#FASuccess Ep 055: Separating Management From Ownership On The Path To $10B of AUM with Tim Kochis

What You’ll Learn In This Podcast Episode

• How Aspiriant grew to $10 billion in AUM [3:48]
• The benefits of charging both planning fees and asset management fees. [10:02]
• How Aspiriant was able to double their fees and still keep all their clients. [15:33]
• Why Aspiriant chose to focus on a niche of corporate executive clientele. [21:38]
• How Tim deepened his reach within his niche and built credibility through publishing. [28:39]
• How Aspiriant was able to attract and retain great talent as the firm grew. [50:59]
• What drove Tim and his co-founder to add partners to the firm. [50:59]
• Three things that have to be transitioned when founder advisors succession out (and why you shouldn’t transition all three at once). [1:02:10]
• Why Tim set a target date for when he would no longer be CEO. [1:09:40]
• Tim’s advice for new advisors. [1:43:20]

Resources Featured In This Episode:

• Tim Kochis – Aspiriant
• Deloitte
• CCH
• Success and Succession by Eric Hehman, Jay Hummel, & Tim Kochis
• Managing Concentrated Stock Wealth by Tim Kochis & Michael Lewis
• David DeVoe
• G2 Institute

Full Transcript: Separating Management From Ownership On The Path To $10B of AUM with Tim Kochis

Michael: Welcome, everyone. Welcome to the 55th episode of the Financial Advisor Success podcast. My guest on today's podcast is Tim Kochis. Tim is the co-founder of Aspiriant, one of the first independent RIAs to have reached $1 billion of assets under management in the early 2000s. That today is one of the industry's few independent RIAs focused on comprehensive wealth management to have reached a whopping $10 billion of AUM threshold. What's fascinating about Tim is the way that he was able to attract and retain great talent as the firm grew by distributing ownership equity in the firm early on, a philosophy that Aspiriant has retained by now having over 50 partners that participate in the firm's equity ownership.

In this episode, Tim shares how he was able to grow so quickly to become one of the leading RIAs with a niche focused on working with the corporate executives. The way he differentiated his firm and gained credibility even without having a big corporate name on his business card, how he deepened his reach in his niche by co-authoring multiple books over the years on tax strategies for managing executive compensation and concentrated stock positions, the reason why Aspiriant chose from so early on to charge separately for investment management and financial planning, and how the firm's structure is lengthy and comprehensive financial plans with a shorter executive summary up front and a deep appendix of technical memoranda in the back with all the technical information.

In addition, we talk in depth about how Aspiriant separated ownership from management of the firm, the management infrastructure it uses to operate, why Tim and his partners ultimately decided to merge the firm with another large RIA after having already reached $2.5 billion of AUM, and how he navigated his own exit as the firm CEO even though he still retains an ongoing ownership stake.

And be certain to listen to the end, where Tim discusses some of the insights he's gleaned over the years and how to successfully execute a succession plan, and the work he's now doing with leading industry consultants like Philip Palaveev and David DeVoe on succession planning and developing the next generation of advisory firm leaders.

And so with that introduction, I hope you enjoy this episode of the Financial Advisor Success podcast with Tim Kochis.

Welcome, Tim Kochis, to the Financial Advisor Success podcast.

Tim: Oh, thank you, Michael. Glad to be here.

Michael: I'm really excited to have you on the episode because you founded a firm called Kochis Fitz back in the '90s, that when I actually started at Pinnacle in the early 2000s, you know, we were like…you know, at the time we were about a $200 million firm that had this vision of being on the path to someday having $1 billion under management. I remember, like, we looked to what your firm was doing to try to figure out where we were going, because you were one of the first independent RIAs that I knew of that got to $1 billion first. And I remember being fascinated with what your firm was doing and all the things that you were doing to succeed with that growth path. And it's only continued now. You know, you were one of the first firms to $1 billion. Now it seems like $10 billion is the new $1 billion marker for RIAs. Aspiriant now is over $10 billion.

Tim: That's right.

Michael: So just I'm really excited to have you on and just help us to understand, like, how does that happen? Yeah. Like, $10 billion, that's a lot of zeros.

Tim: Yeah, it is.

The Beginning Of Aspiriant's Path To $10 Billion In AUM [3:48]

Michael: That's a lot of money and just a lot of people and a lot of clients. And yeah, really excited to have you on just talk to us about what that path looks like.

Tim: Okay, well, that's great. Well, I'm not sure where you want to begin. At the very beginning in 1991, when Linda Fitz and I left Deloitte, we had a pretty good head start. Deloitte decided to get out of the business that I was in charge of, the personal financial planning business, but I was serving, along with Linda, a number of clients that would have been left a little adrift if we didn't continue to work with them. So I made a deal with Deloitte that they would actually encourage those clients to come to work with us. And they also sold me the intellectual property for a token. I think I paid $10 for the intellectual property because I had created most of it for them and they weren't going to be doing anything with it once I left.

And the quid pro quo for that was I gave Deloitte a 10% royalty off the top of all the revenues that we would receive from those clients for the first year, and then the royalty would go away. And I also agreed with them, they insisted on this, that I not poach any of the people who were involved. Linda and I left together, and that was it. There were just the two of us. And we hired a all-purpose assistant who got us very well organized. Neither Linda nor I were particularly technologically adept, and so we hired a woman whose name was Maria, who worked with us actually for a couple of years. And she was really very helpful in getting us truly launched as a business.

Michael: It's an interesting start, though, right? I mean, a lot of advisors, you know, either on their own or in the industry for some period of time and then go out on their own have to do these just completely cold starts. You at least had the good fortune that you could actually bring some of the business that you'd built with you out of Deloitte to kind of seed the business initially?

Tim: Yeah. Again, that was really very helpful because we had…I had already been in the profession for a long time at that point. I started my career in 1973, so I was already an old-timer by the time, 1991. But the business that we were able to take with us from Deloitte was a financial planning business where we charged hourly rates to generate fees, and we weren't yet managing any assets. It's one of the reasons why we left Deloitte because the clients that we were working with liked the investment recommendations that we were making, and they would say great, I adopt those recommendations rather than shove it across the table at us and say, "Now, you do it."

And we always had to say, "Well, no, we can't really." Because at that point Deloitte and none of the other accounting firms at that time had set themselves up to actually be registered investment advisors. So we weren't able to do what our clients were asking us to do. And that frankly motivated me and Linda to try to take this out on our own. So on day one, we had, I don't know, 30, 40, maybe, clients who were accustomed to paying us financial planning hourly fees but up to that point had never given us authority to manage their portfolios.

Michael: But this was your vision at the time was to break out into this asset management firm. I mean, you know, today lots of us do RIA models with discretionary asset management. We've got lots of custodians and choices. Like, that was not a popular thing back in 1991.

Tim: It was pretty rare. And the only organizations that were set up to be a custody and execution platform was Schwab. And they were in the very early stages of that. We were among the very first people to do business with Schwab in that regard. John Copeland was in charge of it then. And we were in San Francisco and Schwab was in San Francisco, so it was relatively easy to sort of make that connection.

So in any event, the clients gave us the grace of their business to manage their portfolios. And I remember in one particular case of one of my most favorite clients and one of my, at that time, largest clients, he had available portfolio aside from his company stock of maybe $8 million or $9 million, I think. And so I went to him and asked him, his name was Bob, I said, "Bob, I've just…as you know, I've just launched out onto my own and it would really be helpful if you would give me the authority to manage your portfolio and pay fees to me for doing that." And he had been a client for, at that point, several years, and he said, "Well, why would I do that? I've never had to…."

Michael: "I've never had to pay anybody for this before. What are you talking about, Tim?"

Tim: "I've never had to pay you for that before." And I said, "Well, Bob, this is the…" He was a businessman, he was the CEO of a company, and I said, "This is the way we can make the economics of having a small independent business that is very dedicated to serving our clients like you very well. This is the way we can make this work financially." And he thought about it for 30 seconds and he said, "Okay, fine. Let's do it." So we were very fortunate to have really great clients who had a lot of confidence in us and gave us an opportunity to build a business model that we had never asked them to do before.

The Benefits Of Charging Both Planning And Asset Management Fees [10:02]

Michael: I'm curious what drove this shift or desired shift for you. In today's environment, I feel like we're having a lot of discussion now about whether the AUM model is done or dead or dying, whether the future is going to be hourly fees and retainer fees and more fee-for-service-oriented billing. And, you know, to me, it's always this great reminder, you know, what's old becomes new again at some point, right? So, you know, we're talking today about whether we need to go from AUM to hourly and retainer fees, here you are in 1991 having spent almost 20 years of your career doing hourly planning fees and then shifting into AUM. So can you talk to us a little bit about that transition?

Tim: Yes, I can. And it wasn't that we only did…we shifted from doing planning fees to then doing only AUM fees. In fact, that was one of our distinguishing features for all the intervening time is that we charged both. We charged planning fees for the planning services and we charged what we considered to be highly competitive asset management fees for the asset management services on the notion that those are two separate professional functions. And that a client, if the client is being well served should pay, should expect to pay for both of them.

And this is a long potential tangent, but I've never been of the view that you should lump all of the services into one fee structure, because then it runs the risk of either the client not paying attention to…expecting excellence on both the planning work and on the investment management work if they don't perceive that they're paying separately for these things. And it also does not incent the service provider to devote the attention to excellence in service, in client service on both dimensions if you aren't being separately compensated for, if you can't point to a revenue stream that is associated with the service. So you won't hire for it.

Michael: We had a recent conversation on the podcast with Greg Friedman, who I know you know from Private Ocean. And, you know, Greg had run a model for a period of time doing planning fees and AUM fees, and they had ultimately decided to shift and essentially consolidate/simplify down the AUM fees out of the sort of concern from the client perspective of, you know, "Just do we really want to have this other extra fee there if ultimately, in the long run, the AUM model is still profitable enough as long as we serve our clients well and they retain anyways, which we generally do?" You know, is there some point at which the planning fee and the risk that they balk at a planning fee and don't become a long-term client, is it just not worth it relative to the strength of the AUM model over time, with, I think the good caveat that you really have to watch out as a business owner? Because if your model is AUM and all your revenue growth comes from AUM, you start treating asset gathering like a revenue driver and you start treating financial planning like a cost.

Tim: Right, exactly.

Michael: And cost, I think if we manage down, we don't tend to, you know, balk up.

Tim: Exactly. Well, that's exactly my point. If you charge separately for the planning work then you are likely to devote the kinds of resources to it that it requires to do a really good job of that. And there's also, I guess, a self-serving business rationale for doing that, in that the planning fees actually go up if there's a significant market downturn. So while the AUM fees may go down, the planning fees actually are likely to go up because clients are recalibrating a lot of aspects of their planning environment and expect to pay for those services.

It also permits you to have some clients. If this is what you want, it permits you to have some clients who are only planning. Clients who are not…either not yet or will never want to be AUM clients. Or you can have clients who are only AUM clients, who don't absorb any of the planning resources that the firm has to offer. So it permits, I think, good business flexibility. It is also, I think, simply a more rational approach to the fee-for-service concept. Clients ultimately get this. Some prospects do balk at this. "So wait a minute, why should I pay you both fees when I can go down this…"

Michael: I'm like, "Aren't you double-dipping on me or something?"

Tim: "Yeah, aren't you double-dipping? Or I can go down the street and get the same stuff, I suspect, for just one fee, for the AUM fee." And in a polite and gentle way, we make the point that, "Well, you get what you pay for. If you're not paying for it, you probably aren't going to get it."

Michael: And clients would buy into that.

Tim: Well, at least enough of them have to permit us to have built a business model around that.

How Aspiriant Was Able To Double Their Fees And Still Keep Their Clients [15:33]

Michael: So what did fees look like for you at the time? And I'm sure it's evolved quite a bit over the 20-plus years since then, but as you were getting going in the 1990s, at least, like, what did that look like? What was sort of the going rate for a blended fee model then as you were trying to build?

Tim: Oh. Well, I think we started out charging only 50 basis points for the asset management fees. And we charged hourly rates. And I think at that time, my hourly rate was $350 an hour, which in 1991 probably impressed a lot of clients as being very, very high.

Michael: Yeah. I mean, even by today's standards, that's a bigger number than what most hourly planners charge, much less what that looked like in the 1990s.

Tim: Well, it was based on the fact that most of the clients we were working with at the outset were clients that we had been working with at Deloitte, and those were sort of Deloitte-level hourly rates at the time. So it was for them not shocking, you know, out of the blue number.

But the AUM fee started out at 50 basis points, and we went on like that for maybe the first year, but in the meantime, we were starting to add costs. We hired some professional talent and we had to move into more expensive space as we grew the clientele. And it occurred to me 1, that 50 basis points was leaving us with pretty skinny profits at the time, and 2, was unnecessarily competitive. That the going rate was much closer to 100 basis points certainly for the first couple of million dollars of a client's portfolio.

So about a year in, with maybe, at that time, maybe $30 million of assets under management, it was really small, and maybe 15-ish clients, average portfolio size of about $2 million, we went to them and said, "You know what? This just isn't working for us. I think we need to move to 100 basis points." And guess what, they all said, "Okay." So that was the first of many times. Not many, first of a couple of times that I went to clients and said, "You know what? We need to charge you more," and they didn't all go away. In fact, in that case, none of them did.

Michael: I'm just trying to imagine what this is like at the time. So, you know, you've got these folks you worked with only ever on an hourly basis, you've left Deloitte, you've convinced them to take a leap with you to work with you now that you're an independent and not at this big firm that they were probably at least comfortable with, you've convinced them of this AUM fee thing they've never heard of but they said, "Okay, what the heck," and then a year later you came back to them and doubled the AUM fee.

Tim: Well, what this demonstrates is the strength of the relationship. That's what's really the key. These were all people who had a lot of confidence in us and were eager to see us succeed. When I first left Deloitte, when Linda and I first left Deloitte, we did this together. When Linda and I first left Deloitte, one of the people that I had been working with as a client, who was himself an entrepreneur, younger than I by a few years but himself an entrepreneur said, "Tim, do you need some capital to help you get started?" His name is Ed. And I said, "Thank you, Ed. Hold that thought, but I don't think so. I think we can do this on our own."

So what that demonstrated to me was that we had over the several years that we had been working with these clients, had convinced them that we were good guys. That we were the kind of people that they wanted to see succeed. And as long as we weren't being out of the realm of the competitive numbers, that if we needed it to work, to make our business work, they were going to say, "Okay."

Michael: Well, and I suppose it makes the point maybe for other advisors out there who have underpriced…you know, I mean, I think most of us tend to do this in the early years when we're getting started, right? Like, you're just so anxious to get any revenue in the door that fee discounting, either deliberate or just saying your prices not even realizing you probably could have priced higher is pretty common. And we all get to a point a couple years in where we're looking at this and going, "I've really got to raise my fees and charge more."

And then you've got this infamous question of, "Well, what do I do with all the people who started with me originally and came to me at the lower rates and took a risk on me at the time?" To me, this just makes a powerful point that, you know, when you're really serving them well, you'll be amazed maybe how many of them stick with you right through a fee increase if they're being served well in the first place. They're probably a lot happier and more content than you're even giving yourself credit to be. And I guess at the point that you're literally doubling their fees, like, heck, a third of them could have left, you still would have had more revenue.

Tim: Right. Yeah, and we, you know, anticipated that we might lose some of them, but we didn't lose any of them. But there weren't that many. And that was, I think, the point. We saw this as the opportune time to do this. If we had gotten much larger with a larger number of clients that we didn't have years' worth of personal relationships with, it would have been much more difficult to do. So we figured we had to set the parameters right before we got much bigger.

Why Aspiriant Focused On Corporate Executive Clientele [21:38]

Michael: Interesting, interesting. So it was a deliberate strategy to do it before you got a bunch of newer clients that came out in the new firm, and they might have balked a little bit more at a new fee increase. So what did typical clients look like for you? Like, who were you working with, where were they coming from?

Tim: Well, this is another key to the initial success that the Kochis Fitz firm had, is that we focused almost entirely on corporate executives. And this was, again, a legacy of where we had come from. Deloitte had served many corporations as an auditor, and the service that my team provided was to keep the senior executives of those audit clients happy by doing personal financial planning for them. So it was in a sense a defensive move on the part of Deloitte and other big accounting firms at the time. They all, in one way or another, established some kind of planning function, the purpose, not the only purpose, but one of the prime purposes of which was to keep the senior decision-makers at their big corporate clients happy.

So we did that, and we were very successful in that. We stole business from some other accounting firms, senior C-suite clientele. But during the time I was there, no other firm got into the C-suite of any firm that Deloitte worked with. And so that was, in my view, major accomplishment. I was successful at defense and also scored a couple of offensive moves.

But the corporate executive clientele is really a wonderful clientele for a couple of reasons. One, very often they get their fees paid for by their employer, by the corporation. Usually not AUM fees, sometimes but rarely, but usually under some kind of a package arrangement of financial planning fees for a certain cadre of the senior executives of a company.

Michael: So indirectly that's what probably also made it a little bit easier to charge this combination of AUM and planning fee, because in practice the client would usually pay the AUM fee but often the firm was willing to foot the bill for the planning fee, which then helped to cover all the upfront work and all the other good things that come from charging a planning fee.

Tim: Exactly. Exactly right. And so there was no price resistance on the part of the client, who is a sponsored corporate executive. But there are other reasons for that too, is that all the senior executives of company X have the same benefit package. They're all the same deferred comp plan. They're all the same restricted stock plan, the same stock option plan, etc. So once you've gone up the learning curve on those compensation dimensions and know how to optimize, once you've done it for one you've done it for all of them.

And so there is huge leverage involved in having a corporate-sponsored, multi-executive engagement because you go up the learning curve only once. And once you're there then you are…you have not just inertia, but you have huge investment that someone else would have to make in going up that learning curve to displace you. So it's a very good defensive position to be in. Once you are involved in helping a client optimize their stock options and their 10b5-1 plans, etc., it's going to be impossible for anyone else to get in there and say, "Let me drive a wedge here." Yeah, good luck.

Michael: I'm fascinated in talking with a lot of large firms of how many built their businesses in niches. You know, you guys started in corporate executives. I know, you know, Sullivan Bruyette, SBSB out here in the East Coast, still around, also primarily executives but in the tech industry in the D.C. area. You know, we had Scott Hanson from Hanson McClain on. They built most of their business early on with Pac Bell utility employees when all the mergers and downsizing was happening. And Greg Friedman was talking in a recent podcast that the early build for him was getting a really big center of influence in the National Tire Dealers Association. And he learned all the ins and out of helping small…

Tim: Yeah, exactly. Exactly.

Michael: …tire dealer businesses and built an amazing business out of it. Now, I get it, you know, particularly corporate executives, like, there's dollars, there's concentrations of wealth, there's, as you noted, even less price-sensitive corporations that are willing to pay planning fees. So I'm imagining a lot of people are probably listening to this thinking like, "Sure, I'd love me a whole bunch of multimillion-dollar corporate executives as well, but how exactly do you get in front of those people? Like, how do you make that your niche?"

Tim: Well, that's obviously a very good question. I got very lucky. And one of the things that I should have said very early on, that I've been an extremely lucky person. I've been in the right place at the right time and have had really wonderful foundations. So in addition to Deloitte, before I was at Deloitte I was at Bank of America, and with a very similar focus on corporate executives for the corporations that Bank of America banked. And before that, I was at a bank in Chicago, the Continental Bank. And it was the same idea. Mostly we worked with corporate executives of the major corporations that the Continental Bank banked. And so I was pretty familiar with this territory.

But I had many of the clients literally delivered to me by the large parent organization, the bank or the accounting firm because it was in their interest to have me and my colleagues do a really good job for those people. So if I failed, if I didn't do a good job, well, then that would have been the end of that in more ways than one. But as long as I was doing a really good job for these people, they kept delivering clients to me.

And then once you've developed a reputation for doing good work in that regard, then you get RFPs from other corporations that aren't delivered to you but know about you. Say, "Oh, I understand you guys do work for the executives of XYZ Company and ABC and DEF, would you like to propose on this program that we're adopting for our executives?" So that's how it happened.

How Tim Deepened His Reach Within His Niche Through Publishing [28:39]

Michael: So I get it that, you know, firms like Deloitte and Pricewaterhouse, some places like that get bids for corporate executive, you know, deals, packages. So what was it like going from having a name like Deloitte on your business card to having, well, you know, your name on your business card, right? Like, "I'm Tim Kochis from Kochis and Fitz." And everyone's saying, like, "Well, I've heard of Deloitte, who are you again?" Like, was it a challenge to make that transition away from always having kind of large known bank and accounting firm names on the business card to needing to go out on your own as an independent and trying to get credibility with the same kind of corporate executive folks?

Tim: Well, again, we had continuity of the clients. All the clients that I was working with at Bank of America, I continued to work with in many cases when I went to Deloitte. The transition from B of A to Deloitte was another interesting transition. But a lot of the clients that I'd been working with at Bank of America from the corporations that Bank of America worked with carried over because of the relationship with me. So I was still working with them.

Then Deloitte started delivering clients to me, and those clients continued to work with me under their corporate sponsorship situation even after I left Deloitte. So the credibility of being a service provider to corporate executives under sponsored programs just carried over. It didn't require the Bank of America name any longer or the Deloitte name. It was just, "Hey, these people do this work and they're good at it." And so again, those pieces of business continued. And because you had a reputation working with those kinds of people, they would refer people like themselves to you. So you'd get a referral to an executive of some other company that you didn't have any dealings with, and you would have an opportunity then to cultivate business, not just with that one executive but with that whole group of executives, particularly if they didn't already have a sponsored provider.

Michael: Interesting. And then at that point, it just becomes some of the, you know, the same depth of networking and finding opportunities for referrals that exists anytime you get deep into a niche.

Tim: Right, exactly. The better a job you do within any niche, the more people that are within that niche are going to come to you or are going to be predisposed because of your obvious expertise in that area.

Michael: Now, I know eventually you went further with this because you published a book at some point along the way as well, right?

Tim: I've actually if you count second editions, I've done six books. But no, I did write a book with my colleagues at…well, I first started at, going back at Bank of America, I was…I don't know how far back into this deep background you want to go, but I was on the…while I was at Bank of America, my boss at the time, I was running one of the offices of Bank of America's three-office financial planning program, and the guy who was in charge of the whole three-office situation wasn't able to go to a CCH advisory board meeting at one time, and so he said, "Well Tim, why don't you go in my place?" So I did.

And from that point on, in a gentle way, CCH disinvited him to participate and invited me to participate. So I served on the CCH tax and financial planning publications advisory board for many years. And CCH was a publisher of books, and so they encouraged me to write a book on wealth management in their format, which is a cumbersome, you know, numbered paragraph format. I don't know if you've read any recently.

Michael: Yeah. Yeah, I have. You know, I'm imagining, like, I…well, because I studied CCH and RIA materials in my master's in tax program a number of years ago. But for those who aren't familiar, see, back in, I guess particularly the '80s and '90s, there were kind of three major research services in the tax and accounting world that basically everybody used, CCH, RIA, and BNA. Those were three company. And they would all publish these, you know, deep, well-researched, like, meticulously numbered and indexed guides on pretty much anything and everything technical. Because, you know, in a world before the internet, like, if you wanted to search for information, you know, you were manually leafing through index pages. So the book that was the most thoroughly written with the best indexing was basically the winner as the best resource material. So these were kind of the three leading services that were producing these sort of go-to bibles for all things that experts on tax and accounting issues needed to look up.

Tim: So CCH asked me to write the book on wealth management. And I did, but I didn't write it single-handedly. I was the editor of it, I wrote a lot of the content, but other people within the firm at Bank of America and then subsequently at Deloitte were also participants in this. And what we did is we took of compilation that we had written, and I was the primary author of this but not the only one, of, we called it "The Appendix of Technical Memoranda." What a terrible name.

Michael: "The Appendix of Technical Memoranda."

Tim: Yeah, can you believe that?

Michael: It's just a page-turner right there.

Tim: Right. So what happened is we would do…this was in the days when you still wrote out pretty lengthy financial plans. But rather than put all of the boilerplate in every particular place in the plan, we tried to keep the plans themselves relatively succinct and then put all of the background boilerplate stuff into this appendix. Well, the appendix, you know, could stand on its own. You could read it if you were motivated cover-to-cover and it would be sort of the basic backgrounder on every aspect of wealth management. Taxes, insurance, retirement planning, estate planning. So we took that book that we had written and put it into…with some refinements, put it into the CCH format. So that was the first of these books.

And then subsequently we did another…edited an online version of that for them when the world did start to use online research. And then we did a second edition as well of the paper cover book. And those were the two sort of fundamental wealth management books. I believe I still get royalties, they're tiny, but people still buy these books, believe it or not. So those were the two of the six. And then I wrote a book on managing concentrated stock. One of the things that you develop a lot of expertise around when you work with corporate executives is managing concentrated stock positions, and so I wrote a book on that and I did a second edition of that a year and a half ago now. And then on a topic that we may get into, on the issue of succession and equity and management transitions with two other authors, I wrote a book on succession planning called "Success and Succession."

Michael: And I do want to ask you more about that in a little bit, but first I just… So take us through a little bit more of this evolution of Kochis Fitz. So you go out in your own in 1991 with, you know, a handful of clients that come with you from Deloitte. You've got, you know, $30 million after the first year, so at least you can pay your staff member and afford your office space. Probably not netting a whole bunch yet, then you have to split it with Linda, but you're surviving. You're producing plans with, you know, a focused plan and a really substantial appendix of technical memoranda. Just boy, if you really…like, if you really want to make sure the client doesn't read all the dense material, like, put that on and they'll definitely not turn past the recommendations page.

No, you know, you're doing this deep planning work, you're building out these investment management ends, like…so when you and Linda went into this, did you have this vision at the time like, "We want to build a $1 billion firm, we want to build a big wealth management practice?"

Tim: No, that vision developed later. No, not on day 1 or even day, you know, 365. The objective at the outset was simply to survive, continue to work with clients, continue to do the kind of work that we enjoyed doing, and to, you know, make a decent living doing it, but there was no grand plan about any particular targeted growth. Nothing at all like that.

Michael: So was there a point at which that changed? I mean, how did that start to shift? Obviously, you eventually became a much larger firm, you introduced other partners. It wasn't just Kochis Fits names on the door after a while. So when did that start to change for you? Or, what drove that change?

Tim: Well, what drove the change was simply the fact that we got very lucky. We were doing this in an environment where the investment markets were performing really well. Remember what the '90s were like. The investment markets were really good in the '90s.

Michael: So you're feeling really good about your AUM model at that point.

Tim: Yes. And we were accumulating additional clients through the usual strategies of going to where the clients are and exhibiting your expertise, networking, and through the referrals that we were receiving from our clients. So the business was growing. Probably in terms of the rate of growth in that first year or two, the rate of growth was probably much greater than it was able to be at a later point. And I think we started…I remember Linda and I used to get together once a month to calculate what we were able to bill clients. And we'd sit down just the two of us, with a piece of paper and across a desk, and we'd sort of count up our nickels and dimes to see whether and how much, you know, in that first year how much we owed Deloitte for their 10% royalty on the clients that they encouraged to come with us and to see how much money there was left. How much money we could pay ourselves.

And after about a year and a half, maybe two years into this, we stopped doing this because it became way too cumbersome. There were too many clients and there was too much money. And we said, "Hey, you know, there's a real business here." I'm not sure at what point we began to articulate that to ourselves, but it became obvious. And so then the issue was, "How do we manage that growth at an appropriate pace? How do we bring in the right kind of talent at the right time to serve the clients that we are able to serve, that we want to serve? That are coming to us without…frankly without too much business development struggle." They would land on our doorstep and we would close them almost…too bad I don't have the statistics, but I'd say our closure rate was 80%-plus.

Michael: And to what do you attribute that?

Tim: Reputation. We were known to be very good at what we do. And we didn't have a lot of competition. We didn't have a lot of local competition. The San Francisco Bay Area was then, as it is now, a robust economic environment, and there weren't many other firms doing what we were doing. There are now, and some really substantial and highly respected firms. And I have a lot of…many of these people are good friends of mine. So I don't mean this in any way to diminish what they've accomplished, but in the early '90s, there weren't many people like us. And so if people were looking for an independent, owner-operated, non-obviously conflicted firm, we were among the few choices that they had.

Michael: Interesting. So even as now I know a lot of independent advisory firms like to talk about the virtue and the value of their independence. And not that that isn't still a virtue for them but I guess it was perhaps even more of a distinguishing factor then when there just weren't as many independent advisory firms. And you could really stand out by just saying, you know, "We actually stand alone and we're independents." And I guess particularly I would think for some corporate executives that are well aware of what corporate dynamics look like would probably be particularly appreciative of what it means to be independent and not facing some of the corporate parent company challenges.

Tim: Right. And it was also the fact that it was a small organization that was owner-operated. What you see is what you get. And so when you would have an opportunity to close a piece of business, for example as I would do this, and I did this throughout my career, I would look the prospect in the eye and say, "I'd really like to do business with you, please why don't you become our client?" And it was like, "Well, okay. Sure. Why not?" So it was the personal relationship that you had the opportunity to build even before the person became a client. And they knew that the person they were saying yes to was the person that they were going to be sitting across the table or across the desk from in the future.

Michael: Because that wasn't always the case in some of those Deloitte and Bank of America-style arrangements? Because the section of the firm that did the negotiating may or may not be the actual part of the firm that then delivers the advice services?

Tim: Exactly. That's part of it. And, you know, we would say, "No one here yearns for a promotion to New York City." And this was a very effective way to sell business in California. Because if you're competing against a Merrill Lynch or a Goldman Sachs or JP Morgan, we would say, correctly, "So we don't have any turnover. What you see is what you get. This is us. No one here is yearning for a promotion to New York." I just stop right there.

Michael: Yeah. Which again, you know, to me just it reinforces the power of the niche. That, you know, for the group you're talking about that had probably worked with other accounting firm and investment banks and had literally watched their people move to New York…you know, the good people move to New York for promotions, because that's where the opportunities were for those firms, that they would get that, right? Even your average affluent person walking in the street in San Francisco I imagine doesn't get the significance of that statement, you know, "Our talent isn't yearning to move to New York." But for the subset of people you were working forth, they got that very quickly.

Tim: So I think the growth just sort of dawned on us at one point. I'm not sure we ever set out to grow. It just started to happen through the accumulation of sponsored corporate executives and the referrals they gave to us. And the fact that these corporate executives were accumulating wealth. That's one of the great things about corporate executives. They tend to accumulate wealth.

Michael: Yes, this is the basic retiree in the net withdrawal phase.

Tim: No, they're exercising stock options and putting diversifiable assets to work. So the business grew. And we had sort of a secondary niche that was also originally delivered to us, of a very big law firm, a firm headquartered in San Francisco called Morrison Forrester. And they're throughout the country and internationally, but they're headquartered and still are in San Francisco. And they were delivered to us by Deloitte too in the sense that Morrison Forrester wanted to have a program for their new partners too so their new partners would have an awareness of what it meant to be a partner of a law firm in terms of cash flows and tax liabilities. Moving from being an associate and an employee with a W-2 to becoming a partner with a K-1 is an interesting transition.

Michael: Yeah, all sorts of specialized financial planning issues that come up there when you cross that line from employee to partner.

Tim: That's right. And so we did that, and they liked the work that we did, and so they established a sort of mini version of a corporate-sponsored planning function for their existing partners, of which they were many. And these were people who were very well-heeled. And it wasn't a full-fledged comprehensive financial plan, but it was like a multi-hour session where you would gather a lot of information and talk them through some of the issues that they had. And again, we did a good job with that. They liked that a lot, and so some of those people became clients of ours.

And since we had these corporate executive arrangements, which always included the general counsel of the firm, we developed a lot of expertise around speaking the language of lawyers. And the fact that I happen to be a lawyer, I'm admitted to the bar in Illinois and in California, was a plus. And so we started getting referrals to other law firms and other lawyers. And so it was sort of a mini niche.

The interesting thing about having lawyers as clients, lawyers have clients, and if the lawyer is happy with what you're doing for him or her, they may refer really attractive, potential client to you. And that happened on a couple of occasions. In fact, our largest client at the time was referred to us by his lawyer who helped him through the business transaction that yielded for him about $350 million. And that person became our client. And so, wow, all of a sudden we had this huge…this was not in the early '90s, this was…you know, we were very well established. It was probably 2002 or 2001, something like that. So we get this whale. He was really a nice guy. He's no longer a client, for lots of reasons but still is a friend.

And when I was negotiating fees with him, because he was a negotiator, and he said, "Well, you know, I understand what your normal fee is, 85 basis points for the first $5 million and then there's a scaling that goes beyond that." And I said, "Well, anything over $20 million is pretty negotiable." And he said, "Well, here's what I think I'd like to have as my fee." And he put a rate on the table and I said, "Okay, but it's got to be at least $50 million for that." And he said, "Not a problem."

Michael: You know, and you said, "Wait, I meant $75 million. I misspoke."

Tim: So he eventually delivered $350 million to us.

Michael: Wow.

Tim: So this is what can happen with a firm that develops a strong reputation for excellent service for clients and has a referral network that deals in that realm of entrepreneurs who transact their business or corporate executives who are accumulating wealth. One niche that we never had any success in was old money. There's plenty of old money in San Francisco, we didn't get a nickel of it because those were not the kind of people that we started working with and had referrals to.

Michael: Interesting, interesting. Even as being a large, successful, highly reputable firm, just the doors in your niche continued to open and the others did not.

Tim: And so we didn't aggressively pursue it because, you know, whenever we tried, we'd come up short in terms of, you know, we haven't been around for 100 years and we don't have a gold-plated tea service in the oak-paneled conference room.

How Aspiriant Was Able To Attract And Retain Great Talent [50:59]

Michael: So eventually you not only added staff but you added partners.

Tim: Yes.

Michael: So I'm curious, like, when did that come about and what drove you to add partners to the firm beyond you and Linda?

Tim: Well, that's a very interesting story, and I think I can sort of create the mindset after the fact. I don't know that this mindset was actually going on, but I think it's consistent with the fact that we knew we wanted to be able to attract and hold onto really strong talent. The first person that we hired was someone who had worked with us at Deloitte. His name is Tom Tracy. You may know him or have met him. Well, Tom, I had to go back to Deloitte and asked them to relinquish my non-poaching agreement because we needed help, and we knew Tom and we understood that Tom if we had made him an offer, would be willing to come and work with us. So I went to the guy who was my contact at Deloitte and said, "I know I have an agreement with you not to hire away any of your people for a year, but someone who I think I'd like to hire…" And we're only six months into this. And he said, "Well…"

Michael: So this was early on.

Tim: This was early on.

Michael: Okay.

Tim: So we hired Tom. Tom was our first professional employee. We started in mid-year 1991 and Tom joined us I think sometime early, maybe right after tax season in '92. And Tom became so valuable to us, so good a contributor to the client service that we were doing, and such a nice guy. I mentioned to Linda one day, "Well, we certainly can't afford to lose Tom." And I said, "Well, why don't we do this, why don't we offer him an opportunity to become a principal of the firm?"

And what I think was going on here in both Linda's and my mind is that neither Linda nor I have children. Linda was widowed at an early age. She never remarried and hadn't had children by her first marriage. And my wife and I simply never had children. So there was never for either of us a sense of, "Well, we have to make provision for our children. We have to sort of husband these assets, these resources because we've got a next-generation, a genetic next-generation to provide for or maybe to pass the business onto." There was never a mindset around that. So it was easy for us to decide that. And again, we didn't use this term, no one used G2, generation two or generation three terminology in those days. But it was easy for us to say, "Well, this firm may not be worth very much now, but why don't we give Tom a piece of it?" So we did. And I won't go into details about how he paid for it, but it wasn't very much because the firm…we didn't even bother to value it. We just gave Tom 15% of the firm. And we arranged...

Michael: He did have to buy, just it wasn't a big number at the time given the size of the firm at the time.

Tim: No, it was not a big number. He did have to buy in cash, and he also forwent some compensation for a while. And the compensation he didn't get paid went to Linda and to me. So we sort of reorganized the compensation structure for a while to have him in effect pay into the firm. And he also paid some hard cash in, but it wasn't very much.

So once we had crossed that Rubicon, if you will, the next ones were easy. And so a couple of years later we had two really strong talents that we had brought in, and we wanted to reward what their contributions had been, and we wanted to cement their relationship to our firm. And so we brought two guys in at the same time, Mike Fitzhugh and Kacy Gott. And so now there were five of us. And again, it went from there. Once you start this process of distributing equity, the next distribution becomes easy because the psychological barrier, if there ever was one, to transferring ownership has already been overcome.

Michael: Right, the hardest part of letting go of ownership is the first time you decide to let go of even any fraction of ownership.

Tim: Right, exactly. And then it becomes easy from then on. I preach this now in the consulting work that I do. I preach that the more difficult psychological thing is the relinquishment of control, the relinquishment of equity. If you distinguish those two things, that's…the first step is to make a difference in your mind between ownership and management of the firm. But once you've made that distinction, the distribution of equity is the easiest of the two to do, easier of the two to do. And it's really helpful to start early for lots of reasons which we can continue to talk about. So we did. We hired Tom in '92 and we made him a partner in '93. So we were only two years into this deal and we already had a new partner.

Michael: And now, I know eventually you got to the point where Kochis Fitz, I believe at the time, and I know certainly Aspiriant now has a very widely distributed ownership structure. You have lots of partners. And I know even in our space there's still a lot of discussion about just who do you make a partner, or even call it just an equity shareholder, and what does that mean, right? Some don't want to let go of any equity at all, for a wide range of reasons. I think a lot of firms kind of view this as, "All right, if we get certain key employees that we really need to retain," you know, as you did with Tom early on, like, "Okay, this one's got to be a partner because we just can't afford to lose him or her, and so this is the way that we're trying to incentivize it." But you seem to have ultimately taken that to an even wider ownership structure. So can you talk a little bit about what that built up to for you guys and maybe, like, what the thinking is or how you look at these questions of who should be a partner and owner of the firm and what that means?

Tim: Well, there are several questions there. Again, once you sort of set down this path, it's easy to continue. And the kind of talent you're able to attract is very strong precisely because they look around and see what happens, "Hey, people get to be owners of this business and this business is growing, so I'm attracted to come to work here. And I want to do a really good job so someday I'll have that opportunity as well." So that's part of it. And it sort of…it feeds on itself. And then those people who were attracted and who are now doing a really good job and have really strong relationships with clients, you can't afford to lose them. And so you happily, not begrudgingly, happily, you make them partners at the firm.

And if the firm is growing then there's plenty of room for distribution of the ownership. If a firm isn't growing then it becomes difficult, or if the firm is shrinking then you've got a real problem. But as long as the firm is growing, it's very easy to distribute ownership if the whole premise, to begin with, was not to make yourself personally very rich, but rather to have a successful business that served clients really well, and was a great place for very talented people to work together. If that's the motivation then distributing ownership is pretty easy to do.

Michael: Well, and I think you make a good point about just the power that having growth adds to the picture. You know, it's easier to distribute ownership when the pie is continuing to grow. Because frankly if you…even if you ultimately transition a substantial amount of equity, if you do it incrementally in a growing firm, like, you as the primary owner or founder or whatever that that key role is, like, you may still see your income go up…

Tim: Oh, yeah. Oh, absolutely.

Michael: …every year throughout, even as you're allowing other people to get pieces of equity because that's the power of growth.

Tim: Exactly, yeah.

Michael: The firms that seem to get really stuck on this are the ones that are not growing, and you get into this chicken and egg problem of, "If Junior would grow the firm more than I would make him or her a partner." And Junior is saying, "Why would I grow the firm? I'm only going to make my ownership more expensive. Like, make me a partner and then I'll try to grow it." And no one seems to want to transition equity because they get stuck in that.

Tim: Right. Well, and that's why it's so important from the standpoint of making this transition to recognize when you've had enough. When you've accumulated enough. We spend some time in one of the chapters of this "Success and Succession" book that Eric Hehman and Jay Hummel and I wrote about having the founder CEO primary or maybe even exclusive owner do some financial planning for him or herself, or have someone within the firm do that to convince them that they've accumulated enough. That accumulating more isn't going to buy them that much more in the way of personal gratification and may get in the way of their continuing to be able to enjoy the wealth that they've already created.

The wealth that most RIA entrepreneurs have created is in the value of their firms. And if those firms don't someday liquidate that value to the founder then they're worth nothing. And the only way that money can in fact happen is if you sell to a third party or you build an internal succession proposition that permits the founder CEO, primary owner to actually liquefy their wealth. So you mentioned this earlier. It really is having a smaller and smaller piece of a bigger and bigger pie. And if the pie is growing faster than your share is shrinking, you are becoming much richer along the way.

The Tree Different Things That Have To Be Transitioned When Founder Advisors Succession Out [1:02:10]

Michael: Yeah, it's such a fascinating point that, you know, so few advisors I think do their own plans, you know, have their own financial planners, have just some outside perspective, as we tell our clients the value of planning, you know, an outside perspective to help you, you know, make some of these decisions, including just trying to find that point of when is enough enough, because we don't tend to be very good at spotting that for ourselves in real-time. That part of the power, particularly as an advisory firm owner is…that external planner perspective to help you figure out when you've actually got enough to achieve the goals that you had makes some of these subsequent decisions about transitions of ownership and transitions of equity a little bit easier because it gets easier once you can kind of acknowledge like, "Oh wait, I've really actually got enough to do all the things that I want to do. Like, it's neat if this gets bigger, but maybe just making more money isn't actually the goal anymore because I've got enough. Now, what else do you want to do with the value thus far?"

Tim: Yeah, it's exactly what we tell our clients about understanding what their objectives are and then figuring out what it takes to accomplish those objectives, how much money it's going to take, what kind of investment approaches they're going to need to adopt. Unfortunately, we're not very good at doing that for ourselves, and so it's really helpful to get a third party perspective. And it's really important from the psychology of the situation that that third party advisor is not the successor because it puts the successor in a terrible position. "Oh, you've got enough, it's time for you…"

Michael: "Yeah, it's time for you move on. You've got enough."

Tim: So it can't be the successor. It has to be some other trusted and unbiased third party.

Michael: You know, one of the interesting pieces I thought that you guys make the point in the "Success and Succession" book as well, and for those who are curious, you know, we'll put a link to this in the show notes as well. So this is episode 55, so if you go to kitces.com/55, we'll have a link over to the "Success and Succession" book. One of the interesting points that you make in there is that when you start talking about these transitions, that, you know, there's really, particularly for founder advisors, there's really three different things that get transitions. There's the ownership, like, the actual ownership of shares, there's the management and the control that goes with it, and then there's just actually transitioning the client relationships. That if you're going to succession out at some point you can't be the advisor for. And that ownership and management and relationships are three different things to transition. And you don't necessarily have to move all of them at once.

Tim: No, and you shouldn't. Again, we, I think, got lucky in terms of building our business model. That the transition of the client relationships was relatively easy because we would double-team every client. Every client had two persons, at least, sometimes more than two involved. There might be an operations person involved as well, but there'd always be two advisors, two professional-level advisors involved with every client, one more senior than the other, usually. And their job would be to be two sets of eyes and ears, observing not only what's being said but what the body language is in the relationship with the client, and having combined responsibility for getting the client's work done, whatever that was.

And so when you have that kind of environment of two on one, if you will, for a number of years, for the more senior person to move on and let the more junior person, the originally more junior person take on responsibilities and bring in another, now more junior person in as the new second chair, if you will, then it's a natural progression as far as the client is concerned. The clients, again going back to the beauty of having corporate executives or businesspeople or working professionals as clients, is that they understand these succession issues. They want the business to succeed for the long-term. And that means that these successions of responsibility for their work and ownership and management for the firm have to take place or the firm will cease to exist. And that is not good for the client. If I'm a savvy client, I want to know, "All right, what's the plan here? How do I know that this firm is going to be in existence 10 years from now or 50 years from now for my kids and my grandkids?"

Michael: And I think there's a lot of advisors frankly that underestimates how savvy clients are about that. I mean, in essence, like, there really is a form of age discrimination that starts to crop up against advisors when clients are considering who to work with. You know, there comes a point where some gray hairs help because it's worldly wisdom and experience and a lot of things that bring credibility and helps to bring clients. But at some point, particularly if you're a smaller or solo advisory firm, you know, you're talking to a prospective retiree and saying, "I'm going to help you…be here for retirement." And they're sitting across from you saying, "I'm pretty sure you're probably going to retire in about five years, so how exactly are you going to be helping me on this journey? And, you know, I'm 67 right now, I want to go find a new advisor when I'm 73, and I'm not sure where the longevity of this firm really is." And suddenly it gets harder to get new clients.

Tim: Right, exactly.

Michael: You know, I've seen a few advisors in their 30s and 40s that basically…one, I forget what the exact line is that he used, but it was something to the effect of, "I'll actually be here for your whole retirement." Like, that was his pitch. Because he's in his mid-30s and he will actually be around to help his clients through their whole retirement. And that's how he gets retiring clients away from a lot of other advisors. Just that whole phenomenon of really being able to demonstrate the continuity of the firm and the services beyond the original advisor I think is more of an anxiety point to clients than maybe we give them credit for. You know, if they've already been with you for a long time, it's hard to move and they're not going anywhere so they'll sit tight. But, you know, when the new client growth gets slower and it gets harder, you know, that may actually be a reason for a lot of firms out there.

Tim: No, I mean, you're preaching to the choir about that, Michael. I couldn't agree with you more. Firms do need to have a credible promise of continuity or they're not going to get new clients. And again, the existing clients, again because of inertia and because of the relationships aren't going to go anywhere, but the next client is not going to come.

Why Tim Set A Target Date For When He Would No Longer Be CEO [1:09:40]

Michael: So talk to us a little bit more about your own path through this. You know, you've got 10-plus years in the firm, you're into the 2000s, you survived the tech crash of 2000, which I know hit your area particularly hard, you managed to get a whale coming out of it, so that was all good, and then a couple of years later you do this giant merger with another very well-known West Coast advisory firm. You're in San Francisco, they're down in LA. So what drives a firm that was already growing and succeeding as much as yours was? You know, I don't even remember where the milestone was or how big you guys were by late 2007.

Tim: Both firms were about $2.5 billion at the time, so the combination on the merger date was about $5 billion. So just coincidentally, they were about $2.5 billion. The business models of the two firms were different, and the number of clients were different, the average AUMs were different. But that was one of the reasons behind the merger was to combine business models to provide for even greater versatility, attractiveness to a broader array of clients. But also the geography, the opportunity to combine the two major economic population centers of the largest state with a lot of economic vibrancy within California. That was the real attractiveness of this.

There were a lot of things that were important aspects at the background. The two firms in terms of their staffing were very, very similar. There were a lot of people at both firms who had spent careers, earlier careers in accounting firms. There's a lot of Deloitte DNAs to this day in Aspiriant, both from the Los Angeles and from the San Francisco initial merger partners. Rob Francais had been a Deloitte partner at an earlier point in his career. So there was a lot of similarity among the members of the staff. We were all highly dedicated to excellent client service, we had the same kinds of credentials, and we were about the same size.

And issue of succession was an important background for both firms. In my case, in the Kochis Fitz's case, I had announced to my colleagues and to our clients about three and a half years before the merger. I think at the time I would have been, like, in my late 50s, 57, 58, something like that, I announced that I was not going to be the guy who had to be blasted out of the CEO chair. That I was going to step down as CEO in five years. So by the time I was in my early 60s, I would no longer be the CEO of Kochis Fitz. And we had five years to work toward who the next CEO would be.

Michael: And is that because just you were ready to be done and on new and different life challenges? Like, what drives that for you?

Tim: What drove it for me was, I'm a pretty vain person, those people who know me know that, and I just did not want to be the guy who… All of the commentators even then were talking about that succession is a big issue in the RIA space and founder CEOs are not coming to grips with this issue. Sort of shame on them. It's time for them to step up. Someone said words somewhat to that effect at a conference I attended. And I came back from that conference saying, "I'm not going to be that guy. I am going to exert leadership in this realm as I have exerted leadership in other realms before, and I'm going to set a target date, five years from now and I'm not going to be the CEO anymore. And it's not because I don't want to be involved in the industry, it's not because I don't want to work with clients, it's just that no one should be CEO forever. It's a bad psychological proposition for everybody involved. So I'm going to create my own term limit."

So that was about, again, about three and a half years or so, maybe three years before the merger discussions got underway in early 2007. And the opportunity to see in Rob Francais, who was the managing partner. They had four founding principles at Quintile and Rob was sort of the effective operating managing director of that organization. And I saw in him a person who, one, had the right age horizon, he was 20 years younger than I, had the right set of skills, aptitudes, and appetite to take on the role of the CEO of some firm. In fact, if we hadn't merged, I've told Rob this, if we hadn't merged, I would have tried to attract him away from Quintile.

Michael: So if you didn't merge then you were going to poach him anyways.

Tim: Yeah. Well, but the merger conversation, you know, got along the way. And very importantly, Rob had a very well-articulated vision of using either Quintile or the combination of Quintile and Kochis Fitz to be the model for growth in the RIA space as an owner-operated firm. So Rob probably had a vision of someday being a $10 billion firm. I didn't. I was happy at the $2.5 billion level, and I knew we were growing, and I expected to continue to grow, but I didn't have a distant vision of a order of magnitude change in the size of the firm and providing an opportunity for other firms that hadn't figured out their own succession to join up with the...well, Aspiriant. We can talk about how the name got changed, but to join up with Aspiriant as their solution, because Aspiriant had figured it out.

We had developed a management system, we had a very robust equity distribution system. We had a vision for being forever an owner-operated firm and to be the leading independent wealth management firm. That's our call sign if you will. Not everyone perhaps would agree with it, but that's what we call ourselves, the leading independent wealth management firm. And we had that vision from the beginning.

So it was a combination of things like geography, the opportunity to recruit and to provide career options for people in these two major geographies. It was also a client service thing because if you looked at a map of the Kochis Fitz clients, most of them were in Northern California but there was a big chunk in Southern California. And if you looked at a map of Quintile's clients, most of them were in Southern California but there was a big chunk in Northern. So you put the two maps together it's like, well, we dominate the state. And we did. I think we still do because we have now additional offices in San Diego and Irvine and Silicon Valley.

So that was a combination of Rob's vision and Kochis Fitz's commitment to having a new CEO sometime soon at that point. So when the merger agreement was being formed, the plan was for me to be the CEO of the merged firm for two years, as we discussed early on, and for Rob to take over after that. Well, that's what happened after the global financial crisis was weathered and we were into the recovery in 2009.

Michael: Yeah. I mean, it is a striking thing, the timing. You know, I know you guys are just coming up on your 10-year anniversary for this deal, because you struck the deal 01-01-2008, so…

Tim: Yeah, that was the closing date. The deal was made during 2007 but the closing date was January 1st, 2008.

Michael: So heck of a time to do a deal and set a valuation for a merger.

Tim: Right, right. Well, we survived. And it was really good. We couldn't focus on the minutiae of integration because we had, you know, an emergency going on. The firm's revenues were severely impacted by the market downturn, but again, it was helpful to have a large stream of revenue associated with planning because that was not affected. In fact, that actually increased a little bit during that time. But also, we were concerned about making sure that we were continuing to serve clients well and keep them from doing foolish things like getting out of the market at the worst possible time. And unfortunately, we weren't successful in every one of those cases.

Normal attrition in a business like ours as you know is about 1.5% or 2% a year, for a variety of reasons. But during that era, we lost 5% of our clients. So for us, that was a devastating increase in lost clients, but when you think about the fact that 95% of the clients hung in there and trusted us to help them come out the other side of that.

Michael: Well, and it's striking, I mean, even those attrition rates, you know, when you start putting numbers to them, I mean, you guys were, you know, 2-plus billion-dollar firm, $2.5 billion firm, it's like, just losing even 2%, it's like, that's $15 million going out the door just with great retention, never mind having it tick up in a bear market. You know, the sheer amount of growth and new client flows that you need even just to tread water as the firm grows gets to be a really daunting task, I think, for a lot of firms when they start getting up to that size.

Tim: Well, yes and no, Michael. I think there are some benefits to size, not in the terms of the rate of growth because as you get bigger, the rate of growth obviously has to slow down. But in the absolute levels of growth, as you are continuing to serve clients well and they continue to refer their friends and business colleagues to you and you do even a modest amount of marketing and sales activity, and if you have clients who for the most part are continuing to accumulate wealth, it's not too difficult at all to…and then if the market helps out by going up let's say on historical average of 8-ish percent, you know, those big numbers, if you're a $10 billion firm, market performance alone can be expected to generate somewhere in the neighborhood of $1 billion of new assets.

Michael: So one other thing I want to ask about, I guess the Kochis Fitz structure even leading up to the merger, you know, you mentioned that you already had even at the time a management system and an equity distribution system in place.

Tim: Yes.

Michael: Can you talk to us a little bit about what that looks like? I'm trying to imagine, you know, you were north of $2 billion, there's dozens of employees, there's lots of advisors, like, there's just a lot of people to manage. You had a distributed ownership system. Like, what does management and equity distribution look like in a multi-billion dollar RIA like that?

Tim: Well, the equity distribution was all internal. As we invited new employees to become owners, we fixed the amount of ownership that we would permit them or encourage them to buy, and then the sales of that would occur either from Linda or from me or pro-rata from the existing owners. Without going into a lot of detail, there was a fairly complicated sequencing approach, but I probably shouldn't go into that in too much detail.

Michael: But the basic gist of it was to…you and Linda were partially trying to sell yourselves down over time but then you were also trying to maintain some evenness to how quickly you were divesting?

Tim: Well, it was sort of opportunistic. Sometimes Linda wanted to sell, sometimes it was more appropriate for me to sell.

Michael: Okay.

Tim: Here's an example of that. When we were approaching the merger with Quintile, Quintile had 4 founder-owners and they each owned an equal share of the firm, they each owned 25%. But they had a number of people, I won't get the number right but it may have been 12 or 13, I can't recall exactly, people who were under a phantom stock plan, and a phantom stock would trigger on the occurrence of various events. One of those events was a merger of the firm. So upon the merger, Quintile was going to have 12 or 13 new very small owners, and their small ownership share was going to come pro-rata out of the 100% that the 4 founders owned.

And my colleagues at Kochis Fitz looked at that and said, "Even though these people are going to have very, very small ownership interests as a result of the phantom stock plan triggering to real stock, there will be a large number of them. And there are nine of us now who are the owners of Kochis Fitz, and we don't want to be overwhelmed by the sheer numbers, leaving aside…"

Michael: Yeah, like, 21-person partner meetings are not very productive.

Tim: Well, that's a different point. I'll get to that in a moment.

Michael: Okay.

Tim: So we said, "So let's look out over the next several years' horizon. Who among the people who are now our employees are we likely to invite to become owners of the firm over the next several years? Let's invite them now." So we did. We identified another seven people who were at that point employees of Kochis Fitz who we thought had really good potential to be owners of the firm and were likely to be invited to become owners of the firm in the next two or three years. So we said, "Let's bring them on now so at least in terms of the absolute numbers of Quintile owners and Kochis Fitz owners, it's about the same number of owners, leaving aside how much anyone owns." So we did that, and we decided that the sum of those seven people would own 7%, that's a coincidence, it wasn't 1% each, would own 7% of Kochis Fitz along with the other existing nine owners of the firm. And at that time, we were all feeling pretty ambitious about the growth prospects. Remember this was during 2007, remember what was going on.
Michael: Right, right. Bad stuff hadn't happened yet.

Tim: Bad stuff hadn't happened yet. We were all feeling really good about the valuations that our investment bank had given us for the value of our firm going into the merger, and no one was really eager to relinquish pieces of what they already owned to fund the 7% that we were going to permit these new people to own. So I stepped up and said, "All right, well, they can buy it from me." So 7% of the sum of what I owned at that time got transferred to them and I got paid for it. And I got paid for it at a really nice price, which was the price that applied before the market downturn. So I don't complain about this at all. But it wasn't because I decided, "Oh, now's the time to cash in." It was a decision that, "Well, we need these people to become owners, someone's got to, you know, relinquish ownership. We don't want to delude everybody, so who's going to step up to sell?" And so I said, "All right, I will." So I did.

Michael: Now, can you talk a little bit about the management transitions as well? You know, I think one of the reasons often why we talk about…particularly from kind of the younger planners' side is, you know, making partner is great because you have more control, you have a seat at the table. Like, you know, we kind of talk about it as, "This is your entree into being in a decision-making role." Except when the firm gets to a certain size and you get to a certain number of partners, like, that can't work. You can't put 21 partners in a room and say, "Let's make recommendation."

Tim: No, it doesn't. And we, again, I think we just got lucky. I'm not sure that at the time we could have articulated this as strategy, but we separated management from ownership very early on. Back in the early '90s, we formed an executive committee that was made up of me and two other of the owners, but they rotated. I was not a rotating member. And when we hired our chief operating officer, Michael Kossman, even before he became a partner himself, because he was the chief operating officer, he was a permanent member of the executive committee. So he and I were permanent members of the executive committee. He didn't have a vote at first. He had a voice but not a vote. And the other 2 members of the executive committee rotated every, I don't know what it was, 18 months or something like that. And the idea was that the executive committee had the ultimate decision-making authority of the firm.

And the ownership of the firm was a separate proposition. The ownership of the firm was about economics. It was about distributions of dividend, it was about being able to buy and sell ownership shares. And if you sold you got the value of the firm, a value of your ownership interest. So we, again out of blind luck, just fell into a situation of distinguishing management from ownership very early on.

Later, we created a board of directors notion that at the outset had only three members, and the board of directors were elected by the owners according to their ownership weight, but the board of directors voted per capita among them, there were three of them so there couldn't be any ties. And the board of directors supervised the CEO, and that was me. And I structurally could not be a member of the board of directors. I was the only owner who was not permitted to be a member of the board of directors. So I had a distinct management supervisory body overseeing what I did.

But I ran the firm through a managing committee, and the managing committee were made up of department heads. The head of HR, the head of operations, the chief investment officer, etc., etc. And these managers were beholden to me. They sat on the managing committee at my pleasure. What that did was it made me responsible completely for the management of the firm, but I did it through delegates. And the decisions at the managing committee were intended to be made through consensus. If there was a consensus, that was the decision that got made. If there was no consensus but nevertheless a decision had to be made, well then it was my job to make it.

But I had sort of independent authority to make management decisions only when there wasn't a consensus among the members of the managing committee. So that model got established, oh, I want to say that the board of directors and the managing committee led by the CEO, that got established probably very early 2000s. And that system…

Michael: Help me understand though, is management committee different than executive committee in this structure?

Tim: Yeah, the executive committee went away. The executive committee had rotating membership only, so that was kind of cumbersome and it didn't provide for continuity. And it didn't have the management decisions being made by the people who had responsibility for execution. And those were the department heads. So the idea is, "The executive committee needs to go away and we need to develop two alternative systems, a board of director supervising the CEO, and then the CEO managing the firm through a managing committee made up of department heads." So pretty much a corporate structure. Very much a corporate structure.

Michael: Yeah. So you went through this merger, you had a two-year plan to wind down your CEO role, part of the original five-year plan that you wanted to be out in five years, I'm just kind of curious, what happened next for you? You know, it's kind of a big change. Like, you're the CEO of a leading firm with your name on the door and then two years later your name's not on the door and you're not employed anymore. That's a big life shift.

Tim: Yeah. Well, it went in stages, it went stages. And this is where, in retrospect, I think we all could have done a better job of planning. We were so involved in, you know, the merger negotiations and the terms of the merger, and then, you know, surviving the global financial crisis. I think we left at too pretty…not adequately attended to. It's not as if we didn't do something about this but it wasn't adequate. And there were parts of it that were, I think, really good design but could have been made better.

I went on a sabbatical for six months. And it was a true sabbatical. I wasn't paid other than a small amount to cover…I continued to be on the firm's health care system and so they paid enough to cover the premiums for my health care coverage under their system, but that was it. There was no net cash that came to me for that six months. My voicemail was shut down, my firm email was shut down. And we had told everybody, we told the world, told clients, we told the press, we told everybody who was interested that Tim was going to go away completely for six months to give the new boss a completely free runway to exert his authority.

Michael: So this wasn't necessarily your desire to be out per se as much as just trying to give Rob a clean launch by sort of structurally removing yourself from the equation.

Tim: And the plan always was, always to come back. There was no question I was coming back after six months, the question was to what?

Michael: I was going to say did you know what you were coming back to or that was sort of to be determined?

Tim: Yes and no. My first point about that sabbatical is it should have been longer. Six months wasn't enough time. It would have been better had it been a year. Six months passed by way too fast. The first month or so was, "What just happened? What?"

Michael: You know, "What did I do to myself?"

Tim: But I knew. And so I was trying to get my brain around where my emotions were. And then after a couple of months, you start to…you know, the rest of your life takes over and it's kind of fun not to have to get up every day and go to the office. And I got to read all the newspapers I wanted, and I took up painting and did a little travel more than I otherwise would have done. But then all of a sudden at about month five is, "I have to come back, and there's not much of a plan here." Well, part of the plan was that I would come back as the chair of the board of directors because, at this point, we continued this notion of a board of directors. The board at this point had five people, I was elected to it before I went on my sabbatical but then I went into hiatus and then I came back, went on the board when I came back and was its chair.

So that was one thing to do, but I was also expected to do something that involved trying to develop new lines of business. But it was too vague and I started to focus some of that on, "Maybe we'll buy a trust company and maybe we'll develop some business overseas," because I'd always been focused on overseas opportunities. And the problem was that we didn't make the authority that I would have clear enough. We didn't make the…

Michael: Right, if you're going to run a new business line, like, "Well okay, so how much latitude do I have here, guys? Like, what kind of budget are you giving me and what sort of new things am I allowed to do and not allowed to do here?"

Tim: Right. And so that was what wasn't adequately well defined. Where the authority began and ended, what the resources to work with would be, what the staff capabilities…could I hire some new staff? Could I reposition some existing? So none of that was adequately laid out. And as the result, things got a little frustrating and it became obvious to me that the best thing to do was to just resign from the firm as an employee. But that final resignation from the firm didn't occur until 2012, April of 2012. So that was a good two and a half years after I stepped down as CEO. So I stepped down as CEO, sabbatical, board chair, trying to develop new lines of business but without adequate definition around that. And I said, "Hey, you know what? This just isn't working. The simplest thing for me is just to go." So I did. And that was 2012, so about 5 and a half years ago now.

Michael: Now, you've still stayed active since then. I know you've had a few projects over time, you're now doing new work with David DeVoe, kind of circling back to this discussion around succession planning. So can you talk a little bit about what you're working on now?

Tim: Yeah. Well, again, I was continuing to write. And I enjoy writing, so I wrote…in the last couple of years I wrote three books. A second edition of the concentrated stock book, a book on success and succession, which we've already talked about, and I wrote a book in Chinese about financial planning in China. I've always been focused on overseas opportunities, particularly Asia, particularly China within Asia. I have a lot of contacts there. And I, with a co-author, a woman who's Chinese, lives in the U.S, she's a PhD in behavioral economics, and she and I wrote this book together for the Chinese market, for the affluent Chinese market. So that was a fascinating exercise because I had to learn a lot about what goes on in China, much more than I knew. And I read everything I could put my hands on in English. I don't speak Chinese, I don't read Chinese, so I've written a book I can't read.

Michael: So you just have to take it on faith it's all there.

Tim: Well, no. Not quite. Well, I wrote in English, she translated into Chinese. And then I took side by side my English copy and her translation and gave it to another person who's fluent in Chinese and English and said, "Do these things match?"

Michael: No, excellent. Just literally speaking, make sure nothing got lost in translation.

Tim: Right, right. And so the answer was, "Yes, they match. Not quite the same style. And Chinese usage is not the same as English, but yeah, this says what you wanted to say." So that was interesting. I'm still writing. And I think there are a couple of other books someday that I'd like to write, and maybe not even within our profession. Although probably because that's where I have credibility. I'm not sure anyone would want to read a book that I might write about, I don't know what, cooking or something like that. It's not my skill set.

And I've been doing a lot of consulting, some overseas and much more domestically on the issue of succession planning. I'm part of a training program that Philip Palaveev's Ensemble group has. It's called their G2 program. I've been on their faculty for that for the last several years. I really enjoy that. Sponsored by Fidelity.

Michael: Yeah, that's the one where, you know, next-generation leaders that want to actually learn how to run firms and execute them get to basically go through a, I think it's a two-year crash course on…

Tim: No, it's a two-year course and they operate…teams of four or five or six people operate on a hypothetical but very real firm that goes through a lot of issues that any RIA firm would go through, over the course of two years. And I'm a coach for that and also a judge. I evaluate the exercises that they do and score them. And so this gives me an opportunity to stay very tuned into, first of all, the next generations of the people within our profession, and I like working with Phillip and his staff. And it keeps me tuned into the issues. So I do that.

And then relatively recently, starting at the beginning of 2007, I've been working as a special advisor to Dave DeVoe and his work in valuation, succession planning, M&A. He's got several tricks in his bag. And I've been working with him as an advisor to his firm for the benefit of his clients. And so just doing today, preparing a bill to send to Dave for the work that I've done in the fourth quarter. And it's not a huge undertaking at this point. I think I put in about 55 hours or something like that over the past 3 months on these kinds of projects. So it's not a huge undertaking, but it keeps me very tuned into issues around, particularly around succession planning. And so that's most of the work that I'm doing, is working with his succession planning clients.

Michael: Interesting. And what sorts of issues? Like, are there common themes you're seeing these days around succession planning?

Tim: All the stuff that we've been talking about. The distinction between management and ownership, coming to grips with the psychological issues around these transitions, coming up with literally negotiated approaches between sellers and buyers about how these things will proceed. Obviously, I don't want to mention any client names in this regard.

Michael: Sure, sure. Yes.

Tim: But that's the kind of stuff that we're doing.

Tim's Advice For Young Advisors [1:43:20]

Michael: Okay, very interesting. So as you look at the landscape overall, you know, I'm curious your thoughts for advisors coming in today. You know, you've had I think a fascinating perspective on the industry over several decades. As you've noted, you know, there's a lot about today's environments that's changed from even where it was when you started Kochis Fitz. And I know you were at Deloitte and Bank of America and Continental before that. So as you look at the landscape today, like, what's your advice for young advisors today, or I'll even just say newer advisors in general because some come in as career changers?

Tim: Well, I get asked that question a lot, Michael. Many people call me out of the blue and say, "Can I, you know, buy you a cup of coffee," or, "Can I come by and talk with you for a little bit about career choices?" So I talk to a lot of people in their 20s or career changers in their 30s and 40s who ask me about wanting to, you know, reap the benefit of what perspective I can give them.

And I tell them all the same thing. And that is this is a great career and a great business to be in. The business is not going to go away. There will, notwithstanding the differences in how it's delivered and the advent of…we could spend an hour talking about robo-advice and what all that means. But notwithstanding the technological innovations that are occurring and will continue to occur, the business of providing personal financial advice and giving people the benefit of intelligent, durable, and perseverant investment management will never go away. And advisors and practitioners will simply have to be adept at using the newest tools and the newest technology to accomplish that. But the need is not going to go away. And so, from a business standpoint, from a career choice standpoint, it's an excellent career to choose because it's not going to obsolesce.

And from the standpoint of the psychic rewards, this is a wonderful business to be in because to do it well, if you're really committed to it, you have to know a lot about a lot of different things and how to put them together. You are not a specialist so much as you are a generalist about anything having to do with people and money, which requires you to know an awful lot. And so the professional gratification that comes from becoming a master at all of those things and the interrelationships is something that you're not easily going to find in too many other places.

And then finally, maybe not finally, next to finally is that this has got great psychic rewards from the standpoint of the personal relationships. This has been a consistent theme through this conversation over the past couple of hours, is how important those personal relationships are. You help people get to where they want to go, and they recognize that they're getting there because of work that you're doing. They give you so much positive feedback. You can take so much pride in your work from doing what we do in personal financial planning and wealth management that, again, there aren't many other careers that have the same kind of psychic rewards as this does. And then finally, maybe not very importantly, you can make a very good living doing this. A lot of people have.

Michael: Yep, certainly it doesn't hurt. That's a nice bonus on top of the rest.

Tim: Right.

Michael: So as we wrap up, you know, this is a podcast about success, and one of the things we always talk about with guests is just what that word means. Because it means different things to different people, sometimes different things to us at different stages in our own lives and careers. And so as someone who's I think certainly objectively has built what, and I think everyone would call a very successful business, I'm curious at your own personal level now as you look forward, how do you define success?

Tim: Oh, that's an excellent question. I think, again, I've been a very fortunate person. I've been very lucky in many, many respects. And I cherish that luck, but I can't take any credit for it. So the kinds of things that one could look forward to and be able to take credit for is to continue to earn the respect of your peers and the respect and affection of the people who you do professional services for, whatever that is. And so that imposes on me or anyone, I think, an obligation to continue to do your best, whatever that is. And so that's what motivates me, is the desire to continue to do whatever it is that I do well, and recognizing that I've been very lucky, and I am acknowledged as someone who's been pretty good at this and has become successful.

And I guess my fear is, maybe two. One is failing to do that, somehow, or becoming irrelevant or fading into obscurity. So I think for me, the future success will be never fading into obscurity. I hope that I'm still active and involved and respected till the day I die.

Michael: Well, I'm thankful we'll have your continued involvement for many years to come. You know, I've, again, admired your work and the firm that you built for a long time and love now what you're doing with Philip Palaveev and with Dave DeVoe. So I'm thankful and thrilled we'll have your contribution to the profession for many years to come.

Tim: Well, thank you, Michael. You are one of the outstanding people within this profession. We're all very fortunate to have you, and it's a real pleasure to call you and an honor to call you a friend. So thank you very much.

Michael: Likewise. Thank you, my friend.