#FA Success Ep 335: Systematizing Succession And New Partner Transitions In A $1.5B Ensemble Enterprise, With Timothy Wyman

Resources Featured In This Episode:

• Timothy Wyman
• Center for Financial Planning
• Tim’s Sample Annual Review (download) – PDF
• The 5 Stages Of Growth In A Financial Planning Firm
• Envestnet Tamarac
• EOS Worldwide
• Managing the Professional Service Firm by David Maister
• Holistiplan
• FP Alpha
• Calendly
• Mark Tibergien
• Philip Palaveev
• Rick Kahler FAS
• Kinder Institute of Life Planning
• MoneyGuidePro

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

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Full Transcript:

Michael: Welcome, Tim Wyman, to the "Financial Advisor Success" podcast.

Tim:  Hey, Michael. I'm super excited to have this conversation, so thanks for having me. I was thinking I consider myself to be a student of our profession and I'm always looking to learn and share what I can. And I can't think of a better person to have that chat with, so again, thanks for having me.

Michael: Awesome. Thank you. I appreciate your willingness to join as well for a conversation I'm really excited to have about just the real-world challenges and dynamics that start to come as advisory firms really begin to scale up. We published this article a bunch of years ago about the different stages of growth that advisory firms go through. This startup stage, or you're an advisor on your own and just trying to get enough clients to survive and get enough revenue. And then, eventually it starts going well. You're getting enough clients. Then you hit this wall, this capacity wall. I've got too many clients. I got to start hiring some more advisors. So then, you start shifting from being a solo advisor to a multi-advisor business or an ensemble.

And then, there's a whole bunch of different problems that come up. You got to create this infrastructure, you have to make systems in process, and you need departments of people who manage people who do things, like middle management appears in your advisory firm. There's all the additional complexities that begin to come as the business really starts scaling up, including then you got to figure out how are you handling ownership. If there's all these people and all these decisions that get made, is everybody who's an owner a decision-maker or not? And if not, how do you make that transition? How do you introduce new owners without infringing on existing ones? All this complexity basically starts coming. There's sort of this more money, more problems phenomenon. I feel like that begins to occur.

And so, I know you're a firm that's closing in on a billion and a half of dollars in management that you are living and have lived this stage of the journey. And so, I'm excited to talk about the dynamics of what really happens and what do you really have to deal with as the business starts scaling up, as you have to really build infrastructure to support advisor teams, as you really have to figure out what ownership and succession planning looks like if you want to sustain the business internally, and just how you navigate that in practice as it's played out real-time for you.

Tim:  Yeah. I wish you would have written that article in 1991 when I got into this profession. It would have made things a lot easier and maybe I would have chosen a different profession knowing all those walls. But fortunately, we've been able to break through a lot of them, those walls, like a lot of folks. But yeah, you mentioned the transfer of leadership and ownership, for us at least, has been one of the most difficult transitions and I think that's the same for many firms. And we're not unlike other businesses where it's very possible that the great majority of our firms actually won't survive the founder's retirement. Because I think the reality is, in our profession at least, most firms are still owned and managed by the founders. So, there's that old quote from Yogi Berra who says, "In theory, there's no difference between theory and practice. But in practice there is." And that reminds me of succession planning. There's been a ton written about succession planning, but it's hard. It's difficult. And fortunately, it's also rewarding.

The Center For Financial Planning As It Exists Today [07:04]

Michael: So, as we delve into this, I think to start, I'd love to hear you just paint the picture for us of the advisory business as it exists today, so we can understand where is the business now that you spent the better part of a couple of decades building up to. And then, we can talk a little bit more about how that's evolved and what that journey's been like over the past several years.

Tim:  The Center, as we refer our firm to, and we're a privately held professional services firm founded in 1985 by 3 wonderful individuals. And they all have retired in 2003, 2014, and 2015, respectively. And I've got to say that we're proud to say that they're all clients of the firm. I just had a review meeting with one of them before this call. The Center serves 30 team members and about 1,000 clients representing roughly [$]1.5 billion in assets. The firm has 7 equity partners, 5 of those are planners, 2 are operations-focused folks. And you might find it of interest that currently, out of the 7, 4 are men, 3 are women and we have a long history of female ownership and leadership here. 2 of our founding founders were women. Women have made up, I think, 60% of ownership throughout our history. Today, 40% of our planners are women and I think out of 30, 18. So, it's something unique and something we're very proud of.

Michael: I'm just trying to envision overall. So, 1.5 billion of assets, so I'm going to presume most advisory firms, we talk about the proverbial 1%, but by the time you get breakpoints, householding of clients, the occasional large client with the discounted rate, usually we end out with a revenue yield that's closer to 70 basis points, give or take a little. So, I'm going to guess you're $10 or $11 million of revenue? Is that fair?

Tim:  That's fair. And you're spot on. Our average return on assets historically has been rated 0.7, 0.71. And today, that would put us in the $10.5 to $11 million of revenue.

Michael: Okay. Give or take market on any particular day. Good, healthy place for the firm overall. North of 10 million of revenue across 1,000 clients. So, average, obviously individuals vary, but average client is almost a million and a half dollars. So, you've got a good fairly affluent clientele that pays a pretty good fee per client to run and scale the advisory business.

Tim:  Yeah. Historically, when we do benchmarking with the various studies, usually our average client is slightly on the lower side. Historically, I would say we've been able to serve, I'm going to say quite well and quite profitably, that $500,000 client. But certainly, we have relationships that are over 100 million as well. But I think the 1.5, as far as an average, is a fair number. I like to say most of these are folks who have done a really good job-saving money. They need money in retirement. And fortunately, we can serve them well.

I was going to say it might be helpful just looking at our structure or our functions. We have 10 lead financial planners, who would all be CFP practitioners. Plus I have a law degree. We have a couple of CFAs, and MBA. We have 2 associate financial planners right now and we think of them more as an in-residency versus a centralized department. And in the past, we did view it as a centralized department.

Michael: So, what's the difference between being in residency versus a centralized department for you?

Tim:  We view these folks need to be in meetings. And it's not just to take notes. And we also make sure that they are the lead planner on some relationships. Versus just being in a, what I'll call a centralized department, cranking out financial plans, doing research only.

Michael: Okay. So, in this context, just really in a client-facing role. The industry used a lot of different labels for things, but I sort of envision this as really in the associate advisor role, actually in client meetings, interacting with clients as opposed to, I'll call it, a paraplanner role, that might be more of a purely back-office support off decentralized support function.

Tim:  Yeah. And we went that way for a little while and it didn't seem to work for us. I felt like our planners were not progressing as fast as I thought they could. It's interesting as I think about the structure, I think, was holding people back.

Michael: So, can you talk about that more? What was holding back or limiting about trying to put new advisors through a centralized planning department, because I do feel like that's a fairly common model for how a lot of advisory firms try to bring in new talent.

Tim:  I think the relationship management skills progress much faster if you're truly responsible for not only being in a meeting but being maybe in charge of part of the meeting. And you are viewed with some clients as the lead planner. Certainly, there's plenty of resources available if needed. But those relationship building skills, I think, are so important. And I get a chuckle when I, in a meeting with an associate financial planner, and they'll start describing a solution to a client. And I'm like, "Yeah, that sounds familiar. They apparently liked how I presented that." And the associate financial planner, I think it's more rewarding work for them.

Michael: Yeah. I'll admit, when I reflect back on early, early days of my career as well, there was a similar phenomenon that I got a good amount of time with a number of the different partners at several of the firms I was at really early on. So, I got exposed to a whole bunch of different ways of communicating and delivering planning ideas and concepts. And I definitely ended out, I became an amalgamation of all of them. I really liked John's way of warming up and getting to know new clients. But I really liked Ken's way of delivering a financial plan. But I liked John's way of talking clients off the ledge. And as you do more of that as an advisor with clients, you find your own words and your own language and style. Then it comes together over time.

Tim:  Finding what doesn't fit for your personality is just as valuable, I agree. And I love having meetings and we'll kind of debrief after and say, "Hey, what did you think about this? And how might you have explained it differently?" It's just a good partnership and like you said, when you can see a variety of different planners truly in action in a meeting, I think the growth can happen a lot quicker.

Michael: Is that actually a structure for you, this debrief process, or do you just try to find moments, when interesting moments were there and talk about them?

Tim:  I would say it's more ad hoc and me personally with my calendar, if it doesn't happen immediately, it's not happening. So, 10 lead financial planners, a couple of associate planners right now. We have 10 client service associates or managers. A couple of these folks also have the CFP designation, but they would rather be in a client service role. I'm going to give you the half. 3 and a half people dedicated to our investment department. Okay? Let's see. We have 2 full-time technology or IT folks. One is, I'm going to say, and very talented, by the way, but heavy infrastructure, I'm going to call it. And then, we have a second person who is kind of putting out fires for people on their desktops.

Michael: There is an interesting phenomenon as the business grows to a certain size. It's like, the number of people that have the, "My computer's not working. It won't boot right. My camera, my mic just won't work. I set it to the right mic but it's not coming through. My camera won't turn on. Someone help me with this." And you need a person to help.

Tim:  We've tried other solutions. We've worked with outsourcing and having, I'm going to call, desktop help, where our folks could call someone. I would suggest there was a lot, lot more frustration doing it that way. Now at the same time, it certainly was more cost effective. But we have found a benefit by having a person who sees themselves as part of our team and they're here every day.

And it's interesting. I had nothing to do with the decision, but I think it was brilliant because it goes back to about 1997. We had a full-time staff member, who I'm putting in the IT area, but it was more of helping our team be more productive, more efficient. She and one of our partners, Matt Chope, actually began a proprietary CRM at that time...

Utilizing A Proprietary CRM To Integrate Automations And Meeting Efficiencies [17:57]

Michael: Oh, wow.

Tim:  ...with workflows. A simple one. But printing a number 10 envelope, she was watching 5 people do it 15 times a day. And saying, "Would it make your life easier if I had a button from this database that just went to the printer right away?" So we were spoiled. And then, she, for one reason or another, she was not with the firm anymore. She was on a contract basis with us. So then, we went to this managed services and now we're back to, I think, for our size, having 2 full-time team members is the right number.

Michael: So, one is the, as you put it, IT, put out the fires. My computer's not working. Set up my equipment. 30 team members, there's always some people having some kind of tech issues. So what's the other one doing? Are you still maintaining this proprietary CRM system and are they managing that? Or are they building other tech? Or are they just more deeply involved in core tech?

Tim:  75%, I would say, is core tech. Network issues, certainly cybersecurity-type issues. And then, we still do have this proprietary database that has evolved over time. We use Tamarac CRM in addition to this application that is, and I'm expanding all my knowledge, built out of Microsoft Access and Microsoft SQL. And we basically have, I'll call it an automation tool, that we're bringing in information from a variety of sources. And it looks and feels a lot like a financial planning software minus crunching the numbers. So, our annual review meetings, with a few punches of buttons, I can have a complete annual report that is covering topics from cash flow to net worth to insurance to financial independence to estate planning.

Michael: Interesting. I'm just trying to visualize, not getting too technical because neither of us are the IT team. So, I'm envisioning a database that basically has just client data including not just the CRM-ish sort of data, but the financial planning kind of data. So, Tamarac sits on top of that or draws from it so some of the data can be there. But when you just get to things, like producing financial planning reports and your client deliverables, you don't have to build it out of the CRM and planning software. You're building it out of this database that you've created over time to just automate your direct workflows and deliverables, because you've been building this for 30 years.

Tim:  That's a fair representation. Just one more detail. For example, in the insurance, I don't know if anyone else has ever had a conversation, let's say, what is going to be the strategy around managing the long-term care risk? And I'm looking at a client's record. I have basically our analysis that says, "We're self-insuring this risk. We've actually earmarked some assets in a previous non-qualified annuity for this reason." I used to dispense that advice, if you will, and it would go somewhere in a black hole and I would have to remember every single year what the strategy was. So, it's captured in our database.

Michael: So, you've got report, I'm almost thinking report templates or educational client content templates so that you can pull from that more directly and not have to keep rewriting elements of the plan deliverables?

Tim:  Exactly. I'm excited about it. I always have. And like I said, it has evolved immensely over the years and we're putting time and money into it. And this is one of those areas that I think maybe the pendulum is swinging. At one point, I remember the consensus being, "Hey, firms, there's no reason that you should even consider being in the software or the application business." And then, it seems like, well, okay, this whole integration in our space isn't happening, folks. So, maybe we do need some sort of proprietary overlay or maybe it is a good investment. And that's where we're at right now.

Michael: So, I'm wondering in that context, does it integrate? Did you create your own integration? Do you have to double data entry into your database and then into CRM, into planning software, or have you figured out how to make that data flow because you've got technology people who can do that?

Tim:  Most of it, it flows. I'm trying to think. We use, I mentioned, Tamarac CRM. There's no double entry there. For MoneyGuidePro, that we use for retirement planning crunching of numbers, that is a second data entry. We haven't figured that one out. And then, we also use Tamarac's Advisor View and that does integrate with this program.

Updating Financial Plans Using An Annual Review Report [23:40]

Michael: Okay. So, when you actually get down to the good old-fashioned financial planning projections, MoneyGuide, are they on track for retirement, you've got to rekey that. But I'm guessing from the nature of what you're describing, ongoing client review meetings, you're probably not necessarily doing full MoneyGuidePro reprojections. You're doing some other type of annual report that you just create directly from your database in the first place?

Tim:  That's fair. And when a client has a 95% probability of success based on our variables and assumptions, we don't feel a need that we need to review that every single year. So, that's a note in our financial annual report that essentially says, "Based on our last analysis, probability of success, is 95%." I like MoneyGuidePro as a, with a client, it's a great experience. But quite frankly, other than retirement planning, the combined details pages, I don't feel like I use much of it.

Michael: Help me understand what's in your annual report that you are using? If it's not what we get from MoneyGuide, what does the firm produce and bring into that annual client meeting?

Tim:  One major component is a net worth statement and we archive it. So, we can show a 20-year net worth if we wanted to. So, in 2022, when markets are not performing well, it's always a good thing to say, "You know what? Let's just go back 10 years and look at your net worth statement and feel good about the progress you've made."

Michael: And that's captured because every time you do an annual update of net worth, you're doing that in your database. You build an automation to create a net worth statement from the numbers you punch in your database. But that means every year, you did one of these in your database, you've got 20 years worth of net worth statements that you created. And so, now you've also got a 20-year progression?

Tim:  Yeah, and it's a simple archive button and now we've captured that forever. And we, custody assets, Raymond James Financial Services, and any accounts there, our system automatically updates every day. But certainly, house outside accounts, we need to obtain that information from the client. Most of the time, it's before the meeting. Sometimes we update it at the meeting, and again, easy to archive.

Michael: So, what else is in the annual report besides net worth statement?

Tim:  We're addressing, I'm going to say, every discipline of financial planning. We have income taxes. We can show the last 2 years’ comparison. That's in our system. We don't automate that so we're not using Holistiplan. FP Alpha is on our list. I think we're close to signing an agreement with those folks. That'll be something new.

Michael: So, income taxes and what's going on over the past 2 years in income taxes. So, what else comes through in this deliverable?

Tim:  Estate planning. We don't...and this is one time. We get documents and we list out all, I'll say, the fiduciaries and their documents, and beneficiaries are listed there in 1 place. So, at a meeting, we can easily scan those and if there's...and many times, a client will go, "Oh, I didn't know I had him or her on there." And I find if it's not front and center every single year, things get, better chance of getting missed.

Michael: Very cool. What else? I'm fascinated by the list here. We've got network statement, income taxes and what's going on over the past 2 years, estate planning with the particular focus on the who's, the people. Who are all the fiduciaries and trustees and executors and powers of attorney and guardians, who are all the beneficiaries, who's getting what money. So, what else appears in this?

Tim:  There's an investment planning section in our meeting. We would use Advisor View with the client. But you know those little things, like I don't know. There might be an inherited stock that we all know we're not going to sell. Where do you document that? Or there's, I'm looking at this one, there's $8,000 a month coming out of a trust account. Where do you document that so everyone knows what's happening? That's a section. There's a section on kids and education planning. Many times, there might be a...in that area, the so-called planning is how we're going to distribute moneys. We're going to take a, I'm just using an example, we're going to wait the last 2 years of college to use MESP money because it might not be subject to a student's financial aid calculation. Things like that.

Michael: Okay. So, how are we drawing down Michigan 529 plans and coordinating it with student aid and the rest. “The plan. The plan.”

Tim:  Some call it the strategy. How about Social Security? You talk with a client. They're 60 years old. You've done the analysis in MoneyGuidePro and it's one spouse is going to take it at full retirement age. The other's going to wait until age 70. Well, we have a place where we can put it one time. It's there. Certainly, we can change our minds, but everyone knows what the strategy is.

Michael: Other sections? We have to with this is great list. I'm just wondering now. Net worth, income taxes, estate planning, investment planning, kids, education planning.

Tim:  We'll start with is kind of personal information check-in, any major expenses. Are you traveling? Selfishly, if they are, I want to make sure that we know about it so we can get money available, liquid, if there's been any changes in their personal life.

Michael: Okay. Okay.

Tim:  One of the benefits of a firm that's been around 38 years is a lot of trial and error in this area. And I was laughing the other day. We do call it an annual review report. I love the idea of people calling it an annual strategy and tactics meeting. But if we were to change the name of it, it's not so simple.

Michael: Right. This is the "problem." This is the problem with systematizing. That word probably appears in 27 different places in various documents and automation. The amount of work it takes to change the word once you systematized it is kind of tedious.

Tim:  Yes.

Michael: And I know you’ve separately said you’d be willing to share an example of this out to our advicer community, which I really appreciate. So we’ll post an example copy of the Annual Review Report to the Show Notes for this episode. For those who are listening, this is episode 335, so if you go to kitces.com/335, we’ll have Tim’s sample Annual Review Report posted in the Show Notes.

So, I'm kind of envisioning a document that...I'm thinking similar-ish to how a lot of advisors produce financial plans with the caveat that just the projection-y stuff isn't necessarily there, because that's MoneyGuidePro calculator engine things. It's let's talk about your income taxes and where your taxes have been for the last 2 years. We're not drawing the estate diagram to calculate your estate taxes. We're making lists of the fiduciaries and the beneficiaries and who the people are. We're not projecting your 529 plan's growth. We're documenting the spend down strategy from it when your kids are actually in college and you need to coordinate with the timing of financial aid and FAFSA. Am I thinking about that well?

Tim:  You are. And in my experience, even MoneyGuidePro, I think it's relevant, meaningful when people are just before retirement. Answering the “Do I have enough money?” question. After that question or that time period, I don't find that clients have a need for it. I think they're looking for their advisor to say, "You're on track." You don't have to prove it with the numbers. That's just my experience.

Michael: Help clarify as well, I was going to ask when you were talking about your associate advisors being more in the meetings of, okay, but do they also still do the financial plan number crunching and building? Do you still have that function? But it sounds like in practice, that's actually really heavily automated for you because of the investments that you've made into the internal technology over the years.

Tim:  Yeah. My meeting prep time, my personal meeting prep time can be 15 minutes. And I'm talking about addressing all of the disciplines of financial planning. Not just in investment review. That's huge. And fortunately, some people before me had, I'll just say, the wisdom, the vision, to think in those terms. And I would say a lot of our team does think that way. It's not, don't do things just that one time. There's a lot of people in the firm. We have at least 1,000 clients, we have closer to 600 to 650 annual review meetings a year. We have to be very efficient. And this, I'll say, platform, we believe helps us do that. Because at some point, maybe we talk about our lead planners, the target number of relationships is 150, which is higher than many, at least, benchmarks would suggest.

Michael: But you feel it's manageable given how much faster meeting prep is for you thanks to the technology investments?

Tim:  Technology and I mentioned our 10 client service managers, associates. They are every bit of a paraplanner technical expertise.

Developing A Customer-Centric Staff Organizational Structure [34:48]

Michael: Okay. Which is why some of your CSAs have CFP certification as well?

Tim:  Correct. Correct. Yeah. They're not just answering phones and transferring money. They are very efficient and important to our annual reviews.

Michael: Okay. And so, I'm assuming that's not a coincidence, 10 lead planners, 10 client service associates managers. Is it essentially, are these all one-to-one assigned teams, like 10 lead planners have 10 CSAs assigned to them in 10 two-person teams?

Tim:  There's definitely some, I'll say, commonality, or maybe I answer it this way. I have at least 3 CSAs that I work with, with different clients. So, it's really more about focusing on the client. When you have ownership transition, planner transitions, we find that having the CSA be consistent is very important to the client relationship. So, I would rather have me, if I can use the word inconvenienced, rather than the client.

Michael: Interesting. So, as you've done advisors retiring, advisors transitioning and you want to make sure that the clients transition well to the new advisor, part of what you're doing to support the clients is the CSA remains the same. So, the client has a continuous relationship and point of contact with at least someone on the team as their lead advisor changes, with the caveat then that as you do that over time, CSAs...so the CSAs have dedicated clients and the advisors have dedicated clients. But the advisors don't necessarily have dedicated CSAs, because as clients transition from 1 advisor to another, the CSA goes with the clients, which means they can end out supporting multiple advisors depending on where those clients went over time.

Tim:  Yeah. I think I've had so many clients when there's a transition say, "Well, yeah, that's great. But is Janette going to stay with me?" And not Tim. It's "Is Janette going to be there?" So, there is comfort in having that continuity. If we think a client is fine with any CSA, it is best to try getting a CSA and a planner the majority of clients together. But it's too simple. It just doesn't work that way. And again, I don't think for many clients, it's in their best interest.

Michael: So, lead advisors really get the driving support from their CSAs who are rather paraplanner trained beyond, I'll just call it, a purely administrative, answering phones, scheduling meetings, transferring money kind of functions. So then, when you get 2 associate advisors in there, I'm presuming then, the assignment of associate advisor isn't necessarily a function of who needs the client support. It's more directly who's ready to train an associate advisor and gets assigned that way?

Tim:  I look at or try to suggest that an associate financial planning should be involved in a meeting when 1 or 2 things. Really one, if it's a good opportunity for training an apprenticeship. There's something going on with that client that will really benefit our associate financial planner. That's a good reason. And the second good reason is if there's a future transition potentially of that client to this associate financial planner.

Michael: Okay. I'm envisioning then in practice, the primary placement of an associate advisor is alongside another advisor that may be retiring or transitioning out and the bulk of their client meetings and activity are attached to that person. But then, if there's some other interesting client planning opportunity, they may get pulled into some other advisor and client meetings just to get to see that and be a part of it and learn from it.

Tim:  Yeah. Our senior financial planners, I think, do a good job at looking for opportunities for associate financial planners only because they had the same, the gift, the same benefit. Our 3 founders, Dan, Marilyn and Estelle, were phenomenal and any time you could get in a meeting with them was really special because you learned so much. And that's how it's happened the next generation. So, I think we're always looking for opportunities for our associate financial planners.

Michael: I am also wondering just processing more of lead planners with this target of 150 client relationships. I understand the meeting, the annual review report. Is there an expectation of other meetings throughout the year or is your primary service model, we anchor around this annual meeting with an annual review report, and then we handle whatever they need as they come in, but we're not necessarily outbound pushing 2 or 3 meetings a year.

Tim:  I'd say a few things, the decisions over the years that I think personally were positive. One is we never spent time on quarterly investment reports, sending those out. And second, we never, our service model was not 3 or 4 meetings a year. Our main...and we have standards of service, and I would describe our service model, and it's very much process driven in our CRM, where yes, there is an annual review meeting. We have a 6-month check-in call, 6 months from the time of that meeting. A task comes off and says, "Hey, planner, review notes and make contact with the client to make sure everything is fine." And then, we have another quarterly task that will generate if that client hasn't had, what I call, meaningful contact with the firm. Meaningful contact can mean a personal email, phone call, meeting for another purpose.

Michael: Okay. So literally, you're tracking if the clients had a touchpoint and there's some, if then some trigger in the CRM system, if there has not been a personal phone call or meeting for another purpose, so the client hasn't had a human-to-human touchpoint, then prompt advisor to do a check-in email or call outreach. If they have, then fine, they've had a touchpoint this quarter and we aren't going to have either an annual review meeting or a 6-month check-in call coming up next quarter because now we'll be 2 quarters out.

Tim:  Yeah. And there's always from a meeting, I shouldn't say always, many times, there are tasks or things that have to be done later in the year. The easy example is if you look at my November task list, when November comes, I'm going to have a list of people who I need to call, meet, review Roth conversions. But that's based on the client. So, after a meeting, I'm going to put that follow-up task in CRM, hopefully quite frankly, forget about it, until that time.

Michael: Now help me understand just the last parts of the org chart and structure. We had 10 lead advisors and then 2 associates. We had 10 client service associates supporting them, 3.5-ish dedicated to investments, 2 full-time tech IT. So there should be a couple of seats left on the proverbial bus. Who's left?

Tim:  I missed, we have a person and a quarter, person and a half dedicated to compliance. We have one and a half dedicated to marketing kind of communications. And then, we have one HR/bookkeeping. So that gets us somewhere around that 31 probably. Yeah.

Michael: So, who has the management functions in this environment? Because you're at a size where business is almost inevitably start forming in department structures, people who lead departments and just the...it's nice to talk about a flat organization, but you don't literally want 1 CEO with 30 direct reports. It gets a little unmanageable. At some point, you need a couple of layers at least of management. So where and how do managers appear in this?

Tim:  And I'm looking at our org chart. Our director of investments manages the other couple people in investments. She also manages our compliance and IT. We have a director of financial planning who manages our associate financial planners, we have the next layer is financial planner. I, as managing partner, actually am responsible for our senior financial planners. And I, at one time, did most of these areas, I should say. And then, the third is a director of operations who's splitting her time. It's interesting. She's going to be a fantastic financial planner. But she manages our CSA, our client service area as well as our HR person.

Michael: Okay. So it sounds like a 4-person core leadership team then? Director of investments, who has investments, and then scooped up compliance and IT. Director of financial planning, who has the associate planners and planners. Director of operations, who has the CSAs and HR. And then, as managing partner, you've got sort of that leadership team and then the senior financial planners are still rolling up to you.

Tim:  Yeah. When I think of how we operate, we have the 7 partners, not everyone is involved in the day-to-day running of the business. Actually, 4 of the 7 are a part of our operations committee that meets every Monday for an hour and a half. I should also state there's one, our senior marketing person, communications person, is also on that operations committee. So, a total of 6. And that is the group that is responsible for day-to-day management.

Michael: So, are the directors that we just highlighted, investments and financial planning and operations, are all those people partners or not necessarily?

Tim:  They are. Those are our partners. And I may not have done the best job. Director of operations, there's actually a second person, a CSA manager who, for example, is reviewing professional development plans with our individual CSAs. And the same in our IT. So, we usually look at how many direct reports someone has and 7, I think, is the highest.

And that seems to work. At one time, I believe I had 15 and we all learned that I am not only a terrible manager, but I just couldn't do it with 15.

Michael: That's a lot. That's a lot of direct reports. So, primary day-to-day decision-making happens in this operations committee. Managing partner, director of operations, director of investments, director of financial planning and senior marketing person who sit in this for 1 and a half hours every Monday to just look at what's happening in the business and make day-to-day, week-to-week decisions in the business?

Tim:  Like a lot of your guests, we do run on EOS. And we've actually been doing that since 2014, I think.

Michael: Oh, wow. You were really early users.

Tim:  Yes. The book was shared with me and, in the beginning of the book, spotlights 3 businesses. And I knew them all from this area. They're all successful and they're always at every kid's baseball game. And I said, "Why wouldn't we want to do this?" And it's been so helpful and like your other guests, I'm sure, as far as running a track, your business on a track, it's been very helpful.

Michael: Okay. So that Monday meeting is a classic, weekly L10 meeting.

Tim:  That's correct.

Michael: Okay. So, you've got a business scorecard of the weekly numbers you're looking at to make sure that things are on track. And then, you're digging into weekly issues.

Tim:  Yeah. We have what we call a “State of the Center”, and it's a monthly scorecard. We did not believe a weekly made sense for us. And it has a variety of different data points that we spend a significant amount of time on each month, certainly assets and revenue and expenses are a part of it. But looking at client service and our net promoter score. While planner compensation is not based on a grid, we can tell you every single month by planner, how many lead relationships, what's their assets? What's the revenue that they manage? How much of that did they originate from day one? We're tracking clients by CSA. That helps us determine when we need to hire folks. I'd like to think we're data dependent.

Michael: Where does that level of just data tracking and business intelligence reporting come from? Have you built that in Tamarac? Does that come from your internal database structure?

Tim:  Much of that comes form Tamarac CRM. Yes. And I'd be less than...some of this is certainly manual, but a great majority for planners, that's a hit of a button, we can have that report at any time.

Using Monthly Data To Evaluate “The State Of The Center” [50:23]

Michael: Okay. And so, this monthly data, from the leadership end, do you have to have a separate monthly meeting to talk about the monthly data? Or does this data come into the weekly meeting just like 1 of every 4 meetings is the data meeting?

Tim:  Yes. It's part of our operations meeting. One of the weeks we'll say, usually the second one of the month is when we'll make sure we spend time on State of the Center. And these are all one, partners and our non-partner is an emerging leader. She's in this meeting for a reason and she has access to this data. And the last part to this is, and we do this twice a year, we still call it the Moss Adams ratios. You know that, if you can think of that report that has every ratio, active clients per financial professional, revenue per active, we update that in June and January of every year. And that's always telling. And again, we're not trying to be like everyone else, but it does point some things out where we have to at least ask ourselves some questions.

Michael: So, can you talk a little bit more about that? Because again, I'm struck. When you're at the size that you are of 10 million plus of revenue, you start getting to a point where, yes, there's still some individual advisor productivity and metrics to look at. But at some point, you just start looking at the business and the aggregate, how are we doing. So, I really am curious then to hear more. What are the particular Moss Adams ratios that you look at and find meaningful as a business? You mentioned 2 clients per advisor, revenue per advisor, where Moss Adams is, advisor professional to capture people who are client-facing, anybody who's client-facing.

Tim:  We'll look at, I mentioned active clients per financial professional. We're on the high side. We're actually 1:11, which tells me a couple things. One, it's less than 1:50, so I have some capacity. And that's very much intentional. And then, we say we look at revenue per financial professional and we're actually high, meaning I would suggest that our financial planners are quite productive if you have revenue be the measurement of productivity.

Michael: Because you're at, roughly speaking, 10 lead advisors and a little north of 10 million of revenue, so your revenue productivity is a million per advisor, a little bit lower if you put the associates into the denominator. But then, you're a little over 10 million into 12 people. So, you're still just under $900,000 of revenue per active financial professional, which is a big number.

Tim:  Correct. Yeah. I think benchmarks are 7:750,000. So, I think that's an important data point. We, at least the story we've made up, is our clients are a little bit smaller than other mid-size or super ensembles. Our newer clients fortunately are a little bit upstream, but on average, we're a little bit lower and we have really good leverage between our financial professionals and our client service. I would say that's intentional.

Michael: And just the service dynamics of you not forcing yourselves into 2 to 3 in-person meetings per client. So, the baseline is a one in-person and then a check-in call. And obviously, you do more if clients call in and have more. But a lot of the time, they don't once you're a couple of years into the relationship. You're not necessarily doing an entire new financial plan, input all the data into MoneyGuide and output a report, because instead you've invested the database. The database builds the annual review report, which is automated down to less than 15 minutes of prep time to generate the whole report. So, when you do that across 150 clients per advisor, that adds up really fast into the amount of time savings that comes back. And so, it sounds like some of the productivity metrics just drive from that that you found a good balance of we're doing the work and clients are happy and retaining. But we're not doing more than that to the point that then it impairs the productivity and capacity.

Tim:  Well said and you're right. And you've done an article of the math. A lot of the advisor is, in my experience, is about the meeting time. And when I do the math on 150 clients, one annual review meeting, a 6-month check-in, maybe one other, there's plenty of time in the year for other things like continuing education, business development, conference. It's significant. So, we're comfortable with our 150 target. Where I was wrong in the past, Michael, was I used to think if a lead planner could manage 150 relationship and they were in meetings, that our CSA team could actually manage 200 relationships because they didn't have the meeting time. And I was wrong about that. And we also target 150 for our CSA team. And I'm actually thinking it might need to be closer to 125.

Michael: So what are the squeeze points that the CSAs are hitting?

Tim:  The preparation for meetings is still challenging. One of the great things, like a lot of folks, we use Calendly for scheduling. That was a huge time saver. But before a meeting, we are still mailing or emailing a, I'll say, a packet looking for updates and a return. When that comes back, it's actually our CSA team who is doing all the updates to both our proprietary database, CRM. So, it's still a significant time, even though I think we made some improvements. I don't know what the next step is there, quite frankly.

Michael: But from the business productivity end at least, you've managed to push and delegate a lot of that work down to the CSAs, with just from the pure business end, my staffing costs are lower for CSAs than it is for my lead financial advisor. So, if I can increase my advisor capacity to 150 clients per advisor but I have to bring my CSA capacity down to 150 or lower, because some firms do run higher, that's a good business tradeoff. But that's better than running 100 clients per advisor and 200 clients per CSA, because you now need more advisors that are more expensive to the business than providing the more CSA support that's not as expensive to the business.

Tim:  Correct. And obviously, our CSA team has all the other day-to-day, we need checks, we need money wired, all of those good things. And they are a very productive group and a non-partner, Andrew, manages that group currently. And they seem to really be gelling right now. Quick aside, that group used to be all women. Our last 2 hires happened to be 2 young guys. So, it's a really nice, diverse group.

Michael: So, are there any other big Moss Adams ratios that you look at besides clients per active professional and revenue per financial professional? Or those the big 2 bellwethers that you use?

Tim:  I know you are aware of David Maister and "Managing A Professional Services Firm."

Michael: Mm-hmm.

Tim:  I got introduced to that years ago and that's probably the 1st or 2nd most impactful on me, how I manage the business. And I love when he says, "The ultimate measure of success in a partnership is or should be profit per partner." And so, looking at pre-tax, I'll say, income per owner is important. And our numbers are slightly lower than the mid-size ensemble, but pretty close. I think once the, one of my partners, Matt, and I, as we transition out, that'll, I think, probably get even better. And then, last is what's our profit. Unfortunately, like a lot of other firms, we've been at that 33%, 34% the last few years.

Michael: 33, 34% profit margin?

Tim:  Yeah. Yeah. This year, we have budgeted actually closer to 23%.

Michael: That's a big dip in shift, so what's bringing that down?

Tim:  Apparently in 2022, the stock and bond market wasn't very good.

Michael: Oh, that. The market's supposed to rebound. You'll be so fine by the end of the year. This is not a guarantee. Please do not rely on me for investment results.

Tim:  There's a, I don't know, a good and bad here. We did work a budget out to where it's 24% is our budgeted net profit. And let's just round numbers. That's almost a million and a half dollars less, right? Not insignificant. But fortunately, I think we're big enough where we can do that. We're not laying anyone off. No one's job is at risk. Partners will, if that's realized, will make less money and that's okay. That's how it's supposed to happen, I do believe. We talk a lot about finances with our team in general and they know these numbers. And I try to stress the reason that we have to budget a profit, and we didn't always budget a profit quite frankly, number one is to protect jobs. So when 2008, 2009 or what looked like was going to happen in 2020, no one had to worry about a job. That's the number one reason for profits.

Michael: It's always struck me. There's a lot of chatter out there of just are advisory firm profit margins "too high?" A lot of industries struggle to have just double digits, top of margin, not single digit. We talk to the advisor industry about whether our profit margin is a 20 something or 30 something. But the caveat, as you noted, is but we deal with market downturns. And if you're on the AUM model, severe bear market that tanks the market by 35% to 40% even on a diversified portfolio can tank at north of 20%. And so, if you don't have at least a 20% profit margin, you're going to go upside down in a bear market. Or conversely, the one the primaries most advisory firms try to keep at least a 20 something percent profit margin, is that means when the bear markets come periodically, your profit distributions may go to zero for a year. But you don't actually have a partner capital call where everybody has to pony money into the business or you have to fire people because you're out of revenue. And that's just the reality of the cyclicality.

And if you reflect that it might be a 20 something or low 30s profit margins, but there's 2 out of every 10 years it's almost a 0 because of the bear market, all of a sudden, your average profit margin over a cycle is a bit lower and your risk adjusted profit margin adjust for risk is appropriate. And all of a sudden, it's like, "Oh, our business isn't magically so much more profitable than anybody else's. It just has to run a higher margin because it has way more revenue volatility than a lot of other industries." And we're a service industry. You can't lay people off in a down market because you have to service clients more in a down market. And if you do that, you death spiral your firm. So, you have to keep enough padding to deal with the bear markets.

Tim:  I remember hearing the, it was from Mark Tibergien, the 40/40/20, 40% direct, 40% overhead, 20% profit margin. And I think that's probably, it should still be a good benchmark. I was thinking the last couple years before 2022, being so good with markets that having a higher in the 30s was appropriate. But 20 has to be the minimum.

Michael: Yeah. When advisory firms, I find, get under 20, when the bear market cycles come, things get really hard and tight and unpleasant really quickly.

Tim:  So, it's a big dollar amount. It's the right thing. Fortunately, we have 2 quarters in the books so we might surpass that. But that's how we approached our budgeting process. And it's been interesting. Over the years, we've gone from eat what you kill to certainly an ensemble. And we never used to worry about what the firm bottom line was. And it's been healthy, I think, since about 2015, that the budget process has really been about budgeting to a net profit number.

How Tim Restructured His Firm From Siloed Advisors To An Ensemble Practice [1:05:11]

Michael: Now help us understand just the dynamics of how partners and partnership works. How have you added all these partners, and then as you noted, all the founders are gone so you're actually on...all next generation owners, I don't even know if this point, if somewhere the third generation, if you even had a second-generation owners rotate out at this point. So, help us understand how partnership works.

Tim:  Sure. This goes back to, I suppose, 2003 when our first founder retired, Estelle Wade, that was our first transition. And that was eat what you kill. She had a certain amount of revenue in her silo and the firm paid her on an earnout of 30% over 5 years or 1.5 multiple. It was pretty easy, right? Money came in, if it didn't come in, she wasn't going to be paid.

Michael: Relative to where we were 20 years ago, that was pretty normal standard. 30% trail for 5 years. You're not doing the work anymore, so pretty sweet wind-down, and off you go.

Tim:  Yeah. And then, our next 2 founders, they were 2014 and 2015. And I'm going to step back to 2009 if you'll allow me in a minute, but 2014, '15, their buyout was the same earnout method. So, our 3 founders, I'll just say, treated the same way, silo, eat what you kill and earnout method. Okay? In 2009 was a significant strategic planning event and we had an outside facilitator and the catalyst were really a couple things. 2 of our founders at the time, Dan and Marilyn, were starting to make retirement plans over the next 5 years and really wanted to see The Center as this enterprise and we needed a new structure to build this sustainable firm that was going to hopefully outlive them. So, that was the first catalyst. The second catalyst is we had a operations person or a non-financial planner who we desired to be a partner. And having silos just wasn't conducive to having a non-financial planner as a partner.

Michael: Right. If your whole partnership model is built around you monetize the value of your client revenue, there's literally nothing to monetize if you're in a non-advisory role. If they don't have revenue, they're not managing revenue.

Tim:  It just doesn't work. And I would say there's so many good things about the eat what you kill or the silo structure. You don't have to worry if your partner's slacking or taking a day off. They're going to get paid. As long as they cover their expenses, hey, that's on them. So, there's some good things. But we basically said, "Hey, no more eat what you kill." And we were looking at a structure which was influenced by this David Maister's "Managing a Professional Services Firm." It's a structure he called a one-firm firm model. And essentially, we made a decision that because the founders were going to be retired, we're going to separate them. They were treated the old way. But new partners going forward, we were going to have this new system. And the change really fell on Matt Chope and myself because we were the G2 partners. Okay? And I know you've heard this before, but I think the messiest or the biggest challenge when firms go from silo to this one-firm firm or an ensemble, is partner compensation. Right?

Michael: Yes. Absolutely. It's all fun and easy to say, "We're all in it together," until eventually you get to the point of, but my client book is bigger than yours and it sounds cool for all of us to be in this together until I'm literally like, "But us together means my comp goes negative 100 and your comp goes plus 100 because suddenly we're feeding off the same trough, even though I put more into it." Then all of a sudden, things get a little awkward. You have to figure out what to do with that or about that or how to remedy that or reconcile it or make people feel like they're whole on it.

Tim:  And fortunately, we had, Matt and I had a very good relationship. I don't know if we'll get into this, but we also had the benefit of a couple founders being at the firm. And it's a terrible analogy, but I'm going to use it. It still was like the parents were in the house living and could help smooth things over. Okay? But it was. And so, we decided, hey, our new compensation model going forward is even partners, we're going to be salary incentive compensation and a partner distribution. We're going to target partner or financial planner compensation at the Tibergien 40%. And neither one of us needed to take a pay cut fortunately. And the reason was clients were transitioning to us from the 2 founders that were still in the business. So, we could, I'll just say, we could justify. And they were, what's the word I'm looking, subsidizing a little bit. So, we didn't have that real awkward part of, hey, your income's going to go down significantly and mine's going up. But it stayed relatively flat for a few years whereas if we were on an eat what you kill, it definitely would have gone up.

Michael: Oh, so in essence, these probably aren't the right numbers, but something to the effect of it's 10, 15 years ago, you're early in your careers. You've got, whatever, you've got a $30 million book and a founder who's got a $100 million book who's transitioning out. So, they're shifting clients over to you because that's part of the transition plan for them to exit. So, if you had stayed on an eat what you kill model, your income would have ramped up as their client revenue moved over to you. Instead, you didn't get the ramp up of client revenue coming over to you because you had converted yourself to salary plus incentive comp kinds of structures. But that means the firm was becoming more profitable because you weren't ramping up your advisor comp. And so, at some point after a few years, this starts showing up in profit distributions particularly as the founders wind their way out.

Tim:  That's the great summary of it, yes. So, it was challenging but like you said, not as challenging as if there would have been this massive pay cut or a pay cut. Because that's when people start digging in and say, "Yeah, I love change. Just make sure it doesn't apply to me."

Michael: What I find for most advisory firms, if they really get stuck there, they actually end out with basic intrapartner transactions. The advisor who has a $700,000 revenue base, and the advisor who has a $300,000 revenue base says they want to come together and make an ensemble firm. So, they're going to draw evenly from a million-dollar firm. Except it's like, but I brought 70% of this, you brought 30%, so I want to be shared but don't really want to take myself down from 70 to 50 when I had the 70, that a lot of partners I find, at least in those scenarios, the advisor with the smaller book basically buys a portion of the firm equity or contributes some dollars in to transition that. So, if you're bringing 70% of the client revenue and I'm bringing 30% of the client revenue, I have to buy 20% from you to equalize us. And then, we're equal. You brought a certain amount of revenue. I brought a smaller revenue plus a cash buy-in. And then, we can be equal going forward because the person who was higher might take a step back in comp, but they get a check for the portion of their client base that was bought.

Tim:  So, that appeases the other person, at least for a period of time.

Michael: Right. And then, if you really believe you can build a bigger thing together or better, which is ideally why you're creating a one-firm ensemble model, by the time you get a couple of years into that, everybody should be taking a percentage of a larger pie and be doing better in the long run.

Tim:  Growth solves a lot of challenges, as long as there's growth. But if there was, we did not have, let's say, Matt and I did not have the same salary. I became the, we named a managing partner at that time that was me. It was interesting. We actually paid me separately for that role. It was a minimal amount, at least in my mind, but it was a recognition of this new role.

Michael: So, you had, I don't know what the numbers were, but I get $150,000 of comp for my advisor role, but then I also get $50,000 of extra comp because I'm also wearing the managing director hat.

How The Center Outlines Their Path To Partnership [1:14:58]

Tim:  Fair. Yes. Yes. So, the next clunkiness was in 2012 when we essentially offered partnership to this, I'm going to say, operations partner. And the question was how are they going to buy in? And we're in a much different, much better place now, but in 2012, this person bought in based on the retained earnings of the business. And let's just get...let's say we kept $250,000 in the business to meet payroll or cash flow float. If they wanted to buy 10%, that was $25,000. They paid $25,000 for 10% of the business. I'm using the word clunky. There's probably a better word. We didn't know any better and it was a very wise investment by this person.

Michael: So, they basically they only had to pay for a percentage of the retained earnings, not the actual ongoing cash flow...

Tim:  Correct.

Michael: ...earning that was still flowing.

Tim:  Yeah. So, you could say even at that point, let's just say earnings were, profit was $250,000 and we used a multiple of 6. Right? Probably the right buy-in was 6 times the amount that was the buy-in.

Michael: Right. And yeah, essentially if your float is about an annual year's worth of profits, basically they got to buy in for one-time profits for their sake.

Tim:  Yeah.

Michael: So, that went relatively well.

Tim:  If anyone's listening and they're going to make that deal, give me a call. That changed and...

Michael: But a good note and reflection. The things we do as we're figuring out how to run and build and scale the business. Fun to reflect on it...

Tim:  We didn't know...

Michael: ...but that was an actual deal, someone got that deal, right? That's actually how that person got to do their buy-in, right?

Tim:  That actually happened. Yes. And again, we wanted this person as a partner. It seemed at the time fair, so hey, life is good. Fortunately, we worked with Philip Palaveev in 2015 and something where he helped us develop, we call, Center Path to Partner. And it is our guide for everyone how to become a partner at the center, what are the terms, how it is done. And it also included a new valuation method.

Michael: Okay. So, can you guide us through the guide? How does it work now? What are the terms? What is the valuation method? How do you do this at this point?

Tim:  Sure. The first important part is we identified traits that who we're looking for in partners. And I'm going to fast forward a little bit. Also, these traits, characteristics led to us saying goodbye to an existing partner. So, we're looking for people who certainly are passionate and want to live by our mission, our values, our vision. They have to be able to manage themselves before they even try others. And that doesn't always happen. They need to be someone who, for example, wants to create a great place for people to work, not just be productive, but we want a great place that people are proud to work and they have to respect and treat all team members with respect.

You've talked about, I think, this paradoxical struggle between, I'm going to say, autonomy and what we call intrapartner cooperation. And that's not easy for everyone. You got to be driven, but it can't be all about you and it's got to fit with your other partners. And so, we came up with a criteria. We have guidelines for financial planners as well as operations folks because again, we don't have restrictions on the number of partners or the types of positions. But I do tell the team it's very common or normal that the financial planners, the majority of the owners are probably going to be the professionals, the financial planners. It's like a law office, right? That's just normal.

The other thing I would mention is in our document, we hope that there's no 1 or 2 partners that have a controlling interest. And right now, we do have 2 people with a slightly controlling interest. We're going to be, I think in a year and a half, we'll be out of that situation. But I think that's healthy for the business.

Michael: So, meaning in essence, no individual partner would even have more than a 25% stake. So, no 2 can even get to 50. You'd have to at least get 3 people together to drive...

Tim:  Correct. And I have this in my mind. I'd love to be at a place where we had 10 partners and they were all near 10%. That would be a goal. So, right now, I think we have, there's 2 people that total about 55%, if I'm correct. But we have plans where the next 18 months, that should be done.

Michael: Why the push to get way from that? Why the push to disseminate it that broadly?

Tim:  I don't know that I have a...I just think a true partnership shouldn't be concentrated. I think too many times, firms are concentrated ownership and in my opinion, there should never, ever be said a junior partner. You're a partner with full rights or you're not. I think we do a disservice. That's an aside. But I just think the firm has a better chance of weathering storms if 1 or 2 people aren't having all the say. That's just an opinion. And we haven't been able to get there just from the financial standpoint. We can't sell enough quick enough to get there, but we're making progress.

Michael: Okay. So, you've got some psychographic, those are mentality criteria of just you have to be partner material by kind of the framework that you set, ready to contribute to the firm and wanting to build a good place to work and being able to show intrapartner cooperation. So, what else determines or sets who gets a partnership opportunity?

Tim:  So, for financial planners, we have some guidelines and I'll share a few. For example, we want that financial planner to have responsibility of a million dollars in revenue or more. We want them to have a current target of 150 clients that they manage. If you're a planner, we want to see that you manage client expectations and you're like the rest of partners where you're 98% retention and above. A big one, that person has to have demonstrated that they can actually bring in business, they can contribute growth. So...

Michael: So, if you want a piece of the pie, you have to actually show a track record of making the pie bigger.

Tim:  Yes. And I can be a little crude or offensive perhaps with some of my teammembers, not on purpose, but a good service advisor is really important. But to be a partner, you have to bring in business. You have to grow the pie. At some point, you have to be a donor. You've had to have brought in more revenue than your income supports because you're supporting other people. So those are the main, I'll say, quantitative. We struggle quantitatively with our operations partners but usually if you're client-service, they're managing at least 7 people. They probably have a sizable budget that they're managing and they've shown somehow to improve profitability and improve the quality of our structure, our processes. That one's a little bit harder to have quantitative criteria.

Michael: Okay. So, for those who meet the criteria, how does this work? Do you evaluate once a year? Is it a continuous rolling thing? Do partners vote about whether you've met the criteria? Does just one person make the call? How do you, where does the process actually kick off to evaluate whether someone's getting in?

Tim:  Right now, our Path to Partnership document says that all partners vote on new partners. And every June, the partner group confirms what the valuation for the next January, any equity transaction that happens in the next January is done in the proceeding June. That's also when any invitations to a new partner are extended. So, we say, "Hey, partners have discussed. They'd like to offer you a partnership. Here's the valuation. As an initial purchase, you can decide to purchase a minimum of 1% and a maximum of 5%. That's your initial purchase."

Michael: Okay. And how do you decide whether it's 1 to 5? They get to choose...

Tim:  They do.

Michael: ...how much they're buying?

Tim:  They do.

Michael: And so, if they're buying in and they set the 1 to 5, who sells? Are you issuing shares and everybody takes pro-rata dilution or do you have to match a seller to a buyer?

Tim:  We have been very fortunate since 2014-ish, that we've had people retiring. And so, the conversations of, again, knocks on wood, fortunately have been good. It's like, "Hey Laurie, you're retiring in 2 years. We want Michael to be a partner. He wants to buy 3%. It would really make sense if you would agree to sell your 3%." And that has worked out for us fine. Our document does say if no one is willing to sell their shares, then it's pro-rata.

Michael: Okay. Interesting. So, you can actually have forced pro-rata selling if the business decides it wants to add a partner and no one else is specifically willing to sell.

Tim:  That's correct.

Michael: So, what happens if it goes the other way? Someone leaves who has a larger stake and you don't have enough partners coming in? Who gets the preference on what to buy if there's actually more buying in play? Because I'm presuming at some point, existing partners may want to buy more.

Tim:  Again, starts…our document says pro-rata. And we have had a, in 2018, we had a 30% owner exit. So, 30% was available. And we did the existing partners purchase pro-rata. Since then, again, fortunately it has worked out where we have Matt, who's retiring in a couple years, for personal reasons, he actually wanted to reduce his stake by a couple more percent in January. And one of our existing partners said, "You know what? Yeah. I'm willing to do that." So, we didn't have to do pro-rata.

Michael: And then, how do you set the valuation on this? Is it formula-based? Do you go get external valuations every time there's a transaction? How are you handling valuation?

Tim:  Philip and his team helped us with a template. And essentially, it's a multiple EBITDA. And there is a, oh, a worksheet that goes into figuring out what EBITDA should be based on a variety of factors. But I'll tell you it comes out to be somewhere, each year is 6 to 6.2. And what we're doing is in June, we look at the last 2 years of actual EBITDA, and then we project the current year, the next 6 months, and we use those 3 years in calculating EBITDA.

Michael: Oh, because you do this in June. So, the June 2023 deal for this year essentially will be based on EBITDA of 2021, 2022 and the forecasted full year 2023 EBITDA, which will have 6 months already baked in and the second half of the year that you're projecting out. It's just a straight 3-year average of EBITDA?

Tim:  Yeah. And obviously, we're trying to do something to even EBITDA out. It hasn't been an issue. I suppose there could be some games played depending on if you might be a buyer or seller come in January. We haven't had those issues.

Michael: And so, then how is this handled from a financing perspective? Down payment, firm finance, they have to go get bank financing. How do you manage just the affording the cash flows for it?

Tim:  First, we do ask for a 10% down payment in the initial purchase. And then, our document, our Path to Partnership, says that the firm will guarantee financing for that first initial up to 5% purchase. Historically, the last several years, it's been all seller-financed. And it's just been a...it's worked out fortunately that way for both the seller as well as the new partner. Slightly lower rate than some of the other banks.

Michael: I was going to say, is there a typical of what rate you set and just what term you set over how many years it's financed?

Tim:  Yes. They've been 7.

Michael: 7...

Tim:  I'm sorry, 7-year amortization. And rates, I think, have been 5%, 5.5% recently.

Michael: Obviously, might shifted this year's numbers versus last year's numbers, but at least if you go back a year, our rates haven't been moving up very, very much.

Tim:  Yes.

Michael: I can see just overall, you're buying at roughly 6 times earnings, but you get to finance over 7 years and you put a 10% down payment in. So, you're financing 90% of the purchase price over 7 years when you're paying 6 times earnings. So, the money should be pretty darn close to cash flowing itself.

Tim:  Yeah, there's a little tax drag probably the first 2 years. That's fair. But a lot of talk on multiples, especially now. Even today's news was another PE deal and I'm sure it was at 10, 12, maybe 14 times EBITDA. The bottom line is I think there's a reasonable justification that internal transactions should be done at a discount. One is these people who you want to be partners probably had some influence on several years of growth. It's not like they're a third-party. They're new to the business. And the second might even be more important or critical is it's not going to work if you have too high of a multiple. So, it seems fair and yet I think a founder or someone who's selling equity, their worst fear might be, "If I'm selling at 6, and in 5 years these folks turn around and sell it at 14..."

Michael: Yeah, it doesn't feel good if you're next generation buyers. Then I'm like, "Yeah, I actually think these multiples are too good for me. I'm going to take them even though you had to sell to me at the other number." Are you trying to limit that in the shareholder agreement or process or just that's a risk for better or worse?

Tim:  It's a current risk for better or worse right now. I should go back. Our founders, when they did their earnout or we paid their earnout, they actually did put in a provision if shares were sold at a higher multiple within X years, that they would be compensated. So, it's a common provision, I think. We just have not done it.

The Surprises And Low Points Tim Encountered On His Journey [1:33:17]

Michael: Okay. So, as you look back on this journey over the past 20 plus years that you've been in the firm, what surprised you the most about how the path of building and scaling up the business?

Tim:  We kinda talked about it just now. The complexity. You'd like to think that you could make things simpler, but whether it's just some legacy...Technology sometimes, it can be a very complex business and yet we know that if we take care of clients, both external and internal clients, that this is a very good profession. It's a very rewarding profession. We get to have immediate feedback from clients and see that we're making a difference every day. And I have to share this one story. I mentioned one of our former partners, who I'm her planner, and we're having a review meeting and she's in North Carolina in an affluent area now. And she says, "Tim, you have to know this. People really need you." It was just this great affirmation of someone in her position to say, "People really need you." And so, I think we're very fortunate.

Michael: I just find it interesting that dynamic as you're scaling up. There tends to be this feeling of, we're just a little bit bigger and we got a little more revenue and we can hire 1 or 2 more people to solve this problem that we're dealing with. And everything will finally be okay and settle down. And you never actually get there, because then it gets a little bigger and some other problem crops up in some other part of the business. So, you have to put another person or a few over there. And then, you solve that but then something else comes up, and then the whole thing's just bigger. So, there's just more complexity to it that there really is a, as you know, it's a good business and it's very remunerative. So, this doesn't have to be a woe is me kind of thing for scaling up firms. But I do find there's this mentality of if we just got a little larger, we could solve these problems. And what happens in practice is just mo’ money, mo’ problems.

Tim:  You get the benefit of bigger problems! But you know what? And what I do love though is it's never-ending, right? There's always a challenge and it's, from a cool standpoint, never-ending, always trying to improve and once you get to 1.5, we're saying, "Okay, our vision 2030, we want to get to 3.5 and how are we doing to do that? And let's start executing on it."

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

Tim:  How much time do you have? We could probably do a whole show on this. I think back to 1998, I'm struggling on my own. I hung my own shingle. I'm going to law school at night, working all day. My wife's at home with 2 young kids and I get to tell her that not only do we have $120,000 of school debt, that we got $100,000 of credit card debt that we got to earn our way out of. I look at 2008, 2009 when I...

Michael: You racked up $100,000 of credit card debt while the business was getting...while you were building your first practice in '98?

Tim:  I absolutely did. Yes.

Michael: Oof.

Tim:  And always thought I could earn my way out of it. But at that time, I was a pretty good borrower and I was a really hard worker. And I've never been low on confidence, thanks to my mother. But having a wife at home who was in my corner every day is the only way I didn't lose it. But yeah, that was hard. I always have taken, I'll say, the long view and made investments. You'll love this one. I have on my credenza here a Cold Call Cowboy Productions credit card from the $7,500 I spent on audio files or audio cards. Remember the audio business card?

Michael: Yeah, yeah, yeah. How'd that work out for you?

Tim:  It didn't produce $7,500 but it reminds me that it's okay to take risks. And I've taken a lot and I can say that more than not, they've worked out. But 2008, 2009, after 17 years, I felt like I was an overnight success finally, starting to make money. And then, I had to give up a third or a half of my income so we didn't have to lay anyone off. Asking a partner in 2018 to leave the firm was absolutely a miserable time period. It was emotional. It was distracting.

Michael: Because they weren't a good fit or other challenges?

Tim:  No, I think that's fair. When I mentioned some of the qualitative items, characteristics that we're looking for in partners, it was no longer a good fit. But that doesn't make it any less messy and yucky, right? The next one is recently remote work, I'm beginning more of a fan of remote work, but I'm afraid that it's leading to kind of this transactional relationship between employees and the firm. And we spend so much time on being a great place and offering a great place to work. That concerns me. This is when I'm supposed to say all those had led to personal growth opportunities, right?

Michael: Exactly. Exactly. The very 1st episode we did on the podcast, Rick Kahler loved to talk about these and he calls all of them AFGOs, another freaking growth opportunity.

Tim:  Lucky you. Yes.

The Advice Tim Would Give His Former Self And Younger, Newer Advisors [1:39:40]

Michael: Another AFGO. So, as you reflect, what do you know now you wish you could go back and tell you 20 something years ago as you're coming into The Center and getting started?

Tim:  For me, something I'm working on is trying to be really more open-minded and more curious. I've been telling myself, be open to being wrong, that I don't know all the answers. I think that's important. But as far as what I would do different, what I would regret, I'm just not wired that way. I'm always kind of what's next. I'll use some of those things as learning. But maybe the last thing I would say is you got to work hard. If you and I are the same intellectual capacity and I work 50 hours and you work 40 hours, there's a good chance I'm going to do a little bit better than you. You got to work hard. And the other is don't be afraid to stay in the box. Everyone wants to talk about getting out of the box. Sometimes it makes sense to just stay in the box and have your 3 or 4 things, make sure you're treating clients well, you're writing, you're speaking. I don't know that it has to be anymore complicated than that.

Michael: It's okay just to do the core things well.

Tim:  Yes.

Michael: Any other advice you would give, maybe the younger, newer advisors getting started today?

Tim:  Fortunately, unlike you and I, I think, is we had to go through the life insurance or the brokerage, right, channels to get where we are. Fortunately, there are more opportunities. And I had this conversation with one of our younger teammembers today. You got to try your best to look at 3 years. Always 3 years and not just today. Be in a place where you're going to have good mentors. And they don't even need to know that you're a mentor. Doesn't have to be formal. But get around people that you truly respect how they are, the person that they are, the planner that they are, because I think that is so, so important in the early years.

What Success Means To Tim [1:42:01]

Michael: Love it. Love it. So as we wrap up, this is a podcast about success and just one of the themes that always comes up is the word success mean very different things to different people. And so, you're on this wonderful track of success with the advisory business as it crosses 10 million plus of revenue and third generation of owners. And so, the business is going incredibly well now. But how do you define success for yourself at this point?

Tim:  So, what episode is this, Michael?

Michael: What episode is this? We are on Episode 335.

Tim:  So, I will have heard 334 times that you've asked this question and each time I wondered how I might answer it. As I look back, I'm a free lunch program kid from Dearborn, Michigan, so achieving a certain level of financial stability has always been a part of my definition of personal success. I know that's not always the great thing to say, but it's absolutely true. Certainly over time, the goalpost of success has changed and I think of George Kinder's questions. So, success for me now is certainly a lot more about relationships, making sure, healthy, loving marriage, which has been 30 years quite frankly, with my wife. I got 3 kids that I don't know if I'm their hero, but I'm pretty sure they like me and think I'm doing okay. I've had, what, 10 business successful business partner relationships. I'd like to think I played a role in positively influencing our growing team. So, our mission is to improve lives through financial planning done right. Success to me is just making sure that I'm improving the lives of those that are around me.

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

Tim:  Thank you, Michael.

Michael: Thank you.