Growing To $350M AUM By Putting Client Cash Flow At The Center Of The Planning Process: #FASuccess Ep 493 With David Mozeika

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Resources Featured In This Episode:

• David Mozeika: LinkedIn
• Currence Calibration, Enrollment and Free Cash Flow Worksheet – Download (PDFs)
• TOMORO
• Currence
• Currence Cash Flow Course

Full Transcript:

Michael: Welcome, David Mozeika, to the "Financial Advisor Success" Podcast.

David: Thank you, Michael. Happy to be here.

Michael: I'm thrilled to have you on today and excited to get to talk about what I just think of as good, dare I say, old-fashioned cash flow planning for clients. Because I find this is a domain that, I guess, fewer and fewer of us seem to tread as advisors these days. I think at best because a lot of us work with clients who already have good savings habits and have been successful accumulators, which is why they can afford to engage our services or meet our asset or fee minimums. At worst, maybe some of us skew away from detailed cash flow planning just because of how messy it can be. The clients who need the most help are usually the ones who have no idea where the money goes and also aren't interested in tracking it, which makes it very difficult to give them advice about how to adjust their spending and then they may resist the advice even when we give it.

So historically, I find the advisors who focus most on cash flow planning tended to come from the insurance background, which I mean, I lived myself. I started at New England Life. If you're sitting across the kitchen table from a middle income family and want to convince them to start saving $100 or $200 a month at the time, probably into our variable universal life policy, you had to go through their cash flow to help them find $100 or $200 a month of savings to redirect. But I feel like there's been this resurgence starting to come around doing more cash flow planning for clients amongst advisors, I think if only because we're kind of running out of affluent delegators who've been successful savers who have mostly...find an advisor and already given them their life savings by now.

So if you want to grow in the future, it's sometimes easier to pursue younger clients who can save and will save rather than the ones who already did save, which then highlights that a lot of us have a gap in going deep and help clients plan around cash flow. So I know this is a place you have very much focused your practice in what you do. I think very much the theme for the conversation today. So I'm excited to get to talk about what does it really take in today's world and, I think, with today's tech to help clients better manage their cash flow and become savers and accumulators.

How Cash Flow Planning Is Different Than Budgeting [04:36]

David: Well, so there's a lot to unpack there. When you talk about cash flow planning, it's probably one of those terms that means something different to everybody listening to this podcast right now. And I want to make a very clear distinction upfront. When I talk about cash flow planning as in the way that we do it, it is not budgeting. And I think probably part of the challenges that advisors have seen over the years when putting themselves in the cash flow discussion, what they've really done is put themselves in a budget discussion. And to me, budgeting is really more sort of past tense. Like, this is where you already spent your money and therefore we need to track it. Because the word that I wrote down as you were asking me that question was tracking it. It kind of, like, made me want to throw up in my mouth, tracking it.

To me that is extremely laborious and it sort of creates a negative feedback loop on if you were tracking every dollar you spend... I mean, how much fun would you be to live with if you had to track every dollar that went out the door? The average American household from what I read, what I've studied is that they have 600 to 900 transactions every single month. And to track every one of those and do it in a way of budgeting after you've already spent the money…it's no wonder that I don't believe that anyone's ever been able to show that budgeting has worked over an extended period of time. It's like a financial diet.

Michael: Yeah, I mean, for better or worse, I feel like the industry's, I mean, I'll say attempted evolution in this direction is there's so many transactions every month, right? There's just so many places that money goes and people don't want to track it. I got a great idea. Let's automate the tracking. Let's get E-money or Right Capital or mint.com or Monarch Money, now, which has an advisor tool. Let's use technology things to automate the categorization tracking as at least one way to try to solve for this. But my impression from what you're saying is the solve is not how do we get better tech to help people track their spending, it's that that's the wrong approach to cash flow planning in the first place.

David: One hundred percent. The word you said that sort of popped up for me was categorization. To create tech to automate the categorization of money, first of all, nobody ever trusts. They haven't figured out that well enough for people to have confidence in it. I don't think people have a savings rate problem because that's really what it comes down to. And you talk about and you sort of bifurcate the marketplace of the affluent and the not yet affluent, or you have the HENRYs [High Earners, Not Rich Yet] of the world and we all have different ideal clients to go work towards. What I'm talking about is the flow of funds. Americans have a flow of funds problem, meaning that their money flows in the wrong direction. So when I talk about cash flow planning, I'm talking about literally building automations and literally building, designing where your money should go as opposed to where it's already been and do I want to sort of intervene that or disrupt that pattern?

Let me say it differently. We live in a world of choice architectures that exist everywhere, default positions that were put in as consumers and the default position that all of our clients are put in is to spend before they save. And so what happens, what I found, and we can get into this and I'm sure we will, is that early in my career, I realized that people didn't have confidence in implementing some of the strategies that we were teaching. But what I realized was that that's because they had to disrupt the habits that already existed probably for years or decades and manually save money. Why don't we just put people in a position where they're saving every dollar that comes into their life and then choose how much money they want to be allowed to be spent?

Michael: So, this is, I feel like you're sort of taking us down some version of the proverbial pay yourself first, save first kind of frameworks around, well, I was going to say frameworks around budgeting. Maybe that's still the B word and we're not supposed to say that.

David: Well, yeah. Yes. But the question is how?

Michael: Okay.

David: Right? Theoretically, everyone will tell you, you should save first. The question is how? So when you get a paycheck, Michael, and it goes into your checking account, what happens first?

Michael: Money hits the checking account and immediately gets debited against for whatever bills I'm paying out of said checking account. Money's already flowing.

David: Money's already flowing. There's all these default positions that you would have to opt out of in order for you to be able to save. Think about the subscription economy we live in right now, Amazon, Netflix.

The point is, is the default is to spend because the checking account is really nothing but an expense account. It's designed to pay bills. It is literally a spending account. You spend money, you pay bills, and then maybe after the fact, then you have to manually choose to save money. That is the common flow of funds. Some people have habits and discipline, but the challenge is as you go through time, what I found is that what happens when you get that pay raise, or you get the promotion, or some other liquidity event shows up and all of a sudden you have more capital, but if it all defaults to the spending account, better known as the checking account, what is the likelihood of what's going to happen to those dollars that are residing in that account?

Michael: Right. I do what I always do, which is I spend the money until there's a certain amount left that I intended to save maybe, otherwise I just spend the amount that's in there and try not to overdraw it. And so, if more money flows in, I just flow it out faster.

David: Yeah. Well, it's like psychologically what I found is that when you have money residing in an account that's replenishing itself on the 1st and the 15th of every single month, you almost feel like it's this evergreen source of capital. It's not, because it's all predicated on your paycheck or your business distribution or however you get paid. What I'm literally talking about is changing, flipping the flow, flipping that direction of money, not just theoretically, but in reality.

Let me tell you more about that. Along the way in my career, we were always trained to maybe have a way of separating spending money from wealth building and protection money. But the common pattern was always the client's going to make money, it's going to go into their checking account. Maybe you take them through a budget exercise and you say, you know what, let's minimize this. You don't need to do that. You're the problem, by the way. That's what happens with the problem with budgeting.

Michael: Budgeting is an expression of your failure of self-control. So we're going to try to reassert some kind of new control. That's the implicit message often.

David: Right. Budget, tweak this, move this, and voila, you can save $500 a month now or $800 a month or maybe more, maybe less depending upon your income. Then you would try to save it. As advisors, we come in after Amazon and Netflix and life. Then we have to motivate them to buy that financial vehicle that's going to take them to the promised land. That's what most people feel as what save first means. I'm going to force you to save X amount of dollars every single month. That's the pattern that most financial professionals live with. That's the common default order of operations that our clients live with is make money, send it to the checking account. What I'm saying is we need to create something that breaks the connection between our spending and our income.

The Power Of Automatically Putting Income On The Asset Side Of The Balance Sheet [12:36]

David: What we've done is we've created what we call a cash flow reservoir that literally lives between our money coming in and our money going out. So Michael, the default of every dollar that comes into your life is that it goes into the asset side of your balance sheet. It goes into this reservoir and then all you're doing is choosing how much money goes from the reservoir to the checking account.

Let me say it in math. Let's say you brought home $10,000 a month, every month after taxes and deductions in your paycheck. Your goal was to save $1,000. What everybody in America is doing is putting $10,000, allowing it to go into that leaky bucket called the checking account. $10,000 goes there, live life, and then you try to manually save $1,000. What we're saying is no, create an account called the reservoir, deposit your $10,000 into your new reservoir, and then schedule $9,000 to go to your checking account and watch what happens.

Michael: I guess I want to contrast that with the other, I guess the save first, the pay yourself first mantra, which would be something the effect of just redirect $1,000 from your paycheck to your 401k directly so when the money shows up in your checking account, there's just only nine because you saved first. I feel like you're advocating for something different here because there's this whole other reservoir account that we're allocating to and then putting dollars in and out of. Is that right? That's the distinction here?

David: That's the distinction.

Michael: So why? So take us further. I mean, I get...

David: So let's say your...the one thing that I think is the most effective part about the 401k is the payroll deduction because it takes the human behavior out of it. I'm talking about doing that with every dollar in your life. So literally, I think there's a psychological difference. If your money... Think about it this way. If every dollar that shows up in your life is going to your checking account or let's call it the spending environment and then you have to use manual effort to, intentional behavior, to then go put money onto the asset side of the balance sheet, that takes habits.

What I'm saying is if you put all the money in…let's make the manual effort on how much money you send to the spending environment. So have all of your money go to a reservoir. And the significance is if you were saving $1,000 in my previous example and next year, you were choosing to save $1,000, and next year when your income is now $11,000 a month, what happened to the extra $1,000 bucks?

Michael: It's sitting in the reservoir.

David: Well if you do it my way it is.

Michael: Yep.

David: Right?

Michael: Yeah. Otherwise it just hits my checking account and I spend the dollars down until the next thing comes. That's what most households do in practice.

David: So all I'm saying, that's a long way of me saying is like why aren't we defaulting, helping people default themselves to success? That's the default position. We have to opt out of success. That is the word I'm looking for here. Think about all the things that you have to opt out of. I have a million streaming subscriptions because I have two teenage kids. Right? And the only way I'm going to get rid of them is if I opt out of them. I have to actually go take the manual effort to go stop it but I don't because it's too much energy.

Michael: Yep. It's a hassle. Life is busy. I got other things to do than crawl through my subscriptions and try to figure out the very nuisance-y unsub process.

Michael: So it strikes me for what you're describing. I spent most of my career after the early insurance days on the retiree side of the business. This is functionally what we do for all our retired clients already. The reservoir is their investment accounts but we do the same thing which is they don't just spend directly from their investment accounts and hope that they don't overspend too much while the account may or may not deplete, at least for most of us if only because of the ease of checking accounts versus brokerage accounts. We have some kind of systematic distribution we do monthly or quarterly or whatever your process is where we draw money out of the investment brokerage accounts. We put it into the checking account in the amount that they have proactively planned that they're going to spend and then they spend from their checking account. The rest of the assets are segregated which strikes me that it seems like it's effectively the same thing. The difference is we sort of naturally do that for retirees. You're talking about doing this for people who are still earning and accumulating where there's dollars coming in.

David: Yeah, 100%. It's exactly what I'm saying. You think about it. In the example you just gave where you're working with a retiree and something's come up, you notice the difference in their posture when they come up and say, you know what Michael, I need a little bit more money than what was allotted for me this month. And then think about how proactive you need to be as an advisor and all the engagement that takes place from that point.

Michael: Right, right, right. I mean, just that unto itself, it triggers a conversation of, of course, it's your money. We'll get that transfer set up. Tell me more. What's going on? What cropped up that you've got stuff going on? Sometimes it's a surprise trip or I'm so sorry about the roof, whatever. But it's a good conversation.

David: Totally. And again, they're defaulted to keeping every money on their balance sheet unless they consciously choose to disrupt or deviate from the plan that you set.

Michael: So practically speaking, if you start doing this with folks that are still in their working years and then life begins to happen, right, as you noted, I get a raise and now $11,000 is coming into the account instead of $10,000, but I'm still pulling out $9,000. So what happens to the rest of the money in the reservoir if and when it starts to build? How does this play out?

David: Yeah, so this is where the engagement comes. Every account, every reservoir has what's called a target balance. That's bespoke to the client themselves and their fact pattern. So this client that has a consumption rate of, we call it a spending baseline, which is a nice way of saying what's your scheduled burn rate. If their spending baseline is $9,000, we will set the target balance in the reservoir for at least three times that. So maybe $27,000 as the target amount of reserve cash to keep on hand at all times. That's what's considered a full tank of gas.

Michael: Is that effectively the equivalent of my emergency fund?

David: Yes and no. So I think it's part of your emergency funds and it can be your emergency fund, but I personally, as you evolve financially, I have emergency funds that I have other cash non-correlated assets that I could tap and get at. To me, it's more of a number of what's the right amount of reserves to have on hand in the reservoir to make sure the music doesn't stop. If I lost my job for a period of time or spending was up for a little bit, whatever it may be, depending upon the scheduled movements of money. But that reservoir target is where we start to define the rules of engagement with our clients.

So think about if you're going on a road trip and you're somewhere you're not familiar, you probably feel a lot more confident when you have a full tank of gas than if you were under a quarter tank of gas. So imagine having all of your clients feeling like they have a full tank of gas at all times and they're in a position of power. So the emergency fund, it's an emergency fund because you have redundancy built into your cash flow because you have at least a three-month runway if the income stopped. If somebody has lumpy income, whatnot, I might encourage them to have four or five times, maybe even six times their spending baseline as the target balance.

But what's happened, the situation is fluid. People are getting pay raises, incomes are coming in. The deal here is that the spending amount is totally disconnected from how much money you make. The longer you get from the outset, those two paths are widening. Your income is going up and your spending only goes up unless you consciously choose to increase it. I'm just saying that because I want the audience to know that accumulations are happening automatically. They're defaulted to accumulate money. And then it just creates that one pause and it helps foster a lot of conscious behavior, conscious thought around what to do with the excess money. So think of it like this. I work with a lot of clients that are on Wall Street that have large, they actually spend probably more than their salary throughout the year. And then 60% of their income comes in one check in March.

Michael: Right, their giant bonus.

David: So what's going to happen is the default is that that tank is going to get filled up and then they're going to have surplus dollars. And then it's just, we have a conversation around, Mr. Client, this is what I think you should do with the surplus money.

Helping Clients Fight Back Against "Unconscious Consumption" [22:27]

Michael: Because I'm contrasting, because otherwise, like what, what happens? I mean, I'm just thinking to all the clients that have various lifestyle creep, right. Which is usually what happens is folks get raises and income goes up in their working years. "Hey, I didn't used to buy this, but I know I'm making some more and I've been watching my checking account balance go up so I'm going to start spending a little bit more on this thing I would enjoy or whatever it is I want to do. And you know, I still got money left in the checking account at the end of the month. So apparently that was okay. And that's my lifestyle now." Because once you add, you never want to subtract.

So you know, income rising into the checking account sort of naturally accommodative of lifestyle creep. And here it's not. Like if I start introducing new spending, I'm just going to blitz my checking account. I have to actually affirmatively change the distributions from my reservoir accounts to my checking accounts to accommodate my higher spending, which I might still do and can choose to do, but I have to actually do it consciously with extra effort and action.

David: Exactly.

Michael: Which makes sense. At best slows me down because you know, I'm a lazy human being and I don't want to do any extra work. And at best, at least I have to be conscious about it. So maybe just being, having to be more salient slows me down.

David: People call it lifestyle creep. We call it unconscious consumption. And what we want is unconscious savings. And so, when you change the flow of funds, what you're just doing, it's really that simple. You're just changing the default position. And you're making, you're letting gravity work in your favor as opposed to working against you, because the money's getting trapped and then you're creating this conscious thought around every dollar. And so, it's done so much for me, which is why I've radically altered my career around leading with cash flow. And it's not just for the accumulator. I mean, the retirees love it too, for the reasons you just said. I mean, you're creating structure around, creating a connected cash flow structure. Every dollar is connected by way of this reservoir. In reality, it's not just theory it's, you're actually creating the infrastructure.

Michael: So then what happens as my reservoir continues to grow? I mean, if I'm getting raises and I'm managing my outflows, at some point I can literally build the reservoir higher than the target.

David: Yeah. And that's what prompts the conversation between the advisor and the client is, "Michael, you have a surplus cash balance of $50,000 and you told me you wanted to add to your growth portfolio. I think now's the time to do it." And what did they say? "Okay."

Michael: So I got the money to want to improve my lifestyle, so sure.

David: Right. What happens is people literally become addicted to their savings rate, their net cash flow rate, as opposed to addicted to the consumption. And so the reservoir becomes this frictionless environment where we can make, from a position of confidence, all of our wealth protection and wealth creation decisions before Amazon, before Netflix, which automatically gives us, the advisor, more influence, more relevance, more engagement.

Michael: So mechanically, the shift here is I need another account, because ostensibly this can be a savings account. My paychecks and income auto deposit to this account. And then I'm setting up a series of automatic monthly transfers or biweekly, or whatever I want the frequency to be, to go from the savings account to my checking account, to go from the savings account to my IRAs, to go from the reservoir to wherever else I might do it ongoing. And then periodically, if the reservoir overflows, we'll have the conversation about what to do with the extra money.

David: Yeah. And conversely, if the reservoir is dipping below the target, then that tells you a different story and that you need to intervene.

Michael: So it's an additional bank account in my household cash flow routing. To me, that's the key here in what we're doing to actually change the defaults in the flow of funds.

David: Yeah. So what I would say is it's one account to actually, in reality, save first.

Michael: Okay. And I'm just trying to think through…for an individual that's pretty straightforward for couples, lots of different ways that couples handle household cash flow. Sometimes there's just a checking account that they use. Some will do his and hers, his, hers, ours, various combinations. All of those still become flows from the reservoir. The whole point is still all deposits go to reservoir, all spending, checking accounts is inter-account transfers that you can set up and automate.

David: Yep. And the math, if you do the math, it's incredible. So people, what I'm searching for is optimal in every client engagement, relationship. I think systems, winners have systems. And this was a system that I started doing, call it the first...there was the, probably the inflection point of my career. And when I started doing this, originally I was using brokerage accounts because I was a registered rep at the time. And it was the only way that I could create an ACH agreement and set some automations up.

And my narratives had to be really good to get people, motivate people to do that. And we've kind of worked that all out. But once I did that, my production as an advisor, the quality of my relationship, everything just all of a sudden I was just having incredible outsized results. And so, it can be a brokerage account, it can be a checking account, it can be a savings account. The interest rate that you earn is somewhat immaterial because you're not going to keep too much money there. It's really about the automations and created a connected cash flow system.

So I think in order to be effective in cash flow planning, you got to get out of the budgeting conversation. You got to create a plan as to where your money's intentionally going and just put people in the position where their default position is success. So you need to separate inflows and outflows so that they're not connected. Because the problem is lifestyle creep happens because their income is being deposited into the same account where their consumption happens. So we need to create a disconnect between those. And then you need to automate what you can and then ultimately create a feedback loop that has you in constant engagement with them, just studying the empirical evidence, data, that's showing up. And so, we say people live in a constant state of choice. Choose to spend or choose to create more wealth.

Michael: So where do clients get stuck when you start rolling this out? I mean, I'm sure some just, they get it and it makes sense, off they go. And others get stuck because human beings are wonderfully varied. Where does the friction crop up for people who have trouble with this?

David: I will say that having been doing this for now, I'm about to say this, almost 20 years. I can't believe that. I'm very good at telling the story and being in the cash flow business has become part of my identity. And so, when people are meeting with you for the reason that David's going to help me maximize my cash flow , it's much easier because it's become more tangible for them. I would say that the common misconception is, "Wait a minute, I got to change my banking relationship?" The answer is no. No, because we don't want you to. We don't want you to change those automations that you have on your bill pays. We just want to automate how much money is going to be exposed to the spending environment.

Michael: You don't need to change your automated bill pays and payments. We just need to change your automated deposit.

David: Yes. And so, you think about it, what's happening, your direct deposit now is coming from one of your own assets as opposed to your employer. We're just putting the money to use based upon the rules and what we've set prior to Amazon, Netflix, Costco, all these one-tap bills, just all the easy ways it is to spend money. And it's not just for people that are starting out. A lot of my success, one of the niche markets that I worked in throughout my career was with orthopedic surgeons and then later some other specialties, dentists as well. I used to love meeting with them when they just finished their training because they're psychologically used to living on $65,000, $70,000 a year from being a resident. And then what would happen is they would get their first job and they're making probably $250,000 and they make them pay some more dues and they allow them to go on a partner track and then it'll become a partner. Then they eventually let them buy into the real estate assets of the group and the surgery centers and all that. It wouldn't be uncommon for a surgeon to end up with a $1 million to $1.6 million of total income. And that happens in like a five-year period, six-year period.

So it's like, set them up based upon the life they're used to, where they are, meet them where they are today, get them set up and then they only increase their spending because they've consciously chose to...the amount of accountability that they have to you and the plan becomes incredible. The awareness they have of their behavior becomes more and more incredible. And it's just amazing the savings rates that get accumulated that way.

What David's Advisory Business Looks Like Today [32:55]

Michael: So now let me take a step back for a moment. What is your business as an advisor? How does this translate into how you get paid and drive outcomes as an advisor and advisory firm?

David: So my team, my team is made up of 17 total team members. There's three lead advisors, myself, Jeremy Suarez, Todd Levine, and we have five other advisors that are more responsible for bizdev [business development]. And then we have eight people on the support staff. We currently manage about $350 million of AUM. It's made up of about 600 households, most of which are both insurance and investment clients. And there's some just investment clients and some just insurance clients. We have a fee business, a planning fee consulting business that's in the early stages. And that's what our team looks like today.

Michael: So and where is, can I ask where revenue is overall? So if you've got multiple revenue streams, I'm assuming it's not just AUM fees off AUM.

David: Yeah. It's about $8 million a year.

Michael: Okay.

David: Which is made up, you know, I would say less than 10% is fee-based business, planning fee based business. And that's growing. And the rest is pretty equal between insurance business and asset management fees.

Michael: Okay. And so now I do want to understand the, I guess, the difference between, as you framed it, there are three lead advisors and five other advisors. So who's doing what? What are the differences between these roles?

David: So we, first of all, we consult on a lot of areas of finance. We have, I would say we're very good. Most of us came from the insurance business first and then got into the investment advisory business secondary. We are very good in the world of estate planning, asset protection, insurance planning, and have become quite good at the investment management as well.

So the three of us, we are sort of a melting pot. We've kind of come together from past lives and created the partnership and we have literally have just merged our practices just recently. And so, we have five other advisors that are responsible for their own bizdev. Most of the three lead advisors are closing most of the business. We're coming in as the expert. For example, Jeremy is expert in business exit planning, which to me is just another entry point into our firm. My expertise is more in the cash flow design and insurance protection as well as Todd is as well. And so, the other folks are out there bizdev hunting, they have client relationships that they manage and then we have an incredible support team and honestly work a continued work in progress.

Michael: And so the other five are kind of living the proverbial ‘eat what you kill' sort of model, hunting for their own clients under the firm's umbrella, whereas you and Jeremy and Todd are more of an ensemble style, you bringing clients together for the firm or they're still ultimately your own respective books of business, but you're sharing on support staff expenses and the other overhead.

David: No, we've actually done that model before and we came from a eat what you kill model, share expenses. And that's to me, that's only as good…what I've learned is that that's the way I was taught to build a team in the past. And what I learned is that what ends up happening is the firm gets robbed of all the revenue and there's never any money for more business development or leaning into growing the business. So that doesn't work. And so now all the clients are firm clients. Everyone has a different area of expertise. As I said, Jeremy has leaned in really hard into the business exit planning. Todd and I, you could kind of position us as architect of an overall financial position. We have a lot of expertise in planning. We have resources on the team that are adjacent centers of influence in the estate planning world. And then as you said, yeah, Mike, the other folks are bringing folks to the firm, but they're firm clients. And yeah, that's where we're at.

Michael: So relative to now all of the discussion on cash flow, so this isn't from a business end, this isn't necessarily a model for you of "I'm working with accumulators and want to help them set good financial habits and I'm charging planning fees for cash flow planning and spending advice." Ultimately they still engage with you in, dare I say, the traditional ways that clients can engage us that ultimately compensate us in the business. But this is the expertise you bring to the clientele that you attract who want and need help to make prudent decisions as their income is ramping.

David: Yes. And I think it's going to be sliding more towards sort of a hybrid between asset management fees, the insurance business obviously speaks for itself and charging more of a fee for service on the planning side. So it's literally a work in progress. By the time this podcast drops, we will have just announced the merger and it's sort of full happening as we're doing this recording. But yes, we believe in process. And what's interesting about our process is we spend a lot of time on financial positioning over financial planning and, to me, cash flow is just part of the positioning of it.

David's Cash Flow-Centric "Financial Positioning" Process [39:00]

Michael: So now David, help me understand in this positioning, financial positioning or financial planning, how does that show up in practice? What does financial planning process look like in your firm? When you do this?

David: Totally. And I would imagine that my process is not too much different than most of the folks listening to this podcast right now. And in fact, one time I actually Google searched financial planning process and I would encourage everyone to do it. And when you do it, and if you Google search it and then hit images, it's going to show you some form of, some wheel of some continuum process, right, that all kind of look the same. And I think for me, what's important is that we touch on every area of one's financial life. So that's equal parts protection, growth, estate planning, and cash flow. And so...

Michael: Protection, I just want to make sure I got those protection, growth, estate, and cash flow. That's your four buckets, okay.

David: Yeah, for sure. And I mean, you could probably put estate planning in the protection bucket, but they're definitely adjacent. When I meet with somebody, my first interaction, one, is, call it an introductory meeting is really, let's get to know each other. Typically you've come in because you were referred in by somebody else. And I want to get to know you from a qualitative person first. Do we jive? Do we fit personality-wise? They're interviewing me. I'm interviewing them. And we just share what our process is and the way that we do it, which is really, we start with literally a one-page financial plan where you can see your entire life on one page. And what's interesting about that is that allows us to sort of start with a stress test in mind. But once I get to the point in the intro, what's ultimately going to happen and the goal, the focus, is for me to, one, determine if I want to work with them, and then, two, decide if they...I want them to be okay with sharing their life with me, their data. And that would then lead into the second sort of milestone, which would be, let's do a discovery meeting. Let's have a fact-finding based meeting to find out not only the quantitative information, but also what's important to you, the qualitative questions, so forth, so on and so forth.

And so, once I have the information that I need to move forward...and the other thing I'll tell the audience is, one of the things I used to do, I think was a mistake early on was send them a questionnaire ahead of time and make them gather all this stuff and do a lot of homework and then get it back to me. And I wouldn't meet with you until you did that. And I've actually changed that. And I think it's counterproductive because I think people want to know if they like you too. And so what I found is more people were canceling meetings than actually fulfilling on the engagement. So I'll get high-level information and then give them the homework after the fact, after we've decided that we want to work together.

Michael: And then that'll come, that comes after the first meeting or that comes after the second meeting?

David: So it's funny you say meetings because I actually think of them more as milestones, not meetings. Because if you and I were in our first meeting and we had our introductory conversation, we might know inside of five minutes that this is going in the right direction and we want to work together. We might also know in five minutes that we don't want to work together. Typically somebody, there's so much information out on all of us out there in the ether that they may already know that they want to work with you. They're coming to you because they want help, right? Otherwise they wouldn't be here. So if you and I can determine that we want to work together or at least take the next step, to have a second date, why wait to schedule another meeting? Why not just get into it right now?

Michael: Okay. So thus the milestone-ing, first meeting, first milestone is let's get to know each other. Are we a fit?

David: Right.

Michael: So if it takes a whole meeting, sometimes we figure that out in five minutes. If it's not good, then we're done in five minutes. If it's good, hey, let's just start getting into the discovery conversation right here. We're already in the meeting. We're already feeling good. We met the first milestone. Let's just go right into the second with the caveat now of, but you definitely didn't get a data gathering form first because this meeting started as an intro, get to know you meeting. So you just start asking questions?

David: I start asking questions.

Michael: How deep do you get into...?

David: I had a one-page form of what their financial model is, what is their income, but obviously what is their assets. I'm going to ask them what their insurance coverages are. They're never going to know the exact numbers. And then I'm going to say, well, you can get me that after the fact. But in order for me to start teaching strategy and inviting them into my world, I don't really need to know exactly how much money is in their 401k because by the time they give me the statement, the number is going to be different anyway. So I just want to get a high-level understanding of the choices they've made up unto this point. And moreover, what's important to them? What keeps you up at night? What gets you most excited? And chances are all of those things on both categories are going to be related to your cash flow.

So it's interesting about, we started this call with cash flow is everything is a cash flow decision. If I want to retire early, that's a cash flow problem. If I want to pay off some debt, that's a cash flow thing, issue. If I want to go on vacation, that has to do with my cash flow. If I want to buy a vacation home, I need the cash flow to do it. So it's interesting. And one of the things I'll do in this sort of high-level data-gathering session is we'll create a list of all the things that are important to you that you want to accomplish. What's important to you about money, what's important to you about life and what you want to accomplish, and what keeps you up at night? And then I'll just talk to them and say, it seems like everything that you're aspiring to accomplish and everything that has you staying up at night or has you concerned is all related to your cash flow. How about in our next engagement I take you through a cash flow exercise that I believe will have a major impact on your success going forward?

Michael: And then what's the cash flow exercise in the next milestone?

David: Yeah, so what we've done is we've crafted materials around this, which I'll share with your audience. But I literally take them through this exercise and I want to teach theory through the lens, through the context of an exercise, because I want them to be disarmed. I want them to experience something.

So what my cash flow exercise looks like is a narrative and with some visuals that reinforce this is first, it's a dialogue. And that would be typically the next engagement. But it's also one of the next milestones. Now I could go into a protection milestone where I'll have a meeting around protection, insurance protection, or it could be estate planning or it could be how they are managing their investments. It just depends on what their hot button is.

Michael: Sure.

David: I think of all these things as different entry points into my process, and it's not linear. I can start anywhere, go anywhere. I want to meet them where they are.

So anyway, so my cash flow exercise will be a narrative that'll look like this. First, we'll talk about the definition of cash flow. And people have different definitions of cash flow, but mine is it's an all-encompassing term of all the money flowing in and out of your life, all the cash and cash equivalents flowing in and out of your life. And we'll talk about the different movements of money. That's the second page of the exercise, which is there's inflows, which are new monies that didn't exist before that are showing up, things like your paychecks, business distributions, interest income, pension income, maybe Social Security income, gifts, bonuses. Basically any new dollar that didn't exist before that's showing up in your life is an inflow. The other flow of funds, money, money movement is outflows, money that's leaving and never coming back. So things about your living expenses, your discretionary expenses, your lifestyle expenses, all the monies that we're consuming and never coming back.

And the third is what we call capital flows, which by the way, it's only in that space between where money comes in and money goes out where capital is created and wealth is created. And what you choose to do with the capital that gets created is what we call a capital flow. So if I'm going to move money from my savings account into my brokerage account, that would be a flow of capital, not an outflow. So we are constantly measuring net cash flow because to me, I believe that is the number-one key performance indicator of one's overall financial health, which is the difference between what's coming in and what's going out of your life. And I just want them to know that I'm the resource for them to help them make the choices all along the way that's going to either impact positively their inflows or positively impact their outflows so that we can create more capital and get more money to work and ultimately help you live the life you want.

Michael: And so, when you say these are exercises or experiences, what are they doing? Are you giving them worksheets to do things for themselves?

David: I literally have a worksheet and we fill it out. And what ultimately happens is that, so one, that's high level, what is cash flow. I'm giving them an education, right? I'm trying to take you into the exercise right now. And then what we do is we just take a high-level understanding of all the new systematic, all the monies that are the inflows that you have in your life, what you perceive to be your burn rate, right, and then help them understand high level, not accurately, not completely accurately, what their net cash flow is. Just to put a peg in that. And then we talk about the flow of funds, which is we live with financial gravity in our lives. You make money and your earned income is taxed at the highest possible rate. And if you think about what happens, the order of operations is when you make money, we're all partners with the government and we pay federal taxes, state and local taxes, Social Security taxes. There's confiscation that takes place immediately. And then there's probably a whole bunch of line items on your pay stub, if they're a W-2 employee, of voluntary benefits, discretionary benefits, maybe their 401(k) contribution, which is not a bad thing but may not be the best first place for the money. Certainly puts pressure on their cash flow. Then after all those items, then you got to bring money home, you got to deal with life and your lifestyle expenses, your fixed expenses and whatnot. The question is how much money is left over?

What I want them to understand is that money is a finite resource and every choice that we make affects everything else in our lives. And we have a way of educating them in this. But if we can actually capture some capital and if we're strategic and we put monies to work in things that produce additional income streams, we can create sort of a velocity of cash flow because my investment incomes, the incomes that my investments earn more than likely are going to be taxed more efficiently than my paycheck. And what will happen is if we can start putting our money to work and actually impact the inflow line, then we can create a widening between the outflows and the inflows. And then they'll just start to snowball and it literally becomes like taking your car from first gear to second gear to third gear.

So there's a visualization that takes place that's part of this exercise which then leaves them with yes, that's very different than the way I have my money flowing through my life today. And that is a worthy objective and let me teach you how. But it doesn't happen automatically, Michael. The reason why it doesn't happen automatically, which is what we show them is it's because the common pattern is you make money, it goes to your checking account and then all your spending is correlated to how much money you make. And then maybe at the end of the month as an after effect, you save some money, but then life gets in the way and you raid the savings account and it's not getting you where you want.

So all we need to do is just flip the direction of the money and then this is where I show them if you have a cash flow reservoir that lives between your inflows and your outflows, you automatically create separation between the two. So the reservoir will automatically capture every extra dollar and then whenever you have surplus, we choose, choose to spend it or choose to create another instrument, asset, I call them cash-flow engines that are going to produce additional cash flow. And those engines are the various investments that we consult on. Maybe it's investing in your business, maybe it's buying real estate. Whatever it may be that lights you up, we're going to help you do more of that. And then those income streams then just feed the reservoir additionally to your pay, your earned income. And then it's like first gear, second gear, third gear, fourth gear.

And that's how we are going to exist in our relationship is every time there's excess money, we're going to make a choice of what is the highest and most effective use of that capital that's available based upon that. And then our engagement is what we call our calibration process, which is my ultimate goal is to get in a state of calibration. But in order to get to calibration, which is about being in one continuous conversation, about always being present and directing the capital that's available to them and to the highest and best use, but in order to get there, you need to design what's ideal. And that's what the exercises are.

Michael: And did you say there's materials for this that you're up for sharing with the advice or audience that listens?

David: Absolutely.

Michael: Awesome. Awesome. So, I guess, so for folks who are listening, this is Episode 493. So if you go to Kitces.com/493 and scroll down a tiny bit to the show notes section, we'll have some links out for David's materials if you want to follow along with the visuals and the exercises.

David: Yeah. And furthermore, I mean, if you want, I'll even record a separate series and a separate recording of me role-playing that exercise so they can have it and implement it, give them the scripts and everything.

Michael: Sure. Sure. Would very much welcome it. So we'll put all that in the show notes for folks who are interested.

David: So by the way, that is my cash flow exercise to a T. But it's designed, Michael, to bring you through a journey of education to awareness to ultimately say, I want to bring you to a crossroads of choose to do it the way you're doing it or choose to do it this way. And whatever you choose is fine. I just, I want you to be informed. And so what I'll tell you is that to one of your earlier questions, where the hurdle, I mean, most people say, yeah, I want to do that and I want your help.

Michael: And so from the business end, this is essentially where I'm building up to the proverbial close, getting someone on board as a client. I'm, I'm trying to get there by the end of this third milestone on the cash flow to get them to say that would be different than what I'm doing now. And you can say, great, can we help you with that? And they say yes. And now they're becoming a client.

David: My question literally is, Michael, is there any reason why we should not be doing this? And so maybe they have a question or two, but ultimately they say, let's do it. And then we get them set up and that's just one entry point into my practice.

Michael: When you mentioned earlier, there's a one-page financial plan element of this as well. So where does that fall amongst the milestones?

David: So when I go through data, I'm actually filling out the one-page financial plan. That is like my...that is my fact finder to use industry terms. And then, that evolves into something that's real concrete over time as they give me the homework and, they give me the other, the data, the more sort of quantitative data that I need, like give me your 401(k) statement.

Michael: Which becomes a plan that I'm going to deliver after the third milestone, after the client commits to become a full client.

David: Yes.

Michael: That I'll do the rest of the analysis and bring them the financial plan.

David: Correct. And it's really a financial position. It's literally looking at where you are in one moment in time. And then it's from there that we stress test people's lives. So that's how we then get into probably the protection area of our planning where we'll help them understand that the only way to...if we can look at your maximum potential, where you can be, what your goals are, what you, what the end state is, it's only going to happen if you also protect yourself against the things that you don't have control over. And so we, which is why we have such a big protection business because we believe that defense wins championships. I believe creating wealth is just as much about avoiding loss as it is finding gains.

Playing "Defense" With A Focus On Insurance Planning [56:38]

Michael: So what's the, just in practice for you, what's the protection side of the business? I mean, is this life, is this disability, is this long-term care, is this annuities, are we permanent insurance, term insurance? Just what actually goes on there for your business and your clientele?

David: So we would actually look at as far down as your car insurance and your homeowner's insurance and identify liability limits and look at replacement costs. Because at the end of the day, if you knew you were going to get sued tomorrow or you could be sued tomorrow for millions of dollars, how much liability coverage would you buy today? As much as possible is usually the answer. And so if that's the answer, then don't you think we ought to own that amount because you don't know when the event's going to occur? And people say, "Yeah." And then my job is to show them how to get that as efficiently and as effectively as possible. So we'll look at and evaluate their property and casualty insurance. We'll evaluate their disability insurance or lack of, which most people have.

Michael: Yeah, I'd say usually lack of.

David: Right. And help them understand what impact a long-term care event would have on their financial trajectory. There's a whole exercise for that. We would look at their life insurance. And to me, life insurance is, there's two parts to the life insurance area exercise. One is what's the right amount of coverage. Because at the end of the day, if I don't come home tonight, I don't think my wife's going to care if I have term insurance, whole life insurance or variable life insurance or group insurance. So one is what's the right amount of coverage and then two, what is the right type. And so I'll tell you that most of our clients have a combination of term and permanent insurance.

Michael: Okay. And how do you weave together term side, permanent side and investment side for growth?

David: So the first, as I said, first it's what's the right amount of coverage? And I think a lot of people look at life insurance as a need, a need to have. And it's, I think needs are a terrible motivator. And I think, so one of the things that comes true in my dialogue is I never talk about needs. The word need really never comes out of my mouth. I always talk about wants.

Michael: No more capital needs analysis.

David: No, it's all about wants. And in other words, Michael, if I said, "Hey, you make this much money and you consume this much money and we just, maybe we'll assume an inflation rate on both. Ideally they're separate. This is your trajectory. Is it important to you that all that you're working so hard to create for you and your family happens whether you're here or not?" I've yet to have somebody say no to that question. So if that's the case, then we need to look at your income as an asset. You are your biggest asset. And so, if the asset's not going to be here, do we want to insure for its full replacement value? And so I just help them understand what their full replacement value is of their income. And we give them the opportunity to buy that. And you could buy it in all term insurance if you want. You can buy a yearly renewable term policy and go buy 20 times income. And there's very few people that can't afford that. The question is, do you want it? And so we'll start there. And then it's about efficiency because I believe that permanent insurance has a place in every financial plan.

Michael: So why the permanent and just when you're doing the growth side as well, why the layer of permanent versus go buy your amount as term and we'll go invest the growth dollars in the growth bucket.

David: As I said earlier, I think that creating wealth is just as much about avoiding loss as it is finding gain. And so, think of it like this: if I buy a permanent life insurance contract, I'm actually avoiding the term cost. If I'm leveraging the features of a permanent insurance contract like waiver of premium and my cash flow is flowing through a permanent life insurance contract and I become disabled, well, if I don't have permanent life insurance, my savings are not going to be insured. So I can insure my income with a disability policy, which is a pure cost unless I go on claim or I can create a layer of protection again of my savings as well because life insurance comes with waiver premium benefits. It also could come with an accelerated benefit or some living benefits or long-term care rider to protect that as well. So I'm never in an either/or discussion. I'm helping them understand the characteristics that needed to be in place for their plan, their life to work out. And then to the extent that they want them, I'm going to show them how to get it.

Michael: So is there a particular chassis for this? I mean, meaning is this mostly whole life then that gets implemented? Is this mostly UL [Universal Life] policies where we've got more flexibility for riders, whether it's waiver premium or accelerated benefits or long-term care riders?

David: I typically use whole life insurance almost exclusively. Because I actually believe in…that whole life insurance has better guarantees. And what I want is some guarantees, some sort of... I want guarantees in my life so that I can leverage the guarantees. And I think you probably see most universal life contracts end up getting underfunded over time. And therefore they become term insurance policies in disguise. And people living up to their own devices will actually more than not, they'll be disappointed in what's available to them there. So I'd rather buy term insurance than buy a universal life contract.

Michael: You'd rather buy term than UL if I'm sort of doing the proverbial rent my coverage anyways. But if I care about guarantees and permanent protection, then you're in a whole life bucket. It sounds like not as a savings accumulation vehicle, just literally as a layer of whole life permanent protection with the riders that you can then get with that type of coverage.

David: So I think every fact pattern is different. I think you can design a universal life contract to be a term policy to age 100 or 110 if you wanted to. And the premium theoretically will be less than a whole life premium, but you'll have zero utility of the money that's in the policy because if you take it out, it'll fall apart.

And so where I think the biggest misconception on whole life insurance is that it's not flexible. And I will debate that with anybody because I think it's actually more flexible as long as you own it for a couple of years. Because one of the biggest opportunities that people don't take advantage of is the policy dividends that get paid out in a whole life contract. The fact that it's a non-correlated asset to the stock market, which gives you an unbelievable volatility buffer later on in life. The fact that one of the things that I care about, and if you asked your clients is, Michael, is it important to you that all that you're working so hard to create perpetuates for the next generation and your grandchildren? Or would you prefer that your kids start at zero?

And so, I tend to care about legacy. My clients tend to care about legacy. So is it cheaper to leave the insurance company's money to my kids or leave my own? So there's so many other strategies. And this is what I love about your community, Michael, is that, I came from the insurance world and have found the investment world. And that most people on this, listening to this recording are way more technical than I am on the investment side of the industry. Now I have team members to help me with that. But there's so much I can learn from people that, where their origin stories started from the investment world. And I think the investment world could learn so much from the people that have started in the insurance side of the industry. Because one thing that's for sure is that the industry is converging.

Michael: Oh, yes.

Treating Ongoing Client Engagements As A "Calibration" Process [1:05:04]

Michael: So now take me back to the other part of the process you highlighted earlier, which is that the ongoing engagement process with clients is a calibration process. So what does that mean?

David: So if I took the time, right, and we...milestone one is the intro meeting. Milestone two is to get me started on data. Milestone three is either a protection discussion, a cash flow discussion, an estate planning discussion or an investment discussion, whatever it is. I'll eventually do all four. It just depends on what the entry point is. But moreover, what we're going to design is what are the key characteristics that need to be present in your plan. So you're going to tell me things like, yes, I want to have maximum income protection or I want 75% of the maximum. Whatever it is, it is. We're going to memorialize that on what I call a financial doctrine.

And so where I think financial planning breaks down is very deductive in reasoning, meaning we're here and I'm going to predict where I need to go in 30 years and I'm going to assume that I get there in a straight line. Where what I'm talking about is matching or mixing the deductive reasoning with inductive reasoning which is how do I make somebody...let me examine your financial position and how do I just measure are we on track or off track. So if I took you through my estate planning, my investments, my cash flow and my protection exercises, we will have designed the optimal financial position for you.

Where calibration comes in to answer your question is when I meet with you six months from now, 12 months from now, 18 months from now, five months from now, your financial landscape is completely different than it was when we started. So your income may be 50% higher which means maybe your life insurance is not adequate anymore based upon what you told me was important to you. Do we need to adjust it or not? Your choice. So the calibration is about I think we all spend more time off course than we do on course and the calibration process is about keeping my clients on course; constantly measuring what's ideal compared to what their position is all along the way. So calibration--

Michael: Functionally, those are "review meetings" with ongoing clients, but in your context these are calibration meetings because the plan defines the position you want to be at in the future and we constantly need to recalibrate to keep you pointing back there because life happens and the journey drifts.

David: Exactly. And so I've taken it as far, Michael, as to remove the word review meeting from my dialogue. My clients do not have review meetings. They actually have calibration meetings or calibration sessions. If you try to book a meeting on my Calendly, it'll be I want an intro meeting or a calibration meeting.

Michael: Interesting.

David: Because psychologically people are coming to the meeting with a more prospective outlook on what we're going to do today. To me, it's always about what's the highest and best use of the resources we have available to us right now. And that could be sliding it towards offense, it could be sliding it towards playing defense. And then we just pick it up. So literally every single one of my clients is on my calendar in perpetuity.

Creating A Software Solution To Implement His Cash Flow Planning Process [1:08:22]

Michael: And then coming all the way back to where we started. So just in practice today, how do you actually manage the cash flow side of this planning process? I think you said at one point you were creating brokerage accounts so you could facilitate the ACHs. Do you still do it that way? Do you just have them open another bank account? How do you do it now?

David: So I don't do brokerage accounts anymore. What happened, I think it's an easier way to answer the question is, I started doing this and then we started doing brokerage accounts as I said, because it was really the only way we could set up automations and have purview into the account at the time when we started doing this in 2006 or 2007 or whatever it was. But I was having such outsized results. My early career, I felt like I was living in the world of the one-time sale. Everything was a sales funnel. Let me go sell you a product and then go find the next guy that I can put in a headlock and sell another product to. That was exhausting.

Once I started doing this, I ended up in one continuous ongoing conversation with my clients.

I started doing this and my results and my productivity and the momentum that I had not only in my production as an advisor, but also in the quality of the relationships that I had and the referrals that I was getting. It just became so apparent, but I couldn't quantify it. I couldn't create empirical evidence to show what was actually happening and prove it. You could see it sort of anecdotally. The problem that I had with a brokerage account is that if you ever look at all the different transactions that take place, because money gets deposited in and then it buys a cash position and it was a disaster. We finally just resigned ourselves to, after looking to what was existed in the marketplace technologically from an account perspective, it didn't exist.

So myself and my partner, Vince Daddona had ultimately decided to say, you know what, we need to build this ourselves and make it available to financial professionals. And that was sort of the detour. I don't want to say detour that I took as an advisor, but it was, it just, somebody needs to do it and somebody needs to continuously put human advisors in the forefront of the conversation. I just realized we can help so many people if we just make it available to everybody. So we went full blown into tech development and built what is now called Currence, which is a platform where financial professionals go to build what's called their income under management business.

Michael: So now take me further there. So what is income under management and what does Currence actually do in that regard?

David: So I would say income under management is really an industry term. It's a term that describes being in the income under management, cash flow under management business. Everyone on this call likely is in the assets under management business. But what I'll tell you is that if you're also in the income under management business, it'll drive your assets under management business and your protection business if you're in the protection business. So I would say it's a whole new business category that didn't exist, that we kind of figured out on our own.

Michael: Because when you build clients in this direction, as their income grows, their savings rates tend to explode upwards and they start to have lots of free cash flow, which means they fit all the traditional advisor lines of business because now you have clients with free cash flow to save or allocate to the various things that we implement with them.

David: Yeah, you participate in all the positive life events and they're rooting for you and money is going to keep showing up. Now you end up with the chicken, not just the egg, right? Because you're meeting the clients at the paycheck, which gives you more influence. And because you're calibrating with them, you are always more relevant with them. And your engagement just goes off the charts and you just wait for people to evolve financially and then they all grow into A clients. And that was the experience I had and that's why I'm still an advisor and why I'm still just having such incredible success and why I'm so passionate about teaching other people how to do this.

Michael: But this isn't necessarily from the perspective of a business model, revenue model. I do assets or management, I charge 1% of assets. Now I'm going to do income management and charge a percentage of income. You're not going that route. Maybe this is more around what's my value proposition that I'm adding to the clients' benefits and I know how this plays out from this perspective.

David: Totally. And as I stated, I'm new to the fee-based charging fees for planning side of the business on my retail business. And I think there's a there there. I think with our tools for the folks that are in the charge a fee for either planning only, fee only, this is a tool that you could manage a book of business with. And so let me explain the tool because I think that'll clear up a lot of confusion for the audience.

Think of it this way. We have members, which are what we call our clients, your clients, the end users in the system. And we have strategists, which is the financial professional. So when I was building this with brokerage accounts, the challenges I was having was managing a population of clients and understanding what their target balances were. And you imagine having a spreadsheets and having to look up account balances one at a time. And it just was not scalable as well as being able to create an experience for the client and be able to articulate what their net cash flow and free cash flow rates were, how much capital was showing up, how much surplus cash they had, when they should be making the next decision.

It didn't exist. I had to, that's kind of how the calibration process by accident started. Because every one of my clients was, we were just, I just put them on the calendar every quarter because I just knew there was going to be dollars that were showing up, not in theory, but reality that then needed to be calibrated with. And that's kind of why my production went up, you know? And so what the system does is, again, it's a platform where advisors can come to and manage their business, their income under management, their cash flow business. Again, it's no budgeting. It's helping people choose their spending amount.

So clients will come in, you can invite the clients, they open up this cash flow reservoir account, which is an FDIC insured, it's really a checking account underneath the hood. And it's FDIC insured up to $3 million. So we aggregate some FDIC and earns a very competitive interest rate. And what it has is a technological interface that allows you to connect with your client. They get a mobile app and a desktop version where they can manage their cash flow. They can see all the key metrics, what their net cash flow is, do they have surplus cash? What are their trends? What is their financial health from a cash flow perspective? On the advisor side, we call them strategists, they have a dashboard, a portal where you can manage an entire population of clients, unlimited amount of clients, and literally triage your book of business by looking at who is in trouble and who has opportunities. And with a click of a button, you know all the clients that have surplus cash, and that should be making a decision right now.

Michael: And so functionally, you're actually in the banking business, the bank account business, because Currence is making the new reservoir accounts that we need to be the place that the direct deposits are steered so that we can then auto-transfer to wherever their actual checking account is, which doesn't need to move. Thus, you're like, you can still bill pay where you bill pay from, we're just going to change where you're depositing into because we're trying to create the reservoir layer and break the inflow/outflow connection.

David: Yeah. And I would say moreover that the advisor becomes a destination for the first dollar, not fighting for the last dollar. So, it's like you were literally putting financial professionals in the cash management business that otherwise wouldn't be. And if you get known for managing cash, you'd be amazed at how much cash shows up.

Michael: So as an advisor, am I charging fees on the reservoir account, is this a managed account or do I charge some fee for this service? Or what's the business model back to me as the advisor? Or I just, you're going to save well and I'm going to earn it in AUM growth and other opportunities over time?

David: Yeah. What I'll tell you is that the fastest way to double your business is to double your client savings rates. And that'll happen inside of a couple of years. And so, yeah, there's no AUM-based managed fee that an advisor would earn, but many advisors are charging or making this a deliverable for their planning to validate their planning fees.

Michael: And then what's the cost of the software to, I don't even know if you charge the advisor or the clients, who pays what to do this?

David: Yeah. The advisor pays, there's a couple of different offers and we were actually going to have by the time this airs, probably a new offer that's going to make it even easier, but there's an offer that we can actually make to your audience that'll give them the opportunity for a discount, but you can for $317 after the discount I give you, you can put an unlimited amount of clients on there, have access to it. There's some planning tools and some cool calculators. And we have some new advisor tools in the cash flow space that are going to be geared around helping advisors engage in this conversation, like these exercises that we talk about that's coming out. But yeah, it's $317 a month.

Michael: $317 a month for all the clients I want and need to put on the software.

David: Exactly.

What's Next For David As He Builds His Advisory Business [1:17:58]

Michael: As this plays out in your business, I mean, as you mentioned earlier, your roots were in the insurance side, you're newer in the fee-based side, but it's growing rapidly in part because you generate high savings rates for clients over time. You're starting in the financial planning fees direction. I'm curious how you envision this continuing to shift over time as you continue down deeper and deeper into the financial planning side of the business. Is there a goal for how the revenue shifts over time? Is there an end state that you envision for where this ends up as you continue to add in AUM and planning fees?

David: I believe in co-collaborators and I believe the fastest path to building the ideal financial firm is to bring in talent that has expertise that's different than yours. I think to be determined, and as I mentioned, we're a work in progress from a firm business, but one of the things that we've built is an environment where everybody that enters our organization has a pathway to partnership. I think that's critical to the growth. I see myself really kind of pulling back and empowering my team and the growing team that we have to work with my clients the same way I would have and kind of focus on the certain ones that I'm suited best for and then leverage the rest of the team members.

I know it's sort of an abstract answer to your question, but the answer is I see us becoming more a family office where they'll be called a subscription fee base. I think there's going to be fee compressions on the AUM side and I think that's inevitable. We're going to constantly look to reinvent ourselves. I think one of the things about being independent as opposed to the way I was is we get to pivot very quickly. I'm a student of the game and I'm learning and there's so much from people that have different business models than I do that we soak in and try to learn from every day. I've made a lot of mistakes in my career and I'm happy to share those with others and I want to learn from other people as well.

What Surprised David The Most Building His Advisory Business [1:20:23]

Michael: What surprised you the most on this journey of building two businesses? You've been building the advisory business and building the fintech side. What surprised you the most on this business building journey?

David: I would say being an advisor is not the same thing as being in the advisory business.

Michael: What's the difference?

David: Being an advisor, by the way, I actually don't even like the word advisor. That's the person who gives their opinion. To me, if you look at the definition of advisor as a person who gives opinion, I'd like to see us human advisors as leaders because I think people are really looking for leadership. But aside from that, to be an advisor, you need to maintain and be at the top of your game. You need to be relevant. You need to be effective. You need to be current and engaging with your clients. There's an art and a science to being able to lead people and get them to take action because that's really what we do better than anybody. Us advisors, all of us on this call.

Being in the business, I never envisioned being an HR manager, being responsible for hiring, firing, billing, scaling, marketing, making sure the garbage gets taken out. People look at folks that have success and we've had a lot of success and we're a very successful, highly productive organization. It's not all...from the outside looking in, it looks simple and it's not. All of us have different challenges that we've had to face over time. I've had some low points in my career, for sure.

The Low Point On David's Career Journey [1:21:55]

Michael: What was the low point?

David: Every day is... Every day. Because first of all, being a fintech founder, you always feel like you're taking two steps forward and 1.9 steps back and you do it for the right reasons. If I really thought about it, I would say the early part of my career...listen, I've made every club and award that this industry has to give out. I remember being in one organization and being very young and making their top club, call it President's Council, whatever. I worked my butt off and I got there. You ever see those images of people when they run their first marathon or whatever marathon and they just give everything they got and then collapse after the finish line? That was me. That was me.

I remember I woke up the next day on January 1st, you would think I'd be so excited and feeling victorious. I was like, oh my God, I got to do that again? It was that feeling of the early part of my career when I was more transactional in nature, feeling like I was waking up unemployed every single day. I wouldn't say it was that one moment that was crystallized for me, but it was something that you feel every day.

Low points. There's low points and high points every day. I think a lot of advisors feel like they're on an island. Part of my mission is with Currence and who I am today, and I'm a very different person than I was even five years ago. I just want to lean into the industry because I believe our industry needs better representation, better support, better tools than we have today. I want to keep the humanity in the industry. That's part of my career. I'm happy to share all my low points.

David's Advice For His Younger Self And For Newer Advisors [1:23:46]

Michael: What else do you know now you wish you could go back and tell you 10, 20 years ago as you were still earlier stage and growing? The pearls of wisdom you know now you could impart from hard-earned experience.

David: I think the key to success is solving other people's challenges. My success is directly correlated…it took me a while to realize that, but my success is directly correlated to the impact I make on other people. I had this distinction recently of the difference between problems and challenges. The distinction was that problems are things that you run away from and challenges are things that you are worthy of running towards. I think our clients need that distinction. I think sometimes we look at things as problems.

For example, if you look at…the Federal Reserve every month posts the national savings rate. You literally go to the Federal Reserve and you'll find the data. Basically the average American saves four percent of their income. Some months it's 4.2, sometimes 3.7, 3.9, whatever. Just call it four percent. We can look at that as a problem and our clients look at that they aren't getting ahead. They look at it like "I have no confidence, I have no hope." We can show them it's just a challenge and not a problem. All they need to do is change the direction of their money and give them a vision of hope. That's one. What I learned is that if I just focus on solving other people's challenges, any challenges that I perceive to be in my world, they just automatically evaporate.

Michael: Any other advice you would give younger, newer advisors coming and getting started in the profession as it exists today?

David: That's easy. Yeah. Be careful who you spend your time with and protect your confidence.

Michael: And protect your confidence? What does that mean?

David: You already know 90%, this is one of the best pieces of advice I got early in my career. As I came out of my first career school learning, they said to me, now you know 99% more than most Americans out there. That made me confident. Take yourself seriously. My partner Vince always says, take yourself seriously and take yourself seriously in the lives of others. I wake up every single day and I would encourage every young, newer advisor listening to this, to wake up every day and tell yourself that the world needs what I have and it's my job to share it with them. So you're going to find low points. The reality is some will, some won't, so what, move on to the next person. There's 300 million adults in this country. The market is endless. And the only other advice I would give newer people is find a niche. Be known for something in a niche.

What Success Means To David [1:27:04]

Michael: As we come to the end, this is a podcast about success and just one of the themes comes up that word success means very different things to different people. It changes for us as our lives go. You've had a lot of success. You've won the awards. There's now a multimillion revenue business and a second tech one being built. The businesses seem in a wonderfully successful place as they grow. How do you define success for yourself personally at this point?

David: Personally? I define success as freedom. There's no dollar amount, monetary value associated with it. It's literally freedom.

Michael: Freedom for what or to do what?

David: To being able to do what I want, when I want, with whom I want, the way I want. Not being bound by something. I think it took me a while to get there, but I think a lot of people in our industry just own a job. And it's, I've learned how to create a business that gives me freedom. Freedom to go lean into training other advisors and share this income under management story and provide a tech platform to let advisors share it with their clients and have the impact that I've had with folks. And if I was not free to do that, the opportunity costs for not just me, but for others and the impact on society would, that's what I'm all about at this point.

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

David: This was incredibly enjoyable. I really appreciate the opportunity to share and I hope that the audience found something in what we talked about. If there's just one tactical thing that could make an impact, that's what lights me up and gets me excited. So thank you for giving me the platform today.

Michael: Thank you.