Systematizing Your Differentiated Service As A (True) Retirement Expert While Scaling To $850M Of AUM: #FASuccess Ep 509 With Dana Anspach

Podcast Player:

Resources Featured In This Episode:

• Dana Anspach: LinkedIn
• #FASuccess Ep 029: Attracting Baby Boomers Digitally To A True Retirement Decumulation Specialty with Dana Anspach
• Sensible Money
• Finding Confidence To Differentiate On Advisor Value Instead Of Price
• Box
• Why 50% Probability Of Success Is Actually A Viable Monte Carlo Retirement Projection
• Does Monte Carlo Analysis Actually Overstate Tail Risk In Retirement Projections?
• Estimating Changes In Retirement Expenditures And The Retirement Spending Smile
• Asset Dedication, LLC
• Strategic Coach
• "A Game Free Life" by Stephen Karpman
• Stagen

Full Transcript:

Michael: Welcome, Dana Anspach, to the "Financial Advisor Success" podcast.

Dana: Michael, thank you. It is so good to be back.

Michael: I'm excited to have you back today. This is another one of these moments where we get to look back on almost a decade ago. You had originally joined us in 2017. Many things have changed since then. And part of the framing even then was that you were very focused on differentiating yourself as a retirement expert, as someone who is really trying to craft a specialization in retirement.

And I think I'm fascinated to get to talk today about how that has changed and evolved for you over the past decade, as I feel like now we are really crowded in this world of "everyone" who's an advisor wants to work with retirees and help them manage their retirement portfolio, it seems.

And we've always had that, to some extent, for decades. When someone transitions to retirement, and the 401(k) assets are suddenly liquid and available, that's always been a new client transition opportunity. But it really does feel different, at least to me in today's environment, as more and more of the industry goes from products and brokerage to advisory and financial planning.

AUM model is more dominant than ever. There are more holistic advisors looking to work with retirees and roll over their assets. And it's just not as differentiating as it once was to say, "Well, we don't just manage your retirement assets. We provide comprehensive financial planning as well." That's a box that more and more firms are checking.

And so I know you've had incredible growth over the past decade. You were just over $100 million when you joined us then. You're now cruising towards a billion now, still with the focus on, as I would say, true expertise in retirement planning.

So I'm excited to get to explore today and just understand, what are you actually doing to try to differentiate yourself and your services and what you deliver to clients framed around retirement expertise?

Dana: Yeah. It is a challenge. I agree. Ten years ago, or nine or ten years ago, when we recorded setting yourself out as an expert in the retirement income side of things, decumulation, was something that you didn't hear about as often. And as that has changed, it has become more challenging for us to differentiate. A lot of people say they do retirement planning, but when you look under the hood, they may be using off-the-shelf tool, whether that be like MoneyGuidePro or eMoney.

And when you look at the actual strategies and the way they align the portfolio to the cash flow needs, we can see that what we're doing is very different. And yet on the surface, the terminology that's used may sound the same to the consumer. So I think it has become a big challenge for us. And there are times, truthfully, where we go, "Okay, it would be simpler to do it that way. It might be even more efficient from a firm cost standpoint to do it that way. But do we believe the way we're doing things adds enough value?"

And every time we dig down and look at that, we go, "Yes. Now that I know there's a certain depth that we can go to, I wouldn't feel right about not doing it that way." But it has taken a lot of customized processes in order to get to the depth that we really feel good about.

How Dana Navigates The Data Gathering Process [06:01]

Michael: So to start, I'd love to just dive right in to understand what does the actual, I guess, financial planning/retirement planning process look like in your firm?

Dana: Yeah, absolutely. And I think that has stayed remarkably the same. So I think it'll be easier to start with new client onboarding. And of course, when we do an introductory meeting, we've explained this process to them. But we break our onboarding into a series of what we call strategy meetings with very specific topics that we cover at each one.

And so we start with Strategy 1. They've already uploaded their documents. We've gone through those. We've gotten the documents into the planning tool we use. And we use a custom-built planning tool. We've looked at off-the-shelf software. And there are certain things that I'm sure you and I will get into that they don't do that we want to be able to do. And so for that reason, we've continued to build our own planning tool that we are just now coding into actual software.

And so we get all that data into the tool. And at Strategy 1, we want to focus on the big picture. And the big picture to us is, generally speaking, do you have enough to maintain your lifestyle and retire at the date that you would like to retire at? And we aren't doing any tax optimization here or any portfolio strategies. It's just a broad general look at do we think you have enough? Because if the answer is no, we need to rethink the actual retirement date or the total amount of spending. And there's no reason for us to go into all this more detailed optimization if that initial answer is, hmm, I'm not sure that works.

We also feel like there's so much to go over and the stakes are so high at retirement that if we can break it out into a series of meetings, it gives the client a chance to digest the information, to be more thoughtful, to really understand. And confidence typically comes from understanding. So if you gather all the data and then you have one meeting to look at a broad general plan, I feel like you haven't covered all of the nuances and factors that are applicable and that the household, the people may not really understand those nuances as well. So we feel like education is a critical part of the process and why we break it out into these three meetings.

Michael: So now help me understand then, as I'm coming into meeting number one, how granular is the data? What am I providing? What do you not need yet? How do I get it to you as the new client? What does that data gathering process look like? Because that's a pain point for some of us unto itself.

Dana: It is always a pain point and it is very granular. So we ask for everything up front. We ask for Social Security statements, and then we provide specific instructions so they can log into their Social Security account and actually download the earnings history, which no longer appears on the statements.

We need that earnings history to get a more accurate projection of what Social Security benefits will be and how to calculate when someone should start, and survivor benefits, taxation, all of those things. We ask for a detailed budget and we provide our own template of how to organize that information.

So some items inflate, some don't. So, for example, when we pull a mortgage statement, we have a principal and interest amount. Goes in one field because that is going to end at the point the mortgage is paid off. But we want to separate out property taxes, homeowner's insurance, and even necessary repairs. And those items are going to inflate.

And so we want to separate those things out. We want to separate out medical expenses. We use a different inflation rate that we apply to those versus the inflation rate that we apply to what we call general living expenses. So it's pretty granular. We ask people to use our template to fill in their living expenses. But if they don't, we'll take whatever they have. If they do it on an Excel spreadsheet or type it up in a Word doc or export it from a software program that they use, and then we will convert it into the categories that we need to get that into the planning model.

Michael: So what other...I'm intrigued now even by the category details in the budget. So what else are you uniquely breaking out or doing differently as you collect budget information?

Dana: Now we like to separate out auto purchases. And we will ask people details, for example, on how frequently and what price points they may purchase at. And households can be really different. Some people don't care much about cars and they might say, "We'll spend $30,000 to $40,000 every 10 years. We drive our car until it's gone." And other people, they want to lease, they want to have the newest car every single year, or they're going to buy a higher end vehicle every five years. And so that is one of the areas where we get into more detail.

We will also ask about the age of the home. And so if you have someone that is in an older home that hasn't had any major repairs done…for a household that is lower net worth, expenses like replacing the roof or the whole plumbing system or electrical system may need to be redone. Those are pretty large. A water heater, we may not need to itemize that. But some of the big major repairs, if someone has an older home, we want to factor that in, build that into the budget.

We'll ask about what we call them now lumpy expenses or one-time expenses. It might be a wedding coming up for an adult child. It might be a dream vacation to take everybody, the entire family on. And something they may not do every year, but we've had people ask about a once-in-a-lifetime around-the-world trip that was going to cost $150,000. Could we do that? And so those are expenses we like to build in. It might be, I might have mentioned this, a down payment on a home for an adult child.

So we think it's important to account for those periodic lumpy expenses. They may not happen at exactly the year we have them in the plan, but the plan has then been built. So those expenses are sustainable and part of the process.

Michael: So I've got to ask, how often do new clients get stuck on this? My experience is there's a wide range of how well people can actually express and articulate their expenses. And some do it quite well. It's very straightforward for them. And others, this becomes a huge blocking point. So how often does the process flow as it ideally should? And how often does this become a sticking point or something you got to work around?

Dana: Yeah. We really try to accommodate the client and meet them where they're at. So if they're very detail-oriented, we find they will fill out our spreadsheet and actually love it and say, "Oh, this is great." If they're less detail-oriented, they may provide us a summary in a Word doc. If they're even less detail-oriented, they may give us a one-line item. We think we're going to spend $10,000 a month or $20,000 a month. And then in that first meeting, it becomes easier to do some dialogue to pull out some of the details that are needed.

So you have to meet the client where they're at. Some things, upload a mortgage statement or tell us your total credit card spend for the entire year. You can usually go look that up on your year-end credit card statement. Don't worry about the details. So we can find ways to work with them in whatever span they fall.

Michael: And then you try to start teasing some of it apart in the first meeting to just ask them in person, "Hey, you put $12,000 a month. Hey, can we just brainstorm a little how much of that is probably medical? How much of that is your mortgage? Can we start trying to articulate this a little bit more?"

Dana: Yeah, and a lot of it we can articulate from the documents. So we ask for pay stubs. And from that pay stub, we can see if health insurance is coming off the pay stub. So we don't have to ask them. And then we have some built-in assumptions that we use in terms of what health insurance will cost once they're no longer working. So we can use those assumptions to feed in, assume they're going to have a Medicare supplement plan. Our model will automatically calculate Medicare Part B and D based on what the modified adjusted gross income was.

And so there's so many things that if they can just get us the documents, we can extrapolate from that and then ask a few key questions. For example, we have a simple...we use Box as the technology for them to upload the documents, a secure encrypted environment. And within Box, there's a...it's like a Word doc, but it's called a Box Note that has questions in it that they can just type in answers. And so those questions might be, "How often do you purchase a car and at what price point?"

So instead of having to think of that in terms of their budget, they can answer that in real life language. And then we can extrapolate that and turn that into the assumptions that we use.

Michael: Okay. And so they're getting essentially a questionnaire and list of requested documents and a link to Box before the first meeting for them to complete the questionnaire and upload documents.

Dana: Correct. And all of that, of course, is a template email that we use, and we try to templatize everything we can so that it's consistent and standardized.

Why Dana Is Willing To Accept A Monte Carlo Success Rate Well Short Of 100% [16:18]

Michael: Okay. So then I get into the first meeting and we've plugged this information into planning software because we're just trying to get to the high level, do you have enough? Is this reasonably on track? Just like, can we go in the direction of your original plan? We want to retire at 65 and live on about this much money, or do we already see it's so off track that we need to pick a different goal?

Dana: Correct. And it also helps us assess what will come next. So I had a client that had several pensions and Social Security and wanted to see every iteration of claiming the pension at this age, Social Security at this age. We must have run 50 iterations of their plan. And so other clients at that conversation in Strategy 1, you get the sense of a much more simplified situation, or they don't need to see all those iterations.

And so that first meeting also gives a sense of where we will focus next. What are the main issues that we see where we can add value? We don't know that until we have that big picture. We also run three, what we call different retirement readiness tests throughout the process.

And so Strategy 1 is a Monte Carlo. It's a simplified version of Monte Carlo. And matter of fact, internally, we were just referencing your article. I think Derek Tharp wrote it.

Michael: Yeah.

Dana: Yeah, is 50% Monte Carlo probability enough when you're planning on an ongoing basis. And so we were just reevaluating our own Monte Carlo parameters and redrafting and rewriting our testing parameters and what we think actually makes sense and incorporating some of that research.

Monte Carlo, we feel like has its limitations, which I know are discussed in the industry. One that has come up recently, and I don't know if you've come across this before, but generally, if we get higher rates of return, you're also going to pay more income taxes, and if you get lower rates of return, you're going to pay less.

And so we were just talking about that recently. Really, all of the assessments are overstating the upside because if you're using a cash flow-based assessment and taxes have already been deducted out, on a higher return scenario, taxes are going to be more. You haven't really accounted for that. And they're understating the negative side. And how do you solve for that as you're building software without running every single permeation?

Michael: Well, some of that, technically to me, it's a modeling...it's a calculation engine tool, right? If you build your tool to dynamically calculate prospective tax exposure every year and compartmentalize into what's likely dividend income, what's likely interest income, and what's likely capital gains income from rebalancing or liquidations, you can model that with what tax brackets would you fill or not and get to those results.

That being said, I don't think a lot of the tools out there do, if they account for taxes at all. They tend to account for flat tax rate assumptions that are assumed to apply in all years, which creates the exact problem you're highlighting. We end up overstating the extremes in both directions. The good returns aren't as good because the tax burden is higher, but the bad returns are actually less bad because the tax burden ends up being lower.

Dana: Yes.

Michael: And there is an irony to me when we...we started out doing Monte Carlo because we wanted to model just like what happens, not just on average, but with sequences and with some of the tails that can occur. And in practice, most Monte Carlo tools actually overstate the tails.

Dana: Yes.

Michael: From what happens.

Dana: Yes.

Michael: We've modeled that in some research we've done on Kitces as well over the years, that there's actually a bunch of different assumptions in traditional Monte Carlo tools that ironically tend to overstate the tails, not understate the tails. We don't do taxes dynamically. Most models don't do returns dynamically. It's like if the market was up 70% in 2 years because of some raging bonkers bull market, the traditional Monte Carlo tool says it is equally likely to get a good return in the next year when realistically, if you're up 70% in 2 years, you're probably at elevated risk for a pullback. And you can model that in tools, but most don't. It's not technically limited to Monte Carlo as a framework, but it is a limit of how most software implements Monte Carlo in practice.

Dana: Yes. And so knowing that you have to understand the limitations of the software and then adjust what is a "passing" result for this stress test accordingly.

And so that has caused us to revisit the assumptions we use in the Monte Carlo and realize, okay, maybe we thought you needed an 80% success rate or higher, but realistically that's probably 70% or even 60%. If I follow Derek Tharp's research, maybe 50%. And so how do we adjust those parameters? Are we, by using stress testing that is too conservative and we're already so conservative in the assumptions that we model, are we contributing to this client underspending during the go-go years?

As we know, most retirees that have done a good job of saving and accumulating are going to retire or pass away often with more wealth than they had at retirement. And so we're really trying to reevaluate those assumptions. Nobody wants to be too aggressive and we don't either because it is a big responsibility to say, "Yes, we are confident that this retirement works and can sustain your lifestyle." And so finding that balance is a challenge. It's something we spend a lot of time on.

Michael: Because the countervailing factor for you is I don't want to cause them to underspend in the go-go years and not actually enjoy their money while they could have.

Dana: Exactly.

Michael: That's the balancing point you're trying to weigh here.

Dana: It is the balancing point. And having clients that I have now worked with since 2001, when you've served people throughout what I now call the four phases of retirement, pre-go, you've served them throughout the pre-go, preparing for retirement, then the go-go years where they are spending more, and then the slow-go years, you watch that cycle. And then as they enter the tail end of life, it informs how you think about it.

If you are a newer practitioner and you haven't lived through those cycles with clients, we read about it on paper, it's very different to experience it. These clients become like family. You know them so intimately, and you think, "Wow, okay, people should do those things when they can and when their plan says it's sustainable," because we've seen clients get cancer or pass away suddenly or a disability takes over and they're not able to do those things later.

So you try to balance that out very, very carefully. Make sure people can do the things and enjoy those years where they're healthy and they're able, while preserving enough that they would never be running short later.

Michael: So out of curiosity, where is your Monte Carlo percentage threshold at this point? What levels for you are, "That's too high, we could probably increase your spending," or "That's too low. We really got to change something. You're at too much risk?"

Dana: Yeah. We just agreed this week, actually, to set it at 70%. Still what we feel is conservative. We have a footnote in the document that goes to clients that references your article, and the ability for each of our planners to exercise professional judgment. And what I mean by that is if I have a client that's still 5 years away from retirement and their Monte Carlo is 68%, I know every single year it is likely to improve. That's just the nature.

Michael: Every year there's not actually a catastrophe. This is probably going to get a little better. Yep.

Dana: Yes. And so I wouldn't tell that client, "Nope, that retirement date is not feasible." This is where the planner's judgment and training comes in. And so we have...but by the time they get to retirement, now I'm on the cusp of retirement, I want to retire next year, well, that's when I want to see it hit that success level. But if I've still got many years ahead and it's not there yet, I'm not too worried because it's only one of three retirement readiness tests that we use. So I have other metrics to balance that off.

Michael: Okay. And so that encapsulates first meeting, then? Like, "I brought my data. We're doing an overall viability smell test for the plan. Monte Carlo is the particular engine for doing the determination and to figure out, is this strategy viable or do we need another strategy? Because your goals just aren't realistic to your assets and your plan." And that's the crux of meeting number one?

Dana: That is the crux of meeting number one and talking with the client, getting their feedback on... In most cases, truthfully, we see that the plan they want is feasible and that there may be room to do more than they were thinking. So in those cases, we want that feedback to say, "Given this result, would you want to retire earlier, or would you want to do some things differently in those go-go years, build in more spending? Is there gifting? Is there travel?

And so that initial pass allows us to say, "What would you like to do, given this result?" In the cases where it doesn't work as well, it is the same conversation but a different conversation. But I would say the nature of the clients that we are typically working with, we are very lucky that oftentimes the plan looks sufficient and there is room to do more than maybe they thought.

Engaging In Scenario Testing To Model Different Planning Strategies And Outcomes [26:44]

Michael: Okay. So what comes next in the process then?

Dana: So what comes next is scenario testing. And that can be anything from running different Social Security strategies, really deciding when the highest earner should claim, if it is a couple, or if it is a single, discussing the pros and cons of different claiming ages and tax optimization, or what we call withdrawal planning. I actually like to call it tax management now because how do we really know if we are optimizing? We won't know that until we are looking backwards in time.

And so we think of tax management as, should I withdraw from the IRA? Are there years where I can realize capital gains at a 0% tax rate? Are you already doing charitable gifting? What does that look like if I switch that to using qualified charitable distributions when you turn 70.5? So all of those things that come into the tax management process. If you have rental property, is there a year where it might be more beneficial to sell it than in other years due to the other income streams that you have coming in?

So we will model different scenarios, come up with a path for the client. Should they do Roth conversions? When should they begin drawing out of a health savings account if they have that option? Should they continue to contribute to Roth IRAs if one spouse is working longer and maybe one is retired earlier? Sometimes households that didn't have that ability because their income was too high suddenly find that there is a five or six-year span where they are able to do that.

So those are all the scenarios we'd look at in that Strategy 2. When it's corporate executives or people with benefits, then it's looking at stock option, exercising deferred comp plans. So we've had many cases where we looked at restructuring the timeline of those deferred comp payouts. And, of course, that can get tricky. Now, if you change the payout date, it usually has to start five years from the original date. So there's some discussions there around the financial solvency of the company they work for and if it makes sense to extend it over that timeframe.

But all of those nuances, if there's life insurance and significant cash value, does it make sense to use some of that value for tax-free income during certain years? Those are all the nuances that we're looking at in that Strategy 2 meeting.

Michael: So I can see the flow now. So meeting number one, we got the big parameters in place, right? When's the retirement transition? What's the baseline spending level or tiers if I'm higher in the go-go years and I slow down a little later? So that puts some meat on the bones so that then you can scenario optimize around that framework to say, "Okay, well, given your retirement is at this date and this age, okay, how do we Social Security optimize around it? Given your spending is going to be these layers in these years, okay, what's our drawdown strategy across the Roth and the traditional...and the IRA? And what conversions do we want to do? And all the rest. So, right, am I thinking about that sequencing well?

Dana: Absolutely. Absolutely. Because let's say the client thought they were going to work till 65, but we're like, "Actually, you could be done now at 62." Well, that's going to change that withdrawal strategy. It's going to change the Roth conversion pattern. Or maybe they say, "Wow, okay, we will work till 65, but man, when we're done, we want to go, go, go. So let's build in this extra spending." Well, that can also change all of those parameters. If we need more of those withdrawals to cover lifestyle spending, sometimes that means the Roth conversions don't make as much sense.

If you have a household who does want to really contribute to the next generation in the future, Roth conversions are great for that. They can also be great to set up a surviving spouse for a more beneficial outcome if one spouse should be long-lived and one shouldn't. But there's other cases where really all you're doing is converting and paying tax for the next generation, which is great, but maybe you want to give to them now. Maybe you want to be able to see the benefit of what you're giving. And so that may entail less Roth conversion.

Michael: So help me just think through, I guess, mechanically how you're doing this. I guess I'm just trying to visualize how much is what you do between meeting number one and meeting number two. Because I'm presuming you got to build some scenarios in the software. You got to create some alternatives to look at. How much is building scenarios before and presenting recommendations in meeting number two? Are we building scenarios before to talk about them and choose the scenarios in meeting number two? Are we asking them about scenarios and building them on the fly and illustrating them live? What's the pre- versus the end meeting balance to this?

Dana: It completely depends, of course. Our typical financial planner answer, right?

Michael: Of course. Yeah.

Dana: Of course. It depends on the complexity of the client. There are clients where, just working through some of the post-Strategy 1 discussions, we end up...we call it Strategy 1B, Strategy 1C, where we're still working through potential retirement dates and spending. And then when we get into Strategy 2, typically we like to have a most likely path by the time we get to Strategy 2. And then we're running the scenarios in the background and most often presenting the client with our recommendation rather than going through all of the scenarios.

Now that does still depend on the client. A lot of clients hire planners because they want to delegate, and they really don't want to get into every one of those nuances. And so they prefer, here's our recommended strategy. These are some of the things we looked at, but this is why we're going this direction.

We do have clients, though, that want to see all the iterations. And so when they want to see all the iterations, there is a comparison chart or tool that we've built that we use to discuss the pros and cons of those different situations. And the way we typically measure at Strategy 2 is the second of our three retirement readiness tests, which is a fundedness ratio that I built coming out of the Retirement Management Advisor designation. It doesn't follow their formula exactly, but it follows the same principles.

So we're taking the present value of the cash flows that the client needs and comparing that to the current value of their assets to get a ratio that we want to see at 110% or higher, so that their current assets are 110% more of the present value of the cash flows it needs to support.

What we love about this metric and the way we run this in Strategy 2 is I assume the rate of return on all of the accounts is identical. And so what I can do is simply compare withdrawal strategies, compare Roth conversions, and everything factors into that fundedness number. So if I did a certain type of withdrawal order or added Roth conversions or changed when they claimed Social Security, did my fundedness go up or did it not? And because everything's encompassed in that one number, it allows us the metric to say, "Regardless of portfolio, using a conservative set of assumptions, did this strategy work?"

Michael: Right. So I guess I'm just thinking that is different than a lot of advisory firms. So I think about how this plays out for most of us. If I'm doing scenario testing, either I'm looking and saying, "Scenario B has a higher Monte Carlo than Scenario A, right? It was 83%, but we did this scenario and now it's 85% and 85% is better than 83%, so you should choose Scenario B." Or we're looking at some wealth at the end, wealth over time, I guess technically, well, looking more in future value context than present value context and saying, "Hey, your plan was pretty good, and this scenario also adds half a million dollars to your wealth at the end, or you can spend it along the way, but clearly more dollars at the end for an otherwise equal scenario is better than not. So this must have improved your wealth over time."

So I think, like most of us, it's probably Monte Carlo or some reflection on how this changes future values. You're shifting it because you're present valuing everything and doing it on a fundedness ratio.

Dana: Yeah. And we find that to be an all-encompassing way to measure one technique versus another. Now we do also look at, we call it liquidation value at the end of the plan. So for Roth conversions, there can be an interesting...

Michael: Yes, if I heavily Roth converted you, I can get to some weird scenario, like Scenario A, you have $1.1 million and Scenario B, you have $1 million, but Scenario A is all IRAs and Scenario B is all Roth IRAs. So you probably want $1 million Roth over a $1.1 million pre-tax. So at some point, we have to reflect liquidation values.

Dana: Yes, we have to reflect liquidation values. And in those cases where the answer is not clear-cut, we will often look at break-even. So if I'm running out my liquidation value in a Roth conversion strategy, and it looks better with the Roth conversions, and I compare that to a strategy where we don't do Roth conversions and the break-even, it starts to look better in terms of after-tax value in 12 years versus it doesn't look better until year 27, well, those are very different scenarios.

The one where it doesn't look better until year 27, the answer to the client might be, well, this strategy can improve the after-tax wealth that you're leaving to heirs, if that's what you want. In the scenario where the Roth conversions look better in year 12, well, it's also providing some value for a spouse that may be a single surviving spouse. And so that becomes another nuance that... We don't have to look at in every case, but in the cases where those are the relevant factors, it becomes another level of how we evaluate the decision.

Michael: Okay. And why 110%?

Dana: Well, we just wanted that margin.

Michael: Okay. Fair enough.

Dana: That's the honest answer. If we look at could 50% Monte Carlo be enough? Yes, but when we're talking about retirement, we just want that margin in there.

Michael: Out of curiosity then, how did the two line up? Because if you're running similar...if you're running both of these metrics on what ultimately is a similar strategy, I'm presuming there's some correlation, like 100% funded tends to be X% in Monte Carlo and 110% funded tends to be Y% in Monte Carlo.

Dana: Yes, and that is one of the reasons why we were rethinking our Monte Carlo strategies, because we were seeing many scenarios where 110% was sufficient in the fundedness model, but Monte Carlo may show it below the previous 80% we used. And then when we really think through it, we're like, "Well, this doesn't make sense." For all the reasons you said earlier, Monte Carlo is overstating the tails. We really need to rethink these metrics so they align a little better.

Michael: Okay. Okay. And so that was part of the pressure even to revisit, could we actually manage to lower Monte Carlo and just explain, "You can make adjustments if things are going really badly. You don't have to spend a lemming off the cliff if things are going badly."

Dana: Yes. Yes. And I've often said it doesn't make any sense for me to retire day one as if the Great Depression just began. It has not begun. If it does, absolutely, we will all be making adjustments together, right? But why would I plan my retirement right now as if that was the reality when there is time to adjust?

The other thing we do in Strategy 2 is customize testing based on the spending demographic. So when we look at David Blanchett's research on the spending smile and smirk, and look at real spending declines in retirement across all demographics, that is definitive, from all the research we've seen, not just from him. There's a RAND study done in 2022 we were looking at, there's JPMorgan's data, and they break theirs into different net worth segments. So we'll often look at the $1 million to $3 million net worth segment.

So when we look at that, we will break out this testing to say, "Well, what inflation assumptions make sense if this household is spending $250,000 or more a year, or if they're spending $100,000 to $250,000 or if they're spending less than $100,000?" And for the higher net worth, higher spending households, how do we also customize that by maybe building in what we call rolling go-go spending? So let's say a household wants to spend an extra $50,000 a year on travel for their go-go years.

Well, if I build that $50,000 in for the life of the plan, it's probably not going to look great, but if I build it in for the next 7 years, it looks good. And then next year, if the plan continues to pass all the metrics, well, we just extend it so it still goes for seven years. And the next year, we may extend it again. And if we start to get a more adverse set of market conditions, well, then we could say, "At this stage, we may need to reduce or roll off that extra go-go spending." So we've found treating it on a rolling basis like that really works well.

Michael: So does this cover all of meeting number two then?

Dana: It does.

Aligning Client Portfolios To Match Cash Flow Needs [41:10]

Michael: Okay. So what comes next in meeting number three?

Dana: So in meeting number three, it's really around aligning this portfolio to the plan. So by the time we're done with Strategy 2, we typically have a proposed cash flow plan. How much is going to come out of which account in which years? And I'll take the simple example of a couple where there's an age difference between them. Let's say an eight-year age difference. Well, we may be withdrawing from the older spouse's retirement accounts far sooner than the younger spouse's.

So should those two accounts be aligned and allocated the same? We would say no. So we want to take those cash flows, and we use a specific investment process called asset-liability matching, where we're buying bonds or CDs or bullet shares, which are a package of bonds that all mature in the same year. And we're matching those fixed income instruments to the specific cash flows that are coming out of each account in each year, typically for about the first five to eight years. And then the remainder of that account goes into the growth portfolio. And it's an alignment of the investments to the plan.

One of my pet peeves, which we have probably talked about before, is there can be this great plan, and then you fill out this disconnected risk tolerance questionnaire, and it spits out, well, you should be at 65/35. And so I don't like that disconnection in our process. The investments are aligned specifically to those cash flows that we need.

Michael: So functionally, I'm going to, I guess, calculate a present value at actual bond interest rates of your spending needs over the next eight years, buy a series of bonds, CDs, bullet shares, whatever it is, to mature at the right dollar amount for each of those five to eight years to cover those spending. And then everything else goes into, I guess, an all-equities portfolio at this point because we just did our fixed income allocation.

Dana: Correct. And we work with our investment partner, Asset Dedication, and they have a specific type of equity model that they call time-segmented equity models, where, if you look at what the minimum outcome would be over a worst-case scenario, they're building that equity model around that. So if I think of standard risk metrics or using standard deviation, often on a quarterly or year-over-year basis, well, if I have fixed income that's maturing and it's going to cover all my cash flows for the next eight years, do I really care about one-year standard deviation? Or do I care about what is the standard deviation of the portfolio over a five to ten-year timeframe?

And so their time-segmented equity models look at the volatility of the equity portfolio over longer timeframes and solve for what they call minimax, what scenario gave you the best outcome in a worst-case market condition, at least in the past. And so they're often weighted more towards small cap value, international, emerging markets, value in general, than you might see in a more traditionally constructed portfolio.

Michael: Okay. I was going to ask, in practice, how does this show up? So you get some tilts towards, I guess, the things that have tended to have good factor outcomes over longer periods of time.

Dana: Yeah. And what's interesting is it's not because their performance was better. The reason they end up in the portfolio is when you look at some of the worst equity decades we've had, they held up better during those times. So it's a really interesting nuance where people often assume it's because the factors outperform, but that's not the reason they get put into those portfolios.

Michael: It's because they've got some value and diversification tilts, in a sense.

Dana: Correct.

Michael: Okay. And so is Asset Dedication, I guess, doing both sides of this? Do they implement the bond bullet share ladder in the first five to eight years and the equity portfolio in the out years? Or is there a you do part, and they do the other part?

Dana: They do both parts. So I think of us as the architects. We're designing the specs. We're saying, "Here's the type of security we want in this account." And if we're debating that, we will have a conversation with them before implementation and really talk about the pros and cons, or where the yield curve is right now, or agency versus munis, or CDs versus agencies, or do we want to implement with half bullet shares and half agencies? So there's nuances that we will talk through with them depending on the client, but they are implementing that per the specs that we lay out.

Michael: Okay. So almost... You're the architect, they're the builder or general contractor thing.

Dana: Yes.

Michael: Okay. And then I assume you...well, I guess, so they have a separate fee. Do you pay the fee? Does the client pay the fee? How does that work when there's multiple people at the table now?

Dana: In our arrangement with them, we pay them just as we might pay anyone if we had to hire a team of people to do trading, and reporting, and rebalancing. And so we don't charge an extra basis point fee that we pass along to the client. Asset Dedication sends us an invoice quarterly, we pay them directly, and their cost is absorbed into the total pricing to the client.

Michael: So then where does your fee schedule sit? How do you charge?

Dana: Our fee schedule starts at 1.25% on the first million, and then begins to tier down. And so clearly, for clients with over $2 million, it's typically coming in less than 1%. For really large clients, it can be at 50 basis points, at half a percent. We do try to tier that down in an appropriate and fair manner.

Michael: And then Asset Dedication is a typical TAMP-style fee. It's 15 to 30 basis points with breakpoints, kind of thing. Is it that structure?

Dana: Yeah. And I don't know if they would want me to share the particular structure that we have, but it's basically a flat rate on the first set of assets that we have with a pretty low bps [basis points] rate on any dollar over that amount.

Michael: Okay. Okay.

Dana: Yeah.

Michael: Okay. So as with any of us, we've got to cover a certain level of overhead to take on a client or a firm, and then the marginal dollars are more manageable.

Dana: Yeah.

Michael: Okay. Okay. So I guess my only other question in the context of a strategy like this, so you start out with your, whatever it is, eight years of bond ladders or bullet shares or whatever it is, and the rest is the growth portfolio. So what happens is I get a couple of years in, because I'm presuming I don't go eight years. I'm like, "Well, we spent the bond ladder, and now we're 100% equities, but hey, you're 8 years in," or maybe you do. Is there some way that this gets...the ladder gets replenished?

Dana: Absolutely.

Michael: Or do you just wind through it? Because by then you're through the sequence risk period.

Dana: Yeah. It absolutely gets replenished. So we use a few different metrics…Asset Dedication produces something called a critical path for us. So based on that original plan, it's basically calculating what's the minimum dollar amount that I need each year for this plan to work through the time horizon I've outlined. So if you think about this, if it's 30 years in the future, I could go back one year and go, "Okay, what's the minimum amount I need to cover that last year?" And then you could go back the year before that and say, "Okay, what's the minimum amount I would need to cover these last two years?"

And so that is creating this arc called the critical path. And it's one of the tools we use to measure against. So are they ahead of path? If so, likely we're going to want to take gains and extend the income ladder. Are they over 60% in equities? That's another metric that we use. And is their income ladder less than eight years in length?

So generally, if they meet all three of those criteria, we are looking at extending the income ladder. We also look at the rate of return of the account we're extending in. So has it hit its target rate of return for projecting the plan, typically at 5%? As we've seen the last couple of years, accounts are exceeding that number. And so we want to take these opportunities and extend those income ladder. Take the gains while the gains are there and extend the length of the bond ladder in some cases. We could go past eight years. We could build up a buffer or just extend the bond ladder if they're already in retirement so that we're replenishing what has been spent.

Michael: Okay. So as I would infer, ultimately you're trying to do some version of we want to replenish the ladder when markets are up, and we can take gains and not have to liquidate from equities while they're down. And so then there's a series of rules that get put in place to make sure that replenishment liquidations are happening at the good times and are not happening at the bad times.

Dana: Correct. And the natural result of that that we've seen is that clients will have, in many cases, a higher equity allocation 10 or 15 years into retirement than they had at the start of retirement, simply because the equity markets have been strong. And even though we've replenished the income ladder and it's still sufficient, or in some cases longer than it was at retirement, their equity portfolio makes up a larger component. Now, that leads...

Michael: It literally outgrows, it outcompounds because it has higher returns. It's the natural math of it.

Dana: Looking at the latest research on, I think it was the retirement risk zone, was it Finke and Blanchett and Wade Pfau? And so in thinking that, I thought, "Well, why as an industry do we use these static allocations? Why wouldn't we use something that aligns the risk with when the household experience is the greatest risk?" So if we know the greatest risk is around those five years leading up to retirement, the first year of retirement, well, that is when we would want things more conservative.

And so as the client ages, no, I don't want a 90-year-old client with a probably 95% equity portfolio. But at the same time, if they still have sufficient cash reserves and a sufficient income ladder in place, why would I just arbitrarily make them more conservative and potentially realize capital gains that would get a step-up in basis just for the sake of rebalancing a portfolio?

Michael: Right.

Dana: I think there's a lot of room for having that be more flexible, more flexible parameters around the life cycle or stage that the client is in.

Michael: So meeting number three, from a process end, is now... I guess, between meeting number two and three, we've got our strategy. We know when retirement is happening, what spending is happening, when we've set our scenarios of what spending comes from where when we're doing drawdowns, when we start Social Security, all the different things. So now we have a very concrete, "I actually know how much money needs to come out of the portfolio each year over plan in order to do my calculations."

So between meeting number two and number three, now I can do the calculations with Asset Dedication to figure out how much do I need to buy in each of the first five to eight years of the various fixed income instruments to ladder out and mature. I can figure out what the remainder dollars go into the growth portfolio with their time segmentation model. And so I'm presuming by the time I get to meeting number three I'm basically explaining this process and providing a proposed portfolio to execute.

Dana: Yes, exactly. And at meeting number three, we're running the third of the three retirement readiness tests. And that is a historical audit that Asset Dedication runs based on the particular income ladder and growth portfolio that we've proposed. So they run that through as if the client retired, for example, in 1929 and then 1930 and then 1931. And you get this yellow squiggly line that represents every path their assets would have taken based on their starting values and their specific withdrawals.

And you can see, okay, which scenarios passed, which scenarios were successful, and were there any scenarios that were not successful? And generally there we're seeing any scenarios that were not successful occurred in the timeframes that started before 1947, I believe. And pretty much every scenario tested from 1947 on passes. And we want typically about a 95% success rate across the whole span for that particular test.

Why Sensible Money Runs Three Retirement Security Tests For Each Client [55:05]

Michael: Okay. So why the... I guess just start from a theory on why the three different tests here now? So you've got Monte Carlo, a fundedness ratio, and a historical audit. I get the fundedness ratio, in particular, because we're literally trying to optimize scenarios. You need some metric to "keep score" to literally figure out quantitatively is B better than A or is A better than B? Why or how do we end up with three different tests? Why not just carry fundedness all the way through or Monte Carlo or whatever it is?

Dana: The best answer I have is confidence. So I had dinner with a friend of mine in San Francisco a few weeks ago, and she has been through our planning process as well as many others. She's a do-it-yourselfer, but she likes to go out and get these financial plans. And she said, "Your process is," in her words, "far superior to the others because of the confidence with which you can tell me that I can do this." And I would say that is why we do it. It is a huge decision.

People are so scared when they enter retirement and taking that first withdrawal in that first year or two. No matter how many iterations we run, we find that people are nervous and concerned, and they may want to meet many, many more times around that retirement date to be sure. And so having these different ways of looking at the plan, different ways of testing the plan, even if the client doesn't want to see any of that, they give us the confidence to say, "Yes, I feel 100% confident. You can take that around-the-world trip, or you can gift that amount to your adult child to help them buy their home, or you can retire at this age."

So I want to have that confidence. And if I were just using Monte Carlo, I don't think I would. I know the limitations of that tool. I just don't think I would feel as confident about the recommendations that we give.

Michael: Okay. So we're building up to the portfolio model that we use, and then we actually historical audit that particular model to see how the strategy would have fared through the historical scenarios, through actual real world, here's how it would have played out if you retired at 19, whatever.

Dana: Yeah. And in most cases, we see that the real-world scenarios actually turned out better than most of the testing scenarios. So we find, as you stated, Monte Carlo tends to overstate the tails. And so real life, we're unlikely to get an outcome that is as horrible as Monte Carlo may look like it could be.

Michael: Okay. And if that goes well, that ends the process? So just clients now have a portfolio to implement, and we're ready to proceed?

Dana: Yes, and we repeat that process every year.

Michael: Okay.

Dana: So for us, it's not a one-time process. It's every year we're using those metrics to reassess. We're starting fresh with year-end balances. There's also a particular reason we don't want balances to update real time in the model we use. We feel like if you're testing at a market peak, that's going to overstate the numbers. And then if you're in the middle of a market trough, like we were in March of 2020, that's going to understate the outcomes. And so we like to be very consistent and say we test based on year-end values to bring some consistency to the methodology and how we're comparing it directionally over time.

So is your funded metric and Monte Carlo improving every year? And are you ahead of your critical path? That often means, as we've seen in the last few years, there's plenty of room for inflation adjustments. So we will be discussing with the client, "Do you need extra money every month? Are there some extra things that you want to consider?" And we again have the confidence to be able to say, "Yes, that is doable. We feel comfortable that that's sustainable in your plan."

Moving Away From Offering Standalone Financial Plans [59:19]

Michael: So out of curiosity, just because you're on an AUM model, so at the end of the day, when do you actually sign paperwork? When do you do asset transfers? When do you start billing? Because I'm assuming this process takes some time, and you really can't invest until you get to the end of meeting number three in your process. The whole thing builds up to that. So when do you do paperwork transfers, onset of billing?

Dana: So what we did last time I talked to you is very different than what we've just switched to this year. And so we had an upfront planning fee that typically ran $6,900, could be as high as $8,900. And at the end of that planning, Strategy 1, 2, and 3, clients could move into the assets under management process.

And we really started to run into some capacity issues last year. Because our process is so detailed, getting staff up to speed can take more time, training can take more time. We know from our Schwab benchmarking study, it says we spend about twice as much time per household as our peers. Now, granted, many of the peers in that study aren't planning firms. They may be doing investment management only, which would mean it would take less time.

But when we looked at all that, we said, "Okay, at this price point, our plans...they're taking away time that we really want to focus on the clients that want that long-term ongoing relationship. We love the relationships we develop with our clients. And as they move into that later life, past the go-go, the slow-go, the no-go, those relationships become so important in the level of trust that people have as cognitive decline steps in, as we've had many spouses lose a spouse due to cancer or other conditions. And just having that continuity there is critical.

And so when we really thought about what we love, we love those relationships. And so we decided not to do the standalone plans. And so now people sign an agreement upfront. We do ask for a $1,200 deposit. They go through the planning process and typically will do all of the custodial or account paperwork after Strategy 2 or 3. Typically, it's after Strategy 3, when we've laid out the process. If there's clients who just like, "Hey, move over my assets. We won't make any changes. We want to just get the assets out of where they're at right now," we can accelerate that.

And there's still an opt-out clause. So if someone really goes through a process and is like, "No, that's not what I want," then we would charge a planning fee and say, "Okay, we're not going to move into that ongoing AUM relationship." But our default now is we are going to move into those full service relationships. As technology changes and efficiency improves, we're open to the possibility of being able to do plans on a standalone basis again. But right now we realize we don't have the capacity to do it.

Michael: So I guess, help me understand. I get I don't want to do planning-only clients versus clients that come into the long-term process and become ongoing AUM clients. But if you had clients that were already willingly paying the upfront fee for the planning work before moving into AUM, why not continue to charge them the fee they were willing to pay for what is clearly a lot of work to get them through the process?

Dana: Yeah. Because we had so many at that price point that also weren't moving into AUM, people who were looking for a one-time plan. And so yes, I suppose we could still have charged that upfront fee. Because we know we're moving into that ongoing relationship, we feel like that fee is recouped over time, that upfront time cost, I should say, which is a lot of time is recouped over time. Whereas if we don't know that is going to happen, then we need that upfront planning fee to at least cover the cost.

Michael: So, in essence, from the business end, the decision was 100% of clients have to be ongoing AUM. We're just telling them that upfront. If they say, "Yes, I don't care about the planning fee because they're profitable in the long run, and if they don't want that, then I'm not going to do it for any fee. So therefore, the planning fee is moot."

Dana: Correct. Essentially, that is where we landed.

Michael: Okay. Okay. And because you actually had a number of people that wanted planning, but not the subsequent, and that wasn't appealing for the business.

Dana: It was appealing for the business until it wasn't. And so...

Michael: Okay. Fair enough.

Dana: Yeah. That's how I would describe it. We really enjoyed the plans we did. We really enjoyed doing that. And then we just hit a certain point where we realized this was great for about a decade, and suddenly it doesn't work for our business model anymore. And in addition, there's so many planners out there now that are doing that. So people have more options. We were one of the first people doing that. And so now we have people we feel confident that they can find that service. And there are people that we can refer to in a case where it's not the right fit for us.

Michael: Okay. You just don't quite have the, I don't know, call it the moral, ethical obligation of, "They want this from us and I don't want to send them back out to the wolves. I got no place else to send them. I guess I have to do it." And now that pressure isn't there. There are other folks that will do this if they just really want a standalone plan and not an ongoing relationship.

Dana: There are. And I think so many of us that are in this profession, we really care about people.

Michael: Yeah. Yeah.

Dana: And we want them to find good advice. And ideally, we would want to help everyone, but from a business model and the tools and the compliance costs and the staffing costs, you realize you can't. To be fair to the clients you do serve, you need to have a service offering that makes sense for a specific demographic and training for your staff around those specific issues. And so there is just a reality that comes in where you go, "Wow, we cannot help everyone and be good at it."

Michael: Right. So if we add this up, how long does this process take? I guess I'm thinking about from the client end, how many weeks does it take to go through the strategy meetings? And from your team's end, how much time does it take to actually produce all the stuff?

Dana: Yeah. We estimate about 30 to 90 days to go through the strategy meetings. A lot of that depends on everybody's scheduling, less about how much time the work takes, but more around vacations and if staff are out. And then we estimate about 40 staff hours for that initial planning process. There are clients where it could be less and clients where it can be more, just depending on the complexity, the nature of the assets they own.

Michael: And do you have ultimately a fee minimum or an asset minimum just to make sure that even the ongoing clients, the relationship adds up to make the math work?

Dana: We have a fee minimum that, of course, we can waive when it makes sense, but it's $12,500 a year. So it essentially equates to about a million in assets, but we also want to be able to accommodate people that are in that pre-go phase. So they're planning for retirement, they may not have a million dollars of assets that are manageable. And so those are the cases where we would set a different minimum for them so we can begin that relationship and be ready for that retirement event.

Why Dana Doesn’t Use Traditional Financial Planning Software [1:07:15]

Michael: So now take me back to why don't you use traditional planning software or what is your internally built tool do that you can't do with other software out there?

Dana: Yeah, it's a different answer today than it was a decade ago.

Michael: Okay.

Dana: A decade ago, it was anything from I can't actually see the dollar amount flowing into each tax bracket. So I originally used ExecPlan. I don't know if...

Michael: Oh yeah, yeah. That's a, dare I say, older school Excel-based financial planning software.

Dana: Yes. And it had some functionality that I loved and some functionality that I hated. And so the part that I loved was the transparency with which you could see how funds flowed through to different income tax brackets. And so we really wanted that, and that didn't exist when we initially built our model.

And then certain account types over the years. We would find the software hadn't incorporated inherited IRAs yet or hadn't incorporated health savings accounts. And so we were always having to jerry-rig software to be able to account for this account type, or property sales could be such a pain to model in certain types of software.

Now, more recently, we've gone back out and looked at tools like RightCapital and Income Lab, Larry Kotlikoff’s software, which I think all of them are fantastic. But in terms of the way we want to see and present the information and the way we want to use our fundedness test and an additional tool that comes out of the retirement management advisor designation, something called the household balance sheet, they don't have that functionality. They don't look at things in that present value terms that we want to look at things in.

And so the way we've designed our Strategy 1, 2, and 3 with key reports that come out for each of those three discussion points, we can't custom-build the reports that come out of those tools. So it becomes, well, now we're presenting things the same way everyone else is presenting things. And we think there's a way that's more digestible for the client and more appropriate for clients at this phase and helps them educate them. And so for all those reasons, every time we'd gone back out and looked at the market, we're like, "No, we still need to use our tool. It allows us to see things the way we need to see them."

Michael: And so your tool is a combination of, it sounds like, an actual calculation engine that tries to model cash flows and tax brackets that will apply to the cash flows in each of the years. So you can just really spreadsheet out the math. It's present value calculations because you need that to do fundedness ratios and the like that just the default tools don't certainly do. And then you've got particular reports, deliverables that you built around this that...just you like your report your way because you built it.

Dana: Correct.

Michael: And so I got to ask, how painful is it to maintain a spreadsheet through ten years of tax law changes?

Dana: Oh, my gosh. Luckily, one of our firm partners, CJ Miller, has been a champion of that and has kept it up to date and also far more quickly than we saw software updates. So that was another advantage of having our own tool. We were able to incorporate tax law changes very quickly and be ready with answers that clients had, which we loved. But yes, it has been a challenge.

We are currently in the middle of coding our tool into software that we can actually use. And so that in itself is a challenge. Modeling out all of the components that happen, for example, when a property sale occurs and whether you need to account for tax-free gain and gain subject to long-term capital gains and gain subject to recapture depreciation. So whether cash flows happen at the beginning of the year or the end of the year, do you want to deposit separately than withdrawals? All of that has to be modeled out, and it is a challenge.

Michael: And I've got to ask, I hear this from some other advisors who have built and maintained tools over time. Just do you worry about, I guess, the fidelity of the calculations, or it's the risk that if there's a spreadsheet error in there somewhere that now you have liability exposure because your software was wrong versus a third-party's tool?

Dana: I don't worry about it nearly... I guess I would worry about it the same way I would worry about a third-party tool. So years ago, there was a vendor I was working with, and I caught an error in their software. I had to go back and forth and back and forth. And finally, they actually sent me their export files. And it was a small nuance in how they were treating a certain part of the tax code.

And so can you rely on anyone to always get it 100% right? We test the tax component of our tool against Holistiplan. And so we do have testing parameters that we want to use. And so that helps us go, "Okay." And against the client's tax return. If I put this in and now I get their tax return, if I had the same dollar inputs, am I getting the same dollar output? And if I put this in a list of plan, am I getting the same dollar output?

And so there's numerous different ways we test that tool and case studies that we run through it to go, "Does this pass the common sense test?" We also will occasionally go out and plug case studies into other tools and go, "Okay, are we getting approximately the same answer?"

What Sensible Money Looks Like Today [1:13:03]

Michael: So what does this add up to? What does the business look like today? When I just think about assets and clients and team and revenue. So paint the picture where the firm sits now.

Dana: Yeah. So today we're sitting around $850 million in assets. We have a total of 21 team members, which is high, and there's a reason for that. We hired a chief operating officer a few years ago. And so that has been a huge addition. We were just crossing over about $500 million of assets at the time when I looked at my capacity and said, "Wow, we're going to need more help here." We also just hired somebody that is in charge of what we call our digital growth strategy.

So we launched a YouTube channel and podcasts at the beginning of this year. And we're redesigning the website. And then as we look at turning some of our tools into something that's more connected through AI, not necessarily AI, but through a cloud-based environment where the data can all talk to each other. That new hire will help with that. And then we hired several people right out of school simply because we have some people who we know will be retiring in the next few years, and when we look at the longevity at the firm and making sure clients are taken care of as a couple of our people enter into retirement, we need continuity there, and we need to have enough time to train.

Michael: Okay. And how many clients is it?

Dana: It's about 330 clients right now.

Michael: Okay. So a typical client fee really is...that's a $2 million, $3 million average.

Dana: Yeah. Our average is running right around $2 million per household.

Michael: Okay. And can I ask, where is revenue overall for the business?

Dana: Revenue this year will be right around $7 million.

Michael: Okay. Well, look, when I napkin math, 21 team into $7 million of revenue is $330,000 of revenue per team. That's not unusual for firms at your size. I don't look at that and say, "Wow, it seems like they're staff-heavy."

Dana: Yeah. We track all those metrics, in large part, thanks to you publishing all those. So we have a big spreadsheet, we track it all. And it's like a staircase. And I've used this analogy with the team in terms of our growth. At actually one point looked up the names of the parts of a staircase. So you have the riser and the tread, and the riser is the part of the staircase that goes straight up, vertical, and the tread is the horizontal part. Who knew that these pieces had names, right?

But I think of that as the business. You go through these different periods where you have to hire ahead of what you need. That would be the riser. And then you might go through the tread where your hiring flattens out for a period of time. And boy, have I seen those cycles as we've grown. And so right now we feel like this is a riser period where we hired intentionally, and we'd like to see some of those metrics improve a little bit, but that's just going to happen naturally as we grow.

What Surprised Dana The Most Building Her Advisory Business [1:16:21]

Michael: So as you reflect on this, what surprised you the most about building and scaling up the business? When you were on with us 9 years ago, it was $130 million of assets. And now you're $850 million, a little bit of compounding. You're probably over a billion next year. So I'm just curious, so what lessons, or what surprised you the most of this business that's almost 10x-ing over ten years?

Dana: So many things. My brain just splintered into about four different directions. From a big-picture standpoint, I described this period…it might have happened shortly after you and I last recorded, where the business went through this period where everything functioned like a Swiss watch. And then that Swiss watch broke and the pieces just went everywhere. And I think of that as something I learned through the Strategic Coach program, where they said, as you're growing, about every quarter, something will break, something...

And by break, I don't mean in a bad way. I just mean a process that worked when you had 10 people is no longer effective when you have 12. And so something that worked with 12 doesn't work when you have 16. And so the amount of iteration and change as you grow is at times overwhelming.

So I would say, while I knew that was part of the process, it still has surprised me. It can come down to things like you spend all this effort building training and then something in the process changes. And the next person who goes through that training is now telling you, "Well, you don't have that anymore. That's outdated." And you're like, "Oh, my gosh, we just went through all that effort to build these great instructions or training, and a quarter later, they're obsolete." Of course, we've experienced that with the tax law changes.

Then another thing that surprised me is the game of telephone that can happen as the organization grows. So I've heard it said as a leader, your whisper is like a shout. And yeah, really understanding that, that if I say something and I assume people might know my personality and that it's meant as humor or meant to be, this is something we're thinking of or experimenting with, but we're not doing it yet, well, that can get passed along and end up coming back to me in a way where I'm like, "What? Wait, how did that interpretation get made?" And so you've experienced this yourself.

Michael: I'm laughing because I've very much experienced this. Yes. Wow, there comes a certain point where your business, where you cannot even lightly throw out an interesting hypothetical you were maybe noodling on because a whole bunch of people are like, "The leadership just said we have to do this and go in this whole new direction effective immediately." I'm like, "I said it was a hypothetical for next year. And y'all are off and running already." Yes.

Dana: Yes. So I think that has surprised me. And then trying to figure out that balance between what do I need to share with everyone as quickly as possible so that that doesn't happen? And then what is truly just in experiment mode that, if I share, will cause chaos because we're not doing it yet. And then how do I keep track of who I shared what to because I might have a conversation in the hallway and then that person passes it along and then someone else's feelings might be hurt because they hadn't heard that yet, but that wasn't my intention at all.

And so being on top of firm culture and putting in place some intentional trainings. So there's a great book called the "Drama Triangle." And we put everyone through this training called a Foundational Leadership Course offered by Stagen a few years ago and are looking at how we build some of that into our training to just help stay on top of that and help people understand how to decipher maybe a meaning or a story that they attributed to something versus what might actually be the case or how to go back to the original source and confirm before assuming something happened a certain way. That has been a big challenge that I didn't necessarily know was coming.

The Low Point On Dana’s Journey [1:20:55]

Michael: So what was the low point on this journey over the past ten years?

Dana: There was a low point in 2015 that I may have mentioned on the last recording, where I thought, "Oh, my gosh, if this is what it's like to run a business, just kill me now. I'm exhausted." We had hired three people, and we didn't have written instructions and processes in place. And so I just felt overwhelmed every single day.

There's another low point I experienced probably maybe shortly after we recorded, where someone had been promoted into a key position and left shortly thereafter. And I again went through an overwhelmed period because I didn't have anyone ready to take over their duties. And I was already at capacity, which was why I was assigning those responsibilities to them. And so that was another point. And then again, shortly after 2022, when we had an advisor leave under not great circumstances.

And that was a lot of stress on me, and communicating to the clients and figuring out a continuity plan for the clients and me having to take on a lot of that responsibility on top of everything else I was doing. So the number of hours I had to work, weekends and evenings, and just not having a mental break. I was just exhausted. And so I would say I've gone through some of those cycles.

Right now, I'm at a really good point. Earlier this year, I needed a break. And I remember my husband's like, "You either go away for a week or I will." And so I booked myself a week up in Beaver Creek, where I did work, but I didn't have any interruptions. And it really helped me reset.

And so understanding that cycle, and I feel like what I'm learning now is really paying attention to my level of energy and being more in tune with that. And when I have endless energy, which I have right now around some AI and technology projects we're working on, then go for it, right? Work the weekend. Do what gives you energy. But when you start to feel that burnout feeling, don't wait too long. Slow things down, put off meetings that aren't critical, slow down projects, take the time that you need. And so learning to balance that out is really where I'm at right now, and it makes a big difference.

Michael: So it sounds like a lot of the pain points, low points, ultimately revolve around people leaving and the stress or burnout or overload that comes when things boomerang back to you after they leave.

Dana: Yeah, because I think what people don't realize, and I was talking with my best friend about this recently, she was considering a change, and she works, again, for a relatively small organization. And I was sharing, yes, you can leave, but your owner, your founder, they can't. And I had that realization. I guess technically you could, right? But it's not an easy process. You would have to figure out a buyer. It's not a quick, easy process. Whereas somebody who's really decided that this isn't for them can just turn in their two weeks' notice or literally just say, "I'm done," and not show up the next day.

And so there's a trade-off there. Again, as an owner, I feel like there's a lot of security in terms of you have a viable business that you can contribute to, and you can't get fired, but at the same time, you can't leave. And so it's a double-sided coin there, and understanding that anytime something happens, it comes back to you. And it doesn't matter if you had vacation planned. It doesn't matter if you had planned on taking up a new hobby or playing in a tournament of some kind. You may have to pause everything you were going to do and deal with this situation right now.

Dana’s Advice For Her Younger Self And For Advisory Firm Founders Headed Down A Similar Path [1:25:05]

Michael: So any other, just think of it as pearls of wisdom, things you know now from experience of doing this journey you wish you could go back and tell you 10 years ago as you were just cresting $100 million.

Dana: I would say the things that have helped me most are learning soft skills, working with coaches, going through development programs like Strategic Coach, and I went through Stagen's Integral Leadership Program. Those are the things that have helped me figure out how to navigate our direction with heart, with a sense of values that matter to me that aren't financially driven. And if I had had some of those resources earlier on or some of that training, there are certainly things I think I would have navigated more gracefully. But you learn. Those are the things that force you to learn.

And that's also one of the reasons I wanted this journey. So I was very clear when I started my firm that I wanted to build a firm that at least had the potential to live beyond me. And I also think there's huge value in lifestyle practices, and often admire people who they don't have employees or all of the complexity that comes with growing a firm, but to serve clients throughout all the phases of retirement, I felt like you needed that type of continuity, and that was going to involve training and staff continuity and all of those things.

But I personally also wanted the challenge. So I knew it wasn't going to be an easy journey, and over time, it is the journey I've grown to love. So I would say initially maybe it was...you have this vision and this destination. And now it's like every day, I actually get more excited about the journey. The daily conversations you have, the feedback you get from clients when you've helped them through a difficult time, hearing from someone that you helped mentor and how much they appreciated it and the value it's added.

So those things are part of the journey. And when you really just learn to love the journey day to day, yes, the hard times come along, they're hard. Don't sugarcoat it, they are going to be hard, but you focus on all of the things that you love and are grateful about.

Michael: So any other advice you would give other advisory firm owners that are maybe at the early end of this $100 million to a billion journey of scaling up the firm and the team?

Dana: Yeah. Be clear about your why. So why are you scaling up the firm? What is it that you love and don't love? I have mentioned this to several people when I encounter them at conferences. When they talk about scaling or hiring, is that really what you want? So did you start a practice for the freedom and the lifestyle components? Because as you scale up, you lose some of that freedom. As I mentioned, when stuff goes wrong, you are on the line. You're the one that steps in and does all the work if an advisor leaves or a key staff member leaves.

And so you really need to understand what's ahead and be clear about the reason why, why you're doing it and what you're trying to build. And if that suits your skill set and the things that light you up, if those are in alignment, and reevaluate it periodically. We go through different stages in life, whether you're raising a family or whether you're like me…I was single with no kids for many years. I'm married now, but still no kids. And so that gave me a different capacity to do some of these things.

So you can reevaluate that from time to time. You may say, "Well, at this phase of life, I'm going to focus on this," and then there might be a time where that changes, where the goal changes. But I think it's really being clear about the why and what it is that lights you up.

What Success Means To Dana [1:29:20]

Michael: So as we come to the end here, this is a podcast about success. And just one of the themes we've always observed, that word success means very different things to different people. It can change for us through stages, seasons of life. And so you're on this wonderful path of success with the business, as it's had extraordinary growth over the past nine years. It seems like the business is in a wonderful place now. How do you define success for yourself personally at this point?

Dana: Yeah. And, of course, I knew you were going to ask this question. So the answer that came to my mind as I was thinking through this ahead of time was being true to my values.

Michael: Okay.

Dana: And those values for me may be different than for someone else. But being true to my values, that's how I define success. And there's, of course, components to that. For me, profitability isn't our number one metric, but doing the right thing for the client and having an environment where our staff feels safe and supported and has work-life balance, that is important. And so we've made an intentional trade-off there. And looking at those things and then how we make decisions and hiring.

Being true to my values in terms of my own energy level. And as I said, paying attention to what lights me up and when I need rest. And then being true to my values in terms of making a difference every day. So that can be as simple as a conversation you have in the hallway, how you interact with someone at the grocery store. For me, it's that never-ending quest to, did you leave people feeling good and in a better place? Or did you deliver feedback that really needed to be delivered even though it may be tough feedback? Those to me are all a part of that bigger idea of making a difference.

Michael: I love it. I love it. Thank you so much, Dana, for joining us on the "Financial Advisor Success" podcast.

Dana: Well, thank you for having me. It's been a pleasure.

Michael: Thank you.