Welcome back to the tenth episode of the Financial Advisor Success podcast!
My guest this week is Eric Hehman of Austin Asset, who over the past 20 years has completed an incredible journey from being an unpaid intern for the founder John Henry McDonald when he was still a solo practitioner, to now becoming the successor owner and CEO of what is today a successful independent RIA with $750M of AUM.
In this podcast episode, Eric gives us some background about Austin Asset today and its incredible growth since he started working for the founder in 1997, from how the firm established itself as an early fee-only pioneer in the Austin area, to how it adapted its business model from standalone financial planning fees to charging on AUM (and why the firm still often charges separately for a financial plan as well), the way the firm develops its younger financial planner by having them work with smaller clients to gain experience and confidence, and the firm’s current structure today with 16 staff (including 12 CFPs) serving about 300 affluent clients.
What’s fascinating about this interview with Eric, though, is not simply the story of Austin Asset’s growth, but how its succession plan unfolded over time, as told from the perspective of the successor. Eric details why the founder was willing to sell him a 10% stake at just 1X revenue, how the founder transitioned his own role away from client relationships and out of management over time, and the way ownership and salary was transitioned to maintain the founder’s income at a steady level for a period of time.
And be certain to listen to the end, where Eric discusses what led him to ultimately write a book about his succession planning experience – aptly called Success and Succession – and why it is that notwithstanding the industry’s focus on the crucial financial and management transitions of a succession plan, it’s the emotional issues that ultimately drive (or can ruin) the outcome.
So whether you’re simply looking for ideas on how to grow a large financial planning firm, or are specifically looking for perspective on succession planning – as the founder, or the successor – I hope you enjoy this latest episode of the Financial Advisor Success podcast!
What You’ll Learn In This Podcast Episode
- How Austin Asset shifting from financial planning fees to an AUM model, and why it still offers project financial planning. [6:48]
- How Austin Asset makes money by serving young clients, not just older and wealthier ones. [23:12]
- How a personal financial planning class by Vickie Hampton at the University of Texas, over 20 years ago, led Eric to financial planning. [28:57]
- Eric’s beginning as an unpaid intern at Austin Asset, which he discovered by cold-calling its founder John Henry McDonald. [32:08]
- “He knew how to catch fish, and I knew what to do with them” – Eric & John Henry’s saying that encapsulates their cooperative work style. [37:58]
- Why it wasn’t strange for Eric, as a 24-year-old, to essentially manage an 80-client firm. [48:03]
- Why John Henry sold 10% of AA to Eric for 1x revenue – essentially half the market price for such a sale – when he was just 24. [49:50]
- How Eric and John Henry reached a crossroads in 1999, having to decide between remaining a lifestyle practice or more seriously growing their business. [59:50]
- How Austin Asset’s succession plan allowed John Henry to take pay cuts yet maintain his income as he transitioned out of the business, and how Eric adjusted to life in the first chair. [1:13:27]
- The meticulous and honest process of succession planning that Eric went through, and how it inspired a book on the subject. [1:27:37]
- How founders and young CFPs can work together to build succession plans, and why young planners shouldn’t want to bust up old practices. [1:44:37]
Resources Featured In This Episode:
- Eric Hehman – Austin Asset
- John Henry McDonald
- Worth Magazine – Power 100 List
- Vickie Hampton – Texas Tech Personal Financial Planning
- Why CEOs Fail: The 11 Behaviors That Can Derail Your Climb to the Top and How to Manage Them by David Dotlich and Peter Cairo
- The e-Myth: Why Most Small Businesses Don’t Work and What to Do About It by Michael Gerber
- Success and Succession: Unlocking Value, Power, and Potential in the Professional Services and Advisory Space by Eric Hehman, Jay Hummel, and Tim Kochis
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Full Transcript: Eric Hehman On Growing From An Unpaid Intern to CEO and Successful Succession Planning
Michael: Welcome, everyone. Welcome to the 10th episode of the Financial Advisor Success Podcast. My guest on today’s podcast is Eric Hayman. Eric is a partner and the CEO of Austin Asset, an independent RA in Austin, Texas that provides comprehensive financial planning and investment management to 300 clients with more than 750 million dollars in assets under management charging a combination of AUM and standalone financial planning fees. What’s interesting about Eric, though, is not simply the story of the very successful advisory firm that he’s helped to build but his own path going literally from being an unpaid intern for the firm’s founder 20 years ago to becoming its CEO today.
And so in this episode, Eris shares his perspective on the entire journey from what he actually did to land that first unpaid intern job and then a few months later, persuade the founder to finally start paying him a modest $18,000 a year salary to why the founder decided just a few years later to sell 10% of the firm to Eric when he was only 24 years old and the challenges that the business faced as it continued to grow over time culminating in the founder retiring and exiting from the business and selling the remaining shares to Eric and two younger partners. We also talk quite a bit about the book that Eric coauthored about his succession planning experience actually called Success and Succession and how even though most succession planning advice focuses on the financial and the operational issues of succession planning, it’s ultimately the emotional challenges both for the founder and the successor that are really the hardest to navigate and solve.
Remember that you can find more information about all of our episodes including a link to Eric’s excellent book in our show notes. Since this is episode 10, you can find all the show notes for this episode at kitces.com/ten. And so, with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast with Eric Hayman.
Welcome, Eric Hayman to the Financial Advisor Success Podcast.
Eric: Hey, Michael. How are you? Thanks for having me, bud.
Michael: I’m excited you’re here. You have one of the coolest stories, I think, about a path in the advisory world that is frankly, pretty different than a lot of others that have come through. You basically climbed this ladder from intern…unpaid…the firm’s first unpaid intern to its CEO and then buying out the founding owner and taking over the business entirely and I just…I’m so excited to have you share this story and what that path looks like for all the listeners for the podcast.
Eric: It’s a fun one. It’s a fun one. I’m looking forward to it.
Michael: It’s a heck of a journey. It’s a heck of a journey. So maybe you can start by just painting the picture for us of Austin Asset Management, your firm as it looks today. So how big is it, who do you serve, what does the business look like?
Eric: Sure. So the firm now…there’s 16 of us in the firm. Of the 16 folks on the firm, 12 of us are CFP so very heavy concentration on financial planning. Do manage money for clients so we have about 750 million dollars we manage for a little over 300 clients. So that puts the average client just north of two and a quarter in terms of the assets we manage for them but we’re very much a wealth management firm that does the financial planning for all those clients. And so the firm just crossed through the five-million-dollar revenue mark in the last year so some nice milestones have occurred just in the last six to 12 months with the assets we’re managing reaching the 750 and the revenue finally crossing over the five million. So that’s how we sit today and we take on two, maybe three clients a month and we are very deliberate about who we take on and most of them are folks that are just at a point where they have reached a level of complexity where they’re not really sure if they can handle it on their own and they reach out to us. And so we’ve been the benefactor of that being in Austin. It often shows up on a lot of lists of top places to be and so that means that the 100 people a day that move to Austin, if we pick up one or two of those a month as a new client, then that’s great.
Michael: I mean, two to three clients a month at two plus million dollars a clip is a heck of a lot of organic growth. So where does that come from? How do you find clients or how do clients find you and how do you power this kind of growth?
Eric: So it really goes back to the…I mean, in a lot of ways, it’s the rising tide is raising the boats here in Austin. So I’m an Austin native. So I was born here, I lived here most of my life and this was a small, sleepy college university, state government capitol town when I was a kid and as high tech grew in Austin, many people were moving here because of cost of living. And so when I joined the firm in ’97 as an unpaid intern, the firm at that point was essentially…had revenue of about $150,000 dollars and was the founder and a helper that worked with him in the firm and less than 25 million under management. And so it was really just a neighborhood solo practice but in the late 90s is when Dell Computers, a lot of other high tech companies started really getting a foothold in Austin and it meant that people that were looking for fee for service advice as a fee only firm, there really weren’t many choices. And so we just benefited from being one of the first firms in town and the founder of the firm, John Henry McDonald, had gained a fair amount of accolade for being one of the first fee only firms in town and had made it on the Worth Magazine list and other…medical economics and things like that early in the day, in the late 90s that made it so that when people looked for a fee only financial planner in the early days of the internet, we were basically the big firm in town. Or really, the only firm in town that would do it.
And so the way it works now is we just have all that good will that’s built up in Austin with existing clients and centers of influence around town who also benefited from the growth in Austin to the point where there’s about a 100 inquiries a year that come to the firm of which 60% are actually qualified for what we do. And so then we meet with a good portion of the 60 of those and we find two or three a month that will hire us as a client. And part of the hiring us as a client is also we will do financial planning for clients without managing their money. So we will do the consulting work that we used to do in terms of how the firm was built. So not all of those clients that hire us end up being a wealth management client but the majority do.
How Austin Asset Shifted From A Planning Model To AUM, And Why They Still Do Plans On A Project Basis [6:48]
Michael: So can you talk to us a little bit about what those fee structures look like? You said you’ll do plan standalone but you also manage assets. I’m presuming there’s an AUM fee there. So what does your fee structure look like? How do you price financial planning and wealth management services?
Eric: Yeah, so I’ll start with how we got to this point because it’s actually a good story. So the firm was founded really doing hourly project work for anyone that maybe had credit card debt to questions about retirement. And so when I joined the firm, that was essentially the culture of the business which was we wanted to be a real live consulting firm for people that were willing to pay a fee for planning, for financial planning. And so along the way, we actually resisted managing money for clients till the late 90s and clients started asking us to manage their money. So in those days, what we would do is we would charge a fee for the planning, an hourly rate essentially for the project and we’d design a scope agreement and then we would manage money for clients free for a year. Essentially because we were just trying to help them get organized and then, after doing that for a number of years, it became…we might charge a $2,500 or $3,000 financial planning fee. Then we would give them a credit for half of the planning fee towards their asset management fee schedule and then that evolved to the point where we dropped giving the credit at all to entice them to have us manage their money to where we would charge a standalone planning fee anywhere from four to $8,000 for a six-month engagement where we would have five or six meetings going through all the areas like the CFP board would tell you in terms of the scope of their agreement. And we would charge those fees for planning and then clients would decide during the scope of that work.
It’s evolved to the point now where most clients…we ask all the clients to go through that study and whether or not they…whether they desire us to manage their money or not. And so the fees will usually range now from 2,500 to $8,000 now that we have a bit of an emerging wealth Henry, higher earner who may not reach that type of offering where we might charge them $2,500 dollars for a modified smaller plan all the way up to the client that’s got multiple entities and many tax returns and property all over different states where we might charge them eight or $10,000 for the consulting.
Michael: So does every client have to buy a financial plan for $2,500 to $8,000 before they can become an asset management client or is there an option if they say, “Hey, I’ve got a couple of million dollars and I just want to do everything with you.” Can they do everything at once or do they still have to go through planning first with planning fee and then AUM second with AUM fee if they decide to go to step two?
Eric: In most cases, clients will present themselves as this. Something hurts. They just know that we will provide a good service to them because they were referred in most cases. Almost all the clients, those inquiries are referrals. So they know that for some reason, we’ll be able to help them but they don’t really know exactly what we do. So in a lot of ways, the planning was meant to be the easy entry to…I’m not sure if I’m convinced to have you manage my two or three or four million dollars. I want to find out what you do and what kind of recommendations you design.
So a lot of times clients will say the planning is the way for them to get their feet wet with the relationship and then decide to have us manage their money. There are a number of clients that will show up and say, “I’ve heard about you. I like what you do overall. I have five million dollars at XYZ brokerage firm. I would like for you to take that over as well as do all this planning work for us.”
In those situations, we don’t necessarily charge a separate planning fee because they’ve already decided they want the entire offering. And so the way it works out is over the course of a year, there’s usually half to two thirds of the clients that will pay the separate planning fee and then the other third or so may not because they’re already predisposed to the full offering of doing the planning on a parallel track with the wealth management.
Michael: Interesting. So for a lot of your clients, the plan…the standalone planning fee and option is almost a tasting menu option of if you’re trying to get someone that moves literally millions of dollars, it’s such a weedy decision for them that doing planning work for them first or answering their particular pain point issue from a planning perspective is what lets you work with them to build the trust to ultimately get to the point where they want to become a more holistic and ongoing relationship.
Eric: Yes, that’s exactly how the firm grew and that it was a way for us to endear them to us because we would give them objective advice in a way they hadn’t received it before, back in the early days of my being here with the firm and…so it was a way to differentiate ourselves because we’d actually do the consulting without managing your money and now it’s turned into…that’s where a lot of the good will and trust is built in saying that…here’s the work that we’re going to do for you over the next six months. During that process, you’ll get recommendations about investments in all other areas and there’ll be a point where you’ll likely look up and realize that A, we’re more cost effective but we also have a stronger value proposition in terms of we’re going to be doing the planning as well as the wealth management for you.
So it’s…we still try and tweak it a little bit as it relates to the emerging wealth clients but it’s part of how we built the firm is be able to do the consulting for clients that don’t actually have us manage their investments because there are a number of do it yourselfers that still want to manage their own money or they’re a small business owner that doesn’t have a lot of wealth yet but they’ve got complexity and they are looking for objective answers. And so if we can provide that, then we feel like that’s a good service to the community as well as ourselves. I mean, it’s a good work for us so…
Michael: And I’m curious, though. Is it good work for you? I mean, I know what the metrics look like when clients come onboard for two million dollars and stick for the long run and pay AUM fees and start incurring revenue and…I know a lot of advisory firms that have just said, “Getting the long term clients is such good business that I just don’t want the standalone project fees.” It might be decent time for…fee for service hours but it just doesn’t grow and scale my business in the same way as getting long term clients and saying, “You’ve got to work with us with everything or we don’t want to work with you.” Do you ever think about going that route or you’re not convinced of that? What’s your view on it?
Eric: No, we are definitely…we deal with that tension on a regular basis and here’s where the tension shows up. It’s when you have a mature…like I said, there’s 12 of us in the firm that are CFPs but only seven are the planners, if you will, lead advisors. So there are five that are in either support roles or in more tactical portfolio type of roles. And so for us, the tension is those that are already planners…it’s much better that they’re more mature in their practice or more mature in their experience to only take on clients that are long term clients. The challenge is as we’re building the firm, at least when I think about how I learned, most of the best learning I had was on those early engagements where I was proving my value through doing really good consulting like giving advice and it made it so I could convey the value of a long term offering to that client. And not every time, not every client would engage us long term. And so in some ways, by doing the consulting for us, it’s still our proving ground. It’s a way for a new planner that maybe only has three or five years of experience that might not be able to convince that…if they’re…let’s say this planner is in their 30s. To be able to convince that client that may be in their late 50s or 60s that it’s time for them to move over their life savings to them as an advisor. Well, if they hire them for $4,000 or $5,000 dollar planning agreement and spend six months with them, very quickly the planner on our team will learn great skills around how to identify problems and design solutions and things like that that in some ways, it’s like the residency where doing those…just being in the room, observing, writing their recommendations, looking at the files makes it so that when that client does present itself, it says, “I’ve got the three million dollars and I am prepared to hire you for everything.”
You have much stronger answers to their questions because you’ve done the consulting where you had to prove your worth, I guess, in a different way. So again, like I said, it’s about half of the clients that…last year, there were eight of the 30 something clients that did planning only. So there were two a quarter the way it averaged and the reality of that is it’s good work. Not for maybe a mature planner because they already have their skills but it’s great work for someone that’s just beginning to transition into being a lead advisor. And so that’s how we utilize a lot of the planning work is having the newer advisors either partner with a more senior planner in the firm or at least with a team approach where they can learn how to give really good answers to people that want objective advice.
Michael: And it’s always been an amusing thing to me that there are a lot of firms that do ongoing investment management and financial planning. So I mean, they do have the financial planning angle but they only want to do it for ongoing clients and not as one-time project fees. Yet, I know so many planners…I guess, in essence, including your firm that start on the hourly end and often end up pivoting into doing assets under management because the story’s essentially the same. You work with some clients on an hourly basis and they come in and they ask you questions and you help them with stuff and then they come back in to meet with you maybe in a year or two and you’re basically telling them to do the same things you told them to do the first time a year or two ago because they didn’t do them and then maybe either in that meeting or maybe you go through this once more another year or two later and eventually, everyone realizes, “I keep telling you to do the same thing. You keep not doing it.” And the client at some point says, “Can’t you just help me and do it for me? I trust you. I’ve been working with you for a while now. Can’t you just do it for me?” And the project planning work ends up setting up actual asset management clients anyways. I think the tension or the other tension is consumers, I think, are increasingly savvy about what’s going on and so giving way planning as a lost leader to get assets I think is probably not as effective as it once was. But just charging for them, just charging the full on market rate so the client can be confident that this isn’t a pitch for assets guised as planning. This is actual planning that you’re paying for but they have a good…they pay for it and they have a good experience and a good experience that they have says, “Maybe I do want to work with you with more.” And they turn into full scale ongoing wealth management clients.
Eric: Well, I’ll tell you that’s exactly the case. And I mean, you’re spot on in that the reason we started managing money was because clients would go back to their bank or brokerage firm or try and do it themselves and they would look up in a year or two and then call us back up saying, “Well, I went to my advisor that was at XYZ bank and they tried to do what I asked them but they wouldn’t do it the way you suggested.”
So there’s this tension around the model that was outside of our firm versus the model that we are representing and clients would come back and say, “Will you please just do this for me because I don’t want to go back and try and coordinate this with three different investment advisors I have outside of you as my consultant?” And the wild thing happened…interesting thing happened to us in the mid-2000s in that we had received this referral from a really prominent estate planning attorney here in Austin and the reason he referred the client to us is because they already had four investment managers but they didn’t know what everything was doing so he basically hired us for the client, brought…introduced the client to us because he wanted us to basically organize what was going on with their outside managers. And he had all the big names that you can imagine nationally. This was about a 30-million-dollar client and this was the biggest client we had ever seen.
But we were just hired for planning so we charged a really large planning fee because it was a really big project. Well, today, nine years later, we manage all their money. But it started off as just a six-month planning engagement.
Michael: You formed your own little niche for yourself around actually being the fee only objective planning only folks in the town that at least at the time really didn’t have many others doing that.
Eric: Right. That’s exactly right. And to this day, there really aren’t many firms in Austin that will do the planning without managing the investments. And so we…that’s a majority of why we still have…the good will that we have is because we’ll still do it for clients that don’t necessarily want to move their investments to us so…
Michael: So what about on the asset side itself? So planning fees vary from $2,500 to up to maybe $8,000 or more if there’s more complexity. So with an average client that’s close to two million dollars, do you have a one or two-million-dollar minimum for doing asset management in the first place?
Eric: So we don’t. We’ve…what we’ve gone to is we’ve tried to go back to the early days of the firm but also look at the runway of the firm. So I’m 42. Been here for 20 years and when I joined the firm, our average client was barely probably $150,000. When you think of that…when you finally start managing money for clients, that’s about how big our average client was. So you can see that the average has quite changed, right.
Well, the same phenomenon is occurring now in that we still have a really long runway as a firm. And so in many cases, we want to still attract clients that have great potential that they can be part of our firm for a long time just like the clients that hired us back in the late 90s that now have become two and three million dollar clients today. And so we don’t normally have a minimum. What we try and do is just gauge the complexity as well as the potential of what’s going on in the client’s life to see if we can provide value.
So we’ll take on clients that might only three or $400,000 that are in their 30s because they’re in great professions and they have great potential and they’re just really great people to work with and we know that as we endear ourselves to them over many years and they work with one of our newer planners and they learn together that they’ll make a great client 10 years from now just like the ones that I started with 15, 20 years ago. And so what we try and do is we work in these collaborative teams to the point where there are four roles assigned to each client and so you can imagine that the largest client has the most senior people in each of those roles and the smallest client of the firm might have the most inexperienced or junior people in the firm in those roles.
And so that’s the way we just…we just try to manage the human capital that way as opposed to saying, “Oh, our minimum’s two million. We’re not going to take on a client unless they have two million dollars.” Because there are clients that have more than two million dollars that are bad clients for our firm.
Michael: So interesting. So it’s…you don’t necessarily segment drastically different services to clients based on their wealth level. You segment the experience of the advisor and support team that works with them?
Eric: Yeah. So I think in some ways as…I mean, I use this term. I don’t think it’s a real accurate term but it’s what I call it. Essentially, it’s cost accounting. So if my most senior people are working with the most senior clients providing the most complex work, then that’s how we structure that and if the newest CFP with the newest team member that’s in this…and a least experienced person in terms of their career track is working with the smallest clients, then in some way, I’ve segmented the clients by who serves them. And yes, there’s a slightly less complexity or less work that goes into that and the client that’s paying $4,000 a year compared to the one that’s paying 40,000 but we try and segment it based on how the teams are designed as well.
But we don’t have a true segmented…like a tier one, tier two, tier three type of client.
How Austin Asset Makes Money Serving Younger Clients [23:12]
Michael: Well, it’s an interesting point because I spend a lot of time talking about serving younger clients as well. It’s our focus for what we’re doing at the XY Planning Network these days and I know we get lots of questions from existing firms that’s basically something in the effect of, “I don’t understand how any of those advisors can make any money serving young clients. They just don’t have enough money or they don’t pay enough to justify it.” What do you pay your advisors? And sometimes it’s big numbers and particularly, when you get into firms that historically have done a lot in the high-end wealth management space. They might have advisors that make a $150,000 of bonuses or 200 to 250. I’ve even seen higher numbers than that. Well, why don’t you just hire a 27-year-old planner with a couple of years of experience, pay them $70,000 to $80,000 to sit there and just be an awesome service person for young clients. If you had a planner that you only payed 70 or $80,000, do you think you could be profitable charging $2,000 a year to a 100 young clients? Right. It’s $200,000 of gross revenue. Your gross margin is going to be 60% after you pay the salary. You allocate a little overhead and there’s your profitable young client. And I think we sometimes get ourselves trapped in the idea that we can’t serve small clients because it wouldn’t be cost efficient given what we pay our senior advisors and forget that not every client has to work with the most senior advisors and the deeper your team and the more you just segment your client services by the experience and basically, the cost level of your advisor staff, the more room you have to serve a wide range of clients and have them be profitable up and down the spectrum. It’s not that your high end clients get super fancy services and elite client events and all that while your lower end clients get one meeting a year with you to meet with them. You can serve them similarly up and down the spectrum. You just do it with people that have a little more or less experience overall and segment by staff.
Eric: Yeah, I completely agree. That’s one of the biggest things that I think…folks that have…when I think of a firm that’s gone from an average client…like we’ve had to our average client now. Part of what begins to kick in is this idea of just the pride and ego of having an average client of two and a half million dollars or whatever.
Michael: You could be a two and a half or three million, Eric, if you didn’t keep screwing it up by taking on young…
Eric: That’s right. Well, the other part…what shows up in that is the opportunity cost because the most senior advisor is thinking, “Well, I don’t want to work with those clients so why should we take them on?” The challenge they’re…I think what they’re missing is exactly what you laid out which is if you want to build an enduring business, you’re going to attract and hopefully bring people into your firm that don’t have the same experience you do 20 years later and what a great way for them to begin to learn the craft if you really care about teaching them how our firm works by working with people that are much more closer to their age, they’re much more closer to their level of net worth or complexity.
Because when I think about it now, I’m having lunch with a client here pretty soon. We just confirmed everything the last day. He was one of the first clients I worked with and they had barely a $100,000. Now, he great thing is they’re only…they’re essentially my age. So they hired us for basic planning back…18, 19 years ago when they were in their mid-20s. Well, now they’re in their mid-40s and they have got three million dollars. So it’s like what’s my opportunity cost? My opportunity cost is actually not taking that client on but has the potential. You’re not always going to get it right. They don’t always become three million dollar clients but I have a…there are a number of those clients that have been part of our firm for 12, 15 years that started off with 10% of our average client now and they’re better than average clients now. And so I think it…but I think it has to do with the approach of the firm and so if you’re just looking at it from an opportunity cost of your most senior advisor, I completely agree. The challenges, the way our career tracks are designed and our paygrades are designed that we hire people that don’t have very much experience, that are going through the process of getting their CFP and then they get their CFP and there’s this huge chasm between getting your CFP at 28 years old and working with a client with a five-million-dollar net worth in my view.
And so now what have I done? I basically set them up for failure because I’ve said, “Oh, well, you’ve got to work with clients that are twice your age, that have incredible net worths that you’ve never been exposed to before.”
Michael: Now go get three new ones.
Eric: Right. And so when clients reach out to our firm because they want planning, if I can design a team that can service most of the needs of the clients that are presented to us, then I think we can grow a really great business and provide opportunities for tat planner that make $70,000 or $80,000 to then get to the point where they might make 150 as they grow into their own experience in their own firm and so…because they don’t have to go out and do business development. So that’s the other part of this is that our advisors aren’t asked to go out and do business development because we have these great inquiries that come in. Now, they’re awarded if they do it but the culture of the firm is meant to service the opportunities that present themselves and so that my job, I think, of as CEO is designing the service model that can design the team that can work with those clients that maybe are only paying four or $5,000 dollars a year in a way that it’s really good learning and it’s really good experience so that in two or three years, that planner can then sit in that new client meeting with the one that is an ideal client.
How A Financial Planning Class In College Got Eric Started In Financial Planning [28:57]
Michael: So talk to us a little bit about how you got started down this whole path. I mean, you said you’ve basically been at the firm for 20 years since the late 1990s. You’re 42 now so did you start right out of school? How did you land in financial planning or financial advising or financial services? What were you even looking for when you first got going?
Eric: Yeah, I wasn’t looking. I was completely delusional college kid. So I was…both of my parents had backgrounds in accounting and so my junior year I decided I wanted to an internship at an accounting firm because that was the most natural extension of what my parents had done which was, “Okay. Go work in accounting in some form or fashion.”
So I went and did an internship at an accounting firm. And I liked about 5% of it. And the other 95%, I’m like, “Why am I sitting here doing this during my summer?” It was just mind-numbing to me. I just didn’t enjoy most of it but there was 5% I really liked which was the modeling and the scenarios and running the financial tax models, right. Just different scenario analysis.
So I ended that internship after, whatever, four, five months from the spring to the summer and I went to my career counselor person at the University of Texas. I had one year left of school and I was talking to them about this and I thought, “Well, gosh. I thought I was going to go into accounting. I’m not going to do that now. So now what do I do?” And he was great because he had this conversation with me where he said, “Well, you’ve got this one elective space that’s open and there’s this class I heard about that you might really like. It’s called personal financial planning because it’s got a little bit of business law which you liked and it’s got a little bit of tax in it and I’ve heard people get really good grades in it.” And I thought, “Well, fantastic. I’m going to sign up for that.”
So I signed up for this personal financial planning class at the University of Texas and lo and behold, it was taught by Vickie Hampton who now runs one of the best financial planning programs at Texas Tech University. And so Vickie was my professor and I showed up for class and within the first three or four weeks, I went to her after class and said, “Do people really do this for a living? Can you actually do this for a living where you actually do financial planning?” And she said, “Yes.” And this is 1997. “The challenge is…” She said, “Most people that do this are actually selling products and they’re not really doing a lot of financial planning.” And I go, “Well, that’s disappointing.” And she said, “But I have…I’m on this committee for this CFP board where we’re working on the CFP exam, item writing committee or something and I’ve got a list of people that are helping me with that and if you’d like, I can give you their information. You can call them to see what a real CFP does on a daily basis.” And I thought, “Fantastic.” Because this accounting thing wasn’t going to work. I wasn’t doing any job interviews and my parents thought I was crazy for thinking that waiting tables was going to be the right idea after college.
And so I started calling people down this list and most of them worked for big banks or brokerage firms or insurance companies and so I would call them and say, “Hi. Can you tell me what a CFP does on a daily basis?” And most of them didn’t have time for me or they didn’t return my phone call. That was the one strike. The second strike is when I would talk to them, most of them said, “Oh, yeah. We’ve got opportunities for new entries. We take on 10 people every three months and one might survive.” And I’m like, “Oh, I don’t want a sales job of cold calling.”
How Eric Got Started At Austin Asset By Cold Calling Its Founder [32:08]
Michael: No, tell me about the net worth of your friends and family.
Eric: Exactly. And so then it…so then I got a hold of John Henry McDonald and so I called him and I said, “Okay. So here’s my name.” He called me back. I was like, “Well, that was the first one of those.” And he called me back and said, “Hey, I’ll spend 15 minutes with anybody talking about anything.” And I thought, “Okay. He’s crazy enough to actually do that.” And so we schedule a time for me to go meet with him and this was in the spring of ’97. So right about 20 years ago. It was in March.
And so I went to go meet with him and he gave me…we set 30 minutes’ time and so we talked and I asked him about what he did and he talked about how he was against…he had decided to go fee only the year before and why he did that and why he was charging hourly rates and project fees like a law firm or an accounting firm and how he wanted to be a professional and not a salesperson anymore and all this. We ended up having a two-hour conversation. And it got me really interested to the point where at the end of the conversation I was like, “Do you mind if I just come here after class or on my days off?” Because I had…I think at the time I had Monday, Wednesday, Friday classes and so I thought I could come on Tuesdays and Thursdays and just…” Do you mind if I just come to your office and just observe to see what you do?” And he said…
Michael: Can I just show up? Will you let me show up and not kick me out?
Eric: Because at that point, I was…I didn’t know what I was going to do. I was going to be finishing school and I had no…all my friends were doing interviews at all the big accounting firms or consulting firms and all the stuff I thought I was going to do and I didn’t want to do it. And so I thought, “Well, Eric, you’ve got to figure out something because your parents are going to think you’re…you get a degree and you’re still waiting tables.”
And so I went…so he said, “I can’t afford to pay you anything.” I’m like, “I’m not asking you to pay me anything. I just want to come to your office and just learn if this is something I really want to do or not because that accounting internship I did where I got paid, I knew I didn’t want to it anymore.” And so that started the process where for four or five months I would come in on my off days of school or over the summer I would work…I worked full time almost at the office and then I would wait tables at night so that I could just learn what a CFP really did to decide if it was something I wanted to do. And so I did that for four or five months through most of the spring and through the summer and August came and I had one semester left and so I was going to graduate in the fall and I went to him and I said, “Okay. We’re four or five months into this and…” Well, the neatest experience he and I had was my wife and I were engaged. We were about to get married and my lease was ending at my apartment. And so I wanted to buy a house for us to live in and I had two friends that needed a place to live and so I went to him and said, “John Henry, I’m waiting tables but my income that I show for waiting tables isn’t very much because I’m a waiter but I want to buy this house. So could you at least commit to paying me $750 a month for me to work in your office so that I can add that to my income so I can qualify to buy this house to rent out the two rooms to my friends so I can live there for free until I get married?” And he…and basically, he…he told me later. He’s like, “I would’ve paid you but the fact that you put the proposal together like…” I still have the proposal on one sheet of paper. I kept it because I thought it was just such a neat thing where I laid out the fact that I had…and at the bottom paragraph I said, “I have some real opinions about what I think we can do with this business and how I think I can improve it and I think you’ll definitely get your moneys back…your money worth of paying me $750 a month.”
And so he agreed to pay me the 750 a month while I was still in school until I graduated in December and then to pay me full time $18,000 a year once I graduated in December. And so I bought the house. I bought the house, rented out the two rooms, lived there for free until my wife and I got married the next year and it was very much a…I just did anything I could in the office. It was back when you had paper files and so you’re…a whole lot of copying, a whole lot of organizing, a whole lot of just being a gofer, doing anything you could in the office to be valuable and my idea was if I could prove myself valuable for nothing, then eventually he will pay me something.
And the way it worked out was if I could serve him in ways that made his day a little bit easier, then eventually he wouldn’t want to get rid of me. And that’s essentially the story was that that’s…it just evolved like that over time to where he would then give me more little projects to help him out toward that we could do a little more planning than he was doing before because now I was supporting him. So it was a little bit of leverage, right. And so that just…it snowballed to the point where he agreed to pay me the full time salary and then about 18 months later we…I went to him and I said, “Look, we need to hire another person to do what I was doing for you 18 months ago because I think we can actually leverage that person too like you leveraged me.” So yeah. That’s how it worked out.
Michael: And how big was the business as this was happening? How big was his practice by then?
Eric: Yeah, so in ’97, our revenue as a firm was about a $150,000. By the end of ’97, I think we were managing about 25 million dollars. And so there were maybe about a 100 clients, 120 clients. Something like that. And these were clients…when I say a 120 clients, these were probably 70 of…well, not 70. Probably 50 of those were that year one-time financial planning engagements whether it was hourly or it was a project or it was a full plan and then there were probably 60 or 70 that were asset management where we were just starting to manage money for clients.
So back in that day, it was…if I could provide structure to help him…because he was so great with relationships. I mean, his genius was that he knew how to talk to people about doing financial planning and how…he had a radio show. Like I said, he was on Worth Magazine. He had done a great job of creating a name for himself and the firm and what he needed was just someone to follow him around and pick up the crumbs. I mean, essentially just to come behind him and organize his thoughts in ways that he leveraged to do more of what he was already doing in a way that was more efficient.
“He Knew How To Catch Fish, And I Knew What To Do With Them” [37:58]
Michael: Which I think is a pattern we’re seeing a lot of. Advisory firms, really, they get founded by someone who’s particularly good at business development and they survive because…if you’re pretty good at business development like you, you get enough revenue coming in that you can pay the bills and you’ll survive and then that works up until a point where I guess even as John Henry was. You get somewhere up around 75 to a 100 clients and you start getting closer to capacity. Particularly if a lot of it is one off business and reactive business because that’s very hard to manage and systematize. And you start hitting a wall where you need a little bit of help and then you…that’s the first crossroads of are you going to start hiring, trying to build a business that’s at least a little bit beyond just your individual capacity to do all of the work to serve clients.
Eric: Right. And that’s…you’re exactly right. I think that’s where I was so fortunate and that he was comfortable letting go of that. Very early on I think he knew where his skillset was which was…he had great awareness about that. He knew that he was much better on the front end. And we had this silly expression that essentially was he knew how to catch the fish and I knew what to do with them. I mean, that essentially was it. I mean, it was as though he was the fisherman that took the boat out and caught the fish. He’d brought them back to port and I operated the restaurant. And that’s essentially how we grew the firm was he knew how to create really great interest in the firm and activity and he would essentially turn over to me with open hands saying, “Okay, you figure out how we’re going to do this and who we’re going to hire, what we’re going to pay them, what we’re going to actually ask them to do, what’s the deliverable and how we’re going to build for it and are we going to have agreements.” And so just think of everything that was done before was very one off. How do we create systems for it?
Michael: So does that feel weird that the dude who’d built the business and was bringing in all the clients was asking 22-year-old you what to do for all these people to get paid?
Eric: Well, it was…in some ways, it is now when I think about it in the rearview mirror but at the time, Michael, it was…I was ready to help and I think part of was…having little victories early on during that unpaid internship was…there’s a concept that I talked about that John Henry and I really shared was there was this idea of emotional deposit. So early on, me working for free for him gave me great deposits into him to support him. So when it came time for me to exercise a little bit of my thoughts about how to improve the business, he could look back at that experience and go, “This kid may be crazy but he came here and worked for free and so I’ll give him a little area of the playground to try it out.” And in some ways, he just expanded the playground. He just gave me a few more toys and a little bit more…a bigger part of the sandbox to design things and so what I became was this researcher. I mean, I would get my hands on every single benchmarking report, every single article I could get about practice management. I would attend every conference that…I wouldn’t go attend IRA distribution sessions or estate planning sessions or investment session. I would go attend all the practice management sessions. And so I became essentially a practice management student early on because I didn’t know. I hadn’t worked in the business and so I really just tried to compile as much information I could from the best minds that I could find about how they were running firms five or 10 times the size of our firm. And then I would bring it back and say, “Look, this isn’t my idea. Here’s these three firms that do it this way. If it’s working for them, maybe we should consider it.”
Michael: And I guess that’s the distinction, right? You weren’t coming back and saying, “Hey, since I got 11 months of experience now, let me tell you how I think we should reform your business.” It was, “Look, I’m going to conferences and I’m reading the industry benchmarking studies, I’m reading the industry research and here’s the best practices that I found across the industry that I think we could apply here and I want to help apply them.”
Eric: No, that’s exactly right. And that was the only way I felt like any of my ideas had credibility was if I could prove that they were working in other environments that he would respect meaning…back to those early days, as a smaller firm that was on the Worth Magazine list…I mean, it was a huge accomplishment. We were the only firm in the Austin area that was on that list. Well, most of the firms that were on that list were much more mature than we were. Much larger businesses. So all I had to do was…not all I had to do but the idea was I would go to the firms that were on that list, learn about how they were doing what they were doing and then go back to him and say, “Look, they’re on the list too. What if we tried doing things that they’re doing?” And he was so open to it because he conveyed the same credibility on them that he was experiencing by also being part of that group. So it made my job easier than it really would’ve been if I had been going, “This is my great idea for how to improve your business.” It would’ve come off pretty arrogant.
Michael: But I think it’s a fascinating takeaway for maybe young people who are listening to the podcast as well of just that journey of, “I wanted a good opportunity so I just found a person and said I’ll show up for free if I have to because I just want an opportunity to contribute and help.” Because the inevitable outcome is if you do a good job of that, reciprocity world kicks in. People like to try do well by people who do well by them and so your unpaid work for John Henry ultimately got you a job with him and the work that you did got you the credibility to be able to influence the firm more and do more positive things over time and you put in the work and did the hours to come to the table with actual external…I mean, I’m sure your own ideas as well but validated externally so you can make your case up the line.
Eric: Yeah, I think that’s the part for…I think for the next generation of leaders is that really…it’s an area where you can expand your voice in a way that doesn’t mean you actually have to have the experience of being in the real seat but there’s so much great information that’s out there that can be gleaned at conferences or from benchmarking studies or just articles around practice management where you could begin to connect your own dots around how to apply those within your firm and I would say most owners of firms…they’re not thinking about working on their business very much and so there’s an aspect of…there’s an entry point where the barrier to entry is…it’s not like there are professional managers in most firms that are registered investment advisors. They’re usually advisors that became managers of their firms because the firms got so large and so in some ways, I could go out and do the research and make myself sound like I was 10 years more experienced than I was because I just compiled the information that others were sharing. How, what was working and what wasn’t working in their firms and go back to him and say, “What if we try this?” And I would try low-risk experiments, right. Just what if we tried it this way? And one of the first ones was just getting people all on the same fee schedule because he had a lot of different handshake agreements with lots of different clients.
Michael: Particularly when you’re growing the business from scratch, right. You do whatever you can.
Eric: And that’s exactly right and so you just start navigating those lifecycle type of discussions around formalizing your fee structure or formalizing your reporting or formalizing the process of doing financial planning. All those things…I just gathered those from firms that were much larger than us and appealed to the fact that he wanted to grow a larger firm and you’re right in that I think in a lot of ways most firms could market themselves by creating opportunities for employees as much as whatever their pay is. And that’s how we’ve tried to position our firm meaning we aren’t in the biggest markets and we aren’t the biggest firm but what we try and provide and we talk a lot about is the opportunity that you have and so in a lot of ways, for employees or people that are interested in getting into the business or younger advisors, identify a firm that is very attractive to you and be willing to work for the opportunity as much as you’re willing to work for the paycheck because I think in a lot of ways, you’ll be rewarded for making yourself valuable. Maybe you don’t become the CEO like I did but I would’ve been happy with where I was just making into being a full paid planner a few years later. I mean, it didn’t have to…I didn’t…I wasn’t…the prize wasn’t to become the CEO so…
Michael: So you got started there in ’97, you kicked off as an unpaid intern, the firm had a $150,000 of revenue, was just starting to do this assets under management thing and you tried to help John Henry starting to make a few of these changes and systematizing the practice. So what did the trajectory look like over the next couple of years? How did the firm grow? How did your role change?
Eric: Sure. So when…so like I said, in ’97, the idea was…I was essentially coming behind him learning. Not talking very much about taking tons of notes, right. And his nickname for me was Radar. So it was like I carried around a clipboard like Radar from M.A.S.H. and I would just take notes of everything. I would just…a man of few words, right. It wasn’t because I was trying to be EF Hutton. I was just trying to take down a lot of notes and I would carry around this clipboard so to speak in his eyes and I would just…my idea was just to look for all the little things that were going on and try and connect the dots. So by ’97…then you start looking at ’98. By the end of ’98, I’m looking up and realizing, “Wow, we could actually hire another planner. What would that look like? And do we have enough work for them?”
And so by the end of ’99, we had gone essentially from a team of three in ’97 to a team of six in ’99 and the firm’s revenue had tripled.
Why It Wasn’t Strange For Eric To Manage An 80-Client Firm At 24 [48:03]
Michael: And that was just your freeing up his time more and he’s going out and developing more business and this AUM thing is starting to work?
Eric: So what had happened was is we had essentially quadrupled the amount of planning we were doing and more than doubled the assets under management revenue. So essentially creating leverage on the planning to quadruple the amount of planning we were doing in ’97, ’96 and ’97 meant that now all those opportunities like we talked about at the very beginning became opportunities to then manage money.
So now, taking on that many more clients for planning meant that now we had that many more opportunities to manage money for clients and so by the end of ’99…so we hit this crossroads in ’99 for me, for my career. And so at the end of ’99, we looked up and realized that, “Okay, there’s six employees now including myself and there’s a real live business that has to be taken care of.” And so by the end of ’99, we had about 50 million dollars of assets. So we had more than doubled the assets and tripled the revenue over the course of those three years and the decision was, “Does Eric keep focusing on being someone who takes care of the business or does he start utilizing his CFP?” Because I just passed the CFP at the end of ’99. So I’m 24 years old, about to turn 25. Do I become a lead advisor or do I become the business manager is essentially the conversation we had at the end of ’99.
And what we determined was I could go charge $200 an hour as an advisor or I could go spend an hour working on the business and these are John Henry’s words, “That would make him $10,000.”
Michael: Well, I’m pretty sure I know which one he wanted you to do.
Eric: And so I became essentially the managing partner if you will and I bought 10% of the company from him at that point.
Why John Henry Sold 10% of Austin Asset To Eric At Just 24 Years Old [49:50]
Michael: You bought in 10% of the company as a 24-year-old?
Eric: Yeah, I just turned 25 and so at the beginning of 2000…we signed all the documents in the ’99, beginning of 2000 and I bought 10% of the company form him at the end of ’99.
Michael: I’m curious. How do you price that? How do you afford 10% of that company in 1999? Granted, it was 50 million dollar AUM and not a billion-dollar firm. That’s a big ass chunk of money for a 24-year-old. So I mean, did he just give it to you and said, “You’re making my business bigger. Be my partner.” Or did you buy it? What did that look like?
Eric: So it was a little bit of yes and no. So the firm’s revenue was a 150 when I got there. We were 450 when we closed the door in ’99. And there was this conversation that was brewing amongst us where he had a desire to build this premier financial planning firm in Austin and I really thought I could help him do it. And so we locked arms in that discussion and there was another person that was involved in the firm and they were focused more on the investments. And so when it came to the business decisions, those started just showing up on my desk. How do we want to hire this person? What would their job description be? These things just started showing up on my desk like COO, head of HR, all those kinds of deals. By then I’m in charge of Quick Books, I’m in charge of HR, I’m in charge of all these things. And so end of the year and I said, “John Henry, I think we have to decide whether you want me to do what you do which is being an advisor and we hire a replacement for me to be a bookkeeper officer manager type person, general manager of the business or I become that person.”
And so we looked back at the story and said, “I think it’s much easier for me to find someone to be an advisor as opposed to find someone to do what you bring to the firm as a COO type of person, general manager.” And so at that point, we looked at the agreement and he ended up selling me 10% of the company for one times revenue.
Michael: For one times revenue? I’m going to imagine a few listener jaws just hit the floor. He sold it to you at, call it roughly half the going rate out there for buying books of advisory firms? At least the rough rule of thumb’s about two times revenue and you got to buy it for one times revenue?
Eric: That’s right. And as I…when I say it, I feel a little bit embarrassed by it but I also know the story which was this was a firm that he had operated for 10 years. I mean, he founded the firm in ’87. Now, it was a different firm meaning it was a lot of commission work that become more fee work and then it became more completely fee work. But you have go to back to that position and say, “Okay, it was a $150,000 a year business. And three years later, it was a $450,000 a year business.” It wasn’t like I did all the work. I just helped him create systems so that he could be better at what he was doing and then hire other people, to leverage them, to understand, to provide them opportunities. And so in some ways, I think he looked at the one times as, “Wow. I’m going to keep this person from leaving and going somewhere else.”
And it was still a small business so it was still an unproven asset. This wasn’t a business that was worth millions and millions of dollars. So from that perspective, the business was probably worth, I mean, maybe…I don’t know. Maybe half a million dollars because again, half the revenue was planning revenue so it wasn’t recurring. I mean, it was one-time revenue. So when you think about it that way, it wasn’t like it was all AUM at a two times multiple.
Michael: A little bit more modest of a discount.
Eric: Yeah. Maybe it was a 25 to 40% discount maybe because much of the revenue was planning. But it was still a material discount. And so that was the sweat equity if you will. And the way we structured was essentially it was like a really big car payment I made each month and he held the note and charged me interest and I worked to pay it off and if we had any profit the next year, guess what? I got 10% of it and I would use that to pay down the loan to the degree that I wanted to but essentially it was like a bought a really fancy car that year that I couldn’t afford.
Michael: But a car that pays a dividend. But a car that pays a dividend which is better than a depreciating asset.
Eric: That’s exactly right. Yeah, so we ended the year in 2000. The revenue that year grew by 50…well, the revenue that year grew by almost 50% in 2000. That year alone. And so we ended the year at just shy of a 100 million in assets. So we had 90 million in assets. So we went from 50 to 90 in one year and revenue grew at almost 50%.
Michael: So at that point you’re feeling slightly better about your car payment.
Eric: Absolutely. Well, and think about it…and that’s the point I talk to our peers about is the thing that you can convey to a founder or an owner is that there’s a degree that you gain from having someone else rowing in the same direction and I think what John Henry gathered by him sharing the good will of a reasonable price with me meant that I was then very motivated to make good on that. And maybe that’s just me but I think a lot of people would be willing to do that meaning, you create easy terms to buy in and look what…there’s a great possibility to grow the pie because now someone else is rowing in the same direction for the same reasons you are. And I think…and so…so I think in a lot of ways, we both benefited from that, because he was willing to do that.
Michael: Well, and I mean, you just start doing the simple math right there, right. So even if we’re just going to keep it pegged to one times revenue to make the math simple, at the beginning of the year, he sold you 10% of his $500,000 firm. So you bought 50 grand and he had $450,000 left over and by the end of the year, revenue was up more than 50% so his remaining $450,000 share was worth six or $700,000. Literally in the span of a year, your ability to help grow the business or your participation in supporting the growth of the business more than made back not just the value of the shares that he sold to you but…and I mean, just maybe the discount of the shares but the entire value of the shares. He sold you 10% of the business and it was worth 20 or 30% more at the end of the year for having done so.
Eric: Right, and it was in…and you’re exactly right. And I think that’s the…that was his genius in a lot of ways was he was willing to try that and I think that was one of the things I’m most appreciative about the experience with him was that he was willing to give that a go. I mean, he sold me an asset that he’d had for, at that point, 12 years but it had grown three times in value in a matter of three years and then it goes up 50% the next year and then, by the time we end 2001, the firm had doubled from the time I had bought it.
So when you think about that, the smaller piece of a bigger pie really did happen.
Michael: Well, and it makes a powerful point that I still don’t think is appreciated enough in the advisory industry and landscape today. This is why growth matters. There’s often a lot of discussion. Should we grow or not grow? Are people too obsessed for growth? And you shouldn’t grow for growth’s sake. We’ve got all these sayings out there but this is why it matters. Growth does two things. One, it makes the process of adding new owners, adding new people, deepening your team, it makes it less painful or literally positively accruing because you can have a smaller slice of a bigger pie and end out ahead. If John Henry was just sitting on his 50 million dollars and he was comfortable and happy with it, he might’ve made a great income and you can take home a pretty good number now just sitting tight on even less than 50 million dollars under management but any time you add someone to the picture when the revenue growth is stagnant, every piece of equity you transfer to someone else is a personal loss for you. Every team member you hire is money directly out of your pocket and lessen your take home whereas when you’re growing, in essence, you’re giving up a portion of your future growth value but if you do a good job investing into people and bringing them on, the people grow the business way more than what it cost you to bring them on, right. That’s kind of the definition of a good investment or a good return on investment. And you can sell pieces of a business or hire staff and “give up revenue” to pay your staff and still end up with more money and more value in the end.
Eric: I completely agree and I think that’s where…at least I feel what John Henry was. He knew what he was really good at but he also came to a point where he recognized that if he could leverage the talents of others meaning finding people that are actually…I mean, he used to make this comment. He’s like, “I want to hire people that are a lot smarter than I am so that I can do what I’m really good at.” I mean, it’s the early strengths finders type of ideas. He knew what his strengths were but he also knew what his strengths weren’t and when you do all the different personality tests and look at all the different skills each person brings. He and I are complete opposites. And that was the beauty of it was that there was tension in that, of course, but there was also this appreciation for each other’s skills that meant that we could come together and work on things in a way that…I think there are a lot of founders like him that are holding onto the control that aren’t comfortable enough with their strengths to realize that they can’t do everything and I think there’s a lot of successors or next generation advisors that maybe have skills that they could add value to the firm in but they haven’t…they could use a little bit more confidence to just speak to that, just to speak to that voice in terms of a little bit of matchmaking to go, “This is how your puzzle piece fits into this based on personalities and skills and strength.”
How Eric and John Henry Had To Decide Whether To Grow A Lifestyle Practice Or Not [59:50]
Michael: So how did this progress forward? So I know ultimately, years later now, John Henry has retired. He’s out of the picture. You’re running the business. So can you talk just a little about how ultimately that came about? How did that transition occur? What did that look like?
Eric: He really…John Henry’s desire was to grow this…the premier financial planning firm in Austin and so once we got through the 2000, 2001 period and the firm had just quadrupled in size of assets and revenue and all that by the time we got to 2001 and I was getting much more comfortable with my role. I had been with the firm for four years by now. We ended up with this decision point and the decision point was do we align ourselves with who we’ve been meaning a lifestyle practice that’s in the neighborhood that provides a lot of flexibility to him and to the advisors and meaning if there’s not a client meeting, then you just didn’t have to be at the office type of mentality. Think of just a larger lifestyle practice that had six or seven employees total or do we really commit to building a professional firm? And so in ’02 was probably one of the most difficult years because John Henry and I sat down at the lunch shop, a little sandwich shop around the corner from our office and had this discussion around how committed was he to this vision of building the firm versus how committed to his lifestyle was he in terms of the flexibility he had and what we came away with was an alignment around the idea of…he really was prepared to build the business. Actually really build a business. But that meant that that third person that had been with him for a while that had also…was a small…an owner of the firm…we had to have this conversation with him as well and what we found in that conversation was he was much more comfortable with the lifestyle practice. So in 2002, we bought out that third…the shareholder that…the employee that had actually been there before I was there that had been working with John Henry for a few years, a number of years because we were going to commit to building the business. And that meant that we wanted to have full alignment and he was much more interested in…if I could work 30 or 40 hours a week and take three weeks off and not come in for a couple of…and that’s fine. I think that that is a completely appropriate model as long as that’s what you want. The challenge we had was we had two competing models. One was here’s the model that I’m bringing…that Eric is trying to help me build because I say it’s important and here’s the model of our past. And so in 2002, we really committed to growing a business where we actually would create an intern program and design a residency for planners and how they would get their CFP and this whole career track was built in ’02. We buy out this other shareholder that owned a small part of the company and we push forward. So ’02, ’03, ’04, ’05. Now the firm’s right around two million dollars in revenue, 250 million dollars of assets and a staff of 12 people. Now we’re starting to hit some real growing pains around operations, HR, hiring and staffing and service model and all those types of situations and so by ’05, he and I probably hit our lowest point in terms of our relationship and this is where Eric playing the de facto COO, CEO type of role while John Henry was still in the CEO role charged with leading all the strategy of the firm and where we’re going and John Henry was one of the most visionary people I’ve ever met. The challenges is he would have a lot of visions and a lot of ideas and then I would be expected to carry them out. And so there would be this conflict around is this just another new idea that you’re just sharing with me on Wednesday or is this something we’re going to talk about again on Friday and it’s something we’re really going to do? And I think that’s the beauty of an entrepreneur is that the business required that in order to survive its first 10 or 15 years. But we hit this lifecycle stage in ’05, ’06 where the tension was we need to professionally manage the firm but we also…John Henry also loves being a lead planer and a relationship person and being on the radio and being on the TV and being the face of the firm. And we ended up having an offside between the two of us with one of our management consultants where we essentially had to recommit to the needs of the business were more important than the needs of ourselves. And the discussion revolved around the idea if we’re really going to push through this, then we need to have the really difficult conversation about who’s going to lead the firm and what our role is going to look like.
Because at that point, in ’05, ’06 we had about 280 clients or so and he and I were responsible for half of those meaning the legacy clients, the firms…the clients that had built the firm, the clients we’d attracted from ’01 to ’05. He and I would share those clients. So I was doing double duty as an advisor with him and leading my own clients as well as trying to run the business. And I was just getting worn out and he was as well. And so this discussion happened at an offsite where there were a lot of tears, there was a lot of elevated voices, there was…it was really difficult to the point where we weren’t sure if we were going to go forward. But we aligned ourselves around the central idea of the needs of the business were more important than the needs of ourselves and if we could commit to that, then we could work through it.
So then in ’06, we started working with the same consultant that we went through this book called Why CEOs fail? And we did the weekly…
Michael: Why CEOs fail?
Eric: And it’s a great book. It’s written by David Dotlich and Peter Cairo and essentially it’s the 11 behaviors that can derail your climb to the top and how to manage them. And so it’s essentially a blind spot book. Here’s the blind spots of CEOs that they think they’re doing really good but here’s the 11 behaviors that actually hurt their businesses. And our…the consultant took us through this book as a way to recognize that I have failures and John Henry has failures but based on where the firm is, the needs of the business are likely in the position where the behaviors that John Henry has that might be hurting the business are really going to hurt us now compared to early on and some of the strengths I have and some of the weaknesses I have…the weaknesses I have were his strengths. So those carried us to this point. So now if we’re going to go forward as a real e-myth type of thing like where we’re actually going to manage and operate the business, it’s…maybe this is where Eric’s strengths show up stronger and his weaknesses can be delegated or diversified across the staff because we have enough employees.
And so that took…we went through that study in fall of 2006. He came into the office one day and we were both really frustrated because we were feeling the tension and the reality of this, what was coming. We were both…a little bit of fear and he came in and I…we sat down in my office and we had this conversation. I said, “John Henry, this is hard for both of us and I care a lot about you and conflict, to me…embracing in conflict to me shows that you actually care. Avoiding conflict means you actually don’t care enough to actually address it with the person and work it out.” And so he came into my office and I said, “I can see that we’re both acting out in ways that aren’t really productive for our relationship, me included and both of us.” And so I gave him a homework assignment and I…well, I didn’t give it to him. I asked him. I said, “Would you consider going home and going and talking to these five people, these four or five people.” As they were a group of people that I knew. I mean, we had been working together by this point for eight or nine years and so I knew who his circle of support was. Spouse or counselor or friends and things like that. “Would you consider going and talking to these four or five people about what you really want from this business and not come back into the office until you have those conversations?”
And it was one of the…as scared as I was that day when we talked about committing to the needs of the business and then as scared as I was when we had the offsite where we committed to committing to the needs of the business above ourselves, this homework assignment was one of the moments where I made as many withdrawals out of the emotional bank account that I’ve ever made because it was a…
Michael: I mean, you basically called him out? Is this kind of the…
Eric: No, it was…I hurt for him. I hurt for the situation that we were in. I felt as though we are both close enough to where we could self-destruct what we had built because we are both feeling the weight of it. We were both feeling how real this business was. I mean, it had…it was an animal.
Michael: Because of the complexity, because of the pressures, because of the…
Eric: It’s the…
Michael: Staff and management?
Eric: Just all of that. It was…there were 14, 15 people at that point. You felt like you were the dog that was chasing the truck for years that would run by the front of your house and all of a sudden, you caught the truck and all of a sudden, you looked and went, “Where’s the truck going?” I mean, I think that’s what the reality was for the two of us was that…
Michael: You wanted to be a big firm because it sounded cool to a big firm. Then you’re a big firm. It’s like, “Holy shit. There’s a lot of stuff to deal with now. What am I supposed to do from here?”
Eric: That’s exactly right and I think we were having a bit of an identity crisis, each of us, in terms of…I had been the de facto second chair the whole time I had been with him. He had always been the first chair but each day it felt more like I was supposed to be the first chair by making decisions and looking at what a CEO does and…but yet, that was difficult to address. We couldn’t figure out a way to do it healthy. And so we had this homework assignment and I was in tears. I was like, “John Henry, I care enough about you that I want to get this right and I think one way to get this right is for you to help me understand what you really want.” Because that’s what he’d always done. I mean, early on it was like, “Here’s my vision. Here’s what I want to accomplish.” Okay. Well, let me design the systems that support that. And so this was another area where I said, “Just help me understand what you really want.
And in ’06, he was…so let me think how he old he was. So in 2006, he was 58, 59. So he was getting close to being 60 and so this was a bit of an identity thing for him too. Here is this young kid that he had trained who was now essentially starting to take over the firm. I mean, by this point, I owned 30% of the firm. He had sold a little bit more of the firm to me and so it was definitely becoming this scenario where Eric is starting to have a larger voice in the firm but we hadn’t designed a formal succession plan or a transition plan. So this was the beginning of it was this homework assignment.
And he came back about a week later, back in the office in much better spirits and we debriefed and what we came away with was he really didn’t want to run the business anymore and he really wanted the parts he enjoyed which were being the ambassador and being the face and being the voice and being with the relationships and all those things but he was really…he didn’t want to run the business anymore. And so in early 2007, we designed the transition plan and it started off with an exercise that I put together as a way to honor him which was a few page document that basically said celebrating success. And it was essentially acknowledging all the great things that he had done in the firm even before I had been here and all the risks he had taken and all the things he had done well and then that was the first page and then the second page was then, “Here’s what the business needs from you now.” And outlining, “Here’s how you can still do great things for the firm over this next part of your role with the firm.” And I think that really helped because I didn’t want him gone. I didn’t. I mean, in earnest, I did not want him gone. I was not prepared for him to be gone but I was prepared to start having a larger voice in the things that I was already doing in a de facto role and so we designed this memorandum of understanding, we called it, where he would scale down…
Michael: So you actually put it on paper?
Eric: So the celebrating success was an exercise we did in the early part of 2007 and then by June, July…I think it was late June of 2007, we had this memorandum of understanding, we called it. So it wasn’t a binding document meaning it wasn’t a legally enforceful document but it was a memorandum of understanding that our attorney drew up with the help of our management consultant that basically outlined, “Here’s the steps that we’re going to take over the next number of years to address things like operational transition and financial transition and the roles and responsibilities and hours in the office and pay.” And all those things so that it would be a plan. Just like your financial plan for a client, right. We’ve designed this plan in a way that would show how I would redeploy his income to capital improvements to the firm or hiring people and how that would show up as profitability to him and…so all these models were part of that as a way to make him feel comfortable knowing that it was the right time to start the process of handing the baton off. And so in year one, there was very few changes and then by year two, we had transitioned half of those clients that…those half clients that he and I had that he was leading to others in the firm. So we had all these transition meetings and endorsing the team and so we spent a good part of two years doing that and by the end of the first two years, then we adjusted his compensation because he was no longer serving as an advisor.
And then we adjusted the compensation a couple of years later when he was no longer really in the office very much or managing the team or managing employees or responsible for…
How Austin Asset’s Succession Plan Allowed John Henry To Take Pay Cuts Yet Maintain Income [1:13:27]
Michael: And he agreed to all of this upfront in the memorandum? This was the deal? “You’re going to transition your clients over two years and then you’re going to take a pay cut and then you’re going to release some management responsibilities and you’re going to take a pay cut.” And that was all just laid out in the new agreement upfront?
Eric: Yeah, so the spirit of it was certainly laid out and the specifics were part of the document. The way it happened did not look anything like the document and what I mean by that is it actually happened faster. So the document was my…not my. The document was really…the approach that I felt like were safe. So it was calculated, right. It was…I wanted to honor him but I also didn’t want to be so abrupt that I wasn’t prepared either. So part of it was I wanted some training wheels for a little while and I wanted him to feel like he still had a valuable role because he did. And so it was almost me saying, “Okay, Eric, what are you willing to…how far are you willing to stick your neck out?”
And so what happened was is we thought the transition of clients would take three years. We actually worked through it in two. So that adjustment in pay happened a little bit sooner but he was completely comfortable with it because now he had the discretion of time that was created because the clients had been transitioned.
Michael: And was that the driver? I mean, it’s hard to imagine for many people like, “Hey, I’ve got an awesome idea. Let’s come up with a plan where I make less money every two or three years over the next couple of years.”
Eric: So you’re exactly right if you’re not growing the firm. So a big part of the plan was and this…I mean, I’m completely comfortable sharing this was that big part of the plan was…he didn’t want his overall income to go down.
Michael: So the pressure was on as long as you can grow the firm enough to make up salary cuts that he’s taking and he’ll cooperate with this plan?
Eric: Which…it wasn’t that he would cooperate. It was that that was my…that’s what I’d always done. And so I was totally comfortable with the idea of him saying, “Okay. If you’re able to…” I mean, it wasn’t quid pro quo completely but a little bit of it was in that if I could redeploy income or let’s say his reward for labor, right. So I think of reward for labor versus reward for ownership. So if we made adjustments to his reward for labor by adding an additional owner which is what happened in 2007. So we added an additional owner who then took over the oversight and strategy for the planning department which is one area John Henry had been running. So they then started leading this department together.
If that provided leverage and growth to the firm to the point where at the end of that first year revenue was up based on what we expected because we created additional capacity and so forth, then he would be comfortable taking a reduction in pay because now his pay, his reward for labor…because his reward for ownership went up. And so the amazing thing that happened was from ’07 he never had a pay…he never had a total income reduction as he reduced his reward for labor and as he sold shares.
Michael: Because the business…again, this is the crucial aspect of growth. The business was growing enough that his…and I guess that’s the virtue of size, right, that by the time it’s a couple hundred million dollars, it doesn’t actually take that much top line revenue growth and profit growth to make up a decent chunk of salary that you back away from.
Eric: That’s right. And so the way it worked out was after we transitioned all of the clients, he took about a 50% pay cut and then as we transitioned all of the day to day responsibilities and to the point where he had…he didn’t have…we didn’t expect him to be in the office at all. Essentially, his job was to be an ambassador of the firm and be involved in partner meetings and things like that but he didn’t have to be in the office if he didn’t want to be. At that point, he took another 50% pay decrease so essentially we were paying him as an ambassador, a representative of the firm like you…essentially, like a staff person to be part of our story and so that’s how it worked out for the last three years.
And in those last three years, he spent four…three to five months in another state because he had bought another home in a state he wanted to live in and so he spent three or four, almost five months the last year in that state and we’d have conference calls for partner meetings but he wasn’t required to be in the office. So paying him a staff salary and also getting really nice mailbox money in the form of profit distributions where your income never really went down…I mean, it was…it worked out really good for him and it worked out really good for us.
Michael: His income stayed even, the business got to redeploy his salary for other growth angles and he got the time that he wanted for the stage of life that he was at.
Eric: Right. And his equity in the firm grew. The shares that he continued to own continued to really grow.
Michael: So was part of this agreement also that he was eventually going to sell at the end of this journey as well or was this just about redeploying his time and the salary that went to him with the expectation that he still likes this ongoing, as you put it, the mailbox money? It’s one thing to say, “We’re going to dial down your job and dial down your salary but you’ll get more time and the mailbox money makes up for the salary you’re not getting.” It’s another thing to say, “And then you’re going to sell the firm and there’ll be no more mailbox money.” So was that part of this plan and the memorandum that you guys agreed to in the progression or was it a separate conversation that came up about actually buying him out entirely?
Eric: The plan advanced quicker than really any of us expected and what I mean by that is the client transitions went really well. We added another owner in 2007. Then we added another owner in 2010. And so you had this experience where we thought this was going to take a lot longer and he was engaging in the experience as quickly as we were meaning he was willing to let go as fast as we were willing to take hold of it. And so this unique environment occurred where the plan we thought would be a lot longer. It became…essentially, it was getting shortened every year and we reached this point where we had to have that conversation. And so that conversation happened in 2014 where he was out of the office for four, five months out of the year. We started realizing that he still owned enough of the firm to where we just couldn’t reconcile the idea of having a passive owner. We thought we could. We thought when we designed the memorandum of understanding in terms of how long it would last and what it will all look like, we thought it would be a lot longer runway. And when the runway became shorter and shorter and we were affirming that in him. He was doing…it was great. It was going so well that it was going quicker than we thought that we had the discussion around maybe it’s time. And so we had the discussion in early 2014 and there was a little bit of the…you went through all those areas again. You went through the operational piece again. You went through the financial piece again. You went through the emotional piece and we ended up with the conversation that by that June we bought the remainder of his shares and found outside financing so that he wouldn’t have to hold the note so that he could receive a lump sum payment for those shares and we also designed in the agreement to where there was a four-year reevaluation on the portion of his shares to let him ride along in the success of the firm or if the firm was purchased or something like that.
Michael: So he’s got some kicker that…so he’s not frustrated like, “I sold it and then you guys grew the hell out of it and I feel like I missed out and I’m angry.”
Eric: That’s right and that was designed to also just address the idea that this wasn’t adversarial. We didn’t want him gone. This wasn’t like we didn’t…I mean, I worked with him for 17 and a half years. He was in a lot of ways my very first professional mentor and so…but we reached the point where the lifecycle of the firm was getting to the point where we needed to figure out a way to redeploy equity and to redeploy the energy of the firm in a way that…how do we get to the next stage of growth and so the one…a couple of things I didn’t want to do. One thing I didn’t want to do is have him hold the notes which he had always done when we had bought share because I didn’t think that was right for him to continue to hold the risk while we’re paying him out over seven years. That was one thing I didn’t really feel right about if he was going to actually sell his equity. The other was I didn’t want him to feel like we were going to turn around and two years later flip the company and make a whole bunch of money because we sold to one of the bigger rollups or something.
Michael: Right. Let’s get that other dude out of the way and then we can sell for a rollup at a premium.
Eric: Right. And so I didn’t like anything about that because I wouldn’t want that to happen to me. When I think about myself, I wouldn’t want someone to do that to me so I didn’t want to do that to him. So we spent four or five, almost six months trying to find an outside lender which we found that wouldn’t make him guarantee the loan. And so that was a win. And the other thing is we designed in the structure to where a portion of his equity was revalued four years later. And so we’re 15 months away from that revaluation date and he’ll get what right now is a really nice payout and I’m completely fine with that because that was designed into the modeling that we did with him on the front end which was if he’s not earning a salary each year and not receiving a profit distribution and we’re paying this note to the bank for the lump sum that we paid him, then the economics work out to where we would be willing…we’d be certainly willing to give him a piece of the growth the firm had achieved over that four year period as a way to honor him being…him adopting the succession plan in a very expedient way, right. Meaning because it went through…it went faster than we thought and so having that kicker, if you will, that second bite at the apple as John Henry called it…we’re completely fine with that. And so we just want to grow the firm and we want him to benefit from that because if we’re growing the firm, then that means our equity is growing and so giving him a part of participating in that, I felt like that was an honorable thing to do so…
Michael: So I’m still curious. How do you broach that conversation, though? “So John Henry, we had a great run. You’ve been dialing down your time but we’re getting a little tired that you own so much of the shares and take so much of the profits and don’t show up in the office anymore. More power to you but we want your shares now.” How do you have that conversation?
Eric: Well, I’ll ask you the question. So how do you think I would do it based on how I did the other stuff early on?
Michael: Well, clearly we need a consultant involved so the recommendation comes from a third party and…
Eric: And a lot of research, right.
Michael: And a lot of research, yeah.
Eric: So there aren’t really many truly passive owners of advisory firms. I mean, in the true sense of the word. They’re still either rainmaking or they’re still taking on a few clients, they’re still going to lunch with clients or something. Even the ones that are the most passive that I’ve seen, still have some role that relates to client leadership or client development. And so because of that, I think the conversation, as uncomfortable as it was, I think he knew it was the right conversation because he wasn’t in the firm. He wasn’t connected to the firm. He wasn’t creating clients for the firm. He wasn’t involved with mentoring or development of the staff and so it was really difficult, though. I’m not…I mean, I think if we had gone the runway of the succession plan, it would’ve been another few years before we would have the conversation but because everything got shortened like the lifecycle and the…of all the decisions happened almost 50% faster than we expected that it meant that we had the conversation sooner than we expected. And so mentally, it was a bit of a surprise to everyone but I think once we had had the conversation a couple of times and the management consultant, as you mentioned, that was certainly involved was a part of those conversations…I think we could pull back enough and go, “What are the needs of the business, John Henry? We agreed to the needs of the business back in ’05, ’06 when we were at our lowest point in our relationship. Here we are. Not at a low point but at, really, a high point because we’ve actually accomplished all the things in the memorandum that we had designed to but it just means that now we’re at the inflection point a little bit earlier than we all thought.” And so we…I mean, we worked out an agreement to the point where we came up with this solution to where he would have a…he received his lump son and so he got a…so all the notes that he had had…so I had…by that point…just to clear it up, I had paid off all those shares that I bought from him which was 40%. But we had restructured the firm as an escorp with two share classes and so he and I were sharing control at this point. So the last…almost four years of the succession plan, he and I shared control with voting control. So we each owned the same amount of voting shares while the other owners in the firm were buying shares from him. He could still own 31% of the company and have it be voting shares and I could own 31% and have it be voting shares if that makes sense.
Michael: Yep, so 62% of the shares had a 100% of the voting power between you and John Henry.
Eric: That’s exactly right. And that was a way for him to work through this succession plan where he and I shared control until the point where we didn’t. And so the nice thing was the last four years we shared control but he never dissented meaning if I wanted to go a certain direction, he was very supportive of that and we might have a dialogue about that but we never had a stalemate or we never had a, “Oh, my gosh. We’re completely on the opposite ends of the spectrum.” Because we were both willing to give a little bit. And so when it came time for the succession plan, it was the same thing where we didn’t have to pay him a lump sum and we didn’t have to go borrow the money from the bank but we did and we didn’t have to have a four-year revaluation but we did. And so everybody…so but he didn’t have to sell either. He didn’t have to complete the succession plan a few years early but he did. So we tried to…each person felt like they gave up a little bit in order for the benefit of the business so…
How Their Meticulous And Honest Succession Planning Process Inspired A Book [1:27:37]
Michael: Right. Well, at any rate, the perfect measure of a compromise. When everybody feels like they gave up something.
So I know ultimately you wrote a book about this. I guess, coauthored a book with a few others about just this succession planning experience and what it was like. So here…we’ll put a copy of the book in the show notes as well so this is episode 10 if people want to get a copy of the book. They can go to www.kitces.com/10. But can you talk a little bit about the book and what you shared there and what else you learned through this succession experience?
Eric: In a lot of ways, the book was therapy for me. So being a successor for a founder is oftentimes a lonely place as I’ve talked to a lot…a number of successors in that the founder in many ways is one of your most meaningful mentors if you’ve worked with him for a good period of time. And there’s this launching that occurs much like it happens with a parent and a child when they go off to college or start a life of their own and that was one of the loneliest parts of the succession planning was feeling like this part of the relationship was going to change. And so as I was going through the succession planning and as I’ve talked about it a number of times, I was just doing a ton of research. And so I was doing research about this thing called founder’s syndrome or founderitis and I would go out and talk to a number of people that had been mentors of mine and one of my mentors from a distance was Tim. And Tim and I would have discussions. Not regularly, monthly or anything like that but just periodically and what I found was there were others like me and there were others like John Henry meaning Tim was not dissimilar from John Henry from a demographics and life experiences and growing a firm and then I would talk to others that were a lot like me and I’d met another gentleman that was a lot like me in terms of my peer group named Jay Hamill who had been a consultant, who had been…who had asked to come in and be part of a succession plan or a president-CEO of a firm that was quite larger than our firm and he and I developed this conversation because we were introduced through a mutual friend and he and I would have quarterly phone calls and we would just discuss what was hurting, what was hurting our firms. This was back in 2011, 2012. And what we found was we were having sidebar conversations with a lot of people about these same things.
So in 2012, 2013, Bob, Jay and I and Tim had all done different presentations. Tim would talk about separating management from ownership and Jay would talk about what it was like to be an operational expert or how to run a firm because of his consulting background and I would go present at different conferences and talk about what it was like to be the intern that turned into CEO and some of the emotional stories and things that I had gone through in mentoring and career development and career tracks and things like that. And Bob had asked Jay and I to be part of the panel to talk about what it’s like to be a successor and at this conference, Tim was on a panel to be…to talk about what it was like to be a founder and after the conference, Tim reached out to Bob and said, “Do you think Jay and Eric are going to do anything with this? What they’ve been…what they talked about and what they’ve been doing.” And Jay and I had no plans for it and Tim was like, “Well, maybe I’ll reach out to them and see if they want to actually put something together.”
And so that started the conversation but this was in the heat of our succession plan. We hadn’t even finished it yet. And so what was great was we started drafting concepts for the book and why would we even write a book and what’s its purpose and…because we all had day jobs and what we found out was is that most of the writing was on the financial pieces of succession, valuations, buyout, terms, that or it was on the operational pieces in terms of…well, how would you design a management team and how would you structure a leadership pipeline for planers and…but there was very little written about the emotional piece and so I started just having little…sharing little conversations about this founder syndrome or founderitis or some of the parts that we talked about in the book at different conferences and people seemed to like it. So we came up with the idea. We would structure the book around three main areas. Operational, financial and emotional and we would weave emotional stories into all aspects of the book by interviewing people that had been founders or that had been successors or they were industry consultants or heads of major RA or what you call rollup firms or merger acquisition firms and get their perspective in those different areas as a way to share insight into stories that had never been shared in industry publications because they’d all been about the terms or the structure. Never about really the emotions or the stories.
And so we decided to put the book concept together and really…I would say we were reluctant authors I think because there were three of us. We felt like there was a mission for doing the book to share not only our stories but also to help the founders and successors that were behind us because the demographics were such that so many of the founders of our firms in our industry weren’t addressing it. They were talking about it but they weren’t really putting plans into place and then so many of my peer group or our peer group had been at firms for 10 years or 12 years or 15 years watching the train wreck on the horizon. And so we put the book together. And so the book’s called Success and Succession and it’s meant to really unlock…have conversations about how to unlock the value, the power and the potential that these firms have from a successor’s point of view by also sharing founder stories that hadn’t been shared before.
And it was really a lot of fun and so we started drafting pieces of the book and sending it out to different publishers and such and then Willy E. Publishing decided to take us on as the project and we signed the publishing agreement the month after we finished the succession plan here at the firm. And so what I meant that it was…
Michael: So you were fresh out of the transaction as you’re sitting down to write?
Eric: Well, and that’s why I said it was very therapeutic because the book concept was being built the last 18 months of the succession plan that we were orchestrating here at our firm and as we were designing chapter outlines and summaries for the chapters and what the purpose of the book would be, it was really crystalizing why it was a good time for us to go and completely the succession plan here at our firm. And so then we signed the publishing agreement the month…so July of ’14 and then spent the next 12 months writing the book and then it came out just a little over a year ago. And it’s been quite a lot of fun for me because I did it with two people that are really close to me. I mean, one that had been a mentor for many years. Then one that had been a confidant and a peer sounding board for many years.
Michael: And so the book is called Success and Succession. So we’ll make sure we’ve got a link to it up on the site at kitces.com/ten. Again, the thing that’s I think so impactful to me reading the book really is the emotional discussions and I say that as the nerdy introvert that’s of course low on empathy. I mean, I think we often forget…as you said, there’s so much discussion out there about the numbers and the valuation and the math and so little about what it’s like when you’re a founder and this firm has been part of your identity and then someone asks you to buy it out and give it up and how do you walk away from that or reconcile that. And I mean, likewise, from the buyer’s or from the successor’s end, what’s it like when you’re trying to buy into a firm and take over and how do you have the conversations with the person who functionally still has the power in the relationship because they own the shares or the bulk of the shares and you guys talk about that in a way that I think is really powerful, is really meaningful for people that are staring down the succession challenge really from either end. I think the book has a lot of relevance for both owners and successors that are coming in whereas most of the other books out there are really just written for the owners, for the people that are looking to sell.
Eric: Well, thank you. That was our hope and to lend…to not discount the voice of the founder and make the successor’s voice the most important but to also give them somewhat of an equal billing and that’s what was great about having Tim involved was he could reach out to many of his counterparts that were in his stage of building really successful firms and they could share stories that hadn’t been told in ways that…they’re real people. I mean, these were…many of the founders like John Henry, they were great at investments or they’re great at relationships or they’re great at financial planning and all of a sudden, they do that really well for a number of years and they have this real enterprise that has value and in some ways the part of what…I think what I would share to the founders and successors is that…there’s a show that’s filmed in my home state called her Fixherupper that’s on Home and Garden TV or whatever. And the premise of the show is there are these homes that are 50, 80, 100 years old in some situations that they have great bones and they have great potential but they’ve been neglected. Not because anyone wanted to neglect them but because they just weren’t cared for or they weren’t updated. In a lot of ways, that’s like our firms in our industry. Some of these firms are 30, 40, 50 years old in some extreme cases. Part of what is exciting for the next generation of people that are coming from CFP programs and getting their CFP and going into the industry is that they look at the bones of these firms and say, “Gosh, if we move that wall and change the carped and painted that room, wow, how great could this firm be?”
And so in a lot of ways, it’s not that they…and I think this is one of the things that I heard from a number of founders is part of the fear is…the fear of selling the firm is that it’s going to be ruined or their legacy is going to be tarnished and in most situations, it’s not indifferent to when we go buy a home. Most people go buy a home not because they want to leave everything the same way it is which you and I can have a side…you can chime in because it’s funny. Most people buy the home because they like the neighborhood, they like the streets it’s on, they like the way the rooms are laid out but they want to change the light fixtures and they want to change the flooring and they want to paint a few rooms and so in a lot of ways, the successor generation, while they may not be as entrepreneurial in the eyes of the founders, they have a lot of those same ideas to come in and improve. They don’t want to scrap everything that’s there. They want to take what’s there that really is working well and just make it just a little bit more relevant or more updated or more…addresses where the culture is or where the industry is. And so I think that’s the…once John Henry, I think, understood that…and that was one of the central points was I’m not going to delete everything that you’ve done and change everything. That would be foolish for me to do that. To risk my…to risk this much money on something that I don’t…to essentially blow it up and start over and I think…but that’s one of the fears that founders have and I think for successors, one of the things they can take from that is you don’t have to go in and change everything. Just change a few things. Just change the paint color and the flooring and the light fixtures, so to speak, meaning you might change a few of the things about how you deliver the service or how you price the service or how you pay your employees from a compensation plan standpoint but the bones of the firm are likely very good. So the successors…the gap is in you have to come up…you don’t have to be a visionary and an entrepreneur and create something totally new and the founder…you don’t have to be afraid that your legacy’s going to be lost or that the firm isn’t going to…because those would be too foolish things to actually act on when you’re talking about exchanging…in some cases, millions of dollars.
Michael: Right. When you’re a buyer and you’re taking on hundreds of thousands or millions of dollars of debt. I don’t want to come in and blow up the firm. I’d rather not declare bankruptcy.
Eric: Yeah, the expression that John Henry had was…we’re in Texas and so there’s a lot of…we’re all blazing trails references and I said…one of the conversations we had was I said, “John Henry, you blaze the trails. I mean, you blaze the trail for the business and you figure out where the business was going. I came back and then just put pavement on it and made it so that we could do it a little bit faster for a little bit longer period of time with a little less wear and tear and impact on the operations.”
And that’s really what…that’s the beauty of succession planning in my mind is that not all of them are going to be stories like mine because people tell me it’s very unique but I think there is a lot of potential that’s left out there and so when we were talking about the book and things, we came up with this concept of…visually, of this rusted, old barn lock as the image for the book because in a lot of ways, that’s like our businesses. Maybe they haven’t been accessed or really looked at intently on the inside for a while. And a lot of it is just how do you unlock that with some of the potential ideas that the next generation has. Not to wholeheartedly change things but just on the fringes…little bitty…risk it with little bitty small projects in a way that you might end up unlocking 10, 15, 20 percent more growth than you had before that then certainly pays for the idea of sharing ownership and engaging others in a meaningful conversation.
Michael: So as we wrap up here, I’m curious. So you’ve had what I think most people externally would call a phenomenally successful path from literally being the unpaid intern coming into the firm to becoming an owner, becoming the manager of the business, ultimately buying out the founder of the business, now operating as its CEO as you guys cross five million dollars of revenue and a couple of years out from a billion dollars of management at your current growth trajectory. So I think successful as most people would classically label it in terms of a career progression. But I’m curious from your end that success often means very different things to different people. So as someone who’s built what you built and done what you’ve done, I’m curious how you reflect back on it? How would you define success at this point?
Eric: That’s a really good question and it’s one I thought a lot about in that once we finished the succession plan, there was a bit of a grieving process that occurred that I’ve talked to a number of successors as well as founders about in that he and I had worked together for 17 and a half years and like I said, he’d been one of my first meaningful mentors. And so there was a decompression zone, almost, that occurred after where I had to look back in the rearview mirror and go, “Was this the right idea? Did this…was this what I really wanted or is this really what I want?”
And so there was a bit of revaluing of success from that perspective in terms of, “Okay, now you are the CEO and now you are in control and now you are all the things that you thought you wanted to be.” And I will tell you there’s a bit of a reflection in that that says, “Gosh, this…that conquest of solving succession had really occupied a lot of your time.” So what I mean by that is, here’s the prize and the prize is to complete the succession plan and that had been a multiyear project that was highly engaged, highly involved, highly emotional, lots of research, lots of consultants. I mean, it was a wonderful project, right. It was a big, huge science experiment. And then you solved for the drug that would cure the cancer, right. I mean, then you found the drug, you designed the prescription and then here it is. And then you complete it and then all of a sudden the…and then you look up and you go, “Well, wow. That was really time consuming.”
And I think…so when I think about success for me, it’s…the book, like I said, was very therapeutic because successful to me was meaning that I could be more of a conduit. The point there is…so I’ve had this experience meaning as the successor but I’ve also had this experience as a business owner of building an investment advisory firm. And what I found after completing the thing with…completing the succession plan with John Henry was I wasn’t going to go tackle another big succession plan because it was done but that had been on my radar for so long so I had to change what the mindset of success looked like and the mindset of success had to become, “How could I be a conduit for these experiences?”
Meaning, I’m not much more motivated to create more opportunities for the employees we don’t even have yet or for the owners that we don’t even have yet or to be involved with founders and next generation employees to solve succession for the benefit of clients. And so success has meant how do I create a new leverage of time for me by the way the firm operates just like I did for John Henry 17 years ago? Does that make sense?
How Founders And Young CFPs Can Work Together To Build Succession Plans [1:44:37]
Michael: Yeah, and so…what drives you for success or what you’re moving towards for achieving success is itself a moving target. Are you talking about generally you’re the dog that chases the car and then once you actually catch it, you have this moment of, “Okay, now what do I do or what’s next?” Is that the nature of success? You will keep hitting the way points you’re shooting for but then you have to set a new goal for yourself to know what you’re moving towards next?
Eric: Well, I think of it…in some ways, that’s right. In some ways, it’s slightly different in that I feel like the experience I’ve had aren’t just for the benefit of this firm. And so success to me is…much like when I started up with John Henry, I figured out a way to create leverage for him like he found leverage in me. My direct focus now is, “Well, how can I use the stories of the book or the stories of our firm or my experiences with clients in terms of training and mentoring here in the firm to train as well as transition aspects of the things that I’ve learned so that the whole face of the industry…”
So John Henry and I used to joke about this idea of changing the face of finance in America and the idea was…we were in our early of the days of the firm designing what we wanted the firm to be. We had these grand ideas, right, and what it’s turned into is it’s not that we’re changing the face of finance for the consumer. It’s that I really found this desire to change the face of finance, I mean literally. So if the face of the firm is the founder, changing the face of finance in America, in a lot of ways, is replacing that face with either two or three faces, like a whole new management team or a whole new succession team. And so that same thing for me meaning I’m actually working on my succession plan and I’m 42 years old. So trying to identify how to leverage the strengths of the owners that we don’t even have yet in our firm as a way to prove…as a way to continue to prove out the experiment but then also lending my voice to conversations with successors and founders that are stuck because I feel like if John Henry hadn’t been as open to the conversations that we had early on, I likely would’ve left after two or three years which is what a lot of people are doing right now where they’re watching succession plans not occur meaning the audience is listening and so they’re watching…if there’s no communication, they fill it in with their own stories is what I will tell founders. And so if the staff isn’t hearing a story from you, they’re making up their own. In a lot of ways, that story is worse. And so people are leaving. There’s this competition for talent, right. And so if you’re running a great firm and you’re not having a conversation about the fact that you really are just an interim CEO and what I mean by that is we’re all interim CEOs. At some point we went be the CEO either because the business fails and it closes or we don’t make it anymore, we die. And so we’re all interim CEOs.
And so having that…sharing those conversations I hope helps the clients of these firms because the last thing I want for the clients of our firm or the employees of our firm is to look up one day and realize that Eric held too much control and yes, he made a great living doing it but when something happened to him, all of it just really went away or the clients scattered and we couldn’t make good on the promises we had made to service them.
And so in some ways, that’s what success looks like for me now is having the discretion to be more of a conduit for part of the stories that I think have always benefited our firm but now having it benefit people outside of our firm.
Michael: Hey, man, I’ll…we’ll have your information at Austin Asset to how people can find you up in the show notes so again kitces.com/ten for episode 10. For people who are interested more and I have a feeling there may be a few founders or successors who listen to this episode and follow up with you with maybe some further questions or perspectives. Hopefully we’ll give you more of an opportunity to be a conduit for that message.
Eric: Well, thank you, Michael and the one thing the audience should know is Michael’s been a great friend of mine for many years. More than 10 years and so I appreciate the fact that you developed a venue where you can have people share their stories and give the audience a way to see themselves in those stories. So thank you for doing that.