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Financial Planning > Tax Planning

Jumping Into the Next Phase

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Drop by an FPA or NAPFA conference, and you’ll be sure to find Bob Veres, surrounded by a crowd of advisors who want to ask him about a business problem–or to tell him how they solved theirs. A former IA columnist, Veres publishes a monthly newsletter, Inside Information, available at His dialogues with advisors provide much of the source material for The Cutting Edge in Financial Services, his new book on the future of the financial planning profession (National Underwriter). He shared his thoughts on the industry recently with IA Editorial Director Bill Glasgall. You can buy the book, or read an extended version of this interview, at

You’ve said the financial planning profession is entering a new phase. There are two things to understand about the evolution of the planning profession. The profession goes through what I call professional cycles, which are like normal economic cycles, but are specific to the profession. Just like economic cycles, you have a period of prosperity, which gives way to a period of excess, and then there’s a major shift of some sort, which suddenly changes the nature of the game. The profession goes into recession, it sheds the excesses, and a lot of people who seemed to be doing quite well are suddenly out of business. The second thing to understand is that the profession changes dramatically during recessionary periods. All of the evolution seems to be compressed into a very short time. We are in one of those periods now.

How has this happened in the past? Look back to the 1980s, when the highest marginal tax rates were 90%. The cycle began in an awful, terrible investment climate, 10 years or more of zero returns from stocks. People weren’t interested in investment advice; they wanted to know how to deal with the confiscatory tax scheme, and it happened that the tax laws at the time favored investment in tangible items. So the profession turned to tax planning. Eventually, it became easier to specialize in that and abandon full-service financial planning. That’s how you know a cycle has turned; when it suddenly becomes much more profitable to specialize in the most visible element of the service, and stop doing the hard work of full-service planning.

Then the Tax Reform Act of 1986 came along. Tax shelters were no longer economically viable, you had the stock market crash, and all those people who were specialists were suddenly being sued out of business. I estimate that 25% of all planners left the profession between 1988 and 1991. And that brief period gave birth to a whole new dynamic.

Which was assets under management? Notice how fast the change was. After that very brief recessionary period, suddenly the service that had been paying for the entire financial planning engagement–tax shelters–was no longer contributing a nickel to anybody. Professional leaders were suddenly behind the curve, while new faces emerged as leaders of the profession. In the blink of an eye, the profession moved to modern portfolio theory, from commissions and junket trips for producers to fees and fiduciary conduct.

You think we are in a comparable period today? The next two years are going to see a compression of change, very rapid shifts in the service menu, in how planners are paid. It will be difficult to keep up. The stakes will be enormous.

What will the new phase look like? People who specialized in pure asset management–the most lucrative of the financial planning services, and the service that was at the top of the menu in this last professional cycle–are now getting hurt. The simplest prediction I can make is that people who hung onto the full-service financial planning engagement will have a near 100% survival rate during this professional recession. Those who specialized in asset management have lower odds of survival.

Why? There are two issues to consider. One is future returns, and how they affect the AUM business model. About a year and a half ago, I attended a a meeting that had gathered the leading academics who study equity returns. They included Roger Ibbotson, Jeremy Siegel, Robert Shiller, Robert Arnott, Brad Cornell at UCLA, Clifford Asness of AQR Capital Management, and Stephen Ross of MIT. They were there to talk about the equity risk premium. At the end of the meeting, the organizers asked everybody what they thought the premium was today. The result was an unprecedented agreement among people who come at this from very different directions. Most of the attendees were clustered around 2%. Jeremy Siegel was the raging bull of the group–at 4%. I think Arnott said the equity risk premium was actually negative. Think about the implications. If you’re charging 1% of assets under management and the market is delivering 15% or 20% a year, nobody really notices that fee. But suppose the market delivers an average of 2% for a very long period. The client suddenly realizes that he and the advisor are basically sharing the portfolio returns equally. I take my half, you take yours, and I hope you like the asset management services we provide. That arrangement may not be sustainable for long.

You feel that “life planning” services will be the next top-of-the menu service for financial planners. Another lesson that seems to be common to all these professional cycles is that the next big service will be created by the most idealistic and least financially motivated advisors in the business. They’ll try to identify what service their clients really want, and pursue that even if there is no viable business plan to make it pay your bills. That’s how the asset management service started, and people literally starved for the first few years trying to figure out how to make money at it. The same is true today of life planners. They don’t have a clear business model, but recognize the importance of the service and want to do a better job of delivering it to clients. If I’m right, a business model will evolve around it and the next professional cycle will be even more rewarding, in money and psychic gratification, than the one we are emerging from.

But what is life planning all about? Life planning is really financial planning offered in a new, more customized way. Planners are developing new tools for the initial interview–I call them “psychware” to distinguish them from software, which was the defining tool of the last cycle. And they are using their technical expertise–in investments, legal documents, forecasting possible futures, and how much money is needed and can be assembled–to help people achieve something more than what they were asking for just a couple of years ago. In the next cycle, everybody will want financial planning services offered in this life-planning context.

You talk about “Rolodex marketing.” A better word is “Netweaving,” a term which I believe was coined by Bob Littell, who practices in Atlanta. The concept is almost anti-marketing, and much more powerful than simple networking or traditional marketing. The idea–which is entirely compatible with the life planning concept–is that the advisor spends time identifying the very best professionals in her market, in as many different areas as possible. A great estate attorney and tax accountant and insurance professional, first, and then maybe a terrific travel agent, and a banker whom you form a great personal relationship with, and a computer technician who has magic in his fingers, and maybe a career counselor, or the best plumber and electrician in town. Then you begin recommending these excellent providers to your clients, friends, anybody else. Your clients benefit from their excellence, these great people get more business and, perhaps, consult you on how to expand to service more people. But more importantly, before long, you’re known in the community as the person to talk to if you want to find the best person for any job that might come up. And as you refer people out–with no expectation of anything in return–you become part of that charmed circle yourself.

You praise those who outsource business functions. This is the wave of the future. Outsourcing is a way of getting rid of all those things you are not highly skilled at. And it’s cheaper.


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