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Practice Management > Building Your Business

Road to Independence: Four Keys

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In the financial services industry, as in so many other professions, creating a successful enterprise comes down to a few key areas. First, you must have something of value to offer. Next, you must have a good business plan and be efficient and effective in carrying out your mission. Finally, you must get your message out to the right people, your target audience.

In this article, the ninth in a series of articles chronicling my personal Road to Independence, I will share a few lessons I’ve learned during the past three years and discuss what I’m doing to attract new clients and service existing ones at my firm, Integrity Wealth Management in Baton Rouge, Louisiana. Although I have been “in the business” for over 20 years, I’ve learned that operating as an independent is very different from working in a large corporate environment. I believe there was once a time when these large entities were more nimble and eager to grow, that at one time they were completely focused on helping the client. However, you might say that their success has led to their downfall. You see, as they grew larger and larger, they lost sight of what was important. They lost the client-centered focus that made them great and became slaves to their boards of directors and shareholders. You might even say in some respects they lost their soul. At the very least they lost their compass.

Frustration = Stimulus for Success

During my years as a broker at the largest wirehouse and then at one of the largest banks in the U.S., I consistently found it difficult to implement new ideas because by the time they became multibillion-dollar entities, those corporations had become set in their ways and the layers of management had become so numerous that it was difficult even for the talented managers in those firms to maintain efficient, informed decision-making.

On the other hand, one of the great benefits of independence is the freedom to be creative. As long as your creativity falls within the bounds of the regulatory structure, you can implement some very innovative, out-of-the-box ideas. As an independent, you are no longer bound by the more narrow-minded focus often found in larger firms. Moreover, when you work for a large firm, you must adapt to the firm’s way of doing business. This can be good if you’re new to the business, as some of these companies provide excellent training programs. However, at some point, advisors often become frustrated as they realize that their company’s primary interest is the production of revenue.

They may feel torn between their desire to serve the client’s best interest and the pressure to produce. Ultimately, many of these advisors desire a change of scenery. As we know, some migrate to other large firms, enticed with great monetary incentives and a contractual obligation to remain for a specified number of years (out of the frying pan and into the fire?). Some become disillusioned and leave the business altogether. Still others decide they can do it better themselves and embark on their own road to independence.

To compound this standard advisor peregrination, a number of scandals and financial missteps over the past few years have fostered an exodus of brokers from these firms and a proliferation of independent advisors. That’s partly because an independent firm does not have to pander to shareholders or adopt a culture of sales where production of revenue trumps all.

Most independent advisors understand that if they do a great job for the client, the client will refer others and their business will grow. Although there are many differences, the sheer fact of being independent is one important step in the quest to differentiate your business. On another level, differentiation may be as much a byproduct of an innovative, well-run business as revenue is the byproduct of a client-centered approach. In other words, the growing distrust of large Wall Street firms has ushered in a period where people are actively seeking independent, objective advice. Plus, as these firms continue to be painted with the proverbial broad brush of greed, consumers are growing more skeptical and cautious about the people with whom they work. All of this bodes well for the honest, independent advisor.

The key is to place the interests of the client ahead of your own. Simple, yes, but apparently it’s not important enough for the regulators to pass appropriate legislation mandating such an approach, though at press time some of us still held out hope that such a mandate would be part of Senator Chris Dodd’s financial services reform bill. So the status quo remains: there are two camps of advisors and, in one of them, the focus is squarely on production. While one can make a lot of money without placing the needs of the client first–and I fear this is something that will continue–I would argue that it is not a sustainable business model. As the [negative] word gets out, people will lose trust. And without trust, the industry as we know it will die on the vine.

Today, a great opportunity awaits the ethical fiduciary advisor. Not only is independence great, but the niche world of the RIA is even more exciting. Let’s look more closely at this wonderful life.

The RIA Storefront

In the beginning of my journey, I struggled with choosing which services to offer and how to price them. When you are aligned with an indie broker/dealer, many of these decisions are made for you. However, as a Registered Investment Advisor, it’s up to you to create the structure. It was once explained to me this way: “As an RIA, you have a storefront. It’s up to you to decide what goes on the shelves and how much to charge.” I think that presents an accurate description. In any event, here I am three years later, and I no longer struggle with this. So what products and services do I offer? How do I price my services? How do I differentiate myself?

The way in which you present your business is critical. It must be unique, but simple. Above all, it must resonate with the prospective client. It must demonstrate that you are there to serve them and not to sell product! Being a fee-only practice is a tremendous help.

I divide my business into four distinct quadrants: analyze; realize; organize; and immunize. Most everything I do falls under one of these areas.

Quadrant No. 1: Analyze

This is the financial planning part of my business. It’s important to note that there are several definitions for financial planning. In my view, financial planning is a comprehensive process designed to enhance the quality of financial decision-making. Since life is largely a series of decisions, high-quality financial planning is an excellent tool to help minimize poor financial results. Therefore, the only type of financial planning I engage in is comprehensive. If you don’t take a comprehensive approach you are leaving a great deal on the table. You are also subjecting clients to unnecessary risks because the process would then fail to address other critical, interrelated areas of their lives. The plan is simply a tool that allows the practitioner to gain a better understanding of the client’s financial situtation so as to make prudent recommendations. Since recommendations are nothing more than decisions awaiting implementation, a thorough analysis must be the first step. I follow the same basic steps of the planning process which are:

o determine the goals

o gather the data

o analyze the data

o present the plan

o implement the plan

o monitor the plan.

In the beginning I couldn’t find a financial planning tool I liked so I created my own. I use Excel with an add-in called Crystal Ball. Excel provides the basic calculations and Crystal Ball provides the probabilistic analysis. Together they are a fantastic tool.

Financial planning can be an excellent way to differentiate your business. This is true even though there are thousands of advisors who offer planning. It’s difficult to convey exactly what I mean without viewing a sample of my planning output. You might want to read the article I wrote in the May 2010 issue of Investment Advisor called “Carpet Balming.” In it, I go into detail on some unique risk management ideas I’ve incorporated into my plan.

Through the planning process you can demonstrate significant expertise and establish a strong bond of trust between client and advisor. Therefore, planning may be viewed as the foundation not only of the relationship, but also of a practice. Again, when I create a comprehensive plan for a client they are saying they have great trust in me. Equipped with this, I frequently know as much or more about their situation than they do, which places me in an enviable position. It’s all about bringing clarity to the client.

A final note about my presentation is in order. I recently purchased a digital projector. When it’s time to present a financial plan, I project the output from my laptop computer onto the wall of my conference room. Clients love it and unless they specifically ask for a hard copy printout, I simply upload the PDF to their portal on my website (more on this in a minute). Then, anytime they wish, they can login and view their documents. It saves time, money, and even a few trees in the process.

I also update client plans annually and charge renewal planning fees quarterly.

Quadrant No. 2: Realize

Since clients’ investments are the instrument that helps them realize their goals and dreams, this quadrant of my business has to do with portfolio management. Accordingly, it’s important to manage portfolio risk. The first step is to determine the client’s required return. I realize this may be a different approach for some, but you must develop a required return for the aggregate portfolio. This is the return the client will need to earn to reach their goals, whatever they may be. Then, depending on the target, you must assume enough risk to provide a reasonable probability of achieving it. Too much risk and the portfolio could blow up. Each year you should measure the portfolio’s actual return against its projection and determine the new required return. When you exceed this target, the required return will fall. The ultimate goal is to drive down the required return over time and reduce risk in the process. Not convinced? Let me ask you a question. Would you rather have to earn 2% to meet all your goals or 8%? The obvious answer is 2%. Which one requires you to assume more risk, a portfolio with an expected return of 2% or 8%? It’s extremely important to get your client on board with this approach. If they understand it, they will buy in and you will have a client for life.

I believe it’s much more difficult to differentiate yourself through portfolio management. You could say that you do it better than others, but how would you prove it? You might even choose a period in time when you performed well, but there will also be periods of underperformance. This type of thinking is classic “time-period” bias. Moreover, markets are made up of emotional creatures making emotional decisions. Hence, there is no perfect program, system, or other instrument that can accurately and consistently predict market movements. To do this, one would have to know what the majority of investors are planning to do, before they do it. Clearly, this is not feasible.

Quadrant No. 3: Organize

Basically, organizing is the process of simplifying the client’s life. It has to do with the consolidation of assets, but it also includes issues such as creating an inventory of every important document and even establishing who should be called in the event of the client’s death. In one sense, much of what I do affects this area. For example, when I write a comprehensive financial plan, and render advice based on it, I am taking concerns off the client’s plate. The clarity realized through the planning process makes clients feel more comfortable. In short, when they understand and trust that I am watching over their affairs, they can relax and spend more of their time living instead of wondering. After all, when a client spends so much of their life in the pursuit of wealth, at some point the natural inclination is to enjoy the fruits of their labor. Simplifying their lives and helping them become more organized fits perfectly with this desire. This area can be a significant point of differentiation for advisors. Here are some additional things I am doing to accomplish this.

Located at the top right corner of–my Web site–is a login to a Client Portal. This is a 256-bit-encrypted, password-protected, document storage center. Whenever we upload a document, the client receives an e-mail notification. Some of the documents in the portal include: past three years’ income tax returns, estate documents, passport, driver’s license, marriage license, and more. In addition, we post all client agreements, financial plans, investment reviews, etc. It’s a significant value-added service. It also drives clients to my Web site.

Quadrant No. 4: Immunize

I define this part of my business as reducing the risk of certain events. At this point, our offering is simple. We have negotiated a discount with a major identity theft company and offer this protection to our clients. Sometimes we pay the fee and sometimes the client pays. This is based on the amount of revenue received from each client. Clients really appreciate this. I should also note that the online document storage helps with this in the event they should lose documents in a fire, flood, or other disaster.

Finally, there’s one other service I offer (see Baton Rouge Confidential sidebar, below).

Differentiation and Independence

The difference between a large firm and an independent firm is what you make of it. If you’re an advisor who has escaped the clutches of the large, impersonal, bureaucratic conglomerate (How’s that for drama?), in favor of independence, welcome. If you are contemplating this move, I wish you well.

It all boils down to this. If you believe you could be happy setting your own hours, conducting business according to your beliefs, and receiving the rewards of entrepreneurship, then consider joining the Wonderful World of the Independent Advisor. To the large sales-oriented brokerage firms, just let me say I appreciate your existence. After all, without you, it would be much more difficult to differentiate my business. Thank you!

In addition to his day job, advisor Mike Patton writes a weekly Road to Independence blog at He can be reached at [email protected].


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