How does a sole tax practitioner work his way up to a firm with $1.3 billion in assets? Larry Elkin chalks up his success to communication skills he honed as a reporter.
Look at the job description, says Elkin, president and founder of Palisades Hudson Financial Group. You need to figure out what somebody wants or needs to know; gather the information and communicate it accurately and clearly so they can use it. Its exactly the same for both professions.
Elkin, who spent eight years writing for The Associated Press early in his career, says one difference between being a journalist and being a planner is that he switched from having a mass audience of strangers to having a small audience of clients, whom he knows exceptionally well.
Sixty-five high-net-worth families entrust him with their assets, paying fees that can add up to more than 1% of assets under management. Another 100-plus clients come to Palisades Hudson for à la carte services, from estate and financial planning to tax preparation.
In the late 1980s, a few years after Elkin completed a New York University night school course that gave him a graduate degree in accounting, then-thriving (now defunct) national accounting firm of Arthur Andersen recruited him away from AP bylines to join its tax department.
Lauded for his communication skills, Elkin was whipping through the accounting firms ranks and well on his way to becoming a partner. But the work Elkin liked best, doing tax planning for individuals, wasnt a high priority at the firm, which specialized in auditing large multinational companies.
Likening the firm to a dog, Elkin says the audit department made up the dogs body; the tax department the tail. And as someone who liked to do tax work for individuals, rather than big companies, Elkin says: I was the flea on the dogs tail.
So with a years worth of living expenses set aside as a security blanket, Elkin struck out on his own, founding Palisades Hudson in 1992.
Three things saved him in that first year, he says. He wrote a book on financial planning for unmarried couples, receiving an advance payment from the publisher; and a newsletter he wrote convinced some wealth managers at Bankers Trust to hire him for consulting projects. Then one of his former clients at Arthur Andersen demanded that the accounting firm enlist Elkin to complete their work on a freelance basis even though he would otherwise have been barred from doing it by a non-compete agreement.
That first year, I did three tax returns, he says. Those other [writing and consulting] projects filled up the year.
What he didnt do was as important as what he did do that year, he says. He didnt accept clients who didnt fit his business model, despite the temptation to beat the bushes for work.
If you accept work that doesnt fit, you will absorb all the time that you would otherwise use to build your practice on the people who really dont fit into it, he says.
Because his specialty was high-end tax planning, Elkin needed to focus solely on wealthy clients who would have complex tax problems to solve things like family businesses that needed to be divvied up among heirs, for example.
ESTATE PLANNING TOOLS
Elkin began creating so-called family limited partnerships legal entities that have officers and a management structure, as well as assets. (He remains a fan.) Typically, Elkin sets them up as a way of transferring assets to heirs over time, while the original owner of the assets maintains control over how and when those assets are used.
While the IRS appears to consider family partnerships mainly as tax-avoidance tools, Elkin thinks theyre a great way to test responsibility and stewardship of heirs before they get control of an inheritance.
Lets say, for instance, that John Smith owns $50 million in rental real estate and wants to pass the assets to his five children, including John Jr., who is likely to manage the properties when his father dies. By setting up a family partnership, John Sr. can act as general partner and transfer equal limited partnership interests to each of his five kids.
One advantage is tax-related: Because the holdings are private and the interests cannot be sold, the value of each share is likely to be discounted from its net asset value to account for the illiquidity. That allows John Sr. to transfer relatively larger chunks of the assets each year on a tax-free gift basis than if the transfer were done through another structure.
However, the real beauty of these arrangements is that the general partner retains control; the limited partners have no authority to direct how the partnership is run or the assets are managed. Thus, if John Sr. thinks that one or two of his children are contentious or irresponsible, he can save them from squandering their inheritance by keeping the partnership in place.
At John Sr.s death, John Jr. can become the general partner of a legal entity that could survive into perpetuity. But if all the heirs prove responsible and amenable, the partnership can be dissolved or it can distribute money or property to the heirs at any time. That could allow John Jr. to give his kids their inheritance while hes still alive to watch them enjoy it.
What you are doing is setting up a structure where you can flexibly manage the issues of ownership and control, Elkin says. You want to give heirs the chance to make some decisions and make mistakes, but you dont want to put them in a position where they make mistakes they cant recover from.
$5M AVERAGE CLIENT
Today, Palisades Hudson maintains four offices, with a team of 14 advisors, many of whom are CPAs and enrolled agents.
The firms average client has $5 million invested. Although the firm doesnt have a minimum investment requirement, Elkin says he waves away those with less than $300,000 to invest, simply because his $4,750 minimum annual fee makes his service too costly to make sense. (These clients can hire Palisades on an hourly basis, he says, if they want a plan that theyd implement themselves.)
But he continues to believe the success of his firm is all about communication. Every new hire gets a copy of Strunk & Whites grammar primer Elements of Style. Team members are encouraged to help write the firms newsletter, which addresses a wide array of topics, from politics to finance.
Theyre also expected to listen and learn enough about their clients lives and goals that they can answer the one question every client asks: What should I do? When clients ask that question, he notes, his planners must put themselves in the clients shoes to provide a good response.
Theyre not paying you to be smart and certainly not paying you to be smarter than they are, Elkin adds. Theyre paying you to help them make informed choices, based on their values, not yours. That requires that you really know and understand them.
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, contributes to Kiplingers and CBS MoneyWatch. Follow her on Twitter at @kathykristof.
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