The View From The Top

One of the surest signs of the growing importance of the independent advisor business model is the proliferation of studies that seek to unlock the secrets of advisor success by studying the best firms. The leader of this growing corps of benchmarkers is Moss Adams (whose lead researcher, Philip Palaveev, discussed its 2007 Study in October 2007′s cover story), but it also includes Rydex AdvisorBenchmarking (whose latest contribution to Investment Advisor begins here), the firm contracted by the FPA to benchmark its members–McLagan Partners, and Schwab Institutional, which just released the findings of its second annual benchmarking study (see sidebar).

This flurry of research reveals another truth–there are so many unique advisor business models that it’s impossible to accurately and absolutely capture the one, two, or three, or even four hallmarks of a successful advisor. The differing backgrounds and interests and entrepreneurial nature of independent advisors makes each one sui generis to some degree, despite the many similar traits and challenges shared by independent advisors.

To understand the whole, you have to explore the parts, and in this article, we will explore the advisor universe through the eyes, insights, and unique voices of six big, successful advisors who agreed to give hours of their time at a Schwab Institutional gathering in Kohler, Wisconsin on September 26 to relate their individual stories of success. These six advisors–Chuck Betz, Dave Huber, Jerry Johnson, Joe Sheehan, Mark Soehn, and Marita Sullivan–come from firms scattered throughout the heartland of the country, are RIAs that custody large portions of their clients’ assets at Schwab, tend to offer what most observers would call wealth management to their mass affluent clients, rely mostly on referrals to gain new clients, and are quick to share credit with their partners and employees for the gains they have made.

However, these six also started in far different businesses–in accounting, insurance, banking, brokerage, corporate benefits–and are CFPs, CPAs, CFAs, and JDs. They have differing ownership arrangements, client minimums, fee structures (which seem to be still evolving in several cases), and client niches. They realized years ago that they needed professional managers to run their firms like businesses–one has had an HR VP for 10 years–yet are deeply involved in their clients’ lives. That’s why the stories of this half-dozen of the best and brightest hold treasuries of wisdom for advisory firms of all sizes, shapes, and duration.

In the Beginning

“One of the things they don’t teach you is what it’s going to cost to start your own business,” cautions Dave Huber, who started life in the late 1970s as an insurance agent, became a CFP in 1988, an RIA in 1993, and grew his Huber Financial Group planning firm outside Chicago partly through the referrals that came his way starting in 1998 from what is now called the Schwab Advisor Network. Huber just signed a deal to sell his practice to Mesa Holdings from Minneapolis; while the reasons behind that decision are many, he says, they flow from asking himself, “How do I take this business that I’ve built up and create a company that’s going to outlast me?” The main motivator was his desire to be in control of the transition process, and not wait so long that his options were limited. Between the insurance work and the exit strategy, Huber came to a crossroads several years ago, one visited by many other successful entrepreneurs. He could “stay small and work as a sole independent advisor, or grow it into an actual business,” he says. “I chose to grow it into a business.” It would also be a business where he controlled how he ran the firm, who he hired (more about which later), and who his clients would be.

In building a practice, Huber raises the importance of educating your clients about what you offer, and what you can’t. “You can do it with a shotgun approach, or you can work with people you want to work with, be more selective. People have to buy into what you’re telling them. If they don’t, it’s probably not going to be a good fit.”

The background of Chuck Betz “was more traditional audit accounting and tax.” He joined the CPA firm of LarsonAllen in Minneapolis right out of college in 1976; got his CFP in the mid-1980s; and since his true love was money management, with a partner he left the CPA firm in 1993 to launch a boutique money management firm. Nine years later, he rejoined LarsonAllen Financial with a mandate to grow the financial services business.

Like Huber, referrals are the major source of Betz’s marketing, but with a twist: clients come through the partners of the accounting firm. “We build relationships with them, so they’re comfortable referring their clients to us.” Thus, when LarsonAllen Financial gets a new account, “we really have two clients to please: the client himself, and the partner in the accounting firm.”

Jerry Johnson admits that when you start a firm it’s common to take clients of any size, but as the president of the multifamily office firm Meristem in Minneapolis, “We’ve figured out what kind of clients we like to work with, and what we’re really good at.” What Johnson and Meristem are really good at is handling the often-complicated needs of very wealthy clients. “We tend to gravitate toward more complicated clients with more wealth,” he says. The firm’s average client has around $8 million, though newer ones are in the $20 to $30 million range.

Johnson’s firm typifies another trait common among these leading Midwestern RIAs: they get paid for what they do. Meristem, he says, charges two fees: a standard one for managing the client’s assets, and a “family office fee” that covers all the financial related tasks it handles for its clients, though he hastens to add that the firm doesn’t do any “oddball stuff.”

Johnson argues that “clients appreciate what they pay for.” The firm has raised fees twice in the last three-and-a-half years, but has not had pushback from clients, which for Johnson confirms the business strategy of finding, and educating, the right clients for your firm. “We’re much better at finding the right clients to take on as new clients, and for the most part they have these [family-office-type] needs,” and are willing to pay for them.

You Get What You Pay For

Getting paid for what you actually do is something that resonates with Mark Soehn, cofounder and managing director of Financial Solutions Advisory Group in Chicago. While his firm so far has only $125 million under management, (Huber Financial has $350 million in AUM; Meristem $1.7 billion; and LarsonAllen Financial $1.4 billion), Soehn is as committed to the RIA model and its unique service offerings as the bigger advisors in the group. He and his partners have instituted a fee structure meant to educate clients while compensating them for their work–the firm charges a minimum of $3,000 for the financial plan they write, and depending on the complexity it could be much higher. “We have not had one new client say they’re not coming on board because they’re paying this extra fee. We believe they see the value of the plan because they’re now actually paying for it.”

JMG Financial, based in Oak Brook, Illinois, has never had a problem charging its corporate executive clients for its financial plans, says Marita Sullivan, a principal and the firm’s CEO since its inception in 1984. Those execs are delegators, Sullivan says, and “perfect clients” for the firm which now has 49 employees, with 13 advisors and $1.4 billion in assets. The minimum retainer is $10,000, she says.

So what’s the problem? JMG just “redid our whole compensation plan, and in June opened up our ownership, so now we have 12 owners.” Why would such a successful firm remake itself? Sullivan says it was prompted by the overarching issue for many firms today: how to find, compensate, retain, and motivate employees.

“Our firm became very, very successful because of the entrepreneurial spirit. It was silos; and you eat what you kill,” she recalls now. “We ended up having very highly compensated, very smart advisors,” but “nobody cared if the firm grew; nobody cared about the other employees; nobody was hungry.” Sensing that something was wrong but unsure of what it was, the principals hired Moss Adams, implemented most of its recommendations, “and we became a firm. We changed our compensation. We changed our ownership. Our advisors get evaluations now, their bonuses are contingent on doing certain things. They’re expected to bring in new clients.” The process was painful, but it resulted in all the employees learning, she says, “there’s a goal greater than you.”

At the Moneta Group in St. Louis, there are 27 principals and 140 total employees, notes Joe Sheehan, who serves as managing partner of the firm, which advises on $5.7 billion for 2,100 families. Moneta sees its job as being CFO to these “successful” families, outsourcing the investment management–”we really manage the management”–but providing a host of other services. Moneta has an estate-planning attorney on retainer who reviews clients’ trust documents, “We do tax returns. We’ll help them with mortgages, with their bank relationships, with whatever financial happens to occur. We’ll help them with elder care.” From the beginning, however, Moneta’s success has partly come from having “professional management,” argues Sheehan, “somebody who was responsible for strategy of the firm and implementing those strategies to make sure we were looking out five years, and progressing toward the goals we wanted to achieve. As a primary goal, not as an ancillary duty,” he says, but as “This is my responsibility; if this doesn’t happen, it’s on me.”

Finding, and Keeping, Good People