#FA Success Ep 275: Growing Organically Past $4B Of AUM With A Shared Ownership Mentality, With Michael Chasnoff

Resources Featured In This Episode:

• Michael Chasnoff
• Truepoint Wealth Counsel
• Commas
• FP Transitions
• David Devoe & Associates
• Echelon Partners

Looking for sample client service calendars, marketing plans, and more? Check out our FAS resource page!

Full Transcript:

Michael K.: Welcome, Michael Chasnoff, to "The Financial Advisor Success Podcast."

Michael C.: Hey, Michael, thanks. It's a great opportunity to be with you today.

Michael K.: I appreciate you joining us for the podcast and an opportunity to talk about what happens in scaling up a really large advisory firm. I know you guys have been going for the better part of 30 years now, have many billion dollars of assets under management and serving well over 1,000 clients. And I just find so many advisory firms these days, as they're growing, and particularly once they get into the billion plus dollar range, there's been an immense amount of mergers and acquisitions. And sometimes I feel like a viewpoint that the only way to sustain growth at a certain size is that you just have to start acquiring other advisory firms to keep the growth momentum.

And I know your firm, it's largely bucked that trend for several decades now and has continued on in a growth cycle through the billion-dollar mark and the 2-billion-dollar mark and the 3-billion-dollar mark and up. And so, I'm excited to talk about what it's like in building and scaling an advisory firm that's focused on, "We can just keep growing by serving our clients well and figuring out the markets that we have impact in and powering along under our own organic growth engine."

Michael C.: Yeah. I'm happy to really get in and talk about how that happened. Because it is unusual today to be an independent employee-owned firm that...it's pretty much the same way that we started 31 years ago we are today, except we’re bigger.

Truepoint Wealth As It Exists Today [04:22]

Michael K.: So, I think, to get us started, can you just describe the advisory firm as it exists today? Just paint us a little bit of a picture of Truepoint Wealth Counsel.

Michael C.: Well, we're a fee-only independent wealth-management firm. And what I always tell people that aren't familiar with who we are, I talk about what wealth management is. And some people in the media think you're a wealth manager if you're strictly investing in managing assets on behalf of a client. But in our view, wealth management is something much broader. And it begins with a comprehensive personal financial plan. And then it's complemented with the subspecialty categories of tax, estate planning, investment management, risk management. So, having all those financial disciplines represented internally in our firm creates a unique wealth-management experience for our clients.

Michael K.: And so, how big is the firm overall at this point?

Michael C.: I think we're over 75 employees right now. I talked to head of our people, HR department or people department, and we're always out there in the interviewing and hiring mode. It seems like the pandemic didn't slow us down a bit. We brought in about 13 new individuals during about 12-13 month period, wrapping up at the end of last year. So, it's just been incredible to bring on really interesting smart individuals to the team. But it's definitely been a growth phase for us, even though that COVID has slowed down and changed the way we do business otherwise.

Michael K.: And so, how many clients get served across a team of 75 plus?

Michael C.: We're looking at about 750 families. And the families might, of course, mean parents and children, sometimes grandparents. And so, we have a lot of activity working with the family. And it's one of our real focuses is multi-generational planning.

Michael K.: And then how big is the asset base for the firm overall?

Michael C.: Well, on a good day, I'd say it's a little bit over 4.5 billion dollars. We've had some market volatility, I don't know exactly where that stands at the moment, but we're getting close to 5 billion and hope to be there shortly.

Michael K.: So, if I'm just doing this from a napkin-math perspective, 4.5 billion dollars and 750 families being served, so, that's like a 6-million dollar average family being served, is that a good reflection of typical clientele? Obviously, you've got a range around that, I'm sure you have much larger and much smaller, but...

Michael C.: That's right. And now we have focused on working with higher net worth clients and have had a 3-million-dollar minimum in place for quite a long time, even looking at bumping that up at some point.

Truepoint’s Fee And Specialty Team Structures [07:41]

Michael K.: And then how do fees work for a firm of your size and structure?

Michael C.: Okay. Well, we charge 8 tenths of 1% for clients at essentially 3 million dollars and up. We have a break point at 5 million where it drops to 50 basis points. And the next 5 million would drop to 30 basis points. We have a minimum fee, so, clients that might come to us at 3 million or below are subject to a $24,000 annual minimum.

So, there are times where we take on clients below that 3 million. And, as long as they are willing to pay that minimum fee, we're happy to service them. And many times it makes sense for them, because of their wealth-accumulation opportunities, to get started with us before they've achieved the higher asset levels.

Michael K.: So, now help us understand a little bit more, just what does the firm do for a $24,000 minimum fee? Right, as I'm sure you know, a lot of us talk about doing comprehensive financial planning. We tend to cover all the things in the CFP domain, so, taxes in the state and investments and insurance, all the areas that you've described as well. I'm going to guess there's still ought to be something a little bit different around what your firm is doing for clients, the $24,000 minimum versus the average advisor who charges one-tenth of that for a financial plan. So, help us understand a little bit more just what the firm does, how is it different in a way that you're working with significantly more affluent clients with much higher fees than most other firms.

Michael C.: Right. Well, first of all, when we do look at the 8 tenths of 1% rate, that is actually lower, on a percentage basis, than many clients are paying. Many clients are at brokerage firms and banks spend over 1%, as you know, but they don't have 3 million dollars or more.

Secondly, our client experience is different. And because we have internal capabilities, we feel like we have the opportunity to dig deeper with our clients. We go deeper in that wealth-management planning experience. So, many times our clients are saying to us, "You guys know me better than I know myself."  And so, that starts off with a really deep dive on the discovery side, really understanding the why that our clients are making the plans they're making and documenting their vision. And really, essentially, work the plan throughout the year.

So, the fact that we have 16 CPAs on our team, there's a CPA that's part of the client team along with an estate planner, along with a CFA. There's, essentially, these teams, financial-planning teams effectively get very deep and personal with our clients. And we take them through a process of really understanding what their purpose is and how to get to a more meaningful outcome.

So, look, I know that there's a lot of great financial planners and advisors across the country providing deep client planning experiences but it's hard to do that as an individual responsible for all of the areas that we dig into. And so, having a team effect allows us to, like I said, go deeper.

Michael K.: So, is that all internal staffing? You had mentioned that client teams include a CPA, an estate planner, and a CFA, is that all internal capabilities for you? So, you've got CPAs, attorneys on staff in addition to the investment folks?

Michael C.: That's right, that's right. So, just recently looking at the numbers, we have 31 CFPs, 16 CPAs, 8 CFAs, a couple attorneys on the team. They're not actually drafting documents but they're using their legal experience in advising our clients in trust estate areas. We have three CTFAs, which are, of course, more estate and trust-focused advisors as well.

Michael K.: So, how does this work from like a client...I guess I'm trying to envision how the client teams work. Is it always static groups, like there's a group of 4 that's a CFP, a CPA, estate-planner, and a CFA and the 4 of them have their group of 50 clients or 100 clients or however many it is? Or is there more of a rotating thing, CFPs managing clients but then the CPAs and the CFAs mix and match amongst them, depending on the clients? How does that come together when you're structuring teams and servicing?

Michael C.: Exactly. So, it is more of a dynamic approach. We have talked about the benefit of creating pods where you have a static team helping with certain advisors and those clients. But we have found that there's so many advantages to customizing and, you might say, curating the team for that specific client. And our team members prefer it that way. They enjoy working with different advisors, the specialists. They don't want to only work with one financial or wealth advisor, they want to work with several different wealth advisors and be able to have more variety.

Michael K.: So, how is this actually just structured organizationally then? You have an advisory team of CFPs but then you've got a tax department with the CPAs and the state team with the attorneys and their internal resources?

Michael C.: Yeah. Yeah, exactly right, Mike. So, essentially, we have...of those CFPs, I'd say there's 16-17 lead wealth advisors. Those lead wealth advisors are the single point of contact for each client coming in to the firm. And then their job is to coordinate with the specialist on our team, the investment managers, the tax specialist, and estate planning, and the risk-management folks. They're going to coordinate and make sure that they're all prepared in advance of that client meeting. And then, when the meeting takes place, different folks might all be present or they may be rotating in and out of the meeting when the client is either in the office or we're together on a Zoom call.

Michael K.: So, 17 wealth advisors in the lead across 750 clients. So, that's like 40 to 50 clients managed by any particular lead advisor, is that...

Michael C.: That's right.

Michael K.: Do you think of that as a capacity target? Because I know you're working with some more affluent clients, they've got some greater complexity, so, I'm going to imagine the hours per client is higher. So, do you guys actually target that kind of capacity, "Thou shalt not have more than 50 clients at once."?

Michael C.: Right, exactly. So, that's pretty much the case. Certain advisors are dealing with certain clients that represent more complexity and their number of clients might be below that average than others may have, more of a less complex group of clients, and they might have a few more. But our goal is to have a limited number of clients to wealth advisors, clients to total employees in the firm.

So, we want to make sure that the type of client satisfaction that our clients are reporting to us is not diminished by our continued growth. So, we're continuing adding to the team, making sure that we can maintain these deep relationships with our clients.

Michael K.: What I think it does help to highlight when you get into just what's different about what your firm is doing versus others. It's one thing to say, "We help you with your tax estate planning," it's another to say, "and we have 20 CPAs and attorneys literally on staff sitting in on meetings with our lead advisors." A lot of us talk about being higher-touch firms but we don't necessarily get to the point of 44 clients per advisor and just the amount of room that leaves you to interact more proactively with clients. So, to me, that's part of what sticks out between...a lot of us say we do these broad things but then there's literally just, "What kind of team and staffing ratios do you bring to the table to fulfill that?" And that's what charts showing up as differences to clients, right, 44 clients per advisor. I think you said, in total, 750 families and 75 team members. So, on average there's one team member every 10 clients. And obviously, they do a lot of different roles with that, but if you look broadly at the industry, the average clients per team member in total is often more like 20 to 30, not 10. And just that means you literally have more team resources to do more stuff for clients.

Michael C.: So, Mike, when I tell prospective clients about our firm, they want to know a little bit more about what their client experience is. I even share with them the fact that we do a lot of benchmarking and we look at our financial metrics compared to the industry, to firms similar to ourselves, we think. And we notice that our cost, our overhead cost, as far as advisors and staff, is higher than many of our peers.

And so, yeah, I relate to that and say, "Look, that's a conscious decision we make. We're willing to accept potentially a slightly lower profit margin because we want to deliver the type of client experience that leads to client referrals." And we just think that, in the end, it's the way that we want to do business.

So, we tell the client, I explain to the client, our experience is different because we're built differently than our peers. And that's okay, there's other firms that are doing a great job, but the way we do business is different in that regard. And it's in our numbers.

Michael K.: And I guess, conversely, there's, obviously, a little bit of a double-edged sword with this. And just if you're going to staff at that level, you need to have a good value proposition for some fairly affluent folks. Because the math just won't work, right, if the average client...or even if the minimum was $2,000 instead of $24,000 and you have enough clients on board that have to be served. You can't do it with that staffing level if the revenue per client isn't high enough to make it work. So, there's a synergy of how all that works together.

Michael C.: Exactly. We talk about our ecosystem, and it's a very important one to keep tabs on understanding how all of these factors together drive a successful business. And I've always said this from the very beginning, it all starts with that client experience. If you're not creating a great client experience, you're not going to get paid, you know what, you're not going to be able to build the business the way you want to build the business. And the whole thing looks different. So, I've always looked at, "How can we make this experience better?" And many times that meant adding expertise that can provide a richer broader experience for the client.

Challenging Industry Standards To Organically Grow A Firm [20:17]

Michael K.: So, talk to us a little bit more about the clients themselves, just who are you serving at the end of the day? Beyond, obviously, some folks of reasonable affluence, given the $24,000 minimum fee. But is there anything else specific to the clientele that you serve?

Michael C.: Yeah. You know what, we started off with saying, "Hey, we're not going to target, we're going to break the marketing book and not target market." We'll just, when people come in, if they're referred to us or we get to know them and they really are a good fit for our organization, we'd bring them on.

But, over the years, maybe I've gotten a little smarter and we really have some outgoing communications that are geared towards that business owner, geared towards families with multi-generational planning needs. And we also focus on that corporate executive that has, in me many cases, here in Cincinnati, Ohio, that's a PNG executive. And the executive has some really complex retirement planning opportunities with NUA opportunity type planning, stock options, other deferred compensation. So, it really utilizes the team and the team's capability really well. We have physicians and others, but maybe we do less of those than a traditional planning firm because some of their needs might not be as great a fit for, you might say, the firepower that Truepoint brings to the table.

Michael K.: So, how, ultimately, does the firm find these clients, connect with these clients? Are you marketing, are you out in the community, are you doing like niche marketing strategies to PNG? Is this all referral-based, at this point, because the firm's existing client base and years of doing it? So, where does all this growth come from?

Michael C.: So, I'm going to take us back to the beginning just to answer this. So, this might be a long-winded story. But I started Truepoint in 1990 with a part-time University of Cincinnati employee who happened to be pretty good at Excel, or something similar to Excel back in those days. And so, we started a little financial-planning shop, and I recognized three things about myself. One, while I don't shy away from engaging with people, I, like many of us, don't like making cold calls and don't like the idea of being a pushy sales marketing type individual. So, I decided that I needed to get my name out there in front of the community. And the three things I did to do that was that I wrote white papers based on ideas that there were a better way to go about doing planning, investing, insurance, whatever. From a consumer's perspective, what would be a better way so that you're not incurring a lot of the loads and expenses and maybe some of the misinformation that is out there in the industry? That was back in 1990 where business was so transactional at that time. But writing white papers...

Michael K.: You're talking about basically principles like fee-only and advisory structures and financial planning structures in the 1990s when just the industry is absolutely dominated by selling mutual fund A shares?

Michael C.: Exactly. So, I got my name out into the financial media. I researched and found who were writing the articles on personal finance for "The Wall Street Journal," "The New York Times," "Money Magazine," "Kiplinger's." Even in Cincinnati, our own local newspaper, back in those days, actually had personal-finance columns. So, I was a regular featured resource in our local newspaper. So, that was one thing.

I also went out and identified who the top estate-planning and accounting tax professionals were. And I wanted to make sure that they understood that there was a different way to help and advise their clients, that it would not be subject to a transactional relationship, that I would operate on a fee-only independent basis. And that was welcome to some, some of the other guys, their best friends were insurance professionals and other brokers who referred a lot of business to those guys and they didn't want anything to do with me.

And then the third thing I did was I got active in the industry. I got involved heavily with NAPFA, I ended up becoming the chairman of the organization during the years. But also I was a locally financial-planning chapter president here, in Cincinnati. So, I'm just building my credibility and activity level in the city, in the industry, so as to have a better crack at being recognized as someone that could help my end user, my client, my customer.

And then, ultimately, I want to make sure that my client experience was one that they were willing to share that experience with others. I never asked specifically for referrals but I always made it very clear to them that the way that we're going to grow this business and help them further, that client, further is to help others that they knew that might be in need of services like this. And that's how it's grown. It's continued to pretty much grow that way over the years.

Michael K.: So, I'm struck that what you're describing, at the end of the day, is a version of expertise marketing, right, creating white papers, that I'm an expert in this area and engaging with the media, building with estate planning and accounting professionals, which is a centers-of-influence approach, and industry volunteerism for building credibility. Which is I'm struck, they're all good things, it's not a...I don't mean this a negative way at all, it's not like I found a completely new unheard-of marketing strategy that no one's ever seen before and ran off running with it. Just demonstrate your expertise, build relationships with people who can work with you and build your credibility in the industry...and 30 years of compounding does some amazing things with that.

Just I don't know, to me, there's something really powerful for that. I feel like sometimes we try to make advisor marketing more complex than it needs to be, like, "Where's the super secret thing and the magic formula?" as opposed to just build your expertise, build relationships with people who appreciate your expertise, and build the credibility of your expertise, and give it some time to work.

Michael C.: Yeah, I do think that we might overthink it a little bit at times. But I think it's like the noodle, if you pull the noodle, you can make a nice straight line. I think sometimes, in our industry, in any industry where you have more aggressive sales and marketing strategies, you're pushing that noodle. And that little curvy noodle is no longer the trusted solution.

And I think what we have always done is operated in a manner that was always in the client's best interest. We were acting like fiduciaries, in 1990, when there just wasn't others operating like that, at that time. I do have some great pals here, in Cincinnati, that were but the gross majority of the activity in this city and any town I would've visited was the same, it's like everyone was operating and selling whole life insurance and front-loaded A shares or B shares. And it was just totally different than it is today.

Michael K.: It does strike me that just I don't think it's understood and appreciated sometimes in the environment today how just truly unique it was to be offering financial planning and charging advice fees and not implementing products 30 years ago. Just I would almost think of it like that literally was a niche unto itself, being the only sizable fee-only financial planning firm in a city with 1,000 brokers who were selling mutual fund A shares and life insurance into irrevocable life insurance trusts, that was the other big strategy at the time...that you were actually incredibly differentiated in that environment by focusing on financial planning the way that you did.

Michael C.: What we did also that continued to make that different...because people started noticing, "Hey this fee-only," and people are saying fee-based, "approach is kind of sexy. Let's start doing that." But again, what we did, over the years, was really build out a really deep team. And so, it took a lot of investment in commitment to kind of a long game that would really be more valuable over a longer period of time. And I think the fact that we started not just providing tax planning and estate planning but we were actually filing our clients' tax returns, we were operating a tax-management activity that it was totally different rather than coming in in March with all your 1099s and W-2s and having tax preparation made on a kind of reactive basis...we took tax planning and tax management to a whole new level within our client experience.

And I think maybe that decision to engage in the tax work the way that we were doing it resulted in a much more active referral level from the types of people that we were working with, where tax complexity was probably the highest factor on their mind. Yeah, they knew they needed to manage their assets intelligently but they might have thought they could get that done a lot of other places. But here, at Truepoint, you could have it all done at one place.

And I might want to just comment on this investing intelligently thing. Because we're an evidence-based investment-management type of firm and, back in 1990 and even today, active strategies are still very, very popular. And our approach was saying, "Hey, that's not how we're going to add value. We're not adding value through things that we don't see evidence." And so, our strategies of using index strategies, diversified portfolios with multiple index or index similar type strategies, such as dimensional fund advisors, really gave us another interesting differentiator, I suppose, at that time. Not so much as today but, at the time, I think clients were saying, "Hey, this makes sense. This is working and it's kind of smart from a tax-management perspective as well."

Michael K.: So, I'm struck, just relative to the time that you were going to the firm, just all these different things that were different of the industry is mostly selling active management, you're talking about like DFA factors and evidence-based investing. The industry at best is maybe doing some tax planning, you've actually brought the tax work and the tax preparation internally. The industry was very driven in a broker-dealer mutual fund and life-insurance sales world and you're talking about fee-only financial planning.

So, to me, it accentuates just the power of the differentiation, particularly in the building years as you were getting going, that you were really coming to the table with something that more firms do today but almost no one was doing at the time. Which positioned the firm very uniquely for growth.

Michael C.: Yeah. You know what, it just seemed like the right thing to do at the time. But I kind of think about some of the other things that we started to get involved with over those years as well. Just looking back, in 2010, we started our women's wealth counsel group. Today, if you're not actively involved advising specifically with women in mind, you're really behind the curve. And the fact that we've been doing it for over 12-13 years now gives us another little differentiation point. The fact that we've been engaged pretty deeply into the life-planning area is part of our process, our discovery. The commitment that we made to be focused on our clients' purpose has been an important decision. Which I think has also led us to some additional growth.

And then there's a couple other things we could get into but one thing I'm particularly proud of is that, back in 2007, I started a succession plan. And I'm fully engaged with Truepoint today but I have sold my founder's shares down to about 30% of the total to about 25 senior members of our firm. So, we have decided, many years ago, that, in order to retain and attract great people into our firm and keep them, we were going to need to compensate them with an opportunity more than just a paycheck. And I think that's made a big difference to the success of our firm.

Offering Equity Compensation To Attract And Retain Top Talent [35:53]

Michael K.: So, share with us more about that, just how did that play out? How did you start introducing shares? Who gets access? How's the purchase...are they granted, are they purchased? So, talk to us more about just how does equity participation work for the team at Truepoint?

Michael C.: Okay. Well, I'm going to give you a little bit of a longer story. But before starting Truepoint, before starting my business in 1990, I had a brief period of time where I worked for an insurance agency. And this insurance agency was a typical organization, marketing and promotion and incentives. And there was an opportunity to actually buy into that company. I guess they liked me enough to offer me an opportunity to buy into this black box, which just wasn't very attractive to me.

If I go back, some of the reasons why I became a fee-only advisor was knowing that I didn't like the experience of working in a transaction-based marketing organization. I didn't like the stress of Monday-morning sales meetings and I didn't particularly like the fact that there was basically no transparency into the financial model that ran that organization.

So, when I built my firm, today called Truepoint Wealth Counsel, it was named Advanced Capital Strategies, back in the 1990s, and we rebranded I think in 2001. But we decided, back in 1990, that things had to be different the way that we run a business. And it's all got to start with respecting anyone that comes in the door to work with me, it comes with full transparency about how we go about running the business. And so, having really well-thought-out career paths for everybody, understanding essentially the milestones that you need to achieve in order to move from analyst to advisor to senior advisor. We had a process. And I'm saying this is an important part of having an equity participation plan is that you have to have the kind of structure and transparency in a business model that lends itself to having the trust and the kind of leap of faith that you need in order to want to buy into a business.

Now we go through a process where we get independent third-party evaluation for our business. We price those shares at a discount from full value because every individual coming in, becoming a shareholder is a minority investor and they're buying into an asset that's less liquid, and so forth, and there's a lot of different factors that affect pricing. But we created something that pays a distribution, it's easy to calculate based upon our growth rate and profitability and the way that we share our financials throughout the year. So, that's important because I didn't want to buy into a stock-equity plan that I couldn't understand or crunch the numbers and see what's going on.

So yes, we have set standards. And once you have, essentially, ascended to the senior management position within our firm, you are now eligible. And then your senior managers are considered for the opportunity. And my company president and I used to be the only two people that would determine if employee A or employee B received the opportunity based upon a number of different factors. But today, because we have 25 shareholders, we actually do a process where the other shareholders evaluate our different senior managers. We go through a rank-ordering process to see who is ready for that opportunity, that it's extended to them. And while we say to everybody, "Look, owning stock in Truepoint may not be what's important to you, and we recognize that, and we don't want you to feel obligated to buy into this company, we've not had one member that we've offered that to that didn't want to buy their allocation that they were offered."

And we have been, you might say, oversubscribed every year, essentially. I've had tough situations because it's expensive, from my perspective, as a founder, every time I sell my stock, I'm basically giving up ownership of a higher earning asset, in my opinion, maybe with some lower risk factors and exchanging that for after-tax proceeds that go into a portfolio that's not nearly as maybe attractive, in many...

Michael K.: Well, yeah, right. You're selling a high-appreciation private business to buy the S&P-500 current evaluation. Right? That's what it comes down to, as a founder.

Michael C.: Yeah, yes. But man, I'll tell you, I've had a lot of conversations with my peers in the industry, others outside the industry, about this process. And I think what we've created through this equity participation plan, we have 25 plus people operating like business owners, and they may only own 1% or 2% of the company, and you would think that they were the founder of the company. And they operate like founders. They give such great effort toward their clients, to their teammates. I think it's hard to quantify but I don't think we could have been as successful if I had just paid them more and kept 100% of my stock all this time. I probably would have lost many of them because they would be wanting equity opportunities elsewhere. So, I'm pretty sure, pretty confident that this has been the right thing to do. I've been enjoying a good outcome based upon this plan. But there's trade-offs.

Michael K.: So, this process, you've got career tracks for the firm. At some point, someone moves up to the senior management level position in the career tracks, when they do, they at least become eligible for equity. Then the other senior manager, the other shareholders do a process to decide whether this is someone they want to offer an equity opportunity to. So, it sounds like it's not automatic that you get a chance to buy in because you hit senior management, you get a chance to be evaluated by your peers.

Michael C.: That's right.

Michael K.: For the opportunity.

Michael C.: And if you can imagine all the attributes that are important to become a senior manager, this is like a really good employee. Right? He or she is competent of course, that's the bottom minimum. But besides being competent, their skill set around working with their clients, their relationship skills, their ability to engage with others on the team, and their ability to engage into the community...all these different attributes make a well-rounded you might say rock-star employee now is eligible to become a shareholder. And now they have to actually do things, now they're in this super group, they have to be offered, they have to even stand out even further. They really represent some of the top new talent, younger talent within our firm. So, that's how that process works.

Michael K.: So, do you worry...I'm trying to figure out how to articulate this. I'm envisioning either someone being super nervous about being evaluated by their peers, they're like a Survivor, "Am I going to get voted off the island?" kind of thing or vibe going or not. Maybe that's just me projecting. But that feels like some intense scrutiny. And I guess I'm just wondering, overall, how does the selection process work? Just do all 25 other people have to approve, is this like a unanimous voting thing? Is it a ranking like, "We're just only going to take three every year, so, we pick the top three," and you're in competition with the other people who hit senior manager. Is it something else? Just what's the actual selection criteria or mechanism that the existing shareholders use to evaluate whether this new senior manager should have the opportunity to buy in?

Michael C.: There is actually a metric with all the different factors that I think most people would derive as being appropriate. But then it is rank order, so, and if you're in the top third of that group, you're going to be in. If you're below that top third, it's basically we communicate back to them and say, "Look, this is how you ranked and these are the factors in this ranking system that suggest that you need to spend more time and effort and conveying more than what you are in this area." So, it's tough. But no, it's not like "Survivor," because I hate that show, the best, the strongest or kicked off. In our case, the best and the strongest are promoted and have the opportunity to grow.

Michael K.: So, does this re-up for me annually? If I made senior manager and I don't make the top third so I don't get the offer this year, do I solve the opportunity of like, "Okay, well, I'm going to step up and, next year, I'm going to make it, like a few people will be off the list because they got it this year, a few new people come on the list because more people are getting promoted but I'm going to get another crack at this next year."?

Michael C.: Absolutely. Absolutely.

Michael K.: And so, it's an annual process?

Michael C.: Well, we have a couple super success stories where, I'm thinking one guy in particular, he was up for the opportunity to become a shareholder in the firm for 3 years in a row. And I thought he was going to feel like, "Hey, this place isn't for me, it's too tough," whatever. But I sat down with this individual and talked to him about what I thought he needed to do. And I said, "It's the opportunity, it's right there, in front of you, these are things you have to do to make a difference and moving your overall ranking higher." And he took that as an opportunity to grow. And he hasn't stopped growing since then. He's a great addition to our equity team.

How Michael Evaluates And Determines Equity Compensation Offers [48:30]

Michael K.: So, when someone gets an opportunity to buy in, how much do they get to buy in? Is it a percentage or a dollar amount? Just how do you figure out how much equity is on the table for them?

Michael C.: It's basically we've had several stock splits. And the reason we split the stock is to get it into a kind of denomination of dollars that is, more or less, affordable for most of our teammates. So, it's affordable in that we have financing available set up with a local bank, so we got it really streamlined so that they don't have to...it's not like buying a house with all the disclosures and all the financial information that's shared but we have it streamlined.

And basically, with interest rates, you might say, in a range between where they were and where they are and where they could go in the next few years, whatever the case is, this loan should be repaid within 7 years. If they use their distributions, the S corp distributions, and they use some of their maybe variable compensation that they receive from a team incentive payout, they should be able to live off their salary, use their team bonus and their escort distribution to pay down the loan effectively to purchase the shares.

And so, that has been the case since 2007. Interest rates were somewhat higher at times, somewhat lower at times, but it's worked out just fine for everyone so far. And again, we always talk about the ecosystem. We think about maintaining a high level of client satisfaction, a high level of employee satisfaction, and we also want to maintain a very high level of shareholder satisfaction. All three of these groups we actually survey to make sure that we are achieving, in fact, a very high level of satisfaction.

But if any one of these categories were to be out of balance, our ecosystem would be at risk. And so, we were constantly keeping our finger on the pulse, making sure that everyone feels good. Again, if one group, the shareholders, are disproportionately feeling better than the employees, this isn't going to work. So, everyone understands our financials, understands our profit margins, there are some decisions that we make to invest deeper into, let's say, technology. Or, a couple years ago, we were investing in a new office, I think you came over and visited our new office a year ago.

Michael K.: Yeah, yeah. A few years ago, in the distance past of pre-COVID, which seems so long ago now.

Michael C.: Exactly. So, those decisions, they affect your profit margin. And so, all these things together have to be communicated managed in a way that we were collectively doing what the team feels is right, shareholders feel is right.

Michael K.: So, what led to bank financing? I'm just curious, you could have presumably done this with seller financing or other ways, why bank financing in particular?

Michael C.: I could have been the bank personally. In fact, effectively, I was guaranteeing loans.

Michael K.: I guess the company was indirectly the bank because the bank said, "If we're going to underwrite this, we want the company to back the loan."

Michael C.: Exactly. But I'm telling you, Mike, I know you've talked to a lot of firms that have sold out to private equity who have sold to financial buyers, who sold to others. And there's some real strengths to those models. Some of them bring a lot of platform opportunities that we, at Truepoint, wouldn't have to be spending money or spending time, developing ourselves. But, at the same time, we look at building things that fit what we do. And we like making the choice of being independent and operating the way that we want to operate and just having that complete independent opportunity to do so. And it makes it worthwhile for us to continue in this way.

Michael K.: So, are there limits just in terms of how much the bank will even finance in the first place? Just what if someone says like, "Michael, I am so psyched about Truepoint. I want to buy 25% of the company, lever me to the hilt."

Michael C.: Yeah, right. Exactly. No, again, we're oversubscribed every year. I only sell about 4% to 5% of the company in a given year. So, we basically make the shares first available to new shareholders. And where the new shareholders don't fully acquire that 4% to 5% of shares that are available, then the existing shareholders have an opportunity to add on to their positions. There's a process around how much and who gets the opportunity to buy that from the existing group. Because not everybody can afford to do so, they have children going to colleges or private schools. Or wherever. And so, their obligations kind of limit their ability.

But we have several members of the shareholder group that would like to buy more stock every year. It's been a great investment for them. And just have to say, "No, we can't do that. It's not fair to only sell you the share." I have to allocate that across others that are interested. So, it's kind of a parsing process.

Michael K.: And then how does the valuation works? Again, I think you said you get an external valuation...

Michael C.: Yeah. We use an external firm. Every couple years, we'll engage a firm that does those...a couple times we used a couple different valuations. Early on, we used FP and then we used David DeVoe. More recently, last couple evaluations have been done by Dan Seivert's Echelon Partners. And, going through that process, I probably was thinking, "I know what the number is and most of my shareholders, senior managers, they understand the process and know what the numbers are." But it's one of those things, even though you go through this process up, you like it at the end in that you learn certain things about your business each time that you might not have fully understood before. And so, it's been a valuable process. And that it gives a lot of legitimacy to pricing to the shareholder group.

Michael K.: So, why the changes? You said you were FP Transitions for a while and then DeVoe and now Echelon Group. What leads you to change valuation firms? Or I guess how do you even think about deciding who's going to do your valuation?

Michael C.: It really wasn't anything necessarily against FP or David DeVoe but we did see and get to know Dan Seivert a little bit, I was really impressed with him and his organization. But I felt like he was working with more firms more similar to ours, he really understood our true wealth-management type firms and so forth. So, look, the other organizations do a great job. We just became more impressed over time with Dan and his group and the way they did it.

Michael K.: And so, just trying to find firms that have experienced valuing others like you that gives you more confidence in their valuation of you?

Michael C.: Yes.

Michael K.: And then, where do you set the discount? So, I know that's often a topic for debate in the industry. And I'm struck, at least as you described it, some people talk about offering discounts for internal buy-ins because they helped build the company and were part of creating it. It sounds like at least you frame it differently, it is, "Look, you're buying a limited percentage of a thing you don't control, it's not very liquid." So, I think of those at least the traditional discount factors of minority control liquidity that drives the discount. So, is that how you frame the discount? And where do you actually set a discount on this?

Michael C.: Right. So yeah, it's an area of sensitivity as well. It's probably roughly about a 20-25% discount from full value. And it could be more and it could be less. And Dan Seivert might say, basically, the industry average or some kind of metric that he would maybe even recommend might have been a little bit of a deeper discount than what we do. I think the way that we run Truepoint is not...I'm not a benevolent necessarily leader but I'm also not a...it is not a dictatorship. We do things together. We make decisions together. I really have never used the veto power or used the power that I have as the founder that's spoken in my close corporation agreement that governs our equity participation plan, people know that I'm going to treat them fairly. And I've got a track record of always doing that.

And so, for those reasons...and, oh, one more important factor. I tell them, "I will buy your stock back at the same price I offered it to you at any point in time." "So, this is the discount I'm willing to offer. If you don't like this, for some reason, I'll buy it back from you." So, that means it can be a little less of a discount. But at 20%, it's still...

Michael K.: They basically get a put option back to the company.

Michael C.: Yes, yes. So, that was a long answer. But I think that that's about right. Now, I do know firms that locally here, the founders are selling at no discount. And you're getting a full valuation for... people are buying on a minority basis. Others are potentially selling stock at deeper discounts than we are. But I think that, again, our ecosystem is working at this level. And I don't want to sell at any greater discount and our shareholders are happy to pay at the value that we've set.

Michael K.: So, then I'm curious, I get it from their end, they're comfortable buying...and, obviously, it's had a good growth journey, so, nothing like a lot of shareholders who've had it work out, makes other people want to participate as well. But I am curious to come back to the point you'd raised earlier of just what goes through your head? How do you get comfortable with not even just selling a highly-appreciating high-dividend private company to reinvest into the S&P 500 with the lower growth rate and a lower dividend but selling the private company at a discount to reinvest into the S&P 500, or whatever you invest in, I'm just picking on the S&P today. Just how do you process that? How do you get comfortable with that transition?

Michael C.: Yeah, it was probably one of the most difficult decisions. I remember speaking to some industries' leaders on...and I think I always remember the story that someone said basically, that pearl that you find in an oyster, it was created with a ton of friction from the ocean. Effectively, if you want to realize the pearl in your business, this is kind of the necessary friction that must take place.

And so, it's a little corny story but I felt the friction of not wanting to sell. I might be more willing to sell more at a higher level, at a higher price. I was willing to sell a lower percentage of the total at a slightly lower price in order to enjoy the trade-off of what we could build together. And I think these are the fact that my personality, my willingness to delegate responsibilities, my willingness to hire smarter people than myself, and surround myself with smarter people, and listen to their perspective and act on insights that they had, the same thing that, if you're going to be a successful owner in a business like this, you have to be willing to take trade-offs that, essentially, really probably benefit you more so in the end.

And so, again, it's a giant leap of faith. And I think it's working. Most people around me would say, "Hey, look, you're enjoying the benefit of diversifying your wealth and you've created something that is could be very sustainable for a long period of time going forward."

The Surprises and The Low Point On Michael’s Journey [1:03:57]

Michael K.: So, what surprised you the most on this journey of building your advisory firm?

Michael C.: That's a really great question. Originally, I was from Texas. I grew up in Austin, Texas. I got started working in the trust investment division of a large bank. And I moved to Chicago to trade options on the Chicago Board of Options Exchange before I moved to Cincinnati to get started with investment management for an insurance agency. When you meet people in Cincinnati, they're from Cincinnati, they'll say, "What high school did you go to?" And that's like saying, "What neighborhood are you from?" And to come in here as an outsider, to become a member of a nice prestigious country club here in town, to be an outsider, to make it work, that was my goal was to succeed here and raise a family and make a nice living for myself. I'd have to say, I have exceeded probably my expectations, when I look back over the 30 years.

Michael K.: What was the low point on the journey for you?

Michael C.: Well, initially, the first several years of starting this business, that was negative cash flowing and my negative cash flow was coming out of retirement IRA accounts that accumulated. So, that was somewhat of a low point. But...

Michael K.: How many years were you losing money?

Michael C.: I would say it was about 30 months where I was losing money before we hit break even. And it took another at least 12 to 18 months to recover what I had bled through. Right? So, it was touch and go there for a little while.

Michael K.: So, 4 plus years just to get back to where you started?

Michael C.: Right. And when I left the insurance agency, back in those days, I was making over $100,000. And that was a pretty successful lifestyle for a young 20 something to go negative for basically 4 years. But obviously, the trade-offs...I have a 31-year-old son. Basically, when I started this business, we had our first born child. And while we have a great relationship, I have two other, I have three children all together, and we have great relationships, just got back from a great snow skiing trip with those guys. But there were times where I missed out on some important stuff, working on this business. And no doubt it created some stress on my marriage, at that time. But I'll tell you what, I'm very blessed by how everything has all come together. And I feel very fortunate that the relationships that I have with my family are strong. I've got great relationships here in our community. I'm deeply involved with a number of different non-profits. And my family together and I, we've built the Chasnoff Private Foundation, as well as have a nice donor-advised fund that we've created and we're really hoping to make a difference in a number of other lives of others going forward.

The Advice Michael Would Give His Former Self [1:07:41]

Michael K.: So, what do you know now that you wish you could go back and tell you 20 or 30 years ago getting going with the business?

Michael C.: When I first started the business, I talked to a...back in the days, Arthur Andersen is a great consultant here, in Cincinnati. And I told him about my business plan about creating a fee-only financial advisory firm and we weren't going to charge transaction fees, we just would charge for advice. And he told me, "Michael, it's the best plan I've ever heard of but it won't work."

I guess I'm one of those entrepreneurs type people that, if you say, "You can't do something," I'll double down and tell you I can do it or something. I've got that little competitive spirit. I think that that's the thing that everyone needs to have when they go into any business is they've got to have that perseverance, they have to believe in their dream, basically their vision. And then I really think that the fact that I did this, not to make a ton of money but I wanted to do something the way I wanted to do it...and I really feel like too many people today, these startups are all about building something, flipping out of it to make money and going to another deal and flipping out of that to make some more money. And I'm not a big believer that those are the same kind of thing that I've been involved with today.

The Turning Point In Truepoint’s Journey [1:09:19]

Michael K.: So, what was the biggest positive turning point in the business?

Michael C.: Probably a big break point for me was two things. I guess one...about 2.5 years into the business, I was...I tell a lot of my young people working at the company, I say, “Hey, I'm working here on Saturday morning,” it was a beautiful day, I'm sure all my buddies were out playing golf. And I'm in the office preparing for a meeting on Monday when the phone rang and a very wealthy business owner called me and wanted me to come and meet with him. And if I had not answered that phone call, I know that this guy would not have left a voice message." The fact that I was working on a Saturday morning when that guy called and I was available to come out and get together with him, it was definitely a big break.

But maybe even a bigger break later was because I had built up a bit of reputation in the industry with NAPFA, with being quoted in financial press nationally, "Worth Magazine" came along, back in 1994, and created their first top wealth-advisor listing. And I don't know, I have no idea how many people applied but I applied to that. I thought, "I'm going to give this a shot." And I was selected as one of the top 60 financial advisors in 1994 when "Worth Magazine" was truly a publication that people listened to. So...

And then, not that far right after that, still in 1994, beginning of 95, I was in Jane Bryant Quinn's column. And she wrote a piece about full disclosure. And we used our ADV, back in those times, essentially, as a simply written communication piece that fully disclosed how we do business, how we charge, what services we offer, basically our educational experience. Right? And she was so fascinated, the fact that we would be so upfront and open. And she interviewed some people that were looking for advisors, and no one would provide them with their ADV. And yet, I was using ours as our brochure, effectively. And her piece went national along with the fact that just been named in "Worth Magazine." And we had people waiting in our lobby to meet me, and the phone was ringing off the hook at the time.

Michael’s Advice For Newer, Younger Advisors [1:12:16]

Michael K.: So, what advice would you give younger newer advisors getting started today?

Michael C.: Well, I still believe in all the things, the values and principles, that being a good fiduciary, being there for your client, generating a great client experience, I think those are the most important things that we can do today as yesterday. And the minute we get away from focusing on what's right and treating everyone around you with great respect...because we are no better than anyone else in the office. And we might know or understand personal finance more so than our client, but they're successful for other reasons. And our opportunity is to provide them great guidance and advice that is specific to their personal values.

Now, I think if new advisors today continue to do those things, they will, over time, if they're willing to put in the time and take a long view, I think they'll be rewarded well. I just do see many times seemingly that everyone slams the millennials for having a shorter mindset about how much time it takes to achieve their goals, and I do think that it does require some patience.

Michael’s Plans For The Future [1:13:56]

Michael K.: So, what comes next for you?

Michael C.: Well, I mentioned I'm involved in some charities, some non-profit organizations, some private foundation work here. I personally want to have greater impact in directly helping individuals that need to get over the hump. And so, I've been able to transfer some appreciated securities into private foundation and it will allow me to direct money to individuals. And I really want to make a difference and feel the difference of helping others. Now, the hard part is doing that in a way that doesn't undermine their motivations. I want to do that in a positive empowering manner, and that's the hard part.

What Success Means To Michael [1:14:47]

Michael K.: So, as we wrap up, this is a podcast about success, and one of the things that always comes up is just the word success means very different things to different people. And so, as someone who's built what I would call, objectively call, a very successful business of many billion dollars under management, how do you define success for yourself at this point?

Michael C.: Today, I do recognize that there were sacrifices, times where I wasn't always available to be there to help out my wife with everything, with growing these children. But I did find time to coach them in baseball and basketball and soccer, but the reality is is that, in my mind, for success, there has to be some balance. And, at Truepoint, we offer a tremendous amount of flexibility and life-balance opportunities.

And I think that the way I define it for myself, I want to be able to continue to compete and work and achieve but also want to give back and see and feel the value of what I can do for others as well. And I think I'll be measuring my success seeing others succeed, maybe also if I can get my handicap down to single digits one of these days too.

Michael K.: It's good to have goals, it's good to have goals. Well, awesome. Thank you so much, Michael, for joining us on "The Financial Advisor Success Podcast" and sharing the journey.

Michael C.: Thank you, Michael. I really do appreciate the opportunity to participate and be part of your podcast program.

Michael K.: Absolutely. Thank you.