Road To Independence

2010 is starting off with a bang! In fact, January may be my best month since I started down this “road to independence” just under three years ago. Moreover, income now exceeds expenses with some left over. Why has it taken almost three years? When your business is “fee-only” it takes much longer to get your income to the point where you can earn a decent living. Although it’s a slower, longer runway, once the plane leave the tarmac, the ride is great.

To digress a bit, it reminds me of a time back in mid-2001 when I left the brokerage firm where I worked and moved 1,651 miles away to run a bank subsidiary in the Northeast. This particular bank had 18 branches spread over two states and the subsidiary was established to provide financial planning and investment management services. As principal, my responsibilities ranged from managing personnel to growing the business to working with clients. I remember how long it took to get our income to the point where it covered our expenses. We did receive some commissions but most of our business was fee-based asset management. We also had an excellent referral network. Each branch had a monthly quota for referrals to the subsidiary. In fact, I remember a few months when we received as many as 80 referrals! We increased assets under management from $3.5 million to about $28 million in slightly less than two years. When I resigned, our recurring income was just about enough to cover expenses. Needless to say, I do not have such a referral network now and hence only receive about 8-12 referrals per year. Since my business model is “fewer clients with more wealth,” that works just fine for me.

Although I wasn’t aware of it at the time, a great conflict of interest exists in a banking environment. Banks thrive on deposits and bank brokerage operations thrive on gathering assets. When banks lose deposit money, even if it’s to their brokerage operation, it reduces the bank’s lending activity. The other day I was speaking with the president of a local bank who told me he was looking for an investment person and listed several qualifications. Some of the items on his list included: an existing book of business, a self-starter, etc. One of the items on his list was a person who wouldn’t take deposits away from the bank!

Oh how I love being an independent advisor!

As I approach the end of my third year as an independent RIA, I am very glad to have made the decision to leave the security and culture of the banking and wirehouse world. When I reflect back to my first year of independence, there were many bumps in the road. Establishing an infrastructure, settin my pricing, and clearly defining my offerings were only a few of the items on my plate during that time. I also had to bring in new clients while balancing on a financial tightrope.

Yes, there were a lot of decisions to make that first year. After the end of my second year things were better, but my income was still not adequate. Today, current income is not only sufficient to meet our business and personal expenses, but there is also a small surplus. One of the next items on the agenda is to start a health savings plan. Then, in a year or two, I hope to have a full time assistant and a retirement plan. You have to crawl before you walk and walk before you run. I think I’m walking pretty well now. However, to accomplish this I will need a few more clients.

Fortunately, over the past few weeks, I’ve received three new referrals. Why? Partly because I’ve asked for them. As I go through the client review process, I am incorporating the question, “Do you know of anyone who could use the services I provide?” If they do, I give them some business cards and the rest is up to them. I have also created a tab in ACT! on which I keep a record of the referrals I receive. The tab includes the name of the referral, the date of the referral, the result of the referral, and whether I have sent a thank-you to the referring party.

Referrals are very important, especially if you don’t want to spend a lot of time with seminars or cold calling. Generating business from referrals allows you to spend more time serving clients and not ‘shaking the trees’ for new ones. All of my clients have come from referrals or people I have met over the years. Moreover, referrals are the best source for new clients. If your focus is on satisfying current clients you can be assured that your pipeline will always remain full.

Operating an advisory business is a little like hosting a radio talk show; you never know what question or situation you’re going to encounter. Both require a broad base of knowledge or at least a quick reference to the answer, as no one can possibly know everything about every issue. If your business model is strictly investing clients’ money, you must stay abreast of the markets and the multiplicity of investment vehicles, an area which is ever expanding. However, when you add financial planning to your offerings, and comprehensive planning at that, you add a layer of complexity which can challenge the most astute advisor.

One more point to make. If you do not engage clients in financial planning, and you work for a company that has a “back office” for selecting investment choices, then your load may be slightly less, that is, if you aren’t under constant pressure to continue bringing in new clients. Enough ranting, let’s move on.

This week, I received a referral from a current client. This referral had engaged a nationally recognized company to prepare a financial plan for him and his wife. They said it would take about two weeks to complete. Two weeks later, no plan. Explaining that there was a slight delay, they assured the client that it would only be another couple of weeks. Two weeks later, still no plan. It was at this point that the client bid them a not-so-fond farewell. Now this client is engaging me to do what this other firm was hired to do. Without divulging any personal information, let’s take a look at what’s different about this situation.

First, I live and practice in a community property state. Moreover, the local market is not a hub for company executives. Hence, we don’t see a lot of executive benefits programs here. Therefore, when I encounter a new client from another state, I must become familiar with the nuances of the case. I must learn about the tax structure of the state and consider any effects that might exist on estate planning, etc. In this situation, the client hails from a common-law state. Since I practiced in New Hampshire for several years I had a familiarity with this.

The client also has stock options. I have done a lot of work with clients’ stock options in the past, both non-qualified and ISOs, but I have forgotten much of the details since I haven’t worked with these in a while. Therefore, I had to bone-up on the specifics of each. With tax hikes on the horizon, making good decisions on when to exercise these options is even more crucial since NQs require that you claim the portion that’s “in the money” (assuming you exercise the option) as regular income and pay Social Security and Medicare taxes as well.

The fact that each situation is different is one of the main reasons why I love this business. It’s never boring!

With 2009 behind us and a New Year and decade ahead, I’d like to take a moment to reflect back on the last few years to say “thank you” to some special people.

In my younger days, I thought my success or failure would depend solely on my effort or lack thereof. I reasoned that if I worked hard and learned everything I could that would be enough. Sure, those things are important. They are in fact, vitally important. But to be successful, I believe you must have the help of others.

When I ventured out on my own in April 2007, I had plenty of help. A local attorney sent me a few referrals, as did an accountant. Then there are the referrals from satisfied clients. People like to help other people and it’s especially rewarding to know that they respect your work and you as a person.

Again, to be successful, you must have the help of others and it is in this spirit that I’d like to say “thank you” to a few people to whom I owe a debt of gratitude. I should mention that this list is not in order of importance nor is it entirely complete as there are others I could include. Here’s the list:

My wife Kitty: Her love and support was instrumental in my decision to leave the corporate world and become an independent advisor. Even when I waivered she held steadfast in her belief in me. I am so glad I listened.

Jamie Green and Investment Advisor Magazine: Jamie afforded me the opportunity to do something I truly love to do; write. I am excited about the future.

Readers of IA: Without whom I would not be writing, thank you!

Matt Schifrin and Forbes.com: Thanks for the opportunity to write for you as well.

The Greater Baton Rouge Business Report (local publication): Thanks for knocking on my door and quoting me in your publication!

My Clients: Thanks for the trust and confidence you have placed in me. I do not take this lightly.

TradePMR: Thanks for a great platform on which to operate my business. I’m looking forward to many years together.

My Fellow Advisors: It is the collective thoughts and ideas of all of you which make our business great. Keep on doing what’s best for the client!

God: Thank you for leading me down this path. It’s been a great adventure!

To everyone else: Have a great 2010!