So I've developed a different model from the gypsies and fortune tellers: I look for the crazies. These are the people who abandon well-established business models for the "insane" reason that they want to give their clients something better. I call them crazies because, in the pioneering stages, it's sometimes hard to see how they're going to make money.
A classic example is the advisors who first dabbled in the portfolio management service model. This was in the early 1990s, before any of the broker-dealer AUM platforms and institutional back offices, back when you had to ask clients to photocopy their statements so that you could hand-enter their data on a spreadsheet to create performance reports. Whenever I hear Schwab Advisor Services executives boast about their visionary foresight in developing the first institutional platform, I think back to a NAPFA conference in the early 1990s, when Hugo Quackenbush, then a senior Schwab executive, was badgered mercilessly by advisors who were begging him to please, pretty please, send them duplicate performance statements if their clients would sign an authorization.
While everybody else was selling high-commission partnerships and mutual funds, these advisors were building no-load portfolios, and hadn't yet figured out how to charge a percentage of assets under management. "How do you make money doing this?" I asked with some perplexity. The cheerful answer: "We're not quite sure yet. All we can tell you is that our clients love it."
I knew right then that I was watching the early phase of a major trend. These people, who now run some of the largest planning shops in the profession, were clearly insane.
INSANE OR INSPIRED?
I've run across another person recently who fits the crazy mold, who may be as accurate a barometer of the future as my old fee-compensated friends were way back when. Joe Duran, founder and CEO of United Capital Financial Advisors in Newport Beach, Calif., was actually a leading member of the crazies back then, as well. Instead of managing client portfolios himself, he created a firm that facilitated the AUM activities of advisors before any of the custodial platforms existed. "When we started, people said to me: 'Charging a fee to manage mutual fund portfolios - who would pay for that?' " Duran recalls. "We're already doing that. And I said: 'You're just recommending mutual funds for a commission. Why not charge for it directly and actually do it?' It was a crazy idea," he admits cheerfully, "but it worked."
That firm was eventually sold to General Electric Financial, and is now Genworth Financial Asset Management. "We were one of the first, if not the first, open-architecture, no-proprietary-product custodian and investment advisory firm," Duran says. "I was fortunate that we were able to ride the big AUM trend over the next 15 years."
The sale left Duran, who was 34 at the time, with a tidy sum of money and no clear idea what crazy thing to do next. He asked a prominent financial advisor to help him plan out his financial future, and was disappointed when the advisor gave him a detailed retirement projection instead. "I said, 'This is absolutely not accurate,' " Duran recalls. " 'You have no idea what inflation is going to be or what is going to happen to my income.' He said, 'Well, you said you were going to start making money in a few years.' I told him that I really had no idea if that was true, and I didn't know whether I would be making a lot or a little. That company might fail or it might succeed. There is no way this path is going to end up being the true path, and anyway, what I wanted was help making decisions, not a forecast of my net worth."
At the same time, Duran's mother inherited more than $2 million, and she asked her son for advice. "I said, 'What do you want to know?' And she said, 'I want to know what this money means to me. Can I take the kids to Europe? Can I buy a second home?' I didn't dare send her anywhere," he says. "I didn't know a planning firm that would help her understand the implications of the choices she was making, that would be there to help her make good financial decisions, with a consistent methodology, in a no-conflict relationship."