An Interview With a Fee-Only Planner

This is a loose transcript of an interview with Michael George, President and CEO of FPL Capital Management (aka www.financialplanning.com) on 19 December 2011.  It will be presented in two parts due to length.

Disclosure: FPL is a paid advertiser on this blog (see that blue ad on the left.)  This is not a paid-for post and my financial relationship with this firm consists only of the purchase of the mentioned ad.  I get no commission if you visit their site from my blog or become their client.  I have strict requirements for privately-placed advertisements on this blog (basically if I can’t wholeheartedly endorse a firm, I don’t accept ads from them.)  Read more about my financial conflicts of interest here.

Tell me about your business.

We’re an inexpensive, but full-service, fee-only financial advisory and asset management service located in Louisiana but with clients all over the country.

I see you were previously at Dean Witter Reynolds and must have left about the time they merged with Morgan Stanley.  What made you decide to become a fee only adviser? 


I started my career out of college at Crescent Sterling, an institutional money management firm.  I didn’t like that institutional clients were very finicky.  They were very focused on short term results.  For instance, one bad quarter and they were gone, so we had to spend a lot of time stroking their egos.  I decided I’d rather work with individual wealthy clients.  It was recommended to me that I go to one of the major wirehouses until I could develop a clientele that would allow me to split off from them.  So I chose Dean Witter Reynolds.  I knew from the start that wouldn’t be a long term gig for me, so after a couple of years I left and opened FPL a little before the merger with Morgan Stanley.

A lot of advisors start their career in an advisor position and never work for one of the major brokerages.  That experience allowed me to see firsthand how these wirehouses work and especially see all the negative aspects of how they operate and the mentality of their brokers.  But working with individuals is what I always wanted to do.

Your price structure is very unique.  Tell me about it.

We just started doing this about a year ago.  Investors like it and I can see why because it makes sense.  Basically, we charge a flat fee of $1000-2500 a year for managing a portfolio.  Probably 80% of our investors are at the $1000 level, but we have to charge more if they want some additional customization or if they have a particularly complex number of accounts.  Then, if they need any additional consulting services not covered under this portfolio management fee, we charge an hourly rate of $150 per hour.

That seems to be a very fair way to do it, kind of like the way we pay physicians, attorneys, and accountants.

Exactly.  A lot of the portfolios we do take exactly the same amount of work to manage whether it is a $100K portfolio or a $1,000,000 portfolio.  Charging ten times as much is simply unfair to the client.  With this model, the client comes out a lot cheaper in the end.  It turns out that the typical client needs a lot of consulting work the first year, but not nearly as much after that.  So why pay ongoing fees for services you don’t need?  Plus, every client is different.  I have a CFO who is a CPA who just wants us to manage his investments but doesn’t need help with estate planning, or insurance needs, tax planning, or financial decision-making.  On the other hand, I have clients who need help with all of that and gladly pay the hourly rate for that advice.

Now the guys who work for a fee based on assets under management (AUM) would argue that your model causes people not to come in with questions when they should because every time they come in they have to pay a new fee.  What’s your response to that?

That doesn’t seem to be much of an issue.  When people know they’re getting a great deal for their portfolio management they don’t mind paying a little more for the other services.  What they don’t like is paying for services they don’t need.  They hate shelling out $20K a year and basically only getting a quarterly report for it.  (Editor’s note: $1000 a year on a $1 Million portfolio is only 0.1%, about 1/10th the going rate for assets under management.)

Do you feel most of the firms charging 1% a year are overcharging their clients, or does it simply cost less to manage the more passive portfolios you prefer? 

I don’t want you to be mistaken. We offer a Mercedes service priced like a Mazda.  But there’s nothing cheap about what we offer.  We are a high-end boutique wealth management firm.  We just decided to be fair with people.  We have people who absolutely are thanking us for offering this service.  I think in 10 years what we’re doing will become more mainstream.  We’re a little avante-garde on our approach.


Years ago all asset management was based on commissions and load mutual funds.  Then, when investors would no longer stand for that you began to see the emergence of independent firms offering to manage assets on a fee-only AUM basis.  That forced the big brokerage houses to do the same.  In a few years there’ll be a lot more firms like mine, and when there are a few hundred, then the big wirehouses will have to come around to this model, but they’ll be the last ones to change.  They’ll continue to take advantage of people until they can’t do it anymore.  Honestly, it’s in the best interest of this firm that they keep it up as long as possible so the status quo is maintained.  Once everyone charges like us, we won’t be as unique. We can give the investor a fair shake and still make a healthy profit.

Tell me about the portfolios you use for your clients.

We use DFA funds, ETFs, PIMCO funds and Wisdomtree funds and incorporate them into balanced portfolios suited to the client.  These can all be found on our website along with the past performance.  This is what most of our clients use and the majority of the assets we manage.

We also have a dividend focused portfolio of individual large-cap stocks that we manage for 0.5% of assets under management if the client wants it to be part of their portfolio.  We call it the dividend core folio.  Basically, it is composed of 30 large cap stocks that have continuously increased their dividends each year for the last 5 years.  It is somewhat similar to the Dow Jones index in that the stocks are chosen to represent the overall economy, but with a dividend rate about 1% higher.  It is basically passively managed in that we only change 2-3 of the stocks a year when they drop their dividends.  For instance, we flushed GE out recently.  I hated to do it, but it has worked out well to stay disciplined and stick with the model.  (Editor’s note: This is basically a low-turnover dividend-focused quantitative fund, but managed in your own account rather than a separate mutual fund.)

Here’s a link to part 2.

 

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