A small staff and big profit margins built from retainer fees make Resource Management Inc. stand out.
Dazzling profit margins, a tiny but highly seasoned
staff, and personal service that has included negotiating for the
presidents of companies traded on the New York Stock Exchange and
families with $100 million estates; frankly, that's just the way the
two partners in Resource Management Inc. plan to keep things. This is a
firm that likes to be on the front line with clients, providing
hands-on services and counseling that goes far beyond investment
management. And they do it all on retainer, steering clear of
asset-based fees they say would cloud their judgment in making
financial decisions that best serve their clients.
How good are the two partners? "Randy (Waesche) sits
on my board, he's executor of my will, he's trustee of all the kids'
(legacy) trusts. There's nothing of substance I don't run by him," says
Joe Jaeger, president of New Orleans-based MCC Group, an heating and
air-conditioning company with operations in three states that generates
revenue of $200 million. When Jaeger, a plumber, was recruited out of a
union shop 15 years ago to run MCC, the firm had revenue of only $20
million.
Jaeger has worked with Waesche ever since he left
his union plumbing job for MCC. He credits Waesche and Resource
Management Inc. with being his touchstone, and
setting up succession and estate plans for his sons and family, using
one-on-one and family counseling whenever necessary. "He has fully
integrated my business and estate plans," Jaeger says. "I can't say how
invaluable that is to me and my family in terms of the future."
While Jaeger credits Waesche and his insightful
analysis with steering him right in numerous business deals, including
real estate developments, hotel acquisitions, major oil and gas
investments and venture capital deals to launch friends and former
employees into business, he admits he hasn't always listened to the
advisor who has long since become his friend. "I still have a funny
letter Randy wrote me telling me not to get involved in a Hollywood
production company, and accusing me in a nice way of having acting
ambitions. Unfortunately, I didn't listen to him," Jaeger says. And
yes, he adds, the Hollywood production company tanked.
Doing repetitive financial, asset and estate plans
is not what RMI is about. The partners are not looking for a
cookie-cutter approach to planning or clients. RMI's 325 clients each
average $2 million to $3 million in assets under management with the
firm (though client assets can range from $1 million to $50 million).
The more complex the client situation, the more the two RMI partners
rise to the occasion. "We have a low threshold for boredom," says the
56-year-old Waesche, a CFP licensee. "We refer to ourselves as
financial problem solvers. The bigger the problem, the more we like it
to solve it. We tell clients: 'If it touches on money, call us.' If
they ask us if it's in their fee, we say: 'We'll tell you next year.'"
As we spoke, Waesche was preparing to begin his
hands-on succession planning sessions for a wealthy Connecticut family
reduced to squabbling. The father, who owns seven high-end jewelry
stores, is retiring. Two sons in their fifties will succeed him, but
exactly how existing conflicts will be resolved and what it will mean
to the brothers, their respective spouses and children is what Waesche
has been hired to determine. His first-year retainer fee is $25,000 and
does not include investment management or legal fees.
While other advisors with advanced practices aspire
to build a firm where they can operate more as the wizard behind the
curtain, letting junior staff they've cloned work to service clients,
this is not RMI's approach. "When you hear about what some other guys
are doing, it's clear they're looking to build a machine. We're really
not interested in that," says 46-year-old partner Michael Zabalaoui, a
CFP and CPA, who has been with the firm since 1984.
Zabalaoui took over the reigns of founding partner
and seminal financial planner Judith Cowan Zabalaoui, his mom, who left
the firm in 1988 to care for aging parents. She was the one who created
the firm as a sole proprietor in 1974. Waesche, who got his CFP license
in 1977, heard about Judith from his wife, who had seen her interviewed
on a morning TV program. He called Judith, they met and decided to form
a partnership that year.
Judith Zabalaoui, Waesche and, for the past 22
years, Michael Zabalaoui, are generally credited with being what Marv
Tuttle, the executive director of the Financial Planning Association,
calls on "the bleeding edge." It is a term he uses to capture RMI's
pioneering vision, which included being among the first firms in the
country to transition to fees in the early 1980s, says Tuttle and
longtime planner Richard Wagner, past president of the Institute of
Certified Financial Planners (ICFP), the predecessor of the FPA.
"I've known Randy and the firm for the past 15
years, since he was on the board of the ICFP (Tuttle's former
employer)," Tuttle says. "He's probably one of the more creative and
innovative practitioners out there. He sees opportunities where,
frankly, not everyone does."
While the firm is probably one of the most profitable today, a result
no doubt of it's tiny overhead and upscale clientele, that wasn't
always the way, especially when the decision to do away with
commissions caused what Waesche terms a "palace revolt."
"We just thought, if we're going to move this
profession forward, we have to get away from transactional-based
commissions," Waesche says.
In the '70s the firm charged commissions, then moved to a commission
and retainer structure. In 1983, the partners proceeded with their
plans to go fee-only, charging retainers almost exclusively. The
immediate fallout was disastrous.
"We had seven planners working for us and they were
in an absolute uproar when we told them. A month later, Judith and I
did a keynote speech together at an ICFP retreat in Ogden, Utah. When
we came back, all seven planners had left and we were stuck with the
debt and infrastructure. It was very costly to us. It's a funny story
now, but it wasn't at the time," Waesche says.
The next few years were lean ones for the firm.
"Frankly, in the early days our spouses were supporting us. It took me
six years to bring in a real paycheck. No one had heard of financial
planning," says Waesche. When the entire planning staff left in 1983,
"we had to go back and beg forgiveness from the supportive spouses, and
they didn't give us a lot more time," he says wryly.
Still the planners stuck to their principles. "We
thought, if we're really going to start again from scratch, what can we
do to make our lives a little easier? Let's at least work with folks we
like, who challenge us. That's when we started taking on closely held
business clients," Waesche says.
Of course, none of that happened without a test of the partners'
resolve. Every town has one of those big, splashy plaintiff attorneys
who are on TV all the time. "Well, the one in our town came in to the
office and we hadn't made the rent that month. Judith and I looked at
each other and said, 'We just can't.'"
Today, the firm has two partners/planners (Randy and
Michael), three administrative assistants and a floater who comes in to
do filing. Waesche and Zabalaoui say that finding likable clients is
key to making retainer fees work. Why? "If you don't like your clients,
you're going to hate their referrals," Waesche says.
For Zabalaoui, retainer fees are key to attracting
the complex family and business the planners like to deal with. "For
us, it's stimulating and it's challenging. It gives us the opportunity
to work with folks who can create those challenges and that's what
really excites us. That goes far beyond investment management, so an
asset-based charge would not make sense."
It's not that RMI doesn't do asset management. In
fact, the partners use a team approach to screen for fund managers who
beat their benchmarks. Their favorite portfolios include names such as
Brandywine Blue, Dodge & Cox and Thornburg International Value.
But the real question is how does this
Metairie-based advisory firm succeed with retainers where so many
others have failed? And why, when slapping a percentage on the assets a
client brings in the door is the industry norm, would RMI choose to do
things so differently?
Today, RMI's 325 clients pay an annual retainer fee
of between $5,000 and $10,000. First-year fees can range as high as
$25,000 or even $50,000 if a client has a complex situation (such as
business, succession and/or estate planning) to resolve. But annual
fees are almost always reduced in subsequent years, unless other
intricate planning challenges arise, Zabalaoui says. "Finding
interesting clients doesn't always mean that they'll have a lot of
liquid assets," he says."
As important, Waesche says, "Retainer fees position
us, I believe, to be more inclusive and objective. If bond yields are
low, I can tell people to pay off their mortgages. We don't have to
hesitate because it will take assets out of our revenue stream. We can
tell a client to buy a building out of their liquid assets. Their use
of capital has to be in their best interest."
Zabalaoui, who for many years has been doing two
stock market and economic news broadcasts per day for National Public
Radio's All Things Considered, says the other issue they have with
asset-based fees is one of ethics: "The assets are growing, the work is
diminishing and the fee is going up. I have a problem with a fee that
is rising, when hours and commitment of work are dropping."
Anything can sound convincing if an advisor sells it
right, but are these guys sincere? Would they really hand off asset
management to another advisor if it made sense to the client? The
answer, astonishingly, is yes.
Case in point: RMI was hired by a Minneapolis
couple, first-generation wealth creators, to sort through a
number of delicate planning issues surrounding a $100 million estate.
The company wanted to create a charitable foundation and distribute
some money down to four adult children. "We were engaged to tell the
kids that a large part was going to charity and they were getting $10
million each," Waesche says. "As we created a $60 million private
foundation, we put each of the kids on the board so they would
understand the purpose and functionality of what their parents were
trying to do."
As for their inheritances, Waesche asked them if
they wanted to separate or pool their money for investment purposes.
They decided to pool it and the result was a perpetual (Alaskan
Dynasty) trust that will trigger no taxes. "Now they meet twice a year
to decide on investments and charities," Waesche says.
Waesche's fee? A hefty $35,000, still measly
compared to the $150,000 annual fee even a 0.15% asset-based charge
would have generated to manage the $100 million. He remains on retainer
to the family, but decided against asset management.
"We positioned their advisor to take on all of the management because
it was the right thing to do. He was there on the ground, which is what
the clients wanted. Who else would have let the money go?" Waesche asks
rhetorically.
The firm's finesse in resolving contentious family
and business conflicts is due to both partners' years of practice and
finesse. "We're brought into situations where a sibling is saying: 'I'm
working harder than you!" or 'You're spouse is in our business and
she's disruptive.' In a family business worth $50 million, those issues
are magnified," Waesche says. "So we'll set up a family counsel,
determine family dictates for who should come into the business,
discuss the forces that interfere and walk everyone through the
process, so there is understanding. Then we'll pull it all together in
a document."
Maximizing the goals and ambitions of the parties
involved in such endeavors is what the partners at RMI do so well, says
Richard Wagner. Today he is the president and founder of the fledgling
Integral Finance Center (www.intergralfinance.org) in Denver. Wagner
credits Waesche with helping him find all of his original partners for
the firm that became Sharkey, Howes, Wagner & Javer.
Then when Wagner decided he wanted to pursue a more
holistic, integral approach to planning, he again enlisted Waesche to
help dissolve his part of the partnership. "It was in essence divorce
to the power of three and Randy made it happen amicably," Wagner says.
"He's my friend. He also takes a value-driven approach to servicing
clients and helping them decide how their money fits into life
decisions. I think he's done this to the point of being enviable. I
really don't think they have any competitors."
Of course, no advisor and no advisory firm are
without challenges. Both Zabalaoui and Waesche are extremely gun-shy
about bringing on advisors, dating to when the seven planners quit in
one day as a result of the firm's transition to fees. They admit their
reticence to staff up may get in the way of their growth, maybe even
forcing them to shed less profitable clients as they bring on top-tier
ones, but say they are satisfied with their staffing at this time.
Geography is also not necessarily on RMI's side.
They're located in the wide-spanning flood zone of New Orleans, and had
to threaten a lawsuit to get back into their second-floor offices a
month after Katrina hit. Members of the firm experienced varying
degrees of flooding and are understandably shell-shocked from the
experience. As a result, they are beginning to investigate
opportunities for expanding their business into areas where they
already have several clients (North Carolina and the gulf coast of
Florida). "There are still plenty of opportunities in New Orleans.
We're not leaving, just considering expansion options," Zabalaoui says.
It's more of a hedging strategy, because frankly, as long-time
assistant Petra Smith and office manager and assistant Susan Halsrud
say, the levees in New Orleans are not repaired, the
drains are not working and it's supposed to be a bad storm season. "I
think everyone is nervous about the future of New Orleans," Halsrud
says. "There are so many people sitting on the fence, waiting to see
what happens and what the government does."
Of course, expansion may require adding a planner or two, something the
partners have not done for more than 20 years. "I don't blame them.
It's not an easy thing," Wagner says. "You're essentially training your
competitors."
And that is not likely to happen at the
family-oriented firm, where Waesche says his college-age daughter, who
studies economics and finance, is interested in joining the business.
In addition, the 30-plus-year planning veteran already has his 12
year-old twin daughters come in to file and answer phones.
Family succession has worked so far, and the partners are betting that their winning streak continues.