The formula for success offered to investment advisors by a wide range of consultants and experts is to find a small group of high-net-worth, or even better, ultra-high-net-worth, clients who have a common characteristic (profession, ethnic background, circle of friends) and service the heck out of them. With a high level of assets under management and a small number of clients the advisor can pull in some pretty hefty management fees without the headaches of servicing hundreds or even thousands of clients. It sounds pretty simple, and for those advisors who can pull it off it’s proven to be a winning strategy.

The reality, however, is that there probably aren’t enough of those clients with investable assets of $10 million, $20 million, or more to match up with all the advisors who’d like to serve them. There are many more potential clients with $1 million in assets and an exponentially greater number when the asset level drops to $500,000, or even $250,000. The trick has always been finding a way to run a profitable business while helping clients who aren’t millionaires.

Now, one already successful advisory firm–Hanson McClain, named after its founding partners, Scott Hanson and Pat McClain–thinks it has figured out how to serve clients with assets at that level and even lower. The rest of the advisory world, and many of those experts, will be watching with great interest. After all, the demand for good advice will only increase due to the market crisis and the flood of retiring boomers. Yet where will the supply of advice come from, especially for those who are definitely not high net worth?

Retirement Utility

Although they started with the same goals of serving those high-net-worth clients as virtually every other independent advisory firm and handle that part of their business extremely well, Hanson and McClain have spent the last 18 years developing a highly profitable niche business by helping workers from the telecommunications and public utilities industries plan for retirement. To many advisory firms that might not seem like a market worth developing, but assets of clients from that sector now total about half of the $1.1 billion that Hanson McClain has under advisement.

Hanson McClain, the pair’s Sacramento-based independent financial planning and investment firm, got into the world of telecommunications and utility workers simply enough. A client’s spouse was about to retire and receive a significant lump sum pension payment from the phone company. As they started working with that client, they discovered that there were many other people about to leave the same company with similar packages, so they offered to conduct some retirement seminars.

As Hanson explains, it turned out to be an ideal client group. “They’re an older work force, so they tend to have more assets than younger folks,” he says. “And they work for industries that were quasi-monopolies over the years and provided wonderful benefits to their employees. So these folks all come out of jobs with great pension plans. Whether it’s a monthly payment pension or a pension lump sum, we found the average account size is about $400,000 for people retiring from the companies we’ve targeted. They’re not millionaires, most of them, but they have decent size accounts for just about any advisor.”

McLain adds that there’s a tremendous need among workers in those industries right now due to demographics. “If you look at telecom and electric utilities, approximately 40% of the workforce is pension-eligible, and they will be leaving their jobs sometime in the next two to 12 years,” he points out.

For advisors who tend to be generalists, the intricacies of some of these companies’ pension and 401(k) plans can be somewhat difficult to navigate and the effort might be a little too time-consuming to help just one client. On the other hand, as Hanson points out, “once you understand a company’s pension plans and 401(k)s and you understand them well, you can be highly efficient working with clients. There’s no reason you can’t have appointments that range from 30 to 60 minutes max, and there’s no reason you can’t meet with 10 clients in one day. Not only do you have efficiencies in the office, in the organization, but, out in the marketplace, because it’s a tight-knit group, once you start doing a good job for a few people they start letting their friends know.”

Because the members of this client group are so similar, McClain notes, it allows the firm to start working with prospective clients ideally five years prior to retirement, which is also five years before the fee-only firm will receive any compensation.

It’s a program that over the past 18 years has worked out pretty well for Hanson McClain, which currently serves an estimated 1,500 retired telecommunications and utility workers with collectively more than half a billion dollars in assets. Serving this particular niche has worked out so well for the firm, in fact, that Hanson and McClain now help advisory firms in other parts of the country do the same thing. “We have a network where we work with about 80 independent advisors across the country that are either fee-only or are with different independent broker/dealers. They use our system and our model to work with these employees as well.”

Hanson McClain provides the firms in their network with the tools and training they’ll need to serve this specialized group of clients, including workshops, online resources, and access to unions and other organizational groups. There are no upfront consulting fees. Instead there is a sharing of the revenue generated from those clients. “Our typical share is 20% of the revenue,” says Hanson. “If somebody joins our program and has little success, we have little success, and if they have tremendous success, we have tremendous success. So we have a vested interest in seeing their practice grow.”

There are a number of reasons why another advisory firm might consider affiliating with Hanson McClain and tapping into this market, not the least of which is having access to a consistent stream of qualified clients. “What they really want is more assets under management,” says Hanson of the firms in the network. “If they can double how much money they’re managing, they can double their revenue. And I don’t know who wouldn’t like to double their assets under management.”

McClain adds that it would be much harder for the average advisory firm to replicate from scratch what Hanson McClain has spent almost two decades developing. “Some of the techniques we use are counterintuitive to what the industry is taught to do–which is to go in and sell investments, tell them how great the investments are going to do,” he says. “Our whole strategy is to help the employee prior to retirement so that when they retire, they’re better prepared. We like to get people involved five years prior to retirement. That’s when people get extremely serious about the decisions they’re making.”

Certainly the idea of working with someone for five years before they become a paying client is counterintuitive to how most advisors approach the business. “What makes this model work is the fact that they have such great benefits that they retire with quite a bit of money. And that’s where you end up getting paid,” explains Hanson, noting that with current life expectancies the retiree will be a client for 25 years. “So you invest five years out of a 30-year relationship and you get paid for 25 years,” he says. “I think it’s worth it, but if you do that same thing with someone who’s retiring with $50,000, the economics are not going to work.”

Extending the Brand

Like many advisory firms, Hanson McClain regularly receives calls from individuals–children of existing clients, friends of friends, listeners to their weekly radio show (see The Power of Radio sidebar)–who would like to become clients but can’t meet the firm’s $250,000 minimum. The standard procedure had been to refer such potential clients to another advisor who might be more willing to take them on, but at some point McClain says he added up how much money they were letting get away from them and saw that it was a substantial figure.

But the question remained on how any firm could profitably work with a client that might have only $50,000 to invest. The answer was a new division, Hanson McClain Financial Services, that caters to clients with between $50,000 and $250,000, which was launched on December 1.

“I see a lot of other larger shops and like ours they have account minimums–$500,000 or $1 million minimums,” observes Hanson. “That’s fine, and they clearly don’t want to disrupt their existing organization with these smaller accounts because it will muddy the waters, but most businesses have multiple product lines–even Mercedes. You can spend $30,000 on a Mercedes and you can spend $500,000 on a Mercedes. Most businesses operate that way.”

While the partners want the new division to benefit from the strength of the Hanson McClain reputation, they want to make sure that the new offering doesn’t dilute the strength of their core business. To help prevent that from happening, they’ve housed the new entity in a separate location and have staffed it with an advisor and service person who do not work with existing Hanson McClain clients.

“We think that for 2010 it might bring in $15 million to $20 million in assets,” adds McClain of the line extension. “A lot of advisors would be happy picking up $20 million a year. I don’t see anything different with trying to serve those clients,” he says. “It’s just doing it profitably as a business.”

How They’ll Do It

Hanson points out that firms such as Charles Schwab and E*Trade have found a way to offer investment services to people who don’t have a lot of money. “The difference is that with our advisory practice, with its $250,000 account minimum, and an average account size around $425,000, we provide a high level of service,” he says. “All phone calls are answered by a live person. We have teams so that clients talk to a small group of employees. If they want to leave a message, our office rule is that all calls are returned within four hours. They only get voicemail if that’s something they request. We treat these people very well. We can’t afford to provide that same level of service in the junior division.”

“But what you can do is a quick financial plan,” continues McClain. “A good financial advisor should be able to sit down with them and in 15 minutes give them four things that they should do–Boom! You’re done. They just need someone to tell them how to do it. They don’t need graphs or spreadsheets or any of that garbage.”

After an initial in-person consultation where the advisor would draw up a “quick financial plan” and together with the client decide on an asset allocation strategy, most contact will be handled electronically. Once a year clients will get an e-mail telling them that if they’d like a financial review to fill out the attached document and return it to the firm, after which they’ll be contacted by an advisor.

“They get an annual review, but it’s done over the phone,” explains McClain. “It takes 15 to 20 minutes. You just make them take more responsibility for the planning process at the lower level…They get a level of service that’s better than what they would get in most discount brokerage firms or even wirehouses, but not at the same level that is consistent with our full advisory firm.”

The new division will rely on the back-office capabilities of the parent firm, which will also handle all the investment management. “It will only be fee-based product and they’ll use Hanson McClain models that already exist,” explains Hanson.

McClain acknowledges that it remains to be seen how actively the new division’s clients will participate in the process, but he’s certain that the business model they’ve created can be successful. “The first year it will be break even,” he says. “The second year will be highly profitable because you won’t have to add any staff to that for three or four years. You can get $100 million under management before we have to add staff.”

“Our hope is that within three to four years it will provide an extra 10% to our bottom line,” adds Hanson.

If the new division is anywhere near as successful as Scott Hanson and Pat McClain believe it will be–and as their previous ventures have been–don’t be surprised if other firms look to get in on the action.

E-mail Managing Editor Robert F. Keane at