My Financial Planning Practice – Ten Things I Did Right and Wrong
I’ve been a financial planner my whole adult life – half in corporate financial planning and half in personal financial planning. Looking back at my personal financial planning practice, there are some things I’ve done right and some mistakes I’ve made along the way.
While not for everyone, here are some things to do and not do.
Things I did right:
1. Billing hourly. This is not the right model for all planners or consumers, but it was right for me. The question I asked was that every profession on earth (doctors, lawyers, accountants, etc.) is fee-for-service, so why should financial planning be any different? Though this fee model didn’t eliminate all conflicts, it minimized them. I could recommend paying down a mortgage or evaluate a pension option (rollover to IRA versus monthly payout) without a financial conflict.
2. Stressing simplicity. In 2009, I wrote a book, How a Second Grader Beat Wall Street, using a three- to five-fund portfolio. It’s in first place among the Dow Jones MarketWatch Lazy portfolios. I never dreamed a book about investing being so simple that an eight-year-old could do it would result in attracting so many new clients. But it did. There are complexities (taxes, fees, gated redemptions, etc.) in moving toward simplicity, and that is the business I’m in.
3. Not choosing a custodian. I advise on well over $1 billion in assets annually (typically different clients every year), yet I have zero assets under management with no discretionary authority. I can’t make a single trade. I let clients use whichever custodian they’d like. I will often work with custodians to get clients an “acquisition award,” which often more than pays for my financial planning fees. One recent client got a $20,000 acquisition award for moving securities to a well-known custodian. By not using a custodian or an advisor platform, it simplifies my practice greatly.
4. Getting quoted in the media. Starting an hourly practice isn’t easy and initially I had a lot of time on my hands. I read some of my favorite columnists and sent them emails with some suggestions to write about, typically related to a past column. It turns out journalists are dying for new things to write about and the hourly model also allowed me more freedom for topics.
5. Writing and teaching. I networked and soon found myself teaching finance at the University of Colorado and writing for the local business journal. The latter led to a three-year gig writing an undercover column called “The Mole” for Money Magazine and I am now writing for other publications. I wish I could say I planned this, but it turns out that there are huge synergies among financial planning, writing and teaching.
6. Making people invest a little time to talk to me about investing. In spite of being lonelier than the Maytag repair man, I quickly learned it was a waste of time to meet with most people. The “ah-ha” moment came when I met with a potential client looking for the best three stocks to invest in so he could double his money in the next year. Shortly after that, I developed an intake form a potential client must fill out before I’d have my initial meeting. That meant they had to go to my website to see my philosophy first and learn what an index fund was as they were rarely used by planners at the turn of the millennium. With rare exceptions, this ensured that a potential client and I were aligned with respect to the goal of achieving better financial outcomes.
7. Using behavioral finance. This is the only academic research that has shaped my practice since receiving my MBA at Kellogg in 1982. Back then, I thought I was a logical being working to maximize wealth based on consistent beliefs and, to this day, don’t know how I could have been that clueless. Now I’ve been teaching behavioral finance for 15-years. I talk with clients often about their feelings and what they think they know.
8. Using humor – I spend a lot of time telling clients they are wrong in their beliefs about money and the market. This includes how they think they will feel in a bad and sustained bear market to what they think will happen to interest rates and inflation. Obviously nobody likes to be told they are wrong about anything, so I’ve found a little humor is effective in digesting my message, without sacrificing professionalism, of course. Even my practice domain name DareToBeDull.com has a combination of humor and truth.
9. Offering a guarantee. From day one of my practice, I’ve noted in my agreement that I don’t bill until after the engagement and that the client has a unilateral right to mark cancel on the invoice if they didn’t receive value. I created that policy so that potential clients would be less hesitant to request an engagement. I kept it and no one thus far has exercised that right. It wouldn’t be good for my reputation (or that of any other planner) if a client felt they were charged for a worthless plan.
10. Be willing to make enemies. Early on, I was very critical of certain practices among advisors and was told to get in line and show professional courtesy. If we are to become a profession like doctors or lawyers, then we must be self-critical. As an example, I suspect I am the least popular licensee of the CFP designation offered by the CFP Board, who I believe have abandoned their mission to benefit the public.
Things I did wrong; here’s to hoping you can benefit from my mistakes:
1. Underestimating loneliness. I went from being a senior officer of multi-billion-dollar corporations to a nobody with no clients. My first year’s revenue was $500. Even though I waited until I was financially secure to start my practice, it was still psychologically hard to go from being perceived as an important corporate officer to somebody who few wanted to talk to.
2. Being oversensitive to criticism. Because my self-confidence was low, I was very sensitive to criticism. For example, more than a few times, I was told my trademarked slogan, “Dare to be dull,” was the dumbest one ever conceived. It was only when someone commented that it was “counter cultural”, which was meant as an insult, that I decided to keep it. I still get criticized frequently but, while I don’t enjoy it, I’ve learned to live with it as a consequence of trying to influence change on an industry.
3. Designing my own web site. During that aforementioned period when I had a lot of time on my hands, I learned a little coding and decided I could design my own web site. Spoiler alert – I couldn’t. I wish I had saved a few screen shots so that you could truly appreciate how horrible it looked. No one in their right mind would follow up after seeing it.
4. Accepting clients I shouldn’t have. Since I didn’t have much revenue, any new client seemed appealing, and I said “yes” too often. I found myself sometimes working for clients who didn’t fully understand my philosophy or people I didn’t enjoy working with. For many years, I have been very selective about who I take on as a client.
5. Underestimating investors’ emotions (and my own). In spite of understanding and teaching behavioral finance, I underestimated just how hard it is to control those emotions. In fact, I have some inside information that some of the world’s leading experts in the field of behavioral finance exhibit inconsistencies between theory and practice. I’ll freely admit that I had to white-knuckle my way through rebalancing after plunges three times this century. Far from smiling about the fact that I was buying stock funds on sale, it felt like getting kicked in the gut three times and asking for three more.
6. Failing to pull back. As my lonely practice got busy, I found myself working very long hours and couldn’t do it all as well as I’d like. Ultimately it was teaching that I greatly reduced and then, to an extent, writing. Though I miss doing both, now I concentrate on financial planning for clients.
7. Overestimating regulators’ intent. I love the fiduciary standard touted by regulators and the CFP Board. Like doctors or lawyers, we should put our clients first. But as I’ve seen egregious actions such as charging fees over 5% or falsely overstating income, the response I get from regulators and the CFP Board is to look the other way. They want to catch outright fraud but have facilitated a culture of allowing unethical practices. I have become numb to seeing how people have been legally abused and that numbness is dangerous.
8. Failing to understand economics of media (offending advertisers). My writing quickly went from a free gig to a well-paid undercover “mole column” for Money Magazine back when it had a huge presence. Unfortunately, often the stuff I warned about were products offered by its largest advertisers. I soon found out just how much the sales force despised my column. They were losing out on sales commissions as the magazine was losing out on revenue. In some publications (not Advisor Perspectives), what I’m allowed to write about today is far more restrictive.
9. Thinking the industry had many “bad guys.” There was a time when things were very black and white, and I regarded selling ugly expensive products with false promises as pure evil. I’ve come to realize that selling bad products doesn’t mean the people who sell them are bad. In fact, many who do are very nice people. Though good people can do bad things, there are very few Bernie Madoffs in the world. I started my practice after I was financially secure so who’s to say I wouldn’t put clients into products that paid me well if I need the money to support my family. That said, when I see bad stuff, I call it out to clients and in the media. I will do that because they’re bad products, not bad people.
10. Selling out the small investor (raising my fee). I started my practice because I felt small investors especially were sold ugly products like annuities and loaded funds. I wanted to help those small investors. Today, however, my high hourly fee makes it impossible to help those small investors on a cost-effective basis. While I help those investors with my writing and a free call when they submit a profile, I only do the occasional pro bono plan for the small investor. I’ve found the complex analysis required by investors with a large net worth more intellectually challenging. But I freely admit I do far less to help smaller investors than when I first started my practice.
Some of these things I did right and wrong may help you in your practice. The theme here is that they helped me differentiate my practice so I’m less likely to get lost in the crowd. That is my parting advice– differentiate or die.
I’m not done learning and will discover new things. I will also continue to make mistakes. Hopefully I will also learn from those mistakes.
Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor. He has been working in the investment world with 25 years of corporate finance. Allan has served as corporate finance officer of two multi-billion dollar companies and has consulted with many others while at McKinsey & Company.