Mark Hebner's path to running a $1.8 billion financial planning firm was anything but ordinary. A nuclear pharmacist by training, Hebner had co-founded a nuclear medicine company when he was fresh out of college. He sold Syncor International 10 years later, netting $6 million on the transaction.
Hebner was just 32 when he handed the windfall to a broker at Merrill Lynch and went about his business, starting and running several other companies and largely ignoring his investment portfolio. But after going back to school to get an M.B.A., a newly widowed friend asked for investment advice. Feeling more responsible for her economic well-being than his own, he decided to read up on the financial markets, delving into decades of academic research on investments. He was changed by the experience and abandoned Merrill Lynch to start an investment company of his own.
"I began to realize that everybody should probably be investing in a portfolio of index funds," Hebner says.
Pioneers such as Vanguard's John Bogle had been advocating the concept of investing through index funds for years, but passive investing wasn't well accepted in the late 1990s at the height of the Internet stock boom. While many financial planners worked to find hot technology stocks, Hebner chose to use the Internet another way - to educate consumers about passive investing.
With the help of some programmers and Web developers, he launched IFA.com. The site, which is constantly updated and expanded, became - and remains - the most effective marketing tool for his planning firm, Index Fund Advisors.
With four Web designers and programmers now on staff, he uses the site itself, as well as his email list with 18,000 names, to inform potential clients about the rewards of passive investing, what exactly his firm does and how client money is invested. The site also answers such common questions as: Why hire an advisor when investing through index funds? (His answer: because the advisor forces you to do uncomfortable, counterintuitive things, like rebalance your portfolio.)
EXPLOSIVE GROWTH
The tools on his site - including a 25-question risk quiz, and retirement and college savings analyzers - also provide IFA's planners with a consistent stream of client leads. Users are required to plug in their contact information; results from these tests and analyzers are distributed among IFA's planners, who use the data to start a conversation with potential clients, Hebner says.
That's resulted in explosive growth for the firm. Since Hebner launched IFA in 1999 with $6 million - mostly his own money - both clients and assets under management have soared. IFA now boasts some 1,850 customers and manages $1.8 billion, Hebner says.
"I built this website and people just started finding me," he says. "I would guess that about 25% of our assets are from local people. The rest come to us from the Web."
However, marketing via the Internet also creates certain challenges - including the need to communicate with clients nationwide. Index Fund Advisors has 11 advisors on staff, operating in four states, and also offers a network program that allows non-affiliated advisors to use IFA's website and tools in client meetings for a $500 monthly fee. There are currently five network members, including one as far away as Christchurch, New Zealand.
STANDARDIZED PORTFOLIOS
Hebner, who is IFA's only partner, addresses the geographic challenge with a standardized approach to planning. IFA's risk quiz, filled out by every potential client, determines a prospect's capacity to handle volatility, based on age, needs, assets and disposition. The system then matches that risk tolerance with one of 10 preset portfolios, labeled with numbers from 10 - a super-low-risk option that's 80% invested in fixed-income assets - to 100, which is 100% invested in domestic and international stocks, including REITs.
Each of these portfolios is based on up to 15 different indexes, for the most part using funds from Dimensional Fund Advisor. Hebner believes DFA funds are superior because they give greater weight to small companies and value stocks, which tend to have higher returns. That causes them to perform better than Vanguard index funds, although they charge somewhat higher management fees.
Clients sign a copy of the quiz and certify that they understand both their score and the investment plan that it suggests. Each model portfolio - including the precise percentage of assets in each index fund - is shown in detail on IFA's website, along with that portfolio's back-tested performance over a 50-year period.
Would-be clients are encouraged to look through dozens of number-heavy charts that explain the long-term results, as well as the short-term volatility. The data can be daunting, but it also gives a complete picture that helps answer client questions and double-check their comfort with the answers. "When it comes to the website, our motto is 'more is more,'" says Mary Brunson, IFA's marketing director.
Once clients are settled into a portfolio, IFA usually puts them on an automated, formulaic glide path that reduces their risk as they get closer to the date when they'll need to use the bulk of their assets.
LITTLE DEVIATION
Convinced that the mixture of funds selected in the firm's model portfolios produces the best risk-adjusted returns, Hebner tolerates little deviation from the set program from his own advisors. (Network advisors are not compelled to follow the formula.)
If clients - or, for that matter, his planners - want to deviate from the set mix, Hebner challenges them to provide details to prove that the change will do better over a long period of time. If they can't show that the change would provide superior results, Hebner believes the firm's advisors are compelled by their fiduciary duty to do what they know works. "We recognize that free markets do a good job of setting prices for investments," he says. "Because of that, we elect to be passive in our investment strategies."
This formulaic approach allows IFA to keep some quality control and manage costs; its far-flung planners communicate with clients largely over the phone and Web. The approach has also helped this fee-only operation accept smaller investors, with as little as $100,000 in assets.
The firm's fee schedule works much like a marginal tax bracket, with investors paying 0.9% on assets of up to $500,000, 0.75% on the next $500,000 of assets under management, 0.6% on the next $1 million, and so on. The lowest marginal fee bracket is 0.2% for assets exceeding $10 million. (A fee calculator on the website tells prospective clients exactly what they would pay to IFA, as well as to DFA in fund fees.)
"The only person paying us is the client, so we are always doing what we think is in their best interest," Hebner says. "Not [enough] advisors can say that."
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, also contributes to Kiplinger's and CBS MoneyWatch.
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Mark Hebner
Index Fund Advisors, Irvine, Calif.
Credentials: B.S. in Pharmacy, University of New Mexico; M.B.A., University of California, Irvine
Experience: Co-founder and CEO of Syncor International; founder and president of Index Fund Advisors (since 1999)
AUM: $1.8 billion
How I see it: "We think markets work. And if they do, passive investing is your preferred strategy."
