#FA Success Ep 248: Scaling Diamond Teams Profitably By Charging Separate Planning Fees, With J.D. Bruce

Resources Featured In This Episode:

• J.D. Bruce
• Abacus Wealth
• BLatinX Internships
• Angie Herbers
• Diamond Teams
• XY Planning Network

Full Transcript:

Michael: Welcome, J.D. Bruce to the "Financial Advisor Success" podcast.

J.D.: I am honored to be here. Thank you for inviting me.

Michael: I'm really looking forward to the discussion today and talking about what it's like to live in a world of a...I'll just say a very large advisory firm. I know your firm has now grown to north of $4 billion of assets under management up from "just" $1 billion not that many years ago. And there's all this challenge that comes from how do you actually start scaling up an advice firm, like systematically building out, "Okay, we're going to add another 100 clients, we need another advisor, another 100 clients, we need another advisor, if we add another 100 clients," and on and on down the path. And I feel like we talk a lot in the industry about the challenges of scaling advice firms, the difficulties of scaling advice, and yet, it seems that you guys have gone down a road of kind of figuring out how to do this and how to solve for some of the human capital challenges of just hiring and developing advisors to be able to do that. And so, I'm looking forward to the discussion of how do you actually go about scaling up advice in a four-plus-billion-dollar advisory firm?

J.D.: Oh, I'm looking forward to that too. Are you going to tell me all the secrets?

Michael: I'm hoping we'll glean a few. We'll take all the pain points that have come and just say, "Everybody, do the opposite of that," and then we've all learned something.

J.D.: Exactly. All right. Well, how do you want to start?

What Abacus Wealth Looks Like Today And What They Do For Their Clients [04:27]

Michael: So, I think to kick-off, just paint the picture for us a little bit more of Abacus Wealth as it exists today, just the overall advisory firm, the size, who you do, what you do it for, the team that does it?

J.D.: Sure. So, let's see, Abacus, we are closing in...we're probably close to 80 people. Or will be by the end of the year, I can't keep track, we keep hiring. And of those, we have about 10 advisory teams we operate on the Diamond Team model. And I think a lot of our success, I can lay into my good fortune to have met Angie Herbers back in 2013 and have gotten advice from her and have followed that advice and had faith that it would work out because, in many ways, that's a lot of our secret is that we pick the right organizational structure to create that kind of capacity that allowed us to grow. As you mentioned, we are managing around a little over $4 billion in assets, although we don't really use assets as a metric internally, we are focused on revenue. And a lot of that is because we have a lot of clients who don't have a lot of assets with us or have no assets with us.

And we launched our financial planning-only service where people can actually just pay us for financial planning back at the beginning of 2014, right about when XYPN started. And we had been testing it for about five years before that, just with different configurations, different price points. And so, when we think of our client base, we have a really interesting mix. And when people ask us what our average is, my first response is, "Well, average is a lie," because that's not how we operate our business. We have really three distinct styles of clients and we really have a different service model for each one. And we can talk more about kind of what we call those and what they're like in a minute. But we have clients who pay us a couple of thousand dollars a year and we have clients who pay us a couple of hundred thousand dollars a year.

So, I would hazard a guess that we're among the most broad in our service line in terms of the kinds of clients that we work with. We do cut off, we don't really have a multifamily office. So, I think the wealthiest of the group are people that we don't go after, although we definitely have clients who you would consider family office size, but that's not an area that we focus on. And one of the things that we really focus on is the integration of a client's values in with their financial life. And I'm not a big believer in having a niche at Abacus, I think we've kind of gone the opposite way and said, "We want to be a resource for anyone who wants to work with us, provided that they're interested in looking at their values and how that their financial life reflects those values."

Michael: You mean kind of like a niche?

J.D.: Yeah, except that's like saying that working with women is a niche and I don't believe that is a niche because half the population is women. And I believe that the willingness and the interest in having your whole life be integrated with your values isn't a niche. And ultimately, it's an awakening that anyone having that experience of feeling like their whole life reflects their most closely held values, that's not a limited population, that's everyone. It's an understanding that it's possible and that it doesn't ultimately cost you more than you're willing to spend on having that experience if that makes sense. So, yeah, you could call it a niche but ultimately, I think anyone who has that experience becomes part of that niche or anyone who's awakened to the idea that it's possible and not too expensive or it doesn't cost them something that they don't want to pay would end up becoming part of that niche.

Michael: And so, how do you frame...just help us understand a little bit more, what does that mean in practice? What do you do? Or what is it that makes the advice offering unique for clients that are looking at this intersection of values and finance? I think a lot of advisors say like, "Yeah, we do goals-based planning where we gather information about our client's hopes, dreams, goals, and wishes and what's important to them. And then we craft a plan that's customized to their individual circumstances and that's going to have an expression of their values and preferences." I'm guessing what you're doing is still something different than that but help us understand further, what is the difference between what you're talking about and the advisor who says, "We create customized individualized plans for all of our clients’ goals and values as well?"

J.D.: Yeah, for sure. And fundamentally, I don't think it's different, I think it's a different way of approaching the conversation. And I think mostly from a client perspective, they may not notice the difference other than in very subtle ways, but we noticed the differences in advisors pretty significantly. And what's different about it is that we're approaching what's currently true as opposed to what a client wants to be true. And when I think of a client's goals, I'm thinking about something that they want more of in the future. This is something they don't have that they ultimately want, otherwise, what's the goal? Right? And we don't approach the conversation with our clients as a, "What do you want in life?"

The first thing we ask is, "What do you care about? What's in your life today that you really value? What's something you want more of in your life because you value it?" And it's not, "Oh, I want to have a second home." Because if a client told me, "Hey, one of my goals is to have a vacation home," some advisors would say, "Okay, cool, how much? How much do you want to spend? Where is it?" Right? And they start asking about the ultimate reason or the ultimate kind of vision for what that looks like. And it could be anything, anything that's future-focused, "I want to retire at 65," "Okay, cool, I'll put that into the system." That, for me, is always the beginning of the conversation. If I have a client who says, "I want a vacation home," I said, "Why? What's important about a vacation home?"

"Well, when I grew up, I always went off with my family to this place up in the mountains and it was a really positive experience for me." "Okay, so you want to recreate that?" "Well, not really, because my family is whatever." And I said, "So, what is it you want to experience? Is it the concentrated time with your family? Is it just more time with your family? Is it that you want to be remembered by your family when they're your age because that experience you gave them was important?" Because once I understand that underlying value, what it is that they care about most, sometimes the expression of those values isn't the right one.

And it's easy for me if someone says, "Hey, I want to buy a vacation home," I can say, "Well, from a financial standpoint, that may be really limiting for you, it may be expensive, it may concentrate you in real estate, do you really want to do that when you can just rent a place and then you can go to a bunch of different places?" I'm not meeting the client where they are, I'm not actually understanding their values in that moment. And if I can understand that what they really want is to be remembered by their family, that they want to have their descendants have the same feelings about them that they do about their ancestors, right? Then, that's going to apply in every aspect of that person's life.

We define goals as values someone wants to live more of in the future. And I don't ever ask my clients what they want in the future until long into the relationship because I want to start understanding, "What do you care about today?" And the number of people that I have walked into my office and I asked them that question, "What do you really care about?" Their eyes get big and they go silent for a long time, which is awkward for me but not for them because they're actually thinking and I'm just waiting.

And the number of times I've heard, "No one's ever asked me that before," and then I kind of tear up a little bit because that's sad for me when I realized that no one's ever asked that person what they really truly care about in a business setting. Maybe their spouse has, maybe their friends have, but probably not because I think my spouse assumes that she knows what I care about and my friends assume they know what I care about. When was the last time one of your good friends said, "Hey, what do you really care about?" It doesn't happen very often.

Michael: And so, planning for you is essentially focused and built around these conversations and targeted for just clients who want to have these conversations, who are ready to have these conversations, who are looking to make these conversations part of their lives.

J.D.: Yeah. And don't get me wrong, I have plenty of clients who come to me or who respond to those questions in a very neutral way. Like, "What do you really care about?" "Well, I really like my family and I want to work less, I want freedom, and that's what's important to me." Okay, and I start digging in and they just not that in, right? They're like, "Yeah, this is cool and all, I like this conversation, I love that you're trying to get to know me better. But I really want to talk about getting my will done for my kids because that's what's scaring me today."

And that's fine because not everyone wants to sit around and crying in my office all the time, right? I do, that for me is the fun part. But I recognize that not every client is in for it and not every couple or both people are in for it, right? One of them might be super in and the other is like, "Okay, this is cool and all, but can we get to the brass tacks? I want to know when can I retire? Just tell me when I can stop working because I'm tired and that's really all I care about." And that's fine and we can work there knowing that eventually, that stuff will come out too.

Michael: And so, it's not necessarily a requirement, per se, like, "You must be ready to have these conversations in order to be working with us at the firm?"

J.D.: Oh, no, definitely not at all. We have clients who think it's dumb. They don't tend to work with me, but we have advisors who are less on one side of that spectrum than the other, right? Not all of our advisors are sitting here hungry for those conversations where everyone bursts into tears. Again, I am, but I think I'm pretty far on one side of that spectrum and we have advisors who were on the other side who are like, "Yeah, okay, this is cool." And they do it and they can work with clients in that way and we all go through lots of different kinds of psychological and emotional intelligence training and all that stuff to be able to have those conversations, but it's not always comfortable for them, right? Not all of our advisors are super excited by that kind of client. And so, the kinds of clients who aren't that into it tend to gravitate toward those people. We're all on a spectrum here, you know? And some days I'm really into it and some days, I'm like, "Can we just talk about your portfolio because I'm a little exhausted and don't have the urge to cry today?

How J.D. And Abacus Define Their Client Segments [15:17]

Michael: So, help us understand that a little bit more about the types of clients that you're working with. I think you said there's sort of three groupings of clients that you're working with.

J.D.: Sure. So, we've named...just like everything at Abacus, we have cute names for them. We like our kind of cute names and a very branded experience internally and externally. And we call our three client types, our Builders, our Protectors, and our Changemakers. You can probably intuit who they are just by the names if you're an advisor, it's not that complicated. And they tend to relate to the net worth of that client. It's very highly correlated, although it's not necessarily...that's not how we determine which one they are. So, Builders tend to be our smaller clients. They're the kind of clients you would expect to be focused on by most of the XYPN community. They're usually paying a planning fee and have less than $1 million in net worth and certainly less than $1 million in investable assets.

And the reason those are correlated is because these are the people...and the way we define a Builder, is someone who is coming to us knowing that they don't have enough for all of their needs, wants, and wishes, right? They have a more limited net worth or income or something. They are still in the process of building their life and building their financial life. And we define them as people who come in asking the one main question, "What do I need to do now so that I can be successful in the future? How do I set myself up for future success? How can I ultimately have enough?" They know they don't, they're very clear, "I don't have enough, I need more in order to achieve all the things I want to achieve."

And I have Builder clients who have a $10 million net worth, right? That's just not nearly enough for them and they're still not...they have no idea when they're going to be done or how much they ultimately are going to need. Our Protectors are your more traditional wealth management client, you can think of them as your pre-retirees. And their main question is, "Do I have enough?" They think they might, they think they might not, they're not sure, and the main thing that they want is certainty and then ultimately, to protect what they have. Because they do have something, they have something and they think it might be close to what they need in order to have all the things that they really value in life. And I think we all know how those are typically dealt with.

Those are the ones who really need the financial plan, those are the ones who need all those kind of logistics of that transition from having to work to work being optional. That's pretty well understood in this industry. Your Changemakers are the generally wealthy clients but not necessarily always super-wealthy. But they're walking in saying, "I have too much and I don't know what to do with what I don't need," "I'm not totally exactly sure with what I have, how much I need versus how much I don't need, but I know I have more than I need."

And those are where you get into conversations about philanthropy, about estate planning, about who's going to get what assets when they pass and are more likely to give away their wealth in their lifetime, especially once you can tell them exactly what they need, what exactly that critical capital amount is that they need to fund their lifestyle, their own personal hopes and wants and wishes for themselves. And then most of the conversation fades away from what they need and all the logistics because that stuff gets taken care of really quickly, right?

It's easy to do financial planning for people with lots of money about their own needs. "Okay, you don't need life insurance," do a little estate planning, get all that stuff kind of optimized is...I'm not saying it's easy or not time-consuming because it's sometimes both difficult and time-consuming. But conceptually, it has nothing to do with what they care about. What they care about is the other stuff, how are going to give to causes that they care about so that their life better reflects their values? Is it about their family? Is it about just wanting a greater lifestyle, wanting more luxury? And all three of those things are generally true for everyone, it's about the balance and then how that is expressed. A lot of our advisors really love working with those people because it's a very creative experience working with clients like that.

Michael: And so, I see clearly just that framework of distinctions of, "I don't have enough, how do I build it?" "I think I have enough, how do I protect it?" And, "I've got more than I need and I don't actually know what to do with all of this additional wealth that has found its way into my life."

J.D.: Right. And like I said, those are correlated to net worth pretty typically, like your Changemakers are typically above $5 million in net worth, your Protectors are generally between $1 and $5, your Builders are generally under $1 million, with lots of exceptions. You have lots of people who say, "I want to live on 30 grand a year, I have $2 million, which means I have way more than I need." "Cool, okay, well, let's talk about what you want to....how you want to leverage that extra money into whatever it is you want to see in the world."

How J.D. And Abacus Charge Their Clients [20:35]

Michael: So then, how does this work from a business model perspective? Do you end up with different business models, different offerings, different fee structures across these client types? Or is this just a recognition of, "Everybody is going to pay X percent of their portfolio, it's just we're going to have different kinds of conversations based on how their investable assets and net worth are scaling to our advisory fee?"

J.D.: We have slightly different expressions of our fee structure for each of those client types. It's essentially the same fee structure but it shows up in slightly different ways. When we first started working with Builders, we recognized, as I think you're aware, that you need to charge those people a financial planning fee on top of any assets you might be managing for them. Because if someone comes to you with $100,000 and you're charging them a percentage, even at 1%, you're not really covering what it takes to do a real comprehensive planning relationship, so you need to charge them more.

Michael: Is there a typical fee for what you guys charge for clients at that level?

J.D.: Yeah, we would charge...generally, I think, it's varied over the years. At one time, we were charging people as low as $100 a month. At this point, partially because of capacity, but we just can't afford to take on clients at too low of a revenue level, and right now, we're focusing on clients that pay us at least...sorry, $300 a month or $3,600 a year. I would love for that to go down again and it might as we figure out different ways of working with people.

Michael: And does everybody pay one set number? Or is there still some variability of like, "If you're more complex or higher income or you're a Builder but you're a higher net worth, your monthly fee is higher?"

J.D.: It's all individually priced, so not everyone pays the same fee. So, we look at the complication, we look at, "Okay, what do they actually need from us?" We did develop kind of a very complicated pricing spreadsheet that we use for a while to kind of judge, we'd pick which modules of financial planning that that person needs, and then we'd plug it into the calculator and it would kick out a fee. We used that for a while. I think it was a little bit like a training tool as opposed to an operational tool because once you understand a few different client types and what they generally come up with on that spreadsheet, you don't need to use it anymore. It's like an instruction manual, at some point, you just kind of have it memorized and you know how it's going to end up turning out.

Michael: Because it's like, "Okay, you're a young couple, you're high income, one of you is a business owner, you've got young kids," it's like, "Okay, this is basically going to be a $400 a month engagement because I know how many complexities come because you've got family, high income, small business owner, young kids."

J.D.: Absolutely. And we have...because we don't insist on managing assets so that we generally prefer to manage our client's assets, it's not a requirement, which means that sometimes we end up getting some clients that have unmanageable assets. So, you might have someone walking in with...they're the beneficiary of a trust that we can't manage, but they want someone who sits on their side because they don't totally trust their trustee or whatever reason. And they might pay us $20,000 or $30,000 a year in financial planning fees but we're not managing assets, which was one of the big benefits of working with Builders in the first place.

Because when we got good at pricing that kind of $200, $300, $400, up to like $600 a month of financial planning fee, it actually allowed us to understand what it costs to do financial planning without managing assets across our entire client base. So, after a few years of pricing Builders that way, we also do charge for whatever investments we manage with no minimum. So, if you're paying us for financial planning, you're paying $300 a month and you have $10,000 in dollars in an IRA, we will manage that and charge you 1% and then you pay your extra $100 a year or whatever.

Michael: I was going to say what is the fee schedule startup for you guys? Is that a 1% fee?

J.D.: Yeah, yeah, 1%. And quite honestly, some of that is because it's easy to do the math in your head, we could drop it to something else but then it becomes difficult to calculate. But that said, I do feel like, ultimately, the 1% asset management fee is going to end up being a dinosaur and will be gone at some point. And in recognition of that...

Michael: In lieu of what? What do you envision that moving to?

J.D.: I think it'll be a much lower percentage and everyone will pay for a financial planning fee if they're consuming those services, which is what we did with our Changemaker clients. We realized that the skill that we kind of earned by bringing on these smaller clients and pricing out all these retainer fees allowed us to translate that same activity into our largest clients. Because we noticed that especially for the highest net worth clients, the amount of work you have to do for a given person varies more than any other population. You'll have some clients with the $20 million net worth who basically you throw it into some mutual funds and walk away and they're fine. It's super easy. You have other ones where you're spending hundreds of hours a year on complicated estate planning. It really varies a lot.

And so, we realized that we could be more competitive if we were able to cut the percentage fee that we charged. So, now we charge a flat 0.5% for people over $5 million, and then we charge them at least a $20,000 financial planning fee. And what we realized when we said, "Okay, you can charge whatever financial planning fee seems appropriate for that client given the level of complication," and our spreadsheet worked for those clients as well, we have that calculator for them. And we realized that instead of it always coming in at $20,000, as you would expect with salespeople who might want to just get the client in at 50 basis points plus $20,000, we realized that our average financial planning fee for those clients was in the $30,000 range.

And it's because when you look to a given client, you're like, "Wow, you're paying 0.5% on the assets we're managing but your net worth is so big outside of those assets we are managing and your work complication is so much and your equity compensation is so much that we should be charging you $60,000 a year on top of that 0.5%." The client is like, "Okay, whatever it costs is what it costs," because we can provide that level of value. And that's actually been...we've been able to work with a variety of different higher net worth clients that would have been difficult to work with or we would have kind of resented working with because...or had to try and limit our hours on because of how much work they take.

And we were able to have a lower fee for some of the clients who have that level of net worth but who were super simple and just don't use us that often because their life isn't that complicated. We haven't been able to figure out the exact process for doing that with the Protectors yet for a variety of reasons around our fee schedule and just it being a lot more...we just haven't figured it out yet, but I think we will. At some point, I think our investment management fee will be 0.5% and we'll charge everyone a financial planning fee.

Michael: So, I'm struck by this that...if I just start out kind of at a $5 million client who's right over the line, 50 bps on that is $25,000, and then you went out with a $20,000 planning fee. So, sort of all in, you could actually be...call it just shy of 1%, right? If I calculate this relative to your assets, you're at about 95 basis points. But it's decompartmentalized or I guess it's compartmentalized into separate pieces. And so, I guess I'm just struck that that comes through as a competitive fee conversation when you say 50 bps AUM fee plus this minimum $20,000 planning fee, even though when I add it up, you're at 95 basis points for a $5 million client, which at least relative to a lot of firms, is certainly not the cheapest...

J.D.: We're never the cheapest.

Michael: So, just talk to me more about this dynamic of, "We compartmentalize our fee into pieces, it may add up to others, but it allowed us to be price competitive." I was struck by that juxtaposition.

J.D.: I'll tell you an interesting anecdote. And I was bringing on a $9 million client one time and she was working with another advisor and she was paying a standard 1% fee for some of her assets and different amounts for other ones. And she's not hugely sophisticated, right? She wasn't sitting there running the spreadsheets and doing the math here. So, I did it for her. I said, “Okay, this is everything you're paying all of your other advisors and your expenses on your mutual funds, here's what you'd be paying us."

And she looks at it and she's like, "Well, you're much cheaper," because we're charging 0.5% instead of 1% that she saw and kind of attached to those two numbers. And I said, "Well, if you look at the total math here, you're paying about the same for us as you are currently." She's like, "Yeah, no, you're cheaper." I said, "Well..." So, now I'm arguing with the client about how much more expensive I am than she thinks. So, I'm like, "Okay, well, see, this guy..."

Michael: "I charge more. Appreciate me, darn it."

J.D.: "This guy is charging you 1% over here but he's doing the financial planning for you inside of that fee you're paying. And I'm just charging you half that fee but that only covers the investments and then I'm charging this other amount for financial planning because we just charge separately for those two things." And then she said something that made me stop arguing. And it made me realize what kind of the psychology of paying the separate fees is. And she said, "Yeah, but he doesn't really do much for that fee."

And I realized that the amount that I'm charging her for that financial planning, she ascribes more value to the financial planning because she's paying for it. And we all know psychologically that's true, I've read countless studies and it's always in all the books and presentations or whatever that people value what they pay for. Now, of course, in that moment, I said, "Well, you don't know how much work I'm going to do for you yet." And then I realized I should just shut up because...

Michael: Here comes the point where you're really talking past the sale.

J.D.: Yeah, and I do that a lot and usually, I'm trying to talk people out of working with me, which for whatever reason makes them trust me more and I don't understand how brains work, apparently. So, it is what it is. But that experience really gave me a lot of confidence that this new way of working with people was going to work. And I think it really has, and I look forward to figuring out and doing that next level of the project where all of our clients are paying into that same structure because I think they'll appreciate it. It is more difficult for advisors and it's more difficult because you have to estimate a fee in advance, which is hard for some of our advisors to wrap their heads around.

They are worried about getting it wrong because they will. X percent of the time you get that wrong. And leading to the second part of why having this kind of fee structure is more difficult is the number of times you have to go back to a client and tell them that the fees are wrong and they need to be raised is more often than you do when you're charging a higher asset management fee and just letting it all kind of come out in the wash.

In reality, we try and come back to clients on both sides and tell the clients who are paying us too much that we need to lower their fee because they're not getting the right kind of value from it and we need to either lower it or take away the financial planning fee because we're not doing the work because the client isn't ready to do the work themselves. And it's probably not an equal number of times that we lower fees and raise fees, but both of them happen often enough that you really have to become adept at that conversation more emotionally than...

Michael: When they're not even, which one are you doing more?

J.D.: Raising fee is probably more. Because, in general, if we're doing our job right, our client's financial lives are getting more complicated because they're having more success. And that happens more often than we got it wrong and need to raise the fee. But in reality, the way most of our advisors work, if we're going to get it wrong, it's rare that we're overcharging, it's more often that we're undercharging because we don't want to over...we're sensitive to overcharging and not earning our keep. And so, some of our advisors, just by their nature, are going to undercharge more often than overcharge.

Michael: So, do you worry about that, I guess, particularly at just the size and the depth of the firm that you've got? I'm just imagining where leaving your advisors to their own devices to charge their own fees and having them persistently undercharge their fees writ large across...I think you said like 10 different advisor teams, it could actually end out leaving a rather significant amount of revenue on the table and have more challenge just running the firm profitably. Is it not that dramatic of an effect? Or is that actually a challenge you think about and worry about of, "What if too many of them discount too much?"

J.D.: Yeah, I wouldn't say that I don't worry about it but it isn't a very dramatic thing, it doesn't happen that often. We're pretty good at figuring it out. I mean, most advisors are. When you see a client walk in the door, they open their mouth and talk for about 10 minutes, you have a pretty good sense for what that relationship is going to look like. It's the experience, right? We have 2,000 clients roughly, a little under, whatever it is now. Our advisors know what they're doing. And they don't want to be unprofitable, which has other implications and issues around the firm in terms of taking on clients that are at the lower end.

But, yeah, it's not a problem that we see having a big effect. Mostly we get it right and when we get it wrong, we insist that we address it and we kind of turn into that skit and really have that conversation even if it's uncomfortable and if we notice a problem, then we fix it. And that's kind of part of our culture and even the advisors that are kind of the most uncomfortable with those conversations are down for it, just they have to do a little more meditation before the meeting than someone who feels really comfortable with it and they've done it 100 times.

Michael: So, then, talk to us some more about this...so I guess the last piece is what is the fee structure for the Protectors? It sounds like it's a more traditional AUM.

J.D.: Yeah, it's just AUM fee. And part of the reason it's complicated is we charge 1% on the first $3 million, then 0.75% on the next $2 million, and then it drops to 0.5%. And so, it was easy to translate those people over $5 million into a 0.5% plus a minimum of $20,000. Because if you are really fast at math and have done that in your head as I was talking, you realize that our fee schedule at $5 million, the standard AUM schedule that I just mentioned, the 1% on the first $3 million and then 75 basis points for the next two is exactly the same as 50 basis points plus $20,000, right? We didn't lose...

Michael: The blended fee comes out to be 95 bps.

J.D.: Exactly, right? It's the same thing. So, the people who are in that Protector space, who are maybe at like $3.5 million, I have to think about how do I translate their fee into 50 basis points plus a planning fee. And we have, whatever, 800 clients in that category, and to change all of their fees right away is a daunting task. And so, I know if I were starting fresh, I would start by charging 0.5% plus a negotiated planning fee for every client. Converting to that is a lot of work and that's why we haven't done it yet. We know what to do, it's just the amount of work it would take to actually convert is going to be a lot but we'll get there.

Michael: Because there's just so many different...you'll have the $4 million client who's actually got a super simple planning scenario and when you convert them, they may get a $10,000 discount on their fee. But then someone else is going to be $1 million client with a bunch of complexity and you're going to go to them and say like, "I basically have to double your fees." And you can get there, but that's a lot of work and conversations for what, in theory, on average is probably not even going to be a material revenue change.

Or just if you were materially undercharging your clients across the board, you probably would have raised the fee already. So, presumably, they're decently in line on average, which means it's a lot of work to change fees for what will probably not actually materially alter your revenue. You just do a whole bunch of work to get to the same revenue you had while you make some clients really happy with discounts and piss off others for a big fee increase, which makes it not very appealing to do that faster than you need to.

J.D.: Exactly. Yeah, you've nailed it exactly, that's the issue. It won't change our total revenue, it will confuse all of our clients who don't understand why we're doing it in the first place because fundamentally, it's more subconscious than conscious in terms of the benefits. And so, now you've confused a bunch of clients, didn't actually get any benefit from it, clients actually feel worse at the end and less safe. And so, it's hard. I think that's the future but that's one area where I'm hoping not to be on the bleeding edge. I generally like being on the bleeding edge of innovation. This is one that I'm okay kind of doing it when we have to as opposed to the other way around. We know how at least and that's the important part.

Michael: And so, it sounds like just as a really broad framework, you just kind of see this future world where the business model for investment management ends up being 50 bps relatively flat and planning fees add up to the rest where, I guess, as you noted, even in going from your Protectors to Changemakers, this isn't necessarily a lower fee world...

J.D.: No, it's the higher fee world.

Michael: Because your higher your planning fees are still at least supplanting your AUM fees possibly and then some because a lot of advisors actually charge a lot lower than 95 bps blended fee on a $5 million client. So, this isn't necessarily about a lower fee world. This is just about a world where the benchmark for the investment part comes out to be 50 bps and planning value adds will pick up all the rest of the fees.

J.D.: Yeah, and I think, as a result, you end up with a higher fee world and not a lower fee world because it allows you to price in all the work you're actually doing, which in general, I think most advisors do a portion of their work for free, that most advisors undercharge for the work that they do. Not every client, but on average across the whole population.

Michael: And just curious, where does 0.5% come from as this kind of benchmark number in your head? We have the infamous robo-advisors put a fee at 25 bps, Vanguard is charging 30 bps, there are some other platforms that have been charging 50 bps but even the robo world is sort of all over the place. So, I'm just wondering where does 50 bps comes from for you and is there a reason it's not graduated?

J.D.: The reason I don't like...I don't like graduated fee schedules, right? In general, philosophically, because it makes it hard for people to do math in their head. When I first joined Abacus, I joined a small division and we were charging like 90 basis points in the first $200,000 and then 75 basis points in the next $500,000. And I literally had...every time I talked to someone, I had to do the math to figure out what we charge. And I said, "You know what, we're going to change it to 1%." So, we raised all our fees for all of our clients and a lot of them just said, "Thank you because I had no idea how to figure out what I was paying you," even though now they're paying us like 10%, 20%, 30% more.

It feels dodgy when you give people a really complicated fee schedule, so I want everything to be simple in ways that a client can understand. So, generally, we're either charging 1% or 0.5%, anyone can do that math in their head. And I'm okay being expensive. I recognize we could probably charge...realistically, I think 0.5% is not going to be the commodity pricing for investment management, I think it'll be about 0.25% and I think that's what everyone will charge, eventually.

I'll be one of the last ones to go there probably because we feel like we're a luxury brand and present ourselves as a luxury brand. We're not going to be the 24 Hour Fitness, we're going to be the Equinox, we're going to be the CrossFit, right? We're going to be the one that has a community. And part of what we do to earn that is our values conversations and providing investments that match those values, which takes more work than just putting together a standard index fund portfolio.

Michael: Right. And just what do you say for that whole world of advisors and even some consumers and others that say like, "Okay, but you don't do twice the work for a $2 million portfolio than a $1 million, or $1 million than a half-million," wherever it is, up and down the line. The traditional industry response, I feel like, has been, "Well, that's why we have graduated fee schedules and these numbers, you get some breakpoints over time, so, no, you're not literally paying twice as much when your portfolio doubles and that's part of how we justify it." So, do you think we put too much weight into that? Are we too anxious about that?

J.D.: Probably too anxious about everything. But, yeah, I do feel like we put too much weight on that. It's about value creation, not about hours, right? As much as we are professionals in professional services. And historically, we judge professional services on an hourly rate but that's not really how we're providing value and I think the same is true for a lot of professional services. And I think whether it's an investment management fee or whatever, we're just trying to charge enough to cover the work we're doing. And as long as we have that financial planning fee incorporated, which is, essentially, if you are cynical about it, the financial planning fee is the plug for, "Okay, if investment management doesn't pay us enough for all the work we're doing, charge more and then we're getting paid the right amount."

And the people who really fall out of that are people who don't need anything, all they need is their money in the market, and those people shouldn't work with someone like Abacus. They should just put their money into a standard robo-advisor fund, they don't have questions and don't need help. Our services are for people who need their hand held and who want to have that relationship and they want to have their money person. They want to feel like they can...any time they have a question, they can call me, and regardless of anything else, that's a value too. So, yeah, I think we're too anxious about it.

How Abacus’ Clients Are Broken Down Across The Three Categories [42:47]

Michael: So, you said almost 2,000 clients, so how do clients break down across these categories?

J.D.: In headcount?

Michael: Yeah. Or how we look at it, I guess, there's one split by headcount and there's one split by revenue count, which is going to look different because Changemaker fees are a lot bigger than...

J.D.: Yeah, the average fees for those different three mixes are certainly, as you know, very different. I would say...I can tell you exactly because we track that stuff very closely. By headcount, it's about...now, we do have some clients who don't consume planning. So, inside that, it's about 1,900 clients right now. Inside that, about somewhere over 500, almost 600 are clients who are only paying for investment management or institutions that we do not provide planning services to. Some of those are from a legacy business where we did that where we just had an investment-only offering, we don't really take new clients on there.

So, taking those out, it's roughly, Builders, we have about a little under 700, Protectors, we have a little under 600, and Changemakers, we have a little under 100. Of our revenue, about almost 50% is from the Protectors and about 18% is from the Builders and about 25% is from the Changemakers. And then the rest of that, so the roughly about 10%-ish are the no-planning clients and the institutions.

Michael: Okay. Interesting. So, kind of from a business end, it is striking the Protectors are kind of the bread and butter, as for I think a lot of the industry where that $1 to $5 million client that just...it's a good-sized chunk of revenue for each client, there's a lot of stuff we can do for them, we can provide value, we can do it profitably that adds up to a good amount of money.

J.D.: In a very repeatable and easily systemic way. Most of those clients need exactly the same things, you're going to answer the same questions for everyone. It's a very easily repeatable process.

Michael: And then Changemakers is, by headcount, barely 5% of the clients, but by revenue, almost a quarter of the revenue because the average fee is significantly larger. And then the Builder clients is almost a third of the client base but barely 20% of revenue just because those fee numbers are much smaller with a couple of hundred dollars a month.

J.D.: Right. Yep, that's sort of our strategic investment in the future.

Michael: I was going to ask, how do you think about that from the revenue balance, right? When a third of the clients generate 18% of the revenue and I guess, between the Builders and the investment-only clients, it's more than half the clients and less than a quarter of the revenue, barely a quarter of the revenue. Do you come to some point or ever come to a point of saying like, "Boy, we would be a lot more profitable as a business if we just focused on the Protectors and the Changemakers who are driving the bulk of the revenue and the bulk of the profitability of the firm anyways?"

J.D.: Yeah, I will say that debate is evergreen and that isn't something that really ever gets put down. And I would say that the answer to your question...and both of those answers are correct, that yeah, you're right, if we eliminated that side of our business, we would probably be much more profitable. We'd have to be smaller because you're kind of throwing away $5-$6 million of revenue but it'd be much more profitable revenue. I think that's probably right, although I'm not positive because your cost structure is different. What it cost to serve a Changemaker is higher per hour than what it costs to serve a Builder because you need people at a very different level of experience to work with Changemakers than you do with Builders. So, there is a cost structure difference.

But fundamentally, what it comes down for me is, "Do we want to maximize profits, or do we want to maximize growth?" And I will say that when I was our president, I would run a strategic planning scenario every year or every couple of years where I said, "What would it take to get to 40-some percent margins and what would that do to our firm?" And what it always did is...because I made assumptions on a drop in growth because of capacity, is that we would be much more profitable for about five years and it would break even after about five years because of the slower growth. And the benefits I see to working with Builders is, one, if we do our job right, people don't stay Builders. Going from Builders to Protectors to Changemakers is part of a financial cycle. Not everyone kind of graduates from Builder to Protector and then from Protector to Changemaker.

Michael: I was going to say just by age demographics and time alone, if you're taking clients who make a solid income that have $100,000 of assets, the likelihood they make it to Changemaker ever is not terribly high. Just literally, it's like 1% or 2% of the population, a fraction of a percent that ever gets there.

J.D.: For sure, Changemakers are unique.

Michael: Maybe we're upping their odds a little bit because we're giving them great financial advice and helping them on their journey. But I'm just having trouble visualizing, do Builders really feed your future Changemaker pipeline over a feasible timeline? Sure, like 30 years out, who knows? But you could also just market to them 29 years from now when they're Changemakers and say, "You should see this awesome Changemaker service we have at Abacus," and not carrying them in the intervening 29 years.

J.D.: No, I would say that people move from Builder to Protector over time and people move from Builder to Changemaker suddenly. But gaining that kind of wealth isn't something you do from saving your teacher salary or whatever, you know what I mean? You don't end up with $10 million because you were prudent, you end up with $10 million because you had a really great idea, you sold your business, you had a windfall, you inherited something, whatever, right? There's not many people...it happens, obviously, but there's not many people who get there because of diligent saving and making good financial decisions. They get there because...

Michael: You can get to $1 million or a few, it was hard to get to $5 million and you're not getting to $10 million.

J.D.: Right. So, I would say that Builders become Changemakers more often than Protectors become Changemakers. Every Changemaker you know was once a Builder, right? Outside of kind of inherited wealth, which we do have some of but isn't our typical people who come to us, but it does happen. But I wouldn't say that inheritors are the people that we're really landing with most of the time, outside of the inheritors who are really interested in giving all their money away, so like the people who are part of like resource generation and groups where you have inheritors who don't want to hold on to the wealth, who want to make sure they give it all away and do a lot of really good things in the world with the money they inherit.

We tend to get that type of inheritor but not like the big family generational wealth inheritors. It happens but it's definitely not our bread and butter. But most Builders are going to become Protectors or they're having a failing financial plan because these are people who are all trying to make sure they have enough to meet all their goals. And if we're doing our job right and if they're doing their job right and we have a little bit of luck, Builders will become Protectors just inherently. And then our Changemakers are that kind of special group of people that got lucky kind of or had skill, whichever way you want to think about it.

How J.D. And Abacus Has Implemented A Diamond Teams Structure [50:21]

Michael: So, talk to us now about how you serve these clients. And I think you said you had 10 different teams, you're using Angie Herbers' Diamond Team, so I guess first, maybe just for advisors who aren't familiar, can you explain Diamond Teams and then talk about what that looks like in your firm in particular?

J.D.: Yeah, absolutely. So, I'm a big believer, I do talk about Diamond Teams a lot, I think I talked about Diamond Teams more than Angie Herbers does, crazily. But a Diamond Team, you essentially...and it looks a little different in Abacus than you would see if you read her white paper on the topic. But your standard team has four people, you have what she calls a senior advisor and we call it relationship manager just because we didn't like the term senior, we didn't want it to feel like a hierarchy, who is the leader of the team. And they focus on sales primarily, bringing on clients for other people on the team, and also dealing with the kind of most valuable or complicated clients who need a little bit more experience than they may be getting with a more junior advisor.

You have two lead advisors who...they are called lead advisors because they are leading the client relationship typically. And that's who...like if you're a financial advisor and you're serving clients, that's your job is to be a lead advisor. You own that agenda, the client thinks of you as their advisor. And then you have an associate advisor who is a trainee on the team. And we don't hire experienced advisors for the most part, we home grow almost all of our advisors. Some advisors we get through merging firms into Abacus for people who have a firm and want to be part of something larger.

But the most of our advisors have gone through our associate training program, they take two years learning how to work with clients, and then at the end of that, they graduate and we give them a bunch of clients that we need to pass over because our other advisors need more capacity. And so, there is, on some level, kind of an advisor rotation through our client's financial life and that they'll work with someone for a while and then eventually they'll work with someone else. Most of our advisors...most of our clients aren't working with the same people that they were working with when they joined if they've been here for a long time.

Michael: So, can you talk about that for a moment? I feel like that's actually a very common because basically for your point, I think for a lot of advisory firms, we tend to come at this from a...like clients are clients for life for the firm. And in practice, a lot of us have low single-digit attrition rates, so average client tenures really are often 20, 30-plus years. And I feel like there is this mentality that if they're going to be clients for life, we have to give them an advisor for life and their advisor supposed to be always their advisor and never change their advisor because if you keep changing their advisors, you're undermining the relationship with the client. So, I'm struck you don't seem as fazed by that as a lot of firms do. Or maybe that does faze you a little bit but you're dealing with it anyways...

J.D.: It doesn't faze me, but we have the same anxieties around it as anyone else does, for sure. It's hard to imagine but I think it's way harder for the advisor than it is for the client. I have a pretty funny anecdote here. We did a client survey for all our clients back in the day, I think Dimensional ran it. And at the end, it asked for just open comments like, "Hey, anything else you want to share?" And one of the people we got it, it was a really great comment. They were really happy, they give us 10s on everything and they said, "Oh, my God, you guys are the best, my advisor is the best. We love Garrett, he's my favorite. We love him."

His name is Barrett. And that story is cute and it's funny and, obviously, I enjoy telling it because the punchline is fun. But what it highlighted for me is that clients don't care as much about us as we think they care about us. We are a small, tiny, little infinitesimal part of their life. And realistically, when they care about us the most is when they're mad at us and that's not good, right? Now, I have clients just like every advisor has, where I've become kind of a member of their family, that they call me just to chat, they call me when they want to cry, that if I left Abacus and wasn't a financial advisor anymore, I would probably get invites to Thanksgiving for the rest of my life. Right?

We all have those people because you make friends doing this, you have intimate conversations with people. And so, you do become friends with them. And I will say at Abacus, most of our clients have changed hands. We've been around 30 some years, right? It has to have changed hands. It would be weird if our two founders were still serving the same clients that they served 30 years ago. They're different people, their specialty isn't in what that client needs anymore. And if you really dial in to what's important for that client is to be served well with people who know what they need, with people who have the time and capacity to pay attention to them and make sure their financial needs are being met, then we, from a fiduciary standpoint, have to change advisors for that client periodically. You have to.

And unless you have a weird situation where all of your clients, every single one of them are about three years older than you, right? Or maybe 10 years older than you, where you're able to serve them until about 10 years into their retirement and then you're retiring yourself, well, at some point, everyone's getting a transition because you're probably going to stop working before all of your clients will. So, if that's going to happen then, it can happen any time. And quite honestly, I think the fear around shifting clients from advisor to advisor is way more egotistical on our side than practical.

There are bad ways to approach this issue and there are good ways to approach this issue. I'm not cavalier about that conversation with a client that, "Hey, you're going to be working with this person primarily instead of me." That isn't an easy conversation always. Diamond Teams make it way easier because for most of the people who will be taking on those clients, they've spent the last two years watching that person in training become a very competent advisor. And that relationship in many ways shifts from me to my associate, because the associate is spending two or three times as much time with that client as I am. And by the time...

Michael: Because that's part of the natural shift like, "Hey, the clients got a request, why don't you research that and follow up with them?" Like, "Yeah, I'll review it but why don't you research that and follow up with them?" And, "Why don't you present that thing in the next meeting?" And, "Why don't you do a little bit more of that?" So, clients see it more and by the time the news actually comes, they say like, "Oh, yeah, I kind of had a feeling this was coming because..."

J.D.: They're done with me anyway by that point.

Michael: "Rebecca has been working with me more and more anyways, she's actually getting things done and it seems like whenever I call you, you just send her to respond anyways. So, okay, I'll just actually work with her because she's going to get things done for me."

J.D.: Well, that's the formula. When you're ready to transition a client, a client sends you an email or calls you, you say, "Okay, cool, let me give you an answer on that one," and then Stacy replies. And then the client really quickly learns to call Stacy because they know that it takes longer if they call me. And we don't...

Michael: Not even because you're trying to shift or be dodgy, just they literally realize like, "If every time I send a question to J.D., Stacy sends back the response, it's probably going to get answered faster if I just send the question to Stacy."

J.D.: Exactly. Yeah, it's practical. And we don't have the conversation, "Hey, I was your advisor, now Stacy is going to be your advisor." The conversation that I have with clients when this situation is happening...they know from the beginning we're all on one team, right? "You might talk to John, you might talk to Dari, you might talk to Stacy, you might talk to me. I'm your lead, I'm here for you, right? You can always call me anytime, but you can also call those people anytime." At some point, there's a natural shift in that relationship where you say, "Hey..." I know, as soon as I hear from Stacy that they were emailing her without cc'ing me, then I can stop coming to meetings and I just naturally let the attrition happen. I'll show up to the meeting for 15 minutes, right?

Michael: "Oh, darn, I can't make that meeting, I've got another conflict but Stacy is going to be there and she's awesome and she'll fill me in on what happened, have a great meeting."

J.D.: Or I'll pop in for the first 15 minutes, I'll say, "Hey, I can be in the first 15 minutes of the meeting, and then I got to bounce because I got double scheduled, really sorry. We can reschedule if you want to but it'll be about three weeks before we can schedule another one." Right? They're like, "No, no, don't do that." "Okay, cool, so I pop in for 15 minutes. Anything you need me for?" "Okay, yeah, this thing I really wanted to get your feedback on." "Okay, here's my feedback. Okay, see you later." Gone. And then it doesn't take long before you're sitting in the meeting and they're like, "Why are you here?" "What are you even doing here?" And then it shifts over. And before we had Diamond Teams, the conversation was, "Okay, I'm stepping off, this is going to be your new advisor."

As soon as we put in Diamond Teams, there was a subtle psychological shift that happened because the advisor didn't leave the team. The advisor was still on the team, it was just a different person who was taking the lead. And we really stopped feeling like we moved clients from advisor to advisor and instead, the clients stay at the center of that diamond all the time. They're constantly surrounded by four advisors who have their best interests at heart. And advisors move a lot within that team or in and out of that team, but the client never moves. And once we kind of let that psychological shift happen, it all became very easy.

How Many Clients Each Diamond Team Serves [1:00:01]

Michael: So, help us understand how just capacity works. Who has how many clients? Or I don't even know if you measure by clients or revenue or something else but how many clients does this Diamond Team serve?

J.D.: On average, our Diamond Teams are...kind of lowest headcount, Diamond Team serves 92 clients and has about $2.8 million in revenue. Our highest headcount team has 267 clients and manages $3.7 million of revenue. One has double the average fees. Now, they tend to focus on Changemakers is why, right? Changemakers mean you have fewer people, higher revenue. A Builder-focus team might have lower revenue, higher headcount. Most of our teams are a diverse mix of those three and kind of reflect kind of our mix, right? So, about half Protectors, some Changemakers, some Builders.

Michael: And overall, are these high revenue teams, or is it kind of traditional across the whole firm that basically a team ends up serving something in the neighborhood of $3 million of revenue and it's just a question of whether you have more clients at smaller dollars or fewer clients at larger dollars that are more time-intensive?

J.D.: So, across nine Diamond Teams, our lowest revenue is $1.8 million, our highest revenue is about $4 million. Over about $3-something million, things start to get very tight and everyone's a little unhappy or we might have to put a fifth advisor on that team or maybe two associates or we assign them a paraplanner or something to help leverage. Over $3 million, they start to get stuck.

Michael: Because just the sheer volume, at the end of the day, like if that many clients are paying that much in fees, they probably have a certain level of aggregate expectations of meetings, service requests, and all the other stuff and you just start running out of time?

J.D.: Yeah, you start running out of time, but more importantly, you run out of capacity. And so, the hardest part about being on a team that's full isn't the work you have to do for your clients, although that is intense because of that sheer number of things you have to deal with, but more importantly, it stops you from taking on new clients. And I think we discount a little bit of the value creation for clients in having capacity. Meaning if I have a client who has a friend who needs an advisor and they call me and I say, "Let me talk to them," I'm creating value for my client by talking to their friend.

Whether I take that client on or not, I'm giving them the ability to help other people by referring to me. And if I am full or overworked, then I can't provide that value to that client. And so, I think of a team is full when they're at 80% capacity because they're going to naturally grow through that kind of activity where they have to take that person, "I have to take on my client's best friend," "I have to take on their boyfriend," or whoever, you know what I mean?

Michael: And so, how do you define capacity in 80%? Is it a capacity is $3 million of revenue and when you're at $2.4 million, you're kind of slowing down on your growth?

J.D.: Yeah, that's a proxy, right? Because in reality, it's how much more work can you do, which is on some level, emotional and varies depending on the circumstances that you're facing in the world, right? Our capacity went down when COVID happen...

Michael: So, how do you figure out what your capacity...just how do you figure out what your capacity is, particularly when you've got teams ranging from 90 clients to 267?

J.D.: And that right there, that question, "How do you define capacity?" Not just how do you build capacity, but how do you define how much capacity you have is, I think, the biggest question that anyone should be asking themselves in this industry, by far. That if I'm properly managing an advisory firm, a financial planning firm that is serving clients and doing financial planning, 80% of what I think about should be capacity. I don't know the answer to that question because you can't...there's not one metric. We can see it in revenue, we can see it in headcount. That's two metrics that you can use to gauge is someone approaching capacity. I didn't think we had the ability to have a Diamond Team that manages $4 million of revenue two years ago.

If you'd asked me two years ago, I said, "I hope so, I hope we can figure out how to do that," and now I'm staring at it on a dashboard. And I don't totally know how they did it. I know that team has more professionals on it than the average team, we added a little bit of extra to help, but they're crying sometimes, right? And the emotional component of capacity is really important. Because similar to therapists or other people who do really emotionally burdensome jobs, this isn't an analyst position. You're dealing with people's emotions and giving them emotional advice, and processing their emotions with them. And that is exhausting in its own right, regardless of the number of hours in a day. You can only do that so many hours in a day, you burn out pretty quickly if you try and do too much.

Michael: Right, it's why even though mathematically, you could stack seven or eight client meetings in a day, right? Eight hours in a day, do seven or eight meetings, stack them up, you'd be obliterated by usually the third or fourth.

J.D.: Yes, it's impossible. You can't, as a human being who's emotionally intelligent, handle...not the way we do it, right? There are business models under which you can totally do that. Not the way we do it. We push the emotional angle too much to be able to do that. So, capacity is...

Michael: So, how do you guys think about capacity? Because in practice, you're living this with almost 2,000 clients and $4 billion of assets, how are you guys thinking about capacity at this point?

J.D.: So, the Diamond Team structure, on some level, if you have faith in your structure and you're growing in an appropriate rate, means...

Michael: Which is defined as?

J.D.: For a Diamond Team, probably between 10% and 25%. I think if you're growing less than 10%, Diamond Teams don't operate well. It's like the fuel doesn't burn efficiently enough to get people to learn fast enough, it's not fast-paced enough to get people through the process. And I think you have retention issues if you're operating Diamond Teams with under 10% growth, that people will leave. Advisors, I mean, they're just not progressing in their career fast enough, there's not enough activity for them. And over 25%, I think you need to supplement your capacity creation in some other way.

If you're growing faster than 25%, you can't rely on organic training to train all your people because you'll need more advisors faster. So, you either need to hire experienced advisors or merge people in. You can still have Diamond Teams in both those situations, you just have to be a little bit more careful. But sometimes, it's somewhere in that 10 to 25, it creates enough capacity to handle that amount of growth without you having to think about it.

Michael: So, I'm kind of wondering how this works in the book ends, then, of...so what happens when a Diamond Team gets full? When you're at capacity?

J.D.: Hopefully, what you do is you split it and bring people in...now you have two teams instead of one, and you're bringing other people into each of those teams who do have capacity so that that team can have capacity in total. So, let's say we have...

Michael: But you were saying earlier that maybe an advisor moves, but typically the clients are the clients to the team, but clients aren't clients to the team when you cleave the team.

J.D.: Well, they become clients of one of the two teams and you're going to do it whichever way makes sense. Because normally what happens is if you have a Diamond Team, right? So, let's say you have an associate who is ready to promote to lead advisor. And so, now you have a relationship manager, two lead advisors, and an associate who's ready to graduate. And then when they graduate, you're going to hire another associate, now you're going to have five people. So, what you're going to do is one of those lead advisors... if you're lucky enough, right, to be able to do this, because this is part of the skill of running this is that you have to train one of those lead advisors or cultivate one of those lead advisors to then want to lead their own team.

If you don't have another relationship manager, you can't really do this, you have to have one of those people who's ready to kind of shift their focus from serving clients to leading a team and bringing on clients. Now, our relationship managers do serve clients as well but usually, they try and do it about half as much. So, if a given lead advisor can do $1 million in revenue, a relationship manager should focus on doing half a million in revenue because they need time to bring on the clients. They're the last people to fill up, so when you get to a $4 million team, it means your relationship manager is now serving as many clients as your lead advisors and that's where you start seeing the growth slows down.

So, what you do is one of the lead advisors becomes a relationship manager, probably that associate who's about to promote joins that person's team, so now you have two teams of two people. And then you hire two associates, one on each team, and now you have two teams of three. After two years, those two associates are going to be ready to be lead advisors, they are each promote up into that open slot, and you hire two more associates. A couple of years later, probably one of those four lead advisors is ready to be a relationship manager. And so, you just split again. When we did this in 2014, we had 4 Diamond Teams, and now we have 10. And that's how it happens.

How Compensation Works Within The Diamond Team Structure [1:09:35]

Michael: So, how does compensation work? At least for most firms, compensation is directly or at least primarily tied to your client you manage and revenue you manage, which when you start cleaving teams and cleaving revenue and even just moving clients around and handing off clients to leads or upcoming associates that become leads, all these relationship-lead changes are occurring, I feel like revenue-based compensation gets very sticky very quickly. So, have you guys navigated that? Or is compensation not a “revenue under management” structure in the first place?

J.D.: You have highlighted it, it's like you're in our executive meetings with us and know all the problems. Yeah, we have that issue. We used to pay people based on what they manage and that's problematic when you're dealing with clients that you want to be able to be moved around advisors. We tried a lot of different things to fix that problem, there is no such thing as a magic bullet in compensation, but we moved away from kind of revenue-managed-based compensation, we now have kind of a number of structured levels. We have two levels of associate that are paid different amounts and you fill out your checklist, and as soon as you learned enough, you get promoted.

When you finished your Associate Level 2 checklists and you're ready to promote to Lead Level 1, that has its own compensation. And then we have criteria for each of our...we have four levels of lead advisor and you're assigned whichever one of those roles most fits who you are. And the biggest shift in our compensation philosophy came about when we were coming up with...okay, solving that exact problem you listed, which was, "Well, if you're going to pay people based on how much revenue they're managing, you can't expect them to give up revenue." People hoard it, right? They're like, "No, I'm just going to keep it," and that's problematic for our clients and it's problematic for our firm, that was not the behavior that we wanted.

We wanted them to think about what's best for the clients, to pass them off no matter what would happen to their revenue basis, the amount of kind of revenue they're managing. And what we realized is that what we were doing is we were paying people for their results, that people would do stuff and we'd see what they did and then we'd pay them accordingly. And we shifted our thinking, and it takes a little bravery and it takes a little bit of risk and it takes a little bit of betting on people and faith in people. But we shifted and said, "We want to pay people based on what they're capable of, not what they've been able to accomplish." And primarily, it got highlighted for us because we had two advisors that started around the same time and they were both very similar in capability, right, in terms of their skill level and what they were able to do.

One advisor lived in a different place and lived near another advisor who was passing off a lot of clients. And so, they went from zero under management to $1 million under management in two months. And we had that other advisor who was hustling, bringing on a lot of clients themselves, getting a few clients transferred to them by other people, but they were managing about a third of what this other person was managing. They were the same and deserved to get paid the same amount because that's who they were in their career and what they were capable of doing. And the fact that Abacus didn't create a situation where we had parity in how much revenue was transferred to that person to manage, we felt was unfair in terms of determining their compensation.

And so, we focused on what they were capable of doing, and then the onus was on us to make sure that they were full. And if we couldn't make sure they were full, that's on us, not on them. And sometimes it gave us then more flexibility. We had an advisor and we told her, "We're not going to transfer you any clients for a little while because we have an acquisition that we think is coming down and you're perfect for that client base." And so, we held this person who could manage $1 million at about 300,000 in revenue for about a year because we needed to keep them empty and they got paid the same as if they were full because that was our choice and as a result, it made the integration of that acquisition much better.

Michael: So, I was just going to say, I hear you sort of philosophically around paying people based on what they're capable of and not necessarily based on their results. But just mathematically, if I pay all my advisors as though they've got a full client base when they literally don't yet, they don't have that much revenue yet, I can run out of money relatively quickly here or maybe a little slower, $4 billion of assets, but I'm going to run out of money at some point. So, to me, the interesting piece that you connected to that is therefore as the firm, I have a lot...I as the firm had a lot of pressure to say, "How quickly can I get revenue under their responsibilities so that they're covering themselves?"

J.D.: Yeah, exactly. And that should be my responsibility as management, not theirs as someone who is there to provide a service to their clients. I want them thinking about the clients they have, not the clients they don't.

Michael: So then, how do you stand up Diamond Teams in that environment when they're not full and the revenue isn't there yet? Or is it functionally, you started this when you're already an established firm and had four Diamond Teams from the start, and now they only emerge when you're splitting an existing team so you don't ever really have to stand one up literally from zero, you just stand up a half team that split off from another half and then you kind of round them out over a couple of years?

J.D.: Yeah, I will say I'm very blessed with not having to worry about having too much capacity and having a lack of profitability because I have too much capacity. It's not something I don't ever worry about, it's just not something that practically has been an issue because we're growing very fast. We have had that issue in the past. And generally, the decisions we make when we are approaching it from a place of scarcity, when we're like, "Oh, my God, we have too much capacity, we got to find a way to fill it," and we'll do things that are probably not the right decision. Some of those things would be, "Okay, let's pause hiring," which we did the last time we had too much capacity and now we're feeling it. We do things like acquiring retiring advisors' practices because we're like, "Oh, we got to fill this capacity because our profits will otherwise go down."

And so, then we fill up all our capacity, which constraints our organic growth. And so, we replaced organic growth which is very profitable growth, with M&A growth which is less profitable growth because we have to pay for it at a much higher price. And, as a result, I think we made...not bad decisions because I think all those decisions were fine, other than the pausing hiring which was, in retrospect, not the right choice. So, much of it comes down to just the faith of, "Okay, I've made the right decision based on my strategic plan, it's going to work out. And the more I focus on my profits as opposed to serving my clients well and being amazing and excellent out there in the marketplace, the slower we grow and the less profitable we are." I'm a big believer that you grow faster when you don't focus on your growth rate or your profitability and instead focus on just being amazing.

What Surprised J.D. The Most About Building And Scaling An Advisory Firm And His Low Point [1:16:45]

Michael: So, what surprised you the most about building and scaling up a big advisory business?

J.D.: Surprised me the most? I think one of the things that...I don't know if it surprised me but I think it would surprise most people as they're thinking about it, is how little I should have been worried about culture. I know when talking to a lot of people about growth of their firm and hiring a lot of people, a lot of the questions people ask is, "Well, how do you keep your culture?" Right? "How do you stop your culture from just not being good anymore or from changing?" is usually what they're asking. It's like, "How do you stop your culture from changing and not being what you want?" And presumably, that's negative in their head.

And my answer is, "We don't, we don't protect our culture." And in fact, I think we're very focused on doing the opposite, that we want our culture to change, we want our culture to transform. And we've banned the term culture fit from our hiring committees, we're not allowed to even think about the idea of a culture fit. And in fact, if someone fits our culture, it's almost a negative. I don't want...I already have that, I already have all those people that fit our culture because they're here already. I don't need more of those people. I need people who are culture additive, that are going to help us grow and change our perspective and see things in a different way.

And I want the culture to get completely transformed, I want to be a different firm, culturally, a year from now than we are today. I want people to have come in and woken us up and changed our viewpoint and challenge us and made us all realize that we were wrong. That's the part that had surprised me the most is how...if I look back in time, every time someone said, "Oh, if we do this, our culture might change," or, "How are we going to protect this culture that we really love right now because we all really love each other, everything's really great, and we don't want to lose that, we don't want to lose our culture?"

And I'll go back to those people that express that and I'll say, "Okay, think back to three years ago when you were concerned about our culture shifting. Do you feel like our culture has shifted?" They're like, "Yeah, yeah, we're really different now than we were three years ago." "Okay, do you like it better now or do you like it better then?" And invariably, 100% of the time, they're like, "You know, there's a few things I miss but as a whole, I really think we're amazing now and I wouldn't give it up for what we had back then."

Because it's a little bit like looking back...I look back at my 20s and I'm like, "That was so fun." "Do you want to do that again?" "No way, ever." I would never relive my 20s, right? That's crazy talk. I'm not that same person anymore, I've grown. And like I said, I don't think it's surprising because I kind of always had this in my head but I think it's surprising how universal it is that that growth in your culture and that constant change and that ability to really grow as an organization and how people show up for that and who we've become, I'm very proud of. And I don't miss who we were, even though there are things about it that I miss.

Michael: So, what was the low point for you in your career journey through this?

J.D.: I am someone that...okay, there are people who are going to be listening to this who know me, right? Or have seen me and kind of have an impression of my personality. So, this is going to make them laugh out loud. I am not someone who enjoys conflict or arguing or having division, which is someone who is, on some level, an agent of chaos anywhere I am and always trying to make things change and be better and different, that that sounds insane. Because for someone who is wanting to be at the forefront of innovation and wanting change and wanting to always never sit and just enjoy what we have and always wants to optimize or make better, right? The idea of not liking conflict or debate seems like that's a really bad fit, right?

But the low points for me have been those areas of the biggest division when I can see something that nobody else sees, and in those moments, what I really hope for is that they'll have faith in me and they'll say, "Oh, okay, J.D. can see something we can't, let's just do it because he knows and we're good, let's just do it." And that's unrealistic to expect a bunch of other professionals to say, "Oh, well, anytime J.D. says something, it's going to be right, so let's just do it." Obviously, that's not going to happen. But sometimes my balance between knowing what I think will work or what's right don't match my distaste for conflict, and I'll create conflict that I don't want.

And so, I've had times...and every firm has times when the owners and the executives and the people leading don't agree and they don't agree loudly, and those are the points that are the lowest for me. And I won't say that I regret those times, right? Because that's part of growth is you have to have times where you're pushing yourself through difficulties and trying to find the right answer and if everyone just tried to agree with each other all the time, then we'd come up with less good decisions. But they were certainly my low points where we had to fight about something so that we could come up with the right answer. And whether I win or lose, it doesn't matter because it's the conflict that is the problem for me. I don't mind losing but I don't like the fighting.

What J.D. Knows Now That He Wishes He Knew Then And His Advice For Newer Advisors [1:22:27]

Michael: So, looking back, I know you've been almost 15 years with Abacus in a leadership role. So, what do you know now that you wish you could go back and tell you from 15 years ago as you were starting down this journey?

J.D.: I mean, the first would be to have a little bit more patience and grace for people who think differently than I think. And I think the biggest highlight and the biggest thing I learned through this whole process with Abacus and my time here is that I don't think in the average way, that I tend to think faster, I tend to think in a bigger picture, that I'm less concerned with day-to-day struggles and more concerned with the long term, and that I might be able to see 10 years out but I can't always see 3 months out. And to recognize that other ways that people process information or other people who have different timelines of perception in terms of what's easy for them to envision, they're not doing that to slow me down, they're not doing that to be obstructive, that they're doing that because they need more time to really consider.

And they come up with different ideas and different ways to accomplish things based on intense research or intense thinking or long time periods of really cultivating that thinking and making sure it feels right. And that to be more patient and actually, listen more to those people than the people who agree with me, which tends to be my biggest weakness is the ones that tell me I'm right are the ones where I'm like, "Yeah, see, that's great." The ones that are like, "Well, I think you might be going off too fast," I'm like, "I'm not, leave me alone." I'm always the one walking in the front of the pack because I just want to get there, right? And I'm not very patient. And to honor those people who are more patient would be the one thing I wish I was able to do more of both now and in the past. This is such an ongoing struggle and probably always will be.

Michael: So, what advice would you give to newer advisors coming into the industry today?

J.D.: Don't focus on the money, focus on being excellent at your craft. The more you focus on the growth rate and the profitability rate and the metrics, I think that the more they will stay the same, that you won't have transformative change if you're focusing on what's true today, you have to envision the future. That serving your clients well will always pay off and serving your team well and finding people who you...and companies and situations that fill you with love, that make you realize that, "It doesn't matter how much I'm paid, I'm here, and I love being here so much," that, quite honestly, what will happen, if that's how you feel, everything else will follow. And I'm not sitting here...I know it all sounds kind of California woo-woo, right? I do recognize that.

And it's not because of that, I think it's deeply psychological that when we are focused on something that we tend to make that thing that we focus on be more true. And so, if you're focusing on your profitability when it's low, it won't get higher because you're focusing on it at a low point. So, ignore that, envision a higher one, and focus on that vision as opposed to what is true today. Prudent management needs attention, right? You have to pay attention, you can't just overspend and hope it'll work out, right? You have to do things that are rational and appropriate. Just don't put any emotional angst to it, don't worry about it, that what's true today will not be true tomorrow, it will change. And everyone I work with...and I do a lot of kind of mentoring work with other firms who are just getting started.

One of the things I always ask them to do is envision a future firm, do all the math for it, make it look like what you want it to look like. And again, that sounds like kind of The Secret of manifesting or whatever. That's not it. Focus on what you want and then do all the activities that you would be doing if you were that thing, and pretty soon you'll be that thing. And it's just about practice, right? When you want to run faster, envision running faster. Don't focus on your time, focus on running faster. If you focus on your time, you'll always hit that time. Just go faster. It sounds simple but it isn't, right? It's really hard to not focus on the negative and to instead focus on what could be as opposed to what is.

What Success Means To J.D. [1:27:09]

Michael: So, as we wrap up, this is a podcast about success and one of the themes that always comes up is just even the word success means very different things to different people. And so, you've been on this wonderful success path with the firm and the growth of Abacus, certainly by any objective measure, a very successful business, but how do you define success for yourself at this point?

J.D.: Personally? Freedom, when I have autonomy, when I can choose what I do, when I can choose when I show up, when I can choose when I leave, when I can choose who I want to work with, when I can choose everything. And I try and bring that mentality through as much of Abacus as I can and as much of my life as I can. We try to create as much of that personal autonomy for our advisors as we can. We don't have restrictive policies, right? People can come and go in the office whenever they want. We have an unstated vacation policy, people just take what they want. We do monitor it but we monitor it on the downside, "Who's not taking enough time off? We got to get them out of the office."

I want to always feel like I have a choice and I want all of our people to feel like they have a choice and I want all my clients to feel that they have a choice because choice is important and freedom and autonomy is important. I think ultimately that's what we all want at the end of the day, and having more money or better job title and any of those things are...people want because that will give them that, it'll give them autonomy, it'll give them freedom, it'll give them FU money, right? That's what they need, right? To feel like, "I can make that choice once I feel safe." And they need those things to feel safe. And my hope for myself and for everyone else is that they can feel safe before they have all those things. Before they have enough, I want them to feel safe and that they have choice and autonomy.

Michael: I love it. Well, thank you, J.D., for joining us on the "Financial Advisor Success" podcast.

J.D.: Thank you for having me.