Q&A: LYNN HOPEWELL "THE AVERAGE PERSON’S IN NO POSITION TO KNOW HOW TO INVEST COMPETENTLY"

Lynn Hopewell is one of the nation’s most prominent advisers. Not only is he one of Charles Schwab Corp.’s largest financial planning players in the mid-Atlantic region, he has taken a leadership role in the industry and frequently is quoted in articles on financial advice throughout the country.

It’s not hard to see why. A former engineer with a degree from Harvard Business School, Mr. Hopewell switched careers in 1980. He runs his practice in a meticulously logical, businesslike way, with a clear eye toward promoting it as a business and taking full advantage of technology wherever it’s available.

Mr. Hopewell exudes an air of confidence and sureness about his abilities, and he recently began pushing into a new venue and an area that he feels strongly about — raising standards in the profession. A former member of the Certified Financial Planner Board of Standards, he proposed in July that the Denver-based body include decision science — how to determine the probability that a particular outcome will occur — in the curriculum for planners. The board will make a decision on the proposal next year.

He has high standards for himself, too. Independent consultant Chip Roame, who until this year worked on developing strategies for Schwab’s investment adviser business, says Mr. Hopewell “has a systematic process for assessing client satisfaction with him” — engaging third parties to conduct research because clients are reluctant to make negative comments directly to their planners.

Q What are the most important issues for financial planning now?

A For planners that have been in the business a long time, one of the most important issues is turning their practices from good jobs to learning how to run their practices as businesses.

Most planners today, particularly small ones, are not building equity. It’s very hard to sell a financial planning practice unless it’s running like a business.

So the trick is to make it run like a business. You have to organize it, deliver services in a way that a team delivers and not just one person. You have to really submerge your ego.

You talk to the planners that have been in the business for a while, they revel in how much they’re involved with their clients.

You’ve got two choices: You can deliver your services or you can build a business that delivers your services. There’s a real important distinction.

Q But your business is very closely identified with Lynn Hopewell. Aren’t you violating your own advice?

A There are six people here who work with clients; I don’t do the day-to-day. We standardize a lot. If a client asks whether they should have a mortgage or not, everybody here can give them the answer. The process of getting the answer is the same because I set that up. I defined the answer. We have standards, policies and procedures. If somebody wants to know whether they should have life insurance or not, we all know how to give them the answer, because we’ve discussed it and talked about it. The philosophy and ideas are commonly shared. I take credit for generating those but not for delivering them.

Q What other issues are important?

A There’s a drift towards fee for service, and for providing investment advice for a fee. There’s a competency issue. There’s a challenge for those people who want to give investment advice to raise their competency, because they generally don’t come from places where the competency is high.

A CPA I met at a conference wanted to know what software to use to start giving investment advice. She thought it’s just like learning to knit.

I asked her if she thought I could get software to start practicing as a CPA. I said, ‘Why do you think it’s any different from investing? There’s some kind of magic about investing? I don’t have to know much?’ She was probably sorry she talked to me.

The associations should lead the way. I think a special focus needs to be (placed) on investments.

Q How did you learn the business?

A I had a mentor. I was really well prepared. I had an MBA, I was an engineer. I can do a spreadsheet at the blink of an eye. So the technical analysis was very easy. I didn’t have to say, ‘What’s a probability distribution? What’s a standard deviation?’

Q Do you think the credentials for the CFP are strong enough?

A They need to be stronger, because of developments in the business. Every decision in financial planning involves the future: ‘Will I have enough money to retire?’ We have these very fancy models (in which) we put in an inflation rate, an investment return, when you’re going to retire and how much you’re going to spend. But they don’t have any room in them for the question of what’s the probability that this particular outcome is going to occur.

If the ingredients of the answer are uncertain, doesn’t that mean the answer is uncertain? The challenge for financial planners is to describe that uncertainty. We don’t describe it very well.

It’s coming. There are going to be external pressures. (Nobel laureate) Bill Sharpe’s offering 401(k) providers a service where participants can log in and input data about retirement and find the probability of a (financial) outcome.

Suppose you have a daughter you want to educate and you asked somebody like me how much to save. Suppose the answer was $100,000. If we used averages, there’s a 50% chance that you might need more. Wouldn’t it be useful to know that? Then suppose I said to you, ‘But look, there’s only a 10% chance that you would need more than $120,000.’ You might decide, ‘I want to be really sure, I’ll put aside $120,000.’

Q Why do you count Vanguard, Pimco, T. Rowe Price and Dimensional Fund Advisers among your favorite fund families?

A We like them because they pass all our criteria. We want a fund with a certain size; we don’t want real small funds, because they are expensive. We want the managers to be experienced. We want them to be faithful to their charter. (Style drift is) probably the biggest problem in investing. Our funds don’t drift.

Q Do you think there’s any danger that most people will learn to do all their investing on their own?

A Can you learn how to be a doctor on your own? An engineer? A surveyor or a journalist? Investing has all kinds of technical challenges, information challenges. I’m not saying you can’t learn. I’m just saying that it’s as difficult to learn as learning how to do other things. The idea that this is something you can conquer in a couple of months by just reading a couple of books is not true.

Q In financial planning, is too much attention paid to investing?

A The investment advice part of financial planning is much more lucrative than the other parts, so there’s a temptation to concentrate (on it) rather than on more labor-intensive parts, like estate planning or insurance. I’ve got a client that asked “how much will a certain sum of money (appreciate) under certain conditions?” Somebody here will spend two hours answering the question. What you’re tempted to do is get out of that.

There’s a tension between where to focus the expertise and what kind of advice to give. The danger is you could go too far in the investment direction. The question is how to deliver those other services so they don’t drag down the economics of the total enterprise.

Q Do you think a lot of people out there who need investment advice aren’t getting it?

A There are tons of people who aren’t getting it. Otherwise the popularity of the personal finance press would not be so great. It’s particularly acute in the lower tier of investors, those who have $10,000, $20,000 to invest. If you’ve got $10,000 you can’t afford to pay somebody $500 to tell you what to do — that’s 5%. So they struggle.

Q Do you think people are better off with 401(k)s than they would be with defined-benefit pensions?

A Absolutely not. The average person’s in no position to know how to invest competently. So they make a lot of mistakes. A burden has been transferred from a situation where the investment advice was expert to where it’s amateurish. Let’s say there’s $1.5 million (in a defined-benefit plan) that is providing my share of my annuity. But the company and experts are managing it, not me. Now there’s $1.5 million, (and) I get it (but have to deal with it). You are talking about the average blue-collar worker. It is a great congressional irresponsibility to not provide the legal and regulatory structure to enhance the defined-benefit plan.

Vitae

H. Lynn Hopewell, president, Monitor Group Inc., Fairfax, Va. In business since 1990.

Specialty: retirement planning.

Association membership: Institute of Certified Financial Planners.

Assets under discretion: About $130 million (fee-only). Average account size: $5 million.

Favorite fund companies: Dimensional Fund Advisors Inc., Pimco Funds, Vanguard Group, T. Rowe Price Associates.

Performance: Says the equity portion of Monitor’s portfolio has returned 22% over the past 12 months, with volatility less than half that of the S&P 500.

Data through July 31 Source: Monitor Group Inc.