#FASuccess Ep 071: Appointing A Chief Planning Officer To Ensure Firm-Wide Consistency In Financial Planning Advice with Peggy Ruhlin

What You’ll Learn In This Podcast Episode

• Budros, Ruhlin, & Roe as it exists today. [5:35]
• What Peggy was doing for clients as CFP in 1987. [17:17]
• Why they have appointed a Chief Planning Officer and what this role means. [22:17]
• The methods Peggy’s firm uses to make sure their customers get a consistent experience. [22:17]
• How to reconcile different perspectives on a financial planning issue between two planners. [34:25]
• How they started as a planning only firm and why they eventually shifted to include investment management. [37:23]
• The psychology of a 1% fee. [49:47]
• What Peggy’s current role as CEO looks like. [1:02:28]
• Why Peggy wishes she would have hired an executive coach sooner. [1:14:07]
• What brought the IAFP and IACP together to form the FPA. [1:18:49]
• How volunteering boosted Peggy’s career. [1:30:48]

Resources Featured In This Episode:

• Peggy Ruhlin – Budros, Ruhlin, Roe
• FAS Podcast: Ep. 022 with Jude Boudreaux
• FAS Podcast: Ep. 068 with Heather Fortner
• Strategic Coach
• Financial Planning Association
• CFP Board's Board of Directors
• Foundation for Financial Planning
• Leigh Bailey – The Bailey Group in Minneapolis
• A Concise History of the Financial Planning Profession
• If I Ruled the Financial Planning World by Peggy Ruhlin
• FPA Wins Lawsuit on Broker-Dealer Exemption

Full Transcript: Appointing A Chief Planning Officer To Ensure Firm-Wide Consistency In Financial Planning Advice with Peggy Ruhlin

Michael: Welcome, everyone. Welcome to the 71st episode of the "Financial Advisor Success" podcast. My guest on today's podcast is Peggy Ruhlin. Peggy is a partner and the CEO of Budros, Ruhlin & Roe, a wealth management firm in Columbus, Ohio that oversees nearly $2.5 billion of assets under management for nearly 700 affluent clients.

What's unique about Peggy and her firm, though, is the way that they have focused on systematizing the financial planning recommendations they make within the firm across all their advisors to ensure that every client in the firm truly receives consistent advice and a consistent planning experience across the firm's five planning teams.

In this episode, we discuss in depth the firm's approach to making their financial planning more consistent, including regular collaborative studies meetings one Monday a month, peer-to-peer presentations on a quarterly basis to review unique planning cases, a bi-weekly financial planning committee meeting to discuss what the firm standard recommendations will be on various planning issues, creating a wealth management resource library to catalog them, and appointing a chief planning officer to be responsible for it all, just as the firm has a chief investment officer to do the same in standardizing the firm's investment process.

We also talk about the evolution of how Budros, Ruhlin & Roe has done business with clients over the past 30 years that Peggy has been there. From starting out as a financial planning-only firm back in the 1980s when it was not very common to do so, the combination of net worth and income fees that they used in their early years, why the firm ultimately shifted to add in investment management services and adopt the AUM model, and how they currently offer clients a choice between investment management only for a percentage of assets under management or comprehensive wealth management relationship for a percentage of their total net worth.

And be certain to listen to the end, where Peggy shares her own career path, from starting out as a CPA who decided to earn her CFP marks and make a shift from historically-focused accounting and tax compliance into forward-looking financial planning, why she's been an active volunteer over the years with organizations from the IAFP to the Foundation for Financial Planning and now the CFP Board's board of directors, and why she says that volunteering in professional organizations in her early years was more instrumental than anything else she did to advance her own career.

And so with that introduction, I hope you enjoy this episode of the "Financial Advisor Success" podcast with Peggy Ruhlin.

Welcome, Peggy Ruhlin, to the "Financial Advisor Success" podcast.

Peggy: Well, thank you. I'm happy to be here.

Michael: I'm really looking forward to our discussion today because you I think have a really interesting story, both with the evolution of your very sizeable advisory firm, I know you're well over $2 billion under management and 40-something employees and you've kind of done this transition from advisor to CEO of a firm, which I know is a challenge unto itself that I want to talk about during our podcast today, but you also have what to me is one of the most incredible track records of volunteerism in the profession. I don't know if track record is maybe the right word for it, but you were chair back when the FPA merger was first getting arranged and happening, were instrumental in making that merger happen of the old IAFP and ICFP.

You were involved in the Foundation for Financial Planning for many years. You're now on CFP Board's board of directors. After you have like 10-plus years of board and trustee positions with virtually all the major organizations in the profession, you decide to say to yourself, "Hey, as I come up to my 30-year anniversary at the firm, let's do 4 more years with the CFP Board."

Peggy: I thought it would be really interesting because I had never been intimately involved with the workings of the CFP Board. And, you know, just from reading the press about good decisions they had made in the past, bad decisions they had made in the past, strange decisions they had made in the past, I wanted to kind of discover what it was like to be on that board.

Michael: Yeah. You know, CFP Board I think has a long and somewhat challenging history. We just seem to go through these cycles where, as CFP certificants, sometimes we have a really good relationship with the CFP Board and it goes through really good runs where things are going well and then some problems crop up and the planning community gets all upset and riled up with the CFP Board once in a while. And then things get better and everyone is happy again, and the things are bumpy and they get worse again. Which I guess happens to all organizations I suppose, but I'll admit, CFP Board seems somehow to manage to have a lot more of an up-and-down roller coaster than a lot of other organizations do.

Peggy: Yeah, I can't disagree with your description, but, you know, for the life of me, I don't know why it has to be that way. You know, it really ought to be a smoother relationship.

Michael: Well, I do feel like we've gotten to a better point over the past decade as Kevin Keller has been on board for a little over 10 years now. Because when Kevin came to the helm, he was, I think, something like the sixth CEO in the preceding eight years or so?

Peggy: Yeah, it was something like that. It had been crazy before he came to the board. Yeah.

Budros, Ruhlin, & Roe As It Exists Today [5:35]

Michael: You know, just a ton of turmoil and transitions as the CFP Board went I think from one debacle to the next in the late 1990s and the early 2000s. Controversies like the proposal for CFP Lite and turnover of CEOs. And I think we...I don't know, maybe we don't realize how good we have it right now about just the stability that's come with Kevin Keller's leadership. Which I think is reflected in CFP Board numbers, though, and just continued growth of CFP certificants. It's an amazing thing that the advisor community in the aggregate really isn't growing right now. Most of the membership associations are only growing a little right now. FPA's numbers are down almost 15% in the past 10 years, yet CFP Board and adoption of the CFP marks just continues to grow every single year. It's an amazing thing.

But I really want to talk more about your firm and what you've built over the years. And so as a starting point just to help get us oriented, can you tell us a little about the firm? Who are you and what do you guys do and who do you serve?

Peggy: Last September, I celebrated my 30-year anniversary with Budros, Ruhlin & Roe. And the firm had already been in existence for six or seven years before I came on board. And you know how most financial advisory firms start out as some kind of security sales organization and then eventually grow into financial planning services and that kind of thing. Budros, Ruhlin & Roe did it the other way around. It started as a financial planning firm doing comprehensive financial planning for higher-net-worth individuals. Back then I would say the millionaire next door was the typical client of the firm. They had money but nobody knew it because the clients didn't flaunt it, didn't make a big deal of it. Well, that's kind of the Midwest anyway. That's how it is.

Michael: It's important to note, you guys are based in Columbus, Ohio, so people can paint a picture of the geography of where you are.

Peggy: Yeah. Like I said, we were doing comprehensive financial planning for all of our clients. And it was the clients who told us, "You need to start helping us with our investments. You tell us, "Well, you should have this percent in stocks and this percent in bonds," and then you tell us to go find a stockbroker and get it done. And we don't want to do that. We want you to do it." So that's where we had to kind of increase our knowledge in that area.

And way back when, there was no Schwab Mutual Fund Marketplace. If you were recommending mutual funds to a client, you might recommend the Fidelity Growth & Income Fund and the Vanguard XYZ bond fund and on and on. And you had to open accounts with each of those mutual fund companies for your clients, and then if you wanted to sell the Vanguard fund and buy more of the Fidelity fund, you had to submit a written request to Vanguard. Vanguard would send a check to the client. The client then had to deposit it in their bank account and then write a separate check to Fidelity, send it into Fidelity. I'm telling you, it was kind of a nightmare.

Michael: It's a fascinating thing to me the whole world of solutions we have today on the brokerage firms with the omnibus accounts that holds lots of different mutual funds along with stocks and bonds and any ETFs you want. But that's a relatively new phenomenon, particularly being available to the financial advisor and working with the client. That whole model really didn't come about or at least get any traction till I guess like early 1990s with the first real version of Schwab advisory services for independent RIAs. You know, as you noted, like, most investment business up to that point was direct. So if people bought stocks, they bought stocks directly with the company, which might have one of those direct dividend reinvestment programs.

You know, I still remember one of my first big clients when I got started, they came in with this sizable $1 million portfolio comprised of what had to have been well over 100 different stock dividend reinvestment plans at each individual company that we just kept consolidating into a single brokerage account. Like, they couldn't even keep track of all the various dividend reinvestment plan accounts, so the process for consolidating was basically just, "Hey, bring in your statements." And they bring in a whole bunch of statements and we'd look at anything out of balance and we do transfers for them, and then we tell them, "Next quarter bring in your statements again." And everything that's got a zero balance we know we're done, and everything that doesn't have a zero balance we do another round of transfers.

And it took us over a year just repeating every three months, "Bring in whatever statements you're still getting that show a positive share balance and we'll do another round of transfers." Because, you know, sometimes we'd transfer the stock when it was ex-dividend but before the dividend payment date. So even though there was a zero balance stock account, some stock shares would suddenly reappear when the dividend cash hit and got reinvested. And we had to retransfer that. It was ultimately over 100 different stock accounts for a portfolio that actually was worth more than $1 million that they didn't even know at the time because they couldn't keep track of it all.

But that was how things were done. It was probably maybe a little worse with stocks. At least with mutual funds, if you only had Fidelity funds, there was just one set of Fidelity accounts, which made it a little more manageable. But it was common for advisors to do lots of different mutual funds for diversification, so you would end out with lots of different mutual fund accounts. I'm trying to think what was popular then. Like you could have accounts in American Funds advisors and Putnam and PIMCO and Janus. And they'd all be held direct with each mutual fund company.

So we had to do all that transfer stuff that you talked about. You couldn't even rebalance a portfolio because if you wanted to rebalance, you'd have to liquidate from Fidelity, get a check, transfer the check, deposit the check over in your Putnam account, and then repurchase the shares that you wanted. Like, it would take weeks and a bunch of paper transfers just to rebalance a portfolio.

Peggy: The way you rebalanced was the client adding new money to the portfolio. You would direct it to the part of the portfolio that needed more assets. So that's how you did it.

Michael: Right. Which was feasible because most firms then worked with clients who were in the accumulation stage. So you didn't work with retirees because that wasn't really the focus yet, it was people who were still accumulating in IRAs and defined contribution plans. So at least you had net contributions coming into the account that you could use to rebalance by up whatever was late.

Now, you said you were a firm that started with financial planning first, though, back in the 1980s, which was not common at the time. So can you share with us, like, how did that come about? That suddenly 1980s decide, "Hey, let's just make a financial planning-only firm."

Peggy: You know, I'm not really sure of what was the initial thought or the impetus to make a financial planning firm because that happened before I came aboard. And at the time the firm was founded, I was working as a CPA in my own accounting practice, and I was doing financial statements and tax returns for small businesses and the small business owners.

And when my clients got to a certain point in their lives where they'd paid off their student loans, bought their first house, started their first retirement plan, I was referring the clients to this firm, to Jim Budros for financial planning advice because I thought that was a really cool thing. And I had seen some of my clients who were already working with Jim, I could see that they were making better progress towards their financial goals than the clients who were maybe in the same income situation and everything else but they weren't making the same kind of progress. So I sort of became fascinated with, "What is this financial planning thing?"

So I sent away to the College for Financial Planning to get, you know, the course materials for the first course. Back then, to become a CFP, you had to pass five courses in five different subject areas. There was no comprehensive exam or anything like that.

Michael: At the time, like, the College of Financial Planning still owned the CFP marks as well, right? Because this was before CFP Board was actually formed. So for those who don't know, CFP Board was I guess basically like a spinoff from the College for Financial Planning that originally was both the educational institution for the marks and the holder of the marks that, like, literally had the CFP trademark. And ultimately, it had to be split up because there were antitrust allegations that it was not appropriate that the organization that held the marks was also the one that taught the education for the marks. And so they got forced into a split, and College for Financial Planning continued to be one of the many institutions that taught the education and then CFP Board Board of Standards became the separate entity that was responsible for holding the trademark and then essentially overseeing the marks.

Peggy: Right. Exactly. So, you know, in my time as...doing accounting work, what I really loved was doing the tax planning or helping clients plan for moving into a new building or buying new medical equipment or whatever it might be. I really liked the planning. I mean, I enjoyed doing tax returns, but that was always historical. And I like being able to look forward and make a dream come true in a way. So when I started the coursework for the CFP, it was like, "Where has this been all my life? This is what I want to do." And I made it my goal to get through the program as quickly as I could. And back then, that was two years because you could only sit for one exam at a time, and they were only offered like every four months or so one time, and that's all you could do it. So I got through. I got my CFP.

The funny thing is that Jim Budros was also getting his CFP at the same time. And in fact, I was a class ahead of him. He had his ChFC, but he didn't have the CFP. And he wanted to get that. So we would see each other on the certain Saturday of the fourth month down at the fairgrounds where we all had to go to take our test. You know, we'd laugh and joke.

And about six months after I got my CFP designation, he called me and said, "Would you ever like in a million years ever, ever, ever think about coming and joining our firm?" And I said, "Well, what do you mean? Like, merge my accounting practice into your financial planning practice so we can do both things?" He said, "No, you have to get rid of your accounting practice. We need you here to do financial planning for our clients." So I said, "Let's talk." And six months after that, I came aboard. And a month after I got here was the crash of October 1987. So that was a good baptism by fire. It's just been a...boy, it's been a great ride over these years.

What Peggy Was Doing For Clients As A CFP In 1987 [17:17]

Michael: I love the way that you framed it there. Tax returns and tax compliance are historically-focused, right? What happened that we're literally accounting for. Well, financial planning is forward-looking, right? We plan for the future. And I'll admit, no offense to some of our friends who are CPAs, but I do find that one of the challenge points sometimes in joint work that we do with accountants is that they're very backwards-looking and historically-oriented, right? Tax compliance is all about reporting the taxes on the thing you did. Accounting means accounting for things that have already happened because you can't account for the future because it hasn't happened yet so there's nothing to account for.

And so I find one of the driving differences between what accountants do and what financial planners do, and not to say that one is better or worse or right or wrong, just accounting is very oriented towards looking back and financial planning is very oriented towards looking forward. And I know a lot of CPAs that come into the financial planning side because they felt like accounting was too backwards-looking and they wanted to have more of a future focus. And there are other CPAs that I think struggle coming into financial planning because they're really good at accounting for things but struggle with like the natural uncertainty that comes with looking forward in a planning context. It's just a different mindset.

So you got your CFP marks and you joined the firm as a planning-only firm in 1987, so what were you doing for clients at this point?

Peggy: We would be addressing each of the, you know, subject areas, if you want to call it that, of financial planning. You know, planning for retirement. What tools should you use to save for retirement? You know, 401(k), IRA, whatever. How much should you be putting away for retirement? What should you be doing to save for the college education for your children? What about estate planning? Do you have a proper estate plan in place? And we got really deep into estate planning because Jim Budros came from the bank trust business and he was a bank trust officer, so he was extremely familiar with estate planning. You know, using trusts and other vehicles. So I think actually even back then, the estate planning that the firm did was fairly sophisticated.

So we would meet with our clients quarterly, and each quarter we would maybe address one of the topic areas, and then kind of go through housekeeping of, "Well, what were you supposed to do between the last meeting and this meeting, and did you do it? And what were we supposed to do and did we do it?" And so it was very much a hands-on, in-person, conversational relationship with our clients. And we did talk about investments once in a while.

Michael: And were you using financial planning software to produce the big book plan? Like, was that a standard part of the process of putting down into some kind of planning projection tools and producing output or was it more of just, "We're analyzing your situation, we're talking through it," but you weren't doing like big planning projection books at the time?

Peggy: Oh, we had books, but they weren't full of planning projections. They were mostly full of copies of documents such as the wills, the trusts, whatever. But the only software really that we used for financial planning, they were Excel spreadsheets. And, you know, back in the day, it was all linear planning. You picked an inflation rate, you picked rate of return, you pick annual savings rate and an annual spending rate, and you just ran the Excel spreadsheets and see if they had any money left at the end of their life expectancy. And if they did then by golly, they were on track. And if there wasn't any money left or if they ran out before they were supposed to die then we need to accumulate some more funds somehow.

So it was very basic and rudimentary, but it at least enabled the client to set some kind of goal and see what they had to do to have any possibility of achieving that goal. You know, nowadays, of course, it's so much more sophisticated and there's so many more things we do and very excellent software to do all kinds of financial planning.

But we're still a very...we manage almost $2.5 billion but we're still a very financial planning-oriented firm. I think all firms our size have a chief investment officer, and we do too, and he has his whole department to support him, but we also have a chief planning officer. And the two are equal in importance to our firm.

What A Chief Planning Officer Is [22:17]

Michael: So that sounds like an interesting role. What does a chief planning officer do in a firm like yours?

Peggy: Okay. So the way we serve our clients is through teams. And we have five financial planning teams. They consist of three or four, you know, permanent members plus any kind of intern support they have. And those teams are responsible for guiding clients through the financial planning process. You know, the initial financial planning process and then, you know, the periodic updates, the monitoring, the making sure that things are on track, all of the meetings. The chief planning officer makes sure that our financial planning services are being delivered equally to all clients. So that a client of the green team is having the same kind of experience and getting the same kind of basic advice as a client of the orange team.

As we have centralized our portfolio management, an individual advisor, an individual team cannot make their own investment recommendations to the clients. It all has to run through the centralized portfolio management to make sure it adheres to our recommended investments, our recommended asset allocations and that. And so we're trying to accomplish the same thing on the planning side to make sure the planning is consistent, that the advice is consistent, and that the experience that the client has is also consistent. So the chief planning officer is in charge of making sure that happens.

Michael: And what does that look like in practice? Does the chief planning officer review all the financial plans to make sure everyone is providing the right recommendations or is he or she, like, going out to client meetings to make sure the planning is being delivered the right way and just shows up in some of your client meetings to see how it's going? Like, how do you do financial planning consistency like that?

Peggy: Yeah. Well, our chief planning officer is my partner John Schuman, and he has a financial planning committee, and they meet...they were meeting like every other week but I don't know if they're meeting that often now. And that's where the decisions are made for, let's say, "When are we going to recommend a Roth recharacterization?" let's say, or, "When are we going to recommend this certain kind of trust for estate planning?" And the financial planning committee kind of comes up with the guidelines and then, of course, promulgates that out to all of the members of the planning staff.

As part of the financial planning committee, we have a peer review team. And the peer review team, yeah, just will kind of pick up, go into a client's files and look to see that the planning deliverables are giving the advice and the recommendations that are within the guidelines that have been set and making sure that the client is receiving advice that they're supposed to get. So, I mean, it is a pretty...we do have a process around that. And the chief planning officer, John, he does sit in client meetings. He is also kind of our estate planning expert. So when there is a client with more complex estate planning needs, he will almost always be a part of that meeting. And he will often sit into other meetings. So he has a chance to observe the various wealth managers here to see how they're doing and then perhaps offer some constructive advice if needed afterwards.

Michael: So this committee that's essentially standardized your plans, does that mean there are standardized recommendations or standard parameters around the recommendations for lots of different scenarios? Like, you meet every two weeks on an ongoing basis and review plans that everyone is doing and come up with a consistent set of recommendations for each situation. So after a couple of years, you basically have your own internal guide for every possible financial planning situation that can come up in your firm? I would imagine that the first six months it probably felt overwhelming just trying to set process one at a time, but now there's probably actually not very many new planning situations that come up anymore. Is that the dynamic now?

Peggy: In a way, yes, but often there will be a big change to the tax laws. So then, "Okay, what are we going to recommend to clients in light of the new tax law? Should we have them accelerate deductions in 2017? Should we tell them to start looking at different form of organization for their business if they own a business?" So sometimes the need for coming up with some new planning guidelines is a result of external forces.

Just the fact that the estate tax limit got increased so much over the past 10 years or so, I mean, that had to make us reexamine all of our estate planning advice for our clients of various sizes. Because what we may have been recommending when the estate tax exemption was $600,000 is totally different, you know, today. So just things like that. It's often external. Yeah.

Michael: And so what do you do? Like, do with these client planning scenarios at a planning committee meeting? Do they make a little white paper or write up an issue paper or something like that and then try to build a library of them? "Here's the way we handle Roth conversions or one situation after another," and you just have a library of these things, or do you try to turn into presentations that you teach? Like, how do you get the word out when you've got this small planning committee that sets consistent recommendations but then you've got five planning teams?

Peggy: Yeah. A lot of it is educational. We have what we call grand rounds. We have that once a quarter. And the entire planning staff gets together and someone has been chosen to make a presentation on some planning issue, how we are thinking about it, how we need to approach it for our clients, and what the possible solutions or recommendations might be. So there is a planning element there. And also Monday once a month we have what we call collaborative studies, where one planning team will kind of present an interesting case study of one of their clients that maybe presents something new, a new challenge, a new question, and we all talk through it and, you know, come up with ideas for what might be the best advice to give this particular client with this new issue. So it's kind of an ongoing continuing educational process.

And we also have a library, which is a...you know, it's in Laserfiche, and it's called the Wealth Management Resource. And you can go there and you can find, I wouldn't call them white papers but at least you can find some documentation about how to think about things and what tools to use and those kind of examples. Our wealth managers, our senior wealth managers have been here between 10 and 20 years, and they're the ones who head the five teams. So they have a lot of knowledge and experience that they can pass down to the other members of their team. And that is a tremendous way of learning to do financial planning and learning to do it the BRR way.

Michael: So I'm struck by just the depth of what you've done in the area of standardizing planning recommendations. A chief planning officer chairs your financial planning committee, a peer review committee, you've got grand rounds where every quarter someone presents a complex planning situation, every month you've got your collaborative studies meeting on a Monday where a team member presents an interesting client situation that came up that month, and then you've got your wealth manager resource library that captures all these planning scenarios over time.

So I've got to ask, like, you have all these teams that are headed by wealth managers who you've said have been in the firm for 10 or 20 years, so they're highly experienced. I feel like in that situation a lot of the firms would just say, "We've got good smart people, so we're not going to pull them in on all these meetings that take time. We're just going to let them be smart financial planners and they can teach their team members directly as they wish." So I guess my question is, why did you decide to put all this committee structure in place for what you've already said are good, experienced wealth managers?

Peggy: Yeah. Well, like I said, we want to make sure that every client receives a consistent experience and receives consistent advice. Before we had all this structure in place, we did have teams but we didn't have a financial planning committee. We didn't have a chief planning officer. And how advice got delivered was through meetings with the clients, and the teams would have the client come in and they would go over some matters with them. And then one of the principals of the firm would join the meeting and talk about what the most important issue of the day happened to be. And we found out that the principals of the firm were not consistent in the advice they were giving in various client meeting.

Michael: Sure, I can envision that. The wealth manager might have been consistent but then they might get a different senior partner coming to various meetings and at some point, they said, "You realize Jim was in the last client meeting and what he said was completely different than what you said in the same meeting when you were there."

Peggy: Exactly. Yeah. So, you know, for instance, one principal was just totally opposed to long-term care insurance. Felt that you could self-insure and that the likelihood of needing long-term care was small enough that it was a self-insurance thing, whereas other principals in the firm definitely believe that long-term care insurance was to be recommended in some situations. So when we saw this kind of inconsistent advice being given out, we said, "We've got to stop that. We have got to make sure that everybody in this firm is on the same page in terms of where long-term care insurance might be prescribed, for example, or where a certain kind of trust might be applicable." So we just wanted to get, you know, the big picture items in order. And so that everybody in the firm knew that in these big-picture ways, this is the way the firm was going to think about it and this is how we were going to analyze it.

And, of course, each wealth manager can use their own style in making the recommendations and talking with the client to determine, "What is the actual goal here? You know, what does this client actually want to accomplish?" So they have a lot of responsibility and a lot of autonomy in that kind of thing.

How To Reconcile Different Perspectives On A Financial Planning Issue [34:25]

Michael: I see, but how do you actually find consensus on this? I know that we all try to be consistent but human beings are human beings and we form our own views about things. So I have to admit, you get these scenarios. And I don't know if it was Jim in this case but I'm envisioning it, you know, areas as controversial as something like long-term care insurance recommendation. So Jim says, "Yeah, I've analyzed long-term care insurance and that's why we should absolutely not do it for our clients and be consistent." And then you say, "No, no, I've analyzed long-term compare insurance and that's why we should absolutely do it for every client."

And so you both want consistent advice, but you each want your version of consistent advice that you think is right because you're smart people. And now it's an issue where you've got to debate and try to come to resolution when you're in very different places. So I'm just wondering, how do you actually reconcile these differences when smart, well-intentioned people just flat out have different views on some financial planning issue?

Peggy: Well, you know, luckily it's not just two people here who might be on opposite sides and they have to duke it out and somebody has to win and somebody has to lose. We have well right now, we used to have four major shareholders or principals, now we have three, and usually, in a situation where you have three or four people, it's hardly ever a tie. There are usually two or three people on one side of the issue and some loner on the other side of the issue. So, you know, the goal is to talk the loner into the majority view. And we've been very successful at that.

Now, we pretty much defer to John Schuman and his decisions that he makes with input from the planning committee as to how we're going to make financial planning recommendations and what kind of advice we're giving. So he pretty much has his...that's his job to do that, and we don't interfere very much.

Michael: And I guess ultimately that's one of the fundamental issues that comes from really creating an ensemble firm. I know the term is thrown around a lot where advisors say, "We're an ensemble firm. It's not just about us. We're building a collective business." But truly to me, this is one of the areas that really defines the ensemble attitude to make it a true multi-advisor ensemble practice. If you say you want to be an ensemble firm are you actually willing to surrender your point of view for the consistency of the firm when you get a client situation and you have to not do it your way because the firm has agreed to do it a different way?

I know it really is a challenge for a lot of us to let go of some of that control and acquiesce to establishing a firm-wide position on a particular issue and say, "This is how we do it as a firm even if you personally don't love that particular recommendation."

Peggy: Yeah. Yeah. I mean, that's our philosophy.

Why Peggy's Firm Shifted From Planning-Only To Include Investment Management [37:23]

Michael: So tell us a little bit more about the evolution of the firm. You said that you started out as a planning-only firm but that changed over time because now you're also AUM-based as well. So can you take us through that change? You started with charging clients for these quarterly meetings and all the planning projections you were doing, what changed?

Peggy: Okay. Well, it's interesting, but the firm had actually based their fees sort of on assets under management but it wasn't called that then. And what they were doing was charging the fee based on the client's net worth. But some things were not counted for the net worth, such as the value of their house, the value of their cars, that kind of thing. Because who was going to say what those things were worth? You don't know what your house is worth till you sell it. So things that really couldn't be evaluated or valued independently, we didn't count that, but we charged a fee on the rest of their net worth. And it was a...you know, there were breakpoints. You know, the first XYZ number of dollars the fee was X percent. And then we also...

Michael: And what did you start it at? Like 1% of net worth and then breakpoints which bring the fee lower as the assets rise or the net worth rises?

Peggy: Yeah. I think the first level was 1%, but I may not be remembering that correctly. And then for the first four years, we also charged another fee, which was a percent of income. And I think I recall that the first year it was 4% of the client's income. The next year it was 3%, the next year 2%, the next year 1%, and then it went away and we just charged the net worth-based fee. But when I had come aboard, the clients who had been clients of the firm for let's say at least 5 years, they were being charged a flat fee, and it was like $2,500 a year. And with a $2,500 a year fee, they were getting quarterly meetings, they were getting all the administrative work to, you know, buy and sell their mutual funds and fill out all their paperwork and do everything else. So all that kind of almost family office-type support. And it was an unsustainable model for sure.

Michael: And what made it unsustainable? Like, you know, $2,500 in 1987 is not a trivial dollar amount, even for doing quarterly meetings. Like, what wasn't working?

Peggy: Well, we had...there were about 15 people on staff, and there was a lot of between meetings, I'm going to call it paperwork, that had to get done and follow-up work. You know, calling the life insurance agent to make sure that the policy was progressing. Calling the accountant to find out what the tax situation was going to be for the year, and following up on our investments, doing all these things. And that was just an unprofitable way to do it.

Michael: Interesting. So even though it essentially was 1% of net worth plus 4% of income for doing all this work, you still found that wasn't enough for the level of work you were doing over time.

Peggy: Yeah, that's how the client started. And then when they got to a certain point, they were paying this flat fee. But we weren't doing anything less than we had been doing in the first four years.

Michael: So that was the dynamic. In theory, you do all this upfront work and then you get to the right place and you get the changes done and then their situation stabilizes. But in practice, I guess particularly because you weren't working with retirees, you were working with young people of the day in their 30s and 40s because that's where boomers were at the time. Where you do all that work in the first few years and then after the first few years, their life changes because they have a baby or get a new job or start a business or whatever it is and then you're right back in the thick of it again with a brand-new plan update.

Peggy: Yeah. And yeah, we reran the financial planning projections. Now, once again, these were Excel spreadsheets. But we reran that every single year to take into account anything new that had happened. So we redid the entire financial plan every year. We reexamined the adequacy of the life insurance. We looked at the retirement plan savings. We looked at the college savings. So, you know, we were on an annual cycle where we just, you know, wash, rinse, repeat every year, every year. So you're right, the scope of the work did not decrease after time.

Michael: And so what was the conclusion? Like, how did that play out? Was it saying, "Hey, our fees go down from 4% of income to 1% of income but the work isn't decreasing enough so we've got to hold it higher, we're just going to price it 2% of income and keep it going there?"

Peggy: Well, we found that clients were pretty resistant to that percent of income fee. They were okay with the percent of net worth but they had a hard time with the percent of income. So we decided to gradually get rid of that and kind of roll that revenue stream if you want to call it that into the percent of net worth fee. So we increased the breakpoints in order to produce pretty much revenue that we would have had had we been charging a percent of income. And over the years, we've actually kind of decreased our fees. I mean, we don't charge any fees at the 1% level anymore. Everything is below that. But we've just increased perhaps the amount of assets that are subject to the fees in the various, you know, pricing bands.

Michael: So two things there, what do you think it was that percent of net worth was okay but percent of income wasn't? Like, what was the blocking point? Because, you know, we still have firms today that I talk to that are experimenting with this model. We've even had it on the podcast. Jude Boudreaux was running a net worth and income blended fee model, in Episode 22. So what is it from your perspective that made the net worth fee work but the income part of the fee was a challenge?

Peggy: I think perhaps because the percent of income that we were charging in the first year or two just felt like too much money to them.

Michael: So 4% was just too high for them.

Peggy: Yeah. Yeah, 4% and 3%. They had a hard time swallowing that. And I don't know why, I don't know why, but it was definitely there and it was definitely a perception on their part.

Michael: Yeah. You know, it's funny, we found a similar thing with our advisors in XY Planning Network that charged for planning on a monthly basis. They work with younger Gen X and Gen Y clients. Because at that point you tend to be charging against a client's income as opposed to a client's assets because the young folks don't necessarily have a pile of assets yet.

And we found, at least anecdotally but in a growing number of our advisors that if the planning fee for the year adds up to being less than about 1% of their income, most clients don't think twice about the pricing. I mean, they may or may not value, but the service, you still have to convey a value proposition to get them to work with you. But the fee isn't the blocking point at less than 1% of income. If your fee is somewhere between 1% and 2% of their income then they really think about it. Most of them usually still will come on board if you've got a good value proposition, but they think about it longer.

And then we found it's really hard to get people to adopt a planning fee if it comes out to be materially more than about 2% of their income. And that seems to be true regardless of whether the fee is, like, set as a percentage of income, you know, "I'm going to charge you 2.5% of your income," or if you just set some specific monthly or annual retainer, you know, "We'll charge you $200 a month or $5,000 a year," or whatever your fee is, clients still end out equating the fee back to their income.

And I don't know if they actually do the percentage calculations, but just when the fee adds up to being more than 2% of their income, people seem to balk at it. Which ironically is actually kind of like AUM fees, right, where people also balk if the fee is more than 2%. Like, there's just some mental line. Up to 1% is fine, 1% or 2% creates tension, more than 2% is a problem, whether it's a percentage of assets or a percentage of income. So the choice of model isn't because people will pay a higher percentage of one versus another, it's just, well, I guess like which denominator you're charging against when you set that percentage fee. And if you charge against the bigger thing, their income or their assets, then maybe you can charge more simply because it's viable to charge a smaller percentage of a bigger number, but it feels better to the client because it's a smaller percentage.

Peggy: Yeah. Well, as we began to actually give investment advice and implement the investment advice, we did not change our fee structure at all. We added on this additional service at no additional cost to the clients.

Michael: So you were consolidating the income fee into a net worth fee and I guess just rejigger the net worth percentages to make the math work, which is easier because you didn't have to charge a big percentage to make up the dollars. And then you could just adjust the fee to cover the additional investment advice work you were starting to do.

Peggy: Yeah, pretty much. Pretty much that was kind of the idea. But, of course, you know, that took more time, more personnel, but we were doing that. And we eventually got to the point where we divided the two services. And we still do that pretty much today. We offer two services. One is traditional investment management. You give us whatever money you want us to manage, we charge our fee on those assets under management, and we do, you know, asset allocation, all the portfolio management, rebalancing, all of that for those investment assets.

The other service is the wealth management service as we call it, which is all of that investment stuff with comprehensive financial planning thrown in the mix too. And we still pretty much charge a percent of net worth for the wealth management side because we...some assets are included in the fee calculation even if we aren't technically managing them. And, you know, we don't count the assets in our assets under management, but we do charge a fee on them. And we charge the wealth management clients a higher percentage fee across the board for the wealth management services versus the investment-only services.

Michael: So for a client who wants investment management, you would do a lower AUM fee, but for those who want wealth management, the net worth fee covers both the financial planning and the investment management. I guess you'd say that, "Since we're already charging you 0.75% or whatever amount on your net worth, now we're including the investment management fee for that fee because we don't have to charge you again on the investment portion, and our wealth management fee is already higher than the AUM fee anyways." Is that how the difference in the fees works between wealth management and investment only?

Peggy: We charge a higher fee on...let's say that the net worth is exactly the same as the assets under management, just by coincidence. To get the wealth management services, you have to pay a higher fee. You have to pay a higher percentage of that amount.

The Psychology Of A 1% AUM Fee [49:47]

Michael: Interesting. So it is correct that if I just want investment management I pay you a fee only on the investments and if I want wealth management I pay you a net worth fee that bundles in the planning anyway. Can you give us a sense as to, like, how these price? I'm sure you've got tiers and breakpoints and such but just what kinds of fee levels and thresholds do you find that works?

Peggy: We have found that there's this psychological barrier about the 1%. And if you can offer a fee that is not 1%, that's something lower, it just makes the whole decision on the part of the client so much easier, that really is attractive to them, that they don't have to pay 1%. And who knows? You know, one firm that starts out charging 1% on the first $2 million or whatever it may be and then it gradually decreases, their fee might actually be lower than ours which does not start out at 1% because we've got...you know, the breakpoint doesn't come as soon, or something like that. But there is a psychological thing about this 1%.

Michael: Yeah, it is an interesting psychology. You can have two firms, one that charges 1.2% on the first half a million, 0.8% on the second half a million, so a blended fee on $1 million they are charging 1%. And then a second firm just charges a flat 1% on the first $1 million. So their blended fee pricing is identical at $1 million, but millionaire clients don't tend to view them the same, because they anchor on whatever that first line is, that first tier on the fee schedule. So even if you only pay on part of the money, and it doesn't add up to more because the breakpoints are lower, at the top end, there's this blocking point I think sometimes on where the fee schedule starts.

You know, we see this in our advisory firm because we historically have done this. Our fee schedule starts a little higher at the lower tiers and then has more generous breakpoints as you get higher. So our blended fees, by the time you get up to $1 million-plus is like most other firms. But there are some clients that just fixate on where that first tier starts. I do think you have to be really careful about where you start that fee schedule and whether you want that to be the starting number people see, even if no one pays that on the full amount because they ultimately pay a blended fee at lower fee breakpoints on larger assets. Sorry, and for you guys, and all your fees are based on just this AUM or percentage of net worth fee, right? Like, you don't charge any other separate planning fee for all the upfront initial work to make up for how you used to charge a higher income fee in the early years?

Peggy: No, we do not charge an upfront fee. We haven't done that for 20-something years.

Michael: Okay, okay. So it's just like you want the holistic wealth management advice, you're paying on your holistic net worth, you want investment only, you just pay on the investment portfolio. And you just recognize that there will be a little more upfront work.

Peggy: We tell clients upfront that it's really going to take two years to get through the entire financial planning process and then go back and fine-tune it after we...you know, you always find out more information after you've done the initial plan, and so things have to be fine-tuned. And we tell them to expect to be paying the wealth management fee for two years. And almost without exception, that's what happens. Even if the client...some of them do, some of them do. A very small percentage does that. And even after a few more years, we might recommend to certain clients, "You know what? You need to just go to investment management for the next several years. And when you get closer to retirement, let's get back together and see if we need to resume the comprehensive relationship."

Michael: And so you might have some clients that actually go back and forth between wealth management and investment only and then back to wealth management again?

Peggy: Yeah. The vast majority of clients, if they start as a wealth management client, they stay a wealth management client. And, you know, our average client has changed since when I came here in 1987. We had a lot of clients with $1 million. And in fact, we used to have a celebration when a client's portfolio went over $1 million. You know, we'd give them a bottle of champagne or, you know, some kind of...and now, you know, basically we don't have wealth management clients with less than $2 million. That's kind of the starting point.

And as the years have gone by, we've found that our clients' net worth have gotten larger and larger and larger. And, you know, now we have clients with $25 million of investment assets alone, let alone the total net worth with all their real estate and everything else added in. And those clients have more complex needs in almost every area. And it's really hard to explain your value proposition to even a very ultra-high-net-worth client who's never experienced it before. But once they have experienced it, they know that they don't want anything less than that.

Michael: And when you charge this wealth management fee as a percentage of net worth is that like percentage of all net worth? Like personal residence, real estate and value of business and all the other stuff as well or do you try to carve up and work around some of the illiquid assets?

Peggy: Yeah. We say that if an asset is not valued by an independent party at least once a year, we don't count it. So that would be real estate, for example.

Michael: Okay. So if the asset isn't valued by an independent party at least once a year then you don't value it in the fee either.

Peggy: We don't include it in the fee. We don't include it in the fee calculation.

Michael: So that's no real estate, no small closely held business. I guess maybe like a restricted stock closely held business. If they have an annual valuation that's fine because at least it's periodically valued in the marketplace?

Peggy: Right.

Michael: So when you started this process of shifting into investment management and including investment management services on top of the planning work, I can only imagine the internal discussions when a planning firm wants to add investment management as a service. Like, was that a tension point in the firm to make that shift or no big deal? How does that conversation go?

Peggy: Well, yeah, like I said, our clients were begging us for it. You know, they wanted this service, so, you know, Jim and I kind of had to figure out how we were going to do it and what we were going to do. And we didn't just jump off a cliff and one day we weren't offering investment management services to any of our clients and the next day we were offering investment management services to every one of our clients. We started out with a handful of clients and then we added a few more. We added more, we added more. So we kind of waded into the ocean versus jumped off the cliff. And it made it a lot easier there that way.

And I've always said that the two things that made our firm and made our firm successful in the investment management area were number one, the Schwab Mutual Fund Marketplace, and number two, Morningstar and the research on mutual funds that we could get. And with those two tools, it was doable. It was doable. We could do the research and, you know, get together, you know, a menu of recommendations. And we had the vehicle for actually managing the money and making buys, making sales, doing rebalancing. You know, the time was kind of right when we started doing it, which was probably around 1990.

Michael: Oh, so you were...even before the full rollout of Schwab Advisor Services you were just getting permission for duplicate statements to the clients' retail accounts at that point?

Peggy: Well, between 1987 and 1990, yeah, that's what we were doing. We were getting retail statements. But in 1990, we started working with Schwab through their retail branch here in Columbus. We were able to have a trading platform through the retail branch, but all the paperwork and everything went through the people at the branch. And luckily very shortly thereafter, Schwab rolled out Advisor Services and, you know, kind of centralized all of that.

Michael: Well, it strikes me, though. When you look at the implementational challenges that we still sometimes have to deal with today, it's a reminder I guess of how good we actually do have it. Not to say there isn't still a lot of room for improvement in advisor technology, but imagining just trying to do this before all the technology infrastructure we have today and hearing your story of what was involved. Which, you know, to me it also makes an interesting point about advisor fees and what all this technology does to our fees. So as you said, your fees have come down. You know, there was a point where you used to charge 1% net worth plus 4% of income. Today your fees starts at just below 1% net worth all-in and you got rid of the income component.

And granted, maybe that's in part because the average client net worth has gotten bigger so you can charge a slightly smaller percentage because they're bigger clients. But I suspect a lot of that fee compression for you is just because you've gotten so much more efficient thanks to all the technology that we have. Which I think is important because in today's context, there's all this talk of about the risk of fee compression and price compression and whether advisory businesses can survive if the fees come down.

And I think we sometimes miss the corollary that goes with it, which is when all this technology keeps marching forward, I mean, you would probably need 100 people to do today what your firm does with fewer than 50 if you were still relying on the old systems that you were using 30 years ago. So yeah, the fees came down from what you used to charge, but it doesn't necessarily mean you're making less in profits because the fees come down as your staffing costs come down and these systems get more efficient. And it's just such a difference between then and now. Like now we debate which is a better rebalancing software package or who's got fancier RIA custodian platforms, then back then you were making phone calls to execute one client transaction at a time. Ouch.

Peggy: Yeah. Well, we couldn't even do it on the phone. We had to do it through letters, and, you know, it had to be in writing. And that's why even with maybe just 100 clients and not a very big business, we had 15 people. They were doing all this paperwork. They were getting all these statements. They were consolidating them into one financial statement. So we really did not have to grow our staff in terms of numbers of people very much for a long, long time. We certainly had to upgrade the types of employees that we had. We needed professional CFPs versus just administrative people. But yeah, the technology really did make a difference.

And just to put it in perspective as someone who's been around this for more than 30 years, when I came to BRR, it was a pretty advanced firm technologically speaking, but we did not have personal computers. There was one computer in its own room. It was the size of a refrigerator, and it had...its hard disks were the size of a garbage can lid. And you picked him up and you moved him around inside these drawers in the refrigerator. And we had monitors or terminals on our desk but, you know, we certainly didn't have what today is a personal computer. Also, there was no fax machine. I remember getting our first fax machine. There was no voice mail. There was no internet or email. I mean, just in 30 years, things have changed so much. And today you can't think of even living let alone trying to do business without these tools. And they weren't around then.

What Peggy's Current Role As CEO Looks Like [1:02:28]

Michael: So over the 30 years, the other thing that strikes me is simply the growth of the firm. You started in 1987 with Jim to be an advisor for a few financial planning clients, now it's over $2 billion, 40-something employees, for which I know you now wear the hat as CEO for the entire firm. So I'm wondering if you can share a little bit of perspective on that evolution. Like, going from advisor to CEO and what the CEO role looks like today. Are you still involved in a lot of client meetings or a little bit of client meetings, or do you basically have no time for client meetings because you have to spend all your time running the firm?

Peggy: Yeah. Yeah, I would say I spend 95% of my time just running the firm. There are some situations where I will be in a client meeting, but they are pretty few and far between. I do try to have one meeting with many of the new clients. I'll call them higher tier or more complex clients that I think are going to be needing a really high level of service here. I do try to have a meeting with them.

My first day on the job in 1987, I went into Jim's...I sat in Jim's office and I said, "Tell me what you do during a typical day." And he said, "Well, here's my schedule. I have a 9:00 meeting with this client then I have an 11:00 meeting with this client, then I have a 1:00 meeting, then I have a 3:00 meeting." And his whole day was nothing but client meetings from the minute he got there till the minute he went home. And I said, "When do you have time to think?" And he said, "I don't." And obviously, that was the reason he wanted me in there because, you know, he wanted someone to share this burden. So the two of us, what we did all day long was meet with clients. And he did not have his clients and I had mine. The two of us met with every client. We took turns having meetings with the clients.

And we started...like you said, we started getting bigger, the firm started growing. We brought in a third person to do client meetings, to share the meeting load, and eventually a fourth person. And in fact, the reason why we brought in the fourth person was we came to the realization that everybody was working in the business and nobody was working on the business. And it was almost getting out of control. I was trying to do stuff, you know, in my spare time, which really didn't exist. And plus I was president of the IAFP at the same time. I don't know how I did it. I must have been crazy. But we said, "All right, we need somebody to run the business." And at that time, we had seen other planning firms kind of our size going out and hiring external person to be a COO or a CEO.

Michael: And how big was the firm at this point? Were you $1 billion under management when the conversation came up?

Peggy: We were definitely less than $1 billion. We were maybe $500 million to $600 million, okay? Anyway, these friends of other firms who had tried to hire someone from outside, they had all been failures. It hadn't worked. And so my partner Dan Roe said, you know, "I'll be darned if I'm going to hire somebody and we're going to have to pay him $200,000 a year for 2 years while they try to figure out what this business is and how we do it. And then we're going to have to end up firing them because they're not going to be able to do it." He said, "It has to be somebody from inside. It has to be one of us." And there were three of us. Eye contact with anyone.

And we were in a meeting. We have kind of an executive coach that helps us with our strategic planning meeting. So he's there and he's kind of helping us with this decision. And so all fingers kind of pointed to me. I said, "Well, I don't know. Okay, I'll do it." So that was day one of the strategic planning meeting. So day two we were supposed to get back and kind of flesh out, "What are we going to do? How are we going to do this? What are we going to do with Peggy's client meetings? You know, what are we going to do?"

But anyway, I went home the first night and thought about it and slept on it and came back the next day and said, "I've changed my mind. I'm not going to do it." And they went, "What? Are you kidding me? Why?" And I said, "Well, number one, I don't know if I can do it. I really haven't been educated or trained to be CEO or a COO or anything like that. I could fail too." And I said, "Secondly, my fear would be that my contribution to the firm would not be as valued as the contributions of the people who are meeting with clients."

So they took several hours to convince me that I was wrong and that that was not going to happen. And at the end of the day, I got, you know, like a big piece of poster paper and I wrote a contract on it that said that I only had to do it for two years. And if at the end of the two years I didn't want to do it anymore, that was entirely my decision. I went back into my prior role and we were going to have to figure out something else. And I made them sign it. And so here I am, you know, 17 years later I'm still doing it. So it did work out. It did work out.

Michael: This does highlight, though, the challenges that crop up in how firms value the roles when you shift away from managing client relationships and revenue. You know, we recently had Heather Fortner on from SignatureFD in Atlanta in episode 68, and she came up through operations and compliance and eventually became chief compliance officer and chief operating officer and a partner, but she was an employee in a non-revenue-producing role trying to move up to partner and having these discussions with the firm about how they value non-revenue-producing roles.

Because, like, the reality is just it's easier to measure as a firm the value proposition of client-facing roles, right? Like, a person manages X dollars of revenue, has brought in Y dollars. Like, we can do that math pretty easily about the value that's being contributed. But the value for the firm is a lot harder for these management and executive positions. Like, they're essential for the firm as it grows. At some point, you have to develop more infrastructure for the firm, but then it's really hard to figure out how to value them. So how did you guys look at it I guess then and now in how you value or evaluate and compensate these roles?

Peggy: Well, it really was kind of easy for us because almost from day one, Jim and I made exactly equal salaries. We had equal compensation. So when we brought in Dan Roe, he got equal compensation. And when John Schuman came in, he got equal compensation. So we just kept it that way. Even though I'm doing something totally different than what they are doing, I'm compensated the same as they are.

Michael: Okay. And then you've got your respective ownership shares in the firm to get your participation in the profits of the business. So you get paid your salaries in your business for the roles you play and then you get your profits from the business. So you equalize everyone getting the same salary for key roles, and then the differential on compensation is reflected in ownership basically.

Peggy: Yeah. So that way we don't have to say who's more valuable than the other or, you know, I'm doing more than you are or whatever it is. And it has worked perfectly. I do not know if that is going to work in the future. I think someday when I retire and there has to be a new CEO, I think all of this will be reexamined. But for now, it's working for us.

Michael: And there's no concern that... I don't know, I feel like the fear from some advisors in this approach is the worry that basically someone is going to be a freeloader, right? They're going to say, "I get the same salary regardless of how much work I put in or what results I bring. So, you know, I just don't have to put in as much work and I pretty much hold on to the same conversation."

Peggy: Yeah. Well, since at most we've only had four partners, it's just never been an issue. No one has ever pointed to another partner and has said, "You're not pulling your weight," or, "I'm doing more than you." Never happened. Never.

Michael: Well, for where you guys are at, the trick is whatever your salaries are, your long-term equity value is probably the primary driver of wealth creation at this point. Like, everybody makes the same money in the long run if they contribute to the growth and the value and the efficiency of the firm by focusing on equity value. It's not really about making a few more dollars in salary at this point?

Peggy: Yeah.

Michael: So how hard was it for you to actually make the transition from advisor to CEO and I guess actually hand off your clients?

Peggy: Yeah. Well, remember, I didn't have any clients. Nobody did. All the clients were clients of the firm. So there was no subset of clients that were mine that had to be handed off. Just my meeting responsibilities had to be handed off. And that's why we brought in the fourth partner, John Schuman. He kind of took over my spot in the meeting rotation and he brought...you know, he brought his estate planning and tax knowledge to the firm, which, you know, really added value to the advice we could give clients. So that worked out great.

So for the first two years that I was in my new role, I think I foundered around just like anybody else would have, you know, trying to figure out just what am I supposed to be doing? How do I prioritize? What's going on? I mean, it took a long time for me to even come up with the idea of a strategic plan and then to finally get a plan together and then start managing the firm to meet the strategic planning goals. That took several years for me to get that far up to speed. I've always managed the firm to a profit model, so there is...we have a goal for a percentage of revenue that falls to the bottom line, and, you know, the decisions that we make have to make sure that that profit model is not impacted.

Michael: So you've set a certain goal like, "We want to make sure our profit margins are at least X percent because that's a buffer for risk for the firm and that's a key part of our compensation as partners." I.e., like, you just have this agreement with your partners that you're allowed to reinvest anything above that profit threshold but the partners agree to keep profits up to that number. And that's just how you manage it as a business?

Peggy: Yeah. And, you know, that was basically my rule. That was my first rule, "This is the way it's going to go. We're going to treat this...this is not a practice, this is a business and we're going to run it like a business and, you know, not hire somebody because we feel like it or because they're a nice guy, I mean, it's got to fit into the business plan." And it has served us well.

Why Peggy Wishes She Would Have Hired An Executive Coach Sooner [1:14:07]

Michael: And so as you look back, like, any words of advice you wish you could give back to your former self about the CEO role you were stepping into at the time? Like, what would you share what you've learned now about how to do it well that you wish you'd known then?

Peggy: Yeah. You know, I wish I had hired an executive coach of some sort who could not only coach me through the way I do things or how I feel about things or what that is but also educate me in, "Well, you know, this is how you really ought to think about human resources. This is how you really should be thinking about technology." You know, I had to kind of learn as I went along, and, you know, it took me longer to get up to speed. I think it would have been easier had I had, you know, someone professional helping me. I did go through the Strategic Coach program, and that was extremely valuable to me. It helped me start thinking with a different mindset. I'm glad I did that.

Michael: Yeah, we've had a number of advisory firms that have spoken very highly of Dan Sullivan's Strategic Coach program, but what do you wish you'd had in terms of someone to help educate you about what you'd mentioned like human resources and thinking about technology as challenge areas? Or I guess I should ask like, how do you view them today and what changed in your view?

Peggy: Well, the simple answer is you hire a really, really, really good person to handle that for you. You go out and you get the smartest...we have a fantastic director of human resources, and she has taught all of us so much about how to manage employees, how to think about employee benefits, how to introduce a little more fun into the workplace. I mean, she's been great because she had many, many years of experience as an HR professional. And we have a great director of information technology who is now our director of operations. He had all the experience and knowledge about technology. And, you know, like we trust our HR director. We trust him.

So, you know, find great people and let them run with it. Don't try to micromanage them. I hate to admit it, but in this firm, the owners still have a hard time giving up control on everything. So that's probably our biggest struggle, to let these talented people just, you know, go ahead and make all their own decisions. They make a lot of decisions, don't get me wrong, but, you know, at some point a partner will jump in and say, "Hey, wait a minute, I want to talk about this some more. I think we ought to think about this." So, you know, it still happens.

Michael: And how do you work through that? Like, just give it time and hopefully, good people will be good enough times that everybody lets go and stops trying to micromanage them?

Peggy: Yeah. Well, it's still a work in progress, I will say. We haven't achieved that total goal yet, but, you know, I said that we work with someone who is like an executive coach, you know, for the partners, and he helps us kind of get through those struggles and, you know, try to get on the right track to doing the right thing. And he actually comes in from Minneapolis three times a year for a two-day off-site with the board of directors and often the shareholders join.

Michael: So can I ask who that is? Is that someone you would recommend that we can share with the advisor listeners?

Peggy: Yeah. I'm not sure he would take another wealth management firm on. I don't know if because of conflict of interest or privacy, I don't know, but his name is Leigh Bailey, L-E-I-G-H, and his firm is The Bailey Group in Minneapolis. And he's been working with us for over 20 years. He came in and facilitated an IAFP board meeting when I had only been on the board a couple of years and I was very impressed with him. And so when we found the need for somebody to guide us, I thought of him and called him and asked him if he would do it, and he said yes. And it's just been great. Yeah.

What Brought The IAFP and ICFP Together To Form The FPA [1:18:49]

Michael: Yeah, we'll make sure to put in the show notes, www.kitces.com/71 for episode 71. And we'll have a link out to Leigh Bailey, I guess with a caveat he may or may not take you, but you can reach out to him and try to persuade his business sensibilities to work with you.

So the last thing I want to ask, you were there for the great FPA merger. I know you were one of the leaders who was there when it was IAFP and ICFP back in the late 1990s to form what is now Financial Planning Association. And so I'm wondering if you can just share with us a little bit of your perspective. You know, we see FPA today, I think not a lot of people even realize where it came from since it's been FPA for 18 years. So can you maybe give a little bit more context of what brought IAFP and ICFP conversations about merging in the first place that made this FPA thing we have today?

Peggy: Well, the ICFP was the Institute of Certified Financial Planners, and to be a member, it was a membership organization, you had to be a CFP. And its mission was to promote the CFP designation, give education and help and resources to CFPs throughout the land.

Michael: So it was a classic professional association. Like American Medical Association is for doctors. You have to be a doctor to join AMA, so ICFP was for CFP professionals. You had to be a CFP professional to join.

Peggy: So the IAFP, the International Association for Financial Planning was, and this was the word that was always used, an open tent. The only criteria for membership was that you had to support the financial planning process. So we had many CFPs who were members, but we also had financial planners with different designations. We had planners with no designations. We had vendors. We had consultants. We had insurance agents. We had all kinds of people who were members. So it was more of a big networking organization.

Michael: Okay, so like an industry trade or association. Professional associations tend to be narrow, only the actual professionals that are practicing. Trade associations tend to say, "Hey, anybody who's associated with the industry in this trade come on in." So trade associations you have vendors and professionals and consultants. Like everybody that's involved with the trade, the thing.

Peggy: But what it really boiled down to was that both organizations were kind of offering the same kind of services and products. Education, primarily, you know, conferences, conventions, that kind of thing. So they were always, you know, fighting each other, and I'm using that term very broadly, you know, for attendees at conferences, for sponsors, for events, for exhibitors at conferences. And, you know, the exhibitors and the sponsors, they're going, "God, why do we have to do this two times? Why can't there be one organization where we can deliver what we have to everyone in the financial planning community?"

The big stumbling block, though, was that the IAFP would not recognize the CFP designation as the designation of choice. The IFAP's position was that all designations are equal, and even no designation is kind of equal. And so the two organizations could never see eye to eye on that. A merger had been attempted about 10 years prior to the one that actually took place and it failed at the eleventh hour. And I'm not exactly sure of why it failed.

But anyway, when I was elected president-elect of the IAFP, my friend Judy Lau was elected president-elect of the ICFP. And we sat together in a bar in Cancun, Mexico at a NAPFA conference, of all places. We had both been invited to speak. We sat in the bar and said, "What can we do to get these two organizations together? Because that is what the profession needs. This needs to happen. How can we make it happen?" And Judy said to me, "I'll tell you right now, it will never happen unless the IAFP recognizes the CFP designation as the designation of choice." And I said, "Well, I'm going to see if I can make that happen." So for my year as president, that was my goal, to bring that about. And I did it. I made it happen. I talked him into it. Also, have you heard about my famous article about "If I Ruled the World?"

Michael: Yeah, "If I Ruled the World." Yeah.

Peggy: Yeah. So that is what I did to kick it off, to kick off the discussions between the two organizations. And Joe Votava who followed me as IAFP president a few years later, he said, "What you did was you put everybody in a room, you opened up the door, you rolled in a bomb, then you shut the door and left." You know, because they had to end up figuring out how to make this work, how to do that. And we were not allowed to use the M word, "merger." We had to always say "the new organization," of which was the FPA.

Michael: Because it wasn't the ICFP merging in the IAFP or IAFP merging in the ICFP because that creates perceived winners and losers. It was, "We are creating this new thing."

Peggy: Yep. Create a new thing and the other two go away. So that's what happened. And they made it happen. They worked really hard to get it together. And I think January 1, 2000 was the birth of the FPA.

Michael: So did it turn out the way that you envisioned it as you look back 18 years later?

Peggy: I think it did. I think it did. Yes, I think it did. The organization is a lot more CFP-centric than I thought it would end up being. I'm not saying that's a bad thing. It's probably a good thing.

Michael: Yeah, I guess it was hard to tell at the time whether ICFP culture would win out or IAFP culture would win out.

Peggy: Yeah. Yeah. I guess I expected the new organization, the FPA, to be, you know, bigger and I'm going to say more successful, but that's maybe not the right terminology. I just thought the organization would be bigger and that all the new...all advisors would want to be a member. And that hasn't been happening for whatever reason.

Michael: Well, I know that is one of the big challenges at the end of the day. I think when IAFP and ICFP merged, it was right around 20,000 members in the combined entity. And it stayed fairly even at that level over the next six or seven years. I mean, to me at least it's not surprising it didn't grow initially because inevitably there were going to be some maybe IAFP members who didn't buy into the new CFP-centric focus or joining ICFP or some ICFP people that said, "Hey, who are all these non-CFPs that are in this new joint organization?" Probably some new people coming in as well who were attracted to new FPA but then others moving out because they didn't like new FPA.

And it's worth recognizing like at the time, FPA was a pretty controversial organization because the last big fiduciary fight that we had before all these DOL fiduciary stuff was back in the late '90s and early 2000s where the SEC was giving leeway to the wirehouses to offer fee-based accounts without registering as investment advisors and being fiduciaries. And it led to this lawsuit where the FPA sued the SEC and won. Like, this giant David and Goliath victory for the FPA, and then they had to spin off their broker-dealer division of the FPA into what's now FSI just to clear the pathway for that lawsuit in the first place.

Peggy: That was the zenith of being a member of FPA, that you had that victory. Yep.

Michael: So the FPA was going through that and at least treading water on membership as it was happening, which is another small feat given all the dynamics at the time, and then the financial crisis came, and FPA fell pretty quickly to this range between about 22,000 and 24,000 members, and it's been there ever since. And the needles just pegged at that level. So 18 years into its existence, FPA is still down about 15% in its headcount despite the fact that the number of CFP certificants have more than doubled over that time period. Which means that while the FPA used to have probably upwards of 50% of all the CFP certificants, now they're barely more than 20%.

Peggy: Yeah. That's a shame, and I wish, you know, it was better...there was better participation in the membership. There's good people there.

Michael: So if you were writing, "If I Ruled the World" today, 2.0 now, like, what would you say? Because you're still engaged in the profession. You're on CFP Board's board of directors today. So if you were now, what would you like to see that's different than where we've ended out?

Peggy: Well, okay. Now, I've never thought of this until right this second, but I guess I could say that people not only want to get their CFP designation so that they can be more successful in the financial planning profession, but also because then they will be able to join the FPA. And they can't wait to become a member of FPA and receive all the benefits that the membership offers.

Another thing I said in my "If I Ruled the World" article was that every American each year when they file their tax return, they would have to file their financial plan. And I don't see that happening anytime soon, so a lot of dreaming big here.

Michael: So we still have room to grow. We have room to grow. Do you still see gaps around what FPA does versus what NAPFA does versus what CFP Board does? I do feel like there are some conflicting sentiments out there. Some complain organizations don't do more, they need to do more, and then others who aren't happy that we already have too many organizations, they're overlapping and duplicative. Like, how do you look at the landscape having been involved with a lot of these groups?

Peggy: Well, you know, the CFP Board, it's not a membership organization, it regulates the marks. It gives out the marks, it regulates the marks, it protects the marks. You can't join and pay dues. You are licensed and you pay certification fee. And it's a 501(c)(3) organization. It can't promote CFPs. It can promote to the public that the public will benefit most by working with the CFP, but it can't, you know, have conferences and have, you know, sponsors there hawking their products or whatever.

So that is up to the membership organizations, which now the primary two are FPA and NAPFA. And, of course, NAPFA is limited to fee-only planners. A fee and commission or commission-only planner, the only financial planning organization for them is the FPA. That people have to see a benefit in spending the money just like anything else. Our clients have to see a benefit in spending the money on us, and we have to see the benefit of spending the money on our CFP certification or on our dues to one or more of the membership organizations.

How Volunteering Boosted Peggy's Career [1:30:48]

Michael: So as you look back over your own career and how much the industry has evolved over time, like, I don't know, I guess I'm just wondering, what drove you to be so involved with volunteering in all the various organizations over the years?

Peggy: Well, one thing. When I decided to go down the road of getting involved in organizations, you know, beginning with the IAFP, and I kind of made it a goal to get elected to the national board and to really work hard within the organization. And people would, you know, question why I wanted to do that because I should be out networking with lawyers and accountants and insurance salesmen and everybody else so I can do business development and get more clients. And, you know, the time I'm spending on this board work, I could be spending networking and meeting with prospects or whatever it might be.

And what I found was that my work on the various boards probably did more for my business and personal income success than anything else I could have ever done because it got my name out there. I became, you know, a recognizable name. When a reporter for "The New York Times" or the ABC News or whatever it was was looking for someone to add a quote, and especially if their editor said, "You need a quote from a woman," you know, I was the one that they called. And so I was featured in the national media a lot, and that made my reputation. And, you know, I was networking for free throughout the whole United States just through kind of the public relations aspect.

Michael: Yeah, to me volunteering and being involved can both be good for giving back to the profession and the impact that you can have there and just getting experience in leadership in an organization, potentially some opportunities for media and PR and forming this network of relationships with other advisors. I mean, I know for me, a lot of the businesses I'm involved with today are all people I met and got to know 10 to 15 years ago when I was at that stage where I was actively volunteering a lot with FPA early in my career.

Peggy: Yeah. My first year on the IAFP board, I met the guys who were forming the Alpha Group, which was, like, maybe the first study group that ever was formed in this profession. And I was invited to join. And the things I learned from them and from the Alpha Group, you know, there's no value I can place on that. It is truly priceless. And it would have never happened had I not volunteered for service on the board. So you never know. It's not a dead end to do that, and it's not a waste of time. And you don't have to look at it as completely altruistic giving back. It can help you too, just like what you said.

Michael: Yeah, it can be win-win. It doesn't just have to be a one-way contribution.

Peggy: Yeah, absolutely.

Michael: So as we wrap up, this is a podcast about success, and one of the things we've long observed is that success means different things to different people, sometimes different things to us at different stages in our own lives. So as someone who runs BRR, this very successful multibillion-dollar advisory firm, I'm just curious at a personal level for you at this point, how do you define success for yourself?

Peggy: I would say that I have met my definition of success. I have established a successful business. I have seen dozens of people get successful careers here at the firm. When I walk into our family event at the zoo every year and I see dozens and dozens of children at the event and spouses and I think our company is making their lives possible really. You know, we are responsible for the livelihoods of all these men, women, and children who are standing here. That makes me very, very proud, and that's a big definition of success for me.

Michael: Well, very cool. Certainly I think you've earned it for the success of what the firm has built. And I'm so thankful that you've been able to have both the impact on your firm and really I think the whole profession along the way.

Peggy: Oh. Well, thanks for saying that, Michael.

Michael: Absolutely. My pleasure. Thank you for joining us on the "Financial Advisor Success" podcast.

Peggy: No, thank you. I enjoyed it tremendously.