#FASuccess Ep 406: Exiting To A Perpetual Purpose Trust To Facilitate Internal Leadership Succession Without Indebting G2 Advisors, With Michael Kramer

Resources Featured In This Episode:

• Michael Kramer: Website | LinkedIn
• The Heart Rating
• RSF Social Finance
• FP Transitions

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Full Transcript:

Michael Kitces: Welcome, Michael Kramer, to the "Financial Advisor Success" podcast.

Michael Kramer: Thanks for having me.

Michael Kitces: I really appreciate you joining us today to get to talk about what I think is a really novel approach to one of the really pernicious emerging challenges that's cropping up in our advisor world these days, which is those of us that have grown firms to the point that, bless the wonder of compounding, you do this for 10 or 20 and 30 years, and you add a lot more clients than you lose, and they tend to add more dollars than they subtract, and markets grow over time, and advisory firms can get quite large, often bigger than we ever really thought they were going to be when we get started originally. And on the one hand, that's great for both reach and impact of what we can do and how we can serve clients and can create some very, very positive enterprise value for those who are a part of it, and then creates really significant challenges sometimes about everything from how to actually harvest some of that value for the early owners and just how you maintain continuity of the firm as the original founders and original owners may want to leave. And simply put, the business gets so big that many or all of the next generation of advisors in the firm don't necessarily want to buy it. Either they just literally can't afford it or they don't have the risk appetite to take on the loans that it would take to do the purchase.

And I know, Michael, you're part of a firm that has been navigating a version of this challenge and has come up with what I think is a very novel approach to how to solve around exiting early owners and preserving continuity of the business itself and just being able to sustain as an ongoing enterprise, not needing to sell and tuck into something that's much larger or do a financial transaction with a PE firm. And so I'm just excited to get to talk today about other ways to deal with this challenge of what happens when the business grows big enough that your next generation doesn't necessarily want to buy it.

Michael Kramer: Well, I appreciate your interest. This is certainly something very exciting for us. We're very proud of what we've done, and we really do want to tell the story because we think it has relevance to many, many people in our industry who are looking for alternative solutions to their succession planning.

What Natural Investments Looks Like Today [05:40]

Michael Kitces: So I think, to get the discussion started, I'd love to just have an overall understanding of the advisory business as it exists today outside maybe some of the ownership and succession dynamics you've gone through because we'll get to that next. But before we talk about the ways that you have navigated this challenge, help us just understand the advisory business itself.

Michael Kramer: Yeah. So Natural Investments is a socially responsible investing firm. Our founder started in 1985, so we're one of the pioneering firms in this space, and I actually was one of their first clients when I was 23 in 1990. So this firm has been my entire personal and professional adult life. And we are a collective of individual practices. So we have about 20 advisors nationwide, so we're still a small family, and each advisor owns their own practice and their own clients. But we come together in an LLC format to share resources and technology and investments and policies that guide all of our operations and make us stronger as a unified entity. But we really are a collective, and we actually don't have any employees. So those of us who...I'm a manager of the firm, and I also am an advisor.

So many of us just take on firm-wide responsibilities to operate the firm. We have no back office. We have no physical office. We've been a virtual firm for over 30 years. And we specialize in impact and sustainable investing. We have about 1,300 clients and just under $2 billion in assets under management. And we're pretty horizontal in our structure, therefore. Even though I'm one of the two managers, it's not exactly what I would call a supervisory relationship, as one would normally have with employees. So it's a very interesting structure that we have.

Michael Kitces: So I've got a couple of questions here. I guess I'm both trying to visualize kind of the business structure economics as well as just the regulatory aspects. So, is there ultimately one LLC entity that is the registered investment advisor, the RIA, and everybody else is IARs of this RIA, or are they literally their own RIA entities that's rolling something else separately up to the shared collective?

Michael Kramer: No, we are one RIA, and all of our folks are IARs underneath that RIA. As you know, it's a lot of work to have your own RIA, and that's why we formed this collective. It just makes it easier for everyone to be part of something. And so we're nationally, Federally registered and take care of all of that and take care of all the E&O insurance and everything for everybody. So it helps everybody to be able to focus on what they want to do but not have to deal with all of the administrative affairs.

Michael Kitces: And then help me understand. I thought I heard you say earlier, your structure is a collective but don't have any employees, but part of the structure is that each advisor is sharing technology and resources of the collective. So I guess I'm just trying to visualize, if you're not sharing a centralized employees team, what's being shared? What's getting shared across the collective?

Michael Kramer: Well, the first thing is the investments, and so we have an investment committee that people serve on. We share due diligence on investments, both public and private. And so we're always helping each other figure out what will satisfy their client interests. And for example, we've been rating socially responsible mutual funds for 32 years. It's on our website. It's called the Heart Rating. It's the oldest rating system of mutual funds in the country. And so that type of work that we do to evaluate the breadth and the depth of the social and environmental criteria of various funds is a tremendous resource that everybody can share. And so we're able to combine our best thinking to create model portfolios and such. So that's a big part of it.

The other is technology. So all of our reporting and all of our trading and all of our so-called back office functions are in the cloud, and everybody can access them, and they're all the same. And obviously, we have to monitor all communication from a compliance perspective. So we do everything that other firms do in that way, and it's all in the cloud. It's just that people literally own their own clients. It's their own book of business. So they do have a lot of autonomy, but they're connected to the core.

Michael Kitces: Okay. And so, then, if I'm an advisor as a part of the collective and my client base is growing and I want to hire, then I might hire at the advisor level, but the parent company collective isn't hiring and sharing fractional staff distributed across the firm. Each advisor is doing their own staff hiring. The sharing is investments, investment committee, technology. Those elements are the shared elements.

Michael Kramer: That's correct. So far that's been our structure. And we do have some sole proprietor folks, and then we have others who have decided to build out a team. They want more clients, and they want the ability to serve them. So they have a team, small team, might be 2 or 3 people. So it's up to them. They can design their business the way they want. They can set their own minimum in terms of client household size. They can determine if they want to offer just investment management or if they want to do comprehensive financial planning. We have people with different service models, depending on what their passions are. We even have one team that doesn't do any publicly traded investing at all. They only do private, and they have a very high minimum, and they're definitely focused on wealth redistribution.

So we have a big umbrella here through which any advisor with a specific interest can hang their shingle and do it in their own way. They could even co-brand themselves if they want to and have their own website and whatnot to put themselves out there in whatever way they want, but they are a part of Natural Investments, and they're on our website, and they're definitely benefiting from all of the infrastructure that we provide. So we're a little bit unusual in that way.

Michael Kitces: And then, how does this work from a financial arrangement? Is this sort of like a broker-dealer structure, all the revenue routes through the parent firm, and the parent firm keeps a small percentage to cover the overhead of what it does with the tech and the rest, and then everything else moves down to the individual practices based on what you brought in? Or is there a flat fee, some other structure? How do you make this work?

Michael Kramer: Yeah, that's exactly right. We have a published fee schedule, but advisors have flexibility to customize the fees for clients. Many provide discounts for nonprofit clients, for example. And all the money feeds into the LLC, but then we have a payout schedule to our advisors based on the amount of revenue that they're bringing in, and our payout percentage is very high in terms of the industry average. It's at least 80%. And so the LLC keeps the remainder to operate the company for everyone's benefit. We do subscribe to research, and there are, obviously, the expenses of reporting. And so we try to be lean and operate on that 15% to 20% retained earnings, but most of the money goes out to the advisors because they're the ones doing most of the work.

Michael Kitces: Right. And how high does the payout structure get? Are you mostly in 80 to 85 range, or you wonder, if people get really big, they're 90-something, and it goes all the way up?

Michael Kramer: It can go up to 90, yes.

Michael Kitces: Okay.

Michael Kramer: Yeah, that's rare, but it definitely can. And we think people are pretty happy with that. From what we hear, this is a pretty high rate.

Michael Kitces: Well, there's not a lot that do the kind of socially responsible investing support that you do. If that's the advisor's focus in the first place, there's not a lot of platforms that have centralized support around that, to begin with.

Michael Kramer: Yeah. There's a handful. You could probably count the networks of socially responsible advisors on one hand.

Natural Investments' Unique Ownership Structure [14:42]

Michael Kitces: So given that, now, as context, overall, I know part of what cued up the discussion here was the business has been running since I think you said 1985, you're closing in on $2 billion under management, so there's a lot of dollars moving around, and there's owners that have come in at various stages that you need to deal with now. So, can you now maybe bring us up to speed a little bit more on at least what was the ownership structure that you had that you realized, "We need to do something?"

Michael Kramer: Yeah. In 2017, we got up to 6 of our advisors became partners in the LLC at different levels of percentage of ownership, but there were 6 of us, and so about a third of us at the time who were owners. And the plan was always for each of the 6 of us to gradually sell a portion of our stake to younger, newer advisors. But as our AUM doubled around a few years later and we saw really unbelievable unexpected growth, especially through the pandemic, actually, when I think a lot of people were really reflecting on their values and how it aligns with their money, it became prohibitively expensive in terms of our valuation for younger folks to consider buying shares, even small shares. And as some of us who've been around for a long time, we're thinking about succession and figuring out a way to exit. It was becoming concerning because we knew it was going to take time, because people were probably going to have to purchase shares slowly over time rather than all at once. And we were wondering if we were actually going to be able to do it, given some of us are in our 50s and 60s and wanting to stop at some point in the near future.

So that was the challenge. We were offering shares, and people were turning us down. So it really caused us to think about, "We have to find some alternatives here." And at the same time, we're so committed to our own independence and to maintaining advisor autonomy that some of the typical routes that firms do were not going to be suitable for us, namely selling to a larger firm and letting folks take an equity stake in our firm.

Michael Kitces: So help me understand a little bit more, even the way that you navigated it with the first 6 in 2017, were these 6 new partners that were admitted or you had some owners already and you expanded out to 6 at that point?

Michael Kramer: Yeah, I didn't go back to the beginning. We were owned by a father-son team originally back in the '80s and '90s. And then there were 3 owners starting in 2007, of which I was 1 of 3. And then 10 years later, we doubled that to 6. And originally, our plan was to have maybe 10 people owning 10% each or 20 people owning 5% each. That was our idealistic notion, is that, eventually, we would get to a place where everybody would have equal ownership, because we were very sensitive to the power dynamics. Because when you tie power to the amount of money with the percentage that you own, it can create issues for people. And we were sensitive to that. None of us are really interested in power, actually. And so our goal was always to see how we could create an equitable structure so that those dynamics didn't exist.

Michael Kitces: So when you got to 6 owners in 2017, were you at an equitable split there with 6 owners having 16%-ish each, or was this just, "We're trying to start whittling down some of the early owners with larger stakes to get new folks in," and it was still a little lopsided, I guess, as it were?

Michael Kramer: Yeah. Basically, one of the owners who's a lot older than the rest of us started selling some of his shares first to 3 new people. And so it was not equal yet, and it was all we could all handle and afford. And so we were going very slowly. And so some of that advisor's third got split up a little bit more. And so we just started to realize that this was going to take forever at this rate.

Michael Kitces: How big was the firm even then in 2017?

Michael Kramer: Yeah, I think we might have been at $800 million [Assets Under Management], getting close to a billion.

Michael Kitces: Okay. Okay. So you do the transaction then, some shares get sold, but you're looking at this and saying, "It's going to take a while. It's going to take a long while at this pace." And then markets go crazy. The pandemic shakes everyone up. And suddenly, you're 5 or 6 years later, and the firm has doubled, and the math is just much, much worse.

Michael Kramer: Yeah, the math got worse, and several other things happened. I think all the sort of national attention on racial and gender equality affected a lot of us. And we started realizing that, even though 1 of our 6 owners was a woman of color, that wasn't good enough. And we really didn't want to just be a firm that was mostly white-men-owned. So that was beginning to be a huge motivator for us to change that, to change that structure, to give more power to women and people of color. So that also influenced what we were thinking about here. And we're only about a quarter of our advisors are people of color. So we've made inroads there, and we do have gender parity. But in terms of power, we hadn't really done enough.

So these things were converging at the same time. We were trying to figure out succession but also how to change the dynamics. And we also didn't want to...we wanted to decouple governance from economic rights so that your percentage of ownership didn't translate into your decision-making power. So there were three huge things that affected the way we were thinking about this, which is what led us to look at alternatives. Because the way we were going, power was still going to be tied to the percentage of ownership. And, therefore, profit sharing, which has always been a goal, how would that be equal? We wanted that to be equal. The way it used to be was that the profit that you received was tied to your ownership percentage. So it was maintaining a disadvantage to people who owned less and continuing to benefit the larger owners. So it was creating more disparity in a way.

So you can tell the values by which we operate. This was concerning to us. This was not okay with us. We were feeling a tension here that we did not like. We're all about equality and justice as a firm, and that's one of the reasons we're using money as a tool for social change. And yet here we were sort of stuck in an old paradigm of how we were holding power in our structure. So it wasn't just about creating an exit. It was about these other issues too that were literally right on top of that primary issue.

Michael Kitces: So then, what came next is you're thinking, "Okay, we want to find some alternative solutions." Now, I can understand in more context, when you're concerned about decoupling governance from economic rights, that makes most types of traditional outside investors, private equity, and the like, not so conducive to it. They tend to want a lot of governance in exchange for their economic rights. And in general, they want profit interests aligned to the dollars that they're putting in. So if you're trying to expand profit interests, I can see why just that whole path is even more problematic for your structure than it is for just many advisors who are not thrilled about PE investments.

I don't know that anybody is doing what you do that's larger than you, where you could just say, "We'll sell to the larger version of us that has the same values" because there's not really a clear larger version of you to tuck into to solve this. So I guess, thus, the problems that you're staring down, it means, normally, your remaining option is, "Well, then, let's do it internally." So then you're making offers to the next generation internally, and they're not saying yes.

Michael Kramer: That's correct. And we did still have the same desire for our younger people to have decision-making authority. That was still a desire. It just seemed like, how could we do that without having them to go into debt to have the power and the decoupling? Once you change your thinking to decouple the governance from the economic rights, then you can consider other options. And that's essentially the path that we went down. And we got lucky, actually, because we do a lot of private investing, equity and debt and tangible assets.

And we invested in a firm 5 years ago, a company, a natural foods company in Oregon that was going down this path of converting their ownership to a perpetual purpose trust. And we got some of our clients to invest in that transition. And I'm happy to go into the details of what that all means, but it was very inspiring to us to see an exit structured in a way that would ultimately provide power and ownership to those who were being left behind and remaining with the company. And essentially, it takes ownership out of individuals and moves it into a trust structure.

How A Perpetual Purpose Trust Operates [25:42]

Michael Kitces: So, can you explain more, literally, just what the trust structure is? I get the name, perpetual purpose trust, but how does this literally work?

Michael Kramer: Yeah. Well, it's not difficult to create. It's just that there are many trusts that, in fact, we often create trusts for our clients. But you can create a purpose trust that has covenants, and you can create whatever criteria that you want for how the trust would operate. And for us, it would democratize power and profit sharing and allow people to be elected to serve as trustees, similar to a board of directors of an organization. And the trust just becomes the sole shareholder of the LLC. And so, essentially, what you're doing is you're creating a situation for previous partners and owners to sell their shares to a trust, and the trust has to figure out a way to finance that transaction, which we can talk about. But the idea is that the company becomes owned by a purpose, essentially. And there are purpose trusts that own companies. There are 50 companies right now in the nation that are owned by trusts. We are the first one in finance to have gone down this path.

So it's a brand new idea, in a certain way, but there are states that are set up for this. We decided to use Delaware. And essentially, we went through a process for about a year of designing the trust and, obviously, setting up the financing mechanism for how we could sell our individual shares to the trust. And so it's a very interesting structure. And it got attention when Patagonia did it a couple of years ago. They actually announced that they had done this right while we were in the middle of doing it ourselves. And Patagonia did get a lot of attention for that, which I think put this concept on the map and gave it some legitimacy. But essentially, one of the protections that a trust provides is the preservation in perpetuity. So it takes the pressure off of owners to sell, because the trust can exist in perpetuity, and there's no pressure any longer on anyone.

Michael Kitces: Right. You need continuity of management and governance because whoever is in charge can't be in charge indefinitely. It has to rotate. But you don't have to solve for an ownership change at least once a generation when people retire or pass and move on, "you just need whoever is going to participate in the governance structure when the prior person leaves."

Michael Kramer: Yes, that's right. So the nice thing about creating a trust is that you can create governance for the trust in whatever way you want. So for us, we have elections, and anybody in the firm can put themselves up and be nominated to be a trust steward and be elected to serve a term and, essentially, act like an owner without having to go into debt to be an owner. They have all the power of an owner, and they serve on the board of trust stewards who make the same types of ownership-level decisions, strategic, budget, in the best interest of the firm. And it is the perfect way for us who've been around for a long time to mentor younger people because some of us are going to sail off into the sunset, and we do need people to provide that continuity and to maintain the values by which we run the firm.

So we thought this was a really great way to do it because some of us who were partners are now trust stewards and we can play a mentoring role. And then, eventually, we will term off, and our advisors who rotate on and off in their terms as trust stewards will be able to have all the power. And eventually, we hope everybody will take a turn and rotate. And so there'll be this true sense of ownership, if you will, sort of psychological ownership. Everybody will feel like this is our firm and we're all in this together, and all the "us and them" dynamics of management and employees and people with shares and without shares fades into oblivion. It doesn't exist anymore. And to us, that's ideal, where people feel like, "Yeah, this is my firm, and I have a say in its future."

The other thing that we were able to instantly do when we created this was change our gender and racial leadership dynamics, instantly. And that was very appealing to be able to do that right away. It's such a definitive action to walk our talk and live into those values of diversity and inclusion. And it was an instant way to do that.

Michael Kitces: So help me understand a little bit more of just what's in the trust. How do you structure and word and set the covenants of the trust to be on a track that works in perpetuity?

Michael Kramer: Well, just like you would for any operating agreement for an LLC, you set voting thresholds for how certain major decisions would need to occur. In other words, you'd need a majority for these types of decisions. You'd need a super-majority for other types of decisions, like whether or not to incur debt. You would need 100% approval to say, "Dissolve the LLC." So you structure in certain thresholds for decision-making that, essentially, codify the preservation of the firm unless there's some incredibly extenuating circumstance that would cause the dissolution of the firm. And everyone involved would have to agree.

Michael Kitces: So it's not like you're trying to literally figure out the optimal structure in terms that will hold for the next 50, 100, 200, 300 years. The trust has the capability for those who participate to change it over time to make it a bit more of a living trust, a living document over time. You were just very mindful of the level of voting power or the level of control that has to be exerted to make increasingly substantive changes in how it's structured.

Michael Kramer: That's right, because there would have to be near unanimity in order to make major decisions. The advisors as a whole don't hold the power. It all rests with the trust stewards. And it even could be a staff person of an advisor. It doesn't have to be an advisor. They just have to have 4 years of tenure with the firm in order to be eligible. And so those people get elected. And once we get beyond our initial phase here, everyone's going to serve 3-year terms, and they're eligible to be re-elected. And they're on staggered terms. So there will always be rotation, and there will always be people with experience, and there will always be some new people. We have 7 trust stewards. So it is an odd number. Those 7 people who are elected by the advisors have all of the power to make those kinds of decisions, including hiring the managers who run the LLC and the day-to-day operations. I'm one of the two managers.

Michael Kitces: Okay. And so when you talked about a majority for some decisions, a super-majority for others, 100% approval to dissolve, that's ultimately of the trust stewards, of the 7, to make that decision. Okay.

Michael Kramer: Correct.

Michael Kitces: Okay. But everybody who's an advisor votes on who the trust stewards are, and the trust stewards exist only at the trust level in that the trust stewards then select who the manager of the LLC is as, I guess, functionally, the CEO of the business enterprise.

Michael Kramer: Correct. That's right. So the LLC has not really changed. We just changed who owns it. The LLC is the registered entity. The registered entity has the same 2 managers as it used to have. We just changed our name from managing partner to manager because we don't have any partners anymore. So that continuity remains. So the LLC continues to function as it always has.

We did do one other thing as part of this, I should say, as we converted to what's called a public benefit LLC under Delaware law. We can have a whole other conversation about what that means, but it's another way of walking our talk legally. So that's one thing that the LLC did. But from an ownership standpoint, we just converted from 6 individuals to 1 trust ownership owner. And that's all that we really did there.

Michael Kitces: Okay. So, are trust stewards paid? Is this a compensated role in structure?

Michael Kramer: It's up to each company to decide how to do that. We decided to create a nominal stipend for their service. It's not a lot of money, but it's something. We don't want money to be the reason why people want to serve, but we do want to recognize that there's time involved here. There's monthly meetings. There's serious responsibility here. So it is compensated, but I would call it nominal in the scheme of things compared to the money advisors typically make.

Michael Kramer: There's also another interesting piece of this, which is called a trust enforcer, which is another position that one must create. And all perpetual purpose trusts must have a trust enforcer, who's kind of like an ombudsman or woman whose job it is to hold the trust stewards accountable, to make sure that they are fulfilling the purpose of the trust. And that person is selected and is kind of out there autonomously, able to review what the company is doing, able to analyze, and could take corrective action against the trust if they were not fulfilling the purpose, in their opinion. And the company would have to pay for that legal course of action.

So there's kind of this accountability person who is appointed, who is also paid, but who is not part of the trust stewards. And it's a measure of accountability. And that's a very interesting structure that we learned about through this process.

Michael Kitces: So, what ultimately is the power of the trust enforcer? If the trust stewards are not administering according to the terms of the trust, then the trust enforcer can remove stewards, can force a replacement vote. Is it that kind of thing? The trust enforcer can remove people who are not fulfilling the duty properly, or do they have a more direct control and intervention?

Michael Kramer: They could take legal action. They could file a lawsuit against the trust for violating the terms of the legal document, the trust agreement. And they could go to a Delaware corporate court where we are registered and stake that claim that the trust is not fulfilling its required legal obligations to operate in the best interests of the purpose, and it would go to court. And it hasn't really happened yet, to our knowledge, in history. So it's an untested protocol, and it's going to be incredibly unlikely in our case, frankly. But it is legal protection.

Michael Kitces: At this stage, when there's only 50 of them in the country, I would have to imagine, the people who choose to do this are pretty darn clear about what they're trying to do, not usually your domain of people who are going to create this, and then try to make a hard left turn 24 months later.

Michael Kramer: It's hard to imagine. Most of us are doing this for ethical and moral reasons, but also power. We have a different idea of what economic power looks like. And so, yeah, it's going to be hard to imagine. But this is what Delaware, and I believe Oregon, when they created their statutes for this, they set it up this way, so legal action. So it is something in the back of everybody's mind. It's not just optional to uphold the covenants in the trust. You're legally required to do it.

Michael Kitces: So, can you explain more or just give an example, what are the covenants in the trust? What does this purpose say?

Michael Kramer: It just says things like that the trust exists to support its advisors in fulfilling the mission of the company, and it will assure that advisors have the autonomy to operate their practices as they see fit. It's very vague sort of goals and objectives. What are we going to do as owners? It's just a handful of objectives of what the purpose is. But really the idea is it kind of makes sure that the LLC can operate the way it's supposed to.

Michael Kitces: So if I think of this, to a nonprofit by analogy, my trust stewards are like my board of directors and my manager is like my managing director or CEO or whatever title you happen to use in a nonprofit setting. Am I thinking about that right as sort of by analogy?

Michael Kramer: Yes. I think that's fair, except there's profit-sharing going on with nonprofits.

Michael Kitces: Right. Like you said, the dollars are different, which I want to understand more.

Michael Kramer: Yes, structurally, that is definitely true. And the other thing is that not all nonprofit boards are elected. Sometimes they're appointed. So we do have elections.

How Money Flows Work In A Perpetual Purpose Trust [40:14]

Michael Kitces: Okay. So then help us understand how the dollars work. So this LLC still generates some profits after payouts and overhead. So, what happens to that money and those profits? How does it flow?

Michael Kramer: The trust itself doesn't have a bank account. It's not an entity that has financial flow. It's merely an owner. It's just taking the place of people. So all of the financial transactions occur at the LLC level, including debt financing for this transaction and payments to prior owners. But the profit-sharing will come out of the LLC, and all expenses, obviously, come out of the LLC. All the payouts come out of the LLC. So to a certain extent, nothing has really changed, except now there's a transaction that has to be paid for over time, because we couldn't afford to do it all at once with cash.

Michael Kitces: So I guess I'm still trying to understand, if the purpose trust owns the LLC when the LLC has profits, where do the profits go if they're not going to the bank account of the trust as an owner?

Michael Kramer: Well, there are reserves. We have a cash flow waterfall, like any business would have, and so some is going to be profit-sharing and/or additional profit-sharing. There's earn-out for the former partners. There's reserves. There's reinvestment in the company. So it doesn't go to the trust. The trust is just the entity that's making the decisions about where that cash should go. But it doesn't go to themselves. It goes to these other purposes. And profit-sharing is a big goal. It'll be a lot easier to profit-share once the debt financing is complete, but that is a big desire. And we want that to be equitable too and not based on the size of somebody's book of business.

Michael Kitces: So, how does profit-sharing work in this context?

Michael Kramer: We have a formula that says that, based on the amount of profit per year, how much of that, what percentage of that goes to profit-sharing, what percentage of that goes to earn-out for prior owners? We obviously have some costs for debt servicing.

Michael Kitces: Maybe I'm taking it too literally, but I'm just trying to visualize, when you have a profit-sharing distribution, who gets the profit-sharing distribution if it's not the owner?

Michael Kramer: It's the advisors, because all the money is managed at the LLC level. We pay all of our advisors their advisory management fees directly from the LLC account too. So the LLC takes all the fees, pays everybody their payout. It will also pay their profit-sharing. And everybody has an account at the same custodian. So we can just journal money wherever it needs to go on a quarterly or annual basis. So we're all kind of tied together.

Michael Kitces: Okay. So I guess, functionally, you give your advisors their standard payout, and to the extent there's money left over, you give them an additional payout, which knocks off any remaining profits that might have been in the entity itself, which is fine because the only other party that would accrue benefits of the remaining profits would be the trust. And the trust is not trying to enrich itself and accumulate a bank account balance.

Michael Kramer: Correct. Correct.

Michael Kitces: So you would effectively end out zeroing out the profits on the books by simply paying out more to the advisors, adjusted for some reasonable reserves, like cash flow crisis.

Michael Kramer: Yes. And the trust stewards have the ability to adjust that every year. They could adjust the reserve amount that they would like to have. They could adjust the profit-sharing and make it higher. There's a minimum that is codified, but there's freedom above the minimum. Maybe we suddenly have a lot more money than we thought we would have. Then the trust stewards have the power to say, "All right, we're going to buy this fancy software, and we're going to do more with profit-sharing and increase the amount per advisor, and we're going to give the managers a raise," or whatever they want to do. So there is decision-making authority there to decide, to adjust, but we do have codified, at least from the outset, what the minimums are.

Michael Kitces: And can I ask, what were the minimums? How do you structure or set these targets in the first place when you're setting it up?

Michael Kramer: Well, I think for the first $0.5 million of profit, it's an 80-20 split at the moment. What that means is that, for the earn-out portion, a portion of our sale is occurring through earn-out over time, over into the future. And so it's going to be variable. And what we're saying is that, for that first $0.5 million of true profit, 80% of that would go to earn-out, 20% of that would go to profit sharing. And if the profit is higher, those percentages change. It goes from 80% down to 75% down to... So the profit-sharing can increase the more money we actually have in profit. And we had consultants to help us structure all of this.

Michael Kitces: Right. But likewise, I understand, if I'm selling heavily on an earn-out, I need or want some protection to make sure that trust stewards don't decide to make this 99% profit-sharing, 1% earn-out, and I have to live to be 137 years old.

Michael Kramer: That's exactly right. There's a limit on the number of years of the earn-out. There's a ceiling. There's a maximum. Because there are several things going on here. One, we don't want an abuse of power at the trust steward level to make decisions once the existing folks are gone. And we don't want to gouge the firm's coffers forever either. We would like to do this as quickly as possible, because the quicker it gets resolved, the more money is available for other purposes.

Michael Kitces: So, as you talk about setting the profit-sharing portion that goes to the advisors, the inference I'm taking is payouts happen relative to your revenue, kind of by definition, payout rates, but that your potential goal on the profit-sharing is that it won't necessarily follow the same formula as just being revenue-based.

Michael Kramer: Well, it's a derivative of revenue.

Michael Kitces: How do you plan to carve that up?

Michael Kramer: Everything is after EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization], basically. So you have your expenses, and then we obviously have our debt financing, and then we have...profit comes next, along with earn-out. So there is a waterfall there that has to be reported.

Michael Kitces: But down to how it's distributed, if there's 20 advisors, does everyone get 1/20 of the profit-sharing, or if there's 20 advisors and 1 of them brings in 50% of the revenue, do they get 50% of the profit-sharing because they brought in 50% of the revenue that contribute as a profit?

Michael Kramer: We thought that that was going to be a very contentious issue when we were designing this. But lo and behold, to my great pleasure, everybody agreed that the profit-sharing should be equitable, despite the fact that we have advisors with 9-figure books and 6-figure books and who are contributing very differently into the LLC. But our attitude is, if we really want to empower the future, then we need to help the people who have less, and we need to actually give them a higher percentage relative to the rest of us of what they're bringing in so that they can build economic power and have the wherewithal to stick around and be in charge and take this firm into the future. If we just keep extracting for the wealthy, even within our own firm, it doesn't accomplish that goal.

So everybody agreed. I couldn't believe it. I was actually pleasantly surprised that everybody was on board with that. It makes me feel really good about the culture that we've created.

Michael Kitces: So everyone gets their grid payout based on what their revenue was in the first place. But when you then get to, "I've got my initial earnings," and then I waterfall through. I need to keep some for reserves. I need to allocate some for earn-out of former partners and serving the acquisition. There's some portion I may want to keep for reinvestment in the company. I get down to my remaining profit dollars that are left, and that's effectively just per capita, per head allocation. There are 21 advisors. Everyone gets 1/21 of the profit pool that's left over.

Michael Kramer: Yes, that is correct.

Michael Kitces: Okay. Okay. And again, as I'm processing through, once you pay that out, remaining profits of the entity are effectively zero, and the trust doesn't care because it wasn't trying to build its own bank account. So it doesn't need to accrue those dollars.

Michael Kramer: That's correct. We obviously want to maintain a certain type of reserve. But that's at the discretion of the trust stewards to decide how big that reserve ought to be.

Financing The Payouts To The Original Partners When The Trust Was Created [49:58]

Michael Kitces: Okay. So now, help us understand how the transaction worked. Now, I'm understanding the structure overall. So I see now how it operates. And so the key part of this was the trust bought the LLC from all the original six, I guess, owners who had it, took on some combination of debt and earn-out commitments to make the payments, and now is using the cash flow of the business to finance itself with anything left over going to profit distributions back to the advisors. So, how did this transaction work? How did this financing work?

Michael Kramer: Yeah. Well, you do have it correct. That is indeed how it works. And there were 3 pots of capital that structured the transaction. So one is a down payment, if you will, to the previous owners. And so, for that down payment, the firm borrowed money from a community development financial institution in order to, at closing, provide at least something to the previous owners that was substantial. And for us, it was 25% of the sale price that went as a down payment. And the firm took out a 5-year loan at 6% interest to pay for that and is paying quarterly from that. It's a loan fund. It's not a bank. The type of financial institutions that we deal with are mission-based. So we wanted to pick one that is aligned with our mission, and we picked RSF Social Finance in the Bay Area, which has been around for over 40 years and has had a major loan fund for decades that supports conscientious businesses and is highly committed to, at this point, businesses owned by people of color and women as well.

So we borrowed money. And then the other 75% is a combination of 2 things, fixed term notes to the previous 6 owners that are mostly 5-year notes, and they, again, have a fixed interest rate, and then we have the earn-out portion, which is the variable portion, which has a lot to do with the amount of money that's left over from earnings every year. The amount will change. It's got flexibility in it. And depending on profitability, it could take a longer period of time to pay off. It does have a ceiling, but if the company is having a bad year, earn-out will be low. If the company is having an amazing year, earn-out will be high.

So there's some risk there to the previous owners because the earn-out is kind of uncertain, but we felt like there was a reason to do that. And one is to provide flexibility and not lock the company in to fixed payments and also to potentially capture some upside if the firm should grow over the next 5 to 10 years. The risk that the previous owners are taking, and they're leaving profit-sharing off the table, if you will, by agreeing to do this. And so, for that risk, there is a potential upside should the company continue to grow. They will benefit a little bit. Not a lot, but a little bit.

Michael Kitces: So, how much was the split here? Of the other 75%, how much was the additional layer of fixed-term notes versus the earn-out? Was the remaining 75 split in half between the two, or is this a 25-25-50 structure? I'm just trying to vision, how much were you comfortable taking on in debt notes versus earn-outs?

Michael Kramer: I think the earn-out was 25%, but you can tell that I'm hesitating. I'm not entirely sure that my memory is correct on that. But we didn't want to leave the earn-out to be too big. So I don't think we split it in half.

Michael Kitces: Okay. So the bulk of this actually was debt finance, some combination of the borrowing from the community financial development institution and, I guess, what effectively were seller-financed notes for the remainder.

Michael Kramer: Yeah, it was really important to us to do debt rather than equity, because again, we didn't want to give away power.

Michael Kitces: Right. Right. And can I ask, can you explain a little bit more about just how the earn-out works? How do you structure and set this up just when you've got these layers of, "I've got reserves, and I've got reinvestment allocations, and I've got profit-sharing, and I'm trying to set earn-out?" I know a lot of our advisory firms do these with direct percentage-of-revenue-style earn-outs. If I think of a traditional brokerage business that just does a split rev code and creates a revenue share for a couple of years as an earn-out, how did it work in your world?

Michael Kramer: Yeah, I alluded to it a little bit earlier. There's a formula. So it starts at 80%, 20%, depending on the size of the profit that determines what the earn-out percentage of the profit will be on an annual basis. So if it's up to $0.5 million in profit, it's an 80-20 split, and it changes after that. It gets lower to 75-25 and 70-30. So it's all structured, and so it's not up to the discretion and the whims of whoever is making the decisions. So whatever profit is remaining, it's going to be divided up between the advisors' profit-sharing and the earn-out according to that formula.

Michael Kitces: And how many years does it keep going?

Michael Kramer: Right. Well, we modeled this out. We obviously did a huge 15-, 20-year projection that incorporates all these different variables and all these payments and makes a revenue assumption. Obviously, we had to estimate growth, and of course, that's nearly impossible to do accurately. But you estimate, and we estimated really low, I think. So we had different scenarios that we had to plan for. What if you have 5% annual growth? What if you have flat growth, 10% growth? So we did a lot of modeling to try to see how long it would take.

And so we felt comfortable looking at those different scenarios and trying to see. And frankly, several of us were willing to let it take 15 years, possibly. And I'm one of those people who's like, "It's okay to defer. It's okay. There's no desire here to put too much financial pressure on the company. And if it takes 10 years, 15 years, that's okay. I'll still get paid even if I retire. I don't have to be running the firm, and it's okay." We want to make it reasonable. And if the firm gets really popular and we can accelerate the payouts and the earn-outs and everything, then great.

Michael Kitces: So, thus, there's a floor and a ceiling on the total amount of dollars that can get paid out on this. So if you've got great growth, you're hitting the upper tiers of this, you're getting more dollars faster, but you also get to the ceiling faster where it just ends.

Michael Kramer: And that would be ideal. That would be ideal.

Michael Kitces: Right, right, right, from the exit end.

Michael Kramer: From everybody's end, because then the company has more money to do other things too, and including profit-sharing. So we'd love to get to that place as soon as possible. It's just, right, you can't predict growth.

Michael Kitces: And so, then, I guess, so you kind of set your parameters of about 25% of the purchase price is supposed to be tied to the earn-out, but it could end up being more or less, depending on the growth of the business. You set a floor and a ceiling of the acceptable range. You set a schedule of what the payouts will look like. You run models. So you get some sense of, "Okay, decent chance, I get this in 7 to 10 years. I could get it in five if it goes great. I could get it in 15 if it goes horrible," or whatever the exact numbers come out to be. And you essentially just said, "Okay, with this payout schedule, with these growth rates, I think I'm going to get paid out over this time period, and either I'm comfortable with that as a seller so I'll strike this deal."

Michael Kramer: Yeah. We had to model all of that out in advance of lining everything up to make sure it was even feasible. Could this actually work? There was a legitimate question of, could we make this work? And how many years was acceptable to make it work? And we have people of different ages too in the ownership circle. So some people are in much more of a hurry to complete the process than others. So somebody like me, I'm only 57, I can take a little longer.

Michael Kitces: Okay. And so the other question I've got for this whole structure is, how will you set a valuation for this in the first place? And do you get a third-party valuation? Do you kind of do this internally? Do the owners of six just have to decide the number they're comfortable with? Because if you're going to the highest bidder PE firm, the proverbial market sets the rate, you just find out who's willing to bid what. But you don't exactly have an open auction process on the transaction here. So somehow you've got to get a valuation set.

Michael Kramer: Yeah. Well, there are firms that conduct valuations of advisory practices. We used one when I bought in in 2007, and we went back to that same firm. This is what they do every day, is they conduct valuations on financial advisory firms.

Michael Kitces: Can I ask who you used for it?

Michael Kramer: FP Transitions.

Michael Kitces: Okay.

Michael Kramer: Yeah, we were happy with them in 2007. They do it in different ways. There's multiples of cash flow that are projected out into the future. They can do a lot of different ways in which they can do the valuation, but we decided, and frankly, our lender required it too, we had to have it done independently, and we received that. It was based on a very conservative cash flow projection into the future. It wasn't just a multiple of growth. Although it actually ended up being, essentially, the same as if we were to just do a simple multiple of growth, but you don't know that when you start that valuation process of discounted cash flow. And so we went with that. And the owners could have decided to sell for a premium or something, but we just decided to go with the independent valuation.

We left money on the table, to be honest, because we were getting offers from other firms that were much higher multiple. That was not our point. That was not our intention here. We were not trying to extract the most amount of money from the transaction as possible. So we went with the independent valuation, satisfied the lender, and it seemed like a very objective way to handle the transaction.

Michael Kitces: Well, and for better or worse, other offers with higher multiples often have other strings attached that you didn't have to worry about because you knew exactly what the structure was that you were getting with the deal that you struck, because you chose the purpose benefit trust to do in the first place.

Michael Kramer: Yes. Yes.

How New Hires Are Treated In The Perpetual Purpose Trust Structure [1:01:34]

Michael Kitces: So, when did all this go through and get done?

Michael Kramer: 2023. So it's only been a year. And so we've had a year of our new trust stewards.

Michael Kitces: How has this played out over the past year? What's gone as expected, and what's gone not as expected now that you get to see it over the first year of execution in trust format?

Michael Kramer: I would say, so far, so good. It's going exactly as we thought it would. And we're thrilled with the new trust stewards who were elected. They're amazing. And it's just been seamless, frankly. And all of our financial projections are turning out to be accurate so far, and it's allowing us to do everything we want to do. And just structurally, sure, we have more people in decision-making and new people with a steeper learning curve, but in terms of how we're operating, it really has been very seamless.

And the other thing that I think people in the firm like about it is that we, again, our leadership looks really different. There's more women. There's more people of color. It's got a very different flavor to it just in terms of how we present ourselves and how we facilitate and how we make decisions. So it's creating a very nice shift in morale too. Not that we had problems, but it just has created a very different type of sense of identity. And I think that's been probably the best thing that I've seen so far in the shift. And frankly, I have been running this firm for 17 years. I'm looking forward to not doing it anymore. And I can see the light at the end of the tunnel now.

I can see that, with this structure that we're setting up, the firm will be in good hands and I will not be needed. And that is a really important thing for me personally. When people think about what does legacy mean, that's what it means to me. I want it to continue on in good hands. And so that's very different than I'm out and somebody else just takes over. I want to be here. I want to be helpful. I want to facilitate a graceful transition over many years and assure that the knowledge is retained, that the values are embraced. Because so much of that has been automatic and internal to me and my co-manager for decades.

We've known each other for over 30 years. And so it's very different when you start involving other people who are new, where it's not automatic. You have to really be explicit about your culture and about what the values you want to uphold. And so this is forcing us to be explicit and codify things and train people and model things so that they can hopefully do it. And I'm feeling very encouraged so far.

Michael Kitces: So I guess, as I think about this structurally, there's an election structure now in place to set trust stewards, select the seven on an ongoing basis. The trust stewards are the ones that ultimately hire, appoint the manager of the LLC itself. So you still have to kind of...there is still a manager succession of just, literally, the person to be the day-to-day manager of the LLC that I guess you still have to navigate through now.

Michael Kramer: Yeah. And ultimately, the managers are accountable to the trust stewards. That's a huge shift. When the two of us who were managing partners owned two-thirds of the firm, we had all the power. Nobody could fire us. So we've instantly changed those dynamics where we now have accountability to a board. And so that was a very interesting, noticeable shift of the power dynamics in the firm, but we felt like we had to do that in order to make this work. And now, my vote is only worth 14%, not 33%. And that's okay. I think, ultimately, power is a resource that's better shared than consolidated. So I think we're going to see how we can prove that over time.

Michael Kitces: Interesting for thinking of how this plays out. And so, what happens as you add new advisors from here as Natural Investments continues to grow and bring more people in? Does it affect how profit-sharing ultimately gets handled as more advisors get admitted? I understand, more advisors are also more voters to elect stewards and more profit-sharing participants for the dollars that flow at the end.

Michael Kramer: I see what you're saying now. We had an interesting...this was actually a very interesting discussion that we had of trying to decide, is there a vesting period for new advisors before they would be eligible to profit-share and/or vote? And ultimately, we decided, no, that vesting would be immediate, profit-sharing would be immediate, as well as voting. And so we really didn't want to create any different classes of advisors. Everybody's equal from the moment you start. And that was an interesting conversation. I don't think we had consensus on that right off the bat.

Michael Kitces: It was to say, I can make the case either way. "We're going to create new power dynamics and separation if we have the vested and the non-vested," and then the case at the other end of, "Don't they need to contribute for a while and just really understand the culture of the organization and what we're doing before they come on in with their votes?"

Michael Kramer: Yeah. I think we operate from a place of trust that we're going to be highly selective in who we pick, that we're going to pick well. And I would say that, so far, we have proven that we have the ability to do that. And so, if we're really going to trust our own judgment, then we need to trust these people that they're going to participate in the way that we hope that they would. And it's a leap of faith. And we're not going to wait for people to prove themselves in any way.

Michael Kitces: So there's a piece of this that strikes me that you looked to sell the business internally, and the next generation didn't want to buy because they felt they couldn't afford it, and sort of implicitly, they couldn't just finance it with the profits of the business itself. Yet, you ended out with a structure selling to a trust that's entirely financing the business from the profits itself. I guess my brain is trying to reconcile, if the trust that came to the table with no assets and credit score was able to do this purchase because, at the end of the day, it's using the profits of the business to purchase the business. If the trust could afford it, why is it not viable for the next generation to do it on the exact same terms in economics?

Michael Kramer: Well, that's an interesting hypothetical situation. The truth is when you have advisors in their 70s and in their 20s at different stages of life, we would have had to have done a really comprehensive analysis of everybody's capacity to be able to do that. And I just know it would have been difficult for some and easy for others. And I don't think we could have created the equality in that arrangement easily.

Michael Kitces: True. In theory, you could still decide to have different ownership structures but set a corporate governance board that does something similar.

Michael Kramer: You could have.

Michael Kitces: It's not quite the same as when it's just structurally defined by the trust. There are trust stewards, and there is no direct ownership. Very unambiguous about how this is working in a governance equality structure.

Michael Kramer: Yeah, we could have done that. We also could have just kept the ownership the way it was and then, in 10 years, just given the company away to everybody as a gift. We would have probably made the same amount of money as owners. The thing is we wanted to change...

Michael Kitces: Just because of the profits that it generates over time.

Michael Kramer: Yeah, just because of the money. The amount of money you could make over the years is about the same as what the sale price is now. So it's about the same, or it could be the same. So the issue is we wanted to change who is making the decisions and who is deciding who was making the decisions, and we wanted to do that instantly. And we weren't quite sure how else to do that.

Michael Kitces: Right.

Michael Kramer: We just thought, again, it's that decoupling idea. If we could take money out of the equation, could we create the best governance we could possibly create for ourselves? And I think that was more important to us. It was creating that.

Michael Kitces: And you get to execute that the moment the deal closes with the trust.

Michael Kramer: That's right.

Michael Kitces: And the new governance structure takes effect.

Michael Kramer: It's instant, and everybody feels good. There's no financial pressure on individuals. It seemed to be the best option. We looked at other options. We looked at forming a co-op, and there's other types of alternative corporate structures. Again, we used consultants.

Other Governance Structures Natural Investments Considered [1:11:48]

Michael Kitces: I was kind of curious, what else was on the cutting room floor that didn't survive the evaluation process?

Michael Kramer: Well, a cooperative is a great structure, and we love it. And in fact, the company that we wanted to support originally with this idea was, in essence, a cooperative. And we love cooperatives, and we invest in cooperatives all the time. The thing is cooperatives work the best when you have employees, and we don't have employees. And so our consultants led us through a process of looking at things like that, and it was on the table, but it just didn't seem to be, based on our structure, the right fit for us. But it could be a great fit for some other firm that already is committed to employee ownership.

ESOP conversions are something that a lot of companies are doing to exit founding owners. So ESOP is an employee stock option program, for people who don't know the acronym, stock ownership program, allows the employees to become the owners. And that can be done in a fantastic way to exit, to provide the exit, and create an instant co-op with employee ownership. It doesn't apply to us, but it's a great model.

Michael Kitces: Right. Because all of your advisors are technically 1099 contractors.

Michael Kramer: Yeah, they own their own business and, in some case, their own brand, their own co-brand. Well, they really are and they have a lot of autonomy. They can hire at will. We have an interesting balance of autonomy and interdependence. It's one of the things that we really like.

Michael Kitces: But that's what starts to take co-ops and ESOP structures off the table, because you do have these advisors that are deeply vested stakeholders in the organizations, but they're just literally not employees. So all the things that attach to employee don't really work.

Michael Kramer: Yeah. Yeah.

What Surprised Michael The Most On His Advisor Journey [1:13:50]

Michael Kitces: So, as you look over this journey, having been with the firm for decades now overall, as it's grown, what surprised you the most about just the path of building the advisory business?

Michael Kramer: One of the interesting things about when I started, socially responsible investing was still the orphan of the family and not well respected at all. And so I had these huge headwinds to build this business because even values-aligned people weren't willing to put their money where their values are. They were like, "Isn't that what you do philanthropy for?"

Michael Kitces: I'll make my money with capitalism, and I'll right the karmic balance with my philanthropy.

Michael Kramer: Yeah. And you're fighting the mythology of underperformance, which still exists, even though it's been debunked through research for decades. It doesn't matter. People still think, "Oh, you narrow your universe. You're going to narrow your return." So the headwinds for this whole business and this industry have been there, but they're lessening. The more studies from Morgan Stanley that get put out and whatnot, it has definitely debunked a lot of that mythology. But it's definitely been one of the big challenges in building a practice like this, especially when you're not really interested in advertising or you don't have the resources to compete in that way with other larger firms.

Starting small, it takes a long time. You have to be really patient. And we have been. I started 24 years ago. I moved to Hawaii. I didn't know anyone. And then I started my business not knowing a single soul. Not the best strategy for starting a relationship-based advisory practice. But I did it.

Michael Kitces: If you have to start a relationship-based practice not knowing anyone, Hawaii is not bad weather to do it.

Michael Kramer: The weather was fine, but people are very cautious about outsiders here. There's a history of exploitation and extraction. When you show up here, you have to prove that you're trustworthy. It takes a long time to build a relationship. I think that's probably true in a lot of places where they're not just going to give you their money to manage.

So anyway, I created my own obstacles, but I also think the industry has its own obstacles. And now, of course, we have other types of obstacles where there's greenwashing and the industry has been politicized as well. So there are other things that we're always having to defend against.

The Low Point On Michael's Journey [1:16:33]

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

Michael Kramer: Well, I would have to say that the beginning was the low point because I didn't know how to develop those relationships. I didn't know where to go to find clients. I was already in a niche, an unusual niche in an industry. And sustainability was a brand new concept. And the idea of socially responsible investing was still completely foreign. I had to have a day job for years while I built my practice. It was very, very slow. It was very frustrating. And it really was the low point. I thought, "Oh, I had this great idea that it was just going to take off. All I had to do was put myself out there and do networking and put out ads and write columns and let it just happen."

Michael Kitces: Where did you eventually find traction for getting clients going?

Michael Kramer: Public speaking has always been the best way for people in our industry because we have to explain. And it's not a sound bite explanation that could come across in a print ad. You have to explain the difference. What is values-based investing? What does it really mean? What do you mean you're screening in and out certain sectors and evaluating corporate practices? You have to get into the details. And you can only really do that with public speaking, where you can really explain what you're doing and the values you're bringing so that people can imagine how their values could be reflected in their portfolio. And so public speaking was the thing.

I toured all the islands. I went to community centers. I went to environmental nonprofit organizations and churches and chambers of commerce and the Venture Capital Association. And I even put on conferences of my own to try to build awareness on green business and brought some of my friends from the mainland to talk about this kind of work. And after 10 years or so of all that, it really started to flourish. But it took a long time.

Michael Kitces: And what was the day job to make ends meet in the meantime?

Michael Kramer: I was the clinical manager at a social service agency because I also have a degree in psychology. So it was a really important home-visiting program to help families at risk to try to be good parents and thrive. It was very meaningful work. But it was quite a divergence from what I was really trying to do.

What Michael Knows Now That He Wish He Had Known Earlier In His Career [1:19:10]

Michael Kitces: So, what else do you know now you wish you knew then, 20 years ago, as you were trying to build?

Michael Kramer: I think I had a scattered approach of where I was going to put my energy, and I didn't know what was a smart use of my time, energy, and money. I remember when I first got started, I bought ads on Garrison Keillor's NPR show thinking that that was my audience, and that was $5,000 that didn't do anything. And so I just didn't know anything about promotion, and I didn't know I should have directed my time, energy, and money so much more carefully, and I just didn't know what that even looked like. Because I'm looking for a certain type of demographic. It's mostly women in their 40s. Well, where are they? It wasn't the easiest thing.

Michael Kitces: Women in their 40s is where you see the uptake?

Michael Kramer: Socially responsible investing, there had been all this research done by sociologists that most people who are interested in this socially conscious investing are women in their 40s. That's the largest group of people. They're much more willing to align their values with their financial choices, apparently, than men. And then they have a certain amount of economic power in their 40s that they don't have when they're younger. So they're much more interested and willing to look at investing, and they have more to invest. So historically, that was what we were told, that that was our target.

But regardless, I still didn't know. Should I be writing, speaking, advertising, events? So I was going everywhere. And I think that if I could have just been more careful back then, I wouldn't have felt so frazzled. Because I did, I felt very frazzled by where...I was just wildly casting myself about the community, trying to see if anything would stick anywhere.

Michael Kitces: For which, ultimately, you found public speaking and just really being able to explain what it is you're doing was what moved the needle.

Michael Kramer: I did. I found that to be the most effective. I'm a good writer, so I would write columns in magazines and newspapers and whatnot. It didn't usually generate anything. Public speaking was where it was for me. I think sometimes people want to know. They want to see you face to face and know, "Is this somebody that I could trust with my money?" I feel like that's the most powerful thing about being a financial advisor. It seems completely about trust to me. And so how better to know if you're trustworthy than to see you and hear you talk and see how you relate to people, and they can come up and talk to you afterwards and get a feeling for who are you.

Michael's Advice For Newer Advisors With An Interest In Values-Based Investing [1:21:59]

Michael Kitces: So, what advice would you give younger and newer advisors coming into the industry who have some interest in SRI and going this direction?

Michael Kramer: Yeah. I think a lot of my advice would be around being willing to talk about values with clients, because I do think that that's something that investors are aware of, but I'm not sure how many financial advisors ask what they care about, what matters to them. What type of economy do they want to see while they're planning for their future and for their retirement? And I think opening that conversation can be very enlightening. It can tell you a lot about who somebody is, which I think can only help you serve them better, even if they're not necessarily going to be fully ready to commit to a portfolio of socially responsible investing. Talking about values can make things a little more personal. It can let them know that you care about them and what they think about reality, get their perspective on things. And I feel like that can deepen the relationship regardless of what the design of the portfolio is.

But I do think that the alignment of values and money is natural, and it's actually why we call ourselves Natural Investments. Because we think it is natural. It would be kind of strange to not do that. And so that would be my advice, is to have those conversations. They can be very rich, and people will tell you what is important to them, and maybe that'll have an impact on the design of your asset allocation. You never know.

Michael Kitces: Is there a way you like to open that conversation with clients? I find, for some advisors, there seems to be a blocking point or a fear of, "How do I open this conversation? I'm not even sure if my clients are interested in this direction." As you noted, it's become a bit politicized in recent years, in particular. How do you start this conversation if you're trying to explore with a prospect?

Michael Kramer: I like to start from where they're at rather than my introducing new topics to them. So I try to find out from them, what are they already involved in in the community? Where do they do community service? What do they care about? How do they shop? How do they participate in the community? What matters to them? You can really elicit a little bit about what their values are based on how they respond to that. And then, from that, you can ask leading questions about social justice or the environment. You can let that conversation guide you into some of these things.

In our experience, just because of who we are, people usually come to us saying, "I don't want to own this kind of stuff. Get me out of this. I just inherited this money, this IRA, and I don't want any of this stuff in my portfolio." So they come with something. But for people who don't come with something, because it's usually something to exclude that they don't want to own anymore, I think just talking about them, their family, their job, their career, their interests, what hobbies do they have, what do they care about, it can be very revealing, I think.

Michael Kitces: And then you just flow towards whatever values they start highlighting in that conversation.

Michael Kramer: Yeah. You can say, "You know you could have that reflected in your portfolio. Have you ever thought about that?" And they go, "Really? How could I do that?" "Well, let me tell you. Let me tell you how you could do that. You could have your money matching what you're saying right now. You care about carbon in the atmosphere or whatever. Well, we can focus on that." I don't know, people have different values. They talk about different things, right? So you have to listen very carefully to what they're saying.

The other thing is people sometimes don't have anything to say. And so, then, they are looking for you to give them a menu of what's possible. Because even people who show up with us, they usually have a handful of very specific things they want to avoid. And that creates an opening to say, "Well, did you know about this? There's all these possibilities. Here's a lot of things you could support and avoid." And there's all kinds. It's very complex. It's very comprehensive. Usually, they're very pleasantly surprised to find out how mature the space has become.

When I started in 1990, there were 12 mutual funds that you had. That's it. That's it. And they were all large cap domestic funds. And the standards were weak. And that was it. Still felt good. I still did it with the first $2,000 I ever saved. But things have really matured.

What Success Means To Michael [1:26:48]

Michael Kitces: So, as we come to the end here, this is a podcast about success. And just one of the themes that comes up is the word success means very different things to different people. And so you've had this wonderful path for building a very successful business, going through a successful transition. And so the business seems to be in a very good place now. How do you define success for yourself at this point?

Michael Kramer: I have felt very privileged to live what the Buddhists call Right Livelihood, where you are living in alignment with your tenets as a human. And I'm often astonished that I was able to create and steward a really thriving container through which I could achieve that sense of Right Livelihood to live in accordance with my values and make a living at the same time, has been an unbelievable blessing, especially because it was not my first career. I'm in my third career. So to get to this place and to have built something that I can leave to others that will continue after I am done, it feels very successful to me. I was able to do work that was deeply meaningful to me and that was very impactful on the world.

And for me planting these seeds that are indeed germinating, that is helping humanity connect to its deeper purpose, to stand for equality and justice and sustainability, and to care about people on the planet, because it matters. That is a successful life for me to be a part of that, to be a seed planter, to help bring that consciousness change about it, felt amazing to me. I can't believe that this is what my life has been about for these past 25 years. And yeah, I feel really proud that I was able to do that and also to have participated in creating something that will continue to do that even once I stop.

Michael Kitces: I love how you frame this as being a seed planter. I hope, I think, we've gotten to do a little bit of that today in talking about the structure of how you've worked to maintain the continuity of the firm. So thank you, Michael, for joining us on the "Financial Advisor Success" podcast.

Michael Kramer: I appreciate being invited. This was a fun conversation.

Michael Kitces: Thank you. Thank you.