Road To Independence

I’d like to ask you a very important question. Here it is. What’s the difference between you and your competition? I know you’ve been asked this many times before, but think about it for a minute. Your answer is a significant factor in determining the perception you create in the mind of prospective clients.  When I worked for a large brokerage firm, we were taught to craft an “elevator speech.” In other words, if you found yourself in an elevator with someone, and they asked about your vocation, you would have a brief moment to recite just the right words to make them want to hear more.

So how did you answer the question about your differentiator? Did you say something like, “I have superior investment acumen?” How about, “I do comprehensive financial planning.” A lot of advisors would answer this way. Differentiating yourself can be a very difficult task, especially if you work for a large brokerage firm with thousands of other advisors who talk alike, dress alike, and act very similar. If you are an independent advisor, you have a much greater opportunity to distinguish yourself. And distinguishing yourself from the rest of pack is so very important. I’d like to share a brief story and discuss something I am doing to accomplish this.

Very recently, I met with a client to review his portfolio. Somehow the subject came up as to how I compared to his four former advisors. His answer was very complimentary. He said that what I am doing for him is so far beyond what his other advisors did that there was no comparison. I was pleasantly stunned. Here’s some of the reasons for his statement.

Currently, I have a couple of initiatives on the plate. The first is eVault, where we securely store the client’s important documents, and the next is called a Master Inventory List. I have written about eVault before so I’ll spare you the details.

The Master Inventory List is a document which contains information on every asset and liability of a client. It also includes the institution, the contact person’s name, address, and phone. Think about it. The client will have, perhaps for the first time in his or her life, a detailed list of every asset and liability and who to contact. In the event of death, this will prove extremely helpful.

In short, these initiatives are helping me differentiate myself from the competition. What would my elevator speech sound like? Well, it would probably include language on how I help clients get organized and simplify their lives, something they are all too eager to do.

Most of us view life from our own unique perspective. We make decisions based on our experiences and education and sometimes our intuition enters the picture. Last week I had a conversation with an independent advisor who related an interesting story to me. Although I have pondered this issue a number of times before, something clicked inside me this time.  Here’s the story.

It seems this advisor was being recruited by a manager of a regional brokerage firm. The manager told this advisor that he would no longer have to worry about paying his own expenses and that he would have the full support and resources of the brokerage firm behind him. To the manager, it seemed reasonable that this independent advisor might find the offer attractive. But to a person who has tasted independence and has found success there, accepting this manager’s offer would be akin to taking a step backwards.

What was really interesting was when the advisor told this manager that he was already receiving a 90% payout. The manager just stood there like a deer in the headlights. Was it possible that this manager was unaware of the higher payout of an independent? Then it hit me. I remember when I worked with a large brokerage firm many years ago. I knew what I was told. I drank the Kool-Aid, so to speak.

For example, they would pay the same commission on every product of a particular type, even if these products paid different commissions. They call that a haircut, but I didn’t know any better. Then I joined a regional firm that had a slightly higher payout. Later, I joined an independent broker/dealer with a 90% payout. Wow, 90%! I didn’t know that was possible. How could they survive on only 10%? Now, as an RIA, I receive a 100% payout.

For those who are currently working in a wirehouse or bank system, pay close attention as we do a little math. Let’s say you could transition $10 million of your current book if you became an independent advisor. Further assume you receive a 90% payout and your average velocity (the average percentage you receive on assets) is 1.00%. You would gross $100,000 in the first 12 months.  Could you live and run a business on this? If you had $20 million, you would receive $200,000 a year.

The point is that at some level of assets, you could very easily pay your own expenses and realize a much higher personal gross income. Besides, you would also be building a business which would someday provide you with a very nice retirement. Are you ready to sacrifice the gold watch? Once you taste independence, you’ll never want to go back.

Over the years there has been a great deal of discussion pertaining to the topic of determining a client’s tolerance for assuming risk. Questionnaires abound as advisors seek to understand this most abstract of topics. How much risk is a client willing to assume? That depends. Is there a questionnaire that will provide advisors with an absolute answer? Perhaps, but I have never found it. That said, we still have an obligation to our clients in this area.

I had an interesting interaction with a particular client during a recent account review that I’d like to share. When I first met this client earlier this year his portfolio was 100% in cash. He filled out the obligatory risk questionnaire and his profile matched that of an aggressive investor. In fact, one of the questions asked what he expected his portfolio to return over the next five years. Guess what his answer was? 10%+! That raised a red flag for me. I was obviously concerned that his expectations, especially after what transpired in 2008, might be a little over the top. I was also curious how a person with 100% cash was bullish enough to expect to average more than 10% over the next five years. We have since talked about it and his response made it clear to me that this was not going to be an issue.

Many people believe that because of the horrific decline in the stock market we’ve experienced  investors will be more fearful for quite some time. While I believe this may indeed be the case, it may also be short lived because the markets have risen so dramatically since their lows in March. It’s true that when stocks are soaring, investors get greedy and when stocks are sinking, fear takes over. The point is that accessing a client’s risk tolerance today would yield a very different result than in late 2008 or at the height of the bull market in 1999. Investors’ risk tolerances clearly change based on their expectations, which in turn are based on their emotions at any given moment.

Since an individual’s risk tolerance is such a fluid topic which changes with prevailing market conditions, we, as advisors, need to reassess it on a regular basis.

Recently, I spoke with a friend who left a large bank for another large banking/brokerage operation. He said he felt like he needed to be aligned with a “name-brand firm,” so he chose to move to well-known company. At one time, I felt exactly the same. At one time, I wondered how anyone could ever make it as an independent. I could envision the client saying “You work where?…Never heard of it.” I thought it would be extremely difficult to gain clients and make a good living unless I had the support of a big-box firm behind me.

Now, I hold an entirely different view. I recognize that, to some clients, a “brand name” is important and always will be. I also know that to some, an independent advisor is far preferable. Though I don’t have any stats to back this up, I suspect the independent advisor has gained market share over the past decade.

Why would anyone want to work with an independent advisor? I suppose the answer lies in the question itself. Independent! Why would anyone want to work with an advisor who didn’t have to answer to corporate management or stockholders who clearly have conflicting interests? I won’t even answer that one.

Yes, life as an independent is as good as it gets. Freedom, control over your business, building equity in your company, no political posturing as is found in large corporations. Just you and your dreams, and your clients and their dreams. Now can anyone tell me the downside of that?

This week, we continued to roll out our eVault. (By the way, “eVault” is not our trade name, in fact it is already being used by another company.) It is our way to help clients simplify their lives and when you can do that, you will do well. To learn more about my electronic document storage system, please read my recent post here.

I am also updating my financial planning tool to include a few pages on exactly how a client’s estate would be distributed in the event of death. It will also incorporate past taxable gifts so they can easily see if they need to reduce the inheritance of any heir (assuming they want to be as fair as possible).

Yes, life as an independent is great. Now I ask you, could you create an eVault or modify your financial planning tool if you worked for a large corporate conglomerate?

I rest my case.