#FA Success Ep 362: Developing Associate Advisor Compensation Plans And Career Tracks To Scale Capacity Past $1.5B AUM, With Jeff Brown

Resources Featured In This Episode:

• Jeff Brown
• Stratos Private Wealth
• Strato Wealth Partners
• Associate Advisor Career Path – Download (PDF)
• Associate Advisor I, II, III, Performance Review – Download (PDF)
• 10X Is Easier Than 2X By Dan Sulivan And Dr. Benjamin Hardy
• Hubspot
• Holistiplan
• Income Lab
• Orion
• Salesforce
• Traction: Get a Grip on Your Business By Gino Wickman
• 15Five
• Brian Tracy
• CFP
• CPWA
• ClientWise
• Ed Mylet

Looking for sample client service calendars, marketing plans, and more? Check out our FAS resource page!

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Full Transcript:

Michael: Welcome, Jeff Brown, to the "Financial Advisor Success" podcast.

Jeff: Michael, thanks for having me. Looking forward.

Michael: I appreciate you joining us for the episode today. I'm looking forward to getting to dig and to nerd out a little on advisor career paths and how you compensate advisors as they grow. This, to me, is a unique challenge of the so-called “modern era” of financial advisors, of advisory firms. For most of the history of the industry in the world being a financial advisor, compensation was pretty simple at the end of the day. You went and got clients, you sold them stuff, and you got a percentage of what you sold, otherwise known as a commission. And if you sold more, you got more. If you didn't sell, you didn't get. It was pretty simple and straightforward. There weren't really a lot of questions about how you controlled your destiny and did your thing and sold what you could sell. It's not until we started evolving into assets under management models where, to me, just the fundamental difference, you get paid by the client to serve them on an ongoing basis even if you didn't sell them anything new. We give good advice and service and retain them and get paid a recurring fee, whether that's subscription fees or assets or management fees.

And suddenly, it completely changed the way advisor compensation and career tracks worked because it kind of gets funky to purely pay people a percentage of revenue when they didn't go get the revenue in a traditional commission model. They're servicing the clients, but we do need to pay them reasonably. And it's actually a pretty big deal to manage client relationships, and there's a lot of revenue at stake. So you don't just want to hand that off to someone who's not really trained and experienced. So then we got to train them and develop them. Then we got to move their compensation up along the way, and that just gets messy because there weren't really any playbooks around that for much of the history of the advice world. That was just all commission-based. You didn't have to figure this stuff out back then.

So I know you live in a very sizable firm, upwards of $1 billion under management, that had to do some of this building and figuring out of career paths and compensation in your firm. And so I'm excited to dig into that a little bit and what you guys have learned and managed to figure out in your world, and hopefully, share some ideas out to the broader advisor community as well.

Jeff: Yeah. I'm happy to do that, and I wish there was a playbook on this. It would have saved us a lot of time and energy, and probably would have done it much better and a little less sloppy had that been the case.

Michael: No kidding. No kidding. So I guess, as we dive in or before we get sort of directly to compensation plans and career paths, and such, just paint us a picture of your advisory firm itself as it exists today. Make sure we understand the context of the business that we're talking about.

What Stratos Private Wealth Looks Like Today [5:50]

Jeff: Sure. So currently, we're made up of 21 people, including myself. We're located in San Diego, California, and all but one person works in the office there. Mostly in the office, I should say. One person is remote. We're serving just over 350 households, with a little under $1.5 billion under management. We use AUM to bill the clients. We're not charging subscription models. We've tried that, and we include the financial planning in that AUM fee. And when I say financial planning, it is full-scale financial planning, something that you yourself would like in terms of the nerdiness that we take it to.

Michael: Awesome.

Jeff: Our teams are set up with a lead advisor and either one or two associate advisors per client, with an emphasis of growing those advisors from the ground up, as you talked about a little bit earlier versus hiring experienced advisors from the outside. And like most good firms, we try to maximize our use of technology to create as much efficiency as we can.

Michael: And so when you've got these advisor pods, a lead advisor and one or two associate advisors, how many clients does that group serve?

Jeff: Typically, it depends on the experience of the lead advisor and the complexity of the client. We don't have hard and fast numbers, but typically, it's going to work out to be between 80 to 120 clients per team. In one team, as a lead advisor, and he has two associates, he manages a lot more of the assets. A lot of those assets were the assets that I had managed. I don't manage clients anymore. At least, I have only a couple left, 2 of them, thank goodness, because I can move into a different role. So we really have 4 lead advisors, 1 lead advisor in training, 5 associate advisors, 5 client service folks,1 trader, my COO, my chief of staff, who's kind of my right-hand person. And for those who are familiar with Traction, she is my integrator. And then a director of first impressions. I like that better than saying a receptionist. And then we have another advisor that just does business development. In fact, he was my manager at the wirehouse. And after I left, he came and worked for us on the business development side.

Michael: Okay. Interesting. And so I can see there's sort of this 4, coming on 5, lead advisors, 5 associates, and 5 client service. So I'm presuming then, basically, every 1 of these pods also has sort of a 1-to-1 client service person that's supporting them as well.

Jeff: Not quite though, actually.

Michael: Okay.

Jeff: So what we have is we segment our clients. So we would call them AAA or people might call them their top clients. The top clients have an assigned, we call it CS, client service, but client service person. Actually, a few years ago, as we were growing pretty quickly, my COO used Salesforce to design a ticketing system for things like wiring money, general requests, alternative investments to be done. So she built a very complex way to route the service ticket to who is available. And this really made it easy for us to give people time off from the office, right? It really made things efficient and easy for the advisor to track where something is in the process. So that worked out very well, but the top clients, because they are the top clients, they like dealing with 1 person, they have their own dedicated person, with a team to back them up.

Michael: Interesting, interesting. So I get, from the client end, they put in a request, "I got to wire money", "I've got a deposit going in", it goes in your ticketing system, and it goes to whoever is available. So from an individual advisor perspective, does that likewise mean I'm kind of supported by the pool of client service folks I don't necessarily have "my person" as an advisor either because my not-AAA clients could go to anybody in the client service team to have their needs solved?

Jeff: Correct. And some will gravitate towards a person. I'll use Nick as an example of one of these folks. So Nick might just coincidentally have gotten Michael Kitces multiple things for Michael. Michael reaches out to Nick for something directly and bypasses the advisor. No, that's fine. That works. We say that the client can contact anyone at the firm, and it will get done for them. But generally speaking, our associate advisors really handle a lot of the communications with the clients and kind of the delegation. I think of the lead advisor like the doctor and the associates like the PA that comes in. And the associates, therefore, they can get really involved and understand how the operations work in the firm.

Michael: Okay. So to the extent, an advisor wants sort of...a lead advisor wants a person who is running a point on just the service requests that don't necessarily need to escalate to the lead advisor in the first place. It's the associate who tends to field that communication and those requests to clients and then might be routing it as an internal ticket to the client service team to someone, "Please queue up this wire transfer that we need to do for the client". So the client gets some continuity to the associate advisor. The lead advisor has a continuity point to the associate as well. But then the client service team themselves are more flexible across all the advisors.

Jeff: Yeah, you're exactly correct. The only change, that is, the associate who will run point, kind of if they've moved up the career path to...they're not month 2 in the business, right?

Michael: Right, right. Brand new, maybe they're not quite running lead yet.

Jeff: Yes, yes, correct.

Michael: Okay. And then I'm also just mindful relative to the numbers here. So you said close to $1.5 billion, just over 350 households. Napkin mathing that, typical client is $4 million. I'm sure there's some that are bigger and some legacy ones that are smaller. We've all got some of that. But does that feel right, as I'm thinking about what does a typical clientele look like, that's the scope here?

Jeff: Yes, I'm a data geek, and so, yeah, it's $3.8 million is actually the average account. You're dead on.

Michael: Okay. And so, in that frame, your advisor, you essentially have a 2-advisor team, a lead and an associate, with 80 to 120 clients per team, which I know, relative to some advisory firms, is a little bit smaller, some just by the time they get to 2-person teams, they’re as high as 125 to 150 clients. But you're running almost $4 million client averages. That team might be a $350 million to $400 million book.

Jeff: Yes, you're correct. And I think it's come through, we are on the lower side. And as you pointed out earlier, I think as we've kind of...the journey of the industry as a whole, you've done it in your research where you said, "Hey, we haven't actually had the fees go down. What we've had to do is increase the services". And as we've increased the services to things like Holistiplan, a new software thing, or Income Lab, people have to learn those and execute those things, and therefore, it takes more time and more people. So we're doing more for the client for the same fee.

Michael: And what does the fee model look like for you guys?

Jeff: Yeah. So the way that we have set it up and tried to explain it to people is back in my very first job, I was selling financial plans. So the plan was one Michael: And paying to promote the webinar is like paying for social media ads or like paying...

Jeff: Yeah, social media. Social media. It's promoted on social media. You also kind of link it through your website too. So calls to acti fee, and then the AUM, actually...it was products at that point in time. And I found that if folks had to buy the plan, they weren't necessarily...they would skip the plan sometimes, right? So we decided a long time ago, for better or worse, to include the planning in the fee. And I say planning, right, not just a big, thick plan, so because the planning is part of the fee, we wanted to be able to explain that to the clients, because, as you know, that is the biggest value add that we do.

So the way that we have defined how we do it is we charge 1% on the first $1.5 million that we manage, and then 50 basis points above that for all individual plans. The way that we explain it is we say, really, we charge 50 basis points on assets under management, and we charge $7,500 a year for financial planning. But it's baked into the fee. If you do it that way, that's how it maps out. If we run institutional money where there's no plan, we're just charging 50 basis points. But every client that is not an institution is required to have the plan. So that's how we have explained how we charge the plans.

Michael: Interesting. It's effectively $7,500 for planning and 50 BPS for investment management. And so, by the time you get to $1.5 million, you've earned through the full planning fee, and so that's why now we're in 50 BPS marginally.

Jeff: Yes.

Michael: Is there a minimum as well? Do they have to be at $1.5 million to work with the firm?

Jeff: It's a loose minimum, but that is what we target. We've said no to some clients that are lower than that and in the distribution phase of their assets because it's only going to go down in value. But we'll take somebody maybe with $500,000 to $600,000 that's adding consistently or has a potential stock sale. So it's flexible. It's not just hard and fast, but that is really what we're looking for, if possible.

Michael: Okay. And so I'm presuming, if I just think about with breakpoints, so when the average client is close to $4 million, some of that's at 1%, some of that's at 50 basis points. So you probably end out at 65 to 70 basis points of blended fees at the size of the clients, so $1.5 billion, your $9 million or $10 million of revenue in the practice.

Jeff: Yeah, a little under that, because we have some clients that were very large, and we just kind of negotiated. But, yeah, your math is very good.

Michael: Okay. Interesting. So then, from a service team's perspective, as you're building out five teams across this base, a team may be upwards of $2 million of revenue with a lead advisor and a support advisor associated with them. So smaller by pure client headcount, but that's a really sizable revenue per advisor, revenue per team.

Jeff: Yes. And I'd also say that it's not equal. So, yeah. But you are correct.

Michael: Some books are bigger, some books are smaller, as the firm evolves.

Jeff: Yes, yes. Yeah. And I'd say most of the clients, a lot of them came from me, originally, and all the referrals from that pool. And then we also did an M&A transaction where another smaller firm joined us. And so, for the most part, the idea, in a perfect world where we want to be, is the firm is generating all of the lead flow to the advisors. So it's no longer like it was when I started or even when a couple of my partners started where you got to hunt what you kill type of thing.

Why Jeff’s Firm Wants To Generate All Of The Lead Flow For Its Advisors [17:02]

Michael: So, why that approach of we want the firm to generate all the lead flow to the advisors?

Jeff: I think this, Michael, because when I started, we can talk about my story down the road, but when I started, what I was listening to, and it was CDs back then in the car when I was going to work, it was not people like you educating us on financial planning. It was, "How do I sell?", Brian Tracy. Because I needed to make my rent payment at that time. So it was...and as you're aware, a lot of us, I'm 53, so I'm actually on the slightly younger side of the generation of advisors that was salespeople at large firms, selling stuff. And we've evolved into advisors. And I believe that if you're trying to hire people and that their chief goal is going to bring in revenue to the firm, it's a different type of person than the type of person that can really help and connect with clients.

We want that high EQ. Obviously, we want good IQ as well, and we want that high EQ, emotional intelligence, the ability of someone that really wants to help. And I'm friends with people and would love them to work for me that are great salespeople, but they're just interested about growing revenue. And I feel like there's still that conflict out there. So I believe by the way that we're doing it, we attract a different type of person to the firm.

Michael: So building a firm where the business development is not on the shoulders of the advisors lets you get a particular kind of EQ-oriented, service-mind-oriented advisor who's maybe not as hungry to go out there and just build revenue at all costs with both the benefits and sacrifices that that entails. You don't need them to do that when you separate sort of the service function from the sales function.

Jeff: Yes. And we reward them for bringing in new money. There's a bonus plan attached that we could talk about. But in general, it is not the requirement of them, and that is not when we come in. We're talking more about we want you to really be that guide for a client. We want you to be more of a life coach than a salesperson. And like I said, I think it's a different type of person. Some people can do both. I felt like I can do both. But some people are wired one way or the other, and I would rather lean on the people that have that really good client connection that really want to help people.

Michael: Well, the people who can do both tend to find ways to move up successfully in organizations. Anyways, they go build their own firms or they often find ways to become partners or create other opportunities for themselves in the firms that they're in.

Jeff: Exactly. That's exactly the case. And that's kind of the...a couple of the partners, that's what they did, and that's how they're so good at raising money just because they grew up in that environment to do so.

Michael: So then help us understand where the business does come from? At $1.5 billion, working with pretty affluent clients, those are hard clients for almost anyone to get in any circumstances even when they have a whole bunch of advisors who are out there doing business development. You don't have a whole bunch of advisors out there doing business development because their focus is servicing 350 clients with $1.5 billion. So, where do the clients come from? Where does the growth actually come from?

Jeff: Yeah. So we're very intentional about how we're trying to grow the firm through referrals. We're not actually asking for referrals the traditional way. We get paid in 2 ways. That's the way we all learn how to do it.

Michael: Such a familiar script, yes.

Jeff: Yeah. So we do not do that. We happen to have in our backyard a sea of companies. Qualcomm, for example, is in our backyard. A lot of biotechs. And what you find at those places is a lot of very wealthy people that do it on their own. They're using E-Trade, they have stock options, and such. And so what we do is we are just consistently putting out materials that speak to them, in addition, we've been doing this for a long time, and we're known. So the folks that work at those firms are generally scientists or engineers, and what do those folks have in common? Well, they have a few things in common. One is they're fee-conscious, typically. Number two, they tend to be somewhat performance-driven. And number three, they're detail-oriented, and they want to understand the value that they're getting. Most of them are very averse to paying 1% on AUM just because it's a big number.

I feel like the way that we've priced it out, we encourage larger account sizes. They're paying only 50 basis points on every dollar above $1.5 million, which is fairly competitive, I think. And I think that we go so deep with these individuals, and we help them realize how much word gets out. So we have been able...while we have money that comes through various marketing channels and while we are closing in on a custodian referral program and webinars online, and those types of things, still the bulk of what we get comes from COI referrals, as well as client referrals. And knock on wood, so far, that has kept us growing over the years.

Right now, actually, we hired a marketing person, which is something I think we should have done a lot sooner. We kind of outsourced, and we've messed around with a bunch of other things. And we're now driving some intention on the whole social media/webinar type of marketing and trying to become good at that, and we hope that'll also yield results. And we also are at the final stages of a custodian referral program, which is why we have the lead advisor in training, to potentially take that on. That's starting, hopefully, end of this year. So we'll see. Don't count it until the money arrives type of thing. The goal, long term, is to have a systematic institutionalized lead flow to the firm so that the advisors can just advise people.

Michael: All right. So I want to understand a few of these a little more deeply. You said, in terms of trying to attract the scientists and engineers, the Qualcomms and biotechs and folks that are in your area already, you had said you're consistently putting up materials that speak to them. So what does that mean? What are you putting out in practice?

Jeff: Yeah. So we put out content that talks about things like mega-backdoor, mega Roth conversions where you can use your after-tax money. That's a big thing at Qualcomm, for example, a big opportunity that they have if we talk about Qualcomm-specific benefit selections. Because these folks are engineers, because they do care about investments, and I know we understand that investment is a bit of a commodity. However, we do it pretty well inside, and we run around...we put out webinars and articles and everything associated around that. We tend to be a little geeky on that stuff. So it's a little more complicated than the average “If you missed the best 10 days in the market” type of stuff. So that appeals to this group of people. It's a little different than what they normally see.

So we do that on social. I'm very active on LinkedIn. So anyone could go to my LinkedIn page and see. And we do videos. So that tends to back up. And so what happens is if someone...this just happened this last week. We got a new client that was actually someone that I personally knew, but he had seen our stuff online. And then he approached me one day, and he just said, "Hey, I've seen your stuff. I'd like to sit down and talk to you. I assume you're pretty smart on all this stuff. And I hadn't wanted to pay someone before, but I'm interested now in understanding how it all works." So that's what happens, and it happens enough that we still have consistently pretty good organic growth internally.

Michael: So you're creating content with things like videos, talking about specific strategies like mega backdoor Roth or even mega backdoor Roth at Qualcomm and distributing/sharing it out on LinkedIn.

Jeff: Yes. And even I'll go a step further. That kind of talks a little bit about the career paths. We have our up-and-coming lead advisor. Potentially, one thing that kind of gained credibility for him is that he wrote the article. He crafted it. He put it out there. We shared it. And now we get different faces of the firm out there as well. So I think that that has been and that's an area now that we have a marketing person internally. We were haphazardly doing that before, I would say. We're really putting some intention around it today, and that's really kind of our OKR for Q1 of next year, just to really...where we actually start investing money and promoting these things out there, which we have not done in the past.

Michael: And do you have a sense as to what that would look like? What would you do in investing money to promote?

Jeff: Yeah. So one of the things that we're building is a webinar. It's a webinar around...let's just use an example here. Retirement distribution plan, so using a specific type of software, using dynamic withdrawals, which is using Income Lab, for example, as an example of a software program that is somewhat unique that's out there that people haven't seen. We're going to do a webinar. We're going to record the webinar and broadcast the webinar as if it is live. We're not going to say that it's live or recorded. We're just going to put the webinar out there. We're going to pay in order to promote this.

And while the webinar is playing, I'm going to have one of my associate advisors answering questions. And during, there's periods on that webinar where they're going to be saying, "Oh, yeah, if you have a question, type it in the chat." Well, in that chat will be someone answering questions, and then there'll be several opportunities with a link to book a 15-minute call for any specific question that they have. This is something that a colleague of mine has been doing very successfully. So some of the best ideas, of course, are ones that we get from other advisors. So while I already have the playbook of something to do, to use, that's something we've wanted to do but have yet to have the capacity without a full dedicated marketing team to handle it for us.

on on your website, calls to action in the things that we send out. So we have a whole list of prospects that are on our HubSpot distribution. So all of that would be ways to get people to engage. And I wish I could tell you now that it's extremely successful and it's raised X amount of money, but this is still in the infancy stage. But it's an example of, I think, once you have a dedicated marketing person, you can really kind of dive into things if you're willing to spend the money. And that's an area where we're definitely willing to spend the money. I think most advisory firms spend 2% on marketing. So we're looking to drive that number up significantly from that figure.

Michael: Do you have a target in your head of, "We want to spend X% of our revenue on marketing?"

Jeff: I would like to triple, so get from 2% to 6%, which seems like not a big number, but it's a big number on the big number above. So it is a big number, but we're not going to do it overnight. We have to see success. That is, you start, in my opinion, with everything, you get the minimum viable product out there to just get feedback on it, because we try to make it perfect. It's never going to happen. So we get the minimum viable, we start investing money around it, see what works, see what doesn't, and then continuously reiterate on it until we have something where you put in a dollar and you get out 2 or 3 or 4 or 5, and then you consistently just push money into it.

We did a variety of different types of webinars live. And one thing we didn't do well, we got a fair amount of lead flow from it, but they weren't that qualified. And I think with some of the tools out there that are available now, first off, we're going to let people know exactly who we work with. The minimum is $1.5 million of investable assets of money you can transfer however you want to be as specific as possible to try to weed out. Because what we are having is people booking calls and it wasn't worthwhile for us. So we took a pause on that and kind of looked back to the drawing board and coming back again.

Michael: And where did you find the marketing person who can drive and lead all of this? Did you find someone from within the industry? Are you finding somebody who just has a marketing background and having them learn about the industry?

Jeff: Yeah, I am. So the good news, Michael, is that I don't hire anybody personally anymore. So I have a great chief of staff that does this for me and a team at Stratos Wealth Partners. That's the RIA that we roll up into that has HR. And so what we did is we did a search. We were very specific about what we were looking for. We wanted someone that could lead. We weren't ready for a CMO yet. We wanted to try it out. And more than anything else, we just want somebody that got us, that could take a look at us, take a look at our brand, and do I identify with it, where can we improve it, can you use HubSpot, which is our tool, can you understand Salesforce, a variety of things.

And we found somebody that wasn't in our industry, which you would think might be challenging from the content creation place, but we got extremely lucky that she was a quick learner, and she has taken...in the short amount of time that she's been with us, not even a year yet, she has really made a big difference in terms of rebranding us, putting out good content, expanding our socials on whether the company or my own. It's been remarkable to see, once you can have a dedicated person that gets you, and I think that now we had reworked all the stuff we were doing poorly before, so that was 2023, and 2024, let's go on the offense now and what can we do now that we've rebuilt the website and all of that. What can we do now to really start investing money? To be honest, she is part of the marketing expansion, right? That was really important.

Michael: And you said you were also trying to go deeper into the custodian referral programs. So, how does that work for folks who aren't familiar with the actual system and mechanics? I think most people have heard, there's a thing where the custodians send you referrals, but for those who don't know any more of it than that, what is it, and how does it actually work?

Jeff: Yeah. So the custodian referral program, first off, it is not an easy thing to get into. This is 4 years of work on this. So as I mentioned earlier, I roll up in Stratos Wealth Partners. Stratos Wealth Partners has a variety...they have different firms. They would have Kitces Wealth Management. I was Brown Wealth Management. We could talk, like I said, about the history in a bit. Because of their size, they're a very large firm, Barron's rank and such, they have the assets with the custodians. And what my team had was the process. We had the thing. So we combined their size with what we did, and we started...we kind of went down the path. And we'd been working with them for a significant period of time, and we're told now that it launches at the end of this year.

The way it works is that the offices for the custodians, you go in, Fidelity, for example, you go in, and Michael could be a client of Fidelity, and they can manage money for you. They have financial planners there. But those financial planners, they manage a lot of clients. A lot of them. And they can only operate in a very small sandbox, in some cases. So when clients want something more, I've sold my business, I have a concentrated stock strategy, I have a massive amount of money in Qualcomm, I just got a divorce, I have an ailing parent, I have some unique situation, I have some sort of big thing on the planning side or I don't necessarily...I want something different than my Fidelity mutual funds. They are then...they don't want to see the client leave the custodian. They want to keep the client at the custodian.

So they're going to refer it to a list of RIAs. I think that list, I'm guessing, last I heard, it was about 70 to 80 companies in 1 channel. So they have a list, and they kind of take a look at it, what does the client want, who on this list is good at that, not everyone does financial planning. So that weeds out people. Does it have to be local or not. That weeds out people as well. Do they want alternative investments? That could weed out further people. So when they do that, they typically will send the client 3 names that can do it in a variety of different ways, but typically, it's 3 names, and they might indicate their favorite there too. And then the client reaches out or the Fidelity or Schwab rep will contact the advisor directly.

It sounds great. So there's a couple of caveats here. One is the client is still the client of the custodian. You're in a partnership with it. So you are actually paying them a revenue share arrangement with them. So it could be 25 basis points, for example. I think that's what it is when you start out with these firms, 25 BPS. And that's in perpetuity, and that's including grabbing more wallet share for that existing client, which is, by the way, something good that the custodian wants. So the custodian is still making probably the same, if not more, money on the client. So it's a win for them. It's a win for the clients. And although the cost of acquisition here is a perpetuity for the team, if you run it in an efficient manner and you have technology and processes, and such, you can operate at a lower margin for that client. And I think so it's just one type of...we're not abandoning everything for this, but it's another revenue source, another way to institutionalize lead generation to the firm.

Michael: So I'm wondering, when the cost gets as high as 25 BPS in perpetuity and your fee schedule breakpoints down to 50 basis points at everything above 1.5 million, is that problematic? Is that a concern? You're at 50% of marginal revenue at that point. That's a big chunk relative to what you also just need to run the business. So, is that a concern? Does that worry you? Or it's still profitable at that level.

Jeff: It's still profitable because of the...maybe we can talk a little bit about how the advisors get paid and such. You just have to do the math on it, Michael. You have to say, "Okay, this is..." First off, you have to understand what types of referrals are typically coming in. Unfortunately, it's not a lot of $10 million referrals, right? They're probably referrals in that $1.5 million to $3 million space. So you're still getting the 1% on the bulk of that account size as well.

Secondly, you're also paying...the way we pay the advisors is a portion of their pay is a salary, and a portion, we can get into it, is a percentage of revenue. So they're going to have to manage more. So, how do they manage more? Well, we're going to set up that team that manages these clients in a different way than we currently have our existing teams. We're going to have 1 primary point of contact and perhaps multiple service advisors under that that are more of salary-based that can handle a large amount of this. So we've done the math behind the scenes to make sure it all works. And remember, this is just one way. What that will allow us to do is this will allow us to get more money to invest in the firm. If this was the primary thing that we were going to do, the only thing we were doing, I know some firms, they rely on it, we would change the fee schedule. But that is another plan today.

Michael: Interesting. So your structure handle aside from just if the reality is these are $1 million to $3 million clients, you have a bigger chunk at 1% and not as much at the 50 basis point threshold is restructuring the advisory team support, in essence, to be able to handle more clients per advisor, which makes the math still just work for the firm when you're getting less revenue per client net of the referral fee.

Jeff: Correct, correct. And if it turns out that it is cost...if our math was wrong, the fee schedule is not ingrained in stone either. We can maybe add another breakpoint in there or what have you. But that's been...the plan is to keep it the same for now.

Michael: And do you track overall where the growth is coming from by various sources? Obviously, you don't have the custodial flow yet because that's a new program getting going, but you said that there's client referrals and there's some of the content and social media marketing you're doing, and there's some flow that you're getting from COIs. How does the growth break down at this point? Is it still mostly referrals and the others are just starting to fill in, or are you finding you're less reliant on referrals as the other programs ramp up?

Jeff: No, it's still mostly referrals because of the sheer size of the referrals. That tends to be where we get our largest clients. As an example, I had a client that gave...I knew this person. I surf, and I’ve run into him on the island that I go surf at a couple of times. We didn't talk business too much. And one of my other clients is there, and so he told, "Hey, you should check...you should go talk to Jeff about this," because they're friends.

And so he sees me on social and sees some of our stuff. And he comes and talks to me and says, "Hey, I've seen your thing". So it's hard to really...did that come from social? That came from my friend, actually.

Michael: So when most of the growth is driving from referrals and has taken you so far to $1.5 [million], I guess I'm just trying to visualize why the push with all the other marketing things that you're getting going here if client referrals is driving as much growth as it is already.

Jeff: I think, honestly, because it's not predictable, necessarily, and we're of the size now where we have scale, where we have the money to invest in these other things that we may not have had before. And so we can try and fail on these things, and it's not going to be detrimental to the firm or to the bandwidth of the firm at the time. So you go back several years. We were trying to do some of this stuff while with a day job. It was too much. So I am $1.5 billion, I am a quarter of the size that I want to be. So I want to be trying everything, failing in probably a lot of them, but definitely succeeding in others.

Advisor Compensation And Career Tracks At Jeff’s Firm [39:15]

Michael: Okay. Interesting, interesting. So now that we understand the growth dynamics and where the flow is coming from, take us back now to the advisor world. You've mentioned a few times around advisor compensation being structured a little bit differently because this isn't sales and eat-what-you-kill environment. We spoke in the beginning about career tracks as well. So help us understand more now how you're building compensation and career tracks around this structure where the firm drives the growth and the advisors need to service it.

Jeff: Yeah, sure. So kind of let me explain the failing part first, mistakes.

Michael: That's usually where the lessons begin.

Jeff: Yes. Where did we fail? So we left the wirehouse in 2015, and there were just 5 of us at the time, made about $400 million under advisory management. Thinking in the realm of income and profitability, we're independent now, and we're keeping more of the pie type of thing, and everyone's happy, and we're growing well for a number of years. I think it was around 2019 when we kind of hit this I'll call it the capacity wall. Just so happens that we're talking about growth, this is pre-COVID, so we're sitting down, doing business planning, how are we going to do this, talking about some of these ideas I'm talking to you about now, and...

Michael: So, what was the size of the firm when you're feeling this capacity wall? Where were you by 2019?

Jeff: We were probably, I would say, probably $700 million, $800 million under management, right?

Michael: Okay.

Jeff: So we've done well since the $400 [million] and change. We’ll get some market growth in there, hopefully. But we hadn’t grown the team by that much. We’d added a couple of client service folks, and we had tried our hat with bringing in a different advisor here and there, experienced advisors. We happen to have this one gentleman that started off as an intern with us, math major, very bright guy. And we didn't have an intern program at the time. We just kind of had to do everything, right? We hit the capacity wall, and we had this idea, "Okay, what are we going to do?". Because we don't want to hire an experienced advisor. We haven't had good luck with that yet. How do we elevate this junior advisor to a lead advisor? How do we do that?

And he got to be the guinea pig. So, lucky him. We kind of started and did set it up, "Hey, you're going to be in the meetings". We started setting up our pairs, our pods, as you called them, at that point in time. So he was supporting kind of the advisor that had the most clients. And it turns out my partner, Pat, did this for me at one point. He started off sitting in the meeting, kind of started taking over the planning, and I talked about the investments. He would talk more, I would talk less. So we tried this with Colin, and Colin was very good at it. And we said, "Oh, wow, this is actually kind of working, and he might be able to take clients on at some point here pretty soon. So let's hire more of these people". And when we hired more of the people, what did people ask when they come in for an interview., “What's the career path?”. So, how do I become a lead advisor?

Well, Colin kind of was on the track, but there was no well-defined way to do it. So what I did is the CFP actually has a career path out there. They've actually built it using their own language. So when I took that to the folks I used at ClientWise for my coaching, took it back here, and we sat down, and we customized it to say, "Hey, how can this look in a perfect world?". So we did version 1, which just said, "Hey, there's going to be...you go from an associate advisor to a lead advisor". Well, that was the beginning of the career path. Well, that wasn't enough, right? We needed different levels of an associate advisor.

So we then broke it apart, saying, "Hey, here's when you start to do different things". And then it became, well, how do we promote people within this? How does it work? So we really broke it down by specific tasks that they need to do at each level from an associate advisor level 1 to an associate advisor level 3, right, your kind of top associate advisor before lead advisor. So let me give an example.

At the beginning, associate advisor level 1, he or she is going to be able to draft and update a financial plan with complete oversight from the lead advisor. Level 2, you can draft and update the plans with limited oversight. And level 3, the lead advisor does not look at it. The same thing works at the beginning. At the beginning, you're writing down client questions, and you're researching what the answers might be, even though the lead advisor is going to give those answers. In step 2, you can answer basic questions. And in level 3, you're actually presenting those answers. So we have it broken down from the financial planning component, financial markets component, servicing clients, and then how to service the team and mentor others. And we also have it broken down by the number of years that's probably required, and we have compensation in there.

So this is how the career path looks today. What we then do...so, how do you track it? How do we let people know? We have a software tool. It's called 15Five, and 15Five, you can do a lot of things in it. We do our performance reviews in there, we do our OKRs in there, and we do what's called PDPs, which is professional development plan. So we do these 3 things in there.

And so the performance review, for associate advisor level 1, we're going to grade them on a scale of 1 to 5. 3 is you're doing your job, 4 is you're doing it great, and 5 is you're superb, and 1 or 2 is you're not doing it, right? So if you're getting to this point where you're getting 4s and 5s on everything, you're eligible for a promotion. And then, when you're eligible for promotion, these things you're getting graded on now change to the next thing, and you're going to probably start off on probably not doing your job, almost. And the good news is when you get a promotion, you get a higher base pay.

Well, we also do these performance reviews 3 times a year, and each time we do it, we take the average score, and that becomes the percent of their base pay that they receive as a bonus. So using as an example here, if, for example, the average score is a 3, which means you're doing your job, you're getting a 3% bonus 3 times a year, roughly a 10% bonus per year. If you are absolutely crushing it, you're getting 5s, so you're getting 15% a year. Remember, when you get the uptick, we might not be doing as well on the scoring because you just got a promotion, but your base is going to move up.

Michael: So you set all these standards at associate 1, associate 2, associate 3. They're getting scored on each of those domains 3 times a year, getting their 1–5 scores. After they get scored, you also do 3 times a year bonuses, and their average score on the bonus is their bonus percent. So if you average 3.5, you're getting a 3.5% bonus as you go through the year. When you're mostly getting 4s and 5s...or do you have to literally get all 4s and 5s to move up?

Jeff: Yeah. You need to be really good at dealing with the things that matter. If you're not so great on the financial markets piece, we can educate you a little bit more on that. You could still move up and still get help on that as you move up.

Michael: And so then, as I move up, I get promotion in title, I get promotion in pay. I might not get great scores now because now I'm being graded on harder things that I won't do as well. But if my bonus goes from 10% a year down to 5% a year but I'm getting a much higher base pay, I'm likely still netting higher, so I'm making forward income progression.

Jeff: And probably most importantly, Michael, you're one step closer to that lead advisor, because we do bring people in from the ground up. So they tend to be younger in age and younger in experience. So that's what we have to keep sometimes reminding them, "This is what you're shooting for. You're shooting to become a lead advisor". Now, we haven't had anyone that says, "Hey, I want to stay an associate advisor” yet. I'm not saying there's a problem with that, but generally speaking, everyone that we hire, they're hiring to become a lead advisor. The good news with how we're doing it is we're showing them or quantifying exactly what they need to be doing in order to get there.

Michael: So, who does the grading?

Jeff: The manager. So the manager for each associate advisor is the lead advisor that they're paired with.

Michael: Okay.

Jeff: So the lead advisor is training the associate. We kind of do a bunch of training. So it's not just one person training the other person, but that's the person that is most engaged that can see the work that they're doing, because they're doing the work for that lead advisor. Sometimes an associate might help two advisors have a little... There's a little bit of kind of crossover but not often. Yeah. So that person is doing the grading, and then before there's a promotion, we talk about it internally just to make sure, "Hey, this is what you're seeing. Is everyone else seeing this as well?".

Michael: So then, what are the salary comp levels that go with this? Can I ask?

Jeff: Yeah. Of course, yeah.

Michael: What's the base salary you get at associate 1, associate 2, associate 3?

Jeff: Yeah. So it's a range, and it can be different, depending upon exactly the experience that they have coming in the gate. And keep in mind, I live in Southern California. So the last time that we updated this is I believe it was last year. So that's what I think the data on this is. So maybe it's a little bit different today. It might be the same. So it starts as low as an intern makes $20 an hour. The associate advisor level 1, $65,000 to $70,000 base, plus the performance bonus. And also, I didn't mention, but we also have what's called a net new money bonus. Well, I'll answer your question, and then I'll explain what that is. Then associate 2 is $75,000 to $90,000 base, and associate 3 is $90,000 to $120,000 base.

Michael: Okay. Okay. And then you said so there's two bonuses on top of this. One is the performance bonus that you talked about. So take your average scores, that's your bonus, right? And then you said there's a net new money bonus. I'm assuming that's a business development bonus.

Jeff: Yes, you're correct. So while it's not necessarily required as part of the job description to raise a certain amount of money before you can move up, there's a bonus for it. So we pay our net new money bonus. I'll keep it simple. We take the fees. We take 40% of the estimated first-year fee based on the assets that are there. Okay? Then we will pay out that fee split mostly between whoever sourced it and what team brought in the clients. And generally, a lot of times, it's the same people. It's the same.

But sometimes, for example, you could have Pat on my team who's pretty well at full capacity get a referral for a $2 million client. It's a little on the low side for him. He manages the larger clients. So he'll get the referral. That would count for him because if the referral comes from one of his clients or one of his COIs, he is what we call a lead generator, and then he passes that over to Robert. And Robert and his associate advisor then bring in that new business. And that money is split between those two.

And there's some discretion upon how that split can be done. If the associate does a lot of work in it, doing the planning and everything, the lead doesn't have to do much, they might give him a little bit more. I forget the exact breakdown between the lead and associate, but I think it's pretty close to 60/40.

Michael: Okay. And it's just 40% of the estimated first-year fee. This isn't an ongoing trail rev share kind of thing. This is a one-time bonus for the business development.

Jeff: Correct. And the lead advisors that are not...we could talk a little bit about their compensation as well, but then the lead advisors that are not partners in the firm, then they'll get a percentage of that fee indefinitely, just because they're managing the client relationship. Whoever is managing that client relationship will get a percentage of the fee moving forward.

Michael: Okay. So I do want to understand lead advisor comp in a moment and how that works within your structure, but on the associates, I want to come back for a moment. So they've got this level 1, 2, 3 progression. How long is it supposed to take for them to go through?

Jeff: Yeah, that's a great question, and it depends, Michael. It really depends. I would say that the person that became a lead advisor now, recently, a year or so, Colin, I think it took him about four to five years to get through it. I think part of the reason that it took a while is we were still building it while he was living it. So it wasn't quite as organized during that period of time.

Michael: Fair enough. Thanks for rolling with us, Colin.

Jeff: Yeah, exactly. He's a great guy. But he did. The good news is he's become a Gen 3 leader too. He's really helping, "What should we be doing on this?". And that's how we built our internship program with an intern. So the intern that left built the intern program for the next person. So it's been a pretty effective way to do things. But effectively, my goal would be to try to get people through this thing in less than that time moving forward, if I could. Because I believe that if they want it enough and they can get credentialed, because that is part of this plan as well is they should be getting credentials, they should be getting...they need to have their CFP. In that associate advisory level 3, they need to have it by then. So that might delay them if, for some reason, they can't get it. Ideally, they have it before then, but that is a requirement by that time.

So I think it's pretty doable in terms of maybe 4 years moving forward. And someone that comes in with maybe some level of experience can probably move through it faster than that. And right now, remember, like I said, 2019, 2020, that's only been a few years. I have right now an associate level 3 that we're starting to consider as a lead advisor, really starting to check the boxes to make sure that she is ready to move up because we have clients that we can give to her. A fair amount of them, actually. So we're looking at that right now in terms of, hey, what needs to be done here? Is she a perfect fit for that role? The number of clients. And we tend to make it a fairly...test it with a few and then tend to move a number of clients. Remember, by the time you're associate advisor level 3, you're presenting the plan in the meeting.

Michael: So I'm presuming now this is all written out in some standard career path document so that everybody gets to follow what they're doing and how they progress.

Jeff: Exactly.

Michael: So, is that something you'd be willing to share for advisors who are listening and just want to see a more concrete example of what this looks like? I'm sure a bunch of it is specific to your firm in context. So I feel like we're all looking for more examples of how this works.

Jeff: Yeah. I'd be very happy to do that, as well as show you how the performance reviews look as well.

Michael: Okay. Awesome.

Jeff: So it's a way to sort of...I'll put the 2 side-by-side.

Michael: Okay. Awesome. So for folks who are listening, this is episode 362. So if you go to kitces.com/362, we'll have links in the show notes for Jeff's, I guess, the career tracks and the performance reviews that they do with it, which I guess is just the individual questions, Jeff, that you would be asking that they then get scored on to get their 1-5 scores to get their bonus structure.

Jeff: Yes.

Michael: Okay.

Jeff: Yeah. So in that way, you can relate and see how it all fits together. And on there, we also have the compensation ranges on there as well.

Compensation Structure For Lead Advisors [55:25]

Michael: So then, how does this work for lead advisors?

Jeff: So, unfortunately, Michael, I don't have everything figured out, but we have a lot figured out. So currently, we just didn’t have to worry about the lead advisors because all the lead advisors were partners of the firm collecting profits at the firm. And that's the typical, guaranteed profit distribution. We didn't have to worry about it. Well, then we had to fix that. So Colin, who was so patient with us, he became a lead advisor, and we had to come up with a compensation plan in terms of how...

Michael: Because he was your first non-partner lead advisor that got introduced.

Jeff: Yes. So I spent a lot of time researching this and trying to figure out the best way to do it. And so this may not be the best way, but this is the way that we've chosen for now, is that, currently, Colin has a salary. Remember, they were making a salary all the way up. Well, his salary is...the lead advisor's salary grows with your credentials. It stops growing as much in terms of leads and percentages, but there is a salary component there. And as Colin gets another...his CPWA, for example, then his salary would go up. Then...

Michael: So you reward new designations and credentials pretty directly in your environment. That's a comp adjustment.

Jeff: Yes, yes.

Michael: Okay.

Jeff: Secondly is that Colin then is going to get 15% of the revenue that he manages in addition to the base. And the way it should work at the end, remember, Colin, he gets a bonus if he's bringing in additional business, most of the business was given to him, always done a great job at bringing in new business, then he gets the bonus for that. So he gets 15% of the revenue that he manages. And at the end of the day, what we're trying to target here is for that total percentage to be anywhere between call it 30% to 40% of the fees that they're managing. That's the target here. He is not...we haven't got to that big enough number in terms of management, and we've talked about perhaps just moving to a flat percentage and removing the salary at some point. But I do like the fact that you have the stability there, and part of it's just you're doing the job for the firm, and you're getting paid for that, and then you're also getting paid for the amount of work that you're doing for the clients. And I like the combination of that, along with the net new money bonus that you're getting paid to bring new business to the firm.

Michael: Okay. Interesting. Interesting. And so, does that mean...is that now what all the advisors are tied to? Did you have to go back to other lead advisors who are partners and say, "We're doing comps similarly," or is this new advisors, going forward, this is the structure, but existing advisors are doing whatever they've done historically?

Jeff: Exactly. For the most part, the existing advisors are giving away clients without a penalty to it to increase capacity for them. Like I said, we hit that capacity wall, everyone's pretty full. I have lead advisors sending me emails on the weekends, that's not ideal. So the idea is there's plenty of clients that we already have inside the firm too, without even growing, which is, obviously, that would be a hit to profitability to continue to take a piece of this and pay it out. So we want to keep growing, but there's enough inside the firm to go around and create the careers for a lot of these associates that are working with us today.

Michael: And you don't have levels for lead advisor at this point the way that you have for associate.

Jeff: We've built it out, but we only have one...I would say that...just as our friend Colin is doing, he is also the guinea pig on this one as well. So I think...

Michael: Thank you, Colin. More shout-outs for Colin.

Jeff: Yeah. Thank you, Colin. So I think, yes. So I think that what we are planning to build and what I have with attorneys right now is an LTIP plan that's being reviewed to...as you move into a higher level of lead advisor, can you participate in the equity ownership? And what does that look like? I would love to say that I have that all figured out today, Michael, but I don't. But that is on the docket as he continues to grow.

Michael: So the idea is, eventually, he and others, we're just picking on Colin because he's the guinea pig, but the lead advisors would have some kind of path to partnership equity or at least equity-like participation as they grow to certain levels in the future.

Jeff: Exactly. And then that would be tied not as much to the revenue you manage. That's more about becoming a leader at the firm and being involved in those discussions, like I mentioned earlier. If you go to my website, besides Robert who came through the merger that we did back in 2020, it's a very young group of people that are in the advisory team. So I have my next gen of leaders there, and what I'm trying to get is now I'm trying to get Gen 3, bringing up from the ground, with leadership and everything around them.

Affiliation With Stratos Wealth Partners [1:00:25]

Michael: So now, help us understand for the firm overall. You've got a sizable business at $1.5 billion of assets and close to $9 million of revenue and 21 team members, but you had said earlier, you're affiliated back to Stratos Wealth Partners, one of the advisor platforms that are out there. So what do you do versus what Stratos does? Why are you with Stratos instead of on your own? I don't mean that as a negative to Stratos. How does this work between what you do at a firm your size and what it means to be plugged into a platform like Stratos?

Jeff: Yeah. It might make sense, Michael, for me to take a step back and just give you a brief glimpse of a quick history of kind of where I came from.

Michael: Sure, please.

Jeff: Yeah, yeah. I mentioned I started off at an independent firm a long time ago, and so back in 1996, I was selling financial plans. All roads led to insurance there. I finished my first year and made half as much money as I made waiting tables the year before because it was independent and that was just... I have a masters in finance, but it was all insurance sales. That wasn't something I was good at, but I like financial planning. So a friend of mine at the time said, "Hey, why don't you come over, you would restart your training program, but do it at Credential Securities. And why don't you 'sell' your financial plans instead of stocks?” in 1997. So that's what I did.

So I was at Credential. Credential became Wachovia. Wachovia became Wells Fargo. Don't need to go down that path, but I was at the wirehouse for a long time. By 2015, I was ready to start my own thing. And that's when we left. And prior to, then, the financial crisis, I'd actually looked at going completely independent, or in the financial crisis, because things were falling apart. I was going to leave, and I looked at everything that you needed to do to go independent in terms of getting a lease. And all of the things that would require, and it was just so overwhelming, that I was frozen. There's no way I was going to do it.

Well, I got introduced to one of the founders of Stratos, and what Stratos does is they help people...they call it supported independence. What they do is they help you, more or less, either break away from a wirehouse or a similar type of firm, and what they will do is they will take a small override. And for that override, they're going to do things like compliance, supervision, technology, billing, HR, help you negotiate leases, etc. So at the size where we were, that margin was pretty thin. It wasn't too much. And in terms of commitments for them, at that time, we moved to LPL because we had brokerage assets leaving the wirehouse. We were mostly advisory, but there were some brokerage stuff there. So we landed LPL first, and so that's why I joined Stratos.

And every year, I ran the math of what it would take for me to get my own CCO, my own chief compliance officer, figure out, do the billing, pay the up cost for Orion. And I figured out, based on what we were paying, my quick math was they're making about a 20% margin, at least on my business. That was my math. And to me, that seems fair to not have to worry about it, for all the cybersecurity and everything out there. So I stuck with them, and they're fantastic people.

Michael: So meaning, you calculated, what would it take for me to just hire and do all these things, the CCO, the Orion licenses, all the rest? Then you looked at the math of what you're paying Stratos, and the answer was, "Okay, Stratos is charging me about 20% more than what I could probably spend by doing this all piece by piece." That's their profit margin. But at the end of the day, paying 20% of those costs to have someone do it and manage it and be responsible for it, deal with all the consequences with it, "Okay, that's a reasonable markup so that I don't have to deal with all of this myself". That was the mindset.

Jeff: That was the mindset, and I reviewed it for a number of years. And as we grew, we became one of the larger firms that they had. So I felt like I had a seat at the table in terms of the direction of Stratos, not really who the recruiting or what they're doing, but effectively, "Hey, we're interested in this type of technology", or "We want this type of alternative investment", or whatever it might be, and they listened. And that made a big difference coming from where I was before. In fact, one such idea is, in 2019, our brokerage business was so small, but as you may know, we're still reporting to FINRA for this tiny little piece, we came up with a plan where I sold my brokerage business to Stratos, they serviced it. And so they purchased it from me, but the account numbers didn't change. It was still on the Orion report, right? So we could help them on the financial planning side of their annuities and their 529s we had left there. Still continue to advise them, we just couldn't advise them on individual transactions. It was a very clean way to do that.

And then, in 2020, my coach, Ray Sclafani, challenged me in one of the meetings here around a question that I had, because I had to grade myself on my exit strategy and the value of my business. I said, "On a scale of 1 to 5, how important is it, 1 being not important? On a scale of 1 to 5, how are you doing on it?". So I marked 1, I'm not doing very well, and on the other side, it's a 1, it's not important to me. I'm calling it, I'm 49 years old at the time. And I got a browbeating in our class saying, "I can't believe this, Jeff. You help business owners and people. You should do this". So I spent the better part of half of that year making the mental shift from income to enterprise value, and, "Wow, this is really worth something. Oh my gosh, if something happens to me, my young next-gen talent is never going to be able to buy this. There's no way."

So at that point in time, I negotiated something with Stratos where they took a minority stake in my firm. And, silent partner, minority stake, which gave me complete succession planning, which was great, allowed me to take little chips off the table, which also feels good. And I also had the expertise now of Stratos' executive team, their attorneys for M&A, and such, at my table. And later, not 12 months later, we did our first M&A transaction with another Stratos advisor and brought those assets in with us. So we rebranded in 2021 from Brown Wealth Management to BWM Financial just to get my name off the door per my partner, my new partner.

And so probably most interesting here is that I remember, we've been working on this custodian referral program for four years, and the plan was BWM Financial powered by Stratos is the offering. Well, I'm in San Diego, so how good of a job can I do servicing in the country? That's going to require a lot. And I just was daunting around thinking about it. I talked to Jeff Concepcion and Lou Camacho over at Stratos, saying, "Hey, I have a business plan here. I have an idea". So what I did is I flew out to Cleveland, and I said, "Hey, Stratos is a bunch of Brown Wealth Management, Kitces Wealth Management". And I love it. I heard it on this podcast where Joe Duran said, "Hey, it's a bunch of pirates out there with these individual flags". I said, "What we need to do, we need to create the navy inside of Stratos," using Joe Duran, also what he said about United Capital. I said, "We can do that here".

And we sat down and built out a business plan to create what is now Stratos Private Wealth, which is the navy inside of Stratos. So what we're in the process of building is the intake plan for that custodian referral program where some of these other marketing things will be built and powered by Stratos Private Wealth and run. And some of the expense will be borne by the mothership on the top, right? Also adding things like tax advice, a CPA, estate planning partnerships, for example. And succession planning and a financial incentive to these folks as well should Stratos ever have an event. So we've been talking to the other "pirates" at Stratos about joining in major cities to create this unified platform where they can have ownership in there. So they don't have to sell to one of these other large RIAs that are aggregating everybody and doing this today, where you could still own a large piece of your firm, still benefit from the scale of a multibillion-dollar operation, still keep the culture of your local office in place.

So that's kind of answering a long question or answering your question with a very long answer. That's how I've gotten to Stratos Private Wealth when we really had to.

Michael: Interesting. All right. So I've got a couple of questions of how this played out and the turning points along the way. So take me back once more to this piece where you sold the brokerage portion of the business. So I'm presuming this is like a lot of us that came from the broker-dealer world into the advisory side. Your brokerage-based business is, well, initially, it's 100% of your revenue, but then it's 80, then it's 60, then it's 40, then it's 30, then it's 20, because you keep growing these advisory assets, and you're doing less in transactional sales. And then it's down sub-20%, sub-10%. And as long as it's anything but zero, you are still subject to FINRA. So at some point, you get small enough that it gets appealing to say maybe we just need to stop this. And I know some advisors that just...it gets small enough, they say, "I'm just walking away from it. It's not big enough to be worth keeping for having FINRA in my life". I'm struck that you didn't just walk away from it. You structured a transaction to sell it to a particularly friendly party that you had an affiliation to. So, can I ask, how does that deal get structured? How do you value that? How do you set terms to a transaction like that?

Jeff: So this is just to kind of break it through. I look at this thing through a funnel where on the top of the funnel, you have the clients, in the middle of the funnel, you have your staff, and at the bottom of the funnel is the prophets of the firm, the partners. And so if you look at everything through that lens, I think you can make really good decisions, and I think a lot of advisors do that. But I always try to put that every time I have, especially, some sort of financial transaction in front of me. And in this particular case, the number one objective on this was to make sure that the clients are going to be fine, that it doesn't hurt the clients whatsoever. Because by that time we had already done the lifting of what made sense to convert to advisory versus not or we held it, we call it below the line, if you're holding a large amount of, for example, Qualcomm stock, where it's in an account with us, we're just not going to charge a fee on it. It doesn't have to be a brokerage thing with FINRA.

So we got to the level at which we had done all that, and we were really left with...it came down to legacy annuities that we had from people transferring stuff in. Over the years, we had some very limited cases where that made sense, but there were large transactions and a lot of 529 plans. Once again, legacy from the wirehouse. So there's trails on a lot of that, and what we did is we structured it in a way where Stratos would pay us over a long period of time, some turn of the revenue that they were going to keep. I forget exactly what it was. It wasn't extremely profitable. It was like we made this money, because it's being paid out over multiple years. It's more or less so that they can cash flow it over time. So they're making money on the purchase because of the trails, and they get to adjust it as the trails adjust.

What we get to have is same account number, complete visibility into it, a friendly party to deal with the clients, and we get to drop FINRA. So we made a little money on it, and we continue to a little bit of a trail, if you will, if you want to call it that. But it wasn't consequential. The main objective was just to get it off the books, but we made a win-win out of the financial piece.

Michael: And so, because I'm cognizant, literally, once you drop your FINRA license, you can't take a direct rev share participation because that's the whole point of the license that you don't have anymore. So I'm presuming that it's some kind of structure. You set a value for what it's going to be overall, and then they're technically just paying off a note to you for the value of the transaction, and maybe the note can have some adjustments if revenue doesn't stick around, which you pointed out.

Jeff: One hundred percent. We agree to the payments upfront, and if the revenue drops to a certain level, they recast the note. So it's not, "Oh, you're getting paid a percentage of it if it drops". I view it like a clawback, the same way we would look at an M&A transaction. So if you don't keep the assets, we get to claw back some of that price over time. It's the same type.

Michael: And how did you price this? This is like a multiple of the revenue of the trails. That was the sort of upfront number, and then we amortize it over a long period of time.

Jeff: Yeah, something like that. And I forget. I'd have to look at the note, but it wasn't...let's just say between one and two times. Maybe it was, yeah, one and a half times. It was not meaningful whatsoever.

Michael: Okay. Okay. So then, now, take me forward to the second transaction where you're structuring a minority stake in the business from Stratos. Now, that's the main thing. That's not the part you're moving away from. That's the part you're going into. So, how did that transaction and deal work?

Jeff: Yeah, sure. So I got a certain amount of money, paid, once again, kind of mostly upfront in that arrangement. There was a 25% stake where they had minority protections attached to it. At a fair valuation at the time, much lower valuation than it is today. It's like selling your stock on the way up, but I got to sell some recently.

Michael: Because you did this in 2019, and it's really just been the past 24 months that multiples kind of got bigger.

Jeff: Yes, yes. It was a pretty clean, easy transaction. I was already comfortable with them. Really, and to be honest, they've been very, very good partners. I think I mentioned, they took a majority stake in order for us to do Stratos Private Wealth. So that was one of their requirements, for me to live my vision here. But the minority stake, they, more or less, left us to do our stuff. We were growing, we were doing well, and then that set the stage for the M&A. Because the other gentleman was at Stratos, and that gave us a little bit of credibility that we had, "Oh, Stratos is investing in them". We had been talking for years about perhaps combining forces, and so that actually teed us up to do that second transaction within 12 months with another firm.

Michael: So help me understand more why the minority stake at the time. I get it if just you literally want to take some chips off the table, and so you sell a portion of the business to take chips off the table. You had framed this around succession planning as well. And I get it, once they have a piece of the firm, they can potentially buy more of it if you need to exit. But I'm presuming, at the end of the day, if you hadn't done that deal and you got hit by the proverbial or literal bus, and someone called them and said, "Jeff got hit by a bus. The next-gen advisors can't take this over. Can you guys buy this thing out?" that they would do the deal. They're not going to say, "No, spin-off. Go ahead. Leave. Watch all the assets dissipate and walk away". If they're willing to buy it now, I'm presuming they would have been willing to buy in any case to solve your succession needs whenever you got to the point of needing them. I guess I'm just wondering, why take the action where you did as opposed to just saying, "Guys, sign a buy/sell with me that you buy me out if I get hit by a bus."

Jeff: Yeah. I think there's two things. One is I like to tell people every advisor is going to have an exit. It's either going to be planned or not. So if you...

Michael: As with every business owner.

Jeff: So if you plan it, you set your own terms. And in this case, I was able to set the terms. My main goal is, to be honest, I wanted to protect my family should something happen to me. We have a great lifestyle, a great life. It wasn't always about I needed to have more and more money at the time. If something happens to me, I want to make sure that the business continues in a certain manner, and I want to make sure that my family is set. And I was able to do that at that time. And quite honestly, it's nice having people on your...I couldn't ask them to be on my board and help me out, but when I have skin in the game, it's a different outcome.

And quite honestly, that facilitated the next transaction, which the way the payout structure works at Stratos, they might not have been too fond of, because when we put the larger force together, this new person comes in at my payout level, which was much, much better. But now they're a part owner in that transaction. So they win on that. So I think it all worked out, and also, we really tell, or at least we do, we tell our clients, "Look, you should be diversifying over time". And that was one way for me to begin to do that.

Michael: Okay. And now, take us forward to the next stage of the transactions here, which was, like you said, selling a majority stake for building in this private wealth direction.

Jeff: Yeah. So when I talked to them about this, it was about, "Hey, this is a great idea, but we don't want you, potentially, to sell to somebody else", which, if I'm building it under their name and we're going to be doing all these things, because I had been approached by people that were saying, "Hey, we’ll buy you"

Michael: Sure. You're sizable enough, your name shows up on lists, and PE firms start calling. Yeah.

Jeff: So they're very keenly aware of that. Now, after doing the minority stake in us, we were their second transaction. Fast forward a few years, they've done a bunch of them. So they're investing in a lot of firms now, and they get it. They're in that space too, so they said, "Hey, we'll do this. We'll help you grow. We'll pay for resources. We'll compensate you in some other ways if you grow, but we want to take a minority stake in the firm". I negotiated a pretty nice deal on that one in terms of the multiple and everything. And I've heard you say this before, you can't invest that money and make the same amount of money. But what I have done is I've completely secured myself financially, and I get to leapfrog in a number of years to where I want to be heading. And I think, to me, that's more important than worrying about how much money I keep in the business at this point in time.

We negotiated. There's also, if Stratos has an event down the road, and this is the same thing for other firms that join us, is that there is a big multiple left on a percentage of the equity if they have an event. So you're getting a much-outsized multiple on your business should that occur, and that's a very big financial incentive.

Michael: Interesting. But from their end, it was, "Hey, if you're going to build this thing that starts aggregating and banding together, firms under our umbrella, we have to own a majority stake of it because, otherwise, if you own a majority stake, you could build it and sell it to an external party." And yes, we monetize our minority stake, but you could sell out a huge portion of our business from under us and just disrupt the platform business from their end. So at majority stake for them, they at least get to control the terms and timing and dynamics of whether that sale ever happens. So they can make the decision on their end, but they don't have to worry that they're going to be in a compelled dragged-along sale scenario of the bulk of their firms that they helped to grow up and sell.

Jeff: That's completely true, Michael. And to be honest, before I present to them with this business plan, I've been approached by other firms, large RIAs, and each one of them, the requirement for becoming part of that platform and getting all of the bells and whistles, and once again, kind of thinking through the funnel, is this good for the clients? Yes, I want my clients to have tax advice. I want my clients to have more differentiated investments. I want my clients to have the benefit of having access to services. We can't pay for it today, and then I want my... I also want the growth associated with the custodian referral program, which gives my team members a lot more upward mobility, a lot more career path growth. So it helps. And then, yes, at the bottom, Jeff, as a seller, he gets money, but he might be selling early. But nonetheless, everyone else becomes a winner.

Michael: Well, there comes a point in growing a business when you get to a certain level of enterprise value that you can do a partial stake. It just literally solves all the money problems you might have had. We can retire, and the kids can go to college, and we can live the lifestyle we want. And there's probably even some left for the kids at the end to help the kids and the grandkids. And if I can do a partial deal that solves that, then basically, everything I do thereafter is the proverbial house money. So let's go for it. It's the extra dollars I didn't need, so.

Jeff: Yeah. And if I...

Michael: See what happens.

Jeff: Yeah. And if I was going to try to do all this on my own without the scale, it would crush our profitability to do all that. So that's kind of painful. And so the other route is to join someone that has it, and they're going to make you sell everything. So this model, as far as I know, doesn't really exist. So it felt it was a little bit unique in terms of potentially offering it out to other folks, and so far, we've been received pretty well.

Michael: So I've got to ask, what's it like to become a minority owner, an employee, in the business you made?

Jeff: Yeah. So it's actually two things, Michael. Not only am I a minority owner, I also report to somebody at Stratos as well.

Michael: Fantastic. So you have a boss too.

Jeff: Yeah. Yep. And if it was easy, it wouldn't be worth doing. I think that there's... The good thing about the folks at Stratos is they have the best line, "We're always going to land in a good place". And I think that that is always...if there's some miscommunication or an issue, that team there is among the best of the best people that I've ever worked with. So I really enjoy working with them. Yes, there's some disagreements or maybe, "Hey, I want to go north, and you want to go east. Let's hash it out a little bit", but it's been really, really fun.

And the other thing that's been really unique is my job has completely changed, and I'm out there flying around, talking to different offices. I'm understanding how P&Ls work far better than I did before. I'm understanding the intricacies of building out an internal investment platform. It's a lot of things that are just exciting to me. Where I'm in life, I think that's more important than the money these days.

What Surprised Jeff The Most On His Journey [1:23:17]

Michael: So, as you reflect on this journey, what surprised you the most about the path of building your own advisory firm?

Jeff: I think what surprised me the most, and it continues to surprise me, is just how many different ways there are to build a successful firm and that there is no manual of how to do it. It's the craziest thing. So there are so many different ideas. It's crazy the amount of...you go to a conference and you hear a few things, or even listening to your podcast and you get these ideas, there are so many different ideas and great things to do. There's not enough time to do them. So I think that's what made it incredibly fun, and for a person that fell into this industry, I went to school to be an investment banker, and I ended up being in this business, it's one of the best moves I've ever made. As I work, it's my hobby when I go to work every day, and it makes it completely enjoyable. So just the sheer different ways you can do it. And even when someone says, "Oh, yeah, you can't. You can't do it that way," you know what, someone will pop up on your podcast or I'll meet them at a conference, and they're doing it that way, and they're crushing it, right? So it's amazing to me, and it's very exciting.

The Low Point For Jeff On His Journey [1:24:29]

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

Jeff: Yeah. There was probably a few of them, but besides the average financial crisis of going down with the ship at Wachovia and that whole thing, I think that might have been the low point. But one that eclipsed that, and it was one thing that helped me that I learned and one of the reasons I actually left the wirehouse, was I used to have a junior partner that we came to an arrangement where he would call, he would set the appointments, I would do the appointments, close the business, etc., right? That was the model back then. And this person got a certain percentage, and that percentage increased over time, but their job didn't change. So, eventually, we were very successful at that, and we had a lot of clients, but now I'm managing all the clients, and he is getting a percentage of the business.

And when we started kind of talking about, "Well, hey, you need to start doing these various things", he, more or less, because it's a wirehouse and we have a split on the rev code, he said, "You know what, I don't want to do that anymore. I'm going to take my percentage and leave." And these were all my clients, 30% of my clients. And it was very easy. It was written in the contract, and I never thought it would happen. And, boy, did I learn a lot about partnerships at that point in time, and that is one of the reasons that we left the wirehouse so that I could provide next-gen equity but in a way that was structured around it with agreements and such.

Michael: So because he got paid the sourcing fee, he also essentially had a permanent right to get back 30% of the revenue of the client base that had been developed that way.

Jeff: Yep. Yep, that's how it works...at least that's how it did back then. If you have a joint rev code and one person wants to split, whatever the percentage is, that person gets to keep in perpetuity unless you come to some other arrangement. But that's what it was back then.

Michael: Okay. And I guess, if you can't decide how to carve up the 30% of clients and 70% of clients, branch managers get pulled in to help settle this.

Jeff: Yes, that's exactly what was going to happen if we didn't do it ourselves. We're cordial friends today, but I never...it just caught me out of the blue and never suspected anything like that could happen.

Michael: How do you think about partnership differently now?

Jeff: Now, when we left, there's operating agreements. There are things like that about you or the clients or the clients of the firm. It's not like you can take the client. If you leave, you can't take the clients. At least the partners cannot take the clients, without retribution and things like that. So all written into the document, which was ironclad, when we designed it. I wouldn't think that would ever happen again, but now we have legal documents, and back then, it was just a split number.

Michael: Okay. And particularly for partners, because it's one thing to try to do this with employment agreements. but the point that equity ownership changes hands, there's a lot more you can do in a partnership agreement than what you can do with an employment agreement in terms of being restrictive.

Jeff: Yeah. At least, back then, that was a long time ago, that was probably 2005, 2006, somewhere in there, that was a long time ago, but it was an expensive lesson to some degree. And technically, he was already...I kept the same amount of revenue that I had before. Actually, I got some clients that left with...he took but I think came back to work with me. So I actually ended up with a higher net income from the transaction, but it wasn't a low point in terms of financially. It was a low point in terms of understanding, "Wow, I really made a mistake that I can't come back from."

Advice To His Younger Self And To Newer Advisors [1:27:51]

Michael: So, what else do you know now you wish you could go back and tell you from 20+ years ago?

Jeff: I think, for me, telling myself, I would think big. I would think much bigger. Because my goal when I was an aspiring advisor of one person and half a sales assistant, as what we called them back in the day, if I can just get to $100 million under management and do my $100 million in production, I will be forever happy. I will have arrived. And now my goal is to be in the top 10 RIAs in the nation. So it's a far different goal. If I had started thinking bigger back then, I think I'd be further along today. Just listening to people that I hear on your podcast that have done this in a shorter time, I'm happy with what I've done, but I think if I would have just thought a little bit bigger, I could have gone a little bit further and I would have probably thought about things differently. There's a great book, 10X Is Easier Than 2X, or something like that by Benjamin Hardy, that type of thinking. It's that type of thinking I wish I had back then.

Michael: So, any other advice you'd give younger, newer advisors who are just getting started in the profession today?

Jeff: Yeah. I would say that, and I happen to...so San Diego State is a school that's near where I...it's my alma mater, and it's near where we're at. And I've had the luxury of speaking to students there in this field, and this is the advice that I give to them. I say, typically, there are 2 types of advisors out there. There's probably more than 2 types. But generally speaking, there's going to be two types. There's going to be the type of advisor that wants to build what I built or some version of that, that wants to build their own firm, that wants to... And as you know and from talking to folks all you do, that is not an easy journey in terms of building your own firm. And the success rate is actually not great. Starting out trying to build a book of clients when you don't know anybody at a young age, the failure rate, at least when I was younger, was 90% failure. But if you're ready for that, it's a great reward for you, and to try to find that out early.

The other path is the path that we've created for folks. Hey, you want to make a very, very good living, helping people. Help them change people's lives. You can do it on the other side too. It's a much stabler way to go. It's a different type of...in my opinion, a different start to the career and the different decisions you're going to make along the way. And the sooner that you can figure that out, I think the more successful you're going to be, and you're going to save yourself a lot of time.

And the second thing I would say is that don't underestimate the power of multiple years. Some people get frustrated when they're younger about it's not happening quick enough. Gosh. I remember those first 3 years were brutal for me. And it was different when you're building it on your own because it's scary at that point in time. But look where I am today. Look at where a lot of people are. Look at where Colin is today. He's gone pretty far in the amount of time that he's been working. So to have your eye on the long game and not focus so much about, "How much am I making today? What am I doing today?". Have your eye on the prize. And I think if you have that long-term vision, it's going to make all the difference in the world.

Michael: So, as we wrap up, this is a podcast about success, just one theme that comes up is that that word success means very different things to different people. And so you've had this incredible path of growth and north of $1 billion now. And so the business is in a wonderfully successful place. How do you define success for yourself at this point?

Jeff: Yeah. I think the key part to that is the last part, Michael. You said at this point. If you had asked me this even as far recently as 2015 or right around there, I would have defined success as it would have something to do with the business. That I live and breathe. I still live and breathe the business, but I lived and breathed in it, and my identity was tied to that. And I think, as I've sold a piece of the business along the way a few times, I've changed that perspective. It's not what I'm all about. I love doing it still. But really instead of listening to just financial advisor podcasts and business books and all that, I've really branched out into health, and wellness, and science, and a bunch of other things. And so I've really tried to diversify.

And I heard this quote and I'm going to steal this. It came from Ed Mylett. I'm going to give it a different version. But he came up with this, and when I heard it, I said, "That's what I want". He said that success is being introduced to the person that you could have become at the end of your life and knowing that person very well instead of looking at that person and being completely different than that person. So business would be part of it but also relationships, health, the things you experienced in life, all of that, trying to make the most of every single day, because, at this age, I'm having more people pass away, unfortunately, than going to weddings, like I was a number of years ago. So I think I really try to keep that perspective in things and I try to use that as my guiding compass these days.

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

Jeff: Michael, thank you so much for having me. It's been a great conversation. I've really enjoyed it.

Michael: Likewise. Likewise. Thank you.

Jeff: Thank you.