#FA Success Ep 273: Scaling Yourself As An Advisor: Tucking In Or Institutionalizing Your Own IP, With Penny Phillips

Resources Featured In This Episode:

• Penny Phillips
• Journey Strategic Wealth
• Thrivos Consulting
• Penny's YouTube Channel
• Kitces Report: How Actual Financial Planners Do Financial Planning (2020)
• Mark Tibergien
• Envestnet

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Full Transcript:

Michael: Welcome, Penny Phillips, to the "Financial Advisor Success" podcast.

Penny: Hey, Michael, great to be here!

Michael: I'm so excited to have you on the podcast today, and I think talking a little bit about just this ongoing evolution in our industry from so many of us that have kind of a sales and product-based roots. I started 20 plus years ago in a life insurance firm, it took me a while to find this thing called financial planning, to an industry today that just increasingly is focused on advice.

Personally, I've been really fascinated by this, just this shift and transition for many years now that there are some skillsets that we build in the sales world that do translate very well to advice, including that even if you want to be in the advice business, you still have to sell. You're selling yourself and the knowledge between your two ears. You do have to still convince someone to pay you for your services, and in some ways, it's even harder because they actually have to write a check sometimes for your services. You still have to sell something.

But there is a difference in just the focus, the conversations, the mindset, what it takes to be successful in an advice role versus a product sales role. And I know you've lived a lot of that journey for your career as well of helping advisors make that transition. I'm looking forward to this conversation of how you transition from sales to advice and what changes and what stays the same when you try to make that transition.

Penny: Well you know this is a theme that I love, and people often ask me, "How did you get into this space of the business?" And the truth is it was completely by accident because I started my career actually in sales at an asset management company, subsidiary of an insurance firm, and loved that work and it was sort of fun to wholesale to advisors, but quickly shifted out of that and ended up in what is considered, I guess, practice management consulting and coaching.

And I spent the first part of my career within an insurance broker-dealer, observing really successful insurance agents who were struggling to make the transition to be what we would consider to be wealth management advisors or financial planners. And what I learned really early on, which I know we're going to talk about, is that it doesn't have to do that challenge with the transition, doesn't have to do with technical competency or knowledge set which you could be taught or certified to, but it really had to do with behavioral shifts, mindset shifts, belief system shedding, and so much more of what I consider to be the coaching work than the consulting work.

And that early experience has informed many of the decisions I've made throughout my career, and I've gotten to use that experience as a consultant and now as the owner of an RIA working with advisors every day. So it's been really interesting.

Shifting Mindsets To Transition From Insurance Broker To Financial Advisor [05:53]

Michael: Just talk to us about that a little bit more. What were the shifts? What were the mindset shifts? What were the belief shifts? I guess, what was happening or was not happening that was blocking advisors from making that transition.

Penny: So one thing I noticed really early on, Michael, and I think many folks this will resonate with them. The first thing was when you are trained in a sales organization...and this could be any sales organization and I ask the audience to imagine an advisor and it will call this sales professional who's been doing the same thing, let's say, for two decades, they've been trained a very specific way, their activity each day looks a very specific way.

What actually happens is, and I still talk about this all the time on videos, dopamine is produced for the sales professional a very specific way, and it really gets down to that fundamental stuff, the psychology stuff, right? So, the advisor is used to selling...transacting, and in some cases, especially if you grew up in the insurance BD world, getting to that sale or transaction within the first meeting or first conversation. That's the goal for them.

So, think of these advisors who've been trained this way to think that the more exhausted you are, the more successful you'll be, the more quantity, the better. And the faster you can get to the end sale, by the way, of a product that nobody wants at a time that they don't want it, that is the ultimate for them. So that's the psyche of most of these successful insurance agents that I had initially been sort of observing and analyzing.

And all of a sudden, we want to get them to a place where they're certified CFPs engaging in financial planning and engaging in this comprehensive engagement with a client where the end result isn't, in fact, a sale of a product, but rather the positioning of this roadmap that gives them theoretical ideas and solutions that they can decide on. It is a totally different way of doing business.

And what I found was, challenge number one, it is very hard to untrain or retrain when you've been selling a specific way, and literally, everything that makes you feel good and happy and successful is derived from a certain set of activity. So, just to summarize that really simply, what I noticed is that advisors that were..." had evolved on paper," meaning, got the certifications that they needed to be "advisors," were still thinking about the advisory business and planning as a sale and not as a process. And that was really challenge number one.

Thinking differently about the outcome that's going to be produced about the way you're going to feel and the client's going to feel about it, the way you're going to present it, the time it takes to do that, there's a lot there to get used to that firms were not thinking about or training advisors to think about. So that really was number one.

Michael: One thing that resonates with me... We did a financial planning study off the Kitces' platform a few years ago where we went out and literally did time evaluations of not even just how long advisors spent on planning, how long advisors developed on each part of the planning process, and what they do along the way and what software and tools they're using.

And one of the hypotheses, one of the things that we wanted to test was...this was a couple of years ago as account aggregation was not quite as widely used as it is today, and so we wanted to look and see... In theory, account aggregation has a lot of time savings opportunities, so just like you can pipe data in so you don't have to do it manually, you can shortcut the data-gathering process of clients, just start linking accounts.

And so we wanted to see, are the advisors using tools like eMoney with its account aggregation faster in their financial planning process than those who are not. And what we found was literally the opposite, the advisors who used account aggregation and gathered more data spent more time in the planning process, not less because, once they got more data, they could go deeper in the process. There were more things to analyze, there were more recommendations to perform, there were more things to do, there were more opportunities to implement. It enriched the planning process very much.

The advisors weren't using the technology to do planning faster, they were using the technology to do planning better. And what's always struck me about that is I've watched this trend over the past four or five years of a lot of different planning software tools trying to make their software simpler to use because the sales that they're trying to do into a lot of what were historically product-based organizations, the pushback they hear, very much the minds of the advisor you're talking about, "I already get this done in a one meeting close. Planning takes more time. I don't want to do planning. All that planning stuff takes so much time. I don't want to do it."

The software company response has been, "Well, we'll try to make our planning software faster and easier." And then they make the planning software simpler and easier to use, and it still doesn't get adopted by those advisors because, at the end of the day, you could make planning software that magically takes three seconds and outputs the plan. If your dopamine pathway has been built to getting the sale in the first meeting, that's still three seconds more than you needed to take to get to the same outcome. Why would you do that to yourself? It's not a time problem. You spent 20 years teaching me and rewarding me for getting to the sale as quickly as possible, and any additional planning conversation you introduce, just drags that out if that's your goal.

Penny: It's so true. There's another element of that too, and by the way, this isn't just exclusive to the insurance BD world, this is wirehouse world, this is even old school broker-dealer world, anywhere where advisors were raised in a system in which they're rewarded for production, really, so it's our entire industry, let's say.

Michael: Yup.

Penny: The way in which many of these firms still pay their advisors has not changed, and so all these other things, training has changed, tech has changed. But if the way in which you're rewarding the advisor and you're still calling them producers and you're still giving them ribbons based on X, Y, Z sales, then the feelings are not going to change.

There's this bigger issue that ties to the dopamine pathways, and it's, when you're a sales professional, and think of the advisors who've been successful because of their own abilities, that conversation, that engagement with a client, and I'm generalizing here, that really is about, in the advisor's mind sometimes, the advisor's talent, right, and the advisor feeling good about their ability to influence or convince somebody.

When you're in a planning engagement or you're trained as a coach, what you learn is that you need to be solely focused on the objective and outcome that the client or consumer wants, and not at all about yourself, how good you are at sort of selling. And if you're really effective as a coach and planners are, coaches essentially by trade, then it's this shift from it being about me to it has to be about the consumer.

So, the bigger, I would say behavioral shift that I noticed, was getting an advisor to enter into a conversation or meeting with no preconceived notion about what the end result is going to be, and that is totally different from going in and knowing you're going to sell whole life or this muni bond or whatever it is. And so that was the bigger issue that I saw across the industry.

Michael: So, one of the dynamics here is this, when you've been trained in a certain way and you're rewarded in a certain way, it's very hard to rewire the brain off of that. And frankly, as long as you're continuing to be rewarded that way, it's really hard to change off of that. That's kind of one domain. I think you'd said there's a second part or some additional parts to what else goes on or is struggling to happen in this sales to advise shift.

Penny: Yeah. They're linked together, right? I would say that second piece is this idea of it being about the advisor practitioner's sort of talent and knowledge set versus going into meetings or conversations with prospects and clients, being able to have no judgment or beliefs about what the client needs until you sort of know all the information. So that's the second shift.

And then the third is really just seeing things very transactionally specifically. And you will likely remember this, Michael. When the industry really shifted from product focus to advisory focused for a fee, advisors were still... And I went through this at Envestnet working with broker-dealers. It was always interesting to me, even with the best technology and access to advisory programs and the investments of the world, adoption of the tech and the advisory programs were very low.

Advisors would go direct to a tamp that they were used to working with or just continuing to do business exactly as they did because this shift to presenting an advisory engagement as a process and not as a solution was very hard for them to grasp. And I would say...

Michael: And you've been doing so well not doing that, doing it the old way, right? This is like...

Penny: Exactly. Super profitable businesses. And I would say that leads to the last I would say this shift of when you're changing from running what is essentially a sales practice, enduring business that is underpinned by recurring revenue, right, which is what happens when you're a planner and charging fees for advice. Okay, you have to run the practice very differently to continue to be profitable.

And the problem is some of these sales practices are very profitable, and again, the cash flow is different. And so the biggest challenge of all is now, okay, if you actually evolved enough to be able to act as a planner and an advisor, okay, now we also need you to learn how to run a business and manage a P&L effectively. And that's a whole other aspect of practice management that firms just had not trained advisors on how to do effectively.

Michael: Yeah. I used to call this the accidental business owner, phenomenon.

Penny: Exactly.

Michael: There was a natural effect. When you're in the sales business, when you're in the commission-based business and just...every January 1st you go back to zero, not totally zero, you get a little bit of trails these days. You basically go almost all the way back to zero every year, and because of that, you tend to never really hire up much team or build a large organization behind you.

You can make some really good money if you're good at sales and business development, but you don't pick up a lot of team overhead when your income goes to zero every year. If you pick up enough staffs like, "Cool, "I'm going to work until October just to pay my team, and then sometime in November all my business will have the business version of Black Friday, where I actually go into the positive and then I only make money in the last month of the year because I had to cover my overhead fee." That just does not feel good in a business sales context. So, rarely did we ever hire more than admin staff just to handle the paperwork so that we could go to do more sales transactions.

And when you get into this recurring revenue model where you'd get clients and they tend to stick around, and then you go get more clients, you add to the existing ones and then you've got more of them, and then suddenly, you just literally have so many clients you couldn't see them all, so you start hiring a support advisor to go see them and then another lead advisor to take some of them over so you can free up your space to go get more.

And it happens very slowly and organically for most firms. You get your 5, 10, 15, 20 new clients in a year and slowly bulk up, but then at some point over 5, 7, 10 years, you actually have a bunch of team members and suddenly not so much of your time goes to other clients anymore, and a lot of your time goes towards managing all these people. At some point, I stopped being an advisor and started being an advisory firm business owner, and I'm not even sure where it changed.

I just saw that now I work a lot of hours and have a lot of clients and a lot of staff and I'm making a lot more money, but I'm actually more tired than I was before because, suddenly, I find myself in this business, really sizable business owner position that I hadn't really been prepared for or trained to handle.

Penny: Completely. And then there's this piece about...when, again, this always resonates with advisors, that... So what you just described all true, plus, because the advisor likely built his or her business by just acquiring...sometimes they say anyone with a pulse, and the reality is, is that many folks started that way, right? They just wanted to bring on clients or had to. They end up...

Michael: That’s what we’re taught, like, anyone who can follow me or any revenue you can get is good revenue.

Penny: Exactly. So, by the time the advisor gets to the place that they realize, "Oh, my God, I'm running a business," and now we're talking about enterprise value, and now they're thinking, "Gosh, A, do I even like running this business? B, wow, I have a real asset here. But I've built the business so that I am the most relevant person to it in two ways. Number one, I'm the primary and only revenue generator, and secondly, I'm the only main decision-maker in the business." So two really dangerous things when you're trying to build enduring enterprise. So that's one thing.

And then the other part of that is advisors realize, "Gosh, I built this business, but the majority of clients are actually not clients I want to be working with anymore. But I don't have the time and capacity to even think about how to replace or bring in more clients that look more like the top 5 relationships or 10 relationships I have that I do actually consider to be ideal." So they're stuck in this conundrum.

And it was at that conundrum that I really started coaching advisors when obviously I was running the consulting business. And it's at that point where I looked to attract those type of advisors to the RIA now journey. So it all has come full circle for me in helping folks at that stage of the business life cycle.

Michael: So, what changes for the advisor that does get to that point or what has to change? When you were coaching them, what were you trying to coach them to change or move to or move towards to handle that transition?

Penny: So a bunch of things, and I will say foundationally, the very first thing is... Well, first of all, hopefully, the advisor is coachable, right? We hope that when we're having a coaching conversation or engagement, that the advisor is prepared or capable of shedding old belief systems. And I use that term a lot. I'll give you a really simple example of that.

I talk to advisors all the time who've said things like, "I didn't get in the business to manage people. I suck at managing people," right? That's probably the one I've heard most often, and I challenge that belief system because, if you think that way about yourself, you will look at everything through that lens, and oftentimes, negatively through that lens.

Michael: If you really believe you suck at managing people, I promise, you always will.

Penny: Exactly. And I challenge the belief system too because, look, advisors manage people for a living emotionally, right? It's just like clients. The part of their job is sort of people management and leveraging EQ skills.

And there's, again, this belief that the advisor is the most important person to a business, and up until a certain point, yes, he or she is, but the advisor often feels very much responsible for the development of each person on the team. And I challenge that thinking. I'll talk about that. So the first thing is getting advisors to understand they're going to have to shed belief systems they've hung on to for a long time.

The second thing is getting comfortable making a decision or at least being on the path to making a decision about whether they want to build lifestyle practice or enterprise. I position it as simply as that because that really is the decision we're asking advisors to make for a long time and still to this day. And I write about this and talk about it every day. We're obsessed with telling advisors that they need to be CEOs. There's so many programs out there, an advisor to CEO. I've run a couple of those programs.

A, not everyone knows what a CEO does, first of all. Second of all, not everybody wants to do that, should be doing that. And there's nothing wrong if you're at a larger organization where you can gain efficiency and scale. There's nothing wrong with building a boutique niche practice that's small and just has you working with the 80 people you want to be. There's nothing wrong with that model.

However, if you're committed to building something that lasts and endures long after you are gone, then you have to think and build differently. And the number one thing you have to get comfortable with is becoming irrelevant to the business over time, and that's a really hard concept for advisors to accept, embrace, and make decisions around because, for so long, they've been the most important...

And there's nothing wrong with becoming less relevant to the...let me not say irrelevant, less relevant to the business over time. And so that forces advisors to start thinking about other talent that can work with... And not just service clients, but I mean work with clients, deliver review meetings, help them make decisions, be the go-to person. That requires hiring a specific way, developing a specific way, and giving up control, which is really difficult. It's thinking about themselves in their own role differently in the business.

That's one of the things that we always used to coach to, it's hiring differently and really getting clear about what it is you want to build and why. The why piece is very important as well because it's the why that's going to carry you through the business life cycle when you've run out of capacity and have to pivot and think about a different way of building that's sustainable for the next decade or so.

How Becoming Less Relevant To A Firm Means Intellectual Property Has Been Successfully Institutionalized [24:17]

Michael: So, I want to actually spend a few more moments on just this discussion of what does it mean to become irrelevant to your business over time. That is a thing we kind of say in the business practice management world. I think for so many of us in the advisor role, almost everybody in the building phase, you are the center of the business, you are the business. There is no one else, it is you. If it goes well, basically, you put yourself on a bigger pedestal, which is, "The business is built around me, and there's a whole bunch of people that support me, so it's me and people who support me." That's what you have to do, not to be egocentric. That's what you have to do to build the business in the early stages. What does it mean to make yourself irrelevant to the business? And if you do that why, are you getting paid so much money?

Penny: Yeah. Well, the second piece...pause on that for a second. So the first question is... Maybe I will address the second piece first. I have a lot of conversations with advisors about fees and compensation. Sometimes I spar with advisors on social media about...or consultants rather about what advisors get paid and that last piece... And I say this all the time, it's...and we've seen it, especially the last two years.

Outside of a medical professional, I would argue that somebody who is technically proficient in planning and it's helping a family navigate the complexities of life and set themselves up for a happy and fulfilling retirement, that is the most important professional next to a medical professional that a family in any country could work with. And so I will always defend an advisor's... the fees that they generate for advice and for actually delivering that value proposition.

Michael: I hear you, but you're then making this case, "But I don't do that anymore apparently because I made myself irrelevant to the business and handed off my clients to everybody else and hired owner...leaders to run it. What am I doing here at this point?"

Penny: Well, what that actually means when you've successfully made that transition and made yourself less relevant to decision making and you put people in charge of operations and the lead advisors on your team is you've institutionalized what you've done so successfully. And essentially, guaranteed that the impact that you have had on, let's say, the 80 families that you have work with on an ongoing basis, that you've been able to 5X that. So now you're not just having impact on a handful of people, you're having an impact on entire communities of people.

When I talk about this idea of being less relevant, what it actually means is that you've institutionalized the way the business grows. So you've been able to actually acquire clients, not necessarily through your own individual efforts, meaning I'm out there prospecting every day, but I've built enough of a name or I've built enough brand recognition and value proposition recognition that the business is now institutionalized, and that it's...the content we put out generates interest and people are coming to us. And we also have financial planners and advisors on staff who are able to deliver this value proposition and advice in the same way.

The most beautiful thing is building that business where you don't have to be the one driving the things that we know we need in order for the business to be successful, right? Leads and clients coming in the door and value being delivered the way you promise to deliver it. Having that happen without you being the one to drive that 24 hours a day, it's a beautiful thing. And, yes, it does mean you're less relevant, but in a way that ultimately benefits society. I know that sounds like sort of a big thing, but it's the truth.

Michael: I like the framing that it's around...it's not around making yourself irrelevant per se, it's about institutionalizing what you do in a way that's just more transferable to other people on the team who can get trained to do your thing your way because this is why when I think about it from that perspective, I sort of think of it as you're going to build a bigger, more successful business that may even be more financially profitable for you because, in essence, you're not getting paid for your work anymore, you're getting paid for your intellectual property.

Penny: Correct.

Michael: You have created the Smith way of doing financial planning and the Smith way that clients are served and the Smith client experience. You don't necessarily have to name it that way, although you can. You made a thing and taught other...you made a way that clients are served, and you taught other people to do it your way. And so, the reason why that becomes a bigger business now is you're essentially...you've turned what you do from a service you offer to an intellectual property thing you've created, and you're now getting paid to teach others the method, the approach, the style, the thing.

Penny: Yes. And what's even more and why I love this business so much and what I think is even more exciting about it for advisors is that the CFP and the financial planning organizations dictate the way in which we think about planning, right? The advisors don't have to consistently reinvent the wheel as it relates to how to deliver... I talk about this a lot. Services in our industry are commoditized to some extent.

What you can actually institutionalize is client care and things like experiences for clients. And what I mean by that is there are tons of advisors doing financial planning in very similar ways across the industry, and all of them are great. Where advisors really get to differentiate and institutionalize is in the way in which they actually deliver that experience. And I think that's something that's a newer concept as we've really pivoted to delivering advice in our industry. And it gives advisors the freedom to, I think, creatively build their practices how they want to while all adhering essentially to the same standards of care as financial planners.

Michael: So who makes this shift? As you said, some advisors make this shift, some don't, some struggle with it. So, who makes this shift, and how does it happen?

Penny: That's a really good question. I think it manifests differently depending obviously on the advisor. I've talked to so many advisors who are 40 years old but have been doing this for, let's say, 20 years and are really exhausted. I would say the first couple years of doing this type of work, that was the profile that would emerge often, it was advisors in the wirehouses or in a traditionally sales or an old BD traditional sales sort of culture that had gotten to a place where they're like, "God, I've made..." And I'm talking about a very specific psyche of advisor here, "I've made more money than I ever imagined making, but I'm exhausted. And I don't know if I can continue to build this."

And by the way, firms are really smart, right? It's not just the advisors' year renewing in January. There are many firms that have advisor years or in the insurance BD space, agency years that actually end midway through the year. So they're actually incentivizing advisors to sell, sell, sell, advisor year ends in June, and then sell, sell, sell because you have your calendar year.

So if an advisor gets to a place where like, "God, I want to get out of the grinds, and I realize the only way to do that is to really evolve the way I think about the business and the way I deliver my services to clients." So that's the one advisor who sort of gets there naturally and is ready to make the shift. I'm not saying it's easy, but that is one profile of advisor.

And I would say the other is the advisor who's gotten to a place where they recognize that they are up against time. And so that's the other I would say advisor that's...maybe they're 10 years out from retirement, in many cases, it's a lot less than that, and they realize, "Oh, my gosh, I want to start slowing down, I can't or I thought I would be able to. But by the way, I've built this team, again, where I have a fabulous support team, but they are supporting me in revenue generation, financial planning, and decision making. And I actually need people that can proactively and strategically sort of operate."

So, sometimes they get there intentionally, but I found that in many cases, they get there, to your point, by accident and then realize, "I have to make some major shifts and changes." And that's usually when they're reaching out to a culture consultant or they're making a transition to leave a firm that they're at to go out and "go independent."

So oftentimes it happens by accident and then they're faced with the reality of, "Okay, now I need to evolve." And so much of that is the personal coaching work that they have to do but then also learning how to actually systematize and institutionalize a business, which is where most of the problems emerge. Sometimes they don't, but most of the time.

Penny’s Journey In The Financial Advisory Business [33:29]

Michael: So, how did you just come to doing this work? Can you give a little bit more background on just your path of how you came to delving into all these issues?

Penny: Absolutely. Me too, it sort of happened by accident. I started in sales. I was at an asset management subsidiary of an insurance company, the fancy way of saying, third party distribution or wholesaling. And it was a fun way to start in the business. I loved working with advisors. I didn't love the transaction-oriented nature of that type of a role, and so I had an opportunity very early on to transition to a different part of the New York Life, everybody knows that's...who knows me knows that's where I started, to their corporate RIA.

And at the time, this is almost right out of school, New York Life corporate RIA called Eagle Strategies was trying to figure out, "We have these really successful insurance agents who we call financial advisors, but they're insurance agents. And they're really great in the mid-market. We want to give them access and the resources and tools they need to dominate the affluent...and what the industry calls the affluent market. But they're having trouble making that transition. Why is that?"

And so the firm was running a pilot program. I spent probably a year, Michael, as part of that pilot just in the field talking to advisors across the country and sort of understanding where the challenges were for them in even with the certifications and getting their CFPs and all the things, still having trouble operating as advisor business owners, let's say.

And what was so striking to me was that the answer to me seemed very obvious after about I would say eight months of really spending time with advisors and also studying the Mark Tibergien’s writing and following people like you. And it became very apparent to me that the issue wasn't technical competency because you can teach that to some extent. The challenge really was thinking differently about your own role in the advisory conversation and relationship and really having to learn and adopt new skill sets and behaviors and mindsets when you're making that shift. So, that was my first foray into this space.

And what ended up happening as part of that pilot was wrote a program called practice management solutions, which was essentially a paint by numbers program for advisors who were shifting into that, "Oh, wow, now I run a practice, and I need to make it a sustainable practice." And it was covered five core areas of practice management and step by step how to make decisions and build and transition.

So, it was fascinating work. I loved it, but what I found was that it's really hard to build a true practice management coaching division within an insurance company. And I went so far as to... We hired a team. I worked with fabulous people. We all became certified as coaches because, for me, it was much more critical for the team to have the skill sets to be able to help people, again, shift their belief systems than it was to teach them a concept. And so we were all certified as coaches, it was an amazing experience.

But look, New York Life wanted to tie practice management success back to life insurance sales, and so I thought obviously different about what we were trying to do and ultimately left and went to Envestnet, which was a tremendous opportunity for me. And again, there's a theme here, it's always sort of newly started divisions that I could go in and see what's going on, and it was a strategic consulting division that Envestnet was building out, and it was similar work, but on a bigger scale. So working with institutions to not just understand advisor behavior, but also, is the advisory program we've introduced or we're leveraging Envestnet. Is our pricing right? Is this going to help advisors make the transition? So it was really consulting on a different scale. And I loved that work, but I missed working individually with advisors.

And so I ended up leaving Envestnet. I went to work at a coaching company, left there, launched my own company ultimately, which, looking back was obviously my destiny to sort of run my own thing. And that was exciting work. The company's called Thrivos. It still exists. I don't obviously consult anymore. But we worked individually with teams, many of them that had passed that million in revenue mark, were really trying to figure out how to build something that could be monetized in a real way or who were in transition, that work was fun.

And working with institutions. So I've written programs that I've licensed the IP2 to programs in the firms in the U.S. and Canada all around practice management concepts. My favorite one was building the generation resilient business, which was a program all around helping advisors think not just about the changing consumer demographics that they're facing, but the changing advisor demographics, meaning, the advisors we're talking about are bringing in to take over their businesses obviously and who are going to be their successors are a totally different profile of human being than the senior advisor. And that's a whole other element of this that's interesting and confusing at the same time. So, teaching advisors about how to obviously work with the next-gen, and so that was a real fun program to build.

But ultimately, I pivoted, as you know, during the pandemic and left the coaching and consulting world to launch an RIA. And in many ways, it's the culmination of all my experiences and things that I wish advisors had at a firm. Me now being able to deliver that as an RIA has been just the pinnacle, I think, of everything I've done so far.

Michael: Sorry. So I got to ask, who goes and launches a new business in the middle of a pandemic?

Penny: I know. Me. I start every presentation, by the way, because you know I'm a speaker now, and I've always admired obviously you're speaking. But I start most presentations now with, we may feel like everything's changed, but nothing has really changed. And I felt that way right before we launched the firm, and I launched with three partners obviously. We sort of kept telling ourselves, "Yes, we have to do this via Zoom and not physically in person." But nothing fundamentally about the industry has changed.

We know the headwinds we're facing. We know the challenges and opportunities that advisors have been thinking about and worried about for the past decade. They're here and maybe have been exacerbated because of the pandemic. But the core vision and the value that I knew we could deliver, I was 100% sure about whether or not we were in a pandemic. That part actually wasn't as challenging as just the sheer challenge of launching an RIA and corralling a team around a mission when there's thousands of other RIAs out there.

How Journey Strategic Wealth Helps Advisors Build Independence [40:22]

Michael: So talk to us a little bit more then about what you actually launched and what you built.

Penny: That's a great question.

Michael: In said crowded landscape.

Penny: Yes, it is. Part of it was thinking about, "Gosh, if we're going to launch this, it has to be different, it has to feel different." And we want it to be different obviously. Again, this is years of consulting and then doing the Thrivos thing and really working in the independent and RIA space more than ever before and realizing that, gosh, technology is not a... I don't ever want to see that on someone's website because it's in the...when you're in the independent landscape and you're running your thing, we all have access to the same stuff. And I kind of grew tired of this, of seeing our differentiators, our technology, and our investment management process. It's really not.

For me, the differentiator to advisors and trying to attract advisors is that we are built for advisors who want to spend 80% or more...and this is by mandate, this is our mission, 80% of more their time with clients or with prospects because, to me, leadership and being an advisor, to me, that can mean being the actual practitioner or just being the person that's better at delivering the value proposition and the thought leadership content and whatever it is. So we want our advisors to spend 80% more of their time doing just that, whichever one is their destiny, I guess, if you will. And so we're an RIA that focuses on totally taking over the operational infrastructure work that an advisor would need to do if they're running their own thing.

And we also have a ton of flexibility in terms of how we support advisors, not just from a practice management perspective, but from a capital perspective as well. So I'll explain what that means. We basically add teams...allow them to outsource all of their operations to us, meaning we really step in as almost a C-suite executive/back-office team to do everything from trading and billing and investment management, of course, to HR, to paying all the advisors expenses and bills. Every expense of the business becomes a Journey expense. We step in to help develop team members, help advisors make hiring decisions, help advisors decide what it is they're going to compensate.

So, we try to strike a balance between the advisor having independence because they can own 100% of their equity, meaning, there's no restrictive covenants in our contracts, and even though the advisor team comes on our ADV, they can leave us at any time without restrictions, that's intentional. So we want advisors to feel they own their business, it's their team. But we're literally helping them behind the scenes make the decisions that they need to make to run a profitable and sustainable business, and then we're actually implementing those decisions for them.

So, I will know better as a consultant, and my partners, of course, one who has M&A and CFO for RIA's background, we will know conceptually when an advisor needs to hire the next service advisor, right, or the next paraplanner. And so, in allowing us to have this ongoing almost practice management coaching relationship with the advisors we bring on, we're able to pre-empt hiring decisions. We come to them with research and say, "Hey, it's time now to think about compensation for next year. Here's the three-way comp and development pathways that your associate advisor is on. Here's what we're thinking in terms of salary plus bonus. How do you think about that?" And it's a discussion and then they obviously deliver it. So, it's this really unique way of combining all the resources that an RIA aggregator has, if you will, with hands-on practice management support.

And what I found is that...and before we launched, what I'll say is we looked at thousands and thousands of advisor businesses people we had coached P&Ls. And what we found is that advisors don't realize that when they leave a larger organization to go independent or run their own RIA, they tend to chase payout, Michael, especially if they're leaving a captive firm, and they get really excited by the idea of being independent and having a 92% payout. And the truth is nobody has a 92% anything, okay?

And you know this better than anyone. The profitability of an individual advisory practice is between let's call it 38% and 45%, right? So, what we said is we need to educate the industry about the reality of running an independent business. Oh, and by the way, we can pay out between 50% to 65%, and that is the net payout to the advisor. There is not another expense that they have to make because we're betting on the fact that we can run the business profitably and more efficiently at scale than the advisor could individually.

So, advisors taking home more money, the business is going to be worth more because they're tucked into a $3 billion RIA. Oh, but the advisor still has the ability to sort of develop into the leader that they want to be with us really doing all the hard stuff behind the scenes. So, for me, it's the cross-section of flexibility support and independence, and it doesn't actually exist the way we've built it right now in the industry.

Michael: So help me understand a little bit more of just the mechanics of how this is structured because just so many different firms are kind of arranging these in different ways. So, the advisor is on your ADV. So it sounds like at the end of the day, technically they’re IARs of your RIA. They're not running their own “Smith Financial Planning, LLC” or anything anymore. But you don't have any restrictive covenants associated with any employment agreements. You're going to have the relationships because you just meet with the clients have their relationships. You can walk away and change that and go re-hang your shingle across the street anytime you want because there's nothing stopping you from going out the door.

Penny: That's correct. The first part of what you said is absolutely true. And one of the things we said when we launched is we care much...and I will say this as the president of the company with 100% conviction. I care so much more about educating advisors about their options in the RIA space and the realities of what it means to be an IAR versus an employee versus a 1099. I care more about that than actually getting advisors to join us, although obviously I want that as well.

And so I tell advisors to think about it as the RIA space is a spectrum, right? One side of the spectrum is you launch your own RIA, you have 100% responsibilities, obviously, you have 100% freedom to do whatever the heck you want, but all oversight compliance decision making about tech, custodians, negotiations with...everything is your responsibility. Obviously, tremendous upside there.

But what we've learned in the business is that it's becoming increasingly more...and we're seeing this with consolidation in our industry with private equity money and money pouring into the space, which has made it more difficult for advisors to run businesses...standalone RIA businesses sub, let's just call it 100 million. It's hard for them to gain efficiency and scale, right? Pricing is more favorable when you're larger, you can gain efficiency and scale when you're larger, right? We know that.

We will continue to see consolidation for a bunch of different reasons, and by that, I mean advisors joining firms like Journey or joining service providers. So that's one end of the spectrum. The other end of the spectrum is you're bought 100% by let's say a Mercer and you become part of their organization and there are branch offices. And it starts to sort of feel very much like a wire, by the way, but that's the complete other end of the spectrum.

And then there's this piece in the middle where it's you can tuck into an RIA and get access to services. And in some cases, you're not on their ADV, you're accessing services, and you're getting a payout between, let's call it 70% and 90%. And in some of those cases, you have à la carte choices, right? You can just use the investment management resources that this firm is offering or you can just use them for compliance and oversight, but you're responsible for running the rest of the business. And we know and I know as a career consultant number one thing advisors have trouble with is human capital and just the sheer challenge of building and developing people and structuring deals and succession plans, and so all of that stuff.

And so the gap that I saw was at this middle point. So now we've told advisors the best thing you could do, maybe not launch your own business, but tuck into an organization and get the highest payout. What started happening in the industry, we've seen this the last couple years, is there are many RIA "service providers" that charge a lot for stuff that is actually cheap to access now independently, and they're still overcharging advisors. Advisors don't know it.

Michael: What are people charging a lot for that doesn't actually cost a lot to get?

Penny: Access to technology I would say being one of them. Pricing has changed in the fintech space. I won't name names, but there are a lot of firms that... If you were to run a firm independently, you can get access to some of these services cheaper than you are getting them because, keep in mind, if a firm is charging you for access to their services, they've got to make margin on that...

Michael: Yeah. They've got to make margin.

Penny: ...whatever they're charging you. The decision now is the same decision really the consumer has actually when working with an advisor, it's the same decision the advisor has now when affiliating with an RIA, it is lowest cost or highest value.

And what I tell advisors is lowest cost means to these firms, they're going to give you an 87% payout and they're going to say that's cheap. And now you have to go run your business versus what we're doing, which is saying, we're going to give you a 60% payout, but we're going to do literally everything. We're going to provide highest value. So, yes, embedded in that 40% you're giving up is technology and compliance and oversight.

Oh, and by the way, it's also us actually operationally running the business. And that was a gap that I really wanted to solve for. And I want advisors to understand that being a W-2 doesn't necessarily mean you're a slave to a corporation. And that's another thing we've told advisors, and maybe they've felt that in the wirehouses. That is a decision that we made that was strategic for us as Journey to maximize ultimately our valuation so that everybody can benefit in 15, 20 years if we ever sell our business.

Journey Strategic Wealth’s Advisor Payout Structure [48:12]

Michael: So now help us understand a little bit more how Journey then prices on this spectrum in the world of payouts. It sounds like you do have kind of a payout style structure, clients pay fees into Journey because technically, you're the RIA, it’s your ADV, and then advisors get remitted some portion of their revenue back to them. How does the payout structure work in Journey?

Penny: Sure. So it's really simple, and we designed it intentionally that way. And when we do comparisons on an advisor running their own thing versus joining one of these RIA, like service providers will call them versus us, it's very clean. When you're running your own thing, you have a P&L, you're likely netting let's call it 43%. You're joining RIA service provider, you have your payout, cost of goods sold, and then you're running your thing, net profits are around the same. Versus Journey, there's no expenses to you, you get a single payout of between 50% to 65%. And that's net net.

Payout is determined... when we are going through the process of discovery with the advisor, we do a deep dive on their book of business. In some cases, we will help the advisor optimize their team before joining us, meaning, if an advisor is coming to us, their million-dollar practice, and they've got seven team members on staff and two of those are insurance underwriters, I'm making that up, we may say, "Look, okay, you likely don't need these two roles. So, we either recommend we find new homes for them or we transition these roles into something else," associate advisor roles, revenue generator or revenue retainer roles, as I call them, so that we can create more capacity for the business, and it could be more profitable on its own.

We go through this long process of deep discovery into everything from the way they price the fees they charge to team members to comp. And just like we would in a practice management engagement, we sort of say, "Here's how we would optimize the business so you can step into the powerful role you want to step into." And then obviously, if they join Journey, we go about implementing all of that.

So, advisor joins us, and what I say is their day-to-day won't feel much different except for the fact that they don't have responsibilities around managing their books, or HR, or payroll, or compliance, or tech is down, or, "Gosh, do we need to...somebody just quit. I need to hire somebody." None of those responsibilities they have to worry about anymore. We literally step in and do all of that.

Yes, they are Journey firm, and here's where that I talked about the intersection between flexibility support and independence comes in. We recognize that it's really important for advisors in many cases to still lead and be the leader and be viewed as the leader. And so, we actually work with them to customize the way we will support them throughout the year, meaning, we have a standard set of meetings and sessions that we do with firms, right? We have monthly business development sessions. We have quarterly strategic business planning sessions. We have annual compensation sessions. And that's where myself and others at Journey "home office" are actually meeting with the key stakeholder partner advisor and saying, "Let's sort of plan what the next quarter looks like or let's talk about goals, let's talk about how we're going to develop the associate advisor on your team." And so the advisor is still the one ultimately making the decision, but we are truly consulting them on how to make the most optimal decision.

I just had a call with an advisor that they said something that really resonated with me... just sort of the light bulb went off for me. And they were talking to me about a firm that is trying to court them and showing them how much more profitable they'd be if they joined this firm and not Journey and our payout stock and whatever. And what I always say to advisors is... first of all, when you're talking to a firm that's trying...they're putting their best salesperson in front of you, number one. Okay.

Number two, they're painting you a picture of the most operationally efficient business that could be run. Any projections that a firm is showing you is best-case scenario, and the reality is it just does not work that way. People are not as productive as you assume they'll be, right? Parkinson's Law, all these things. And so what we're actually showing advisors is the reality of what it's going to be when they join us. There's no surprises in terms of how they're going to get paid out or sort of grow or make money.

Oh, and by the way, they're going to benefit from multiple expansions. So if they're concerned about what they're going to sell their business for down the line as a standalone, they get the benefit of also monetizing likely at a higher valuation that they would on their own. So, it's like any pushback that I've heard from advisors going through the...we tried to solve for all of those. So it's a super concierge sort of relationship with our partner firms where they day-to-day are doing their thing, but we're really behind the scenes operating and implementing everything they need to serve clients, develop team members, and attract new business.

Michael: So take me back once more just to this kind of payout range of 50 to 65. It is like any particular advisor, where do I land in this range? Are you ultimately moving it up and down to, "Hey, you got a lot more staff than most firms your size. If you want to hold on to them, that's cool, but we're only going to give you 52% payout. If you're willing to dial your team back to something that's more typical for your client base size, then we can move you up to 60%." Is it that kind of negotiating back and forth? I'm thinking about that in contrast to at least how payout rates work in, I'll call the old traditional world, which is essentially all production-based. At X dollars of revenue, you get a payout of this, and if you hit the next tier, you get a payout of that.

Penny: Correct. So it's the former, although we do have opportunities for advisors to max out at 65, which, by the way... any advisor who I have these discussions with, you're not netting 65% on your own anywhere if you're running advisory business, maybe at a certain... There are certain places where I've seen that, but it's very rare.

You can max out at the 65% after you've achieved a certain sort of gross revenue number, but everything...and this is my belief, that we've gone to a place where we're very cookie-cutter with advisors, and as RIAs have grown bigger and bigger, it's become less about the advisor experience and what's customized to their business and more about, "We need to quickly gain scale, and this is the formula, and this is how it's going to work." No, we spent a lot of time exploring the P&L and the team construction and the business, and it's a negotiated payout that to your point is based on what the advisor is willing to take our advice on or not.

And in every scenario I've looked at with the exception of one where it was a firm that was doing a lot of insurance production, the advisor is taking home more money in this structure than running it on their own.

Michael: And so does that mean, if I have staffing changes to my own team, I either want to bulk up a little bit more, I'm comfortable to dial down a little. My payout could get changed or renegotiated at the end of the year because I changed my staffing support?

Penny: No. The payouts are negotiated before an advisor joins us, right? And again, this is part of our belief that we don't want to transact with advisors. And honestly, Michael, maybe this will change in 10 years, but our approach right now is that any decision about the business itself, the advisor's feelings about where the business is at, any decisions about the business need to be made in conjunction with the advisor.

So, we will make the decisions about how we're going to optimize team. We'll agree on payout. And again, it's always going to be within that range. Advisor joins us and then we come to an agreement around, "Look, if you hit this sort of revenue mark, you're going to climb up to a max out at 65%."

The other piece of that that we really try to get advisors to understand is that you're not just going to theoretically take home more money that represent "net profits," but we're also creating space and capacity for you to grow at a faster rate, and then actually teaching you how to organize your day so that you are maxing that out. Let me expand on that.

The first piece of that is that when I tell advisors, imagine your week is suddenly empty of the hours that you spend on all the things that don't actually have to do with having conversations with clients, financial planning, and bringing a new business. Imagine taking away all of that. And we get down to as granular as building out CRM workflows. So when the advisor...day one that the advisor starts with us, their entire business is set up for them so that they can optimize their day and the way they work through workflows.

So, everything from CRM workflows to marketing tech platforms that help push out content to team meeting agendas for their team, everything is built out. This is where the practice management, content creation comes in handy because we literally put all these things in place. They start day one, they're hitting the ground running with their team, we go so far as the associate advisor has an idea of what development pathway they're going to be on for the next three years. The advisor doesn't really do or create any of this.

Well, great, now the advisor is left with 25 more hours in their week, and we know that one of two things can happen, either work expands to fill the time you have to complete it, right? So now you're operating less productively, or we step in and we're saying, "Wow, you have 25 more hours. Let's strategize on who you're talking to, how you're filling that time, what you want to be spending that time." Maybe you want to spend your time with your kids. That's great and we support that. But let's be strategic about it.

And so, what we know, and we prove this with our first tuck in is advisors will grow faster than ever before when they have time to do so. And so we proved in year one that it works the way we thought it would.

What It Means To Tuck-In To Journey’s Advisor Network [1:01:37]

Michael: So, I guess I'm just trying to understand. What happens as my team grows? I get this when me and my support team, right, my CSA, my paraplanner, or associate advisor, you'll help manage and oversee them a little bit. I just get to go do my thing with clients. You'll kind of guide me on their development paths and so forth. What happens when eventually my associate advisor wants to move up to a lead where normally they're getting paid on revenue? They're servicing, but that was dollars that I was getting under the Journey payout. So, do you pay me and I pay them? Does my revenue get carved off to them? Are you not necessarily working with advisors that are looking to build multi-advisor systems that way in the first place? It's folks that want to tuck in with their own team not necessarily grow multi-advisor teams of that nature. How does this work as the team expands or is the idea that you're not necessarily working with advisors who are trying to build multi-advisor teams? They're trying to build highly profitable practices for themselves.

Penny: That's a great question. And no, it's the former in terms of who we tend to talk to. It's advisors who want next-gen on their team to develop into the lead advisors in the organization or advisors who are coming to us with other revenue generators on the team. The answer is it depends on how the advisor comes to us. And here's what I mean by that.

Well, first of all, if an advisor is the only...I'll say coming to us as the only sort of producer on the team, meaning other advisors are paid a salary plus bonus, that's the best-case scenario and sort of easy to manage because we're responsible for helping to continue to develop compensation. We can get really creative with how we pay people who are developing into the "lead advisor" role. If that advisor wants to be sort of their own advisor within an advisory organization, there's a lot of unique things we can do with paying overrides to the senior advisor. We can keep them on a salary plus bonus track. And the benefit is that that responsibility and risk is really on us. The advisor's payout who's coming to us as the owner of the business, the advisor's payout doesn't change. Journey has to be smart about how they're managing that P&L so that we can still be profitable on that team and also pay people what they deserve.

Now, if an advisory team is coming to us from a wirehouse, let's say, where there's multiple producers, every advisor gets a payout. Now, we still treat that...let's just say it's a team coming out of UBS, there's multiple producers on the team, they get a 40% payout, let's just call it where they're at and then their support staff that are on salary plus bonuses. The advisors that are producing or have been called producers will get payouts. Everybody else is managed with the traditional salary plus bonus and incentives.

If the associate partner gets to a place where now succession planning is coming into play, maybe they want to buy out senior advisor's book of business or maybe they're thinking about what is partnership look like, we can actually provide the capital for them to buy the advisor out because the challenge now too in our industry is valuations are so high that it's hard...just candidly, not every associate person on a team is able to afford to buy out the advisor at the valuation the business is now worth.

So we actually support advisors in developing into that lead advisor role and also we will co-invest with them in buying out the senior advisor. So it's a long answer but it's highly customized, and it depends really on the contracts that the advisor is coming to us with, if that makes sense.

Michael: And so what are the typical size of practices just that are coming to you for this...? I think of this as a tuck-in model. I don't know if that's a label you use.

Penny: Yes, it is. Yes, we do use that, although, again, I found that that doesn't always resonate. That's a term we use a lot.

Michael: Yeah. It's industry-ish. I don't know but I'm excited as an advisor say, "I'm tucking in." It feels business descriptive. It's probably not the best marketing label.

Penny: Right. Essentially, that is what it is and we explain really clearly, joining someone's ADV...and we're almost at 3 billion in AUM. There are benefits to doing that and especially when you've got window of time to build and...there's reasons why some advisors would want to do that. I totally understand advisors who don't want to do that and want to maintain their own name recognition, this stuff is really personal, and I'm committed to...even if an advisor says, "You know what, those are deal-breakers," great, let's find you a forever home somewhere with a firm that's a good firm. So I'm totally fine with that.

Michael: Because advisors come to you, they do need to use the Journey label. They need to use the Journey firm name. You're not necessarily doing DBA kinds of structures?

Penny: No, DBA. We really debated this. It's really simple. Our goal as the firm and the "home office" is to drive enterprise value for the overall organization so that everybody can benefit. And I would say uniformity in name, marketing, PR, being able to scale those services, it's much easier to do that with one name. And look, we've seen firms that have done the partnership model with DBAs, and it's not always super successful or profitable. Yeah, we were sort of clear on that from the beginning. 

Most of the time I'll hear somebody say, "Well, I got a lot of stuff I want to write off, and I've always written off." We'll have those discussions. Part of being as hands-on as we are, is we want advisors to feel like we’re their CFO will come to them and say, "Look, theoretically, here's what you should spend this quarter on all your travel and client events." And I have found that that's actually what advisors want. They just don't know they want it. And so I need to bridge that gap in their minds.

What's been so interesting about running this because it is a startup even though we've had a tremendous 15 months, we anticipated a certain type of advisor speaking to us, and it has been really all over the map. I would say the standard business that we can do a lot with in terms of helping is the advisor that's generating, let's just say, a million in revenue and wants to figure out how to get to 5 million in revenue, or an advisor that's in a Northwestern Mutual building has a DBA, is managing 250 million in AUM, and has a team of five and it's sort of like, "God, I'm about to plateau. I've done so good up until this point." So that advisor it's this solo practitioner who has a support team is trying to figure out how to scale, is generating a million in revenue. We can do so much in terms of helping that business institutionalize and grow exponentially.

What I didn't anticipate was having the $4 million wirehouse team be like, "This sounds a lot better than us trying to go out in the final inning of my career and trying to launch my own RIA." And that's been the really exciting thing for me because I just didn't anticipate really wanting to or going after those advisors, and I find that they actually get it because they've come from...

Michael: They've lived a payout world except payouts at wires tend to be a bit lower than where you guys are because a lot of additional overhead and dynamics in wirehouses.

Penny: That's exactly right.

Michael: It strikes me even relative to the straight independent channel, at least the independent broker channel. You've talked about where you get to these high 80%, low 90% payouts. It's like, well, okay, but then you still have all of your overhead. You need to do your technology and support staff and admin staff and HR and bookkeeping and compliance and finance, all the stuff that goes in the overhead category of an advisory firm, which in practice for most firms is 30% to 35% of revenue is pretty typical once you get to sort of just a critical mass of size and team infrastructure. You can go try to get a 90% payout and then still have 30 plus percent overhead, and when you net that out, it's, yeah, you're basically right back in the same place.

Penny: Exactly. The other thing is industry is changing so rapidly just in terms of solutions and the fintech space is a whole other animal. And what I found for many of these advisors who are leaving captive systems to go out on their own, they don't know a whole lot about the industry. It's not their fault. But I talk to firms all the time that have actually gone out, they've launched their own RIA, they have no idea about what's new in fintech or what's happening.

You're a business owner in a specific industry. It's actually critically important that you understand what's happening in the industry you're at. I think that is something that's underestimated how much time and effort and resources that take, going to conferences, joining podcasts, listening to people like you, and staying in the know. I don't think advisors should have that responsibility if they don't have to. And so, we try to solve for that as well.

And I just say the last piece is...there are RIAs out there that'll say, "Join us. We have 100 billion in AUM and all these teams." And it's, yes, but not always necessarily, just because firms have affiliated with an RIA or pay whatever they pay a year to access certain technologies, it doesn't necessarily mean that they're really getting anything other than tech and some compliance oversight. It's really important for advisors to fully think through, "What do I want to be responsible for? What are those responsibilities comprised of on a day-to-day basis?"

And then finally, when the firm says they offer practice management, which every firm in the industry says that, what does that mean? What it usually means is it's just a BS marketing line that they put into a pitch deck, and the truth is that what that means is that if you have a problem, you can call a relationship manager and they'll help you. That's not practice management coaching. And as somebody who's in that space, I get very offended by that. That's not consulting. You can call somebody and complain about tech not working. That's not somebody who's trained to help you develop as a leader and help you make critical decisions about the business proactively on an ongoing basis. That is what Journey is.

Michael: And out of curiosity just because I know some other firms do versions of this, advisors who tuck in and participate in Journey, are they equity owners in Journey? Is there a... and if we sell this Journey thing someday, you participate in that with the way that some aggregators do it and pitch their value proposition, or are these meant to be separate? You've got your journey for doing your thing, you're helping them build their practice and get their payout, and that's their deal.

Penny: They don't own a piece of Journey overall. Listen, if a firm is with us and if we ever monetize down the line, obviously firm benefits...underlying firms are... It's tag-along, not drag-along. So if they want to sell at that time as well, they'll benefit from our multiple. We'll take a small turn on that. But it's more than they would get if they were selling independently.

And additionally, we do set up...and this sort of gets into the specifics and logistics... but we do set up a corporation, and we want to ensure that if they do monetize, that's tax favorably to them and it's not paid as ordinary income. And so we've tried to think about all the different ways in which we can benefit the advisor at the moment of monetization if they want to sell before we...

I don't know what's in the future for Journey. I know we're not going anywhere for at least the next 15 years. But if they want to sell before that, we have the capital to be able to buy up to 100% of their business at any time. And so they don't own Journey overall, but they do own "their underlying business."

The Surprises And Low Points Penny Encountered On Her Journey [1:13:53]

Michael: So as you've gone through this, well, journey, no pun intended. Having lived the practice management consulting side for many years and now building and scaling yourself with Journey directly, what surprised you the most about building an advisory firm at this point?

Penny: Honestly...this is going to sound crazy, but I know it's going to resonate, how different the tech is when you're working in it versus talking about it or coaching around it. And really simply what I mean is how disjointed tech is and not aggregated enough and not...maybe aggregate is the wrong word, but integrated, I guess. Data flow...just the actual sheer challenge to build a structure where we're centralizing operations and relying on technology to pass data back and forth in a world where people are calling single sign-on a full... That's not a full integration, and I complain about this all the time.

So just really getting the insider's view on what it is like to actually try to build something efficiently. It's incredibly challenging. And honestly, the hardest part has been efficiently using technology in a way that will help us scale the business. And I can't believe advisors have to go through some of this stuff on their own. Believe it or not, I would say that's the most challenging. In terms of getting people interested in our idea and building and hiring, I did not find that to be the challenging part.

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

Penny: Umm...We've been technically in business for 15 months. I love this work. I can't say there's a lot of low points. The lowest points are...and this is something as a leader you face all the time, it's just when you're running an organization that's not just a lifestyle coaching business, you're going to make decisions that are not popular all the time. You're going to have a perspective on things that others will disagree on, and the truth is, you can't get through building something like this. We're at 15 people right now and growing and obviously got a lot going on this year for us. You're not going to be liked every day, and I think advisors face that, leaders face it.

And the low point is just...I think for me is trying to find the balance between knowing what's right in terms of where to take the business, but balancing that with it not always being the popular choice or decision. And look, working with people is, in my opinion, the hardest part about being in a service business, different people, different personalities, experiences, it's hard. It's just really hard.

The Advice Penny Would Give Her Former Self [1:16:28]

Michael: So, what do you know now that you wish you could go back and tell you from a few years ago?

Penny: I would congratulate myself, first of all, for not...I'd pitch this sort of idea about Journey to a potential investor years ago, and I'm so happy I didn't and launched with these partners in this way. It's just like I was smart to do that. I saw that that would not be a good partnership. So, that I would say, good for you, you're thinking right there.

But, something I know now that I didn't know then, be open-minded I think about...this is not in a negative way. When I was consulting, I'd consulted for wirehouses on projects, and I'm like, "I don't really know if I want to work within that division of the industry." Advisors, it's really hard for them to actually implement and make decisions and do things. And I think just keeping open minds about who this type of business could benefit and where this value proposition would resonate the most. That was definitely a learning for me. And sort of that's something that I wasn't really thinking about a couple years ago that I've definitely shifted on now.

Michael: To me, that's always one of the fascinating things around just entrepreneurship and building your business. Usually, we build with some vision or expectation, where this is going, who is this going to serve, where we're going to get traction success. But ultimately, the people who buy are the people who are going to buy, the people engaged, the people who are going to engage in. It doesn't always turn out to be the ones that you thought it was going to be. Often it does. Usually, we've got a good sense of who we're serving, but not always. Sometimes you find traction or success in unexpected places. And I find of the challenges for some people is you can even unwittingly get stuck in the vision of how you thought it was going to go originally and miss the opportunity that knocks on your door because they don't fit where you thought it was going to go originally and then you fail to make the pivot when it was right in front of you.

Penny: So true. And we pivoted on something major within 11 months. Advisors tend to come to us with books that are comprised of different revenue sources, right? Maybe they're doing planning and charging a fee and they've got advisory business and maybe they're selling some insurance or whatever it is.

We originally intended to run everything through the single payout and treat the entire business as one business, one P&L. And then we found that the insurance business is a different animal. And we actually pay out completely different...we found that advisors who are ready to make a transition to an RIA are likely not concerned about hitting insurance quota. But if an advisor is going to sell insurance as part of implementing a plan, they keep the majority of the revenue on that business. And so that was a major pivot we made because we were open to evolving the way we've thought about the structure.

I thought of one other thing that I wanted to share on learnings. I just recorded a video on this for my YouTube channel. And it's the importance of we can't underestimate how valuable it is to leverage EQ skills when you are talking to advisors who are looking for a home. We are obsessed in our business with the transaction, right? How much was the business worth? What's the AUM?

The advisors that I want at Journey are advisors who want us to ask things like, "What would feel most fulfilling to you? What does your spouse think about this decision? Talk to me about the things that you really want to make sure never change post-transition."

I've been in so many conversations, Michael, on both sides of the equation as a consultant and now in this space trying to do deals. And I've got M&A guys in the room, P guy, whatever it is. There aren't that many conversations that are targeted to, let's look at the advisor seller's psyche and quell all their concerns before even putting an LOI in front of them. And that is a major differentiator for us, and I didn't realize how important that would be a couple years ago.

The Advice Penny Would Give Newer, Younger Advisors [1:20:24]

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

Penny: I would say keep an open mind about how you define success. What's happened to a lot of the...we'll call them old school advisors, is that the industry defined success for them a very specific way, especially if they grew up at any of the firms we've talked about. And what's important for the next generation and the newer generation is that there are 1000 different ways to build. There's a bunch of different ways in which you can be an advisor on a team as still as a solo...whatever it is.

Forget what the industry tells you or what you read about. There's no one way that is better than the other or more right than the other. Everything is about trade-offs, and so knowing and using the first couple years to really identify what you know and love, super important, whether that is the technical components of actually being a planner or whether you like being a planner because you also get to lead a team. Figuring out what you really love and enjoy, number one, secondly, not having a preconceived notion about what success may look like for you really important as well.

And again, I've seen a lot of advisors not make a good decision about a transition or about where they're going next because they're so caught up in this thinking of "I need to be the CEO with Phillips Financial on the door." And they're just so stuck in that thought process that it's hard for them to think about "Is that really aligned with what I said I wanted to spend my time doing?" And so having an open mind around that and being willing to sort of evolve as the business life cycle unfolds, that's my advice to younger advisors.

Michael: If it's not the industry's traditional definition of success and it's supposed to be something different. What is the industry's traditional differences of success? And what kinds of different definitions are you talking about here?

Penny: Well, I could be wrong in terms of this still being the definition. But it feels to me as somebody who tries to also be a student of the industry and put myself in the sort of mindset of an advisor reading all of the news that comes out and press releases. The way we market to advisors, right? It still very much favors this idea of solo practitioner, solopreneur advisor building a business because they're an amazing rainmaker and ultimately getting to nirvana, which is you've hit 1 billion in AUM and you have your council member. Look at any article or press release that's written about an advisor, right, or an advisor transition. It's almost always about the same things, right, like AUM valuation of business, then that's pretty much it.

And even when you look at and when you consult at the larger institutions, the way they pay advisors has not changed for the most part. There are some that have really embraced the teaming model, but for the most part, it's still you produce and you get paid, and the more you produce, the more you get paid. In some firms, it's still you produce a specific product sale and you get paid more.

So we're still pushing this idea that you as producer and then you as CEO equals best. And it's the reason why we still have really low retention rates. It's the reason why we let go of advisors who...even in the RIA space. Everybody wants to bring on an advisor with a book of business, which is understandable, and everybody wants, "Where's the next rainmaker?" And the reality is is we're dealing with a different generation of advisor.

You may have to train that...that person may need to be mentored for 10 to 15 years before they develop the skill set of developing business. Oh, and by the way, they may never develop that skill set of developing business, but that doesn't mean they're a bad advisor. And so when I talk about the different success pathways, and I speak to female advisors and planners specifically who've said to me, "I really enjoy what I do, and I wish I could just do that and have that be the way I spend the majority of my day."

So, number one way to think about success is you are not the CEO. That may mean you have to hire a CEO, by the way, to build and grow and strategically drive the business, but you can be the practitioner in that organization and still be the owner. That's one thing.

The other thing is just because you can't "produce" doesn't mean you shouldn't be an advisor. And this was always my rub with the insurance broker-dealer channel. Advisors would leave because they couldn't hit their quotas, but these are people sometimes with phenomenal relationship management skills or really technically proficient in planning but couldn't produce to their contract, so ended up with...you lose that talent. That person could be a great lead advisor in an organization and eventually make partner. That's okay too. And so those are the different pathways of success that I think we need to think about.

I could go on a rabbit hole here because there's also this challenge of, "I think this advisor is aging out of the industry," the old-school advisors. They feel resentful in some cases about the advisor that's going to be their successor that didn't have to grind the way they did. And I think we got to get over that and just accept that we're in a different time. And advisor...leaders are going to be developed differently in our business.

What Success Means To Penny [1:26:01]

Michael: So, as we wrap up, this is a podcast about success, and one of the themes that just comes up is the word success means different things to different people as we've just been discussing the context of advisors. And so you've been down this successful journey with your career both in building practice management consulting business and now in launching Journey. And so I'm wondering, how do you define success for yourself at this point?

Penny: For myself personally or for Journey? We are one and the same I feel like sometimes.

Michael: For yourself.

Penny: Yeah. Such a good question. Like I said, and I think this... And I don't know if it's a gender thing or if it's a me thing or... There are certain things that I look, and I do this with the team as well. And I encourage everybody in our organization to think about success in a way that's meaningful to them. And that goes for the advisors. That goes for everybody on the team. Meaning, at the end of the week, on a Friday, if you ask yourself, "Was this week successful, yes or no? If yes, why? If no, why? Was this week fulfilling, yes or no?" How are you answering those questions? And when it's affirmative, what are you...why? I encourage everybody to think about that.

And what we learned from doing those exercises is that a lot of times, it doesn't have to do with...sometimes it has to do with AUM and new business, but other times it doesn't. And so, for me, personally, when I think about success, it's, number one, did I drive recognition around why we're doing this this week? And all the things I talked about with gaps, I've seen advisors being unhappy, I think the industry really driving outcomes versus allowing advisors to create their own. All those reasons. Did I drive that point home in the conversations I've had with potential advisors, the conversations I've had with the team, the content that I've put out? That's one way I look at, did I move the needle? Was I successful?

Another thing personally is just this idea of being direct and honest about concepts that we've convoluted for advisors, so payout being one of them, the way they think about what it means to be on someone's ADV. Am I giving advisors all of the objective as objective as I can be owning a RIA? Am I giving them all of the information as objectively as I can that they need to make the most educated and empowered decision for themselves?

I talk to advisors literally every single day. Obviously, the majority of them are not going to come to Journey. It would be great. But is the decision that they made as a result of the discovery process or conversation or exploratory, whatever we just had, enough to get them to a place that they'll never want to leave. That's at this point in my career how I define success.

Now, I also think about all day every day, and again, this is translatable for advisors, we have a very specific value proposition, we have a very specific mission statement. I am successful if and only if we delivered that in a real tangible way to an advisor at the end of every single week. And an example of evidence of that. So I'm constantly looking for evidence of either I've achieved this personally or not.

When I have my catch-up calls with each of my team members and our partner advisors and they'll say something like, "I reflected this week and realized that I was able to do all the things I wanted to do, bring on the relationship and also pick my kids up from school at 3 and didn't skip a beat." When the advisors are articulating to me that they're living their most fulfilling life, then I am successful. What I've noticed is it's become much less about my talents, which my consulting and coaching career was focused on my ability to get people. Now it's much more focused on these bigger concepts and advisor success, which is actually really fulfilling to me. So it's a long way of talking through how I think about whether I'm succeeding.

Michael: Well, as we said earlier, it's that journey to making yourself "irrelevant" in the business by institutionalizing your intellectual property.

Penny: Exactly. That's right.

Michael: Well, I love it, Penny. Thank you so much for joining us on the "Financial Advisor Success" podcast.

Penny: This is awesome. Thank you so much, Michael.

Michael: Thank you.