Next Generation Planner: February 2021
Steve Swicegood, CFP®
Founder, Conscious Money
My journey to becoming a financial planner was a bit circuitous, but probably not too much different from many in our profession today. I started life as a property and casualty insurance agent, initially working for a large independent agency and then operating my own firm as a captive agent with a nationally known carrier.
As time went on, there was more and more pressure to sell the company’s life insurance, annuities and mutual funds. I was OK with this at first, as these new offerings represented additional commission sources. However, two things became apparent in a short amount of time. First, the company’s products were only ‘middle of the road‘ or worse in terms of performance and pricing when compared to what was available in the marketplace. Second, the only training we were receiving was on how to sell the products. No time was devoted to learning how to really help clients.
The final straw for me was when the company began to tie our auto and home insurance commission rates to the additional sale of life insurance and annuities to our clients. I decided that if I was going to hold myself out as some sort of expert dedicated to helping my clients prepare for their future, I really should try to figure out the right way to do that.
Figuring out the Right Way
I was able to move my securities business to a regional broker-dealer that also owned a corporate RIA. The firm was not only offering the ability to select from a wide assortment of vendors and products, but they were also providing very good training for their reps. My tenure with the firm was successful by most measures. I was consistently a top 10 producer and was able to grow my income to the point that I felt comfortable in closing my property and casualty agency. My focus, however, was more on asset gathering and product sales than on real financial planning. It was about this time that I read an article about Bert Whitehead and his commission-free, retainer-based practice.
Bert’s story and the story of what was then the Association of Cambridge Advisors (ACA) really resonated with me. Here was a methodology to really help people realize their greatest financial dreams and aspirations in a way that did not involve product sales or some minimum asset amount. I called Bert the very day that I read the article to learn more about his process. He was quite gracious and very forthcoming about what he was doing and how he was doing it. It all sounded so great!
I did, however, have doubts that any of my clients—or anyone that I might meet in the future—would ever pay me a flat fee to provide financial planning services. As compelling as Bert’s story [and the story of ACA, which was eventually renamed and branded as the Alliance of Comprehensive Planners (ACP)] were, I just did not think that the whole thing would ever work for me. Fortunately for me and my clients—in spite of my doubts—I was already hooked! I just could not get the concept of having a retainer-based practice out of my mind.
After my conversation with Bert Whitehead, it took me 10 years and a few really bad market cycles to finally convince myself to join ACP and convert to a retainer-based practice. As I was starting my own RIA, I continued to offer services on an asset-based calculation just so my existing clients could transfer to the new firm with a minimum of disruption. However, all new clients came in under the retainer-based program. Within two years, I had successfully translated all my clients to the ACP retainer-based business model—and I haven’t looked back.
5 Reasons for a Retainer-Based Practice
So, what is so great about a retainer-based practice and why am I such an advocate? Here are a few of my reasons:
(1) It allows advisers to serve a broader range of clients. The fee calculation is based on income, assets and complexity. This opens the door to accepting young, high-income/low-asset clients like early-career doctors, dentists, engineers and so on. I have had a number of young physicians who became clients just as they were starting their first job out of residency. They had great contracts with relatively large, guaranteed salaries, but they also had remarkable student loan debt and a negative net worth. By using their income as a component of our pricing model, I was (and continue to be) able to charge an adequate rate to begin working with these types of clients. We help them gain a solid financial footing, which generally involves trying to avoid falling victim to pent-up consumer demand after so many years of little or no earnings, and we develop a plan to deal with their student loans and help them grow their net worth. While these are not our most directly profitable clients, they have been a top source of referrals to more established physicians who are a meaningful part of our practice.
(2) Conflict of interest is reduced. No pricing model is totally free of potential conflicts of interest, but I believe that retainer pricing goes a long way toward reducing those conflicts. An example might be client questions around whether to pay off their home mortgage. Under an AUM model, moving money from an investment account to pay off a mortgage results in a direct reduction of asset management fees to the adviser. When the adviser recommends against paying off the mortgage, is it because it is a wrong decision for the client or because it reduces the adviser’s income? Under retainer-based pricing, which includes any home equity in the fee calculation, the adviser’s compensation isn’t a consideration. The focus is solely on whether this is a good decision for the client.
(3) You step off of the AUM merry-go-round. As I stated previously, it took a couple bad market cycles to convince me to switch to a retainer model. During the 2008 and 2009 market crash, my AUM income was reduced by almost half, yet my workload during that period (and beyond) more than doubled. Working more for less money is not a happy or sustainable business model. Under the retainer model, the adviser’s income is not tied to the vagaries of the stock market. In years where the markets are unkind, I am not penalized for things that are out of my control. As well, in years when the market is very kind, I am not overly rewarded for being lucky. This is not to say that we do not adjust rates periodically—we do. However, the asset portion of our calculation is only one component of the math. Consequently, it does not dominate the fee (as it would with a straight AUM calculation).
(4) You get to measure performance in a whole new way. Under the AUM model, the client is focused on portfolio returns, usually quarter-to-quarter. The adviser’s client conversations are then typically dominated by those returns, whether good or bad. Providing holistic or comprehensive financial planning under a fixed retainer model moves the conversation away from market performance and toward the client’s goals, dreams and aspirations. I tell my clients that portfolio construction is properly done only after we have a complete understanding of who they are, where they are and where they are going. With that knowledge, we can build an investment portfolio that has a reasonable chance of getting them where they want to be within the expected time frame, while only taking the amount of risk necessary to accomplish their goals. Our investment review meetings generally are 10 percent ‘This is what’s in your portfolio,’ and 90 percent ‘This is how you are progressing toward fulfilling the dreams and aspirations that you have shared with me.’
(5) Retainer clients are generally happier clients. My clients like the fact that there is someone who sees and understands their whole picture. Because our process is comprehensive, we really get to know our clients quite well. We help them stay focused on the things that are within their control and the elements that are moving them toward their goals. Retainer clients have 24/7 access, and they know that I want to be involved in all the decisions that touch money or are touched by it. The ability to pick up the phone and talk to someone who already knows their ‘big picture’ is one of those priceless intangibles that keeps clients with us for many years.
There are many more reasons why I believe that the fee-only retainer model is a great choice for today’s financial planners. However, I feel that it is important to state here that many honorable and honest people will stay within the AUM model or may simply aspire to be the very best commissioned insurance salesperson they can be.
There are times when prospects come to me whom I believe would be better served under an AUM model. Quite often, I also recommend specific insurance products like life insurance, disability insurance and long-term care coverage. I am grateful for the relationships I have, and the counsel I receive, from my friends who are AUM advisers or very good, conscientious insurance agents. None of this, though, takes away from the fact that I believe that retainer-based pricing, as originally envisioned by Bert Whitehead and practiced by members of the ACP—and now adopted and promoted by many other groups—is the future of financial planning.
Certified ACP Member Steve Swicegood, CFP®, is founder of Conscious Money, an RIA that provides financial life planning services to clients on a fee-only retainer basis. A veteran of the U.S. Air Force, Steve attended Central Arizona College and the University of Albuquerque as a business major. He completed his financial planning curriculum through Florida State University. Learn more at www.ConsciousMoney.com.