Authored February 10, 2010
I’m writing an article for the next issue of my Inside Information newsletter about an advisor named Mark Herhold, who has cracked one of the toughest codes in the financial services marketplace. Mr. Herhold has (the reader is advised to sit down before reading further) has figured out how to profitably offer financial services to middle-income clients. His take-home pay would make executives at much larger firms envious, he works out of his home, and he and his wife are the firm’s only employees. Even if you have no more than $2,000 to invest, he will sit down with you and provide life-changing services, taking only an asset management fee of less than 1% of the portfolio value.
Naturally, the article talks about how he organizes his practice, how many meetings he has with clients, his software, his marketing activities and all the other questions that you or I would want him to answer. But the key to it, it seems to me, is the core service he provides. Instead of a lot of fancy financial planning calculations, tax analysis, estate planning, Monte Carlo projections and all the usual polished bells and whistles of the traditional planning service, Mr. Herhold focuses on the essential thing that sits at the heart of all great financial planning advice, what I call The Formula.
You know The Formula at such a deep level that I hardly need to articulate it: you save 10% to 20% of your income each year, you live debt-free, and you invest your money in sensible managed accounts for the long-term, which means you don’t self-churn the account and end up buying high, selling low and missing out on more than half the returns that the market delivers.
Follow The Formula over any reasonable period of time, and you will enjoy a comfortable retirement, almost regardless of what happens in the investment markets. It is The Formula for financial success, and for people of modest means, those other, fancier, more complex, more time-consuming services are so secondary that, for the sake of practice efficiency, you can leave them out and your middle income client will not miss them. (Mr. Herhold DOES encourage his clients to draw up a valid will and powers of attorney, but those services are provided by a local attorney he recommends.)
The Formula is not complicated to understand, and not too challenging to articulate. The challenge is actually living by it–something that few Americans have done during this recent period when our national savings rate dipped alarmingly below 0%. So in addition to giving his clients the sure secret to financial success, Herhold has built his entire service model around moving his clients closer and closer to this optimal financial way of life, a step at a time, with each conversation and each meeting.
How? If a client happens to be holding significant credit card debt, then the entire financial planning engagement focuses on helping this person save more, and pay off those balances.
Once the balances are paid off, the focus shifts to the investments, which Herhold selects and tracks using Morningstar reports, keeping the money in place during periods of euphoria and despair and everything in between. In order to keep his clients interested, Herhold goes beyond simply reporting on the size of their portfolios. He calculates their future Social Security and pension information, and then calculates how much additional income the growing portfolio will provide. So in one meeting, he’ll tell a client that she can expect to have an income of $2,500 a month once she turns age 65. Two years later, after a lot of hard saving, he will tell that same client that she will now be able to spend an estimated $3,500 a month in retirement.
Occasionally, the focus will return to the (growing) size of the portfolio. Herhold recently sat down with one of his clients, who had come to him initially with $300,000 to invest, and congratulated him. His investments had reached $1 million in value. His message: “Welcome to a very exclusive club.”
And that illustrates how Herhold has cracked the tough middle market practice management code. While The Formula is working hard for his clients, it’s also working hard for him. His clients start out with very little, so little that other advisors turn them away. But at a high savings rate, their portfolios quickly move upscale–and so does Herhold’s income, as a percentage of assets. Meanwhile, the clients suddenly realize they have more money in their account than they ever expected, and some of the more grateful clients become strong referral advocates for his business. It’s a virtuous circle, powered by The Formula.
I happen to think that the financial planning profession won’t become a real profession until we offer our services to everybody–like doctors and lawyers do. The trouble is, nobody seemed to be able to figure out how to do it profitably. By concentrating on The Formula, and making it work for clients and your practice, and leaving out a lot of things that are time consuming but not crucially relevant, a new generation of advisors might soon be making a huge difference in the lives of the unwealthy. I can hardly wait until this catches on.
Bob Veres
Owner
Inside Information
San Diego, CA
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