#FASuccess Ep 041: Structuring A Leadership Team And Family Succession Plan In A Billion Dollar RIA with Elaine Bedel

What You’ll Learn In This Podcast Episode

• What Elaine’s turning point was in her career, and how it led her to financial planning, including what it was like to study for the CFP in the 70s and 80s. [2:35]
• How financial planning has progressed over the years, yet with many of the same challenges and conflicts the industry still faces today. [10:39]
• The early career steps that Elaine took to establish her credibility and expertise as a financial planner. [23:40]
• What Elaine feels new advisors should focus on when they first enter the workforce, drawing on her own experiences. [23:40]
• What Elaine did when she first started her business, why she chose to become fee-only, and what she feels has been the key to her success in the beginning. [27:14]
• What an “engagement letter” is, and how Elaine’s firm uses it to help affirm her value in charging separately for financial planning, and onboarding her new clients. [40:35]
• How to tell what will be a good client relationship, and the importance of showing clients why financial planning matters even if they only think they want help with investments. [53:45]
• How Elaine’s firm provides its financial planning deliverables over an initial 3-month period with new clients, and how the firm’s team is structured. [57:46]
• Why Elaine started the Generation Next portion of her business, and how she expects it to benefit the future of the firm as well as its clients. [1:00:39]
• How the industry can encourage more females to enter into financial planning. [1:30:20]

Resources Featured In This Episode:

• Elaine Bedel - Bedel Financial
• Generation NeXt
• R&R Newkirk
• Coopers & Lybrand (now PriceWaterhouseCoopers)
• Execplan

Full Transcript: Structuring A Leadership Team And Family Succession Plan In A Billion Dollar RIA with Elaine Bedel

Michael: Welcome, everyone. Welcome to the 41st episode of the financial Advisor Success Podcast. My guest on today's podcast is Elaine Bedel. Elaine is the founder of Bedel financial, and independent RIA in Indianapolis that provides comprehensive financial planning and investment management, and over the past 29 years has grown to more than $1 billion of assets under management. What's fascinating about Elaine's business, though, is not simply that she's been successful in growing to the $1 billion AUM milestone, but she founded the firm from the start as a fee only RIA in 1989, a time when very few financial advisors launched fee only firms, and even fewer who were women.

In this episode we explore Elaine's journey as a pioneer female fee-only financial planner, from starting her career in a bank trust department where she learned all about estate planning and investment management to becoming the director of financial planning for Coopers & Lybrand and honing her tax planning expertise in a big eight accounting firm at the time, before ultimately transitioning to create her own independent RIA.

From there Elaine shares how her advisory fee structure evolved from initially doing standalone financial planning project fees to her current blended AUM plus upfront planning fee model, the unique engagement letter process that she uses after her initial meeting with clients to quote them a fee and onboard them, and the way that she breaks up her upfront planning fee into an initial and series of ongoing payments in the first three months, to help clients get buy-in to complete the process.

And be certain to listen to the end, where Elaine talks about how she navigated the challenges of bringing her son into the advisory business, from first requiring him to work in another firm for a period of time, and then hiring him into the business, but in a position that would not report directly to her, and how ultimately he has both become a partner and successor/owner in the business, and is underway in launching the firm's Generation Next offering, which started as a financial planning solution for the children of the firm's clients, but is now growing even further beyond them. So with that introduction, I hope you enjoy this episode of the financial Advisor Success Podcast, with Elaine Bedel.

Welcome, Elaine Bedel, to the financial Advisor Success Podcast.

Elaine: Thank you, Michael. Great to be with you.

The Turning Point In Elaine's Career [2:35]

Michael: I'm thrilled to have you on the episode because you, I think, truly are a very early pioneer in not just building an advisor firm, but building as a fee-only advisor, building as an RIA, frankly building as a woman in an industry that still has a horrible gender imbalance and was even more so when you started your career. So I'm really excited to have you tell the story of your firm and what you built from starting from scratch, and I know you guys just crossed $1 billion under management, which is quite a phenomenal milestone.

Elaine: Great, yeah, thank you. Yeah, that $1 billion is one of those milestones. I do recall when I was thinking, "Oh, if I can just get to $100 million, won't that be wonderful?" So it is nice to think that we are where we are. But of course, it's taken 29 years. We're going to finish 29 years in the firm at the end of this year, and it seems like it's gone very, very quickly in many ways, but when you ask how did it get started, I probably have to go back even a little bit further. I was with a bank here in Indianapolis, and after I'd been with them for about four years in kind of a management/consulting area of the bank, I moved into the trust division to start a financial planning practice, which is what they had...As many banks at the time, they were looking at, "Do we want to get involved in this service? What would it entail? How do they do that?" So they asked me to consider moving in, starting a financial planning practice, which I did. The first thing I did is I went down the CFP path and started working on my certification, and ended up getting that in the next couple of years.

Michael: And when was this? I don't mean to date you, but just kind of timing and context for when all this is happening.

Elaine: Well, I'm very old. It was actually late 70's. It was probably 1978-1979 when I was asked to move into the trust division. I often look back on that as being a turning point. I could have said no. I was in the corporate bank at the time. I could have said no, I could have stayed where I was, and I didn't. I was a little bored with what I was doing, so I chose to do this, and I look back on that sometimes, and if I wouldn't have taken this route, I don't know what I would be doing today, because it was obviously finding something I really enjoy doing, and just one of those turning points that happens every once in a while in your life.

Michael: So what does financial planning in a bank trust department in the late 70's and early 1980's look like?

Elaine: Well, it was really just sitting down with clients and doing a plan. As part of the trust division, if there was anything, money that needed to be invested or whatever, that would be done through others in the trust department or even the investment division that we had in the bank at the time, or perhaps if they're active with the branches, there would be some investing that maybe the branches would help them do. But it was mostly doing just financial planning. So it really gave me an opportunity to learn what financial planning was all about, just get really focused on the education side of it, but it was also good because I learned an awful lot about estate planning. I was in a perfect spot to learn estate planning, but also investments and everything else about financial planning. But we just basically did plans for individuals. Then came along some software we did have for a while where there were like six different lessons that you could go through in financial planning and we were trying to promote that through the branch system at the time-

Michael: What, educational lessons for clients? "Hey, we'll get you more financially savvy, go through these six modules"?

Elaine: Exactly. And actually when I started doing that, I started doing kind of a CFP 1, if you remember, there were like five or six different sections to the CFP designation, and the first one was general education about what's financial planning about. I was actually holding classes inside the bank for branch managers and others who wanted to learn more about that. So we were doing all kinds of things to try to get everybody on board with that. But it was just plain old financial planning, and I did that with the bank for about another, I guess, six years. I left there in 1984.

Michael: And you got your CFP during that time period?

Elaine: Yes, I got my CFP in, I think, 1980-81 time period.

Michael: How did you find your path to CFP? Was it out there? Was it a known thing? Were you looking for some way to get deeper on financial planning and you found it?

Elaine: Well, it was funny because we were just starting an IAFP, International Association of financial Planning chapter here in Indianapolis. So I got involved immediately with that, and it was just very early on for that. So there were other people in Indianapolis doing financial planning, and it was through them that I learned about the certification. And that was when it was only done through the College for financial Planning. That was before the CFP Board was ever in place.

Michael: Yeah, so for people who don't know the history, IAFP was one of the predecessor organizations to the FPA, along with the IFCP merged in 2000, and when CFP marks originally got started, the College for Financial Planning in Denver was not only the organization that taught the educational program, it was the only organization that taught the program, and it gave you the marks. It was the one and only, and it wasn't until later that the organization split apart and the CFP Board became a standalone credentialing organization, and the College of financial Planning remained a separate educational institution, and then other education providers built up over time.

Elaine: Right, exactly.

Michael: So you got your CFP from the college when it was the college.

Elaine: Correct.

Michael: Because you heard about it through IAFP.

Elaine: Right.

Michael: Okay, very cool path. So were there a lot of CFP's in Indianapolis at the time you were doing this? Or were you still an early CFP pioneer at that point?

Elaine: There were a few. There were a few others that were here, and what we did is we created a little study group. So there were like three or four of us that got together every week or so to kind of go over the materials, because it was all self-study, and then you would go at the end of each of the sections, we had a testing site in Indianapolis where you went, you took the exam, and you had a blue book. You had to write everything out.

Michael: No Prometric electronic instant access reporting results at the time.

Elaine: No. Well, I take that back. There were multiple choice questions, and then you actually, at the end of it, had to write out a portion of a plan. You know, whatever the topic of that section was, you had to do that, and with each ongoing section, that plan got a little larger. You had to address more than one section each time. So it kind of progressively accumulated all the topics until the last one. But yeah, that's how we did it. Our study group started out, like I said, with maybe even five or six people, and ended up with just two of us at the end. Others dropped out before they even got all the way through the program, but it took about two years to do it, because you had to take them in order. You couldn't jump around. You had to take section one, then pass that exam and go to two.

Michael: Right, and I guess they were only offered so often, right? They're only offered . . .

Elaine: Like once a year, I think, at that time.

Michael: Yeah, and then it takes a year and a half or two years to cycle through them. So was the bank supportive of you going to get the CFP marks? Or did you just venture out on your own to do it?

Elaine: No, they were very supportive. Again, they were really trying to figure out, "Do we want to be in this business? And if so, what does it look like?" So that's kind of what I was tasked to do, was to figure it all out, which is kind of interesting, to jump into something like that.

How Financial Planning Has Progressed [10:39]

Michael: Yeah, how does the financial planning that was getting done then, how do you find that compares to what it is today? Are we basically still doing the exact same thing, we just have prettier computers and software tools? Or does it feel more substantively different now?

Elaine: You know what, the process is really still the same, which I think is fine. I mean you go through and you gather data, you ask questions, and you come back, you try and figure out what their issues are, what the future needs to look like for them, and you build a plan around that going through, you know, insurance, investments, income tax, estate planning, retirement planning, all the normal things that you do still today. But I don't think that's a bad thing. I think now the way we deliver it has changed drastically. I mean, back then I was doing a lot of my own spreadsheets. Then we came across Exec Plan, I think might have been a software way back then that I was using. But you really did a lot of hand analysis, if you want to put it that way, and I created a whole bunch of different spreadsheets that would analyze your insurance need and what your investments would look like, and I did a full cashflow projection that created an annual income tax projection. I mean, I did the whole thing on mostly a spreadsheet that I created. It got kind of complicated. I'll tell you the real problem with that later on in life was I still had that as I was developing a business, it's hard to tell someone else exactly how to use your spreadsheet, because when I did a plan, I might have made a change somewhere in the spreadsheet to accommodate something special with them. And then you kind of forget that maybe you didn't change that, then you go through it the next time and you catch it, but other people can't catch it. It's not, you know, it wasn't menu-driven. It was, put the numbers in the spreadsheet and see how it works out. So it's much easier now, and nicer.

Michael: And all probably, like VisiCalc and Lotus 1-2-3 at the time.

Elaine: Lotus 1-2-3. You hit on it.

Michael: So you did this for a period of six or seven years with the bank. So what did that journey look like? I guess you stayed six years, so they found some traction with financial planning.

Elaine: Yeah, I think we did. Well, but being in the trust division, I was kind of given a few other things. We had a retirement planning focus that was kind of a separate service that I did, and I was also responsible for all of the trust accounts that had closely held businesses as the main asset. So if a family business was held in trust, I had responsibility for those trust accounts, and doing valuations periodically and working with some of that as well. So they pulled me different directions. So it wasn't that I was 100% doing financial planning, because maybe that wasn't keeping me as busy as what I had capacity. But I did get to do a lot of interesting people. The board of directors were behind this and supporting it. So I had an opportunity to work with some of the board of directors to do financial plans for them. So for someone my age at the time, that was a pretty awesome task, to be able to have access to those people.

Michael: So from their own institutional buy-in perspective, they put the board of directors through the financial plans to get them comfortable with the financial planning division?

Elaine: Yes, basically. So it was inter-

Michael: There's a lot of wisdom for that in organizations looking at adopting financial planning today.

Elaine: Right, but then I ended up having an opportunity to leave the bank. So I ended up taking that and becoming Director of Personal financial planning for R&R Newkirk, which was a publishing firm. And this publishing firm was very big in insurance, brokerage, writing, educational materials, marketing materials, and reference materials for those industries, and wanted to move into financial planning and start something there. So supposedly they did this national search and they found me. So I thought, well, okay, maybe it's time to kind of take a step. I had been with the bank for 10 years. So I jumped over to R&R Newkirk, started finding software to...I was kind of on the other side. I wasn't a practitioner any longer, I was supporting practitioners by providing software and reference materials, marketing materials, and those kinds of things.

Michael: So this would have been a competitor to companies like what we now have for National Underwriter Company or Forefield or solutions like that that kind of publish these educational materials for advisors?

Elaine: Right, exactly. And R&R Newkirk had a charitable arm and some other things. So it was a good company. It was one of, I think, seven publishing firms, because it was considered a publishing firm, that was owned by ITT. ITT turned around and sold the whole publishing firm to Macmillan. Macmillan turned around and sold R&R Newkirk, my company, to Longman, the financial publisher out of Chicago. So these were announcements that occurred six months after I'm there.

Michael: Oh, fantastic.

Elaine: I know. You're thinking, "Okay, I'm really caught up in this mergers and acquisition thing suddenly." But six months out from there you get the first announcement that the division's being sold to Macmillan. Two weeks later we got the second announcement from Macmillan that we're selling R&R Newkirk to Longman.

Michael: Which is basically a nice way of saying, when Macmillan bought the company they didn't actually want you.

Elaine: Exactly.

Michael: So you were being immediately spun back out and sold to someone else.

Elaine: Well, and then two weeks later Longman comes in and says, "We're moving the company to Chicago." Yeah, I think they may have made a mistake there, because we did have some well-established materials and people in those areas, particularly in the insurance area. I don't know if you remember, there used to be a reference set that every life insurance person had. It was like a 12-volume set that everybody had as a life underwriter, whatever. And they were all published books and they had to be updated every year, and the gentleman doing that at R&R Newkirk chose not to go with Longman. So Longman really kind of lost all that value that they had there. I did not go. Instead I decided I would just start on my own and create my own practice. So before you jump too far with that-

Michael: Oh, so you made the transition, because basically the company you'd joined vanished shortly after you joined, or at least left the area.

Elaine: Right.

Michael: So you just didn't want to go start another firm at that point? Or you did want to go join another firm and get another job at that point?

Elaine: Right, it was just kind of like, well, I guess I should just start practicing again. I was kind of stunned, kind of shocked, that after being with one employer, your first employer, for 10 years, you make a move and then this happens. It was kind of like, "Gosh, what a stupid mistake I made." So I just set up shop in one of the office suite areas where you have an office along with a lot of other people, and you share conference rooms and that type of thing. Everybody else in the office could be doing other things, and that worked fine. I probably did that for about a year, year and a half, when Coopers & Lybrand asked me to join the local office here in Indianapolis as Director of financial planning. So here comes the accounting industry wanting to get into financial planning and trying to figure out what route they should take, and did it make sense for them. So I got caught up in that little quest as well. So I joined, you know, doing the same thing I was sort of doing on my own. I just went inside their local office and started doing financial planning. Coopers & Lybrand, which now is PricewaterhouseCoopers, but Coopers & Lybrand kind of took the office by office approach.

So it was kind of the ground up. So other offices around the country for Coopers & Lybrand were hiring local people as well. That was one way to do it. So we would get together once in a while and kind of figure out what are we doing and should we be sharing ideas and whatever. Some other accounting firms, there were eight of them, the big eight at that time, started a top down approach. So they at the top decided, "Here's how we're going to do it," and kind of fed that to each of the offices, and ours was kind of the opposite of that. Good experience. Obviously really shored up the income tax side, because along with doing financial planning, I was reviewing tax returns, personal tax returns. So I wasn't on the audit side. I was part of the tax group, the personal tax group. And I got involved with reviewing tax returns before a partner would sign, and that type of thing, and again, learned an awful lot about income tax. I was there for about two and a half years, and decided to come back out on my own.

The reason I did, you know, both the bank and the CPA firm were great places to learn things and really, in many ways, good for me to be there to really get an opportunity to practice and learn and that type of thing, but in both cases I was kind of the specialty service. As I mentioned, at the bank I was doing some other things, and as well as the CPA firm, I was doing taxes and some other things as well. So it wasn't like I was doing just financial planning only. So I left there with the idea of starting a firm. And actually I will tell you, too, Coopers & Lybrand were kind of trying to figure out, like they all were, should we be doing this, should we not be doing this. And I think the problem with financial planning in that kind of a setting where you're charging hours, it's hard to be profitable, I think, because it takes an awful lot of hours to do a good financial plan, and it's labor intensive in many cases, and more so then than now, because you can be a little more efficient with your time now.

Michael: And no one likes to be on the clock. So they're naturally trying to minimize the hours as you're trying to do work.

Elaine: Right.

Michael: It does strike me though, that, you know, for all the discussions that we have in today's environment about banks and trust companies increasingly doing more financial planning and CPA accounting firms moving more into wealth management, and the challenges and conflicts and competition that creates for independent advisory firms, I mean it strikes me that we're going back 30 years to the 1980's and we're still talking about independent advisory firms and working at a bank and working at a CPA firm, moving into financial planning. There's an interesting, what we think are new trends are not actually that new. We've been beating this back and forth about which companies do and don't do financial planning from various channels for a while now, and it's the same dynamics.

Elaine: Mm-hmm. In many ways it is. Still trying to figure out how do you do it, how do you do it profitably, and can you sustain the service, that type of thing. And I think that's kind of why I became an independent registered investment advisor and kind of stepped away from both of those worlds. Now, I will tell you, to your other point that you mentioned earlier, both of those industries are male-dominated. They were then, maybe they're getting better now. At the time when I was with Coopers & Lybrand, they had no women partners anywhere in the whole country.

Michael: Like in the firm, they're a big eight accounting firm and 100% of the partners are men.

Elaine: Right, back then, which would have been the mid to late-80's. Late 80's, actually. I don't want to ever say that I felt like I was totally discriminated against. That's not it. I never felt that at one time, never ever. But I think it's just that sometimes opportunities were directed a different way just because there was more of a comfort level there perhaps. So I can't say that I...I don't know. It's hard to know.

Michael: Well, and it's hard to feel like you've got an upwardly mobile career potential when you look at the top of the career ladder and literally none of them are women.

Elaine: Yeah, it's hard to imagine something like that, but both places that I was, again, I got a lot out of the opportunity. So I harbor no ill feelings there at all for being there.

The Early Career Steps That Helped Elaine Establish Her Expertise [23:40]

Michael: It strikes me, I mean you ended out covering this interesting range that, you know, we talk about the traditional curriculum of financial planning. So you were in a bank trust department where you end out spending a lot of time on estate and investment issues. Then you're at Coopers & Lybrand where you're doing a lot of tax-related issues and probably approaching retirement issues as you're getting with affluent folks approaching retirement. You're checking off deep experience in each of the different financial planning subject areas one at a time as you're just going through these curricula.

Elaine: Right, and that is not lost on me. I really do feel like I benefited greatly from having those deep dives in some of those areas. Just as I get in conversations with a lot of people, there's just so much you pick up along the way by having the experiences that I did that you don't get just in a classroom, education that you might come out with today. Nothing against the programs that are out there. I think they're great. We hire them right out of college and they know so much already, it's terrific. But there's something about that experience piece and learning it as you go that really gets ingrained, I guess.

Michael: I think there's a striking piece to it, as well, that I feel like it's particularly common these days that when I talk to a lot of younger, newer advisors coming in, they're all trying to find the perfect firm at which they can build their long-term career, and are hyper-focused on finding the one perfect firm that fits them. And the thing that I push to most of them is, you don't need to find your perfect job when you're graduating from school and coming into financial planning. Just find a job. Find a job. Do it for a few years. You might even find something you didn't think you were going to like that you like. Even if you don't, you'll be amazed at how valuable the experience is, even if you simply use that as a stepping stone to move onto something else that you find you like more, and you'll probably have a better chance of figuring out what you like more once you've done it for a few years and you actually have a sense as to what you like and what you don't like. I spent two years in my early career in a heavily ops-oriented role, and while I don't particularly want to do that work now, I've moved on to do some other things in my career, I still know how ACATS and non-ACATS work, and why NIGOs matter, and all of these things from an operational world that I know, because I did it for a couple years, and ultimately I had to make a change in firms and job paths to take another step forward, because the firm I was at didn't have an upward track for it. But I don't regret at all the time that I spent in that job. You learn so much just getting some experience and doing it for a few years, and then decide what you actually want to do.

Elaine: Right. I couldn't agree with you more. A lot of times when I'm counseling young people as well, it's kind of, bloom where you're planted. When you find this job, just do the best you can while you're there, make a nice impact, take in everything you can, and then have another opportunity come down the road that may again, like you said, fit you better and maybe something you just fall in love with and are really glad that you've been able to make that transition. But every experience, as you mentioned, is so valuable. It helps you make that next decision. So whether a good experience or bad experience, it many times is a valuable experience.

The Keys To Elaine's Success In The Beginning [27:14]

Michael: And so your experience path through the bank trust department and the CPA firm, and I kind of chuckle, the experience ultimately led you to say, "I don't want to work for someone else anymore." Because you went out on your own after that.

Elaine: Well, and I think the nice thing about having my own firm at that point in time, anybody who came to my door, they knew exactly what they were getting. They were getting financial planning and then eventually investment management. And I was fee-only. Coming from a bank and from a CPA firm, fee-only was all I knew. I didn't come to it from an insurance or brokerage background where commissions were part of what I was used to receiving. So I was fee-only, which, as you mentioned earlier, was not a popular way of practicing, in January of 1989. I use that, 1989, as my starting date. I had people from around the country who I got to know, because I was active with the IAFP at that time on a regional and national level. And they're saying, "You're leaving money on the table. You need to be selling products and things," and it just didn't seem right to me.

Michael: Well, and it's striking to me, we still say today, "Why would you go from a broker dealer to an RIA where you can't help people implement? You're leaving money on the table."

Elaine: Right, and I just found that that played to me better. I mean, I like being very objective, I like being able to tell people, "I'm sitting on the same side of the table with you. There's no benefit for me. If I tell you you need $1 million of life insurance, it's because you do, $500,000 isn't enough, and $1.5 million is too much. You need $1 million. I'm not going to sell it to you, so I have no reason to give you any other kind of information but exactly what the need is." So I enjoy practicing that way, and it works for me. Nothing against people who do sell the products. Nothing about that at all, it's just that being fee-only was kind of the way that I started the practice, and we continue to this day.

Michael: And again, as you said, it was what you knew at that point, having spent 10 years in channels that just operate that way naturally.

Elaine: Right, exactly. But that was not the way most people were practicing at the time.

Michael: So were people telling you you were nuts to walk away from a salary and go out on your own and do this?

Elaine: Well, it's funny. I didn't ask for that kind of opinion, I guess. I'm sure people thought that, but it was kind of like, I remember having a discussion with my husband, "Okay, if I can just cover the mortgage, I think we'll be fine." That's what I have to do. Having a spouse that was working was very helpful. I didn't have to support a family on my own with this new venture. So I was very fortunate to have had people from both the bank and the CPA firm refer clients to me. I started out sharing space with a management consulting firm. So I was using their conference rooms and a little of their support staff. Eventually they kicked me out. They said, "We need that space. So go find your own," which was another good thing. It got me out, made me hire my own support staff and continue to do the work. And I tell people today, the hardest decision you make is to hire someone, that first person you hire, because now you truly are working to pay them, because you just get what's left over. But again, one of those lessons, as soon as I did that, I became more productive, because I wasn't answering the phones, I wasn't sending out invoices, I wasn't getting the letters produced and out the door. So it was a big step, but once you do that, it's important you just bite the bullet and understand that that feeling of, "I'm working to pay you," comes around that way. But now we have 25 employees or whatever it is. So you kind of get used to it after a while. But it is a first step and a, I think, owner's responsibility is what I felt, that you know, I really had to make sure that we were doing a good job here.

Michael: Well, and it's an interesting dynamic. That first hire, I find, for everyone is the most disruptive. It's the only time your company doubles that fast, because you go from one to two, and you just increased the head count by 100%. So what are you going to do with the extra resources?

Elaine: Exactly.

Michael: And suddenly there's another person that's depending on you. I mean I find for some advisors it's very exciting to say, "I'm hiring someone, and all the stuff that I'm going to be able to delegate to them so that I can go out and focus on growing the business," and then there are others that come at it and say, "Oh my god, this person's going to depend on me for their livelihood. I already have to contribute to supporting my spouse and my children. Now I have an employee, and their spouse and their children who are now going to rely on me as well," particularly when it still comes down to, you're the only one that's going out and getting clients and you're the only one that's bringing in revenue. Truly, they're all relying on you. So I guess for you it was a little of both, the good and bad side of that?

Elaine: Yeah, exactly. You've got to take the step, and then it obviously worked out well. And we continued to grow, to find more and more clients, but then what I was doing in the financial plan for the investment section is I was basically analyzing where they were, told them what they needed to do, even gave them names of mutual funds, gave them the asset allocations, said, "Here, go do this, go do this, go do this."

Michael: So you were like charging standalone fees, like I'll charge you $100 an hour, $1,000 a plan, or whatever the number was, and then you just got paid fee for service, and then they went and did whatever they were going to do.

Elaine: Right. I gave them the direction, but clients would come back and say, "Can't you help us do this? Can you do this for us?" So eventually I hired a person just to do the investment side. Again, I thought financial planning was important, I liked financial planning, I wasn't crazy about doing the investment side, even though I knew it was very important to clients, I enjoyed talking about it, but I hired somebody to focus entirely on investments. So that's when we started serving as a custodian using Schwab or Fidelity, serving as an investment advisor, I meant, and using a custodian to hold the accounts, and us doing the management for them. So that got started a few years after I started the practice.

Michael: Well, and there's a mental jump there that you made, that I find a lot of us never actually make, which is, this recognition that there's a thing we need to do in the business because it would be good for the business and clients, and I don't like doing it or I'm not good at it, so I'm not going to do it. I'm just going to hire a person to do it and make sure it gets done. So the business is going to do it, and I am not. And just that separation, I mean still, most advisory firms I know, what they do or don't do for clients is dictated entirely by what the advisor, founder, person likes doing or not doing in the business. And they do what they like and they're hopefully good at, and they find clients who want to buy and engage that, and it makes a good living, but it's a different kind of thing when you look at your business as a business and say, "Here's a thing that we need to do that I don't want to do, but the business needs done, so we're going to hire someone to make that happen."

Elaine: Right, and the irony of it. The person who started working with me to do the investment side really kind of started part-time and then grew the position, was the person that I worked for in the trust division while I was doing financial planning.

Michael: So you hired your old boss to run the investments for your clients.

Elaine: Yes. He had kind of semi-retired and was teaching at the university and doing some other things, and wasn't at the bank any longer. So we kept in touch, and so he thought it would be interesting. So he did that.

Michael: How does that conversation go?

Elaine: It went well. I mean, he actually was saying, "I could do this for you, we could do it this way, I'm sure we can do it," blah, blah, blah. So it was really a true partnership, even though he was not an owner in the business. I don't mean it from that perspective, but I mean in talking about it and saying, "What could we do here? Does this make sense?" and he was anxious and ready to jump in and do it, which was a big help for me. We kind of drew that size. But I think you did point out something that I have kept all the way through. We have financial planners and we have investment managers within the firm. The reason I did that is I think a financial planner loves doing financial planning, I assume, because that's what I do. I love financial planning, I love everything about it, I love the analysis of it. And an investment person generally has maybe even a little bit different personality. They love investments. They love what they do there, they've been trained in that area, they enjoy doing the research, they enjoy doing the implementation and the asset allocation. So I never wanted to have the person have to make a choice of what they do. So that's why we don't have one person do both. I'm not saying that's a bad model, but we've always kept it separate. So we have two people kind of assigned to every one of our clients. One's a financial planner and one's an investment manager. The financial planners are all CFP certificate holders, the investment people are all chartered financial analysts or have some other designation or are working toward the designation. So I kind of let them really focus on the areas they enjoy, but yet they come together to work with a client.

Michael: So every client essentially has two people, two points of contact, one investment manager and one financial planner?

Elaine: Right.

Michael: And do they actually interact with both? Or do you structure it more like the financial planner is client-facing and the investment manager is behind the scenes?

Elaine: No, they're both client-facing. Both meet with the client, in most cases. Once in a while there will be a meeting with one or the other, if that makes more sense and there's scheduling sometimes...That's a little bit of the downside of trying to always have two advisors in the client meeting, is just the scheduling part of it. Yeah, but they both have a client-facing relationship so that the client knows who they are, and then they may call one or the other when things come up, and the investment side will handle things, but the planner and the investment manager always keep each other informed on what's going on, and like I said, the majority of the time will meet with the client together for an annual meeting or quarterly meeting, whatever it might be for that client. But that's just kind of the model that I started because it was comfortable for me. And again, my concern was always, if we've got one person doing both, and of course you've got a client coming in tomorrow and their plan needs to get done, I've got to work on that today while the market's going crazy, I should be investing this money over here, well, you're going to have to let one slip. And the one you probably let slip at that point is the investments because you've got a deadline on your plan. So I just didn't want that to have to happen for our clients. So that's why we chose this model of doing it.

Michael: Interesting. And it's a split I feel like I'm seeing more and more in advisory firms as they grow and scale. There's always a little bit of a challenge when you're getting started. You kind of have to do everything, cook and chief bottle washer and all that. But as the crossroads you went through, first is you grow, you tend to hire some admin support, and just let go of some initial tasks. Then you may hire an associate planner because there's just, if you're doing planning work for every client, eventually there's a lot of planning work to do as the clients accumulate. And then most advisors at some point have to face this split about, are you going to keep being the financial planner and investment manager? Or are you going to decide or acknowledge that maybe these are separate functions and need separate expertise with separate people, and begin to split them out? So when did that hire come for you in the sequencing?

Elaine: To start the investment practice, I want to say probably two years in, two or three years in, something like that, we started managing money for people.

Michael: And was that basically the first hire, the second hire?

Elaine: It would have been a second, because the first person was my administrative person and kind of receptionist and do everything else around the office, and the next one was the investment side.

How Elaine's Firm Using An Engagement Letter [40:35]

Michael: Okay, so you made this pivot relatively quickly, just like two years in, of doing straight...Like were you doing mostly hourly fees? Were you doing project standalone plan fees?

Elaine: Actually that's kind of interesting. I would always do an engagement letter for a client. And in that engagement letter I would always quote a fee. And I would try and base it on how much time I thought it would take, basically, you know, again kind of coming from an accounting firm, the hourly came in there. But I felt like it only made sense to give them a fee, because if you don't, it's like, well if you tell me what your hourly rate is, you still don't have any idea what the fee is. So it's hard for a client to say yes to something when they don't know exactly what that might mean. So my first attempt though in the engagement letter is to say, "Here's what we're going to do, here's a fee range. It will be between X and Y." I only did that for a short time because as soon as I got a client who said...I was well within the range, but it was like, "Oh, I thought it would be at the low end, and you're at the high end."

Michael: Right, as soon as you put a range, the client wants you at the bottom of the range, and you were hoping to be at the higher end of the range, and that just inevitably isn't going to work out well.

Elaine: Yeah, so what I started doing is, "Here's the fee. So client, or prospect, you can choose. Does this make sense? And would this be valuable to you to have this planning process done?" So they get to make a choice up front, so everybody knows what that fee is going to be. I will tell you, many times I underestimated the amount of time that it would take. I think probably most of us do that.

Michael: A lot of us tend to do that. Either we just underestimate, or particularly just when you're getting going early on it's like, "I really want the client to get in the door. So having my time be slightly less valued than what I would have liked is better than not getting new clients and having no revenue coming in, since I've got a lot of time and not so many clients."

Elaine: Exactly.

Michael: So most of us tend to make that sacrifice early on, I think sometimes for good reasons, of just, you need some revenue coming in. The problem is later you've got to strengthen your pricing or eventually you can't scale because you're still compromising on every fee.

Elaine: Right, and I think a lot of times I would get involved in the plan, I think, "Oh, here's one other thing. We didn't talk about this, but I'm going to look into this a little bit more." So you kind of keep expanding the scope of your project without maybe adding to the fee. But that's okay.

Michael: So are you still using this engagement letter approach as you take on new clients in the firm today?

Elaine: Yes.

Michael: So what does that look like? I feel like it's not terribly common to actually see that. What goes in the engagement letter and where does it come in the process?

Elaine: It comes right up front. After we meet with a client, or excuse me, after we meet with a prospect and kind of talk about what we do and how we do it, and we get data gathered. So that could take two meetings, that could be one meeting. We try and talk to clients. Traditionally it was always two meetings. I'd meet with them usually on the front end, tell them about the firm and what we do and how we do it, and if they liked what they heard, then we'd schedule a data gathering meeting. The data gathering meeting, early on, was always with me as well, but as we ended up hiring more and more planners, it might be with another planner, but we do a data gathering meeting, and the investment manager who would be assigned would be in that meeting as well, and then from that meeting we'd send an engagement letter. But now, many times that gets collapsed a little bit because we do a good job, the person I've got talking with clients when they call in the first time can really talk them through what we do and how we do it, and they can go to our website. So there are a lot more ways for them to get information on, really, what is it we do.

Michael: It seems like that's a fairly, I mean that could quickly be a very time consuming and expensive for the business process if you're going through a full data gathering meeting still in the approach phase, and then you're drafting an engagement letter for them and then you're seeing if they follow through.

Elaine: Well, we're still doing that. Like I said, we may not have that first marketing meeting any longer. They may come in ready to do the data gathering with us, but it's only after that meeting that we send an engagement letter. And the engagement letter is really just a clear communication piece. At the beginning it says, "Here's what we're going to do in the financial planning," and we kind of outline the various subject areas within financial planning and might even highlight what their big issue might be that we've already learned, and then we'll talk about the investment management, we'll put that into it as well and say, "Here's what the fee would be for that." And then bottom line, I should clarify here, too. Our financial planning fee is really kind of a one-time, upfront fee. It's kind of like the project fee to really kind of get things going. Now, we all know we have to continue to update, and we continue to update our plans as well, especially in the retirement planning areas, sometimes the estate planning, just whatever's necessary for the client, but we don't charge another fee for that. What we do is, since the client is also going to be doing investment management, we charge a management fee. So there are basically two parts to our fee, the upfront financial planning fee and then the ongoing investment management fee. And we assume that all the updates are covered with the investment management fee.

Michael: So I'm just trying to think through the process. So you have maybe an initial screening call with the prospect to do at least the very initial, here's what we do, make sure they're a qualified prospect. If that goes well you do a data gathering meeting with the financial planner and the investment manager. So the client brings in all their stuff, you go into some depth about their situation just to fully understand the scope of the potential plan. Then you create an engagement letter and you email it to them? How does that actually go out to them? Because you can't make it in the meeting because you're still taking in all the information. I presume you need some time to digest all the things you just took in to figure what an appropriate quote would be.

Elaine: Well, we send an engagement letter after the data gathering meeting, which again, collecting all their information and they're finding out what their goals, their objectives, anything that we can find from them, and then we put the letter together. We used to mail it out. Now it does go out via email, and I think we even have some kind of way that they can electronically sign it and immediately send it back as well. I think that's right.

Michael: Do you find you then need another meeting or another phone call to explain the engagement letter? "So you saw the fee, it's X dollars, let me just talk to you about why it's that and make sure you're still on board"? Is there sort of a post-engagement letter sales process to make sure they actually say yes to the engagement letter and come on board?

Elaine: Sometimes. What happens, we send that engagement letter back and we do require them to sign it and provide a small deposit, basically to say they've got some skin in the game here. Then we actually, once they become a client and we do the work, we basically divide our fee in three, and we try to get everything done in the first three months. So we're basically billing them, over that time period, a third of what the total fee is.

Michael: So they actually end up making four incremental payments, one up front and then one at basically monthly milestones while they work through the process.

Elaine: Right. And our objective is to really get it done in those first few months. But your question, if we don't get the engagement letter back, then we have someone who will reach out and say, "Do you have any questions? Can I get one of the planners or investment managers to answer your question for you? Or is there a reason you haven't returned it," basically. And sometimes they'll say, "Oh, forgot." Sometimes we get them back right away. Sometimes it's, "Oh, it's laying here. I need to get it in the mail." Or, "Something's come up, we need to postpone this for a little bit." There can be a lot of things that happen, but the majority of them we'll get in the next short period of time.

Michael: And how unique is an engagement letter to each client? I imagine a lot of this is just kind of our template of, "We're Bedel financial and here's what we do," and there's a blank where you put in the fee, so you're going to type in the fee in the blank. Is it mostly kind of form letter that you've just found works over the years? Or do you still spend a lot of time taking all the data gathering information and going into some detail of, "No, here's exactly what we're going to do for you based on all the things that you said in the meeting that you want to spend time on."

Elaine: Right, it's sort of a combination of that. We always like to have the opening paragraph to make them understand we heard what they were saying, we understand what their needs are, and you might just have a paragraph that says, "We understand that you'd like to be retiring in the next five years and you've got this, this, and this going on," blah, blah, blah. You know, just kind of a really brief, in a few sentence-

Michael: Makes them feel heard, right? Like, okay, they captured the key points and reflected them back to me. Active listening 101.

Elaine: Right. I can't think of anything worse than getting something on such a personal service that's a pure form letter.

Michael: That's part of why I was wondering. There's a business efficiency to this. I can't write a hyper-focused, customized letter every time to spend more hours for the person who already hasn't said they're going to do it with me yet.

Elaine: Right, so in our case, kind of that opening paragraph or so is a little more personalized. Then from that point forward we kind of pick and choose what we're putting in there. But we may say, if there is something that's kind of unique to them, we'll have an income tax and insurance and investment paragraph, maybe long-term care will be there, maybe it won't. It sort of depends. And we might say in the estate plan, "We understand, we have copies of your estate planning documents. They were just done, we will review them, but now since they've already just been done, there's very little we may have to do." So we'll try and add a few more clarifying points and some of those things, but we do have the need to be efficient. So a lot of the same initial boilerplate. You pull it in and customize it with a few words here and there. That's kind of how the engagement letter gets put together. It can be a few pages. That's about it, maybe three pages, something like that, that kind of tries to explain the investment management process in the second part of the same letter.

Michael: So if they say yes, they sign this. And then is there still a follow-up of...I guess, do you still have to do a separate advisory agreement if you're going to do investment management?

Elaine: Right, yeah. That's the second-

Michael: But this one's the financial planning engagement.

Elaine: Right. But we also send our other investment management agreement with them as well. So they have to sign the engagement letter as well as the investment management agreement so that we're in compliance. But once we get that engagement letter back, they get called by our client service representative, and she'll basically set up maybe two more meetings for planning purposes a couple weeks in between so we can get them on the schedule to keep things kind of moving. But right away we'll try to get them scheduled within the next couple of weeks for their first planning meeting.

Michael: Okay. An incentive that you've created for yourself, because you want to move them through the pipeline because that's how you earn your planning fee that you've structured.

Elaine: Right, exactly.

Michael: So what are typical planning fees that you charge in this sort of structure?

Elaine: Well, again, we like being able to customize the fee based on how much planning they need to have done. So it can be anywhere from probably $3,000 or $4,000 on the low side to $10,000. It just depends on where they fall there. And that's why I like the project fee, because I want to make it reflect what we're actually doing for the client, if it's a lot or if it's a little. But we need to do it thoroughly and we need to do it well, and to give them good advice and good client service along with all of that as well. So yeah, that fee can vary, again, based on the number of issues and how complex we think they're going to be.

Michael: Okay, so as you do this initial deposit and the rest ongoing, is there like a percentage of the fee, we charge 10% as a deposit and the rest over three months? How do you structure that?

Elaine: No, we basically use $500. It's just flat, send us $500 so that we know you're serious and you really want to get moving, and then whatever the fee is, we basically as I said, charge a third over the next three months.

The Importance Of Showing Clients Why Financial Planning Matters Even If They Only Want Help With Investments [53:45]

Michael: Okay, and then if they want to move onto investment management, so do you kind of quote this all at once? Do people only sign on all at once? Can they do one but not the other? Do you actually give them the choice?

Elaine: We've kind of evolved in that area. I think we did kind of say, "We'll start with the planning, and then once we get to the point where we need to do something with the investments we'll talk about that." We don't do that anymore. We really do have it all started up front right away. So they're agreeing to both services. If we talk to someone and they only want financial planning, and there's no opportunity at all to manage money for them, we may try and refer them to someone who's probably a little better suited for them. It's just that our model right now is geared to doing both services for everyone.

Michael: Now, what about in the other direction? Do you get people that say, "Yeah, I'd like your help with my portfolio, but I don't really want to pay thousands of dollars for this financial planning stuff. I just want you to manage the portfolio for me"?

Elaine: You know what, that doesn't work very well. We have found that over the years when we've had a couple of situations where...And usually they've been related to maybe a client or something, "Oh, I don't need a financial plan. I just want you to do this. Here's what I want you to do." You try and manage it, but you really don't know what you're managing it for. I mean, and sometimes clients can't give you the best information. And those kinds of situations, if they're just looking for return or whatever they're comparing, it's not a good relationship for us. So we really insist upon doing some amount of planning for them. In other words, even if they say, "I think I'm covered everywhere," okay, just let us review it. Just bring us your documents, let us see it, and if we don't need to do anything, we won't. But it helps us know the direction you're going. We can better manage your money if we know what your money needs to do for you. Usually clients get that and they kind of understand that. And today, many clients have a brokerage account and they also have retirement accounts, and many of them aren't sure exactly how they need to be working together. So there are a lot of reasons for us to see the bigger picture so that we can give them better advice. And it just is a closer relationship. We know that when we can do planning for someone and really help them through a lot of difficult steps, as you know, when a client comes in, they have no idea which direction to go, and even just doing the data gathering meeting sometimes takes stress off of them. We have people leaving saying, "Oh, I feel better already. You're taking care of it now." And it just makes for a closer relationship with our client when we're doing their financial planning as well as their investment management.

Michael: Well, and I like the way that you frame it, that we can better manage your money once we know what your money needs to do for you, just to help people understand why the planning part matters as well.

Elaine: Well, and we really determine how much risk a person can take. I mean, I know a lot of people would want your client to tell you that. They may tell you one thing. So if, say, we're not doing a plan for someone and they come in and say, "Oh, I can take a lot of risk," and you're thinking, what do you mean by a lot of risk? Or when they say, "I can't take any risk." You'll find out how much risk they can take when they lose money and then they're back saying, "I didn't think I'd lose any money." So when we can go through a financial plan, we can guide the client to say, "Here's how much risk your portfolio can take because you've got time on your hands, you've got the ability to keep that portfolio invested in the stock market for five, 10, 15 years. So you can sit through a downturn in the market. We know that. So we know how much risk you can take. We know what that balance needs to be within stocks and bonds to make sure you're at a good place." So I feel better putting an asset allocation together once we kind of know all of that information versus just trying to pick one out of the air or have the client pick one out of the air. So another reason why we feel we need to do financial planning.

How Elaine's Firm Provides Deliverables Over An Initial 3-Month Period [57:46]

Michael: So what does that financial planning process look like for your clients? You said you kind of go through it in three months, that's getting billed incrementally every month. So I presume that means you've kind of got some milestones that you work on every month. So what does the planning meeting and deliverables process look like for you?

Elaine: Well, we usually start with more of kind of cashflow, budgeting, getting the cashflow together so we know what's going on with the client, what the expenses look like, what the assets look like, so a balance sheet, those types of things. And then you might also do a retirement planning calculation, education funding, insurance needs analysis, but some of those have to go over to the next meeting. We'll again divide some of those topics up so that if we do retirement planning and education funding, maybe next time we'll do insurance and estate planning. So you kind of allow it to build across. And so by the end of the third meeting or maybe by the end of the second meeting you'll kind of have the whole plan put together, any revisions will be done, and that type of thing as well. So it's a very thorough process. The investments get talked about right away as well. Even if we don't know what the new asset allocation might be, the investment manager can be there saying, "Let me show you where your portfolio is now, let me show you how it's allocated now as we look at it on a global basis," and they may even say, "Given what we see in the plan, here's the asset allocation we're going to be recommending." And then they'll bring back, "Here's the recommendation for the changes in the portfolio as well." We want to make sure they understand what we're going to do before we do it, but we take discretion when we do investment management because again, I think that's what they pay us for, to make the decisions, and if we're not making good decisions, then fire us. But I don't feel good going back to the client and saying, "Well, it was your decision. You said to invest in it. It wasn't me." We're responsible for every investment, but we want to make sure that they understand the direction we're taking the portfolio, and feel comfortable with that.

Michael: So does the process of actually getting the portfolio invested as well, does that end up being held in abeyance for a couple months while you're getting through the planning process?

Elaine: Not necessarily. We try and get that started right away as well, because they're obviously, unless they're already a custodian using one of our custodians, we'll need to have paperwork applications signed, transfer forms, and that type of thing. So that will get done sometimes in a separate meeting, but many times in that first meeting if we can tell that from the data gathering meeting what we need to do. So that will get done fairly early, to get that process started, and then we can get the money moved in, and by the time the money gets moved in, we're probably to a point where we're ready to start making changes to their investments. So we try and move them along together, I guess, is what I'm trying to say.

Why Elaine Started The Generation Next Portion Of Her Business [1:00:39]

Michael: And so can you talk to us a little bit more about the firm and how it's situated today? So you mentioned 24 team members. So how does that break down across the firm? Like if I were to draw an org chart, who's where on the firm for how you're actually structured deliver what you do?

Elaine: Well, we have a financial planning team and an investment management team. So each of those teams is led by an individual who is a practitioner themselves. So in both cases the head of the financial planning team meets with clients. We have two other seniors. So there are like three senior financial planners, and there are two support people. Their career is at a point where they're doing financial planning, creating the plans, working with the senior advisors, and I'll mention what else they get to do in a second, but so they're under the financial planning team as well. Then on the investment management side, we have the head of the team as well as two others that are senior investment managers, and then we have, again, two juniors underneath them, we have an operations team that has two operations individuals who basically work with our custodians. We have an administrative team, and there are one, two, three, four individuals in that group. The lead of that team is kind of our operations officer as well as compliance officer, and then has client services as part of her responsibilities, and the receptionist and things like that report to her as well.

Then we have a planner who is kind of doing the Gen Next service and heading that area. Generation Next, Gen Next, and the interesting thing about that is...I'm labeling them as junior people, but our four junior people, two in the financial planning team and two in the investment management team, also work in the Gen Next area. So they get experience being in front of clients to help their career path. So we have career paths for each of them and how they're going to get moving forward and what their steps are to become senior planner or senior investment advisor. And the Gen Next is something that we started in 2009. The sole purpose was to serve adult children of our clients. So college age to 35-40. So 18 year old's to 40 year old, kind of thing. For a couple of reasons. One, we knew that eventually they might inherit their parents' money, and the last thing we wanted to see happen was them to be paying off credit card debt. We wanted them to get involved in the process, and obviously secondly from a selfish point of view, we know well that if they're not using us as planners when money transfers to them, we're not going to get them, probably, at that point.

So it was kind of self-preservation for us as well to be able to work with that second, and sometimes third, generation within the family. So this is the interesting story here. We decided we were going to hire a younger planner to really focus on this and really get this started, and at the time my son, Evan, who was working with another firm in Ohio...To back up even further, when my son was out of college, he came to me and said, "Okay, if I want to get into financial planning, what do I need to do?" So I said, "Well, go to Texas Tech and get a master's, sit and pass the CFP exam, and go to work for somebody else." And he did all three.

Michael: The "somebody else" being a key part of that?

Elaine: Yes, go to work for somebody else. I was a little concerned with having him come work for me, especially right away. I just, for all of the stories you hear, all the horror stories you hear.

Michael: Is that about the ability to train and develop him as an advisor? Or the concerns about staff perceptions when the owner's child comes into the business?

Elaine: I would say both, because I wanted him to get other experience somewhere else, working for somebody else, that he would kind of get a feel for what the business looks like. He had been in our office in summers. During summers he would come in and do tasks for the office, which probably weren't very interesting. We do a much better job with internships now than we used to do, making something helpful and interesting and valuable to the interns. And so I just felt it was important for him to do that, and I just thing that's smart. I kind of picked that up from a lot of other family-owned business, regardless of business they're in. They always felt that if their child went somewhere else and worked somewhere else first, they would bring experience, knowledge, but also maybe a healthy respect for what it takes to run a business. So in 2009 we were kind of deciding we wanted to go this direction, and we started looking to hire someone, and my business coach at the time said, "Why don't you hire Evan?" I'm going, "Oh, no, no, no, he hasn't worked for somebody else long enough. That's not good." And my coach says, "Wait a minute. He's a CFP, he's got some experience now, he's the right age. Why wouldn't you hire Evan?" Well, my concern at that point was, what would the rest of the firm feel like? What would this mean to them?

And particularly there were a couple of people that I was afraid if I brought in someone who was already a CFP, they would feel like their career track might be cut off and that they wouldn't be able to progress in the same way. And just some of the other key people in the firm, I wanted them to understand this doesn't change anything. They're still in their roles and whatever, if I do this. So again, I had these conversations, and it was nice to hear from them, "No, I think you ought to hire Evan." In fact, the one that I was concerned about her career path feeling like, because she was working her way to become a certified financial planner practitioner, and I was worried that she would feel like she was going to get pushed back, and she said, "No, I'm not ready to do that yet. I think that's a great idea. We should do that. I think you should get him to do it." And that helped me quite a lot to go down that way and make that decision as well with some of the other key people when I asked their advice, "What do you think? Do you think it would work if I brought him in?" and they all said yes. So we offered the position to him, he joined us in 2009, and it was amazing the reception by the clients. When we started talking about Generation Next, it was like, "Oh yeah, here's their email, here's their phone number. Please call them." Because you know, as parents it sometimes is difficult to talk to your own children, your adult children at that point who kind of think they know a lot about finances. It's just not an easy conversation, many times.

So it was easy to get started with it, and I think the children of our clients really enjoyed having a planner that wasn't their mom and dad's and that was somebody their age who was kind of going through the same first job things, or recently had gone through that, maybe getting married, having that first child. So Evan was able to kind of connect with all of that. So now that we've even added the other individuals to that who are now using this a little bit as their training, their career path, because they've been doing plans, in the case of the financial planners, they've been doing plan. So now it's their opportunity to sit down in front of someone and kind of present that plan. And again, the younger clients in this case have less complicated issues to deal with right away, and really it's a little bit different in that it's, "Okay, what's the need today? How do we do this?" They communicate differently, they think differently. So the service is kind of getting formed a little bit differently. But it's been really successful. We've been really happy with it.

Michael: So what is the solution for them? What do you do? What are you doing for them and what do you charge them?

Elaine: Well, again, I kind of leave that up to Evan. He does charge for the plan, and he charges to manage their money. The planning piece of it may be a lot different. It may be, you know, more what we used to call modular planning, where you didn't do it all at once, but you did parts of it. It's whatever they need at the time. So there's a little bit more of that going on, and I really can't probably explain exactly what he does for a fee. He charges more of a set fee. It might be $1,000, $1,500, something like that, and then charges to manage money. Now, when we manage money we have no minimums with that younger group. We just want to get them started. In fact, what we do with families is we apply the investment management fee to the entire amount. So it doesn't matter if it's the children's accounts or the parents' accounts.

Michael: Okay, so the kids get householded up with mom and dad to set the fee and reach the break points on the fee schedule.

Elaine: Exactly. You said it better than I. That's exactly right. So that makes that a little bit easier, because again, assuming someday they're going to have mom and dad's money. So it makes sense to us to be able to do it that way.

Michael: And are you still limiting this to only children of existing clients? Or has this gone broader to others as well?

Elaine: It's gone broader, which is kind of interesting, because they tell their friends, "Guess what I'm doing now. This has been great. You've got to go and talk to them." So there's just this whole group of younger clients that we're working with. Now, are we making money on just those clients individually? Maybe not, but that's the future of the firm. Our younger planners are going to grow up with these individuals who are young attorneys and young doctors, and they're going to be looking at these individuals as they grow older and have higher needs than what they might have now, just like I did when I started a practice. You know, you've got your friends who are necessarily wealthy, but as you all progress through your careers, you've got them to work with now as well. So it's all about building the firm. As a little side note here, I've had opportunities over the years to have joined someone or have someone join me or buy me out or those kinds of things. And every time we looked at it, I just kind of decided it didn't make sense. It didn't make sense for the clients. It just seems that what we need to do is build the firm to a point where it can exist for many, many years and continue to serve the clients and continue to change ownership over time and keep people there and make it its own firm.

Michael: And it's funny. At XY Planning Network we have a lot of advisors that want to work with their peers, and the firm tells them they can't because we have certain minimums and certain target clientele. So they end up leaving to work with those clients that they want to work with, and so a lot of them end up needing to start their practices from scratch. And it's always struck me that frankly the, it would be so much easier to launch models like this in an existing firm like yours, because you already have children of clients and centers of influence and lots of other places that you can drive referrals and drive initial activity, and quickly grow the number of clients and maybe at least get to a point where it's paying itself and supports the future of the firm, and maybe even is a little cashflow positive and profitable for the business. So few seem to actually go the direction that you've gone with Evan and say, "No, let's just do it here," even though as you're finding, sure enough, clients send their kids in and their kids bring their friends, and suddenly you've got a whole base of young clients that you can grow with for the next 30 years.

Elaine: Right, and I don't think it will be long before they're profitable. You just have to watch how you're doing that part of the operation and that you're being as efficient as you can be when you're working with these young people. I think they will be eventually profitable, probably quicker than we think, but the first day they're not going to be. They just don't have the same need for a lot of things. But even going back to another comment, at least with our firm, I look at financial planning and investment management as one service. So all the fees coming in from all of that support all of the firm. If we were trying to do just financial planning and charge just a fee for doing financial planning and not doing investment management, it would be tough because you can't charge as much as what that planning is worth. As many hours as we put into that, clients would just not, we think, pay that. Now, I know that's changing, because people are truly understanding the value of planning more so now than what they did 10, 20, and 30 years ago. So I think that is changing as they see it, because I know there are some models out there that are great models that do a set fee for both financial planning and investment management, a fee that can be adjusted periodically. We still keep them separate, but if we didn't have the investment management, in other words, we said we're going to just do financial planning, I think it would be more difficult to have the profit that we can have by having both services together.

Michael: Yeah.

Elaine: I don't know if that makes sense.

Michael: It does. And again, we're now seeing a growing number of firms even within XYPN that are existing RIA's rolling this out, and most of them are going that similar path. It's basically a retainer plus AUM model. They're doing ongoing financial planning fees to cover the financial planning time, they're doing the investment management in their core process. They've already got the systems and the models and the technology and all the stuff to implement. It's like at the margin, if the financial planning fees at least cover the time, the incremental cost as a business to manage one more client's portfolio even if it's a younger up and comer client is not really very problematic for the firm, and is easier in many ways than it is when you're going out on your own and you literally have to figure all of this out from scratch for yourself.

Elaine: Right, and I know you've done an awful lot of research, as some others have, on fees and the direction of fees. And they very easily may be changing drastically in the next, short time, five years, 10 years, whatever. We're probably a little bit more on the old fashioned model yet, where we haven't combined them 100% even though...We have a little bit. It's an upfront project fee, then it's the ongoing updating that gets part of the investment management. So we're open to that. We have discussed it multiple times if we're doing our fees the right way, if we should do them a different way. I guess for now we're trying to be aware of it, but what we're doing works. So we haven't made any adjustments.

Michael: I'm still the one that's in the camp that says I think the industry actually has underestimated how persistent the AUM fee is going to be, just because of all the easy consumer psychology of having a fee that comes directly from the investment management accounts and it's always in the context of the accounts, and standalone planning fees are just harder. They're more salient, people are more cognizant of the pricing, which, all else being equal, tends to make them more resistant. Now, if you want to work with young folks that don't have piles of assets, you have to come up with something else. Just AUM doesn't work, at least not on its own, because there aren't enough assets there to support the minimum cost to service a client. So I'm a big advocate of alternate fee models just to reach populations that AUM can't serve. But I think we're going to be shocked to find how persistent the AUM model actually is for people that have financial assets that can be managed as part of the model in the first place.

Elaine: Right. I still think so much value is in the financial planning side. I can't say that enough. And you know, it's hard when someone comes in that's brand new, has never had a financial plan done, and you're going to charge them thousands of dollars to do this, it's hard for them to realize on day one what they're going to feel like even six months down the road, let alone year three, five, 10, and 20, where they really now find themselves in a situation where they're not worried about retirement because they've got it all planned out and they know exactly what their lifestyle is going to be, versus those people that are maybe their associates or their peer group that's panicked because they can't retire. That's when they're going to recognize the fact that, oh yeah, that financial planning really has paid off.

Or in times when someone passes away. Unfortunately if a spouse of our clients, one of them passes away, there is no financial issue around that at all. It can be emotional, and that's great. Let the spouses and the family work through the emotional, knowing that the financial part, there's no stress, there's nothing to be concerned about, we've done the planning. So we know what's going to happen. We planned for this, and so they can just sit back and deal with what they have to at the time and not worry about that added stress or, "Do I have to sell the house, what do I need to do now, where's the money going to come from?" We know all that. We can walk in with a client and, a lot of times we get a very early call on, "Here's what's happened," and we can say, "We've got it covered, don't worry about it, we'll meet with you down the road at the right time, and we'll have it done." We have pulled the attorney and the family into a conference room and basically said, "Okay, attorney, are you ready to do the transfers?" They go, "Yes," and we can do the transfers, and it's done. There's no digging around in file cabinets. There's nothing trying to figure out where is everything. We're got it all. We know where it is, and you know, that's the thing that I know people understand only when they find someone who's gone through it and there had been no planning and no organization, and they understand how much of a real burden that becomes on the family.

Michael: And I think, frankly, a lot of us underestimate the value of just helping people through a lot of those operational paperwork-y issues. It feels like that should be simple stuff, but it's scary and overwhelming for a lot of people, and helping them through it is a material value.

Elaine: Right.

Michael: So I do want to ask, you talked about not having Evan come into the business initially because you wanted to kind of create that gap and manage some of the potential perception issues. A number of years later, he came back into the firm and you had conversations with all the employees to make sure that they were comfortable with that. So now I know that Evan actually is a partner in the firm, and so can you share some of how that's evolved, what's happened to make that shift and how you think about it now?

Elaine: Mm-hmm. He's done a great job. I will start with that. You set rules, though. When he first joined the firm, it's like, okay, you can't call me mom, you've got to be much more formal in the office. You've got to understand, being a child of the owner, you're going to have to go that extra mile, you're going to be scrutinized a little bit more, it's just natural. That's just what's going to happen. And the other big thing is, no negotiation. All through his lifetime he was really good at negotiating. "No" was never a good answer for him, so he would always come back with, "What about this? What about this?" and he got real good at negotiating for his outcome. And it's funny when you've got a child that suddenly has become an adult and who has become very responsible, and who understands all that now. So there's been a great respect, I think, between the two of us that has come through, and he kind of is over strategy and finance as well as the Generation Next.

So he's interested in the business side of it. Not that my other key individuals aren't, but when I hired them it was, "I need you to be the best planner you can be or the best investment manager you can be." In fact, probably to my error. I basically said, "You probably don't need to get clients, because we've got plenty of clients coming in the door." We were fortunate with that. But that is one of the things we have to face now, is that a lot of the clients come through me, because I'm recognized in the community and I've done a lot of things in the community, and I speak a lot, those kinds of things. And if that's where the clients are coming from, we have to reverse that, and I think we've started doing that. There are a couple people in the firm, Evan being one of them, who are more out in the community a little bit more. Even though they've got their other responsibilities, they're out there talking about what we do, and generating recognition for the firm. So that's been helpful, but Evan's been very helpful in that. He really has the business sense or the important perspective of the business that he keeps in mind as he works through some of the decisions. So it's been good.

Michael: And so from the start coming in, you actually sat him down and had this conversation of, "All right, if you're going to come into the business, we need to restructure this mother/son relationship and how we communicate to be different, so no more calling me mom and you can't push back on me the business owner the way that you push back on me sometimes as mom, because this is a different dynamic"?

Elaine: Exactly. It has to be a professional relationship for everybody to respect everybody and for the others in the firm to see that. So yeah, we were pretty intentional about that. He did not report to me when he first joined the firm. I made sure that wasn't the case, so that he was working with and reporting to others. But I will tell you, having worked for another firm where he was doing both sides of the business, he was doing everything, that was helpful. He basically understood what they were doing and what we were doing differently. We were both fee-only firms, but what we were doing from a marketing perspective that maybe wasn't happening there, and was able to recognize some things that maybe we could do differently and some things that we were doing well. So I think that was good experience. One other thing that he did quickly, he got invited to be part of a coaching group. There's a particular coach in town who everybody in his little group of eight or 10, whatever it is, are all children of business owners, and they're in the business. And it's been helpful, I think, because they were able to talk through some of these issues that might come up when a parent is the owner of the firm. I think that has been helpful, and he got started in that shortly after he joined the firm, and he's continued that over these years, and I think it's a good place to maybe blow off some steam sometimes, or other times get good advice and see what's happening in some other situations.

Michael: So how many years was it that he was out on his own before he came back in?

Elaine: Probably only two.

Michael: Okay, so enough to get some traction in his career, and then came back.

Elaine: Right.

Michael: And how long was he in the firm before becoming an owner in the firm with you?

Elaine: Boy, let's see. Six years. About six years.

Michael: And he's not the only one that owned shares in the firm, right?

Elaine: actually what we have done is that he and I are the only owners of the firm, but we have created kind of a phantom stock plan for the other leadership team, parts of the other leadership group.

Michael: And so is the plan for you specifically at this point that he is the successor, he will transition into full ownership of the firm over some period of time as you plan to retire? Or is this just, he did the things to make partner that people do to make partner, and who knows if he's going to go off in this other direction at some point down the road?

Elaine: Well, we did both the phantom plan for everybody else as well as the ownership for him at the same time. But I'm not saying that there won't be another partner coming in at some point in time. But it just made more sense, given the familiar situation, that he be an owner versus in the phantom stock plan. That doesn't mean that...You know, the plan can be convertible, we can make some of the phantom stock shares real shares. So there are things like that that can happen. I think it gives us an opportunity to see what makes sense for the firm moving forward, what kind of leadership we need where. But I have a great leadership team now and I'm pleased with all of them. So things can change in the future as to what they are now.

Michael: And how did you message it to the employees at that point when he's becoming an owner? And I'm sure employees are looking at that and starting to ask questions like, "So does this mean you're about to go? And how long until he's taking over?" We live in a firm with a healthy number of employees as well. It doesn't take long for the rumor mill to start going.

Elaine: Sure. Exactly, and I probably don't have the inside scoop on all of that, but-

Michael: But at least from your end, how did you try to message this to make everyone comfortable with the transition that was coming?

Elaine: Well, first of all, everybody knows I love this business and I probably will never retire. But again, in my mind, I'm not ready to retire. But at some point in time, I'm going to wake up in the morning and say, "Okay, today's the day. I'm done, I'm good." And I know it will be that kind of, "Okay, we'll move onto something else." But I think I do have to feel that the firm's in a really good spot and that our clients will be in a really good spot with whatever's happening next. So at the time, I mean it wasn't that we announced it to the entire firm. In fact, the leadership team may be the only ones...Others have probably figured it out, but the leadership team may be the only ones that know of the phantom stock plan as well as the ownership that Evan has. Now, that's all going to change when everybody listens to your podcast, which is fine.

Michael: Yeah, I was going to say, we kind of let the cat out of the bag at this point.

Elaine: Because I think we'll probably be doing other plans as other employees move into a level where we want to make sure that we can retain them, that we'll want to have some other type of plan if not coming into the same plan, a second plan that would fit the younger employees as well. The message was, you know, we're trying to continue to grow here, and I want everyone to understand their value to the firm and share in the growth of the firm, and that's what I think this plan will do. So the plan is really one that will be in place for 15 years, 13 I guess now, 15 years, and at that point in time a variety of actions can be triggered, and there's a vesting process within that plan, and those kinds of things. But it will allow my key employees to create net worth and value in the firm. Now, is that better than being an owner? For many people it would be. There are certain responsibilities of ownership that some people don't want.

Michael: There's a lot of stress that comes with it that you don't always want.

Elaine: Oh yeah, there's stress. We have, what if the stock market goes down, as we all know it will again? I think they all recognize when the markets have gone down and our revenue has gone down, I was the only one that took the hit. Nobody else did. Everyone else continued at their salary. We didn't lay people off, we didn't change anything. And I think they understand that's part of being an owner as well, that you're the one that takes the hit. You get the good years as well as the bad years, and sometimes people are uncomfortable with that. They don't want to be in that kind of situation that they have to do that. We've never been in a position where I've had to put money into the firm as far as lending money back or even borrowing money from a bank. We've been very fortunate. And that's a responsibility that falls on the owner as well if that comes up. So ownership can sound really nice, but there's a whole set of responsibilities that people have to be willing to bear as well.

How The Financial Planning Industry Has Progressed And What Can Be Done To Encourage More Females To Enter The Industry [1:30:20]

Michael: So as we come toward the tail end here, I do want to ask you a question or two about the broader advisory industry as it exists now. So you still went a pretty incredible path in starting your own firm in 1989 as a fee-only advisor, as an RIA, as a female when very few people had any of those characteristics when they started their firms, much less doing all of that at the same time. So a number of years later here will still struggle with bringing more women into the industry, the number of CFP professionals that are female has been stuck at 23% for about 15 years. Many of those are not in business ownership positions as you are. So I'm just curious, from your perspective, what is it we're doing so wrong in the industry that we continue to struggle to bring women in and we continue to struggle to have women start advisory firms, and what do we need to do differently and better to try to move the needle on this?

Elaine: You know, that's a mystery because I really do think financial planning in particular is so well-suited for women. I really think that women tend to have that listening ear a little bit more, perhaps. I mean not taking, I don't mean to be generalizing here too much, because I know many men have great talents in being financial planners and financial advisors. But I think women could be well-suited to it. I think we follow up, we like details, we just empathize maybe even a little bit better with situations that happen with families, and can be good at that.

Michael: Well, my wife's certainly better at it than I am.

Elaine: I don't know about that, but I was a math major. So I came through life liking numbers, and for some reason some women think they don't like numbers. I don't understand that either, because what I liked about math and numbers was that there was always a right answer. Many times there was no gray, it was either yes or no. And I like that part. You could figure out the problem. So I don't know if that's the reason or not, if they feel like it's too much of a commitment of time or that the career isn't as interesting to them. I don't know what we do, because it is pretty astounding that, you know, almost the entire time I've been in the industry we've had anywhere from, as you said 20-23% female. I know we're working hard to help women see the benefits of it, you know, is it flexibility that's needed. I will tell you, I had no flexibility. Well, I guess I had all flexibility. As someone once said, I could work any 24 hours out of the day that I wanted to, which meant 20 of the 24 hours of the day, any 20 of the 24 hours that I wanted to. So if you're a business owner, there comes a lot of those kinds of issues, that it is a time commitment. People who try to do our business part-time, or try to limit their practice, I mean I'm not sure that that's always healthy. If you say, "I'm going to limit my practice to a few clients," well as soon as you lose one client, how do you replace that client? It's kind of a never-ending battle there. Plus I think if you say you're limiting the size, many times you're not staying on the cutting edge with a lot of things.

You're at that point saying, "Okay, I'm just going to let my firm sit here until at some point in time it goes away." I think from my perspective, my view, I need to keep pushing forward, I need to keep building the firm so that it will continue into the future. We bring a lot of women into our business. We have a lot of women financial planners. In fact, the majority of our financial planners are women. Unfortunately a majority of the investment managers are men. We have a tough time finding women who have gone the CFA route and who are interested in having client contact as well as investment analysis and research and implementation. So I don't know what the answer is. I think the more we talk about it, the more opportunities we give women to kind of see the inside of a business, but the young women that we got right out of the college programs have been great. They've been terrific, and they're going to be great senior planners as well.

Michael: So as we wrap up here, this is a show about successful advisors, and one of the things we've seen repeatedly through the episodes is that just the word "success" means very different things to different people and their businesses. So as someone who's built what I think most would objectively call a very successful advisory firm, I'm curious as you look forward from here, how do you define success?

Elaine: It's kind of interesting. I've always told the firm that my success would be when I'm not actively involved in the firm any longer and someone comes up to me on the street and says, "Oh, I love working with your firm. I just love it, I'm getting everything I need from it." That to me is success. That means that I'm not even involved. The client doesn't know that I'm not there any longer because they're getting such great service from the firm. That to me means that my firm got launched. So I need to tell you a little bit about what my current situation is. I was just appointed by the Governor of the State of Indiana to serve as President of the Indiana Economic Development Corporation. And what we do is we look to create jobs in Indiana by providing tax incentives for existing businesses to expand or businesses from around the country or around the world to want to establish facilities in Indiana. We provide incentives to encourage them to do that. Very interesting, a lot of stuff I had to learn, totally different world. That opportunity came to me when the Governor-elect, at the time, maybe December 1 asked if I would be interested in considering that position. And of course it was like, oh my gosh.

Michael: That's not a part-time gig, kind of thing?

Elaine: It is not. It is a fulltime responsibility, and of course the first thing that came to my mind, can I even do this? How could I step away from the firm in order to serve the state of Indiana in this way? I mean it was quite an honor to be asked. So I really thought about it a lot, and I'm kind of a person that, I really have to think about it, before I even ask anybody else about it I've really got to think hard about it and ingrain it to myself. My biggest concern in doing anything is, "What about the firm? What would the firm say?" So I finally got the nerve to say to my staff, my senior leadership team, I said, "Okay, here's the situation. What do you think?" They were all ecstatic. They said, "You've got to do it. This is great. This is something that would be great for you to do, and I love the state of Indiana. They know that, and they said, "You need to do this." So that was helpful to hear that they were all very positive. So eventually, obviously, I took the position, and I started in that role February 1, which meant I'm not going into the office every day. Now, I am trying to keep up with emails and things like that in the evening, and that type of thing, but in a way, the firm is at a really good place for me to do this. I've been working with my leadership team for five, six years now, but every time we meet and we have great discussions on things, if I'm in the room the decision falls to me.

Pretty natural. So this was an opportunity for them to kind of put that contingency plan in place that said, "What if Elaine gets hit by a bus? How do we keep the business running?" So I didn't get hit by a bus, which is good news for me. I'm a text message away if something comes up, but they're given this opportunity to really exercise their leadership skills and to spread their wings a little bit, and to make decisions that are impactful to the firm. And in a way it's been a blessing to me to have this opportunity to do the role, but also to see what it looks like for the firm. Now, I will tell you there was huge separation anxiety. When I started this role in February it was like, "Oh my gosh, what have I done? I love that business, and here I am over here in a totally different world. But even though it was a little bit difficult at first in this new world, and with that separation anxiety, it still is the right thing to do. It's the right thing to give the firm the opportunity to kind of figure out how to move forward on their own. Now, I'm going to do this role for a few years. I don't know how long, but I'll be back. At least I think I'll be back, but it's just wonderful to see how well people are doing and to be able to test this. I didn't die, I didn't go off the face of the earth, so I'm still here, which is nice. It can actually maybe give the clients a little confidence as well that I'm still around, because clients were thrilled that I was taking this opportunity. I got lots of very nice emails when, of course I let all of them know before the public announcement was made, and I got these wonderful emails back. So it's been all around kind of an interesting situation. So I think when I've talked to people I've said a couple of things.

Form your leadership team early, and work with your team so that when opportunities like this come up, you can take them, or, more seriously, if something does happen to you as the owner or the leadership in the firm, and you're not able to come in, it's not when you retire, it's what if you get hit by a bus and can't come in on Monday, that you've got things in place that can automatically move forward. And it's being able to see that and to be able to experience the outcome of having worked in those ways. So I think those things are important for firm owners to do now, and to be planning not to retire next year, but to retire in 10 years and what does that need to look like and what do you need to do between now and then.

Michael: It's kind of a practice retirement plan within your own business.

Elaine: Yeah, exactly.

Michael: Well, very cool. Thank you so much for joining us and sharing this story and journey about how you've built your firm. It's really an inspiration.

Elaine: Well, you're welcome. It's one of those things that I was fortunate to fall into it and have really enjoyed it. So it's never been a day of work in my life. It's all been really fun. Not that it's all been easy, but it's really been a joy to be part of the profession.

Michael: Well, wonderful. Thank you again for joining us.

Elaine: You're welcome. Thank you.