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It's All About the Plan

Unbundling financial planning from investment management  (with a big dose of the warm fuzzies) has paid off for this firm.

Ilana Polyak, 12/17/2009

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For financial planners, asset-gathering is largely seen as the way to grow a business. The more assets, the more fees advisors collect, so it benefits an advisor if a client brings over all of his or her accounts.

But Juli Erhart-Graves, president of Worley Erhart-Graves Financial Advisors in Indianapolis, and her partner, Grace Worley, have been using a different model. They levy an hourly fee for financial-planning services, separating the duties of financial planning and investment management.

"Not everyone needs someone to manage their portfolio, but they might want someone to tell them that they're on the right track," Erhart-Graves says.

When working with a new client, Erhart-Graves and Worley first come up with a financial plan, never assuming that assets will follow. Only about half of the firm's 700 or so clients use the firm's investment-management expertise.

Investments have their own fee schedule. "If we're working with someone and they decide to use our investment-management services, then we'll bill hourly for the financial plan and then as a percentage of assets under management as soon as we start doing investment management," Erhart-Graves says.

Working this way, she says, gives her firm a wider view of her clients' financial lives and an ability to make a wide array of recommendations, including what to do with workplace 401(k)s, insurance, and health-care needs, areas that advisors working on an AUM basis sometimes do not see as their purview.

To be sure, Erhart-Graves would be pleased to see more assets come her way. But she is content to build client relationships around financial planning before the assets follow. "We encourage annual reviews with our clients," she says. "So the following year, we'll meet with someone to review their portfolio, and that's when they might say, 'What about you guys implementing some of the recommendations you've made so I don't have to?'"

The Warm Fuzzies
Erhart-Graves is no stranger to relationship building. She started at the firm in 1995, when she was hired as an office manager, and she worked full time and attended college part time. She developed a strong working relationship with Worley, so much so that she focused her studies at Indiana University on business with an emphasis on finance.

In between, she also cared for an infant daughter. "When I started going to college, my daughter was 3 months old," she says. "When I graduated, she was 6 years old. It was really hard to balance both." Upon graduation in 2000, Erhart-Graves tried mutual fund analysis, but it wasn't where her heart was. She worked as a senior investment advisor for Conseco Capital Management, analyzing individual stock holdings in the firm's mutual funds, and began studying for the Chartered Financial Analyst exam. Eighteen months into the job, she had lunch with Worley, who suggested she come back to work for her, this time as a planner with her own clients.

"I so missed working with clients," Erhart-Graves says. "At that firm, I was just one sliver of the pie. I never got the warm fuzzies you get when you help someone plan their financial lives," she says.

In February 2008, Erhart-Graves purchased the firm as part of Worley's succession plan. "Grace is now my employee," she says.

Smooth Transition
As Worley has scaled back her schedule to just two days a week, Erhart-Graves has taken on more clients, though Worley continues to service her clients. "I've been with Grace for so long that most of her clients already know me," Erhart-Graves says. "We'll stick with this arrangement for the next few years, but eventually, her clients will transition to me."

This past year, as markets were in turmoil, Erhart-Graves' warm fuzzies were tested as she had to soothe her nerves. The firm held regular client briefings, including a two-hour event at which she and Worley dissected the history of stocks and bonds. They also reviewed the mutual funds they held to assure investors that, despite the market drop, their fund managers were doing better than average.

About a third of their clients showed up to the meeting. "Clients went away from that with a much better feeling about the portfolios," Erhart-Graves says.

The firm also sent follow-up e-mails and letters to keep clients abreast of market developments. As a result, hardly any clients made dramatic changes to their portfolios, though a handful felt that they couldn't stomach the volatility and sold their equities. "Our goal is to build good, all-weather portfolios that you won't have to flee when times are tough," Erhart-Graves says. "You can tell me as much as you want that you have a high risk tolerance-I'm still not going to put you 90% in stocks."

Emphasis on Asset Allocation
Just as she advised her clients to adopt a "stay the course" mentality, Erhart-Graves herself made few changes to her clients' portfolios. She felt confident that she and Worley had made good upfront investment decisions. "Obviously we want to take advantage of the markets when there are opportune investments, but we're not market-timers," she says.

She found those opportunities over the past year in convertible securities, mainly through the Vanguard Convertible Securities Fund VCVSX. In addition, she thinks that inflation will become an issue for investors in coming years, so she added portions of the iShares Barclays TIPS Bond TIP as well. And she likes Loomis Sayles Global Bond LSGLX because it seeks out opportunities for bonds around the world.

To construct a portfolio, Erhart-Graves maintains a short list of five or six funds in each section of the Morningstar Style Box. She says that she leans toward value, and the resulting portfolios reflect that bias. Then, using Morningstar Office, she digs deeper to make sure the funds have low fees and are tax-efficient. She uses exchange-traded funds when there are large lump sums to invest.

She reviews client portfolios once a year. "We don't do quarterly performance reporting," she says. "Our philosophy is that what's really needed is an annual rebalancing. The goal is to pick quality managers who make those decisions on a day-by-day basis." Even then, most portfolio changes are for rebalancing purposes, not because of performance. "If I recommend a fund or an ETF to a client, that client is going to own it for years and years," she says.

Case in point is Templeton Foreign TEMFX, one of the oldest and most respected funds in the foreign-stock category. Earlier in the decade, the fund's value orientation held it back from its peers. But Erhart-Graves believed in then-manager Jeff Everett's ability to keep the fund on track for the long term.

She has been rewarded: The fund is in the top 4% of foreign value stock funds over the past three years and continues to hold a respectable long-term performance record. "We knew it was a deep-value fund, and we expected it to be out of step with its peer categories from time to time," she says.

Ilana Polyak is a New York-based freelance writer. 

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