#FASuccess Ep 171: Transitioning From Successful Wholesaling To Financial Advisors To Becoming One Instead, with Tom Kennedy

Author: Michael Kitces

Team Kitces

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

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

What You’ll Learn In This Podcast Episode

• The Unpredictability Of Wholesaling [00:04:26]
• What It Was Like For Tom To Transition From The Wholesale Business To The Advisory Business [00:28:51]
• Why He Decided To Get His CFP Certification And His Early Years In The Business As An Advisor [00:36:10]
• How Networking Helped Tom’s Career Progress Quickly And The Lessons He Learned As A Wholesaler [00:58:14]
• How To Decide Which Firm To Work With As An Advisor [01:09:42]
• What Surprised Tom The Most About Building His Business And The Low Point Of His Journey [01:25:54]
• What Success Means To Tom [01:34:03]

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Tom Kennedy, to the “Financial Advisor Success” podcast.

Tom: Thank you. Thanks for having me. I’ve been a listener since almost day one. So the pleasure is all mine.

Michael: Awesome. Well, welcome to the, I was going to say the other side of the microphone. I guess the other side of the headset or the earbuds of talking to us and sharing.

I know you’ve had an interesting journey and one that I am starting to see crop up more often. So I was really excited when I had heard a little about your story and your background to have this discussion about the journey from wholesaling and calling on all of us as advisors, to jumping over to the advisory firm side and saying, “Maybe instead of calling on some of these firms, I actually want to work as one of them,” and come over to the advisor side of the line.

And with all of the challenges I think are happening these days in the mutual fund world, annuity world, and the product world overall, I know the wholesaling realm has gotten a bit more challenging than it used to be as well. So I feel like I’m seeing more wholesalers now that are making the transition to the advisor side of the industry.

I’m just really excited to hear your journey of crossing that divide and coming over to the advisor side and what it looks like from your perspective having lived the wholesaler world and now living in the financial advisor world.

The Unpredictability Of Wholesaling [00:04:26]

Tom: Yeah, it’s been a great move. It’s been about two years now. I’ll tell you, I get a ton of calls almost on a daily basis from wholesalers. I think they all want to make the move, but some of them are just in tough spots to make that move for many reasons. And the wholesaling world has changed dramatically since I first started over 10 years ago. And I think that trend is going to continue. Asset managers are struggling. I think there were nine, if I’m not mistaken, net positive active asset managers in terms of flow last year.

Michael: Nine out of what – I don’t even know what it is – hundreds of asset managers if we scoop up all the small to mid-sized shops in there, as well?

Tom: Yeah. It’s crazy. If you look at the market, everything worked. Unless you were day trading Bitcoin, you made money. So you had fixed income in double digits. You had the equity markets up 30% and these asset managers are still struggling. It’s just all fee compression. The problem when you have the fee compression as an asset manager is, the portfolio managers, they’re not taking the cuts.

The distribution channel is the one that’s going to feel it. It comes down to the wholesaler. So goals are getting bigger, basis points are coming down, and it’s just getting tougher and tougher. There’s a lot of consolidation happening. Look at last week; I think Legg Mason just bought Franklin or vice versa. I think you’ll see a lot more of that going on.

Michael: That’s an interesting point of just the ways that fee compression plays out when it shows up. I think from the outside world, we just sort of talk broadly around the fee compression in products. Average expense ratio is getting lower in mutual funds and ETFs across the whole asset manager complex.

But then when you drill down within those areas, any particular asset manager has a lot of different expenses. There are dollars for the managers themselves, there are dollars for research, there are dollars for infrastructure and execution, and then there are dollars for distribution, right? Wholesalers and marketing and sales and all the ways that you get these asset managers product solutions into the hands of advisors or investors.

When you ask where across those areas are you going to cut? Well, it’s hard to cut your research because at some point you’ve got to analyze the stuff to hopefully make good decisions and get reasonable returns. It’s hard to cut asset manager comp of the fund managers themselves because there aren’t a lot of them that are good, so if you start cutting them, they’re going to leave and then you don’t have a core manager.

So you start going down the line of where the dollars can get cut, and right or wrong, one of the most straightforward things that usually get squeezed is marketing and sales and distribution, and where you were living as a wholesaler. Higher thresholds to hit the same bonus as you used to get in the past and lower payouts on those thresholds to boot.

Tom: Yeah, that’s exactly right. I think a big concern, too, is just the velocity of money too in the industry. You don’t see too many buy-and-hold strategies. So for a mutual fund to actually make money, the money has to stay there. And the assets aren’t as sticky as they once were.

And you have ETFs that are just getting a tremendous amount of market share. Traditionally, wholesalers are paid off of basis points. There are no trails, there are no assets under management, it’s just all upfront, it’s basis points. And you’re starting to see a more base-compensation structure and more of a consultative approach for wholesalers.

I think BlackRock is doing one of those right now. And it’s not so much, “’Hey, we’re going to pay you on basis points and money coming in’, we’re going to pay you more on, ‘Hey, here’s an annual salary and here’s your goal.’” And that’s kind of what I think the landscape is going to look like going forward and what it’s starting to change like.

You’re also starting to see some of these asset managers implement net business. So if you have $100 million coming in in your territory but you have $100 million going out, you’re net zero. So the firm doesn’t make money, and in turn, you’re not making money. It’s just out of your control. You can only control so much. And you also live and die by performance of your mutual funds.

Michael: Just so I’m clear, because I think for a lot of advisors, we still don’t necessarily actually know how wholesaling works and how wholesaling is compensated. So when you talk about traditionally wholesalers getting paid basis points on flows, that’s not our version of basis points in advisor world, which we usually think of as assets under management basis points for ongoing assets that we manage.

On the wholesaling side, basis points are just on upfront gross inflows. Like, your territory brought in $100 million of new assets, so I’m going to get paid some number on that of basis points. So, “Here’s your bonus based on $100 million in net flows into your territory.”

Tom: Correct. So there are no trails. And the worst day for a wholesaler is January 1st because you’re back at zero. And you’ll look back and it’s like, man, you think about all the meetings you did and all the struggle you had trying to get business in and now you’ve got to do that again, probably times two. So it’s a challenge and it wears on you after a while.

Michael: And can you give context, is there at least a typical range of what the basis points are that wholesalers typically get paid or compensated on flows? Like I think for us, we just have no context of whether this is 2 or 3 basis points when $100 million of flows comes into your territory? Is this like 10 basis points? Where does that number sit?

Tom: Yeah, it’s a good question and obviously varies by firm. Your top tier-one firms… I think most advisors don’t realize how much most wholesalers actually do make. I think it’s understated. And every firm is different. Some firms pay on certain funds, some firms pay on certain firms that you bring it in, just kind of where they’re trying to gain market share and attract business. But it can go anywhere from 1 or 2 basis points up to 20. I’ve seen as high as 25 basis points.

The firm has a budget each year for wholesalers. So sometimes they just mistake goals. If it’s, say, “Hey, we’re paying you 10 basis points, we think we’re going to bring in $3 billion in sales” but we end up bringing $5 billion, it’s a big issue top-down from distribution because they just paid out to wholesalers a ton of money that they didn’t plan for. So next year…

Michael: Next year, that bar is going higher, man.

Tom: Yeah, it’s going higher. The best analogy – wholesalers are like running backs in the NFL. I think the average life span is like 3.3 years. And if a wholesaler makes $400,000, they’re spending $450,000 that year. I don’t know what it is. I was somewhat guilty of that as well, but they just…it’s money in, money out.

They don’t realize that next year it changes. It goes up and down. So you really have to manage that cash flow. And just because you made X one year, you’re probably aren’t going to make it next year. That’s the one downfall is it’s very unpredictable of what your income is going to be because 90% of that income is based off of that flow coming in.

Michael: And so from a wholesaler end then you end out with a territory, some geographic territory, and the deal becomes like, whatever flows come in from this territory that you’ve got, you’re going to get comped on those in that territory. Is that usually the gist?

Tom: Correct. Yep. You’re going to have a territory. And again, depending on the firm, you could have…typically, there’s about 30 to 60 wholesalers covering the country. They usually split it up into different channels. So maybe some will take the wirehouses and then one person will take the independence, the RIAs, banks, etc. And yeah, that territory and whatever comes in that territory, you’re going to get paid off of.

Michael: And so then I imagine, well, on the one hand, some territories probably become more appealing than others because there’s just more firms and more density and more flows that are probably coming in even from the people that you don’t necessarily get to see but they’re in your territory and you get credit.

On the flip side, territories then vary in their size accordingly. So someone’s probably just got New York City or one borough of New York City and someone else has Minnesota, all of the Dakotas and most of the Midwest as well, because that’s actually the same number of people across five or six states as it might be just to have a borough of New York because of the density?

Tom: Right. They tried to level it out, but it’s almost impossible to do. You get a lot of what I used to call hit by pitch, just an advisor you never met with but fund screens out and they give you an allocation. And a lot of that happens. They have a thing, it’s industry-wide, it’s called Market Metrics, and they basically can see down to an office level how much mutual fund business your office is doing. All wholesalers have access to it.

So from the manager’s perspective, they have an idea of the market share, how much mutual fund business is in certain territory. So that’s how they sort of divide up the states and the cities and say, “Okay, we’re going to try and make this as even as possible.” But it’s just very hard to judge that.

And some wholesalers…the delta is pretty wide. Between the top earner at a firm and the low one, it’s wide. You’re talking sometimes $600,000, $700,000 wide.

Michael: So between what the top wholesaler at a firm makes and what the bottom wholesaler at even the same firm are representing the same funds may be making just because of the territory they’ve got and as well as obviously or hopefully how well they’re doing in their territory to just actually build relationships and draw flows.

Tom: Yep.

Michael: So even when you just talk about numbers, the range could be $600,000 or $700,000 from the top or the bottom. So as you said, an advisor, well, we don’t necessarily have much context on what wholesalers actually typically make, what kinds of numbers or ranges are realistic?

As you said, I could be getting paid anywhere from a basis point or 2 up to 25 bps. I’m sure that varies by product and also just by volume, but what kinds of numbers are typical, I guess for either flows that an advisor might have in a territory? At the end of the day, is it typical to have multi-hundred-million-dollar territories, billion-dollar territories? And what does this stuff typically add up to at the end of the day?

Tom: Yeah, the flows, again, just range. You do have some territories that are doing over $1 billion in flows, some of the big companies, and then you have some territories that might be doing $100 million.

But I would say the typical salary is probably between, on the very low end $200,000, and on the high end, you have guys that have made over $1 million. I would say the 80% would probably fit between like the $250,000 and maybe $350,000, $400,000.

Michael: Okay. Which is interesting to me both just sort of understanding the costs and dollars it takes to distribute mutual funds in a very competitive world, but also to me because that has really interesting implications around wholesalers that are looking to make a shift to the financial advisor world because, as you noted, the challenge in the wholesaling world and even the challenge historically in the advisor world is, I call it the tyranny of waking up every January 1st and you were back at zero.

Even the advisor commission world I think typically gives a little bit more in trails than what wholesalers usually get, which is like a hard zero every year. I think it’s one of the things that shifted advisors into the assets under management world in the first place, because of that recurring revenue model. And that at some point you’ve accumulated your client base and you wake up on January 1st and there’s a bunch of revenue already from clients you’ve got, you just have to not screw it up and give them awesome service and awesome financial advice and make sure that they stay on board.

But the challenge for financial advisors is, going from commissions to fees is difficult, right? If I’m used to selling $100,000 mutual fund and getting a 4% upfront on an A share and…I used to get 5% or 6% 20 years ago, but I’m used to getting 4%, $4,000 in the next week or two on this $100,000 client and instead, I go to a fee-based environment and I’m getting paid 1% a year on a quarterly basis, 3 months from now with my first quarterly billing, I’ll get 250 bucks instead of $4,000, just from a household expenses end.

I cannot do that all at once if I am used to the dollars that come from the commission side and that’s how I’m paying my bills. You have to do that more gradually or you can blow up your business for being unable to make payroll or pay your mortgage.

And there’s a similar challenge, I would imagine, that you were looking at coming from the world of wholesaling into the world of financial advising as well, which is you don’t see a lot of starting salaries at advisory firms that start at $250k-plus.

You can get there building a client base. There are advisors that go much higher than that building a client base. But that takes years of building. And so you get that similar kind of transition challenge, not transitioning your practice from commissions to fees per se, but transitioning your practice from wholesaling to the advisor world that at least is usually not 100% upfront at very many firms anymore.

Tom: Yeah. And that was the biggest challenge. So this decision didn’t happen overnight because it just financially couldn’t. I couldn’t just wake up and say, “You know what, I’m sick of this wholesaling gig. Let me leave and go make almost nothing for two years.”

This was well planned out. I had to be financially. And I can tell you right now, the reason why more wholesalers don’t make this move is because they have families. And they’re accustomed to making a certain amount. And you can’t just leave and say, “Hey, okay, maybe I’ll try to join a team and they can pay me a small amount, maybe $50,000, $75,000 and I can try to grow my book and work those or whatever the structure you do.

It just doesn’t happen because wholesalers, again, I don’t know why they just have a problem saving their money. And the money they do have saved is all qualified assets. So I think that it’s a challenge.

For me, it was easy. I’m single, I don’t have a family. And I can honestly say if I did, I really don’t know if I could have made this move. But for me to tighten the belt, it wasn’t hard.

Michael: Yeah. Well, it strikes me, again, there are fascinating parallels, to me, between the dynamics of the wholesaling world and just sort of what firms do to keep people on board in commission-based environments.

Frankly, what I’ve watched in the advisor world over the past 20-plus years, it’s I think less so today, but when I was coming into the industry, it was very… managers that were hiring advisors really liked people with young families because if you had a mortgage and kids, you were going to go out there and sell. You were extremely motivated because you had to make your mortgage. Unfortunately, that usually drove a lot of people with very desperate financial situations who made a lot of bad sales to clients, a lot of problems with that.

But I knew sales managers out there; their dream was to find people with a whole bunch of family obligations because they would become so financially bound up and had absolutely no financial flexibility, that they would have to come in and try to rely on commissions. They were extremely incentivized for it because they wanted to keep a roof over their family’s heads, and they could never leave because they couldn’t afford to ever take a step off the treadmill to even try to move into a different channel or do something different because they had so much of that personal expense overhead looming over them.

And either by deliberate design or just by culture, that still seems to be often what happens in commission-based environments, right? If I’m a firm hiring a bunch of commission-based folks, whether it’s on the advisor side or the wholesaling side, the worst thing that I can do from a business perspective is to encourage really prudent managed household spending at home, because then you’re going to save a ton of money and you can leave my job anytime you want, right?

Like, I want to create a sales culture, put the people who are big hitters and big spenders up on the podium and show that these are the people you want to exemplify towards. Because the more they bring in and the more they spend, the more they have to stay kind of addicted to it and can’t make a change. Not specifically trying to call out any particular firm for sort of the slightly Machiavellian strategy. But I do know firms out there for a fact that do this. It is part of the process of managing people in a commission-based environment.

And if you are in the commission-based environment and you don’t realize the game that’s getting played, you get caught up in the game, you end out in this position that you’re talking about, or like I make great money, I spend all of it because that’s what everybody else does where I am. And then you realize like there’s no way to make a change. You can never make a change because you can’t afford to take one step backwards to hopefully take two steps forward in the long run.

Tom: Yeah, it’s a great point you bring up. There’s a book called “Question-Based Selling” and they have an analogy. It’s the German shepherd or gold medal, and who are you going to run faster for? And it’s this fear-driven culture about the commission is to just keep working so you can keep a roof over your head and feed your family. And it’s the opposite with wholesaling. They can get kind of complacent and they’re happy. And they know that they hopefully have a job.

And even if they don’t sell that much, they’re going to be making a couple hundred thousand dollars, which is a great salary to be making. So I think they just get so caught up. And what I hear a lot from wholesalers is like, “I’m going to make this move, but I don’t want to do it before a recession.” And there’s always a way to justify not making the move.

Michael: Yeah, once you can’t handle that transition, there is a never-ending list of, I was going to say excuses, but that’s not fair. Just like rationalizations that you can tell yourself about why now is never the time until it’s 3 or 5 or 10 years later and you’re burning yourself out and now is never the time. Like, it’s never a good time.

It’s kind of like folks out there that have started a family and having kids. Kids are a wonderful blessing and an incredible life disruption, like, there was never a good time to introduce children into your life. There’s never a convenient point where everything is really calm in your career and the rest you’re going to be like, “Hey, we’re kind of bored right now. Let’s have some kids and mix it up a little.”

There’s never a good time. At some point, you just have to take the leap.

Tom: Right, right.

Michael: I am struck, though, as well because this is something even that hit me personally a bunch of years ago. The dynamics of when you do save, everything out there these days is you take your tax advantages and you save in your tax-qualified accounts or you put in your 401(k) plan or your IRA and all the different preferential accounts we’ve got.

And look, I can do the math as well as anyone about the value of tax-deferred compounding growth in the long run. But from the perspective of someone that’s looking at making a leap, making a shift, starting a new business, like an advisory business, tying up your dollars in tax-qualified accounts doesn’t work. You can’t get the dollars when you need them to actually make your career shift.

Like even for me, I got to a point about 10 years ago when I started doing more in the world of being entrepreneurial and starting businesses, like, I stopped contributing to all of my employee retirement accounts. I got some dollars in there because of what I saved early on, but I basically stopped contributing because it was tying up dollars that I need to be able to make improvements in my career now by starting businesses or changing firms or originally taking the leap to start the Nerd’s Eye View blog and all the content that we do. And I couldn’t do that by tying dollars up inside of tax-qualified plans. It needed to be outside so that you’re actually flexible with it.

Tom: Yeah. And I think for wholesalers, most of them max out their 401(k). And some will even take advantage of the after-tax buckets. Most of them do have it at the asset management firms. So they feel that that’s a good amount. And it probably is that they’re saving. So anything they’re taken home after that is just kind of spent.

So there are no non-qualified brokerage accounts that they’re putting money into. I was kind of the same way until the end where I realized I needed to make this move and started saving up, which is what I did.

But I did make some sacrifices, too. I had to sell my house, not because I couldn’t afford the mortgage if I made this move, but I needed to pull the equity out to help float me. So in the long run, this was the big picture for me. So I didn’t mind sacrificing two or three years to start this business. And I’m glad I did. I wish I did it earlier.

Michael: Yeah, it’s an interesting dynamic that as much as we talk about the importance of financial planning and getting your financial house in order for our clients around if you want to save for the long run to be able to retire, you need to spend less than you make and save in various ways. And here’s all these tax-qualified accounts to do it.

That to me, there’s a broader piece of it, which is just your job mobility, like, your flexibility to change jobs, careers, industry channels, tracks from employee to independent, just all the different ways that people make shifts and changes in the industry.

And that being able to manage your household expenses to spend less than you make and be able to accumulate savings isn’t just about saving for retirement, which ultimately matters in the long run. There’s a more short to intermediate-term impact, I think particularly when we’re still in our 20s, 30s, and 40s and have a pretty long career time horizon left, heck, even in your 50s with medical advances now, that building up savings is also just about your ability to change careers and find something that might take 1 step back to take 2 steps forward, as you put it, like sacrifice 2 or 3 years to have 20 to 30 years in a great advisory career.

And all this stuff around managing your household expenses and spend less than you make and save more dollars isn’t just a function of retirement, it’s a function of being able to reinvest into your career to make these kinds of shifts or to be able to make these kinds of shifts in the first place.

Tom: Yeah. It’s such a good point. And it’s something I’ve talked to clients about, too, is it’s maybe not the best idea that, again, just like you said, we can talk to her blue in the face about the advantages of tax deferral and compounding, but it’s also nice to have access to this money, too, if you needed to make a change or to take on another investment opportunity.

It’s something that I kind of didn’t learn the hard way because I started saving, but I just wished I saved a little bit sooner because most of my assets are tied into my qualified accounts as well.

What It Was Like For Tom To Transition From The Wholesale Business To The Advisory Business [00:28:51]

Michael: Yeah. So talk to us a little bit about kind of the transition itself. At what point did you make the decision that you were going to transition and say like, “I don’t want to be on the wholesaler side of things anymore, I actually want to be on the side of the advisors that I’ve been calling on?” Was there a particular moment or transition or trigger event?

Tom: I can tell you the exact minute it happened. It progressed over time, but I had to do an event. It was West Texas. I don’t even remember what the town was. I had to drive there. It was a four-hour drive. I forgot about the event. I went there to go help sponsor the event and the assistant got the date wrong. So I went all the way out there. I didn’t want to drive back four hours.

Michael: You took a four-hour drive into the middle of West Texas to support an event and they’d given you the wrong date.

Tom: They had given me the wrong date. I won’t mention the firm. And it was…this town, we were in West Texas. It’s like 100 years back in time.

Michael: So I’m an East Coaster, born and raised. When I think of rural West Texas, I’m thinking of literally tumbleweeds blowing across the road. Is that actually a fair characterization?

Tom: I’m pretty sure one hit my car when I was sitting there debating over whether I should drive back or not or get a hotel. I ended up getting a hotel because I was so frustrated. Like, “Let me get a drink, cool off, sleep it off. I need to drive back.” And I’m sitting on like some rundown motel on the bed staring at the wall like, “What am I doing? I need to make a change.” And that was like the final moment.

But leading up to that, it’s just…it’s tough. When I started doing it in my mid-20s, it was great. It was a fantastic job. You’re making good money, you’re out entertaining, you’re having a good time. But you can only have so many steak dinners. And it’s just…it’s not fulfilling. You look back and it’s like, “What have I done?” Hopefully, you’re indirectly helping clients, you’re positioning advisors with good mutual funds, which in turn help their clients and their portfolios and they grow. But there’s no way to really measure that. And you start at zero.

The biggest thing about wholesaling is you’re just constantly afraid of losing your job because you have no control. You’re only as good as your last day in sales. And it doesn’t matter how hard you’re working, how well you’re doing, if the asset managers are having a tough time with flow and they need to cut heads, you just have…that can be said about any industry, it’s a scary thought having no equity in something and you could just lose your job overnight and just starting over at zero.

Michael: Yeah, it strikes me as well that part of that is also the challenge of just the whole mutual fund world kind of in just structural net outflows. Not trying to bash them, just the math is the math.

If the total dollars in mutual funds are in net decline, all the money around it, all the jobs around it are going to be in net decline. And so just at some point, it gets a little Hunger Games-ish about like, there’s only a few that are going to be left standing when, by definition, there have to be fewer wholesalers in total because there’s just fewer dollars moving around and in play in the first place.

Tom: Yeah, I totally agree. And I think there’s…I think advisors are relying less and less on wholesalers. And I don’t necessarily agree with that, but that’s just the way it is. And I think that there’s a lot of reasons for that. One is just, there’s more available at your fingertips for research, and advisors are using different strategies or they’re using third parties. And wholesalers are not as relationship-driven, I think, as when I at least first started.

And you look at active management, too, you look at any large-cap growth fund, they’re all within 20 basis points on a 10-year number if it’s a decent fund family. So it’s really hard to differentiate yourself and not being as relationship-driven. And what you can and can’t do in the industry is getting tougher that it’s kind of starting to weed out some of the roles of what wholesalers play.

Michael: Yeah. It’s been fascinating to me to see the shift as well. I can feel it from the advisor end, just the number of wholesalers that call on our firm is frankly kind of an ungodly amount in the aggregate.

I feel like particularly in the RIA channel because our data is all public. It’s all on an ADV. You know exactly where we are and how to find us and who the people are and what the asset dollars are. And if you track those ADV updates over any period of time, you can see who’s growing and where it is. And so for firms that are doing well, that are sizable or fast-growing or both, they just get targeted pretty squarely by the wholesalers.

I kid you not, I just look at my inbound email for our advisory firm, and I’m not even in a direct investment team role anymore the way that I was in the past, and I literally get 20 to 30 wholesaler inquiries every week. It is probably three to six a day every day, all week, all year long. I couldn’t even cordially decline all of them because there’s not even enough time to do that. If it took 2 or 3 minutes just to decline every wholesaler inquiry over the span of the year, I would spend 50 hours a year just declining people.

That kind of onslaught of inbound wholesalers combined with, as you noted, the tools that are out there, all the different analytics tools that are out there, even when folks break through, I’ll admit, our most common response if someone actually does get through is basically, “Yep, we know you’re out there. If you come up on our screens and we’re looking for you, we will give you a call when we have questions. I promise.” And we do.

When we’ve got deep questions and we want to get into something further, I’m actually a big fan of what good wholesalers can provide and can still provide in today’s environment. Like, you know your products better than we do or we ever will. You see a lot about how other people are using and positioning it that we don’t.

So I think there’s a lot of value still that wholesalers play, but it’s still way more of a, “Don’t call us, we’ll call you,” which, to your point earlier, just takes even less control. Like, it gives the wholesaler even less control in a world where it’s already challenging that you have very limited control over what you’re doing.

Tom: No, and the teams like you, the ones that you want to be in front of, that’s exactly the response. And you can’t blame them. It makes sense. The ones that will take meetings are typically the advisors that are probably not growing in size, so they’re not going to move around a lot of assets. Sometimes I don’t even know why they take the meetings, to be honest, but it’s a crazy and never-ending circle.

Michael: Well, you’re buying lunch, man. That’s why. I’ll take a good free lunch. I didn’t have anything else going on in that hour. Hate to say it, but I’m pretty sure there’s a little of that that goes on out there.

Tom: Oh, there definitely is.

Why He Decided To Get His CFP Certification And His Early Years In The Business As An Advisor [00:36:10]

Michael: So you’ve got this arduous drive out to middle of West Texas, four hours, show up, find out nothing is going on but the tumbleweeds, have your moment of realization staring at the wall, “I can’t keep doing this and I need to make a change.”

So what comes next? I’m sure there are plenty of other wholesalers out there who have had some similar experience of a horrible event or interaction and having that moment of, “Why on earth am I doing this?” We all have those moments in our careers from time to time. But ultimately, you translated into action. So what came next in the thought process or the process for you as you said, “Okay, I think I’ve got to make a change?”

Tom: Yeah. Leading up to that, I was coming off record after record year, I was doing well. And it was just nonstop top-down from management to keep pushing, pushing, pushing. So about two years prior to that, I had…about a year and a half prior to that, I started my CFP.

I knew eventually I was going to make this move, and I wanted to have as much credential as possible when I did it. And I’m glad I did it. So I had started that. And I had started talking to different teams that I respected, that I liked, that I thought if, hey, I was going to make this move, I would want to join them.

So there were probably about five different teams that I had on the list that we’d have conversations about. I let them know that eventually, I wanted to make this move. I didn’t know when, or what it would look like. I was new to structuring these deals and there were a lot of different ways to do it. And we started just kind of addressing the conversations.

And when that day happened, that was when I was like, “Okay, I need to get this going quicker.” So it was kind of…I kind of got lucky, the team that I ended up joining had just purchased a book. So that’s when all the numbers made sense, and that’s when I was like, “I’m ready for this to happen.”

And we sat down and had a formal conversation. Because I’ve had conversations in the past and the numbers just weren’t there. I wasn’t looking for income, I was looking for equity. If I wanted income, I would have stayed wholesaling. So I made that very clear to all the teams that I was talking to.

Michael: That’s an interesting point that just if all you wanted was opportunities for big income, you could do that where you were, particularly if you’re coming from the wholesaler world.

The appeal of shifting to the advisor channel isn’t necessarily just the raw income dollars, because frankly, it would be hard for most firms to come close to matching what wholesalers do, it’s the recurring revenue.

It’s literally what you build over time, and it’s the other conceptual or literal equity that goes with it that becomes appealing to move away from the great income you can already make as a wholesaler.

Tom: Right. And the couple teams that I spoke to, it’s, “Okay, let’s talk about a small, small salary,” which was fine, but, “We don’t have much as far as equity. You’re going to have to just build your book. We have maybe some clients, a smaller portion of our book, you can start to work.”

It was just too much, not cold calling, but just too…I didn’t have a base to work off of. So it just…I didn’t want to go that route. I wasn’t the guy that was going to become a financial advisor and then, I’m from New Jersey originally, call all my friends and family, “Guys, I’m a financial advisor now. What are you doing with your finances?” I never wanted to be that guy.

So I was waiting for the right opportunity. And when this…one of the teams I was talking to that I’m on today approached me, it all just worked out perfectly.

Michael: Interesting. So there’s a few interesting striking pieces, to me, around that. The first is just…the cool thing in your world because of what you were doing, I find for a lot of advisors that want to make some kind of shift, change channels, come into the industry as a career changer, finding a firm to talk to that are reasonable people and get to know them enough to find out that they do good stuff, they’re one of the good advisors, that in and of itself is incredibly challenging and time-consuming and arduous and still fraught with uncertainty about whether you’re actually going to find a good firm or not.

Whereas you live in a world where your job literally is to call all of these firms and meet them. You, I would imagine, know more of the landscape of the firms in the area and who’s doing good work for clients and who’s growing well and who’s retaining their advisors as an indicator of a positive environment. I would imagine you see that pretty much more than anybody else out there to know who the good firms are to talk to.

Tom: Yeah. That was the huge advantage I had. Averaging maybe 4 to 6 meetings a day for 10 years, I knew everybody in town as far as financial advisors. And you start to see a common trend with the good teams and the not-so-good teams and also the good firms.

And I always said there are…outside of going completely RIA, there were two broker-dealers I would have joined and one of them was the one that I’m at right now. So it was kind of just…it just all fell in place pretty nicely for me. And it was great timing.

Michael: Yeah, I love that point that just you see so much more of the firms in the area to figure out who to talk to because you’re naturally doing it for your job anyways. And then the piece around, I guess as you would put it earlier, the math of it and making the math work, obviously, you have a, particularly for successful wholesalers like you, you have a track record of doing business development.

So it’s not like you can’t come up with a way to go out there and find clients when the time comes. You’re experienced at this probably more so than the overwhelming majority of advisors themselves, but it doesn’t necessarily mean it feels good to start over completely from scratch. At least in a wholesaling environment, you do have a territory and existing relationships, even if the income resets every January 1st. And going to the advisor world cold is still pretty cold.

So this pairing, to me, I’m fascinated by, so the firm had just purchased a book and needed an advisor to service those clients, which means you don’t have to necessarily start from zero. There was revenue there.

So there’s some means to pay you a reasonable salary coming in that doesn’t have to be contingent on business development because someone’s got to service those clients anyways. And that isn’t necessarily your endpoint, because as you said, you want to grow and you want to build equity, but it gives a base, which makes that transition, I would think, a lot easier both mentally and just the math of the dollars and the compensation.

Tom: Yeah, it was more of just the base of clients to call on because I was prepared to make no income for two years. I was set for that, set the bar really low. They paid me a small base. So kind of how we structured the deal, the book we bought, we did it over two years, and after two years, it was ours.

So they said, “Work it for two years, after two years, you’ll vest in that book. And you’ll always work that book. Those would be your clients, and they’ll have a small portion of that as a percentage.” So that’s… we purchased a lot of households. It was 400 households. That’s all I needed. Just give me people to call…

Michael: Well, that’s a big number. That’s a lot of people to call.

Tom: It’s a lot of people to call. They were very small accounts but a lot of people to call, which was good because one, I was able to start to learn the business. I can start doing meetings, which is what I need to do, and I have people to call on. And that’s all I needed.

I was comfortable and confident enough in myself that it’s just…just getting in front of people, it’s no different from wholesaling. The learning curve was small if we’re talking weeks.

The CFP helped a lot just because you go really wide and an inch deep, but it makes it conversational, at least on almost all topics. So meeting with these people and just finding additional assets outside. And the clients that we bought, they hadn’t met with an advisor in three or four years, so there was a lot of low-hanging fruit out there as well.

It was really nice just to have a base to work off of. The income I knew would come. I wasn’t worried about that. It was more just having people to call. Because if you said, “Hey, okay, you’re now an advisor, go,” I wouldn’t even know where to start and who to call.

Michael: Right. Interesting. So I’m guessing then like the firm was basically purchasing, well, I’m going to assume was a fairly traditional, call it old-school brokers kind of book? Just a broker who had called on a zillion people over 10, 20, 30 years of their career. So they had the 400 clients, probably 300 of whom they hadn’t talked to in years. But there are accounts there, there are some dollars there. People will take those calls because they did have an existing relationship with a former advisor. And that was the base that you were building on.

Tom: Correct. It was a Dave Ramsey following, so they were great clients to work with because they were at a debt. They all owned a lot of…all their portfolios look very similar. So it was easy to do the meetings.

And the advisor that we bought from, she’s great. I think she just took on a little too much at once. And she had to…she was doing a disservice to some of these clients by not meeting with them. It wasn’t her fault; she just had so many clients that she had to downsize.

Michael: Yeah, that’s a huge number. If you literally just do…if you tried to do a meeting a year with all of them when it takes an hour or two for the meeting, because we’re talking once a year and a little bit of prep time to go with it and scheduling and all the rest, like, you could more than obliterate the entire year just trying to meet with those people once a year.

When you multiply it across 400 households and a couple hours per clients in total for all the different prep work meeting and post-meeting work that goes with it, the math just doesn’t work. But it’s a good illustration. Her “C clients” that she didn’t have enough time to handle were amazing A clients for you to call on and starting your business.

Tom: Absolutely. There are just a lot of just small accounts, 529s here, small Roths. So it was nice… And there are a lot of younger clients too, which also helped. I’m 35. So you can relate. When you’re talking to someone your age or a little bit older, it’s much easier than talking to someone 30 years your age. So it was definitely a good starting book for me.

Michael: So talk to us about just the financial transition of what it still takes to do this. Like at the end of the day, how much did your income crash the first year from what you used to do in wholesaling world to what you were suddenly doing first year out as an advisor calling on this book of 400 clients trying to find whatever opportunities you can find?

Tom: Yeah, it went…it pretty much went to zero. It crashed. When I was talking to my partner, and he’s never done this, I’ve never done this, so it was like, “Well, what’s a fair salary for you?” I’m like, “I don’t know. I don’t want you to get the bad in the deal. I don’t want to get the bad in the deal.”

And it was something as silly as like, “Well, what are your fixed expenses every month?” And I gave him the number and he’s like, “Okay, that’s your salary.” I’m like, “Okay, that sounds good to me.” And then we had a deal where after these two years then we vest, and whatever that account is at, I have a percentage of that.

We grew that book a good amount from when we took it over just by referrals and rollovers, just advised clients that haven’t met with advisors or recently changed jobs. So it was a really good opportunity. So the income was really bad at first, but it picked up.

Michael: So help me understand a little bit more of just the way this got structured. So in essence, you got a base salary, which was, “Tell me your fixed overhead expenses. Okay, I’ll cover that.” So at least you’re covered and not starving. Although I think that’s, again, that makes the point of the higher your fixed expenses, the harder it’s going to be to find someone who’s even willing to cover your base expenses. The lower your fixed expenses are, the easier it is to get a firm to at least say, “I’ll cover your fixed expenses while you do this.”

So you had a base salary to cover some of the fixed expenses, and then how did the rest of this work? You got just the salary for two years and then after two years do you say, “Okay, let’s see what the ongoing revenue is” and you’ll get a percentage of that or were you participating in it along the way as well? How did the rest of this comp come together?

Tom: Yeah. So basically, any referrals that we got off this book went kind of back into that book. And then after it was paid off, which was paid off early because the other half was doing earnouts. And once that was fully paid off then I would have a vested interest.

So we have a split code with my ID and his ID, and I have a certain percentage in my favor off that. And my job is those are my clients. I service those clients, I work with those clients. And my advisor, my partner is going to have a percentage of that going forward. So he put the risk out at first and then I’m paying him back over time for giving me the shot and the opportunity to come in.

Michael: Oh, okay. So I understand. So in essence, over the first two years, you’re getting your base salary and only your base salary because, at the end of the day, they just bought this book of clients. So there’s a third hand in the cookie jar here, which is the advisor who sold the 400 clients who also expects to get paid.

So the growth opportunities and the new revenue that got generated for the first two years went back to accelerate the payoff of that purchase so that from the firm owner’s perspective, they could be free and clear on this book of clients that got purchased.

After two years, old owner is paid off, revenue now is clearing up, momentum is building. We can say, “Okay, from this point forward, Tom, now you get a piece of all this business.”

Tom: Correct. So we kind of went from no income to more of a kind of hockey stick once we paid off the book. And then my percentage was on that book and the reoccurring revenue.

Michael: And can you give us a sense as to what that split looks like? I know it’s always a challenge for advisory firms just trying to figure out what is a reasonable number to split business, particularly in these kinds of scenarios. Like, the firm bought it and paid it off, but they obviously can’t serve it.

Someone’s got to be out and servicing the clients. The person who’s servicing them well, is ultimately going to grow them in the future. You want to reward the advisor for the growth. So what kind of split percentage did you guys come to and how did you get to a number?

Tom: Yeah, we didn’t really know at first. And that was kind of what we were going back and forth on. I asked other advisors that I’ve known, that I’ve worked with in the past and my partner asked other colleagues of his, and we kind of came to this 40/60 in his favor.

And then kind of as we started going, if I brought on business, which I’ve brought on a decent amount just outside of this book just from other sources, we were going to throw it back into our joint account him and I.

So I’m like, “You know what, let’s put this in favor of me and we’ll just have breakpoints. So every $5 million or $10 million I bring on, we’ll up that percentage.” So that’s going to continue to go up as I bring business onto that joint account. And they cover all expenses. And that’s kind of how we decided to do it. And I think it’s worked out really well. I think it’s very fair.

Michael: So as you grow the base with them, then your number can get from a 40% split to a 45% or 50% or 55%. It climbs as you bring in more because, at that point, he’s getting a smaller percentage of a larger base.

So the firm’s revenue is still growing. They can cover the overhead and expenses of just having a platform to support you. That’s basically the structure?

Tom: Correct. Yep.

Michael: Okay. Interesting. And so as you look at it now, you’re, correct me if I’m wrong, about two years into the transition itself?

Tom: Yep. It’ll be just two years almost on the day.

Michael: All right. And so how’s it going?

Tom: It’s going well. It wasn’t easy making the move and going from making income to almost no income. But the last, call it six to nine months, there has been tremendous growth just on referrals alone. So it’s going really well.

And to your point earlier, I still have clients that we took over who we still haven’t even been able to get in front of. We’ve reached out to them, but there’s just so many households to call and that I really haven’t…I’ve been so busy with that. I just opened up a Houston location.

So we have…kind of how our firm structure, there’s five of us advisors and we have six support staff. Half of them are up in Dallas. My partner here is about 30 minutes south of Houston. And I just opened up a Houston location. So I had a girl who interned for me last summer. I just hired her full-time to help out. And I’m building out an office space as we speak right now.

I have a couple…I have a CPA and a TPA in town that I’ve known for years who are partnering up with us. They’re going to sublet some office space. So I know a lot of people in town from the wholesaling world, and currently looking for a 401(k) advisor to join the team that I’m in talks with.

So growth is good. We’re looking to buy more practices. We’re in the talks with a few other teams. And the one advantage that I have is I know everyone who’s selling. I have this like, call it kind of like a black book. I would have that conversation in almost every meeting I did.

Maybe the last three years of wholesaling is just trying to figure out who’s growing, who’s selling, not only for my own purposes but also to try to match them up with other advisors. That’s how I would try to bring some value as a wholesaler is I know who’s looking to buy a book and I know who’s looking to sell and try to make the connection.

Michael: To me, there’s a whole other interesting angle to this around the subset of advisory firms that are particularly acquisitive, they’re looking to acquire, they’re looking to acquire firms in the local market. And the challenge for most firms still ultimately comes down to deal flow. Just finding opportunities of firms that might be willing to sell and maybe a reasonable fit and figuring out where they are.

That to me, aside from just the advisory business and serving clients and sort of growing organically that way, there’s a fascinating angle around firms that want to acquire that actually bring on people with your kind of wholesaling background because you know everyone in the community and who’s doing what and where some of the opportunities are to be able to find them.

Maybe not as a sustaining role because at some point, your list of advisors to call on gets a little bit stale as you’re out of wholesaling for a while. But over the first few years of transition, the ability to help support matchmaking to find firms, if you work with one that is looking to acquire, is an interesting angle and opportunity unto itself.

Tom: Yeah. There are services out there like Succession Link and others. The problem is, everyone is looking to buy. So I don’t think they work really well. And I tell other advisors, you can really lean on wholesalers for just that and give them, I used to call funding ideas, give them ideas on what you’re looking at.

Don’t just say, “I’m looking to buy a practice,” give them kind of looking at the structure, demographics, location, size, be more specific because there are advisors out there that are looking to sell or at least looking to try to slowly transition out. I think a lot of them just don’t really know how to do it or have the conversation or really where to start.

Michael: Yeah, it’s an interesting angle of just, if you’re looking for firms in your local market to acquire, I would think probably particularly outside of the RIA realm, just because, again, you can find a lot of data on RIAs if you want to look around or you can buy access to databases like Discovery Data that pull all the ADVs and all the information and you can at least find some of the firms, but most platforms don’t give a lot of breakout down to the individual rep in a broker-dealer environment. So if you want to know who’s in a broker-dealer environment that might some point be selling, getting ready to exit the “in play,” it’s actually, at least from what I’ve seen, still pretty hard to find that in public databases and public information, but there’s a pretty darn good odds that your local wholesalers have met all of them 10 times and know exactly who they are.

Tom: Yeah, absolutely.

How Networking Helped Tom’s Career Progress Quickly And The Lessons He Learned As A Wholesaler [00:58:14]

Michael: So tell us a little bit more about just what it’s like trying to start calling on clients and just doing this advisor thing when you did the wholesaling thing for 10 years. Like, what do those conversations look like as you’re calling on clients where you have to both say like, “Hey, we’re the new firm that bought your old firm or your old advisor out and I’m the new guy?” Obviously, you don’t necessarily want to say it that way. Like, “I’m the new guy. You just had a change. I’d love to come out and see you and find out what’s going on.” How do those conversations go? How are you cueing them up and trying to actually get out there in front of people?

Tom: The transition itself, I guess they can always go better. Ideally in a perfect world, you want to sit down and introduce the new team and tell them, “Hey, here’s a new advisor, here’s who they are and what they do.” But it’s just, when you have 400 households, that’s not possible. So when you’re calling on them… When you meet with these, they’re very skeptical. They don’t know kind of what took place, why it took place. And you’re playing defense for the first 30 minutes.

But I’ll tell you, having a client actually want to meet with you is so nice and so different from the wholesaling when you hear no 99% of the time. So it really wasn’t that difficult. It’s nothing challenging. It’s something that I’ve been used to is playing defense. I think most advisors, when I used to call them, and they know why you’re there, you’re trying to sell them a mutual fund and you’re guilty till proven innocent a lot of the time. So it really wasn’t much different.

Michael: But I guess that’s really the point. At the point you’re calling on clients that got acquired, even if maybe they don’t have a tight connection to the firm and some of them don’t want to meet or they’re skeptical and like, even if you only get a 50% hit rate on being able to get people to meet with you and sit down with you, that actually feels a heck of a lot better than the 1% or 2% hit rate sometimes in wholesaling on advisors. Like, “Wait, I only get a 50% meeting rate? Darn, that sounds like a great improvement.”

Tom: Yeah, it was. We had very little attrition. Most clients understood. And also, most clients, like I said, they haven’t met with an advisor in a while. And actually, a lot of them almost felt guilty like it was their fault. So it was really interesting, the conversations. And they varied a lot, but for the most part, you have to explain kind of what happened, who we are, who I am, what took place. Most were fine. And as long as you provide good service, which we have, they’ve been happy.

Michael: So talk to us about your view of the wholesaling world at this point. Now that you’ve lived the advisor’s side for a while, you spent 10 years on the wholesaling side. So having actually been to the other side of the mountain, as it were, how do you reflect on the similarities and the differences between the world of wholesaling and the world of financial advising itself?

Tom: The biggest difference was, when I used to go to a party, I’d be out and it would be someone out of the business and I would run into a financial advisor, and this is going to sound so cheesy and corny, but you’d get so excited because your pool to sell to is so small. Your clients are financial advisors. And you really get to be able to get in front of them. So when you run into one, it’s super exciting. And that’s how sad it is wholesaling. But what was different and what kind of shocked me is, the pool of your clients is unlimited on this side. It is just unique that…anybody and everybody could be a potential client. So you’re just so set in your ways of, “Hey, my clientele are financial advisors.” That’s it. And in this side, it’s much different.

So I think in a way, it’s very similar. Having a message down, having a story, being prepared, knowing and being educated on what you’re talking about. And like I said, it wasn’t much different from having a meeting with an advisor. The questioning is obviously a lot different and you get thrown off with a lot of stuff you just don’t know because you haven’t been doing it, but you’ll learn. And it really wasn’t too much of a learning curve.

Michael: Very cool. Very cool. And so as you look forward from here, having… Oh, versus, I have to ask, now that you’re wearing an advisor hat, any wholesalers calling on you yet?

Tom: Oh, yeah. Well, the problem is I know the wholesaler, and they all know me. And I have my group of wholesalers. And I obviously feel bad for wholesalers. I used to do it, but I’ll tell you, it didn’t last very long. I thought I’d be a lot more sympathetic. And I find myself like you. You get inundated. And it’s crazy how many calls and emails you get a day. Yeah, no. And I use the wholesalers for a lot. And it’s not for marketing, it’s for…they do bring a lot of value-add. And I know what firms can offer what. Especially for looking to buy a practice, I have all the wholesalers out there trying to help us out for who’s selling or who’s trying to join a team. So I keep in close contact with all the wholesalers.

Michael: So this interesting point, you said like you still use the wholesalers a lot, but it’s not for marketing, it’s for other stuff. So what do you find are the…now that you’re living on the advisor side, what do wholesalers bring to the table that’s useful for you wearing the advisor hat, knowing all the stuff that they can bring to the table? What’s actually the most meaningful and impactful aside from introductions to other advisors we might want to acquire or recruit?

Tom: Yeah. Now that I’m kind of disconnected from that side of the table, it’s, who’s bringing in…what advisors are bringing in money and what are they doing to do that? What ideas are they using? What are they doing differently? I know the good teams in town, and they kind of do recon missions for me. What are they doing differently that I’m not doing? And just keep me updated with different ideas that different teams are using, whether it’s marketing or prospecting or whatever it may be. I use them for that. I use them for referrals. I tell them all, I go, “Listen, I want three at-bats a year. You all know someone that has money, send them my way. Just give me a chance, give me an at-bat.” And they do.

Michael: Meaning like outright referrals or prospects?

Tom: Yep, prospects. And two of my top clients today came from referrals from wholesalers. So I’ve used them for that. Some of the firms have great value-add, too. Columbia has got Retirement Learning Center where you can pull up any 401(k) plan and learn how it works, what they can and can’t do. And that’s extremely useful for me when I’m meeting with a client, and I can walk them through the in and outs of their plan and their pension plan. And is it at risk? Is it frozen? And can they do a backdoor Roth? Can they do the after-tax?

So just certain ideas like that. And then I also, I don’t know if I told you this earlier, but I started a podcast a couple months ago, and they bring me some great speakers. And not portfolio managers, but just different outside-the-box guests that I can bring on, which is a tremendous help for me.

Michael: So you’re running the podcast but they’re helping you to essentially find guests that can come and join the podcast. You tell them, “Hey, here’s the kinds of topics or things that I’m interested in,” and they’re saying like, “Oh, well, you should talk to this person or that person to check this out.”

Tom: Right. Yep.

Michael: Very cool. And what’s the podcast called?

Tom: “Your Money Momentum.”

Michael: And so, what’s the focus of the podcast?

Tom: The idea of it originally was just to have a different platform to get timely and relevant material out to clients. We’re getting more and more email bounce-backs and fewer people open monthly newsletters. They think they’re canned emails. So we’re just trying to find a way to just get this information out to clients. And if we get business out of it, if they send it to friends and we get prospects, that’s great. And that’s ancillary. But the idea was really just to start with just a different way to get in front of our clients. And it just talks about everything and anything financially-related.

Michael: So for you guys, the podcast was less marketing to prospects and more just literally another way to get in front of existing clients who maybe will be more willing to listen to something than read another email as emails bounce or go to spam folders, you don’t get through.

Tom: Right. And I think over time, as we get word out, hopefully, it does become more of a prospecting tool. But I think we just wanted to really just set expectations low when we started this and to see how much time it would take. And it takes me…I do it every other Friday, and it takes about…all in about an hour and a half to schedule it. And the podcast goes for anywhere from 30 to 40 minutes. And it’s really easy to do. And it’s fun. I enjoy it. So it doesn’t cost much. It doesn’t take much time. So we’re going to continue to do it. And it’s just all topics on financial planning.

Michael: What is the cost? Does it mean you’ve got someone externally that’s helping to produce the podcast?

Tom: Yeah, I call him our podcast guy. I don’t know his exact cost. Pamela, who does our marketing, she’s probably the best I’ve seen. She basically does all of it for me. I just schedule the person, get them in there, get them in here or get them on the mic and do the interview. But it’s not expensive.

Michael: So from your end kind of values for wholesalers, it’s introduction to prospects, it’s introductions to other advisors that maybe you can recruit or hire or acquire. It’s kind of the marketing and sales strategies. What are other advisors doing that’s growing their businesses and working? It’s introductions, even a guest for the podcast, and then it’s some firms like Columbia that have actually built helpful thought leadership resources for you. So they’re Columbia’s Retirement Learning Center and tools and solutions of that nature.

Tom: Yeah, absolutely. And we don’t…I haven’t done much marketing as far as doing events. So I haven’t leaned on them for that. Every asset manager has a different value-add, in my opinion, and I lean on them for that. And also too for the funds I use, it’s, they know the analytics that I like to get, and they send them to me without asking when I need them to be sent. And they also give me a heads-up if I should be making a change. They collaborate, they work together.

So if I’m looking for a certain fund, a certain category, I can send an email to all of them and I know they’re not going to just all send me the fund that I’m looking for, they’re going to send me it if they have a good one. And if they don’t, they’re not. And that’s what I used to do too with them. The guys that I work with, we all worked together when I was wholesaling. So we get it. And that just takes a lot of work off of me. I don’t want to focus on just the models all day long.

How To Decide Which Firm To Work With As An Advisor [01:09:42]

Michael: And so as you were looking at firms to join and switch over to, I am curious to know more about what…aside from having an existing client base that you can work with to have a base to build from, when you had your initial list of at least five firms that you narrowed down to, what makes it appealing from your end to pick firms or get it on the list? What were the drivers? Is it size? Is it channel RIA versus BD, large versus small business models? What were the drivers for you in deciding what firms were going to be on your shortlist?

Tom: Yeah, I think there was just, and I won’t mention any names, but there was just some firms you just…at a different level of advisor. More firms were more proprietary, product-driven. More firms would be…they were independent advisors, but they were the farthest thing from independent advisors. They were definitely employees. And I think it was just the quality of advisors at a couple firms was just very consistent. And I think that might have just…I had a bias towards that.

Because I never sat down and used the technology. I never sat down and did the trading. I never sat down and called the back office. So I didn’t know those things. It was more driven by just my experience with a lot of the advisors that I worked with and the teams. And they never complained about their firms. They only praised their firms. And you’d have a lot of advisors out there that all they would do, you go to lunch and they would just complain nonstop about how bad their firm is.

And my shortlist, I had a good amount of firms. Truly, I wanted to go RIA, that was the first thought. But with our firm Commonwealth, we’re duly registered. And it’s a great firm. We have had no complaints. And the guys that I’ve joined have always said good things about it, and any advisor that I called on from this firm was the same. So that kind of narrowed it down to my shortlist.

Michael: So I’m curious then what was leading you in the direction of Commonwealth originally and then…or I should just say like, what was leading you in the RIA direction originally and then what pulled you to the Commonwealth side?

Tom: So RIAs, I covered as part of my territory. And I feel like the RIAs just, there was a different level of sophistication that these teams had. They tend to be bigger, just seem to be more…they’re independent by design but could just…they weren’t held to any quota. They didn’t have to use certain products. They were completely open architecture. And I just really liked that.

They didn’t seem to have much of any conflict of interest. And my whole thought process was if I came to this side, I wasn’t going to do any commission business anyway. So RIA just seemed to make the most sense. And again, I think a lot of my decision-making was just driven by my experience with the advisors at these firms. They were just on a different level.

Michael: Well, and I guess particularly when you’re living a wholesaling world, you see a whole other level of some of the challenges of industry conflicts of interest or I guess really platform conflicts of interest of the advisors say like, “Look, Tom, your products are fine, I’d love to do business with you, but my company only pays me a fraction to do business with your thing as our company’s product. So I just can’t afford to work with you.”

And all of those indirect challenges that come up because of how platforms structure compensation that you don’t see on the RIA side, for the most part, because that’s not how the businesses and platforms were built. We all talk about the conflicts, but I would think when you are on the other end of wholesaling into it, it’s a particular frustration for the conflicts of people that can’t work with you, and the appreciation of the ones that have platforms open enough that they can.

Tom: Yeah, 100%. And I think going back three or four years, the DOL just completely missed it. They went after the wrong subset. They should have been going after the pay-to-play from the corporate level. Some of these broker-dealers, the amount you have to pay them as an asset manager to do business is insane.

There are ‘s asset managers that just say, “No, we won’t pay it,” and they’ll drop them from their list. And they’ll make it very hard for the advisors to use them. So I didn’t like that aspect of it. And it wasn’t just one firm, there’s a lot of firms that are doing that now.

Michael: Well, particularly as grids get squeezed, it’s the part that a lot of advisors don’t realize is, as payout rates have kind of crept higher over the years, payout rates off of grids have crept higher, particularly in the independent BD world, like, the BDs still got to make money to run their business. So if they can’t…if they feel compelled to pay you more on the payout end, the way they do it is they extract it from the asset managers instead. It’s pay-to-play to be on the shelf. It’s share classes that are marked up because the BD gets a cut. It’s TAMP platforms or other asset managers that get marked up from what you would pay directly because the BD gets a cut. They make it on the backend instead.

If you just dissect even some of the publicly traded broker-dealers that are out there, it’s public information for the ones that release their financials, like, for a lot of BDs, almost 50% of their revenue comes not from the grid, but from everything that they get in some way, shape, or form on the back end or on the underlying. Which when you think about as an advisor, if what you’re paying them is only half of what they’re making and the other half is on the backend, like, at least some interesting questions about what exactly is getting negotiated where and how to get that number up.

Tom: Yeah. And I don’t know how much longer it’s going to go on for, but I just…yeah. So I think the puck is going towards the RIAs. And I know you’ve had multiple conversations on this with your podcast. And I think most of us would agree with that. And I just think in 5, 10 years, the landscape is going to look a lot different altogether.

Michael: Yeah. So how do you look at that for the wholesaling world of how that evolves and changes in the coming years? You lived the 2010s of wholesaling, from the wholesaling end, now you’re seeing it from the advisor end. So as you look out, what’s wholesaling in the next 10 years?

Tom: I don’t know. I started off at AXA wholesaling annuities. And that was back in 2007. And I made it through 2008 and then I said, “Okay, annuity wholesalers are never coming back again. They’re dead, going the mutual fund side.” And now they’re starting to make a comeback on the annuity side. So I thought they were kind of dead in the water.

Now you look at the mutual fund wholesalers and they’re just the fee compression that you’re getting squeezed out with the ETFs. And I think what you can and can’t do is being more and more restrictive. Budgets are coming down, compensation is coming down, you’re having bigger territories, so you’re traveling more. Most of these wholesalers spend Monday through Thursday on the road.

So I don’t know what it looks like. I’ve got to imagine it looks more base-driven, base salary-driven than this compensation because…I’ll be the first to admit it, wholesalers make too much money for what they do. Some of these firms just take off in sales. And there’s times where they have to cut your compensation halfway through because it’s just…there’s too much business coming through.

I don’t think that’s a healthy model for the asset managers because, think about it, if you’re paying wholesalers all this money for this mutual fund business that’s coming in and then two months later all these advisors do a rebalance, that mutual fund business goes out. You already paid the wholesaler on it. So you’re losing money as a firm. And I think they’re starting to see that.

Michael: Yeah, to me, there’s just an irony that’s like, the wholesaling world itself to me was so built around the accumulation model, right, working with accumulators when baby boomers were in accumulation phase, so all the comp systems were based on new flows, because almost everybody was in accumulation phase.

Now the majority of baby boomers are on the decumulation spending phase. And when you only comp the inflows and not the outflows and your average client is actually in net outflow, you end out paying for a lot of growth even though your net growth is negative. Obviously, you’ve still got to bring in the inflow to offset the outflow, but only paying the inflow seems, as you’re noting, sort of increasingly problematic in this environment.

Tom: Yeah. So I don’t know what the lifespan is. And all the wholesalers I talk to, that’s the big concern. And you just look at the numbers. We averaged about 13.5% over the last decade on the S&P and asset managers are having net outflows. What happens when we go through a bad market? Are they all just going to be…so that’s my concern.

I think it’s going to look much different than it does today. They’ll still be around, but I think it’s just going to be more of a, “Hey, we’re going to pay you a base salary and you’re going to be more of just a consultant.” It might not be as sales-driven, which I don’t know if that’s good or bad.

Michael: So now we’re saying all these challenges around commissions distribution and the woes of wholesalers, woes of broker-dealers that are doing more pay-to-play stuff on the backend, what got you comfortable with Commonwealth if you were talking about moving further away from that world? What made Commonwealth different to you?

Tom: Commonwealth, like I said, it was more just the quality of advisor. They won’t even bring you on board, I think, unless you’re doing $350,000 in production is the last number I heard. I was able to join because I joined up with the team. I’ve been to their conferences. They’re a private company. I like that. They’re smaller. And they’re more open architecture.

Now, just like any broker-dealer, they are pay-to-play, but they allowed us to do the duly registered model with the RIA. I also couldn’t be picky either. An opportunity came, so I had to hop on it. But yeah, I’ve never heard anything bad about them. And it’s been a really, really good fit so far.

Michael: So as you’re living this on the advisor end now, what do most wholesalers not actually understand about building an advisory business that you can share with them from the other side of the mountain?

Tom: It’s a good question. I don’t know what they don’t understand. I think they do understand what it takes. And I think that’s the reason why they haven’t made the move is because they’re just so…they’re handcuffed. I think most of them just can’t do it. It’s a big risk too just giving up that income, going to nothing. And hopefully, you make it as an advisor.

When I talk to them, I let them know that it’s really not that much different from wholesale. You have to be likable. You have to be a people person. You have to be able to… One good thing about wholesaling is you’ve…I’ve met every type of personality I think known to man. So there’s no client that I meet with I’m like, “Oh, how do I handle this?” I’ve seen it 1 million times. I can’t tell how many lunches I’ve done with advisors where it’s like pulling teeth trying to get them to talk. And it’s like forcing conversation. And it’s just…it’s brutal.

But it’s trained me to…because that’s what…we’re in the people business, we’re in the service business, and I think that’s half the battle. And I think wholesalers know that. And I’ll tell you, I get a lot of calls and a lot of them want to make the move, but they talk…they can talk themselves out of it very easily. There’s a list of excuses of why they don’t want to do it. And sometimes I don’t blame them because they have families they have to look after.

Michael: So for wholesalers that do want to make the transition, what advice would you give them?

Tom: So I always used to…I would…advice I give to them is they know the teams. When you meet with the team, I meet with an advisor, sometimes you just click and you say to yourself, “This is a guy with, one, that I would give my money to, to manage, or two, if I ever did want to make the move, I could see myself working with him or her because of personalities and the way they structure their business and etc.”

So I always say, approach it this way, talk to them where they’re at right now. Are they looking to grow? Are they on cruise control or are they looking to get out of the business? And you kind of know which ones are looking to grow and you just start having that conversation like, “Listen, I respect you as an advisor. I don’t have many teams that I would approach this conversation with. I feel that we get along. We match on personalities. I really can’t…don’t see much life left for me at wholesale. I want to make this move.” And just kind of leave it open-ended. You’d be surprised how many advisors, one, they’re honored that you’re having a conversation with them and they open up and they start asking the questions.

You’ve got to take the baby steps and start slow. Because again, most advisors don’t realize how much wholesalers make. Not that it’s justified that they make it, but you have to…there’s equity and there’s income. And the problem is, is that most advisors don’t want to give up equity, but the income doesn’t make sense either. So you’ve got to find that advisor. It might be the best way to do it is find a team that’s looking to buy a book and do it the way I did. I think it’s a win-win for everybody unless there’s an advisor that’s looking to get out of the business and wants to start handing off clients or handing off equity that way. Either way, these wholesalers need to know it’s a sacrifice for sure. You’re going to have to have low to no income for a couple years.

Michael: And how do you think about that financial transition? Just going from the income to not the income, trying to get comfortable with that, trying to rationalize that in the positive way instead of rationalizing and talking yourself out of it. How do you think about that income transition that you’re still in the midst of now?

Tom: Yeah. For me, it was work-life balance. Money isn’t everything. And I saw that firsthand. And there was a guy at AXA. I think I was at…maybe it was at Prudential, and he said, “I never had so little fun making so much money.” It’s a grind. And if you’re not happy with what you’re doing and if you’re not satisfied with what you’re doing, then you need to make a move. And I’m okay. I wouldn’t trade the income in for my happiness and my work-life balance for anything. I enjoy having my own schedule. I enjoy not having a boss looking over my shoulder, giving me a hard time. Looking at three weeks out of my calendar saying, “Hey, I notice Tuesday from 2 to 5, you have no meetings. What’s going on?” It’s crazy. It’s brutal. And that’s just something that I didn’t want to do anymore.

So I’m okay with the income. Because I know over time, I’ll build it back up. And I’m building something for myself. And that’s the best part. Even though it’s going to be a slow build, I know come January, it’s not going to be at zero again.

What Surprised Tom The Most About Building His Business And The Low Point Of His Journey [01:25:54]

Michael: So what surprised you the most about building your own advisory business?

Tom: The business aspect of it was probably the biggest surprise. Like I said, being the advisor to the clients, the meetings, nothing was really surprising. I kind of figured that’s how meetings would go and all of that. It was more of just the owning your own business now. Like I said, I’m opening up a Houston office, and built it out from a concrete slab and just everything that goes into running a business. Or hired someone to training her and to just dealing with the everyday business aspect.

Because I never had to do that before. I always worked for a corporation. I was always W-2, and I just had to go out there and do what they told me to do. So that was the biggest change. And I like it. It’s an adjustment. Everything you do is on you. There’s no one telling you what to do. And all the mistakes you make fall back on you.

Michael: Yes, I joke sometimes, it’s sort of the double-edged sword of independence is, when you’re out on your own and building your own business, like, you can make absolutely any decision you want. And the bad news is you have to make all of those decisions. They’re all on you. They all fall on your shoulders.

To be fair, if that’s not appealing for you but you do want to be on the advisor side, there are employee models, there are other structures out there. There’s some other income and opportunity trade-offs that go with that, but particularly for the folks, if you want to be more of an independent and all of that sort of control your life, control your destiny, build the thing that you’ve got a stake in. And there’s a lot of cool about that. And you get to do it more or less any way you want because you’re independent, you make your own decisions, but you have to make all your own decisions. It’s a lot.

Tom: Literally, all my own decisions. Right before this call, I had my headphones on. I was on hold with Best Buy about the fridge that’s coming. The lady walked in about the planned service. I got my assistant on hold with their back office. And currently, I’m sitting on wicker chairs in my conference room because the furniture got delayed. Like, I’m all over the place. I have no idea what I’m doing. And it’s just like trial by fire. It’s great, but you are making all of the decisions.

Michael: Welcome to entrepreneurship.

Tom: Yeah, exactly. I kind of went just on the complete opposite. A more natural progression probably would have been to go to one of the wirehouses or some kind of employee channel and baby-step from there. But I kind of knew I wanted to go this route anyway. So I said, “You know what, I might as well just do it.” And it’s been a great learning curve.

Michael: So what does a typical week look like for you at this point? And maybe even, how do you contrast it to what a typical week used to look like in the wholesaling world?

Tom: Yeah. So one thing that I picked up from just teams that I worked with that I thought did things really well is they all have processes in place. And they were very, very structured and organized. And I got to structure my week very similar to how I did with wholesaling.

Monday is my office day. I try at all costs to not to clients or really anybody unless they need to see me, that’s fine. But Monday is my day. My most effective day is for me to catch up on anything, is for me to schedule, do follow-ups, do all the administrative stuff. Tuesday, Wednesday, Thursday are my client meeting days. And I try to pack those out as much as possible. And then Friday is kind of my flex day, trying to take prospects out to golfing.

One thing I started doing with clients that have referred me a lot with certain companies is taking them out to lunch and ask them to bring some colleagues along and just kind of going over their plans and what they can and can’t do within their actual 401(k) plan. That’s worked out really, really well. And I also have clients that are outside the state that I travel to, and I use that as my travel day.

And then I’ll do meetings on Saturday, too. So that’s kind of what my typical week looks like. And it varies as far as appointments that I have on Tuesday, Wednesday, Thursday. I usually have at least one, but I could have four or five in one day. It just depends. And they’re kind of all over town.

So it’s funny because I’m driving a lot to meet people either at their homes or for lunch or somewhere just not right in the Houston area because I don’t know how…well, Houston, but from tip to tip could take you two hours. It’s massive. So I have clients all over the place. So it’s kind of like wholesaling, where you set meetings, you set an hour in between and you drive from one office to the next, or in my case, one house to the next.

Michael: But I guess the distinction is, pretty much all your travel for meetings on Tuesdays, Wednesdays, and Thursdays now is the Greater Houston area, not all of West Texas, all of Texas, all of multiple states, depending on how broad your territory is? It sounds like kind of similar meeting cadence but not as much road time because, in essence, your “territory” is a lot narrower now because you’re not only calling on financial advisors, you’re calling on anyone in the Greater Houston area who might be a prospect, which means you don’t need as big of a territory.

Tom: Yeah, I went from doing about 30,000 miles a year in the car to about 12,000. So yeah, a lot smaller.

Michael: So what was the low point of your career so far? Either on the advisor side or on the wholesaling side?

Tom: It was probably on the wholesaling side. It was during my best year ever, too. And that’s where I knew there was just a structural issue. Having my best year earnings-wise and I’m just miserable. And I don’t know what it was, if it was just added up and just the travel. I don’t know what it was, to be honest with you, but it was probably in that hotel. It probably was just looking at that ceiling just like, “What am I doing?”

Towards the end, there was just so many advisors that just I didn’t want to meet with but I had to because it was my job, and it was just forced conversation. It just kind of grew on me after a while, but I haven’t had any really low points on the advisory side just because I kind of expected it. I set my expectations really low for income, and that helped. I really planned on making like $0 for two years. So obviously, I made something, but that helped tremendously. If I had any expectations of making, “Hey, I’m going to bring on $10 million in the first year and $20 million in the second,” I would be rethinking my decision.

So the low point was definitely wholesaling, which is unfortunate too because it gave me a great career, put me where I’m at now. And I truly did love it when I started, but just, I just couldn’t do it anymore.

Michael: So anything that you wish you’d done differently as you did make this transition? Like, anything you know now you wish you could go back and tell you from three years ago in that hotel room when you started thinking you were going to make the shift?

Tom: It’s probably the first time in my life where I’ve looked back and said…I don’t think I would have done anything differently. The only thing I probably would have done differently is just done it sooner. And I was thinking about it sooner. But the problem is I didn’t find the opportunity. And I’m glad I waited because I lucked out with the team I joined, the guys I joined.

And the deal we did together, everyone is happy. It’s been super successful. And there’s not much I would have done differently looking back. The one thing we would have definitely done I think as a group was the transition, buying the book. I think all parties involved would have done it differently. But I don’t know how different you would have done it just because of the mass scale of clients.

What Success Means To Tom [01:34:03]

Michael: Yeah. So as we wrap up, this is a podcast around success and one of the themes that always comes up is just the word “success” means different things to different people. Sometimes changes for us as we hit certain goals and then decide we want new and different goals.

So you had this great career on the wholesaling side and good income but all they didn’t decide that was scratching the itch for you. So as you look forward now, how do you define success for yourself?

Tom: Yeah. I was trying to prepare for this question because I know you ask it and I couldn’t think of anything clever to say. But I don’t think I need to say anything clever. I actually believe that success is just…it’s being happy at what you do; it’s not about money, because waking up every day really miserable, not wanting to get out of bed, dreading wholesaling was just not something I want to do.

So success is, if you’re not happy with the people that you’re working with, with the company that you’re working with, with the industry that you’re working with, make a change, because in a day, life is too short, in my opinion, and it’s not worth it. So my success, probably like most, is just good work-life balance and to be happy.

Michael: Well, I love it. I’m glad the transition has gone well for you. As we said, I suspect there are other wholesalers that are suffering from some of the very similar challenges and difficulties in the industry right now. So hopefully this is helpful food for thought for them as well.

Tom: Yeah, absolutely. You’ve personally helped me out a lot on the podcast and more importantly, your participants. I’ve gotten some really good stuff from them. So like I said, the pleasure was all mine. I appreciate you having me on.

Michael: Likewise. Thank you, Tom. Thank you for joining us.