From the December 2004 issue of Investment Advisor • Subscribe!

December 1, 2004

Step Up

Admitting that the future is unknowable doesn't absolve us from planning for it. What should you do now to raise your practice to the next level in that future?

Advisors face a conundrum. They must help clients plan for a future that is, by definition, unknowable. Moreover, preparing a financial plan to deal with the multitude of future uncertainties doesn't get any easier as planners become more skilled at their craft. Indeed, as a wise person becomes more aware of his limited wisdom as he ages, so an experienced planner knows that it is impossible to plan for every possibility. So while predicting the future is fraught with danger, we nevertheless must plan for it. After all, that's what your clients look for you to provide: Not future certainty that all will be well, but a plan to sharply reduce the chances of bad things happening--running out of money in retirement, failing to preserve a legacy for children and grandchildren, falling short on indulging a favorite pastime while working or in retirement.

But what of your future? What steps will you need to take now to help ensure your success in an imagined but essentially unknowable future?

After extensive interviews with researchers, consultants, experts in investing and technology, and thoughtful advisors, here is the consensus: Four strands lead from the present into the future; we will consider each in their turn.

1: Past Is Prologue

The two main, complementary forces that helped create the modern-day financial planning profession will continue to drive the profession in the future. These two forces are altruism, defined here as the desire by advisors to serve clients better by providing objective, personalized advice, and entrepreneurship, the desire to establish a vibrant practice to serve clients now and build a business to pass on or sell.

Regarding the first force, the research supports what you suspect is true: clients value objective, conflict-of-interest-free advice from independent advisors most of all. In fact, the Chicago-based research firm Spectrem Group reported in its November 2003 survey of ultra-high-net-worth consumers, "Relationships With Advisors," that those households with $5 million and up in investable assets not only were turning away from full-service brokers as their primary advisors, but "intentionally avoided advisors affiliated with a brokerage, bank, insurance or mutual fund company."

As for entrepreneurship, independent advisors want to be their own bosses; many chafed under the restrictive atmospheres of their former wirehouse or insurance company employers. This yearning for autonomy does have its down side, however, since most independent advisors who wish to grow their businesses must have one or, more likely, several partners. This spectrum of independence ranges from the semi-autonomous "groups" popular at the wirehouses to the representatives of independent broker/dealers to the fee-based RIAs who shun commissions of any kind. All along that spectrum there are interdependent relationships, whether you're a registered rep interacting with your B/D and its clearing firm or an RIA who must pick a Web site hosting company in addition to a custodian.

According to those interviewed for this article, the tools you need to build a thriving practice today are the same tools you'll need to succeed in the future: in a word, systemization. The practice that thrives is one that systematizes its major processes, including prospecting, client services, practice management, and employee compensation.

2: Demographic Disaster

Advisors do not practice their profession in a vacuum, and we stand on the cusp of a major demographic change that will deeply affect how and to whom financial advice is provided in the future. To sum up the change, America is getting older and darker. The 2000 Census found 35 million people over age 65, or 12.4% of the entire U.S. population of 282 million. By 2050, the Census Bureau estimates that segment will have grown to encompass 86.5 million people, or 22.7% of the total population of 419 million (see An Aging America). The new CEO of the Certified Financial Planning Board of Standards, Sarah Ball Teslik, has studied demographic disasters like the Black Plague. She notes that the coming disaster will be the first "in the history of the world caused by too many people living rather than dying." There's little comfort in pointing out that the United States will remain in much better shape than most of the rest of the developed world, where birth rates are lower and immigration more restricted.

The ethnic and racial makeup of the United States is changing as well. That portion of the population that the Census Bureau calls "White alone, not Hispanic" stood at 69.4% of the population in 2000; by 2050, that will have shrunk to 50.1%, the Bureau estimates. By that year, Hispanics, who can be of any race, will account for a full quarter of the nation's population. Consumer marketers and the national political parties are well aware of the changing demographics of the U.S. population regarding race and ethnicity and the economic and political power that the non-white portion of our diverse population represents. The financial planning profession and its membership organizations have responded slowly to this disconnect. Take, for instance, the makeup of the profession itself. Of the 29,000 CFPs who volunteered their racial and ethnic backgrounds in 2002 to the CFP Board (the most recent data): 94.75% were white, 75% male.

Planners have been slow to respond to the growing retirement population, too. Yes, many advisors cater to today's retirees and are aware that the baby boomer generation is on the verge of swelling that segment of the population, but the coming changes go beyond a mere increase in the number of retirees. Tanya McDonald of Spectrem is not alone in pointing out that advisors may be adept at the wealth accumulation phase of their clients' lives, but need different skills to handle the more challenging wealth preservation and distribution phases of planning.

Part of the challenge in helping clients plan for retirement in the future is the uncertainty of Social Security. The annual report of the two trust funds that fund Social Security and disability insurance put it succinctly: Beginning in 2018, the funds will begin to pay out more to beneficiaries than they receive in tax levies; by 2042, the funds' assets will be "exhausted." There are ways to fix the Social Security system, and President Bush indicated in the first days after his reelection that he would make Social Security a top priority in his second term. Making the changes necessary to "fix" the system would require the imposition of either higher taxes or lower benefits and later retirement ages, however, and senior citizens tend to vote. Even if Social Security is fixed, the growing ranks of retirement-age boomers will need help with the two other legs of retirement funding. While boomers are fond of making highfalutin' claims to have reinvented every age of mankind, their sheer numbers can't help but affect retirement planning in the years to come.

How much are we talking about? Cerulli of Boston estimates that private retirement plan assets will grow from the current $3 trillion to over $10 trillion by 2012.

Moreover, the number of wealthy people in the United States continues to grow. The most recent Merrill Lynch/Cap Gemini World Wealth Report puts the number of high-net-worth individuals in the U.S. (those with more than $1 million in financial assets) at 2.27 million; Spectrem estimates that in the U.S. there are 650,000 ultra-high-net-worth households--those with more than $5 million in financial assets.

As industry guru Bob Veres points out, the traditional concept of retirement is undergoing a big shift as well, from being a time to stop working to what he calls a time to "find something you enjoy doing and never want to completely stop doing; this will provide meaning in your life throughout your final years."

Of course, many people won't have the luxury of pursuing those goals. While the Garrett Planning Network and many individual advisors have made progress toward meeting the planning needs of middle- income and even poorer folks who are most in need of advice, there is plenty of work ahead if the benefits of planning are to be extended to the entire population.

One other demographic issue to consider is the graying of the planning profession itself. The CFP Board reports that more than 45% of the 48,000 CFP certificants are over age 50.

3: Staying Compliant

So there will be many advisors in the future looking to serve the complex wealth accumulation and distribution needs of a more diverse and older population. What will be the atmosphere in which these advisors practice? Chances are good it will be one in which you'll be on even more intimate terms with government regulators.

In a June speech at Stanford University, Securities and Exchange Commission Chairman William Donaldson boasted of the commission's increased oversight commitment. "Thanks to significant budgetary help from Congress and the President," he said, "we have been able to hire over 840 professionals for the Commission's staff." Moreover, Donaldson continued, "The division also filed more enforcement actions (679) in the previous fiscal year than in any other year on record."

Two items are of particular interest regarding the SEC. One, not only did the SEC add significantly to its staff, it's also paying staffers higher salaries, which means the commission is attracting more highly qualified people. Second, this increased regulatory effort took place under a Republican president who has made clear his preference for less government interference, not more, in the life of small businesspeople. The SEC's tougher stance can partly be attributed to the goading the Feds got (and are still getting) from New York State Attorney General Eliot Spitzer's various investigations, but it will be much tougher to put the regulatory genie back in the bottle.

When the SEC required RIAs to appoint a compliance officer, draw up a compliance manual, and adopt a code of ethics, many began wringing their hands. They worried that the requirements would have an onerous effect on their practices, adding layers of unnecessary paperwork and procedures, and hurt their bottom lines. While most agreed that the intent of the new regulations--protecting the investor--was a good one, most advisors also thought they were essentially unfair. After all, it was the mutual fund scandal that prompted these new regulations, they argued, so why should planners and advisors who provide services to individuals be forced to share the cure with mutual fund companies and other big-time money managers responsible for the disease?

Rather than just complaining about the regulatory weather, planner Dan Moisand did something about it. In "My Final Exam," a paper that won the FPA'a annual Call for Papers competition in the Future of the Profession category, Moisand envisions a future world in which financial planners are regulated by the Financial Planning Regulatory Commission, a division of the SEC, which can fine, suspend, and even revoke the right of planners to practice. In the future, he writes, all planners must register with the Financial Planning Board of Registration, which administers a competency exam and continuing education.

Presented as a look back by an older Mr. Moisand (he's now 37) preparing for retirement, the fictionalized future structure solves most of the major regulatory challenges faced by advisors today, while making advice givers more accountable to advice recipients. Moisand, a fee-only planner from Florida recently named president-elect of the Financial Planning Association, hinges the more rational regulatory structure on a new focus on the term "fiduciary" prompted in part by the corporate, brokerage, and mutual fund scandals of the early 2000s. In his imagined timeline, the CFP Board dissolves, with its staffs populating the FPRC and the FPBR and its responsibilities spread between the two groups. Everybody wins--planners get more respect and are audited by their peers, and consumers get far better disclosure from all who hold themselves out as providing financial planning. Moisand admits to glossing over a few steps from the present to the future (such as the SEC acceding to creation of a new regulatory body, and agreement being reached on a functional definition of the term "financial planning") but his paper is essential, and fun, reading for anyone concerned with how the current alphabet soup of designations, certifying bodies, and membership organizations may play out.

4: Keeping It Personal

Dealing with these demographic changes and operating under a more restrictive regulatory structure, what will the clients of the future expect, and demand, from you?

Clients want and expect personalized, objective advice from advisors they consider independent, as Spectrem research shows and many advisors have experienced, and those desires and expectations get even stronger as clients' wealth increases.

You can't supply that advice without help, however. Faced with renewed competition from Wall Street, which now uses the independent advisor's vocabulary, if not his sentence structure, of asset allocation and fees and "being on the same side of the table as the client," the independent advisor must beat the wirehouses at their own game. After all, those firms spend vast amounts of money on systemization--everything from their CRM systems to their statement mailing systems. Independents may not be able to match the wirehouses' budgets, but they can use off-the-shelf and easily customizable software, hardware, and basic business practices to make sure they are not reinventing the wheel every time they hold a seminar or conduct a client meeting or give an employee a performance review.

So how can the independent advisor compete? There is more than one successful business model for advisors. Research conducted by Moss Adams for the annual FPA Study on advisors suggests that many advisors need to cross the $1 million threshold in revenues to achieve the economies of scale that yield increased profits that keep pace with revenue growth and staff increases (an in-depth look at those metrics is provided by Mark Tibergien and Bob Clark beginning on page 64 this month). Even advisors who don't want to grow bigger must nevertheless be more focused in terms of client selection and outsourcing in their business practices to be successful, the Study found.

Perhaps independent advisors need not fear the future at all. Indeed, in its "New Wealth Advisor" report published last year, Spectrem concludes that "the traditional brokerage model will continue to be threatened by the expertise" of more independent advisors, which it argues will "ultimately lead to a new holistic model of providing services to the wealthy." For independents to provide such holistic advice, they must of necessity partner with their custodians, B/Ds, and other product and service providers. The good news is that there are plenty of potential partners out there. The bad news is that it can be difficult to find the proper partner. To do so, you must be clear on what you want to achieve with your practice--do you want to grow larger, or not? Do you want to specialize in specific client niches, or generalize? Are you comfortable with a passive index-fund approach to investing, or do you believe that adding alpha to client portfolios is mandated by the shrinking equity risk premium and by clients' demand? The answers to those questions will help you narrow your partners search.

Many advisors have already found partners they can live with and are providing that holistic advice. One tack encompasses "life planning," an approach first broached by planners George Kinder and Dick Wagner and embodied by the "Nasrudins." Bob Veres defines life planning as advisors encouraging and advising clients "as they pursue nonfinancial, personal goals that give them increased satisfaction with their lives." The life planner's intent is not just to help clients manage their money, but identify and define their deepest goals, then help them achieve those goals.

A different, related approach, and one that advisors are uniquely situated to adopt, is a psychologically savvy approach to planning. Investment Advisor columnist Olivia Mellan calls on advisors to be "therapeutic educators" who as part of the advice process can help clients come to their own conclusions regarding goals and passions by using solid listening skills. Then by virtue of their unique positioning between client dreams and financial reality, advisors can gently guide clients toward realistically achieving those goals within the context of their entire life. The value of a holistic approach that is psychologically savvy is not just that you're covering more of the financial waterfront, but you're dealing with relationships: goals and dreams and finances and our families are by definition interrelated. If you only cover one small piece of the waterfront, you're providing limited value to clients, who in most instances want a coordinated approach to managing their money and achieving their goals, but can't or won't do it themselves.

There's something else that will affect the future in ways we can't predict: improvements in everything from agriculture to medicine to computing to energy sources may radically affect the way we live in the future, and thus affect how we plan our financial lives. Just as Schwab's mutual fund supermarket concept made the planning profession as we know it possible, new products and ways to deliver those products may drastically shift the planning landscape. Government actions in the form of legislation, regulation, or judicial actions might reshape the financial landscape as well, much as ERISA did for retirement planning. What if the U.S. moves to emulate the Chilean system of retirement funding, for instance, where individuals control the allocation to specific money managers of their social security taxes? How will the construction of wide-ranging wireless networks--such as the Wi-Fi network Philadelphia is building right now to cover the entire city--change the way society and business communicate, compute, and live?

Rest assured that past is prologue and that you control your own destiny. Provide personalized, objective advice that is psychologically savvy. Align yourself with partners that can help you extend your marketing and service reach by providing you with access to products and technologies you couldn't afford to efficiently build yourself, and by delivering practice management advice culled from your peers. Systematize your practice's procedures and practices so that you and your staff are being rewarded for your efforts now, and so you can reap the benefits of what you've built when it's time for you to move on to your own retirement. That's how you will succeed in the future, regardless of the predicted and unexpected changes that are sure to affect our society and the financial services world.

Editor Jamie Green can be reached at jgreen@ia-mag.com

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