The last year held plenty of challenges and opportunities.
It was around this time last year that we finalized the merger of Mosaic Wealth Management with Smith-Rapacz, our Boston partners. After spending a lot of time in 2006 thinking through and negotiating our merger, completing it reminded us of the feeling we had when we stepped out of the car and brought our first child into our homes for the very first time. It was a proud and at the same time daunting moment for all of us.
Looking back, on our first year as Garnet, it has been both what we expected and full of surprises at the same time.
Sharing Successes.and the Rest
By far the biggest benefit of our merger has been the opportunity to work with additional partners who bring so much to the table. Regular readers might recall that in the Bethesda office of Garnet, Veena's background and strengths are on the investment side, with more than 25 years of experience as an institutional money manager, while Annette is a CFP who worked in the management consulting business before entering the financial advisory business 11 years ago. Our Boston partners worked together for years in a family office-style setting, providing financial planning advice to high-net-worth clients. Bringing together our diverse perspectives and skills has enriched all of us, and we've had many lively and thoughtful discussions about how to best approach various aspects of our business.
Both offices have grown in 2007, though not dramatically. In Bethesda, we said goodbye early in the year to a few clients who had never been a strong fit for our practice, and they made the decision on their own to move on. Over the year, we brought in new clients whose needs and financial profiles were a better fit for us. Around midyear, we reset some client fees that were either below our minimum or below the rate calculated by our fee schedule, allowing us to increase revenues without adding additional clients.
Early in the year we learned that our Boston partner, Tanya, was expecting her second child in August. This was wonderful news, but presented a planning challenge we had not anticipated in our first year as Garnet. Because our two offices currently operate as separate profit centers it was up to Tanya and Lisette to negotiate the terms of Tanya's leave. They came to an agreement that resulted in "graduating" some clients who were not a fit for their practice, as well as restructuring responsibilities within their office while Tanya is out. As we did, they adjusted some client fees that had been below the calculated rate for some time, and were able to add new clients and increase their revenues in 2007.
Unexpected Challenges and Change
As the year progressed, we in the Bethesda office were becoming increasingly concerned about the scalability of our business. We have always taken great pride in providing our clients with a proactive, integrated service. We meet with every client multiple times in their first year with us, and once or twice a year thereafter depending upon the complexity of their circumstances and their desire for face time. At each meeting we present an updated financial snapshot summarizing their financial planning accomplishments to date, their probability of achieving stated goals in the future, and their investment performance since inception. Preparing the snapshot report takes considerable time--and leads to a crunch at meeting time. We often find ourselves right before the meetings re-running scenarios in MoneyGuidePro, and updating reports with client performance data and comparable indices.
We did an analysis of the work associated with meeting prep, meeting follow-up, trading, rebalancing, and client service, and we realized that much of it required advisor time. Some of the data input and report generation on the financial planning part can be done by non-advisors, but many of our functions actually needed an advisor's hands-on efforts or close oversight. It hit us that if we two as the sole advisors in the Bethesda Garnet office wanted to maintain a somewhat flexible schedule but yet enlarge the business, we needed additional professional help.
With this thought in minds we listened with cautious interest when Laura, a colleague of Veena's from a prior job approached us about joining Garnet as an advisor. We were immediately impressed with Laura's obvious competence and her calm, assured demeanor, which were backed up by her academic and work experience. We knew she would be a great addition to our team, but worried that our future growth might not come quickly enough to support another advisor's salary. After multiple discussions and meetings we came to an agreement, and Laura joined us in November as a part-time advisor in the Bethesda office. She has been joining us in client meetings and gradually taking more and more responsibility for overseeing the preparation of reports and follow-up activities. In time, we'll begin to switch off, with just two of the three advisors attending each client meeting, freeing the third advisor to attend to other matters.
In recent weeks, we have also begun exploring the possibility of outsourcing our plan input and report preparation. For some time, we have thought that this was not going as smoothly as we would have liked and that the process is taking too much advisor time. We have decided that a possible fit would be an outsourcing provider like Naomi Scrivener (Back Office Solutions) or Pat Jennerjohn (Planning Partners). Each is an experienced planner who works with advisors looking for plan preparation help. They are experienced planners who can accurately input data and help produce plans and reports efficiently. In addition, they are experienced enough to provide the higher level thinking that requires extensive time to develop in junior personnel. We're currently talking to both of these providers and plan to test the waters in 2008.
Streamlining the Investment Function
If you read our November column you know that we've been thinking a lot about how we can better manage our investment function as well. At the end of that column we put out a request to readers, asking how you manage investments and how your choices have shaped the structure and efficiency of your firm. A number of readers responded by telling us how they have added staff to allow them to provide more-elaborate investment options.
Several practices have actually added staff dedicated to functions such as in-house hedge funds or alternative investments. Kipley Lytel of Montecito Capital Management told us that his firm's in-house fund, the Montecito Hedged Strategies Fund, has created "more administrative and employee demands, yet offers better solutions for our firm's clients needs." In a similar vein, Jim Putnam of Wealth Management told us that "We have one staff member that spends 100% of his time on the alternative fund administration."
While we're impressed by the ambition and dedication of these colleagues, what we really hoped to hear from our readers were good ideas on how to reduce the amount of staff time devoted to the minutiae of portfolio administration-- the time spent on tracking cost basis, monitoring, rebalancing, setting up dollar cost averaging programs, and raising cash to fund distributions and withdrawals. Despite our relatively simple approach to investing--using low-cost diversified portfolios, DFA funds and ETFs to the extent possible--we spend an inordinate amount of time dealing with the everyday demands of the investment management function.
At the same time that we are considering outsourcing much of our financial plan preparation, we are looking very closely at investment solutions that would allow us to provide our clients the diversified asset allocation and high level of service they have come to expect--while allowing us to smoothly grow our business in the future.
A reader, Stan Royer of AMD Financial Services in San Francisco said that he uses BAM Advisor Services as back-office support for his DFA-based portfolios. While we believe BAM to be an excellent fit for many advisors, we don't see it as a fit for us.
Another third-party investment solution, alluded to in our last column is SEI Investments.
David Morgenstern of CMC Advisers in Portland is a big fan of SEI and has worked with them for the past 8 years. He said he believes that the service and customization SEI offers to an advisors' clients is unparalleled. It is the difference between a bicycle and a Lexus, he enthused. We all agreed that while some clients might be drawn to the many good qualities of the former (we enjoy a nice bike ride ourselves on occasion)--the luxury vehicle is a likely fit for many more of our current and prospective clients.
Impressed by David's enthusiasm, we are planning a due-diligence visit to SEI headquarters in January to learn more about their process and advisor solutions.
One of the things we love about this business is that it's so challenging. There are no right answers, no final solutions to any issues. While we occasionally gripe about the constant difficulties we face in growing a practice into a thriving business, we know that we'd be bored and restless if it were any other way. But a little boredom never killed anyone--so if, in 2008, you stumble upon the solution to any of our issues, please share them with us. Send e-mail to firstname.lastname@example.org is the best way to reach us. While we can't always answer each inquiry in detail, we save our reader e-mails and often use them as an inspiration for future columns. All responses are considered "on the record" unless otherwise requested.
As 2007 comes to a close we wish all of our readers a peaceful, healthy and happy new year.