If you're ready to leave commissions behind and brave managed money territory, check out how other brokers survived the new environment.



Making a move to fees can feel a lot like being part of the brokerage industry's own form of the “Survivor” TV show. You have only your wits to keep your business going. You fear that if you can't drop a ticket to make it through a month, you'll end up like the “Survivor” guy who barbecued rats to make it through the day. And if your firm doesn't vote you off the island, your clients just might.

Many investment management consultants have had a tough transition, says Steve Winks, co-founder of The Society of Senior Consultants in Richmond, Va., a small group of high-level consultants who manage $200 million or more. “They did it on their own, gutted it out and barely survived the first couple of years,” he says. “Full-service firms don't guide brokers to make a transition. Everyone has to reinvent the wheel — one spoke at a time.”

Take a deep breath. Transition survivors say the process isn't all about pain. The only painful part is letting go of the fear before you commit to a managed money strategy.

Here's what it takes to conquer transition fears.

Survival Tip: Know why you're making the move.

“You have to accept and believe that you can't do as well managing portfolios as a specialist can,” says Jack Harmon of Raymond James Financial Services in Atlanta, who began a gradual transition to managed money 20 years ago. “You have to believe that asset allocation is a main tool for managing risk. If you can look at a management-style grid and believe you can be better than everyone in all styles, don't go into managed money.”

Find a coach to help you analyze your business and write a mission statement before planning a transition. Timothy Pagliara of CapTrust Financial Advisors in Franklin, Tenn., attended a weekend workshop led by Leo Pusateri, who helped him formalize where he was adding value.

“I found I had a high quality of service and had been creating superior strategies,” Pagliara says. “I had kept clients out of the speculative tech bubble. Leo challenged me to think through my move thoroughly.”

Mark Van Leeuwen of Linsco/Private Ledger in Richmond, Ky., worked with Pusateri, Steve Moeller and Bill Bachrach to understand the fee model of business. Through them, he met more established investment management consultants who shared their transition experiences.

Survival Tip: Understand the managed money process.

Earn a Certified Investment Management Consultant (CIMC) designation before beginning the transition, says Joe Murray of Merrill Lynch in Savannah, Ga.

He wishes somebody had told him that; it would have made his move easier. Murray became a CIMC in 1997, nearly 10 years after starting his transition. “The designation gives you a lot of statistics education to help you know how to do manager searches,” he says. “It helped me create written quarterly reports of the same quality as institutional clients receive.”

The CIMC designation “gave me a track to run on,” says Douglas Shannep of QRS & Associates, an affiliate of Mutual Service Corp. in San Diego. “It showed me how to do investment policy statements, which we realized were the big value we added to clients.”

Survival Tip: Know what it costs to transition.

Coaches say the average broker should be able to add $25 million in managed assets within a year. That means opening about four managed accounts a month and drawing on a monthly prospecting pipeline of eight prospects with at least $300,000 each.

Brokers who've transitioned say activity won't turn into comfortable income for about three years. You'd better have another source of income for the first year. Harmon suggests setting up a home equity credit line and running an expense sheet to highlight nonessentials to cut out for a year.

“To make my business plan realistic, I created three scenarios,” Van Leeuwen says. “Plan one was what the business would return if everything came together perfectly, meaning I got every client I wanted, the market was great and my expenses turned out as expected. Plan two was what the business would look like if some things didn't go as expected. And plan three was the minimum I needed to do to survive. I created a war chest so that I had enough in cash to stay at it for 18 months if everything fell apart.”

David Bach of Morgan Stanley in Orinda, Calif., set a goal of earning $1 million in fees after three years. He had been bringing in $20 million a year in assets that weren't suitable for fees, so he needed to increase assets gathered to about $30 million annually and change his target. Bach tripled his prospecting, holding three to four seminars a month. A year after he began the transition, his production was up 30%.

Big lesson: Write a business plan that covers at least 36 months. Include your target market, the assets you have now, the assets you expect to gather from your current book, and your short- and long-term asset goals.

Survival Tip: Decide upfront the type of clients and fee business you want.

You'll know what kind of transition works best for you if you do a client audit. Van Leeuwen had 2,500 accounts when he began planning his transition after 15 years in the business. He first defined his ideal client as someone serious about investments who wanted a relationship with an adviser. The client would have annual income of at least $50,000 and a net worth topping $400,000. He highlighted clients who matched that profile and came up with his transition target: 188 clients.

Bach's client audit revealed that most of his portfolios were in mutual funds and laddered bonds. “There was no ethical way to transition them to managed money, so I decided the only new clients I'd accept would be those who set up fee-based accounts,” he says.

Bach determined that those with assets under $500,000 would go into a mutual fund wrap program and the rest would be placed with individual money managers. The two-tiered plan ended up being a mistake, he says. It made daily business too complex.

“You should pick only one managed account model and have only three or four model portfolios,” Bach says. He now has a $1 million minimum for new accounts and only works with individual money managers.

Survival Tip: Meet individually with every client you want to transition.

Don't rely on phone calls and letters. You want clients to feel they're embarking on an exclusive relationship, so give them special attention right away.

Van Leeuwen invited his 188 clients to a party at his home to explain his new style of business, and with it, a change in his firm. “I shared everything with them. I explained where I've been in my business, the reasons for making the move and where I want to go,” Van Leeuwen says. “I told them they're now going to be part of about 150 clients, not 2,500. I used the phrase, ‘We're all in this together.’”

He offered to set up appointments to discuss the impact on individual portfolios, and then gave attendees a four-minute audiotape summarizing his presentation.

Van Leeuwen met with 72 clients in the next two months. He has gathered $40 million from 150 clients since then.

Survival Tip: Don't underestimate the service you need to provide.

Expect to spend more time with fewer clients, more time researching and less time looking for clients, Shannep says.

“If you don't make a leap to fees, you won't see that it works.”
— David Bach, Morgan Stanley

The biggest surprise Murray had during his transition was clients' increased service expectations. “You think you're creating a revenue stream and everything else takes care of itself,” he says. “But managed money clients want to be treated as special because they feel that way since they have money managers looking after their portfolio.”

In particular, fee-based reps advise you put a lot of time into crafting performance reports and finding ways for clients to get truly useful information from you online.

Survival Tip: Stick with your game plan.

Accept no new business outside of your parameters, Pagliara says. He had one family who had $3 million with him before his transition. They told him they didn't want advice. They'd rather pay commissions for transactions. “I held my ground and told them I'm not in that business anymore,” Pagliara says. “They left, and it freed up my administrative time immensely.”

The toughest part of transitioning is saying no to commissions, Shannep says. “You say to yourself, ‘Here's a lump sum. If I had the commission on it, I'd make a lot of money right now.’”

Ignore the little voice in your head when it says things like that. Doing commission business with clients you want in managed money can shake your confidence, Bach says. “If you don't make a leap to fees, you won't see that it works. You need $10 million to $20 million under management before you start to feel the benefit of fee-based business.”

Don't give a discount to one client and not another at the same asset level just because you're anxious to bring the money in. “You must know at the gut level that you're worth what you're paid,” Bach says. “You never know when clients will talk to each other.”

The Rookie Experience

A wirehouse rookie in the West feels like she's swimming upstream. She decided two years ago out of training to build a managed money business. Everyone else in her training class gathered assets in B share mutual funds. She worked on relationships and so far has $20 million under management.

“I could have quadrupled my income last year if I'd done B shares,” she says. “I got lucky two years ago when the market was so good. I earned enough income to have a bit of a cushion. But now I'm scrimping. You just have to be willing to bite the bullet to start out in managed money.”

Starting a brokerage career focused on managed money is “almost impossible” in a wirehouse without an unusual amount of encouragement from a branch manager, says Joe Lukacs, head of coaching firm International Performance Group in Melbourne, Fla. “For the first two or three years, it will be a real challenge to survive if you don't do insurance, annuities or mortgage products.”

If you don't have a supportive manager, build a book of transaction clients who you can transition to fees later, Lukacs advises. Don't open $2,000 IRAs. Work the senior market. They have the net worth for managed money, and you can do long-term care insurance and annuities with them as well. The rollover market is also good because clients have large sums from 401(k) plans.

Another avenue is to partner with an investment management consultant nearing retirement, with the intention of taking over the book. That's the route Todd Foster is going. He left an accounting career in mid-1999 to join his father's fee-based retirement planning practice, Total Investment Management, affiliated with Sun America Securities in Scottsdale, Ariz.

Foster started on salary, equal to what he'd been earning as a CPA, plus half of the fee from new clients he brought in. Once his share of fees exceeded his salary, he went off salary and began keeping 100% of fees from new clients. Foster could afford to spend his first two years getting licenses, learning the 401(k) business and crafting mutual fund portfolios.

John Bowen of money management firm Reinhardt Werba Bowen in San Jose, Calif., believes rookies should be aggressive about building a managed money business. “Eighteen months ago, I would have said it was very difficult to get into managed money early in a career,” he says. “Now there's a window of opportunity as investors realize they need advice to get through a bear market.”

Get a fee-based business plan started during training by creating a list of 10 successful consultants both inside and outside your firm, Bowen advises. Ask them for 20 minutes on the phone to discuss their experience of getting established. Then, ask 10 business-savvy clients or friends to serve as an informal advisory board guiding your managed money plan.

By laying the groundwork for managed money, rookies can start ramping up a fee business in 90 to 180 days, Bowen says.

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