The lure of owning your own company can conjure up images of afternoons on the golf course and evenings around the dinner table – with some work in between, of course. Vanity aside, starting a financial planning business is a serious undertaking, and you may in fact find that you will tally up more time with your own company (especially in the beginning) than all your previous working hours combined. There’s a lot that goes into opening your own practice – from evaluating your risks to building a large enough book of business. The question is: Are you ready?
Book of business
After 12 years, James Twining, president of Financial Plan Inc. in Bellingham, Wash., left the security of his job at a major wirehouse and started his own financial planning practice. His reason is one that is echoed throughout the industry: He didn’t feel the wirehouse was serving the best interest of the client. He knew he could do more, and he knew his clients deserved more. Despite the obvious risks involved, Twining started his own business, armed with 12 years of experience in the field and a committed client base.
“I think that in any major life decision there is always doubt. But you weigh the odds, and if they look good enough you take the plunge,” he says.
The key to making it work, Twining attests, is a solid book of business. For younger advisors in the field, this is often lacking. And although some advisors started their businesses from scratch, Twining doesn’t recommend it.
“An independent advisor who is completely starting from scratch will almost certainly fail unless he does business on a commission basis,” he says. And commission-based selling, Twining says, is “fraught with big challenges and conflicts.”
Rather, his advice is: wait. Gain experience at an investment firm, build a solid book of business and then think about going independent.
For the fee-based advisor, Twining advises having $10 million under management. Because the majority of fee-based advisors are working on a percentage of assets under management, they average about 1 percent, he explains. This works out to be minimum gross revenue of $100,000.
Other advisors might have different numbers in mind, but one thing is for certain: If you’re taking clients with you from a major wirehouse, prepare to lose a few. It’s the nature of the beast.
Risks and worries
Losing clients and a chunk of your book of business is always a worry when you’re starting your own practice, but it’s a practical reality that you need to plan for. Stephanie Guerin and her partner, Kelly Voitenko, owners of The Planned Approach in Prairie Village, Kan., started their own business to structure their jobs around their families. They suggest keeping it simple when evaluating if your book of business is suitable for starting your own company.
“The simple version is really this,” Voitenko says, “gross income minus expenses, including salary and benefits for you, equals net profits.” Then, Voitenko says, reduce that amount by a fair percentage because you would be surprised to see how many clients won’t follow you.