#FASuccess Ep 388: Transitioning To Independent RIA With Only $7M Of AUM To Turbocharge Growth With Website Local SEO, With Freeman Linde

Resources Featured In This Episode:

• Freeman Linde
• La Crosse Financial Planning
• RIA Toolkit Calculator – Download (Excel)
• RIA Toolkit Launch Services – Download (PDF)
• Kitces Financial Advisor Technology Map
• The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey
• The Game of Numbers by Nick Murray
• Nick Murray Interactive
• Enrolled Agent Information
• RetireMentorship Podcast
• The Perfect RIA
• AdvicePay
• Box
• Microsoft OneDrive
• COMPLY
• Schwab Advisor Services
• WordPress
• EncorEstate Plans
• Swartz Financial Planning
• XY Financial Planning
• Calendly

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

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Full Transcript:

Michael: Welcome, Freeman Linde, to the "Financial Advisor Success Podcast."

Freeman: Thanks, Michael. Great to be here.

Michael: I really appreciate you joining us today. I'm looking forward to a discussion around these dynamics that we go through when we start our advisor career at one firm, and then eventually decide, "Maybe this isn't the place for me. Maybe I want to switch and go somewhere else or go out on my own and do my own thing," if I started with a larger platform. And we have this label for it in the industry now of “breaking away”, which I have to admit, I don't entirely love as an analogy. It sort of implies you're in jail and breaking away for free, which I don't think is a fair characterization. There are some large firms that provide a lot of platform and services that really is a good value for what they do, but if it's not what you're looking for and what you need for the platform, you at least tend to make a, call it a transition.

And I feel like the broad debate out there is, if you're going to transition away from a large platform, what do you need to actually be able to go out on your own? What do you need in assets or revenue? The benchmark number out there many years ago was you couldn't really go out on your own unless you had $100 million under management. And then with $50 million under management. Now there's a sort of debate around it. And I know you had a very different path. Your transition after a few years in the business was going out on your own with $7 million under management, which is I think certainly a lower number making that transition than a lot of advisors tend to talk about. And so, I'm excited to talk about this journey of getting started in the career and then how you decide at $7 million, "This is enough. I'm going to go hang my own shingle, do my own thing. It's time."

Freeman: Yep. Well, and the thing about that too is, it was $7 million across 2 advisors, so call it $3.5 million.

Michael: With a partner, $3.5 million, we're all moving together. We're all moving...

Freeman: Even better.

The Challenges Of Growing Within The Insurance Industry [04:49]

Michael: So, I think to help us understand this journey, just share with us your path through the advisor industries. Where did you get started? How did you come into the industry? That eventually takes us a few years later down the point that you're making this transition.

Freeman: Yeah. So, I have loved personal finance for a while. I think I first got that love when I listened to Dave Ramsey's "The Total Money Makeover" in college. I was referred to it, got it up on Audible, and ended up listening to the whole thing just in one sitting because I just loved it so much. And so, did a year in retail after graduating college. But then I wanted to join the industry, and so interviewed around at a few places. Ended up joining a local firm that I didn't really know was just a DBA [Doing Business As] of a MetLife firm. And then 2 weeks after I joined, we found out that they had gotten bought out by another large mutual life insurance company. So I did the whole...

Michael: They went to MassMutual. Yep.

Freeman: Yep. Yep. And so, I did the whole, like a lot of people do, I think a lot of us have come into the industry this way of earning your life and health and trying to go prospect and get clients so you can sell them some term and disability and whole life and earning my [Series] 7 and 66. I think part of it initially was that the local leader of the local firm there just had their Series 6 and 63. So, they'd come from a sales world and it was all about the premiums that you were selling, and the annuities, and setting up brokerage Roth IRAs with some A-share American funds, mutual funds, and some of that. I think with all that, because I joined a firm where there were no minimums, no requirements, and 2 weeks later got bought out by a firm that then said, "Hey, if you want to work here, you need to sell X amount of premium every year." And I, again...

Michael: Oh, that was a big shift out of the gate, was you went from a more open architecture platform to one that had some expectations of company product sales.

Freeman: Yeah. So, it felt like a little bit of a bait and switch. I don't think it was intentional. I don't even think the local leader knew that was happening. He was surprised, I think, with everyone else. And so, you try to make it work because you're already in the system, you're already going. But again, I got introduced to personal finance via Dave Ramsey who is, "Whole life is the payday lender of the middle class. And here's why it's the worst product out there." And so now, to be working for a firm that says you must sell X amount of just total insurance. And by the way, you're never going to hit that selling just term and invest in the difference. The quotas are too high to do that. So, just trying to grapple with, "How do I justify... I'm not good at selling things I don't believe in, how do I justify adding this product into people's situation?"

Michael: So, I suspect it may have changed since then because companies evolve these over time, and I know you got started a number of years ago. But for those who aren't familiar, what did the requirements and expectations look like? Was it a certain amount of coverage, a certain amount of premiums? What goal thresholds were they setting for you?

Freeman: Yeah, it was basically a certain amount of premium. So, just by the nature of it then, if you're selling $25 to $50 terms, that's just not going to go as far as a $500-a-month whole-life policy. They did different multipliers where certain annuities would count more than others. You could sell any other products that you wanted. It was half-open architecture. You could go out and sell other insurance companies' products, but none of that would count towards your quotas. We had the guise of “We're allowed to sell whatever we want”, but really, you're pushed into the home team's products there. And I've always just found that whole life is sold and not bought. You'd have these meetings with clients, they had no Roth IRAs, and you'd tell them about a Roth IRA. And no one who hears that was like, "Oh, nope, that sounds terrible. I don't want to do that." They're like, "Oh, that's awesome." You tell them about investing in HSA, and people are immediately on board.

So, there's certain strategies, certain things that we do in planning that clients immediately gravitate towards and they buy that. They go out and look for that. Almost no one searches the web for, how do I buy whole life? Almost no one searches the web for, how do I buy an annuity? Those need to be sold by people. And so, I struggled in that first couple years trying to grapple with, how do I do this? How do I earn my contract? And thankfully, the quotas that they required for the first 3 years, your training years, were pretty low. And then they had a giant cliff at the end of year 3 that, "Now you need to hit this or you're gone." I don't know if they still have that or not. That was just what it was at the time.

Michael: Yeah. Well, it's common in the industry because the sort of perverse reality of incentives, especially in the insurance world is, you're going out in the first 3 years and you're getting prospects into clients. A lot of people go to their natural network first and take a year or 2 or 3 to go through their natural network, and then you really find out, can you figure out how to market and grow beyond your immediate friends and family environment. But the nature of the insurance world is, there's typically an upfront commission and an ongoing trail to service the client. The advisor leaves, the company doesn't have to pay the trails. They keep the trails for themselves. So, there's this weird incentive for the companies that if someone is modestly successful, it's actually more profitable for them to make the requirements really high once you've gone through your friends-and-family network and then have you leave and retain all of your friends and family as their clients and not have to pay the trails than it is to give you a lower threshold where you can keep going in four, five, or 6 [years].

Which I think is why, at least historically, a lot of companies had these cliff thresholds to their contracts once you got 3 or 4 years in because that was the whole idea, like, you got through your friends-and-family network, now either you're good at going out there and marketing for new people, or we'll just keep your friends and family network and the trails on them and you can move on.

Freeman: Yep. Yep. It's highly profitable, and I've read different data showing the percentage of whole-life policies and universal-life policies that are surrendered, and it's rather high. They don't pay out most of the time. It's all the more profitable if they can also have clients pay in for 10 years and then even if they surrender it, they don't have to pay much cash value back out. It did feel like a very firm-centric compensation model and business model versus new advisor-centric.

Michael: So, what was it like for you in this environment where you're coming from listening to Dave Ramsey being very negative on whole-life insurance and literally landing in a life insurance company that manufactures whole-life insurance and other coverage, but that quickly becomes the theme?

Freeman: Yep. I think my initial attempt was just to try to hit it with term life and disability. They did introduce us to fee-for-service planning. I did have my [Series] 7 and 66. I'm glad I made that choice to get that right away. And so, there was, I think 5 of us at the time in this local kind of new startup office and I was the first one to do a fee-for-service plan. It was 1,000 bucks. I still have the client. I'll probably always have them just as a memento to starting that part of the plan. And so, that helped with the revenue. Switched over to advisory almost immediately. I think I maybe had one brokerage Roth IRA before I realized that advisory was a better long-term strategy.

And then the other thing I'm grateful for is they introduced me to Nick Murray specifically with the "Game of Numbers" book that he has just again, to, "Hey, you're all new advisors. Go out and prospect. Get over the nos. It's just a game of numbers. You just got to hear enough nos, hear some yeses, and then you can sell them whole life, and move on to the next one." It was their reason behind it. But he also wrote "Behavioral Investment Counseling," which I then found and read. And that changed my whole life. I love that book. And I highly recommend it to anyone. You can't really get it in print anymore, which is unfortunate. And so, that was just really helpful to me to focus on behavioral equity investing, and then to use fixed income just as a hedge for downturns in the market, basically.

In that way then I was able to justify to myself, and therefore to my clients, "Well, hey, we're going to help people understand behavioral investing. We're going to help them to get more into equities and have higher long-term growth rates. And we're going to use whole life as their fixed-income replacement on the backside so that when, not if, you have downturns in the market and they need money, they can always access their cash value. Equities are going to be their long-term, but variable growth and whole life is going to be their more fixed, stable security blanket in the background." And so, that allowed me to justify starting to sell some of those products. I'd always use Whole Life 65 at the most, or, and a lot of 10- and 20-year whole lives, which didn't pay me as much, but I still couldn't justify doing a pay your whole-life policy and... So, that helped me at least survive, definitely not thrive, but at least hit the minimums in the first few.

So, we were doing full planning pretty early on. And so, you'd look at their 401(k) or their Roth IRA at another company that you were taking over. And it was a 30-year-old who's 60-40 equity to fixed income. And we'd go through this whole process, help them understand what investing really was, what long-term buy-and-hold behavioral investing is, recommend that they switch to 100% equities in their Roth, and then replace the fixed income over here with whole life. You don't need the fixed income in your Roth, you can't touch it for 30 years anyways, but you can touch this cash value sooner. And so, that seemed to work, and was able to... I never won any awards, never got on any leaderboards, but made enough to justify my contract for the first couple of years there.

Michael: So, how long did you stay in this insurance company environment under this structure?

Freeman: It was about 3 years.

Transitioning From The Insurance To The Independent Broker-Dealer Model [14:18]

Michael: So, what happened is you're coming up on 3 years and contract validation with requirements that start getting a lot higher as you head into year four.

Freeman: Yeah. I think it's not too dissimilar to your track. I couldn't prospect, but I could learn, and I could do planning, and I could learn how to do really good planning for people. Got my CFP certification, had to wait until I had 3 years of experience because I wasn't under any CFP, and so, you couldn't get away with the 2 years of experience. And so, I basically tested for that and got that at just about 3 years. And I would team up with other advisors who were slightly better at prospecting and not as good at eMoney and the deep planning and those kind of things. And so, we'd do some splits. We had so many split codes and so many ways of doing it, and it was so convoluted, but we made it work.

Then year 3 was coming up, and I think what actually started it is I used to drive past this other advisor's office all the time, looked him up once just out of curiosity. He looked like he was on the verge of retirement. And so, I just walked in there one day, introduced myself, and asked him if he had any plan for retiring and transitioning his book. So, he explained that he was at Voya Financial Advisors and explained what an independent broker-dealer was. I didn't even know this existed. And it's weird to me how far you can go in the industry and not understand other sides of it.

Michael: Yeah. And we understand the channel that we're in and that we live in. It always reminds me of the movie "The Truman Show." We accept the reality with which we're presented. That's our world. That's how things work because that's the world you live in.

Freeman: So, I finally heard all these things, like, "Wait, so you can just do insurance through whatever, and you have no quotas? Oh wait, you can just do all the products and plan all things through this broker-dealer and get higher payouts? And so, I started researching this. And like any good financial advisor, in order to figure out if this was a good move, I made a spreadsheet because that's what you do when you're evaluating situations. You've got to make a big ugly spreadsheet that puts everything in there and shows, "Hey, what are we losing out on, and what are we gaining from doing this?" And for me, it was easy because I wasn't making enough to get benefits. You had to sell X amount just to keep your job, and then you had to sell Y amount, which is much better, to qualify for subsidized healthcare and all this. And so, I wasn't doing that.

And so, they were providing no benefits to me whatsoever. And so, for me, it was easy. A couple of the other advisors were getting health insurance, and so I had to convince them, "Hey, this is still better when you go from a 50% grid rate on your advisory to 70%, and you go from 50% average payout in your insurance to open architecture 80% to 100%. You're going to get way more paid out to you for the same things we're doing to clients. And yes, now we also need to take on these additional expenses and whatnot." So, the whole spreadsheet just showed all that.

Michael: And so, that was the spreadsheet exercise, was like, "Hey, we're not going to get the health insurance, but we're going to go from 50% to 70% payouts, and we can buy the health insurance for less than 20% of our revenue."

Freeman: Correct.

Michael: That becomes a line item on the spreadsheet. And you just started deconstructing.

Freeman: And I think what finally got to move the hump is just being able to show them, here's your actual marketplace insurance coverage. Not just guessing, here's the actual amounts. This now is a fixed dollar amount. And so, if the extra percentage we're getting paid covers these fixed expenses, the more money we make on top of that, the greater percentage of that we get to keep because the fixed expenses are already covered. Whereas if you are in a situation where the company takes a very large percentage, it doesn't matter how much you make. And yes, they have tiers and grids and all that and they'll take a smaller and smaller percentage, but it's always a percentage. And so, demonstrating the difference between giving up a percentage versus paying a fixed cost, I was finally able to convince the team, "Hey, this is a better move for everyone right now, and certainly going forward, and have the flexibility to do more of what we want." It wasn't a ton of flexibility, but it was a little bit more.

And so, we all decided, "Yep, okay, we're all going as a team." There was 5 of us. We set a date, we were going to execute this, transition all of our clients, all these things. And the date we had set a few months earlier was March of 2020. And we didn't, obviously, know what was going to happen in March of 2020 when we set the date. So, yes, we ended up transitioning from MassMutual to Voya Financial Advisors, literally in the middle of the pandemic when everyone's accounts were down, when everyone was freaking out, we were telling them, "Oh, by the way, you need to sign these DocuSigns to transition your accounts in the middle of all this craziness." And so, that was maybe not the greatest timing in hindsight, but you don't always know what's going to happen in the future. The benefit was then we looked like geniuses on the backend because all the new reporting would just show it from when it arrived at the new broker-dealer. And so, we just saw tremendous gains from that point. So, that made up for it maybe in a little bit just seeing that.

Michael: So, I have some more questions about the Voya transition, but before we go there, I want to understand a little bit more of the dynamics of this analysis you were doing to switch platforms and the tradeoffs here. So, I guess I'm just wondering, when you did this spreadsheet exercise, the company keeps 50% of our grid. If we go over here, we get 70%, the company's keeping 80% of our brokerage. If we go over here, we get 90%, but then we got to cover these costs. Here's what they are, and we can go out to the marketplace and get costs and line-item them out. So, I guess I'm wondering, when you went through that exercise, was the math literally better out of the gate to make the transition, or was it worse, but you saw that your costs would be fixed and so your margins and your upside would be better in the future and it was one step back to take one step forward? How did it actually line up for you by the time you went through that analysis?

Freeman: Yeah. For me, it was immediately better and then much better going forward. And for some of the other advisors, it was about the same, maybe a little better, a little bit worse. The higher producers had the benefits that they needed to replace some of those kind of things. But even for the ones that were maybe slightly worse, only for a moment with those fixed fees and then anything above that would immediately make it better.

Michael: So, it was actually more even for them because their production was higher, so they were paying the company more, but they hit the tiers where the company gave them a lot more stuff because they were bigger producers, and the numbers were actually worse for you because you were lower on the grids, and so you weren't getting as many of the additional add-ons in benefits, so that actually made it easier for the switch?

Freeman: Correct. I was already paying my own health insurance beforehand, so that didn't change. That's a big thing. You see it with retirees, a big reason you have retirees that spend 60 grand a year, have $5 million in retirement, and don't think they can retire before 65 because of the health insurance. It's an overblown issue, I think, for a lot of people. That was the main sticking point for a couple of those other ones who were older, they were getting the health insurance and just showing them, "Hey, but this is exactly what it costs over here, so we can get this done for you."

Michael: And that was being provided by the new company? Or you were just going to state insurance exchange?

Freeman: Yeah, just the marketplace because they... It was an independent broker-dealer, so it's like, "Hey, we'll provide the infrastructure, but we don't cover any of your expenses at all. We don't provide health insurance, we don't provide benefits, any of these things." It was especially hard for the local leader too because he was getting the, I don't know what he was getting, but he was getting overrides on all of our production and all that, and that would just go away. So he was the hardest one to convince, but it was overall better for everyone on the team. So we made the switch.

Michael: And so, basically, your whole local office branch left?

Freeman: Correct. Yep.

Michael: So, why everyone as opposed to just if you weren't thrilled with the environment, making the switch yourself?

Freeman: Well, everyone liked everyone else on the team. It was a good team. And so, I enjoyed working with all those guys. We were a satellite office in our own DBA anyway, so we identified more with each other and our local firm that we were creating more than with the mothership. And again, at the time, I was still doing a lot of work on their cases, and so I didn't probably have enough to transition on my own, didn't have enough clients to work on because I wouldn't be able to keep any of those. At the time, I felt like I needed them all to come along, otherwise I wasn't going to be able to hack it alone.

Michael: So, you make the transition in the pandemic, you have to do DocuSign and transfers in the middle of all the craziness. I guess for what I'm gathering was not a ton of business that was coming over though, I'm assuming. Investment business moved, insurance products stayed where it was because there wasn't necessarily a need or a reason to replace anything.

Freeman: Yeah. Broker-dealer changes on the annuities for servicing. Most of that was all upfront stuff anyways, so you were just getting access back to it without getting trails.

Michael: So that you could get statements and make calls for withdrawals and beneficiary changes and all that good stuff?

Freeman: Yep. And I think at the time, MassMutual had, I don't know what they have now, but I think they had a two-year non-solicit. We couldn't solicit any of our clients to drop MassMutual products. But we could take all of our advisory and outside annuities and those kind of things and do whatever we want with those.

Michael: Okay. So, the sort of the flip side of being an insurance company was their non-solicits were mostly written around the insurance product...

Freeman: Right, they didn't care about the rest of it.

Michael: So what happened from there? The independence of the broker-dealer allowed us to do a few things we couldn't do otherwise. And so, they let me, for instance, in December of 2020, we talked about adding tax preparation as a service to our clients. And so I got my Enrolled Agent designation, and in the 2021 tax season, we started preparing tax returns for some of our clients for the 2020 tax year. And so, again, I didn't have many clients, had a lot of time, had time to get the designation, had time to do the returns. Clients loved it as a way to…hey it's very hard to collaborate with your CPA during tax season because they're doing 500 returns, how about we just do it in-house?

If they were big enough clients, we did it for free. And if they were smaller, we charged them a below-market tax prep fee because we just reasoned, "Hey, we're not trying to cover 12 months of overhead in 3 months of a tax season, so this is just an add-on." Clients really loved it. So, I think we did maybe 30 tax returns that first one, and then 70, and then 88, and we'll do 180 this year. And so, that's been a growing part. We had to do that as a separate entity, but MassMutual wouldn't let me do that. And the independent broker-dealer allowed me to do it as a separate thing. I launched a podcast in January of 2021. Same thing, Mass wouldn't let me do it. Compliance wouldn't...they said, "Hey, if you sell enough insurance, then you can have a podcast that we'll review." So, in order for me to talk about investments or financial planning, I need to sell a lot of insurance.

The Numbers Behind The Decision To Break Away And Start An RIA [24:50]

So, there's just a few things that it freed us up to do which we weren't able to do before. And then I think the big change for me though, because this whole time, again, I think I finished 2020, and for my first 4 years of business, I was looking back, I think I averaged $30,000 a year in Schedule C net income at the end. I was just barely making it. My wife was working for part of it, and so we were able to make it as a family, but we'd had a kid in December of 2019, and so then she stayed at home. And so, I'm feeling this pressure like, "Hey, something's got to change. I can't keep just struggling along in this environment." I was listening to the "Perfect RIA Podcast," which I originally heard about on here, on the Kitces Financial Advisor Success Podcast. And one of their episodes that they released in January of 2021, they asked the crucial question, go do the math on what you are paying your broker-dealer in dollars, not in percentage. And then, can you replace what your broker-dealer is doing for you for less?

And that just made so much... I didn't even know what an RIA was until I had heard some of this stuff. Again, same thing, independent broker-dealer was news to me, and then just being an RIA was news to me. And so, again, I made another spreadsheet and realized, "Hey, what is my broker-dealer doing for me?" And again, I think broker-dealers help a lot of people. Some people, it's an integral part of what they're doing, but I was 95% advisory and planning fees by this point anyway. I didn't do any commissionable products or investment products. And so, I wasn't using the broker part of the broker-dealer, just the corporate registered investment advisor part. And then the other thing I realized after really doing this math is, the broker-dealer is not just taking the flip side of the advisory fee, or at least not at the broker-dealers I was at. They also had platform fees, they had built-in portfolios that you needed to use, with expensive funds in there that the broker-dealer would get kickbacks on, all these things.

And so, I made this spreadsheet detailing, "Hey, here's what we're charging on the advisory fee. Here's the platform and custodian fees that are being tacked on there. Here's the average expense ratio of the funds that are in these portfolios that are built for us. And so, the client's all-in fee is much higher than the 1% we're quoting them for an advisory fee."

Michael: So, what were client all-in fees by the time you were going through this exercise when you're now trying to compare it to what it might be somewhere else?

Freeman: Yep. The spreadsheets, they don't lie. The math formulas on Excel are perfect. It was a 1% advisory fee that we were charging, just standard. And then between the other things, there's another 40 basis points, 42 basis points or so of additional platform fee, custody fee, expense ratios, all that. And so, the all-in fee for the client was 1.4%. And then we were getting paid 70% of the advisory fee, so 70 basis points on a total fee of 1 [percentage] point of 140 basis points. And so, we realized, "Hey, we're not getting 70% of this, we're getting 50%...

Michael: You're getting 50% of it.

Freeman: ...of what the client's actually paying. And on an RIA platform, which I found out, and I was very surprised about, hey, you get 100% of the advisory fee. There's no one to take a percentage. Oh, Schwab doesn't charge anything for custodian fees. I still distinctly remember an introductory call with Matt at Schwab as I was investigating custodians, and it was just blowing my mind when I'm like, "So, what's your custodian fee?" And he was confused, "We don't, we don't have that." I was like, "Oh, what's your trading fees?" There are no trading fees on ETFs and a huge list of mutual funds. And he's like, "So, you're just trying to figure out how we make money?" I'm like, "Yeah, how do you make money?" He's like, "We just have a lot of cash and we make spread on the cash." So, I'm like, "So you're telling me that we can park all our money there, do all the trading, build portfolios, rebalance them, build model portfolios, put clients in them, have them automatically rebalance all these things, and you guys charge us nothing?" He's like, "Yep, nothing."

I'm like, "So, if we need help, is there someone we can call, or…?" Because we've always called the broker-dealer, we weren't allowed to call the custodian directly. And so, I was like, "Oh, man, what if we need help? What are we going to... " And he was confused by the question. He is like, "Yes, we have a 1-800 number. They pick up immediately." And so, there's just all these things I did not even know existed. And so, I realized, hey, we can do everything we're doing on the advisory platform for free instead of paying half of what we're doing as a percentage to the broker-dealer. And that just blew my mind. Oh, and then for our financial planning fees that we're currently giving up 20% to the broker-dealer on, if we go an RIA, we can pay AdvicePay 50 bucks a month plus 1.5% for transaction fees, and then we get to keep the other 98.5% instead of 70%. That sounds pretty good.

And so, just doing all this math on the spreadsheet and showing how much more, again, for the client paying the exact same, we're not interested in trying to make the client pay more or any of these things, just for what they're paying, how much more can flow to us instead of getting chewed up by all these middlemen, and it blew my mind. But then you’ve got to replace some of these things, and that's where the broker-dealers scare you.

And the biggest one that they scare you with is, "What about compliance? What about compliance? You're going to get audited and you're going to get shut down and you're going to get sent to jail because you're never going to be able to do the compliance." And it turns out there are compliance organizations that will help you do the compliance for, again, a flat fee, a flat monthly fee, and they will take care of this for you. It turns out that the E&O that your broker-dealer gives you, it was...I individually was paying 10 times as much for my individual E&O at the broker-dealer as we found we could get for the entire firm under an RIA because advisory, I'm assuming, I guess I don't know this, I'm assuming it's because people in the RIA world, in the fee-only world don't have as many claims against them as people in the broker-dealer world.

Michael: No, it is. There's a caveat that, and I truly don't know Voya's policies in particular, especially at the time, but some broker-dealers do charge a markup on their E&O insurance. It costs them, whatever, it costs them 3 grand, but they charge you 5 on your statement because you have to have it and you're not allowed to shop it around anyways, so it's kind of captive. I always equate it to the, it's the taxi cab model of credit cards. The taxi companies make it that the drivers all use a particular credit card vendor that the taxi station gets an override on. So the taxi drivers don't want you to use a credit card because they have to pay a big cut to the house that they can't work around but it doesn't actually cost that much. So, at least for some firms, there is a phenomenon there. The secondary effect is, to me, it's the ultimate irony that all the hand-waving in public is the fiduciary model is very expensive, has increased liability, and therefore creating fiduciary rules will increase the cost of advice for advisors. And then you go to E&O insurance, which to me is the purest expression of what the liability actually costs by the people who have to write the check. And it turns out they charge a lot more on E&O for brokerage suitability, best interest than they do for RIA fiduciaries. The people who have to pay the claims are like, "No, the fiduciary thing isn't actually a higher liability." It is if you do the same egregiously bad thing, but when you know you're a fiduciary and that's your liability, there's stuff you just don't do, and then you don't have those lawsuits.

Freeman: Yep. Some of that self-policing does work. And then things licensing, under the broker-dealer, I needed the 7 or other people needed to keep their Series 6 and their Series 65 and all these things. But under an RIA, you just need the 65. And so, our licensing fees went from $1,500 a person to $500 a person. So, some of these things actually got cheaper going to the RIA than get it added on. The broker-dealer had group contracts with MoneyGuidePro, so that would be included for your affiliation fee and some of these other things. But even then, we shop these things out. And I started with eMoney and tried MoneyGuidePro, didn't like it, so I was still paying for eMoney at the broker-dealer, even though they had MoneyGuide for free. They give you a website, but it's just one of your canned websites that you can get anywhere and you're not allowed to do anything with it. All these things.

So, you just start listing out, hey, what would we need to replace? We need a CRM. Oh, good news, that's a flat monthly fee for anyone who's involved. We need financial planning software. I was paying for that anyway, so I guess I'll just keep paying it. I'll have to pay a little bit more, I don't get the group discount, but it's a nominal difference. We need portfolio management and billing. Oh, by the way, Schwab does all your billing and portfolio management for free. Okay, great. So, we need financial planning billing. Oh, AdvicePay is a really great deal.

You're going to need a website. Oh wait, it means we can do whatever we want and we don't have to just use this one pre-approved vendor from the broker-dealer? Oh, that's cool. That opens up a whole new world for us. We need work email, you need secured data storage, you need some of these other miscellaneous texts that you need. But all that, again, line items, every single one of those is a fixed monthly or fixed annual fee. And so, if you're doubling your revenue that you actually take home overnight by switching to an RIA and dropping the middleman, and then you're adding on a nominal amount of fixed fees in the middle there, net profit was a massive increase overnight. Now I call it the ROI. The ROI overnight increase in what you get by jumping to RIA instead of staying with a broker-dealer, because it truly was, overnight, we went from one billing being X to the next billing being twice as much for a much smaller monthly fee.

Increasing AUM Fees While Providing Clients With Lower Overall Costs As An RIA [34:28]

Michael: So, I get conceptually the billing dynamic. If you charge 1% and you're getting 70% payout, you were making 70 bps [basis points]. But then when you put in the investment platform fee, the custody fee, the models they make you use with versions of funds or ETFs that would've been more expensive, you mathed it all out and it was 1.4%. So, when you transitioned to advisory and some of those other costs came out, as you frame, some of those middleman, intermediary costs came out, did you literally strike a new higher fee schedule and say like, "We're now charging…" it wouldn't be the whole 1.4% because underlying, there are some costs.

Freeman: Correct. Yep.

Michael: You re-marked your fees from 1% to 1. 2% or 1. 3%?

Freeman: Yep, we went to 1.3% because it was then advisory plus the platform fee they were already paying. And then we said, "Hey, and now clients, we can use these cheaper funds for an average expense ratio, weighted average of 8 basis points instead of 10 or 12 or whatever it was at Voya. And so, overall, you will pay a slightly lesser fee. And we'd just pitch like, "Hey, the custodian fees, the trading fees, all that stuff is just going to now be included in this 1.3% that we're charging you instead of the 1% plus all these other things being tacked on." And that's how we were able to come away with, it probably wasn't quite double, but it was a 90% increase in take-home revenue.

Michael: You're going from 70 bps net to 1.3%?

Freeman: It's a significant jump.

Michael: So, it sounds a big piece of what changed the math for you was when you were looking at it not just in terms of, "What's my sort of grid payout? I get 70% of my grid, I get 70% of my 1%." It was the, "Oh wait, if my clients have to pay these additional platform fees, custody fees, etc., I have to put that into the proverbial kitty because if my clients are really paying that, I could charge that myself on the other side," which you literally did. And then the math looks really different.

Freeman: Yep. They were still saving some money. It was still less. If you really wanted to, if anyone had some head trash around this, you could go to 1.2% instead of 1.3% and save your clients 10 to 15 basis points, and you would still make 60 more basis points, 50 more basis points than you were making before. And so, the math really, I just realized, I couldn't lose on this math and the clients couldn't lose. It was win-win-lose where we won, the clients won, and the broker-dealer lost, which we were fine with.

Michael: And the caveat then was...well, I guess in the other upside to this was I have to line-item out all these things that I have to replace. I feel like it was a pretty long list. I was trying to scribble notes as I went, but you had planning software, CRM software, performance reporting tools, compliance vendor, health insurance, series license, E&O insurance, website provider, email provider, secure data storage. Which it sounds some were cheaper, like E&O got lower, some were more expensive, like you didn't get the discount on the planning software from what you would have under the platform. But the biggest driver for you was just that they were fixed. So, as you look aspirationally at growth, like, when my revenue goes up, my costs aren't going to go up, so this is just going to drop straight to my bottom line.

Freeman: Correct. Yep.

Michael: And so, that's why at the end of the day, you said this maths at $7 million under management.

Freeman: Yeah, it worked even at that low of amount. And we couldn't get the rest of...so, I pitched this to everyone. I'd shown the spreadsheet. And one guy, Michael, who wasn't part of the original 3-person team, we had started teaming up a little bit more and he was a believer and wanted to do it. And then we found out from Voya Financial Advisors, that Voya, the parent company, was selling its broker-dealer, Voya Financial Advisors to Cetera. And so, we knew we were going to have to make another change anyway. And so, that really accelerated my timetable.

Some of the other guys decided to join another firm. They did a lot more brokerage business, a lot more annuities, and some of those things. And if you do that, if your practice is built on upfront commissions and big annuities and all that, you need a broker-dealer. And so, there's no way around that. You can only do fee-based investments under the RIA. But I wasn't doing any of that and neither was Michael. And so, it made sense. So, we joined forces and joined our $7 million total between the 2 of us to go launch this RIA.

Michael: At that point, effectively, a portion of your grid is paying for a bunch of FINRA compliance overhead that literally doesn't apply to you because you just weren't writing any FINRA products.

Freeman: Correct? Yep.

Michael: What happened to retiring Voya dude?

Freeman: I don't know. I think he's still working.

How Freeman Implemented A New Tech Stack After Breaking Away [39:14]

Michael: So, as you were looking at this, I'm also just stuck, all the things you had to list out and figure out to replace, just how did you literally figure out what all the things are that you had to replace? As you noted, a lot of this was very new territory for you because you'd always been in the environments you've been in. We just don't know the world that we haven't interacted with before. So, how'd you even figure out all the things that have to be on this list that you then had to line-item out one at a time on the spreadsheet?

Freeman: Well, I don't know if you know this, Kitces, but there's somebody out there that creates a giant infographic of all the available advisory tech that's out there.

Michael: Oh gosh, that thing's kind of painful to navigate.

Freeman: It's got to be big. It's like shopping at Amazon. And so, we literally used your, I can't remember exactly what you call it, the financial advisor tech app or something like that. And so, I just used that. We were familiar with some things, we used them across the 2 broker-dealers already. But I wanted to use eMoney, not MoneyGuidePro. MoneyGuidePro was part of the fees that I was paying, but I wasn't using. So, when you're independent, you can truly just use the things that you want to use. We used Box for document storage at VOYA, which is a great system.

But we just realized, like, "Hey, we need Microsoft Office anyway for Word and Excel and all that stuff." And it turns out they've got OneDrive, they've got built-in Outlook that you can use. I don't know of any company in the world that spends more on data security than Microsoft does. And so, that seems like a pretty secure way to encrypt things and keep that. And so, it just allowed us to pick and choose what we wanted instead of paying for tech stacks that we felt some of the options were inferior to what was out there. And I think that's part of it, and again, this is really... I know, granted, not everyone wants to do this. Not everyone wants to choose their own things.

They're maybe not tech savvy, they want a cookie cutter, just plug in and go, everything provided to them. But for us, again, it wasn't worth how much I was given up to have that provided for me. And again, I didn't have as many clients, I had...this whole graph between the amount of time you have available to you and the amount of clients you have, so a negative curve. And so, I was on the front end, very little clients, lots of time to evaluate these things. And for me, I just looked at it as, "Hey, with this increase in revenue, I am paying myself to do this research." And it was a pretty good return to do it.

Michael: So, how many years in were you at this point?

Freeman: So, I was about 4 years in, 4 and a half years in to make this jump. And so, I had 4 years of experience, but in some ways, it was one-year of experience repeated 4 times. Some growth in there, getting the CFP, but no real...I think my income at the end of year 4 was exactly the same as it was at the end of year one. Just struggling with the belief and trying to sell products you didn't believe in and all these things. And now I finally had something that I felt like, "Hey, I'm passionate about this, I'm focused on this. This is great."

Michael: I was going to ask where it's mathing at this point. So, you're $7 million of assets when you do this transition, you're charging 1.3% now, so it's like $90,000 of revenue, out of which you pay your fixed costs and which you then split in half with your partner?

Freeman: Yep.

Michael: So, you're still at like, I'm Schedule C netting 20, 30, 40 grand at this point?

Freeman: Yep. So, I think when we started, we were making 30 grand. And I think at the end of the third, fourth year or whatever, I was up to 45, which felt like, "Ooh, this is great." And basically, since then, it's grown 60% a year in terms of what's actually hitting my paycheck, which is just going from basically no growth to 60% year-over-year growth several years in a row here, it's just a proof to me of the power of being an RIA, the power of being fee only, the power of being independent and being able to use your creativity to choose what you want to do instead of being stuck with what's prescribed to you. And so, I've seen no growth for 4 years and then just wild growth for the last 3. And it's been great.

Managing Compliance As An RIA By Working Directly With His Regulator [43:19]

Freeman: The last thing I would say, because the big fear, I think, for a lot of people going independent is compliance. And that is the scary bad thing that they hang over your head your whole life, "And what about compliance? What if you get sued?" All these things. And I just kind of realized, "Man, if I actually did something that I was going to get sued at, I just feel like this giant Fortune 100 company is not going to go to bat for me as this tiny little producer. It's not like they're going to shell out a million dollars in defense fees to protect me against something." And even when we left, literally as we told the people that were left, their partying shot was, "Oh, just be careful about compliance."

So, it's this big thing that hangs over our head. And again, there's compliance companies that help you with this to help you make sure you're dotting all your I's and crossing all your T's. Yep, it's a little bit more work, but again, you're getting paid 90% more, and so you can pay someone to do that for you if you don't want to do it. There's room in the budget. And we got audited 6 months into the business by the state because we’re a state-registered IRA. And we were told by the compliance consultant like, "Hey, when this happens, you're going to get half a dozen demerits at least. And they're not issues unless they persist. If they audit you again and you're still having those issues, then it's a really big problem. But they're going to tell you what you need to fix. Just fix them, send in proof that you fixed these processes, all these things. It doesn't have to be a big deal."

And so, they came and they audited us, and they did all these things and we had zero demerits. We passed with flying colors. We had no issues whatsoever. And from that, we developed a relationship with the actual auditor for the state and now I just email her when I have questions and she promptly responds to them and says, "Yep, you have to do it this way or make sure you have this in place." And so, instead of it being this big bad wolf, she's like a friend of mine that helps us through our business compliantly. They're not actually out to get you.

Michael: So, you have a free compliance consultant, why pay a compliance consultant when you could just have the auditor tell you free?

Freeman: Correct. So, we were paying a bigger compliance fee for the first year, and then we dropped it just to basically the software service because the judge is now on our side. And that's the thing. I don't know about the SEC, I haven't dealt with them yet. We're not big enough. But the states that regulate these things, they're not out there to get you. They're out there to help you make sure that you're just doing it the right way. And when we look at it that way, instead of it being a big bad wolf to a German shepherd that's on our side if we'll work with them instead of an opposition to them, it's just compliance, is just not scary. And so, I was pleasantly surprised by that. And yeah, it's not as bad as we've been led to believe.

Michael: So, then can I ask, what did you use for the compliance consulting?

Freeman: Yep. So, we use RIA in a Box. They've since been bought out by COMPLY. I think they still just offer it as the RIA in a Box software. I don't know if I'm grandfathered into anything old or if they still have the same pricing that we started with. But we paid a larger fee upfront that worked for them to help us get registered, like a one-time fee for them to help us get registered as an RIA, a larger monthly fee to have a consultant with the software that they help. And now we just pay for the software that just helps us report everything on time, keep our records straight, update our ADVs, those types of things. That's all really reasonable.

Michael: Do you remember what the costs were? I just know it's really fearsome when you're transitioning, every dollar is scarce.

Freeman: Yes. So, I think it was like a couple thousand bucks for them to register us in the first place. And so, we looked at it as like, "Hey, we're going to get a 90% bump in our first quarterly billing. All that is just going to go away in these initial expenses, which is fine. But then every quarterly billing after that, we're going to get to keep, that increase." So, we just looked at it that way. And then I think we were paying 500 or 600 bucks a month for the first year, and now we're paying 300 bucks a month for 3 advisors for them to keep our information straight. So, I feel it's a good value and certainly better than paying 30%.

Michael: Yeah. And then, what filled out the rest of your, I guess, stack of what you launched with? So, health insurance, you went to the state insurance exchange?

Freeman: Yep. And then we used Redtail for CRM. They increased the fee, which I was annoyed about and took away some of the benefits. I don't even know if I'd recommend them anymore going forward. But they've been great. Otherwise, eMoney we use Schwab's portfolio, billing software and reporting, AdvicePay. We use WordPress for website. We'll get into that later, I think. And then just Microsoft basically rounds out our tech stack for the most part. And a couple of little ancillary things we use just for help and support and whatnot, but those are the main ones.

Michael: Do you do anything specific for portfolio performance reporting and what you generate for clients? Do you just have them log into like Schwab and look directly?

Freeman: They have performance reporting as part of their billing that'll generate quarterly statements across the whole household and all that. Part of what we do though is we don't focus on the returns at all. So, I have never gone through a performance report or a statement with a client unless they bring it up, they're just confused about one point on the statement. There's been maybe 3 times that that's happened. But otherwise, we do not look at performance reporting at all. We are much more focused on financial planning and overall behavioral management and just staying in equities for the long haul. And so, all of our communication is around that and not around. And so, that's maybe part of it, is we have very, what some people would call very simple portfolios that are a lot of buy and hold index funds and whatnot.

I think I see a lot of other portfolios that feel like they just have this illusion of complexity where they have 17 different funds, but if you look under the hood, Apple's the number one holding of most of them. And so, it feels like a big fancy portfolio and it's 90% the same under the hood. And so, we use specific funds that are not duplicating each other. They all have a specific reason to be there.

Freeman’s “All-In” Fee Model [48:51]

Michael: But I do have to ask, so the core business model is all AUM, I guess there must be some separate billing if you're doing AdvicePay fee-for-service as well?

Freeman: Yeah. And that's the other thing, when you're independent, you can iterate as many times as you want to find out what's worked. So, we've gone through multiple billion iterations. As it stands, right now we have what we call our “all-in” model, where people pay us one, usually AUM fee, and they get all of our services for the one fee. We're kind of the Amazon Prime of financial planning. It's going to be more valuable to some than others, but they'll get the financial planning and the investment management, the taxes, the estate planning, all that for one fee. And then there are some people, if they don't have enough in assets, then they will pay us a fixed monthly fee that we use AdvicePay to bill for. And so, that's worked pretty well.

Michael: And what do those fees look like? What's the AUM fee? I don't know if it's still 1.3% or if you've changed, and where do you set the monthly fee minimum?

Freeman: Yep. So, back when we were doing 1.3%, we'd charge separately for financial planning and then we'd have insurance things and all that. So, now we've dropped our insurance licenses, we went fee-only and now we charge 1.5% on the first half million, 0.5% on the next half million, which then averages out to 1% on the first million. And then a quarter of a percent on anything over a million. And we just switched that recently because we're trying to attract more higher-net-worth clients with greater AUM. And we find that then the weighted fee they end up paying when you've got a few million instead of $1 million continues to get cheaper for them and becomes attractive for what they're getting versus what they're paying. So, we'd like to get up and get SEC-registered.

So, that's our current goal. And that's just worked really well because then we don't need to... Because you get paid pretty similarly then on someone who has $500,000 versus someone who has $700,000 and not even that much more for someone who has a million. And so, our revenue per extra $100,000 goes down. But I would rather have a whole bunch of clients paying us $10,000 and a little bit plus than not have them in the first place. And so, that's kind of where we've landed lately.

Michael: And what's the monthly minimum fee?

Freeman: 300 bucks a month. So, that basically works out too, if you've got a quarter of a million dollars, you can just pay the AUM grid. And if you have less than that, then we will bill it to you out of pocket via AdvicePay.

Michael: So, I guess 2 questions then that I've got here, one, why 1.5% on the first half million and 0.5% on the next half million that blends out to 1% in a million versus just charging 1% on the first million?

Freeman: We can pitch it that way to people who have $1.5 million, $2 million, those kind of things who are never going to dip below a million. Where I realize that it gets weird is when you have someone who's got basically a million dollars, $1,000,050 and they come over at 1%, but then they drop below it and suddenly they're at different fee schedule or those kind of things. So, I like the progressive fee schedule because there's never a drop in fee when they hit over a certain threshold. And then there's just a certain amount of work it takes to do the all-in planning that we're doing. And so, we charge heavier on the front end just to cover that expense. And then we still very much believe in the aligning of incentives to align, "Hey, we make more money when you make more money."

But someone with $5 million isn't 5 times as complicated as someone with a million. And I have no problem with people who charge 1% all the way up. That's awesome. We may get there eventually too when we're going... I think there's a difference between starting your own firm and trying to grow it to just something reasonable versus people who are in the mature phase who are trying to scale down their C and D clients and only add highest-level clients and those kind of things. So, I've got no problem with anybody else charging more all the way up, but that seems to have attracted quite a bit of clients since we've switched to that model.

Michael: And there's no tension or fears of the proverbial, everybody charges 1% and your fee schedule starts at one and a half?

Freeman: No.

Michael: Doesn't that create issues with clients and prospects?

Freeman: No, because we just pitch it to them, "You can pay 1% over here just for investment management and then pay separately for planning and separately for tax and separately for estate planning. You can get to your estate plan done for 5,000 bucks or all that. Or you can pay us one and a half and we'll get it all done for you."

Offering Outsourced Estate Plans As Part Of A Bundled Service Offering [53:19]

Michael: So, is someone in-house an attorney as well, like you're doing estate planning documents?

Freeman: No. We use EncorEstate Plans, which is advisor-facing, "Hey, you give us all the information." Because that's the thing, and we'll explain this to clients too, "Hey, the reason it costs you $5,000 to get your trust done with the local attorney..." Nothing fancy. If you need something fancy, then we're still going to go to attorney, all that. But for a lot of people, they're good hardworking people, good savers. They got a million bucks in their retirement portfolio and they've got a couple kids they love and they're just trying to avoid probate. They're just trying to make sure their kids get everything without the attorneys and the government deciding what's going to happen there. And the reason they pay $5,000 to an attorney is because the attorney's sitting there asking them, "What's your address? What's your date of birth?" All these things, charging them 500 bucks an hour to do it.

And so, we say, "Hey, look, we already know all these things. We're already having these conversations to do beneficiary designations and all the rest. We can just go a little bit further. We can just explain the estate planning part of it. We're giving you no advice. We're not attorneys." We make that very clear. It's bolded in our financial planning agreement several times, "You are not getting legal advice from this." But we'll gather the information. We submit it up to this outside firm that works exclusively with financial advisors and they will kick back the legal documents to us. And then I'm also a notary, so we can just get it notarized right here in the office, and then you're set.

If you're doing fancy things, you're trying to disinherit children and set up generational trusts and do all these other things, we're still going to go outside and get legal advice. But for your run-of-the-mill kind of essential estate documents, that can be included.

Michael: And so, if this is bundled in, does that mean you pay EncorEstate's fee for the client to get their documents done?

Freeman: Yep. They just charge one fee. I think it's like 650 bucks for a trust, will, financial power of attorney, healthcare, POA, all that stuff. So, basically everything, transfer and death deed. We just call it essential estate docs. The essential things you need for the average person to avoid probate and make sure their kids and churches and charities get what they want.

Michael: Because clients only need estate documents generally once every few years anyways. You're willing to eat $650 out of pocket for the client to get it because it's a one-time fee, or not one time, once-every-half-decade fee, this averages out pretty quickly for you.

Freeman: Correct.

How Freeman Turbo-Charged Growth Using SEO And A Custom-Built Website [55:39]

Michael: So, now take us back. You kind of commented earlier that since the transition, you've had these huge 60% growth years in an environment where it was really tough for the first 4 years. Or I think you took home a little more in the fourth year than the first, and then all of a sudden growth was off to the races. So, what changed that growth suddenly unlocked for you in the RIA, or I guess after the RIA change, that wasn't working for you earlier as the self-professed non-prospector?

Freeman: Right. So, people have pitched it like hunting and farming where prospecting is going out, hunting, trying to go out and get something and bring it back. Whereas farming, you're sowing seeds, you're planting, it takes longer, but then you can reap a harvest later on. And so, I knew I couldn't hunt. And some people don't like that analogy and neither do I because it does feel very much like going out and bothering people who don't want to be bothered to try to work with you when they don't want to work with anyone. Versus farming and being available to people when they're ready…when someone's ready for financial planning, are they finding you?

And so, I think 2 things really contributed to that success. One was going RIA, especially when we went fee only because when we no longer had the quotas, shockingly, we stopped doing as much insurance. Funny how that works. And then as we were doing less and less insurance, we finally realized like, "Hey, this is not a big enough part of our business that if we lost this revenue we might be able to make up for it and the clients we can attract by being fee only." There were no other NAPFA-registered fee-only firms in our city where we live. And so, we said, "Hey, we could be the first ones to do this." And so, that helped a lot.

Michael: Where are you? Where are you based?

Freeman: We're in La Crosse, Wisconsin, which is, there's maybe 80,000 to 90,000 people in the surrounding areas here. So, it's big enough, but it's not a metropolis by any means. And then I think the second thing was being able to do our own website. Because when we were with both of the other firms, they used the same website vendor and all these independent firms that are DBAs of the big firm, they use these vendors and it's the same website with a different coat of paint on it, different logo. But it's like, "Hey, we'll give you all this SEO content that's built into the website. And so, you have all these great resources and all these things." But the way that Google looks at this, is they see the same content on 600 different websites. They don't SEO for any of that.

And so, for the 4 years we were with the broker-dealer, we got zero, not a single client through the website for anyone. Not one. We had zero people call in, strangers looking for financial advice. So, no phone calls, no website leads for 4 years. Then when we switched, and again, lots of time, not a lot of clients, I realized like, "Hey, instead of using these cookie-cutter websites, let's build our own from scratch." And so, I learned how to use WordPress and use plugins and all these things and built a website that is 100% original. It's not a copy, it's not a paste, all the content in there is generated 100% by us. And just built this website, built a Google profile that then attaches to it. So, if people search it and made it SEO for fiduciary and fee-only and all these things.

And so, now when people search, "Fiduciary financial advisor near me," we pop up and they give us a shot. And so, we went from zero leads in 4 years to now we get several people a month just scheduling discovery meetings with us from finding us on Google. And I think just the uniqueness of the website and the uniqueness of being fee-only, those 2 things together help us get found by people who are looking for an advisor versus chasing down people who are not.

Michael: So, you are the fiduciary fee-only firm in La Crosse, Wisconsin?

Freeman: Correct.

Michael: That's the differentiated position. So, anybody googling that with any kind of near-me town name, zip code, any sort of geographic angle that's your space.

Freeman: Correct. And that's the other thing too. When you're with a broker-dealer and they have to approve what you call yourself, or you have to call yourself by the parent company or whatnot, there's got to be somewhere where you're with such a big firm that yes, you have name recognition for the firm, but what are they doing for you specifically? And for us, we were very deliberate when we chose our name that we said, "Hey, we are doing financial planning in La Crosse, let's call ourselves La Crosse Financial Planning." And so, that's the name of our firm. And so, when someone searches financial planning in La Crosse...

Michael: You show up. So, it's the name of the firm, it's the URL. So, you very much own the SEO on that I guess by deliberate intent. That's not a coincidence, that's a strategy.

Freeman: Yeah. And we joke about, like, there's some just other firms in town that might be like Block and Kroll or Johnson and Associates, and we play a game trying to figure out what the company does by its name, and you're like, "Ah, they're probably CPAs." "Oh, nope, they're architects and I was wrong." And so, we just follow the guidance of people should know what you do by what you're called when you're new. We're not trying to get our name out there. We're not trying to build a fancy new word and create meaning to it and all these things. We just want people to look at us and know exactly what we do by our name. And we get a lot of compliments on it, and it seems to have worked pretty well.

Michael: Yeah. Well, I've always been in that mental camp as well, like, "New planner recruiting, guess what we do." AdvicePay, I guess for advice.

Freeman: Absolutely.

Michael: This is what we help with. There is a certain simplicity. I am a big fan of you can brand a name to mean it whatever you want. We've worked hard on the kitces.com to make that name and brand mean something because otherwise, it's just a really weird-sounding jumble of letters and no one knows how to pronounce the name. So, you could make it mean something, but it takes a lot longer and there is a certain simplicity of you just literally call it what it is and what you do and everybody understands it immediately...

Freeman: Correct. Yes.

Michael: ...because it's in the name with the added benefits that when it ties to geography as well, you get a lot of geography-based SEO benefits.

Freeman: Correct. And so, what we're trying to do, and we just tell people this too, and people love the underdog. Who doesn't love good underdog stories? And so, we'll have people that are looking for an advisor and they want to interview 2 or 3 and they've heard of fiduciary. I've heard people knock that like, "Oh, fiduciary is just table stakes now. Nobody cares about that." And I just totally disagree. I think it's catching on. I think once people know the difference between suitability and fiduciary, they're not going to go back. And so, we most often get found, sometimes it's from people searching financial planning in La Crosse, financial planner, most of the time it's from people searching, fiduciary financial advisor.

And so, they'll meet with us, they'll meet with a couple other firms, and then to be able to tell them the difference in person of being fee-based versus fee-only, or being a sometimes fiduciary where they can call themselves a fiduciary because they're fiduciary on your advisory-based assets, but then it's written right there in the contract where they can switch hats and become a representative of the company when they're recommending specific products, versus being fee-only fiduciary all the time.

And so, we explain to people and that makes tons of sense to people when they hear it. And again, you're not going to go back. And so, we just say, "Yep. So, interview us, interview a few other fee-only financial advisors in town and then make the choice that's best for you." And guess what? We're the only fee-only financial advisors in town. So, that works out pretty well too.

And there's just plenty of people here in town. We have some random people that have found us online elsewhere. And so, we have some random clients that have found us in other states that are now clients in Vermont and Florida and some of these other places. But we're trying to SEO and do really well locally because we like sitting across the table from people.

Managing Multiple Niches Under A Single Firm Umbrella [1:03:06]

Michael: And so, who's ideal client for you at this point? Is this just anyone in La Crosse who wants fiduciary financial planning and can afford $300/month or a $250,000 asset minimum? Or are you trying to drill in further than that?

Freeman: Well, as you know, niches bring riches, not just for us, but for the client. So, we are trying to niche into certain things, but what we realize is that...obviously, the biggest problem that some people have with niches is that, well, hey, if you niche down into this, you're going to miss out on all this other business. And I think that's especially scary for people who are just starting out where you're taking anyone who will fog a mirror. And so, what we decided, our compromise was, let's just niche in several different things. And so, there's me and Michael are the 2 main people that left and started it. We hired Ben as operations/advisor and now he's passed his CFP exam and he's more advisor than ops. And so, there's kind of 3 of us.

And so, we have 3 different niches. Mine is folks over 50, basically, people plus or minus 10 years from retirement. And just to help them navigate that change or to help them when they think they've reached the finish line and realize that there's still a few decades left, to help them with that. And then Michael is niching into medical professionals, specifically clinicians and kind of the higher end there. His wife is a PA [Physician Assistant] at the local hospital here. And so, he is gotten in good in there and building frankly an amazing practice doing that amazing resources and really hitting some other just psychological and coaching needs that medical professionals especially doctors have that they're not getting.

And then we kept hearing, especially from the retiree side, one of the most common phrases I would hear when you would go through all the planning and whatnot with people is, "Man, I wish I had known this 30 years ago. I wish someone was around here to tell me 20 years ago. Oh, I wish I had met you 5 years ago." And it's always like, we should have been doing this a long time ago. And so, there is this need for people to get off on the right foot and how much better off they can be starting right versus ending out right in the end. And so, we had people that they would send my book, which is geared at retirees to their kids to read, even though half is not applicable to them, because they loved what we were doing.

And so, that's where we've trained up Ben, our other financial advisor, to be niched towards Millennials and Gen X clients to capture those people who are really, for the first time getting serious about financial planning, they don't have the assets yet, and so he's on a flat fee model to attract some of those and work with that population.

Michael: And so, how do you manage this multi-niche framing when you're trying to run it all from La Crosse Financial Planning? Do people get to like, "If you're a doctor, go to this page. If you're a young person, go to this page. If you're a retiree, you go to this page," and you try to parse them out?

Freeman: Yeah. So, La Crosse Financial Planning is the official business. It is the RIA, is registered under that entity, all of that. We're all on that main website. And if you click on Schedule a Discovery Meeting, it pops up a little pop up where you can schedule with any of the 3 of us. But then again, since I already learned WordPress, and the nice thing about learning a skill is that you can then duplicate it over and over and over again, is we then built separate websites for the other 2 niches as well. And so, Michael has his medical-focused website that people find and they search financial planner for a doctor or financial planner for a PA or those kind of things. And we get some traffic through that one too. And we've got people that have found that website, found him, scheduled, become clients, all that just by having that niche website out there.

And then we've got XY Financial Planning for Gen X and Millennial generations as a flat fee, one that SEOs for flat-fee financial planning. I find that a lot more younger people are interested in flat-fee financial advising than baby boomers and older folks. And so, we saw on community forums and community Facebook groups and stuff like that repeated over and over again, people looking for flat-fee-only financial planners. That's getting more and more well-known in my generation.

No one else is doing it, again, there's no other fee-only people in general, and no one doing it flat fee, in the area. I still like the AUM model and that alignment but we just said, "Hey, let's just build another website that SEOs for that." And so, we get a decent amount of traffic on that one too, and have gotten several clients out of that, but then also to Ben. So, you for sure want a niche and then just have a couple of niches and you still capture everyone, but everyone feels like they're with a specialist in their niche.

Michael: But I guess I'm struck for all the advisors that struggle with, "I'm worried about picking a niche. I don't want to pick the wrong niche." There's a lot of niche selection fear. For you, it sounds like the firm is effectively multi-niche because you are working with retirees, Michael has physicians and Ben is doing this model for younger clients. Each of you individually has one particular specialization that you are pursuing as an individual. You're individually not multi-niche, the firm has 3 people who each have their own niches.

Freeman: Yep. And part of that being too, that I, frankly, I hated the way I came into the industry and Michael came in the same way. It's not a good way. We know the attrition rates, it's horrible. And so, one of the things that we're very proud of is helping Ben get in the industry. And he just finished 2 years and he's making more now than I was with 5 years of experience. And just because we didn't set him up to fail like a lot of these other models do. And we allowed him to go from ops to advisor and build his book. But then the other thing that you see a lot is one big firm website where all the traffic is funneled to the main advisors. And yeah, you can be an associate advisor there, but where's your traffic? You get the leftovers.

And so, we also just wanted to build something where each person could be first in line for a certain segment of clients and allow them to really do their own farming and to build their own client base along with it and benefit from that.

Michael: And the multiple sites thing ultimately allows each site to do the SEO work for its particular segment. Is that why it's ultimately come down to the separate websites and not just having each of you with your niche listed on 1 website?

Freeman: Correct. It just seems to me... I'm not an expert in SEO. I've done some research and built websites and whatnot, but I, by no means an expert, but it seems to me that you can only SEO for a certain amount of keywords and at some point, you start to litter in too many things and it's going to be like, "Ah, this guy's trying hard and so no. We're just going to SEO them for nothing now." And so, we can't SEO for retirees and flat fee very well on the same site, but you can SEO for 2 separate sites to do that. We bandied about because well, now you're splitting your traffic between multiple websites instead of having all go to one and what's the balance between keyword SEO versus traffic reinforcement and some of these other things?

And I think we ultimately just decided to try it, and at some point, the proof is in whether or not it works, and it works. So, at least it works for us. And again, our benchmark is 4 years of zero leads. So, it all works very well compared to that.

Michael: Yeah. I'd say, what's the worst thing that happens? You make a hyper-focused niche and piss off literally 99% of people who come to your website? If 1% of them do something, that's a drastic improvement over zero.

Freeman: Correct. Yes.

Michael: When the bar is low, any activity becomes a positive outcome.

Freeman’s "3-D Evaluation Process" To Demonstrate Value To Prospects [1:10:26]

Freeman: Yeah. And so, we use Calendly to schedule meetings, we explain the process and we've got what we call our “3D evaluation process” where they're going to schedule a discovery right there online. A lot of people don't like to call, and so, they can just schedule it online. So, we'll just see once a week or so, one of us will get a discovery scheduled on our calendar, it'll just pop up and we're like, "Oh, that's cool." And then we've got the discovery, we come in, bring them in. We go through their information kind of high level and then we say, "Hey, like a doctor, we're going to give us a prescription. We need to look under the hood, we need to diagnose some things. And so, give us your data," And then we'll bring you back in for the second D, which is a demo.

And we're not going to just ask you to trust us, we're going to prove it. And so, we're going to demonstrate to you the value that we can give by sharing if you 1 or 2 strategies that can help you improve your situation, even if you decide not to work with us. And so, we bring him back in, and so, we do all that and we say, "Okay, now at the end, now you're going to go home. Talk about it with your spouse, take a few days, and then the last day is you're going to decide if you want to work with us or not." And so, it's not a timeshare presentation, there's no locks on these doors. We will not let you decide in this meeting. We will send you home.

And when you can lay that all out for people and where they can just realize like, "Hey, I've got multiple opportunities to say no via email. I don't need to say no to people's faces, every step of the process is up to me," you just get a lot of people going through that. And then you have an opportunity to actually share that value and show those things. And every once in a while we do that extra work, that second meeting and we did a bunch of work to prepare for it, and they end up not being clients. They're not a fit, they don't agree with our equity position, whatever else. And so, yes, you wasted that extra time, but for so many people that come on, you had to spend that time anyway, you needed to walk them through those principles, those planning decisions. And so, you were just getting paid a little bit further into the process of a process you need to do anyway.

And so, that just helps people get comfortable with us versus maybe the other people that they're interviewing with and they have one meeting and they felt pressure to go with or they got a whole-life pitch in the first meeting or something like that. And that helps us stand out quite a bit.

What Freeman’s Firm Looks Like Today [1:12:30]

Michael: So, what does it all add up to at this point? What's the state of the advisory firm today if you fast-forward from $7 million between you and Michael when you were breaking out roughly 4 years ago?

Freeman: So, at the end of the year, I think we finished with just over $40 million in assets for 2023. We've since added like another $9 million in Q1 and we have another $10 million lined up that have been through that process and I think are very likely to come on. Ended 2023 with 60 planning households, we call them. We have a few other grandfathered-in people that have a Roth IRA here or there, people that helped us out in the beginning and we don't want to graduate them yet. But we count our planning households, people that are doing all-in planning with us. We ended the year with 60 and we added 13 in Q1 and we've got another 18 in the process.

And so, just the sheer volume of what we're doing and how fast we're adding people on because of how easy it is for them to find us. And then I think what we do for them compared to what other people are getting, the value they're getting versus what they're paying, the comfortable atmosphere of being introduced to our firm, I think all those things together have just really compounded one after another into this growth that we could've only... I mean, now we've grown more in a quarter than we did in an entire year before.

Michael: You're growing more in a quarter than what you broke away with…

Freeman: Correct. Yes.

Michael: But the marketing flow is effectively people finding your niches through Google searches, and I'm going to presume some level of client referrals and word of mouth...

Freeman: Correct. Yes.

Michael: …from the community now, because you're in a small community environment. That's it? You're not running local seminars or chairing the chamber of commerce or that sort of stuff?

Freeman: No. I did a lot of that networking early on, go to your chamber of commerce, young professionals here, join your BNI [Business Networking International] group, and all this. Again, zero traction from any of that. So, it's about half and half, of half people finding us on Google because they're ready to find something and half referrals from people who are just raving fans. And we actually find it easier. It is easier for us to take over a client who's worked with another advisor than it is to get someone who's been a long time DIYer and then realize they actually need to pay a fee to have professional help just because of how different we are compared to...

Michael: The other advisors are just a clearer comparison?

Freeman: Yeah. They have some benchmark of what they expect and the service and the fees and all that. And then we come in with much more services, better for usually cheap. We're not trying to be the cheapest, again, we start at one and a half [percent]. So, for some people, we're way more expensive, and then the higher you go up, the cheaper we get by comparison. So, we're trying to be the best in town, not the cheapest. And so, people have those comparisons and they see, yeah, we suffered through quarterly investment reporting meetings every quarter that we didn't know or care about and now we're just talking about our goals and our dreams and our big-picture strategies.

And I think part of it too is the tax piece has been an absolute boon to our business of adding that in, because for so long, it's the classic like, "We'll give you tax planning but not tax advice." And when it comes right down to it it's like, "Oh, sorry, we can't answer that. Go ask your tax advisor." And then the client's like, "Why do TurboTax? So, does that mean I'm my tax advisor? How does that work?" Or if they do have a CPA, the CPA's like, "I don't know, go ask your financial advisor." Or they'll say, "Don't do a Roth conversion because then you're going to pay more taxes now." And it's not that they're not smart enough to do the math, it's just that they're doing 500 returns in 2 1/2 months and they don't know what your 401(k) balance is, your social security projection or any of those things.

So, to be able to pull that in, to be able to just offer, "Hey, we will just do your taxes for you," which again, some people, it's a huge benefit, some people it's marginal. But then to incorporate actual tax advice into our decisions because... And we just found that...we dropped our insurance licenses to go fee only and we just find that investments and tax are a much better pairing than investments and insurance. Because once you have your insurance, you don't really need to keep doing it. You get your term life insurance in place, you get your disability. I personally don't think anyone needs whole life or permanent life insurance. But you got your home and auto people that will need to refresh every once in a while, but after that, you're basically just done. But for your entire life, you will have tax consequences to what you're doing.

Every investment recommendation that you give to someone involves a tax consequence. And so, to me, it just made way more sense to add tax into the investments and drop the one-time insurance piece because right now, if someone wants to leave, they don't just have to replace their investment advisor, they have to replace financial planning, they have to replace their tax repair, they have to replace their estate planner. And so, it makes clients, I think, a lot more sticky to what we're doing by doing it all in-house. And again, we, I was a bad prospector, I was a bad networker. I got zero referrals from CPAs and from estate planning attorneys and all those things. But now, we get a lot of referrals from clients who have done all these things with us and refer out these other services to their friends and family. Not good for everyone, but for someone who's bad at networking and bad at prospecting, it's been great.

What Surprised Freeman The Most Building His Advisory Business [1:17:38]

Michael: So, what surprised you the most on this journey of building your advisory business?

Freeman: I think 2 things. One was how hard it was to build it under the insurance and broker-dealer model, because they kind of hang out this carrot, this twinkie on a stick saying, "Hey, unlimited income potential and you can change lives and you can have an impact and you can make as much money as you want in this great thing. Look at all these people making all this money. Come join us and we'll help you get there." And then realizing how hard it is to sell a whole life policy to someone. Again, you would spend 20 minutes convincing, not even convincing, just telling people about a Roth IRA or an invested HSA. And they would be all in and then we would need to spend 2 meetings convincing them to do a whole life policy because of how much harder it's to convince someone to do something that I think they, in my opinion, feel isn't the greatest thing.

And so, it's just very difficult for me. And I was surprised, I did my own eMoney projection early on about how much money I was going to make and all these things. And my reality fell well short of my five-year plan. So, that was just surprising to me at first, I think. But I knew what it could be and I knew the impact we could make, especially doing it the right way. And I knew the impact I grew out on my family, on my clients, all those things. So, I think it just had some unwavering faith in the beginning even though I was making no money to stick through it.

And then I think I was surprised on the opposite side. I knew it would be more successful, that's why we did it. I had a feeling we'd get more clients if we went fee-only than if we kept doing insurance and all those extra assets that would then be ongoing lifetime revenue would be worth more than the one-time revenue that we were getting from insurance products. I felt like that was the case, but then to see how drastic that growth was after we switched, and I was just surprised by how much more successful it was. And I wish I would've done it sooner, frankly.

The Low Point On Freeman’s Journey [1:19:29]

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

Freeman: I think certainly several low points in the early years of just continuing to make no money. And I think probably culminated in a low point of 3 years into the business, end of 2019, we were having a child, my wife was hoping to stay at home, but we didn't know if we could afford it. It's one thing when it's just 2 of you working and she was a teacher so she wasn't making very much money either, but we could live simply and it wasn't a big deal. And now to have this responsibility placed on you and just feeling that pressure to make it work and to the point where I ended up joining briefly an outfit of the insurance broker-dealer like another team up in the cities kind of as a foreign liaison, helped with some of the financial planning and whatnot.

And so, I thought that was going to be a solve for that. They offered me a salary plus incentives and stuff to do that and I could do work with both teams. It was a weird situation. So, got up there, kind of thought that that was going to resolve it, that that would be the answer, and then just realized that they were doing some sketchy things. For example, they would put in whole life into eMoney and instead of putting it as a whole life policy, they would put it in as a Roth IRA with the premium as being the contributions at 6%. And obviously, that model's quite a bit different than whole life insurance policy model in real life.

So, this is why you guys are so top of the leaderboards and all this is because you are, I don't know, it just felt like they were just straight lying to clients and they had some excuse about, "Oh, well it doesn't model the cash flow and the taxes correctly if we put it in that way and all these things." And like, "You can't model premiums as contributions to a Roth. You just can't do that." So, as soon as I found out about that, I just put in my 2 weeks' notice. I'm like, "I can't be a part of this outfit." And it was shortly after that that I walked into that retirement or that broker-dealer or the independent broker-dealer advisor office and kind of set me on that path. But both of those low points of realizing I had responsibilities I wasn't going to be able to meet, thinking I had solved it and then realizing it was with what I thought was an unethical team and having that conflict was probably the low points there.

Freeman’s Advice To His Younger Self [1:21:33]

Michael: So, what else do you know now you wish you could go back and tell you from seven, 8 years ago getting started?

Freeman: I don't think there's enough ways into the industry for one, but there are more ways in an industry than just your classic, “Get hired by an insurance company, get thrown like spaghetti at the wall, and see who sticks.” And so, I would've told myself... I knew I wanted to get into the industry, I didn't know there's multiple ways, and so, I just joined the firms that were recruiting. And as you know, all the firms that are recruiting are the insurance companies that can spend money on that. I wish I had found an RIA and gone in under operations and taken a lower salary. Like, "Don't take the carrot of you have unlimited earning potential year one. Here's some examples of people that made $100,000 in their first year by selling to all their natural market” and whatnot. And instead, done it, learned planning, learned operations, learned some of those things at a good IRA firm, and then worked into developing clients after that.

That's what we're trying to do with ours. One of my dreams is to have a financial planner pipeline where we bring people in who are good people that want to do it the right way in the industry, help them learn operations, marketing, all the different skills while getting a salary doing it and building their business on the side. And then to eventually they reach that tipping point where they're just a straight advisor and can make a livable wage and not feel like they need to sell clients the things they don't need to get paid that month, but just to have something else. So, I would've told myself to go in a different direction and then maybe a little bit later, I probably would've skipped the independent broker-dealer and gone straight to RIA after the insurance company if I had known it existed.

And so, that's one of the things that I want to do too, is just if there's anyone wanting to do this or this is the first time you've heard about it, again, I made a big ugly spreadsheet to demonstrate this and I've since cleaned it all up to improve that. But just to show other people how to calculate the difference between being under a broker-dealer and insurance company versus going on their own and help them do that math that I didn't even know existed, and then I spend a ton of time learning how to do. If anyone else wants that, that's something I would love to just help other people with.

Michael: Is that something you'd share out for folks who are listening?

Freeman: Yeah. So, it's just a 1-page Excel spreadsheet where it's just got highlighted boxes where you can put everything that you have now and adjust a few numbers and then it will just kick out. It's obviously not going to be perfect and you'd have to tweak it a little bit to your specific situation, but it will in general just kick out, "Hey, here's where you'd be in the end if you switched over." And maybe that starts some conversations in your local office about, do we want to stay here or do we want to...like you said, not break away, but transition into something that gives us greater freedom and purpose.

Michael: "Here's what I paid to my platform and here's what I get from it." And it maths well or it doesn't.

Freeman: Yep. And so, we have the great advisor tech map and some of those softwares are built more towards enterprise firms, not startup companies. And so, what we've done then is said, "Hey, you can shop on Amazon and have access to everything with the advisor tech map, or here's the Aldi of options. Here's what we did anyways. Here's exactly what we did to break away with $3.5 million per advisor and turn it into a thriving company." And so, if you think that it's $100 million or $50 million or even $10 million per advisor that you need to have before you break away, I just don't think so. And it's more about some of the other things.

Michael: So, I guess, for folks who are listening, this is episode 388. So, if you go to kitces.com/388, we'll have, Freeman's channel comparison spreadsheet. Or do you have a better name for it?

Freeman: It's just called the RIA Toolkit. So, the toolkit is a list of all the things that we've used and a spreadsheet calculator just to help you see the math of it and just to get your mind moving and see what's possible.

Freeman’s Advice For Newer Advisors [1:25:15]

Michael: So, any other advice you would give younger, newer advisors coming into the profession today around career paths, beyond, you say like, "Wish I joined an RIA in an operations role and transition to planning later," which I think is powerful?

Freeman: Yeah, I think that too. And then I also think, people have said this before and it's absolutely true, focusing more on long-term value to clients and long-term value to you instead of choosing the upfront commissions and the one-time payouts and all those things, and then being stuck doing it over and over again. That was one decision that I think someone told me about, and I made early on, was to, from the very beginning, do advisory. For the news we did do, you know, choosing the long-term payout and then eventually dropping that and doing advice only and some of these things. I think it's better for the clients. It's definitely better for advisors in the long run. And I think it builds a business where you are basing what you do for the clients on the value you continually bring to them instead of just a one-time sales meeting. And it feels different, I think.

What Success Means To Freeman [1:26:18]

Michael: So, as we wrap up, this is a podcast about success, and just one of themes that comes up is the word success means very different things to different people. And so, you're on this fantastically successful path with the business now, as you said, growing more in a quarter than you did in the first 4 years cumulatively. So, the success growth path is very much unlocked now. How do you define success for yourself at this point?

Freeman: For me, it's having success in every life domain. People categorize them in different ways. I kind of categorize them as spiritual, relational, mental, physical, vocational, financial, and recreational. And I think there's a lot of people that have what I call "pseudo-success", which is where they're very successful in 1 or 2 areas at the expense of all the others. And typically, that's vocation and financial in the U.S. because those are the only ones you can measure externally. People don't usually broadcast their marital fulfillment or their spiritual whatever. Sometimes on the recreational side, that too. You see that on Instagram, your highlight reels and whatnot, but you don't know what's happening behind the scenes.

And so, I don't want to build a great business that's thriving and helping lots of clients and then come home to a family that doesn't want me there, or give up my relationship with God in the meantime, or do all these other things. And so, I'm trying to prove that you can have a successful business.

And I think there’s this false dichotomy that we need to sacrifice, that you need to grind for 80 hours a week to get your business going. And maybe that’s why it took me 4 years because I wasn’t willing to do that.

And I’ve always liked your Kitces & Carl podcast teaching people how to do it right while having a life in the process. And that’s always resonated with me too, of there’s so much more than just building AUM, or so much more than increasing your paycheck. That you really can, with proper balance and proper habits, focus on all of these and have a thriving relationship across all areas instead of going deep into debt with one in order to fund the others.

Michael: Amen, amen. Well thank you for joining us on the "Financial Advisor Success" podcast.

Freeman: Thank you Michael. It’s been an absolute pleasure talking to you. I’ve been listening since…I think episode 35 and so it's great to be on the other side.

Michael: Absolutely. Thank you.