#FASuccess Ep 025: Leveraging A TAMP To Roll Out Wealth Management Services In A CPA Firm with Tim Delaney

What You’ll Learn In This Podcast Episode

• How and why Tim pivoted from being a full-time CPA to wealth management. [2:48]
• The negative experiences Tim had investing with brokers that made him want to start a values-driven financial planning firm. [2:48]
• Why Tim chose to partner with a TAMP – BAM Advisor Services – from the outset, and how their partnership has worked over time. [9:48]
• How Tim and his partners navigated the dot-com boom and bust on the strength of their (non-investment) value proposition. [12:02]
• Why his tax-planning clients were eager to hire Tim as a wealth manager as soon as they were able. [19:45]
• The three-partner arrangement that allowed Tim to advocate for and direct business to his tax firm’s new wealth management arm. [24:10]
• Why he decided to bring his son, a former broker, into the business as JDH’s first hire. [26:21]
• The typical amount low-hanging fruit that CPAs could capitalize on to build out a wealth management business of their own. [38:34]
• Why Tim decided to go full-time on the wealth management side of things in 2014, when the firm hit $120 million AUM. [1:00:27]
• How Tim and his son are designing a succession plan that will keep the firm operating smoothly and clients taken care of. [1:03:58]

Resources Featured In This Episode:

• Tim Delaney - JDH Wealth Management
• Buckingham (BAM) Strategic Partners
• Irv Rothenberg
• Mark Tibergien
• Orion Advisor Services
• Charles Schwab
• Fidelity
• Junxure
• Why TAMPs And Outsourced Investment Management Are The Future For Most Advisors

Full Transcript: Leveraging A TAMP To Roll Out Wealth Management Services In A CPA Firm with Tim Delaney

Michael: Welcome everyone. Welcome to the 25th episode of the Financial Advisor Success podcast. My guest from today's podcast is Tim Delaney. Tim is the cofounder of JDH Wealth Management, an independent RA in Northern California that oversees nearly 200 million of assets for 120 affluent clients in 401(k) plans. But unlike most financial advisors who started out selling life insurance or mutual funds, Tim began his career as a CPA and it wasn't until after nearly 20 years of experience doing accounting and tax preparation that he decided for the first time to launch a wealth management firm from within the existing accounting business with a goal of leveraging the firm's existing relationships with his tax clients to begin doing investment management.

And in this episode, Tim talks about the transition from tax preparation to wealth management, why he decided from day one to build his wealth management business on a third party tent platform despite the fact that it would take a material chunk off his long-term revenue. And how he structured the wealth management firm as a separate entity from the tax practice and why he ultimately decided to buy out the wealth management division and part ways from the accounting firm after more than a decade which, as it turned out, just accelerated the growth of the wealth management firm even further.

We also talked at length about the opportunity that CPAs have in offering wealth management services to clients, how their typical accounting firm can likely generate an additional 25% of its gross revenue by offering investment management to existing clients and why, unfortunately, most accounting firms still fail to capitalize on the business opportunity. And be sure to listen to the end as well where Tim talks about how he's executing an internal succession plan with his son and how he structured the arrangement not to give shares but to have a son buy into the practice over time in large part because that's what's necessary to balance the value of the business against what his other two children who aren't involved in the business may also someday inherit. And so with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast with Tim Delaney. Welcome, Tim Delaney, to the Financial Advisor Success Podcast.

Tim: Well, thank you, Michael. It's a pleasure to be here.

How And Why Tim Pivoted From Being A Full-Time CPA To Wealth Management [2:48]

Michael: So I'm excited to have you on the podcast because your background is a little bit different than the other guys we've had on the podcast so far because so many of us come into the industry selling mutual funds or insurance or some other products and maybe we pivot later to wealth management or we come out of the more direct investment management business, but you actually started as a CPA and built a wealth management practice within an accounting firm and using a TAMP, where you're not even the one doing the investment management hands on the same way that a lot of other advisors do. And so, I think it's an interesting story to hear because I think for a lot of advisors, they're not really maybe entirely aware of how these dynamics work in accounting firms. And conversely, I know there are a lot of accountants that are actually having some of their own woes of challenges around the accounting and tax preparation business these days that maybe would find this journey interesting that you've gone down about what does it look like to pivot from doing tax preparation and accounting work into a world where you're doing wealth management and financial planning and investments. So maybe as a starting point, you can just tell us a little bit about your advisory firm and what it is today and your role, what do you do in your firm?

Tim: Sure. So I started JDH back in 2000 and I had seen over the years, there were three major events that took place that kind of caused me or pushed me into wanting to do, that time, asset management and that became wealth management as we progressed through it. And there were three big events that happened. The first one that came along was back in the '80s. I was going to do my first IRA investment personally and was looking where am I going to put my money into. And I knew a guy, a stockbroker, and he said, "Well, we've got this real estate deal in Southern California." We live in Northern California, up in the wine country. He said, "Well, there is this real estate deal down there. It's a sure thing, can't lose. You can put your IRA in there."

So I said, after talking about it and looking at the perspectives and all the good stuff, we, my wife and I, put our first $2000 each, four grand into it. A few years later, it tanked and we lost our investment and I happened to ask the broker, I said, "Did you invest in that?" He goes, "No, I never did." I said, "Well, okay, that's interesting."

Michael: Why would I do that?

Tim: Why would I do that? Then my dad who was with a big brokerage house who, I won't say who it was but they have a bowl sign on their logo.

Michael: An unknown bowl represented large firm.

Tim: Right. He got into a wind energy project in Southern California and he…my folks at that time were living in Southern California. He put 50 grand into it and it too tanked. And I asked my dad years later, go ask your broker if he personally invested in it. And he said, he looked into it and he said, "No, he never did." I go, "Mmh, okay, now we're burned two for two." So then in the '90s, I happened to be doing some stockbroker's tax returns and we had mutual clients and I took some time to look at what both of those two parties were investing in and they were very different investments that the broker was doing personally versus what our mutual clients were being put into.

And so when I started JDH, I said, you know, I want to develop a firm that whatever we recommend the clients, I'm already doing it myself personally. I never want to be sold something because they haven't seen it three times from different perspectives: myself, my dad, and clients. It's a yucky feeling. And so, that was kind of one of the major tenets of doing this, was I researched it, this whole academically-based passive approach to investing is what we decided to go into with the understanding that we would never sell a client and we would only do…recommend strategies that we ourselves personally have done: our 401(k), our personal money, my parents', my siblings', my kids' now.

Michael: You want to work with the chef that eats their own cooking.

Tim: That's it. You got to eat your cooking. If you're not eating your own cooking, then it's probably not a good situation. So I went to my partners, I had two partners at the time, John Jones and Cecil Humes. And so we came up with the name JDH, it's the first initial of our last name, very creative accountants, and we started it.

Michael: And it works. It's worth knowing, I feel like we spend…there are some advisors who spend like an inordinate amount of time trying to come up with the name, the right name, the perfect name and sometimes, it's just to grab some initials and off you go and it works amazingly well.

Tim: It did. It worked…and part of it was I had come from Peat, Mark, Mitchell, one of the big eight back in the '70s and then became KPMG and I thought, "Well, they're a bunch of initials and they've been successful." So I thought let's try the JDH wealth management and that's what we did. So we launched that in 2000 and my first client was my parents. If you can't get your parents on board, you've got a problem I think. So they came on board and then a few of my clients started to come over as I explained what we were doing and then John referred some clients and Cecil referred some clients and I continued to do full-time CPA work. I was during autumn accounting and had tax responsibilities and a couple of 100 tax clients and was doing…

Michael: A couple of 100 tax clients? That's a lot of tax planning.

Tim: It is. And so through all that, as we were starting to do the, initially the asset management and then we're starting to do the more advanced planning, we were taking deeper…I was taking deeper dives into the client's life and what's going on with them. And I started to see a difference of the level of involvement as their CPA versus the level of involvement as their wealth advisor and very two different relationship shall we see, kind of were in two different halves. And it was a fascinating time back in the early 2000s and we initially, when I started because I didn't have any one clients at that point, I thought, well, I heard about these terms, these turnkey asset management platforms and I went looking and came across BAM Advisors who were out of St. Louis who were started by a group of CPAs.

So they kind of understood how we think and how we relate to clients. So we associated with them and what that allowed me to have is a very scalable business. So I pay a portion of what we charge clients to BAM to provide a lot of administrative support, intellectual capital support, which is probably the biggest benefit and a couple of learning groups that we're a part of now as part of BAM. So that's how we got initially started and it grew and grew and grew.

Why Tim Chose To Partner With A TAMP From Day One [9:48]

Michael: So wait, let me pause there for a moment because I actually hadn't even realized…I didn't even realize BAM alliance actually went back that far. So when you were getting started in 2000, did you literally start with them out of the gate or were you doing some stuff on your own for a little while and then it's like, "I'd use…I got to find someone to help and then went to work with the TAMP."

Tim: Yeah. We started with another TAMP. So we started with a TAMP from day one. There was another TAMP that was in Sacramento that we were with them for one year and how they were conducting business was not what I wanted to do so I had to find a new TAMP and came across BAM. And so when we joined them in 2000, they started their TAMP in '97 I believe so. I was one of the earlier folks, wasn't the first one but I was maybe client number 20 or 30 at that point.

Michael: Did you know them through the CPA world then because I know them as the TAMP extension of Buckingham Wealth, Buckingham is an area that's been in St. Louis for a long time, as you mentioned, founded by a number of CPAs. So was that connection how you found them, like some AICPA conference and you met and said, "Here are some CPAs that do a TAMP. I'm going to talk to them." Or did you just find them, like someone referred you?

Tim: No. I heard of them through Irv Rothenberg who was one of the founders of BAM who's in Santa Rosa where we live, in Santa Rosa, California. He was one of the founders of BAM and still involved with BAM. And so when I needed to switch from the current TAMP that we were with, I gave Irv a call and I thought this was going to be…I don't know what Irv was going to say because I wanted to open up a shop in his neck of the woods. And he was so gracious. He invited me to his office that day. Come on down, Tim. And we were literally a quarter of a mile away from each other. At that time, two officers were in town and I went down and spent the next two hours with Irv and he kind of walked me through it. And I said, "Can we join because I don't know if there is a territorial restriction whatever because…" "Tim, there's enough here for everybody. I'd love to have you join us." And that's when we joined in the summer of 2001.

How Tim Navigated Down Markets Through His (Non-Investment) Value Proposition [12:02]

Michael: I'm curious even at the time, really, I'm thinking of this in context to what was going on. So the 1990s, the markets just basely go up a little or up a lot, so you get to 2000 and it's like, "Man, these things go up a lot. We should launch an investment solution." Then you launch it, then the markets go down for a year, then you join another TAMP, then 9/11 happens. So is there a point where you're 12 or 18 months in going like, "So guys, you know that whole thing I had a whole idea, I had like maybe we should just grab this after all."

Tim: Yeah. That never came across my mind in part because the CPA firm was my full-time gig, shall we say, and but our value proposition as I was honing that value proposition, not being sold something came through right from the beginning. And I think clients could hear that in my voice, in my presentation. And back then, I was accused of maybe going a little too deep into the weeds with my clients and I do remember one time when I thought everybody wanted to hear everything that I knew about asset allocation and all that statistical information and I was just like a pig in mud explaining that to people. I went almost three hours one time explaining how we do it and diversification and the passive approach and the Sharpe ratio and how you change and you tweak the portfolio and all those stuff.

I don't think I took a breath for three hours explaining to this prospective client and he's…I said, "So what do you think, Joe?" And he says, "Two things, Tim. One is I get…" or three things. "Number one, I can see you understand this stuff and you believe it. Number two, I trust you so I'm willing to go with you. Number three, I never want to hear this stuff again from you in that kind of detail." I go…

Michael: All right. You proved your point, let's never have this conversation again.

Tim: That's right. So I had to back up because I just was trying to impart all my knowledge on people but it was like it was too much.

Michael: That reminds me what was former experience, I guess, early in my career. I was sitting second chair to an advisor who was talking to a prospective client, like a retiree that was getting to retire, and the client asked something to the effect of so, like how are you going to generate income for me from the portfolio? Very normal question for a retiree to ask a perspective advisor. And so, the advisor couldn't do that similar thing where I probably do in two or three hours. There is probably a good 25 or 30 minutes of just well, here's our investment process and we may enter total return but then, we'll periodically sell things and here's how we do our rebalancing and here's how our tactile process is and we make these adjustments for evaluation, just this whole…the investment's appeal and the awe was pretty all polished and it sounded very intelligent and we got to the end of that conversation and the client asked this follow-up question for like 30 minutes of this.

And he said, "No, no, I meant like how do you get the money into my checking account." So the actual answer he was looking for was just oh, we'll transfer money into your account every month so you can pay your bills. That was all he was actually looking for when he said, "How are you going to generate retirement income for my portfolio?" Like just literally, how will the cash show up in my checking account so I can pay my bills and we had to answer this with basically a 30-minute investment presentation. It was that, I don't know, it was that crystallized moment for me of sometimes we get a little bit too stuck in our own heads, in our routine, and like the urgency we have to show off how much we know and the stuff that we know and it leads us to sometimes, very much misinterpret what sometimes is actually a simple question that just really needs a simple answer for the client.

Tim: That's right. You've got to keep it simple and that was a good lesson for me. We've all, I think, had one of those once or twice in our life like, well, that was not what they were looking for and you got to boil it down to very salient, simple, very simple information so they can entrust, but comes through that though Michael is…what I've learned is most clients, most people, unless they're do-it-yourself, they don't really get into wanting to know. They just want to trust somebody and once they establish that trust, there's a lot of things that go into it but once they establish that you established that trust with them, then you're going to probably go to the next step with them and continue the conversation of becoming a client and remaining a client but trust is a cornerstone. If you violate that for some reason, that would be it. You may still be the best manager out there, wealth manager out there, but if you violate trust, things will change very quickly.

Michael: So you get started out of the gate in 2000, in a CPA firm. So how long were you actually already a practicing CPA at that point? Like how long had you been in the business?

Tim: Well, I got started in 1977. So when we started that in 2000, that was 23 years. I've been a partner for, was that 14 years or 15 years already. I had a good CPA practice, a good firm, great partners, great staff. I really thought well, this is just going to be an additional line of service like auditing is or tax planning.

Michael: So that was the kind of the context. So I'm primarily a tax practice, I do a couple of 100…I have a couple of 100 tax clients but there's a few small businesses where I got to do audits and then I've got these two nonprofits where I've got to do some additional accounting work and I've got a couple of small business clients and hey, sometimes we have clients that ask some investment questions. So let's get an investment management offering for them as well so we've got like another arrow in the quiver to serve to a subset of our tax clients. Was that basically the context?

Tim: That was it. I enjoyed the stock market and how it worked. I go back to when I was in eighth grade, my dad, when he would come home from work, he'd read the Wall Street Journal and it would have pages and pages and pages of stock information. I go, "You know, dad, what is this stuff that you look at every night when you come home?" And he always explained it to me and I said, "Well, could I buy a stock?" And he said, "Yeah, what would you buy?" And I go, "Well, I don't know." But that time I enjoyed drinking Dr Pepper. So I said, "Does Dr Pepper exist as a stock?" And it did. So I took $180, it was a bottle I think then in eighth grade, bought three shares of stock of Dr Pepper and four years later, he split, split, and split three for one, my $108 became $2000 and I…

Michael: Well, that will make you an adherent for life.

Tim: I went and bought my first car when I graduated from high school. It happened to be a Ford Pinto which as we know was not the best the cars back then but…

Michael: So you were a slightly a better stock picker than automobile.

Tim: Exactly. But that's what I had and that was like wow, that was pretty awesome and that was one of the foundations for me back then that enjoy the stock market in college, learn a little bit more about it. I always had a desire to track it and follow it, never thought though I would actually do what I wound up doing in the wealth management side.

Why Tim's Tax-Planning Clients Were Eager To Work With Him [19:45]

Michael: So you get started with this, you got a couple of 100 tax clients, you start offering some investment services to them. So what did that conversation even look like? Were you looking at tax returns trying to spot investment opportunities? Like, "Hey, boy, your portfolio had a whole bunch of losses. Have you ever thought about talking to another advisor?" I mean did it queue up from that end or did you just have clients who would periodically ask you about investments because you're the CPA and you're trusted advisor. And so, at some point, they would just ask about it and you say, "Well, actually we offer that as a service." How did that come about?

Tim: What I started off doing was BAM would do a portfolio analysis if I could get a copy of the statement of their last month statement. So I would talk to the client and explain to them what we're doing and said if you would be willing to let me have your brokerage statement account, I could do a portfolio analysis and see how diversified you are and then make some suggestions to that and we could do it or you could use…go back to them. So we do the analysis and oh, 99% of the time, it was primarily a US, an S&P 500 type portfolio almost every single time. And I said, "You know, you don't have any small stock exposure, very little international, no value exposure." I said, "You don't look very diversified in my opinion here and I think you need to be diversified."

And then we'd show him some calculations, some charts that we had that would show why diversification is so key. And through that explanation, clients started to say, "Yeah, you're right. I'm not very diversified. I think I should. Let's give it a run. Tim, why don't you take either the entire portfolio or take a portion of it." At that time, we started with a $250,000 minimum which I thought was huge. Will I ever get a client over 250,000? But we did and then as time went on, we raise it to a half a million and then we were like, "Do we dare raise it to 1 million?" And we did and that's where we are now. Today, it's at $1 million. We call it a soft minimum. We're not hard and fat. It depends on what they have.

There's a lot of work that goes into working with clients so it has to be worth the time to make it worthwhile economically for us and for us to build that and add value to them for it to justify the fee. But that's kind of that was the progression from 250 to 500 to 1 million. And at this point, that's where we are right now.

Michael: How quickly did it gain momentum then? Because for most advisers, when we got started, I mean, particularly even back then, there was no do not call list yet in 2000. It's like most people who were starting doing investment stuff are cold calling or doing local seminars with ads or your business cards in the fishbowl at the local restaurants. It's like all the strategies that were popular then and some even still today because you're prospecting from scratch to find anybody you can do business with but you've already got a couple of 100 tax clients.

Tim: Right. They trusted me as their tax advisor, tax preparer. So I would look at their tax return in more detail to see who had the assets and then I would talk to them and I'd say, you know, probably in the first year, 10 clients came over. So I was probably at the couple of million dollars within a year. And then the next year, another few million came in. I remember a client came in with $3 million. I thought I'd died and gone to heaven. When $3 million came in, that was a lot.

Michael: And take like 15 years ago, that's a really big number. Especially since he used to have five in 2000 but it was three by the time he got to you in 2002 but that was still a good client.

Tim: And it came up slowly enough that…I mean I wanted it to grow but at the same time, I was still doing full-time on the CPA side. If the floodgates had opened, I would have been a whole different situation. But I was blessed that it just kind of rose 10%-15% a year in terms of new money and kept going.

How JDH's Three-Partner Arrangement Helped Grow The Wealth Management Business [24:10]

Michael: Wait, let me ask something really fast though. As you're getting the business going as like a revenue line in accounting firm, how do you actually split the dollars from this? If like you've got some accounting partners, they were doing tax and accounting stuff, you're not doing the investment stuff. As you started generating from revenue this, does this just go into the revenue kitty that all the partners contribute to and then you take your shares based on your profit interest of the business or did you have some kind of earmarking process or something else that says, "No, no. Tim's building this investment management line so Tim gets the money or the profits or the bulk of the profits or something."

Tim: Yeah, no. Because we did set up as a separate entity, as a separate LLC, but it was just viewed as another line of business for the firm, for the CPA firm.

Michael: So the CPA firm actually owns just the LLC? It was like independent subsidiary but it completely rolled up to the CPA firm?

Tim: No. It's a separate LLC owned by the three partners. That were the three partners in the CPA firm but we just…so we distributed monies, the profits out, one third, one third. That was our ownership. But in terms of the revenue metrics on the accounting side, on the CPA side, that was considered more revenue that I had generated and we split the profits equally but within the CPA firm, that was taken into consideration in terms of how each partner was doing. And so when John, who was a major partner, would decide how the profit structure in Lincoln Hammer, who was the name of the CPA firm was operating, I got credit so to speak for the revenue that I had generated on the on the JDH's books but we just split it three ways.

Michael: So the actual profits of the investment firm just got split by ownership but the profits of the accounting firm actually get adjusted based on revenue development and you got credit for the revenue development of JDH?

Tim: That's correct. Right. That's how we did it.

Why Tim Decided To Bring On His Son [26:21]

Michael: So you're getting a couple of years in, a couple of million dollars is starting to grow, at what point is this no longer just a thing you're doing on the side?

Tim: Yeah. So in 2005, I took seven weeks off. I'm a private pilot and have an airplane. And I wanted to fly around the country and get down to the Bahamas. So I planned this trip and I would be gone for seven weeks as we flew clockwise around the perimeter of the United States, eventually get down to the Bahamas for a few days and then work our way home. And we'd check in one day a week to the office, do it remotely via laptop computer, nothing like you can do today, but was doing it.

Michael: It worked. I remember traveling 2005 with like a really old school version of a mobile hotspot. You could stay connected. It was a little bit of a pain but you could it.

Tim: And so one day a week, I would…my wife would go shopping or go tour the town we were in and I would just camp out in the hotel room for that entire day doing nothing but work. So we're back there and that was the year of Katrina and Wilma, Hurricane Katrina that hit New Orleans in September, early September. We left town on September 27 so that had already happened. And so, we had planned to go to New Orleans but we did not got to New Orleans because of their devastation. And then while we were on the East Coast, Hurricane Wilma showed up and that was the hurricane that ravaged Cancun and then came across Florida and it was expected to hit Florida when we were going to hit Florida. So I did not want to tangle with Wilma.

So we hung out in North Carolina with some friends for like a week. And after we had kind of, I think, probably overstayed our stay with our friends, the BAM conference was coming up that I was not initially planning to go to but I thought while we got some time to deal with because we got to deal with the hurricane. So we decide to fly to St. Louis from Raleigh, North Carolina and go to the conference. And at the conference, Mark Tibergien was one of the keynote speakers. And at that conference, when he spoke, he was talking about…so mind you, here is maybe 50 advisors that are doing full-time CPA work and doing this wealth management at the same time from around the country. And he said, made the statement that, you know, you're probably at some point, if you're working by yourself even though you have BAM at your back office, here's some metrics you have to think about when you're going to bring on your next advisor.

And I was kind of there so I thought to myself, well, my son at the time was working at Smith Barney." He been with them for three years, my son, Matt, and in San Diego. And I thought, "Well, I wonder if Matt would want to come back to Santa Rosa, come back home and come work with his dad." So as we then walked our way home, we were planning to spend some time with Matt and his wife, Allison. We arrived and I broached the subject with him and I said, "What do you think about coming to work with me?" And he goes, "Dad, you do nothing but index funds." I said, "No, no. No, we do a lot more than index funds but you'll need to understand how that works." So we talked and he decided that he would come on board and join me.

So full-time, that was going to be our first full-time employee for JDH and so, I talked with my partners. I said, "I'd like to bring Matt in, what do you think?" And the knew Matt. So long story short, Matt and Allison moved back to Santa Rosa and he becomes our first employee.

Michael: He was specifically an employee of JDH, not an employee of Lincoln Hammer?

Tim: Right. Well, he was technically an employee of Lincoln Hammer but he was working full-time for doing wealth management work. And that was an interesting conversion for him because coming from the brokerage industry, being more actively oriented and I sent him to a two-day class that Dimensional Fund Advisors put on and he had an epiphany at that that he goes, "Dad, I had no idea this is what you did. I had no idea that there was all this academic evidence supporting your approach." He goes, "I get this, I want to do this." Because I told him, I said, "Matt, you're going to have to agree and drink the Kool-Aid and really understand it, come to grips with how we do it because we're not like a brokerage house at all. And so if you can't support what we do, this is not going to be a good fit." And he convinced me that he was…that he got it and he did get it. So he joined us in Christmas of '05 and at that point, we were right around 50 million of AUM, then we hit the recession two years later and that was a challenging time for everybody, for clients and for us.

Michael: So at the point he started, he came on board in 2005 and you're at 50 million, how many clients is that? Because I mean with a $250,000 minimum, I think that's actually a lot of investment clients to deal with.

Tim: Yeah. I think at that point, we were probably pushing maybe $800,000 of average AUM per client, so what would that be? Sixty clients at that time, maybe-ish. That's one reason that I needed some more help because I was still doing CPA work full time. And then so he came on and took some load off of me and we got through the recession which was a challenge for us to deal with that, for everybody. That was not an easy time but we got through that. Our clients, by and large, understood the philosophy of stay put, don't panic. It took, for some clients, more talking, what we would say, had to talk them off the ledge so they didn't jump. But almost every client was able to get them off the ledge and they didn't jump.

And so we got through that okay and hopefully, we don't have to experience that again but you never know and it kept going. And then it was probably in 2009-2010, I started to realize, you know, I really…it became the difference of liking your work and loving your work. I liked the CPA work, great firm, I enjoyed what I did but I was finding I love the wealth management work.

Michael: And what was the wealth management work for you at that point because like I mean for a lot…I think for a lot of advisors, the wealth management work is basely do in all the portfolio stuff and managing the assets, servicing the assets but you're not doing that directly because that's BAM.

Tim: Yeah. BAM gives us the models to follow whereas we still…because BAM is technically an advisor…is a vendor to us. So it's ours, it's our call, we're responsible. We have compliance requirements. So we are running our own shop but we get tremendous intellectual support from BAM.

Michael: So you hadn't literally outsourced the entire back office? Were their hands on running the money? They're giving you the models and they're giving you the intellectual, the investment intellectual property information, but then you still have to hit the button and execute the trades and make sure portfolios are invested and rebalanced.

Tim: Right. So we would meet with the client, we would do a discovery meeting, figure out their need, willingness, and desire to take risk and come up with an investment policy statement that we thought would fit them the best, explain to them how we're going to do it. And so we would roll that out using the BAM software but we would build the model that has suggestive models, portfolio models. And so we would implement those based on what we thought the client needed to do and how much risk they could handle and not panic during a decline and we placed all the trades. But the philosophy was so consistent every time in this passive approach that we follow. We're not doing research, BAM would provide that but they don't do per se no research on where the market is going. They do research on which funds are going to deliver the best stay the course but we're not trying to…

Michael: BAM is kind of…BAM is a passive firm.

Tim: Right. Passive approach. And so as we went through and as clients were coming on, the advanced planning became part of…you know, the investments is part of it but then we're doing more tax planning, finding out what their goals are and then giving them the retirement planning and giving their spending identified during the root Monte Carlo projections to say what should their…what does your spending need to not run out of money? And we incorporate social security optimization into that calculation, so and then tax planning into that in terms of how do we minimize to the extent that we can based on asset location, tax loss harvesting when we have drops in the market to try to whack away at the taxes that everybody has to pay to make incremental improvements in their taxes. But then, the investments though, unless something changes in their situation, we have the client stay the course and stay with that allocation, rebalanced when needed, tax loss harvest when needed and then begin the withdrawals to fund their lifestyle when they go into retirement.

Michael: And so you got to a point where you're just deciding I like that stuff more than the tax prep and accounting work I've been doing for I guess 20 plus years at that point?

Tim: Yeah. I had a number of clients. This was just how the feedback you get from people. I heard many, many times that they said, "Tim, I trust you." And that just kept coming through: I trust you, I trust you, trust you with new clients, even existing clients. And then clients that were tax clients, long-term tax clients, that I'm now managing their money, I would get comments like, "Tim, I sleep better at night now that you're involved with our investments and helping us plan our future." I never heard that or if I did, I forgot about it. I mean clients were very kind and nice but on the tax side, it was on accounting. You know, that was usually never set there. In the tax return, is it more of a…it's a commodity, a necessary requirement for everybody to file but on the wealth management side, you come alongside them and you partner with them and you help…and you find out what's really important in their life, their goals.

On the tax side, you could be coming in for an hour interview once a year and you're focused on getting the tax return done and you don't really have a lot of time to spend to go deep with what's important to them. And if they come to and their kids are all grown, you didn't even know what kids they had sometimes because they're not on the tax return anymore. You don't even know who's in the family. But on the wealth management, we go through them, the discovery update for who the dogs are, the name of the dogs, the cats, their children, their grandchildren. And when people get to talk about their family, they usually light up like a Christmas tree and they love talking about family. They don't really need to talk about their tax return and they don't really necessarily want to talk about their investments. They just want to talk about what they enjoy doing and we're just there to help guide them to do whatever it is that they want to do between now and when they leave this earth.

Michael: Yeah. You don't hear a lot of people that say, "Tim, you prepared that tax return so well. I sleep better at night."

Tim: Yeah. Never got that one, never heard that one.

Michael: That would have to be quite a tax return. So you're going down this road, so I guess, how large was the accounting firm as you're doing this?

Tim: We were around 20 people, 20 staff, three partners initially and then we grew to four partners. And when I was coming to the realization that I really want to do this full time, I was talking to John who was the managing partner and I said, "I think maybe this would be…I would like to do this, go full-time on that." So we bought out…at this point, Cecil had already retired so he was no longer in the picture. And so it was just John and I as the partners in the two firms. And so we kind of horse traded our ownerships. I was bought out of the CPA firm and then John was reduced on to a very small minority position in the wealth management firm because he is not licensed and the only way you can compensate somebody who's not licensed is through distributions and ownership. So I wanted to keep that open because he had been a very good referral source and had sent over some wonderful clients over the years and understood our whole investment philosophy and he got it. You know, not every partner gets it.

And as I was doing peer reviews, and we talk about that with who's listening on the podcast, if they're in this CPA world, they kind of developed as one third ratio where in a firm, maybe a third of the partners could embrace wealth management, getting into this industry. A third might say, "Yeah, I can…I'm okay with it. I can take it or leave it." And a third would probably say like over my dead body, whatever, refer you a client. And I learned that for a firm to be successful in this area, there needs to be a champion that's going to head it up and I was that champion. And I've told firms, if you're going to get into this business, somebody has to be a partner. It can't be your staff, it can't be your manager in my opinion because those who aren't supporting at the partner level, you're going to be walking the gang plank I think.

And so, some firms would listen to me and go, "Well, that's interesting. Maybe we will go give it a try." But a lot of the firms, they just didn't know where to…nobody was going to be the champion. And then within BAM…

Michael: So this isn't the context of accounting firms tax practices, like those multi-partner firms that are doing tax accounting and want to start doing wealth management. Like you can just roll it out as a service, as a thing you do if there isn't some partner that actually wants to champion it and drive it.

Tim: Exactly. Because you've got a couple of objections that would always come up. One would be, if we going into the practice Tim, our referrals from the brokerage industry is going to dry up.

The Typical Amount Of Low-Hanging Fruit CPAs Can Capitalize On [38:34]

Michael: Right. Because now you launch wealth management services, you are competing against your referral sources.

Tim: And so I said, "Well, let's look at the dynamics." And after I did enough peer reviews and then through BAM that we were all coming out it, we were all part of CPA firms. Some may be transitioning out, some staying in it and still doing CPA work full time. I was able to kind of develop some metrics with firms. So the conversation would go something like this. In fact, I just have one at a conference I was at about a month ago down in Southern California and met a partner there, a CPA partner. They don't do any wealth management at all and I said, "How big is your firm?" And they'll go…they'll always give you body count and they'll say, "Wow, it's about 80 people." And I go, "Oh, 80 people? Staff and partners, right? Well, you're about $15 million a year in billings." And he looked at me to go, "Yeah, that's pretty close." And I go, "Yeah, so 200,000 revenue per person." And then I'd say, you know, if you're doing this rounded up to 16 million to make the math easy, I use…I found a multiple of 25 meaning you take your revenue, enlarge your traditional tax practice accounting firm that you have a least 50% of your revenue in the CPA firm comes from tax work, then you got a pretty good client base sitting out there of the low hanging fruit, I'll call it.

And if you multiply that revenue of 16 million times 25, you get a figure of around $400 million of low hanging fruit that's sitting out there within your client base. And when you convert that at 1%, let's just keep the math easy, 1% fee that you're going to charge them, that's $4 million in new billings. That will take anywhere from three years to five years to harvest that, those clients. That's the low hanging fruit that's out there and as I was talking to firms…

Michael: It's an interesting number formulation. I don't know. Can you walk me through that a little bit more of like how you got to 16 million times 25 equals about 400 million of low hanging, you said, fruit. So are you backing 16 million into some approximation of clients and then making some assumptions about how much idol assets a subset of those clients have?

Tim: Well, what I did was so in the BAM network, when firms, when we would be talking at the conferences, when they were all associated with a CPA firm like we were, they were saying, "Well, our revenue…

Michael: That's BAM's thing, is still very heavily focused on CPA financial planning firms that want an investment solution.

Tim: Right. Whatever their revenue was, their AUM with clients, and then they would tell me their billings in the CPA firm, the 25 multiple was seen to be coming out every time and it was true in our firm's case initially. And so, that seems to be…and then firms who have come into the practice now are doing it. After three years, four years, I'll check those numbers again with them if they're willing to talk about them. They usually are. That low hanging fruit multiple of 25, you take the firm's, the CPA firm billings, times 25. That's probably the low hanging fruit that if you have a champion, that you could probably convert those clients into wealth management clients over a three year to five year period.

Michael: Interesting. So basically also 25X at 1% basically means you can add a 25% to the revenue of the firm by rolling this out as a business side. Like if I got a $16 million firm, there's about a quarter of that, 4 million of revenue, that should be on the table in low hanging fruit over the next three years to five years by rolling this out. And I guess low hanging fruit basically just means if you've got enough accounting clients, tax and accounting clients, and you do a good job for them so they generally like you, just you tell them you're now doing this and do a semi-decent job of communicating it and someone looks at me like, "I already like you. You do this great. You want to help me with my portfolio?"

Tim: Yeah. That's it. That's it there. You already have a high level of trust established with those clients and there will be a number of them that will be willing to say, "You know, I don't get a lot of…I don't hear from my broker very often. You can do this too. It's kind of a one-stop shop. Let's do it, Tim." And so, they sign up and become a client. And going back to the comment about the objections from you won't get any more referrals from the brokerage industry, when you do the math here, you say well, how much do you think you get a year in referrals from the brokerage industry and they'll rattle off a number of maybe, you know, they refer five clients a year, 10 clients a year. So maybe $5,000 to $10,000 in new tax prep billings and you compare that to what's hanging out there. It's not even a fair comparison.

Michael: There comes a point where it's like you can lose a referral for a tax client for a couple of 100 bucks to get asset management clients at $10,000 a pop. At some point, you've got enough tax clients that converting a quarter of them to asset clients is going to be way more valuable for the business than just getting a couple of more referrals from brokers.

Tim: And then on top of that, going back to the champion, how, you know, and people have told me it comes…like I said, it comes across when I talk to people that I really believe this, that I really do believe our approach of how we manage people's money and the whole value proposition is such a compelling proposition to people that it's…they haven't seen that level of service before. And being able to let me when they you used to tell me, "G, I sleep better at night," well, they came from somebody who was managing their money before and now, they tell me they sleep better at night. So there is something there that we're able to deliver to help them come to grips with what's going on out there to help them solve their retirement.

The big thing is am I going to run out of money. Everybody has that question. That's the biggest question people have. Am I going to have enough to make it through retirement? And we're able to quantify that for them and sometimes, it's not the answer they want to hear but at least we're giving them an answer that they now have a…we can help them change that trajectory so they don't run out of money or others that they do have enough and it becomes a piece of mind that they never had before. And the investments per se, that's just a sidebar issue, is wow, you've helped solve some serious problems or what about our college funding or should I do rough? What's the benefit of doing rough?

As a CPA, you can do that but at least for me personally, you know, when you're billing by the hour, that sometimes can be an impediment for clients that want to talk to you about that. And so, when you're not billing by the hour, it's fee-based, you can have long conversations and go over that stuff with them and the communication is wide open. Let's talk. We can talk anytime.

Michael: I think it's a fascinating point that you make though. There is this discussion of having a champion and I find just it's hard to…for advisors that aren't already in multi-partner firms, it's hard sometimes to appreciate just the interpersonal dynamics that start cropping up. And when we see this in so many advisory firms as well, when there are multiple partners or multiple advisors, firms often start falling into silos, really, whether it's accounting and tax or advisory firms like I got my clients, I generate my revenue by doing my stuff with my clients. And an advisory firm, it's pretty straightforward because that's what we do, that's what we built the firm to do, that's what we get paid for but when you get into accounting and tax firms, additional dynamics start coming into play. Like so Tim, let me get this straight. I'm going to take one of my best accounting clients who likes me and trusts me and pays me very well and I've got a great relationship and you want me to introduce him to you so that if the market goes down, I might lose my best client. He's going to get really upset and fire you.

And I have to go through that anxiety that if I refer you my clients within the firm, then you get a revenue bonus and I put my client relationship at risk for a revenue loss, for something that I can't control, because I can control the quality of the tax and accounting service because I run that in my area with myself and my support team. But it's scary for me to refer my accounting clients to you within the firm because I put my revenue at risk.

Tim: Right. That was a constant discussion in the firm. My clients were the first ones to…a bulk of the initial clients say in the first couple of years were my clients. John and Cecil and Mike, who was a manager at the time, and referred a few over. The experiences regarding…even, you know, we started in 2000 and March 2000 is when the .com took place and blew up and the market took a hit until the end of 2002 and it was a difficult time to get started. It was a lousy time to get started actually. But our value proposition I think was coming through at that time because we had clients, they weren't knocking down the door, but we definitely had clients coming on board as JDH clients. And they, my partners, took a risk. They didn't really know what this was going to turn out like. I didn't know what it was going to turn out like.

Michael: You want to do what?

Tim: I felt that because of how we were going to do it in this whole passive approach that I felt very confident that we've converted our 401(k), our firm, 401(k), over this whole approach back in the late '90s. So we were very comfortable with the approach. And I said, I'm very comfortable that what…confident and comfortable that what we will be delivering to our clients in terms of how their money will be managed, I think, is rock-solid, very evidence-based approach and it turned out I was right. It was a gamble but I was confident that that would be a successful outcome and clients have rewarded us because they've stayed with us. We've had very little turnover of clients, never lost a tax client because of poor performance on the wealth manager side. Not one did we ever because of that. Some of my first clients on the wealth management, they go back now 15…no, 16, yeah, 16 years, 17 years. That's a long time and they're still with us.

Michael: I'm still fascinated by this. You take the revenue of the firm and about a quarter of that is available for your potential low hanging fruit as potential assets under management. So I'm just curious. If I'm an advisor not in a CPA firm that likes to do relationship building or referrals with CPAs, does this relationship still hold? Like could I go to a CPA firm that's in my area, like they got 20 CPAs, so I can do the math about 200,000 per employee, probably make $4 million and say, all right, I think there is $1 million of asset management revenue on the table for this firm over the next couple of years if we can work through the client base and like go to the CPA firm and say, "So here's the thing, I think there is about $1 million revenue opportunity here so I want to work with your firm and I want to set up a referral relationship and maybe I'll give you a referral solicitor fee for a portion of that $1 million and then our service can do the work." But like could I pitch a CPA firm and say, "You don't even realize the referral potential you've got on your books, let me help you work through that and we'll share the value."

Tim: You could. And there are some of the firms in BAM that have come that route where they came to the firm and said exactly what you said Michael. You guys have a great opportunity here, you have a great reputation in town, you have a great opportunity to develop a new line of service for your clients. I'll run it for you and you guys will get be on the recipient of the revenue stream or the profit stream and those work. Those are a bit more unusual or rare because again, if you don't have, at least from my advantage point, if you don't have a champion at the partner level inside the CPA firm, there is a lot of…you'll run into a lot of resistance with the partners because they don't know what they know what they know which is they get referrals from the brokerage industry. They're not wanting to upset that applecart at this point in time.

They're hearing you say there is all these great low hanging fruit but they don't have any firsthand knowledge of that so they're like, "Well, I hear what you're saying but golly, that's a big gamble." It can work and I've seen it work but I've also seen it work where a champion gets started from within the firm and the, you know, my one third ratio of those who support it, those who are kind of indifferent, and those like no way, if you set it up where all those partners are receiving their revenue stream and your referrals are only come from one third of the clients, you do create…one third of the partners, you do create a problem down the road where they now have gotten to enjoy the revenue stream. They don't really believe in your approach but they like the revenue.

They like their distributions that they get every quarter, every year, however you're going to make distributions to the ownership pool. And now, you have a problem where you're not really embracing our approach. You like the revenue but you're kind of now serving two masters and that becomes a little difficult.

Michael: Is that part of what made this survive so well in your firm, that it wasn't just that you aren't doing internally in that year. You were a champion but that your partnership, profit payouts, at the accounting firm adjusted for the revenue that you generated for the AUM. So everybody got to participate in the profits of JDH but you didn't have to worry as much over this, about building this kind of resentment factors like guys, I build the whole JDH unit and I brought in all the revenue and you're not…and like I just participate with everyone else even though I built the whole thing which starts to feel awkward at some point when it gets big enough.

Tim: Yeah. Well, I was fortunate with John, that John is one of the most greatest guys you could work with and he's very, very fair. And so, it wasn't necessarily a tit for tat. It was kind of more of a ensemble practice than it was a silo practice on the CPA side. Had it been a silo practice and you eat what you kill, I think the outcome could have been very different. So I was just fortunate, lucky that who my partners were, and particular John, that we were able to…we got along on this and everybody benefited and I got credit for the revenue that I was generating out of the wealth management firm just like I was getting credit for my CPA billings as well as whatever everybody else did and then John would kind of work on who should get what in the drawers and it always came out fair and it worked out and we were very, very fortunate.

The other thing I would encourage for those that are listening out there if they do this is, is I would…I've seen a lot of wealth management firms be set up as a subsidiary of the CPA firm and I would keep wealth management firm as a separate entity owned by the partners but not part of the CPA firm because it does make it easier to pull the firm away like we did JDH. I think it makes it easier to run it separately than as a subsidiary of it because you don't always get all of the total buy-in from the partners. And I would say within the BAM group, many of my colleagues out there probably…well, how many? This is just a crazy guess but a number of them have done what I have done and want to go this full time but it has been a bit more difficult to extricate themselves say from the CPA firm for let's say that one third that enjoys the revenue but doesn't want anything to do with the firm but they like the revenue and they don't want to lose that revenue.

And I think having a separate distinct entity, common ownership but not a parent-sub arrangement, I think works, gives you better options in the event you finally wake up one day and you go, "I don't really want to do taxes anymore. I love doing wealth management. I want to do this full-time and let's try it out to figure out how we can work that out."

Michael: But you're generally still going to end out in the world where if I'm the advisor that did it, built it, grew it, love doing it, want to do it full time, and want to get out of the annual tax season roller coaster, like I'm still basically…I'm going to have to buy this thing out. I mean do I just have to accept that going in? My partners aren't going to be on board unless they own a share but if they do and it grows well, at some point, I'm going to have to buy out their share and…

Tim: Yeah. That's what you're going to wind up looking at. And then on our situation, I had ownership in the CPA firm. So we were able to…those were not identical but they were close so we were able to offset on that. And so then I was completely bought out of the CPA firm and John was mostly bought out of the wealth management firm and Cecil had already been bought out of the wealth management firm earlier. So yes, we had to go through those buying out their positions but it was…that's just what you had to do. I was a one-third owner and then I became a 50% owner and then I'm a majority owner now with John, a minority, and then my son, Matt, who is a partner. He became partner seven years ago. He is now an equity partner in our wealth management firm. So we're the three owners now. So we could call it JDDH because we've got two Delaneys in here now running the show.

Why Tim Decided To Go Full-Time On The Wealth Management Business [1:00:27]

Michael: So when did this swap happen where you decided I just like the account…I like the accounting. I like the wealth management work more than the accounting and tax work so I just want to go this direction full time. When did that transaction actually occur?

Tim: Well, the thinking began probably back in 2010 and then it was as of 11/2012 when the transactions took place. And then we had two years later, so 2014 I guess it was. Yeah, 2015. 2014, we're still all in one building and we'd been in that building for seven years and John came to me and he said, "You know, we're at capacity seat-wise here on the CPA side and at that point, I was not doing any CPA work per se but we were still…the four of us were still over there occupying four seats. And he said, "By next year at this time, one of us has to move out." And I go, "Well, I guess that's going to be us because we're only four us and there's 20 of you." So we turned out we're able to move right next door to a building adjacent to where we currently are. I still maintain a one-stop shop.

That was probably a big turning point for us because now, I think there was…when you're inside the CPA firm physically, I forget how the ownership is structured, but physically, once you come out, we had the comments of like, "Wow, you guys are now a legitimate firm." And last year, 2016, was our first full year of being in our own space and last year was…we grew by one-third. We grew by about $50 million last year. It was huge. And I think part of that was, in part, was now, we're maybe more legitimate and we were legitimate then at 150 million and we got up to 140, now, we're at 190 at that point. So it was a legitimizing kind of event that took place. It was just kind of we needed to move because they needed more space and it worked out and I was like, "Oh, this has worked out well."

Michael: So how big was the firm when you made the transition to go independent in 2012 then?

Tim: That time, we were probably 110 AUM, 120, 120 million AUM. We're 200 now, today, 200 million of AUM. Yeah, probably 120.

Michael: But wait, but you said Matt became a partner seven years ago. So Matt was already a partner in 2010 before you actually did the split?

Tim: Right. Right.

Michael: What did that process look like? Was Cecil already out or did Matt buy Cecil's share or how did you add him in?

Tim: So Cecil was out at that point. And so, Matt's ownership had begun and we…I developed a five-year plan for Matt to gain equity ownership over a five-year stretch and then we…so then the ownership was just between John and myself at that point in time because Cecil was out. Matt had his own…we had a plan for him how to acquire ownership from me and then John and I were then kind of horse trading what I had in the CPA firm with his in our wealth management firm. So we worked it out that way and then struck that deal in 2012.

How Tim And His Son Are Designing A Succession Plan [1:03:58]

Michael: So, you know, family transitions are challenging for many. So how do you approach it? Are you transferring shares to Matt because it's a family planning strategy? Is Matt buying shares from you? And like this is the same as an arms-length transaction where you just happen to get a first chance crack at the deal because he got the job because he was part of the family. What did that look like for doing a family transition?

Tim: So we have two other children. And so, I told Matt, you know, we have to keep this relatively arm's-length because if I give you a super sweet deal than your sister and your brother, kind of lose out way down the road and he understood that. We've just been doing 5% increments and I wanted to get him up to 25% ownership position. And so, each time we did that, we would come up with a evaluation, an internal evaluation. I put it together and which shows…

Michael: You didn't send it out to a third-party evaluation service? You decided to just keep it internal and do a reasonable estimate yourself.

Tim: Right. And I had enough metrics from other…the BAM firms, what everybody was out there doing to the extent that that was a good one. And I used to do evaluations back in my previous life. That was another line of service we did, I did in the '90s business highway. So and it…

Michael: It's a steady recurring revenue business, this kind of cash flow calculations aren't that too terribly…

Tim: Right. Not too bad. And I would check with some of my colleagues and the numbers, they thought, "Yeah, on service, that makes sense." And I was not trying to get, you know, being my son. I wanted to be fair. I want to be fair with anybody whether they're my son or not my son. It's got to be fair for both parties. And so, we would make some adjustments. Sometimes Matt would say, "Mmh, that might be a little high." So we would talk it through why or why not and try to come to an agreement. And fortunately, we were able to work it out. We never had any big roadblocks there. Schisms set, that came along.

Michael: How do you actually structure these kinds of deals? Does he make a down payment and then pay the rest over time? Do you actually send him to a bank to get a loan or are you effectively financing the loan? How do you actually do an internal transition? So if it's external, often I might want them to…I mean you can finance with the bank loan. I don't need to take your buyer risk but that's a little different when it's family, I think there are upsides and downsides to that.

Tim: We did the bank of bad. I did it. I internally financed it. I carried the paper. And part of that was, have being my son and he's working with me, huge amount of respect for Matt and trust. He is the future of the firm. And so having him go out to a bank would be onerous. And so I was able to cut him a little bit of a discount in the interest rate to make it a bit more palatable and then no down payment and…

Michael: You can actually do really inexpensive inter-family loans.

Tim: You can. And so we'd look at the AFR and bump it up a little bit. So he was getting a good deal and I was, you know, he is really part of my long-term exit strategy, is Matt is my exit strategy and he became managing partner earlier this year and that's part of…I'm going to retire now, about four years from now. That's the plan. Clients, when they got the postcard that Matt was now the managing partner, and they were asking me, "Are you quitting? Are you retiring?" I said, "No, no. Not for four more years but we're starting that transition and part of that transition is giving you, the client, to understand that I'm not going to be here forever and Matt is going to be taking over." So he's now the managing partner of our firm and I, in essence now, work for Matt and it works really well.

When you watch your son or child to claim business, you know, he's watched me and now he's doing stuff better than the way I did it and I think part of that is he got to see me do it and saw what he likes and what he doesn't like and he's made some changes as we move through time and it's been absolutely wonderful.

Michael: Can you tell us a little bit about what the firm looks like today? I mean where are you now? You mentioned you're close to $200 million of assets. So what's the fee schedule and structure of the firm? Where does that take you to in terms of revenue of the firm?

Tim: So we're right about 1.4 million. So our average fee is about .7% 70 pips because we have a sliding scale and the rate goes down as clients have more money. Matt and I are the two partners and then we have one and a half staff, full-time staff, a full-time equivalent. A full time, our office manager Sadie, and then a half time, 20-hour support lady, Eve. It's the three and a half of us so to speak or four of us here.

Michael: Those are some very solid metrics to have, $1.4 million on two partners and one and a half full-time equivalent. So if it's 200 million, how many clients is that? How many actual people do you have to meet with and tend to?

Tim: We've got three-quarters of our clients are individual clients and families and then a quarter of our business is 401(k)s plans. We have 16 401(k) plans right now. And so total clients is right around 120 total clients that we service.

Michael: So kind of 60 for you and 60 for Matt, give or take a little and one and a half support team just to handle all behind-the-scenes for 120 clients.

Tim: Exactly.

Michael: It's a pretty solid average client then so if I’m at, well, granted the 401(k) plans probably distort that a little but 120 clients now, like that's a $1.6 million-$1.7 million average clients at this point?

Tim: Yeah. Exactly. And we have with the 401(k) space that we have enjoyed doing that because we get very passionate on trying to explain how to save money for retirement. So we've been blessed to be able to now have, I think we're up to 16 or 17 401(k) plans in our area and we meet with…we offer to meet with any individual participant. They can come into our office and meet with us at no charge as part of our offering to help them with…if they want to come in with their spouse or significant other or if you want to come solo or if it's just themself, help them with their personal planning and that's just part of our offering as part of managing the 401(k). Fortunately, we don't get a lot of take on that. If everybody showed up, we'd have to figure out how we were going to do that because we would be buried.

But in fact, just yesterday, I was doing a 401(k) meeting with one of our clients and trying to explain to them about saving and walking through all that and they said, "Tim, we never got this with our prior firm that was managing our 401(k) plan and you guys really seem to be about this saving for retirement and giving us examples, simple examples of why saving is so powerful. Start early, start young, and keep going and you'll have a nice pot of money out there when you get to retirement." And that seems to come through very loud and clear with our clients because they tell us that that this has been really helpful to them to help them start putting money into the 401(k) and it is so critical. There is such a shortage right now in our country. People aren't saving for retirement and 401(k) is for a lot of people. That's about the only place they're going to save. So we're trying to move the needle to the extent we can impact that. We're trying to move that needle to get people to save more money.

Michael: I'm curious a little bit more about fees. Your average billing service is coming out right around 70 basis points at $1.7 million clients. We saw the list that industry benchmark rule of thumb of 1% is the going rate on wealth management as an AUM fee. So I'm just curious how you think about fees or look at that number. Do you just think 1% is high and you feel a lower number is more appropriate or is this like a partial curve out because you've got a TAMP. Your BAM alliance is in the background and there's a TAMP fee so you adjusted your fee down a little bit because BAM's got to pay for what BAM does and that's just how you would kind of allocate the fee to get to an all-in cost for the clients. How do you think about that fee structure?

Tim: So our stated fee structure, we start at 1.5% on the first $500,000 of AUM and then as the AUM goes up, we're dropping down into the tiers. So the blended rate, the weighted average blended rate, starts dropping down as they have more assets.

Michael: So you must tier down pretty quickly if you start at one and a half but ultimately, you get down the .7 across the firm. And I guess some of that's probably 401(k) assets that distorts the average.

Tim: And then out of that, we share a percentage of our revenue with BAM for what they deliver to us in support.

Michael: So that's an interesting point. So you don't say that like, "Okay, this is my fee for advisory and then BAM has got a fee over there that's going to be for their investment management stuff and then, hey, there is some ETFs and those have their fees and like just layered out." You just charge your fee, you start at 1.5 and it drops down and you just pay BAM out of your share, out of your billing for their services?

Tim: That's right. Yeah. And so we have a set rate and those rates with BAM depend on the size of the firm and all that but it varies and it's very scalable because that rate stays relatively constant, that percentage. And so as we grow, they make more money and if we have a big hiccup in the market and we decline, they decline in revenue. We're on the same side of the table and I've had the discussion…in fact, we were looking at trying to acquire another firm here in Santa Rosa four years ago and we were in negotiation and then they decided to do an internal succession plan. And so we weren't successful in buying their practice but we were about, at that time, we were at 120 million, and their firm and my JDH and their wealth management firm started exactly at the same time and they were at 60 million and we were at 120. And he was not with a TAMP.

He was just doing it direct with the custodian and the mutual fund companies and they were using Dimensional like we use, DFA funds. So philosophy was very much in alignment and he says, "Gee, Tim, you guys pay that BAM fee," and I said, "Well, but Rick, remember, we're twice as big as you are and I don't think we'd be twice as big as you are if I didn't have BAM to provide a lot more support." So yes, there's a cost to that but I wouldn't do it any other way because I don't…I am still running a full CPA firm practice like he was but I wouldn't want to be lone ranger in trying to do this because I want…there is a lot of smarter people out there and BAM has, or probably any TAMP, but BAM is the only I can speak with, for about, have tremendous intellectual capital.

I can quantify the software that I don't have to buy and the work that they do in billing and sending out quarterly reports to us and all the stuff that I can quantify. And then there's a component that I can quantify what we would pay if we did it ourselves and what I paid them and there's a delta. There's a difference that I can't quantify and I call that the intellectual capital gap. And I can call back there and talk to Lewis Larry Swedroe or Jerry Kaiser and one of those guys at any time, they come out and provide speakers for us at no charge to meet with our clients. If a client sometimes wants to talk to one of them, I can get them on the phone and we've become like family and we have the annual conference that we go to. You've seen that in action.

And it is just, man, I talk about that because every year…three years, the contract comes up for renewal and it's not even up for…I mean it's up for discussion but the discussion lasts about 10 seconds. We're going to renew. And they just give us a lot of support and I wouldn't want to be on my own without their support and I know there is cost to it but we're doing very well and I've got a lot of backup support and it just works. So I love it.

Michael: So at this point, does BAM do any more of that back-office and training kind of stuff or that, you actually still do internally, you and Matt and your staff support because you find it manageable at 120 clients?

Tim: Yeah. That part has not changed so we still do all that here. We're using their platform but we do all that here. We just upgraded the software and they went out…we went to Orion or they want to Orion and so, we're just now in the process of migrating from an internally developed software that they had at BAM to Orion, who they purchased their software and modified it to fit the BAM community and all that is part of what we pay them so there is no additional charge that we have to pay for the conversion to Orion.

Michael: The technologies is kind of bundled into the platform that they're providing you. And where do you custody assets?

Tim: There's three custodians we can use. We use two. We use Schwab and Fidelity. TD Ameritrade is the third one that we currently don't use.

Michael: And then how do you actually get all of this trading done? Like how do they transmit models to you or changes to models so that you can execute this? Is this rebalancing software that you work off of or spreadsheets or?

Tim: Yeah. So it used to be spreadsheets but it's now all interactive. We get online onto the BAM report center website and now, it's Orion and all of our client information, they download…do the downloads every day. They reconcile that for us. We don't have to do that. We have a few clients that have both Schwab and Fidelity so all that comes into one spot. So all the client data there and then we go on and look at it and then we get notification. If they're out of balance, we look at that to see what's out of balance and we do have discretion with all of our clients. So we're able to rebalance them and usually, we'll send the client an email saying, "Hey, just to let you know, we're rebalancing your account. You're going to get a couple of notifications from Schwab about some trades. Here is what we've done to get you back online and the way we go." So that part is relatively easy. It's one of the first things I do in the morning to get all that, see who is out of balance and what not, since the market on the West Coast, we got to be done by 1:00.

Michael: And then those trades queue up in just directly to Schwab and Fidelity? How does all of these models sort of happen because Orion is not a rebalancing software but they're building one but they don't have one yet?

Tim: BAM has got the software and we go on and we populate what we want the trades and then we create the trades and then those are sent to BAM and then BAM sends those to the custodian to execute at the end of the day.

Michael: And they just do, oh, because your BAM heavily uses DFA which is mutual funds. It's like you don't have to punch in a real-time trade in the middle of the market day. It's going be closing at the end of the day.

Tim: Right. I mean the only time we're dealing with individual stocks is when we're selling them because we don't do individual stocks. We don't believe in individual stocks. If a client wants it, we make sure that's their fun money if they want to play in with individual stocks. It's almost 100% mutual funds with DFA. AQR, Bridgeway. Those are three that we use most of the time. We can use whatever we want. It's up to us. With BAM, we can buy anything we want for our clients but they do the research, we review their research and generally, we're following what they're recommending on the recommended list. And after they have done the vetted funds and the fund families, those three.

And so it's a great relationship. And so we don't have to do that type of heavy lifting. BAM does that for us from their investment policy committee that they have and that's a very robust committee. We get their committee notes. They are very open about how they came to their decisions. We can change from that if we want. Once in a while, we do. By and large, what they've adopted has been very well vetted and reasoned out and we follow it.

Michael: How do you actually handle just all the meetings with 120 clients at this point? Are you a firm that meets quarterly or just twice a year? Do carve up the meetings or you see some clients and Matt sees others or do you see all of them jointly, so it's you and Matt? What does that process look like?

Tim: So some of our clients, we meet together with, some, we meet individually with, split up about 50-50, 50% mine, 50% his. He manages the 401(k) practice now. And so I will come in and help out when he needs me to go do a participant meeting or an enrollment meeting. I'll go out and do one for him if he's not available. And so most clients, when we meet with them initially and they want to come on board, we'll ask how often they want to meet. I'd say most folks in the beginning were probably going quarterly and then we'll back that off to semi-annually. Some clients want to meet once a year. So it's up to the client how often they want to meet. We'll meet with them as many times as they want to but I'd say twice a year is probably the typical for our clients. So I've got 60 meetings, or what would that be, 120 meetings spread around the year.

Michael: Okay. So I mean that's two or three meetings a week plus a little for some holidays, so very manageable volume.

Tim: Very manageable. Right. So we plan, what we do is we use Junxure as our CRM and we've got that pretty well dial in in terms of our process. That's been so key as to have your processes figured out.

Michael: And I know Junxure is pretty robust on planning firm workflows and processes because the…Greg Friedman is the founder and he comes out of an advisory firm and like he's lived it and run it. So he's with some so many of the tools in our advisor industry. Advisor had a problem, made software to solve the problem, it worked well, sold it to some friends, made his main software business, right?

Tim: That's exactly, yeah. It works very well for us and we've got…there is a learning curve there but now that we understand how to run Junxure, we can…in most of it, we can make this sync pretty well for us for what we're looking for. And the biggest thing now is now, I think this was my fourth non-tax season year and I don't miss taxes and all. I mean I enjoyed the work, I mean I enjoyed doing the taxes but it's like I tell people. It's like if you have to commute a lot, you rise to the occasion and you rationalize, it's not that bad. And tax season, I did it for 37 years and I just did it right after Super Bowl Sunday, tax season starts and it was good to go for two and a half months. And it was a fast-paced time.

When it was over, once we got to April 16, that was great. It was like, "Wow, I have my life back together again." Once I don't do any more, it's like, "Wow, that's like this is really." So it's just a different time of my life that I'm not doing it and going back to what I said earlier, I liked the CPA work, I love the wealth management work and I now see the two differences and I wish I could've done this earlier. But the way it's worked out for me, I have been very blessed that it's all worked out without too many hiccups and we've got a pretty nice client base, pretty nice business, working with my son, ooh, I love it.

Michael: So when you look back on the path, the journey over this particular, the past 17 years since you started on the advisory firm road as the extension from the tax and accounting work that preceded it, are there particular crossroads or junctures that you look back and say like, "This is the big thing that we did when we got it right." I mean did it just come down to hey, everybody, just launch a tax practice…launch an involved wealth manager from your tax practice, trust me, the dollars are there and the business is going to come or do you look at it differently?

Tim: Well, if you're talking within a CPA firm, I think the easiest route to go would be to align with a TAMP and there's a number of them out there. So you've got to find one that fits your philosophy. BAM because they were…they are CPAs, they get our industry and how we operate in tax season and they're very respectful of tax season because a lot of the guys do taxes still. And so they have to, you know, there is no conferences during tax season. But because it's so scalable, you pay as you acquire clients. You can do without it but…

Michael: Right. Because you pay basis points, because you don't have to pay a lot until you've gotten a bunch of clients. That's really convenient for growing a business.

Tim: And you can part ways if you want to go on your own at some point and they understand that but you've got a look at if you're making a good living, yes, you can make more money but there is no free lunch out there I've learned. So you can do it yourself and make a little bit more money but there is a cost to that which is where is your intellectual capital going to come from, who do you lean towards or lean on when you need help? Clients have issues. I've got a learning group within BAM that I reach out to. We talk like every two weeks for an hour and I'm sure that could be developed if you're on your own, it was Schwab and just going with Schwab direct. There is firms that do that and they're very successful at it but I've always wanted to be…

I was told when I was doing the CPA work full-time, I would never want to be a CPA by myself. I always want somebody there, few people that I can bounce ideas off of, check my work, make sure we're doing it right and when you're a sole practitioner all by yourself, you're it. And a lot of people do it that way, there's no question about it, and they do a very good job. This just wasn't my style. And so, you got to know what you're going to be comfortable with but there is a lot there to learn.

Michael: It is an interesting trade off retention that I find that for a lot of advisors, like when you're building from the start, often it's pretty easy to build an a TAMP because frankly, you don't necessarily want to spend all the money in dollars in stuff and time it takes to hire and build out or even just the time it takes to figure all these stuff out especially when you're already in a situation like a tax and accounting practice because you've got other things to do. It's a little easier when you're starting from scratch and when you have a lot of time and not a lot of clients, you can make different trade-off decisions but when you're getting started within a firm and within a practice, you can't do that or you're just…you're not going to have the time. You're not going to be able to get done what you need to get done. So the outsourcing decision becomes so much more appealing and easier when you're starting but much harder when you do it later because once you've got the revenue, it's hard to adjust to giving it up even if maybe you're in for the business. It's a hard transition.

Tim: Right. What we have though within the BAM community, there have been firms that join BAM that are already up and running, that are 100 million, 200 million, 300 million of AUM already and they have been doing it themselves but they see what BAM will bring to them to help them out and they take an immediate income hit to bring BAM in and you convert over to the BAM methodology in their website and all that which that gets worked on behind the scenes. So firms have come in when they didn't start from the beginning and there have been a couple of firms who have decided to go off on their own and not use them anymore and they think they can do it and when I see them doing that, I wish them well and I hope it works for them because that's what they're going to try to do.

So everybody is going to be different as to what works for them and how comfortable they are being a lone ranger versus having somebody to provide a second opinion when you have an issue come up from a client or internally, how do you do it? And in fact, when we started back in 2000 to this day, once clients kind of understand who BAM, it's a little bit of alphabet soup because we got JDH, we got BAM, we use DFA funds. It gets a little confusing who's on first and what's on second but nevertheless, having that their…for clients to know who's behind Tim and Matt, it's not just Tim and Matt even though we're an independent company and BAM is legally a vendor to us. That gives some reassurance that it's not just us doing this.

We're 140 firms, I think up to like $29 billion dollars under management within the BAM community around the United States. We've got some horse power but even back in 2000, we were much, much smaller. We still have some horsepower behind us to help clients solve some issues. And if I get a question that comes up and I'm not sure, man, I can call a variety of people at BAM to help solve that problem and if I didn't have BAM, I'm not sure how I would get those problems solved. And that's the key. Then I get back to the client and say, "Hey, this is what we've come up. Let's talk about the solution. This might be a way we can go." And it just works and it doesn't take that much time because I've got that intellectual capital to draw from.

Michael: So as we come to the end, this is a show about success and one of things I always talk about on the podcast is that, and we really hear from our guests, is success means different things to different people and even different things to us at varying points in our lives. So as someone who's built what I think most people would objectively call a successful business of $1.4 million of revenue with two partners and one half full-time equivalents and bringing your son into the business and executing a succession plan, the business is working. So I'm curious at this point, how do you define success?

Tim: Well, from a business standpoint, being able to have transitioned my son into the firm has been a huge success. When he and I talked back in 2005, we had a relationship of father-son and now we're going to go into employer-employee and hopefully, partner-partner down the road, but you don't know what's going to happen when you start working together and we were very frank that in six months, we may say, "Yikes, this isn't working and yet, you're still my son, I'm still your dad and that's never going to change. So that can be awkward going forward at Thanksgiving or Christmas when we get together." So there was a risk there. So I would say that success is, from a personal standpoint, being able to work with one of your kids and have them come into the business is like…you know, if you had gone back 30 years ago, I would have thought well maybe that might happen but I'm not sure if it will or not, but the fact that it did, I'm very blessed that that worked out as well as it did.

Being able to go from one industry to another industry without too much of a hiccup was, would be success, to go from doing CPA work full-time to doing wealth management work full-time and extricate out of one environment and get into the other environment full-time and still have a good relationship with the CPA firm is, I would call that success. And the clients telling me that they sleep better at night, that's like over-the-top success. So I sometimes, Michael, we'll look at this and go, " I can't believe this is where I'm at at the age of 62." This has worked so well. I am so fortunate that this has worked out. I've been able to help many, many people and we've got a very good business and having, you know, talking to Irv Rothenberg back in 2001 and he was kind enough to spend two hours with me and he said, "Come on in, I think you'd be great if you start a new firm or be a new firm within the BAM community." I was fortunate there. Sometimes, I was just lucky. The Lord just blessed what we did.

Michael: Very cool. Thank you. Thank you for joining us on Financial Advisor Success podcast and telling your story.

Tim: Well, thank you, Michael. I appreciated the time and sincerely, I appreciate all that you do. This is just super awesome, so I thank you.

Michael: Wonderful. Thank you.