#FASuccess Ep 421: Integrating Tax Preparation Without Hiring In-House CPAs To Bring More Tax-Focused Value, With Daniel Friedman

Resources Featured In This Episode:

• Daniel Friedman: Website | LinkedIn
• Envestnet
• Arkadios Capital
• Robert Cialdini
• Reflections on the Art of Living: A Joseph Campbell Companion by Joseph Campbell
• Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company by Andrew Grove

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Full Transcript:

Michael: Welcome Daniel Friedman to the "Financial Advisor Success" Podcast.

Daniel: Great to be here, Michael.

Michael: I appreciate you joining us today and a chance to dig into this, what to me is like a really interesting ongoing convergence of tax and financial planning. We've always had taxes as part of the financial planning umbrella, the 5 or 6 domains of insurance and estate and investments, and retirement. Tax has always been in that mix. But I feel like there's a shift over the past 5 to 10 years where more and more advisory firms are getting deeper and deeper into the tax planning. Sometimes it's not even just the tax planning, but outright incorporating tax preparation in their services.

We're just queuing up the latest version of our advisor productivity study and finding in our results almost 1 in 6 firms now are including tax preparation in their offering to clients, either doing it in-house or partnered externally, but bundled together. And I know you have very much lived this intersection of increasingly tax-oriented offerings that kind of blend together the tax and financial planning. And so, I'm excited to talk about how this has evolved for your firm as you're going deeper and deeper and more tax-centric in the work that you do.

Daniel: Yeah, definitely. It's been part and parcel and, at times, one of the keys to the relationships that we have with folks.

What WMGNA Looks Like Today [05:13]

Michael: So, as we get started, I think I'd like to just hear from you, the advisory firm itself as it exists today. Just help us understand the business, what you do, who you serve, and then we'll kind of get a little deeper into how really does all this work.

Daniel: Yes, absolutely. So, the folks that we serve, it's sort of a barbelled approach. We serve folks that otherwise would not be able to perhaps get financial planning services solely under an AUM model, the HENRYs [High Earners, Not Rich Yet], if you will, as their lives are becoming a bit more complicated. Higher incomes, not a ton of money outside of retirement plans, but there are some tax issues now of whether it's on should you do Roth contributions, traditional, some tax planning around perhaps 529 plans per your state. And so, those folks who are starting out.

And then the more traditional folks that are, we would say, have accumulated significant amounts of money and are in the ‘red zone' for what we call "Restylement", where there's going to be some changes in the next 5-10 years. So, mid-career approaching that, "Hey, you know what, maybe look at restyling, making a change." I think those would be the 2 demographics that we are focusing on now. Of course, we've got people all over the place, above and in between those two spots.

Michael: And can you help us understand a little bit more? Just what is restylement in your nomenclature? Is this kind of your word and label for retirement and like an alternative way to think about retirement?

Daniel: Yes, yes. Well, many moons ago, we retired the word retirement because that conjures up sitting around and waiting for to go on to the next stage, which is not here anymore. Most folks, I think, dramatically underestimate their mortality. They go back to, we all do, how we grow up and how we grew up, and that will shade a lot of our financial decisions, among other decisions. So, restylement is the next stage.

So, we were talking to someone, a rather 20s, 30s executive at a tech startup that went crazy during the pandemic and is making several hundred thousand dollars a year, long-term incentive compensation. She's looking at leaving, though, because it's taking a toll on her. Yes, they love her, and the money's great. So, we're now looking at her restyling into something else. There's a family business opportunity. So, that's what restylement is. It really is planning for the next stage of your life.

Michael: Okay. So, now help us visualize overall. So, you've got clients that are kind of barbelled here. You've got the proverbial HENRYs at one end. Higher income, in need of planning, not necessarily fitting the AUM model. And then folks at the other end that are closer to retirement have more assets in kind of the sweet spot for restylement conversations. So, how many clients are there, or approximately how many clients are there of each? Where do they sit on this barbell?

Daniel: Well, one thing is in grasping exactly what we do sometimes, I have to take a look at everything.

Michael: Sure.

Daniel: So, the subscription is not a replacement for AUM revenue. So, we also have a significant investment management services that are part of the suite of services that subscribers can avail themselves to. So, the other end of the barbell, often they bring over significant assets. Once they become a subscriber, we put the investment policy together, looking at the tax placement, all that good stuff. And if they want to hire us to do it, then that's a separate conversation.

Michael: So, in your world, the HENRYs run on a subscription model, and the restylement clients run on an AUM model, and people basically go from one to the other, like the HENRYs go from subscription to AUM as they accumulate?

Daniel: No, the subscription is the folks that avail themselves to the AUM for their investment management. And we are looking at, and it may be a separate conversation, "You could connect me to someone who's managing money." We don't manage the money. We use Envestnet. Excellent, great financial technology. We have open architecture there through our own RIA.

So, subscribers come in, a financial plan is done. They sign up for the services. Again, include your taxes. And then we go about implementing the plan. They want outcomes. They want tangible things done. And so, the AUM is there throughout. Even the HENRYs, they may have an inheritance comes along, or we want them to diversify even if it's $250-$500 a month into a taxable account to start to build up that. So, though it's not a requirement, and sometimes, and in many cases, the AUM revenue to the firm is equal to or greater than the subscription.

Michael: So, how many clients is it in the firm overall?

Daniel: So, we have capacity for 100 subscribers per advisor. And so, Brian and I, we're usually hanging out in that 80 to 90 range. And we brought in a really bright, great guy, good person, knows everybody who came from a wirehouse 5-6 years ago. So, he has a lot of investment only, I would say investment sales clients, where there's sort of the financial planning and it was sort of nebulous and converting them to subscribers. We thought, and I have in my notes to talk about challenges, we thought that it would be easy for him to, after 20 years, go to his folks and talk to subscriptions. So, he's not at that 100 subscribers, but he's got double the investment AUM that Brian and I have. So, we're working on that. So, we could handle 100 subscribers per advisor.

Michael: So, how many clients do you actually have in the firm now?

Daniel: Subscriptions, I would say we probably have 200.

Michael: And then, it sounds like then you have a few more clients who are purely AUM, investment-only and not subscribers.

Daniel: Yes. Yes. And that's primarily through the...for a long time, it was just Brian and I, and we were a little trepidatious because of that. So, we're sort of still learning to fly on that. And we recently brought in a G2 "Tax-Out" advisor specifically who was again at more of a sales office investment. That was somewhat...he's a CFP, somewhat constricted on what they could do financial-planning-wise, what they could charge for financial plans. He came over. And so, we're going to get him up and running. He's sort of apprenticing right now, the first 6 months or so sitting in on meetings and things like that.

Michael: And what's the AUM base then? Because it sounds like you've got 200-plus subscribers, but it's a sizable asset basis as well.

Daniel: I would say the AUM is 270, something like that, $270 million.

Michael: Okay. And can I ask what's revenue overall? Because if you've got mixtures of AUM fees and subscription fees, I'm just trying to visualize how they come together.

Daniel: Yeah. Gross revenue is $2.5-$2.7 million. And sometimes we got to share it with some of our friends out there.

Michael: I was going to say if you're using Envestnet's TAMP [Turnkey Asset Management Program] platform, then a portion of fees have to go to those sort of advisor-managers as well.

Daniel: Oh, yeah, yeah, yeah. I'm just saying we do also have…our philosophy on the investment piece is independent, open-minded, and opportunity agnostic. And while almost all of our new money, and new, probably the last 10 or 15 years, has gone almost exclusively through the unbundled, every dollar has a name Envestnet space.

We still have a relationship with broker-dealers that can appreciate the again hybrid. I don't really consider ourselves a hybrid, but we want to be able to until things get to the place where we can push more through, and I think that's happening through the unbundled non-broker dealer space.

There's opportunities where we've made money, folks have made money. Private placements, 529 plans. It's really often a convenience. If a subscriber has a business, we often take over the retirement plan, make sure it's actually a benefit for the employees, make sure we're maximizing all of the opportunities. And then our TPA strategic professionals do a bang-up job on all that stuff.

Michael: And then, so who's the broker-dealer that you tie in for the BD side of the business?

Daniel: Well, we just... And we can have a long conversation on broker-dealers. I let go of my registration many years ago. Brian and the 2 other advisors are registered, and we just switched from Osaic, and a lot of great experiences and friends there, to a...we were really with Triad. Triad then went into advisor group to Osaic, to Arkadios [Capital], small broker-dealer out of Atlanta. They are the predecessors of Triad. So, some people that we talked to. And Triad was a broker-dealer that catered to and basically didn't leave us alone on our RIA but didn't require corporate RIA relationships like an LPL would. And I think Osaic was going to end up going down that line anyhow, which would not work for us.

Michael: Okay. So, the big thing for you was, "You have to let me be my own RIA. Like I'll put the brokerage business through you for whatever brokerage I'm still doing, but y'all can't be up in my RIA."

Daniel: Right, right. And the compliance and again, follow the letter and intent of all rules and regulations. It's always been our mantra. We also do not... The broker-dealer gets a taste on the Envestnet part of cost of doing business. "Hey, you want to do your broker-dealer stuff through us," so we give them a little. But as far as our subscriptions, they have nothing to do with it. We have our own RIA consultant. Of course, any marketing stuff that we do goes through them. But 99% of...I'd say 100% of the stuff we do gets approved in a day because it has nothing to do with investments or FINRA stuff.

Offering Subscription-Based Planning With A Money-Back Guarantee [19:55]

Michael: So, now help us understand the fee structure and how this works. What are the subscription fees? What are the AUM fees, and how does it blend together for clients?

Daniel: Well, I read a...or saw a study Invesco did, and investors hate the word fees. So, I don't use that. So, the cost of a subscription…the preponderance are between $575 a month and $225 a month. And that's based upon, since it includes the taxes...

Michael: Meaning includes tax preparation?

Daniel: Tax preparation. We do tax approximations, the sourcing, the whole nine [yards]. So, we will often price out something that we can tell by going through it. Schedule C. There's maybe some more complicated things. We're going to have to break out ESOP [Employee Stock Ownership Plan] options versus this. The accounting work may be a little more. So, we would send it out to our strategic professionals, and we've worked with them. So, we're not wed to it. And so, sometimes the first year we live with it, if it was maybe a thousand dollars. So, we go back to the subscriber. And so, that's a key piece of it.

The other piece is how much time and is this something that is reasonably affordable to get the relationship going? So, a young family that's paying $225 a month often has a lot more work to do. There may be no wills. There may be no trusts. We send it out to our insurance people to make sure life insurance, disability. We often will go through open enrollment to see what benefits we can get subsidized through that. So, there's a lot more time and energy that goes into that.

So, if there are subscribers who have significant monies, again, no obligation to bring it over. But many times we know that part of the reason they want someone to take care of everything, and they understand that we're in business and we're not shy about it. Everything that we touch, or everything our strategic professionals touch, we believe we're getting you amongst the best terms and conditions. We will detail every dollar, but we're going to get paid, and it's a great deal for what you're getting is our philosophy.

You want to do it yourself. That's great. We can work with you. We'll have the quarterly call. Here's what you need to do. You log into your account. You go ahead and follow what the rebalance is. And then we can also evaluate the subscription based upon the liquid net worth of someone. But since it's an individualized thing, we individualize the costs that are associated.

Michael: Can you help us understand a little more, though? Just how do you get to a number, just a person walks in, between $225 and $575 a month? That's a fairly sizable range. It's a thousands of dollars per year range. So, how do you actually price an individual client? What are the factors? What are the inputs? How do you arrive at a number?

Daniel: Well, the ones that are higher usually are higher income earners. They may have more complicated pay schemes. There may be, if there's 2 couples working. Let's say we're here near ESPN, one is at ESPN and one is at Pfizer. We've got clicks at both of those. There's a lot of complicated employee benefit, especially on the compensation side. It takes us some time to go through. Then they change things. Then they get VERPs, voluntary early retirement offers. So, we price that in. What we don't want to do is nickel and dime people. And every 2 years we look at it. So, I know you're looking for a nerd's eye, like some chart that we could...but that's not necessarily how we do it.

They may have a ton of accounts that are going to take a lot of consolidating. Old 401(k) plans. Again, we're not marking up the AUM by any stretch on that. But then often we have to get on phone calls with them to make sure it goes exactly how we want to do it. Are we leaving money behind in a 401(k) plan because they're 55, but not 59 and a half? So, a lot of the when we do the plan, it's almost like a subscription proposal. And so, we often price it in real time.

We also give a 12-month ‘wow' money-back guarantee on the subscription. Less if there's tax work. We attach that. Where if you're not wowed, where if you don't naturally want to tell other people what we're doing, we'll give you your money back. That's sort of how we were mentored and coached up when we started the whole thing. I hope that that gets you close to where we come up with this.

Michael: So, my understanding is you talk to the person and you figure out a number. There's no formula. There's no calculator. You have a conversation with them, and you make a judgment call about where they need to be on the spectrum.

Daniel: Yes, that's correct.

Michael: And if it turns out you're off, you revisit in 2 years and get it back to where it needed to be.

Daniel: Well, if we're seriously off, every year we have a new agreement. And I think it's not a matter of shy. It's just being straightforward. It's like, "Hey, you know what? We thought, and the accountant thought it was going to be $750. It ended up being $1,250. And you didn't do anything wrong. So, we're going to adjust this year's to cover that."

Michael: And I'm curious, does anybody exercise the money-back guarantee? That's always a scary thing to put it out there.

Daniel: There may have been one years ago that Brian was working with. But 2 subscribers in 30 years have asked for... And again, I think it's good business. We parted company as friends. They thanked us. They just figured that you know what? They're doing all the work. Who knows what's going on? We always take it like we did something wrong. There could be something going on in their household that we don't know about, and nor do we need to. And folks who are dissatisfied with a service. And if you give someone their money back, it's an easier pill for them to swallow.

Someone who is not satisfied or unhappy with the service, regardless of financial or otherwise, they'll tell 20 people. If they're wowed, they'll tell 3 people. So, we don't like to be on the exchange.

Michael: Be on the back of it.

Daniel: A minus 17 exchange.

Combining A Subscription-Based Planning Fee With An AUM Fee For Investment Management [28:07]

Michael: So now how does the AUM side of the business work? What is that fee schedule?

Daniel: So, at a million dollars, first million dollars will not exceed generally….and again, there's always exceptions, but the rule is will not exceed 1% all in, everything: us, what it costs for Envestnet, what it costs for the money managers. And the reason is that 80% of what we do, strategic ETF strategists that you can't get direct from Vanguard or State Street, Symmetry Partners following everyone's variation of modern portfolio theory. BlackRock uses...they're more U.S.-large than, say, Vanguard's 100% CRSP [model portfolio]. And those are very low cost. The underlying investments are very low cost. And so, we detail all that out. And then as it goes up, it goes there's discounts families that we have. We household everything, even though it's not necessarily one address.

Michael: How steeply do you break point? What does it step down to as assets rise?

Daniel: Well, let's say after $2 million it's another 15 or 20 basis point discount. And then when you get up to that over $5 million, it goes down considerably, probably in the range of 60-65 [basis points], maybe all in.

Michael: So, does that mean you'll end up with a different fee for different clients? Because client A, you're charging 90 basis points because the underlying is only 10 bps, but client B has different stuff that's got a cost of 30 basis points, so you're only going to have a 0.7% AUM fee on that client.

Daniel: And part of it also is on the administration of the accounts. So, if there's a bunch of accounts for whatever reason. There's a trust account. Some couples, blended families, they want some money here and an individual account for each of them, a joint account, then there may be a joint TOD [Transfer On Death] account. We factor that in into what the costs are. So, someone could have a million dollars in 4 or 5 different accounts. They may be paying our... We may be making a little more because there's more time and energy on that, on the investment management side,

Michael: I guess I'm just trying to envision from just the sheer billing and setting fees end. Does everybody have the same 1% fee, and you just eat the underlying Envestnet costs, or you really...

Daniel: No, no, no.

Michael: ...each client is going to end up with their own AUM fee because you have to back into what your fee is after you get to the underlying…

Daniel: The 1% at a million is everything. That includes us and Envestnet.

Michael: Understood. So, I'm just trying to envision, like, when you run billing, 100 clients could have 100 different fee schedules because you have to reverse engineer the fee for each one.

Daniel: Here you go. We don't do the billing. Envestnet does it.

Michael: Okay. And so you can program into Envestnet to say...

Daniel: We just fill it out on there. Exactly. Here's...

Michael: ..."I need the all-in to be 1%," and they'll remit to you whatever your piece is.

Daniel: Right. Well, it's broken out on the SIS [Statement of Investment Selection]. Again, I know you like to get technical. I'm left-handed, so whenever I get technical, I get a rash or something. But yeah, the SIS and the service team, they're experts. I will say, "Here's what the house needs to make and tell me what it will cost us, what it will cost the subscriber if the house needs to make 70 basis points on managing all their money."

And then if it clicks because we have a certain manager, then sometimes I will get on the phone with my friends at Envestnet and say, "Is there something that is as suitable?" Because they've got 1,400, or they got thousands of... We've got anything that Envestnet has. And is Envestnet perfect? No. Any large financial institution has a problem with their no-customer-service customer service, same with custodians that we work with. So, yeah, we're able to back it in in that way.

Michael: Okay. And so then I'm presuming clients end up essentially having 2 fees. There's a subscription fee for the planning work because you're running those subscriptions through your RIA. And then if they've got investments, whatever they've got, that's a separate AUM fee that runs through Envestnet, and they facilitate your billing.

Daniel: Comes right out of their account like any other AUM. And the subscription, we send a bill payout at the beginning of the month. Again, compliance. We got to make sure so they've got time to accept the draft. So, it's basically an ACH from their checking account to the RIA's WMGNA checking account. And then the Envestnet goes to...they go ahead and pull the money from Schwab is who we're with right now. And then, that then gets sent to the broker-dealer because that's our relationship with this hybrid broker-dealer, Arkadios. We just we're in the process of switching over now. And then they send us the money.

Michael: And then the tax preparation fee side, is that a separate cost as well, or do you just...

Daniel: That's included in the subscription.

Michael: Okay. So, kind of functionally, you've got a subscription fee of $225 to $575, and the tax prep comes out of that. You've got an AUM fee up to 1%, and the underlying managers come out of that. And so...

Daniel: Yeah. Again, there are some cases where it's more than 1% all in. Very, very rarely. So, let's say not to exceed 1 and a quarter [percent].

Michael: Because it's a very specialized strategy.

Daniel: Let's say not to exceed 1 and a quarter all in on the first million.

Why Most Clients Choose To Have WMGNA Manage Their Assets [35:38]

Michael: So, I think you said you've been doing the subscription side for almost 30 years. So, as this has evolved now, I guess I'm just curious, in practice, do you know of the...you said $2.5 to $2.7 million of revenue. How much is subscription, and how much is AUM? How has the split evolved?

Daniel: About 20%, 15% of our gross revenue comes from subscriptions. Maybe $250,000-$300,000. And I may be off a little, but let's say it's $350 [thousand]. So, the other $2 million to $2.2 million, whatever it is, is from either AUM or broker-dealer or commissions.

And so, the vast majority of the other gross is from AUM. And then there's probably a handful of 10, 12 retirement plans. Right. So, here's a guy who's pumping subscriptions as the be-all and end-all. But there's the preponderance of the revenue is through AUM. Keep in mind, we are looking at other ways of perhaps incorporating…so, you have a million dollars, and we know it's going to be $8,000, $10,000 a year, all in, of incorporating that into the subscription. And so none of the costs come out of your account.

Now, getting there with Envestnet or in most custodians...we won't talk about how custodians get paid, that's a separate conversation. They may not. But we've had conversations with Envestnet as far as being the guinea pig and saying, "Okay." Now, the account goes down. The subscription doesn't change. We started with a million. Again, you can ask about having it both ways, and I'm fine. Hey, you know what?

So, we are looking at that. Right now we're just not there as far as the boots on the ground making that happen. But it is in my mind, and I tell people that the AUM is for people who are in it and are comfortable. We don't have to have that conversation. For newer people, I sort of say, "This is going to be good. It's not great, but we don't want great to be the enemy of good. We are working towards bifurcating all of these things." And the logic behind we didn't work any harder, and the Vanguard went up 30% or 22% trailing, so we made 22% more. Conversely, we weren't asleep at the wheel if it goes down 22%.

Michael: So, I'm struck. You started this as a subscription business many decades ago. Was it your expectation that this would grow into being a kind of majority AUM revenue business after a few decades of growth and compounding? Was that the goal in the plan? Is that just how it turned out? Was that the expectation?

Daniel: We thought that the subscription services would be as ubiquitous as Netflix is now. And it isn't. The original one was $75 a month. Ka-ching. Ka-ching. Ka-ching. Ka-ching. Ka-ching. And then we realized that A, you need a lot of $75 a month. And they're then going to most people are not going to implement it themselves. If they're seeking out a financial planner to begin with, then their DNA isn't the do-it-yourselfer.

Michael: So, it sounds like ultimately just clients who wanted you for the advice disproportionately ended up wanting you to help them implement, or you wanted to help them implement, or they were going to implement another screwy, less-than-ideal ways, and no one had a problem paying you for the implementation either because everybody is going to get an AUM fee or commission or whatever it is anyway.

Daniel: Yeah. You know what? We had, as we grew, one of our first relationships was someone who had an energy technology company. They grew to 300 people. He signed up for his personal taxes. Again, we know what our limitations and what our strategic professional…most of our CPAs farm out the audit work and they needed audit work because of their banking relationships. So, we're like, "If you're happy with your existing audit people?" He moved sight unseen to a new accountant.

So, one of the key things as far as the subscription and building your AUM or building out your investment revenue is who...if you come across to people proficient in their taxes, it's very powerful. It's like, so we're doing the taxes, and we do not come out with economic forecasts. We don't have an in-house, and we tell people to avoid that. I would. Show me the GIPS compliant of your live money based upon all your calls, please. And there's no one out there. There's always someone who knows where to be and when. Just never the same person. And so we say that.

And so, that's what ended up happening, just same with auto, homeowners. We got strategic professionals. We looked at perhaps partnering up and/or buying an agency. So, we would like to get a piece of everything that we're doing. Obviously, and we tell people that. And they're like, "Fine, we'd rather pay you." So, obviously, we bring in attorneys into the office. We have a tax-out approach to our strategic professionals. And Jerry Ballinger, one of our mentors, "Call on people that are raising their hand." If I have to talk an attorney into saying, "Here's how we work. So, no sit-down fees. You get paid. And I will personally guarantee you will get paid once the documents are executed."

Part of the reason people are anxious about all these things is they think it's going to cost an arm and a leg. They got to schlep to a lawyer's office. We have our... It's like my office is like a living room. You come in, you sit down, we'll bring in the attorney. They're just regular people. We know ahead of time. We either send your existing documents. And so, it's very rarely a...almost everyone who comes is like, "This is a godsend," and it goes to our true success formula: great lifestyle plus money. And there's a lot of folks who are great financial planners. They can add money. They can add value. The subscription, we get paid for multiplying it by the time to enjoy it.

WMGNA's Team And Incentive Compensation Structure [44:25]

Michael: So, what is the team structure that drives all of this for you? I guess how many team members are there and what are those seats?

Daniel: So, we've got 2 client relations. I would call them subscriber relations. 2 client relations, people dedicated to just working with subscribers. Recaps after every meeting. Prepping the advisors with Redtail notes, everything, open activities since the last call. We also have a 3-day-a-week retired Air Force vet who was in technology there. She's amazing. And so, she does all the fintech, gets all of the eMoney…I call them 2-pagers that show the asset allocation, the holdings. We also work directly with the subscriber if there's any technology issues. So, again, a lot of people have this portal, but nothing's ever...it's a double verification. So, we will set up a call. If there's something screwy with that, get in touch with Vicky. She'll help you. So, that's all Vicky does. And it's 3 days a week. We've had her in more recently because of this god-awful transition.

Michael: Which transition is that?

Daniel: The broker-dealer, and we're switching custodians.

Michael: From who to what?

Daniel: From Schwab to Raymond James.

Michael: And what's driving that shift for you?

Daniel: The Schwab-TD merger.

Michael: Were you TD originally and got sucked in?

Daniel: Yes. Yes.

Michael: Okay.

Daniel: So, we are a bigger fish in a smaller pond with Raymond James, independent RIA. They also don't have a custody direct-to-consumer model. We talked to Fidelity. Fidelity, substantially the same thing. And they wanted at least $25 or $30 million of our money to be in these Fidelity-managed products that are on Envestnet. And I'm not confirming or denying the efficacy of them, but we had no money in them. So, I said to Brian, "A, I don't like to be required. And if we're going to do that, then we've got to put our money in these things, too." Or they were going to charge us, I think we got down to 4 bps in custody. And it doesn't sound like a lot, but 4 on $300 million, we're growing, it ends up being something.

So, visited, talked to a lot of people. Raymond James, again, their technology we're finding out it isn't quite what the other guys and gals are, but that's what we're doing. We're doing both of them now as we speak.

And so, then after Vicky, there's Beth, who's the director of first impressions, someone who our ideal subscriber can relate to. And Beth runs Redtail. She does the reminders for meetings when we have a service that sends out, like, brownies and birthday cards. [With] everyone, she makes a great first impression. So, that's what Beth does.

We have a controller, Stacee, who's remote, who's been with us, I think, the longest, 25 years. She was involved in client relations. She also had been doing some bookkeeping for us. Now she's a controller, works with Brian on the finances. Again, you need to know your numbers. And as a matter of fact, we have an open architecture on our numbers here, daily totals. So, we have this revenue-sharing part of our team stuff is, "Hey, if no monies come in this month, then you better start looking around because Brian and I will be the last 2 going down with the ship."

Michael: So, part of your compensation is that the team gets a slice of revenue?

Daniel: Yes.

Michael: How does that work?

Daniel: We do a trimester revenue bonus. And Brian comes up with that each year, and then we go through it. So, we're going to be doing our semiannual. We have 2 meetings. One is here in Connecticut. The other is, Brian is in...we have a shared office. We have an address in Boca Raton. He was in Delray. So, we go down there, and then we go through, "Hey, here's what we did. Here's what our metrics are." And so when we hit our numbers, then everyone knows what their trimester bonus is. When we do a review on the team members, then we look at, "Okay. Hey, here, you're getting a pay increase. You did great." Most of our pay increases we look at a cost of living increase, and we sort of have that at 4% using, again, long-term cost of living.

And then performance-based bonus. Someone did something. We would recognize it in real time. And then increasing the revenue. And that can be 5 figures for folks throughout the year easily. So, we want everyone to feel that we're all in this boat rowing together. Now, I have to make sure that my trimester is better than anyone else's, but we're all in this, and you can see in real time, you can see how much the... So, I can go in right now and see revenue to date, and then we have what's known as the revenue bonus. Then we have a super bonus, Michael, where if we hit the super bonus, we close down Christmas Eve till January 2^nd, paid. We add that on to your deal.

And we also have a points bonus on subscribers, and we break subscribers out into platinum, gold, and silver. And so, if we bring in a new relationship and it's going to generate at least $10,000 a year, and maybe it's 15 now, then you get points for platinum in every trimester. We base it upon or if someone goes from silver to gold. Because Brian and I can really only take on between us, maybe a dozen new relationships a year. We're trying to build up Chris' thing, and then now we've got Jake, the younger one, the G2 advisor. And so, Stacey's the controller. We often have...

Michael: Just a quick question back to bonus structures. I guess sort of 2 things I'm wondering: is there an overall percentage of the revenue just that you allocate to this compensation pool in total? Is it 2% of total revenue? Is it 10% of total revenue?

Daniel: Yeah, we basically go from where we were. And then if there's a growth on that... I do not come up with the calculation. Brian does that, and then he rolls it out. And then we have a frank discussion as to here's what we think. How do you guys feel about it?

Michael: Okay. But it's a percentage of the growth of new revenue, not necessarily of the entire revenue of the company, because you're measuring from A to B.

Daniel: Yeah, yeah, yeah. Right, right. So, if the bonus this year, the trimester, and again, it can be in arrears. We can hit it all at the end of the year is $2.3 million, and we eclipse it, then we say, "Okay, you know what? Regular growth would be, let's say, 3%-4%. Right? We can't count on the market. We know that the subscriptions every couple of years, those go up.

So, let's say we do 5%, then that extra 2% goes into, and then we look at where everyone's trimester bonus is, and those go up every year with their compensation package. Explaining, of course, it's not guaranteed. And then we also have a point system on new subscribers and subscribers that are advancing. We also give a little when there's a new subscriber. There's a $500, $350 into the next payroll for when someone becomes a subscriber. Rewarding people in real time. So, when we hit the...if we hit a trimester bonus number, either on the revenue side, it goes right into the next paycheck when the trimester is over. It's not waiting and...yeah, that's our thing, because without the team, we wouldn't have what we have.

Michael: And so, if I'm following, so team overall, you and Brian are co-founders, Chris was an additional advisor, and then Jake is like a newer next generation, helping.

Daniel: Just came on 3-4 months ago. Yep.

Michael: So, 4 of you is advisors, and then 4.5 team who support. Your 2 subscription support folks. Director of first impressions, controller, and the part-time person helping on technology.

Daniel: Yes.

Michael: Okay. And so you're kind of like a 4... I think, sort of a 4 plus 4 of team with the caveat that you don't have to do some things like billing and trading because that all happens on the Envestnet platform.

Daniel: Right. Right. Yes, and would encourage folks again to figure out how to outsource payments. It's if we had to do all those things, we would at least have to have another highly proficient person who's familiar with this. And in our neighborhood those are hard to come by. And you're looking if it's not almost $100,000 total comp to get someone who knows what they're doing and has experience. And we've got to then train them up because almost everyone who comes over, if they've been at somewhere else... Stephanie was somewhere else is like, "This is completely different than anywhere else I've been."

Why WMGNA Outsources Client Tax Preparation [57:00]

Michael: And so then I'm struck relative to the original discussion. So, tax preparer is not on your list of team?

Daniel: No.

Michael: So, help us sort of understand that, the approach there that you bundle the tax preparation in, but you're using outside strategic partners instead of hiring internally.

Daniel: Yes.

Michael: So, just talk us through that decision, that evaluation. I'm imagining this has been a discussion for you and your partner over time about bringing it in versus referring it out. So, how has that evolved for you?

Daniel: Well, we have looked at bringing someone in. We've also, are in conversation with accounting firms to tax out their services, pare down. And they're doing it. We've been talking to accountants. Many of the accountants now are getting out of the 1040 new business, or it's $700, which to me again is very low in this cranking out 1,500 tax returns per partner.

Though the CPAs typically are not raising their hands. So, again, when I feel that I'm persuading them to do it, even the ones we've had long-term relationships, they're like, "You know what? Here, we will send you the people." I've talked to some firms about coming together or setting up a separate LLC where we come up with some get you guys RIA'd so we can share in this and the 75-25. We do all the investment management work. You do all the tax work. We get 25. And I'm just using those numbers off the top of my head. It hasn't gone anywhere.

Michael: Did you ever look at just hiring this internally, or was that never of interest for you?

Daniel: You know what? It really hasn't. The level that we need, a one-woman shop, might not be robust enough. And so, if they're then farming stuff out, then...

Michael: So, you're concerned...

Daniel: We've always used... Yeah, there's things where even the existing people, but they then go ahead and find someone who can help us with folks who've got GlaxoSmithKlein UK pensions to going through with FBARs [Foreign Bank and Financial Accounts]. And not that a small firm could do that, and do we want to buy a small accounting firm? It's something we've thought about.

Michael: So, your concern is that the breadth of different client tax return needs is more than what you could get in hiring one person, and you don't really want to hire a whole giant firm because you've only got so many returns to do?

Daniel: Yes. And the other part of it is, and it could be my own barbed wire. If I was a subscriber, it's not a closed shop. So, we do a lot of tax planning.

Michael: What do you mean by that?

Daniel: Meaning that there's an independent third party that you're contracting. So, it's not a redundancy, but a lot of the tax planning that we do, if it gets a little higher up and Brian's a CPWA, he's really bright on that. I'm self-taught. But that's, you don't need Harvard lawyers to run a law firm. So, 90%, but sometimes there's a 10% thing where I want to run it by the accountant. And so, it's an independent accountant...

Michael: Okay. And so you position...

Daniel: ...as opposed to someone who would say, "Well, wait a second, of course, the accountant is going to sign off. He's in-house. She's in-house." And not that they've... Yeah.

Michael: So, you position as a plus that this is an external independent and not just us doing everything under one roof?

Daniel: Yeah.

Michael: So, how involved are you in the tax returns if you're sending them out? How involved do you want to be?

Daniel: We are heavily involved. I can take a look at a tax return, see what's going on, and usually either have questions that most of the time lead to the answer is we need to do something to save thousands of dollars in taxes and often other expenses when you find out what's going on. Tax return says a lot. So, the whole tax process...

And we just invested in Holistiplan. So, we used to send out the tax approximations, and then we do a quarterly tax approximation. We're doing ongoing tax opportunities, whether it's...again, there's a lot more to it than just tax-loss harvesting. Money comes up. Where do you take it from? And that's why the one-stop nature of it. Okay, well, you know what, get us the statement from Morgan with the cost basis, year-to-date realized, unrealized, and then we can say, "All right, you know what? There's a great opportunity on this second home at the shore. Where are we going to come from the money? Should we take an asset-based loan right now? Or is there an opportunity somewhere where we can maximize current opportunities that we're going to rebalance anyhow? It's a long-term game. We may be able to offset it with something else that we've done." So, we do all of that.

And then Holistiplan, we're doing tax approximations. We do them often the 4th quarter or early 2025. These are not necessarily planning opportunities. But just so you avoid one of our popular podcasts, you avoid the triple whammy where a lot of folks bring in their stuff in February, maybe, right? They have everything in their tax person. She says, "Let's see how we did this year." Really? And you end up with a situation where you're hit with penalties, perhaps. You owe taxes, and you don't have the money sitting around to pay for them. And it happens to be, "You know what? The honeymoon's over with this new administration." And you think you're diversified, but everything's 90% correlated to the S&P 500, and it's down 15% the first quarter, and you've got to sell to meet that April 15th deadline.

So, we do a lot of the tax work in-house. I'm not a tax whiz, but if I need a tax whiz, then we send it out to the...but most of the stuff, again, keep it simple. Any tax thing that is really complicated, I get antsy.

Michael: And so, how are you able to find CPAs who will work with you this way? And do you have 1 or 2 that everybody goes to, or do you have a wide base?

Daniel: No, I think we have 3, and the 1 does probably 85%-90%. One of them. We tell other people that we trust and admire in the area, "We need your help." We're looking to bring on a service. It is important. Phone calls, emails, it's the little stuff that really...and then Darlene and I will sometimes go. If it's down in Florida, obviously, Brian, we go and meet them and say, "Here's what we're doing. This is not a..." I hate the word referral. This is not a referral. And folks get frustrated, "Oh. I gave them a tax return, and they're going to send me..." Yeah, they're not going to send you because you gave a $750 tax return to one of their clients. It's just that's not going to happen ever.

You need to be a value added to their people. So, when there's an issue that their clients have, they can call us to solve the issue. And so, that's how we work. And we do get a fair amount of folks. They were not maximizing their own retirement plan. We put them through a tax-out so you know what we're doing. And if you think you'd fit in, great. And it's tens of thousands dollars a year of revenue where you don't have to do anything different than you're doing.

Michael: But I was going to say, and ultimately you're writing a check for all these folks. You're writing...

Daniel: They'll send us the bill. You're not chasing down people. You're not waiting to get paid.

Michael: So, do you actually try to negotiate a bulk discount, volume discount?

Daniel: Of course. Of course.

Michael: Do they give you a break on the fees that get charged because you're bringing them a big old block of business?

Daniel: We manage a lot of the firm's money and partner's money. And guess what? The more money it is, the less it costs. We do the same thing with Envestnet. We were taught to leverage everything and our own money last. So, every couple of years we go to Envestnet and say, "Well, here's what the cost was at $250 million. We're at $300 million. Here's how much more you're making. You're not doing anything more. Now, we are willing to spread the wealth, but not 100%. Give us a little something. And we just saved 4 basis points for everyone whose accounts are under $1 million in part of that negotiation. They're like, "Here's what we'll give you." And then Brian and I can say, "All right. Part of it will build into the platform part of it." We won't build into the platform on the discount. Same thing goes with the accountants. And it's you need to kiss a lot of frog firms to find your princes and princesses.

What Surprised Daniel The Most In His Advisor Journey [1:08:47]

Michael: So, as you've gone this journey over 30-plus years of building the advisory business, what surprised you the most about building the firm?

Daniel: The first 10 years, that it took so damn long to get to a place where Brian and I, we always made sure to... We always had a 3% match and 75% of the single rate on healthcare and obviously payroll. So, there were times the first I figured within 10 years, within 5 years. I would have already been on Nerds Eye [View]. I would be speaking at conferences that people would be knocking our doors down, and it just didn't happen that way.

So, one of the things when you're starting out is, you know what, just continue to be...you don't have to be great. Just be really good and continue to do it. Once we had the first person, Ron and Jane. Once we had the first person sign up, it's like this proof of concept, this works. We've got a person. And it wasn't my mother or charity. These were disinterested third parties that we had marketed to, and they were interested, and then more came along. But it took 10 years before...and a lot of folks have this idea that, "Wow, he's on Michael's podcast. They're doing this." But beneath all that was a...

Now, I had always the privilege of a lifetime is being who you are. I was convinced that Brian and I, if we committed to each other, we could build this thing, and if we brought in the right people and we treated them well and we were completely transparent with everyone that we met with, we were not all things to all people. Again, folks who want to do it yourself, they're good people. We'll give you some ideas. We want everyone to walk away from us, and they say, "Wow, these are good dudes and dudettes, but not everyone's going to sign up."

Michael: Was there a change or a turning point that made it gain momentum, or was it just raw time, and eventually it just started compounding and adding up?

Daniel: I would say the folks who are good... Derek Jeter wasn't the best baseball player on the Yankees ever, but he will go down as one of the greats. He showed up early. He understood the respect that you earn respect. You don't come in, even if you're the first-round draft choice, Mr. [Joe] Torre. And he was always, I don't want to use profanity, the SOB was always in the right place at the right time. So it looks like he was always lucky. No, he was prepared.

And so we got lucky. We got that one big $30 million dollar 401(k) because we got the owner. So yeah, part of it was we got a couple people. We've always haven't been shy about getting credibility marketing. We don't pay for media, but Peter Montoya has a great book on how to market yourself. We send these...do things in your own voice, and if you're on to something, often it takes a little longer than...patience is a virtue.

The Low Point On Daniel's Journey [1:12:47]

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

Daniel: I would say a lot has to do with me, with my personal situation. There were some relationships and children and things and the wondering if I'm going to be able to pull through, and again, mentors and definitely Brian and the rest of the team has been there. So, for whatever reason, I never thought we weren't going to make it. There were some times... Brian and I never had that conversation where it's like, if we don't bring in blah, blah, blah, because that was not our thing. It's a process. It's you first, then me. Over time, the Getty gas station, instead of owning all of them, we will take a small piece, but there will be a service station on every corner of every town in the country.

And so it was the low point that just has not spread as much as I thought. So, and again, a roundabout way, it really had to do with where I was personally. And that was probably around my age 40. I made some personal changes. Failed marriage, 2 kids. Failed relationship, another kid. And so, I had to sort of take a look at myself and say, "Hey, you need to make some changes." And guess what happened when I made those changes? Magically, and maybe it was coincidental with us being at this for a good 10 years or so, things started to change.

Michael: So, what were some of the changes you were putting yourself through?

Daniel: I have always been into health and fitness. I've got a gym garage, and I have nicknames for everything. I have a name for opponents. Little Wayne, "Show me my opponent." And for large periods of time, I had my sons. I moved in with my mother and stepfather when I was 40 with the 3 boys. Of course, peace and love to their mothers, but they were with me a lot. And Gerry Rafferty, he gave up the booze in the one-night stands on Baker Street. I woke up one day and said, "Even though you're getting up and working out, taking care of the kids, when there's not things going on, your life is not congruent, let's say, with that health and fitness." And so I think those were some difficult times for me. And it bled over into the business, probably. There were some times where I just was making bad decisions and would not be as effective. So, maybe that was the low point around between 35 and 40.

The Advice Daniel Would Give His Younger Self And Newer Advisors [1:16:18]

Michael: So, what else do you know now you wish you could go back and tell you 10-20 years ago as you were still earlier in the building stages?

Daniel: Well, I was turned on to a book: "Reflections on the Art of Living" by Joseph Campbell. Great title. And the first sentence is "The privilege of a lifetime is being who you are." And my mother, my stepfather, my father, whether they...I always was sort of that way, like I'm going to make my own way. It's okay to be different. Be yourself and you'll attract your... You want to make a million dollars? All you need is 100 families to buy into your thing.

Michael: Any other advice you would give younger, newer advisors looking to build their careers today?

Daniel: The people we serve on websites, anyone who can fog a mirror is not people that you serve. So, again, call on the pre-retirees, retirees, executives, doctors, divorced people, people who got inheritance. So, it's okay to be different. Call on people who are raising their hand, scarcity, [Robert] Cialdini stuff, read thought leaders in...ultimately, when you're talking to someone, if you can't answer so what and what's in it for them, it's going to be a struggle back and forth. High anxiety. Talking to other people, we have very... You want to have long-term relationships.

And maybe the last thing that we talk about is we always know how much money we have. We don't know how much time. And so, how are you using your time when you're talking to your clients, your subscribers, your customers, your policyholders, your corporate clients? They're just like you are, and sort of this balance between spending now and spending later. There's 2 things you can do with it, money, and it's a means to an end. If you can find out what's important about money and coming from me, who's been talking most of the time, and listen to what other people are saying, and not with an agenda to put them into something, but "Hey, listen, I've got something."

Then you end up with something that's repeatable. You'll find out who your tribe is. And those folks will naturally want to tell other people, and the people that they're going to tell are probably like them. Again, all this whole Cialdini liking. People like to do business with people that are like them. They end up liking people like that. And not sales, the, "Hey, Michael, you look great. What gym do you go to?" nonsense. But true stuff like that. It takes time. I think it's one of the greatest businesses, professions, things to do.

We don't call it... I don't let anyone go home and say, if someone asked them how work was, you have to correct them and say, "How was fun today?" Have fun. You can have fun. This isn't brain surgery. It's important. And what's next to your health is your money. But you can still have fun. We're not operating on people's brains. We're not resuscitating people in car accidents. So, that's how I would wrap it up for folks.

What Success Means To Daniel [1:20:54]

Michael: So, as we come to the end of the podcast, this is a podcast about success. And one of the themes that comes up is just literally that word success means different things to different people. And so you've had this wonderful path of building a very successful multimillion revenue advisory business, and so, as I view it, the firm has been very successful. How do you define success for yourself at this point?

Daniel: That's a... Andy Grove. Where was he? Intel. I have the book.

Michael: Intel.

Daniel: "Only the Paranoid Survive." I have it right here. Okay? So, for some reason, I still. Success is that, you know what, I get up at 5:00 in the morning. Tim, the trainer, has been with me for 10 years. He shows up at 5:45. We do our thing. I come in here and I am constantly thinking someone is going to find a soft spot. There's something that we're not doing to take care of everyone here, that someone's going to leave that...existing subscribers.

So, I still look at myself as just like when someone says it and my mother and other people, I need to figure out how to maybe enjoy it, but it's a yin and yang. If I start enjoying it, am I going to rest on my laurels? So, being close and taking care and encouraging my sons to figure out their path in life, 29, 31, and 23. All of my parents are alive, spending time with them, being there for the people that have been there for me.

Yeah. So, that's what I would measure my successes. I really haven't given that much thought to it because there's still a lot of successes that I know are ahead for me personally and professionally.

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

Daniel: Thank you, Michael.