#FASuccess Ep 400: Sizing Up Versus Scaling Up To Build An Enduring Advisory Business, With Mark Tibergien

Resources Featured In This Episode:

• Mark Tibergien: LinkedIn
• #FASuccess Ep 005: Mark Tibergien On The Rise Of The Professionally Managed Financial Advisory Firm
• Kitces Research on How Financial Planners Actually Market Their Services
• Practice Made (More) Perfect: Transforming a Financial Advisory Practice Into a Business by Mark C. Tibergien and Rebecca Pomering

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Full Transcript:

Michael: Welcome, Mark Tibergien, to our milestone 400th episode of the "Financial Advisor Success" podcast.

Mark: This is incredible. I appreciate your inviting me for this great honor. I've been following what you've been doing for a long time, and this is a true treat, especially considering I was on it, I think, last in 2017, maybe.

Michael: 7 years ago. I would actually have to... I remember that you had joined us early on. I had to actually go back and double-check when we were setting this up and realized you were episode number 5. So we launched in 2017, and you were on the 5th Tuesday in 2017 because that's when we got underway. To me, it's amazing how much the industry has moved over the better part of 7.5 years since that conversation. You've always had a fascinating perspective, just a fascinating view on the industry back to, originally, when you did consulting and benchmarking for the industry and then ran Pershing Advisor Solutions for many, many years.

I think I'm excited today just to talk overall about the state of the advisory business, where we are, because I feel like a lot of the industry talks its book. The consolidators say "you have to consolidate" is the future, and the independents say "independence is the future," and the big firms say "big firms are the future." And I've always felt like you have a really sharp take and a really independent thinker's take on what's really going on in the advisory world. And so I'm excited for just your view on kind of past, present, and future of what it means to run a financial advisory business.

Mark: Well, that's great. Looking forward to the conversation.

The History Of Consolidation In Professional Services Firms [05:34]

Michael: So I think I want to start this discussion with, as I call it, a somewhat industry-controversial view of the past that I think is interesting to look back on. So 25-odd years ago, Mark Hurley put out a now relatively infamous industry report that said in 20-something years in the future, the solos will all be knocked out of the business, mega-firms are going to rise, we're going to go through a huge wave of industry consolidation, there'll be a couple of national firms, a few more regionally dominant players, basically, what the legal and accounting industry kind of look like, a couple of big, big players, a slew of regionals, and then almost everybody else just struggling to survive. And I think, certainly, it's not hard to observe kind of recent wave of consolidation, in particular PE [Private Equity] firms and the like. But then I also see a lot of solo advisory firms saying, "All this technology is amazing, and we're running great today."

So I'm really curious how you think about this landscape where we've said at one point, "Solos can't survive. You have to consolidate to survive." We're seeing the consolidation. Do you see the Hurley report and this prediction playing out as originally projected, or are we seeing something else right now? How do you think about big versus small and solo versus consolidation?

Mark: Great opening question, and I probably have about 9 things to say about it.

Michael: Beautiful. Well, let's just go all the way through. I'm excited.

Mark: So it's interesting because I remember when Mark Hurley and I were often on the same stage one after the other. And when he was stirring up the industry by going to conferences with this comment, I remember, at one point, I was giving a presentation. I think it was a Morningstar event in Chicago. And somebody in the audience just stood up and started screaming at me about the stupid ideas that I had. And when I started listening to what he was talking about, I said, "Wait a minute, you're confusing me. I'm the good Mark. That's the bad Mark over there."

Michael: He was shouting Mark Hurley down and throwing it at you?

Mark: Yeah, we got confused oftentimes. So whenever we see each other, we refer to each other as the good Mark and the bad Mark, so it's good. Mark has always been a terrific thought leader and provocateur in the business. And there is a method to his madness, and that was to cause people who are owning and operating advisory firms to be thinking about whether or not they're building something enduring or whether or not it's a business that will die with them. And of course, he had his own interests because he was leading an effort to ultimately take minority positions in advisory firms. And so the idea behind being on the forefront of consolidation was important.

But generally speaking, whenever I hear predictions about the future of this business that it's either gloom and doom or ebullience, that there never seems to be anything tempered in between, I tend to think about all the other industries that I've been exposed to over the course of my history. One of the things you may or may not know is that among the businesses that I was involved with is we did training for banks and businesses all over the world, and included in that were funeral homes, and Goodyear Tire dealerships, and Hallmark card shops, and banks.

And so what I've generally found is that every industry goes through a transformation. It begins with fragmentation where you have a bunch of small players. Then it goes through a period of acquisition or consolidation, as you're referring to it. And optimally, these companies that consolidate then begin to integrate because they have to do that before they can expand. The truth is that, over the history of consolidation of every industry, very few of them succeed. There tend to be a few that emerge, and very few truly succeed in creating a transformative business as we know it.

So when I look at professional service firms, like advisory businesses or medical businesses or law practices or accounting practices, in fact, when I was one of the partners that sold its firm to Moss Adams in the '90s, we were in the process of consolidating accounting and consulting firms. And Moss Adams became the 10th largest accounting firm in the country through internal growth, organic growth, as well as consolidation. And we learned some things through that process about professional service firms, not the least of which is that it was important to have people who were part of the firm still have real equity in the business. If they were just employees of the consolidated enterprise, it was going to be difficult in order to create a harmonic convergence of those businesses.

Michael: What do you mean by true equity holders? Are you just speaking literally like it's got to be shares and not synthetic equity?

Mark: Yes, exactly.

Michael: Is there something more to it? Okay.

Mark: Yes, it's either real or it's Memorex. So we look at this whole notion of not just a sense of ownership but truly being participants in the growth of the enterprise in true equity value with that sense of ownership that comes with it.

Michael: Does that mean literally everyone? Is the idea, by analogy, every accountant needed to be a partner and an equity holder in their accounting firm, every advisor needs to be an equity holder in their advisory firm? Or are we talking about, at a partner level or a leadership level, not necessarily top to bottom in the organization?

Mark: We're talking about having the standards of ownership the same as always within professional firms where individuals first qualify through a series of evaluations, including experience in the business in order to rise to become a partner in the firm. And then the firm economics have to support admitting new partners into the business as well. But that doesn't preclude the idea of firms having ESOPs [Employee Stock Ownership Programs] or some other ownership program. But in terms of the people driving the growth of the business or driving the leadership of the business, having that true ownership is critical. Not to dismiss the value of passive ownership, which PE firms bring into play, or disinterested parties buying into firms. That creates an interesting dynamic because when you have pure investors in an advisory firm, for example, they're less focused on the conduct of the practice. They're more interested in the growth of the business or the profitability of the business because they're investing in it, and they want to realize the value from their investment, the return on investment.

Going back to the point of what we observed within the accounting profession is that the accounting profession at that time was going through considerable consolidation, not just among what was once the Big 10 and then the Big 8 and now the Big 4, but also among the what they call the Group B firms or the super-regional firms where they were expanding their markets. Regardless of this consolidation, there were still scores, hundreds in fact, of solo practitioners or small practices that remained viable. What changed was what they could do or what they could offer because there were certain types of services where business owners, for example, would only want to go to a firm the size of a Moss Adams because they had auditing capability that might not be existent within a small accounting firm or they might have more sophisticated tax planning capabilities or, in fact, consulting capabilities within those firms that had to transpire.

What we generally found was that the smaller practices were viable. The individual professionals were doing exactly what they wanted to do. It's just that they were constrained by their ability to do everything just because they may be a solo practitioner or have limited expertise in other areas.

The Difference Between Size And Scale For Growing Firms [13:51]

Michael: I feel like a version of that is maybe already showing up in the advisory world. One of the data points that's jumped out to me for many, many years now, I remember noticing this in benchmarking studies 10+ years ago, and you may have even seen them further back then than this, just this striking dominating trend that there was almost a perfect correlation between the size of an advisory firm and the average revenue of the advisory firm's clients. Basically, the bigger the firm, the bigger the clientele. The bigger the firm, the bigger the clientele. And it just formed an almost perfect line. The average $0.5-billion firm has larger clients than a $100-million firm. Billion-dollar firms have larger clients than $0.5-billion firms. Five billion-dollar firms on average have bigger clients than $1-billion firms.

I don't know if the numbers have held from there because we don't have as many benchmarking studies as we used to, but a version of that seems already to be playing out in our industry that, expressly stated or not, there does seem to be a tendency that the larger dollar, more affluent clients seem to be skewing to larger firms, including a lot of the national firms, the wirehouses and the like that still seem to be doing just fine working with mega-ultra-high-net-worth people with 9 and 10 figure net worths.

Mark: Well, I don't know if there is a cause and effect there, but I think that when you have any type of a brand or brand presence, you're likely to get more opportunities to serve clients than if you're more invisible to the market. So it's possible that some of these firms started with large clients, like some of the multifamily offices did, and because of the complexity of the client relationships, they just naturally grew. And when they grow, they have more overhead, and so they have to support that. So it becomes this whole feeder system where you're forced into that dynamic.

But I think too that we also find that this brand presence is critical within the market. And if you're dealing with clients who have complex financial lives, it's important for you to be able to deliver more services to those clients because the decisions they make are probably more important than the money they make. And how you navigate that depends on the expertise you have within your firms.

Michael: Can you talk a little bit more about that? What do you mean by offering more services and supporting, as for my inference, supporting more complex decisions?

Mark: In my opinion, when I look at the true value of an advisor, it isn't in managing investment portfolios. To me, that is the commoditized aspect of the business. It's more in helping clients to navigate their financial decisions. And as individuals become wealthier or their lives become more complex or they want to do more things with their wealth, such as ideas around philanthropy, as an example, then having the ability to help your clients navigate those choices become critical. For example, in your own business, it wouldn't surprise me if you have clients who come to you with what I refer to as custom investment offerings, where somebody at the country club said, "Hey, we have this new business that we're creating. Would you be interested in investing in it?" So, does the advisor get involved in helping to evaluate that opportunity or not?

What I find as an example is the higher up the food chain you go, the more involved you are in those types of decisions. But let's use philanthropy as an example. I think, in many cases, where advisors play a role is in helping the client to define how much they can give to charities and what the tax impact might be and how they might physically structure it. But if my motivation for philanthropy is to make impact, the advisor probably should be involved in helping to find what impact looks like. How do I measure it? How do I evaluate it? How do I concentrate my resources so that I see it? And that's a good example of helping clients to navigate the financial decisions that they have to make.

Michael: And so the idea being that either if I want to move upmarket, I need to have more expertise in these deeper domains, and/or if I'm moving upmarket, I'm able to expand my team, hire more and deeper and more experienced advisors to be able to deliver at this level in the first place.

Mark: Or put another way, what you want to be is the first call that every client makes rather than that person calling the attorney or the accountant. And so if you have that expertise, then you're going to be the touch point, the main touch point, and the one who's helping that client to navigate the choices. That would be the optimal position to be in.

Michael: So I'm struck as you talk about this and kind of this evolution of if your firm is growing, you tend to be expanding depth of services and expertise, because I feel like there is a narrative or a focus in the industry right now that if you want to be successful as a larger firm that's scaling up, it's all about tech experience, tech efficiencies, gaining the efficiency of helping advisors be able to have more clients and increasing those ratios. I don't know if I'm creating a dichotomy that isn't really there, but I hear you talk about the evolution of firms and expanding expertise, and I feel like there's a lot of industry narrative around the evolution of firms in scaling efficiencies to improve advisor capacity ratios.

Mark: Yeah. So I think the first point you're really touching on is I believe that most observers of the industry confuse the word size and scale, that being larger is not necessarily translating into a scalable firm, particularly if you're buying offices in multiple locations where you never achieve critical mass in those locations. So scale, in the literal sense, is when your revenues grow faster than your expenses. That is one measure of efficiency, one measure of productivity, but we also are looking at how do we create a self-sustaining business by market or by location that we have to think about.

Technology, to a degree, obviously, helps with the efficiency ratios. But the other component of that is, how are you dealing with the client experience? And so just by focusing on efficiency and not effectiveness tends to be a dangerous proposition. What this means, I think, for many firms that are going through consolidation, as I described it before, from fragmentation to acquisition, this failure to integrate and to define things like career pathing within a firm, to define critical mass by market or by location, by failing to adopt consistent client experience and technology, by failing to improve the way in which you're reporting and interacting with clients, is probably where there's a breakdown in this expansion of businesses. In many ways, growth is a silent killer in that what we find is the inability to manage consistently and to fulfill what your vision and strategy is really becomes a negative for many of these firms that are growing too fast. And we have to be conscious of this in how they're building not to just become more efficient and reduce costs but to become more effective in how they're procuring clients and building out this optimal client experience.

Michael: So, what does growing too fast mean in this context?

Mark: Growing too fast is when what you find is that your client satisfaction is declining, where you're not sought out as the primary resource for clients making important financial decisions, when you have high turnover of staff at all levels, when your profit margins are not increasing consistently, but where your ratios of things like revenue per client, revenue per staff, revenue per administrative staff are really falling out of whack. Those are good examples of where we see deficiencies in growth, where most people are measuring growth. In fact, if you read the trade press, it's in how big are their assets, how many assets do they have, not how many clients and how many dollars of revenue and how many staff do they have doing what they should be doing.

Key Profitability Benchmarking Metrics For Advisory Firms [22:41]

Michael: So I'm wondering if you can help us benchmark, a familiar space for you, what are even normal numbers? Just when we talk about growing too fast, for most advisory firms that are growing and building, the only advisory business they've ever known is the one they're building and the only experience they have is everything they've done the firm up to today. You haven't seen what you haven't seen, and you don't know what you don't know. So when you talk about things like growing too fast, what kinds of growth rates are associated with too fast? When you say high turnover of staff, what's not high? What's high? What kinds of numbers should we be thinking about?

Mark: Good question. So one absolute truth is what the...let's just look at the income statement as an example. So one thing that really hasn't changed much is what the income statement should say. If revenue is 100%, then you should be targeting a gross profit margin of 60% and an operating or net margin of 30% to 35%. So let's just kind of use that as a benchmark to say are you within the realm of reason? It is possible for some firms to actually be too profitable. If they're showing net margins in the 45% to 50% range, which some of them are, it's possible that they're not reinvesting in the future of their business. It's possible they're extracting and distributing profitability, perhaps to the benefit of their private investors, and not reinvesting in what the future of the business is.

So just on a superficial basis, if we look at the income statement, we see some numbers that are indicators. When we go deeper into that, we say, "What might be causing the gross margin to be under whatever I consider to be my standard?" That could be the result of poor pricing, poor productivity, poor service or product mix, if that happens to be an element of your business, and poor client mix. One way in which this shows up as an example is many firms, in order to grow, will have multiple client segments. They may have one person who's serving a client segment or two people serving a client segment. And when you begin digging into what that client segment is, let's say it's the ultra-high-net-worth market or the mass affluent market, is it growing at an appropriate rate, and is it generating the appropriate level of profitability for the business based on the investment that you're making? Are you continuing to invest in the branding and the positioning within that market, or in fact, is it detracting from your brand as a business?

So these indicators really tell us a lot about whether or not there's dysfunction in the financial decisions and the business decisions that leaders are making within their firms. So to use a corollary to something you've talked about quite a bit in the past, there's this notion of diversification and the notion of over-diversification. If I come to you with $100,000 and that's my starting portfolio, and you buy me 100 different positions, then there's a probability I'm over-diversified. I'm really not making an impact with the resources that I've allocated to this portfolio. And that happens within businesses, is that if you can't sustain the investment in the business that you've decided or the multiple businesses that you've decided, then there's a chance that you're going to experience real stress in one area or the other. So that's an example.

Michael: And just for folks who maybe don't even, we'll say, have the cleanest of standard accounting, just to make sure we're on the same page, can you define gross profit margin, operating margin, how I'm supposed to be calculating those as an advisory firm just to make sure I can line up my 60% gross margin and 30% operating margin?

Mark: Yes, good question. So revenue is obviously everything that flows into your business, whether from asset management fees or project fees or hourly fees. The direct expense, which is its revenue minus direct expense equals gross profit, the direct expense is like a cost of goods sold in a manufacturing business or a retail business. It's the cost directly related to the generation of revenue. In simple terms, that means all of your professional staff compensation shows up as direct expense but would also show up...

Michael: So that means my financial, literally, the advisors of my firm, the people that do the client things.

Mark: Exactly. And if you are participating in any referral programs, like through Schwab or Fidelity, then the amount that they take off of your fees is also part of the direct expense. So if you have a payout to somebody else, that's a direct expense. So that's a good example of a cost of goods sold to frame it just another way.

Michael: So, do I put all my marketing expenses there?

Mark: No, marketing is different from the cost of goods sold.

Michael: Okay.

Mark: So marketing is what you're doing in advance. Marketing is an overhead expense, just like rent, utilities, administrative staff, insurance. All those other elements really fall below the line as expenses in support of the business, not directly related to the generation of revenue.

Michael: Okay. So if I kind of do my math backwards, if I'm running 60% gross margins, it means 40% of my revenue is going towards my advisory staff and any solicitor rev shares and the like.

Mark: Exactly.

Michael: And then if I've got a 60% gross margin and I'm finishing with a 30% final margin, then my overhead is another 30% of my revenue.

Mark: Exactly. And so what happens is when you get larger and you're operating more efficiently, you will see that overhead costs reduce as a percentage of revenue. But you have to be careful that it doesn't go down too far because that could imply that you're not reinvesting in the business.

Michael: And so when we talk about gross margins and direct expenses, I feel like I've seen a lot of industry conversation these days trying to mentally assimilate this number in a world where, if I came from a wirehouse, I'm used to 45% to 55% of my revenue getting paid out to me, give or take a little. If I went to an independent broker-dealer world, I'm used to 75% to 92%, depending on what platform I'm using. And I see a lot of advisors just were used to these numbers of, when I'm an advisor, I'm getting 45%, 55%, 65%, 75%, 85% of my revenue. How do I reconcile this back to, but apparently, when I'm a business owner, my total advisor comp isn’t supposed to be over 40%? How do I pay out my people if everybody pays up to 92% and I'm supposed to pay under 40%?

Mark: This is probably one of the biggest psychological hurdles for breakaways from FINRA-registered firms into the RIA market. The truth is that your payout from the broker-dealer is your revenue. It's not your compensation. And so you have to begin with that notion that the house is taking somewhere between 5% and 50% of your revenue as revenue to them and they're splitting the rest with you. So you're beginning with your revenue. It's not really your compensation. And so if you go into the RIA world, then obviously, the revenue is 100% of what you charge to your clients because you're accepting the referral cases, you're not really sharing with other people, and your expenses come out of that. So I think this becomes a big area of confusion.

So just going back to your original question, what you get paid from the broker-dealer is your revenue. Now, how you make decisions with that revenue, like if you have to pay an administrative assistant or if you're an independent contractor registered rep, how you pay for your rent and other expenses within your business, that's the proper way to think about it.

Michael: So, why do we still get so many breakdowns where advisory firms trying to go multi-advisor are saying, "Apparently, I'm supposed to pay under 40%, and I can't figure out how to hire advisors because they all want 60%, 70%, 80% and say if I won't give that to them, then they're just going to go to the BD, corporate RIA up the street?"

Mark: Yeah, that's real. They're dealing with the language problem because the moment that you get into talking about percentages and basis points instead of dollars, it gets to be really confusing. As a business owner, if you're trying to be transformational and building out this business, you're going to be limited in who you can recruit if you can't get over that hurdle about whether fair compensation is being paid for the activity that the professional is supposed to be bringing to your business. And I think that that element of dysfunction is why many RIAs do not recruit from broker-dealers, but in fact, those breakaway reps are forming their own firms because they can figure out their own compensation. So that's real, and I don't have an answer for that. But the economics are the economics. If you can't generate the sort of return that I just talked about, then you've got some work to do as a business owner and a business leader.

Michael: And I guess the implication on the other end is some of the firms out there that are still purportedly paying those rates to advisors they're hiring on are probably not running the healthiest of margins. And that's the part that we don't see underneath the surface.

Mark: I think if you look at any benchmarking studies like what Philip Palaveev is doing or what Schwab is publishing or what Eliza De Pardo is putting out, you will tend to find a large population of so-called independent firms that are generating 10% to 15% net margins rather than 25% to 30% net margins. And one reason could be because their compensation to advisors is too high or their overhead is too high or they're not generating sufficient volume in order to cover their costs.

The Link Between Growth And Succession Planning For Advisory Firms [33:13]

Michael: Okay. So take us back now. I took us down a bit of a rabbit hole here around firms and consolidation. But I want to come back to kind of the original, how are we playing out relative to the Hurley prediction, or what do we learn about how consolidation has played out in other industries? You had highlighted one of the big pieces is when the consolidation comes and the integration sort of woes settle, the firms that actually create true equity holders, I guess the true paths to equity for the people that can run the business and grow the business becomes a key factor. So, what else do you see in this landscape of how consolidation is playing out and the mega-firm versus the solo?

Mark: I think the other way that this is playing out is we are seeing the emergence of different types of consolidators or buyers. There are financial buyers, there are tactical buyers, and there are strategic buyers. So the financial buyers are merely looking for a return on investment over a relatively short period of time, maybe 5 to 7 years, for acquiring your firm and acquiring other firms and then selling it to somebody else at some reasonable rate of return. The tactical buyers might be an organization like a bank or even a brokerage firm or an RIA that is trying to open up a new channel of business where they say, "I want to acquire this business because it's complementary to what I do." The third, the more strategic buyers are actually trying to build a branded business, something that firms like Mercer or Pathstone or Hightower or Wealth Enhancement Group seem to be doing where once they make the acquisition, firms become identified as part of their offer. They don't continue to operate under a separate name. So the difference in the motivation of the buyers is interesting.

The second component of that is we try to understand what is the driving force of the consolidator itself, of the base firm. Is it trying to become just a platform, is it trying to become a branded wealth management firm, or is it trying to become a service provider? So an example of a platform, you can hear this when someone says to you, "We're going to let you run your business the way you want, and we're going to just limit the number of investment choices you have to, say, 150 of the funds that we use on our TAMP. And we're going to help you become more efficient in how you run the business, and you're going to operate under our name so that you get some brand equity in the process. But we're going to be a platform for you." Other firms might say, "We're going to be a technology provider, and we're a buyer of services and goods. So you're going to be able to use our buying power as a service provider in order to build out your business." The third ones that are trying to build out a branded business are actually saying, "We want to create some consistency in how we're positioned in the market, how we train and develop individuals, how we compensate people, how we invest in your business." And that's going to become a known financial advisor or wealth management or multifamily office business in the marketplace. So really understanding that motivation becomes helpful in going forward.

Michael: So, how am I supposed to pick amongst these or decide whose calls I'm supposed to take? Because most of us, particularly in the RIA space, because our data is public, thanks to the SEC, get a pretty steady continuous flow of calls.

Mark: Well, I think that the beauty of being a financial advisor is you're trained to ask questions. The only difference is now you're doing financial planning for yourself instead of for your clients. So it's really quite remarkable how so many sellers or prospective sellers fail to do due diligence on their buyers, particularly if they're taking an equity trade as part of the transaction or they're taking terms that don't result in the full payout for 3 to 5 years. So there is a discipline around this process that's important and may help to hire an advisor yourself to navigate that.

But what's interesting is that a lot of people describe this M&A world as a succession plan for founders of advisory firms. In my opinion, it's the failure to do succession planning that is causing a lot of these firms to sell. They haven't created a process internally that allows other people to buy in, and they get these big checks being waved under the noses and they say, "You know, this is pretty appealing. I think I'll take it, and I don't really care what happens after I get 80% of my value for this business. I'm off into the sunset." So it's interesting.

Michael: So I have to ask. I struggle a little bit with that, that at least there's some sizing difference that it's one thing to be...I don't know, I'm plucking numbers slightly out of the air, it's one thing to be a billion-dollar firm with many advisors on board 6, 8, 10, whatever it is, depending on your ratios and saying, "I can't figure out how to find a single successor owner who wants to take a stake of anything around here," versus I think by just sheer numbers, the overwhelming majority of advisory firms who are still solo or a small partnership, there might only be 1 or 2 advisors. And at best, it's very hard as a solo advisor to say, "I'm going to train my entire successor to try to find someone who can take over and hope that the person I hire now in their 20s turns out to be the person 10 years from now in the 30s that actually wants to take over this business." And even for a lot of those firms, paying a successor a salary for 3, 5, 7, 10 years to get an exit plan is remarkably expensive compared to just running your solo practice and selling to a buyer who will give you pretty close to full market value whatever day you want to leave. I struggle a little. It's one thing to be a big firm and say, "I'm struggling with succession." But for most advisors, succession is expensive and requires training people. And if I wanted to do that, I wouldn't have made this solo firm.

Mark: Well, it's a fair argument. I think that, again, I would use the analogy of how you help your clients to navigate their choices. When do you know when they're at the level that they can afford to retire, for example, or when do you know that they're at the level that they can afford to buy a second home or summer home, or when they can afford to pay for their kids' college education? It's the same decisions that if everything is put through a financial filter, then the dilemma you talk about is real. But if your decision is to build an enduring business, then you think about continuity long before you're close to the exit. And I think most people don't deal with this question until they're closer to the end than the beginning.

So if you've built a firm that has been growing and that you continue to attract people to your business, then at some point, you have to begin thinking about what will it take to ensure continuity, not just for my sake but for the sake of my clients. Because something is going to happen. Either I'm going to retire, I'm going to sell, I'm going to get disabled, or I'm going to die. Something's going to happen. And what will happen to my clients if something happens to me? And so this continuity plan really becomes critical in the event of either a planned or unplanned transition.

Michael: Is there some size when that really becomes or should become a more central consideration or even just a strategy in how you're pursuing this?

Mark: I think the moment that you recognize the need to bring on more professional staff, more advisors in order to help you serve clients, becomes the time that you begin thinking 5 years, 10 years down the road as to what this business will look like. And one of the reasons why this is critical is because the moment that you start adding those costs is the moment you also have to start adding revenue to cover those costs. And so you've already begun the cycle. You're not going to say I'm going to stop growing because people will say, "I'm not getting paid well enough for all the work I'm doing," or, "I don't have an opportunity to grow in this business." And how many times have we seen that happen within firms that they train individuals and the individuals say, "Well, there's no opportunity for ownership. There's no opportunity for partnership. You're not giving me a lead role in the business. I'm going to leave?" And what did the founders say? "Nobody of this generation wants to work hard anymore."

Michael: Right.

Mark: So, at what point do they become their parents? That's the question.

Michael: I have been struck. In my own career journey, I had the sheer dumb luck of picking a firm fairly early on that turned out to have some partners who are pretty good at executing steady growth at some good organic growth rates. And so I got all sorts of career opportunities that came because the firm just kept doubling every 3 to 5 years, and there were all these new seats on the bus, to use the Jim Collins analogy. There's all these new jobs that are getting created and all these roles that have to get created. It's like there's a person that does this. Now, there's a department that does this, and someone has to lead that department. And then we need more of a leadership team to lead these multiple departments. And just the firm grew and all these opportunities that came from it, that, for me, was just very natural.

So when I was growing in my career early on, I didn't understand all these discussions of "My firm won't give me any opportunities to move up." I was like, "I'm on my 5th business card in 6 years." I keep changing my job description because all this growth stuff is happening. And it was a long time before I realized, no, I just happen to have the dumb luck of showing up at a firm that actually had a good growth trajectory and that a lot of firms don't. And when there's just not much underlying growth happening, all of a sudden, all of this gets so much harder. You don't want to introduce other partners when your firm's not growing very much because the only way you give someone a piece of the pie is your pie gets smaller. When you're growing, I can share the pie with you and our pie is larger than my pie was. But because we're growing, that only works if you're growing. To me, there's this factor that how much you're growing really drastically influences these conversations in a way that I never understood for the first decade of my career, because I just lucked into a firm where that wasn't the issue.

Mark: Well, I think the chance plays a major role in the fortune of all of us. And the fact is that you're an extraordinary talent that firms wanted to have as part of their team. And so it didn't matter if the first firm you were with didn't want to grow. You would have ended up somewhere that was a growth-oriented firm because you were pursuing your own passion and you wanted to have the ability to make that kind of an impact.

Those who don't grow, I don't want to make it sound as if I'm casting judgment, I think it's a perfectly acceptable decision to remain small and to recognize that you may be training your future competitors. The question is whether you're serving your clients right and you're ensuring a continuity plan for them going forward. That's the only point about that. If you say, "I'd rather run a small business until I can't anymore," and then sell it or close it, that's perfectly fine. As long as you do it in a proper way, there is no judgment about that.

But it's that tweener. It's that in-between position. It's like a teenager where your skin is breaking out and your clothes don't fit and you can't get a date. That's a really tough spot to be in because you're never sure that you're going to grow up to be a real adult until something else changes. And that becomes a challenge, I think, for a lot of these firms today.

Michael: Yeah. I've long been a fan of this is a business where you can make a pretty darn amazing income being a solo, with very limited administrative staff support, or in these days, just a bunch of really good tech or maybe some virtual service that supports you so you don’t have to manage them. I've always been a big advocate of how good our industry is to be able to support those. I come back to the framing that you made, Mark, which is that's all well and good for you, individual solo advisor, but beware the moment you add professional staff that isn't you. Because you can stand still if you are happy with your income. But if you expect the young, upwardly mobile person to hang out where you are indefinitely, it's probably not a realistic expectation.

Mark: And this is probably the takeaway from this discussion, Michael, is that there is a point in all of our lives if we're leading a business where we have to become transformational. Either we say to ourselves, "We don't desire to build a business beyond this," or we recognize the need to do this in order to serve the demand for the services that we provide. And the moment that we make that step from going from practice to business to enterprise, we have to become a transformational leader or at least recruit the talent that's going to help us do that. I think that's probably the missing link in the so-called independent world is that we've gone from technician to CEO, and we haven't prepared ourselves for that process.

Navigating The Transition From Advisory Practice To Business To Enterprise [47:41]

Michael: So, can you frame a little bit more what you mean when you say going from practice to business to enterprise? I feel like those are...a lot of people use those words interchangeably. I think you have much more intentionality about using them the way that you did.

Mark: I don't know that I can fully quantify it in terms of size, but I can in terms of characteristics. So if you're a practice, pretty much, that is a professional service firm that revolves around you. And you have your clients, and you're not driven by growth. You're making an adequate amount of money that fulfills your personal needs, and you're impacting the lives of others. And you don't have multiple staff that you have to manage. You're just really focused on serving those clients because you're drawn to the profession. It's not unlike other professions, by the way, where we're drawn because of our technical skills or our passion as a musician or as a doctor or as a lawyer. This is something that really draws us.

When we move into that business phase, this is when we start adding employees, and we start adding processes, and we start adding procedures. And we have to think about some level of organic growth in order to keep up with the rising costs of building this business. It's that tweener phase that I referred to where you are now looking at revenue and profitability. You're actually managing a financial statement. You have to think about your balance sheet and the impact on cash flow and how you're going to fund this growth. But you may not fully have adopted the notion of becoming a full-time CEO. You might say, "I'm going to manage the business with 25% of my time, and I'm going to work with clients for the rest of my time."

When you move into this enterprise phase, then you're starting to think about professional management, and you're thinking about career paths and role definitions and measures of accountability. You're truly thinking about your brand presence in the market and how you grow organically and have visibility in the way in which you function. Generally, I define success with an enterprise as if you're recognized as one of the top three firms in your market, then you'll get twice as many opportunities to do business as the fourth, next firm. That begins to look like an enterprise to me because it's more of a business for the business presence. It's not you and your reputation that you're solely dependent on. So those would be examples of how I think of the difference.

Michael: So I'm struck by your comment around, when I'm 25% of my time managing the business and the rest managing my clients, I'm still in the business phase. I'm not moving into the enterprise phase. Am I to infer then that part of the defining characteristics of moving to the enterprise phase is that you're supposed to become the full-time CEO and let go of your clients?

Mark: No, that you are recognizing the need for professional management, whether it's you or someone you hire.

Michael: Okay. There needs to be a full-time CEO who doesn't have clients. You get to choose if it's you.

Mark: Yes, exactly.

Michael: Okay. And is there a size when that level of C-level roles and leadership starts to emerge?

Mark: I think this is when the economics come into play, if you go back to the original discussion we had about the profitability of the business and if it's going to be transformative in how you do things. The cost of hiring, if it's not a CEO, at least a general manager, somebody who is going to be responsible for the day-to-day management of the business, it could cost you, depending on the size of your business, between $300,000 and $500,000 for that role. If you're bigger, it's going to be well beyond that. But it's going to be real money, and it's going to be an overhead cost. It's not going to be a direct expense. So you have to think about what it's going to take to break even for that position.

What's important to acknowledge here, though, is that almost every RIA is a small business by SBA [Small Business Administration] definitions. The SBA says that financial services firms under $100 million of revenue are technically small businesses by their definition. And I would say that you can see the characteristics of small businesses at that level. I think once you start to get to $10 million or $15 million of revenue, you're moving into that phase where you have to have sustainable organic growth and profitability. And this is probably the trigger point of having professional management at least be part of your consideration going forward.

Michael: And so if I'm thinking about $10 million to 15 million of revenue, at least if I'm doing traditional AUM model metrics, I'm somewhere in that zone between $1 billion and $2 billion under management fee schedule revenue yield.

Mark: But what I'd like to encourage your audience to think about is stop using AUM as a measure and start thinking of revenue and profitability as a measure.

Michael: Meaning gross revenue and profit margin or just raw profit dollars that we should be thinking about and talking about more?

Mark: Both. I think the quicker that you can move into talking about dollars versus basis points and percentages, the more you begin to understand the impact of your decisions. The metrics, "Here's my average fee per client in basis points," or, "Here's my gross margin and my EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization] margin," it's interesting, especially if you're looking at a pattern over time. It's an interesting measure. It's a way to simplify the metrics. So you can say, "Am I improving or not?" But in the end, you have to come down to the question of, "Am I generating enough dollars for input for the output?" That ultimately becomes the question.

Michael: And so talking about dollars and revenue and profits just gets you to business dollars thinking more than just AUM or just bips, percentages, and the like.

Mark: Exactly. Because those terms tend to camouflage a lot of sins. You could be a billion-dollar firm that's generating 100 basis points. You could be a billion-dollar firm generating 35 basis points. It depends on the type of clients and what you're delivering. It also depends on whether you're a pure asset manager or you're delivering full financial planning or other services. I think this is where it tends to be a little bit confusing, because going back to the earlier discussion about the nature of the client that you're serving, the more complex their lives, the more things you're doing. Are you getting paid adequately for all those other things that you're providing, or are you still just charging based on assets under management, even though the thrust of your services goes way beyond managing their assets?

Michael: So, are you in the camp that AUM becomes a problematic business model as firms go increasingly towards financial planning and wealth management and other non-portfolio management services?

Mark: No, I'm not in that camp. I think that it's part of the consideration. Here's my point of view on that. The market supports the idea of asset-based pricing. And so there's no reason why you'd compromise your own business economics if that's how the market is charging. But the irony is that this is the only business I know where the clients pay for the value they bring rather than the value the provider brings. It's as if my doctor is charging me by the pound. I'd be overpaying, of course. But the notion of, "The more money I bring to you dictates the higher the fee I pay you," doesn't make any sense. What it really feels like.

Michael: Then we respond by saying, "Well, then I clearly need to do more for my A clients because they pay me more." We lift our services to the level of the fees that we're collecting.

Mark: Yes, but you don't always demonstrate it. So a good example of this is let's say that, on some systematic basis, you are doing cash flow planning, debt planning, outside acquisitions of businesses, or other interests. You're helping me with my philanthropy. You're helping me deal with estate issues and the management of my family. So you have all these things that you're helping me with. And I'm assuming that it's ongoing. It's not an event. So what's interesting about that is you still only give me a report on my investment performance. You never report the progress we're making with all those other things that we're talking about, at least not on a systematic basis. I view that as a major gap in demonstrating value.

What Does It Mean To Be An "Independent" Advisory Firm Today? [56:39]

Michael: So you had said earlier, you made a comment about the so-called independent world, which I'm kind of taking a little jab at the word independent these days. But I have been fascinated by evolution of the industry over the past decade that independent really is getting a strangely muddied framing these days. I've got independent broker-dealers and independent RIAs. I can be an employee at an independent RIA, but I actually have an employment contract with the independent RIA that's more restrictive than the wirehouse. So I'm at an independent firm, but I'm really quite a bit less independent than in the wirehouse world. We seem to have really stretched what was an independent channel. Maybe it still is in a lot of different directions now. So, how do you think about independence, independent world? What does independent even mean at this point?

Mark: I love the question because the vernacular of this business is very confusing. When I talk to the friends with whom I play golf, they don't know what an RIA is or registered investment adviser or an independent advisor. They don't. This is all for our conference conversations because the general public has no clue what the hell I'm talking about. And so independence, I've always wondered where that phrase came from. Does it mean we are unbiased in the advice we deliver, or does it mean we're unconstrained because we're not controlled by an employer? Or does it mean that we own our business independently and can make any decision in our business that we choose to?

To me, it's the difference between the barbed wire facing in or the barbed wire facing out. One way or the other, there's a fence that controls our behavior, and I just don't know what we're trying to protect against. I think when we started to allow people who were not advisors to use the term "advisor" that it created a language problem, and then I think the difference that came in at the time was people saying, "Yes, but we're an independent advisor. We're not professional sellers that are compensated based on the products that our home office wants us to peddle."

So to me, this just became a whole olio of terms that really don't have any significant meaning in the market. And I don't think that it has any bearing on whether one sells to a consolidator or another firm as to whether you operate independently. I'm going to use the term independent in the context of being a fiduciary, meaning that the advice I give is independent of any bias that is tied to the reward I get. And if you can argue that position, then even consolidators have to adhere to the notion that they are buying fiduciary standard firms and they're going to be governed accordingly. So that's where I come out on this whole thing. I think independent is kind of a dumb term for the marketplace, personally.

The Future Of Solo Firms [59:58]

Michael: So, does the solo firm still survive? Can it still thrive in this environment, or are we still in this inevitably or "inevitably," it's just going to be more consolidation and more consolidation and more consolidation until there's not much left that hasn't sold to one of them?

Mark: Again, going back to the illustration of other industries, solo practitioners will always have a role. There will always be people who want to create their own business either because they don't want to be hired or can't be hired by another firm.

Michael: As an unemployable person, I appreciate that framing.

Mark: So, of course, there will always be small firms and big firms. There's only so much room for dominant providers in the market. But let's not forget when we look at consolidation that the captive employee world, the so-called wirehouse world, went through massive consolidation in the '80s and '90s, as we experienced economic troubles. Those names that don't even exist anymore, like Kidder Peabody or Dean Witter, there's a whole list of them that many people don't even know about. And then we saw great consolidation among independent broker-dealers where it's continuing, where, at one time, I think there were 5,000 or 6,000, I believe there's now 3,500 or fewer in that market. A few are emerging, like LPL and Osaic and Commonwealth and Cambridge and Raymond James, that continue to hold a position within the market. But change is always afoot within an industry.

Within the RIA world, I don't know what the numbers are now, 15,000 RIAs. There are maybe 100 that control 90% of the assets. But there are still thousands that are doing just fine working with their local community and serving the kind of clients that they want to, and they don't really have a motive to sell because they're going to do just fine. And clients will ultimately make the decision. Do I want to work with a big firm, or do I want to work with a credible individual who I know?

I can tell you, from my standpoint, I get lots of inquiries from people saying, "Something has happened in my life. I'd like to work with an advisor. Can you make a recommendation?" My process of inquiry is always to find out what's important to them. Is it a woman who wants to work with a woman? Is it someone who specializes in people going through divorce or death? Is it inheritance or a lottery winner? Is it an individual that's important or working with a team? As I think about it with each of these referrals, I want to understand what's the expectation of the individual so I don't waste their time introducing them to financial professionals that don't meet their standards.

Michael: So what I'm struck by when you describe that, what are you asking, what's important to them, does the gender of the advisor matter, their specialization, and something like that, they’re divorce, you're working with an individual or a team, the things you're describing are basically not criterion on any of the major sites that are out there for consumers to find a financial advisor.

Mark: I'd love for you to identify 10 sites and see if you can find the difference in their language.

Michael: Yeah. If you look at most "find an advisor" platforms, the first characteristic that you use to find an advisor is their ZIP code. The primary way I choose the person to manage my life savings is who's geographically convenient to my home or office. I say that in jest, but no joke, that really is the primary way that people find through a search site. The number one advisor-related search on Google is "financial advisor near me," which I just think speaks to consumers who can't tell us apart that, at the end of the day, they'd throw their hands up in the air and just pick whoever's geographically convenient for lack of any better idea about how to do it and not wanting to ask 27 questions to ask financial advisors to figure out who to work with.

Mark: Yeah. And ultimately, it becomes an emotional connection. But one of the things that's interesting to me when I have these conversations with individuals is that, generally, there is a life event, a catalyst, that causes them to want to engage an advisor, and there is some sort of demographic characteristic. It could be geographic, but it's usually some sort of demographic characteristic, like age or approach or philosophy that will inform their preference. And I would love to see more websites begin talking about life events that might cause you to consider this to introduce this notion of empathy into the positioning that the advisory firm might have with prospective clients.

Why Do Firms Struggle With Organic Growth When The Advisory Industry Is Thriving? [1:04:58]

Michael: So in this theme around growth and attracting clients, one of the big conversations that seems to be cropping up in the industry these days is there's sort of this twofold…the future of the advisory business is bright, there's all this growth opportunity, all this demand. We're lifting our value propositions. We're doing more financial planning. There's more growth opportunity than ever before. We're all bullish on the industry. And then everybody's collective organic growth numbers are rapidly approaching low single digits and hovering not much above zero. So if the outlook for the industry is so good, why is organic growth getting so hard for so many firms right now all at the same time?

Mark: Great question. I think that part of this is due to the leakage. Many people take on client relationships with people who are their age or older. And by definition, these are individuals who are de-accumulating or distributing because of death or estate planning needs. And so they're not necessarily growing more clients. And this is one reason why firms need to think about regenerating. So if we look at the mass, I think that's true, but we can look at a collection of firms that are actually growing organically at 8% to 10% a year because of their positioning in the market. I've heard some advisors say that, "Well, we're more like a country club. We're exclusive. We don't just take anybody." And the minute that you cross your arms and take that attitude, the chance of attracting more clients is pretty limited. It's, "I don't want to go to a country club for my financial advice. I'd like to do that for some other reason." So I think that becomes an issue as well.

I think the third thing that's happening is firms get to a certain level of comfort where the income they're generating is pretty good, and the reputation of the community is pretty good. But they're not acting like when they were beginning, and that is to more assertively look for business. And in fact, many of them are participating in these custodial referral programs because they don't want to get their hands dirty building business on their own. They would rather have somebody feed them leads. And so this absence of branding and positioning really is abandoning the market to other organizations. The truth is that the wirehouses and the banks and the independent broker-dealers are still attracting business. There still is money flowing into the wealth space, regardless of channel. It just means that a number of RIAs are not getting their share because they're being too exclusive in their proposition.

I think, though, that we also have to be conscious of the fact that this is an old industry, and we haven't been regenerating the population of financial professionals at the rate we need to. And so the moment that we begin that process is the moment that the RIA firms will begin appealing to the next generation of accumulators, and that's probably where they have to begin to look. I think this death watch around the great wealth transfer is not only morbid but wrong, and it's not where firms are going to realize their growth.

Michael: So, what's wrong with the "death watch" around the great wealth transfer? What's wrong with focusing on whatever the numbers would be, $50 trillion, that's supposed to change hands over the next several decades?

Mark: What's wrong with it is that people expect it to come from their own clients. And as a singular number, it's awesome. But how many of your clients are even a fraction of a percentage of that total wealth transfer? The reality is, I think, for most advisors, what they find is that, let's just assume it's a couple, when the couple passes, the distribution of assets goes to multiple people and possibly even to charities. And there's a good chance that the couple lived to be old and they have consumed most of those assets themselves. And so I don't know how many people I talked to that say, "Well, I'm not going to leave that much to my kids. And if I do, it's going to be fragmented." It's not going to be in one lump sum to one child.

Michael: So I'm sitting around, waiting for my $3-million clients to die, as it were, and the reality is it's going to be down to $2 million with spending. They're going to donate half a million of it to charity, and then they're going to split it amongst their three kids. I'm going to go from one $3-million client to three $500,000 clients, which does not necessarily advance my business.

Mark: And then the kid is saying, "Wait a minute, the advisor is as old as my parents. Why the hell would I want to go to them?"

Michael: So we only keep one or two of the three kids, at best.

Mark: Yeah. So that's the death watch.

What Firms With Strong Organic Growth Are Doing Right [1:09:52]

Michael: So then, from the flip side, when you talk about firms that are growing healthy in an organic way and are getting 8% to 10% organic growth rates, what are they doing? Is there a size or a capability or some other characteristic that defines the firms that seem to be figuring this out?

Mark: Yes. So first of all, they have clear branding and positioning in their market. They use the idea that I talked about before, where they're not only describing what they do for clients but what the general catalyst might be for engagement and what their approach is going to be. And they reinforce this. Secondly, they do develop their professional staff to be actively involved in developing business and may even use this as part of the evaluation as to whether or not one rises to partner. Three, they are creating internal demographics so that they can be appealing to different generations of clients, knowing that if the average lifecycle of a client for an advisory firm is 25 or 30 years that they're continuing to replenish what they're losing going forward. And they're doing this by having professional staff that's aligned with future accumulators, not just future inheritors.

So this element about brand presence becomes increasingly important in the market. I think that being wholly dependent on sources of referral really is abandoning your own brand identity in the market, and it's important that you assert yourself in a way that people begin to recognize who you are, what you stand for, and what people can expect if they engage you.

Michael: We've seen a version of that cropping up in the advisor marketing studies that we do on the Kitces platform where we've seen this for the past two cycles that when we drill into which firms have the strongest organic growth rates, we find that the fastest growers are relying on referrals, the least of anyone. Not nothing. They've got a bunch of clients and some things. Some fruit falls in their lap, as it were. But the fastest growing firms seem to be the least reliant on referrals because they're doing other marketing things that generate more activity than the passive referrals that then also still show up because everybody gets some.

Mark: In fact, a good example of this, not too long ago, I was talking to a firm, I'll try to camouflage who they are, but what was interesting is their collateral material talked about them having a national client base when, in reality, 80% of their clients were within an hour of their home office.

Michael: Well, as long as you have one on each coast, you're a national firm. Come on, Mark. That's how this works.

Mark: And so you say, "Okay, now, why would you even say that? How does that connect you to the clients that you want? The fact that you're national, is that important to me or not?" And the fact that you can't even define the characteristics of your client, who is your optimal client and how have you made an impact on their lives were things that were just absent from any of their collateral material. So it just became the sort of same numbing dialogue. And I think that when we look at how firms position themselves, the first thing you want to do is get an at-bat, and then you can see if you can get a hit. And this becomes a challenge if you're not even getting inquiries from people who might fit your profile. So I think that this whole idea of becoming recognized among a certain type of client with a certain type of need becomes increasingly important.

Michael: So some kind of specialization, some kind of niche, some kind of something that you can differentiate around?

Mark: Yes. In one of the books I wrote, "Practice Made (More) Perfect," I talked about the 8 driving forces that exist within advisory firms. The two most common were a niche or a named market, and the second was a technical specialty being known for something like estate planning or divorce planning, whatever the element is.

Michael: Ed Slott’s the IRA guy. Everybody knows where you go.

Mark: Exactly. And so the idea is that you're first connecting with that positioning, and everything you do tends to reinforce that. So people begin to recognize who you are and what you stand for. Does that mean there are some clients who won't even call you? Yes, but that's not the point. It's not about the big reach. It's about the focused effort that makes a difference.

Best Practices For Firms That Want To Scale Successfully [1:14:27]

Michael: So I do want to come back for a moment. You had presented a framing earlier that we need to make more of a distinction between firms that are getting bigger versus firms that are actually scaling. I kind of think sizing up is not the same as scaling up.

Mark: Correct.

Michael: So, what are the firms doing to scale that are actually scaling? What makes it start to scale and not just size up?

Mark: So scaling basically means that you're getting operating leverage within your firm. And so the way in which you do that is by first thinking, "What does critical mass look like in your market?"

Michael: What is critical mass in this context?

Mark: So a good example would be if you're an acquirer and you happen to be located in St. Louis and you acquire a firm in Maine just because they're available, you'd say, "All right, first question, why would I go to Maine as my location? Is there some connection to St. Louis from Portland, Maine or vice versa?" Secondly, is it just a two-person practice? And what will it take for me to build a brand presence within that market? Alternatively, the St. Louis firm could say, "I think I'll acquire a firm in Wichita or Kansas City because of its close proximity and I can support and service them properly." And it might be a 2- or 3-person firm.

But the next question is, "Can I build that office up to a level where they are recognized as one of the top three firms in that market? Who can I recruit? Who can I serve? What's the nature of the wealth in that market? How is the accumulation rate occurring?" Generally speaking, what you want to find is that you have redundancy at every key position, that you're growing, that you have the potential to grow organically at a rate of 5% to 7% within that market, and you're generating that profitability range of 25% to 30%. That would tell me that you're at critical mass within that market.

Michael: I feel like just when you say, "I need redundancy at every key position in my advisory firm," not much less a location, I'm starting immediately thinking, okay, we're already talking 10, 15, 20 people, at the location, the headcount. Advisory firm-wise, at best, at the least, you're talking about many, many millions of dollars of revenue to have enough for the staff to be at that kind of critical mass threshold, and generating 25% profits.

Mark: Exactly. Because, otherwise, you're vulnerable. And this is the overlooked premise in the growth strategies of many of these firms, is they're not considering the risk side of it. And, how many times have you seen these acquisitions occur where one or two of the key people decide to leave after a year or two? That has made that investment virtually worthless, and they have to figure out how to replenish it in any case. And so this also informs the strategy for consolidation because it says, "I need to think about how I'm going to support the markets into which I enter," whether it's the type of client or the geographic location. I have to think about, "How am I going to do this properly in order to support it and build it out?" Because if all you're doing is buying a practice and scraping off the income that comes from it for a period of time, that's okay, but that's a financial buyer making that decision. It's not somebody trying to build an enduring firm. The notion of actually investing in a property, in an asset, in a business that makes it more dynamic is where the joy of consolidation really comes.

What Surprised Mark The Most About The Evolution Of The Advisory Industry [1:18:26]

Michael: So as you look back over this, over 30-odd years now, I know that you've been involved in our industry, what surprised you the most of how you thought this was going to play out when you started your work back in the 1990s versus how the industry actually has evolved over the past 30 years?

Mark: Yeah. The truth is I've been around the industry for about 50 years. I started as a financial writer in Chicago, covering primarily the OTC [Over-The-Counter] market and the investment banking world, which was worlds apart. But it exposed me to an industry that was going through transition at the time because fixed commissions were being eliminated and negotiated commissions are being introduced. In every decade, since the '70s, I've seen this change happen. Probably the most significant change is how significant the small practitioners who I knew through the old IAFP [International Association for Financial Planning] that were breaking away from brokerage firms to form these RIAs actually transformed from practices to businesses, now, to enterprises, and how clients have actually followed this model and have begun shifting relationships over to that world. So it made sense that something would happen, but the presence of the way in which advisors operate has made a big difference.

Secondly, I think the part that surprises me to an extent is it was in the '70s when the first CFP mark was also introduced. In fact, my first boss, when I moved out to the Northwest, was in the very first CFP class. He has since passed away, but he told me at the time that this financial planning thing is going to be a really big deal, and you ought to get involved with the Financial Planning Association.

Michael: Good advice. Good advice.

Mark: This is the 1970s. And he was right. I had no idea how significant it would become. I think the part that I'm disappointed about though is that, while people talk about financial planning, I think that technology has not supported it in the way that I had hoped. The planning process is obviously supported by technology, but the reporting process is really absent when it comes to financial planning. And I think that too many firms have not figured out how to demonstrate value around financial planning as a means of pricing their services or demonstrating their value to clients. So that one has become more commoditized than it should, and it actually should be recognized as more of a value than it has become.

Michael: Just help me understand further. What exactly is the technology gap, the reporting gap you feel around financial planning? We have planning software. We do our ongoing meetings with clients. Just help me understand more. Where do you see the gap?

Mark: Well, let's just take an example. I referred to this earlier, but let me just see if I can give you an example. My wife and I realized that we were donating quite a bit of money to quite a few different charities. And we were doing it just because these were different organizations that would reach out to us. And the more we talked between ourselves about why we're giving away money, we realized it wasn't for any tax planning purposes but because we wanted to make an impact. And we went to our advisor and said, "We're feeling unfulfilled with our philanthropic strategy here, and we'd like you to help us think it through." And so where the advisory team worked with us is to help us define, for each of us, two things that were really important for us to invest in from a charitable standpoint. And that helped us also to evaluate what the impact those organizations were going to make on their beneficiaries and how we could measure that over time.

Now, what would be interesting is if they could carry that one step further by actually giving us some sort of report that would demonstrate the impact of philanthropy, which is part of our financial planning strategy, and how it's fulfilling our personal goals. Does that make sense?

Michael: Yeah, yeah. So in terms of this overall evolution, I guess I am curious for your perspective. I guess I have a sort of twofold question. Why did the RIA movement, I guess, work? We're in an industry that is really resistant to change and changes very, very slowly and has a lot of people that come in and say they're going to change and disrupt the industry. And then absolutely nothing happens. So I sort of have a twofold question. Why did the RIA movement actually work? And why did it work over the past 30 years? Because we made RIAs in the Investment Advisers Act of 1940. To me, the fascinating thing about the RIA model is both how much it's grown over the past 30 years and the fact that it basically did nothing for the first 60. And then, all of a sudden, it moved.

Mark: Well, I would frame that a little bit differently. What I think is that the RIA industry as formed by the '40 Act was really an institutional business. It was an institutional money management business. And I think it was when financial planning as a profession was introduced to the market that it became a retail business. So I think there was a demarcation between institutional and retail, and that's when we started to see a new chapter of fiduciary advisor unfold.

I think what we also saw was that, by becoming retail, it framed the choice between professional sellers and professional buyers, between suitability as a standard and fiduciary as a standard, between being a product advocate versus a client advocate, as being a positioning. And so, for individuals who saw financial advice as a profession and not as a job, I think this notion of having a mission-driven profession was very compelling to them. And it drew a lot of people into it. I also think that they found this notion of having the ability to be financially rewarded, be emotionally fulfilling, impact the lives of others, was quite a compelling proposition in drawing a number of people into it.

Michael: Frames up a lot better than selling the boiler room stock of the day when you put it like that.

Mark: Yeah, it does. And I think that I remember that because I was involved in the IFP on a national level before it merged to become what it is now. But there were a lot of people who worked with IBDs who moved to the RIA world for those reasons. That was what was drawing them. It wasn't the economics. It was the ability to practice the way they wanted to practice and not be governed by sales rules but be governed by advisory principles. Those were really functionally important elements that came into the business. And the fact that they made a lot of money doing it didn't hurt.

Mark’s Advice For Newer Advisors [1:25:46]

Michael: So, what advice would you give younger, newer advisors coming into the profession today and thinking about what they need to be doing and thinking about to be successful and survive and thrive over the next 30 years of industry change and evolution?

Mark: I think that it probably is something that applies to everybody, but it certainly does to people who are building a career, and it's something that I personally can relate to. I think that having the willingness to confront whatever your weaknesses are and whatever your imperfections are and being able to reflect on whatever failures you have helps you to define what kind of a person you're going to be going forward. So this element of introspection and recognition of what's working, what's not, truly becomes important.

I think that, when I look at the individuals in this business who have flourished, not just in terms of their personal wealth but in terms of their personal reputation and their ability to make an impact, I think that what has differentiated them is their ability to extract wisdom from each of their experiences and become transformative as a result of it. So when I look at people coming into this business, I think that it's important to define what success looks like, not just in terms of your career growth and your income and your personal net worth but in terms of the impact that you'd like to make on your community, on your profession, on your family, and on your own life that is going to be rewarding. Otherwise, it's just chasing the dollar, and there's a chance you can do that anywhere. So that's how I look at it.

What Success Means To Mark [1:27:36]

Michael: As we wrap up, this is a podcast about success, and one of the themes that always comes up is just the word success means different things to different people, sometimes different things to us as we move through stages of career and life. And so someone that objectively built very successful businesses and career and working with advisors in many ways over the years, professionally, you've had great success. How do you define success for yourself at this point?

Mark: I would say, in a way, it goes to one of the points about how I measure my impact on others. I still make myself available to people who want mentoring or coaching or counseling on their own career choices or on their own life choices, and I find that to be extraordinarily fulfilling to help them discover themselves. The fact that people will actually reach out to me to discuss those things, I just find incredibly rewarding. I think that having the time and the health to do what I want to do that I have passion for is also a way that I define success. So we have a comfortable life, and we're grateful for that, but it's all the other ways that ultimately people view you as having impacted them, I think, is probably what is my standard for success.

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

Mark: Thank you so much for having me, Michael.

Michael: Thank you, Mark. Thank you.