From the October 2009 issue of Investment Advisor • Subscribe!

One True Thing

Two and a half years after going independent, advisor Mike Patton shares what he's learned. Service is the key.

What motivates a client to hire a particular advisor? What separates one advisor from the next? These may be two of the more important questions to advisors, whether you're just starting in the profession or are a grizzled veteran. After all, growing our business is what it's about, right? Well, that's not quite right. Some 30 months into my new life of independence, I believe that what the independent advisor is really all about is focusing all of our attention on the needs and desires of the client. If we do this, and do this well, then business success will follow. If we fail at this one true thing, then even if we experience short-term prosperity, our-long term prospects will be dim.

It is with this in mind that I write this, the eighth article in the "Road to Independence" series. Join me in reviewing my progress report at the two-and-a-half-year mark.

In the Beginning

In case you're new to the series, a brief history might be in order. My background includes some experience as an advisor with a major wirehouse, a mid-size regional bank, and a global bank. On April 1, 2007, I left that secure environment and embraced the life of an independent advisor. At my last position at JPMorgan, I sported the title of senior financial planner and did not have my own book of business. So when I began this journey, I had only a dream. The dream was to create a company that would be completely focused on, and attentive to, the client.

My motivation for this dream was simple. I sought to eliminate the conflicts of interest and culture of sales which is so prevalent in the financial services industry.

There I stood on April Fool's day with no custodian to hold assets, but that didn't matter since I had none to manage. However, I did have one financial planning client. It was certainly a daunting proposition by anyone's measure. In the beginning, my income was derived primarily from financial planning fees. A few months later I secured a custodian. Then, almost 17 months later, my custodian raised its minimum requirement for assets under management to a level I had not yet obtained. That drove me to the first of many stark business choices: to remain and pay a substantial quarterly fee until such time as my asset level exceeded my current custodian's minimum, or find a different custodian. I chose the latter. So in February 2009, 22 months into this journey, I pulled up stakes and transferred my accounts to my new custodian, TradePMR. At 30 months from inception, I am the sole proprietor of Integrity Wealth Management in Baton Rouge, Louisiana, with a growing clientele and a partial fulfillment of my dream.

Although I felt all along that I was a good financial planner and could service clients well, one of the big things I've had to learn was how to be a business owner. Let's start my progress report on this key topic.

Lesson No. 1: Learning to Run It Like a Business

According to author Michael Gerber in his book E-Myth Mastery, many business owners were once good technicians, employed by a company who decided to venture out on their own. But being a good technician is not enough to become successful. You must also be good at running the business. You must develop a sound marketing plan, properly manage your cash flow, and choose appropriate office space, furniture, supplies, software, and so on. These were just a few of the issues I faced. I remember trying to project income and expenses while at the same time defining my offerings and pricing my services. Yes, it was a bit overwhelming at times, but it comes with the territory.

As an independent there are many decisions that you alone must make. You have to decide how to measure your progress by determining which items you will track in your business. I keep track of all income and expenses, assets under management, and the average velocity on the assets. Average velocity is simply the average percentage earned on the assets managed. For example, if you had $10 million under management and received $8,333 per month, your average velocity would be 1.0% ($8,333 x 12 months / $10,000,000 = 1.0%). I also track financial planning fees.

When I passed the one-year mark, I began looking at my year-over-year numbers to gain an understanding of the practice's growth. In my practice, asset management fees are up 53% from one year ago. However, financial planning fees are down considerably from this time last year, primarily because I have focused more time and energy on growing the assets. All things considered, total income is up 12% on a year-over-year basis.

Lesson No. 2: Using the Right Tools

From the moment I entered the financial services industry, I have held the belief that financial planning is the foundation on which to build a successful client/advisor relationship. So choosing the right software was another critical decision to make.

I chose Microsoft Excel and a Monte Carlo add-in to Excel called Crystal Ball. This has been my preference for several years and has evolved to a point where I'd say it will not only compete, but outshine most of the off-the-shelf planning software applications available today. Though it may be a bit more labor intensive, the end result is outstanding. Without exception, every client for whom I have created a comprehensive plan has greatly appreciated the level of detail and clarity of the report. This report also provides me with an excellent view of the many facets of a client's financial life and places me in the unique position of most trusted advisor.

For it to be truly valuable to the client, and serve as the foundation for my practice, the plan must be a living document (See "Beyond the Plan" sidebar).

Lesson No. 3: Building and Managing AUM

As I mentioned earlier, this year I have spent more time focusing on developing the asset management part of my practice. I like to keep a close watch on the accounts, and creating an efficient procedure for this is critical if you intend to manage a growing book of business. In the beginning, when I only had a few clients, it was easy to look at each account and make decisions without spending much time. But as the number of clients has increased, it has become more difficult to do this manually. So I have developed a spreadsheet (yes, I seem to do that frequently) that will automatically categorize the account holdings according to broad allocation and sub-category. It also provides a snapshot of the gain or loss in each position. In addition, it will compare the account to its assigned model and show where I need to rebalance. I will update this monthly for most clients.

Lesson No. 4: Creating Investment Screens

Selecting investments is an important function and creating an efficient way to handle this is critical. I use Morningstar's Office Edition, which includes research on a wide variety of investments. The first step was to decide which categories I would use. Then, I established screens for each. Some of the search criteria I've chosen include: manager tenure, relative performance for various trailing periods, risk, and expenses. There is, however, one inherent problem with screening. Let's assume part of your screen includes searching for managers who are ranked in the top half of their peer group for the trailing 1-, 3-, and 5-year periods. If a fund is below the midpoint for any of the periods, it will be eliminated from the results, even though it may actually be a good fund. Therefore, I use screens in conjunction with my Fiduciary Scorecard, yet another modest invention of mine that, in concert with screening, provides a more accurate evaluation of a particular investment (see Fiduciary Scorecard sidebar).

Lesson No. 5: Focusing on Service

It seems as though service is a dying art in many American businesses. When I call a large company I frequently get a recording and am forced to go through a maze of phone prompts before I ever reach a human being. Then, if I'm fortunate enough, they are able to help with my request. There are too many scenarios just like that. I could mention names, but I'll refrain.

I learned a long time ago that two primary reasons a client will leave an advisor is lack of contact and poor service. I vowed never to make that mistake. How can you maintain excellent service? Don't promise more than you can deliver and always do what you say you're going to do.

Let's assume you are responsible for managing 300 clients, each of whom you meet quarterly for account reviews, with each review lasting about an hour. That's a total of 300 hours each quarter. If you work a 40-hour week, you will spend 58% of your time on this task alone. When you factor in meetings with prospective clients, financial planning meetings, other business functions, marketing activities, lunch, and a little time off now and then, you would need more hours than are available. Perhaps I've beaten this point to death, but remember there is a limit to the number of clients you can serve.

The lack of service found in many larger firms presents a golden opportunity for those advisors who are service minded. In my opinion, one reason why there is such an overabundance of television commercials from large investment firms is the general weakness in the service arena. If their service were stellar, then their clients would be their best source of advertising and would save these companies millions of dollars in advertising expenditures. In summary, when clients are happy with you, you'll be able to reduce your marketing budget.

Lesson No. 6: Using Marketing Strategies That Work

There a number of marketing strategies, but I'll restrict my comments to the strategies I have tried and the strategy which I consider to be the most effective.

When I started in the business I built a clientele through seminars, holding five to six each year. When I went independent, my plan was to build the business on referrals from various sources. Today, I have reached what I consider to be a critical mass of clients and have received several referrals from them. I consider word of mouth to be the most effective marketing strategy. As a result, I endeavor to do the best job possible for clients, hoping that they will recognize my excellence and refer people to me. I recall Roy Diliberto, the former FPA chair and planner in Philadelphia, saying something to the effect of: the best marketing plan you can create is through your clients. I would heartily agree. There is no one better qualified to sing your praises than a satisfied client. Think about it. If each of your clients referred two qualified individuals per year, and if only half of them became clients, your business would double annually.

30 Months and Counting

So that's my story so far. How about yours? Are you pursuing your dreams? If your dreams include becoming an independent advisor, then why not grab your parachute and jump? I think this quote from the legendary writer, Samuel Langhorne Clemens, or Mark Twain as you may know him, says it best:

"Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover."

It takes planning and perseverance to make this transition, but if you will study and hone your craft, and place the client's interests first, then your chances of success are excellent.

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