#FASuccess Ep 416: Avoiding The Compliance Headaches When Going RIA By Choosing A ‘Supported Independence’ Corporate RIA Platform, With Fran Toler

Resources Featured In This Episode:

• Fran Toler: Website | LinkedIn
• #FASuccess Ep 406: Exiting To A Perpetual Purpose Trust To Facilitate Internal Leadership Succession Without Indebting G2 Advisors, With Michael Kramer
• The Ensemble Practice: A Team-Based Approach to Building a Superior Wealth Management Firm by Philip Palaveev
• FP Transitions
• G2 Leadership Institute
• Live Oak Bank
• Rossby Financial

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Full Transcript:

Michael: Welcome, Fran Toler, to the Financial Advisor Success podcast.

Fran: Thank you, Michael. It's such a pleasure to be here. I'm really looking forward to our conversation.

Michael: I really appreciate you joining us today. I'm really excited for today's topic discussion around, as I think, the different ways that we're starting to structure our firms with affiliates, with partners, with platforms that we work with. Because when I look at the industry over the past 20-plus years, there was kind of this spectrum that you could be in the pure employee model at a wirehouse or a bank. You could be in an independent model working with a broker-dealer platform, an independent broker-dealer platform. Or you could go RIA…it was like the ultimate in independence and autonomy. You get to build your own log cabin with your own 2 hands on whatever portion of the frontier you decide to put your flag in. Advisors could basically decide where they wanted to be on that spectrum from employee at a platform that does the things to independent broker-dealer and out to the hang your own shingle environment.

I find over the past, I feel like 5 to 10 years in particular, that's really starting to shift. We're going from a world where RIA is the ultimate of independence at the end of that spectrum and into a world where, no, no, RIAs are actually just recreating the entire spectrum. We have mega RIAs now that are mostly employee models where you serve clients of the firm and have some restrictive employment agreements that are not dissimilar to what wirehouses have had over the years. You've still got the other end of the spectrum where you can go build your own log cabin with your own 2 hands and have complete autonomy and independence to do what you want. Then there's this kind of frame in the middle that, to me, is effectively replicating what independent broker-dealers have historically done where there's a platform that may help you with the compliance, the technology, maybe some levels of staff support on back office around admin, investment operations, trading, and such. And it kind of recreates what the independent broker-dealer model was doing, but it may still be your firm and your practice. And so it's not like I'm an RIA building my log cabin or I'm associated with a broker-dealer.

Now we've got these...some folks are calling them supported independence models in the RIA realm as well with this wide range of kind of advisor networks and corporate RIA offerings that sit in the middle. And so I know you have made a version of this transition from the independent broker-dealer side to the supported independence RIA side. And so I'm really excited to have the conversation and understand that journey, how you approached it when you're making the transition, how you how you pick the platform or the vendor or the providers you're going to work with, and what led you to say, "I'm going from broker-dealer to RIA, but I want to stay in this supported environment that I've had."

Fran: Great. Yeah, no, it's been a fun journey and very interesting and quite specific reasons for changes. So I'm looking forward to that.

What Toler Financial Group Looks Like Today [06:51]

Michael: So, I think before we dive into the journey itself, let's take a moment just to get oriented for your advisory firm practice as it exists today. So can you just tell us a little about Toler Financial so we understand the context?

Fran: Sure. So Toler Financial Group is...there's 7 of us in the firm. I'm the 100% owner still at this point. There's 3 advisors and a support and admin team. We're coming up on $200 million sometime in the next year and so also coming up on about $2 million in revenue. We primarily work with individuals and families. We are not oriented towards super high net worth. We have a good number of high net worth clients, but we also have quite a lot of whatever you want to call middle market, mass affluent, normal people, however you want to call it. So we have a fair amount of volume…our assets, we have like 600 accounts, which is a little bit high from some people's perspective and 280 households.

Michael: Okay, I was to say how many family households.

Fran: So, yeah, so it's not a horrible metrics.

Michael: Two accounts per. Okay.

Fran: Yeah, it's not terrible metrics, but it's not we're not trying to just be for the ultra-high net worth or anything like that. We're really trying to serve normal people with their normal money.

Michael: Right. Right. If I just kind of do rough math to it, 280 households and almost $200 million. Right. Our average client's around $700,000. Obviously, there's a distribution to that on either end, but gives a sense of where you are. So kind of very squarely in what the industry would call the mass affluent. Right? Two fifty to a million or so.

Fran: Exactly. And a lot of those are...we have trended younger. We've made a strong effort to not just serve our retired community, but also to serve lots of people in their 30s, 40s, and 50s. So some of those are builders, you know, kind of seeds in our portfolio. Others are people of more limited means who are older. So it does vary.

Michael: So you said you've tried to do that more deliberately. Can you share a little bit of just what are the deliberate efforts or activities in that direction to try to pull the client base a little bit younger?

Fran: Well, one is, you know, creating a financial advisor talent pool that trends younger, more female, you know, LGBTQ representation, more black and brown people. We're trying to create a talent pool in our firm that we think better represents the marketplace of the next 40 years. So, I think, you know, Michael, if you go to most conferences, there's an awful lot of white men over 55. And God bless them. But that is not the future. And so we need to be creating a diverse talent pool. So that's that's one aspect.

Michael: And so from your perspective, having a younger and more diverse advisor and internal team is a component of how to attract or be able to work with or be able to support a younger, more diverse clientele.

Fran: It's one component. I think another component is we don't have account minimums. We start with a financial planning agreement. We typically charge $4,000 to up to $6,000 if there's a little more complexity. And we have raised our rates over the last couple of years, and we have had a little bit more difficulty finding a spot for some lower-resourced people that we used to slip in. But we don't have account minimums. So we're willing to take people and sort out together with them, perhaps on a customized basis, maybe a subscription model in addition to AUM, whatever it is, sort out a way that we can continue to provide services to clients in their 30s, 40s, and 50s. Because my experience in building my business over the last 23 years is many of my sort of A-plus clients now, you know, started with a $20,000 Roth IRA with me 22 years ago. So if you weed those people out, then they aren't your clients. They aren't your loyal, loving clients later.

Michael: So does every client at this point, even if they're maybe younger and not necessarily sizable in assets, they still all have to start with a financial planning agreement that is paid. So there is a certain amount of revenue that's going to come from the relationship, even if they're not an assets client.

Fran: That's correct. And I would say there's a few people that we skipped that process for.

Michael: We all can choose pro bono clients of clients.

Fran: Those are more likely pro bono or like a 74-year-old who really doesn't need planning. They just need someone to manage their retirement income stream, there's just not a lot of value to be gained by planning. And the other thing is, you know, one of the things that's really helped us build our reputation among a broad client base is that we do free hour-long initial consultations for everybody, anybody. And this has really helped build our reputation. And our goal in that initial consultation is to really fully attend to that person. And if they're not going to be a sort of a good client fit for our firm, then to do everything we can do in one hour to get them set up for the future. Here's the four things you need to focus on. And here are the resources. I'm going to email you some resources like come back to us when X happens or Y happens, you know, just really genuinely seeking to serve them and have them come away like happy, feeling seen and cared for. And I think that's been a tremendous part of our success.

Michael: So I'm just trying to visualize that meeting, that one hour, I guess, at the point they come in, they're still a prospect. We don't necessarily know if they're going to be a fit or have the right dollars and such. So I'm going to kind of infer. Usually you get into the conversation with the prospect like 15, 20 minutes in, I probably got a pretty good sense as to whether this is a likely possibility of a prospect or not. So I'm assuming that there's just some sort of subtle shift. If I think this is a prospect, I'm going to continue down the road of how I approach them as a prospect and understanding them and a little bit at the end about what we do. And if I'm realizing this is not a prospect, like my approach and tone shifts in the meeting and my goal is I'm just going to be so incredibly helpful here that when I tell them at the end, I can't work with them, it's not a big deal because I literally already gave them all the value I would have charged them for anyways.

Fran: I think that's quite close. And I would say we're even a little more transparent because often at the beginning, I'll say, "Here's how we work X, Y, Z. And my goal today is to really listen and understand your situation." And I'll often say, "This might mean that the best thing, the best solution I can come up with is to gear you up with some referrals and some tasks to do and send you on your way. And it might be that I propose that we work together. And this is a conversation and I want to give you the thing that's going to help you move forward towards your goals the best way." So it's very sincere. I feel like we make good money, we should be offering all kinds of community help. And we do some talks and webinars and sponsorships and stuff, but I feel like there's no substitute for the one one-on-one genuine conversation where you really listen to someone and you really try to help them move along, even if it's just one hour in their life.

Michael: Well, I really like how you framed that, just the choice of words. My goal is to really listen and understand your situation. The best solution I can come up with, maybe to gear you up with referrals and tasks and send you on your way. Or it might be that I propose we work together. So, to me, just you're planning…obviously, you're plant the seed there of “I may propose that we work together.” So a lot of us are going with it. But you've also planted a seed of “I may gear you up with referrals and tasks and send you on your way” like that is a normal, acceptable outcome of this meeting and it's not even my goal. My goal today is to understand whether you have enough money to work with me so that I can decide whether to accept you as a client or reject you. Right? That's not a good tone. But, to me, you've completely gotten away from that. I'm going to either gear you up with referrals and tasks or I might propose that we work together. So now let's have a conversation because I just want to get you forward to your goals.

Fran: Yeah, I think it's very easy to accidentally or purposefully, I don't know, come across as a little bit exclusionary and set a tone that really damages your reputation. And I've seen plenty of this. I've seen people come away from other advisors saying, "Oh, yeah, they weeded me out. I didn't have enough money." And there may be a reality there, but I just think we can treat each other more gently than that. And there are many reasons why I might not be able to bring enough value to a prospect in order to justify their being a client. So, it could be any number of things. And that's really for me to determine whether or not I want to propose that and to set it up so that they're not feeling like it's a personal affront.

Michael: So I was going to ask as a follow-up, so what happens, right? So I can kind of think of three scenarios here, oversimplifying, they like you, you like them, so you make a proposal and everything goes great. They don't really fit the dollars and minimums, that's not really a great fit. Everybody sees it. You give them super helpful things and everybody parts ways reasonably happy because they got value from the meeting. And then there's that messy one in the middle where they like you, "Fran, you're wonderful. We had such a great conversation. We would love to work with you." And the math isn't going to work for you.

Fran: Yeah, those are awkward. And I'm not going to lie, they're painful. In the past, I took 100% of those people as clients. But my capacity is...my capacity was blown five years ago. I don't have a penny's worth of room in my schedule and life. So those are awkward. There's no great way around it.

Profitably Serving Clients While Having No Asset Minimums [17:41]

Michael: Have you found a way to...do you at some point introduce a minimums conversation or something else? Do you try to steer them away? Just sound like I'm not going to give you a proposal to work?

Fran: In an ideal world, so I'm not quite there at this precise moment in time. But in the ideal world, my firm would have sort of a stair step group of aspiring advisors who I would feel very comfortable with. Right now, my two advisors are crackerjacks. They're just fantastic. They're fully wonderful, Guli and Brandon, and they're not really offering discounts like they're they're fantastic. So in the perfect world, I would have two aspiring advisors at different levels who are being mentored into the process, but ready to take on clients that don't otherwise meet minimums. And so that's my goal. But when you have a 7-person firm, you don't have every personnel slot...you might be aware of this problem.

Michael: Oh, yeah, yeah. There's a certain value to Swiss Army Knife utility players, as we're doing.

Fran: A hundred percent. Right now, where we are with personnel is my associate advisor who's been with me for 4 years, and we literally do call him the Swiss Army Knife, he's leaving for a larger firm. He wants a different opportunity, which so I'm considering him graduating from our firm. It's just great. And we do have younger, or not younger, we have newer advisors coming along. But so just at this moment, someone in that in-between spot, I don't really have a great place for them. But I plan to. I want to build a thing where I don't have to say no to anyone who wants to be seen. I have to say no to most people who want to see me, I am fully maxed.

Michael: And how does that handoff work then?

Fran: So I also say at the very beginning of our initial consults, we work on a team basis. So, Michael, we're structured as an ensemble. So everyone's paid salaries in my firm. We look at sort of production credits for setting targets, but we are an ensemble practice and so most of the new referrals come to me. And I say at the beginning, we work on a team basis. Part of what we'll be figuring out today is who you might be a good fit for. Generally speaking, I'm going to be passing you off to Guli or Brandon to be the lead advisor. I'm always in the background. I can always join a meeting. But, you know, I'll be sort of assessing which one of them might be a better fit for your needs and your personality.

Michael: And so you kind of frame around needs personality is how this matchmaking process will work.

Fran: Exactly. And people don't always love it. "I want to work with you," which I get. And I say, "Look, I want to work with everyone, too." And then I make some kind of joke like it turns out I'm mortal and I have limitations. And I just actually can't run a firm and see hundreds of clients. I just actually can't. So, I'm still the lead in this firm. And if you're not loving your lead advisor, I expect you to come to me. That's quite rare because Guli and Brandon are both amazing. But, it's going to happen. Personality, personalities are personalities.

Michael: Sure. And I guess at worst, as you're going through this, you have a $4,000 planning fee for every client when they get started. The worst case scenario is they say they really want to work with you. And I say, "Okay, then here's the proposal. And it starts with a $4,000 planning fee. And if that really wasn't a fit for them, they'll be like, "Maybe not."

Fran: Sure. That can happen. Yes.

Michael: So is there a ongoing minimum as well? Do you have a minimum fee or a required subscription or something? Again, I'm thinking the context, like those who don't have a minimum fee, they don't meet the AUM goals in context?

Fran: We're a little bit loose on that, to be honest. The concept is that clients with under $500,000 in their household under management "may have a subscription fee" on top. But we're not very rigorous with that. And so sometimes we do…and it is a little bit like, it's not that... I don't think it's unfair because we'll typically say, "Look, you really want someone to meet with you quarterly on an in-depth basis about your cash flow. And that really just goes beyond what we're able to provide with the $200,000 that we're managing. So we're going to propose a $300 a month fee on top of that. And that'll cover the extra work that we'll be putting into to help you stay on top of your cash flow," just throwing that out as an example.

Michael: And then what's the fee schedule on the AUM side?

Fran: So we just went from a... You remember DoL when it first came out? Anyway, I want to say 2017-ish. So I remember being at a big conference at Cambridge where my firm was then and listening to them and feeling like I had to have a tiered fee schedule. I probably misinterpreted it all, but I felt like I had to have a tiered fee schedule where each tier has its own fee. Over the years, I found that to be really increasingly difficult to explain. And I could never be precise about what people's fee was, unless I went in the back end and did a lot of calculations. So we moved when we moved firms in August, we moved to a break point schedule, which means that it's the AUM on the household. So if our household has under $500,000, we're charging 1.25% on assets. If it's between $500 and $1.5 million, it's 1%. So we still talk about we typically charge about 1%, little more for smaller households, a little less for larger. Between $1.5 and $10 million, our fee steps down from 1% to 0.6%. So we're a little bit more aggressive on the step down than Chevy Chase Trust or US Bank or some of the big trust things. But we're maybe just somewhat more aggressive than a lot of other RIAs. I'm honestly not sure. I think we step down a little quicker than some people.

Michael: So you describe these as break points. Does that mean if I cross a threshold, your whole fee back to dollar one. I'm at 499 [thousand], I'm 1.25 [percent] on everything, at 500 and 1,000, I'm just a flat 1% on everything back to the first dollar.

Fran: Yeah, it's a little weird. They both have weird aspects. In the end, we felt like our conversations about our fees were big, muddy piles when it was tiered. We just couldn't precisely explain it. And nobody understands the progressive tax system. Financial people hopefully do. But clients typically have a weak understanding of it, how it really works.

Michael: Right. They infer that their top tax bracket is their entire tax rate to every dollar they earn. Yeah.

Fran: Precisely. And that tends to happen in a tiered fee schedule. So, one of the things I've just tried to think about from my client's perspective is what's going to make things clear and transparent for them. Whether it works well for me or not, what's going to help them grapple with this and understand it and be able to explain it to their CPA or their friends? So that's kind of the goal of simplifying it.

Michael: So I feel like the standard objection, concern that always crops up from this from an advisor end is, okay, but isn't it funky when clients go from like $499 [thousand] to $501,000 and their fee literally goes down because they cross the threshold?

Fran: There's no free lunch rate. Every system has its downsides and that's the downside there. You could say it's a downside. You could also say if someone's sitting on their $80,000 Roth IRA at Vanguard, it might motivate them to move it over.

Michael: Well, while I am struck that the sort of just having this flat 1% all the way through up to $1.5 million, at the end of the day, as you noted you're closing in on $200 million of AUM, you're closing in on $2 million of revenue. So just in this lane, the simplest math, your revenue yield, right, revenue we generate from the assets at the end of the day when you include all the fee schedules, the breakpoints and the householding and the discounts and all the things that we do, your revenue yield is almost dead on at 1%. Right?

Fran: So yeah, pretty much.

Michael: A little higher for small clients, a little lower for big clients. It averages there. And I'm fascinated by it because for all of us in the industry that talk about 1%, we're all like 1% plus or minus a little. The actual industry average revenue yield is not 1%. It's like 70 to 75 basis points.

Fran: And I think that might be because we tilt a little bit smaller.

Michael: Yeah.

Fran: Which in the past, our 1.25 [percent] threshold was at $250,000. So I did raise that when we moved because I love having small clients and being able to serve them. But we can't just bluntly subsidize it, right? There has to be a balance in there.

Michael: You effectively raised your fees by lifting the breadth of the 1.25% channel, which matters when you're on a breakpoint schedule all the way up to that threshold. That's a non-trivial difference for all the clients right in that 250 to 500 range.

Fran: It is. And I want to be clear. One of the reasons I'm being vague about my numbers is because I just transitioned two months ago and my numbers are still firming up. I'm still...

Michael: You're literally in transition. We don't run afoul of the SEC for any...they're not literally quite the client because they haven't signed yet. Understood.

Fran: I literally don't exactly know what my monthly revenue is going to be. So every month I'm a little closer to knowing, and we lost a couple clients in the transition, 2 or 3 out of almost 300. So, you know, that's fine. But all of it, I'm still only seeing maybe $170 million in Schwab right now, but there's still some other bps [basis points], it's not entirely done.

Michael: But I am struck that, look, so many of us have this desire to serve people up and down the dollar spectrum. It doesn't feel good to anyone to start out where you basically work with anybody who can pay you any revenue because you have no clients you want to get going. And then you grow to this certain point where it feels like I can't afford to take those clients anymore, even though those are the clients that made me to get me here, to be who I am, who I am today. And so many of us come into this with a desire to serve. Yet I see a lot of firms that do that to the point where it overworks and starts to break them because there's so many clients and not enough dollars to at the end of the day to hire the staff it takes to be able to sustain growth and expand capacity. And at the end of the day, I'm fascinated that you have this interesting blend that, yes, you seem remarkably, I would say, accommodative. I don't know if that's the right word, remarkably flexible to not leave those clients behind, but you do have a solid 1% revenue yield. You're doing it in a way that it actually generates enough revenue that you can hire the 7-person team it takes to support these clients.

Fran: Yeah. And I'm not going to lie, there have been periods where I simply have to work my rear off. So my work-life balance has varied from good to not that great. And I've just gone through a very challenging bunch of months. But I am trying to build something. I'm trying to build something bigger than me. I'm trying to build something. I'm 61, Michael. And I don't feel my age except in a few joints, but I'm trying to build something that will continue to accomplish some of the things I'm trying to do in financial services, to build this diverse talent pool of advisors, to serve the people who I serve, who do not feel well served by the majority of financial people and build this into a multi-owner ensemble structure that is resilient and that I can sell my shares to and retire and see it working. That's the goal that I set out to achieve back in about 2016, 2017. And I have a plan and I'm working the plan. It's actually going somewhat better than I thought it would. But I have a very specific goal. I have a giant spreadsheet that goes from 2018 all into the future. I'm in love with my spreadsheet.

Michael: There's a giant spreadsheet. Carl [Richards] would be weeping, but I'm so happy. I'm so happy to hear there's a spreadsheet.

Fran: I don't know how anyone works without this. How do you set goals? How do you track your past? How do you keep yourself accountable to yourself? Anyway, I'm all about the KPIs and the spreadsheet and I'm all about the people I've learned this stuff from as I've gone, which I'll be happy to talk about. But I am trying to build something that isn't just me. It isn't just a cult of Fran, right? That's not really very helpful.

How Fran Is Thinking About Succession Planning [31:58]

Michael: So can you share with us a little bit more of the, say, the grand spreadsheet, but really the grand plan of how do you see this transition when you want to make an enduring firm that has resiliency with future owners that can take over within their means and they're not just funded by a giant P.E. [Private Equity] check? Can you share more of what the plan is, how you see this playing out?

Fran: Yeah, there will not be a giant P.E. check unless there's a crisis that I cannot control. I don't really think that's going to serve my clients well. So my goal is to sell partial shares to up-and-coming professionals on my team, advisors and others, who are ready to be in an ownership, leadership role. I was very intrigued by a recent podcast you did with Michael Kramer, who separated the ownership and the leadership, which was fascinating to me. It's challenged me to rethink some pieces, but I'm far smaller than they are, let's be blunt. I don't think I'm going to be selling to a purpose trust. I don't think I can afford the legal fees. But I am thinking in terms of how do I make shares of my business accessible without, okay, today the debt would not be staggering, let's be clear. But as my spreadsheet goes, in 2033, I'm expecting my business value to be over $6 million. So shares start to get... No, more than that. Sorry. That would be my revenue. My business value then would be like pushing up to $20 million. So then shares start to get pretty expensive. So my goal has been to sort of sell 10% to 20% internally to rising leaders and do that over the next 10 years, probably holding on to 10% or 20% myself, depending on how senile and I get how quickly. My goal is to be out of leadership and out of being the investment manager in my late 60s so that I'm not overstaying my welcome and that I'm building…but I can stay in some leadership and mentorship roles and continue to sell shares to these rising leaders in my firm. That's kind of how I'm imagining it.

Michael: All right, so I've got so many questions here. So you said selling shares to up-and-coming professionals, which could be advisors and others. So for a lot of advisory firms, future owners are almost always advisors and often exclusively advisors, something just being connected most directly to the revenue and the clients. So who else do you envision becomes an eligible owner besides the advisors?

Fran: Well, that's a question I've been asking myself. So, Toler Financial Group LLC is not an RIA. So we are an LLC that serves financial advisors. We provide functional services. So like we take in our revenue as individuals. Actually, it all gets swept to me. And then I have an agreement between Fran Toler and Toler Financial Group that I sweep all my business revenue in there. So Toler Financial Group, LLC can be owned by anybody because it's not an advisory firm. Does that make sense?

Michael: Yeah.

Fran: But I don't know. I certainly started with the prejudice that only advisors should own the firm. And I would say that time and experience and opening my eyes and also Michael Kramer's and others' podcasts, it doesn't necessarily serve my firm the best. What if my COO is not an advisor, but is a crackerjack COO? Wouldn't I, for goodness sakes, want them to be an owner in the firm? I'm still fine. I'm building this ship as I'm sailing it myself, like everybody else.

Michael: So why that ownership structure then of the revenue sweeps to you, because I guess functionally, you're the IAR of the corporate RIA...

Fran: I'm the branch manager, I guess, I don't know what you call it.

Michael: So why that structure as opposed to I know that them putting revenue to Toler Financial directly?

Fran: So back in 20…whatever it was, '16, '17, I started reading Philip Palaveev's book, "The Ensemble Practice," and it really spoke to me. And I read it 5 times cover to cover, highlighting notes and really in many ways used it as a model for building my firm. And I engaged FP Transitions to write the LLC documents and the employee agreements. And I really felt that one of the aspects of bringing new advisors in that I didn't care to repeat is that kind of eat what you kill process. I feel that in order to bring in a more diverse talent pool, when you make people survive on what they can produce in the first 5 years, you really are discriminating against people who don't have generational wealth. I don't know how else to say it.

Michael: Yeah. If you don't have family resources or a support network and or family and friends in your network who can just literally be your first client, so reasonable value, it's really hard to start and eat what you kill.

Fran: It is. So to me, a salary and bonus and whatever, firm profit sharing all that stuff, structure, it's not perfect. Like every other part of what we're talking about, there's a compromise. But for me, I'm trying to put my money where my mouth is, that I want to be able to hire a diverse team and they're not all going to be coming in with money or other familial resources. So, I'm assuming over the early years with an advisor that the firm is, more or less, taking a loss, and then it's up to me to keep them engaged and then we're kind of creating a structure where once they've reached sort of replacement value, you could say after a couple of years where they're bringing in their...the value they're bringing to the business is at least equal to what's being spent on their salary and bonus, then we go into sort of a period where they're expected to contribute to firm overhead and ultimately to firm profit out of their business. So it's just kind of this gradual progression and maturity of them being cost centers to being profit centers and owners. And to me, when someone crosses that threshold, it is logical, if they are a good fit for the future of the firm and a rising leader, to have them participate in the profit of the firm because they're now contributing to it. Does that make sense?

Michael: Absolutely. And so does that mean that this structure, where you sweep dollars to a separate non-RIA entity, like was that designed with the intention of divisibility of ownership of these revenue and profit streams in the future? Was that why the structure is the way that it is?

Fran: Yes, I think so. Philip Palaveev might be rolling his eyes right now, but I think that I read that correctly. I actually did part of his course, the G2 leadership because I really think he has a business structure concept in our industry that is freakishly rare. I don't know how else to say it. But I really floundered for a business model. And I didn't like the old siloed eat what you kill model. I was like, uh-uh. So I really didn't find a lot of other options besides his model. And I really liked it. And it spoke to me. So I am doing my best to implement it. And yeah, it's been driving. I said to people when I was 55, like, I'm starting a 15-year plan. And this is what I'm doing. So now I'm 6 years into it. And it's literally going how I said it would.

Michael: So have you done the first sale transition yet? Or I think you said you're still the 100% owner now. So how do you plan to, I guess, value shares and finance it? Because I find that's usually what crops up.

Fran: Sure. So I've been using FP transitions for their...they have an affordable annual valuation process that's been helpful to me. So I've been doing that for the last 6 years so I can kind of track my firm value, according to them, which is good enough in my book. And my thinking, my understanding, and I would engage someone, I would need to engage someone to do the actual negotiation. I've talked to them and several other firms in terms of rewriting the agreements and doing the actual sales. But I believe it's typical for minority shares to discount the value somewhat because you're a minority shareholder. I'm actually thinking, I'm just thinking out loud here, Michael, nobody hold me to this, but I'm thinking about the first tranche someone buys in being discounted a bit more heavily than later tranches in order to make it a bit easier for lower resourced members of my team to feel like they can take that first step into ownership if they're invited, but I'm still working. That actually kind of really has only been fomenting in my brain since listening to Michael Kramer. So I'm not quite sure how it'll work out, but in terms of financing, we've talked to Live Oak and some other banks, so we might do a cashflow financing through someone like that. I might self-finance it. It's possible that someone on my team could finance it themselves independently from debtor assets. So I think it's, it may end up just all being one way, but since we're more than a year away from this, I have not yet dived into the details.

Michael: Okay. Very cool.

Fran: I just have the vision.

Michael: And you had said, ultimately this comes down to when they grow to be ready. Are there triggers or frames in your mind? How do you figure out who's ready and when they're ready?

Fran: I would love to be part of a study group that's addressing this question, Michael, because I have such a great, talented group of people, but with the person leaving, who's leaving now, no one's been with me for more than 3 years, so this is, I feel like we've worked together forever, but we haven't, and so I honestly don't know how to, how to parse this. I have a lot of ideas. I think about it a lot, but this is one of those areas where you can feel a little bit lonely as a business owner, not being 100% sure how you want to sort it out. And that's, I would guess I would say this is going to be an upcoming issue for me over the next couple of years that I'm going to need to resolve. And I have as many questions as answers.

Michael: Well, what's the saying, the captain always drinks alone?

Fran: In the stateroom. Yes, 100%. So that is it. You can feel a bit like, yeesh, I have to make these decisions. They really affect everybody and I'm not sure who else I can really share this with.

Calculating The True Costs Of Staying With Her Broker-Dealer [44:01]

Michael: Yeah. So now help us understand the transition. So as you said, you were with Cambridge, so fairly well-known independent broker-dealer, you're not at this point. So share with us some of the journey, what changed, when did it change? Why did it change?

Fran: Sure. So I want to say first, I started in the mutual life insurance world in 2001. And before that, I was a midwife.

Michael: Wow. That's an interesting transition.

Fran: It is possible. I'm putting it out there to the Kitces universe. It is possible that I am the only midwife turned into a financial advisor. Not sure.

Michael: I feel like that's a challenge. So if you are one of the other midwives turned financial planner, at least reach out to Fran.

Fran: Reach out. We need to have a beer.

Michael: So there's a community group opportunity meet up here.

Fran: So I didn't know anything about this world, the financial advisory world. I was a self-taught bookkeeper. I thought I might need to go into bookkeeping. I was looking at a career change, but the thought of giving up my client relationships, you know, midwifery is also based on trusted client relationships over long periods of time. And I really wanted to continue that. I wanted the autonomy. And this did speak to me, but the mutual life insurance world offers an enormous amount of training and you're a W-2 employee, a statutory employee, so you can write off your expenses, but you really are forced to sell proprietary products, frankly. And so I got an enormous amount of training, which some of which was not particularly useful for my clientele, but I also, I want to shout out to Jonathan Adams, who is our investment guy. And I think back in 2002, he gave a talk about the whole IAR world and getting your [Series] 65 or 66 and having a fee-based business. And I was like, I put my fist down on the table. I was like, "That's where I'm going." And he left that firm to go off on his own firm. He might hear this podcast.

But I was like, that's where I want to be, but I wasn't quite mentally ready to leave the insurance world. Now, I looked at doing that quite seriously in 2007 and I didn't do it. And I don't really know why Commonwealth was my choice then. But just briefly, I, this is a little long-winded. I will get to the current transition. In 2009, I got seriously ill and I was sick for almost a decade, and it was awful. Like there was, whatever, silver linings, give me a break. So it was like hung on, avoided bankruptcy and business failure by the skin of my teeth. And I think probably having stayed in the insurance realm was better than if I had just made a transition to the IAR world. I don't know. But anyway, as I started to recover in 2015, that's when I moved to Cambridge. And at that point, I just had $20 million under management and a half-time support person. But I also had a vision of where I wanted to be.

Michael: And how far into your career were you at this point?

Fran: 14 years.

Michael: Okay. So that's a grindy 14 years to get to $20 million and a half-time support person.

Fran: Yeah, exactly. And in the 6 years prior to that, like I had spent horrifically sick, like sometimes coming into work and just having to lie down under my desk crying because I was so sick. So it was not fun. But I didn't go bankrupt. My individual disability policy that I learned about and bought for myself from Guardian basically saved my bacon.

Michael: Shout out for disability insurance.

Fran: Shout out. Yeah, nobody gets through me without disability insurance. So, Cambridge was a wonderful choice for me then. And I was so relieved, but from the beginning, I was disappointed in their software, which was a bit archaic, even in 2015. I was frustrated with their proprietary trading platform that I thought stank, but I loved the community, I got a lot of training and support. I did their in-house practice management training, which was great. I really got a lot out of Cambridge and I loved their ethics, their business model, it was really good for me. And I feel like Eric and Amy, who were the leaders of it, are both incredibly ethical people with big hearts that built a team that they could be proud of.

So my joke with my team, when they would get frustrated with Cambridge was, dude, you can transition out of Cambridge after I retire. I was like, I'm not doing it. We have too many accounts and I love them. That's really how I felt. So I don't want to in any way bash them, but what happened this year, early this year, is I finally sat down and did some math and the math was shocking to me. All in, my relationship with Cambridge, just expressed in basis points, was close to 25 basis points. And I know from my work with Philip Palaveev's metrics and numbers, that I was supposed to be running a 25% profit margin. And I will tell you that over the last 6 years, I've only managed to hit that 2 out of the 6 years. And some of that is investment in people and blah, blah. But when I really looked at it, I was like, 25% of my revenue is going to Cambridge. This relationship is too expensive for technology and service that I'm often frustrated with.

Michael: And just that I'm sort of inferring indirectly, and it's not as though you're paying 25% of revenue and that's avoiding you needing to hire anyone because they're doing all this staff-level work. You're still running a 7-person team, which is not dissimilar to what a lot of firms would be team-wise at closing on 2 million of revenue. But then I get it. Then it's harder to say, okay, if the platform is mostly tech and compliance investments, that feels a little high for just those and nothing else.

Fran: It is. And I sat down and talked to one of the vice presidents who I really respect and care for, and I said, "Look, no can do." And she said, "Look, I remember when Cambridge charged 5% back in the day in the day," and I was like, "Well, I kind of want to be back there." And it wasn't an option. We talked about some options. My supervisory team, whatever, we talked, I don't want to name names, but we talked through options and there really weren't options that were acceptable to me. And it was very sad because I really came saying, "I want to stay here." I like and respect you guys, but I am also a business owner and this haircut on my business right now today reduces my business value by a million dollars. And partly as the result of being sick for a decade, I don't have a high net worth, right? I barely got through those years. I can't even tell you how much they cost because it's too hard to say. So this is my net worth. I'm not giving up a million of it to stay in a firm of people I like when there's other options out there in the world."

Michael: So quick question in this regard, what were the things that were adding up that get you to 25 basis points? I feel like so much of the independent broker-dealer world…it's grid-based payouts. Everyone's got sliding scales, but it seems to mostly be in the high 80s to low 90s, 86 to 92%. So, how do you get from 92% payouts to this is actually costing me 25 bps?

Fran: Yeah. So I was getting a 92% payout and that's what it's easy to focus on. And I was like, 8%, fantastic bargain, right?

Michael: Yeah. For compliance and tech and all the other stuff. That math's fine.

Fran: Totally maths, 0 problems. So then in addition to the grid fee, there's technology fees, which they don't look that bad when they come out twice a month and then your team grows and they're on everybody in the team. And that starts to add up a little. But the real kicker was the trading platform, the platform that allowed me to have my models and trade to them. And first of all, I never liked the software. It's built on Folio. I don't know anything about Folio, but I don't ever want to know anything about it. Didn't like it, never liked it. It did work. Looking back, maybe I was too harsh on it, but the price really, I think that's where we were in at something like 17 basis points for a trading platform. And I don't think that's the right number. I started looking over a year ago, I started looking doing demos with Black Diamond and looking at Orion and just looking at the other options out there. And it seemed like 17 basis points was a good fee if someone's going to manage your investments and do the trading for you. But it just didn't feel fair for the bare-bones platform where it's still all yours to do the work. Does that make sense?

Michael: So it's not like it was outsourced trading.

Fran: This is not a TAMP [Turnkey Asset Management Program].

Michael: Right. Not like outsourced trading. Okay. They hit the button, they staff for the investment operations. They have the trader. They can deal with the claim if they hit the button at the wrong time and have a trade error, like this was essentially the trading technology, but someone at Toler Financial saw it to log in and build the models and execute the trades and do the trades. And so you're effectively paying 17 basis points for trading software, but not outsourced trading.

Fran: Precisely. I've never actually articulated it this clearly before, but that's exactly what it was. The night I started to do the calculation and really dig into it, which took me quite a bit of effort, I stayed up most of the night, I felt completely shocked and shocked that I hadn't done the math until then. Embarrassed.

Michael: So 17 bps is on investments, 8% payout is on everything. So I guess some planning fees are probably scooped in there, but nominally, okay, 8%, 8% grid plus 17 bps investment platform.

Fran: Unless there's tech fees, plus, plus.

Michael: There's right there. There's 25% plus pretty, pretty quick like that, that math's up quickly, which as you're, okay, which as you're approaching $2 million in revenue is $500,000, right, if just cash?

Fran: That's the number that basically kept me from sleeping an entire night. Yes. And I felt humiliated that I hadn't been doing this math all along. Just on, according to my own standards of being a business person, I was a little shocked, but that's why I wanted to negotiate with them.

Shopping For The Right RIA Platform [55:47]

Michael: Right. Again, right, percentages can be deceptive as it were, because right from there in 25 bps, when you're just getting started and have $2 million, it's like, we're losing money on you. The same 25 bps when you're at $200 million is like, I may, maybe the math starts to be different, at least either charge me less or give me more for what I'm doing because paying your fees and then hiring all of my staff is getting expensive.

Fran: Precisely. So there's my profit margin right there, right there. That's it. And so then I was like, well, okay, now we're reaching the point where it's financially worth it for us to go start our own RIA and just jump ship. So I started doing all the research, talking to all the SmartRIA and this and that RIA In A Box, all the people and more and more demos with Black Diamond trying to fit all the pieces in place. Realizing I would have to hire someone to manage compliance in addition to a compliance-like package because I have zero training and, frankly, zero interest in supervising that part of my business. It just wouldn't be a good fit. So I was like, okay, well, you know, part of that goes away, but I just felt like, oh my god, I might have room to breathe in my profit and loss statement. Right? I might be able to get myself... You can't sell your business if you don't have a functional profit margin. You can't sell your business on a 6% profit margin in our world. That doesn't actually work. So my whole dream, my whole 15-year plan was being threatened by how squeezed my P&L [Profit and Loss Statement] looked. And I, as a business person, I need to change this. So yeah, I started looking into forming my own RIA, was very grudgingly not interested in the compliance part.

Michael: So quick, quick question on that end. So did you actually, like, did you have brokerage business that was going through the broker-dealer side or functionally were you almost all corporate RIA, and so your compliance support was their support for your RIA structure, not necessarily their support for the broker-dealer?

Fran: Yeah. Our broker's business had dwindled from little to nothing. We have some legacy commission variable annuities because I've moved now to fee-based variable annuities. I really do like a quality variable annuity for someone in a constrained position retiring. I actually believe it's a functional use of insurance. But I prefer the fee-based annuities and so it's like a level playing field, but I have 20 commission-based annuities from before those existed. Really almost no actual brokerage business. So the other goal was that I would just go all, you know, all IAR or RIA. I wasn't going to keep my broker business, that was over. I was really ready for a breakup with FINRA. So that was also part of the goal, but yes, 98% or 99% of our revenue was going through the Cambridge corporate RIA.

Michael: So, so you're starting the exploration like, okay, I think I need to launch my own RIA cause I guess I think I can do the platform stuff I get from my broker-dealer for less than 25% of my revenue. It's going to cost something, but if I can save some on it, then I get incremental margin improvement, but hanging your own shingle means doing your own compliance. And that was not feeling compelling.

Fran: It was feeling anxiety-producing and just out of alignment with my strengths, and I feel very taxed as a small business owner, as probably most of us do, I'm only really good at half of what I do. And the other half I have to really push through. So adding a whole thing that's really... I'm never going to rise above a C+ on, it just didn't feel like a great idea. So I started looking at other RIAs and I was, despite being called 150 times by LPL, there was no chance I was going there.

I talked to maybe 15 firms. I talked about a tuck-in. I looked at all the bps. Maybe not all, but I looked at a lot of interesting options. And the option that appealed to me the most is where I ended up, which is a small startup RIA called Rossby, R-O-S-S-B-Y, very small, very streamlined, real tech-forward, And the guy who is the CEO, Andrew Evans, this was kind of his business school project, right? How can we create an RIA that doesn't get so bloated, for want of a better term? How can we rely, for example, one of his theses is that Schwab, as a custodian, provides outstanding support, like direct to the reps, so why do we need to build an intermediate structure between the RIA and Schwab to manage that communication when Schwab actually has a fantastic support team and tech team? So how can we utilize existing software support and offer a streamlined software stack that appeals to independent advisors and cuts the fee way down so that they can run a profitable business? I think I've accurately portrayed his vision.

Michael: So the idea being you're not going to use them for investment operations and training support, because you still got a team for that. They want to make the tech accessible for you to let you do it, which I guess is effectively what you were doing with Cambridge, but can they do it for less than 17/25 basis points?

Fran: Yeah. And looking for really transparent pricing. That was the other thing, Andrew's vision was making this completely transparent and fair and across the board. And so I liked his vision. He was choosing the custodian and the trading software, Black Diamond, that I was planning to choose for my own RIA. So far, I'm keeping my CRM at Wealthbox. It's got some issues, but it's good enough for the moment. And so it was in alignment with that. They were going to, they're taking care of compliance. He's since made some really great hires in his little RIA and I'm feeling really great about having moved there and really happy with Schwab. I am not yet happy with Black Diamond, but these are early days. So get back to me in 6 months.

Michael: Say they transition in new systems are challenging, even if the destination is good.

Fran: That's right. And I hope the destination is as good as I thought it was going to be. But right now, I'm feeling unhappy. So, but it's early days. So overall, I'm feeling quite thrilled with my relationship with Rossby and, and their business model. And even if they can't stay exactly where they are with pricing, one of the things I appreciate is that with transparent pricing, if it does have to change, it'll be really clear and I just prefer that model. I feel like that is in alignment with how we try to be with our own clients.

How Working Under A Corporate RIA Supports Fran's Business [1:06:00]

Michael: I want to make sure I just understand what they, I guess, what the structure is and what they do and or what they don't do. So they're taking care of compliance. Does that mean literally you're an IAR on their corporate RIA, like you've gone to another corporate RIA structure?

Fran: That's right.

Michael: So what thing, given the whole we're not going to be your whole investment operations back office because Schwab supports fine and you've got your own team, so what do they do? What I'm hearing is essentially IAR affiliation, their a corporate RIA. So they cover compliance, chief compliance officer functions. You just have to comply with what they're using to oversee you. The tech, I guess, mostly the investment. They provide the tech.

Fran: So they provide Black Diamond.

Michael: What else besides Black Diamond? There has to be others just like, are there other things?

Fran: SmartRIA, you know, for our RIA connection and DocuSign and one or two other things.

Michael: But not CRM, not planning software?

Fran: No, that's on me. So I got to keep Wealthbox for CRM and eMoney for planning, which was what I wanted to do. So it is kind of bare bones.

Michael: It's really investments, compliance, and investments tech.

Fran: Yeah, that's right.

Michael: It's really simple.

Fran: That's right. And they're really trying to, they're a fully remote RIA. They're trying to keep their overhead low. They did provide a great deal of transition support, but most people do and Schwab provided a tremendous amount of that. Everybody wants to provide transition support so you come. But I feel like this, there were so many aspects of a larger RIA that I just didn't need or the hybrid broker-dealers that I just wasn't needing. And one of the things that my contact at Cambridge said to me is, "Well, are you going to be able to replicate the community that we have here at Cambridge?" And I said, "No, no, and I will miss it." Let's be clear, but as a business person, I'm going to have to handle our community needs some other way.

Michael: Well, yeah, again, much love to a lot of organizations that build great community, but I get it from the business owner end I really love your community, but I don't love it $500,000 worth.

Fran: Yeah. I don't know how else to put it. So we'll be exploring some different festivals and conferences, I've always gone to conferences and so forth outside of my own structure, but we'll be continuing to do that. And honestly, I think I was the only one at my firm that got anything out of the Cambridge community, nobody else was really engaged with it. So I think for me, for where I am in my maturity as a business owner, that's less critical for me, but I really don't want to...it was a great solution for 9 years. I would not be where I am today without it.

Michael: So then what is the pricing structures? What is the new, the new pricing streamlined cost of Rossby for this kind of focus, we're going to be really good at this thing offering?

Fran: Well, for me, all in, it's coming in under 5%.

Michael: 5 percent of your revenue. So do they charge a percent of revenue? Is it a grid-based structure?

Fran: No, it's 100% payout with this...it's on their website. Let me see if I can get it right. There's like a $20,000 base fee. And then there's like a data feed fee per account. So that, the data feed into Black Diamond, I think that might be how Black Diamond charges them. I'm not entirely sure.

Michael: Yeah. Black Diamond and Orion and all of those are a per-account fee.

Fran: Yeah. So they kind of pass that on and then there's a per-advisor fee to cover supervision, so everybody with a 65 or whatever in your firm. So all that comes in at under 5% of revenue. So it's a very dramatic difference.

Michael: So base advisor fee, 20 grand. That's the turn on the lights. Per account usage fees that are monthly that started $6 an accounts and get down to like $1 an account by the time you've got thousands of accounts.

Fran: Correct.

Michael: And then a supervisory fee for each additional advisor. Over the first one that starts at $7,500 a head and eventually gets down to like a thousand by the time you've got, you know, 10, 20 advisors being supervised.

Fran: Yeah. So I just feel like it's a fair and transparent structure. And my biggest question for Andrew when I first started talking to him is I want to understand your business model. Does this work?

Michael: Yeah. Like, can you do this profitably or am I just going to find all these things get increased in 6 or 12 months because it turned out it's more expensive to do this?

Fran: Precisely. But, after exploration, I have confidence in his business structure. And there always is a wait and see. The people who built the Titanic were confident too, but I'm just saying, I'm not comparing them to the Titanic, but I can always go to my own RIA, right? He's extremely clear in his structure that there's zero stickiness. He wants this to be a fair and transparent and highly mobile thing that if it's not the right fit for you, you go easily, and I really appreciate that. I feel like that's where this industry might be headed for a sector of it.

Michael: Right. And I kind of get it or, look, I can pay 10, 20, 30 grand for compliance consultant help, come in and like sit sidecar with me as I go through my compliance or I can pay them 20 or $30,000 to cover me and my team. I can go by Orion, Black Diamond, Tamarac, and pay my account fees that are, at the end of the day, like a couple of dollars per account per month, or I can pay Rossby, which, I can do the math, they start slightly higher than the rack rate of some of the others, but I'm presuming...

Fran: But not significantly.

Michael: Not significantly. They don't have a database minimum, at least I can see here that a lot of others have. So, and they've got some pretty aggressive break points. So, yeah, like I get it. It feels like they're maybe similar or a tiny bit more expensive than what it might cost you to do it yourself, but you don't have to do it yourself. You don't have to spend the time. The moment you allocate the cost of some of your time as the firm owner, it starts to math pretty well. You're solving compliance and the investment portion of your tech for 3% or 4% of your revenue.

Fran: My estimate was that it would cost me more to go out on my own.

Michael: Interesting.

Fran: My assumptions may not have all been correct. But that plus the stress of it, and I really like the folks at Rossby. There is a tiny little community there. One of my other good friends joined there. Other friends are interested. What can I say? I think that this will, I think this firm will, this RIA will probably double every year for the next bunch of years and there will be a good group of people there.

Michael: Well, look, at the end of the day, well, ideally as firm owners, we choose our partners because we think it will cost us less in the long run when we put in all the costs. And to me, one of the things that's always fascinated me about the advisor world, and I think in part why there is so much of these kinds of emerging supported independence models is there are things around tech and compliance, and some centralized operations that do tend to scale reasonably well. Ironically, the actual advisor part is really hard to scale because we all want to get compensated for our client work, but there's some back office and technical compliance stuff that does. And so just at the, right, business school level, if there's a big gap between the enterprise costs and the solo RIA costs, in theory, an enterprise should be able to do it at less than what it costs solos and more than the cost of the enterprise to do it. You split the difference and that's your profit as a platform. And it's still cheaper for the individual RIA to have the affiliation.

Fran: And just to be clear, it's not just that I want to take home piles and piles of money. What I want is to build a structure that allows me to invest in my staff so that I can build this diverse talent pool so that I can build this firm. We haven't even talked about our very strong emphasis on sustainable investing. I want to build this firm that serves my community well, which has been very underserved by financial services. And in order to do that, I have to keep my costs down. I have to keep a profit margin that allows me to bring on other owners. Just to say it for the third time, I cannot bring on other owners with a 6% profit margin. I can't, and I can't invest in staff in the way I need to. I can't take chances on interesting new employees who may or may not work out. I need this flexibility in my profit and loss to be able to build what I'm trying to build. And so it is really in the interest of that overall alignment and what I want this to look like in 5 or 10 years. Once my basic needs are met, I am not a particularly money-oriented person. I have very few luxury tastes. I really can't stand paying more than $30 for a pair of pants. This is not about piles of money. This is about professionalizing a corner of our advisory market that has been underdeveloped and that's what I'm trying to do.

What Surprised Fran The Most On Her Advisor Journey [1:13:56]

Michael: So as you reflect on this journey and evolution, I'm even thinking through the, through the stages, right, starting with a large mutual insurance company, going the independent broker-dealer route, now being in this supported independence RIA model, what surprised you the most about this path and journey of building an advisory business?

Fran: I think what surprised me the most at first and the least later on is that the more authentically yourself you are, and the more you work on yourself to bring your own life in alignment with your values, the more of an interesting and great clientele you attract. It doesn't help to try to be somebody you're not. I think I did spend some time in the early years thinking I needed to fit into the financial services industry, but it didn't take too long for me to decide that they need to fit in with me. They need to scoot over and make room for people like me. I think like now I'm just increasingly passionate about it because the demographics are on my side. The times are changing and we need a financial services industry that responds to that. And it just took me a while to sort of come out of my own uncertainty about…I came from a very alternative background and I went into what's widely seen as the most conservative industry. And it took me a while to find my own true voice in it, but that has been what's grown my firm 10-fold in a decade. That's what did it. Not trying to be someone I'm not, but being exactly who I am, although constantly working on myself to try to be a slightly better version, but really trying to build something authentic.

Michael: Yeah. I am struck by this. You have 2 phases of the business for you, right, 14 years to go from $0 to $20 million. Granted, starting in a mutual life company that probably is not as focused on AUM and with a lot of health challenges along the way, but 14 years to go from 0 to $20 million, then 9 years to 10x that from $20 to $200, it's like some stuff changed over the past few years from the first segment. So I guess this, can you share a little bit more of what changed or how this, what you actually did differently? How did this show up?

Fran: I just got more transparent, more fee-based, zero product focus. My clients were thrilled that I went independent. I think they had...my lovely loyal clients stuck with me through the insurance years. I was trying to run a fee-based financial planning and investment business inside an insurance company. So I was constantly in trouble. I was constantly in trouble and my clients stuck with me because I was trying to build something and it's easy to say, dang, I should have left a decade earlier, but I didn't. So here I am. So really I felt like it was just ripe, like I had enough experience and knowledge. You do learn a few things in 14 years of doing this, enough experience and knowledge, a solid client base, and it just exploded. So for 9 years, I've just been trying to catch my breath, trying to sort out how quickly I can hire and who I should hire and how it's going to work and all of the business owner details that come with that kind of growth.

The Low Point On Fran's Journey [1:17:50]

Michael: So what was the low point on this journey?

Fran: Well, clearly being as sick as I was, was a very low point in my life. But I would say a small, a small thing that happened was a very low point for me. Don't even know if you've ever talked about it on your podcast, but unfortunately, I had chosen to put a fund into some of my clients' accounts that went bankrupt in 2018, the LJM fund. It was a fund that misrepresented its hedging strategies, its market risk protection strategies. I don't know if you're familiar with it, Michael, but it was, it's now the subject of a lot of lawsuits and SEC investigation and people have been fined over it and the wholesalers represented it to me as asset protection, that it was very, very safe hedging strategies and the whole thing went belly up and it's actually, if I'm not mistaken, the only mutual fund in the history of the country that failed. And I mean...

Michael: Originally a bunch of the Investment Company Act rules restricted certain types of leverage and vehicles basically to try to avoid that, that precisely.

Fran: So this was horrifying and humiliating. My clients lost money in it. They held me accountable for it. I don't think I slept for two months, it was terrible and I'm still embarrassed by it. But I can't be too hard on myself because they lied. They lied and they've been sued for it. So they were placing volatility bets that were different than what they said they were doing. Let's just put it that way. And I'm not knowledgeable about derivatives. I'm not super sophisticated in this realm. So what it's done to me is that I'm extremely skittish about, you say the word buffered or hedged and I'm out the door. So my feeling is 80% of the advisors and 100% of the clients don't actually understand what those funds and ETFs are doing. And maybe I'm wrong. Maybe you're in the 20% and you understand it, but guess what? I don't, and I'm never going to use it. So I'm not interested. That's what I would say my takeaway has been.

Michael: The idea being I don't even want to have to try to figure out how to due diligence, whether you're actually doing the option strategies you said you're doing and whether you're actually doing them properly.

Fran: Yeah. How can I do that due diligence? I don't have the tools, the background, the training. And I was so well and thoroughly lied to and before, that I'm just, I don't know, I don't, I'm not seeing a place for these derivative strategies in my portfolios. And of course I'm gun shy because it was a terrible and humiliating situation. So that was a low point, but I will say, I think I lost 1 client, which is amazing.

Michael: What was the allocation? I'm going to presume this wasn't a we put half our clients, half our client money in kind of thing.

Fran: No, no, no. But I would say it was somewhere between like 4% and 8%. But for bigger accounts, those were actual dollars.

Michael: Yeah.

Fran: This client lost $60,000, this client lost $45,000 that they're not going to get back, you know? And that, that was terrible.

The Advice Fran Would Give To Her Younger Self And Newer Advisors [1:21:22]

Michael: So what else do you know now you wish you could go back and tell you 10 years ago as you're evaluating some of these next steps, transitions, business ownership?

Fran: 10 years ago, I'm thrilled with what's happened. I really am. I feel so fortunate and I feel so, I guess, validated that the vision that I had...and of course I've course-corrected a thousand times, right? I'm not saying I set one plan and stuck with it, but I feel like I would just say, hey, this research that you're doing, this plan that you're making, this commitment you've made to bring your business fully in alignment with your personal values and create something that is meaningful for you and your clients, this community, this is going to work. This is right. So stay up less at night. Don't let this bother you at three in the morning because you are on the right track. It's good.

Michael: So any other advice you would give younger, newer advisors about looking to become a financial planner, start a career today?

Fran: I think the one thing, this was actually a saying that one of my colleagues early on at the Guardian said, which is there's no right way to do the wrong thing. And I would say the motto that I've sort of stuck to from the very beginning is to always choose the long-term relationship over any short-term anything. I don't care what the short-term thing is, whether it's capturing the client, making the sale, bringing over the AUM. But if you 100% of the time choose the long-term relationship and the, I don't know, some people would call it servant leadership or any number of words, but the real genuine, this is a helping profession and go there, create a functional business model, like be a business person, but don't be afraid to give of yourself in it and to choose that. You won't be rich right away, but you'll have something you're really proud of.

And for me, you'll have a community of clients that you deeply care about and that care about you and support you and will let you...will see you through a mistake or a stumble in your business. And I think that that authenticity, that alignment with how you want the world to work, is very important and meaningful. I really feel a sense of community with my clients. It's one of the reasons where selling to private equity is kind of off the table. Yeah. But I don't really have any advice how to start in this field. I don't know, get a job at an RIA you think is amazing.

So right now, Michael, I'm hiring and I'm evaluating dozens of fantastic resumes. And most of these are people who specifically want to work for our firm because of the way that we live and express our values, that we're upfront about our sort of social, political, and other stances. And they want to work somewhere that's gay-friendly. They want to work somewhere that is trying to be the change. And they're passionate about that. And I feel so fortunate because we've had such high-quality applicants that are like, "I'm sick of the direction my firm is going and I feel out of alignment with it." And so I feel like as business owners, this is the way to go. This is where you want to be. You want to be that firm that shines like a light for other people, not the one that makes the extra 3% profit.

Michael: Well, and I'm struck in that context that I feel like we get trained, at least in the traditional sense of advisory, right? There are topics you're not supposed to open in a professional context, right? Don't talk about religion. Don't talk about politics. And you seem very comfortable not taking that advice or going the other direction of it because you're attracting other people who share those values and views, other clients, future team members.

Fran: And really, for my clients, that's part of feeling safe and feeling seen is that they know that we support gay rights and reproductive rights for women and environmental protection. And these are the things that our clients are fighting for in their day life, right? And they want to work with somebody who chooses them as a community, who chooses to align with them, where our investments are aligned and our own personal beliefs are aligned. So every year at our holiday party, we choose 3 charities, local charities, and they're often somewhat political or divisive or social policy divisive charities. But that's who we are. So I think other financial advisors are leaving a huge amount of our community on the table by not orienting towards them specifically. But that's okay because that's allowed me to grow tenfold in 10 years. So that's okay. But I'm running out of steam. So really some people need to pick up the slack.

What Success Means To Fran [1:26:53]

Michael: Fair enough. Fair enough. So as we come to the end, this is a podcast about success. And one of the themes always comes up is just that word, "success," means very different things to different people. And so you've had this wonderful path of building a successful business and like literally 10x'ing in under 10 years. And so the business is in such a wonderful place now. How do you define success for yourself at this point?

Fran: We all know this question is coming when we sign up for your podcast. And the best quote I could find is Maya Angelou's, who said, "Success is liking yourself, liking what you do, and liking how you do it." And I just can't think of a better way to put it. I want in my life to build community and to care for the people around me, my clients, and my team in a way that elevates us all. I want to create conversations about money that center around values and meaning and experiences and not around piles of money. So, liking yourself, liking what you do, and liking how you do it, really, it says it for me in plain English.

Michael: And thus the power of finding that alignment in what you do and how you run and what you speak to and espouse to externally has been the growth driver for you over the past decade in particular.

Fran: I think that's right. And I think it's a fluid process. So, you know, yesterday was Election Day and I'm stepping into a period where for the next many months and years I'm going to be managing my clients' concerns and grief and shock over a second Trump presidency, frankly. I think that's going to be a long part of the conversation and being authentic with them and attending to their worries and trying to separate out the things to be afraid of and the things not to be afraid of are part of the guidance that we give. And so, yeah, that success is really about being there for the people I want to be there for. And I've been, it's exceeded my wildest dreams.

Michael: Very cool. Very cool. Thank you so much, Fran, for joining us on the Financial Advisor Success podcast.

Fran: Well, thank you, Michael. It's been a pleasure.

Michael: Thank you.