#FA Success Ep 316: Building A COO Society To Help Advisory Firms Scale Up Their Efficiency, With Matt Sonnen

Resources Featured In This Episode:

• Matt Sonnen
• PFI Advisors
• COO Society
• IACCP by NRS
• Tamarac

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

Full Transcript:

Michael: Welcome, Matt Sonnen, to the Financial Advisor Success Podcast.

Matt: Thank you, Michael. Thanks for having me, this is really exciting.

Michael: I'm really looking forward to the discussion today and digging into a domain that I feel like is starting to crop up a little bit more often these days, just as advisory firms continue to grow and build up. Which is the advent of advisory firms having COOs, chief operating officers. Which just historically really didn't exist in advisory firms. Most advisory firms, you go back 20 or 30 years, it was an advisor who went out and got clients, and back then probably just sold them stuff, and a bunch of administrative staff who helped support the paperwork and all the administrivia that goes with implementing a lot of products with clients.

And over the past 20 years, we've seen this shift to more recurring revenue models, AUM models, subscription models, that allow advisors to start building recurring revenue, hire bigger teams. Because now you can actually hire people whose sole job is to service the revenue, and you can pay them less than the total amount of revenue. So, you now have a business with margins and opportunities to reinvest. And if you do that long enough, you can make a pretty big business.

A lot of advisory firms, even that are a billion-plus-dollar firms, really wasn't much more than two or three partners who could each bring in $10 to $20 million a year of new clients, and they did it for 10 or 20 years. And it's $20 to $30 million a year, adds up to a half a billion dollars over 10 or 20 years, plus some market growth. And suddenly, you're at a billion-dollar firm. And that's great from the growth of the business, until you get down to you need a lot of people to actually handle that many clients and that much assets and that much revenue. And most of us didn't get into this business to manage people, we got into it to do the client thing. We just ended out with a lot of people if the business grows to a certain size.

And so there's been this advent, I think in particular over the past 10 years, of firms starting to try to hire chief operating officers to deal with all this operations and systems and people stuff that starts cropping up when you have a lot of people in your business. And it's still such a new role because so few advisory firms, I find, really have a true COO role.

And so just today, I'm excited to delve deep into just what does it really mean for an advisory firm to have a COO, chief operating officer, and what does that person actually do in an advisory business. And I think to start the discussion, I'd love to just literally start it right there. As someone who's been down this road, you have a society for COOs, which we'll talk more about. You've been in the chair itself. What exactly does a chief operating officer do in an advisory firm?

What Chief Operating Officers Do And Why They Are Useful For Advisory Firms [06:56]

Matt: So, the joke I've been saying a lot lately, when I was 14 years old, Eddie Van Halen was my hero. And when I was 40 years old, Mark Tibergien became my hero because I think he was...I feel like he was the first, at least he was the first voice I really heard, talking about practice management, talking about everything you just said about the evolution our industry is going to. And so I've just tried to...with PFI Advisors, I've just tried to sort of continue what he started. And we've really honed in on that specific role. He was talking a little broader, just practice management in general, how to run a firm, how to run a business. And we've really honed in on the COO role. That title frightens some advisors, they go, "Boy, that sounds expensive."

Michael: I was going to say that sounds like a very expensive non-revenue-producing hire in the firm. So, yeah.

Matt: If it makes people feel better, we can say director of operations. I actually started, that was my first title, and then graduated to COO. But it's really, in my mind, in the RIA space, the COO, the director of operations, you can call it operations manager, it's a, like you said, non-revenue-producing professional at the firm whose primary role is not to go get clients, it is to run the business, handle the technology, handle vendor management. And I've started saying quite a bit 75% of the COO's job, in my mind, is HR. While those advisors and RIA owners are out of the office most of the time meeting with existing clients and meeting with prospective clients, the employees need to look to somebody who's sort of driving the culture and who are they reporting to and who's sort of the model that they're looking to. So, it really turns into this director of operations/COO person.

Michael: So, you defined a couple of different scopes, roles, within the business. There's sort of technology and vendor management. I guess that's everything from what tech are we using to run the business, what tech are we using to serve clients. Just the IT needs of the business, do all the team members have an e-mail address and a working computer and all that good stuff. So, there's a chunk that is technology.

There's a chunk that is HR. Right? So, who do the people report to, who's making the calls in the business when the advisor isn't there, and just all those core HR functions. Right? We have to hire people, we have to compensate them, we have to manage benefits, we have to handle payroll. So, a bunch of those functions that add up to a nontrivial amount when you get a larger team with one or several dozen people.

Matt: Yeah.

Michael: So, is there more, are there other aspects, or is it that really the core, that we should kind of think of this as the technology system stuff and the HR people stuff?

Matt: And then I think there's, just as a catch-all I call it, business administration. So, quite a few of these director of operations/COOs at RIAs, they're also handling compliance. And if they're not the named CCO... I was a dual-hatted COO/CCO. If they're not the named chief compliance officer, they're really working hand in hand, shoulder to shoulder with the compliance officer. Most RIAs, their compliance manual is the closest thing they have to an operations manual. The compliance manual is saying, "Hey, we meet on a quarterly basis to check best execution, we verify that billing is done correctly," etc., etc.

Michael: Right.

Matt: So, the COO is going to be very involved in that. And then, while these aren't marketing professionals, I think the client experience, figuring out who your ideal client is and what the service offering is, I think a lot of that falls on this person, as well. Who are we serving and how are we trying to serve them. Because then from there, that will drive, "Well, what type of technology systems do we need?," etc., etc. So, I kind of just use it as a catch-all, I say business administration, but there's a lot of other components outside of just the tech stack and HR.

Michael: Well, and I guess in the business administration context, I'll presume just finance reporting functions are in there, as well. Is that part of administration, keeping the books? Or usually at that point probably manage the person who's keeping the books, or the accounting firm that's keeping the books?

Matt: Yeah. Just like I said with this, maybe they are or are not the named CCO, they're working very closely. Maybe they are or are not acting as the chief financial officer, as well. A lot of times, the COO is processing billing. So, the revenue of the firm starts there. Maybe they're not the one digging into QuickBooks and balancing the P&L and that sort of thing, but they're working very closely with that person. And then managing the budget, obviously, figuring out, "How much do we spend on HR, on our staff, and how much do we spend on technology? Do we have it in the budget this quarter to do a new marketing campaign?," or whatever it may be. The COO touches a lot of those areas, as well.

Michael: Well, and per your discussion, I guess, just it's the...it's all the running the business stuff that a lot of advisors don't necessarily have as their strength because we'd rather be out there serving the clients and getting new ones and sitting on that end of the business. But if it grows to a certain size, someone has to deal with all this other stuff, it still has to get done.

Matt: Someone has to deal with the nuts and bolts. But also... Heck, as a business owner myself, I sort of fall into this trap, too. But a lot of RIA owners, you say, "Well, what are your goals for next year?," and they kind of look at you blankly and they say, "More."

Michael: "Grow."

Matt: Yeah, "Grow."

Michael: Yeah, "Grow."

Matt: "I just want more of what we did this year." And so, I found the COO, a good COO, is asking, "Well, what do we want more of?" Again, and you've written quite a bit about this, just figuring out who your ideal client is, what is the right client. Of course, when you start your business, you kind of take any client you can, but "Is this the year we've grown now where we're actually going to start saying 'no' to certain clients under a revenue number?" under an AUM number, whatever it may be.

I feel like the COO is, I don't mean to say it badly, but is sort of the adult in the room that's asking these questions and challenging the advisors who are, rightfully so, they're just focused on client service and business development. But asking some of these higher level questions of, "Well, what is it we want more of and how are we planning to grow next year?"

Michael: So, you'd mentioned earlier different labels for this name...different labels for this role. You can call it chief operating officer, you can call it director of operations, you can call it operations manager. So, are those fully analogous or are there differences between those?

Matt: I would say, as you go up the chain, so to speak, up to that COO role, that's where you get more of the strategic conversations. So, maybe your director of operations is more involved in the tech stack and a little bit involved in figuring out the roles and responsibilities of the team. Then they kind of graduate into they're working a little bit more on really defining roles and responsibilities, who's doing what, "When are we hiring?," figuring out exactly, "Is it a revenue number when we figure out when we're going to hire?" Just on our podcast where we interview COOs, I say, "Hey, how do you know when to hire?" "Well, sometimes, it's a metric. And other times, it's just I walk around the office at 6:00 p.m. and if we're packed, I go, 'It's probably time to hire.'"

So, maybe it's just a qualitative metric that you're looking at of when to hire. But I would say as you go up the chain of command, up to that COO, you get more into the strategy of the firm.

When Advisory Firms Should Hire A COO And What It Would Cost [15:17]

Michael: So, how does a firm know it needs one, or when should you be going down this road?

Matt: I think it's as the... And I don't mean to simplify it, but as the overwhelm on the advisors continues to grow, right? It's, "I just can't do it all. I can't manage the clients that I have and prospect for more and have the employees reporting to me and get why is the performance report not right anymore," somebody needs to spend time digging into that. "Our Internet seems to go out at 2:00 p.m. every afternoon. Why is that? I don't have time to figure it out." The more often they're saying, "I just don't have time, I just don't have time," that's... And again, I'm not trying to simplify it, but that is a pretty good indication of, "Hey, we probably need to bring in a business manager," director of operations, COO, whatever you want to call it.

Michael: Do you see a pattern of a common size of clients or revenue or number of team members where this crops up? Is there a business size threshold or is it just purely a personal when you just can't take it anymore, and we all have our own personal tolerance levels?

Matt: As a consultant, I'm supposed to have the exact metric. And I've always been bad with benchmarking just because it, a lot of times, depends on the size of your clients. You've been asked this question a million times, "How many clients can one advisor handle?" And we all say, "Around 100, give or take," but that "give or take" is where all the magic is. Is, well, do you have ultra-high-net-worth clients that have, on average, 34 account numbers in their household and they're super complicated, and you're dealing with the business managers and the lawyers and everything else? You might only be able to handle 50 clients. Are they more mass affluent and smaller clients and you've got them pretty much on models? You can probably get up to 120, 150 even.

So, same thing with figuring out when you need this person. I'm guessing it's probably around five employees, full-time employees underneath the advisors, somewhere in that range. It definitely turns into some complexity around who should be doing what, what are the roles and responsibilities. A lot of people reach out to us and say, "Hey, we need to hire a new person. Can you help us with the job description?" And I said, "I can, but can you give me job descriptions on who you have?" And they say, "Well, no." They've been there for 10 years and they've just sort of morphed into the roles they have today. Which I get, and I love that they've grown into the role they have. But, well, we've kind of got to start there, "Well, who's doing what now?," before we can figure out what the sixth employee, or the fourth employee, whatever it may be, happens to be.

So, it's as the complexity... I wish I had an exact number for you, but it's just as the complexity of the business increases and the owner is feeling more overwhelmed.

Michael: Well, it reminds me of the old saw in the management world, which is good managers often struggle with more than about six to eight direct reports. Because at that point, just if you're really trying to be involved in your team members, and growing them and developing them and keeping tabs on what they're working on and getting them en bloc in whatever it is that they're trying to solve for, just there's only so much time in the day, in the week, in the month, in the year to handle there.

So, just managers often start topping out at six to eight team members. And if you're an advisor-founder and you also have 100-plus clients, and business development and management responsibilities and all the rest on top of that. Yeah, I would kind of envision by the time you're at five full-time employees and heading towards six, you're almost there on what managers start to top out at when they don't also have 100 clients and run the business.

Matt: Yeah, right.

Michael: Which means you might actually be beyond the pale at that point.

Matt: Yeah. That's exactly right.

Michael: But do you see advisors at five full-time employees literally hiring a COO as the sixth, or is that more the point it may be an ops manager at that stage because the business is only so big at this point and COOs come later?

Matt: Yeah. I think that's probably right. It's ops manager/director of operations. We worked with an advisor recently, he was right around that five full-time employees. Probably $275 million, somewhere right around there, of AUM. And he just said, "I can't breathe," right? "I've just hit this... There are so many things that I wish we could get done around here and we're just not doing it. Can you help me with the job description, the hiring of this... Can you be one of the rounds of interviews for me so that I know I'm hiring someone with the right background?"

Michael: And so how... Because I'm sure you've had this conversation from time to time. How do advisors get comfortable with the cost of... This is usually not a low-cost person, who is not revenue-producing.

Matt: Yeah.

Michael: Just most of us historically, the first few hires are pretty consistent. It's people that leverage my time to grow the business more or advisors who actually get clients and grow the business more. The only hires we tend to make early on are grow the business or give me time to grow the business.

Matt: Yes.

Michael: And I suppose, arguably to some extent, operations managers still function the same way, it's going to free up some time for you to do more things. But I find just a lot of advisors really start to struggle when you get to, "Wow, this is a lot more expensive than simply hiring an administrative assistant to leverage my time by getting the scheduling off my plate."

Matt: Yes, you're right. But they really should be viewing this as that, "They're going to allow me to grow the business." "I" meaning the advisor, I'm speaking in the terms of the advisor now. "I don't have to deal with payroll anymore, just the processing of payroll and reporting." People say, "Oh, I have a PEO, I've outsourced payroll." Well, you're still being asked...as the advisor without a director of operations, you're still being asked, "Well, did anyone take vacation over the last two weeks?," and reporting that to the PEO, and checking hours and that sort of thing.

So, freeing up that. The employees now are reporting to this person, so they're not sitting outside your door anymore while you're on the phone with clients or in meetings with clients. And then just all the minutiae around the technology of the firm. Like I said, the Internet is not working properly. They're going to deal with that. The website isn't loading correctly. All of these things that are on the shoulders of the advisor until they make this hire.

I'll push back on some of them and say, "I understand that this is a big hire for you and it's scary, but are you really telling me you can't make up their salary if we give you 50% more of your time? If you go deal with your clients in a more holistic fashion, which hopefully will lead to referrals and just the downright business development efforts as well, freeing you up to do that, you should be able to recoup the expenses of this hire within the first year.

Michael: So, in that context, can you help set expectations for us? What should I expect to be paying, or to budget from the business manager end, if I want to make one of these hires, if I want to start going down this road?

Matt: It's a little tough to say because it's always dependent on geography, cost of living, etc., and the size of your firm. But I would say that director of operations is going to be in the $75,000, $85,000 on the low end, and up to $125,000 on the higher end. And then COOs, a full-fledged COO, I typically say budget...as an earmark, budget $200,000. Now, some parts of country that's your base salary. Other parts of the country that's the annual salary is a little bit lower than that, but with their bonus that's going to get them to $200,000. But I would say it's...give or take, it's around $200,000 for a chief operating officer.

Michael: All right. So, then two follow-on questions for that. One. So, I get costs vary by just geography and different costs of living in various metropolitan areas, or when you're not in an expense metropolitan area.

Matt: Yeah.

Michael: You said it also depends on size of firm. So, how does size of firm play into the comp decisions for this role?

Matt: Well, it's just the complexity of how many employees are we juggling, how many different people are going to be reporting to this person, that sort of thing. That's what I mean by the size of the firm. Because you're right, they're not dealing with the clients directly. But just the complexities of the business, how many clients that... Again, a lot of times they're taking on compliance, as well. A lot of times they're taking on billing. So, billing, the complexity of billing is going to be directly related to how many account numbers you have. So, that's where I say the size of the firm will drive a little bit of the cost, as well.

Michael: And so help us understand a little bit more. It was one thing when you said the director of ops may focus a little more on just tech stack and core people roles, the COO is a little more strategic. But now, we're getting down to...I feel like now we're getting down to brass tacks. Okay, I get one does a little bit more of this and the other does a little bit more of that. But now, we're saying... And basically, their director of ops is $100 grand, plus or minus something, and the COO is $200 grand, plus or minus something. So, now that we're down to this a $100,000-dollar difference in staffing, what, again, do I get for the more expensive one?

Matt: So, calculating metrics. I guess a lot of your guests have talked EOS. So, think about the scorecard, right? That the advisors now are going to be getting. This COO is going to be calculating a lot of these metrics for that scorecard so that the advisors are able to know the health of the organization at the drop of a hat. This person is managing all of these metrics, figuring out client segmentation, figuring out different service offerings.

So many firms struggle with the scale, "Hey, the advisors just keep bringing in clients that don't quite fit. We're starting... We always go below our minimum and offer 100% of our services." So, a good COO on that higher end is going to solve that problem for you. And that's never easy. Trying to tell advisors or salespeople to turn down business is never easy. But just figuring out how the business is going to scale, how it's going to scale appropriately, that's where you're getting the big bang for your buck with this position.

Why Matt Created The COO Society And How It Educates And Trains New COOs [26:43]

Michael: Interesting. And so where do you find these people? If I'm an advisor, I'm like, "Okay, this sounds like a big investment, but, yes, I'm feeling this pain. Okay, I've got to hire someone to help me with this." Where do you go and how do you figure out who to hire?

Matt: So, there's pros and cons to a couple different ways you can go about it. I wouldn't say it's a mistake, but where a lot of advisors go is, "Well, I need a good operations person, but I'm going to pull them from a completely different industry." And I totally understand where you're coming from, "Hey, we found our perfect COO, we've been looking for him for years. This person ran a McDonald's franchise for years," or, "is coming from the retail space." And that's all well and good, and they're going to understand HR. The struggle you're going to have with that type of a person is I'll get questions from those types of people of, "I just got out of this meeting, we're talking about trading muni bonds. Why aren't we just running the muni bonds through our rebalancer?" They're just not quite understanding the nuances of our industry, right?

Michael: Right.

Matt: "I don't understand exactly what our employees are doing every day. I'm used to selling widgets and I'm not used to a people business," that sort of thing. So, that's a very common area though, "I just need a good operator."

The other area. Again, pros and cons. You find someone in our industry, but maybe hasn't been an exact, "I've been running an RIA." "Oh, this person is coming from Morgan Stanley." We all know that the RIA space is run differently than a firm of that size. I'm going to find someone coming from Vanguard or one of the asset managers. Or I'm going to find someone from one of the tech vendors, "This person worked at Orion." They're going to know a lot, they're going to understand the industry, they're going to know who the players are, they'll understand, obviously, the tech stack, but there might be some nuances of, "Okay, now, I'm trying to manage a seven-person firm and I've never really done that, I don't have the managerial experience."

So, again, pros and cons to each. But typically, it's I found a good operator but doesn't know the industry or I found someone that knows the industry but doesn't have the managerial experience. But that's typically where these people are coming from, and then they have to kind of grow into the...get molded into the role.

Michael: Okay. Well, so, if I don't want to have those struggles, because I just need a person that can do it. "If I had a lot of time to hire them, I would have done that a few years ago and not need to listen to this episode of the Financial Advisor Success Podcast." So, if I need someone that's going to get up to speed faster, I'm trying to find someone who can ramp up more quickly, what do I do, where do I go?

Matt: This is one of the reasons we've created the COO Society. Is back when I was placed in the director of operations role, I tried googling, "How do I run an RIA? How do I do operations for an RIA?," and never found it. And so we've tried to create online courses that explain how a rebalancer works and what it is, and think through the org chart of your firm. What are the pros and cons of having a centralized back office versus working in pods where each advisor has their own little service team. Who are the major custodians, what are the differences between them, how do you integrate the data flowing from the custodian into your performance reporting provider. That sort of thing.

So, we've tried to create just the basics, and then we do monthly calls with all of the members of the COO Society where they can ask our team or each other, "Hey, how are you handling this? Where are you finding your latest CSAs? What benefits are people asking for? We're so worried about the Great Resignation, are you guys offering more benefits?" So, there's great communication among the members of the society.

Or, and not to be too salesy, so, the other...to answer your question. You obviously go to LinkedIn, you find people that are in the role today, and try to pluck them off from other firms.

Michael: Interesting. So, in essence, for firms that are in this position, you get two choices. You can try to poach talent from another firm, where they have someone in this role who's already been doing it and you can try to get them over to your firm with whatever you're going to do to either entice them away or find someone who may be unhappy with where they are and get them while they're leaving, get them while they're in motion. Or you have to accept you're either hiring the operator with no industry experience or the industry person with no operator experience, and have to start training them up. For which you guys have now been trying to build a program to teach them to do that.

Matt: Correct. Because, you've coined the phrase, the accidental business owners, the advisors themselves, the RIA owners themselves, aren't really in a position to train this role. Because they're not...that's why they're hiring for it, because they weren't able to do it themselves. "Hey, I know how to handle clients, I know investments, but I don't know how to tell you the best way to send data from a performance reporting tool into the rebalancer or write the right job description for our next hire," that sort of thing. So, yeah.

Michael: Interesting. And so for...I guess for firms that have hired or have a COO who maybe still is hitting some speed bumps and trying to figure out, "How do we actually...how do you do this role well? How do you pick the right CRM? How are you supposed to try to integrate in with the other tech? What is the typical comp levels for our CSAs at different levels because I'm trying to build out my career track at my firm?" You're trying to build the COO Society to be the community place that the COOs can go to actually learn how to do, I guess basically, the thing you didn't get when you were looking for how to do it when you were a COO back in the day.

Matt: Exactly. So, again, I was Director of Operations and Chief Compliance Officer. And this is 2008 we're talking about. I was able to google how to be a CCO. And I came across... And I'm not affiliated with them, but I'm a huge proponent and I always advertise for them. NRS has an amazing program, the IACCP program, Investment Adviser Certified Compliance Professional. And I didn't care about the certification, I didn't care about those letters on my business card, but I needed a crash course on what compliance was for the RIA community. We had a compliance consultant, but I didn't even know...2008, as a green compliance officer, I didn't even know the questions to be asking my compliance consultant.

Michael: Right.

Matt: So, I was able to do this online course and get at least the lingo and the basics. And then I felt confident in working with my compliance consultant.

So, we've...I've really mimicked COO Society from the operations perspective after that IACCP program. I'm trying to solve the same things and give confidence like I got from that on the compliance side. I'm trying to give confidence to these directors of operations and chief compliance officers.

Michael: And so for advisory firms that want to have a COO in COO Society, how does that work or what does it cost or do they get engaged?

Matt: It's just month to month. We just have it linked up to Shopify, so they just put a credit card in. It's $600 a month. Or, if they want to do an annual subscription, it would be $6,000 for the year, so $500 a month. So, saves a little bit of money if they want to buy an annual subscription. But most are just on a month-to-month engagement through Shopify. And like I said, they're getting...the new courses come out every month. We've got the monthly member meetup, we call it, the Zoom call with all the members. And then we have a discussion forum that looks like Slack, basically. Each course has its own channel, to use the Slack terminology. So, they go into that channel under HR processes and say, "Hey, what PEOs are you guys using?" Or they can go under the CRM channel and say, "Hey, we're thinking of making a change. What CRMs do you guys like?" And so other members can jump into the discussion forum, or me and my team, obviously, are putting things in there, as well.

Matt’s Journey Into The Financial Services Industry [35:37]

Michael: So, how did you come to this path of teaching and training COOs, and having a society for them? I know you've had some experience with this in the past yourself, but can you share with us more of the journey of how you came to the point that this is the program you offer into the world? How did you get started?

Matt: Yeah. So, stumble into it, into this industry. 1997, graduated from UCLA, with nothing more than an interest in... There was a sandwich shop in Westwood that I would go to as a senior at UCLA that always had CNBC on. And I would see the ticker going by and I knew...I didn't know what the heck that was, but I was intrigued by it. And I said, "I kind of want a finance job." That was about the extent of my grand vision, "I think I want a finance job." So, when I graduated...

Michael: This is, you said, 1997. It's the '90s, the tech market is booming, everybody is day trading online. We are getting pretty heavy into the finance space was on the rise.

Matt: Yeah. And I just thought, "I want to get into that industry and learn what the heck those numbers scrolling on the bottom of the screen mean."

So, I graduated with no job. But through a headhunter, found out there was an opening at Merrill Lynch. And I said, "Well, this is perfect." Merrill Lynch in Beverly Hills. And again, I just stumbled into the perfect situation. This hotshot team of four advisors had recently left Goldman Sachs and joined the Beverly Hills branch of Merrill Lynch. Those four advisors were doing more business than the entire branch of 40 advisors. So, I was hired as, "Hey, we got to keep these four guys happy." They were frustrated.

Michael: Wow.

Matt: They knew how to do business at Goldman Sachs, they're now here at Merrill, they don't know who to call for an options trade, they don't know how to place a mutual fund trade, they need to do block trades, they need an operations point person. So, in Merrill's grand vision of their own, they hired someone with...

Michael: So, they hired a 22-year-old straight out of college with no industry experience to be the point person for their biggest team.

Matt: Correct. That's... Yeah. That's how these things happen, Michael.

Michael: Awesome. Well, at least they were willing to commit some resources to support the team.

Matt: Yes, yes. And so I...as a 22-year-old, I did realize that I just stumbled into something special. And I remember going home and sitting at my little IKEA table in my little tiny apartment and thinking, "Boy, I've got a really great opportunity here. I really need to make the most of this."

So, I started going... I found out... I'd go in at... We're on the West Coast, so the market opens at 6:30 our time. So, I said, "Well, I've got to be in before the market." So, walked in at 6:00 and, "Well, there's quite a few people here." So, got in at 5:30, "Well, there are still some, some advisors are still here." So, got in at 5:00, "Oh, there's still one guy that gets here earlier."

So, at 22 years old, I was like, "I've got to get in at 4:30 in the morning, I want to be the first one in the office." Again, it was a lot of trading at the time, so I was going through and trying to reconcile all the trades from the day before, and checking cash balances and that sort of thing, and making sure the advisors felt confident before the market opened what the client portfolios looked like, etc.

And I just sort of worked my way up. I worked with them for eight years and sort of worked into, today we call that, I guess, a service advisor. I was...while they were out getting clients, the clients knew that they could call and ask for me, "Hey, Matt. What's my portfolio look like? What's going on in the market?" So, I was...I never had to go get clients and I wasn't...I was really just helping non-discretionary execute trades, I wasn't really providing any advice at that point.

But, so, I was with them for eight years. And then in 2005, lost my mind and I left the golden goose and said, "I'm going to go sell insurance." Again, not...

Michael: But why?

Matt: But said, "I'm going to leave and go do this." And, but, I was at least smart enough, the one vision I had was...

Michael: Why? Where were you... Did you get wooed away, did someone give you an amazing pitch? Why make the change?

Matt: It was really silly. I just wanted to try something else and see if I could stand on my own two feet. And so tried the insurance thing for a couple years, but was at smart enough to keep in touch with them. So, I'd see a Wall Street Journal article about one of their clients or just about something that I knew that they were...some industry that they were kind of interested in, I'd sort of send them an article, just to make sure that I was sort of staying on their radar.

So, two years went by, and then they called me and said, "Hey, this actually is going to work out great. We know you're miserable selling insurance. We're here at Merrill Lynch. You don't have a Merrill Lynch e-mail address anymore, you're not a Merrill Lynch employee. We want to start an RIA. But we don't have the time, energy, or desire to learn how to start an RIA. So, why don't you, insurance boy? Why don't you, in your spare time, go build our RIA for us? And when it's ready, just let us know and we'll come join you." And so that was how I fell into this whole RIA space.

Michael: What an interesting position. So, they knew you had the operations experience and were someone that they trusted because you'd done it with them for eight years.

Matt: Correct.

Michael: But at that point, you're outside of the entire Merrill mothership. So, there's no Merrill e-mail address, you can do all the work and correspondence, it's not going to fall to the corporate e-mail address that someone can oversee. You're not even at risk of getting in trouble with Merrill because you're trying to build a breakaway firm while you're at the firm. Because you're really not at the firm, you're already out.

Matt: I was starting an RIA, it had nothing to do with these guys, exactly. Exactly.

Michael: All right. So, how does this play out? You're trying to figure out how to create an RIA for this huge Merrill team on spec? How does this work?

Matt: Yeah. They needed an L.A. office. We were dumb enough, which I do not recommend to anyone. "Oh, this is great. You're not associated with Merrill Lynch anymore, Matt. This is so easy." Well, we were dumb enough, we put the RIA offices eight floors below the Merrill Lynch office, same elevator bank. So, I was sneaking in and out of the building as we're building out the office and getting furniture delivered and everything else. So, I do not recommend doing that, that was dumb. And I'd worked there for eight years, so they all knew me. So, I couldn't...

Michael: So, at some point, they're going to ask, "Hey, Matt. What are you doing back here? I thought you were off selling insurance."

Matt: Correct, correct. So, but yeah, had to figure out phone systems and do we have... This is '08 we're talking about. So, "Do we have on-site servers? Do we"... In the cloud was still kind of new. "How does custody work? How does compliance work?" Had to just sort of stumble through all of that for several months, figured it all out.

So, we had an L.A. office in the same elevator bank as the Merrill office. And then I also had to build a Northern California office. And then in May of '08, said, "Okay, guys. We're ready." And so then they did the classic resignation, and then that's what became Luminous Capital. Is we started with a $1.7 billion of client assets in May of '08 and were off to the races. And then that's when I was Director of Operations and Chief Compliance Officer.

Michael: Interesting. And so relative to what we talk about as the breakaway broker trend today, this is really early, to be leaving a brokerage firm in 2008. That trend really didn't get underway for the industry until the 2010s, basically after a lot of people's stock retention deals became way less valuable when the market crashed in the financial crisis. And a lot of golden handcuffs kind of evaporated that helped to kick-start what we talk about today as the wirehouse breakaway movement. But this was pretty unheard of in 2008.

Matt: Yeah. They were very early. And it was, again, May of '08. And some clients were saying, "Boy, this really sounds risky, I don't know." And then, what was it, September? I should know. I think it was September, wasn't it? When BFA... September of '08, BFA had to rescue Merrill. So, those few clients that hadn't come over said, "Well, I guess we're going to jump ship." Because...

Michael: Oh, interesting. So, having been a pre-Merrill breakout, and then watching Merrill and Wall Street implode, and Merrill getting sold to Bank of America in the crisis was a very effective, "Are you sure you don't want to leave and come independent with us?"

Matt: Correct. Yes. So, at the time, people said, "Oh, jeez. Did you guys know that there was problems at Merrill Lynch?" No, it wasn't that. It was more just a desire to be business owners, etc., etc.

Michael: So, the business gets launched in breakaway in May of 2008. So, I guess just can you paint a little bit more of the picture for us of... I get $1.7 billion in client assets. But what was this from a number of clients or revenue or number of team members? What did this look like in practice?

Matt: 17 total people. It was 4 main advisors, and then 13 employees that were supporting the advisors. They had... I mentioned it earlier, whether do you centralize your operations or do you work in pods. We had, I call them, pods, each advisor had sort of their own. They had a vice president under them, which was the service advisor, and then a client service associate. Some of them had kind of an analyst that was sort of between the vice president and the client service associate that was basically a trader that was rebalancing portfolios and everything. But we had sort of four separate service teams for each of the individual advisors as they were building. It was still... While it was an RIA, again, like you said, it was kind of early on. It was still a little bit of the wirehouse mentality of each advisor sort of ran their own book of business.

Michael: So what happens from there? How did the breakaway go, and living in the newly independent world?

Matt: So, I'm clearly biased, but I think that it was one of the more successful organic growth stories. Those four advisors gave themselves each $250 million of net new assets as a goal. They wanted to add a billion a year, and pulled it off. We went from $1.7 billion to $6 billion in four and a half years. Purely... No tuck-ins, no other advisors joining. It was all through referrals and just...

Michael: Now, I'm going to presume we're working with some pretty affluent folks.

Matt: Correct.

Michael: So, $250 million of net new assets is not because they got 250 millionaires. This is going to be more like they got a half a dozen to a dozen people that have $10, $20 million each. Is this the kind of households that they were working with?

Matt: Yes. That's exactly right. Yeah.

Michael: Okay. But still, that's an absolutely monstrous number. So, they're adding a billion dollars a year. And basically doing this straight through the financial crisis, or perhaps expedited by the financial crisis. Because there were a lot... If you were an ultra-high-net-worth space, there were a lot of really interesting conversations in 2009 and 2010 of, "So, you picked a mega Wall Street firm and it nearly almost blew up the system. Why are you there and not working with an independent like us?" Which, when there weren't very many breakaway independents, yeah, that was a really unique story at a really good time to tell it.

Matt: That was... You're very good, Michael. Yes, that was a lot of it. It was... Today, I tell advisors that are doing the breakaway movement today you can't...just throwing up the "fiduciary" name on your website isn't going to do it anymore.

Michael: Right.

Matt: But back then, and especially with...

Michael: But back then, it actually worked pretty good.

Matt: It worked pretty good. People were very nervous, the nasty Wall Street had bankrupted the country, etc., etc. And so we were sort of riding the white horse, and we've gone outside and become independent because of all of the conflicts of interest, etc., etc. So, that definitely helped with the story, for sure.

Michael: So, huge growth here. I'm assuming that means firm gets bigger, staff gets bigger, role and complexity gets bigger for you, as well? How did the business evolve if it went from under $2 billion and $6 billion in the span of a couple of years?

Matt: Yeah. We did rip out the tech stack a couple times as we were sort of figuring things out. And we still kept the head count relatively low. We went from, like you said, $2 to $6 billion, we doubled head count. We were at 34 when we were at $6 billion. But added...had to figure out how to add different roles within each of those pods. Again, we kept that pod structure throughout. But, "Okay, advisor A, his team now needs two vice presidents, two service advisors, and three analysts, and two CSAs," or whatever it may be. "And advisor B, what does his pod structure look like?," etc.

So, I was spending a lot of time... We were right down the street from UCLA. So, I felt like Norm from "Cheers" when I'd walk into the Career Center at UCLA, "Matt! Luminous Capital is here, they're hiring again."

Michael: Very cool, very cool.

Matt: Yeah.

Michael: So, how does the business change, I guess, just from your end as... I don't know if you were still Director of Operations or transitioned more formally to COO during this time period.

Matt: Yeah.

Michael: How did the role change for you?

Matt: It was just a lot more employees, it was a lot of the hiring, like I said. We invented an internship program. So, just sort of figuring all of that out on the fly. And then the pod structure was interesting, and I think it does work for the level of clients, the complexity of those clients, it's hard to have a more centralized operations. But it was...a lot of my time was spent trying to load-balance between the pods and, "Hey, can I grab this CSA from that pod over to this pod for the next week? We're onboarding a couple new clients over here."

And so it was, like I said early on, I think, 75% of the COO's job turns into HR. And it was really a lot of just figuring out who was doing what. Not only just from a roles and responsibilities, but just on any given day who was working on what projects and what new clients, etc.

Michael: Interesting, interesting. So what happened after this? Four and a half years, it goes from under $2 billion to $6 billion.

Matt: Yeah. So, they were very early on this breakaway movement, and then they were very early on in the whole monetization of their RIA. So, 2012, they sold the business to First Republic Bank, which was...First Republic has just exploded in terms of their wealth management business. And again, I'm biased, but I think a lot of it was built on this big headline of bringing on the Luminous Capital acquisition in 2012. So, sold the business, and then became wealth advisors within First Republic in 2012.

Michael: Interesting. And so I'm presuming then that was a big...you said monetization, that was a big payday transaction event for the folks that had founded the firm and gone through that transition?

Matt: Correct, yes. And so even today, that...a lot of people still point to that because it was a... When you're trying to sell the independent model to wirehouse advisors, a lot of people, even in 2022, they still point to that Luminous Capital because it was so fast. In four and a half years, they were able to leave Merrill Lynch, grow the business aggressively, and then monetize. So, that's still today kind of the blueprint of, "Hey, if you go independent and own 100% of your equity, etc., it can do great things for the owners of the business."

Michael: And do you know what the revenue base was at that point? Because I'm assuming, ultra-high-net-worth clients, this was not $6 billion of assets charging 1% generating $60 million of revenue.

Matt: Yeah, it was just under 50 basis points was the average fee. So, it was 25 to 28, somewhere in there.

Michael: So, high 20s.

Matt: Yeah.

Michael: High 20s and millions of revenue.

Matt: Yeah.

Michael: Interesting. So, what came next for you? Did you go with the deal into First Republic and continue this path in First Republic, or did you go your own route at this point?

Matt: So, I went my own route. I really had fallen in love with the RIA space. And again, think of me as a...I wasn't client-facing, so I am the COO and CCO, and First Republic had a COO and had a CCO. And so I thought, "Well, I don't know how this is going to end for me personally."

Michael: But yeah, probably not as promising when they've already got those roles.

Matt: Correct.

Michael: I know it is one of the challenges for folks in the operations space, when firms buy other firms and they talk about "cost synergies," cost savings, the biggest place they usually save cost is, "You've got an operations infrastructure and I've got an operations infrastructure and we only need one of these."

Matt: Yeah.

Michael: And either you're the one that gets to stay or not.

Matt: Correct, correct. And they were fantastic and very warm to me and everything, it wasn't...there was no writing on the wall, "You're really not going to be needed here," but I just...it wasn't as a certain future for me as the rest of the Luminous Capital group.

Michael: Yeah.

Matt: So, I reached out to Focus Financial and said, "Hey, you're a big aggregator of RIAs." I think at the time they were...they probably owned 30, 35 RIAs. I think they're in the 90s now. But 2012, they were probably kind of in the 30s. "Hey, you're running a lot of firms and acquiring a lot of firms and I've worked at a successful firm, maybe I can help from an operations perspective from the home office." So, they took me up on that and I joined Focus. Our deal closed December of 2012, and by March of 2013 I was living in New York City and sitting at the home office of Focus Financial, yeah. And as a, I think my title was, Vice President of Operations.

And so I worked with the...mostly the point person I was working with was the COOs of the various Focus firms and just helping them think through operational efficiencies. Again, just same old stuff. The roles and responsibilities of their firms. And that was sort of my first foray into consulting of working with the various firms. And then they're...as everybody knows, they're very acquisitive, so a lot of those firms were doing tuck-ins. And so I would come in as kind of boots on the ground and help integrate some of the businesses into the existing Focus firms.

Michael: Interesting. So, from the... I guess just from the Focus perspective overall. They've got stakes in, by then, 30-odd RIAs. And so... And typically, some fairly large firms. "So, if we can bring Matt on board and he can make incremental changes and improvements in some of these very large firms, that's a really good ROI for Focus with its financial structure and ownership. If you can help these folks figure out how to be 1% more profitable in a multibillion-dollar firm we own a big stake in, that goes really well for everybody here."

Matt: Exactly. Exactly right. Yeah.

Michael: I know the industry looks a little bit different now, because this is still we're seven, eight years ago.

Matt: Yeah.

Michael: But what kinds of...just in practice, what kinds of systems or changes or things were you working on and implementing then? What was the hot thing to help firms execute more effectively or change to or implement in the mid 2000-teens?

Matt: Well, again, it's inorganic. So, again, I love my...the career that I've stumbled into. I feel like the Luminous story was one of the more successful, if not the most successful, organic growth story. And then Focus, I get to go to one of the most successful inorganic engines. And so it was really all about...at the individual Focus firms, it was all about scalability and what PFI, we call kind of buyer prep of helping firms think through, "Do we have the infrastructure in place to do tuck-ins? And could we bring on other advisors and support more clients, more assets, etc., overnight through an acquisition?"

So, it was a lot of just making sure that the firms were scalable for M&A. And then we also were...we did do a few breakaways, as well, where we would...under the Focus umbrella, we would help firms leave the wirehouses and start firms. So, obviously, the work I had done with Luminous on the breakaway side, I was tapped to do a lot of that work, as well.

Michael: So, in practice, for firms that needed to go through buyer prep to get ready to do more mergers and acquisitions and tuck-ins and all the things that were only just getting going then, there's a lot more of them now.

Matt: Yeah.

Michael: Just what did that mean in practice? What did firms actually need to do to be ready to acquire advisors and tuck them in?

Matt: So, it comes down to, "Do we have the right technology solutions in place? And more importantly, are we using our technology appropriately?" So, it's one thing to say, "Well, we've chosen Tamarac." I'm randomly just one example, right? "We've chosen Tamarac as our performance reporting tool." But what is the process around that? Do you have a streamlined performance report that you're using, or is every advisor customizing it? Can you produce the performance reports quickly after quarter end? Do you have the right billing processes within Tamarac? Are you using the rebalancer appropriately, or even do you need the rebalancer?

A lot of firms get sold on you're starting your RIA and you're just told, "Well, you're going to need rebalancing." And they, "Sure, great, we'll buy that." And then you realize, well, they really manage all the assets through SMAs. So, there's really nothing for the RIA itself to be rebalancing, right? You're basically just journaling cash into an account number, and then the SMA manager is using their rebalancer to actually buy the portfolios.

Michael: Right.

Matt: So, sometimes we're stripping out technology that's unneeded, other times we're just getting the technology to work appropriately. Very rarely do you really, "Oh, Tamarac isn't the right solution, we need to go to Orion," or, "Oh, you're using Addepar. Don't use Addepar, you should be using Black Diamond." It's usually not telling people you've chosen the wrong technology, it's more about are you using it appropriately and is it built for scale.

Michael: Interesting. So, much more in the direction of how do you actually get the most out of your tech, as opposed to doing a lot of changing and swapping of tech.

Matt: Correct. And then, clearly, "Do we have enough bodies to... If we were to acquire and we're going to bring on another 1,000 account numbers, do we have enough bodies to support that?" Obviously, you're bringing on the support staff of whatever firm you're acquiring and merging into your business, but part of the sales pitch, right? To an advisory team that's going to join an existing RIA is, "Hey, we've got people that are going to handle HR, we've got people that are going to handle compliance, we've got people that will handle billing for you." So, does the buyer have the right people in place and are they going to be able to execute on all the promises they're making during that M&A pitch to the joining firm?

Why And How Matt Launched PFI Advisors [1:00:45]

Michael: So, you're digging into firms with a lot of, "How do we actually use our tech better, train on it better, adjust our systems and processes to get the most out of it?" So, it sounds like you did that for a while at Focus, but obviously not...you're not still there either. So, what ultimately happened with Focus?

Matt: So, did that for two and a half years. We had both of our children were born in New York City. So, we were...by Southern California standards, our...as you can imagine, our apartment in Manhattan was a shoebox.

Michael: Yeah.

Matt: So, now, I had two children, we thought. And all of our family, the grandparents and everything, were in Southern California. This is pre-COVID, so I said, "Hey, Focus, do you think I could move back to Southern California and work from home?" And they said, "No, you really need to be in the office." And so Reese, my wife who had been an advisor with AXA Advisors, she was whispering in my ear, "You've had all this great experience with all these different Focus firms and looking at all the different tech stacks that they're using." And she says, "I've got the experience in this industry. We could start our own consulting firm and run it out of Southern California." So, when I went to Focus and say, "Hey, can I work from Southern California," and they said, "No, we'd really prefer you to be in New York," I said, "Okay, well, I quit, I'm moving back to Southern California."

So, it was really driven by a geography decision more than an entrepreneurial decision. But Reese is more the entrepreneur than I am, and she was whispering in my ear. And so in an effort to get back to a larger house for the two kids and be around the grandparents, we said, "Let's take a swing and start our own consulting firm." So, that's when we started PFI.

Michael: And at this point, you're almost eight years in, I guess, between operations work at Luminous, plus the operations consulting at Focus, having already done another eight years of the operations work when you were at Merrill to build the relationships with the Luminous people who eventually came back to you.

Matt: I had some gray hair, yeah.

Michael: So, you've got 16-plus years of hands-on, "I've done a lot of operations in a lot of different types of advisory firms." And Reese is saying, "You don't have to have Focus farm you out to consult. Just stand up your own consulting firm, you can get paid directly."

Matt: That's exactly right, yeah. She...it was her whispering in my ear that got me to actually do it, yeah.

Michael: Okay. So, what happens next? So, you... What was the initial consulting business, what did you create, what did you launch?

Matt: So, I'm the business builder, right? I've built Luminous Capital and I've helped with all these Focus firms. So, getting... We had a Regus office space. So, getting the office space and figuring out our technology and all of that worked great, and our website went up in September. My last day of Focus was in July, and then getting across country and finding an apartment or a house to rent, and etc., etc. So, our website went live September, end of September, of 2015. And I thought, "Okay, we're off to the races." And then I remember very well the day of sitting at my desk and thinking, "Okay, well, the website is live and my phone is working and the computer is great. We don't have any clients. What are we going to do?"

Michael: "I'm staring at the phone, but it hasn't rung."

Matt: Exactly.

Michael: Yeah, there is a weird effect for anybody who's ever done the launch of building a business, especially when you build it from scratch. You do all this prep work and effort and stuff to get it launched, just to get it launched, get it going. "I've made it, I've got the website and the marketing materials and the entity and the bank account and the name and the logo." And there's all this stuff that you do. And then you finally get it launched, it's like, "Okay, I'm not a business owner. I've left my old job. I have a lot of time. I have no clients. I'm just sitting here staring at the wall and now suddenly feeling really depressed because I walked away from my old job and nothing is happening here. What have I done to myself?"

Matt: That was the moment of panic. And then, again, I'm a nerdy operations person, I've never had to go out and get clients. So, I was, "Oh my god, what are we going to do here?"

Michael: So, in a moment, I want to know what you did, what do you do. But first, just help us understand what was the consulting service that you were offering at launch? What was the initial target, "We want to do blank for blank"? What was it going to be?

Matt: It was two main service offerings. It was, "Hey, advisors. If you're thinking of leaving the captive environment and want to start your own RIA from scratch without joining a platform or an aggregator, etc., and you really want to start a firm from scratch, we can help you. For a consulting fee, we can help you navigate that whole process." And then it was the, again, sort of similar to what I was doing with Focus, is, "Hey, if you're a 20-year-old RIA and you're thinking through efficiencies and, 'Hey, revenue goes up every year, but profitability doesn't seem to be moving. Do we have the right people in the right seats? Are we using the right technology? Are we using it in the right way?'" So, we could just do traditional consulting with existing firms, as well. So, those were our two main service offerings when we launched.

Michael: Okay. So, directly to the two things that you had been doing all along. "So, if you're a wirehouse and want to...if you're at a wirehouse and you want to break away and you actually want to stand up an RIA from scratch, I know how to stand it up from scratch. Or if you're an existing RIA that's been around doing this for a long time and you're trying to figure out, 'How do we get more out of our tech? How do we use it appropriately? How do we make the scalability thing show up that's supposed to show up but it's not showing up because we keep getting bigger and our revenue...our margins aren't getting better?'"

Matt: Yeah.

Michael: You'll help them with that?

Matt: That's exactly right, yes.

Michael: So, I'm struck. Those are somewhat different in its just scope and style. Breaking away from a wirehouse, to me, that's a really intensive build and lift just to do it and stand it up. But then once you're done, you're done. Existing firms that are trying to refine existing tech and systems, I could need someone...I could need a relatively short engagement for that, because I just want you to come and look at my stack and make sure it's good.

Matt: Yeah.

Michael: That could be a really long thing of, "Help me build out training programs and systems and processes and refinements over an extended period of time." So, was it that different in practice in just the scope and the nature of the engagements you would get from each?

Matt: Yeah. And some ways, you think, "Well, starting from scratch, that must be the harder one." And to some degree, there's a lot of education there and these advisors just haven't thought about a lot of these things. And again, "How do I... I never even thought I had to do billing. I actually have to process the billing?" Yes, you do. You're the business owner.

So, there's a lot of education there. But in many ways, that very famous, "Well, this is how we've always done things. Why do we need to change?," that mentality of those existing RIAs sometimes makes those projects even harder. But at the root of it, it's still the same core tech stack. You need a custodian, whether we're picking one to start your business or we're figuring out how to work with the custodian better. You need a performance reporting tool, you need a client portal, you need a trading and rebalancing tool, you need a financial planning tool, etc. So, there are a lot of overlaps in those two types of projects, but it's a little bit more of just the education around the advisor mindset of who you're working with.

Michael: And how did you price this? Because these are big...these are pretty big-scope engagements.

Matt: Yes. So, over time, we've sort of, on the breakaway side, we've come up with a second kind of tier there where we call it affiliated advisors. An advisor leaving LPL, Raymond James, Ameriprise, they're like three-quarters of an RIA as it is. And a lot...those engagements are a lot less involved for us, those are more, "Well, I can make the phone calls to these vendors and ask the questions, I just need to call you afterwards and say, 'Hey, I'm being told this and I'm being told that from the custodian. Is that right? And what questions should I ask?'" Whereas the wirehouse advisors, they don't even...they need me on every one of those calls. Because they don't even know what questions to ask of the performance reporting vendor, etc.

So, our breakaway services, we don't charge by the hour, but it basically comes down to how many hours of work is this going to be. We may wind up working with a firm for over a year, six to eight months before they've launched and basically six to eight months after they've launched. So, that could be a yearlong project. So, our engagements on that side range anywhere from $40,000 of the, "Hey, can I just call you and ask you some questions as we're thinking through this?," all the way up to $400,000 if it's, "I need you on every single call. I need you in my office for three to four weeks once we've launched helping us with the custodial paperwork and everything else," and very labor-intensive. So, it's a project fee either way, but the engagements are priced just based on level of work we're putting into it.

Michael: So, sizable transition when you're at $40,000 up to $400,000.

Matt: Yeah.

Michael: But again, if you're a billion or multibillion-dollar wirehouse team that's doing $5, $10-plus million of revenue, that's a cost of doing business for making a transition to the independent channel. And, well, if you'll be the next Luminous and you're going to sell it for $100 million, after a while that $400,000-dollar consulting transition fee is going to look really, really good as a long-term business decision.

Matt: Yeah. And I hope they're sleeping better at night getting all these questions answered as they're going through this process. It's a pretty scary undertaking. So, they're usually very happy to pay for the guidance.

Michael: And then what do engagements typically look like on the RIA side?

Matt: So, to do just sort of an analysis of, "Hey, are you running the firm correctly? Or do you have the right tech stack in place? Are you using that correctly? Do you have the right people in place?," etc. We call it an operational diagnostic. We've got a 10-page questionnaire we'll send ahead of time. Each page is sort of a different sort of system or process. "How do you onboard clients?," there's a whole page of questions on just the onboarding. "What performance reporting tool are you using? How are you using it? Are you billing on a quarterly or a monthly basis? Do you bill in advance? Do you bill in arrears?," etc.

Michael: Right.

Matt: So, just from the questionnaire, we get a good sense of where the pain points are. Then we do... And Zoom has been great for this. We used to do them on site, but now doing Zoom interviews, the firms actually like it better. We don't have to have them pause their business for three days while we're in their offices, we can just, "Hey, we'll do two interviews today via Zoom, and then we'll do two interviews tomorrow. And maybe next week that will work for... We'll interview your compliance folks or your CSAs on how they're interacting with the custodian," whatever.

So, that typically takes about a month for us to do the analysis of the questionnaire, the interviews. And then we'll come up with... We're a consultant, so there has to be a PowerPoint deck.

Michael: Absolutely.

Matt: So, we'll give them a nice findings deck of, "Hey, this is where we think you can be working better with the custodian. This is where we think you can be doing better with financial planning. The client onboarding, you should think of this and think of that," etc. And some firms say, "Hey, we'll just take the deck and we'll implement ourselves." And others say, "Hey, can we just do a month-to-month retainer after you've done your initial analysis and can you stick around and help our folks implement these changes?" And if it takes four months, it's a four-month engagement. If it takes six months. We've had some go 18 months and we've had some they're just a couple months.

Michael: And so how do you price or scope that? I guess for the diagnostic at least.

Matt: Yeah, the diagnostic is, again, depending on how many interviews we're going to be doing and how big the firm is, those range from $15,000 to $25,000 for the diagnostic. And then the retainer is typically right around $5,000 a month. No minimum, no max. Just as long as we're adding value and making progress through those implementing of those changes, we'll stick around on the month-to-month retainer.

Michael: Interesting. So, you launched this in 2015.

Matt: Yes.

Michael: So, now, take me back there. I guess just how does it get going? Where do you start finding clients initially? And how do you actually get going when you're offering this for the first time? Particularly since this wasn't really a thing yet.

Matt: Yes. So, we've gone the... Again, I'm not a great salesperson, I've always been more on the operations side. So, I've gone more the content marketing strategy. The biggest problem with sales, as you know, is are you in front of the person at the time they have the need.

Michael: Yeah.

Matt: And I've just found that blog posts, white papers, we've... Eventually, over time, we've fallen into the podcast, we've got our COO Roundtable podcast. But through the content marketing, that's, I've found, the easiest way to be...to keep people aware of our services. And then when they have the need, I'll get a call and say, "Man, I've listened to your podcast for two years," or, "Boy, I've read your white papers for years," or, "I've been reading your blog," "Seen you speak at a conference," whatever. "We just never had the need until today. Now, we're actually thinking of getting into the M&A game and we really think we should do that operational diagnostic and make sure that our firm is ready and poised for when we're going to do an M&A engagement." Or, again, just, "We've had some employees leaving and we want you to do a diagnostic today and help us just think through who should be the next hires," whatever it may be.

So, we've really gone the content marketing route. And then having that great network of all the Focus firms and just all the different RIAs that I had been associated with, just kind of relying on my network of finding clients that way.

Michael: And did one path take...just did one of these get more traction than the other? Between the RIA offering and the wirehouse breakaways, who showed up?

Matt: I knew all along that we... We did hire a marketing firm in the...to kind of do a launch, so to speak. And they told us... I don't know if this was, still to this day, eight years later, was this good advice or not. They said, "You can't confuse the market. You've got to go with one service offering." And so I said, "Well, the breakaway side is the sexier thing we're doing. That probably gets people talking about us more."

And so, again, was it a mistake? I don't know. Because I knew we would only do...and it's been just played out almost exactly right, we do about one big breakaway a year. There just isn't that many firms that...or that many teams that are saying, "I want to start an RIA from scratch." The move into the independent channel, into the RIA world, is very real and there are teams coming over the wall all the time. But the vast majority of them...and I knew this back in 2015, the vast majority of them want to join an existing firm and they do not want to go through the headache of figuring out real estate, figuring out a 401(k) plan for their employees, and payroll, and benefits, and everything else.

So...

Michael: But yeah, I guess there's just kind of a mentality, self-selection thing. If you have spent your whole career in the wirehouse environment where the mothership provides, you tend to be pretty comfortable in environments where the mothership provides. Which means truly going out on your own into the proverbial wilderness of build everything entirely from scratch in the RIA channel... For the people who really love independence, they love that they get to build it from scratch, make it exactly what they want it to be. But if that's your proclivity, you probably wouldn't already have 15 to 25 years logged at a wirehouse. If you stayed there that long, you tend to like things that are a little bit more built already for you and you can just do your thing. So, you end out at a platform, you end out at an aggregator, you end out at some of the other offerings that are out there.

Matt: Yeah. So, now that I'm talking about it, it probably was a mistake. We went to market as, "Hey, we're a breakaway firm," knowing I was only going to do one of those a year. So, those were...that was sort of how we got known early on, was, "Oh, they're that breakaway firm that helps advisors start an RIA from scratch." But I always knew, and now jump forward to 2022, our bread and butter really is working with existing firms.

And then sort of, I guess, a cross between the two, we've really gotten involved, as you can imagine with all the M&A headlines over the last several years, we've been doing a lot of M&A consulting. Not from a David DeVoe type of perspective. We don't do deal structure, we don't do valuation work. But, "Hey, I'm a buyer and we've just acquired a firm. And, oh, jeez, I didn't really think about integration. This is actually kind of complicated. I'm using Salesforce and they're using Redtail. I'm using Addepar and they're using Orion. Which of the systems should we use? What do we do with all these people now from both firms?" PFI, again, will do that sort of operational diagnostic on both firms and figure out, "I like this process of the buyer, I like this process of the seller, I like this technology of the buyer, this technology of the seller. This is what the combined firm should go with." So, we've sort of...we've been doing a lot of that over the last couple of years, as well.

Michael: Oh, interesting. So, basically, acquisition integration consulting.

Matt: Yes.

Michael: That sounds like a mouthful even as I'm saying that out loud.

Matt: Yeah.

Michael: But I guess that's what it is. You acquired, you actually have to integrate them in. It turns out integrating the acquisition is more complex than you realized. And you all are doing a lot of work right there.

Matt: Yes. Exactly. And some of our early engagements we... The way you just worded that made me think of it. On a breakaway side, maybe they didn't hire us to do the break, "Hey, I figured out my tech stack. Hey, I got the clients transitioned." We actually got a couple of our engagements weren't full-on breakaway engagements, but they were, "Hey, we're four months old and the clients are here. We still haven't set up our performance report, we haven't done billing yet." This is... You just said on the acquisition side, "Wow, integration is harder than I thought." Some of these advisors have said, "Oh my god, running an RIA is harder than I thought. I was able to do the break, I was able to set the firm up, but now I don't know how to run the darn thing. PFI, can you help us there?" So, that was some of our early engagements, as well.

The Surprises And Low Points That Matt Encountered On His Journey [1:20:47]

Michael: So, what surprised you the most in the journey of just trying to build your own consulting business back in the advisor community?

Matt: I think the...what surprised me most, I've got two different answers for you. On the just dealing with RIA owners, I think 2022 we're in much better shape. This was sort of how we started our conversation. I think this practice management mentality has landed much more in 2022 than it did in 2015. I was still struggling. I thought the RIA mentality of, "Hey, I'm running a real business here and we need to either bring in a COO or we need to hire a consultant to help us run the business." I didn't realize we were a little bit more behind the eight ball than we...than I thought in 2015. But it's been great to see the evolution over the last seven years, seven-plus years, of...

Michael: So, it's one of those the market is coming and catching up to you. Yes, these businesses keep growing and they keep getting more complex. They really never get simpler, there's no point in the growth cycle where it gets simpler. So, enough time of RIAs compounding, and there's just more and more firms that are hitting complexity points and saying, "Maybe I need some help with this."

Matt: Yeah. I think RIA owners self-identify as financial advisors first, and business owners fifth.

Michael: Right.

Matt: And so in those early days, I would do my pitch around RIA efficiencies and operational scalability, etc., etc. And they would listen very politely and stay quiet. And then when I would finish my pitch, they would say, "So, if I give PFI money, do I get clients?" And I would say, "No. We're not a marketing firm." "Oh, well, I'm not interested in anything that's not bringing me clients." I think that... So, that was...it was more challenging in 2015 than I had anticipated.

Michael: And then, so, what was the second piece? You said there were two. One is just RIA owners seem to be more interested in the practice management mentality now than back then.

Matt: So, the other piece is just more on a personal note, but I know we like talking about the challenges of running a business, and perseverance and everything. So, 31 days after our website went live, our six-month-old daughter woke us up in the middle of the night breathing very... And that woke us up. And we went to her bassinet and her hands were pumping in front of her face, she was having a seizure. And we were... So, we take her to the doctor the next morning and we're told...

Michael: As a six-month-old?

Matt: Six-month-old, yeah. She was having a seizure. And we were told, "Well, the brain, all these synapses and things are coming together, and seizures aren't that uncommon, and it could just be kind of a fluke." And Reese, mama bear, said, "No, we're not leaving. You're going to run tests."

And so they did an EKG, they put the probes all over her head, turned the machine on. And Layla was just hanging out, smiling as can be. But as soon as they turned the machines on, doctors and nurses came crashing into the room. She was...they said, "She's crashing, she's crashing." And she was just smiling as could be. We did not realize... Layla passed all of her tests in the hospital, but her brain did not develop, or it wasn't developing, and she was having four different types of seizures at any given time. Whether she was physically showing it or not, her brain was firing.

And so that led... So, this is 31 days after launching PFI Advisors. So, you're saying, "Well, what were the challenges and surprises early on?" Reese and Layla didn't leave Children's Hospital for six weeks, as just more tests and the news just kept getting worse.

Her... So, again, her brain hadn't developed. And so we, over those six weeks, discovered that her optic nerve was fine, but she couldn't...there wasn't enough of brain to interpret sight. So, she was blind. Her eardrums and everything in the ear canal was fine, but the brain couldn't interpret sound. So, you think you have a health daughter, you're trying to get a business off the ground, and you're told, "Oh, your daughter is having four different types of seizures at all given times. Can't see, can't hear." Again, over those six weeks, discovered that she couldn't regulate her swallowing, so feeding tubes went in.

So, it just...it became challenging, to say the least. I was trying to get the business off the ground. So, this is...the seizure happened in late October. And so Impact is our biggest conference of the year and I'm trying to get the consulting business off the ground. So, November of that year, I went to Impact and one of my old co-workers from Focus comes up to me and he says, "You"...he knew what we were dealing with and he says, "You shouldn't be here." And I said, "No, no. Reese is with her and everything is fine, the doctors are there." And he goes, "No, I'm looking at you. You look like hell." He's like, "You're not... You think you're pushing through this and you're just not." And he says, "You just don't look good, you need to go home."

So, poor Layla struggled for about two years, a little less than two years, going through all of this as we're getting the business off the ground. And ultimately, unfortunately, just the brain, just as she grew older, her brain couldn't regulate her body and she ultimately passed away in July of 2017.

Michael: Oh, I'm so sorry.

Matt: Thank you. Thank you. So, she was our little...we named her our warrior princess. And she has an older brother. Luke was three when she passed away. So, we had... Everybody kind of jokes and says, "Your business is your baby." So, we had...trying to get PFI off the ground, and then we were dealing with Luke and trying to keep him as a normal childhood as possible through all of this. So, that was a challenge that was...I was not expecting in getting the business off the ground.

Michael: So, how do you process that, how do you manage to that?

Matt: Yeah. It's... You just wake up every morning. You just keep pushing forward. And we just would look at Luke all the time and say, "Just we've got to keep going."

And one of the struggles with Layla is there was no...other than her brain hasn't developed, there was no diagnosis, there was no name, there was no "she has Layla syndrome" or whatever, right? "And children with Layla syndrome have a life expectancy of blank." Or, "Layla syndrome, their liver will get"... We just had no... It was... No pun intended, but we were flying blind through the whole medical journey.

Michael: Right. Because they couldn't even give you a prognosis of how this tends to develop or evolve or not evolve, or just how this goes and kind of what to expect.

Matt: Correct.

Michael: There wasn't even...they couldn't even give you that because no one had something like this.

Matt: Yeah. And one of the four seizures, they called it a mind eraser. And they said every time she has that seizure, she just, from a brain development perspective, she goes back to newborn first day. There was just zero brain development going on. So, that was our biggest hope, "Hey"... And we studied a lot of brain elasticity and can a different part of the brain learn certain things and could she learn sight. And she had a speech therapist and a vision therapist, and we tried everything we could.

And no one ever used the word "terminal," we didn't know that she was going to pass away super young because of it. But as she got older, for some strange reason, again, they never were able to explain it to us, her seizures, whether they were literally painful for her or it was the brain interpreting it as pain, but her seizures turned painful for her. And so she wound up, poor thing, just writhing in pain and crying out. And so that was...as that condition got worse, we ultimately had to put her in hospice care because the pain management drugs that CHLA was giving, we maxed those out. And they said, "There's nothing left, from a pain management perspective, for us to give her." So, we ultimately put her in hospice care. But even when she was in hospice, it wasn't...no one ever used the word "terminal." But she just ultimately...she just couldn't regulate.

Michael: So, in the meantime, you're still trying to get clients and do breakaways and operational diagnostics for advisory firms just with this running in the background, the "background," for two years of getting the business launched.

Matt: Our first big breakaway client was up in San Francisco. And so I spent, it was, May of '17... Yes, it was May of 2017. I was in San Francisco for a month. And then Reese actually came up for the last week I was on site and was helping with some of the paperwork and things, and getting the business off the ground. And then we came home right after Memorial Day, and that was basically when we put her into hospice care.

So, yeah, it was... You just wake up every day and just keep pushing forward. And then, again, trying to manage Luke through all of this. It was... People say starting a business is the hardest thing you'll ever do. And, of course, people say saying goodbye to a child is the hardest thing you'll ever have to do. And we were sort of managing both simultaneously.

Michael: So, is there a point where you just say, "Why am I doing this? Can we just go back and get a salary job somewhere doing something where I don't have to think about building the business on top of the rest of this?"

Matt: Well, it's interesting. As cliché as that is, you're your own boss. And so parts of it were helpful in that I didn't have a boss to report to and I didn't have to be anywhere at any given time. So, if there was... Our very first client that we signed up in 2015, I actually got the verbal commitment. I was just pulling into the parking structure of Children's Hospital, about to go underground, and had to pull over on the ramp, because I would have lost cell service going into the... And got the, "Okay, great. We're moving forward. I'll send you the contract." So, being able to do that was...had benefits. As opposed to having to go to an office every day for a "boss."

Michael: Right.

Matt: The first RIA RIABiz article that I guest wrote I actually just handwrote. I bought a notepad at the gift store of Children's Hospital and wrote that over Christmastime during that first six-week period where Layla was in the hospital. So, wrote that bedside at the hospital. So, parts of it were being a business owner allowed us to spend a little bit more time with her. But there was just that stress of no paycheck coming in, obviously, in the early days of our business.

The Advice That Matt Would Give His Former Self And Advisors Considering Scaling Up Their Business [1:33:30]

Michael: So, is there anything now you know now you wish you could go back and tell you from seven or eight years ago as you were launching the business? What do you know now you wish you knew then?

Matt: I think underestimating the sales nature of it, right? I sort of...again, I told kind of the funny story of cleaning up the desk and moving kind of paper from one side to the other and thinking, "Okay, we've launched our business, this is great." "CEO," everyone loves the CEO title, but sales is a big part of that. I think I've learned the sales side of it and gotten better at it, but I probably should have, prior to launching the firm, been a little more educated on the sales side.

Michael: So, was there something you did to learn and figure it out, books you wrote or courses you took or something, or was this pure school of hard knocks?

Matt: School of hard knocks. I think you kind of realize, again, those early pitches of advisors saying, "Well, do I get clients out of this?," just realizing what language works and what language you can say and pinpointing what an advisor's or an RIA owner's pain points are.

Michael: Right.

Matt: And explaining how our offering is going to solve some of those. As opposed to I just assume that an RIA owner cares about business operations.

Michael: Right.

Matt: Having to reframe it a little bit more towards, "Hey, this is going to help you grow the organization, this is going to help you attract advisors, this is going to help you service clients better." Just figuring out the language of how you're explaining your offering. I was very poor at that in the early days.

Michael: So, I guess in that context, what advice would you give to advisors who are in the...stuck in the throes of trying to figure out how to scale up a firm?

Matt: I have... As an operations consultant, it's funny how much I'm spending time talking to advisors about you really need to understand who your ideal client is, who you're serving, and what your service offering is. I just think that, sort of that same mistake, I was presenting my offering in language that made sense to me.

I think that a lot of advisors are... And we all talk about it. You've talked about it ad nauseam, as well. You really look at, from one RIA's website to another, we're all saying the same things. And what's making you different and what...who are you serving in a different way that is going to land clients and prospects faster? "Hey, we're the RIA that focuses"... The example you always love to give, "bass fisherman," right? "Fisherman" was too wide. I've interviewed on our podcast a firm that focused on doctors. And one of their value propositions wasn't even investment-related, it was, "We understand new doctors and the process of you getting a job at a hospital. We can help you negotiate your contract." This is an RIA, this is on an RIA's website. You don't see that everywhere.

So, I just...

Michael: And that's differentiation. Right? In the truest sense, that's different.

Matt: Yeah. So, I just think that we...as an industry, we all need to really be honing that and figuring out what makes us different, who are we serving, how are we serving them different, and making that a big piece of our messaging.

What Success Means To Matt [1:37:13]

Michael: So, as we wrap up, this is a podcast about success. And just one of the themes that come up is the word "success" means very different things to different people. And so you've been on this journey of building up a successful consulting business. Well, I guess and now as COO Society grows, as well. I don't even know if you think of yourself as a consulting business or a COO Society platform, I don't even know what you would call that. But as the dual channels of the business are building, how do you define success for yourself at this point?

Matt: Well, I mentioned I'm a UCLA graduate. And so you're contractually obligated, if you went to UCLA, you have to mention John Wooden whenever success comes up.

Michael: That seems fair.

Matt: For those that don't know, John Wooden was UCLA's basketball coach in the '60s and '70s. He's considered to be possibly the most successful coach in history. They won 10 championships in 12 years, they won 7 championships in a row. This is college sports where his roster changed every year. At one point, I think it was a three-year period, they didn't lose a game for...they won 88 straight games. And people, when... It's one thing to achieve success, but what's almost impossible is maintaining success over a long period of time. And so what I think he was so great at, his definition...I'm paraphrasing a little bit, but his definition helped keep his teams motivated. He said, "Success is the self-satisfaction in knowing that you've made an effort to do the best that you're capable of." It's all about putting in an effort to be the best of which you're capable.

And so for those UCLA teams, they knew they were better than almost every one of their opponents. But success came down to their level of preparation and their execution of the fundamentals. It wasn't necessarily about the final score. If they made it about the final score, I think the team could have easily floated through games and still won. But inevitably, over 88 straight games, I think they would have had a mental letdown somewhere in there and been embarrassed by someone. So, he made it about, "Did we play to our fullest potential in any given week?"

And so I like that definition for myself, as well, because it's all about being satisfied with yourself and asking, "In that situation," or, "with that client, did I do everything I could have?" Some things are out of your control and you're not always able to get the end result you want. But if you can look in the mirror and say, "Well, in that situation, I put everything on the line, there was nothing else I could have done," you can still hold your head high. Or vice versa. If you get lucky every once in a while and you get the end result you wanted, but it's not necessarily a success if you can say to yourself, "I really kind of floated through that project," or that client engagement.

So, I really like John Wooden's definition of success. It keeps me humble, it keeps me motivated on a day-to-day basis.

Michael: Well, thank you. Thank you, Matt. I appreciate you sharing it and joining us on the Financial Advisor Success Podcast.

Matt: Thank you. This has been so much fun and what an honor for me. So, thank you, Michael.

Michael: Absolutely. Absolutely. Thank you.