by Melissa Klein
Alvin Rogers’ clients don’t have $50 million in assets. They don’t even have $5 million. In fact, most of the Little Rock, Ark.-based planner’s 200 or so clients have an average family income of $50,000 to $200,000.
“Our clients are hardworking, everyday people,” said Rogers, managing planner of Financial Decisions Institute and a CFP. “My clients represent me, my family, the background I come from. Growing up, I didn’t know anyone affluent.”
Rogers and other planners are reaching out to what has often been an ignored or overlooked market: middle-income families. “We target middle-income clients because most planners don’t want to deal with them,” said Rogers.
FDI was founded in 1999 by four planners with their own practices who were getting calls from people who wanted to be clients but didn’t have enough money to meet their investment minimums, who couldn’t afford their fees, or who didn’t fit the kind of planning they did. “They realized a large number of people were being ignored or underserved by the financial planning industry,” said Rogers, who joined the firm in May 2000.
“The basic financial process is the same, and the needs are similar, but what I find is different from affluent clients is that middle-income people have so many competing dreams,” said Rogers. “They want to make sure their kids will be able to get a good college education. They want to be able to obtain the type of house they want. They want to take vacation every year. Because all of those things are competing for a very limited amount of resources, we have to be efficient in what we do.”
Rogers and a full-time assistant work on a fee-only basis. The firm has no minimum investment requirement. A financial plan costs an average of $300 and entails four to six hours of planning time. The firm also offers asset management for 75 basis points. After the initial plan, which normally involves three meetings, the firm does annual reviews for an hourly fee of $75. If a client has assets under management, the first hour of the annual review is included.
“It’s difficult to build a profit margin that most planners would like,” Rogers admitted. “You’ve got to have a very efficient system. We can’t do a lot of customized work. It all has to flow within the system.” FDI uses five model portfolios for the investment management, and relies on Risk Capacity Index Calculator software to plug in data.
In 1991, while working at a CPA firm in Newport Beach, Calif., personal tragedy prompted CFP Louis Barajas to return to his hometown of East Los Angeles. He and a partner set up an accounting and consulting firm, Barajas & Torres, and a separate financial planning firm, Barajas & Associates.
“My intention was to work with the community,” said Barajas, who noted that nearly all of his 300 clients are Hispanic. “I grew up in an environment where there was a lot of poverty. I decided I wanted to try to change the community.”
While his client base ranges from low-income families that earn less than $50,000 to the very affluent, most have household incomes of from $75,000 to $100,000. Barajas admitted that it is his roster of affluent clients that enables him to serve his less-wealthy clients and stay in business.
The biggest difference that he sees between wealthy clients and low- and middle-income clients is their mindset. “The well-to-do already have what I call ‘prosperity consciousness.’ They’re open to ideas, they want to discuss how they’re going to send their kids to college,” he said. “They’re proactive, they have a longer vision. Lower-income clients are more reactive; they have narrower vision. They can’t think about a five- or 10-year process. They want to know how they’re going to get through this year.”
“It’s tough dealing with smaller clients because they’re very focused on price. They don’t ask what’s your experience and what are your qualifications. I have to do lot of work on the psychology,” Barajas said. “I manage a lot of behavior, sometimes more than I do investments.”
“We build their foundation,” he continued. “I help some of them work on their income. If they’re making $10 or $12 an hour, we’ll strategize how they can make $15 an hour. I role play with them so they can ask for raises.”
A consultation with a junior planner costs from $75 to $100 an hour and runs between an hour and 90 minutes. The firm offers asset management for a percentage of assets for larger clients (1 percent for $100,000 or more). For clients who can’t afford to pay a percentage of assets, the firm offers commissionable investments.
Marilyn S. Steinmetz, CFP, of Money Matters, in Hartford, Conn., has about 400 clients, 98 percent of whom are middle-income people who earn from $30,000 to $150,000 a year. “They can’t afford plans that cost from $3,000 to $5,000,” said Steinmetz. “They don’t have that kind of discretionary assets. Most of them don’t have any money left after they contribute to their 401(k) and fund their Roth IRA.”
Steinmetz bills hourly for planning and offers money management for either a percentage of assets or a commission, depending on what the client wants. She waives the hourly planning fee for asset management clients. A plan takes from one to two hours to develop.
“I work on behavior modification Ñ I try to get clients to change their spending habits and thoughts about money. We talk about their real needs versus what they think they need. We’ll do budgeting. We make sure they’re contributing enough to their 401(k),” Steinmetz said. I’ll help them get a new mortgage with a lower rate. I’ll help them do a 529 plan if they need it.”
“I don’t think middle-income people’s needs are substantially different,” said Bonnie Hughes, CFP, of A&H Financial Planning and Education Inc., a fee-only planning firm in Rome, Ga. “They’re just as busy as higher-end clients. The main difference is the level of complication. They have a lot of the same questions. They want answers that aren’t tied to a sale. They want the answers in the context of their personal life.”
The bulk of her clients earn from $120,000 to $250,000 per year. “I end up doing a lot of clean-up work for clients who have dealt with a bunch of people and never put it into the context of a financial plan,” said Hughes. “They’re patching things together and have no road map to follow.”
Hughes is a member of the Garrett Planning Network Inc., a group of fee-only planners who provide advice on an hourly, as-needed basis. Her typical engagement spans from two to four weeks and costs between $750 and $1,500. “I’m not doing heavy-duty tax planning, or estate planning. I do cash flow, investment policy statement, asset allocation,” said Hughes. She doesn’t implement the plans or manage assets. “I give clients instructions on how to do that themselves. It’s an affordable way for regular folks to get expertise and planning.”
“It’s much more difficult to make money on this model, but I think that when transparency comes more to financial planning, the model might win,” said Hughes.
