#FASuccess Ep 005: Mark Tibergien On The Rise Of The Professionally Managed Financial Advisory Firm

What You’ll Learn In This Podcast Episode

• What it really means to be a “professionally managed firm” as a financial advisor (and what sets them apart from the rest) [1:59]
• The unexpected way Mark got looped into the financial world through journalism and excellent mentorship [18:31]
• What the average advisory firms looked like when Mark began his benchmark studies in the early 1990s, and how it has evolved over time [22:59]
• Why it can be helpful to think of your advisory firm as an investment portfolio to manage [32:52]
• Mark’s explanation of the four stages of an advisory practice: wonder, blunder, thunder, and plunder [34:59]
• The walls advisors run into as they grow their firms, at 3, 5, 8, and 13 employees, and the challenges (and benefits) of hiring good personnel [48:17]
• Why standardization is essential for any firm that wants to offer a customized client experience [52:50]
• Where Mark sees the financial advisory profession going in the future, and whether you should build a firm from scratch in the coming years [1:11:14]

Resources Featured In This Episode:

• Mark Tibergien - Pershing Advisor Solutions
• Valuing a Business: The Analysis and Appraisal of Closely-Held Companies by Shannon Pratt
• Practice Made (More) Perfect: Transforming a Financial Advisory Practice Into a Business by Mark Tibergien & Rebecca Pomering
• Fibonacci Number
• "The Starbucks Experience" - Using Technology to Personalize the Client Service Experience
• XY Planning Network
• HighTower Advisors
• Aspiriant
• United Capital

Full Transcript: Mark Tibergien On The Rise Of The Professionally Managed Financial Advisory Firm

Michael: Welcome to the fifth episode of the Financial Advisor Success podcast. My guest in today's podcast is Mark Tibergien. Mark is the CEO of Pershing Advisor Solutions, an RIA custodial platform for rapidly growing IRs that serve very high net worth clientele.

But for many advisors who've been in the industry for several years now, you probably know Mark Tibergien primarily as the now former leader of Moss Adams Consulting Group, which effectively created the category of financial advisor benchmarking studies back in the early 1990s. And it's Mark's cumulative experience in working with advisors both in his role at Pershing Advisor Solutions and as a consultant and industry researcher previously that made this a fascinating interview. From talking about the four stages of advisory firms - wonder, blunder, thunder, and plunder - to the walls that advisors typically hit as they grow to 3 employees, and then 5, and then 8, and then 13.

And you'll get some perspective on how Mark's own career has evolved from humble beginnings as an entry level journalist writing general assignment articles to sort of unwittingly falling into a world of working on valuation, then practice management, that ultimately led him to the career at Moss Adams, and eventually a role as CEO. And so without introduction, I hope you enjoy this episode of The Financial Advisor Success podcast with Mark Tibergien. Welcome, Mark Tibergien, to The Financial Advisor Success podcast.

Mark: Thank you, Michael. Good to be here.

What It Really Means To Be A "Professionally-Managed" Advisory Firm [1:59]

Michael: I'm really excited to have you on the show. I don't know if you know this, you are someone that I've looked up to and followed through 15-plus years of my career in the business. Ever since back in the early 2000s, I first became aware of the benchmarking studies that you were doing about the progression of the advisory industry and how it was evolving. But I know right now you're in a different role. You're with Pershing Advisor Solutions. You're the CEO of Pershing Advisor Solutions. So I'm wondering, to kick off, can you just tell us a little bit about what is Pershing Advisor Solutions and what do you do? Can you help give everyone some context for what we're going to be talking about today and kind of your knowledge and background?

Mark: Sure. Thanks. And thanks for the kind comments, Michael. It's great to be on here, and I am mutual admirer of yours as well for all the things that you're doing to impact this business. With respect to Pershing Advisor Solutions, I joined the firm nine years ago. This is my seventh career. I've done quite a number of things in addition to my most recent stint at Moss Adams before coming over here. The company, Pershing, is a division of BNY Mellon, and combined, we are the largest custodian in the world with about $33 trillion of assets globally.

So, our business as an enterprise is the custody of assets. And the focus of Pershing Advisor Solutions, obviously, is providing custody and business solutions to registered investment advisory firms domestically and internationally to the extent that that's relevant. When I was brought in by Pershing to take on this role, part of my mission was to enter this from a position of respect, where the other firms that are known in this marketplace have clearly done a great job to establish their market segments and what they do well. And so, what I decided to do is focus on who we serve rather than what we sell, and recognize that, at a minimum, we had to be at par with our competitors on the basics and we had to be noticeably superior in areas where we could, and that's leveraging a large national/international custodian in order to do this.

So we decided, as a point of differentiation, to focus on professionally-managed, growth-oriented advisory firms who serve clients with complex lives. And the reason we decided on that was because we saw the marketplace for the advisory business shifting away from practices to businesses. We saw that most firms were limited by their capacity to grow, and so we wanted to be working with advisory firms that took their business seriously and were reinvesting in their future. And third, we saw a giant gap in the platforms that were helping advisors to serve the high net worth and ultra high net worth marketplace, which we knew we had a unique capability to do. The consequence has been that we've grown from 30 billion to almost 200 billion within the last 5 years of assets under custody.

The average advisory relationship with us is double our nearest competitor. The average household that we serve is around $5 million. And we are one of the fastest growing divisions within the entire BNY Mellon enterprise. So it's been a great run, a great success story with the tremendously talented people that, in fact, have come from the other custodians to be part of our business, as well as having grown up here. That's our story and we're sticking to it.

Michael: So what does that average advisory firm look like on the platform? I mean, the hard metric that you measure that by, like people or average AUM for the firm.

Mark: Typically, AUM is the easiest metric because it's one that's generally known. So last year, the average size of the advisory firm that joined us was $750 million.

Michael: Okay. So you're in what...well, most, I guess, including you, as we'll talk about later, would probably call ensemble firm, or like large multi-advisor IR firms at that kind of size and complexity level. And in a high net worth space, I guess, if you're $750 million average and $5 million households.

Mark: That's right. So, actually, what has evolved is that we really have two... The common denominator is that they are real businesses and professionally managed. But what we found is that there's a mix of what I would call institutional advisory firms that tend to deal...they may be TAMPs or they may tend to deal with the mass market. So some of the digital platforms, for example, use this as their primary custodian. And then we have that high net worth segment. So the common theme really is that they're of a size and a sophistication in terms of their business to manage professionally from that standpoint.

Michael: Now, we might unwittingly insult perhaps a few advisors that are listening, who have high views about how they manage their firms, but how do you define professionally managed firm? If I have a couple hundred million dollars and I'm very happy that I've grown my firm to this part and maybe I'm working with a couple of partners, like, "Hey, we got it this far. We're doing a pretty good job." What's the difference between an advisory firm that is growing and seems to be managing and executing well enough that they're growing and have gotten to a couple hundred million dollars from a "professionally managed firm"? Do I have to hire a COO to validate that I'm a professionally managed firm for joining onto the Pershing Advisor Solutions platform?

Mark: It's more of an attitude than a result. The question is whether or not you have individuals in your business that are skilled and dedicated to the running of an enterprise just as they are skilled and dedicated to the serving of their clients. So, those firms that tend to view the management of their practice as a nuisance or they fail to implement the disciplines required in order to develop talent, implement the strategy, manage to profitability, become operationally efficient, those kinds of firms, I would say, are not professionally managed. It doesn't mean that they're not growing and attracting clients, but what it does mean is that they are limited in terms of their ability to grow from here. Those firms that tend to be highly dependent on one advisor, for example, would not be a professionally managed firm.

And frankly, we have terminated well over 100 relationships because we didn't feel that certain practices were being followed that allowed them to show the kind of discipline that we needed in the relationship. There's several reasons why it's important. One is, we think that's the direction of the business, but two, we know that if advisors can't take their own business seriously, then it's going to be very hard for them to value the kinds of things that we deliver and provide to them. And core to our proposition is that we're a business solution provider with custody in the middle, rather than thinking of ourselves as a custodian. And this helps us to differentiate, but clearly, if we want people to perceive the value, then they're going to have to be able to take advantage of it.

And so, it's like when advisors view client relationships, if you just said, "My advisor practice is focused around people with money," that's interesting, but I have a feeling that every advisor listening to this podcast has probably terminated relationships in their life or wish that they had because there wasn't a philosophical compatibility or the ability for their clients to value what it is that they actually delivered. And that's really the filter that we use there. You know, it's not a velvet rope in the literal sense. You can get in, but what we hope is that you will learn to appreciate the things that we deliver over time.

Michael: If you view Pershing Advisor Solutions as...or a business solutions provider with custody in the middle, can we understand a little bit more about what that means? What does business solutions provider mean? Because I feel...I think most of us in the independent RIA space feel like... Frankly, it's getting really darn hard to differentiate the leading custodial platforms. TD Ameritrade has kind of their VO open architecture or structure, so a lot of advisors I know that like to construct their own technology stack like to go to TD Ameritrade and build around VO as a hub. Schwab and Fidelity are giant players that do what they do, but it's often very hard to differentiate them from the rest. And then there's Pershing Advisor Solutions. What am I getting for my business solutions that makes it appealing to take a firm with that kind of size and growth to your platform as opposed to one of the others?

Mark: Yeah. There are several things that make a difference. One is, we share TD's approach to the marketplace in that it's complete open architecture. We have an API store. We have the ability to adapt to the way in which our clients want to run their business from a technology standpoint. We have a robust platform. In fact, NetX360, our technology, is third in terms of technology used by financial services firms behind Bloomberg and Thomson Reuters. So it's a widely used technology platform that from an operational standpoint is robust but still open architecture in terms of how advisors want to function. But the technology is not where we find the key difference. For example, we are the only custodian in the U.S. that delivers both a bank custodial platform and a brokerage custodial platform using the same NetX technology.

Why that's significant is that quite a few assets managed by RIAs are held within banks, and they're held within banks because the assets may not be securities, they may be something else. The clients may have a greater comfort with the bank, particularly in light of the failures at brokerage firms like Lehman and Bear Stearns. And the other firms are pure brokerage. They may want to have a different dynamic in terms of managing their assets. They may not want to do it in street name, for example. They may have international assets where they want to have access to that. So, using bank and brokerage custody is a big offering in the marketplace today, particularly in the high net worth space.

Secondly is with private banking. I can't emphasize enough that we are the largest custodian in the world, and part of that is having a substantial balance sheet. We deliver private banking to our clients. Pershing is 55% of the bank's private banking loan growth. Just to give you an idea of how the advisors in our platform view it. We've done lines of credit as big as $400 million, which, you know, you just can't do in margin or in the small banks that you're doing with the other firms. And the mortgages, we don't resell the mortgages. We keep them on our own portfolios so they're not subject to the Fannie Mae, Freddie Mac kinds of restrictions, and it becomes quite a compelling offering. So, from a leverage standpoint, using solutions that are appropriate for the high net worth market but are not available at the mass affluent custodians becomes a big issue.

Michael: So I get that framing around households that are...or firms that are working truly in high net worth space when you've got 5 million-plus and 10 million-plus and you start moving up. You know, our advisory firm's average client is pretty healthy by RIA standards at about $1.6 million. But, you know, we're not having a lot of conversations with them about how to move money around to their house in France because they're going to be spending the next three months there. That's not our clients' problems. But I get it. If that was my client's problems, I would probably start feeling pretty constrained on traditional...other competing custodian platforms.

Mark: Yeah. And the truth is that the higher net worth you go in the marketplace as an advisor firm, the more likely you are to be multi-custodian. The more you have in assets, the more likely you are to be multi-custodian. So we're not saying that in order to have a relationship with us we need to be your primary custodian. We have to earn that right to be your primary custodian. But if you're using several custodians, the question is, are you using different types of platforms, or you should be looking at Pershing as a solution to something clearly different and in some cases noticeably superior?

Michael: What kinds of advisors, then, are typically finding their way to your platform? Would these be, "Hey, I've got an existing relationship at a place like Schwab, Fidelity, or TD Ameritrade, but I'm doing more in this high net worth space and I'm feeling the constraints of some of the capabilities around banking and lending and international clientele, and I want to add Pershing Advisor Solutions in"? Or, are you more in a team that was at Merrill Lynch and had a billion dollars and is breaking away but is used to private banking capabilities and just says, "Hey, Pershing Advisor Solutions is a natural fit for us because we already come from a platform that had those kinds of capabilities and we just want the continuity even though we're going to be on the independent RIA side"?

Mark: Half of our growth comes from breakaways and half of our growth comes from takeaways. In the case of the takeaways, it is looking for an alternative solution or it is looking for diversification of custodian, which from a risk standpoint, is important, which I'd like to talk about in a second. And it may also be because they have grown to become dissatisfied with the client experience at the other place, because the nature of their business may not be mass affluent anymore and they may be taken for granted, or they may not like the nature of the competition that they're seeing from the other solution providers and will seek us as a way to deal with that.

So sometimes they come over in mass and sometimes they just come over in chunks. And either way, we're happy to engage them along those lines. And I would say, over the last three years, the level of takeaway in the large advisor category has been quite substantial. With respect to the risk standpoint, our company, BNY Mellon, is one of only 30 enterprises in the entire world that's considered a global SIFI. That's global regulators rate us as a global systematically important financial institution. The implication...

Michael: That's not the good kind of important, though, is it?

Mark: Well, it is. It is, from a risk standpoint because, clearly, we are systematically important to the world financial markets. But I think the level of comfort that clients find in it is that our liquidity and safety ratios have to be considerably higher than the average financial institution. We have to be fully transparent about our survival plan and our liquidity plan and our management of risk. We have to get that approved by the global regulators. So the standard of safety is much higher than the rest and it's completely transparent. So not only are we a public company, but the higher standard of care is also critically important in that case.

Michael: So truly for that subset of high net worth clients that have a lot of anxiety around, like, "Where do I put my eight or nine-figure balance?" that is most likely to be safe in the next global financial crisis, which is perhaps not terribly likely, but when you've got like $100 million, you sort of care that you're the survivor. Literally, people would look at Pershing Advisor Solutions and BNY because you are globally regulated to be one of the survivors in the next financial crisis.

Mark: In a way, that's a good way to look at it. And I wouldn't say that another financial crisis isn't likely. The pace that money moves and the risk to the markets that exist are great, and the conversations that are having around neutering many of the regulations is real. And so, anything is possible. I mean, who would have thought that Lehman and Bear Stearns and all the companies that have disappeared actually disappeared? So what you want is transparency, don't you? And if you don't have it through the company being a public entity, then how else do you have a window into the financial health of these organizations?

How Mark Entered The Financial World Through Journalism [18:31]

Michael: So take us back a little. What does the career trajectory of a guy who becomes the CEO of a $200 billion RIA custodian? Where did you get started in the financial services world? Or did you even start in the financial services world?

Mark: Well, I didn't. My very first job was reading the obituary reports on the radio, and some days I feel I've come full circle.

Michael: Well, here we are recording on a podcast, so I'm glad I brought you back to the radio days. Hopefully, we won't be talking through anyone's death today.

Mark: Yeah, I was weird. I actually aspired to be a journalist. I grew up in the Upper Peninsula of Michigan and there aren't a lot of career opportunities up there, but I always wanted to be a journalist. I wrote for the local newspaper. I was a newscaster on the radio and literally did...I had a five-minute spot before Paul Harvey, where I had to call the local funeral homes, find out who kicked the bucket, and write an interesting story about them to report on the air. And because Paul Harvey followed me, I had a pretty good following for my obituary reports. I was subsequently recruited to Chicago to write for a financial magazine called "Investment Dealers Digest," and that frankly was my first exposure to stocks and bonds and investing. I literally didn't know a whip about the subject when I went down there.

Michael: And you were 20-something at this point, right out of school?

Mark: Yeah. Early 20s, hardly had any experience in life, let alone living in a big city and working in the financial world then. Immediately, I was put on the road. I was writing about publicly traded companies. And I had two segments I was following. One was the new issue IPO market and the other was the OTC trading market when that was big in its day, over the counter. And that was a tremendous experience. I did that for four years and then became recruited to a company out of Portland called Willamette Management. That was well known for publishing research, and was also a RIA, by the way, that managed money, focused on Northwest securities. So it's very parochial...at the time, it was a very parochial area, and so it tended to focus on companies that were headquartered in the Pacific Northwest.

Michael: Back when stocks literally got traded regionally.

Mark: Exactly.

Michael: Kind of a strange thing for us now...

Mark: Yeah, the Pacific stock exchange...

Michael: ...in modern, globally connected world.

Mark: It's true. And in fact, it was even before mutual funds were used in vogue. And remember, this is in the '70s. This is a while back. So that was a pretty good experience. The guy who was running the company, Shannon Pratt, also wrote...literally wrote the book on how to value a closely held business and is, to this day, considered one of the thought leaders in the valuation world. And that's how I got exposed to private company valuations. And what was interesting, Shannon Pratt was in the first CFP class ever created. He was one of the first CFPs in the country.

Michael: That original whatever was a class of like 23 people in 1973 group.

Mark: Exactly. And I joined his company in 1976, I think it was. So the first thing he said to me is, "Mark, you need to get involved in the IAFP and get to know these financial planners because that's where the growth is. And all of these guys are dealing with closely held business owners, and that's where the business opportunity is." So that was my exposure to the financial planning world right from the get go.

Michael: But it actually wasn't to be a financial planner per se. It was because you were doing valuation work for closely held businesses and financial planners which, of the time, were heavily insurance agents doing work with small business owners. It was an entree to do valuations for closely held businesses.

Mark: Exactly. And what was interesting is that I'd go to the IAFP luncheons and people would say, "You know, I'm going through a divorce," or, "I need to sell my practice. Can you help me with the valuation of the practice?" And so, I started to do that as kind of a favor to people, is helping them out with that sort of stuff. And by accident, I ended up creating this monster around valuation buying and selling of financial planning practices, and it actually turned into a business after a while.

What The Average Advisory Firm Looked Like When Mark Began His Benchmarking Studies [22:59]

Michael: Surely just bubbled up from the organic level of, "Hey, Mark, you're a valuation guy, right? I got a problem with my own business. Can you help me out?"

Mark: Exactly, yeah. You know, it's so funny how much of this is accidental. Anyhow, I ended up leaving... I was going to start my own company and then was recruited to a local consulting company that had spun out of Seattle First National Bank. In addition to doing valuations of businesses, they also did consulting and training on financial management of closely held businesses. And this is where I started the idea of the benchmarking and looking at practices from a management standpoint because this was the whole subject. And so I would teach finance, actually, globally because we did. We had a program through USAID. So I taught in the Middle East and in Europe and in Australia and other places around financial management, teaching bankers how to lend, and teaching business owners how to borrow.

And so in order to do that, a big part of banking was really understanding the ratios of a business. They used the RMA, Robert Morris Associate ratios to view the business. And then a few years later, they made me the president of the company. We then sold it to Moss Adams in the mid-'90s. And this probably was the most significant development for me, personally, in that the chairman of Moss Adams at the time, a guy by the name of Bob Bunting, probably my best mentor and leader ever, he said, "Mark, now that you don't have a company to run, let me just give you some advice." He said, "You should develop an industry specialty, you should develop a technical specialty, and you should become famous at both." And I took that quite literally.

Michael: Not with a particular direction. Like, just his generalized career advice to you was just find a thing to specialize in, become a specialized expert at it, and go dominate an industry?

Mark: Exactly, exactly. I said, "You know, I've been around financial services, I think I'll do that. There really is nobody in that market." And so I took valuation and management as my two technical disciplines, built a consulting business, and that's how it happened.

Michael: Because that was just the path you had been on. You had been doing closely held valuations for a while, then you had been doing financial management consulting for a couple of years. And so that was the genesis of the... And you had been doing with financial services. And so, you just put those three together and suddenly you're doing financial management consulting and valuations for advisory firms.

Mark: Yeah. And we attracted great people like Rebecca Pomering and Philip Palaveev and Cathy Gibson and just a whole slew of people who have come through, Eliza De Pardo, Dan Inveen. These are all people that have come through at some point and are now active in the business, in one form or another.

Michael: Yeah, I mean, it's fascinating to me when you look today at who does a lot of the leading benchmarking studies, financial management analysis of advisory firms, and virtually all the players out there today seem to wind back to your group at Moss Adams. You kind of spawned an entire... Well, I was going to say you spawned an entire cottage industry doing this. But frankly, that probably understates the significance of how big their businesses have actually grown. They're not just a cottage industry. There's a whole ecosystem now around doing valuations and financial management for advisory firms.

Mark: Yeah, that's very true. You know, the first study I did was in 1991. So that's 26 years ago. That was the first...

Michael: Like, the first benchmarking study?

Mark: First benchmarking study. The IAFP, predecessor to the FDA, sponsored it. We had a number of participants in it. Then we did classes or advisors on financial management of their practice. And then Schwab hired us to do the study for them for several years. And then after they learned our tricks, they took it on for themselves and now have their own version of the study. Obviously, the other firms are doing variations on that as well. And so...which is good, you know? Because I think for the profession to have...you have to have multiple data points to make informed decisions, and the question is, what's the insight that you can provide behind the numbers? And that, to me, is the lasting impact we're making on the business.

Michael: When this benchmarking study got going in the '90s, what did those firms look like? We're talking the most early nascent period of sort of the birthing of this independent RIA movement, or maybe it wasn't even that focused on the RIA side of things at the time and it was broker-dealer based? Who were you even covering at that point?

Mark: It was both. It was everybody who considered themselves a financial planner. So the practices were really quite divergent. We had RIAs in there. They weren't significant. We had registered reps in there that mostly...well, they were all independent contractor reps at the time. So they could be hybrid advisors in some form. Some had a heavy insurance practice. And so, the initial studies tended to show the mix of revenue from different sources. And over time, it evolved to more pure advisory model. But, you know, it was a big thing back then to have $10 million of assets. And then it became a big thing to have $100 million of assets. You really didn't see many billion-dollar practices. That was such a fantasy for so many people. And today, in the U.S., there's something like $650 billion-plus advisory firms. So, it's funny how that changed.

Michael: I mean, it's an amazing evolution. So most of the firm...so when you're doing benchmarking for advisors in the '90s when good advisors actually had $10 million, I guess like a small handful at 100 million, are we even talking about...? What are you benchmarking at that point? Because I would imagine not a lot of these folks even have employees. Maybe they have an admin assistant. Was it mostly just about...? And you couldn't even set your pricing if you were using broker-dealer platforms. So was it just kind of like, "Hey, here's how much money I make, and I'm going to compare it to how much money others make"? How much financial management could you do with benchmarking studies at the time?

Mark: Well, it was real missionary work. I won't deny that. Because, you know, back then, they thought of a balance sheet as the cover page and the income statement as a scorecard. And what they really wanted to know was whether they are better or worse in terms of operating performance than the other firms. And the quality of the financial information was poor. They tended to use general ledgers, not real P&Ls;. And so, part of our mission at the time was really to codify the business from a management standpoint, to give some logic and discipline to running a business so that it would inform your strategy and your structure and your growth and your people plan and so forth. So, what ended up happening out of that is, we use the financial management principles to inform the rest of the business grow.

Probably, from that period to when I left Moss Adams, I probably consulted with over 1,000 financial advisory firms in one form or another. Some that have done extraordinarily well and some that have not, and you can kind of see the reasons for both. I think that those that adopted the principles of professional management back then got it, and those who didn't, suffered because of it.

Michael: I'm imagining...just this starting point. I mean you've set kind of the difference between a general ledger and a true profit and loss, a true P&L statement, which... I mean, correct me if I'm wrong, to me, basically, when you're talking about a solo advisory firm anyways, you're basically talking about effective categorization of income and expenses in the first place, right? When my business is me, my business finances are, "Is there money left in the checking account at the end of the month? Did my income exceed my outflows?" is about the extent I get into it. So your focus was, how do we start categorizing these so we can begin to standardize the measurement?

Mark: Yes. In fact, it's not unlike what I think financial planners do when they first take on a new client. I mean, how many times in your past did you get a shoe box full of records, where you had to make sense of it? Part of our world was to help them to understand that if their outflow exceeded their inflow, then their upkeep would be their downfall. That was what was driving a lot of these decisions. And many of these practices were growing broke. They were spending more than they were making, or they didn't have a discipline around a strategy to define where they were going. And so, when I thought about this... I mean, the first couple of years, it was just, you know, "Here's a nice thing to do as an industry benefit," and it would get me exposure as a consultant.

But then I really developed a missionary zeal around the impact we can make on the business itself. And that's when we started saying, "How can we translate these numbers into actionable decisions? And how can we help advisors to truly build value in their business? And how do we create the same discipline around running the practices to have around advising their clients?" That really became the idea, probably the advent of true practice management that was not sales-oriented but was business-oriented that really came out of that.

Why It Can Be Helpful To View Your Firm As An Investment Portfolio To Manage [32:52]

Michael: So, a lot of the advisors that are listening to the podcast probably actually are still in that stage of being a solo advisor or maybe have a staff member or two, but really at the end of the day are still managing the business by, "Does my checking account balance grow every month? Just as long as my inflows exceed my outflows, I'm doing okay." So where is the starting point for an advisor like that, that wants to orient themselves around in a P&L? Do you have starting tips for them?

Mark: Well, the first thing I would say is I have no judgment at all about people who choose to have a lifestyle practice. You know, all of us have to decide what's important in our lives, and running a business is not appealing to a lot of people. And a lot of people recognize that running a business isn't probably their strong suit. So I wouldn't get too...I wouldn't get insulted by what I just said, nor concerned too much, as long as you recognize that, in those cases, the practice is an extension of your personal financial plan.

I mean, all it's doing is translating into your personal net worth and saving and investing habits, and I think that that's acceptable. But if you want to understand...if you viewed your practice like an investment portfolio, or at least a portion of your investment portfolio, then the reason that you'd want to create some discipline around financial management using the benchmarks is because you have complete transparency into what's working and what's not, to decide when to rebalance and when not, when to reinvest and when not.

I think that many advisors have never really viewed their business as an asset to be managed, rather than a cost to be controlled. And if you kind of recognize that your paycheck comes out of your business, your value is building in your business, it is the primary driver of your net worth, but it's the one thing you don't take control over like you do your investment portfolio, then there's an opportunity for improvement along those lines.

The Four Stages Of An Advisory Firm: Wonder, Blunder, Thunder, & Plunder [34:59]

Michael: I think they're rebalancing... Your sort of framing for it is a good one. The version of it that struck me, just going through this evolution myself, you start a business and first, there's not much money. You're just scrambling for revenue and you're keeping cost down as much as you can. And then eventually some revenue gets going and maybe you start getting a couple pieces of technology or outsourcing a few tasks or getting a little miscellaneous support. And then the business grows more and the money starts getting better. And there's a crossroads that I find that most advisors hit, most advisors hit subconsciously, only a few do it consciously, where you get to a point where there's actually enough money to cover your lifestyle. You've gotten to the stable, livable wage point. That's always the scramble when you're getting started.

And then you've got a decision to make, that you make consciously or subconsciously, which is once you've got a little bit more money than you need to support your lifestyle, are you going to upgrade your lifestyle or are you going to upgrade your business? I.e., are you going to take that extra money and say, "Well, I can invest this back in my business and do some more marketing or some more hiring or some more infrastructure or whatever I need to move the business forward"? Or, are you going to say, "Hey, I'm making more money. I'm going to go and enjoy making more money and go do more things that drive my lifestyle"? But if you don't recognize that crossroad then, to me, it's very much the same thing that you see with clients.

I mean, I remember this conversation over and over again, talking to people that were coming in to retire but they couldn't figure out if they wanted to retire because they were making pretty good money where they were. And we would get in immediately in this conversation, like, "You know you've got enough money to live your lifestyle." "Yeah, but I'm making more money." "Yeah, but you've already got enough. Are you just working for the money now? Do you need to reset what your goal posts are?" And just reflecting that back to people, I find, for a lot of them, makes them pause and think, "Do I really still need to be working this hard or directing my dollars this way?"

So for the retiree, it's like, "Do you still need to keep working to make more money, or can we recognize that you've got enough to cover your needs and that you can direct your energy elsewhere and stop working?" In the advisor context, it's maybe, "Your practice is giving you enough money to maintain your lifestyle. Are you just going to let yourself default into spending more and lifting your lifestyle, which maybe you want to do, or maybe you just do unwittingly? Or do you actually want to take these dollars and start treating it like a business and saying, 'Where can I reinvest this money back into the business that will support the growth of the business?'"

Mark: I think that's a great analogy. And clearly, behavioral finance comes into play in the work we do and the businesses we're running as much as it does in the risks we take and our philosophy around saving. I think what's interesting, you've heard me oftentimes refer to the four phases of an advisory practice as wonder, blunder, thunder, and plunder.

Michael: I love this so much. You've got to define the terms for people because I love this saying.

Mark: Wonder is that early phase of you start up your business and you wonder what in the world are you doing and you wonder whether or not you're going to succeed, and you grasp all business opportunities you can. That could last a year or it could last your career. And I've seen both examples where advisory practices have been in the wonder phase for their entire lifetime. And then you have other examples where, like a firm, Pathstone Federal Street that started seven years ago and today is three-and-a-half billion dollars of assets. So you have the opposite examples of that.

Then you move into the blunder phase, which is a period of unprecedented growth, where you have no time to do the right thing, and you're making a lot of revenue but you're spending a lot of money. And so the business tends not to be as profitable, and your span of control really gets drained at that point. Then you move into the thunder phase where you have a more formal discipline around management and everything is operating at the level it should be.

And then you enter into the plunder phase, which is either a period of renewal or a period of decline. The vast majority of practices experience it as a period of renewal, where they don't replenish their client base. In fact, their client base looks like a depleted oil well. They tend to be not reinvesting in their business. They tend to be harvesting everything that they've invested in the enterprise. And in fact, they don't even have the same discipline around client contact to management that they didn't before. And literally, the business is dying. It's dying before your eyes. And so...

Michael: Except it's very profitable at the time.

Mark: It's profitable but not valuable. And this is the illusion that people have, is that when you buy the notion that value is a function of the future, just like investing is, you don't...hopefully, you don't make investing decisions based on what something's done but rather what you expect it will do. I know there are people who don't do it that way, but that's the presumption. That if you looked at the typical client base of these practices that haven't reinvested, you'd say the future life of this is diminished because the clients are going to die and they have no transition plan at all, and they're not regenerating what they're doing. And that's okay because advisors have realized value on a current basis rather than a future basis, but oftentimes they can't reconcile the two.

Michael: Well, and I find it almost... I had a conversation with an advisor who was going through this recently because it's a generational dynamic. He's a successor that wants to buy in. But they're going through a version of this. The owner's basically kind of in a plunder phase. It's a very profitable firm. They're probably doing 30-plus percent profit margins at $200 million AUM. There's a good chunk of money moving through. But it's not growing. All the money is coming out to shareholders. He's participating in a piece of it because he's got a slice of it already. But the comment that he made to me is, "I know technically I own a stock, but I feel like I own a bond. I own a really high yield bond that's paying very well, but the problem is the principal value is not growing. It's not growing like a stock, it's just yielding like a bond. And when I look at this in the long run, I just see a bond with declining purchasing power as inflation takes its toll in the long run."

So the founder that's cruising into retirement and living off of this bond is very happy to live off the bond because it provides him all the income he needs. But his successor is really struggling to say... Basically he came to me and said, "Am I nuts? This is a ridiculously profitable practice, and I don't feel like it has much value and I don't want to buy it." And it's leading to all sorts of tensions to them. And it's that very distinction that the founding owner values the income stream, the successor values the future growth of the business. And they've got very different views about what's valuable right now because they're in very different places and stages of life.

Mark: Yeah, I love the analogy. I think that's a really great analogy. I think that the younger person is asking exactly the right question. This is where you have to separate the familial connection and say, "What's right for me long term?" I can't tell you how many times I've seen young people take over their parents' practice and resent their parents for the rest of their life and for the rest of their death because they got sold a bill of goods, or they felt like they were bullied into buying the practice, which often happens in a circumstance like this.

A couple things that you said are really important in that example. One is, it's very possible for a practice to be too profitable. It's okay at 30%, 32%, but usually, and, in fact, you revealed this, usually what that means is that the advisory firm is not reinvesting in itself. And a $200 million asset firm with a 30-plus percent net return, in my estimation just on the surface, is probably too profitable. They're not a critical mass to sustain that kind of value. So if the young person has to take it over, it's like buying a fixer upper but paying a premium price for it. And so not only did you overpay, you're now going to have to pay for the repair work that has to be done on something that has bad plumbing, bad infrastructure, and a bad roof.

Michael: And that was his challenge. He was coming in and saying, "There's a whole lot of cash flow. I can buy it for the cash flow because the cash flow will finance the deal." But he was saying, "But I want to come in and grow it. I have to buy the cash flows and then I have to take the money from the cash flows to pay for the purchase. But then I have to take the money from the cash flows to get the growth going again, and I can't do both."

Mark: Right. So that would tell me that... I mean that's a good way to analyze the business opportunity in that case. It's interesting, sellers tend to have an overinflated perception of value, and I think family dynamics really make it awkward and difficult in those cases. And sometimes it's because the founder has not done planning for himself and is not either emotionally or financially ready to leave the business. And in some cases, it's just a question of greed, where they don't fully understand the business economics. So there's a thought process that people can go through that gets you to agree on the assumptions before you agree on the conclusions. And I think that one of the problems we have in the business today is people are bought into rules of thumb for what practices are worth, thinking that every firm is the same...

Michael: Right, the infamous two times gross revenue for an RIA.

Mark: Yeah, exactly. And it's like, well, that can't be true. I mean, I knew of a practice that had... It was generating three-and-a-half million dollars of annual revenue. The owner was taking home $75,000, and he thought his practice was worth two-and-a-half times revenue. You know, how do you get there?

Michael: So there's this progression of phases of the firm, which I love, from wonder, to blunder, to thunder, to plunder. So I'm going to imagine, in the early stages of the benchmarking study, it was all wonder and maybe a little blunder because, literally, the business isn't big enough and around long enough to even showcase what those thunder and plunder stages look like.

So I'm curious how the study evolved for you, or I guess how the conversations evolved for you, if you went from, in 1991, you're doing this study and a leading advisor actually has $10 million on top of what's probably predominantly a commission-based business. And then by the early 2000s, I'm going to imagine it's, you can correct me, maybe $25 or $50 million. And then by the mid-2000s, it's $100 million-plus. So what did that evolution look like from your end as you saw that happen across the whole industry? What kinds of challenges did you watch cropping up as firms went through those growth processes?

Mark: Well, the first one was really in the hiring of personnel. In fact, one of the points I was going to try to make around the notion of wonder and blunder and the other phrases is that oftentimes advisory firms get too big and too small at the same time, where they needed to reinvest because they were growing clients and they couldn't adequately support them by themselves, and so they had to add people. This impacted profitability and this impacted cash flow. And so, as a result, they often thought, "Well, I need to figure out how to make more money off of these people or I'm going to die." And so, the tendency was to make poor choices around people, and leverage and training and development that hurt a number of them.

Michael: So that would be a scenario like, "Hey, I'm actually getting...I'm getting $200,000 out of my practice and I feel like I'm hitting their wall. I want to hire someone, but the only way I'm going to hire a $50,000 person is if it's someone who can go get $50,000 of business and pay their salary because I don't actually want to go backwards personally." And then you're not actually building the infrastructure of your business, you're just hiring more people that go get more clients, that actually compound the problem because you don't actually have any staff to run the business.

Mark: That's exactly right. And in fact, they'd hire people who weren't hired to be business developers, where they'd say, "You have to earn your own keep." I mean, this is even in RIA firms. This is not just in registered rep or brokerage practices. Even today...

The Walls Advisors Run Into As Their Firm Grows [48:17]

Michael: Anybody's who's in 15-plus years, we all came from an "eat what you kill" environment. Even for me, I've been in the RIA world for, what, 14 years now, but I'm still old enough as a 39-year-old to have started an insurance agency and spent time in the independent broker-dealer. I mean, the first few years of my career were all "eat what you kill" as well. Only later did I get to a firm and was like, "Oh, people pay salaries in this business? This is kind of neat."

Mark: I know. If you compared it to other professions, as so many people in the business try to do, they would realize that there's another way to do it. But what would inevitably happen is that practices would hit a wall. I often equate it to the Fibonacci sequence where what happens is that...wherein the numbers are a multiple of the two previous numbers. And so, what we would see is that practices would hit a wall at 5 people, then at 8 people, then at 15 people, and it would just continue to go. And hitting a wall meant that their span of control would become a problem.

Many founders didn't want to give up control of anything. And so, the people they hired to do the work wouldn't do the work, or they'd say they did poor work, and so it really became complicated in those relationships. So I think that one of the things I would say has really been transformational over the past decade is this notion of taking a more professional attitude about management, where the better firm's conscious of what their strategy is and they manage to that goal, where they organize their business around their vision and their strategy.

And they have metrics that help them to measure things like productivity and efficiency and error rate and those sorts of things, where they have a human capital plan and some discipline around not only how they hire people but how they define success and how they help individuals to achieve success. And then actively managing the profitability, paying attention to the metrics that we just spent some time talking about, that really inform whether you're managing to the right outcome. That's probably, over the last decade, been the most fulfilling part of this missionary work, is to see it actually taking root in quite a few firms where they've learned over time that there's a better way to do things.

Michael: So I'm curious, this Fibonacci sequence of walls that we hit. Maybe you can paint a little bit more of a picture of truly what some of those walls and dynamics are. I know I like to talk about a lot, the hardest hire you ever make in your advisory firm is virtually always the first hire. I mean, it's that moment when your headcount doubles. So you go from one to two.

You will take the single worst hit to your profitability that you will ever take for any hire, because 100% of it comes out of your pocket with no operational leverage yet because you've never hired anyone else and there's no people making money in the business besides what you do personally and what you take out of your pocket. And you hire your first person and you start delegating some stuff. And then you hire another person and you start delegating some more. And then you hire another person and you delegate even more. And a lot of advisors tend to get these teams of kind of two to four support staff. Maybe there's an admin and a paraplanner and maybe one or two part-timers that kind of add up to another full-time equivalent. And then you get to about five. And so what's the wall that people hit at five? What's the magic thing about five?

Mark: So what happens now is that the owner or the founder is not in control of every activity. Things actually go on in the practice that he knows nothing about. And it could be a client contact, it could be getting out a report, it could actually be delivering a piece of advice or a solution to a client. And inevitably, the client, if something goes wrong, is going to come back to that person and say, "Man, you are really screwing up." And so the instinct of the advisor is to find somebody to blame. There's an old adage in this business that you're never really successful till you find somebody else to blame.

So span of control is probably one of them, because you hired people to create operating leverage but you did nothing to implement processes that allow you some degree of command and control within that process, and quality control tends to suffer.

Why Standardization Is Essential For Providing Customized Services [52:50]

Michael: And so that becomes the driver. Now is when you have to start doing more process and systems if you didn't before because that's how... If you let every new staff member do whatever it is they're going to do, they may or may not do it the way you wanted it done. If you make the process for the firm and that's what people have to follow, now at least you've got some reasonable assurance that either they're doing it, or if they're not, they're accountable to something because you set what the standard is supposed to be.

Mark: Exactly. And in fact, several years ago... If any of your listeners want a copy of the white paper (Note: Paper titled Mission Possible III: Strategies to Sustain Growth in Challenging Times), I'm happy to provide it. They can let you know or let me know, however they want to do it.

Michael: Sure, we can post it up to the show notes on this page. For anybody who's listening to the podcast for the first time, this is episode five. Show notes for the episode are just at www.kitces.com/5. So, www.kitces.com/5 for episode five. And we'll have the white paper posted up or a link where you can download it.

Mark: Yeah. The idea behind the white paper was to look at the operating efficiency of advisor practices. And what we found over the life cycle is that, in the first phase, practices tended to be advisor-centric, meaning that everything they did from a process standpoint was organized around the preferences of the advisor. And clearly, that's not efficient if you have multiple advisors because everybody has their own preference in how they do things.

So they have this epiphany and say, "Well, we can't be advisor-centric, we have to be client-centric." And often what that meant was the advisory firm would customize everything for the client. Not just the advice, but the way in which they created reports, the way in which they would deploy technology, all kinds of things that you can imagine within a practice. And that wasn't efficient because what they had to recognize is it's okay to have the advice be customized but the process had to be standardized.

So the recognition of the best performing firms were those who were what I call process-centric. And in that case, they had literally a discipline around the way in which work was done. Those things that could be standardized were standardized, and those things that had to be customized were customized. The consequence is that you have a quality control process in the work you do and you can check on it with some regularity and systemization. But that didn't mean that you altered the client experience, it just meant that the client couldn't define every step in the process.

Michael: I'm always fascinated by this dynamic. The, always to me, been this prevailing view in our advisory world that we're client-centric businesses, it's all about the client, you do whatever the client wants. And since we all like to talk about how everything we do is individualized for the client and customized for the client, "Your financial plan is for you and your advice is for you, and we're implementing what's right for you," that things can't be standardized because then you will erode the individualized, customized experience for the client that we say we're trying to create.

And the distinction for me that I love, I don't even remember where I heard this the first time, is to look at a company like Starbucks. So however many thousands of locations around the world, I can go in and I can get my nonfat, skim Caffè Misto with two shots of espresso and an amaretto mixer, and they'll make it exactly the same way, no matter where it is that I go, so I can always get my little specific drink. And the fascinating piece to it is that juxtaposition that one of the legendary things about Starbucks is they have standardized every possible, imaginable step of the process, down the point where they've standardized the role of ordering and making the coffee, down to, I think, something like 10 or 15-second increments so that they can figure out how to do process improvement in 15-second increments.

And so, you take that kind of obsessive focus on every minuscule part of the process, but what they end out with is because they are so focused on standardizing the process, that's what lets me order my customized, individualized drink just for me and it's made exactly the same way at thousands of Starbucks locations around the country. The standardization doesn't eliminate the ability to customize. The standardization is actually what lets you customize consistently for clients over time.

Mark: Yeah, that's such a wonderful example of how standardization actually is beneficial to the client experience. Another one that I would give, because people in this business often invoke the idea that they're professionals, like doctors and lawyers and so forth. Imagine going to your physician with an ailment and that they didn't have a protocol for how they discovered what that ailment was. What if they just said, "Well, tell me how would you like me to do this examination. Do you want me to start from the bottom or from the top?"

And we know where they would start. It's the same sort of thing here, is that you're letting your clients dictate your profession, dictate the way in which you know it should be done. And there's a reason why you have a sequence to your discovery, your analysis, your recommendations, your implementation. And clients aren't paying for that part of it. They're paying for an experience, not for "I want the graph to be up in the left corner, not the right corner," you know, all these kinds of things. And so, part of it is how we train our clients to appreciate the way in which we do things, and there's a logic to it. And eventually, they adapt.

Michael: So if we hit this wall around five, where it's kind of the process one, I should even know there's an earlier one that I see for most firms that hits. If not with your second staff member, it hits the moment you add a third, which is, if you don't have some kind of centralized CRM, it becomes absolutely crucial when you get the third person because now you get to the point where you are not the only one touching and communicating with the client. You can't coordinate amongst three people with informal conversations to keep up on who talked to who and who said what.

Like, I can keep up with my clients. I can keep up with my clients and my assistant because it's either me talking to the client or her talking to the client, and I know what conversations she's having, or she tells me. But the minute you add a third person in, and everybody can't keep everybody else updated, you have to go and adopt CRM in some centralized location where you capture client contact and client interaction so that everybody knows what everybody else has been doing in that client relationship.

Mark: Yeah, what's interesting about that example, I think, is if you imagine what a good idea it is to have that discipline anyhow, even if you were a solo practitioner. You know, because, I mean, our memories are never what we think they are. And in fact, it's interesting when you have the chance to actually document something and you go back to it, it gives you a chance to think about it too and to actually self-evaluate, to do your own quality control on what you're doing, and to being able to feedback to the clients exactly what it is that they're expecting from you. But, you know, it's the nature of the beast...

Michael: I find like a lot of people seem to feel like, "Well, I've got all my email threads, and I kind of do that and I communicate a lot by email so I can reconstruct the threads." I agree with you. It's valuable to document those interactions in a central place from day one. But I know what I see for a lot of advisors in practice, CRM or their email Outlook or Gmail or whatever it is they use, often becomes that starting point. It works fine for them and it works fine for them and their assistant because their assistant is CCed on everything and CCs them on everything. But the minute you introduce to yourself the need to read three people's email just to make sure you know all the correspondence that was happening with your client, you hit a wall and your business starts breaking down because it's got to get centralized at that point. It goes from a best practice to a necessary one.

Mark: Well, what's interesting is that in a way, it's like a communications general ledger. It's the same problem in financial terms that we talked about in client management and communication terms, is that what are you really solving for if you've got to go through a whole history of emails to find out exactly what it is that you said.

Michael: So we know what these walls look like. You get the CRM wall at two or three, and then a process wall at five. So our Fibonacci sequence then takes us to eight. What's the wall that we start hitting when we're approaching eight employees?

Mark: Well, there's several things that happen when we get to eight employees and bigger, and the first one really has to do with the recruitment and retention of talent. And key to that is having a career path and a development plan for the individuals that you bring on. There's probably a higher level of people turnover at this level than at any other stage within a practice because the owner or the founder or the managers are not truly connected to their staff. Their staff tend to be feeling overworked and underappreciated. There's no obvious course for them to follow. There's no clue as to how they're going to become a lead advisor or a principal or partner within the firm.

Michael: The business is too small to promise a career track because, "I don't know what our business looks like in 5 or 10 years." But you're still an employee here and you obviously want one, so you get rather dissatisfied not being certain quite what your own track and future is.

Mark: Right. And ironically, in many cases, the founder may have hired people to support him or her in the servicing of clients but may not have another growth engine. So this becomes really a dilemma in that the owner is saying, "Man, I need to grow more revenue and profit before I can afford these people or give them raises or make them partners." And so it's really a challenge of being too big and too small at the same time.

Michael: I find for a lot of advisory firms, even for the most successful of those advisors who are really good at going out there and getting clients and bringing in business, at some point in that stint from five to eight employees, and frankly some people hit this wall earlier, you just start getting to a point where it's like, "Oh, my God, there's a lot of people that I am solely responsible for powering the growth for. If all my staff are going to get raises next year as they're probably going to want, I need like X million dollars of new assets that I personally have to bring in. Not to put any more money on my plate, but just to make sure they get their raises so they don't start quitting."

This burden starts to grow on the advisor's shoulders. I feel like I see a lot of firm owners, this is when they start looking for partners and, "How do we bring in more business than I can bring in alone? Because this burden of carrying all the growth on my shoulders gets hard when the firm gets that big."

Mark: Yeah. And what's interesting is there's an element of martyrdom that comes into play, too. In fact, oftentimes it's phrased similar to how you might have characterized it there, in that, "I'm working for you, you're not working for me. I'm doing all the suffering here and you need to suffer as much as I do." And you know, it's not exactly an attitude that's conducive to employee retention and development.

I remember one situation. I was on a speaking tour for a mutual fund company and we would have a lunchtime talk, and then we'd have a breakfast with a group of advisors and a dinner with a group of advisors. And usually, the breakfast was a small, maybe five or six advisors around a round table. In this one particular one that I participated in, the moment I went into the breakfast room, there was one advisor who just dominated the room. He was just complaining about everything. He talked about how the business has grown and how successful and wonderful he is. He said but, you know, his employees suck. "You just can't find good people anymore." He just went on a rampage about...

Michael: His challenge in finding good people?

Mark: Yeah. And the people he had, he said they were just terrible. I mean, it was really uncomfortable. And finally, I interrupted him. I said, "Excuse me. I got to ask you a question." He said, "What's that?" I said, "If something were to happen to you," hoping that it would happen soon, "If something were to happen to you, would you tell your wife that she should work with your employees to manage through the process?" And he said, "Absolutely not." It was a stunning moment, like, "Wow." We have to really think about, are we prepared to be a manager and a developer of people if we're going to be in this business? And that's what I worry about as firms get bigger, is whether they are emotionally, let alone financially, but emotionally ready to act and be a true leader of businesses?

Michael: So I know for a lot of advisors... I didn't get into this business to be a manager and developer of people. I got into this business because I like answering people's financial questions and helping them with their financial lives, like, the clients. I didn't get into this to manage and train and develop people and staff. Is that a fatal wall, if I'm not willing to do that or I can't transition to do that? I just only get to have a business so big and then I have to top out?

Mark: Probably. Or you have to hire somebody who's going to be your crap master, and that's a legitimate choice. That's why chief operating officer is one of the fastest growing career paths within financial services today, is because advisors say, "I love the client side of things. I hate the business side of things. So what's my solution?" And that's perfectly acceptable.

Michael: How big do firms typically get when they have to face that conversation and decide "Am I really going to hire a chief operating officer or not"?

Mark: When you're probably at a million to a million-and-a-half of revenue. That is the time to be thinking at least about a general manager if not a chief operating officer. In fact, I had a group of independent advisors from Australia over here a couple of years ago. And I was talking about this subject, and the host said, "You know, Mark, we've heard this topic before and this has been one of the disciplines that we've introduced for all of the firms we serve." And every one of those practices, when they hit $750,000 of revenue hired a professional manager. And I said, "What was your experience since then?" And almost every one of them has doubled in growth because it allowed them to focus on what they did well, and delegate that which they didn't do well or didn't have a passion for.

Michael: We went through a version of that with XY Planning Network as well. You know, the business has grown very quickly. We're two-and-a-half years in and already put on 350 advisors or so onto the network and you hired up 12 staff to run and operate the business. And my partner Alan Moore and I actually had made an agreement and commitment rather early on that my skill set is writing and speaking and strategy and vision, and it's really not managing people. I wore that hat for several years and have proven to myself with substantial effort that it is not my skill set and my gift on this earth. And Alan readily acknowledges it's not really his either. He's fantastic at starting projects and coming up with ideas and getting them off the ground, but he doesn't relish the path of that ongoing manage and nurture staff and employees. We recognize it's important but it's neither of our skill sets.

And so we made a decision very early on that somewhere around employee number eight, we were going to be hiring a COO, if not sooner. And I think, in the end, we ended up hiring at number 6 because the business was growing so quickly our road map was we're going to go from 6 to 12 in another year or less, and said, "We need someone that can handle that pace of growth and all the hiring and the staff development and management that goes with it." But it was a conscious decision for us of, "I know this is not my skill set, so we need to plan to get ahead of the ball, or the business is going to collapse on itself because we're not going to develop our people the way that they should be developed. And someone's got to be responsible for that if it's not going to be us."

Mark: There's a line often attributed to Confucius. I don't know if he's the one who said it, but in essence, it says, "Do work that you enjoy so you'll never work a day in your life." And I think that for many people in this business, they tend to dabble in things for which they don't have a passion, but they also have a death grip on the business and can't let go, but for those that get comfortable with the idea. And financial advisors are just like people. I mean, they're just like every other business owner that I've ever worked with.

And that was a big part of my focus in my early years, is that entrepreneurs don't tend to start a business saying, "I really want to build a castle with a bunch of people in it." What they're saying is, "I want to build this product or this idea or this solution, and hopefully people will buy it." And I think that, you know, one of the best examples I can think of, an innovator and an entrepreneur who recognizes early would be Bill Gates. He was quite young and the business was in quite an evolving stage when he hired a CEO for the business. I mean, he moved up to chairman and he said, "I'm the idea guy but I sure in hell don't want to be running this thing day to day."

Where Mark Sees The Profession Going In The Future [1:11:14]

Michael: I'm curious, as you've watched how much the business has evolved, where do you see it going from here? If I'm a younger or newer advisor coming in today and trying to figure out where do I want to build my career or where do I want to start a firm or where do I want to go with this thing, what do you see is the forward-looking path from here?

Mark: Well, frankly, I think this is an unbelievable business to be in. I think if I were starting over, I'd seriously be thinking about how could I get involved even more quickly into this business. But, unfortunately, this is not a profession that is attracting a sufficient number of people. So, one of the cool dynamics but also one of the concerning elements is that we have an oversupply of clients but an undersupply of people to provide advice. So anytime you have that kind of dynamic, you have to say, "Man, this is the right business."

That said, I think what's clear, what's very clear to me, it's almost like watching it in slow motion, is that there are going to be a handful, perhaps as many as 10 to 12 national firms. And frankly, Schwab, TD, and Fidelity are in the lead on that in terms of already having great brands, great retail brands with advisors already staffed in their business, with a proposition that allows them to do it, and a human capital department.

Michael: And perhaps Vanguard pivoting to be number four there now.

Mark: Vanguard. And then you've got another tier of firms like Aspiriant and HighTower and Savant, United Capital. You look at all these firms and they actually sought capital in some cases. I don't think that Aspiriant has, but in other cases where they've actually raised capital to begin this. Pathstone Federal Street, another great example that I cited earlier of a firm that has been making moves in that direction. And so we can see them all over the place.

So I think what will happen is, we'll have several nationally-branded firms, and I expect to see probably 50 to 60 super regional firms. The template for this is really in the accounting profession. To a limited degree in the legal profession, but certainly in the accounting profession where they had a big 10, then a big 8, and then a big 5, and then a big 4. And there are a number of reasons why there was shrinkage there. But what they also had were firms that they call Group B. These were the mid-tier, super-regional firms like Moss Adams as an example, like Plante Moran in the Midwest, that the AICPA actually classified these as Group B firms, that they had a full-service practice but they were market dominators. They led within their regions.

There's a belief that when you're one of the top three firms in a service business, then you're going to get twice as many opportunities to do business as the fourth next firm. I think that with the sophistication of management coming into this business, the recognition that there's an opportunity to be a market dominator, which means that you have to be the employer of choice, is really going to be critical.

Michael: So if I'm a person getting started or I'm a couple years in my career now, should my goal simply be, "Don't even bother trying to build one of these things from scratch. Just go get a job at Schwab or Fidelity or TDA or at least one of the large emerging, regionally dominant firms, United Capital, Pathstone Federal Street, one of those"? Just go get a job at one of these growing up really mobile firms and you'll have a good career and that's that?

Mark: I wouldn't say it's that's that, but I would say that's a very good first step. I appreciate the fact that everybody wants to...or many people want to own their own business. But sometimes starting out in this environment where you have some really sophisticated competitors, you may not be advantaged by trying to create and compete with a tiny little business, unless you came up with a unique proposition.

Michael: So some kind of specialization, some kind of niche, some angle like that?

Mark: Right. I say that, but I think it's perfectly fine if somebody can come up with their own business. They say, "I just don't want to work with other people. I want to create my own thing." There are plenty of examples like that. But I don't think that's the easiest path to success. But I would have in mind my own career path that I'd take control of, to say, "Who can I learn from that is going to be transformative for my business? Who's going to teach me what I need to know about this business? Because even if I just got my CFP right out of school, it doesn't mean that I know anything. I don't know how to manage people. I don't know how to develop consistency in my recommendations or the protocols for how I want to do things."

And I think that's where people, if they manage their career, can learn from others in a form of apprenticeship by taking control of it. I don't think that they have to be consumed with the idea that they're going to work in the same place for all of their lives. I mean, that's something that my dad and his dad did, is...his generation anyhow, where they thought in terms of a company is their career. And you don't have to think in those terms.

Michael: I'm curious for you at a personal level then, that decades now of consulting with advisors, watching the evolution of the business, making your own transition from a consulting role to a leadership role as CEO for Pershing Advisor Solutions. I'm curious how all of this has rubbed off on your own leadership style or how your own leadership style has changed and evolved over the years.

Mark: Well, the first point I would make is that this isn't my first leadership role. This is one of several that I've had over my career. Even though I was consulting, I was also running the consulting business and I was the CEO of another consulting firm. So much of this... I would say that my... You talk about doing things that you have a bias for. I think business leadership is always something that has turned me on as a career choice. And that's not to say I've been always good at it. In fact, I can recall many times where I've been terrible at it. And where I was terrible at it, in the beginning, was in the management of people. I don't think I was... I was either too empathetic or not empathetic enough. I was either too disciplined or not disciplined enough. I was either too tolerant or not tolerant.

Michael: So you just swing back and forth like, "I was too hard on that last person, they quit, so I'm going to be softer this time." So then you were softer the next time and then someone just took advantage of you and you just kept going back and forth, trying to figure out how to manage these crazy people.

Mark: Exactly. And I would say that the other area that I probably...much better at, but I don't think I was good at in my early years, was I am a natural delegator. I feel very comfortable when I've developed trust in a relationship to empower people to do the right things. But one of the lessons I learned after a few tragic experiences, I would say, is that when you delegate, that doesn't mean you abdicate. And that was a really hard lesson for me to learn, is that delegation doesn't mean not being involved in the process. And so, I would say that's also a big lesson for firms that are emerging and individuals that are emerging in this career as to how you take control of that.

Michael: So what does that balance look like for you now? You'll delegate but you'll still go in and oversee from time to time? And you're running a big business, so I imagine that's personally time consuming. How do you...what does that balance look like then for you?

Mark: For me, I learned this...I don't even know who taught it to me but it's worked for me, since I've been here at least, is that during any period of time, and it could be a short period or a long period, any period of time, there are three positive things that I'm working on for the business and three things that are a problem or an issue that I'm working on. And so, because I can't...I can't manage everything. I can't deal with everything. I can only deal with those things that are within my grasp, is taking one element at a time and managing to an outcome has really been a better way for me to address things. And then I move on. It's like I don't stay perpetually involved in something. But at times I just have to dig in and do what I have to do.

I also spend a fair bit of time directly with clients. One of the things I do enjoy is spending time in the field with our clients, talking about their business and other things. One of the things that that provides me benefit, is really understanding what's on the minds of the marketplace, is that we can't forget the fact that we're in business to serve advisors who are serving clients. And if I distance myself from their daily woes, then I'm going to miss a lot of bets, and I don't want to do that.

Michael: As a final question as we wrap up here, you've seen lots of advisors at different levels, in different stages of success. As you had said in the beginning, strongly agree that we need to be careful not to render judgments around someone that has a "successful lifestyle practice" versus someone that has a "successful advisory firm" that they've built very, very large. People measure what success means to them in very different ways and it's actually a very personal definition. And so I'm actually curious for your perspective as you both have consulted with 1,000-plus advisors and in your own career trajectory. If we look at success, what does success mean to you?

Mark: Success, to me, is whether or not I impacted the lives of the people with whom I work. I tend to think of what kind of legacy am I leaving. Not in terms of trophies or awards or things like that, but more in terms of, did I help to build a sustainable, enduring business? Did I help other people to make a difference in their own careers? And if I can touch people that way, then I probably don't find anything any more rewarding or fulfilling than that, to be perfectly honest. I could do that all day long. And hopefully, when I move on to the next chapter in my life when I do my encore, I'll continue to function in a similar capacity of working with people to make that sort of change.

Michael: Certainly, I think have left quite a legacy in the industry already, from all of the benchmarking studies out there that pretty much emanate from what you started doing in the wilderness, in the early '90s, to, frankly, the fact that most of the people that still do that work today were people that were built and trained under you during those years. And I can only imagine what the legacy will be at Pershing Advisor Solutions with, what, already like 7X growth in the past 5 years, which, in a hyper-competitive world like custodians, is frankly an astonishing number and amount of growth to me.

So, I thank you, thank you for joining us here on The Financial Advisor Success podcast. I hope it's been helpful food for thought for everyone, just getting some perspective on how the industry's evolved, and the kinds of walls that we hit and get over them, hopefully some ideas to take away for people that are maybe trying to work through some of those walls in their own practice.

Mark: This is a real service to the advisory community and wish you great success with it. We will be sure to promote it to our friends and clients as well as something to tune into. I'm looking forward to future podcasts as well.

Michael: Well, thank you. I hope we can get the word out there.