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 likeĀ 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.