Illustrations By Christophe Vorlet
Maybe I'm getting cranky in my old age, but I'm not the only one. When I talked with attendees at the IAFP's last annual conference in San Antonio, my usual opening question was: Which sessions have you gone to that were really good? This was not an idle activity. This year, the meeting featured seven educational tracks, which means a diligent attendee (which I try to be) could, at most, attend fewer than 15% of all the breakout presentations. I figured if I asked everybody I sat down with at breakfast and lunch, and everybody I met in the exhibit hall, and somehow worked the question tactfully into the dialogue whenever somebody came up to me in the hallways to tell me how violently they disagreed with my past eight columns, then I'd have a full inventory of all the great sessions I was inevitably missing out on, could buy the tapes, and would be able to at least experience the good stuff secondhand.
That was the idea. When I actually asked the question, however, the typical response was, "Well, I was kind of disappointed in the first one I went to, and I haven't seen anything much better since. So I was sitting here trying to figure out which tapes to buy."
The problem was not that there were no good sessions - I did, in fact, find a few - but that the best sessions were also the most lightly attended. Meanwhile, a surprisingly high percentage of the presentations turned out to be either dreadful, like a session on working with accountants, or merely lame, like one offered by Julie Lord, a financial planner who lives in Cardiff, Wales. Lord's talk, prominently featured in the pre-conference write-up in another magazine, was entitled "Expanding Your Practice Internationally." Yet somehow she managed not to discuss, ever, even once, any of the technical nuances of dealing with two or more different tax jurisdictions, or help in any way either the foreign attendees who might be confused by the U.S. investment world of annuities and mutual funds or the U.S.-based planners bewildered by other countries' superannuation and real estate trusts.
Lord confessed that she herself doesn't know a Roth IRA from a 401(k), and doesn't expect to have to learn. She believes that if you have a client who works in Bahrain, Hong Kong, or the United States, you should simply contract out the overseas tax and investment work to a competent professional in Bahrain, Hong Kong, or the United States.
The trouble, as Lord was the first to admit, is that it might be hard to find a professional you trust and respect in the host country - particularly if you don't speak the language or know anything about the local financial services industry's customs, procedures, and interlocking support structures. Since Lord presumably has some experience walking through this potential minefield, we were hoping for some direction.
Instead, her discussion, verbatim, was this: "The difficulty there, very often in dealing with people in other areas, is: How do you know them? How do you find them? How do you know they're going to be any good? How do you know you can trust them? Do they have the same sort of philosophy - investment philosophy, business philosophy, integrity - that you do yourself? Incredibly difficult to find exactly the kind of person that you can do business with. But nevertheless you've got to sell yourself to people. So here I am. I'm running my small little practice in Wales and I want to know who are the good guys in Canada. Who are the good guys in Mexico? Who are the good guys in the U.S., Belgium, etc., etc.? How are you telling me this? Do I know? Have you told me how good you are? Do I know this? This is the sort of networking that is very, very important in the international dimension."
The only useful nugget in the two-hour session came when Lord began talking about marketing yourself as an international consultant. How do you get started? She suggested getting your feet wet by finding out which companies in your local area are setting up offices overseas and sending executives to remote locations. Then you spend however long it takes to identify an advisor in the overseas location who knows the local tax laws and any special planning issues, get some prices for contract work, and then offer the company's human resources department an international planning service for those executives. It's a limited, but seemingly workable, marketing strategy.
As a follow-up, Lord suggested that as long as you're compensated by fees, you have a leg up on the international competition, which apparently has lagged behind the U.S. fee trend. "International executives are beseiged by salespeople," she told the audience. "You're going to offer investment planning? Fidelity does it. Merrill Lynch does it. People can buy stuff online cheap. Why on earth would they want you to look after their investment planning? Because you're going to not just do their investment planning; you're going to see how that investment planning fits in with the rest of their financial affairs. That's not what people like Fidelity and Merrill Lynch and so on are doing. Let's be a global general practitioner. Because there aren't any of them out there at all."
At the other end of the spectrum, the conference included two sessions that rank among the year's best. The first was a presentation by Greer Kendall, "The Power of Family Legacy Planning." Indeed, the session offered a surprisingly clear road map showing how to stretch ordinary financial planning into powerful new dimensions.
Kendall started by pointing out the obvious: that the Internet is offering many traditional financial planning services, including asset allocation, investment management, fund selection, and insurance. This, he told the audience, poses a fatal threat to traditional service providers. "If all we do is offer financial advice, if all we do is offer insurance advice, or asset allocation, or investment advice, or managed portfolios, the Internet will do that better than we do," he said. "It'll do it in the middle of the night when you and I don't want to take calls from our clients. And it will do it more cheaply."
He then suggested that financial advisors begin to offer services that are not easily delivered through a semi-impersonal medium. Like what? Kendall introduced the audience to what he considers the three most powerful words in the English language. The first was "family." "So much of what we all do in our own daily lives and in our practice, where we go, the places we go, it's all about the family," he said. "We live for the family. We love the family. We're passionate about the family. I don't care how wealthy any of your clients may be, if you want to talk to them about their family, they'll sit down and just start going on and on. You want to talk about the family, all of a sudden people are very passionate. They love to whip out their wallet and start showing you the pictures."
The second powerful word was "wealth." Roughly two-thirds of the remaining presentation revolved around Kendall's attempts to get the audience to take a broader perspective toward the concept of wealth, to see it not just as the balance sheet assets or the investment portfolio, which he called "financial wealth." "One of the problems in our society, in this profession and other professions, accounting, legal, you name it, is that we've all been party to letting people think the only wealth is financial wealth," Kendall said. "Because you know what? That's the only wealth I get paid on."
By this time, the audience was wondering what the other types of wealth are, but Kendall spent a little time exploring different ways of measuring financial wealth before moving on. The most obvious way is the traditional balance sheet, with which everybody in the audience was familiar. A second is what he called the "convert-to-liquid-cash" method, where you subtract the value of all the unrealized capital gains and early withdrawal penalties if you're under age 59 1 1/4 2. The third method he called the "when-you-die" method, which obviously involves estate taxes. And a fourth he termed the "Murphy's Law" method, which converts all assets to cash, then subjects the whole lot to estate/death taxes. "As you take people through these four methods of calculating net worth, their eyes really begin to open," he said. "They realize they're not worth anything close to what they thought they were."
From there, we began our tour of Kendall's more open-ended definitions of wealth. "Social wealth," he told us, "is how we relate to the world around us. Social wealth is what we believe about our responsibility to live in the world and to benefit our fellow man. It's our involvement with charities. It's our involvement with other people. It's how we spend our free time when we go places with friends. It's how we relate to the world. It is just as significant," Kendall argued, "if not more significant, than our financial wealth. Social wealth is more complex, though. It's moderately personal. Not well defined, typically. It is more difficult to discuss and yet is very important."
This, finally, began to relate the talk back to the opening gambit about the Internet. Kendall suggested that the Internet is not well suited to addressing areas that are more personal than how to allocate an investment portfolio, and yet clients are increasingly interested in more personal service. "They've identified their financial wealth," he said. "We begin to identify their social wealth. Who and what do you care about and why?"
More personal still is personal wealth - which Kendall defined as a client's personal experiences and life wisdom. "Personal wealth is what makes up who we are at our cores," he said. "Our convictions and values. Our beliefs. It's the sum total of the experiences of our life." How would you begin to get a handle on that? Kendall offered some questions that he asks his clients: Tell me about yourself, your life, and your experiences. Tell me about your parents and your grandparents. Tell me where you came from. Tell me about your childhood. Tell me about some of the successes. Tell me about some of the mistakes you've made. Tell me what you've learned over your life. What do you care about? What really chaps your hide when you read the morning paper? What really motivates you and excites you?"
By making the distinction between the various kinds of wealth, financial advisors can offer a much more powerful service than what passes for financial planning today. "You begin to say to people, I'm not just your financial advisor," Kendall said. "I'm a family advisor. I'm a legacy consultant. I'm here to evaluate all of your wealth."
This introduced Kendall's third powerful word, which is "legacy." Kendall offered the oft-quoted line that peoples' greatest fear is not extinction, but extinction without significance, or (to put it in less lofty terms) the awful feeling that they haven't made much of a difference in the world. Planners who help their clients influence the world, he said, will have virtually unbreakable relationships and be immune from the competition of the Internet.
The second great session brought Chip Roame of Tiberion Strategic Advisors and Mark Tibergien of Moss Adams LLP to the podium. This was one of those rare instances where two speakers have complementary backgrounds; Tibergien has become the person to see when you're trying to put a value on your financial planning practice, and Roame, who worked in strategic planning at the Schwab organization, is a consultant who helps advisors position their practices for sale. "Clients are voting to put their money with fee advisors and financial advisors," he told the group. "Everyone knows that." As a result, he said, it's only a matter of time before larger financial services organizations begin purchasing planning shops as a way to buy client relationships.
That may happen a few years down the road, but it apparently isn't happening yet. Roame's explanation is that the financial services arena still has a lot of consolidating to do at the top. He noted that the U.S. currently has 9,000 banks, compared to five or six in most other developed nations. Banks and brokerage firms are merging their operations, and Roame expects the larger insurance firms - which have more assets even than the banks - to start making significant purchases in banking and brokerage early in the next century. "The whole financial services world is consolidating," he said. "But we have a long way to go."
If you want to position your firm for sale, Roame suggested, then you might look at the view from the other side of the table. This led to a discussion of what United Asset Management did wrong in its consolidation of money management firms: 1) it purchased managers who focused on defined-benefit business - a stagnant business model; 2) it made the mistake of purchasing 100% of the acquired firms, leaving no incentive to the former owners to continue managing for profits and growth; and 3) it never sought operational synergies in the acquisitions, which meant there were no cost savings.
Consequently, if you're negotiating with an outside buyer or consolidator, then you should look for these factors. Roame expanded a bit on the subject, saying he'd ask about cost synergies (eliminating duplicative overhead), revenue synergies (where one acquired firm can cross-sell services to another), and what's called p/e multiple lift (where firms with more revenues tend to command higher p/e multiples). He would also find out how the company intends to take its operation public, a subject that Tibergien picked up on later in the talk, when he discussed terms of sale.
Tibergien thinks that, right now, there are far more prospective sellers than buyers, which, if you read your Adam Smith, means that financial planners are not in an ideal negotiating position. And they probably won't be until the financial services giants have finished merging with each other and finally turn their attention toward the small planning shops growing like grass around their feet. In addition, he believes that many financial advisors confuse their take-home pay with free cash flow; that is, they don't consider that an acquiring firm would have to pay somebody to do what they do. If that uses up all the free cash flow (if the new advisor would be paid roughly what they're making now), then the practice isn't going to be very valuable, no matter how high a multiple you put on it.
If there is a grand industry roll-up, then it may take the form of a company that plans to go public. Tibergien advised the audience to think about the fact that part of the compensation they'd get for their firm would be in the form of stock in a closely held business that might go public one day. "You have just made the decision to invest in another business," he said. "Is this an investment that you'd recommend to any one of your clients? Are you willing to take that kind of a risk?"
At the ICFP's final national convention in Dallas last summer, there were a considerable number of IAFP members who came to check out the "other side" that would be joining them in the upcoming consolidation of the two organizations. So it was probably not surprising that the IAFP meeting attracted a fair number of people with the CFP designation - which may explain why this was the organization's best attended convention of the 1990s. The ICFPers, who tend to be culturally suspicious of corporate-sponsored events, got an eyeful at the opening reception, when scantily clad women handed out Corona beer to attendees, courtesy of the Invesco organization. Another commercial moment came the following morning, when it was announced, to great fanfare and applause, that ING Berings had sponsored the opening keynote address by former British Prime Minister John Major. According to strong rumor, Major was paid $50,000 for his hour on stage, and many of us regulars were expecting something that has become depressingly common at financial planning conventions: a highly paid speaker who is absolutely clueless about who financial planners are and what they do for a living.
Happily, we were wrong. Major is not only a highly polished speaker, but also an astute observer of world affairs. He started off with a nice one-liner, thanking ING and the IAFP for inviting him, and the British electorate (which elected his opponent in the last election) for making it possible for him to attend. Then he told the audience that few international investors are focusing on what he considers to be very clear international economic trends. "Today," he said, "five countries - Russia, Brazil, China, India, and Indonesia - have one-half of the world's labor force and one-twelfth of the world's economic output. In 25 years, and probably less, their share of world trade will double." These five countries now generate roughly one-third of the volume of international trade of the European Union. In two decades, at present rates of growth, they will have between 1.5 times and two times the European Union's share of world trade.
Stepping closer to home, the former British prime minister talked about some of the opportunities in Euroland, where Germany is pushing its economic influence eastward, where France has emerged as the swing vote in discussions of how to implement the economic union, and where everybody has basically fumbled away an opportunity to ce-ment democracy and capitalism into the Russian society.
Major, over time, sees the European Union taking hold all the way to the Russian border. "The present union will grow from 15 nations to 25," he said. "A group whose GDP is already larger than that of the U.S. will be significantly larger." Its currency will rival the dollar, and merged corporations will emerge as tough global competitors to U.S. firms. Meanwhile, Major expects to see Kosovo, Albania, and Macedonia, all with large Muslim populations, to form closer ties with or even merge with Turkey, recreating the old Ottoman Empire. "We will eventually realize that not allowing Turkey into the European Union, even though it is a NATO member, was a significant long-term mistake," he said. (At an early December meeting, the EU voted conditional acceptance of Turkey into the group.)
Major also appealed to the audience to raise its political sophistication, and to expect more from our political representatives. "Too often, policy is driven as a child of sound bites," he said. "And that drives us to seek simple solutions to complex problems. Politicians today play back to the electorate the views their pollsters have discovered that they hold. But policy made by focus groups can go badly wrong."
Interestingly enough, one of the other keynote presentations, by Michael Gerber (author of the E-Myth books), brought us all back to the Roame/Tibergien talk, when Gerber had everybody in the audience look at their practice and write down the words "Where's the equity?" "There's one reason, and one reason only to create a company," Gerber said. "To sell it."
Gerber offered a sometimes funny, sometimes poignant discussion of how entrepreneurs tend to get lost in the creation of their own businesses. His description of how a would-be entrepreneur hires an assistant, and then begins throwing some of the work on his desk over his shoulder, burying her in work, and then advises her to hire an assistant when she complains, and then eventually the chain goes out to 20 or 30 people, was one of the funniest, truest depictions of the haphazard growth of the profession that any of us had heard in a long time. Most readers of this magazine have probably read Gerber's books, however, and there was really very little new in his presentation. Gerber also had an unfortunate tendency to yell at the audience, and seemed to think that we were unreceptive to his message. It was one of those sessions where you give the content an A, and the delivery a C-minus.
This is the last IAFP convention - ever. However, the new Financial Planning Association will feature an annual convention that should not be very different from what longtime convention attendees have come to expect: more sessions than you can possibly attend, extremely long walks through very large buildings to get to the meeting, more exhibitors than you can possibly visit, and a sense that you're somehow, for a short time every year, in the heart of the real world of financial planning.