#FASuccess Ep 188: Leading With Directly-Held Real Estate Advice To Differentiate Traditional Wealth Management, with Rich Arzaga

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, 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 Led Rich To Start Offering Advice On Directly-Held Real Estate [04:28]
• How Rich Got His Start In The Industry [10:57]
• How He Incorporates Directly-Held Real Estate Advice Into His Practice [16:36]
• What The Analysis Of Directly-Held Real Estate Actually Looks Like [24:18]
• Where Rich’s Clients Go To Execute Recommendations After The Analysis Of Their Real Estate Portfolio [39:55]
• How His Real Estate Advising Fits In With His Overall Advisory Business [44:31]
• How Rich Navigated The Great Recession And What His Practice Looks Like Today [1:01:52]
• What Surprised Him Most About Building His Advisory Business [1:12:02]

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Rich Arzaga, to the “Financial Advisor Success” podcast.

Rich: Thank you, Michael. And thanks for the headset, by the way.

Michael: Absolutely. I’m glad you could join us in. We try to make sure all of these have good consistent sound quality. So we always send some headsets out to guests to record with and keep with our compliments.

I’m excited about the podcast and the discussion today because I know you have what I think at least relative to advisor world is a somewhat unique practice and specialization and expertise in that you do a lot of work with directly held real estate. And I feel like it’s one of those worlds that we just do very little of in advisor world, despite lots of people have created a lot of significant wealth with real estate investing. I don’t know how much of it is maybe even some of the conflicts of our business model. A lot of us work on assets under management and sort of selling or getting paid to manage a REIT. I don’t often get paid with direct real estate. It’s like I have an incentive to have clients pick portfolio-based investments. We don’t really teach it terribly deeply in things like the CFP curriculum. So for some, I think we probably just have an expertise gap in being able to get in deeply. I know you’ve done a lot of work around this. You work with clients around it, you actually teach a course on it. And so I’m excited to kind of dive into this intersection of what does it look like to advise clients on directly held real estate as part of a financial advice offering?

What Led Rich To Start Offering Advice On Directly-Held Real Estate [04:28]

Rich: Good. I hope it helps.

Michael: So talk to us a little bit about how you, I guess, came to this place, this journey of having directly held real estate as…I was going to sort of say like part of your portfolio of what you do in giving advice to clients.

Rich: Back in 2000, I was coming out of the technology world. It was a startup company, and it was sold to a blue-chip company. I thought I was retired at that point. So I was looking for a planner, and I interviewed a number of them here in the Bay Area, the East Bay in particular. And the mix of things that I needed help with included estate planning. I was going through stock options. So help with that. So certainly taxes, financial planning, and also real estate because I had some smaller directly held real estate investments here in the Bay Area. And so when I interviewed these advisors, I got the same two answers on real estate consistently from them. One group would say, “Good for you on your real estate.” And that was the time when the real estate market is still doing okay and…

Michael: Pre-housing crisis decline? Understood.

Rich: Yeah. Yeah. “Congratulations.” So that’s where that came from. “And why don’t we sell those and we can put those in bonds?” Okay. So that was a real estate alternative. The second group was, “Good for you. Congratulations. Go ahead and just give me the numbers on those and we’ll add those to your plan.” So it really just became data but it wasn’t really advice. And I know because I had previous dealings in real estate that the real estate is a very big asset class. It represents maybe 30% of this country’s wealth. So I thought, with all the advisors out there and all that they do to impact people’s lives and this being 30% of the total wealth in America, there’s a wide-open niche opportunity for an advisor who knew about how to help clients with their directly held real estate investments. So I became the person that I was looking for back in the early 2000s.

Michael: Which I feel like is like the quintessentialism of most entrepreneurship. Like, had problem, couldn’t find solution, said, “Darn it, I’ll make solution,” sold it to other people, have business.

Rich: Yeah, exactly. Exactly. Plus, it was a fun asset class for me. I really enjoyed it. So it was an easy niche or problem to solve.

Michael: So talk to us more about…I guess I’m wondering even from the…I’ll call it from the client side, right? For where you were even then as you’re going to advisors saying like, “Give me the numbers.” I guess like, “What’s your free cash flow because I can put that as a cash flow in your plan? What’s the property worth so I can put that as an asset into your plan?” What were you hoping the advisor would ask you about or give advice on that they weren’t doing that you would have thought that they would have been doing? Like, what was the advice gap?

Rich: Yeah, that’s a great question. I guess I was hoping for some sort of collaboration on that. At that time I wasn’t really…I knew a lot about the asset class, but I wasn’t really the expert. So I thought I made good choices, but I wasn’t certain about that. It would be nice to have somebody who is smarter than me to say, “Here’s a few things I see in what you’re doing.” So some sort of assistance around, “How’s it performing? Is it complementary to your existing set of assets? Is the cash flow really necessary? Is it conflicting with other cash flows and is it causing taxes?” I just wanted somebody to put it in perspective of our entire picture. And also just to get some sort of advice either way. If it was, “This is a good idea,” or, “This is a bad idea,” I’d like to hear that too.

Michael: But the idea being not just about real estate in the aggregate, like, you wanted this down to like, “Let’s talk about this property. Like, I’m not just looking for real estate advice. I’m looking for like advice about this piece of real estate that I have a deed that says I own and I need to know what to do with it.”

Rich: Yeah, that’s right, a little bit more in-depth on that investment, as they would a fund that they would choose. Maybe not as detailed because I know they don’t…the operating part is out of their hands, but just more of a higher level in terms of the cash flows on property.

Michael: Interesting. So, what did that then take you towards? Did you go out immediately and say, “Okay, I’ve now realized in my moment of epiphany not being well served by advisors that I’m going to go become an advisor? I’m now going to do this as my thing?” Like, was it that direct and immediate that you said, “All right, I’m going off to do this?”

Rich: It went in increments, I think. I took some time off. I actually worked for a company, Prudential Real Estate. They were very…one of the larger brokerages, brokerage companies in the real estate business. I was working in their new media trying to start that up for them in-house. And while I did that, I decided to go ahead and begin to take courses that took me in the direction of this. So I always knew about a year or two I’d be out and doing what I’m doing now. So the two approaches are, one was take CFP courses. And back then in 2001/2002, I imagine the best way to become a CFP and an advisor is to take CFP courses. And then the other was to take CCIM courses. And what CCIM is, it’s a top designation, like the CFP is, for commercial real estate. It stands for Commercial Real Estate Investment Members. It’s kind of an awkward name, but it’s CCIM. So I ended up taking courses for both and got duly, I guess, educated. Then I realized pretty much after I took the CFP courses, as many of my students do now, or some of them do now, that you don’t need to take those courses to get licensed for the business.

Michael: You were actually coming out assuming like, “I need the CFP certification to get my license to be an advisor.” And then got out, was like, “Oh, well, I guess that’ll still be useful education.”

Rich: Yeah. Well, I knew I wanted to be a CFP, but I didn’t know I could get started. And I thought I did enough work, but I was so focused on the CFP that that’s the direction I went. So by 2003, I had my education done for both, and I began getting licensed and really started practicing in 2004. So it was a little bit slower because I decided to go and take the educational route, but that’s how I got to getting the credentials for what we do now.

How Rich Got His Start In The Industry [10:57]

Michael: And so, how did you launch and get started. Like, where did you go? Like, did you hang your own shingle from the start? Did you join a large firm? What did the entry pathway look like when you decided to come into the industry and knowing you were coming with this CCIM designation that not many other advisors at all have?

Rich: Yeah. Back then, I think they were…I did a search one time at that point and I think there was maybe about what, 36,000, 40,000 CFPs, and I think only about 3 or 4 had CCIM designations, and those 3 or 4 actually were selling commercial real estate. So the CFP was probably the first thing they did then they decided to go to sell commercial real estate. So I knew it was a thin market there. Mixed blessing, I went to work for Sagemark Consulting, meaning I was a contractor with them. Sagemark is a planning arm of Lincoln Financial. Mixed blessing because I got some wonderful training there. I learned a lot in that program, and I’m so grateful for it. And I still use what I learned because it is comprehensive. And then the next part of it is that it’s not really the captive environment that I wanted to be in. It’s less independent, I should say, than I was hoping for. So within six months after that training, I popped out and joined FSC, which is now known as Advisor Group, I think, and was with them for a while. So that’s how I got into that. And I was always mindful about the real estate. So in the compliance process in the intake for those firms, I let them know that this is my interest. And we looked at a couple of presentations that I did, the compliance department reviewed them. So I knew I was going to be okay being able to serve that community, at least at that point.

Michael: I was going to say did the firm, I’m thinking particularly in terms of these kinds of traditional brokerage firms, have problems, have concerns with you saying, “I want to talk about real estate, I want to advise on real estate with clients?”

Rich: No, I think they saw it as a market target audience. I wanted to get into the advice side of it. There are no tools out there, still isn’t really. So I don’t think they really saw conflict. The only thing that they were really concerned about was to make sure that the rules around selling outside the broker-dealer, that weren’t being violated. Which is easy, I just follow the rules and it’s not a problem. But they’re vigilant around that because I do have this specialization.

Michael: So that’s all the selling away securities to rules of not selling outside securities, which I guess ironically means like, direct real estate is fine, as long as you weren’t having clients invest into something that was a syndicated securities offering because that would have to go through B/D compliance.

Rich: Yeah. And in fact, I actually get even further away from that line. If there’s a discussion on where to go next, I make recommendations to the brokers, but I don’t get close to endorsing or even reviewing those other purchases they’re about to make. I give them the tools, I give them the coaching, but I’m not there to say, “This is the one to get.” So I stay away from that part of it. And it keeps me further away from that selling away line. But they are aware of it. I’m at the LPL now. And so I probably get a few extra questions, but it’s never an issue because it really isn’t a risk that we take.

Michael: I guess, and again, sort of speaks to the…I was going to say the irony of just, directly held real estate is so outside of our normal regulatory purview. It’s like, “Oh, I don’t even have to oversee the advice you’re giving because it’s ‘not our world.’” Which feels kind of strange to me on the one hand, as you said, 30% of wealth in America is in real estate, it’s a major driver of wealth for a lot of people, and we sort of talk about it as an asset class when it’s a REIT, but talk about it like it’s this alien thing in another world when it’s directly held real estate to the point that even compliance isn’t as concerned about it.

Rich: Yeah, that’s absolutely right. I’ve always felt that there was room for a designation in this industry that focused on real estate investment, real estate planning. And that might be able to create the corridor for working more in the space. But I don’t know what the appetite is for that sort of thing.

Michael: Yeah. Yeah, I guess it would…well, hopefully, there’s at least a little bit more overlap now of CFP professionals and CCIMs, but I guess that’s your starting market. And it doesn’t sound like it’s a really big one so far. I think, again, as you’ve said, just we come in the industry, at best, we’re not trained on really understanding real estate, the mechanics of evaluating properties and deals and mechanics and cash flow. And at worst, as I think you experienced from a few of the advisors, we essentially get down to, I don’t get paid to give you advice on real estate. It’s like, “How about you sell those we put that into some income-producing bond funds or REITs that I can actually manage for you? Because I don’t know how to manage that thing you’ve currently got.” Like, it is, I think, one of the fundamental business model conflicts that we almost all collectively experience beyond the broker-dealer side or the RIA side, almost all of us have models that are fairly tilted towards not just assets, but investable assets. And directly held real estate doesn’t fall in our investable asset bucket for most of us.

Rich: Yeah, that’s right. That’s right.

How He Incorporates Directly-Held Real Estate Advice Into His Practice [16:36]

Michael: So, how did you start incorporating this when you said, “I want to actually make this part of my business model,” when at the end of the day, you can’t sell or collect at least a classic AUM fee on directly held real estate? So, how does this work for you? Or I guess how did it evolve as you made some of the initial moves? I guess went through Sagemark, landed at FSC and said, “Okay, I’m building my business now. I get compensated for certain things through FSC. I want to work with clients who do directly held real estate. That is not one of the things I do through FSC.” So, how did the business model work? Or what were you at least envisioning when you got started in this direction?

Rich: The way it started and how it is now hasn’t changed too much. The advice part is really covered as a planning fee. So, for example, a client comes to me and they have $3 million in net worth and maybe about $1 million is in an investment real estate property and another $1 million is in their liquid assets, another in their home, I would charge a fixed planning fee for the initial plan as we do right now. That fixed planning fee would also include any sort of additional work or discussion on the directly held real estate investment, any sort of cash flow modeling, that sort of thing, and any advice. So I would simply take our base or whatever the fees that we would charge them for that plan and add a little bit more in for the real estate discussion. So that’s how I cover the initial plan.

And then after that, I don’t charge for the AUM. Once you have a property and you understand its cash flows, unless there’s problems down the road, there’s not a lot of variance to that. And it’s actually…it can be very predictable, except for the risk that comes with owning directly held real estate. So then that’s when we get back together and talk about it. We mostly talk about how to…what we do to mitigate the impact of that risk more so than the risk itself. And we talk about the risk itself, and I’m mostly talking with them and advising on what sort of attorney, or maybe you give some recommendations. So that’s how that works.

Michael: And just, when you talk about risks, are we talking investment risks? We’re talking like tenant gone haywire and destroys your property risks? What kind of risks are we talking about when you say just you’re discussing and advising on risks?

Rich: Well, it could be that it’s a commercial property and the tenant has a long-term lease that was favorable but the market demand for that property has gone down. And so once the tenant leaves, it would leave a big hole in their cash flow or in their income, and they still have their expenses for that. They might have to bring another tenant in, they might have to actually reduce their price, which would impact their cash flow to their family. It could be a smaller property where a tenant squats there for a while. It could be one where they’re sued. It could be one like one, I own owned a commercial property in Washington state where for a year, the tenant went dark on paying rents. So a variety of different risks. Could be legislative risk, where in the plan, they actually expected a certain amount of increases in terms of rents. It was proforma that way.

And there’s now more rent controls in some areas than there was way back in what, 15 years ago. It could be operating risk. It could be that the owner, him or herself is not a very good manager of properties or people or tenants. And so there’s that risk where they just don’t want to increase the rents because they’re afraid to annoy or upset the tenant. So they keep the rents the same so everyone’s at peace. And then five years later, they finally make an increase, and the tenant is upset because they didn’t expect that. So there’s lots of different risks. And those are the things that pop up in that sort of conversation.

Michael: So I’m struck by just the framing that, hey, once we do an analysis on a property, like, as long as stuff isn’t happening, your tenant is stable, the situation is stable, there might not be, in essence, a lot of ongoing advice need. So you charge upfront for the advice and the analysis, but it’s not necessarily a big piece of the ongoing fee model and the ongoing service model. It’s like, “I did my analysis, let’s talk when and if something changes.”

Rich: It’s almost right. It’s a discussion point during the reviews to make sure that things are largely the same. But yeah, there’s not a lot of changes until there’s something that happens that requires a discussion. And then that discussion is just…I’ve had those many times before. So that’s to cover that under our AUM model. On the example I mentioned earlier, the $1 million that we get to manage, that’s easily covered under that for us. There’s not a need to charge another fee for that incident.

Michael: So talk to us a little bit more about fee structure itself. Like, what’s…I don’t know if you have like a standardized base planning fee. Like, what do you add on if they do have directly held real estate and want these conversations and want this advice? What do you find is actually tenable in the marketplace?

Rich: Yeah. I don’t know that I’ve explored what clients would pay or take. I’m not testing the high side on that. As a policy, and we’ve kept this since I started, because I know how long it’ll take to proforma a property using their tax returns and have the discussion, and have the discussion on the second property and the third. So we kind of know what that looks like. But we have a base planning fee. It’s a minimum. Today it’s $4,900 for a plan that’s comprehensive but not too complex, meaning there’s not advanced estate planning or real estate issues on there. If they have a piece of property that’s a, let’s say, duplex or a single-family home that’s a rental property, we’ll probably add about $500 to that. That’s been the…what we’ve charged or what we add consistently. If they have 2 of them, we’d probably add another $500 to that. If they have 4 or 5, we’ll probably keep it just at that $1,000. What we find is this, a lot of the time it takes is shared time. So when we collect a tax return and we look at their Schedule E to help us do the proforma on the real estate, the three or four or five properties are in that Schedule E. So we’re not asking for those documents over and over again, we’ve got them once. And we proforma all the properties because we want to do that, see if there’s any weird stuff going on.

And then once we take one or two that represent good examples of the discussion we want to have with them, when we cover them and explain to them how it works and then put it into the plan, then we really, even though we haven’t proformaed, we really don’t have to talk about the third, fourth, and fifth, and so on. So I don’t know that we maxed it out and said okay, that you have 6 properties times $500, that’s $3,000 more. We haven’t ever done that. Now, that said, there are some plans that are more complex, and that start maybe at $6,000. And they have 2 properties and it’s $1,000 more. There’s a plan we did that was $15,000 plan, it was more of a business exit planning case, and they had commercial property, and they had another one they were thinking about buying. So we added some more dollars to that, a little bit more for that commercial property. But the process is the same. So it doesn’t take us out of our lane when we do that work.

What The Analysis Of Directly-Held Real Estate Actually Looks Like [24:18]

Michael: And so when you talk about doing these analyses, how long does it take you to do this for each property? And what are you doing, for those who aren’t familiar with what it means to proforma a property projection?

Rich: So proforma, cash flow, those are kind of the same things in my world. What most people want to know when they have a piece of property, at least those that are advisable, is they would like to know how their property is doing because they think they have a feeling of how it’s doing. And their math on that is really about, “Here’s my gross income.” And by the way, it’s gross, not including vacancies or bad debt, that sort of thing. So they use gross income. And then they take out the mortgage and take out the taxes, and they might remember the insurance. And that’s really the…that’s really it. And when people give us an idea, you ask about the intake of these other advisors early on, when advisors ask, “What is your income?” mostly they’re given a gross number, they’re not given the net. And then if they’re given the net, they’re not given the net of all actual expenses, because there’s a lot of other operating expenses that are forgotten that really weigh down performance.

So the tool that we use to help us assess performance on a property is called an APOD. APOD, and it stands for Annual Property Operating Data, again, another awkward term. But if you look up “APOD real estate” on the web, you’ll see a bunch of companies offering these spreadsheets that you can buy. So these spreadsheets are really a way to proforma the property. And you put one property on every spreadsheet, and then you can see how it flows. And the great thing about these, I’m going to go use the word “APOD” now, the great thing about these APODs, these cash flow tools, is that they also, the good ones, consider the client’s tax situation. And they count right off an interest, they count the cost recovery. So it really is tax-sensitive. And they can give you a performance analysis year to year for, let’s say, 10 years. They can also give you an internal rate of return before and after taxes. So if you put in the right tax, marginal tax rate for the client, and make sure you include the state, you can have a really good idea what performance looks like.

And so when we do these analyses, that’s what the end product is, is really is a proforma or an analysis of the cash flow for the property that the client owns. And it’s an eye-opener because they don’t realize that actually when they thought they were making money, they’re break-even, and when they’re breaking even, they’re actually losing money. So that’s just one step of getting them to help them decide to either keep it for whatever other reason or to help them make a better choice on that equity. And then you bump that to the plan and it becomes…it just accelerates the drama of whether it’s…especially if it’s bad, of a bad property.

Michael: And so, what are you ultimately trying to boil down to? Like a raw dollar cash flow, a like return-style metric? Like, “What is your free cash flow relative to your equity invested? What’s your free cash flow relative to the asset value?” Like, what do you look at at the end of the day to say, “Is this a good return or a bad return?” I get it, if they thought they were making money and it turned out to be zero or negative, clearly, this isn’t probably good. But we do the math, I’m making money, like, on what basis are you deciding or giving recommendations to say, “That’s good money,” or, “That’s not good money, we should redeploy that?”

Rich: Right, right. So the big picture, we use the plan as a way to see if the property is…contributes to their objectives or if it actually takes away from them. So after the APOD is done, we use a tool to put that…some of that data in. Because at that point, we have kind of net information that we can just plug in, make it easy for the tool. The tool we use is eMoney, and they do have a schedule for real estate. It’s not very comprehensive. So we find that using the APOD first and then taking key data and then putting that into eMoney’s schedule for real estate does the trick. And so by putting that property in there, we can see…and they’re keeping it for the balance of their life if that’s really what they…if they plan to own real estate and that’s really one of their objectives or strategies to get to their objective or for financial independence, we’ll put that in there.

And then we’ll do a scenario where, well, what if we didn’t have this in there? And what if we sold it? And by the way, it’s not my preference to sell or not sell. I just want to know if there’s a better use of that equity. So to answer your question, we put the scenario in there, where do we take the equity? Where do we sell it for a little bit less than we think it’s worth? We pay the taxes. And we really do a number of the net proceeds for that property just to make sure that it’s very conservative. And then you put that equity back into the plan. And then what it shows us is it shows us the use of that net equity at their risk tolerance level, based on their risk-reward. Are they better off keeping that property? Which would be great, that means it’s consistent with their goal to own that property, or whether they’re better off using that equity elsewhere, or buying a better-producing property. We’ll put that as another scenario, to do a 1031 exchange. So that’s what we use to measure how a property is contributing to a financial plan for a family.

Michael: And so, I guess in essence, you end out with, if the cash return on equity is a better return than whatever your portfolio assumption is then this is going to model well. If their cash return on equity is worse than whatever your portfolio return assumption is, it’s going to look better to make some shift.

Rich: That’s most of it. I think the other part is taxes. So when you put this into a plan and then you consider taxes, if they’re already…for example, if they’re already earning a large amount of income and then they’re generating more income from the real estate, their tax situation is actually worse because they’re paying taxes on some of the income that they’re getting from the real estate property. So maybe taxes actually play a role in that, but you cannot see that from the APOD by itself.

Michael: Because sometimes your APOD analysis just says, “Okay, you’re not making a ton of free cash flow after depreciation, it’s actually negative, but I’ve got to look at the rest of your plan to figure out does that depreciation offset against somewhere else? Is this actually helpful from a cash flow perspective? What’s the net tax impact in the overall scenario?

Rich: Yeah, that’s right.

Michael: And eMoney can handle that level of tax analysis and crossing over depreciation deductions and the other tax aspects of real estate?

Rich: They can. You just have to use the right cost recovery number, and you have to have the right adjusted cost basis when you put it in. And the other thing it can do well is it can also assume appreciation for that property. Appreciation is not a primary driver of value of real estate, but you put an appreciation number in there as well and it will count that as well for total net worth and estate planning and that sort of thing.

Michael: Okay. And is there a particular piece of software that you use for this APOD analysis? Like, is this your own homegrown spreadsheet? Is there some commercial tool? Is there like the eMoney Advisor of APODs out there?

Rich: Yeah, that would be nice. I think eMoney is terrific. No, it’s a little bit of a wild west out there, but the tools are pretty consistent. I use a free tool, actually, that CCIM gave me. And it’s probably one of the most primitive tools out there, but it’s very simple to use and show to clients. Happy to share that on a link so everyone can have that tool. Their instructions are on tab number five or six. But that’s what we use.

Michael: It would be great if you can share out. So for folks who are listening, this is episode 188. So if you go to kitces.com/188, we’ll have a link out for the CCIM APOD.

Rich: I think the only thing I would add to that if somebody downloads that and begins to use it is you’re only good as the data that you put into it. So if you put in a high annual rate of inflation of 10%, right, or you use the wrong cap rate or…so it’s maybe a little more complicated than just getting it for free. But just be aware of that. You want to learn how…what to put in, what sells, and why. If you don’t use enough expenses, it’ll just be a house of cards. So that’s where the Schedule E comes in. So just use it wisely, but use it often if you use it well.

Michael: And I guess helpful note for eMoney, like, an APOD is apparently a spreadsheet. So you could probably code this into software and make it an output in eMoney.

Rich: That would be so exciting for someone like me, but there has to be a demand for that, right?

Michael: Yeah. Well, although on the flip side, create a tool that makes it easier to do real estate analysis and we might find out that advisors do more real estate analysis for clients too. I’m sure for at least some who are listening, who are out there who maybe do have some interest or some expertise in this, just getting down to, “Okay. I want to analyze for clients, but I don’t know what the tools are. I don’t have the time or inclination to make my own. And I can’t do a grind it from scratch analysis every time because then it’s time-consuming and I charge clients a lot more money and then they may not want to pay for that.” So it sounds like at the end of the day, once you…like, you’ve got the APOD template from CCIM, you’re collecting information heavily from Schedule E that it sounds like kind of drops into the spreadsheet, into the calculations. And so, how long does it actually take you to do a property analysis when you’ve got the tool and you just need to collect the information, get it in there, and then obviously do some analyzing of, “What do I actually see and is this a good deal?”

Rich: Normalizing the Schedule E takes some time because we’re talking with the client about expenses from one or two Schedules Es over two years that might be extraordinary. So the discussion around normalizing, and for them, this is the first time they thought about this, and they didn’t know they have these expenses, or they forgot the $24,000 expense on the fence from 3 years ago. So that’s where most of the time comes from. And it depends on the situation, but maybe that’s another hour or so. And then the APOD itself probably takes…once I have good data and I can put it right in there can take about 15 minutes. For 15 minutes, I like to sit back and just look at it and really appreciate what’s going on with that property. It’s really kind of fun. And then the advice or the discussion part of it will probably take another hour or so for that one property. And then the second and third will be very quick if we even do those because they’ll understand.

Michael: Right, because once you’ve taught them like, “As your advisor, as a professional, here’s how I look at your property, here’s how I analyze it, here’s how you properly think about all of these different costs and expenses,” like 15 minutes to teach the first time, 1 minute to remind them for the second property after you’ve gone through the first.

Rich: Yeah. And at the end, when they learn that, then there’s one part of that APOD that we go to religiously. In fact, we just jump there because they know they can rely on this. Because the key around populating the APOD or any plan is to make sure that you use your own data. You’re not using your own stuff. And that there are missing things you want to point that out to and agree on, the assumption on that expense. But the part that we go to is called a T bar or T chart. And that is a simple illustration. It’s a T form. And people have four questions about real estate that they have or that they want to buy, how much money goes into this property? And when does it go in? So there’s two questions right there. And then how much money comes out and when does it come out? And so the T bar does a really good job in one setting showing this year by year, very simple, concise way, and also shows an internal rate of return. So we jump to that then for the next properties, and it’s very quick work around them.

Michael: And so then you just start, get to see…you do with an IRR. So you can account for timing of cash flows. And you just start to see like, okay, over the long term, you’re getting, whatever it is, a 1% IRR or a 3% or a 5% or a 7%, and then we can start having a conversation like, “Is this an appealing rate of return? Is this a good number? Could we do better elsewhere with either other real estate or other available investments?” And down we go down that path?

Rich: Yes. And I realize as we’re talking about this, it sounds like quite a process what we’ve just been talking about the last 15, 20 minutes or so, but once learned, clients don’t see the back end of it, the back office part of this. So it’s actually much more enjoyable for them because they’re really learning a lot. And for you, it’s really kind of, if you really like this sort of advanced planning work, it really is kind of fun.

Michael: Well, and to me sort of makes the classic point around anything where you form some kind of niche or specialization, I think for a lot of advisors listening, like, we can also…I can take in a bunch of real estate information and put it into an Excel spreadsheet and do some analysis. It’s like, yeah, but if you’re not used to looking at them on a regular basis, it’s going to take you longer to figure out where to grab the right information and what information you need and make sure the spreadsheet is calculating right and you’re doing the math right and you’ve got all the pieces there. And then it gets built each time, and you’re not used to exceptions, and clients take a while until you’ve done a whole bunch of these. And you just get to a point of, “Yeah, I could do it. Anybody who wants to take the time can probably do it,” but you’re doing this in a systematized basis in an hour or two, which lets you charge less and do more of it. Everyone else may have to charge $1,000 or $2,000 to cover their time for it. And if you charge enough, you don’t get as many people that want the service because it got more expensive and the economics don’t hold.

Rich: Yeah, that’s right. And I think we’ve been focused on the technical side of this because Sudden Money, I know you had Susan Bradley on your show before, but they talk about two sides of finance. They talk about the technical side, and then the emotional side. So we’ve been covering the technical side, but the emotional side is that there’s a whole another discussion around why they have it, why it’s important, what will it do for them? That sort of thing. And so when you talk…when an advisor thinks about this, there is that technical part of it that you just talked about, but then there’s also the discussion about why is this important? And it normally boils down to something about…it’s common but…either about insecurities about the other asset class, supreme confidence on real estate, some sort of family imprint that the family had real estate or some sort of very close friend they trust that was successful in real estate, something like that. And then being…having that discussion on a deeper level than just collecting the data is really important.

Where Rich’s Clients Go To Execute Recommendations After The Analysis Of Their Real Estate Portfolio [39:55]

Michael: And how often, or I guess I should ask like, do you get into the conversations and dynamics of just, “Mr. and Mrs. Client, do you want to be a landlord? Have you dealt with property managers before?” Like, how much are you into, I guess like the execution of buying and selling real estate or the ongoing management of buying and selling real estate or trying to connect clients to those resources? Or are you primarily at just the business and the economic analysis, like, “We’ve done the APOD, this is a good deal or not a good deal, you need to find a different property to invest in?”

Rich: Often. The area that we don’t spend a lot of time on with them is execution of that, because there’s other people, insurance companies, attorneys, brokers, that help them with that and they get those details. But we’re often the precursor for that sort of activity. So I have a client in Berkeley now who is thinking…he was retiring and thinking about either leasing their commercial building or selling it. So it’s quite a discussion. He has a great range of options. He’s actually in a good position right now in his case, even with COVID-19. But it’s not an easy decision. And it’s also a financial decision too because all of them have different outcomes, their range of outcomes is considerable. So I’m happy to spend time with him on that discussion because it’s interesting, it’s important to him. And he may not choose the best financial decision, but that’s okay because it’s really more…I think more about comfort level for him and what he’ll be okay with in the future, and maybe about risk. Maybe he wants to take a little less risk, and so maybe some of the options kind of fall off the table. So often.

Michael: And so, does that mean you’ve ended out with like a network of people that you refer to or you just kind of let clients go do their own thing once you’ve given them advice like, “You need to find a different property,” or are you actually trying to give suggestions like, “Hey, you might want to buy in this city or county or area, not that county or city or area?” How far down that road do you go?

Rich: Yeah, the latter we don’t do. We don’t pretend to know which markets because you can actually get a decent real estate investment in a market that is perceived to be not a good market to invest in. So it really is more…real estate decisions are more by property than they are by market, although the market is more of kind of a global thing. You can still find a good deal somewhere. But we don’t do the tactical stuff because there’s no way we can really know that. But we do have a resource for clients, especially local here in Northern California.

But if I have a client that wants to settle some real estate in Florida, the CCIM network comes in very handy. The advisors can do this too. They don’t have to be a CCIM. They call the local chapter, they see who the board members are. They work their way through the board members. The advisor would give them profile of the client and what their needs are and what they have, not the details, like address or name, but just kind of a profile. These folks in that position at CCIM will give some names. They will be happy to share. Sometimes it’s their own name, right? But they’ll be happy to share some other names. And then that’s how you come up with… And then you vet them across and you ask another person, “What about this person?” So you actually end up with three or four pretty good names as a start for a client. So the network can be as far away as that. There’s a process for getting some decent names and getting a good head start.

Michael: So help me understand this from the overall business perspective. Just it sounds like at the end of the day, when you’re doing close to $5,000 planning fees and $500 property fees, like, the real estate advising is not literally the driver of the business model directly. And so is that still primarily the clients that you work with? Like, is it unique because all your clients or almost all your clients end out with these kinds of real estate analyses as part of the discussion because other advisors won’t do that level of analysis for them? How does the real estate component fit in in the end when the real estate analysis charge is not necessarily the dominant portion of the client fees?

How His Real Estate Advising Fits In With His Overall Advisory Business [44:31]

Rich: Yeah, that’s right. First of all, real estate is a niche that we’re interested in, and it serves a community. From a advisory perspective, a business perspective, it’s the milk in the grocery store for us. So they put the milk all the way in the back of the store, the customer comes in, and they have to go through a bunch of aisles and a bunch of other products to get to the milk. And I don’t mean to make it sound that way, but it really is kind of our centerpiece and the reason some people come to us in the beginning. From there, and I would guess probably about 40% of our client base, it’s a small client base, 40% of our client base has directly held property where we’ve done some sort of work like this, like we talked about. The other 60% came from referrals or came from our natural market. Or maybe they initially thought they wanted real estate investments, they came to us as being more knowledgeable, and then maybe they actually did something or maybe they didn’t, but they stayed with us as a client. So that’s kind of how that breaks down. But you’re right, the fee from planning for real estate is not a big driver for our business in terms of gross revenue.

Michael: But it’s the driver for a lot of new client growth because it’s what distinguishes you from all the other advisors that won’t do that thing.

Rich: Yeah. We get referrals from CFPs on discussions of people that have real estate, and they just…the CFP’s eyes glaze over because the folks, all they want to do is talk about their real estate. So they gladly refer those people on.

Michael: It reminds me, I think I had first heard this from Mark Tibergien. And apologies, Mark, if you’re listening and I bastardize your quote, but something to the effect of, “To be effective in the marketplace, you really just have to be similar in capabilities to everyone else in almost everything and materially better in one.” One thing can create the differentiation for you to say, “Yeah, a lot of advisors can do a lot of stuff for you, but if you need this one thing, this is where I have expertise that you’re not going to be able to find anywhere else or very many…with very many other advisors.” And you often only need one thing that you’re materially better than everybody else. And anyone who has that problem is coming to you, and you can grow a business on that basis.

Rich: Yeah. I understand that statement. It makes sense. For us, we’d like to believe, and I think many of your advisors believe this as well, that we’re very good at everything that we do. And we are special at the real estate advice area. But yeah, you’re right, in the land of the blind, the one-eyed man is king, I think that’s what you’re saying.

Michael: Yeah, yeah. I don’t mean at all to belittle or put down the rest of the work that you do with clients, but I think we all have sort of had that collective struggle like, “Well, you should work with us because we do good, comprehensive, holistic financial planning.” It’s like, “Well, okay, but all the other advisors I talked to said that as well.” It’s like, “Well, we’re holistic-ier and comprehensiver.” Like, it gets really awkward really fast just trying to say “we’re more betterer” than everybody else at something that ostensibly is holistic and comprehensive in the first place. But when you can really stand up for this one thing, whatever your one thing is, like, when you can stand up for this one thing, “Oh, well, if you have real estate, directly held real estate investments, you’re probably going to struggle with other advisors that don’t have the depth to do the analysis and aren’t fluent in the language and the lingo and the relevant evaluations that need to be done. We’re really good at this. This is what we do.” And as you said, it becomes your milk in the grocery store. Like, that’s the milk you’re shopping for. Everybody’s coming. And you get other opportunities to do business with them over time.

Rich: Yeah, that’s right. And people that we sit down with them and that’s what they have questions on and they realize how deep we go, sometimes they don’t even know that’s something that we do, they get very excited. They feel like they’ve met a match. It’s nice too.

Michael: So talk to us about the evolution of the advisory firm itself. So you set out in sort of 2003, 2004 with a firm change or two with the idea of doing this model. Like, “I’m going to be an advisor. I’m going to charge for real estate analysis because I’ve got a passion around it. I’m also building an advisory business more broadly.” So, what did you do when you actually wanted to get started and hang your shingle and you had to start getting clients? Were you immediately into the real estate world to market yourself? Were you doing more traditional advisor marketing channels? How did you actually get going when you said, “I’ve got this expertise and the vision of how to do advice, now I’ve actually got to find somebody who’s going to pay me?”

Rich: Yeah, yep. And I tried to do exactly what you said. Since that was a focus, I spent my time in that community. So I ended up meeting realtors and commercial brokers, title folks, exchange folks, attorneys who are real estate attorneys. So you just hang around that environment, and you attend their programs. CCIM has chapters all over the U.S. I was a committee member on CCIM East Bay or Northern California for a couple of years. So you hang out with those folks, and then you find of those, that community, a few folks that you really like. And then we started doing real estate advice workshops. And it included a CPA, a financial advisor, and a title person, a broker. And then you take that around different topics, different over time for a couple years. And that’s how we really started building some traction here, is by hanging out with that community.

Michael: And so literally going out to things like CCIM chapter meetings, which is…that’s where you found that community, was through CCIM?

Rich: Yeah. Most of my relationships in the beginning were from that community. Then they broadened when clients had their advisors and I contacted…I met a CPA in Fresno who does a wonderful job with the land. So now he is my land attorney for California mostly. So yeah, that’s how you go out to that. And then what we did was we then would invite our past and present client base, and at that time I had virtually nobody, to these communities. And so we kind of shared visibility that way. They came to the workshops, and we gave the workshops, and then we met new…they met new advisors.

Michael: And so as you were building this way, how long did it take you to find some traction, start actually getting client opportunities to work with? Because I know just any time you show up in a community and like, “Hi, I’m the new guy, I love some clients,” kind of gets awkward out of the gate. How long did it take you to find some traction with this?

Rich: Yeah. So at that point, being in my early 40s, maybe, I didn’t look like a new guy. And I was comfortable having conversations. And with the CFP and the CCIM work, I really knew a lot more than a lot of other folks did there. So I really didn’t have to suffer through the whole new guy effect that way.

Michael: Interesting. One of the benefits of coming in as a career changer to the industry, just for better or worse, some of the age bias issues that exist for advisors coming in when they’re in their 20s, especially early 20s, it’s not the same dynamic if you’re coming in a little bit further along in life and the conversations are different.

Rich: Yeah, that’s right. That’s right. But it was a grind. That 2004, I remember this year, a lot of smaller clients. And then over time, it just kind of grows and the net worth grows of the clients that you serve. But I had…I think I had 24 plans that year, and I believe the average revenue per plan and then that implementation was about $4,000 or $5,000, on a gross basis. So my first full year was just over $100,000 of revenue in 2004 for this business.

Michael: You only get to keep a small piece of that in broker-dealer world as you’re growing as well. So that’s gross minus grid payout minus business expenses and the rest?

Rich: Yeah, that’s right.

Michael: And these were…even at the early stage, these were planning fees? These were real estate analyses? This was also implementation with insurance and investments and other brokerage products? What did the business model look like for you then?

Rich: Yeah. The real estate analyses were part of the planning fees. So that’s kind of in one bucket there. I think I was charging $2,500 a plan back then. I think most of those 24 plans were paid. So that gives you an idea what that looks like. And then the balance then came from implementation. So it would be advisory accounts, it might be some insurance as well. So that was the first year. In the second year, then that doubled. I didn’t do as many plans that second year, but the revenue doubled. And then the third year, I think it increased a little bit more as well. So this is what, 2004, 2005, and 2006. So at that point, and it doesn’t exist today, but at that point at FSC, we could do 1031 exchanges because they’re securitized. They offered them. So I did a couple of…one or two of those, not a whole lot of those, frankly, because directly held real estate, mostly they want to control it on their own. So they’re not likely to go into a group investment. It’s contrary to what their objectives are. So we did a few of those, and that helped a little bit with the revenue.

Michael: Those were 1031 like-kind real estate exchanges into packaged REITs that are still eligible for 1031 exchanges?

Rich: So to be clear on that, actually, there’s only one way you can go into from a directly held property into a REIT, that’s through a 721. So they didn’t…none of them involved that. You would actually go into another commercial property, or they were all commercial properties at that point for 1031s. So you go from like-kind real estate, which you couldn’t include land, by the way, to another real estate asset that generated cash flow. So these were industrial warehouses. Oh, there’s only a few of them, but industrial warehouse, office building, another warehouse. So that’s where they went.

Michael: But they were securitized products or they were limited partnership structures? How did they click into FSC as a broker-dealer that’s making it feasible for you to do these?

Rich: They were Reg D partnerships. So they were that, but they’re also securitized. So the broker-dealer reviewed, approved them, and said, “Our reps can sell them.” So that’s why they’re both.

Michael: Okay.

Rich: Now, fast forward a couple years, then they came up with a DST model. And I apologize for being technical here, but that actually allows an exchange…a person who owns a residential to go and do a commercial exchange, just like what I said, except instead of just having one building, you can actually have a pool of assets in there. So it reduces risk and increases diversification. You can have three or four Walgreens, Home Depots, whatever the flavor is for that particular DST.

Michael: And so what’s…for those who aren’t familiar, what’s DST stand for? What is the structure?

Rich: Thank you for that. That stands for Delaware Statutory Trust, and it’s like a tenancy common 1031, except it allows for more properties in that exchange, and also allows for a little bit less agreement from all of the owners of that on certain things that happen during the life of that DST. So you don’t have to agree on everything, which was a problem with TICs.

Michael: Which just makes it a little bit easier for whoever is going to manage it or exit if it’s time to exit because you don’t have to…you don’t have a whole bunch of different people who all own fractional interest in this real estate and you have to get every single person to sign off on something at the same time.

Rich: That’s exactly right.

Michael: Okay. Interesting. And were these also securitized brokerage-sold solutions, or was this just something in the consulting advice quiver for people that wanted to go that route?

Rich: No, these were securitized solutions or broker-dealer approved. And several broker-dealers, mostly the…to get FSC to approve on these 1031s, and later LPL, they did a few of those. They really had to be…had to have a good story, good track record, good management. It was really very scrubbed. Stanger & Associates got their hands on it as well, did a review. So, several people looked at it before the broker-dealer would approve them, fast forward to today. I know that LPL does not allow 1031s, which is fine with me because they’re just so much work, and they take so long to review, and only a few people benefit. So I understand that finance is something.

Michael: We, unfortunately, our whole industry has had challenges with exchanges into a wide range of REITs, particularly private REITs and non-traded REITs. Some work fine, some don’t work so fine. A few turned out to have fraud in our industry. And so I was going to ask like, how do you think about our handle and just some of the product due diligence in those sorts of exchanges? And did you have challenges in getting caught up with some of the 1031 programs that turned out not to do so well?

Rich: No, I got lucky. Again, our broker-dealers, the ones I was with, did a good job on making sure that these as best they can tell were good. And they turned out…the 1031s turned out fine, actually. Yeah, they all had outcomes. Now, when something bad happens and there’s a hurricane in Houston and there’s an office building that takes a hit and they lose part of the roof and they lose a bunch of windows, insurance covers that, assuming…putting the fraud aside because there’s a lot of properties that don’t involve fraud. In fact, mostly don’t.

Michael: Right. Yes, mostly don’t, fortunately.

Rich: Yeah, exactly. But things like that the question is, “What is the risk?” And then the next question is, “How do we mitigate that risk?” And these professionally managed 1031s or operators do a good job considering that. But it’s nice to not have those available because, frankly, it just took a lot of work. And it’s still…in my mind, it’s still a lot of equity in one property. So I’m kind of glad it’d be diversified away from that 1031s for my own practice.

Michael: Yeah. So, how do you handle the challenge in the other end of just, again, you’re back to this world of, “I’m doing a lot of advising on real estate with a specialization in real estate, and I don’t have a way to get paid as much on that advice, short of the advice fees I do on the real estate analysis upfront, but that’s not the driver for the business model?”

Rich: Yeah. I’m not really worried about that. I don’t think I’m losing any…leaving money on the table. It’s not really a primary goal of mine. The primary goal was to be the person that I was looking for way back in the early days. And I’m not…I’d rather keep it on a higher level and be an advisor than execute on some of those details. So I don’t really miss the revenue on that. But I do get it back from the assets that we manage, some of the insurance that we offer, like long-term care, life insurance, that sort of thing, and from referrals. So I really…I don’t think I’m leaving a hole there. I just don’t think it’s necessary to chase money from that sort of advice long-term.

Michael: You don’t literally have to try to get paid on every possible thing that the client’s dollars are attached to or involved with.

Rich: No, I think I get paid okay.

Michael: Yep. So, Rich, you’re building this specialization in real estate, getting your firm going, going deep into the CCIM community, and then a couple of years in there’s this kind of like wee worst-in-a-century recession in real estate while you’re trying to get going. I feel like one of the big fears that a lot of advisors have in picking some sort of niche or specialization is like, “What happens if the thing I specialize in has bad stuff that happens to it?” So, what happened to your business, this model, this kind of specialization way of growing when the whole real estate recession, financial crisis rolled through?

How Rich Navigated The Great Recession And What His Practice Looks Like Today [1:01:52]

Rich: Yeah. So the crisis was dated 2008 and 2009. And what happened to us is that we were flat for a while. It did have an impact. So there is truth to the idea that, at least in our case, that you’re subject to the risk of that one asset class. So our servicing was probably a little different, and the sort of calls that we got in were different too. We got in calls from people who knew that we…this is what we did, but they’re mostly trying to get their clients or their friends out of a partnership or out of a friendship that had…where they’d invested in the property together. There’s a lot of stuff that happened that was bad during that time. And so we got calls like that. And none of those are really very…everyone was trying to exit and cut their losses. So there wasn’t a lot of great business opportunity there for us. But there was a chance to help a few folks and then get them along to some attorneys who helped them even further. So that’s what that was. But it really did impact the growth of the firm for a number of years.

Michael: But is that like, it set you back? You lost assets and clients? Just kind of knocked you flat because the growth channel thing you had just wasn’t growing as much but you still had clients already that did their normal client things?

Rich: Well, I think if 40% of our clients are subject to that risk, and probably more than that because it did impact people that didn’t have directly held real estate. So there was…it really impacted everyone, but especially our directly held real estate clients. And then they needed money out for reserves, right? And then we got someone in from somewhere else. And then some more money came out. It really was a flattening of our AUM, if you want to measure that way, as well as revenue. So it did have an impact. We weren’t starving, and we were okay. I was still sort of retired from 2000, 2001, but it wasn’t fun.

Michael: Right. So, what does the advisory firm look like at this point? Can you paint us a little bit of a picture of the practice as it exists today?

Rich: Sure. So we have a number of clients that we help with plans. Like we have two right now that probably won’t be long-term clients, we don’t count them in our client base, but we are helping them, and they’re both real estate cases. So putting folks like that aside who might pop up later on. We have 65 clients where we do comprehensive work, where we handle assets. Some of those clients are really…some of those 65, not a lot, but a few of them are really small because of relationships that we have, and we want to help them. But they’re counted in that 65, and we help them with the overall planning, comprehensive planning. And again, about 40% have directly held real estate. So if you focus on that 65, we manage…well, it depends on the market this week, right? But we’re at about $70 million of assets under management. Almost all of it is advisory, and we charge a classic scale. We are at 1% all the way from $500,000 to $2 million. For anyone under $500,000, we really don’t go after that community. Sometimes we still help them, but that’s 1.35%, but we end up never charging that. We end up always charging 1% all the way to about $2 million, even though it’s on our schedule. And then it drops down 10 basis points roughly for a few (almost) every $10 million or $20 million after that. So that’s what that looks like in terms of what we charge and where our AUM is and our clients.

Michael: And so you’ve got an upfront planning fee of $4,900 plus add-ons and then an ongoing AUM fee if they want to work with you after initial planning? It’s like a step one, step two thing?

Rich: That’s right. And then the average plans this year, I think we’ve been about $6,000 or so. And then on top of the planning fee and the AUM, there’s also insurance. If there’s a gap and there’s a need for insurance, then we offer that too.

Michael: What insurance domains are you typically involved in?

Rich: The three are life insurance, disability insurance, and long-term care.

Michael: And in practice, when you look overall at the revenue mix of the firm, how much of the revenue is planning fees versus AUM fees versus insurance business? How does that typically break down in practice?

Rich: I should know that. I don’t know that. We, in fact, we’re a customer of Bean Counters. So they would know that. But I don’t remember what that is. But our insurance revenue is not bad. So I’m Court of the Table every year for the last 11 years or so. That’s at MDRT, Million Dollar Round Table, I guess, performance level. And Court of the Table means that you’re up there and then…I don’t know. Maybe it’s the top 10% or 15% of producers for people that belong to MDRT. So it’s pretty decent. And then we have another revenue stream with the Insurance Whisperer. But I’d say over $100,000 in revenue from the insurance side not included in the AUM side. And planning fees, if you want to spitball it, if you use $5,000 times maybe 5, 6 plans a year, that gives you an idea what that looks like. So maybe piece that together.

Michael: Because you’re…at this point, you’re not necessarily trying to add a high volume of clients, you’re focused on building the practice around you and your personal capacity?

Rich: Yeah, we have another…we have two advisors here to serve the 65 clients, and then we have one service advisor. So we can…I think we can serve another 20 people without having to add headcount at this point. And then the next person we bring on is going to be the person that takes over from us, which hopefully will be sometime…we’ll bring somebody in sometime in the next year or two for that.

Michael: And you mentioned Insurance Whisperer as well. What is Insurance Whisperer?

Rich: So both Dave Winkler, my partner, and myself teach at UC Berkeley Extension. In fact, Dave just…I think he just stopped there recently. The PFP program there offers a variety of classes. I’ve taught four of them over the years. And I would get requests from advisors for help on their RIAs. They know that I do real estate. I’ve taught the class for many years. They know me and to some extent trust me, I think. And so they say, “Can you help us with this case?” So back in the old days, we would do that. But when we gave people or their customers or clients our business card, it would look like we did the same thing that they did, that we’re competing. So I decided a few years ago to create a brand that was separate so that we would be able to help RIAs and other professional advisors with the insurance services that were fiduciary-based and also planning-based. So I created Insurance Whisperer. So that is that, what that’s about. In our marketplace, we help RIAs who want an insurance partner or who might have an insurance license but they don’t want to do it themselves anyway, they want to be able to talk about it. They don’t want to handle the transaction.

Michael: So taking your insurance expertise as a partner with other advisors but being able to put it under a separate brand so as the advisor, when I explain like, “Rich Arzaga is coming in to work with us on your insurance needs,” they don’t feel like I’m putting my client in front of someone else who looks similar to doing what I do. It’s, “Rich is with Insurance Whisperer and it’s going to specifically help with the insurance needs that you’ve got because I’m working with you on the rest on an ongoing basis.”

Rich: Yeah. I think I had more of a concern about that than the advisors, because they know me and they know I wouldn’t do anything to poach their relationships. But I think it helps both clarify their relationship with their client.

Michael: Interesting. Okay. And I’m curious as well, you had mentioned growing the business at FSC, you’re now at LPL. What was the switch and what led you to LPL?

Rich: Well, so back at FSC, I was with a OSJ group that was at FSC, and they decided to leave FSC all at once, all 200 advisors-plus, and move over to ASC, Associated Securities Corporation, which was a subsidiary of LPL Financial. So I liked my relationships back then with this OSJ, and I just…I went with them. And LPL was a big firm at that point, or ASC was. I was a small firm, but it was part of a bigger firm. So I said, “This is…”And their due diligence was comparable and so on. So I made the move with my group. Within a year, inside of a year, we had another BD change, where LPL swallowed up ASC, we became LPL. So probably a good move for everybody.

Michael: Interesting. Part of the…I guess the reality of the broker-dealer world, particularly in the consolidation ages, just sometimes the name of that top changes and you get the news. It’s like, “Okay, I guess we’re over here now.”

Rich: In that case, back in 2009, I think the…it was less on that and more that LPL was planning to go public. So let’s clean things up and make them consistent. So that’s what happened with that. They rolled up I believe it was three or four different firms into LPL. And now LPL is about 16,500 or 16, 600 advisors in the group.

Michael: So as you look back over this journey, what surprised you the most about building your own advisory business?

What Surprised Him Most About Building His Advisory Business [1:12:02]

Rich: How slow it is. So I’m used to things happening very quickly and…

Michael: I guess particularly if you originally built in the tech world, in the 1990s boom, like, things moved really fast then when they got going.

Rich: Yeah, it was fun. I had so much fun in that industry. But here, not only do things lag around technology, and especially around insurance technology, but also developing a business as a comprehensive planner really is a lot of work. If you really do the work, which I would argue that probably a lot of your listeners do do the work because of the nature of your content, but a lot of advisors don’t do the work, and they’re growing so much quicker. And so I kind of look at that, and I wish it was that way because that’s what I’m used to, but this has been very slow. So that’s what I’m, I guess, most surprised by and even frustrated by.

Michael: Yeah, it’s the comment I make for a lot of younger advisors, just newer advisors coming to the industry, like, you have to view what you do here as much more a marathon than a sprint, right? We try to come out fast on getting started, particularly if you don’t start with enough savings or fallback net for yourself, like, there’s a lot of pressure to get revenue going very early on. But as with running a marathon, if you try to sprint right out of the gate, you’re much more likely to just tire and burn out. You have to make sure you’re set up to pace yourself through it because it’s a long run. Like, it’s a really positively compounding one the longer that you’re in it, but it’s a really…

Rich: Yep, yep.

Michael: Well, and I’m struck as well, I think you still got a much faster start than a lot of advisors if you got up to $100,000 even of gross revenue in the first year and $200,000 in the second, which I guess is in part to the virtue of either being a career changer coming in and just being able to come at it without some of the age challenges that are there for younger advisors, and coming with your designations, your studies. I guess, technically, when you got started, were you not able to use your CFP certification? Like, you couldn’t use the letters yet because you didn’t have the experience, or did you have enough?

Rich: Correct. Correct. So I had the education. And I didn’t even have my CCIM back then because I didn’t have the hours or the portfolio that’s required to be able to qualify for that. So I had to wait for both of them for a couple years. And I remember those years, I remember being there on the weekends, being there late, either in my T-shirt, and the weekend when the office cooler was off and sweating. So it was a lot of work. But that’s really okay. That’s what I really enjoyed doing, was building things from scratch. So it wasn’t…the $100,000 was okay. It was a lot less than I used to make, but it was worthwhile. And there’s a lot of great people I met along the way.

Michael: And so, what was it like coming to the table, I guess, with the education, because you’d done the coursework but not the letters?

Rich: So this is the… I guess if you think of the Kolbe test and you look at the different four colors, and there’s the green, which is a Quick Start. And my green is a 10, which is really for a lot of admins unmanageable. It’s just totally focused. So part of that was…so my what, in 2005, so I was only a year into this business, and this is where I get the street cred that you’re asking about, I had a terrible insurance instructor back at Berkeley. Now they’re gone. That person is still with us but long gone. But I realized the way you learn insurance is by teaching it. So I didn’t have very many transactions. I had two at that point, I think, two insurance sales in nine months or something like that, or a year. And so I called the program and I said I was a part of that program. I took this class from this instructor. I remember that class because I know it was a common…weak link for them. I know it was a problem for them. And I said, “I think there’s a better way to teach…” I said, “I think there’s a different way to teach that class.” So I used the word “different.” And they said, “You think there’s a different way?” And I say, “Yes.” I said that.

And this is without…this is back then. They’re trying to solve a problem. I didn’t have very much credentials, except that I called and I said I could teach the class. And this is in the fall of 2005. So they said, “We’re brainstorming.” They said, “I wonder if you can take over the class midway through.” And she realized as she was saying that that it would be very disruptive to do that. Plus, I don’t have any curriculum, plus, she didn’t know I only sold two policies. I needed some ramp up time. So she decided…she talked herself out of it and I actually took it over the very next spring, fully prepared to teach it, still not a lot of actual experience. So teaching in 2006 at the Extension. By the way, I think I’m a pretty good teacher. I don’t know why people think that when they come to class they’re going to get a guy they don’t know.

Michael: Not when you’re 15 years in the program.

Rich: Yeah. So it’s a lot of street cred. When you teach the program, you’re an instructor of PFP classes. And that’s how I was able to kind of pre-use that education. And then I finally got the CFP in 2009 and my CCIM about the same year. Yeah.

Michael: So for you, teaching the program in addition just, there’s nothing like learning it by teaching it, being an instructor for the program became part of the credibility marker that you could use because you didn’t have the designations yet.

Rich: Yeah. And I don’t know, I think it would have still been okay if I didn’t teach, but I learned a lot about insurance. And you have to be smarter than students, and the students in that program are very smart. So it was really a great idea to take that risk.

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

Rich: The thing that comes to mind is I wish we had more of the same clients that we have now. I wish the business was bigger. I would equate that to success. But I don’t know. So that’s really…I wish it was more. I’m not used to slow growth. But I don’t know that if you get your hands on everything and a family’s life and you help them with everything, and I don’t know how much more…we talked about this a few minutes ago. I don’t know how much more you can really stimulate that. So I’d rather have the relationships with my clients that I do now than the growth, but it would sure be nice to have that growth. And I think that’s the most…that’s the area that I struggle with, was it’d be nice to be bigger.

Michael: So anything you wish you’d done differently in the journey? Like, what do you know now that you wish you could go tell you from 15 years ago?

Rich: I think there’s some things that have come up along the way that you think that might work. I remember this program back in the East Coast, and they were talking about building partnerships with CPAs. And I remember spending some time on that and some money on that and realize it was just another…it had great potential, especially if executed, but realized it just wasn’t up my alley the way they were structuring that. So I let that go. But I wish I could avoid distractions like that. But I also think that you learn a lot from those distractions. You take pieces here and there. It would be to streamline my focus a little bit better.

Michael: It’s the blessing and the curse of being a Kolbe 10 Quick Start. You can get off the line to get started on something in the way that a lot of other advisors, a lot of other people struggle with. One of the biggest challenges, I think, for people starting businesses, starting firms, getting launched as advisors is just like, the hardest thing about getting started sometimes is getting started, usually not a challenge for 10 Quick Starts. The challenge is that you may have so many different things you want to get started in that it’s hard sometimes to pick which one you’re going to focus on because another one seems neat and then another one seems neat.

Rich: I think that’s well said. I absolutely agree.

Michael: So, what advice would you have for advisors who are interested in making real estate and making directly held real estate more of a focus?

Rich’s Advice For Advisors Looking To Learn More About Advising On Directly-Held Real Estate [1:20:55]

Rich: I think maybe the first layer would be to make sure that you have an interest in serving that community, that audience, and it’s not just a marketing niche for yourself. The people that love real estate and that are in it can tell if you’re real or not. Plus also, if it’s not really something you really want to do, the people you want to serve, then it might get exhausting for you. So before you decide to focus a lot of time on this, make sure that you would really enjoy this. And I have a feeling there’s a subsection of our advisor base out there or industry that would really enjoy this. And then after that, become credentialed. The best education I had for this is the CCIM curriculum. And it is expensive, and it takes a while. And then to get your CCIM, it takes some work.

Michael: Can you give us at least a sense, like, what kind of costs are we talking about and what sort of work does it take thereafter to get it done?

Rich: Yeah. If I can summarize it, I’m thinking about my prices back then in 2002 or so. So back then it was about $1,000 a class and each class lasted a week. And they didn’t come around very often. So I ended up flying to Denver and Jacksonville to take several of these weeks. So $1,000 a class, you have to take 4 classes, so that’s $4,000 back then. So it’s probably about $6,000 now if I had to guess. You can go on ccim.com and see. And then another elective or two. So there’s that. You have to pass them all. There’s exams at the very end of them. They’re not easy, but for CFPs, they’re doable. Some people there will not pass because they just struggle with concepts and numbers, frankly, commercial brokers. That’s who else is in the audience, commercial brokers and you as a financial advisor.

And then you have to have a portfolio of advice. Now, if you’re an attorney or CPA, you get exemptions from that because you’re deemed to have given advice on that. There’s a way that they can certify that. For me, I got an exemption because I give advice. So I had to show I think it was $10 million or $20 million worth of advice, a plan. I had to show an APOD. I had to show the outcome. I had to show the receipt that I got paid for it. So that was pretty easy because, by my first year or two, it was well over that amount of money.

Michael: Interesting. That’s how they measure it, like, what is the aggregate amount of real estate that you have given advice and done APODs on for which you were paid?

Rich: Yes, correct. And then they look at this…it’s a portfolio you put together, they review it. I suspect they review it, and they want to make sure that you’re not crazy before they give you. Because once you have the designation, then, unfortunately, there’s not any CE to that. That said, there’s only I think probably about 12,000 or 14,000 CCIMs out there. I don’t know the number recently, but it’s not that high.

Michael: Interesting.

Rich: But that’s where I would go for the education. I’d be happy to chat for a few minutes. Wouldn’t charge you but also wouldn’t take a lot of time either. But I’d be happy to answer some questions and push along the way. And I have a class that I teach that teaches financial advisors at Berkeley. So that’s still ongoing. And this next semester, it’ll be online. I’m sure they’ll cap the audience on that so that way people can get real value from it. So those are some tools out there, but CCIM and especially the CCIM 101, where you learn about the APOD and the cash flow analysis, very valuable.

Michael: All right. Excellent. Again, for folks that are listening, this is episode 188. So if you go to kitces.com/188, we’ll have links out for CCIM and Rich’s real estate program at Berkeley if that’s your learning style, and some additional resources for anyone who wants to go deeper on this.

So Rich, what comes next for you from here?

Rich: Thanks for the question. That’s very nice of you to ask. I’ve thought about that a lot over the last couple of years. I think that I love what we do and I love the clients that we serve. I think the next iteration of this is to go in with another firm somehow. I’ve been the boss before, so I don’t have to be the boss this next time, but I want to play some sort of key role and integrate this real estate advice and this Insurance Whisperer service, integrate those into that. So it’d be an RIA. Actually, many firms don’t do the two, but ideally is an RIA that would want to go ahead and begin to offer more specialization in this thing and these asset classes. Insurance is an asset class, or it can be. So that would be neat. Or maybe there’s a smaller version of that.

And then making sure that my clients are taken care of. And I really would like to do more with Insurance Whisperer. It’s such a gap out there, so the next niche. And I’m excited about the potential to marry fiduciary thinking and planning. There is RIA-friendly products out there and services. There’s a few of them out there, no-loads, low-loads, index funds, but they really don’t solve the bigger problem around…the fiduciary problem around selection or planning or suitability. And they’re still not fiduciary-based. They appear to be closer, but there’s a big gap there. So I think there’s another niche there. So that would be nice to explore that more. So I think I’ve got another career left, probably kind of a sub-career off of this one here for that. And I’m excited about that. But right now I’m just…focus is on growth and bringing somebody in, and then we’ll go from there, for the meantime.

Michael: Very cool. So as we wrap up, this is a podcast about success, and one of the themes that always comes up is just even the word “success” means different things to different people. And so as you’ve built this successful practice for yourself and still going and growing, I’m just wondering, how do you define success for yourself at this point?

Rich: Yeah. I know that you ask this question. It’s probably the least best answer I have in this conversation here. For me, it’s situational. I think it’s whatever…is it family? Is it my clients? Is it my practice? And it’s all different, and they all have different metrics. And then when you get to those…when you get there, then the metrics move. So I don’t think I’m in the position to put an umbrella on this and qualify or quantify that. I’d be uncomfortable doing that. I’m grateful that we have great relationships, but I always think we can do more. So I don’t have a definition for that. And then when I finally land on a place for one area, it moves up, and then there’s more to do. And that’s the best answer I have, Michael.

Michael: Well, I love it. I think it speaks to the point you made earlier of just always wanting to be growing and moving forward. Whatever that means for you and wherever it is that you go. Sometimes the growth journey in and of itself is the point.

Rich: Yeah. There we go. It’s been fun.

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

Rich: Thank you. Thank you for your questions. I really appreciated this.

Michael: Oh, my pleasure. Thank you.