From the October 2010 issue of Investment Advisor • Subscribe!

October 1, 2010

Past, Present, Future

What the experience of industry pioneers suggests about future success

The year was 1980.

Chrysler was rescued, CNN was launched, the Dow began the year at 824 and Investment Advisor published its first issue. Today, Chrysler has been rescued once again, Fox News is on top and the Dow hovers at 10,000. This month, we continue with the celebration of the magazine's 30th anniversary by taking a look back and gaining perspective from three pioneers in the financial services industry.

Tim Kochis has been in the industry for 37 years, working with banks, accounting firms, and, more recently, registered investment advisors. Formerly CEO for San Francisco-based Aspiriant, Kochis is now chairman of the board and director of new business lines. Aspiriant manages over $4 billion and has over 60 advisors, and offers an array of services including comprehensive wealth management, expense management, and tax planning and preparation. Kochis has garnered multiple awards for his work. He was awarded the Charles Schwab Impact Award in 2006; the P. Kemp Fain Award in 2010; Financial Planner of the Year (San Francisco IAFP Chapter) in 1987, and has been quoted in Barrons, Worth magazine and other reputable publications. Kochis is a JD, MBA and a CFP.

Fellow P. Kemp Fain Award winner (as well as "other non-descrip awards") Ben Coombs made the transition from life insurance agent and manager to training director to fee-only RIA. Although he is currently enjoying retirement after a career that began in 1961, Coombs is still active in the markets. He earned his CLU and CFP designations in 1966 and 1973, respectively, and at the time of his retirement in January of 2000, assets under management were $100 million. Coombs's services included financial planning and asset management.

E. Denby Brandon Jr.'s career began in 1952, and with assets under management close to $250 million, he's still going strong. Today, he is Chairman of Brandon Financial Planning Inc. in Memphis, Tenn. He was an original member of the CFP Board of Standards and author of the book, "The History of Financial Planning." He has worked as a life insurance agent and managing general agent and is currently an RIA. Brandon received the P. Kemp Fain Award in 2007 and was inducted into the Robert E. Musto Tennessee Insurance Hall of Fame in 2009. His designations include the CFP, CLU and ChFC. Brandon has adopted a comprehensive approach in working with clients offering such services as estate planning, investment management, tax and charitable planning.

These industry leaders offered their insights into the way the industry has changed over the years; what's important today; and what independent advisors will have to do to stay on top.

LOOKING BACK

Over the past 30 years, name the biggest adjustments advisors have had to make in response to market forces?

Kochis: Some of the more significant changes include the ascendancy of the "independent" advisor, market awareness of, and preference for, the fiduciary model and a much more sophisticated clientele.

Coombs: The first by a wide measure is technology. The second is the expansion of regulatory oversight and compliance requirements, and the third is the ability to outsource everything except the client relationship.

Brandon: The emergence of the independent financial advisor with fiduciary standards. We believe that financial literacy programs have played a role in a growing and informed consumer base.

How has the 'independent' advice industry evolved in that time?

Kochis: Independent advisors have a much greater capability and sophistication rivaling that of larger organizations through supporting platforms such as Schwab, Fidelity, TD Ameritrade, Pershing, etc.

Coombs: We have folks coming into it right out of college and there is a developing career path. There are also a greater number of female planners, but we are still way short on minorities. Education is much better and the body of knowledge is growing by leaps and bounds.

Brandon: We believe that it has evolved in a way that greatly favors a team approach.

How has technology changed the way you do business?

Kochis: Substantially through CRM, e-mail, the Web, billing and time-keeping, etc. Planning software has also improved, but not as dramatically as the client management/communication technology.

Coombs: It allowed me to do more with fewer employees and make much better investment allocation decisions. In the latter case I have a feeling that the marginal increase in our ability to make investment allocation decisions is rapidly diminishing now.

Brandon: It allows us to do more with a smaller staff which increases profit margins.

A GLANCE AT THE RIA MODEL

Since all of you are experienced RIAs, what are some of the pros and cons of working under this arrangement?

Kochis: Some of the pros of the RIA model include fewer conflicts of interest and less bias. On the other hand, the differences between an RIA and a broker are poorly understood by many prospects.

Coombs: The primary disadvantage of any working situation is the impact on your sources of information. Your form of compensation, if you let it, will drive your continuing education. Those who receive commissions must meet continuing education requirements established by their broker-dealers which limits the time they have available for the education of their choice. Those who receive AUM fees and actively manage their own portfolios (as opposed to farming it out) often spend the majority of their education time on investment issues to the neglect of other subjects. Just look at the overemphasis of most conferences on investment-related subjects. The most underweighted continuing education emphasis is in the area of insurance (of all kinds, but especially disability and casualty insurance) and estate planning.

Brandon: We value the independence of working under an RIA and owning our own broker-dealer.

When and why did you choose the independent RIA route?

Kochis: From the beginning in 1973, primarily because of the appeal to myself and to clients of the fiduciary focus.

Coombs: I am an independent cuss and I prize my freedom of thought and action. Also, when I got started the closest you could get to a financial planning orientation was with insurance company agencies and I wanted to stay as far away from that orientation as possible.

Brandon: I chose the RIA path in 1980 because of the independence it offers.

TAKING THE LEAP OF FAITH TODAY

What are some of the key issues an advisor should consider before going independent (becoming a business owner)?

Kochis: Entrepreneurial risk and a lack of heavy organizational support.

Coombs: Capital requirements and overhead demands, regulatory oversight and compliance, the ability to wear many hats all at the same time (business owner, compliance, HR, PR and business development, client advisor, et al.), and you have to have a high degree of self-discipline and focus.

Brandon: They should have sufficient operating capital and surplus along with a critical mass of clients.

What advice would you give to someone who is just starting a new independent firm?

Kochis: I would focus on a special competency niche ... or create one.

Coombs: I would recommend that you have enough financial resources to tide you over for at least two years or an ace in the hole like a spouse who works and the ability to survive on that one income.

Brandon: Again, make sure you have adequate operating capital, surplus, and client base.

How would you go about building a 'start-up' business today?

Kochis: I would seek help from a deep-pocketed custodian.

Coombs: I would farm out all responsibilities including compliance, bookkeeping, asset management, plan production (data entry to the final product), everything but client development, data gathering and plan reviews. Delegate or farm out everything except what it takes to get to know the client and care for their needs.

Brandon: Since the business is more complex today, I think I would seek a team of partners.

Would you recommend growing a new business as the income would support it or capitalize it through personal funds, investor equity, or debt financing?

Kochis: In order of priority I would use debt; organizational cash flow; personal funds; or investor equity.

Coombs: I would, as mentioned above, start with enough capital to support myself for up to two years or be sure that you have an independent source of income such as a working spouse.

Brandon: Either way is workable, I suppose it would depend on the circumstances.

PRACTICE MANAGEMENT

Outsourcing areas of the business is becoming more common. Do you outsource any parts of your business?

Kochis: We outsource parts of the expense management and tax compliance work and execution of the estate planning documentation.

Coombs: No, primarily because there were little or no opportunities to do so until late in my career.

Brandon: Yes. We work with attorneys, certified public accountants, other investment advisory firms, insurance specialists, fringe benefit consultants, and real estate specialists.

What is your 'general' approach to portfolio construction?

Kochis: We tie return requirements to the time frames of client objectives. We also spend the client's "Risk Budget" where it can do the most good: where markets are relatively inefficient and manager selection and management skill can pay off.

Coombs: I told my clients that they weren't paying me to help them get rich, but to keep them from losing too much money. I told them to look upon my fees as an insurance premium. First, do no harm!

Brandon: First, we determine their objectives. Then we develop an asset allocation plan to fit their needs. In short, we use a long-term, strategic asset allocation approach.

Has your approach changed as a result of the recent financial crisis, and if so, how?

Kochis: Not very much, but now we're more sensitive to clients' needs for more frequent and robust investment conversations.

Coombs: In the management of my personal portfolio (I retired just before things started going to hell in a hand basket) I have been taking an income approach instead of a total return approach. I am looking for as much income as possible so I can get paid (i.e., dividends and interest) while I hold my investment instead of relying on growth.

Brandon: Not really. We are having different conversations and addressing questions such as, "Why did the portfolio act the way it did?" We have also reduced risk for some clients.

What types of investment vehicles do you use?

Kochis: Mutual funds; exchange-traded funds; exchange-traded notes; separately-managed accounts (especially tax optimized index proxies) and private investment partnerships, especially for diversified access to alternatives like real estate and private equity.

Coombs: Since I'm retired, this is an answer that applies to my own portfolio. I hold a few open-end value funds, a number of closed-end funds in both stocks and bonds, master limited partnerships, REITS, and municipal bonds.

Brandon: We primarily use mutual funds. There are some occasions when we'll use fixed and variable annuities.

What are some of the technology tools you use when managing your business and client assets?

Kochis: Portfolio Center; Saleslogix by Sage for CRM; and Outlook for calendaring.

Coombs: The answer to this question would be too far out of date to do any good.

Brandon: We use ACT for CRM, Principia CAMS for portfolio management and Lumen for financial planning.

How do you communicate with your clients (e-mail, phone, etc.)?

Kochis: We use e-mail, phone, writing letters and white papers. We also incorporate periodic planning and investment and, of course, face-to-face meetings.

Coombs: In order of importance: face-to-face meetings, group meetings, phone and e-mail.

Brandon: In person, by telephone, regular mail, e-mail, and through a quarterly newsletter.

How frequently do you communicate with clients?

Kochis: At least once a quarter.

Coombs: I tried to see them all once a year individually, but more frequently if you include the group meetings I held semi-annually.

Brandon: This varies greatly depending on the client and the circumstances at the time. We meet with clients face to face at least annually.

How do you market your business?

Kochis: Primarily through referrals from clients and influencers, but also through industry and community service leadership. We also have a dedicated marketing department and a public relations firm on retainer.

Coombs: Almost exclusively by referral.

Brandon: Primarily by client and other professional referrals.

How would your marketing strategy differ from that of a start-up operation?

Kochis: For a start-up I would be bold, innovative and hip. For a more mature firm I would emphasize experience and resources.

Coombs: I would recommend using referrals.

Brandon: A start-up operation would need a large variety of marketing strategies in order to survive and grow. This includes seminars, mailings, radio and print advertising, etc.

Do you ever turn away a prospective client and if so, why?

Kochis: Yes. Either because they are too small to fully benefit from our service model, or they are not a good long-term fit with our value proposition (i.e. only looking for short-term, opportunistic portfolio management).

Coombs: No, not on purpose.

Brandon: Yes, if we do not feel we can satisfy their needs and develop a long-term relationship.

What are some key questions you like to ask a prospective client?

Kochis: Tell us why you think we can be of help? What will be your measure of success? These questions will surface inappropriate expectations of how we serve our clients.

Coombs: What is the one thing I can do for you today? Why? I was always asking why questions. If you could retire today would you? What are you going to do on the first day you retire? What is going to happen to your family and your money when you die? I could go on and on, but I won't.

Brandon: We ask specific questions about their views of money, risk tolerance, and financial and life goals. There are so many questions, but the goal is to probe as deeply as possible. For example, what is your idea of success at different stages of your life?

How do you handle regulatory/compliance issues?

Kochis: We have a dedicated compliance function (two people) and a compliance consulting firm on retainer.

Coombs: This was not a big issue up until I retired.

Brandon: We handle them internally with assistance from Stark and Stark, compliance attorneys.

How might a start-up business handle compliance?

Kochis: Seek FPA guidance and training programs; but in any event someone will have to be "Jack (or Jill) of all trades."

Coombs: I would farm it out as much as possible.

Brandon: I believe they could handle it in a similar manner to the way we handle it now. Mostly internally and use an outside law firm if financially feasible.

What are the keys to running a successful independent business?

Kochis: In order of importance I would say quality service, competitive pricing, and disciplined expense control.

Coombs: Major in the majors and farm out the minors.

Brandon: Competency and commitment--adequate productivity and cost control.

How do you define success?

Kochis: In order of importance: Satisfied clients, enthusiastic colleagues, industry recognition, reasonably comfortable financial rewards.

Coombs: Client retention! Over 60% of the clients of the firm are ones I brought in and it has been 10 years since I retired and maybe 15 years since I brought in a new client. When I retired I had clients that went back to my life insurance days and my days with the real estate syndicator; clients for over 30 years.

Brandon: We define success as developing a financial and life plan that is adequate for the needs and aspirations of the client. If their financial and life plan enables them to become free and responsible, we believe they are successful.

With what you have learned in the process, what would you do differently if you were starting your business today?

Kochis: This has to be the hardest question of all. I don't have an immediate answer. I've been very lucky and have been in the right place at the right time.

Coombs: Because of technology, the mechanics would be different and because of increased regulatory oversight that part of the business would be different. Other than that I would do everything exactly the same; concentrate on forming deep client relationships built on trust and friendship.

Brandon: We have the same philosophy of business today that we started with.

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