From the November 2007 issue of Investment Advisor • Subscribe!

The Long and Winding Road

Six months in, Mike Patton has found life as an independent has required some adjustments, but he's really glad he made the move

Six months have passed since I became an independent advisor and it has proved to be a very interesting period, to say the least. At the beginning of the year, I had the security of working for a large institution with a steady income. I could go home at the end of the day and forget about things until the following day. Then, on April 1, I jumped off the cliff (metaphorically speaking), hoping my parachute would prevent me from crashing and burning. There have been moments when I've soared and moments when I could see the ground rushing up at me. You see, now when I go home, I no longer have the luxury of forgetting about things. These days I find myself frequently thinking about all the things that need to be done. Please don't misunderstand. I'm not complaining, but I am experiencing a period of adjustment. All things considered, I'm very glad I made the decision to become an independent. I'm equally glad I chose to work as an RIA instead of running my business through a broker dealer.

Challenges

I remember thinking, when I still worked for someone else, that I would create such a well-designed business plan that all I would have to do is execute it and success would be mine. In theory I still believe this to be possible but in practice it may not be entirely realistic. This is because you cannot possibly anticipate every obstacle. There will be situations along the way that will require you to make tactical adjustments. Here are some of the issues I've encountered.

One of the biggest obstacles was in the area of technology. As we all know, technology is great when it works, but when it doesn't, it can really increase stress. When I bought my laptop, it was equipped with Windows Vista as its operating system. I soon found out Vista was not compatible with many applications I was using. I eventually switched back to XP and learned a valuable lesson in the process. Never buy a new operating system as soon as it shows up on the market. It's best to wait until the flaws are ironed out. Fortunately, for my sanity, there's a highly qualified technical expert in close proximity who has helped me on more than one occasion.

One of the more demanding challenges I'm facing at the moment is due to the fact that there are so many different ways to structure the business. Operating as an RIA requires you to spend more time on infrastructure issues. Someone once explained it to me this way: As an RIA, you have a storefront and will need to build out the interior. Because there are so many ways to proceed, you should think it through carefully before beginning to build. What services will be offered and how will they be priced? What processes will be needed and how will they be implemented? Frankly, there are so many facets of our business that it's difficult for one person to get a handle on everything. Also, when do you add personnel? Should you incur debt to hire staff or wait until the cash flow will support it? These are just some of the decisions that you'll need to make.

Marketing

In the first few months, I had plenty of business. Looking back, I was so busy working with clients and getting established that I neglected to market my services. As most of us know--or will eventually learn, marketing is the lifeblood of any business. So far, my marketing effort has consisted of apprising a few attorneys of my practice. Specifically, I would demonstrate my financial planning tool, discuss my process in working with clients, and hope they would see the benefit for their clients. Remember, they need to be assured that when they put their name on the line by referring someone to you, the client will be more than satisfied with what you offer. So far the results have been good. I've met with three law firms and one accounting firm. I've received multiple referrals from one of the law firms and one referral from the accounting firm. In each case it has resulted in a new client. Again, you must be able to deliver what you promise or it will reflect badly on you and your referral source.

I sometimes laugh at the thought that I might be one of the most stealthy advisors around. You see, other than what I've mentioned above, I haven't really attempted to get the word out. But that's about to change as I'm adding one additional prong to my marketing plan. I plan to mail thousands of pre-printed postcards to selected individuals on a regular schedule. The postcards will contain a photo, a brief message, and of course, contact information. I'll mail these postcards to a few hundred people at a time. Here's how it will work. Let's say we're working with a list of 900 qualified names. I'll break them into three separate groups. Each person in each group will receive a postcard with a different message every three weeks. Specifically, group one will receive a card in the first week, group two will get the same card in the second week, and group three will receive it in the third week. Let's call that phase one. Phase two will contain a different message, as will phases three and four. This process will be repeated until each person receives a post card at least three or four times.

You can use direct mail to either announce an event or to get your name out in the marketplace. I plan to begin with the latter. While I've done hundreds of seminars in the past, this particular strategy is designed to put my name in front of the recipient. Then, at some point if I decide to hold some type of event, they will have seen my name and perhaps it will increase the chance that they'll attend. If this strategy happens to generate some phone calls now, then great, but that's not my intent. So you might ask, "Why would you spend the money on this if you're not trying to get business?" That's an excellent question and I'm glad you asked. Unfortunately, since I don't have enough space to explain it here let me suggest reading the book, The Brand Called You, by Peter Montoya and Tim Vandehey. It is an excellent manual on marketing. In it they discuss this type of approach as an important precursor to the more common type of direct mail in which the recipient is invited to an event.

When it comes to marketing, you have to decide which approaches you'll use, how they will coordinate together, and how much it will all cost, which leads us to the next topic, expenses.

Expenses

I thought it might be helpful to provide an estimate of the expenses I incurred to get started. For my office I purchased two desks, two bookcases, two filing cabinets, three printers, two printer stands, a some side tables and a lamp, a laptop computer, computer software, office supplies, filing fees, printing, and graphic design. As can be seen in the chart at left, this came to approximately $8,700. The graphic designer created a coordinated look for my business cards, letterhead, envelopes, covers for my financial plans and proposals, and the aforementioned postcards with plenty of white space for my message. I've been pleased with the work she has done.

In addition to the above expenses, I spent $110 to engage a professional photographer to shoot a high-resolution portrait. Also, not included in the above is the brochure I plan to have designed and printed. The printing should cost about $225 for 1,000 glossy brochures and the graphic design should be about $45-60 assuming I write all of the copy.

Expenses are a key area and need to be carefully monitored or they could easily get out of control. The key here is to grow at a reasonable rate. I remember while working at a bank in the Northeast, I had to create and submit an income/expense budget each September for my department. It covered the remainder of the year as well as the following year. The expense side of the ledger was always the easiest to project and the income was the most unpredictable. I would track both during the year to see how close we were to the projection. When you think about it, it's very similar to a financial plan, except it's tracked on a more frequent basis.

It's interesting to note that the income you earn has a direct relationship to your expenses and your expenses have a direct relationship to your income. It's very similar to a circular reference in MS Excel. The more you earn, the more you can spend and to some extent, the more you spend (on marketing) the more you should earn. Some expenses are necessary to the operation of the business while other expenses can be leveraged for its growth and ultimate survival. I'd highly recommend putting a monthly budget together for the business and include your personal expenses as well.

Services

As of this point, financial planning has comprised the majority of my business with asset management being a smaller component. This is due, in part, to the fact that I didn't have a custodian in place until late May or early June. Though I planned to use a particular broker dealer, when things didn't work out, I decided to become an RIA instead. Operating as an RIA has it benefits but also requires a greater commitment on your part. You do have greater control over how you run your business and a higher payout but it does require you to make more decisions.

In my practice, I offer comprehensive financial planning services, for which I charge a fee ranging from a few thousand to several thousand dollars. The particular tool I use is something I've developed over the years using an Excel spreadsheet plus an add-in to the toolbar for simulation and optimization. Recently, I conducted a webinar, hosted by Crystal Ball, a global business unit of Oracle, where I demonstrated it. A few hundred advisors signed up and I'm told it was received very well. As a presenter of a webinar, you can neither see nor hear the audience, so you really don't know if they're sleeping or listening intently. If you'd like to know more about what I'm doing with this, refer to the October issue of Investment Advisor and the article entitled, "Simulation Wizardry," which discusses MCS and how I use it in my practice.

One area I've been spending more time developing is portfolio management. I believe that in order to do a credible job here, you should first create a comprehensive financial plan. It's not always necessary, but for many, this is clearly the best approach. I'll illustrate this by asking two basic questions. First, what return will you target? Second, how will you derive the target return? If you haven't created a financial plan then your target return will probably be based on a risk questionnaire or some other method. It seems prudent to me that if you can determine the clients required rate of return (ROR) then you can establish a portfolio with a high probability of achieving it.

I have nine model portfolios ranging from ultra conservative to most aggressive. For each portfolio, I have employed Monte Carlo simulation to forecast the magnitude of returns on both the upper and lower end of the spectrum. I try to show the client what they might expect from their selected portfolio. If everyone has a good understanding of the portfolio's expected fluctuation, then you should be able to select one that is more suitable to their temperament. Also, if their stated ability to tolerate risk is greater than the risk needed to reach their ROR then I would consider that as compatible. If their risk temperament is such that the selected portfolio would be too volatile for them, then I would consider that to be incompatible. In the latter case, more discussion would be required to reconcile the difference.

Life insurance is another offering in my business. I have looked at a few no-load life insurance policies but have not been impressed so far. When I obtained a quote on a no-load survivor policy there was little difference in premium between it and the traditional version. I assume this is due to the fact that there's a much smaller pool of lives in the no-load universe so the cost per unit is higher. Perhaps the law of large numbers isn't quite large enough yet. I expected a premium reduction of at least 20-30% with the no-load insurance. Perhaps my expectation was too high.

Looking Ahead

In an earlier writing, I mentioned that I was beginning to work with a business consultant. This process got off to a slow start but is gaining traction again. One of the first things we hope to accomplish is perhaps the most difficult task for us business owners. That task is to create a strategic business plan. More specifically, in my case we will prepare a strategic marketing plan. While I have no problem understanding different marketing strategies, when it comes to mapping it all out, prioritizing the strategies, and selecting the ones to adopt, well, I tend to bog down a bit. He'll gather all of the required information and consolidate it into a written document. From there, we'll make projections as to the growth of my business. Tactical adjustments will surely be necessary at times but that's one of the areas where he'll provide assistance. I've found that many business owners have a vision or a plan in their minds but have some difficulty putting it on paper.

So, going forward, I still have a lot of work to do. I'll need to continue bringing in new clients while at the same time build out the interior of my business. This is both very exciting as well as somewhat daunting. I'll keep you posted.

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