#FASuccess Ep 215: Tracking The Client’s (Non-Portfolio) Results To Price Your Financial Planning Retainer Fee, With Shawn Tydlaska

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

Resources Featured In This Episode:

Full Transcript:

Michael: Welcome, Shawn Tydlaska, to the “Financial Advisor Success Podcast.”

Shawn: Hi, Michael, thank you for having me. I’ve been a loyal listener since your first episode. And I’m so glad that you got coerced into doing this podcast.

Michael: I appreciate that. I appreciate that. I’m glad you’re able to join us. You did a really popular post on the site – I think three-plus years ago now – about how you had launched your own firm 12 months earlier and you had put forth your “12 Tips to Survive Your First 12 Months,” which we kind of cheated a little. I think it was actually 13 tips, but 12 tips in 12 months just sounds a lot better. So you had your 12/13 tips of just what had worked for you because I know you had a great start coming out of the gate, you were building subscription clients, you had gotten dozens going.

Now, it’s a couple of years later. I know the practice has grown much larger for you. There are several team members on board. You’ve got visions of growing it even bigger. And so, I thought it would be a cool opportunity as both, maybe a little bit of revisiting some of what you’ve written and talked about in that article, and how it’s changed in the years since.

And also, just how you’re looking at the advisory business now and going forward because I know you run a little bit of a different business model than a lot of others that are out there. You built early on in the subscription-fee realm; you do a lot with retainer fees and some net-worth-based fees. And as we have all this discussion around sort of the industry’s innovation of advisor business models, I’m always a fan of talking to advisors that are doing something a little bit differently and making it work. So just really excited to talk about the advisory business and what you’ve built.

Shawn: Yeah, me too. Yeah, it’s crazy to think that that article was three and a half years ago. Now I’m just over four and a half years into my business. So happy to dive in wherever you want to start.

Michael: So I think to start, just paint us a little bit of a picture of the advisory firm as it exists today. Who are you, what do you do, who do you do it for, what does this financial planning business look like?

What Ballast Point Financial Planning Looks Like Today And How Their Services Are Priced [05:01]

Shawn: Great. Yeah. So we currently serve 115 – actually I just signed a couple more clients – 117 families across the country. Most of them are here in the Bay Area. I’m located in the Bay Area in Burlingame, just south of San Francisco. Our team, we have 4 team members.

I’m 39, most of my clients are kind of in my age group. Our average client is about 38, a lot of tech professionals, a lot of couples, a wide range of people just starting out in their professional careers. I say we help people, 25- to 45-year-olds. We have a few clients that are in their 50s, a couple in their 60s, but most of our clients are in their 30s – people starting families, buying their first homes, getting life insurance, those sorts of things for them.

In terms of what we do for them, it’s comprehensive financial planning. I say the three differentiators for us are that we have a financial life planning tilt. I try to balance doing the life planning and being efficient. So we do a blend of some of Kinder’s work, Money Quotient, and some other values exercises that I’ve learned to use and incorporate in my practice over time. For the second piece, we do a lot of cash flow planning. I like to say we help clients turn income into wealth. And then we do a lot of tax planning as well.

We are able to do taxes in-house. That’s something I’ve experimented with over the years. But what we’re doing this year is we’re going to partner with a tax preparation firm. For some of our clients, tax preparation is covered in their fee. But for most of them, they pay that separately.

For our business model, it might be a little bit different from some in that we charge a flat annual retainer. That covers their investment management. It covers their financial planning. And then for some of the – we call them ‘Comprehensive’ clients; there’s about 20 of those – it covers their tax return as well. We also do tax projections for all of our clients. And in the fall, we do a lot of stock option planning. So some people figure out AMT Crossovers and things like that. I like to tell our clients that we help them kind of align their money with their values.

Michael: So you’ve got a lot of interesting stuff there in terms of what the firm does. So let me start on the fee model side because you’d kind of put in there you do a flat annual retainer, it covers financial planning; it covers investment management. So talk to us a little bit more about the retainer fee model. What are you charging? How is the fee set? What does it add up to for clients?

Shawn: Yeah, so that’s evolved a lot over the years. I’ve tried net worth and income, I’ve tried an AUM model where once they get to a certain amount of AUM, they don’t have to pay a retainer anymore. So what a typical fee structure looks like right now is that we do charge a one-time onboarding fee. For single people, that’s typically $500 to $1,000. For couples, it’s $1,000 to $2,000. And then we charge a monthly retainer. On average, it’s about maybe $330 a month. So our average fee per client is about $4,000 per year.

Since there is more work that goes on in that first year, we charge kind of that one-time onboarding fee. So say, it’s $1,000 for that onboarding fee, and then their retainer might be $4,000 for the year. So their monthly retainer starts on the 1st or the 15th after that first meeting.

We have two packages. We have one that’s called a ‘Wealth Builder’ package. And I’ve always wanted to try to serve, maybe a young professional, someone who’s just starting their first job. So our lowest package starts at about $500 upfront, and 150 bucks a month. That’s for someone who may be referred to us or someone that finds us on our website that I really just want to help.

But what’s actually posted out there that’s public-facing is we have a $5,000 flat annual retainer for individuals, and it’s $7,500 for couples, that’s our minimum. And that’s what I was referring to as our ‘Comprehensive’ package. And that includes their tax returns as well.

And then, just recently, I added a net worth kicker to it. So what I was finding was, there were some clients that were coming to us – and it’s probably just because I’m here in the Bay Area, but there’s a lot of wealth here – and I was finding that some clients had a net worth of $5, $6 million. And then, if they were an individual, they would just be paying $5,000 a year. But their complexity was really complex. I’m doing a lot of tax planning and investment planning and things like that. So I added a net worth kicker.

And it essentially works out to be the $5,000 covers your first $2 million of net worth. And then, for each additional $1 million, it’s $1,000. So it’s 0.01% of your net worth above $2 million. So, for example, we actually just signed our biggest client this week, her net worth was over $8 million. She worked at Airbnb for six years before they IPOed. And so her fee is at $5,000 for the first 2 million and then for the next $6 million, it was 1,000 bucks per year. So it’s per million per year. So that works out to about $11,000 for the year for her.

Michael: Interesting. And so when you talk about this net worth fee or sort of the net worth, I guess, ‘kicker’ or add-on for more net worth more complexity, I guess, does everything go into that bucket? I feel it sometimes sounds like a simple thing, but it’s not always in practice of just figuring out what exactly counts in net worth. Everything? Even stuff that you’re not necessarily doing much with, or are there certain exceptions? How do you value maybe things that are a little less liquid and harder to value? How does that work in practice?

Shawn: Yeah, so for her, it included everything. She didn’t have any complex like small businesses or anything like that. It did include her home. And yeah, I know that there are some firms out there where they might not advise on certain things. To be honest, this is a newer model for us. We just rolled it out at the beginning of the year and we’re in January now, towards the end of January. So it’s fairly new for us. So it’s everything that we advise on is what, I would say, we would include in that.

Michael: Okay. And is the idea that you’ll sit down and update this every year going forward?

Shawn: Yeah, I’d imagine every two years going forward. Yeah, I don’t want to have to get into the practice of every time we do a review meeting that we have to sit down and talk about fees.

Michael: So talk to us about just how many clients overall now are… I guess with the firm or under packages. You said 117 clients or 107 families – is that all of whom are in some version of these retainer-fee models? Either they’re your Wealth Builder clients that are $150 a month, or they’re the more main clients that are $330 a month, or they’re the comprehensive clients that are at $5,000 minimum includes tax services?

Shawn: Yeah, so we’re at 117, I would say about 20 of them are on this comprehensive package. Everyone pretty much gets the same type of service. We just wanted to have a way to tier it with the amount of wealth and the amount of complexity that we’re dealing with and a little bit of the capacity to pay to some extent.

I’m the lead on about 63 clients right now. Liz Plot, she’s on the team. She’s actually based in Maryland. And we have maybe three clients out in Maryland right now. She moved there about a year and a half ago. Her husband is in the military and got reassigned out there. So she’s the lead on about 36. We have a newer team member, Brandon Amaral. He joined us just about five months ago, and he’s already the lead on maybe 15, 16 clients.

One thing that was a big shift for me was that last year I stopped taking on clients on my own. So I’ve kind of capped my capacity so that way I can focus on other parts of the business. So right now, Liz and Brandon are the only lead advisors that are taking on new clients at this moment.

Michael: Interesting. So when you talk about this framing, now help us understand a little bit more of just what do clients get on an ongoing basis? You’ve mentioned, “For our comprehensive clients, we’ll do tax projections as an additional service.” What’s the core service that I get from your firm throughout the year at $330 a month as a core client?

The Services That Ballast Point Financial Planning Offers Their Clients And Shawn’s Client Service Calendar [13:56]

Shawn: Yeah, so everyone pretty much gets the same service. I just did it that way just to make it easier to know what we’re going to be offering our clients. So when a client signs up, we have an initial onboarding sequence of three meetings. We call them specific things.

So the first one is an initial client meeting, we call it an ICM. We go over their values, their balance sheet, anything that I think is really, really important, anything that they really think is important. So for me, I want to make sure we look at all their insurance policies and their credit score. In the second meeting, it’s more about their investments and cash flow. And then in the third meeting, we deal a lot more with the goals and estate plan. And by the end of the whole financial planning process – by the end of those three meetings – we will have covered the whole comprehensive financial process.

Kind of the sequence is: Let’s understand what’s important to you. Let’s understand your cash flow to see what goals you can afford and how much money is left over on a monthly basis. Then in that third meeting, let’s talk about your goals. We call it a ‘dreams and possibilities’ exercise. And then we start prioritizing, “Okay, you’re going to fund this account first.”

And then from there, I call it a ‘four-two’ model. So the ‘two’ part is we have progress meetings twice a year. So every six months, we’ll get together for a progress meeting. But every quarter, we’ll touch base. And typically, what that looks like is that in the spring, we’re doing our clients’ tax returns and reviewing their tax returns.

Last year, we did 65 returns in-house. This year, we’re probably looking at…you know, helping our clients. We have over 100 clients, so we’ll probably be helping them review their returns. In the fall, we’re doing open enrollment, and then doing a lot of tax projections.

So I say that at least every quarter, we’re touching base with our clients. And we have set agendas for each one of those meetings. I can share with you my client service calendar. We break it up into six-month increments, and it’s broken out over two years. So you don’t need to review someone’s estate plan every six months or every year, but once every two years, it fits into one of those six-month chunks.

But every time we meet with our clients, we’re going to review their balance sheet. We will send them a survey in advance to let us know if they want to add anything to the agenda. And that’s how we break things out. So yeah, it’s broken out into six-month increments with consistent agendas.

Michael: Interesting, interesting. So first of all, I would love to share out the client service calendar. So for those who are listening, this is Episode 215. So if you go to kitces.com/215, we’ll add a link for you to be able to look at the client service calendar that Shawn uses.

Shawn, can you talk us through a little bit more though, just what does this two-year cycle look like? What does come in the six-month increments over the two-year cycle?

Shawn: Yeah. So through January through June – this is kind of the beginning of a new two-year cycle for all of our clients – in this segment, we’re looking at everyone’s investments. Once a year, we collect all of their statements, including their 401(k)s because sometimes we’ll provide recommendations. We’re not really sure if they’ll actually implement it. Because sometimes you have to change your current investments, and then also your future contributions.

And so we review all their investments during this group of meetings. We are doing a life planning exercise. So we’re actually using…there’s a free one through Goldman Sachs, the Money Mind, where you can see how people think about their money. So we have them do that exercise. And we review that with them together.

Once a year, we try to do some life planning exercise with them. Last year, we did Kinder’s Three Questions with them. The year before that, we did a reverse bucket list with them. Those are a lot of the… We’ll also…

Michael: So, you come up with some new life-planning-oriented exercise from year-to-year that you’re then going to do for all clients that are going through that cycle?

Shawn: Yeah. I try to keep it new and fresh with our clients. I don’t know what the standard retention rate is for a model like mine. Sometimes I feel I always need to pull a rabbit out of a hat or just do something magical or amazing for my clients to keep them excited and onboard. Because we’re not doing AUM, so I feel it’s easy for clients to move on, or I call it kind of ‘graduating’, when we’ve automated all their finances and taught them how to manage things on their own.

We use Betterment for Investment Management, so it’s easy for them to just flip over to become a retail client. So that’s why I try to keep things interesting with additional items, additional life planning items, to kind of get them thinking a little bit differently. Like the reverse bucket list, it’s thinking about the last year: “What are three things that you’re most proud of?” You know, a lot of times people don’t take time to stop and think about that kind of stuff, and I would get the feedback. “Man, it was really hard to do that, to kind of think back about things like that.”

Michael: All right. So the first six-month cycle there’s some reviewing investments, there’s doing a life planning exercise. It’s, I guess, the first part of the year, so you may be doing your spring review of tax returns as well. So what comes in the second half of the first year?

Shawn: Yeah, that’s right. We also do a financial independence review. So that could be putting things in RightCapital. That doesn’t really mean a lot for our clients since they’re so young and then we’re projecting for 70 years, but we have some rules of thumb about having them be on track. And then we also check their credit scores in that first six months.

In the next six months, we do the balance sheet review again. We sent out a financial satisfaction survey. It’s similar to the questions that Money Quotient has about how satisfied are you with your savings, that you’re on track to retirement, that money isn’t causing an issue in the relationships that you care about. We check their progress towards their goals. This is something I wish that we had better tools with in our industry of just goal tracking. Right now, it’s just manual in an Excel file. A lot of our planning is in Excel.

Michael: So talk to us a little bit more about that. What kind of goals are you tracking where it doesn’t work to have them in RightCapital or some other financial planning software and just be doing updated projections towards goals?

Shawn: Yes, things like funding their home down payment goal. Sometimes, we set up a banking structure for our clients of, “This is how much you should have in your checking and savings. This is how much you should have in your emergency fund. This how much you should have in a high-yield savings.” And then, we create some of these – we call it a ‘possibilities’ fund – where it’s a three-to-five-year time horizon of a goal. And we do something with Betterment where we set up 40% stocks and 60% bonds.

So it’s a little bit invested in the market, but it’s muted from the downswings. So we might use that for a home down payment if it’s a little bit further away. And then, that is a multipurpose account. So it could cover things like if you want to buy a new car, start a business one day, supplement your kid’s savings for college. It’s hard to kind of segment that out to what portion of that fund is towards what goal. So things like that, we’ve just had to create just custom-make tables in Excel to just track “how funded is that goal?”

Michael: Okay, and so what else comes in the second half of year one? You have a financial satisfaction survey of how they feel about their progress. You’re actually quantifying and tracking progress towards goals so that you’re tracking the Excel spreadsheet. What else comes up in the second half of the first year?

Shawn: Yeah, I had to pull up my client service calendar so I have it in front of me and I can talk you through it. We do the estate plan review. We do open enrollment review for our clients and then also do the tax projection during that time.

Michael: And so then what changes or shifts in year two? Because I’m presuming some of these “tax prep and review in the spring” and “an open enrollment review in the fall” are kind of consistent annual processes because you’ve got clients that deal with an ongoing basis. So what otherwise changes in year two of a two-year client service calendar site?

Shawn: Yes, so a lot of the same things we covered in the first six months: updating their financial independence projection, we have an update survey for them, and doing another new life planning exercise with them. This is the sequence where we review all their investments, checking their performance, making sure that it matches their time horizon and risks. So a lot of the same things we did in that first January to June bucket.

Michael: Okay. And then is it similar in the second half of year two? Another financial satisfaction survey, goals, goals update, and open enrollment review?

Shawn: Yeah, the other two things there are checking everyone’s beneficiaries, and then also all of their insurance policies. And so, yeah, again, for some of these things, I wish there were better tools. So for all their insurance policies, we created a tab in Excel that lists out all the premiums, deductibles, and liability limits and you make sure that… So we have it all listed out in a table like that.

And then the same thing for their beneficiaries. We actually have our clients send us screenshots of all of their accounts that do have beneficiaries and make sure that they actually are the people that they want. So it’s actually making them do that legwork. And then if they added any new accounts over the last couple of years, we will have them update their beneficiaries and send us screenshots of that as well.

Michael: Interesting. And so, why a two-year cycle? You could have made it a one-year cycle, you could have made it a three or four or five-year cycle, just wondering what brought you to two years as the way that you structure this?

Shawn: Yeah, it’s funny. I was just looking at all the things that we could potentially cover in a financial planning engagement. And we wrote it all down on a Post-It note. Liz and I, we did an off-site retreat. She used to live in Monterey, which is pretty close to where I live here in the Bay Area. And we just wrote down all the things we could possibly cover in a financial planning engagement. And then some things we review every single meeting. And then some things, I just thought, over a two-year cycle, it’d be good to review.

We could probably update it, maybe just do the estate plan every three years or as life event-driven. I think just two years just made sense to us. And this is actually, I think it’s our second or third time… I think it’s our third time going through the two-year cycle. So we’re kind of repeating it, and it just gives us some structure, and yeah, it just kind of made sense to me.

Michael: Interesting. And do you get, I guess, any gaps or any challenges with clients that you’ve got this two-year cycle with your four-two meeting structure of, four check-ins, two in-person with updates, but your model is monthly subscription fees? So you do you get any pushback from clients? Like, “I’m paying you every month, but we only check in four times a year? Why don’t you charge me quarterly? Or what have you done for me this month?”

Shawn: Not explicitly, but that is something I worry about. That’s why I try to set expectations – or I do set expectations upfront – that this is an annual fee, but you pay it monthly. And we just break it up into monthly installments just to make it easier to pay on cash flow.

And to alleviate worry from the client or prospective clients, I say, “I want you to be happy that you have us in your corner. If at any time you don’t feel you’re getting value, you can cancel at any time. You’re not locked in for any certain length of time. There are no penalties or anything like that.”

When I first started, I was tracking the value – the quantifiable value – that I was bringing to my clients. And on average, it was $457 a month. And at the time, I was charging, I think, $280 a month. So I knew that I was actually delivering more value than what I was charging.

And now, I don’t think about it that way. I’m confident in the value that I’m providing to my clients. And if it’s not a good fit, then we don’t normally end on… I don’t think we’ve really had any clients fire us. It’s more been a mutual parting of ways. So no, I haven’t got…

There are some clients, maybe just two or three, that are like, “Yeah, what are we going to do this month? What are we going to do this month?” And I’m like, “As a reminder, we’re not going to meet every month or do something every month. It’s going to be every six months.” Some of them have decided on their own that this isn’t a good fit, and then they’ve left.

Michael: So I am curious. You mentioned there that there was a point where you were charging clients $280 a month, but you measured out and figured out the average client was getting upwards of $400 a month of value. How do you actually figure out that number in your model? Where does that number come from?

How Shawn Calculates The Actual Value He Provides To His Clients And The Type Of Clients He Serves [26:59]

Shawn: Yeah, I had a ‘results-thus-far’ tab. So for each client, we have a big Excel, just like a book, or just a big Excel file for each client. And one of the tabs I had in there was the ‘results-thus-far’. So if I was recommending they change their deductible on their auto or homeowner’s insurance, that would make their premiums go down. So I’d plug that in there.

You see this all the time. Some of the clients, they were doing a Roth 401(k) because their company just started offering it and thought it was a good idea. But they were really, really high-income earners. So we flipped them over to do the pre-tax version. And so that could save some of our clients $9,000 in taxes.

Early on, there were some clients that had some whole life insurance policies. We were able to get new term policies in place and save them that monthly fee, all kinds of stuff like that, or refinancing a mortgage. I was really big into credit card hacks early on, like, you get a $500 signing bonus.

Earlier on, a lot of my clients had student loans, and we helped them refinance that and get refinance bonuses. So, some of my clients, they refinanced with three different companies. So they would break up their big student loans into three smaller chunks. And each time they did that, they would get between $300 to $500. One of my clients actually got $1300 to refinance her student loans, and it lowered the interest rate, and it shortened the period of time for her to pay it back. So there’s all kinds of things that I was tracking to come up with that number.

Michael: Interesting. And so the idea is just every time you do a thing for the client, you are capturing it in your results-thus-far tab. And I guess some of these ended up being one-time items. We did a refi, and you got a $500 credit or bonus. Or, we swapped credit cards, and you got a $500 signing bonus. Others are more ongoing, like, “We replaced your expensive insurance with something better.” Or, “We changed your deductible and improved your premiums. You’re saving X dollars a month, every month going forward, now that we’ve made that change.”

Shawn: I had a green, yellow, and red coloring to it. So, green was actual things that improve their real cash flow. Yellow is things that maybe deferred their cash burden, so changing their 401(k) just defers when the taxes are due. And then the red actually cost the client money, so getting an estate plan and things like that.

So then at the bottom, I had two categories: the real cash savings and then the cash savings like when I would take into account also the 401 (k) switch. And I would do that early on. Just there is that imposter syndrome of when you’re first starting your firm. And it was just for my own confidence, to be honest, that I was delivering value to my clients. And I stopped doing that, maybe after a year or so.

Michael: Oh, interesting. So you were doing it early on as a results-thus-far tab and adding it up. But you actually don’t do that going forward at this point?

Shawn: That’s correct.

Michael: Okay. So you don’t feel any pressure? You don’t feel any pressure to keep doing it for the clients, and it was really more just for your end to get you comfortable with your fee? You don’t actually feel the pressure to just keep doing this to send it to clients on an ongoing basis?

Shawn: Right. Yeah. And also, one thing that it really helped me with…you noted my average fee at the beginning. After maybe a year, I got more confidence, and I raised my fees for existing clients. And so the results-thus-far tab helped me when I had those conversations with my clients about with our raising fees, to be honest.

So at the end of the review meeting, I went through and raised fees for about 20 clients. At the end of one of our meetings, I would say, “These are the things that we’ve accomplished together. I keep track of some of the actionable things that you’ve done that actually have improved your cash flow. If you were to become a new client today, this is what your new fee would be. But I want to thank you for your loyalty.” I’d frame it in a certain way to say like, “I’m not going to make you come up to the current fee, but this is what your new fee is going to be.”

So having that data was really helpful when I did raise fees. And now, I’m at a point where I feel my fees are pretty fair across the board for all my clients, where that’s another reason I stopped keeping track of it as well.

Michael: So talk to us a little bit more about just what the typical client looks like or just who’s paying $330 a month or $4K-plus a year for accounts that get sent out to Betterment for Advisors? You said they’re 30-something-year-old clients on average. And you said average client was 38.

But talk to us a little bit more about just who hires you? Who engages into this kind of model? Because I think for so many financial advisors out there, that’s a pretty healthy-sized fee in particular for younger clients that don’t necessarily have investment accounts, and especially if you’re sending the investment accounts out to Betterment. So who engages the service?

Shawn: I would say there are a lot of tech professionals in my area. There are also some people that are just starting out as… We have some teachers. But I would say the classic client is two professionals, maybe they just had a baby or they want to buy a home, and they’re coming to me saying things like, “We’ve been meaning to do this for a long time. We don’t know what we don’t know.”

Actually, this week, it’s kind of funny, I had three prospects from Google reach out. And I like making the…it’s kind of cheesy because they work at Google. But I always say like, “You can google the answer out there. The answers are out there. There’s tons of information, but I can help you shorten your learning curve, help you filter out the noise. This is something we do on a day-to-day basis. So we’ll help you figure out what you really need to listen to.”

I read the book “Building a Story Brand.” And that helped me frame how I think about my relationship with my clients, and kind of in the prospect process as well, of taking them on a journey from confused and overwhelmed. That is where I feel a lot of people come to me. And then, by working together, they’re confident and informed. And we’re providing them an opportunity set of decisions and tradeoffs to make.

So just getting back to your original question, the typical client, they make a good living here in the Bay Area, so they’re able to afford the fee. Since we don’t charge an assets-under-management fee, most of the time, we’re sending our clients old IRAs to their current 401(k). So we’re actually doing a lot of rollovers into 401(k) plans. And that way, it allows us to do backdoor Roth IRAs for our clients every year.

So those are the types of clients that typically come to us. And I guess also a lot of the issues they’re facing – specifically with the Tesla clients, and we’ve had some Airbnb clients lately – a lot of people, they don’t do anything with their stock. They just let it vest. And a common theme I’ve been seeing is they don’t know what they would do if they did sell it. So they’ve just been accumulating, accumulating.

With Airbnb, in particular, people were able to sell 15% of their shares in the IPO. And for some people, that’s like a million dollars. And so it’s just sitting there in cash, and they’re like, “Well, okay, now what? What do we do with this?”

And so some of the things we’re doing are like, “Okay, did you pay enough in taxes? Let’s make sure you paid your quarterly estimate.” This is before January 15. Like, “Make sure you get your last quarterly estimate in there. Let’s see what you’re going to be on track for next year.” So it’s a lot of that tax planning.

And then, having that values tilt. We’re doing things like, “What’s the money for? How can we invest it? If you don’t really know what it’s going to be for, how can we invest it and still maintain liquidity to it and give you those…?” That’s where you kind of like that ‘possibilities’ fund.

Michael: And so, I guess, what’s typical income for clients then? Because I’m going to presume that you’ve got clients at some of the tech firms in the Northern California Bay Area, Silicon Valley area, some have some big stock shares that vest, as you’ve noted here, but I’m assuming incomes are pretty healthy as well. Is there a typical income profile for clients?

Shawn: Yeah, I would say it’s probably $400,000, when you add in the stock that’s vesting. I would say, pretty easily, most of my clients make six figures, just as kind of base. Bonuses are like 10% to 20%. And then with the vesting stock…

It’s just crazy. Honestly, it’s just crazy the amount of wealth that’s here in the Bay Area. A lot of my clients are first generation wealth. They didn’t come from money. They grew up, similar to me, just a middle-class background. A lot of clients are from immigrant families, so they’re the first generation that went to college. So they didn’t have really great role models for investing. Their parents might have just told them, “Okay, save, don’t go into debt.” And that’s it.

So when they have this amount of money, they’re not used to dealing with this type of money. They don’t have like…”We don’t talk about it. And as a culture, we don’t talk about it. We don’t have good financial literacy in our schools.” So, yeah, they are making pretty good livings.

Michael: And so, I guess, it’s good to frame them from that perspective. When you’re working with clients that make a couple $100,000 a year – $330 a month retainer fees, $5,000 to $7,000 a year annual fees, including tax services – you are still coming out with something that’s 1% or 2% of their income for what they earn. Which is…wealth is relative. What’s expensive or not is relative.

So, what might be an expensive fee for some clients is totally quite manageable and comfortable for others. You’re working with a segment that’s got some pretty healthy income and assets, albeit not traditional liquid investable assets, but they have incomes, they have net worth. So fees can feel very reasonable relative to net worth, even though by industry averages, you have a very above average fee.

Shawn: Yeah, I just looked it up. And my average is $260,000 for family income for my clients. And I would say at the low end, maybe $50,000 or $60,000 is at the very, very low end of what someone needs to make to be able to afford $150 a month. But that’s where I was…I heard about that 1% to 2% of income to set your fee from you guys at XYPN and you, Michael.

And then, also as I have raised fees over time, I’ve also tried to think about, “What’s the alternative?” If they go somewhere else, what other firms would be charging them and if they have investable assets of $4, $5, $6 million. I’m trying to do what’s fair for us as a business of what I know we’re providing, the service we’re providing and what they would get somewhere else. But also trying to balance that with what’s reasonable. What do I need as a firm to grow and hire new team members and from that end as well?

Michael: Yeah, it’s been interesting, we’ve seen this just cropping up in our pricing research on the Kitces Research side as well that, when we see advisors charging flat fee models, whether its annual retainer fee, monthly subscription fee, just outright upfront financial planning fees, that the sort of benchmark fee for AUM is about 1% of assets, right? That’s our traditional industry benchmark. And the fees as a percentage of income, I’m finding, are showing up right around the 2% range. So 1% of assets or 2% of income.

And I don’t think anything magical about it. It just seems to be where people are comfortable. Like 1% of income is fine, and then 2% of income causes the, “I’ve got to talk to my spouse about this. But if we’re on board, we’re on board.” You can get a little bit higher than 2% of income if you’ve got a good focused offering, but you have to be able to clearly articulate what your value is and why you’re worth that fee.

And it just strikes me, relative to those numbers, your fees end out right in that same space, that $50,00 to $7,500 fees on an average client with $260,000 in income is right around 2% to 3% of their income, maybe a little bit less for the clients that do have some stock bonuses vesting and other things in there that’s sort of lumpy, illiquid income, but a big chunk of their net worth because that’s who you’re working with when you’ve got a lot of tech clients that are building tech company wealth.

So then talk to us about where these clients come from, that you’re getting multi-hundred-thousand income, multi-million-dollar clients in the Bay Area? I understand there’s a lot of assets and income and wealth there because of what’s going on in the technology sector. But there’s also a small army of financial services professionals in the Bay Area because there’s a lot of wealth, and where there’s wealth there tends to be a financial services industry to participate in that wealth.

So, where are your clients coming from? And how are you getting to the point where, at the end of the day, you’re four-and-a-half years in, you’ve got 100-plus clients that are paying multi-thousand-dollar financial planning fees with multi-hundred-thousand-dollar incomes? Where’s all this new client flow coming from? How do you get them all?

How Shawn Attracts His Ideal Clients [40:53]

Shawn: Initially when I started, it was “build it and they will come,” like the “Field of Dreams” analogy. So that doesn’t really help out newer… So initially, there weren’t a ton of people on the XY Planning Network. I think I had 40 leads from the XY Planning Network when I first launched four-and-a-half years ago. A lot of those were reaching out for student loan planning.

Over the years, I was really, really hustling. I’m meeting prospects, I made myself available when they were available. So I’d meet prospects on the weekends. I remember there were three weekends within a month, I think, where I met three prospects for hour-long meetings on Sundays, so three different Sundays, I met three prospects at a time, and I just remember being just exhausted.

So I was meeting people at night, on the weekends. And when I say, “build it and they will come,” I mean putting up my website, making it really easy for people to sign up for a meeting, being on the relevant websites like NAPFA, Fee Only Network, XYPN, and CFP.

And then, that first year, I had two people; they were actually friends from business school, who I did a little bit of planning for, just on a pro-bono basis. And they’re like, “This is really great. How can we help support you?” And so I asked them to write a Yelp review. And so two of them wrote a Yelp review, and just from those two Yelp reviews, six people signed up as clients in that first year.

And so, fast forward, there are certain rules around Yelp and soliciting reviews, and there are actually new changes happening right now. But for me, to make sure that I was covering myself from a compliance standpoint, I wouldn’t just try to cherry-pick my clients each year, I would ask all of my clients to submit a review and send the link to my Yelp page.

So fast-forwarding now to today, about a third of my clients find me on Yelp. Maybe it’s a Bay Area thing. I think it’s also a social proof kind of a thing where you want to see someone’s review of…even things on Amazon or restaurants. You want to see some reviews out there.

So I’ve got over 20 reviews that are five-star from real clients. A lot of them actually write it as they’re leaving. They’re like, “Thank you, we like working with you.” So, when they would write nice things, I would say, “Well, would you mind dropping that into a Yelp review?” So a third came from Yelp, a third came from existing clients and just my natural market of people referring, and then a third came from everywhere else, kind of just nothing really stands out from that last third.

Michael: So take me back a little bit more to the beginning of what got you going. You said a whole bunch of different stuff there: you stood up your own website, you got on other websites – XYPN, NAPFA, Fee Only Network, and CFP Board, which all have find-an-advisor profiles – you got set up on Yelp, you got some from there.

As you look back, what actually was working and what didn’t help as much – for advisors that are getting going today and hearing this – where should they be focusing, or at least what worked for you in focusing to try to get that initial traction?

Shawn: Yeah, I heard networking with centers of influence was a thing. So I tried to do that initially with the big RIAs here. But when I first launched – I moved to the Bay Area, I think, August of 2015 and then I launched May of 2016. So I was pretty new to the area. I’m from Southern California originally. So I didn’t have a big personal or professional network in the area. So I was networking with larger RIA firms.

And if I had to do it over again, I would have skipped that and focused more on NAPFA and XYPN members in my area because when you’re first starting off like that, you’ll take anybody and you’re really hungry. You’ll give way more service. And then once you’re in the network for a while or you’re an NAPFA person, you’ll get prospects that aren’t good fits for you. And so then you want somewhere to refer them to. So I would have focused more on NAPFA firms and XYPN firms and kind of developing relationships there because with the big…

Michael: Just in terms of joining the organizations and literally going out and meeting other advisors in the area and just saying like, “Hey, you’re growing, you’re doing so well. I’m new,” or “I’ll take your castoffs and I’ll serve them really, really well because I’m new and I need some clients and you’re established and you’ve got a more focused clientele at this point.”

Shawn: Yeah, like coffee chats with them, going to the local FPA events, going to local conferences, those sorts of things, kind of building relationships that way.

Michael: Okay. So organizations like NAPFA and XYPN, you also mentioned like Fee Only Network’s website, CFP Board’s website, were those actually helpful for you or didn’t draw much? You mentioned FPA, actually, as well. What was working for you, at least, with the asterisk, “This is what people do in the Bay Area. Your mileage may vary depending on your regional location around the country”?

Shawn: Right, I think the XYPN network was where I got the most leads that first year. Like I mentioned, I got 40 leads from XYPN. I think I had a total… And when I say ‘lead’, it’s like we do a one-hour discovery meeting. We did about 100 that first year. So that was what was working for me early on.

I tried a lot of different things. I went to my local library and did a speaker series there. And that’s actually how I found some of the professionals in my network. So for one session, I partnered with an estate planning attorney and we did an ‘Estate Planning For Young Parents’ session together. One I did: ‘Buying Your First Home In The Bay Area’, with a real estate professional. Then another one was just, they’re just a bunch of tips for millennials.

And there weren’t that many people that attended, maybe six. And then one was my wife, Jen. And then one was the real estate agent’s parents came. But I did get a client from that, and she ended up signing up a year later.

And so, I just approached it like – there was a programs person at the library – and said, “Hey, I’m a new financial planner. I’d love to put out some content.” The library doesn’t have a ton of content for young people, young professionals, and so they wanted to do that.

And they actually even paid me for it. They were like, “Oh, do you have an appearance fee or honorarium?” I was like, “I don’t even know what an honorarium is. I had to look what that is.” I asked what their normal… So I really didn’t know. And so then I asked, “What do they normally pay?” And he suggested 150 bucks a session. And I would have done it for free, but since they were offering, and I was trying to be scrappy and do whatever side hustles I could, it was a nice little perk.

Michael: Yeah. Well, yeah, I got early on, like, “You’ll pay anything? That’s better than the zero I was otherwise going to get with that time So, sure, that sounds awesome. Yes, that.”

So then talk to us a little bit about how it grew and changed over time. As you noted, you’ve got a few team members on board now. So I guess I’m wondering what was the point at which you decided, “Okay, I need to hire. I need some more help in here. This has to go beyond just me individually serving my clients.” When did that first transition come?

What Prompted Shawn To Begin Hiring Additional Advisors For His Firm [48:30]

Shawn: Yes, that happened pretty early on for me. And my vision for the firm has changed over time. And it evolved over time. I would think at maybe just over a year of being in business? I was getting traction, and I was bringing on a lot of clients. But just the onboarding process itself, it takes maybe 20 steps to sign the agreement, send it to Dropbox, and get them on RightCapital. And so I was just wanting to leverage my time better.

So I started by reaching out to a virtual planning group called ‘Virtual Partners Group’. And then, I hired someone to just help me build an operations manual. That only lasted a couple of months. I would say when you’re at maybe 70% to 80% capacity, that’s when you want to hire someone because then you have time to train them.

And then, from there, I decided I wanted to have someone more in-house that could write emails to clients and just do more client-facing stuff. So then that’s when I reached out to Simply Paraplanner, and they posted a job.

And that’s where I found Liz, and she just celebrated her three-year anniversary with me. She is an accredited financial counselor. She has since gotten her CFP. And she started part-time, just 10 hours a week. She was full-time for a while, but then with COVID and she’s got two little girls at home, she’s moved back a little bit to maybe 30 hours a week.

So that’s kind of how that evolved over time to where she just started helping out, maybe taking notes in meetings, then she would start presenting a little bit in meetings. And now, she’s grown into a senior planner here and is doing a phenomenal job. And to be honest, that’s been one of the most rewarding things is just grooming the next generation of planners and just seeing her confidence grow and her capabilities grow, and how her personality really comes out in meetings.

And I mentioned things have evolved for me. I have gotten more satisfaction out of that than doing the day-to-day client work and meeting with clients. And, to be honest, I feel kind of drained after meeting with a client. I only do two client meetings a day. And that’s enough for me to really feel wiped out at the end of the day.

So it’s been really great seeing her grow. And that it is something I’m passionate about is helping provide pathways into the industry and helping planners grow and develop their careers.

Michael: And so was there a particular – because I’m just wondering – client size or revenue point where you got comfortable enough to pull the trigger? I mean, I know in the industry, we often say you need to hire before you’re at capacity. But when you’re getting going and it doesn’t necessarily feel like there are as many dollars coming through as you wish there were, we can say that but it still usually hurts at the time, especially when you’re hiring your first person because it doubles your headcount from you to two. It’s one of the biggest financial setbacks just taking the leap on that hire. What led you to the point that you are ready to pull the trigger?

Shawn: Yeah, I’m trying to think back to exactly where I was revenue-wise. It wasn’t that much revenue. I was maybe at $70,000 of revenue. But when you bring on a team member, you don’t have to hire a full-time team member. So for her, it was maybe 10, 15 hours a week, $20-something dollars an hour. So that’s not that big of a financial hit for you as you’re growing your firm.

And then, you can start with a 30- or 90-day contract so that way it gives you both time to test out the waters. So it really doesn’t have to be that scary. When I did hire her, I was scared. I was nervous about, “What if she quits and files a wrongful termination suit against me?” I did have doubts like that. But now that I’ve done it once, it really has lowered my fear about bringing on new team members.

Michael: I think you have a powerful point that, just when you start out with 10 hours a week at $20-something an hour, I mean, you’re talking about literally $200 a week. If you hire them for 10 hours and they save you 2 hours, and the 2 hours lets you do 2 hours of things with clients, you’ve doubled your money at $200 an hour for your time. Like you just said, the time leverage is so powerful for what we can do and be compensated for our time with clients relative to what it takes to start getting at least…or especially the administrative help early on.

Shawn: Yeah, and I would say a few things… I know you had Alex Hopkin recently on. Some other things that paraplanners can do beyond prepping the financial plan and things like that – like Liz can help you. I guess I’m bucketing Liz with all paraplanners or CSAs. But a new team member, they can help you with billing. I had her sit in on all the client meetings initially to take notes and just observe. And after meetings, it used to take me an hour and a half, two hours to write up the notes and send them out to clients and upload everything to RightCapital and the CRM and all that.

And now, it can be as little as 10 minutes after a meeting. I review the notes – they’re taking notes in the meeting – and by the end, they’re like, “Okay, notes are ready for you to review.” You’re reviewing them. You’re like, “Okay, it looks good.” Liz goes out, and she sends it out to the client. So it can just save a ton of time that you can get back in your day.

Michael: How do you look at hiring and capacity going forward? You said you would basically cap yourself out at 60-something clients. You’re not taking more at this point. They’re going to Liz and now Brandon, who you hired.

What do you think of as a capacity for clients in the kind of model that you’re doing where you’ve got monthly fees, ongoing meetings, your four-two structure, all the stuff that you’re doing and tracking and producing in Excel and planning software? How do you think about capacity and hiring when you hire more?

Shawn: Yeah, that’s a good question. That’s something I’m trying to figure out right now. I think a full load for a planner with our model is somewhere between 60 to 70 clients. Like I mentioned that the onboarding process is really, really intensive. So for me, I’m not doing any onboarding for new clients now. I’m just shadowing Brandon. Mostly Liz is pretty much working on her own and only needs help with the most complex clients.

And the demand is out there for services. Like I mentioned, it’s just January now. We have a waitlist until April to bring on new clients. And we’re actually able to bring on five new clients per month. And even with that capacity, we still have to have this waitlist. In December, that was the most clients we signed up in a month; it was eight that month. I think we could bring on… Right now, we’re actually looking to hire a new lead planner and two client service associates.

So for our career track, it kind of goes: client service associate, once you pass your CFP and can start being the lead on a client and you learn the Ballast Point way, then you move to an associate – that’s where Brandon’s at, that ‘associate’ level – and then, from there, once you are the lead on maybe about 30 clients…maybe one way to think about it is when you have enough clients to where you’re covering your revenue or covering your salary is one way I think about it – once you’re the lead on a certain number of clients, then you’re moving up to a senior planner.

So like I mentioned, my vision for the future has evolved for my firm. I could hire just one planner maybe a year, one or two planners a year, and just do it out of cash flow. But since I do want to help more people get into the industry, I’m hiring a little bit ahead of where we’re at as a business. So last year we made $400,000, pretty much dead on. So we don’t really have the resources to hire two or three new advisors right now.

So what I did was I researched the whole industry. Like Live Oak and Oak Street and trying to raise working capital. And for them, they didn’t want to lend money to you unless you had really good cash flow and had a certain amount of profit margin. And then, I was like, “Well, if I had that profit margin, I would just hire another planner, and I wouldn’t have this issue.” So what I ended up doing…

Michael: The joy of the businesses that have a lot of free cash flow – can borrow money, even though they don’t need it. And then businesses that actually need to borrow money can’t get it because they don’t already have money. The joys of banking.

The $150,000 SBA Loan That Shawn Took Out And How He Plans To Use That Money To Grow His Firm [57:25]

Shawn: Yeah. They would lend for things like if you were going to buy another firm or merged with another firm. But in terms of hiring people to serve more clients, that wasn’t something they were interested in. So there are small business loans. So I ended up taking out a $150,000 SBA loan. And when I’m thinking about your question about capacity and things like that, my goal for that money is to see how quickly we can onboard and train new team members to where they get to the point where they’re able to serve clients.

And I have big visions for what Ballast Point can be. One model – I don’t 100% love this analogy – but maybe like the next Edward Jones, but the fee-only version, without the cold knocking, and for young professionals. The reason I picked Edward Jones is I love that they have a national presence and they have a really good training program. I don’t love the historical transactional nature. So maybe a better analogy would be like “the Starbucks of financial planning”, where everyone gets a consistent client experience. But again, it’s nationwide.

So when I’m thinking about growth, I’m like, “Okay. Let’s use this $150,000 as efficiently as we can, and use that to prove this model. And then reach out to individual investors.” And what I’m thinking is independently wealthy investors, maybe financial planners or previous financial planners, who want to help grow the profession and see the vision. As opposed to trying to do a Y Combinator Venture Capital, trying to create an app or something like that. That’s where my head is at and what I’m envisioning right now. So we’re experimenting and figuring it out as we go.

Michael: So talk to me a little bit more about this loan. I just don’t see a lot of debt financing of advisory firms, particularly for hiring, as you noted. Debt for buying someone else’s firm is one thing, but using it to staff up for hire…

So who ultimately wrote the loan? Were you able to find an industry provider or was it someone outside the industry? And just help me understand more what you’re thinking through, taking on debt and, I guess, the most basic level, how do you make back the debt that you’ve taken on?

Shawn: So it was through the SBA itself. And for the loan that I took out, I think it’s a 25- or 30-year repayment. So the monthly servicing cost for that is really, really low. The interest rate is 3.75%. So when I think about it for my business, and I think about it in terms of the enterprise value of my firm – whatever multiple you want to use. It’s usually based off of your recurring revenue. Say it’s 2X of your revenue. So my firm might be worth $800,000, if it’s 2X, your trailing 12 revenue.

And so, if I can take this and then add capacity, and then our revenue grows to $600,000 by the end of the year – our recurring revenue. So then our firm goes from $800,000 to $1.2 million of enterprise value. And I think about the return on that investment, there’s no investment that would give you a better return than that. And I know that the demand is out there from the prospect side, I just need to have planners in here to help service them. So that’s how I’m thinking about it.

Michael: Interesting. So it sounds like a big piece of this, for you, in particular, is just you’ve got a strong marketing presence between find-an-advisor sites, Yelp reviews, existing client base, a dense area where there’s just a lot of wealth and clients to work with that you’re comfortable that client flow is coming.

And so it makes it easier to say, “I’m going to take out a loan to hire more advisors” because you’re literally staring down a waitlist of clients right now saying, “I could literally just get them in here faster and get going. I’m going to make this back almost immediately. Because I can just literally take new clients faster that are already knocking on my door and their revenues are going to be paying this back.”

Shawn: Yeah. And I know it’s a little bit different than what traditional advisors would do. But it was just a really cheap source of capital. And a good way to kind of, yeah, like I said, test the waters to prove this model.

Michael: And so then share with us a little bit more. You’re talking about, then, the next stage might actually be, I guess, not going out for debt capital but going out for equity capital. Help us understand a little more of what you’re thinking in terms of – you might actually take on investors who are investing for growth?

Shawn: I mentioned independently wealthy individuals, and I’m not sure what the right financing tool would be. Maybe it’s equity or maybe it’s convertible debt? So I haven’t worked out what’s in it for them. If I’m going to say, “Hey, I’m going to raise…” say it’s $3 million from 4 to 8 individuals. “I’ll pay you an interest rate of…” whatever, 8% or 6% or 4%, or whatever the going rate is.

And then, what would get them excited enough to get on board and make that investment? Would it be maybe to get on board or to form a board where they could have more say in the direction of the firm or provide mentorship and insight? I guess I haven’t quite worked out what the carrot would be for them to get them excited to participate. Maybe it would convert to equity in the future? Yes, I don’t quite have that figured out yet.

Michael: But the idea is just further accelerating because you see even more growth opportunities. You want to hire even more people and just are trying to make this go faster at the end of the day.

Shawn: I mean, I’ve also thought about maybe trying to build some internal technology just to help with our processes. Right now, we use 33 different point solutions – when you look at all of our tech stack – just to make things more integrated for the client experience, and also with the onboarding, and just with our team members and all that. So I have thought about maybe creating a platform to help advisors, to make me more efficient, and then also make it easier to onboard and train newer advisors and help them serve their clients more efficiently. So I’ve thought about doing maybe a middle office tool, internally, for advisors.

Michael: So, my brain is trying to wrap around 33 different tech solutions. I know I can’t ask you to name all 33 because that’s just a lot of technology to keep track of. Well, I guess, what at least are the anchor tools that you’re using for the technology stack and just help me understand where some of the gaps are from the anchor tools that you use?

Shawn: Yeah. So, for the CRM, we use Wealthbox. For our portal, we use Dropbox. I like that better than RightCapital. For financial planning and data aggregation, we’re using RightCapital. We do a lot of planning in Excel. I like tracking someone’s progress with their net worth over time, and there’s not really a good tool out there because the links break all the time to track someone’s net worth. And I don’t want to have to ping my client every time the link breaks.

So I guess in my vision, I’ve taken demos of the FinLife through Goldman Sachs. I was actually a client of Facet Wealth. I really like what they’re doing, and having just a dashboard where you’ve got the vault, you’ve got a lot of workflows and stuff – like a better client dashboard.

Even just keeping track of to-do items for clients is tricky and getting them to give us progress updates on their to-do items. We put everything in RightCapital but they can’t really comment on their progress, so we have to dump all of their action items from RightCapital into a Google Sheet and then send that to them before their meeting and say, “Hey, where are you guys on the status with these homework items?”

So it’s all of those things. There’s Betterment, there’s Boxkryptor to encrypt all the files that are in Dropbox. And when I say 33, I’m also counting the whole Google Suite, like Google Forms, Google Sheets…

Michael: Sure, those are all things that you’re weaving together in practice, if everything’s trying to talk to everything else.

Shawn: Yeah. And Zapier to try and get things to talk to each other. Yeah, it’s crazy.

Michael: So you also mentioned earlier, I wanted to come back to this, that you were experimenting with bundling tax returns, which we’ve actually talked about on a few recent episodes of the podcast. I’m hearing this cropping up more and more amongst the advisor community. So what’s led you to bring tax planning internally and then what’s working or not working in trying to actually do it and deliver it for clients?

How Shawn Uses Tax Planning To Increase Client Retention [01:06:31]

Shawn: So this goes back to my initial concern about having clients stick around. That wasn’t as a bigger concern for me lately. In 2019, my retention rate was 97%, which is really, really good. Last year in 2020, it was 80%, 18 clients left due to COVID and just graduating normally, just kind of they’re ready to move on.

So the idea for tax services in-house was I wanted to increase the stickiness of the client relationship. If we’re doing financial planning, investments, and taxes, I thought that would just add additional value. So I think I’ve hired three different tax professionals and tried in different ways to get them to – maybe it was someone who was a CPA who was interested in financial planning – trying to teach them the financial planning side, and then they would do the taxes for our clients. I’ve tried three different ways to try to bring it in-house where they were working part-time. And just for whatever reason, it just ended up not working out.

I learned a ton about running a tax practice. And I’m actually licensed to – I have an EFIN and a PTIN so I can actually file taxes for my clients, personally, using Intuit ProConnect. But I don’t feel comfortable doing it. There’s just so much I don’t know about the systems. So that was the original idea. And in practice, what I’ve learned is that it’s really hard to do it. What I mean by ‘do it’ is to hire someone to come into your firm to do it maybe on a part-time basis.

So if I were going to try to bring it in-house again in the future, it would be if I hired someone that was going to be full-time working for Ballast Point, and I was their only employer. So where we’re at right now is we use Inspired Tax Solutions. That’s Rob Colon. He and his sister Danna had a firm for a while. And then Danna is doing the financial – they’d joined forces to do financial planning and tax. And now, they’ve kind of split companies, and so Danna is doing the financial planning and Rob is running the taxes.

And so, I partnered with Rob. So he’s going to do all the taxes for my clients. And then when it’s ready, he’ll send a draft to me and the client. And so that’s where we’re at right now. And then for the ones that are the comprehensive clients where we’re paying for their tax returns, I’m going to pay Rob directly for those taxes.

Michael: And so it sounds like your inclination, at least, is that you would rather send this out than bring it in at this point?

Shawn: Yeah. This last year was super challenging. I hired a CPA just trying to vet her out. So by last year, I mean, I guess, the 2019 tax year. So starting in early 2020, I hired her to do taxes for us. We were going to split the revenue, kind of 50/50. And I think I overestimated her ability, and I think she underestimated how long it would take to do the returns and how complex our clients are. And so it just wasn’t a good fit. We had committed to doing 65 returns and then she quit on April 15 after only filing 4 returns for my clients. And one of those had a…

Michael: That’s not pleasant at all. Yeah, that’s not good.

Shawn: Yeah, so that was… And then one of them, we had to file an amendment for, so then I was scrambling. And tax season got extended last year to July. So it was just a never-ending tax season for me. So it’s also hard because clients, they’re used to paying not a ton to do taxes and maybe paying $300 or $400 a year for a return. So they don’t really value it that much. It’s not something like a core competency.

So I think I would do it as, maybe – not like the loss leader, but at least to just break even – with the idea that it will help with client retention, if, in the future, if I do want to try to bring it back in-house. But for now, I’m outsourcing it. And I’m just going to do a review when it’s ready.

Michael: But in the outsourcing context, you’re still positioned to clients, “We do tax. We do your tax return here as part of our fee.” You’re just working with someone behind the scenes, I guess, I can think it’s like a subcontractor relationship for them to actually do the tax return work behind the scenes. So that you’re not personally buried in tax season, but you can still say the firm has brought this solution, as opposed to just referring the client directly to them and not being part of the process.

Shawn: Yeah.

Michael: Which I guess also means you effectively pay their tax prep fees directly to Inspired from your end, since it was already part of your fee, you’re writing the check to Inspired and the client comes through you for it?

Shawn: So for the Comprehensive clients, I mentioned there are about 20 of them. That’s how it’ll work. I’ll pay Rob directly for those 20. But then for the majority of the clients, maybe 60 or 70, they’re going to pay Rob directly. They’re going to use his dashboard. His tax planning software. His data-gathering tool.

Michael: Okay. Because they haven’t bought up to the Comprehensive full package. So as you’re looking at this, my guess is it sounds like it’s been a bit up and down in just getting through it and getting it implemented because of some of the prior woes. But you’ve been trying to implement this with clients for a while, are you finding it impacts retention rates? Is it making them stickier? Or do you see more retention of the ones who stayed last year that were doing tax preparation with you versus the rest? How are you feeling about it now that you’ve done it for a while?

Shawn: I haven’t tracked like…I think what clients really want is they want tax advice. They don’t really care who’s doing the return at the end of the day. So we do a ton of tax planning and BNA tax tools. And I think that has increased retention. I have noticed that the ones that have “graduated” didn’t necessarily open accounts at Betterment. They might have just kind of kept their accounts at Vanguard or they were maybe more arm’s length engaged with us, looking back at what they engaged with us on. So I think there’s something to be said there.

Michael: Interesting. So you’re feeling it in practice, it’s the tax advice and the additional tax planning that comes around the tax preparation that may add value or get them more engaged and sticky, not literally, “We did the tax return.” But I guess the caveat, but it is easier to do some of the tax advice when you’re doing the return in-house.

Shawn: Yeah, a big selling point is having the left hand talk to the right hand. So your financial planner really engages with your tax situation throughout the year and then being able to look at the tax return to make sure everything’s incorporated correctly. And so, another manual process that we’re keeping track of is that we have a ‘Tax Tracker’ tab in that big Excel file.

So we’re keeping track of things that happen throughout the year to make sure it gets reflected on their return, like someone who exercises stock or they did their backdoor Roth or had a baby – kind of the events that have a tax impact – or moving to a different state, switching jobs, making sure they’re not over contributing to their 401 (k). So all that stuff gets put into that Tax Tracker, so when we are reviewing their returns, we kind of pull that up and make sure all of that stuff is incorporated into their returns.

Michael: In the end, you just find it easier to capture that stuff in the Excel sheet as opposed to putting it in CRM and using CRM as your reminder notes in areas like that?

Shawn: Yeah, perhaps there’s a way to track it better in the CRM and tag it as a tax activity. But that’s where we’re tracking it right now.

Michael: And just for the Excel document that you’re talking about is, is this something that actually gets shared out to clients? Is this part of a collaborative document with clients? Or is this simply something you use internally to keep track of all the different clients and what’s going on and Tax Tracker value-added net worth and so forth?

Shawn: We mostly just use it internally. But when we are prepping for the upcoming meeting, we’ll dump some of the tables into a Google Sheet. So again, this is all the logistical stuff that I’d love to clean up one day.

So, for example, for some accounts that are linked in RightCapital or we have access to in Betterment, we’re trying to update their balance sheet, and so we’ll update it with all the cells that we have access to. But we’ll highlight in yellow the things that we need them to update before their next meeting. And we’ll send that over in a Google Sheet so they can update it live.

So it’s been hard to maintain – kind of figure out version control, in that sense. If we’re updating their spending plan, that might be a tab that we’ll send over. We also do a 12-month cash flow projection. Actually, I don’t think we share that one with clients. But that’s another thing that we’d help clients with – just kind of it’s a good data visualization tool to see their cash flow over the next 12 months of when is their stock going to hit, or when is the property tax due. Again, that’s another manual thing that we have created for our clients.

Michael: So as you look at this model overall… I know there’s a lot of discussion and debate out there just in general around AUM models versus retainer models. And in particular, what this does to retention rates, right? For better or worse, just having a client’s life savings under your purview kind of seems to make them sticky, right? And just as we look at industry numbers, retention rates in the AUM model are really high for AUM firms and even surprisingly high sometimes for not very good AUM firms because clients just seem to get a little bit of inertia around once dollars are parked somewhere.

So I am curious. It sounds like you’ve had a wide range of retention rates. You were at 97% in 2019. You said only 80% last year, some of that’s COVID rippling through, which I’m sure is harder when you’ve got a younger clientele who were more directly impacted by job changes and economic impacts. But how do you think about client retention rates?

And you’ve even mentioned that some clients graduate? I don’t know if that’s sort of a euphemism or if you truly envision a segment of clients who are just going to graduate because that’s what happens when you work with younger clients. Sometimes they move on to different stages of life and different needs. How do you think about the retention of your firm in the long run?

How Shawn Views His Firm’s Client Retention Over Time And What Surprised Him The Most About Building His Own Advisory Firm [01:17:18]

Shawn: That’d be something interesting that I hope you guys can weave into the benchmarking studies you do at XYPN for firms that don’t charge AUM. I think, just my gut is telling me that it might be around 90% retention might be normal for a model like mine. And maybe I need to redefine what we are, as opposed to a financial wealth management company. Maybe it’s like an education company where graduation is like you’ve learned how to do this and you kind of graduate to do it on your own. So, yeah, I don’t know.

Michael: I guess the flip side, it’s not as though it’s stopping you from growing, at least for where you are. You’re still running five-plus new clients a month and a waiting list of clients and hiring and taking on debt to hire faster. So I don’t know if that’s part of the tradeoff process, as well, of the bad news of clients turning over more in this model or working with younger clients is the higher turnover.

The good news is that this also tends to mean there are more clients in play. So your new client may be someone else’s client that moved away from them because it didn’t work for them. And that’s what brought them to you. Is it just the reality that maybe there is a higher volume and flow of clients like coming in and going?

Shawn: Yeah, I would say also, we do charge the upfront fee. So I think that’s important to note. So that way, we are getting compensated for our time for that initial…that heavy lifting in those first few months. So I do keep track of how many hours we put towards our clients and the amount of revenue that they’re bringing in and the expenses associated with that. So I think, for my model, I think charging the upfront fee makes sense, and having a significant amount upfront due helps us if they do end up graduating.

Michael: I mean, you’d mentioned, I think it was $500 or $1,000 upfront for singles, $1,000 to $2,000 upfront for married couples, and then they go to month-to-month. Is that the upfront you’re talking about here? Are you talking about or looking at front-loading their fees even more just to protect you if they come and leave relatively quickly?

Shawn: Yeah, I’m talking about the first point. So how it works is the upfront fee is like their… Typically, it’s $1500 for a couple. They pay $750 and they sign the client agreement and then they’re a client. Once they have their first of those three meetings, their monthly fee starts. And so that’s when that $333 starts. And then the second half of that initial fee is due after their second client meeting. So in the first year, they’re really paying more like $5,500 and then it tiers down to $4,000 per year.

Michael: For you, that helps to cover the additional time of the work of having them come on board in the first year. And then you just have to maintain a certain number of new clients coming in just to keep the flow and volume in place to make the growth happen in the long run.

Shawn: Yeah, and we’re finding between two to three clients per advisor per month. It’s about a sustainable rate at this point.

Michael: So you can take on five new clients because any individual lead advisor can take on two or three new clients in a month. Beyond that, there’s too much upfront and onboarding work and initial plans and the rest to make it manageable given the existing clients you’ve got to service as well.

So as you look back over just the past couple of years now of building this, what surprised you the most about building your own advisory firm?

Shawn: Yeah, I think when I started my own firm, I think I had really low self-confidence. I had a CFP. I had tried to find my way into this profession and just hadn’t found a good fit. And then my wife, she had a good job here in the Bay Area. So it was a time to take a chance on myself. So I’ve always had big dreams, but I didn’t have… I don’t know, I also had never been a lead planner before. So to launch the firm, I was really nervous, really anxious.

So I think what surprised me the most is that I was able to find success in getting people – getting clients – to sign up and seeing the demand that’s out there. It’s been really rewarding. And I think also, what’s surprised me is how much your own personal views on finances come through. When I mentionrd we review someone’s credit report, that’s something that I would want in an advisor.

And I don’t think…not necessarily everyone gets into credit reports and what credit card they’re using or getting to the level of detail of what beneficiaries are using. Or just even the softer stuff of like, “Should I take this job with a startup?” I don’t know. It’s like your own personal views really influence your recommendations to your clients. It’s where you’re at, and your own personal journey that really impacts the advice that you provide.

Michael: Yeah. It always struck me that just so many advisory firms, at the end of the day, basically end up working with people like themselves – plus or minus 10 years or so – similar age, similar life stage, often similar backgrounds and circumstances. And I think part of it is just that, it’s this combination of we tend to build better rapport with people who are similar to us. We can connect with them. We build our firms based on what we think is important. And so, it’s of no great surprise that if you build on what you think is important, you tend to attract clients that are similar to you, and therefore prioritize those things in similar ways.

And there’s no right and wrong about it, just that’s part of what makes it work, right? That we build the things that we think are important and we attract other people who are similar to us who similarly believe that’s important. And they’re therefore willing to pay us to be their financial advisor to do that for them.

So how did you…? I am curious though, just the challenge for so many advisors, I think getting started really is the confidence issue and just getting comfortable with launching and convincing clients to pay you and convincing clients to work with you and charging what you’re worth and you’re not over-servicing clients. Although, virtually all of us do it early on. Were there, I guess, breakthroughs or transition points for you of how did you get to the point that you are comfortable enough to do it and make it work even though, as you said, you didn’t have a lot of direct client experience being a lead advisor or growing your client base, you kind of leapt into it?

Shawn: A couple of things: Before I launched my firm, I was working at Personal Capital. And one of the things I would do there is some lunch-and-learn activities or lunch-and-learn sessions for… So, go to companies and kind of present just some personal finance tips. And I was co-presenting with another person at Personal Capital and someone asked a question, and then she answered it. And then I answered it. And it was just an aha moment of, I don’t know; I know this stuff. And maybe we don’t have the same recommendation or advice, but we each have an opinion on it. And each is equally valid. And yeah, that was an inflection point for me.

And then, the other thing I would recommend is, I was really, really prepared. I did a lot of business planning in terms of creating a business plan itself and making sure I had the financial wherewithal to do this, to give it a shot. I would recommend having at least three years of financial runway for your firm.

And then, another thing I did – which I would recommend to anyone that’s thinking about starting a firm – is write down 10 ideal clients from your network of people who you’d love to work with, and then survey them, and do some informational interviews and say, “Hey, I’m thinking about starting this firm, what are some of the financial pain points that you’re facing? What do you think about this business idea? Is this something you’d be willing to pay for?”

I did that with 10 of my friends, and one of them eventually became a client. But there was no expectation of it. So doing all those things. I mean, it was scary. I think it wasn’t until maybe month…I guess, four or five, that I was like, “Okay, this is going to work.”

I signed up pretty early on to do Money Quotient training. Four to five months after launching my firm, I signed up to do their training. And it’s a pretty intensive two- or three-day training. And in the evening, I met with a prospect, and I pitched them to work together. And I was using some of the tools from the training, and then they ended up becoming a client. And I think it was at that point where I was like, “Okay, this is going to work.”

Michael: “Oh, this stuff works, hey.”

Shawn: Yeah, I meant…the tools that they’re teaching and then also this business model is going to work and that I will get enough people. So it didn’t happen for a while until I felt like, “This business is going to work.”

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

The Low Point For Shawn On His Journey, The Advice That He Would Give To His Past Self, And His Advice For Newer Advisors [01:26:35]

Shawn: Yeah, I think back to when I earned my CFP in 2010 – early 2010. My wife was in business school and we moved to San Diego. I was trying to find a job in San Diego. And I thought I had found my dream job with a fee-only RIA. And their minimum, though, was $2 million.

And I just didn’t really feel like… I don’t know. It just didn’t really work out for me there. They had been around for 25 years. They served about 250 families. And the minimum was 2 million bucks. So they had maybe $400 million of assets under management. But their typical client was 55, 65.

But I wanted to serve people that were more in my peer group. So I decided to go to business school. Take the GMAT and study and apply. And part of the application is you ask for letters of recommendation. I wanted to be upfront. And I told my boss about applying, and if he would write a letter of recommendation. And maybe I was naïve to think he wouldn’t tell other people at the company, but just being in alignment with my values, I wanted to let them know.

And so, he told the other team members pretty much really quickly. And I hadn’t even applied to business school yet. And so, this is in the fall, where you’re submitting applications, and already things weren’t going that well at that firm. And then once they knew I was going to business school, they started taking away responsibilities from me. And that was just really hard to see. My colleagues were going away to conferences in other cities, and I hadn’t even applied to school, and ultimately, they asked me to leave before I even wanted to.

And that was a really low point where I wasn’t really happy with my performance at the company. And yeah, it was just a really, really difficult time. And that was when I was like, “Is this really the profession for me?” I’ve had that doubt a couple of times throughout my career.

Michael: So I guess I’m wondering, what led you to stay in the industry and still say like, “I do think this is the industry for me, and I’m going to stay even though I’ve just had this challenging experience”?

Shawn: I guess the impetus for business school for me was I wanted to make a bigger impact on people’s lives. And like I mentioned, they had 250 families, but they were all really high-net-worth. And I felt they had won the game when you get to that point in your life where you’ve got this nest egg, and you just help people figure out how they’re not going to run out of money.

But I wanted to help people that were more like me and kind of starting their careers and growing their careers. And my dream was to basically start like a Personal Capital and to leverage technology and personal advice. I was pursuing that through business school and, yeah, so I think it was keeping that dream going, and now I’m able to affect the lives of my clients and hiring planners that can help their clients or the clients of Ballast Point. So yeah, it’s been a journey.

Michael: So in retrospect, would you have done some of that differently in how you handled the conversations at the firm? Or is it just one of those unfortunate things that happen in life?

Shawn: Yeah. You know what? You’ve got to be true to yourself and your values. And I’m not the type of person that would just send a resignation letter two weeks before I’m going to leave for school to say, “Hey, I’m out of here.” Yeah, I know, that was really hard. I try not to live with regrets. But yeah, so I don’t think I would necessarily have done anything differently.

Michael: As you look back over the past couple of years, though, as you’ve been building the firm, what do you know now that you wish you could go back and tell you from five years ago when you were getting ready to launch? What do you know now that you wish you knew back then?

Shawn: Yeah, I guess I was thinking about this question of getting ready to launch, how to prepare yourself for the launch. So, like I mentioned, kind of having the three years of capital. And then, the other thing, I really like what you’ve said in previous podcasts, I just wanted to echo it here, that you do need to have certain work experience before you go out and start your own firm. And I was really nervous about not being a lead planner. And I like when you say typically it takes three jobs before you find your spot in the industry.

So when I talk to people that are wanting to start their own firm, I always recommend that they work at least three years at a firm that’s doing real financial planning. So I think I just wanted to echo that out there into the universe of you don’t have to find the perfect job out of college. I’ve had some companies that really did not do financial planning, but I still learned a ton.

So I like the phrase, “Grow where you’re planted.” If I could go back and tell my younger self that, I would have really tried to do a better job at that one firm that didn’t work out.

Michael: I like that, “Grow where you’re planted.” So any other advice you would give for younger or newer advisors coming into the industry?

Shawn: I think when you’re first starting out, another phrase I like is “your network is your net worth,” kind of starting out. So getting involved in the financial planning community, networking with other advisors. And don’t be afraid to put yourself out there and reach out and do cold emails to advisors and pick their brains about how they’ve been successful.

It is hard to get started in this industry. So don’t be afraid to put yourself out there and get to know people. We’ve all had people help us out. So it’s a very giving profession that we’re open to giving our time.

Michael: What comes next for you? What else are you working on right now?

What Comes Next For Shawn And How He Defines ‘Success’ For Himself [01:32:32]

Shawn: Yeah, so one thing I’m excited that I’m working on is the BLX Internship. This is something I’ve rolled out with Emlen Miles-Mattingly, Chloe Moore, Luis Rosa, and we’re providing internship opportunities to aspiring financial planners, both students and career changers, who identify as Black or Latinx, and they want to work at a fee-only firm.

So we’re shooting to match 100 internships for this upcoming summer. Right now, actually, today is the deadline to apply. So once this drops, it’ll probably have passed. We’re going to be doing this for five years. So if you’re interested in hosting an intern or applying in the future, we have a newsletter on our website that you can sign up for. The website is blxintership.org. And yeah, I’m happy to talk more about that. It’s, like I mentioned…

Michael: Where did this come from? What’s the vision for it?

Shawn: Yeah, so it was actually… I was inspired when I was listening to a podcast when you were interviewing Emlen. So George Floyd died in May, there was such anger and frustration, and the Black Lives Matter movement. And as a white dude, I’ve wanted to do something for a long time. And I just didn’t know what, and sometimes I feel paralyzed. And I don’t know what to say. I don’t want to say the wrong thing.

And then, when I heard him on your podcast, you guys mentioned that there were only 3% Black and Latinx Certified Financial Planners, but there’s 31% in the U.S. that make up that demographic. But the distribution of wealth matches that 3% number. So the majority of wealth is controlled by white people.

That really hit me in the stomach. I exactly remember where I was when I listened to that podcast. And I was running, and I was like, “I’ve got to do something about this.” So I reached out to Emlen, and I was like, “Hey.” My original idea was that I was going to ask Emlen if he knows any minority aspiring financial planners, and I would do an internship for them this summer as just a one-off. And then, as we were talking, we were like, “What if we rolled this out to the broader industry?”

Like I mentioned in the past, I had a really hard time getting started in this industry. And there’s a lot of demand out there for people that want to get in. I feel there are just people dying to get in. And then, as I learned more about Emlen and my other co-founders, I had a chip on my shoulder about how it’s hard. You’ve got your war story about how you got started selling insurance. And then, when I learned about their stories, it’s nothing compared to that.

For Emlen, he grew up in a single-parent household. And then when he was a young man, his mom overdosed on drugs and died. And then Luis, he moved here from the Dominican Republic when he was a child. And he was living in New York City and there were 10 people in a one-bedroom apartment. And that’s the environment that he grew up in. And Chloe was raised pretty much by her grandma. I don’t know. It was kind of like a calling. Once I learned about that and just got me inspired to want to provide opportunities for those groups.

Michael: And so how does the program itself work? I guess, at least for those who may be interested in the future either as firms to be involved or just as advisors of color or future advisors of color who want to be finding an internship, how does this actually work? What is the BLX Internship program itself?

Shawn: Yeah, so I’ve had maybe four internships just to get into financial planning. My first one was with Merrill Lynch, and I was cold calling the whole time. So we want it to be a really great experience for the interns, and we want the firms to have a really good experience as well. So we are narrowing it to fee-only financial planning firms because that’s what all of our cofounders are, that’s the future that we believe the profession is moving towards. Now, that’s the direction that we want to build towards.

To participate at the firm level, you have to be fee-only; you have to commit to at least an eight-week program, at least – I think, we said 15 hours a week – and the pay, at least $15 an hour. So it’s really important that it’s a paid internship.

And then for the students or career changers, you have to at least be a junior in college or have graduated from college and have an interest in personal finance. You have to be able to work those 15 hours a week and commit to at least eight weeks.

And our hope is that they’ll get exposure to the industry. That it is a welcoming place. That they can thrive here. And there’s that phrase, “You can’t be what you can’t see.” And to see themselves – maybe they’re working for a firm that’s predominantly white – but maybe they could visualize themselves sitting in that lead chair, or maybe in the operations role. So those are some of the things that they’ll get out… And then we’ll also provide training along the way of like, “This is how to set yourself up for success in the internship.”

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 the word ‘success’ means different things to different people. And so you’re on this incredible growth path with the firm of hundreds of thousands of dollars in revenue after a couple of years and multiple team members and even taking on loans just to hire faster and grow faster. So the business is going well. But how do you define ‘success’ for yourself at this point?

Shawn: Yeah, I knew this question was coming, and I’ve been wrestling with it. It’s hard for me. I don’t feel successful. I feel I’ve had some successes, but I don’t feel overwhelmed with success right now. And it’s hard for me to even articulate that. But what I am hoping to achieve with my contribution to the profession and the industry is that I want to help move the profession forward, help provide pathways into the profession, and help make the profession a profession.

I think this is me standing on my soapbox a little bit, but I think our profession can be pretty exclusionary, kind of elitist. You have to either have a certain amount of assets under management or a certain amount of cash flow so that you can afford our fees. I’ve heard that phrase, or I like saying the phrase, “Comprehensive financial planning right now is a luxury good, only the wealthy or high-income earners can afford it.”

So for me, success, I want to put this out there in the world, maybe, I think it might be a good rallying cry for the CFP or the FPA. What if success as an industry meant a financial planner in every home or access to a financial planner, if you want it? There have been studies that show 50% of people are self-directed. They’ll never hire a financial planner.

But for the people that are validators or delegators to have access to financial planning. So if I can help move the direction of the industry and the profession that way, that’s something that I would really feel good about and that’s something that I’m striving towards.

Michael: Very cool, very cool. I love the journey of it that you’re on so far. And the accelerating hiring growth pace of working with clients that, still at the end of the day, don’t meet AUM minimums and would have trouble finding advisors at most other firms. I think you’re on a pretty amazing track forward already.

Shawn: Yeah, thank you. And then to expand a little bit on the BLX Internship, my maybe gut or just intuition is that, like you mentioned, people work with people that look like them, and kind of 10 years plus or minus. I think there’s an innate human desire to work with people that are like you and help support your community. So that’s another reason I want to try and bring more advisors of color into the profession.

It’s crazy, the stat that jumps out at me is 73% of CFPs are white males. So it’s not white or male, it’s 73% are white and male. So of the remaining 27%, that’s all the minorities, all the women, everything. So to just provide more opportunities for diverse populations, I think, will just… I don’t have the answers for the service model, but that’s what I’m trying to build towards is to just to provide more pathways and more access to people.

Michael: I love it. I love it. Thank you so much, Shawn, for joining us on the “Financial Advisor Success Podcast.”

Shawn: Thank you, Michael. And thank you for everything you do for our industry.

Michael: Oh, my pleasure. My pleasure. Thank you.