#FA Success Ep 246: Finding The Right (Valuation) Formula To Give Everyone Buy-In For An Employee-Owned Advisory Firm, With Jessica Hovis Smith

Resources Featured In This Episode:

• Jessica Hovis Smith
• Longview Financial Advisors
• Tracy Beckes
• Half Time Institute
• Chartered Advisor in Philanthropy
• FP Transitions
• Tim Kochis
• Live Oak Bank
• CIMA Designation
• Lean In by Sheryl Sandberg

Full Transcript:

Michael: Welcome, Jessica Hovis Smith, to the Financial Advisors Success podcast.

Jessica: Thank you, Michael. I'm excited to be here.

Michael: I'm really looking forward to today's discussion and talking a bit about succession planning. I feel like succession planning is this thing that's been out there for our industry particularly over the past 10 years, just all the industry demographics, average age of financial advisors, 50-something, almost a third of advisors, are 60-plus years old. We're kind of getting to the traditional retirement age. And so, we've had just all this discussion, mostly steered at founders of advisory firms that usually go something like this. “About five years before you're planning to retire, you should hire that younger person to come in and train them up. Introduce them to your clients. Get them ready to take over your practice. Then in about five to seven years, you just transition the firm to them and ride off into the sunset and everything works great.”

And, in part, I know the realities. It's never that simple because we're all human beings and we have our wonderful complexities. But I feel like there's very little discussion in practice of what succession planning's really like when we get to some of those moments of figuring out how are we going to transition ownership and management and responsibilities and get through this. And I know you have been living some of that journey over the past decade or so. And so, I'm looking forward to having a discussion of I guess just like what does succession planning really actually look like when we're trying to transition a firm from founders to the next generation.

Jessica: Yeah. And so, the answer, there's no straight answer, right, because it just depends on your firm and how you operate and what your goals are and what you're trying to achieve there. But for us, it has certainly taken more than five years. It's taken a decade and we're still working on it. And as we transition from G1 to G2, we're now having to start to look forward in the future to transition to the next group at some point. And how do we continue the succession plan? And that's an important piece that often gets overlooked, as well.

Michael: So, as we get started, maybe just paint a little bit of a picture for us of the advisory firm as it exists today, just so we understand the overall context of the firm. And then, maybe we can talk a little bit more about how we've gotten here and how some of this has evolved over the past 10 years.

What Longview Financial Advisors Looks Like Today, Who They Serve, And What They Charge [05:12]

Jessica: Sure. So, as of today, we have assets under management around $194 million. We do offer financial planning and wealth management services. And we do that for 199 clients. Of the 199, I would say around 166 are probably receiving ongoing financial planning and wealth management services right now. The other 33 are either adult children of clients who have started their own accounts, they're inheritors, or they may have worked with a company of a client as an employee there, and we started a SIMPLE for them or something of the like. So, we have a staff of nine. That includes three people in the lead position role on the financial planning side, one associate advisor, a CSA, an office administrator. And then, we have three people who are on our investment team, which includes a chief investment officer and two portfolio managers. And that's gonna change near the end of the year with one of them entering semi-retirement.

And so, we do this in two locations. We have a location in Huntsville, Alabama. And then, our second location is in Gadsden, Alabama. It's about two hours east of where we are located in Huntsville. And we offer services primarily to two types of clients. The first is a young professional couple with a family who either currently gives or volunteers or is looking to do that and just hasn't found their spot yet, or they're someone who's a pre-retiree or early retiree who also has a heart for giving, either through their time, talents, or financial resources.

Michael: So, a few questions here just understanding a little bit more about the firm. You make this distinction of financial planning services and wealth management services. So, what's the difference between those two for you in the context of how you serve?

Jessica: Right. So, we actually are a merged firm as of 2010. And part of that merger was the fact that we had one firm that was very planning-centric. They offered investment management services but the focus is really on the financial planning. And then, the other firm, while they did planning, their focus was more towards the investment management. And part of that merger was to allow people to find their spot, their seat on the bus if you will. So, at the time of the merger, we actually created...we bifurcated our services. So, we have a financial planning department, and then we have a wealth management or investment management department. And we collaborate quite a bit. But we don't have people who work on both teams. It's, you're one or the other.

Michael: Okay. And so, in your context, like clients that engage with wealth management services are going to be having some kind of ongoing portfolio management offering. Those who engage with financial planning or financial planning only might literally be planning only clients, not necessarily getting any investment management, portfolio management.

Jessica: Right. However, still, most of our clients are getting both services. And so, they have a team that would have two people from the financial planning side and then, one person from the investment management side.

Michael: Okay. And so, part of that distinction of the investment management side of the business is separate from the financial planning side of the business. If you're a client of the firm and you are engaged with planning and investments, you actually have a multi-person team of someone from the planning side and someone from the investment side.

Jessica: Right.

Michael: Okay. And is that separated from a pricing perspective as well? Like, do you charge planning-only fees for planning clients, investment fees for investment clients, and like a planning-plus-investment fee for both, or how does pricing work?

Jessica: So, not originally when we merged in 2010. However, in 2018, we did change that. And so, we had that bifurcated where if you came in for financial planning only, you were just given a proposal based on complexity for the financial plan. And that was a one-year agreement. And then, at the end of that, the idea is that you would likely transition to either being a financial planning and investment management. We had a few who didn't but most people transition. And then, the second group would be someone who's wanting financial planning and wealth management. And if you're in that group, then you fall in one of two categories. Either you're in our Capstone model, which are those who are the pre-retirees that I was talking about earlier, and retirees, or you're in our Cornerstone model, which are those that are in their 30s and 40s and trying to start out. And in both of those cases, it's a bifurcated fee. So, there is a fee for financial planning, and there was a fee for investment management. And it was reduced investment management fee. So, if the average AUM is 1% of the first $1 million, we would start at .6% for the first $1 million. But we were charging a true financial planning fee on top of that, so that was the next piece.

But we changed that, actually, this year because we realize that is a lot of work. It is really difficult. And our plan in doing this was, one, we wanted to show value on both sides. And, two, we wanted to make sure that people understood that where the value really was in our book was in the financial planning that we did. And so, we wanted to be paid fairly for that. But honestly, people don't understand the difference. And now, they're having to pay a financial planning fee out-of-pocket. They can't debit it from their IRA or whatever that looks like. So, we had several people saying, "We don't want to do it this way. We prefer to do it AUM." So, we've stepped back and listened to the clients. And we're changing now to actually move back to an AUM schedule for that Capstone model, so that financial planning and investment management for those who are retirees or pre-retirees. And then, for the people who are starting out in their 30s and 40s, we still have that fee bifurcated because, usually, they don't have as much in assets but they still need a lot of financial planning work. And so, we still do that. And they, basically, can move into the Capstone model over time. And then, they would switch to an AUM model at that point.

Michael: So, what kind of base fee do you set for planning to cover your time and protect your time for Cornerstone clients?

Jessica: For Cornerstone clients, so we try to start at a base fee of $4,000 to $5,000. And a lot of that might be made up through the AUM. So, the planning fee tends to be less. But yeah, that $4,000 to $5,000 range is where we need them to be, generally, for a Cornerstone.

Michael: And then, what is the AUM fee if they actually do have some assets, as well? Are you doing a blend or an offset or just Cornerstone base fee starts at $4,000 for planning and X percent on your $200k or $400k or whatever it is that you have and your fee is column A plus column B?

Jessica: Right. It's column A plus column B. However, we changed the AUM schedule this year, as well. So, as I mentioned before, the AUM schedule before when we first bifurcated was .6%. So, now, it's 1%. So, the AUM schedule is higher but our starting fee for financial planning has been reduced.

Michael: Because previously, it was an even higher base fee?

Jessica: Right, because at the end of the day, you have to get paid for the hours that you're putting into it. And we are a young firm. We have two individuals who are either going into retirement or semi-retirement at the end of the year. And when that happens, the oldest employee will be 44. And so, we have naturally seen our average age of the clients go down because of the age of the people who work at our firm. And to do that, we needed a way to get 30 and 40-year-olds comfortable with coming to work with us and, also, us to get paid fairly. And so, we do look at that every year. We look at what our minimum needs to be. And it really depends on where the complexity is for that client and where we think our minimum's going to be. And then, we back into that financial planning fee to some degree at a minimum. Now, if it's someone who's going to have a lot more complexity, so you have someone who comes in and they are starting a business but they don't have assets and they're looking at accruing assets over time, or it might take them a decade to get there, we might charge a much higher financial planning fee because we know the assets under management fee is going to be lower. So, it's still a proposal-type situation based on what their needs are and what their complexity is.

Michael: And if they are Capstone, so they're over the $750,000 threshold, then it's just one single AUM fee?

Jessica: Right. And so, there has been a lot of conversation in our industry and also in our firm about is AUM going away? And there are people on both sides of this fence. But we strongly believe it's not going away, at least not any time soon. And, in fact, our experience has shown us that that's what prospects know. When they do their research, that's primarily what they're finding. And they find it sometimes more complicated to understand the split fee than just a straight AUM. Just listening to me talk about our process and our fees, you probably understood the AUM fee a whole lot better than how we do the split fee. It's the same way for people outside of our industry.

So, we don't think that that's going away any time soon. So, we've taken the step back to go back to AUM and understand, at the end of the day, it's better to... As long as our clients feel like they're getting the value that they need and they understand the fee schedule, we don't have to prove anything to them, right? We came at this thinking we want to show them there's value here. And this is we don't want you to be focused on the investment piece. But if a client's coming to us for financial planning, they're not focusing on the investment piece unless we keep putting investment pieces in front of them, right? And so, it's changed our way of thinking about it a little bit. We got out of our heads and started listening to our clients more.

Michael: So, effectively, the base planning fee for Cornerstone clients just helps shore up that number that if someone comes in and they're only a $300,000 of assets but you still really need to get to $6,000 or $7,000 of revenue per client to be able to do the work that you do, just the planning base fee gets the total minimum fee up to where you need it to be to be able to serve the client.

Jessica: Right. And if we don't feel like the client can pay for the value that we add, if it's not in their best benefit to write out a check for $4,000, $5,000, $6,000 to do that and that's what they're primarily having to do, we will let them know there are other options. We don't offer hourly planning but someone down the street does. And we can refer you to them and you can get the hourly planning and at least get a base plan in place. It's just not how we work. And if you want to work with us and how we work, this is what we'll do. But we're not going to put you in harm's way or in a situation where we're hindering your ability to actually save for your future.

Michael: And so, is there a...? Do you guys have a number in your head of just here is the minimum fee we have to generate from any client we work with to make it worthwhile for the firm? And then, we'll try to make sure that's valuable to the clients. And if not, then, we'll help them get somewhere else. But is there a number that you guys set in your head or calculated out or however you arrived to it to say, "Here's the revenue we have to get to on a client to make this work for us?"

Jessica: Yes. That number is $7,500, which is where the $750,000 comes from. So, for those clients who are in the Cornerstone, what we do is we've changed our service model because the clients who are in the Capstone, they're getting full services. If you're in Cornerstone, you're still going to get financial planning and wealth management services. But they're going to be more tailored to what you need. You're not going to need social security planning. You're not going to need a lot of these other things. And so, we can streamline your services. And most of them are more comfortable doing things online. So, we can do more things online. And our meetings instead of five to six a year, we're going probably going to have three to four in that first year. And then, after that, it's meeting one time a year. So, we've found ways to remove that hindrance and make sure we're still getting paid fairly. So, for our Capstone, we say $7,500. And then for our Cornerstone, it's, again, that $4,000 to $5,000 range, which is where we really need you to be.

Michael: Okay. So, you actually do have a somewhat lower fee threshold of what you're trying to get to for Cornerstone because there's a little bit less of a service demand and a meeting demand and they're a little bit more efficient to serve.

Jessica: Right.

How Jessica Incorporates Philanthropic Planning In Her Practice [17:57]

Michael: Okay. So, the second thing I wanted to understand further is just the clientele that you aim to work with. You had articulated both for Cornerstone and for Capstone either a younger professional couple or family that gives or volunteers or pre-retirees, retirees who have a heart for giving, time, talent, resources. So, talk to us a little bit more about this charitable philanthropy overlay for clientele and who you're serving.

Jessica: Sure. So, this actually goes a little bit more into our past. When we merged firms, so, originally, Larry West and Jeff Cedarholm were running lifestyle practices. And they decided that they wanted to merge their companies and create a sustainable business. It was part of their succession plan, as well. And so when this happened, that when they turned the company into an employee-owned company. And Jeff, his past experience is running a multi-national business. So, he did that for 25 years. So, he has loads of business experience, which me, coming into this field, had none. I was straight out of a financial planning program and interned my last semester with Larry at his firm to enter this field. So, when we merged the idea was that, “Jeff's going to be president and we're going to train Jessica to take over this role in the future.” And the best way he could think of to do this, and I think it was probably the best decision anybody at our firm has ever made for our firm, was to hire a business coach.

So, we started working with Tracy Beckes, who is a fairly well-known business coach, in our field. And one of the things she's really great at is she's got a system that's very similar to the EOS system where you figure out what your goals are, your core purpose, your core values, your BHAG, and you really start to work towards that. And it starts to frame everything in your business. What types of people do you work with? How do you market? Where do you spend your resources? And so, she did that with us. She was walking us through this process. And Jeff and I were trying to do it together. And we just could not get on the same page with it. We both respected what the other was saying and agreed but we weren't getting connected to it. So, finally, Jeff just sat back and said, "Jessica, this needs to be your baby because you're the future of the business." And it happened to be at the same time that I was pregnant with my first child. And so, I was going through those emotions you have as a parent or a soon-to-be-parent where I was trying to figure out what kind of child I wanted to raise. How do I get this child to become a productive member of society?

And at the same time, there was a third piece, which was coming into this, which was I had been an active volunteer with our community foundation in town. I still am. It's near and dear to my heart. And they had a speaker come from the Halftime Institute. I don't know if you're familiar with that but it's, basically, Bob Buford wrote a book. And it basically talks about the steps for successful people. You get through life and you hit your success. And then, you ask what's next, and that this halftime, the second part of your life. And so, I joke that at 30, I had my midlife crisis because I was sitting in this presentation, had been thinking about what kind of mom I want to be, and thinking about what kind of leader I want to be. And it hit me that I wanted to raise a child with a giver's heart, and I wanted to work with people with a giver's heart. And so, I went back to the drawing table, threw out some ideas around what our target market would be, what our core purpose would be. I even wrote up a philanthropic promise around it. Things started coming to me in a way that they just hadn't before. And I shared it with Jeff the next week, and he bought into it. He said, "This isn't bad." And so, then we shared it with the team, and they all bought into it. It was just one of those really special moments when everyone agreed. And that's hard. That's tough when you have a team of any size.

And so, we decided to go that direction. I actually went back to school to become a chartered advisor in philanthropy. We started looking at our own clients. And there were some that were certainly great inspirations for us. And I even talked to them personally about it. And they helped us think through some things. And it is amazing. I thought what would happen is that we would, all of a sudden, go out there with this new focus. And all of these philanthropic people would come to us because we're offering something that you don't find in a financial planning firm. But that's not what has happened. At the end of the day, we're still a financial planning firm, right? And that's why people come to us. They either want investment management or financial planning. But they pick us from the place down the street because they connect to this idea that we have a bigger purpose in life, that we are supposed to be giving back in some way and helping others in some way. And so, that's what they connect with.

And so, the really interesting thing has been not that we've gotten a lot of clients out of this but that the clients we have, more of them are giving now, or they're giving more strategically. And that's really our focus is “How can we help you link your own personal values to your giving philosophy? And then, let's create a plan around that.” Just like you create a financial plan, let's create your giving plan and help you through that. And so, we've had clients become much more impactful in their giving. And that's been simply the most rewarding experience. And so, that's a long way to answer your question. But I thought it was important to really hear that back story because it's why we focus on the clients that we have and the avatars that we have. That's the reason we have those is because we all have this desire to do something bigger. and our core purpose is actually to help clients live with fulfillment and build with purpose. And so, the clients who come to us, they tend to connect with that on a deeper level.

Michael: I'm struck with the way you framed the outcome, that the focus has helped the firm grow but not because you took on this philanthropic focus and clients who care about philanthropy came out of the woodwork and started coming to the firm. But instead, that it was, “We have people who come to the firm because they're interested in financial planning and wealth management because that's what we do and what we're known for. But they choose us over the other firms that they may be interviewing with because we have this philanthropic giving focus.” And that creates some purpose or meaning or resonance or there's a higher level to why work with the firm than just maybe we'll get you X percent of additional returns or come up with that other tax strategy or trying to differentiate on that technical basis alone.

Jessica: Right. And that's not what any of us were expecting. In fact, there was a point where... We did this change in 2015. So, there was a point in probably 2018 where I really questioned did we make the right decision because things were just not happening as I was envisioning them to happen. And then, over the next six months or so, we really started to look at our own clients and the conversations we were having. And we realized we're having these conversations with clients that we would have randomly with a client we knew likes to give but now we're having it with everybody. And just seeing the response of clients, we have... This is just one story, but there's several like this who they were giving in their estate documents. And they would give a little bit here and there but they were giving in their estate documents. And we had this discussion about giving. And, of course, there's always a tax benefit to discuss there. We talked about that.

But then, we talked about, well, what really is your purpose? You, obviously, have an intent if you've gone as far as to put in your estate documents that you're going to leave money to an organization. What is the intent behind that? And then, after talking really deeply, we completely changed that. We help them create their own endowment with our local community foundation, which you can do at something as low as $50,000. And we help them create their own endowment. Actually, they're building an asset there every year they make a distribution of a QCD to the community foundation. But they make a donation there and on an account that is growing. And then, they've already dictated where they want it to go. They don't have any control over it now but they have already set the stipulations. And whenever they're ready to turn on the endowment, they can turn on the endowment and see that flow out. And they are so excited about this. Every year, we meet and we're talking about how much are we going to contribute this year? What are we going to do with it this year?

And as a result, they're often more involved with the community foundation and because they have a connection there. And I just met with someone this week. And she said, "Well, Jessica, do people who work with you, do they give and donate to the things that you are actively involved in?" I said, "Well, some of them just because they see the work that's being done. But a lot of them don't. A lot of them, it's just a matter of inspiring them to start finding their own path." And so, it's made for some really fun, passionate discussions with clients. It's fueled the individuals who work there. I would say it has a lot to do with why the individuals that work at our firm want to stay with our firm for the long term because there is a very strong culture around this. We give out time, free time, PTO for people to go out and volunteer in the community. We give of our own assets. We write about it on our blog. There's just a lot of things that we do to inspire. So, it's changed our relationship and the conversations that we're having with clients.

Michael: And so, help us understand just how this works I guess from a marketing and growth perspective. Do clients have to have an interest in giving and philanthropy to be a client of the firm? Is this just like, “Hey, it's a thing we do. If you want to do that we've got a lot of capabilities to help you. But some engage with it and some don't.” How does that manifest in practice in who you're attracting or even just how you're talking to prospects around this?

Jessica: That's a really good question. It's the latter. We never force a client to do anything. So, if they want to work with us and we feel like we can help them and they meet other criteria. Maybe it's a young family who hasn't even thought about giving because they've been so busy living life. And they don't have time to volunteer. That's okay. We are not going to require it. We're not going to turn them away because they do it. If we feel like we can help them and they are a good fit, then that's fine. But a number of clients do come to us or at least recognize that for what it is and say, "Well, we appreciate that you do this." Even if they aren't the ones currently doing it, they find an appreciation. And there's a really great, interesting... I think it was "Investment News" where they had done a survey of retirees. And 75% of the people who were 50 and over and in retirement or thinking about retirement said that they wanted to find a way to give back more, either with their money or their time in retirement. That says a lot. There's a lot of people out there that have an interest in this. They just haven't had time to think about it.

So, what we say is, "If you're not interested right now, that's okay. But we have this process. We actually have a seven-step process. And if you are at some point interested in delving into this, we are happy to do that. And we'll help you in whatever way that looks like. If that means giving away money, that's okay. If that means you're looking for a volunteer opportunity, then we can help you do that." We've helped some of our clients join different organizations working on the board of different organizations as well. So, there's different ways that can work but we don't require it.

Michael: But as you noted just, you're still ending up connecting with and attracting the clients who do care about that because if they care about that, that becomes the differentiator that may put you over the edge with another firm they're looking at. And if they don't care about that as much, you're probably at least relatively less likely to get them as clients just because now you're in pretty much a head-to-head competition with whoever else they're looking at.

Jessica: Right. And I think it's a mental hurdle that I had myself, and it's taken me a long time to get over it, which is if you set a target, that's who you've got to work with. That's who you've got to market to, and that's who you've got to work with. and you stick to that target market, right? And you stick to that avatar all the time. And I have come to the realization, at least for us, that's not how we're thinking about it. It does dictate how we operate. It dictates how we use our budget. It dictates how we market, how we interview, the kinds of people we hire. But it doesn't have to mean that every single person that comes through the door has to fit that target market perfectly. We just want to make sure most of them do. And if you put yourself out there in a way that really shows who you are and your true core values, you will attract people like you. And so, it's been a bit of a mental hurdle for me, and I know for others, to get over that but I think I'm finally getting there.

Michael: So, this distinction. You had an interesting way of putting it at the end there, that when you get clear about what it is that you're trying to do and who you're trying to serve, it will start to drive I think you said what you spend resources on, who you hire, how you manage, how you market. You might still attract other people, which is fine, but you may attract more of the people that you're trying to connect with in this way because they are the ones that you're going to stand out for. But it doesn't mean no one else will show up as well, particularly when you're a firm that's already been around for a long time. You just may stand out a little bit more for the people that fit that way. And your client base probably tilts that way over time.

Longview Financial Advisors’ Origin Story And Why The Firm Is Employee-Owned [32:01]

Michael: So, now, talk to us a little bit more about the dynamics of employee ownership. I think you had mentioned earlier that you were formed of a merger. There was this vision of being an employee-owned company. And so, I guess, take us back to the merger and the origin story and then, help us understand a little bit more about how employee ownership is involved.

Jessica: Sure. So, Longview Financial Advisors is a product of a merger that occurred in 2010. Larry West and Jeff Cedarholm each had these lifestyle practices. Larry was located in Huntsville. He had two individuals working with him, and I was one of those. And Jeff Cedarholm had a practice in Gadsden, Alabama, which is about two hours away. And he had one other person working with him. He had gone through a split from a partner just a couple of years before. So, he had just gone through a transition out of a merged company into a new one. But the idea was to create a succession plan. And at the time, Larry and I had spoken a lot about me buying him out. But I was in my early 20s and broke. So, that was not happening. And, honestly, my interest is around financial planning, not investment management. So, we were trying to figure out how to make this work. And we had a friend who was in study group with us, Jeff. And Larry and Jeff started talking more seriously about succession planning. And I appreciate this. Even though I was not an owner and in no way a decision-maker, they kept me actively involved. And they decided to merge their two practices with the idea to create a sustainable business that would be around for their clients and for their employees.

And in order to do this, they felt the best way to do it was to create a truly employee-owned firm. And what I mean by that is that every employee in the firm at the time was offered ownership, regardless of their position. And so, from admin up to president, we all had an opportunity to buy in. And then, we said any future employees would be able to buy in after just a year of service, regardless of their position. And that, I think, was unique, especially at the time. We're talking about 2010, early 2010. You didn't find a lot of that in our industry and it worked out really well for us in the sense that it did help us attract some really talented, young professionals. We decided that we were going to grow and train versus hire people who are already in the financial planning field. And so, we've had really great relationships with different advisors and professionals that are working at our universities that have financial planning programs. And we've just nurtured those relationships. And once the students would come to us and they would learn about this opportunity to buy in at such an early age and not have to buy out a whole firm, it brought in some really stellar candidates. It did. So, that worked out really well for us at the beginning. But the intention was to transition the ownership over maybe 15, 20 years.

Michael: So, wait. Let me just clarify there. So, the vision was this, as you'd put it, truly an employee-owned firm. So, when they did the merger, every employee was offered shares but this wasn't the succession plan at the time. Larry and Jeff sold all of their shares to the employees. This was an incremental step. Everybody got some opportunity to buy some shares but I'm presuming then a large chunk or the majority was still owned by Larry and Jeff at that point.

Jessica: Yes. That's a very good point. Yes, that's the case. So, the idea was that Larry was going to be retiring within the next three years. So, he would be the one to make his shares available. And he just said, "If you're interested, it's open for business and you can buy." And I know that seems very simplistic, but that is, essentially, what we did. But the problem is, like I said, we had younger people. It was just hard to come up with the money because we were having to pay cash. We didn't have the opportunity to go out and borrow. The company wasn't going out and getting loans to turn around and make this an opportunity for everyone to buy in. So, it was truly you had to save up your money and buy it.

Michael: And was it a...? Were they doing any internal seller financing pay-over-time, or it was just, you can buy shares but literally you've got to come to the table with cash to buy your shares?

Jessica: Yeah, initially that's how it started. Just you have to come with cash. Now, we did offer a bump in your bonus. So, you got... It was minor. There was a 10% bump in bonus if you used that bonus to turn around and buys shares in the company. But there's a little bit of bump there but other than that, you had to have cash. And that was at least for the first seven years, that's how it was. And then in 2017, we realized this is not happening as quickly as anyone had hoped because at the end of the day, you have these people who are young and having to buy houses and start families and they have a lot of other pulls on their resources. So, it just wasn't transitioning like it should. So, we started offering internal loans. So, the loan was capped at 1% of the company plus 100% of your salary. And you could take it out up to five years. It was a very reasonable rate but it was completely sponsored by the company. And so, we did that starting in 2017.

How Longview Valued Firm Shares [37:34]

Michael: So, a quick question. Just before going further on that, the initial version of this over the first seven years or so, how did this work from a...? So, I guess two things. One, how did this work from a valuation perspective? You're still doing business. You're still growing. The company's still evolving over this time period. So, if someone came to the table and say, "Hey, I'm ready to buy another 1% of a portion of a percent," if that was too big of a number for team members with more limited dollars available, how did you set what the value was going to be that someone could buy their shares at that year?

Jessica: Sure. So, initially, when the merger occurred, they used an individual to help them, a business succession plan, or to help them come up with how they were going to do this. And his suggestion, at the time, was, well, you just need to use this equation, right? And that happened for a few years, not very many because we soon realized this is not working. This is not a proper way to value the company.

Michael: What was the original equation framework?

Jessica: Yeah, it was mainly based on...it was an equation that he had actually just given us. It was, basically, using what the retained earnings were, and then, essentially, when you calculated it out, you might have the typical 2.5% or so times valuation, right? It was one of the industry averages.

Michael: Right, roughly 2.5% of AUM roughly.

Jessica: Right.

Michael: Roughly 2 to 2.5 times revenue.

Jessica: Right. Yeah. And it really wasn't working, right? So, we decided to transition...

Michael: What wasn't working about it? People weren't happy to buy it at that number or just regardless of valuation, they didn't have enough cash to buy a meaningful chunk anyways?

Jessica: The valuation didn't feel fair. When we started looking at how it would work, part of the issue also is that we were holding a high amount of retained earnings in the company. And part of that was just a risk factor. There was a concern there about the transition and what would happen if both of our leaders ended up having either to retire or were disabled or there was a death issue and we had to buy them out quickly. And so, there was a little more cash being held in the company than would normally be recommended.

Michael: Except the valuation formula was tied to retained earnings.

Jessica: Right.

Michael: And so, that ended up boosting valuation as well.

Jessica: Right. Exactly. And so, we were having this issue where the pricing just seemed really high. And so, we went to a new transition model, a new valuation model. And we actually hired someone to do our valuation. And they started doing our valuation and we did that. And for a year or two. And then, we realized it didn't feel right. And so we went to another valuation company.

Michael: So, because just you hired someone externally to do the valuations but employees still didn't feel comfortable with that number and how it was coming out.

Jessica: Well, mainly, the owners didn't because when they came back to us originally with the new valuation, it was too low, or they felt like it was too low.

Michael: Because they were used to the number they were getting for the preceding years.

Jessica: So, you're now starting to see the problem. So, there's starting to be a confusion here not just with the owners but with the buyers in trying to figure out what really is the right price or the right way to go about this? And we all know valuations are just whatever buyers are willing to pay for it, right?

Michael: Right.

Jessica: But it got to the point where the buyers weren't willing to pay that because we weren't sure. And that was another reason why buying into the company started to slow down a bit. And so, we eventually ended up transitioning, again, to a firm that we could all agree with their process. Mainly, it was that we understood their process. And I'm purposely not naming companies here, but the first company we felt like there was too much secret sauce and it was hard to really understand the thought process behind it. The second company, they were a little more open. And they would help us to better understand what their process was. So, we ended up staying with them and using that process and that's how we've been doing valuations since then.

Michael: And are you comfortable to share who that one was, at least, since that was working out?

Jessica: Sure, FP Transitions. And so, I will say there's an extra layer here, right, is that we used FP Transitions. We were pretty satisfied with the way they were doing it. But where we struggled was whether or not we should be using an internal discount on top of what the valuation was because it's an internal transition. Normally, you would have some kind of discount added there and what was the appropriate discount. And so, what we were doing was we were taking... Anybody who's familiar with how FP Transitions gives valuations, they, essentially, were giving us three different options, right? And there's cash, which is someone's just coming to you and paying straight cash for your business. And that's going to be the lower option. and then, you had one where if it was financed over a five-year period or financed over a seven-year period. And we were using the lowest valuation process and then giving a 5% discount.

But what happens is when you educate people in your firm and you encourage them to go out to conferences and do their research and they start reading and they realize, well, normally, you see a 15 to maybe 30% discount and we're giving a 5% discount, what's happening here? So, there were some questions around that, that came up. So, that's where we were as of the beginning of last year where, even though we had some internal loans available for people to take part in, buying into the company had dried up because we still were having issues around what the appropriate valuation really was. And not just the valuation, but now, what's the discount? What's the appropriate discount at this point?

Michael: And I'm imagining, as well, the number of changes to it that had happened over the preceding decade just made either everyone more uncertain about the valuation or more inclined to say like, "Well, we've changed it before. So, we should have another conversation and change it again," consider changing it again but, obviously, from your perspective if you want to see it change, you're hoping it will change again.

Jessica: Right. Well, and what we finally came down to is it doesn't matter. We can go back and we can change it again. And someone's going to feel uncomfortable with it. We need someone who's smarter than us. And, honestly, looking back, this is where we probably messed up in this whole thing is that the idea was there. It was a great idea. It was a different idea. There's a lot of positives. But we should have went out and just hired... We were trying to do it ourselves. We should have hired the right professionals to help us with this at the very beginning because what happened last year is that we now had to go back and revisit again. And we did end up finally getting there and hiring a professional to help us, Tim Kochis. We hired him and while he's not a valuation expert necessarily, he did help everyone on the team. He brought everyone to a meeting and there's nine of us. And he said, "Look. The way you're doing it is fine. You just need to figure out what the right discount is." And he walked us through how to determine the right discount and everyone was on board.

And so, we finally got to that place last year where I think we're in a really good place with the valuation. We restructured this transition plan and the ownership's transition plan. And we ended up transitioning quite a bit more of ownership this past year than we had any other year in the past. And we have a plan in place. We already have people who are planning on doing it again next year. And we can start to talk about that now, if you want to, if you want to go into what does that look like and how is it that people who didn't have money before to buy in all of a sudden have money to buy into the company. But yeah, it was a hard road to get to that place where we finally decided oh, okay, we need to get that extra help because we're not figuring this out. We're smart at financial planning but we're not smart when it comes to this. This is not where our expertise lies and we need to find someone who can help us figure it out a little bit better.

What Jessica Feels Was The Fundamental Problem With The Initial Valuation [45:39]

Michael: So, I want to come to that moment but I'm curious as to hear a little bit more of what wasn't working on the valuation previously? Because I group these into two categories, at least from what I've seen myself over the years. There are succession plans and valuations that blow up because the math just literally doesn't work. It would be like firms that finance over five years, except their profit margins are so low or the valuation is so high relative to their profits that the business isn't producing nearly enough cash flow to actually cover the payments. And then, the person can't afford the payments, and then they don't want to buy anymore, or they feel too constrained. The valuation of the purchase relative to the profits that the business makes just the cash literally isn't working from a math perspective. And then, there are other gaps that occur where we just don't feel comfortable with the valuation or confident with the valuation or I've heard someone else got a different valuation number that would have been a better deal for me. And right, wrong, the math works or doesn't work, whatever it is, they just fundamentally don't have confidence in the valuation, and then they won't buy. So, I guess I'm just wondering was this the math just wasn't adding up and people didn't feel like they were getting a reasonable economic deal, or was this more of it may have been okay but no one had confidence in the numbers. So, they just wouldn't buy regardless.

Jessica: I think it was more of the latter. So, here's the problem, right? So, we started the process. People were buying in. It wasn't a great amount every year but people were buying in every year. and then, we realized the pricing or the valuation method using an equation was not the proper way to value the company. And we went to one place. And this is what I think hurt us is we went to one place. They gave us a number. We felt like, mainly the founders, felt like it was too low of a number. And so, then, we went to a different place, which gave a higher number but there's this gap in between. And so, the rest of us are sitting back and trying to figure out, well, why is there a gap? One firm is valuing it one way. One firm is valuing it another way. We don't know what we feel is a fair price, right?

And then, what we hear is that the discounts that normally apply to internal successions are not being applied here, right? And so, we felt like, well, obviously, as a seller, you liked the number that's higher. And as a buyer, you liked the number that's lower. And so, the first number was more attractive to the buyers and the second number was more attractive to the sellers. And so, the buyers were now saying, "Well, we've got to feel comfortable that we're not overpaying for this." And that's when you get into, okay, do the numbers work? Now, it's a profitable company but we're not at the 25% profit margin that we are aiming to be at. Now, we will be in the next couple of years but we haven't been. And part of that is our structure. We have nine people on $194 million in assets under management. That's a high headcount for that many but we do that on purpose because we have two different departments. And the way we pay is a little bit different, right? And so, does that answer your question? It was a little bit of both.

Michael: Yeah.

Jessica: But mainly, it's this side of we couldn't get on the same page of what a fair price is.

Michael: And so, that's why it sounds like at least the FP Transitions version started working better for you, not that it was necessarily because it was a higher or lower number, per se, but just they had a clear, more transparent valuation process. Everybody was able to get more bought into the process of how the valuation was working. And that's what was giving them at least a little bit more comfortable with the number that came in because at least we can all agree okay, that was a reasonable process.

Jessica: Right. It's a reasonable process and they give us three different options here. And we understand why there are three different values. And as a company, we're all agreeing we're going on the lower end of that scale, right? And that's what we did. Now, when we met with Tim this past year, Tim Kochis, one of the benefits he had, he offered us, was the fact that we started talking about these three different values, right? And he said, "Well, yes, that cash one is lower but that's not how you're going to handle a succession plan internally. You're going to probably have people who are coming out-of-pocket some. But most of them are getting some kind of loan." And so, he told us we really needed to be at the middle number, right, and look at a discount rate that was higher, probably somewhere between 10 to 20%, based on how our company's operating and what he knows about our company, right? And so, we took the middle, and we went 15% on that middle number, and guess where it landed?

Michael: Pretty much where the...

Jessica: The bottom number.

Michael: ...5% discount number was.

Jessica: Yes, exactly. So, at the very least, it led us to this point where we all agreed that okay, maybe we weren't so far off before, and now we've got validation from someone who does this for a living. And we all got to a point where we could agree that this is a fair price. Whether we like it or not, this is what we can all agree on or all be a little unhappy about. So, that's worked out well. And you can tell it has really changed people's openness to come out-of-pocket to buy in. We've had several new people start to buy in who were not buying in before or at least not at the same level.

Michael: And so, I think it does emphasize that interesting dynamic that you didn't necessarily end up with a materially different number at the end of the day. You picked a higher valuation and applied a higher internal employee discount. Lo and behold, the math came out similar to where you were. But when everyone felt more comfortable with the valuation process, then the buying activity actually starting picking up.

Jessica: Yeah. And I think a lot of that had to do with hiring an expert to come in and talk to everyone and tell them, "Yeah, this is fair. This is a fair price." And so, I think the biggest lesson for us through this is yeah, Tim is not cheap. And I told him this afterwards. I said, "You're not cheap but you were one of the better things that's happened to us because it got us to a place where we could all get on the same page and move forward," because it was really handicapping us. We're at this place now where our first retired owner is about to turn 80 and he still owns a considerable amount of the company. And then, the other owner's going to be retiring at the end of the year and he's the largest owner of the company. And we couldn't... It was going to handcuff the company if we didn't figure this out. And so, it took the step of paying a lot of money for a professional to be able to do that. And we realize, we tell our clients they're paying us for a professional. We need to take our own advice and actually do the same.

Michael: I guess, as the story really illustrates and emphasizes, at some point, it's not even just about the number. It's about everybody's confidence in the number and the process and feeling like their respective concerns have been heard from both sides. And is someone doing the valuation who only represents one side or the other or whichever side it is, or has too blind of a process, just even if the math and the number is right, it doesn't create the confidence. The confidence came with someone who was representing neither buyers nor sellers but just came in and said, "I've looked at your deal. It's pretty much reasonable. You should restructure it this way. It's still basically going to come out to the same number. But I can confirm for you this is a reasonable market number. You should both be equally unhappy with the traditional, “You know you got a good deal although everyone's a little unhappy. So, now, you all can move forward."

How Longview Adjusted Their Shareholder Agreement And Funding Structure [53:39]

Jessica: Yes, we are moving forward. So, we did change our shareholder agreement completely. So, we made a few changes after that. So, the first thing we recognized is okay, great, now everyone wants to buy in. How are we going to make that happen? What is the funding structure here? Because, again, we still have younger people who don't have the cash just sitting in their bank to come in and buy 10% or more of the company, right? And so, we started looking around for a lender that would work. And what we were trying to accomplish was ensure that we still have this consistent buy-in process. We're not trying to move large pieces of the company in any given year. We are trying to do it systematically and then be prepared if something happens to one of our founding partners who maybe owns a little more so that we can buy them out and we have a plan for that. But we're going to it systematically so that everyone has an opportunity over time to buy in. It's capped at 15% ownership. And that way, we don't have all decision-making or ownership in any one, two, or three people's hands. And we wanted to make sure that loan rates were reasonable.

And so, we started talking to a lot of banks, local banks. We talked to industry banks that handle these transition plans. And what we found is that most of the industry banks that we talked to, they were focused on working with larger transitions. So, they're wanting to transition more at a time you'd often find more than a million-dollar minimum for the full transition. And it was just not what we were wanting to do. We wanted a lot more flexibility. So, we found a great a local bank who has been willing to not only do the loans for us but do them in such a manner that we could...it's someone could do it as low as 1% of the company, the ownership, or they could take out a much higher amount. And we don't cap anymore on the amount of the loan that someone can take. We do have some consideration of the amount that Longview, essentially, is having to back at any given time because the problem with working with a small company and doing it this way is that the bank is still wanting Longview to back some of this loan, right? And so, we have to recognize that for what it is. Longview needs to be prepared to come in and buy out someone who may default if that's such the case.

Michael: So, that's ultimately how the bank is protecting itself being that they're saying, "All right. Longview, in the aggregate, you're profitable enough that if someone buys a few percentage points at a time, and then something happens and they default, you can buy your shares back, which effectively pays off your loan." And you can do that if you're just buying a few percentage points at a time because the firm can basically finance its own internal transaction at that point.

Jessica: Right. But what we're doing is we're saying if you... And we actually put this in our shareholder agreement, that if someone fears that they may be in a default situation, we ask that they come to Longview first. And that way, Longview can directly buy from them versus having to go through the process of defaulting with the bank and then, Longview buying from the bank, right?

They don't want to own some part of some small financial planning firm, right? They just want their money. That's the whole idea. That's what they do. They loan money. So, they want to make sure someone's going to buy it.

Michael: And so, what are the loan terms? How does that actually work?

Jessica: Sure. So, the other thing with the bank loans like this, they tend to be shorter because the bank doesn't want to be tied to an individual for a long period of time without a formal backing from the company. And so, most of these loans are anywhere between three and five years, and the idea that you might take one loan one year and you might take a new loan the next year. So, you're layering the loans on top of each other. And the shorter the duration, the lower the rate. And so, a three-year loan was a 4% rate. And we have it set up so it's interest only with one payment towards principal a year. So, it's really attractive financing to buy in. And then, if someone wants a longer loan, they may have to have a higher rate, right? So, if you're doing five or seven-year loans, you might be paying 4.5%, right, anywhere between 4 and 4.5%. But people can do a longer loan if they want to do that and take out more but they need to be able to back that on their own accord without Longview's backing.

Michael: Okay. And do they still have some kind of down payment that they come to the table with as well, or will the bank finance the whole thing as long as they're taking their relatively short repayment period?

Jessica: That's a really good question. And one of the reasons we picked the bank we decided to go with is because they require no down payment. We shopped around to a lot of banks. And many of them do require a 20% down payment, and this bank didn't. So, they were offering us no down payment, very attractive rates, doing it over a short period of time should someone want to do that, minimum fee for the loan. It cost $500 per loan. And interest only with one payoff towards the principal a year.

Michael: Is the interest-only payments monthly though?

Jessica: Yes.

Michael: Okay. So, if I buy in, essentially, I'm going to have three principal payments over the next three years from now. So, I'll pay off roughly a third of my principal every year and I'm paying interest only on a monthly basis in the intervening time period. So, I get, basically, a 12-month head start before the first big old principal payment comes due.

Jessica: Right.

Michael: And so, I guess the interesting distinction from the bank's stand, right, as you noted, some of the industry financing folks, just they want to write one big loan and be done with it. They don't necessarily want to write a whole bunch of smaller loans that keep coming back to the table. The local bank was willing to do that and do smaller loans one chunk at a time. They just have their flat I guess setup and processing fee payments of $500 a loan. So, if you want to keep buying 1% or smaller tranches, you might rack up a bit more in these $500 increments. If you want to buy fewer tranches that are a little bit larger just so you have fewer payments, that's part of your prerogative as an employee doing your perspective purchases.

Jessica: Right. Yes. That's exactly the case. And I would say for anyone who's really looking at this, it depends on what your goal is, right? There are cases where what you normally find in our industry where you're making a large transition at one time works out very well. But it just wasn't in keeping with how we operate. We are a very collaborative company. We're a company where we hire young. We're a company where we're not trying to transition really quickly to the next generation. Now, management, and we can talk about this if you want to, but ownership transition and management transition are two very distinct conversations. And from an ownership piece, we wanted to make sure that that part was taken over time. It actually works good for, in our case, the buyers and the sellers. The sellers get to participate in the gain of the company over that time. And the buyers get to buy it out over time. now, there are risks that go along with that for both sides. But for us, we felt like those risks were worth it to do it in this way. We have a plan to have everything transitioned in 10 to 12 years. And if things happen in the following years like they have in this year, it might be sooner. So, it's going well from that standpoint. We'll see if it continues to do that.

But on the other side of that, if you're looking for a quick transition of ownership where it's maybe happening in a shorter time frame or you're trying to sell a larger amount at one time. There are really great resources out there like the bank as an example that can help you in that direction. So, just the first step is figuring out what you're trying to accomplish and then going that way. But if you want something flexible, local banks are the way to go.

Michael: So, then, come back to this discussion of how often do people get to buy, who's allowed to buy, and how much are they allowed to buy?

Jessica: Sure. So, you can buy it was once a year prior. We value the company once a year but we allow buying multiple times in the year now if the need is there. There's one time every year where it's a very open buying season basically. And that is in the May-June time frame because we complete our tax return. We do distributions for the profit distributions. And then, we handle the... That's also when we pay our bonuses. So, if people want to turn around and invest that money back into the company through ownership, they can do that in the May-June time frame. But if we had a situation that was a one-off where someone just needed to sell for family reasons or someone's retiring and they wanted to sell this or and they had someone in the firm who's interested in buying, we would do it in an off-season time if that makes sense. So, generally speaking, it's once a year but it could happen at other times of year if necessary. But we always just go back to that valuation that we had in the February-March time frame.

Michael: And so, then, how much are people allowed to buy and who's allowed to buy?

Jessica: There's no cap on what you can buy, except for the 15% cap, which means you cannot own more than 15% of the company at any point. And once you own 15%, you can't buy anymore. If, however, we decide as shareholders to change that in the future, we can do that, as long as 67% of the voting shares vote in that capacity in that way. So, we don't put a cap on the amount that they can buy anymore. Now, the people who can buy, that has changed slightly. So, just as a reminder, we used to open it up to everyone as long as they had been with us for at a least a year. And what we learned from that experience is that, especially young advisors coming out of a financial planning program, they get very excited about the idea of being able to be an owner in a company.

And so, they come in, they initially just buy something so they have some ownership in the company. And they don't always understand what that means. It's not just about being an owner and getting a distribution at the end of the year. Being an owner is much bigger than that. And the more you accumulate, which that's what we want you to do, the more you start to realize that, right? If the market goes down, we don't get paid as much. You may not get the distribution that you want. Being an owner also means taking the risk of the company and the business. So, there's a lot more to it than just buying in and sharing in the ownership, right? And so, we recognize...

Michael: And were those creating issues? Were you getting team members who had gone down the path? They bought something and they weren't happy when they didn't get a profit distribution in the year? Was it like, “Yeah, because the market is down; that's how this works,” and they just haven't realized that.

Jessica: No. We never had to not make a profit distribution. We've always made a profit distribution. Well, at least since 2010, we've always made a profit distribution. But the problem really wasn't that. It was this idea of keeping employees. So, part of the reason we did it this way is we wanted life-long employees. And we wanted to make sure they were getting in and they were getting into the culture. Their culture fit our culture. Their values fit our core values, which means ownership's important. We believe in ownership but we want you to think like an owner. So, we want you to come to work and act like an owner. We want you to be active in our conversations. We have quarterly off-sites and we want everyone to have a say. And if you come in and you really never talk and you don't really have a say into the business but you want to keep buying in, that's okay but it just doesn't fit well with our culture.

And so, we wanted to make sure the ownership was really for those who maybe had a little more experience under their belt. They had some training of what that actually meant and had some time, a little more time, to understand our culture. So, it's not a huge change. But we have changed it to be a minimum of two years. And now, you must wait until you also have your designation for your role. So, for the financial planning side, that means you carry the CFP designation. For the investment side, that means you carry the CIMA designation. If you are on the operations team and there's really not a designation for you to carry, then you have to be nominated by your direct superior. And so, two years is just a minimum. It doesn't mean two years and you get it. You also have the extra hurdle of having your designation by this time. and the thought process there is it takes two to three years to be able to hold these designations. So, you've had time to really acclimate to Longview, our culture. We've been able to coach you a little bit more on what it means to be an owner. And so, by the time you're at that point where you can make a decision, you're better informed to make that decision.

Michael: And just out of curiosity on the investment management end, why CIMA as the designation? There's a lot of different investment designations out there. Why CIMA as the one that you guys hung your hat on?

Jessica: Yeah. Sure. So, this was a decision that was made by the investment team. And they felt like a CFA was really not a good fit for how they operate. We operate with mutual funds and ETFs. But the CIMA offered a little bit more in the lines of better understanding the reasoning for the decisions that were being made on that side, meshing the financial planning side to the investment management side. So, while we value the CFA marks, and that was one avenue we started to go down, we felt like it was more of making sure you understood how to analyze the stock and do those kind of things, which is not what we do. We are more mutual funds and ETFs. So, we decided the CIMA was a better fit for us.

Michael: It was a better fit for just actually constructing portfolios of funds and not necessarily doing individual stocks and bonds analysis.

Jessica: Right.

How The Management Transition Worked Alongside The Change In Ownership [01:07:45]

Michael: So, you've talked about the, I'll just broadly say, the ownership transition of the business and how shares are transitioning. How does it work from the management side of this because I know you now wear a president hat with the firm? Obviously, that wasn't the hat originally. So, how has the management's transition occurred just in parallel or alongside all the ownership discussions that we've been having?

Jessica: Sure. So, I have touched on this a little bit in the earlier part of our conversation. But when I started, I actually started as an intern, an unpaid intern, with Larry West in my senior year of college. It was my last semester. and I worked with him for about a week. He had one person working with him. It was an admin assistant. And so, she trained me for a week, and then she left. Her husband had moved to a different state for his job. So, she moved with him. And at the time, Larry said, "I need some help. So, can I just pay you to come work with me? You can be an administrative assistant. I'll let you learn a little bit. We'll continue your internship. And then, we'll figure out what's going on at the end of the semester." And I had another job at the time that I promptly quit and said, "Sure," and went to work with him.

Michael: Why is that? Why were you so excited to quickly do the shift from wherever you were?

Jessica: It was a job. Even as an admin, it was a job in a financial planning firm. And I knew without a doubt that that's where I needed and wanted to be. And my current job was in retail. And he said, "Look. I'll pay you the same amount you're working over there, the same price you're working over there for." And I said, "Okay." It seemed like a no-brainer to me. This is what I want to do with my life. And I understood at the end of the semester that I might not have a job but I felt, well, at least I would have a degree in financial planning. And if he decided he didn't want me, I could say, "Well, I worked with a financial planning firm for a month. I'm sorry, for a semester. So, I have some experience under my belt." So, it just seemed like a no-brainer.

And so, I did that in my last semester. And sure enough, at the end of the semester, he offered me a job as a paraplanner. And I took that and it was just him and I. And we worked very closely together for a few years before we hired an admin. And so, I was still doing the paraplanner admin work, both sides of that. Eventually, I moved into an associate planner role. And that's where I was at the time of the merger of the firm in 2010. And then, with the merger of the firm, knowing that Larry was going to retire in a few years, we decided that I would become director of financial planning. So, I went from associate planner to lead planner and director of financial planning.

And I needed to build out a financial planning team and create a process because remember, I worked at a firm that was just two individuals. We didn't create processes for anything. And we just did it because we always did it together. And so now, I had this job of creating processes for how we worked and to create this team and now to hire people, which I had no experience with hiring anyone. Luckily, Jeff was the president of the firm. And he had a lot of experience with all of that. So, he was a great mentor during this time. And he and I worked together. So, we merged in 2010. 2012 is when he decided we should work with Tracy Backus and start the transition of the succession, not the ownership succession, but the management succession.

And we did that for about five or six years together. and then, he rolled off and I just worked with her for a couple of years by myself before we finally went our separate ways. And that was in 2018 that we decided to go our separate ways. So, that's how we got there. And then, I took on the president's role last year. It was supposed to be at the beginning of the year. But it ended up happening mid-year because of COVID. We felt like we can't just tell everyone we've got a new president and then COVID happens, right? So, we decided to just give it a little bit of time. So, it was the summer of last year when we announced the change in the president's role. But over that time, he and I worked very closely together. We were slowly transitioning the different aspects of the job to make sure that we were both comfortable with the transition. Last year, going through the ownership conversation, and the management conversation, it became more difficult just simply because I'm one of the buyers. I'm in that buying group and he's the seller.

So, the things that we were trying to accomplish while we were trying to accomplish the same thing, we were going at it in slightly different ways. And it also meant that things were getting a bit real for both of us because Jeff was having to seriously think about his own retirement and, basically, his baby giving it... It's like having a child and then giving your child to someone else and saying, "Now, I need you to raise my child." And that's a really hard transition for him. And for me, I'd always played number two. That's what I did. I came up with ideas and I might shoot an idea at him. But at the end of the day, he was the boss. He made the decision. And now, I was having to say, "No, I'm your boss. I'm going to make the decision. I'm going to listen to you but I'm going to make the decision. And it may not be the same decision you would make." And so, there's always a little bit of natural tension and rub there when you're dealing with those kind of transitions. So, a part of what Tim did when he worked with us last year is he got to the point where he said in front of the entire team, he said, "Jeff and Jessica, Jessica is the president. And you have an executive team. So, if you want to try to get consensus but if there's not concensus, and you need someone to be a tie-breaker, it's always going to be Jessica."

And I will tell you, I needed to hear that more than anyone because I needed to hear like, "No, you've got to take the reins. You've got to start acting like your position and your title." And that was really hard to do. And Jeff had to step back and say, "I'm going to let go. I'm going to stop trying to make it into something I want it to be. But I need you to step up and start making it into whatever you want it to be." And so, between that comment from him and the comment that we probably should go through therapy, that we realized “Okay, we can do this. We can do this on our own and get through this,” and sure enough, we did. And we're at this place now, I'm telling you, the last six months have just been a drastic change where I still sometimes catch myself calling him and saying, "Jeff, what would you do in this situation?" And he will tell me what he thinks but it's very much in like, "You do what you need to do. But here's one way to think about it." And I think he appreciates me calling him and asking him every so often, "How would you handle this situation?"

It also helps that one of the things that was really important to me when we did this transition is I wanted to create an executive team because I wanted to be able to see what was happening on the investment team and the financial planning team. And so, our executive team includes the director of financial planning, chief investment officer, and myself. and so, we make a lot of those business decisions together. And we operate as an executive team. And at the end of the day, yes, I do have final call. But it doesn't feel like I've really ripped it from him, right? I think it helps him with the transition because he's seeing that there are other people who are involved in this conversation. he serves on the executive team for now until he retires at the end of the year, as well.

Why Jessica Created An Executive Team And What Surprised Her The Most About Taking Over The Leadership Role [01:15:14]

Michael: And so, what was the purpose, the driver, for you wanting to create an executive team?

Jessica: Yeah. Well, again, part of it was around making sure that I had a better understanding of what was happening on the financial planning team and the executive team and that we were making collaborative decisions. One of our core values as a company is to always be collaborative. And I wanted to make sure that was happening. Then, the second reason is look, I think that I have some true strengths that are great for this role. But I also understand that I don't know everything. And I'm not above asking for help. I'm not above talking to other people about their opinions. We're going to be better when we have more people who are involved in this process. Now, we have to be careful that it doesn't slow down decisions. But at the end of the day, if we're working together and working towards a common goal, we all know where we're going and we're remaining collaborative. And that's one of the things that is great about a small company is that you can involve more people in the decision-making to make sure everyone's there and they're there for a long period of time, that they're buying into what we're doing.

Michael: So, what's surprised you the most about this path of building and taking over leadership of the advisory business?

Jessica: Oh, really, I think it was just what we were talking about. I didn't understand how hard it would be to transition into the president's role, not that the president's role in and of itself is the hard part. The hard part is changing how you operate, right? If you're used to being the person that's foot on the ground, you're handling making sure things are happening the way they're supposed to, and you're the one that's implementing, right, and to change that way of thinking and saying, "No. I'm going to let other people implement now. I'm going to give up that role and that title and let someone else be responsible for that," and now I'm going to take up the task of being the visionary of the firm. “How do we think about where we're going in the future? How do we ensure that we're continually moving towards those goals that we create and that we revisit every quarter?” That has been the hardest transition for me. I didn't expect it to be that hard. I just felt like “I'll get in there and I'll figure it out. We work hard enough, we'll figure it out together and it will be great.”

But it has been a tough transition for me to change my way of thinking. And the other part of that is I came into this wanting to be a financial advisor. I love relationships with clients. and part of that transition means I have to do less with my clients. I don't have time. I can't be a good president of this company and continue to be so actively involved in my client relationships. So, now having to step back and saying, "As much as I love that relationship part of financial planning, I still have that. I'm still working with my clients. I'm not transitioning them. But I am having more people step into those roles and help me to plan for that meeting." So, when I'm talking to clients I say, "I just don't have the time anymore. So, Jonathan here, he's really doing your planning for you. So, I'm going to let him talk through it. And I'm just here to see if you have any questions. and I'll continue to be a part of it but I'm not doing the day-to-day stuff as much anymore." And that has been a hard transition, as well.

Michael: I'm going to say how have those conversations gone?

Jessica: It's really funny. Most people are just excited for me. Remember, I haven't taken on clients in over a decade. These people have watched me grow up. I was 22 years old when I started working with them. And I've been with them for 16 1/2 years in some cases. And so, most of the time, they're very supportive, and they just congratulate me. And the other side of that is the process that we've used to bring in new advisors has been the same process that Larry and I started out with. And so, they've gotten used to the idea that new people are going to come in, they're going to work their way up, and they're going to become an advisor. So, it's worked out really smooth. I think this is another time where sometimes we get in our head and we think that they're not going to love anyone as much as they love us. And it turns out that they do. They're capable of loving other people too.

Michael: Yeah. Carl Richards still likes to tell the story that when he was originally getting ready to do his first transition out of his firm and sell the firm and dial back from some of the client work that he was doing, the most shocking thing was that he made the transition and he made the announcement and he went and told all his clients that this change was coming. And he wasn't going to be the one working with them anymore. Nobody cried.

Jessica: Right? We'd like for someone to cry.

Michael: He was like, "Nobody cried," like, "Great." Just they wanted to know how they'd be taken care of, wished him the best. It was very cordial and it was like, "Okay." And I think it makes that point. We get a little bit too in our heads sometimes. and not that the client relationship isn't important and what we do isn't important. But the irony is at the end of the day when clients have that much trust in us then when we go and say like, "Here's the member of our team now who's going to be working with you," that trust transfers pretty well because they trust you so much that when you say, "This is the person now," most of them trust you and go right along with it.

Jessica: Right. Yes. And if they don't, if they end up not appreciating that transfer for some reason, I have no doubt they'll come back and tell us because they're very open with us. Like I said, I've worked with them for a very long time. So, we've got this very honest relationship. And we try to tell them that. If something's not going well, we always want your feedback. And I feel comfortable that if it wasn't going right, they would come to us and give us the feedback before they would just leave, right, and give us the opportunity to adjust if we needed to do that. But honestly, that hasn't been the case because no one really cares. 

The Low Point On Jessica’s Journey [01:21:14]

Michael: So, what was the low point for you on this journey?

Jessica: Yeah. Again, this is one we talked about but I didn't describe it as the low point. It was really hard for me last year. This transition to the president's role, it has been tough because I just didn't realize just how much work it would be in communication with Jeff and making sure that he and I are on the same page. And we have great respect for one another but we all create in very different ways. And finding out how you tell someone that you really respect and you want to make sure you're coming off as respectful, how do you have a conversation with them that I wouldn't do it this way? And technically, now I'm your boss. So, how I would do it is the way we've got to do it. And that's just a really hard conversation. I'm a natural people-pleaser. And so, I had to get out of that part.

And then, to be fair, I'm sure it was tough for him on the other side to say, "Okay. Well, let's do it your way then." So, that's been the hardest part for me is this transition. But the sun always comes out after the dark. Getting through that, we managed to get through it. and I feel like things are moving much smoother. We're working together. We're honoring those boundaries. And that was the important part. And I would say this for anyone who's going through a similar situation is, very early, set the boundaries and figure out what those are for both of you so that you both can honor them and have open communication about when maybe one or both of you aren't honoring them. And that's where we came to and we ended up doing that. And it really helped our relationship. I think it's helped the company, as well.

Michael: So, can you just share a little bit more of that? What do you mean by boundaries? What were the boundaries that you were setting here?

Jessica: Yeah. So, we just had to make sure that, like I said, there may be a time when he and I didn't agree on how we would approach some things. And instead of... It would be natural, right, if you're in that role of president and you've been doing that for 10 years for you to step up and say, "Okay, team. This is how we're going to do it." And then, I'm like, "Hold up. We need to talk about this first. Before we just make the decision, this is the path we're going down." And on the other side of that, there were times, to be fair to him, that he was probably expecting me to say, "Hey, I'm going to do this." And he felt like maybe he had to do it. And so, just understanding here's your role. Here's what I need from you. And I promise that if I overstep the boundary or I feel like you are, I'm going to call you. And I'm going to call you out on it, and I want you to call me out on it. And that way, we can monitor this transition and make sure this relationship remains intact, not just for us but for our company too." And so, I think we really have managed to get through that pretty well.

Michael: So, what do you know now about this whole journey that you wish you could go back and tell you from 10 years ago when the merger was getting underway and you were just starting on this journey?

Jessica: Yeah. I think I would tell myself to just have patience. Of course, it is a virtue. It's not one that comes very naturally for me. And so, just have patience. Breathe through it. Our transition, our management transition, plan was actually supposed to happen in 2018. And then, it got pushed because we had several things happening at work. We both felt like we needed to be pushed. And then, it was supposed to be happening in 2019. But then, I had some medical issues that made it impossible for me to start to take on that role. And so then, it got pushed to 2020. And all of that constant pushing, it made me think, "Okay. Is there something I'm supposed to know here? Is this not supposed to happen?" And I just had to wait. I had to be patient and wait for it to come together because if you asked anyone in our firm, I think that they would agree because we have these conversations often about it just feels like we're on the verge of something. Things have started to finally move in this direction. And just like any other firm, we've had our ups and downs. But we've been fairly successful for a financial planning firm over the last decade. But it, again, hasn't come easily. And so, we are finally at this place where I feel like some things are starting to fall in place It feels like we're on this path to something pretty big. So, I would just tell myself to be patient. Be patient with myself. Be patient with others. And we will get there. We will find that path and accomplish the goals.

The Advice Jessica Would Give To Newer Advisors And What Success Means To Her [01:25:57]

Michael: So, what advice would you give to younger, newer advisors coming into the industry today?

Jessica: Yeah. So, one of my favorite things to do is to work as a mentor with younger women in the financial planning field if you are entering the financial planning field. And I always tell them to find their place at the table. There's a great book by Sheryl Sandberg called "Lean In." And a lot of people, I'm sure, have heard of it. And I recommend it all the time. It's actually a book that was recommended to me from one of my clients. He manages a large company. And he said, "I really think if you're going to go in this direction, you need to read this book." It was really life-changing for me. It was this piece of... It just shared so much information about how women, in particular, don't do the things that men would do in the same field. For instance, something as simple as negotiating their contracts. I say this all the time. Every single guy that has come to Longview and we've offered an agreement to, a contract to, has negotiated that contract.

I don't get that same result from the women. And so, I like to mentor the women and just encourage them, one, not to be afraid to come to the table, to know what they offer, to find their seats, speak up, and to make sure that you're getting paid your worth. Be willing to negotiate. Don't be afraid of it. In fact, as an employer, I would say I appreciate that. It tells me that you've done your research, and you're doing the things that you need to do. So, on top of that, I would just say find a firm that matches your core values. It's going to save you a lot of time and heartache if you figure out early on what's important to you. And look for a firm that is a good fit in that way. And if you mess up, and it's not the right firm, that's okay. Don't cry over spilled milk. Figure out what is important to you. And then find the next step. What is that firm? You've learned a lot at the firm you've been at. So, how do you take that and use that for your future?

Michael: So, as we wrap up, this is a podcast of success. And one of the things that always comes up is just the word success means different things to different people. And so, you've had this wonderfully successful career track literally internally intern to president of the firm so that the business success has come for you. But I'm wondering how do you define success for yourself at this point?

Jessica: I would say success to me is a continual journey toward this ideal life. And in that sense, I mean that a life that has purpose and impact. I feel most successful through the impact I have on another's life, whether that's a client's life, if that's people I work with, my own children. My goal for my children is to make sure I raise grateful children with hearts for giving. And so, I want to make sure I'm a positive influencer in that and how can I encourage that? And so, for me, just seeing success in the people around me, whether it's my children, my coworkers, my community friends, or just someone I'm mentoring. When they have success, I feel that success because I feel like I've been a part of that. And so, I want to continue that for the rest of my life, just continue to find ways to add impact in my life and those around me. And if I do that, I would consider it a very successful life.

Michael: Cool. I love it. I love it. Cool. Thank you so much, Jess, for joining us on the Financial Advisors Success podcast.

Jessica: Thank you, Michael, for having me. It really was a pleasure.