and the more your fee base declines. Gee, Ollie, that's another fine mess you've got us in!
    But this doesn't have to be as dire as it sounds, say some veteran advisors and industry experts. It just may be possible to provide an income stream clients can live off of while not crippling your own economic base.
    Adopting the aforementioned retainer fees is a possible solution if done well before the problem plays itself out. Retainer fees say to the client, "I charge a fee for our advisory relationship that reflects your entire financial profile-not only investments, but estate, risk management, cash flow, tax and other considerations."
    In fact, many successful advisors have moved to such a fee structure in recent years because it also creates fees that are "stickier" should assets suffer a temporary decline. Just don't wait until the last minute to implement this strategy. If you do it right when the market is sliding into the tank or the day your client demands a plan to take regular income from his retirement portfolio, your motives may be questioned.
    Brian R. O'Toole, CEO of AssetMark Investment Services Inc. (www.assetmark.com) based in Pleasant Hill, Calif., might say the retainer fee strategy is just part of the broader-based differentiator called wealth management. "In January 2005, we sponsored a study of the independent broker-dealer community that differentiated multidisciplinary wealth managers from more focused advisors-those just selling insurance or managing assets. If I'm an advisor who relies exclusively on fees generated from assets under management, then clearly as my client base transitions from asset accumulation to asset distribution, all things being equal, I'm looking at declining revenues. We always say to advisors, 'What doesn't grow, doesn't survive,'" says O'Toole.
    O'Toole's solution has several parts. "First, as an advisor I must do the right thing for my clients or I won't be in business very long. Second, I must plan for the reduction in assets under management by supplementing my practice with new clients." In addition, says O'Toole, advisors must position themselves as "wealth advisors" who will do much more discovery with clients and provide a consultative approach based on the significant time they've spent understanding their clients' goals and objectives. Wealth advisors will offer a collaborative, interdisciplinary set of solutions involving a team of financial professionals who can all contribute to the client experience.
    AssetMark figures into this equation by helping advisors pursue the wealth manager business model. "We've developed a strategic relationship with The Legacy Companies (www.legacyboston.com) of Boston to help financial professionals make that transition. We also work with eMoney Advisor (www.emoneyadvisor.com), which has the technology needed to bring it all together."
    Perhaps the most critical aspect of the transition, says O'Toole, is the need for would-be wealth advisors to focus on differentiators. "As a wealth advisor, I need to demonstrate a problem-solving capability targeted specifically to the needs of retirees and their issues. I need to differentiate my firm by the quality of its ongoing client relationship experience."
    Visualizing the wealth advisor process as collaborative, AssetMark encourages advisors to outsource everything that's not in their specialty and doesn't directly contribute to the success of their business. Assetmark is, itself, an outsource solution for the investing process by assisting the wealth advisor with asset allocation, manager due diligence and rebalancing.
    But not all advisors want to define themselves as wealth managers. (In fact, some would probably say the term is too trendy and downright nebulous to consumers and advisors alike.) Planners who anticipate the problem of clients' shrinking capital might rely on a targeted wealth preservation strategy like that of Jim Huller of Maximum Wealth Advisors in Roanoke, Ind.
    Huller works with NFL players, a client niche that accumulates assets rapidly and can dissipate them just as fast. "Most of my clients are done at age 35," says Huller. But even that is a crapshoot, he says, because football players are more prone to injury than most other professional athletes and their salaries don't have the same guarantees. "The NFL player must plan such that whatever money he has now is all he's going to get; then if he gets more-great."
    How does Huller deal with such a potentially unstable client base? "From the beginning, our approach is to have our clients live off their net worth rather than their salary." Huh? "Let's say my player has a $10 million account. We distribute 5% for them to live on. If they can make do with that, they're usually going to be adding money to their account, so their payout goes up the next year." If they spend too much, then Huller lowers the payout. "In other words, we treat them as if they're already retired."
    That could work, you say, but what if the athlete is just starting out and doesn't have $10 million? "Usually they'll get a signing bonus up front. My rookies will buy a house, a car, maybe a few other things. Then they begin getting a salary and the nest egg comes pretty quickly. The 5% strategy preserves the wealth both for the client and the advisor."
    Do clients really buy this strategy? After all, being an NFL player with a multimillion-dollar contract is heady stuff. How does Huller keep the athlete's expectations under control and his portfolio on track? First, he sells them hard on the 5% concept. "We do a cash management plan where I plug into my spreadsheet their salary, bonus and income from marketing deals, and I show them how much their payout would be if they add money or take it away."
    Huller says he doesn't worry about losing the accounts of players who would rather live large than play by his rules. "Once a client gets used to the 5% payout and sees his account is doing well, he doesn't want to leave. He's got a comfortable income stream and his net worth is growing. At that point, he doesn't want to risk what he sees is working so well."
    The question is, can a strategy that works with NFL players work just as well with baby boomers? That's a question not only for advisors but for broker-dealers, too. "We want to help our reps think through this question," says Thuy Nguyen, assistant vice president of advisor services marketing for Associated Securities Corp., "because if it affects their income, it affects ours too." Associated's revenues come, in part, from $2 billion in assets under management.
    Yet, Nguyen's concern isn't as great as one might expect. "I've worked on the fee-based side of the business for nine years, yet I'm not completely committed to the notion that advisors should go completely fee-based or fee-only," she says. "When I was a rep, I looked at clients' insurance and other needs, not just their need for a managed account." Nguyen is an advocate, for example, of reps using variable annuities if they fit a portion of the client's needs because VAs will provide an income stream for both the client and the rep. "The advisor must diversify his own income stream," she says. "A rep who has moved to independent RIA status and disassociated with his broker-dealer has more of an issue because if his fees are entirely dependent on assets under management, he doesn't have a way to diversify his income stream."
    Nguyen recommends another strategy, as well: Outsource the management of your clients' assets to a third party, an institutional money manager, and use the free time to prospect for new clients. Associated helps its reps find these third parties (separate account management or mutual fund wrap programs), as do most other broker-dealers.
    In other words, say our sources, get more efficient and lower operating costs. And if your big clients are becoming small clients, no problem. Just go out and get more big clients. Isn't that what most advisors want in the first place?

David J. Drucker, M.B.A., CFP and an independent financial advisor since 1981, now writes, speaks and consults with other advisors as president of Drucker Knowledge Systems. Check out his practice management portal, Practice Lifecycle, at www.practicelifecycle.com.