Kitces & Carl Ep 149: Do You Really Need A Business Partner… Or A Study Group?

***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.

Show Notes

• Nifty Advisor Support
• "Sticky Honey Bear" scene from Silicon Valley

Kitces & Carl Transcript

Michael: Well, good afternoon, Carl.

Carl: Hello, Michael. I think it's actually evening probably, don't you think?

Michael: It depends on your time zone. It could actually be...

Carl: And your perspective.

Michael: It could be morning, depending on where you are downloading and listening to this podcast.

Carl: That's right. Good morning, good afternoon, good evening.

Michael: We are equal opportunity time zones. I think there are truly...this gets picked up basically around the world now. Like, I know we have folks in Europe who listen, in South Africa who listen, in Australia, England who listen. So it might even be good tomorrow, depending on which timezone you're on.

Carl: Exactly. What are we talking about?

Why So Many Advisors Seek Business Partners When Launching Their Firm [00:53]

Michael: So I am really interested in your thoughts on something that I've seen crop up a couple of times lately. And I don't know, I'm trying to figure out if this is just me being crotchety about something or not. So you can agree with me and validate me or otherwise. So I've had this conversation with a couple of different advisors lately. So I'll just use 1 in particular … reasonably anonymized.

So Jay is getting ready to launch a firm and go out on his own. So he's been doing it in an employee environment for many years, has gotten to the point where he's ready to do this on his own, has a sense of who he's going to serve and how he wants to serve them, and a decent base of clients that he believes will come with him and navigate non-solicits appropriately. But he's understandably a little freaked out since he's been doing this 10-plus years in the employee channel and never actually hung his own shingle before. And so...

Carl: What do the kids say now? So he's feeling a certain way?

Michael: Sure, if that's what the "kids" are saying now. He's feeling a certain way. And so because it's scary to launch and a lot of costs that he has to absorb, he's an in-persony guy. So there's going to be rent, office space, someone to handle and support on paperwork because he's going to be coming with a decent chunk of clients.

He has decided in this launch that he's going to try to convince his friend Matthew to come along. So Matthew is another advisor in the organization that he's known for many years. I like Matthew, I trust Matthew. I think his head's in the right place, his heart's in the right place. Not exactly the same. Matthew's a little bit more of an investment guy, Jay's a hardcore financial planning guy. So they're not quite the same in their styles in coming into the business, but it's like we can share expenses. I just fundamentally trust the guy.

And so he had come to me to say, "What do you think?" To which my first and gut response in hearing this was, "I don't think you need a business partner, I just think you need some friends to commiserate with you on the scariness of this journey. I don't want to belittle how hard it is to do a launch, any business transition."

But when I started asking him, "Why do you really need a business partner on this?" He was like, "Well, we're going to split office space." I'm like, "Cool, but I'll bet you there's a Regis in your area that probably has 12 financial advisors that just take down fractional office space for the time that they need it." He's like, "Well, I'm going to split my admin staff." It's like, "How many clients do you have?" "Well, probably 100 that are going to come with me." Like, "You're going to need 1 admin staff for just you. There's no sharing, you're going to need 1 for all your clients. You need a full-timer just for you if you're going to go down this road."

As we started going down the list, it was a lot of either you're going to need a person to do that, or there are a lot of fractional solutions out there to do this. Like, "I want someone to help me with compliance." Cool, hire a compliance coach. There's a lot of them out there and they're really good at what they do. And Jay has a healthy amount of revenue. I don't know exactly what his numbers were, but many hundreds of thousands of dollars of revenue. So this isn't the, "I'm starting from scratch. There's just no, no money to spend." He's got some financial wherewithal.

And so I was just reflecting. I feel like I've heard this conversation a number of times lately, and frankly, talked to a lot of advisors at the other end of this, which are firms that are breaking up and unwinding partnerships because they launched together and grew apart. And sometimes it's like, well, I'm not sure how together you actually were in the first place. You didn't grow apart, you were never the same. You were building 2 separate practices under 1 umbrella from day 1.

And I keep hearing these stories and thinking like this sounds like a great opportunity for you to start a study group with other advisors maybe who are launching back. If Matthew wants to go out and start his own firm, make a study group with them, do weekly calls with your study group so you can all talk through all the crazy stuff that you're dealing with and navigating and sorting out and have some friends in the trenches with you. But you don't have to make them a 50% equity owner in the enterprise that you're going to have shared ownership with because that gets a lot messier really quickly.

Carl: Yeah. Yeah, look, I totally agree. And first, just deep empathy for feeling a certain way. When you're getting ready to do this, that can be scary. And second, a joke, and then 3rd, a question. I remember asking the same question years ago, and I can't remember who told me, it feels like my father-in-law said, "The fastest way to sink is on a partnership." It was really, really bad. Really bad. And that's not always true, of course.

But in the scenario you're setting up, I think the 3rd thing I would say is just a question. It's been really, really helpful to me, which is... And I think this is really helpful with clients. It's, what are you solving for? Right? So that's the question I'd ask Jay, what are you solving for? Get really clear about that because as you went through the list of things...

And it's hard actually to get really clear about it because you're going to tell yourself all sorts of stories. And those stories are not made-up lies. They're not. They're literally just we have a hard time getting clear, and you watch clients do this all the time, it's so much easier to see in other people's behavior than your own, of course, that you can see like, wait, wait, wait, let's back up. And then when you help somebody back up a little bit and they're like, "Oh, yeah, of course. Okay, shared office space, great. There's not one bit of that that involves equity sharing," right? Like, "Let's rent an office."

Michael: Yeah, you make your equity and they make their equity and you can see if you can get co-signing on the lease if you really want to go down that.

Carl: Yeah. A buddy of mine and I, we shared an office space. The businesses were completely different. So you just get really clear about what you're solving for, and I think at the end of the day, you're probably in the conversations I've had because I've had this exact same conversation. Like, "Are you sure you want to be..." And again, I want to be careful of my own bias. I just want to admit it out loud here. I'm not a very good partner in terms of...I've got all sorts of fancy feelings about how I want things done and those don't always equate into equity, especially 50/50 equity, but they equate into lots of other arrangements that are mutually beneficial economically to everyone that feel and act like equity and everybody participates, but not equity.

And so I have that bias, but that bias aside, when I have these conversations with people, it often feels like what we're solving for is a friend, a buddy in a foxhole, that feeling. And so once you know that, to me, that's the main key, is once you know what I'm solving for is this is scary. There's a million ways to solve that problem that will be far less entangled and expensive and painful. There's therapy, there's study groups, there's literally a launching mastermind group. You could create your own, like, "Hey, creating a group. We're going to be together for, let's just say 6 months because we're all doing a thing," whatever.

But I think you've appropriately nailed it. You just go through the reasons until you settle on "Oh, you know what, it turns out this is what I was solving for." And with clients, you think the same thing. So you're like, "Oh, what's the value or the thing I'm solving for?" And it could be you get down to it and the thing you're solving for is let's just say friendship in retirement. Well, then you can start asking the question of, okay, what's the optimal way to optimize for that thing? So if you're solving for I'm scared, oh, that's a different discussion. And there's lots of ways.

So then you can start thinking about what's the optimal way to solve that. And then that becomes... We often just get so far down the decision-making tree, we're out in the branches waving and we're like, "It's this." And it just takes a few minutes with somebody to walk you back in, off the branch, back to a bigger branch, back to the trunk, maybe back to the roots, and then you go, "Oh, things aren't shaking so much out here. What is it that I'm really trying to solve for?" So that's how I would view it. So the question, what are you solving for?

Alternative (Cheaper) Options To A Business Partner As A Financial Advisor [11:01]

Michael: Yeah, I really like, Carl, how you frame that. Because when I... Just think back over the years of all the times I've had some version of this conversation. I find, at least my experience, it almost always comes down to 1 of 4 that I can think of. Well, actually I guess 1 of 5. I'll come back to the 5th. So I just want someone to split costs with. Stuff's expensive. If Jay has not been the business owner who had to write the checks and make payroll before... So when you go from whatever numbers are, percentage payouts too, you get 100% of the revenue but you have to write 100% of the checks. And you see the size of the checks the first time that you're writing. The math can add up. It's still really scary when you start writing checks that big and you have to get comfortable writing those checks.

But I find I think particularly in today's world there's fractional everything now. You don't have to get an admin and split it with someone. You call a Nifty Advisor Support and Michelle Wong gets you a part-time VA. You don't want to split the whole office space. Just find a Regis, I was going to say WeWork, not so many anymore. Find a shared office coworking space. There's a lot that are very nice, high-quality, professional-looking spaces, and you can work there.

For some advisors, I find it's just something I feel like... I feel like we need to look like a bigger firm. It feels weird when people are going to come to Kitces Financial Planning because it's Kitces and I'm the whole firm. It feels awkward, particularly if you're coming out from a larger firm that has a big national brand.

But I find even in that context, okay, find a corporate RIA to attach to, work with a TAMP platform. A lot of advisors just leverage their custodian, right? You're working with me individually, but your money is at Schwab or Fidelity. They have 4,722 branches across the country, whatever it is, I don't know their numbers. You can walk into any street corner in America and cut me off and have access to your money anytime you want.

Carl: Let's pause real quick because I just want to comment on each one of these as you go because I think this is a great way to do it. One, things are expensive. I think you've nailed one piece of it. The other piece is it's just a mindset shift of back yourself a bit. I think you're making it as...I love...and I can't remember the exact details, but Jordan started signing 1 and 2-year deals near the end of his career. And I love the 1 year. And that was largely a, "I'm going to back myself. I'm a free agent and my value is going to be more next year."

And I think so that idea of just all of what you said, expenses are lower, and back yourself. Think of this as an investment. You're not just going to give up equity. If you were making an...if you were a venture capitalist or you were building a tech firm, you would be very careful about who you give equity to, right? And you'd want to...equitably. You'd only want to exchange that for somebody who was demonstrating value. Now, capital's cheap. You probably have your own. If you don't have your own, you can borrow it pretty cheaply. So it's just back yourself. And then the second one, the idea of the big...

Michael: Things look bigger. Yeah.

Carl: Yeah, things look bigger. Honestly, I feel that one because I went through it and it's so interesting on the other side of it. You start to realize that's really just in our heads, especially when you help somebody understand that their money's not at Kitces Financial Planning. Their money's at insert custodian's name, and that last statement.

Michael: It's like large national custodian with a bajillion dollars and only does this…

Carl: Yeah, and with 1 phone call you've... I just think that alone, and then I think the rest is mindset. The rest is like I don't think people care as much as we think they care unless we look like they should care. So both of those mindset shifts I think.

Michael: So the 3rd one that I see crop up is, it's like someone to share the work. Someone else is... It's a lot of stuff to launch. I want someone to share the work. And again, I get it. I certainly have a lot of sympathy for, is someone trying to process through all the things that you have to do and manage when you're going to hang your own shingle. But particularly folks in situations like Jay, where I'm moving with clients, I'm moving with revenue, $50,000 admin staff is a lot cheaper than 50% equity. If you're going to do 50-something, $50 grand is a lot better than 50%.

Carl: Yeah. And again...

Michael: Maybe it's a little more or less expensive depending on your geography and cost of living. You don't have to do it all on your own. You're a business owner with revenue. Spend a portion of your revenue to get help. It's totally normal for advisory firms to spend 30% to 40% of their revenue on admin staff and overhead support. So if you're not spending that much, you might be underinvesting.

Carl: Totally. And I think there's another type of 'a loan' that we're all increasingly afraid of, which is real. It's lonely. And that is a real thing. Trying to solve that with equity is like trying to make orange juice with a hammer.

Michael: That's so good.

Carl: Right? No premeditation on that one. It's just the wrong tool for the job, right? There's plenty of ways to gain a greater sense of connection and community than giving up equity in your business.

Michael: I feel like a lot of these come down to so many of us have lived some version of the brokerage world at some point in our careers. Yeah, we're not really equity partners. Your book's your book, my book's my book. You get your revenue, I get my revenue. We call ourselves partners, but we're not, I think sometimes with the idea that therefore it's not a big deal if we're mostly running different businesses under the same umbrella. You'll get your revenue and I'll get my revenue.

But the challenge I find that still crops up is it's easy to allocate the revenue. My clients are my clients, your clients are your clients. It's not so easy to allocate the costs. It starts with, "Let's split it together," and then after a year, it's, "Well, you come into the 5 days a week because you're a 5-day-a-week office guy. I really only come in 1 or 2 days a week. So I really like working from my home office. So I don't know why we're splitting the office space 50/50 because we don't really use it evenly. You should pay 60% and I'm only going to pay 40%."

And the other person's like, "Well, but you use all this planning software stuff. I'm really mostly investment-focused. I basically wouldn't even use the planning software if you didn't buy it. So I think you should have to pay all the planning software. If you're going to pay less in rent and we're going to carve this up by usage, then, okay, you can pay less of the rent, but you got to pay more of the financial planning software and the Holistiplan, the Income Lab, because I'm not using those."

And you start going down the list as everyone's trying to be "fair." And it is fair. If we each take our own respective revenue, we should each take our own respective cost. Except if you're really going to precisely split every cost down to usage, you may as well just hire someone fractionally where you pay by the usage because you're going back to the same model, except if I go to a fractional service and I say I need 8 hours a week, they bill me for 8 hours. If I've got a business partner that we split 50/50 but not really because we're splitting based on usage, I have to haggle and argue about who used how much and what percentage of what.

Just that's what I see in practice when I talk to the folks who are in partnerships that are breaking up. That's almost always what it comes down to is we grew for a while, we grew in different directions, we don't really use the same stuff. We're having a lot of arguments now about who should pay what percentage of each. We're good friends, we've been there together a long time, so we're trying not to make this ugly, but it's a constant point of friction that we can't really agree on how to carve up the costs. And it's because you weren't really partners together in the first place, just you basically become each other's fractional leasing service anyways, except it's harder to do that with a business partner than it is just pay someone who does that for a living.

Carl: Yeah, totally. And I think it's hard to warn humans of those lessons when you're really focused. You've got a story in your head. Like, "I don't really care about your warning signs. It's all going to be fine." I think it's smart to just consider all that stuff. Especially again, what are you solving for? Right?

Solving For Fear Of 'Going At It Alone' By Seeking Out Advisors Launching At The Same Time [21:00]

Carl: So yeah, that's number 3. What's number 4? Or was that number 4?

Michael: I'm just freaking scared to go out on my own. And what did you say? I want a buddy in the foxhole. Totally true, totally valid. Frankly, a lot of advisors, my gut is a lot of the first 3 are really rationalizations because it's the 4th. It's really the 4th. It's just terrifying if you've never been out on your own to go out on your own and start a business and do the entrepreneurship thing. And it's just a lot less scary when there's someone in there with you.

Carl: For sure. Again, right? So if we got down to that spot where we're like, "Okay, you know what, that's the truth," then we get to ask some really fun questions like, okay, if that's what we're solving for, what's the best tool for that job? And that could lead you back to a partnership. It could lead you back to an equity partner, and that's fine. But it could also lead you to... I would suggest that there's probably better tools. And we've gone over a number of them, study groups, a friend.

Actually, I found this exact same thing with creative brainstorming sessions, for instance, where I needed them but my team, I kept noticing it, kept causing problems for them. So I just got a group of other business owners that wanted to isolate their team from their problems too, and we became each other's brainstorming partners. And it was really, really good because it saved the team. So I just think that is another example of, okay, what were you solving for? Carl needs creative time. Is there a better tool than taking up the team's time? Well, it's just 90 minutes of the team's time. No, it's not.

Michael: No, because they find your ideas stressful because they're visioning what they're going to have to do to implement them.

Carl: All the downstream, yeah. All you have to do is google "The Bear Is Sticky With Honey" and watch that little segment. You'll see what I mean. But my point is, that's another example of saying, "What are you solving for?" Carl needs creative time. Okay, is there a better way to get it? If you're scared and nervous and you can just be honest with yourself about that, then you can say, "Okay, what's the best tool for that job?" Then there's all sorts of it.

I actually think if we could really get down to this, that fear is deeply rooted in just reasonably so, fear of failure, fear of ruin, fear of ridicule, all the same fears that we have about writing a book or doing anything. And that is a different problem, right? Closer to meditation, mindfulness therapy, that kind of thing. Or at the very least, a group of people that can act as a sounding board that share a similar problem.

Michael: Who are going through it as well. Basically from its start at XY Planning Network, we've always put advisors who are launching. We seem to like launcher groups, just into study groups or the cohort of other people who are launching about the same time as you are, because everybody's going through it together. And everybody's path is a little bit different, but it mostly rhymes, because just a lot of it is the things that we all go through as we're launching and getting going.

And so I hear a lot of advisors are often asking just, how do I make a study group? How do I find a study group? It can be as simple and straightforward as whatever platform you're joining, right? We do an XYPN. If you're going on Schwab, if you're attaching to a TAMP, just ask them who else is launching around when you are and if you could have their name and contact information.

And if you're this scared, I can pretty much guarantee you almost everybody else is too. And if you reach out and say, "What do you think if we formed a mastermind group where we just go through this together and we can be each other's sounding boards and we'll come together?" Heck, a lot of groups I know that do this when they're in launch phase, they'll spend an hour every Monday morning for a year just having a place to go to vent, to feel a little support, to be able to at least say, "I'm having a good week. Let me help you out this week since you were really helpful for me when I was in a bad place last week."

Just talk to your platform to find out who else is launching around when you are. It can be that straightforward. There are some fancier ways to make study groups with more framework around it, but it can be that straightforward.

Carl: Yeah, totally.

What To Look For In A Good Business Partner [25:51]

Michael: Now, I do feel compelled to note. When I look at reasons why I hear people want to launch something with a business partner. I said there's 4/5 that I hear. So I want to split costs. We need to look bigger. I want someone to share the work with. It's scary to be alone, so I want someone in the foxhole with me.

And the 5th is we've been talking about this and I feel like I found my kindred spirit. And the more we talk, the more excited we get about this thing that we could create together. And that's the good version partnership. Go do that. I'm excited to build something with someone with whom I have shared vision, right? Jay and Matthew didn't really have shared vision about anything. They served their clients differently with a different model and a different style and different focus on planning versus investments, which means they used different tools and software and neither had any particular interest in doing like the other person. They just wanted to split costs and look bigger and share the work and not be alone.

But sometimes you have this conversation. It's like, I think we can truly make something bigger and better together because we have this shared vision of what we're creating together. And I come to this as someone who has made multiple businesses with multiple partners over the year. Almost all the businesses I've been involved with have had 1 or more business partners. And I've done it with multiple business partners over the years.

And it always starts with a shared vision of we have this thing that we think we can create and we think we can make it bigger and better and more successful by doing it together because we're literally in it together to build a thing together. Not because we're building our own things and sharing the overhead, but we're literally sharing a vision to co-create something together. And those are the partnerships I find that tend to work.

There are still some hazards. Sometimes our goals change and situations change over time, but when you're starting with shared vision, that's very different than, I just want to split the costs. We're trying to look bigger externally. I just want someone to share the work with. It's scary to be alone. This is all like, no, I think we're literally creating something together that we couldn't create on our own.

So if that's where you are, you don't need a study group as a sounding board and folks to commiserate and provide support. You need a business partner to go co-create that thing together. So I want to be clear. I feel like we spent most of the episode basically bashing business partnerships. What was it you said? The worst sinking ship is a partnership.

Carl: The fastest way to sink is on a partnership.

Michael: The fastest way to sink is on partnership. So I'm actually very, very much bullish and a fan of partnerships. It's how I built most of my businesses. But it's not for any of the reasons I commonly hear advisors looking at partnerships. It's all because several people started talking about a thing and realized that they were excited to create this thing together because there was a shared vision of what could be created that just takes more people to create than what any one of us could do on our own.

Carl: Totally. Yeah, I agree with that, for sure. And for those of you who are still hesitant about that, I think we have a shared vision. Just remember you don't have...there is no rule about how fast you have to move on these things. There's lots of experiments. Hey, let's do a project together. Hey, let's... There's lots of experiments while retaining the free option of not forming a formal partnership.

And then at a certain point, there's probably a time when you'll know or not know. And you shouldn't be nervous about that. As you rightly point out, it comes with... And you'd be much more able to speak on it than I would, but from my experience, and watching others' experience, it comes with a different set of trade-offs and you just need to be aware of those.

Michael: Amen. Thank you, Carl.

Carl: Amen, Michael. Cheers. Thank you.

Michael: Thank you.