For a town with a census population of 2,073, Eureka Springs, Ark., has acquired more than its fair share of nicknames over the years: America's Victorian Village, Stair-Step Town, Wedding Capital of the South, even Little Switzerland of the Ozarks. But spend a few hours talking with Sheryl Garrett, one of this mountain hamlet's prominent citizens, and you may come away adding another: the New Wall Street.
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In the span of a dozen years, Garrett, a soft-spoken 50-year-old transplant to Eureka Springs (she's from Kansas), has amassed a network of about 325 financial advisers, catering to some 25,000 clients around the country. The "global headquarters" for this operation is Garrett's modest two-story home, a short walk from
Myrtie Mae's, a popular eatery, where on a recent springlike Monday the founder of the Garrett Planning Network has come to talk about her strategy for upending the $14 trillion financial-services industry. Indeed, between lusty bites of Myrtie's famed "country recipe" chicken, she begins to sound as if she's leading a pitchfork rebellion against the Merrills and J.P. Morgans of the world.
Her plan is to stick to a fee-only system, with no commissions that might sway advisers the wrong way, and to operate under a strict fiduciary standard -- one that obligates advisers to work in the best interests of their clients. In the process, she claims, financial-planning costs will come way, way down for "the 83 percenters" -- the middle-class Main Street investors who, Garrett says, have been shunned by the century-old broker-dealers. And while her mission is not yet finished, one thing is eminently clear by the time she finishes lunch: Garrett doesn't lack the confidence to pull it off. "I'd like to be the H&R Block of financial advice," she says.
But if this is the future of portfolio planning for America, it's going to come as a surprise to anyone accustomed to the old pin-striped-suit model, with brokers at brand-name Wall Street houses reciting their firm's "strategic outlook" and touting the company's line of stocks and funds. Unlike traditional brokerage houses, Garrett's network doesn't instruct its far-flung advisory firms -- known in the industry as registered investment advisers, or RIAs -- on what investments to pick for clients. It doesn't have a squad of researchers selecting stocks and studying economic trends. Nor does it demand that "franchisees" commit to having a key industry credential (the certified financial planner accreditation) until five years after they join the network -- or even commit to financial planning as a full-time career. One in five Garrett advisers, in fact, is a part-timer. "A good number," explains Garrett, "are semiretired."
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Close Photograph by Gregg Segal for SmartMoney
Joe Duran says his "honest-conversation cards" get even the most stoic clients to find their financial "place of happiness."
- $6.1 billion: Assets under management at United Capital
- 33: Branch offices, in 26 cities
- $865,000: Average size of a client account
And yet, to the surprise of many industry watchers, the RIA movement, for lack of a better word, has been winning more than its share of happy converts. Already, such non-Wall Street advisory firms control some $1.4 trillion in assets, compared with $5 trillion for traditional brokerages. Since 2004, the number of RIAs has jumped 31 percent, to nearly 21,000, according to research firm Cerulli, even as the big financial firms have shed brokers by the boatload. Some say the shift is just the latest example of how fed up Americans are with the retirement advice they got before the crash of 2008. Others think the RIA model is just, well, more consumer-friendly. Either way, Alois Pirker, an industry analyst with Boston research firm Aite Group, thinks the old guard better wake up: "They need to take the competition seriously."
So who are these scrappy outsiders -- and why do their playbooks and rules differ so much from those of big Wall Street firms? The answers, perhaps no surprise, depend on whom you ask. The brokerage houses insist these newer outfits aren't the game-changers they claim to be. "Any RIA who argues that their way of doing business is best for each and every investor is simply blowing smoke," scoffs James Wiggins, a managing director for Morgan Stanley Smith Barney. The upstarts, though, say all that smoke is coming from a genuine investor brushfire. "You see this mass exodus" from the old-school firms, says Garrett, "because of one reason: trust." Many people, she says, no longer feel comfortable leaving their money to "these black-box entities." We caught up with her and two other outside-the-box players in what is becoming a rather high-stakes game.
Fair warning to anyone who finds himself on the opposite end of a sales pitch from Joe Duran: He isn't likely to let up. When we meet Duran, the chief executive of United Capital, a prominent RIA outfit based in Newport Beach, Calif., he's in full-throttle PowerPoint mode -- explaining why the fellow sitting across from him needs to join Duran's own revolution in the financial-advice realm. The 44-year-old Duran, who exudes a kind of casual suavity befitting his British colonial accent, a byproduct of his days growing up in Zimbabwe, has little interest in a pitchfork rebellion. His is more of an oyster fork. Duran's sights are set on wooing "mass affluent" advice seekers (those with investible assets between $500,000 and $5 million) away from Wall Street wire houses -- and part of his strategy for getting there is to acquire, shall we say, a bit of scale. Since 2005, Duran has built United Capital into a national brand, with a brick-and-mortar presence in 26 cities and $6 billion under management; but he's nowhere near done, he says. United Capital has already rolled up 41 smaller advisory firms and has plans to acquire another 75 in the next three years. And that's why James Pierik, the owner of a small financial firm in San Diego, is facing Joe Duran's unrelenting PowerPoint attack.
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Financial planning "should be a discussion that takes about eight minutes," says Ken Fisher. The rest is "mumbo jumbo."
- $43 billion: Assets under management at Fisher Investments
- 0: Branch offices; advisers counsel by e-mail and phone
- $1 million: Average size of a client account
Slide by slide, Duran tells Pierik why his three-employee outfit, which manages $220 million spread over 1,000-plus accounts, doesn't have the staffing to adequately service its current clients, much less grow the ranks. "The more important you are to the business," says Duran, "the less valuable the business is." Now, if Pierik would just sell his sleepy little firm to.... About an hour later, Pierik looks shell-shocked.
Duran, it turns out, has a history of empire building: Before joining United Capital, he helmed an advisory firm called Centurion Capital Group, which grew its assets from $100 million to $2 billion in less than a decade. (GE Financial Assurance Holdings purchased it in 2001 for what Duran will only call a nine-figure sum.) For this go-round, though, he insists his aim is not just to get big but also to create a model for financial advice that goes far beyond minding a client's investment portfolio. United Capital casts itself as a kind of berplanner, offering assistance on everything from estate planning to insurance coverage. (It also often manages its clients' money -- Duran has a five-person investment committee, which oversees seven core portfolio strategies.) For all this holistic hand-holding, the company charges, on average, a flat annual fee of 1.8 percent of assets (including product costs), or about $9,000 a year for a $500,000 portfolio.
Despite the Manhattan-level fees, Duran's approach is surprisingly California in feel -- deliberately touchy-feely, if not an outright New Age clich . (Duran, an Ashtanga yoga acolyte, has been known to do a headstand for six minutes straight.) United Capital advisers are trained to engage new clients in what Duran dubs Honest Conversations on seemingly nonfinancial topics. ("You're planning a child's birthday party. What's your top priority?") The aim, he says, is to get at the root of his client's financial goals and concerns -- and the plus for advisers, Duran acknowledges, is that the conversations are billable. The responses, he says, tend to be more informative than those to boilerplate questions such as "When would you like to retire?" But even touchy-feely can devolve into formulaic shtick, and some financial pros say Duran's heart-to-hearts are no more probing -- or useful -- than the standard financial assessment that advisers have been using for years. Duran responds that his approach lets advisers go deeper into an investor's psyche -- or, as he puts it, their "place of happiness" and "place of fear" -- and that leads them to a more appropriate choice of investments.
And not surprisingly, as United Capital expands, it's also attracting a whole other line of criticism from within the industry. Some question whether the rapid pace of United Capital's growth -- the firm's client base has more than doubled in the past two years -- is in the best interest of its customers. With $31 million in funding from outside investors, the pressure to show shareholders a return on investment is substantial, experts say -- and Duran doesn't rule out the possibility that the firm may go public or sell itself in the coming years. Some contend that could leave clients suddenly in the hands of caretaker advisers they don't know. Duran, for his part, says his company "will always be completely in line with our clients' interests." But even fans like James Pierik say they worry a bit about how big and fast United Capital is growing. Duran's PowerPoint muscle notwithstanding, Pierik ultimately nixed the sale of his small advisory firm. "If I knew Joe was going to be there long-term," he says, "it would have been a no-brainer."
As huge as Joe Duran's aspirations seem to be, market maven Ken Fisher has already amassed an operation that manages some seven times the assets of United Capital. With 26,000 U.S. clients and with satellite operations as far away as Germany, Fisher Investments is by some measures the largest RIA in the country -- but don't let its size make you think there's anything conventional about the model. The 61-year-old investing guru says he's not there to walk his clients through a mortgage application or to help them pick an insurance policy. He's there merely to plot their portfolio. In fact, he doesn't even place much value in meeting with investors face-to-face. The vast majority of the firm's clients communicate with their investment counselor by phone a few times a year; the only in-person contact they typically have with a company representative comes at market-focused seminars and other events held around the country.
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Close Photograph by Dero Sanford for SmartMoney
Leading the charge from Arkansas, Sheryl Garrett aims to bring advice to "the 83%" of Americans Wall Street ignores.
- 325: Advisers in the Garrett Planning Network
- 25,000: Clients the network now serves
- $180 to $240: Hourly rate to speak with an adviser
If this mostly go-it-alone model sounds a bit quirky, it's pretty much a reflection of Fisher, a self-made billionaire who invariably flies coach ("I sleep really well in planes no matter where I am," he says), lets his cats have free rein of his corporate headquarters, and seems to have few interests beyond investing (he's written eight books on the subject) and enjoying the ancient redwoods surrounding his Woodside, Calif., home. (A redwood tree "doesn't die when it is cut down," Fisher points out, knowingly. It's the sort of thing someone says to be inspirational -- but it sounds a bit scary when he says it.)
Despite the fact that he practically came into the industry as a matter of birthright -- his late father, Philip Fisher, is a Wall Street legend who helped give rise to the concept of growth investing -- he's always been something of an outsider. He's also faced plenty of jeers from investing professionals who say he is too equity-centric -- particularly in a postcrash, volatile world. Others say his view of financial planning as a mere adjunct to stock picking is also misguided. And that may be one of the more surprising twists in the RIA revolution, experts say: For what makes Fisher's evident success in gathering assets -- and grabbing market share from traditional Wall Street firms -- so remarkable, say some industry pros, is that he's a lot more like an old-school broker than an adviser. (Fisher says he adheres to the same fiduciary standard required of all RIAs and has a similar cost structure -- he charges a flat annual fee, typically between 1 and 1.25 percent of a client's total assets.)
The biggest controversy surrounding Fisher, however, concerns his prospecting approach -- his strategy of building his client base through junk mail (a description he, too, uses) and other blanket marketing. Critics have said his sales tactics are overly aggressive, including to potential customers who may not fully understand what they're buying. Last year, a California arbitrator ruled Fisher's firm may be liable for at least $376,000 after determining that it "breached its fiduciary duty" to an investor who claimed she was placed too heavily in stocks, given her financial situation. (The client and her attorney declined to comment.) Fisher says his marketing practices are appropriate, but he declined to talk specifically about the case, other than to say it is his first arbitration loss in seven years, a respectable track record given the company's size, he contends. Other former clients, however, say they, too, have been disappointed. Rand Hoch, an attorney in West Palm Beach, Fla., says he went with Fisher because "he advertised he had a good record of going to cash before the markets tanked." But when they did just that in 2008, Hoch says, his portfolio nonetheless plummeted 37 percent.
Fisher brushes off the criticism, saying clients have a variety of portfolio options and pointing to his many correct calls over the years -- he did, for example, warn of the tech bubble in March 2000, just a month before the sector went into a downward spiral. What really makes him bristle, however, is what he calls the mumbo jumbo of other RIA models -- the ones, he says, in which advisers profess expertise in areas they don't know and sell clients on strategies or products they don't need. Fisher believes most financial planning ultimately comes down to seeking the right investment solutions, based on a few questions: "How much money do you have? What is the primary purpose for it?" Says Fisher, "It should be a discussion that takes about eight minutes."
Back in Eureka Springs, Sheryl Garrett agrees with Ken Fisher about one thing: The financial-advisory industry is on the wrong track. But Garrett says the mistake is that advisers have been so focused on the mass affluent they've all but ignored the mass market. Too many RIAs are built around a fee-based asset-management model for clients who are able to invest $500,000 or more, she says: Main Street investors, says Garrett, need basic advice on saving for a child's college fund or making sure the family's insurance covers what it should -- same goes for portfolio management. "Regular people need direction on investments," she says, and "they can't all afford or justify paying for a Ken Fisher."
For hourly fees that average about $200, the advisers affiliated with Garrett are hoping to offer it to them. Unlike both United Capital and Fisher Investments, the Garrett Planning Network doesn't actually have any individual clients; its affiliate firms do. Each of these RIA franchises (Garrett calls them members) pays the network an initial fee of $10,100, then an annual membership fee of $1,200. In return, they get a slew of informational materials, management tools, software and -- of course -- referrals, many of which come in by way of Garrett's website. Though a few of the planners provide asset-management services on a percentage-fee basis, all are required to offer hourly-rate planning advice, which means they might meet with clients as little as once a year -- or once a lifetime. Such arrangements, say boosters, make the cost of a little help no more expensive than the tab for a weekend hotel stay.
The question for some skeptics, naturally, is whether that comparatively low cost for advice simply reflects the fact that clients are getting a lower grade of advice too. Some charge that while many of Garrett's planners may be adept at offering commonsense solutions and boilerplate strategies, they don't necessarily have the training to delve into more-complex financial situations. And at least one would-be client felt he couldn't trust the advisers in the network to provide solid base-level advice. Jory Olson, an electrical engineer in Portland, Ore., says he sought some referrals from the Garrett network when he needed help with his 401(k). One of the planners that was suggested to him "just didn't know what she was doing," Olson says. Garrett is quick to defend her vetting process, saying she verifies every applicant's credentials and licenses, and checks that the applicant's industry disciplinary history is free of "any client-related complaints, litigation or settlements." Still, she admits she doesn't have a minimum accreditation standard for acceptance. "A good deal" of the vetting, she says, "is subjective."
In any case, Garrett says, the real proof of her network's merit has been its expansion. Starting with barely a handful of advisers in 2000, her professional alliance grew by double-digit percentages annually until the 2008 crash. (It has grown more slowly since then.) As she polishes off that plate of fried chicken, Garrett seems ever more confident that her firm is poised to become a huge nationwide chain -- the RIA as fast-food burger joint, if you will. And as for those other firms fighting for market share, the Planning Queen of Eureka Springs welcomes the competition. "When Burger King moves in across the street from McDonald's," she says, "they both do better."
