Welcome back to the 116th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Harold Evensky. Harold is the co-founder and chairman of Evensky & Katz / Foldes Financial, an independent RIA in South Florida that oversees nearly $1.5 billion in assets under management.
What’s unique about Harold, though, is that he was one of the early pioneers to financial planning under the RIA model all the way back in the 1980s, and taking a holistic goals-based wealth management approach to portfolio design in the 1990s, having literally written the book on it 22 years ago in 1997.
In this episode, we talk in depth about what it was like to start an RIA in the early days of the independent advisor movement before platforms like Schwab Advisor Services even existed. The way Harold hustled with seminar marketing up to six nights a week in the early days just to get clients and survive, how Harold engaged early on with the media as a means to establish credibility for the firm in its efforts to compete against mega-wirehouses of the time, and how becoming fee-only in the early 1990s helped the firm to differentiate itself, because back then, being a fee-only fiduciary actually was a niche.
We also talk about how the firm grew and evolved over time. What it was like to transition from an advisory practice to a business, how Harold thought through the process of introducing next-generation partners and beginning to relinquish control of the firm, the way Evensky and Katz instituted a formal management committee to separate management and ownership of the firm as the number of partners proliferated, and how the firm made an all-in bet on the shift from AUM fees to retainer fees, and then unwound the entire change and went back to charging AUM fees for wealth management less than three years later.
And be certain to listen to the end, where Harold talks about the evolution of the financial planning profession. The CFP Lite controversy of the 1990s, whether the CFP Board and FPA have lived up to their expectations, and what it will really take for financial planning to truly be recognized as a profession by the public.
So whether you’re interested in hearing about what it was like breaking away from the brokerage world when an AUM structure was still a novel idea, how the financial planning profession has evolved over the past few decades, and where it may be headed, then we how you enjoy this episode of the Financial Advisor Success podcast.
What You’ll Learn In This Podcast Episode
- An overview of Harold’s firm as it exists today. [04:11]
- Harold’s experience with the early days of the CFP. [22:42]
- A short history of the infamous CFP Lite [29:15]
- His experience transitioning from the brokerage world to the RIA world. [40:08]
- Challenges that Harold feels small practices face [46:44]
- How the business grew and evolved over time. [55:17]
- Why and how the firm instituted a formal management committee to separate management and ownership. [1:06:44]
- What led Harold to publish his book [1:10:36]
- Harold’s thoughts on the state of the profession and the direction of the CFP Board [1:29:55]
- How Harold views the wealth management space now. [1:35:59]
- What comes next for Harold [1:38:42]
- How Harold defines success [1:41:29]
Resources Featured In This Episode:
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Michael: Welcome, Harold Evensky, to the “Financial Advisor Success” podcast.
Harold: Thank you. Excited to be here.
Michael: I’m really excited about this episode today and having you out on the podcast because, you know, you, to me, are truly one of the pioneers of our financial planning world and, you know, so much that’s changed over the profession over the past 30-odd years. Like, you’ve been there. You’ve been at the front of it, from, you know, I know being involved in FPA and its predecessor organization, CFP Board in its earlier days, an incredibly successful firm that you’ve had for upwards of 30 years, and, you know, this phenomenon now of, you know, financial planning and wealth management that we do. Like, you’re the guy that literally wrote the book “Wealth Management” back in the ’90s when, like, this was a new concept, because everybody else was selling a mutual fund, and you put out this book that was like, “What if we did broader wealth management?” You know, blew everybody’s mind.
So I’m really excited just to talk about the evolution of what this, like, financial planning, financial advice, wealth management business has gone through over the past 30-odd years that you’ve been, like, in it doing it.
Harold: It has been a fun trip.
Michael: So maybe to get us started, can you just talk a little bit about the advisory firm as it exists today?
An Overview Of Harold’s Firm As It Exists Today [04:11]
Harold: Yeah. Today we are an RIA, a fee-only practice, with our headquarters and primary practice in Miami or Coral Gables, Florida, and an office in Lubbock, Texas, where Dean and I live. We have about 25-odd staff in Miami and about 6 in Lubbock. The practice is an AUM-based practice with primarily individual clients and a few institutional and plans, but a pretty traditional kind of personal financial planning practice.
Michael: And so, when did this get started for you? Like, when did E&K get founded originally? I guess now it’s EKFF because I know you’ve gone through a couple of names.
Harold: I started in my dining room table, I believe it was about ’85, 1985.
Michael: And you started as an RIA in 1985 or were you in a broker-dealer environment at that time?
Harold: It was an independent, but we were an RIA. I had a BD, what’s called a fully disclosed non-holding. We cleared through Pershing because the initial relationship we had with the support organization required us to have a broker-dealer. So in effect, we were a two-hat shop at the time
Michael: Because, I mean, I think it’s important to point out even as we get started in this discussion, like, this whole phenomenon today of all these wonderful RIA custodial platforms that we have, from, you know, Schwab and Fidelity and TD Ameritrade and Pershing as well and a number of smaller players, like, that didn’t exist in 1985. Like, Schwab’s first Advisor Services platform didn’t come until almost 10 years later.
Harold: Yeah. No, nothing like that existed. I mean, Schwab was what really ultimately put us in business when they established, you know, their platform. But I had come from the brokerage industry. Quick story, I was a production home builder, fairly large firm. I don’t remember anymore, but I was maybe like 110th in size in Florida or something. But the ups and downs of the economy, the same thing that led to a need for planning, led me to conclude that I needed to find a different career. And I had seen an ad in the paper about the time it was Bache and said, “You know, that sounds kind of interesting.” And my partner had been involved in taking a small company public, so I felt like I was a real market maven at the time, and went down and had an interview.
I can still remember, I mean, I was a builder, so I got dressed up. I put on a clean pair of pants and a shirt, and the recruiter must have been about 12 years old, made me wait, like, 45 minutes to prove how important he was and came down, “So I didn’t know you were waiting for me the way you were dressed.” I said, “You know, I got dressed up for you.” I wasn’t real serious at the time about being interested. And after a couple of minutes of his asking me, like, personal 101 questions, and I was, in hindsight, not very polite, not very serious, he said, “I think you need to speak to the office manager.” So I came back in the afternoon. And this was classical brokerage firm. I don’t know like in Hallendale, Florida or something, ticker tapes, etc. And he had a big old cigar and put his feet up on the desk and said, and I won’t use the language, but, “What are you doing here? All you can do is make money and get an ulcer.” And I said, “Sounds good.” Put my feet up on his desk and we talked and he hired me. So that was how I started off in the business.
Michael: And, like, this is, I mean, we are in, I guess call it like classic 1980s stockbroker era here.
Harold: Yeah, this was ’81. This was super classic stockbroker. And it was Bache Halsey Stuart, now Prudential. So he sent me to New York for training. I got back and he sat me down on a desk with the phone and said, “Start calling.” First lady I got sounded like my grandmother Val, “What do you want?” And I said, “I’m a nice man, I want to talk to you about investments,” and she hung up on me. And I said, “Whoa, this is going to be a very short career.”
Michael: Welcome to the business.
Harold: Yeah. And I saw an ad for something called the College for Financial Planning. I said, “Well gee, that sounds kind of interesting.” And enrolled in it and started, we called it yellow-pad planning back then. And it really was yellow-pad planning, and started doing seminars six nights a week. I’d call up and say, “I’m a fellow member of the chamber,” and had people come in and sat them down at the secretary’s desk, you know, all lined up. And it was always a new Tax Act, and so I just did educational programs. And that’s how I built my practice.
Michael: You were doing seminars every day of the week?
Harold: Every day. Six days a week, you know, at the end of the day, and ultimately became a VP of investments at Bache, which simply mean I was doing business. And I had a good experience. They never pushed me to do anything I didn’t want to do. Never understood what I was doing. Every morning the office manager would come by with a list of people’s money market accounts and say, “Well, you know, they got some money here, why don’t you call them and, you know, talk to them about this or that.” And I said, “They didn’t need it.” He said, “What do you mean?” I said, “Well, I know what they need.” He said, “No, no, they always have something you don’t know about.” I said, “No, I know everything they have.” So they left me alone because I was doing enough business, but a little frustrated. I was out in what’s called Plantation, Florida, sort of nice suburbs. And so I got permission to go a couple of days a week downtown to the main Miami office because I wanted to deal with, you know, like, some of the accountants and attorneys. And ultimately, I moved over to Drexel Burnham Lambert, which is…that’s the old Milken firm.
Michael: Like, that’s the old Milken firm in the Milken days.
Harold: Yeah, yeah. Yeah. He invited about a dozen of us out one year to his office out in California. He had pretty much captured the institutional market, so he was looking to tap into the retail. And needless to say, if anyone knows the old story about the Junk Bond King, Milken, you know, blew our socks off and introduced us to a fantastic investment. I still remember it was Integrated Resource, floating rate preferred. And, I mean, it was like a no brainer because it was a return of principal and floating rate, so there was no interest rate risk. I mean, it couldn’t have been more perfect. So I took about a dozen of my largest clients, and I don’t remember anymore, like maybe $50,000 each into it. I was trading at $25, and within about a month, it dropped down to like $20. I said, “How can that possibly be?”
Michael: But the interest rates were floating, so you don’t have to worry about the interest rate risk.
Harold: Right, interest rates were floating. I mean, theoretically, it was a no-risk investment. It was a return of principal. So from a tax standpoint, it was perfect. And they said, “Well, you know, we’re doing some new underwriting and, you know, we can’t,” whatever, BS they gave me at the time. Ultimately I found out that there had been problems and Milken had sent back the retail practitioners to protect the institutional. You know, anyone making $1 billion at the time was going to screw his own partners. He wasn’t a very good guy, so I didn’t feel too bad when he got into trouble.
But in any event, that was an exciting period. But ultimately, I just decided that… You know, it was really a fine firm. Again, good people, but they just didn’t understand what I was doing or wanted to do. So one day I said, “You know, I’m going off, start my own practice.” And I started literally on my dining room table. But that was the good old brokerage days. You know, when I said I was leaving and they realized they couldn’t change my mind, the office manager called the secretary and like, “Linda, come in. Call the locksmith. Change the locks.”
Michael: When you’re in, you’re in. And once you’re out, you’re out.
Harold: Yeah. Absolutely. So that was the beginning of the firm. At the time we were Evensky & Brown.
Michael: So, you know, the stockbroker era was still, for most people, a pretty brutally difficult time unto itself. As you kind of highlighted, like, you know, this was the era of cold-calling, of literally, like, cold-calling to sell an individual stock that your company was underwriting.
Harold: Yes. Exactly. Yep.
Michael: So, you know, in this world where so many people didn’t even survive the stockbroker era, like, what worked for you that you were able to make it work and get through and eventually get to, you know, VP level at Bache?
Harold: Yeah, I mean, basically it was through small, you know, seminars, purely educational seminars. I literally would, you know, what every evening do something. I started working with the University of Miami. I developed, ultimately in the adult education program, an evening program, a pretty comprehensive financial planning program. And I had, you know, other practitioners give courses. I would do, again, seminars for, you know, the community, downtown community college. I can remember one day doing one and one person showed up. I said, “Well, we’re here, let’s go.” So it was purely through educational, you know, seminars.
And then fairly early on, I realized, you know, my competition was not the practitioner next door. Back in those days, you know, the Merrills and the wirehouses would say, “Oh, you know, that little guy over there, yeah, he’s a nice guy, but, you know, he doesn’t know anything, and, you know, we have all these resources, etc.” And I couldn’t begin to compete, you know, with their multimillion-dollar advertising. So that’s when I realized that PR or public relations was going to be critical for me to develop a presence, basically what I would call my marble to compete with their marble.
Michael: What does that mean? Your marble?
Harold: Some credibility. Something beyond being the little guy next door. So I worked very hard at developing relationships with the media, both locally and ultimately national media. And what I told my students today is, you know, I read pretty much every magazine that I thought, you know, my clients would be reading. You know, “Money” magazine, at the time “SmartMoney,” etc. And if I saw an article that was interesting, I would simply write a note. And it’s a long pipeline, but eventually, I became a good resource for media. For every 10 calls I got, I might get quoted once. But they knew if they called me, I would put them in touch with someone who could answer their question or be a good resource on whatever subject they were interested in.
Michael: So you were, like, reading the consumer publications, finding an article where like, “Oh, I think the reporter missed something here,” and just, like, writing a note to the authors like, “Hey, next time you do a story on this, call me, I can give you more and better information than this other person that you quoted in the story.”
Harold: In effect, yes. Not quite as stepping in. I’d say, “You know, I really enjoyed that, but, you know, Mr. So-and-so said that, and I think there’s really a different aspect. Next time if you cover it you might be interested in thinking about.” So it was never a, you know, “Call me,” or, “Look for me,” it was just…or, you know, “Here’s an extension of that that I think you might find interesting if you cover the subject again.” That sort of thing. And literally, I’d get calls well later saying, “You know, I’ve had your name here, you know, five years ago, now, you know, here’s something that might be up your alley.” So again, it was a very, very long pipeline.
Michael: So how do you keep going to persevere with the strategy when it’s a very long pipeline? Like, I don’t know very many people who are like, “Hey, I’m going to start writing some letters to journalists now because I’m hoping sometime in the mid-2020s one of them will call me back.”
Harold: I guess nothing else to do. You know, like the other entrepreneurs at that time, I think we were putting in probably, you know, 15, 20 hours a day. So it was just sort of what was the choice sort of thing.
I remember, it always amazed me how infrequently I got asked to speak about it, but every now and then I would do a talk on about PR, public relations. And it was a big program, probably an IAFP or something at the time. And one of the people in the audience, turned it was a friend of mine, got up to ask a question, and he was, like, really livid? He said, “You know, I talked to a reporter, I think from “Barron’s,” and I gave him a great idea and he never quoted me, you know, should I sue him?” I just cracked up. I said, “No, write a letter saying, ‘Gee, really glad you thought it was a good idea. I enjoyed your story.'” I said, “You know, in effect, how stupid can you be? You know, these are resources. You’re not going to get quoted every time you talk to somebody. Just be happy that they found what you suggested worthwhile.”
Michael: If they’re finding what you suggest to be worthwhile, there’s a decent chance they’re going to call again, and at some point, they may even quote you on it more directly.
Harold: Yeah. The key is good media, good reporters need you as much as you need them. And for the most part, my experience is they’re all extraordinarily professional and they will treat you very fairly. I think all the times I’ve talked to the media, I think maybe once I felt I was misquoted or something. So they’re really, you know, good people and they’re trying to do their job. You help them eventually you’ll get your share, you know, of publicity.
Michael: What was, like, the angle or the goal for you with PR and media activity? Like, was this a world where people would see you quoted in the paper or in a magazine or on TV and like, and would literally call you for business? Like, did you just get new clients straight out from being in media or were you trying to leverage it in other ways?
Harold: No, that was eventually, certainly over time, I would get calls because people had seen my name. But again, my goal was simply to try and develop some credibility to compete with, you know, the million-dollar advertising that the wirehouses were doing so that, you know, my practice and I didn’t look like this, you know, sort of some little guy next door who didn’t know anything. So it was largely to build credibility, as I referred to it as marble, you know, my presence as a serious practitioner.
Michael: I’m struck, though, by just the sheer amount of hustle that was going on at the time. I mean, like, out doing seminars every night of the week and just writing all these letters to reporters because, you know, hey, maybe it’ll work out in a couple of years, and obviously just all the grinding of phone calls or cold-calling and all the other interaction with clients. Like just, I don’t know, there’s just, like, a sheer amount of hustle to me that’s pretty striking for what it took just to survive in the early years.
Harold: Yeah, it did. And, you know, I knew, as I said, after the first day of cold-calling that that was not going to be a solution for me. So after those first couple of calls that they made me make when I started in the business, I never cold-called after that. You know, I got involved in, you know, the local chamber activities and organizations. So basically, just put myself out there, you know, look to try and establish, if not relationships at least an awareness among, you know, the accountants that were practicing out there and insurance agents and everyone else. And, you know, very active in the IAFP, which at the time was a great organization because it wasn’t just CFPs. Not that there were that many CFPs at the time, but, you know, there were professionals from all different aspects of the financial services industry, so it was a great opportunity to network with others. Something that, you know, I encourage my students to, you know, get involved in all our professional organizations for that reason.
Harold’s Experience With The Early Days Of The CFP [22:42]
Michael: So talk to us a little bit about kind of the world of, I guess, IAFP and just CFP certification. You know, you said you had…saw, you know, an ad for the College of Financial Planning that I guess took you down the road of getting CFP certification fairly early on, right? We would have been, like, early to mid-1980s here?
Harold: Yeah, I got my CFP in ’84.
Harold: Yeah. I mean, back in those days, it was called the College for Financial Planning, the CFP program was…I mean, it was certainly educational but not particularly rigorous. As I remember, there were, like, five different, you know, classes or programs, and I used to teach it in the evening program at the University of Miami. And, you know, I’d tell my class, “Look, you pay attention, I guarantee, you know, I’ll get it so that you pass the tests,” because each one was a standalone subject area, you know, estate planning, investments. I taught investments.
Michael: Right. The whole world of the comprehensive exam for…
Harold: Right, was much, much later.
Michael: …it didn’t come until later.
Harold: Yeah. So, you know, I was very involved in that. Then, you know, ultimately, the IF or the College for Financial Planning gave up the ownership of the mark to, at the time, the IBCFP, now the CFP Board.
Michael: It’s an interesting note for people that don’t know the history, you know, that the College for Financial Planning out in Denver, which is still one of the larger educational programs for CFP certification, like, originally, they were the organization that conferred the designation. Like, the College for Financial Planning and the CFP Board was one and the same organization for the first I think roughly 13 years or so, and it was only in I think 1985 or 1986 that they split apart and the CFP Board became a separate body that was solely focused on the marks and the credentialing and the education provider. Like, the college became separate, and then they started registering other programs, and, you know, now we have hundreds of them.
Harold: Right. That was what really led to the beginning of our becoming a profession. It was still, I think, a long way from it, but that was certainly a seminal event when it became independent of the college. I don’t really remember the years, but as I served on the old IAFP Board, you know, now the FPA, the National Board, I was also on the regional ICFP. Back in those days, there were two organizations, the ICFP, which was really an alumni association of those who had received their CFP mark. That was the “professional” organization, and the IAFP, the International Association for Financial Planning, was the real gorilla. And that was, not just the business but the professional association. So, I was very active in both of those.
Michael: And so it is an interesting split that I think, again, folks who have been involved in FPA, I mean, even for the better part of now almost 20 years that the FPA has been the FPA, you know, may not know the predecessor history. There were two organizations. As you said, there was ICFP, which essentially was for people who had passed CFP certification. They would join after they passed, was solely focused on CFP certificants and, I guess, building the profession around CFP, and the IAFP, that was a much broader organization. It was multidisciplinary. It allowed more people in than just CFP certificants. It was, I guess, arguably more oriented around networking in general because it had people from multiple disciplines involved and just sizewise and financially it was the much larger organization and the much financially larger organization because the broader IAFP version was also the one that did broader sponsorships. And sponsorships are where the dollars were, so IAFP was much larger and stronger financially as well.
Harold: Yeah. And that was…you know, that was the national convention. That was the convention of the year, both in terms of exhibitors as well as educational programs.
Michael: So what led you to getting more involved in these organizations? I think you had said you were involved in IAFP. You were involved in CFP Board after it split from the college.
Harold: I’ve just always loved our profession and was lucky enough to have the opportunity, you know, to be invited to participate. And certainly, at the very beginning, I and some of my local friends, we established the original IAFP chapter in South Florida and the original ICFP chapter in South Florida. But again, I was lucky enough to be around at the beginning of all of these processes. So, you know, at some point, I was invited and voted on to the IBCFP Board, which, you know, I really enjoyed. Deena and I chaired one of the big national conventions, which that was just a lot of fun, very rewarding. Then one day I got a call and was invited to consider serving on the IBCFP Board, which ultimately, you know, I did, and then, you know, the CFP Board of Governors. Mostly it was just because I enjoyed doing it. It wasn’t so much because I was trying to, you know, give back to the profession. It’s because I just liked doing it. It was fun.
Michael: So in today’s environment, CFP Board is spending a lot of time focusing on growing the marks and putting them forth as the gold standard. You know, FPA is spending a lot of time on advocacy issues as well as just trying to function as a professional association. So what were the issues for the organization at the time?
A Short History Of The Infamous CFP Lite [29:15]
Harold: Well, I started off serving on the Board of Examiners and was on the board and then chaired when we created the comprehensive exam. So that certainly was one of the major steps. And that was, of all the different things I’ve served on, that was probably the most interesting and the most fun and most rewarding. Then I went on to the parent board, the CFP Board of Governors, served on that for a number of years and then became chair during the infamous CFP Lite. Luckily not too many people remember that. That was a really painful period.
Michael: So can you fill us in for people who aren’t familiar?
Harold: During that period, we had been alerted, led to understand that Merrill Lynch was considering developing their own designation. And back in those days, some wirehouses would not allow their brokers to put “CFP” on their cards because they were afraid that that would increase the potential liability if they did that. So we had become very concerned about because if a Merrill had done that, that might just potentially wipe out the whole concept of the CFP, because they had infinitely more resources than the board did at the time.
As part of that discussion, what came up was the idea of developing a second designation, recognition, something that we could offer the wirehouses, the brokerage firms. If they would commit to the Code of Ethics and Practice Standards developed by the CFP Board, then they would be able to have, in effect, their brokers earn this like associate CFP, some sort of recognition. We thought that it would do two things. It would one, potentially eliminate the threat of a competing designation and get a pipeline for brokers to move on to the CFP mark. And at the time, that was an extremely common strategy or offering throughout the rest of the world. The CFP mark had become international by that time. The staff of, at the time, “we” meaning the board had been told that they had done some extensive research and the, like, associate CFP was something everyone was in favor of. They, you know, loved it and it was great. So we came out with that.
Well, we hit a firestorm of objections by the current CFPs. Some legitimate concerns about it, you know, watering down or confusing the public. But a good deal of it was just concerns about the potential competition if in fact the wirehouses seriously adopted it. Our feeling of the board at the time was, if we could get some of the major financial services firms to adopt the Code of Ethics and Practice Standards, that would be extremely good for the public. You know, maybe it would provide more competition, but it would be just a wonderful thing for the public. We later discovered that this research that supposedly had been done was just a sham, that there had been no research and there was nothing to support it.
Michael: Which you discovered the hard way when you got the feedback.
Harold: Yeah, we definitely discovered the hard way. Long and short is eventually, we gave up and dropped the idea. Although I still think it was a great idea and it would have been very appropriate. As I say, most of the rest of the world has something like that very successfully.
Michael: I guess the good news, at least in terms of development of CFP marks and CFP certification I guess is apparently, Merrill never did go all-in on another, you know, major consumer-facing designation?
Harold: No, they didn’t. And eventually, you know, they became very supportive of the CFP mark, as, you know, most of the major financial services firms have. Because they ultimately realized that it didn’t increase liability. In fact, it decreased it because if their brokers were more educated and more professional, they were less likely to get themselves in trouble or the firm in trouble. So a huge number of CFP licensees now work for major brokerage firms.
Michael: Yeah, it’s a piece, you know, and you highlighted it indirectly in your comments earlier as well that, you know, all the way back when you were a stockbroker at Bache that, you know, part of the challenge was just, like, nobody entirely knew what was going on. Like, you just sort of, you do what your sales manager tells you to do. If your sales manager says this is a good thing then it’s a good thing and you go do it. And that, you know, to me, one of the things that’s always kind of bothered me about the discussions of industry channels, industry competition, you know, to some extent just all of the fiduciary discussions, you know, there’s this, like, broad brush painting that anybody who gets commissions is, you know, greedy and evil and trying to take advantage of their clients. Then we inevitably see bad things that happen to people and say, “See, you know, I told you these commissions were bad.”
You know, having started my career on that side of the industry as well, like, what always struck me is that most of the bad stuff that happened, it didn’t happen out of, like, greed and over conflicts of interest of like, “I’m going sell this thing and make a bunch of money off of my clients,” it happened just because there was no training or education for people to even know that the stuff that they were recommending probably wasn’t actually good. Like, I started in the industry selling VUL or variable universal life insurance, projecting it at 12% rates of return, straight line indefinitely, because that’s what everybody did in 2000 before the market crash. And that’s what my manager taught me, and, like, he’s the one that knows because he’s the one that brought me in and is teaching me.
And, like, you know, in retrospect, I look back and, you know, fortunately, I was such a terrible salesperson. I didn’t actually manage to sell anybody VUL based on a 12% return assumption, but I sure as heck tried. And all of it just comes from, like, I had to get more education to know how ridiculous some of the things were that I was doing and recommending to my clients. Because, like, I just didn’t know at the time until I went and got CFP certification and more educated and suddenly realize like, “Oh, there are some things that other firm told me that are actually not really very accurate, I think I’m going to do it differently now.”
Harold: I couldn’t agree more. I have major disagreements with my fiduciary friends. I get very incensed at the, you know, us versus them kind of argument. As I say, I may be more competent because of experience, but I’m no more honest today than I was when I worked at the brokerage firm. And my experience was, pretty much everyone I worked with was caring and honest. The issue is the institutions I don’t necessarily think have their heart in the right place, but the individuals, you know, for the most part, I believe do.
Certainly, yeah, there are, you know, conflicts in the brokerage industry, but there are conflicts in the RIA universe. And, you know, I’ve talked…no one talks much about it, but I think our conflicts are going to be infinitely bigger than the broker. As, you know, immediate longevity annuities become important, the conflict of telling someone “You need to take, you know, 10%, 20%, 30% of your portfolio and move it to a payout annuity, you just lost a big chunk of your income stream,” that’s all a bigger conflict than a commission. So, you know, conflicts abound across the board. So I don’t think it’s good guys versus bad guys. And I think, you know, there are structural issues that need to be addressed.
Michael: Well, and it’s frankly one of the things that aggravates me the most about the SECs recent Regulation Best Interest proposal, which, you know, essentially says like, the advisors, whether they’re at broker-dealers or RIAs, have to, you know, act more in clients’ best interests, but Reg BI puts, like, virtually no actual requirements on broker-dealers to do anything different, just the advisors. And to me, like, it misses the point because, as you’ve said, like, and I’ve interacted with our industry peers on both sides, like, almost everybody wearing an advisor hat is trying to do the right thing for their clients because just, it’s good for business and we tend to be helping types, that’s why we picked the job and that’s why we come into the profession.
And so, you know, most people, I find, want to do the helping stuff, want to do the right thing, hopefully,, have been taught the right thing, aren’t always taught the right thing, but that most of those problems come from parent companies that have a very strong business incentive to not necessarily teach their people the right thing. You know, the legal reason a broker-dealer exists from a regulatory perspective is it’s literally an intermediary for the distribution of products. So you can’t take something whose sole, sole purpose for existing is to facilitate the sale of a product and then hope that their conflicts won’t be magnified down the line. And, like, I actually have much more of a problem with broker-dealers than with brokers.
Harold: Yeah, I couldn’t agree more. And if the SEC would simply enforce the law and reasonably interpret “solely incidental to the sale,” it would pretty much eliminate all of the problems.
Harold’s Experience Transitioning From The Brokerage World To The RIA World [40:08]
Michael: So take us back to the transition from the brokerage world to the RIA world and going out on your own to start a firm. I mean, now we see people go out and start RIAs because lots of advisors have done it and we kind of know what this looks like and there’s all these providers that give you this ecosystem of support. Like, it’s still a pretty big leap for people that make the transition, but, like, there’s a lot of infrastructure and support and guidance and roadmap now about how you do that. None of that back then. It’s like, what…? I mean, I’m just wondering, like, how did you even find out about this RIA thing and that there was another way to do business than just going from Bache to Drexel Burnham to whatever the next brokerage firm was that might have solicited you?
Harold: One hundred percent of that credit really goes to Deena, my partner, now my wife, Deena Katz. We’d been in business a couple of years. And I was out in Denver doing a talk for the ICFP at the time on how to select planning software, I think. I came in one evening. I had gone out to dinner with a friend and I hear this raucous group downstairs in the hotel and the restaurant, and I go down, there’s a table of about eight people, seven guys and one woman. And most of the senior staff of the ICFP was there.
And I sit down. And it turns out the woman was Deena, and they had played a joke on her, asked her if she’d ever had Sambuca. “Have you had Sambuca?” She said no. They said, “Well, you need to try this.” And so it’s the strong licorice drink with a couple of coffee beans in it. And they said, “Well, you have to swallow it, you know, chug it down and eat the beans,” which she did. And the beans are dry. And long and short is she ended up spitting it all out. And so I sat down and she asked me, “Have you ever?” I said, “Oh no.” I said, “You know, this cute young thing is going to jerk my chain. I’m game.” And so I did it, spit it out. And that was how I met her.
Well, the backstory of that is when I went training for Bache in New York, first bar, had a four-man suite. We went to and plunked down, like, five bucks for a beer and they said, “Well, I’m sorry sir, it’s like $6,” or something. I mean, we were really rubes. We found a little bar around the corner and Sambuca must have been cheap. So I spent a couple of weeks just drinking Sambuca. So I knew exactly what it was, but I said, you know, “What the hell, you know, again, I’ll go along for the ride here.” Then the next year, I think at another meeting, I bumped into her. And so we developed a business sort of relationship.
And one day she called up, she had a practice in Chicago, and she said, “You know, I’m thinking of moving down to Florida. My mom has retired.” And her mom was a fifth-generation Salvation Army minister. And I said, “Why don’t you come join our firm?” At the time we weren’t very much. I had a partner and maybe one other employee. And she said, “Well, let me think about it.” Called back and said, “Well I’m interested, but I have two conditions.” I said, “Okay.” And she said, “Well I’ve always owned my own practice, so I want to be an equal partner. Whatever is a fair price, I’ll pay it.” A fair price would have been about 2 cents probably. I said, “What’s the other?” She said, “Well I’ve always run my own business, so I want to be president.” Well, I went to my partner because I’ve never been any good at running a business, “What do you think?” He said, “How fast can she get here?”
So she came down, joined the firm and looked at what we’d been doing and saying… Back then they had something called the Registry of Financial Planning Practitioners, which was kind of the next step beyond the CFP mark. And a lot of, you know, my friends had sort of achieved this. And we had our own broker-dealer, and they said, “Well, can we put our, you know, license with you?” I said, “Oh, sure, know, it doesn’t cost anything.” So we had a lot of people name on the firm. She said, “You’ve got all these people and they couldn’t sell themselves out of a paper bag. You know, we need to clean this up.” So she said she freed up a lot of futures. And then she said, “You know, you’ve got this broker-dealer, but, you know, that’s not really the future and where we need to be, so I’m going to sell off the broker-dealer and we’re going to become fee-only planners.” I said, “Okay, you know, if that’s what you say, let’s do it.” Because we really never used it. So we sold the broker-dealer and became solely RIAs. And that was the beginning of the real firm. I think that was, like, ’93 or something like that.
Michael: And so that was a part of like a deliberate decision to say like, “We want to be RIA? We want to be fee-only?”
Harold: Yeah. Both. I mean, that was…again, that was 100% Deena. She said, “We are going to be fee-only.” We had one other person with us that, you know, we said, “We’d love for you to stay, but this is the direction we’re going.” And, you know, he elected to go off on his own, I think because, at the time, he didn’t want to give that up. But no, that was a very conscious decision.
Michael: I mean, can you paint the picture for us? Like, what did it mean to try to be fee-only and RIA at the time? I mean, is it still similar to where it is today or?
Harold: Well, given that we weren’t doing very much business before that, it was a pretty significant transition. You know, it sort of helped clarify for me, you know, the story and what we were doing and who we were, but it was difficult only in that the market had no idea what that meant. It was a pretty new concept for most of the retail world. So again, back to just doing lots of programs and education, but obviously, it was…you know, it resonated with enough people that we were indeed, you know, able to grow the practice, you know, and develop a business around it.
Challenges That Harold Feels Small Practices Face [46:44]
Michael: I think it makes an interesting point, as you framed it like, “You know, we weren’t actually doing a ton of business before that, so we didn’t necessarily have a lot to lose.” But once you put a stake in the ground on something, on frankly almost anything, it starts to clarify the story of the firm going forward. Like, you have a more proactive, clear, effective way to describe the firm, what you do, the value you provide, etc. And that’s usually what then starts getting the growth going.
Harold: Yes. Today I have a different sort of belief than many, including I know from your writings, in terms of practitioners going off and starting their own practice. You know, back then, we had a practice and at some point decided, you know, we needed to stop being a practice and become a business. And I didn’t want to. I enjoyed being a practice. I didn’t particularly want to grow or be larger but concluded that we simply had to in order to develop the resources that I thought we needed to be both competitive and provide to our clients the services, you know, that they deserve.
So today, you know, like when I have my students, when they talk about what they want to go off and do their own, I’m a major skeptic. And I think, you know, the papers Hurley has done had been misleading. Not that there won’t be small practices, just like there are small accounting practices and law practices and doctors, but that’s a lifestyle choice, not a business choice. And the reality is, I simply don’t think that a small practice can compete with firms like ours today and my friends whose practices have grown in terms of the resources and the depth of intellectual capital we have, etc. So, you know, they certainly will be able to develop and have a client base because of the personalities and because people like them, etc., but, you know, if I were referring someone to a practice, it would be to a large one, not to a small one. Because I just don’t think they can possibly get the services, again, the intellectual capital and the resources that they get from a large one today.
Michael: Yeah, this whole debate on an ongoing basis of kind of a large firm versus small firm and, you know, the opportunities or the plight of the solo advisor, you know, I still look at this on the one hand, like, there are so much more in tools, technology outsourcing, resources, support and the rest today, like, it’s so much easier to make a solo firm today than it was at any other point in the past 30 years because of all the capabilities of technology outsourcing, just, like, all the things the internet enables makes it pretty amazing to run a solo practice today compared to the past. Like, more effective, more profitable.
But I do actually agree with you to a large extent that, you know, to me, the challenge of being a solo advisory firm in the future, like, isn’t about, can you literally mechanically run it in a profitable, cost-effective way? I think, frankly, you can run it in a more profitable, cost-effective way than you have at any point in the past. It’s a marketing challenge. It’s a business development challenge. It’s, you know, how are you going to attract clients to your small solo firm when, particularly if you’re, I’ll say, like, “just,” in air quotes, “just” doing broad-based comprehensive financial planning and acting as a fiduciary for your client and giving them all of this advice, so do a whole bunch of other firms that are larger with stronger brands, more advertising, more marketing budget, more capabilities, get themselves out there and an actual deeper bench at providing broad-based financial planning advice.
So indirectly, this is why from my end, like, I’m very upbeat about the potential for solo practitioners, but why I continuously pound the table that if you want to do that successfully, you have to find some kind of niche, some kind of specialization, some way that you distinguish yourself. You know, as you said, like, you effectively did it 20-plus years ago putting a stake in the ground around being an RIA and fee-only in a world where virtually no one was.
Harold: Right, we had no competition. Correct.
Michael: Now that’s…you know, the market caught up, competition gets fiercer. You know, I don’t think you can start a solo practice and make that your line in the sand anymore because too many others do it. You have to make some other niche specialization differentiator line in the sand. Like, I mean, the truth was, you know, when you went out to be a fee-only RIA, like, that was a niche business.
Michael: You built with a niche.
Harold: Yes. Absolutely.
Michael: Your niche was fee-only RIA. And so, in the same manner, like, if firms want to be successful today, going that solo start-your-own route, you better know what your niche is. And it can’t be the niche of 25 years ago because that one is not a niche anymore.
Harold: One of the things that I think is lost in this discussion debate is the reality is, if someone joins a firm like ours, they stand an extraordinarily high probability of ultimately becoming a part owner in that firm. So it’s not that you need to go out and start your own because you want to be…you know, you want ownership. Everyone in my firm today, you know, certainly all the full-time people, pretty much everyone has some ownership interest now, just because I think that’s, and Deena, you know the right thing to do. But that next-gen, they’re going to need to sell to the gen behind them. So, you know, the reality is that they will become owners. So they don’t have to start their own practice not simply to end up, you know, permanently as the employee of a big firm. You know, it’s unlike, you know, a major wirehouse. So the opportunity for joining a larger firm and becoming an owner is pretty close to 100%.
Michael: Yeah. Well, and it is the reason why for anybody that’s coming in, you know, I still advocate pretty strongly like, when you’re starting out, go get a job in a mid to large size firm. Like, don’t go hang your own shingle when you’re getting started, go get a job in a mid to large size firm, learn your trade, learn your profession, just learn what you like and don’t like about the industry and different roles, and maybe you’ll get some insight on different channels based on whichever one you land in. And, you know, do that for a few years, then you’ll probably make a transition in three to five years to some other firm if you don’t like the one that you started at. You can do that for a few more years and see if you like that more. And then, yeah, maybe if you’re 7 years in and you know your profession and you’ve got the skills and you’re confident in your abilities and you’ve checked off all the rest of the boxes and you’ve just really decided you want to make a thing in your own vision and doesn’t fit working for someone else, like, knock yourself out, go start a firm in year 7 to 10.
Harold: Yep. No, I think that’s great advice. And I would add to that, you know, the very…that first job, don’t eliminate the wirehouses. I mean, you said you started there. I had extraordinarily good education training. And again, I was never pushed to do something that I thought was inappropriate.
Michael: Yeah, I just push people like, try to find a firm that cares a little about financial planning, right? So that hopefully you learn a little bit along the way. I find easiest way is just, like, if you’re interviewing at a place you just ask them for a copy of their sample financial plan.
Harold: Well, you know, what’s changed is the major wirehouses are coming to like tech to hire graduates to be the planner for a team, and they’ll pay them a reasonably good salary for two years. So there is significant opportunity to go through a planning process with a major wirehouse today.
How The Business Grew And Evolved Over Time [55:17]
Michael: So you made this transition in the early ’90s, I guess, to say, “We’re all in on the RIA model, the fee-only model, we’re casting the broker-dealer relationships aside for good and we’re going to try and start building towards a business beyond just a practice.” So what came next?
Harold: What came next was not so dramatic, just the larger growth, the business. Probably the biggest next transition, and I really don’t remember, five years, six years, whatever. Oh no, what came next was when we established relationship with Mark Hurley. And at the time, you know, his firm provided the funding for a number of our employees at the time, our senior people, to buy in as owners. So that was clearly a major transition. Then subsequent to that, I formed a management committee, and we elected a managing partner, Matt McGrath. And I still serve on the management committee, but again, our move towards being a business, not just the practice. And so, you know, those two steps were the really, you know, big changes in where we were. Related to that was, I had always focused on the senior practitioner planners saying, “Your job is to do a good job for your clients,” which no one had a marketing or a business develop responsibility.
Michael: Right, we don’t…most of us at least, like, we don’t hire business developers when the advisory firm is starting to grow, we hire more financial planners to do great financial planning because usually the founders and the partners are doing the business development stuff. They just need a person to hand the clients off to so they can go get more.
Harold: Exactly. And that’s where we were. And that’s how I pretty much educated everyone. But as we were making this transition and they became owners, kind of, you know, like a light going off saying, “Wait a minute, you know, they’re going to need to be responsible for growing the business.” So that was probably a three or four-year sort of psychological transition period in which they move from being just senior planners to partners and business developers. And that certainly led to, you know, more increased growth in the business because now everyone is out and active and developing new business.
Michael: So how do you drive that shift? Because I know a number of firms that have tried to do this, and frankly, a lot of them seem to really struggle that, you know, they try to come down to their next-generation of advisors and say, “All right, you know, if you want to be successful in the long run, you’ve got to start learning some business development.” And the advisor goes, you know, “What the hell, I didn’t come here for a sales job. Like, I’m here to be a financial planner. I’m doing great financial planning work. Like, what’s the deal?” And there’s this, I don’t know, like, the culture gets so focused on “serve the clients well,” which is great. Like, I’ve got nothing against that, but, you know, the culture becomes so focused on “serve the client well” that the advisors just often push back and say like, “No, no, I didn’t come here for a sales job. Like, I came here to do financial planning for clients.” And the firms really struggle to get their advisors to start doing business development.
Harold: Well, there’s two tracks. If someone simply wants to remain a planner, that’s an option. If they want to become an owner then they will have a responsibility for business development. But one of the things that for me was an aha, David Bugen, part of our study group, whatever you want to call it, the Alpha Group, was talking one day, said, “You know, if someone is really doing an extraordinarily good job for their clients, there is no earthly way that they won’t be getting referrals from those clients.” And it was like, “Wow, I never thought about that.” So, you know, we have a couple of my partners whose business development comes almost 100% from referrals. We have other ones who are getting new business through, you know, their outside activities, particularly their charitable involvement. But, you know, it doesn’t mean that sales is someone has to get on the phone, start cold-calling. Again, it can come simply because you are doing an extraordinarily good job for your clients.
Michael: So you made an interesting statement there to the effect of, you know, look, if you want to be a financial planner then great, be a financial planner, if you want to become an owner then learn to do business development. It’s an interesting distinction.
Harold: It’s a responsibility of ownership to develop the business. So to me, that seems like a pretty reasonable rational conclusion, but it doesn’t mean that someone has to become an owner. You know, certainly, the future, the compensation and control over the future of the business is going to be primarily in the hands of the owners.
Michael: It’s an interesting way to frame it. So, you know, “Look, you don’t have to learn business development here, but the path to partnership means if you want to be a partner and owner of the business, you have to contribute to its growth. So we’re not telling you you have to go do business development, we’re just saying you have a choice. You know, financial planner has a job, partner has a business development role. You choose whether you want to have a, hopefully, great job that pays well or if you want to be on a path to ownership and partnership then you choose.”
Harold: Both are very viable and very reasonable paths, and the individual’s decision. You know, in our practice, everybody wants to be an owner, which is great. I’m all for it.
Michael: So what is that like from the owner’s perspective where you are the first time you start introducing, you know, new owners, next-generation owners?
Harold: It was frustrating, but I’m not a particular control freak.
Michael: So what was frustrating?
Harold: Well, you know, originally, anything we did, I made the decision, “We’re going to do this. We’re not going to do that.” Whether it was, you know, what reports were going to look like, what investments we’re going to make, etc. But, you know, when I formed an investment committee and a management committee, I just became one vote. And I would say that I’m probably somewhere around 50% in terms of, you know, winning my point versus not winning my point. So there’s no question. In order for it to be real, you need to give up significant control. For all intents and purposes, you need to give up control. You don’t have control. So there’s lots of things that go on that, you know, frustrate me or that I may not agree with, but, you know, that’s part of being a member of a business and having partners.
Michael: And so, for advisors that still struggle with this, kind of this letting go of control, or I find for most, like, it’s not just sort of an abstract like, “I don’t want to let go of control.” I guess it is for a few people. But more often I find like it’s a, you know, look, I may have given you a stake in this business, or not given, like, you know, you may have earned a stake in this business, but I still own most of it. And if you screw this up, it still hurts me a whole lot more than it hurts you. And that it gets really hard to let go of more control and decisions to other owners when their actions still impact your finances more than their own.
Harold: That’s certainly true, but if I were that sort of, you know, the junior partner, I don’t know why I would stick around if I didn’t feel like I had some really significant control over the future. So I guess I’d say for those, and I know they’re, you know, certainly of my generation, those who just want to maintain control, you know, my answer is, great, well, cherry-pick some of your best people because I don’t know why they would ever stay there.
Michael: It is a valid point, though. You know, even when we sort of joked about it early on in XY Planning Network, you know, when we got started and we looked at who was joining the network and launching their firms early on, you know, it’s changed a little bit now, but in the early days, it was overwhelmingly failed succession plans. As we sort of fondly put it, like, we were the network of pissed-off junior advisors.
Michael: In the early days it was just a lot of…
Harold: And for good reason.
Michael: Yeah. I mean, we had a lot of advisors that were on the seventh year of a five-year succession plan that was now getting ready to start. And they’re like, “You know, I came in to take over this business after 5 years, it’s the seventh year and now you’re telling me 5 more until year 12 and then maybe we’ll finally do it? Like, I just don’t believe it anymore.” And the firms were losing their people. And, you know, they had the ownership mentality, but if they couldn’t exert it where they were, they went and launched their own firm from scratch, which was where a lot of the launches were that we saw early on.
Harold: Yeah. And I’m completely sympathetic with the next-gen. I think they made the right move.
Michael: Yeah, it’s an interesting challenge. I don’t know, any other advice for the firm owners at the other end of like, I don’t know, just how did you make this mental transition to get comfortable with all these other people making decisions in a business in which you still have such a substantial stake yourself?
Harold: Yeah, for me it was and often remains frustrating but not a real problem because I’ve never had this, you know, control gene. So it wasn’t like I had to go through a massive psychological change to give it up. You know, maybe just a few ulcers, but other than that, no. Basically, I was just lucky that it wasn’t a major problem for me.
Why And How The Firm Instituted A Formal Management Committee To Separate Management And Ownership [1:06:44]
Michael: And talk to us a little bit more about this management committee structure that you said you created. Because this, to me, is another interesting challenge and phenomenon that crops up for advisory firms. You know, first, like, you’re growing, you decide to introduce some additional partners. You do that for a little while. Like, that’s fine when you go from one owner to two owners to three owners and maybe up to four or five. But then at some point, you’re at like 7 owners, 10 owners or more, and it quickly becomes apparent that you can’t just make decisions by putting all the partners in a room because there’s way too many of them. And the decision-making process is no longer efficient. And so, you seem to have addressed this with, I guess like, as you said, forming a management committee. So can you talk to us a little bit more about, like, what did you form? How does it work?
Harold: It’s, you know, a very formal structure. There’s a management committee, and we have a managing partner. And management committee meets once a month. And the managing partner is basically the COO, runs the daily business. Each one of the members of the management committee has a responsibility for sort of a segment of the practice. In other words, there’s someone who’s responsible for compliance and technology, someone who’s responsible for operations. So they become the point person, you know, for the employees in those particular areas. Then there’s subcommittees. There’s an investment committee. There’s a planning committee. But the management committee is where the ultimate authority is. The management committee is the group that ultimately if there’s a decision that needs to be made, you know, a significant decision, it’s by majority of the vote of the management committee.
Michael: And again, how many people is it? Or how many people has it been? I would imagine maybe it’s evolved a little over time?
Harold: Yeah, it has. It started off, let’s see, it started off with six members and now I believe we’re at seven members. So it’s grown over time.
Michael: How did those members get selected? I mean, obviously, like a managing partner clearly has to be in charge of it because someone’s got to be in charge and, you know, managing partners manage management committees.
Harold: Yeah. Originally, I mean, originally, I selected the original management committee. When we purchased another practice, Steve Foldes, who was the principal of the practice, joined the management committee. Then, because we have… That was really the way it came about. It was largely, you know, my original choice.
Michael: And is it solely just based on, like, people you think will do a good job at making management decisions? Does it come primarily from partners? Does it, like, feed up from department heads like, “Hey, you run investments so you’re on this committee and you run planning so you’re on this committee,” and, like, it’s an aggregation of department heads?
Harold: No. The management committee was…you know, my decision was really all the senior sort of principals of the firm at the time. It was the senior practitioners or planners, and then my son David, who has always been in charge of, you know, the marketing development of the firm. So, I mean, that was the original…my original criteria in selecting.
Michael: And is that still the structure today or did it shift in how those people…?
Harold: No, that’s still the structure today.
What Led Harold To Publish His Book [1:10:36]
Michael: So talk to us a little bit as well. I know you have published quite a bit of research, articles, books in the industry. You know, as we’d mentioned at the beginning, like, you know, you literally wrote the book “Wealth Management” 20-odd years ago when that was not really out there as a thing yet until you helped to put it out there as a thing. How did that come about for you in the practice? Like, what were you trying to build or create that took you there?
Harold: I think the writing was, you know, partly an ego trip and partly just helping me clarify ideas and think them through. Putting it down on paper and writing about it helps me think through issues. And, you know, my original book “Wealth Management” was just because I…say I had a vision was kind of overstating it, but I just, you know, thought, “Wow, this is an exciting field and there’s really nothing out there to help anyone else think about what the issues are, how to put it together or develop a business around it. So this seems kind of fun.” So that was my motivation.
I remember at the time my partner, Peter Brown, saying, “What are you doing? You’re telling everyone what we’re doing.” And I said, “Peter, there’s enough business to go around. I don’t see this as being a competitive threat to us.” But when I wrote my original “Wealth Management” it was back at ’96, I think, I defined, and I still believe, it’s changed, the use of the term over time, but I considered it a sort of a financial planning specialization that focused on the investment universe but through the financial planning process.
Michael: So you viewed wealth management as like a subspecialty or a specialization of financial planning?
Harold: Yes, exactly.
Michael: Primarily around, like, how do you apply the investment realm to the financial planning process?
Harold: Yeah, I mean, from, you know, going through the planning process and determining what, you know, portfolio should look like, the overall allocation, and how do you develop the details of the allocation? How do you implement it, report it and integrate that with a client’s, you know, overall financial plan?
Michael: Well, because, you know, again, I’m cognizant, like, in these days, things like, “Oh well, we make portfolios and we tie them to long-term goals and we try to make sure our investment policy statements are consistent with our…you know, the goals of the portfolio,” like, that wasn’t out there 20-plus years ago.
Harold: No, that definitely was not out there then.
Michael: And so you were advocating that kind of approach I guess in a world where everybody else just threw on the blinders and managed the pot of money essentially?
Harold: Yeah, they drew a big circle if they were really in asset allocation and, you know, took a pie and sort of broke it into pieces. Remember, I’ve been a, not a CFA, but a member of the old AIMR, now CFA Institute, and going to the first program they had on personal planning, since no one in the CFA universe really knew anything about it, the closest they could come up with was a couple of, well, trust department people. Real classic, you know, with a vest on. And you could just see him smoking cigars. They were talking about how they develop a portfolio allocation. He said, “Well, you know, we get together a couple of times a year with some good brandy and cigars and kind of cigarette, sit around and knock the world around and come up with something.” So that’s about where it was at the time.
Michael: Now, I know you were also active in, well, I guess sort of the applications of, you know, “How do we start applying investments in a wealth management and financial planning context?” You know, you were active with things like doing bucket strategies, creating core and satellite portfolios in a world where that stuff wasn’t really out there yet. So talk to us a little bit about how those evolved and came about and what you were doing.
Harold: Yeah, I’ve always, you know, had an interest and followed sort of the academic literature on investing. The real, really the first and leader in that was Roger Gibson. Roger subsequently became a really great friend. But I can remember going to I think an old IAFP meeting where Roger gave one of his first talks talking about asset allocation, and, you know, he wrote his book on asset allocation, and being furious because I said, “That was the book I wanted to write.” But that was kind of the beginning of it was thinking about, you know, this concept of asset allocation and, you know, Brinson, Hood, Beebower, the importance of allocation.
Then, and I’m trying to think, at some point, I certainly became aware of this issue of the sequence of withdrawal and timing and trying to figure out, you know, “How are we going to manage this?” And that’s when I developed what today would be called the two-bucket strategy. Really a very simple concept of…based on what we call our mantra, five years, five years, five years, which means we don’t think you should be investing anything if you think you’re likely to need a big chunk of it within the next five years.
And then in terms of supplementary annual income, you know, someone needs some income in retirement to supplement pension or whatever, Social Security, originally, I had come up with two years set aside subsequently with…my TA is now our professor and my partner who’s a professor, we revisited much more sophisticated analysis and came up with one year. Because when you carve that money out, there’s clearly an opportunity cost.
Michael: Right, you get the infamous cash drag.
Harold: Yeah. It was basically a behavioral strategy as well as an economic strategy. There’s criticism that it’s inefficient. And from a mathematical standpoint, it’s clearly inefficient because there’s an opportunity cost when you carve money out of a portfolio. But my conclusion was and has remained that the behavioral advantages overwhelm the marginal investment inefficiency because it keeps people invested and reasonably, maybe not happy, but reasonably comfortable during catastrophic times, like the ’87 crash or, you know, the tech bust or the grand recession. So it’s been an immensely effective and useful strategy.
The core and satellite, it came about when I was looking at…not looking forward, which is presumably what we always need to be doing, and concluded that returns are expected to be significantly low over, you know, foreseeable future and said, “Wow, this is, you know, a problem. What do we do about it?” And I did an article, and I forget what it was called, something about, you know, the Titanic sank, “Hey, wake up everyone, we’re facing a problem here.” And then again to think through the process of what we need to do about it, I wrote an article for the “Journal of Financial Planning,” which was really, you know, thinking my way through what we needed to do. Problem was nothing had changed in my investment philosophy. I believe in diversification, believed in domestic and international, believed in a value bias, etc.
But I’d read an article by Jean Brunel, who I think at the time was the editor of the “CFA Journal” and more intellectual of money managers, and he had a really simple little graph that showed, like, tax-efficient managers and tax-inefficient managers and plotting the tax efficiency versus the activity and said, “You know, this is stupid. There’s this big,” what he called the murky middle. “So what you need to do is take some of your money and put it with a very tax-efficient,” which basically boils down to, you know, like the S&P 500 or something. And take that whole budget for risk that you’ve been spreading across all these active managers and give it to the go-go down at the other end who are doing enough to overcome all that expense and tax drag. And basically, that was the concept of core and satellite.
So in a low-return environment, if you can save even a 0.5% through efficient tax and expense management, they’re going to increase significantly what I believe is the net-net-net return, meaning return after taxes, after expenses, but the big bites after inflation. So, I mean, I came up with my forward-looking expectations in a balanced portfolio around 2.5%. So to save a 0.5%, that’s a big difference. So anyway, that’s what led to it.
Michael: Well, and I’m struck, I mean, you were, correct me if I’m wrong, you were looking at these concerns about lower return expectations back in the ’90s when valuations were really, really high during the ’90s boom. Like, that’s not in the context of today where we’re talking about low returns. This was low-return environment from the ’90s.
Harold: I think that paper was about 2002 or something like that. But, you know, unfortunately, my opinion hasn’t changed.
Michael: So you have these, you know, ideas and concepts that you put forth, championed, implemented at the practice and become very successful with them around wealth management and core and satellite and bucket strategies. So I’m just curious, like, what’s sitting on the cutting room floor? Like, what things did you try in the practice that did not work out? That we just don’t hear about now because they’re the ones that didn’t survive this?
Harold: Probably the biggest one, the one you’ve written about frequently is, you know, the fee structure, the AUM, which I’ve always felt and agreed with and I think what you’ve written in many that it’s a completely inappropriate structure for what we do because it’s not focused on where I believe our value is, which is the planning process. So quite a few years ago I said, “You know, this is just…doesn’t make any sense, so we’re going to go…” This is when I was completely in control, “We’re going to go to a retainer structure,” which we implemented, and it was a massive unmitigated disaster. First of all, people didn’t necessarily understand it, and then, you know, put this big number up in front of them day one, intimidated them. And they also, as soon as you did it, they instantly converted it to an AUM number anyway.
Michael: They all did the math basically.
Harold: Right. And our sort of conversion ratio of prospects to clients just fell off the cliff. But, you know, we continued on. But then the problems were, if someone had $1 million and they added another $1 million, increasing that retainer was not really very successful. But, you know, if it went from $2 million to $1 million because they took money out, you know, the first thing they did was say, “Well, don’t we need to revisit the retainer fee because we have less money?”
Michael: Because you were still trying to set a retainer fee that at least in some way related to their assets so they had some expectation or they just came to the table all by themselves and were like, “Hey, you have less of my money, I shouldn’t have to pay the same retainer fee?”
Harold: Yeah. No, that was exactly right. They just came, “So we’ve got less money, so we ought to be cutting the fee.” I don’t remember. I think we tried it for two or three years and then finally threw my hands up and said, “You know, intellectually this is absolutely the right thing to do, but maybe someone else can do it, but we’re completely unsuccessful. I’m completely unsuccessful doing it.” So we went back to the AUM. So again, I don’t disagree with the arguments in favor of other structures, I just don’t think they’re going to be viable.
Michael: Yeah. Well, and this is why, you know, I’ve said for quite a few years now like, look, I’m incredibly upbeat about the potential for the retainer model. Obviously, we’ve got a whole, you know, group at XY Planning Network that’s doing this specifically around financial planning monthly retainer fees working with younger clients. You know, charge them $100 or $200 a month for ongoing planning, or $300 or $500 or whatever your number is. But to me the distinction of that has always been, like, I’ve advocated retainer fees to reach markets that you literally can’t serve with AUM. Like you can’t do AUM with a young person. Like, there’s no A, there’s no assets. They’ve got income, like, they can pay you, but there are literally no liquid assets available to invest. So the only way you can work with them is you have to charge them a fee for your services. So off you go, you charge them a fee for your services. And we’re finding a lot of people there are willing to do that.
But, you know, as soon as you take it into an affluent market and go head-to-head against the AUM model, it gets harder, for all the reasons you said. Like, just there’s a lot of positive client psychology around how the AUM fee works. You know, for good firms, it just means clients are less objecting to the fee. Unfortunately for bad firms, it means you can do really crappy financial planning and investment work and clients sometimes don’t even realize how much they’re paying, right? So there’s a good and a bad to having, you know, what I call an AUM fee. Like, it’s transparent but not salient, right? Like, it’s there. You can see it. It’s not buried like commissions often are, but it’s not salient. It’s not slapping on your face.
Harold: Yeah. Yeah. Yeah, you know, I agree. And we’re looking at this sort of structure you’re talking about for those other targets and ones where it doesn’t fit, and I think those are very viable potential solutions.
Michael: So are there other things that you had, you know, put forth and tried in the firm over the years that just didn’t work out or didn’t work out at all the way that you’d expected?
Harold: I’m trying to think. Really nothing else comes to mind. During the tech boom, we had clients coming in unhappy because their friends were getting rich, you know, investing in, you know, these strange tech companies. And standing back you said, “You know, we tell our clients that our goal is to help them sleep well at night. We have clients not sleeping well because, you know, they don’t have bragging rights. You know, they go to cocktail parties and they’ve got very boring portfolios.” So I developed what we called, I think I called the opportunity portfolio or something like that. As I remember, it had six different really go-go tech investments like the, you know, QQQs, Nasdaq. We looked through and picked those clients we thought were not happy and figured out well, how much could they afford to lose without impacting their plan? Somewhere like between $50,000 and $100,000. And we said, “Well we have an option for you here, portfolio.”
At the time I did the original letter and include, you know, “We recommend you not do it,” but my partners vetoed that. So we just said, you know, “Here’s an alternative.” And our criteria was that they could afford to lose half of it and not affect their lifestyle. And I think we had, I don’t remember anymore, maybe 10 people do it, and sure enough, it lost about 50%. And the only response we got from a number was, “Oh God, thank God you didn’t let me put all my money in this.” So that was fairly effective.
Michael: So, like, would you frame that as this was a success? Because, yeah, they invested and they got clobbered, but at least by compartmentalizing it I, you know, gave them an opportunity fund so they could invest a little, and that’s actually what kept them from investing everything, in which case this would have been a full balance sheet catastrophe instead.
Harold: Yeah, exactly. It was a pure behavioral strategy. And our core and satellite really is, I mean, part of the design, the satellite is today 20% of our equity allocation, and the target is net of expenses and taxes. Over an economic cycle, it’ll provide 2% over the world, you know, EV world index. And, you know, my thought in originally designing it was, even if it breaks even, it still would be…with, you know, the world markets, it would be a valuable because it’s providing bragging rights because the balance of our portfolio is pretty boring. So, again, I’d said, “We’re financial planners, so our job isn’t to make people rich. Our clients come to us basically rich. It’s to, you know, help them enjoy the quality of life the way they envision it, and help them to the extent we can sleep well at night.
Michael: So as you look back, you know, what surprised you the most about building an advisory business?
Harold: That we grew to the size we are today. I still shake my head at that. I certainly never envisioned that. It’s been fun. It’s been exciting. And certainly, the credit goes to, you know, my partners, my staff, and everyone else. And as I said, just a lot of luck being at the right place at the right time. I mean, I was lucky to start in this, you know, at the very beginning of what I consider our profession. But, yeah, what surprises me is that we’re where we are today.
Harold’s Thoughts On The State Of The Professions And The Direction of the CFP Board [1:29:55]
Michael: And you had made the comment earlier, you know, around the profession that we’re starting to become a profession, but I think, as you’d frame it, like, we’re not quite there yet. How do you look at the financial planning profession? Are we or if we’re not, like, what does it take to get there? What’s missing?
Harold: It’s going to take, and I don’t know if it’ll ever happen, a requirement that if someone says they’re a financial planner, that they’re held to certain standards. Basically the kind of standards the CFP Board has established. And, you know, without some regulatory authority, states or the SEC, requiring that, I don’t know when and if we’ll get there. Certainly we’re a long way towards that, you know, now that we have educational programs and degrees in financial planning, but the reality in the day is if you want to be a financial planner, you know, as I tell a new client, you know, get a piece of cardboard and a crayon and write “financial planner,” put it on the door and you are one. So that’s not exactly the basis of a profession.
Michael: So to you it’s about creating those, I guess, like, standards and essentially barriers to entry of saying like, “We can’t be there until we say you have to do these things to be a planner.” And if you haven’t done these things then you’re not allowed to say you’re a planner, and that’s what starts to draw up a line?
Harold: Yeah. Yeah, I mean, certainly, something that the public can count on. If someone is using that title then it has some substantive meaning to it. Just like a CPA, MD, you know, LLB, you know, that admitted to the bar, that sort of thing. Right now, there’s no meaning to the term that the public can count on.
Michael: And has the CFP Board and CFP certification side of this evolved the way that you expected since you were involved 20 years ago?
Harold: To a certain extent it’s evolved well beyond I expected and that I’m comfortable with. I mean, it’s certainly done some incredible things, but it’s gotten well beyond what I envisioned the role of the board being.
Michael: How so?
Harold: I’m just trying to be politically correct. Lots of different efforts that I would rather see focused on just the mark itself.
Michael: As opposed to the Center for Financial Planning and the research work and the other things…and the things they’re doing in that direction?
Michael: What about in terms of the PR campaign? You know, marketing the marks to the public directly?
Harold: Needless to say, anything helping make the public aware of the marks I think is great, but I’m not particularly persuaded that, you know, that’s been a good investment. I mean, certainly the board has spent a significant amount of dollars, but that pales in comparison to what the competition can do. So I’ve not been a big believer in the efficacy of those resources in that area.
Michael: So similar to the discussions early on of just, you know, we… If there’s sort of one indirect thing I take away from this conversation it’s that I think we all still grossly underestimate just how absurdly large the marketing budgets really are of some large firms compared to our whole space?
Michael: And what about in terms of the world of IAFP and ICFP, you know, becoming the FPA and going that direction? Because I know you were involved a few years before the merger happened. So, I mean, do you…like, were you a fan of seeing the merger? Did that turn out the way that you’d expected or were you in the camp of keeping it separate?
Harold: I was a fan of the merger but not a fan of, I’m not sure, driving away may be too strong, but becoming totally CFP-centric. I mean, I loved the IAFP, I love the ICFP, but desperately miss the concept of the old IAFP where sort of everyone is welcome. I liked going there and meeting insurance agents and accountants and attorneys and everyone else. I mean, that was…I needed that. And, you know, I’m not sure why someone wants to be a second-class citizen in terms, and the answer is they don’t. And it doesn’t seem particularly successful in being CFP-centric because there are not all that many CFPs as a percent of CFPs out there that are members.
Michael: Yeah. Well, it’s, you know, CFP Board’s penetration even of CFPs has declined basically every year since the FPA was created. You know, it was, about 50% of CFPs were in the organization 20 years ago and it’s probably barely over 20% now. It is a strange phenomenon to me that, like, the FPA managed to figure out how to be just CFP-centric enough to turn off non-CFPs while not being CFP-centric enough to actually attract CFPs.
Harold: Yes, I absolutely agree. And the new, you know, one CFP is not something I’m in support of, for the reasons both you and, you know, Bob Veres have written about. Yeah, no, it’s gone in the direction that I’m not supportive of.
How Harold Views The Wealth Management Space Now [1:35:59]
Michael: So has wealth management more broadly sort of evolved and grown the way that you expected? You know, when you were putting out these discussions, like, it was a very unique positioning then. Now I feel like most advisory firms try to use the wealth management label, if only because, you know, it sounds more sophisticated than the financial planning, or it skews more affluent. Does that just mean wealth management sort of fulfilled this vision that you had or is it time for the next thing? How do you view the wealth management space now?
Harold: No, the term has, in many cases, been, you know, moved to beyond what I envision and a term I don’t relate to, which is almost more family office-oriented. You know, I kind of like my idea of it being a fairly simple subsector of financial planning. So I don’t relate to the way it’s often used today.
Michael: Interesting. Interesting. So, like, where do you think it needs to be next? Or is there some…?
Harold: No, I just like to see it being, you know, toned down a little bit perhaps or just, you know, a little more generic and back to, you know, the kinds of issues that I wrote in then “Wealth Management” and the new “Wealth Management.”
Michael: So is there anything you wish you’d done differently in how you launched and built the firm? Like, you know, anything you know now that you really wish you’d known then?
Harold: Not really. Again, I’ve been lucky with my timing and the people I’ve associated with. And it’s just been a wonderful ride. So nope, no regrets.
Michael: What was the low point for you?
Harold: I’m an inherent optimist. So you know, if glass is almost empty, my response has always been, “Wow, look how much room there is to add to it.”
Michael: Was there a particularly harder time though in kind of going through the journey?
Harold: Yeah, probably the CFP Lite was one of the darkest times. You know, that was a pretty miserable experience. I would say crash of ’87, which was short lived, but one of the scariest times. It did look like the world was coming to an end. And then the grand recession because we’re passionate rebalancers. By the third time we got around to telling people we were selling bonds and buying stocks, that was fairly painful. Nothing that ultimately wasn’t survivable.
What Comes Next For Harold [1:38:42]
Michael: So what are you doing now? Like, what are you working on now? What comes next?
Harold: Still retired from teaching but still involved in the practice as a member of the management committee and the investment committee. I’m just not responsible for any daily responsibilities. And a little bit of expert witness work still, and continuing to write sort of, you know, doing a paper or a column here and there, and just kind of enjoying this semi-retirement, doing lots of cruising. Still some speaking. Just came back from Dallas last week doing a program for the university. We’re offering a master’s program in conjunction with Fidelity. So just being a dilettante.
Michael: So I know you were…you know, we haven’t really gotten to talk about it much, but you had a nearly 10-year stint of teaching at Texas Tech University in the financial…you had nearly 10-year stint of teaching in the financial planning program at Texas Tech along with Deena. So I guess I’m just curious, like, as you talk to students and young people coming into the industry today, like, what do you tell them about the opportunities and the best path to be a successful advisor today?
Harold: I tell them they’re unbelievably lucky picking an extraordinary profession with extraordinary opportunity that I don’t understand why everyone doesn’t come into our program or programs like ours because it’s interesting. It’s fun. You get to deal with people. And again, the opportunity ultimately of becoming an owner of a practice is extraordinary. So no, I mean I think everyone should tell their kids and grandkids, “You ought to look at this. This is the place to be.” As Deena says, someone graduates our program, you know, they walk out with a degree in one hand and three job offers on the other.
Michael: And where do you focus in terms of…what’s the key for them to succeed? Where do you try to focus them?
Harold: I mean, I’m trying to think. I’m not a particularly good mentor. Just, you know, be intellectually curious and work your tail off. It really comes down to that.
Michael: Be intellectually curious and work your tail off. Somebody said that.
Harold: Yeah. That’s about the best advice I can give them.
How Harold Defines Success [1:41:29]
Michael: So, as we wrap up, this is a podcast about success, and one of the things we always find in the discussion is just that literally that word “success” means very different things to different people, sometimes different things to us in different stages of our own lives. So, you’ve certainly built what anybody would objectively call an incredibly successful business, but how do you define success for yourself?
Harold: Looking forward to getting up every morning and go do whatever you’re doing. You know, enjoy it, as opposed to, you know, “Oh my God, I’ve got to go to work today.” You know, I’ve obviously worked hard and six, seven days a week many times, you know, 10, 15 hours, but it’s because I wanted to and because I enjoyed it, not because I had to. And that to me is success. Just having a good time and enjoying what you’re doing and working with good people. And, you know, in our field, good clients.
Michael: Well, amen. To me, it’s still, as you said for the students, like, it is the powerful thing about financial planning. Like, we get to wake up every day and help people and get paid pretty darn well for it. Like, it’s a…
Harold: Yeah, absolutely.
Michael: Yeah, it really is an amazing career opportunity these days.
Well, thank you so much, Harold, for joining us on the “Financial Advisor Success” podcast.
Harold: Well, thank you so much for inviting me. That was fun. I enjoyed it, and I was complimented to be asked.
Michael: Absolutely. Thank you.