Photography By Robert Burke
Seems like planners have never had it so good: Clients' soaring salaries are producing more investable capital, valuable options are being handed out like candy at start-up companies, and wealth is being transferred to the next generation at an unprecedented pace, thanks to better estate planning and more liberal inheritance tax laws. And the frosting on this already tasty cake is that the leading edge of baby boomers is nearing retirement, a point in life when practically everybody needs competent professional advice.
But too much of a good thing can be as bad as not enough, warns Kevin Condon of Baltimore-Washington Financial Advisors (BWFA) in Ellicott City, Maryland. "The demographics for our industry are fantastic," Condon agrees, "but the question is, are we as an industry prepared for the tidal wave that is going to hit us?" His answer is no.
That might seem like an odd answer from someone who last year celebrated his firm's 34.7% increase in income from investment management fees, and someone whose aggressive aim is to have assets under management triple over the next two years, from $65 million at the end of 1999 to a targeted $200 million in 2002. But Condon believes that a majority of companies lack the infrastructure and/or the personnel to cope with the flood of new clients, new assets, and new challenges that are already beginning to wash ashore. "If you are trying to maintain a comprehensive relationship with your clients and you don't have the systems in place to manage your growth, you live under the constant terror that the whole thing is going to collapse and wipe you out," says Condon. "You can't keep up with the demands on your time, and you may make major errors that will cost you in litigation."
Planners caught in this trap have but two viable choices. "Either you begin to simplify brutally, which means you cut out the things that make your practice a comprehensive service and turn it into just an investment management service," says Condon, "or you go in the direction of doing everything for your clients but restricting the number of them you can accommodate." Either way, growth soon becomes self-limiting.
But BWFA thinks it has the solution. Condon and his colleagues are developing what they believe is the first full-scale financial planning application of Lotus Notes for small, independent planning firms. He is the first to admit that Lotus Notes is expensive and may seem like overkill for a small company. Indeed, it was developed for large corporate conglomerates that require instant online compatibility among different departments at multiple work sites, and practically all of its 33 million work stations are located within major corporations. But for Condon, that power is precisely the attraction: "The capabilities of so powerful a platform will be increasingly needed by smaller planning firms that seek to compete with the 'big guys' in the highly competitive 21st century."
What makes the program so great? In a word, communication. Lotus Notes will enable planners to meld together all the information about a client that is currently dispersed among programs that can't "talk" to one another - in tax software here, in portfolio management program over there, in financial planning applications somewhere else. Other bits and pieces may be in e-mail programs, a calendar, or to-do lists - all of which means more juggling between programs and more re-entering of data, more opportunity for error and more wasted time. "The more pieces that don't talk to one another, the bigger problems you've got," says Condon. "Notes offers the capability of interfacing with and extracting information from a variety of different software, so that we can manage the entire client relationship from within Lotus Notes." The program won't replace the specialized software used for portfolio management or other specialized tasks; instead, it will link the programs together and provide a command central where all the information about a client is pooled in one place.
The software also offers a built-in capability to communicate with planners in other locations. The firm is opening an office in Westminster, Maryland, and Condon envisions eventual additional expansion, and relationships with planners around the country to whom he could lease exclusive access to the system.
In fact, by the time other planners fully realize what they lack, BWFA could be so far ahead in development that some may find it more feasible to affiliate with Condon's company than to reinvent the wheel by trying to develop their own computer systems. "When we are finished developing this program, we will have a big leg up on being able to manage a planning firm that can take a dominant position in a whole geographic area of the country," Condon declares. At least that's what he's counting on as he charts his strategy.
Condon and his partners believe that Lotus Notes is the best software base for a company-wide operating system for financial planners because its original features most closely match what they want in a final product. Besides communication, its automation capabilities are a major draw. "Let's say that a client orders a packet of information from our Web site. We have to manually take that from the Web, enter it into our client database system, type the response letters, put together the package, and send it out," explains Sax Birdsong, one of Condon's partners. "With Lotus, that client's data would automatically be entered into the client database. Five letters would be printed for the five prospects that registered that day, and we'd just need someone to mail them out."
BWFA has almost finished designing and debugging the basic system. The next step will be to test it in-house for several months. The firm will then make sure it works from remote locations, then test it throughout a multiple-location company.
Condon may be building the practice of the future, but he has taken a circuitous route to get to this point. After composing music and playing bassoon as a University of Kansas undergraduate, he studied transcendental meditation with Maharishi Mahesh Yogi, then returned to collegiate life for a PhD in geography. During a stint working in oil and gas exploration, he put together two successful drilling syndications and crossed paths with former U.S. Senator Mike Gravel of Alaska, who brought him to Washington, D.C., to package a real estate limited partnership. Condon eventually realized that his future lay in financial planning, and opened his own practice in 1986.
Based on BWFA's technological aspirations, one might think Condon has been a lifelong computer nut. By 1996, however, he was no more computer literate than most planners and probably a good deal less adept than some. And he was really, really frustrated. "I was making a decent income, but I did not have a practice I wanted to own," he admits. He was trying to do everything a good planner should do for his clients, but he often felt like he was running up a down escalator. "The net worth of my clients was increasing, and I constantly needed more sophistication. Yet every month I realized I was less and less capable of knowing everything, and I was at the end of my rope."
Rather than struggling to be all things to all people, he decided to invite people with complementary knowledge and skills to become principals in his firm. His new computer guru, Sax Birdsong, brought technology expertise that has proven crucial to the development of the firm's Lotus software. Birdsong's investment background made him the natural choice to manage the firm's investments as well. Bob Cassel had operated his own tax preparation service since 1983 but wanted to expand into broader-based planning; since coming on board with Birdsong in 1996, he has handled all aspects of tax planning as well as office administration. The two men's expertise provided the perfect counterpoint to Condon's own experience in planning. Condon also spearheads the firm's marketing efforts.
Armed with Lotus Notes' ability to automate routine tasks, BWFA expects to hire few additional support staff members to accommodate future growth. At present, just seven people are on the payroll. Besides the three partners and an additional specialist, a CFP prepares financial plans under Condon's direction, an assistant to Birdsong maintains portfolio records, and the firm employs a receptionist. Cassel also hires two employees during tax time. To keep pace with the growth he plans, Condon hopes to hire at least two more advisors over the next two years.
When Condon, Cassel, and Birdsong formed their partnership, Cassel had about 150 tax clients, while Birdsong delivered about 20 investment management clients. Even when their wealth was added to Condon's own 40 planning clients, the firm was barely able to claim $25 million in assets under management. Today, however, BWFA manages investments for 130 clients, does 250 tax returns a year, and has prepared financial plans for more than 100 people who are likely to become investment management clients.
Retirees and pre-retirees comprise about 70% of BWFA's investment management clients. The rest are about evenly divided between two categories: single older people and what Condon calls "young accumulators." These are executives on the fast track, often in high-tech or start-up firms. They are millionaires, at least on paper, thanks to the stock options they have been granted.
Stock options bring with them a whole host of complex issues. For instance, the difference between the below-market grant price of the option and the current trading price of the stock can trigger Alternative Minimum Tax problems. Then there's the issue of timing. Once an option is exercised, conventional wisdom dictates that the stock should be held long enough to create long-term capital gains, but hanging on to a volatile stock too long could erode or erase any profit potential. Even when the gains are long-term, the state taxes that are due on them can create more AMT problems in the next tax year. Beyond that are the planning issues: What are the company's prospects, how will these impact stock prices, and how long should the client remain with the company?
For now, BWFA uses at least three different programs to handle options. Lotus Notes' ability to share data among applications will streamline BWFA's options work, and Condon expects options management to become such a major segment of the firm's business that he has assigned one staff member to work full-time to develop a specialized corporate marketing program targeting option holders.
Currently, 46% of new business comes from client referrals. Most of the rest comes either through NAPFA referrals or from the Baltimore Yellow Pages, but screening is kept to a minimum no matter where the client comes from. For the most part, anyone who wants an appointment gets one. "If they can pay our fees, we'll work with them," says Condon. The fee schedule contains a blend of flat fees, percentage fees, and hourly rates. Condon bills $150 per hour for his time and charges $75 per hour for paraplanner-type jobs like handling a transfer. In general, a comprehensive financial plan costs between $3,000 and $6,000. Investment management fees begin at 1.25% for the first $500,000, drop to 1.0% for the next $500,000, and go down to 0.75% for everything over $1 million. "Asset management fees divided by assets under management give us 85 basis points in income," Condon says. This means that many clients are handing over more than $1 million apiece to be managed by the firm. Yet the average net worth of all clients is a relatively low $460,000, because BWFA has no minimum requirements and often accepts a client's family members who are not well established in their careers.
Condon's asset management fees seem on the high side, but BWFA clients usually end up paying less overall than the industry average. To avoid a double-dip on mutual fund management fees, BWFA builds its portfolios with individual stocks, rather than mutual funds, whenever possible. "We buy a lot of Street research and construct portfolios out of individual domestic securities, using mutual funds for international investing and other specific areas," says Birdsong.
To further cut costs, the company has negotiated lower-than-published commissions at TD Waterhouse. BWFA pays a minimum of $28 per trade, rather than the going minimum of $35. BWFA also has a "soft-dollar agreement" with Waterhouse, whereby 10% of brokerage commissions are earmarked to offset BWFA's investment research costs. "That 10% pays for two satellite dishes on our roof, plus subscriptions to Value Line, Reuters, and Standard & Poor's," Condon says.
In the end, Condon expects the combined benefits of low commission rates, the firm's individual stock-picking strategy, and the efficiency of Lotus Notes to enable BWFA to keep expenses down even as the firm expands into new territory, both geographic and otherwise. As the firm reaches out a hand to new planners, offering new ways of working, who knows - you might want to take it.