#FASuccess Ep 163: Building A Fast-Growth Practice Without Prospecting By Working Under A Credit Union, with Michael Gennawey

Author: Michael Kitces

Team Kitces

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

In addition, he is a co-founder of the XY Planning Network, AdvicePay, 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

• Michael’s Path Into A Career As An Advisor Within The Credit Union Channel [05:26]
• How Credit Unions Differ From Banks And What Michael’s Credit Union Looks Like [11:45]
• What SoCal Wealth Looks Like And How Their Business Is Structured [22:53]
• How Michael Leverages LPL In His Practice [31:38]
• How The Process Of Growing A Client Base Inside A Credit Union Works [37:58]
• How Michael Manages The Wide Breadth Of Clients He Serves [50:35]
• How The Payout Structure Works Within Michael’s Business Structure [1:01:49]
• What Happens To An Advisor’s Book Of Business When They Leave [1:09:51]
• How Advisors Can Find Similar, Member-Focused Credit Union Opportunities [1:20:37]
• What A Typical Week Looks Like For Michael [1:27:12]
• What He Would Have Done Differently And What Success Means To Him [1:33:24]

Resources Featured In This Episode:

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Full Transcript:

Michael K.: Welcome, everyone. Welcome to the 163rd episode of the “Financial Advisor Success” podcast. My guest on today’s podcast is Michael Gennawey. Michael is a financial advisor and program manager for SoCal Wealth Management, a hybrid advisory firm in Southern California that oversees $260 million of assets under management for nearly 1,800 clients.

What’s unique about Michael, though, is the way he’s been able to build SoCal Wealth Management under the umbrella of the Credit Union of Southern California, which itself has nearly $1.6 billion of credit union assets serving almost 120,000 members across 18 branch locations and feeds a continuous flow of prospect referrals to Michael’s advisory firm, with the caveat that as part of the credit union, they have to take every client that is referred to them.

In this episode, we talk in-depth about the unique structure of credit unions as customer or rather member-owned financial institutions, and how member-centric culture of credit unions can be so complementary to the client-centric culture of advisory firms. The way that Credit Union of Southern California structures its referral program and trains its member service officers across branches to identify members with client needs and steer them towards SoCal Wealth Management at a pace of nearly three new clients per week, and the way SoCal Wealth structures its offering on the LPL platform to keep it efficient enough to run this kind of high-volume client business.

We also talk about the way that Michael’s firm uses an internal team member supporting the financial advisors to both set initial appointments with referrals but also to help screen them to ensure they’re a fit for the firm in the first place, SoCal Wealth’s financial planning process and their two-meeting approach that delivers the plan interactively with MoneyGuidePro, not only to engage clients but to save significant time in the plan preparation process, and the way that Michael’s firm segments clients for ongoing services, given the incredible range of who the credit union refers to them, from multimillionaires to those opening their first IRA.

And be certain to listen to the end, where Michael shares how to figure out which credit unions have the right client-centric culture and which are just offering wealth management as a product-based profit center, the typical payouts that advisors receive in a credit union environment in exchange for having to do little or no business development, and the unique structure that SoCal Wealth has built for its advisors where clients that are referred through the credit union must stay behind, but advisors can still have their own personal clients that the advisor can take with them if they leave in the future.

And so with that introduction, I hope you enjoy this episode of the “Financial Advisor Success” podcast with Michael Gennawey.

Welcome, Michael Gennawey, to the “Financial Advisor Success” podcast.

Michael G.: Hey, Michael. Thanks for having me on. It’s my pleasure.

Michael K.: I’m excited for today’s podcast discussion of what I think is a little bit different of an angle or a path or a journey in the financial advisor world than what we typically cover, which is a lot about people that go off on their own and hang their own independent shingle. And certainly, there are virtues to going out and kind of building your own client base as an independent, but there’s also a lot of caveats. One of the biggest of which is, you’ve got to find all your clients from scratch. Because when you’re out on your own as an independent, there ain’t really no one to hand them to you. You’ve got to go do that and beat the bushes, as it were, from scratch, which is difficult for a lot of people. At the end of the day, the advisor world is an incredibly high attrition rate, incredibly high failure rate of just people that go out to do that and they fail and they don’t succeed as an advisor, and has nothing to do with their knowledge, their ability, their quality of advice, their ability to help clients, and just starts entirely from couldn’t find enough clients to pay me before I ran out of available savings and had to go back to do something else.

And so I know you’ve spent a good portion of your career building in the realm of credit unions and under the umbrella of a credit union and a financial institution, which is a very different I think path into becoming a financial advisor and building an advisory practice. And one that has itself changed I think as the bank and credit union channel has sort of shifted its views around the advice business and the wealth management business. And so I’m excited today to just talk about what this looks like in the pathway of trying to enter financial services through the bank and credit union environment as opposed to either the like traditional wirehouse or insurance agency, “Here’s a desk and a phone, go call people,” or some of the independent channels where like, “Hey, you can launch your own firm and do whatever you want. Good luck with that.” And sometimes leaving people floundering at the launch. So what brought you to the credit union channel in the first place as a way to build a career as an advisor?

Michael’s Path Into A Career As An Advisor Within the Credit Union Channel [05:26]

Michael G.: Yeah. And you kind of touched upon it already. The big advantage is that not only are you going to be getting prospects, but they’re prospects who are already wanting to work with you versus somebody else, because you’re already a part of the institution that they trust. So it’s really easy to start building up your book of business when you have people coming to you with that mindset, they’re ready to do business, ready to start talking to you about their finances. So that was the part that was really compelling about the credit union. Because before I was there, I was at Merrill Lynch where it was all on my own, and I would try everything. I did cold calls, I did trade shows. I had booths at 5Ks and marathons. Just trying to see as many people as possible and open those conversations up. But when you’re at the institution that’s actively soliciting people to come see you to talk about how you can make an impact in their lives financially, it’s a big leg-up.

Michael K.: It’s an interesting phenomenon to me as well that, I think particularly what this looks like in credit unions. Because I sort of frame this as, banks and credit unions are sort of conceptually the places where we deposit our cash and our paychecks and have checking accounts and savings accounts. But to be fair, there really is I think a distinction out there between banks and credit unions in particular, that banks, I think, get treated a little bit more transactionally. You can often feel sort of the for-profit motive of a lot of banks. Credit unions classically were for the community that they serve. They usually don’t call their people customers, they call them members.

And there’s just I think often a different level of trust maybe between members and their credit unions than customers and their banks that really probably builds up that fast launch a little bit more, as you’ve highlighted, of like the people who come in, you’re a part of this credit union that they already trust. And so that trust is endowed on you, and they actually usually want to talk to you and have the conversation. You’re not dragging it out of them, they come and seek you, because they trust the credit union, the institution, and you’re a representative of that institution, and then you get to do the financial planning work that you’re going to do.

Michael G.: Exactly. And there’s a bit of loyalty and almost pride in it too. And first of all, my credit union that I work with is very regional, Southern California, and I’ve had members come in who have said, “Look at my member number, it’s only got four digits, it’s only got five digits and now we’re up to six and seven and eight,” to show that they’ve been with the credit union for so long. They have some pride in that that they almost feel like some ownership that they’ve helped build up the institution to what it is today.

Michael K.: Yeah, it reminds me, there’s I think a similar effect out there for CFP certificants as well. That CFP Board has done the same thing. It’s issued the numbers sequentially. So you have five-digit CFP certificants, you have some four-digit ones. Every now and then you see some 3-digit folks, which at this point probably means you’ve been in the business for almost 40 years. That similarly like when people get bound and bonded to something and stick with it for a long time, we get a lot of sort of that pride of ownership of like, “I’ve been a part of this thing for a long time.” So I love that you get that off the credit union members as well. Like, “I was one of the first 10,000, I’ve got a 4-digit member number.”

Michael G.: Exactly. Yeah. And you kind of touched upon this too, not all institutions are created equally. You look at big banks and they’re going to operate in a certain maybe push towards advisory and kind of siloed into different segments of their platform. Whereas you work with a smaller institution and they’re going to treat you a lot more like…they don’t have the resources to kind of micromanage. They let you run a business the way that you would want to run it. And having that flexibility will help you take charge of your business.

Michael K.: Well, it’s a very interesting point. So like the large financial institutions tend to be more I guess hierarchical because that’s just part of what happens with size. Smaller institutions are at least more likely to have a little more flexibility for some level of entrepreneurship and ownership. Obviously, you’re still within an institution, but allowing a little more flexibility than like, “Here’s the cookie-cutter lines and boxes of what we allow based on what the 47 lawyers told us we’re allowed to do.”

Michael G.: Exactly. You go to a large bank or credit union, they’re going to have training programs and different types of guidance and guidelines that you have to follow. When you’re maybe a solo practitioner inside a small regional credit union, they’re just going to have you as a place for members to go if they need financial advice. There isn’t a whole lot of other structure outside of that to start, because if it’s a brand-new program, they’re not even really going to understand if it’s going to be successful or not. So they kind of give you the ability to just try be profitable and give good service to the members. Because that’s always number one. And then after that, start building it up into maybe an enterprise.

Michael K.: So for folks that are maybe less familiar, can you just give some context or background I guess to credit unions in general and your credit union in particular? Because I find sort of regionally, there are folks that are in areas that have a lot of credit unions. They’re very, very familiar with them and may be a part of one. And then other parts of the country, credit unions just aren’t a thing as much, and they’re not around. And you may have literally never seen one or interacted one or have any context as to how this is different than any other bank where you might keep your checking account, savings account, deposit your paychecks. So can you talk a little bit about credit unions overall as distinguished from traditional banks and then what your credit union looks like in particular?

How Credit Unions Differ From Banks And What Michael’s Credit Union Looks Like [11:45]

Michael G.: Yeah. And I fall into that first category. I didn’t really know much about credit unions until I started working for one. I always had banking institutions and Merrill Lynch and Bank of America before I joined up with my credit union, which is Credit Union of Southern California. And we’re community-based. So to become a member, you have to live, work or worship in the Southern California area. So there is usually some level of qualification. If you’re in a credit union that works with only aerospace employees, you have to be an aerospace employee to become part of it. So there are some limitations there, but most are much more flexible today than they have been in the past. And that’s because a lot of credit unions are consolidating. There was quite a few consolidations in the industry to have more scale, have more size. And because of that, they are becoming more community-based.

And the big push, the difference of the credit unions is we’re profitable but we’re not-for-profit. So we’re here to serve the best interests of our clients or customers or in our case, what we call members. And the members are owners of the credit union. So if you have a savings account with us, you’re technically an owner of the credit union. And so we approach service and experience from that perspective of that we’re working for the people who own us. And when we make decisions on should we do plan A or initiative B, we say, “Is this going to help our members have a better life?” We have a saying at our credit union that we’re here to build better lives. And that’s what we strive for when we put together our business plans and our new products and services that we’re going to offer.

Michael K.: So how does it work with members being owners of the credit union in practice? Is this like I open up a checking account and I get some shares of stock that are going to pay me dividends? How does that work in practice for credit unions?

Michael G.: Yeah, it’s not that formal. So instead of having a savings account, we call them shares. So instead of having like stock shares, these are your credit union shares. And that is your technical ownership of the credit union. And I’m not sure if it’s the case everywhere, but I believe that you have to have a savings account or shares account with a credit union to be a member of it.

Michael K.: Okay. And then do I get some kind of dollars or return on my investment or is it just because we’re not paying profits out to shareholders, our savings accounts are going to have better yields because we can just push all the dollars back?

Michael G.: That’s exactly what it is. The interest rates are the returns to our members.

Michael K.: Okay. Interesting. And does that happen in practice for you? That like, if you look at your yields relative to the yields of other banks in your area, are you actually able to pay a higher rate because of this shift in, “We’re not taking…we’re not profiting off you and sending it to Wall Street shareholders, we may profit off of you, but we put it back to you in the higher yields of your accounts?”

Michael G.: It kind of depends. I’ve seen it would fluctuate year-to-year with changes in the business cycle, in changes in interest rates. So I’ve seen it be above market, I’ve seen it be below market. And if the credit union, let’s say credit union is trying to expand their offering of auto loans and they need to put some capital into that, maybe their earnings to investors, their interest rates are going to be lower. Whereas if a credit union was not going to do that, they would maybe be able to pay out a higher rate.

Michael K.: So I guess sure, like kind of any business in the aggregate, you take your profits, you decide what you’re going to reinvest, the remaining or the remainder of the profits go out to shareholders. So if you’re having a bigger reinvestment year, you have less to share with your shareholders, or in this case, your shares account.

Michael G.: Yeah, it’s exact same way to think about it. The other thing is, since it is a not-for-profit organization, the taxes are lower or non-existent for those institutions, which makes it a little easier for them to be competitive with those rates.

Michael K.: And I guess at the end of the day, it strikes me, this is similar to the functional ownership structure of Vanguard as well, which sort of took this to the multitrillion-dollar level of scale, but same functional concept, which is the company is structured, so it’s owned by the people who invest in the mutual funds. And the fundamental benefit that you get to that that at least Vanguard has been able to do perhaps better than most is when you’re not trying to generate profits that go to external shareholders, you’re generating profits but the profits go right back to the people that you’re doing business with in the first place, you kind of have an incentive to pay better yields and returns or to bring your costs down because it’s not like charging people more gets you more, like, you get more out of them only to give it back to them, which is really not very helpful. So you may as well just make the cost lower, and then you help the people you’re serving. Oh, and by the way, everybody else shows up as well because now you’ve got a really good deal with this positive cycle of paying back the people who invest in you starts to build upon.

So just it’s interesting to me that this structure of what essentially are mutually owned companies, this was a dominant structure in financial services in the early 1900s. Like insurance companies were all owned by their policy owners, it’s what we call the mutual insurance companies. Credit unions got built around this model. Vanguard worked around this model. And then we had this trend in the ’80s, ’90s, and 2000s where insurance companies demutualized and went…stockholder financial world seems to have shifted more towards banking. Most asset managers outside of Vanguard are for-profit entities. And now it almost feels like the pendulum is maybe starting to swing back the other way as we look and say, “Oh, that structure was actually working pretty well in financial services. Some of those companies are actually serving their people pretty well. And I’m not thrilled with how some of the shareholder-owned or external shareholder-owned companies are behaving these days.”

Just it’s interesting to see how those cultural differences play out over years and decades, and as you’ve noted, becomes ingrained in the culture of places like credit unions, that at the end of the day, our profits are all going to the members anyway, so we really, really may as well only focus on serving them.

Michael G.: Yeah. And that’s the thing, it’s when you’re in that mutual structure, you really can’t ever take the priority off-service. And because of that, it’s just snowballed into every initiative, every project, how is this going to better serve the members of the organization? It just always comes back to that. And that’s a positive thing.

Michael K.: Right. It’s just the whole…there’s so much I think debate and concern out there these days of the challenges of taking care of your customer versus taking care of shareholders, because executives and boards have a fiduciary duty to their shareholders. And it’s like, well, if the people you serve are your shareholders, this gets easier, right? Like, much more cleanly lines, much easier to focus on.

So talk to us then about kind of like size and structure of your credit union in particular. And I don’t even know how credit unions get measured, but who do you serve? What’s the base? What does that look like in credit union world?

Michael G.: Yeah. So we’re open to the community. So we look at anyone who is in Southern California. That’s open to us. But in terms of what the credit union looks like, I started Credit Union of Southern California about 11 years ago. And they had about $400 million on deposit. So the grand scheme of the financial world, very small. But through mergers and acquisitions and just general growth, the credit union is now up to $1.6 billion in deposits. We’re getting close to midsize now. And then I think they assume a credit union is large when it gets above $2 billion or so. So we’re knocking on the door of that.

And as the credit union has grown, so has the ability to grow the investment program. So we call ourselves SoCal Wealth Management, started off as just two advisors. That was myself and my business partner, Ryan. And then from there, we’ve added on two more advisors. And now we have one in-branch client associate and one virtual client associate. And we’re growing from there. We’re probably going to hire one to two more advisors this year to keep scaling up, make sure that we have a nice in-branch presence and also keep our service levels high.

Michael K.: And so what is the overall I guess like size of the credit union in terms of like how many employees work there or how many branches are there? What’s the reach overall? Is this like 10 people in 1 building? Is this 100 people across a dozen locations? How does the overall structure and footprint work?

Michael G.: It’s changed over the years. Right now we’re about 400 employees, and we’re about 18 branches, from Orange County to Los Angeles to the Inland Empire. That’s kind of our footprint right now.

Michael K.: Okay. Because that helps. So when I think about this in just like traditional advisor world, a firm with $1.6 billion of AUM in our context is probably a firm that’s like 30-something employees, give or take a little, maybe 40, often has 1 location, just kind of serves everyone from there, $1.6 billion in credit union deposits, though, is a very different size, scale organization. This isn’t 40 employees, this is 400 employees. This isn’t 1 location, this is 18 branches. Relative to banking credit union world, as you said, this is a pretty sizable midsize growing to large enterprise.

Michael G.: Yeah. And this is someone’s everyday banking institution, so having more locations for convenience is very important.

Michael K.: Right. So now talk to us a little bit more about the SoCal Wealth side. So as you had framed it, the investment program that sits within the credit union. So what does that look like? How does that work?

What SoCal Wealth Looks Like And How Their Business Is Structured [22:53]

Michael G.: So we’re a financial planning-first firm, and we are there to help members with anything financial or investment-related. So whether that’s needing an insurance policy or setting up a financial plan because you want to retire or starting a Roth IRA, those are all things that are our day-to-day type of conversations that we have.

Michael K.: Are you also having I guess like the banking conversations as well? Are you also talking to people about opening a checking account, opening a savings account and that sort of stuff as well because you’re anchored in this credit union that does banking?

Michael G.: No, no, that’s all on the other side of the branches. We handle just the advisory side. We’re the Series 7, 66 personnel. When it comes to auto loans, everything else, that’s on their end.

Michael K.: Okay. Okay. So you may be within the bank, but you don’t actually need to wear the banker hat. There are separate staff that does that. Your SoCal Wealth portion looks more like I guess what I would otherwise call a traditional advisory firm. So investments, insurance, retirement, those sorts of financial advisor domains, you just happen to live within a banking credit union environment.

Michael G.: That’s the exact way I think about it. I approach it as, we just happen to be a boutique that is inside an institution.

Michael K.: Okay. It’s an interesting way to frame it, a boutique that’s inside an institution.

Michael G.: Yeah. Well, because in terms of how we approach things, we take a very much planning approach. Like we said earlier, a lot of institutions, especially larger banks and credit unions say it’s more product or sales-oriented. And we don’t really approach things that way. It always starts with a conversation, finding out what’s most important to our members, and then working backwards and building a plan, and then coming with some advice after that.

Michael K.: So what does the business model look like for a firm in your situation? Are you on the RIA side? Are you on the brokerage side? Are you a hybrid structure? How does it work from a business model end and what sorts of stuff are you ultimately involved with, getting paid for with folks that you work with?

Michael G.: Yeah, hybrid was the best situation for us because we still have some clientele that needs to do something outside of advisory or fee-only business. Sometimes people come to us and they just want a better rate on their deposits. And we could look at things like the fixed annuity world for somebody who’s not quite, I’d call like an investment grade investor, but they’re just trying to do better on some long-term savings. So things like that still exist that we use. But the majority of our business is advisory accounts, and 85% of our business is actually qualified. So when it comes to having conversations with people, a lot of times it revolves around getting to and getting through retirement.

Michael K.: Okay. Which again, kind of similar to conversations a lot of us would have in financial advisor world, just they’re coming to you through an anchor to a credit union to have similar conversations. I’ve got a 401(k) plan, a rollover. I’ve got dollars I need to invest. I’m queuing up for retirement but I have no idea if I’m invested properly or if I can afford retirement or how much I can reasonably spend in retirement. And so all those conversations then come to the fore.

Michael G.: Yeah. And the one conversation that kind of works backwards from that happens a lot. Like someone will be referred to me and they’ll have some money that matured in a CD, and they’re referred because they’re looking for a better rate. And I’ll talk to that person and find out well, the most important things in their life is making sure that they have income replacement in retirement to make sure that their family is taken care of if something happens to them. And so a lot of times we don’t even really invest the money that’s on deposit at the credit union. We look at that 401(k) or that 403(b) or that IRA that they’ve been trying to manage themselves that hasn’t done so well and bring that in and start managing that.

Michael K.: And I’ve got to ask, this is their…is there weirdness if you actually like literally are pulling money off deposit? If this is a credit union that’s primarily still first and foremost in the credit union banking business, we’ve got deposits and we lend them, and you’re out there in this wealth management division pulling out their deposits and investing, you’re pulling out their deposits and moving fixed CDs to fixed annuities for clients that can get a better yield. Does this upset someone on the credit union side that’s like, “Hey, guys, appreciate your own business, but can you not like disintermediate our credit union in the process?”

Michael G.: We had one moment like that, I think it was 2010, where we were just doing too much of deposits and they’re like, “We need to start tracking this to make sure we’re doing this at a reasonable pace.” But after that, since we have been tracking it and it has been so much money from outside the institution, it hasn’t really been a problem at all. But you’re right, if an institution is trying to focus on having to retain deposits, if you have an advisor who’s running it off, it could be a problem.

Michael K.: Well, and I know there was a challenge in like late 2000s, early 2010s when interest rates crashed and at one point got so low that not only did you not get much of any yield at the bank, but the bank couldn’t even make much yield at the bank because everything was suppressed so low. That there were some banks in like the early 2010s that made big pushes into “financial advisor wealth management” world, and it was basically like rip out their deposits and get them over into annuity contracts because the few banks actually figured out they literally made more money on the annuities than they did on their own deposits. So they were trying to push the money out off their books and into the products that were actually more profitable for them. Not I think a highlight for the world of banking crossing into financial advisor world.

And some of that now has wound down as rates have normalized. But I know there is some history on that end for at least some institutions that really just kind of looked at this as a profit center, another way to make money off of their deposits. It wasn’t really about the advice, it was just at the end of the day like, here’s another product we can cross-sell to expand wallet share and make more revenue per deposits because we found some products that are highly profitable to the bank to sell.

Michael G.: Yeah. And that’s a call from the leadership of that organization. I remember that time. And we weren’t as affected by that, but if a CEO of institution is going to make that call and say, “Here’s how we’re going to review this, we’re going to start pushing money into the investments program to get into annuities to make more money,” that could happen. And yeah, there was a lot of advisors at that time that had their best years ever. But it wasn’t the way that we were trying to run the business.

Michael K.: So you said the business is heavily advisory accounts in practice, so what does this look like now for size of the firm? I don’t know if you ultimately measure like based on AUM since it’s heavily advisory accounts or GDC since you’re doing some annuity or other business as well. What does the practice within the credit union look like now from a wealth management portion?

Michael G.: Most of the business, about 60% is in advisory, and the rest would be still like transactional business. So the way it breaks down is we’re about $260 million under management. And we had three of the four advisors converting to advisory last year. So our GDC was about $1.1 million. So it was a little bit of a low point. But now that most of that has been converted, we should be closer to about like $1.7 million or so this year and going forward.

Michael K.: Okay. So the ultimate like generating $1.7 million from a base of $260 million of assets by whatever combination of advisory fees, a little bit of product that gets sold.

Michael G.: Exactly. Yeah.

How Michael Leverages LPL In His Practice [31:38]

Michael K.: Okay. And then who’s the broker-dealer that wraps all of this up?

Michael G.: LPL. We clear through them. We use them for advisory platforms. We use their open-architecture platform. And I create model portfolios that we use for the members.

Michael K.: Okay. So LPL has the tools, has the tech to essentially just let you run your own model portfolios, create your set of models, off you go on your way as clients come in.

Michael G.: Yeah. One of the things of working at institution is you have to be able to work with scale. And so I know a lot of advisors look to a TAMP for that. I’ve always wanted to maybe control it a little bit more. So I run the portfolios and then block trade them so that I can update lots of portfolios all at once to make sure everyone’s getting the latest updates to their risk and objectives. And that’s worked out well.

Michael K.: And so what software do you actually end out using to do that?

Michael G.: Well, in terms of the actual rebalancing software, it’s proprietary through LPL. So I don’t use any third-party for that side of the business.

Michael K.: Okay. And so the LPL’s own home office software lets you set up models, rebalance clients to them, queue up the block trades. That all happens directly off of their platform?

Michael G.: Exactly. Yeah. It’s all through…their main ecosystem is called ClientWorks, and all of that is integrated right into ClientWorks.

Michael K.: So what does investment management look like for clients? Are you mostly in a brokerage world of mutual funds and C shares? Are you ultimately running this on the advisory side of the platform and building with no-load funds and ETFs and stuff like that? What does the portfolio process look like in practice?

Michael G.: Yeah. So most of the portfolios are going to be no-load and ETF, probably about two-thirds ETF, one-third funds. For accounts that don’t meet the platform minimum, which is $25,000, I actually use a white label robo-advisor called Guided Wealth Portfolios that’s also run through LPL and BlackRock.

Michael K.: Okay, that’s…Guided Portfolios, is that the original FutureAdvisor BlackRock platform?

Michael G.: Exactly. Yeah. So LPL has rebranded that as Guided Wealth Portfolios, and I use that for accounts below that $25,000 minimum. And those clients, I actually make sure that they’re aware that they’ll eventually graduate as their balances get large enough into a full advisory account.

Michael K.: Okay. So this is really for you like specifically built as a small account “robo” solution. Like just what, a straightforward model portfolio. What ultimately then is the difference between what Guided Wealth Portfolios does and what you do in your own if we’re all running off model portfolios? Is it just like Guided Wealth is pre-packaged portfolios, if you want to make your own custom thing, you have to eventually come over and build your own models in ClientWorks?

Michael G.: Yeah, exactly. So they’re set models based on risk tolerance like you would normally think a robo would have. And then once you get to the level of having an advisory account, we could start being a little bit more creative. If there’s certain types of stocks or sectors that you want to own, I could customize that. But you can’t do that beforehand.

Michael K.: Right. And then what does this look like from the planning end? Are you still going through and doing custom financial plans for clients? Are you charging separately for the plans or are you even allowed to charge separately for the plans in your structure? What does the planning side of the practice look like?

Michael G.: We don’t charge for plans, but we are allowed to. We actually tell members that, “Being a member, this is your member benefit.” So once again, we’re saying, “It’s the right thing to do. To do the plan, we’re not going to charge you for it.”

Michael K.: Oh, because again, you’re right back in the world of like, I can also charge you for it and make more money off this and then you’ll get it back in the share accounts as a member anyway. Because like, I don’t need to make any more profit than I need to make just to run the business and reinvest, because that’s what happens in a mutual structure.

Michael G.: Yeah. And then the software that seems to resonate the most with my clients is MoneyGuidePro. So I use that. And we use that to go through all the goal planning and open up all those conversations that we need to have to make sure the investments are going to match up with what the client really needs. And I’ll tell you this, the number one goal that people come to me with is just 100% income replacement at retirement. They’re just trying to see what they could do. If they could just have what they have now retired, they’re going to be financially happy. And then it’s my job to open up all those other questions like, “Well, are you going to have more travel to do? Are you going to renovate your home? Are there major type of vehicle purchases that we’re looking to do?” And kind of show them that there’s more to just like saying, “I just need to keep my net income my net income.”

Michael K.: Right. So how does this work from the perspective of getting clients and growing your business? As we’d said earlier, one of the appeals of working within a credit union environment is like, they actually trust you because they trust the credit union, you’re part of their credit union. And so you get more opportunities to work with people. But how does that process actually work in practice? Are you sitting in credit union branches and people can just come on over if they want? Is there an internal referral system? Do you still have to do your own events and marketing, you just happen to get access to the credit union lists? How do you actually start growing a client base within a credit union environment?

How The Process Of Growing A Client Base Inside A Credit Union Works [37:58]

Michael G.: Yeah. And we do a lot of those things you just mentioned, but the actual effort for it doesn’t always come down on the advisor, which is the best part, because the advisors need to be meeting with clients and reviewing plans and building plans and doing all of that work. So yes, we have an internal referral system. So our staff is trained that if they’re meeting with a member and they have, especially like an IRA account that’s earning sub-2% in some cases, maybe you should talk to one of the financial advisors and see if this is what’s best suited for you. And then if a member says yes, it goes to an internal referral system that pops up as an email to my client associate who does that first outbound call to the member and says, “Hi, thanks for letting us contact you. Would you like to set up an appointment with Michael to build a financial plan?” Or whatever they were most interested in.

Michael K.: Interesting. So you actually don’t take that call, that prospect referral inquiry. That’s a client service associate whose job is to do the follow-up. Because I guess in…I think for a lot of us, the gut impulse is, as advisors, we always return those calls, because this is a sales opportunity, this is a business development opportunity. A little bit different perhaps in a credit union environment because the odds that person is going to make the appointment with the client service associate is incredibly sky high because they already trust the credit union. They asked for the service from the credit union. The credit union referred it internally to people at the credit union and someone “from the credit union” is calling back to follow up to schedule the appointment. So it’s pretty natural for them to schedule that first appointment without a lot of sales effort at that point.

Michael G.: Exactly. And we don’t get a lot of drop off. If we get a referral, most likely someone’s going to answer the phone. It’s not very common for that to drop off at that point of the cycle.

Michael K.: So that ultimately is I think even part of the efficiency opportunity then is you actually don’t have to do the same level of initial outreach and follow-up work even when prospects come in because, again, you’re carrying the trust of the credit union. And so when a service associate calls up and says, “Hey, I’m following up to schedule your appointment with Michael,” people are just taking that call and most of them are saying, “Well, yeah, of course, because I was expecting your call.”

Michael G.: Yeah, exactly right. And sometimes we have members who work in one area but live in another area, and maybe they want to meet at the branch that’s close to home versus the branch that’s close to work, and so the client associate, just to make sure that this is going to be the most convenient location for them to have that follow-up meeting.

Michael K.: And so how many members are at the credit union in the aggregate? When you’ve got like $1.6 billion of deposits, how many people is that?

Michael G.: Last time I checked it was about 120,000.

Michael K.: About 120,000.

Michael G.: Yeah, it’s a large pool.

Michael K.: Yeah, that’s a monster…that’s a monstrous pool, right? Like just if you can someday get 1% of that pool, that’s 1,200 clients. That’ll keep you busy for a while.

Michael G.: Right. And right now we’re working with about 1,800. So we already have a lot of clients on the books, and we’re trying to build that up even more.

Michael K.: Interesting. So you get these internal referrals that cross over. So like someone in the individual branch, you get an opportunity to train them around how to ask questions to understand if someone maybe has some financial advice needs beyond the basic banking stuff they do, it comes over as an internal referral. If it does, you schedule a follow-up call or the client service associate schedule a follow-up call to make a first appointment, and then what happens? How does this process work for trying to get someone on board and close them?

Michael G.: Yeah. So the person comes in, we see what they’re…assess the needs. Hopefully, that’s to build a financial plan. We do the fact-finding appointment at that point. Usually, it’s complex enough where we’ll want to circle back with a delivery appointment of the plan and then actually ask for the business at that point and see if we could transfer the accounts and set up anything that they may need to do on the asset management side.

Michael K.: So meeting…I’ll make sure I follow this. So an inquiry goes out, or referral comes in, you do a follow-up call to schedule appointment. That first appointment is essentially trying to do initial round of data gathering on the spot, understand some of the needs and concerns and the situation. Then like, from meeting number one, you’re actually going to create a financial plan in MoneyGuidePro. Meeting number two is going to go right into presenting that plan, “Here are some observations. Here are some recommendations we have. And if we’re able to help you with this, we’d love to start working with you from here.”

Michael G.: Yeah, exactly, MoneyGuidePro. I usually do a pretty interactive presentation of that live so that if we want to change any of the data, I could do that right on the fly. And then in addition to that, I usually do like a risk analysis with Riskalyze to show the client if they have existing assets, “This is how you’re currently positioned. Maybe that makes sense. Maybe that doesn’t make sense based on what your financial plan says now.”

Michael K.: Right. So you get the opportunity for, “Okay, we just went through the planning process. It looks like you only need to take a moderate level of risk to make this retirement plan work. Let’s put you through a risk tolerance evaluation with Riskalyze. Okay, this confirms like you’re actually a fairly conservative client. Okay. Now let’s take a look at your portfolio. Oh, okay, it’s completely out of whack with all of this. We need to start making some adjustments. Can we help you with that?”

Michael G.: Yeah. And I’ve had some clients where one spouse is saying, “Oh, no, we’re very conservative.” And then the other spouse is, “We’re very conservative.” And then I show them the portfolio and it’s definitely not very conservative. And they look at each other like, “Who made it so risky?” And it’s good to bring up those conversations because a lot of times they don’t know they have issues until you tell them.

Michael K.: Right. So what does a plan look like in a firm like yours when just, I’m presuming you’ve got a fairly high volume of these that you have to go through. So you don’t necessarily have the time to do the sort of traditional like 20 hours construct a detailed plan and write up all this analysis and recommendations, or maybe you do. What does a plan deliverable look like in an environment like yours?

Michael G.: And a lot of the clients I work with are mass affluent. And they’re employees, not business owners. So the complexity isn’t always as great as you might think. A lot of times they own a property or two, they have bank accounts, credit union accounts. They have maybe some insurance policies and some retirement accounts. And that’s usually the bulk of it. So using MoneyGuidePro, I’m able to show that goals, show those resources and make those projections. And that’s usually a good enough of a deliverable. And then I can put in, “Okay, here’s our action items. This is what we need to work on. This is the order of operations.” And from there, we can know what we need to do by our next meeting or our next follow-up or review meeting.

Michael K.: And I guess that’s…it’s worth recognizing as well like that’s part of the value of doing planning work more interactively with clients. When you put MoneyGuidePro and Play Zone up on the screen is like, if people want to look at a…if people want to see where they stand, like, “Here it is, it’s on the screen. Oh, you’ve got questions about some other options that you’re considering, like, let’s just look at them and see.” And I don’t need to prep and print and produce and spend a couple hours creating like three different what-if scenarios and all the way down the rabbit trail of what happens if you do this or you do that or you do this other thing. Like, we just put it on the screen and see. And if you want to look at half a dozen different scenarios, it takes all of about five minutes to just move the sliders around and look at the different scenarios. And just from a time efficiency perspective, you start saving a lot of time in the plan construction and delivery process when you can just cue up the plan that way.

Michael G.: And a lot of my clients don’t even ask for a hardcopy deliverable. They know that…I tell them, “This is a living, breathing document that’s going to be on my systems.” And they know every time that we get together, it’s updated with their latest balances. And if there’s new concerns, we’ll run it live again and see if anything changes. That’s satisfactory to my clients.

Michael K.: And remind me again, so you have, I think you said $260 million of assets under management and I think you said 1,800 clients?

Michael G.: Yes.

Michael K.: So I’m doing the math here and like, that’s about $150,000 of average assets per client. Obviously, net worth is a little bit higher because the house and bank accounts and some other things. But I think, again, as you said, sort of helpful for context, like, that’s squarely in the mass affluent end, sort of the lower half of the mass affluent end, which is classically $100,000 to $1 million. And so, as you noted, there’s not necessarily a lot of complexity of analysis here. I would imagine, for a lot of them, it’s just, they’ve literally never sat down and seen projected numbers before to understand whether their current path is on track, whether what they’ve saved and created is enough to support their lifestyle. And so you’re just literally trying to show them like, “Does the math work or does the math not work? And then who is going to be stewarding these assets for you while you’re on that retirement journey? Can we help?”

Michael G.: Yeah, exactly. And we have a lot of clients that wouldn’t even be considered like financial planning clients. They opened up an IRA 8 years ago with $5,000 and they haven’t come back in since. So we have some of that, too. So that kind of skews that average balance lower. But I would say our typical client usually invests about $250,000. That’s when we start getting into like the planning space. Or if they’re nearing retirement, that usually is like an automatic qualifier for kind of doing that assessment to see if there’s anything that they weren’t thinking of. Make sure that the financially retiring is going to be as easy as they may think.

Michael K.: Right. And so I’m also just thinking like, sheer volume here. Just 1,800 clients over 10-odd years that you say that you’ve been doing this is still like, that’s about 180 clients a year. That’s like 3-plus clients a week, 50 weeks a year. That’s a lot of client flow. In a world where a lot of advisors start their firms from scratch, it’s like, I had a two-client month, this was an awesome month, you’re running at a pace of three new clients a week ad infinitum for a decade.

Michael G.: And that’s fair. That’s what it’s been. It’s a different world. People sit down with you planning to do business. And they become clients fairly easily. So that’s when it starts getting to like segmentation. Not everyone can have the same level of service. You have to kind of segment it out. And not everyone needs a level of service that’s going to be financial planning, but that your upper-end clients, they’re $1 million-plus investible assets, they’re going to need that extra hand-holding. You’re going to need to be able to compete with any other advisor that they’re going to be talking to.

How Michael Manages The Wide Breadth Of Clients He Serves [50:35]

Michael K.: So I’m struck by that as well, that just this whole phenomenon of the range and breadth of clients. As you’ve noted, you try to address this with segmentation. I think for a lot of advisors out there, the way we ultimately manage this is just we create minimums. We don’t work with clients under X dollars because it’s hard to be profitable in the time as the advisor or just it’s hard to even get those clients in the first place. So if we’re only going to get a limited number of clients, we may as well focus on ones that are a little further upmarket and can pay more of the bills. In the credit union environment, do you even have the option of setting higher minimums and not working with certain members?

Michael G.: You could as long as someone else was going to service those members. So we wouldn’t ever turn anyone away. But the advisor…

Michael K.: So you personally might not have to within the SoCal Wealth Management, but only because you’ve got to hire someone else in the firm who does. Like, you can segment your personal workload, but as this advisory business attached to a credit union, you are obligated essentially to take everyone?

Michael G.: And it should be that way, because we’re here to service the members, once again. And we have a saying at the credit union that there’s a story behind every face. And yeah, I like it going into my prospect meetings not knowing if this is a high-net-worth client or not, just because I want to treat everyone the same way. And it’s been a powerful thing to treat someone who wants to start an IRA from scratch the same way that we treat someone who has a multimillion-dollar rollover.

Michael K.: So I’m just wondering, how does that…just how does that conversation go? Because that is such a broad juxtaposition, particularly if you’re trying to go into prospect meetings and like not prejudge people by the interaction or their appearance or however they’re showing up in your office when literally you could…the next person you sit down with could be a $5,000 account or a $1 million account, and you have to take everyone no matter what. And you’re trying to be appropriately respectful to everyone no matter what. But there’s just this enormous range of who you’re serving. How does that go? Do you try to prequalify these things? Do you try to clarify this in advance? How do you suss out to figure out what kind of conversation you’re supposed to be having?

Michael G.: So we do a little bit of that. So when we get the referral, we’ll make sure that someone’s not coming to us because they thought that we can help them with like debt consolidation or filing their tax returns, because we don’t do things like that. So we do like an initial level is to someone looking to build a financial plan. And we’ve trained the staff to know what that looks and feels like. So that’s the first layer of kind of quality control.

Michael K.: When you say staff is sort of trained in trying to identify that, is that essentially the client service associate, when they do that follow-up call when the referral comes in, is just asking a few questions like, “Hey, can you just…I’m going to schedule you with Michael, can you just let us know a little bit more about what you’re looking for and how we can help?” So that the member at least has an opportunity to say like, “Oh, yeah, I really need help with this credit card consolidation.” You can say, “Oh, actually, that’s probably not the best fit for us.”

Michael G.: That’s a different department.

Michael K.: That’s a different department.

Michael G.: Yeah. And sometimes that does happen. That’s kind of like the downside of working at an institution like a credit union, you’re going to get a little bit of everything. But you’re going to get…as long as you’re getting the good accounts and the great clients along with some of the lower-end clients, it’s something that personally, I’m totally fine with because I like talking with everybody.

Michael K.: And so you have to serve everyone in some way, shape, or form when they come in. But as you noted, segmentation is crucial. And I guess and you get to segment, you’re allowed to do that. But what does segmentation look like in practice for you? What do you segment in that you can do for certain clients but not do for others and where do you draw those lines?

Michael G.: It has to come down to actual in-person touchpoints versus things like social events or our emails that we send out, things like that. So like a top-end client is going to get face-to-face interaction anytime they want. We call out proactively for reviews. We invite them to our social events. I try and have as much fun with the clients as possible. So I like rent out a movie theater and give four tickets to top clients so that they could bring their kids or grandkids. I did a harbor cruise, a cocktail cruise in Newport Beach last year. That went over really well. So trying to have more non-financial socializing type of events with clients is a lot of fun. And they enjoy it too. And that helps build that relationship. So that’s what top clients get.

Michael K.: And what is top for you? Where would that threshold be for you?

Michael G.: I’ve gone back and forth on that. Dollar amount-wise, it’s probably anyone over like $600,000. But it really comes down to who I enjoy doing business with the most, because not everyone has retired, right?

Michael K.: Sure, you can…you always get your subset of clients to like, this is not technically a high-revenue, high-asset client now, but they’re going to be soon. They’re on a good track. They refer us a lot of good people. They’re a good center of influence. There’s always some other folks who may otherwise work into the list.

Michael G.: Yes.

Michael K.: Okay. So then what’s the next tier down? How do you handle them?

Michael G.: So they obviously can have access to an advisor, but usually they would proactively have to call us. And so if you need to have a meeting, we’ll schedule you with the next available advisor if you don’t have a preference of someone and go over whatever concerns that you may have there.

Michael K.: Okay. And so there’s not necessarily a like, “Hey, we’re calling to meet with you twice a year” or even necessarily once a year. If you’ve got to do your due diligence check-in, I’m presuming they probably get a letter, “Has anything changed in your financial situation?” But you’re not…you don’t reach out to them for meetings, you let them reach out to you. And they don’t necessarily get a dedicated advisor, they get the next available advisor.

Michael G.: Yeah. And we kind of leave it up to them as well. If they’ve met with someone in the past and they’d like to meet with them again, of course, that’s no problem. Yeah. The advisors usually like to work with the same people, obviously, so…

Michael K.: Well, yeah, it’s easier on us. Like just when you’ve got to learn the person new and cold every time in a meeting, it slows down productivity for everyone compared to an advisor, if you’ve worked with a client before, even if you have a lot of clients, probably remember some stuff about them, they remember you. Just it’s usually easier and faster for everyone to line up advisors again if it’s feasible to do so.

Michael G.: And the longer tenure you have, you kind of stop having those lower-end clients, you stop taking referrals, and then you’re kind of just left with that top segment of client book of business, and then you just kind of service that. And that’s when you can focus more of those like social outings and being more about that service and experience part of the business.

Michael K.: So is there like a third tier and segment for you as well beyond just the like, top-end clients will reach out and try to do all this stuff and the reviews and the social events, the next tier like, they have to call, but then we’ll meet with them, next available advisor or they can request a particular one if they want? Is there a third step down or is that really the only two categories you have?

Michael G.: That’s really the only two categories. But on the advisor’s side, there’s kind of like a career path here where you start by needing to 100% of focus on referrals. And then you get to the point where you have a decent book of business and you’re only semi taking on referrals. And then you basically graduate into, let’s call it a wealth advisor, where you really aren’t taking referrals at all anymore and you’re just managing your book of business. So that’s…like you saw, with the amount of volume that you have with working at an institution, having three new clients a week, you could ramp up to that in five to seven years, and after that, that’s your now book of business that you get to operate with and get a little bit more work-life balance.

Michael K.: Right. And what do you…in that context, what do you view as a full advisor when some clients you’re meeting with a lot, some clients you’re meeting with a little, some of them you just don’t necessarily interact with much at all, they opened an IRA five years ago and you haven’t heard from them since? What is full where you don’t really take on any new referrals anymore and they go to the next person down the line?

Michael G.: Usually you’ll look at their trailing 12 of an advisor. And if an advisor is to a level where they’re satisfied with their advisory business and they’re trailing 12 and they don’t need to take on referrals anymore nor do they want to, then you can do that. My business personally, I’m like probably a year away from that, of just feeling satisfied with the amount of top-end clients that I have and not wanting to take on referrals, and then giving that to somebody new. I need someone to replace me to take on that business. And I’ll have someone new in the branches to take on those referrals now going forward.

Michael K.: Right. And so, for you, it’s not necessarily a client count like, I can only handle 100 clients or 200 clients or 500 clients then just it’s too many phone calls, can’t handle it anymore. From your end, full is primarily just off of a, it’s a personal income goal of the advisor. Like whenever you’ve got enough clients…enough trailing 12 revenue that after payout grids you’re getting the number that you want personally, then you’re all good.

Michael G.: Yeah, I think that’s the best way to handle it because once again, you want to keep the control with the advisor. I’ve seen other programs that have tried to segment it by number of clients or number of branches and tried to give ultimatums to advisors and it has not worked out well at all. They feel like maybe they’re not ready because of the income goal, or maybe they feel that they just don’t feel like they want to stop taking referrals. So you have to work with the different personalities of your advisors and what they really want.

How The Payout Structure Works Within Michael’s Business Structure [1:01:49]

Michael K.: Okay. And so how does payout structure work in this environment? I know classic IBD, classic independent LPL structure, there’s a direct payout off my grid, because I don’t know exactly where LPLs numbers are these days. Most IBDs are somewhere in the like low 80s to really low 90s by the time your production gets really high in payout. So you do your gross, LPL gets a piece for all the services and tech and compliance, the stuff that they provide, and then you net the rest as the advisor and then you’ve got to pay your own business expenses from there. So how does that work in a firm like yours where I feel like there’s sort of some extra, call it hands in the cookie jar here, because the credit union at some point wants to participate in some economics as well. This is a business for them. Advisors still have to get paid. You’ve got this kind of intermediary layer of the SoCal Wealth entity. So how do the dollars get carved up in a business like this when you get down to like what can an individual advisor earn or participate in the revenue that’s being generated?

Michael G.: Yeah. And we take a…there’s two different parts to that, because we get advisors who come in from other firms, and we treat that business differently than the business that was generated at the credit union. So typical credit union grid will be somewhere between like, call it 30 and 45 bps of that grid. So anything that’s referred from the credit union would be on that scale. However, any business or AUM that you’ve brought in from other firms would…we want to pay that more as if you’re independent. And so we will do a higher grid on that of 50 basis points-plus, depending on the advisor to make that more competitive.

Michael K.: And is that specifically for clients I may bring if I join this credit union advisory firm enterprise or is this like anything I develop that was not a credit union referral I get to participate in a higher payout on?

Michael G.: Yeah. Anything that was an existing client from your previous broker-dealer that you bring to SoCal Wealth Management, we’ll give you the higher payout on that. And then we just use what’s called rep codes to split off that business to make sure it’s not commingled. So we know what’s producing what.

Michael K.: So to the extent I’m not coming to the table with an existing client base or just like, I want to build a career, I don’t want to cold call, I don’t want to go out there from scratch, I’m trying to figure out where to get clients, credit union that sends me three a week ad infinitum sounds fantastic. If that’s the world I live in and then maybe I’ll generate some business on the side, because if you do this long enough, eventually people you know figure out what you do and some of them will ask for help, then I’m just, I’m living on a typical credit union grid, I’m getting 35% to 45% payouts, but I don’t have to go out and beat the streets and do my own business development, those leads are flowing to me because that’s part of the credit union structure.

Michael G.: Right. And it’s kind of up to the advisor how much they want to focus on each sides of that business. Some people have more of that built-in referral network, they’re going to be doing more of that outside business. But for people who are newer and trying to build up their AUM and don’t have the network, the credit union side is going to be what they’re going to want to focus on.

Michael K.: Well, and I would imagine, nothing negative to the credit union, but just if you’ve got a great natural market and natural base that you can go to market to, you may just go elsewhere in the independent broker-dealer world. Like if you’ve got a base of prospective clients or the natural network to market to, you have a number of choices about where you might go or what you might do. If that’s not your thing or you don’t have that natural network, you’re not inclined towards that sort of business development, being in an environment where there is an existing member base and there are existing referrals and they do flow steadily is very, very appealing, very, very appealing. But just, you just have to accept that’s part of the trade-off. Like, you will not get the same kind of payouts that may exist on other platforms, but you don’t have the same level of business development obligation or pressure, or just you don’t have the same level of risk.

Michael G.: Oh, absolutely, because the credit union is providing your technology, your infrastructure, 401(k), profit sharing. There’s a lot of benefits to not being a business owner on the credit union side that’s going to compensate you for picking this channel versus going direct independent. And LPL has helped me with some numbers to try and figure out like at the end of the day, obviously, everyone’s business is different, but what is your like effective payout when you go independent? And they came to me with a number of 63%. So if we can be competitive with that number plus have all that infrastructure and built-in referral source, that’s kind of when it makes a compelling argument to pick this channel over anything else.

Michael K.: Yeah. Well, just I think of like the classic advisory firm P&L, like even on the independent side, once you reach some level of scale, if you think of like $100 of revenue at the top line, typically, about 40% of that revenue goes to what we would call direct expenses like advisors, investment team and management, like just doing the advice and investment management solution. And so you see a lot of advisors in large advisory firms, either they’re paid percentage of revenue or they’re paid salaries, but if you do the math, you find out their salary comes out something in the 30% to 40% of revenue range. Then you may have 35% overhead, and you end out with about a 25% profit margin at that point. If you’re a smaller solo advisor, you usually don’t make the distinction between like paying yourself a salary and what you keep as a profit, but if I just take 100 cents on the dollar and I subtract out typical overhead, which once a firm reaches critical mass is usually around 35% plus or minus a little, you would keep 65%.

Michael G.: Yeah, that sounds about right.

Michael K.: Yeah, that’s about where it ends up. And what you end out with is essentially, of that 65%, 30% to 40% of it is what you get paid for doing the advice work, and 30% of it is what you get paid for taking the risk of going out and starting your own firm from scratch and needing to get the clients and needing to build the infrastructure and needing to figure out the tech and the platform and all the rest of the stuff. And so if you’re entrepreneur-inclined, you take some risk and you get some reward on that risk. But the core portion that goes out for advisors doing advisor work when firms hand them leads, ironically to me, what you described in the credit union environment is not actually that different from what you usually end out with in almost any advisory firm if you actually deconstruct their profit and loss statement.

Michael G.: And we’re trying to do that by design. The greatest risk to the program would be advisor attrition. And so why would an advisor leave? Well, maybe they’re looking to take on more entrepreneurship or maybe a better payout or something. So we just need to be able to take that payout argument off the table the best that we can. And by treating the business differently, that seemed to be a really good way to do that.

What Happens To An Advisor’s Book Of Business When They Leave [1:09:51]

Michael K.: So talk to us a little bit more of what happens on that end. Like, what happens when I join the credit union and I build this client base because the referrals are coming over and it’s doing what it’s supposed to do, but I eventually do get to some point, hey, 10 years in my career, I feel a little bit differently about being an independent or a business owner than I did before. I’ve got more connections in my community. I’m established as a financial advisor. I’m sort of thinking maybe now I actually do want to go out on my own. What happens if someone leaves or wants to leave? What happens to the clients? Who owns them? Are there non-competes or non-solicits? How does it work on the other end if someone is not staying?

Michael G.: Yeah. So another reason why we separate the businesses is if you’re coming to us with business and it’s in the personal rep code, that’s your business. And we don’t go after that. But anything on the credit union side that came from credit union referral, that is our business, and we would expect that to stay. I’ve only had one advisor leave SoCal Wealth Management. And there wasn’t…they didn’t bring in anything and they didn’t do much production, so it wasn’t ever an issue.

Michael K.: Right. Sometimes these things just don’t work out at all, unfortunately.

Michael G.: Never really encountered an issue with that. And once again, the reason why I treat it separately is so I hopefully don’t have to run into that, that type of situation. And one of my big projects for this year is to put actual succession plans in place for my advisors. Because if an advisor is going to build up a business for 10 years and feel like they need to go somewhere else to unlock the value of it, I think we should be the one writing that check versus some other broker-dealer or RIA or something like that.

Michael K.: So help me understand, you kind of frame this as sort of two types of business. There’s, you came to us with existing clients because you left another broker-dealer or whatever. Those go under our personal rep code for you. If you leave just those go with you, and you get a different payout on them along the way. Anything that comes through the credit union as a referral, that’s the credit union’s business. So I’m presuming like there’s a non-solicit or non-accept thing that’s attached to the employment agreement that says you’re not supposed to take those clients with you.

Michael G.: Which doesn’t hold a lot of water in California, where we’re located.

Michael K.: Oh, right, right.

Michael G.: But yes, we do have those on file. Once again, it’s if…my credit union, in particular, knows that the advisor owns the relationship no matter what. So you could try and put these legal documents in place, but at the end of the day, if an advisor is going to leave, they’re going to take their business with them. One advisor that I hired last year basically took his entire business with him from another credit union. And they don’t have much of a program anymore because even though he was an employee of that credit union, had a non-compete, those clients reached out to him to stay with him and it all came with him.

Michael K.: So as the program manager running your credit union program, does this concern you?

Michael G.: Yes. And that’s why I want to do everything in my power to make sure that my advisors feel like they don’t need to leave to unlock the value of their business here. And the credit union gets that, too. They understand that even if they are less profitable, it’s worth it to make sure that we don’t have advisor attrition and that everyone’s happy.

Michael K.: But what does that look like in practice? Like you would literally offer buyouts to advisors? Like, “Hey, even though we gave you these clients and refer them to you, we’ll also buy them from you?” Just what are you thinking of doing in practice to try to, as you put it, let advisors unlock some of that value without feeling the need to leave to do so?

Michael G.: Something to that effect. I haven’t been able to set up anything yet because I haven’t focused on it. But between LPL and the credit union, I think we’re going to get some type of, yeah, deal in place where there would be some payout for retirement. LPL has some calculators and ways to kind of evaluate businesses. For example, like let’s say we were able to put something in place that said if you have this much tenure with the company and you retire, we’ll give you a 1.4% payout on your trailing 12 or something like that I think would be fair.

Michael K.: All right. So I guess that’s a version of like, look, if you’re leaving and try to go somewhere else, you’re taking your business or we’re competing with the business. But at least creating the environment of look, if what you’re concerned about and going independent or elsewhere is like you wanted to build a thing where you could sell it and get a check at the end when you retire, we’ll give you a check when you retire. We’ll give you an internal retention payout check. Just work with the next-generation advisor to hand your clients off whenever it is you’re leaving. Agree to not go somewhere else and take the clients after you get the payout. But if you want to stay with us until the end and wind down with us, there will be a payout for you. You don’t have to move the book elsewhere to try to monetize it.

Michael G.: We call people who work for the credit union, not employees but team members, right? We’re also members of the credit union. So we treat ourselves with that service-first mentality. What’s the right thing to do here? Well, the right thing for the credit union to do is make sure that we don’t lose advisors and keep the business here. And the right thing for the advisor is to make sure that they’re doing the best they can in serving their member clients. And so this kind of helps everyone keep it together.

Michael K.: So what about kind of the, I guess something even, the third category of clients? So there’s, I already had them when I came to the credit union. Those are mine, stand on my rep code. There’s clients that get referred to me from the credit union. Those are clearly credit union clients, came through the credit union referral channels. Then there’s the clients I get myself outside of the credit union channel and pathway because I’m an advisor and I’m building my network or establishing myself in the broader community and I start getting my own clients. Can you have personal clients that you are still allowed to take with you in this environment or just if it’s not something you brought in from day one with you, nothing else is under your personal rep code, all of this is as a representative of the credit union, so these are all credit union clients?

Michael G.: No, that’d be…the third style would be a non…if they’re not a member of the credit union, they’re a personal client. So if you went to the rotary meeting and built up a network and you’re getting businesses to invest with you, then those are your personal clients.

Michael K.: And so those are also ones like, I get personal rep code, I get higher payout, and those I’m allowed to take with me if I leave. Like, no offense taken. I don’t get in trouble for that. The only expectation is just literally like, if they’re credit union members and you represented the credit union and we handed them to you as a credit union representative, those really should stay with the credit union.

Michael G.: Right. And that sounds like the fair thing to do, right?

Michael K.: Yeah, yeah. Yeah, I think so. It’s been interesting to me that just there’s been a lot of, or I guess growing hubbub in the industry these days about firms that go after advisors who leave. There’s always been some of that at wirehouses and some big banks. There’s more of it now in the RIA channel, but I feel like there’s been some particularly high-profile stuff lately at some of the retail brokerage firms that have been building out wealth management. So like the retail Fidelity, the retail Schwab. And Schwab, in particular, has been hit a bunch in the headlines lately for pursuing, sometimes aggressively pursuing brokers who were retail advisors, retail financial consultants at Schwab who left and took clients with them and Schwab pursued them.

And look, in general, I’m all for advisor mobility and not limiting advisor’s ability to move around and run their businesses, but it strikes me, even in firms like that, there’s sort of a similar parallel of like, Schwab also spends I don’t know, whatever it is, $1 billion a year on marketing to bring in all these clients, to bring in all these assets to make people walk into Schwab branches and say they want to do business with Schwab. That I have actually a lot of sympathy for just firms that say, “Look, if we actually figure out how to organically generate clients on behalf of our advisors and hand them to the advisors to service, like, the advisor should respect the firm, that those are the firm’s clients.” The flip side I think is for the firm to say, “But if you’re actually going out and getting your own clients, maybe those should be your own clients because you’re not getting them from the firm’s organic marketing process.” But in practice, I find very few seem to make that distinction. It’s either everything is the advisor’s clients or everything is the firm’s clients.

Like I actually…I have a lot of respect and appreciation for what you’ve built here. Although I think it’s probably particularly easier, straightforward in the credit union environment because there’s a really clear dividing line, like at the end of the day, either they’re a credit union member or not. Like, if they are, it’s credit union member, if they’re not, they’re not, right? It’s harder in the context of some other firms. Like if I’m at Schwab and they’ve got a giant brand name and someone decides to work with me from my personal network, how much does the Schwab name on my business card matter? I don’t know. I don’t know if we’ll ever be able to untangle that and figure out was that a Schwab lead you got or a lead you got and you happen to be at Schwab. But the credit union, it’s a pretty straightforward line. They’re either a credit union member or they’re not.

Michael G.: Yeah, exactly. And you could have…since we’re like a regional credit union, if I have clients outside of the membership, it’s really easy to tell. So that dividing line is pretty clear. And if you want advisors to be out there marketing and building their businesses, you’re still going to get some revenue while they’re here. So my job, if I’m doing it right, is going to only attract advisors, not have anyone start looking out the window at, “Oh, wow, I could do this on my own and the grass will be greener.”

How Advisors Can Find Similar, Member-Focused Credit Union Opportunities [1:20:37]

Michael K.: So we talked a little bit earlier about the fact that like there are some banks and even some credit unions that did the, call like the less client-centric, the less member-centric approach to this. Like, it was a “profit center.” It was a way to make more money off their existing assets than what they’re already doing by cross-selling products to existing bank customers, often at volume, often with high-commission products, because just it’s what made money for the bank. You get firms at the other end of the spectrum like yours that are really building a member-centric approach. You’ve got to do it in a particular way because of the sheer volume and the level of client, but you get to build it in that context. So for an advisor who’s out there and hearing this and is like, “Okay, this sounds awesome, but I don’t know whether my local credit union that has a job listed on their website is like the good kind in your category or the bad kind in the other category,” how do you figure this out as an advisor which type of credit union you’re talking to or looking at or considering to apply with?

Michael G.: Yeah. And that’s the toughest part right now because it’s hard to tell. And you know when you go in for an interview, you have to be interviewing them as much as they’re interviewing you. And you just need to hopefully find a company that’s going to give you that flexibility to run the business the way you want. The more that they’re kind of telling you what to do, that’d be a red flag. The more that they’re trying to tell you like, “These are the type of products that you need to have,” or if there’s a pretty strict limitations to or goals or hurdles that you’re going to have to hit, that’s a problem. You want a credit union or institution that’s going to tell you, “Do right by your members, do good business for them and the rest will follow.”

Michael K.: And so, can you ask that point-blank in an interview? How would you suss that out if you’re in interview process and trying to figure this out?

Michael G.: Yeah, I guess I would try and ask as much about what is the day-to-day like, what’s going to be expected of you as an advisor. If they come to you with a grid of like, “We expect this much in production and this much in net new assets and all that,” that’s good to a certain extent. But if they came to you with, “We want to make sure that you’re focusing on financial planning,” or, “We want to make sure that you have high service scores when we do…when we reach out to your clients,” that’s kind of telling a different story, right? So the way that they’re approaching you as a hire shouldn’t be because they’re trying to expand their profitability? They will be, but if they frame it like that to you, that’s a problem.

Michael K.: Okay. Yeah, that’s an interesting distinction of just, yeah, look, any business is going to have some metrics at the end of the day that they want to achieve. If they have no idea what the metrics for success are, that’s actually not a good sign in and of itself for the viability of the business. But when you start saying like, “What am I going to be judged and evaluated on,” there’s a big difference between, “We have to see this level of production and net new assets” versus, “Well, first, we want to see that you get high service scores from the members.”

Michael G.: Yes. Yeah. And always number one for me is service scores, and then activity. I don’t care how much money you’re bringing in or what you’re producing, but are you sitting in at least three appointments a day with people and trying to get some financial plans done? That activity level as we know is going to turn into your book of business. And as long as you’re doing that, you’re going to be in good shape.

Michael K.: So what surprised you the most about trying to build within a credit union environment?

Michael G.: Biggest surprise was…I can’t think of anything off top of my head. I guess my initial concern coming from a wirehouse was, is this going to be my business? And I definitely can say that the business that I built is my business at the credit union. It’s one and the same. And I was nervous that coming off the financial crisis, is this going to be another situation where maybe the rug is pulled out from under me. And it’s not that at all. And that might be my particular situation, but that was a concern I had early on that that’s been alleviated.

Michael K.: So I was going to say like, is that a credit union thing or is that like your credit union thing that you were able to find that or find a credit union or credit union leadership that was supportive of that?

Michael G.: It definitely was unique to me because I know other advisors who have not been in good credit unions. I had one that I know of that their credit union was not paying for their parking, and he was coming out of pocket $150 a month just to go to work. Now, that’s showing that you’re not on the same side of the table for that. I had another advisor where they didn’t do any marketing for him. He was there but no one knew that he was there to help because they were focusing on all their other products and services. That didn’t work out well for him. So I guess the biggest surprise is that the amount of support that I’ve had has only grown more with time.

Michael K.: Interesting. So in practice, I guess just asking, well, as you’d said earlier, asking what the day-to-day is is like, but also just asking like, I guess basically, “What is your process for marketing me as an advisor or generating referrals within the credit union?” And just trying to suss out like do they have a good answer? Does it sound like it’s really going to work? Can you talk to other advisors there and see if they are actually getting the referrals the way the credit union makes out to just try to clarify whether they really actually send you business?

Michael G.: Yeah, that’s a good way to do that. And I guess one of the risks with being tied in with an institution is that can change, right? There could be a change in management and then their views of the wealth management division can change as well. And that can create a concern for an advisor.

What A Typical Week Looks Like For Michael [1:27:12]

Michael K.: So what does a typical week look like for you at this point?

Michael G.: For me, typical week is I have usually three appointments a day. And I usually meet with one or two reviews of financial plans or presenting, delivering a new financial plan for clients. About a third of my time is doing operational, running the program type of tasks, making sure that my advisors have everything that they need to be successful. In terms of outbound marketing, I really don’t do any at this point. It’s all through the credit union. I don’t have to go through my personal network to drive business that way. Yeah, that’s basically my whole week.

Michael K.: And just like Monday through Friday, every day is just like three appointments plus one and two reviews or delivery of plans and it’s just a regular, steady drumbeat?

Michael G.: Yeah, that’s exactly right. And that’s part of what I value too. I have a young daughter and my wife. I like work-life balance. So I’m not looking to be in the office on Saturday or having 12-hour days at this point.

Michael K.: How has your role at the firm changed over the years? Was it always like this? Has it shifted over 10 years of being there?

Michael G.: It’s definitely shifted. Early on, before I was with LPL, we were at a smaller broker-dealer where the management of the department was outsourced to that broker-dealer. And it was much more about GDC and trying to grow the program with bringing in advisors, whether there was a true opportunity for some to thrive or not. And so it kind of got to an inflection point where it was like, “I need to kind of take control of this.” And that’s when I took on not just the advisor role, but also the program manager role, where I was able to kind of build this up at the right pace and bring on advisors as the opportunity was really there.

Michael K.: Oh, interesting. So that was a shift, I guess, for the credit union from subbing out somewhere else to then subbing out to LPL and shifting the management of that from the external broker-dealer to the internal people in the process?

Michael G.: Yeah. Because like I said, when you’re working with credit unions, especially on the smaller end of institutions, a lot of times they’ll outsource basically everything they can to keep the expenses low, right?

Michael K.: Right. Variable expense, outsourced variable expense is a glorious thing in the startup phase. Yep.

Michael G.: You see the trend now. But it got to the point where it just made sense for…and they luckily saw the value to bring it in-house so that I could build it up at the right pace because all of our initiatives were aligned. I wanted to grow at the same pace as the credit union, not faster or slower.

Michael K.: I guess, again, that sort of reemphasizes that the…just what the philosophy and management is of an advisory business within a credit union really matters, right? Like, lo and behold, when it was actually run by the external broker-dealer, they were kind of focused on broker-dealer production. When it gets run internally at the credit union, lo and behold, they kind of take the credit union member-centric philosophy.

Michael G.: Yeah, it was simple as that. And having that mindset of member-first and really focusing on that, sure, could we have grown faster and could I have more advisors by now? Of course. But would my advisors be as successful as they individually are now? Probably not. And that’s more important to me. As an advisor first and a manager second, I want to make sure everyone is thriving with their businesses. Once again, because the last thing I want is attrition. I don’t want to have to fill a seat for someone who felt like they needed to leave.

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

Michael G.: The hardest part was being managed early on, like the first five years. We were just coming off the financial crisis, so everyone was feeling the next 5% correction was going to be the big one. And money wasn’t in motion as much. And then the fact that they did…the former broker-dealer did try and put in advisors and kind of try and take away business from me. That’s the wrong way to approach… They said, “You’ll grow your business by us taking your clients.” Obviously, that’s not something any advisor wants to hear.

Michael K.: Well, because then you’ll be desperate and hungry. So you want to go out and get new ones, right?

Michael G.: Exactly. So that’s not the way to treat that. And eventually, like I said, now I see it that I want my advisors to get to a critical mass where they don’t want to take referrals, but I want them to say that. I don’t want to take away anyone’s business. But there is a way to set this up where you start having associate advisors below you. They build their own business, they go off on their own and become wealth managers. Then you just continue with that graduation path.

Michael K.: Right. But again, just to me just sort of further reinforces the local management and local leadership and overall philosophy of that wealth management platform. Like, is this a members-first credit union offering? Is this just a profit center? Is this a broker-dealer-run thing for add-on revenue? Like, who’s running that and what that structure is and what their guiding philosophy is really does carry up and down across a wealth management offering in a credit union.

Michael G.: Yeah, I agree. Yeah.

What He Would Have Done Differently And What Success Means To Him [1:33:24]

Michael K.: So anything you wish you’d done differently in this path over the past 10 years? Like, anything you know now you wish you could go tell you from 2010 as you were getting started on this?

Michael G.: I guess, and I’ve heard this from other advisors as well, that going to advisory…transitioning to advisory sooner would have been helpful. I was basically 100% transactional for like the first 5 years. And part of that was because I wasn’t in control, I wasn’t the manager, and I felt like that carried more risk to it. But then if I was able to know what it was going to be today, yeah, I would have been more on an advisory path earlier in my career.

Michael K.: Just because then you could have built the AUM base and the recurring revenue for longer with more track record?

Michael G.: Exactly. Yeah. And maybe I would have already had an associate advisor or two at this point if I started earlier.

Michael K.: Okay. So what advice would you give younger advisors, or I guess even just say newer advisors because some people career-change and at a later age and stage? What advice would you give newer advisors looking to come into the industry today if they’re thinking about this credit union channel?

Michael G.: Yeah, first piece of advice is to make sure that when you’re building your business, you’re building it with some type of expertise. So whether that’s a company that is partnered with your credit union and you can be an expert in their retirement plan, something that’s going to help drive that referral business outside of what the credit union offering you, because those clients tend to be the ones that refer you their friends and really build up that top segment part of your book. It’s something that I’ve seen in the credit union world. Most of the top advisors have something like that, where they have an expertise in a certain plan.

Michael K.: Something that you can become known for, even when it’s internal referrals. “Oh, we’ve got seven advisors over in our wealth management team,” but like, “Oh, but you have a bunch of issues with the employer retirement plan, you need to call Michael about this.” And so now like, you’re getting particular referrals. And obviously, if you pick an expertise of something that tends to be associated with more money and wealth, that probably means you’re going to end out just proportionally getting the better referrals, the higher-end referrals, and then building a client base with higher-end clients who tend to refer other higher-end clients. So having some way to distinguish your and differentiate your expertise.

Michael G.: Yeah, that will help build the business faster, which is what everyone who’s in the growth stage of their career is really looking for.

Michael K.: Yeah. Which to me is a striking thing. We certainly talk about this a lot on the podcast in the independent advisor context, like find a niche, form some kind of specialization, have something that you can differentiate around and become known for. That just it strikes me like, that actually still matters even when you’re in an employee environment or an internal environment or a place where referrals are flowing, like, there’s still better referrals and not quite as good referrals, there’s still an opportunity to draw a business, if only from other employees who might have gotten those referrals as well. And so it’s still meaningful to create some kind of expertise, some kind of specialization, some way you can differentiate yourself to get opportunities to work with the kinds of clients you want to work with.

Michael G.: Yeah, exactly. Because at the end of the day, the more that you could replicate the clients that are in your top segment, that’s going to be better for you, that’s better for them.

Michael K.: 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. So you’ve spent the past 10 years building this wealth management offering within a credit union to half a…or excuse me, a quarter of a billion dollars, so had an incredible run in building that business. But how do you define success for yourself at this point?

Michael G.: Well, it’s definitely changed over the years. Early on it was, “How do I make this a profitable, successful business?” At this point, success to me is going to be, how am I going to leverage that for the next generation of advisors? Because there’s so many obstacles to getting to cruising altitude with setting up an advisory practice that if I could help others get to that level where they’re successful, I know I’m doing my job right. That’s definitely successful for me.

Michael K.: Oh, very cool. I love it. And I would imagine there are even a few people that are listening saying, “I wouldn’t mind actually getting to do that on your team.” So this is episode 163. So if you go to kitces.com/163, we’ll have contact information if you want to get in touch with Michael and pick his brain about finding a credit union opportunity that’s a good fit.

But Michael, I love that just kind of pay-it-forward mentality. Like, I found a path that worked for me, now how can we help others find that positive path as well? Because as we said at the beginning, just our industry pushes so many people into the, “Here’s a desk and a phone book, good luck getting some clients.” We’ve had this deep cold calling culture for decades and decades, that just to be able to highlight like there are other ways to do this. Some of the economics are a little bit different. There is still the old soul like, if you want to take a slightly riskier path, you may get rewarded a little bit more for it. But not everybody wants to take that risky path. Some people it’s just not a good natural fit for them and their skill sets. And there are other ways to do this, as I think you’ve highlighted, and hopefully, we get to spread that word a little.

Michael G.: Yeah. No, it’s been a great path for me. And like you said, there are higher-risk, high-reward avenues for this. Not every advisor wants to be like that. And this is a great place to hang your hat if you don’t need to do that.

Michael K.: Awesome. Well, thank you, Michael, for joining us on the “Financial Advisor Success” podcast.

Michael G.: Thanks for having me. Really appreciate you having me on.

Michael K.: Absolutely.