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Financial Planning > Behavioral Finance

After the Flood

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Bob Reed considers himself one of the lucky ones. When Hurricane Katrina took its unexpected final turn toward the Gulf Coast, the Covington, Louisiana, financial planner evacuated his family, packed up his office computer, and headed for Tuscaloosa, Alabama.

Even with his assistant in Arkansas, his junior planner called up to serve in the National Guard, and his clients spread all over the South, surprisingly, he didn’t have much trouble setting up shop in his brother’s house. His client files were on his hard drive, he reached most of his clients by phone, and since both his back office and compliance functions long ago had been electronically outsourced to other regions of the country, he was able to start working with his clients as soon as they were ready to work with him.

Reed moved back to Covington (a suburb across Lake Pontchartrain from New Orleans) when power was restored a week after Katrina made landfall, leaving his wife and school-age children back in Tuscaloosa. He was relieved to find his house and his office relatively unscathed. Three days later, he was able to get back on the Internet, and get back fully to work. So far, he says, his clients have been “quiet.” Their concerns have been finding new cars, filing insurance claims, and of course, managing their cash flow.

Yet, with everything seemingly under control at the moment, Reed is far from sanguine with his current situation. When asked what help he needs, he refers to a recently written five-year plan that is now as much in shambles as the city of New Orleans itself, and said he asked his management consultant, Angie Herbers, to come on down and help him sort out his scattered staff and what he sees as his three options: revamp his existing plan to expand into Baton Rouge and New Orleans, focusing only on the former; sit tight in Covington until he can see the future a little more clearly; or relocate to another city altogether, possibly back to Tuscaloosa.

In the wake of any disaster, uncertainty about the future is one of the most uncomfortable feelings all business owners and their employees can have.

The devastation and aftermath of Hurricane Katrina (much of which we have not even begun to comprehend) has created a level of uncertainty about the future of most if not all of the 3,000 or so (by my estimate) independent financial planning practices in the region. Many business owners, not just financial planners, have lost their offices, homes, likely some family members and clients, and their very livelihood.

Support for Independents

While we have yet to discover the ultimate impact, one thing is certain: When rebuilding a dream that right now seems to have been destroyed, the decisions that are made in the process will be the determining factor in these business owners’ ability to thrive along the rough road ahead–and this is the very support that the rest of the financial planning community can and must provide them if independent advice is to prove truly as viable as being a captive broker at a wirehouse. For as the images of New Orleans underwater, and thousands of hungry, thirsty, and victimized people in the Convention Center start to recede from our minds, and the country is left to sort out how such a disaster could have been handled better, and who is to blame that it wasn’t handled better, the financial planning community is left to face the reality of what it gave up to have independent practices.

Once the life-threatening emergency seemed to be behind them, most independent planners naturally turned to their broker/dealers or custodians for support: an office in which to set up shop, computers, phone lines, and client data files. Most independent B/Ds rose to the challenge, finding firms that were in nearby but unaffected areas to provide office space and technology. Schwab, which only had a few of its 5,700 or so affiliated advisors displaced, opened the doors of its retail center in Houston to accommodate them. Most important, the brokerage firms served as centers for clients to find their advisors and vice versa–the first professional call most advisors made was to their B/Ds to tell them where they were, and when displaced clients called in, the circle was completed.

Yet, after a few days of exchanging e-mail with advisors who had been displaced by Katrina or who were relatively unaffected in stricken areas (one lesson from this crisis is that the Internet has proven a whole lot more reliable than the phone system), it became clear that as in Bob Reed’s case, advisors used their technology to get back up and running fairly quickly and easily.

The real challenge will be helping these advisors rebuild their businesses. I must admit that I didn’t get a total warm and fuzzy after I heard that, when asked, a number of B/D executives replied that no, they didn’t actually have a legal obligation to help their advisors, because after all, they are independent contractors. But, they added less than reassuringly, they certainly would help as much as they could.

Compare this to the treatment that wirehouse brokers, as employees of their firms, receive in a crisis such as this one. Yes, they have offices all over the South to move into, temporarily at first, but also longer term if necessary. Yes, they are provided computers, telephones, administrative support, and, of course, access to the same client files they had in their original offices. In fact, the disaster response program is so strong at some of these firms it’s as if their displaced brokers merely moved to a second office. Most important, however, these firms are committed to rebuilding the books of their brokers through referrals, clients from retiring brokers, marketing, whatever it takes, because it’s their business.

Independent B/Ds’ Limitations

On our side of the fence, independent B/Ds aren’t likely to provide this level of support to rebuild traumatized practices. For one thing, they can’t afford it: with no proprietary products and 90% payouts and up, even the most successful financial planning B/Ds run on very narrow margins. With few exceptions they don’t have the deep pockets required to invest in rebuilding the businesses of their independent reps.

What’s more, they’re not set up to provide the information and support necessary to reestablish a financial planning practice. Unlike their wirehouse counterparts, independent B/Ds (or custodians) didn’t have much of a hand in helping independent advisors build their practices–that’s one of the things that makes them independent. In return for this lower level of support, independent advisors get a much higher level of payout, as much as 100%, in addition to an even more highly valued autonomy in servicing their clients.

They also get home offices that are neither staffed for nor with the expertise or resources to provide much help in building or rebuilding practices, particularly in times like these. Consequently, to get the knowledge and find the resources to build independent practices, financial planners have largely turned to each other, sharing information, experiences, vendors, and sometimes even clients in local association chapters, at national gatherings, in self-created study groups, and often these days over the Internet. It’s just this collegial rather than competitive atmosphere among financial planners that has long baffled industry observers, especially those coming from different industries such as Mark Hurley, and many others.

More like other professionals such as doctors and lawyers, rather than other players in the financial services industry, financial planners have historically turned to each other for support and guidance. So it’s no surprise that in a time of unprecedented disaster, affected planners would turn to their traditional support group: other planners. Unfortunately, since the profession has never faced a crisis of this magnitude before, it didn’t have the programs and procedures in place to respond effectively. As with governments at all levels around the country, one might have thought 9/11 would have served as a wakeup call to consider such a response, but that clearly hasn’t been the case.

The FPA Rises to the Challenge

Fortunately, the financial planning community is stepping up. The Financial Planning Association has taken the lead in relief efforts, as you might expect from the dominant membership organization, by creating the Hurricane Relief Center for Planners on its Web site at In fact, having the ability to respond to situations like this is one of the reasons it’s important to have a dominant organization.

To respond effectively to this crisis, the planning community needs a single clearinghouse for information, resources, and volunteer efforts to help affected financial planners and their clients. The HRCP is such a place. Open to all financial planners who need help or those who want to help them, the HRCP will enable all financial planning groups, the vendors who serve them, and their broker/dealers and custodians to pool their resources to create a powerful disaster response tool, without recreating the wheel or stretching beyond their means. Headed by the FPA’s Laura Garrison, and staffed largely by volunteers, the HRCP will bring together volunteers with planners who need help, and find resources to solve the problems faced by displaced advisors, including financial aid.

Of course, the key to any effective response is to quickly and continuously identify the real needs of those who need help. This is particularly essential in a situation such as this: one that the industry has never faced before, and on an unimaginable scale. There are no experts here; everyone is virtually flying blind. As with Bob Reed, those needs can, and probably will, prove surprising. But the FPA, NAPFA, and other organizations and companies are already committed to working together to listen to whatever needs planners have and finding the resources to respond effectively. With a community-wide response, we may just witness yet another demonstration that independent advice is truly more powerful than the alternative.

Bob Clark, a former editor-in-chief of this magazine, sagely surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].


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