Getting a plan through a broker. The advice may be free but a sales pitch is likely
New York — ``Most people spend more time planning how to get to and from their vacation resort each year than how to reach their financial goals.'' Thus comments Charles M. Atwell, vice-president and director of financial planning at Waddell & Reed, a Kansas City, Mo.-based investment house. Back in 1968 Waddell & Reed pioneered the technique of using personal financial plans -- comprehensive goal-oriented allocation of client assets -- to lure clients from its mainly $30,000- to $50,000-a-year Middle American constituency.
Certainly there is a demand for plans offered by brokerage houses. Last year alone Waddell & Reed's platoon of in-house-trained financial planners/sales- men (with the aid of an eight-page questionnaire and a computer) drew up 46,000 new plans.
The service is free. But Mr. Atwell concedes it is also a successful marketing technique and says that some 10 to 20 percent of people who undertake financial planning become customers, generating sales of mutual funds, life insurance, and tax shelters.
Of course, it doesn't always work that way. ``Sometimes,'' Atwell says with a shrug, ``we just have to tell them to take out the scissors and cut up their credit cards.''
Since its foray into financial planning nearly two decades ago, Waddell & Reed has been joined by its more high-powered media-oriented Wall Street competitors, many of which trumpet their own mass-market financial planning services on television as if financial planning had been invented last year.
Prudential-Bache, Shearson Lehman Brothers, Merrill Lynch, Sears, Roebuck, and E. F. Hutton all have their own versions of mass-market financial plans. And many smaller and regional brokerage houses, unable or unwilling to staff and train their own financial planning departments, have acquired financial planning firms to compete. There is no doubt the marketing departments at brokerage houses have dreams of using these financial plans to cement permanent client-broker relationships and learn more about other accounts and assets their clients have.
``What we are trying to do is establish a long-term, ongoing relationship with the clients,'' says Robert Errico, senior vice-president for marketing at Prudential-Bache.
But Wall Street's financial planning products are not nearly as democratic as Waddell & Reed's. Many firms offer two-tier, even five-tier, planning services to various levels of clients, depending on their assets, the complexity of their investment and tax situations, and who is footing the bill for the service.
At Shearson Lehman Brothers, for instance, there are at least four tiers of financial planning services. At a Shearson subsidiary called Ayco, purchased two years ago by American Express, corporate executives are offered highly detailed personalized financial plans covering their pension plan and corporate benefits as well as their investment goals and tax planning strategies for a fee of $10,000 to $12,000.
For top brass, the cost is picked up by the corporation, in the belief that when an executive's mind is free from personal financial anxiety, he can concentrate more on business.
At the individual level, Shearson offers $3,000 and $1,500 fixed-fee plans to high-asset individuals. Although these are the current prices, according to John Gross, a Shearson financial planner and accountant, who is studying to become a CPA, ``these fees may be revised upward.''
The current fixed fees at Shearson vary not only with the client's net worth, taxable income, and cash flow; they are also determined by the complexity of the client's needs. Mr. Gross says the low-fee plan is aimed at the individual who has $350,000 to $750,000 in assets, exclusive of his home. The $3,000 fee is generally charged to clients with more than $750,000 in assets besides the home.
A far less expensive option is Shearson's latest mass-market financial planning product, a computerized 8- to 16-page questionnaire it is slowly rolling out in select markets. ``It is really a mini-financial analysis,'' Gross says. Called the ``Personal Review Outline,'' it is considerably condensed from the 70-to 100-page clients must fill out for the fixed-fee service. According to Gross, the new computerized service emphasizes the client's goals, risk propensity, and tax bracket.
At Prudential-Bache, a similar computerized service is based on a questionnaire that asks about a client's assets, debts, income, and some indication of expenses and goals.
``So far, the service is free,'' says Jack Haggerty, head of Pru-Bache's financial planning division. ``But that may change soon.'' A similar service costs $25 at Sears. ``What we are trying to see,'' Mr. Haggerty says, ``is what the clients' assets and income are today relative to meeting their future needs.
``The answer may be that they have to save an additional $1,400 a year. It gives them parameters for solving those needs. Then they can go over it with their account executive and pick a specific product that fits that goal.''
Such simplified plans, Haggerty says, are aimed at individuals with incomes ranging from $25,000 to $125,000. But Pru-Bache has other services designed for wealthier individuals whom Haggerty describes as ``millionaires. It doesn't take much to be a millionaire these days. These people have incomes of $150,000 and up and with their homes, cars, and summer homes, they are worth in the million-dollar area.''
Pru-Bache charges from $3,000 to $5,000 for such financial plans. ``In this scenario,'' Haggerty explains, ``we have attorneys and CPAs that go out and meet the client, help him fill out a 25-page document, and look at his will, his tax return, corporate benefit statement, and then we will prepare a 50- to 100-page report.'' That effort can not only bring in the $3,000 to $5,000 fee, but it can generate sales for Bache.
Still, not all firms have found the intensive fixed-fee version of financial planning a profitable enterprise. At Merrill Lynch, which has had a $5,000 personalized financial plan available since 1975, a decision was made three years ago to convert its financial planning service to a $250 mass-market, computerized, and simplified service called ``Financial Pathfinder Service,'' which caters to a client with a $40,000 to $50,000 income.
Previously, notes Jay Rabinowitz, chief of Merrill Lynch's financial planning service, the firm sent out ``a counselor to sit down with the client and gather data. People for the most part are not very organized. But sending someone out required a lot of time.'' To do the same thing cheaper, Merrill Lynch now asks the clients to do it themselves.
``If a client has a question about filling it out, we have an 800 number. There is a staff of 10 people who are professionals who are trained to answer,'' says Mr. Rabinowitz, himself a tax attorney. While Merrill Lynch's brokers have some in-house coaching in financial planning principles, the work is done by the special professionals.
Customers may wonder how the brokerage will use a plan once it is fashioned. In most cases, it is available to the account executive who introduced the client to the financial planning service. And in most cases he will call to discuss whether the client needs a product that will fit the plan. Since most brokerage firms are now full-service, he will offer everything from life insurance to tax shelters, as well as stocks and bonds.