The Handbook For Next Generation Partners Of Independent Advisory Firms

The Handbook For Next Generation Partners Of Independent Advisory Firms


While the CFP certification for financial planning has been around since the early 1970s, it wasn’t until the 1980s and 1990s that it began to gain widespread adoption amongst financial advisors. And it’s only been over the past 20 years or so that the highly scalable AUM model gained enough traction and popularity that the typical advisory firm evolved from solo practices into larger ensemble firms with employee advisors and multiple partners.

As a result, while the essential set of skills needed to establish your ownadvisory firm are now relatively well known, the most effective path to become a partner in an existing advisory firm is still in its earliest stages, with no set industry norms, a wide variety of career paths from one firm to the next, and a number of firms that haven’t yet designed their formal career tracks at all. Which, to say the least, makes it very difficult for next-generation advisors to figure out where to focus and what to do in order to succeed.

Accordingly, practice management consultant and guru Philip Palaveev has published what should soon become the seminal handbook of next generation advisors pursuing partnership. Because in “G2: Building The Next Generation”, Palaveev – who himself joined a major accounting firm in his early 20s and rapidly ascended to partnership by his early 30s – sets forth exactly what so-called “G2” (second/next generation) advisors in large independent advisory firms should be doing to successfully manage their own career track to partnership, what kinds of expectations are (and are not) realistic, and why (and how) the requisite skills to develop will themselves change as the advisor achieves new levels of success.

Perhaps most notable, though, is the simple fact that at the most senior levels of leadership within an advisory firm, it’s really more aboutleadership and the ability to manage people, than the actual skill set ofbeing a great advisor. And in turn, the path to leadership and partnership eventually entails growing beyond “just” being a great and expert advisor serving clients, but also learning how to manage and develop a team of subordinates. In addition to learning how to “manage up” to the expectations of founders and senior leadership, with respect to everything from projects and initiatives the advisor might champion, to the advisor’s own career and path to partnership.

Of course, the irony is that when it comes to advisory firms and making partner – like in most industries – success just begets more work and burdens, not to mention a substantial financial commitment to buy in to partnership. Yet at the same time, the good news is that for those who are effective at managing the career marathon, the long-term benefits of becoming a partner – both financial and psychological – can be incredibly rewarding.

G2: The Next Generation Of Financial Advisors

Although the CFP marks originated with the first graduating class of 1973, financial planning didn’t really begin to shift into the consumer mainstream until the 1980s and 1990s. As a result, the majority of today’s most experienced financial advisors – and independent advisory firm owners – were amongst that first and founding generation of financial planners. Now in the advanced stages of their own careers, many have grown their firms to the point that they have hired employee advisors to carry on their client relationships – and the entire advisory business – beyond themselves.

The caveat of this second generation of financial advisors is that the world of financial planning they enter today is fundamentally different than in decades past. While the founding generation of financial planners were virtually all originally insurance or investment salespeople who later evolved their careers and practices to provide financial planning (and become responsible for managing the business they built), today’s “G2” (next generation) advisors are increasingly likely to join existing advisory firms as a support or service advisor, and only later (if ever) grow to the point of being responsible for business development and management, and participating in ownership.

Which means G2 financial advisors have a fundamentally different path to success in their own careers than the founding generation of advisors. Not only because they are more likely to start with financial planning and learn business development later (instead of founders who did it the other way around), but also because founders typically created and ran and grew their own firms, while G2 advisors are responsible for growing their careerswithin an existing firm, and navigating the dynamics of a growing firm of employees for which ownership – partnership – is often just a distant opportunity to hope for.

G2 Building The Next Generation by Philip PalaveevIn fact, arguably one of the greatest challenges for G2 financial advisors is that because navigating the employee dynamics of a growing multi-partner independent advisory firm is so new, there are few established industry norms and no guide or handbook. At least, not until now.

Because advisory firm consultant Philip Palaveev, in his new book G2: Building The Next Generation, has effectively written the Handbook for G2 Financial Advisors (who want to someday become partners), explaining everything that it takes to succeed in an established and growing independent advisory firm, from the necessary stages of personal skills development, to the best way to ensure that your desired career track actually happens in a world where most advisory firms are still figuring out how to create that career track as they go.

The Skills To Develop As A G2 Financial Advisor

One of the most striking aspects of Palaveev’s book for G2 advisors is thatit’s a path he’s lived for himself, having joined the national accounting and consulting firm Moss Adams as a young 20-something, made partner by his early 30s, and then ultimately moved into leadership positions at other firms.

Accordingly, Palaveev suggests that the starting point for today’s financial planners trying to navigate their career path in a large firm is to establish some kind of specialization or expertise. Because the reality is that it will be decades before you have enough age and “gray hairs” to command credibility from your experience alone; instead, the best way to overcome the common age bias against you as a younger advisor is to become soexpert in a particular topic that – at least as long as you get to talk about that area of expertise – you can command clear credibility, despite your age. Or as Palaveev puts it, “You don’t have to start a relationship by trying to golf with your clients. Start it by being an absolute expert in what matters to them. (Golfing will come to you later!)”

Notably, a key value of establishing a focused area of expertise early in your career within a large advisory firm is not merely to be more credible to the client. It’s that, if you ever want to rise to the position of being a “lead” advisor responsible for client relationships, the client must accept you as an authority. And as long as you are simply a generalist, it’s virtually impossible to be accepted as more of an authority that the founding advisor who originated the client – which effectively limits your ability to move up. Or viewed another way, it will be hard for the client to ever see you as a better generalist advisor than one who is older and more experienced, but if they’re a business owner/executive/retiree and you’re the company’s leading expert for business owners/executives/retirees, you actually canestablish yourself as an even better authority on the issues that actually matter to the client.

In the long run, though, success as a financial advisor in a large advisory firm entails more than “just” being an expert able to provide financial planning advice to clients. Those who want to become partners and participate in the ownership of the firm, will generally only have an opportunity to get a slice of the pie if they can help to make the pie bigger. Which means learning to develop new business.

Fortunately, the reality is that establishing a recognized expertise or specialization – which is effectively a form of niching – can help support a younger advisor’s business development efforts. Because while it may take 10-15 years of experience to become established enough in the community to bring in new clients – especially affluent clients – the path to becoming an established expert in your niche is relatively short by comparison. Or as Palaveev puts it, you may not be able to say “I’ve been doing this for 15 years” but you can focus on a niche expertise that allows you to demonstrate you do have something valuable to say (even for clients who are much older).

Ultimately, though, the real path to the most senior levels of the financial advisor career ladder – and making partner – isn’t just about knowledge and expertise, or business development. It’s about management and leadership.

In fact, as Palaveev notes, while the first half of his own career was all about clients and expertise, success in the second half is all about working with others: your team, the (other) partners, and the rest of the firm. At Moss Adams, making partner actually meant spending less time with clients, so that the partner could spend at least 50% of their time on business development, managing the team, and firmwide leadership.

Which is a challenge, because learning to become a good manager – and a good leader – is an entirely different and new skillset than “just” being a good advisor. For many, it’s especially challenging within a larger advisory firm, because co-workers who were formerly friends and peers may suddenly become subordinates to whom the advisor must deliver sometimes candid and critical feedback not as their friend but as their manager and coach. (For which Palaveev recommends Douglas Stone’sDifficult Conversations book to learn how to have difficult conversations effectively.) Though as Palaveev notes, delivering critical feedback – which is essential to avoid undermining the entire team – shouldn’t be viewed as mean or negative (when done appropriately); instead, he suggests it’s a form of respect: “It means that you believe in their professionalism and ability to take feedback constructively and not overreact or ignore it.” Or viewed another way, the most common regret of managers in retrospect is not letting people go, but not letting them go sooner.

In essence, what all this means is that navigating the career the upward career track in a large advisory firm is about developing an evolving series of skills as the advisor themselves grows from paraplanner (technical competency) to associate planner (relationship management) to a senior/lead advisor (business development), and ultimately towards becoming a partner (management and leadership) in the firm!

Skills Progression For The Financial Advisor Career Track

Pursuing A Partnership Track Requires Managing Down And Managing Up

In an ideal world, when a new financial advisor joins an existing advisory firm as an employee, there’s a clear roadmap about what it takes to progress up the career ladder and achieve partnership. Yet unfortunately, while this often is the case in large accounting and law firms, the phenomenon of “large” advisory firms is new enough that relatively few have formalized their career track and what it takes to become a partner. In fact, for many firms that are still “small” or even mid-sized (up to $1B of AUM or even more), the firm may have never yet introduced an employee advisor to a partnership opportunity, nor even had the depth of career opportunities to have a “track”… and as a result, the firm is figuring it out as they go, as much as the financial advisor themselves!

Which means in the real world, a key skill that employee financial advisors must learn to reach the pinnacle of their career track is not just the ability to “manage down” – training and developing a team, and various subordinates of the firm – but also in how to “manage up”, which Palaveev defines as “steering information, expectations, and suggested actions to those who are above you on the org chart”.

In other words, it’s not enough to just try to be a “good” advisor and wait and hope for the firm to recognize your contributions to the firm. Especially in a world where the firm owners and founders may not really be certainhow to recognize your contributions, or even be in a position to recognize them (as the larger the firm gets, the more distant the founders/partners get from daily interactions with all of the advisory firm’s employees, including new and upwardly mobile advisors!).

Accordingly, Palaveev emphasizes a number of potential tactics for “managing up” in your firm, from the fact that you need to speak up in public forums of the firm and contribute (but it’s important to be recognized as acontributor, and not just someone that constantly argues and plays Devil’s Advocate, which just makes the leadership not want to include you in conversations!), get involved internally with the firm’s committees (an opportunity to show your contributions directly to the leadership that manage those committees), and if you feel “stuck” in your role it’s up to youto broach the conversation with your manager (respectfully) to ask what it is you need to do to grow and move up further. Don’t wait for the firm to manage you into new opportunities; manage up to drive your own career forward by asking what you can do to better grow and succeed!

On the other hand, Palaveev notes that a key aspect of managing up for new opportunities is that they will entail risks, and ones that won’t always work out. In fact, Palaveev defines leadership itself as “The process of making difficult decisions, accepting responsibility for them, and convincing others to follow through.” Which is challenging both because of the outright risks and fear of failure that may ensue, but also because advisory firm owners and founders are often reluctant to give “risky” opportunities to younger advisors – because a failure of the advisor is also a failure with consequences for the firm. Even though the reality is that the only way to really learn effective leadership is to practice making risky decisions that have consequences… and learning from them. For which the starting point is to Manage Up to get those opportunities (and, ideally, to manage expectations about the potential outcome!).

Of course, it’s also important to remember that your own career is much more of a marathon than a sprint. For those who are talented, it’s somewhat “natural” to be impatient with progress – as if you’ve had early success already, you’re probably accustomed to climbing the ladder more rapidly than others around you. Nonetheless, when you look back as a partner who’s been with the firm for 15+ years – or at the tail end of a 40+ year career – you won’t likely remember (or care) whether your big breakout year was your 5th or 7th year in the firm. So even though you may feel that, after 5 (or some other number) of years that “this year must be the year…” it probably doesn’t really need to be. Have patience, and manage up to figure out what it takes to open the next door.

Work/Life Balance And The Risk Of A Partnership Buy-In

Perhaps the greatest irony of doing all the work in pursuing the path to partnership is that being successful virtually always involves… even more work. The good news is that the advisory industry in general, and being a partner in particular, does often provide far more flexibility than traditional employee jobs in most industries. But it’s certainly not easier, and it still takes time and hard work.

Accordingly, Palaveev cautions that G2 financial advisors who pursue a career track should be prepared for the reality that you’ll “feel the squeeze” in trying to balance work, career, family, and children. Especially given that the path to partnership tends to hit in your 30s and early 40s, right around the stress peak of getting married, buying a home, starting a family, and raising young children. For which Palaveev’s only advice is just to accept it. And try to survive as best you can. Or as he puts it, “You won’t always be the most ambitious professional in the office. Or the most dedicated parent at the soccer game. Just never stop trying to be both.” The good news at least is that if you schedule your personal appointments on your calendar, your colleagues will likely respect those commitments (because they’re in the same boat, too).

And of course, if it all goes well, it culminates in an even greater burden of actually buying into a partnership – which will typically involve at least a short-term step back in income (to cover any downpayment and begin making ongoing note payments to finance the purchase), and years of flat income until the loan is paid off, while taking on what may well be the largest debt you’ll ever have in your lifetime (which for larger advisory firms and senior partners, can be substantially larger than even the mortgage on your home). Because the personal career investment of focusing all your time and energy into the firm in the preceding years still wasn’t enough!

Nonetheless, the good news at the end of the journey is that for those who are willing to make the investment, and take the leap of faith, is that climbing to the pinnacle of partnership in a large advisory firm can be veryrewarding. According to the latest industry benchmarking data, the typical practicing partner makes $200,000 to $250,000/year in total income, and standout firms have take-home pay per owner of $400,000/year and even higher. Even more substantively, partnership is an opportunity to be a part of a business that impacts hundreds or thousands of clients, the broader community, while creating jobs, opportunities, and careers for dozens or hundreds of employees along the way. Which means that while the first purchase of equity is incredibly difficult – a mixture of fear, anxiety, pride, and excitement – the subsequent purchases are often much easier. In addition, the responsibilities themselves do eventually stabilize, productivity increases, delegating gets easier, and personal efficiency (and work/life balance) do improve.

G2 Building The Next Generation by Philip PalaveevAgain, though, perhaps the greatest real-world challenge in the path to partnership is simply that, unlike more established professions like law and accounting, the track and path to partnership in most advisory firms is not well defined. There are few established industry norms about how to pursue the partnership track, and firm owners themselves may not have a clear vision for the future of the firm (and their role in it). Which means it’s often incumbent on G2 financial advisors to begin the process of Managing Up to craft their own path and future. Both to ensure that they can pursue the opportunity they wish, and because learning to manage – both down and up – is an essential skill to be an effective leader as a successful partner, anyway!

And for those who still aren’t certain how to proceed, and/or want additional practical advice, I can’t more highly recommend Philip Palaveev’s book G2: Building The Next Generation. Or as I call it: the handbook for the next generation of financial advisors.

So what do you think? What skills are needed to develop as a G2 financial advisor? Does pursuing a partnership track require the ability to both manage down and manage up? Does pursuing partnership inherently mean sacrificing some work/life balance? Please share your thoughts in the comments below!

Massachusetts Regulator Accuses Scottrade of DoL Fiduciary Rule Violations

Massachusetts Regulator Accuses Scottrade of DoL Fiduciary Rule Violations

This week, theMassachusetts state securities regulator accused discount brokerage firm Scottrade of violating the Department of Labor’s fiduciary rule by holding (at least) two sales contests in late 2017 after the “Impartial Conduct Standards” had already taken effect, including a “Q3 Run The Bases” contest including $285,000 in cash prizes and a fourth-quarter contest that included weekly cash prizes to reps of $500 and $2,500. As notably, even though the remainder of the Best Interests Contract Exemption rules for DoL fiduciary are delayed until the summer of 2019, the Impartial Conduct Standards still took effect last June 9th of 2017, and sales contests in particular were a major focal point of the fiduciary rule. In fact, the Massachusetts regulator specifically noted that it felt the need to step up and protect its citizens because the Trump administration appears to be waffling on implementation and enforcement of the fiduciary rule, and follows a similar path of other states that have recently taken up their own fiduciary initiatives (including new state fiduciary rules in Nevada and Connecticut, and similar proposals in New York and New Jersey). The Massachusetts regulator is seeking both an administrative fine, disgorgement of profits, a public censure, and a cease-and-desist order against Scottrade requiring a full review of the company’s supervisory policies… although the real buzz is that if Massachusetts is already pursuing Scottrade, what other financial services firm might also be targeted by the regulator for similar failures to adhere to the DoL fiduciary Impartial Conduct Standards?

12 Tips To Survive Your First 12 Months As An Independent Financial Advisor

12 Tips To Survive Your First 12 Months As An Independent Financial Advisor


While the average financial advisor with 10+ years of experience makes nearly triple the median US household income, the caveat to becoming a financial advisor is that most don’t survive their first few years, and the pressure of getting all your own clients (and persuading them to actually pay you for advice!).

In this guest post, first-year financial planner Shawn Tydlaska shares his own survival tips for having gotten through his first year, on track for more than $100,000 of recurring revenue(!), which he achieved in large part by heavily reinvesting in himself throughout the first year. Of course, reinvesting means that Shawn spent more than many advisors do in trying to start their advisory firms on a low budget… yet at the same time, by focusing on reinvesting his income as it came in, he was able to do so while limiting his actual out-of-pocket costs.

Shawn also shares exactly what kinds of conferences and courses he put himself through to accelerate his growth, how he structured his marketing (and what materials he takes into a typical prospect meeting today), what he tracks in his business, how he leverages his study group, and more!

So whether you’ve been thinking about going out on your own as an independent advisor but aren’t certain what to do, or you’re already in your first few year(s) and looking for fresh ideas about how to better focus, or are an experienced advisor and just want some fresh perspective, I hope you find today’s guest post to be helpful!

Ok. So I lied. There are actually 13 tips. I had trouble chopping this list down to 12. And I thought 12 tips for the first 12 months was a better hook.

Before launching my own independent fee-only RIA, I read Sophia Bera’s and Andrew McFadden’s guest blog posts on the Nerd’s Eye View blog, which were so helpful in starting my own firm. Those posts inspired me to share my own learnings in this guest post, while things are still fresh in my mind.

My journey evolved from the excitement of the launch, to the landing of my first client, to the fear of not knowing what my financial planning deliverable was, to coming to the realization at around six months that “this is working” and I won’t go out of business, to increasing my fees (a few times), to losing my first client, and to eventually paying myself my first paycheck.

As I write this post, I am actually about 20 months into the business (I know, I started this post about 8 months ago and it took me a while to put the finishing touches on it!) and have worked with a total of 63 clients. I currently have 40 ongoing monthly subscription clients and have done financial planning projects for 23 other clients. I have had seven subscription clients “graduate” thus far, one more will graduate shortly, and I suspended the monthly payment for one client until they get back on their feet. I have $4.3M in AUM, although that doesn’t mean much for me because I don’t charge an AUM fee. My average up-front fee is about $1,200, and my average monthly fee is $235. Thus, even if I don’t get another client, I am projected to generate $110,000 of revenue over the next 12 months. My total annual expenses are about $40,000 right now. About $14,000 of that I would spend regardless of being in business on things like travel, meals and entertainment, my own financial planner (Hi Sophia Bera!), tax prep, a business coach, utilities, etc. I expect my fixed costs will go up as I just hired Liz Plot, AFC® who will be a remote Client Service Associate and she will be working about 20 hours per week. Fortunately, with new clients continuing to come in, my revenue is on track to grow more than enough to make up for that cost!

So here are my top tips for surviving your first 12 months as a fee-only independent RIA, based on my own experience!

1. Invest in Yourself

After being in business for two months, I was getting a decent number of good leads. But I was frustrated that I was only converting about 30% of them into clients. I made the conscious decision to reach out to experts to help shorten my learning curve on two key aspects of my business. (As a side note, in my first two months I received 11 leads from the XYPN Find an Advisor Portal and 17 leads from family, friends, and other professionals. So I was getting pretty decent lead flow.)

When I listened to Nancy Bleeke on the XYPN Radio podcast her approach to sales really resonated me. It was a mind shift to think of sales not as a sleazy or dirty word, but as a process to help prospects make the decision to help themselves (by working with me!). So, I hired Nancy for a few private coaching sessions, and she immediately provided great feedback. She actually took the money I was going to pay her and applied it to her sales training course, where I would learn her entire sales approach. The results were immediate and significant, and my conversion rate increased from 30% to 75%.

The investment for the course was $2,000 (which she has since raised to $3,000 due to popularity, although XYPN members get access for 10% off). Which is tough to swallow when you are first starting out. But sales skills are something you can use for the rest of your life. And the investment quickly paid for itself with the increased number of prospects that agreed to work with me based on what I had learned!

At the same time, I wanted to learn the softer side of the business and I had heard great things about Money Quotient. So I enrolled in their three-day training course in San Francisco. At this course, you learn how to use their life planning tools and you practice them with a partner. I found this experience really helpful, because it taught me how to be a more active listener and ask really good questions. Going through this process really made me appreciate how cool it is to feel like you have been heard. This investment was a one-time fee of $950, and then a licensing fee of $60 per month to use their materials. I really think the future of our profession will incorporate more aspects of life planning, so whether you use Kinder’s three questionsSusan Bradley’s Sudden Money InstituteThink2Perform Values Card deck, or something else, I would put some effort here.

I also attended a few conferences very early on. I launched on May 2nd in 2016, and two weeks later I was at the NAPFA National Conference in Phoenix. As soon as you join XY Planning Network, I recommend joining NAPFA (which is included in XYPN membership), and scheduling a peer interview with Bernie Kiely. He is awesome, and he offered to sponsor me to attend the conference. I had to pay for my flight (using miles) and lodging (slept on the futon of Andrew Davis’s Airbnb), but the conference fee was paid for out of pocket. At this conference, I met 6 or 7 other XYPN members, like Chris Girbes-Pierce, Scott Frank, Justin Rush, Joe Morgan, Gabe Anderson, and Lauryn Williams. I cornered Justin at one of the happy hour events and peppered him with questions about how to run my business. He introduced me to Rhonda Moore (now affiliated with FA Bean Counters) who did my initial bookkeeping for $60/mo. He helped me understand what I can deduct as a business expense, how to track receipts, and answered the many, many other nagging little questions I had.

Next, I attended the FPA NorCal conference at the end of May, which cost $699 for registration (but no hotel cost since it was local for me). This conference is a bit stuffy and more old-school. If I had to do it over again, I would probably skip this one. It is located in downtown San Francisco at the Palace Hotel. One highlight of the conference was getting to meet Michael Kitces in person (who speaks there annually).

I also attended the Far West Round Up at UC Santa Cruz. I had just moved to San Francisco a few months before launching my firm, so I wasn’t very established in the local financial planning community. This was a great chance to network in a very intimate setting as all ~75 attendees attend each session together. At this conference, another mind shift happened. I went from being a financial planner who launched a firm, to a firm owner. It was cool being a CEO and having conversations with leaders in the industry like Tim Kochis and Dave Yeske. I felt really respected and enjoyed talking shop about how we ran our practices. This conference was $519 and included lodging, programming, and meals.

I also went to the XYPN16 Conference in September in San Diego. The investment was $199 for the conference, $399 for hotels, and I booked my flight using points. It was great to meet all the XYPN members from around the country, but I was a little disappointed by the content of the conference itself. I had really high expectations, but the whole first day was a tech demo with no formal content sessions (although that has since been moved to the center of the conference between sessions on the first and last days). The best part of this conference was definitely networking with my fellow XYPN tribe members.

I hired a business coach in February, which was about 8 months after launching. I used Meg Bartelt’s article as a framework for how to interview candidates. One of the biggest things the coach provided me was focus on where to spend my time and energy. He also got me to embrace my CRM, which I wasn’t using fully. And instead of letting myself “get distracted by shiny objects” (like creating webinars, blogging, writing an eBook, pursuing speaking engagements, etc.), he helped me focus on signing 2 clients per month, with the goal to get to 60 retainer clients by the end of 2018 (which I am still on track for). The business coach I hired was Joe Lukacs and his company is Practice Power Academy, and he is pretty expensive. Initially it was $700/month for two 30-minute sessions. Eventually we moved to one 30-minute conversation per month for $350/month. While I am glad I hired him and he did help me a lot, he wasn’t the right business coach for me in the long run. Just like finding a financial planner, it is hard to find a coach you really click with, and I don’t think there is anything wrong with trying one out for a little while. But it was a good learning experience and I am happy that we worked together. (Note: I am no longer working with him, but plan to hire Elizabeth Jetton in the new year.)

Overall, this means that if you’re going to invest aggressively in yourself, you will spend a lot more than $10k (as Sophia Bera did) in your first year to start your RIA. Expect to spend $20k-$25k, depending on how much training you pursue, and the number of conferences you attend. But I found it was quite worthwhile in turbo-charging the growth of my own firm (entering my second year already having a revenue run rate of over $100,000/year!).

2. Speak From the Heart on Your Website

I got this tip from XYPN member Michael Powsner. He and I had a conversation over coffee one week before I decided to join XYPN.

He recommended I take 1-2 days to just bang out the copy for my website. He recommended going somewhere picturesque where you feel inspired. For me I spent one day in Half Moon Bay at a Peet’s coffee shop, and then another day at a Marriott hotel that overlooked the San Francisco Bay.

Create a FAQ page that talks about who is a good fit for your services. I really spoke from the heart and used natural language. I think that this helps prospects figure out if they are a good fit for your firm, and they self-select into engaging with you by signing up for a meeting directly on your website. It’s OK that describing who is a good fit will turn some people off. Because the ones who are a good fit will find what you say really resonates, and be more likely to sign up with you. And those are the people you want anyway!

Create a Services and Fees page that shows what you provide, and how much you charge. This really helps prospects understand the financial commitment before they set up an appointment to have a Discovery Meeting with you.

While we are speaking of websites, make it really easy for your prospects to set up a Discovery Meeting with you. I use Calendly (though there are a lot of other options, too) and have a page where prospects can put an appointment directly on my calendar. Try to remove as much friction as you can, which will enable more prospects to set up meetings with you! Make yourself available when your prospects are. For me, that means opening up my calendar to meetings at nights and on the weekends. It works! Over my first 12 months I met with 101 prospects.

3. Don’t Over-Analyze

Don’t spend too much time trying to develop the perfect process. What you need are clients and a “test lab” to develop your perspective, refine your approach, and see what tools work for you and your clients.

Most of your clients have never worked with a financial planner before – especially if you’re serving younger professionals – so this is all new to them. Which means if you try something new with them, they will have no idea that this is brand new for you too! So don’t be afraid to take risks and ask new questions, try new tools or techniques, and try new deliverables to see what resonates with your clients.

For example, at my last firm, if I told someone to open a savings account at Ally Bank, I would fill out the paperwork, send it to them with sticky notes and a return envelope, fax it in, etc. Now I empower my clients by giving them a task and sending them off to do it on their own. It makes you more efficient, and it empowers them. And the first client I tried it with just accepted it as reality and did it. They didn’t complain that I was giving them “less service” by not doing the paperwork for them now, because they had no idea that I “used to” do it a different way with other clients at another firm!

4. Shut Up and Listen

I had never been in a business development or sales role before. It was really weird to be the one doing the talking during those first meetings with prospects. Initially I was trying to prove my knowledge, talk about my pedigree, and demonstrate my expertise.

But what I found is that prospects already assume you are an expert, because they are the ones who set up the meeting with you. So just embrace the role of the expert and own it. Don’t try to dominate the conversation with bullet points from your resume. Ask good questions and aim to listen for at least 80% of the meeting.

My initial prospect meeting is 60 minutes. Guide the conversation, but give them space to talk for the first 45 minutes, then in the last 15 minutes, talk about your service model and how you can alleviate the financial pains they just shared with you.

Here are some of my favorite questions in the order that I ask them:

– Tell me about why you set this meeting up, and why you reached out to a financial planner?

– What are some of your short-term/1-3 year goals?

– How are you currently managing your finances? Mint? Spreadsheet? Or just winging it?

– What did you observe about money growing up? (my favorite question)

– How do you think that impacts your relationship with money today?

– Is there anything about your finances that keeps you up at night?

– Have you ever worked with a financial planner before?

– Do you have any concerns or fears about working with a financial planner?

After this last question, the conversation normally transitions nicely to a discussion about your services and fees. Most people will say something like, what services do you offer and how much is it going to cost me?

5. Peer Review Your First Few Financial Plans

I had to figure out what my financial planning process was going to look like when I started. I didn’t know what I would include in my financial plan or not. For the first few plans I created I had someone from my study group be my peer reviewer. Thanks, Eric Gabor!

I only charged $200 for the first plan that I did. One of the comments that Eric has made a few times is to remember that I am not running a charity. But I didn’t have a reference point, so I had no idea if what I was producing was valuable or not. I really spent a lot of time on these initial plans. (Tip: remove the confidential info from one of your first plans and keep it at your fingertips to show prospects what a “sample financial plan” looks like.)

Having someone that you respect look at your stuff really gives you confidence before you present it to a client. It also helps make you a better planner, because they can find blind spots in your planning that you may miss.

6. Have a Few Good Pieces of Marketing Collateral

I got this tip from PJ Wallin. XYPN has a thriving community of planners who make posts in their members-only forums. PJ wrote a post about what he would do differently if he started over. One of his comments was to not get too bogged down with making the perfect pieces of marketing materials, and I took that advice to heart.

The three key pieces of collateral I use are my Services and Fees handout12 Tough Questions To Ask A Financial Advisor (to use when a client says they are thinking about interviewing other advisors), and a sample financial plan. I don’t know why, but having a sample financial plan was really reassuring to have when I was first starting out. I think it was because I didn’t really know what my financial plan would look like. So it was kind of reassuring to myself that I could produce a valuable deliverable.

Also, part of our job as financial planners is educating people on what “real financial planning” is. If you need some reassurance or feedback about your financial plan, again, have someone from your study group peer-review it.

As the year progressed, I developed a cash flow module and spending plan. I often break this out after I ask the question about how the prospect is currently managing their finances. I show them how I think about creating a spending plan that aligns their finances with their values. The cash flow tab has a great data visualization graph. Here is a link to my spending plan and cash flow template.

7. Measure Your Activity

I heard Michael Kitces and Alan Moore say that in your first year, it is more important to measure activity than to measure results.

I use this Google Doc and I update it every Sunday night. For more details on how I use this doc to track my KPIs (Key Performance Indicators), listen to my interview on XYPN Radio with Alan Moore. It is a great way to track your progress. Also, how do you know what your conversion rate is unless you track it? Or how can you tell if a change had an effect? It’s crucial to track your KPIs from the very beginning.

Here are some of the key metrics that are important to track:

– Number of Discovery Meetings

– Number of “Plan Design” Meetings (Proposal Delivery Meetings)

– Number of Retainer Clients

– Number of One-Time Clients

– Conversion Rate of Prospects to Clients

– Number of Meetings with Professionals

– Number of Meetings with Large RIAs (if I had to do this again, I would focus on NAPFA firms specifically and not just RIAs in general, as they were more likely to give me referrals as a fellow NAPFA member, in large part because larger firms tend to have higher minimums and therefore turn more people away who need to be referred out)

– Source of Your Prospects

– Average Revenue Per Client

In addition, it is important to me to track the total number of lives I have impacted. My personal goal is to eventually touch the lives of 1 million people using personal finance as a tool for empowerment.

Another item I keep track of is the recommendations I make to my clients that have quantifiable value. Like paying off credit card debt, minimizing taxes, reducing investment fees, getting a rewards credit card, or getting out of a crappy insurance policy. This helps me feel like I am worth the financial investment my client is making. I make it a game to come up with ways that I can save my clients more money than they are spending on my monthly fee. On average, I am able to help my clients save $470/month (as compared to my average monthly retainer fee of “just” $235/month), and have helped my clients pay off a total of $400k worth of “bad” debt.

Another thing to track early on is how much time you spend on your financial plans. If someone pays you to do a one-time financial plan for $1,000, keep track of how many hours you put into it. Do the same thing for a comprehensive financial plan. After a while you will get a sense of how much you need to charge. I think a good planner should value their time at least between $150-$250/hour when you are quoting a prospect for work on a one-time project.

It was also helpful for me to see how much time I was spending on my prospecting process. I used to spend about 6 hours on a prospect before they reached their decision to work with me or not. I spent 1.5 hours of face-to-face time, 1 hour of prep before each meeting, 1 hour of writing notes after the first meeting, and another 0.5 hours of back-and-forth communication. Given the lifetime value of the client, I was happy with this investment of my time, since my conversion rate was about 75%.

As of the writing of this blog post, I recently switched to a one-meeting proposal process. Since I have about 8 prospect meetings per month, my new goal is to get a 20-30% conversion rate. That will enable me to reach my goal of 2 clients per month. I also recently raised my fees. So when you combine all those changes, I will be happy with 2 clients per month since my new process only takes about 2.5 hours of my time.

8. Develop a Strong Support System

My wife, Jen, was, and still is, very supportive, both financially and emotionally. She is just as invested in this business as I am, and I couldn’t have done this without her. Each day she is so excited to hear about the progress I am making with my business.

Make sure you and your partner are on the same page because building a business is a slow process. I gave myself a three-year time horizon in my business plan before I would make a post-MBA salary. My initial goal was to net $100k from my business within three years.

It is also important to have a strong study group. XYPN puts every new advisor who is joining and launching their own firm into a “Launchers” study group. Although my XYPN Launchers group was great initially, eventually I felt like I was ready to move on. I kind of regret this decision, though. It took me a really long time to find another one where we clicked, and I felt like I was alone for a long stretch of my first year. Fortunately, now I have a good study group, we meet each week for 90 minutes and everyone is very committed to the group.

Another way to keep the motivation up is to keep track of your accomplishments. Sometimes when you are in the day-to-day grind, it doesn’t feel like you are accomplishing very much. But when you take a step back and see everything you have done for the month, it helps give you perspective. Keep track of things like mentions in the press, the number of new clients, putting on a seminar, giving yourself your first paycheck, when you cross over 10 clients, etc. What I do is write notes on my iPhone and then once a month I upload them to something I call my “rap sheet”, which is a word doc with all my accomplishments.

9. Keep a Celebration Folder (aka “A Smile File”)

I have to give Nancy Bleeke credit for this one. As part of the Sales Pro Insider program, they send you a box of swag. One of the items is a bright yellow celebration folder. You’re supposed to use this folder to collect nice notes from clients, thank you emails you receive, and any other positive feedback you get.

The idea is to bring this folder out if you are having a bad day. I haven’t had to dig it out yet, but I think having a place to collect nice feedback helps with the mental game.

Also, don’t forget to celebrate successes. Sometimes when I signed a new client, I would buy myself something for my office. It could be something as nice as an Apple wireless mouse or a good camera for video conferences, or as cheap as a multi-color office pen from Target.

10. Off-Site Retreat

The E-Myth Revisited by Michael Gerber

Many business leaders like Steve Jobs, Bill Gates, and Mark Zuckerberg schedule “think weeks” where they get away from it all to read, think, and plan. I really like this concept, and apply it on a small scale. I spend 1.5 days per quarter working “on” my business and not just “in” my business (see “The E-Myth Revisited”).

In fact, I wrote this blog post on my 4th quarterly off-site retreat at the Portola State Redwoods Park. I left Thursday afternoon, and came back Friday night. You don’t have to spend a lot on lodging. Going camping costs about $40 to reserve the site. But it is important to get out of your home so that you can focus.

My basic agenda looks like this:

  • Review your one-page business plan and update your financial projections
  • Review your Quickbook numbers for the latest month and quarter, and make sure all expenses are categorized properly
  • Read, read, read. I collect interesting articles throughout the quarter, and print them to PDF so I can read them if I don’t have internet access. I also have some business books that I am working my way through. Right now I am reading “The E-Myth Revisited”.
  • Set 90 day priorities that will support your 1- and 5-year goals
  • Review your Profit First target allocations (see below)
  • Then focus on something major you want to work on at the retreat like starting an operations manual, ironing out the details of what the first three client meetings look like, a financial planning concept I want to explore more, or creating a business mission statement
  • Set the date for the next retreat

It is really nice to get away from all the distractions around your apartment or home. I find myself always tidying up (that dish doesn’t belong there), which ultimately distracts my business focus. It’s good to unplug and focus on thinking about the business.

11. Set Your Prices Just Beyond What You Feel Comfortable With

Alan Moore said this on one of his XYPN Radio podcasts and it really stuck with me. He said to price your fees at just beyond the point where you feel comfortable. If you know you can sell your plans at $1,000 all-day, maybe you are getting too many yeses and not charging enough for your expertise.

My average fee is over $1,100 for onboarding, and $235/month for the ongoing services. I still get nervous quoting those fees, but I know I provide a ton of value to my clients. Since I help my clients save $470/month, I feel confident charging them at least half that.

But remember to follow your heart and do what feels right. You will be more successful if you try to sell something you believe in, than if you try to sell something that just doesn’t feel right. Initially I tried charging an AUM fee, and it just didn’t sit right with me. I think investment management is a commodity, and I don’t add much value after setting the initial allocation with my client. So I outsource my portfolios to Betterment For Advisors.

At the time I launched, the Betterment platform fee for advisors was 0.25%. If a client went directly to Betterment, the fee could be as low as 0.15% if they invested over $100k, and they could get up to 6 months managed for free if they went to As a fiduciary, I couldn’t stomach charging a fee for investment management when they could get the same exact portfolio for cheaper. (Although notably, Betterment has since raised their top pricing tier to 0.25%, and XYPN advisors get access to the platform for only 0.20%.)

Nonetheless, since asset management is included with my services, I simply charge a reasonable monthly retainer fee to cover the value of my time to a point where I feel like I can include investment management for free.

12. Get Involved with Your Local Financial Planning Community

Not only was I a new firm owner when I launched, but I was also new to the Bay Area. So I got involved with my local FPA chapter, and highly recommend that you do, too.

I volunteered for pro-bono events at my local library like Financial Planning Days. I also sat on the board for the FPA NorCal conference as a Speaker Liaison. This gave me an opportunity to network with other professionals and in the case of NorCal, you get a free ticket to the conference worth $699!

Set up meetings with fellow NAPFA and XYPN members. Pick their brains. If there isn’t anyone local, set up virtual meetings. Members of the “secret society of financial advisors” are very willing to help you out, so don’t be scared. If you think about it, there are 75,000,000 Millennials, and there are only 550 XYPN advisors, so it isn’t like we are competing against each other.

A key realization that hit me like a ton of bricks was prospects aren’t asking themselves: “Do I want to hire Shawn or another financial planner?” I believe they are asking themselves “Do I need a financial plan at all?” Once I had that realization, it helped me with my approach to prospect meetings.

When you meet with fellow XYPN members or other advisors, it is also a good way to practice your pitch with live people when they ask, “so what do you do?” The more you verbalize it out loud, the more you start believing it yourself. It just feels real when you say “I provide financial planning for young professionals…” even if you don’t have a single client yet.

13. Pay Yourself – Profit First

I think it is important to treat your business like a business and not a hobby. Thus, you should pay yourself and be proud of that.

Even though I invested in conferences and professional training, I kept my fixed overhead really low, and was fortunate to be cash flow positive from almost the beginning. However, I didn’t pay myself until month 10. I wanted to make sure that my business was sustainable and that I wasn’t going to run out of cash. So, I waited until I had about $20k in my business checking account before I thought about giving myself a paycheck. I didn’t know how much I should distribute, so I did some research.

Profit First by Mike MichalowiczI read the book Profit First, and the premise is: take whatever balance you have in your checking account, and multiply that by 50% and that is what you should take home as owner’s pay. 15% should go to a sub-account to pay for taxes. 5% should go to a profit sub-account where you will pay yourself quarterly distributions. And then the remaining 30% is what you should use for your operations and overhead expenses. Thus, you pay yourself first and then whatever is left over is how much you should spend on your business expenses.

Then do this every 10th and 25th of the month. I like to keep $10k in my checking account at all times. So my first paycheck looked like this ($20k – $10k emergency fund = $10k x 50% owner’s pay = $5k).

Be proud of your first paycheck. Frame it. Take a picture of it. Go out to dinner to celebrate. You have worked hard and earned it. The system works because you pay yourself first, and whatever is left over is what you use for your operating expenses.


I feel very fortunate to be where I am. In 2017, I grossed $109k in revenue with about $40k in expenses. I had 99 prospect meetings, and am starting off the year with about 40 ongoing clients. Notably, I haven’t even done very much marketing. My experience over these first 20 months was “build it and they will come.” Though I don’t think that should necessarily be your expectation.

What I have had going for me was life experience (I was 34 when I launched), business experience (I earned my CFP in 2009, joined the financial planning profession in 2010, and earned an MBA from a top-10 program in 2015), and lived by a major city. I believe the last point is crucial to your success. There definitely is an appetite and hunger for good financial advice, but with personal finance people often still want to work with someone who is local. I have worked with 63 clients, and only 7 are people who I have never met in person. If you are trying to build a completely virtual practice, I think it can be done, but it will require a lot more time to build your credibility in your niche (blogging, posting to relevant forums, networking with centers of influence, etc.) so people can find their way to you. If you’re in a dense metropolitan area, it can be easier because they’re already around.

The first year is a wild ride. If you are committed to your practice and take it seriously, I am confident you will make it. This is an amazing profession, and definitely worth the effort.

So what do you think? Did you employ any of these strategies in launching your own advisory firm? How did it work out? Any suggestions of your own that aren’t included here? Please share your thoughts in the comments below!

What This Week’s Market Volatility Teaches About Making Customized Portfolios For Every Client

What This Week’s Market Volatility Teaches About Making Customized Portfolios For Every Client


The big news this week was the “record-breaking” drop (at least in absolute point decline) in the stock market on Monday, the incredible blow-out of the VIX, and the challenge that inevitable comes when market volatility rises: the need to check in with clients, talk them through what’s happening in the markets, evaluate whether it’s necessary to make any portfolio changes, and try to talk them off a ledge if they’re really freaking out. But the reality is that being able to proactive communicate with clients, and have effective client meetings, during times of market volatility, is actually heavily impacted by how youconstruct your client portfolios in the first place, and the extent to which you customize those portfolios for each client.

In this week’s discussion, we examine the problem with financial advisors customizing every client portfolio, particularly once we experience volatile markets, and how financial advisors (and asset managers) should look at “customization” going forward!

In a world where advisors are trying to become less product-centric and add more value to clients, there does appear to be a nascent trend of advisors trying to create more customized portfolios for clients. Though this idea isn’t exactly new (it has occurred for decades in the form of selecting stocks and mutual funds for clients and adapting at every client review meeting), the rise of rebalancing software (or “model management” software tools more broadly), has made it easier to systematize the process of customizing individual client portfolios, while still being able to monitor and manage them centrally.

But I think this week’s market volatility is actually a really good example of the problem that arises with trying to create drastically customized and different portfolios for every client: if every client has their own “customized” portfolio, then it is really hard to keep track of all of your different clients and their portfolios. And so, instead of being able to easily send out broadly applicable communication to your client base, you’ll end up spending an hour to prep for every meeting and write every personalized client email during volatile market times. Simply put, customizing every client portfolio isn’t scalable for the client relationship itself (regardless of the scalable back-office technology to support it).

The challenges of the trend towards customization is notable with respect to asset managers as well. Because asset managers are – justifiably, I think – afraid of their future in a world where advisors are less product-centric, and looking to retool their own businesses. And the discussion I’m hearing more and more from those asset managers is “if advisors don’t want to use standard mutual fund products anymore, then we have to pivot and go the other direction. From products to customization instead!” But here’s the problem: when we look at the advisory firms adopting ETFs and eliminating mutual fund products, they’re not really customizing that much anyway. Even advisory firms that have dropped mutual funds and are building model ETF portfolios, not customized ETF portfolio (allowing them to keep charging their 1% fee while disintermediating the cost of the mutual fund manager, and effectively turning themselves into portfolio managers). So the real shift is that the client buys the investment “product” from the advisor and the advisor’s firm, not from the mutual fund company or other asset managers. The opposite of product isn’t customization. The opposite of product is advisor. When our value proposition is based on what we do, we don’t want to sell a third-party product, of any type. We want to sellourselves!

So where does all of this leave us? From the advisor’s perspective, and particularly for those of you who are now struggling to figure out how to assess the damage of this week’s market volatility because all of your clients have “customized” portfolios… let this be a call-to-action for you of how not scalable you’re making the client relationship management needs of your business. There are a lot of firms that are growing just finewithout customizing every single portfolio differently for every client. There may be times when some customization is still needed, but it is better to customize from a planning perspective (e.g., for tax purposes) rather than an investment perspective.

And for Asset Managers, particularly mutual fund managers, trying to figure out how to reach advisors and stay relevant… I can only caution you that the push towards making more customized solutions is not likely to work out well for you. If you want to stay relevant as financial advisors transition from salespeople to actual advisors, figure out how to make better products that cost less and are truly best in class at what they do. Because as advisors, if you can pass our screens and get to the top of the list, you get all of our money in that fund or category. And if you can’t, you’re never going to get in the door in the first place anymore.

The bottom line, though, is just to recognize that customizing portfolios for every client is simply not a scalable model, not because of technology limitations but in light of the stress and communication challenges that come with trying to help our clients through volatile markets. Which means this may be a great opportunity to begin the process of standardizing your investment process (if you haven’t already) so that you can actually be more proactive with clients, when you’re not spending all that time re-analyzing every client’s portfolio one at a time!


The Problem With Customizing Every Client Portfolio

In a world where we as advisors are becoming less product-centric and trying to add more value to clients, I’ve observed that there does appear to be this kind of nascent emerging trend of advisors trying to create more customized portfolios for each and every client. To be fair, the idea of customized portfolios isn’t exactly new. It’s effectively occurred for decades as we crafted mutual fund portfolios and before that stock portfolios for clients, which was some combination of investments we were recommending at the time, ones that the client was interested in, ones that fit their investment needs.

And because we didn’t have any technology tools to manage all this, historically, over time, our practice would become a bit of a mess because every client ended out with a different portfolio customized to whatever stocks or funds were being recommended the last time they came in for a client meeting, and then usually didn’t get changed until the next time they came in for a client review. We would print our Principia Pro reports from Morningstar and try to evaluate whether to make any changes.

In recent years, we have the rise of rebalancing software (or really what probably should more broadly at this point be called model management software tools), and they’ve made it easier to systematize the process of creating models for clients, including customized models for each individual client, and then being able to monitor and manage them more centrally. So everything from existing rebalancing software tools like iRebaland Tamarac or even newer players like Capitect that are building software to facilitate the creation of customized model portfolios for each client. And so, customized portfolios are becoming less of a technology barrier issue than they were in the past.

But I think this week’s market volatility is actually a really good example of the problem that crops up when trying to create drastically customized, different portfolios for every single client. And it’s the stress that it introduces into our advisor-client relationship. Because the truth is that when every client has their own customized portfolio, your brain just can’t keep track of all the different clients and all the different stuff that’s in all their different portfolios. If you have half a dozen standard model portfolios that you use for clients with, you know, varying levels of risk, it probably took you about 5 minutes this morning to figure out what the damage was from yesterday’s market volatility even if you’ve got 100-plus clients. I know some advisory firms that even yesterday were already sending out messages to all their clients communicating their thoughts, putting the market decline in context of how their clients are invested. More advisors are sending messages out today and queuing them up for the week.

Unless, of course, all your clients have individually customized portfolios, in which case it’s probably going to take you days or even weeks just to evaluate the damage, analyze one security at a time for one custom portfolio at a time to figure out what if anything you’re going to do or not do and then communicate with the clients, which you have to do one at a time because each client’s portfolio is different. And heaven forbid all the client review meetings you already had this week you’re probably scrambling right now just trying to figure out what your talking points are in all those client review meetings because every review meeting is different when every client portfolio is different, when, you know, markets do crazy things and some clients are more impacted than others just based on whatever it is that they happen to own.


Simply put, customizing every client portfolio this way just isn’t scalable… and certainly not if you’re serving dozens or 100-plus clients at a time. And not because we don’t have the technology tools to manage so many different models, which it really is getting better with all the model management software, it’s because of the client communication and client meetings. The process of talking clients off a ledge isn’t scalable when your brain has to try to relearn and keep track of a conversation for every single client in every single meeting, all of which are different because every client’s portfolio is different.

The Opposite Of Product Isn’t Customization

Part of the reason that I point this out is that it’s actually also an interesting trend towards customization that’s coming down from a lot of asset managers as well. Because a lot of asset managers, and mutual fund companies, in particular, are justifiably quite afraid of their future in a world where advisors are becoming less product-centric. You only have to look at the nearly $1 trillion of outflows from mutual funds over the past decade since the financial crisis to see this trend unwrapping. And the discussion I’m hearing more and more from asset managers is something to the effect of, “If advisors don’t want to use standard mutual fund products anymore, then we have to pivot and go the other direction for products to customize solutions instead.” You know, this idea that if they can better customize their asset management strategies for our clients and then maybe use technology to distribute them, they can regain their market share.

But here’s the problem: When we look at advisory firms even today adopting ETF’s, eliminating mutual fund products, they’re not really actually customizing that much. Most advisory firms I see that drop mutual funds that are building model ETF portfolios are building model ETF portfolios. Typically, you know, maybe half a dozen different options from very conservative, very aggressive on the risk spectrum because they’re…but they’re not building different customized portfolios for every client because it’s not scalable for us, because it’s not scalable for the advisor-client relationship to do so.

Instead, as I’ve discussed on this blog in the past, I think the real reason we’re seeing so many advisors shift away from mutual funds and ETFs in the first place is that effectively, we’re disintermediating mutual fund managers. We’re cutting out their fees and their layer and then trying to earn it ourselves. After all, if I’m an advisor who charges my 1% advisory fee and then I have to stack it on top of a mutual fund manager’s fee, if I can shift to a strategy where I manage low-cost ETFs instead, I save my clients the difference in fees between the fund manager and the low-cost ETF, I use technology to manage it efficiently for myself, I get to keep my whole 1% AUM fee, and the client’s cost go down, right? Who doesn’t want that? I’ve got a solution where your portfolio gets cheaper and I add the value directly. Of course, that’s why we’re seeing such a shift. You know, in essence, we’re making ourselves into the portfolio managers, but since we typically don’t have time to do individual stock analysis and are more focused on the asset-allocated portfolios these days, we use the easiest building blocks for asset-allocated portfolios, which are ETFs.

But again, when you look at the kinds of ETF portfolios that most advisors seem to be building, especially the largest firms that are fastest growing and the ones that care the most about the scale, I find they’re the ones least likely to be customizing portfolios for every client. Most aren’t even trying to, they’re trying to instead develop a centralized investment team to make the best possible models that their advisors can use with all of their clients.

In essence, the large advisory firm is making its own in-house managed account products. Larger RIAs are doing it, increasingly broker-dealers are doing it as well with their own shift to in-house accounts. If they’re not comfortable with their in-house capabilities, they sub-advise out to a TAMP if they don’t have the time or the inclination to do it internally. But in all these scenarios, the client is still essentially buying an investment product if you want to call it that, it’s just the product is a managed strategy from the advisor in their firm, not from a third-party mutual fund company or other asset manager. That’s the real shift here.

You know, it isn’t a shift from product to customization, it’s a shift from product to advisor. When our value proposition is based on what we do, we don’t want to sell a third-party product of any type. We want to sell ourselves. Otherwise, we fear that at some point the client will say, “Why am I paying you for a product that I could just get directly online for myself?” That I think is the reason why we’re seeing ETFs grow so rapidly but actively managed ETFs are not, because advisors don’t want to use actively managed ETFs, we want to actively manage the ETFs ourselves because then the client perceives us as bringing the value to the table, not selling a third-party product.

And frankly, I think the situation is probably only exacerbated by the fact that in the real world clients often have a behavioral bias that just leaves them towards, let’s call it, the disaggregated solution. So some people call this the naive diversification bias. It’s the phenomenon that if you show a client a portfolio of 500 stocks, they believe they’re very diversified. If you show them a portfolio that has a 100% in the S&P 500, they feel concentrated and risky. Same 500 stocks, same allocations, but if you put 1 line item on that statement instead of 500 of them, it feels less diversified.

Now granted we don’t do this much as advisors with individual stocks, but I think this is another reason why there’s so much pressure on mutual funds, especially fund-to-fund strategies because not only is there an extra layer of cost, but clients like to see all those line items. And even the trading and rebalancing that occurs, that shows them, you know, the advisor is doing something and being engaged.

Now, I realize not all this is rational, and it’s not even always good activity because of a lot of bad overmanagement and overtrading that could come from this phenomenon, but you can’t ignore the power of behavioral biases that are there and the perceptions of what happens when you don’t just roll everything up into one solution. The advisor, you know, owns the line items because they own the ETFs or they own the components, rather than just letting the third-party manager do it all in mutual fund format.

The Path Forward For Advisors (And Asset Managers) [Time – 10:48]

So where does this leave us? From the advisor’s perspective, particularly for those of you who are now maybe struggling a little to figure out how to get a handle on what’s going on on all your clients’ portfolios, figuring out if you’re going to make any changes and then how to communicate them or you’re waiting for each client review now to do it because you couldn’t even possibly reach out to all your clients at once, you have to wait for each client review, which means now you’re just not communicating with your clients, it’s because your clients have all these different customized portfolios. And let this be maybe a little bit of a call to action to you about how not scalable you’re making your business. If you’ve wondered why are other advisors getting messages out to clients same day or within 24 hours and you’re going to stagger it over the next 3 to 6 months of client review meetings, this is why.

There are a lot of firms that are growing just fine without customizing every single portfolio differently for every client. You know, if you’re not sure that your client will buy a standardized portfolio that you create, or to be fair, you know, a range of them, at a minimum you’re still going to have something that goes from very conservative to very aggressive just to cover the normal range of risk, don’t try to do more customization, just spend more time and resources trying to make better, more compelling portfolios. Or maybe just spending a little bit more time on your marketing materials so you can better explain the value you are creating for your clients with that standardized portfolio, and then figure out what your talking points will be for clients about why you’re not customizing. It doesn’t even have to be all that complex.

I’ll tell you how we typically handle it when you come up for prospects because we run standardized models for clients. Range of risk, but here’s our portfolio. So what do I say when a potential client asks, “Why aren’t you customizing this more for me?” You know we say, “This is the risk you need and want to take to achieve your goals. And we have a dedicated investment team that spends all their time researching to find the highest quality and the lowest cost ETFs to get market exposure in all the areas that we want to invest for our client portfolios. So if you really want to, I’ll go through all the recommendations that we’re making to you, and you can tell me which lower quality higher cost ETFs you want us to substitute in instead of the ones that we’re recommending. But I can assure you we don’t have a super-secret list of extra-special higher quality investment ideas that we hold back for certain clients and give everyone else something inferior. This is the list of the best portfolios we believe we can construct. And we spend all of our time focused on these portfolios, and once we find something that we think is the best, we implement it for all of our clients. Does that seem reasonable to you?” We don’t get a lot of objections after that.

Now to be fair, there are some circumstances where even our firm does customize, but it’s not from an investment perspective, it’s from a planning perspective. It’s the clients that have unusual embedded capital gains circumstances or portfolios that we need to transition over time. Our firm is based in the Washington, D.C. metro area so we have a lot of government employees and various agencies where sometimes we have to work around their industries. Some people at certain levels of Department of Defense can’t own defense stocks… some people tied to senior levels at NIH (National Institutes of Health), can’t own medical company stocks or biotech stocks… so those are planning situations and we’ll adapt as necessary. There’s some good technology in the rebalancing software these days to handle that. But that’s a matter of planning customization, not investment customization.

And for asset managers (and particularly mutual fund managers) trying to figure out how to reach advisors and stay relevant, I can only caution you that the push towards making more customized solutions is not likely to work out well for you. Because the truth is, even in the mutual fund age, advisors already had a ton of choices of different mutual funds to customize for each individual client account, and usually what ended up happening, most of us would end up using a small subset of mutual funds that we were comfortable with, learn the stories of those funds, you know, American Funds and The Growth Fund of America story or PIMCO Total Return in the days of Bill Gross, and then we tended to recommend the same common set of mutual funds for every client.

Not because technology was the limiting factor (although it wasn’t great at the time), but because when you’re sitting across from clients, you have to know what you’re talking about and you have to be able to convey confidence to clients. And if you can’t even keep track of all the stuff that you own, which you can’t if you’ve got dozens or 100-plus clients who all have different customized portfolios, it is a surefire path to losing client confidence and eventually getting fired.

Simply put for asset managers, if you want to stay relevant as advisors switch from product salespeople to actual financial advisors, figure out how to just make better products that cost less and truly are the best at what they do, because as advisors, if you can pass our screen to get to the top of our list, you get all of our money in that funding category because that’s what happens when we standardize and don’t customize. And if you can’t get to the top of that list, you’re never going to get your foot in the door in the first place.

But this isn’t about product versus customization, this is about whether we create as advisors our value through your products or create the value ourselves. And selling your product, which is what we did historically but now is something that any client can buy from any online brokerage account anyways, doesn’t reflect well on our value and that’s what’s driving the shift.

I hope this is some helpful food for thought. Maybe a fresh opportunity for some of you to use the pain of this week’s market volatility and the stress of trying to figure out how you’re going to communicate with all of your clients on all their customized portfolios, in order to begin the process of not customizing so much in the future and standardizing more of your investment process. And you can actually be more proactive with clients, rather than needing to spend all this time reanalyzing every client’s portfolio, and actually just spend your limited investment resources, whatever you’ve got, focusing on one set of the best investment opportunities you can find for clients and not trying to relearn and reinvent every portfolio every single time.

This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays. Got a slightly late start today, but thank you for joining us and hanging out, everyone, and have a great day.

So what do you think? Have you used a TAMP? Have you thought about outsourcing your investment management? What types of services would you like to see TAMPs provide going forward? Please share your thoughts in the comments below!

WisdomTree’s AdvisorEngine Acquires Junxure CRM For $24M

WisdomTree’s AdvisorEngine Acquires Junxure CRM For $24M

The emergence of robo-advisors in 2012 was a call-to-action for the advisory industry about just how far behind our technology tools had fallen when it came to the client experience, especially with respect to client onboarding. Yet ultimately, investment management – even when delivered through a sleek technology wrapper – is not an “if you build it, they will come” business, and the difficulties of robo-advisors in actually acquiring a critical mass of consumers has led most of them to pivot into a B2B solution for advisors instead. AdvisorEngine is one such convert, having started out as a B2C company Nest Egg, later merged with Vanare, and then rebranded when WisdomTree invested $20M into them in late 2016 to focus on financial advisors. The challenge, though, is that even in the context of serving advisors, technology is still a crowded landscape, and many onboarding “robo” tools have struggled to find adoption (and literally a place to fit into the advisor technology stack) between what portfolio management tools and/or broker-dealer or RIA custodial platforms already provide. Accordingly, many of the robo-advisor-for-advisors tools (now often dubbed “digital advice” solutions as the options have proliferated) have themselves tried to become more of a “holistic” advisor platform, shifting from just onboarding tools to include portfolio management, financial planning, and/or CRM functionality as well. In this context, it is perhaps no surprise that AdvisorEngine, which last year bought WealthMinder for its financial planning tools, decided to acquire Junxure CRM to further expand the scope of its technology stack (funded with an additional cash infusion from WisdomTree). Yet the reality is that since its prior substantial investment from WisdomTree in 2016, AdvisorEngine reports “only” about $3B of assets on platform from 60 advisory firms, which even at its top pricing tier of 10bps would be less than $3M of revenue (concerning given a prior $20M funding round!). The good news, then, is that the Junxure acquisition provides AdvisorEngine a more comprehensive advisor platform it can use to try to win more users and accelerate its asset growth; on the other hand, though, offering a proprietary version of portfolio management and CRM could make it even harder for AdvisorEngine to acquire new firms that may not want to swap out both of their existing solutions for a full AdvisorEngine platform. In that context, it actually seems likely that AdvisorEngine wasn’t merely seeking Junxure CRM technology to add to its technology solution, but was literally seeking Junxure users to convert and upsell into their AdvisorEngine platform (as hinted by the fact that in its press release of the acquisition, AdvisorEngine took pains to point out the $600B of AUM managed by Junxure users, despite the fact that AUM normally has no relevance as a KPI for a CRM solution). Unfortunately, though, because Junxure reports that the majority of its users are still on its own “Junxure Desktop” solution (and haven’t even migrated to their more recent Junxure Cloud offering), it’s not clear how many Junxure users will even be able to use AdvisorEngine in the foreseeable future. Which means for the rest of 2018, it’s likely all-hands-on-deck to not only build AdvisorEngine integrations, but finish rounding out the Junxure Cloud feature set to persuade the remainder of the Desktop users to switch over so they can even become AdvisorEngine prospects. And given that Junxure is known as the most financial-planning-centric of advisor CRMs, it’s not clear how interested its users will be in moving to AdvisorEngine’s more investment-centric tools. Especially since advisors are historically not accustomed to paying AdvisorEngine’s bps pricing model for “overhead” software like CRM and portfolio accounting solution… which may ultimately force AdvisorEngine to pivot its business model, akin to OranjMAX, in offering its technology for free in exchange for advisors agreeing to use model portfolios that AdvisorEngine creates with its parent company’s ETFs (monetizing AdvisorEngine technology not through software fees but as a WisdomTree distribution channel).

Getting Over Yourself

Getting Over Yourself

There are two critical junctures that define the long-term success (or failure) of an advisory firm. The first is at the moment the business is created, when the entire focus is about figuring out how to draw in clients – which means developing a solid service model, creating good marketing materials to sell that service model, and figuring out how to get in front of good prospective clients. Everything else about the “business plan” is really just a distraction during this critical revenue growth phase; in fact, Herbers suggests that fully (overly?) developed business plans at launch can hinder the success of a firm, by making new advisors too fixated on “sticking with the plan” and thereby failing to adapt their businesses to what they find is actually working with their initial client base. Once the initial revenue hurdle is cleared, the process of growth is relatively straightforward… just continue doing what’s working in getting and serving clients, and start hiring a team (administrative staff, paraplanners, etc.), to support you. Until somewhere around $2M of revenues, which is the point where the business can no longer just be run in a seat-of-the-pants figure-it-out-as-we-go approach anymore (and it shifts from being a practice into a “real” business)… as at that size, and the number of staff it entails, a business without a plan becomes a business that’s out of control. Which in turn leads to hitting a growth plateau as the firm struggles to grow materially beyond $2M of revenue, as client retention slips, and/or profit margins slip, or the find suddenly finds itself less competitive for new clients. The key to clearing the hurdle – the advisor/business owner must shift from being an advisor and a business owner, and make a real and concrete decision that they can likely only do one or the other well… which means fully committing in one direction or the other, and hiring someone senior (a lead advisor, or a COO) to help drive what must be left behind. Although arguably, the first and biggest step is simply realizing that the business may be growing beyond the point of your individual ability to manage it all! (Thus why Herbers suggests that many successful advisory firm business owners need to “get over themselves”!)

Amid Broker Protocol Fireworks, Industry Shifts Administrators

Amid Broker Protocol Fireworks, Industry Shifts Administrators

Late last fall, as Morgan Stanley and then UBS departed the Broker Protocol, lawyers that represent breakaway brokers (most prominently, Brian Hamburger of MarketCounsel) called foul over the way Protocol administrator Bressler, Amery & Ross (which, notably, often represents large brokerage firms as their own clients) only gave four days’ notice after the major wirehouses had already delivered notification that they were leaving the protocol (despite the fact that Protocol rules require firms to give 10 days’ notice). Accordingly, administration of the Broker Protocol is now being transferred to an expert-witness consultancy firm, Capital Forensics Inc., which going forward will provide updates of new and exiting Protocol members twice weekly (rather than the current once-per-week freshening). However, the decision to transition control of the Broker Protocol from Bressler, Amery & Ross to Capital Forensics appears to have been facilitated by SIFMA, and MarketCounsel’s Hamburger is once again raising concerns that it’s not entirely clear whether SIFMA had the authority to make the decision, nor even what selection criteria were used to arrive at choice of Capital Forensics. In the meantime, though, buzz around the steady unraveling of the Broker Protocol continues, as Morgan Stanley continues to pursue Temporary Restraining Orders against departing brokers, and now Wells Fargo has announced that it will begin to permit its employee brokers to shift to its FiNet independent channel for free (which may be a precursor to Wells Fargo finally leaving the Protocol as well, as once it’s “free” to become an independent with FiNet, the next step would be dropping out of the Protocol so it becomes the “only” way for Wells Fargo advisors to become “independent”!), even as consumer groups are raising concerns about the potential client harm that may result.