Welcome back to the 108th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Jon Guyton. Jon is the founder of Cornerstone Wealth Advisors, an independent RIA in the Minneapolis area that oversees $240 million in assets under management for about 240 mostly retiree clients.
What’s unique about Jon, though, is that he doesn’t only run a financial planning firm that serves retirees, he’s also contributed to the retirement research himself, with several seminal articles in the mid-2000s on creating retirement withdrawal rate guardrails and decision rules, and now has spent the past decade actually implementing those strategies with clients and finding out what really works in practice.
In this episode, we talk in depth about Jon’s retirement planning approach with his clients. How he separates out a client’s prospective retirement expenses into core and discretionary categories, the way he applies decision rules to adjust that retirement spending in subsequent years, and the way he then creates multiple portfolio buckets, each with its own investment policy statement, to handle each of those retirement spending categories but notably does not create a cash bucket for short-term expenses because of the consequences that cash drag can have on actually reducing a client sustainable retirement income in the long run.
We also talk about the unique resident program that Jon created in his firm, similar to a medical resident program, to leverage next-generation talent. Why he deliberately chose a model that brings in young advisors with the plan that they will leave after three years, how having a limited duration financial planning resident program has actually allowed his firm to attract even better talent regardless of geography, and the key traits that Jon has found that really make a financial planning resident and in the long run a financial planner themselves more successful.
And be certain to listen to the end, where Jon shares the challenges he faced in his own advisory firm at the start and how even though today he’s the owner of an incredibly successful $240 million AUM practice, in his first year in the business, he qualified for the low income Earned Income Tax Credit and had to continue for nearly 4 more years before he finally reached the point of earning a livable wage from his practice. Because the reality is that the first few years are incredibly difficult for any financial advisor, even those who are incredibly successful in the long run.
What You’ll Learn In This Podcast Episode
- An overview of Cornerstone Wealth Advisors, Inc. [07:49]
- The approach Cornerstone is using to attract younger clientele. [12:18]
- Cornerstone’s staff structure and how they divide clients. [23:19]
- The firm’s compensation structure. [28:03]
- The financial planner residency program Cornerstone created in 2009. [35:18]
- Some key lessons from developing Cornerstone’s residency program. [49:17]
- Jon’s unique retirement planning process. [1:01:41]
- Why some Cornerstone retiree clients have up to three portfolios and the tools used to track them. [1:11:58]
- What’s coming next for him and Cornerstone Wealth Advisors. [1:42:21]
Resources Featured In This Episode:
Michael: Welcome, Jon Guyton, to the “Financial Advisor Success” podcast.
Jon: Hello, Michael. It’s good to be here.
Michael: I’m excited for our discussion today because you sit at, to me, an interesting, I guess, intersection of the advisor world, that you are a firm owner that runs an advisory business, a planning practitioner that sits across from clients, and someone that’s also done some research in this space. You published a number of very, I think, important, very influential articles in the mid-2000s around safe withdrawal rates, sustainable retirement income, set forth a framework that frankly I think we still haven’t adopted as much today as we should have around setting guardrails on retirement spending and establishing decision rules and creating spending withdrawal policy statements.
So I don’t just want to talk about some of the research today. You know, I’m sure we’ll chat about it a little, and we’ll link to it in the show notes for people that want to read it, but I’m particularly excited to talk about what someone who does that research then literally does with it in their practice across from clients, right? Like, which pieces have you found works with clients? What does it look like in practice sitting across from clients doing this? And kind of that intersection of, there’s stuff that we do because we research it that’s interesting in theory, and then there’s stuff we do in practice with clients. And I’m always fascinated with where those meet. Like, how do we take ideas and put them into action?
Jon: Yeah, because sometimes they don’t work and you find yourself then thinking, “Well, what made me believe that was a good idea?”
Michael: It’s part of the entrepreneur’s itch, right? Like, “I’ve got this idea to try.” And then we try and it’s like, “That did not work out as I expected.”
Jon: Yeah, yeah, but it kind of takes you to the next place. But I’ve always, you know, like you pointed out, first and foremost, I am a financial planner. At the end of the day, what I do more than anything else is sit with clients and work on things that affect clients’ financial well-being. And so early on I think the thing that always drove me, you know, there was a part of me that once wanted to be a university professor but that didn’t work out, but that part of me kind of intersected with part of me that looked at the way people behave and wanted to find the closest linkage that I could come up with between what actually worked empirically and what would blend in with the way human beings behave and then continually to look for the places where those things intersect. Because we can have the greatest theory in the world that’ll work if your client is a spreadsheet, but most of our clients are not. And so it has to work also when they happen to be human beings.
Michael: Amen. I love that. Like, we can have great theories as long as your client is a spreadsheet.
Jon: Well, and, you know, Thaler and Sunstein wrote their book “Nudge,” and in the very beginning of the book, you know, they say that the world is about…I call them spreadsheets, they call them econ. So they’re econs and humans in their language. And they estimate that about 20% of the world is econs but the other 80% is humans. We might have slightly…well, I don’t know, if maybe all the econs want to be…they’re the folks that want to be do-it-yourselfers….
Michael: I was going to say like, I think we have a smaller than representative share of econs in our world as financial advisors. I think they’re mostly self-directed. I think we get more on the other end who are not econs and had made enough mistakes and inflicted enough harm on themselves that eventually, they go, “Oh my God, I just have to hire someone else to do this for me.”
Jon: Well, and they’re the kind of people that frankly, because being right is most important and admitting they were wrong is the most lethal thing to do is they don’t want to do that, so they just keep trying to fix themselves. But we’ll go with a 20/80 split. And so, you know, it basically had to work and resonate with people that were in that 80% group.
And I guess the thing that’s always… You know, when you think about the typical financial what you should do if you don’t want to shoot yourself in the foot, you know, buy low, sell high, save more, spend less, none of those things appeal to us. None of them except for the things that you probably should do when you’re retired and spending money, which is if it gets a little rough out there, cut back a bit. That actually goes with the grain. That is a tailwind. That is not against the grain and a headwind. And that really makes a big difference I think.
An Overview Of Cornerstone Wealth Advisors, Inc. [07:49]
Michael: So, as we dive in here, I think as a starting point, can you just give us an overview of your advisory firm, Cornerstone Wealth, as it exists today just so everyone has a little bit of context for your firm, your clientele, who you work with, what the business looks like?
Jon: Sure. Well, we have clients that, you know, through kind of some different iterations, some go back over 25 years. Because, I basically began as a financial planner and knew that that was what I wanted to do by the time I was 25 years old and was doing that. So things have evolved, as lots of things have evolved over that time period.
But Cornerstone Wealth Advisors today is an RIA firm. Everyone who interacts with clients in any kind of advisory or client service capacity is a CFP or is nearly there. The way we’re currently structured, we have three financial planners who have primary relationship responsibility for clients. I’m one of those three. We have two financial planning residents, which are people who have graduated from financial planning degree programs, in many cases, not all. This is their first full-time job ever. It’s certainly their first full-time job in the financial planning profession, and they aspire to have advisory roles with clients. And they are with us for the first three to four years of that career and then basically, they leave. And then we also have a client service associate. We outsource a number of things. We use Orion, so we don’t have anybody reconciling things. So stuff that other firms might have people doing, God help you if you still do, you know, we don’t. So our headcount right now is six, and that’s up from where it was a few years earlier a little bit. And we work with about 240 households in over half the U.S. states where people don’t have any connection to Minnesota because no one wants to retire to Minnesota
Michael: I feel like they do tend to retire away from Minnesota more than retiring to Minnesota.
Jon: They do. They do. But, you know, the state is considering a new PR campaign which says, “We have 10,000 lakes and winter is getting better, so, you know, come on down.” But still, that’s not really working all that well. So I hope that’s a helpful intro. For people who like numbers, the assets under management is around $240 million. Does that give you what you wanted?
Michael: Yeah, I think that helps. And so, as I think about business from the math, so about 240 households, about $240 million under management, so, like, average client is right there at $1 million. You know, you’ve published all this research around retirement planning, like, is the focus of your clientele retirees as well? Is that where you are, where these are all folks in their, you know, 60s and 70s.
Jon: Well, they’ve gotten older like I have. And that’s funny to watch how that evolves. But, you know, very early on, and I’m talking like 25 years ago, I kind of had this crystallization that I wanted to work and anything I was involved with I wanted to be working with clients where doing financial planning well could actually make the difference between them being able to live the lives that they wanted to live or having to significantly compromise that. You know, we all know people that have so much money that they actually don’t need to do planning well. They can mess a lot of things up and they’ll still have enough money. And, you know, we have some clients where that’s probably true, but that’s not the meat and potatoes of who we work with. And so I think that kind of reflects our clients now, where we are attracting clients that are above that $1 million mark more often now than we’re not. You might call those legacy clients. We’ve never told someone to leave because they were a great dance partner once but not anymore. You know, I would say right now about 40% to 45% of our clients are retired. Another third of them plan to within the next five to eight years.
The Approach Cornerstone Is Using To Attract Younger Clientele [12:18]
And we’ve actually started to attract a fair number of clients that are actually under the age of 40 because of some special service and pricing models that we’ve put in place for them, which is really kind of cool. They’re the clients that 25 years ago would have been considered really small. And we basically bet on these people, and they have very successful careers and expand their earnings and assets geometrically, and then they become these kinds of clients that everybody wants. But you start with them 20 years earlier.
Michael: So what is the model or approach that you’re using in trying to work with younger clients?
Jon: Now, why would you ask that Michael?
Michael: Well, I happen to have a personal fascination with that particular type of model.
Jon: Well, the first thing was what I just said, we realized that…you know, we looked at clients today that might have $2 million or $3 million and were with us 20 years ago and it’s like, “Well, 20 years ago,” or they’ve worked with us for 20 years now, but saying, “20 years ago, what did they look like?” And they looked very much like the kind of clients that today you might persuade yourself that you really wouldn’t want to have because they weren’t, you know, profitable enough or whatever. And that was, you know, plainly stupid to think that.
So then you go, “Well, how do you find a way to work with these folks?” And we just started to charge them a percentage of their income. And with the idea that, “Well, as their income rises our fees will go up, their planning work will get more complex, and it more or less will probably work out. And we’ll find out.” And we’ve been doing that for about a half a dozen years, more often with adult children of clients than, you know, people who have no prior connection to us. But the model isn’t any different. And so that’s how we do it. And they seem to like it.
Michael: And what percentage do you charge? Like, what are you finding is palatable to people?
Jon: Well, we haven’t really experimented with a lot. Early on we started with a flat 1% of income. And so that’s basically how we’ve kept it. But we do…because we’re doing comprehensive planning, we see their tax returns, we see their W-2s, so we do make sure we count all their income.
Michael: And is it, like, literally just I go to the front page of your tax return, go down to that AGI on the bottom right and, like, 1% of that, that’s our fee?
Jon: Oh, no, we add back in your 401(k) contribution Michael.
Michael: Oh, okay. So, you know, you don’t want to get punished the fact that they’re saving in pre-tax accounts.
Jon: That’s exactly right because that’s just…you know, obviously, that’s good advice.
Michael: Well, you just have to have them save in Roths and then their AGI will be higher.
Jon: That’s true, but, you know, that’s why I wrote a column a couple years ago called When the Roth is Wrong.
Jon: Boy, that’s something we see people that come in and talk about how tax diversified they are and all this stuff they’re doing, and we just go, “Wow, do you know how much money you’re spending to do that?”
Michael: Yeah, I continue to struggle with clients that come in, you know, there’s this irony that, like, the people who are the most bothered by the taxes they’re paying because their income is the highest are the ones that tend to do Roth accounts because they don’t like all the taxes they’re paying. And the truth is those are usually the worst possible people to do Roth accounts. They’d be much better doing good old-fashioned boring pre-tax retirement accounts and convert it later when you retire and the rest of your wages go away and you can convert it at a lower tax bracket.
Jon: Right, even if you want to pay 22% of the marginal federal rate later, or heaven forbid, 24%. But yeah, it’s true. And that’s kind of one of the things that, you know, we’re talking about…practice in working with clients now. But, you know, it’s interesting, you learn a lot about what works from a messaging perspective simply by listening to people, and sometimes by listening to what they don’t say.
You know, the financially well-off consumer knows a lot more today than they did 10 or 20 years ago. There’s no question about that. And of course, the things that they think they know a lot about and are very pleased to tell you what they can already do is almost entirely in the investment area. But the very people who will say, you know, will so strenuously, you know, believe that they don’t need any help in area number one are quick to admit that they need a lot of help in area number two, and area number two is tax planning. And, you know, whenever we just go there, we get a lot of openness. It’s like, “Yeah, you know, I’m going to have to have a plan for…you know, my RMD start next year and I’m going to have to have a plan.” It’s like, “Well, buddy, you needed a plan about six years ago.”
Michael: Yeah. When we could have been doing all those partial Roth conversions while your income was low before you hit where your RMDs are imminent.
Jon: Right. But it just serves to point out, you know, again, this is people’s humaneness is that, it’s like, “Okay, you know, I’ll find an entrance or I’ll find an entree into the conversation where I’m not going into the wind.” You know, when you’re going against that kind of force, which is their resistance, you won’t win. You know, even if you can do great things for them, you will never find a way for that persuasion, if you will, to occur to them, so just stop. You know, you’ve got to find another thing to talk about. And it’s been fascinating in the last few years to see as more and more baby boomers have retired or getting closer to that moment, that they just readily admit that they know they have a problem and they don’t have a clue about how it works and how to address it. So, yeah, happy to share that.
Michael: I am curious, though, just going back for a moment to the services for younger clients as well, what do you do for them for this 1% of income fee?
Jon: Well, we find that rather than doing what a financial planner might think of as a plan, however you deliver a plan, what we do more for them is planning, which is to take the things that they’re doing right now, so, that are going on in their life right now, and focus in on those things. So for instance, how much money should we be saving? You know, we just got a promotion or somebody just went back to work, you know, rather than say, “Well, we’re just going to…we’re going to rerun your retirement projection,” which, you know, good grief, when you’re 33 years old has so many assumptions in it that it can’t possibly be right, we just say, “Oh, well, there’s this great piece of research out there from about 10 years ago that Wade Pfau did on safe savings rates which basically says if this percentage of your income over this period of time is going into your retirement savings then you’re going to be fine. And if you can be at that number or a little bit above it, you’re going to be fine. And we can fine-tune it later.”
It’s kind of like, you know, there’s two parts to saving for a kid’s college education. There’s the first part where you know you should be doing something but you have no idea how this child is going to turn out as a parent. You have no idea what kind of school they’re going to go to. You have no idea what the landscape is going to look like. You have no idea if they’re even going to go to college. And the second part is you start to have a very good idea what this is going to look like. It’s like, “Oh, we really are going to need a lot of money,” and so then we ramp it up. And so no one can save for college on a flat dollar amount per year, it has to go up by large increases because no one can afford to do that level of savings. You know, that consistent saving amount number, you know, when their kid is three years old because their income isn’t high enough.
So, you know, it’s just continuing to look at things that change. You go, “Okay, now that we know this, how would we change this? How do we think about that?” So it’s much more I guess you would say dynamic and flexible. And we have almost a checklist of things that we want to go over where we’ll say, “You know, well, let’s talk about your life insurance. Let’s talk about your disability coverage. You know, let’s look at the health plan that you’re choosing.” It’s just all the kinds of things that proactively we know that good financial decision-making and planning needs to look at, given where they are in life. And we do that. And then when we meet with them again, usually for them it’s once a year, we’ll come back to all those things and get updates and update those recommendations until they’re 40, and then we say, “Okay, time’s up, you don’t get this deal anymore.”
Michael: And that’s specifically how you limit it. Like, the 1% of income fee is just, you only get that if you’re under 40?
Jon: Right. And then we have the ability to extend them if we want. Like, you know, one spouse is three years older than the other. So when are you 40? Well, you know. And so we prepare them for it.
Michael: But I was going to ask, like, how do you…you know, how do you make sure you don’t have your retired clients come in and be like, “Wait, 1% of my retired income is a whole lot lower than 1% of my retirement portfolio, so Jon, how about you charge me 1% of income and not 1% of assets?”
Jon: Yeah. Well, that conversation doesn’t go on very long.
Michael: Right. But that’s why, because you say, you know, “Well, since you are retired and not under the age of 40, that is not an option for you here.”
Jon: Right, right. And we specifically on our website have…you know, it says, you know, financial planning for generations X and Y. So that enables us to…people pretty clearly get the idea of where they fit and where they don’t.
Michael: Which to me is always one of the interesting pieces around segmentation. I have known a lot of advisors that wanted to build alternative models for younger clients and get really worried about like, “What if my existing clients want to do that fee structure as well?” And, you know, as you said, like, as you put on your website, it doesn’t have to be that hard. Just say, “Here’s our service for retirees and here’s our service for Gen Xers and Gen Ys.” And, like, your retirees aren’t Xs and Ys, they’re not going to self-select into that group. It’s not for them. Like, it gets pretty clear pretty quickly.
Cornerstone’s Staff Structure And How They Divide Clients [23:19]
Michael: Interesting. Interesting. And so you’ve got this base of 240 clients and 3 financial planners. And I was struck that, you know, you simply said like, the firm has three financial planners, you just happen to be one of them. So can you share a little bit more about that, of what that model looks like of who has what clients, who leads what clients? You know, I think for a lot of firms with six employees, it tends to be, you know, a founder, who is the lead advisor, some support advisors who help them. And, you know, it kind of runs down like a pyramid. And that’s not at all how you frame your planners with clients.
Jon: No. I would say that I’m in less than half the client meetings that occur. So, you know, it’s been a wonderful thing over the years to have people who’ve had very long stays at Cornerstone, that are very, very good at what they do and aspire to be very, very good, and where it’s just not…it’s neither efficient nor necessary for us all to be in the meetings. And yet, you know, in client conversations, a lot of times we can finish each other’s sentences. Yeah. So that’s what I mean.
We have Andrea Eaton, who has been at Cornerstone for 15 years, you know, has a lot of meanings that I’m not in. Sara Kantor, who is a younger…earlier in her career as a CFP is…you know, as she continues to take on more and more, I guess I’ll say has more and more of client interactions in meetings that she doesn’t need anyone else in the room that has more experience than she does, I tend to be in more of those meetings. So, yeah, that’s what I mean by that. That’s what that looks like.
Michael: And so, like, how are clients, I don’t know, set out or allocated? Like, are you ultimately still “the lead” to clients but then they support you and in certain meetings you just don’t need to be in or they’re literally like, some clients are Jon’s clients, some are Andrea’s clients, some are Sara’s clients and they’re separated out that way?
Jon: Yes, it’s that way, and there are instances where two of the three of us are in the meeting. But I would say we each have about 50% or more of the clients that we never see. So, yeah, that’s different from a scenario where, you know, there’s one person that is in all the meetings and obviously has a lot of stuff that that person doesn’t do. I’m just trying to think if I need to say any more about that. Don’t think so.
Michael: Well, so how do clients get set as far as who’s the primary, who’s the lead? Like, are these clients that Andrea and Sara brought in versus you so they’re the lead on them? Do you transition clients to them? Like, how do they get the clients they’re responsible for versus the ones that you’re primarily responsible for?
Jon: Right. Well, we started making that distinction a number of years ago. And now, whenever there’s a new client, it’s basically, what is that new client’s, I guess, family tree? So if there’s a client that Andrea works with and that client refers someone to us, that referral is going to be Andrea’s client. And if it’s somebody that Sara or I work with, it’s going to be, you know, one of ours. It’s not going to be Andrea’s. And then if it’s somebody who has no connection at all, they read an article, they contact Cornerstone, we have an initial conversation, Andrea and I are both in those conversations, those initial ones, and then basically decide where that person, where that client is going to go as far as who works with them and who is, if you will, the lead advisor.
Michael: And so that’s just based on, like, their needs, personality, “Hey, like, we just talked to this person and I think they get along better with you Andrea than me, so why don’t you take this one?”
Jon: Right. And in that conversation, it’s one where the initial conversation was with both of us. So there wasn’t a, you know, “I talked with them,” or, “You talked with them,” it was, “We talked with them.”
Cornerstone Wealth Management’s Compensation Structure [28:03]
Michael: And can I ask, like, how does compensation structures then work within the firm? Like, are advisors that work under you on a, like, salary and bonus structure or are these revenue-sharing payments where, you know, depending on where clients go amongst your advisors also impacts you as the business owner since you get paid on the bottom line as well?
Jon: It’s kind of a combination of the two. So, you know, every advisor has a, I guess you could call it a total, think about it as number that they’re going to be paid. And it’s really a function of their experience level, the degree to which they can independently deliver advice, and the other roles that they play in the firm. For example, let’s say that you were one of those people Michael, and based on all those things that I mentioned, that we determined that your number was going to be $160,000, then you’d have another…there’d be another choice to make, and that would be to decide how much of that $160,000 was going to be base salary and how much of it was going to be what we would call bonus.
So the base salary piece, let’s just say you wanted to split it evenly and, you know, I agreed that that was okay. So $80,000 would just be paid out like a flat salary every pay period straight across. The other $80,000, which we would call bonus, the question is, well, how much of that do you actually get? And if you do the job you are supposed to do and you don’t have any, you know, big mess-ups or anything like that, you are going to earn 100% of that $80,000 bonus. However, that $80,000 number is tied to the revenue of the firm, not the revenue of a subset of the firm’s clients. So that $80,000 is subject to a multiplier. It could be multiplied simply by 1 so you get $80,000. It could be multiplied by something as much as one and a half or as little as eight-tenths of a percent revenue. Revenue this year basically over revenue last year.
And so essentially, if the revenue change is no more than 2%, up or down, then you’d get the $80,000. If the revenue changes by 2% to 4% in either direction then…if it’s grown by that level then your multiplier is, I think the number is 1.15%. So you’d get $80,000 plus 15% more than that because the firm did…well, the idea is that you are…the level at which you interact with clients has a real opportunity to impact their experience. They could refer people in. They can leave. They can be happy. They can be unhappy. And while there are other forces that affect the firm’s revenue that you and I have no control over, you have a lot…you know, as you advance in your relationships with clients, you, of course, have more ability to impact that.
Michael: Okay, I see. Because I was going to ask, like, you know, if it’s just, “Hey, you can have a portion as base and a portion as bonus,” like, why would you not just pick 100% as base and not put any of your compensation risk as bonus? But the answer is because if the firm grows, the portion you take as bonus can get a nice upward multiplier effect. And so you get to decide how much of your comp do you want to put at risk to be variable up or down, based on the firm’s growth targets and growth success. But if you’re willing to put more of yourself at risk, you can get more upside out of it.
Jon: Correct. We get to decide normally. Of course, you don’t just come in and be at $160,000, you start at less. And as your compensation grew, one of the philosophies is that, as you have more and more ability to affect the client’s experience then a bigger and bigger percentage of your compensation should be on the bonus side. And that’s even true in our residency program, you know, that once…if someone starts the third year of their residency and they’re interacting in more and more meaningful ways with clients, they are already influencing that client experience. And so, I think for them it’s like 10% of their total compensation is in this bonus side. They don’t have any say in that matter. But fortunately, it’s worked out for them better than if we hadn’t done that.
Michael: And these are…these targets up or down, like, they go up or down, right? So if my bonus is supposed to be $80,000 but the firm has a bad year and revenue was down, like, I get a negative 15% multiplier, my $80,000 bonus turns out to be only $68,000?
Jon: Well, the downside multipliers are less…let’s just say hurt less than the upside multipliers.
Michael: Okay, they’re gentler.
Jon: They’re gentler. There aren’t as many of them. I think it goes 1.15% then 1.33% then 1.5%. On the downside, it’s 0.9% and 0.8%. There’s nothing below 0.8%.
Michael: Okay. But I guess the idea, like, it gives them a little bit more incentive to try to conserve revenue, save clients, do what they can in tough times for the firm or down markets or whatever it is because it reflects directly on their comp.
Jon: I don’t look at it that way. I don’t see people saying, “Well, I could make this additional effort. And I think I will because it affects my compensation this way.” I look at it as, you know, putting the client’s interest first, showing due care, treating people the way you would treat your mother. You know, people just do the things that are in their nature, but in doing the things that are in their nature and based on what they know will work for clients, they are, almost as a by-product, affecting the client experience. And so, I think it’s important for people to know that they are getting back. You know, at least if, you know, everything works out in their favor, you know, they have the ability to get more back than they anticipated because they help the client…the client’s experience was better than they would have otherwise expected.
Michael: So it’s…I guess it’s less trying to incentivize behavior per se and more of just, “When things are going well, we’ll share a little bit more of the wealth with people who are doing good work?”
The Financial Planner Residency Program Cornerstone Created In 2009 [35:18]
Michael: So talk to us a little bit as well about these financial planning residents. You know, you mentioned them briefly. Like, they’re not advisors, they’re, I guess, a step down. They’re more like at a paraplanner level. They start with you, they’re there for three or four years and then they leave. So what’s the structure with these residents?
Jon: Well, if you think about…I’ll look at it from the residents’ perspective. Let me start with the firm perspective. You know, every firm has things to serve clients well. They have things that have to be done well that frankly, you don’t need any financial planning knowledge at all to do. And then there are things that need to be done well that…early-level planning technical knowledge without a lot of experience that someone who let’s just say is right out of a financial planning education program can do or can be taught to do in fairly short order. And then there are other things that, of course, only come with experience. And I look at that third…I look at those two categories together as…the second and the third category as these are what you need advisor-level people to do. And I call that advisory capacity. If you are going to have 240 clients and they have certain things that only people with a financial planning knowledge and experience can do, the firm needs to have that level of advisory capacity.
Now, if you’ve been doing this Michael for 12 years and someone else has only been doing it for 1, there’s a heck of a lot more you can do and do well than that other person. And so we need to find a way for you to be doing more of the things that only you can do while at the same time also making sure that the other stuff is done exceptionally well. And I have a belief that everything that is done with a client is done better when it is done by someone through the lens of the comprehensive financial planning process or that overall planning orientation.
I think it was a long time ago, it was either Guy Cumbie or Dave Yeske I heard once say that financial planning done well is more than the sum of its parts, whether it’s investment management or retirement planning or risk management or cash flow or tax planning or estate planning. Okay, I just named what, five things there? That if I have five people who independently do each of those well, that will not be as valuable to the client as some overall element where everything takes the other aspects into account. And so as a result, we need that kind of advisory capacity.
And so the idea is to have folks that are early in their careers, the things that we don’t want you to be doing Michael, you’ve been there for 10 years. You know, we don’t need you to be doing tax projections. We don’t need you to be figuring out how much Roth conversion should be done. That’s something that, you know, we could teach, you know, someone by the time they’re nine months out of Virginia Tech with their financial planning degree, if they’re really good, they can be doing that. So the firm needed more of those kinds of people. You know, firms also have an issue with okay, as those people succeed in that, they get to a place where they want to be doing more and more and more and more. And smaller firms and even bigger firms can get top-heavy.
Michael: Right. It’s sort of a challenge to that pyramid model, right? If you have like one senior person at the top supported by two or three associate planners, like, that’s great and can leverage the person, but if all three associate planners are fantastically awesome, in a couple of years you’re going to have three people who want to be lead advisors, which means you need triple the clients to feed all three of them. And even if your firm is growing, like, just the whole nature of having a small top and a big base means eventually when your base of entry-level advisors wants to move up, either you need a zillion new clients, because you’ve got to feed all of them at once, or you have a problem. They’re competing or they’re leaving because they don’t have opportunity, and you’ve got turnover issues at that point.
Jon: You have culture issues and, you know, people are…there’s a limited amount of clients, so there’s a limited amount of turf. And so we just decided, this is kind of that same almost power versus force thing we were talking about, where if there’s a force that you can’t get around, don’t try to fight it. So what we said is, “Okay, when you get to that point where you’re ready for that and we really don’t need you up at that level, we just aren’t growing that fast,” most firms can’t grow that fast. You know, going from 2 to 3 lead advisors, my gosh, that’s 50% growth. You can’t do that. You can’t do that every couple of years. So what we say is, “Well, then you have to leave.” You know, and this is actually a whole part of the design.
And the idea came from, you know…this problem, this challenge isn’t something that hasn’t been known for a while. But it was at an FPA Retreat probably back in 2000 I want to say 9, ’08 or ’09, where I was on this panel, a career development panel, and we as panelists were dreadful. I felt bad for the audience because we really didn’t have that much to say. And it was painful because, my God, there was still half an hour to go, and so the moderator just started inviting comments from the audience.
And Carolyn McClanahan, who at that time was relatively new as a financial planner having made her transition from being a practicing physician, stood up and said, “I don’t know why we don’t have a residency program like they do in the medical profession. Where you go to school, you learn all of this stuff from the books and such and then you go and you can get your…you know, you get your bedside manner, you get your experience, applying this under the supervision of someone who really can help you learn how to apply this.” She said, “I don’t know how we do that.” And I’m sitting up there, and I said, “I don’t know why we don’t either. That sounds like it fixes just about everything.” You know, then they have to leave. We don’t have any of the things that you were just describing, and you have all of the things that I was saying that we needed. And the planners that have been there for 6 or 8 or 10 or 12 years don’t have to be doing so much of the stuff that it’s not real efficient or profitable for them to be doing.
And so the residency program began with the idea of doing that. And so when we say we have two residents in our structure, what that means is that we have basically one person that’s in the first half of their residency and someone else in the second half. Because even as someone moves through a three-year period, boy, you can move quickly up that learning curve. And if you’re…as you start to be ready to do new things, there are other things you need to stop doing, to take off your plate. And so you teach the new resident to do those things and they follow in your footsteps. And in theory, that’s how it’s all supposed to work.
Michael: And I’m fascinated by the structure because you just…you know, you take what I feel like is the fear that most advisors have, which is I hire a young person as an associate planner, I put this time and energy into training and developing them, and then they leave. And you’re making it a complete like, “Yes, we will hire them and we will train and develop them and they will leave. In fact, we’re going to require them to move on after three or four years when their residency program is done.” So on the one end, like, I’m…I think it’s interesting that, you know, you can now hire people and just sort of manage around all those cultural challenges that crop up when they get three or four years into their career and say, “I’m ready to move up” and you go, “We don’t have enough new clients for you to move up. There’s just not enough clients for you.” And then they’re figuring out what’s going on. You’ve set expectations that they’re likely to move on at the end. But for most firms, turnover is time-consuming and stressful. And it’s a pain in the backside to keep retraining new people. So, like, how do you think about that?
Jon: Well, you definitely have to decide which pain in the backside you want to have.
Michael: Yeah, I guess we really sort of had like, you can have the pain in the butt of people who want to move up and they can’t or you can have the pain in the butt of planning to not move them up but move them on and then you have to keep training new ones. Like, it’s kind of a trade-off there I suppose.
Jon: Well, yes, that’s true. You know, it’s funny in talking to people, the conversation always comes around to this. There’s the, “Wait a minute, they leave?” “Yes, they do.” You know, Kacy Gott had this great quote once where he, you know, in describing this to someone, because there was a time when Aspiriant tried to do this, and then because they were so top-heavy, they realized that they actually needed these people to stay because they needed exactly what these people could do in three years, which is what all of the longer-term senior advisors didn’t want to be doing any more.
But before they did that, Kacy came up with this great quote, which was, “You don’t get to keep the puppy.” They have to go after you’ve raised them. And I said, “Well, you at least have to do that but the first one.” Because if the person stays then you don’t have a residency program, you have a career development track, you have an entry-level position that goes on and on and on and on and hopefully works out really well. There’s nothing wrong with that. That’s great if you can keep doing that. But you clearly don’t have a residency program, at least not in the model that Carolyn described, that’s more or less exactly like the medical profession.
And one of the interesting things we found, especially with people in their 20s and oftentimes in their earlier 20s is that, you know, and they’ve told us after the fact that they stay because they know that they get to leave. Like, would I stay three years if I thought it was open-ended and nobody really knew because it wasn’t open-ended? But the idea of saying, “Well, this is a three-year commitment. I can make that commitment. I wouldn’t want to live in Minneapolis or Houston or wherever it might be. You know, I wouldn’t want to move there and live there indefinitely because I want to be here or I want to be there. But I could see myself doing that for three years, and I’ll make that decision.” It just takes a lot of some of the other things off the table.
Michael: That’s an interesting point. Like, you get a unique opportunity to attract different and potentially better talent. Especially if you’re not already in, I don’t know, a dense metropolitan area that people are moving to in the first place, you can get more people than you otherwise would have because they simply say, you know, like, “I don’t know if I necessarily want to set my career and my lifetime building with you in the city you’re in, but, like, hey, you’ve got a good firm and opportunity. I get to learn and do good stuff for three years and then to make the next stage. Like, sure, I’ll do that.” In the same way that I have…we have both clients and I have friends that have been through, you know, the medical residency world, and the same thing happens. They’re like, “Yeah, we don’t plan to live there in the long run, but we’re going to, you know, X City for the next three years while my spouse goes through residency. And that’s the deal. And then after that, we’ll figure out where we actually want to build our lives.” And it’s an okay normal thing. That’s part of the career professional development journey for them.
Jon: Right. But it is kind of funny. You know, back after this thing in 2009, came back and I sat down with Andrea and Mike Branham, who was at Cornerstone for a number of years, and we talked about this and would this make sense and would we want to do this and how would this affect them. And we decided we wanted to do it. And, you know, we thought we knew how it was going to work. And, you know, in a lot of ways we were right. But nobody ever thought of that one. It’s really funny, no one ever thought of the notion of, “You know, there are people at this age probably that don’t want to…you know, they wouldn’t come to Minneapolis for an open-ended commitment.” Some would.
Michael: That feature was not one of the things you were actually anticipating originally? It just turned out that way?
Jon: Right. Right. Right. Nobody was that smart to foresee that. And yet, you know, not that we have…I don’t think any of our residents would have been like, “Oh God, I wish…” Because some of them actually extended to a fourth year, none of them gave any indication of, “Oh my God, I don’t know how I lasted beyond year two.” But as they…you know, as they talked to and interacted with their peers, you know, “What are you doing now that, you know, we’re all two years out of graduation,” you know, as you know people stay in touch with their classmates, we started to hear that story or at least that perspective as people evaluate this. And it was kind of funny because we all said, “We never thought of that.”
Some Key Lessons From Developing Cornerstone’s Residency Program [49:17]
Michael: So you had mentioned you kind of had the like…the in theory version of the residency, and then you’ve actually been doing this over a number of years now. So what else have you learned or surprised you about how it went, or what worked and didn’t work versus what you’d expected originally?
Jon: Yeah. Well, we’ve had three residents graduate. One of them stayed. We had grown to the point where we needed another advisor. So like we were talking earlier where you aren’t growing that fast to absorb everyone as they move up that path. But every now and then, every once in a while you have grown that much, where you do need that. And so that person, that’s Sara, one of our residents stayed and two have left.
I think the biggest thing that we’ve learned is that being a resident is hard, and that having been a really good student and a nice person, you know, is not enough. And so the things that we wouldn’t have put on the list that turn out to be really important, which of course, makes it harder, you know, to find someone that has all of these characteristics, one of them is writing, expository writing. You know, any financial planner does a lot of their work by communicating in written form to clients. And, you know, that was the biggest technological revolution in any field. It’s when I could communicate something to you in writing and it did not involve a piece of paper. So, you need to be able to take abstract concepts, describe them in a way that frankly has good English. That is at the level of the other communications that clients are used to receiving from Cornerstone. And fortunately or unfortunately, we have a lot of good writers. So you need to be. And I don’t know where one gets that, but we know that it doesn’t come from taking a class.
Michael: I mean, you can start it and learn some tips, but it takes a while to develop.
Jon: Right. In a smaller office environment, the way people interact, rely on each other, work independently, avoid annoying each other, all of those things matters a lot. You know, whether you want to call that socialization or whatever, you know, that can make a big difference. For better or for worse, it’s harder if you’re an only child. I don’t know how good a…I was a firstborn. I don’t know how good a resident I would have been. I probably wouldn’t have been hired on the Kolbe A, which we use as an assessment. I have the lowest Fact Finder score in the office.
Michael: You would have been a terrible resident.
Jon: I would have been a terrible resident. That’s right. Even though I was a good writer, it’s like, “Oh my…”
And then the third thing is that, and I don’t mean to say…I don’t mean this to come off the wrong way, but having a general orientation toward gratitude and appreciation is incredibly valuable, just in a sense of being a little less self-centered and a little more able to just appreciate what’s going on around you, it’s really hard to test for that.
Michael: I was going to say, like, are these things you try to test for now: writing ability, the way they interact and work together and sort of this attitude of gratitude worldview?
Jon: Oh God, yes. We have spouses in our environment, in our firm, you know, there are a lot of us, we know each other a lot, and we have a great time when we get together with spouses and significant others, and so people have told, you know, their spouses or partners about the process, and the reaction, one was, “God, I never would have done that. I would never put up with that, all those steps.” There are actually three different writing assignments in the selection process.
Michael: So, like, you give people writing assignments as part of the…how you hire them.
Jon: Oh my gosh, yes. And the last one, the last search which Andrea mostly ran, where she did run, she even told them the one thing that had to be addressed in their cover letter. Then we give them one that is…we give them a financial planning…here’s what we do. We got worried that, you know, we were getting the writing ability of people’s parents or roommates. So we literally say, “For this next interview,” because these are people all over the country, so yes, we can do video conferencing, but we say, “Michael, you know, for your next…you know, congratulations, you’ve made the next round, we want to set up a time, it will take one hour, we want to set up a specific time, and you need to be at your computer with internet access. And then at 4:00, we will send you an email.” So the email comes and it has some relatively simple, usually, it’s a financial planning-related question, and we say, “You need to email your response back to us within 60 minutes.”
Michael: I had evolved almost the exact same version of a…in the hiring process at Pinnacle back when I was responsible for hiring our planners. You know, give them a writing exercise, set, like, a specific time, you know, for a while we would do that in our office, but as hiring became more virtual, we would do them virtually. But same thing. Like, you know, “We’ll set a time that works for you, but, you know, your next one-hour interview is not going to be a video call with me, you know, we’re going to set it at 4 p.m. on Thursday, and, like, at 4 p.m., I’m going to send you an email with the writing assignment, and at 5 p.m., you’re going to send me back whatever you’ve got.” And yeah, you know, we would…same sort of thing, we would give planning scenarios to try to see if they could sort of talk through concepts but also just sort of awareness of clients.
Like one of the ones we used quite a bit was, you know, you just got an email from your client who says, “My mother passed away and I’m inheriting about a half a million dollars, and, you know, we’ve got a mortgage on the house of about $400,000, and so I’m wondering if I should, you know, use the inheritance to pay off the mortgage.”
And so, like, great sort of conceptual question, right? Like, we can talk about investment returns versus mortgage. Do they understand the tax deduction on mortgage? You know, the after-tax return versus the after-tax cost of interest. Like, there’s all sorts of interesting technical stuff. But the number one thing that I would actually watch for whenever we gave that writing exercise is the first line of the email that you write. “Dear client, I’m so sorry your mother died.” Right? Like, can they pull themselves out of the technical situation to also recognize this is an empathy moment first? Like, your client just told you their mom died. So actually answering the math question is important because they asked it, so you do need to give an answer, but you also need to be able to address that they’re grieving because their mom just died. And if you don’t have the presence of mind for that, that’s a concern.
Or conversely, well, if we were doing this with younger or newer folks at the industry, like, the ones who had the presence of mind to realize that and clue that as the opening of their letter and then answering the question very much stood out because they had a different level of empathetic awareness that got demonstrated when they could pause and say, “I’m going to answer your math question, but I’m going to take a moment to show some empathy for your family tragedy first.”
Jon: Yeah, yeah. I mean, the final step when people become finalists is we bring them…obviously, we bring them to town, and one thing that happens is they sit in on a real client meeting, which is important because, you know, these folks are in client meetings from their first week. We tell them they will be in four or five client meetings their first week and every week thereafter. And when our first resident finished after…she stayed for four years, Christine D’Amico, who’s now on the faculty at Virginia Tech as an adjunct, which is really cool, so some of our client stories and case studies are, you know, a part of the first…the intro to financial planning class at Virginia Tech. It’s really kind of fun. So we counted up how many client meetings had she been in in her 4 years, and she went, like, to 800.
And so when we say…you know, when people coming into our profession, you just said industry, I say profession, and we might want to talk about that, but, you know, it’s like, “Yeah, you really do.” And just like when you’re in a medical residency, yeah, you really do walk into hospital rooms or you really do walk into patient appointments and sit there with, you know, the real people and run those meetings by the time your time is over.
Anyway, we’re back at the final interviews and you come into this meeting and then we send you off into a room and we say, “Okay, you need to write an email to this client. You have 30 minutes. And we just want you to summarize for them what you consider to be the three most important things that we talked about. And can you do it in a way that probably requires some complex sentences.” Do they actually come off well? We’re getting your first, maybe no more than your second draft. You know, you read it and then…you write it and then you proofread it and you fix a few things and then time is up. How good is it? Yeah. So that’s the third writing assignment.
And we literally had a scenario once where the two leading candidates who came in as finalists, you know, we’d done a lot of things with them, so there was one person, let’s just say candidate A in our minds ranked slightly above candidate B. And it got to this point and A was really disappointing in how they did this and B was off the charts good. And that was it. Case closed.
Michael: Interesting. Yeah, because otherwise you’re looking and saying, “Look, I get the other candidate was really strong throughout, but, like, if I hire this person, I’m going to have to back-check every email they send for the next two years. And I don’t have the time or interest to do that.”
Jon: And we can’t send them to a class to fix it.
Michael: Yeah. Or at least writing skills take a lot of time and years to improve. It’s not quite, “Go to one class and learn how to do this,” and then that’s that.
Jon: Right, right. Yeah, so that’s the residency program. And we find that, you know, when people do leave and they kind of decide where the…the geographic area where they want to be, we have had…you know, one resident had three job offers, another had four just limited to their geographic area. I would encourage anyone listening who’s thinking about some of the same problems and growth pains, I guess, that you described earlier Michael to really noodle through this model and see if it might address more of the things that they really feel they need to to continue growing then it will stir up other things that they wish weren’t true like yep, you do have to…you know, every three years you have…well, actually, every year and a half you have a new person starting. They have to learn all over again, you know, how we fill out these forms or how we get…you know, how do we get a Roth conversion done? Or how do we do a tax projection?
And we don’t joke, they think we’re joking, we say, “Well, by about six months and you’ll be able to do a simple tax return in your head.” We actually ask people, we say, you know, “So when you’re out with friends and the check comes and there’s that moment where no one wants to pick it up and start doing the math, what do you do?” The right answer is, “I’m usually the one that people look at,” or, “I kind of like to figure it out,” or, you know… or at the very least, “I have an app. I can calculate.”
Jon’s Unique Retirement Planning Process [1:01:41]
Michael: So shifting tracks a little bit, I am really interested to know, just as someone that’s done a lot of this retirement research around, you know, the infamous question, like, how much can people spend safely from their portfolios and how do you manage that, what does your retirement planning process look with clients? I guess I’m kind of wondering both what do you do up front? Like just, what’s the retired client’s…the new retired clients’ process that they go through with you, and then what does it look like on an ongoing basis as well?
Jon: Yeah. Well, you know, fairly early on, we talk about…well, let’s start by saying that some people have enough money that they don’t have to worry whether the level at which they want to spend is sustainable or not. You know, they just have enough money or they have a low enough lifestyle cost or they have enough, you know, defined benefit sources of income that, you know, if they have $1 million, they only need $2,000 a month pre-tax. It’s like, we don’t have to…none of this stuff matters in that scenario. But a lot of cases, people do. And so we talk a lot.
And it might be a long-term client that is now…you know, it’s the first time they’ve said to us that, “You know, I’ve always said I wanted to retire. We’ve always been targeting, you know, me to retire, you know, in my mid-60s. And, you know, now I’m 61.” You know, and from everything we know and everything we look at, they’re on track and such, but we haven’t really talked about, “How does it work?” other than, you know, we’ll allude to things like…like at a time like this, we would say to someone who is, you know, three to five years away, “Boy, I bet you were…I bet you’re glad you’re not retiring now, like, with this market.” And of course, you know, we’re kind of baiting them. And they go, “Oh, yeah, I know.” Like, “Well, you know, we have clients who are, you know, and so just want you know that when you are in this position, that the approach that we use, which is evidence-based, it gets them through.” And we’ll talk about how this works and how…you know, how this will work for you. And we just want to keep planting those seeds oftentimes at moments where it’s not head-on, it’s just something…it’s just a little something…if this were a theatrical performance, it’s an aside. This is an aside in a play.
And then from there, we’ll say, “Well, let’s talk about how this works.” And one of the things that I think that we’ve learned in applying this with clients more and more is that we have to do a better and better job about distinguishing between what we kind of call core expenses and discretionary. And so distinguishing that breakdown has a lot to say about how much lifestyle you can afford. And so we’ll talk to clients about their spending, and we will work with them to get much more specific about their spending, and then we will tell…it’s like, well, you know, exclusive of taxes and health care costs, you know, their list of expenses is $10,000 a month. And we’ll say, “Well, the way we look at this, $7,400 of this is core and $2,600 of it is discretionary.” And that leads to a different capital requirement than if $8,400 was core and $1,600 was discretionary.
Michael: So you’re…like, they just mark down…I’m going to try and think of how this happens in practice. Like, you give them some worksheet or spreadsheet or something and say, “Put down all of your household expenses and the ones you’re anticipating in retirement,” and then they’ll send this document back to you, and then you go through the list and assign which ones are core and which ones are discretionary and then start having a conversation about it?
Jon: Right. Yes. So that’s what it looks like to clients. And frankly, this can be…you know, this can be really difficult, you know, not only for new clients but also existing clients to do. Because, yeah, they kind of have a budget, but all we’ve known before is that they had a lot of discretionary income, they were saving a lot of money, and we really didn’t care. It really didn’t matter about this distinction. But we need to understand…and that term discretionary is sometime it…I would love to come up with a better one. Because what it suggests is this is stuff that you can live without. And that’s not true.
One of the big things we’ve learned is, and I don’t mean we like we, you know, at Cornerstone have somehow learned this, I mean all of us who interact with clients and retired clients, is that, you know, the ability to travel at a certain level is every bit as core and central to the retirement that they want to live as the need, you know, to pay the grocery bill and the real estate taxes.
Michael: I’ll admit, I’ve always struggled, or I guess not always but, like, for many years have struggled similarly with this idea of, like, segmenting out core and discretionary, some people call it essential versus discretionary, because then, like, you start actually trying to categorize expenses and you get some that are just awkward like cable TV and Netflix, like, discretionary or essential, right? This is not quite food, clothing, shelter-level stuff, but, you know, people watch a lot of movies, and some retired people watch a whole lot of movies. So, like, ask them to envision their lifestyle without access to television and it’s pretty life-changing to them. Never mind when you get into restaurants, travel, eating out, where there’s a social dynamic, there’s a community dynamic, and, you know, yes, you don’t need it to survive, but losing that “discretionary” expense would still have, you know, essential expense-level psychological trauma to them to have to go through that kind of lifestyle change.
Jon: And what we found is that it helps to think about it less qualitatively and more quantitatively. And here’s what I mean. So let’s take the travel piece, for instance, the distinguishing characteristic between the two types of expenses is is this going to continue for the rest of your life in some form or is it going to decline and/or eventually stop at some point along the way? That’s what matter.
Michael: That’s an interesting way to segment it. So now when I think about it that way, like, okay, travel is in the discretionary budget because it’s going to decline. Like, I’m going to do less in my 90s than I do in my 60s. Ironically, cable TV may still be relatively stable here. I’m doing that throughout. But it’s the…you know, it’s just literally the expenses that tend to self-mitigate and wind down over time versus the ones that are not buckling no matter what.
Jon: And, you know, whereas I’m spending, you know, my eating money now is including going to places that give me enjoyable experiences that I want, later on in life I will go somewhere else and I will eat, and the food will probably not be as good, and the experience might not be quite as stimulating, but the dollar amount isn’t going to be all that much different, given the amount of money that my assisted-living monthly fee that goes for the meal plan. So that actually becomes core.
Michael: I almost feel like as opposed to core versus discretionary, it’s almost a like fixed expenses versus dynamic or adaptive expenses, right? Like, some that just naturally adapt and adjust over time either to our world, our lifestyle, our health changes, whatever is going on, and others are just fixed. Like I’m going to have my house and I’m going to have my Netflix no matter what. Like, those are non-negotiables for me.
Jon: Yeah, it’s permanent versus non-permanent maybe is the best way to put it. Because the other thing about these non-permanent expenses is that the amount of spending from year to year tends to be quite volatile. And we don’t ever want to be in a position…we want to minimize the amount of times, but we get asked to give permission.
So the reason that we want to do, back to what does this look like and what’s the process, the reason that we have to have this distinction is that number one, we need to be sure that their permanent core expenses as well as the…you know, as well as their healthcare costs and insurance premiums and income taxes are being funded by some sustainable income source that has the ability over time to adjust as cost of living goes up, whether that’s Social Security or defined benefit pension or some form of systematic withdrawal, safe withdrawal approach. I mean, even the 4% rule works if that’s the way you want to do it. Annuitization also works, obviously, for this. But it’s like, “Okay, we know the capital and the resources that are going to fund these types of expenses, and then we have the rest, and we want to construct a pot of money so that you get to decide when it’s worth…you know, instead of…you know, when it’s worth taking $15,000 out of this pile of money for travel this year versus the normal $9,000 or $10,000 that you normally do.”
Why Some Cornerstone Retiree Clients Have Up To Three Portfolios And The Tools Used To Track Them [1:11:58]
Michael: And so do you…like, do you literally get to the point where you’re creating, like, buckets where there’s, you know, “This is the portfolio bucket that covers your core expenses, this is the portfolio bucket that’s going to cover your discretionary expenses,” and start segmenting them out that way?
Jon: Yes. We have actually our retired clients that might get…have three different portfolios and get three different quarterly reports. They have their core portfolio which has its own allocation and follows, you know, in our case, the dynamic withdrawal policies. And they literally are followed to the tee. If you go back and you read the 2006 “Journal of Financial Planning” article that I co-authored with William Klinger, the computer scientist. And then you have this discretionary pot which you may spend down to nothing over 8 to 10 years, or, you know, you may never really want to touch it, but it’s there and… And this is the client psychology piece. We do this because it matches the way humans behave and how they like to make decisions.
And then the third one, since I mentioned three, maybe you’re retired, one spouse is 67, the other is 66. The 66-year-old has started claiming Social Security, the 67-year-old were waiting until you are 70 to claim, but you need that income, and so you have, we call it the bridge portfolio. And this is a pot of money that’s designed to give you exactly what that defined benefit plan will give you until it does. And then at the time that all of those checks are coming in from those other sources, that fund has run itself out of money by design.
Michael: Interesting. So I can see why you end out with literally, like, three different portfolios with the three different reports, because they just have substantially different time horizons. Like, your bridge portfolio is a classic, you know, asset/liability matched, you know, defined payments portfolio of generally a short term, your discretionary pots it sounds like are at least generally call it intermediate term, right? They may run 8 to 10 years. You know, “Here’s your extra travel budget while you’re in your 60s.”
Jon: Right. They are usually more conservatively invested than their core sustainable lifetime portfolio.
Michael: Right. Because that’s the ultra-long term one, so we can hang out with that for a long time.
Jon: Yep. That’s right. And we do all that because we’re lazy.
Michael: Yeah. Clearly, that’s why you would have like…I mean, do you literally have three investment policy statements for some clients that have these three different portfolios?
Michael: So how does that get managed just from the practical perspective? Like, how do you keep track of these things? What software tools do you use to keep track of all of this and manage it?
Jon: Well, so we run model portfolios. And if you imagine, you know, a bunch of models where your most aggressive one is…you know, it could be 100% equities and your least aggressive one is 10% equities, and maybe you have 15% increments, you know, so you have 100% equity and then 85% and then 70% and then…you know, or however you want to do it, you know, you have a manageable number of models, and every single one of those portfolios is one of those models
Michael: And what are you using to make all these different performance reports for each of the buckets and each of the groups under one household? Like, that just still sounds administratively complex to me.
Jon: Well, I mean, we use Orion, but there’s…you know, you know more than I do about who the other providers are that are out there. And, you know, every one of those model portfolios, you know, can be rebalanced. And, you know, obviously, we have to provide cash for the withdrawal amounts and such that are done. We’re trying to become even more efficient with that. But if you don’t do this stuff and you just, like, slosh the whole thing in together and somebody is not drawing Social Security yet so you’re drawing more out and then they have their regular withdrawals and then they’re taking, you know, their extra money out and you say, “Well, you know, you’re 67 and…yeah, you’re 67 and 66 and you have $2 million and last year you drew out $150,000 should we be worried?” What you basically have to do is then deconstruct the $2 million into its component parts.
Michael: Right. I was like, “No, no, you’re okay because this portion of the spending is actually just temporary because it’s bridging until your Social Security starts, and then your spending kind of drop way down. So we may draw a couple hundred thousand dollars over the next few years, but once we get there, you know, you’ll still have $1.5 million left, and here’s your stable spending from that point forward,” which means you literally just deconstruct the portfolio into the component parts.
Jon: And then we said, “Yes, so you’re okay,” and then next year they come back and it’s a little different number and they go, “Are we still okay?” And we go, “Well, let’s deconstruct it again.” It’s like, “God, I don’t want to do that.” “So why don’t we just deconstruct it one time?” And the beauty of the non-permanent or the discretionary portfolio is we tell clients, “That’s all there is.” You know, there’s that song, Is That All There Is? Well, that’s all there is. And so you get to decide when it’s worth it. Because people who do a good job saving for retirement have some degree of discipline, usually, and are rule-followers. You know, you should save money, you know, they followed that rule. They did it. They succeeded. And nobody wants to do anything that…most people do not want to do anything that’s harmful. I believe that people that run out of money, by and large, choose to because it enables them to defer something else in their life or avoid something else in their life that is even more painful.
Most of us, thank goodness, you know, we have painful things that have been in our lives at various points in time, but they aren’t…they don’t rise to the level of that pain, at least on an ongoing basis. And so people like that, it’s like, “Well, here’s your core portfolio, and thou shalt not spend more than this. Because if thou does, then we can no longer say that we have the same level of confidence that you’ll be okay.” A number of years ago Mike Branham came up with this idea, he called it green light, yellow light, red light. Kind of like the traffic signal. It’s like, “Well, you know what? You no longer have a green light. You don’t have a yellow light. It’s the amber light.” “Why is that?” “Well, because, you know, you violated this spending rule, and so you’re probably okay, but we can’t say it.” And people don’t like that. And so, we can say, “Thou shalt not take more out of the core than the spending rules say and if thou needst more money, thou takes it from the discretionary pot.”
And here’s the dirty little secret. People say, “Well, if I run my discretionary portfolio out of money, can I replenish it?” And the obvious answer is I don’t know. Because I don’t know whether the conditions are such that that safe spending policy number, which, you know, is really designed to make you be okay if you get dealt a really unfortunate hand of cards in terms of returns and inflation and all that other stuff, if that’s what ends up happening then no, you can’t replenish it. But in 10 years, we might be able to recalibrate the whole thing and go, “Oh my gosh, you have $125,000 over here in this core that you don’t really even need.” And yes, we can replenish your discretionary portfolio, but we didn’t know that 8 to 10 years ago because we didn’t know what was going to happen.
Michael: And so, how do the dollars get set to these? I mean, I get the bridge portfolio. That’s going to be a simple math problem. You need X dollars for Y years until Social Security starts. But the split between core and discretionary, does this come back to like, “This is why we do all this budget breakdown, to understand what their core versus discretionary expenses are because then we can get down to like, ‘Okay, your core spending is $7,000 a month, and so that’s $84,000 a year. And if you want $84,000 a year at a 5% withdrawal rate, like, we’ve got to put,” whatever that is, “$1.6 million into the core portfolio and then everything you’ve got left goes in the discretionary bucket because that’s what you’ve got left?'” Like, is it that sort of structure?
Jon: Yep. And except the $7,000 in your example was $7,000 that was not being provided by defined benefit sources.
Michael: Okay. So you’ll take core back out: pension, Social Security, etc., getting down to what’s left, and then that’s the number.
Jon: That’s it. That’s exactly it. And sometimes people have so much in discretionary that, you know, the question comes up, “Well, what about long-term care insurance? Do we need that or do we still need that? Because we bought this back when we were in our mid-50s. That seemed good, but things have actually been better than we thought. We worked longer, we got an inheritance, whatever, and our discretionary pot is $800,000.” And we go, “Well, what you could do is break that down further and create a long-term care portfolio to say, ‘This is what that’s to be used for.’ And you just see it there. And you know that, ‘Oh, okay, yes, we can self-insure. This is the amount that our policy would have provided. We don’t think we need that money.'” And we literally have clients, you know, a lot of people in their…you know, retirees bring all of their habits of managing money and cash flow that they’ve accumulated over all these years, and a lot of people like to categorize their savings and spending.
You know, it’s literally the system where you have an envelope that you drop money in for lots of different categories. You know, we hear about that, and lots of people do some version of that. And whether they’re, you know, different online savings accounts or different, you know, sub-accounts at their bank or whatever, they have lots of different “envelopes.” And some people you know, it’s like, if that’s what makes sense for someone, how they organize their life so that they get that level of security and peace of mind that they want, then we want to help create that for them. That’s just another example of that letting the theory match up the behavioral aspects of clients. Because at the end of the day, they have to believe that this is working for them and that they can understand it in a way that gives them the peace of mind that they want.
Michael: So can you now also talk to us about exactly what’s going on in that core portfolio? I know you mentioned dynamic withdrawal policies from your article. And we’ll put it in the show notes. This is episode 109, so for those who are listening, if you go to kitces.com/109, we’ll have some of the research that Jon’s published in the show notes section. But Jon, can you give us a little bit of a walkthrough of just what these dynamic withdrawal policies in the core portfolio look like since it sounds like that’s kind of the anchor of the whole thing because that’s literally where the bulk of the client’s spending comes from?
Jon: Sure. Sure. Well, I mean, you know, to go back to your example at $7,000 a month on a pre-tax basis was what, you know, was needed to fund the rest of those core expenses, we figured out that, you know, that works out to be at, you know, about $1.6 million, there you are. And so most of the time that money comes out monthly. You know, there’s also the tax planning element. So we try to put as much…we like to let the bridge be as much as possible after-tax money, which leaves more room for Roth conversions. And we’ll use non-qualified money for the core, you know, at least until they’re 70. So we’re looking at that aspect of it too. But it’s literally just the $7,000 a month comes out minus any tax withholding that we want to do. Most clients like to have their taxes withheld. So we’ll probably do, you know, at least two tax projections a year for each client to be able to answer these things.
People talk about, you know, how much money do you have in cash? How many years’ worth or whatever, I think that’s silly. I frankly don’t see any difference between having a bunch of money in the money market and having…you know, as long as some of your fixed income is allocated to a high-quality bond holding with around a duration of one, I think, you know, there’s no difference.
Michael: It’s an interesting framing that, like, you have this fairly rigorously constructed bucket approach but not the bucket that most people have with a bucket approach, which is the short-term cash bucket for, you know, one, two, three years’ worth of spending.
Jon: Right. And there’s now research that was published last year which says that if you take the way that bucket approach is usually implemented, it really leads to a lot less wealth at the end versus just a simple balanced portfolio that’s rebalanced every year.
Michael: Yeah, we’ve covered this on the blog a few times as well. You know, it sounds great in theory, but from a practical perspective, when people are spending 4% or 5% a year, if you hold 3 years of spending in cash, you have a 15% cash allocation. And if you hold 15% in cash for life, you just end out with less money because that’s a lot of cash to hold for life for a multi-decade timeframe.
Jon: Well, it is, and it really hurts if it’s only the remaining 85% that you allocate 60/40. And furthermore, you know, the way most likely that portfolio has got somewhere in the neighborhood of a 2% overall yield between the interest that the bonds are paying and the dividends the stocks are throwing off. So you’ve got 2%, you know, coming in every year, so 3 years for 5% does not require 15%, it only requires 9, even if that’s what you wanted to do.
But anyway, to get back, so, you know, we will raise cash every three months, every three to six months. For that, we’ll rebalance portfolios every three to six months. You know, we have tolerance levels for, you know, if a sub-asset class like U.S. large value or emerging markets gets enough out of whack then, you know, we do that. Something that we’ve not yet done is go to, you know, I guess I’ll call it a fully automated rebalancing software where, you know, the trades are proposed by the machine. But I think that’s coming for Cornerstone in the next couple years.
So that’s it. You know, the thing I’ll say is people say, “All these policies, these rules sound really complicated,” and I just say, “Well, compared to what?”
Michael: Right. I just have a meeting with clients every year and we figure out where the next year’s money is coming from. Like, that feels nice and flexible, but it’s actually much more mentally straining than, “Oh, we just follow a rule, and this is what we do.”
Jon: Well, even the question of, “Should I change how much I’m taking out or not?” You know, you have to…all of these are questions that you have to answer. And by ignoring them, you’re simply saying, “I’m going to keep doing the same thing even if I’m not aware of its impacts.” So it’s not that hard, and it’s not really much different than what people are doing anyway, it’s just way more systematic. You know, in their paper on financial planning policies, Yeske and Buie defined a policy as something where, you know, it’s general enough so as to apply in virtually all circumstances. And I would amend that to say it’s general enough so that it actually does apply in the circumstances when you care the most, like the world is falling apart, but it’s specific enough so that you are rarely in doubt as to what to do.
Michael: So, can you talk a little bit more about how these decision rules work on an ongoing basis with clients?
Jon: Yeah. I mean, there’s really only a few things that…there are only a few things that can change from year to year and what you take out. You can either take out the exact same amount, you can take out the same amount plus inflation, you can take out plus more than inflation, or you can take out actually less in nominal terms. And so, you know, the decision rules really get to that where if you had a year where your return was negative, you freeze. You just don’t take the same…you take the same amount out as you did last year. You know, if your withdrawal rate goes up by more than 20% then you reduce what you’re taking out by 10% on a real basis.
Michael: So it’s 20% of my original rate. So like if I started at 5, 20% of 5 is 1. So if my withdrawal rate goes from 5 to 6, I’ve got to take a cut.
Jon: That’s right. And, you know, if you really look at the original research and look at those numbers, you know, I wouldn’t…if anybody got up to around 6.25% or whatever, you know, because markets fell, you know, that would trigger the reduction.
And one other thing is it doesn’t matter so much when inflation is really low, you know, like almost non-existent, but the reduction is 10% off of what the next year’s withdrawal would have been had you gotten an increase for inflation. So it’s a 10% real reduction rather than a 10% nominal reduction, which the real reduction is actually a smaller decrease in dollar terms.
Michael: So you’ve essentially got this, like, giant matrix of all the clients and what their spending was for the past year and what their portfolio was for the past year so you can keep recalculating these withdrawal rates to see if they’re still within the bands?
Jon: Yeah. I mean, every client comes in about…you know, most of our clients come in every six months. So what we’ll do is we’ll say, “Oh, okay, well, what’s your withdrawal from the core portfolio? If we annualized that based on where you are right now and, you know, yesterday’s portfolio value, what was that withdrawal rate?” If it hasn’t gone up by more than…you know, if it hasn’t hit that 20% trigger, there’s nothing we need to do.
And you and I were talking before the podcast started, but, you know, if there’s a year…you know, a year where returns were positive, the model says that you get a raise for inflation, well, most clients don’t come in and ask for it. And we usually don’t say, “Hey, you know, would you like your raise for inflation?” So for the most part, over time, those withdrawal amounts often don’t increase very many times. Which ironically is right in line with what David Blanchett found in his article on spending patterns, that retiree spending does go up, but it does not go up by as much as inflation. And I wrote a piece in the “Journal of Financial Planning” a couple years ago where I said, “Well, what if your core spending is basically 50% from Social Security and 50% from your portfolio? So you have 50% that is going to get a CPI adjustment every year, come hell or high water, because we can print money. So there’s no problem.
And then you look at what Blanchett found in terms of his rates of spending increase and you say, “Oh, if it’s not actually going up quite as much as inflation and you have half that is going up with inflation, how much does the other half actually have to keep going up in order to fill in the gap?” And the answer is it hardly needs to move at all. It’s almost exactly flat on a nominal basis over the whole 25 years. I was surprised at that. And that’s a big deal. But it matches what our clients are telling us. Because they’re coming in and they’re not saying, “Oh my gosh, you know, everything costs more.” Because, I mean, everything does, but they’re just not spending as much.
Michael: And what’s the anchor initial withdrawal rate that you use to build around all this in the first place? Like if you’re monitoring that they go plus or minus 20% from their original withdrawal rate, like, what is the anchor rate that you typically set?
Jon: As long as the client is comfortable with a portfolio that is somewhere between 60% to 65% in equities, which most of them are, as opposed to something that’s a little more…has less money in equity, so is a little more conservative, so as long as is they’re there, we’re comfortable at 5.2%, which is a number that’s right in line with the paper. Because valuations have been so high in recent years, we’ve started everybody there, which gives them a lot of…you know, it gives them a fairly large amount of space before, you know, they would trigger a reduction. In other words, it’s not… But right now, those withdrawal rates are now up to, you know, somewhere around 5.6% simply because of the market drop.
Michael: And so how do you reconcile? Like, there’s all this discussion out there around, you know, classic 4% rule and at least a few folks that have said, “No, no, valuations are high. We have to take a lower number. It’s 3% or 3.5%.” Like, how do you explain 5% or 5.2%?
Jon: Sure. Well, the first thing is that we talk about the 4% rule, but as…you know, you don’t need me to…you know this very well, Bengen’s original number was 4.1%, and then Bill said, “Well, wait a minute, we don’t have all the equities in the S&P 500, we have some diversity,” even back in the early ’90s when Bill was writing this. So he said, “Well, what if I add a little dollop of small-cap stocks to this and redo it?” Well, he got 4.6%. So Bengen’s rule is really the 4.5% or the 4.6% rule, it’s not the 4% rule. So that gets you part of the way there.
The other thing is that…and the analogy that we use, we use a lot of analogies. We were talking about how we, you know, talk to clients. We say, “Now, you know, if you think about the withdrawals that you take over a lifetime in retirement, think about that as like a financial road trip. You are going to drive for a long time, you hope it’s a long time, you hope it’s a great trip, but you are going to encounter a lot…” The first thing is, you know, I say to you, if you’re going to be driving, you know, down the road, so to speak, that your withdrawal rate is analogous to your speed. So the higher the withdrawal rate, the faster you’re going.
And if I were to say to you, “Now, in your car, you have no brakes and no mirrors, how fast will you drive?” And the answer is slower. And that may seem like a ridiculous question, but the 4% rule, you know, Bengen’s rule that you get an inflation-adjusted increase every year is analogous to having no brakes and no mirrors, because you never do anything other than increase by the rate of inflation. So you’re not slowing down. And if you’re not slowing down, you don’t need brakes. And secondly, you do that each and every year regardless of the conditions around you. So you don’t need to know what the conditions are around you, thus you need no mirrors.
So what we say is, but actually, we know that if you do have brakes, you can tap the brake, you know, back off your withdrawals a little bit. And you also have mirrors so that you can take into account the conditions. And this is where, Michael, we bring in the work that you did back in 2000, you can tell me whether it was ’08 or ’09 that it first came out, on dynamic asset allocation adjustments and how that affects safe withdrawals, which I consider to be the most recent innovation in this category. Nothing since, I don’t think, really moves the needle. So we use that in our practice. So we just say, “Because you have this flexibility, you can go faster.” And that’s how we explain it.
Michael: “Would you drive your car faster with brakes and mirrors to make adjustments than without?” “Well, yes.” “Then great, would you take a higher withdrawal rate when you have the ability to make adjustments and apply the brakes?” “Yes.”
Jon: But the other piece is there’s no free lunch here. If someone says, “Don’t ever tell me that I need to, you know, not have a raise for inflation,” or, “Don’t ever tell me that I need to take a little bit less,” it’s like, “Oh, okay, well, then that withdrawal rate doesn’t work.”
Michael: Then we’re going to dial that number back down.
Jon: That’s exactly right. I mean, seriously, there is no free lunch.
Michael: So how has this worked out as we’ve gone through this recent bout of market volatility?
Jon: Well, it’s almost been a non-event in the sense that because markets got so high, withdrawal rates got lower. They got down, you know, close to 5%, 4.8%, 4.9%. And so if you do the math, if the portfolio value declines by 10% then the withdrawal rate increases by 10%. So, you know, someone whose withdrawal rate was 5% is now 5.5%. And that’s higher. You know, it’s definitely within the range of what’s okay.
Michael: That’s the point, right? They’re still within the bands. They’re still within the safety zone. That’s the whole point of drawing them with, you know, 20% parameters. Like, you can ignore…to me, like, it essentially tells you, “You know, things between the bands are noise, things that move you across the bands are signals that require adjustments. So here’s where the threshold is. And as long as you don’t cross this line, you really don’t have to worry about it or call me.”
Jon: Well, right. And, you know, sometimes the term “guardrails” has come up, and it actually applies really well to that driving the car analogy because you’re driving down the road and you just…it’s beautiful scenery, hopefully, and hopefully it’s a really nice day, you don’t get a storm, you don’t have ice or snow or limited visibility. I mean, this analogy is a rich analogy. But you know that along one side of the road is you don’t want to go off that side of the road. You know, where we are, in short, you have a guardrail there, of course. Where we are right now is, instead of driving really close to the safe side of the road, you’re actually kind of back in the middle of the lane. You’re closer to that guardrail than you were before. You’re not in danger of hitting it, but you are closer than you were before. And aren’t you glad it’s there?
Michael: So anything that surprised you about, I don’t know, gaps between theory and practice? Like, how it’s gone with clients versus how you expected from doing the research and the theory work?
Jon: You know, I’m sure after we, you know, finish this I’m sure I’ll think of, you know, what I would really want to say, but I think the biggest thing is continuing to…and I think this will, by the way, keep evolving. You know, different generations look at the same questions. And while they don’t come up with hugely different answers, there are different ways that people will look at things. And so continuing to take the theory that someone is kind of anchoring their advice to and say, “But how can we do this in a way that feels natural to clients?” You know, for us, I think the biggest…frankly, the more important innovation was this discretionary or non-permanent portfolio which allows clients to know exactly how much extra spending they can do without, you know, having that traffic light start to blink yellow or know what they can do. Because people want to know that. They want to walk right up to the line and they don’t want to go over it. That’s worked really well.
I don’t know whether that construct exactly will be the most helpful to clients 20 years from now. I suspect the principle will be the same. We’ll probably be looking at longer periods needing to have sustainability or we’ll be looking at gaps in the drawing of things. You know, if you think about people who interrupt their careers and such, you know, you have different dedicated pots of money that have different roles in that. So I guess that’s the biggest thing, is that, you know, having, whether it’s portfolios or withdrawal schemes or ways of tracking things really fit the purposes of that money. No different than when clients are younger and you, you know, gosh, you do want to invest the education fund differently than the retirement fund because they’re just different characteristics of it. But by and large, it’s been really cool to see that these approaches resonate with clients. It kind of sounds to them like common sense. And again, that’s that tailwind we were talking about earlier on in the broadcast.
What’s Coming Next For Jon And Cornerstone Wealth Advisors [1:42:21]
Michael: So what comes next for you and Cornerstone.
Jon: Well, you know, the tax law change was a big next. I mean, just really rethinking how we do a lot of things. You know, we’ve got some really exciting transition planning underway.
Michael: Transition planning meaning you eventually to retire or wind down?
Jon: Exactly. Right. And so, that’s all I’m going to say at this point.
Michael: Fair enough. It’s underway. We’ll have you back in a few years to talk about how it went.
Jon: Right. Right. You know, continuing to fine-tune the residency program. I don’t think there’s anything that’s annexed that isn’t on many of your listeners, you know, the people that care enough about their clients and their businesses and their careers to be listening this far in, I don’t think there’s anything unique to Cornerstone.
I guess I’ll just say that, you know, it’s funny in our field, I don’t think of us as an industry, I think of us as a profession. And I think we should be careful about, you know, how we want to be perceived. But you get…you know, our field asks a lot of practitioners and then it doesn’t ask anything more than 30 hours every 2 years of CE. Anything beyond that is based on curiosity and motivation. So it’s just, you know, I want to continue to develop those parts of myself that maybe aren’t as easily. You know, if you think about right-brain, left-brain, if you’re a little more comfortable on one side of the hemispheres than the other is to do stuff that exercises the other, because financial planning done well is a multidisciplinary art and science. And so, you know, if you don’t have those multiple dimensions that are well-developed, you just can’t do as good a job for clients, for your business, and it’s not as much fun either.
Michael: So looking back, I’m curious from the other end, what was the low point for you?
Jon: Ah. Well, in 19 I want to say 91, I qualified for the Earned Income Credit.
Michael: The low income Earned Income Credit.
Jon: Right. Made money and made so little that I received a refundable tax credit. The practice that is now Cornerstone, which really began in 1990 for me, it’s hard. That stuff is hard. And happened to begin in the middle of a…or as a recession was beginning. So that taught me early on that market timing was not my forte. And so that was the low point. When you are just like, you know, “Where is the next client going to come from?” And we do things differently, obviously, today in how we can reach people, and in some ways, it’s easier and in some ways, it’s harder.
Michael: You know, it is a striking thing for…you know, looking at this practice with $240 million and multiple advisors and successful clients and kind of remember like, it sort of sucks for almost everybody in that first year or few right down to qualifying for the Earned Income Tax Credit while you’re trying to launch your financial advisor business.
Jon: Right. That’s a battle scar, but it’s also a nice…it’s a touchstone that I appreciate even. I didn’t really appreciate it then, having two young kids who’re very…even younger than young kids, a lot younger than your kids are now Michael. So, yeah. But I think that having a fire within you for what you see yourself doing and the way you want to make a difference in the world, I don’t think anyone…everyone experiences their own version of that, I think. Even if it’s within a firm where there’s all kinds of clients and you’re supporting them and you’re growing up and that, you still have challenges to yourself and low points in your own development. And they’re just different. But hanging on to that vision and remembering why it is that you chose this really does make a difference in those times, even though you don’t think it does.
Michael: And out of curiosity, I mean, how long did it take before you got to, I don’t know, livable wage status?
Jon: Yeah. I was thinking back to that and I think that the first year, you know, so that was…I started by…I grew up in Maryland and I started with what is now Ameriprise, back then IDS Financial Services, I was lucky in that I was offered the financial planning Kool-Aid and I drank it when I was 25 years old. And so I really did only ever learn the financial planning process, if you will, as a way of working with clients based on their needs and goals rather than…put that first. And, you know, we didn’t really talk about it, it wasn’t maybe quite a fiduciary mindset in the letter, but, you know, I took it that way in the spirit. So I was lucky in that regard.
Moved to the Twin Cities shortly after that to teach at their training center. So my first practice went away and the second one, the one that is today, began in 1990. And that, of course, is when the difficulties were. And I think it took to 1995 was the first year. And I think that was the year that I started, and I go, “Oh my gosh, I’m now…” You know, I had made the decision to do this assets under management thing, starting even before there was Schwab’s OneSource program. This was just after the technological revolution when you had a computer at your desk versus not entering 1995 thinking, “Oh my gosh, there’s $5 million under management, and that works out to about $50,000 if everybody sticks around.” It’s like, “Okay.” So it really did take until then.
Michael: It’s a striking thing to me just, you know, almost 5 years to get the first $5 million and then over the subsequent 15 years it goes from $5 million to $240 million.
Jon: Right, right. And it’s like, you know…but it’s no different than any client. It’s like how long…it takes a long time to immerse your first $100,000 and then the next $100,000 is a heck of a lot easier, and they get quicker after that. That doesn’t mean you stop doing the same things. That’s that power of compounding that Einstein was so impressed with.
Michael: So as we wrap up, this is a podcast about success, and one of the things we’ve always observed is that even just that word “success” means different things to different people. And so, as someone who’s built what most would objectively call certainly a successful business, how do you define success for yourself?
Jon: Wow, I don’t often think about it in those terms. I don’t know that I would have done a whole lot differently. I think I could have had a very different result numerically and probably not done anything differently. But I do believe that if you are continuing to be curious, if you are continuing to not be satisfied in the way you are doing things, if you are…you know, you find yourself late at night instead of reading something that might be pleasurable that you’re saying, “Well, what if we adjusted our fee schedule to this?” or, “What if we did that from a marketing or a messaging perspective?” or, “What if this was rewritten on the website?” or, “What if…?” You know, what if? What if? What if? I think that really…cumulatively, that makes a really big difference. And so I guess if I had to, you know, define what it looks like or attributed to anything, it’s kind of stuff like that. And truly believing that if you can perform at that level and treat people the way you would want to be treated, that it really is going to work out fine.
Michael: I love that message, you know, just being continuously curious and then treating people the way you would want to be treated, it’s going to work out fine.
Jon: It’s simple, but it’s not easy.
Michael: Well, thank you for joining us and sharing your story on the “Financial Advisor Success” podcast, Jon.
Jon: Well, it was a pleasure. Thank you so much for asking. Look forward to seeing you again hopefully soon but when there’s not wires involved.
Michael: Yes, indeed. We’ll cross paths sometime soon, I’m sure. Thank you. Thank you very much for joining us.
Jon: Thanks, Michael.