#FA Success Ep 317: From Individual To Partnership: Managing The Merger Transition From Solo Practices, With Jennifer Climo

Resources Featured In This Episode:

• Jennifer Climo
• Milestone Financial Planning
• NAPFA
• Bentley University
• New Planner Recruiting
• NaviPlan
• RightCapital
• Junxure / AdvisorEngine CRM
• AssetBook
• Orion

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

Full Transcript:

Michael: Welcome, Jennifer Climo, to the "Financial Advisor Success Podcast."

Jennifer: It's great to be here, Michael. I think I've listened to most of your 300 plus episodes, so this is quite an honor.

Michael: Oh, fantastic. I appreciate that. And I'm excited to have you join us for the episode today, and the opportunity to share some of your story that I think speaks to a phenomenon that I see happening a lot, particularly in the independent advisor channel these days. Which is advisors that go out on their own, we spent some number of years building the business. We get to a certain level of success in the business. But the burden and challenge in the independent channel, to me, always and forever has been just everything's on your shoulders. You got to pick everything, you got to decide everything. It all sits on you.

And you can get a little lonely. It can get a little isolating sometimes. And to some extent we try to find community in places like membership associations. But it's not quite the same as having someone else there leading the business with you, also known as a business partner. And I've seen this phenomenon in recent years where advisors who've been doing this for a long time decide that, "I've been fine for maybe 10 plus years in running my own business. But I've decided that I'd like to do this with a business partner now. I'd like to merge, I'd like to work with someone else." Sometimes it's kind of driven by succession and sort of eyeing an exit plan in the future.

But a lot of the time it's...I view it as more fundamental than that. It's just I would just like another person around that I can sort of share this journey with, and share these burdens and decisions with, and maybe find someone who has some strengths in my weaknesses, and I've got strengths in their weaknesses, and we can be complementary. And the whole is worth more than the sum of the parts. But there's this urge to merge that I'm seeing cropping up more lately, and I know this is a journey that you have been down yourself over the past several years.

And so I'm just really curious and excited for more of the discussion of how you came to this decision that said, "I've been a solo for a long time, but I'm ready to not be a solo anymore. I would like to not be a solo anymore." And then how that transition happens. What leads you to say, "It's no longer time for me to run my solo practice anymore."

How Jennifer Found A Merger Opportunity Through Her NAPFA Study Group [06:10]

Jennifer: Well, for us, for me, I wish it was that conscious of a decision. In my particular case, it was a little bit different. I had been working as a solo since 2003, and we're pushing 2015. And in the interim, as many solos do, we had a little group of us that would meet to discuss practice management. We all ran our own practices. Mine was the only one that had employees. My other cohorts thought I was crazy to have employees. I thought they were crazy not to. But we would all get together once a month or so, and chat about different practice management issues.

And so, we got to be good friends. We did that for about, I want to say 9 or 10 years. And then one day, and I'll never forget it, I got an email from a member of the group. One of our members had merged her practice, because she was a little bit older, about 19 years older than me, and she had merged her practice in with a younger advisor in 2008 as a succession plan. She had about 20 clients, he had about 80. And he suddenly passed in his sleep. He passed away.

Michael: Oh, my gosh.

Jennifer: And the email from one of the members of the group is, "Oh, my goodness, so-and-so died. And can you believe it?" And now Jean has suddenly 100 clients and has to call the SEC because they were SEC registered, and report that. And we were all horrified. And everybody in the industry, I have to say, it's a really tight knit group up here in New Hampshire. New Hampshire isn't very big. There aren't a ton of NAPFA advisors, but they all support each other. People were sending their professional staff down to help Jean out to look at clients, to try to figure out...I mean, imagine just being gone. So, you have no to-do list. Your to-do list is never done, right? So, there's some to-do list somewhere. Plus, you got to get a handle on the clients. And they really ran their practice more like eat what you kill, not necessarily as a combined practice. Some things were combined, but...

Michael: Meaning that Jean had 20 clients, and her partner had 80, but they were in even that overlapping and engaged with the clients. So, a lot of these people were basically strangers to Jean individually, but now they're your clients.

Jennifer: Yes. And now he'd mentioned her to them, most of them, which is fine, but they were very different personalities too. And they did planning differently. It was just a shock. So, very quickly, within a couple of weeks after he passed, I went up and said, "Hey, let's just have lunch," because they didn't have employees either. But again, I did. And so, I said, "I think I have these systems in place, and I've really been wanting to grow. And I've been contemplating hiring another CFP. But I kind of think I'm pretty good with this business stuff. I think I can handle the business stuff. If you can just keep these clients from leaving, I can do everything else, and have us merged in a couple of months. And then we can create a new business to move forward." And that's what we did. Three and a half months later, we were legally merged.

Michael: I have so many questions about this. So, first, just the group that you had that was coming together, I think you said there was a group of you, you met on a monthly basis. So, just where did the group come from? How did you actually find a group for yourself? Because for some advisors I know, they're very lonely solos, and they literally can't find a group, or they don't know where to look.

Jennifer: Right. And this is hard for me particularly, because I am an introvert. And so, I get exhausted when I go out and hang around a lot of people. But this is back in the early 2000s. I didn't have children. I was super interested in starting and growing this practice. So, I'm the type of person that needs to binge learn. I'm always binge learning something. And the topic was financial planning at the time. And so, I had gone back to Bentley to get my master's in financial planning. And there I met some folks, and knew them. And so, I'd go to conferences and FPA stuff.

And then the big thing was after I joined NAPFA, and then we had an annual conference, I think it was in Chicago every year, and I would go to that. And there's a little airport in Manchester, New Hampshire, because I lived in Massachusetts, right on the New Hampshire border, tiny little airport. But we all took the flight from Manchester to Chicago. And on that flight were, unbeknownst to me, a whole bunch of advisors. And I was seated next to Jean. So, Jean and I started talking and we really hit it off. And just chatted about all things nerdy financial planning the whole way.

Michael: So, you met your...are all your study group mates New Hampshire NAPFA advisors, is this specifically like a local geography thing?

Jennifer: It kind of is. So, we are on Southern New Hampshire and Northern Massachusetts. So, I lived in Massachusetts at the time, but on the tip, sort of. So, us Northern Massachusetts folks would connect with the Manchester folks and New Hampshire folks to go to these conferences.

Michael: Because you're all coming together to fly out of the Manchester airport, because, really, who wants to go down to Logan in Boston? That's just such a hassle.

Jennifer: Exactly. That's exactly it. Correct.

Michael: So, I'm struck by this as well, that a lot of study groups that I know that advisors form, they make them fairly geographically dispersed, often sort of by intention. That way, we're not too close to each other, that we're in each other's backyard either for clients, or even for team members sometimes. So, I guess I'm struck that your study group was very geographically local because many, I find, are consciously the opposite.

Jennifer: We didn't worry about competition, actually. And this was before really video was a thing. So, it would have been hard to do it distant. And we would get together for lunch, actually, in person. It was supposed to be once a month. It never was, as people get busy, and tax season happens, and whatever. And sometimes years would go by. But we always communicated by email or phone and would chat about different things. And occasionally, someone would say, "Hey, I met this person. They'd be a great addition to our group." And so, we would add another advisor that way. But it never got beyond four people. And often...

Michael: I was going to ask how big was it? So, four people. So, this is just a handful of folks. This isn't like a room full of 12 to 15.

Jennifer: Right. And also, everybody had different goals. So, I was solving for something different than they were, which is why I had employees. I always wanted to create a practice beyond me. That's why it's not my name, right? So, I wanted to grow something that someday could have other owners, have employees. I just didn't know what it was going to look like. And they were solving for just lifestyle practices, which is fine, but it's just a different goal.

Michael: So, you have this study group. Jean's one of the fellow advisors because she's in the study group as well. So, that's the connection to know her, and know what's going on, as she hits this crisis moment for herself in 2015. So, I'm curious, I realized this is projecting through Jean's world and not yours. But I'm just struck by this conversation that Jean had merged with this advisor in 2008. They were merged for 7 years until 2015 when he sadly passed. But it was still eat what you kill. It sounds like there weren't necessarily a lot of common shared systems, there weren't shared clients. So, what was this merger partnership she had? What did it mean to be like a merged practice if they were still basically running two separate practices?

Jennifer: Well, it was the administrative and the compliance and everything that was shared, I think. And I think the idea was that so Jean could slowly ramp down her hours, and the other advisor would take over her clients. And I think that was the whole point, is that she was in her 60s, and wanted to slow down, and just methodically work her way... She never wanted to have a bazillion clients and work a bazillion hours. That just wasn't her goal. And so, that's where that was.

And unfortunately, they had this operating agreement, of course, because it was an LLC, that specified what happened if somebody passed. But unfortunately, it was a little bit one way because you don't expect the...I mean, he must have been 35 when they merged. You don't expect that person to be the one that passes. Right? So, there were a lot of challenges with that. When we get to the what are the greatest challenges, that whole merger was, there's a lot of weeds we could get into on that.

Michael: Yeah. I am actually curious to go more into those in a moment, but I just wanted to make sure I understood the context. So, from Jean's end, I guess this was, "I'm older, this gentleman is younger. I'm probably going to retire out at some point in the coming years, coming decade, or so. So, let's merge together. We can share some overhead compliance costs, and software costs, and office space, and the like. Over time, you'll be able to take over my clients. Eventually, I'll retire out. No one's in any great hurry here, but we all kind of know where it's going."

Jennifer: Yes.

Michael: That was the structure. And then he unexpectedly passed away. The successor passed away.

Jennifer: That's correct. The successor passed away.

Michael: And now, suddenly, Jean has her clients and all of his, and is drowning.

Jennifer: Right. A hundred clients for one person that's used to just coming in a few hours, working on their own stuff, it was a lot.

How Jennifer Handled The Logistics Of Merging Practices [16:06]

Michael: Yeah, that sounds fairly awful. And so, I guess I'm wondering as well, was there a buy-sell agreement or something other binding in place? Did Jean have to take these clients? Was it possible to say like, "Well, I guess this..." Very sad, like, "I guess this partnership hasn't worked out since the person has passed away. I don't have capacity to do this. So, we're just going to let these clients go off to wherever they're going to go off to."

Jennifer: That was an option at the time. I mean, she didn't have a lot of options. There were no good ones, for sure. But from my perspective, I was smaller, so I had maybe [$]50 million under the management. They had about [$]120 million. And to me, AUM shouldn't really be the discussion. It's always what is the revenue, right? And so, my revenue was like...I want to say [$]490,000, just under 500,000, and theirs was maybe 600,000-something. So, it wasn't that far off from a revenue perspective. And so, what I said is, "Hey, let's merge. I have the employees and the systems. I'll do all of the work. And if you guys...you just keep the clients from leaving."

And so, then that gave purpose. Something she's very good at and very comfortable with is dealing with clients and doing planning. And something I'm very good at and very comfortable with, which is running a business, and then doing my own client stuff. And that's how we moved it forward.

Michael: So, I guess what were the respective staff infrastructures in place just to be able to handle this? What staff or support did they have for their 600,000-ish of revenue for their clients? And then what staff did you have in place, I guess both for your revenue, and the fact that all of a sudden you have to support Jean and her revenue? What did the rest of the business look like?

Jennifer: They had no employees. I was the only one with employees. I've always had an admin...back then, it was really administrative assistant type of a role, full time. And then, since 2004, a year after I started. And then I also had a part time sort of paraplanner but not trained as a paraplanner, really was helping me with some bookkeeping on the CPA side, because I have another business. I always had two businesses. One is a CPA tax practice, and the other was Milestone. And the tax practice used to be way bigger. And then slowly as I grew Milestone, Milestone eclipsed it and became bigger, and now the tax practice is a tiny piece of Milestone in comparison.

So, I had one and a half FTEs of employees. And what I said is, "I'll tell my half time person they need to go full time, and that will be the capacity to start us off." And so, that's where we started. And I want to say, so we were fully merged by February 1st, 2016, legally. And then a couple of months after that, we quickly decided, I said, "Look, I think we need to hire another CFP to help us out." And that's when we used new planner recruiting actually to find John, my current partner.

Michael: So, how does this deal come together? I mean, even like mechanically, how does this work? I mean, you had an LLC. They had an LLC.

Jennifer: Worse. I had an S Corp. I had a Massachusetts S Corp, and they had a New Hampshire LLC. And I'm very picky with...because I'm a CPA also, so I'm kind of picky about the advice that we get. So, we had to find an attorney that was well versed in tax law as well as the legal stuff to be able to figure out how to merge us in a way that wouldn't kill us on taxes, as well as with the actual mergers of inc. into LLC. And we found a fantastic attorney in Manchester, a larger firm who helped us out and structured the merger, the new operating agreement. Did all of that stuff so that we could move on. But we did it as a 50-50 split.

Michael: So, not to get too in the weeds, but just how did it work? Was this an asset sale? Was this a stock sale? Did money change hands, or did you just kind of...everybody puts in their respective clients, and revenue, and we call it 50-50?

Jennifer: So, no money changed hands other than Jean had to buy out the widow. So, an LLC was worth something in the estate, right? So, there was some sort of negotiation there. So, there were lots of attorneys involved. So, there was a separate attorney...

Michael: So, Jean had to buy out her deceased partner for the share of the business, which I guess it sounds like there wasn't necessarily a buy-sell setup in that direction, because he wasn't presumed to be the one who would pass away first.

Jennifer: Correct.

Michael: But the LLC entity still has value. So, you still have to find some way to value, and buy out deceased partner's share for whatever the value of...there is revenue, but there's no one around to manage the clients. But we want to retain the clients.

Jennifer: Actually, and Jean did a fantastic job negotiating this with her attorney, because she's like, "Well, I think the revenue is X, and realistically, I'm not going to be able to keep all the clients because I'm not him." It's a lot easier when you have a nice transition of clients. But when you have...hard to replicate somebody who's a completely different personality. If you have a client that wants a male advisor, can't change that. So, she did a great job negotiating that, whatever it was. So, she had that buyout. And then right after that, we did our merger, and no money changed hands, but we became our new entity.

And that amount was then amortized on the business, the buyout became...so the debt that she had to purchase that business became debt of the entity. And they merged it such as...it was a very complicated merger. So, it was not an asset sale. And because it was an S Corp versus an LLC also made it more complex.

Michael: And so, you really get into the minutia of specific New Hampshire and Massachusetts state law of what entities can blend with what, what can convert into what, what structures are permitted as you engage in this merger transaction.

Jennifer: Right. And that's why it was very important to me to have an excellent attorney involved in that.

Michael: So, how did you decide on just the split, 50-50?

Jennifer: Well, it's from the very beginning when I went up there in November, right after he'd passed, I'd said, "I have this sort of sketch of an idea of how this could work, but I have very few non-negotiables, but I do have a couple." And so, one of my non-negotiables was that it was 50-50. "I'll only do this if it's 50-50. It's going to be a ton of work for me. But I think I can really help us and grow this. And this could be a great thing for the future." And we both had a lot in common. So, we both custody to TD Ameritrade. We both used TFA. We were both members of NAPFA. We had the same investment philosophy that is crucial for a merger.

And I already knew we got along. We got along really well. And since we've known each other for 10 years, she knew all the bad parts about me. Right? So, that wasn't going to be a surprise that I've got this strong personality. And sometimes I say things that come across poorly. She already knew all that. So, like you said, it's exactly like a marriage when you get into a business partnership.

Michael: So, the 50-50 sort of acknowledgment of framing was, strictly speaking, their practice had a little bit more revenue than yours. A lot more by AUM, a little bit more by revenue. But they're in transition. Who knows how many clients are going to stay? "You need my support in order for them to stay. I'm going to do the work to actually make this merger happen. This is what I need it to be to make it work." And I guess from Jean's end, the risk that the whole thing falls apart because she doesn't want to do 100 clients solo after having done 20 for a long time. And that was a good deal for her too.

Jennifer: Yes. I think, in the end, it was a good deal for both of us. But on my end, it was definitely sweat equity is what I put into it.

Michael: So, you get through the merger in a couple of months of legal wrangling. The dust settles. So, I guess at that point, it's early 2016, suddenly now you're about 170 million of assets, $1.1 million of revenue. You and Jean and two other full-time employees. How many clients was it?

Jennifer: A hundred.

Michael: I guess she had 100. How many did you have at this point?

Jennifer: Oh, actually, I'm sorry, 180. You're right, because I had about 80.

Michael: So, you're serving about 180 clients as well, or I guess between the two of you.

Jennifer: Yes.

Michael: I think of that just sort of classically. That's a pretty good, healthy just advisory practice overall. Two advisors, two support, 180 clients, $1.1 million of revenue. When I think about that from a business metrics end, it's about $275,000 of revenue per employee, which is a pretty good metric for advisory firm. You've got 90 clients across 2 advisors to get to 180 total. When I think about that, those are really healthy practice metrics, but that's a business at capacity. You don't have a lot of room to grow. You can service that, but there's not much room to grow, which I guess takes you to so you needed to...so once the dust settles, "We made it, now we have no capacity to grow. We need to go hire an advisor."

Jennifer: That's exactly correct. Yes. And remember that. Remember, because we merged so quickly, there was no time for due diligence. So, the other thing we had to do, we had to merge performance reporting systems, and we had to merge CRMs, and all of our systems. We had to come up with, what do you use for financial planning software? I was using NaviPlan at the time, but we both realized that was super time intensive and not ideal. And she was looking at this, "Hey, there's this great new system called RightCapital. Let's look into that." So, we were doing all of that at the same time.

Michael: So, what did you end up picking as your systems of choice when you had to go through this transition? What were you using? And then what did you end out with if it was different?

Jennifer: Sure. So, I had Junxure Desktop at the time, which I had purchased in 2008, and they didn't really use a CRM at all. So, there really wasn't one, especially because I didn't have employees. There wasn't workflows or anything like that. And I had very loose workflows. So, what we did is we decided to go to Junxure Cloud. And so, shortly after we hired John, I want to say this coincided with when we hired John. That's one of the things he helped us do, is go up to the Cloud and make that work, because obviously Cloud is very different than Desktop. So, we started with that.

Then our investment management software, I believe I was using Morningstar at the time. And we did our own reconciliations at the time. I can't believe it now. But one of my employees did. And then she was using AssetBook, I think. And we had to merge both of those systems, and we didn't want to go to either. We couldn't agree. We agreed that we didn't want to stay with either of those solutions for various reasons. And she said, "Oh, well, Bill was looking at Orion before he passed. Let's look at Orion." So, we had Orion come in, and they did a presentation to us, and we were like, "Oh, my goodness, this is amazing." We couldn't believe what software can do. I was like, "That is amazing."

Michael: After you've been doing your own manual download and reconciliation. I remember from my early portfolio center days as well of doing manual downloads and reconciliation. So, yeah, "Wait, the software just does it once centrally, and then my numbers are just right every morning? That's amazing."

Jennifer: Right? It was amazing. But it was obviously going to be a lot of work, and it was very expensive. And it was big contract. So, there's a lot of leap of faiths here. "Let's sign on the dotted line and merge our entire futures into this business after only thinking about it for, I don't know, couple of days, a week, whatever. And let's sign our life away a year later and    sign this huge contract with Orion." Of course, I think, they make you sign a three-year contract, so hope we like it.

Michael: So, you end out with Orion, Junxure Cloud. And then did you pick RightCapital as the planning software?

Jennifer: I think that came a little bit later, and we just muddled through with whatever we had. But then I can't remember if I was still using...I think we were still using NaviPlan. But NaviPlan was just so slow and clunky. I hated it. Took too long to do anything. And then once Jean showed me RightCapital, I thought, "This is amazing. It doesn't take nearly as much time to put a plan together. It's very interactive." The clients loved it. I think it came a little bit later, but a couple of years later, when we hired another advisor, I think he spent his first year...he must have done 100 plans. He did a plan for almost everybody in the company where it was appropriate.

How Jennifer Retained Clients And Updated Fee Schedules During Her First Merger [29:36]

Michael: So, you've got through the merger. And I guess it sounds like Jean managed to retain substantively all of the clients through this.

Jennifer: Actually, no. We lost a lot along the way, but it was more of a slow dribble. If it were. So, first of all, there were a few that we couldn't keep because it didn't make sense. With that many clients, you have to graduate the ones that you can. So, we had to graduate some of those, and she had all those difficult conversations. And then there was some other clients that just left. And then for the next, I don't know, five years, four years, or however long it's been, it was a slow dribble. But it's basically stopped. But if you look today, I think we've only got about 40% of those clients are still clients today.

Michael: Okay, interesting. I guess I'm struck by that relative to...at least what I think of as a lot of the fears for advisors just going through those kinds of transitions that, "Something's going to happen. All our clients are just going to vanish and scatter." It sounds like, while some did drift away, and some just you don't want to retain and fight for, like, "I was looking for an excuse to fire that client anyways. So, we'll just not send them the paperwork to transition." That it wasn't an exodus. It was a slow transition of clients shifting as you work through this.

Jennifer: Right. Which, of course, gave us the time to build up the revenue, because we were always continually growing, and adding clients, just sort of as we've always done, slow and steady.

Michael: And so, in that transition though, did you still have to re-paper advisory agreements when you did the merger? Was there still a round of you had to get everybody who was going to come to at least sign once?

Jennifer: Actually, every single client had to. I was forgetting that. I think I had blocked that out because it was so awful.

Michael: We all block out re-papering. No one ever wants to remember re-papering experiences.

Jennifer: So, we had to have...all of the clients had to sign a new contract, all 180. And I think all of my clients, because her firm was the surviving firm because legally, that's what made sense. So, even though my firm was Milestone Inc, her firm, which was Bill's initials, WJM Financial LLC, was a survivor, but we changed the name to Milestone Financial Planning LLC. And so, all of my clients had to sign some sort of paperwork with the custodian to integrate over. But her clients didn't.

Michael: But since her...so I guess that's an interesting angle, because her entity ended up being the one that remained, her clients didn't have to re-paper to a new advisory agreement, and sign anything because they actually stayed with the entity they were with. They just got notified of a name change on the entity.

Jennifer: Well, they had to sign a new contract because of the merger. They did not have to sign new paperwork with the custodian.

Michael: Okay. So, there was still a new advisory agreement, but you didn't have to open new accounts.

Jennifer: Correct.

Michael: Okay. And so, how did it go just putting out advisory agreement? And thinking on her end, were her clients struggling with this already, with Bill's death, or is there a version of this that's just like, "We don't really know what's going on. Jean seems fine. We'll sign this." And then a year or two later, they decided they didn't actually want to stay, and left?

Jennifer: Well, as you know, it's very difficult to clients to do things of their own volition.

Michael: It's actually paperwork that does not particularly help them, we just need it for us. Yeah.

Jennifer: Right. But obviously, they knew he had passed, and everybody was, of course, totally, very sad and upset. And it was very traumatizing for a lot of these clients, because they were very close to him. Then she would just put out something saying, "Okay, here's what's happening, and here's next thing that's happening." So, they knew what had to happen. So, most of the vast majority of them signed. But we were sweating the last ones towards the end. And then all of mine had to sign. And mine were harder somewhat because I had one person say to me, "Well, I don't want to sign this contract. Just because you know this person doesn't mean I know this person. I might not want to have them be part of the business."

Michael: Oh, interesting. So, you had clients that were like, "Well, Jennifer, I know you vetted Jean, but I haven't vetted Jean. So, how do I know I want your new partner in my advisory relationship?" It's kind of fascinatingly presumptuous, yet productive of the client.

Jennifer: Well, it was interesting because I would say 90% of my clients said, "That's fantastic. You're merging and growing. We love being on this journey with you." And that's how it's always been. They've always been very supportive, but there's always that 10% that are more like, "Oh, no, it really should be all about me."

Michael: So, how do you talk through that concern? What do you do in that moment?

Jennifer: I just said, "Well, I have to have the contract or we can't move forward. It is what it is." They finally signed.

Michael: So, you just really didn't give them much of a choice.

Jennifer: I couldn't, there was no choice. There was no choice. Without the contracts, we couldn't bill. There's a lot of things with billing, because I billed in advance, and she billed in arrears. So, I had to go an entire quarter with no billing. So, it was very stressful.

Michael: Oh, interesting. So, your resolution was because you bill in advance and she billed in arrears, you were going to consolidate to her world of billing in arrears, which means you had to go a cycle of no billing?

Jennifer: Right. So, when you merge with somebody, there's a whole lot of weeds. And that was not one of my non-negotiables. So, when she said, "But you bill in advance, and I bill in arrears," I said, "That's just a detail. We'll figure it out." And then when it got time to figure it out, I said, "Well, I feel like this." She said, "I feel like that." She felt stronger than I did. And I said, "Fine. We'll bill in arrears."

Michael: So, what was the...I mean, just sort of nontrivial amount of pain, particularly when you have staff and payroll to not do revenue for a quarter to get synced up. So, what was the case for arrears versus advance, I guess, that Jean felt so strongly about that you were up for acquiescing to this and doing this transition?

Jennifer: I think she just felt it was better for the clients. And I agreed. I said it's fine. It doesn't matter. Because it's also easier when somebody leaves, you have to bill them instead of refunding them, but you don't have that risk of not refunding them at the appropriate time, and the appropriate amount. So, it was fine. They didn't care.

Michael: Okay. So, just from the client termination end, if I bill in advance and the client leaves mid-quarter, I need to refund the unearned portion of fees for the quarter, and I have to make sure I mark that and calculate that very accurately, because that's the kind of thing regulators love to do the math, and make sure that you did the math correctly. When you bill in arrears, at worst, you have to go back and figure out how much of the quarter you should have billed for. And you still have to do that calculation correctly, but it doesn't get nearly as much regulatory scrutiny because you're not actually sitting on the clients' fees that you haven't earned. You just have to bill appropriately for your partial quarter services while they're on the way out the door.

Jennifer: Right. Or you can choose to waive it depending.

Michael: So, was there anything else you did to just handle this transition from billing in advance to billing in arrears, and just kind of punting on a quarter's worth of revenue?

Jennifer: I think we didn't take payroll for a couple payrolls. But we always knew there was light at the end of the tunnel. We just needed to get through this difficult marriage period. Like I said, there were a ton of challenges with the merger, but once we got through it, it was all blue skies and bright times ahead. Not really, but it seemed that way.

Michael: So, what else were...I guess I'm just curious, any other big speed bumps that cropped up in this merger integration process for you?

Jennifer: Well, picture this. So, we're in the office. So, whose office do I have? I have Bill's. I have to clean out his desk. I have to go through his computer. I have to go through emails. Every time a client came in for the next two years, because they don't come in that often, it was like the death was fresh to them again. "And who is this person?" Not that I was...

Michael: Because you're literally now...you're in their old office space. And you may be meeting with clients in Bill's office, which, for them, is the first time they've been in the office when it wasn't Bill.

Jennifer: Right. So, it was difficult for all of us, just the logistics of that. Having somebody die unexpectedly is terrible for everybody on so many reasons, but it's just being an advisor was very challenging.

Michael: So, I'm struck as well that...I mean, you had commented earlier just from the pure business end, it's not about the AUM, it's about the revenue. So, their practice was higher by AUM, [$]120 million versus [$]50 million, but only slightly higher by revenue at about [$]600,000 versus almost [$]500,000 of revenue. But I guess I'm wondering just does that mean there were other opportunities in the existing client base from Jean and from Bill? I mean, just when revenue was that low relative to assets, is that because there's one mega client that was just getting billed lower, or is that because there were a bunch of clients that probably should have just had more robust fee schedules that maybe needed to be fixed? Were there opportunities to "fix" billing and fee schedules to try to lift the revenue up for the clients that stayed? Was that part of the opportunity here?

Jennifer: Now, when we had to do a sudden merger that had no...it was through no fault of the clients, we were not able to really do a giant fee increase. So, we had to merge our fee schedules, which we did, and that took a lot of work to come up with a structure that worked for both of our clients. And as you can tell, they had a lot of fee schedules that were abnormally low. So, some of them were adjusted at that time to fit into the new fee structure. But a lot of them, especially because he had a lot of large clients, and we needed those to stay, so we didn't feel like we could whack them with a giant fee increase.

So, we tried to grandfather them in at lower contracts. So, at that time, there really wasn't a lot of flexibility in the fee structure. But I always knew that we were going to need to do that. I mean, one of the challenges I see with a lot of advisors is they like to do the advising and working with clients, and they're not great at the business running. And part of the running the business is coming up with a fee structure that works, and that can support your business to grow, and pay for staff, etc., going forward. And so, over time, we slowly were able to adjust some of the contracts, basically because I would keep hammering on it. "This person needs to be adjusted," etc.

But a large adjustment, we didn't do until just this year. We restructured our fee schedule again, and we moved pretty much all of our clients into a new structure that makes a lot more sense to bring up our average billing rate per AUM. That's always a statistic that I would love to hear people quote on your podcast. I always wonder, "What is the revenue per AUM?"

Michael: What do you mean? So, meaning fee schedule billing rates?

Jennifer: Right. Well, overall, if you take your total, you literally take your total revenue and you divide it by your AUM. And I track this. So, I track this daily now, so I can see the trend because we, of course, made...we had another acquisition last year. I mean ours, as you can see, ours was really low from the beginning, from our formation in 2016. And my task as CEO has been trying to increase that over time. And so, now that was, I want to say, 60 basis points back then. And now, I've got it up to 74. So, I'm pretty proud of that. But that was a lot of work this year's project.

Michael: I was going to say, you were a million to [$]1.1 million of revenue getting in the merger on almost [$]170 million of assets. So, yeah, like 60-ish BPs. And you said, now you're at 74.

Jennifer: Correct.

Michael: It is worth noting in that regard, as much as advisory firms talk about the proverbial 1% AUM fee, and we do see that in the data, the median fee on a $1 million client is 1%, and it has been for 20 years. It basically has not moved one iota for a long, long time. But we have graduated fee schedules. A lot of firms have at least a handful of clients that are larger at much lower fee schedules because of the break points. Sometimes firms have couple of 401(k) plans and other things in there that often have lower rates. And so, if you look at the industry benchmarking studies, which the label they use for this is revenue yield, which is just, as you said, total revenue divided into total assets. Most advisory firms, the actual revenue yield is typically 70 to 80 basis points.

Jennifer: Right.

Michael: That's where it tends to come in by the time you get to the discounts, the big clients, the accommodation clients, all the exceptions that crop up out there.

Jennifer: And in our case, we have a lot of big clients. So, currently, today we've got [$]360 million and 225 clients. So, we have a number of clients that are on tiered fee schedules. But our main fee schedule, the first million is that 1% that's our fee schedule.

Michael: So, in the context of these fee changes, I guess I'm wondering what changes you did make to the fee schedule? I guess both initially, what did you have to change and adjust just to make the merger a fee schedules happen? And then I'm also curious to hear what came in the second-round fee schedule change that you did more recently. But in the merger, what were the fee schedule merge issues in practice as you were trying to do this?

Jennifer: So many. So, mine, I used to do billing on the end of the quarter based on that exact number. That was the billing. And it wasn't a tiered schedule. I think it was 1% over a certain amount, or...I think I also had 1.5% on small accounts. I forget, but it was basically on that exact number at the end of the quarter versus...

Michael: So, single quarter end balance, just snapshot on the date. Okay.

Jennifer: Snapshot on the date. But with Orion, we were able to do average daily balance billing, which I love because you can explain it to a client very well. Whatever happens to your account during the quarter is where our fee is going to be based out of. So, if things go poorly, our fee goes down. Things do well, our fee goes up. Life is good. We're on the same boat.

Michael: And I guess just the appeal for you, it just literally makes you a little bit less sensitive to whatever the darn market happens to do on the last day or two of the quarter. That can materially alter your fee billing.

Jennifer: Right. And she had to merge her clients into...we created these different...our base fee structure, I think, was a little low. It was 1% on the first million, and 0.8% on the next million. But in practicality, if we were bringing in a $2 million client, we'd bring them in at 0.8% on the first million. And then we had different discounts. So, a really large client, we set them up so they weren't getting a huge fee increase. We might start them at 0.7%. And then another client, well, for some reason, we didn't want them to leave, so we started them at 0.6%. These aren't small clients. These are all, in general, clients that are in the millions.

Michael: So, it sounds like, functionally, there were two issues. There was how do you merge your standard fee schedule with Jean's standard fee schedule? And then the second was, "How are we handling the nontrivial list of exception clients that everyone's had over the years? And line by line, client by client, are we going to grandfather this person? Are we going to try to move them to the new fee schedule?" And you had to slog through those one by one as well?

Jennifer: Right. And we were stuck with the lower fee schedules because it's not like we could say, "Oh, look, we're providing you all this value. Let's up your fee to 1.5%. When your primary advisor has passed away, and you don't know us from a hole in the wall." We couldn't do that, so we had to keep them.

Michael: It's not like you're going to them and saying, "Because of all the value we provided over the past several years, we've determined that a more appropriate fee to fully recognize the value of the service we're providing to you is blank." This is more like, "Your advisor died. We're trying to make sure we take care of you." Not the best time to say, "Oh, and by the way, we're going to charge you a lot more than Bill, the person you liked, who's gone."

Jennifer: Exactly. And we did...now I like to think that we've rectified that now with our current fee structure. But we moved everybody up. We still have some. We didn't want to move people up more than a certain percentage, big percentage. But still, I didn't want to have everyone moving up by 50% or anything. So, there are still some fee schedules that are slightly lower.

Michael: So, what changed this year? What is the adjustments or updates that you made to the fee schedule now to try to rectify this?

Jennifer: Well, this year, what changed is at the end of last year, we acquired another member of my original NAPFA study group. She was a solo advisor, and we acquired her December 31st. And she custodied with Fidelity. And all of last year, we were talking about preparing for the merger, and talking about it, and this is how it would work, and whatnot. And at the same time, as you know, TD Ameritrade got bought by Schwab. So, the customer service we've been experiencing at TD Ameritrade was terrible, and we went and do due diligence on, "Okay, let's look at custodians. Is there something better out there?" And then here's Kathy saying, "Oh, Fidelity's fantastic. Look at what I can do." Showing us... And we'd say, at the end of the year, it took two weeks to get a in kind Roth conversion done at Ameritrade.

And in fact, they told me it couldn't be done. And she said, "Oh, look here, I hit a button and it's done instantly. See, it's in the client account." I said, "Oh, my God, I want that." That was just a small example. Obviously, it was a much larger decision. And I wasn't even on the committee that made it. But we had a subcommittee, investment committee that made the decision to switch custodians. And when you switch custodians, everybody has to sign a new contract. So, I said when we determined this spring that everybody was going to have to sign a new contract, I'm like, "Well, if they're signing a new contract anyway, we're doing a fee increase."

Michael: If you're going to queue up paperwork to every single client in the book, you may as well include another page.

Jennifer: Right. So, then I did everyone...so, my partners weren't on board. I mean, they understood fee increase. They understood why, but they were lukewarm towards it. But then I said, "Look, I'll go first." So, in May, I do...it was the first year I done all my cluster meetings. So, I clustered all my meetings together for four weeks in May and met with the vast majority of my clients. And explained what was happening, why we were changing custodians, why Fidelity was better. "And oh, by the way, we're also adjusting your fee, and here's how that's going to work." And went through their quarterly report and explained it all. And I had no pushback, none whatsoever, which was amazing. And so, as everybody else saw me doing this, not getting pushback, they're like, "Huh."

Michael: So, what was the fee...what was it and what did it become? What change were you making in practice?

Jennifer: It was different for every client, but basically, we were changing the middle tiers. So, whereas the second tier might have been at 0.6% for some clients, we moved that up to 0.8%. I think we might have had...the old schedule was the second...second million was at maybe 0.6%. And then the next million was at 0.4%. And we made a fee schedule so that first million is 1%. The next 2 million is 0.8%. The next 3 million is 0.6%. So, we adjusted it on the tier level, but it made a big difference. And we also calculated for every single client, I had this giant spreadsheet with every client on it, what the actual percent of their fee change was going to be. And then it would come out to like 25%, 30%. I'm like, "All right, that's good. I feel that's a healthy fee increase for this year. Gives us a room maybe we can do more in a future year, but it's not overbearing." Again, I really wanted to stay away. I didn't want to do a 50% fee increase for folks.

Michael: I mean, 25% to still put it mildly, that's not a trivial fee increase, although I guess relative to...if you're talking about this in the context of clients that are in your middle tier, is I guess by definition....there's already a few million dollars on the table here in the first place. So, presuming that means when we talk about 25% fee increases, this means the client who is getting billed $20,000 for a multi-million-dollar account goes to $25,000...

Jennifer: Correct.

Michael: ...for a multi-million-dollar account. They do have the financial wherewithal to pay this. This is not a fee increase for people who can barely afford the fee.

Jennifer: And the clients understood, or at least my expectation is that they understood what was happening here because we're growing, they see us hiring new staff, we're adding more services, doing more in-depth planning. I mean, they've seen RightCapital came out. Over the years we did that, and we do detailed tax planning. So, there's a lot of depth there. I mean, we do a lot for our clients.

Michael: And so, in practice, how do you, sitting down across from a client, explain and justify a 25% fee increase?

Jennifer: Well, it was helpful that we were also changing custodians because I was able to explain that and everything together. People just sort of associated, "Oh, this is a whole big change and it all goes together." Even though they were two separate things. Mostly I just said, "And your fee is changing from this to that." And the clients that I didn't meet with, I would do it by email, and I'd say, "Oh, and we are sending you a new contract, and there is a new fee schedule." And they said, "Well, what is the old fee and what is the new fee?" And I sent them the exact calculation from my spreadsheet, all the information, and let it lie. I said, "It is what it is." I didn't try to hide it. I didn't try to sugarcoat it. I just said, "Here's the old fee calc, here's the new fee calc." Emailed it off, and then they said, "Okay, we understand that you're trying to grow. And we want Milestone to be there for us for a very long time." So, actually, I didn't have any pushback.

Michael: Did you get any defections?

Jennifer: No, I didn't. I think some of the other... So, remember, my clients have always been with me. Whereas some of the other clients, we call them Bill clients, or they're the former Bill clients because some of those, we got some pushback. Because remember, advisors taking them over, these weren't advisors that the clients chose. Right? So, you can build a relationship with people, a new relationship, but that takes time. And some of the clients aren't local, so it's a lot harder. Or they're the kind that are non-responsive. So, you can't build a relationship with somebody that won't meet with you or talk to you. And so, some of those fell away, but very few.

Michael: And I guess, again, it's worth noting in context, as you said earlier, your revenue yield was at 60 basis points, and it went to 74 basis points. So, it's not as though we're in the context of and now everybody...and now all the clients are paying 1.25% or 1.5%. And we're trying to rationalize a "premium fee" relative to typical quote that they're given. A lot of these were clients, at the end of the day, had gotten aggressive break point favors that you were just dialing back slightly.

Jennifer: Right. And it's very easy to say, "Oh, well, you should just raise the fee and just bite the bullet. And raise it to whatever because of the value you're providing." And that's great and all. But remember, it's not the Jean show anymore. So, we have a lot of different advisors with a lot of different opinions, several different owners. And we have to do something that works for everybody that moves us forward, but also everybody can live with.

How Jennifer Structures Partnerships, Succession Plans, And Profit Splitting [54:38]

Michael: So, in that context, as you do this, as you put it, the transition from the Jean show to the multiple partners on board. I know one of the biggest challenges for firms when they go through these kinds of transitions is actually figuring out how that gets reflected in income, in compensation, in distributions to owners. Because when you're a solo, even when you're a solo with staff, your income is pretty straightforward to figure out. Gross revenue minus what all the other team members get paid equals my comp. Once you have a partner, that dynamic starts to look different, especially if you've got different client bases with different revenue associated with it.

So, how did you handle the split of salary and/or profits and/or whatever else with with Jean when you make this transition from solo to multi partner, to multi owner for the first time?

Jennifer: So, if you remember, I said I'll only do it if it's 50-50. So, it was 50-50, but not...so we were 50-50 owners, which means by definition... So, we became an LLC taxed as an S Corp. By definition, we had to have the same distributions. But our salaries were set at a reasonable salary. Salary that I was making on my practice, and I rolled it in and gave her that...a giant raise on that salary on her practice, on her new practice. And then whatever fell to the bottom, fell to the bottom.

And then I spent the next couple of years researching and studying how an advisory business should be run. Read Philip Palaveev's book and Mark Tibergien book and came up with the percentages of what your P&L should look like, 40% advisor comp, 35% overhead, 25% profit. And I said, "Oh, okay, this is a guidepost. This is what we're going to write our operating agreement about, use it as a base to try to make sure that we fit within these goals." And that's what we've done. And so, as long as we can maintain that 25% profit. And then we further refined that over the years to split that 25% in 5 different ways. I don't know if you want me to get into that now or later.

Michael: Sure, I'm very curious how you allocate your 25% profits.

Jennifer: So, this came about because the advisor we hired in 2016, John, the plan was always, we still needed a transition for Jean. Right? At this time, she was in her mid-60s, going to eventually retire. So, we needed to figure that out. So, slowly, over time, as we worked with John, and he over the years got more clients, took over some of Bill's clients, took in all the new clients, but the thing about John also is he's in the military. He's an officer in the Army Reserve. So, every so many years, he actually is gone for a year as he goes off to deployment. And so, we have to cover for that.

Michael: Wow. For a year at a time. That's not just how do you cover for a team member on a two-week vacation, or a month-long extended vacation? He's out for a year at a time.

Jennifer: Yes. So, he was gone for a year a couple of years after he was hired. And we knew that when we hired him. And of course, we wanted to be supportive. So, we had to cover for him and plan for that, which we did.

Michael: Which you do how?

Jennifer: Well, he was very good. He had his own system for how he handled his clients. And he had these detailed Word documents where he detailed everything about the client. And plus, we had Junxure. So everything was in Junxure. He was a very big user of Junxure, as we all were. I was just the on-call advisor, so before he left, he had met with everybody. So, everyone was pretty much all set. I just had to deal with the emergencies, and a couple of things that were still in process for the first six months. And then the next six months, there were a few more things that came up, and things that had to be dealt with. But for the most part, it wasn't...he didn't have a lot of clients at that time. I want to say 30 maybe, or maybe slightly fewer. But the next time, the next deployment which will be coming up in the next few years is going to be more challenging as he's now...

Michael: Because he has more clients now.

Jennifer: And he's a full owner, he's a manager. I mean, he's everything. But getting back to it. So, when he left, Jean and I knew. I said, "All right, we're going to focus on writing an operating agreement that will make it so we can do this next transition." We had the operating agreement. We had to write at the shotgun wedding. Now, let's take some more time, and figure out what we want things to look like. So, we had our draft, the existing one, and then we ran some calculations. "So, how do we want this to look? What do we want the profits to look like? How do we want to split things?"

And then what we came up with is, "All right, so we need to be able to get young advisors to buy in to the company." There's this problem where young advisors are having children buying houses, still maybe paying off student loans. I mean, they don't have a lot of cash. Right? And you have an advisor that maybe has built a practice up to a certain level, and they want to retire, and they need to cash out to be able to...they don't want to be the bank. They want to be able to fund their retirement. How do we make these two people on the same page? And that's what I kept thinking of over and over in my head.

And I would come in...I can remember going to the Jean's office every few days and I'm like, "All right, how about this?" I would throw a structure out to it. And then she would poke holes in it. And I'd go back to my office, and I'd do a little more work. And I go back, "How about this?" And finally, we came to this conclusion. "All right. So, if we have that 25% profits, let's split that further. Let's call 55% distributions to owners," because remember, we're an S-Corp. The owners also have to pay the taxes, right? So, that's included in that number. "And we're going to put 20% in a bonus pool that's paid to all employees based on different metrics, including performance and contribution to the success of the team, and etc."

And then later we added a 3% slice to charity, 7% reinvestment in the business, and 15% retirement payments. What are retirement payments? Well, what we're going to do is we're going to give the incoming owner a 60% discount on this stock. We'll get an appraisal. And the incoming owner will pay 40% of fair market value for the shares. And in exchange for that, the retiring owner will get 15% of the profit, so not 15% of revenue, but 15% of profits, for life with a 10-year period certain.

And that's how we decided to start structuring it. And I keep holding my breath. Every year, we move deeper and deeper into this operating agreement, and this this way of sharing profits and I keep waiting for it to blow up or something to go wrong. But so far, so good. Knock on wood. We did the first transaction with John in 2019 under the structure. We did...was it '20? Might've been 2020. 2020 with the first buy in. In 2021, he bought the rest of the Jean stock. And then we acquired...this is how we were able to acquire Kathy, because she saw what we did with Jean and she said, "Hey, I want that deal." And so, same deal, no money changes hands. You merge in, merge all your stuff in.

Michael: So, I just want to make sure I understand this. So, in essence, when you sell your shares, in exchange you get 40% of the value as an enterprise payment, a purchase payment.

Jennifer: Yes. Cash.

Michael: And then in lieu of the other 60% of value for stock, you agree to take 15% of profits for life distribution, literally annuity style, just we'll write you the check as long as you're alive, and when you pass away, then it ends.

Jennifer: However, there's some caveats because if you have multiple retired owners, they have to split that right. So, there's an allocation of how much you get. And so, how we figured that out is it's a combination of factors of...I think it's how many years of service at Milestone you had, and equally weighted to the dollar discount you gave up on your transaction date. And that's the share of the pool that you get compared to all other retired owners.

Michael: Interesting. So, I'm just trying to think about math on this. Just to make the numbers round and easy. So, if I assume I've got $1 million of revenue, there's $250,000 of profits.

Jennifer: Yes.

Michael: And so, my retiring owner distribution might be 15% of that. So, [$]37,500, if I'm doing my math right, call it almost 40 grand, just to round it. So, I get a roughly $40,000 per year for life payment.

Jennifer: And it's a little bit more complicated than that because we actually have a thing...because there's profits, then we have a thing that translates profits into distributable cash flow. So, we leave one payroll in the business, for example. We actually deduct debt payments, and we just have a few calculations to get to that distributable cash flow. But yes, it's essentially...an easy way to think about it is 15% of profits.

Michael: I guess that's the one thing I'm trying to process. How does that get adjusted for just the amount of ownership I had or sold in the first place? I mean, am I getting 15% of just total profits, or am I getting 15% of profits allocable to however much stock I gave up in the first place? I'm just trying to visualize.

Jennifer: So, here's the theory...

Michael: Would Jean get the same thing whether she sold 10% of her stock or 50% of her stock?

Jennifer: If she was the only retired owner, yes, but she's not the only retired owner. Well, she will be. So, she's now sold all her stock. So, even though she still is employed, she gets retirement payments. That's the other thing is you have to have sold all of your stock to get any retirement payments. So, we needed to incentivize the retiring advisors to actually retire and move on. And so, that was the incentive for them. And then it puts everybody on the same footing though, because then we get people...we get the retiring owners who say, "Oh, I don't own stock anymore. I'm not as involved in the business. I'm only working one or two days a week, but you need me to source some equipment for new hires. I'm going to go do that because the extent I can help make Milestone successful, I get more money in retirement profits."

Michael: Right, right.

Jennifer: Right? And it incentivizes the new folks to be able to buy in because they only have to pay 40% of fair market value. It's a lot easier to swallow. It puts everybody on the same page. And then as you have multiple people that are retiring...and that's the other thing is we have advisors of all different ages here. And when we do an acquisition, we acquire a retiring advisor, a part of the negotiation is we grandfather them a certain number of years worked. Because remember, you don't get retirement payments unless you have 10 years. At Milestone, you have to be at least 60. There's stipulations.

Michael: Again, I'm just trying to napkin math this to wrap my head around it. So, if I start with this million-dollar practice, I realize that's not quite where the business was. It just makes the math numbers rounder and easier. So, Jean's share going in was 50%. So, $500,000 of revenue is attributable to her ownership stake if we use, at least, an easy rule of thumb, two times revenue. Her 50% stake might have been worth $1 million. And so, to wind down her million-dollar stake, she essentially gets a $400,000 payments. That's the purchase from the junior owner who covers $400,000.

The other $600,000, instead of getting $600,000 as a purchase payment, I get this 15% distribution that, on the math that we did, adds up to just shy of $40,000 a year, at least at current levels. So, it takes me about 15 years to recover my $600,000 at 40 grand a year with the caveat, I could live shorter, but I could live longer. And if the business grows, that $40,000 actually be a lot higher by the time I'm...

Jennifer: That is the key.

Michael: ...10, 15 years out. If the advisory firm is growing at 15% a year, then this thing quadruples in 10 years, even just at 15% growth rate. So, that number can get quite, quite large in the out years because they're still participating in future growth of profits.

Jennifer: Exactly. And that's exactly right. So, this only works if we grow. So, I've always had a 20-year rolling forecast going in very specific fine tooth detail on all of the numbers, and how things are going to look.

Michael: A 20-year rolling...?

Jennifer: Yes.

Michael: That's a long business forecast.

Jennifer: Well, it's no different than a financial plan, right?

Michael: Well, that’s fair.

Jennifer: You go out 20 or 30 years, so you know it's garbage in the future, but you've got something to work with. And you can give an idea because if you say, "Oh, well, if we do slow, steady growth and we had so many clients a year, then that pace increases after so many years." Then at the end of the 20 years, you'll have X number of clients. And how have you done the staff right? Because in this forecast, you have so many advisors. And does that work out the ratios? I mean, you can be in the right ballpark. And you can see where the business is going to go. And it offsets bad years because you know in one of the years, there's going to be a market crash, and so things won't be great. But you know in other years, the market's going to go gangbusters, and you're going to have a banner year, right? So, it all smooths out. And then you do net present value on that, and things look pretty darn good. Again, I keep waiting for there to be some problem with this process. But…

Michael: Well, I guess, as I think of it functionally, most advisory firms, to the extent that they finance purchases, they essentially finance it over usually 5 to 7 years, maybe 10 at the outside. If purchases happen, either seller financed or debt financed, it's most often 7 years, and generally somewhere in the 5 to 10-year range. You've got this version that is much less upfront. I'm only getting my 40% upfront, whereas some deals are getting struck as high as 70% or 80% upfront and financed over a much longer time period because I may be stretching payments out for 15 or 20 plus years, depending on how long I live. But in exchange for less upfront, and a longer, call it, amortization period for paying this down, I participate in upside.

Jennifer: Right. That's exactly right. It's like everything. It's just like investing, really. You're participating in your upside.

Michael: And I presume as well, just the fact that the retirement payments are 15% of the margins, also means years like 2022, 2020, just the bear market-y years, everybody just understands there may be years where margins are a good bit lower because we had a nasty bear market. That's part of the deal. We can also get good bull market years where margins end up higher. But I guess just they likewise have to know and own and acknowledge that there is some volatility to these payments, because advisory firm profits in particular are volatile. It's part of the leverage of the business.

Jennifer: Right. And everyone is in the same boat. So, you've got your employees in that boat, because remember, 20% goes to employee bonuses, right? So, they're in that profit-sharing mode as well. So, everyone's in the same boat. If there's a bad market, everybody understands. There's a great market, everybody understands. We had to control for owners raising their salaries to unheard of levels to make sure that there weren't profits. So, the operating agreement actually specifies that we're running the business for that 40%, 35%, 25% split that the owners’ compensation, just like all compensation needs to be based on fair compensation for the job role that they're doing.

Also, the other thing I want to point out is that we were not solving for...at Milestone, we're not solving for making the most money. That's not any of our goals. This situation won't work. If you want to make the most money, stay a sole proprietor because you'll make gobs of money that way. But we make a really good living. We help a lot of people. We have a fantastic team. We get to work with people we love, and things look good. It's not like anyone's going to be poor in this situation.

How Jennifer Structures Compensation And Bonuses [1:11:48]

Michael: Right. So, I guess two follow-on questions that I do have around this. First, so how do you set the employee bonus pool? I mean, you mentioned kind of there's things that side of performance and success, but just setting bonus pools is a very challenging thing for a lot of advisory firms to figure out what's appropriate, what's fair. So, I'm curious, just if you can share some further details, how exactly does that work?

Jennifer: So, it's obviously a challenge, as everything is. We keep trying to make it, "Well, there's got to be some black and white way to do this," but there really isn't. How can you do that? It comes down to...so, we meet as a group of managers every year, and it used to be back in the day, just me and Jean. But now we have more of us. And we sit down, and we say, "All right, here's every single employee. The first thing we look at is contribution to the success of the team," because we really focus on that here. We expect everybody to really help your teammates out. If somebody is struggling or if somebody is overwhelmed, where can we jump in to help with their workload, etc.? So, how are you on that scale? And pretty much everybody here is this great on that scale. So, we have a base.

Michael: That's kind of like just your managers, for better or worse, subjective evaluation. Were you a good team player, and a good contributor to the success of the business? And I guess, you got a score of one to five, or some kind of functional equivalent to that, just to say, are you at the top of the range, the middle range, or the bottom of the range?

Jennifer: Something like that. But more usually...that's just like a base number for everybody, because honestly, if you weren't a good team player, you wouldn't still be working here, because you wouldn't be happy, we wouldn't be happy. Right? So, then the next level is, "All right, what did you do that is over and above that helped increase our revenue, reduce our expenses?" Now, it would be very easy to say, "Oh, John and I did everything. We get it all." Right? That's not really our goal. So, we're looking at everybody else and what did they do? Did they go out and they staff a booth for us, or did they come up with a new process or start a committee? I don't know.

We had one person, one of our administrative people actually did a whole bunch of work in a prior year, coming up with new systems, and writing an employee onboarding flow chart, two-week training plan. That was amazing. And helped me help do a whole bunch of slides for some financial triage courses that I was putting together through my church. Just went over and above doing all of this work. So, that person got a sizable bonus that year, right? Because that was over and above. And what I didn't want to do is tie bonuses to percentage of salary. I really felt like everybody...just because you're in a non-advisory role does not mean that you didn't make a massive contribution to the success of the business, and you should be compensated accordingly. So, it doesn't matter what your position is, it matters what did you do to move the business forward.

Michael: So, then just help me understand mechanically how this ultimately gets allocated for people. So, again, I'm going to go back to my generic million-dollar baseline just because it helps to make the math easy. So, $1 million of revenue, $250,000 of profits. If there's a 20% allocation to this pool, there's $50,000, hard dollar cash in this pool to get allocated to employees. I understand there's sort of a relative, "You're going to get more of the pool because you contributed more to the success of the team, and you did this super cool thing that was over and above. This other person is just going to get the baseline participation because they contribute to the success of the team, but they did not do anything that was over and above." But how do you actually get that down to...okay, but who gets how much of the $50,000?

Jennifer: Well, we just start assigning numbers, and we put everybody's name down on the spreadsheet, and then we put numbers next to everybody. And then we discuss it as a group because the bigger our team gets, the more people you need to know that person specifically.

Michael: Interesting. And so, you'll just come down to there is a half a dozen plus names on the list, and we just start going down the list to say, "I think this person should get $8,000, this person should get $5,000. This person's really only at $3,000. This person actually was really a over and above, they did a huge thing. It's going to be $10,000." And the numbers just get set that way to be what they're going to be until it adds up to the $50,000 you had to allocate?

Jennifer: Pretty much. Yes. And some years, the bonus pool isn't as big as what we'd like because we weren't able to hit that 25%, so it's a little smaller. And in that case, because...as drivers of the business, I mean, John I are running the business day to day, we do participate in the bonus pool. But we also will undertake our bonus so that other people get what we feel that they deserve. There is also a certain level that we really...it makes us feel good to be able to compensate people in a way that appreciates their performance.

Michael: And I guess per your earlier comment, the notable thing about that structure is you've got $50,000 at the top of the column, and then the list of names, and you're trying to allocate the dollars out to the names. But just as you noted, nobody's salary is on this list. So, it's not like, "You get a 10% of salary bonus, and you get a 15%, you get a 3%." We're allocating dollars. And so, in practice that could be a very large percentage for some people, and a smaller percentage for others, relative to their salary. But you're not looking relative to their salary.

Jennifer: Correct. Because, again, depending on position, your position could be one of the most valuable to the entire firm. And without some of these operations folks, we couldn't do what we do. I'm big on making sure people are compensated for that.

Michael: And for the people who participate in this, is this by definition employees who are not owners?

Jennifer: No. It's everybody, except that retiring owners traditionally have waived theirs so that there is enough of a bonus pool to go around. So, again, you have to look at, the Milestone culture, we are not solving for making the most money. If that is your goal, then you probably shouldn't work for us. We're more built around helping people and helping-people mentality.

Michael: Very cool. Very cool. So, the other question I have in this context, when you get down to how do you get dollars allocated, so you've made the point a few times that you really focus on trying to pay reasonable salaries for owners for their roles. And then profits come on the profits end later. So, it's in your operating agreement to try to tie to fair compensation so that you ideally get pretty close to the 40% direct expense to advisors, 35% overhead, 25% margin structure that Tibergien and Palaveev and others have talked about. It's always the question of just how literally do you figure out what a reasonable salary is for owner roles. Where do those numbers come from? Or how do you figure out what appropriate numbers are?

Jennifer: So, we're just now coming up with what is a career path for advisors, taking them through the planning associate all the way through. And so, we're having to calculate this. And then what is the formula for paying an advisor as they go through their time with us, and get more clients and more revenue? And then how does that apply to us? Because it should be the same, somewhat similar. But then there's bump ups for other things, because we all have multiple jobs. I'm the CCO, doing a bunch of clients, I'm running the business, I'm the CFO doing the finance stuff. As a CPA, I get really into the nerdy numbers. So, there are different ways.

But we're trying to just now come up with a formula of percentage of revenue that you support, maybe with bump ups, add ons for different other roles, but it's not perfected yet, honestly. Right now, it still feels to me like it's a little bit of a shot in the dark, but it is loosely tied to revenue supported.

Michael: So, it sounds like the baseline is kind of a percentage of revenue that you manage as an advisor comp, and then those of you in leadership roles are getting extra dollar amount allocations for your C-level title responsibilities. You got a percentage of revenue plus X dollars because you're chief compliance officer, plus Y dollars because you're CFO.

Jennifer: Right. Because someday we're going to have to hire those positions. So, if we start building them into the projections now, then when it comes time to hire, then we've already got the numbers there.

Michael: And how do you think about these percentages of revenue to figure out what a number is?

Jennifer: It's a good question, one we're struggling with. Because is the revenue just the advisor salary, or do you include the planning associates in as advisor comp, or do you include the planning associates as overhead? Without them, for me, particularly, I'm unique in the firm because I have so many different hats, I don't actually do day-to-day nitty-gritty planning. I meet with the clients, I review the planning, I train planning associates, but they're doing the work. So, without them I couldn't service the clients. So, to me, that's planning related. But then sometimes, they're doing paperwork, which is not, that's overhead and there's a whole training component.

So, we go back and forth on where to put folks and how would that fit in to. Because obviously, if I have 80 clients and I have a planning associate, then that's...do I include their salary before I take the percentage? We're trying to work through those numbers now. But the main bottom line, the only thing that really matters is that we hit the 25% profitability.

Michael: And nominally, you're trying to get to that with the Tibergien sort of 40, 35, 25 split. Which, I guess, for those who aren't familiar, the framework which just comes from where advisory firms tend to average out when you put all the numbers into a P&L or a benchmarking study is 40% of revenue goes to direct expenses which essentially is the money it takes to make the revenue happen, otherwise known as advisors who are responsible for clients.

So, 40% into a pool that covers the cost of advisors servicing revenue, 35% that covers overhead, so admin ops, support, compliance, technology, office space, insurance, all the other things that cover business expenses besides the people who make the revenue happen directly. And ideally, that leaves you 25% left over in profit margins if you've got all your revenue, and you subtract 40% for direct and 35% for overhead.

Jennifer: That's right.

Michael: So, you're trying to make the revenue numbers fit that kind of profitability and framework?

Jennifer: Yes. And again, I’m not worried too much if advisor comp goes to 42%, and our overhead drops a little, as long as the 25%. We're managing to try to get to that 25%, because if the 25% gets too high, then that means we need to reinvest in the business. And if it gets too low, then we need to change something.

Michael: So, I guess I'm just wondering, what does all this add up to today in terms of just where does the business stand? I mean, we've talked about different advisors adding, subtracting, and then growth and volatility, assets, and revenue, and employees, and clients. Just can you paint the picture of what it all adds up to, and where the business stands today?

Jennifer: So, today, we have 360 million under management, 225 clients, we have 12 bodies, 12 team members, but 2 of them are part time and phasing out over the next couple of years. Jean's down...in 2023, she'll be just down to one day a week. And I think Kathy will be three. So, I have to build up to replace two senior advisors with a lot of experience. So, since it's so difficult to hire CFPs, of course, we perpetually trying to hire a CFP, as we are right now. We build them, we grow them. We bring in and kind of...I have a knack for finding people who are usually career changers. They're really good either...it's something to do with finance or super interested in finance, but that wasn't what they did out of college, and they want to be a CFP. And then we bring them in and we train them how to be a CFP, pay for all their CFP work, and those become our CFPs of the future.

So, we call those planning associates, and we have four of them today, right now. And then we have two retiring senior advisors, two current senior advisors, and one advisor who came in as a planning associate in 2018, and is now an advisor. Then we have operations team, we have a client service rep, we have a director of operations, and we have something called a project leader who has been in operations, so can do overflow operations, but really is there to do all of those things. When you're looking at something and you're like, "Oh, that would be a great project." Boom, project leader! So, that's where we are today.

Michael: I love it. It's good to have a person that's like, "Oh, we have a project." That person does the project. Got it.

Jennifer: Right. It's a person who ended up being very...when they were in operations, they were very good at projects, and technology, and the SharePoint, and etc. And so, that just became sort of a natural fit.

The Surprises Jennifer Encountered On Her Journey [1:25:49]

Michael: So, what surprised you the most about building an advisory business?

Jennifer: What surprised me? I mean, it's very, very difficult, for sure, but I guess what most surprised me is being where I am today. I guess I never thought... Malcolm Gladwell talks about putting in your 10,000 hours. And I just every day got up and did the grind. And then one day I woke up and suddenly was running this much larger practice over $1 million. I think they say that only 4% of businesses get up to $1 million worth of revenue in a year. And some even smaller percentage were run by women. That surprises me. I mean, it's not like I planned for it. I mean, obviously, I just put my head down and did the work. And then here we are. It's just slow and steady growth with a little luck thrown in, and some big bursts from mergers.

Michael: Because at the end of the day... When did the firm start originally?

Jennifer: 2003.

Michael: So, slow and steady growth for coming up on the 20-year anniversary.

Jennifer: That's true. And part of that is because in the early years, I was having kids so I could only work 20 hours a week, or 25 hours a week. So, there wasn't a whole ton of growth in those early years. It was just slow and steady, and here we are today.

Michael: It is one of the interesting effects that we've seen a version of this in our...the research studies we do on the Kitces platform as well that there's lots of things that go into advisor income and earnings success, and career success over time of the degrees and designations that you earn is a factor, and the types of clients that you work with is a factor, and your effectiveness in leveraging technology to run the business well is a factor.

But the thing we find every time we do the study is the sheer greatest predictor of advisor's income is the number of years that they have been client facing. And just raw years, just the raw counts. And I think it's some version of Malcolm Gladwell's 10,000 hours of putting in the time to learn the skills. It's how we build our client base, we build our reputations in our community, we build our brand, we just hone our skills, both with the client work and the business management side. And just sheer time. It's amazing how much it adds up in compounds and the advisory business.

Never feels good when you're in the first few years, and the numbers aren't big, and the hours are huge, and it feels awful. But always fascinating to me the sheer impact of cumulative time in the business, because most of us have mid to high 90s retention rates of our top clients. And just if you do that long enough, it adds up. It really adds up.

Jennifer: What's really funny is I was looking to prepare for this back at my statistics from early on. And in 2009, I also had about 80 clients, but only 14 million under management. So, it's just interesting the progression from there to here. And now only probably 26 clients of that set of clients are still clients today. I didn't start out getting all clients and pricing everybody. I priced everybody appropriately, but I didn't start out with a minimum because in the beginning, you need to eat. I was trying to add revenue.

Michael: Your minimum is, "Can you pay me because I would like to eat."

Jennifer: Right. But then if you want to grow, you have to know how to graduate clients, and continually evolve.

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

Jennifer: Interestingly, low point is mostly personal for me, mostly personal stuff that happened along the way, such as I got divorced in 2012, and that was very difficult and scary because the real estate market was terrible, and the economy wasn't great, and the business was still really small. That was difficult. Other difficulties was some staffing issues that we had to make in 2018 right after the merger. One of the things I wish I had done differently is learn early on how important it is to work with the team, and grow them, and how do you train, and grow, and make a really great place for people to work, so that you don't have turnover. I think we've got that done now, but I didn't figure that out until 2018, 2019. And so...

Michael: So, what happened? What was the gap that got exposed for you?

Jennifer: Because I didn't have the time, or I didn't make the time to dedicate towards employee training and growth, an employee issue came to light that we couldn't work with anymore and had to transition that employee elsewhere. And that was extremely painful for me, particularly because I like people, and I like all the people I work with. But it just wasn't working out for various reasons. And I will forever feel that was my failure in not properly training the person from the beginning. They'd worked for me for two and a half years, but because I just didn't take the time, the issues didn't come to light until later. That was very painful.

Michael: And so, what does that look like now? What do you do differently now to try to fend that off?

Jennifer: I actually spend a lot of time with all of the team members, even though some of them report to me...three or four of them report to me, but the rest don't. I spend time talking to everybody at every level, at least weekly, just casually, just to get to say, "Hey, how's it going? What's going on? Here's what's going on in the firm." I don't like having us versus them. And to me, we're very transparent about everything. There are no secrets. So, I will talk to anybody about, "Hey, this is what the latest thing is that we're thinking about. We're thinking about hiring this position or that position," or, "Hey, we might be acquiring another advisor next year, and this is what that's going to look like."

And making people feel like they're in the know. Because I find that really every problem in business and in life is due to poor communication. So, I try to overcommunicate now. It takes a lot of time, but it's really worth it. It really makes me have very good relationships with people. And I think it keeps people, I don't know, feeling in the know, feeling like they really like to be here. I mean, we've had no turnover since that time. Every single person that we've hired since 2019 is still here. Some of them have told me, "This is the best place I've ever worked, and this is the best job I've ever had." So that makes me feel good. I feel like we've built a place where people are happy, and people want to come to be. And that's one of our goals here at Milestone is that we want to be the place to work in New Hampshire.

Michael: I guess I'm just wondering what does this look like in practice to be able to talk to all the people in the firm every week, at least casually? I mean, is there a structure? Do you do a lot of one on ones? Do you just have a common kitchen area, and you hang out there a lot, and let people rotate through to the proverbial or literal water cooler, and catch up with them as they go through? How do you do this?

Jennifer: It's a little bit of both. And it's not strict weekly necessarily. So, my team, the people that I work with on a daily basis, I make it a point, Mondays are meeting days. So, we have a full team meeting every Monday for an hour, and I have separate meetings with the people that I'm working with to make sure that they don't have any roadblocks in what they're doing, and to talk about issues or whatnot.

And then some of the other people will have...I might have a standing meeting every two weeks to chat with them, again, on a Monday and just say, "Hey, what's going on? What's the pulse? This is what I'm thinking. What are you thinking?" Obviously, that's not scalable, and it isn't going to work forever, but for right now, if I can train the team to do that, and then they can replicate that going forward as they go throughout their career, then information can keep flowing to everybody in the firm. Because as long as everybody knows what's going on, then people aren't scared. People are terrified of the unknown, and you have to keep the unknown to a minimum.

The Advice Jennifer Would Give Her Former Self And Newer, Younger Advisors [1:33:56]

Michael: So, anything you wish you had...or I guess anything else, aside from the team relationships that you wish you'd done differently? What do you know now you wish you could go back and tell you 15, 20 years ago as you were getting started?

Jennifer: It's mostly...that's just it. It's just mostly developing, leading, and managing my team sooner. That's so important. If I could give anyone any advice, I would say that is probably the most important thing to building a successful business. Because if you have turnover, that can destroy your business pretty quickly, or make your life difficult at a minimum.

Michael: So, any other tips or changes that you've made of what's helping you lead and manage the team better now than you did in the past?

Jennifer: Communication. That's really it. Communication and sharing of information, not being afraid to tell people what's going on, both the good and the ugly. That would be primarily what I would tell people.

Michael: So, what advice would you give younger, newer advisors looking to become a planner in the profession today?

Jennifer: I would tell them don't be deterred by people telling you what you can't do. Early on in my career, I got a lot of that. "You can't do that. You won't be successful doing that." And if I'd been deterred by that, I wouldn't be here today. Also, another thing that is commonly told to girls and women is, "You're bad at math." So, I would encourage all women, especially young women, don't believe it. If somebody tells you that you're not going to be good at math, it's sort of ingrained into our society. And my mother would always tell me, "I wasn't very good at math," but all of the bookkeepers and all of the analytical skills I have come from her side of the family, not my father's side. And she's also excellent with puzzles. And math is kind of like puzzles. So, I think that's one of the lessons I want to impart on any young women is you can really put your...you can do anything you put your mind to.

What Success Means To Jennifer [1:35:59]

Michael: So, this is a podcast about success. And one of the things I've observed, even the word success means different things to different people. Kind of as you've noted in your journey, sometimes it changes for us as the business evolves, and the needs of the business evolve. And so, the business is now at a great place of success. But I'm wondering how do you define success for yourself at this point?

Jennifer: So, I'd say I have success because I was able to be home for my kids when they were small. I get my kids off to school every day. I eat dinner with them every night, I'm with my kids when they go to bed. I have a good job. We're never going to be hungry or not have a place to sleep. I feel like that to me is success. I get to coach my son's baseball team. I get to help my daughter look for colleges. That and do work that I love. And share my gifts. I feel like I'm very blessed with these skills, and it's my duty to help as many people as possible and share them to the extent possible.

Michael: I love it. I love it. Thank you so much, Jennifer, for joining us on the "Financial Advisor Success Podcast."

Jennifer: Thank you very much, Michael. It was a pleasure.

Michael: Thank you.