#FA Success Ep 300: The Evolution Of The Advice Business At Scale And The True Power Of Brand, With Joe Duran

Resources Featured In This Episode:

• Joe Duran
• Goldman Sachs
• Kitces AdvisorTech Map
• #FASuccess Ep 100: Scaling A Financial Life Management Firm By Starting With Client Intentions Instead Of Goals with Joe Duran
• Facet Wealth
• Anders Jones (CEO, Facet Wealth)
• BlackRock
• FinLife
• Salesforce Financial Services Cloud: CRM for Financial Advisors
• eMoney
• MoneyGuide
• McKinsey & Company

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

Full Transcript:

Michael: Welcome, Joe Duran, to the "Financial Advisor Success" podcast.

Joe: It's so good to be back on, I guess, 200 episodes later.

Michael: Two hundred episodes later. You joined us for milestone Episode 100, all the way back in 2018, well, approximately 200 weeks ago. And here we are now, 4 years later, Episode 300. And I was really excited to have you back to kind of revisit that milestone episode because, to me, just the advisor industry overall, and particularly sort of the domain in which you've lived of large firms becoming larger firms becoming larger firms, has changed so much over the past four years.

I was going back and looking at the notes from when you joined us in 2018. So, United Capital was one of the early players in trying to really build as an independent firm to reach national scale. You were at $25 billion under management, more than 200 million of revenue. The vision was 100 billion was the next stop. And you were really talking about this opportunity of large-scaled independent firms like United Capital, what Peter Mallouk was doing at Creative Planning, that were becoming national in scope, were increasingly able to compete against the incumbent Wall Street mega firms like Merrill Lynch.

And then, six months later, the news breaks that United Capital is being acquired by a Wall Street mega firm, by Goldman Sachs. And over the past three years, I feel that trend has just gone further with high-profile mergers and acquisitions, like a huge amount of private equity dollars flowing into RIA aggregators, firms like Schwab and Fidelity and Vanguard all hiring a few CFP professionals for their own internal advisory platforms.

And so, I think to kick off the conversation today, I would just love to hear your perspective now, four years later, given evolution of the industry, your experience now of having lived on, just call, the other side of independence, and how you think about the competitive dynamics of independence versus national brokerage firms and bank incumbents like Goldman Sachs.

How The Adoption Of Financial Planning By Wall Street Firms Is Creating Competition For Financial Advisors [05:54]

Joe: Well, thanks, Michael. And yes, the industry has changed a lot in the four years. And I'd say a few of them were very easy to anticipate. And I've written about this for Investment News. The first big one was this idea that they were going to be national firms and that the advisory business, wealth management and planning business, would go through the same transformation that happened with accounting firms but in accelerated pace.

And that was there would be 5 to 10 national firms that had 100 billion [dollars] or more. And then you'd have some super regionals, many dozens of those, that would be somewhere between 10 and 30 billion [dollars], maybe 5 to 30 billion [dollars]. And then you'd have the usual local lifestyle practices.

And I think that's pretty much borne out when you see firms like Creative Planning continuing to grow. Obviously, Fisher was one of the first really national firms, not as much planning, but investment centric, certainly. And then you have firms like Wealth Enhancement Group, Focus, obviously. And you're seeing, I think, the development of a whole industry of national firms. I do think the fact that so many of them have grown by acquisition poses a risk, which is a separate conversation we'll talk about, but that's the one big shift that's happened in the last four years.

The second big one, is the Wall Street firms, of which now I am part. As you know, I'm a partner at Goldman Sachs, running what I'll call their retail wealth. I'm co-head of Workplace and Personal Wealth Group, which includes the Ayco planning group as well as my old United Capital. And it's somewhere north of 100 billion [dollars] in assets and thousands of employees. And that business, what we're doing here is being done by JP Morgan, Morgan Stanley, all the big wirehouses, which is to really lean into the corporate marketplace and work with the corporate participants to try to provide planning and advice before they rollover their IRAs.

So, you're seeing this really accelerated shift where it was Morgan Stanley is buying all of these stock plan administrators. So, JP Morgan just announced they are buying stock plan administrators to really get closer to the corporate marketplace. Before, they have to try to get them after they've already identified an advisor, probably at Schwab or Fidelity. So just seeing this unquestioned move toward planning and access to the corporate market, that's a second big shift.

And then the third one, that we can't ignore, is this providing more comprehensive services to the end client. And I see this, when I speak at independent advisory practices, where many firms are now expanding to tax prep, estate planning, lease services, like helping with the handicapped children or children with special needs. You're seeing all of these expansion of services for that same 1% fee. And that's true at the big banks and that's true at the independent advisors.

So, the big banks, obviously, were able to offer savings accounts, and checking accounts, and tax prep, and all these other ancillary services that are all being included with the fee. So, while the fees haven't gone down, what the clients are receiving is a lot, lot more.

And so, in essence, it does affect profit margins for everybody because you're doing a lot more than you used to do for 1%. For 1%, you used to just deliver a wrap ETF portfolio, mutual fund portfolio, have a nice day. And the big wirehouse firms will charge 200 basis points for that. And so, the pricing is pretty sticky now, somewhere between 60 basis points and 1.1%. But what we're doing all is a lot, lot more. And obviously, that costs a lot of money, and technology's got a big part in that. So, those are the three big mega trends that I've seen that have really shifted and altered the competitive landscape.

Michael: So, I want to understand each of these a little bit further and particularly with just this lens of sort of the independent world that you were building in and the... I don't even know what to call it. I know what you call the large, mega-firm incumbent world that you live in today. I don't know how you would characterize Goldman Sachs in that landscape.

But so, when you talk about they were going to be that handful of national firms, is that now being supplanted because firms like Goldman Sachs are making the push to be the national firms before the independents can scale up and get there? Or is there a world where some independents do this and some banking brokerage firms have this as an offering? How do you think about that world?

Joe: I think, ultimately, the word wealth management has come to now encompass some form of plan and deliverable. We can debate the quality of it. But as we know, most clients can't tell the difference between an eMoney plan, a MoneyGuide plan, and back-of-an-envelope plan. It's a plan, right? And so, whether they go to Ameriprise or they come to Goldman Sachs, is the experience different? Yes. But do they have the people comparison shop? No. The reality is that once I get my financial plan, I have one, I'm done, that box is checked. The level of ancillary service is changing.

And to answer your question specifically, what I am concerned about is I do believe there is room and real estate for the large full-service brokerage New York-based firms, which are now national, that are definitely leaning into planning. As you know, JP Morgan or Morgan Stanley are building national planning desks, very much like Vanguard. We are building one here at Goldman Sachs that Larry and I oversee.

But we do think about the salary and bonus subscription-based model, which is what we have at Ayco with a group that works with corporate planners. We get paid a subscription fee by the corporate, deliver financial planning on the phone, or in a Zoom to answer what I call event-based planning questions, "Should I retire? Should I buy or lease my house? How much do I invest in my 401(k)?" We've been doing that here at Goldman way before I came, for decades, for 50 years.

And thinking about that subscription model apply to a broader industry. And that's happening, obviously, in the independent channel, too. You have firms like Facet Wealth, Anders and his group that are thinking about a subscription-based model for financial planning and then the investment implementation, in addition to that.

And what I would say my biggest concern with the independent firms that are ultimately going to be a competitor for that segment, for the wealth management planning and investment implementation, the biggest dilemma is that most of these firms are not growing organically, they're growing by acquisition. And that places an awful amount of pressure on your ability to actually invest in the platform.

And at United Capital, we would spend tens of millions of dollars just reimagining the client experience, thinking about how do answer more questions in a scalable way, deliver a client experience that's memorable but repeatable and scalable. And I think it's very hard to do when you're paying so much for your acquisitions and you have private equity investors who demand a return and you go through a period like we've gone through now, where the exit multiples have maybe been rethought, whether these firms can spend the kind of money necessary to be competitive.

So, that's the dilemma that's out there is, can these large firms that are building spend what's necessary in order to be competitive because they're all in a much shorter fuse than the accounting firms that took decades and decades and decades to build into national firms.

Michael: So, what does that mean for the mere average advisor, which is a solo advisor or maybe with two or three partners, who has one to six staff? The overwhelming majority of advisory firms are tens or a few hundred million dollars.

Joe: In lifestyle practices, yeah, of course. Yeah. Well, look, here's the good news. The FinTech world, the ability to access tools and systems, and you have that beautiful chart you put up with all constantly exploding new solutions available.

Michael: It was originally just meant to show the landscape. But only afterwards that it became the punch line for a joke about how complex the advisor tech space has become.

Joe: Well, here's the dilemma. They have amazing tools out there, but it takes time to figure out which one should I work, then it takes more time to integrate them into your platform. It takes more time to actually build them into your story. And here's the hardest part, almost all of them are operating on SaaS models now. What do I mean by that? It's subscription models.

And so, your actual cost is now variable. It used to be you buy Microsoft Office, you had a fixed cost, and everything else was margin, right? But now, whenever you add one of these additional services, it's someone else dipping into your management fee. And there's only so much of that you can do before the cost start to eat your life.

And so, the good news is there's many ways for independent advisors to get access to tools and systems that would allow them to be competitive. What I think is that most advisors are so busy taking care of their couple of 100 clients, their 500 clients, whatever they have, there's not a lot of free time to think strategically about what should we be doing next to remain competitive. And what you'll find, again, is most advisors run lifestyle businesses. They have their 300 to 500 clients, maybe they've got a couple of partners, so their whole firm services 1500 clients, and they live a very, very good life.

And as Carl Richards likes to say, you know, "Why mess it up? It's a great lifestyle." The problem is, again, not that your clients will ever leave you because the one thing that is proven to be really true is that the high-net-worth segment, this million to $10 million client, is incredibly sticky. They develop a relationship with their advisor. They aren't likely to shift once they get older than 60, that they typically stay where they are as long as you service them and take care of them.

The problem is your next generation of advisors. If you want to grow, they need more than probably most of these firms have available to them to be competitive because they're not distinctive in any way. There's no problem they're solving differently than anyone else. And you talk about this all the time. If you're not really special in some way, it's hard because there's not as much money in motion to grow, if you're dealing with clients who are in their 60s and they already have selected their advisor, it's very hard to grow.

And most firms, again, recent acquisition has taken off so much, its most businesses are lifestyle businesses, "I've got my 200 or 300 clients." And that's hard to attract and retain really talented people, too. Now, again, that doesn't mean there's anything wrong with having a lifestyle business, but if you're going to grow, it's very difficult.

Developing A Distinctive Brand To Capture Market Share And Stay Competitive [16:21]

Michael: So, the question that just makes me wonder then, the aggregate. We talk about how valuable financial planning is and how valuable wealth management is and the wonderful opportunities that exist in it. If it's so great for everyone, why is it so hard for all of us in the aggregate to grow?

It's not as though you do a consumer survey and find out that 99% of all consumers already have a dedicated financial advisor. It's like there's just nobody left. Most consumer surveys I see still peg the number of consumers that even have an advisor at maybe somewhere in the 20% to 40% of consumers who have an advisor. And often, that's with a fairly loose definition of "advisor."

Joe: Here's the question. Can you make money servicing a $200,000 client? And I would suggest the model that most advisors have, the answer is no, you cannot. And so, your universe that you actually have available to make money on, that have 500,000 [dollars] or more in investable assets, liquid, free and clear of their 401(k) plan that's locked up with their employees, or concentrated stuff that they received as part of their compensation, the actual amount of people you're talking about is just not that big. It seems like it should be big, but it's in the handful of tens of millions, 15 million households, 20 million households. It's not 200 million households.

So, you either have a way to deliver service to much smaller clients profitably, which almost all advisors have no way of doing that, or you have to find a way to be distinctive and capture that money before it locks up. Because, as most of the people listening on this podcast will think, "My 250 clients aren't leaving me." And that's probably true. The problem is, what about the next 50 that would be eligible clients if the big banks are getting them with their corporate employees at Chevron or Disney, before they ever have the opportunity to rollover?

And this is the thing I wrote about, actually, a few years ago… When I first started this business, before you're even in it, probably, but it was certainly true when you joined it, which is it was so easy because you could just speak to anyone who was at Merrill Lynch and say, "Well, you're paying 250 basis points and you have extensive funds underneath it. I can do this for 1% and give you open architecture mutual funds." It was easy.

That's not true anymore. You go today. And by the way, that's how most independent advisors grew their business. They either started a big wirehouse and moved and told their clients they'd save money. Or they closed the business from the wirehouses. Well, today, you speak to somebody at Morgan Stanley or JP Morgan or any of the big banks, and that client is paying 1%. And they probably, not all cases, but probably have a financial plan. They probably have an open architecture ETF, they probably have a couple of really interesting investment solutions in there. And they probably have a line of credit and a savings account, which is hard for an independent advisor to compete.

So, the biggest pond where we used to all go crazy going for that $1 million to $5 million client, a sweet spot, were underserviced, overcharged, and had underwhelming solutions provided to them. That's not true anymore. It's simply not true. You will find it hard to find somebody that doesn't have a wrap account that's less than 1% with interesting investment solutions, not proprietary products, but open architecture, and often has a plan.

And so, this really open area that was just so easy, lots of fish, and we had the best ones they were to fish. That's not true anymore. And so, I don't think advisors have realized why it's lightened up. But the reality is, the competition is just much better than it was. And guess what? It keeps getting better.

But the independent advisory business as a whole, as a group, we're not evolving. I don't think at the pace that the big banks are in rethinking and investing strategically. And that's the dilemma of having so many lifestyle practices. They cannot invest. They cannot keep up. They don't have the strategic bandwidth or dollars to rethink what should a client experience be like.

Michael: But what would they be reinvesting into? When I look at how most advisory firms operate, particularly when they're not huge and at scale in the first place, because scale brings benefits but also has all of its other challenges... I think a lot of independent advisors in that segment, "I've got my 100 or 200 great clients or my 50 great clients. I've got a great advisor relationship with my clients. When they need stuff, I answer their questions and I provide the service and I get them what they need, and they trust me." I don't even hear a lot of those firms necessarily trying to figure out, how do I invest to build the next technology for other things?

Joe: That's exactly… It's not even that. They don't even ask the question, why would my clients keep paying me 1% for what I do? They're not even asking the question, why would somebody pick me over the guy across the street or the gal across the street? Because they're fine and fine value is the enemy of growth. They have a business that's valuable enough and doing just fine. And they have no particular reason to think about, why would I put this at risk to rethink the business?

Michael: Because it's profitable.

Joe: It's just fine.

Michael: And as we've all agreed, your clients aren't going anywhere.

Joe: Yeah, that's good enough, "I can play golf three days a week, and I meet with my clients, and it's fine. And I'm making a million bucks, or 1.5, 2 million in revenue, and I'm netting 500,000. It's great." And there's nothing wrong with that, by the way.

It's just that the reality is, in order to keep growing, you have to do something. And you talk about this a lot. You'd have to be world-class as a niche player, "This is the area I'm great at." Let's say, airline pilots, "I know more about airline pilots than anyone else. So if anyone ever retires as an airline pilot, you need to get rid of your advisor and come to me because I know more about your situation than anyone else."

Michael: That's that distinctiveness factor is as you framed it.

Joe: You're going to grow because you have a distinct mindshare that allows you to penetrate and own a market and a segment, whatever that happens to be. Now, again, most advisors started their businesses by being all things to all people, haven't even reduced their current client slate, took from their less profitable clients. But more importantly, they're not thinking about, "Why am I different and better than anyone else?"

And if you're going to be all things to all people, and Lord know we know this from United Capital, my view was, we gotta do things no one else does. We're going to have conversations with people that their first meeting will be so memorable and so different that they will never want to go to anyone else. And that's why we built these behavioral economics tools to help our clients and our advisors shorten the trust cycle in ways that was so different that when we would get referral from custodian, our closing rate was 78%. Even though they were being referred to 3 different advisors, our closing rate was 78%. And why? That first meeting was like nothing that they've experienced.

And I used to use Starbucks as the example because we had the chief innovation officer from Starbucks on my board. And it was very much a, "How do we delight our clients right from the get-go in ways that they will not experience anywhere else, and get them to feel the pleasures of a great brand?" Which very few independent advisors think of that. They think of themselves as lawyers and very bespoke creators. But the real profits are made by being able to relay your magic to more people than the folks that are in your immediate availability to service.

And so, that kind of thinking, it requires money and it also requires time to stop and evaluate, “how do we do that?” And, frankly, good enough is good enough for most people. It just wasn't that way for me.

Michael: I think it's a striking point to make, though, that notwithstanding all the discussion in the industry about your competition and changing value propositions and how those are shifting that the risk is not someone's going to come up with the magic thing and your clients are going to leave you, and your business is going to shrink and die, because clients really are that sticky and we've proven that out pretty well. The way this shows up is growth just keeps getting harder and harder.

Joe: You just atrophy.

Michael: There are fewer unattached clients because they found an advisor. If they found an advisor earlier, a large firm got to them in their 401(k) plan before advisors could even get to them with the classic rollover, and so it just gets harder to grow.

Joe: And you just think of that…Think about this…You're at a corporate and Morgan Stanley is doing your stock plan administration. Okay. If that's the case, you're getting assigned a broker as soon as you get stuck in that company. Now, that is a huge competitive advantage, right? There's no question that's competitive advantage, whether it's the same.

Michael: You're just getting in the first place. To me, that's why Financial Engines bought Edelman. That's why Empower bought Personal Capital. Fidelity is building out their CFPs to serve their 401(k) plan participants.

Joe: Vanguard is building that because they realized, the sooner we get there, the less money there is in motion. And again, for most of us, it's not just that, it's the fact that we could literally go to the country club, or wherever we hang out, our kids' school, and know that every person we talk to is paying too much or getting too little from almost any financial institution they work with. And that's no longer true.

So we can't just give them our card and, "Yeah, I'm here for you." It's just not as easy because people are more aware. They have higher expectations. And candidly, the person across the street might be willing to do a lot more than you are for that 1%. And at some point, you might start seeing some of your clients say, "Well, I want tax preparation. I want some help with my estate planning. I want some of the things that they're doing for 1% that you're not doing for me."

And the reality is, we all know the financial plan. Every financial plan that's ever written is wrong. And most advisors spend way too much time talking about a person retiring. And, as I say, the person on the park bench, which none of our clients envision themselves being, and yet, we spend so little time talking about the benefits of planning today and allowing them to do the things today, because they work with us, that they might not have thought they could do.

It's so amazing how much we spend our profession talking about our planning is about helping people make the tough choice, the disciplined choice, which is often the thing they don't want to do. So, we're like visiting the dentist. They don't want to talk to us because, "What you're going to do is save more. Do this more." Rather than knowing that, "Hey, until they're 55, they're going to have very little free cash flow because they should be taking vacations with their kids. They should be paying for whatever schools they want to afford for their kids. They should be buying the house they want to live in because the voyage matters."

And yet, the reality is we spent so much time talking about the end state and retirement, "What are you going to do at that time?" And that really makes us less relevant to the people we want to get at their maximum lifetime value as clients when they're 45 to 55. That person is still accumulating, has a lot of risk tolerance, has the ability to adjust. And our impact, even though our plan is wrong, can have a massive impact on the way they live today that fundamentally improves their entire life. And yet, again, that's not where most advisors concentrate, sadly.

Combating Fee Compression By Expanding Service Offerings [27:46]

Michael: So, how do you think about this relative to this driving debate in the industry for the past five plus years that fees are compressing, fees will inevitably compress? Consumers aren't going to pay as much in the future. How do you fit the fee compression discussion in the midst of all this more services expansion?

Joe: If you have any doubt that fees are compressed, think about what people were paying for just a wrapped ETF or mutual fund portfolio? It was, in the '90s, as much as 2.5% to 3%, not including the underlying fees.

Michael: Well, but what strikes me about that is, yeah, I also knew firms in the '90s that were charging 1%. And so...

Joe: How many firms today?

Michael: To me, the discussion today is, "Well, we're all charging 1%, but we can't charge 1% in the future because of fee compression." Look at all the fee compression.

Joe: Yeah, but it feels the work is up.

Michael: But the fee compression is the people who used to charge two and a half, who now have to charge only one to one and a half.

Joe: I think it's very hard to find firms that can charge 1% today for just wrapping an ETF portfolio. The reality is that is not a 1% business. And most clients will not pay you, shouldn't pay you 1% for just wrapping an ETF portfolio, which I can get as much...

Michael: I can get that from a proverbial Robo for 25 bps.

Joe: Exactly. Yeah, well, 15 or 0 from Schwab, right? The reality is, all of us, we've had fee compression. We've just been really good about adding more services for the same fee. We basically realized, instead of two and a half, the underlying, the products, now the delivery of an ETF or mutual fund portfolio rebalanced and allocated, is somewhere around 50 basis points. And two years ago, four years ago, that's probably still good. You could defend 75 basis points to 1%.

That's no longer true. You're now including a financial plan. You may be including tax prep. You're offering all kinds of ancillary services to maintain that 1% because if you don't do it, then it's very hard to justify that pricing. That's the dilemma.

And one way to differentiate is to have alternative investments added or have products that are hard for individual clients to access directly. And so, again, I think what you're finding is there has been pricing compression. The way we have combat it as an industry is by expanding the level of services we offer.

Michael: So, how do you think this plays out? What are the services that firms are going to have to be doing to be competitive in this environment and over the next 10 years, if they want to, call it, defend their 1%?

Joe: I think that three things they're going to need to offer, and I'm going to break this out into two different areas. Number one is the planning and advice segment, and the second is the wealth management or investment implementation, etc., because I think about them differently.

We here at Goldman, that's the way I've tried to frame things is, "Look, we do two things. They live up guidance and advice. That's the counseling that we do. The second we do the implementation." It's very helpful to think about in that way, because what you want, when you're delivering this is you want to think about scale. All your margins will typically come from implementation. And so, you have to have a scalable implementation methodology because you're probably going to end up charging base points. And that is where your margins will reside.

And by the way, there are ways to differentiate there as well, which we'll talk about in a second. But on the delivery of planning and advice and what we call guidance or counseling, whatever we want to call that segment, that's where your differentiation has to reside because that's why you'll be different than everyone else. And that is typically where it is a fixed cost with very, very little margins. Whenever you're delivering financial planning, that's incredibly time-consuming. That's where your hours go, right? And that's true if you're doing tax facilitation or tax prep.

And so, I think that what is going to keep happening is, we're going to have to become even more specialized in the planning and advice that we do, whether it's becoming more like a family office and helping with bill paying, whether it's doing tax prep, whether it's doing estate planning, whether it's providing trust services, but becoming more of the CFO to individuals in a more direct way.

And that's going to require one very important element. You're going to have to think about service tiering because you might be able to do things for people, like include tax prep for free, if you have $5 million, which I cannot do for you if you have $500,000 because your fees simply can't support it.

And so, advisors are uniformly awful, all of us, at segmenting our client service offering. And one of the things that we've done here, the firm has been very good at it, is realizing, look, the CEO of a big corporation, we need to be completely well versed in their benefits at their company, as well as understanding their stock plan, as well as understanding their tax prep and actually filing their taxes for them. Whereas somebody who's an entry-level employee, they just need to understand a different level of things which are much easier to do at scale.

And that model that we apply here across tens of thousands of clients at different levels of the wealth spectrum in the corporate America, you're going to have to think about your practice in that way. What are the service offerings we offer distinctly under planning advice and guidance at different tier levels so that we can be competitive? So, if you have a client with $5 million with a lot of complexity, in order to earn your fee, you might have to do more and still be profitable than you might do for somebody with $500,000. So, that's the one area.

And then, on the implementation side, I think that you obviously need to drive the cost down as low as possible wherever you can. But then having distinct offerings in addition, whether that's alternative investments, tax overlays on individual security portfolios. The investment solution set needs to allow for the clients to have something interesting that makes you distinct from everybody else who's offering the exact same thing. And that doesn't require changing everything you do because the core should be the same. And having access to complete or complement the existing scalable portfolio, it's something that's unique, that it's interesting.

Michael: Like what? Just what does that look like in a world of mutual funds and ETFs?

Joe: I'll tell you what we did. So, in our world, it's very simple. The client comes in with 5 million bucks, they're going to get a laddered muni portfolio on which Goldman Sachs will manage for free, or they can use BlackRock, and we've negotiated very low basis points cost to have a unique laddered muni portfolio on top of it. And by the way, we can do this now to $2 million. So I'm just using 5 million as an example.

They have an equity portfolio where we buy 400 S&P 500 stocks. They can filter out for their personal values, take out guns if they don't like guns, woman-friendly boards. Whatever personal values they have, we could show them the exact performance on the S&P 500, taking out the companies with values that don't align with what they want.

Michael: So, that's an adapted version of a direct indexing kind of offer?

Joe: Exactly. And then, put a tax overlay on top of that. And then on top of that will say now we're going to allocate it with a completion portfolio that takes into account all the other areas that you're not going to be investing in through this, and by the way, that might include private equity, might include structured debt. Goldman Sachs has access to all kinds of solutions.

And for clients, they go, "My goodness. So think about it. I'm paying 1%. My muni management is free. My equity management is free. There are no trading costs. It's all free. And I have this nonproprietary completion portfolio,” which all get delivered, and again, depending on the underlying products, might be expensive if it's private equity, but your all-in class are so low because there's no intermediaries really anywhere. That's hard to beat, in my mind.

And in addition, this is on the wealth management side, there's all the banking products that you can have access to. There's checking accounts and there's savings accounts and with yields of 1.8%, 1.9%, 2%. And so there's all of these other things, credit lines, that you can do that today might be difficult for an independent advisor, but over time will be easier. But you still have to be willing to do all of this stuff. And that's all very scalable high margin business.

Michael: And you wrap all of that with an aggregate 1% fee.

Joe: Yeah, that's correct.

Michael: So, I guess, I'm curious from just the fee-business model end as you're describing this. You're going to do all the hard work in the planning advice for a fixed cost with very little margin. You're going to drive your margins from the wealth management, investment implementation side, because you can do that more scalably. Is there some point where that just pressures the whole model to change, and we stop doing this with an AUM model? Are you still upbeat about the AUM fee structure in this?

Joe: I think the AUM fee structure is inescapable. It's just what we're doing is a lot more. When we were United Capital, we were charging 1% to wrap a set of ETFs and maybe some separate accounts with their own underlying costs. Well, we're charging 1% now for straight through, including the munis, including the equities. To me, that's remarkable, right? To me, that's truly remarkable.

Now, again, for disclosure purposes, you should read ADV for whatever...I'm sure there are variations.

Michael: Understood, fee schedules, breakpoints.

Joe: Yeah, exactly.

Michael: Understood.

Joe: But generally speaking, I can tell you that all of our clients pay less in this environment than they would if we were independent and that is because the scale and our ability to do things that we couldn't do when we were an independent firm. I didn't have an entire equities team to go and buy the stocks and the technology. I didn't have an entire fixed income team, even at 25 billion, that could do things at that scale. So, I worked with outside portfolio managers, which we still do today.

But Goldman Sachs can negotiate pricing that I could never have negotiated at United Capital. Although, I could still negotiate at United Capital a much lower price than the advisors who joined us would have been paying if they were 100 million or 200 million.

And so, the scale thing really does matter. It's the advantage that the big independent RIAs are going to have. They can negotiate things that no firm with 100 or 200 or 300 million can offer.

Michael: I was just going to say, where does the scale show up? Where does the cost savings come? Because I think the view in a lot of the independent world is, "If we just get bigger, our operational costs will go down and we can save on advisor and technology costs." And you just at least look at the industry benchmarking studies for firms well north of $15-plus million of revenue, which by then you're a couple of billion dollars. And there isn't any expanded margins really showing up in any particular way. So, how big do firms have to be to hit the kind of scale you're talking about, and where do you save the money?

Joe: And I'll tell you what, well, we got to 25 billion. We were at 25 billion as an independent firm. And every time I think this is the point at which we are going to see the margins takeoff, that never actually happens because we're always investing for growth. And so, what you're going to find, there's natural points in which you'll be at optimal margins. One of them is around 100 million, 80 to 100 million.

If you invest to grow, then you'll hit another one around 250 to 300 million. But then, what typically happens, once you get to 300 million, you just stop growing. Then you'll hire more advisors. You'll invest in marketing. And all your budgets will disappear until you get to 500 million or so.

And then, you'll get to a billion, and what you'll find is you're constantly escalating the level of talent. You now need a COO. Then, you need to see a chief marketing officer. Then you get bigger, you need a CEO. Then you need a CFO. And then you need to upgrade the talent of your CFO because you bring private equity money in. And now you need to upgrade the talent of your CMO because you're not doing direct marketing campaigns.

And what you'll find is, you're constantly investing in the business. And for me, I can tell you that once we got to over 10 billion in assets, once we were doing over 100 million in revenue, we really did start having choices. And I could really break out investing in the business rather than maintaining the business.

And there's a point at which, even at the smallest size, you should be thinking about, "What are the things I need to operate every day? And what are the things I need to grow into the future?" Because you'll find that one can grow fairly slowly, the what do I need to operate every day, because the clients are sticky. But in order to grow, there are investments you'll need to make to get to the next level.

And as I mentioned, many advisors don't need to or want to. But what you'll find is that your margins will constantly taking tomorrow's profits to invest them into today so you can grow. And Ken Fisher was very good about this. I met with him a few years ago. He was great about this because he had really some of the most remarkable margins, which I'm not free to disclose, but he would say, "I know what my growth rate is going to be if I invest all of my margins into the business rather than take it as a distribution."

And he's proven it to be true. Regardless of whatever's happened in the public marketplace, he continues to grow. And I see his ads everywhere because he knows what his yield is going to be. And what he's basically doing is taking today's profits, driving his margins down to zero, knowing that he's compounding out his growth, which very few advisors, especially lifestyle practices, would ever dream of doing, especially before they know what the results are going to be like. Especially when you're doing your marketing spend and everything else, you first got to have a product that's going to generate interest and a position that's going to catch eyeballs. And then you need to have a whole process to actually maximize the yield.

Why Joe Sold His Company To Goldman Sachs [41:42]

Michael: So, help us understand a little bit more just how the environment, how the advisory world is different living in an environment like Goldman Sachs versus where you were in the independent side?

Joe: Oh, my gosh.

Michael: Most of us have only lived one side. So, how is it different?

Joe: So, as you know, this is the second company that I've built and sold. My first one, I'd sold to General Electric, it was a remarkably short-lived stint. I had a five-year contract, I lasted I think six to nine months, mainly because it just didn't work for me. And the people were very nice and all the rest. But it was a very top-down bureaucratic organization that just did not work for my very independent mindset.

There are two reasons. That's nobody's fault, by the way, I'm not pointing fingers here. But I came in at a level where I was a very small fish in a very big ocean. And I had come from being a big fish in a small ocean. So, my own ego wasn't ready. I was young. I was 34 at the time. I was quite young. And I just couldn't deal with a hierarchy.

It's very different at Goldman Sachs, which, by the way, I am also surprised I'm still here three years later, by the way because...

Michael: Oh, I will admit, I am surprised as well, just knowing your independent-mindedness and entrepreneurialism and at least what we tend to generically project onto large firms, banks, Wall Street firms in general. I would not have guessed that if we were chatting three years after the acquisition, you would still be at Goldman.

Joe: Yeah. Honestly, the number one thing is just the people. I don't know that I... I can say honestly, there's nobody that I interact with at Goldman Sachs that I wouldn't have hired any day of the week at United Capital. I've never seen the level of talent and brilliance, and also, believe it or not, humility, that I meet here at Goldman Sachs.

So, just for me, personally, I love brilliant people. And this place is swimming with, honestly, the most down-to-earth, authentic, most ambitious, really smart people everywhere. And I've lost pretty much my entire executive team that built United Capital is no longer here. They have a couple of folks here still, like Jason Del Col, etc. But most, by and large, everyone's kind of left, and the firm has continued to grow and thrive because there's just so many brilliant people that when someone leaves, while it's sad personally, there's somebody equally competent, if not better, to sit in the seat. So that's the one thing that, for me, has been really interesting.

The second, I have got such a completely different respect for risk management that I will say, where I to go back, I would have said, "Pay more attention on the details of risk management." And this is a lesson...

Michael: Meaning what? What risk?

Joe: Meaning, when we acquired firms and integrated them, we did, I think, a relatively good job of putting them on platform and putting oversight over them. But when I look at the regulatory scrutiny that a firm like Goldman Sachs goes through and the required level of risk oversight, our clients are getting what they said they wanted. We have records of the billing that we have. Are we storing and ensuring that they are being billed exactly what they were told? And if they have exceptions in their portfolio, it's being implemented. That if somebody dies, we got all the stop gaps, safeguards, that we have all the risk and privacy safeguards we should have.

The standards are so high. And I know that at United Capital, while we did all this stuff with diligence and care, it's not even close to the standards that I can honestly say our clients have today as far as security and safety and aligning with their interests. It's not even close. And that comes at a price, obviously. Because, obviously, it's expensive, it's painful, it's a lot more regulatory scrutiny. And that means a lot of work for our clients and our advisors. But it's for their good. And I would say that's the one area where I'd say, "Boy, this firm..." And what I've learned as a consequence.

And then the third big thing for me that's been really enlightening is just the way you can be a big firm and also be contributive. And it's a very flat organization. So, myself and Larry run a fairly substantial business, as I mentioned, with thousands of employees. But these tens of thousands of employees across the four big divisions of Goldman Sachs, there's just a few hundred partners. And we're remarkably connected.

So, when a company is going public, we can come in and offer them our services to help all of the employees figure out how to deal with the windfall that they're about to receive. Or if Goldman is advising on one side, and we can come and advise them on the participant side. This immense power to having this very collaborative environment, and it is a remarkably collaborative environment, where all the different elements of how we can help individuals can be brought. We call it OneGS to support and help those individuals.

And I understand. I remember one of my most frustrating client losses, by the way, ever, was actually a client in Florida who had sold their business for 12 million bucks. When I was working with the advisor down in Florida, and they were taking in a big substantial amount of that 12 million to start a new company, and they were very quickly dwindling their financial plan. So, they were spending so much maintaining this business that they were going to run out of money.

And I got off the phone with the advisor in Boca, and he said, "You got to help me with this client because they're running out of money. They are going to run out. And he has remarried and did not have a cheap lifestyle." And I said to this client, "Look, you've built a business before, I built a business before. You need to treat this as a standalone entity. You need to bring in outside money or shut it down, but you need to stop funding it right away."

And the client said yes. And so he did that. He took some outside money. Two years later, he sold the business for 70 million bucks in cash proceeds, so netted after the private equity and everything else. He did great, right?

And he calls me, he calls the advisor, Steve, and he said, "Steve, I'd like to have a call with Joe and you." And he proceeds to tell me that he's firing us. And I said, "What?" He said, "I'm going to Goldman Sachs." And I said, "Why would you go to Goldman Sachs? We helped you to make the decision." "No doubt about it, you've been great. But you know what? I need a lot more than you can do for me. And I have graduated from you. Thank you very much." So, I remember being...

Michael: So, what's the difference now on the other end? What are they getting from Goldman that you couldn't do at United Capital?

Joe: You could never have provided the banking, all the private equity solutions, all of the sophistication that this client needs in the estate planning realm. There was no way on earth, no matter what I said, even though I am a pretty convincing human being, and now that I'm here I realized, we would never have won that battle. Even if they charge more than us in the investment implementation, which they did, they gave away all the planning and advice for free. And it was much more than we could do. And so, it became a non-winnable battle.

Again, I didn't realize it until you become to this side because while I saw their proposal, Goldman's proposal, I didn't actually receive the presentation. And of course, the client came up to here to turn the rest, where I'm sitting right now, and he looks around and he goes, "My money is safe."

Now, even if we don't have custody, Goldman Sachs has been around for 150 years. And it has a brand value that was far in excess of what United Capital could ever have. And by the way, we underestimate the power of brand. And it makes sales so...

Michael: How so?

Joe: Well, our own advisors will tell you, the average client has grown. The referrals grew exponentially the minute we joined Goldman Sachs. Existing clients decided to give us more money. Existing client said, "You now need to meet my dad because he wants to be a client of Goldman Sachs." This is a whole universe of people that didn't know they could be clients of Goldman Sachs but now know they can.

Michael: Because clients perceive such a cache to the Goldman brand that it literally attracted clients' assets from referrals.

Joe: It's remarkable. And guess what? Unfortunately for the independent advisors, it's earned. That reputation is earned. I see how much we spend on technology, and how much we spend on security, how much we spend on enhancing and developing new investment solutions. It's earned.

I have nothing but love and respect for what it takes to be an independent advisor. But I also see, from here, sitting in the office that I do, the incredible investments that big banks are making to be leapfrogging and jumping ahead on the client experience and delivering solutions that are really exceptional. So, that's the dilemma.

But I can tell you right now, there's not just thinking about corporates, but there's a lot of thinking going into how do you offer private equity and more sophisticated solutions to the high-net-worth market, to the accredited investor, not just the qualified investor. And once that gets done at scale, whether it's one way or another, I think you're going to find that it becomes even more important to just be thinking about your client experience and what you're delivering for the fee that you're charging.

Michael: And per our earlier discussion, what this ultimately comes back to is still not, therefore independent advisors have to worry about whether clients are going to leave them, this is all the discussion about who wins the growth over the next 5 to 10 years?

Joe: Who gets the clients' kids' money? Who gets the spouse's money if one of the spouses dies? Because there are natural points at which every human thinks about what shift I should be making. Every human goes through this. When you get married, how does my life change? When your first kids go to college, do I have the right situation? When I'm very close to thinking about retirement, that's another roadblock. When your parents get sick and/or dying, you rethink things.

And those are the natural choke points where you want to be there to be...and by the way, where your own clients have to be protected because that's when they're going to reassess, "Are things working for me right now the way they are?"

Michael: So, what does the independent side do to stay competitive and survive and thrive in this environment with, as you're framing, all these resources and capabilities coming down the pike from large banks and brokerage firms?

Joe: Well, I'd say first, if you want to stay small, you have an advantage in that you can be more agile and nimble, and more personalized than a big firm can be. The reality is, for a firm that's larger, you are naturally going to look for ways so you can scale things. And technology allows you to deliver such a level of personalization now at much lower levels, profitably. And that's one of the dilemmas that I would say you need to solve for, to say, "What can I do in a unique bespoke way that is very hard for a large firm to replicate?"

And that might be building portfolios that are true one-offs for individuals. And again, most advisors don't want to be doing that for a living because it's very, very time-consuming and expensive. But if you only have 200 clients, you can do a lot.

The second, I would say, most advisors are overstaffed and under capacity. I think that most advisors can serve a lot more clients than they think they can. But they have to invest in their own technology to deliver scale, whether it's digital onboarding so that it doesn't take hours and hours of a person's time to onboard a client, whether it's managing with models that gives them scale, whether it's using planning systems. Many advisors still meet with clients four times a year, even though the clients don't really want to. But the reality is, most advisors who run businesses, they're working 30 hours a week. They're not working 40 hours a week. They're not hiring staff so that they have more capacity because they want to keep the money.

And so, if you want to grow, the first step is to run this like a business. Ask yourself, outside of my comp, what would a smart private equity investor be doing with this business? Just so you know, both businesses that I've been a part of building, every 18 to 24 months, we would ask the question, "If we brought in a private equity investor today, what would they do with our business? What changes would they make?"

And it forces you to rethink, "Are we competitive? Are we making the most of our position with our existing clients?" But I think honestly, for most advisors, they're good enough, and so they don't really try to be ambitious about what we can do next.

Michael: So, in that context, or if I'm raising capital from a PE investor, what am I doing to stay competitive with Goldman Sachs' Personal Financial Management?

Joe: Or even with your peers. Start with something that's completely unmatchable. How do you be just a little better than the guy across the street? Literally go on Google, type in wealth management with your city and look at the top three and just see.

Are you even in the top 50? Start by being visible because that's how people find you. What is your personal footprint? Almost everyone that comes to see you will have formed an opinion before they actually meet you. What is your actual message? Does it look any different than anyone else's? Are you solving any problems more uniquely than anyone else?

There's almost no introspection from when I sit with advisors. Very seldom do they stop and go, "Okay. Would I choose me? Is there something I'm doing that makes me be different than everyone else? And why would I choose me? Other than because I'm really nice and I'll take care of you because those are the table stakes."

The reality is it's just a sea of sameness with very little time spent on, what makes us distinct? What makes us shiny and want to attract people to be attracted to us? Because if you don't have that, then it's very hard to attract talent that's going to want to be a part of what you do, never mind the end clients. And so there's so little personal investment into the business, whether it's branding, whether it's positioning, whether it's service offering, whether it's the underlying products and services you deliver. How do I think about being the next iteration of what we do?

And again, it's typically because people have been doing what they've been doing for 25 years and that kind of works, and so they're like dentists who show up every day and do what they do. And once in a while, the client will say, "I've got a friend who needs to come in." "Yeah, that works okay." And there's not a big incentive to change it because it's kind of good enough and nor do they need to worry about it.

It's just if you want to be a growth company, you're going to have to think in terms of not a lifestyle business but operate and think about this like a franchise. What should a franchise look like? What would be repeatable and scalable?" And it's a completely different thing if you want to run a local coffee shop that services your local clients versus running a Starbucks. Your thinking has to be different.

Leveraging Technology As A Value Proposition And Useful Tools To Scale And Grow [55:55]

Michael: So, if I project this out 10 more years, it's the early 2030s, what is this financial planning, wealth management value proposition look like another 10 years out from all these changes that we're in the midst of right now?

Joe: I think you're going to see 5 to 10 large wealth management RIAs that to the end clients will be indistinguishable from the large banks.

Michael: So, this is Creative Planning, Fisher Investment, those types of firms?

Joe: Yeah…Who knows who the winners will be. If I were running an independent RIA today, if I were running United Capital three years on from where we were, my hope was we'd be at $50 billion. We would be offering banking services. We'd be offering tax prep. We would be looking at how to offer more sophisticated investment solutions. And we would have segmented offerings for every client set that would be different, with a different service model, with many of my advisors being salary and bonus employees rather than revenue-sharing employees, if I were an independent firm, to replicate what Vanguard is doing, but with a much more bespoke, much more planning-centric and with a really great client experience.

And I think, since that's just my view, that there will be several folks who will build that kind of experience. And I'll tell you why. Because if you don't do that, the end value of all these acquisitions they've done will be no higher than the sum of the parts. And if you want a premium return, you have to do something to improve the underlying value of the business you acquired.

That's what was always true at United Capital. We would acquire them at X. And we knew, after they'd been integrated, that they'd be worth 2X. We will grow the revenues. We'll grow their margins. And we'll grow their brand experience.

If you don't do that, then you're simply hoping that the cost of capital goes down and that your exit multiple is higher because there's a hundred of you versus two of you. And that alone is not a bet I was willing to make.

And I think, ultimately, what we're seeing in the public markets today is that you're seeing the valuations of the few public companies there are that have applied independent advice. And I don't want to mention any names, you can go look for yourself. But it has not been pretty what's happened with stock valuations.

And while I think the sale of United Capital reset the market, it made private equity go, "Oh, my gosh. These things are really valuable." What we did: invest heavily in our client experience, integrate those offices, put them all on one ADV, deliver a centralized execution platform, have a unified culture. I don't know that everyone in the independent space is doing the acquisitions are making that effort because it's very expensive and it drives the annual rate of return. And as you and I was saying earlier, I don't know that you're necessarily rewarded for it.

Michael: It's an interesting dynamic that the nature of private equity firms classically is they want 3X to 5X their money in five years. And if you just start doing the math of that, it essentially means growing something on the order of 30% to 40% growth rates compounding for 5 years.

And just to grow at that level is a real sprint for any firm to achieve. It's almost impossible to do that, to grow it that quickly from I'll call it "just good old fashioned organic growth rates," which means a lot of firms end up finding the only way they can grow at the level that they need to grow to satisfy the investors who took the deal is that you have to do an immense number of acquisitions.

But you don't necessarily then have the time to build a new systematized client experience. You don't necessarily have the time to really, really integrate them and generate the buy-in it takes to have everybody aligned to one big whole and...

Joe: No, look, it's a reality…

Michael: Even if you do that stuff, most of the outcome of your valuation is based on getting your growth rates and being larger. So, you're not necessarily financially rewarded for doing that stuff versus just take more of your dollars and keep doing more deals.

Joe: Look, we were asked when United Capital launched FinLife, which was the White Label of our platform, why would we do it, give away our secret sauce? And one of the reasons was exactly what you're pointing out, which is, first of all, we were acquiring firms, we were making them better. But I still needed to invest tens of millions of dollars on our platform.

And if I do that, and I have, let's say, this couple hundred million in revenue, and the contribution to our overhead is, let's call it, 40%, 30%. Let's say, 50 million, 60 million, 70 million bucks. If I go spend tens of millions of dollars on all the administrative people and the marketing people and everything else, that starts to affect your EBITDA, right? Which is your valuation.

If, I then want to reinvest in my technology, it drives down EBITDA further. And if your multiple is, let's say, 15 times on X, or whatever number you want to use, well, what are you going to do because every dollar you spend is costing you $15 at the exit? And if I'm looking to sell in the next 18 months, that's a very expensive spend.

And so, what we did to solve for that is we launched FinLife, which has allowed us to then make the investments in our platform be for a different business, which was the White Label business, and have a sum of the parts, which worked. It worked because we got dozens and dozens of very nice, really amazing advisor clients, who could potentially then be part of joining us in the future, in very elegant and easy fashion. And also, our own existing advisors got to benefit from all the investments we made in the technology. And it kept our private equity happy because it added the bespoke of the business.

So, that we had a platform that could go to market, it increased our addressable market because it wasn't just clients who were only our clients, they could be clients of other advisors. It increased our profitability because we will now have two different business lines. And ultimately, it led to a much higher multiple.

But people who don't have this other element automatically go, "Well, we'll get the United Capital multiple." But they didn't understand that what we had done was build a technology platform as well as a wealth management platform that allowed us to offset some of those expenses that, by the way, it wasn't just Goldman Sachs. So, it was everyone who was in the process also identified this business is worth a lot more than the EBITDA we currently see because there's two different businesses of value.

And that's the dilemma. If you're only doing acquisitions and you're counting on an exit multiple that's significantly higher but you're doing nothing to improve the underlying businesses, then you really rely on a really lower cost of capital and underpaying for these underlying firms. And as we know, the pricing has gone up a ton for the people leaving because there's so much money available.

And as we also know, the cost of capital has gone up a ton. We were at 3%. I think probably most of these firms now are going to be at 7% or 8% cap rates. Well, if the exit multiple goes down, and that's what most public comps would tell you, you'd say, "My gosh, that doesn't look very good. How in the world can these firms invest at the actual platform and end up with margins with a happy exit?" That's the dilemma.

And because they underinvest in their own risk management, a lot of strategics would say, "Well, this just looks like a collection of independent pirates rather than the navy." And I always say to people, "United Capital is the navy. We built the navy. We are not a collection of merchant marines or the pirates. We are the navy." And that meant we did a lot fewer acquisitions that we could have done. But it also meant we had a unified view, which made us appealing to a big, amazing bank like Goldman Sachs.

Michael: So, how do you think about the advisor tech, FinTech environment, more broadly then? The debate for the past 10 years was will robo-advisors replace human advisors or essentially is, as we're thinking, will technology be so good that it replaces advisors? I feel like now we're talking about in different...

Joe: Like I've always said, the reality is, I've always believed that as long as you have enough complexity and the cost of being wrong is high, you will always use a human being. I'll give you a good example that is not in our profession. If I stubbed my toe, the cost of being wrong is relatively low because, oh, I got a bloody toe. And it's relatively easy to fix. I'll go online, it says, "Put some Neosporin on it, rinse it off with whatever, and bandage it up." Great.

I get a heart murmur and having trouble breathing, I'm going to go, "Okay, the cost could be wrong could be really, really high. And it's too complicated for me to figure out what the hell is going on. So I'm going to go to the doctor."

The same is true with legal. Before I start a company or I have a simple estate plan, because I've got one kid and no money, I just go to a legal. I take a look, I find an estate plan, have a nice day. Or I go online and incorporate a company. As soon as I have 50 employees and I'm sitting in 2 different states, the cost of being wrong is high and the complexity is high, I go get a lawyer.

Same thing on my tax return. I wish I could do it myself, and I can, except, at my level, it would take me my whole life to fill my tax return, which is hundreds of pages. So, I have to have an accountant whom I pay lots and lots of money to. So, the two drivers that will always allow for humans to have a place is when complexity is high and the cost of being wrong is high.

And when you have kids or when you get married, your cost of being wrong goes up. When you're a bachelor, your cost of being wrong goes up. If it's easy, you don't have a lot of complexity, you probably don't need an advisor. But if there is complexity and the cost of being wrong is high, you probably need an advisor. And that's the truth.

Even if the individual can do it themselves, I would say to the client, "You need me because you might not be around. Who the heck is going to pass on the knowledge and the wisdom and the ability to maintain things the way you intended if you're not around?"

So, the reality is humans provide consistency and the peace of mind that comfort that things can be done and that I help you avoid the dark alleys that you might not know about because I've been doing this a long time. That's the value I bring, or any advisor should bring to the equation, which is, "I'm going to help you to optimize your life and avoid the mistakes, the expertise and the knowledge to help you solve the problems that you don't even know you've got."

Michael: So, then what is the role of tech? How do you see tech fitting into this picture?

Joe: Look, the role of our human advisors is to remove financial anxiety from people's lives. That's what we do. Ultimately, we are paid for one thing above all else, and that's to remove financial anxiety from people's lives.

Technology allows us to answer questions in a very efficient way. And so, our ability to take complex situations, using technology to simplify them internally is very, very high. Technology keeps making it more advanced and easier for us to solve and answer questions. It allows us to do many financial plans easily. It allows us to bring data and be more efficient.

Interestingly enough, most advisors are not servicing more clients although the technology allows them to do it. And so, again, the industry average is still that most advisors service somewhere between 100 and 150 clients per advisor, but technology should allow them to be serving 250 to 300.

Michael: Is that where you see the number going?

Joe: Absolutely. Yes, the technology that's there today should allow you to serve a lot more clients. So, if there is pricing compression, it doesn't harm you because your margin per client is maintained. And if not, you can get more clients to service them at slightly lower margins and still maintain your profitability.

And the dilemma is that many advisors don't think about technology and say, "Which of these two buckets does it fit in? This allow me to service more clients scalably and make sure it gets used for that purpose? Or does it allow me to be unique and differentiated and do things no one else can do?" And if technology doesn't fit into one of those two stacks, it's probably going to be wasted.

Michael: So, help me play this out though because just, I will admit my brain really has trouble wrapping around the idea of numbers like 250 or 300 clients. I just think at a high level, look, there's only about 2,000 working hours in a year. And realistically, I can't do all of those in client meetings or anything close. Maybe, I can get 60% or 70% of my hours on client-facing stuff. Maybe.

And so, I've only got 1,200 to 1,400 working hours in a year. I can do client stuff when I've got 250 to 300 clients. It's six or seven hours per year for everything I do for my clients. It's one or two meetings and one or two phone calls, and a couple of emails. And I haven’t even done any analysis.

Joe: Can I ask a question? Do you do a physical every year?

Michael: What was that?

Joe: Do you have a concierge doctor?

Michael: No.

Joe: Okay. I do. I think lots of people do just because the typical doctor has 1700 clients, but if you're concierge, you typically have 300 to 500 clients. Now you're doing a physical every year, you're meeting, you're doing answering questions. How are they doing that? They're doing it because most of the interactions are wellness visits, which is what we do for a living, by the way.

Once in a while, you're going to have a situation where you have somebody who's actually sick. Somebody dies in their family, and you've got an estate planning question. But most of our interactions with clients are wellness visits.

Michael: So, meaning, at least for context, we're not onboarding 250 clients a year. This is like we're in maintenance mode with 250...

Joe: We're in maintenance mode. They already have a financial plan. We're literally just updating it. My goodness, in today's day and age, your prep work should be no more than 20 minutes. If you're taking hours to prep for that meeting, you need some technology. It should not be.

Now, yes, you're going to have some clients with 10 or 15 million that are more complicated. But for the vast majority of this advisory universe that we're dealing with $500,000 to $3 million clients. That's where most of our independent advisors' wealth lives. It's a remarkably simple performance report, "Here's where your assets are. Here's your financial plan updated." And by the way, you have an RM, and maybe you have, instead of one RM, two RMs, relationship managers, who are prepping everything for you, like your nurses, and you're showing up to make sure everything's good.

Michael: So, what does that team structure look like then with advisors and support advisors and administrative staff and technology?

Joe: To me, in a $250 million practice, there should be one advisor who's working as a point on the $5 million-plus clients. Because the needs do change once you get to 5 million. And those clients should have a different service model. It might include things like tax prep. It might include things like more concierge services, more bespoke financial plan, more complicated investment solutions that might not be able to be automatically sent to a financial plan. So, there might be higher levels of maintenance costs.

And by the way, you will find that we tend to overcomplicate things that even clients with 10 or 15 or 20 million don't need that much complexity in their investment solutions that we overcomplicate things that are unnecessary. But let's assume you do some things different. You then have a next tier of wealth advisors, wherever you choose your segment to be, that works with, again, just to keep it simple, your secondary tier of clients.

And your secondary, they fall into one of two categories - emerging clients, who are on their way to making more money, and maintenance clients, who are on their way to having less money. And that's the way to think about it.

And say, "Okay. I should not be..." This sounds cold, but the reality is, if they're on the way to having less money, that's not a great place for you to be spending a whole lot of your A team's time. Because the reality is, this is a relatively simple, "Don't spend too much money. Let me run your financial plan." But the advisor has to be a specialist who comes in when needed and is like a surgeon that comes in when there's surgery needed.

And for most clients, 90% of the discussion is just to check in, "You're on track, everything looks good." And by the way, the advisor can come in and do that, and it's a 30-minute discussion, maybe it's an hour, but that's it. If you have 250 clients, you did all of them, that's 250 hours a year in a 1,920-hour work week. My goodness, that's not a lot.

And if most of your servicing is done via a mobile app, electronically, with a relationship manager who does the flow of funds necessary, even if you do two meetings a year, that's 500 hours. It's a quarter of your work hours.

You and I both know, Michael, that's not what's going on. What's going on is the advisor is taking three hours to prep for the meeting, probably using a lot of time that's unnecessary. They're not really working 1,920 hours, they're working 1,200 hours because I don't work Friday afternoon. Wednesday afternoon is my golf day. I'm doing business. I'm "going prospecting," play golf. And so, the real work week for most advisors, I'm guessing, is if you were to do the math, I think on average, the industry is probably close to the 1,200 than 1,900 a year.

And that's why they're like, "Well, I don't really have more time." But that's because you work a really nice work week, which is okay. But if you want to take on more clients, you need to create more capacity. That means you either need to shift some of the work to junior staff. So, you have more time to do more prospecting and growing, and servicing the high end of your client book. Or you need to work harder, which is probably not the answer anyone wants to hear. That’s the nature of the beast. There's no magic to it.

Michael: I think it's interesting how you segmented though that, as you would frame it, "Look, just that secondary tier of clients is not where you want your A team's time to be spent." That, to me, it is an interesting way to think about tiering and segmentation that, "Look, when I have to engage services with law firms and accounting firms, if you work with a larger firm, there's a pretty clear tiering of, whatever, you get the partner's time at, whatever, $600, $800 an hour or the mid-level associate...

Joe: Oh, there is no question. Of course! And accounting firms do it too. And you would start…

Michael: Yep. And we don't tend to that in advisor world.

Joe: But you have to. We're in the professional services business. You point me to who doesn't do this. It's not possible to be in a advisory capacity and not have tiering. If you work with a law firm, and you want the partner's time, it's going to cost you $600. Hell, now it's $1,200 an hour for the top lawyer.

Well, guess what? A lot of what I need, I'm happy to take the associate at 400 bucks an hour, or 300 bucks, or 200 bucks an hour because, frankly, I just need somebody to redraft this. That's not viewed as unusual. It's perfectly normal. And this is true at accounting firms too. And it's true at all the other consulting firms, the McKinsey's of this world. That's how they work, right?

The Surprises Joe Encountered On His Journey [1:15:10]

Michael: So, you started this United Capital journey nearly 20 years ago.

Joe: Oh, my God. Okay.

Michael: So, as you look back on this whole journey, what surprised you the most about just this building of the business and how the industry evolved around you as you were building it?

Joe: Well, look, I think the idea we originally had, which was that when you acquire, you have to integrate. That idea was very pooh-poohed initially. And I think it's proven to be true because I look at who's being successful in the acquisition business. And I would say, we were early in saying, "We're a navy. We're not a collection of independent firms." And that model, I think, is definitely proving to be the one that most people are going toward. Although, again, as I mentioned, I think difficult with the technology.

The second, I don't feel like a lot of the firms that I see out there have invested heavily in the client experience. And that I'm surprised and a little disappointed by, to tell you the truth. I felt like, again, maybe it's just me because I lived in… But United Capital like it stood for something with the behavioral economics and the client experience was quite differentiated that I don't see independent firms seeing the value of building a brand that stands for something.

And that's sad to me because it's impossible to be truly successful on a global stage at the level that these firms are all going to need to ultimately be without investing in your brand. It makes sales easier. It makes it easier to recruit talent. It makes it easier for clients to want to relate with you because they know what you stand for. And there's just not enough brand development work happening in the independent channel, which is, again, very disappointing to me because I would just assume there would be a set of firms that I would know what they stand for, who they are, and why they matter, and that I don't see out there.

And that gives a big advantage to big brands like Goldman Sachs, which whatever you think, you want fine people, the ones those really smart people, they know a lot about investing, and they are in the room when big decisions happen. People have an opinion.

And even with these larger national firms, I'm not sure that there's a consensus about what is... If I were to ask you, what does Creative Planning stand for? I'm not sure you can give me a pretty answer. It would be the same answer that everyone else would give me, which is what the power of a brand is. That everyone has a fairly consistent view about what it stands for and what problem they solve, what makes them special. And so that's the second.

And then the third, we have almost an abundance of solutions that is making it incredibly complicated to pierce through to the next level with a consolidated experience. And you articulate this really well in all your writing.

There's so much stuff being developed that it's almost overwhelming when you walk to these conferences. And now, they're trying to reignite again. You're like, "My God, there's so many things that in every segment, there's 5 to 10 different choices." You don't know which one is going to last, you don't know which one is good or bad. And all of it requires integration into your staff.

And so, the thing that I would suggest that we were quite good at, but I would suggest is really important, is what's your middleware. In this day and age, having really robust middleware... By middleware, I mean, what's the technology you're going to use to stitch together the subcomponents to create a sustainable competitive advantage for your client offering? We use Salesforce, by and large. But what are you going to use to stitch all these pieces together to control your data, to then push that out and interact with your clients, to then manage the experience, to be able to tier the services, and offer the different levels of service with data flows that don't require you going to five different systems to execute?

We spent a lot of time on that, being able to go to one dashboard, and you would automatically prepopulate all the financial planning software with eMoney or MoneyGuide to then prepopulate the client documents, to provide the ADV at the appropriate level, to personalize the client experience with their app, to then interact, and store all the video interactions we have with them and the client experience.

All of this integration requires really good middleware, And that's very, very hard for a business with 2 million in revenue to invest in. But I would suggest in this day and age, if I were to build the next independent firm, I would start with what middleware are we using because we got to be able to API everything and not be beholden to anybody. And that part is, to me, the unspoken challenge that almost all these advisors have. It's the biggest bottleneck to their growth, meaning not in getting clients but in capacity.

My ability to grow and service 250 clients, it's simply not possible if you don't have integrated systems because you do have to go check custodial. Now, I need to go check my portfolio accounting system. Now, I need to go look at my planning software.

Michael: And so, do you see platforms like Salesforce being the ones that ultimately solve this problem?

Joe: I don't think so because, again, that doesn't mean there won't be bespoke vendors who use Salesforce as the engine, but they're operating with firms like Merrill Lynch and Goldman Sachs. And maybe they can go down to the next level, and certainly their cloud solves for this. But it still requires a lot of customization that needs to be done that requires an investment that many firms are not willing to make.

I could tell you that Mike Capelle, when he worked for me at United Capital, he had an army of people, who just built Salesforce out for us. With Salesforce spending millions of dollars themselves to build what was our own version of their financial services cloud. But there's a lot of maintenance work. And every time you add a new vendor or a new solution, all of these pieces require a lot more in technology spend than almost any advisor is willing to do it.

And the thing I will share last, the big observation is wealth management has become a tech business. But most advisors don't operate that way. And that's a serious blind spot. We are in the information business. And if you're in the information business, you are a technology company. And most advisors do not think of it that way. And so, those that do will have a huge competitive advantage.

Michael: How does that show up in practice though? What does it mean to say, "We are a technology company," when earlier we we're saying, "Okay. But our core value, at the end of the day, is we remove financial anxiety for people."

Joe: We deliver through humans, but we are powered by technology. It means that every part of the execution at scale is stacked through technology that requires a push button, not a multiple sequencing of execution. In other words, almost every account can be rebalanced with one allocation shift that almost every client can onboard digitally without touching a piece of paper, without having to put in any data because we have it all. Because from the minute they interact with us online, they can experience most of our experience, have a Zoom call, onboard, become invested in a sequence of hours, not days or weeks.

That's the kind of thinking that you should be implementing to your business. That doesn't mean you lose the human element, but the human is providing the heart and the empathy. But the technology is powering everything behind. And again, I wrote about this. I called it "The Bionic Advisor." It's just sad how few advisors have really integrated the technology to really understand, like, "Hey, you need to have a deeply embedded technology core at the mass affluent level."

Michael: Well, I feel like the challenge on the advisor end is we would say, "Well, my technology vendors aren't giving me what you're talking about, Joe."

Joe: No, again, of course, because you have to keep stitching the pieces together. And of course, it's expensive and you need to have somebody who understands this stuff. And most advisors are great advisors, they are not technology people. It's not a coincidence that Mike was the first guy I hired, and he was an MIT master's in engineering, electronic engineering, because I realized that this is a technology business.

And then we worried about what are the advisors we're going to bring on because you've got to have the pieces fall together if you're going to have a larger firm. And by the way, it also makes you less dependent on the individuals because if it is a replicable system, that can be relatively easily executed, then you don't become completely dependent on the one person who knows how to do the 15 sequences it takes to put together a client meeting. You know?

Michael: So, was there anything that surprised you about the actual process of building United Capital as an enterprise?

Joe: It's all about people, honestly. And I would just say, it's really, when you look back and reflect on what would I have done differently, I think I held on to people who were not good enough for too long. It's very hard because I'm a very loyal person. And one of the things I'd say is, "Along the way, we probably should..." As you grow, you want to evolve the talent alongside you and always make sure that people you're working with know more than you do about wherever you're headed.

Maybe it was my own insecurity. Maybe it was my own blindness and loyalty. I don't know. But I do think, while we have brilliant people, I probably would have elevated some of them, brought in more talent. It would have been expensive, but it would have allowed us to have been faster in our growth.

Second, I think we were very fortunate with the private equity investors we had. And certainly, we're very fortunate with the timing. We sold right before the pandemic and all the craziness that ensued. But I probably underestimated the amount of money I should have been spending in risk management and compliance and controls, given the fact that we were hundreds of millions in revenue and tens of thousands of clients.

And, gosh, I definitely, had we stayed independent, I would have had to spend a lot more money on the control side of the house because the regulations would have gotten a lot higher, and we would have maybe ended up with a problem with the way we were operating when we were independent. I just wasn't spending enough time on the...And that's bulk that I really don't love, but it's an essential part of running a big business.

Michael: I was going to say, "What was the problem with that in practice?" How did that show up as a gap for you?

Joe: We had an SEC exam right before, and we were fine. But they were little nits and nats that, if a client said, "Hey, make sure you don't own this." Or, "Here's what I don't want to have in my portfolio." If the advisor didn't show up, did we have the systems in place to ensure those wishes were executed with? Do we annually check in to say, "Is this still true?"

It's a lot of the nuts and bolts, the day by day, if you're an independent, small firm, isn't as important, doesn't get looked at us thoroughly, and probably doesn't fall through the cracks because it's 200 people. But when it's hundreds of advisors and thousands and thousands of clients, you just need a different level of oversight. That's expected of you from the regulators.

Michael: I was going to say, so the challenge, in essence, is, as you grow, the expectations of the regulator's begun to change.

Joe: Absolutely. And they should, by the way. They should.

Michael: Yeah, that's fair. Yeah.

Joe: So that's the thing. And when I look at what I currently live with, I'm like, "Wow. It's just eons beyond where we were. And it's really good for our clients. It's really good for our clients."

And I'm like, "I think we had a gap there that I would have been a little bit more disciplined about that." And I would suggest, I'm guessing, there are several firms that probably aren't spending as much time as they should. It's totally not rewarding. It's complete cost. But it's really important.

And then, we are in a much firmer regulatory environment than we were. And as these big RIAs grow, the regulators will, no doubt, want to look more firmly because it's a different thing now. We have these large national, independent, full-service IRAs that are going to get a level of scrutiny. It's going to be very, very different than when they work $5 billion IRAs.

The Low Point On Joe’s Journey [1:27:04]

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

Joe: I would say there were two. Number one, in 2008, 2009, when the whole world was going down, we were only 4 or 5 years old. And we had a private equity investor that failed to fulfil. And we had a bunch of acquisitions we’re meant to do. And we had to basically wonder about our financial lives. And I had to cut everyone's comp down, all of my executives' comp down by 70%.

And that was very hard. And the choice was, do we fire people or do we cut out comps down to that level? That was awful time. And also...

Michael: Because you had M&A deals you had to close on. But your PE firm backed out of funding because they lost their funding when the world was imploding.

Joe: Yeah. And so, I had to go raise capital at that time. That's when we brought in Bessemer. And the terms were very expensive, as they should be. It worked out great for everybody, including the firm that wasn't able to execute. It worked out fine for everyone, honestly.

But it was a very tough period because people are taking comp cuts. We didn't know what was going to happen with the business. I had to call these people who were acquiring, and I went through the front door. I'm like, "Guys, we have a deal. I don't know that I can execute. You can walk away or just give me a few months." They all decided to wait. And we got the funding, and we executed. So, it worked out, but it was really a dark period.

And the second is we almost had the business sold prior. And through a series of weird events, it ended up going sideways, and that's...

Michael: Meaning, it was almost sold earlier than when the 2019 event happened with Goldman?

Joe: Yeah, and that was, oh, boy, tough. But fortunately, I've never celebrated until it's time to celebrate. And so, we've moved on, and we literally sold for significantly more just a year later. So, it worked out great for everybody, honestly.

And honestly, we couldn't have dreamed of a better outcome than being at Goldman Sachs. And then post the deal, the saddest part is just you build this group of people that you've been through this voyage together and so, there’s this bittersweet, "That voyage is gone and I'm on a different ship now."

People often say to me, "Joe, don't you miss those days?" I'm like, "No, I genuinely, honestly don't." It's like I climbed to the top of Everest the second time. And I'm like, "Okay, that was great." But now, I'm in a different place and the stress of having to make payroll for 800 people, have to deal with the private equity, and making sure that everyone gets what they need. And remember, we had hundreds of advisors who had taken equity in our business, traded their own equity for our equity. And I felt an immense burden to execute on that and make sure that everyone had a good ending.

And so, when you get to that, you're like, "Hallelujah." Honestly, it wasn't even like I celebrate. I just felt a sense of relief, "Oh, my gosh, we got this." And that is really rewarding, but it's sad too, because you're like, "Okay, well, that was done. What's the next voyage like?"

And I'm not somebody who ever rests on my laurels. I'm 54 and I'm not done. And I love building. But saying goodbye to some of the people that you had that voyage with and working with them in the trenches, that can be really bittersweet. I still am friends with all of them. I'm still huge fans and mentor a lot of them.

But it's a new team. And it's a different team. And they're great, but you lose a lot of that camaraderie that you've had for a decade of working together, changing the world.

The Advice Joe Would Give His Former Self And To Newer, Younger Advisors [1:30:34]

Michael: So, what do you know now you wish you could go back and tell you about the dynamics of working with outside investors, just like that whole side of the advisory business, because it's a very unfamiliar space for most advisors?

Joe: I think the most important, I think, remove all of your defensiveness. Don't be too insecure about why people are asking questions. I'll tell you, private equity investors are universally economic creatures. And there is no such thing as, "Oh, this is the right thing or the wrong thing." There is one answer, which one is the economic optimal outcome for their investments. That's it.

And so, I would think that, because they were friends and they were colleagues or whatever, that there was anything other than that. And every decision was based 100% on economics. And so, I wished that I had been more aware of that early on. Because at the end, I had to be a lot more assertive about getting equity to people that didn't get it. And I had to fight at the endpoints rather than doing it when they came in to invest and saying when they invested, "This is what our policy is going to be. Build that into your pricing model."

Michael: Meaning you wanted to give equity to leadership or to executives or to attract talent?

Joe: And even to the next level down of employees. Yeah.

Michael: And the PE firms said, "Well, we don't want to let go of that now since you didn't negotiate that upfront."

Joe: Of course, we don't have to. Exactly. And so, we did it anyway at the end. We collaboratively came to a good outcome, but I could tell you that those discussions, rightly on their part, honestly, they boiled down to, "Okay, this is the economic choice you've got." But it would have been a lot easier had I, early on, part of their investment and said, "This is what our expectations are."

And so, I would just say, this is about expectation management. But I probably would have been a little bit better about making sure I take care of everyone before they're in the boat, rather than while we're on the boat together.

Michael: So, what advice would you give younger, newer advisors looking to come into the industry today and navigate a career path?

Joe: That you are in the business of forging deep, intimate relationships. That's the business. And McKinsey did a great job describing how you do that. First, you need to have expertise. Second, you need to have intimacy. You have to know people better than they know themselves, if possible. And third, you need to be disciplined and follow through. You need to live up to your promises.

But the base of that equation, if it's intimacy and expertise and follow-through or dependability, at its base, is self-awareness. You need to know how you come across. You need to know how you interact with people. You need to amend that to the audience.

I think I was, very often in my career, a one-note pony. And I would tell every advisor, every emerging advisor, you have to be self-aware enough to know your weaknesses and to adapt who you are to what people need from you. And that's different.

Whether they're an employee or a client or a fellow colleague, everybody wants to be understood and seen on their own terms. And the more flexible you are in adapting to that person, not losing sight of what you want to accomplish or what you want them to accomplish, but seeing things from their eyes, the more powerful you'll be.

It has become my way of being nice to just stare from other people's perspective. What do they want from this interaction? And not in a bad way, what can I give them that will serve them? And that's different.

And what I find very often is, for many advisors, young folks have been really great with clients but awful with the people they work with, or they'll be really good with their clients and really bad for the people that work for them. And everybody wants to be loved and cared for. And they have their own way of wanting that.

So, I would just say that to just be kind to yourself and to everyone and try to view everyone as somebody that you can serve. And that'll be how you end up being successful.

I have a very simple view of the world. My job is to help brilliant people do brilliant work. And it's starts by me making sure I don't get in the way. So, that's how I've changed and how I think I would advise any young advisor to really take radical ownership of your own decisions and who you are. And know that every bad relationship, every bad interaction is at least some part of due to how you're approaching it.

Michael: Well, it's tough medicine to say.

Joe: Yeah, that's the truth.

What Success Means To Joe [1:34:50]

Michael: So, as we wrap up, this is a podcast about success. And one of the themes has always been that success means different things to different people, sometimes different things to us as we go through the stages of the journey. And so, you've done this. You grow entrepreneurship cycle more than once, in building a company and ultimately exiting it. How do you define success for yourself at this point?

Joe: For me, it's that I finish every day. And it's the same measure I've had my whole life. When I go to sleep, I do an assessment. And do I feel proud of how I conducted myself that day? That's all.

Do I feel like I've lived up to the expectations that I set for myself? Have I been a good colleague? Have I been a good person? Have I grown as a human? Am I reasonably close to the person I'd like to be? That gap between who you think you are and want to be and who you actually are and what you act like, the narrow that gap is the more fulfilled you'll feel.

And that it's not my thinking. I can tell you that's the very good work that gets done in all behavioral economics. Happiness is a state of mind that comes and goes. I am very happy after I've had an old-fashioned fulfillment, which is the thing that really counts. Satisfaction, which is what really counts. It's when you live up to the highest ideal of yourself.

So, when I feel successful, I go to sleep at night saying, "I have been as close to the person I'd like to be as I can be." And there are many days when that's not true, and I go, "How do I fix that?" But that's to me what success is.

Michael: I like that framing, "Happiness is a state of mind, but fulfillment comes when you live up to the highest ideal of yourself." It's a tall order.

Joe: It's a tall order, but it's what we're on this earth to do.

Michael: Amen.

Joe: Michael, thank you. This was a great time. Hopefully, we'll get together for your 1000th podcast soon.

Michael: Yes, yes. Or at least here, we can come back to number 500 in another four years and see what comes next.

Joe: Thank you.

Michael: Thank you.