Welcome back to the 261st episode of the Financial Advisor Success Podcast!
My guest on today's podcast is Andrew Miller. Andrew is the founder of OLIO, a financial planning firm based out of McLean, Virginia, that manages $275 million for over 275 households.
What's unique about Andrew, though, is how he’s been able to craft a scalable business model based on complexity fees, by meticulously capturing the details of every planning analysis he’s done for his clients over the years and translating it into a clear estimate of the time and effort it will take to handle any new client’s planning needs.
In this episode, we talk in depth about how Andrew developed his time-based system to determine how to price his services to clients, why Andrew’s focus on time has led the firm to do less and less investment work for clients and more and more for clients’ other financial planning needs (because as Andrew notes, if your technology stack is good enough, it really does take about the same amount of time to rebalance a $100,000 account as it does to rebalance a $9M account), and the financial planning proposal process that Andrew created to help translate the value of his time into dollar amounts that make his fee worthwhile to the clients he serves.
We also talk about how financial advice given to Andrew developed a skepticism of the financial industry that ultimately helped shape his career and OLIO’s financial planning process, how Andrew’s experience as a civil engineer fostered an understanding of how time and productivity are intertwined (which helped him create the tools that are applied to OLIO’s fee structure), and how Andrew is positioning himself and his firm to be successful as technology encroaches ever further into the realm of financial planning.
And be certain to listen to the end, where Andrew describes how his own financial planning philosophy and ‘money scripts’ began at an early age, how fostering the education of resident advisors means so much to him and his vision for the future of the financial planning industry, and how despite being told by other advisors that his business model would ‘never work’ that it’s been his willingness to create his own definition of success that’s allowed him to achieve it.
So whether you’re interested in learning about how Andrew’s own experience with financial advice and fees inspired him to promote change from within the financial advice industry, how Andrew employed his civil engineering background to create time-based data to determine his fee model, or how Andrew is helping to shape the future by coaching and educating resident advisors, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Andrew Miller.
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Michael: Welcome, Andrew Miller, to the "Financial Advisor Success" podcast.
Andrew: Thanks, Michael.
Michael: I'm really looking forward to the discussion today. And I think talking a bit about the ongoing evolution of just the advisor business model and fee models. There was all this discussion, I think, 10 years ago, when robo-advisors came out, and tried to set this new fee benchmark of saying, you know, the new 1% fee is 0.25%, because that was where Betterment and Wealthfront, some of the others, drew the line in the sand. And it sort of set off this chain of events where everybody suddenly said, "Well, if advisory fees could fall that quickly, fee compression is coming. We're all doomed. And if it falls out far that quickly, then basically, we're just all going to zero. And it's just like matter of time before the AUM model just vanishes." And in practice, that really hasn't happened, right? Robo-advisors did not take over the world. If you actually look at just the advisory fees and revenue yield of advisory firms over the past 10 years, it basically didn't really move basis point. Like, literally, didn't move basis point about average revenue yield for almost 10 years. Kind of the vaunted fee compression didn't really come that way.
But, you know, as I've looked at it, I've always thought that the way this really likely plays out is not some robo-advisor comes along and just keeps doing it for cheaper and cheaper and cheaper. Because there's still value to the rest of the advice, clients seem quite willing and maybe even increasingly willing to pay for the advice. And to me, the greatest threat to the AUM model has always been the advisor who simply comes along and says, "Look, I'm just going to charge you this planning and advice fee. And I don't really care how much in assets you bring. Like, you can not bring assets or you can bring assets, maybe we'll charge you a little bit more if we just have to literally do the work to hit the rebalance button for you. But our fees are just going to be set based on the services we offer." And it becomes us internally, in the industry, that actually become the challengers to the AUM model.
And so, I know you are now building a firm this way, where you're living in a flat fee model, building off of complexity fees, starting to go down this path and differentiating yourself on that fee model. And so, I'm really excited to have a conversation with you as someone who's living this evolution of fee models and holding it out to clients, and trying to grow that way, to understand, like, what are you charging? What are you seeing as fee models of the future? And how is that working in practice for you?
Andrew: Yeah. I think it's, you know, you never know a person until you pull back the layers to see where they've been. I knew I wanted to be a good financial planner from an experience that I personally had. But a big part of the fee was my own experience as a civil engineer. It wasn't necessarily looking at the industry and saying, "Oh, this is terrible." I knew I wanted to be... This is the service. This is what you pay for it. I wanted to substantiate that. But it was really that experience that kind of triggered me to think, well, how would I bill a client for advice. And in civil engineering, everything had a process, from proposal to submittal, including the color of pen you use. If it wasn't red, you get to redo it. And so I basically took that methodology and thought, well, let's apply this. And it was basically time tracking within 15 minute increments. It was a real headache and pain in the butt. But it was data. And the firm was billing off of it.
And so when I got into it, I had already kind of had this preconceived notion that this is what I wanted to do. But I had no real concept of what the industry was, how it was billing, other than the experience that I had with a financial advisor. And so, I was assuming that my experience, that was the way financial advisors billed their fees, and I wanted to provide an alternative to it.
How An Introduction To Industry Issues Inspired Andrew To Become An Advisor [6:39]
Michael: So what was the advisor experience you had that was so formative for you?
Andrew: Well, I think it's like one of our biggest challenges now. It's what most people experience without really knowing. And that is, you don't pay me. And it was a conversation, we recommend selling this fund, buying this fund. I had $3000 bucks in my 401(k). So, it wasn't like a complete rebalancing, it was basically, this fund will work. And there's contingent deferred sales charges. There's front end loads. And I was just generally interested. In engineering everything, there's theory, and this is the answer. Whereas the market, money, it's very subjective. It's very emotional. And so I thought, well, let me take a look at it, I'll get back to you. And it was kind of daunting because it was like, I knew at that point, I shouldn't have said it, but I said it. And I said, "I'll get back to you. I want to look at your recommendations." And what I found was a minor deviation from American Funds Growth Stock of America to American Funds... I think mutual, basically, large cap growth, to large cap value. And that's not really how it was presented. And that kind of triggered this skepticism, if you will. And then 19 other colleagues, I'm thinking, they've probably made the decision only to find out that they did. And so that kind of pushed me into this, like, I want to do something different than what this experience was for me and what it was for the others.
Michael: So, basically, you were getting pitched to, like, swap from American Funds Large Cap Growth to American Funds Large Cap Value, generate a new commission for the advisor and incur a new B-share, surrender schedule, contingent deferred sales charge on it. And then realize, like, you're swapping me out to a mutual fund that is not actually really all that different, at the end of the day. I don't want to have the whole benefits of large cap both versus large cap value conversation. But, like, it sounds like not that different relative to what you thought you were getting as recommendation about overhauling your portfolio.
Andrew: Yeah. The presentation is concerned about the market. If you're concerned about the market, sure, you can go to value or you can go to growth, but that's not really moving the needle, if you will, on the whole premise of how it was presented.
Michael: So I guess, so help me understand this a little more. On the one hand, you're like, "Okay, I'm not so thrilled about the service and the experience I had. I'm now a little more skeptical about financial advisors." But you didn't come out of that saying, like, "Therefore I'm going to get savvy on my personal finances, so I never have to talk to one of those people again." You came out and said, "Then I'm going to be a financial advisor, and do it differently myself." So just help me understand that journey or that shift.
Andrew: So the shift was immediate. I didn't really know how to articulate it. I think there was a time when I thought investing could mean I'm going back to school. I'm going to study finance. And I'm going to go convince farmers to sell land for building development, and selling those houses to consumers. And so I didn't really know what it was. I just knew it was a form of investing. And so as I started going down the path, which was the new path, the new career, this is what I'm doing. I quickly realized that it wasn't the advisor that I was working with, in the shenanigans I experienced. This was a major industry problem. And I just wanted to see what could be done about it, just out of pure curiosity. Then I get into the industry, I go back to school, I'm studying in Virginia Tech. I thought, well, I've got to leave civil engineering to get some experience to know what the heck it is that I'm really going to be doing, as a practical matter. And the stories just started from there. I mean, there's a life insurance agent that, long story short, I'm taking the CFP exam, he's taking the exam. He's like, "What are you doing here?" And he was just like... He was really upset that I was there. And I'm sure some of it was youth. But we go to the exam, he says, "Are you ready to fail?" And I was like, "I sure hope not. The past six months has..."
Michael: Why was he so negative on you being there?
Andrew: Well, I think some of it was there was a group of students who, you know, from Virginia Tech, so there's kind of a gathering of people that he wasn't included in, and they're young, and kind of starting to push into his space. He's been taking this exam, at this point, it was the fifth time. And I think...
Michael: So that wasn't like... He wasn't saying, are you ready to fail, to be negative or mean to you. He was saying, are you ready to fail, because he'd been through it four times and failed?
Andrew: Yeah. I mean, again, you got to pull back the layers to see where someone's went before you under really understand them. And so I take the exam. And then this same guy, literally, no joke, failed again. And at some point, it's like, when is it just not in the cards? And the story is, he's ran into in Best Buy, and the conversation is, "Hey, how did you do on the exam?" And he pulls out his large Mercedes key fob and says, "Do you know what my W2 was last year?" And it's like, what relevance does this really have to passing the exam? So that was one. I overheard a colleague at a conference offered to do her a favor. And the response was, "Of course, I'll do it. I know you're going to bring on 100 million. So of course, I don't mind." I'm sitting at a conference a few years later, and the guy's telling his fellow neighbor, working with clients was like catching fish out of a barrel, so easy and little work. And I could go on and on and on about this.
But, Michael, this is why I'm doing it. Reinventing the financial advice industry is a pretty ambitious task. I mean, when I was in my 20s, that's essentially the frame that I had. But as you get into it, you're like, well, this is a monster. This is going to take multiple, multiple lifetimes, and a whole lot of influence, which if you're busy doing really good work for clients, you don't have that kind of time. But it was a lot of sales tactics, over-promising, under-delivering, hidden fees. And, of course, to that same industry, we know now that we're fishing in the ocean, not the barrel. It's not based on products, it's not based on AUM. Those models obviously have worked in the past, it's just not the approach that I took. I felt if your technology stack is good enough, it doesn't take any more time to manage $9 million dollars versus $100,000. And I think that's potentially where a lot of the problem lies. I mean, how many people have a CRM that has the social security number, the address, maybe a picture, but its capability's fully unused.
Utilizing Time Projections To Construct A Unique Fee Model [13:52]
Michael: Right. So then help us understand a little bit more, like, what is this fee model? How does it work when clients want to work with the firm?
Andrew: So, there was a software that I used in engineering, if that's what you want to call it, where you put your time in, in increments of 15 minutes. And we had to do it, and no one wanted to do it, including me. And as I got into the industry, I thought, "Jeez, if I'm going to do this, I'm going to have to keep using it." And so, of course, I didn't have the software, I just used Excel. And that was the point. Everything that I did, from conversations, to a retirement analysis, to insurance review, it was documented. How much time did it take? And over 2 years, 5 years, 12 years, 15, it was sorted by category, it was sorted by subcategory, time, and then there was basically the end result, is, if it took you this much time, how much you're going to bill.
So it's very much the...you just apply an hourly rate to it. But there's so much data that went into it, it just eventually became this, okay, check the box. This is the scope. The client needs this, not that. And it spits out and says, this is what the fee is. And so the premise of that then was just, this is the answer. This is how much it costs. Then it was a lot of comparing to the industry from commission based, fee and commission, fee only, to really see, is this substantiated? Is this something that would actually work or am I just spending a lot of wasted time? Because it was unproven, of course.
Michael: So were you charging straight hourly fees, initially, as you were doing this and tracking your time? And then evolved to a point of saying, okay, well, I pretty much know how much time this takes me every time I get a client that asks this, so I'm just going to set it as a project fee up front, because I know since I've now done it so many times.
Andrew: Yeah, that's a good question. I think it's really... For me, in the beginning, when I started the firm, it's a question of, it's going to work or it's not. And I very much felt, I just want to help, and how can I help? And if it's just investments, okay. If it's just estate planning, okay. If it's just retirement, fine. So it felt a little more hourly-like, or project-based, or limited scope. But the intent was, this is what it costs to get you where you need to be, and that's $4,000, $1,000, a quarter or whatever. And there was pushback, because as I'd mentioned, it's really easy to say, your fee's 1% of what we're managing, versus $4,000, or $5000, or $20,000, whatever the case may be. And so there was a lot of pushback. So I am a big believer in reflection and taking what you know, and saying, "Okay, what do we need to do to deviate?" And I lost my dad to brain cancer.
And I would say one of my biggest professional catastrophes was, "Hey, dad, no problem. When I get to town, we'll do your estate plan and get you on track, and so forth." Of course, it's very much a father/son relationship. So it's like, well, no, I'm your dad, I still know financial decision making better than you, even though you saturated yourself into this for the last decade. And that was the moment that I thought, you don't always have tomorrow. So, prospect client, no, you need estate planning, you need it bad. And if you don't want it, it's all or nothing. Because then that's where I lose sleep, or I start to question what I'm doing. And so it eventually now has evolved to, this is the scope. This is how we help. This is the fee to do it. And we're not going to start nickel and diming and saying, "Well, we just really want the retirement and the investments. Is that okay?" Yes, there are plenty of firms that will do that for you, but not OLIO.
Michael: So the essence of it for you guys, it sounds like, is, look, we do comprehensive planning. We're going to have a list of stuff that you need, right, just based on your situation. So, maybe you do have some portfolios to manage, maybe you don't. Maybe you've got estate planning needs, maybe you actually have that sorted out. Maybe you got some insurance stuff to look at. Maybe there's some tax planning. You're going to end up with a list of stuff to do, because you have time tracked so many clients in how long it takes you to do that, you actually have a really tight estimate of how long it's going to take you to do that. And so, every client gets some flat fee quote, nominally based on the time that you're estimating it's going to take. But from their end, it's just, we're going to give you these services, you've got these factors, which impacts how long it's going to take. You need these services, there are certain factors. Here's your all-in fee for us to do all this stuff.
Michael: And do you equate that back to an hourly rate when you're trying to set fees? I mean, from your end, does it still come down to, well, I've estimated this is going to take about 22 hours to work with the client. And we bill the equivalent of $300 an hour, so I'm going to give them a $6600 quote. Does it boil down that way to you, where you're ultimately making everything a time-based hourly fee? You're just really good at estimating what the time is going to be because you spent so many years documenting what the time is?
Andrew: Yeah. The only hourly input is the time tracking. It's not hourly work. I've done very few hourly plans or hourly-based engagement agreements. It's predominantly been, this is where you are, this is how we can help, and this is the fee to pay to get there.
Michael: Understood. But just when you have to decide whether my fee is $3 grand, or $5 grand, or $10 grand, how do you figure that out?
Andrew: It's basically a service matrix, from buying a mattress, to investing a portfolio, to doing a retirement analysis, a pension. You know, should you take the single life or the joint last survivor? How much is it going to take to review your auto insurance, your homeowners insurance, your umbrella, if you even have one?
Michael: How do you figure out what to charge for each of those?
Andrew: It's just time tracking and saying, okay, this is what we need the firm, based on the resources. This is really what it's going to take for it to make sense to do this work. To where it's not just, we can pay good talent, we can have an office over our head to bill. And so, that's basically the time and then the resources to make it all happen. And then presumably, you can back into the profit margin or whatever the net needs to be through that. But when you add it over many, many relationships, it's beyond 10, 15, 20 clients becomes more difficult. But it's basically a service matrix, that is, yes, they need it. No, they don't.
Michael: Well yeah, from their end. But just, I'm still trying to understand from your end, like, you do the math, the service matrix says it will take 22 hours, how do you know what to charge me?
Andrew: I have time per team member.
Michael: So it might not even just be, it's going to take 22 hours do this work. You're actually all the way down to, like, it's going to take 6 hours of your time and 16 hours of other team members' time. And your time is X dollars now, or the team member time is Y dollars an hour, which is lower, because they're not the lead. And you go all the way down to that level in figuring out how to do an individual fee.
Andrew: Yes. It's scheduling the meeting, emails back and forth, or scheduling software. It's meeting prep, it's preparing the agenda, sending it, anything that you want to add, or take off, or prioritize. It's the actual meeting itself, the follow up. So, each of the pieces that are a part of the planning, there's the time to do it, and then there's the person doing it that has a different rate than I have or someone else on the team. And so that's exactly what we're doing.
How Andrew Prioritizes Money And Time Saved When Structuring Fees [21:43]
Michael: And then each person's time, their hourly rate, you created some function of, what do I need to compensate them? What do I need to cover my overhead? What do I need to build a profit margin for the firm's, that we're doing this profitably as a business and it kind of grosses up to get to a particular hourly rate for each team member?
Andrew: Right. Yeah. From payroll tax, to health insurance, to 401(k), to you name it. This fundamentally is what we believe we need to provide to have talented people serving our clients. And this is what benchmark studies and salary surveys are saying. And so then we just start backing in to that number. So, as an example, $50 an hour for client success, paperwork, scheduling. Then you move to associate level or resident, what is their time? Maybe it's 75. Then you have a financial planner's 100, and then elite planner's 150.
Michael: And is that actually just the neighborhood of the rates that you guys end out billing, just as you actually create this and put all that together?
Andrew: No, the differences are a little bit bigger. I think it's 200, 100, 50. And I'm trying to decide, do we peel that back more, but then you end up in this, just like every variable, it doesn't need to be that precise if it's working. I just want it to be substantiated. And basically meeting with the client and saying, "This is the fee. I want to tell you exactly in dollar terms what that fee is you're paying. And if we can't put the fee back in your pocket, pay our team, then we'll just say keep doing what you're doing." Or narrow the scope at worse and say, "Okay, they really don't need a full fledge auto homeowners and umbrella review. Like, it's good." I mean, there's never a client that you can't share something with that would benefit them, but it doesn't mean you're full fledge, like, hey, you're going to pay $1,000 a quarter, $3000 a quarter for this resource.
Michael: So I'm struck that, at its core, I guess, it is kind of a time-based project fee, is sort of how you end up quoting clients. Except, I daresay, like, a lot of advisors that try to do that are still sort of roughly estimating what they think the scope is going to be and how long it's going to take. Whereas you have created a meticulous spreadsheet model, having detailed time spent for years and years and years, and have a, arguably, I suspect, a much, much better understanding of exactly how much time it takes across the team to actually figure out precisely what the fee should be for any particular clients in any particular service.
Andrew: Yeah. It is detailed.To me, in financial planning, the easiest expense to project or sustain is a fixed expense. And so, while the earth isn't flat, I felt, well, fees can be. And I kind of started with this and just really wanted to do it. And like anything, as one of the best financial planning databases in terms of knowledge, you have added to that over time, significantly, right? And so that's essentially how this is happening. Where you do an investment portfolio, you do a retirement analysis, you do education plan. All the way to the point... I'm having this conversation with a client who was the most wonderful human being I've ever met, the sweetest lady. It was the ideal relationship. I have no idea what I'm doing. I just need you to do it. And she calls me one day and says, "Andrew, I need $10,000 in my bank account." And she was furious. I have never heard her this way. And I just felt, oh, my gosh. I just couldn't get over it. It was that different. And so I said, "What's going on?" So I instigated a bit, I was nosy, if you will. And she said, "I have to buy a mattress." And I said, "Oh, okay." And I'm thinking in my head, like, "Ten grand. Whoa. Like, this thing..."
Michael: That's a sweet mattress.
Andrew: Yeah, what's it doing for you? But then I thought, "Well, tell me about how did you determine the $10,000?" "I have no idea. I've never managed a checkbook. I've never seen an account statement." Of course, her husband did all these things for her. And so I'm looking at this as, this is a basic fundamental decision of making a purchase and using dollars to do it. And she was completely overwhelmed, had no idea where to start, basically in tears. And so I said, "Don't worry." I sent her three mattress stores in her area, which was in Florida. And I said, "Go to all three. There's some brand overlap. And if a salesman says, ma'am, I'm sorry, you've been laying on this mattress too long. We've got other customers, get up and don't buy there." And I said, "Once you do that, give me a call and let me know. I want three mattresses from low end, mid range, and high end." And the high end actually was closer to that $10,000 number, believe it or not.
But I said, "Well, which one?" And it was, like, 500, $600 bucks, 2000, and I think it was, like, I don't know, 6000. And I said, "Which one did you decide was best?" And she said, "the $2,000 one." And I said, "Tell me more about that?" And she said, "Well, it was in the middle. It was comfortable. I felt..." You know, it's not the cheapest. So I'm thinking, this is the fundamental reason why this is not just about dollars, it's about the behavioral aspect. But my point is, we go through this exercise. This is what was important for her. She's paying a fee and she could care less about standard deviation, tax loss harvesting, sustainable withdrawal rates. She just needed to buy a mattress. And that's what we delivered. And I tracked my time the whole time, because I mean, little did I know I'd be getting in the business of helping someone shop for a mattress. But that's just another scenario that's one off that just as you build your content out, we're doing the same thing.
And the more you do it, the more data you have, the more refinement. So, maybe that took a little bit longer, because I'm just still figuring out where are there three mattress stores in Florida. But then that just starts to build on itself and get more refined. You know you're going to have that conversation, you know what the result is going to be when she comes back, and the transferring of the money. So, I mean, it's not down to the step of hitting submit on the money movement, but it gives us context into what it takes to help someone buy a mattress.
Michael: But help me understand in that regard. I mean, I'm presuming when a client comes in and you start the conversation of giving them financial planning advice, that, like, the prospect process isn't literally getting down to, do you think you might need help buying a mattress? Because if so, we need to add that into the quote for your financial planning fee. So, when you're doing all these time-based project fees or also complexity fees that are built off of time, how do you handle these situations where you didn't know when you started with her at the beginning of the year, you were going to have a mattress project? So, do you build buffer into the fee? Is this a... I'm envisioning this sort of, like, the engineering contracting world. Like, oh, you want to put in a change order on your project scope? Like, sure, we can do that thing for you. Here's the additional fee that it will cost you for the additional time.
Andrew: What we do do is have conversations in those early meetings that we can narrow in on a scope that says, this is what we're going to need to do for this client. And I'm not really in the business of doing limited scope. Here's your plan, I give it to you, it's worth no more than the paper it's on, and it never gets implemented.
I'm looking for long -term, usually rewarding, you accomplish a goal, we celebrate together, type of relationships. And so it's our job as financial planners to know the client, know their needs, know the scope, and then base the fee. I am pleased to report I do not hit a stopwatch when a client calls and say, "I'm sorry, this was out of scope. We've got to bill you some extra money." But what it is, is throughout the conversation, if the client is asking more questions than what we had allocated in time for retirement planning, or they're just detail oriented, they want to ask a lot of questions. Then as we review the scope, which is typically annually, and we're not necessarily amending the agreement annually, but if we find that we're spending a lot more time, either in different areas of planning or within one area, then we add that time back in at that time. So we are reviewing the scope periodically enough to where, it's just taking more time to answer these questions. And they're good questions. We don't want to discourage you from answering them, but we've got to bill for it.
How Andrew Adjusts Fees When Time Projections Shift [30:18]
Michael: So I'm just wondering because I'm guessing you may track this, how often are your time projections off, I guess either to the high side or the low side. How much variability is there relative predictions? Does it average out pretty well over time? Or are you still finding just clients have uncertain situations and life happens, and fees have to be adjusted fairly regularly, because just life happens and scopes change?
Andrew: The biggest scope change is from year one to year two and beyond. The first year is for us more education. It's understanding what is it that we're doing for you. It's getting to know their situation. Really trying to figure out the inner why. If we can figure out the inner why, we know we can get them there, because they'll be motivated to do it. So there's a lot of conversations in year one. We build the plan, we implement the plan, then we move to more rolling phase where we're making sure that if the rapids on the left are worse than the right, then we go right. But that's really the biggest difference, because the conversations shift more back office team oriented versus client meeting, meeting prep. I mean, we still have meetings with clients, but it's not topic based, or a few topics at a time where there might be four meetings over the course of the year to implement the plan. We're not analyzing insurance at the same level auto, home, umbrella, life, disability. We've already gotten the plan in place by year two. And we're periodically reviewing declaration statements to make sure that insurance company isn't hosing the client. But the estate plan is already implemented, the trust is funded, assuming there is one.
And so we've done a lot of the legwork to get it in place. Now we're just monitoring and maintaining. That's where the biggest break is. So there's typically year one fee and year two and beyond. And then there's periodic scope changes, change of employment, transition from working life to retirement life. I've absolutely blown a few fees, for sure. Where it's just like, we have lost so much money. And it's a learning experience, it's data. When I was building all this out, it would literally be, if the spreadsheet was available, I had it. If it wasn't, it's a post-it note, two hours, mattress lady, and I would pop it in. But now we've got a lot more data. We're really not tracking time as much now, although I think as we evolve, we're going to have to start looking at that. Because I started tracking as an entry level, I'm scanning paperwork, to now giving advice, and reviewing meeting notes, making sure that the meeting is ready, and then doing the meeting. But what it takes me may take someone different. So I think that there's got to be some spot checks.
But that's typically, it's either completely botched. There have been a few times where the scope changed, and we never billed for it. Or the scope changed, it was less than what it should have been. Or the time spent, the service was less. And so, typically, we make that adjustment on the rowing phase or the ongoing phase agreement. And it might be that that's a year and then we revert back to, okay, this is the actual ongoing fee because the client is now whole on what they overpaid essentially. And we've cut checks before, although it's rare that it's that off that we're having to send, "I'm sorry, we over billed you $4,000. Here's a check."
Michael: So help put this in context for us. What is a typical fee for a client in practice in this model? Like, just what does this add up to?
Andrew: If you were to do the AUM equivalent, it's right at 0.75% of AUM. We've got portfolios from $50,000 to portfolios of $15 million. And so, the law of large numbers, it has taken a lot of time, but it is an approach that is working. It feels more normalized and that we've got enough data where we know the core areas. We're going to talk about cash management. We're going to talk about retirement insurance. What are your risks? Maybe education planning. And it's really once we start building off of that as more satellite if you will, we're buying a mattress, we're buying our first home, or we're buying our retirement home or stock option analysis. That's really where we'll start to see some deviation. But the core fundamental planning piece is, there's a lot more data there than, say, the mattress story.
Michael: Sorry, and how many clients is it in total?
Andrew: We've got about 275 to 295 clients over 27 states, some of which are 401(k) plan participants. So, our goal is to service about 50 clients full fledge financial planning per advisor.
Michael: And I think you'd said, like, you don't charge fees as a percentage of assets. But if you did, relative to your assets, it comes out around the 75 basis point fee. So just if I'm doing math right, like, approximately $275 million of assets, approximately 275 clients to make the math easy, is average client has about a million dollars. If the flat fee ends up being about the equivalent of 75 basis points, the average client ends up with a $7,500 flat fee per year, with variability around that based on their complexity. Like, is that about where it adds up for you?
Andrew: Yeah. I mean, it's over the entire client base. I mean, if we've got a client, they're in their mid 30s, young professional. We might only have $50,000 of money that we're managing, but they've got the money to pay the fee. And we can substantiate it enough to say, "Hey, we want to put this back in your pocket through the advice." Their AUM fee could be 4%. But they're in a different position. Conversely, someone at $5 million, $6 million, $10 million of assets under management, their fee is probably going to be lower, and potentially even closer to the... If you think of the Vanguards, the Betterments, the Wealthfronts, on an asset base level, it's probably in that range. So, it very much depends on the scope. But yes, if you take it over a whole, that's correct. Average client is around $900,000, $950,000, in assets under management.
How Andrew Presents Time Projections In The Financial Plan [36:51]
Michael: So then help me understand just, how are you presenting these fees to client? Just, like, that's $7500 planning fee, if that's an average, obviously, some are lower, but I mean, some are higher. So I'm presuming you have clients in there who are 10-plus thousand dollar flat fees, which is... That's not a trivial number for quoting someone a flat fee. So, how do you present this to clients? I mean, you had mentioned you were sort of tying this back to your days of civil engineering, where you put together these project proposal scopes. Is that literally how you do it with clients? Like, a scope proposal with a, here's all the things we're wanting to do for you, and here's the fee that it adds up to in the end?
Andrew: We don't, although we have a presentable matrix that, if a client... I've used it a few times where it's like, well, what are we getting from this? And you break it down, setting up accounts, insurance review for whatever it may be, education funding analysis for your kids. Like, it's there, but it's not presented. The only thing that's really presented is the fee itself, and how we're substantiating it. And if we can't put the money back in their pocket, then we're just going to say that. Like, keep doing what you're doing. Call us. We are here... If this happens... I am anticipating this could happen in four years. Call us. But a big part of that is, if you think of a relationship, if you think of the plan and say, "Okay, well, what would be the equivalent of paying this fee today? Michael, I can put $100,000 in your pocket today, if you pay this $10,000 fee." But recognizing that if we're just doing the plan and turning it over to you, this thing's got to be implemented.
Like, you can't just say, because you've got a plan, you've got these dollars in your pocket. So then we move more towards the, well, we know the things that have to be done. We can't do Roth conversions for the next four years because your tax bracket's so high. But you're about to retire, and we're going to have from 58 to 67, potentially 70, to do these things. So what are we really basing the value on and the tax savings of doing some of these different strategies? And what would be the equivalent per year? So let's say the fee is $10,000, but the value is $20,000. So there's net $10,000 in your pocket. The future value conversation, I've always found clients just... The numbers are usually too big if it's a younger client. I mean, if it's a client that's 95, yes, maybe it's like, oh, okay, well, that seems reasonable. But if you say the benefit of working together and implementing this plan is worth $2 million, like, it just doesn't. Come on. Like, how many things are going to change? The scope is going to change, the goals are going to change. We know the financial plan is virtually wrong the day we do it, it's just basically a guide, and we know what we need to do for you. It could be tax law legislation, it could be the Federal Reserve policy, or whatever the case may be. So that's something I try to stay away from because it's just almost incomprehensible for most clients.
Michael: Understood. So then bring me back to it again, though. So, how are you presenting and communicating the value to justify a $7500-plus fee? Just how does that get presented?
Andrew: We break it down by the scope. And refinancing could be an example, or insurance policies are somewhat tricky. If there's an obvious, like, you've got a whole life insurance policy of $100,000, it's costing you $2,000 a year. Maybe you need a million dollars of life insurance that we could get. So those are a little bit more tricky. But there are virtually, we're trying to substantiate each area that we're helping. Retirement planning, should I do Roth? Should I do pre-tax? Investing, we're looking at a screen of fund cost, or asset-based fee, or commissions. And speaking of, that is one of the more challenging conversations in a prospect meeting is, "Whoa, I'm paying you $7500. I don't pay my advisor." And so part of the first two meetings, that's what we're analyzing, so that we know exactly when would we be looking at Roth conversions? Or would we at all? How should you fund retirement? Is it pre-tax? Is it Roth? What are the costs of your underlying investments? You know, do you have insurance policies that you don't need? Or you've got massive holes in your coverage and no disability?
Like, yes, now we're starting to add money back in, there's a premium that you're going to have to pay. And if you're like me and any other client, you're not going to die, you're not going to be disabled. Like, we have to factor that in, in these conversations. But at the end of the day, I want to say, based on what we know, based on the assumptions that we have here, and we go through those, and the goals that you have, we want to put conservatively $10,000 in your pocket, net of the $5,000 fee you're paying us. And then we're reviewing that. And the fees price for impact, we want to be held accountable to that. And if the scope changes, the fee changes. But that's essentially how we're approaching it.
Michael: So you may come all the way down. Like, we see a refinancing opportunity, you'll save $175 a month, so we'll put that in there. We see an opportunity to change the deductibles on your insurance, you're going to save $27 a month, so we'll put that in there. And you just start line itemizing out a projected dollar value of each? Is it literally breakdown to that level?
Andrew: It does, but again, it's more, like... And I think part of what's missing is, the first two meetings are free. So our onboarding costs are fairly high. We don't spend a lot on marketing, and brochures, and things like that. But we do spend a lot of time gathering data. Like, it's turned out to be a weed out, because it's just like, I'm not sending you all this stuff. But before we ever ask for that, we have a first conversation that is really designed to, what brought you here? And what does money mean to you? And have you worked with a financial advisor before? Really kind of understanding where they're at. Then the second meeting is more of a, okay, here's where you are financially. This is the trajectory that you're on. We see that you've saved a bonus of $77,000. And then we start breaking that into, these are the areas of opportunities. This is what you're doing well. This is a blind spot, a big one. And so we're really just delivering, this is the fee, this is what we anticipate the benefit being.
Michael: So I get how you quantify some of these refinancing a mortgage, that's like a pretty straightforward dollar savings, maybe insurance coverage, if you can help them replace a policy or adjusting deductibles, or things like that. Those tend to have pretty direct dollar savings. So help me understand how this works in some other areas. Are you doing this on the investment side? Are you doing it on the tax side? How do you quantify some things that aren't just an outright, like, here's your annual premium, and we're going to save you this much on your premium.
Andrew: Yeah. So, since you mentioned investments, let's do that. So we screen all of the funds, we screen, basically, this is what your investments cost. From, you know, we're not necessarily looking at the transaction fees, but commissions, underlying fund cost. And then we compare that to how we would approach it for them. And let's say that the fund cost for them by dollar amount is $4000. And the fund cost for us by dollar amount would be $1000. That's $3000 of benefit that we feel we can get them there because the portfolio is better. And it's going to put money in their pocket. Now, they're not going to see it necessarily. But that is an element of, we're hiring you, and that would be an explanation for that particular client. And of course, Vanguard has their studies on the perfect financial planners were 3% net fees.
The first investment conversation I have with clients is, we're going to invest this money. And it's possible that it goes down 15% and you're like, why the heck did we hire these knuckleheads? But that's the reality, that's a possibility that this could happen. So let's set ourself up. Let's move beyond the behavioral piece. And I'm an engineer type, so I tend to want to focus on the numbers, but also set the expectation. So it's probably more in the half a percent, 1% range, in terms of tax loss harvesting, which really isn't showing up in your portfolio performance, it's showing up on your tax return. So is it a tax planning item or is it an investment item? But the fund costs are a big one, and the rebalancing piece. So it's really basing it on where they are, where we want them to be.
Michael: And because you live in a flat fee world, all this gets converted back to flat fees. So the client were, I don't know, plucking numbers out of the air, like, they have a half billion-dollar portfolio. Their portfolio's got a expense ratio of 80 basis points, because they got a bunch of higher cost funds. You're going to use a bunch of low-cost things that cost 20 basis points. But you boil that straight down to dollars of, okay, on a $500,000 portfolio, your expense ratios cost you $4,000, hard dollar cash, ours cost $1,000, hard dollar cash. We're saving you a $3,000 delta. See, we've already knocked out a third of our annual fee with this $3,000 savings right here. So you're out of the basis points world and solely in the...we're talking about it in dollars, because we're quoting our fee in dollars.
Andrew: Yeah. And I try to stay in the present value. We do a lot of time value of money to make these determinations. But I try to stay in the present value, because it's easier to explain, it's easier to understand. If I say I'm putting $10,000 back in your pocket, and this is the 20-year equivalent, it's like, you're not doing anything for me. Like, this is 20 years from now. On the investment piece, the tricky part is, it's very easy to say, take all of the lowest Vanguard fees you can find, and let's push this as our prospecting. Like, this is what we're saving you. But in reality, you end up with four or five different actively managed funds with expense ratio of 1.19%. I'm not an active or passive person, I'm a persistence. And if you've got a track record over the appropriate time horizon, I mean... But it's got to be substantiated. It's got to be persistent.
And a lot of times, as you know, it often isn't. There are some areas that are, but it can be difficult. If a small cap value fund in 2008 lost 32%, but index small cap value lost 38, no one wanted to lose 32% in 2008. But let's look at it over 15 years, and maybe it's the index fund produced, on a $10,000 investment, $100,000 in compound fees. We're not really getting into that. But that is the premise of how we're making decisions on investment selection. And if you think of retirement, the 4% rule versus say Jon Guyton's, "Dynamic Safe Withdrawal Policies." Like, you're withdrawing more. Yes, there are some guardrails, there are some things that we have to be mindful of. But overall, you get to retire sooner, spend more, save less. And so it's really, where are some of these variables coming in, or where are you making the decision of how much to withdraw from your portfolio.
Michael: And then you're going to try to come up with some present value calculation of the economic value of doing that well.
Andrew: If it gets to the point of, if we've got, say, an engineer type that's like, can you send me the funds that you're using? Yes, we will present, okay, here it is. This is the supporting documentation. But most people are not having that conversation. I think that's, to some degree, it sets the stage for a lot of time for one client to answer all these questions or have to support. But fundamentally, I believe we've got to substantiate what we're doing and say, if a client says, "What am I getting? What am I paying for?" This is it.
Michael: So when you create this to formulate it for a client, like, I guess a prospect you're still approaching, is it literally just a proposal? I mean, I can imagine in my head, like, a one-pager that just says, here's 11 line items of the things we're going to do for you. We're going to help you refinance your mortgage, and we're going to do this Roth conversion, and we're going to review your insurance policies, and we're going to help you fix up some not so great stuff in your portfolio. I got 11 line items of the things I'm going to do in the comprehensive planning process. Each one has some dollar amount next to it. And then somewhere lower on the page, there's just a total of that column. Here's all the dollar things we're going to do for you in the coming year. And hopefully, it adds up to more than $7500, or whatever the client's fee is. Do you actually break it down to that level in presenting to them what the value is relative to the fee?
Andrew: Yeah. So we have, I think it's about six pages. So it's a cover page with the client's name. It is basically an agenda, and our philosophy. Like, this is why we do what we do. It is how we can help. So now we're getting into Virginia's stance on long-term care policies, or Virginia's stance on 529 plan deductions, the benefit of an HSA through employer contributions via payroll rather than putting it in April before you file your tax return. So there's two or three, four, bullet points in each of the core areas of planning, of which can blossom, but we're keeping it on one page. I don't want 60 pages of we're substantiating how we're going to help. They're not going to read it. Then we go into a roadmap of, this is how we're going to help you. This is what we suggest that roadmap look like. We're going to tackle this in November. We're going to tackle this in January.
We've actually got a deadline coming up for your employee benefits, it looks like, so we need to look at this first. But we're going to come back to it and get what we need now, but really focusing on this in March. And so that gives them kind of the overall timing of when we're going to tackle certain things. And then we take a much deeper dive into goals, and expectations, and what it's like to work with us. And if one of the things that... I would say probably the hard way, I have found that to really help a client, the best thing you can do is to tell them how you're going to work with us from the beginning. And that's if you're uncomfortable with us getting in your wallet and pocketbook, we're not a good fit. And so we have some of those conversations, and present the engagement agreement, go through any questions that they have.
Michael: So you do get to a point of adding all these up. Like, we have determined if you work with us, your estimated dollar savings is going to be $11,300, and our fee is $8,000. And saving $11,300 is worth more than $8000. So clearly that means you should work with us. Does it get to that level? Are you putting it down to an imprint to that level with them?
Andrew: It's more of a conversation. And these are the things that we want to do to get you where you want to be. And I say, even in a follow up email, like, our relationship is a partnership. And there will be things that we believe you should do. And you may decide that you just don't want to do it. You don't want to refinance, you want to pay off your mortgage. Like, fine, but we're telling you the best way to get you where you want to be. But based on what we know, under these things, these are the highlights, and here's some significant ways we feel we can help you. Actually, I'll share this because I think this probably helps from a client perspective.
So I'm reviewing a loan estimate for a client that's refinancing. And on the loan estimate, they're charging the new issue rate for a title insurance policy, which was like $2200. And we had done so many refinances. I'm like, the sniff test just says this seems high. So I shoot him a note and I said, "Hey, I've reviewed, everything looks good. But I would ask about the refinance rate on the title insurance instead of the new issue rate." And sure enough, they had made a mistake.
Determining The Financial Plan Complexity To Frame Fees [52:37]
Michael: So now, kind of coming back to the earlier conversation around the investment management side of things. So how does this fee structure work for you when it comes to their portfolios? You framed this very heavily around just the time-based estimates of what it takes to do everything, whether it's a Roth conversion analysis, or set up your retirement distributions, or review your insurance, or buy you a mattress. So is it the same framework on the investment end, where I'm going to charge you something to manage your portfolio because it takes time, and everything takes time, and you guys rigorously measure time. But it's going to purely be a time-based function. Like, we're going to charge you if we have to rebalance your portfolio, because I got to handle that account. But I'm going to charge you the same thing, whether it's a $100,000 account or a multimillion-dollar account. Because if it's one account to rebalance, I know how long it takes us, and here's the fee to do it. Is it the same kind of approach for you on the investments end, where it's all just this time-based dynamic to estimate the scope, and here's what the fee is going to be to include that as part of my service?
Andrew: So from your perspective, what would be the essential...just one example, something that would go into that recommendation. And that's my recommendation.
Michael: From a client's end? I'm going to have to do some analysis of what you've got. I'm going to make some recommendations about what you need. I'm going to have to implement some trades to sell X and buy Y. I may have to do some tax evaluation of the consequences of that, depending on where those dollars are held. I may or may not do some asset location evaluation of where I'm going to hold that if you've got a broader portfolio. And all that's presuming we have the dollars with our platform. If not, I've got to do some account openings and transfers.
Andrew: All of that, everything that you just mentioned is what is a factor in the fee to manage investments. So investment policy, investment questionnaire, or conversation. Maybe it's not, hey, fill out this questionnaire that's somewhat meaningless, because you're going to tell me today that the market is down, you don't like the market. The conversation to me that's better is, what if we go on... We have a new relationship, we go to a cliff, and we're going to do an exercise. And I'm going to say, okay, I know we're new clients, but we're going to do an exercise. And I want you to stand as close to the cliff as you're comfortable. And husband says, "Oh, this Garden State of a dude isn't going to push me over the cliff." And the woman says, "I don't care. It's cold, I'm going to sit back and just chill." That's actually a better indication of risk, not the questionnaire.
But all of these things, whether it's the conversation, it's the investment policy, you have a taxable account. Well, there's some opportunity here with tax loss harvesting, or we do have a few tiers of AUM thresholds. If it's the...you know, you've got total bond, total U.S., total International. But if we're starting to build, we need more diversification. Maybe there's a little bit of time. But what we're really doing is starting to push more into the account level, the account setup, the investment policy, the rebalancing. Is it one time? Is it two times? That's what's driving the fee. But a lot of that demands the technology stack is good enough, that we're managing money and thinking through it as a percentage, not a dollar amount.
Michael: And I guess I'm just curious, what does this typically add up to in practice? Because I feel like you have a very unique perspective... seriously, at the end of the day, how much does it take? How much time does it actually take to manage a client's investment account? Do you know offhand? I mean, just what does this portion of the fee typically add up to for clients of the firm? I mean, is this still the majority of a fee? Is this, like, no, actually, we use so much technology, this is basically, like, $500 bucks a year to our clients. What does it add up to in practice?
Andrew: Well, I can tell you, from the team's perspective, some of these custodians, it is more time to set up the daggone account than it is to manage the money that's in it. But Albert Einstein said, compound interest is the most marvelous mathematical tool in the universe. Investing, really, I mean, there's still clients that no matter what we deliver in insurance savings, or tax savings, or whatever, it's still, what was my performance? Because we are in a world where financial planning is a synonym for investing. But when you really break it down, open an account for a client with $9 million, they probably have a slew of things going on.
Michael: I'm still just curious to know what this adds up to, at the end of the day, on the investment side of things. I mean, just at the end of the day. Andrew, I need a bunch of financial planning stuff, and I have a million dollars to invest. You're going to do a bunch of things on the planning side, and it's going to cost $5,000 or $6,000. You're going to manage my million-dollar portfolio. When you do your time-based equation, how much of my fee is going to be your process to figure out how much it's going to cost to manage my investment account?
Andrew: Seven hundred and fifty dollars. We already did the screen of your portfolio. And we know what the costs are. And you could add that, well, that should be an add back. Because we did it, we just did it as a prospect, not a client, but we need to recoup that. Like, some, sure, if that's the approach you want to go, fine. But 750, we've got open two accounts, we've got to do an investment policy statement. We've got to have a conversation about how close you get to the cliff in this exercise. We've got to have the conversation about... It's possible that your portfolio goes down 15% and you're six months away from retirement. How's that going to feel? We've got to talk about the money you need today has got to be in cash. The money next year, think of it as a CD for one year. Yes, you get a little bit more interest, but in one year, it's maturing, and you've got it. So that's really where the time is spent.
Michael: And is that truly typical? Just a client at that size, $750, is the neighborhood of what it costs when you do your sort of project-based fee to figure out, well, how much time is it actually going to take for us to do this?
Andrew: Yeah. I mean, and maybe less after we've implemented it, because we've done the investment policy. It's the rebalancing. And again, if the stack you're using for technology or the one software you're using allows you to do it in scale, then... I mean, how many sub-advisors or how many people now are charging 0.1 basis points for... Well, 0.1, 750, I mean, actually in this examples, is exactly the same price.
Michael: Yeah. I'm struck with that, right? As you said, the fee in the aggregate might still add up to something close to 75 basis points. It might be $7500 for a million dollar client, which is not dramatically different than others out there. And even though we talk about the proverbial 1% fee, a lot of advisors start putting in break points and average revenue yield for advisory firms. If you just take all their fees and divided into all of their assets, usually comes out in the 70 to 80 basis point range. So, when you put the discounting and the occasional big client, all this stuff in there, that's what it averages out to, which is almost exactly where you guys are. But just literally mechanically, from a time-based perspective, I'm struck that just the actual investment management portion of your fee ends up being basically 10% of the fee, right, $750 bucks out of $7500. And the other 90% is all the other financial planning stuff.
Andrew: Well, it's somewhat of an anomaly in your example, because the fee could be 20,000, but that fee is still the same, right?
Michael: Right. So if I've got more planning complexity in the investment realm, it would be smaller. And I suppose the other way, right? If the rest of my planning life is fairly straightforward, but I've managed to make a complete mess of my investment accounts, and I have 17 of them spread all over the place, and there's a whole bunch of stuff to dissect. I'm sure that that investment fee can add up more, or at least particularly in the first year, since you've got a lot of cleanup to do, if I come with a messy situation. It's a fascinating example to me because again, for all the discussion around fee compression, the total fees you charge for the total stuff you're doing is not that different than what most other advisory firms are at.
But the composition of how you get to that fee, literally down to actually charging for the relative time, looks completely different. But I'm not actually sure that the time is all that different. Because we did our Kitces research study on advisor time and where advisor time goes. And the average advisor spends 10% to 15% of their time on investment related stuff. Just if you look at total hours in a week and how much time we typically spend, it comes out to be right around 10%. So structures even from that end, a lot of us are charging the proverbial 1% fee when 90% of our fee is planning work and 10% is investment work. You have a completely separate fee structure system, but it ultimately adds up to a similar fee and actually has a similar allocation of time. I just feel like you're just owning that a little bit more directly by getting to it from a project-based formula, with a caveat that I'm presuming, like, when you get clients that have less investment need and more planning work, you get well compensated for that, because you actually charge based on the planning work being done.
And those of us who are in an investment-based world may get disjointed. Right? Not that the fees are necessarily lower, you average out the same as where other firms are. But your fees are probably much more consistently aligned to the amount of work that gets done for the client than the average advisor, where it may average out but we end up much more wildly off because we get the super simple client with $3 million dollars and the super complex client with $300,000. And we charge 10x for the million-dollar client who was actually easier. But you don't have that problem because you set the fees much more directly to the complexity.
Andrew: Yeah. Well, the mattress lady has one account. But the mattress lady needed a mattress and had never made a financial decision in her life. So, I don't want to be squeezed in the investment conversation. Frankly, I love it. I mean, how many people do you know that says, "Okay, I've got a 401(k) , I've got a Roth, and a pre-tax. Well, I'll do 50-50. Like, that may very well be a good idea. But generally, there's a right or wrong answer. You're in the 37% tax bracket, you're going to be in the 15, maybe, in retirement. But I don't think the investment conversation, like, the value is so substantial because, again, compound interest. So if we took all of the areas of planning and said, well, we're going to assign a percentage of what we're doing based on the value that it's going to contribute to your success in your financial plan, investments is a big one.
But when you add in investing, taxes, insurance savings, refinancing, it just compounds far beyond that. And we've got a lot more control and a lot more levers that we can say, "Hey, you don't want to take a lot of risk? No problem. We can do these tax planning strategies, and we don't have to lean as much on those investments." So I think investing, our portfolios aren't sexy. They're proven. I would love to rebrand all of our investment strategies, just for context into, why's this the blue blazer? Because it's good for all occasions. That, to me, would be sexy, but the strategy itself is not. It's proven, it works. I think of...you know, there's commercials out there. We don't have cookie cutter portfolios for our clients. What's wrong with that? It's proven, it works. What else are you doing?
Michael: Well, and what when it's only 10% of your fee, and it's primarily driven by the just raw, actual administrative time to implement it anyways, and it may add up to less than 10 basis points. You don't really need to do a lot to try to show more value there because it's not where you're driving your value. It's not where you're driving your fee, so it's not where you're driving your value. It kind of frees you to focus more on the planning stuff.
Andrew: Yeah. And this is just the world that I have created for myself. Then there's the incredibly amazing, touching, financial planning commercial for once. And you're, like, "Wow, that was awesome. I want to even go there as a client." That was just such a powerful commercial. And then you watch the financial advisor giving the recommendations to the client, presumably, in this case, and they're increasing college cost and the comfort score, probability of success is going up. What software are you using? I know it's just a commercial, but it's just, like, that's how I think. And that there's a lot on the line here. If you've got $30 million and you're invested in a hedge fund, you can afford to lose a few, and you'll probably be okay. But everything that we do, if we're really doing it for the reasons that we're doing it, it's like, it should count. It should not be overly cautious and conservative, but it should also be realistic, and that, yes, you don't have to save $100,000 if you make $200,000. And you can retire at 70 instead of waiting till 86.
Michael: And then just remind me again, so how often are you coming back and actually revisiting to change the fee? It sounds like you will look every year at sort of the ongoing scope of services, but may not change every year unless it's pretty material.
Andrew: Yeah. A couple, actually. So scope change, not always, but typically, after year one, because there's a lot of time in year one. But really, the scope is moving more from conversations with clients to back office in year two and beyond. But let's say that we've made that shift and now you've been an ongoing client for five years. Job change, that could be a scope change. Buying a house, moving to a new city, that could be a scope change. Divorce, getting married, that would be a scope change. So it's those fairly significant... You have a baby, now we're incorporating education planning. Or your child now is fully funded and we're no longer confirming 529 plans at the account, determining, should you do it, should you not. So the scope has been reduced.
How Andrew Adjusts His Scope And Fee Model When Life Changes Occur [1:06:29]
Michael: I mean, I get it when they've got perspective changes, but I'm going to assume, most of the time, or well, at least some of the time, you're going to do your annual re-scoping of the fee. And then four months later, they're going to find out that there's a job change, it's causing them to move to a new city. And it turned out, their spouse doesn't want to go with them, they're getting divorced. So, didn't know in January, when we talked about the annual fee that I was going to have a job change, new city, and divorce. Now we do, you are my planner, I'm expecting help. So how do you deal with the midyear life changes that happen?
Andrew: If it is a persistent change, like, this is now part of the planning, then we would amend the ongoing agreement. Versus if it's, I'm divorcing... that is an immediate call. This is a scope change. I'm so sorry. Like, this has got to be really difficult. We're going to schedule a meeting right away, so that you know we're here.
Michael: And I guess I just got to ask, because you had said at the beginning, in the civil engineering world, everybody does the timing in 15 minute increments, and it drives them nuts, but you do it anyways just because that's how it's done. Does this time level focus drive you nuts, where you are now? Is it still the same challenge? Does it feel different when you're doing it as an advisor? Just how do you handle the time focus?
Andrew: To be honest, explaining it is what's nerve racking. And I'm not saying you, in this conversation, but it's funny... I've approached it from the beginning this way. I didn't really know how it would take shape until it did. It makes sense to clients. Like, they say, "This makes sense. If I get a hair color, or a perm, and a eyebrow wax, like, okay, this makes sense. Thank you." It's the people in our industry... One very influential person, and friend, and I could see myself carrying the casket type of thing, said, "This is not going to work. It is not going to work." I joke with one particular team member, like, you do you, I'll do me. Keep doing what you're doing, if it's working. I'm not criticizing. The thing that I would criticize is the client not knowing what they're paying.
The Surprises Andrew Experienced Throughout His Journey [1:08:41]
Michael: So what surprised you the most about trying to build your own advisory business?
Andrew: My head just exploded because there were a lot of surprises. And I think the whole premise of this podcast is just brilliant, because it's this award, that award. Like, oh, they must be doing things so well. I wish someone had shared that this would not be a Hollywood movie with a thumping soundtrack and special effects. It's not always going to create those warm and fuzzies. If that's what you're looking for, great. But I would say, save yourself some time and go watch a "Rocky" movie. For me, it was purchasing a firm. As I said, my father was diagnosed with brain cancer within two years of closing. Here, I'm trying to get to know clients, and my best friend, my mentor, my dad, the source of all solutions, to some degree. I love building things and surfing. And so that was shattering. I'm not one to be confrontational. Like, again, you do you, I'll do me. I'm more of a, I'm just going to crush work. My mojo is my work ethic. But you get what you tolerate. Whether it's a client or it's a team member.
I think that was, to some degree, a rude awakening. Because when I was in engineering, I never was managing people or I had no real experience. I was a design engineer or technician, where I'm giving something to someone. I'm getting feedback of, hey, you're really good, but you're working really fast. So I was never in a management position. That was an interesting, challenging, at times, transition. I think I'm big on let my work speak for itself. And Dale Carnegie said, "Be more concerned with your character than your reputation. Your character is who you are. Your reputation is just what others think of you." You can't ignore both. You can't just do something for the sake of your reputation. But you also need to worry about your reputation. If Michael Kitces posts a banner on the top of his website, OLIO sucks. We may not get to hire anyone. I mean, I think you've got to consider it. And I never would have thought hiring decisions could be the single most important factor in putting your clients' interests first. And I expect a lot of this team. It's good work.
The stories that... We had a guy who was a prospect, had no umbrella insurance. And I was like, for some reason, stars aligned or whatever, "We need to get you an umbrella policy." And I guess that's why people say don't ignore your intuition. We did. Six months later, his daughter puts the pencil underneath her best friend's seat, she sits on it. And now he's making a claim on the umbrella policy. It is so rare that that happens, but we've got to... It will. And to me, early on, it was, you're a great person, you've got good character, you show up presentable. Our application process, thanks to two wonderful women on our team, has completely been revamped to dive into that. Because I think it's so important that we know, to the extent that we can, everyone, to some degree, is on their best behavior until they're not. But to the extent that we can, from content, to interviews, to testing, to the "How to fascinate" assessment is probably one of the few that I have been spot on.
If you read my assessment, it is like, holy smokes. And that actually is true for a lot of people on the team. So just the experience and building it out. I was a big believer, you've got to look at where you want to go first, and then you got to go there. Those were areas where I was surprised that I should have done that early on. Because I'm thinking it's going to work or it's not. If there's an employee, then great. But I'm not building out HR employment agreements and things like that. But those were all areas that I was surprised, and probably naive.
What Changes Andrew Would Make If He Could Start Over [1:13:23]
Michael: So anything you wish you'd done substantively differently? Like, anything you know now you wish you could go back and tell you from five or six years ago, when you were launching OLIO?
Andrew: Yes, there are. Fundamentally, no. But in terms of expectations, work hard and smart, not one or the other. Where I come from, you earn your high fives. And I think the residency program is one of the best strategic decisions that we've ever made.
Michael: Meaning, having resident advisors in your firm?
Andrew: Right. I mean, that's a high five to Jon Guyton and Andrea Eaton at Cornerstone. OLIO is just a recipient of their great work and the experience that Christine Damico and Amanda Ansell had, who were both leading that. I have a few rules, show up, work hard, be resourceful, and listen. Whether that's team members, its clients. We bust our tails for our clients in every way possible. But I expect the team to do the same for them. And starting was all about clients and what they needed. I have to admit, it was more, like, you're here to serve our clients. Now it's, they are here to serve, just as I am, but it is a little bit different because I do want them to succeed. And I want this to be a professional relationship that we're all proud of. And I don't want to just get to the top, I want us to stay there. I want us to still keep creating. The flat fee is just one piece of what we're doing.
But going into this, I had no clue what to look for. I just knew I wanted to make an impact and I might need a team, but intelligence is important. Talent is important. Your competitive drive is important. Being able to fail is important, but also being resilient. I knew none of that coming in. And so those would be the things that I would change. And it's not that I'm changed, it's just the awareness and maybe the self work, if you will. I think it was Joe Duran, maybe, said that, "At least the good financial advisors have raging insecurities." That's a man that's growing beyond his asset base. He's recognizing that, we all go through stuff, fundamentally. And it's just, you aren't necessarily approaching that conversation until you're right there in it. And it's really hard to look back and say, "Well, this is what I would change." Because I didn't know.
But now knowing what I knew, I guess as they call it in golf, you get a mulligan, you go back. Yeah, for sure. This is what we do. This is how we do it. You're going to work hard. This is not going to be for everyone. But it is going to be extraordinary. And you may decide to leave, that's okay. But you might decide to take something that you found tremendous in your experience, and it propels you to great things.
Andrew’s Advice For Newer Advisors [1:16:17]
Michael: So, any other tips you would give for newer advisors coming into the industry today and getting started from here?
Andrew: I would say, be very mindful of the extinction, to some degree, of the travel agency business. I think we're flirting with that. If technology can do what we do, which I'm not saying that it can, but a lot of the industry, if we see this massive shift of these retiring advisors, I think you had noted, it's like a third of advisors are approaching retirement. It'll be a very interesting transition. I'm excited to see where the industry is going. I think we're moving in the right direction. Steve Martin once said, "Be so good, they can't ignore you." Look for something more than a fee-only RIA, charging 1% of AUM, putting clients' interest first, and suggesting that financial planning is what they do, but it's really just investment management.
Your first job could set the stage for your entire career. And to me, that is one of the reasons I was in the camp with the residency program. Christine and Amanda, like, it's been great. But I was in the camp of, we're really going to pay these people for three years, train them, for them to leave and go benefit another firm. Yes, we are. If we really set out to push this industry, not only can we create the client experience that we want, but we can help create the client experience that other advisors could get a tidbit from a resident. Like, yes, let's do it. And I would say, create your own pressure to succeed. Don't let others create it for you. I think of stress, to some degree, is a privilege. And what we do is stressful. I mean, whether it's a money movement, or the market's down, or you forgot to make a tax payment.
But if you want to set the world on fire, you better know how to put it out. And it takes those types of situations, and being unique and different, sometimes just takes pursuing what you believe and what you want to do, and sharing it. And if you're at a place, they say no one cares about saving for college or 529 plan contribution. But you really believe because you had to pay for all of your education yourself, you really believe that this is meaningful, come work at OLIO. That to me is someone who has passion, who understands the benefit. And yes, there are places like that for you to shine and do what you want to do.
How Andrew Defines Success And What It Means To Him [1:18:32]
Michael: So as we wrap up, this is a podcast about success. And it's one of the themes always comes up, is, even the word success means different things to different people. And so as you're on this wonderful track with the growth of the firm, and $275 million, 275 clients, and a model that your colleagues said wasn't going to work. But here you are going along. So the business is certainly growing successfully. But I'm wondering, how do you define success for yourself, at this point?
Andrew: I think in the work that we do, what if there was a technology that continued the client experience far beyond the delivery of a financial plan, and monitoring that plan. Or simply put, measured your heart rate as you're about to make a large financial decision and presented you with the opportunity cost of doing so. It doesn't mean it's the wrong decision, it just gives you the information so you know its impact. To me, that is amazing. I have a story, Mr. Goodbar and a coke. And if you go back... I went to a convenience store two days a week from the time I was 5 until 12. That was when I stopped going to the babysitter. And Monday through Friday, we would stop by a convenience store called Bucko's Pantry, and I would buy a Mr. Goodbar and coke.
And when I got into this industry, I thought, well, I have a money script. Evidently everyone does. So what would be mine? And this was just one example of that $2 a day, 50 weeks a year, because we inevitably went on vacation, or I wasn't at the sitter, maybe I was sick. What would that mean to me if that money was set aside from 5 till 12? At 18...12, contribution stop at 18. I was aware now that this was created, but it was for my retirement. We're on track for $1.5-plus million, just at $2 bucks a day. And I don't want to micromanage the types of decisions that you're making day to day. But just the information of knowing, that, to me, is incredibly impactful. But I think, to me, and my role is more strategic thinking. It's ensuring client relationships, or transition, but they feel that they're not passed off. I think that's been a challenge is, to grow, you've got to think strategically. You've got to focus on processes, and procedures, and new things.
And it's hard to meet with a client every single day, three clients a day, and have the time to do it, but also not sacrifice other things. Financial planning has been my career, my hobby, my significant other, at times. I think success to me would be the type of work I'm doing within a normal work schedule would be similar to those things. I'm able to surf a lot more. Some of my best ideas come sitting on a surfboard, just past the break. And I'm the type of person that looks at a blank piece of paper and wants to start creating. And so having that time, but knowing that clients are still in a really good place, and maybe even a better place because our team is that stellar.
Michael: I love it. I love it. Thank you so much, Andrew, for joining us on the "Financial Advisor Success" podcast.
Andrew: Absolutely. Thanks for having me.
Michael: My pleasure. My pleasure.