#FA Success Ep 371: Pairing Equity Appreciation Rights With Partnership Equity To Retain Long-Term Advisor Talent, With David Savir

Resources Featured In This Episode:

• David Savir
• Element Pointe 
• David Savir's Path To Partnership Document – Download (PDF)
• iCapital
• CAIS
• Addepar
• IntelliFlo RedBlack
• J.P. Morgan Private Bank
• Goldman Sachs

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

Are you a successful financial advisor, or do you know of one that would be a great fit for the Financial Advisor Success podcast? Fill out this form to be considered!

Full Transcript:

Michael: Welcome, David Savir, to the "Financial Advisor Success" podcast.

David: Michael, thank you for having me. I'm so excited to be here. This is a full-circle moment for me. I've been listening to your podcast since episode one, and it's been a hugely instrumental part of shaping the way that we've built the company. So, thank you for all that you do for the industry, and thanks for having me on.

Michael: Oh, well, thank you. I know you've had, I guess, a journey for the firm that's kind of paralleled the growth of this podcast itself. And you had started not long before we started this in late 2016, very early 2017. And so, I'm looking forward to talking about the growth journey, and, I don't know, I guess what's been good milestones for you and the growth as we've grown the podcast and brought guests as well because I'm...

David: Likewise, I'm excited to talk about that. I think the first episode of the podcast was around 6 or 8 months after we started Element Pointe. So, I feel like we've grown up with the podcast.

Michael: Oh, it's so cool. That's so cool. And I know it's been an interesting growth journey for you. Well, I'm always looking forward to the conversations around...today I think around these dynamics as firms grow, and we decide we want to be multi-advisor, that's a choice to make. But once you cross that invisible line and you start adding multiple advisors in lead positions, I find there's this whole dynamic that changes in the firm where you're not just in a position as a firm owner to provide a salary and a living for the team that works for you. Once you get to a certain size and start bringing on other advisors, there's kind of this obligation and pressure that grows to build out entire career tracks for them.

Team members often stay at firms for many years. Advisors can stay at firms for decades. And so, there's a whole other layer that starts to crop up around, "Well, what is our career track to become an advisor, to become a senior advisor? Can we become a partner? Is there a partnership opportunity? How does equity work around here? When do we get to tap into that? What's the difference between equity and partnership and compensation and management?" And I know your firm has been dealing with this as you've gone through your own rapid growth cycle over the past 8 years or so. And so, I'm looking forward to digging in and getting to talk a little bit more about how you're trying to solve for these dynamics of partnership and equity and compensation within a fast-growing advisory firm.

David: Absolutely. It's an area that we have spent a lot of time thinking about, and I'm excited to share the approach that we've taken. And it's continuously evolving as we learn more about the industry and the possibilities and how to structure these types of things. But I think it's so important to have in place forms of both phantom equity or real equity and structuring an organized path to partnerships so that every member of the team knows that they have the ability to be partners in the business one day and some clarity around what it would take to get there.

Element Pointe Family Office As It Exists Today [07:23]

Michael: So, we're going to get into that a lot further, but I think before we delve in there, to get us started, just help us understand the advisory business itself that you have as it exists today. Just paint the picture for us of the current firm, who you serve, and what you do.

David: Absolutely. So, our firm, Element Pointe Family Office, is a fee-only RIA and multifamily office. We work with a fairly select group of ultra-high-net-worth and high-net-worth families primarily. It's about 50 families today throughout the U.S. And we oversee about $1.5, almost $1.6 billion in assets under advisement. Our business is somewhat unique vis-a-vis many RIAs in that we...because we work with many single-family offices and ultra-net-worth families, we have about $800 million or so in assets under management, but we also have consulting engagements and family office advisory service engagements for both portfolios and illiquid assets, private equity holdings, direct investments, real estate holdings, and so on that aren't necessarily traditional regulatory AUM.

Michael: Okay. So, I'm just trying to visualize these numbers. So, almost $1.6 billion of AUM 50-ish families. So, we're talking about average household has $30-plus million, and it maybe the higher net worth because you don't necessarily advise on everything on the balance sheet necessarily.

David: Yeah, that's exactly right. And the median and the mean are a bit different there. So, over time...

Michael: Big clients pull up numbers.

David: Exactly. Exactly. And so, there's a pretty wide range.When we started the firm, we really wanted to serve a variety of clients. And we felt like there were opportunities to do a better job in many ways than what we were seeing in various parts of the industry. And we really wanted to impact as many people as possible at first. But what we found over time is that we really were adding the most value to high-net-worth and ultra-high-net-worth clients in terms of the complex planning and the unique needs that they had. And we really decided over time to just focus in that space. And so, our business has really shifted entirely into the ultra-high-net-worth space over the last few years.

That might make us an outlier, but that's the trajectory that we've taken. And I think it was really informed by just our professional backgrounds and educational backgrounds, where we thought we could add the most value.

Michael: What brought you to that?

David: Sure. So, I started my career, and I should preface this from an educational standpoint. I started out... I'm a lawyer by education, although I don't practice. And we, as a firm, don't practice law. But I came out of a JD/MBA program and joined Goldman Sachs out of graduate school, and started my career there working with high-net-worth clients. And then, later joined J.P. Morgan and spent about 4 years at J.P. Morgan working with ultra-high-net-worth clients. So, most of my career had been spent on the ultra-high-net-worth side of the wealth management and private banking business. My business partner and co-founder of the firm, Carlos Dominguez, he and I worked together at J.P. Morgan Private Bank. So, he had a similar experience in working with high-net-worth individuals and families.

But he actually was a complete career changer from the institutional side of finance to the wealth management side of finance. He spent about 9 years as a hedge fund portfolio manager at an equity long-short fund in New York City, and then started his career as an equity derivatives trader and market maker on the AMEX, which, of course, later merged with the NYSE and became part of the NYSE. So, he came from a deep institutional money management background, whereas mine was more rooted in law and in wealth management for high-net-worth and ultra-high-net-worth individuals. And when our firm initially took shape, we had launched it to initially work with 2 or 3 families that we had a pretty good idea would work with us coming out of the gates.

And when we sat down and we thought about the business, we thought through a lot of the things that you just mentioned. We considered the fact that we'd want to diversify the client base fairly quickly. In the wealth management business, the fees from a percentage standpoint on smaller portfolio sizes tend to be higher in terms of basis points than for larger clients. So, we thought that was a nice way to diversify the business as well.

And so, when we set out to start the firm, our initial vision was, "Let's also have some high-net-worth or emerging wealth clients to diversify the client base and diversify the revenue base." But over time, what we've realized is that our real expertise lies in giving sophisticated and highly customized advice to ultra-high-net-worth families and single-family offices as well. We're really deep in that area. And we've built an outstanding team of 11 professionals today who are all focused on the ultra-high-net-worth space. And some of whom weren't necessarily focused on that space before joining our firm, but who really have specialized in it over time. And so, it's really become our focus. And so, it's been the focus of the firm over the last several years.

Growing The Team To Meet The Hyper-Customized Needs Of HNW Clients [13:26]

Michael: So, tell us a little bit more about the team structure that serves this client base of...what are the seats on the proverbial organizational chart to do what you do?

David: Sure. So, day 1, there were only 2 of us, Carlos and myself. But over time, the team grew from Carlos and I each having 10 roles to gradually bringing on great people and delegating some of those roles and having other advisors and investment professionals as well. So, our team today consists of 3 professionals who are in what I'll call an advisory role. So, I am CEO of the firm, but consider myself the senior advisor on the team. We have a VP-level advisor, Kris Martin, who has been with the firm now for about 7 years and is an outstanding advisor and a wealth planning specialist on our team who joined us in a planning capacity. A lot of people think of planning in the context of retirement planning and so on.

We think of planning in a little bit of a different context, although just as important, in our side of the business, planning can involve very complex ownership structures with all sorts of irrevocable trusts or family-limited partnerships or other entities that have been created over time. And often, those entities have cash flows that go between them, either for inter-family loans or promissory notes on intentionally defective grantor trusts with sales of businesses being made to those trusts. And so, planning on our side of the business really involves a lot of cash flow modeling for what the cash flow requirements are for various entities that make up this overall family ownership structure. And so, my colleague, Anthony LaBrake, who's a wealth planning specialist on our team, focuses a lot of his time in that area in modeling out ownership structure, the estate plans, and having a really deep and thorough understanding of what the overall architecture looks like of a family's ownership map, if you will.

Then on the investment side, which is led by Carlos as our CIO, we have 4 professionals. Carlos is CIO and oversees overall investment strategy. We have a VP on the investment team who has been with the firm almost since day one. He started about, I think, 6 months into the firm, and then an analyst and associate on that team. And so, their focus day in, day out is the investment side of the business. They are conducting research, they're meeting with economists from a variety of areas, they are meeting with fund managers on a regular basis evaluating all sorts of financial products, and also doing trading and rebalancing of portfolios. And so, their focus day in, day out is the investment side of the business.

We have a client service team led by our client service manager, John Rodriguez, who joined us also fairly early in the evolution of the firm. And then, we have a full-time operations associate and marketing person as well. And that's a fairly recent addition to the team to have kind of a dedicated marketing role. And that just goes to our growth plans, which are to really continue to develop the brand and have the business be not just a business built on my network or Carlos's network or a couple of our colleagues' networks, but rather a standalone brand that's recognized within the family office and ultra-high-net-worth space that we can continue to build upon.

Michael: So, I'm struck in this framing. It just gets to the nature of much larger clients and service demands that they entail. You've got essentially 3 people in the advisory capacity, yourself, and a VP, and a wealth planning specialist. I'm putting that in air quotes, like 'just' serving nearly 50 families. From a ratios and like 16 clients per advisory staff team because there's a lot of stuff you've got to go through when you're trying to validate fee structures for those clients. And what it takes to serve them when part of the planning process is like, "Let's map out the cash flows between your agents and your other family trusts and make sure the family member partnership is sufficiently funded and map all those cash flows."

David: Yeah, that's exactly right. There's so many variables depending on the family and where they are in the life cycle of wealth creation, if you will. So, there may be a family that continues to own and operate a highly successful family-owned business and is perhaps looking to maybe not monetize in the immediate future, but over the coming years. And so, they're thinking about putting the plans in place. And we may be doing everything from meeting with investment bankers alongside them to discussing various liquidity type of scenarios that don't involve an M&A transaction, like a dividend recap, and standing beside them each step of the way, educating them on what the process looks like for something like that. So, that may be an area where a family in that scenario could use our assistance and guidance.

On the other end of the spectrum, there are families that perhaps are post-liquidity events, may have numerous legal entities set up. It's not uncommon for families that we work with to have dozens of LLCs or family-limited-partnership-type entities owned, in turn, by 5 to 15 irrevocable trusts. And then, on top of that, of course, have individual accounts for each family member and joint accounts and revocable trust and so on. So, I refer to it as a giant logic game. It's more than merely asset allocation or investment selection. It's all of those things, but it's those things in conjunction with asset location, understanding the tax implications across this overall jigsaw puzzle that is the family's overall holdings and really diving in and understanding all of that and being there to guide them as well.

Michael: So, help us understand more then on the investment side of the business more.

David: A lot of firms will talk about customization and building unique portfolios for clients. And I think there are many firms out there that do that and do a great job of it. I think increasingly, though, the business across the board has moved in a direction and in many ways of standardization, certainly amongst the bigger firms like the wirehouses, the private banks, and so on. When you have a trillion dollars under management already, like many of these large institutions do, it's really hard to grow and grow meaningfully unless you plug folks into one of a number of models and then focus on asset gathering.

And so, I think a lot of firms have moved in the direction of not customizing in any sort of deep and meaningful way. And so, when we started the firm, Carlos and I really set out to create a platform where we could carefully customize portfolios to the needs of the individual families that we work with. And the way that we approached that is really by first and foremost mapping out the ownership structure, figuring out what the overall investment strategy or philosophy of the family should be. But then, amongst the various generations of the family or legal entities, you may have different investment strategies or investment mandates depending on what the portfolio is designed to do.

So, I'll give you just a real-world example of that. If a client was approaching a liquidity event and set up a grantor retained annuity trust, and there's an annuity payment that's supposed to come back to them from that trust over the course of some number of years, the way that you build the portfolio for that trust is going to be significantly different than the way you might build a portfolio for even another trust that doesn't have that same cash flow obligation. And so, the model of just plugging into 1 of 5 model portfolios doesn't really work when you want to design portfolios in line with the specific cash flow needs or time horizon or whatever it may be of the entity. So, we spend a lot of time on the investment side really understanding what the needs are of not just the family overall, but the underlying elements that make up the family's holdings, and then we build the portfolios around that.

The investment platform and availability of various types of unique investments is also an important part of the way that we approach investing. So, one thing that was really important to us from the outset was to be truly open architecture. And so, it's one of the reasons why we decided from day one to be fee-only, to drop our brokerage registrations, and not have any sort of commission incentive or product sale incentive, and really be as aligned as possible, we think, with the client. We saw firsthand over the years the inherent conflicts of interest in the brokerage and bank model and...

Michael: Not just looking at them like you lived them.

David: Yeah, yeah. So, look, I think there are a lot of firms out there that proclaim that they have an open-architecture investment platform. And I think the reality is that that is a bit of an exaggeration in my view of the way the platform is actually created.

Michael: It's completely open to any of the things that we preselected will be available on the said open platform.

David: Exactly, exactly. And there's a lot of positives in as far as the global banks or wirehouse firms are concerned. They hire smart people. I've worked with just tremendously smart people in that world. But at the same time, there are institutions that have many businesses, and product sales is a huge part of most of their businesses. And so, inherent in any sort of product sale environment is conflict of interest. And a lot of times, what ends up on an investment platform has something to do with due diligence, but also has to do with selling agreements and payments for shelf space, where fund companies will literally pay brokerage firms to participate on the platform, retro recession agreements, rebate agreements, all kind of fancy names for payments that go back and forth between products, managers, and companies, and distribution channels for the sale of products.

And so, we did not want any of those incentives to in any way cloud our thinking or our judgment. And I think that's hugely important. So, we really look at everything de novo from the start viewing it through the lens of, "Does this make sense for our clients? Is this something that we would want to include in portfolios?" And we approach every manager meeting that way, both in the public markets and in the private markets. And then, what's also been really interesting to us, going back to the unique investment component, is there's so much access to quality private investments, alternative investments via the RIA channel, particularly for RIAs who are more multi-family offices and work with larger clients. In many ways, the access is so much broader and more open than anything that we experienced when we were in the banking and the wirehouse world.

Michael: What makes it different, the breadth of access to private and alts you get in the RIA channel versus having been in the mega-firm environment where I feel like a lot of that stuff basically originated?

David: Some of it is really just based on the practical aspects of what these banks and wirehouse firms have to deal with in terms of capacity constraints. So, if you're a large private equity firm or a mid-size private equity firm, you might have 8 or 10 funds that you bring to market in a given year, and a few of those might be very large, $10-plus-billion-dollar funds or even $3 or $5-plus-billion-dollar funds. But several of them may be smaller in size, a billion dollars, maybe even sub a billion. And so, when you think about the world of the wirehouses and banks and so on, they're serving...well, to start, they're serving, in many cases, 10,000, 15,000 advisors, who in turn are serving hundreds of thousands or millions of clients. And so, when you consider just the practical application of rolling a private equity investment or private credit investment across their client base, rolling it out across their client base, they need a pretty significant amount of capacity. And that capacity is not always available.

And to take it a step further, they also have institutional investors in those funds, sovereign wealth funds, pensions, insurance companies, etc. So, really, there's not in that billion-dollar fund, or even the $2 billion fund, there's not a billion of capacity. There's whatever capacity is left after institutional investors took their interest.

Michael: So, basically, in a mid-sized credit world, I actually don't want a wirehouse or a bank because, basically, if I can get in the door, they're just going to oversubscribe the heck out of everything, which no one's really thrilled about at the end of the day. Whereas if I distribute this in the RIA channel, I can go one firm at a time, I can get a handful of firms that have the right clients in the right fit. And if I am mid-sized PE or doing private investment work, that's a much easier sweet spot to get the right amount of dollars, large enough firms that can bring big checks, but not so many firms and advisors that you get swamped as the private fund and then have unhappy people because you're too oversubscribed.

David: Exactly, right. So, that's the practical consideration. There's also an economic consideration. And the economic consideration is that, generally, if a fund manager, and particularly in the alternative investment space, is being distributed or their fund is being distributed through a wirehouse or banking channel, they're paying for that distribution. And...

Michael: So, it's like the RIA doesn't ask for the rev share kickback.

David: Exactly. And that rev share can be significant. Numbers can run anywhere from 2% to 6%. So, on a billion-dollar raise, that billion-dollar raise could cost that private equity firm between $20 and $60 million in rev share over the course of the first several years of that fund. And the way that that gets paid generally is through a portion of the management fee that the private equity firm collects over the course of the first several years of the fund. So, it's expensive. It's expensive capital for a private equity firm or a private credit firm or a hedge fund, although we don't do much hedge fund investing, which I'm happy to get into the reasons why later. But it's very expensive for them to raise capital via the wealth management channel at a brokerage firm or a bank.

And so, what's happened over time, particularly as the family office universe has proliferated, is many of these alternative investment firms have actually built coverage groups that specifically focus on single-family offices, multi-family offices, and RIAs that work with ultra-high-net-worth clients. And the reason why they've done so is because it makes total economic sense for them. And also is from a practical, how do we roll out this vehicle standpoint? It makes a lot of sense as well. So, the conversations that we're having with these firms are so different than the interactions as when we were an advisor at a large institution. It's a much more iterative, symbiotic type of conversation where they'll come in and say, "Okay, here are the funds that we're bringing to market over the next 12 months."

Michael: Interesting.

David: "What interests you?" And so, now, we're having a conversation where we're leading with what we're looking for and the universe is being narrowed based on what we're looking to access. And so...

Going Direct And Leveraging Better Economics For Clients [31:59]

Michael: So, how do you find them, then? Are you still going to one of the various alts platforms that has cropped up so that you can do your searching and finding and due diligence, or do you pursue by other means?

David: So, for starters, Carlos and I have been very fortunate in that we have fairly deep relationships going back years with many of these private equity firms and managers, including senior management at many of the top firms in the country. So, I guess that's an advantage that's a little bit more challenging to replicate for advisors who maybe don't have that background and those relationships that have developed over time. So, that's been hugely beneficial for us because we're one degree removed from most firms that we want to speak with. But...

Michael: You don't have to go through some of the RIA platforms that have cropped up, which I'm presuming also get some version of their financial participation, the distribution for which, once again, a PE private credit firm is happier to work with you guys directly if it saves them the distribution costs, as long as it's efficient on their time because you got big enough clients who can bring great enough dollars to make this work for everyone.

David: Yeah, yeah. That's exactly right. And it's not that we don't use the platforms at all because we do have some clients whose portfolio sizes are smaller and who can't write a large enough subscription check to go direct into the fund. So, it's actually from a high-net-worth...

Michael: What are typical check sizes in that world for you guys? What do people have to be prepared to write a check for to get to participate?

David: So, it varies firm to firm. But in general, what we have found is that most PE firms are happy to let us go direct if the subscription amount is $500,000 or more, provided that in the aggregate, our firm is committing a larger amount of money. So, might be $10 million across our client base or something along those lines. But each of those investors will be a direct LP. But the fund will look at the aggregate commitment size across clients of the firm in meeting what they would ordinarily think of as their minimum.

Michael: Right. And this is literally into a single investment.

David: And so, to your prior question about the private equity platform businesses that are out there, we will work with them. So, we've worked in the past with both iCapital and CAIS on various alternative investments, and generally, we're not accessing it via the platform for all clients. There are clients who can go direct because the check sizes are significantly larger than what would be required. And then, for clients who cannot, if the investment still makes sense, even after accounting for whatever expenses may be associated with the platform and so on, then we may make the investment through CAIS or iCapital or similar platform. But usually, what we're doing is direct.

Michael: And so, as someone who's so deeply into these platforms, then I'm curious how you compare iCapital and CAIS. Is there one you use more than the other, and how do you compare them or decide which one to work with?

David: We think having relationships with, you know, both CAIS and iCapital benefits our clients because there may be access to investments on one platform, but not the other that we think may benefit them. And so, I think in our case, it's important to have both. And then, I'll just caveat that as well with we also do a lot of direct, and wherever possible, we want our clients to be direct LPs in the main fund rather than go through a platform, but it's not always possible

Michael: Simply because of the cost savings that ultimately accrues the client when you're not routing through a distributor if you have a means to not route through a distributor?

David: That's exactly right. And you can also negotiate better pricing, particularly with private equity and hedge funds and so on. Because when the fund manager doesn't have to pay for distribution, there's incremental margin there. And so, it's not uncommon for them. And so, it's not uncommon for us to find scenarios. In fact, it happens all the time where we will see a fund that is shown to us by a private equity firm. And we may choose to invest in it, we may pass, but then 6 or 9 months later, we'll be forwarded an email by a client who maybe has a friend or a relationship with a wirehouse broker-dealer, and there's that same fund 9 months later with a management fee that's 50 basis points higher than what we saw 6 or 9 months prior. So, what that shows you is that the fund company or the fund manager, they want to maintain certain economics. So, if they have to pay distribution charges to a third party on...

Michael: Oh, yeah, it gets marked up to the client.

David: Exactly. Exactly. So, we really take the client advocacy role very seriously, and that extends to our discussions, even with private equity managers and hedge fund managers. We're not always able to do this. It obviously depends on the supply-demand dynamics of how many people are seeking to invest in a particular fund. But in a number of cases, we're able to extract better economics for clients on account of the fact that we're often going direct, and there's no distributor or brokerage firm in the middle.

How David Determines The Balance Between Public Markets And Private Alts [37:44]

Michael: So, then, how do you think overall about the balance of just public versus private? It's how much client dollars, particularly with your clientele, go into, dare I say, good old-fashioned public markets, and what goes into the private alts world?

David: Sure. So, there's so many factors to consider in assessing that. Obviously, one of them is needs for liquidity. So, the larger the portfolio, generally speaking, unless a client's spending is extraordinarily high for very large portfolios, that generally means they can handle greater illiquidity. And so, we're big believers in private equity as a long-term investment. We think when you look at the data and you consider the performance and risk-adjusted performance for high-quality private equity managers over time, there is a compelling case to be made for higher allocations to private equity, provided that you can have the illiquidity in your portfolio that comes with being locked into an investment for, in most cases, 10 to 12 years. So, we do have significant private equity allocations in portfolios.

They tend to be larger as portfolio size is larger, unless there are some spending needs or liquidity needs that prevent us from having a significant private equity allocation in a particular portfolio. We do very little investing in hedge funds, pretty much none, but we do a lot of investing in private equity because we think private equity is an area where...when you consider a private equity fund, they're making investments, they aim to increase in value the investments and monetize them at a later point in time. And upon monetization, they receive their incentive fee, which is a lot better aligned than the aforementioned hedge funds.

Michael: Okay. So, in a private equity world, I find often the financial participation is not dissimilar in that there's some ongoing base management fee, and then they participate in a chunk of the upside applies for private equity and applies for hedge funds. But it sounds like the distinguishing factor for you is in the private equity world, you basically don't unlock any of that until the very, very end. So, you are in it to win it all the way through because you don't get anything until the end. Whereas hedge funds sort of the irony because you participate in that upside downside with each year's volatility, you get a very different incentive structure where you just need a few big-up years at the beginning, and you make all your money. And if you get it down, you just say, "Ah, we're going to shut this down," and then you start over again. And you can't do that in the private equity world. Once the dollar is deployed, you're in until you get to the end.

David: That's exactly right. And I'm often surprised by how often people conflate the 2 hedge funds and private equity and almost treat them as the same type of thing because they're generally all limited partnership vehicles. They're very different, and they have very different incentive structures, and obviously very different investment mandates. And so, we really like private equity, and I would say really dislike...

Michael: Interesting.

David: ...the hedge fund universe.

Element Pointe's Business Model And Raising Fees To Reflect The Real Value They Provide [41:24]

Michael: So, now, help us understand how this comes together from a fee structure perspective, how the business model works for you guys.

David: So, we have a wealth management fee that is based on assets under management. So, our business consists of managing money, managing discretionary AUM, and then also advising and consulting on other assets. Whether we charge one or both of those fees depends on how much money we're managing for a family and the other services that are being provided. So, for example, there are relationships where we are managing a significant liquid marketable securities portfolio for a family, and we're also asked to perform other services like consolidated reporting or general advice around family office setup, family office governance, and so on.

But because the asset sizes are very large and the money that we're managing is significant, we are not charging any additional fee for those services. They're part and parcel of the overall AUM-based fee that our firm charges. There are other instances where we may be managing a fairly small portfolio or no portfolio at all, depending on the liquidity picture of a family, but where we are asked to provide strategic advice, consolidated reporting, consulting services, or advice around structuring and setup of a single-family office. We've had a unique consulting engagements where we've been tasked with kind of building out a family's ownership structure because the family themselves, it's multi-generational, and the structure had grown so complex that they themselves weren't sure kind of where everything was and how ...

Michael: Nice.

David: Yeah. So, there's an example where the revenue in that client relationship is really solely driven by a flat-fee consulting engagement. And that flat fee was arrived at based on an in-depth assessment of what the scope of work would be. So, before we took on that engagement, we interviewed and had a meeting with the attorneys for the family as well as the accountants for the family and the corporate finance arm of their company. And that gave us a pretty solid understanding of what the scope of work would be. And then, we were able to arrive at what our fee for services would be in that scenario.

Michael: So, how do fee schedules work in your world? Is there a standard published fee schedule, this percent of the first millions next threshold for the next millions, and so on down the line, or is this more of like every client has a negotiated arrangement?

David: Great question. No, we do have a published fee schedule. We're recording this on December 13th. It's actually going up slightly on January 1st. But that published fee schedule, and I'll give you the new January 1st one. It's a fairly small incremental change there, but it's 1% on the first $3 million. It then drops to 85 basis points on the next $7 million, that's up to 10. It's then 65 basis points on the next $15 million up to $25, 45 basis points on the next $75 million up to $100, and then 25 basis points on every dollar above $100 million. So, that's a weighted average. So, the fee scales down as the asset size grows. And in the majority of our client relationships, that is the sole way that we are paid for our services. In some relationships, as I mentioned earlier, where that methodology doesn't make sense, we have a flat fee arrangement

Michael: Functionally, though, are you still in a world of 90% of the revenue of the firm is AUM or...?

David: Yes, absolutely. So, we are still in a world where 90% or so of the revenue is AUM-driven. It's changing because the needs of clients are changing. And so, we've done a lot of work over the years in areas that have a lot to do with family office setup, governance efficiency, but little to do with investment management. And so, investment management is still the core of our business and our revenue stream. But I'm finding that over time that that is changing. And by the way, the 2017 tax act had big impact on the family office space, which has led to a need among many families for consulting services on family office setup and structure. And we have a deep expertise and experience in that space. So, we've often been called upon by families or their legal counsel or accounting counsel.

Michael: So, what changed if you're updating the fee schedule? What had to change relative to wherever it was that you're updating and incrementing fees higher?

David: Yeah. Great question. So, we have evolved our services over time as a firm. So, I think if you looked at us day one in 2016, we really were a portfolio manager. We started the firm to manage investment portfolios for high-net-worth families. And as we've grown as a firm, we've added sophisticated technology, we've added personnel and talent to the team to focus on a variety of areas, from complex planning to philanthropy to comprehensive consolidated reporting. And we never really adapted our fee schedule to reflect the broader way...

Michael: Right. All the added cost?

David: Exactly. Exactly.

Michael: That's enough. Yeah.

David: And so, it's really just to reflect the change in our business and the scope of services and the talent personnel and technology that we've added over time. I'm incredibly proud of the tech stack that we built because I think what makes it unique is the way we've really geared it toward ultra-high-net-worth families and family offices. And so, we've over time really refined all of the tools that we are using to really cater to a very specific client base.

Michael: And so, what actually changed in the fee schedule?

David: So, it went up from that first tier of 1% of the first $3 million was always there. The other tiers basically went up about 5 basis points overall. So, the next 7 went from 80 to 85, and then the next 15 went from 60 to 65. The next 75 went from 40 to 45. And then, $100 million and up was always 25 basis points. So, it incrementally went up a bit, but we didn't arrive at that arbitrarily. We were very methodical. So, we took a look at what our input costs were for everything from technology to wages, to insurance costs, to everything else that goes into the overhead of running the business.

And then, we also did a competitive analysis. So, we looked around the industry and tried to really hone in on firms that we thought were within what I'll call our peer groups. So, boutique in nature focused on very high-end service offering to high-net-worth clients and ultra-high-net-worth clients. And only after we did that very complete analysis of what the competitive landscape looked like and what the operating costs looked like did we arrive at the fee schedule. And thankfully, it didn't require that significant of a change. But I think the change was warranted, given what we saw on the broader market.

Michael: Well, and to me, it highlights what I've been fascinated by as one of the counter-trends to the conventional wisdom, the dominant theme of the industry over the past 10 years has been robo and automation has arrived, fee compression is coming, just wait for all of us to start having our fee schedules knocked down. And in practice, everywhere I look over the past 10 years, more advisors are raising their fees than lowering their fees. We're using all the tech because who doesn't want more automation? It reduces the size of our back office because we don't need as many operations support when the tech automates. So, then we hire more advisors and investment team and planners and do more things for clients. And we end up doing so many more things for clients, after a couple years, it's like, "Wait, not only are we doing more for clients than we did before, we should actually be able to charge more than we used to because look at all the additional things that we're doing now." And then, lo and behold, we don't see fee schedules getting compressed, we see more advisors raising than lowering.

David: Yeah. I'm seeing that as well across the industry. But the key element there is you have to really earn that fee.

Investing Heavily Into A Tech Stack For Detailed Data And Customization [51:39]

Michael: And you mentioned earlier part of this is the tech stack that you brought together for serving clients. So, can you just touch on what the tech stack looks like?

David: Absolutely. I'm really proud of the tech stack that we put together. So, first and foremost, we are big believers in integration between systems and software. And so, we've spent a lot of time over the years making sure that our various software tools don't exist in a silo, but actually work together to do what we need them to. So, we were a client of Addepar from the early days of the firm. So, we use Addepar for our performance reporting and portfolio analytics. And what I think is unique... And there are numerous other firms now who use Addepar in their business. What I think is unique about the way that we utilize it is we have really spent the time developing customizations in attributes and views and logic functions and integrations with data providers into our Addepar instance.

And I think we are delivering reporting in a way. And I've seen lots of other reports from various firms out there that utilize the same software. And I'm so proud of the clarity and the granularity of detail and everything that goes into our reporting. And it was really a labor of love. I think we've probably spent... it's been 8 years. We've probably spent, I don't know, 10,000 hours developing and building customization in Addepar, and integrations, and if then logic functions, and all sorts of things that aren't just the default turnkey performance reporting platform. And so, that's been really important. Because we're managing portfolios across multiple custodians, and, in many cases, executing trades across multiple broker-dealers, we've invested in a very robust trade order management system. We use RedBlack for trade order management.

There aren't that many wealth management firms that I'm aware of that utilize RedBlack, I think it's thought of as more of an institutional asset manager type of solution. But given the types of portfolios that we manage and the fact that we're multi-custodial, we manage across multiple custodians and brokerage platforms, we felt it was really important. We built an integration between our trade order management system and our portfolio reporting system. So, it really streamlines the process of trade execution and then reconciliation and then ultimately reporting. So, we have invested just heavily both in terms of time and dollars in building a really phenomenal tech stack that I'm incredibly proud of because it enables us to...going back to the clients being in charge and their needs being paramount, it enables us to really accommodate the needs of clients. If a client comes to us and says, "I understand that Fidelity and Schwab are your 2 recommended custodians, but I have a portfolio that needs to remain at Citibank or UBS in custody because I have a large line of credit there," we can actually accommodate that because of the robust tech platform that we built to manage and report across portfolios.

Creating An Equity Appreciation Rights Plan For Key Team Members To Participate In Firm Growth [55:25]

Michael: So, now, help us understand the team dynamics. I'm coming back to where we started the conversation. As you noted, the growth of the firm over the past 8 years has been all these investments into technology that automatically make things happen faster and more efficiently so that you could expand the investment team, expand the planning team, get a higher level of talent to do the very complex things that you have to deal with for your clientele. And for most firms that inevitably starts raising these questions and challenges around, "Okay, so how do we build a career track for these people? Can they become partners? What does it mean to become a partner? Do they get to participate in equity? Who gets it, and why, and how?" So, I know you said at the beginning, this is very much something that you have been tackling in the firm as well. So, now, can you talk to us about the career tracks and compensation structures that you built out for the team as you've developed this?

David: Sure. So, I'll be the first to admit my thinking about this topic has changed a lot over time. When we first were starting the firm... And I've been very fortunate throughout my career to have great mentors in a variety of areas, both within the financial industry, but also within law. And one of my mentors I was meeting with shortly after we started the firm, and I was talking to him about how we were thinking about growing the business and growing the team. And my mindset at the time, candidly, when we first started the firm, is I thought that we would retain all of the equity between Carlos and myself, and then compensate people well, and build the business in that way because I was obsessed with this idea of maintaining a level of control that I think in hindsight was really just naive.

And my mentor, who was the managing partner or founding partner of a large law firm that has since grown into one of the largest law firms in the country, he said to me, "That's a really terrible idea, David." And so, we had a conversation about it. And his point to me, and he was 100% right, was that you can't retain the top talent over time unless you bring people into the business as partners, enable them to participate in the economics and the growth and enterprise value of the company. You just wouldn't be able to retain the best and brightest people unless you do that. And so, I've really reflected on that over the years, and I totally agree with that sentiment.

And so, around the 3rd year that we were in business, Carlos and I started talking about how we put in place a structure that lets the team know that in every role, there is an ability to progress to partnership in the firm. And not just to say that, but to actually create a structure behind it so that they know that we mean what we say and that it's important to us and that we've taken the steps to really start that process. So, around year 3, maybe year 4, we decided to create an equity appreciation rights plan. And I'll pause there for a second because you may be familiar with those plans, but some of the listeners may not be. So, maybe I should define that.

Michael: Yeah, let's have a refresher. There's going to be some like, "Oh, I think I remember reading about SARs in my CFP material. Is stock appreciation rights the same thing as this?" So, yeah, let's do the refresher.

David: Okay. Perfect. So, there were 2 elements to this. We knew that over time we would invite members of the team to buy in as partners in the business. And buy-in was extremely important to us because we felt that if we were to just grant equity to someone as perhaps a form of compensation, it wouldn't be the same from an accountability, from a literal emotional buy-in perspective if there wasn't a monetary buy-in component to joining the business. So, we knew that when we ultimately offered partnership opportunities to members of the team, there was going to be a buy-in component. But we also felt that it would be somewhat unfair to ask a person who's been with the firm, let's say 8, 9, 10 years to buy in at the valuation at the 10-year mark when the reality is they've played a significant part in the growth of the business over that 10-year period, over the time that they've been there.

So, we wanted to find a way to reward our team for the growth in value of the business over time, even before they were partners in the business. And so, when that moment came, when they're invited to buy in as a partner, they've had some sort of compensation come to them over time that was tied to the growth and enterprise value of the business while they were working alongside us to grow the firm. So, an equity appreciation rights plan, while not perfect, accomplishes that in a number of ways. So, the way the plan works is as part of the compensation that certain key team members receive, they receive units of equity appreciation rights, and they typically have a 3-year vesting period on those units. And the equity appreciation rights are based on the enterprise value of the company at the time of grants.

And that's a formulaic valuation. It's not really a fair market valuation. It doesn't have to be, it has to be consistent. And then, 3 years later, at the time of vesting, they receive a cash payment that's equal to the delta, the difference between the value of that unit at the time of grants and the value of that unit upon the vesting date 3 years later. So, what this really does is 2 things. Number one, it's an additional sort of compensation mechanism for team members that we want to reward and that we see as potential partners in the long term. It also enables them to participate in the growth and value of the enterprise. And then, when the day comes, when they buy in as partner, there's money that has come to them over time or cash that has come to them over time to help with the economics of that buy-in at that point in time.

Michael: So, who gets access to appreciation rights and this additional cash comp kicker opportunity?

David: Yeah. So, technically, every member of our team is eligible to participate after they've been with the firm for several years. And so, the next step in this process of figuring out the path to partnership was to actually craft and put to paper a path to partnership. And that one, candidly, took us longer to put together. So, we spent a lot of time thinking about what are the criteria for us that we would look for in an individual to be eligible to become a partner in the business. And I think we started with the premise that that depends on the role. So, the expectations for someone who's in an advisor role may be different than those for a member of our investment team versus client service, versus operations, versus marketing, and so on. So, we spent a number of months over the last year putting together that path to partnership, and I'm happy to share that.

Michael: Yeah, please.

David: It's, I think, a document that may be helpful to many RIA founders.

Michael: So, then, just a quick note, for folks who are listening, this is episode 371. So, if you just go to kitces.com/371, we'll have a link out to David's path to partnership document if you want to take a look and see what it looks like. So, David, can you describe a little bit more, though, just what is the structure? How does this work?

David: Yeah, absolutely. So, there's both quantitative and qualitative criteria. So, when we were thinking about what we would look for in a partner in the business, obviously, there are certain quantitative metrics depending on the role, of course, but quantitative metrics that are important. So, for wealth advisors on the team, there is a business development responsibility in addition to a client relationship management and advisory responsibility. So, some of the quantitative metrics for those roles involve new business development, the number of client relationships with which that advisor is involved, and then there are also qualitative metrics like mentorship, whether they've led an initiative or project for the firm, whether they have been involved in the training or education of new team members.

And then also, we really believe in being involved in our local community, but then in the industry and the finance community generally. So, we think it's important that partners in the business not only have checked the boxes of quantitative and qualitative criteria internally, but that they also have the respect of our industry peers, and the community, and COIs, and other professionals in the business community. So, we did our best to articulate what the various criteria would be. And we also delineated between roles. So, on the investment side, there's the quantitative and qualitative criteria, quantitative being the responsibility that they may have for oversight of investment portfolios for a specific number of clients. Qualitative might be the role that they've played in building some of the trade order management or operational infrastructure of the investment side of the business. And then, similarly, on the client service side, there are both quantitative and qualitative metrics and so on. So, once we had the completed document, we sat down with the team, we reviewed everything. And the feedback was great in that I think that it gave everyone much greater clarity as to what we are thinking in terms of what would qualify somebody to be eligible for partnership in the business.

Michael: So, have you given thought then about...? I'm presuming, well, you said earlier, it would be a buy-in structure. Have you given thought how you value it, how they finance it, how will this work?

David: Yes. We've given it a lot of thought. Now, I have to admit, I don't have all the answers. We're definitely working through that and intend to over the next couple of years. I think what we will likely do from a valuation standpoint is bring in a third party from outside, so one of the firms that specializes in valuation in our industry. We think it's important to have that objectivity. We don't want to unilaterally decide what the value of the business is for buy-in purposes. And so, we definitely feel it's important to bring in that third party. Now, in terms of financing, candidly, the best option would be outside bank financing, but we're prepared to seller finance the buy-in or provide financing for the buy-in for the right candidate.

We don't want their ability to obtain financing to be the impediment to their becoming a partner in the business if we believe that they should be and would be a great partner in the business. So, Carlos and I have had conversations about that. We both feel that we would be willing to finance a significant portion of a buy-in if we thought that it was the right candidate to be a partner in the business. Yeah, I think that, fundamentally, we really...and I think this is really important for entrepreneurship generally. We've always believed in delayed gratification, and I think that you really can't start and build a business with a goal toward making it an enterprise if you're not willing to make near-term sacrifices for long-term gain and long-term success. And we've always had that philosophy, whether it was investing in technology, or investing in growing the team, or investing in infrastructure. That's always been our mindset. And I think that that extends to partnership discussions, where we are willing to make the right decisions, even if in the near term they may not be optimal for us, if they're optimal for the business in both the near and long term.

Michael: So, help me understand the delineation you make between equity appreciation rights, which gives everybody who's eligible a chance to participate in the growth of the equity value of the business, and becoming a partner where they have a chance to buy an equity and participate in the equity appreciation of the business that you get once you own shares.

David: So, they're 2 very different things. The equity appreciation rights in a lot of ways are like a deferred bonus plan. So, really, what you own is not units of equity in the company. You own a right to a payment that's equal to a formula, and that formula happens to be based on the change in value. And that formula may or may not have anything to do with the...or be reflective of the fair market value in an exit scenario. There aren't voting rights attached to those equity appreciation rights. So, you don't have the say in the management of the business that you might have if you were a unit holder and partner in the business. And also, the tax treatment is different. Equity appreciation rights are taxes, ordinary income, basically to the recipient. So, not the right itself, let me qualify that, the payments. The payment upon vesting is treated as ordinary income, as would a bonus versus the arguably or certainly preferable tax treatment of capital gains on a sale.

Michael: I get it from that end. But just at a core, if everybody is supposed to be able to earn a little bit more by participating in the appreciation of equity after they've been there 3 or 4 years, why not just give them a chance to buy a very small slice of equity after 3 or 4 years?

David: Yeah, great question. So, I think the way that we think about it is for us, when someone buys in as a partner, that's going to bring with it voting rights and a seat at the table, from a management perspective. So, we've had many conversations about this and decided that we don't want to have a bifurcated management or ownership structure where there's voting interests and non-voting interests.

And there may continue to be certain decisions that require super majority or a significantly greater portion of the vote. But when we bring in a new partner, we want them to have a vote and have a say. And we may not be prepared to take that step with someone at the point at which we're willing to grant them equity appreciation rights, where they can participate in the economics and the growth in that manner, but not necessarily the management of the organization.

Michael: Okay. So, that's the delineation because partnership for you ties to management decisions and those responsibilities as well. Equity appreciation rights is the earlier mechanism of, "Okay, at 3 or 4 years, you can start getting a little bit of participation in the growth, the value creation of the business growing, but you have to get further down the road to actually get partnership and seat at the table."

David: That's exactly right. And it's also a great retention strategy because what we do is we grant equity appreciation rights each year on a rolling basis. And so, what that does is every year, you have recipients who receive grants, and those grants vest 3 years later. And if they were to leave the firm, they would, of course, forfeit those equity appreciation rights. And we came from the world of large banks where you have RSUs, and at any moment in time, if you walk away from your job, you're walking away from these...

Michael: They always come on the table. They always keep them rolling, so you always have to give up something.

David: Exactly. Exactly. So while I may not agree with everything about the way they manage their business, that was definitely something that I took away because I know how important it was for retention at those institutions. So, we were really looking to accomplish all of those things, to reward key team members who we wanted to reward, to also create an incentive for retention, and then also to create a stepping stone toward ultimately a partnership buy-in several years later.

Michael: And on the equity appreciate rights end, do you think of this in a bonus style, like everybody's eligibility is a certain percentage of their salary that they can earn in bonus variable comp? Is it that kind of arrangement?

David: Yeah, we do think about it, I think, in that way. There's no precise formula, but it's really been an iterative discussion of, "What do our pro forma target growth goals look like? What does that mean in terms of increase in enterprise value of the business? But more importantly, what does that mean in terms of increase of value based on the formula of multiple of earnings before owner's comp that we've created for these appreciation rights? And does that align with the level at which we're comfortable compensating this individual at the time of vesting?" And that's really the way that we've approached it. So, it hasn't really been a percentage of compensation. And by the way, if we exceed those growth goals, we're more than happy to write a larger check to the individual on the team.

Michael: Well, kind of my definition, you should have the cash flow for it.

David: Exactly. Exactly. So, it's very much aligned in that manner. There's never a time when we have been disappointed to pay a bonus tied to equity appreciation rights because it means the business is growing, and that's great.

What Surprised David The Most About Building An Advisory Business [01:15:29]

Michael: So, as you reflect on this journey, what surprised you the most about building an advisory business?

David: How many different things I would need to learn. When I really reflect on it, 8 years ago, I was a private banker at a large global bank overseeing investments and lending in a variety of areas. But I knew nothing about tech infrastructure, and trade order management systems, and portfolio reporting systems, and building API integrations, and just all of these other areas, whether it's compliance or legal or HR. You have to learn so many new things in launching and building an RIA. And I actually really enjoyed that because I'm intellectually curious. I like to dive in and learn about all these areas. But there are so many areas where I am now reasonably knowledgeable, where I was completely clueless 8 years ago. And so, I think as I reflect on it, that's probably what surprised me the most. I think when you start a business, you have some sense that there's going to be a lot that you need to learn, and that you don't know everything, and that you'll figure it out. But I think when you actually dive in and realize truly how much you do not know, it's an...

Michael: You do this like, "Why did I do this to myself moment?"

David: It's an incredibly daunting experience. But I have zero regrets. I'm so happy and so proud of the way the firm has grown, the amazing relationships that we have with the clients that we serve, the amazing team that we've built, who really enjoys coming together and working together each day. It's just an incredibly gratifying experience that I could not imagine doing it any other way. But it has been an extraordinary amount of work. And we've had to learn so much about areas that we had no knowledge of prior.

Low Points And Challenges That David Encountered On His Journey [01:17:47]

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

David: Ooh, that's a tough one. So, for me, the first couple of years were probably the most challenging. That's where you're really just trying to refine your business model and figure out what's working and what's not. And we were fortunate. We had some pretty good early traction, but we were investing in building the team and building infrastructure and all of that. And there was a moment at which...and I remember this, I just shared it with a friend of mine the other day. I remember, like, 16 months into building the firm, it was growing, but not growing quite as quickly as I thought it might. And we were plowing every dollar back into the business to hire and to invest in technology and to do all these things.

And I remember sitting at my dinner table with my wife, and we were talking about the business. And I was terrified that I had made a huge mistake leaving a large bank, and foregoing the salary, and foregoing the bonus, and plowing money into the business. And I remember that just being a really terrifying moment. My wife and I had 2 children at the time. We now have 4. So, our family has grown. And that was a very scary time. But then, maybe a month later, I remember, and I'll never forget this moment, I remember receiving a phone call from a prospective client that we had been speaking with who said, "I'm just calling to let you know that I want to move forward with you guys." And so...

Michael: Yeah, the rollercoaster.

David: Exactly, the rollercoaster. So, it was just this euphoric moment on the back of a moment where I was wondering whether I had made the right decision and whether the business was going to be successful and grow. So, the early days have a lot of ups and downs, and that was probably the hardest part. I think once we got past the two-year mark, then it became more about refining strategy and thinking about where we wanted to be in 10 years versus just making sure that the business would survive. So, that...

Michael: Once you got to year 3, it starts to shift.

David: Definitely, definitely. And now, we're having a lot of fun. We're still working extraordinarily hard, still challenging ourselves every day to improve and to get better. But the issues are less existential and more strategic. And so, it's really an enjoyable time, I think, in the evolution of the business.

The Advice That David Would Give Himself 10 Years Ago, And Other Younger, Newer Advisors [01:20:44]

Michael: So what do you know now you wish you could go back and tell you from 10 years ago?

David: I think I would tell myself 8 years ago that it's important to get comfortable delegating and to do so on a quicker timeline. So, I'm a very type-A person. I like to be in control of everything going on. And I think to build a business, you have to relinquish that control. You have to know that you've hired great people and trust them to do their job and do it effectively, and really let them run with it rather than try to micromanage. And I still struggle with this, I think, to some extent because it's just who I am. I want to be involved in everything. But I've gotten a lot better at it over the years. And if I were to give myself advice from back then, I would say do that faster, get comfortable delegating. And if you've hired the right people, which I'm very confident that we have, then you can trust in them to run with their area of expertise.

Michael: So, what advice would you give younger, newer folks coming into the industry today?

David: So, the advice that I usually give when younger folks ask me how to break in and what to do, I just tell them to learn everything that they possibly can. There's no way to rush this business, I don't think. When I started at Goldman Sachs, I don't think I got my first client for over a year. I think it took me over a year to bring in a client. And thankfully, Goldman was patient with me. But I think there's no...

Michael: It's hard getting clients when you're hunting for big fish and you're very young.

David: Exactly. Exactly. I was 26 years old. But I think it's really important to be patient. This business is a series of small steps that happen over time. And then, at some point, you look back, and you're like, "Wow, I've covered a lot of ground making these small steps." And when you're 22 coming out of college, or even 25, 26 coming out of graduate school, there's a temptation to be in a rush. You want to earn as much money as you can, as quickly as you can. You want to get promoted as quickly as you can. And I think that this business, it does work like that for some. I think for most people, it's a business where every activity, every day, every month builds on itself. And it takes time to get where you want to be.

So, it's really important to be patient. But while you're being patient, you really need to be focused on doing all the right things. And to me, all of the right things means developing as much knowledge as you possibly can early on in your career. It's not enough just to be charming and a good relationship person. There lots of charming relationship people. You really need to know your stuff, and you need to know it better than anyone. And I tell college students all the time, the best way to do that is try to read one book a week. If you're 22 or 25 and you read one book a week, you've read 500 books 10 years later. And I can almost guarantee that there's just about no one out there or a tiny fraction of 1% of the population that has read 500 books over a 10-year period on subjects ranging from investments to tax, to U.S. history, to whatever it may be.

And then, I think, developing your network, which is something that also takes a very long time. It's a slow start, and it takes years to really develop relationships with other professionals, with COIs, and then, of course, with prospective clients and clients. But if you diligently work at it, at expanding your network, and expanding your knowledge over the course of years, you will find yourself invariably in a great position 5, 7, or 10 years out. And I think just about anyone can do it if they really diligently focus on those areas and their patient about it.

I've always viewed business development as having kind of 3 prongs do it. There's the cold outreach, there's the networking with other professionals and centers of influence, and then there's community involvement. Now, each of those things happens at a different pace. So, cold calling, extremely low probability, but you can move from someone you didn't know to someone who ultimately becomes a client a lot faster, particularly if you're at a large institution where there's a recognized brand. Community or networking with other professionals takes a long time, but it's deeply rewarding. You build great relationships and, hopefully, have great referral relationships over time.

And then, the community involvement piece is where you become really a brand ambassador for your company or your profession and a known person in your community. And that takes a very long time but is also deeply rewarding and can result in many client relationships over time. So, I've always been of the view that you have to do all 3, especially early in your career, because often, depending on the firm that you're with, you won't have enough runway to start developing a network of attorneys and accountants and hope that they send you a referral. 

So, I do think the cold outreach component has to be a part of your business development strategy early in your career. But I think while you're doing that, you have to be cultivating relationships with other professional advisors in legal accounting and so on because those will be the referral sources for you in the long term. And so, I haven't picked up the phone and called somebody cold in years, but I did in the early days because that was the quickest way for me to get some traction.

What Success Means To David [01:26:32]

Michael: So, as we wrap up, this is a podcast about success, and just one of the themes that come up is the word success means different things to different people. How do you define success for yourself at this point?

David: So, for me, success is defined as having a significant impact on the lives of many people in my orbit, from the clients that we serve to the members of the Element Pointe team, and ultimately creating successful outcomes for each of them based on their own definitions of success. So, financial success is important. And certainly, it's something that I think about. But that's never been enough for me. I think if that was enough for me, I would've been happy to climb the corporate ladder at large global banks. For me, fulfillment is about more than that. I need to know that what I've done has meaning and has an impact on people's lives. So, I would love to see Element Pointe continue to grow to a firm with $10, $15, maybe $20 billion in assets under management and create many jobs and careers along the way, and also impact the lives of many clients along the way.

And ultimately, if there's an exit scenario, I don't know what exactly that means. I might want or prefer to, or Carlos and I might want or prefer to exit internally to partners within the business so that we can really build a 100-year organization, to steal, I think, Avy Stein's line from Cresset. I think that that would be an incredibly rewarding to see the organization live on. Whether that means maybe an exit to a strategic or something like that over time, yeah, that could be as well. I would be very careful about that because I really believe in the fee-only fiduciary model of the business, and I would want to make sure that that continued. I'm 40, so I've got many years ahead of me, of continuing to run and build this business. So, success to me is really continuing to scale and grow, but not necessarily for purely financial reasons, more for reasons of impact and seeing the organization flourish and the people around it flourish.

Michael: Very cool. Very cool. You've got a lot of years to keep compounding from age 40. That maths well for you.

David: Exactly.

Michael: Awesome. Well, thank you so much, David, for joining us on the "Financial Advisor Success" podcast.

David: Michael, it was my pleasure. Thank you so much for having me.

Michael: Thank you.