#FASuccess Ep 102: Transitioning From Wirehouse To Independence: Is The Grass Really Greener? With Michael Henley

What You’ll Learn In This Podcast Episode

• The conflicts of interest he was concerned about in a large firm environment.  [07:20]
• What made Michael decide to go independent after a decade with Merrill Lynch. [18:33]
• The mental shift Michael needed to make [27:31]
• The tool that helped smooth the transition for Michael and his team [41:42]
• How he handled the breakaway transition. [48:13]
• How Michael talked through his transition with clients. [53:02]
• One key thing Michael needed in order to make it through the breakaway process. [59:55]
• How Michael chose the components of his "service stack." [1:01:28]
• What made him decide to build his client portal around eMoney Advisor. [1:09:53]
• How Dynasty fits into the mix [1:19:38]
• What Michael’s firm looks like four months into the transition [1:35:43]
• What he would do differently if he could do it all over again. [1:43:18]

Resources Featured In This Episode:

• Michael Henley
• Brandywine Oak Private Wealth
• Mindy Diamond Podcast on Independence
• Diamond Consultants
• MarketCounsel
• Dynasty Financial
• Schwab Advisor Sophomore Study
• Redtail CRM
• eMoney Advisor
• Fidelity Performance Measurement Tools

Full Transcript:

Michael K.: Welcome, Michael Henley, to the "Financial Advisor Success" podcast.

Michael H.: Thanks, Michael. It's great to be with you.

Michael K.: I'm excited to have you on the episode here. Because we are going to talk about something that we actually haven't really covered that much on the podcast yet, which is the whole world of breaking away and transitioning from large firms to independence, and in particular from wirehouses to independence. You know, there's been a lot written over the past couple of years about the breakaway trend and… I forget what the number was... the 100 or 200 sizable advisory firms that broke away from wirehouses last year, many of which have $0.5 billion or $1 billion or more, which is a big number. Although, I think people sometimes forget that, you know, Merrill Lynch alone has more than $2.5 trillion. Like Merrill and Morgan are as large as the entire independent RIA space put together, all of them, just Merrill and Morgan, 30,000 advisors between the two. So when we talk about, like, there were 100 big breakaway teams last year, it's not actually that big of a number relative to the ecosystem of wirehouses.

But when $1 billion-plus teams break away one after another, like, there's definitely something going on there and that's a lot of dollars at stake. That makes a lot of people interested in participating and has kind of created this whole ecosystem around breakaway brokers supporting that process over the past decade or so. But I'm excited to talk about you, because you literally just did this over the past couple of months, built a career at Merrill and have transitioned away to the independent side. And I'm just excited to talk about the story and that decision, and why you did it, and I guess how it's gone. You're here with us, so it's going okay, I guess. Right?

Michael H.: Yep. So far, so good. So I'm excited to talk about it as well. It was an interesting journey. So at Merrill, I am the first to say that, you know, all I really knew was Merrill Lynch. My entire team, all we really knew was Merrill Lynch. We're all legacy Merrill Lynch. None of us ever worked really anywhere else. We all started our careers at Merrill Lynch. All we knew was Merrill. So I would say, all things considered, it was definitely a significant decision. No question about it. You know, I'm probably the prototypical kind of poster child of Merrill Lynch in that I met my wife at Merrill Lynch. I actually had a bull as a wedding cake for the groom's cake, so kind of I had about a half of our Merrill Lynch office at my wedding.

Michael K.: Wow. So you had a.. wait... a bull as a groom's cake? So you were all in on Merrill?

Michael H.: I was all in. I was going nowhere. I said, "There's no way I'm leaving this firm." If you would have asked me two years ago, I said, "I will retire from Merrill Lynch, there's no question about it." And it's interesting, I learned a lot about the independent space…I guess, when I go back to, let's just call it "five years ago," when I first actually saw you speak as an instructor for the CPWA, I pretty much have been obsessed with your work ever since. I still follow it to this day. So I really appreciate all you do. And I would just say that I learned a lot about the independent space in terms of, "Okay, what is the difference between working for a big bank and working as an RIA, if you will?" And kind of going through that whole, you know, exercise the last five years around how much the independent space has evolved, "What are the pros and cons of staying at a big bank? What are the pros and cons of being independent?"

And really going through it, you know, more and more and more, it became evident that for us to really give conflict-free advice to clients or to wealthy families, it became more and more challenging within a large, you know, wirehouse environment.

Michael K.: So I feel like there's a lot of discussion these days, well, gosh, particularly with DOL fiduciary rule over the past couple of years and now, potentially, the SECs Regulation Best Interest, and all this discussion around fiduciary and conflicts of interest. And, you know, certainly, I know a lot of the independent channel likes to throw barbs at large firms and wirehouses, in particular, around conflicts of interest. And certainly, if you go back decades, I mean, they were built to be distribution arms for their own proprietary products. I mean, that was kind of the roots, as well as just distributing investment banking securities they literally underwrote and sent out. Like that was the purpose of broker-dealers 100 years ago.

Michael H.: Yep.

The Conflicts Of Interest Michael Was Concerned About In A Large Firm Environment [07:20]

Michael K.: So when you talk about it today and say things like you wanted to be able to give more conflict-free advice to wealthy families, like what sort of conflicts were you concerned about in the large firm environment? Like what impacted you in the day-to-day world?

Michael H.: That's a great question. So one of the things that I would say unquestionably was the compliance side of being at a wirehouse. You're managed to the lowest common denominator. So for those advisors who really were doing what was in their clients' best interest, they really put their clients first, we would have to document excessive notes, for example, really an excessive amount of documentation for every single thing we would do with a client. You know, if we were doing a Roth conversion, if we were, you know, buying a structured note, if were doing long-term care, all these various things that if it's in the client's best interest, you were just managed to this lowest common denominator standard. There was the compliance side. There was the excessive amount of time spent learning about Bank of America's products. So we would be pulled into a training session, you know, a couple times a month on Bank of America's latest credit card offerings, on their checking accounts, on their, you know, XYZ benefits.

Michael K.: And so just worth noting or pointing out for people who maybe don't know the full context of a large firm. So, you know, Merrill Lynch is a major wirehouse brokerage firm, one of the big four that are still left in the landscape today, along with Morgan Stanley, UBS, and Wells Fargo. Obviously, a very storied name that goes all the way back, but in the midst of the financial crisis was sold to Bank of America, and so Bank of America is now the parent company that sits over top of Merrill Lynch as the owner. So Merrill operates, I guess, as many subsidiaries do, kind of semi-independently, but obviously still has connections to the parent firm. And so when we talk about like training sessions for Bank of America offerings, I guess that's like, "Parent company would like to see more of their credit cards, mortgages, and other products adopted in their Merrill Lynch advisor subsidiary unit. So they're doing product training coming down on just making sure you understand these Bank of America products."

Michael H.: Yes. And it was always a situation where, just by way of example, if we were going to secure a mortgage for a client or help a client, you know, with a second home purchase, we're going to do its financing, so a 30-year fixed mortgage, we couldn't really shop the street on behalf of our client. So we could not go to BofA, Wells Fargo, Chase, Quicken Loans, and a local bank and shop the most the competitive rate in closing cost terms. We really only had access to Bank of America's loans. You know, it was against kind of company policy to shop elsewhere. If we were going to look at a charitable fund, for example, you were encouraged to use Bank of America's Giving Account, not a Fidelity charitable fund that may have been much cheaper. So it was just a… it's not that I think, in general, Merrill Lynch advisors are not looking out for their clients' best interests at all. In fact, I would say that most advisors at a wirehouse do put their clients' interests first. I just think it's the infrastructure that they're kind of working within, they just don't know what they don't know. So in a lot of ways, it's just, you know, the evolvement of the independent space.

Michael K.: So I have kind of a few follow-up questions on this that I'm curious about. So one, like I feel like there's been a lot more discussion these days about wirehouse platforms being less focused about proprietary product, more open architecture, more open systems. You know, I'm noticing, like, a lot of what you just talked about is really, actually, primarily, bank products from BofA as opposed to sort of Merrill's own proprietary products and mostly on the banking side. So was the investment platform more open-feeling to you, and it was just the banking products that the parent company was trying to push down or giving you less open-access choices? Or did you find similar challenges on the investment side just trying to get your clients to what you wanted to get them to?

Michael H.: That's a great question. I would say that, in general, it was on the banking side more than anything else. But having said that, there were certain limits. In general, the investment platform was completely acceptable. I would say, generally, you know, no issues overall. Now, having said that, you know, there were certain limitations. For example, we run passive ETF models, very simple, plain, vanilla stocks, bonds, and cash, nothing fancy. And there were certain limitations to have, you know…For example, you couldn't have more than x percent in one ETF. Even if it made the most sense for a $10,000 Roth IRA to just be in a small-cap index, you know, 1 position rather than have 10 positions, you know, there were certain requirements that, once we had got, you know, to the outside world here, we realized, "Okay, we can now do what's in the client's best interest truly." I mean, it was, buy a single index fund, and call it a day, as opposed to having to have a certain number of positions.

Michael K.: So, you know, sort of by definition, that structure, like no Vanguard Total Market Funds to just cover that client's, you know, small account like, "Hey, you know, you got a young kid, they're going to college in 16 years. We're just going to buy the total market and sit still." Like, you couldn't do that because of the, ironically, the overly concentrated ETF rule, even if the single ETF is literally every stock there is.

Michael H.: That is exactly textbook, a perfect example. Because we would often say, "Wait, it's a $6,000 Roth for the kids." We do a lot of the family gifting for the families, where we'll fund Roth IRAs for the kids and grandkids very often. And very often, to your point, it makes sense, just buy VTI, the Vanguard Total Market Index, call it a day, and be done with it. But, no, we had to "actively manage it." If we wanted to buy one ETF, we had to have the child or grandchild open a Merrill Edge self-directed IRA on the self-directed side, had to tell the client what to buy. You can't give them advice because it's supposed to be self-directed. It just got to be this kind of mess of a lot of extra work from what we thought was a simple, yet effective gifting strategy.

Michael K.: And did you also find challenges around… I know, wirehouses, historically at least, have gotten lots of criticisms around commissions, high commissions, commissions that unduly incentivize, you know, certain products or sales, or transactions over others. Like, did you find yourself needing to navigate the comp system in the same way that you had to navigate some of the platform limitations? Or did that feel more levelized, you just had limits on what you could do and what you couldn't do?

Michael H.: Okay, so here we go. Since I've been at Merrill Lynch, I obsessively, obsessively went through the compensation plan. It was to better understand it, to make the most of it. Because just like a tax code, it's all about just understanding what you're working with and kind of, you know, reshuffling your resources to make sure that you get the best after-tax, or in the Merrill comp land, best compensation outcome.

Michael K.: If they write the rules, you get to play the game, by the rules as they're written. That's how it works.

Michael H.: That is the name of the game.

Michael K.: You do it with tax code. You do that with your platforms, absolutely.

Michael H.: There you go. What do we say? "There's two tax codes, one for the informed and one for the uninformed."

Michael K.: Yes. So there are two comp plans, one for the informed and one for the uninformed.

Michael H.: So let's just start, okay, with TeamGrid's. Okay. We can kind of go back, a lot of these comp changes over the years. So there was something called "TeamGrid," which is fascinating. They said, "Okay, we'll give you the highest cash grid rate of the highest-producing advisor on your team if you hit XYZ hurdles. If x percent of your clients have Bank of America products, if x percent of your clients have a securities-based line of credit," so what's called an "LMA" at Merrill Lynch, a Loan Management Account…It's just a fancy way for a margin account, essentially, or a "non-purpose margin account" I should say. And you'd have all these criteria you'd have to kind of abide by, and so long as your practice hit XYZ criteria, you were paid at the highest cash grid rate of the highest-producing advisor on the team, which made sense in concept. You know, Merrill really did a good job of pushing for teaming, because it made the teams stickier. If, you know, one person left, the team is still intact, etc., etc.

Michael K.: Right. At least now, if someone is going to break away, they've got to break the whole team out, which is way more complex than just one person leaving. So if you kind of want to encourage some…I mean, in addition to the fact there's, I think, value for the end client around team structures. Like, from the firm's end, it's a little harder for people to leave when they're part of a team, so it helps a little on the retention side as well.

Michael H.: That is exactly right. Yep. And I would just say that, to the TeamGrid, that made a lot of sense in concept. Of course, over the years, they've raised the criteria more and more. Now, you have to have, x percent of clients have to have a direct deposit into a Merrill Lynch CMA account, Cash Management Account, or a Bank of America checking account. A lot of cross-selling kind of being pushed there. But that, you know, it made sense in concept. But I would say, the compensation plan over the years has really changed. And in my personal opinion, it has gone the wrong direction, and I'll share with you why. Basically, so the entire time I was at Merrill Lynch, up until the past two years, the CEO or the President of Merrill Lynch was John Thiel. John Thiel was a legacy Merrill Lynch guy. He's a rock star. I have a tremendous amount of respect for him, and the current CEO. But the compensation plan was always, in a nutshell, it was very similar to running a very efficient RIA, you know, shrink to grow. Shrink the number of families you work with. Give them better planning, better kind of service, if you will, and limit the number of families that you work with. It was always a kind of shrink-to-grow philosophy. Kind of raise the average level of the median client in the practice, if you will.

Michael K.: So basically, just a keep-moving-up market. I mean, it's the same advice we often hear in the independent channels. Like, you know, "Fire your smallest clients, get more of your largest clients, replicate those, and you just keep drifting further upmarket over time." And you serve like fewer people with more assets, larger practice, larger revenue, but fewer clients.

Michael H.: Exactly. And we took that almost to the second degree. The two older partners that I am teamed with now, Steve and Tracy, when I first joined them…Let's just go back to 2012, I guess it was, 2011, 2012. They had about 1,200 clients. And, you know, primarily transaction-based. I had always been planning-based, so it was really a great marriage, if you will, all this energy. And what we ended up doing was kind of reducing the number of clients from 1,200 to 400, and we did that kind of a couple different ways. One of the ways was moving some of the clients to Merrill Edge, the self-directed or kind of call center side, if you will. Another way was we formed situational partnerships with other advisors in our office.

So for example, we have a couple different what's called "pools" at Merrill Lynch, where basically we would keep, you know, 40% of the revenue for life. The servicing advisor, the servicing team would keep 60%. And we'd say, "Okay, we have a handful of clients in the practice that we're not giving enough attention to. Well, we're going to move them over to a pool with you, you'll get 60% of the revenue, you'll service them, but we'll get 40% back to our primary business." And that model actually worked really well relative to the shrink-to-grow kind of philosophy. Because we were able to kind of continue to bring in larger new clients and move kind of the bottom of our book over to continue being serviced by the other advisors, if you will. So that's just something that, under the shrink-to-grow philosophy, I would say that in our experience at Merrill, you know, that was a great, I think, an appropriate compensation plan.

What Made Michael Decide To Go Independent After A Decade With Merrill Lynch [18:33]

There was something called a "Strategic Growth Award," which basically gave you additional compensation if you brought in x amount of dollars. They incentivized growth in the right way. You know, we were always very selective on the number of new families that we'd bring in per year and making sure they're all a good fit, etc. But that all made a ton of sense. Now, backtrack, let's just say two years ago, Merrill, you know, John Thiel ended up stepping down. You know, I guess he "retired." Andy Sieg stepped in, you know, and a lot of respect for Andy Sieg as well. But the compensation plans to follow were fairly significant. They really went from, what Andy and his team called, a "shrink-to-grow philosophy to a grow-to-grow philosophy."

Michael K.: It did kind of set up that new slogan, didn't it?

Michael H.: Yeah.

Michael K.: After you run with shrink-to-grow for years to become like grow-to-grow, it was coming.

Michael H.: Yep. So the grow-to-grow really said, "Okay, you know, now you have this minimum number of new families you have to bring in per year." And this is really when I said, "Okay, is our team at the right firm for the next 20 years?" Because we are all very young, so six of our eight partners are between 30 and 35 years old. So when we look at it, and I run the team, you know, with kind of my Co-CEO, Alison. And we run the team, you know, kind of the two managing partners, if you will. And we wanted to make sure that we were at the right platform or right, you know, firm, if you will, for the next 20, 30 years of growth. And once this compensation plan came out, where we said, "Okay, we've spent a lot of time really getting the book down to a manageable number of families, really, you know, managing all aspects of their finances and their investments." You know, we really felt good about what we were doing, and now we have to bring in, for example, 25 new households.

And the challenge that I had was that a new client at Merrill, you know, they had to have, minimum, $0.25 million of investable assets. They had to have…You know, a $300,000 rollover was a new client, for example. You got the same amount of credit for a $0.25 million client that you did a $2.5 million client. I mean, it did not make any rational sense whatsoever.

Michael K.: Oh.

Michael H.: You also got counted, you know, for liability. So if we had, you know, the client's kid do a $300,000 refinance, we got a new household. So you had to kind of game the system and say, "Okay, let me see who I can do refinances for, for the clients' kids. Let me see if I can, you know, get referred to the client's brother or a friend, or something to bring in just a couple hundred grand to get over this comp plan hurdle," just to get paid the same we were paid the prior year. So we had to grow significantly with a number of new small clients, you know, just to be paid the same, essentially.

Michael K.: But it is interesting. It does strike me that, you know, these shifts…I mean, on the one hand, like a lot of the independent channel I think has gone through some of the same pendulum swings back and forth of like, "Are you moving upmarket to work with more affluent, smaller clients?" Or you're saying, like, "No, no, no. Now that we're larger and we have more economies to scale, we should be able to serve more clients and bring our minimums down, instead of bringing our minimums up." But it also strikes me, just as you're talking about kind of the incentives and the ways that you have to play the system…I mean, it sounds like, frankly, it's a lot less of what I think the classic criticism around brokerage firms and wirehouses has been. Like, "Hey, you have to push this product. We'll give you a great commission. Push this product. We'll give you a great commission," and like trying to overly incentivize individual product sales.

And instead, that the way the game is played now, as it were, is, "Look, like you just have to hit certain marks of total production or production in these various categories in order to get your whole payout on everything being consistent." So like, "I'm not going to try to make you sell this one thing that has a really high commission. But if you want to get your continued payout on your aggregate client based on all the things you're doing, you'd better do at least a few of these things in these other categories, or we're just going to cut your total percentage payout and push you lower on the grid."

Michael H.: That's exactly it. And I would say that they do that very strategically, of course. And I would say that now, this year, the compensation plan came out, and I have a lot of my close friends are still at Merrill, of course, and basically the most recent change has been somewhat significant. So now, they're giving the client associates, the CAs, $100, a Bank of America checking account they open. So they're giving this kind of, "We're going to dangle a carrot in front of you, if you can really open a lot of Bank of America checking accounts." They've made the team grid require a higher threshold of bank products. They have increased the compensation plan hurdles around number of new families you have to bring in per year to get paid the same. So basically, what they've kind of done is said, "Okay…"

They've actually raised the standards for a client associate. Within a wirehouse, it's fascinating compared to the RIA world. Because, you know, the firm pays the support staff's, if you will, benefits, as well as a nominal base salary of $35,000 or $45,000. Then, kind of, it's out of your pocket for anything over and above that. And what they do is they say, "Okay, you have to have $2 million in revenue per advisor for each CA you have." So for each associate you have, they'll say, "Okay, well…" You know, they went ahead and raised that revenue requirement again in 2018 for 2019. So what they're really saying is, "Hey, do more, bring in more assets, sell more bank products, bring in smaller clients. We're going to give you less CA coverage." So I don't think it's terribly surprising that you see the top advisors at Merrill continuing to go independent.

So you saw, believe it or not, the number one advisor at Merrill at the time was actually Jim Atwood out of Boston. As you can probably tell, I'm obsessively competitive, obsessed with winning. So I checked the production reports every single month in terms of the top-ranked advisors in the entire firm, and the number one production rank advisor was Jim Atwood out of Boston. And he, I want to say, left, and I think it was June, like a month before we did, or maybe it was March/April. But he went to, actually, First Republic Bank, and that was a tremendous move for Merrill. Because, you know, one of my early mentors and a complete rock star is Jeff Erdmann out of Greenwich, Connecticut, and I just remember, you know, even Jeff was shocked at that, saying, "God, Jim Atwood is one of my longtime friends. I can't believe he would leave Merrill."

And sure enough, you know, Jim and his team left $4.5 billion AUM. Then, you saw KORE Private Wealth out of New York City, that was another huge Merrill team that went independent entirely without a service provider, which was interesting. So you're seeing a lot of the biggest teams at the firm…But I think, you know, as these big teams say, "Look, we're in the relationship business. If we can upgrade everything that we do for families, it's going to be a lot of work on the front end. But if we can get better economics in terms of a transition plan, in terms of succession planning, you know, kind of all else being equal, it makes sense for us to, you know, take a leap.

Michael K.: So was part of what led you to decide that you wanted to look in other directions essentially the leadership change from Thiel to Andy Sieg, and just kind of the culture changes that are now shifting around what's it's like to be an advisor on the platform?

Michael H.: Yes. I would say, the culture shift was significant. And I would say, even our local office, I mean, there was significant turnover. And to be completely truthful, the culture shift was what made us start to really look. And I'll never forget asking my partner, Alison, "Hey, you know, what do you think about sitting down with Greg Sarian from HighTower?" He left Merrill in 2013. I kind of kept up with him ever since. He was one of my early mentors, you know, way back when. And he left Merrill for HighTower back when HighTower was very early on in kind of its infancy. And sure enough, "Okay, let's just see what he has to say." So we went and sat down with Greg and his team, and sure enough they said, you know, "Yes, the grass is greener. There's a reason no one's ever gone back to a wirehouse anecdotally." And essentially, everything about, you know, being independent, You can better serve your clients. You know, you'll work with a custodian."

He talked about pros and cons, the way everything is more modular in the independent world, where Merrill Lynch kind of platforms or packages together all the technology software all under one umbrella. Your WMW workstation has the Flex monitor, it has the planning software, it has the CRM, it has everything kind of pulled together in one system. But he really went through and said, "Okay, here's what you can expect." And sure enough, you know, shortly thereafter, believe it or not, Michael, a podcast actually is what really got my attention. I listened to yours since inception. But also, Mindy Diamond has a podcast for independents, and that was pretty much…I mean, I still got to listen to that quite a bit. I reached out to her, and said, "Is there really any harm in investigating, exploring more about the space? I don't think it's going to hurt."

Little did I know, you know, as soon as I really started going down the path and seeing, you know, how…Especially, demoing the planning software and eMoney and MoneyGuidePro and saying, "Oh my gosh, you know, this is light years ahead of what we're used to." I'm a complete planning nerd, a tax nerd. So, you know, to me it was just such a significant upgrade in everything that we're doing. It just was kind of a no-brainer.

The Mental Shift Michael Needed To Make [27:31]

Michael K.: So talk to me about just the mental shift of going from, "I'm going to be a Merrill lifer," and, you know, the bull as the groom's cake…I'm never going to forget that. Is there a picture, or can you get a picture at some point?

Michael H.: I thought you liked it. I can actually share with you a picture, I sure can.

Michael K.: All right, fantastic. We will get a picture of this up on the site, because that's just too awesome.

Michael H.: My wife will really appreciate it. This is a complete surprise to me. So I am a, you know, longtime fan of the movie, "Top Gun." So when the groom's cake came out, you know, this song, the theme song from "Top Gun" came out. And sure enough, the bull wedding cake came out. I said, "Oh my gosh," because everyone at Merrill knew I was diehard Merrill, you know, my entire career. To the answer the question, Michael, you know, the mental shift was…It's interesting. I guess, I would start by saying my loyalty unquestionably is to our clients. My loyalty, of course, was to Merrill Lynch. But I would say, more than anything, it was to my clients. I think of my clients, you know, as an extended family. I think of them…And my own personal family are my first family, and my second family is my team here at, you know, the RIA. The third family is clearly our clients.

And I would say, having loyalty to your clients, it was impossible for me to see what type of advice I could give them and what type of services we could provide and not do what's in their best interest. It really was this…I knew it'd be a lot of work. I didn't like the idea of leaving kind of my friends at Merrill, the competitiveness of Merrill. But I knew that, if you really think about it and say, "Okay, I can give clients better outcomes, and we're all about outcomes. If we can give clients better outcomes and kind of keep their fees the same," it just did not…I could not sleep at night knowing, "I can give them better advice, but I'm choosing to be lazy and stay at Merrill Lynch." I would say, if I would have stayed at Merrill Lynch, it would have been out of inertia. It would have been just because that's all I knew, kind of a fear of the unknown.

But I wouldn't have felt right about it knowing there's a better alternative out there. I'm just choosing to stay at a big bank because, you know, just I'm afraid of the unknown. It'd be as simple as that. I think the number one reason, I have talked to a lot of Merrill advisors the last four months, from our old office specifically…I mean, I'm having lunch with quite a few of them in the month of December. But I would just say that the number one thing that holds them back is inertia. It's just that they think they're clients aren't going to come. They think that their clients are wedded to U.S. Trust, which is insane. They think that the clients need the big brand of a Merrill Lynch.

And to be honest, going independent, you're able to use kind of a big, well-known brand like a Fidelity, where we've taken assets from Fidelity for the past 10 years, and now we're moving all the money back to Fidelity. So it's quite interesting. But having a big, well-known brand like a Fidelity or a Schwab, there's really very little pushback from clients, especially when you explain that, you know, "Your assets are held separately from our RIA. You know, we're giving you independent advice." But something that Shirl from Dynasty has really done a great job explaining is the triangulation of advice with custody, advice, and product manufacturing all completely separate. And I think kind of explaining to clients, "Hey, this is how the independent world works. It mirrors what a family office has done for billionaire families for 100 years," you know, clients were very receptive to the independent model.

Michael K.: You know, it's a fascinating piece to me that…You know, and I know a lot of advisors over the years that have started at big firms like Merrill and Morgan because they wanted that brand name on their business card. Right? You know, I feel like, in the industry, there's a lot of debate about companies and who's better than who. And, you know, all the discussions are on conflicts of interest and the rest. When you get to the consumer end, like, there's two types of companies – companies I've heard of that have been around for a long time, and companies that I haven't heard of and I don't know anything about.

Michael H.: Yeah.

Michael K.: And if you ask me which one I trust, it's the one I've heard of that's been around for a long time.

Michael H.: That's it. Yep.

Michael K.: And so there's just a natural trust. I think a lot of independent advisors kind of underestimate how much brand trust there really is and still is with wirehouses. But when you still need a custody arrangement as an RIA, and you end out with large firms like Schwab and Fidelity and TD Ameritrade, in particular, like these are still consumer household names. You know, I talked to a platform recently that was looking at coming into the advisor space and basically wanted to say one of our great edges is that we have no consumer retail presence. So we won't compete with our advisors the way that a lot of advisors are concerned about the retail competition from Schwab, Fidelity, and TD Ameritrade. But I had to point out, so I'm like, "There's a tradeoff with this as well." You know, on the advisor end, yeah, it irks a lot of us to know that we're in competition for clients with firms like Schwab, Fidelity, and TD Ameritrade, but it helps our client trust.

Because any prospect we talk to like, "Oh, well, your assets will be held at Schwab. They're independent from us, and their sole focus is on custodying your assets," like, "Oh. Okay. Well, that seems really safe. Like, I've heard of them. I know Schwab. I'm comfortable with that. Heck, if I don't like you at any point, I just fire you and go into any Schwab retail branch I want."

Michael H.: Exactly.

Michael K.: "I can work with anybody." Like, I've got a natural fallback. It reduces the stakes compared to going to an advisor-only platform. And just there's this interesting tension to me that, yeah, it's frustrating to compete with some of the custodians' retail divisions. But the fact that they have such a strong retail consumer presence is what lets independent advisors replicate the same kind of brand trust now, that I think you got to build at a company like Merrill, and others build at Morgan and UBS, and the rest, by having that nationally-known firm that they can say like, "Here's where your money will be held. They do this for trillions of dollars. You'll be okay."

Michael H.: I totally agree. I think that is very well said. I would agree with that 100%. I will accept, you know, the small amount of friction, where maybe clients get Fidelity viewpoints or something in their email and ask us questions about it. The tradeoff being, "Okay, well, you have this huge well-known brand for client custody." I think it's an acceptable tradeoff in my experience. That, having a backup plan if they're unhappy with you, like, you know, for better or for worse, they can just leave the money at Fidelity, be self-directed or otherwise. And Fidelity comes right out and tells us, which I really appreciate, that their retail advisors are not by any means trained in advanced tax strategies. They are not trying to do the type of planning that we are doing. So long as we're not a typical investment-focused kind of team or firm, if you will, I think as long as your value-add is on the planning side, I don't see it as that much of a threat. At least, you know, we've had zero issues, no different than we were at Merrill losing clients to Fidelity or Schwab. So it's just a similar…You know, I completely agree.

Michael K.: But it is an interesting piece to me, you know, just this kind of mentality shift of moving away and deciding to transition. You know, again, I feel like there's a lot of barbs these days that independents still throw at wirehouses around, you know, I think, like you said, the conflicted compensation and the role of commissions. And the point that I think you've made very well is that, like this is stuff that gets set by the parent company. Like, they define the rules of the game, and then try to nudge advisors in certain directions. Which is less about, "Here's the giant commission payout," and more of just, "Hey, we just wanted to make sure you're doing a reasonable diversification of various products and solutions for your clients. So just make sure you at least do a few of these, and you can continue to get the compensation you get on the bulk of what you do for clients." Except, then they change the system over time and try to nudge advisors forward more.

You know, I've gotten this growing appreciation in recent years about how important it is to separate out the advisors at large firms from just, literally, the large firms themselves. And a lot of the challenges you're describing, like, are not problems with being a Merrill advisor, per se, but just the way that Merrill and BofA made the rules of the game that didn't let you serve the clients the way that you wanted to serve them. Or made you serve more clients than you wanted to serve because you had to grow to grow, instead of shrink to grow.

Michael H.: Exactly. And I would say, it's interesting on that note, Michael, that if you really take a step back and look at it, one of the things I think where Merrill may be trying to head towards…And, you know, this is just a shot in the dark. I have no idea. But the U.S. Trust model is salary plus bonus. And so if you're a U.S. Trust, you know, private wealth advisor or whatever they call themselves there, you are a salaried employee, and you're incentivized on an uncapped bonus based on the amount of assets you bring in per year. And that's kind of the JPMorgan model. So JPMorgan Securities is, you know, kind of a greater rate, if you will, kind of like a Merrill Lynch. But JPMorgan Private Bank is on the salary and bonus side.

So it seems like, at least from what we've heard over the years, that Merrill is trying to eventually get to that sort of model just to have a better control around compensation. I think Bank of America looks at Merrill Lynch advisors as they are insanely overpaid. And over time, even in the most recent, you know, compensation call, they came out and said, you know, "Basically, Merrill Lynch's advisor compensation has outpaced Bank of America's revenue significantly." So I think it comes back to kind of control from the top, if you will. And I think over time, it's fascinating to me that Merrill is still in protocol. I find that fascinating. I thought with certainty, they would be out by now. So I guess it was Morgan and UBS left, right?

Michael K.: Yeah, them and UBS. Yeah. I admit, I'm actually surprised that Merrill has stayed in as well.

Michael H.: I think Merrill is kind of…If I had to guess, I think they're almost shocked they haven't seen more attrition. With Merrill staying in the protocol for as long as they have, they continue to squeeze the compensation plan. Advisors are not happy. The culture is not what it was. You can ask any Merrill advisor, they all say the same thing. They're either there for the CTP plan, the retirement plan, or for a personal reason.

Michael K.: What's the CTP plan?

Michael H.: Client Transition Program. And it's basically a 4-year payout, where if you're more than, I think it's 15 years of service at Merrill, you essentially get 1.8 times your trailing 12-month production over 4 years. So if you're a $2 million producer, let's just say you get, you know, $4 million over four years, so it's $1.2 million per year. But if you're a $2 million producer at Merrill, you're probably making $800 grand a year, so it's a pretty decent four-year payout.

Michael K.: And like you get this when you retire? This is like a retirement pay?

Michael H.: You lock into this, and it's four years. So basically, over that four year period, you stay on as a consultant almost, getting this income. But essentially, what happens is you end up going into, I think it's a six-year non-solicit, non-compete for the rest of the team. So the rest of the team cannot leave the firm. Essentially, it's a way for Merrill to retire advisors, give them a good amount of compensation to retire. But then after that four-year period, the advisor is essentially gone. Now, what I mean by that is they either have to retire or they're out of the business. What I'm finding, though, I think you had an article about this recently, most advisors and especially with my partners on the team, they don't want to just cut it off, you know, and essentially just walk away from the business. They want to cut back to maybe 2 or 3 days a week, you know, for the next 10 years.

And so in the RIA world, we can really do that for them, give them a 10-year installment sale, or what have you, for their equity. It'd be a long-term capital gains treatment instead of ordinary income and just much more flexibility around kind of the bottom-line economics, as well as the structure of the deal.

Michael K.: And both the irony and reality, like if you're an advisor in that situation, and you build up your team to be able to support you on this succession plan, you also build up to your team to the point where it's like, "Geez, I could pretty much just hang around and do like my top 20 or 30 clients and stay for another 20 years and make really good money. Because I don't have to do that much work, because my team handles all the rest of the clients in the practice." I've joked about this in the past because I see it on the independent side as well, like the actions that people take to prepare for their succession plan gets them to a more delegated, better run business that then makes them not want to actually do the succession plan and retire. Because now, you're just making good money, maybe slightly less than before, but way less stress than working far fewer hours if you don't want to lead anymore.

Michael H.: Yep. That's the name of the game. It's funny, my partner, Steve, he's probably the exact example of that. So he's really two and a half days a week, so Monday, Tuesday, Wednesday until noon. He's then become the chairman, which he was really excited about. And he left, you know, 36, 37 years at Merrill Lynch, so a significant…I mean, he walked away from a long career at Merrill, and that was a tough decision. You know, we kind of got together, kind of the five owners, at his house and said, "This is what we're thinking." And he, you know, had some hesitation at first, but we said, "Look, it's better for our clients. None of us are happy at Merrill Lynch anymore." He was actually at Merrill Lynch only two and a half days a week, you know, when we first decided to do this.

And once we kind of went through it and said, "Okay, everything is better for clients, better kind of atmosphere, flexibility, freedom. We're not navigating a comp plan every single year, which is a ton of work on our part. Maybe we can be selective on what clients we bring in per year, not just randomly bring in a client because we have to hit some kind of XYZ comp plan hurdle," you know, I can tell you, he cannot be happier. I mean, he is thrilled.

Michael K.: So I am struck that as you're talking about these transitions and planning, and kind of the mentality shift, just the conversation of like, you know, "Can I make more money? Or is it more profitable? Or do I keep more of my bottom line as an independent versus at the wirehouse?" hasn't really seemed to come up much. Like, was that not really a factor or just not a factor at that point? Or was that not even a holding for you, you were making the transition for other nonfinancial reasons?"

The Tool That Helped Smooth The Transition For Michael And His Team [41:42]

Michael H.: I would say, it was really nonfinancial reasons. I'll be completely honest. As you know, in this industry, we make great money, and it's a phenomenal profession to be in. I would say, if there was a significant drop in compensation by 50%, I mean, I probably wouldn't have done it. But just knowing, "Okay, I'm probably going to make, give or take, the same at Merrill. We want a nice office. A lot of things we want are more high-end." You know, we wanted to be able to replenish the unvested deferred compensation for our older partners, so we leveraged a revenue participation note through Dynasty, our service provider. So we said, "Okay, we're going to sell 10% of our top-line revenue to Dynasty, so that will basically make up for the deferred compensation awards that Steve and Tracy are walking away from." I wanted to make certain that they were made whole.

I would not have felt right about making the transition if our, you know, senior partners would have been, you know, lost out on significant assets. But to be honest, in this new world, we can structure the replenishment of their unvested deferred comp as a tax-free loan, so, you know, a personal loan, if you will from the business. So it's tax-free to them at some nominal interest rate, which eventually gets paid back, you know, via a liquidity event, or what have you.

Michael K.: So can you talk about that structure a little bit more, just what you did for buying out some senior partners or replacing their lost deferred comp? You said, like selling a revenue anticipation note to Dynasty. Like, just can you walk through that once more? I don't think that's something that a lot of advisors have heard of.

Michael H.: Absolutely. So let's just say, at Merrill Lynch, we did, you know, let's call it "$7 million in revenue." So 10% of that would be $700,000, so we would sell "$700,000" of revenue, you know, to Dynasty, if you will, our service provider. And they would give us a multiple, I think it was a 6x or 7x multiple. Let's just call it "6" to make the math easy. So $4.2 million is the amount of, you know, kind of capital they would give us over the first initial 12 months, kind of as startup capital, if you will. Now, that was incredibly helpful for us leaving a wirehouse, because one of the things that I kind of required was I didn't want any of the partners, the staff or the owners, to have any drop in compensation out of the gate. So we basically put ourselves on flat salaries the first four months of the year, or the first four months of independence, essentially while we were in transition.

So this way, our compensation was the exact same it was at Merrill Lynch. It was from a lifestyle standpoint, no issue. Then, the rest of that, you know, RPN note, if you will, a good chunk of that is going to reimbursing unvested deferred compensation awards. So myself, Steve, Tracy, Mark, Alison, the five owners, all had either restricted stock units, unvested deferred compensation, a lot of pre-tax dollars that basically vested over an eight-year cliff vest at Merrill Lynch, as ordinary incomes. We said, "Okay, what's 50% of the unvested value? Okay, it's x dollars. We're going to structure these reimbursement awards, if you will, as tax-free loans, you know, from the business to each of us, so we're made whole on the unvested awards."

So really, what we tried to get to was, "Okay, we want to make sure we're made whole out of the gate, in terms of our, you know, transition, salaries, etc. We want to make sure we're not walking away from substantial, you know, assets, if you will." So by doing this, kind of, the RPN note was a beautiful thing for us. It really kind of solved all of our issues from a cash flow standpoint.

Michael K.: So the dollars-wise is they get 10% of your revenue, whatever it will be going forward? Or they get 10% for a limited number of years, just until you've recouped the cash and there's a little bit of interest on it? So like, you know, they give you $4.2 million because it's a 6x multiple on $700 grand of revenue. But then, after six years, you're done, and you get your revenue back? Like, how does this work exactly?

Michael H.: Great question. It's a 10% revenue share. Now, we can pay it back and reduce the revenue share if we choose to. It's really sort of an optional thing, so there's no prepayment penalty. At this point, we've kind of run the numbers and as you might imagine, if you're going to ramp up your RIA revenue, ideally, you'd kind of reduce it to maybe 5% if you can while your number is lower, as opposed to if you get to $25 million in revenue, that gets to be a big number.

Michael K.: But they've got a 10% rev share for life? I mean, just like they've got a permanent profits interest…

Michael H.: Correct. Yeah.

Michael K.: …in the business. So essentially, just you sold off a small chunk of the business. But rather than selling in terms of I guess selling a bottom-line profits interest, you literally just sell them a 10% of top-line revenue, and they get it off the top instead of off the bottom?

Michael H.: Exactly. Yeah.

Michael K.: Okay.

Michael H.: And the way we looked at it was, right, wrong, or indifferent, we said, Merrill Lynch was keeping 60%, you know, getting very little in return, "Ten percent, you know, to make us whole, we're willing to accept that."

Michael K.: Well, and it's not just that they are taking 10% off the top. Like, they're taking 10% off the top, and they wrote you a giant check…

Michael H.: Exactly.

Michael K.: …for that.

Michael H.: Yep, exactly.

Michael K.: You got cash for that. That's not just a house keeps a cut thing.

Michael H.: Right. But I think what it does, I think it helps incentivize both parties, though. Because Dynasty now has skin in the game in terms of helping us grow. So in terms of marketing campaigns, in terms of branding, in terms of all of those things where that's really where their strength is in our opinion, they have an embedded interest to help us grow, you know, exponentially as opposed to without the RPN note, if you will. So I think the more wirehouse teams you see lift out, especially partnering with a Dynasty, for example, I think the vast majority will take advantage of the RPN note. Because Merrill's compensation plan, I can tell you, they've done such a good job. Every year, what they say is, "We've decided to shift 1% or 2% of your cash grid rate, the money you get now, to the Wealth Choice Award." The Wealth Choice is an eight-year cliff vest. It says, "Okay, if you go to a competitor, you lose it all. Invest that through eight years, ordinary income." So basically, they keep shifting 1% to 2% over to the deferred side.

Michael K.: And you always, each year's comp is on a new eight-year cliff for the comp that year?

Michael H.: Exactly.

Michael K.: So you never get off the treadmill, right, basically?

Michael H.: So let me say this, you never get off the treadmill. I've been in the business now eight years. So I started, and I got my Series 7 license in 2010. I have never actually seen a Wealth Choice Award…Actually, my 2011 and 2012, you know, Wealth Choice Awards were significant because I, you know, blew the hurdles out of the water, out of the gate at Merrill in their training program. My first Wealth Choice of like $150 grand, $200 grand would have vested I think in 2020. So I left Merrill before I ever actually saw a Wealth Choice Award vest, unfortunately.

How Michael Handled The Breakaway Transition [48:13]

Michael K.: So talk to us about just the breakaway and the transition itself. You know, there's still a lot of stories out there of you resign at 4:59 p.m. on a Friday, and then you hurry out the door with the five pieces of information you're allowed to keep from the protocol, and then just begin this onslaught of call every client and try to keep them over the weekend. Was that the world of what it was like breaking away, or is that like overly glamorized – well, I guess that's not very glamorous – overly dramatized from what the reality is these days?

Michael H.: I would say that's pretty similar in that, I mean, you know, Merrill is still part of the protocol, so we were able to take those five pieces of client information and that was very helpful. We resigned, I guess, it was 3:00 on a Friday, maybe 2:00. Believe it or not, in our local branch…Here's what we tried to do, we tried to time it very well. Our local Wilmington, Delaware Merrill Lynch office was undergoing a move from Downtown Wilmington out to the suburbs. So they were actually undergoing an office move. So I said, "Okay…" And this is maybe about a year ago, last October, November, we decided we were going to pull the trigger and do this. You know, Merrill was moving their office in July, or sometime July/August. So we said, "Okay, this will be great. You know, there'll be so much chaos with the office move, we'll go ahead and leave Merrill all at the same time, so the timing will work out beautifully."

Of course, like most things with commercial real estate, it got pushed back a number of times. So when we resigned on July 27th, the office was still kind of in chaos, and they didn't move for about another month or so. But what happened was, when we actually went in to resign, I hadn't worked Fridays in five years. I mean, I had stopped working Fridays back in like 2013, just working a lot Monday through Thursday and kind of working from home Friday mornings a couple hours.

Michael K.: So when you show up on a Friday…

Michael H.: So I show up on a Friday and my partner, Steve, as you know, is only two and a half days a week. So our whole team is there on a Friday. This is never heard of. And it's interesting, so the management at Merrill was not there when we went to resign. So of course, the managers, I guess, were at a Billy Joel concert. So we had to go ahead and....

Michael K.: So there's no one. So you all show up highly suspiciously on a Friday morning because you're going to resign that day, but no one is there to see it or receive the resignation?

Michael H.: No one is there. So we call…Sharon Ash, you know, was our lead, you know, kind of counsel from MarketCounsel. She was a rock star. You know, she said, "Okay, you're going to have to resign to some admin or cashier, or something." So we got Chris, the cashier, great guy, and he said, "Okay, let me call…" Because Sharon advised, you know, for me to call Lisa, the branch manager, on her cell phone. So I never call Lisa. You know, I had a good relationship with her overall.

Michael K.: Oh, man. You're totally going to ruin the Billy Joel concert here.

Michael H.: Let's just say, I officially ruined the Billy Joel concert. So I call her and said, "Lisa, you know, it's Michael Henley from Merrill. I want to do this in person. But unfortunately, you're not available. I'm taking my team, and we're actually going to resign from Merrill Lynch." And she thought I was 100% kidding because, remember, I am the poster child…She was actually at my wedding with the bull cake. She said, "There's no way this kid is going to leave Merrill Lynch." So sure enough, she goes, "Why are you doing this?" I said, "You know, a lot of reasons, but I'm not going to get into it. And here's our, you know, client list, our protocol list, and here's our letters of resignation." And for a while, she thought I was kidding.

And then, from there, we literally all left together and went to our temporary office. I think, Dynasty, a lot of their folks were there. I think four or five of them were there. So we all, you know, did a champagne toast and then we were off to the phones. It was pretty chaotic. That first weekend, I would say, you know, definitely, I think you're calling…I think the most important thing, I would say, is it's unquestionably, when clients entrust you with their entire financial lives, I mean, you are as important to them as their family, as you know, Michael. I mean, you're calling a couple hundred people on a Friday, Saturday, and Sunday and surprising them, and we absolutely hate surprising our clients. So I would say the hardest thing for me was having just the complete shock of a lot of client…You know, a lot of clients said, "Hey, what took you so long?" Some clients said, "You know, you've got to be kidding. I thought you were going to be at Merrill Lynch forever."

So it's just something that…I would say, it was certainly a crazy experience, looking back now. But I would say, you know, the clients…We're in the relationship business. You know, for someone to hire you, they have to like you, trust you, and see you as the expert. That's all there is to it, as far as I'm concerned. So the clients were very receptive for the most part. They wanted to understand some of the moving parts as to, "Why?" Like you probably hear a lot of, a lot of the clients you'd expect to just be a slam dunk, no-brainer, you know, "Just send me the paper, I'll get it done. It's over," they wanted in-person meetings. A lot of our clients wanted in-person meetings to better understand what's in it for them, what's in it for us, etc. But unquestionably, I would say that, you know, in hindsight, that first weekend is pretty crazy.

How Michael Talked Through His Transition With Clients [53:02]

Michael K.: Yeah. It's one of the biggest frustrations I've heard from advisors going through the breakaway process. That, you know, up until the moment you hand in your resignation letter, you are an employee of the firm and have to represent the firm. And part of what that means is you can't tell your clients you're leaving in advance. It means you're soliciting for a different business while you work for the current one. You can't do that. It's a fire-able offense and will get you into some legal trouble. And so the only way that you can handle that situation is you can't tell any clients, sometimes you can't even tell all your staff, until the moment of the resignation. And then, you're taking these people that you have these deep, intimate relationships with and saying like, "Hey, ginormous surprise in our relationship together. I really value our relationship, which is why I haven't told you about this at any point along the way."

Michael H.: Right.

Michael K.: Like, it's just awkward, even in the best of circumstances.

Michael H.: It really is.

Michael K.: Like, how did you talk through that with them?

Michael H.: I mean, we just started off by saying, you know, "Unquestionably, our loyalty is to you." Really, I would say to them something along the lines of, "It's my job and responsibility as the CEO of this firm or of our team to get you and your family access to the best services and resources in the industry regardless of whether or not those services are at Merrill Lynch. So we've decided as a team, every single one of our partners you've worked with, all of the people you've worked with from Merrill Lynch the past 10 years," how long they've been clients, "all came with us." So that was really helpful, I think, moving kind of entirely as one succinct unit. It's not like some of us stayed behind and some of us were kind of skeptical about whether to come or not. I think that was helpful. But overall, it was just, you know, "We're doing what we know is in your best interest. We're one of many teams doing this."

A lot of clients, you know, they get assurance from other teams that had done this already. We'd send them articles of other Merrill teams, huge Merrill teams that have done the same thing. So think that was really helpful.

Michael K.: So just pointing out to them that, "Hey, other teams have left Merrill and gone independent, and their clients were still well-served. You will be too," like, you would actually use that as social proof?

Michael H.: We would. And actually, we would use…I can't remember if it was from you or Mindy Diamond that shared the, I think it was called the "Schwab Sophomore Study," where it interviewed a bunch of breakaway teams on kind of what percentage of clients went with them within, you know, 6 months, 12 months, "What was their reason for going, you know, more objectivity, more open architecture, etc.?" That study actually helped a couple clients on the fence say, "Okay, this is in your best interest. You're not locked into our team. It's the same arrangement as before." So that also really helped as it relates to kind of convincing them, "This is in your best interest. We're one of many teams doing this." I think the bottom line is, if planning-focused Merrill teams listen to this podcast, I would highly encourage them to at least talk to recruiters, like a Mindy Diamond, a Louis Diamond. They were phenomenal around due diligence, around, "Okay, their job is not to force us to go independent. But let's understand the options, the pros and cons."

I think a resource like you is invaluable as it relates to, "Here are the benefits, here is the differences." And if I had to do it all over again, I would just say that, you know, doing due diligence is critically important. It's around what technology you're going to use, what are the surprises, you know, you face, like the name, for example. So, you know, we worked with a marketing firm to select our name out of the gate, which was Wyeth Private Wealth, you know, because of Andrew Wyeth, etc., the historic painter.

Michael K.: Who is local to the area in Delaware there?

Michael H.: He's actually Chadds Ford, Pennsylvania. So we're actually in Kennett Square, Pennsylvania near Longwood Gardens. But, yes, he is. And so we said, "Okay, we'll trademark the name. No issues." We thought it made sense. You know, no big deal. We were never entirely crazy about the name, to be truthful, just because, you know, we didn't have a better name to go with. The name that Alison and I always wanted was Brandywine Private Wealth. That was the name that we absolutely loved since day one.

Michael K.: Where does Brandywine come from?

Michael H.: Because the Brandywine River runs along Pennsylvania and Delaware, and we work in the Brandywine Valley. So the Brandywine Valley is actually Pennsylvania-Delaware, kind of Northern Delaware, Southeastern Pennsylvania. So Brandywine Private Wealth, we said, "Oh, this is a no-brainer." Well, that was already taken. There's an RIA or I think an LPL team, actually, in Willowdale, Pennsylvania, Brandywine Wealth Management. So too close, couldn't go with that one. So after we heard from kind of the Wyeth Family Estate, if you will, around, you know, them being…

Michael K.: Like, you went after the like Wyeth Private Wealth named after the Wyeth family, or the famous Wyeth, and the Wyeth Estate came after you and said, "You can't use our family name?"

Michael H.: So how's this? You're about a month into your new business. I mean, it's chaotic enough. I mean, going through all of this stuff, calling clients, surprising them, "You've got to be kidding me," you know, getting clients, one by one, moved over, and you're constantly…It reminded me a lot of starting off in the business at PMD and Merrill Lynch, where your first month in, I'm cold-calling strange, I'm cold-calling my family for money, and I'm like, "What did I get myself into? This is a disaster." You start to have second thoughts around, "Am I really doing the right thing here?" And sure enough, so a month in, we get this formal letter to me. I'm the CEO or what have you, so sure enough, it gets directed to me. You know, they referenced a bunch of media articles, "Michael, you've been cited here in XYZ. You know, you named the firm after our family."

Michael K.: So you get a letter from a lawyer, and the first presumption is like, "Oh, God. Merrill is going to fight us."

Michael H.: Yep.

Michael K.: And you find out it's from the Wyeth Family Estate.

Michael H.: Oh, yes. That was lovely. And sure enough, it's funny because Merrill shockingly was…And our experience, knock on wood, was we followed protocol to the T. We had zero issues. I mean, we had absolutely no issue whatsoever with Merrill.

Michael K.: But you followed the protocol to a T?

Michael H.: We did, yes. Yep. That was something that was really, really important. Now, on the Wyeth side, so we said, "Okay…" It was by the trademark attorney, who's phenomenal. She's out in Washington State. Or Oregon, I'm sorry, one or the other. And she said, "What name did you want originally?" I said, "We wanted Brandywine Private Wealth. I'm, you know, emotionally attached to this name. I love this name." She goes, "You know? Why don't you just add a second word to it to strengthen, you know, the trademark ability, if you will, like Brandywine Oak or something." And sure enough, you know, me, Alison, and Mark were all sitting in the room, we said, "That's not bad." Like, "Oak" for, you know, strength and resilience in terms of investing and all that. So we said, you know, "We'll go ahead with that."

So the name that we changed to right at about maybe 90 days in – I think it was just south of 90 days – was Brandywine Oak Private Wealth, and we collectively absolutely love this name. And compared to the previous name, we were able to incorporate a tree logo that we really wanted and, you know, kind of the path to being intentional around your wealth, so a lot of kind of tie-ins.

Michael K.: Yeah. And the lawyer cleared this... ?

One Key Thing Michael Needed In Order To Make It Through The Breakaway Process [59:55]

Michael H.: Yes. Yep. Exactly. You know, so that was an interesting exercise. But it's funny, in hindsight, the one thing I will say as kind of going through this process is you have to be open-minded. You can't get emotionally attached to any name or to really anything for that matter. I mean, just it's something that there are going to be surprises. Everybody warned me – I think you were one of them early on – that, "Going independent, you're going to have a lot of surprises. So you're going to have to just, you know, take it with a grain of salt. You just kind of roll with the punches. Do not react. Don't have a breakdown over the name." You know, it's just something that where, it's almost…And clients, naturally, kind of default to our reaction. So when the markets are turbulent, if we're panicking and reacting, they're going to react. If we are calm and kind of, "This is the normal order of things," they don't react. It's the same exact thing with a name change. We joked about the name change with a bunch of clients before we actually announced it. They all said, "Who cares? You know, who cares about the name?"

Michael K.: It's like, "Michael, I'm hiring you, not the name of your firm."

Michael H.: Exactly. They all said, "We never understood the name "Wyeth." Why did you even do that in the first place?" We joked about it. They joke about it now. So we kind of jokingly ordered about a couple hundred pens, Wyeth Private Wealth pens that we give out now. We tell them, "They're collectibles, so hold on to them."

Michael K.: Ah.

Michael H.: So, yeah.

Michael K.: "From that brief month when we were Wyeth."

Michael H.: Exactly. So it's certainly been an interesting experience, you know, overall.

How Michael Chose The Components For His Service Stack [1:01:28]

Michael K.: So how did you choose some of the platforms, providers? You know, I think you mentioned at various points you work with Market Council, who's one of the law firms that works with advisors who are breaking away. You've mentioned Dynasty. So I guess, I'm wondering both just what is kind of like your platform, your stack now, like what thing, what vendors and solutions are you using, and I'm kind of curious about just what led you to choose some over the others? You know, if you are working with Dynasty, you were probably talking to competitors like HighTower as well. So who are you using, and kind of what led you to choose them versus the other options that were out there?

Michael H.: Okay, great question. So I would say that we went through the process…So we met with Mindy and Louis Diamond, and they kind of talked us through the Raymond James model, the independent broker-dealer model, and that was actually something that is also invaluable, in terms of you don't know what you don't know. So I had no idea what the difference was of an RIA versus an LPL. I had a colleague of mine go to LPL within the past, you know, say, year or two ago. So I knew what that model was. I didn't know the difference, though. So kind of like going through it with a recruiter, understanding better the pros and cons of each kind of model, that was very helpful. And then, meeting with Greg Sarian at HighTower, the challenge that we had…

So we basically looked at Dynasty Financial, HighTower, and Focus Financial. And I would say that, HighTower, the challenge I had there was that you're basically branding yourselves, I think, under their corporate RIA. So you're not really creating your own RIA. And one of the things I said, you know, and Alison and I talked about was, "If we're going to go independent, we want to go all the way. We don't want to do this half, in-between thing and still be the Henley Group, or something, at HighTower or something like that. We just felt like we were constantly underneath their umbrella. Now, I had another colleague, a couple years back, 2014, left Merrill and started Quadrant Private Wealth under Focus. So I had a kind of direct contact at Focus in terms of what they offered, and that was…Focus seemed like the right model if you were willing to sell a lot of your upside. If they were going to buy 50% of your kind of cash flow, if you will, you know, it was a significant amount of compensation up front.

You know, maybe 20 years from now, when Alison and I are 55 and we want to sell the practice, maybe we'll go ahead with a Focus or something like that. But we just couldn't wrap our arms around, "Why would we sell so much of our upside when we're in kind of a growth firm, we're constantly growing?" So us being so young, we couldn't justify why to go with a Focus.

Michael K.: And we hadn't really pointed this out earlier, but you're an advisor in your 30s. You know, it's not like you're breaking away in your 50s having done 20 or 30 plus years and saying like, "Hey, I just kind of want one more stint as an independent, and I'll get a couple more years out and maybe get paid a little more." And you saw the overwhelming majority of your career in front of you as you're looking at this in kind of time horizons and opportunities?

Michael H.: Exactly. So the longer the runway, I would argue, the stronger the case for independence. And if you have a 10, 15, 20-year runway, I mean, it is an absolute no-brainer, at least in my opinion, for advisors who are willing to own a business, not just be an employee at a big firm. And I would say that Dynasty, one of the things that I can say with 100% confidence is that they were our first conversation. So, you know, we talked to I guess the lead recruiter. It was actually a gentleman who now went to Focus, I think it's Mark Dupont or something, I forget his first name, who was phenomenal. He was a rock star, really well-spoken, you know, helped us understand the model. But then, our first conversation at HighTower, we talked to them briefly, but our first conversation with Dynasty was with the CEO.

So we spoke to Shirl Penney on our first conversation. And I'll never forget it, because he's younger in his career. I think you and he went to school together. So younger in his career, very similar in age, I think, to us, as we're in our, you know, mid-30s, early 40s. And he had a big runway ahead of him. And we knew right then and there, just from a culture standpoint, this was the right fit for us. I mean, he was very familiar with Merrill teams. He was very familiar with kind of the pros and cons of the wirehouse, the different models. He was able to solve for our liquidity need around the RPN note. That was helpful. And just the culture itself, Dynasty being a lot of younger employees, you know, we felt was a great fit. And of course, in our first meeting in person with Dynasty, I'm, you know, raving about you, as usual, saying, "Oh, I follow all Michael Kitces's work. He's a rock star." Austin Philbin was there and said, "Oh, I went to school with Michael." It's such a small world.

Michael K.: Yeah. So for those who aren't familiar, like the sheer random, you know, "it's a small world" coincidence, Shirl Penney and I went to college together at Bates College up in Maine and were overlapping there for three years at Bates. And only discovered a few years ago that we were there and classmates and overlapping. Bates is actually a rather small school. Each class is only about 400 students, whole school is 1,600 or 1,700, undergraduate only. So like, you're at least acquaintances with pretty much everybody, even if you don't know them that well. And Shirl and I, you know, really only had overlapping acquaintances, were never in the same dorm together, which is notable because there aren't that many of them.

But we went to school together and caught up and reminisced about this a few years later. And Shirl has hired a lot of former Batesies, and so a whole bunch of Dynasty are former classmates of mine who all landed there and went over there to work with Shirl. So there's kind of this small-world, Bates College connection between me and the Dynasty folks out of sheer coincidence that we just discovered a few years ago.

Michael H.: I mean, it's a small world. And it's too funny. But again, I will say, Shirl and his team have done a phenomenal job stepping up around this name change. This has been a heck of a time-consuming task, I mean, redoing all the marketing material, all that stuff. So I would say that…

Michael K.: Right. It's not just like, "Oh, we're not doing Wyeth. I guess we'll do Brandywine Oak." Like, you'd already made the website, the marketing collateral, and the pens.

Michael H.: Everything.

Michael K.: So like, you had to redo everything on your marketing.

Michael H.: The only thing I will say, thank God, is that, in hindsight, we hadn't purchased yet our signage for the building. So we were right at the point of purchasing all of our signage for the building. And sure enough, we said, "You know what? You know, let's just go ahead." And, you know, fortunately, that was not purchased yet. We have all the new pens in now, so everything is good.

Michael K.: Uh-huh. See, I have to admit, I would have gone the other way. Like, the pens are disposable, but to actually have the Wyeth signage, like that's a keeper, man. Like, you hang that somewhere in your house that it stays forever.

Michael H.: That's very, very true. If we would have purchased the signage, it'd probably be in my basement, that's true, on the wall.

Michael K.: Uh-huh. Yeah. Yeah. You can't lose that at that point. So the draw for Dynasty for you was this, you know, "We want the full-scale independence," and being a younger firm that still has a long growth horizon? Just literally being aligned to a younger firm that has a longer growth horizon?

Michael H.: Yes. That was huge. And I would say, as it relates to all the vetting of the technology providers, for example, the custodian vetting, I mean, all of that, all of those ancillary aspects, we would do weekly calls. From when we decided to go independent, we would do weekly calls every Friday for six months or something. So we'd kind of go through, I mean, every aspect of building an RIA. MarketCounsel, you know, we were very pleased with them overall. You know, very pleased with Sharon Ash. And I would say that, all things considered, you know, the due diligence process can be overwhelming, you know, "Why MoneyGuidePro versus eMoney versus…" I forget the other two that we looked at. And then we had, you know, in terms of, you know, vault software, in terms of reporting software, in terms of we had to demo all these different tech providers and kind of see what made the most sense. And it's unquestionably still a learning experience.

We were trying to dial in to, "What do you need as an RIA?" Your entire philosophy or your outlook changes being a business owner, because now you have the cost of all these technology providers. So for example, at Merrill Lynch, we had Salesforce. We didn't know any different. So all we had was Salesforce. It's all we knew. We couldn't stand it. We didn't like one aspect of it. I can tell you, our whole team despised it, but we were required to use it. So now, when we went independent, you know, kind of the CRM we ended up with was Salesforce just kind of by virtue of that's who we had at Merrill. And we said, "Okay…" We compared the cost of Salesforce to a basic C-…All we use the CRM for is basic notes, "Client called in." We were using, really, you know, eMoney as the primary system for client interaction, but the CRM for basic note-taking, nothing crazy. So we kind of demoed Redtail. And after launching, we said, "Okay, we can cut our costs by like $15 grand, $20 grand a year by going from Salesforce to Redtail." So Redtail I think is $100, 15 users. It's all we need. Redtail integrates with eMoney beautifully. You know, so there's a lot of things that we liked about Redtail that really were a better fit.

What Led Michael To Decide To Build His Client Portal Around Emoney Advisor [1:09:53]

Michael K.: Interesting. And so you were on Redtail because it got done what you needed it to do, and it was a heck of a lot cheaper than Salesforce. You've mentioned eMoney Advisor, so I guess that's planning software for you. What was that exploration or transition like from what you were using previously? And I mean, you know, does Merrill have some deal where you're also using eMoney or MoneyGuidePro, or one of those there, or are they on their own proprietary tools?

Michael H.: Great question. Yeah. They're using their own proprietary tool called the "Wealth Outlook," which not knowing what you don't know at Merrill, it seemed to get the job done. But I would say now, being an eMoney user, when I say it is a game changer, I can't even begin to tell you how…This is probably the number one thing that I love the most about being independent, is that you're really able to demonstrate outcomes for clients. A partial Roth conversion strategy from age 60 to 70, it sounds great on paper. You know, but really being able to show the client the before and after, "Hey, this is going to add $1 million to your family's wealth 30 years from now," you know, forget the side market, this is just from the tax planning alone, it really can demonstrate the value that we provide as planners. And I would say that we're using eMoney as the primary client portal. So clients log into eMoney, they have access to all the reports that we show them. We use eMoney for the vault. So if they want to upload their trust, tax returns, any of those items, they do that there as well.

Michael K.: So I'm struck that you're using eMoney as the primary client portal and not something on the performance reporting side, an Orion or a Black Diamond, or one of those solutions?

Michael H.: Yes. So basically, we actually started off with Black Diamond. And not knowing what you don't know, for Merrill advisors listening to this podcast, I would say the CRC…CRC is kind of the Client Relationship Center at Merrill. That's kind of the performance reporting tool in and of itself. It's a proprietary, internal tool at Merrill Lynch. That's basically the Black Diamond. So that is essentially what Black Diamond is in terms of performance reporting and asset allocation analysis, size and style, etc. Black Diamond, for us being a planning-focused kind of firm and team, our value-add is on the planning side. So we did not want clients logging into a performance-centered, you know, client portal, if you will. It was sending the wrong message. It was focusing more on short-term performance that we found resulted in inappropriate behavior, in terms of reacting to the market, etc.

I would say, eMoney, when clients log into eMoney, they don't…So for certain clients, because we're doing our performance reporting now through Fidelity…So through our custodian, we basically have added performance reporting, asset allocation, etc. I think they refer to it as "performance measurement." Right now, the Fidelity tool, you can only track performance on Fidelity accounts. But come 2019, they're going to add outside custodians, so we can track the clients' alternative investments or annuities, or whatever it is. But what we really liked about it was clients could log into one portal, their eMoney portal, and they can view their financial plan, they can view the vault, they can view all the stuff they're used to seeing. They can also see, if we enable them, performance reporting. So if they want to see year-to-date performance of their various accounts, you know, they can do that all within eMoney, which we thought was very, very helpful.

Michael K.: I'm fascinated by that. Because I'll admit, this is a pain point, a frustration, even for our advisory firm. You know, we're not Black Diamond users. We happen to be Orion users, and have been MoneyGuidePro users for a long time. And despite being a planning-centric firm, it drives me nuts that we don't have a good planning portal to send clients to. Because MoneyGuidePro really hasn't built one, or certainly nothing remotely close to the capabilities of what eMoney Advisor does. I can send people into Orion, but then they're logging in and looking at investment stuff first. And I mean, I don't want to hide that from them. Like, they should be able to access and get it. Frankly, they can get it through their custodian anyway. So like, we still want to present that, but I would love to be able to send them to a planning portal first and let them drill down to the investments if they want to, because a few clients will and the rest won't.

But I feel like that's largely been a gap out there. Right? Like, every software company wants to make their software the portal. So like, you know, the CRM wants to make their thing the portal, and the performance reporter wants to make their thing the portal, and the planning software wants to make their software the portal. And clients go nuts, because nobody wants to log into those zillion different portals. To me, the ideal has always been it should be a planning portal first, which I think is part of why eMoney is growing so well. But I actually didn't realize that they had like a fully integrated Fidelity, what did you call, "performance measurement" system on the back end. So does that mean you actually got rid of Black Diamond, and you're just literally using Fidelity only for performance reporting?

Michael H.: We did. And that was another significant cost-saving. So that was something that we looked at both and said, "Okay, do we need this kind of additional firepower as it relates to performance reporting?" We said, "You know what? You know, if we can cut the cost by…" It was a significant cost difference. Because basically, Black Diamond was a basis point, kind of charge and asset-based fee, versus a flat dollar amount fee per account. So we said, "Okay, if we can cut the cost down dramatically, none of us are going to use Black Diamond, we just don't, that's not the way we run our practice." So all in all, basically, in eMoney, if I'm a client logging in, I log right in and see my net worth. I have the vault right there. I can go to Reports at the top of the client portal, and I can click on, one of the drop-downs is Performance Measurement. So it's still not right in their face the way with Black Diamond, it's right in your face.

And the thing that's cool using Fidelity as the custodian is that we can actually turn off the client performance within their fidelity.com login. So we make sure they can only see performance within the context of their overall financial plan. As opposed to them going to fidelity.com, seeing what the market did that day and, "How did I do that day?" they have to kind of go to, you know, their eMoney portal to actually get to the performance reporting.

Michael K.: And can I ask, like, what do you pay for Fidelity performance measurements versus Black Diamond side? Like, it's flat fee for firms or advisors, or just down to the client account level, like Orion and some of the others?

Michael H.: Yeah. It's actually at the account level for Fidelity. So Black Diamond, if I'm not mistaken, was three or five basis points…I'm drawing a blank now on the actual, you know, total assets under management, if you will. So larger accounts, more AUM, Black Diamond got to be pretty cost-ineffective. You know, again, I'm not saying it's bad, but for people who that may use it a lot…

Michael K.: If you've got small clients, bps look good, and per account looks bad. If you've got big clients, per account looks good and basis points looks bad. Right?

Michael H.: Exactly. Yeah.

Michael K.: You know, you play the system. You play the game.

Michael H.: That's exactly it. And I would say that Fidelity, I think it's like, you know, $10 per account the first 500 accounts. The next 500 accounts are $8. I think the floor is $6 or something. But it ended up being, you know, much more cost…It was about a 50% drop in cost overall, in terms of the difference.

Michael K.: I mean, that's an impressively low cost for Fidelity. You know, I think most of Orion's pricing is something like $40 to $70 per account, you know, scaling down with larger sizes as most do. But that still means Fidelity is pricing their internal one at, you know, a miniscule fraction, granted, Fidelity-only, at least for now. But, you know, just pricing out at less than a quarter of what Orion is for performance management, and I guess build a deep integration to eMoney, since they own eMoney. So that should be an easy integration for them to get done.

Michael H.: Yes. That is huge. I think more and more, you're going to see these custodians...I think you talk about this a lot. They're Fidelity and they own eMoney now. They're going to have their own internal tools. They're going to compete with the Black Diamonds. I think the more they can have you do it in-house, you know, it's simpler for us. And for any wirehouse breakaways, it's brilliant on Fidelity's part because we are used to one system that has everything. In terms of the client portal and our portal on our side, we want one system that does everything. So now, you know, we basically come into work, have three windows open, we have Wealthscape, you know, eMoney, and Redtail. And you essentially have pretty much everything you need from a client standpoint in terms of, you know, our daily work, if you will.

Michael K.: And is that what literally drove you to make the decision to work with Fidelity? You can buy eMoney separately, and it sounds like you didn't even start with their portfolio tools because you started with Black Diamond instead. So like, what actually brought you to Fidelity?

Michael H.: I would say the biggest driver of Fidelity was, East Coast, huge brand over here. We do a lot of work primarily with DuPont corporations or DuPont, you know, retired executives and what have you. And DuPont and Dow are now merged together, so there's DowDuPont, and Dow's corporate 401(k) plan is with Fidelity. Believe it or not, DuPont's 401(k) plan is with Merrill Lynch, but there's a lot of rumors it's all going to be moving to Fidelity within a year or two. So ultimately, Fidelity's huge kind of 401(k) presence was a significant reason. That, brand recognition, local Fidelity presence was helpful in terms of, you know, brand recognition.

Michael K.: So Schwab was too San Francisco for you?

Michael H.: Too San Francisco for us. And I would just say that, overall, our clients know and love Fidelity. I mean, if I looked at our entire practice, believe it or not, I would say that the majority of our flows coming over kind of to Merrill, as we built the practice, were from Fidelity, Vanguard, Merrill Lynch 401(k) plans. Very few were from Schwab, so our clients didn't really know Schwab.

Michael K.: So they already knew Fidelity because you were taking the money from Fidelity. So now, you're just bringing the money back to Fidelity?

Michael H.: That's exactly right. It's all coming full circle.

How Dynasty Fits Into The Mix [1:19:38]

Michael K.: So that's now the core stack for you is Fidelity for custody and using Wealthscope and their portfolio to secure investment management, eMoney on the planning side, and Redtail for the CRM?

Michael H.: Yes.

Michael K.: So what does Dynasty do for you in this mix? For advisors who aren't familiar, like where does Dynasty fit in now?

Michael H.: I would say all middle and back office support as it relates to the day-to-day operations of the business. So when it comes to, you know, reviewing commercial real estate leases, when it comes to negotiating the terms of the commercial real estate lease, when it comes to billing, all kind of the advisory fee billing, their operations team handles all of that. When it comes to investment research – so for example, we have a lot of DowDuPont executives, so naturally we want as much DowDuPont, you know, stock research as we can get. So they'll have, you know, one or two of their investment guys send us, on a weekly basis, all of the various firm research on DowDuPont stock. So a lot of the HR functions that Merrill will do, so when it comes to offer letters and all those kind of things that we just had no either interest or time in managing all those various items, we can pretty much reach out to Dynasty for anything and everything we would normally have reached out to Merrill Lynch for. So it's just a…

To be honest, I would say that, you know, having been in a wirehouse, you're used to having done for you. There was just no way we were going to go out there and just do it on our own and say, "Okay, who the heck knows? We don't know what we don't know." We wanted to have a resource we could constantly go to. And the folks at Dynasty know well that I kind of text them all the time with questions or, you know, "What's going on with this or that?"

Michael K.: So certainly, how does that work exactly? Like, do you have a primary account rep equivalent at Dynasty that becomes your primary point of contact when you've got just whatever these questions are, and you can just come with everything from, "Hey, we're hiring a new employee, we need to make an offer to them," to, "We're negotiating a commercial lease. Someone over there, review this and let us know if it's okay?"

Michael H.: Yes. I would say that you have relationship managers and your primary point person, and they'll usually direct any inquiries to the appropriate person. But they'll have…I don't know if he went to Bates College or not, but Justin Winkle from Dynasty is absolutely brilliant. And hopefully, you can get him on the podcast. He's a rock star around the M&A space.

And I think you have the firepower of the other, you know, 30 or 40, or whatever it is, network firms in their network. So by leveraging kind of the entire network, you're able to get economies of scale. So just, for example, if we're going to do a structure note, you know, we'll do it through Dynasty in relationship with Halo. And we can kind of create our own structure note, you know, shop every single bank or every investment bank on the street and say, "Okay, who came back with the best kind of terms for our clients?" So they really give you kind of the firepower of all the network kind of collectively, if you will.

Michael K.: Okay. So just the whole nature of leveraging economies at scale and, essentially, buying power, just Dynasty aggregated together with, I forget what their number is, on $25 billion or $30 billion of collective assets, just gives them more buying power and better terms than what you might get if you were going directly?

Michael H.: Exactly. Yeah. And also, with Fidelity, especially. They have a huge relationship with Fidelity. So we had a couple surprises out of the gate. And here's an example, so for clients who have, at Fidelity, less than $1 million, but they are not getting e-delivery for statements, that they're getting paper mail statements, it was something like, instead of being $4.95 for, you know, trade commissions, it was $17.95 or some ridiculous number. We were just blown away by this, and we couldn't…

Michael K.: Stop taking the paper statements.

Michael H.: Oh my God. And with some of our clients that are 80 years, they don't even have a computer. They don't even look at this stuff online. So it sounds crazy to say that. So we went to Dynasty and said, "Look, this is crazy." They were able to go up the chain at Fidelity, get it addressed and completely resolved. So now, they're $4,95, whether they get paper or not. So it's just certain things that, you know, in terms of escalating certain issues, we wanted to make sure to get done right away and efficiently. I can tell you, you know, right now, that name change, you know, Dynasty's marketing team was unbelievable around getting this all done, updating everything simultaneously. We made the announcement on a Friday. Sure enough, everything was seamless, no surprises there at all. I can't imagine trying to do a name change on your own.

Michael K.: And, you know, you make an interesting point with this. You know, like, this world where Fidelity upcharges your trading commissions if you won't get e-delivery and you make them keep sending out paper statements. And not to pick on Fidelity. The other custodians have done similar things to try to incentivize people to shift to e-delivery. It does again illustrate that point, I think, similar to the earlier discussion that just the large firms have certain business objectives they want to accomplish. So they change their rules of engagement to try to, you know, nudge people and incentivize them in a certain direction. Whether it's, you know, "We want to lift up the mortgage volume at BofA, so you have to do this many mortgages and households in order to get your full grid payout," or Fidelity is saying, "We'll charge you 4x the trading fee if you don't get e-delivery, like, all firms do this.

But it is an interesting difference between when you're at a company like Merrill and just those are the rules, you can play the game as best you can, but you don't get to change the rules versus when the firm you're working with is not your employer, they're your vendor as Fidelity is to an independent RIA, where if you don't like the terms, at least there's more opportunity to negotiate or use a firm with more size and scale, like Dynasty, to leverage the negotiation and say, "No, no, no. I want different terms for this part. This isn't working for me." And at least it's on the table. Not that you always win those debates or those items that you want to push back on, but at least it's on the table because it's a vendor relationship, not an employer relationship.

Michael H.: It's a different relationship. And really, I say to clients all the time, you know, "We are not employees of Fidelity. We don't receive a dime of revenue from Fidelity. It's our job," and you've talked a lot about this," to keep Fidelity's cost as low as possible. We want the drag from Fidelity's fees as low as possible." And Fidelity does a phenomenal job, very, very low-cost provider, of course. But I completely agree with your kind of take on this in terms of industry outlook as it relates to custodians should charge a flat basis point fee to RIAs and just give them free trading. It just seems, we play so many games around, "Well, should it be an asset-based pricing? Should it be transactional-based pricing? What's going to keep our clients' fees as low as possible?"

Michael K.: Yeah. I mean, if you give us choices, it's really easy. We'll just do the math and pick whichever one gives our clients the most and you the least, and we'll do that one.

Michael H.: Exactly. I don't know why that is something that…It just seems so much simpler just to charge a fee, some sort of flat basis point fee, whatever it is. I make the same argument around realtors and attorneys. They should be a fee for advice model, just like our industry is. It just seems so much…They're on the same side of the table charging a flat basis point fee, and then we'll be inclined more so to use them, you know, as opposed to having to pick certain ETFs off the iShares list. And then, you know, it just gets to be this game of, you know, trying to keep fees as low as possible for clients.

Michael K.: Yeah. And is it similar structuring with Dynasty as well, that they charge you basis points or a percentage of revenue, or something similar for the wrap-around services that they're providing?

Michael H.: It is similar in the sense that it's a basis point fee for the core services, but they keep it pretty straightforward. There's going to be breakpoints of, you know, if we have more than $1 billion under advisory assets, or what have you, or to custodian, you now, we'll get a breakpoint over and above that of x. But there's not really any games to play, which is very, very helpful. And what I really liked about Dynasty also is that, you know, being an RIA owner, they'll pass through cost-savings down to us. So for example, even though I want to say that Salesforce is their primary kind of CRM provider for most of their network firms, we said, "Look, Salesforce is not for us. You know, can we get those cost-savings at hard dollars?" "Yes." "Look, Black Diamond is not for us. You know, I understand there might be contracts, etc., but can we get those hard-dollar cost-savings passed down to us?" "Yes. You're the business owner, you tell us what you need." And so they've been very, very flexible around not locking us into a box the way we were before.

Michael K.: And not that you have to give the details, since it may have been negotiated, but like the neighborhood, at least, of Dynasty pricing, I mean, are we talking five basis points? Are we talking 25 basis points? Like, how does their cost relate to your overall just fees of revenue?

Michael H.: It is a basis point fee. And to be completely honest, I don't know the exact…I would say it's in that range, somewhere between 10 and 20 basis points, somewhere in that range if I'm not mistaken. I would say this, our most recent P&L net of the…Our margins are probably somewhere around 60% or thereabouts, you know, let's just say after the RPN note, after all expenses, overhead, etc., staff, compensation, etc. So I would say, we basically went from about a 40% "grid rate" after staff compensation at Merrill to about 60% all else being equal.

Michael K.: So that's essentially margin after overhead, but before your payments to yourselves as advisors?

Michael H.: Correct.

Michael K.: Okay.

Michael H.: That's before. It's net of everything that owners…That's basically EBOC, if you will. Now, having said that, I would say, often, I think advisors at wirehouses forget that you don't necessarily need to bring over the same amount of clients. If you have $7 million of revenue at a 40% grid rate at Merrill Lynch, your net compensation to the advisors is $2.8 million give or take. Right? So let's say $2.8 million. If you only bring $5 million in revenue over, you know, let's just say as an RIA, and your 60% margins, you end up better off. You know, you don't have to…I think there's this kind of idea that, as a wirehouse advisor, you have to bring over 90% to 95% of your clients to be paid the same, and we have found that's completely inaccurate.

Michael K.: Well, and that's one of the things that I feel is often understated or underrepresented in some of the industry surveys even, around like, "Hey, you changed firms or broke away. How many clients came with you?" And, you know, it's like 80%, 85%, 90%, which is not a bad number by any means. But for a lot of those firms, it's not because 15% of their clients said "no." It's because they didn't ask 15% of their old clients because they didn't want them to come along. Because, you know, it wasn't a profitable client, or it just wasn't a good-fit client. Right? You know, I'm sure we can all think of a few clients in the practice, it's like, "You know, if I made a transition and he or she didn't come, I'd kind of be okay with that."

Michael H.: I can assure you that there was a lot of that going on, where basically clients were not a good fit. We were like, "Thank God we can get rid of so and so." Either they weren't a good fit, they took up a lot of time, they were either performance maniacs trying to beat the S&P 500, no thank you. Basically, we were so happy to kind of trim the book and say, "Okay, a couple hundred meaningful relationships we want to bring over, and we're going to bring those over no questions asked, upgrade what we do for them." But I would say that the other thing I think, often, we were kind of surprised by is the number of clients we've added, not a crazy portion of all our existing clients, but a couple new clients who have said, "We would have never joined you if you were at Merrill Lynch." They don't like big corporations, don't like big banks. They like the idea of an independent, kind of local presence.

You know, a founder of a company here locally, you know, met a couple of the employees. Sure enough, he said, "You know, I would have never joined your firm if you were at Merrill Lynch. I want nothing to do with Bank of America." And I can't tell you, while I was at…What really opened my eyes the past couple years in terms of making this transition was a couple of referrals that we had gotten or great clients that say, "I'm in Florida meeting with a family. I want you to meet a referral of mine. She has, you know, four times the amount of money that I do." And the day before the meeting, I would hear back that, "She said she's not going to make it. You know, something came up." And I had finally asked the client, "What happened here?" And they said, "Oh, her son got burned by Bank of America. You know, she will never do business with Bank of America." And I don't think people can appreciate how many potential prospective clients just don't like Bank of America.

Michael K.: Well, and unfortunately, Wells Fargo is having some similar issues these days, and you can see it in their advisor attrition numbers of advisors leaving that just, like, the problem…You know, in theory, the bank is supposed to be this great synergy to the rest of the platform. And honestly, if I was making a wealth management firm from scratch, like no regulatory barriers or other limits, I wouldn't make it in an RIA or a broker-dealer, I'd make it at a bank. Because if you really live at the center of a client's cash flow and you support them on the cash that moves in and out, like investments and all the rest is ancillary. Like, you know, I don't look at my portfolio that often, I certainly don't run my personal retirement projections that often, but you engage with your cash flow every day of the year.

Michael H.: That is so true.

Michael K.: You have to. Like, you spend your cash. So if you're great at the center of where the cash is, you're at the center of the relationship. Except, in practice, banks don't seem to be executing that holistic wealth management relationship very well. It's just, it seems to be the bank mentality right now – they don't measure themselves on depth of client relationship, they measure themselves on number of products per client household. And like, it's all about product wallet share, instead of around wealth management relationship. And so now, ironically to me, even though I would make a wealth management firm with a bank at its center, a lot of wealth management seems to be moving away from banks, unless they're sort of unique standouts like First Republic, that seems to be doing something differently over there than a lot of the other banks.

Michael H.: Yep. I'd certainly agree. I mean, I think First Republic seems to be on the forefront in terms of kind of, at least from what I've observed, doing it more right than some of the other big, you know, wirehouses. You know, it's definitely interesting. And I would say another thing that is certainly different, at Merrill, you know, we were able to, up until like 2015, 2016, charge for a financial plan. So very often, sitting down with a prospective client, you know, a lot of the planning the work that we're going to do on their behalf, 8 to 10 hours of labor with a maybe, you know, "Are you going to come on board or not," what I liked the idea of doing was charging an up-front fee for a financial plan. So something called a "financial foundation," Merrill allowed up until 2015, where you could essentially charge, you know, $500 to $1,000 for a financial foundation. And if the client decided to come onboard, they would be reimbursed that fee.

You know, it was a great model. Because at the end of the first discovery meeting, you were able to say to a prospect, "You know, there's two ways that we can proceed. You know, one is a free plan. It's a retirement forecast. It's not going to cover tax, estate, insurance, gifting, all of the other stuff. You know, the other is a comprehensive plan that's going to cover everything. There's a charge for that one." And the families that were willing to write you a check in the first meeting were committed. They had skin in the game. They took the second meeting a lot more seriously. They would never miss a second meeting. Because very often, when they didn't pay for the plan at all, they would be a no-call, no-show or, you know, they'd cancel last minute or something. They paid for something. If you paid $1,000 for something, you're going to show up to that next meeting.

And in the RIA world, now being able to charge again for a financial plan is powerful. Because, you know, if you're sitting in front of the right prospect, if you give them a choice of a free plan or a comprehensive plan for a fee, the right prospects will always pay the fee. I mean, every day of the week, you know, $1,000…We're not going to charge $10 grand for a plan or something. But basically, they're always going to, you know, pay for that out-of-pocket cost to kind of see, "Okay, am I going to be okay?" Because at the end of the day, we're in the business of answering, you know, what I call the "expensive questions." You know, "Will I be okay? Can I afford to retire? Will my family be okay?" Because you don't really get a do-over, so you can't afford to get it wrong. So I think, you know, for the right prospects, that kind of being able to charge out of the gate for the initial planning we do on their behalf is powerful.

What Michael’s Firm Looks Like Four Months Into The Transition [1:35:43]

Michael K.: So paint us a little bit of a picture of just what a business looks like now at Brandywine Oak. Like, you're four or five months into the transition. Did clients come? Like, what's the size of the firm now? What do things look like as it exists today?

Michael H.: Yeah. So just to give a little bit of background. So at Merrill, we were about, let's just call it $900 million in assets give or take. Now, I have to caveat that, because a lot of that was what I would call "dead assets," you know, low-basis DuPont stock that it was not advisory assets, if you will. We had, at the time that we left, only because I tracked these numbers obsessively, about $650 million in advisory assets, so money we were actually…You know, revenue-producing, you know, managed assets, if you will. We're at approximately $550 million now, so about four months in. So we're, about 80%, 75%, whatever that is, of where we were when we were at Merrill. And I would say that we are still actively moving clients over. Just last week, another two $5 million clients. We're just busy.

I think the thing that advisors have to keep in mind when they break away, while it may be a good time to break away in your and your team's life, it is not always a good time in the client's life. And they're not going to stop what they're doing to sign, you know, 1,000 signatures to move every single account they have at Merrill over to you because you thought it was a good time. So I think a lot of it just, you know, kind of it takes time to get everybody moved over. But I would say that, in general, the vast majority of our families that have moved over, we have about 300 families, maybe 320. The median family is around $2.5 million that we oversee for them. Clients range from probably $1 million to $50 million that we manage for them. And it's interesting, in this kind of new world, we were primarily just basis point fee, very plain, vanilla. You know, they were paying a fee of x at Merrill Lynch.

We've taken away the downside breakpoints. We never liked at Merrill how if the client had $2.5 million, their fee was 0.9, but if the market took a nosedive or they took money out, the fee would jump up to 1%. If it fell below $1.5 million, it'd jump up to 1.2%. If it fell below $1 million, it'd go to 1.3 or 1.4. There are always these breakpoints in the downside to kind of protect the brokerage firm's revenue in a down market. And it's nice, as an RIA, being able to charge, you know, 90 basis points, period. And if they refer a…You know, we do kind of a referral pricing model. If they refer a colleague, we'll lower their fee five basis points for life, which, you know, a lot of our DuPont retirees find attractive. And one thing I'll just mention, Michael, that's been interesting is that being able to charge a flat fee now is also helpful. Because we have some DuPont engineers who are now retirees who just want a purely passive portfolio. They want the S&P 500. They want an international index or two, you know, bond index, keep it very simple, you know, pay us for planning. And it's helpful to be able to say, "You know, look, we charge, you know, the minimum fee for a new family is $15,000 a year. That's it. It's a dollar amount minimum, not an asset minimum.

So if a client says, "Hey, I have $10 million. I'm going to pay you $15 grand a year for the planning you do on our behalf. You know, I want to do two meetings a year, etc., or view my tax information, estate plan, etc., help me optimize charitable and family gifting," it's great to be able to charge a flat fee, debit their pre-tax IRA. They can pay the fee before tax dollars, which is helpful. And it's a nice kind of alternative to an asset-based fee, which is all we had to pick from at Merrill.

Michael K.: A flat investment management fee for, you know, a simple portfolio you're not as actively managing?

Michael H.: Exactly. Yep.

Michael K.: So now that you've lived some time in both worlds, you know, you spent almost a decade at Merrill and now building on the independent side, so like how do you compare and contrast the two, having lived on each side? Like, what's working better for you on the independent side? What's actually still lacking on the independent side that the wirehouse still did better?

Michael H.: That's a great question. So I would say, first and foremost, you have to be prepared to be a business owner. And I think, you know, no matter how much due diligence you do, it's not just coming to work doing advisor work only. I think that a lot of the points you make, Michael, are spot on around you get into this business because you love helping people. And as the business gets bigger and bigger and bigger and bigger, you're more and more disconnected from the actual planning side of the business. So I think the more you can kind of empower the people around you to help do a lot of the heavy lifting around the day-to-day operations the better. I can say that, you know, for example, Alison, my number two on the team is kind of the co-CEO, Chief Operating Officer, she does a lot of the heavy lifting for me, so I can focus on the need of the clients. You have to build that kind of team structure around you, because otherwise the business ends up owning you.

So I think the one big compelling difference, I would say, is that you have to be prepared for what it entails, unquestionably. I'm a huge, huge, huge fan, like you are, of Mitch Anthony. It's far better to prepay her than it is to repay her. The more due diligence you can do early on, the better. So you have to balance, especially if you're a Merrill advisor, a Merrill team, the chance they may leave protocol with doing proper due diligence. Because they were just kind of…We had kind of a gun to our head over the due diligence process because we kept thinking Merrill was going to leave protocol, and we wanted to make sure we had protocol protection as it relates to calling our clients. So I would say that doing, you know, due diligence early on is helpful. And talk to other wirehouse teams who have done this. That was, by and large, the most valuable thing that I did was talk to other wirehouse teams who have gone down this road, "Here were the surprises. Here's what we liked. Here's what we didn't like."

But comparing and contrasting, I would say the one thing that the independent space…I think the more they can pull together kind of all the technology providers under one umbrella the better. I think eMoney is doing a great job with that. But coming from a wirehouse, one thing that was really nice was you have one system. I mean, there is one tracking system for everything. Not having to log into different systems, different logins, as it gets to be almost overwhelming in terms of where you go to find what when you're very used to having one system for everything. So I think here's just a simple thing in eMoney. When it kind of comes to kind of getting used to eMoney and kind of how that whole planning system works, I went to the eMoney Summit in, I think it was early October, mid-October, whenever it was.

And that was phenomenal because I was able to go talk to the experts there in person and say, "Okay, I'm trying to show this. I'm trying to show…You know, they changed state residency before they died to avoid the inheritance tax in Pennsylvania. How do we do that? How would I model that?" And just kind of, having the eMoney experts there in person, I would encourage anyone who's going to use eMoney, or probably MoneyGuidePro is the same thing, you know, go to the summits and learn from kind of the best practitioners because that was a powerful thing. And I would just say that, you know, all in all, eMoney being at kind of the forefront of our clients' interface has been, you know, a game changer for us.

Michael K.: It's just giving clients that portal and the ability to log into the portal.

Michael H.: Yes. And having just their entire financial plan right in front of them, where, you know, they can go to their cash flow whenever they want to see it. "Okay, if we only earn, you know, 5% on your portfolio from now until you're 100, you know, you're happily ever after." You know, so it just helps them focus on the long term. And I would just say that, you know, in terms of at Merrill, I think there will always be a large amount of kind of, you know, rock star, phenomenal financial planners at like a wirehouse, just because they don't want the inertia that…They're just there for inertia reasons only. It's just, it's too much work to move. I do think, having said that, there's going to be a lot of bolt-on opportunities, where, you know, for example, we've already established the firm, there is Merrill Lynch advisors in our local office. So I know with 100% certainty, they deserve better than the current, you know, environment that they are in.

So I think you're going to see more bolt-on opportunities than anything else, as opposed to just building it from the ground up. Building it from the ground up has been, you know, an exciting process, but I can't see all the Merrill Lynch advisors that I know going through this process. I mean, it's a lot to undertake.

What Michael Would Do Differently If He Could Do It All Over Again [1:43:18]

Michael K.: Yeah. So as you look back, like do you regret the path that you took of building 10 years at Merrill and then transitioning? Would you still do it exactly the same way if you were doing it over again?

Michael H.: Honestly, I will be brutally honest, I absolutely would, and I'll tell you why. I think Merrill has the best training program in the industry. I think if you can make it at a wirehouse, you can make it in this business, period. And the reason why is because the new money, the new household hurdles are not insignificant. They are real hurdles. And if you can actually, you know, cold-call and build your business from the ground up, then you know with 100% certainty you can make it in this business. And I think that type of competitive environment starting off in the business, it really teaches you to go after it. You're going to have this drive from that kind of culture, if you will. And at least, when I did the training program back in 2010, 2011, I absolutely love…I had to be number one in every single category all the time. So I think that sort of, kind of, drive, I don't necessarily think you can get that from a small RIA to start with.

Now, I could be totally wrong. But in my experience, even talking to other financial planners at conferences, if they joined a small RIA to start with, they weren't held to the standard of, "You've got to bring in money to make it in this business, period."

Michael K.: I mean, it's a tough blend on the one end because a lot of people, you know, are like, "I didn't come to bring in clients and money. Like, I came to do me some financial planning." And, you know, that's fine. You can do that. I think there are actually increasing opportunities to do that. But if you want to be a lead advisor and, in particular, if you want to build an advisory firm, like at some point you've got to get comfortable with getting out there and convincing people to do business with you. Like, even if you're selling advice and yourself and not products and whatever a parent company is telling you, like you still have to be able to sell something, even if it's yourself. Which means, eventually, you've got to learn how to do it, train how to do it, or put yourself in an environment where you're going to have opportunities to get good at it, or you do hit a pretty significant ceiling as an advisor in your career. You can make good money, but you will hit a ceiling if you're not prepared to either get clients or learn how to get clients.

Michael H.: I think that's very well said. I would almost take it a step further to saying that, you know, if you want to be a lead advisor, you have to be strong on the sales side bringing in money. That's a requirement. But if you're okay being a paraplanner role, which is critically important…Because the paraplanner role, almost by definition, allows the rainmaker to go ahead and bring in the money. And if I didn't have a bunch of financial planners at my firm doing all the financial planning, you know, for us, if you will, I'll take a look at it, you know, before we present it with a client, I wouldn't have the time or the ability to go out and bring in the money. So I think you have to just have kind of both roles at the firm or on the team, if you will.

But I think whether you're a paraplanner or the rainmaking advisor, I think, you know, one of the things I've always said, even to trainees at Merrill is that, number one, you have to outwork your competition. You know, you cannot substitute work ethic in this business. Number two, I've always said you can never stop learning. You know, basically, as soon as you stop learning, it's over. I think you always have to be wanting to get better. My number three, never lose your humility. Never be impressed by your success. I think, those three things, if you kind of follow those, you'll probably be in pretty good shape, you know, long-term.

Michael K.: So what's the vision for you from here? Like, where does it go from here? You've made the transition. You've survived. Most of the clients came. So, you know, wipe the sweat off the brow, like, "Thank God, we're going to make it."

Michael H.: Right. Yep.

Michael K.: So where does it go from here for you?

Michael H.: I would say, it's interesting, because there's a lot of talk about M&A in this industry, and I'm not against M&A. But I've had a couple advisors join the team over the years and they haven't been a good fit, so we've kind of coached them off the team. I would say that makes me a little gun shy on M&A. I'm not saying I'm against it. I would say, Alison and I, really, we want to continue to keep, I think, the growth very, very, very, I would say, responsible and deliberate. So I would say, we're probably going to look to grow to maybe $6 million in revenue, or maybe next year full-year revenue, it's at $10 million the next five years or so, but being very selective on the number of new families we bring in per year. On the advisor side, I'll say, we're big on organic growth. So one of our partners, Brittany, we stole her from another team at Merrill right before we left, and she is a rock star. So I think she's someone that we would ultimately promote to an advisor role.

So we're really big on kind of almost grooming and kind of coaching the partners on the team, as opposed to grabbing someone from a competitor that has $100 million to move over. Now, I'm not saying I'm against M&A by any means. But I would say, we're much more thoughtful around organic growth. I think we prefer it that way, kind of building the team from the ground up, as opposed to just bolting on, you know, a bunch of other advisors that may not fit our culture or may be more investment-focused. We're very planning-focused. So we just want to make sure that any kind of additions we add to the firm are the right fit, very similar to clients. I would say that long-term, our kind of runaway, at 55, we want to sell this thing. So I would say, we'd like to go from probably $1 billion to $5 billion in assets over that time period. I mean, nothing too, too crazy.

But I would say it's, you know, being very thoughtful and kind of much more concentrated growth than pure M&A, just doing a bunch of kind of focused transactions. Where I think the one gentleman from Focus that was phenomenal, with a lot of M&A, just I think, you know, you get more and more disconnected from the business. We're going to have to manage these other advisors, and they're going to want to come to me with questions or what not. So I think it's going to be a much more organic growth trajectory.

Michael K.: So as we wrap up, this is a podcast around success, and one of the things we always ask guests is just how they define success for themselves. Because it's a word that means different things to different people. So, you know, having just built a firm by your mid-30s to $6 million of revenue is a phenomenal success by virtually anyone's standards. But I'm curious for yourself, how do you define success?

Michael H.: For me, I always keep things really simple, probably to a fault. I would say that success is really doing the things that you love in the places that you love with the people that you love, which is basically what I do every day at work because I love this stuff. But I think it's as simple as that. I think it's just, you know, I don't think there's a monetary aspect of success. To me, it's just, as long as you're doing what you love in the places you love with the people you love, that's it.

Michael K.: Wow. I love it, doing the things you love in the places you love with the people you love. Fantastic. Well, I thank you for joining us, just sharing the story and the journey of what you've been through. I'm excited to see where it grows for you from here.

Michael H.: Thanks, Michael. And thanks for all you do for the industry. And I'll get you a picture of that bull cake in a few minutes.

Michael K.: Fantastic. So this is Episode 102. So if you go to kitces.com/102, we will have a picture for you of the Merrill Lynch bull groom's cake, as well as links to some of the other providers and solutions that Michael talked about. So thank you again, Michael, for joining us on the "Financial Advisor Success" podcast.

Michael H.: Thank you.