Scaling To $3.5M Of (Flat-Fee) Revenue By Leaning Into A Unique Retirement Income Approach: #FASuccess Ep 495 With Bradley Clark

Podcast Player:

Resources Featured In This Episode:

• Bradley Clark: LinkedIn
• Kitces Report: How Financial Planners Actually Do Financial Planning
• Retirement Income Certified Professional (RICP)
• Leveraging Educational YouTube Videos To Drive Hundreds Of New Clients Per Year: #FASuccess Ep 445 With James Conole
• Dunbar's Number And How Many True Financial Planning Client Relationships You Can Really Have
• "Be the Bird" by Bradley Clark
• The RISA Framework: A Systematized Approach To Personalizing Retirement Income Strategies For Clients
• "What Investors Really Want" by Meir Statman
• DPL Financial Planners
• Recruity
• TestGorilla
• "Mindset" by Carol Dweck
• "Thinking, Fast and Slow" by Daniel Kahneman

Full Transcript:

Michael: Welcome, Bradley Clark, to the "Financial Advisor Success" podcast.

Bradley: Thank you so much, Michael. I've been looking forward to this.

Michael: I'm really excited to have you on today and to get to talk about, dare I say, nerd out on the dynamics of what it takes to scale flat fee advisory firms, like, where the firm just has one standard flat fee, we charge X dollars for each client for the services that we deliver. What we see from the Kitces Research studies we run, and even data internally at AdvicePay is that there really is a growing trend towards this business model. But when we look in the landscape, most of the firms that are doing it are still quite small, typically solo practitioners.

And so, I watched as this has played out over the past couple of years, more and more folks in the industry are raising this question of, well, can these flat fee models ever really scale if almost everyone doing it is a solo? And it hearkens back to me a little to, like, 25 years ago, we said the exact same thing about the AUM model back then. Almost everyone doing AUM was a solo. A big firm had $100 million of assets with two or three advisors. Most firms had $10 or $20 million of assets with a solo. And the dream was like, maybe someday someone could scale to a billion dollars of AUM because the revenue model felt so different. Like, if you were 25 years ago and, like, $100,000 IRA rollover client came in, which is a pretty good client back then, you could go to a “Growth Fund of America” and get your 5.5% commission minus grid cut in your bank account in, like, two weeks. Or you could do this strange new AUM thing where the client will pay you 250 bucks three months from now when your first quarterly fee hits.

And the whole question was like, how could you ever scale making 250 bucks in three months instead of getting $5 grand in your bank account in two weeks? And then here we are today with firms that have, like, hundreds of millions and billions and tens of millions and up. And so, it just creates this question to me, are flat fee models really that difficult and challenging to scale? Or is it just different in the way that AUM was so different and alien to commission-based models? And so, I know Brad, you've been executing this model, operating on a flat fee basis, now, actually managing well over a billion dollars of assets with sizable teams. Like, you are living the scaling journey. I'm excited to talk about the reality. What does it actually take to scale a flat fee firm and, like, what are people missing that they don't think it can, but clearly it can, or clearly you are?

Calculating The “Minimum Efficient Scale” For A Flat-Fee Advisory Business [05:02]

Bradley: Right, right. So, one concept I learned, I believe in business school is the concept of minimum, efficient scale. So, it could be a distribution center. It could be any business or location that says, how much throughput, or revenue in this case, constitutes minimum, efficient scale for a given business, or in this case, revenue model? And here is my belief. The minimum, efficient scale for somebody that's going to do a flat fee enterprise is substantially higher than the minimum, efficient scale for somebody is going to do an AUM-based enterprise. So, you can be viable as a sole practitioner as a flat fee firm, or you can be viable with 20 employees as a flat fee firm. The between kind of 2 and 18, I think, is more tenuous because the amount of revenue you actually need in an enterprise that's flat fee is, I would say, 2 or even 3 times higher than what you need in an AUM.

And so, that is that is what I have concluded. I'm sure not everybody agrees. But the implications are you have to either decide to be tiny lifestyle, make a job, or you need to commit to an enterprise. And if you wiggle around and you're kind of unclear about which, you could be in no man's land. And then there's implications for the capital requirement, capital required, and everything else.

Michael: So, I'm fascinated by a lot of things you said there. I will certainly...the idea that you can run a great lifestyle firm and you can run an enterprise, it's the part in between that's tough, very much resonates with me. I've long felt like there's this dangerous middle in between. When you're too big to be small, you can't just make the decisions around yourself because now you've got other employees and advisors and teammates and partners. But you're not big enough to have all the infrastructure that the business runs. I think as you put it, like, the minimum, efficient scale.

And that the in between part is tough. I mean, I think that's why so much of the merger and acquisition activity right now are firms somewhere between a couple hundred million and just over a billion of assets, because that that is the in between. Depending on what your revenue per employee is times 20 headcount to get to the number. Like that, that that in between of 2 to 18 employees, basically, is a couple hundred million up to a billion something of assets. And that's where the M&A is happening of people saying, you know, "Not fun anymore. Don't have the capital. This is challenging. Maybe I'll just let someone who's running an enterprise solve these problems. I'll go back to being an advisor." But I am curious to hear more, like, why do you think the minimum, efficient scale revenue dynamics are so much different and higher for flat fee firms versus enterprise? Why isn't revenue just revenue?

Bradley: So, I guess I would do a little math. The way I would look at it is, and maybe I'm missing something, but let's say you have 200 clients. And in a traditional AUM shop, I mean, our average client is $4, $4.5 half million at Schwab. But let's take that down to 3 million. You know, 1% of that's $30 grand, and assume a contribution to overhead of 60%. So, $18,000 of contribution dollars, $18,000 actual dollars per client. In the flat fee world, say the revenue per client is $10,000, essentially for the same work. And the contribution is now $6,000, not $18 [thousand]. The overheads are the same. So, it becomes a volume business, right, unless I'm going to be out there charging $30 grand as my flat fee, which is not going to happen.

As you pointed out, the beauty of the AUM model is that the pricing has extremely low salience. So, it fades into the background. But if I stick $30 grand on my website, I'm not going to get buyers. So, I'm running more of a volume business. So, it's the volume business and the much lower margin dollar intensity per client that drives my conclusion on minimum efficient scale. So, that no man's land that you put your finger on is exacerbated in the flat fee world. And I don't think a lot of folks in the flat fee world have internalized this. And if they want to go enterprise, they either need to capitalize it or they need to be so good at marketing that they can grow it quickly and use the revenue to finance or break through a reach escape velocity to minimum, efficient scale.

Michael: And what do you think of as minimum, efficient scale? I mean, is it a literal revenue number? Is it a head count number?

Bradley: Yeah, I think it's $6 to $8 million in revenue. I know we can debate all of that. I'm almost halfway there. As I've modeled this, I think the P&L [Profit and Loss statement] for a flat fee enterprise starts to settle out and really look like the P&L of an AUM firm at $6, $7, $8 million of revenue. Between starting it and reaching that level, most firms are going to struggle because of the reality of having far less margin in each client.

Michael: And the less margin is because there's sort of this inherent assumption here, I think, at least for the way that you're building it, that your flat fee model is going to attract higher dollar clients who find the math appealing because they essentially do the math compared to AUM. But that means, for whatever a certain asset base is, you will have more clients at less revenue per client than this AUM firm would have had on that same asset base.

Bradley: Of course. And I think that's completely clear. And I think that's shown by all these firms, whether it's, I mean, Wedmont [Private Capital] is another firm that's a leader. I think they're bigger than we are. Their revenue per...sorry, their AUM per client, I think, is 6 or 7 million bucks or so. Mine is about $4.5 million. And when I started this firm, I didn't know what the hell I was doing. I put out my shingle as a true believer. So, I put my shingle out at $7,500 full stop. Because the one thing I knew is that I wanted to go after people that were deeply ambivalent about the financial advice industry, that would never pay an advisor 1% if they have $3 or $4 million. I felt so strongly about that that I hung my shingle out at $7,500. Well, who did that attract? At first I thought it would just attract people that were ambivalent. No, it attracted people with $3, $4, $5, $6 million. And who are they? They're pre-retirees. So, what did I do? I got my RICP and then I bet the farm and the firm on becoming world class at retirement income planning. And that's the spark that drove this.

Michael: Interesting. So, I guess if I take that thread further, so from your end, there is a...because I've even heard, some people have debated around this, are our flat fee or fixed fee models meant to be a lower, different price than AUM, or just literally a different way to charge? Like, "Hey, other people will charge you 1% on a million. I just charge you $10 grand because it's clear and transparent. But it's still the same $10 grand. I'm just charging a different way." Your model feels different. You are conscious that you are charging a lower fee, but you're doing it at the upper end of the market. You're not charging $1,000 flat fee to win $300,000 clients. You're charging a $10,000 flat fee to win $3 million clients.

Bradley: So, we're actually charging $12,500.

Michael: Sorry, $12,500.

Bradley: I use $10,000 as an example just because...

Michael: Makes the math easier.

Bradley: ...well, it also... I mean, and we launched at $7,500, we raised it to $9,500, and then we raised again to $12,500. I've never bothered with the cost of living adjustment. That was probably a huge mistake. But $12,500, especially with the inflation burst that we had there for a few years, I think $12,500 is fair. And if you look at the other firms that are the most similar to ours, everybody basically pushed to $12,000 and $12,500. So, in any case, I think the point is, like, in AUM, the Pareto Principle is alive and well. And if you look at clients, of course, you're going to have a small number of clients with $10 and $20 million, and then a ton of clients in the long tail. That's just a law of the universe. You're not going to be able to push against the Pareto Principle. It just exists.

So, then the question is, if the Pareto Principle is there, and all these clients have very different assets, where do you price a flat fee firm? And many flat fee firms have multiple tiers of pricing based on complexity, net worth, all these other things. If you're cynical, you would say, they're just backdoor AUM. If you're a pure flat fee firm, then you're out there with either one fee, or maybe two fees where the services really are meaningfully different. And so, if you've got this wide dispersion of assets per client, and you limit yourself to one fee, where are you going to put it? So, by definition, there's going to be clients in there where they're getting an incredible deal. Like in economics, I think that's called consumer surplus. If you look at the supply and demand curve, that basically we are letting our clients keep their consumer surplus. We're saying, the economies of scale that accrue to your portfolio are none of our freaking business. Those are yours.

Michael: Right. Well, because to me, there is an interesting phenomenon that, as you know, Pareto Principle's alive and well in most AUM firms, which for those who don't know, it's some version of 80% of your profits come from your top 20% clients. Which effectively means your big clients are subsidizing your small clients. Which effectively means if you didn't have so many small clients, you could have lower AUM fees for your big clients and still be just as profitable. But if you're running an AUM model with this wide client dispersion, you end up in a world where big clients subsidize smaller clients, in which case, when you come in with a straight flat fee for only one client, you don't have the small clients scalability problem. You got other challenges, but you don't have the small client scalability problem, which means, you don't need a disproportionate amount of your profits to come from your big clients. Every client can be comparably priced, comparably served, comparably profitable.

Bradley: Right. And we just get that. Right, because the problem just shifts to the folks we're competing with that are charging 1% on $3 million. They're making $30,000. We make $12,500 in revenue, and we do, at least, the same amount of work. So, then that takes us down a different path, which is, how do you actually control cost of service in a flat fee model where you're yielding to the client? You know, again, in economic terms, you're yielding the consumer surplus, or you're letting them keep the economies of scale and what they've spent their whole life building, aka, their portfolio.

Michael: So, if I follow this theme then, the shift for you becomes, if we're going to do a flat fee model with a standard price for everyone, we have to heavily standardize the service offering, like, the exact things we do so that we can do it very repeatably and cost efficiently in order to scale this with volume.

Bradley: That's right. And there's one nuance, and I wish I could conjure up the buzzword. But imagine a home builder that is extremely standardized. They do all the things the same. But then for the last 10% of the build, there's real modularity and custom finishing. So, the buyer is able to pay a reasonable fee for the home, get the benefits on the cost side of all the standardization. But that last mile, if you will, or that last 10% that can really be personalized and customized, then you get the best of both worlds. And I think until you master that, you can't profitably scale a flat fee firm.

Michael: And ostensibly, you've got a clientele where that's a compelling offering. I mean, I'm imagining some set of folks out there who are listening are like, "No, everything for my clients is, like, hyper customized to each individual client. That's why they pick me and do all the things." It's like, "Cool, but that's why they pay you 1% on $3 million." And Brad, your firm is charging you $12,500 flat fee for that client because you've got a subset of clients who have said, "Okay, I'm willing to trade a little bit of fancy customization for what I perceive as a much more reasonable fee. Because at the end of the day, I just write the check and I choose my services." So...

Bradley: And I don't know if this is probably...you can take this with a grain of salt, but in ten years, I've never heard a prospect or client say that, say that they feel like they're trading, that they're making that trade. Now, maybe they do before they show up, or maybe we never meet those people. But I think the house analogy, if you move into a house and you can feel the craftsmanship and the personalization, and not pay $1,000 a foot, that's a very good feeling.

Michael: Unless you're one of those people who really, like, super custom homes and think $1,000 a foot is awesome. Like, that's great. Then go find your $1,000 foot builder. It's all good.

Bradley: And they're not scheduling mutual fit meetings with us.

Managing The Costs Of Growth In A Flat-Fee Advisory Firm [19:51]

Michael: Right. I mean, to me, that's always part of the interesting dynamic, I find, across all of the industries or battles over fee models and who's serving who. The consumer marketplace is really, really stinking big. There's 130-plus million households in the U.S., and we serve dozens or a few hundred clients each, most of us. There's so many different archetypes of clients out there to find the thing that works for them with the exchange of services for fees that they pay as long as the math works for the business, which it sounds like is squeezier now, and in your view, starts to normalize at $6 to $8 million of revenue because you've got enough of the parts in place that the P&L begins to settle.

Bradley: Right. And the idea of capitalizing it is really stressful. I didn't raise. So, I bootstrapped this thing, and we've just been lucky enough to use revenue to reinvest. And I remember my corporate finance professor in business school on day one, he said that if you remember one thing from this class, is that growth sucks cash. So, the faster you grow, the more cash you are burning to grow. And so, I guess, I'm just positing that using revenue to finance the growth in a flat fee firm is more challenging than using revenue to finance the growth in an AUM firm. So, therefore, if you want to build a flat fee enterprise, you either need to capitalize it or you need to find lightning in a bottle on the marketing side.

Michael: So, then can I ask, how do you think about ratios for the firm? I don't know how you break it down. I usually think of it in terms of, there's a percentage of revenue that goes to my advisor comp that's, like, direct expenses cost of goods sold essentially. There's a percentage that goes to overhead of all the stuff it takes to run the firm. And then what's left is my margin. So, can I ask, where do those numbers sit for you? Where do you think they are once you get to minimum, efficient scale? What does this P&L look like as it evolves?

Bradley: So, just interesting. Because I spent so many years at the Motley Fool, I got kind of hooked on subscription marketing and the P&L of a subscription marketer, not of a professional services firm, not of an RIA. So, I think, for better or for worse, like, my DNA now is subscription marketing. So, how would a subscription marketer architect a P&L, right? And so, the first thing on a subscription marketer's P&L is client acquisition. I'm talking about the cost side, not the revenue side. It's not cost of service…subscription marketers are marketing-driven subscription companies. So, you start the P&L with client acquisition. And in my world, that's marketing and sales.

And if you think of a client acquisition funnel, the top of the funnel is called marketing. The bottom of the funnel is called sales. And so, you first go with marketing and sales. The next chunk on the P&L, I just call delivery. I mean, some people would call it COGS [Cost Of Goods and Services], but it's not really a good. You could say cost of service. We use the term delivery. It's the delivery of the service. The third is overheads. And then I have a fourth below overheads called platform investments. I use the term platform very carefully. And there are two significant line items in platform investments. The first is all the lead planner compensation, basically, that we are subsidizing before their client books are big enough to finance their fully loaded base salaries. So, I break that out as a platform investment. I don't bury it in cost, in the delivery, right?

Michael: Oh, interesting. So, I just want to make sure I'm translating this well. So, this is some version of, I don't know, like, let's say, you know, my senior lead advisor makes $150,000. I know at full capacity, they can handle half a million dollars of revenue or more. So, we're wonderfully cashflow positive. But if today, I just recently hired a new advisor, they only have $50,000 of revenue. Their book is negative $100,000 because they haven't filled their capacity, yet. You would book the $100,000 of unused salary thus far into platform investments versus delivery.

Bradley: Almost. I would book a lot more than $100,000. So, think of it this way. Let's just take round numbers. I mean, assume...so take $150 grand, and then on a W-2 basis, assume that 25% of that flows back to the financial planner. Okay, just for rough numbers. $150,000 divided by 25% is $600,000. So, when they reach $600,000, they are paying for themselves. So, if they're at $300,000, then my platform investment in this example is $75 grand. And the amount that I put into the delivery expense is $75 grand.

Michael: Okay. So, in my example, if they've only got $50,000 of revenue and their capacity is $600,000, like, they're not even 10% of the way to their capacity, so...

Bradley: No, I think in that method, maybe it's $138 grand or something in platform investments.

Michael: Okay, interesting.

Bradley: And so, if you have to hire people ahead of revenue...because I don't look for books. I don't do tuck-ins, right? I don't want to mess around with any of that. I want lead planners who we can, basically, brainwash into our model. And I don't want to deal with inheriting books of business. And we don't have to. We don't have to play that game yet because our organic growth is so high. I mean, someday we may have to play the messy, kind of M&A tuck-in game, but I'm not interested in that if I don't have to be. So, we are putting a lot of cash out there, both on the platform investment side for these people, but also, on the marketing and sales side. And this gets back to what I said earlier about the corporate finance professor, growth sucks cash. So, the other thing we put in platform investments, I'm finally, ten years later, having studied kids like James Conole, and I mean, my hat's off to that kid with the lightning in the bottle that he has pulled off.

Michael: It's amazing the growth that Root Financial is having.

Bradley: I mean, even if I'm one-tenth as successful as James, building a YouTube channel is a no-brainer, okay? All that effort, okay, all the effort associated with making great content, I'm actually conceptualizing as a platform investment. Whereas I'll do pay-per-click marketing, I'll do other standard marketing things that are performance-based or even sponsorship-based, I'll shove in the first category, which is client acquisition. But I view the YouTube investment as a platform investment because all that content, if you can finally get the POPE wheel spinning, by POPE I mean, produce once, publish everywhere, that will lift all boats at the firm. I mean, James has his one call close. Everything, it lifts all boats. So, I'm putting that in.

Michael: Right, because some people have consumed a zillion of his YouTube videos. By the time they show up on his website, they know who he is, what he does, they already like him. They're just excited.

Bradley: Right. But then the ability to repurpose that content every which way but loose, okay, into blog posts, into everything. For those reasons, I've decided to conceptualize that content engine as a platform investment. And so, I stripped it out to the more standard things that you would see in a marketing P&L, like, Google pay-per-click or social media. I mean, all the things that you would...search engine optimization, consultants, all the stuff you would typically see in marketing. So, our P&L are those four points, okay?

The cool thing about that, Michael, is if you zero out the platform investments, the P&L looks good, right? You've got a good P&L. You've got EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization] there at 30% or whatever. You've got delivery expense, which is planners and CSAs and trading at 40% or 42%. You've got a viable P&L. But the thing that kills my EBITDA is all those platform investments. And I'm fine with it because I'm managing for revenue growth, not for cashflow.

Michael: And what is, like, the actual client acquisition marketing line then in your world? Is that only a few points because a lot of the marketing you're building is meant to be the long-term stuff that you're putting in the platform line?

Bradley: Yeah. I mean, luckily, knock on wood, we don't have a lot in there. I mean, I allocate part of XYPN expenses in there, right? Because the directories that are the directories...

Michael: Oh, yeah, the directory, yep.

Bradley: ...NAPFA and XYPN, we participate in some other directories. We do some search engine optimization stuff. We have some marketing technology that we throw in there, like, Active Campaign. But it's not big bucks.

Michael: I mean, can I ask what this, I guess, percentage is out to? Is this 2% of revenue, like, a lot of firms say that? Are you somewhat higher because you want to invest more in growth?

Bradley: For marketing?

Michael: Yeah, yeah. You're, like, client acquisition marketing.

Bradley: So, if you don't ask me about platform investments, the standard marketing stuff is pretty light. It's probably 2% of revenue, 3% of revenue. But we also do pay...our first meeting is a mutual fit meeting. It's funny, I used to call that a consult call, like a lot of people do. And then I saw somebody in another industry refer to meeting number one as mutual fit. And I loved it because it starts to shift the balance of power. Like we're interviewing each other. And so, the mutual fit meeting has been a great pivot. And I did all of those myself for nine years. Well, now, I've trained three planners to do them. And so, there's some comp associated with doing those meetings. And in my world, I talk about kind of majors and minors. So, a lead planner has a major, which is, they're a service advisor. They don't have to go get any of their clients because we get them for them. But we have a variety of minors, right? And one of the minors is taking mutual fit meetings. So, I will take that minor comp and stick that in the client acquisition category on the P&L.

Michael: So, you're actually down to, you're literally carving up segments of advisor comp into how much of this is delivery comp and how much of this is marketing and sales comp.

Bradley: Well, yeah, I'd be very careful. I would say it differently. Yes, majors and minors. The major is the service advisor comp. That's why they came to work here. Some people just have their major. Other people have, let's say, a major and one or two small minors. Most of the minors have nothing to do with marketing and sales, and none of them has anything to do with marketing. So, the minors tend to be like, "Okay, well, Joe is responsible for maintaining our investment models, and Susie is responsible for updating our Roth conversion suite of tools each year." So, these are the types of minors. My dad was in the CIA. I used to ask him, "Does James Bond exist?" And he would laugh and say, "No, but we can do all the stuff that James Bond can do." And when I think about the director of financial planning, like, if you think about the James Bond version of a director of financial planning, it may not exist in the world. But if you really look at all the different skills, you'd love that person to have.

And so, you have to pick your punches. And what we've decided to do for now anyway at our current scale is to take the James Bond incarnation of a director of financial planning and hive it off to lead planners based on their interest and ability in that minor. So, of our whole list of minors, Michael, there are zero in marketing. We have one minor in sales, and it's simply taking that mutual fit meeting, but it's not prospecting. The prospecting engine is what brings people through our Typeform experience, through the qualifying questions, all the way to book the call, while the lead planner is doing is showing up and talking about our service. Now, that takes skills, but it's certainly not traditional selling or prospecting.

How Bradley Breaks Down Overhead Expenses [32:38]

Michael: And then tell me about the overhead category for you. I mean, a lot of advisory firms, this can add up to 30% to 40%. But I feel like we stuff some things in there that you are consciously segmenting out into other buckets. So, I guess I'm wondering, like, what's overhead allocation look like for you, and how do you actually think about and categorize that bucket?

Bradley: Yeah. So, it's funny when you say that I've pushed some of it out. I do try to variabilize as much as I can. So, like, trading, I variabilize. I don't put that in overhead. That's part of delivery expense. The delivery is basically the financial planners, the part, but the part that's not in platform investments, financial planners are the big one. My CSAs are in delivery. The trading is in delivery. And then and then any software associated with delivering the service is in delivery.

And then overheads, obviously, we have pushed all the platform investments out of overheads. We have a fully virtual firm. And so, we get the benefits of that from an overhead perspective. We have 14 employees. If I had to estimate, and let's just think here, six, three, I bet we are nine and a half delivery, half mutual fit meetings, and that leaves four of us spread between platform, investments, and overhead. And of course, it's a people business, so all the software and the compliance consultant, I mean, all that stuff is trivial compared to the fully loaded comp.

Michael: So, your staff, it's interesting to me that you've even got CSAs in delivery. I mean, I get it.

Bradley: Why would you not? I mean, how could you not put them in delivery?

Michael: So, your staff overhead, I mean, these are centralized admin, management, leadership type roles.

Bradley: Well, so I put myself there. So, I'm in there. I mean, I've got my fingers in a few things. And then I've got a... I've decided to carve up my operation into five systems. And by system, I don't mean technology. To me, a system is a combination of people, process, and technology. And so, instead of the traditional RIA functional areas that you may see, like, 8 or 10 or 12, what we've agreed to is that we have a growth system, we have a delivery system, we have a people system, we have an operations system, and we have a leadership system. And so, I own our leadership system. And then I've got Angela and Megan, who each own two of the other systems. And so, Angela, Megan, and I are operating the company. And then we have an admin who would be the kind of the fourth person that I would stick in, in overhead, if you will. So, our overhead, I would get argue, is probably sized for, a $5 million firm. And that gets back to my comments earlier about minimum, efficient scale. We've got three hundred and forty clients. We have a lot going on. So, I have to staff this for future revenue.

Michael: The systems framework is interesting to me, so I just want to make sure I capture those. There's a growth system, right? Where does the client come from. There's a delivery system to do the things for the clients. There's a people system…s, how do I manage my people and team and culture? And then there's a leadership system.

Bradley: And operations.

Michael: Oh, sorry, and operations is the other one. Okay.

Bradley: And notice I didn't say technology. So, I know that some RIAs are kind of tech forward. I would say we're very strong on process. We use Hubly. We have 150 workflows. We have lots of templates and everything. But I would not say we are a leader in tech, nor do I aspire to be a leader in tech. And that's why there's no tech system. You know, tech is just a thread that is woven through the five.

Michael: So, what does overhead add up to in your...? Does this end out at 30% of revenue or are you still at 40%? Is it down at 20%?

Bradley: That's a good question.

Michael: I'm just trying to visualize how it settles for you.

Bradley: You know, it's funny, frankly, I don't even know, but I can do quick math with you. I mean, we do $3.5 million of revenue. If we put four people in there fully loaded with all the goodies and stuff, maybe that's $750,000, and then toss in another couple hundred grand of miscellaneous things, that's $900,000. So, what's 900,000 on...? It sounds like it's 30%, yeah, 28%, something like that. It's not horrible. But given the fact that we've pushed a bunch of this stuff out into other areas, it still rates high. But what's cool is, I'm pretty confident that if we put another million on this business in the next year or $2 million or whatever it is in the next few years, I think the three of us that I mentioned can handle this from $3 to $5 to $5 or $6. At that point, maybe we pick off another person overhead. I think if you understand your ratios, like, for every lead planner, if we need 0.6 CSAs, and for every lead planner, we need 0.6 overheads. I mean, starting to get really facile with your dials is important.

Michael: And that's how you, like, literally model out the growth. Every X client, I need Y lead planners. For every Y lead planners, I need Z CSAs and overhead staff. And now, I just hire incrementally as I have clients. Kind of run the formula.

Bradley: Right. Correct. And then you also need to understand how long it takes to find and ramp one of those people. And then you can kind of work backwards, right, from what the model is saying. You also need to understand, and this is a huge decision, how much slack capacity do you actually build into your system in case somebody goes down, right? And so, that's a very interesting thing. If you're managing for cash flow, then you build no Slack capacity into your system. If you're thinking about this as kind of risk management, and you can capitalize, you can afford it, then you bake in, you bake in the slack.

Michael: And so, where do those ratios sit for you? I don't even know which ones are drivers. Does it start with clients per advisor and the new staff behind it? Is it a revenue number?

Bradley: Yeah, for sure. Clients drive everything. It's not revenue. So, I believe that a lead planner with no miner, who's 100% dedicated to client service in our model with our support and our tools, can handle between 80 and 90 clients. So, then, I think, you have to have a range there because some people that join want to work super hard, right? And they want to bust through as soon as possible to become bonus eligible. For other people, there's other stuff going on in their lives. So, we need a range, right? And so, I think I was articulating the top end, but I think you need a business in order to attract top talent that could say, "You can come in here and we're going to feed you between 70 and 90 clients. And that's your choice." And that's if you have a major only.

Well, let's say you want a minor. So, the minor, depending on how much time that takes, competes with, and therefore, takes numbers away from that major. So, you take a point of view on that, and then you have to take a point of view on how much slack capacity do you want in your system. And then you finally kind of have a model for what kind of makes sense for a given firm. And so, everything starts there with the clients and then to lead planners, and then the ratio from lead planners to CSAs, and the ratio from lead planners to overhead. It's not like we're militant about it. But if you're in business long enough doing the same set of things, you can start to see and get a feel for the ratios and how they behave, and then you can make decisions with more confidence.

Michael: And is that really your rough ratio downstream, like, for every lead planner, we need 0.6 CSAs and 0.6 overheads? Like on average, every two lead planners we hire, we hire one CSA and one overhead.

Bradley: Yeah, it's...

Michael: Just a little rounding in there.

Bradley: I would say that the business is still too immature to answer with confidence. But if they can think of it this way, let's use round numbers. Take 80 clients times 12.5. That's a million bucks. A million bucks per lead planner. Let's say we could do that with no miner. So, if you toss in 0.6 CSAs and 0.6 overhead, now what are you at, 2.2?

Michael: Yep.

Bradley: So, 2.2 goes how many times into a million? You know, I think it's over $400,000. That does not quite pass the sniff test, right? Because in a flat fee model, I will admit, doing over half a million dollars per employee, I think is a stretch unless we increase the price.

Michael: Yeah. Even...

Bradley: So, let's say, 350 is more reasonable, then that's roughly 3 people per... So, a lead planner and two more. Okay. So, I'd love to be better than that. I mean, I'd love to see this get to $400,000. I know you've written about Dunbar's number. I'm so fascinated by these things. Here's how I think about AI. So, Dunbar's number is a big deal in my view. Okay, so that's a governor that says, in theory, it's 150, but then you have people, you know, that in your personal life and you have your family and your friends. So, say there's 50 people there. So, then maybe you could take 100 clients, but depending on the intensity of the work that you're doing, maybe each client takes up, you know, 1.2 slots of Dunbar's number or something. So, this is some of the thinking that helped me triangulate to the kind of 70 to 90 range. Does that make sense?

Michael: And so, then did you literally work backwards to say, if it's going to be 70 to 90 clients and I want to get to a million of revenue per lead so that I can put three people in total to be able to do all the things, then it looks like I have to charge $12,500 per client actually moving forward.

Bradley: No, absolutely not. I absolutely not. I don't engineer pricing. I don't, like, stare at my navel to derive pricing. I price based on, you know, the market. And so, I just kind of look around and it's not, like, it's very sophisticated, but I kind of just look around at what other people are charging. You know, and for a while, I wouldn't go past $10 [thousand] because I was convinced there was a psychological barrier when you cross 10. So, I didn't...

Michael: But that didn't prove to be an issue in practice?

Bradley: Well, who knows? I mean, we haven't seen it. I mean, $12,500 seems very comfortable. Because what happens here, Michael, is I actually think one of the reasons we have such a tailwind is that imagine somebody that's working with a one percent advisor and paying, let's say, $40,000 or $35,000, nut when they started with them, they were paying, let's say, $10,000. So, it's slowly creeping up over time. That's one quiet thing happening in the background. There's another quiet thing happening in the background, which is which is they are approaching retirement and they're starting to understand that decumulation is 10 times as complicated as accumulation. And yet they're not really hearing any thought leadership or proactivity or tenacity from the from the advisor on decumulation. So, now, there's two voices in the background, and they slowly get louder and louder and louder, at which point, they end up finding us and scheduling time, and we just take the client.

Dunbar's Number And Reaching Minimum Efficient Scale [44:12]

Michael: So, when you look at this model as it's scaling, what shifts when you get to $6 to $8 million of revenue and minimum, efficient scale? Like, I'm assuming you're...

Bradley: Probably my stress level.

Michael: I mean, I guess, which percentages start changing? Is the vision like, delivery gets lower, platform investments get lower, because now, your platform, you know, has many investments. It's like, this is an economies of scale…

Bradley: I don't think delivery goes down as a percentage of revenue. And let me just try to tie the AI back in briefly. So, here's what I think is logical with AI and these types of firms. If right now the capacity for a lead planner in my firm is, let's say, 80 clients. If you took if you got in a time machine and you went forward 10 years or 8 years, maybe that capacity is 125 or 140. And it would get there because of two things. One is the efficiency of AI. That's easy to talk about. I think the much more interesting conversation is, can AI increase Dunbar's number? And that's, I think, the much more interesting question, because it's easy to wave our arms around back office efficiency and AI this and AI this. But how could AI increase…how can you manufacture Dunbar's number slots? And I think that's interesting.

And if you had a fintech company, and maybe there are, that are focused on that question and not getting distracted on the on the cost side, like, taking costs out of processes, that's interesting. So, if you get in that, if you teleport forward 8 or 10 years, and a lead planner in my firm now has 120 or 130 and 140 clients, that's a pretty nice lift from AI. Would you concur?

Michael: Yeah.

Bradley: Okay. So, that's how I'm thinking about AI. And on the other hand, AI could push more fee compression. And so, as a thought experiment, what if we're still charging $12,500 then? In other words, we're not able really to keep up with inflation. That's the bad news. The good news is we are now at substantially more clients per lead planner, thanks to AI. So, AI is taking something away from us, which is which is pricing power as consumers just see all these awesome AI driven solutions. But it gives us something as well, which is the ability to meaningfully scale clients per lead planner.

Michael: So, as you get to minimum, efficient scale, delivery doesn't go down because it's still, you need the people to do the things, it's service business. So, what moves? Like, does overhead come in? Does platform investments come in? So, how do you think this plays out?

Bradley: So, are you familiar with in SAAS [Software As A Service] kind of the rule of 40?

Michael: Yep.

Bradley: Yeah. I do think there's something to that. And so, my understanding of the rule of 40 is that you could have a firm with no growth that has 40% EBITDA, or a firm that has 40% growth and 0 EBITDA, and they both exactly add to 40. They both satisfy the rule of 40.

Michael: Yeah. So, the goal is, right, I mean, anybody doing this can try it out, you know, take your revenue growth rate, add it to your profit margin, does the sum of those two percentages add up to 40? That's your goal.

Bradley: Yeah. And when you say profit margin, I mean, I would say EBITDA only because the word profit means different things to different people operating profit, profit margin.

Michael: Fair enough. EBITDA margin.

Bradley: So, you'd love to be above 40. But if you're a venture capitalist looking at 100 SAAS deals in front of you, and you and half of them are below 40 and half of them are above 40, it's pretty likely you're going to look at the first pile kind of through a jaundiced eye. And so, what does my P&L look like? Well, I mean, I would say, a company like Root, again, I take my hat off to Mr. Conole, you know, generally, as you grow revenue, it gets harder and harder and harder to sustain 40% and 50% and 60% and 70% revenue growth rates unless you become an M&A machine, or unless you happen to be, let's say, James Conole. But for those of us that are not James Conole, which is going to be 99.99% of the people listening on this podcast, we have to confront the reality, which is that our organic growth engines on a percentage basis, those percentages will start to come down.

Michael: I mean, they have to if you do... I mean, a lot of us can get these, like, 50% to 100% growth rates initially. I mean, if you sustain that for a decade or two, you're, like...

Bradley: A trillion dollars.

Michael: ...global GDP. Like, there's a ceiling.

Bradley: Yeah. So, I think what happens, naturally, is that we move, because right now we're, like, 50% revenue growth and 0 EBITDA. So, we probably just gently think of that as a slider, which just starts to move. And as I stated earlier, what I believe is that the P&L, our P&L at $6 or $7 million, if you reconstituted it into the P&L of a traditional RIA, right, a traditional 1% percent RIA, I think our P&L, at that point, would have very similar percentages as against the standard set of P&L categories. But if you did that now and you compare us now to a $3.5 million RIA, that's 1% percent, and you and you stack the P&Ls next to each other, they look very different. And that that just ties back to my minimum, efficiency scale thesis.

Michael: Yeah, I guess the only thing I do wonder in that vein, I mean, just there's, by the time firms get to several million of revenue as you are, there are very, very few for AUM firms growing at 50% revenue growth either. And ones that do, I find also have very low margins for, basically, all the same kinds of platform investment dynamics that you noted. You know, if you're... I mean, it is an interesting phenomenon of growth. I find some advisors don't connect the dots until they're living a fast growth journey. You know, if you're adding clients fast enough, you really have to hire a lot of advisors before you have revenue, you allocated to platform investments, most just, like, watch their margins crash.

Bradley: And I think I need to clarify my point, that my corporate finance professor who said growth sucks cash was right, and that's true no matter what your fee model is. So, I agree, I completely agree. All I'm saying is if you normalize it by saying, okay, take a $3 million flat fee firm growing at 20%. So, you then take a $3 million AUM firm growing at 20%. So, you normalize. It's an apples-to-apples comparison. The P&L in the flat fee firm will be more uncomfortable because that 1% firm has achieved a minimum, efficient scale, and the in the flat fee firm has not. That's my only conclusion. And, you know, I don't know if... I mean, I people can differ in their opinion, but if you ask me about how I think about scaling the flat fee firm, and that's the model. And so, I feel urgency to reach minimum, efficient scale, what I think minimum, efficient scale is.

How Bradley Has Adjusted His Fees Over Time [51:44]

Michael: So, then help us understand, I guess, the size and scope of the business as it exists today of revenue and clients and assets and team.

Bradley: So, assets are $1.6 at Schwab.

Michael: $1.6 billion.

Bradley: Yeah. Households are 340. The team, employee number 14 started two days ago. And so...

Michael: Revenue is about $3.5 million.

Bradley: $3.5. So, if you take 340 clients and you multiply by about $10,400, that should foot to the $3.5 million. So, we're charging $12,500, but price is so fascinating. Like, because I started at $7,500, and then we raised it again once to $9,500, and now, we're up at $12,500. But those raises are so high. Then the question is, how do you do them with your installed base? Do you rip the band aid off? Do you move people up over time?

Michael: I was going to ask, as you said, you went $7,500, $9,500, to $12,500, is that only new or did you move the existing?

Bradley: Right, right, right. So, we basically split the difference. So, when I moved from $7,500 to $9,500, I grandfathered the $7,500, didn't touch them because I felt so loyal.

I'm like, "I can't raise their fee," when I went to $9,500, so I didn't. And $9,500, we did in about 2020 or so. Then inflation finally hits. Inflation had zero factor for years and years and years in this country. So, finally, we get, like, 25 or 28, whatever it was, points of inflation over a 4 year period, whatever that was. And I had never bothered to do the cost of living adjustments, probably another mistake. And then we raised to $12,500 a year ago.

When we raised it, we then kind of did some thinking and we said, "It's for new business." But then we worked on a pretty cool gradual price migration plan that actually is taking us three years, where we built this whole thing in Airtable with segments and triggers and logic and we made videos and we communicated everything. We assumed we would lose X clients. I mean, maybe we've lost one client over a fee increase, but it's just grinding forward. And we have a couple of years left. And when all the dust has settled, you know, everybody will be at that $12,500, except for a couple of strange cases. And then at that point, once we've kind of reached the end of the rabbit, you know, moving through the proverbial price increase snake, at that point, I'll probably, finally confront, are we going to do the annual cost-of-living adjustment, or are we going to do that every few years, or what have you?

Michael: So, how are you implementing the multi-year thing now for old legacy clients? This is a pain for all of us.

Bradley: Yeah, I mean, it's just rules based. I mean, I can't remember all the rules I came up with, but we worked on it as a team. So, I think one of them was, you are not eligible for your fee to move until you've been here for 24 months. So, if you joined the month prior to the fee increase, then you would have 23 months until you became eligible. And the eligibility trigger, if you were at $9,500 would move you to $11,000, that's $1,500, and then 12 months later, would be the second raise on that cohort. I think the $7,500 dollar cohort, I think what we did with them is migrate them to $9,500, not to $12,500. I mean, the firm is so much bigger. I mean, the number of people that we had in that initial kind of 2016, 2018, that period cohort, is very low.

Because, you know, I just kind of called up some friends and said, "Hey, I don't know what I'm doing. I'm going to start this firm. And trust me, I'm going to figure this out." And that was a small set of people there right in the years leading up to COVID. And then I went through a divorce at that point. I mean, so things happen, like, in your life. And so, it was really just kind of a laboratory then. And I even think it was a lab from 2020 through 2023. And I think that thinking of this as a lab is pretty powerful. And the way to maximize learning is, what, do as many cases as you can. And one of the cool things about a flat fee is that you can do more cases, you can get more reps. If you think about going to the gym, it's reps, reps, reps. And if you have the discipline to be in the market with one price offering, one service, you get a lot of reps on the same thing.

Bradley's Approach To Retirement Income Generation And Investment Management [56:32]

Michael: So, then can you talk to us a little bit about the...? It's just I'm curious both about the discipline of the service model and the discipline of the growth model, but I want to start on the service side. Just what do you do for $12,500 flat fees for multimillion dollar clients?

Bradley: So, I think of this, I've got an equation. I learned I learned this equation at a NAPFA Conference actually. It may have been when I saw you speak, maybe 2013 or something, before I decided to even do this. And somebody had said, "Look, it's pretty simple. Well, the equation is wealth management equals financial planning plus investment management." Okay, well, it's so obvious when somebody finally says it or draws it. But until you see that, you can definitely overcomplicate what's going on, because you may list your service as including, like, seven things. And so, I found that equation. And I literally have the equation in my book, I have the equation in our slides. And so, to me, wealth management equals those two things.

Okay. So, I'll start with the with investment management. For investment management, we use two models on the portfolio side. And let me just distinguish what I mean by this. I'll slow down. So, I'm a huge Wade Pfau fan. I don't use his four RISA [Retirement Income Style Awareness] slices, but in prep in preparation for this call, I was kind of trying to overlay what we do to Pfau's frame. So, this is what we have. And we use MoneyGuidePro for our planning software. and I'll explain why. So, I'm a big believer in slicing spending into needs, wants, and wishes. And I'm a I'm a little bit off the deep end on this needs, wants, and wishes. There's a there's a guy, I think his name was Statman, he wrote a book a while ago that I really liked. Oh, Meir Statman.

Michael: Oh, Meir Statman. Yeah, yeah, yeah, "What Investors Really Want" book?

Bradley: Yeah. I don't know if this is what you recall. My takeaway there is that the financial advice industry has oversimplified the question of risk tolerance. And that almost all of us are carrying around an interesting duality, which is that we are actually quite risk averse as against our needs or our non-discretionary spend, and actually, quite risk tolerant with respect to our wants and wishes, our kind of aspirational spend. And so, I really took that to heart. I never forgot it. Then I got all into the Pfau stuff and went and got my RICP.

And I chose MoneyGuidePro because they stratify their funding goals into needs, wants and wishes. And you can even run the, what I call, resilience curves, what they call, probability of success analysis. You can run that for needs, needs and wants, and needs, wants, and wishes. So, you can unpack a score. And we actually go to this trouble. We actually, when we run a scenario, we will show, okay, it has a 95% probably of success based on the needs, it has a 75% based on the needs and wants, and it has a 40% based on needs, wants, and wishes. And then we say the 40% doesn't matter. And if it's bothering you, that's not a wish. You know, either we have to promote that to a want, or you just have to agree with us that we don't care, and neither should you as the client what the probability of success of the wish.

Michael: That's a really interesting framing. You know, if your needs have a 95% probability of success and your wants, wishes have a 40% probability of success that's bothering you, maybe they're not actually wants and wishes. Maybe they're needs. Like, let's have that conversation with this client.

Bradley: Let me just correct it slightly. You're right on the needs, 95%. So, in our firm, like, our tolerance is that we've settled. You want to see the need probability of success, by the way, which we call resilience. And I'm all into resilience, financial, psychological. I do all of this in my book, what have you. So, I have relabeled probability of success as your plan resilience score. So, the resilience, we want to see resilience scores above 90% for needs. Then bolt on wants, not wishes, you bolt on wants. We want to see that resilience score above 70%. If it's above 90%, we really start to push you and push and push and push to reduce it below 90%. Now, you may say, "Okay, well, I'm not comfortable with that," but the client has to win, but we will push.

Michael: Because, no pun intended, you want to see them push a little bit more on their wants and stretch a little. Come on, they're wants.

Bradley: I would rather err on the side of loading the plan up with more spending to help demonstrate that the spending capacity is there, and help these people shift from an accumulation mindset to a decumulation mindset, which is extremely difficult. And, you know, it's funny, I think a lot of financial planners view themselves as consultative, which is perfectly fine. What I challenge my team to be is more paternalistic, which is we're being hired to lead. So, paternalistic, yes, yes. When one of our core values is transparency, of course, we show the analysis, we show the options.

I think a consultative person would say, "Here's the options. What do you think?" Or, "Here's the options. These two look good. What do you think?" I think if you have more of a paternalistic frame, say we ran the numbers, and we think you should do A, but you show B and C, but you really don't pull any punches. So, I would rather push a client to reduce that resilience score for needs and wants from the 90s down to the 80s or 70s as a way to help them accelerate the transition towards a decumulation mindset. Because one of the saddest things I see is somebody that retires at 62, spends 10 years stressed out, then loses a spouse or gets sick, but finally is willing to give themselves permission to spend, but they've lost the go-go years of their retirement.

We can do something about that. And the device I articulated here is one of several techniques we use to do that. So, it's only when you layer wishes on that the resilience score is rendered, in my view, completely useless. And I think the problem in the industry is we're running around putting resilience scores in, essentially, for needs, wants, and wishes, but not breaking it apart for our clients.

Michael: Because the point is wishes are wishes, we should be fine if we don't get them. It'd be nice if we do, but we shouldn't need a lot of robust resiliency to get things that are just wishes. If it bothers us that much, if we wouldn't get it, then it's probably not a wish.

Bradley: Right. So, a need is a virtual guarantee, but of course, we don't use the term guarantee.

Michael: Understood.

Bradley: A want is officially in the plan and you are very likely to do it unless there's Armageddon or a meltdown. A wish is more like a parking lot. A wish is only going to happen if you have a significant tailwind in the first ten years of retirement. So, you luck out on sequence of returns risk. You inherit more than you thought you would inherit. A wish is a parking lot, so maybe they don't happen. Or maybe it's a parking lot that we can talk about over time with an eye towards promoting some of those things to a want. So, in any case, in that case, this is kind of the spending and resilience framework.

Now, I'm a big believer in asset-liability matching. So, this is where I kind of overlay with Pfau, but in a different way. So, for needs, we talk a lot about income floors. To me, the four standard Lego bricks in an income floor are, in no particular order, Social Security, employer pensions, where we really strongly advise against taking the lump sum. I have all sorts of problems with clients taking the lump sum, which we can talk about. The third component of that would be a ladder. And we build ladders, typically, with Invesco's BulletShares, specific year maturity investment rate corporate ETFs, where we're simply matching the asset, which is the rung that is maturing in December, let's say, of 2028. That asset is then matched to the needs-only cash flow requirements for 2029, and this is some of the asset dedication work, etc., etc., etc.

Or we've used MYGAs a few times. And MYGAs [Multi-Year Guarantee Annuities] are interesting because MYGAs, my understanding with the MYGAs, you can basically buy another 50 or 70 basis points of return if you're willing to give up the liquidity and just get slapped on the wrist on the way out if you ever broke the ladder. So, for us we say, if you are extremely confident, if your conviction in this ladder strategy is high, then take a look at a MYGA. Otherwise, most of our clients just want a very simple, dedicated Schwab account. And we do dedicate the account, where we basically just stack up several BulletShares ETFs, right, to power the ladder. And so, some people we just do bridges to Social Security with the ladder. Other people love the strategy so much, we'll actually replenish the ladder once a year and extend it past the year that the husband and the wife are both on Social Security.

And then the final piece, the final Lego brick in the wall would be commission-free income annuities. And we're a big believer in DPL [Financial Partners]. And I always used to love the SPIA [Single Premium Immediate Annuity]. And then I kind of realized that while some people buy them, most people, at the end of the day, can't sign because they're not really willing to make that bet with the insurance company. Now, you can put more product complexity in in the form of the fixed index annuity with the income rider. So, the complexity is the bad news. The good news is the complexity then it makes it much more palatable for people to buy. So, we love DPL. We do some commission-free annuity work. We don't get into variable annuities or any of that stuff. When we talk annuity...

Michael: You'll do some SPIA's or some fixed index annuities with income riders.

Bradley: Yeah, we're much more likely to do the ladder. We have done SPIAs. My understanding is that DPL's special sauce is in the ladder, right? That you can source SPIA's from multiple places. I think they do a good job, but where they're special is with the fixed index annuity product with the income rider. And I think that's where they're special. And so, you take, if there's a million dollar annuity and there's a $70,000 commission that's just ripped out of the cost structure, that allows the manufacturer of the product to reach into that contract and turn lots of interesting dials.

And it gets interesting enough. I mean, I used to be so militant against annuities, but a few years ago, I realized that there's a tiny slice of the annuity world, this commission-free world that actually is worth looking at. So, we do some of that work. And I just call that in my own lexicon, a private pension. So, you're simply you have an employer pension of Social Security, you're just buying a personal pension. The word annuity, is it's too bad that the word annuity is, like, a four...it's been ruined by the product and sales tactics. The word has been ruined. If you play word association and you say, "Pension," people will say, "Lucky." If you say, "Annuity," they'll say, "I'm going to run for the hills."

So, anyway, that's our income floor gestalt. And that's where the custom work is happening. So, somebody shows up with a $4 million portfolio. Let's say we slice a million off and stick it into the income floor. And we don't just make that up. I mean, we have a bottom-up methodology. That's where we go through MoneyGuidePro. And then we have an Excel tool that we've built, and we're actually sizing each rung of the ladder. And then we put this ETF stack in position and we set it up for the auto transfer each year after the rung results in cash. And so, then the question is, what do we do with the portfolio?

So, the overwhelming majority of the money that we run is in two models. Most of it's in a model I call Beta, and then secondly, there's a model called Factor. This is an example of what I was saying before, which is, where are you going to put your energy and who are you going to claim to be? So, my Beta model is just Vanguard's CRSP model, all right? And so, I'm transparent about it.

Michael: Full broad market exposure. Here you go.

Bradley: Yeah, but I just called it Beta, right, because I'm a marketer. So, instead of calling it Vanguard's CRSP model, I call it Beta. And so, that's maintained by Vanguard's investment committee. And then DFA [Dimensional Fund Advisors] has an analogous investment committee, and to me, an analogous product. They've got a core wealth suite of models. And of course, I branded that model in my firm, Factor. What I'm saying here is, why should I hold myself out to be smarter than the investment committees of Vanguard and DFA? And ironically, when you say that in a client meeting, you earn that much more credibility, right? So, those are the two models.

Now, because we're serving high net worth, we have all sorts of people with legacy positions. Some of them with extremely high capital gains. And of course, we don't force sales, but we assign all the proxies, you know, and in all the rebalancing and everything. Everything is signed in a proxy, so that works very well. We can assign all the do not sells. And I think it's pretty standard, you know, trading operations. But in my book, I talk about core versus core and explore. So, core, to me, a core client would be, yes, we're doing your income floor, and, yes, we want Beta. An explore client would say, "Hey, we're fine with the income floor. We're fine with Beta. However, I'm going to keep a million dollars over here outside of your management because I love playing around with stuff." So, we don't directly support, you know, people's Vegas accounts, right? So, they just hold that.

Michael: So, the explore part is not you doing creative investment exploration things, it's granting the client permission to do creative investment exploration things and scratch whatever itch they insist on scratching.

Bradley: Right. And one of the cool things about the flat fee, is it allows us to say, we are never going to put pressure on you to consolidate all the assets at our firm. We just don't have any of that stuff, whether it's Social Security claiming ages or paying off mortgages or buying the annuity or buying the second vacation property or all those things, are just quietly in the background that represent all the conflicts in the 1% model.

Clark Asset Management's Three-Meeting Client Onboarding Process [1:12:24]

Michael: So, now, help us understand what the financial planning side of the offering or service model is.

Bradley: So, our onboarding process has three standard meetings, but we'll do kind of a fourth or fifth, you know, as needed. And they are Discovery, Scenario of Record, and Aligning Your Assets. So, discovery...

Michael: Say those again. Discovery...

Bradley: Discovery is number one. And, you know, I'm sure ours is similar to everybody's in different in some ways, but we have a discovery meeting.

Michael: Okay, and then...

Bradley: The second meeting is called Scenario of Record, and the third is called Aligning Your Assets. And of course, every word I agonize over for years.

Michael: Understood. So, now, help us understand what happens in each of these three meetings.

Bradley: Okay. Well, Discovery, I assume our discovery meeting is similar to, you know, everybody else's, but maybe it isn't. We tend to stay relatively high level. It's not about going through a bunch of documents. Let me just take a step back and tell you how I think about elevation for a second. So, at the lowest level of altitude, we sell financial planning and investment management. Click up a level of altitude, we sell wealth management. Well, what's the first thing a wealth manager does when they meet a new client? I was captivated by something I read that said, “The wealth manager translates life goals into financial goals. And a financial goal adds dollar time and priority specificity to a life goal.” So, this idea of being a translator or an interpreter is fascinating to me.

And you can even go upstream a click from life goals to values. So, it's values to life goals to financial goals. When you meet somebody, you have to understand, where in that value chain, if you will, are they? Sometimes I meet somebody and they struggle to articulate their values and they definitely struggle to articulate life goals. The other extreme, I have people that have all of that nailed, including the financial goals nailed. So, you first have to kind of understand, where is this person on that continuum and meet them where they are.

So, I was so captivated by this. I designed a discovery session that I would argue is at altitude. And then we helicopter down where we need to helicopter down. So, you know, sections include like, who are the people in your plan? And we get them to talk about their kids, talk about their parents, are the parents alive. I mean, it's so important to understand the generation before and the generation after if you're going to be engaged in a true wealth management offering. Now, we ask them about values. My favorite part of Pfau's RICP course was a section where they identify, I think, 15 retirement income risks. And I massaged that over and over and over again until I got it to five buckets that I liked, and then have the details within the buckets, or six buckets. And then what we created in our discovery meeting is a table. Simply list those risks.

And then the next column is client A's name, and the next column is client B's name. And then we put it in front of them and we ask them, we sort of start with client A, here's the question, "Is there any risk listed here that jumps off the page to you?" And the beauty of that question is that it doesn't take us 15 minutes going through all the cells for A client and client B. You simply ask a question, a yes no question, "Is there any risk on this list that jumps off the page to you?"

And we give it credibility. We say, you know, we've taken the RICP, we've crunched down all these retirement income risks, we list the risks, and then we ask client A. Client A may say, "You know something? As I look at this list, they all seem valid, but none of them jumps off the page to me." And then and then client B goes and you get a different answer. And, you know, they immediately go to, let's pretend it's long term care risk, and that surfaces the story of their aunt or their father, whoever it was who was in a long-term care facility and blah, blah, blah. So, this is a triage device that only takes two or three minutes, but really allows you to capture hugely important information very quickly.

And I'm a big believer in a high momentum meeting. And if I have a lead planner who is not yet trained at running a high momentum meeting, I really work with them on it. And momentum in meetings is very powerful to the point where if you've run a high momentum discovery meeting, at the end, you can see palpable impacts on the client, where they're saying like, "I feel better already." Sometimes we get things like, "You just covered in 70 minutes with us things that we didn't hear in ten years from our financial advisors." So, a high impact discovery meeting that stays at altitude. And we're patient with respect to iterating after the meeting to get more information and to get more granular. And so, my only advice to people listening would be, don't get too granular too fast, and really do everything in your power to run high momentum discovery meetings because it sets the stage for the whole relationship.

Michael: So, then what's the Scenario of Record meeting?

Bradley: So, the Scenario of Record meeting is, so imagine a two-by-two. I mean, I grew up in consulting. So, imagine a two-by-two...and we actually have this device in the in the Discovery meeting. And we've seen so many clients now. So, because we focus on this certain client avatar, imagine two dimensions that are the dimensions that you're going to hang the scenarios on. So, let's say you have a client who wants to retire in the next few years. So, let's say the top of that two-by-two is retire in one year versus retire in four. So, we intentionally turn up the contrast to paint the corners of the consideration set. But we can only design that by listening to the client to figure out the dimensions. But here's a common one, work X more years versus work Y more years, where there's a pretty significant dispersion between X and Y.

The other dimension of the two-by-two is presumably a spending dimension. And it could be generic. So, we actually put into MoneyGuidePro something called permission to spend. Permission to spend is coded into MoneyGuidePro as a want. And it's in there by default at zero. But for a given client, we may just say, "Okay, we're going to run this at a position permission to spend at zero," and that's meant to be additive to all the rest of the spending. Or we're going to run it at $80 grand a year for 10 years. And the 10 years reflects kind of the go-go part of retirement, but we're going to run one version with $80 grand a year for 10 years. That's the layer cake on top of all the rest of the assumptions, and one version that doesn't have it. So, now, we have four scenarios, right? Two times two is four. If you are smart in how you choose the dimensions, you have four.

So, then when we go off and build the plan, we just we just run those four scenarios, and then there's the base case assumptions, of course, of the same across the four scenarios. And we've gathered a lot of that in Discovery. And if we need to validate more after Discovery, we do. And so, people love frameworks. So, when we show up with the four scenarios, okay, most of the time, the clients just look at one of them and they're like, "Okay, that's clearly the answer." Because the human brain loves to compare things. So, the Scenario of Record meeting really is to compare four scenarios and pick yours. Sometimes they pick the one and we suggest the one. This is where the paternalism comes in. Sometimes we have to say, "Well, it's kind of part of two and part of four." And then after the meeting, we basically adapt one of those and get the Scenario of Record approval after the meeting.

Michael: And then what happens in Aligning Your Assets? I can guess by the name, but...

Bradley: So, we prewire the Aligning Your Assets meeting at the end of the Scenario of Record. And we have some tools and homework to do. But that's when we show up with a draft investment plan that says, "Okay, based..." But here's the key, you need a Scenario of Record first because we have to drive your scenario through the assets. Like, we can't instruct an income floor until we know when somebody is retiring. So, you see, you need that plan first, Scenario of Record. Once you have the Scenario of Record, we then drive the Aligning Your Assets plan.

And when I spoke earlier about things being standard, but then customized at the end, you think about different client segments. So, most are core, some are core and explore. Most have income floors, some don't. Many have securities that come in, are not going to be sold, some don't. Some are about to retire, so we have to do a huge donor advised fund contribution in their last high year of income, but not for all clients. So, this is basically just like a pick list. And that's how we modularize the Aligning Your Assets meeting. And we recommend a capital gains budget.

So, all of this is kind of thought through of ahead of time, which then allows the planner to show up and craft a very compelling investment plan pretty quickly. And so, we pitch it in the Aligning Your Assets meeting, and then we make revisions if we have to. And then we can start implementing at Schwab, implementing through DPL, what have you. And when we say Aligning Your Assets, I try to stay away from words like investments. Because I want people to think bigger. I don't want people to think of us as portfolio managers or investment managers. I want them to think of us as leaders and wealth managers. And so, we have to operate at altitude. And that's why I use some of those terms.

Michael: And then what's the ongoing meeting cadence for regular clients in years?

Bradley: Yeah, so we have two financial review seasons per year. And it's almost like going to the dentist. I mean, we get people to schedule. You know, it's our program, but we do agendize with clients ahead of time. So, we operate two financial reviews per year. The first tends to be more strategic. The second tends to be more tactical. But we also have started experimenting with async options like, you know, "Do you want to do this meeting live or do you want async?" And so, that's interesting because you can make, basically, a video meeting. And not everybody wants that, obviously, but we offer it. But our flat fee does not...we've never had to rate limit access. So, of our 340 clients, there's probably two that kind of abuse unlimited access. And it's small enough that you don't have to do it. And I think once you start putting those types of constraints on, you know, the cognitive load and the analysis paralysis starts to kick in, makes the service much harder to buy if they have to make judgments about, is this enough access, or not enough access?

What Surprised Bradley The Most About Building His Advisory Business [1:23:55]

Michael: So, as you reflect on all this, what surprised you the most about building this advisory business?

Bradley: Entrepreneurship is lonely. So, someone... It's just me. I mean, that's hard because I'm, you know, I'm not a screaming introvert, but I'm also not really an extrovert, I'm kind of in between. And so, you know, the idea of camaraderie, the idea of people validating you and picking you up and things like that. I mean, that can be hard when you're just on your own. That's why it's important to join different groups, you know, what have you. What else surprised me? I don't know if this surprised me, but I didn't do it very well for years and years and years, which is hiring. You know, hiring, I think, is the hard part. I think the business strategy, for me, the marketing, the product, the analysis, the planning, those things come easier. And we and we just didn't get hiring right for several years, but we've dialed it in, and we make a lot more great decisions than we make poor decisions.

Michael: What shifted in hiring that finally got it better? Like, what wasn't working that you changed?

Bradley: Well, a lot of it was getting me out of it. And so, the irony is you can only do that when you've hired great people. So, I guess through sheer brute force and trial and error, I was able to get enough good people here that we were saying, you know, do your interest and ability inventory. You know, what should Brad be spending his time doing, and what should he not? And so, I think that's, to be honest, part of it. I think we have a much more interesting structure now. You know, we use an applicant tracking system. We use an online assessment. You know, we get hundreds and probably get 500 or more applicants per position because we're virtual. And so, we use pretty powerful tools. One is called Recruity. And so, you know, we use knockout questions. So, we never see 400 of those applicants. And we use something called TestGorilla. We finally used structured interviews. And, you know, we've just gotten good at it.

The Low Point On Bradley's Journey [1:26:00]

Michael: So, what's been the low point for you on this journey? Is it in an advisory firm or prior. I know you have a whole world before you even launched the advisory firm.

Bradley: Yeah, I mean, I would say the most relevant low point for me was actually before I before I founded the firm.

Michael: Okay, what was that?

Bradley: And I would say that my success is largely driven by having gone through it.

Michael: What was that?

Bradley: So, I, from age 0 to age 37, I basically didn't fail. You know, I went to Harvard. I went to Stanford Business School. I was promoted a bunch of times and became a partner in a strategy consulting firm. I grew the Motley Fool. I was the publisher, I was the chief marketing officer. I was kicking a lot of butt. Age 37, I move up to New Hampshire, and I resigned from the Fool. And why did I do that? Good question. But we just decided to move to New Hampshire, and things started to get hard for me. And they got very hard for me to the point where I, basically, lost my confidence.

And those were some tough years. I had three little kids at home. And I was underemployed. And I lost my confidence. And, you know, I was reading a book called "Mindset" by Carol Dweck, you know, the growth mindset, fixed mindset. So, I'm reading this book. And I'm reading about the difference between the growth mindset and the fixed mindset. And I had this very painful lesson that I learned, which is that I had a fixed mindset, and that I did not really have stores of resilience. And my identity was so bound up in being smart and successful, that once I lost that...I worked for a nonprofit up here. I got fired from the nonprofit. And I didn't have, arguably, the most important thing that we need in life, which is resilience. And resilience is being taught in schools now. And I think a lot of it traces back to the growth mindset that failure is learning. All this beautiful stuff.

So, I pull myself out of this period largely by reading. And I read so much about psychology and positive psychology and confidence and optimism. I mean, Kahneman has a chapter in his book called The Engine of Capitalism in  "Thinking, Fast and Slow".

And in that chapter is about optimism. And that was another thing that I read, he has a sentence in there that also stop me in my tracks, and his premise is that optimism of the 25 kind of core cognitive biases, right, that optimism is the most important, the most powerful. And he summarized it by saying, still gives me shivers to share this, "If I had one hope for my unborn child, it would be that that the child would be born an optimist." And I look back and I've been a realist my whole life. I've been proud of being realistic. I've looked down on people who say, "Oh, it only takes 20 minutes to get to the airport," because once out of 100 times it took them 20 minutes. But then I realized that I wanted to become an optimist. I wanted to adopt a growth mindset. And then I started studying confidence and optimism and the interplay and mindset and all these things.

And then finally, several years later, because I've always been... Like, when I took the Modern Portfolio Theory class, [William] Sharpe showed us the arithmetic of active investing in one of his most famous, like, page and a half sheets. And I looked at it and my conclusion was, this whole thing is a scam. The whole thing is a scam. And that stuck with me. And in that class, we had to write retirement…we had to write a financial plan. I wrote it for my father, who was career CIA and was going to be retiring in a few years. Unfortunately, and this is crazy, but it's part of the story, a couple of months later, after I did that plan for my dad, who was 52, we won we went on a raft trip down the Colorado River in the Grand Canyon to celebrate me graduating from Stanford Business School. And my father got really sick and passed away on that trip.

Michael: Oh, my God.

Bradley: And we had we had to be helicoptered out. And he had liver and kidney cancer. It just came out of nowhere. And so then I'm like, "Okay, my father never got to use this plan." But then I went off and I had to do, like, the business thing. I went back to consulting, I did dot-com stuff, whatever. But there were these seeds that had been planted by Bill Sharpe and by my dad and by that ultimately ended up happening to me and me losing my confidence. That all culminated in me saying, if I don't start what I think is an enlightened practice, and demonstrate to younger advisors how you can actually do this, right, that you can run a flat-fee firm and minimize conflicts of interest and do this in the right way, I'll regret it for the rest of my life.

And so, I was able to take... I mean, I started this at forty six, which is much later than most people who do this. The benefit is I am getting to use every single experience that I've had, every educational experience, every experience. I'm getting to use a very dark period and bring all of that to bear on this firm. And so, in that way, the last ten years have not really been a struggle. But what it has been is a payoff of a severe struggle prior, and then all these other experiences that I had in my life, significant education and professional experiences.

Bradley's Advice For His Younger Self And For Newer Advisors [1:31:46]

Michael: So, are there any other pearls of wisdom you have of the experience now of running the advisory firm that you wish you could go back and tell you ten years ago when you were starting the firm?

Bradley: Oh, boy. Yeah, I mean, I think that's a different way to ask kind of like, what are the mistakes? I mean, I do believe that something that can happen to founders is it's hard to delegate because you assume the person you're delegating to will not do as good a job as you will. And you assume, therefore, that you are actually more important than you really are. And so, I think I've gotten better at delegation. I mean, if I could do it all over again, I would have done that sooner. I would have figured out a way to get out of the mutual fit meetings, not after nine years, but maybe after seven years or six years.

I also think that...I've ran into this other framework I love called Interest and Ability. And so, if you look at all the things that one would do in a senior position in a small financial planning firm, and just, let's say, you wrote down a list of 15 things. And then you score yourself on your interest in each of those things, high, medium, and low. And then you score yourself on your ability, high, medium, low. And maybe there's three things in there that are high highs. Well, you should probably just do those, and then find other people to do the rest of them. And I think that's very powerful. So, we try that. I try to honor that. I'm not always successful. You know, with each of my team, we do the Interest and Ability exercises. And that has been helpful.

And I would say, if your if your interest is high, but your ability is medium, that's okay. That means it's an area where you want to develop. And maybe if you really want to develop, maybe the way to think about your role is you spend 80% of your time in the high highs and 20% of your time on that development stuff, which is high interest and a medium ability. The problem is there's no such job as that. So, every job is going to have some low lows and some medium lows, whatever. But if you can keep that to, let's say, 20% of the role, then you're good. But if you find yourself in 30%, 40%, 50%, it's outside of that high high or that medium high, that's not good because you're going to burn out, and your company is really never going to reach escape velocity.

Michael: So, any other advice you would give younger, like, newer advisors getting started today as opposed to ten years ago?

Bradley: Wow. I mean, I'm going to say something some people aren't going to want to hear. I guess it may depend on what you've done prior to becoming an advisor. Clearly, there are advisors who can spend their whole career in this business and do extremely well. So, clearly, that's true. I'm so biased, though, because of all the things I got to do before I changed careers. And I feel like... I don't want to liken myself to Tom Brady because I'm not Tom Brady, but he has this expression, "Oh, I know the answers to the test." There's something about starting this thing at 46 with the experiences that I've had that feels like an unfair advantage.

And so, what's interesting is, if you're younger, if you're 30 or something, and you've only worked in financial advice, I think there's a very interesting question to ask yourself, which is, am I going to get what I want to get by staying in this business? Or should I just go do a couple of other things and come back? And very few people will choose to do that, because it's very uncomfortable, you have to take a bunch of risks, etc., etc. So, my guess is, very few people will do that. But there will be some for whom that's clearly the answer. And so, I think that's interesting to ponder. And if you don't do that, then how can you grow as an advisor and somehow simulate or get some of the perspectives and some of the skills and some of the things that are not going to be taught to you, unlikely to be taught to you by financial advisors.

What Success Means To Bradley [1:35:54]

Michael: So, as we wrap up, this is a podcast about success, and just one of the themes that comes up that that word success means very different things to different people. Sometimes it changes for us as we go through our journey. And so, you built this wonderfully successful business as it's crossing millions of revenue and a billion-plus of assets. The business seems to be in a great place, although, no, you're not quite at your minimum, efficient scale number, yet. How do you define success for yourself personally at this point?

Bradley: Yeah, that's a great question. So, I'm not sure if I'm going to cheat in the answer, but I am committed to getting my business to minimum, efficient scale. And then once that happens, let's say it's three more years, I think we then start a succession process. And so, you know, it's funny, I struggle with this answer for the same reason I struggled when I was 37, although I think I'm better off, which is, you know, the advice that we give is it's better to retire to something than from something, right? I think that's huge when I heard that. I think a client taught me that. It's very important to retire to something, and it's much better than retiring from something. And so, I know you didn't ask this question, but, like, what would I do if I didn't have this business? What am I going to retire to? Hard question, and because I love it so much.

I think the cool thing is that a business like this does allow you, should allow you, if you choose to do it, to basically fade away into the sunset. And so, right now, this is a single member LLC, but these ideas about succession plans, and over time, you know, you basically train up and mentor the next generation, and slowly transition the firm to them over time. At some point, you've transitioned control, and then you can kind of fade away into the sunset.

I mean, my last kid is about to graduate from high school. I'm married. I got remarried. And so, I feel like my wife is extremely good at living kind of in the present moment. My whole life, I feel like I've lived in the future, not in the present, not in the past. And I think people who are able to live in the present responsibly, I think that's a gift. And I think one of the things that is wonderful about my wife, Kara, is that she can do that. And I've gotten better at doing that. And so, I think to me, I think that's part of the answer.

I love mentoring. I love teaching. And I'm proud of the kind of the culture that we have at our company. We're about to all go to Sonoma, California. We get together once a year, and we can have a two-day team meeting. But it's all fun. It's all social. There's no business done. And I'm proud of that. I'm proud of being able to create that environment. And I definitely want to be an example. I think success ultimately is to be an example to younger advisors. Because I feel a little bit like a trailblazer here. You talked about the flat fee movement that you said most are single shingle. So, if I'm on a pretty short list of people that are kind of powering through to do an enterprise, I do think that could end up being quite an example for the next generation of planners.

Michael: I love it. I love it. Well, thank you, Brad, for joining us on the "Financial Advisor Success" podcast.

Bradley: Oh, it's my pleasure.