Forbes: “Plan Well, Retire Richer”

Taken from Forbes article:

A few years ago, Timothy McCarthy, as the No. 3 executive at Charles Schwab, was one of the best paid financial services executives in the U.S. He was earning $1.7 million in salary and bonuses and was sitting on several million dollars worth of Schwab stock options. He had a vast office on the 28th floor of Schwab’s Montgomery Street offices in San Francisco.

In October 1998, McCarthy, then 47, packed it all in. Taking cramped office space near the New Otani hotel in Tokyo’s Akasaka district, he started AdvisorTech, an application service provider (ASP) that provides personal financial advisers—both independents and those working in banks and other institutions—with the tools and software they need to do transactions, get stock prices, gain access to market information and send monthly statements to their clients. In short, an entire back-office system and guidance for anyone aiming to operate as a financial planner. More than just a software provider, AdvisorTech also conducts extensive training and information sessions to help its clients become better-skilled and better-informed financial planners.

In setting up AdvisorTech, McCarthy hopes to repeat some of the success scored by his former boss, Charles Schwab. In the early 1990s, Schwab launched OneSource—a way for independent financial advisers in the U.S. to provide clients with advice on stocks and mutual funds without having to worry about such details as account tracking. Collectively, the advisers who use OneSource now hold $53 billion in client money. Virtually allof those clients live in the U.S. With AdvisorTech, McCarthy is taking the concept offshore. In March 2000, Dennis Clark, formerly with Schwab OneSource, joined McCarthy as AdvisorTech’s senior vice president of sales and marketing.

What does McCarthy see in Japan? Lots of poorly managed individual savings and tens of millions of aging Japanese savers who would rather not in their old age become a burden on the state or their children. Despite nearly a decade of weak stock market performance, Japan has $13 trillion in personal financial assets compared with the U.S.’ $24 trillion. Yet so badly have Japanese stockbrokers mistreated their clients over the years that millions of Japanese families do the equivalent of stashing their money under their mattresses: roughly $9 trillion is tied up in postal and bank savings accounts that earn less than 1% interest.

McCarthy: “When you take a person who worked even as a middle manager at a company for 30 to 40 years, it’s not unusual for him to retire with $300,000 and not know what to do with it. And because they’re in such good health, that [nest egg] has got to last for 30 years.”

In essence, McCarthy and other smart financial services entrepreneurs are betting that an army of independent financial advisers will soon grow to help Japanese individuals invest their money more wisely. What happened in the U.S., in short, will soon happen in Japan and elsewhere in the world. To better help the planners help their clients, AdvisorTech’s chief investment officer Jonathan Tiemann—formerly a chief investment strategist at Wells Fargo Nikko (now Barclays Global Investors)—and his team conduct research on funds and asset allocation to supply suggested investments to advisers using AdvisorTech’s system.

McCarthy’s technology will help to popularize financial planning, but don’t forget the human factor. No financial planner can guarantee great—even average—returns. And there are lots of charlatans and more than a few crooks in the largely unregulated financial planning game. So choose your financial planner carefully (see Due diligence).

What financial planners can do is educate investors about such elementary concepts as asset allocation and the relationship between risk and reward and encourage them to develop portfolios that will achieve their financial goals with acceptable levels of risk.

Lewis Walker, a veteran planner from Atlanta, Georgia, puts it this way: “The traditional model of advice that banks and brokers use is to begin with products like funds and savings instruments—and then go out and look for people to sell them to. It’s a case of solutions looking for problems.” Intelligent financial planning starts with the articulation of the problem—how to educate a child, say, or retire so that you won’t outlive your money—and proceeds to develop solutions to solve the problem.

If all this sounds obvious, it’s surprising how few people understand such basic investing principles as the importance of asset diversification and the power of compound interest.

Blair Pickerell is the head of Jardine Fleming Asset Management in Hong Kong, another market where financial planning for the middle classes is in its infancy. Starting this month Pickerell is organizing seminars aimed at showing middle-income families that there’s more to a well-structured portfolio than an apartment, a savings account and a few speculative stocks. One of his examples: If a Hong Kong investor had put $100,000 in a local savings account on Sept. 1, 1990, that money would have grown to $144,833 by Aug. 31, 2000. But because of inflation over that ten-year span, $166,364 would have been required to purchase the same bundle of goods and services as in 1990.

By contrast, the investor could have allocated his money in four equal segments to a good U.S. growth stock fund, a European equities fund, an Asia/Pacific stock fund and a global bond fund. In that case the $100,000 principal would have grown to $353,823—and that’s after all fees, and despite relatively weak European equity markets and the disastrous Asian financial crisis (See page 72, Fund tables for a list of 100 offshore funds for long-term investors).

Speaking of commissions, particularly worth consideration in our view are the fee-only independent financial planners—those who are paid directly by their clients for advice offered and who have no vested interest in pushing funds, annuities and other products with high (often hidden) commissions paid by the companies that devise the products and collect juicy annual management fees. It is probably no coincidence that with the growth of the independent financial planning industry in the U.S., the no-load part of the mutual fund business also blossomed. But outside the U.S., most funds still carry hefty 5% loads and charge annual fees of an obscene 2%-plus.

A good financial planner will show his clients that due to the magic of compounding, those loads and fees will over time transfer a big chunk of investors’ wealth to the financial services industry. Prediction: As independent financial planners proliferate outside the U.S., loads and fees will fall.

In the late 1980s and early 1990s, Britain’s savers learned the hard way about the dangers of using planners paid for by the product-providers. Then, life insurance companies and independent financial advisers lured more than a million customers away from employer-sponsored pension plans into inferior private plans, earning huge commissions for the advisers. The companies accused of the fraud are now paying billions of pounds in compensation.

For a look at how far financial planning has developed in the U.S., consider Lewis Walker. The head of Walker Capital Managementnear Atlanta, Georgia, Lewis trained as a certified financial planner in 1975, when there were only a few hundred CFP holders in the U.S.

“It was a brand new idea back then,” Walker recalls. “People said ‘How are you going to make a living competing against c&s Bank [at the time, a prominent bank in Atlanta] and Merrill Lynch?’”But compete they did. Today Walker is one of 35,000 certified financial planners in the U.S., part of an army of independent financial advisers whose ranks are estimated at more than 200,000. Today more than 60% of Americans have investments—directly or through mutual funds and pension plans—in equities; many of them use the services of financial planners like Walker Capital Management.

This provides a nice standard of living for Walker, who charges $225 an hour for financial advice. According to the Financial Planning Association, the average U.S. planner earns $75,000 a year.

Walker sees similarities between conditions in the U.S. when he got started and the dreary state of the Japanese economy today. At a September 2000 meeting of the Japan Association of Financial Planners (JAFP) in Yokohama, Walker reminded an overflowing audience that the financial planning profession was born at a time of economic uncertainty—double-digit rates of inflation and high income taxes—and rapidly multiplying investment options. The U.S.’ May Day deregulation of brokerage commissions in 1975 made it possible for such discounters as Charles Schwab to offer cheap stock trading to do-it-yourselfers. Companies began to offer defined-contribution pension plans [401(k)s], which lured people to invest for the first time. “Financial planners stepped in to help people make sense of it all,” says Walker.

Now Japan is introducing 401(k)-style defined-contribution pension plans. The Big Bang deregulation of 1998 has made it possible for banks, insurance companies and brokers to offer one another’s products—making true financial planning a possibility. Japan’s mutual fund business is in its infancy, much as the U.S.’ was in the 1970s. From just 5,000 a few years ago, the membership of JAFP has climbed to nearly 90,000.

With that kind of explosion, it may seem there is little room for further growth. But of the sheer number, McCarthy warns: “It’s a mile wide and an inch deep—meaning few of those [planners] are really trained.” Only about 4,000 have taken the trouble to pass the U.S.’ rigorous certified-financial-planner exams. As McCarthy traveled throughout Japan, he realized people weren’t asking only for financial advice but for an investment philosophy. He responded by writing Awaken to the Sense of Money, Japanese! which hit Japan’s bestseller lists a month after it was released.

Japan isn’t the only Asian country ripe for a revolution in personal financial advice. Straws in the wind:

• In August 2000 the Financial Planning Association of Malaysia held its first annual conference; a thousand delegates showed up.

• In Singapore financial planning is also taking root, thanks to efforts by the government to support the profession.

• In Korea, where personal savings amount to nearly $1 trillion for a population of only 44 million, the first financial planners’ exam was administered in June; today there are 5,000 financial planners registered with the Korea Security Dealers Association.

On the other side of the world too, financial planning is taking off. In the U.K., one of Europe’s most developed financial planning markets, more than 15,000 Independent Financial Advisors (IFAS) are registered. Michael Webb, the CEO of Invesco’s U.K. retail business estimates that almost 90% of his company’s mutual fund inflows come through IFAS. Throughout the British market, IFAS now represent more than 40% of fund sales.

In Continental Europe, Tim McCarthy sees plenty of opportunity, especially as savers begin adding more common stocks to their retirement portfolios.Like Japan, Germany has a lot of savings stuck in bank deposits and bonds, and people know little about equity investing. Germany’s personal financial assets are between $5 trillion and $6 trillion for a population of 82 million.

As a proportion of households, German investment in equities still trails far behind the U.S. and the U.K. But the gap is closing: In the last three years, the number of Germans investing in shares and investment funds has more than doubled. German financial planning companies like Tecis (Forbes Global, Oct. 30, 2000) and MLP are expanding rapidly to cash in.

Don’t think that Europe’s big banks will idly watch a new generation of independent planners manage the savings of their customers. “European banks have a giant Schwab case study staring them right in the face,”says Timothy J. Connelly, a partner at Brown Brothers Harriman (BBH) in Boston, Massachusetts. His firm serves as a custodial bank for more than 270 European banks. As an added service, last July BBH began providing banks with access to BBH Fund WorldView, an Internet-based system that provides data and back-office trading details on some 300 offshore funds managed by 25 different fund families. BBH’s non-Internet mutual fund dealing capability covers more than 20,000 funds globally.

BBH WorldView, Connelly says, will help the established players defend their business against the independent advisers. “If the guy sitting in the bank can offer any funds from any management company, there’s no need for independent advisers,”Connelly says.Today some $5 billion in third-party funds (those not managed by BBH) have been sold through BBH WorldView platform.

Credit Suisse has taken a leading role in Continental Europe in the movement toward open architecture with its Fundlab product (Forbes Global, Aug. 23, 1999), where clients can buy funds from other families—not just Credit Suisse.

European banks, however can’t take the threat lightly. “The banks in the U.S. weren’t entrepreneurial or aggressive,” says Walker. “Bank-based planning failed [in the U.S.] because the older bankers couldn’t stand the idea of a Young Turk sitting in the lobby making more money than they were.”

Whether the established houses or the new breed of independent planners grab the lion’s share of savers’ assets, this much is clear. American-style investment techniques will help individuals outside the U.S. to plan well and retire richer.