Executive Summary
Up until the last twenty years or so, it was relatively uncommon for financial advisors to strike out and launch their own practice without the support of a larger advisor platform (e.g., a broker-dealer or insurance company). However, technological advances, a shift towards holistic financial planning (versus the more traditional transactional model to which broker-dealers and insurance companies were historically attached), and evolving fee models, have come together to make it exponentially easier for advisors to become entrepreneurs (particularly under the independent RIA model). However, one thing that hasn’t changed is that, even for advisors who are starting from zero, there is still a need to be sufficiently capitalized, not only to actually open shop, but to survive the first few years with little-to-no income as the advisory business ramps up. Which means that insufficient starting capital remains a common blocking point for advisors who may otherwise be ready to launch their own practice.
In our 61st episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a lack of capital may not always be the root cause for an advisor’s reluctance to start their own business, a key mindset shift advisors can make to get a little more comfortable with the risks associated with being an entrepreneur, and some practical tips for sourcing the necessary funds to launch.
As a first step, it’s important to consider that, for advisors who have never done it before, the thought of starting a business can be scary. As while a lack of capital may actually be a blocking point, sometimes the real reason advisors are reluctant to begin the process of starting their own practice is simply that they’re scared that they’ll fail. Which, of course, is perfectly normal. Being ultimately responsible for every aspect of running a business is daunting for many, and it’s important to understand that there’s more than one way to have a successful and fulfilling career as a financial advisor that doesn’t involve starting a business from scratch.
However, advisors who are ready to take the entrepreneurial fork in the road, but are still concerned about not succeeding, can always take a moment to consider what the worst-case scenario really would be. After all, advisors who are ready to “go solo” should already have the technical and interpersonal skills to both bring in new business and provide great service to clients. Which means that, at the very worst, if the business proves to be unsuccessful, then the next logical step is to simply go find a job as an experienced advisor at an established firm (for which there is only a growing demand for hiring and a shortage of talent to fill the roles), and earn a healthy salary to get back on financial track!
And when it’s time to solve the “not enough capital” puzzle, there are a few options. As a first step, advisors can leverage their skills (and natural proclivities) to plan for their goal of saving and/or raising the necessary capital. And if time is of the essence, then they can follow in the footsteps of other successful advisors who have either taken out a loan, found someone to partner with, or taken on equity partners.
Ultimately, the key point is that the reason that advisors hesitate when launching their own firm is often less about not having enough capital, and more about being worried about things not working out. But, by acknowledging that it’s perfectly normal to be anxious about starting a business, and considering the worst-case scenario (and how there’s often still a very strong fallback choice!), advisors can make a more informed decision about whether or not they truly want to hang their own shingle. And if they do, there are several ways to source the necessary capital for those who conclude that they really do want to scratch that entrepreneurial itch.
Authors:
***Editor’s Note: Can’t get enough of Kitces & Carl? Neither can we, which is why we’ve released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
Kitces & Carl Podcast Transcript
Michael: Well, good afternoon, Carl.
Carl: Greetings, Michael. How are you?
Michael: I’m doing well. I’m doing well. How are you?
Carl: Yeah, things are great. Things are great. It’s April 16th and we got 12 inches of snow overnight. That’s always good. Yeah, just like we like it.
Michael: Nice. And it looks like you’re in a new space now. I don’t see the blue couch. I’m a little bummed.
Carl: That’s actually a really interesting point. Yeah, I just moved into a new office. And the interesting point is whether or not I’ll be able to steal the blue couch from my wife when it gets here from London. But yeah, so we’re still working out some of the sound quality like echoey stuff. But yeah, new space. Super sad.
Michael: Well, yeah, there’s always…
Carl: I haven’t had my own space for five years because I’ve been moving so much. So I’m really jazzed. I can’t believe how productive you can be if you go to work.
Michael: When you actually just have an anchor place that you go to work on a regular basis.
Carl: You just go there and work. It’s crazy.
Michael: Well, just bear in mind, if it’s really necessary, there’s always plan B… a second blue couch. You don’t have to do just one.
Carl: That’s right. That’s right. I’ll get a blue background screen, just to make you happy.
Michael: I think it sounds fantastic.
Carl: Yeah, for sure. What are we talking about? You got some crazy idea?
Michael: Last episode we talked about the training, the areas to focus as a service advisor if you’re trying to get to the next level. You want to crack the formula on business development because you didn’t start out that way. You were a paraplanner, you learned your technical stuff, you became a service advisor, you learned to manage client relationships, you want to get to the next level and go figure out how to do business development. So we talked about how to do that. And it spurred up a great follow-up question from those of you who listen and send questions in. Because yes, we really do read the questions when you send them in. So questions at kitces.com or you can tweet it. Carl tweeted me. We really do read these.
The question that came in was what if you start doing that stuff, you get pretty good at it, and you want to go out on your own, but you can’t because going on your own takes capital. Or even this is a phenomenon that I’ve seen for a lot of advisors that we build this skillset, we get better at the technical skills, we get better at the relationship skills, we get better at the business development skills. And then for some advisors, some point you’re like, “So maybe I should just go do this myself. I totally needed my firm for the past 5 to 10 years. And I love them and they’re great. I’m very thankful and all its positive, but I’m ready to spread my wings and do my own thing.” And if you’ve got the financial wherewithal to do that, you may go and do that. There’s platforms out there to help you do that. But what if you don’t? What if you don’t have the means, you don’t have the financial capital and you’re trying to figure out what comes next in this career journey?
When Not Having Enough Capital To Launch A Financial Planning Practice Isn’t Really About Not Having Enough Capital [04:01]
Carl: So I think you’ll have some much better insight on some of the other ideas, how people have done it, how to structure it. I would like to push back on maybe something…maybe take a slightly different take on this. And this is the question, and I think it’s a reasonable question. Is it really about the capital? I think we should have the second part of this be like, “Okay, it is really about the capital.” Michael, let’s talk about those ideas. But I would first push on, is it really about the capital? Because generally speaking, we’re relatively risk-averse professionals, if you will. Because we’ve seen risk, we’re trained to understand it. We’re trained to diversify. All of that stuff seeps in.
And I think more often than not, when I have this conversation, the capital is the stated reason, but it’s actually not the reason. The reason is you’re just scared. And it’s reasonable. It’s reasonable to be scared. It’s a scary idea. This first started dawning on me when I talked to my…it was mainly my dentist friends. I was going to say dentists and doctors, but it was mainly my dentist friends. And they would tell me about the loans that they took on. And I’m not suggesting this, I’m just saying this is when my mindset shifted a little bit.
I was like, “Oh my gosh, I just talked…” And even a doctor now with the medical school loans, but more the dentist gets out…let’s assume they have no medical school loans or dental school loans. They get out and they’ve got to start a practice. And they want to go start a practice because most dentists do. And dentists tend to be a little more entrepreneurial than maybe medical professionals because out of necessity. And talk to them and you’re like, “Oh…” I remember when they first told me how much money they had to borrow to start the business. And good bet, the ROI on it, it’s a reasonable decision. But oh my gosh, they’re comfortable with that. And so, that’s when I first started realizing like, “Wait.”
And then the other thing that happened to me was… The first time it dawned on me, I never did it. But the first time it dawned on me that people would lend us money. And the first time somebody approached me, and they’re like, “Oh my gosh, this is an easy decision. We’d lend you money all day long.” I was like, “I didn’t even know that was a thing. I thought you had to bootstrap everything.” So all I’m saying is those two things. I’m not suggesting borrowing money, I’m not suggesting that. I’m just saying those two things point to the idea that I think in our industry, we don’t even think that way.
We don’t think about like, “Hey, yeah. We’re built for this. I can go take the risk.” And even if you don’t have to borrow from anybody else, maybe you can do it cheaper, maybe you can do it less, maybe you can borrow personally. It may be the best bet. You’ve talked a little bit about diverting some investment funds that may have gone to a retirement account traditionally, to enterprises that are starting up that you have some direct involvement in. So I just wonder if there’s a conversation to be had there like, “Okay, you know what, turns out I’m really scared.” Okay, that’s a discussion we can have. So that’s my first question. Is it really about capital?
Michael: I love how you frame that. I do agree. Just thinking back to conversations I’ve had with a lot of advisors around this, I do find, again, it tends to come at a certain fairly consistent stage. It’s like 5 to 15 years of experience. If we started in our 20s, by now we’re somewhere in our 30s, maybe late 20s to early 40s. But most commonly, I find it’s an advisor in their 30s, 5 to 15 years of experience. “I know my stuff. I know I know my stuff. I know how to talk to people. I know how to manage relationships. I’m starting to bring in clients. Because I’ve gotten at that stage, I’ve learned that skill. My peer group is now actually at the point where some of them make some money and have some money and these conversations are starting to crop up. But I’m not necessarily as entrepreneurial-minded.”
“There’s a reason I took that salary job 10 years ago, instead of just hanging my shingle from scratch. I’m in that stage where buying house, having kids, just life starts coming at you fast. My mother-in-law may or may not be moving in with me in 6 to 12 months. Stuff starts happening. And I’m thinking about doing what to my career by taking a blind leap to build something from scratch?” I think you’re right, and we’ll come back in a moment to the if it really is about the capital. But I think you’re right that often, it’s not really about the capital. It’s just freaking scary. And we’re not necessarily risk-takers. A lot of us are not. Some of us are risky. So it’s on range. So it’s on a range for a lot of people. But the ones who took salary jobs for 5, and 10, and 15 years, that is often also an indirect expression of our risk tolerance, which means the leap is super extra scary.
Carl: Yeah. So which leads to just all these really cool… It’s so funny to hear you describing that, because that’s almost exactly when I left the big brokerage firm was at that age. And then I look back on the next five years, and brother, I’m telling you, I’ve heard Elon Musk say…there’s this great interview with Elon and there was an MBA class with a professor there. They’d come to visit the factory, a pencil factory or something. There’s all these students bright-eyed MBA entrepreneurship-program students, and they’re like… And this professor goes, “Elon, why should anybody want to be an entrepreneur?” And he says, “They shouldn’t.” And then he says, “It’s like…” What did he say? It’s like chewing on glass or it’s like crawling across broken glass, I think something like that. And the professor is like, all the students looked so sad.
And when I think back to that period, I was like, “I don’t know that I would have done it if I knew how hard it was going to be.” Because managing the kids and the mother-in-law, the whole thing, and then all the stress that we take on our job. But I’m glad I did it. And every single person who ever asked me, I almost have a template email where I’m like, “Permission granted.” I’m the self-declared king of permission granting, “I’m giving you permission to do this. You’ve taken the…” I use all the metaphors. “You’ve taken the red pill, so I’m sorry, there’s no going back anyway. This is going to keep bugging you. The fact that you asked this question means you’re not…it’s not going to leave you alone. And please do it.” Everybody who does it says the same thing, “I wish I would have done that sooner.” Like, that’s almost universally what I hear. I don’t know that I’ve heard any exceptions. I’m sure there are. And it’s going to be freaking hard, so be prepared. And maybe enjoy the… I’m now at the point where I enjoy that hard.
But the other question I just want to bring up is where you…what you said, you can find the capital. You know what I mean? If that’s really the problem, we can find the capital. So I really think it’s worth the conversation of “Do you really? Do you really? It’s okay, you don’t have to… Not all the cool kids do. You know what I mean? You can still be as cool as you want. You can still be as awesome as you want. It’s not for everyone. And it’s okay.” I think that’s a really honest, important conversation. And it’s important to say, “We can’t do everything.” .I’ve always wanted to be helicopter pilot, always, always. It gets pretty clear I’m not going to be able to pull that one off. And I’m not going to regret that regret. It’s okay, it’s a regret. I’m going to set it on the shelf over here and go, “It’s okay.” And I’m not going to beat myself up over it. If you really think it’s too scary and you’re hiding behind capital and you have an honest discussion, maybe it’s just best that you just set that one on the shelf and say, “It’s okay.” Those are the kind of things I think we need to be more open to talking about.
Considering The Worst-Case Scenario [13:00]
Michael: The conversation I have with some advisors going through this is, frankly, to look at it from the other end. I get it. It’s scary. It’s a risk. So just roleplay this with me for a moment. What exactly is the worst that happens here?
Carl: Yeah, I love that conversation.
Michael: And you go out, you try this for a year or two, it doesn’t work, you can’t gain traction. And two years from now, you’re trying to get hired as an even more experienced advisor in a world where even more older advisors have retired, and there’s even more of a shortage of talent than there is today. Your worst-case scenario is you’re going to get another job that almost certainly is going to have a six-figure salary attached to it. Because that’s just what we see if you’ve got 10 plus years of experience and at least a little bit of business development capability. There are some mid- to large-size firms that are paying very well for that level of talent because…
Carl: Is that’s true?
Michael: Yup.
Carl: Can you help me with a resume?
Michael: Yeah, we could talk about that. Send it over, I’ll give it a review and patch it up.
Carl: I’m just kidding. I’m just kidding. And I do want to emphasize, this is very stoic of you, what’s the worst that could happen? And I don’t want my last little rant to be misinterpreted. I’m an unabashed fan. I’m a freak about starting your own thing. My family has told me to stop bothering them about starting their own businesses. My wife has said, “You’re killing people. Leave them alone.” So I’m a freak. I also know it doesn’t work for some people. So yeah, I love exploring what’s the worst thing that could happen?
Michael: Sometimes you’re like, “Well, I have so little…” It really is about the capital. “I have so little dollars that if we do this, we could lose our house and couldn’t pay the mortgage.” Okay, if that’s your situation, that’s a legit really bad worse thing that can happen. That’s not just like, “I tried a thing and it didn’t work out. I can put unsuccessful entrepreneur on my business card or my resume where it is a badge of pride and move on to the next thing.” If you’re risking your house, you’re at another level of risk. But then okay, then go solve for that. Can you build up some savings over the next year or two? Do you need to move? Do you want to live your dream of entrepreneurship? Maybe bring your upkeep down a little.
And that’s part of the decision. That’s part of the trade-off. I get for a lot of people like, “I love my house and where we are. I’m not ready to move.” Okay, that’s fine. But just then accept that’s the trade-off decision you’re making is a house is more important to me than starting my own business. No judging here, just acknowledge that’s the trade-off choice you’re making and say, “Okay.” And if you want to change that situation, change how you feel about your house or try to change something else about your financial situation to make it more viable.
Carl: And I don’t know if you’re doing this on purpose, but as somebody who took a risk and lost his house as a result, I will also tell you…and I didn’t know that I was doing that. The way you’re framing it is like we may lose our house is something you’d already thought about. I hadn’t thought about that and given what went on with the housing thing. But I can tell you, I didn’t die. And sometimes when we take entrepreneurial risks, I think it’s really interesting the stories we tell ourselves, you don’t know that that could happen. And also, what do you mean risky? You’ve got one boss right now who could fire you tomorrow. You could tell yourself that story and say, “I’d rather have 54 bosses in the form of 54 clients.”
I think the stories we tell ourselves, you don’t know that would happen. But I think if you sat down and calculated, “Oh, turns out I only have three months of runway to start this business.” Oh, well, okay. That’s a reasonable calculation. That’s not a story. You have three months of runway probably how to think through that before you pull the trigger. So that’s a reasonable thing. So what do you do in those cases where you’re like, “No, truly, I really want to do this, but it’s just not financially feasible.” What do you do in those cases?
How To Find The Capital To Launch A Financial Planning Practice When It Really Is About Not Having Enough Capital [17:19]
Michael: Well, there’s a couple of options that come to mind. One, just you’re a financial planner. You’ve got a goal.
Carl: Stop.
Michael: Formulate… I’m trying to be…
Carl: Build a plan.
Michael: Build a plan for the goal. Build a plan for the goal. I got to make more, I got to spend less. There’s only so many levers here to pull.
Carl: Current reality goal, path to get there.
Michael: Yeah. And it may take a year or a few, but set a goal and figure out what you need to do get from here to there, and start taking the steps in that direction. It’s probably going to be some combination of bring down what you spend, increase your income, increase your savings. Some combination of those levers and the math will work a little better. Option 2 to me is simply like you find other places for capital. You take on a partner, you borrow money. It’s hard to borrow money in financial advisor world because we don’t necessarily have a lot of assets to borrow against. There are people who take second mortgages against their houses in order to do this. There are people who run up credit card debt to do this.
I’m sure a bunch of people are thinking like, “Oh, heck, no. I’m not taking credit card debt to start my business.” Okay, well, go back and listen to some of the…even to some of the “Financial Advisors Success” episodes we’ve done, of all the advisors who have multi-billion dollar firms today, and talk about how when they started in the ’80s and ’90s, 20 and 30 years ago, they had tens of thousands of dollars of credit card debt in the first year or two. And back then, that was really, really a lot of credit card debt. And now they own multi-billion dollar firms. So took on $30,000 of debt, built $20 million business. Pretty good ROI. So granted not…obviously, not guaranteeing everyone who borrows their credit cards is going to be a multi-millionaire advisory firm owner, but this is part of the risk trade-off. How much do you believe in yourself?
Carl: Yeah. And how badly do you want to do that? And there’s no shame or blame in any of those decisions. It’s okay to set this one aside. It’s okay to swing for the fences for it. It’s just not okay to keep complaining about it and telling stories when you’re a planner and you don’t build a plan. This is like a punch in the nose, and then we’ll have an empathetic hug afterwards. If you really want to do it, stop talking about it and build a plan. You know how to do that. And there’s lots… And stop… Here’s the thing, I do this all the time and I got to remind myself continually, something that you label roadblock, I wrote a column on this for the “Times” a while ago about this idea, go start your thing. And I got hundreds if not thousands of emails about, “I can’t because of this, I can’t because of this.”
And I’m telling you, for every email that…for almost with…I can’t think of an exception, every email that said, “I can’t because of this,” I got another email that said, “Oh, I had this obstacle, but I figured this out.” And so I have to train myself to stop thinking about it as an obstacle or a roadblock. And instead, I just think of it as like, “Oh, this is a…” Here’s what I love to think of them as, I love to think of them as problems, like a math problem. It’s like a math…it’s something to be solved for. “Oh, turns out I don’t… How can I do this? Who else has thought about this?” Who else thinks differently? Go to somebody who thinks differently and say, “Teach me how to think the way you think about this thing that I call a roadblock.”
Michael: Carl, you lost me. This was a math problem. I was so excited for you to go straight to you just build a spreadsheet. You just make a spreadsheet and you solve this. But yeah, I guess you can ask other people as well.
Carl: Yeah. So build the spreadsheet, build the plan, ask other people, you can find a solution to this. And afterwards, big hug. I know it’s scary. With all of that said, it’s scary. I happen to love that fear. But not everybody does. And I’m telling you, my email, Michael’s email, I think, but I know my email and on Twitter, please, if you’re trying to do this, you are not alone. It’s okay if it takes you three to five years to build a bridge. It’s okay if you decide to pull the plug tomorrow. You can do it, do it thoughtfully and get after it. Or intentionally set it on the shelf. And that’s okay, too.
What If It’s Less About Starting A Business And More About Not Being Happy In A Current Role? [21:56]
Michael: One other thing I would note to this as well for…because I’ve talked to a lot of advisors that have had this conversation, it’s usually something effective like, “I’ve grown in my firm, but it’s not a good fit anymore. I don’t think I’m well compensated for what I built up to. I want to go off to some different clientele. And I don’t feel like I can do it where I am. Because I’ve got all these problems, my situation isn’t working for me.” And I will say to them, “So have you actually talked to the firm about that? Have you talked to the founder, or owner, or boss, or manager, whatever your structure is there?”
And I find probably 80% of the time, the answer is no. Twenty percent is like, “Yeah, we’ve been talking about it for years. They keep saying they’re going to do something and then they never do. I’m on the seventh year of a five-year succession plan, and they say now they’re about to start it. And I’m like, ‘I just can’t take it anymore and go to year 12.'” So, sure. But overwhelmingly, I find for most advisors that are in this haven’t even had the conversation where they are to say, “Hey, I’m getting to a certain place in my career, I need to look and figure out what’s next. I’ve enjoyed what I’ve built here. I’ve appreciated the opportunity here. But I just want to know what comes next in the opportunity set. Can we build a path for me here to the next level?”
And just don’t assume that the only path forward is stay where I am stuck and unhappy or leave and make a new thing. There’s also, there is a third choice, which is you restructure the world where you are. Because I can tell you, for most firm owners, if you have built to that point, and you’re that good, and you’re building that level of success, they really don’t want to lose you. Now, maybe they aren’t prepared to change the firm in the way that it would take in order to keep you on board. So having a conversation is no guarantee that it’s going to work out. But have the conversation. You might be surprised. And the good news for a lot of firms, if that’s already where you are, where your clients are, and where the revenue is, and where the income is, you’ll eliminate your capital problem because you’re not going to have to start your income over by going and starting out from scratch.
So just have the conversation. Likewise, maybe for anyone who’s listening who is a firm owner who’s on the other end of this conversation or seeing their 30-something advisor apparently germinating on this, you can start the conversation too. Because if you don’t, the first time you may find out they’re unhappy is when they give you the termination notice because they didn’t have the conversation, you didn’t have the conversation. Nobody had the conversation. So they just went and did the new next thing.
Carl: And you know specific examples of people who’ve done that.
Michael: Yeah. I’ve seen both ends of it of just advisors who have had the conversation and restructured their role. Advisors who said, “It’s not working. I’ve got to go out on my own.” We had Ashby Daniels on the podcast a little ways back who did a version of this. Ashby’s story was pretty cool because he found he had to leave, but the way that he did it was he went to another firm and said, “I need two years of salary to come here, and I’ll build my client base with you and you’ll get a percentage of the revenue. So if I’m successful, you’ll make it back over time. We’ll all be financially successful.” He was like, “I don’t have the capital.” Because he is a parent with young family. And so basically, he found a firm that would stake him. Not the firm he was at, he did have to make a change. But he found a firm that would stake him and that was his way of overcoming it.
Reese Harper built an advisory firm and just didn’t have all the capital to do what he wanted to do, so he took on equity partners. He’s not the sole owner of his firm. People put equity capital in. They put in dollars and they got a portion of the ownership. And that’s how he’s building. So many of us live only in a world we’re like, “It’s my firm and I own 100% of it because I made it with my own two hands.” Well, that’s cool. But that also means it’s all your own capital and only your own capital. If you don’t have capital that might be a little constraining. So maybe you don’t own all of your firm. The person with the money brings some of it. You got to find a person with the money. So welcome to the world of finding equity partners. But I have a salary job, or I stake 100% of my own business are not the only two choices either.
Carl: Totally. Yeah, that’s super helpful. Super helpful. Amazing.
Michael: Hope that’s food for thought for anybody who’s thinking about this conversation.
Carl: Yeah, yeah. And just remember, you’re not alone.
Michael: No.
Carl: And it’s okay that it feels scary. It’d be abnormal, actually, if it didn’t feel a little scary. So, yeah, if either of us can be helpful, make sure you ask. And thanks, Michael.
Michael: Awesome. Thank you, Carl.
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