Advisor Janice Swenor, a principal in Langtree Associates in Westminster, Mass., launched a side business earlier this year that sells paraplanner services to other financial planners. "I did it initially to kind of smooth out my revenue flow," Swenor says about her startup.
Swenor and a partner began their venture after she employed a paraplanner who "wasn't 100% loaded down with work." The service offers other advisors the use of a paraplanner to assist with such tasks as data entry, creating planning presentation documents and exhibits, and generating quarterly client reports.
In return, the other advisors commit to buying a monthly minimum of one five-hour unit of a paraplanner's time for a minimum of six months. Prices start at $40 per hour per paraplanner, but rise with the complexity of the tasks assigned.
Swenor, a planner who advises clients on an hourly fee basis and doesn't manage assets, is not alone in finding a new revenue stream within her practice. Other entrepreneurially minded planners have spun out side businesses to sell technology, investment frameworks or other products and services they developed and fine-tuned while managing their firms.
The paraplanning revenue stream represents a "small percentage" of Swenor's income. Indeed, some planners who've recently begun side ventures concede that the financial rewards have been modest or even nonexistent.
But Swenor says the startup doesn't cost her much; the paraplanners she has hired for the new venture serve double duty and also work for Langtree Associates. And she remains optimistic that sales will grow as other planners discover how convenient it is to use someone else's paraplanner- whom Swenor trains and supervises - on an as-needed basis.
Mike Scarborough, founder of Scarborough Capital Management in Annapolis, Md., which has $1.2 billion in assets under management, grew so serious about his spinoff company that he sold his financial planning practice in September to shift all his energies to the other operation, Retirement Management Systems. That business acts as a third-party asset manager, taking on fiduciary responsibilities for planners who want to provide guidance to clients who have 401(k)s and other deferred-tax retirement plans.
The idea started about four years ago when Scarborough developed a separate corporate structure that could serve as a third-party asset manager for 401(k) assets held by Scarborough Capital clients. Soon, Scarborough recognized he'd created something of value for other planners.
Planners who become customers of Retirement Management Systems agree to pay the company a flat fee of $20 a month for each client retirement plan the company handles. The firm allows planners to keep tabs on their clients' assets in qualifying retirement plans without taking on the accompanying fiduciary obligations, Scarborough says. Users set the stage for the time when their clients retire or switch jobs and roll over 401(k) assets to accounts managed directly by the planner - and might boost the advisors' revenues in the interim by allowing them to charge a premium for the service.
Scarborough concedes that Retirement Management Systems has yet to turn a profit. When it launched, he lost about $15,000 a month. The financial hemorrhaging has eased, he says, to about $4,000 a month. But Scarborough believes planners will find the value of the service, and he oozes optimism about the future. With little direct competition, he notes that Americans' 401(k) assets are vast.
Asked how he afforded the time away from his planning business to develop Retirement Management Systems, Scarborough laughs. "You hire people who are brighter than you," he says. "I have 11 guys who started out as interns with me." Five of them have bought the planning firm while Scarborough, 60, stakes his future on his newer business.
CUSTOMIZED BLOG POSTS
Alan Moore, a planner at Serenity Financial Consulting in Milwaukee, began his advising practice just this year and manages $3 million in assets. Moore already has a side business: contentmarketingexchange.com. Through it, Moore offers other planners both prepackaged and customized blog posts they can use to communicate with clients and try to raise their firms' place in search engine rankings. He charges about $900 for 15 customized posts. Moore believes his company fills a void. For planners "to take the time out of their day - possibly two to four hours - to write a blog" can be a drain.
When a top planner's time may be valued at $200 an hour, he says, it makes little sense to expend time on writing. In addition, he notes, some planners struggle to write, and often produce poor-quality copy. Or "it just doesn't get done," he says.
The inspiration for Moore's side business was his own success at posting blogs and improving his firm's prominence on the web. "If you Google 'Milwaukee financial planner,' I'm No. 2," he notes. "The reason I'm there is because of my blogging."
For Moore, selling to his peers represents a win-win situation. "I learn so much by blogging and hearing from other planners," he says. "It's funny, but I find it easier to advertise to financial planners than to potential clients."
His content sales have accelerated, Moore says, but "the margins of that business are much smaller." He says that whatever he and his venture partner earn from the sales goes back into the business.
About six years ago, advisor Sheryl Rowling learned that another larger company was buying the producer she had relied upon for portfolio-rebalancing software, which was then costing her about $50,000 a year.
The news worried the founder of Rowling & Associates in San Diego, which has $260 million in assets under management. "I was uneasy about whether it would remain as good a product after the acquisition," she recalls. Rowling - who won a Financial Planning's 2013 Influencer Award for tech innovation - decided to develop her own portfolio rebalancing software.
Later, at an industry conference, she saw a panel on portfolio rebalancing software drawing a big crowd. Convinced that the software she had developed worked better than some of the alternatives being hawked at the conference, she says, "I realized we had a viable product."
And so Total Rebalance Expert, or TRX, was born. Rowling's spinoff company sells annual licenses for her portfolio rebalancing software to other planners, about 100 of them at present. "The advisory business is definitely the greater income stream, but in the future I could see it going the other way around," Rowling says.
In the early days of TRX, Rowling found she needed to exercise her powers of persuasion with other advisors. "When you start a software business, the initial users have to be brave; they have to take a leap of faith," she says. "But at some point in time, you establish yourself. " She says TRX has reached that stage.
Rowling likes "marketing to my peers." She knows many advisors handle much of their workload on their own. "If I can enable advisors to automate one of the most time-consuming tasks, which gives them some of their biggest exposures to mistakes, I am rewarded," Rowling says. "I could dance my way to retirement, but this is a need that I feel needed to be addressed."
Sometimes, she says, her peers ask why she is selling a product that helps her competitors. Her answer: "There are lots of financial planning clients to go around."
ALGORITHMS FOR TRADING
When advisor Lee Johnson - whose namesake Fort Worth, Texas, firm has $100 million under management - wanted a name for his planned side business, he focused on his shoe size: a formidable 16.
The ensuing spinoff, BigFoot Investments, offers planners a "stock-picking process based purely on the numbers," according to its website. BigFoot sells a trading algorithm for variable annuities that Johnson developed to "measure drawdown depth and duration across the universe of exchange-traded securities."
The idea of launching BigFoot began after Johnson attended some study groups with other advisors and shared some of the strategies he was using for variable annuities. At those sessions he began to recognize, based on the planners' reactions, how valuable his formulas and calculations were.
"They kept asking over and over again for our service, and finally we said, 'We are going to have to charge for that,' " Johnson says. BigFoot now sells subscriptions to financial planning firm for $400 a month.
His switch to charging for ideas that he previously offered for free has ruffled some of his peers' feathers. "Some of the people still have a problem with that," Johnson says. He says he thought of the initial stage as "beta testing."
Although BigFoot loses money - "it's just a tax write-off at this point," Johnson says - "we think it will be huge." But he also likes working with other planners and showing them good ideas. "It's a labor of love," he says.
WISDOM FOR WIDOWS
Alexandra Armstrong of advisory firm Armstrong, Fleming & Moore of Washington, D.C., which has $600 million under management, has long managed the dual roles of planner and entrepreneur. Twenty years ago, Armstrong was co-author of a book with a psychologist, Mary R. Donahue, titled On Your Own: A Widow's Passage to Emotional and Financial Well-Being.
For the first edition, an outside publisher sponsored a nine-city tour, and Armstrong sold some 25,000 copies. Soon after, Armstrong established a company for book selling - and then used that to channel profits from book sales to the Foundation for Financial Planning, a nonprofit organization that promotes pro bono advice and outreach efforts for the industry. The book sales helped the foundation and raised Armstrong's status as an expert on advising widows, she says.
Since she began, though, the publishing industry has drastically changed and sales of her book have slowed. Armstrong now self-publishes, paying $6 a book and typically charging $20. Armstrong has sold 1,500 copies of the latest edition, the fifth; profits still go to the foundation.
Armstrong, who was 8 when her mother was widowed, says she typically markets the book at events where she speaks to other planners about advising widows. The planners sometimes buy multiple copies of the book to give to clients.
Another planner following a similar path is off to a roaring start. Kathleen Rehl of Rehl Financial Advisors in Land O' Lakes, Fla., wrote Moving Forward on Your Own: A Financial Guidebook for Widows, which she self-published in 2011.
Between sales of the book - 17,000 copies so far - and speaking fees, she generates enough revenue to justify winding down her practice this year and devoting all her energies to promoting the book.
But Rehl, who lost her husband in 2007 and conceived of the book and mission to help other widows, says, "The numbers didn't drive me." Rather, Rehl explains, her side business has become her passion. "I could not do this stuff," she says.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.
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