#FA Success Ep 269: Accelerating The Fee-Only Transition By Acquiring A Commission-Based Book Of Business, With Michael Hartman

Resources Featured In This Episode:

• Michael Hartman
• Hyperion Financial, LLC
• XY Planning Network
• XYPN Radio Podcast
• MDRT (Million Dollar Round Table)
• Michael's Client Service Calendar & Financial Snapshot (download page)
• #FASuccess Ep 007: Matthew Jarvis On Building a Highly Profitable Lifestyle Practice by Age 35
• Calendly
• eMoney Advisor
• Holistiplan
• Jeremy Walter
• First Ascent Asset Management
• Mariner Wealth Advisors TAMP
• Betterment For Advisors
• Advisor Growth Community (AGC)
• “Small Giants: Companies That Choose to Be Great Instead of Big” by Bo Burlingham
• The Capacity Crossroads And The Small Giant Alternative To Building A Lifestyle Or Enterprise Firm
• #FinTwit
• “The E Myth: Why Most Businesses Don't Work and What to Do About It” by Michael Gerber

Full Transcript:

Michael K.: Welcome, Michael Hartman, to the Financial Advisor Success Podcast.

Michael H.: Thanks, Michael. Thrilled to be here.

Michael K.: I'm glad to have you on today and really looking forward to the discussion around some of the pathways that we take into launching independent advisory businesses. And I know you had kind of an interesting pathway that, in some ways, many of us have. You started out on the insurance side of the industry, and ultimately moved into the advice side of the business. I did the same thing for my career, as well. But, I thought, had an interesting way that you, I guess, made the transition, or tried to accelerate the transition, which was you had decided to accelerate the transition to a fee-only practice by buying a commission-based book of business. So, you could get a critical mass of clients and potential assets that maybe go from commission trails to advisory business.

And so just when I had heard about your story, I was really fascinated with this idea of, "Buying out a book of commission clients to accelerate the transition to a fee-based practice, I feel like we need to hear that story." And how that works and how you come to the point of saying, "I realize I want to leave the insurance world. How do I accelerate this path? I've got it, let's buy other insurance clients." How does that play out to get to that vision of how to take the journey?

Michael H.: Yeah. It's definitely been a unique journey, like you said, and I'm happy to share some of that as we talk here.

How Hyperion Financial Exists Today [03:59]

Michael K.: So, I think to kick us off, I'd love to just talk a little bit about where the business is today, just to sort of set the table. Let's find out where this journey ended and has taken you, and then we'll talk a little bit more about how you made this transition and the dynamics of buying a commission-based practice to turn it into a fee-only practice.

So, start us off with just tell us about your advisory firm, as it exists today.

Michael H.: Sure. So, name of the RIA is Hyperion Financial. We launched on Memorial Day of 2021. There are three team members, including myself. And by way of the way we measure things, primarily an AUM business. So, we've got approaching $60 million of assets under management here for 75 client households. We do have a subset of clients, in addition to those 75, that are strictly investment management clients, and that's primarily because of the book of business that we had purchased prior to this transition. But, yeah, that's how we sit today.

Michael K.: Okay. And so what's the nature of the practice today in terms of just what do you do for clients at this point? You mentioned some are strictly investment management, so I'm presuming that means the rest are more financial planning-oriented. But what do you do for clients at Hyperion?

Michael H.: Yeah. I think probably not too dissimilar to most folks. We go by the term "comprehensive financial planning," like I'm sure a lot of us do. And it's everything from retirement income planning, tax planning. We've got clients really across the spectrum, so we're helping them plan for their kids' education, we're helping pay off student loans, buy houses, plan Social Security timing, Medicare, all that kind of stuff. So, really across the gamut, we try and hit just about everything. Amongst the three of us, there are two of us which are primarily lead advisors, myself and Dan. So, we've got a pretty wide array of clients.

How Hyperion Financial Charges Fees [05:45]

Michael K.: Okay. And what's the fee structure look like for them? You had said you're primarily AUM, but is that all AUM, you do some hourly fees? What's the fee structure that comes together for this client base?

Michael H.: Yeah. So, most of my clients are really those folks that are at retirement or nearing retirement. So, for all of them it's pretty much an AUM fee structure. But we do have clients, like I said, that are not in retirement mode or nearing retirement. So, for everybody else, we have a minimum fee of $3,750 a year. What we do is we typically...we offset any AUM fee we're collecting against that $3,750. So, especially for your younger clients that may not have assets, or many assets, they're really paying a monthly retainer fee.

Michael K.: Interesting. So, you've got a base planning model and the AUM offsets that, as opposed to having a base AUM model and planning fees offset in the other direction.

Michael H.: Really the way it works, because our fee schedule starts at 1.5% and it tiers down from there. Really once a client has $250,000 or more in investible assets with us, then it just goes strictly to an AUM fee. If they're less than that $250,000, then just the way the math works is there's a remaining difference between the AUM fee and the $3,750 minimum where we're billing that client on a monthly basis a retainer fee.

Michael K.: Interesting. And so I guess that gets you around the whole conversation of having asset minimums. You don't end out with asset minimums, you've simply got a fee minimum. By the time you're at a certain level of assets, your assets will cover the whole fee. But ultimately, you're a minimum fee, not a minimum assets, firm.

Michael H.: Exactly right.

Michael K.: Okay. And I guess I'm just wondering, for the clients that are below that threshold, just how does that literally work? Just AUM fees are usually quarterly, I think you said your planning fees for the minimum is monthly. So, just how do you actually do the offsets and the coordinating between them if they're getting calculated on different cadences? How does that work?

Michael H.: Yeah, it's a good question. So, every year we'll look at it once a year and just kind of match up the differences, or true it up. So, for example, if we're managing a $100,000 of a client's asset and the fee is 1.5%, we'll just take that $1,500-dollar fee and offset it against the $3,750 minimum, and then bill the difference throughout the next year just to get us to that minimum fee number.

Michael K.: Okay. So, in practice, if the market pulls back and suddenly the combined fee is actually a little under $3,750, you're not necessarily going back to them to adjust the base fee higher. And likewise, if the portfolio starts growing above that level, then you end out a little bit higher than the $3,750 minimum fee because the subscription part is set. And then the portfolio growth lists them a little higher, but that's just part of the deal.

Michael H.: Yeah. Yeah.

Michael K.: Okay. And so is that just kind of the core service all the way through? Minimum fee is $3,750, the AUM fee schedule kicks in from there, "And if you want our services based on that fee schedule, we'd be happy to work with you."

Michael H.: Yeah, that's more or less correct. We do have...for me specifically, I really...I set my personal minimum fee at $7,500. So, that's because, with the way our team is structured, I am working with the retirees or the folks that are nearing retirement. So, there are some services that we'll typically combine, or throw in, or include, I should say, with those retirees. And that's more so on the tax planning side of things. So, we're running tax projections, we're doing pretty extensive retirement income planning. Even this year, we're looking to roll out tax preparation, as well. So, we're partnering with a local CPA to do the client's return and we'll be paying for that return for the clients that meet that $7,500-dollar minimum fee.

So, the minimum fee does scale up, we've got a little flexibility based on the services, depending on the type of client that we're working with.

Michael K.: Okay. So, I get it for the retiring clients, tax projections, retirement income planning, all the things that go with that dynamic, and folks that tend to have a higher asset base. So, what are you doing for clients... Because it sounds like you've got older clients and, well, not older clients, not near-retirement clients, who may be at the lower minimum fee schedule of $3,750 instead of $7,500. So, what does planning services look like for the non-retiree folks?

Michael H.: Yeah, it's a good question. It's really anything from, I think I may have mentioned, so, student loan planning, planning for college education for kids...or for parents that have kids going to school, home purchase planning. Unfortunately, we had a client yesterday contact us and they're getting a divorce. So, those life events happen, we're helping them navigate that situation. Employee benefit reviews. Really all your...I would say most of your standard stuff that I would assume most advisors are working with, we're certainly do that, as well.

Michael K.: But I guess I'm wondering how do you frame that to the client for explaining the value proposition when you're talking about a $3,750-dollar minimum fee, but their assets maybe are "only," air quotes "only," $100,000. So, a significant portion of the fee is not the portfolio at that point. Just how do you explain the value proposition for the fees?

Michael H.: Yeah. We really try and lead everything with financial planning at this point. So, the way we describe it to clients is our minimum fee is $3,750, and that's for financial planning. What we do though is, because we do give them the option to manage their investments, in doing so, the way we explain it to clients, is that if we are managing the investments, that fee that we're collecting to do so helps offset that $3,750 minimum planning fee.

So, it's very much positioned in a way of financial planning, so that especially the non-retirees, the younger clients that really aren't...the planning isn't being driven so much by their assets, they definitely understand that it's financial planning at the forefront of what we do.

Michael K.: Because literally planning sets the baseline of the fee.

Michael H.: Exactly.

Michael K.: And out of curiosity, just how did you set the fees? Picking $3,750 as a minimum, picking 1.5% as the start of the fee schedule. Since, as I'm sure you know, right? The proverbial industry benchmark is 1%, Europe starting at a higher number than that. So, how did you set AUM fees and planning minimum fees?

Michael H.: A lot of trial and error. On the AUM side, I think I really tried to surround myself, or network myself, with advisors that are focused on delivering the most value possible to clients. And I've seen in the folks that I've interacted with in those circles that, yes, the 1% is your typical fee, but we really want to go the extra mile. And I think in doing so, that allows us to charge what some may call a premium fee. Again, our fee schedule does ladder down from the 1.5%. But that's really how we pick the AUM fee, is really just trying to deliver the most value possible to those clients.

And then on the financial planning side of things, certainly I've read a lot of what you've wrote about valuing your time and trying to map all that out. And I think just some back-of-the-envelope math. I think the way we figured out, just with the amount of planning work that we're doing throughout the year with a client and what that adds up to from an hourly standpoint, we came out somewhere in the ballpark of $200 to $250 an hour for our time. Again, for the average client based off of typically two to three meetings a year, the stuff that comes up throughout the year. And then, again, all the financial planning work that we're doing up front, and then ongoing. That's really how we settled on that number. But it's certainly a work in progress, we're constantly evaluating whether that number should be changed.

Michael K.: So, something to the effect of, "We value our time at $250 an hour by the time I go through all the meetings and between meeting work and the stuff that we're going to do for clients. It's going to take an estimate of 15 hours a year, on average. So, 15 hours per client times $250, that's our $3,750-dollar minimum fee."

Michael H.: Exactly, yeah.

Michael K.: And so how do you figure out what that anticipated time commitment for the year is going to be? Do you have a process for how you do the planning services through the year? Because I feel like for a lot of advisors it's, "Well, I don't know how long it's going to be because I don't know what my clients are going to call me about and what stuff is going to come up."

Michael H.: Yeah. So, we've adopted a few things that I know many of your listeners would be familiar with. So, surge meetings are a huge part of our process. We meet...we try and meet with all planning clients at least twice a year. So, right off the bat we know that between those meetings, the prep work, the follow-up work that goes into those meetings, that's probably half of those 15 hours in and of itself. Certainly, you have things that come out throughout the year with clients that ask questions, whether that's through e-mails or phone calls or what have you.

And then we do have a service calendar. So, we've...we're hitting a lot of things. I had mentioned reviewing the tax return, tax projections, Social Security statements, credit cards. All that kind of stuff is really part of our service model. So, we tried to map it out on average. Again, certainly, you have some clients that will take up more than that 15 hours throughout the year and some clients that honestly only want to meet once and they're just kind of on autopilot. And that's the way it works, it's just kind of the law of averages, it works itself out.

Michael K.: And you're okay with the averages. For some advisors, "No, I don't want to rely on averages. A heavy-use client, they're getting billed accordingly. Light-use client, we're going to bill them less." It sounds like just you're comfortable with, "Okay. In any particular year, some clients may use less than their 15 hours, some clients may use more than their 15 hours. But this is our fee because it averages out the way that we serve clients and that works."

Michael H.: Yeah, we are. I think we haven't had a situation occur where we feel like a client is, I don't want to use the word "abusing" our time, but that hasn't happened yet. Certainly, if it would, maybe we would be inclined to re-evaluate that average mentality. But for right now it's definitely worked well, I think, for us and, more importantly, for the clients.

Utilizing A Client Service Calendar To Create A High-Touch Client Experience [15:35]

Michael K.: Interesting. And, I guess, can you just describe further what's on the client service calendar, what does that look like for you guys?

Michael H.: Yeah. So, again, I can't take too much credit for really a lot of these things I've tried to adopt from people leading the field, like yourself and many others. We're sending out our tax prep letter, so that's showing what tax forms clients should be expecting this coming tax year. Typically in February, we're sending a reminder to clients to make sure they download their most recent Social Security statement, just to make sure that everything is up to date and accurate.

Throughout the year, again, we're reviewing investment accounts, we're sending reminders to make sure they've made their IRA contributions and HSA contributions prior to tax deadline. As we go towards the fall, we're running tax projections, we're... Danny's niche is really more on the college planning side, so he's helping them with filling out the FAFSA and some of the timing things that go into play from a college planning standpoint. Medicare open enrollment reminders, marketplace health insurance coverage open reminders. Those are some examples. We'll also send out some information typically on credit card reward points and things that they should be thinking about, quarterly market commentaries.

Those would be some examples of what that client service calendar looks like.

Michael K.: Interesting. I'm struck a number of them are kind of reminder-oriented. We may or may not be doing anything, right? "Hey, this is the reminder of marketplace health insurance open enrollment." They may say, "Hey, I'm good, we're covered, we don't really need to do anything with it." But that's fine, that was still a touchpoint. You still get credit for the touchpoint, as it were. Even if it doesn't necessarily result in an action item that month.

Michael H.: Yeah. And I think some other ones I probably should mention that are more hands-on. So, we do review insurance coverages, property and casualty, life, disability. That's more of a hands-on process. Yeah, so that. And then another one I would mention, too, is typically every year or every other year we put together a beneficiary checklist and also a beneficiary review form. So, again, just making sure that the clients' accounts, whether it's insurance policies or investment accounts, their beneficiaries are updated and they reflect what they want those wishes to look like.

Michael K.: And so the client service calendar just lays out month by month or quarter by quarter just literally, "Here is what we're doing when."

Michael H.: Exactly, yeah. We break it into the first half of the year and the second half of the year. It's actually something that we share with prospective clients, as well. Because, as you can imagine, one of the questions that comes up is, "Well, what do you do?" And it's really a good way for us to articulate the kind of planning that we're doing throughout the year, in addition to the time that they're seeing us in those typically semiannual meetings. And sometimes more, sometimes less.

Michael K.: So, out of curiosity, just are you will to share a copy of the client service calendar for others that want to see what this looks like if they haven't done one before?

Michael H.: Absolutely.

Michael K.: All right, I appreciate that. So, if anyone is interested in seeing what a client service calendar looks like, this is episode 269. So, if you go to kitces.com/269, we'll have a link in the show notes for Michael's client service calendar.

So, Michael, you've got the client service calendar that sets out the stuff that you're going to do. It sounds like that forms the baseline of what you're doing. Client meetings occur, on average, twice a year, with a surge meeting structure. And then investment management is happening on an ongoing basis for whatever assets you're managing for them, as well.

Michael H.: Yeah.

How Michael Structures, Implements, And Utilizes Surge Meetings [19:01]

Michael K.: So, can you describe for us a little bit more surge meetings? Just how does that work in practice in your firm?

Michael H.: Yeah. So, again, I'll have to give credit to Matthew Jarvis. Episode seven was really a game changer for me, I'm sure many others, as well, on your podcast. And we've really adopted his practice of surge meeting. And I know several others that have talked about this, too, that I would give credit to.

So, the way it works from a process standpoint for us is we'll typically send out an e-mail to all of our clients about six weeks or so before we want our first surge block to take place. Which typically are in April and in October, are when we run our surge meetings. So, e-mail will be going out here in the next month or so to clients letting them know that, again, the upcoming review meeting blocks are coming up here, give them the opportunity to book those meetings on my Calendly, is what we use to run those meetings.

So, clients will schedule during time slots that we have available. And then once they're getting on the calendar, my team and I are really working to put together the meeting outlines, go over any previous meeting notes, action items, tasks, things that we need to make sure we're on top of, and also the deliverables that we would be covering during the meeting with the clients.

Michael K.: So, what are meeting outlines for you?

Michael H.: It starts with a Google document. So, we'll take prior to the spring review as an example, or spring surge, I should say. We'll get together as a team, the three of us, and brainstorm what do we want to cover during these upcoming meetings. And it's anything from...some of the main points would be anything market-related that might be going on, anything with a lot of the legislation things that have occurred in the last few years, we'll certainly include them on the outlines.

And then it becomes client-specific. So, it's what's going on in their lives, what we covered in previous meetings. What their goals are are certainly something that's on every meeting outline because we want to make sure we're helping them make progress towards their goals. Taxes are a part of every meeting. So, in the spring it's always a reminder to make sure that they've uploaded their tax return to the Vault, we use eMoney. So, we're making sure that we're reviewing tax returns in those meetings. And in the fall, we're running tax projections.

Depending on the time of year, we're reviewing insurance policies. So, if we catch something in...when they've uploaded their most recent declarations page that might need an adjustment, we'll include that in the meeting outline. And then towards the end is always just next steps and things we're going to cover in the next meeting or in the interim.

Michael K.: So, you've got a...it sounded like just a standing template of kind of this meeting agenda structure. So, news and events, right? Market, legislative, whatever it is. The client-specific things around what we covered last meeting, checking on goals, checking on taxes, checking on other planning issues, and then next steps of where are we going from here.

Michael H.: Yeah, exactly. And cash flow is a big component, too. Because we want to make sure if there's anything that's come up to them, for them, or anything they expect coming up, especially for the retirees, that we're taking into account what that cash flow looks like.

Michael K.: And then you'd mentioned associated deliverables that you queue up. So, what are deliverables for you, what are you bringing as deliverables into client meetings?

Michael H.: Yeah. So, we...I'd mentioned the beneficiary checklist, that's something that we'll review pretty much every year to make sure the beneficiaries are up to date with the various insurance and investment policies. That's typically in the fall surge.

Every meeting we have what we call a financial snapshot. So, it's a one-page Excel document that we kind of modified, we got it from somebody else that was doing something similar and we modified it for our purposes. And it includes pretty much anything about their financial situation that you can think of. It has, obviously, where money is at, it has names, dates of birth, it has goals.

It has...if they're retirees, it's showing what their income is currently, be it through Social Security or distributions from retirement accounts. We do practice...for the retirees, we do practice a guardrails kind of retirement income philosophy. So, we're showing on that snapshot where they're at from a distribution standpoint in relation to the pre-described guardrails approach.

We have on there liability limits for insurance policies, also insurance coverage amounts. And it's just something that's become really instrumental for us in...when we're running these meetings, to be able to look at it and say, "Okay, here's what the client's financial situation looks like." And the benefit, I think, for them moving forward is one of the things we do track on there is net worth.

So, we're pretty clearly able to show the clients, "In the last six months, your net worth has increased by this number," or, "In the last couple years, it's increased by this number." And we spell all that out. And part of that process is using eMoney, and making sure the clients' accounts are connected. But there's just a lot of information on there that eMoney doesn't necessarily capture that it's a very manual process, I will warn anybody if they were thinking about going down this route. Tyler, in my office, would tell you there's a lot of time that goes into updating this information. But it's really become something that when the clients are coming into the meeting and they see, if it's in person, we throw it up on the TV screen, they want to spend time on it. They want to know how the net worth has changed or they want to know, "Hey, what's that number there?," or, "What's that?" It's really become an important part of our process.

Michael K.: So, it sounds like this is kind of one-page financial plan-esque, but you're calling it a snapshot. And it's not necessarily the upfront financial planning process deliverable, this is your ongoing client check-in deliverable anchor document.

Michael H.: Very much so, yeah. And I would say this document in particular... I'm a big fan of the one-page financial plan. This document in particular is much more quantitative than some of the one-page financial plans I've seen. Something we have on our radar here is to really kind of enhance it through some of the qualitative measures that I think a really good one-page financial plan can cover. But form a quantitative standpoint, I think this really...it really has worked well for us.

Michael K.: Is this something you'd be willing to share a copy of, just kind of a PDF of what one of these looks like in output for a sample client?

Michael H.: For sure, yeah, absolutely.

Michael K.: All right, awesome. So, if anyone is curious to see the one-page financial snapshot, as well, this is episode 269. So, again, kitces.com/269. And we'll have some links out for samples of what Michael's client service calendar and financial snapshot look like.

So, I am struck, Michael, that you said you pull some of the information in from eMoney Advisor to be able to get updated net worth, because you've got account aggregation tracking. But I'm struck, you're not necessarily building around eMoney for your deliverables, you made your own thing instead. So, I guess I'm just wondering how do you think about the role of planning software versus deliverables that you're creating?

Michael H.: Yeah. I'm not going to claim to be an eMoney expert per se. So, if there's a better way to do it, I'm all ears. It's definitely a very manual process that we've done here. But for us, when we're using financial planning software, it's very much for us...the features that we're using, I should say, are certainly the account aggregation tools. The Vault is a critical part of the process because that's how we're sharing confidential information and all that kind of stuff. And then we are using, especially for the younger clients, the spending tab of eMoney to set them up with a budget and track spending. Those are some of the features that we use heavily.

I think from the...as far as some of the planning calculators and some of those tools, or even the outputs, the "plan," we'll call it in air quotes here, the 50, 60-page plus plan, that's not something that we've really implemented at this point in time just because we feel like sometimes less is more.

Michael K.: So, are there other deliverables that you tend to bring into surge meetings? You mentioned beneficiary checklist in the fall surge, you mentioned financial snapshots. It sounds like you do...every client every meeting you do an update to the snapshot, which I guess is just pull out the existing snapshot and change the numbers that have changed. So, are there other deliverables that you're leveraging, as well, or is that your primary ones, your primary go-tos?

Michael H.: The only other one I'd mention as far as a primary go-to...there are others, but the only other one I'd mention as a primary go-to would be, we’re extensive users of Holistiplan, so I'll give them a big shout-out. They've been fantastic as far as tax projections and tax summaries are concerned. We definitely incorporate both of those things, the projections and the summaries, in each of our client meetings.

Michael K.: So, plugging client tax returns into Holistiplan, letting it do its number-crunching analysis, and then using the tax summaries as one of the takeaway documents, takeaway deliverables, for client meetings.

Michael H.: Absolutely, yeah.

Michael K.: And so for surges themselves, just how do you run them? I'm trying to do rough math in my head of 75 clients in the span of a month, but there are two of you doing the meetings. So, I guess, on average, each of you has like 30 or 35 or 40 client meetings to do in the span of a month. So, does that add up for what it looks like? I'm just trying to break that down. That's like three or four client meetings a day, a couple of days a week, for a month?

Michael H.: Yeah, you got it.

Michael K.: And then you get through all the client meetings for six months?

Michael H.: Yeah, that's correct. I'm primarily responsible for 55 of those 75 planning clients. So, for me, a normal surge week is somewhere between 10 to 12 meetings a week. We block out Monday for prep days and Friday for follow-up. So, it's Tuesday, Wednesday, Thursday is normally three to four meetings a day for a month straight. And it's a lot of work, as you can imagine, but it's really worked well for our process and some of the goals we have outside of the business, as we're all younger guys and growing families and all that kind of stuff.

Michael K.: Because just that's the virtue of surges at the end of day, is it's an intense month, but then you're done and you have very little in the way of client meetings for another five months. Obviously, if people have something that comes up, but your check-ins are done in a month, one intense month, but then there's no more need for ongoing meetings for five months, until you get to the next surge.

Michael H.: That's right. And I think it also allows you to really hone in on, again, the deliverables, it allows you to hone in on the same... You're having the same conversations every day for a month. So, I guess some people could view that as repetitive or boring, but for us I think it just creates more efficiency so that these are our review meetings blocks, this is what we're doing, we don't take on new clients during that time period. It just allows us to really deliver the most value to clients, and surge meetings have definitely been something we've enjoyed, or benefited from, as far as an implementation standpoint.

Michael K.: And do you still end out with many client meetings in between? Just in practice does that come up for you or have your clients really flowed into a...they come in for their surges, and then there's really not many other meetings?

Michael H.: Yeah. Because we've been doing it for maybe two years or so now, the clients have really gotten a cadence down really well. To the point where if it's something in between meetings, a lot of times they'll say to us, "Hey, I know we're meeting in the fall, so this can wait until then, but just wanted to give you a heads up on this is going on." That's been really great. And that's definitely true of the retirees in particular. For our younger clients, we are meeting more than twice a year typically and they just have more going on. They're definitely does tend to be meetings in between those two meetings a year, the surge blocks that we have blocked out there for that group of people.

Michael’s Journey From Insurance Broker To Financial Advisor [30:29]

Michael K.: So, I think that gives us a pretty good grounding in what the advisory firm looks like on an ongoing basis now. So, now, take us back to the start, to the early days in the business before you launched this whole direction. As I understand it, you had started out in the insurance commissions-based side of the business. So, talk to us a little about how you got started on this journey.

Michael H.: Yeah. Oh, man. So, I went to school for finance, and my junior year was 2008. So, I was looking for...at the time was looking to find an internship. And my mom actually, she retired, she had a job in corporate finance and always loved what she did. I've always enjoyed working with numbers and I thought that that was the route I wanted to go. But again, it was 2008, there really wasn't much available in my local area from an internship standpoint.

Michael K.: Not the best time to be trying to find an internship in finance.

Michael H.: Yeah. So, what was available, as you can imagine, were the wirehouses and the insurance company internships. So, I didn't know a whole lot about that world at the time. I did interview with a major insurance company and a major wirehouse. And in those instances I got what I've heard others have said, and then it was true of me, as well. In the one it was, "Hey, you're going to come in, you're going to really be responsible for bringing in the doughnuts. And if my car needs to be washed, you'll do that. And you'll help with some of this stuff here and there, and we'll find something for you to do."

Michael K.: Very gracious of them, yeah.

Michael H.: Yeah. And with the other one it was they had a very structured internship program, this was the major insurance company. And the managing director said to me, very clearly he said, "Mike, we're going to...we'll bring in 10 people. One of you will make it out of the internship because it's only the sharks survive. And here's the phone book, you're going to be calling, you're going to be reaching out to people, you're going to be doing all this kind of stuff." And he was very clear about it.

And I had those two conversations. I wasn't really enthralled with what those opportunities were, but fortunately my parents actually, at the same time, were going through a financial planning process with an advisor. And my mom knew some of the struggles I had going on here. And she just said to the advisor, she said, "My son would love to do an internship opportunity. We enjoy working with you. Is there any way he could just shadow you for the summer?" And fortunately, that advisor said "yes." And I'm glad he did because I wouldn't be here having this conversation if not for that.

And that was the start, I followed him around for a summer, sat in on some client meetings, got to see what he does. And it was great, I really enjoyed the aspect of working with people and helping people, and certainly the finance part of it, too. So, when that internship happened, the next year they offered me a position. And again, this was with one of the major insurance companies. And that's really how I got my start in the career, is that internship.

Michael K.: So, where did it go next? I guess you stayed, so you didn't do the internship and, "Nope," out the door. So, what came next?

Michael H.: Yeah. So, the next part was, again, what some folks will probably be pretty familiar with. The early part of the process was, they called it, the project 100. So, it was the write 100 names down of friends and family, and those are the people you're going to reach out to. But again, fortunately I had this mentor and one of the things he said to me early on, he was pretty direct about it, he said, "You know what, Mike? All your friends, they don't have money. So, you really need to be reaching out to your parents' friends, and these are the people that we can help and we could do planning for."

And I knew at the time my mom, again, was in corporate finance, she worked for the local utility company here, really great pension, a company benefit plan, all that kind of stuff. And he said to me, my mentor just said, "Well, why don't we try and work with folks at that company?" And to his credit, that ended up being a really great strategy.

The way that started, we knew we really couldn't leverage my mom, because she's my mom, in trying to work with folks. So, she had somebody that she was actually mentoring at the company around my age that was just...had a number of questions related to just setting up a budget and all that kind of stuff. So, I had a conversation with her and really just offered her as much as advice as I could.

And unbeknownst to me at the time, she was just super connected with folks within the company. Like she was in charge of the weekly golf leagues and she just had the respect of a lot of her peers. And I never would have dreamed it, but that really led to being connected to some of my best clients today, actually. She introduced me to them and just said, "Hey, you know what? Mike spent this hour-plus with me of just helping with a budget. I think he might be able to help you."

And from there that led to we did several...for years we did several lunch and learn meetings at the company. I spent hours upon hours just reading the company benefits plan and I caught things in there that many of the employees weren't aware of as far as some benefits that they had that they could take advantage of. So, when we would have these lunch meetings, we'd get 20, 30 people in a room a couple times a year. And from every one of them we've got, again, to this day some of our...some of my very best clients.

And that was really the first several years of my career. And one of the things that we did, in addition to going into that company niche, one of the strategies... Again, because at the time, I was with the insurance company. So, life insurance, obviously, was at...needed to be at the forefront of every conversation from a contractual standpoint of keeping your job with the insurance company. And to be fair, I did believe in the product, as well.

So, this company, like I said, they had a great pension plan. So, the conversation my mentor and I would have with the majority of these prospective clients would be based around that strategy you've probably heard of, the pension maximization strategy, where you're using life insurance to leverage, or pick one of the higher pension options. And I think it worked really well. The employees were very receptive to the idea, it wasn't something that they had heard of. And honestly, had it not been for that introduction from that young girl that we helped with a budget, I'm not sure where I'd be here today.

Michael K.: Interesting. So, focused into a niche with a local company, got what ultimately became one good center of influence, refer within the company, and all the momentum came from there.

Michael H.: Yeah, yeah. I think, early on especially, that company probably accounted for 80-plus percent of my clients at the time.

Michael K.: Very cool. Very cool. So, what came next? You survived, still here, so chugging along. So, you got some initial traction. What came next in growing the business?

Michael H.: So, I think the next part, really as the business was growing, was having some success based off the metrics that the company would measure by, which one of which was MDRT, Million Dollar Round Table, was something that was promoted within the company. And was fortunate enough to qualify for MDRT in 2015. Had my best year at the time, was about five years into the career at that point. And had accomplished that goal, if you want to call it that, but at the same time I felt like... Well, I was working with my mentor. He had been in the business 40­-plus years at this point. I've been on teams my whole life, through sports and otherwise, and I felt like this was something, this business was something, I wanted to experience with others as part of a team.

So, what ended up happening from there is I actually changed insurance companies, I switched over to one of the other major insurance companies here. And they were very supportive of that team concept and the vision that I had and building that out. So, made that change. And that company, which was my most recent company before we launched the RIA last year, they're a great group of folks. I would speak very highly of them, I had a great experience working with them.

But I think, as we'll talk about, one of the challenges when you're trying to build any team, but especially a team in an insurance company framework, is contractually the way things work. When you're an employee of the insurance company, you have requirements, contractually, validation and things like that, that you are required to do a certain amount of business. And if you're not doing that, or someone on the team isn't doing that, that can become problematic for their future in that world.

Michael K.: Well, they are an insurance company at the end of the day. Right?

Michael H.: Yeah.

Michael K.: That is their business.

Michael H.: Yeah. And so, while we had a really great group of people that we were working with with that most recent insurance company, eventually it got to the point where it was just becoming problematic for some of the members of the team to reach some of those goals. And it was a very much...you've, I'm sure, heard the term the "eat what you kill" commission type of setup. And while we were a team in name, it really didn't always feel like that because at the end of the day I had my requirements, they had theirs, and that's just ultimately the way it worked.

And what ended up happening, I kind of had this aha moment where for the first, really, seven years of my career I just kind of stuck to that insurance company world. I was very much...those were my peers, it was the people at the company, the broker-dealer, whatever it may be, I really hadn't expanded outside of that. And one day, I'm not sure exactly how I stumbled across it, but I stumbled across this website you may have heard of called kitces.com.

Michael K.: Oh, that guy. I've heard of that, it's a blue website. Seen it before.

Michael H.: Blue, yeah, exactly. So, stumbled across your website for the first time and it was just this light bulb went off. I went down a rabbit hole. And I came across the podcast, I saw the XYPN podcast, as well. Unfortunately, my dad was actually in the hospital at the time and we were going back and forth to the hospital daily for probably the better part of a week or two, and it's almost an hour from where we live currently. So, I just dove in, I was just reading and listening to everything imaginable that you were publishing and some others were publishing. And it was just...it was an epiphany, I just never knew that this whole other world existed from a financial planning standpoint.

I had felt like, at times in the insurance company world, that there's probably something we're missing here if a lot of these conversations tend to lead back to life insurance. And again, to be clear, I'm not...I know some others that feel pretty strongly, specifically on permanent life insurance and its merits. I'm not here to really have that argument, I do think there's a place for permanent life insurance and annuity products and things like that. But I knew, at the same time, there was probably a better way to deliver value to clients and there were things that they were asking about that were not necessarily insurance-related. And we had some limitations there.

So, when I stumbled across your website while my dad was in the hospital, that really kind of set the wheels in motion to continue to dive deeper and deeper into this financial planning world. And really the first conversation I ended up having was with Jeremy Walter, who I believe you know pretty well here. He's the next town over from where I'm at. And at the time, I had came across his profile on the XYPN website, I saw he's about a half an hour from me, and I reached out cold and I just said, "Hey, this is where I'm at. I've come across this whole new world of fee-only RIA, financial planning, all this kind of stuff. Are you willing to have a conversation with me?" And, graciously, he was. And we chatted for probably about an hour or so.

And he was, I think at the time, maybe a year or so into launching his RIA. And he was up front, he just said, "Look, I don't have all the answers, but here's what I know and here are some of the things I'm doing." And that was the first piece of validation to me to say, "You know what? This is something I want to explore more."

And at the same time, every year the insurance company that I was with, we would do our annual kick-off meeting and we'd talk about individual goals for the year, firm goals for the year, just some of the things that the company was working on. And at that meeting, because I had gone down this rabbit hole, I just started raising my hand and I had all kinds of questions about how we could work with more young people, how we could build a retainer model, and how we could enhance our financial planning process, and all this kind of stuff. And it just became pretty clear, as I continued to raise my hand, that that was not going to be the focus of that annual meeting.

So, while, honestly, my initial intent was to see if this was something...this business model and these practices were something that I could build out as part of that company, it became pretty clear pretty quickly that that wasn't going to be the case. And again, that's not speaking illy on them, it just wasn't where their priorities were at the time.

Michael K.: Okay. And so I'm presuming then that that kind of starts leading towards the natural conclusion of, "So, I want to do more of this and it's turning out I really can't do it at the company I'm at. So, I'm going to have to go somewhere else."

Michael H.: Yeah, yeah. So, that started to set those wheels in motion. But one of the things I knew from reading and listening to your content, and many others, is that I didn't have my CFP at the time. And I knew that that was something that was important, especially if we wanted to really focus our efforts moving forward on financial planning, that was something that I needed to get. So, this was the beginning of 2018. And so that set the stage there that I definitely focused a lot of my efforts in 2018 to passing the CFP in November.

Ironically, my dad unfortunately had passed away the following year. And at the time, we...the CFP, because some of the tax law changes that had gone into effect, you didn't find out if you passed right away, or the tentative pass-fail when you submitted the final question. So, it was a four or five-week process until you got that letter. And we were at a memorial service for my dad actually, it was over the holidays of 2018, and that's when I got the notice that I had passed. And it was, obviously, a range of emotions there, but pretty cool to get that notice on that day in particular.

So, anyway, what ended up happening, as we knew financial planning was the route we wanted to go, one of the changes we also made at the time, there was a "team"... And I'm using that in air quotes because, again, it's a little tough in an insurance company setup. There was a "team" of six of us. And we knew that the commission world, which is exclusively what we had ran our business off of up until that point, that that was no longer going to be the case and we were going to go down the fee-based and ultimately the fee-only route.

So, while, at one point, MDRT qualification and some of those things were something that I'd achieved, that was no longer a part of the plan. And we very quickly went from, I would say, a pretty considerable amount of commission business to none almost overnight. And that cut the team in half quickly. So, we dropped from...

Michael K.: What does that do from a literal revenue perspective?

Michael H.: Yeah, it changed it quite a bit. So, we dropped from six members to three pretty much instantly, including my wife who was actually part of our team. I had convinced her a year or two prior to join the team. And her background was in nonprofit, but she's always been great of helping us with different marketing things or deliverables or things we're putting together, she really has a knack for that kind of stuff. So, I'd convinced her to join the team and she was doing that. But it became pretty clear that when the income and the revenue changed, that some changes were going to need to be made.

So, I outlined that vision and, like I said, half the team was no longer part of the team moving forward. We did have...of the three of us that have still stayed part of it, we are still here today. But even at that point, Danny, who was, again, part of the team, he actually...he took a job at... Our office is located within a property and casualty company. So, he actually took a part-time job with them just to help pay the bills, honestly. We weren't in the position to pay him, so he kind of bit the bullet and took that job downstairs. And he would work there for about six hours a day, then he would come upstairs and do what needed to be done as we were building the financial planning business.

Tyler, my other counterpart, I pleaded with him to stay. I offered him a $24,000-dollar salary, which I had no idea, honestly, at that point. I had some insurance renewal business and things like that that were fairly considerable, but outside of that there wasn't much. And I pretty much allocated all those renewals, or most of them anyway, to his salary because I knew he would just be such an instrumental part of the business that we wanted to build. And he said "yes," thankfully.

So, that was the team. It went from six to three, which was really more like two-ish for probably a year or two. And it changed quite a bit. But in my mind the reason we had to make that change and there was no going back once I had seen what I had seen and listened to what I had listened to... There's a quote I've heard, and I don't know if you've heard this one. And ironically it came from somebody in the insurance world where I first heard it. But the quote goes like this, it says, "A person who is honestly mistaken, when confronted with the truth, will either cease to be honest or cease to be mistaken." And for me that was something that's always rung true. Once I realized that there was, I would argue, a better way of helping clients or doing business, there was just no going back. I couldn't go back to the way we were doing things.

So, I was all in. And I communicated that direction. And, understandably so, that meant the team needed to change, but fortunately Dan and Tyler stuck with me, and still have stuck with me to this point where we're at today. But it was really tough, really tough.

Michael’s Opportunity To Buy A Book Of Business [48:21]

Michael K.: So, what came next? You've now shell-shocked yourself into the new transition, but now your team shrunk down, the revenue shrunk down. You're presumably trying to build back to something. So, what comes next?

Michael H.: So, while all this was happening, a few years prior I actually...I had reached out to...there was a local advisor in my hometown that I had stayed in touch with, he was older. And I knew, just based off our conversations, that at some point in time he was going to retire. And so we had stayed in touch, we'd go out to lunch every...a couple times a year, things like that. And it became clear, as time went along and our conversations continued to evolve, it got to the point where in January of 2019 he told me that he wanted me to take over his business and ultimately purchase his business. And that was something that we ended up coming to a... I'll just call it a handshake agreement at the time, that that's what he wanted, that's what I wanted, as well, for a lot of reasons that I'm sure we'll get into. And that was really part of the next phase. So, this the beginning of 2019.

Meanwhile, I was having conversations with another local advisor who I respect and admire greatly. And he was in the independent insurance broker-deal space. We had conversations just about potentially merging our firms and Danny, Tyler, and I joining him. But some of the needs he had and some of the things they were able to do being an independent broker-dealer, that was something that was attractive to us. We had a lot of similarities as far as how we approached planning. And we started going down that conversation.

Ultimately, that merger did not happen, and that's primarily because, while this was all taking place, I decided to take an eight-week, or two-month, road trip across the country. We had... With my dad's passing, it just became clear that...and everything that was going on, it was just something like there's no time like the present sometimes. And I had always wanted to visit a number of the national parks, and I'm a huge baseball fan. So, it was summer, it was baseball season. So, the national parks and baseball were very much of interest to me. And I was able to convince my wife to...and she was able to convince her employer. When she went back into nonprofit, she was able to convince them to allow that.

So, we took this eight-week road trip. As coincidence would have it, Michael, you may or may not remember this, but I stopped at the XYPN headquarters in Montana as part of my road trip and I actually met you for the very first time at this...the middle of this road trip.

And what ended up happening from there, as we were on this journey... And we had verbally agreed to join the independent broker-deal and the local advisor. But as I was on this journey, it just became clear to me that I was never going to be happy, and we were never going to be happy, unless we did our own thing and we went the fee-only RIA route. It was just something that continued to resonate with me and stick with me.

So, from when we returned to that road trip, we let...I let the advisor know that that wasn't the direction we were going to be going. And from that point forward it was really moving towards the RIA direction and going fee only. We did have a conversation with the local advisor here that was fee only, as well, about, "Hey, does it make sense to possibly merge our firms together?" Because the one thing I kept coming back to is just you don't know what you don't know. And I never, obviously, started an RIA, I was honestly pretty scared to do it.

So, this advisor that I had become pretty close with, we approached them and just said, "Hey, this is what we're looking to do. If you'd have any interest, we'd love to have that conversation." And we had some conversations, but ultimately the timing I don't think was right on our end. So, we made the decision to launch the RIA and go solo.

While this was all happening, I was in conversations with the retiring advisor about buying his book of business. So, from January of 2019 until November of 2019, ultimately when we came to an agreement, we were meeting with his clients, he was introducing me as someone that was going to take over the business, we would introduce the team, myself, Dan, and Tyler. And I met with a lot of clients. Not all of them. Now, he had several hundred insurance policies he had sold over the years and several investment accounts and things like that. So, we didn't meet with everybody, but we met with a lot of people for the better part of 10 months. And that was...ultimately that came to a point in November when we agreed...we came to an agreement and he retired.

Michael K.: So, just talk us through this a little bit more. You're having these simultaneous decisions of, "I think the only way I'm going to be happy is if I am entirely under my own control as a fee-only RIA and not doing any of the commission business." And then literally in parallel you're going down the road and buying out this insurance commission-based book of clients.

Michael H.: Yeah, the irony is certainly not lost on me, I've gotten quite a few eyebrow raises on that one. But one of the things I knew at the time, based on my conversations with Bruce, the retiring advisor, I knew...with the conversations with him and also conversations with the clients, that the relationship...he had great relationship with his clients, he's a great advisor, but financial planning really wasn't part of that relationship, it was very much more investment-driven, or insurance-driven if there was an insurance policy in place.

So, in my mind I thought, "This is an opportunity where, yes, it is a commission-based book of business," and it was primarily 12B-1 revenue through American funds, and that was really the primary structure of Bruce's business. But I knew there was an opportunity that if we could build the relationship with the clients and build trust, obviously, with Bruce, that this was something that we could introduce moving forward from a financial planning standpoint.

And I also knew at the same time that the...because we were going down this route, the change to a fee-only RIA was not going to be instantaneous because there was going to be a timeline to take over the business, and ultimately then a timeline to launch our own business. And we didn't want to do those both at the same time, we thought that that would be a little too much change for clients, especially because the business itself was primarily folks that were around Bruce's age, which are retirement age.

So, we didn't want to have too much change going on for them, but at the same time we thought that, based on our vision for the business moving forward and their situation, that financial planning was something that they could definitely benefit from. And if we led with financial planning, where the investments were located or how they were structured would be something that ultimately could be changed to a format that would be more conducive to the business that we wanted to build.

Michael K.: So, I still got lots of questions about this. So, I guess first, just help me understand the mindset shift a little more of just what was it that led you to this conclusion of, "I'm just not going to be able to create the thing I want unless I go hang a shingle as a fee-only RIA." Just what pushed it to that point from having looked at...having been in the insurance company and an insurance BD and checking out independent BDs? What led you to that conclusion?

Michael H.: I think Danny and Tyler would certainly say this of me, and I will admit that they're right. I think it's one of those things that I'm probably never going to be happy unless I have the freedom to do what I feel as though is in the best interest of the business or the best interest of the client. And what continually kept happening with the insurance company firm we were at, there was just a lot of pushback as far as if we wanted to create a weekly newsletter, e-mail newsletter, for example. There was no chance that was going to happen. If we wanted to do a podcast. Student loan planning actually became a big thing that we had... Again, because I'm in my low 30s and we had a lot of clients at the time that had significant student loan balances and they needed help. And we felt like, "Hey, this would be an area where we could help clients and do a little project work and get paid to do so." And that was just not something that the insurance company broker-deal was on board with, that was not something that we could charge for. And financial planning in general was something that was...there was a lot of gray area as far as what we could charge or what we couldn't charge at the time.

So, that part of it became pretty clear there had to be a different option. And then when we explored the independent broker-dealer, it just felt like, again, really great people, a really great advisor, but it felt like it still didn't match exactly what we were looking for in the way we wanted to run our business. Even from the little things, like we're typically more casual when we meet with clients and they prefer the suit and tie approach. And it's just little stuff like that that, for whatever reason, I don't know, it just tends to eat at me and I just can't...I have a hard time looking past it.

So, it just felt like, "You know what? We've already gone down...we've already made all these changes, we're doing a lot of these things on our own anyway. Why don't we just go all in on this and launch it on our own? Yeah, I'm sure there's stuff we're going to run into that we don't know, but we'll figure it out." And so that's really what led to it.

How Michael Launched And Transitioned His Firm Into A Fee-Only RIA [57:28]

Michael K.: And then how did that launching process occur? Because it sounds like you had a period of time where you were standing up the RIA, but you still had the BD license, as well?

Michael H.: Yeah. So, November 2019, we completed the agreement with Bruce. And what happened from there is our initial plan was to launch the RIA pretty early at some point in 2020. But, as fate would have it, my wife and Tyler's wife, actually, they both got pregnant. So, in the middle of COVID, we had...Mackenzie was born in October of 2020 and Eli, Elijah, was born in...four days prior, actually, in October of 2020. So, we had two kids. And between the kids and COVID, it delayed our initial timeline.

So, we ended up pushing back the RIA timeline. Which actually worked out well. It allowed us to continue to build the relationships, particularly with the clients that we had purchased from Bruce, and build those relationships and get them comfortable enough to a point that, when we ultimately did launch the RIA in May of 2021, again, about a year and a half after we purchased Bruce's book of business, there was enough rapport and comfortability built up that it wasn't really a big deal. I'm sure you want to get into the actual purchase of the business from Bruce.

Michael K.: Yeah, I'd love now just to understand more of just what exactly was Bruce's practice, like how many clients, how much revenue was there, what was the nature of the revenue, and ultimately how do you value it, particularly when you're anticipating at some point you may be transitioning to a different business model than the thing that you're buying.

Michael H.: Yeah, that's a great question. And one of the things I would advise anybody going down this route. We had a handshake agreement, like I said, in January. And what we did not have though is what we discussed informally, valuation and all those kind of things. We never agreed to a number. We had thrown some numbers out, we had done...just in conversation. And fortunately, that...everything worked out fine. But I do think, from a best practice standpoint, it's probably better to iron out some of those details before you get to the 11th hour and are officially signing the agreement.

But what we agreed to was ultimately we did two times recurring revenue. So, in his case, there was approximately $100,000 of recurring revenue which was primarily in the form of 12B-1 fees from the mutual funds that he had sold and worked with clients. So, it was $100,000 of recurring revenue. We agreed to a $200,000-dollar purchase price.

And I know...as many advisors that are in that situation that are retiring, I know that that was something that Bruce really struggled with as far as the two times revenue. He just kind of felt like, "Well, why... Two years of revenue, why wouldn't I just keep working? And what's... That just seems low." And I understood, there wasn't a whole lot I could say to... I didn't necessarily disagree, but the benchmarks are the benchmarks, the studies are the studies.

And ultimately, I know he felt comfortable that he wanted me to be the one to take over and I felt like, "There is some risk here that the business isn't structured in a way that ultimately I want it to be structured, from a commission versus fee standpoint. It is an older client base." There were some factors that went into it that ultimately, with just some back and forth, we were able to come to that agreement.

And we did use FP Transitions for the agreement part of the process, they were very helpful in just drawing everything up on paper and accounting for everything that needed to be accounted for. But the valuation was just conversation back and forth between one another. Ultimately, it got to a point where we both felt comfortable enough to make the deal. And when we did, one of the benefits of being at the same broker-dealer, because Bruce and I live in the same town and the same broker-dealer, that was something that they were helpful in that they could pretty seamlessly just transition the clients over from Bruce to me without signatures or anything like that.

Michael K.: Because client accounts aren't moving, there's no repapering. I guess just you technically become the updated broker of record?

Michael H.: Correct, yeah.

Michael K.: So, was this all mutual fund business? Was there annuity and insurance trails and other things mixed in?

Michael H.: There were, yeah. So, there were several hundred insurance policies that Bruce was the primary advisor for. There were quite a bit of annuities, as well. So, because we were still with the insurance company broker-dealer, we did take over as the servicing advisor on those contracts, as well. Obviously, that's not the case anymore. But at least for part of that transition we were the servicing advisor on those policies.

I was very transparent with Bruce from the get-go that ultimately what our long-range plans were and why we felt like we were going to ultimately make some changes from where we were at to going the RIA route. So, he understood that and he understood the direction that we wanted to take the business. So, we really didn't take into account the insurance renewals or the annuity trails because...

Michael K.: So, that wasn't even part of the valuation formula?

Michael H.: No. We just...we really just zeroed in on the 12B-1 revenue.

Michael K.: And, I guess, well, you got the deal done, so it got agreed to. But, I guess, Bruce didn't have an issue with, "You're only paying me for some of the revenue, but I could have been selling the rest of this revenue if I worked with someone else or just had someone else who valued it, because you guys don't," that wasn't a blocking point for you?

Michael H.: No, because in his case, while there were several hundred maybe policies, because many of them had been around... He actually...his father was in the business, so it goes back maybe 60-plus years.

Michael K.: So, there weren't a lot of trail options back then.

Michael H.: No. No. The recurring revenue, or trails, on these contracts were pretty minimal, honestly.

Michael K.: Okay.

Michael H.: Maybe $10,000 in total, it wasn't a huge number.

Michael K.: Okay. So, lots of insurance business, but lots that had been paid out in upfront commissions a long time ago. So, it wasn't actually the trails driver, the trails driver was the 12B-1s from the mutual funds.

Michael H.: Correct.

Michael K.: Okay. So, $100,000 in 12B-1 fees at... Was this a bunch of C shares at 1% or a bunch of A shares at 25 BPS?

Michael H.: Almost all A shares at 25 BPS.

Michael K.: So, then I'm presuming this is $30 or $40 million of assets?

Michael H.: Yeah, you got it.

Michael K.: Okay. Which I guess gets very interesting of, "Okay, if at some point we're going to transition this to a more holistic advisory offering and we're doing panning plus investments and we're charging 1% to 1.5%. I may be buying $100,000 of revenue." But if I can successfully transition these clients in your advisory model, this can be $400,000-plus of revenue for the same client base.

Michael H.: Yeah, that was... I couldn't say it any better myself. That was definitely something we took into consideration and something we were very cognizant of.

Michael K.: Interesting. So, that's part of the growth...the strategic acquisition. The growth opportunity for you is, "If we can convert these clients to ongoing planning clients, we don't even have to get all of them, just a significant chunk of them, and you can actually turn commission trails into a significantly larger chunk of business."

Michael H.: Yeah, that's exactly what the goal was.

Michael K.: So, how did this get handled, just from a purchasing perspective? Did you have cash? How do you actually finance and afford this?

Michael H.: Yeah. So, I feel very fortunate in that Bruce was really able to work with me that the way we structured things is I paid 5% down, which was $10,000, and the rest was seller financed. So, he holds the note for that business. And we agreed upon an interest rate of, I believe it's about, 4.5%. And every month I send him a check, and he's happy and so am I.

Michael K.: Okay. And what time period were you financing this over?

Michael H.: Yeah. So, he actually suggested 10 years. He doesn't have a pension, so he wanted to view this as almost a 10-year kind of pension for him. And as you can imagine, I was receptive to that because that helped lower the monthly payment.

Michael K.: Well, yeah, yeah. "And you're financing. Let's stretch this out, man."

Michael H.: Yeah. So, I think we were both pretty happy with that outcome.

Michael K.: So, $100,000 of recurring revenue at 2X. It's a $200,000-dollar purchase, but financed over 10 years. It's rough math of $20,000 a year, plus interest of ongoing payments, which gets pretty manageable.

Michael H.: Yeah. I send him a check of $2,000 a month.

Handling A Business Transition Through The COVID-19 Pandemic [1:05:49]

Michael K.: Okay. Very cool, very cool. So, now, take us forward. So, you come in, you buy the practice. It's got this base of recurring revenue clients. The long-term vision opportunity is, "We're going to do more holistic financial planning services under an advisory structure where frankly we may be able to charge a full advisory fee, which really expands the revenue. But we haven't our RIA yet," and then pregnancies of babies and pandemics and other things kind of slowed the process down.

So, what was actually going on in 2020 and into 2021? Were you starting to convert to advisory accounts while you were still at the old company, was that not even feasible and it was just service the trails and get to know the clients? How did this work when you're in transition limbo?

Michael H.: Yeah. It was a little bit of both. So, we scheduled meetings with as many of the clients as we possibly could right away. So, after November, an agreement was finalized. We started meeting with all of the clients. Because I had gotten to know them previously leading up to the transition, that was really helpful.

And something I would give anybody considering doing this, you really have to have the support of the retiring advisor or the selling advisor. And Bruce was just so fantastic with just speaking highly of us and helping any time a client had a question that maybe we didn't know the answer because it was a 40-year-old insurance policy, or whatever it was. He was just great, and he continues to be great. So, I can't emphasize enough how important that is.

But what we did start doing is we started having all the meetings with clients without Bruce in the room. And three questions that we asked every client, and I'm so glad we did this, were the first question was just, "Your experience working with Bruce, can you just tell me what you enjoyed the most?" And it was very clear what the clients enjoyed the most was the relationship. Bruce is just a very relationship-oriented guy. It wasn't... Obviously, again, he wasn't doing financial planning, so they wouldn't mention that kind of stuff. It was just, "I like that he sent these birthday cards with jokes in them. And I like that he would come to the house and we would hang out." And so that...we're relationship-oriented, as well. So, that was good to hear.

The second question was, "Okay. You've worked with Bruce a while. Can you tell me was there anything that you wish he would have done differently or could be improved upon?" And, for the most part, there wasn't a whole lot. I think though the things that did tend to come up were more financial planning-related. It was stuff like, "Well, I had this 401(k), but we never really talked about it because it wasn't something Bruce was managing," or, "I have some tax questions," or whatever. And that kind of stuff was right in our wheelhouse. So, we felt like, "Okay, this is really good."

And then the third question was, and I would say to clients that, "One of the things that we do a little differently than Bruce is we believe wholeheartedly in the importance of fee transparency. And the way your accounts are set up currently, they're in a commission-based format. If I were to ask you what you're paying Bruce to be your advisor, do you have any idea how you would answer that question?" And everybody would kind of look at me or they would look at their spouse and say, "We really like Bruce, but we have no idea. We've often asked that question of what he was being paid to do this," or whatever it may be. And to Bruce's credit, I'm certain he talked about load fees and all that kind of stuff. But...

Michael K.: No one remembers it.

Michael H.: Right, no one remembers that stuff. And that was...I'm glad I asked the question because I...then the way I would frame it is I would transition to say, "Well, we do things a little differently. Our fee is transparent, you're going to see it on every quarterly statement you get. And here's how we would suggest going about doing that and some changes we would suggest making to the portfolio," or the financial plan or whatever it may be.

And pretty quickly we grew our AUM in middle of...right dead in the pandemic. We grew it from $10 million to $30 million within a few months. So, those were with...primarily with the clients that we were just able to get in front of. And that was, again, while we still were with the broker-dealer. We just presented some recommendations, and they went with it.

Michael K.: So, meaning these clients started shifting from their commission trails to an advisory account while you were still with the broker-deal?

Michael H.: Exactly, yeah.

Michael K.: Okay. And so that's...I guess that's how you're distinguishing sort of assets that were in mutual fund commission products, versus "AUM" is the assets that have literally transitioned into advisory accounts.

Michael H.: Right, yeah.

Michael K.: Okay. So, I guess, two follow-on questions for this. One, what was your setup for advisory accounts? Like were you self-managing, were you using a TAMP platform, something else? What did you actually do as you started building advisory?

Michael H.: We use a TAMP. We've used TAMPs really since we started managing investment accounts. So, we use a TAMP in that process.

Michael K.: And what was your TAMP of choice?

Michael H.: We use a couple. So, currently we're using...when we made the change to the RIA world, we used First Ascent Asset Management for quite a bit of our clients now. At the time, it was primarily, and still is, Mariner Wealth Advisors is our TAMP.

Michael K.: Okay. And what led you to First Ascent and Mariner in particular?

Michael H.: So, Mariner was because...primarily because in the insurance BD world there are only a handful of TAMPs that are approved, and they were one of the ones that were on the list. And my background, I didn't even...for the first five years of my career, I only had my insurance license. So, I wasn't securities-licensed, the investments really weren't a part of...or significant part of the conversation. So, when I got securities-licensed, I still knew the investments were...I still felt like it was kind of a weak spot for me. So, we preferred working with TAMPs. And honestly, the insurance company, they preferred that, too. They...that's what...they didn't want your focus necessarily to be on that.

So, we partnered with Mariner. And then since then, we've also partnered with First Ascent. The appeal there is primarily from a flat fee kind of pricing model that they implement, I think, is really unique and a credit to them. So, that relationship is newer, since we launched in May of 2021.

Michael K.: So, they're a flat fee as a TAMP provider?

Michael H.: Correct, correct. So, I think they're about $1,400 per household is the maximum fee. And that is attractive when you have clients that are retirees and, in some cases, have millions of dollars. The traditional TAMP model is basis points and can add up to be a pretty significant number. So...

Michael K.: On a million-dollar account, $1,400 per household is 14 basis points. And $2 million, you're down to 7 basis points. So, that fee, if you calculate it, is BPS gets pretty low pretty quick.

Michael H.: Yeah, exactly right. So, they've been a good partner here since we've launched the RIA. And we also use Betterment, as well, Betterment for Advisors, for a lot of the younger clients.

Michael K.: And so why Better for Advisors when you've already got all these others, as well?

Michael H.: I think just...a credit to Betterment, they're just, from a technology standpoint, the ease of opening an account and just the platform they've created is just...it's very convenient, cost-effective. And honestly, from a fee standpoint, with both Mariner and First Ascent, there is a basis point fee in First Ascent's case up to a certain level of assets. So, when you're working with a smaller client, they tend to be a better...a smaller client from an account standpoint, they tend to be a better fit for Betterment.

Michael K.: Okay. So, First Ascent is basis points, but basis points up to a cap. So, once you get above the...once you get above an asset threshold, it's basically just a flat fee. But for a small client, you're still on basis points. That may not be as competitive to others for small clients.

Michael H.: Exactly, yeah.

Michael K.: Okay. So, you start building this, and knowing that you're going to have a transition at some point. So, what happens as you get to the transition? Like how much got transitioned from mutual funds to advisory before you got to the following year when it was time to go RIA and how did you actually do this transition?

Michael H.: So, we grew...we had about $10 million under management prior to the finalization of the agreement with Bruce by about May of 2020. So, about six months later, we grew from $10 million to $30 million. So, we had tripled. And that was pretty much exclusively with his clients. And then, well, as we sit here today, we've doubled again. So, we're just about at $60 million. So, we've moved about $20 million in that first six-month period, we probably moved another 10 or so leading up to the IRA launch the following year in May of 2021. And then since then, we've added another $15 to $20 million through our own clients and referrals, but also through some folks that either didn't make sense to switch from commissions to fee-based or just, for whatever reason, the timing wasn't right or we couldn't get a hold of them, or whatever the case may be.

Michael K.: Okay. So, talk to us a little bit further about how you have the conversation with clients just to get them comfortable with this new fee structure. Just if you're talking more about fee transparency, like, "Let's be really clear about what you were paying Bruce and what we're going to charge. And at the end of the day, your quarterly fee was basically Bruce's annual fee." Right? If you go from 25 BPS a year to 25 BPS a quarter. So, just how does that conversation work, of the...just the magnitude of the fee change that comes through in this transition?

Michael H.: Yeah. So, it was...the first part of the conversation I mentioned to you was just the importance of transparency and telling them that our fee would show up on the statement. But you're right, the second part was, "Well, okay, but compared to what? What is your fee compared to Bruce's?"

Michael K.: Yeah.

Michael H.: And the way things worked out is most of the clients, they were in primarily actively-managed mutual funds in working with Bruce. So, the all-in from an expense ratio standpoint, it was pretty common, especially if there were annuities, that the clients were paying roughly 1%, from an expense ratio standpoint. Which, again, included Bruce's 12B-1 fee.

Whereas compared to us, which we're more on the passive low-cost way of building investment portfolios, an all-in expense ratio might be somewhere in the ballpark of 1.5% or so. It gets lower than that if...depending on the client assets.

So, the way we would explain it to clients is we would show them what the fee will be moving forward, and we would also very clearly articulate, "But here's what you're getting." And what they were getting was financial planning. Raw conversions were a huge one with that client base, just something that hadn't been discussed previously. Qualified charitable distributions. Just a lot of tax-related things that they just weren't aware of.

And as part of the conversation, it, I think, became pretty clear to those clients that we could help, and we could do some things that were important to them and also some things that weren't being discussed previously. So, even if there was a difference in the fee from what they were paying to what they would be paying, honestly, I can't recall maybe more than one conversation where we really had to dig into the weeds of what they were paying working with Bruce versus what they would be paying working with us. For the most part, everybody was very receptive to that change, as long as they understood it wasn't a huge difference in fees and what they were getting in return far exceeded that cost.

Michael K.: Because, while the advisor payment was very different, the all-in cost was a much narrower difference because Bruce had higher-cost actively-managed funds. You're taking a larger advisory fee, but you're using lower-cost vehicles to implement. And so total cost of ownership was a much narrower change than advisory compensation payments.

Michael H.: Exactly right, yep.

Michael K.: Okay. And just how did this transition work when eventually you had to go to clients and explain, "You're leaving your"... Well, obviously, if you're repapering, obviously you don't say it that way to clients. But they just transitioned away from Bruce to you 18 months ago, and now you're going to them and saying, "Hey, there's another transition coming. We're going out and launching our own firm." How do you break that news, how do you have that conversation so that they don't get antsy with all the change?

Michael H.: Yeah. It was...there were definitely some questions, especially the folks that were clients of Bruce that had, like you said, just made this change 18 months prior. But it was a lot of phone calls. And again, I think that the two things that worked to our advantage were that we had enough opportunity to... At that point, for many of the clients, we had had several meetings already since Bruce's retirement with them that I think enough rapport was built that they felt good when we were able to explain to them why we were making the change, what it meant for them, what it means for us moving forward. They were all, for the most part, very supportive.

But again, I think the other key point here was Bruce definitely got some calls. He would tell you that there were a number of clients that reached out that said, "Wait a minute. Why are these guys now making this change? And I don't know how I feel about that." And he was just super supportive. He explained to them what we had explained, too, but coming from him it just added an extra weight behind us that was very helpful.

Maybe a handful of clients that weren't comfortable and preferred to stay with the insurance company broker-dealer and whoever the new rep was. But, for the most part, everybody was just really supportive and receptive. And I think a large part of that was partly because the relationships we built and partly because of Bruce's support.

Michael K.: So, did you track at all how many actually transitioned, how many didn't transition? Like what was the retention through the transition, or the attrition in the process?

Michael H.: Yeah. So, it's... What I can tell you definitively is, of the 75 planning clients that we have today, 25 of those were clients of Bruce. In addition to that, there are 46 investment management-only type clients that also came with. So, in total, it's about 70 or so clients that did come with.

And, for the most part, what ends up happening in that kind of business, and I think Bruce would be the first to admit this, is, yes, you may have hundreds of insurance policies under your name, or even a couple hundred investment accounts. You've written about this a lot. There's only so many people you can have an active relationship, an ongoing relationship, with.

Michael K.: Right.

Michael H.: And for us, it was the 71 people that ultimately came with in varying capacities. And even in Bruce's case, the number may have been higher than 71 that he was meeting with somewhat regularly. But there were a lot of people, I think, that he wasn't. And those people we weren't even able to get on the phone. Or we sent letters, we tried to get people on the phone. But there was a large part of the client base that we just really had no contact with. So, the folks that we made contact with, like I said, 90-plus percent of them ended up coming with. There were a handful that didn't, but yeah.

The Surprises And The Low Point Michael Encountered On His Journey [1:20:20]

Michael K.: So, as you look back on this journey, what surprised you the most about trying to build your own advisory business?

Michael H.: I think it's all the things I didn't know. If I think in the early part of my career, I couldn't even spell RIA, I had no idea what an RIA was when I was in the insurance company world. In the middle part of the career, I had no idea how we would start our own RIA, despite the fact that I had a Google Doc of articles and podcasts and information I had accumulated of 20 pages long. And even then, still you can only be so prepared. I'll give the analogy it's almost like becoming a parent for the first time, like I did last year. And you can read all the books, you can do all of it. But until you have a night where they're up all night screaming and you're changing diapers and you're totally exhausted, it just...there's no amount of preparation you can do.

So, I think the amount that I just...the unknowns, the things I continue to not know, has just been the most surprising, for sure.

Michael K.: Any just particular things that stuck or hit harder in the unknowns that surprised you?

Michael H.: I think the biggest thing is just this world of financial planning and fee-only financial planning. And, like I said, for seven-plus years I just had no idea it even existed. So, when that light bulb went off, that was just a huge moment for me.

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

Michael H.: Yeah. I think when the team of six went from...to a team of almost one, that was really tough. And I didn't mention this previously, but it actually literally was almost one. Tyler, who I had made the offer to, the $24,000 a year, that was only after he had told me he was leaving. He kind of came in, closed the door, and said, "Mike, I'm really sorry, but I just have to support my family. I can't do this." And that was tough, that was a really tough day.

I felt like those two guys, Danny and Tyler, I'm as close to them as my own brother. I would do anything for them. And the fact that I felt like, when that was all happening, that I had failed them is just...it was a really tough pill to swallow. That was a really hard day. Fortunately, I was able to kind of make that Hail Mary offer and keep Tyler aboard, and I'm so glad I did because we wouldn't be here without his support. But that was definitely the low point, for sure.

Michael K.: And so any... Oh, no. Any regrets or anything you would change about how you did that transition?

Michael H.: I don't think so. I think the easy answer would be...it would be easy for me to sit here and say, "I wish I had stumbled across your website sooner," or the podcast, or all those resources. But I'm a believer my journey is my journey, I'm on the path I'm on and I'm right where I need to be.

The only thing I think I wish I could go back and tell myself maybe three or four years ago is just that, "It's all going to be okay. It's going to work out and you're going to be okay, the team is going to be okay." There were a lot of sleepless nights. It was just really tough. Thank god for my wife, her support throughout this process, and even certainly to this day, has just been instrumental. I can't imagine doing it without her. And...

But yeah, to go back a few years ago and say, tell that Mike that, "This is going to be okay," that would have gone a long way. Because, like I said, there were a lot of sleepless nights.

Michael’s Advice For Newer, Younger Advisors [1:23:33]

Michael K.: So, what advice would you give younger and newer advisors coming in and looking at going in the business today?

Michael H.: I think the single biggest thing I would tell a newer advisor is expand your network. Go outside of your company or your broker-dealer, or whatever it may be. And certainly, if you're listening to this podcast, you've done that to some extent. But go ever further. There are so many great communities out there. To name a few, XY Planning Network, The Advisor Growth Community has been absolutely instrumental for me. And the bonds I've formed then, I've joined a study group from my affiliation with AGC. FinTwit on Twitter. There's just...there are so many different people and groups and communities out there that, if you get so bogged down in your company or your broker-dealer, I think you're really missing a lot of different perspective and resources that you could benefit from.

What Michael Has Planned For The Future [1:24:27]

Michael K.: So, what comes next for you?

Michael H.: It's a good question, Michael. It's something we're...I've been thinking about a lot lately. And it's...I feel like I'm in a crossroads right now where for so long I've had...I've felt like I've been running on this treadmill at full speed just trying to get the business to a point where we're sustainable not only from a revenue standpoint, but just serving clients in the way that we felt it would be best. It's been a lot of work to get to this point and I feel like we're...we've maybe turned a corner there.

But something you've written about a lot is that small giant concept. And something that's kind of stood out to me is, to use an analogy...or a story from “The E-Myth,” is I really enjoy...one of the things I could see myself doing more of moving forward is being the pie shop owner instead of the person that's baking all the pies. And I think right now my role is a little bit of both. And I certainly would like to continue keeping a hand in the financial planning process and working with clients, but I also know that there's an opportunity out there to bring advisors into the business in a way that I wasn't necessarily brought into. And I think that that small giant concept really resonates with me.

We've...while we've...when we made this journey to go the RIA route, one of the ideas we had in mind was really what XY Planning Network is found upon, which is serving more of your peers and that millennial generation which I am a part of. And we haven't really had an opportunity to dig as deep into that market as I would like to because of the purchase of the business and just our initial client base, it is more retiree-focused. And I think that that's something that, as a business, we would really like to focus on moving forward.

I think personally, where I'm at in my life right now with a one-year-old and hopefully more in the future, the lifestyle aspect of the business is something that I'm really going to be prioritizing for the first time this year. My goal is to take 100 days off. So, I'm really trying to prioritize family time.

But, at the same time, from a business perspective, we're definitely looking to start shifting our efforts towards that young professional niche, so to speak, and trying to find a partner that we could bring into the business that could help us grow that segment of our business. And whether that's somebody that's maybe on a track I was on and thinks there's a better way to do things from a financial planning perspective or maybe even somebody that already launched their firm and realized that this might not be the right fit for them, they don't enjoy the compliance and bookkeeping and all that kind of stuff. We have a bit of an infrastructure built up that finding that partner and that small giant concept is something that definitely resonates with me, and trying to help as many people as possible but keeping enough balance on the personal side that I can spend time with my family, my growing family.

What Success Means To Michael [1:27:25]

Michael K.: So, as we wrap up, this is a podcast about success. And one of the themes that always come up is just the word "success" means different things to different people. And so as you're on this wonderful track for building the advisory firm successfully and getting the fast start from a strategic acquisition, the business is going well, but I'm wondering how do you define success for yourself at this point?

Michael H.: Yeah. That's something I've thought about a lot. And I think for me, the best way I can describe success is balance. And what I mean by that is we can get so caught up in running a business and being entrepreneurs that... And this is something I'm obviously super passionate about, I love what I do. But we can get so caught up in doing that that we can lose sight of some of the other priorities in our life. And for me the way I define success is just how I'm showing up in the life of others that I care about, so whether that's as a father, a husband, a son, a brother, a friend, a colleague. However that is, I just want those people that are closest to me know how much I care about them and how much they're loved. And if they're feeling that, then I'm doing a good job and that's success for me.

Michael K.: Well, very cool, I love it. I love it. Well, thank you so much, Michael, for joining us on the Financial Advisor Success Podcast.

Michael H.: Michael, it's been an absolute pleasure.

Michael K.: Thank you, Michael.