Advice to Younger FA's Building their Business

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Anonymous0001's picture
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Joined: 2010-03-01

Ok, first, I realize this is a very simplistic calculation.  But if a younger advisor can succeed and make it through the first 3 years with some decent assets, and then bring in some new money each year, assuming a decent average return, is it safe to assume the following example: Using simple numbers.  Advisor has $10,000,000 AUM.  Along with investment gains (over time) at a modest 5% return, advisor brings in net new assets annually of only $4,000,000 per year.  After 20 years, advisor has a book of business north of $150,000,000. So just the fact that a younger advisor has one of the biggest assets, time, suggests that every single dollar they can get their hands on, they should get.  Using the rule of 72, there are multiple times that money would double over a young advisor's career.For example, if the young advisor was able to open IRA accounts for their friends of the same age and children of their clients, it would actually become a decent sized cash flow in the future.  $5,000 IRA's today with annual contributions will be worth around $750,000 in 35 years assuming 7% growth.  If a younger advisor just adds 20 of these relationships now, knowing they aren't making any money on it, in 35 years that's $15,000,000. As a younger advisor myself, it seems we get caught up in setting minimums and not taking the small accounts.  I'm saying younger advisor, not a rookie.  But there is an advisor in my area that manages hundreds of millions and is in his 40's.  He started when I did.  And his goal was to manage every dollar he could find from his clients.  Even if it was a small $5,000 account. Ice, I feel maybe you and I understand this, but anyone else see the longevity and asset of time in their business?

joelv72's picture
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Joined: 2008-11-28

But how are you going to get all the crazy skank/ferrari/yacht/etc with that mindset???

LA Broker's picture
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Joined: 2008-12-03

I see what you are saying and I think it is great you are taking a long term approach to building a business and not worrying about getting rich quick, but this business has so many different variables it is tough to lay out a plan.  Here are a few things you have to consider in your plan.20 years from now many of your best clients may be dead.Over a 20 year period you will have clients leave no matter how well you treat some to other firms/brokers5k accounts take up more time than 500k many times, they call and complain about every few, market move, ect, it will burn you out.  Then when they finally grow enough to make it worth your time you get an ACAT notice.Are you planning on doing commision base or fee base, and what is your payout from your firm.  If you are bringing in 4 million per year at a 1% wrap, that is 40K gross, 40% payout 16K a year, you will starve.  If you are doing commision it will be a little better 4% upfront on 4 million 160K gross, 40% payout 64K, not getting rich, plus your trails on 150 million would only be 325K gross, 130K net factor 3% inflation over 20 years and your not doing that great.I'm not trying to be negative but just pointing out there will always be pressure and demands in this business for a long time.  Unexpected things come up.  Every 10 yr vet stuck at 300K gross probably envisioned a better outcome before they started to burn out.I would say you need to set your goal on 10 million per year of asset growth, if the market helps great, if not more ACAT's.  As a young guy you can probably get away with a few 4 million a year growth years but not many or you may walk away yourself. 

Moraen's picture
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Joined: 2009-01-22

LA - I agree with much of what you say, with the exception of not being able to live on 16k a year.  I've lived on a lot less.  It isn't ideal, but it can be done (also if you don't live in LA).You live on 16k the first year, 32k the second, so and and so forth.Also, if you are independent, that net goes up.  Also, in his example, he is starting out with $10 million, which would put him at 100k gross  

B24's picture
B24
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Joined: 2008-07-08

Lots of things to consider:First: when you say "young", there is a big difference between 27, no kids, no mortgage, and living with Mom and Dad, and 32, two kids, mortgage, car payment.  So for some "young" advisors, the $16K per year thing might not be realistic.  Second: I think it's a good strategy for starting out of you have no network.  Cast the wide net, and get everything you can.  Residual assets, additions, and referrals start to come in naturally over time.  In addition, there is the aditional services that you can provide (life, DI, LTC, etc.) that can create some additional income.  Pick up a client that's 30, contributing $5-10K per year, then add some term life and maybe some DI, and you can actually make some money off them today.  That will be a great client for you when they are 50.Third: It alleviates the need to prospect later in your career.  You will have hundreds (thousands) of good clients by the time you are 50.  Seems like forever when you are 30, but that's when most people are jsut getting started saving for retirement.  You will have a golden goose for the next 15-20 years.Fourth: You need to invest in infrastructure (staff, systems, office space, etc.) to service all that, possibly at a loss for a good part of your book.Fifth: You probably want a plan to shed clients once you determine they are a dead-end down the road.  Whether it's a "Goodknight Plan" at Jones, a junior broker at a wire, hiring a junior as an indy, selling a piece of your book to another indy, whatever.  At some point, the book may consume you. I have read about many advisors out there that focus on quantity.  Some have literally thousands of clients.  You just have to know that you need to build your practice around that model, if that's what you choose.  Because with small clients, you will NEED to do volume.  You just can't have it both ways; quantity, and a small "intimate" practice.  You either build for a few, large clients, or a LOT of small clients.  Either way, have a service level for each.

Anonymous0001's picture
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Joined: 2010-03-01

I agree with all of you in some way or another, except maybe Joel.  I am younger, no kids, 2 mortgages, and your typical bills and stuff.  I have a great client base thus far.  I want to create predictability and sustainability in my business.  Eventually I will run my own independent boutique firm, maybe within 5 years.  My niche are clients 50-62 years old nearing retirement.  After they initially transfer, I make some decent upfront money, and then start collecting trails/fees quarterly. I don't want to wake up 20 years from now having my best clients die off and lose the assets to the beneficiaries.  I want to make sure I have X amount of clients who will be A clients in 20 years, although small today.   When I was using $4mm of net new assets per year, I was factoring total new assets of $7mm, but losing $3mm per year to withdrawals, death, transfer, etc...  I think that is overly conservative, but I would rather underestimate than overestimate. Also, my grid is north of 80% as an independent.  Here are some other conservative numbers.  Bringing in $4mm in new annuity business, I take 4% upfront and 1% trail.  So in FYC, that's $160,000.  Bringing in say $2mm of fund/stock/UIT business, I might average 1.5% upfront...so another $30,000 in FYC.  So this get's added to the assets already under management every year.  So if you've built up $10mm, and make $100k in trails in say year 4, plus $190k upfront, you're at $290k gross, which is $232k net.  Then in year 5 it's $160k in trails and $190k upfront in new business, total gross is $350k. What I'm really getting at is, at some point I will feel more comfortable, I just don't think it will be within 10 years.  But the second 10 years should be different, and for me, I will just be in my mid-40's.  So while it is tough to save money personally now, it is important for me to see where my business is heading.  I guess I think a lot like other small business owners in that my business is partially my retirement plan.   L.A., you are right, a lot can happen over many years, but I can't control changes.  I survived the early years at a young age, eventually I'll get to enjoy the spoils, but it really feels like years 4-10 for the advisor is where the big growth occurs if you start getting referrals to add to new business.  Bottom line.  I want the business to be viable, and worth the effort and tougher times...because we all have ups and downs.  And I don't want to always feel like I'm spinning my wheels.  I'm sure some of you are/were in similar positions.

B24's picture
B24
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Joined: 2008-07-08

Snags, regardless of who agrees/disagrees with your strategy, the important thing is that you have a good plan and a long-term vision.  I think you are being realistic/conservative, and that will serve you well.  You will likely out-run your current plan and surprise yourself.  Just don't let up off the gas too soon.Just keep in mind, in your original example, asset growth is usually not "linear".  You will not grow $4mm net each year.  You will likely grow a lot in years 5-15, and then start to level off (as clients begin to withdraw/die/leave/ and you start to lose momentum and capacity to grow).  What will prevent that is a PLAN for growth in the later years.  Most indies that do not desire to grow a really big practice typically start to peter out around $50mm (give or take).  That's when you often have to start adding staff and infrastructure.  And if you are 12 years in and already taking home $300K+, you might just lose steam.  Just keep that in mind.

squash2's picture
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Joined: 2010-03-09

The thing to watch out for on those 4% upfront 1% trail annuities is when clients start taking money out, because the 1% is on the account value not the income value, so as your clients pull money out of it your trail will decrease... 

hedge212's picture
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Joined: 2009-02-02

RetardedGenius wrote:Ok, first, I realize this is a very simplistic calculation.  But if a younger advisor can succeed and make it through the first 3 years with some decent assets, and then bring in some new money each year, assuming a decent average return, is it safe to assume the following example: Using simple numbers.  Advisor has $10,000,000 AUM.  Along with investment gains (over time) at a modest 5% return, advisor brings in net new assets annually of only $4,000,000 per year.  After 20 years, advisor has a book of business north of $150,000,000. So just the fact that a younger advisor has one of the biggest assets, time, suggests that every single dollar they can get their hands on, they should get.  Using the rule of 72, there are multiple times that money would double over a young advisor's career.For example, if the young advisor was able to open IRA accounts for their friends of the same age and children of their clients, it would actually become a decent sized cash flow in the future.  $5,000 IRA's today with annual contributions will be worth around $750,000 in 35 years assuming 7% growth.  If a younger advisor just adds 20 of these relationships now, knowing they aren't making any money on it, in 35 years that's $15,000,000. As a younger advisor myself, it seems we get caught up in setting minimums and not taking the small accounts.  I'm saying younger advisor, not a rookie.  But there is an advisor in my area that manages hundreds of millions and is in his 40's.  He started when I did.  And his goal was to manage every dollar he could find from his clients.  Even if it was a small $5,000 account. Ice, I feel maybe you and I understand this, but anyone else see the longevity and asset of time in their business? There's some sound advice here, but I have to seriously warn to be careful who you take advice from on these forums. I mean someone who spends there whole day posting has no business and is full of shiit!  You'll see alot of that.  Or someone who changes his name after he posted 3k posts the last year, bc he's embarassed of his insignificance, be weary ain't that right eggplant I mean Squash1....

hedge212's picture
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Joined: 2009-02-02

Moraen wrote:LA - I agree with much of what you say, with the exception of not being able to live on 16k a year.  I've lived on a lot less.  It isn't ideal, but it can be done (also if you don't live in LA).You live on 16k the first year, 32k the second, so and and so forth.Also, if you are independent, that net goes up.  Also, in his example, he is starting out with $10 million, which would put him at 100k gross   Moraen what are you telling him, that's so wrong...  Get it right before you post. Get outta here!!!

LA Broker's picture
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Joined: 2008-12-03

hedge212 wrote:Moraen wrote:LA - I agree with much of what you say, with the exception of not being able to live on 16k a year.  I've lived on a lot less.  It isn't ideal, but it can be done (also if you don't live in LA).You live on 16k the first year, 32k the second, so and and so forth.Also, if you are independent, that net goes up.  Also, in his example, he is starting out with $10 million, which would put him at 100k gross   Moraen what are you telling him, that's so wrong...  Get it right before you post. Get outta here!!! What is so wrong??  He did not lay out the entire story in his first post so I went with the assumption he was at a wire, most newbies are.  I did not realize he was heavy on annuity business, hence the higher payout. 

squash2's picture
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Joined: 2010-03-09

Hey hedge.. changed the name because i could log back in...had 1598 post in 1.5 years mostly before or after hours(some while I ate my lunch)... All I wrote on this topic was becareful building up a fee revenue in a product that works a little differently(not a concern for most now, but in 10-15 years no one knows).Why are you so mad?1. Can't afford to by an ad for liquid leads?2. You and 6 other guys only brought in $61M in 12 years?3. You got caught?4. I am sure they will bring back your show "Wall Street Warriors"(hey i am a fan)5. Sandisk collapsed(reference above)6. Where are you now Lance "The Hard Sell"..? 

hedge212's picture
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Joined: 2009-02-02

squash2 wrote:Hey hedge.. changed the name because i could log back in...had 1598 post in 1.5 years mostly before or after hours(some while I ate my lunch)... All I wrote on this topic was becareful building up a fee revenue in a product that works a little differently(not a concern for most now, but in 10-15 years no one knows).Why are you so mad?1. Can't afford to by an ad for liquid leads?2. You and 6 other guys only brought in $61M in 12 years?3. You got caught?4. I am sure they will bring back your show "Wall Street Warriors"(hey i am a fan)5. Sandisk collapsed(reference above)6. Where are you now Lance "The Hard Sell"..?  Yeah you called my bluff lizard lips.  Now get on the phone and be productive today you hack!!

mlgone's picture
mlgone (not verified)

squash2 wrote:Hey hedge.. changed the name because i could log back in...had 1598 post in 1.5 years mostly before or after hours(some while I ate my lunch)... All I wrote on this topic was becareful building up a fee revenue in a product that works a little differently(not a concern for most now, but in 10-15 years no one knows).Why are you so mad?1. Can't afford to by an ad for liquid leads?2. You and 6 other guys only brought in $61M in 12 years?3. You got caught?4. I am sure they will bring back your show "Wall Street Warriors"(hey i am a fan)5. Sandisk collapsed(reference above)6. Where are you now Lance "The Hard Sell"..?  That was funnyHedge calls people lizard lips and meatball......................wtf.............is this the 80"s?

Wet_Blanket's picture
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Joined: 2008-11-13

The 80's was last when he wasn' t busy dialing!

hedge212's picture
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Joined: 2009-02-02

Wet_Blanket wrote:The 80's was last when he wasn' t busy dialing! Yeah that's it jerk job!!  

hedge212's picture
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Joined: 2009-02-02

LA Broker wrote:hedge212 wrote:Moraen wrote:LA - I agree with much of what you say, with the exception of not being able to live on 16k a year.  I've lived on a lot less.  It isn't ideal, but it can be done (also if you don't live in LA).You live on 16k the first year, 32k the second, so and and so forth.Also, if you are independent, that net goes up.  Also, in his example, he is starting out with $10 million, which would put him at 100k gross   Moraen what are you telling him, that's so wrong...  Get it right before you post. Get outta here!!! What is so wrong??  He did not lay out the entire story in his first post so I went with the assumption he was at a wire, most newbies are.  I did not realize he was heavy on annuity business, hence the higher payout.   Taking advice from moraen, or every other wannabe producer on this site is like taking investment advice from Ronald Mcdonald.  Completely useless!   THERE IS MAYBE A COUPLE OF REAL PRODUCERS ON THIS SITE.. That's it!!!  All the rest of them are switching seats on the titanic. Haaaaackkks!!!!

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