From the April 2007 issue of Investment Advisor • Subscribe!

April 1, 2007

Plotting Your Course

Using his planning skills, ideals, and love of liberty, an advisor goes independent

As I write these words, I'm filled with excitement. Excitement about the new journey I am taking--one that many of you have already traveled and some of you are contemplating. You see, after 25 years of being an employee, of having someone else control my time, my business model, my software, even the color of the paint on my office walls, I am now my own boss. This day, I have become an independent advisor. I invite you to join me on this journey over the course of this year in the pages of Investment Advisor and in a blog at www.investmentadvisor.com/blogs. I know there may be times when I'll struggle. There may even be times when I'll look back wistfully on the security of a steady paycheck. But in the end, I am convinced that I'll find great satisfaction in serving my clients in the way I know best, without conflicts of interest, based on my belief in doing things the right way--exactly the way I'd expect to be treated if I were the client. I'd be happy to hear the stories of your journeys to independence, too, especially in responses to that blog I mentioned. But first, I'll set the stage by explaining why I approached this new path, and the questions that anyone setting out on this journey would need to address. Before going independent, use all your planning skills to carefully plot your course, understanding that there may be detours and unexpected obstacles along the way. I know there are wise consultants who can guide you along this path, but my hope is that our shared backgrounds and my first-hand experiences, presented to you in real time in this article, the ones to come, and online, will prove valuable.

Where I've Come From

During my career I've worked for one of the largest wirehouses, a smaller regional boutique firm, an insurance company, and the second largest bank and wealth management firm in the world. I believe there are four main players competing in the wealth management space. In addition to the independent advisor, they are the banks, brokerage firms, and insurance companies, each of which has their own strengths and weaknesses. With the exception of the independent advisor, they share a common inner conflict between serving the stockholders and serving the client. The exhortation to sell, sell, sell, remains the pervasive mantra emanating from these companies, instead of setting out to meet the client's needs and using whatever products are best suited to do so. While working for a large company, I've witnessed, on numerous occasions, decisions made by upper management that have hindered my ability to perform my job. I have found it fruitless at times to think outside the box. Also, if you work for a large corporation you are building the corporation. When you own your own business you are building equity for yourself--a business that one day should have resale value. These are just some of the issues that have prompted me to head down the road to independence. Before starting the journey, I first had to ask myself whether I had the right personality and temperament to run my own business.

Some of the best business owners I've observed over the years possess a combination of a driver/analytical personality. They can analyze well but don't get stuck there. When it comes time to implement a strategy, they have the resolve to carry out their plan. If you're too analytical and seem to get bogged down in the details, you might consider finding a partner who can complement your style. Conversely, if you're too much of a driver, you may need a partner to balance your unbridled exuberance and help you make well-thought-out decisions. I would suggest taking a personality assessment. There are a number of tests available, some online, and some can be taken for free (such as DISC and Myers-Briggs.).

I'm not suggesting only specific personality types can be good business owners. I am suggesting that you should understand your own strengths and weaknesses so you will be prepared to handle the challenges ahead. Your temperament is also critical. If you're a person who gives up easily when you encounter resistance, independence may not be for you. After all, there will be times when you encounter bumps in the road. You'll also need to address the following questions during startup.

Will You Be a Specialist or Generalist?

Examine your background. What do you enjoy doing? Do you like repetition or do you become easily bored with the same old thing? Life as a generalist can be slightly more exciting and more difficult at the same time, since no one can be an expert on everything. Being a generalist also requires knowledge on a wide range of topics, while a specialist can remain focused in one or two areas. Whatever your answer, remember that the market will always need specialists such as portfolio managers, providers of retirement services, and insurance salespeople.

Who Is Your Target Market?

To get started on this issue, ask yourself more questions. What are you naturally good at? What types of people do you like to work with? Does your background provide a particular knowledge base you can leverage? Who will you target as clients and what are their needs? Will your target be a specific niche based on age and wealth, geography, a certain industry, or a broader segment like the mass affluent or the ultra-high-net-worth? Whatever your choice, learn as much as you can about your targeted audience, including the publications they read, their likes and dislikes, and their hobbies. Learn what types of services and products they need.

What Is Your Marketing Plan?

To borrow a line from Steven Covey's The Seven Habits of Highly Effective People, begin with the end in mind. Ask yourself what you want the business to look like in one, three, and five years. How many clients do you want? How many can you service?

Your marketing plan should take a multi-pronged approach that could include inviting centers of influence to lunch, buying radio ads, conducting seminars, using direct mail, speaking to local organizations, hosting client events, or sponsoring local events. Whatever methods you choose, do your homework and conduct a cost/benefit analysis on each, then prioritize them, selecting the ones you feel can be accomplished well. Studies have shown that it's not the company with the best marketing plan that succeeds but the one that executes its plan best. It's better to have an average plan with great execution than a great plan with poor execution. Finally, assess the market and look for opportunities. If there's an underserved segment that appears profitable, consider tailoring your business to serve it.

It's important to note that some marketing strategies are designed to bring in clients immediately while others take effect over the long term. So why use a strategy if it doesn't bring in clients right away, especially in a startup business? Because you want to separate yourself from the competition by gaining share of mind. You do not want prospects to see you as just another provider of financial services., but to stand out from the crowd. A good book on the subject is The Brand Called You, by Peter Montoya and Tim Vandehey (Personal Branding Press, 1999).

Which Products & Services?

To a large extent, the products available to you will be a function of the platform of the broker/dealer or custodian you choose to work with. The services you'll offer will depend on your target market. For instance, the wealthier client has a greater need for estate and tax planning. If you intend to help retirees manage their retirement plans and will do a lot of IRA rollovers, then you should be well versed in RMD, conduit IRAs, and other retirement issues. The question then becomes what you will do that is different than the rest of the crowd. Perhaps you will specialize in a particular area while serving as a gatekeeper for the client to other professionals. You don't have to be an expert in all areas but you must know who to bring in when necessary.

Will You Go RIA or Be a Broker/Dealer Rep?

Becoming an RIA will allow you more flexibility in making decisions and will include a higher payout, but you alone would be responsible for compliance. You would need to register with your state's securities regulator, until you reach the $25 million level of assets under management. At that point, you would register with the Securities and Exchange Commission. Working as an RIA may require a greater capital outlay on your part.

A broker/dealer's payout will be slightly lower than an RIA's, but may offer a more robust platform. With a broker/dealer, you will also be subject to the B/D's compliance department. Again, do your homework. You can check www.sec.gov for more information on the federal filing requirements. As an RIA, you would have to register through the IARD online registration system. To reach the IARD helpdesk, you can call 240-386-4848.

What's Your Name, and Form of Business?

Your firm's name will be your prospects' first impression of who you are, so choose one that grabs prospective clients' attention, encapsulates the essence of your business, and reflects your personal values. Your target market or your locale should also have an impact on your firm name. You should also create a "tag line" or slogan, and it may be wise to hire an image consultant.

As for the form of your business, should you choose a sole proprietorship, C Corp., an S Corp., an L.L.C., or a general partnership? The business of providing financial advice or products contains a degree of risk not found in many other businesses. If you give the wrong advice, recommend the wrong investment, or the client thinks you did, you could find yourself in an arbitration hearing or facing a lawsuit. From a liability standpoint, you should rule out a sole proprietorship or general partnership. An S Corporation, C Corporation, or a Limited Liability Company would be a better choice.

Which Processes & Procedures to Follow?

From portfolio design and management to the type of filing system you will use, you should have a good idea of everything related to the processes and procedures of your business. How will clients be greeted, and by whom? How will you communicate with your clients, and how often? How often will you conduct client reviews, who will prepare them, and what will they look like? A large number of events can occur in a business on a given day. To make things flow more smoothly, it's wise to have a process and procedures manual (and depending on your affiliation, it may be required). Initially, this will be a very dynamic document requiring modification on an ongoing basis, and will serve as an important tool in the orientation of new employees.

How Much Will It Cost?

You'll need to determine your startup costs and compare it to your budget. What items are essential and what items would be nice to have? Create a list of every possible thing you might need (see table above). After you create your list, estimate the cost of each item, and then prioritize the items. Then decide which ones you can purchase. When you are creating your list, let your mind wander. After you create your list, go back and edit it.

At a minimum, you should have business cards and a professional-looking brochure you can leave with a prospect. Letterhead and envelopes are also important, and all should have a coordinated theme. Consider using a good graphic design artist to assist with your logo. High quality paper is a must. Remember, your marketing materials may be the first thing a prospect sees and will create an impression in their mind. Check with your broker/dealer or custodian to see if they will assist you in building a Web site. Your business location is also important, especially if clients will come to your office. You may need to sign a lease and pay a deposit. You could purchase (and depreciate) your office furniture or you could lease it. Determine your budget and see how far it will go.

The First Step

What I've written comes from my own experience in preparing for this new phase of my life. I'm in the planning business, and I know how to draw up a business plan, create a budget, and stick to it. I've looked hard at my talents and preferences. I am in the process of creating an introductory packet that includes a written mission statement, code of ethics, principles of doing business, financial planning process overview, and a biography. I believe I've done the appropriate planning necessary to successfully start my own practice, but I still feel plenty of uncertainty. In my next article, I'll report on my progress in the first few months of my independence. With the task set before me, I'm reminded of the ancient Chinese saying, "A journey of a thousand miles begins with a single step." I hope you'll join me on this journey throughout the year in the magazine and at www.investmentadvisor.com.

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