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Financial Planning > Tax Planning

On the Record, With Author Bob Veres

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Drop by a Financial Planning Association 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 others who want to tell Veres how they solved theirs. Indeed, Veres has become a veritable clearinghouse for trends affecting the financial planning industry. A former columnist for Investment Advisor, Veres now holds forth in his monthly newsletter, Inside Information ( as well as in email newsletter he zaps out to readers across the country. His constant back-and-forth with advisors provides much of the source material for The Cutting Edge In Financial Services, Veres’ new book on the future of the financial planning profession (National Underwriter Professional Publishing Group). He shared his thoughts on the industry recently with IA Editorial Director William Glasgall. An extended version of this interview can be found at

You’ve said the financial planning profession is entering a new phase of development. What do you mean by that? There are two things to understand about the evolution of the planning profession. The profession goes through what I call professional cycles, which are exactly like normal economic cycles, but are specific to the profession. Just like economic cycles, you have a period of prosperity that gives way to a period of excesses, 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 these recessionary periods, where one cycle ends and another begins. All of the evolution seems to be compressed into a very short time period. We are in one of those periods now.

Can you give an example of how that has 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 like real estate, oil and gas wells, depreciable items like cargo containers. So the profession turned to tax planning as the No. 1 item on its service menu. Eventually, it became easier to specialize in that top-of-the-menu service and abandon full-service financial planning. In the late 1980s, people made a great living by simply asking the question, “Do you like to pay taxes?” If the answer was “no,” they had a sale. And thousands of financial advisors abandoned the full-service financial planning model, and became specialists in asking that one question. 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.

And then the Tax Reform Act of 1986 came along. Exactly. Tax shelters were no longer economically viable, and of course you had the stock market crash in there as well, and all those people who were specialists were suddenly being sued out of business. My best estimate is that 25% of all planners left the profession between 1988 and 1991. That’s about the same as the death rate in Europe from the Black Plague in the 14th Century. And, of course, that very brief period gave birth to a whole new dynamic in the profession.

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? Yes. The next two years are going to see what I call a compression of change, very rapid shifts in the service menu, in how planners are paid, just like every 12 or so years since the profession began. It will be very difficult to keep up with these changes, and 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. It might not be as bad as what happened to the people who specialized in selling tax shelters, but we still don’t know how much further this bear market has to go. 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 services have lower odds of survival. In a couple of years, we’ll be able to look back and see what those odds were this time around.

What else? The next lesson these cycles teach us is that the service that mostly paid for the planning engagement in one cycle does not pay for it in the next. When I give speeches around the country, I usually ask how many members of the audience are still making money selling tax shelters. What is frightening is how quickly these transitions happen. If this lesson applies to this cycle, within the next two years planners will not make money primarily on their asset management services. They’ll still provide the service, but it won’t be their source of revenues.

Why? There are two issues to consider here. One is future returns, and how they affect the AUM business model. About a year and a half ago now, I attended a briefing on a summit meeting that had gathered the leading academics who study equity returns. The list included Roger Ibbotson, Jeremy Siegel, Robert Shiller, Robert Arnott, and some people who are known to academics, like Brad Cornell at UCLA, Clifford Asness of AQR Capital Management and Stephen Ross of MIT’s Sloan School of Management. They were there to talk about the equity risk premium, which is another way of saying the rate of return that will be offered by the markets, after-inflation, over the next 15 or 20 years. At the end of the meeting, the organizers asked everybody what they thought the equity risk premium was today–what those future returns would be. The result was an amazing, 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 it was Arnott who said the equity risk premium was actually negative. Think about the implications of that. First, 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 you. That arrangement, I would suggest, may not be sustainable for long.

Are there other considerations? Yes. One is the document most advisors use to communicate their value, on a regular basis, to clients–the quarterly performance statement. The message, which is sent clearly, if nonverbally, is, “my main function is to get you an excellent rate of return on your investments.” If the markets aren’t delivering an excellent rate of return, then chances are you aren’t, either, and clients begin to wonder what they’re paying you for. We’re also beginning to see some structural weaknesses in the way AUM fees are charged. I think we’re approaching the day when somebody, in the consumer press, is going to say out loud, “Anybody who takes 1% a year for managing assets is a thief.” And a lot of advisors are going to have to scramble to show that the fee is really for a lot of other stuff. There’s another structural problem with AUM fees. A planner who subscribes to my newsletter called me up and said, “Bob, I just had the scariest experience of my life. A new prospect came in the door, and he had a $10 million portfolio, and he asked me what I would charge for my full-service planning work. I told him 1% of the assets, more or less. He thought for a minute, and said, ‘Suppose I only came in here with only $5 million.’ I said that my fee is the same. Then the prospect said, ‘Here’s what I’m going to do. I’m going to give you $250,000 to manage and take your 1% fee out of, and I’m going to have a professional money manager handle the rest of it.’ The point, which consumers will catch onto sooner or later, is that it is not 10 times more difficult to offer planning services to a person with $10 million under management than it is to offer those same services to a person with $1 million under management. Ultimately, the AUM compensation structure is destined to break down, which is too bad, because it served us so well for so long.

In the book, you seem to be saying that “life planning” services will be the next top-of-the menu service for financial planners. But what is life planning? Is it career planning? Expenditure planning? Estate planning? Or finding goals and crafting strategies to meet them? It’s all of the above, and more. This takes us back to how you predict these things. Another lesson that seems to be common to all of 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 service 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 the 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, really is life planning about, Bob? We could spend days talking about the life planning services–I think the book devotes 50 or 60 pages to it–but the short version is that 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. A societal change is bringing it all into focus. People, now and increasingly in the future, are looking past subsistence and toward fulfillment as their goal. The goal is no longer, “Will I be able to eat something more palatable than cat food in retirement?” It is becoming, “I only have one life and I want it to be a terrific one. What do I most enjoy doing, and how can I spend more time doing more of it?” So that may encompass career counseling, helping people move from a dreary job to a fulfilling career, and planning for the money it will take to get retraining and perhaps start a new business. It will certainly transform estate planning into something very different from what is being offered today, as people begin to leave behind their life stories and values, and as they forecast their expenditures and how they want to live and begin transferring whatever is left over. Our society is moving past the whole idea of retirement, so the traditional retirement planning spreadsheet is going to be outmoded. Financial planners are evolving in the direction of fulfilling this need just as this need is transforming our entire social structure. In the next cycle, everybody will want financial planning services offered in this life-planning context, and I expect to see a 10-year-long bidding war for people who have mastered what might be called Better Financial Planning, or BFP. Maybe I should trademark that.

Roy Diliberto, who is certainly a great life planning advocate, argues that the financial planning profession currently charges for assets under management but largely gives away planning services gratis. He would like to move clients to a retainer basis to better express the value of what he provides. Is this a trend you see developing? The business model for AUM wasn’t clear for a year or two, and we are in that period now with these new, expanded “life” planning services. My newsletter readers are in the middle of a huge discussion about pricing and business models of the future, and how and what to charge. But yes, based on our preliminary discussions, I’d say that planners in the very near future will charge for the planning services directly. If that person with a $10 million portfolio were to walk into Roy’s office, he could say, “I charge a quarterly retainer for my services, and the goal is to help you meet whatever goals you bring in here.” The remarkable thing about this is that finally, for the very first time, financial planning won’t be a loss leader for some other activity. People will pay for financial planning, directly. I think that represents a milestone for the profession.

You have criticized some in the planning industry for still clinging to a sales culture. How will the industry break free, while still having to pay attention to business marketing? The sales culture is a relic of the cycle of the 1980s. The old paradigm was. “I offer you free (or practically free) financial planning with the expectation that you’ll buy some of the products I have on the shelf.” If you talk to people who follow this business model, you know that they’re living in an increasingly cold, dark place. The cheese has moved, and they haven’t moved with it.

Are you saying that financial planners shouldn’t market themselves? In the book, you argue in favor of both Rolodex marketing and drip marketing to build a practice. A much better word for Rolodex marketing 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.

Huh? 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 who 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. Somebody who fixes foreign cars and charges a fair price. Then you begin recommending these excellent service providers to your clients, friends, and 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. That’s the great auto mechanic, this is the great electrician, you are the great financial planner. As you weave the network, you attract new business like a magnet.. Netweaving is a part of life planning, of identifying those outside professionals who are worthy of your clients. As for drip marketing, the idea there is simply that you stay in touch with people over time, and offer them periodic information gifts in the form of articles, interesting web sites etc. to demonstrate that you have an interest in their personal development. It’s one of the marketing ideas in the book, and I happen to think, done right, it’s a good one.

Does the current generation of advisors have the skills to make the transition to the next phase of financial planning? Are these skills being taught at the CFP course or college degree-granting program levels? No. Right now, the best training I see is people gathering together in groups at conferences and talking about new psychware tools they’ve developed or heard about, with the occasional educational session that usually only scratches the surface. One of the reasons I wrote the book was to provide a summary of the best thinking that I see out there, culled from our newsletter discussion forum and from hallway conversations with pioneers. There are a few other books that begin to address the same issues–they’re listed in the sidebar, but the authors are probably familiar: George Kinder, Olivia Mellan, and Karen Ramsey. We’ll start to get coursework after the fact, and maybe that’s the way it should be. In my newsletter discussions, the pioneers are very slowly resolving the rubber-meets-the-road questions about how to offer the service and make money at it. Until they’ve finished, it probably doesn’t make sense to offer a course on the subject.

What of the planner serving middle-income consumers, people who may not have the resources to pay hefty retainer fees or even need extremely comprehensive planning services? How will the doctor/dentist model that Sheryl Garrett, among others, uses stand up in the current market? There’s Garrett Planning Services and Cambridge Alliance. I think both offer a sound business model for offering financial planning to a much broader audience than it has ever reached before, and both are entirely compatible with the life planning concept. In fact, one of the best life planning practitioners I know–Kathleen Rehl–is a member of the Cambridge group, and caters to the–how should I say it?–unwealthy.

You’ve written approvingly, in the book and elsewhere, about those who outsource many of their business functions. How important will outsourcing become in the profession 5 or 10 years down the road? It’s the absolute wave of the future. The lesson of life planning is that you want to make progress toward your own goals, and cross that threshold from subsistence to fulfillment. Then, as a pioneer in that new place, you help others cross over. Outsourcing is a way of getting rid of all those things you, yourself, are not highly skilled at. And of course, if you hire outside firms instead of employees, you don’t have to worry about being an excellent personnel manager. And the kicker is that it’s cheaper. This is the practice management model of the next cycle, and I expect to see hundreds of small companies spring up to handle portfolio share downloads, inputting client data into the financial planning software, handling client contact and scheduling appointments, inputting a client’s expenditures into Quicken so you can do detailed budgeting work for clients at a reasonable cost–and there are firms that are doing all of this already.

In the book, you offer two very important pieces of advice to advisors: Know your real strengths and delegate tasks to others; and have a plan yourself. Why do so many advisors heed neither recommendation? What will happen, in your cutting-edge world, if they don’t? They’ll muddle through and fall further behind the curve. I think everybody reading this article has unique skills, talents and passions, and I suspect that just about everybody will admit they spend less than 10% of their time on these things. What if they got it up to 40%? Then 60%? What if they did nothing but client meetings and preparation for client meetings and brainstorming things that could be done better for clients? They’d move the earth itself. In the future, planners will be more conscious of the fact that we have only a set number of hours in a week, and we need to recognize the highest and best use of our personal skills. If we can do that, and just that, and honor our unique abilities, then we become a magnet of personal success and fulfillment. That is the marketing of the future. People who radiate their own personal success and fulfillment will become the most sought-after professionals in our world. People will find them.

One of the more radical things you talk about in the book is the mutual fund being made obsolete. You propose a “new investment vehicle,” which will allow for more efficient portfolio construction, asset allocation that actually works, and other benefits. Folio(fn) comes closest, but it hasn’t exactly been an overwhelming success. What chance do you see of your NIV coming to pass? I just discovered that it’s already here. Two different advisors have told me they are actually doing what I proposed. The easy way to understand what I facetiously call the NIV is a division of labor. You have the manager, who provides expertise in the markets, and you have the advisor, who customizes the portfolio for the client. All of the assets owned by a client go into a single pool, and when one manager is buying a stock that another one is selling, then the advisor simply nixes both trades and crosses them, so there’s no unnecessary transactions. At the same time, the advisor can adjust the portfolio for any large stock holding the client may have outside of the system, and make highly-customized tax decisions based on how much that client is going to realize in income or capital gains that year–which a fund manager simply cannot do. Folios are such flexible, powerful vehicles that they were my early favorite to evolve in this direction; the technology is already there.

As long as we’re on investment vehicles, you speculate in the book that the hedge fund industry will eventually blow up. To be honest, Bob, I am pretty nervous about hedge funds going downmarket–and I think the SEC is, too. Yet some well regarded advisors, who have been prepared to put a lot of time and effort into due diligence, have found hedge funds to be a useful addition to their practices and their clients’ portfolios. What’s your take? This is an argument that I have constantly with Robert Levitt, who practices in the Miami area. Robert uses hedge funds, and he has clients with enormous wealth, and he is obsessive about studying risk/return patterns and vetting the hedge fund managers. So ever time I write that there’s danger in this growing hedge fund universe, he thinks it’s a personal attack on his investment model. If everybody were like Levitt, I’d simply relax and not worry again. But look at what hedge funds are trying to offer: stable, positive retuns in up and down markets, without clearly telling you how they intend to do it. It’s a powerful siren song, which will become more powerful if Arnott and those other academics turn out to be right about future equity returns. In addition, hedge funds typically have high costs, illiquidity, and you never know what they’re buying or why. My prediction is that a couple of hedge funds will create unbelievable track records, and a lot of advisors, who don’t have any easy way to do their due diligence, will want to offer them to their clients. They’ll sell the track records, the portfolio assets will balloon, there may even be some under-the-table or soft dollar payments back to the advisors, probably not clearly disclosed, and the hedge fund will have an incentive to keep telling everybody that the portfolio is making tons of money even when it isn’t, because that’s their sales hook and they make money as more dollars come in the door. Then the whole thing will blow up. That will be the last gasp of the AUM model of the last cycle, an effort by advisors who really want to specialize only in asset management to reach for the kind of returns that justify their ongoing fees. The terrible thing is that these advisors will spend a couple of years lording it over the full-service financial planners who are starting to work on retainer or whatever, suggesting that they (the advisors who got into the hedge funds) are the superior investors and marketing themselves as geniuses right up until the whole train goes over a cliff.


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