Why I Decided to Start My Own Practice
For all you self-starters out there, I'm sure you can relate to a lot of the remarks I heard from people upon informing them that I was branching out to go solo with financial consulting, such as “don't you have a good job?”, “that sounds risky” or “why would you want to do that?". I experienced these same reactions so often that I believe it warrants a full rundown of my rationale for taking this step.
There is stability in working for someone else. A steady and (somewhat) guaranteed paycheck week to week is attractive. I get that. However, what you give up in this trade-off is the flexibility to do things the way you would like to see them done. Your product is set in accordance with someone else's beliefs. If you have strong conviction in doing things a different way, you either have to find another firm that matches your beliefs, or branch out independently. In my case, there are very few firms out there that replicate the service offering I believe in (more on that later), so once I took a step back to really evaluate whether my career was lining up with my convictions, the decision to take a new path was easy.
Stating the obvious, working a 9-5 office job poses many restrictions on one's flexibility in life. Visits with family, hobbies, vacations, children’s schedules, doctor visits, car maintenance, along with many other items have to be planned with ample notice. I love visiting with my family and friends, and most are an extended drive or flight away. I also love traveling to explore new places with my wife. Both of these items don’t fit well with a restricted vacation schedule. The only way to really take charge of your schedule is to become the boss of your schedule. For me, this included starting and structuring a business that caters to my interests and convictions while also being built around living the life I want.
The fees one pays for financial guidance in our industry generally falls under two categories: 1) commission-based compensation, or 2) fee-based compensation.
I am a strong advocate of avoiding, at all costs, guidance from an advisor who adheres to a commission-based compensation structure. There are some individuals providing quality guidance within this arena, but the problem is that there are just way too many bad apples in the mix as well. You will never quite know whether an advisor under this model is recommending a product based on what’s best for you or what’s best for their wallet. The lucrative kick-backs on sales of some products are just too tempting and can often times lead to bad behavior.
A fee-based compensation structure is worlds better, but know that there are a wide variety of "fee-only" models out there. The most common structure is one where services are provided in return for a set percentage of portfolio assets managed by the advisor. This fee usually hovers around 1%. While this is an improvement over commissions, there are still conflicts posed that most in the industry tend to ignore:
1) Advisors most often neglect clients who don't have a large amount of liquid, investable money which is the majority of the population. Are only those with hefty bank accounts in need of financial planning? Does no one else besides the rich need guidance to help set themselves up for a better financial future? I think you know that answer.
2) When portfolio assets are the sole source of income for an advisor, naturally, the focus of the financial planning tends to hover around the investments. This often leads to negligence when addressing other important areas such education, estate, insurance, and tax planning.
3) Maybe most importantly, advisors who work under this model can still be swayed towards making decisions that might not be in their client's best interest. It could very well be the case that funds are better left in that former retirement plan, better used towards paying off old debt, or better suited in a cash-flow positive investment property (just to name a few examples). However, when these recommendations don't fit nicely into the fee structure, they will likely get brushed aside during conversation.
Fee-only compensation can be structured in a more equitable manner, where services are provided for a reasonable, preset fee, no matter who you are or how much money you have. This brings everyone under the same umbrella, and allows for the accessibility of personalized, unbiased guidance to all. No more pressure to move money to a managed investment account if money could be more effectively used elsewhere. And no more paying fees for months on end while the advisor fails to touch base or even glance at your financial picture. Fees should be paid for actual work being done. Period. This is fair and honest, which is something we need a bit more of in the financial services industry. Going independent allows for me to design my own fee structure, which also allows me to take pride in doing better by my clients.
I am of the belief that cultivating the lifestyle you want to live is only attainable through cultivation of a financial plan that focuses on the same. I believe proper financial management should not be over-complicated. Most often, the simplest solution ends up being the best solution. I believe every dollar you earn should be thought of as a worker for your own economy, with the goal of making each worker as productive as possible in an effort to put money back in your pocket. I believe everyone should develop a financial road map that targets the creation of cash flow diversification. I believe doing so will allow for financial independence much earlier in life than retirement plan or social security rules state.
While these beliefs don't follow the general framework of traditional financial planning rules, I believe that following cookie-cutter advice will give you cookie-cutter results.
In the end, starting my own business eventually became a necessity if I wanted to hold true to my beliefs. No more conforming for the sake of others. This time it’s about serving both me and my clients as honestly and transparently as I know how.