#FA Success Ep 350: The RIA Custodian As The All-In-One Investment Operating System Of The Future, With Jason Wenk

Resources Featured In This Episode:

• Jason Wenk
• Altruist
• Kitces Report: The Technology That Independent Financial Advisors Actually Use (And Like)
• XY Planning Network (XYPN)
• Apex Fintech Solutions
• Josh Brown (The Reformed Broker)
• Dave Ramsey (The Ramsey Show)

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Full Transcript:

Michael: Welcome, Jason Wenk, to the "Financial Advisor Success" podcast.

Jason: Hey, man. It's a pleasure to be here. Super excited.

Michael: I'm really excited about today's episode and I think just getting to nerd out, I think probably pretty deep dive on just the actual business and reality of RIA custody and clearing platforms and just how that whole platform thing actually works. I find, for most of us in the advisor world, we just kind of plug into these platforms, and they're there, and they do their thing. And most of us don't even pay anything for them directly. They're just kind of there. A lot of other countries, you actually have to pay for that layer. As an advisor in the U.S., a lot of the platforms are so big we don't even have a fee. We just kind of plug into, historically, a Schwab or a Fidelity or a TD Ameritrade or a Pershing and just kind of do our thing. And I know the reality is there's, quite literally, many more layers to that deeper and, particularly, when you get into why does it feel like some of our technology on the custody and clearing has lagged over the years.

And so, as many listeners probably already know, and we'll spend more time on your building a new RIA custodial platform called Altruist to try to change some of that, I think, overall, I'm looking forward to getting the nerd out a little bit about the RIA custody/clearing platform space in the first place, as well as a little bit of your back story. Because I'm not sure a lot of people actually know that this is not your first rodeo. This is not your first company that you've built and scaled. And so I always enjoy talking a little bit about your entrepreneurial journey as well, and I think we'll get to do a little bit of that conversation too.

Jason: It should be fun. I'm a grizzled old veteran, Michael.

How Jason Began His Journey In The Financial Services Industry [05:40]

Michael: You're a grizzled old veteran now. So, I think, actually, in that vein, I'd love to start by hearing you share a little bit of your journey, where and how you actually got to the financial services industry in the first place and landed in the advisor world.

Jason: Sure. I'll try to keep it semi-succinct. I had never taken a finance class. I had no real interest in finance growing up, largely because my family didn't have a whole lot of money, and I didn't know anybody with a whole lot of money. So, I kind of came of age in the '90s, and during that time period, personal computers became more and more commonplace. Internet became pretty commonly available. I sort of left the small town that I grew up in, a little farming community in West Michigan. And the internet made the world flat. All of a sudden, it was just remarkable, the access to knowledge, and also, that kind of opened up just a real curiosity with computers, and specifically the internet. Just the age of information is really remarkable. So, I wouldn't say I was a refined software engineer by any stretch, but I was definitely an all-consumed hacker and built all sorts of things, whether it be kind of DOS prompter within games to switching out circuit boards and trying to make my computer faster and inserting graphics cards. And so, that really led my interest.

And I think sometimes things always happen for a reason. When I was a sophomore in college, I got my then-girlfriend pregnant. It's these things kids sometimes are not most careful. But it ended up being the biggest blessing in my life. I have this incredible son who's now a college student himself. But it very much changed my perspective, and I knew that, yeah, I didn't have a whole lot of family help, but I took it upon myself to say, "Hey, definitely, I want to be a great dad. I want to be a good provider."

And that's kind of how I ended up with finance. I was doing an internship at Morgan Stanley. But it wasn't to be a financial person, it was just...I was legitimately helping people install Microsoft Outlook synced on their computers. It was pretty basic kind of IT and kind of networking type of work. But it opened up a door, kind of an opportunity for me to join. I was only 19 at the time. But that's why I got into finance. I learned a lot. I was able to go through the kind of crash course of kind of financial system at large. And most of the work I did in the early days was...they called us systems analysts, but it's basically just what today you might call an entry-level software engineer. But in any event, that was kind of assertive, right?

And I would say that the real eye-opening, kind of how I feel in love is I think if you're an engineer, kind of at least if your mind works that way, you love solving problems, and man, there were some problems in the industry. I decided I want to do something that helps regular people. So, I built my first business, was kind of now-defunct website that would help people with their 401(k)s, pretty straightforward really, "Hey, where do you work? And what's your goals?" and take you through a risk assessment, try to identify within their plan how they can invest their money. It was a subscription business, just a low-cost monthly subscription. And what I learned was that...it worked really well, by the way, at first. But I'd say, around the 9-month mark was when I experienced really high churn of people canceling, and it was largely because my advice would basically tell them to never change anything. And so, after 6 or 7 or 8 months of them paying $20 a month, they'd be like, "Why am I paying you $20 a month to tell me that?"

Michael: It's hard to build a subscription model around the persistent message of do nothing.

Jason: Yeah. I was obviously maybe way early to the game, right? This was early 2000s, and not a lot of people...I don't know if anyone in the country was doing a subscription-based sort of 401(k) help at the time. But what I learned is that when people would cancel, I started asking an automated sort of, "Why did you cancel prompt?" And what I learned is there's a lot of people who actually had quite a bit of money. What I learned was that it was people in their 50s and 60s who are getting ready for retirement, and they were seeking 401(k) help on the internet, finding the website, ultimately, canceling but then saying, "Hey, if you just would do this for me, I'd pay you a lot more money."

And that's how I learned about the RIA industry. I then was like, "Well, how do you do that? How do you actually get registered? What do you have to do to charge people?" And I learned about custodians, and it required software to do things, kind of trading across multiple accounts and fee billing. It was a real crash course. I had zero knowledge, no mentor. There wasn't a lot of info on the internet back then. I don't think you had even started kitces.com yet, right? So, there was nowhere to go.

Michael: Yeah. When was this? When was this?

Jason: 2003.

Michael: Oh, yeah, kitces.com didn't launch till 2008. So, yeah, there was nothing out there.

Jason: So, imagine the world before that. We relied heavily on print magazine. There'd be little, tiny ads in the back. There's one, I don't remember the guy's name, but he ran a little ad that would say, "Start an RIA $450," and there's something like call Bob or whatever his name, right? And so, that's how the journey started, and I feel like I've spent now most of my adult life just trying to solve those same problems I observed over 20 years ago.

How Jason Leveraged Blog Posts To Create A Sustainable Prospect Funnel [11:27]

Michael: So, what was the thing that you built 1st? So, you had this. It turned out there's a bunch of folks approaching retirement who have questions and will pay you a little something on the internet for information, but they actually would pay you a lot more just to do it for them. So, you start finding your way to the RIA model, because that's literally how you get paid to do it for them. Welcome to portfolio management discretion. So, what did you actually do or create or build at that point? What came next?

Jason: Yeah. So, that was when I started my first RIA. It was called Retirement Wealth and kind of the reason I went after that market then. And it wasn't this common. Obviously, there's a lot of people that do retirement-focused work today, but 20 years ago, there were very few. But I did it because of the information I learned from doing the sort of self-directed 401(k), just sort of a subscription platform. Again, most of the people who are into that service, they were people getting ready for retirement or in retirement. So, I thought, well, hey, I did a little bit of research, right, and of course, the demographics at that time sort of said, "Hey, listen, there's going to be this huge wave of baby boomers that are preparing for it." And I thought, "Gosh, the next 20+ years, this is going to be a really good space to be in, so I'm going to really focus on that retirement kind of client base."

And so, Retirement Wealth was born. It was a state-registered RIA, just me, so just a solo operator, and fortunately, I learned a lot about online marketing. So, it sounds crazy thinking about it, but performance marketing, before it was such a thing, like pay-per-click back then, a fair bit about that. Eventually, it took a couple of years, but I eventually started blogging and built a fairly useful blog that would help with the client traction.

And some of the cool learnings I guess I would say. Fast forward to today, I remember having to need a custodian, because 1 of the 1st things I was like, "Well, if I'm going to help these people with their money, I've got to have a place to open these accounts." This might sound so silly to people today, because maybe today it seems easy because there's obviously websites like yours that have tons of information, there's membership organizations like XYPN and others that kind of bring people together to help them.

Michael: Yeah. Back then, you're wandering in the wilderness. You're literally getting the magazines to look at the ads because it's the only way you can figure out who actually has a solution to do this.

Jason: And I remember calling the state of Michigan and asking for their help filling out the actual sort of application. So, it just was a very different world, nonetheless. But in that process, I remember I met another advisor in Michigan who had an RIA, and he was willing to kind of share a little bit. He's like, "Hey, listen, here's what I would recommend. Call Charles Schwab, and call TD Waterhouse," as they were called back then, "and you need to get a financial custodian. It's 1 of the most important things you're going to need to have." So, of course, I had no clients, no assets, no experience. I'd have much to offer to custodians, but unfortunately, back then, TD Waterhouse was willing to take me on.

So, I jumped on the platform after I got my RIA up, and I had to learn a few things on how to run it. But I remember 1 of the 1st things that really sticks out of my mind because it really helped shape kind of the way I thought about the next 20 years was I wanted to open my 1st account. I was going to just open 1 for myself, and I wanted to learn how to trade, how to bill, how to collect revenue. And I remember asking my sales rep, "Okay, so, how do I do those things?" And it was like, "Oh, well, we don't do most of those things." "Wait a minute, I thought you guys are the most important part of my...to help me run this business." "Well, no, we have an affinity center. You go to the affinity center, and you can find software partners if you want to be able to do financial planning and if you want to be able to do a bit more sophisticated trading, if you want to be able to do fee billing."

And I thought…I remember just even saying, "That's the most ridiculous thing I've ever heard. You want me to go buy software. You already have all the data. You know exactly what the value of every account is every day. You can reconcile every single position. You're generating statements already. But you want to generate..." and again I had a software background, so I knew what these things were…they were measuring. "You want me to generate a flat file, upload it via SFTP to a third-party software. It's going to be not exactly the same format as what you're displaying. So, they're going to have to reconcile all the transactions and corporate actions and values. And once I started using some of these software, it was like, I'd say, the efficacy was very low. There were a lot of inaccuracies. But you're going to want me to use that system to then calculate the fee to then generate another file that I then upload to your system some number of days later when the data is not even relevant anymore." There could have been a cash withdrawal. It's one with a monthly distribution. But I'm like, "That is the craziest thing I've heard." And they're like, "That's just the way it's done."

And that's just seared into my memory that that was the way it was done. It made no sense. And so, I built a pretty successful firm, but I remember I also got sort of my 1st taste of how inefficient the business was because of these things not being integrated. It was all fragmented.

But that's how I got started. And, yeah, I obviously have to go deep into the Retirement Wealth years, but it was a really cool learning experience because I got to be an advisor. I got to be a financial advisor, financial planner, and work with clients, and kind of learn even what the consumer perspective was of our industry, and super valuable kind of series of years. I've probably spent about 5 years kind of as a practicing planner. It was super helpful.

Why Jason Built Retirement Wealth to Help Retirees [17:32]

Michael: So, how did it build and grow? What kind of traction did you find with this novel concept of doing financial planning focused on baby boomer retirees? I'm not saying that, tongue in cheek, that really was a new thing then, right? The whole baby boomer wave of, whatever, 10,000 baby boomers reaching age 62 and starting Social Security. That hadn't begun yet. That hit in 2008. You were ahead of that curve.

Jason: Of course, in the time, ultimately, it was hard as hell, of course, is how it felt. But it was very successful very quickly. And some of that was I worked really hard and probably a little bit lucky, and for sure I got lucky, I guess you'd say. But I remember the 1st year was a bit slow-moving because I just didn't have any idea what I was doing. I had no interpersonal skills, really, whatsoever. I was really more of a technical person and didn't understand the sort of emotive drivers of how people make decisions. But I just took it upon myself, "Hey, I'm going to learn everything I could." I read every book you could possibly read. I read every industry magazine, cover to cover, 10 times over to try to learn.

By the 2nd year, I had found a really good rhythm. I grew my business really 2 ways. I did seminars. I hosted educational seminars. And then I used my blog. In the 1st, I'd say, 2 to 3 years, I got a lot more business from seminars. By years 3 and 4, probably the blog overtook that. And by year 5, I was 100% virtual, doing all business through my blog. And that was, looking at my notes, that would have been 2008 or '09 or thereabouts, which is way earlier than most would have probably been doing that. And took about 4 years to get to 100 million of assets under management. And then, from there, very quickly got to 200, and from there, very quickly to 300. And so, I would say, and I always try to tell people, the youngsters nowadays, that, mind you, that was a long ago that, adjusted for inflation, that's a lot more than what it is today.

And also, that was the year I first started hiring people. So, I learned a little bit about hiring both for good and bad experiences that shape some of the things that now I realize just how important there, but then I didn't have any experience. So, you're just kind of learning as you go.

Michael: What were the learnings, failing, "I wish I had known then what I know now" about hiring and building team?

Jason: Yeah. So, I think the mistake I made which I think I see a lot of planners and advisors make the same mistake is, 1, they don't have a great hiring process, right? It's more like, "Oh, yeah, I need some help," and then you get referred to whatever, your neighbors, cousin who, whatever, used to be a bank teller or something, and you do 1 interview, and you hire them on the spot, which is... that's not pretty good. Maybe you found the needle in the haystack, but probably you didn't. So, there's not much of a process for people to build really good talent around them. And then I think even identifying and understanding what great talent looks like is also a bit of a misnomer. I think people are more solving for what they can afford. So, it'll be, "Oh, I think I can afford someone and pay them $15 an hour for 30 hours a week." And so, they go out, and they acquire that level of talent. And then they get that level of result.

It's rare that you're going to get someone who essentially fights way above their weight, right? And so, I think, yeah, hiring now, I certainly wouldn't get hired at my own company today. I'm not nearly remarkable enough, and maybe that's probably how it should be.  

But I'll say that I remember, and for all the faults he has probably today, the radio host, Dave Ramsey, he has this 1 saying that I...I still like it just because I think it's short and sweet and makes sense, but he says, in order to live like no one else, you have to live like no one else. And I remember hearing that in the early part of my career, and I would say I'm trying to build something that's going to be really impactful. I really want this to be something that's really meaningful and impactful. And I'm willing to live like no one else. And really what that means for those who can't quite comprehend the simplicity of it is I'm willing to live incredibly austere. I'm going to live in the cheapest apartment, drive the crappiest car, pay myself nothing, work harder than anybody I know to the point that people might think it's actually unhealthy, the level of work I'm going to put into this, because I know the pay off if I do this for the next 2, 3, 4 years, not just personally, but the impact will be this massive, huge multiple relative to the work that went into it. So, that really shaped those early years for me, and I think helped that business become quite successful for the era anyway.

Michael: So, what ultimately happened with Retirement Wealth?

Jason: Yeah. Maybe this will be thematic here. So, my growth was quite high, and the salespeople at TD Ameritrade noticed it, right, because they saw the assets growing quickly a few years in a row where I was adding a lot of assets every month very consistently. And one of the things, of course, they wanted was, "Hey, how are you? How are you doing this? Did you buy a business? Did you do this?" "No, I'm doing this through my blog. Actually, now, everything comes through my blog. Just tons of this is from my blog." And then people looked at my blog, and it was this ugly, old, simple blog, right? There's nothing fancy about it. But there was 1 thing I did really, really well. I pretty much stumbled into it.

Being a fairly technical person, most of my clients were quite technical, right? So, I worked with a lot of engineers, college professors, academics, and just generally people that had sort of an engineer type of mindset, CPAs, things like that, right? So, suddenly, this 1 really brilliant rocket scientist that was a client of mine, he went to a seminar and sent me an email, basically. The email said, "Jason, I know I shouldn't have, but I went to this seminar. And I know I shouldn't have, but I agreed to meet with the person that presented. And they were trying to sell me this very specific," he gave me the brand, the name of the carrier, but a fixed index annuity. And he shared, "Here's all the things that he told me that it would do for me and why I should have it. And I went to the internet and looked around. I couldn't find anything on this annuity. And so, I'm asking you, is this something you think I should do with my money?"

And I just thought to myself, this is genuinely 1 of the smartest people I know. He's 1 of those clients that you love to have, but also, they really challenge you. He really challenged me a lot to be really exceptional, and I'm very grateful for him. And so, I started working on my response, and I knew, knowing this client, I knew I had to do my homework, right? So, I built an entire spreadsheet that broke down how to calculate all the internal rates of return of the various kind of structures of this FIA and its crediting methods and its guaranteed lifetime withdrawal benefit rider and built these toggles so he could very quickly choose an age and automatically calculate kind of the IRR. So, if I bought at this age, look income at that age, and so forth, right? And then I was sort of panning. And of course, I had to source. Basically, it was like a Kitces article, basically, where I'd source everything. It was really well done, I would say.

And then before I hit send to him, I thought, "Gosh, if this guy couldn't figure out how this product worked, what about the other people who are in the same boat?" And so, I asked him for his permission, "Hey, do you mind if I share this on my blog? I'll remove anything that would tie it to you, whatsoever." And he said, "No, I think that would be great." And I published it, and it legitimately changed my entire life. It was such a life-changing post because really it allowed me to give up on having to do any type of seminars or things like that. I never had to see a client face-to-face ever again the rest of my life. I could...

Michael: Because the more the companies pitch the growth of fixed index annuities, the more people Google searched, the more engineers Google searched online, found your engineer-oriented post, and said, "Oh, this is clearly the person I have to work with."

Jason: Yeah. And it's really interesting. It made my pool the whole country. So even though I suspect you probably have the same things you're going to have to see, my style probably turned most people off because I was too detail-oriented. The video...I recorded an hour-long video breaking down all the mathematics of how this product worked, right, and then wrote this who knows how many thousands of words, kind of whatever essay on it. But those who did appreciate it, boy, were they really into me. I would have people be like, "I feel like we're kindred spirits." It'd be someone who's a 70-year-old, whatever, engineer at Boeing or something like that, and I was a 28-year-old. And they'd be like, "I feel like we're the same, and we see the world the same."

Anyway, it's very, very lovely and endearing, but TD noticed the growth, and I kind of shared that's how I did it. And so, they invited me to go to San Diego and to speak at, I think, it wasn't called LINC back then. I forget what it was called. But basically, they're a national conference, probably around 2010 or thereabout. And so, I went out there, and I'd never spoken really much to advisors at that point. I was a very unknown person, right? Even though I was young, I don't know too many people in their 20s that built a firm the size that mine was. I'd never been in any magazines or any industry award things because I very much kept to myself. But anyway, I presented there, and lots of advisors were there, of course, that were very curious how someone was using the internet. This was before Josh Brown, before anybody really. It was just making...

Michael: Yeah, no one had traction in the blogging room yet. And curious, were you then writing takedown analyses of a whole bunch of different products, or was this sort of you wrote the 1 article about the 1 product, and that was enough and off it went?

Jason: So, what it did for me was it got me thinking, this is pretty pragmatic and obvious, right, but I would say that, yeah, then I said, "Well, gosh, this is just 1 random annuity. Let me do some research and find out what the top 10 selling fixed index annuities are." And I did the same thing for them. And then I thought, "Well, gosh, the same thing might be happening with variable annuities. Let me find what the top handful of variable annuities are, and I'll write about those too." And so, quickly my blog became essentially known for annuity reviews. I was the 1st person to ever do it and say, my YouTube channel, 1st person to ever publish long-form reviews. These were long-form reviews.

And interestingly, I didn't necessarily have to drive a ton of traffic because it was so well... there's such wealth of prospective clients that, yeah, I'd probably get about 100 inquiries a month of people, and the inquiries were very interesting. They'd send everything in the contact form and be like, "Jason, I just sold my business. I have $7 million. I've never worked with a financial planner before because I've always been self-employed. I interviewed 7 people. They all said different things. A bunch of them were trying to sell me these annuities. I found your blog. Can you please help me?" What a strange thing, considering most advisors really struggle to get clients, and all of a sudden, I had people asking for my help and telling me all about their life and their challenges.

So, when I did the presentation at TD, 1 of the things that happened was lots of other advisors started reaching out, "Hey, how do I plug into what you're doing?" And what I was doing, by the way, it wasn't just the annuity reviews. I also had built my own sort of client onboarding process where I was assessing the risk and building their plans. I did all of the proprietary financial planning process. I was charging fee-for-service well before a lot of people were because I charge for every financial plan. I didn't believe in doing free financial plans. And then even I had a very algorithmic way of managing money. I think it's because I actually lack the self-confidence to believe somehow I'm smart enough to beat the market. So, I just felt like I don't want to trust any decision I could ever make. Let me just entirely build formulas to help dictate how assets should be allocated, how they should be tax allocated, how they should be traded, etc.

So, my process was pretty simple. Get clients mostly from the internet and then have a very replicable process for onboarding them through planning and then eventually to becoming long-term kind of wealth management clients. And basically, a light bulb went off. Advisors started asking, "Hey, how can I do that too?" And that's what led me to my next company, which eventually started in 2011, started writing the code for in 2011, launched it in 2012. It was called FormulaFolios. And basically, I didn't really know it at the time. I didn't know what a TAMP was. But I just saw myself, okay, there should be a platform that advisors can plug into and help with some of the 2 things they struggle with a lot. 1 is getting in front of new clients, and the 2nd is helping them onboard those clients in an efficient manner. And so, I started with a TAMP.

And Retirement Wealth still existed. I stepped down, offloaded clients to some of the others that worked for me, sold some pieces of my book of business, and even the entire firm decided to have an operating position really there for quite some years. But I maintained a meaningful owner position for quite a few years, and it kept growing and growing and eventually became a billion-dollar-plus RIA.

Why Jason Built His Own TAMP To Provide Advisors With Middle- And Back-Office Solutions [31:39]

Michael: Very cool. Very cool. And so, when you shifted then to FormulaFolios, I guess, same theme, building systematized portfolios, have a marketing system to bring people in, and make the onboarding easier, but the distinction is now you're actually starting to build software and code. Because it sounds like Retirement Wealth, ultimately, you had a process, but this was mostly I'll just call traditional planning, do the work. FormulaFolios was, it sounds like, more of a technology offering or binding value proposition.

Jason: Definitely more. I built my own proposal system that did a whole bunch of really cool things. That became actually the initial kind of code base for FormulaFolios. But definitely, FormulaFolios was much more of a platform business. And so, at our peak, we had a little north of 30 engineers and about 110 total employees. And we're very much building sort of a technology product, and product not meaning financial product, but product meaning software product-first company. And, yeah, I didn't realize it at the time, but essentially, what I was building was I'd call it middleware today where we still sat on top of the traditional custodians, but we kind of sat between the custodian and the advisor and provided a lot of those middle-office, back-office solutions. And we tried to codify as much of it as we possibly could. There are some limitations, of course, but, yeah.

Michael: You can only automate as much as the underlying custodial platform automates in the first place.

Jason: A hundred percent, yes. Well said, yeah.

Michael: So then, how did the FormulaFolios business grow and evolve? I take it, you were getting advisors who were reaching out through the TDA presentation to say, "Hey, I'd love to plug in more of what you do." So, you said, "Okay, I'm just going to make a new business that literally just focuses on plugging advisors in, and so I'm shifting from an advisory business to a platform for advisors' business." How did that actually grow and evolve?

Jason: The 1st advisors, yeah, they largely came from...well, they came from 2 sources. So, after I gave that presentation, there was a magazine article. I can't remember which magazine it was but 1 of the industry's magazines, and the title was "The Advisors' Tech Edge." And you and I were both on it, and it was about these young up-and-comers using tech, right, to grow their businesses. I think Bill Winterberg, I think, was on it. So, some people read about me, right, and that was much more broad than just the TD audience, and there was the folks from that TD audience as well. And there was a couple of articles written about my presentation at the TD conference, and this was in the early 2010, '11, or in that neighborhood.

And so, that was the 1st group of advisors that were kind of the early adopters, if you will, or the innovators, I guess, if you're looking at an adoption kind of bell curve. And so, yeah, I was able to kind of zoom out pretty quickly, get the first 100, 150 million of assets sort of on the platform. As a TAMP, we charge a percentage on assets, and so I was able to work for free and fund it privately because I had built the Retirement Wealth business reasonably large. And so, I had good cash flow from that.

Michael: So, you were effectively able to use the profits from Retirement Wealth to fund the build and the initial hiring at FormulaFolios.

Jason: Correct, yeah. And this is, again, this is another great example of live like no one else, right? So, even though Retirement Wealth was quite successful, I never really spent a lot of that money. I just would invest it back in the business, invest it back in the business, hire people. I always put myself on salary. I learned to live within the confines of that salary versus taking big distributions, profit distributions. So, by the time I was building FormulaFolios, I probably had $1 million in cash that I just never spend, right, after-tax money just sitting there. So, it wasn't incredibly hard to fund sort of another venture. And again, a good lesson for any young, aspiring entrepreneurs, don't spend all your money, save it, live to learn pretty meagerly, and you'll have way more opportunities if you want to do bigger things. But, yeah, so that's kind of how it started.

And then the process was pretty straightforward. I ended up getting pretty good at go-to-market strategies. So, marketing to advisors became something I really tried to get much better at so we could build kind of a pretty replicable sort of flywheel of a great product but also great pipeline. And the business grew. Again, it wasn't easy. It all sounds easy when I tell clients. I'm here to tell you, it was a lot of long days, a lot of heartache, a lot of staff turnover because I didn't know what the hell I was doing when it came to hiring and managing and nurturing people. But in the end, from when I launched it in 2012, I think we probably had a billion in assets by 2014 and 2 billion probably by 2015 or '16. And by the time I ultimately stepped down from running the company, we were just under 4 billion in 2018.

So, it was a pretty rapid growing business. But based on a very simple value proposition, our marketing message was we help advisors that have $5 million to $10 million in assets 10x their business. That was it. That was the value prop. How do we do it? Well, we have marketing systems that are digital in nature to get in front of more of your ideal clients, and we have business automation on the back end to help you onboard, successfully, onboard those clients. Right now, it's the business. So evidently, what I learned over the years is that most financial advisors, many of them anyway, and this isn't, by the way, a knock on advisors by any stretch, they either would like to make more money, work less hours, or both, and many times for very good reasons. I like to earn more money so I can give more away, or I'd like to work less hours so I can spend more time with my family, right? So that was...I built the whole business around that.

And ultimately, I'm very proud of, of course, the work we did there, but I did start having a lot of sort of paranoia in the last couple of years that I felt like the fees were going to become impossible to justify. And no matter what I did, no matter how much software I built, and no matter how Six Sigma I tried to get around efficiency, the operating cost of running a TAMP, you just cannot compress them. I could not envision a world where I could reach a sufficient scale that those fees would be worth advisors paying for. It was my opinion, of course. I was very punitive about it.

Michael: What were you charging at the time? What was the TAMP cost?

Jason: It was variable, based on account sizes and advisor assets. But we probably, across the board, averaged around 0.5%. And in my head, I felt like a TAMP shouldn't probably be more than 15 basis points, 20 maybe at the most. But, of course, our operating expenses were in the neighborhood of probably 30. So, I was looking at this and going, even if I stripped out my RMD, I could maybe get it down to 20.

Michael: I was going to say, all those pesky engineers do add a wee bit of cost as you keep building systems. But, yeah, even if getting your RMD build stuff out only gets you down to 20, you kind of have a problem.

Jason: Yeah. Listen, again, actually, I like to solve hard math problems. This was a math problem that I basically conceded to that this is... And I didn't feel like it was urgent. I was like, "Okay, I could probably get away doing this for another decade or more, and I could probably make more money than I could spend in 10 lifetimes, and I could sell this business and make hundreds of millions of dollars." I was well aware of all of those things. So, for me, as soon as I conceded that I was not going to be able to solve the problems I wanted to solve, then I should no longer work on this business. That was basically what it went down to. And the business is still around, sold to private equity firm, and it's been since rebranded. It's a successful $8.5 billion firm today and growing presumably quite nicely.

But part of the challenge, by the way, on the margins anyway, is that probably my biggest expenses, again, if I strip down all of the RMD, my biggest expenses actually were essentially supporting the custodians, meaning we had a rather large cashiering team because once you reach scale, what advisors will accept as small problems because they don't have a large client base when you have a big firm, these small problems are very obvious, right? So, support 50,000 accounts and just think about managing RMDs or qualified charitable contributions from IRAs or think about all the people who have monthly contributions or distributions, think about all the people who have one-off needs for 50 grand here or 20 grand there, all the checks that you get deposited, and how all the impacts how you try to manage the sort of cash balances inside of client accounts while still keeping generally low cash balances so they don't create cash drag, which is especially important rates for 0%.

It kind of became this problem. There's no off-the-shelf or software we could build that was going to make those problems go away because the bulk of the challenge is actually at the custodial layer, the infrastructure layer of our industry, and there's no middleware you could buy that I was aware of or that I could build that was going to fix that. And the same became true of even opening accounts. We were opening 100+ accounts a day. Think about the mathematics behind that, and it's, okay, well, if it takes 4 weeks or thereabout to get the account properly fully funded, so you're looking at 20, 21 business days or in that neighborhood, right? And if you have a 10% NIGO rate you can sort in back in this math, "Wow, we're sitting on 350 to 400 accounts in some state of disarray at all times at numbers only ever growing."

Michael: Only growing as you scale, yep.

Jason: So, as you can imagine, this is where I was, "Okay, we can't operationalize our way. We can't codify our way out of these problems." And look, as long as the rest of the industry was okay paying more than they should for these services to be sort of outsourced, then we had no competitive pressure necessarily, right? But I looked at the world and thought, "What would happen if we could give advisors and their clients back those 20 or 30 extra basis points? Heck, what if we could give all of them back? What if we could only give all of them back but we could actually do it way better? We could actually get accounts opened faster, lower rejection rate, high degrees of automation around cash management." Again, at scale, again, it might not for the average advisor that maybe has, whatever, 50 to 150 households, maybe they don't believe it's a huge deal, but for me, at that moment in time, man, did I feel like this could be really, really important? And that's the problem I want to solve, and that's kind of how…why I stepped down and eventually started Altruist.

Why Jason Was Inspired To Build His Own Custodian Platform And Found Altruist [43:01]

Michael: And so, that was kind of directly the genesis was, "I'm seeing these scaling issues at FormulaFolios, I can do the math of how they're going to compound as we keep growing, and even with the software engineering background, I can see, I'm literally not able to solve this at the middleware layer because the underlying custodial platforms just don't put enough out there to make it possible to solve. If it's going to get solved, I actually have to build the custodial layer. So, off we go."

Jason: And I think, for me, I should give credit where it's due. The hair that broke the camel's back for me was watching Robinhood launch and grow, because I remember seeing the robo-advisors being generally, okay, this isn't that disruptive, in my opinion. I remember I started FormulaFolios around the same time of the robo kind of revolution. I remember looking at it and being like, "I knew unit economics really well." And I was like, "These things are going to be a disaster. They'll never scale. They'll take their payback fairly way too long." That's why I have always lived in B2B for the most part of the last 12, 14 years, because that's why I left Retirement Wealth. 

But when I saw Robinhood, I was like, "Wow, this is remarkable." You can now open an account on your phone, put money in the account, trade the account in fractional shares with full autonomy on how you decide to do it, you're not being pegged into 1 of 7 model portfolios, it's commission free, it's elegant, it's fast, no minimums, and we, as advisors, are being told to use digital e-signatures, which are still ultimately...in many custodians, they're literally printed off after the received. And then they're processed. They're re-keyed in manually after they're printed. It hasn't evolved a lot since then, for what it's worth, right? Because I think even the major player incumbent, they know the future is fully straight through digital processing. So, why would they...?

Michael: Yeah. Everybody gets where it's going.

Jason: So, investing in something in between here and there doesn't make a ton of sense, and so that's why it's not actually evolved a whole lot since then. And many of the major players are still quite a ways away from full digitization of not just account opening but all of the servicing related to it. And TD had probably the best open API network.

I had a large firm now, and so I had access to sort of, whatever, generally higher-ups at most of the major custodians and even some of the big kind of tech vendors in our space. And I just felt like, okay, I could do that and give feedback and offer advice and encouragement, right? But in the couple of years that I was doing that, nothing happened, right? The pace of change was watching paint dry. And I couldn't bear it any longer. We all have our breaking point, and again, that breaking point, to me, was, okay, if I don't build this myself, I'm not sure how long I'm going to wait for someone else to build it. It's a pretty important moment and a lot of stuff to change, and so it's been 4 1/2 years or so since I resigned from FormulaFolios. But a lot of it stayed the same.

So, yeah, maybe commissions have gone away, and there's been a tiny bit of technical innovation. For the most part, business is not a whole lot different than it was in 2018, and it's not a whole lot different than it was like in 2008. In 15 years, there's really not been a whole lot, because we could use DocuSign in 2010 at TDA. So, it's pretty slow-moving. Again, we all know where things are going, but how long are people going to wait to get there? My patience, obviously, wasn't quite...I wasn't going to wait another decade.

Michael: And so, that's the genesis and launch of Altruist.

Jason: Yeah. I think there's...it had been brewing for a couple of years. I'd even kicked around. I did a full integration with Apex Clearing when I was at FormulaFolios. So, we had an idea of what could be done if you had engineering firepower but also say that, if someone didn't have... This is at the time. I couldn't tell you what it would take today. But at the time, it probably took, I'd say, 8 to 10 people 6 to 9 months, and when I say 8 to 10 people, meaning half a dozen engineers, a product designer, product manager, and it took us, again, call it, 6 to 9 months just to get an MVP of a digital platform for advisors kind of up and running. And so, whatever that cost was to me. It's presumably a couple of million dollars.

But that's also what was said…Well, if that's what it takes, then almost no one's ever going to do this. No one's ever going to build their own digital platform. So, all of them sitting around and waiting for it to be built. But I learned enough about building that that I was like, "I think I can do this. I can build the whole thing, the full stack." Because at that point, I already built performance reporting software. I built proposal software, asset allocation software, trader to management software. We built a lot of the stack, the middle office stack, if you will, at FormulaFolios, and I had also then built this sort of front-end onboarding experience on both. We built 1 for TD's and their APIs. We built this more elegant digital version through Apex.

When I think about, yeah, the launching, I make it sound like, oh, it was 1 day, and the hair broke the camel's back. But it's, actually, it was, there's a number of years kind of leading up to this, and then, again, there was sort of this crescendo, I guess, which led to the starting. And fortunately, I think, clearly, I wasn't alone, because it's been a pretty...once I made the decision, I think others clearly were not totally happy with the status quo either, as evidenced by we have a lot of advisors now that use the platform.

Where Altruist Stands Today And How It Differs From Other Custodians [49:06]

Michael: So, help us understand just Altruist and the platform and offering as it exists today for what I suspect are still a number of listeners who aren't really familiar with what it is or what you do or what the capabilities are beyond maybe they've heard the name at some point.

Jason: Sure. Yeah. So happy to...first, I'm going to audible and back up just a tiny bit too to when I was doing my research on building a custodian, I was shocked how little I knew about custodians. I had a general idea, but there's things we hear about...if we're in this business long enough, you hear certain things. And maybe if you hear them so often, you accept them to be truths. And so, some of those, I'd say, things we've learned to accept as truths, custody requires massive scale, right? It's a super low-margin business. They don't make any money, right?

In fact, if someone's running a big enough RIA for a while, you've undoubtedly had a conversation, I've had these when I was running my RIA, where the custodian comes to you and says, "I don't make enough money off your business, and you need to change either your cash sweep vehicle, or you need to use some of our proprietary funds, or you need to do something, because we're just not making enough money on your business. We might have to start charging you a platform fee." Those conversations happen all the time. In fact, actually, the bigger you are, the more likely they are to notice the lack of their economics, and so then they want to put pressure on the firm.

But if you really look at how a custodian works, the thing that was frustrating to me is I started looking at it, and my job is running a relatively large firm, but I thought it was kind of crazy. If you're a multibillion-dollar firm, that probably meant that your custodian was making $5 million to $10 million off you in gross revenue. And presumably, probably, you could see that their net operating margins were typically 40% or thereabout. So, they're well-run businesses. So, I could do the mental math and go, "Okay, if we're a couple of billion-dollar RIA, this firm's making a few million dollars off from my business." But they don't provide really anything for that, meaning, other than a big brand name and a stable platform, which is very valuable, but what I mean by don't provide anything, if I want to have software to do certain things, I have to go pay for that.

So, if you happen to be multi-custodial and you want to be able to trade your accounts with equitable trade allocation across both custodians, you need to have a multi-custodial trading platform you had to pay for. If you want to have an elegant client portal, again, especially if you're multi-custodial, well, you're going to have to go pay for that. Maybe it's the same company, maybe it's not, depending on how you're building your stack. If you want to be able to do any type of advanced analytics or if you're onboarding clients and you want to just integrate into their onboarding experience, risk questionnaire, that's a whole another software vendor expense.

And the whole thing seems so crazy to me that, as I looked at the space, I was like, "Okay, we have a number of software companies that are pretty meaningful in our space." They are rounding errors to the monthly revenue. Their entire valuations, by the way, are rounding errors to the monthly revenue of the big custodians. I didn't think people were holding custodians accountable enough in terms of what they should provide. In fact, I would say, I think if we had to do this all over again, if we erased all history and we started from just what we know today or what we know, I guess, starting tomorrow, I don't know that people would accept that a custodian should do so little, and you'd have to buy all this other stuff to make them function.

And so, when I started Altruist, I guess, these were founding principles that I understood, okay, the economics are such that even in a 0 interest rate environment, these custodians are generating 30 basis points or more on client assets even if they're not charging anything for them. Before there were commissions and certainly when interest rates were a bit higher, they were a lot more than that, right? They're presumably making 50, 60, 70. In fact, in the early 2000s, they were making north of 100 basis points on advisor businesses, right, and still providing very, very little, if nothing at all, less than they do today, actually.

So, in building Altruist, the vision was sort of this, "Hey, advisors shouldn't have to do all that stuff. So, let's try to actually build a vertically integrated solution, which basically means let's not just provide clearing and custody but let's also have an elegant advisor portal. Let's offer, if they want to use it, an elegant client portal and a mobile app. Let's integrate fee billing." So again, we have the data. They shouldn't have to do all this weird reconciliation kind of rigmarole. They should just be able to tell us how they want to build out clients if they're using fees that are debited from accounts, and this should just be done with very little work. And of course, at the core, the table stakes, this should be entirely digital. You should not have to fill out any paperwork for anything. An account should be able to be opened just as elegantly and fast as they can on that Robinhood app, right? They should be funded just as fast. ACATS should be able to be done in days, not weeks. ACH and wire should be able to be funded same day.

So, these are the general founding principles. And in terms of what we do today, it's pretty much all those things, right? We are a full self-clearing custodian with a very elegant software layer that does a lot of the key things any custodian should do. Now, imagine, we're not trying to boil the ocean. I don't think a custodian should necessarily be your financial planning software, and I don't think your custodian should necessarily be your CRM and a number of other tools. Those tools are also already, I'd say, pretty fairly priced, so they don't get out-of-control expensive as your firm grows. But a lot of those other services I mentioned that weren't vertically integrated, but probably should have been, were really expensive, especially...actually, the 2 levels are really expensive. If you're a brand-new firm, dropping 10,000 or 15,000 or 20,000 on software is a really tough pill to swallow. And also, if you're a really big firm, like in my last company, even though we had all those engineers in-house to build all the software on our own, we were still spending probably in the neighborhood of $2 million a year on outside software, and that just seemed kind of crazy to me.

Michael: Because the model for a lot of those...almost all the performance reporting platforms is some version of a per-account fee with a minimum. So, the minimum means when you get launched, you still may have a historic $10,000 to $15,000 platform fee minimum for your Orions, Black Diamonds, Tamaracs, and the like. And then the per-account fee means you don't really outgrow that. You get to a certain size and scale, and it's basically still the same number. You get an advisor who has 100 client households with 2 to 3 accounts per household, obviously, sometimes more than that, 2, 3 accounts per household, you've got 250, 300+ accounts, you're paying $40 an account, and it's, well, there's $10,000 to $12,000. It's the same number, and every advisor, it's another $10,000 to $12,000 per advisor.

Jason: Well, I think the other thing that that does, and it really bothered me, was that minimum charge per account, and I've had this...I realize we're a long ways away from solving it, but it doesn't mean we should stop trying, is the accessibility of advice and planning. I know you've done a tremendous amount of work there, and as has your broader team, both of your Kitces team and your XYPN teams. And, yeah, I have some thoughts on how we get there, but we're not there yet. But I think, what a great way to tell people that you don't care about them financially than by saying, "Hey, this household, right," if I want to help someone who has 3 accounts, and if you're a small firm, you're not getting 40 bucks per account, you're paying 60, 70 bucks per account. So, you're like, "Okay, the first $200, I don't even get, but this person only has $30,000 to start. I'm going to have to charge him 2% in order for me to make any money, or I'm going to have to charge him a minimum financial planning fee of $2,000 to make it worth my hourly rate or something."

And while none of those things are necessarily untrue, those are not crazy statements and maybe they're not totally off the value chain, if you will, but, gosh, it really sucks in I really wish it wasn't that way. And so, there's a lot of work to kind of be done to get there. But I felt like, again, the custodians could have borne more of those responsibilities if they were built the right way. And part of why they weren't built that way is, like, they were never built, actually, to ride custody for RIAs. These are platforms that were retro...

Michael: They're all retail. Every RIA platform in practice was either a consumer retail platform, like Schwab and TD and Fidelity, all came up on that side, or they were primarily serving independent broker-dealers, like Pershing. And then all these things got retrofit to what would it look like to support a standalone RIA.

Jason: Yeah. And even to this day, right, you think about how long the Investment Advisers Act has been around, and I wouldn't realize this when we're building our press release announcing our self-clearing. We're like, "Yeah, who are we joining?" And we're like, "Oh, wait a minute, we're literally an N-of-1." We're the only RIA-only custodian. There's none. Now, there's a couple of people who are introducing broker-dealers, but again, they actually clear through some other firm. But we're the only actual full self-clearing RIA custodian in the entire country, which is…that makes no sense. That shouldn't be the case. But it's important I think as a consumer because that means, for a company like ours, of course, every single feature we ever built was to serve RIAs.

So, it's not like, "Oh, hey, how do we retrofit that trading portal so that advisors can use it too? Or how do we modify our pricing so that it makes sense for advisors?" I think that was 1 of those weird things. Why is it that my clients can't get all these features? They could open an account with 1,000 bucks directly at whatever insert name of discount broker. Their tools are a billion times better and cheaper than if I serve them. But again, they had to make these distinguishing kind of pricing differences because they had to make the economics work. Most people don't realize that the way a custodian, for most of them anyway, not all but most of them, they do their pricing not on an advisor-by-advisor basis, right?

So, they actually look at it kind of holistically, and they say, "Okay, well, on the whole, we know that it costs us this fixed dollar amount to serve an advisor." And they kind of forget that...so in other words, they're not looking and going, "Well, this advisor uses, makes 75 phone calls a year, and this advisor makes 7,500." They're just looking and saying, "This is the total cost to serve on average, and so we're going to then price it as such. We cannot lose money on anybody." So, it ends up getting this weird kind of where the small firms get totally squeezed because they're being treated as though they have to produce as much revenue to meet the minimum cost structure of the mean across the entire bulk of business, which isn't the real world, of course.

Michael: While at the same time, the larger firms, I think, almost inevitably end out still being ludicrously more profitable for the custodial platforms at the end of the day because the custody model, to me, essentially, lives in a world where it charges basis point pricing with no breakpoints. Because whatever spread you make on cash or all the other economic levers, whether it's a $10 million advisor or a $10 billion advisor, your spread on cash is the same. So, if the firm's 1,000x bigger, you just make 1,000x more in profits from a platform perspective. So, the big firms cross-subsidize the small firms. The custodians then try to lift up the economics on the small firms. Then the big firms who have more systems and resources try to game the system a little bit more because they can actually spend the time to say, "Yeah, I'm going to trade out of every single cash sweep every day because I can staff enough to that to get a little bit more yield into my client portfolio." And they start gaming the system. And then, to me, basically, then the custodian starts suffering on both ends because the small firms don't have good unit economics and the big firms are battening down their revenue.

Jason: Yeah. It sounds like you know how to game the system. I think, this is me oversimplifying it, but I think advisors should understand some very, very simple math, right? And this is what I was kind of getting to, the power of vertical integration. Just keeping math simple, if someone had $100 million, I think you can safely assume, at this very time, in 2023, your custodian is making at least 40 basis points. Again, there's maybe exceptions to the rule. Maybe you're using all dimensional funds, and you hold virtually no cash, whatsoever, and you never trade anything, and you have no retirement accounts, no clients ever leave and close their account, right? Then maybe you're paying close to 0, right? But I'd say, on the average, it's probably around 40 basis points.

What I think is really interesting about that math is that on $100 million of client assets, that's $400,000 of revenue. And what I find really fascinating is that I would say that every single other expense that advisor incurs in their business does not add up to $400,000. Meaning…assume they have 2 employees, they have an office space, they have portfolio accounting software, trading software, fee billing software, their members to happen different.

Michael: Yeah, I mean if I'm a hundred-million-dollar practice charging a proverbial 1%, I have a million dollars of revenue, my overhead in total probably isn't 40%. It's a little bit lower than that and that's staff and tech and rent and everything. Overhead still may not be 40%. Even if I'm paying full boats to all of my external technology vendors, I'm probably paying $20,000-$40,000 in software costs. Just like most firms we find even from the benchmarking side as we do are 2-4% of revenue in tech, maybe 5 or 6 if you're really tech savvy. So, maybe you're spending $50,000 on tech and the custodians grossing 400.

Jason: Yeah, I think this just speaks to again the size and scale of the custodians is just it's remarkable in comparison to everything else that is happening, right? So, all the other decisions that someone's making, they just pale on comparison to the revenue generating potential that the custodians have, which obviously makes for interesting business to be in, but it also just tells you don't believe all of those things, again, these things that we accept as truths. They're doing just fine, right? They're generating a lot of…And especially when rates are something reasonable, like anything above 2-3% effective fed funds rate… It's a very good business for them to be in and they should absolutely be doing a lot more.

How Jason Is Disrupting The Traditional Custodian Profit Model [1:04:47]

Michael: But then I do have to ask from the flip side, I mean, yes, custodians get a lot of revenue, but they have built a whole lot of tech. There is a whole lot of just they make things secure. So, I don't have to worry about their financial stability and such and obviously, that has some cost to run and administer and do. I can't even imagine how many mind-numbingly complex things they have to do to manage cybersecurity in the modern era. And they are staffing service centers. I mean there are people, sometimes the hold times a little bit longer than I like in certain cases, but like there are people who answer the phone, and they have to hire and train a lot of people just given the number of advisors.

So, I guess the core question I would have is it's 1 thing to point where their revenue is but are they that profitable? Is the profitability of the business that high that sort of the implication is either, you're charging "too much", or you should be able to give back a little more? The old like your margins are my opportunity. So, is the mar… are the margins that good? Notwithstanding all the stuff that they say about how they need us to buy more of their funds and use more of their cash sweeps and such.

Jason: Yeah, yeah, yeah. I think you make a good point. I'm not trying to belittle…A custodian has a tremendous amount of responsibility they should do… They should do all the things you mentioned, right? So, provide a safe secure place for securities to be held. The transactions should be done with a customer first sort of matching of transactions where so they shouldn't be like selling all the order flow, right? And just maximizing their profits or matching everything internally but not providing price improvement to the customer...There are things they should do. It just should be like…these should be the minimal accepted standards. You should absolutely be providing those things.

As far as how profitable it is, obviously it depends on the platform. There's a couple of publicly traded custodians, so you can just go pop and take a look at their most recent earnings, and you can kind of see. But you'll find using the largest player that's publicly traded like Schwab. You know their net profit margins are north of 30%. So, are they profitable? Yeah, absolutely. They're generating a couple billion dollars a quarter in profits and sitting on 10s of billions of dollars in cash and generating, I think, somewhere in the neighborhood of like 20-25 billion a year in revenue. Of course, that's across all their business lines. So, they get to make money in asset management, their consumer business, its advisors, etc. But, nonetheless, there's plenty of profit margin there.

Interestingly too, I don't think a lot of people understand that a lot of the custodians actually leave a ton of revenue on the table. And it's because of their incredibly archaic processes for opening accounts. And this is a really big, interesting difference between like a Robinhood for example, and a Schwab. Again, 2 public companies and if you were to look at how they monetize their various lines of business, one of the things that's quite interesting is that a lot of the really big older custodians, because everything that a client does has to be opted into via paperwork, most people just don't opt clients into certain things. So, if it was something like a fully paid securities lending product, which you know is actually all the big custodians want your clients to be in those programs, right?

Michael: Right.

Jason: Because they actually can share in the revenue and provide free additional yield, maybe 10 to 15 basis points of free yield for every customer, what a great net benefit. The challenge is if that's a 2-to-4-page form that you have to fill out manually and send in, their opt-in rates are low single digits. Very few people are even in those programs. So, subsequently they generate very little revenue whereas if someone who goes and opens a Robinhood account today on their phone, you're actually being default opted into that program. You can of course opt out if you want but, again, if you're a digital custodian, us, APEX, Robinhood, etc., you have much higher opt-in rates to the full bevy of services a custodian can provide. Many of which are, again, actually things that give you additional yield at no cost to the customer. So, of course they should be involved in them.

But, again, if it requires paperwork, most advisors are going to take the path of lease friction and subsequently not enroll those people in those programs. That's going to compress the gross for the custodian which is going to make them again have to operate more…a little bit more leanly. And I think the other thing too is that we have to keep in mind that most of the big players in the space, they're trying really hard and they're smart and they're well-capitalized. They're for sure going to get there, but today they don't operate with very high degrees of automation.

So, the number of people that are required, for example, to review and open accounts is extremely high. Whereas, a very large percent of accounts could be entirely reviewed algorithmically. There wouldn't be… They should be done in a codified way. There shouldn't be a bunch of humans reviewing every application. But you could take that times 50 different workflows that are massive service teams doing work and they're working hard doing the best they can but of course that comes at like 2 different costs right? A lot of time and a lot of money. This hurts their ability to do their best work.

So, I think there's… it's kind of been fun because, again, I would say that the Jason 10 years ago, I would have kind of been like "Well, I just want my custodian to be a big name that my clients know like and trust and I want them to do those basic things like open my accounts, trade my accounts efficiently, and keep the money safe."

Michael: Right.

Jason: The version of me today is like I've been in the belly of this beast now for quite a long time and I just feel like they can and should do a lot more. And I know because we're operating in that capacity, and I get to see exactly how the stuff works and exactly how monetization works and exactly how adoption works and exactly what the operating expenses are. Both on the whole, but also on a per account or per advisor basis. So, the deeper I get into this, the more I realize, wow, we've all been bamboozled for like decades. These things should have been done. In fact, I was not wrong in 2004 when I questioned my sales rep at TD Waterhouse. You shouldn't have to use external software to do your fee billing. It's way easier actually if the custodian just did it for you.

Michael: So, can you just break down for us a little bit more…a moment of education for us all? How does this approximately 40 bps that a custodian makes on average... What are the actual revenue levers? Where in practice does the custodial platform make money and how much do they make from the various buckets? Obviously, I realize on average your mileage may vary but can you help educate us on how this works in practice?

Jason: Well, I think the most simple one for people to understand is cash, right? So, net interest income… and a great way to think about it today is the effective fed funds rate is roughly 5% and so... So, just think about it this way, they're making 5% on your client's cash in their FDIC sweep vehicles. And so, what percentage are your customers getting? Are your customers getting 50 basis points? Because if they are, then they're making 450. And that means that even if you only had, whatever, a very small percentage, a 5% of your 2%. Whatever…a very small percentage, they're earning a lot of money. So, 4 1/2%...

Michael: Right. I guess on absolute dollars, if you just keep like a 2% cash allocation because you know the client's doing ongoing retirement withdrawals or something and you're trying to keep it handy, if they're making 4 1/2% on a 2% position, that's actually 9 basis points just from cash.

Jason: Yeah, and I think what you'd find is quite interesting is that most of the larger firms are holding a lot more than 2 percent. I want to say the custodians. If you actually broke down and saw what percentage of assets were actually in cash, it's quite high. I know, again, we have this unique situation. Our software allows people to import their business from Schwab, Fidelity, TD Ameritrade, Pershing, etc. So, we can actually see well what are people holding. And if you're looking at all of the custodians, it's about 10%. That's about what people are holding. And I don't know why. I don't know what these advisors are doing exactly but they're holding 10 % in cash which is crazy.

Michael: Oh, because you've got "Most my clients are fully invested but like oh, you know a couple of clients put in some recent deposits and I haven't allocated yet, a few people just transferred in full cash, and I'm holding a little bit while before we do the meeting to firm up the investment policy statement to do it." But just if you add up all the friction points where some stuff isn't fully invested yet across a whole advisory firm, it starts adding up.

Jason: Yeah, so that's 1 area that it's a lot. I think the other area that's actually a lot more than people would guess again, not so much at Altruist, but at other custodians for sure, is they kind of define it… they'll call it asset management revenue but that also includes 12b-1 fees and mutual fund shelf space fees. Of course, I have a strong opinion on this. It's my… I'm speculating when I say this, maybe I'm just a conspiracy theorist, right? Most custodians don't allow fractional share trading and you kind of have to go "Why not?" The technology's been around to support this for decades. It's not complicated. We did it day 1. A startup with very minimal funding, right? It was not, comparatively to like the billions that some of these big companies make, so why don't they do that, right? Well part of it is, my speculation is that they make a lot of money off these. I mean it's like a lot a lot of money and I'm saying it's over 20% of some of the big custodians' revenue. And in fact, it's over 30% of some of their revenues. But think about it this way, if everyone could do fractional shares, there wouldn't be much of a need for a lot of mutual funds or ETFS for that matter. And I know sometimes direct indexing gets dogged on.

Michael: Oh, particularly for all the advisors that do mutual funds for their small clients.

Jason: Correct. So, you have people who have these accounts but, again, a mutual fund's the only thing you can buy at most custodians in dollar denominations or percentages or in fractional shares. And you can't do it with ETFs, and you can't do it with individual equities. And the mutual fund companies, they have to pay a lot of money just even be in those programs to even be on the platform. So, there's the fixed cost, there's the revenue share costs. And then what people don't realize, it's also a way to make sure people have extra cash because if you can't buy whole shares, right? So, if I'm going to go to ETFS in stocks, I'm going to hold more cash than if I go mutual funds.

If I go mutual funds, I'm going to earn more…the custodians' going to earn more money there. And so, I think people aren't realizing like that's a huge area of revenue. Depending on the custodians, some people make payment for order flow, but it's actually really de minimis for advisors because most of us don't trade enough. It's low single digit basis points. But the 2 areas most consumers make a ton of money is going to be cash and again these asset management related fees. But that also includes 12b-1s and mutual fund distribution fees.

Michael: Well, I was going to say, the key part to me there is the 'and mutual fund distribution fee.' So, even if I'm the advisor, it's like "No, no, no. I don't buy the 12b-1 class. I'm buying the advisory class. I'm buying the…an institutional class or some equivalent." I may still have some layer of costs in here that I don't see that's still kicking back to the custodial platform.

Jason: Yeah, hundred percent. There's no such thing as free lunch in mutual funds. And I think like there's been 1 company, of course, that's refused to play ball on this, that was Vanguard. And so, subsequently…

Michael: And now you know why they have separate trading fees from most platforms that are higher than everybody else.

Jason: Yeah, correct. And because even companies like Dimensional, they still pay for some percentage, a small percentage, right? But they still pay a percentage for distribution on most platforms. So, they get kind of an in-between treatment. You know, not quite the same commission treatment that Vanguard gets, but obviously still a commission treatment. Because they're not paying the same level of distribution as maybe a traditional open-end fund would have.

Michael: Which I think is powerful just when you process that as an advisor to say the additional charges that get tagged on to funds like Vanguard and DFA, you're not actually paying more necessarily. You're just paying different…

Jason: Yeah, well said.

Michael: …because everybody else just has it is paying off the backend which is why their expense ratios tend to be a little bit lower than some of their competition because they stripped out the backend costs but then your client's paying it in ticket charges because the custodian is going to get their layer one way or another.

Jason: Yeah, and look I think in the end, I don't have any problem with people… obviously, a custodian earning revenue. Of course, they should earn revenue and as advisors should and as asset managers should and as software companies should. I think where my…Where I go with a lot of this stuff is kind of back to those early problems, I was trying to solve 20-some years ago which is how do we get things to be more accessible? How do we get things to be more fair? How do we solve some of these conundrums of like underperformance where you see these studies about how the average investor underperforms by 1 1/2 percent or more on rolling 10-year periods and have been forever?

And then I think as advisors we sometimes we discount all of these little things. But if you actually measure them, right? And we know this because we have the data now, we have many accounts, right? And many tens of billions in assets, right? We can see this. It's very crystal clear to us now that if you start getting all these little things right, it's amazing what a difference that can make to the actual outcomes for investors. And I think that… And these are going to be things like minimizing cash issues in accounts. You can do that by fractional shares and automating trading. Minimizing…taking no rev share on any mutual funds whatsoever, which is like what we do, right?

So, we don't want to have any bias. We want you to do what's actually best for your client, right? This is going to hopefully create less of a bias for us to try to push a certain philosophy on advisors and their customers. I think if we think about things like what could happen with individual security ownership. If direct indexing or personalized indexing does take off on a deck with the haters on it, there's a lot of, I think, empirical evidence to suggest that. But to prove that people feeling connected to their money allows them to stay more committed to their investment plan. If they stay working with their investment plan, they're stay more connected to their financial plan. They can achieve ultimately better outcomes. They can also greatly reduce the internal costs of investing and they can also minimize some the tax and efficiencies. So, in a nutshell, it's funny… But I feel like, if you can't get this custody layer right, nothing else in my opinion matters a whole lot. You do the best financial plan in the world. But if you're introducing an extra percent of friction because of all these other things that are not done well. You're just going to make it much harder for a client to be successful. 

The Additional Revenue Levers Custodians Traditionally Employ [1:20:13]

Michael: Well, you can kind of see, right? They tend to… Well, I guess as you pointed out, sometimes they have friction because they've sort of self-inflicted with the technology but sometimes they create friction in the areas that will tend to tilt towards their model right?

Jason: Totally.

Michael: So, you get defaulted to their cash sweep and then you have to trade out of it if you want something different. As you pointed out, maybe 1 of the reasons why fractional share adoption has been slower is because they…if you have to, air quotes, "have to trade into mutual funds that turns out to be better for their economics." So, are there other material revenue levers besides cash, mutual fund scrapes, and order flow?

Jason: Yeah. And so, margin is a big 1, right? So, you get people to use margin, you're in a lot there. Certain security types pay really well.

Michael: If clients actually trade on margin and take on margin.

Jason: Correct. Correct. Yeah, and if people trade options. Options are extremely profitable for custodians. And the last 1 was the 1 I mentioned, fully paid lending is again, it can be a great revenue generator. But it's also great for clients. But it's one of those I'd say almost underutilized forms of revenue generation where it's net better for everybody but because it's so hard for firms that are non-digital to do it. Most custodians wish they did it more but they but they're unable to.

Michael: So, can you explain like fully paid lending securities lending for folks that don't actually know some of the guts of how that works.

Jason: Yes, so it's relatively straightforward, but there are certain securities that are called hard to borrow securities. It's the small percentage of the universe. It's like maybe 5% or thereabouts of all tradeable securities. A lot of times it's going to be like small and midcap stocks and then more thinly traded EFTs that don't have tons and tons of liquidity.

So yeah… So, what would work is if Michael wanted to short a security, hypothetically, or you know he needed to create liquidity maybe because he runs a fund and needs some liquidity but doesn't want to actually trade an actual position. So, he wants to borrow and make a trade, right? So, he's going to borrow those securities in this case, I'm using the example of a short seller. And so, they need to borrow it from someone, and advisors are great people to borrow securities from because most of them don't hyperactively trade, so they're more buy and hold investors. You never lend out all your securities, right? Most firms would lend out a very small percentage again. Just 2, 3, 4, percent of their entire book of business. But it allows sort of the financial markets to have more liquidity than they would otherwise. Of course, when you lend that security to someone else so they can sell it, they have to post collaterals, that way doesn't have any risk to your customer. And they have to post a collateral in cash. It has to be recapitalized every day. Most people have to post 102-103% collateral.

So, again, if Michael wants to borrow $10,000 worth of one of my stocks, he's going to have to post $10,300 in cash. And every day, we're going to recalculate what his collateral is and he's going to have to post that to the lending firm. The lending firm takes that cash, and they get to invest it and they make the entire margin on the cash. So, if cash is paying 5%, they literally make 5% on that cash they share. 25% or 30% or some percentage with the customer and then because they're the facilitator and the record keeper, they keep the balance. So, it's a great win-win for everybody. There's also a rebate since the short seller's likely doing this again on margin, they're paying a margin rate, so part of that margin rate gets paid to the lender as a rebate.

Look, it sounds really maybe hard for some to comprehend, but when this all happens, there's probably 6-8% in today's economy that's being generated depending on the position in revenue for every transaction. So, imagine if only 5% of your book of business as a custodian was in 1 of these pools and being used for lending. This stuff all changes. It's very fluid. So, changing throughout every day. But, imagine earning 8% on 5% of your business. You're pretty good at math. So, suspect you can do that just as fast as I can.

Michael: Yeah, so like there, there's another 40 bps. Just on that.

Jason: That's a lot of revenue, right? Correct. Now again. 25% goes back, or 30 or thereabouts, but goes back to the customer. Again, that's where the customer can earn 10-15 basis points of so to speak free money just by holding their securities with the right custodian. And the custodian puts in 26, 28, 30 basis points to their top line, right? So, these are things where when you start looking at these different elements, again, I think it's shocking sometimes when I tell people, but custodians actually run really, really well. Like really, really well. You were the Henry Ford kind of like of custody, right?

Where it's you figured out how to run it better than everyone else, right? Everyone else is manufacturing 30,000 cars a year. You're doing 785,000 cars a year, right? You're just so much more efficient on all levels. You're paying twice the wages, your workers are working half as much, right? Because you've just figured out how to actually build the most amazing custody platform with all the efficiencies. What's really wild about this is your customers win. Your customers actually get the best outcome like in the Henry Ford Model T example, right? He innovated with the assembly line.

Cars went down in price 50% even though employees made more and worked less. Everybody won because of all the efficiency gains. So, I think the most well-run custody platform in the world will actually generate more revenue than the custodians do today while putting meaningfully more money back into the pockets of the customers and saving massive amounts of time and money for the advisors. It is not a dissimilar structure where it's like… Inventing custody is… it's already been done right? Just like cars were already done. In this case, it's like how do you make it better?

And I think there's a lot of ways to make it better like understanding how the revenue lines work is all fine and dandy, but you also have to do this in a way that's incredibly obviously better for the advisor and the customer. It has to be so much better that you get way past the innovators and the early adopters, right? You get the early majority, the late majority, and even the laggards. And that only happens if what you're doing is so substantially better than what it was prior. And I think there's opportunity for that to happen just based on even our conversation today and hopefully people's understanding of like the economics and the efficiencies that are out there.

Michael: Right, right. Yeah, yeah, and I guess the crux of it from some of your positioning as well is, look, if a custodian can make $400,000 on a $100 million client base. Or maybe $500,000 or $600,000 when you run all the things really efficiently and get people opted into the things they should be opting into and all the stuff that goes with it. To say can I figure out how to build and offer portfolio management and performance reporting software that has a retail rate of $10,000 per advisor, when I might make $500,000 of revenue per advisor, the answer is I'm just going to build the tech and include it because I've got more than enough economics to do that.

Jason: Yeah, totally. And for what it's worth, they should be able to do it way better, right? Because…

Michael: Well because you're actually sitting on the data. You just you have it. You don't have to send it out and have everybody else reconcile it and figure out how to display it. You just have it.

Jason: And you have an economic advantage over every software company on the planet, right? None of these software developers are ever going to touch the economics of the custodians. Unless they become them themselves. Which is, I think, why you see a trend of Envestnet adding…introducing broker-dealer, giving them some form of rev share on their platform. I wouldn't be shocked if you don't see some of our bigger software players that now also run TAMPS potentially add…introducing broker-dealer components so they can participate in revenue share with their custodian. There's this point where it's like, all these things start to become like…I hate to admit this, but they become very financially driven, and they'll come a point where very few people will be able to compete. It'll be… You'll have to be full stack to be competitive because the full stack competitors, those who are good, and again they get this right, are going to have 100X or a 1000X of the economics of everyone else. And so, you're going to be able to have the best talent. You're going to be able to have the biggest marketing budgets. And I'm not suggesting that's the way it should be but that just seems to be what I'm observing is, okay, that's probably the direction we're headed.

Michael: Right.

Jason: And so, yeah, for sure the custodians should be building the software and they should be able to build it better. And they should make it available for free or again, I think you've made this comment in the past, or they should just charge for it and give all the economics that they get to the clients and then what it really comes down to is who gives the best economics to the clients and that's who's going to win.

Michael: Right.

Jason: Right? If everyone just admitted it and said "Hey, listen, custody is going to be worth 40 bps. We're all going to pay 40 bps. Every custodian is going to adopt the same pricing. So, they're not noncompetitive and then it becomes a world of which clients get the most…the biggest yield up in cash…

Michael: Yeah, who's gained the most from my dollar? Yeah, right now to me the weird reality is, I literally don't even have…like as an average advisor, if I'm either comparing custodians or I'm multi-custodial, I literally can't even tell who's more expensive. Like I don't actually even know which 1 is incurring greater costs to my clients because I can't actually see what anybody charges.

Jason: Yeah, and I think again, all the solutions aren't well formed in the market, yet. But I think I'm really glad that these conversations are happening and I've noticed, not to give a big head here, but you guys were one the 1st to really dig deep and publish information on custodians and how they work and the differences. That information didn't exist 20 years ago. Probably didn't even exist 5 or 6 years ago, but ever since commissions went to 0, finally advisors had to start asking, "Well, how do you make money?" Even though the commissions were like 5 to 7…

Michael: Yeah, the truth was the commissions were such a small percentage of revenue for… I mean particularly Schwab, that's part of why they did it, because it hurt their competition more than it hurt them. So, they fell on that lever first and made it up on the others.

Jason: Yeah. So, yeah, lots of work still to be done but it's encouraging that at least the conversations are happening people might be thinking a bit more. And whenever to get any innovation to ever be widely adopted, there has to be access to information and people have to feel good about the decisions they're making. So, without the information out there, we'll never actually see adoption that forces change that ends up putting more dollars in people's pockets and start solving some of these wealth gap conundrums we have here in the states.

The Surprises And Low Points Jason Experienced On His Journey [1:31:00]

Michael: So, Jason, as you look on this journey of 20-plus years of building, what surprised you the most about building solutions in the advisor industry?

Jason: I think… When it comes to surprises, gosh, I learn something new all the time. Every day, pretty much. I'd say something that is surprising to me the most is that here we are in the industry…I remember what drew me when I was someone who had 0 financial experience. I was looking at all the different ways I could be a financial advisor when I was coming off my internet 401(k) experiment. And I looked at all the ways, right? Registered reps go work at a bank, work at a wirehouse. And I remember when I read about an RIA and what that meant. A Registered Investment Advisor, a fiduciary duty to put your client's interest before your own. I just felt like, gosh, that is exactly what I would want. Why would anyone want anything different than somebody who's legally obligated to do this? To do the right thing? That just seems like the only way it should be.

And, I guess, probably 1 of the biggest learnings over the last 20 years is…I think there's a lot of people with genuinely good…they mean well, their hearts are in the right place. But their decisions are not…Yeah, I'm not sure how many people are actually like living up to that fiduciary duty. There's still a lot of people that I'll meet with that will say "Yeah, I know what you're doing is obviously better for my clients, but I'm in the referral program and I get sent free leads from my custodian and I can't give up that lead source."

Right? I'm like, there's nothing fiduciary about that at all. That's a business decision you're making. That's what's in your best interests, not in your client's best interest, right? And I think the same thing is true about a lot of the different kind of tools and resources. Maybe I'm just naïve, I suppose. But I can't understand how we don't we don't all just rally around the fact that we should demand what's best for clients and we should only accept what's best for clients and if we are ever presented with the facts that there is something that's far better for my clients, I should probably get over my insecurities about my business and I should start presenting those things to my clients. So, at least they're aware of them and if they want to opt out of them, then so be it.

That's 1 thing and I think you know the other thing I might just share, as far as…For me, anyway, it's never gotten easier. There's this, I think it was a cyclist. I wish I could recall whom to give proper credit to, but they were questioned about, after winning multiple tour de Frances, if it gets any easier as they get older and I think that the way they responded was that the training and all the work that you put into it never gets easier, you just go farther. And I think our industry's much the same. When you do this for a long time…When I was young, I was naïve. I thought it's just going to get easier, it's going to get easier, it's going to get easier. But what I found is that I keep choosing to do really challenging hard things, but I'm able to accomplish more, getting more, or going farther and that's certainly been a big surprise.

Michael: I like that framing, when you do all the training it still doesn't get easier, you just go farther. Because I do… I've certainly have felt some of that in building businesses over the years as well. I feel like there's this business owner mentality of like, if I can just get a little bit bigger, we grow a little bit more, I can finally hire that position I need or buy that tech or do that thing, right? There's just like a "If I had a little bit more money and revenue, I could finally do that other thing that I've been wanting to do to solve this pain point in my business." And then the inevitable reality is then you grow a little bigger and other problems arise because there's just is kind of a like more money more problems challenges that happen as businesses grow and scale and you never ever get there. The problems just change and morph as the company grows and goes through different stages and needs different things. And so, at some point you just have to relish playing the game of solving the next problem because if you're trying to grow to the point where you've finally got enough money to make all the problems go away, you never get there. You may get better at solving the problems and again I like that, it doesn't get easier but you do go farther as you build the experience in the skill set, but that just really resonates to me at a personal level as well of what that dynamic is like as you keep trying to grow on scale.

Jason: Well, like I feel incredibly fulfilled and happy, but I'm far more realistic today than I was probably 20 years ago. And I realized that yeah, if you're if you're aspiring to do something what you believe to be incredibly important, it probably doesn't happen in a day or week or year or even a decade in some cases.

Michael: But you know, Gen X thing. We wear our cynicism with pride now. Could see how reality bites.

Jason: Well said.

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

Jason: I think the lowest point for me…I think when I stepped down from FormulaFolios and…When I sold my client base to another advisor. I felt very convicted about that advisor being just the perfect fit for those clients. And he has been. He's been just…the clients are so much better off. He's so much more capable and accessible. And so, just very, very… I'm glad for all those clients. It's just such a…it worked out so well really for everybody. When you sell a big firm…anyone who's ever built something and sold it, it's really hard. I was very proud of the work I did at FormulaFolios. I built what I thought was a really world-class team. And yeah, we had a…we did a lot of things, no pun intended, but in a very altruistic way. Just treated people I think really well. And it's really hard to sell something and then watch it just disappear.

And I think…I talked to a lot of advisors, they're very, very proud of their brands. They built this logo, and brand, and so proud of it. And I don't know that all of them would believe me if I told them that I don't care how much money they put in their brand, I don't care how great they thought their brand was, when they sell that company, they've probably got 6 months before that brand is erased from…eviscerated from earth. All of it, it's like almost instant.

Michael: Because just, in general, when you sell a company you tend to sell it to someone who's bigger and bigger companies tend to value their brand even more because they're bigger and put more into it.

Jason: Well, my company was twice the size of the company I sold to. Technically, I sold to private equity. They merged it with a company. It was smaller. But it's those new leaders had their own views right? Their views were different than my view right? So, they changed the culture, they changed the brand…

Michael: Yeah, yeah.

Jason: I'm pretty lucky if that's my lowest point is sold the company and…but I had to watch people get laid off, jobs be eliminated. Things changed that I felt deeply were the way they should be done, changed into different ways. And I'm not saying that wasn't right, by the way. Maybe the new way was the right way.

Michael: Yeah.

Jason: There's different and it's hard to accept that. So, I certainly have a lot of guilt around that time period. Otherwise, I think that perseverance is probably an underrated quality for entrepreneurs because at this point, I'm… I've got so many scars I don't even feel the wounds anymore, I guess. It's just hundreds of mistakes that I've made, and probably been mistreated by other people lots of times. But all that being said, if I'm really being vulnerable with myself or with others, I would admit how hard it is to be an entrepreneur and the faster you can grow a really thick skin and just be focused on what matters most, like whatever your north star is, I would hope it's clients.

For me, it's there's absolutely nothing more important than how do we better serve people who need financial advice and financial planning and financial help. But if that's where you're focused, then you should probably not really give 2 shits about like all other stuff.

The Advice Jason Would Give His Former Self [1:39:05]

Michael: So, anything else that you know and have learned now about building and scaling that you could wish you could like go back and tell you from 15, 20 years ago when you were just starting to build?

Jason: Well, I think being patient would probably be easy to say now. But I was impatient in my young entrepreneur years. I can say that… I've had people ask a lot, especially after starting Altruist, which is a very different type of company, although related, but it's just very different. Structurally, it's an incredibly hard thing to do and it requires a very different skillset actually than building an RIA or traditional software company. But they've asked a lot about "Well, why start that?" I was 38 years old when I started it and I tell people I don't think I could have done it at 35, I couldn't have done it at 32, I couldn't have done…certainly couldn't have done at 25, right? I actually had to go through a lot of…I had to learn a lot of things in order to be ready for the moment. And it's because it's not just a technical challenge. Yes, there's technical challenge. It's not just a fundraising challenge. But yes, it takes a lot of money to build a custodian. It's not just to go to market strategy challenge, finding product market fit, but definitely is one of those too, right? And so, if I was looking back at those early younger versions of me, I'd be like "Hey, just take it in, be patient, except that all of those things that you're going through are a phenomenal learning experiences that will shape you to do maybe something much bigger down the road. Because I feel like to do what I'm doing today, I had to have all of those things and I had to have even some level of reputation in the industry where there was…If I had I been totally an outsider, I think it might have been more challenging.

So, yeah. I hope any advisor if there…I don't know if they have this. I always had this… I'm kind of like man, I wish I was doing something bigger. I just want to do something more important. I want to affect change that is really meaningful, like millions of people's lives in material…maybe trillions of dollars of better economic gain for the average human. And that's really overwhelming. And so, consequently, it's easy to diminish the work that you're

doing right now. Like "Oh, this isn't that important." But I would say it does not matter what someone's doing today. They should be absolutely…learn as much as you possibly can. Perform it at the highest level you possibly can. And use it as an opportunity to prepare yourself for if you ever want to go do that really big next thing, you're going to be much more well equipped to do it. And certainly for me, that's something I could only say today because yeah, if you would have talked to me 10 years ago, I probably would have been a lot more bitter about like my lack of progress. I think I should have been doing more faster in those early years.

Michael: So, what comes next for you?

Jason: Well, I'm super happy doing what I'm doing. And interestingly, if someone is to look at like the timeline of my last 20, roughly 3 years sort of in this industry, my longest tenure of doing anything was approximately 6 years and I'm 4 1/4 years in here and like I can't imagine doing anything else for the next decade plus. I just…And part of it's because I think that this is the proverbial sort of tip of the iceberg as far as what we're doing with custody. I've kind of said…

I think that without having an infrastructure layer, sort of an operating system if you will, that allows for really rapid innovation, then everyone else is just kind of like piling on to bad infrastructure. So, I'm really excited about not just the things we can build here but supporting hopefully another generation of great entrepreneurs who have great ideas and they just needed to have sort of an ecosystem to build on. And so, I think that's pretty exciting, and I'm pretty focused on like a 30-year of…

Michael: So, be positioning Altruist as an ecosystem you build in kind of the way that TD Ameritrade did with VO. They were the big open platform and saw a whole bunch of innovation, new building happened there because they were the accessible platform for all the new companies going to market.

Jason: With no disrespect to the people who worked on that that project. I hope our impact is immeasurably greater. I think having some open APIs as a layer is 1 thing. Being a true operating system is an entirely different thing. So, when you think about the iPhone wouldn't have been a whole lot of value had there not been an app store. And so, all those app developers is really part of why that became sort of the de facto smartphone of choice for a number of years and I think Android has a similar kind of network effect. We have no network effect in our industry as far as I can tell.

There's not like a center of the universe so to speak. You've got like a bit of a duopoly of sorts in terms of custody, but you can't build off from those things, right? So, then you have a whole layer of innovation trying to happen in a bit of a no man's land of sorts, right?

Michael: Right.

Jason: Sort of like this weird purgatory where you can only go as far as you can go. And so, I do think that the possibilities if we could ever build a true network effect, where it's all of these innovations are actually assisting one another, would be incredibly powerful instead of like "Oh, I've got to do 16 different disparate integrations." Which just really slows down the development of technology but also greatly slows down the adoption of it.

Michael: Right.

Jason: Whereas, on my phone, I can very quickly toggle between 3 or 4 different apps completely seamlessly. But you cannot do that on anything in our industry and it's because the sort of infrastructure or operating system layer. And you'll hear people talk about like "Oh yeah, we're building the operating system of wealth." And I'm like, "Well, no, you're not."

If you're not a custodian, you're not. Full stop. End of story. It's not even possible. You are a middleware provider trying to aggregate tools and services and you're always going to be at the mercy of what a custodian will allow you or not allow you to do. And so, it'd be no different than if someone's like "Oh, I'm building a productivity suite of software." It's like, okay, that's great. But if the operating system doesn't want you on it, you're not on it, right? And so, I just feel like there's so much fun work to do. And yeah, I think in terms of what we go with Altruist, it's probably the most intimidating thing is…

All of the things that we can do versus some of my past journey was more like, I'd reach a point where I'd go, I can see the end, I can see it very clearly. I can see how close I am to it, and it would bother me, and I'd want to do the next big challenge. Here I'm like, my biggest challenge is I cannot see the end. Like it's so macro, right? There's such an enormous change that's possible that it's hard for me to really comprehend it, and that's both intimidating but also extraordinarily freeing and exciting.

What Success Means To Jason [1:46:28]

Michael: Very cool, very cool. So, as we come to the end. This is a podcast about success and just 1 of the themes that comes up is the word success means very different things to different people. And so, you've had literally multiple successful companies that have been built and exited. So, you've done the success thing by any classic entrepreneurial measure. How do you define success for yourself at this point?

Jason: Well, I think 2 things… I think impact is an obvious form of success. And so…And that's like a cliche thing to say that, I mean, to be super transparent. It's like yeah, once you've made more money than you could spend in your lifetime, then you don't care about money a lot anymore and that's a very greedy kind of gross thing to say. I feel dirty even saying it. But it's like "Hey, I've already made a bunch of money." I don't really get that motivated by money anymore. But part is because I never did this to make a bunch of money. I never knew anybody who had any money. So, money's never been like really a big driver, but it certainly becomes a lot easier to say impact when you feel like, hey, like my family's going to be okay, no matter what. But I think…So impact to me is, it's different. Some people are like hey impact is hey I helped one person that would have otherwise not been able to get help. And that's incredibly rewarding, and I think I aspire to have that type of impact, like 1 to 1 impact, helping people, I think that's important. But, to me success is ultimately going to be creating entirely new industry standards.

I would say, creating sort of iconic kind of change. Not for me personally, so much as to say the industry. I hope we have a moment where like "Oh yeah, that was the era where everything changed." And we got a lot more focused on like helping a broad subset of people. And it became less about serving the mass affluent and affluent and ultra-high-net-worth and it all of a sudden became about helping the 150 million people who wish they could get an advisor, but they can't today because there's not enough advisor economics maybe in serving those folks. So, I mean…And so, at this point I feel like I've done a lot, so I'm pretty content in some respects. But I think impact is really important.

But the other thing I was going to say is I think it's happiness. And happiness is actually just contentedness. And I think to be very clear, I still think I have a lot to give. Look, if ultimately Altruist failed, and I completely was a complete flop…I forget where to attribute this to, but there's this saying that…pursue something that's so important and so meaningful that even if you fail, the world's a better place because of it. And so, I feel like I'm doing that right now. I'm getting a chance to do something I'm really passionate about and although I don't think it will fail, if it did fail, I think I'd be happy. I'd just be happy that I did the best I could. And I've been doing it for a long time. And I think…Best I could tell is I think I'd be willing to just stop and go spend time with my family at this point. So yeah, if people can get to a point in their career where they go, hey I just I'm just pursuing impact and I'm at a place of happiness, then then I would say that's like a really great definition of success.

Michael: Very cool. I'm still excited to see more of your journey between here and whatever that endpoint is while you keep building the thing you're building.

Jason: Well, there's plenty of work to do, and I appreciate the platform and the support, and it's been a ton of fun.

Michael: Absolutely. Thank you, Jason, for joining us on the "Financial Advisor Success" Podcast.