#FASuccess Ep 398: Building A $2.5B AUM Advisory Enterprise Under The Umbrella Of A National CPA Firm, With Eric Wulff

Resources Featured In This Episode:

• Eric Wulff
• Marcum Wealth
• Zendesk
• MoneyGuidePro
• Orion
• Certified Exit Planning Advisor (CEPA)

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Full Transcript:

Michael: Welcome, Eric Wulff, to the "Financial Advisor Success" podcast.

Eric: Thanks for having me, Michael.

Michael: I really appreciate you joining us today, and the opportunity to talk about what to me is this ever-growing blending that seems to be happening between financial planning and tax. And on the one hand, we've got this, I find, rise of advisory firms that are moving further and further in the direction of tax where we're doing more tax planning or buying software, like Holistiplan and FP Alpha, to delve deeper in that end. Some firms are even getting their enrolled agent and bringing tax preparation into the practice. But then there's this whole other end of the spectrum of CPA firms that are coming further into wealth management. The ongoing tax business just continues to get rougher and rougher every year, and it's transactional and seasonal. And wealth management has lovely recurring revenues, and you can meet with clients all the months of the year and not just be concentrated around building up to April 15th and maybe the extension deadline.

And I know you have lived kind of a version of this journey of building an advisory firm within a CPA firm and what it looks like when the CPA business comes more in the wealth management direction. And as so many wealth managers are building towards tax, I'm just excited today to talk about what happens when the tax or when the accounting business tries to start building in the wealth management direction and what that opportunity looks like in an accounting firm.

Eric: Yes, it's an interesting direction the business is going as it continues to evolve, and what was once before is now coming back full circle again. So we've been here before in terms of accounting firms offering financial services and advice. It kind of went away, and now it's kind of coming back into a different version, a different approach.

Michael: Yeah. Because I guess there was a version, I feel like, that cropped up back in, I guess, the '80s and '90s where a lot of the big accounting firms, it probably would have been Big 8 back then, had these really deep financial planning practices that often were working with executives at Fortune 500 companies. The accounting firm would do all the accounting work for the big corporation, and then one of the employee benefits was financial planning for the executives. And many of those folks actually moved out and launched RIAs back in the 1990s, some of the early RIA firms. So you're right, it's interesting to me that now we seem to be in a fresh resurgence of this where accounting firms once again are looking more and more in the wealth management direction.

Eric: Yeah, I think, the accountants lived at the center of the trust advisory universe, along with the attorneys and the financial advisors, and they're probably the most go-to people for most business owners and high-net-worth families. They always are integrating their CPAs in the process, and the CPAs are looking for how they add value. That's what everybody's focus is in terms of professional services/corporations, to deliver value to your client base.

What Marcum Wealth Looks Like Today [6:35]

Michael: So I think, to get started, help us just understand the advisory firm itself as it exists today. So I want to understand the advisory business first, and then we can talk a little bit more about how this relates to an accounting practice and how growth and business development happens and has occurred over the years.

Eric: Yeah. So basically, we're set up as an independent RIA. We have, obviously, an affiliation with the accounting firm that's a shareholder in the business. But we built this firm as an RIA firm, not an accounting firm, and I think that's one of the advantages we've had versus CPA practices trying to basically launch RIA firms, but they run them like CPA practices. And so it's obviously a different financial model. It's a different set of services and skills they're bringing to those clients, but the idea is we're always focused on how we add value back to the core client base. And today, we're roughly $2.5 billion in regulatory AUM. We have about another $0.5 billion in 401(k) plan assets, about 60 people in the practice today across multiple states, multiple office locations. Largely, office locations are within the footprint of the accounting firm and continue to expand.

And I think one of the things we had to realize early on was standardization. So as you're deploying out a model inside of an accounting firm practice, you can't do something different in one market, then another market. So one of the things we really focused early on was how do we standardize process inside the firm, from financial planning to investment management, to compliance, to service models, really being able to have that mark on wealth experience across different locations, different advisors, different geographic natures, different types of clients, but still having a centralized process about how we go about working with clients and helping them achieve their goals.

Michael: So I feel like standardization is one of those things that advisory firms don't tend to focus on until we get "larger". We have multiple locations, and suddenly, there's this realization of, "Oh, the advisors in the office here are not quite doing the same thing as the advisors in the other location. Maybe we need to standardize this further." Is that how it evolved in your world as well, or is there a different context to this when you're building attached to a much larger CPA firm that, I guess, I'm assuming, probably already has multiple locations and multiple markets?

Eric: Well, it's interesting. The funny thing was when we were at Morgan Stanley from '96 to about 2006, we always kind of questioned…it was a little bit odd. You go and talk to 10 or 11 different investment advisors inside Morgan Stanley, you get 10 or 11 different responses of how to actually do something. That always kind of bothered my business partner, Chris Bart and I, we were originally at Morgan Stanley. It was kind of, "Okay, well, is this the right way to do this, right? Should we have more of a standardized approach where the whole firm weighs in on how we best deliver results to our clients, from a planning and an investment perspective, a process management perspective?"

And so it felt like, from the start, we really wanted to make sure it was going to be consistent. So whoever the advisor was, whoever the team member was, they can always walk in the situation that a client called in. They'd always understand how exactly a client was positioned from their investment portfolio to their financial plan. And that opened up the door to be able to scale it and really continue to grow the business without having to worry about plateauing out.

So we kind of looked at it and said, "We got to be consistent in this deliverable because we were talking to and working with accounting firm partners." You can't do something different for one group of partners than you're doing something for somebody else, because they're going to talk, they're going to share ideas, they're going to say, "Why is this different? Why are you doing this for one client, not for another client?" And so knowing that you're getting a referral source, you got to treat that referral source with a very high standard of care. Because if you disrupt it on one side of the firm, it's going to filter through the rest of the firm.

Michael: So, how do you think about the balance of that between trying to standardize and what I feel like a lot of advisory firms these days want to push, which is customization, personalization? They're sort of, by definition, financial planning is individual to each client and their needs and circumstances. How do you rationalize or think about standardization for what, in theory, is a very personalized service to each client?

Eric: Yeah. I think it's a fine balance to walk, right? Because I think, when you're doing financial planning, it's not cookie cutter. Every client situation is unique and different. So if you take, for example, individual families, you're doing financial planning, that family is unique in its own experiences, what they're going through, and what they're trying to solve for. And so the advisor who's starting the planning process and working with our planning team is basically gathering the information, understanding the nuances, and they're going back to our planning team and saying, "Okay, here's the case." And then they're collaborating together to come up with a plan to achieve the primary goals that the client is looking to achieve, whether it's estate planning, retirement, whatever they're trying to provide for specific goals in the future.

So that is still always very personalized because it's really the story of the client that you're basically putting a plan around. But it's how you go about the planning process that I think needs standardization. So our advisors at the firm do not do the planning software. We have a planning team that does all the plans for all of the clients. So there's a consistency to how they're scrubbing the data, making sure they've got the right assumptions. We're not basically trying to solve to make it look that we're saying, "Here's what you're telling us. And if you're on track, we're going to show you how to make it more efficient. If you're off track, let's just share the numbers. Let's share what we uncover, and then let's figure out a way to get you kind of back on track." So even though every story is different, there's a commonality to how we have to go about the process of planning. And so I think standardization with your planning team allows you to basically get that scale but still provide the customization.

Michael: So then you had mentioned as well, billing in RIA world looks a little bit different than billing in CPA world. I think you said others fail when they try to run a wealth management firm as a CPA firm instead of as an RIA. What is that? Can you talk more about what that difference is? How do you see CPA firms functioning differently?

Eric: So the main fundamental difference is how CPAs bill their clients. It's a rate times hours model generally across most accounting firms. So they're looking at every waking minute of the day, what their billable hours look like. So you're trying to figure out how you get max realization for the number of hours you're working. If you got 2,000 hours a year that you can work, you're trying to basically maximize the revenue for each hour you do. The wealth management business is a little bit different because our, I think, profitability is generally by long-term relationships with the clients and being able to deliver service, drive revenues, and get the benefits of the market growth alongside our client base.

I think the major mindset I saw when I first got into this was saying you got to kind of give to get. And I think that was the thing that really separated us is that we had these big debates with the CPA partners about, do we charge for planning or do we not charge for planning? And part of what we've done is we said, "Listen, before a client ever thinks about investing with us, we're going to make an investment in them. We're going to do the planning to show them really what our product looks like, how we can add value to what they're doing." And the question then, once you get the planning done, is, do they need help actually implementing the plan? And that's really, I think, what the advisors really do is we do a combination of helping them plan but then we also implement the plan and make sure they're sticking to their targets and adding value along the way.

I think that was the fundamental difference. There's a lot of firms that, in the CPA world, were trying to basically charge for every hour, the time they were spending, I think, for every project. Clients were like, "Well, do I want to pay for that or not out of the gate until I see what you actually can do for me?" which is a little bit different than when you're doing tax compliance work, which is pretty straightforward. You put numbers in, you get an output out, and you check the boxes along the way. That's a little bit different than actually taking the time to do planning for clients.

Michael: I guess, to me, just that really gets to the nature of more transactional by-the-hour engagements versus ongoing recurring revenue relationship models. The advisory business can be very profitable in the long run if we can get a client on board, establish that relationship, and then you may still have to do this service for 3, 5, 10, 20 years of providing value for the client. But once clients are on and a relationship is established, they tend to remain clients, and then the revenue recurs, and then we can reinvest in the client relationship. And that's really fundamentally different than "I charge by the hour, and my profits are determined by whether I can charge more than my cost." I can charge more for the hour than what I have to pay my staff per hour to provide that service. I'm making a margin per hourly unit of time, which is sort of the classic CPA model.

Eric: Right. And I feel like in the CPA model, in order to bill more hours, you got to have more people involved. So with our model, if we can get the capacity utilization, we can have more volume through a fixed cost structure. It's a fundamentally different approach to how you run a business.

Michael: Because in the investment side, at least, once I build investment models, investment systems, and I have trading software, I have very little marginal costs to add the next 1, 5, 10 clients.

Eric: Correct.

Using A Team-Based Approach To Building Financial Plans [16:10]

Michael: Okay. So in that context then, I guess that helps to connect for me why you built in the direction of approaches like centralized planning teams to try to further enact the differences in scale when you can centralize versus "just hiring more people to do more advisory work." So help us understand, I guess, the team structure or the team structures of how the firm is organized.

Eric: Right, yeah. So everything starts with planning. So let me kind of walk you through maybe the client experience process, and then I'll kind of dovetail the niche. So each advisory team has their own focus inside the practice, so some focus on work with business owners, some focus working with physicians, some focus working with blue-collar clients, some focus on ultra-high net worth clients. So the target of each advisory team in terms of the clients they're going after can vary, but the process we go through with each client is very similar. There's obviously customization with each client, but the approach we take is as standardized as we can try to get.

So for example, if a team is taking on ultra-high net worth clients, it's going to involve maybe more team members involved in working with that client than it is, say, a blue-collar client that comes through the door with a smaller balance. But they're getting a lot of the same experiences and the same resources the firm leverages across the client base. So once we bring a client in, as we start to bring a prospect on board with our process, the first thing we do is we make that investment in the financial planning process with that client. We always feel like we need to show them the quality of our work to really show the value of the process we bring to the table. And so we make that investment in somebody before they think about ever investing with us. I think that's one of the things that really give-to-get model has always worked well for us over the years.

And so once we go through the planning process, we really then take them to the next part of the approach. So our financial planning process is really designed to help drive what the asset allocation models are going to look like. So we don't really go by risk profile. We're looking at the numbers in the plan and saying, "Here's what we need to achieve as part of the long-term financial plan." We're trying to set up our frameworks of our investment strategies to tie back directly to the financial plans. So if you think about it, it goes from client onboarding process, standardized, to basically financial planning, standardized, to investment management process, standardized, but we still can provide the customization for each of those clients.

Michael: So, can you walk me through a little bit further really what this process looks like? If I come, Eric, and I say, "Hey, sounds great, want to work with Marcum as my advisory firm," or at least I'm interested in starting down your process, how does this work? What really are the steps of the process as you take a prospective client through?

Eric: Yeah. First thing, obviously, we kind of have what we call our "pathway to financial fulfillment", and the first thing is, are we a fit, right? That's the first thing we look for with a client or prospective clients. Are we going to deliver what they're looking for? So if you're asking us to trade Bitcoin futures, we're probably not the right firm. But if you're focused on planning and you want to focus on really process management because that's the thing we can control, that's what our core bread and butter of all of our clients. If you look across the board, all of our clients have a financial plan in place. It's a requirement of the firm. We don't take on clients if they're not going to follow a process. It's really tough to be an advisor to somebody if you can't deliver a process they can't follow.

And so the first thing is really understanding who the client is, and we basically do the standard deep dive. We gather all the information, we look at all their goals and objectives, and we do develop that comprehensive financial plan that most firms kind of do. And then what we really do is just present the hard facts, and we say, "Okay, here's the data that you told us. You're trying to achieve these goals. Are you on target or are you off target? If you're off target, here's how we can get you back on target. If you're on target, how do we make it more efficient across the board?" looking at a holistic approach, everything from the investments, the tax, the long-term planning, the estate approaches, all that comes in that kind of play.

So usually, it takes a couple of times to go back and forth to get the plan right. So we usually just present the initial plan as is. Then we go back and do a couple of updates and edits to the plan. And then we come to an agreed-upon thing where the clients are saying, "This is the outcome I'm looking for. Show me how I can deliver that outcome before we take it to the next phase."

Michael: So, can you take me one step deeper into just how the meeting steps and process work, how many meetings, what are the meetings? I'm just trying to visualize because, as you know, you've got advisors in a centralized planning team. So I'm just trying to understand what meetings happen and then who does what between these meetings as they go through the process.

Eric: Yeah. So that's a good question. So each lead advisor has a number two advisor or associate advisor that they work with. And so basically the lead advisor is really helping the client visualize their goals and ask the right questions, really taking their life experiences, and really understanding what the client is trying to do and what the challenges are going to be. And the associate advisor is working alongside of the lead advisor to kind of take a lot of the notes and get the planning steps built and thought, our financial planning questionnaire process that we go through. And so once that it's all completed...

Michael: Sorry, are you gathering all your planning data in the first meeting, or do you send a questionnaire or some equivalent that clients fill out as well?

Eric: The questionnaire has to get filled out one way or the other. So some advisors send out the questionnaire for the clients to fill out ahead of the meetings. My personal approach is I like to basically send out the questionnaire and then say, "Let's go over this questionnaire as we're talking," so I can pull out the information, expand upon what they're putting in the numbers. So it really boils down on each advisor's style, but in the end, the plan won't get created until there's a questionnaire completely filled out as far as the standardization process.

So one way or the other, we got to gather all the data. We got to make sure that it doesn't go forward in our process until all the information is gathered, statements, all the documentation. So our planning team is pretty disciplined in saying, "Hey, if we're missing certain things," they'd understand, things are going to go back to that advisor and say, "Okay, we don't have the complete picture yet. We can't push that plan forward to the next level."

Michael: Okay. So I'm taking it that there's an initial data gathering meeting. We're going through this conversation, lead advisor is leading the conversation, associate advisor is taking the notes, capturing the data, filling in the gaps in the planning questionnaire. So you're a two-advisors-in-the-meeting firm to make this happen. So then, what happens as you come out of meeting number one? Who takes what? Who does what next?

Eric: So the next step is basically the associate advisor is working with the planning team. Typically, they basically come up with the initial draft of the plan. If there's missing documents, sometimes it takes a couple of back-and-forths with the client to get all the information. So the associate advisor is making sure that the questionnaire is fully completed and we got all the entire client's picture of their finances, so copies of statements, cost basis information, tax returns, all the stuff we need to really dig into a plan, that they've gathered that. And now, most clients will have all that information ready to go at their fingertips. So it takes a little time to gather it all correctly.

But then, once it's all gathered in, then they're putting in, into our system, a ticket to be able to have a plan developed. Then the planning team goes back, starts using their processes behind the scenes in terms of leveraging the different software toolsets to come up with the plan, and presents it, basically, back to the associate advisor who reviews it to make sure that the quality checks are there, that they didn't miss anything. And then they're presenting that back to the lead advisor, "Okay, here's the plan." And then once the advisor is on the same page, then we schedule the follow-up meeting with the client to present the initial plan that we do for that client.

Michael: So you said, ultimately, when the data is gathered, the associate advisor puts a ticket in the system. So, what's your, I guess, CRM or ticketing system that you're using to manage all of this?

Eric: It's interesting. Actually, we use Redtail as our core CRM system for note-taking and kind of the basics of CRM functionality, but we couldn't get it to what we want it to do in terms of workflow management. So actually, firm-wide, we actually use Zendesk, which is familiar for most people who use IT services. We used Zendesk and actually built custom workflows, and then Zendesk across planning, trading, operations, compliance to really run the day-to-day kind of approach of the firm.

Michael: Interesting. Interesting. So, does that integrate back to Redtail at all, or is it just kind of two different ecosystems?

Eric: Yeah, it's two different ecosystems. I know there are CRM systems that can do a better job. We used to feel at the time when we were putting all this thing together that we really have the skillsets to kind of maybe do a more advanced CRM system like Salesforce or something like that where you can build the workflows in there. So we started, as we were growing, we had to kind of find a solution that would basically work for the firm that would basically bridge the gap between maybe a more advanced CRM system and maybe what Redtail would offer.

Michael: Okay. Interesting. So the associate advisor gets all the data developed, creates the ticket for the planning team, the centralized planning team, to start developing the plan. So, what does the planning team use to build the plan? What's your software of choice?

Eric: At the core, we use MoneyGuidePro.

Michael: Okay.

Eric: But we modify MoneyGuidePro in terms of the outputs we put into it into being able to kind of tell our story with the process. Because we're linking our frameworks, which is our asset allocation frameworks, to our financial planning process. That's where, I think, we've done some things a little bit differently. So our goal when we walk a client through the plan is not to tell them how to invest money but to guide them through a process where they can make decisions along the way.

So often, we hear from clients when they go through our process that they feel like they're in control, finally, of their destiny, because ultimately, it's not just telling them what to do. They're involved in making the key decisions about how to allocate capital for the long term, and we're showing them the different outcomes of what can occur from an aggressive portfolio to a conservative portfolio. And usually, what happens in the process is the client points to the sheet and says, "That's the outcome I'm looking for. How do I get to this outcome?" And that's kind of the point where we then transition this to, "Okay, how do we implement that plan to achieve that outcome?"

Michael: So I'm just trying to visualize, how does it work when the centralized planning team is trying to create a plan for a client they've never met? Because there, the lead and associate advisors are in those meetings. I'm just trying to understand, how does that trade-off occur? How do they figure out what's going on when they were never present for any of the conversations?

Eric: It really boils down to taking good notes and really understanding the questionnaire. We make sure all the information is actually in there, so looking at cash flow needs. The planning is as good as the advisor is pulling information out of the client. And so you really have to have advisors that are trained to be able to really work with that client to get the entire information, not just try to put out a set of numbers, really get into the client's head to understand really what they're thinking about, all their goals and objectives, looking at the entire picture, and really working with the associate advisor and the planning team to really make sure that's reflected in the document that gets produced.

Michael: And so I guess that's part of why you said, after the centralized planning team is building the plan, then it goes back to the associate who presents it to the lead advisor, which is your internal "let's make sure we actually covered what we were supposed to cover" kind of structure.

Eric: Correct.

Michael: And so, how often does that take some back and forth? Is that often just collaborative back-and-forth planning as an iterative thing?

Eric: Yeah. Essentially, yeah. So when the draft comes back, it's part of the ticketing system. We can add updates to it, make changes to things. But really if you do a good job on the front end, the back end is a lot easier. But if you're missing key components or you have to do a lot of follow-ups back and forth with the client, that can be a little bit frustrating to the planning team because they have to go back and kind of redo the plan a couple of different times to get it to where it needs to be. But like I said, if you do the work on the front end, it makes the rest of the process a lot easier. So we really try to spend as much time as possible getting the front end, all the data, everything organized, and buttoned up with the standardized approach so that the planning team knows exactly how to take that data from the questionnaires and the documents we provide them and put it into the system.

Our planning team is really smart in terms of they understand what it takes to be...what advisors are going through. They're all deeply experienced. So they can understand these client situations. And this really kind of standardized approach we've taken allows everybody to kind of work more seamlessly together because everybody knows what everybody is looking for from an information perspective in order to do their jobs.

Linking Marcum Wealth's Planning Process To Its Asset Allocation Frameworks [28:44]

Michael: And now, help us understand further, how do you link, I think you said, your frameworks, your asset allocation frameworks into the planning process? Are you showing different planning projections if you use model A versus B versus C, and you're trying to show a spectrum of outcomes that way? How do you actually get to that connection between planning software projections and different portfolio choices that you're trying to present them with?

Eric: Right. Well, our director of financial planning and our chief investment officer collaborate together to come up with a lot of the assumptions that go into our planning process, our return forecast. We're not using historical returns. We're using kind of forecast returns based on what we're seeing currently in interest rates and valuations in the market, because obviously, you can't necessarily look at the last 10 years of bond yields and say, "Okay, that's going to be the bond yield for the next 10 years."

Michael: Right.

Eric: So you got to have some assumptions you put into your plan, everything from inflation to medical costs to college costs, all that stuff. So the research team and the trading team and the investment team work well with the planning teams to come up with these assumptions. And what we do with that is we don't have model portfolios per se because when clients come to us, they can come to us with anything. They can come to us with annuities, SMAs [Separately Managed Accounts], ETFs, individual stock positions. But as a firm, we've got to be able to kind of put that stuff that comes to us in some sort of rules and guidelines in terms of process management approach. So rather than building models, we've built frameworks that are designed at the asset class level to give us exposures we're looking for across the board.

So what we do is rather than, with the software we use, which is largely built on Orion, and their trading system, Eclipse, we can then refer it toward our frameworks, which have multiple substitute securities. So if somebody comes to us with 3 SMA portfolios that are all U.S. equity, we would treat that as, say, U.S. equity bucket, and then we just kind of integrate them in as part of the process.

Michael: Okay. That's why you build these as frameworks at the asset class level because you're very flexible to clients having substitutes for whatever default position you would buy if they just literally came with cash.

Eric: Right.

Michael: You're very flexible around substitute positions as long as that still adds up to the broad asset class level exposures that you wanted to see in the portfolio.

Eric: Correct. And we're trying to basically streamline as best as possible. So if somebody comes up with 4 SMA accounts that, for example, when you put them all together, looks like the S&P, but maybe it's underperforming after fees and taxes. We'll maybe convert that into a direct index, for example, and that'll represent the U.S. equity bucket. We'll use an ETF. We'll use the client's existing positions. But we're looking at things both from an asset perspective as well as a tax perspective, because we don't want to just blow something out of portfolio just so it makes it easier for us. We got to be able to work with the clients to make the most tax-efficient way to invest the money.

Michael: And so I'm just trying to visualize it. How challenging does that get from an implementation, moderating, and performance reporting perspective when lots of clients have lots of different substitute securities? A few clients have consistent returns even in similar asset class frameworks because they've each substituted their own different stuff into it. That means your performance for the same asset framework varies depending on what they brought to the table originally.

Eric: Yeah, I think it's definitely a challenge. It's definitely a pain point of doing it. But I think if you look at the quality, there's a lot of quality investments that people bring to us. It's not usually saying it's a good or bad investment. It's usually that the investments aren't lining up with the long-term plan. So there's a lot of consistency to it. It doesn't really matter whether it's a Fidelity S&P 500 Index Fund versus a Vanguard Large-Gap Index Fund versus a Schwab Large-Cap Index. Those are all pretty similar approaches. So we're looking at the tax and say, "Okay, while there's differences, they're not that different in approach." So we're looking at tracking years. We're looking at kind of consistency in the strategies. And then we're really just doing a lot of quality analysis. So if something's a red flag, it may take us a little bit of time to transition. But over time, if we're smart about it and we look at the tax efficiency over longer periods of time, we can slowly get them close to our frameworks and our ideal allocations. But it may not be day 1, it may take us 6 to 12 months or even 2 years to get them to where we need to get them. We can do it in incremental levels to get it as close as possible to our frameworks.

Converting Prospects Into Clients Through The Plan Delivery Process [33:06]

Michael: So you gathered data, in this initial data gathering meeting, take it over to the planning team. Planning team builds the plan, comes back to the associate, lead advisor. They do a review and make sure they're on board with how it's shaped up or I guess send it back with a new ticket if there are some adjustments that they want to see. So then I'm presuming next is a delivery meeting to the client, a plan delivery meeting.

Eric: Yep.

Michael: So, how does that work for you?

Eric: So basically, we go back from the start and say, "Here's what you told us." As we're walking through the plan, we're showing them, "Okay, let's make sure the net worth report that we developed and all the accounts are lining up," we check that. Then we go into our assumptions of saving versus spending timeframes, what they're saving versus what they're spending in the future. The first meeting, we present the plan. We're just going to really make sure we got everything accurately. We tell them, "Listen, we're not going to be 100% accurate day 1 because there's probably some things you didn't tell us in the initial plan." But we're going to try to get 80% to 90% of the plan updated from the start. We're going to have to go back and probably do a couple of updates as the client thinks about it, sees the plan, and comes back with changes and different assumptions with it.

So really just the first planning session is all about making sure, "Okay, did we actually capture what the client's current financial situation is and what their goals are?" And if we had to make some tweaks from there, we'll go back and do a second planning, and we will make some adjustments through assumptions that the client brings or different things that they hadn't told us in the first meeting. Because now they start to see, okay, there's a process here, and they realize they've got to make sure that they give us all the information so we can do the right job when it comes to our planning process.

Michael: And so, are you coming into this meeting with MoneyGuide printouts, are you placing it up on the screen and just do it live and interactively?

Eric: No, we come in with our version of the MoneyGuide outputs. So we take some of the MoneyGuide outputs. We've actually formatted our own outputs to tell our kind of process story alongside of it. So we take some of the outputs from MoneyGuidePro and put them under our own format.

Michael: Okay. Okay. And so, are you coming into this meeting with recommendations and action items as well? Because it sounds like this is not yet, we're just in the, "Let's really make sure we're all oriented around the financial situation and aligned that this is the right picture."

Eric: Right. The first planning meeting is really about coming in...we're not coming in with any recommendations. We're just coming in to make sure, okay, does this reflect what the client's current situation looks like and what they're achieving? Are they on target or are they off target? And so we're really just presenting the facts they've presented to us and say, "Okay, is this really the story that you're trying to basically achieve?" And so that's what we're looking for is, did we get an accurate reflection of who they are and what they're trying to accomplish, and then, are they on track or off track? And if they're on track, great. What can we do to make it better or more efficient? If they're off track, how do we get them back on track? That's why we're asking those questions in that meeting.

And then, usually, once we basically come back, there's usually a couple of edits. The second meeting we go through is we've addressed the edits we had to make, and then we're really trying to lock the plan. We're saying, "Okay, we all agree that this is the plan" in the second meeting. And so we verify that. And in the third meeting, we're coming back typically with our recommendations on how to actually implement the plan.

Michael: So meeting number 1 is gather data. Meeting number 2, I guess, isn't really a plan delivery per se, it's a pre-delivery review, "Here's the numbers and what we see. Here's the current trajectory of where you are. That may or may not already line up with your original goals. If they are, you're on track, and we can improve. If you're off track, then we may have to come up with some more substantial recommendations." So then you do plan updates. I guess that's a new ticket back to the centralized planning team. "They want to see this. We got to adjust that number. They forgot to tell us about this asset." We make some adjustments. We get a second plan, second version of the plan back. And we have, I guess, now more like a third and final meeting where we're going to bring the recommendations.

Eric: Correct. Obviously, the more complicated cases, it may involve more meetings. If it's a pretty straightforward case, we may be able to do it in one meeting. It just depends on the client's complexity and the accuracy of the data.

Michael: So out of curiosity, do you have labels for these meetings internally of discovery meeting, delivery meeting, whatever they are? How do you characterize them?

Eric: I think each team has their own spin on how they kind of position them with the client. Nothing is formalized across the firm.

Michael: Okay. So when you're getting to the third meeting and it's time to formulate and deliver recommendations, who's crafting recommendations? Does this come from centralized planning because they make the plans, or does this come from lead and associate advisor because they've been the ones that are mostly interacting with the clients?

Eric: So, say, we've agreed to a specific set of goals and objectives in the plan. We've locked the plan, and now we know what the asset allocation model that we need to kind of implement is. We're going to basically do an asset allocation to say, "Okay, here's how you're currently allocated, but according to the plan, we need to allocate like this," and then we really show them straightforward, "Here's how you go from A to B to get to that point." We show them a full disclosure of here's all the recommendations, the trades, the investments, all the fees. Everything is laid out to the client in very clear format. They can understand how they go from plan to implementation.

And then it really boils down to the client saying, do they need help with the implementation, or can they do it themselves? And so, we always kind of tell clients this: "Listen, there's no reason you need to say, hire an advisor. You should be hiring an advisor because they're going to add value in both the ongoing planning as well as the implementation of your portfolio and your plan. The question is, do you need more? Can you do it yourself? Do you need some coaching or do you need us to run the process?" So there's 3 levels that we can work with the client.

If you just basically just need the plan just to check off the box that you're on the right track and you're doing it yourself, that's great. Those are clients that usually don't engage with us, but they refer us to other clients. The ones that need a little bit of coaching may hire us from a consulting perspective. They're running their own process, but they want to have a check-in approach. But the vast majority of clients, they hire us because they're not good at running process. They're going to let emotions take over. They make bad decisions at the wrong time. They're not going to stick to the process. That's when they're typically hiring us under an AUM model structure.

Michael: So, as you go down this path, I guess, I'm just curious, when do they actually become clients? Is this three-meeting process they're still actually prospects, it sounds like, because they're not paying for a plan and you haven't gotten to investment management yet? We're not even clear whether they're DIYers or want coaching or want you to run the process. So, is this ultimately something you're doing with folks while they're still in the prospect stage?

Eric: Yeah. I think, largely, when we get referred in, our goal is to see if we can add value to what they're doing. So usually, on the front end, as you're doing the initial maybe introductory meeting with a client before you get into the planning process, you're really trying to figure out, is this a client that really needs your services or not, what the scope of the process is going to look like. And then if they say, "Yeah, I want to go through the planning process," we'll make that investment in those clients, knowing that we kind of have a little bit of a background of who they are potentially and what they're looking for. So I think we always say we just trust ourselves that if we deliver value to a client from a planning perspective, most likely, they're going to hire us to implement that strategy if they feel that we've added a lot of value from the work products we've done for them.

Michael: I'm going to imagine, you obviously get a reasonable percentage of them that go through and convert because you're still doing it and have a multi-million-dollar firm. I guess I got to ask how many people go through this process, I got to presume, takes a lot of time and goes to you or don't implement or just they're in the DIY or the lightweight coaching and they don't want, actually, you to run the process, which I'm presuming is the core business. How much of a challenge is that?

Eric: I think a lot of that can be weeded out because if the client is not going to take the planning process seriously, they're not going to be a client of the firm in the end anyway. So I think you weed them out in the beginning where if they just want to kind of kick the tires a little bit, see what we do, we're not really taking those clients through the planning process, because they're just out there kind of shopping for performance or shopping fees or shopping some other things, but they're not really focused on really following our process and planning. And every time we go away from our process, that's where we get ourselves in trouble with clients because now you're battling a client. They're not really following your process, so are you really adding value to them? And so we try to weed that out on the front end when we just kind of meet the clients, understand the client situation.

But usually, once they go through the planning process, they're going to most likely become a client one way or the other, whether you're coaching them or whether you're consulting with them or basically doing a discretionary AUM model. But you just kind of trust yourself that you've added value along the way, and I think it's a question of, what service teams are you working with? So we have teams and team members that can cover all the different range of clients. So younger advisors, they're working with smaller-sized relationships or up-and-coming relationships. They need a little more coaching, but these are great feeder ground for young advisors to be able to kind of learn the process, build relationships, and build referral networks over many, many years. So we've always learned that if you give to get and follow the right process and you deliver value to people, you're able to build that referral network pretty quickly.

Michael: So then, how does this work from a business model end? What ultimately is the fee model for the firm?

Eric: It's a standardized AUM fee model. It's on our ADV. It starts at 1%, works its way down in a tiered fee schedule. So that's the standard for our AUM, and we're pretty disciplined about it. We said, "Here's our value proposition. Here's what we do. Here's our fee structure. It's very transparent." And we're showing you, "Here's what we do." And like I said, the clients know, going into this, they're going to see everything that we do, and we're going to give them all the recommendations on how to implement the strategy. So if they're comfortable doing it themselves, great. That's the client that's going to take what we're doing and start it off, and maybe they'd come back a couple of years later and say, "You know what, it is more complicated than I thought, and I want you guys to engage." Or maybe it's a situation where a couple may have one spouse that's active in the process, but then, as they age or they become not able to run it, they want us to kind of step in into that role and take it over.

But the vast majority of our clients is a working partnership because it's more than just running the investments. It's the ongoing planning. It's the ongoing process management. It's really looking at the whole value proposition for their family. And so as long as we're delivering value, I think clients feel like the advisor fee that they're paying for is justified. If we're not delivering value, just providing one component of the things, you're just doing asset allocation modeling or you're just giving some generic advice, well, then they're not really feeling that you're running the process for them. So it's probably not a client that you're going to want to take on long-term anyways.

Michael: And in your fee schedule, I think you said you start at 1% and start breakpointing down over time. Where do breakpoints start kicking in for you, and how low do you get?

Eric: It starts at 1% the first $500,000 and drops down to 0.95%, and it tiers all the way down to 25 basis points, I think, 20 to 25 basis points.

Michael: Okay. So you get to 95 basis points pretty quickly, after the first 500 just to start notching down.

Eric: Pretty much. Pretty much, yeah.

Michael: And then, how high do they have to get before you get down to a number like 25 basis points?

Eric: Well, 25 basis points, I think with those ultra-high net worth clients, there's a challenge between, as you get to clients above $10, 15, 20 million, then you're really getting kind of this more customized pricing models where your pretty much really large clients, $50 million, $100 million size clients, they're coming in with a different mindset in terms of the fee structures. So I think if you look at our fee schedule, we pretty much moved down the benchmarking of our fees across the industry. We're straight down the middle of where advisors are. We're pretty much in line with the median average across the firm. But in the larger relationships, we're probably a little more aggressive in terms of the pricing model because it drops to those tiers. So somebody coming in maybe with a $50 million or a $100 million account, instead of going through the tier structure, we're pretty much starting them at the low end of that tier.

Michael: And you said, in addition to the clients that want you to run the process, practically becoming ongoing discretionary AUM clients, you may have clients that want the more incremental coaching sort of things. So, is that fee for service? Is that you're billing them by the hour? How does that work when they want the one in the middle?

Eric: It depends on what they're looking for. It's a function of what the work we're doing. So we try to basically either it's a rate times hours or it's a flat fee number based upon the scope of services, and the scope of services really depends on what are we doing for that. Some of our more recent engagement, we had a client basically come to us and say, "Hey, listen, I've got assets all over the place. I need to be able to centralize these things, and I'm looking for a team that can actually help me develop a process and technology to be able to link all my accounts together, provide me some coaching, but I want to run my own process." So we were able to kind of show them a digital model of a portal how we can integrate everything from a technology perspective and then show them a fee model that says, "Here's our cost, here's our technology input, here's our time we're going to spend, and here's our margin we're going to make." And we just show them, "Here's the flat fee it's going to be." But they're running their own process, which is a different set of liability than if we're running the process. So you got to take into account the liability management associated with that as well.

How Marcum Wealth Generates Referrals From Its Attached CPA Firm [46:10]

Michael: So now, help us understand just the growth of this multi-billion-dollar advisory firm attached to a CPA practice. So, how does it work in trying to generate clients when you work within a CPA firm?

Eric: Yeah. Well, the funniest thing about working in the CPA firm is you got to learn what a CPA actually goes through. So you need to understand their business model, what they're doing with their clients, and really how you ultimately fit in terms of adding value to what they're doing. And that's hard to do unless you're embedded in the firm sometimes because they're not thinking about every day, "Okay, geez, I need to refer business over to the wealth management side." What they're thinking about is, "A client is coming to me, asking a lot of questions, how do I bring a team in to answer this client's questions?" So adding value from a customer service perspective is really kind of the secret sauce in working with a CPA practice. If you're expecting the CPA to just open up the doors and just hand you business left and right, usually, it doesn't work that way because the CPA is saying, "Well, why do I need to take any extra effort to go and bring in a relationship that you could jeopardize if it's not really what I'm focused on?" But if you're saying, "Hey, let me show you ways I can add value to what your clients are doing and improve your customer service model," that's where you get the traction.

Michael: I think that is an interesting framing. Classically, my best wealth management prospects are probably my CPA's best business accounting, business services prospects, except if that's their best business services prospect, they're already getting paid for that. So me getting introduced in is just the risk that I can screw something up, not necessarily the benefit for them because they're already doing the accounting work they're doing for their client, and also, they're getting paid reasonably well for it.

Eric: Correct. And it says if you add value to what they're doing from a customer service perspective, because, listen, CPAs, it's tougher and tougher for them to do all the compliance work and then actually meet with all their clients all the time and go through and answer all the questions they've got, so we actually...it's nice that we're a non-billable source of value that we can deliver to the client. And then if the client says, "Hey, this is great planning, I want you guys to implement the plan," then that's how we get compensated just in the implementation side. But we get access to these clients because we want to make those investments in those clients to add customer service capabilities for the CPAs.

Michael: So, can you describe that more? What do you mean by adding customer service capabilities for the CPAs?

Eric: Really it's around the planning. So most of the CPAs, they're billing as many hours as they can bill a year. So, how do I take the time to stop and do what they're doing from a billing perspective on the compliance side to start also pivoting to doing the planning side? So I think what we've identified as kind of the gap is that these clients are looking for more information and insight, because the CPA sits at the center of the trust universe of advisors. So these clients are coming to them with every question about Social Security, Medicare, what's going on with their life insurance policies, what's kind of their business, looking at all these different tax rule changes. They have a lot of questions. The CPA is going, "Well, geez, how do I answer all these questions when I don't really understand all the goals and objectives they're trying to achieve?" And that's where we kind of come in as that value proposition on the planning side.

Michael: So, structurally, you're literally under common ownership to the CPA firm. Is that how it works when the CPA firm has a financial incentive, at least, at the parent company level to see the accounting side and the wealth management side work well together?

Eric: Correct, yeah. So Marcum LLP, the accounting firm, is a shareholder in Marcum Wealth LLC, the RIA firm.

Michael: Okay. But to me, part of the takeaway of your discussion is, yes, but that's not really enough if you're building within a CPA firm and hoping to see activity because the individual CPAs, I guess, frankly may not care that much. They don't necessarily own that much of the centralized parent firm. They're not going to retire materially faster because they get their profit distribution on their ownership percentage, on their allocation percentage of a small slice of shared ownership in Marcum Wealth. I think that's a little too far removed from, "Or I can just serve my clients well and bill them my full hourly rate."

Eric: Right. And CPA alliances have been around for decades. We had those back in Morgan Stanley days. And like I said, that's nothing new. But the common problem is they're not thinking about how they...they're not incentivized to drive business to a CPA just for that. It's not going to move the needle for them. And like I said, for them, it's about how do you add value to their clients and their practices. And that's really what gets CPAs motivated, is saying, "Hey, this is a great experience for my clients." I always talk about it's the "CORE" feeling that they're going to get.

So when a client goes through our planning process, they, firstly, feel they're in Control for the first time because we've taken through a process on planning that really leverages and engages them in this process. So it's not somebody telling them what to do with their money, but it's actively working with that client to develop a plan and a process. So that puts them where we've now empowered that client. And then they go through the process. The O is organize. For the first time in many years, they actually have everything kind of centralized in terms of a plan and a process on what they're going to do. That usually leads to the R, which is they're relieved. If they're off track, we show them a path to get them back on track. If they're on track, we show them how to make it more efficient. And the last part is the E, which is basically they're engaged, and they're willing to make the changes that we want to do because we've actually got a plan and a process in place. So they're energized to make that change in what they've been doing to have us take over that process.

And we tell the CPA, as I said, "This is what your clients are going to go through," and then we back it up with delivering that process. And then that's what the feedback is from the client. When the clients tell the CPAs that, they go, "Oh, that was a great experience. Why don't I do that for most of my clients?" And that's how it kind of takes off. But you got to be able to kind of get in there, show that you're going to basically not take but give. And that's kind of the approach. Our firm is really built on a "we" approach rather than an "I" approach. And we really want to give to get as kind of the mantra for our DNA at the firm.

Michael: So I'm still just trying to visualize more how this conversation works with the CPA. You're hanging out in Marcum Wealth. There's a CPA over yonder in the other part of the firm that's doing business services for a chunk of pretty successful business owner clients, which probably includes a couple of prospects for you at some point. So, what literally is the outreach? How do you open the door with them? What's the conversation?

Eric: It's a lot of little things. It's doing events together. It's going to lunches. It's learning about their practices, taking the time to actually know who these people are, and understanding what their client base is looking for and how we can add value, and showing them how we can add value. So it's hard work. You got to network. You got to basically press the flesh. You got to work the relationships. That's where it's hard being outside of the CPA practice getting inside the CPA practice because we see them in the hallways, we're talking about them, we're in lunches with them, we're going and having a cup of coffee with them. We're all just sharing ideas.

When we first joined our first accounting firm partner, it's called Minotti, we would all sit around in a room as partners and talk about how we can add value to clients and solve solutions for everybody. That is carried through to this day. We continue to do that approach where we sit down with our CPA partners, and they bring us ideas, and they ask our opinion, "Hey, what do you think about this? How can we approach this?" or, "My client is going through this process. How can we add value?" And we all share ideas back and forth. So it's a collaborative approach.

Michael: So I understand, but I feel like almost any advisor I know would say, "Well, I provide valuable financial planning. It's clearly a value add for any CPA and their clients who don't already do that." But most of us are not getting an avalanche of cross-referrals from CPAs even though, ostensibly, we're bringing in the value add. So I'm still just trying to understand what's different about what you're doing and every other advisor that offers value-added financial planning to every CPA they know and is not getting the results you are.

Eric: Well, I think it helps that we're embedded inside of the firm. We carry the same brand, we carry the same card, and we're living day-to-day together. That's definitely an advantage we have that drives the referral process. Because without that, if you're not in the building, it's really tough to really make those day-to-day connections. We obviously have situations where a CPA will walk a client into our door unannounced and say, "Hey, I like to introduce you to so and so." That's great. That's part of the magic that happens. But it's also understanding their practices and what they're going through and understanding what their challenges have been and really learning about how their businesses are operating and where we can add that value component. And then really trying to work together to drive opportunity sets, to doing co-events together, going to the same networking events, and really making the connections back and forth both ways.

Michael: Are there particular value-add conversations, offerings that tend to resonate more, that tend to open the door more readily?

Eric: I think it depends on the client situation. So for example, I think where we see a lot of unique opportunities is really in the middle market business owners' succession market. So we have a bunch of our firm advisors, CEPAs, Certified Exit Planning Advisors, which is a big advantage for being in the accounting firm market. So a lot of the firm's top clients are going to be these middle market business owners that are always going to be approached by private equity to sell their business. And these are the bread-and-butter clients for almost all CPA firm practices. But at some point, these clients are going to look to monetize their business, and so your top margin clients in the accounting firm side can all of a sudden be taken away because somebody comes in and buys the business. But if we work along...so one of the things we do with a lot of the CPA partners and their business clients is develop a business plan for the business that's in line with their personal financial plan.

So we're making those investments early on to get a seat at the table so that when there is a liquidity event or the client is contemplating a liquidity event, we're helping them guide them through that process. And then I think they see the quality of the work we bring to the table, the planning we bring into the table so that, when the liquidity event does happen, they're choosing us to be able to implement the strategy post the sale of the business.

Michael: Interesting. And I guess anything that helps to address or maybe fend off or stall that conversation, that liquidity event for the CPA, in fact, is good news because they just get to continue doing the work with the clients that they're already working with.

Eric: Yeah. I think it's maintaining in-house for the firm, and I think it allows us to be able to provide kind of resources to be able to maintain the connectivity with that client over the long term. So it may shift from doing more business corporation tax work to more estate work, estate management approaches. So you're still maintaining them as a tax client, but maybe we're not doing as much work on the business services side. We're doing more work on the personal side for that client. So it maybe becomes more of a higher-end private client services client for the firm.

Michael: Is that so challenging in the CPA world? Because I got to assume, whoever does the accounting services for the business may be different than whoever is providing some of the other personal services.

Eric: It's still largely the same people. I think it's just a question of...they've always been doing the personal side of it. So usually, if you're the business owner, you're having the same team that's doing your business taxes, also doing your personal tax work as well. There may be different team members that focus on different aspects of that. So maybe if you've got your corporate tax side, and then they bring in other CPA members on the personal side to kind of work alongside that lead partner. Usually, the lead partner is maintaining that relationship for the firm.

Dividing Advisory Teams By Geography And Client Segments [57:43]

Michael: Now, I think you had said earlier that, ultimately, each of the advisory teams build their own focus. Some pursue business owners, as you've said, and have their CEPAs, but I think you said there's another group that's focused on physicians, another group that's focused on blue-collar clients. So help us understand more the way these different advisory team focus groups work.

Eric: Yeah. So we kind of have the diamond model, if you're familiar with that kind of concept in place. That's kind of what we've built the firm around is that each diamond has its own unique characteristics based upon the clients they're servicing and their client's service needs. A traditional diamond model would be a lead advisor, on the one wing would be basically your associate advisor that works with the lead advisor, on the other wing is basically going to be your dedicated kind of customer service representative that's going to do all the kind of behind-the-scenes work with the client, and then you got generalized support of the firm at the bottom of the diamond. And then that diamond, depending on your service model, may require some additional components. So you may have to have additional...if you're doing more higher volume, lower AUM type clients, you're going to have more customer service needs and you're going to have to staff for that. So each model, we're trying to basically just look at the profitability of each team, how they're operating, and make sure their staff effectively did deliver the service model for that client base.

Michael: And is there a particular profit margin or threshold that you target and work back to? How do you figure out what those numbers should be?

Eric: Yes. I think it was a work in progress for us. So obviously, we need to continue to upgrade our accounting software to be able to do that analysis. So that's something we're focusing on as one of our kind of core tenets in the next year or two, is to really get the financial reporting system to be able to do that more accurately. Because really it's basically a manual approach to kind of do those analyses today. But as we continue to build our accounting system capabilities, we're trying to basically solve that solution. There's no perfect solution that we can just pull out of the shelf today.

Michael: But ultimately, the goal is, look, you want to do a high volume, low AUM client base. You want to do a low volume, high AUM, ultra-high net worth client base, the firm's perspective of the team is here's the margins that we're expecting you to be able to get to. So you can structure yourselves however you wish in those different combinations and trade-offs. But at the end of the day, a certain amount of revenue should have a certain amount of cost to service that revenue that drives a certain amount of profitability for the team, and that's what we're going to hold you accountable to.

Eric: Yeah. It's also staff utilization. So as you're bringing in younger advisors, so you should be able to help...those younger advisors should be able to service a wider range of clients as they learn the experiences that they need to along the way. So you just go to manage staff utilization, profitability, revenues, cash flows, make sure you're not underspending or overspending for the client segment you're going after.

Michael: And how do they pick the segments, the focus areas?

Eric: I think a lot of it is just what their personal networks look like. Obviously, we have our connections to the accounting firm, but obviously, they have their own networks and what they're good at. So for example, one of our partners was a former nurse anesthetist who got in the business many, many years ago, he went to Merrill Lynch, and then he joined and set up his own RIA practice. So he had a lot of connections back to physicians, and he had a natural market for them because he knew them. Whereas I don't have the necessary access to those people. So that's where a niche kind of develops, and they continue to build upon it. Once they got solidified in that network, they just were able to get more and more referrals out of it. Some people golf. Some people do sports. Some people do other activities, community involvement. So we kind of leave it up to the advisors to say, "Okay, what is your natural market versus the CPA market? And how do you make those connections?"

Michael: So, how many different teams and focus groups are there now?

Eric: The main group is our affiliate team, our Connecticut teams, our Cleveland teams, our Akron teams, our New York teams, our St. Louis teams. So we have them kind of by areas and regions, and then all those office locations. Then we have kind of subgroups and what are they focusing on. So for example, the Akron market, we've got a couple of different advisors working in that Akron market for us, and one is focused on, like I said, the medical practices and medical services providers, another one is kind of focused on his connections with the community. So it just depends on what their natural markets are, but they're all still tying back to our process, how we work with the CPAs, because obviously, that's where they still got their own network of clients to bring in outside of the accounting firm as well.

Michael: So I guess, in that context, it doesn't sound like they're marketing their own sort of specializations independently. It's not like they've each got their own mini website of, "I specialize in doctors," and such. Everything still feeds back to Marcum Wealth as the core advisory firm. This is their local on-the-ground marketing approach or their local Marcum CPA-related folks that they're networking with to position themselves this way.

Eric: Correct. We're not really doing marketing to the public. Basically, we're almost exclusively referral-driven across the board. So we're marketing to maybe the CPAs internally at Marcum to make sure they understand what we can do for their clients. But we're not really doing a lot of advertising in the markets. We're doing the traditional stuff, community support, sponsoring events, things like that, doing our own events. We're providing content to the areas. But we're not going out there and buying lead lists and calling on people and marketing direct to consumers.

Michael: And just how does growth break out at this point between what comes from the accounting firm as a cross-over versus presumably some referrals from existing clients because you've had a lot versus just strangers to the firm that somehow find their way to you, you go to your local networking meeting and build a relationship with the prospect?

Eric: Generally, I think it's been about we've looked at the business over the years on different things, as my business partner, Chris, and I first started the business back in 2006 with the accounting firm. Historically, our business has been about...half of the business is coming from the accounting firm, half is coming from our own networks, which is kind of what seems to be...we've talked out of the firms inside the same similar models that seems to be a standard approach where if you're solely relying on CPA practice, you probably haven't developed your own personal network enough. So the idea is trying to find the balance between the two.

Michael: Okay.

Marcum Wealth's Strategic Approach To Acquisitions [1:04:21]

Eric: What we do find is that it takes a little time to build that thing. So when we brought new people into Marcum Wealth over the years in terms of acquisitions we've done, the first year is really about them making the transition. The second year is about them really building the network in the CPA practice. And the third year is where they start to see the results of the work they put into in terms of building their brand with inside the CPA partners. That seems to be a pretty standard approach. It's a multi-year process to kind of get ingrained with these CPAs. It's not going to happen on day 1. You got to continually give to get. You got to continually earn your spot. If you're expecting instant results, you're not going to see it instantaneously. It takes a while to build these relationships and build the network and really establish trust.

Michael: So, to what extent is acquisitions part of the growth strategy for you when you've already got some flow coming from the CPA firm as is?

Eric: Well, for us, that's the big challenge, is obviously we're not covering all of Marcum's offices today. So if we look at the world today, we're in maybe 7 of the 40+ offices. So we can't cover the entire network as is. We're out there looking to either hire advisors or do acquisitions where we can basically provide a process that they can kind of bolt on to. And I think, as an advisory firm practice, they have to kind of make the decision, if you're going to join another practice, can they do more than just offer a platform to work off of? Today, you can buy off-the-shelf solutions in terms of trading, rebalancing, reporting stuff, all the different major providers. That was one of the big things that allowed the RIA business to kind of bloom and prosper is that the technology became ubiquitous. You didn't need a big firm to be able to leverage technology to set up these businesses.

Now, the challenge I think a lot of firms are having is, how do they grow the business organically rather than just market growth, right? And you got to have a certain amount of scale, process, and a network of centers of influence to be able to feed the machine to make it work. And so, for us, our focus on growth is definitely acquisitions as part of that process, but we have to be able to deliver acquisitions the resources they need to grow and prosper to make it worth their time to come into the practice. And there's a bit of a challenge with that because we're not right for everybody. So I think that's the thing we have to be discernible about when we do mergers is, are they going to fit in with what we do? And we're very upfront about that. There's a certain way we do things. You're going to kind of follow our process. You're going to kind of do it the Marcum Wealth way, which is a bit of a challenge because, like I said, one thing we know about this industry, we've got a lot of strong personalities in this industry and everybody wants to kind of do it their way. And as a firm, we've got to do it the Marcum Wealth way because we have to have consistency of our deliverables across the infrastructure and the enterprise.

Michael: So it sounds like, for you, a material aspect of acquisition opportunities is finding a firm in locations where there's already a Marcum accounting office but you don't have a wealth management presence. That's a way to stand up the RIA branch in that location.

Eric: Correct. And so some of those could be...what's interesting is we've had both mergers and we've done that where we've found a market where we need to put somebody into it, and we've also done acquisitions where Marcum has acquired CPA practices that actually have RIA practices that need a little more horsepower built around them. So for us, I think day 1 has always been about trying to get a footprint in the markets where Marcum has got a footprint that's sizable and then continue to build upon that and just try to figure out, because we are a separate company, one of the challenges is that we have to kind of run our own capital stack and our own access to capital relative to the accounting firm. So we got to figure out, one, can we afford to do the acquisition? Two, is it going to fit in well?

And like I said, we've danced with a lot of people, but ultimately, it's got to be the right fit. So we can like the team that we want to bring into the practice, but the accounting firm guys don't want that firm we were talking to, it may not actually work out. So the personalities have to line up with both those local markets and the regional teams that run those markets. So it's not a perfect easy thing just to bolt on advisors. You got to find people that are going to, one, want to do it our way, two, can integrate with the CPAs, and three would be the patience to let the things develop, continue to work and develop and trust the process that it's going to eventually lead to good results. Because I think some people come in and say, "I expect instantaneous results," and it's just not going to work that way. Floodgates aren't just going to open because you stood up a shingle and say, "I'm a Marcum Wealth advisor inside of that office."

Michael: So, are there particular markets that you're trying to be in right now or cities and locations where the CPA firm has a presence and you wish you could build one?

Eric: Yeah. For us, today, I think we're looking at markets like South Florida. We've got a pretty good connection in the Tampa market today where we've been for a while. But I think Miami, Fort Lauderdale are big practices for Marcum. Boston is one market. We're looking at expanding into New York. We want to continue to build up New York. L.A., San Francisco, most of the Super Bowl cities where Marcum's got a presence, those are the areas we want to do. But we had to look at the accounting firm model as you've got to go one step deeper because you've got to look at those offices and say, "What is their tax business versus their audit business?"

So we are restricted in some of the clients. We can't work with every clients at Marcum because there are AICPA rules and independence rules that we have to kind of follow, and we can't conflict with audit process because there could be a conflict of interest. So we're kind of more focused on where we can add value on the tax side to the tax partners. That's more of the focus than it is on the audit side. But there is crossover. The audit partners do have personal issues with business owners that are not doing audit work, that we can definitely provide value for them on those situations.

Michael: Interesting. So it's not enough just to reflect, "Hey, this is a big CPA practice because the CPAs within the practice have a lot of different subsets of services, and audit is a particularly challenging one to have multi-relationship with versus..."

Eric: Yeah, because you really got to be...you could really do a lot of damage if you violate the independence rules. So we have conflict checks that we have to go through, and there's a lot of behind-the-scenes work to make sure we stay compliant both on our side as well as the CPA side.

Michael: And so, thus, the focus on not necessarily audit locations but the ones that are doing tax and small to mid-sized business accounting, because the accounting work is separate from the formal audit attestation side of the business.

Eric: Correct.

Michael: Is there a particular size or profile of the kinds of firms that you think about acquiring? I'm presuming you've kind of got a balance. Ideally, it's a practice that has some reasonable economics unto itself. But if you're trying to get presence and capacity in a city, you don't necessarily want to get the traditional, it's a pretty profitable advisor who's going to retire and wants to sell their business, because that doesn't give you capacity if they're going to retire. You're looking for a different type of deal.

Eric: Right, that is definitely a challenge because the worst thing we can do is bring in an advisor that's just not going to develop the office. So we don't want to acquire a book of business just to acquire a book of business. We want to bring advisors in that want to grow and that want to basically do more advanced work with these CPAs. Because the advantage of working with CPAs is you can deliver tax advice and other things which you just can't do as an individual advisor because you're not a specialist. You're not licensed in it. But when you can collaborate with a CPA directly on a client case and you're working together, you can really just create a planning for clients that they just hadn't really thought about or hadn't seen before.

So for us, I think it depends on the market size and depends on the office size. So larger offices, say, our Fort Lauderdale and Miami markets, they typically would require a bigger team to kind of come in because I think it's this gravitas of if you're bringing more of a team in for those bigger offices, it does pretty well. But if you put a big team in a small office, then it overwhelms the CPA office. I think it's trying to find to size of the team relative to the size of the office that can make the most sense. And so, for example, in a smaller market, you maybe just hire an advisor directly. So we've been working with a young advisor in the Nashville market that we brought in, that's had a lot of success now starting from scratch, leaving a trust company, and now developing his practice inside our Nashville market. That was a market that was probably only going to support one advisor versus a number of tax professionals they had. But he's now been able to get good traction with it.

And then, as you go from a small office with one advisor to mid-sized office, maybe you're bringing a team in. And then for large markets, you probably have to look more of the overall firm because you're going to do a lot more. There's a lot more people to cover, and there's a lot more things you have to do to kind of get traction in that market.

Michael: Is there some ratio that you think about of how many advisors per tax professionals or how many advisors per tax and accounting clients? I can staff one advisor for every X tax professionals or tax clients in a market.

Eric: We kind of look at it, but it's no hard-and-fast rule. It's just more a question of really understanding those offices. And so what we try to do is we really try to work with the Marcum office leaders and regional leaders to understand what's going on with their market, what their strategy is, what their growth propositions look like, their focus on their clients, the focus on the CPAs, and then really just try to figure out what's the best fit. One of the things we do have to do is we don't just make an offer to an advisor without talking to our CPA partners. So the CPAs are directly involved in any sort of acquisition we do in a market or any new hires in the market, because they really have to buy in, "This person is going to fit within the organization," and especially, not only our organization but Marcum LLP and the accounting firm side.

Michael: Okay. Because at the end of the day, you need to make sure that when that advisor or firm comes on board and starts showing up in the local CPA office that they are happy to have him or her around and engaging with them and not saying, "Who is this person? I don't like them. Make them go away." That's not going to work.

Eric: I think the CPAs pick up on the energy you bring to the table. So for example, if you bring in an advisor that's just sitting, reading the newspaper in his desk, and not integrating with anybody else, then it's going to be, "Okay, why would I want to work with that person? They're not really bringing the energy and they're not really bringing the ideas to me, so why am I going to waste my time reaching out to them?" So I think part of it is you have to kind of come in with that give-to-get mentality and ask questions and integrate and talk with the CPAs and learn about what they're doing and show them how you can add value. It's not a simple task, and you have to do it consistently over time to build that trust. If you do it the right way, you trust your stuff, and you give value to people, then you're going to have a pretty good likelihood that they're going to think about you in the next client conversation that pops up, which is usually around a major life event or something that they have a question about.

So without having that connection to the CPA, it's really difficult to make those inroads because they're not thinking about you when that client conversation comes up. But if you've put yourself in the right spot with that CPA, when the client situation arises and they say, "Hey, I've got a great person you can talk to," they're going to help answer these questions, that's when the referrals start to happen. But you got to earn that with that CPA.

What Surprised Eric The Most Building An Advisory Business [1:15:40]

Michael: So you're nearly 20 years into this journey now. So, what surprised you the most about building an advisory business and doing it within the context of a CPA partnership?

Eric: I guess what surprised me the most is how you have to continually have to evolve at every stage of the development of the business. So you start with a very simple easy practice with a couple of people, and then it continues to evolve as you grow. And as you continue to grow, you have to keep reinvesting back in the business. It's always that balance between how do you find the right people relative to maintaining the profitability of the firm relative to the right deliverables. It's a complex approach because it's how you build a business within a business. And like I said, I didn't have any formal training being a CEO. I always thought of myself as a pretty good advisor, but it's been an on-the-job learning to be the CEO. And like I said, it's always more challenging than you think it's going to be, right? There's a lot of things you never thought about that you have to make decisions on. So that's one of the very interesting things about doing both an advisor role and a management role.

But then, at some point, I think one of the things is saying, "What do you do next?" and then being able to kind of delegate things down. And I think that's always a challenge for advisors is I think a lot of advisors want to control everything. And then, in order to build scale, you got to be able to let things go. So you got to be able to trust your planning team, trust your research team, trust your trading team to be able to do their roles as part of the process and finding really good people to fulfill those roles in the organization. To me, it's always a lot harder than I thought it was going to be, but that's the cost of building a successful practice, it's going to always be more work than you think it is.

The Low Point On Eric's Journey [1:17:34]

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

Eric: I would say that the low point is just the amount of time it takes to run the business. So when we were at Morgan Stanley, life was pretty easy. I could take a lot more time off. It was a simpler time. I didn't have to worry about all this stuff, running the business, payroll, capital, people. I just kind of did my job as an advisor, and Morgan Stanley handled the rest of the stuff. I could just turn things over and vent to them when I didn't like what I saw. But when you're running your own business and you face challenges like 2008, 2020, 2022, those are tough decisions because you've got to be able to make business decisions on top of being an advisor decision process.

So the low points are when you get into stress periods where you're either trying to break out to growth or you're having to deal with potentially the challenges of the things we don't control, which is the market outcomes. Those really test your desire to kind of want to do this every day in terms of running a business as well as being an advisor to clients.

Michael: Which one of those turning or transition moments were worst for you?

Eric: I think the thing that scared us the most was we launched this business two years before the Great Financial Crisis of 2008. And so, all of a sudden, the economy is zooming along, and we launched this RIA practice, effectively, December 15th, 2006. So a year and a half into it, it's 2008, things are starting to go down and become uncertain, and we're trying to build a practice. And we're like, "How do we get...". We weren't profitable that time because we had to make investments in hiring people, and we didn't bring every client over from Morgan Stanley. We brought over the ones that fit our model where we wanted to go. But when you have a market that goes down 50% in the first 18 months from when you launched your practice, it's, how do you rise to the occasion?

So I think there's a lot of sleepless nights leading up to building, the launch of the practice, and carving out of Morgan Stanley to then going through the financial crisis. Those first 3 to 4 years were just really stressful because we had to prove that we could actually do what we said we could do to the CPA practice. But in reality, 2008 turned out to be the turning point for us because, in 2008, people realized that a big firm...I hate to beat up Morgan Stanley, but Goldman Sachs, Morgan Stanley, people raised a lot of questions about their independence and safety of those assets in the wake of Lehman Brothers, and I think people realized that the RIA model really had come into its own fruition. And people were starting to realize the independence and the fiduciary approach that we were delivering as an RIA made a difference for them, knowing that there was no alternative agendas that they had. So they could trust that the advice they were getting was the right decision in a very volatile time.

So I think once we proved that out in 2008, we actually had a blowout year. It was one of our biggest years of net new assets, and that really proved out to the CPA practice that we could thrive in all different environments. And we've actually shown the CPA practice over the years that we have only had one-quarter of basically flat growth since we launched the firm. So we had quarter-over-quarter growth since 2006.

Michael: And out of curiosity, if you had to, you can start not profitable as you're trying to build the infrastructure and clients are still coming in, coming over, I'm just curious, how long was it cash flow negative? And who has to foot the bill in that context? Does the CPA firm come to the table on that, or did you and your partner also have to be out of pocket to get things going?

Eric: So we launched with...it was actually a benefits firm that was a partner in the practice, and then the CPA practice at the time that was going to back us was a partner, and then Chris and I were partners. And they brought us in, and they backed us out of the gate. Were they happy that they had to keep putting money into the business in a period of difficult times for both the CPA business as well as the RIA model? I think they raised a lot of questions, and I think we had to have the answers. But I think we showed them there was a path forward and we can model out, like you said, "If we bring in this amount of assets, here's the date we're basically going to be cash flow positive, regardless of what the market outcomes are." And I think when we showed them the path forward of how to really grow this business and we showed that we could deliver the value and the results and provide really a great customer experience in a very difficult time for their clients, that's when the magic started to happen. And they said, "Hey, we can back this play." But do we have an unlimited timeframe to do that? No, we had a very short shot clock to make this thing work or not work.

Michael: How long was it before it turned break-even? It sounded like 2 or 3 years.

Eric: Yeah, about the third year. So it's probably 2009 when the market started to basically turn the corners when we had already gathered all those assets in from the previous year, in 2008, that we basically then saw the growth. And we just started to get some of our first large clients. Those first $10 million and $15 million clients started to come in the door. And that really moved the needle for us, because we were obviously a very small group, but we were able to kind of bolt on the assets to get to cash flow positive pretty quickly.

What Eric Would Tell His Younger Self [1:22:58]

Michael: So, what else do you know now that you wish you could go back and tell you from 20 years ago when you're still thinking about leaving Morgan Stanley and going independent and building in the CPA firm world? What do you know now you wish you knew back then?

Eric: I think the biggest thing is I wish I would have had more of an understanding of how to run a business before we launched the business. Learning on the go is hard. But sometimes you had to make decisions, and it may help you make the right decisions. But I think that was the biggest leap was to say, if I had some more kind of training and things like everything from compensation models, because we had to figure all this stuff out, and we had some great partners in the accounting firm that helped us do that, with partners like Greg Skoda and Michael Minotti, who were the original partners in the accounting firm, helped us do that. So having that mentor in the business definitely made a difference. And so if I look back at not having a mentor early on in my Morgan Stanley career, probably could have saved me a lot of headaches had I had more outside counsel that I could have relied on to make better business decisions. So having that board of advisors and other partners that you could bounce ideas off of and reality check them makes a difference.

Eric's Advice For Younger Advisors [1:24:15]

Michael: So, what advice would you give younger, newer advisors just looking to come in the profession and get started today?

Eric: The challenge is you got to be patient. I think younger advisors try to get in the door, and it's, okay, great, they can get their credentials, they can get their CFPs, but how do they add value when they have limited life experiences? So it's hard to kind of just be able to just kind of walk in the door and just make things happen. And so a lot of the advisors you see that are successful today had spent decades working relationships and centers of influence and networking events to get their core client base. I think the younger advisors coming in struggle with how to actually build businesses, build their personal books of businesses. And so I think, for us, that's an interesting challenge that we always have to kind of deal with.

Michael: And so, what are new advisors missing in how to build their books of businesses?

Eric: I think it's just the amount of sheer effort it takes to be able to build your brand and build your network. I think that takes a lot of energy and effort. It doesn't just happen because you have a business card and you got an email address. You've got to make the case to your centers of influence of why you and how you can deliver value, and you got to meet enough people to get that referral process going. But once you get it going, that feeds upon itself. So it's that initial challenge. And so one of the things we always question about the brokerage industry before we launched our firm was there were so many people that would just come and go, and I think, at the time, we had hundreds of people who go through our training classes in the 10 years I was at Morgan Stanley, and very few of us ever made it. I think 5 of us out of 300+ people made it as advisors inside of Morgan Stanley. That's not a good way to run a business long-term.

So a lot of the younger talent washed out, and a lot of it was just they didn't know their centers of influence. So they weren't putting the energy in to make the connections. We've tried to change that a bit by saying, "Okay, we don't want our younger advisors out there just necessarily doing business development day 1." We want some learning from the lead advisor. They want some learning from not just the advisor they're working for but the entire organization. You want to pull that knowledge that I have in my brain and how I deploy it to my client base. I'm teaching the next generation to go on because if I make that investment of time in them, then they're going to be able to prosper and grow inside of our organization. So I think the biggest thing is we've got to do more and the advisors that we hire have to do more to be able to kind of learn from each other and really be able to get them out [in] their network. It's hard to market.

When I started, you could cold call people. Today, you don't have the ability to cold call, so you've got to do it, in certain degrees, other harder ways. But we do have a leg up on that because we do have a network of CPAs they can tap into, but they got to go do it. It's not just going to happen magically. You got to work the relationships. You got to put the time in. You got to get to know these people. It's hard when life gets busy.

What Success Means To Eric [1:27:25]

Michael: Right. So, as we wrap up, this is a podcast about success, and just one of the themes that comes up is the word success means very different things to different people. And so you've been down this wonderfully successful path now of building this multi-billion-dollar advisory firm, and so the business is clearly in a wonderfully successful place. How do you define success for yourself at this point?

Eric: I would define success for me as just being able to say, "Did we do the best thing for our clients at all times? Did we really make sure we added value to our clients' lives?" I think I want to make sure that the people respect the work that we did and that we added value to what they were doing. I think that's how I measure everything by. It's the give-to-get mentality. If we're doing the right thing, then the success will follow. And I always told people, when they come on the firm, I say you can either do what's right for yourself or you can do what's right for your client. And my philosophy has always been, if you always do what's right for your client, you'll get taken care of long-term. But if you do this job to make a buck, you're probably doing the wrong thing. And we used to see that in our industry. It's maybe not as bad as it was maybe 20 years ago, where you had just a lot of product sales in the industry. And I think we've evolved. But I still think people have to look at themselves and say, "Am I doing what's always in the best interest of my client?" And if I'm doing that, then success will follow. And that's how I look at things with my clients' respect and the firm's clients' respect, what we do as an organization, and that's the key to our success because that's how we get new businesses, is exclusively largely through referrals. So it's kind of a feedback loop. If you're not doing what's right for the client, you're not going to get the referrals.

Michael: All right. Great. I love it. Thank you so much, Eric, for joining us on the "Financial Advisor Success" podcast.

Eric: Thanks for having me.

Michael: Thank you.