Several of Susan MacMichael John's clients own stately vacation homes on Lake Winnipesaukee, in southeastern New Hampshire. Naturally, they want their "heirlooms" to stay in the family. Trouble is, as in many trendy vacation spots, property values there have skyrocketed, and not everyone in the next generation is as prosperous as those in the last. Finding the cash to pay the taxes and keep the place up can be, well, taxing. "I often recommend a real estate trust sufficiently endowed to facilitate repairs and maintenance," says the Wolfeboro, New Hampshire, financial planner. "That can save a lot of heartache later on."
For John, the joy of financial planning is enhancing her clients' quality of life beyond their balance sheets, which usually means tackling thorny challenges such as heirloom real estate. In fact, her client hand-holding has become such a integral part of her practice, called Financial Focus, that it may serve as a prototype for the multi-family office that many financial planners are moving toward today. To get there, John has found she needs to do things her own way, in her own firm. And like a typical New Hampshire native, she doesn't mince words when it comes to what she does and why her usually unconventional approach is a better way. Consider:
o She prefers private accounts to mutual funds in taxable portfolios: "Why put people in something where they may face giant capital gains?" she asks. (On occasion, she will put smaller clients into funds - if stocks would provide too little diversification - as well as wealthier folks too risk-intolerant to handle the price gyrations of individual equities.)
o Her annual management fee is a low one-half of one percent per year. "Charging one percent a year to manage a portfolio of mutual funds is a flat-out ripoff," she declares. What's more, "When your fees are dependent on the assets you manage, you tend to concentrate more on performance, even though the things you do on the other aspects of a client's life may be more valuable to the client."
o She doesn't like to manage portfolios: "I frankly find asset management boring, so I leave the job to private account managers who love what they do, which leaves me free to do the planning I really enjoy."
She also has no minimum account size, doesn't like hourly fees, and doesn't charge for managing client-owned real estate. Instead, John's bigger picture orientation takes her back to planning basics like cash flow, budgeting, insurance, health care, tax consequences - and particularly retirement planning and estate planning, with an emphasis on "keeping it in the family."
Consequently, John is more hands-on than many planners today. She does most of the planning work herself, rather than delegating to a subordinate. In fact, she currently is the only full-timer in her company. She employs three part-timers, including a client data manager, a secretary/administrative assistant, and a CFP who helps prepare documents and graphics for the quarterly portfolio reviews that John conducts either by mail or in person, plus the annual reviews John always delivers one on one and face to face.
Until last year, John did have a full-time CFP on staff, and the plan was for him to become a partner. Instead, he decided to open his own practice in Maine. "It is very difficult to expand a firm like mine because planning is basically an entrepreneurial business. Sooner or later, everyone wants to try it their own way," she observes. Even so, she is looking for another person to take his place on the partnership track. She is more interested in the candidate's potential and willingness to learn than in his or her resume, although having completed some course work toward the CFP or having some experience in a related field like accounting or tax preparation would be helpful. She would even be receptive to someone with training in counseling. "When you are dealing with family issues, you often wish you had a therapist there in the room with you," she says.
John's bias toward psychology probably was influenced by the seven years she spent as facilities manager of the Aspen Institute for Humanistic Studies in Colorado, a think tank founded by Chicago industrialist Walter Paepcke, who believed that mountain air plus exposure to the arts could improve world conditions. From 1978 to 1984, John organized dozens of conferences on weighty topics like bringing peace to the Middle East, rubbing elbows in the process with dignitaries like Henry Kissinger, the Shah of Iran, and Margaret Thatcher.
When the facility was sold and the Institute moved operations to Wye Plan-tation on Maryland's Eastern Shore, John decided not to go along. Instead, she returned to her roots in New Hampshire, where she studied for her CFP while working as a business consultant to small hotels and motels.
Her path crossed that of Roy Ballentine, who had recently opened the first fee-only planning practice in the state. John became a principal in Ballentine & Co. and stayed 10 years, until 1995, when she and Ballen-tine were unable to resolve their disagreement about the best way to bill clients. Ballentine charged by the hour, a practice that John increasingly grew to dislike.
"I don't think hourly billing serves anyone's best interest, because people often don't ask the questions they should ask because they know it is going to cost them something. So they just take a course of action and present it to you as a done deal, except that the action turns out to have been wrong, so it ends up costing them 10 times as much as if they had picked up the phone in the first place. And if you try to be proactive by calling to suggest they come in for a meeting about thus-and-so, they think you are just trying to ring up the clock," John says.
Her separation from Ballentine was amicable, and took only about six weeks. Although the two principals had agreed from the start that clients did not "belong" to either of them, most clients felt a stronger bond with one than the other. "So we simply went down the client list and agreed on whom I would be allowed to solicit to go with me," John recalls. She ended up with about 30 names. All 100 clients of the firm received a letter explaining John's departure. She sent her 30 prospects a second letter explaining what she proposed to do and a return envelope for indicating whether they would stay with her or not. She then phoned each person individually to suggest they not send back the form until they met face to face and she could explain her new fee structure to them.
What each client would pay actually depended on three factors. First, had comprehensive planning already been done and was it up to date? Second, was John managing a portfolio of mutual funds for the client? Third, was John to monitor the performance of the stock portfolios being run by independent asset managers?
The new price schedule, which is still in effect, calls for a first-year fee of between $1,500 and $15,000, depending on how much planning the client has already done, how good the work has been, and how complicated the client's overall situation happens to be. The typical first-year charge is between $5,000 and $9,000. For new clients, John answers those questions during a free introductory meeting and quotes a first-year fee to the prospect before the hour ends. In the case of carryover clients from the Ballentine days, John already knew each person's situation and how much initial planning work remained to be done, so she was able to calculate costs in advance of the meeting.
In the second and subsequent years, John charges everyone the higher of two formulas: either 45% of the first-year fee when John is not required to monitor the performance of the client's privately managed portfolio, or 0.5% of assets when John does the monitoring (and manages any mutual funds the client may own).
These fees proved, in several cases, to be substantially higher than what clients had previously paid. Nonetheless, 25 of the 30 clients John solicited chose to stick with her, and 24 are still clients four years later.
She has since added another 73, bringing the current total to 97. Collectively, they have financial assets of approximately $75 million, including $23 million in mutual funds that John manages and $52 million placed with private account managers. They also own some $25 million in real estate, about which John advises them at no extra charge. Her annual gross revenue fluctuates between $175,000 and $200,000.
John intends to grow steadily but slowly, adding only another five to 10 new clients a year. And she wants to limit the total number of client relationships to no more than 100, even after she finds and hires another planner for the firm's partnership track. "When you get larger than 100, I think it's difficult to maintain meaningful personal relationships," she says.
All new business comes from word of mouth or referrals, mostly from portfolio managers whose clients need more specialized help than the managers themselves can offer. In fact, so many asset managers seem to have clients in this predicament that John has launched a new service: short-term consulting to private asset managers. A portfolio manager will hire her to meet one on one in the manager's office one day a month with a series of the manager's clients who have specific questions on subjects like long-term care insurance, trusts, second-to-die life insurance, and other financial planning topics.
Clients who have the kind of net worth that John typically works with often have developed a relationship with one or more asset managers by the time they become her clients. If the manager is someone she doesn't know, John makes a point of getting acquainted. And when new clients have no independent asset manager to handle equity investments, John introduces them to several possible candidates. "I make it my business to find different managers that have different styles, and I always take the client to meet two or three of them," she says. "When they make their final choice of manager, it's not someone I picked for them. It is someone they participated in choosing."
Placing such importance on the integration of interests usually prompts clients, sooner or later, to ask John to monitor their investment portfolios at the same time she is keeping an eye on everything else. She synthesizes performance information from all of the client's portfolios, then summarizes this data in a quarterly report. "I want people to have a clear picture of what they own," she says. She also uses her overview to spotlight gaps and deficiencies that an individual manager might otherwise miss.
As John spends her days overseeing, coordinating, and trouble-shooting her clients' complete financial lives, she is doing many things that used to be the cornerstones of financial planning before asset management steamrollered everything else aside. Perhaps her practice is moving forward successfully precisely because she has taken that big step backward.