#FASuccess Ep 162: Efficiently Expanding In-Depth Financial Planning Services To Move Beyond The AUM-Only Model, With Tim Bickmore

Author: Michael Kitces

Team Kitces

Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

What You’ll Learn In This Podcast Episode

• What Got You Here Won’t Get You There [00:03:34]
• Tim’s Business As It Exists Today [00:16:39]
• How The Business Now Focuses More Heavily On The Financial Planning Process [00:27:04]
• When Clients No Longer Fit With The Firm’s New Service Model [00:35:59]
• Why Advisors (And Others In ‘Helping Professions’) Need To Put Themselves First [00:44:00]
• When Clients Leave – Relying On Other Advisors To Take Care Of Them [00:49:56]
• Incorporating Agile Financial Planning Into The Firm’s Planning Process [00:53:38]
• How Tim Helps Accommodate Clients’ Shorter-Term Financial Planning Objectives Through Data Gathering and Expense Analysis [01:00:18]
• The Need To Adjust Fees To Scale The Business For Growth [01:16:45]
• The Challenge In Categorizing Expenses For Accurate Client Spending Analyses [01:28:22]
• What Surprised Tim The Most About Building His Own Business [01:39:49]
• The Difficulty Tim Had Identifying Misaligned Goals And Responding With A Shift In  Business Model [01:43:38]
• How Tim Defines Success – Personally And For His Firm [01:49:00]

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Tim Bickmore, to the “Financial Advisor Success” podcast.

Tim: Thank you, Michael. I appreciate you having me on.

What Got You Here Won’t Get You There [00:03:34]

Michael: I’m really excited about today’s episode and what I think maybe a little bit of a different kind of conversation and discussion that we’ve had in the past on the podcast. There’s a famous saying out there in the business world, “What got you here won’t get you there.” It comes from leadership executive coach guru, Marshall Goldsmith, who I think actually wrote a book by that name as well.

But it’s based on this idea that in our businesses, we often start successful businesses to be like, we find a thing, we do it pretty well, someone is willing to pay us to do it, we start making a business around it, it becomes successful, and we hit some good milestones. And then for a lot of people, at some point, you want to grow to the next level, do the next thing, move forward to the next stage.

What you discover is that what got you here won’t get you there. So, the thing that was totally working in your business to grow it as far as you’ve gotten suddenly won’t work in the same way to grow it to the next stage. Or you want to make a bit of a shift to pivot the business, but you can’t do things the new way because you’re still kind of stuck on things the old way. And then it gets really hard sometimes to reinvent the business.

And, Tim, I know you had reached out because you were actually in one of these transition moments where you spent the past 5 years building a $50 million firm – which is a great base, with more growth than a lot of advisors get to in 10 and 20 years – but want to now grow to the next level and are hitting some of those challenge points of, “How do I get from here to there because what I was doing in the past isn’t necessarily moving me forward?”

And so, I’m excited to have this discussion today around…I think to me it’s kind of about business transformations; how you navigate getting your business to the next level when you’ve been really successful in getting it to where it is today, and you want to do more, but the ‘more’ suddenly looks different than what you’ve been doing; and just figuring out how to do that transition, figuring out how to do that transformation can be really challenging sometimes.

Tim: Yeah. It can be extremely challenging. And I think you probably articulated how I felt for the last five years extremely well. I’ve simplified that analogy down to telling people that you get really excited to start a business. You’re really excited. You think, “Oh, this is going to happen?” And then all of a sudden one day you wake up and you say, “Oh man, I started a business, now what do I do?”

That’s kind of the transition point, of saying we’ve built it to this point. But you are 100% correct; it’s now time to transition and evolve. And I think we’ve done a pretty good job evolving in general, but this has been the biggest pivot point we’ve had in our early history of the firm. So, it’s been a ride so far. It’s been a ride.

Michael: Yeah, I know Alan Moore likes to call this the “Oh crap!” moment. We go out to start an advisory business full of hope that it’s going to work, and a lot of nervousness about whether it’s going to work. Starting a business is very anxiety-provoking for pretty much anyone.

But then there’s this subset of us where you’re trying to build it; you’re trying to get through that initial brutally tough stage. You get through it. There’s sort of this elated “Woo-hoo!” moment. And then the business picks up, you look, and you realize, “I actually have a lot of clients now. There’s a lot of work and things to do and I might need a person at a higher-end; I might need to train and manage a person.” All this other stuff is happening and there’s sort of this “Oh crap!” moment. Like, “Oh wait, what have I done to myself? I can’t get off this roller coaster now, and it’s going; things are underway.”

Tim: It’s going fast. Yeah. It’s going fast. Yeah. The “Oh crap!” moment is probably where we hit in 2019. And it’s interesting, that moment can be very scary, but at the same time – even for where we’re going, I feel we’re going forward in 2020 – it’s also very liberating to really kind of look at yourself and self-actualize as a firm and ask, “Where are we really at and what are we really trying to achieve?”

Because I think we handle a lot of business owners ourselves and we talk a lot about business ideology, thought processes, and a lens to focus on. I think when you first start, obviously, in behavioral economics, they talk a lot about how people are not rational; people are irrational. I think you have to be an irrational person to start a business; you have to be naive and you have to be altruistic in order to take the leap off the cliff.

Michael: I forget where I’d read some really amusing quote; I will slightly butcher it, but it’s something to the effect of, “You see very, very few people with MBAs who are entrepreneurs who start their own businesses because if you had learned that effectively how to analyze a business, you would never start one.”

Tim: No, you wouldn’t; it just doesn’t make sense from a rational perspective. It just doesn’t. And it’s hard. It’s difficult. And it’s not just the quantitative; it’s the qualitative and understanding that, and I think you have to be a little naive or irrational actually to make that jump.

But once you make the jump and you go through those processes, then you do hit that “Oh crap!” moment. Because it’s almost like comparing it to a child, right? You learn how first to roll over, then crawl, then walk, then run. And I think that it’s the same kind of evolution as a business is when we first started the company, it was, “Hey, we want to help anybody!” because in this firm, in our culture, we have a deep feeling of saying this industry needs to change. It needs to change for the better. It needs to be seen as a profession. And everybody does need financial literacy to a degree.

That’s really how we started the company is, “Hey, if you want to talk about finance, come in and talk to us. We have expertise in it. It doesn’t matter if we’re going to work with you or not.” We wanted to push this idea forward of saying everyone should have access to some of this knowledge and education.

Then as we’ve grown and brought on clients and that’s changed and evolved, we started to realize that in order to be a successful business, we really do need to focus on the clientele and the niche that we want to move forward with because we can’t, unfortunately, help everyone. That is too altruistic; it’s way too big. It’s too ideological. It just can’t happen in order for us to be a successful business.

That’s the other thing that I think we’ve learned over time and that we talk about with our clients, is that when you’re a business owner, you can be really good at your trade, but then you also have to understand that your business is probably going to conflict with that trade at some point, right? It’s just the nature of the beast.

Michael: That phenomenon, in particular, of the transition in an advisory business when you realize or decide or just get constrained by the business of how you can’t help everyone anymore is, I think, actually one of the biggest blocking points in and of itself for a lot of firms that ultimately prevents them from growing and moving forward.

It’s a business mathematical reality that you can’t help everyone. There are economics to this of what it takes to get paid for your time and labor. There’s just, at some point, a sheer capacity issue. You can only help so many people. Your business can only help so many people. You can hire more staff to help more people, but if the people you’re helping don’t generate any revenue for you or don’t generate enough revenue, you can’t pay that staff and you can’t bring them on board.

And a lot of firms, I find, hit blocking points that are usually something to the effect of, “I started my business helping anyone and everybody I could because I had the time, I needed the revenue.” So, when you’re at zero, any client with anything is better than nothing. I started my business to help anyone and everyone, and I can’t let them go now. Or like, air quotes, I “can’t” let them go now. You can, it may or may not be a painful, awkward transition, or it may be totally fine.

We tell ourselves, I can’t let them go, and I think that becomes one of the first versions of what got you here won’t get there. Or like, I get it, you got your business off the ground from revenue zero because you took anyone that could do anything with you and then would pay you anything and took them on as a client because that’s what in the aggregate got enough revenue going to get there.

But then when you want to grow the next stage, and it means hiring staff and adding more people and expanding and doing the things that you have to do to grow beyond that point, you suddenly discover, “Well, I’ll have enough money to hire staff to do more.” It’s like, well, you know why that is? Because you’ve only got so many seats on the bus of how many clients you can take on and your client bus is all full of people who aren’t paying you enough to let you grow.

Tim: Yeah. And that is the hard reality. It’s a hard reality to face, and I think it’s even more difficult when it comes to our industry. I think it’s difficult because we are service-oriented. We sit down with clients and we feel we do an extremely good job when it comes to client service and getting to know our clients on a personal level.

So how do you let someone who’s come in and they now feel like your grandma or even a family member or a really good friend saying, “Hey, thanks for helping me out, but now I got to change. I’m not getting paid enough.” That, I think, is sometimes underrepresented on how the difficulty of that from a qualitative perspective. But it is a reality. That’s the hard part too, that it’s not real.

Michael: I think there’s a piece that goes with that as well, as you said at the beginning, you started your firm because you want to see the industry change and you want to see things done differently. And the sad reality is for any advisor that’s been in the business for a number of years, you have seen the bad, you’ve seen the clients that come in from someone else who just clearly took advantage of them. It’s not even a gray area. It was just clearly wrong.

Unfortunately, I do think the reality is those folks tend to get preyed upon a little bit more at the lower end of the income and wealth spectrum because there were fewer others that are in that space that are doing good work. So, I think there’s sometimes this feeling that I get as well, of “I want to help this person; I can’t help this person, but I can’t just throw them to the wolves. I can’t send them back out there into the wilderness without anything to defend themselves.” This is not better. At some point just, I feel a moral obligation not to send them back out there.

Then we get, I think, locked into our binary choices. “Because there are other advisors out there who are bad, I must take all of them myself.” But those aren’t your only choices, right? There’s a third option. The third option is for every client who isn’t a good fit for you; there is some other advisor out there where that is their ideal client. That is their gene client. Or heck, just they’re where your business was 2, 3, 5, 10 years ago and they would absolutely love that client.

And you know what? They might not service that client for 10 or 20 years, but they can service them for the next few. It’s a good client for them. And then we’ll find them a home.

Tim: We did that when we first started our business. We actually went out to actively look for other registered investment advisors in our area and just elsewhere to find where we could send clients because we knew from the beginning to a degree, that not every client was going to be the right fit for us, but we also didn’t want to throw them to the wolves because we knew that if they don’t come here, we need to at least educate them and say, “Hey, maybe this would be a good fit or look at this firm, and these are the reasons why you should look at them.”

But that’s been difficult as well because when we have approached others, sometimes we get this kickback of, “Oh, we’re going to compete.” But we’re not competing. My network is in Salt Lake City, Utah, and I live in Madison, there aren’t a lot of advisors in the Madison area that have that network, right? I have that because I grew up there. Because of technology and different things, we can go approach other markets since our locale’s not even there.

So, there’s this weird dynamic, and I think a lot of people think of it as competition. We’ve just never viewed it that way because we’re trying to look at it as a whole. We just want people to go somewhere where we feel comfortable with them going.

We recognize that when we can get a client, we’ll service them, and it’s our responsibility to keep them through our service. If they decide to leave because there’s something better, then we need to do something different. So, it’s a little bit of a different mindset. We’ve definitely tried to actively push that forward by asking, “Okay, where can I send somebody?” And that’s been a little bit more difficult than I think we anticipated from the beginning.

Tim’s Business As It Exists Today [00:16:39]

Michael: So, talk to us about just the business as it exists today. Can you paint a little bit of a picture for us about the size of the firm, clients, staff, and what this looks like as it stands today?

Tim: Sure. So, we opened our doors in October of 2015, and we started with the three of us. It’s myself and two business partners. We each own the firm a third, a third, a third. Technically Nathaniel has 0.34%.

Michael: Because someone has to get the last 0.01% when we do even thirds.

Tim: Yes. So, he got that. But right now as it sits, we’re at about 230 clients or households, and that is about $50 million. I think we’re just a little over $51 million currently with them or where the market is as of the day. And we’re currently, I think, in 19 or 20 states. Predominantly our client base sits in the State of Wisconsin. Our fastest-growing cities are Los Angeles as well as San Francisco.

Our client base is really strong from ages from about 30 to 50, but our client age range is anywhere from 18 to, I think late 80s. So, we do have a big range and then the AUM size ranges from there, same with income size. So, we have a pretty broad spectrum of different clientele.

Where we’re moving toward in our industry are coined HENRYs, “High-Earners Not Rich Yet”; this is really kind of where we’re leaning towards. Again, going back to that demographic of 30 to 35 to 45 to 50 years old, and with an income of anywhere from $500,000 and above as a household. So, that’s really kind of where we’re focusing.

Our other focus has been a niche with business owners or entrepreneurs; that base has really been more locally in the Wisconsin area than more on a national scale. That also is something that we feel like we can do a good job with. A lot of that is due to our business partner, Nathaniel, who does a lot of work business consulting, looking at client books, helping with capital allocation, and different things. So, definitely, where we are today is not where we started back in 2015.

Michael: Okay. And from a business model end, at least that exists today, you had kind of framed this as 230 households with just over $50 million in AUM. Are you predominantly on the AUM model today? Has that been the driver of business revenue for over the past five years to where you are now?

Tim: We were completely on the AUM model up until December 16th of 2019.

Michael: Okay. So you have just changed.

Tim: We have just changed. We just made that shift, and now we have moved towards a subscription fee model for our financial planning services as well as our business consulting services. Then we’ve taken our AUM fee and we’ve decreased it significantly. So, our old AUM structure, the highest fee that we were going to get paid, was 1.25%. We had a tiered structure from there depending on the assets that we managed. And that was true assets that we manage. This wasn’t assets under advisement. And that was the model that we were on.

But obviously, kind of as I alluded to, we’re moving our client demographic. What we found was that a lot of these clients really fit us well, but under the current structure, we just weren’t getting compensated in order to grow and continue to service that type of client.

We did fundamentally have to make a shift, and we made that shift to the subscription fee where now we’re getting paid on a monthly basis for our planning as well as business consulting if that service is going to be utilized for us. Our AUM fee starts at 0.75% depending on how we’re going to manage the assets and can go as low as 0.25%.

So we’ve really shifted the dynamic of where our economic engine is. It’s not any more that we need to gather big assets; it’s more of needing to gather the right clientele that can pay us our planning fee.

Michael: Okay. And what does that typical monthly subscription planning fee look like? What did you set that price point at?

Tim: Our beginning price point is $250 a month on the personal side and $250 a month on the business side. But on the business consulting side, it’s really based more on the scope-of-work, what we’re really going to do, and what the client really needs help with. We put a lot of effort and work into it, and that takes a lot on our side, so it’s typically really more like $500 a month or above.

We recognize that we want to increase that fee over time. We just felt like it was a good starting point, and then we eventually are going to have to increase that in order to sustain the growth as a company.

Michael: Okay. So, I’m just kind of thinking through this a little from the business math perspective of…

Tim: Oh, this is going to be fun.

Michael: So, like $50 million AUM, 230 households. So, I do the math here and the average client was just over $200,000 of AUM with, I’m sure as usual, where a few much larger clients drive the average up, and the median usually is lower. We all have a positive skew to the distribution of our clients, but with a $200,000-something average client, your fee schedule at the time, I guess, for where you were would have been like a $2,000 to $3,000 fee per client. And that was it, with the caveat that you get them much smaller than that and there aren’t a lot of assets to charge upon if you’re going to do work for younger clients.

So, you shift to a planning model. The base fee of $250 a month is $3,000 a year. So, just kind of out of the gate, that’s effectively a small fee increase for the average client. And when you then layer a fee schedule, an AUM schedule that’s still 0.75% on top of that for that client, that client that was paying you $2,000 to $3,000 a year is now probably paying you more like $4,000 to $5,000 a year. Does it sound like a fair characterization for the shift?

Obviously, some clients that had almost no assets; they just went from paying you near nothing to $3,000 a year. And I’m sure there were a few at the higher end where this might have even been a fee cut for them because they had big assets and going from 1.25% down to 0.75% was actually a reduction even with the $3,000 a year planning fee. But is that kind of what it felt like overall, for the bulk of clients who took a little tick up? Now, I’m going to get paid for the planning work and then a subset of the clients. The lower end got lifted up more because now you can actually afford to serve them profitably.

Tim: Yes, that is an accurate representation. However, what we did decide to do is to grandfather all of our existing clients and gave them what their current structure is. However, if the new structure benefited them actually to reduce their fee, we were obligated, obviously, to switch them to the new structure then. So we had to go through our client base and see if the new structure would actually benefit them as a shift.

For the clients that technically don’t benefit from actually having to pay us more, they would technically have to sign a waiver with us to say, “Okay, I’m actually willing to pay more for the services,” because it isn’t technically in their best interest, which is what we were told by our compliance team and the lawyers.

Michael: So, you can’t run a new fee schedule that’s lower than what your existing clients would pay if they just fired you and came back cold the next day? If it’s a better deal for them, you got to move from there, basically.

Tim: Yes. Yeah, pretty much so. And we’ve done that with all of our clients, but again, it’s up to them if they elect to say, “You know what, I’ll stay on the current schedule,” or not. And then we have to have a waiver for them to sign that they’ve acknowledged that we’ve explained it to them, we’ve told them about it. So we’ve definitely transitioned to that point.

Now, with the current clients, we could force a contract and say, “Hey, please sign this, and then if you don’t, thank you so much.” Kind of that whole cutting and letting them leave. We haven’t decided to do that yet. We don’t feel like we necessarily need to, right this at this point. We do feel like if we can continue to go on this new schedule that we’ll be able to grow enough to be effective, obviously, and profitable.

But that doesn’t mean that at some point we may have to re-look at the current client base and say, “Okay, where are we really at? Obviously, is it okay if you move to this new structure,” and so on and so forth? So, we aren’t quite on that stage yet, but I think that it may or may not have happen. I don’t know, actually, to be completely honest.

Michael: So, I got to ask, why not?

Tim: Why not?

Michael: Right. If the whole discussion is about trying to get the business to the right point so that we can hire and do the things we want to do for the clients that we want to serve, including just serving some existing clients and not feel like we’re losing money on them because they don’t pay us enough because they have needs and we do planning, but their assets are in big, but their income is fine and they can certainly pay us, why not move the existing clients?

Tim: That is an excellent question. And my answer is probably going to be something that doesn’t make much business sense, which sometimes I guess I struggle saying that out loud, but it makes sense from the standpoint of just our values, and I guess our culture is that we feel the current client base allowed us to get to where we are today. And that isn’t on them for them to pay us more because we made the mistake not to have the correct fee structure at the time.

With that being said, I don’t even think that we could have had that fee structure when it first started. So we do feel that they’ve got us where we are today, and we do feel that we can continue to grow and continue to have them on that fee schedule. That’s just a decision that we’ve made as business partners to say, “You know what, let’s see if we can actually make this work because, in all reality, we’re not here today without them.” And we’ve just made that decision and it’s definitely going to be a little bit of a harder road than trying to repaper people. But at this point, that’s the decision that we’ve gone with.

How The Business Now Focuses More Heavily On The Financial Planning Process  [00:27:04]

Michael: Is the business change in terms of just what you do for people since the firm launched?

Tim: Yes, our service has changed significantly. It’s changed quite a bit on the financial planning and the business planning side of things. We’ve really evolved into, I would say, something that’s a true planning firm. I will say when we first started and opened our doors, we probably weren’t.

I think part of that was that it was really relatively new to the three of us. I was with a large firm when I first started in Northern Wisconsin and they did planning and they did a pretty good job. I think we do it differently than they do now. I was exposed to that, but probably not to a high degree. Then when I ended up getting hired with a firm that we were previously with, they also did a little bit of planning, but probably not as much either. It was very focused on investment management and more in that realm.

When we first started the business, we were like, “Hey, we really should do this planning. It’s an important piece.” But we really kind of getting into our own saying, “Okay, how does this really work? What kind of service do we really want to provide?” Because we hadn’t seen it in practice.

So our planning and our structure are significantly different than where they were. It’s more time-intensive because we are big believers in that if we’re going to do this, we’re going to do it right. In my opinion, if you’re going to do financial planning and do it right, it takes a lot of work. It really does.

Michael: And that’s upfront and ongoing. Like, what does that planning look like for you?

Tim: So, we have now really taken on, and this is actually from your podcast with Roger Whitney. We have taken the idea and the thought process of Agile planning. It’s continuous and ongoing, and it’s been extremely successful. I head up our financial planning department and I struggled at the beginning of understanding what financial planning actually was because it’s a very big hype word. But I was like, what is this service? What are people really truly providing? I just don’t understand. Because they’re doing all this work, but it’s like if you really want to do this work, that means you got to take a deep dive into people’s lives and understand statements and expenses to really truly give advice.

I’m not going to throw a 30-page document at them that says, “Oh, you can potentially retire in 30 years.” That just didn’t make sense to me. So eventually, I started slowly understanding that this is more continuous because people are human and people live lives, and life is financial planning and it changes and it changes so fast. Goalposts change, and if you’re trying to get precise, then you say, “Oh man, I got to go back to the drawing board.”

So, after I listened to Roger, or I think I read…either it was a blog or the podcast with him, it just clicked and I said, “Yeah, this is exactly what we’re trying to do. This is how we’re trying to position our clients.” We’re trying to position them for the future because I don’t know the outcome, right? I’m giving up the control of knowing, “Hey, this is where you’re going to be. But what I’m going to do is I’m going to position you when those decisions come up that you’re prepared to make them and make them from a rational perspective without a scarce mindset and that perspective.”

In order to do that type of planning, though, we had to change our technology, change our processes, and go even in more depth. That depth has created more efficiencies for us to turn around questions quicker. I think our clients have really, really appreciated it as well. So yeah, that piece has changed a lot, and it really has allowed us to change as well into the firm we are today because we’re more planning-centric than we ever were when we first started.

I would say when we first started, we were probably a little bit more leaning on our investment management to kind of get us going because that’s how we got paid – through AUM. So that fundamental shift has been very enlightening. I think it’s the right move for us because I do feel we are really good on that side. And investment management is hard to control – you can’t control the markets; it’s difficult, and it’s not our bread and butter. There’s a reason why, you know, there’s mutual funds and ETFs because that’s all they do. But that’s not all we do. We do a lot more than just that. So, it’s been a nice shift and we’ve definitely increased our services.

Michael: I’ve got to ask then, you have all these clients who came on board, they bought you an LBW because you have this investment management process for what you charge them an appropriate fee for the investment management work that you’re doing. You have, in your words, added in all of this additional financial planning service that was never part of the deal; it was never part of the original commitment or part of the original pricing structure. And now you’re doing all this work, and you don’t want to charge for it.

Tim: Yeah. Again, it’s a hard look in the mirror when you say it like that. I would look at it a little bit differently. Maybe I’m trying to rationalize my thought process, but when we first started, it wasn’t that it wasn’t part of the process or it wasn’t part of the deal.

We did tell our clients from the beginning, “You essentially signed a retainer for the assets that we manage, so use us. If you have questions, call us, and let’s talk about it. Let’s move it.” And that really pushed us to get more in front because of a lot of our clients would come on and they just wouldn’t ask us questions.

We’d be the firefighters, not Smokey the Bear. And I kept telling my clients, “Hey, I want to be Smokey the Bear. I don’t want to be the firefighter.” My dad was a firefighter, and I don’t want to do that. So we really started pushing our clients to come to us with more and more questions. That really allowed us to evolve into what we are today from a planning perspective because we started just getting more of that experience of different types of questions

With that service, we obviously weren’t getting paid for what we were doing, but it did pay for the experience, to experience what was going on, to find out what we were really good at, and what we could become even better at going forward. Going back to that ideology was just saying that the clients we’ve had in the past allowed us to find ourselves. They allowed us to push ourselves in different ways. So, it’s just hard to say, “Hey, now I’m going to change the game on you.”

Michael: Understood. But they also got five years of discounts.

Tim: True. That is true.

Michael: Because you’ve got a fee of what it actually costs for you to deliver properly and well today based on the restructuring of your fees that they didn’t have to pay for five years already.

Tim: Yeah. I will say that we try to push every one of our clients that come through the door to utilize our services; some just haven’t taken us up on it. We continue to push, but you know, that is part of the process. When we look at our full service of planning, there are a few clients that haven’t taken the steps to engage with us even though we’ve tried. So, not all 230 clients are necessarily going to be underneath that full-service spectrum even though we try our best to get them to do it, which is also different.

Michael: They’re going to be good fit clients for you in the long run if you’re increasingly becoming more planning-centric in what you’re doing.

Tim: No, I think that’s the next step in our process is what you’re saying isn’t wrong. That’s what I think the hardest part is a realization that you’re not wrong. From a business perspective, what you’re saying is 100% correct. I don’t know that as a firm, we’re there yet. I think that maybe we will get there where we really start looking at it from that perspective.

I just don’t know that we’re ready to look at that in the mirror. I know that sounds hard or not logical from a business perspective, but I think that we will eventually get there where yes, those clients may not be the right fit going forward. And then how we handle that and how we go about it, we’ll have to decide on that. But I will say that we haven’t taken that step as we’re trying to work on other transition parts. But you’re probably right. It’s going to be…it’s tough. It’s just very hard.

Michael: Absolutely. I apologize. I’m beating you up a tiny bit on this.

Tim: That’s okay.

When Clients No Longer Fit With Their Firm’s New Service Model [00:35:59]

Michael: Just because, again, in the context of the discussion, what got you here won’t get you there. What got you here is, “We’ll do anything for the clients that we can get in because we need to get clients and revenue in the door; we need to get growing, and we’re going to service them as well as we can to hold onto them because that’s what you have to do from starting from zero in the business to get it going.”

Then at some point, that becomes a limiting factor to the business, which I think you were already finding by saying, “We literally cannot continue on the current path.” That’s why you altered the fee schedule and sort of changed the trajectory of your path.

The secondary challenge is even if you try to change the path going forward, it is very difficult to do so with 230 clients, and baggage, that you’re lugging on your back and, again, not just to try to beat you up about it all the way through.

This is a common thing I see with advisors across the industry. That loyalty that we have to our initial clients – I think there’s probably a version of this that’s like an effect of the imposter syndrome. “Hey, deep down, the truth is I’m really not sure I knew what the heck I was doing when I started this business and got going. They took a chance on me and worked with me and paid me, and I’m not even sure if I was actually that good in the early years, but it’s awesome now. It’s all good and moving forward. I didn’t hurt anybody too bad.”

I think for some of us, deep down, there’s almost a feeling like I probably overcharged those initial clients because I was still learning. I was still getting experience. I was still getting going. And I feel this loyalty that they are willing to pay me when I might not have been up to snuff. So, now I want to keep them even though they may not be up to snuff in the other direction. And as you said, then we start trying to find ways to rationalize it. They took a chance on us. They got us here. It’s our values to take care of our clients so we can’t change them now.

At the end of the day, the undercurrent of all of it, as you’ve noted, is that the firm is also just in a really different place and what you actually do for your clients today is so different than what it was when they signed on and agreed to the original fee schedule that it’s okay to acknowledge, “Hey, we’re in a different place. We do different things for our clients than we used to. And if you really like that, we’d love to continue working with you at this new fee schedule that properly recognizes the value of the work that we do. If not, we will totally help make sure that you find another advisor that’s a good fit. In fact, we’ve procured this list of three of them who are all willing to take the call and work with you, and we’ve already vetted them to make sure they’re good.”

Tim: Yeah. You’re right. And I think too, obviously, that the point of the podcast is that what got you here isn’t going to get you there. When we were speaking a little bit before about the iceberg effect is that part of why I was excited to jump on this podcast is to talk about that qualitative. Because I think it’s so easy to sit there and say, “Yeah, I’m just going to go and repaper this client.” When the reality of it is that I have to sit down and talk to that client face to face and do it. That is difficult to do when we probably know very well, because we understand their finances, that they may not be able to afford it. I think that is a struggle that’s just even bigger than our client base because we’ve had individuals recently that have called us, and we’ve had to tell them, “Look, you just aren’t the right fit. And unfortunately, we can’t provide it.”

Their response is, “I’m just so frustrated that I can’t get this type of advice because I don’t have enough.” And what we’ve come to realize is that, unfortunately, to get a high-level planning service, it’s expensive and it’s hard because it’s a lot of work, and it’s not for everybody, even though the majority of the United States needs financial literacy. It’s evident. So to have to tell someone sitting across the table from them, “Sorry, you’re not wealthy enough or don’t have enough money,” just goes against so much of the grain that it’s difficult.

But then on the same side, I sit there, I hear what you’re saying, and I’m like, “Oh, you’re right.” It’s coming to the realization that yes, it has to happen and it will probably have to happen at some point. But man, it’s easier said than done and to make those steps moving forward. I think that even some of our shift in business is that it’s gotten to the point where we had to do it. Like you said, it’s not a question of, “Should we do it?” I know I don’t really have to. It’s like, no, no, we won’t survive if we don’t do this.

I think that also is probably a negative with some advisors, where we get ourselves to the point where we have to force change where we should have been forcing change before we had to do it. I think what was potentially a fault of ours was that we should have done this a while ago. This shouldn’t have been forced on us, but we kind of forced it upon ourselves.

Michael: But as you know, because these conversations are awkward and challenging and difficult, particularly because you know there will be clients who are going to say no because they can’t afford the new fee and some of them need help, and you know they’re not going to be able to say yes because they can’t afford the fee.

It’s so easy for us to rationalize, to come up with workarounds, to come up with excuses, but that’s harsher and judgier than I needed to sound. We just come up with ways not to put ourselves in the situation to have those unpleasant conversations, which to me, is why it’s so much about like, “Then don’t make it an unpleasant conversation!”

You go in and say, here’s what’s going to happen with all of these clients. One of two things is going to happen: they’re going to decide that we’re so valuable that they’re still going to come up and pay the new fee, or they’re going to decide that they can’t afford it. And I already have three super-awesome advisors who are going to take great care of them, who are a better fit at the fee level that they can afford. So, the only question is, are they going to have me as an awesome advisor or are they going to have someone else as an awesome advisor? And bummer a little if it’s not me. I want to work with all the clients and have all the people. But you can’t serve everyone.

So if you frame the decision in your head as, “Look, they’re going to work with an awesome advisor going forward no matter what. It just might not be me because I went and found one to three other advisors in my area or that are appropriate for them that I can refer them out to if they say no. I know they’re going to get taken care of now.” You’re not sending them out to the wolves. You’re just transitioning them to whatever advisor is a good fit for them.

Tim: Yeah. Which is probably a conversation that, again, I have to have sooner than later and we have, but if I’m going to be honest, it’s a touchy situation, and it’s difficult, but with being a business owner, and even with our own business clients, we talk about how you have to make some of those hard decisions.

The best example I can give is sometimes when speaking to restaurant owners; they talk about having to cut their costs. They’re unwilling to cut their food cost and go with a different quality of food because they’re passionate about what they make, but they’re unwilling to then up their prices to pay for that because it’s difficult, and is it marketable?

I think we’re in a very similar situation where it’s this ideology that we have that we have to, I don’t want to say give up because I don’t think we’ll ever give it up, but make the realization that, “Hey, look, if we’re going to be a successful business and continue to grow, we have to make these fundamental changes. Let’s talk.” It’s hard.

Why Advisors (And Others In ‘Helping Professions’) Need To Put Themselves First [00:44:00]

Michael: And I think there’s just a piece that if you want to be in a service business – if you want to be in the business of serving people, of serving clients – you can’t serve others sustainably until you create a situation where you will be able to sustain your service to others.

In my early days, all the way back in college, I was actually an EMT. I don’t know if I’ve ever shared that on the podcast before, but this was in the early days in the ’90s and the era of the TV show “ER”. So everybody, including me, wanted to be an emergency room doctor. I was a premed student in college and became an EMT, interning and shadowing in all the hospital emergency rooms in town, and in the direction of potentially going into emergency medicine.

I still remember when I was in my original classes for becoming an EMT, we had this fantastic instructor. His name was Paul Marcolini; I still remember Paul very clearly with his big, bushy beard. Paul had been an EMT for basically forever. His wife was also an EMT. They just lived that world. And the thing that Paul absolutely hammered into our class was that you are more important than anybody else. It was not meant to put everybody up on a pedestal and make them have big heads. It was kind of this recognition that I think he had seen from teaching a zillion different EMS classes that I think EMS and medicine increasingly, like financial planning, are helping professions.

The problem with helpers is if you don’t put yourself first, it’s very easy to put yourself last and put your patients or your client first. And if you do that in financial planning, you can create a business that has wonderful service, but that drowns in a lack of profitability, inability to grow, and inability even to serve its existing clients because it’s losing money.

In the medical context, and particularly the EMS context, you can get yourself killed. You can put yourself in a dangerous situation that you can’t extricate yourself from. So, Paul would just hammer into us that you are more important than anybody else, and you have to take care of yourself first.

I don’t care how scary the scene is when you pull up; there can be people bleeding out and dying on the ground, you will wait, you will stop and make a three-point turn to back your ambulance rig into its parking space. So that if ever there’s a moment of danger, you can run into your rig and get out of there immediately. I don’t care what’s happening and how dire the situation looks for the people, you will take the time to back into the parking space in a giant ambulance so that you can beat a path out of there very quickly if you have to and then pray it never matters. And still, 20 years later, to this day, I am incapable of parking in a parking space without backing into it now.

Tim: So you can get out?

Michael: It’s not really that dangerous at the local mall anymore, but I’m incapable of not backing into a parking space now because Paul so drilled that lesson into us. I really do think it’s a metaphor that applies in our context as well. If you’re learning to be a lifeguard, you have to learn how to approach people who are drowning, or they will drag you down and drown you. If you are scuba diving and you have a buddy who’s drowning because their tank is failing, they will grab the mask off your face because we do completely irrational things when we’re desperate. And you will take someone else down with you.

So there are all these situations where when you’re a helper, and especially when you’re a helper, if you don’t take the opportunities to take care of yourself first, it is so easy to take care of yourself last, and the people you are helping really can drag you down with them. They don’t do it because they’re mean or trying to do anything harmful for you. They’re in their own tough spot. And when we’re desperate, we’ll kind of grab on anything we can and potentially drag it down with us.

You have to be really careful not to put yourself in that position, which to me, gets very into these dynamics of asking what do you do when you want to help clients with financial planning, and they can’t pay you enough to make it actually work for your business and be able to take care of yourself and your team?

Tim: Yeah. The analogy is excellent. And you’re right. Like I mentioned earlier, my dad was a firefighter/paramedic, and it’s the same thing. You’ve got to help yourself first because if you don’t, how are you ever going to help anybody else? Because you may be dead. And it is that analogy.

I think part of it is just understanding that it would be easy for me, again, to rationalize that analogy. Of course, that’s going to be the case because you’re talking about life and death, right?

Michael: We’re not actually at risk of getting shot in the street because you said no to a financial planning client who had a tough budgeting situation.

Tim: Exactly. But the reality is that it’s true. And I think to sit back and just admit to yourself that it’s the truth – we just have to do it. And I just think it’s fascinating, obviously being more on the behavioral side myself, I love behavioral economics and behavioral finance, is that the qualitative is so powerful. It’s so powerful that it will make you sometimes make decisions that aren’t rational. It’s interesting, we experience it ourselves and we tell clients that all the time and we are just as apt to make those types of decisions just like you are.

When Clients Leave – Relying On Other Advisors To Take Care Of Them [00:49:56]

Michael: To me, I think the limiting factor is this sticking point where we think, “I’m the only one who can help this client, I’m the only one who can take this client, so I have to do it myself.” Yeah, again, I get it. There are other people out there who will not do right by the client. We’ve all seen those situations, but if that’s the fear, okay, then don’t throw them out on the streets to find their own way. Find them a new home, find them a new space, find them a new advisor.

It is true pretty much across the spectrum. I don’t care where you are in the advisory business food chain – your A client is someone else’s C client, and your C client is someone else’s A client. So you don’t have to keep them forever as the only person who can help them. Even as a C client, there is someone out there who will put them up on an even higher pedestal because it’s their A client and they’ll probably serve them better.

Tim: Yeah. And probably provide them with the advice that they may be looking for too. Because going through this process, as you are, I love the industry in a geeky way and looking at different business models and understanding now that I kind of understand where we are and what we want to achieve.

But looking at other business models like Vanguard, rolling out their financial CFP type of work, or Betterment, or Personal Capital, there’s a lot of robo-advising, and being able to talk to a CFP for an hour. Like you said, I think we potentially could have an ego of saying, “Oh, I’m the only one that can help.” And I think that you need this service, but our clients may not want that service.

As much as I think they need it, they’d be like, “I don’t really want it. I really want this, and I just want to talk to someone who’s going to give me…” I don’t want to say basic, but rule-of-thumb advice or advice on certain things, which where we’re saying is we want to take an in-depth look and really make customized advice, right?

That customization does cost more, and that’s why Vanguard can roll out a little bit cheaper of a route because they’re probably not going to go as in-depth –that’s not the model they’ve created. And there is a fit for that. There’s a market for that.

Michael: Absolutely. You look at pretty much anything up and down the spectrum in any industry, and there are standardized cookie-cutter solutions at one price point and there are customer bespoke solutions at the other end of the price point. And you make your own decision of some combination of what do you want and what can you afford?

Tim: Yeah. And you’re right. It’s looking to make sure that we put them in a position where they can continue to be successful as well. It’s up to us, too, to provide more of that consumer education. We talk a lot about it in-house, the consumer education within the financial world is just extremely poor, and we do feel like we are trying to be advocates of that, saying that’s why, no matter what, even to this day, and I don’t think we’ll ever change this, that if anyone ever wanted to talk to us, we’re answering the phone and we’ll give them 30 minutes to an hour just to explain, “Hey, this is what you should be looking for. This is what you really need to do.”

That’s worth our time because we are big believers that a lot of the general public aren’t educated well enough about what our industry is all about and what to look for because they just don’t know. It’s doing that, as well as finding others that potentially can help and probably could help them better and giving up that, “Oh, I’m the only one that can do it,” which is again more on a qualitative and self-reflective side, which is difficult. It’s a difficult thing just to get over and move on.

Incorporating Agile Financial Planning Into The Firm’s Planning Process [00:53:38]

Michael: So, talk to us more about this planning process that you’re building and changing into. You’ve kind of framed it around Roger Whitney’s Agile Financial Planning.

Like, legacy clients aside, “I’m a brand new client coming into LBW today. I heard you’ve got some cool financial planning. I want me some financial planning. Let’s do this financial planning thing.” So, what happens, how does this planning process work?

Tim: Every client that walks in our door today goes through our planning process. If there was a certain client that just wanted some of our in-house investment management, maybe we would do that, but that would be a very select individual understanding very select expectations. That’s probably not going to happen as much as it probably did in the past.

Now when we bring on a client that really wants LBW from the planning side, everyone goes through our planning process. The part of our planning processes that comes first, that we do regardless of wealth or where they’re at, is we get them set up on our financial planning software in eMoney. We’ve been very happy with eMoney; we actually switched over from MoneyGuidePro to eMoney about two years ago.

Michael: And why did you make that shift? What pulled you from MoneyGuidePro to eMoney?

Tim: MoneyGuidePro is interesting from a goals-based perspective. Yes, I do think they probably are the leader when it comes to goals-based planning. I know eMoney is trying to get there as well in certain ways with their new fundamental planning, but it just didn’t fit the structure that I wanted.

It didn’t fit how we planned, where I could create different structures. It was really good for post retirees or clients right before retiring – it could be really powerful. It allowed us to do some different types of modeling, but it wasn’t as in-depth that we wanted or as customized from a cash flow perspective.

That’s really more of how we’ve decided to do our practice, really, is through that more cash-flow-based system. So, it just wasn’t working. We’d get these younger clients, and I’d be like, “I’m not even going to use this because it doesn’t really make any sense.” So we then made the shift over to eMoney.

One of the biggest things that eMoney has provided for us is the data aggregation system. Now, every aggregation system’s not perfect. You have Quovo, and you have ByAllAccounts, which got acquired by Morningstar, and all of that. But overall, being able to bring in that data and bring in that information has been extremely helpful because the first thing that we do for clients is we do an expense analysis. It’s not a budgeting tool. We’re not going through and saying this is what we’re going to do.

What we’re doing is we’re saying what is really going on in the household from a cash flow perspective. I have clients link their accounts, and then we will go through and categorize transactions for them because no client actually wants to go and do that and it’s extremely important for us. So, we’ll go through and categorize everything to see what’s going on.

Then we’ll start going through goals, because typically clients will come in and just say, “Hey, I want to retire.” Okay, well, first off, it’s the wrong question to ask. It’s more about, “What do you want retirement to look like?” Because we are big believers that wealth is relative. And it just matters on what’s coming in.

I always tell clients, “Look, we boil it down to a simple equation. What is your income minus your expenses? What do you have leftover? Are you positive, or are you negative? If you’re positive, what can we do with that money? If you’re negative, how do we need to stop the bleeding?”

From there, once we understand those fundamental levels, then we can start talking about goals. “Hey, I want to do a $1.3 million remodel.” “Great. How are you going to access that capital?” Or, “I have all these stock options,” or, “Let’s look at this,” and start going through the actual planning process. So we’ll walk them through an expense analysis, and through the expense analysis, that’s when we start developing realistic and attainable goals.

Because what happened to me is I would start having clients come to us and say, “Hey, I want to do this big remodel,” or, “I want to do this,” and they would tell me…like, “Okay, well, how much are you spending and what is your income?” And, “Oh, it sounds like we have $2,000 or $3,000 or $5,000 of free cash flow. Great. We can hit this goal and this amount of time, this is what you do.” Then they’d come back and be like, “Oh, I can’t do that.” I’m like, “Well, what do you mean you can’t do it?” Like, you told me that this is what your expenses were, this is your pay stub, and this doesn’t make sense. And that’s why I now don’t just trust but verify.

Michael: Oh, because they said they were saving, whatever, $4,000 a month, and then you formulate a plan. Then they actually sat down for a moment and looked at their own accounts. Like, “We’ve been saying, we’re saving $4,000 a month, but over the last 6 months, our account only went up by $2,000 total.”

Tim: Yes.

Michael: When it should have been up $20,000+.

Tim: Yeah. And building a plan off of that, is like building on a house of cards. If your first thing is wrong, everything else is going to be wrong. So we go through that exercise to start developing realistic goals. I will say that regardless of income structure, it’s important.

The best example I can give is of a client that recently came on. We went through the same exercise. Their income level was extremely high, and they wanted to do a few different things. They came to me and said, “Hey, look, I want to do some private equity investments.” I said, “Okay, well, let’s look at that.”

Because I knew exactly what they were trying to achieve, the reality of what they were trying to do with a big remodel and other things, I was able to go back to him and say, “Look, yes, you do potentially have the ability to invest X amount into this. However, here’s where your private equity stands and we really are trying to get cash flow for this, this, and this. You don’t have the cash flow to support it. I think you’re already overweighted in this certain area. You can’t do it.” And he’s like, “Oh yeah, that makes sense.” Because what people miss is that even though they have all this income coming in, they forget that they also are supporting expenses that are just as high because lifestyle inflation is as real as it can be. And that is part of our process.

So, what we’ve done is we’ve taken that, and then we start positioning our clients for when things are expected to happen. We recognize that our clients are going to say, “Oh, I want to retire in 30 years.” But then they have kids and then those kids go to college, or they don’t go to college, and then this happens or there’s a death in the family and there’s so much that can happen within someone’s life.

I just started saying, “I’m done trying to predict 30 years out. All I know is I can be consistent in the next 12, 24 to 36 months.” That’s where I really want to plan and then take into consideration long-term goals to make sure that we’re getting towards them but positioning them to be able to shift if their values and things change, which I feel is very powerful for our clients.

How Tim Helps Accommodate Clients’ Shorter-Term Financial Planning Objectives Through Data Gathering and Expense Analysis [1:00:18]

Michael: So, talk to me a little bit more about how some of this gets, I guess, reflected or done in the planning software or the planning process. I get they come on board and we link their accounts, we do the expense analysis, we’ll help them with the expense categorization to get a handle on where the money is going. But when you start talking about things like we’re going to have a big focus on just goals and milestones over the next 12, 24, 36 months and not the 30-year projection.

I feel like all the planning software tools, at the end of the day, are, first and foremost, glorified retirement calculators, and then everything else builds off of the 30 years to retirement and 30-plus years in retirement. How are you doing 12, 24, 36-month planning? Does this just peel out of eMoney and into spreadsheets, or written plans and things you do separately? Are you actually doing some of this in eMoney? What does this look like?

Tim: It depends on the client if we’re going to be using eMoney or if we’re going to be diving into our spreadsheets – we definitely have spreadsheets. Even with our expense analysis, eMoney’s great to have the transactions and see the data, but we usually dump that data out and put it into our own spreadsheet because then we can slice and dice it because there’ll be things that come through that are like, well, why did this $10,000 check come in? Or there was this massive expense that was a check. We don’t know what this is. And then to be able to show, because we really want to create normalized income and normalized expenses…

Michael: Normalized, meaning what? Like, looking all of it as a percentage of the total? You’re not saying you’re spending, you know, $17,000 on eating out in restaurants. You’re spending 4% or 8% or 12% of your budget on dining out in restaurants.

Tim: It would be more of, for example, let’s say someone had a big tax refund in 2019, right? We’re going to exclude that. We’re going to say, “Look, we’re not going to count your tax refund.” Or if there was a gift from grandma and it was $20 grand. Well, that’s not going to happen consistently, but it’s going to throw your numbers off if we include it. What we’re trying to find out is what’s really happening month to month. And if you do get grandma’s $20,000 check, we’re not planning for it. That would truly be a bonus. Then we can start allocating that somewhere else.

Michael: So, you’re sort of normalizing out the one-off and one-time events to get down to what’s really making up recurring household cash flows.

Tim: So, we do that. We’ll bring the client in, we’ll do that. We then create these goals and a plan. From there, we’ll review it every six months because things change. If it’s a quick, “Hey look, you’re tracking on the right route,” or, “Look, your expenses moved up, your expenses moved down,” and then get them on a 6-month schedule to see how they’re projecting towards some of these goals in the next 12, 24 and 36 months.

Once we position them to a point, then we start saying, “Okay, look, we actually have an emergency fund now. Great. We actually have saved up for these short-term expenses. Great. Now, let’s start maxing out the 401(k). Now, let’s start looking at this private equity. Now, let’s start looking at this really big house remodel in the next couple of years. Now, let’s start looking at college planning.”

Because we get a lot of people that will come in and say, “Oh, I’m just going to dump all my money into the 401(k).” But then they’re running a deficit on cash flow. And that’s like, well, if you just run yourself into debt, that money that you saved is going to have to then pay the debt off when you’re in retirement. So, this doesn’t make any sense either. So, it’s adjusting them and positioning them to get in a different mindset. And then reviewing that every six months allows us to track it on a consistent basis in more of that Agile manner.

Because maybe clients want to have a baby, but then their situation changes and then we can actually say, “Hey, this is where you were in the last 6 to 12 months. This new baby’s coming. That means your expenses are going to increase anywhere from $1,200 to $1,500. We had this free cash flow, and now we’re only going to have $300. That means we have to shift these goals,” and we really calibrate them to a pretty high degree.

There are other things that come in with that. I just recently went through the CPWA in 2018, and I tell a lot of the clients, “Hey, this is technically for high net worth, but where it’s misrepresented is that a lot of new firms, tech firms especially, are giving executive compensation packages to these younger individuals.” So, then it’s looking at those as well and saying, “Look, you have non-qualified stock options. How should we look at that? What are we going to consider?” Or we have someone at a health tech firm with a lot of incentives in stock options. What does that look like? Now you have RSUs, how should we look at that?

So then it’s tying everything else together, but making sure that we’ve positioned them with everything else because none of that matters unless we have an emergency fund and we’re positioned well. Then those decisions become a lot easier over time. But it’s definitely usually a pretty big change for most clients that go through it. That includes looking at homeowners and life insurance. We go through that whole process and we step them through making sure they’re facilitating all of that as well.

Michael: So, it sounds to me like a very just cash flow-intensive planning process and not cash flow-intensive as we’ve historically, I think, talked about cash flow-based financial planning in the industry, which is sort of like the old-school NaviPlan. We’re going to have a line for every single cash flow that’s going to occur over the next 67 years of accumulation and decumulation. We’re going to project out like the detailed tax projections of every single one of those years and every single cash inflow and outflow and every single year.

It’s not the long-term and future detailed cash flow projections. It’s literally cash flow today. Like, literally today. Where the actual cash is flowing in and out of your household with a big focus on things like, are we capturing it? Can we categorize it? Can we reflect it back to the client? Can we make sure we normalize it to pull out the one-time stuff, so we really understand what’s happening with the cash flow in and out of their household? And then all the conversations that then come from, do you have a surplus? What are you doing with the surplus? Do you have a deficit? How are you fixing the deficit? And continuously attuning that as people’s expenses and income shift over time.

Tim: Yeah. Even though it’s a lot of upfront work, it’s allowed us answer clients who call us and ask us questions, because what will come up is that clients will say, “Hey, what if I want to buy this new house or do this new remodel,” or, “What happens if I do want to retire at 55 instead of not 55?”

We can turn those questions around a lot quicker because we understand what’s really going on. If you really want to make some of those calls or at least give advice on it, you have to know those numbers. I’ve found that most clients, when we show them, intuitively, they understand where they’re at. But if you ask them beforehand, because we always will do this as like a small experiment, like, “What do you think you’re spending?” And they’ll say, “Oh, this.” And then we’ll come back and most of the time, I’d say at least 90% of the time, people are at least $1,000 to $2,000 off, at least. And that’s a big difference over 30 years.

Michael: That’s a big difference over one year. It adds up quickly over 30.

Tim: Yeah. Because if you’re looking at what people are paying today, you have credit cards, debit cards, no one’s really using cash, and you just don’t realize how it adds up and it’s that ancillary expense. It’s not the mortgage, the bills. Everyone knows what they’re paying on that. It’s all these other things that then add up that they’re like, “Oh.” And then we show them; they’re like, “Yeah, that feels right. Yeah, that makes sense.” And it’s like, okay, well, now that we’re breaking even, this whole idea of you trying to do the X, Y, and Z, it just doesn’t make sense. We need to fix this problem first before we can even fix the next problem.

And it goes even towards retirees. No matter what, retirees, we’re doing the expense analysis because if I’m going to do any projection for them over the next 20 years in retirement, I better know that that expense number is accurate. Because, again, if I’m off $1,000 to $2,000, that changes the advice. It changes the whole game. Your withdrawal rate, all of that. And that means I can give a more accurate representation where I feel like the industry has gone and just let you tell me what, and then I’ll just give you the numbers and give you suggestions. I just have a really, really hard time with that.

Michael: So, one of the things I know you have raised as the concern about shifting into the more planning-centric process is the sustainability and scalability of the planning process. As you noted earlier about when you started, you were mostly kind of planning but investment-centric. You did some planning stuff, but not as much. This is all new. This is more time-intensive. This is more labor-intensive. So, the good news is that you’re charging a planning fee. Bad news, though, it still takes a lot of time.

Do you even have a sense of how much time does it take you to go through doing all this stuff now? Did you try to figure out the time and set the fee? Did you set the fee and try to figure out the time or just kind of have like, here’s what we want to do and here’s what we think we can charge and let’s see if we can make these work in harmony together?

Tim: That question opens up a can of worms on a lot of different levels. Once we started figuring out the planning and understood that we were shifting to a planning fee, we started to realize very quickly that our business model, and again, our economic engine was going to shift. So I’ve always said this, but we never really put it into practice, as an advisory firm, I’m a big believer that when you’re in business, you’re in the business for something and people sometimes misrepresent what they’re in the business of.

Because we’re in the business of time management, right? At the end of the day, if we are more efficient with our time, we become more profitable because that’s really what it comes down to because we’re an hours-based company. But the problem was is that we were never tracking our hours because we didn’t have to.

Finally starting in November, and we should’ve been doing this a long time ago, I started having everyone track their hours and really specifically on the financial planning process because you’re exactly right, I didn’t know how long each part of the process was really taking. Which meant I couldn’t model out and project how many clients we could have depending on the number of hours we have as a firm. So I started looking at the firm as a bucket of hours.

So if you did 2/20/80, which is roughly 40 hours a week for a full-time employee, that’s the amount of hours one employee technically can have. Let’s say you upped that to 50 hours a week or whatever you think maybe a salaried employee would take, and then you start figuring out, well, you start realizing that the scarcity is time, which means that if my one client’s going to take me, for example, 30 hours a year, well then I can only have so many clients until I need to hire someone else to hire more hours then to scale up and get more clients.

When we started tracking it down to how many hours we were spending, it was very interesting. I think again, intuitively, when I talked to my clients, we kind of understood because before we actually tracked it, we white-boarded it out saying, this is roughly how much time we think it’s taking.

We did figure that breaking it down; for example, data gathering takes about an hour. So, we do pretty much a meeting with someone where we actually sit down and get all the information because it’s extremely important for us to get the information, the correct information. We don’t put it onto the client and say, “Hey, you get us information,” because we’ve tried that and it was a terrible experience. Now we actually sit down and help clients gather the info and set them up on our software. So, that takes an hour. Sometimes there’s one or two of us in it because it’s easier with two people in the meeting gathering data to have a conversation, so it could take up to two hours of the firm.

Then we’re looking at the next process of actually doing the expense analysis. That takes anywhere from two to four to sometimes six hours because depending on the amount of transactions, it can be very labor-intensive…

Michael: So, what’s taking all of that time?

Tim: Categorizing transactions is a big deal. That probably takes us anywhere from two to four hours. After that, it’s about an hour, maybe an hour-and-a-half to two, to go through and analyze it. Because sometimes, people move money from one account to the other and it’s a little bit more confusing if we have to reach back out to the client and ask a few questions. That usually takes some time.

Then we usually set up the eMoney portal. So we’re doing a little bit more analysis or if we know that we need a little bit more analysis before that meeting because they really want to talk about a specific goal or a specific item.

When we present, we’ve gotten our meetings down to about an hour-and-a-half. Typically, there are two people in those meetings. So again, you’re looking at a total of three hours to present. And then for notes and follow up that usually comes out of that meeting, you’re looking at an additional two hours as well. So, that would be the process. And that’s just the planning process, and we want to try to replicate that every six months.

Michael: You would do that whole thing every six months? Like, fresh expense analysis, fresh expense categorization?

Tim: Yes. The data gathering won’t be part of that process, but it is another fresh expense analysis. The analysis would just be depending on where we are with their goals and just where the client is in that situation. And then usually, from a client service perspective, we’re at least touching that client once a quarter.

Essentially we’re touching the client four times a year, two big meetings, and then two, “Hey, how’re things going? Is there anything that we can help you with? Is there anything that’s changed in recent weeks?” And from there also, if the clients do come up with any questions just between those two timeframes, we’ll try to handle that as well. So, we figured that roughly speaking, a full service when it comes to client service planning on that side of things, we’re probably about 25 to 30 hours per client per year.

Michael: Kind of looking like data gathering meetings are two hours because it’s two people times one. Your expense analysis work can be up to six hours, and you’re at eight. Your presentation is 3 hours jointly, so you’re at 11. Follow-ups, another 2 hours, you’re at 13, do it twice a year, you’re at 26. So yeah, like right in that 25 to 30 hours a year range.

Tim: Yes. And then from there what we are looking at is saying, okay, how do we price it? That was the next question is, do we look at hours and then price? The difficult part is when it comes to pricing. I love this podcast because I get to hear what other people are doing and it has been extremely beneficial to understand. I think in our industry what’s missed is we provide the service but we don’t know what it’s like relative to everyone else. I don’t know if it’s a lot, if it’s a little, if it’s good, if it’s bad, you really kind of go on what you think is best and wonder if it’s comparable?

So, when people say, “I’m charging a minimum fee of $20,000 a year,” it’s like, okay, well, what are you actually doing? Like, what does that really, truly mean? And the other issue that we were having with compliance is that we would say, “Hey, we want to charge X amount of dollars.” And they’d be like, “The regulators aren’t going to do that. They’re going to come at you, and they’re going to say, ‘You’re gouging clients because they only have $100,000 of assets under management, and you’re charging them $10,000 for a planning fee.’ And they’re going to say that’s 2% or 3% of X, Y, and Z.”

So we sit back, and we look at it as like, okay, but we know other firms that may gather someone at $5 million at 1% or $5 million at 0.75%, and they’re generating more than the fee we’re getting. And they may be getting nothing other than a passive index portfolio.

The Need To Adjust Fees To Scale The Business For Growth [01:16:45]

Tim: Yeah. And they won’t even get checked because it’s 0.75%, which is an okay fee based on the assets they’re managing. So the way that fee structures have been presented from a regulation standpoint, it’s like, well, how are we supposed to get paid? We’re doing work. But I have to make sure that I show all of my work. But this other firm, just because they are gathering a large amount of assets, they don’t?

I think that’s the hard part is saying from a regulation standpoint, what a regulator’s going to shun away or say, “No, you can’t do that.” And then also to know what’s marketable and what we need to do to make sure that we can continue to grow.

We felt that the $3,000-plus, depending on if there’s any AUM that comes with it at the lower fee, is sustainable now. But like I mentioned earlier, we do believe that we’re going to have to increase our costs pretty quickly over time to be able to scale it appropriately and making sure that we’re finding the right clientele.

We definitely think that it’s still a good deal for the client. They think they’re a little underpriced, but it’s a new step, so it’s kind of an experimental test run. We’ve gotten a good response so far. We are actually bringing new clients on the new contract since we just launched it, which is fantastic, but it’s definitely going to have to change.

Now that we understand how long it really takes and how much an employee is going to cost and all that, we can really start modeling out where we’re at.

Michael: Actually, it’s interesting to me when I just think of this of like, can we build it up and scale it from here? As you said, some traditional employee has about 2,000 working hours in a year, 40 hours a week times 50 weeks a year with 2 weeks for vacation. Now, not every hour of every day is productive or client-facing, nor can it be.

So, you figure, maybe if they’re really productive, like 75% of their time is productive to clients. Particularly if you’re managing not someone in a business development and management role, just like we’re going to give you a whole bunch of clients with all this planning work, you’ve got to do it for a whole bunch of them. So, maybe 75% of their time is productive.

Tim: Yeah, we actually broke that down as well per individual who’s touching the client when it comes to the planning process. And we do have an employee, Darren, one of our team members who really assists me. He’s a financial planning analyst. We figured that about five to six hours a day is where he’s really spending a majority of that time.

Even for me, for example, where I’m really leading the efforts, I have about four hours of my day that have been dedicated towards a lot of the work, which goes back to reviewing Darren’s work, doing the analysis, some analysis, and then presenting a lot. So because I do a lot of operations and marketing and we have to run the business as well, I look at it from that standpoint. We’ve also considered that if we hire, I now know what hours I have and where I should be allocating those hours.

Michael: And just what it can add up to really. Like, if 1,500 of the 2,000 hours are productive and it takes 30 hours per client, then the person can do 50 clients, and if it’s $3,000 of revenue per client on the planning fees, it’s $150,000, maybe it goes up to $200,000 of gross revenue if they’ve got some assets that they’ve got and they’re adding over time. So your revenue per client will lift over time.

On the one end, that’s not “broken,” sort of putting it in air quotes. There are planners out there I think who would very happily take less than $150,000 to $200,000 if all they had to do was just sit there and be an awesome financial planner for 50 clients that the firm’s going to give them to do this planning process.

It’s even worth noting that traditional advisory firm margins as you grow and gain scale are usually in the 20% to 30% range. So a normal advisory firm should only make $20,000 or $30,000 off of this, of net profit. It should cost you $120,000 to service $150,000 of revenue. Not just in terms of the advisor, but advisor overhead, staff, rent, all of it. You’ve got to put all of it in that pocket to be fair. But that actually still does seem economically feasible, at least if you can get the clients in, in the first place.

And then you get to all the ways that you can manage the cost. So, as you said, we can split the labor, right? Is there a subset of these tasks I can give to a lower-cost employee instead so that the total cost to support it comes down? Do I need to raise the fees? Do I need to charge more to make this economically aligned? Or just can I reduce the hours?

It strikes me that there’s not much you can do to really change the time it takes to do a data gathering meeting because you can only ask the client the questions so quickly and have them answer. Your presentation’s the presentation. What strikes me about this is just that almost 50% of your process for the year is basically expense categorization, expense analysis, expense categorization.

Tim: And I have battled with that because to your point where it takes so much time, but then on the flip side, where we’re trying to get (and have gotten) more efficient, is looking at other potential aggregators. You have the problem pretty much across the board – these aggregators sound fun and cool and awesome, but at the end of the day, they’re not a perfect system. You have to manage them and do some things. eMoney has some cool tools where you can set rules and different things where it makes it easier going forward and cuts some of that time out. But in general, we’ve looked at it too. Maybe it’s too much to do the expense analysis.

But the productivity and the value we’ve seen for the client and for us has just been fundamental. It’s been a big, big help and a big shift. So, we’re trying to figure it out.

That’s really what we’re moving forward to; talking about what got you here isn’t going to get you there, is tracking our time, understanding really how long this takes, understanding our levers like you’re saying – do we decrease service or do we increase fees?

That fog beforehand is starting to lift and we’re starting to see this clarity of knowing that this is what we need to do in order to move forward. Part of that is also, like you said, how we can improve our processes or what can we do to make this better or more economical. I don’t think until really recently in the last few months we had the data or the knowing of saying this is what…

Michael: You’ve got to track it and measure it so you can even figure out where you have a problem or even just whether you have a problem. Again, I’ve seen a lot of firms that are like, “Geez, all this planning work is really labor-intensive, and I don’t know if we can do it profitably.”

Then we kind of go through an exercise like this, and it’s like, well, your advisor makes whatever, $80,000 or $100,000, they can service enough clients to generate $300,000 for revenue. You realize like if you’re paying them $100,000 to service $300,000, you’re actually doing really well as a business, that’s going just fine.

I get it, you got rent and staff and overhead and other things, so you only make a portion of the dollars that’s left, but this is actually profitable for you, for what you’re doing now. It may not feel as profitable as your core business. Or what I find is that for a lot of firms, it’s not as profitable as when you’re filling up your own client base.

There’s this phenomenon when you start from scratch, your first hundred clients, if they bring in $300,000 of revenue, you get all $300,000. It’s from your clients; it’s paid to you. You get those dollars directly, minus maybe just a little bit of overhead cost, but there’s usually not a ton when you’re getting going, you don’t have all those capacity limitations yet.

When you get the second hundred clients, you add like another $300,000 of revenue. But now, I need to hire another planner. I need to hire support staff for them. I need to expand my office. I have more rent. I’ve got to pay more software licensing fees. I add all these different costs in, maybe I do okay on the profit margin, and I make like a 20% profit margin. So, my first $300,000 of revenue, I made most of the $300,000. My second $300,000 of revenue, I maybe make $60,000.

Tim: We actually experienced that exact thing. When we first started the business, our profit margin, again, not including our distributions, so if you concluded that maybe it’s not looking as clear, but if you were to exclude our distributions or the owner’s compensation, we were probably in that 50% range or even in the 60% range…

Michael: And for some solo advisors that start on their own, I’ve seen firms that are in the 70% or 80% range once you get over those initial overhead costs. Like, when you have no clients and you pay for eMoney, you’re at negative $3,000. But once you get your first set of clients, you get a little bit going, you get these really huge positive margins at least before owner’s compensation, and then you start adding more clients.

Tim: Yes. Then you start adding more clients, and that’s where I think too, which has been slightly nice, is we’ve built out the structure. So, where we are with office space, we have the ability to expand. We did bring on, obviously, our team member Darren as well as we have our office assistant and director of marketing, which is Ying, and she’s been fantastic.

We’ve built in a lot of these costs, and now we feel like we can actually kind of move forward. Because before our office space was cheap, and with cheap comes different struggles. We’ve increased our technology because when we first started the business, we took a step back and said, where do we really want to allocate capital? Where do we think the true return on investment should be? Technology and infrastructure were the two things that we felt we wanted to put money. I think infrastructure also included human capital. We recognize that our business will survive with the people that we bring on.

Now we’re at a position today where we feel like we can add a little bit more people based off of, again, the hours and tracking that we can then grow that up and then scale it up to then bring on someone else to then help for that next growth phase. But we definitely weren’t there.

Our margins have gone down to more of that 30% to 40% range. We recognize they may go down even further as we scale the business up. Obviously, we don’t want to go down too much, but overall, it’s kind of getting there. We’ve definitely seen that transition. Nathaniel, who really helps us with our books and looks at the analysis, keeps telling us, “It’s okay, guys, our profitability is going down, but we were running so lean that this was inevitable.” So, definitely, yeah, we’ve experienced that for sure.

The Challenge In Categorizing Expenses For Accurate Client Spending Analyses [01:28:22]

Michael: So, in turn, help me understand, though, just this expense categorization. Like, what at the end of the day is so time-consuming that the software tools are apparently still sucking at that it takes more time? I think I can make the whole remainder of the plan in less time than it’s taking you to do the expense categorization.

I’m not trying to beat you up about that. I understand the power of conversation, but what is the software gap here? Is it basically, literally, the categorization or is it something else about how you like to present, show, and illustrate budgets and household cash flow that the software doesn’t do, so you’ve got to pull all the data out and put it in your own spreadsheets to show what you want to show? Is this a presentation problem, or is this just an actual expense categorization data problem?

Tim: It’s a literal data categorization problem. If you’ve used Mint or any other type of software that aggregates data, I assume the gap is from the technology across credit cards, debit cards, and banks don’t have unified data. So when the system tries to go through and categorize itself, it can only do so much. Now with machine learning and artificial intelligence and all that and big data getting worked on, I’m surprised that there hasn’t been something that’s fixed the problem, but…

Michael: eMoney, I think, has more than 50,000 advisors now. So, if the average advisor has 20 clients that do anything to track their cash flow and categorize it, there are a million people who have categorized these expenses in eMoney, after the first thousand of them categorize an expense a certain way, can we just make that the default and then it should be like default categorized properly for pretty much everyone else.

I get it, sometimes certain people have their own categories, and there are always wild cards with 47 line items from Amazon where you’re trying to figure out, was this the toilet paper, computer parts, books, or whatever else it is that you order an Amazon? I’ve always wondered, why can’t we just flat out crowdsource this amongst the zillion people that already use eMoney and do this?

Tim: Yeah. And Darren and I have talked about that quite a bit. It’s just amazing that there isn’t technology that can do that. Like you said, the data points that are there, I don’t…

Michael: I wrote an article about this literally 7 years ago in 2013. It was like, “When will there finally be a good PFM, personal financial management solution like Mint for advisors that categorizes expenses properly?”

Tim: Properly, yeah. The only thing is I’ve noticed is the data is just not unified. Amazon comes across in a million different ways, and it’s difficult if people want to do subcategories. There’s got to be a way where you can have high-level categories that are the same every time and then you can then select if you want to do subcategories. The thing with eMoney and how we may use it differently (and again, I don’t know how people are using it) is to say, “Hey client, can you please go through your transactions and make sure they’re clean? Because the data doesn’t mean anything unless it’s cleaned up.”

They don’t do it because it takes a long time to sit and go through. Then we can’t do what we need to do. So to speed the process up, we’ve just taken on the role and said, “Okay, we’ll just do it for you because then we know it will get done, and we can provide the information we need to provide. But it is a struggle.

Michael: But it does make me wonder again, okay, either A, can eMoney pull expenses from how other people are categorizing? Or I swear, I’ve seen this even…I’m a Mint user myself and have for tracking household expenses for years, and I’m still amazed sometimes that Mint can’t figure out how to categorize something. I’m like, if you literally just Google the name of the business, it’s the first hit on Google and it says what it is.

So can we teach Mint to use Google to find out that this was a hair salon and it’s where we get our hair cut, and you can just put it in that category and move on? Between that and crowdsourcing and what other advisors do, I get the data is messy, but after the first 50 million data points, I would think a data company could figure out how to categorize this a little more effectively. I don’t know.

I’m not trying to be blithe to what I’m sure are some employees at eMoney that work very hard on this. But as you said…

Tim: I agree.

Michael: …when the expense categorization takes more time than the entire remainder of the plan in the aggregate, someone at eMoney and Yodlee and the rest are missing the ball on the advisor business efficiency opportunity.

Tim: And I would say this, I am kind of a geek when it comes to the software side of things within our industry just because I really enjoy it. It’s just amazing how so far behind we are when it comes to planning software and some of this stuff. And the big issue, and I was talking with another individual that’s creating a new planning software, is these are developed for the enterprise firms. You have Pershing that buys MoneyGuidePro, and they’re just using it for insurance sales. They’re just completely removing it. Or eMoney’s built for these big organizations.

What I don’t understand is how no one’s taken a step back and asked, “What is financial planning?” Financial planning is project planning. But eMoney is not project planning software. It’s a glorified retirement projection calculator. If you really want to do planning, there’s so much more to it, whether it’s module-based or not. It’s so far removed from the reality of wanting to do, in my opinion, actual planning.

Michael: I’ve thought for a while that…as much as we talk about FinTech competitions and the risks of disruption and new categories of software, I have thought for a while now that financial planning software itself is the category that is most prone to be completely disrupted.

MoneyGuidePro just revolutionized the space 20 years ago when everything was like 60 years of detailed cash flow projections and MoneyGuidePro came in and said, “How about we just focus on the cash flows and the goals that matter for the client plan and not go into all the other minutia and detail?” It took a ton of the market.

And eMoney has had an amazing run over the past 10 years saying, “No, no, no, the future is about these portals, data, account aggregation, tracking not just the assets but the liabilities, and the cash flow as well.” They’ve done some work around that, but they’re still mostly glorified retirement projection calculators.

I’m waiting for the software in the 2020s that’s actually built to facilitate ongoing planning and not just to make a plan because I get paid to implement the plan at the end. I’m not trying to knock plan and plan implementation, but planning clients to me are 30-year relationships, and it seems like the planning software is basically built to be awesome in the first 3 months and useless in the last 29-and-a-half years.

Tim: And I think that they were built to be sales tactics. Honestly, in my opinion, it’s like, “Oh, look, I’m going to put this in front of you.”

Michael: If you go back to the early days of planning software, everybody was paid on commission to implement the plan at the end. That was the business model when planning software was originated.

Tim: Yeah. No, planning software was created to cross-sell. “Let me just see what you have, and then I’m going to cross-sell you on other products.”

Michael: It so much easier than just having one product to try to sell to everyone.

Tim: Yeah. And so, that’s where I would love to sit down and say, “Hey, this is what I think it can be.” And I would, if I had the time or capacity, I’d actually create software that makes sense in how I see planning. Maybe I’m the only one out there that has this one idea.

My brother, for example, is a general contractor, and we talk a lot about our businesses and just how they’re similar and we are the exact same business. He’s just building a house, right? He has subs, he’s working with different things, but he talks about it from a project planning or a project management standpoint. And not once have I heard people say, “Oh, I’m project planning for my client,” because that’s what we’re doing. I’m building a house. But it’s a financial plan and there are just as many intricacies as making sure the floors are right.

But planning software doesn’t even have the ability to track project planning… and that’s why I loved it when Roger Whitney came up with, “Hey, this is Agile.” Like, yes, this is because it’s exactly what it is.

Michael: The distinction is once Agile Planning came along, software platforms like Jira appear to facilitate an agile planning process, or an agile software planning process. So yeah, it’s an interesting question. Like if Roger’s agile financial planning comes on this sort of continuous improvement, continuous incremental progression planning approach takes hold, it opens the door for the next generation of planning software that will actually facilitate it.

Tim: Yeah. And then would be interesting too, because even talking about it from the standpoint of designations, the CFP, which I held my CFP as well, I went through the curriculum, it’s all great. But what’s interesting about the CFP is if you really start breaking down how they want you to put together their plan, what do they talk about? Cash flow analysis. They talk about debt analysis. If you try to compare that and throw that into a planning software, good luck. Good luck. So, you’re seeing the curriculum and the software aren’t even matching, they’re not even together.

And then you expect me to do a 40-page report where it’s all spreadsheets, there’s no way, and it’s static. And that’s a problem too is with software, we can become dynamic because people’s lives are dynamic, they’re not static, and it will change.

I don’t want to have to go back and redo every single thing once a client comes to me and says, “You know what? We were going to do that remodel, but it’s too much.” Or, “Yeah, we’re pulling the trigger. We decided not to, but now we are.” Those are fundamental changes that I have to change because the plan is now changed and it’s a struggle that I’m passionate about.

Michael: So, everybody who’s listening, contact eMoney and tell them to listen to this because we clearly need it. And Tim, I know you are not the only one with this pain point at all.

Tim: Yeah, which is nice to hear. Because again, that’s why I like listening to your podcast because then I can listen and I’m like, “Oh, thank you, someone has this problem too, the same struggles.” It’s very nice.

What Surprised Tim The Most About Building His Own Business [01:39:49]

Michael: So, as you look at this journey and what you build and what you’re trying to transition towards, what surprised you the most about building your own advisory business?

Tim: What surprised me the most? I grew up in a small business family, and my dad was a tile setter. My brother is a general contractor; he took over my dad’s business. My uncles are in the finished supply business. So I grew up in this entrepreneurial, small business world. I always had the dream of owning my own business. I think out of my three partners and me, I’m probably the only one that really probably wanted to do it. We felt we started the business out of necessity that we had a different idea. We wanted to approach the industry just differently than what we had seen. And starting the business, I think the biggest surprise to me is, honestly, how humbling it is.

You come in with these ideas and what you feel is right or wrong; if you’re not willing to really look at yourself in the mirror and look at your business… this is part of the conversation that we’ve had today; I’m just surprised by how much it made me grow up in a very, very fast manner. It allowed me to see the world through a very different lens. I think as well as owning the business and being able to really connect with clients, I would say this is more of a surprise within the industry itself – that the amount of people we get to meet and see from different walks of life has been the most rewarding part of the job.

I love the example of a client of ours, who is originally from India. We go to her house, and she makes us traditional Indian tea and tells us about the culture. I get that kind of experience just from doing my job. When I step back, I can just say, “Wow.” That has been extremely rewarding and surprising. I never really looked at it like that.

Part of starting the business and trying to appreciate life in different ways has allowed me to self-reflect and say, wow, this is actually really neat, and I shouldn’t take it for granted. It’s been very rewarding just to get to know people in that kind of way. We have to get to know them on a deep level to really do appropriate planning for them. So, that’s been good.

On the business side, people always come to us and say, “Oh, I want to start my business.” Sometimes my answer is, “Good luck. It’s going to be fun. Just wait. I like your enthusiasm, but make sure you have the ability to go through the ups and the downs.” I was told an analogy that you feel like you’re a dog in a pond and the water’s rippling just enough and you can see the other side of the shoreline and just trying to tread water to get over there. That’s kind of the feeling.

So, I think that the surprise was just the sheer difficulty, and then understanding why people are where they are. It’s opened my eyes, I think, overall to the industry and how it really functions because owning the business has forced us to look at every aspect: regulation, compliance, tech software, processes. That’s been really surprising, the learning curve for everything, which has been rewarding for me. I like that stuff; it’s been pretty fascinating.

But overall, it’s been a great journey, and I don’t know that I would change it. I don’t know that I’d go back and want to do it all over again, to say the least. But I think that’s what a lot of people would say who are entrepreneurs or business owners.

The Difficulty Tim Had Identifying Misaligned Goals And Responding With A Shift In Business Model [01:43:38]

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

Tim: The low point? I think everyone here at the firm works really, really hard and I think we…as a firm, we talked about this in our semi-annual meeting we had in January and we kind of were just reflecting on the year. And I think that as we’ve approached this inflection point, I think we got burnt out, and burnt out not that our service a dipped or anything like that, but I think just personally that everyone was just like, “Whoa, this is becoming a lot.”

In order to really take a step back and say, “How do we fix this? Where are we really going? Who do we really want to be?” I don’t want to say it was a low point necessarily, but it was definitely a really quick, “Hey, let’s look in the mirror.” And obviously, that’s why I reached out to you to say, “Hey, what are we looking at?” Because we wanted to figure out how to really truly make this work. But we know we can’t do it on our own. We only have so much information.

Michael: So, what precipitated that in the first place? Like, what got you to the point of saying, “Geez, guys, I think we’re going to have to do this differently, I think we got to change something?”

Tim: I would say, going back to your analogy, is that what we were doing before wasn’t going to work going forward. I think it became very evident in a very quick manner that how we were approaching the firm; our goals were misaligned because it was what we were doing in the past. We had to realize that we needed to shed the past to then kind of move forward to the future. And that’s why I would say it was kind of that low point because that’s not an easy bullet to bite.

Michael: To be fair, not to keep beating you up, but you haven’t entirely bitten the bullet of shedding the past, because you grandfathered all of the clients.

Tim: You are correct. But it feels a lot better than where we were.

Michael: And it doesn’t matter just like, there’s a plan. I think this is part of why financial planning is so powerful for clients as well. Even if you’re in the spot that is not ideally where you want to be, and you’re trying to work towards something together, having a plan about where you’re going and how you’re going to get there is really powerful.

Tim: Yes, yes. I think that was the inflection point, though. Just like you said, that what we were doing in the past just wasn’t going to work. It’s hard, and you’re right, we haven’t quite bitten the bullet. But like you said, we have a plan going forward and that fog is starting to lift. We’re really coming into our own; we now recognize what we really are good at.

Being a planner myself, it’s now that we have the idea that overall lens, we can work back and say, “This is how we can now get to where we need to be.” We didn’t have that in the past and that’s provided a lot of comfort personally. I think I probably speak on all of our behalves that as a firm, it has changed the tone of the firm internally. Now we know where we’re going. This is great; let’s start actually having true objectives.

Michael: So, I know part of the challenging reality of building an advisory firm is that we all have to learn these lessons for ourselves at some point where we just don’t internalize them the same way until we live through them. Life has a funny way of teaching you lessons that way. But I am wondering, what do you know now that you wish you could go tell you from five years ago when you were getting started?

Tim: I think about that quite a bit. I think about it from the standpoint of, could we have done things differently to be in a different position? It’s hard to say that I would change the past because the past has obviously gotten us to where we are today. I know that’s a cop-out. But the only thing that I would say that I would learn is trying to figure out who we are in a little bit more of a quicker manner. I just don’t know that we would have done it without the way we went about it.

I guess if someone were to come to me and say, “Hey, I want to start my own RIA, and this is what I’m looking to do,” I would definitely walk them through the different models, have them understand the industry, not what they’re trying to do, but the industry and then where do they fit within that industry.

And I wish I would’ve known that when we first started is where can we really fit, and what’s the reality of where we could fit from experience to marketing, to branding, to understanding if I’m competing with Vanguard or if I’m competing with this local RIA? Because our industry just doesn’t have that kind of information necessarily out there.

What model structures or what you’re trying to achieve, that would’ve been really nice to know earlier on. I think we may have gotten to where we are today, maybe a little bit quicker. But that would probably be…if I were to tell someone, if someone were to come to me, that’s probably what I would really sit down and have them work through that exercise.

How Tim Defines Success – Personally And For His Firm [01:49:00]

Michael: So, as we wrap up, this is a podcast about success. And one of the themes that always comes up is just that the word success means different things to different people; it changes for us as our businesses change. So, you’ve already had the success of building from scratch to $50 million, which is an incredible achievement unto itself. But now looking at the next stage for the business, retooling the business, the model, the services, and what you’re doing… I’m wondering how do you define success for yourself at this point?

Tim: So, I’ll answer that on my level and at the firm level. Actually listening to your podcast, I’ve thought about this question quite a bit because it’s like, “Oh, how would I define success?” What’s crazy about it is that there’s all of this change, and there are certain things that don’t change. In my eyes, what hasn’t changed since we started this firm is how I would define success. To be honest, the way that I would define success is that if I can walk away from this firm and have every client that we touched and every employee that we had the privilege to hire to say, “I’m just so glad I met LBW,” that’s how I would define success.

Because the way that I look at that is in order to achieve that goal, even though it’s very simplistic and pretty high-level, that means that if my employees were happy, I did a good job when it comes to management and that they were successful within the firm. With my clients, that means we serviced them appropriately, and we charged them appropriately.

All the pieces that need to get to that degree have to happen. They’re all just residual effects to us just striving to make sure that when the client walks away or we walk away, they say, “I’m just so glad I met you guys.” That really would be the biggest honor or success that I think I could think of because that means I know I did everything else right. So, that’s how I’d probably define it at the end of the day.

Michael: I love it. I love it. It’s the positive impact and legacy in the world.

Tim: Yeah. And it’s funny because that has not changed. I think when we opened the firm, we talked about that as a firm and we haven’t gotten away from that. There are some values and ideals that we have not strayed from, but the processes behind those ideals have maybe changed. I think that we continue to strive on that level to make sure we are impacting anybody we have the privilege to touch.

Michael: I love it. Well, thank you, Tim, so much for joining us on the “Financial Advisor Success” podcast.

Tim: Thank you. I really appreciate you having me.

Michael: Absolutely, my pleasure.