For this second installment of Fix My Practice (the first one appeared in the September 2005 issue), we talked to an insurance industry veteran who recently embarked on a push to expand his financial-planning practice. We asked three experts — Steve Sanduski, managing partner of Peak Productions in Omaha, Neb., and co-author of Tested in the Trenches (Dearborn Publishing, 2005); Tash Ellwyn, a branch manager with Raymond James & Associates in Chattanooga, Tenn.; and Stewart Lee, president of Lee Training Systems, a Wellston, Okla.-based firm that provides training to financial services professionals — for their suggestions.
Two years ago, financial planner Leon Rousso launched an advisory practice, with his eye on a specific prize: Growing the investment side of the business and getting $100 million in assets under management by 2010. With about $25 million in assets, he had his work cut out for him.
Rousso, now 57, didn't originally intend to become a financial advisor. In fact, when he was in his 20s, he worked as a professional musician, playing saxophone and singing. Then, at 30, with his wife pregnant, he faced facts.
“I'd never become Elton John,” he says. He went to work for Equitable (which was later bought by AXA Advisors). For the next 15 years, he sold insurance, mostly group plans for companies. “I built up a nice business,” he says.
By 1991, however, he started to get nervous. With the U.S. edging towards a national health insurance system, he reasoned that basing a financial practice on employee benefits probably was not the best way to prosper. So he chose to go in a new direction, by getting a certified financial planner (CFP) designation. Then, in 1999, he got a Series 7 and Series 65 and started handling investments and financial planning for clients out of an AXA branch in Woodland Hills, Calif.
But Rousso grew increasingly frustrated by what he felt were limitations placed on him by his employer. So, he decided to take the leap and go the independent route, with the goal of building up a practice that, ultimately, would get most of its revenues from financial planning and investments, not insurance. He hooked up with broker/dealer Centaurus Financial, took along with him an AXA associate to handle the administration of employee benefit plans and set up shop.
Since then, Rousso says he hasn't had trouble winning clients — he has about 1,000 in all. At the same time, though, he hasn't grown the business anywhere near as much as he wants. He still finds himself spending a fair amount of time serving insurance clients from the old days, although he makes almost nothing from his efforts. Some 50 percent of revenues are from employee-benefit plans, with the rest coming from a mix of financial planning, investments and life insurance.
What to do? His plan is to hire a junior partner with a modest amount of experience to serve B-list clients, doing quarterly reviews, asset-allocation models and the like. “Someone 25 to 35 years old, who is still hungry to grow but knows he'll find it difficult to sell himself,” he says. This would let Rousso devote more time to financial planning and his better clients. Ultimately, in another 15 years or so, he could also sell the practice to his new colleague. At the same time, Rousso would broaden his insurance administrator's duties, expanding her sales responsibilities.
So far, however, he hasn't had much luck. Two former AXA colleagues whom he had trained turned him down. One decided the move was too risky. The other got married and moved. He has put ads on the Financial Planning Association's Web site, networked in the Ventura county FPA chapter (of which he is president) and interviewed students at local universities — all to little avail. In addition, he remains on the fence about how to structure compensation, fearing that he'll spend an arm and a leg on his new recruit before the person gets up to speed. Says Rousso: “For a lot of people, it's all about what am I going to give them, not what they're going to give us back.”
This advisor should put a number of pieces in place before he can focus on increasing revenue. First, he needs a clear roadmap for where to take the business. I would encourage him to have a mission and vision statement, with goals for the business, and revenue and profitability projections. Without that, he'll be jumping around from strategy to strategy until he hits on something that works. I would urge him to nail that down. What type of client does he want to work with? How many clients? He also has to find what makes him unique.
After that, he needs a plan that will let him delegate more. That means hiring a support staff, with a clear idea of what their duties will be. As he continues to add staff, he will reduce the number of activities he does and free up time to focus on the two or three areas in which he can add the most value.
Then, he has to make sure he has segmented his clients adequately. We recommend he group them based on segments A-plus, A, B, C and D, The A-plus and A clients are top accounts. B and C don't have as much money. But, also, they may not share as much in common as the A clients, so they're best suited for an associate advisor. D's are just a bad fit.
I'd like to see him get down to a mix of no more than 150 clients. He also needs to set an account minimum for those clients he handles personally. The good rule of thumb is for the asset minimum to be equal to your previous 12-month gross revenue. He needs to keep his client base at a size that allows him to provide a high level of service, so he gets more referrals from top clients and gains access to higher-net-worth people. One other step: Focus on getting referrals from people who enjoy the same passions, like musicians.
I agree that hiring an associate advisor will be a key step for him. I would suggest he try local job posting Web sites, in addition to his other efforts. As for compensation, I would recommend that if it's someone relatively inexperienced then put that person on salary for the first 12 months. It should be enough to live on, but not so high that they get too comfortable. After that, put him or her on 100 percent commission and fees, with a 35 percent payout.
But he also has to work on making himself less known as an insurance advisor. As part of that work, he should align himself with other key professionals, like an estate-planning attorney and a CPA.
The first thing to do would be to set up timelines. Where does he want to be in five years, 24 months, 12 months? And he has to measure his progress.
Then, he needs to evaluate the type of client he requires to get him to his goal. What should the client demographic be? What services should he provide? What cross-selling opportunities are there? Each time you add a new service not only do your retention rates go up considerably, so do your revenues. He also has to think twice about spending a significant amount of time providing service to small insurance clients. He's doing a disservice to his other accounts.
He needs to segment his clients. Remember that a number of nonfinancial factors go into that. Do you cringe when you're with a client, or are you happy to work with him or her? That's as important as the amount of revenue they bring in. Ultimately, his objective should be to develop relationships as quickly as possible so he either upgrades them to an A level or down to a C.
For each category, there should be a different level of service. For top clients, I recommend a 12-4-1 schedule. That means initiating 12 contacts per year. Four should be in the context of a quarterly portfolio review and at least one should be conducted in person. On top of that, a junior associate should make four additional telephone contacts. For other clients, I suggest a 6-1-2 rotation, with six contacts, two of which involve a review, one of which is in person, with two contacts from a junior associate.
Compensation for the junior partner should be based on revenue sharing on all existing relationships. It creates an instant income for the junior advisor and aligns the risk for both partners. The associate should get a monthly guaranteed salary, but low enough so that as much of the compensation as possible is risk based. I'd consider 50/50 revenue sharing on all new client relationships.
Simply inserting a new associate into the practice doesn't mean clients will instantly gravitate to him or her, however. You need to have a strategy for introducing the person. Let clients know you're hiring a new member of the team to improve the level of service. Then over 12 to 24 months, phase the individual in, while you gradually move to the background. Your new associate will gain client confidence in bite-sized pieces.
My biggest fear is that this advisor doesn't have a written business plan with contingencies, what ifs and so on. It's like someone trying to plow a field without a tractor. He has to have a plan and really work out the metrics. What does he have to do to get to $100 million in five years? Then, he needs to seriously analyze his clients to find the 20 percent who are worth it. His top clients should be people who have a variety of financial needs and the dollars to go with them. But they also should be able to provide access to centers of influence and other potential referrals.
I also think he can get more leverage from his insurance administrator. I would recommend that he give her an assessment to see whether she can move forward. That means getting a Series 6, and maybe a 7, so she can do more commission work while he concentrates on the investment business. She needs a 7 so that she can place orders in his absence. Also, while she continues to manage insurance renewals, she can look for people with other financial needs and pass them on. Figure out a compensation arrangement whereby she gets a piece of any new business that she helps to bring in.
When he thinks about compensating his new junior advisor, he needs to change his approach. He's not just spending money, he's investing in his practice: It's an important distinction. And it won't take a whole year before he starts getting a return, just the first quarter. To find the right person, he should continue to look at universities and advertise on Web sites, as well as publications. In addition, some of the big brokerage firms are cutting off people making under $200,000. He might be able to grab one of them.