The year was 1980.
Chrysler was rescued, CNN was launched, the Dow began the year at 824 and Investment Advisor published its first issue. Today, Chrysler has been rescued once again, Fox News is on top and the Dow hovers at 10,000. This month, we continue with the celebration of the magazine’s 30th anniversary by taking a look back and gaining perspective from three pioneers in the financial services industry.
Tim Kochis has been in the industry for 37 years, working with banks, accounting firms, and, more recently, registered investment advisors. Formerly CEO for San Francisco-based Aspiriant, Kochis is now chairman of the board and director of new business lines. Aspiriant manages over $4 billion and has over 60 advisors, and offers an array of services including comprehensive wealth management, expense management, and tax planning and preparation. Kochis has garnered multiple awards for his work. He was awarded the Charles Schwab Impact Award in 2006; the P. Kemp Fain Award in 2010; Financial Planner of the Year (San Francisco IAFP Chapter) in 1987, and has been quoted in Barrons, Worth magazine and other reputable publications. Kochis is a JD, MBA and a CFP.
Fellow P. Kemp Fain Award winner (as well as “other non-descrip awards”) Ben Coombs made the transition from life insurance agent and manager to training director to fee-only RIA. Although he is currently enjoying retirement after a career that began in 1961, Coombs is still active in the markets. He earned his CLU and CFP designations in 1966 and 1973, respectively, and at the time of his retirement in January of 2000, assets under management were $100 million. Coombs’s services included financial planning and asset management.
E. Denby Brandon Jr.’s career began in 1952, and with assets under management close to $250 million, he’s still going strong. Today, he is Chairman of Brandon Financial Planning Inc. in Memphis, Tenn. He was an original member of the CFP Board of Standards and author of the book, “The History of Financial Planning.” He has worked as a life insurance agent and managing general agent and is currently an RIA. Brandon received the P. Kemp Fain Award in 2007 and was inducted into the Robert E. Musto Tennessee Insurance Hall of Fame in 2009. His designations include the CFP, CLU and ChFC. Brandon has adopted a comprehensive approach in working with clients offering such services as estate planning, investment management, tax and charitable planning.
These industry leaders offered their insights into the way the industry has changed over the years; what’s important today; and what independent advisors will have to do to stay on top.
Over the past 30 years, name the biggest adjustments advisors have had to make in response to market forces?
Kochis: Some of the more significant changes include the ascendancy of the “independent” advisor, market awareness of, and preference for, the fiduciary model and a much more sophisticated clientele.
Coombs: The first by a wide measure is technology. The second is the expansion of regulatory oversight and compliance requirements, and the third is the ability to outsource everything except the client relationship.
Brandon: The emergence of the independent financial advisor with fiduciary standards. We believe that financial literacy programs have played a role in a growing and informed consumer base.
How has the ‘independent’ advice industry evolved in that time?
Kochis: Independent advisors have a much greater capability and sophistication rivaling that of larger organizations through supporting platforms such as Schwab, Fidelity, TD Ameritrade, Pershing, etc.
Coombs: We have folks coming into it right out of college and there is a developing career path. There are also a greater number of female planners, but we are still way short on minorities. Education is much better and the body of knowledge is growing by leaps and bounds.
Brandon: We believe that it has evolved in a way that greatly favors a team approach.
How has technology changed the way you do business?
Kochis: Substantially through CRM, e-mail, the Web, billing and time-keeping, etc. Planning software has also improved, but not as dramatically as the client management/communication technology.
Coombs: It allowed me to do more with fewer employees and make much better investment allocation decisions. In the latter case I have a feeling that the marginal increase in our ability to make investment allocation decisions is rapidly diminishing now.
Brandon: It allows us to do more with a smaller staff which increases profit margins.
A GLANCE AT THE RIA MODEL
Since all of you are experienced RIAs, what are some of the pros and cons of working under this arrangement?
Kochis: Some of the pros of the RIA model include fewer conflicts of interest and less bias. On the other hand, the differences between an RIA and a broker are poorly understood by many prospects.
Coombs: The primary disadvantage of any working situation is the impact on your sources of information. Your form of compensation, if you let it, will drive your continuing education. Those who receive commissions must meet continuing education requirements established by their broker-dealers which limits the time they have available for the education of their choice. Those who receive AUM fees and actively manage their own portfolios (as opposed to farming it out) often spend the majority of their education time on investment issues to the neglect of other subjects. Just look at the overemphasis of most conferences on investment-related subjects. The most underweighted continuing education emphasis is in the area of insurance (of all kinds, but especially disability and casualty insurance) and estate planning.
Brandon: We value the independence of working under an RIA and owning our own broker-dealer.
When and why did you choose the independent RIA route?
Coombs: I am an independent cuss and I prize my freedom of thought and action. Also, when I got started the closest you could get to a financial planning orientation was with insurance company agencies and I wanted to stay as far away from that orientation as possible.
Brandon: I chose the RIA path in 1980 because of the independence it offers.
TAKING THE LEAP OF FAITH TODAY
What are some of the key issues an advisor should consider before going independent (becoming a business owner)?
Kochis: Entrepreneurial risk and a lack of heavy organizational support.
Coombs: Capital requirements and overhead demands, regulatory oversight and compliance, the ability to wear many hats all at the same time (business owner, compliance, HR, PR and business development, client advisor, et al.), and you have to have a high degree of self-discipline and focus.
Brandon: They should have sufficient operating capital and surplus along with a critical mass of clients.
What advice would you give to someone who is just starting a new independent firm?
Kochis: I would focus on a special competency niche … or create one.
Coombs: I would recommend that you have enough financial resources to tide you over for at least two years or an ace in the hole like a spouse who works and the ability to survive on that one income.
Brandon: Again, make sure you have adequate operating capital, surplus, and client base.
How would you go about building a ‘start-up’ business today?
Kochis: I would seek help from a deep-pocketed custodian.
Coombs: I would farm out all responsibilities including compliance, bookkeeping, asset management, plan production (data entry to the final product), everything but client development, data gathering and plan reviews. Delegate or farm out everything except what it takes to get to know the client and care for their needs.
Brandon: Since the business is more complex today, I think I would seek a team of partners.
Would you recommend growing a new business as the income would support it or capitalize it through personal funds, investor equity, or debt financing?
Kochis: In order of priority I would use debt; organizational cash flow; personal funds; or investor equity.
Coombs: I would, as mentioned above, start with enough capital to support myself for up to two years or be sure that you have an independent source of income such as a working spouse.
Outsourcing areas of the business is becoming more common. Do you outsource any parts of your business?
Kochis: We outsource parts of the expense management and tax compliance work and execution of the estate planning documentation.
Coombs: No, primarily because there were little or no opportunities to do so until late in my career.
Brandon: Yes. We work with attorneys, certified public accountants, other investment advisory firms, insurance specialists, fringe benefit consultants, and real estate specialists.
What is your ‘general’ approach to portfolio construction?
Kochis: We tie return requirements to the time frames of client objectives. We also spend the client’s “Risk Budget” where it can do the most good: where markets are relatively inefficient and manager selection and management skill can pay off.
Coombs: I told my clients that they weren’t paying me to help them get rich, but to keep them from losing too much money. I told them to look upon my fees as an insurance premium. First, do no harm!
Brandon: First, we determine their objectives. Then we develop an asset allocation plan to fit their needs. In short, we use a long-term, strategic asset allocation approach.
Has your approach changed as a result of the recent financial crisis, and if so, how?