Making The Decision To Add A Partner (After Leaving A Partnership Yourself) While Approaching $500M AUM: #FASuccess Ep 476 With Kathy Longo

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Resources Featured In This Episode:

• Kathy Longo: Website | LinkedIn
• "Values Self-Assessment Tool" And "Learning Resource: Navigating Difficult Conversations" – Download (PDF)
• #FASuccess Ep 075: Walking Away From RIA Partnership To Scratch Your Own Entrepreneurial Itch with Kathy Longo
• Loveland Consulting
• PPC Loan
• Succession Resource Group
• EOS Worldwide
• Strategic Coach
• The Strategic Implementer
• RIA Recruiting
• Kolbe
• The Caliper Success Path
• Unearth Coaching and Consulting
• "What the Heck Is EOS?: A Complete Guide for Employees in Companies Running on EOS" by Gino Wickman
• "Traction: Get a Grip on Your Business" by Gino Wickman
• YESS!
• FPA Residency

Full Transcript:

Michael: Welcome, Kathy Longo, to the "Financial Advisor Success" Podcast.

Kathy: Thank you. It's great to be back.

Michael: I'm really excited to have you back again with us. You had joined us now seven years ago back on Episode 75, kitces.com/75 for anyone who wants to go listen. And I'm excited about today's discussion because when you joined us seven years ago, the dynamic was that you had been in the successor partner track at a large billion-dollar firm, which back ten years ago a billion was a really big number, though. Now there's some $10 billion firms and up, but that was a mega firm at the time. And you had this partnership track opportunity to become the successor and effectively decided, I think I'm going to kind of walk away, go in my own direction and hang my own shingle, and I'd rather just not really have partners anymore. I'm going to do my thing and steer it my way in the vision that I've got.

And I know now seven-plus additional years into the business, I think you've more than 3X'd from where you were then, that the business is much larger and has gotten to a wonderful place. And now you have started down the path of partnerships and succession planning. And just this whole dynamic to me is really challenging. The industry sort of generally talks about, well, the natural path of succession planning. It's just like the normal way that firms would transition, and everyone should be doing it. And in reality, succession planning is really hard, and a lot of succession plans fall through and don't work out. And just really getting everyone aligned on vision and goals and keeping them aligned is really hard. And so someone that has now lived both parts, you were the successor who stopped buying in, sold back to the founders and left, and now are the founder introducing succession and ownership to a partner coming in. I'm really excited to talk today about opportunities, like challenging realities of introducing new partners and the succession paths having literally lived both sides of it yourself.

Kathy: Yeah. I'm really surprised. I remember that conversation and it being so fresh of leaving and starting the firm and thinking, I'm not going down the partnership path. That's way too hard. And I'm not sure where I thought I was headed long term with the firm. But, yes, I have my first partner in the firm and thoughts about who might be our next partner in the coming year.

What Flourish Wealth Management Looks Like Today [05:06]

Michael: Very cool. So I think to start the conversation here, tell us about the advisory firm overall as it exists today, just so we have some context for the business, and then we can talk about some of these dynamics and paths.

Kathy: Perfect. Well, I started Flourish in 2014. And when we chatted, I think it was 2018. So back then, we had $130 million of assets under management and 61 clients. And now we're at $455 million and 163 households. Our demographics are still pretty similar. We focus on women and wealth and connecting the emotional and technical sides of money. And we were about 40% focused in that area back then. We're at about 38% right now. And still a really good mix of people that are still building and accumulating their assets and those that are more in retirement. So we're at 50% on...50-50 on that.

Our team has grown. We were three team members back then. Now we're at eight team members. And that consists of so, obviously, myself, and then I have three wealth managers, a director of investments who is also my spouse, who was also there back then, an investment associate that works with Jay, a client service associate, and an executive assistant. And so it's been great to build our team and Joey, who's been with us five-and-a-half years, who's the new partner. And Grant's been with us five years. And then a couple of our other...two of our other team members have been here a little bit over a year as we've expanded into some positions. So that's where we're at from a firm perspective.

Michael: And can I ask where revenue is overall for the firm?

Kathy: Yeah. We're right at about $3.2 million.

Michael: Okay. So as I look overall, $460 million of revenue, 160 client households. I know we've all got some barbelling and unevenness. But if I do the math, typical household for you could be a million or $2 million or more. Is that fair? It's like you've got…the moderate millionaires clientele as a sweet spot for you?

Kathy: Yeah. And definitely higher-end clients too in there. That can sway the number, but we've really kind of...we're sticking with a million of investable assets or higher as an entry point to work with us. And one of our focus areas is bringing in more accumulators as clients. So looking to create that entry for them too.

Michael: And so then the team is eight folks to support these households. You said three wealth managers and you. So are you still taking clients directly as well, or is the 163 households all served by the other wealth managers?

Kathy: I'm still involved in...not all client relationships, but I I'm involved in a good amount of client relationships, and we do a team approach. So there's always two individuals within every client relationship.

Michael: Okay. So you plus another wealth manager or two of them paired up for all client relationships. And then client service associate and investment associate support them for all of the underlying paperwork and things that go along with that.

Kathy: Yeah. And there may be...our director of investments may attend some client meetings, kind of depending on the client and interest level. And he might be paired up with another wealth manager and be in part of the meeting too.

Michael: Okay. So now that we have context for the business overall, take us back to this discussion of how did the person who left a partnership and swore off partners end up going down the road of introducing a new partner?

Kathy: Well, I realized the importance of the firm surviving well beyond me. And to really take care of my clients and be there for their long-term needs, I needed to think about that next generation and who would be there so the firm can continue to outlast me. And it's really about this legacy piece of building a firm that is more than just me as the founder of the firm. And then also, we can talk a little bit more, we bought another firm since I last talked to you. So that also kind of put front and center of the importance of succession planning and getting a plan in place.

But another opportunity too was thinking about the team members. So Joey, for example, and how to create opportunities for him to be rewarded for all of his contribution and his growth and incentivize him as an owner and how valuable that is. And also for client retention. And I know that there's no guarantee that Joey will stay with Flourish forever. I hope so, and we go into it with that intention, and then we write our agreements also with what if it doesn't work out. And I think I learned from the experience of leaving a partnership where our buy-sell agreement did have ambiguity and how things would be treated and worked with that same attorney who I worked with in exiting and creating what this new agreement would look like just to make sure things were covered in terms of I can't stop Joey from leaving. I can create pieces in there to discourage him from leaving. But that was really important.

But it was hard. I think I was…we finished up the deal earlier this summer, and I was really emotional. I just found myself almost feeling like I was selling a family member, and just kind of had to keep reminding myself it's bigger than what I created. I need to think about the broader purpose in our clients and that opportunity for Joey. Yeah. So I think that it's just the evolution of a firm. And it was definitely encouraged by being at so many different conferences and being at Future Proof and hearing about the importance of securing G2 [Second Generation] into the firm and just knew it's what we had to do for the success of the firm, for our clients, and to create opportunity for team members.

Michael: I'm curious to hear a little bit more, I guess what the trigger was? Why now? What so turned the thoughts from where you were? It sounds like it started with, "I want to have visibility that the firm lives beyond me," as the primary.

Kathy: As one of the reasons, but I think it's multifaceted is I need to reward people. They're looking for opportunity to stay at Flourish and to be at a firm that gives them that opportunity of ownership. And so to retain people and give them that opportunity and share in the financial reward and all the joys and learning that come with being an owner too. It's about the career pathing and the work for other team members. So it's about the team members. It's about the clients too. If I don't think about securing their important people that they work with in the firm, I'm not doing a good service to them. So they want to be with a firm that has a plan for the future and has people that will be there long term.

Acquiring Another Firm By Bringing On Client Tranches Over Time [12:59]

Michael: And then you mentioned doing an acquisition yourself also brought this into focus. So I'm going to infer that's because you bought a firm that didn't have a succession plan.

Kathy: So we bought a firm that...and we became their succession plan. I think she had visions of creating it internally at various points, but it just didn't manifest for her. And so we were her succession plan. And I can talk more about that acquisition too because the way we did it was in a really thoughtful way in that she didn't want to just sell her firm all at once and part with all the clients. What she envisioned is parting ways or selling a fourth of her clients at a time. So we bought those clients a quarter over four different tranches. And it was a nice way because we were still smaller. We started that acquisition in 2020, a little bit before, right before COVID, and then we completed it in 2022. It was supposed to be finished in '23, but by the time we had transitioned the third group of clients, shortly after that, she said, "Okay, we got to move faster than waiting a whole another year," and so we transitioned the last group of clients in there.

But for us, it was about 38 clients. But being a smaller firm, thinking back to our size then, and it was $90 million in assets, it was meaningful for us, and it was a great way for her to slowly leave the business, and then for us to take on those clients. And another plus was she did not become part of Flourish, so she still stayed in her own business and then gradually moved clients over to us. But she didn't have to come into our firm, adapt to our culture, learn our technology, and we didn't have team members to take on with her. She had one other individual that she worked with who also decided it was the time for her to retire. But yeah, so it just kind of brought front and center the importance of creating a good continuity plan for the firm and bringing people up within the firm.

Michael: So I'm intrigued just by this incremental acquisition and tranches over time. Can you share a little bit more about just how this worked, how you did it in practice?

Kathy: Yeah. So we spent a lot of time dating, I'd say. We spent multiple days at each other's office learning about how we worked with clients. For her, these were her family members. Not literally her family members, but she felt so attached to her clients like advisors usually do, and she wanted to find a good home. She was interviewing, I think, three or four different firms and really just trying to find that right fit and how the service model would match hers. And there was...

Michael: How did you find her or how did she find you to have the opportunity in the first place?

Kathy: Financial Planning Association. So we had met at the local chapter in Minnesota, and then actually would run into each other at national conferences. And when I started Flourish, she kind of reached out and we just started to connect. And over those earlier years, she started to talk about what she was envisioning for her, that she needed a transition plan. So we just hung out together for a while, and then we got serious and really started to share how we work with clients so she would feel comfortable that we would be a good fit. And we had a couple of things that were nice shared synergy. She worked with Charles Schwab, we did. So account transition was really easy. We also shared one software. The only other one we shared was ShareFile, which meant it was easy for her to drop all of her documents of the whole history of clients, all prior meetings, all legal documents, pretty much everything right into our ShareFile.

And so we had all of this information to start, but we also really were thoughtful on how we communicated. We worked with a group, and we said, "How do most firms make this transition? And they said, "Well, usually they just write their clients a letter saying, 'I'm transitioning. Here is the new firm.'" And we thought, well, that is so impersonal, how would that work? And maybe that does work when...maybe that's the only way you can do it if you have 400 clients or something like that. But for us, we were...she met with the clients, prepped them as to why she chose Flourish. She set up a meeting for the client to meet us. We talked about how we would work together, and then they had the choice if they wanted to come on board or not. And pretty much all but one client came on board with us, which was really impressive. And then following that, we had a couple of meetings where she walked us through the entire history of that client, what was still open for planning items. And so clients came on board knowing that we didn't miss a beat. We knew all about them. We were ready to take on their next planning piece. It was seamless for them.

Michael: Interesting. And I'm sorry, how many...you said it was 38 clients?

Kathy: Uh-huh, 38 clients and about $90 million in assets.

Michael: So you're doing these in tranches...just in practice, a tranche might be…

Kathy: Like ten.

Michael: ...ten people at a time. So thus I guess your point, a very manageable slice even if you're at the stage where it's like you and one other wealth manager trying to absorb these clients. You don't want to get overloaded.

Kathy: Yeah. And we had two wealth managers at that point. Actually, Joey, it was his first week coming on board with us, and I said, "Hey, we're thinking about doing this acquisition," and Joey has a CPA by background. I'm like, "I need you to build out some detailed Excel documents to help us figure out the financial benefits and how we would make this work." And so right away, I gave him access to everything and he was there on day one. And some of the clients that we took on had really very deep technical needs from really complex employee benefits and executive compensation. And Joey is just great on that subject matter expertise. And so he was the perfect person to bring on board. And I think another selling point was we were a bigger team that had dedicated investments. We had multiple wealth managers. And so the clients saw that benefit of a even a little bit larger firm.

Michael: So I want to make sure now I understand the process. So for each tranche, she goes out and does a meeting that says, "We're doing a deal with Flourish and Kathy Longo and her team. Here's why they're great. I'd love to set up a meeting with you and Kathy and her team so you can get to know them and how you'd all work together." Then you'd do a meeting and explain yourselves and what you do and give them the opportunity to sign and agree to come on board. So I guess this is all...everyone has positive consent here. There's no negative consent switch over. Each one has to agree and resign new advisory paperwork with you. That was the path.

Kathy: Yeah, that was the path. And so sign a new agreement and then an agreement to transfer all documentation, which just gave us a nice heads up on understanding the client and not having to ask them for tax returns or key documents that we would want.

Michael: Okay. So any surprises or challenges in how this played out? As you're framing it up, this all went smoothly and 37 of 38 came over and off we go on our merry way.

Kathy: So doing it over four times, there was a point where...I can't remember if it was number two or I think it was actually the third grouping where we had a difference in personality and how we were looking at things. And there's no right or wrong, but there is a point where she was thinking about changing her mind, if this was the right way to go forward. We brought in a great person, his name is Keith Loveland, who has done work with FPA, and we brought him in for some counseling and how to get us back aligned on the communication, and we did that. And then we continued on with three and four. But I think it's emotional selling your business and trying to make sure the communication. But if you sold it all at once, you wouldn't have to come back and have an experience where the person might change their mind. But Keith was great and just really kind of facilitated that conversation.

Michael: So the challenge specifically is because you were doing this in multiple tranches, she had, I guess, time to decide whether to second guess this or have regrets. Because for better or worse, if you do the deal in one fell swoop, once that paperwork's signed, it's like we're done. And when you're doing it in tranches, somewhere around the second or third, you can say, "Wait. Do I still want to be doing this?"

Kathy: Yeah. And the way that the loan structure had to be worked out, each agreement had to be its own agreement legally. So you couldn't commit to I would buy the all of the clients because I couldn't get the...PPC Loan is who we worked with. They're like, "We will only agree to financing one tranche at a time," because they're going to look at our financials and make sure everything is okay and reassess us on each one. So we originally had this agreement thinking we'll just write it for all four, but that wasn't permissible in terms of how I could actually buy it.

Michael: Because from the lender's perspective, they're effectively pre-approving...they would be pre-approving you for the second tranche loan that might not happen for a year with who knows what financial situation is in place by then. They don't know how to underwrite that. They're like, "Show us your financials when you do the deal, and we'll underwrite you on that basis."

Kathy: Exactly. And that was another thing, variables do change in that time period. So it actually worked out to our benefit that she decided to retire a little bit earlier and not wait a whole full year for that final fourth grouping of clients because interest rates hadn't really started to rise as much then. But if that was structured later on, we would have had much higher loan rates in that time period.

Michael: Was that actually a driver to try to get the deal done faster or just...

Kathy: No...

Michael: ...serendipity and respect?

Kathy: Yeah, serendipity. Yeah. But it's something that I had...I didn't really think about it too seriously in terms of where might interest rates head and how might that impact the purchase price. But PPC Loan was great to work with, and they had a structure where it was a ten-year fully-amortized loan model, and then they would keep adding to the tranche. The other thing in how we bought the firm, we would buy 80% of the value that we agreed upon with the firm. And then if those clients were still with us a year later, we paid the remainder 20%. So they also had to agree to hold funds for that final payout with us. But they were really good, and that model worked out well for us. We had one client who passed away, I think it was in that first year period. And so we had to kind of adjust for that. And then, actually, Lori was really great, and she had a client that she said was incredibly difficult to work with. And she said she let that client go versus selling them to us or transitioning them to us. She's like, "I couldn't do that to you." So there was definitely thoughtfulness on both sides as we put this deal together, but...

Michael: Nothing like a client deal where someone says, "I'm not going to sell this client to you. I couldn't do that to you."

Kathy: Yeah. Exactly. Oh, and I would say one other difference is that her firm was more on a flat fee model, and we use an AUM [Assets Under Management] fee model. So that was a concept to get the clients used to.

Michael: So did you transition all of her flat fee clients to your AUM model?

Kathy: Yes. Basically, that's what we did. And it wasn't too far off, and I think that she tried to kind of be more market…where sometimes people set a flat fee and they just never really adjust it over time. And so it's so far behind what maybe an AUM model would be. But there were certainly some clients that had like, "Ooh, that that's going to be a larger fee joining Flourish." And some of it, we could kind of position as more resources, more things that we were doing for the clients. But it's part of the conversation because as they joined that firm, I'm sure that was one of the pieces that she would use is, "Oh, here's the way we price."

Michael: I was going to say just right or wrong, there are folks out there who position flat fees very specifically as this isn't AUM. You don't have to pay AUM and the dynamics that go with AUM, which I would think makes it really hard when you're trying to do a deal and merge clients into AUM. But it sounds like she didn't necessarily market herself as flat fees as the alternative anti-AUM model. It was just how she wanted to price.

Kathy: Well, I think she did market that benefit to her, but I think what I recall in the transition is that more firms are based on AUM, and that just happens to be the way the industry is. So she had to educate those clients and get them ready for an AUM model.

Michael: And I think you said at the end of the day, all but one did convert. So at the end of the day, this did not prove to be a blocking point for them. Did you have to make fee or pricing concessions to some or many of them, or were you really able to get everyone to just be on the standard AUM fee schedule for the firm?

Kathy: Yeah, almost everyone. So pretty much, and the reason being is that it doesn't feel fair for me to have different models out there for clients. So to have consistency and fairness to existing clients, we really worked hard to get them all pretty similar.

Michael: Because you don't want to be in a situation where two clients have similar wealth receiving similar services and somehow don't end up paying the same fee.

Kathy: Yeah. Or an example of where...what we did is we gave them a period of time to get to the full model. So there's a couple that we said, "Okay. We'll kind of adjust you to 80% of what the full fee is, and then the next year, we'll kind of bring you there. And then by year three, we want to get you onto our full schedule."

Michael: Okay. So you just gave them an onramp, like a two to three-year onramp.

Kathy: Yeah. Exactly.

Michael: And I guess in practice by then, either they're happy with your services and the adjustments aren't a big deal, or they're not happy with your services and it wasn't working out anyways.

Kathy: Yeah. Yeah. And fortunately, we had the happy scenario.

Deciding To Pursue An Internal Succession Rather Than External Sale Of Her Firm [28:42]

Michael: So now bring us back full cycle. So you did this deal in, I guess, 2020 through 2022. Good news, person without successor still managed to get value of business. Flip side from your end, but I'd rather...I guess it's like you'd rather see your firm continue than do an external sale the way that this person did.

Kathy: Yeah. Yeah. And so I think that for sure that background of doing that external sale was also cementing that I need to start thinking about an internal sale. And back to your point of me not being involved in all clients, having a wealth manager who has ownership within the firm also was another opportunity that that person is vested in the client relationships and the growth of the firm. But yeah. So then back to Joey coming on, so he bought in 5% of the firm this past year, and we also structured it as a ten-year buy in. And for our structure, it's a personal loan so that he pays me for buying into the firm.

Michael: So you financed for him directly? He didn't have to do the whole bank loan path.

Kathy: Yeah. I did talk to PPC Loan, and that is an option out there. For the first 5%, I chose to self-finance.

Michael: Okay. For any particular reason or driver?

Kathy: Simplicity. And I felt okay with that format. There were some pieces that if he were to pay the full 5% down, I would be required to pay down our loan that we still have for the acquisition of the other firm. And I think it was I'd have to put 5% of that value down. And so I didn't want to do an immediate pay down. And also structuring it over the ten years was more tax beneficial for me with being able to structure that loan over a ten-year period. So tax reasons, and then PPC Loan was going to require me to pay down more of my loan because of that piece.

Michael: Makes sense. Because you’ve still got a loan commitment for the prior acquisition. And so if Joey doesn't want to sign on as part of the backer and guarantor, if you're going to have only 95% of the business, PPC only wants 95% of the loan. But then his purchase and financing forces you to do a pay down, which means it doesn't help your cash flow.

Kathy: Right. And there will come a time with that loan...I believe it's at 10%. So because it's not like...I do envision selling more of the firm to Joey. We don't have a set plan. We just finished the first one this year. But once at a 10% ownership or more, he will have to personally guarantee that loan, which isn't a big issue. Well, for me, it's not because it's his personal guarantee. But that is something in consideration of our acquisition that will have to be thought of in the future.

Michael: So can I ask, how did you do valuation? How did you do terms and structure for this first tranche transaction?

Kathy: We used Succession Resource Group, or SRG, for the valuation, which was...So we actually did that about a year ago, the valuation, which was done September 30. But it took a while for me to get all of the legal documents in place, so we didn't really have that until July. So we had a little bit older of a valuation. Actually, I remember getting that report from them, and it was...I'm often thinking about what's next and not stopping to celebrate enough of the success, but seeing the number, what the firm was valued at...I was with my daughter. We were out to dinner, and I was like, oh my goodness. I was just like...it was like getting an A-plus on a report card and just made me think about I've worked really hard to build Flourish, and it was like the stamp of approval. And it was also really insightful.

I'll get back to more of this number part of it. But I think everyone should have a valuation because there's a lot of good comment and feedback that they gave us. He started our conversation in the reviews. He said he didn't have a lot of comments for us because we were doing so many things right, but there were some great takeaways. Our average age of our client is about 62, and he talked about bringing that age down a little bit more. He talked about not doing another acquisition anywhere near if we were ever to sell, externally, because they look at the average age of your clients. So that kind of brought us down a little bit because we had done an acquisition recently. He talked about really continuing to build the next generation of clients. So with the families, making sure we have continuity with their kids. And then also talked about expanding into our other state focus, which we have been building up. Not only in Minnesota, we have clients all over, but we have a wealth manager who's based out of north of L.A. and we've been building up our market in California too.

So the valuation was just affirming and insightful and created some areas that we've been working on as we think about our strategic planning. But logistics, so Joey has a loan to me. It's a 5% interest rate payable over ten years. There's a provision in the agreement that you will set what our target profits are for the given year. And if we exceed that number, like 50% above that, we'll require an earlier pay down of principal. So it can account for taxes too. I wasn't so set on that provision, but Joy really liked it and liked the encouragement to pay the loan down sooner.

Michael: Oh, interesting. So nominally hitting your target profits and Joey getting his 5% share of profits is the cash he uses to just pay the note in the first place. If you have better profits, it sounds like he has a commitment that a portion of the excess profits prepays the principal faster.

Kathy: Yeah. Mm-hmm.

Michael: And then do you recast...what's the word?

Kathy: Yeah, every year.

Michael: Do you recast, reamortize the loan? So if he gets a principal payment, his next year's payment is lower or he just finishes it faster?

Kathy: No. Yeah, just finishes it faster, which then gives him the opportunity to feel more comfortable buying more sooner, which I think there'd be more sooner than ten years anyway. But so we used a valuation, like a revenue valuation, which was 3.46 [times revenue]. But it's adjusted based on the outstanding loan that we have out there too. And so some of it...we're an S corp, and so we made him a partner as of January 1st of this year, but we actually didn't do the transaction until July. So there were some discounts built in that we were using a much older valuation of September, had a lot of growth this past year. Our loan was paid down even more once we got there. And so he had a full year of profits, but also only started paying me the loan as of July. So little things to help give some discounts in there. Not necessarily that we do that formula.

Michael: Yeah. But it sounds like nominally, just the valuation came at 3.46 times revenue, and that was the number and then you adjust to the fact that, okay, technically, that number was last September, and we're a little bit bigger now in July. So that accrues a little to your benefit and you're getting six months of additional profits back to 1/1 even though we're not doing the deal until July. So those were the incremental concessions to help with affordability.

Kathy: Yeah. And that revenue multiple has to be adjusted for our loan, which we still have, I think, six years, seven years left of that loan. So it's still a pretty big loan for that other acquisition. So there's that benefit even once that loan is paid off that future cash flow that is going to come there. But we also have to consider that too, it's like some cash flow from the business is allocated. So we built out a really big...and Succession Resource Group did some detailed cash flow analysis, and then we took it and kind of built out what it would look like to hit those targets. And it's a little tighter and he needs to use some compensation in the first couple years. But kind of given growth factors, then a couple years out, it looks really good. It's also been interesting…I've been having to not really be responsible for other people's...the profit piece, I could take it a little bit more loose when it was mine. But this December, I'm looking at the numbers. Is it the way we thought it was going to be? And next year I'm just...

Michael: Because he's counting on this for a debt payment.

Kathy: Yeah. And we've actually exceeded what we thought the profits would be for this first year, but I do feel a real sense of responsibility to make sure those numbers are there for him. And also managing the business and investments that we need to make for the business, but a different feeling of having to be reporting to another person and not just myself. System-wise, I would take profits kind of when needed, but now I have to have a monthly system. So a different way of operating the financials.

Michael: So in this vein, I guess I'm curious if you can share, the deal at the end of the day does a multiple of revenue or a multiple of EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization]? What did EBITDA multiple look like?

Kathy: 8.55 [times EBITDA]. So they positioned it as both. What did it work out to in there? And that was based on the older valuation. The numbers were more beneficial just kind of given…but we didn't recast the financials to reflect not quite a year later.

Michael: And so I guess I get it from the math end, you're transacting at eight-and-a-half times EBITDA and financing over ten years. So stretch the payments out a little bit more than the multiple, and the cash flow tends to math pretty close to itself. Was that the idea, basically the profits would mostly cover the note?

Kathy: Yeah. Exactly. And then looking at, so we put in salary agreements for both of us, what it would look like. That was one thing that SRG said, my salary was too low because it really didn't necessarily matter. It was a reasonable salary, I thought, but not…

Michael: Well, we tend to push these numbers lower for certain tax purposes.

Kathy: But not really were market. So we had to put a salary agreement in place for both Joey and me and Jay too, being my spouse and the director of investments. So really thought about how he was benefiting cash flow-wise, the investment he would make with where his salary was headed and then also with the profits. And then, like I was saying, it's just kind of getting there in the first year, although we exceeded revenue expectation or profits really more so in this first year. So it was a little bit higher where we were at than we thought in the first projected year. So now we've got year two to look at for next year. So hopefully it's...but once we get into year three, it looks pretty positive. But who knows when we have market setbacks and other adjustments that come along the way.

Michael: I am struck by just the things that have to get adjusted indirectly once you add a partner beyond just you as founder. The established timing and consistency of profit distributions because other people have to plan their household cash. And, oh, now we truly have to set a fair market salary for ourselves because we're splitting the profits after compensation. So if I underpay myself, I end up over-distributing to my partner instead of just fairly distributing to my partner. So suddenly you need fair market wage salaries for yourselves to make sure those numbers true up properly.

Kathy: Yeah. You really do. And an agreement ahead of time so that it's not like, "Oh, now I think I should be here." Just in a fairness aspect.

Michael: So what else? Are there other adjustments or things that you had to change at the point that you've now introduced another owner besides yourself?

Kathy: Not really in the financial aspect. Although I did tell my husband, "We can't run our lunches through anymore. That's not fair to Joey." Like when I order Panera. But so just being conscious or Joey's not on our health insurance, and so kind of an adjustment for I am running our health insurance for me and other team members, he's on his wife's. Yeah, just transparency on how we're meeting on financials, setting expectations together. Joey is on the leadership team. So there's three individuals, Jay and myself and Joey on the leadership team. So we're talking about directional-wise as an owner. I think that the one piece I have on my mind is as we start to think about the New Year, I really think we might be at that point where we need more dedicated operations.

And so there's competing demands. We run on EOS, or Entrepreneurial Operating System, and there's what's called an integrator or a chief operations officers, kind of more general, or at least an operations manager. I really think we need more support in how to run the firm. Partly because I envision myself, I want to move more in visionary, continue to work on business development and marketing and key client relationships. But that's a piece that I have to think about with Joey that when can we make that investment and get alignment with him? But him being an owner is able to look at what's for the best of the firm and how does he look at that personally too? And I think that was a huge consideration of bringing him in. He has that owner lens in how he looks at the firm, and it's not always just through his own...what would personally benefit him.

Michael: And did Joey have to make any down payments or take salary adjustments or anything else?

Kathy: Well, he's using part of his salary, so his salary was adjusted. Every year, we look at people's compensation and where it should be and set that for the new year. So he did have some salary right kind of adjusting him for his role, and his role also within the firm is director of financial planning. So he did some kind of rightsizing on his salary. And the way we kind of thought about it is some of that increase he had, he'd be using some of that to pay the loan, and then in addition to profits, and then gradually profits will continue to rise. So it is a personal investment of taking some of his own compensation for this investment.

Michael: Okay. So now I'm curious. As someone who went through the other side of one of these succession partnership transactions that ultimately didn't work out and led you to part ways, I'm very curious what parts of that infused into this, whether it was conversations with Joey upfront, or ways that the deal got structured, or terms, or other provisions or aspects? How did your history with this influence your transaction here?

Kathy: Really being clear on if we were to part ways, what does that look like? And so, oh, and I did not look up this exact value, but there's a formula in there in terms of if clients were to leave with him, the amount that he would need to pay for those clients. Because I can't stop clients, if Joey is their key person, from leaving, but there should be some financial benefit that comes back to the firm.

Michael: Oh, interesting.

Kathy: That was a big thing when I left. That was part of our negotiation. We just didn't have it down in a solid fashion. So I have to be mindful as I know from personal experiences, some partnerships aren't meant to be forever. And so thinking about, okay, what does this exit look like if it were to happen?

Michael: So the structure is he's not non-compete bounds that he can't leave and hang his own shingle. It's simply if you leave and hang your own shingle and clients go with you, you essentially need to buy them out and just pay the market rate for essentially an acquisition buyback.

Kathy: Yeah. And it's market rate…there's not an incentive for him to just go off and be like, oh, just pay that market rate. It would be expensive for him to do that.

Michael: Okay. So it's not designed to be an unappealing deal-creating path. It's designed to be a reasonable rate recognizing the hardship on everyone to separate, but he's not bound and handcuffed for life if he needs to separate. He's got a pathway and you've got a reasonably enforceable mechanism for it.

Kathy: Yeah. Exactly.

Michael:  Okay. Okay. Anything else in just what you did differently in process or in terms and structure given your history with partnerships?

Kathy: Well, and I just spent a lot more time in working through the legal documents and really making sure that we had thought about the different scenarios, talked to a lot of the individuals in my study groups and understanding what to think about and just really try to be knowledgeable and thoughtful on how to do it. And then worked with myself personally because it's emotional selling this part of the business I've worked so hard for, and just realized it's more than just me. This is about the clients, this is about other opportunity, and it's the right thing to do. But it felt hard and I felt like I was a little emotional this summer working through all of this.

What’s Next On Kathy’s Business-Building Journey [47:59]

Michael: So are there more tranches planned? What comes next on this journey?

Kathy: So I envision another individual in the firm as our next owner, and there's not a set...this is the amount for Joey, but I do envision...We've talked about there will be other tranches for him to buy. We just haven't put a set plan. I'm just getting used to getting partnered again.

Michael: Yeah. So is there a vision of, I guess, how much ownership you want to transition or timelines for it? Is this, I don't want to be majority owner in X years, or I want to be able to be completely out in Y years, or we're just kind of taking this one day at a time?

Kathy: One day at a time. But a vision that I really want to keep our key people hiring. When we last spoke, that was where I was struggling with hiring people. I really want to secure good team members to our firm, and I think ownership is that opportunity for them. And I want people that join the firm in some of these roles that want that ownership and strive to think like an owner. So that synergy will create more opportunities for more ownership and transferring it. I don't have a set date that this has to happen or this is exactly how it will look going forward. So kind of being open with those goals in mind are the important considerations that I'm thinking about now.

Michael: Is there just an overall timeline for how long you still want to be working in the business and doing adviser things? I'm cognizant all of this started with, "I want to make sure the firm can live beyond me."

Kathy: Yeah. There's not a set like, oh, I see myself doing it for this period of time, but I have gotten more clarity on thinking about my own unique ability. I did Strategic Coach for a couple years, and one of their concept is your own unique ability and what would bring me joy. And so I've really been thinking about how to move the business to the next level. I'd say at our ten-year mark, I was really kind of like, ugh, I just felt stuck in…what's that next piece? And that's where I think bringing in maybe a key individual that can help with really the operations side of the business would allow me to move more into...I love being the visionary, but I'm feeling a little drained on having to be so much in the implementation. So finding that partner, I really do think that's the piece of what the firm needs and what I need to continue in my joyful path of being a part of Flourish. And so that's more what I'm focused on is how to bring the firm to the next level, but not necessarily...there's another concept in Strategic Coach, “It's the who, not the how.” I really need to figure out that who person who's going to help me bring that business to the next level. So I definitely see that in the coming year of working on what that might look like for us as a firm.

Michael: And so your size with a team $3 million-plus of revenue, it's that deeper operation seat that's feeling like the pinch point, the pain point now?

Kathy: Yeah. That is what it is for me in creating where I find joy, which is in key client relationships. I love the marketing. I love business development. I really love kind of thinking of the vision. There's another concept in EOS, LMA, leadership management and accountability. I'm really bad at holding accountability and not the greatest manager. I feel like I could use a little help in the general operation and then the team management.

Improving Hiring By Using Assessments And Recruiters To Identify Candidates Who Fit The Firm’s Values [52:12]

Michael: So I am interested to hear more as well, because you had highlighted when you joined us seven years ago that the dynamics of hiring were challenging, finding the right people and the right fits. It sounds like that has gotten better now. So I guess I'm also curious to hear more of what's changed on the hiring side of things.

Kathy: Yeah. So shortly after you and I met, I would say, actually, oh, that was almost like a low point. Like, oh, great, I started Flourish, and things were going really well. But I was really struggling with getting the right team members in place, and then feeling so lonely, like how do I figure this out? And sure, I have study groups and other people that I can reach out to, but I really didn't have a dedicated resource. So I hired a firm called Strategic Implementer and Ginny Hudgens, and she really became that person who I met with her weekly, like a coaching type relationship, and really helped me look at the firm and what the firm needed.

And one key thing was hiring is to not...I needed more dedicated help in hiring. And so there was an individual that was part of her firm. I think he actually is still part of her firm, but he has his own firm now called RIA Recruiting. And Brian Looper has done all of our hiring since then. He's the individual that's brought on Joey and Grant and our key team members. So removing me from hiring, and then really doing deep dive in. We do a real initial screen of Kolbe, but then we do this test called Caliper, which is great, although it can take a while to find the right person. It really measures their job...a score and job fit and how well they were doing the job. So that dedicated slow time to finding the right people has really helped make sure that we've got the right team in place.

Michael: So I'm curious to hear more then. So what are the, I guess, assessments or tools that you're using now to try to figure out who's the right fit?

Kathy: Yeah. So Brian will do all of our initial screening for candidates, and then he'll present the candidates to us. And then we'll have him do...if we're like, "Yep, that looks right and this is what we're looking for," then we'll have the quick Kolbe test, which will give us a little sense of where they're at in terms of their fact finding, follow through, quick start. Then from there, then we will meet with them. So we've kind of almost screened them from that Kolbe, or whoever is kind of maybe the person they're going to report to will meet with them. And then we'll do this Caliper test, which takes a couple hours to complete it. I actually hated it when I completed it, but it does really give some great insight into different work characteristics like assertiveness or empathy, their sense of urgency, thoroughness, their self-structure, like personal organization. And then it takes all that information and it has set jobs out there and it matches them to a score of how well they would do in that job. And so you can find things that are really inconsistent...things that you never would have thought somebody that might kind of show up too aggressive. Thorough, but aggressive, probably not the best fit for us to is having an aggressive person within our organization.

And then also the work that we've done on our values. So I know we had this values and culture assessment when I last met with you. We continue to really look at how do we hire with our core values and really understand what the principles and the culture and who would be a good fit, which some of these characteristics in Caliper kind of speak to how they do within our culture. And then more in person, or not in person because three of our team members are actually remote, but more meetings with them via Zoom and getting to know them. But that's really helped us, having that independent person to help us evaluate, and then never questioning. I think some of the mistakes really were questioning some of these assessments. Like, "Oh, but we like them." Never can question...if there's something that's questionable, get a pass on that person, and that's been really helpful too.

And then on the people side, we've also done a lot of work on career development. We work with another individual who's done great work on...She's an industrial psychologist. Her name is Susan Geissner, and she has a firm called Unearth Consulting. She's done a lot of work on, what do we do to onboard people into our culture? What do they need to learn? And what does that look like from the various paths? And so that's really been helpful in getting people into the Flourish culture.

Michael: So help us understand further...I guess as I'm trying to visualize the hiring process, the assessments you use, when they actually kick in. So Brian does initial screening to present candidates, and is that specifically for adviser positions…or is that all positions?

Kathy: All positions. He focuses on the financial planning industry. But he can do any different positions. So he's hired my executive assistant. He's hired wealth managers at various stages. He can do operations people too, but he has a strong understanding of the RIA environment and what type of a team member would work well. And his work in working with Ginny at Strategic Implementer where they are working in financial planning firms being their coaches and helping them with their strategic plan has given them great insight into what it takes to run a firm.

Michael: Okay. So he does the screening. You look at candidate list. You, I guess, narrow it down to a shorter list. So then they get Kolbe and Caliper at that point?

Kathy: No. Kolbe first and just kind of an initial screen like...Because that one takes maybe 20 minutes to complete, and so we don't want to have them invest too much time. The Caliper takes a couple hours. So then we'll meet with them, and it'll usually be whoever is their...who they're going to report to, they'll meet with them. And then assuming they feel like there is a good fit from there, then we'll have them do the Caliper test. And that tends to screen quite a few people out that we really like still, but it has been invaluable of understanding their fit for the role at a much more detailed level.

Michael: And then is there more that comes after the Caliper test, or at that point you've now narrowed down to a short list and you're going to make your decision?

Kathy: And it tends to be...it's not like, "Oh, here are your ten candidates." It's like maybe they're at a little bit of...we're kind of working a couple at a time and, no, they didn't work out. So it's never like, "Oh, here's the ten." Brian's still continuing to look, assuming that they might not make it all the way through the Caliper part of it all. But from that point, then we're bringing in the broader team who's not really interviewing them so much as starting to sell them on Flourish and our values and giving them a chance to meet us. And usually at that point, we're ready to make an offer.

Michael: And you said there are aspects of culture, values, principles that feed in this process as well. So can you help us understand, I guess, what that is, how that works for you?

Kathy: Yeah. So it can be...an example, so we have our values, which are things like bring excellence and heart in everything we do, make a difference, grow and share our experience and insights, take initiative, be resourceful, appreciate and celebrate. But then we have this principle document that really kind of talks about what that would be, like question premises and strategy. You can look at the way people are, some of these characteristics, to kind of see how they might be in kind of their accuracy, their follow through. You know, another one of the principles is keeping your promises and over-delivering on projects and deadlines, problem solving, or recognizing and taking action. There's about 20 of kind of what the culture looks like. But these...

Michael: These are behavior statements about what it means to live the values. If you're living the value, you're doing these things.

Kathy: Yeah. Exactly. So what works for Flourish. And then at the same time, we have this piece about what doesn't work. Oh, some of it is like expecting your teammates to motivate you or counting others to do...putting off what can be done today, those type of things. But you can see these characteristics in Caliper. And then also using it to ask specific questions about examples where this might have shown up. And so that culture document is one that we use. We use it on an ongoing basis to hire people. We use it as an annual conversation where we have this values self-assessment tool where every year individuals go through that with their manager and we ask them questions...

Michael: Talk about whether they're doing the values and the principles, behaviors.

Kathy: Yeah. Exactly. And ways that they want to continue to use that or change...maybe some things that they're noticing that they're not exhibiting as well. So it is a good way to keep values front and center within the firm, and I just think that's such a key of understanding your culture as a firm and using it in all aspects.

Michael: And you said this is something that you've documented internally. Is this something you'd be comfortable to share with folks? Just so they want to see what does this look like in practice? Just values and principles, I guess a scoring document, assessment document. I don't know what you call it.

Kathy: A self-assessment tool is what we call it, but a values self-assessment. So I'll share that with you. And it's a couple of pages, and it has some really good questions that people can use to have conversations and really just kind of make sure that they're aligned. And one of the things with people management, and being an EOS firm, we're using this people analyzer tool where we're grading them as far as their alignment with our company values in addition to other aspects of being able to do their job and getting it, wanting it, and having the capacity to do it. But values...that document, I think, is really key for firms to state, or has been key for us to state what our values are and what does it really mean to be living in our culture. And we review it every year as a leadership team to say, “Is there anything we would be tweaking?” And it really hasn't changed since I last spoke to you.

Michael: Well, appreciate the willingness to share. So, I guess for folks who are listening, this is Episode 476. So if you go to kitces.com/476 and scroll down a tiny bit to the Show Notes section, we'll have a link out for Kathy for Flourish's values and principles assessment tool.

Aligning Compensation And Career Paths With Flourish’s Values [1:04:06]

Michael: So because I guess, Kathy, I'm just trying to envision as you go through, does this impact compensation? Does this impact raises? I guess, at least on the ongoing basis. Are they literally scored if you don't get an average of four out of five on the values, then this has adverse repercussions to you?

Kathy: Yeah. So it does in different ways. Well, if there's not a value alignment and other components of not being able to do the job, we would have to look at them not being a fit. But the work that we've done with that values assessment or working with that industrial psychologist, we've created this whole career path that has these types of conversations and learnings. And so our incentive compensation program is built out where there is a traditional firm component with revenue and profits hitting a certain number, and then that opens up an incentive piece for them. But then the whole individual part of it, which is the second layer of it, is built on them completing career development work. And this is what I would call annual career development work or...in each phase of one's career, there's a checklist and work that they're...what we've defined as opportunities for them to grow in their career.

So we say the individual component is based 50% on them hitting certain service standards and doing this career development work and growing in their role along their career path. And then the other 50% of the individual is based on them completing their rocks, which in the EOS terminology is really just their quarterly goal that they're working on, which is usually something to make the firm better and move us along as a firm. So we bring some of this work back into the incentive compensation, and then their individual component is comprised of various tools like this.

Michael: So I'm intrigued by this. So incentive compensation, I'm hearing two components. There's a firm component that is hitting revenue and profit goals. So can you share just how much of compensation is on the table for that? I don't know if that's a 2% bonus potential or a 20% bonus potential or something in between.

Kathy: Yeah. It varies based on role, but it does go up to 20% for some of the roles. And 10% being based on the firm component and 10% being based on the individual, and then the individual kind of breaking down further in them hitting their quarterly goals, them hitting service standards that we've defined for them, and then the career development work.

Michael: So higher tier...I'm assuming it's like higher accountability roles in the firm have higher variable percentages of upside they can get if things don't go well.

Kathy: Exactly.

Michael: So for the firm component, is it just like a knockout threshold? We hit the number and you get the bonus or not, or is it more gradual and formulaic?

Kathy: It is…we've hit the number or not. So it's pretty straightforward. And then there's two payouts, one in July and one in...well, one in July and one in January.

Michael: Okay. And then the individual component, so half of it is doing their quarterly objectives. It's quarterly rocks for us EOS folks. And the other 50%, I think you said hitting service standards and career development work. So can you explain more what service standards and career development work are? What are they doing? What are you measuring?

Kathy: Yeah. So for wealth...well, everyone has kind of a task completion because we work in Salesforce. And so having a certain amount of task...or not having more than…tasks two weeks late and not having more than 20 tasks out there. But also things like we set service standards of we want to make sure we have agendas to clients in a certain time frame. We want to make sure we have summary letters laid out and any follow-up items within a certain time frame. So those are all measured out of Salesforce and rolled up into service standards. And then even at higher levels, there are certain things we've put as part of their KPIs [Key Performance Indicators]. In leadership team, we're making sure that we're each taking clarity breaks once a month at least to work on the firm and really think about the firm at a deeper level. Monthly is the expectation of moving forward with one of the career...it's a career reflection that somebody would use based on where they're at in their career work. So it can be anything from this whole path has things like reading different books to watching a certain pod or watching a TED Talk and then reflecting on it.

And so we've laid out different areas within the career pathing that cover everything from technical skills, functional skills, what is expected, client service skills, leadership skills to develop, and business development skills. And we have these different career paths for not only the wealth manager, which it kind of starts at associate, to moving to wealth manager, to moving to senior wealth manager, to a relationship manager. But we also have it for client services, being an associate, to moving to senior client service, and then a client experience lead, which we've defined. We don't have anyone who has done that role yet. And then investment path has their own pathway there too. But the concept is really built on how do we teach people to manage themself, to how do they start to manage others, to how do they start to manage functional areas within the firm? And so there's a whole bunch of details below and different tools that we've developed along the way.

It's like one of the other ones in that learning resource, and this is with Susan who's an industrial psychologist. She's created tools with how to navigate difficult conversations. And so it has this video that people watch about crucial conversations and really this exercise of understanding how to give feedback and come prepared for a conversation, which is really important as a manager, to be able to work with your team member, to be ready for that. And then we have her in-house at various times throughout the year to work on training with our team and communication skills. But really, that's probably been a key in shifting not only the way we hire, but also how do we grow and develop our talent within the firm.

Michael: And just I'm struck with this in the context. This isn't necessarily, I guess, your happy place. Per your comments earlier, you'd rather do more of the visionary stuff than the lead manage hold accountable. So it sounds like this is the work of the organizational psychologist helping. This is Susan Gleisner helping to build some of this out?

Kathy: Yeah. So she helped to build it out, but I would have to...so I do have the ability to do this detailed work in Implementer.

Michael: You could do it. It's just not your happy place.

Kathy: So Susan and I hung out for about a year in working on these pathways and developing them and giving her feedback of what was important to me. So me kind of setting up the vision and coming back with, okay, so here are some of the tools we use. And this is...for example, we're that EOS firm. So here's how I see a brand new person. They start in their first 90 days, there's a whole onboarding piece. But reading, "What The Heck Is EOS? Because we use a lot of this jargon that's come up a little bit in our time together. But understanding, what is EOS and the strategic planning process for this firm to later really having read the book "Traction," learning how to run the weekly meetings, which they call L10s. And so I've had to be really involved with the creation of this because I believe it's really important. But I'm very happy for that person that might be coming along down the road to take over and how to manage and continue to run these systems throughout our firm.

Michael: So what comes next for you and the firm from here?

Kathy: I do think it's continuing to think about what brings me joy and what my unique ability is. I envision just really continuing to...how to figure out how to run the operation of the firm and develop our team so that we're really helping them grow and have rewarding careers. So I think that's the key piece is what is that next...the next piece is me letting go of some more, getting the firm to be able to run without me, not that I'm going anywhere, but I think that's also the success of a good firm is that that I surround myself with great team members that they don't necessarily need me all the time.

Michael: Is that challenging given that it has been built around you for the past ten years?

Kathy: Yes. It is challenging. I think I can do it though. It's learning to be okay with different outcomes. There's kind of being really clear, what's my non-negotiables? Really trying to instill how we do things. But in the end, I do have incredible trust for the team and their decision-making ability. And so it's just being okay with a little different outcome, and not...So, for example, I'm not in some of our various team meetings. There's a financial planning team that meets weekly. I'm not involved with them. And so I need to be an investment team, kind of the same aspect where they run their own weekly meetings. I'm just in the leadership meeting. I have to be okay with what comes out of there and let them grow and kind of learn from what works and what doesn't work.

Michael: I like how you framed it that just I have to get clear on what my real non-negotiables are, and then I can better let go of the rest because I at least made clear what really is my non-negotiable.

Kathy: Yeah. Yeah. There is another tool that is used in Strategic Coach. It's called an impact filter. But it does help me kind of think about, okay, if there's an objective, what is the purpose? What's the ideal outcome? Kinda say what my thoughts are and what success would mean, and then let them run with it. And let that see how that rolls out. And I think that'll be really important too in bringing that operations person on down the road is I have to be willing to let them run with it, and I have to be willing to let them come back to me and say, "Hey, that's not going to work." And somebody who can challenge me, that's important.

What Surprised Kathy The Most On Her Journey [1:15:30]

Michael: So as you reflect on this journey now over the past decade of being in the founder seat and building your own versus the preceding decade as a partner in the firm, I guess I'm curious, what surprised you the most about this path of building the business and now expanding ownership in the business?

Kathy: I think the surprising piece is how much guidance is important along the way, to surround myself with people that will help me grow. So that low point that I mentioned where I was just feeling so lonely at the top and then reaching out to a firm, that strategic implementer, and working with that person for a period of time. And then not being afraid to recognize you work with people for a set period of time, and then it's time to look for your next growth opportunity. So I continue to find growth opportunity and resources along the way that do help me to grow and be the best president of Flourish Wealth Management as possible and the best person too. I think it's just really important to surround myself and invest and put the money towards those resources. And I've had coaches along the way too, because I'm not done growing and learning.

Michael: Can you share a little more of what those investments are that you've made? As you view it, what are the resources that are helping you be the best president of Flourish Wealth Management that you can be?

Kathy: So that piece of bringing in that outside resource with Strategic Implementer, we hired them for a set period of years, to then I felt like I wanted some more tools and resources. So I did a two-year Strategic Coach program, and that was really good. And I've taken away different tools there. To also we were self-implementing with the whole EOS system when you and I last spoke. We started to work with an implementer. She's an early implementer. Her name is Sue Hawkes, and she has a firm called YESS! and she's actually writing the book about there's a whole way you identify issues for the firm, like how do you identify them, discuss them, and solve them. She's writing this book that's going to be coming out. But she was a nice-size investment for us to bring in that level of expertise. But it really helped us figure out how to really run on EOS, use all of the tools. We met with her quarterly. We did two days with her. And she challenged us as a leadership team, and we learned a lot through that process. So that's what I mean, invest in those people and resources that developed me and challenged my way of thinking.

Michael: Is there a budget you set, a dollar amount you think about? Just how do you set the spend or get comfortable here? Because I've seen folks talk about making these sorts of investments and some of us do that by spending a few hundred dollars and some of us do this by spending tens of thousands of dollars. How do you set that?

Kathy: More so working within the budget. But typically when I think about all the resources I just mentioned, they're much more in that higher than the few-hundred-dollar amount. But I think sometimes it's also taking a chance in that if I were to base everything about, oh, financially, ugh. So they're kind of just taking a chance that the investment is going to pay for itself. And so using a little bit of my intuition and like, "Okay, no, I think this is really what the firm needs." We tend to be a little bit early when we reach out for resources. They'll say, "Well, mostly we start working with firms when they're at this size." I'm like, "Well, I think we're ready." So I tend to usually take a little bit of risk on that side for the end goal of becoming a better firm.

The Low Point On Kathy’s Journey [1:19:50]

Michael: So then share with us a little bit more where the low point was in this journey and what was going on there.

Kathy: I'd say the low point was really just losing two of my team members and being left with...well, this is bad. Not left with, being with my husband, who I'm so fortunate to work with. Well, it was just the two of us, and we had to figure out how we were going to build the firm. And really, Jay's been incredibly supportive over the years, but we've also had to work hard working with a spouse. It requires a whole new dynamic and communication, and when we can talk about things and when we can't. I do know this rule, I can't wake up in the morning and start talking business. I have to wait until business hours. But that was probably the low point.

Michael: What are the couple's rules here? Now I'm very intrigued. You have to wait until business hours to talk about the business.

Kathy: Yeah. We have to wait until business hours. We have to have...and this is probably any good conversation is like, nope, I'm just looking to share. I'm not looking for advice, being clear what you're looking for at that time. Setting time frames for how long you'll talk about things. Also, technically Jay reports to me. It was 100% my firm. I am the president. He is the director of investments. And so I have to give him feedback. Back to that navigating difficult conversations. I have to sit down with him, and there'll be this point where I'll need to say like, "Okay, this is me coming...we're having a conversation, me as the boss here." And so we've worked and we've done a ton of therapy too, which I also think is a great investment, not only personal, but couple therapy, and how to work together. But those are hard. So I think communication and really laying out what it looks like, and then not letting certain things carry through stuff that happens on the personal side, that just can't come into the workplace. And then anything that's tension that we might have in the workplace, that has to be...we have to let that go at night to be a married couple again.

Michael: Right. And so then all this got brought to a head when...I guess I'm inferring it was you and Jay and two team members, and then the two team members both left, and it was suddenly you and Jay again?

Kathy: Yeah. Well, Jay wasn't there in the beginning, but it was just Jay and I. And then I just really didn't have the confidence that I knew what to do and how to build a team.

Michael: So what happened that all the people left?

Kathy: I think that some of it is really being...One individual, I think that I was just too hard with her and just had too high of expectations. And with a small, growing firm, there's so much to do, and I think that it just can be challenging wearing so many hats. Another person, I think it was just probably not the right fit in the hire to start with. And so some of it, I definitely have to look at myself, and what are my expectations, and are they realistic as we hire? And what's the right type of a person who can be with us? And I think as such a growing firm too, we outgrow people and who is there for us at one point might not necessarily be the right fit for us. But it's hard in a smaller firm because one person who is not functioning well or leaves the firm, it creates a big hole in the fir, or two people who leave, and then it's just down to me and my husband. That was hard.

Michael: So how did you handle or what was the response you had to rebuild when all the team members leave?

Kathy: That's when we hired the firm RIA Recruiting, who was part of Strategic Implementer, and just said I need...and that was kind of what they called...they said, "You need to get the right team in place. You've got to do this differently in how you build your team." And so I really relied on their expertise in how to put things together.

Kathy’s Advice For Her Younger Self And For Newer Advisors [1:24:09]

Michael: So what else do you know now you wish you could go back and tell you from ten years ago as you were starting down the founder-owner path?

Kathy: I still believe I probably could've done the founder-owner path earlier, believing in myself, and just really finding the joy in building the firm and using my entrepreneurial skills. I think the way that I've been able to put both my personal and professional life together has been a surprise. So some of it's just the time in my life, but I spend half the year in California and the other part in Minnesota. COVID was a great shift in how I could work with clients, so that made that possible. But that has been personally gratifying to me in how could I work in the business? And also, how would I work with team members? So I never would have thought of having remote team members, but three of our team members are in other states now other than Minnesota. And it's also opened up hiring opportunities, expands our market. So I think those are surprising things and just finding that joy of the personal and professional way of being in my life.

Michael: So what advice would you give other younger and newer advisors coming into the profession today and trying to figure out their path through this?

Kathy: I think there's so much opportunity in working at small firms in terms of getting exposure to so much of the different aspects of the business. So I think that there's just so much to learn not only on how to be the best financial planner out there, to also how do you really understand what happens in a firm and how do you start to think like an owner? And I think especially in smaller firms, you get that exposure. So I think that, and I think continuing on the financial planner path is how does a planner continue to...a lot of times they come out with these technical skills, but there's so much to learn on the communication side, and how do you support a client through some of the necessary but sometimes uncomfortable conversations? And there are programs out there.

I'm going to do a little plug for Financial Planning Association and their Residency program. I'm the dean of that program now, so kind of continuing to give back to Financial Planning Association. But it's a program for new certified financial planners and teaching them the art of financial planning. And it goes through...it's a week long intensive program. Oh gosh, it's all day long. The people that attended, the residents, they work so hard in developing their skill sets, and it's amazing to see the shift that takes place over the week. It's with experienced mentors that are a part of the program, and I'll be the dean at the next program, which is next June. But I say that and that it's so important to develop your skills in so many different aspects, not only from your technical knowledge, but how do you really sit with clients. And I go back to that therapy comment too. I think there's so much personal work that we can all do that just creates the best version of ourselves.

What Success Means To Kathy [1:27:40]

Michael: So as we come to the end here, this is a podcast about success, and just one of themes that comes up is that that word success means very different things to different people. And so you're on this wonderful path of success with the business now as you're coming up on half a billion of AUM and millions of revenue and new successor partners coming in. So the business seems to be in a wonderful place. How do you define success for yourself personally at this point?

Kathy: Well, obviously, because I was here before I knew this question was coming. So it had me thinking about a text that I received this summer from my son who's now 20 years old. And so if you'll humor me, I'll just read this little text. But he wrote to me, "I'm so proud of you, Mom. I remember being little and setting up your office, and I felt so happy because you were living out what you wanted to do. And it always reminds me to this day that anything is possible, and always stay humble. You truly are someone I look up to, and I strive to have the work ethic you do because I've honestly never seen someone work with determination and drive that can match yours. Keep on working at it, Mom. You will always be number one in my eyes." Ended with four yellow hearts. And so that's success to me.

Michael: I love it. Wow. Wow.

Kathy: Yeah.

Michael: Well, thank you, Kathy, for joining us on the "Financial Advisor Success" Podcast.

Kathy: Thank you for having me back. It's so nice to reconnect.

Michael: Thank you.