John Burns has learned that the quickest way to grow his practice is to merge with other like-minded firms. As part of a determined growth strategy, Burns Advisory Group is joining with Executive Financial Group, a firm that focuses on Fortune 500 executives.
Combining his existing infrastructure with this small practice should allow for fairly seamless growth, since his firm serves a similar clientele. For business owners, Burns handles business planning issues (his specialty) and designs investment portfolios. For corporate executives, he tackles complex tax issues, including compensation and pension plans.
After the merger, Oklahoma City-based Burns Advisory will jump to 450 clients from 300. In addition, the newly combined firm will add another $300 million to its existing $450 million in assets under advisement. Not bad growth for a year's work.
Staffing will remain lean, with two principals, one additional financial advisor and minimal support staff. Jerry Georgopoulos, the principal founder of Executive Financial, has been counseling senior executives on their comprehensive financial planning for over a decade.
Burns opened his financial planning practice in 2002. After graduating from the University of Oklahoma with a B.S. in business administration, Burns went to work for John Hancock in the mid-1980s. He earned his CFP in 1992.
THE RIGHT ALLOCATION
Burns customizes each portfolio based on that client's particular situation, especially cash flow needs. "We do a cash flow plan first and then look at the investment portfolio," he says. "Our first rule of thumb is to insure that each client builds a cash flow period of two to five years so he or she is never forced to sell equities early."
To illustrate how his asset allocation process works, Burns uses a hypothetical situation of a retiring 65-year-old couple with a $1 million investment portfolio who need $40,000 a year beyond their Social Security and pension payments. Burns assumes twin objectives of capital preservation and a guaranteed income stream.
To meet this goal, the couple must earn 4% a year for their income needs and build in an inflation factor of 3%. This puts what Burns calls their "hurdle rate" at 7% or more. If the clients have a very low risk tolerance, even long-term bonds will only return around 4%, nowhere near the 7% the clients require. The couple's cash flow needs will force them into equities, a prime example of backing into asset allocation based on cash flow, according to Burns.
To get to 7%, Burns often recommends a mix of 65% equities (including international and emerging markets, but not commodities) and 35% fixed income (including cash, short-term domestic debt, global bonds and TIPS). For some clients, Burns includes exposure to international and domestic real estate within the equity portion of the portfolio.
For almost all clients, he sticks to mutual funds and ETFs. He rarely uses separately managed accounts or unified managed accounts because the expenses are higher for managing individual stocks in these accounts and tax reporting, filing and record-keeping is difficult. It's also harder to rebalance a group of stocks; if one manager becomes over-weighted in an asset class, it is often costly and time-consuming to have another manager adjust.
Convincing clients of the need to invest in equities is not a tough sell. "I absolutely see equities attractively priced relative to competing investments at this point in time," Burns says. He believes the traditional equity risk premium is safe for years to come, and market volatility is simply the price investors must pay.
Furthermore, equities are attractively priced on their own terms, with the S&P 500 price-to-earnings ratio currently in the low-to-mid-teens, compared with a P/E ratio near 40 in 2000. "Back then, you could buy Treasuries paying 7% and REITs paying 9%, but today with dividends paying more than 10-year Treasuries, where else is there to go outside equities?" Burns asks.
Burns is no fan of bonds, and he believes fixed-income investors could see as much as a 30% to 50% decline in purchasing power over the next decade. Don't use the word gold around Burns, either. "It's a purely speculative play, more of a fear hedge than an inflation hedge," he says. The advisor likes to remind gold bugs that, from 1968 until today, gold has returned 5.8% annualized, with extreme volatility.
Burns adds that the market anxiety in the Great Recession of 2008 and 2009 created a great business opportunity for his firm. There was enormous worry over 401(k) plans in those years, both among employees worried about their retirement savings and employers worried about their fiduciary responsibility. Burns Advisory counseled many businesses on their 401(k) plans during this time and grew its assets under advisement in the 401(k) market to about $150 million.
TWO IN ONE
Burns specializes in planning for small business owners, but has also become adept at integrating business and personal financial planning for clients. For example, one client was a successful business owner who was divorced with two teenage children.
On the personal side, the client was concerned about his children receiving an unplanned windfall should he die. On the business side, he wanted to keep a key employee who controlled the relationships with all of the company's critical suppliers.
Despite annual income of more than $2 million, the client's family lived frugally, and the man reinvested most of his income in his business, which had grown to a net worth of about $10 million. The client also has a liquid investment portfolio of another $10 million.
After Burns' discovery process, he suggested four steps:
* Develop an incentive plan along with an employment contract that rewarded the key employee for sharing his knowledge, contacts and relationships with other company employees, thus diversifying the risk should he leave the company.
* Create an irrevocable trust in a state with favorable income tax rates that would create asset protection for the business or its future sale proceeds. The trust would also serve as a family bank to mitigate the client's concerns about leaving his children too much, too soon. Assets owned inside of this trust are outside of the client's estate as well as the estates of his children and future generations for estate tax purposes.
* Set up a testamentary charitable lead annuity trust to continue to provide for the client's favored charities after his death. This trust would also eliminate estate taxes.
* Form a captive insurance company to insure the risks of the client's operating business. This strategy allows the client to save money each year on income taxes, thus improving his cash flow and allowing more money to be reinvested in the business.
When asked what single adjective best describes his firm's approach to financial planning, Burns chooses "evangelical." He adds, "We are evangelical in our dedication to our fiduciary responsibilities when managing client assets." That zeal probably helps Burns' clients sleep better at night.
Jim Grote, a CFP in Louisville, Ky., writes regularly for Financial Planning.