#FASuccess Ep 397: Powering Growth To $1.2B Of AUM With An Intentional Focus On (Local) Acquisitions Of Retiring Advisors, With Jaime Benedetti

Resources Featured In This Episode:

• Jaime Benedetti
• Benedetti, Gucer, and Associates
• BEAM Wealth Advisors
• Live Oak Bank
• Advyzon
• Kitces Research On The Technology That Independent Financial Advisors Actually Use (And Like)
• FP Transitions
• SkyView

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Full Transcript:

Michael: Welcome, Jaime Benedetti, to the "Financial Advisor Success" Podcast.

Jaime: Thank you, Michael. It's a real honor to be on here.

Michael: I'm really excited to have you joining us today, and to get to talk a little bit about growth by acquisitions. I feel like acquisitions and M&A in our space has kind of become an interesting domain. There's this subset of generally mega huge, large, private equity-funded firms that are aggregating and gobbling up firms all over the place, all over the country. There's always been some smaller level of M&A in our business that often just basically comes down to, "Hey, you've been working for a while in your practice, I've been working for mine, and we both feel a little bit lonely, and it would be nice to split some overhead. Do you want to kind of merge, and come together?" And solo practices often come together.

And to me, there's this interesting midpoint where the fact that we have this ongoing wave of advisors reaching retirement, entering retirement means acquisitions can become an ongoing growth opportunity, and not "just" because you've taken giant piles of private equity money to go about doing it. It can simply be a growth strategy, and particularly appealing for firms that maybe don't feel like other forms of marketing are their strength, this is the proactive way that they go out and get clients.

And I know you have kind of lived this journey of serial acquisitions, a half a dozen over the years, and so I'm excited to get to dig in and talk about what it looks like when you want to make acquisitions your sort of slow and steady ongoing growth engine.

Jaime: Yeah, absolutely. I mean, one of the things that made this really click for us was that my partner and I...well, I'll give you just my background. I didn't play golf in college, and I don't come from money, so the wirehouses weren't going to hire me because I wasn't getting any rich people in the door. And so when we started, we quickly came to the conclusion that we're just okay at marketing. We were growing very slowly, and we are good at being advisors, and over the years we've built really good systems, and we deliver good advice, and we just needed the opportunity to get in front of clients. And if we could do that, we could add value, we could show our value, demonstrate it.

Making A First Acquisition As A Relatively Small Firm [05:48]

And it worked really well, and so we bought our first practice. It was really the scariest thing we ever did. It was a $9 million practice. My business partner took a $40,000 loan from his mother-in-law, and I put $35,000 on one of those Capital One credit card access checks, and it was the scariest thing we ever did. And it worked out really well. And after we bought that first...

Michael: So wait, wait. When was this that you're buying a $9 million practice, and financing it from the in-laws and the Capital One access checks?

Jaime: This was probably in the early 2000s.

Michael: Okay.

Jaime: It was right after we went P2. Which we started at American Express Financial Advisors, that spun off, became Ameriprise, and then we started in the P1 channel, which is their employee channel. My partner and I then flipped over to the P2 channel, which is you're an independent franchise owner, which is essentially, it's kind of like a semi-independent channel, and it was right after we went P2 that we did that. So at the time, we had next to nothing under management, and it was a big expense, and it was a big kind of...I mean, if you think about it, $9 million in hindsight doesn't seem like that much for an advisor's book. For us, it was really big at the time, and it was enough to give us kind of a base to work off of.

And one of the nice things about that is you start doing a good job, and you do start to grow organically as well because you get referrals from those clients.

Michael: So where did this first opportunity come from? Who had $9 million available for sale?

Jaime: So this was an advisor that we knew. She was getting married, and her husband was a consultant, and they were moving to the UK. And so she was like, I need to sell my book. We hadn't seen a lot of them at the time, and yeah, I mean, it was really just word of mouth. It was someone we met, and it was internal, right? So it was another advisor to Ameriprise that we'd known...

Michael: In the Ameriprise system.

Jaime: Yeah.

Michael: Okay. And so I'm just curious, flashing back to then, do you recall, how did you value it? How did you pay? Was it financed over time, was there just a straight cash payment? How did buying a practice work then?

Jaime: We've gotten a little more sophisticated since then, but at the time, the going rate...and you have to bear in mind what we were buying as well, because this was a practice at a broker-dealer, and it was a smaller advisor, so there was some recurring revenue, but most of it was just a client list. There were assets there, but it wasn't really generating that much revenue, you know? This advisor may have had...I don't even remember if she had anything in wrap accounts or in fee-based accounts. There were some trails from mutual funds, and the way it was valued at the time was 2 times recurring revenue plus 1 times non-recurring revenue. So we looked at her production, commissions that had been generated, and we valued that at 1 times, anything that was recurring we valued at 2 times. And then I think we structured it such that there was, at the end of a year, there was a retention number, like if more than a certain number of clients left, we reduced the payout by a certain amount.

Michael: Okay. But this was, again we're going back to the early 2000s, so I'm assuming like this was a very, very heavy mutual fund book, maybe a little annuities, and you mostly did A-share business back then, and maybe some B-shares were still around?

Jaime: Who knows what was in there. It was a combination. And it gave us the opportunity to go into these clients and really kind of clean up the book, right? To go start offering planning, and hopefully deliver some value, cleaning up some of the investment portfolios.

Michael: So just help us understand a little bit more for context, how far into the business were you at this point, and what was the size of the existing practice when you went out to do this deal?

Jaime: I started in 2002, and I think I went P2 somewhere around 2004, 2005. So I was probably 3 or 4 years into the business, and our practice wasn't that big. If we were buying a $9 million book, my guess was, I don't know, maybe between my partner and I, we had $20 million maybe. I don't know.

Michael: Okay.

Jaime: And even then, not all of that was recurring, because the model that I started under was the sort of broker-dealer model. And I've got to give some kudos to American Express because I do think they really pioneered the idea of planning. So we had a lot of clients that we were charging a flat fee for for planning, but our book was really a mix of...we were working with very small clients, so a lot of it was you'd put them in A-shares, you might sell some term insurance, some disability if they were younger, and that was appropriate, and that was it, that was your revenue, it was an annual planning fee.

And then, as we matured in the business, we learned about different models, we started moving to more of a fee-based model. And that was where we were at at that point, where we were saying, okay, we're not doing commissions anymore. I mean, there are some products that are only available in that manner, but we said we like this fee-based model, it aligns our incentives. We're definitely taking a pay cut in the short term, but in the long run, we're building a viable business that really aligns with our client interests. So it was right around that time, and so I don't know exactly what we had, but it wasn't a lot. I mean, this was a big deal for us at the time.

Michael: Yeah, I guess if you and your partner each have roughly $10 million books, $20 [million] total, and you're buying a $9 million book, this is a sizable deal at the time. Thus all the loans. You didn't have the free cash flow, personal income profits to say, "Oh, I can drop down $30,000 or $40,000 each to do this deal", it's family loans and credit cards.

Jaime: Yeah. And it was scary, but if I did the math, what we were really banking on were a couple of things. So, one, we looked at how much revenue's being generated just in trails, right? Okay, that we know is coming in. I mean, we'd have to really piss off the clients to lose that revenue. What's that going to cash flow? How long is it going to take us to pay this off in a worst case scenario? And then, what's a realistic expectation of the value that we can add with our skill set as advisors, right? So maybe engaging clients that weren't really good clients, and only have some of their assets with us, maybe other clients who aren't doing financial planning, getting them to do financial planning, right? How much additional revenue do we think we can generate?

Michael: Especially because in American Express' Ameriprise model, going out to clients, some of those clients are starting to do financial planning for them, that's revenue outright, because you're in an environment that supported charging for financial plans at the time.

Jaime: Yes. Yes.

Michael: Okay.

Jaime: So there was that, there was how much value can we add, but that was a big stretch because we'd never done it before. So we're guesstimating, we think we can do this, we believe in our skillset as advisors, but you don't really know until you do it. And then after we'd done it once, now we at least have a barometer, this is how it worked last time, this was the amount of client attrition, this was the additional value, the additional revenue we were able to generate, and then we kind of modeled it from there.

Michael: So was there a target, a break even? Or was it just the numbers seem good enough that we're just going to plow in, pretty sure this is going to work out?

Jaime: I'm pretty sure the first time we did it, it was the latter.

Michael: Okay.

Paying A Premium To Acquire Additional Practices [13:39]

Jaime: We said, we're confident we can make this work. And from there, the next practice we bought was a little bit bigger, it was like a $16 million book, and that one we were actually able...it was kind of the best and the worst time. Because it was right before the '08 market crash., and on the one end, we were able to get bank financing for it. But then shortly after we bought it, the market tanked, and obviously the value of the practice was a lot less, the revenue it was generating was a lot less.

And the goal in all of these was, we were very conservative. We really just tried to take all that revenue and plow it right back into paying the debt off so that we got them paid off as quickly as possible.

Michael: So tell me a little bit more about the second now. Where did this person come from? How did you find this? What did that $16 million book look like?

Jaime: So this was another Ameriprise advisor that was retiring, and this one, the real difficulty at that stage in our career was actually just finding sellers. There's always more buyers than there are sellers for these books, but it really is...or at least it was kind of the Wild, Wild West. Nobody really knew what's a practice worth. At that point, you didn't have banks like Live Oak that exclusively financed practice acquisitions, so you couldn't necessarily get financing. Sometimes you'd run into sellers that just thought their book was worth a ridiculous amount, other times you'd run into sellers that had no idea that they could even sell their book.

But it was really difficult to find a practice to acquire, and even more so inside of a captive channel like Ameriprise. Because they would encourage you to go out and buy outside books, but that's easier said than done. And so a lot of it was really just trying to find other Ameriprise advisors, and everybody was looking for that.

And so in this case, in the second practice, I distinctly remember we weren't the only ones that he was talking to, and we just kind of came in with, we came in with the highest offer. We said, all right, we'll pay more. We'll pay a little bit more. We still think the math on this works, we can make it work.

Michael: And do you recall, so what was the offer, and what was the composition of this book in terms of recurring and one-time?

Jaime: I want to say it was in the neighborhood of like $160,000. But again, my guess is it was very similar. It was a book where the advisor, the lion's share of his business had been commission, so there was some recurring revenue in there from trails, there was probably a small amount of fee-based revenue, but he was running his business completely differently to the way we were. And so when you buy a book like that, it inherently has less value because it's just not generating enough revenue.

And that's kind of how we started, was buying these books and cleaning them up, in a way. Or the way we like to look at it is hey, can we improve the experience? Can we really knock these clients' socks off to where they're like, "Wow, this is so much better than what we were getting before, we're really happy this happened." And so this was an advisor, he was a good advisor. He'd been in the business a long time, and was retiring, and it was a book that was a mix of probably some annuities, a bunch of A-share mutual funds, and then a small amount of fee-based business.

Michael: So what was your business model at this point? Were you mostly recurring revenue, doing fee-based accounts at this time? Or were you also in the world of still doing a good amount of A-share mutual funds and annuities, and what was often running in the BD [Broker-Dealer] environment at that point?

Jaime: No, we were squarely in the fee-based camp. We felt like it was the best way to align our incentives with the client's, and we felt like long-term, it's just a much better model, you know? It puts us on the same side of the table, and where we take a pay cut today, but so that we get a more stable long-term recurring revenue, and maybe a more stable relationship with the client. And so any new business we got was all fee-based, so our revenue at the time was a combination of flat financial planning fees that could be a one-time fee or they could be annual fees. Any investment management was typically going into fee-based asset management. And then we would occasionally use products that generated a commission, but that wasn't really our business. It was more in the scope of holistic financial planning. If the client needs insurance, we'll go out and we'll shop it, and we'll present the insurance that they need. We did very little annuities, but occasionally that's the right tool.

And that hasn't changed, really. Obviously, it's shifted. We can talk about fee-only versus commission versus fee-based. I think sometimes fee-based gets a little bit maligned because it can be very misleading. Fee-based can be the advisor that's got one wrap account, and everything else is going into annuities or commissionable product.

Michael: Right.

Jaime: Or it could be the other end of the spectrum, where it's like 99% of their business is fee-based, and they will occasionally use a commissionable product because it's only available in that format. And that's where we are. I really think...we have this conversation every year, about hey, should we just drop our licenses, because it's such a pain. But we feel like if we're going to hold ourselves out as holistic advisors, we need to have access to all the tools in the toolkit. And so we still have our licenses primarily to accommodate business when a new client comes along, but also because occasionally, one of those products that maybe we're not that fond of, that we feel like are misused very often, sometimes it's just the right tool, and if we were fee-only, we wouldn't have access to it.

Making The Math Work As A Fee-Based Advisor Buying Commission-Based Books Of Business [19:40]

Michael: So I'm partly still just trying to wrap my head around what it's like when you're doing these acquisitions that are so heavily commission-based books in the first place. It's one thing when you're buying...if it were a recurring revenue advisory practice, and you sit down, and at least classic rule of thumb when it was a 2x revenue, you could sit down and say okay, I'm going to buy $100,000 of revenue, it's going to cost me $200,000, but I am getting $100,000 a year of actual cash from these clients because I serve them.

Jaime: Right, yeah.

Michael: Maybe, hopefully I can find a way to finance this over a couple of years so I don't have to pay $200,000 up front, I can pay $30,000, $40,000, $50,000 a year for 5–7 years if I can finance this out. And it's like, okay, I'm getting in $100,000, I've got bank payments of $30,000–$50,000 a year, I can kind of make this math work, especially if I don't have a ton of staff overhead yet. But when you buy a commission-based book, it's like, well, here's a base of clients who all bought products at some point in the past that added up to $100,000 of commissions, but there's no revenue coming in. It's just a list of people who've bought a product in the past. And you know there's money there. I mean, at least it's a highly qualified list, because you know there's dollars, and where it is. But there's literally no revenue or maybe there's a little from trails.

Jaime: Yeah, there's a couple things. There was some revenue, there were some trails, but you're not that far off. And the truth is these aren't practices that we would go after today, we just took what we could get. And the fact that there isn't that much recurring revenue just meant we were buying them at a deep discount to what that same practice would sell for if there was recurring revenue, so it gave us the ability to go in there and create some of that recurring revenue.

Because you'd have a client who, for example, if you've got a client that's got some A-shares, and if they bought A-shares, that's probably all one fund family, and they bought it...

Michael: Hopefully, at least.

Jaime: Yeah, yeah. So it's all one fund family, they bought it 5 years ago, it's never been rebalanced, they've never done anything with it. And you kind of have the conversation, you explain to them, this is what you purchased, this is how the advisor was paid. We work differently, so here are our options. We can try to find some other...let's say you're in Fidelity, we can try to find some other Fidelity funds, and limit you to Fidelity. That way you're not paying a commission every time. Or we can move over to this fee-based model. Here's how we're compensated, here's the benefit, and we can go anywhere. We can buy Fidelity, we can buy a different...we can use a different fund family, we can buy ETFs. Oh, and by the way, your A-shares, let's flip those over into institutional shares to lower your costs, because we're getting paid our asset management fee.

And I think as long as you're upfront with the clients about how they got here, why you do business the way you do, and what it would look like moving forward, and you just present the facts to them and let them make that decision, and a lot of clients are appreciative that you're transparent, and they see the value.

And particularly if, okay, let's say you had that, you've got those A-shares that have been there for 5 years, untouched, never rebalanced, and now you've changed jobs and you're rolling over a 401(k) that that was $50,000, here's another $100,000 or $200,000, it's like, do you really want to just continue in A-shares with the new money? We can, but...

And so it was a lot of those conversations, and frankly, a lot of giving advice away for free to demonstrate value and earn clients' trust.

Michael: So you up the feeling of service from someone who really might have just sold them a mutual fund 3–5 years ago, and not called them since. And now you're telling them much more ongoing advice, and an engaging experience for them.

Jaime: Well, there's also the fact that when you buy an A-share, that advisor gets paid for, call it 5 years' worth of work up front, and there's zero incentive. I shouldn't say zero, but there's very little incentive to continue monitoring it.

Michael: Right, very little.

Jaime: And I think you make that clear to the client: "Look, I would make a lot more money up front if I got an A-share for your new money, but I don't think that's the right thing for you. Frankly, by investing in this manner, we're sitting on the same side of the table, because I'm getting paid as I go. If you're not happy with me, you can pull your money out, and you can go up the road to Merrill Lynch, and you will have only paid for the amount of time that you were working with me."

More importantly, "If the market's down 40%, and your account is down 40%, guess what? My revenues are down 40%." And we feel like that's fair. We feel the pain along with you, and it means our only incentive is to get you the best investments at the lowest cost.

Michael: And I guess in that vein then, cost becomes one of the second talking points around this. If we go to an advisory account, we don't just get access to a wider range of funds. We can use ETFs that often have lower expense ratios, we can class exchange your A-shares into institutional shares at a lower cost. And so now, all of a sudden you get to come along as well and say, "Hey, we're going to go from the upfront commission to advisory fees, but look at this, you're going to make back a bunch of the advisory fees and lower expense ratios that we're going to bring you anyway, so we're muting our own incremental cost by going to this ongoing model.

Jaime: Yeah, absolutely.

Michael: And then if they don't like it initially, when they have a new rollover and they're adding $100,000 to their original $50,000, and you point out to them, "Do you really want to pay that full commission now, you can do that, but here's how much it's going to be, or I can put you in an advisory account with a much smaller upfront cost, you tell me which one you want."

Jaime: Yeah. And I think that there's also, clients who want planning will naturally pre-select into that type of relationship. Because they want ongoing advice, they want an alignment of incentives, they want to be meeting with you regularly.

And I mean, I really, I'd be remiss to point out, just because we're spending some time on this, but this isn't an ideal practice to buy. These aren't the practices that the serial acquirers are going for. It's just the only...it's all we had access to at the time.

Michael: Well, but I'm fascinated from the flip side, is this a space that is under-appreciated as an acquisition opportunity even today? Granted there are fewer commission-based practices now compared to the past, but did you find at the end of the day, you got pretty good metrics of how much dollars really converted from commissions to fees, and how much additional assets ultimately came in from the people that you started serving while ongoing?

Jaime: We did. And I do think this is an opportunity for newer, younger advisors to build a book. Now granted, there's fewer of these books, but there's plenty of retiring advisors that they just haven't...their book's a mess. I mean, really. And obviously they're not worth as much. The value really comes from what value you can add as an advisor. So it works really well if you're a good advisor, and you're confident in your abilities, and you're going to be the one servicing the client.

Obviously, this doesn't scale well if you're not the one doing it. Because you really have to have somebody competent in there to have these conversations, and just use some common sense, and kind of convince these clients who've been doing things one way to maybe do things a little bit differently.

Michael: So how long did it take to convert them? I mean, to get through this book of clients, and harvest the opportunities that were going to be harvested?

Jaime: It's a messy process, and in my mind, it's just ongoing. This is one of the real downsides to buying, to acquiring practices, is if you build your book organically, every client comes on board, and is onboarded the way you want them to be, you're able to set the expectations from day one. It's a much cleaner book, you're able to do things the same way across your book. And frankly, you'll have a much more valuable practice, that someone like a serial acquirer is going to want, because it's systematized. Everything's done the same way, all the clients have the same expectations. When you buy a book, you're buying clients where a different advisor set those expectations, and in a perfect world, we're going for practices that operate similar to ours, and it's a very easy transition.

But that's not always the case, and so it's an ongoing process to realign expectations. Some clients don't necessarily buy into the changes, and you've just got to try to work with them at their pace, and you end up with a book that's kind of a mix. You've got some clients that you brought on, and they're working like a well-oiled machine, and then you've got some clients from the book you bought that you're transitioning, and that have kind of bought in, and they're sort of in your standard service model. And then you've got some clients that just really are not cooperative, and you still have to service them. You still have to try. And it might take years, and there might be some that never make those changes.

Michael: Is there a point where you decline some of them, or let some of them go? Like if you acquire, I don't know what the numbers would be, a book of 100 clients and say, okay, we got 20 great ones, and 50 that are reasonable and manageable, and this last 30, whew...

Jaime: Yeah, absolutely. I mean, there's liability as well, right? And again, this really comes down to having good systems and processes, right? So we have a meeting with a client, we discuss these things, we send them a summary letter, and we outline what we recommended. If they didn't want to do it, we document why.

But you're absolutely right. I think there's 2 pieces to this. One, you have to really make an effort to help people, because clients don't know what they don't know. They've been working this way forever, that's the expectation they had. So I don't think it's fair to come in and just right off the bat be like, "Oh, they're not going to convert to fee-based, let's get rid of those." You've got to give it some time. But there does come a point when if the relationship clearly isn't a fit, and it's not really helping the client, and it's not helping you, and I think if you can, maybe you transition those away. Depending on the setup that you're in, you can transition them to home office, you can transition them to another advisor. In our practice, what we would try to do is bring in a junior person, and really give some of those smaller clients some TLC, and really let that new advisor kind of cut their teeth, having these conversations with some of those clients that still just didn't buy into our philosophy and our model.

Michael: And have you ever gotten to the point where you just had to let some of these go? Like you pay dollars to acquire them, and then have to not continue with them?

Jaime: Yeah, absolutely. But you give it some time. I wouldn't say we do that right away, but that does happen, for sure.

Michael: Some time meaning 6 or 12 months, or several...

Jaime: Several years.

Michael: Okay, a couple of years to see whether this settles.

Jaime: I think you've got to make an effort. I just feel that way ethically, nobody likes to be handed off.

Michael: Right.

Jaime: And you really want to give them the opportunity to get to know you, and to trust you, and that doesn't always happen quickly. I think sometimes it does, but there are certain clients where they just weren't responding, they weren't...I don't know, it didn't click. And suddenly, 2 years later you get a phone call and they're like, "Hey, I don't know, I'm changing jobs, I want to roll over this money to you," and then all of a sudden they...I don't know if it was just a life event, or maybe it's the fact that now they've known you for 2 years, and they know that you're not going anywhere. So that definitely happens as well.

The Challenge Of Finding Practices To Acquire [31:48]

Michael: So why was it 3 years from the first to the second deal?

Jaime: Really just because that's how long it took us to find another one.

Michael: Okay. So you were looking and watching all along, it just takes a while to find...I guess find advisors willing to sell, or find advisors willing to sell, who aren't already getting gobbled up by someone else in the Ameriprise system because there were a lot of buyers?

Jaime: All of the above.

Michael: Okay.

Jaime: Or you find someone, and you try to build a relationship, and they're like, "Well, I've already got someone in here. I've got a junior person that I'm going to sell to." And it was about just building a lot of those relationships, and saying, hey, we're interested, we're stable, we're honest, we're going to take good care of your clients, and if that doesn't work out, come talk to us.

Michael: Okay. Because I was going to say, what were you doing? So you're going to internal Ameriprise events and meetings, and just literally trying to meet people, and just make them aware, "Hey, we're one of those practices that buys other practices, tell me about what your plan is for retirement"?

Jaime: All of the above. Not just internal to Ameriprise, we were always looking externally. This was just something that was always going on in the background. Obviously, we're still trying to grow our book organically, we're getting referrals from clients, we're trying to do marketing events. But any chance, whether it was at a due diligence meeting, whether it was in an FPA [Financial Planning Association] event, you talk to someone and they're...we would always kind of joke, always sit at the table that's got a bunch of people with gray hair, you know? And you just start talking to people, and if an opportunity arises, great.

And as we progressed, a couple things started happening. I mean this was still early. That's only 2 acquisitions in, and they were both pretty small. But we would also make it clear to people that hey, we want to continue doing this. So it's important that this is a win-win, because we want to transition your clients successfully, and then we want to do it again, and we're not going to be able to do it again if you're pissed off because we didn't do a good job. I want to be able to introduce you to the next prospective seller and say, look at the experience he had, has he been happy?

Michael: Because you want to be able to introduce the last firm that you...the owner of the last firm acquired to the owner of the next firm you hope to acquire.

Jaime: And then I think the other thing is as you start kind of moving up the value stack, you're trying to buy better and better practices. Now they cost a lot more. If you've got a practice that is already set up well, and already has a model similar to yours, it's recurring revenue, they're delivering financial advice, organizationally it's not a hot mess, those practices cost more, and it's much more competitive, and as they get bigger and bigger, we're competing against these serial acquirers that pay just astronomical amounts of money. Because their model is very much like "We're going to buy you, you're going to kind of become a part of the Borg, you're going to plug into our systems and processes, but we're going to pay way, way more than your practice is worth.

And the reason is they'll say, well, your practice is worth much, much more if it's part of our practice. Because of the scale we have, ours is worth a higher multiple. And I think the thing that really sets us apart is probably because of our experience early on, we were willing to go after the more messy ones. The ones where maybe it's a nice practice, it's primarily fee-based, but the advisor's got some broker-dealer business, or he's got a handful of 401(k)s in there, or it's just messy. It wasn't that well-organized, and the advisor doesn't want to repaper it, maybe the systems aren't running as efficiently as you'd want them to be, you know? And a serial acquirer is going to say "Yeah, we want you, but we're going to make you fit into this box. And so this part of your business we don't want, and we're not willing to pay for, or this part of your business is going to need to change, or you're going to need to rebrand, your name can't be on the door anymore." And we're able to be just a little bit more accommodating to some of those idiosyncrasies that a seller would have, and I think that's why we've continued to be successful, even though we're not a massive acquirer.

Making A 3rd Acquisition And Transitioning To The Hybrid RIA Model [36:09]

Michael: So I am curious to talk more about valuations, and what you see, but first I'd just like to understand the ongoing acquisition journey. So you did this second deal for a larger practice, a $16 million book, heading into 2008. So what came next? What was the next deal in this sequence?

Jaime: So the next one was pretty interesting, because this was the first non-Ameriprise practice we acquired. And we'd been looking, I'd talked to people, but it was always...even acquiring another Ameriprise practice was starting to give us some heartburn, because this was the point where we were really questioning the model at Ameriprise. We kind of, we felt like we'd outgrown it. There were a lot of things in there that I just felt were not aligning with our values, and what was right for our clients. Ameriprise is not a bad place. There's definitely worse broker-dealers. But we just felt like it wasn't the right fit for our clients, and it wasn't the right fit for us anymore.

Michael: Just because of the brokerage model, and you were going more and more fee-based, and they still have brokerage roots, and they are legally a broker-dealer?

Jaime: Yeah, I mean, it was a lot of different things. It was that, it was...there were just a lot of corporate policies that were really tiered towards the least common denominator. And so that, and the compliance environment was also ridiculous.

I'd had a couple of experiences where I was doing something that was clearly in the best interest of the client, and I got my hand slapped for something like selling away. And I'd also seen advisers who were doing things that clearly were not in the best interest of the client, but they ticked all the boxes, and they didn't get in trouble for it. And so it was a variety of things.

There are also a lot of fees we were paying. As we became more seasoned, and we really understood what went into our payout, how much was coming out from the client side, and we started to really understand that and talk to some people that were in other channels, we were like, wow, we're paying a lot. What are we getting for this? Is it worth it? And so...

Michael: Is that because just your grid payout wasn't at the level that you thought it should be for the value you were getting? Or other fees and costs that were layered in?

Jaime: All of the above. The grid fee is the most visible one. And at the time, no one's happy with their grid payout. Ours was okay. I mean, they've continued to be squeezed since then. So if you talk to anyone at Ameriprise, I've been gone 10, or I don't know, 15 years and I talk to them, I'm like, what? That's your payout, and you're writing this much? But there's been this push towards bigger and bigger teams, and so it's a natural thing that the hurdles get higher and higher.

But the grid is just kind of the tip of the iceberg, right? Because then you also have this global admin fee that gets pulled out of an asset management feed before it hits your grid, you also have different product…I mean, the product piece wasn't a big issue for us, but you have different products where, as an example, the client...let's say 7% comes off the top as a commission, but 2% of the broker-dealer just pays you 5% of that, and then that hits your grid. So there's a lot of that stuff going on. Same thing with insurance.

I also just didn't like being captive, you know? You had kind of a subset of products you could use that were non-proprietary. So it wasn't like they were pushing proprietary products, but you were kind of limited. And sometimes I'd run into situations, for example like with a doctor, where the best DI [Disability Insurance] policy was something like a Guardian, and just because of the nuances of their profession, and the specialty they had, and I couldn't sell it. And there were times when I was like, I think this is the policy you should buy, I can only offer you these. And so it was a number of things like that.

The other piece that really I had a hard time with...because again, Ameriprise is a great place. I know a lot of advisors that have spent their whole career there, and I still know a lot of people there, but I always had a hard time with the franchise model, where it's like you own the business, you own the clients, we're controlling the branding. And if you want to sell to another Ameriprise advisor, that's cool, we'll help you do it, but if you want to sell to someone from LPL, we're going to do everything we can to screw it up, and to keep those clients from leaving. And that always...I just had such a hard time with that.

Because I was like, I'm putting in all my blood, sweat, and tears building this business, and what if now I'm 80 or 70, and I'm ready to retire, and I found the right person to buy my book, and not only are they the right person, but they're giving me a fair deal, and Ameriprise is telling me no, I can only sell to Ameriprise advisors, and they're paying me less, or they're just not the right fit for my clients? And so I always felt like we had that headwind.

And so there was definitely a period of time where I was just struggling to really grow my business, knowing that if I buy another practice, I'm married to Ameriprise for another 3 or 4 years, and so that was right around the time we decided to make the switch. And at the time, we were really just looking for a more independent broker-dealer. I had this belief, likely because your podcast wasn't around at the time, no podcasts were around at the time...

Michael: No, no, that wasn't a thing yet.

Jaime: ...that to be an RIA, you just had to be massive. Because you had all these costs, and you had to have attorneys, and I just thought we're too small. And I don't remember what we had...

Michael: I was going to say, do you remember how big you were?

Jaime: You know, when we left, I know we brought over about $80 million. And we had more assets than that, because there were some assets that wouldn't transfer, so I mean, I'm guessing, I don't know, maybe a $100 million, $110, something like that between my partner and I.

And so we were looking at kind of the more independent broker-dealers, and we started looking I think right around 2007, and then we had the financial crisis and we kind of put the brakes on it, and then we started looking again after. And it was right around that point I was doing due diligence, and I was interviewing everybody I could, and a couple of people kept telling me, no, you don't need to be that big to be an RIA. They're like, I know a $20 million RIA that's just fine. And then it kind of opened up, and then we started interviewing custodians, and we started thinking about, all right, what if we drop our licenses? Or if we keep our licenses, what broker-dealers play nice with custodians, which ones don't? Which is a whole other piece. And that really opened our eyes, and then it became very clear, oh yeah, we're definitely going RIA. That's the way to go.

And simultaneously, as I had gone to more conferences, let's say non-Ameriprise conferences, and you'd talk to other advisors that were RIAs, I always got this sense that, you know, you're at the bar at the conference, and you're talking to someone, it's like the smartest guys were always the RIAs, and it just seemed like that was the direction the industry was going. Everything about it made sense. It was better for the clients, it was better for your business. And then on top of that, if we really wanted to grow through acquisitions, well, what better way to do it than being an RIA? Because I don't have to re-paper another RIA's book, I can have multiple custodians.

Michael: Right.

Jaime: So that made a lot of sense. There was another piece to it, which was at that point in my career I started building a book of qualified retirement plans, which is kind of a whole other conversation to get into, because that's a niche that we have a team that just does retirement plans, and at the time, those were very, very restricted at Ameriprise. I mean, there were a handful we could use. And most of the time we'd call on a plan sponsor, and we just wanted to take over their existing plan, and help them make changes and fix it. I don't want to make you change plans if you don't have to. But we were really limited at Ameriprise in what we could do there.

So it was a combination of things. Going full circle to your question about the fees, one of the things we found was we could lower our client fees, we could lower what we were charging, and still make more money, and so we were just like, this is a no brainer.

So you asked about the next acquisition. So the next acquisition, it was someone outside of Ameriprise, and we had been having these conversations, and we basically said, look, let's line this up with when we transition, and then we'll acquire that practice, and transition those clients once we've transitioned to being an RIA.

Michael: And where did you transition to? What was your custodian of choice, and did you still keep some BD relationship?

Jaime: So at the time, we were...and some of this was just not knowing, but it had kind of come down to Schwab and Raymond James, and we were kind of kicking the tires on both, and we ended up choosing Raymond James. They've been a great partner. We're multi-custodial now, so we have assets at Schwab, we have assets at what used to be TD, we've got assets at Fidelity. But at the time, we were pretty small, and one of the things we really liked about Raymond James, we went to their conference and we said, I want to...because one of the pitches they made was, look, we have an independent employee channel, we've got an independent advisor channel, and we also have an RIA channel, and advisors can choose. The gloves are off, you can move between channels. And it's not quite that cut and dry, but we were like, cool. So we went...

Michael: So that was appealing in a similar vein to Ameriprise in the first place, this large national multi-channel platform.

Jaime: Yeah. I mean, if you think about it from an advisor standpoint, I thought it was pretty awesome that you could progress your career starting as an employee advisor, then as you grew your book, you could become an advisor in the independent channel, and essentially run your own business on the broker-dealer side, and then become an RIA, and the whole time your client statements would never change. That's a really unique offering for a young advisor. Obviously, I didn't come up through that channel.

But one of the other things we liked, so we said, all right, I want to go to one of your conferences, and they invited us to one of the RIA conferences, and I said, I want to speak to other advisors that are multi-custodial. And so they introduced me to a couple, and we went to dinner with one, and I always asked them about the different custodians they had, and every one of them said, oh, yeah, I have these relationships, but all my new assets are going to Raymond James. And so we were like, all right, that's good. That tells us one thing.

And then I think the other thing that was a real value-add was because Raymond James has a broker-dealer side, even though we're not on the broker-dealer, they have all these systems and resources built out for their broker-dealer advisors, which is frankly where their margins are. Same as Ameriprise did. They had this advanced planning department we could call, we could call for advanced estate planning, they just had a lot of resources for advisors. And that was one of the things that scared us, are we going to lose access to this? And at Raymond James, they had the same thing, and then they said, "Well, yeah, you have access to that", and we were like, "Well, do we have to pay for it?", and they were like, "No, you just...you're on the RIA channel, but you can still access it." And so that was kind of one of the reasons, that was a big reason we chose Raymond James as the initial custodian.

And again, we've got relationships with all the other custodians, they're also great partners, but at that point in our career, those things were really important.

Michael: Interesting.

Jaime: And one other factor was that the advisor whose book we were acquiring, he was at a small broker-dealer who used Raymond James as a custodian. So that also kind of tipped the needle in their direction, because now, repapering his book was going to be much, much simpler because it was the same custodian.

Michael: Okay. So tell us about this next acquisition. What did this practice look like?

Jaime: So this was an advisor who, funny enough, I had met with about 5 years earlier, and he just wasn't ready, you know? I'd had a couple meetings with him, and you can kind of tell when an advisor just sort of kind of stops responding. And then 5 years later, I just called him out of the blue and he said, nope, I've already got someone lined up to sell my book to, and I was like, well, we'd love to talk to you. Maybe we can make a higher offer. And so we met, and we did, we made a higher offer, and it was off to the races.

And I don't remember how much this book was. I want to say maybe $30 or 40 million, maybe $40? I think this one was primarily seller-financed, where we made a big down payment, and then we continued to make payments to that advisor for the next 4 or 5 years.

Michael: And do you recall, is that we made payments because it was a seller-financed note, or some kind of ongoing revenue share code split thing?

Jaime: No, it was a seller-financed note. So we came up to a valuation that we both agreed on. I think we put a quarter of it down. And this was primarily money we'd saved, and then I think we had a line of credit that we pulled from. And so we used that for the down payment, and then the remaining amount we paid over 4 years, with an interest rate that we agreed upon, and I think it was 6%.

Michael: And do you recall what the valuation was, or how this was valued?

Jaime: This one, I want to say was similarly valued, probably 2 to 2.2 times recurring revenue. And his book did have recurring revenue. This was more of a fee-based book at this point.

Michael: But so this similar baseline of 2-ish times recurring, plus 1 times one times trailing commissions, that kind of structure?

Jaime: Yeah. At that point, we were kind of starting to get away from even paying anything for commissions. Like okay, great, you made a lot of money off of this, but the client's in this product, and we're not going to screw them over and pull them out, and have them pay a surrender charge. So this is locked in there for 10 years, we just have to try to help them navigate it.

So I think it was a slightly higher multiple than 2, and I don't think we really were paying anything for non-recurring revenue. But it was primarily recurring revenue, so that, that worked out. And it was an attractive deal for the seller.

And so that one, that was a busy time, right? Because we're transitioning our clients, and then simultaneously, he was transitioning his clients.

Building A Tech Stack After Transitioning To The RIA Channel [50:56]

Michael: And so then, what came next as you continue down this acquisition path?

Jaime: So then, the next one was a practice we bought from a CPA firm that we knew, where one of the partners also was running a small financial planning, wealth management business that was part of the CPA firm. And it was kind of a similar story. I'd known them for a while, known the CPA, known the partner that was retiring, and some of the other partners, and I'd approached him in the past, and it was a good business. And right around the time he was going to retire, it was kind of the same thing, he said, "No, we've already got someone", and there was an advisor in their office that they were renting space to I think, and I said, well, let's have lunch. I think this was the first practice that we actually financed with a specific lender. I think we did this with Live Oak. So this was a lender that specializes in acquisitions of financial advisory practices.

And so I had lunch with the 2 partners, it was actually a father and a son. The father was retiring, the son was another partner at the CPA firm, and they didn't have an interest in continuing to manage this wealth management book. And I said, "Well, here's what we typically pay, and here's how we'd structure the deal. You've known us for a long time, we've done a lot of these", and they were like, "Wow, that's a lot better than the deal that I was getting," and yeah, so we acquired that book.

And that was also a book that was at a different custodian, so that's when we first went multi-custodial, and we just said we're not going to move custodians. It did require us internally to just rejigger our tech stack, which I can get into, but there are some nuances to custodying at Raymond James versus other custodians, and so we had to kind of add to our tech stack to be able to do it.

Michael: Tell me more. What threw you off there?

Jaime: Well, so this is really important if you're an RIA. Just taking a big step back, and thinking about what's the difference between being an RIA and being an independent broker-dealer? Well, the primary difference is that there are certain things that the broker-dealer does for you, and you pay for, that when you're an RIA, you're going to do on your own, or you're just going to pay for on your own. And there's a lot of them, but I'd say it's primarily compliance, and then things like performance reporting and billing. Those are the big ones, right?

So compliance, you've heard this from other people on your podcast. I mean, there's a lot of great compliance consultants out there that will do a better job at a lower cost, and will actually look out for you, because it's not a captive environment where you're only able to work with this subset, right? So that's an easy one. But the billing and the performance reporting piece, that's a little daunting for a lot of advisors.

So one of the things that we didn't realize, so when we left Ameriprise, we can have our own performance reporting software, they're not going to give you the data. So you leave, you start fresh. The performance reports from that point on, if clients have been with you a month, you've only got a month worth of data, so you're kind of rebuilding it.

The other thing I didn't know at the time is that the majority of custodians do not do any performance reporting for you. So when you get a Fidelity statement or a Schwab statement, or Pershing or wherever, it'll show the change in value since your last statement, but they're not tracking the performance, and so as an RIA, you have to buy software and do that on your own. And that, and your billing software is the same. You're using the same piece of software to do billing, where if you say I'm going to charge 1%, and I'm going to charge monthly and in arrears, every month you've got to run that software, and calculate what's the fee for every single account. It goes into a spreadsheet, you send it to the custodian, they bill it and send it to you. So those are the types of things you're doing on your own.

One of the nice things at Raymond James, when we first went, is that it was a more gradual step into being an RIA, because they had a lot of those tools that they just kind of gave you for free. And so some of the... For example, they have a billing tool that you can use, that you don't pay for. And then the bigger issue was performance reporting. Because Raymond James also has a broker-dealer channel, they do all the performance reporting anyway. So even though we're on the RIA side, we're only custodying with them, they don't hold our licenses, they're not taking a haircut of our business, they're just our custodian, all those statements still have performance data on them.

So for a long time, we really didn't even need this extra software, because Raymond James was doing our performance reporting. And when we bought that practice that at the time was custodied to TD, we had to go out and buy our...we had to kind of like, look at our tech stack and say, what do we need to add to do this, and evaluate different vendors, like Orion, Advyzon, Black Diamond, all the big names you're familiar with.

Michael: Okay. Because obviously, you can't use Ray J's internal billing system to do TD billing, and the fact that Ray J puts performance reports on their statements doesn't help when your clients are getting TD statements.

Jaime: Exactly. Exactly.

Michael: So you had to buy your own, essentially "independent" performance reporting and billing tool that could overlay multiple custodians.

Jaime: Yes. And that's ultimately where we wanted to get to anyways, because we knew if we were going to continue down this path, we would likely be multi-custodial, and we needed some kind of interface to make it so that our team wouldn't have to learn 3 or 4 or 5 different systems at every custodian.

Michael: So what did you pick for the performance reporter?

Jaime: So we picked Advyzon.

Michael: Was there a reason? Just Advyzon, Orion, Black Diamond, Tamarac, a lot of choices would have been out when you were looking.

Jaime: Yeah, I'll probably piss a lot of people off by just giving my opinions on this. They're all good. I mean, they are all good. There are some massive price discrepancies, and frankly, they've all got pros and cons. I think the service you put out, where you have advisors rank them, and then you have that third-party service is incredibly valuable. But I kicked the tires with a lot of them, and we just really liked Advyzon. At the time, they were really an up and coming platform...

Michael: So what year are we in, roughly, at this point?

Jaime: That was maybe 8 years ago?

Michael: Okay. Okay, so circa 2016. Okay, so you're early for Advyzon, just they hadn't been launched all that many years before. So a big price difference it sounds like was one driver. They were just lower cost than the other big 3.

Jaime: But we also liked the fact they had an integrated CRM, and at the time, we were also kind of like, all right, let's look at new CRMs. I really liked Wealthbox, but when I compared the Advyzon CRM, the native CRM, to some of the other big players, I was like, I really like this one, too. It was a close second to Wealthbox for me at the time. And so we kind of took a leap on them, thinking that, hey, they're an up-and-coming company, we learned a little bit about their background

And it was also, at the time, we were only using the performance reporting for the TD clients. We didn't do it for the Raymond James clients because we were like, why are we going to pay all this extra cost to do it? So we ended up going with Advyzon. All of them are good. We're sort of in the process of reevaluating our tech stack now, and I've kind of come to the conclusion that they're all pretty good.

Michael: Well, I can tell you from just the advisor tech studies that we run, Advyzon continues to show up at the top of the satisfaction scale. So I think you have company in feeling good about how they were showing up for you.

Jaime: Yeah, the thing we've been really happy with is they've continued to iterate and improve, and add functionality and add functionality and add functionality, so it's turned into a very, very robust system. But so, yeah, that was that acquisition, and that was the first one where we really had to go down the path of...we were an RIA, but I think because of some of the benefits of custodying only at Raymond James, we didn't have to do a lot of the heavy lifting, or some of the heavy lifting that you have to do being an RIA, and that was kind of the first step in that direction.

Comparing Bank Financing To Seller Financing [59:23]

Michael: So were there any material differences that showed up when you did this with bank financing, versus the prior ones where you had family financing or seller financing?

Jaime: Yeah, this is really interesting. Because this was around the time when Live Oak Bank was starting to become more popular, and it was very difficult to get a loan prior to then because banks just did not understand our business. We'd show them, look, this is recurring revenue, it's paying for the note 5 times over, and they were just like, yeah, but where are the assets? And they just, they never really understood.

Michael: We can't repossess goodwill.

Jaime: Exactly. So this was when Live Oak was really kind of stepping into the scene, and one of the things that happened is that as they started doing these loans, they're typically structured as a 10-year loan, and it kind of drove valuations to roughly 2.6%, somewhere in that neighborhood, 2.6%, 2.7%. And the reason was...at that valuation, you could get a 10-year note, and it would still cash flow. And you would have to put something down, but...or not, you know? Live Oak would give you a loan, and they would also take into account the equity you had in your own practice, and you could pay cash up front for this, and then pay that loan off over 10 years, and it would cash flow from day one. You were paying the note, and it was profitable from day one.

Michael: Yeah, it's one of the discussions we've long kind of had on the podcast here, for all these questions of our advisory firms getting "too expensive" to be able to afford for next generation advisors or just in general. And my response has always been, no, as long as you can finance it over a long enough time period. If you can amortize the payments over long enough years, then the deal cash flows nearly perfectly from day one. So when most seller financing was 5 to 7 years, it was hard to get a purchase price above 2x because otherwise you'd get cash flow problems. When banks started showing up with 7-10 year financing options, valuations started drifting higher because it actually cash flows pretty darn close.

Jaime: Yeah. Yeah, yeah, and I mean, that's what we saw.

Now, there's a caveat here, is that this isn't...I won't say it's not scalable, but it's not easily scalable, because this works really, really well when you're the advisor, or you and a partner, you're the ones actually getting in there, meeting with the clients. In my opinion, it's also a lot safer because you've got a bigger margin, and you're relying on your own skillset.

Now, you can't do that forever. There comes a point, as your book grows, where you either need to transition clients to someone else, or bring your...let's say you're going to acquire a book, bring someone else on to take over those new clients. And that's where the margins become a lot thinner, and I think there's a lot more risk involved in a transaction like that. Because not only now do you have the salary that you've got to pay, but you're relying on that individual skill set. And I would argue in a lot of ways, transitioning clients when you acquire a practice is probably more difficult than just bringing on a new client, because you're not setting expectations, you're resetting expectations.

Michael: Right. It's an interesting point, that when you're doing the acquisition for clients that you're going to serve, right, if I sort of think of it in the context of an advisor profit and loss statement, if I acquire the clients I'm going to serve, I get the advisor compensation line and I get the profit line, or basically gross revenue minus my overhead expenses is what I keep, right?

Jaime: Yeah.

Michael: And direct owner's comp in a practice like that, you might pick up anywhere between 60%–80% of revenue in an independent practice, depending on quite how much overhead and infrastructure you have. So you've got a lot of room at 60%-plus margins. When you're doing this with advisor employees, because you've grown beyond personal capacity, and they get the advisor comp line, and you're spending 30% or 40% of revenue on advisor comp, whatever it adds up to, and you 'just' get your 25% or 30% profit margin, it feels a lot tighter when you're making your money on 30% margins instead of 60% gross owner's comp. It just feels pressured.

Jaime: Yeah. And you have to factor in things like, okay, what if client attrition is higher than we anticipate? Or what if we have a market downturn? What if the market's down 20%, are you still profitable then? Because those things happen. Sometimes the timing is just bad.

Using Recruiters To Find Potential Acquisition Targets [1:04:11]

Michael: Yep. So did that change how you approached acquisitions, as you came up on...we'd be at number 5 now?

Jaime: Yeah, number 5 was... And I should point out that we're making this sound like it was a really smooth journey from one to the other, to the other, to the other, and that was not the case at all. Along the way, for every practice we purchased, I probably had 10 conversations, 5 of which went really far, and I was very excited about, and it just never materialized for one reason or another. So there were a lot of strikeouts as well. But the next one was really the largest one that we'd acquired.

So at that point, we were right at around $500 million in assets.

Michael: Okay. When are we?

Jaime: This was 3 years ago.

Michael: Okay.

Jaime: And there was a practice just outside of New Orleans, and we had been running across several issues, right? One is how many of these opportunities are there in Atlanta? So are we going to expand our geographic footprint? And...

Michael: Because all the other deals up to this point were local?

Jaime: Yes. Yes. And so that was one thing that had been in the back of my mind for a while. I'm like, oh, what if there's a really good opportunity somewhere else? And do I really want to do this? Do I want to commit to this, and have to travel back and forth? And then there's all the risk that you're not there, you're not physically there...

But what happened was the pandemic, and we all ended up working remotely anyways. And it was not something I would have voluntarily done, or let our team do, but we did it, and it was working fine. I mean, it worked great. It was going without a hitch. And then as we were growing, we were hiring people, we said, well, why are we going to limit it to someone who's 30 minutes from the office when we can open up the talent pool to the whole country? And so we were able to just hire some exceptional people, and we kept growing as a remote team, and that made this acquisition a little bit less scary, because everyone was working remotely anyways.

And this was a large practice. It was about $500 million that we acquired. And this was a little bit of a different animal because this practice has employees, has staff, on top of that, we knew that we couldn't go in and be the advisor for every one of these clients. So it was the first one where we were going to be involved, we're definitely going out and meeting with clients, but we couldn't be the primary advisor for every single client. And on top of that, buying a practice this size was, I felt like it was perfectly in our wheelhouse and I can get into some of the details there as well, because that practice was a mix of, let's say half the assets were the actual advisors, and then the other half were affiliate advisors that had kind of plugged into his network, which is something we do as well. I can talk more about that. But we felt like we were perfectly capable of transitioning that practice.

And at this point, I should mention I've been working with a recruiter for years now, where we paid them a fee and they would put us in front of prospective sellers, and essentially, if the deal closed, they got a commission on the sale. And so we'd gotten in front of some good ones like that...

Michael: So who, can I ask... So what do you have to pay as a commission for that, for those opportunities? And where do you find these people, or who did you work with?

Jaime: I want to say we pay like, 6%.

Michael: Okay. That's kind of the standard broker-dealer platform recruiting rate as well.

Jaime: Yeah. But the issue with recruiters is, you can sign...I've signed that same contract with multiple recruiters, and they all just kind of disappear. The only way you really get it to work is if you pay them a retainer. And the way we structured it was we were paying a retainer of I think it was $2,000 a month, but then once our balance got above a certain point, I don't remember what it was, like $10,000, we stopped paying the retainer, because that retainer would basically be credit towards the commission when we closed something.

Michael: Okay. Okay. But the fact that you were willing to put a little upfront cash skin in the game instead of just a contingency sort of buys a little bit more of their attention than your direction in particular?

Jaime: Yeah, yeah.

Michael: Okay.

Jaime: I think you kind of need to, or you're going to be disappointed.

Michael: Okay.

Jaime: So I'd been getting in front of people, and any time somebody like this called me, I'd always have this conversation. And it's funny, because at one point I got a call from another sort of recruiter who specialized in doing succession plans for advisors, and he called me, I took the call, and I said yeah, we'd love to work with you. And he was like, oh...he kind of backpedaled, and was like, you guys are too small. You're only $500 million, he's like, I'm really only doing deals of practices that are $300 million or more, and they're never going to want to sell to you because if it's a $500 million practice, they're going to look at you and they're going to go, well, we're 100% of your existing business or more, you can't handle us.

Michael: Right.

Jaime: And you know, I kind of convinced them to go ahead and have the call with me, because I wanted to demonstrate, hey, we've done this before. We're overstaffed, we have the capacity for this, we've got experience doing this, this is not our first acquisition. And he scheduled the call, and then he just no-showed me. And so that was one of the things you kind of run into when you're trying to acquire bigger and bigger books, is that it's hard, it's hard to acquire a book that is bigger than yours is the reality. Maybe you can do kind of a merge acquisition...

But this was the case. This was a book that was as big as ours, maybe a little bit bigger, and again, I think the reason it worked is that it was a messy deal. It was a good advisor, like a lot of good advisors, a lot of personality, clients knew him, and he had a lot of different lines of business in there, and we were comfortable with all of them. There was nothing in his book where we said we don't do that, or we're not comfortable doing that, or...

Michael: Because he had an employee model, and he was doing affiliated advisor stuff? What else?

Jaime: And he had some 401(k)s, and then some of his affiliates had broker-dealer business, you know? So we couldn't be...fee-only wouldn't work for them. So we could essentially accommodate all of it, we were comfortable with all of it. And that was a great acquisition. It's not without its challenges. We've definitely had some operational hurdles that we've had to jump. But it's been a great acquisition, not just because of the clients and the book of business, but also we've acquired just some incredible team members as well. And that's actually where our chief compliance officer, Amy Betts, came from, was from that acquisition.

Michael: So how did this work in terms of how do you value it, how do you finance it?

Jaime: So the valuation, I mean, if you're doing the kind of back-of-the-napkin, it's usually not that far off. But we were using FP Transitions, and we actually were introduced to this practice through FPTransitions. And we've used them for...this wasn't the first time we used them. We actually used FPTransitions for some of the prior deals as well.

And so it was an FPTransitions valuation, we were comfortable with it. And then a typical deal, the way we'll structure it, it varies, but a typical acquisition, we'll get a loan, we'll pay cash, and then we'll typically put a third or a quarter of it in escrow to be released at the one-year mark if certain hurdles are met, essentially, client attrition hurdles are met, where we don't have attrition past a certain amount.

Michael: So wait, can you walk me through this structure once more, of just how did you actually set up the purchase?

Jaime: Yeah, it's all financed. And I think for this one, we used a different company. We didn't use Live Oak. Because again, there were some nuances to the term of the loan that just made it kind of annoying. You had to put...I forget what they call it, like a personal guarantee on all of your assets. And so with the other company that we used, the terms of the loan were a little bit easier, and...

Michael: Do you recall who you used as an alternative?

Jaime: It's SkyView. And so we've done, we've actually done 2 loans with them since this acquisition, because we did the next one with them as well. And that was also part of the reason we moved to them, because we said we want to continue doing acquisitions. We don't want to get to a point where we've done an acquisition, and let's say there's another good opportunity, and you say, well, you've got too much. They are going to have a limit to how much they'll lend you, but I think they...it's reasonable.

So yeah, so we took out a loan for the entire purchase price, and we paid, I think it was...

Michael: Like, literally, they financed 100%?

Jaime: They financed 100% of it. And the reason they can do that is because at this point, we have a practice that is worth just as much, if not more than that one, right? And as part of that process, you have to get a valuation of your own business done as well, you know? So we're giving them an FP Transitions valuation of the book we're buying, and an FP Transitions valuation of our practice, and they're looking at that and going, okay, from a debt to equity standpoint, we're still very comfortable because of the cashflow your business is generating.

And so we were able to finance it at 100%. We paid...I can't remember if it was 3/4 or 2/3 up front, and then the remainder went into escrow, and then at the end of a year, as we were transitioning those clients, that amount is released, but then we have an attrition clause in there where if attrition is above a certain hurdle, it kind of reprices, and not all the escrow gets released.

Michael: And is that like I need 100% retention or some of the deal terms start releasing back? Or do you allow some wiggle room before it has financial consequences?

Jaime: No, we allow some wiggle room. I mean, I think you have to be flexible. The reality is no matter how good you are, I think you're going to lose some clients. Because people's circumstances are different. There might be some clients that were really just not super happy with that advisor, and they were just looking for an excuse to go, and you could be the best advisor in the world, and exactly what they want, and it's just bad timing. And I think you have to be realistic about that, you're going to lose some.

But we allow some wiggle room, and obviously, we kind of project that out. I have this big spreadsheet I put together, and we kind of project that out for each practice, and say, okay, what if we get 10% attrition and the market drops 20%? What does the cash flow look like, what's our loan payment, what's our overhead, what's...you know? And you have to build in enough of a buffer.

What BGA Wealth Looks Like Today [1:15:27]

Michael: So what does the advisory firm look like today? Bring us up to present, where does everything stand in terms of assets and clients and revenue and team?

Jaime: So we have roughly $1.2 billion under management. And the way we're structured, about half of that is our internal clients and team, and about half of that is affiliates. Because we do have affiliate advisors who've just chosen to kind of plug in, and there are advisors who said I want to be in RIA, but I don't want to do everything myself, and they plug in.

Michael: So what do you charge those advisors? How does the revenue model work?

Jaime: This is another one where it's all over the place. Because on our end, we have 3 of these advisors, we had 3 of these advisors on the BGA side before we acquired BEAM [Wealth Advisors]. BEAM had a whole bunch, and they had negotiated terms for all of them that were just kind of like, they're all different, they're very, very different. So I don't have a standard answer.

And frankly, this isn't even a business model we wanted. For a long time, I always thought we don't want affiliates, because frankly, we're trying to do things a certain way, we're building our brand, and it doesn't...it just takes one bad apple to give you a lifetime's worth of reputational damage. And the whole value proposition for an affiliate is, look, you own these clients, you own your business, you can run your business how you want, and we're not this corporate office telling you how you do things. And so that, to me, just seemed like a huge liability.

We had one affiliate that has been with us for 20 years, because he was with us at...he was an associate advisor for us at Ameriprise. When we went P2, he came with us, so we had him. And then we had some other opportunities along the way, where one of them was an advisor who came to us, and I had a conversation with her and I thought it was about buying her book, and she was like, well, I don't want to sell my book, I just want to team up with you guys, and I was like, well, we're really not looking to do this. And she was like, well, what if I team up with you guys, and then in 5 years when I retire, then I sell you my book? And then it was like a light bulb, and I was like, wow, I'm a moron.

Because as long as we partner with affiliates that line up with our values, and a clean compliance record, do things the same way, this is ultimately a succession plan for them. Even if it's 20 years out, they know that I can sleep well at night knowing that if something happens to me, my clients are fine, these people are going to do right by me, and then the day that I do want to retire, I have a seller lined up.

And so that's kind of happened in conjunction. It wasn't really something we wanted to do, but then when this acquisition opportunity happened, and they had a bunch of affiliates, we were like, okay, we can work with that. And so...

Michael: So these are...functionally, these become future acquisition, future retiring advisor acquisition pipeline opportunities for you.

Jaime: Yes.

Michael: And that makes it worthwhile to be in the business.

Jaime: Yes. And not all of them are going to.

Michael: Sure.

Jaime: Some of them will grow, and maybe go off and start their own RIA.

But so, you were asking about our business. So roughly half of it is ours, roughly half of it is affiliates. In terms of staff, we have about 20 people. And then on the affiliate side, there's roughly another 20 or so, between advisors and their staff. And if I look at our business now, we've got different advisors with different niches. We have one advisor who really focuses on...he's in Louisiana, and he really focuses on Chevron executives, Chevron in particular, but also some of the other oil and gas companies in the area. We've got a female advisor who is really carving out a niche in widows and divorcees. We've got another advisor on our team, a younger advisor who is...he's a recent CFP, really, really talented, and he's building a book that is primarily like the HENRYs, the high earners, not rich yet, the kind of like, in the accumulation phase.

Michael: Yep.

Jaime: And then we have another advisor on our team that I work really closely with, that specializes in qualified retirement plans. And we didn't talk much about that, but that's a niche that I think we do a really good job in, and it also kind of cross-pollinates to the wealth management side. And...

Michael: And how many clients is it in total across the practice now? Do you know?

Jaime: I want to say it was 900 households. That's only our internal clients. That doesn't take into account the affiliates.

Michael: Okay. And then, can I ask what's revenue overall at this point?

So revenue, we finished last year at about $8.5 million, and we're trending at about $9.5 for this year. I mean, we'll see. It would be really cool if we could hit $10 million, but we're trending at about 9.5.

Michael: And is that the employee side and the affiliates? Is that the employee side, and just the portion you earn from the affiliates?

Jaime: That's a really good question, because that's a deceptive number. That's our gross revenue, what we're trending for.

Michael: Okay.

Jaime: So if you look at...a little more than half of that is our portion, between what we're generating internally, and then our portion of revenue from the affiliates.

Michael: Okay. Okay. So is acquisition still the thing, the growth path going forward from here? And where do you find sellers now, in this "so many buyers for every seller" environment?

Jaime: Well, at this point, we're relying much more heavily on recruiters, and on marketplaces like FP Transitions. But I will say, while acquisitions are still a key part of our growth plan, we're also kind of tapping the brake. Not necessarily on acquisitions, but we also want to make sure we grow at a sustainable pace. I think we probably could be growing faster than we are, but it's very important to us that the client experience doesn't suffer as a result of it.

You reach certain levels of growth, you hit these plateaus where you almost have to take a couple steps back to move forward. And that could be changing the way you do things operationally, it could be hiring team members. We've hit multiple of those plateaus along the way, and we're kind of at one of those now. And so we're looking at a couple of things. We are looking at some internal changes to our tech stack. We're also really just trying to find ways to add value as advisors, right? So we're evaluating things like potentially acquiring a tax practice, and rolling that service in, because we just find that's a big pain point for clients.

And then obviously, organic growth as well. Our COO, who came on board about 3 years ago, has been just a massive, massive boost to our firm, and she came from a practice that was almost entirely organic growth. So that's really one of the things that she is very passionate about, and so we're trying to spend some time on that as well.

What Surprised Jaime The Most Building His Business [1:22:30]

Michael: So as you look back on this, what's surprised you the most building this business through acquisitions over 20-odd years now?

Jaime: You know, I think just getting to where we are, when I started, like if you had told me 23 years ago that this is where I'd be, it would have been really hard for me to even imagine the path to get here.

Michael: Sitting on a $1 billion-plus firm when you're starting in 2000?

Jaime: Even just running a business. Because when you start as an advisor, and you've got to kind of build it on your own, it doesn't feel like a business. It feels like it's just you doing everything. And that was always my goal, was to build something that was sustainable, that when I'm gone, this thing will continue to run without me, and it'll take care of clients without me. It's just hard to believe that we're at a point where that could happen. I mean, I'm sure I'd be missed, but if I got hit by a car tomorrow, I don't think our firm would go away. And so, I think that's one. Just I always...this was the direction I was trying to go, and I had a vision for kind of what it would look like, but it wasn't a very clear vision.

And I think the other thing that's been surprising, and I think this is just about the career in general, I had heard this early in my career, but experiencing it is still kind of a wonderful thing, is that over time, you really get to work with a lot of people that you like. You tend...at least the clients that you bring on organically, and through acquisitions it happens as well, because again, the clients that gravitate to you, you tend to attract similar personality types. And it's kind of awesome, because you end up working with a bunch of people that you actually like. They're people that you develop really deep and meaningful relationships with, and you get to a point where you would hang out with them if they weren't your clients. It's not everybody, obviously, but that really does happen, and it's one of the best things about this career, is that you get to have an impact on people's lives, and you get to really develop deep relationships with your clients.

It's also one of the hardest things, if you're transitioning a client away, because you really care about them, and you care about that relationship.

The Low Point On Jaime's Journey [1:24:38]

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

Jaime: There were a lot of low points, and I don't think that ever goes away. You see other firms, and you're always seeing it from the outside, where everything looks perfect. And I felt this way when we had $10 million, I felt this way at $100 million, and I still feel this way at $1 billion, where you look at another firm and you're just like, man, they're doing everything...everything that we're struggling with, they make it look easy.

But I'd say as far as low points, early in my career it really had more to do with clients. Losing a client was devastating. The longer I'm in this industry, the low points really have more to do with employees and team members. One of the hardest things, that I just dread, is having to fire somebody. And you know, it's never fun. And if I think about the one low point that really, really jumps out at us, it was the first real advisor hire that we had, where we hired somebody, we were paying him a salary, and we were going to try to transition clients to him. And we spent 2 or 3 years transitioning these clients, and it wasn't working great. This advisor, very good technically, but culturally it just was not a good fit, and it really just came to a head. He was very unhappy, very vocal, and was just making everybody on the team miserable. And we had to do something, and just things got to a head, and we were kind of stuck.

We were like, well, we spent the last 3 years transitioning clients, and telling them that this person's going to take care of them. What's the right thing for clients? How do we then go to them and say, nope, we got rid of him and we brought someone else on? And so we went back and forth, and we were like, what if we just sell him these clients? We'll give him a fair price, it's the best thing for the clients, and we can kind of part ways. And we tried, and we were honestly giving this individual better terms than we get when we buy practices, and he just kind of dug his heels in and didn't...you know? And ultimately, we ended up having to let him go anyways.

And it was a good thing. One of the things we learned was clients were actually not that happy. But then, as part of that journey, we're hiring a replacement, and we had some great interviews. We had one advisor who's still with us, a phenomenal hire.

What Jaime Would Tell His Younger Self [1:26:50]

Michael: So what else do you know now, you wish you could go back and tell you from 10, 15 years ago, when you were just getting started down this path?

Jaime: I would say listen to the Kitces podcast. I mean, it wasn't around, but the truth is there's so much good information on this podcast that I wish I'd had access to when I was starting out.

Michael: What were the gaps? What did you not know?

Jaime: There are so many things that maybe took me 10 years to learn just from making mistake after mistake after mistake, that I think realistically I could have learned in 2 years, right? And it's everything from how to structure your business, I would have gone to to a fee-based or a fee-only model much much sooner, to how to articulate certain concepts to clients. Just the fact that you have advisors on here, and you hear them talk about a new client engagement the way they would talk about it to a client. Well, when you're a year in, and you're kind of tripping over your words, and you sound really inarticulate, that's so valuable, just being able to hear that, write it down, mimic it, say it in your own words.

I'd say one other thing is just even being in a mentoring relationship with a senior advisor that knows the business well, and has built a good business. That's so valuable, and I wouldn't have even known where to go for something like that.

The Advice Jaime Would Give To Newer Advisors [1:28:08]

Michael: So any other advice you would give younger, newer advisors coming into the profession today?

Jaime: I think 2 things. The first one, I'm really stealing this from Tony Robbins, but you want to add more value than anyone else. Do more than anyone else for your clients. Always just if you do a good job for them, if you put clients first, it will all work out in the end, you're going to have good clients, you're going to just continually get better clients, you're going to get referred to clients. So that's really the first thing, everything really needs to be done with the client in mind, and if you can try to do more for them than anyone else, you're going to carve out a business for yourself.

And the second thing is that this is a hard business, but it's a great business, and it really does reward persistence. I've met a lot of advisors that weren't particularly talented, but you know what, 15 years into their career, they're killing it. And you just have to try to get a little bit better every day. I remember feeling exactly the same way where I'm 2 years in, and I'm like, how am I going to compete with this guy that's got $200 million in assets, and 20 years experience, and 3 staff people? But you just have to try to get a little better every day.

And getting better, if you really think about where you need to constantly be working to improve, I think it's 2 areas, broadly. One is the technical aspect of it. You need to know your stuff. You need to get your CFP, you need to understand the planning software, you need to understand investments, you need to understand insurance, you need to understand estate, and really be able to give practical advice on those things, and problem solve.

And then the other area is, you also need to have some sales skills. I mean, sales is kind of a dirty word, but you need to be able to take these complex topics, and explain them simply and concisely to clients in a way that they don't feel threatened, they feel heard, they feel understood. And that's a skill as well, and you need to constantly be working on both of those things.

What Success Means To Jaime [1:30:09]

Michael: So as we wrap up, this is a podcast about success, and just one of the themes that has long come up is the word "success" means very different things to different people. And so you're on this wonderfully successful track with the business, now more than $1 billion under management, and so the business is in a wonderfully successful place. How do you define success for yourself at this point?

Jaime: Well, in my career, success, to me, is being able to choose how I spend my time, and working with people I like. That's always really been my goal. Outside of my career, this influences it, but it's really, having a good relationship with my wife, with my kids, being fulfilled spiritually, emotionally, and just having the means to take care of my family, and hopefully leave a meaningful legacy that I left the world a little bit better than I found it.

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

Jaime: Thank you, Michael. It's a real privilege to get to spend some time chatting with you.

Michael: Thank you. Thank you.