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Financial Planning > Tax Planning

Limitless Horizons

By Bob Keane

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Partnership is a cornerstone concept at Harbor Lights Financial Group. First there’s the equal partnership of the three principals–Ken Roberts, Rob Tendler, and Doug Lockwood. Then there’s the partnership between the firm and its broker/dealer, LPL Financial, and a more recent one with Two River Community Bank. Finally, there’s the partnership between the firm and the 650 households that make up its client base, where the success of the firm is dependent on clients being able to realize their financial goals.

Headquartered in a building they own in the Jersey Shore community of Manasquan, Harbor Lights was founded in 1994 by Roberts and Tendler, who were joined by Lockwood two years later.

Like the triumvirates that ruled ancient Rome, it’s the differences among the partners that make their union so strong.

Tendler started his career in accounting with the then Big 8 accounting firm of Coopers and Lybrand specializing in taxation and auditing, but after about two years was recruited by the Wall Street firm Donaldson, Lufkin and Jenrette where he was responsible for investment strategies, among other things.

Roberts (who was out of the country at the time of Investment Advisor’s interview) began his career as a financial analyst for a couple of Fortune 500 companies and was also an insurance agent before realizing that providing comprehensive financial planning and advice was the professional direction he wished to take.

Lockwood, on the other hand, started off in the wirehouse world with Dean Witter in 1994, but after two years left because he was more interested in offering comprehensive financial planning and thought he was much better suited to life as an independent advisor.

“There was a Forbes magazine cover in the 1980s of a monkey dressed in a suit that read, ‘Anybody could be a financial advisor,’ and I said, ‘I could be that advisor,’” Tendler says with a laugh. “So I got started when financial planning was in its infancy. We always wanted to set our firm up to be independent advisors, not having somebody telling us what we had to do or what products we had to offer, and to this day we’ve kept to that. I think it’s the only way to go.”

“The unique thing about Harbor Lights and the principals is that we’re a leveraged group,” adds Lockwood. “Rob, and Ken, and I collect the same paycheck. We’re not a silo practice, to use the industry terminology, so everything we do is cohesive.”

Although they’re not there yet, the firm’s goal is for compensation to be strictly based on fees for assets under management. “We are 50% recurring revenue and 50% commission still,” explains Lockwood. “In 2003 into 2004 we had zero recurring revenue and we began the transition process. At this point in time any assets that we accumulate are 100% recurring revenue. We’ve got some older assets that we just cannot convert yet, but we have a plan in place to have them converted within three years or sooner.”

When asked about the minimum account size for new clients, Tendler and Lockwood glance at each other and smile. “We battle with this as our counterparts probably do as well, and we just literally went through this process,” answers Lockwood. “We don’t base it on account size, we base it on revenue–$5,000/year. If you want to tag that to a $500,000 account size you probably can. We’re not there yet, but we’re looking to get there.”

“It’s something that’s part of ongoing discussions,” Tendler adds. “We have meetings on a weekly basis, like our own board of directors meeting, to sit down and discuss firm policy. Because of the way we’re set up, we want to make sure that we’re doing things in a uniform fashion and we’re not just going rogue. Doug’s not doing his thing and I’m not doing my thing. We’re doing it in concert with each other.”

Each of the principals started with his own book of business, but since all revenue is shared equally, the clients are really the firm’s. As a result, every client gets to know at least two of the three owners. “It’s important for folks’ peace of mind when they join a firm, no matter how big or small, that they know there’s going to be continuity, if something happens to the ‘planner,’” says Lockwood.

“I think that a lot [of clients] like that they’re dealing with an owner of the company, as opposed to going to a wirehouse situation, where you’re working with an advisor who may be there in five years, or may not be there,” adds Tendler.

Although the partners operate as a team, each has specific responsibilities in addition to handling clients. Tendler is responsible for compliance, Roberts for marketing, and Lockwood for public relations. The key to making it all work, say the partners, is the fact that they have what Lockwood refers to as “a commander-in-chief” in the form of COO/CFO Steve Catapano. “He’s very quiet, but he’s the glue that keeps it all together. We dream the dream and he kind of produces the results for us.”

Having a manager like Catapano in place lets the principals use their time and energy in a way that makes the most of their individual strengths. “What we’re trying to do is make use of this leveraged group and build out the larger clientele, a million and north, by using some of our talents to attract a higher asset client base,” Lockwood explains.

Partnership #2: The Broker/Dealer

When Harbor Lights was launched, the firm chose Royal Alliance as its broker/dealer primarily because Tendler had worked with Royal at his previous firm and had been satisfied with the relationship. And for most of Harbor Lights’ history the firm was satisfied as well. “We, for years, had really enjoyed our relationship with Royal Alliance, but we found that when AIG bought them they promised all kinds of technology to us and they just did not deliver on that,” explains Lockwood. “So early on in 2008 we knocked on LPL’s door and just fell in love with their technology platform.”

“It was very tough for me to let go after 25 years,” admits Tendler of the switch, “but it was definitely the right move.”

“Moving 650 households was a great challenge at the time the market was crashing,” Lockwood continues. “It was stressful when we did it, but here we are growing at a rapid pace, year over year; we see very strong growth numbers going forward.”

Harbor Lights has been affiliated with LPL since September 2008, but Lockwood, Tendler, and Catapano all act like they’re still in the honeymoon period and indicate that they don’t expect those good feelings to change.

“What they do better than anyone else is to anticipate what our needs are going to be, and our needs are really reflective of what our clients are looking for,” says Catapano, who says that besides the technology, he’s been especially impressed by the quality and depth of the management team at LPL.

Lockwood adds that the back-office support and technology assistance that Harbor Lights has gotten from LPL has allowed everyone in the firm to be more productive. “Many firms like ours think they can do it all themselves. I think that we know we can’t,” he says. “LPL has much deeper pockets and resources than we do, so why not use them as that resource?

“Our year-over-year growth is 47% to the positive,” he continues, acknowledging that some of that growth can be attributed to strong market performance. “We do see a 25% growth rate moving forward in our business cycle. A lot of that has to do with not spending time doing things that are a waste of time.”

One of the time wasters that bogged down many of the staff under the old B/D arrangement was dealing with irate clients who had received erroneous statements and then having to get them corrected. Now not only are the statements correct, but the technology has allowed much greater integration of all the client information, which makes managing 650 households much easier. As an example, Lockwood points to a new feature that LPL added in response to advisor requests that allows universal portfolio rebalancing, rather than manually readjusting each account.

He also says that client service is becoming more efficient because of the relationship with LPL. Harbor Lights doesn’t have to hire new people every time it launches a new initiative because help is available from its broker/dealer. One of the projects where LPL is lending a hand is with a client segmentation effort wherein Harbor Lights is attempting to identify those clients in the sweet spot of $500,000 or more in assets.

“We’ve always believed, even when we were with Royal Alliance, if we’re partners with a broker/dealer, then let’s be partners,” says Lockwood, who when we spoke had just returned from an industry meeting in Chicago where he spoke on behalf of LPL. “We put a lot of effort into developing a two-way street, delivering a service to them, which is having a true equity partnership with your broker/dealer. At the end of the day they can help us and we can help them.”

Partnership #3: The Community Bank

One of the ways that LPL has been of help to Harbor Lights was in securing the firm’s latest partnership–with Two River Community Bank (see Partners in the Community sidebar). The conversation with the bank, which had been working with another advisory firm in the area, began because of a personal relationship Tendler had with an executive at the bank (his daughter and the bank exec’s son were both valedictorians in different years and both attend Colgate University). Although the bank approached Harbor Lights about working together, both Tendler and Lockwood agree that the deal would never have been consummated without LPL’s support.

Tendler says that when Harbor Lights signed on with LPL it knew the broker/dealer had a division that provided financial planning services through banks, but never thought the firm would need to call upon it.

For those advisors who may not be familiar with how banks fit into LPL’s business, in announcing record earnings for the first quarter of 2010, LPL Financial’s CFO, Robert Moore, noted that the banking channel is “an important strand of our business model” that represents 30% of LPL’s overall revenue and number of representatives. “Within our financial institution channel,” Moore said, there are 750 institutions, “which gives us the largest market share,” and “we view that as a source of growth,” in part because “those institutions have experienced fairly strong growth” themselves.

When it came time to present a partnership deal to Two River’s top management, Lockwood, Tendler, and Roberts explained what Harbor Lights has to offer their clients and how they do what they do. LPL sent a team from Charlotte, North Carolina, to present along with them.

“We wanted to show that it just wasn’t Harbor Lights Financial, but that we have an industry leader standing behind us in terms of servicing,” recalls Tendler. “That would not have happened, I think, in any other situation we were in. It’s an added benefit of joining LPL. What we’re finding is that any situation that comes up, if we can envision something, we can go to LPL.”

“LPL has a couple of different models,” explains Lockwood. “They have the independent model, which is a hybrid model, and what we’re using, where a bank can go out and hire a firm like ours to do the financial planning for their customers and then they get a revenue-sharing agreement. LPL does all the behind-the-scenes work, all the compliance. They do all the splitting of fees at LPL.”

Lockwood explains that under the firm’s previous broker/dealer arrangement, if Harbor Lights had somehow managed to land the bank’s business, the accounting and back office work would have been handled by Harbor Lights internally, but now LPL does it all. He says this allows Harbor Lights to focus on the relationship with the bank and its customers and not on the minutiae of managing the details.

He adds that the Harbor Lights principals have been told by some industry consultants that this relationship should be worth, at a minimum, $1 million a year in extra revenue. The relationship gives the bank the ability to offer customers additional services and tap into a new revenue stream without much expense or effort.

It’s been in place for less than a year, but the relationship between Two River Community Bank and Harbor Lights Financial appears to be a win/win for both entities and a real plus for the clients they have in common.

“The advantage for them is they don’t want to have an in-house financial planning firm,” says Tendler, adding that the firm’s independence and residence in the same community the bank serves were also important factors.

“I think another reason is that the bank realizes, along with us, that relationships with our clients, or their depositors, are strengthened by having more financial connections,” adds Catapano. “By having a customer that’s connected with another part of their business or with us, that makes that customer a little bit stickier.”

Although individual bank branch managers have been referring appropriate customers to Harbor Lights, the bank has recently kicked off a concerted effort to introduce the firm to its customers. “You want to get it off the ground, but you don’t want to get it wrong,” explains Lockwood. “The bank has, to their credit, been doing statement stuffers and a separate letter as well.”

Another indicator of the success of this arrangement between Two River and Harbor Lights is that LPL has added the New Jersey firm to the list of advisors who are willing to hand off any bank business that the B/D doesn’t want to take on itself.

Partnership #4: The Client

Although the principals at Harbor Lights are in the midst of segmenting their client base into two groups, with $500,000 in assets as the dividing line, they haven’t changed who they see as their clients. “Our client is the white/blue collar worker who worked for the same company for 35 years, and that’s still the client we want to attract,” says Lockwood. “Our largest group is from IFF (International Flavors and Fragrances, which has facilities in Union Beach, Hazlet, and South Brunswick, New Jersey, and other locales), which Rob represented, and Verizon Communications (in telecommunications research-rich New Jersey). That typically is the bread and butter of our revenues and our clientele. Then we have the more high-net-worth clients that are coming to us through referrals. Nearly 100% of what we do here in new business is through referrals.”

In the case of those two companies, the clients are mostly pre-retirees, and the advisors at Harbor Lights are working with the individuals, not the company plans, but it’s a good and steady source of business. “We get one or two in a company and it grows like a tree,” Lockwood observes. “Every client you get from there becomes an internal source.”

To make the point, he notes that the firm has over 200 Verizon retirees as clients, all of whom were acquired through referrals. In 2003 Verizon had a major downsizing and Harbor Lights picked up 100 new clients.

Even when faced with such a large influx of potential new clients, the advisors look at each client as an individual. “We didn’t tell all of them to retire,” reveals Lockwood. “If you’re 52 years old and you don’t have enough to walk away, then you shouldn’t walk away. We try to give the right advice, which everyone in our business is supposed to be doing.”

Speaking of the same situation, Tendler recalls that a number of the individuals they met with had already been to see other advisors and been advised to retire. “They didn’t look at the actual numbers,” he says. “We do a good job comparing where the client is now on a net after-tax basis, and then, through the programming work that we do, where they are going to be in retirement. If their capital runs out, which can easily be seen in these reports that we do, we advise the client that it’s not the right time to go. Do the right job; it always comes back to you tenfold.”

Lockwood nods in agreement, adding that some of the people they advised against retiring because it was inappropriate have come back to them several years later when the timing was more fortuitous, primarily because they got good advice initially.

While they stress that every situation is unique, Lockwood and Tendler say the first steps tend to be the same.

To begin, the potential client receives an inventory checklist of all the material they should bring to the initial consultation–list of assets, tax returns, estate planning documents, and the like. There’s also a 10-page questionnaire that asks about their financial life and their tolerance for risk.

“Everybody’s a little bit different in how they view retirement, and through their goals and objectives we help direct them to cover the bases financially first,” says Tendler. After that come other considerations like travel, buying or selling a home, or even the desire to help children pay off student loans. “We want to know everything that affects them financially, emotionally, psychologically, and through that whole process come up with what we think is an impactful way to look at retirement,” he continues. “Maybe a lot of firms say this, but I feel we deliver a really good view of what retirement looks like. It’s like a company would look at themselves–budget vs. actual. You can look at what we are projecting and what is actually happening. Clients get a kick out of that.”

As has been the case for advisors nationwide, the last two years have been difficult for many of Harbor Lights’ clients as they’ve watched their asset levels fall, and many have been forced to make hard choices. For some clients, says Lockwood, that means putting off the time of retirement for another few years; for others it’s a willingness to give up on some of the activities or purchases to keep to the same timetable. Regardless of what kind of adjustments they’ve had to make, Lockwood thinks many clients belatedly have realized that they should have done a better job of saving.

The task now is to keep those clients on track and keep them from trying to recoup their losses haphazardly. “We have to protect them from themselves now that the markets are coming back,” says Lockwood. “The thing that I get most concerned about is clients who say ‘We’re 70% bonds and 30% stocks, let’s flip it, now that the market’s at 11,000.’ We have to get involved and say, ‘Time out!’”

Lockwood started the discussion about clients by noting that Harbor Lights is not looking to change its basic client profile, but it does want to make sure it is positioned for substantial future growth, which is the impetus behind the firm’s client segmentation initiative.

“As you can imagine, 650 relationships is quite a lot for three advisors to maintain,” says Lockwood with a smile, adding that there are also nine other individuals in the firm, almost all of whom are involved in client service at some level. “What we’re trying to do is segment our top clients and deliver Mercedes white-glove service to those top clients. Now the clients who don’t fit into that, we’re not going to give them black-glove service; we’re going to give them good service, but we’re going to have relationship managers, junior advisors, service them better than they think they should be served.”

The first step in that process is segmenting the client base so the principals have a clear picture of whom and what they are dealing with. The second step will be hiring those previously mentioned relationship managers/junior advisors to provide outstanding service to those on the lower rungs of the wealth ladder. What the firm wants for those positions are professionals with three or four years experience, passion, and a good work ethic.

“Let’s say we want to be in five years at half a billion dollars under management. If we want to do that we can’t grow by taking on 600 more clients,” explains Lockwood. “It’s impossible.”

Taking on additional staff to manage the lower dollar-value relationships will allow the principals to concentrate on delivering the high-end service Lockwood alluded to.

“My role as the planner, the advisor, is to manage those relationships intimately,” he says. “Breaking out the other ones for a team of people to manage so that we can continue to grow the firm at a continued pace of at least north of 20%.”

As the principals attempt to intimately manage their most important relationships, one of the things they’re doing is rolling out what Lockwood refers to as “a lifestyle concierge service” that will go above and beyond financial advice.

The examples he gives are tasks like negotiating a deal for a client who wants to buy or lease a new car, or through the firm’s own concierge at American Express, getting tickets for a hot Broadway show. The service pays off. He says that he’s had clients come by to show him their new car on the way home from the dealer and from the smiles on their faces, knows he’s helped cement that relationship for life.

“We’re in a commoditized business,” Lockwood admits, “but I think at the end of the day the difference between us and the next person is us, and the passion that we have. We have a lot of history of making sure our clients feel that.”

E-mail Managing Editor Robert F. Keane at [email protected].

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