Planning and living are not mutually exclusive

Imagine a financial planning practice that has only one full-time adviser, two full-time staff and is three years away from meeting its target of $100 million in funds under advice.

Now imagine getting an annual income of just under one per cent per annum of those funds. That’s a sizeable revenue figure for such a small operation.

Or look at it from the client’s point of view. You are one of only 70 clients, a number of those are corporate groups, but nonetheless, it is a small group of people receiving hands-on financial advice.

You pay a small annual fee and everything is covered, and you know your planner is not taking on any more business so he can service your needs properly.

Now imagine all this happening in a nine-to-five business.

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For a select number of financial planners this is the reality, but for a great many more, this is a dream they aspire to. They envy the lucky ones who have made it.

But that is the model that Hawaiian planner Harry Kasanow has created and built, and has been running for close to eight years.

Kasanow is no stranger to Australia. He has been here on a number of occasions and this time is in the country to speak with planners and present a session at this year’sFinancial Planning Association(FPA) annual convention.

And so when he speaks he knows he is not delivering a message about how it’s done back in the States without any relevance to how it’s done in Australia.

Given this background, he also knows that advisers in Australia face the same issues that planners back home have to deal with.

Kasanow is not here to highlight any major issues or criticise the industry for its sins, but rather wants to encourage planners to organise their work lives so they can have a life outside work.

“I wanted to press people to realise that in the post-September 11 world they should be moving their practices to a stage where it is just part of life, not all of it,” Kasanow says.

A key element in doing this, according to Kasanow, is having a fee for service-based business that creates an income in any market conditions.

However, Kasanow is not prepared to dismiss commission-based advising, rather he says for what he wanted to achieve, fee for service was a better option.

“I don’t believe being fee-based is ‘better’ than commission-based, but I do believe it is easier to run a practice and have a full life if you know where your income stream is coming from,” he says.

“Having a fee-based income from having built relationships and maintained them over time is an easier approach than having to find new clients to sell to each day.”

Apart from the fact that a fee-based model has been very lucrative for Kasanow, he has other motivations for wishing to see financial planners out of the office.

Kasanow says he knew a number of people who died in the September 11 attacks and as a result, he re-examined his relationships and his business.

He also says that from an Australian standpoint the recent Bali bombings have brought home the message that planners need to act now to ensure they are not tied to their office at all times.

But he says making the move is not easy because planners will need to look at issues of how to build a fee-based business, the impact it will have on staff and clients, as well as the impact on revenue.

Nonetheless, he says the first thing an adviser needs in order to make the move to a new business model is a clear mindset that they want to establish lifetime relationships around the provision of financial services.

“The relationships I am talking about are those in which you know the names of your clients’ kids and the schools they go to. You will be involved with their dreams and goals and create plans to help meet them prudently,” Kasanow says.

“This also means seeing them regularly, over a lifetime because that’s the type of relationship-driven model you need to build if you wish to sell your business, as opposed to a book of managed fund sales.

“If you are just selling products and are not the primary person in a client’s financial affairs, you can be replaced.”

However, he says this type of shift in business has to be accompanied by large cash reserves. While this may sound like a very pragmatic decision in the midst of an ideological shift, he says the reasoning is sound.

“Most people move slowly from commissions to fees. In my practice we did it literally overnight and the next day reduced our trails to zero,” Kasanow says.

“Yet, whichever way the move is made, planners need to be ready for a change in revenue and cash flow.”

There are other drivers for making these moves, Kasanow says, and that includes the nature of commission-based revenue.

He points out that in the US, revenue from trails has dropped over the past two years and those planners who had become accustomed to a certain standard of living would have had their income reduced over 24 months.

Kasanow does admit that despite his moves to shift the business some years back and the re-evaluation of the business after September 11, most advisers will move gradually towards any change.

He says there is nothing wrong with such moves, but warns advisers not to think that they are immune from the market.

“People do things gradually, but when Vanguard and Fidelity introduced no load funds in the US, the effect on costs of managed funds was immediate,” he says.

“Most people work gradually because they don’t believe it can happen or that situations like that will occur or if it does, it will not affect them.”

As an example he cites his first place of employment as a financial planner, American Express, which dropped its commission for advisers from 8.75 per cent to 5.25 per cent in the early 80s.

He says almost overnight half of the sales force left, not because they were concerned about the impact on clients but because they were looking at what sales paid best.

Kasanow realised he too was uncomfortable with the commission figures when an elderly couple gave him a cheque worth US$1 million to invest.

“I enlarged it on the photocopier until it was as large as a newspaper sheet and then took it into the bathroom, held it next to my face and asked myself in the mirror if I would give myself a cheque that big,” Kasanow says.

“I realised these people would have to make $20,000 on that money just to break even to cover my commission.”

That was over a decade ago now and since then Kasanow feels he has moved away from that style of planning, not only in how he charges clients for services, but the impact it has on his lifestyle as well.

“The fee model is better suited to those considering family because you do not have to worry about making a sale everyday,” he says.

In fact, Kasanow says that financial planners are in the top five occupations when it comes to divorce rates in the US, which he feels could be reduced if those planners focused on building practices that allowed them to build a quality of life.

It is something Kasanow says most advisers can do and something he has done with a fair degree of success.

“We can go for three to four years and not bring in any new clients because the average client is paying 0.85 per cent per year in fees. On funds under advice approaching US$100 million that’s a substantial revenue figure for a practice with one full-time adviser and two full-time staff,” Kasanow says.

“When we get to US$100 million we are going to close the door to all new clients because by then it will be more money than we need, and I am pleased to say that point is only a few years away.”

Harry Kasanow will be makinghis presentation,WealthManagement Hawaiian Style:Taking your practice and life tothe next levelon FridayNovember 22, 2002 at the FPAconvention.