Welcome back to the forty-third episode of the Financial Advisor Success podcast!
My guest on today’s podcast is Marty Kurtz. Marty is the founder of The Planning Center, an independent RIA based in Moline, Illinois, that – as the name implies, quite deliberately – provides comprehensive financial planning for clients, along with investment management for more than $700 million of client portfolios.
What’s unique about Marty’s business, though, is that he’s already in the midst of executing a succession plan that will ultimately wind down his ownership and management of his 26-employee and now multi-partner firm. In other words, while a lot of advisors talk about succession planning, Marty is actually living the process.
In this episode, we talk in depth about succession planning, and the real-world challenges that crop up in trying to facilitate an internal succession plan, from the difficulty in finding an “appropriate” valuation for the firm, the dynamics that emerge between founders and the next generation of advisors that want to take over the business, and why founders need to recognize the trade-offs that often exist between maximizing the dollar value of the business by selling to a third-party, and maximizing the longevity and sustainability of the business itself by selling internally.
From there, we also talk about how The Planning Center is shifting away from the AUM model to a unique retainer model that charges clients 1% of their income plus half a percent of their liquid net worth, how Marty jump-started the growth of the firm in the early years with a strategic partnership with a local accountant (and how they structured – and had to later change – the revenue-sharing solicitor agreement), and the unique household cash flow planning technique that he uses as the First Step of the financial planning process with every client.
And be certain to listen to the end, as Marty provides his advice to those who are looking to become successors in a firm about the conversations they need have – and drive, if necessary – with their founders to ensure the succession plan really happens. And Marty talks about the new business he’s helping to create – called Turning Point – that helps experienced advisors who founded firms and are looking to sell to figure out what they really want and need, deep down, to make the succession plan a success.
So whether you’re curious to hear the successsor’s perspective on executing a succession plan, or are looking for ideas of new and innovative non-AUM advisory firm business models, or simply want to learn how one advisor built success with a focused strategic alliance with an accounting firm, I hope you enjoy this episode of the Financial Advisor Success podcast!
What You’ll Learn In This Podcast Episode
- The Planning Center as it exists today. [4:30]
- Why the mentorship process is so important, especially when used with succession plans. [13:20]
- The unique 3 bucket household cash flow planning technique that he uses as a First Step of the financial planning process with every client. [24:55]
- Why The Planning Center is shifting away from the AUM model to a unique retainer model. [39:47]
- How Marty jump-started the growth of the firm in its early years by a strategic partnership with a local accountant. [54:58]
- Why founders need to recognize the tradeoffs that exist between selling to a 3rd party and selling internally. [1:08:07]
- How to navigate finding the right valuation for your unique succession plan. [1:14:08]
- The dynamics that emerge between the founders and the next generation of advisors that want to take over the business in a succession plan. [1:30:47]
- Marty’s advice to those who want to become successors in a firm and how to have the right conversations. [1:36:20]
Resources Featured In This Episode:
- Marty Kurtz
- The Planning Center
- First Step Cash Management
- Turning Point
- FASucces Episode 22 – Jude Boudreaux
- The Opposite of Spoiled by Ron Lieber
- CFP Board
- FPA – Financial Planning Association
- Money Quotient
- Sudden Money’s Certified Financial Transitionist
- Matrix Asset Allocation (now Matson Money)
- Dick Wagner
- Peter Block
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Full Transcript: Navigating The Internal Succession Planning Turning Point As An Advisory Firm Founder with Marty Kurtz
Michael: Welcome, everyone. Welcome to the 43rd episode of the Financial Advisor Success Podcast. My guest on today’s podcast is Marty Kurtz. Marty is the Founder of The Planning Center, an independent RIA based in Moline, Illinois that, as the name implies quite deliberately, provides comprehensive financial planning advice to its clients, along with investment management for more than $700 million of client portfolios. What’s unique about Marty’s business, though, is that he’s already in the midst of executing a succession plan that will ultimately wind down his ownership and management of his 26-employee and now multi-partner firm. In other words, while a lot of advisors talk about succession planning, Marty is actually living the process.
So in this episode we talk in-depth about succession planning and the real-world challenges that crop up in trying to facilitate an internal succession plan, from the challenges in finding an appropriate evaluation for the firm, the dynamics that emerge between founders and the next generation of advisors that want to take over the business, and why founders need to recognize the trade-offs that often exist between maximizing the dollar value of the business by selling to a third party, and maximizing the longevity and sustainability of the business itself by selling internally.
From there we also talk about how The Planning Center is shifting away from the AUM model to a unique retainer model that charges clients 1% of their income plus 0.5% of their liquid net worth, how Marty jumpstarted the growth of the firm in the early years with a strategic partnership with a local accountant, and how they structured, and later had to change the revenue sharing solicitor agreement and the unique household cashflow planning technique that he uses as a first step of the financial planning process with every client. And be certain to listen to the end, as Marty provides his advice to those who are looking to become successors in a firm, about the conversations they need to have and drive, if necessary, with their founders, to ensure the succession plan really happens, and the new business he’s helping to create, called Turning Point, that helps experienced advisors who’ve founded firms and are now looking to sell, to figure out what they really want and need deep down to make the succession plan a success.
And so with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast, with Marty Kurtz. Welcome, Marty Kurtz, to the Financial Advisor Success Podcast.
Marty: Thanks, Michael. It’s great to be here.
Michael: So I’m excited to have you on the show because you have a really different perspective than, I think, really any of the other guests that we’ve had on at this point. So you’re in a practice where you’re actually going through a succession plan. And I guess you’re kind of largely through it. I know you’ve dialed down, but not out, by I think deliberate design. And you’ve traveled this succession journey of transitioning ownership and transitioning management in a way that not very many advisors have done yet. Maybe a lot are thinking about it, because they’re eyeing succession planning and exiting at some point, and frankly we know a lot of advisors don’t do well. Or I should just say it doesn’t go well. Succession planning is really hard, particularly for advisory businesses that many of us spend literally a lifetime building. It’s basically like selling and handing off your child. It’s really hard to do. And so I’m really excited to have you share some of your perspective of what that journey is like and what you’ve done, maybe a little bit that you’ve figured out about how to make it work that we can share with some of the listeners here.
Marty: Great, Michael. I hope I can articulate well enough to help people understand what I’m trying to say.
The Planning Center As It Exists Today [4:30]
Michael: I’m confident you will. You have a way with words once we get you going a little bit. We’ll see if we can tee you up a little. As a starting point, maybe you can just talk a little bit about The Planning Center, the firm as it exists today. What is The Planning Center, what do you do, who do you do it for?
Marty: Well, I opened The Planning Center in 1998, and basically I’d been in the business for about 14 years. I was a career changer. My dad and I had a food company that I ran with him for a number of years, and then we sold it. But when I opened The Planning Center, I said, “We’re going to name it for what we do.” That’s why it’s called The Planning Center. We do planning. And of course, investment management has come along with that, but so did a lot of other things, cashflow management and insurance analysis and looking at income taxes. So I wanted a firm that could do all those things and help people really deal with the complexity I saw gaining in society.
And today we have six offices around the country, we’ve got 25 or 26 employees, we’ve got 13 CFPs. We’ll have our 14th hopefully in the fall, and it’s today a gathering of people that have a common belief that everybody needs a third party to talk to about life and money.
Michael: I like that, everyone needs a third party to talk to about life and money.
Marty: Yeah, I mean, if the financial planner doesn’t fill the bill, somebody else will. There are a lot of qualified people out there to lead the discussions and the conversation. But we are a firm that, anybody that’s joined us, that’s come on, that’s one of their core beliefs. They believe in the process that we have. We believe CFP is a great starting spot for who we want to be as professionals, and we constantly work on that sense of who we are being in front of the client, who are we today, what are we there for, why are we doing what we’re doing, and the driving purpose behind all those questions.
Michael: That’s just a striking way to frame what you do as advisors. Not a lot of us have talked about it in those words. We constantly work on who we are being in front of our clients. So can you talk about that a little bit further? What does that mean to the interaction or what you do?
Marty: Well, we’re playing bigtime ball. We don’t deal with some of people’s money, a little bit or a corner or a half or a third. We deal with everything, and everything is connected. Just like in transition…We have several of our group that have gone through the financial transitionist program, it’s because we catch people in vulnerable spots. They’re in transition and their lives are changing. I think in the broadest sense we look at, everybody is in transition all the time. I mean, we’re moving from point A to point B and we need some guidance on where are we at and where are we going. I can’t tell you how many executives from companies I’ve had come in and say, “Geez, I do this at work, but I never thought about doing it at home.”
Michael: I feel like it’s one of those things we almost forget. I remember from starting in the industry and my sales training at the time was, you know, if you want to do business with people, you have to find money in motion. Most people don’t want to just, no one wakes up in a cold sweat in the middle of the night and is like, “I’ve got to get me a financial planner when I wake up.” We wake up in a cold sweat at night because we’ve got some real financial stressor thing, some of which we may not be able to help with, because it’s overlapping with other parts of their lives, but if they’ve got some financial stress thing that ties to an event where money would be moving, so retirement is obviously a big one, where 401(k)’s come out, business liquidity events, major events for executives.
Those are all things where money is in motion. It’s going to be moving anyway. So it’s a particularly good business opportunity as an advisor because the money is moving, so inertia has been overcome, and there’s an opportunity for you to do business. But at the same time, you make a good point with this as well, that you come at it from the sales end like, these transition opportunities or money in motion opportunities, that’s how you can actually get someone over the inertia to work with you and hire you as an advisor, but it also maybe misses sometimes just the fundamental point that these are transition moments for clients. That’s why the money’s in motion, but it also just means these are transition moment for clients, and that can be very emotionally stressful in and of itself, and maybe is something that we can help them with more.
Marty: That’s right. The world is not standing still. It looks like it is, but it’s not. It’s flying around, it’s flying through space, and we just lose perspective sometimes. We think things are going to stay the same, and they’re not. They’re changing all the time. This is what the power of conversation is. If somebody asks me what’s the number one tool a financial planner needs to have, from my perspective, and maybe I’m biased, but I think you’ve got to be a great conversationalist. You’ve got to really know how to bring out what people want to talk about and help them state things that they may or may not believe. But it’s that bringing it out, getting the conversation going, and then having it all blurt out on the table and we all sit and sort it out together, like, “Well, what really is relevant here? What’s important?”
Michael: And it’s a challenge, I think, because we’re not trained in this. I mean, to the extent we’re trained at all to be “conversationalists,” it’s kind of the sales side of, you know, you have to demonstrate that you’re listening to the client and build rapport because that’s how you establish the relationship so that they’ll trust you and work with you. But it’s not really from the perspective of what you’re talking about in really getting to some of the root issues around money. It’s, we’re trying to establish relationships and build rapport so that we can have clients and retain them.
Marty: That’s right. I think the other magical thing about so many financial planners today is that they not only have that conversational skill, but they also have the technical background to read Kitces articles and understand what they’re about and use them and apply them correctly in an interview process and have kind of a good view of what the world around us is. That’s why it’s such a fascinating job. I’ve had employees in the past that have come in and interviewed for jobs, and what’s appealing about this job? Well, I think something is you get a really great perspective of how the world work or how it is working. We see so many different things.
Michael: Like what? Just how people really operate and the dynamics they have with their money?
Marty: Yeah, and how the news affects them, how they feel about…People coming in are talking about what’s going on in North Korea, they’re talking about our President/Congress relationship. In Illinois, we have great conversations about the running of the State of Illinois, the school board. Sometimes they’re coming in and talking about the school board. Sometimes they’re coming in and talking about what their kids are doing. I mean, this unbelievable span of conversations that come in that we need to bring back together, corral in, and say, “What does this mean to you? Is this something we should be thinking about or not thinking about? Or not worrying about?”
The Importance Of A Mentorship Process [13:20]
Michael: So how do we figure out how to do this? I mean I feel like a lot of the stuff you’re talking about is not necessarily the usual ground that a lot of us are accustomed to spending time with on client meetings. Do we just have a gap in our industry of anyone that teaches how to have and facilitate these kinds of conversations?
Marty: Well, the number one way you learn, I think, is to do it. A couple years ago I sat back and figured, I think I probably…Which most guys my age would be the same, probably had 18,000-20,000 interviews. What does “Outliers” say? You need 10,000 to have mastery?
Michael: Yeah, 10,000 hours to work towards mastery.
Marty: You can blow through that in your first 10 years.
Michael: I think I blew through it in about four because I worked way too many hours in those early years.
Marty: Exactly. I bet you did.
Marty: And I had a day when I saw too many people a day, too. But you start to hone in. I’m going to go back to this sense of being. What are we doing there? And I just think with time you get better. What’s really, I think, powerful about the succession planning that we’re going to talk about is that when so many of my compatriots and my age group around the country started in this business, there was no mentorship, there was no safety. I always tell my guys, when they sent me out with a book to sell some life insurance. I wasn’t a safe individual. I didn’t know what I was doing. I had a singular focus. And today, one of our senior planners sat next to me for seven or eight years and took notes and learned. Now he knows how to do that conversation thing, along with the technical knowledge.
Michael: It’s very much the journeyman apprenticeship model of training professionals, which is they just have to sit in, call it 10,000 hours’ worth of meetings and you start getting the gist about how to make this work?
Marty: Yeah, it’s a great opportunity.
Michael: Well, I guess, to accept the challenge…I can imagine a lot of advisors that are listening to this saying, “Yeah, I would have loved to do that early in my career, but no one would hire me for a job to sit in 10,000 hours’ worth of meetings. They just wanted me to go out and get clients.” Is that a gap we have to get over?
Marty: Well, I think some will and some won’t. It’s something from my perspective, we should. I mean, we want to be a profession. I kind of hate to keep repeating it, but the way we’re going to do that is to really gear up who we are being with our clients. Religion, law, medical, they all have that down. That’s what we need to improve on, it’s where we need to go.
Michael: So help me understand a little bit more about just the nature of the advisory firm and what you guys do. So you mentioned six offices and 26 employees and 13 CFPs, going on 14. So can you tell us a little bit more about just what is the business model, what do you do for clients at the end of the day? Is it all focused on these philosophical questions that tie to money? Are you also still doing good old asset management? What does the business look like?
Marty: I think there’s a little bit of a lot of things. We don’t necessarily have a niche. We have people that come in that have a lot of commonality. John Deere is a large corporation here. We get a lot of employees from John Deere, both white collar and blue collar, but especially the white collar. We have a lot of single women. Different locations have had different histories. We have a mother/daughter group in Chicago, Cicily and Michelle Maton, that have a great practice, that joined us a few years ago. And we have John Longstaff that’s third generation out in Fresno, California. Mike Branagh, that we bought a practice up in Anchorage, Alaska, that he’s converting that into the people that Mike wants to work with. And JJ in Minneapolis, and now Jude Boudreaux down in New Orleans coming up to Chicago and help a little bit. So all of them have a little different perspective because they have a different history.
But what we’re working on together is to get to what Eric Kies, our President, calls “the way.” We do believe there is “the way” that we want to do it, and that doesn’t mean the advisor doesn’t have a lot of freedom. It means we want to tie the systems together with purpose, what are we trying to do here. So we are a fee-only firm. We converted to fee-only many, many years ago. We are driven on the financial planning process, and when people come in, the first thing we do is, after a fit conversation, figuring it out together whether we’re going to work together or not, if that’s a positive thing we’re going to work very hard on fact-finding and put together their cashflow.
We’re really big on working with people’s cashflow. We use a proprietary system that we put together a long time ago and we tell all our clients we’re going to work through that with them to understand the important elements of what their financial plan is built on.
Michael: So can you talk a little bit about this process that you have around cashflow? I feel like for a lot of us in the advisor industry, helping people with cashflow is like the third rail of financial advising. It’s messy, the people who need the most help have no idea what they spend in the first place, so it’s hard to even help them, and then heaven forbid you actually tell them how to spend their money, and then they’re all indignant that you’re telling them how to spend their money, even though it’s probably really good advice and they’re doing some really irresponsible things. It’s a hard area, you generally don’t get paid for it, it’s really messy, and the people who need the help the most usually can’t even give you the data about what the heck’s going on. So what have you guys figured out about how to give financial advice around cashflow and cash management?
Marty: If it’s all right, I’ll just tell a little story, kind of how it started. Before I opened The Planning Center I sold life insurance for a little company out of Waverly, Iowa. So I do prospecting, and most of my appointments were in the evening. And kind of a side rail, I always kid the guys that work here now. It’s like I had two appointments a day, 7:00 p.m. and 9:00 p.m., and I always had three things in my car. That was a phone book, a roll of quarters, and a flashlight because that’s how you existed in those days. You had a phone book to look up their address or find out their phone number. You had a roll of quarters because you had to use a payphone, and I had the flashlight so I could shine it on street signs to see where the heck I was, trying to find my way around. But anyway, that’s another story.
Michael: All I’m thinking is, jeez, I love Google Maps on my smartphone now.
Marty: Oh yeah. Where we came from was really ugly, really ugly.
Michael: A phone book, a roll of quarters, and a flashlight.
Marty: Yeah, and if one of them ran out, it’s like, god, I’ve got to get it fixed. I mean, there was nothing worse. I used to run up outside of phone booths and they had a phone book in there. Unbelievably, every time somebody had ripped up the phone book. It’s like, why do they rip up these phone books? Anyway, I digress here.
Michael: So you’re selling life insurance at your two appointments a day, 7:00 p.m. and 9:00 p.m., fully booked.
Marty: We did financial needs analysis, was what it was called in those days, put together where we had tapes to listen to, we had scripts to learn. And it really was great fundamental training for what it was, but it was put in to develop a need to sell life insurance. Anyway, that was fine, what’s what it was. Anyway, so I had these appointments at 7:00 and 9:00. So a lot of times I’d end up in, there’s a chain of grocery stores out here called the Hy-Vee stores. And their deli is up front, so I’d go in there to grab a bite to eat often, before my two appointments, and I’d see women grab the grocery cart and start down the aisle, throw their purse in the little kid carrier, and open it up, pull out their checkbook, and they’re thumbing through the pages of their checkbook at that time. And all of a sudden I realized what they were doing. They’re doing financial planning in front of the deli. They’re looking at it going, and this is the 80’s now, “I’ve got $500 in the account and I owe my phone bill and I owe my utility bill,” and they were figuring out what they had to spend on groceries. So I realized it’s like, this is where people are trying to do their financial planning. There’s got to be a better way.
Coupling that with the fact that I was on 100% commission, so my income was all over the place. So the one advantage I had was that I got to talk to a lot of successful people and see the way they managed their money. So with that I put together a little system for me out of three buckets on how I was going to manage my money. And I did it for years, and all of a sudden as I got more away from selling life insurance and pension plans and health insurance and things like that, to working strictly in a financial planning environment, more and more people started to ask me, “How do I handle my money?” So I started teaching what we now call this First Step system. The first step in financial planning is learning how to handle your cashflow.
Marty’s Three Bucket Cash Flow Planning Technique [24:55]
Michael: So can you talk about what these three buckets are about how you were managing your money and eventually teaching others how to do it?
Marty: Yeah. It’s the furthest thing from rocket science in the world. First of all, it’s like what we needed was a system to deal with just the money we control. We needed to separate out what’s taxes and what’s 401(k) contributions and disability insurance that’s deducted from our paycheck, and anything else that’s deducted. Let’s clean it up and just say, “Those are all taken care of. What we want is a system that takes care of what’s left, what actually hits my checking account.” So the basic premise that I saw people using, that I think is really true, is it wasn’t so much where the money was going. That wasn’t the most important thing in the world. We knew it was going to go somewhere. What was really important in understanding is when, what’s the timing on this. So if we can separate money that has different timings, probably we’re going to understand our money a lot better than trying to understand 50 or 75 line items on how much we’ve budgeted to each element.
Michael: So you mean different timings, so which of my expenses are monthly things, which are annual, like those kinds of timings?
Marty: Kind of, but actually those that are monthly and annual have a lot in common. And that is they’re due once a year or once a month and they’re highly predictable. You know exactly what they are. So you can set up, we can add up all your fixed expenses and put it in one bucket, and every paycheck so much goes in there, and it’s what we loosely call 30 day expenses, all that stuff that you’ve committed to pay for that, as it comes up, you just want it deducted from your check and paid. The internet service, your insurance costs, everything that’s really highly predictable and you’ve already agreed to do it would go in that first bucket. We call it the static bucket. Then the second bucket is the one that really runs the show. It’s called the control bucket. That is how much money do you need to live seven days? Every seven days we put enough in there to have you last another seven days. So if there’s a couple, you each probably have a bucket in the control category.
Michael: So this is like my getting around money, my commuting money, my lunch money, just the daily living kind of stuff? Not necessarily the, “I’ve got to go shop for some new clothes” kinds of things?
Marty: Well, some people buy clothes every week or every month, and some people buy them twice a year. So if you bought them on a regular basis, that would be a control expense. If you bought them twice a year, that would be this third bucket, what we call the dynamic expense. And those are all the expenses that are beyond seven days out, like home repair, auto repair, vacation money, gifts for people, clothing if you’re a guy that shops once or twice a year for clothing. If you go out and spend $2,000 once a year, because you buy a suit and some sweaters and a couple pairs of shoes, and then you’re done, that’s a dynamic expense. That was something that you probably haven’t allocated money for in the other buckets. But if you order clothes once a month, well, you better figure that into your control money.
Michael: So how do I actually start carving money up? The idea now is I take my total paycheck and I’m going to allocate it in some portions amongst static, control, and dynamic?
Marty: That’s correct. And it’s going to, what’s so effective is we’re dealing with 100%. We’re going to allocate all your money. And we see some people come in and they’ve got 75% of their money in static expenses, 30% of their money in control expenses, and nothing in dynamic. Well, what are you going to do? If that’s your circumstance, what are you going to do? You’re going to create debt, and you’re going to change dollars from control dollars to static dollars because you’re trying to pay back your debt. And it just becomes a cycle of winding down what you have. So hopefully we can catch people and get them into where they’re allocating effectively in each bucket, and we’re not losing ground, if you know what I mean.
Michael: And is there a particular target that you try to set? Like, ideally you want a third, a third, a third in each of these three buckets?
Marty: I can tell you that people who have a third, a third, a third typically are extremely happy people. And people say…This is what kills me. A lot of times when we’re talking to planners about this, they’ll say, “My clients are wealthy. They don’t need this.” It’s like, are you kidding me? They’re the worst. The more people make per year, the more dependent they can become on a system like this, because they can afford to do anything. If your cashflow is $30,000-40,000 a month, you don’t know where our money’s going. There’s a lot to put together there. And setting up a cashflow system where you really understand what’s fixed, what’s control that I’m living on, what’s dynamic that I get to work with and build with, is a great discovery.
Michael: It struck me a lot, there was a book that came out a couple of years ago by Ron Lieber, who writes for the New York Times, and he published this book around raising children to be responsible with money. It was called “The Opposite of Spoiled.” I had bought it because we’ve got several little ones and we’re coming close to the age of starting them on allowances, so it felt particularly salient to me to figure out, you know, we would like to raise our children to be not spoiled, and he calls it “The Opposite of Spoiled” because the point is, we don’t really have a word…We have a word for people who get raised to be rotten with money. We call them spoiled. We don’t actually have a word for the other thing. So he just literally called it “The Opposite of Spoiled.” But one of the things that struck me about it is he said there’s a particular challenge that comes…Well, there’s a particular benefit that comes from trying to create allowances for people who are very affluent, because most people, there’s a natural constraint that tends to steer you towards reasonably prudent spending behavior, which is, you just only have so much money. And by the time you pay your essentials, or as you put it here, you cover your static bucket, there’s just only so much money left. And so your choices are constrained and there are trade-offs that you have to make.
So we learn to make those trade-offs. But when you get affluent enough, a lot of those trade-offs start breaking down. You can spend a whole lot of money on a whole lot of stuff, and hardly even notice the difference if you’re bringing in $30,000 a month or $50,000 a month or $100,000 a month, for someone who makes $1 million a year. The thing they point out, the only thing that’s harder than imposing that on ourselves is figuring out how to impose it on our children. If our household is of limited means, you get to teach your children, “We’re not going to buy that.” Why? “Well, we can’t afford it, because you have to make trade-off choices in life.” Unless you work with really affluent clients, and the kids say, “I want to buy that,” you can’t say, “We can’t afford it,” because you can, and if you just keep saying you can’t afford it even though you can, you’re going to make your children think that they have no money when they actually do and you can create a lot of dysfunctional relationships around money later. So the only solution is, you have to introduce entirely artificial constraints around how you spend your money, because it’s the only way you can start creating some structure for yourself around it.
So you make such a good point, that I think we’re often most dismissive about doing cashflow planning for people that are high income and high net worth because it’s sort of like, “Oh, they’ve got plenty of money they can spend on whatever they want,” but they’re often the ones that struggle the most with figuring out what is “prudent” to spend because they have so much affluence and flexibility, they don’t even have the natural constraints of being cashflow constrained to help them make trade-off decisions. It basically comes down to you either feel like denying yourself or not, and if you don’t have a system around how to do it, it’s really hard to keep denying yourself. So you tend to impulse buy, and then you blow through a whole lot of money. And then you end up with the clients that make $500,000 a year and live paycheck to paycheck.
Marty: You make a really valid point about the children, but there’s another one, too. It’s couples talking about money. How effectively, when your take-home pay is $40,000 a month, how do the two of you connect on that? There are some people that are pretty good at that, but there’s a vast majority that are terrible. And opposites attract. Oftentimes we’ve got two totally different beliefs about money sitting in the room, and one is buying Lamborghinis and let’s go around the world, and I want to retire at 50, but I want to enjoy it now, and the other one’s going, “I grew up on a farm in northern Minnesota. Mom and dad just had enough to get by, and I feel weird about the way we spend money.”
Michael: So when clients are coming on board, the first thing you do is, “All right, you all have to write down all your spending and where your money goes, and then we’re going to start categorizing it to you into static, control, and dynamic and start having a conversation around this”? Is that-
Marty: We have a website that we can go to, and we try to keep it light and we’re not driving for exact numbers. If we can get hand grenade close on…I think Matt Sivertsen said, you know, a lot of times, 20-30 minutes, he’s 90% of the way there, 80-90%, and we can have them go home and finetune things, and every time they come in, we go over it. We’re kind of talking about it, because if we don’t understand that bedrock stuff, if we don’t understand those three buckets, I would state unequivocally the rest of the plan may or may not be right, probably is not right. The assumptions we’re going to build off that are going to be the bedrock we’re building the plan on.
Michael: So do you charge clients for this? Is there a standalone planning fee for just going through this first step process and getting oriented on their cashflow? Or is this part of your overall financial planning process? How does this fit in from just the perspective that you’re a business owner with 26 employees? Someone’s got to get paid at some point here.
Marty: We need money. We do. We don’t tell them that right up front. When somebody comes in, or when they call in…I think we’re getting most of our leads for our clients from off the internet. People search us out. We do have, in Moline and some of the other spots, really good flywheels running where people just call in.
Michael: That’s basically like client referrals or people in the community that referred you? Those kinds of call-ins?
Marty: Yeah, been on the website, read our blog, social media somewhere, met somebody at a party, their parents come here or their kids come here. It’s just a million different places, but they show up. When they call in, somebody talks to them for 15 or 20 minutes to see if this is a reasonable person to waste their time or our time. And if it is, we set a time for them to come in, see an advisor. And when they come in we spend time explaining who we are, what we do, we explain our pricing schedule, and we basically want them to come to a point where they’re going to hire us. We used to say we’ll work for an hourly wage for a few months to let them kind of learn what we are about. Because let’s face it, nobody’s ever been to a financial planner before that comes in, statistically. Maybe a few have, but most of them never have. So they have no idea what to expect, and they’re kind of scared, and the guard’s up. So we try to put them at ease, explain the situation and let them ask a number of questions, and decide whether they want to use us or not. We explain our billing processes as net worth and income pricing model.
Why The Planning Center Is Shifting Away From AUM [39:47]
Michael: So a net worth and income pricing model. So how does that work?
Marty: We were so frustrated with AUM back probably about eight or nine years ago because, okay, here’s my belief. Somebody might say, “Marty, you’re all wet,” but my beliefs are, as long as we’re charging AUM, people believe we’re money managers. I named the place The Planning Center thinking I want to name it after what we do. I could have named it the Financial Advisory Center, but no, didn’t. It’s not what we do. It might involve a little bit of that, but we’re a financial planning firm. So we wanted a billing system, a formula that reflected on what we do and what we want to do with people, not mislead them into thinking we’re just investment management people. So we were trying to figure out how to do it. Okay, I was a member of an RIA in1988 called Century Financial Services of the Heartland. The little insurance company I worked for opened up an RIA, and we did financial plans for a fee. The way we figured the fee was on a grid of net worth and income, and basically it was 0.5% of net worth and 1% of income. So I was telling the guys that, and they said, “Let’s try it.” If you know Kies and the Sivertsens, they were cranking every example you can think of through the computer, and it seemed to make sense in pricing.
Michael: At 0.5% of net worth plus 1% of income.
Marty: Plus 1% of income. Now, we’ve modified that a little bit. The 0.5% of net worth drops to 0.25% of $2.5 million, and 10 basis points at $10 million, and the 1% has gone to 1.25% because we are doing everyone’s taxes now.
Michael: Okay, which also makes it particularly convenient to figure out their income when you’re doing their taxes. Do you literally take 1.25% of adjusted gross income off the tax return? I feel like even just, when you start saying, “We charge 1% of income,” or 1.25% or whatever the number is, you quickly get into the, “So what’s income?”
Marty: Yeah, bottom line of AGI. You know, front page of your tax return last year. Just show us what it is. If somebody says, “Well, I sold a bunch of stock options last year,” well, we adjust it. I was kind of hoping we’d talk about fees a little bit, but this is something that I kind of really think is a big thing in our industry, is we get so analytical on our pricing models and what they are. I look at our fee as a proxy to see where they fit in bigger picture of everybody we’re working with. It’s like, we can’t charge the same fee to everybody. I’ve had people say, “Why don’t we just charge everybody $5,000?” It’s like, well, because you’re going to get adverse selection. You’re going to get the people that that really makes sense for. The people that should be paying $10,000 are going to hire you because you’re charging $5,000, and the people that you should be bringing in are not going to come. So anyway, it is a proxy for what our whole book of business looks like, and I think that we need to listen to our clients on when we explain how we bill, what they have to say. Why does it work for them or why does it not work for them.
Michael: So do you ever get issues…I mean I get it on the income side. I can pull this off a tax return. Income is what it is, particularly when you’re doing a lot of cashflow planning around the income. It kind of fits naturally, like, “P.S. Let’s make sure we earmark our fee in that static bucket.” Net worth to me feels a little bit messier, though. It’s not hard to imagine clients are like, “I own my house, I’ve been in it for 17 years, I plan to be in it for another 17 years. Why are you charging 0.5% on my net worth of an asset that’s not going anywhere? Or investment property that I own,” or, “Hey, if you all think you can figure out what the value is of my closely held family business, and then charge me on it, knock yourself out. But there’s no valuation because we don’t publicly trade our family business.” Do these become deal-breaker issues for you? How do you handle idle assets and clients saying, “I don’t want your advice on this. Don’t bill me on this,” or, “We can’t figure out a value for that”?
Marty: Well, there are issues there. I’m not going to say there aren’t. And almost all the time with small business assets and multiple real estate holdings or C Corp closely held business assets, we’re going to exclude them unless we see some real purpose to come back in. What we’re trying to find out is…And we’re not charging people on their house. That’s kind of, I mean we’re judging the complexity of the case by looking at the size of their net worth. If things are skewing that a long way, we’re going to exclude them.
Michael: So it’s meant to be, I guess, a combination of net worth and income. It’s meant to be a proxy for complexity.
Michael: As we often make the case for AUM as well. We have larger fees for more affluent clients in part because more affluent clients just tend to have more complexity associated with them. Not always universally, but often the case, and so AUM becomes a decent proxy for it.
Marty: That’s right. But it also really eliminates the issue of, we have a liquidity event on somebody we’ve been working with for five years and they retire and roll in a $1 million 401(k), and all of a sudden with AUM we have this huge revenue boost. It’s like, well, what did you do for that? And what I’ve heard a lot of times from advisors is, “Well, I’ve been giving them advice on them all along.” Well, then my response to that is, “Shouldn’t you have been charging them all along?” That’s what the net worth and income allows us to do.
Michael: So how do you actually bill this? Do you bill them once a year? Do you bill them quarterly? Do you calculate it once a year but then bill them quarterly? Do you recalculate it regularly? How do you just handle the billing process and where do they pay it from?
Marty: Yeah, we do everything to make it as comfortable for them as possible. I mean, if they have after-tax accounts, trust assets, we can bill those. The IRA’s you can only bill on the IRA. So you have to be very careful there. But we also have Pay Simple where they can pay monthly, if that works out better for them. People write checks. It’s not been a big issue.
Michael: So how many clients do you have on this net worth and income system? You mentioned six offices, 26 employees, and 13 CFPs. That’s a lot of people on this-
Marty: I think we have around 800 clients. So I believe our goal, I’m not quite sure exactly where we’re at on this, but our goal is, by year end, to get to 25% of our clients on this. So that would be 200 families.
Michael: So what are the other 75% of the clients on?
Marty: A lot of them are on AUM still.
Michael: Okay, because you started the firm on AUM.
Marty: I started, and kind of the attitude I’ve taken and we’ve taken in working on this is, we made a deal with people, and if it’s a better deal to stay where they are, we’re showing them the difference, but we’re just saying, “We think you ought to stay where you are.” We’re not trying to disrupt everything, but even having the conversation of, they’re seeing there’s a different fee schedule helps them understand who we are. We’re not just those guys that take 1% off their assets because we’re money managers.
Michael: So what is the asset base overall then? What does a typical client look like? And if you measure like AUM for the firm, what’s the aggregate AUM for the firm?
Marty: Yeah, because 25% of our clients being on, it skews it a little bit, but I think it’s around $700 million. We have maybe $4.5 million revenue.
Michael: So even the clients that are on this retainer and net worth structure, you’re still doing investment management, you’re just not charging them an AUM fee because you’re charging them this net worth and retainer fee that includes first step cash management and financial planning and investment management all rolled into one fee?
Marty: Right, and we want to keep it as clean as possible. When we talk about asset management, it’s like, “Well, if you want to leave it at your employer after you retire, we’ll manage it the best we can. We’ve got these other systems that we think our costs are competitive. We have rebalancing services that are really efficient, but if they want or for some reason they need to leave it where it is, we’ll work with it there.
Michael: So can you talk to us a little bit about the journey that you’ve been through with the firm? So you said you were a career changer when you came into the industry, you were in the life insurance sales business for a while, you opened The Planning Center in 1998. So when you opened it, it was just you? Did you go out as a solo?
Marty: Yeah, it was just me?
Michael: Did you have a partner or other folks involved?
Marty: It was just me. I had one support staff to begin with, and went out and…It’s so funny. I actually went to an IAFP meeting in 1997, and met Bill Marshall and Genie Robinson, who became great friends of mine. And actually, we lost Genie, a very sad event for me because she was a great mentor. They helped me understand what was going on. I was walking up to tables seeing Advent, going, “What do you guys do?” And they’re trying to explain to me what they do, and I’m like, “Really? I don’t get it.” But with some time then, I decided to open my own firm, and I did start to understand that you do need some of these people that could help you manage people’s money.
So I think I had prepared for a while to open my own firm. I didn’t exactly know when I would do it, but when I did do it, I had about $2 million or $3 million in C shares. So I was trying to levelize my commissions, and so when I did go out on my own, I had those to move. And I know a custodian called me while I was in the midst of that and asked me how much I had under management, and I said, “About $3 million,” and they said, “Where do you want to be five years from now?” and I said, “Well, if I could get to $14 million, I’d be really happy, because I could pay my bills.” They never called me again, Michael.
Michael: Wrong answer.
Marty: Evidently I was under the threshold. But actually, I started working with a TAMP at the time and worked with them for a few years.
Michael: What was the TAMP that you built with?
Marty: The first one I worked with was Matrix Asset Allocation, out of Cincinnati, Mark Matson. I was there for just a year or so, and I had a broker-dealer at the time, and I switched broker-dealers, and Mark was not licensed with the next one I went to. So I started working with RWB, which was much the same. I was there for a few years, and eventually, just from changes in their systems and my systems and where I was going, I soon branched out on my own and took on a different direction.
Michael: So you started doing the investment management process internally.
Marty: Right, exactly.
Michael: So where were clients coming from at this point? It’s worth noting for folks who aren’t familiar, you’re in Moline, Illinois, the Quad Cities metropolitan area, on the river.
Marty: 43,000 proud people in Moline and the quad cities is about 300,000.
Michael: Okay. So you’re building an RIA in a community that is a reasonably-sized city, but not a huge one. Were there even other RIA’s and fee-only firms building in the area that were doing your kind of thing? Or is it like, bad news, not a huge town, good news, we’re the only people who do what we do?
Marty: Yeah, really even today there are very few fee-only advisors out here. I think there are a couple in Cedar Rapids, Iowa, and possibly some here in the Quad Cities. I don’t know much of everybody anymore. But in 1998 and 1999, we were pretty much the only one making the change.
How A Relationship With An Accountant Jump-Started Marty’s Growth [54:58]
Michael: So you started out at $3 million. You said you wanted to get to $14 million in a couple years, and that wasn’t good enough to even get you on a custodial platform. It’s been almost 20 years, you got to $700 million. So apparently this worked out at some point along the way. So where did you start finding traction? Where did you start getting clients going as a solo advisor in Moline in the late 1990’s?
Marty: I worked fairly hard at meeting people and telling the story, and at one point in time I did a…It was in 1999, I did a seminar for CPA’s that I believe SCI came down and put on for me. They just wanted me to talk to them, and we did a continuing education program for accountants, and three showed up.
Michael: Well, you got three. You only need one or two active referrers to get a good business going. So three works, right?
Marty: That’s kind of the vision of the story. One was Otto Bieber, a lovely man here in town, the CPA who was probably 80 at the time. He was just trying to keep up his CPA CE credits, and there was another young man that had just gotten fired from a CPA firm, and he was going to go out and start his own, and then there was this other guy that was from a mid- to large-sized CPA firm that I called after the event, and he said, “Yeah, let’s get together.” Well, within three months there were some negotiations and things like that, conversations back and forth. But they had been trying to do it on their own, and their story was really pretty weak, and mine was pretty strong. And we took it out to their clientele, and for the next year and a half or so I did about $1 million worth of business a week.
Michael: $1 million a week?
Marty: Of new sales, yeah.
Michael: Like of new asset flows, of new clients?
Marty: Yeah, bringing on new people.
Michael: Wow, just from one strategic relationship with a good center of influence.
Michael: So did you have to do a revenue-sharing agreement with him to have some skin in the game?
Marty: Yeah, we did, and there were some ups and downs from that, but we just ended up buying out the main partner. We’re in the process of buying him out. We started the payout to him over the last year or two.
Michael: So obviously there are some costs to that, but $1 million a week is about $900,000 a week more than what most advisors get in their early years if they’re lucky. So I would imagine that went pretty well for you, all told, even with some cost of revenue sharing to an accountant.
Marty: It was good, safe business. We took good care of their clients and our systems got stronger as we moved forward through time. Then we started branching out and getting more clients on our own, too.
Michael: So is that still something you would advocate to advisors looking at today if they’re getting started? Look at a strategic relationship with an accountant or attorney, do some revenue sharing with them so they’ve got skin in the game as well, and try to drive some early growth that way?
Marty: Yeah. I think any way you can get in front of people is going to improve your skill set. It’s anybody’s call where it’s going to go down the line. I mean these relationships are like marriages, and there are ups and downs, but not necessarily do they have to be negative. They can be, and you go into it with open eyes and understand we need to keep everything very clear. We had some moments of unclarity, which weren’t so fun, but we lived through it, and I think no clients were ever hurt. As a matter of fact, the clients really came out ahead, in my estimation.
Michael: So what do you have to pay to accountants to get them involved and willing to do this? Do you split revenue with them 50/50? Do you share at 10%? Is it 25%? What did you find worked for, you know, there’s enough for you to be able to earn money in the business and there’s enough for them to want to work with you productively, I guess up front and on an ongoing basis, because if you share revenue on an ongoing basis they have some incentive to help work productively with you for retaining clients as well.
Marty: We started off with a 60% for us, 40% for them split, and over time it went to 80/20. Then even I think went down to 90/10 after they’d been with us for three or four years.
Michael: So not just the relationship changed as you grew, but literally the clients were on a staggered schedule, like, you’ll get 60/40 in the first few years, then you’ll get 80/20 for a few years, and then it will trail down to 90/10 as, over time, you’re less involved with the client and presumably we’re more involved now because we’re several years into the planning relationship.
Marty: Yeah, and we had the 60/40, and it really wasn’t equitable. I mean, that was built when we were doing everything in their office, but CPA firms sometimes don’t have the technology that we need. So we started doing things down in our offices, and so then I came back to them and said, “We really need to make this 80/20,” and they were agreeable to that. And we also came back with another piece of negotiation and said, “Look, after three years, you’re really not even doing anything meaningful today, other than you’re still billing on your tax work. We would like to go down to 90/10,” and they agreed to it. So I think a lot of it is just, you know, what’s fair, what are you doing and what are they doing.
Michael: Well, and I think it’s a good reminder that, I see a lot of advisors, particularly when they’re getting started and you want to get stuff going, and they do things like, I’m going to do this agreement indefinitely at this level because I want them to commit to it and I want them to stay involved. And I feel like sometimes I see a lot of advisors just give away too much of it when, as you said, in the long run, eventually it’s not so much the CPA’s client anymore. It’s really your client because you’re the one with the ongoing relationship for years at that point. And we somehow convince ourselves no one’s going to do this with us unless we give some indefinite, open-ended agreement, when truth is nobody really spends that much time valuing what a client revenue sharing agreement is in the 2020’s. When it’s 2017, you can have it drop off a little after three years or five years. You’re not really likely to get any objections. No one’s likely doing this deal based on their idea that this is going to be a big revenue driver for them years and years from now. It’s usually much more of like, “Hey, if we can refer you some of our clients and the split is 80/20, then we can drive 20% of the revenue for helping to expand our relationship with the client by bringing you in,” because that’s how the firms tend to view it from their perspective. And it’s okay if it falls off later, and it helps for the firm, because if you’re going to do this in the long run, it kind of stinks when you’re 15 or 20 years out and you’re going, “Jeez, we pay a lot of revenue for relationships we got 20 years ago.”
Marty: Right, what’s really been fascinating though is the CPA’s response to working with our clients, or together with us for 15 years, 17 years. He says things like, “I am so glad we did this. I would have never had these relationships with these people and I would never have understood their circumstances the way I do today.” See, we did set it up as a rule that he had to come to all their meetings, even for the 10%, it’s like, you’ve got to show up. So he did, and then we had that tax expertise in the room with us, which was very fun. Now, there came a day years later when we bought our own CPA firm and he wasn’t part of that, but just his expression on his face when he talked about those clients and how they’re his best friends and he sent his mother and his mother’s friend, and his ex-wife, and all these people showed up just because he really believed in what we were doing.
Michael: So the firm got a bit of a healthy jumpstart going when you found a good relationship with an accountant who had a lot of business to refer and partner with you on. So that presumably means at some point the firm starts growing and the staff starts growing, because $1 million a week is a lot of flow. That’s a lot of clients.
Marty: A lot of paperwork.
Michael: Yeah, a lot of paperwork. So can you share with us how did that evolve from the staffing and infrastructure perspective for you?
Marty: Well, we just did the best we could. Systems certainly weren’t like they are today, but we just worked hard, and certainly it’s like any average, it was like $1 million a week, but some were $2 million and some were $500,000. We stayed at it, and I was lucky enough to have, in the early 90’s one of my clients’ sons started showing up, and he’d come in for lots of financial planning interviews before his parents’ meetings for a number of years, but all of a sudden he started coming in and hitting me up for a job. That was Matt Sivertsen. And then about 13 months later I was at an FPA meeting, and I’d met Eric Kies, and he told me he was going to go out on his own, and I said, “I’ll help you in any way I can.” He was talking to me because I was the only guy he knew that had done that, and I said, “That’s great. I’ll help you in any way I can, but I think you’re crazy. It would be a lot better if, why don’t you just come and work with me?” So I picked up those two guys within a year of each other, and we really just started to build an ensemble.
Michael: And they were joining you as advisors?
Marty: Matt was a support person and started off working with, he was literally called File Boy, I think, for a while. But when Eric came in he had his MBA and his CFP. So Matt worked through his, got his CFP. When Eric started, I remember very clearly he was standing in the office one of the first days he was here, and he looked at me and said, “What do you want me to do?” I looked back at him and said, “I don’t know. What do Eric’s do?” He kind of scrunched up his face and looked at me, and I said, “Look, every door is open, every book is open. Anything you want to see, let’s figure out what we need to do and go do it.” Those two guys along with Matt’s brother joined us later on, Andrew Sivertsen. And the whole rest of the crew just have joined as we needed them, as we put the systems together. And we’ve always talked about it as ours, not mine. We’ve never voted shares of stock.
Michael: So when Eric and Matt joined, did they have equity in the firm when they joined? Did they simply join as employee advisors?
Marty: They joined as employee advisors, and basically Eric had been working in the back room for some people at Ameriprise, putting together plans. So he really didn’t have a bunch of business of his own. Matt had none. He just came to work here. He was actually a music major. He plays the saxophone, but he just loved financial planning, and really wanted to get involved. So we kind of started at ground zero, and I had some experience and I had the tools, and I had a bunch of clients, and said, “Let’s go.”
The Trade-Offs Between Selling To A 3rd Party And Selling Internally [1:08:07]
Michael: Now, I know at this point some of these folks are equity participants in the firm. So when did that change? What did that transition look like?
Marty: Well, I was gone a little bit. I was on the Board of Professional Review for the CFP Board from 2001 through 2005, and I chaired that committee in 2005. I kind of had a built-in dependency. I needed lots of support. I could still meet with all the clients, but as far as the back office and being there every day, I just could be there when I could, and when I couldn’t, they had to take care of it. So we kind of had this five or six year period where I just had some kind of dependence that they needed to help me get through stuff, and they learned what they needed to do and they took care of it. Then in 2009, I think, I was elected to the FPA Board, and then 2010 elected to the Executive Committee of FPA, and was President of the organization in 2011 and Chair in 2012. I was gone a lot and they had to divvy up the work, Eric, Matt, and Andrew. So they were given opportunities to buy some stock, and we didn’t have a sophisticated system to do it. It was like, you know, bring in a little bit of cash and we’ll figure out what we think maybe it’s worth. So they were able to buy into a very minority position, but it was something. It was some skin in the game and checks they had written to the company saying, “I’m part owner in this thing now.”
Michael: And when did that begin?
Marty: I’m trying to remember, Michael. Right before I was elected to the FPA Board.
Michael: So 2009-ish, give or take.
Marty: Yeah. They may have owned a very small amount before that. But then after serving on that, when I came back it was like, well let’s get serious about this succession plan, because I really believed in the best spirit for the clients, it’s we had to have a succession plan that would work for a long time. When I’d opened The Planning Center I’d always had this vision that it’s like, and we verbalized it to everybody that worked here, it’s like, “Well, wouldn’t it be cool if 50 years from now, there were different advisors, different clients, same money? How can we build things that sustainable, that stable?” So they really bought into that, and I think that conversation was me stating it, but then them bringing the reality of that. Well, that means we’re going to have to be here. We may not be that 50-year guy, but we might be the 20-year guy that plugs into the next 20-year guy to the next 20-year guy. So I think the story just started to build, and we’ve been extremely horizontal.
I don’t think they have, when Eric was saying today at lunch, one of the challenges maybe we have sometimes is when people join the firm, they think it’s going to be a hierarchy, and it’s not. We’re all very level. We all do what we can. I’m the CEO, but I was putting away dishes in the dishwasher earlier today because it needed to be done, and that’s the attitude we’ve always wanted people to come in with. We’re an entrepreneurial company. We all do it all to make it work, and they bought into that heavy, and today Eric is President. He runs the company, and Matt’s his Senior Advisor, and Andrew, and they do a great job, a better job than I could ever do.
Michael: So can you tell us a little bit more about what that transition looked like from 2013 you came back and said you want to get serious about a succession plan, and then four years later now Eric is President. So did you transition ownership as well? Do Eric and Matt and Andrew now own the bulk of the firm? Do they own some of it and you still own some of it? What did that succession plan look like?
Marty: You know, the hard thing on these succession plans is finding that right pricing model. I mean, just like pricing our own services, pricing the value of these companies is extremely hard. We’ve got two very different points of interest. Me as a 30-year guy, 66 years old, going, “Okay, been here, nurtured this thing, got it to here. What’s my cut on the thing?” and theirs being, “Well, we’ve been working alongside you for the last five to 10 years, 15 years, and we’re helping building the systems, and we want to be here in the future. So it’s got to be doable for us.” So it’s the realization of everybody getting kind of vulnerable, saying, “We’re going to work this out together,” and one of our partners, Cicily Maton said at the end of our stockholder’s meeting about a month ago, “When everybody feels a little screwed, you probably got the right price.” In a crass way, I think that’s exactly right. Everybody gives a little bit, but everybody is vulnerable, too. We’re all sitting here realizing we need each other.
How To Find The Right Valuation For Your Unique Succession Plan [1:14:08]
Michael: So how did you ultimately come to an agreement around price? Did you get an external valuation firm to come in and say, “We’ll be the arbiters of determining value. Here’s the number”? Or did you guys just haggle back and forth until you found a number that everybody could live with?
Marty: We did hire firms. We spent some money having some valuations done. I think what everybody needs to realize is valuations are very dependent on what the purpose of the valuation is, and I don’t mean buying out the company as a purpose. I mean, are we trying to do an internal sale? Are we doing something where the advisor is going to leave and a bigger advisor is taking it over and all the revenue is going to drop to the bottom as profit? What is the real issue that’s going on here, is crucial. We spent I think some money on finding the wrong valuation.
Michael: You spent some money finding the wrong valuation.
Marty: It wasn’t what we wanted.
Michael: Because, I mean, what does that mean? They gave you a number and someone was very unhappy?
Marty: Basically what happens, I think, is when you go out and get a valuation, oftentimes that valuation is for a larger company taking over a smaller company, and the revenue dropping down to profit, which makes it a very profitable venture for the company doing the buying. And they can afford to pay a lot more for it because of that. But what we want is we want something that younger planners can buy into over time, and yet when they buy the stock, the revenue from the stock reimburses them for the payments that they’re making. It’s an internal sale. It’s a very different pricing level. And once we got that clear in our mind, then the discussion was, how do we put together a pricing model that accomplishes…One of our things that we really stood for and believed in, all of us, myself, the senior partners, all the younger guys, is we said, “When we sell stock, it’s going to perpetuate itself. It’s going to pay for the purchase,” because that’s what we think a profession should do, people working in it, they get a contract to buy some stock, the stock kicks off enough revenue to buy the stock.
Michael: Which means in practice you said some combination of the valuation and the payment period to make the math work where the cashflow dividends, the company pay the purchase payments?
Marty: Yes. We’re trying to get it in. It’s all kind of relative on how good your profits are, but in that 7-year, 10-year framework, that’s where we’re trying to get.
Michael: So like paid out over 7 to 10 years.
Michael: So at the point you’re trying to set this valuation, you get some valuation. The math doesn’t seem to work internally. Like you said, maybe that would work for an external buyer, but it doesn’t seem to work well internally because of the costs that the buyers still have to sustain to keep all the infrastructure in place. So does that mess with your head that someone just came in and said, “Your company is worth X.” Then your successor buyers basically say, “Yeah, that number isn’t going to work for us.” You go back to the valuation firm and say, “Guys, what’s going on?” They say, “Sorry, that’s really what a third party would pay, maybe not what an internal succession would be,” and now you’re looking at this number that they just told you an external buyer would give you, maybe or maybe not, but they’ve set the number. You’re now looking at an internal succession plan that’s going to apparently be a lower number. So I mean how do you work through that? It’s kind of like they gave you the candy and then they take it away.
Marty: Well, I think that’s the power of purpose. We want this thing to be sustainable, and coming to the realization it’s just not all about me. We’ve got to have this thing so that it replicates our belief system. And that’s where when we started saying, like I thought when our partners as a whole stood up, everybody stood up and said, “We want this to work for the next generation, so they don’t have to dump in bunches of cash, they work their asses off, they get the growth, that 5% to 7% growth we need every year, and they manage the company so our revenue is at the right percentage, that 20-22% revenue, whatever we’re saying that should be. If they hit those, their stock ought to be bought for them by the company.” And when you start to set it up like that, well, there’s not a lot of wiggle room. It’s going to pop out a number that says that’s what it’s worth, and so then you have to say, “Is this for the good of the clients, is this for the good of the company, is this for the good of the employees?” And if it is, it’s like, well, that’s what it is. What other answer could there be? But that is a mind game. If somebody is a senior partner sitting there, and I had a couple other senior partners in our group, Cicily and John Longstaff, we’re all in our 60’s, and we had to look at each other and say, “We’re committed to this thing. We’re going to do this.” So it was a point to get to, Michael. You’re right.
Michael: So once you decide to make this transition, do you come in and say, “Okay, guys, we’ve figured out the number. Here’s the deal.” All the equity’s on the table and the deal just gets underway and they’re now in the process of buying out all the shares, and then you’ll be done?
Marty: No. Senior partners have to put some shares up for sale, as they want. We’re kind of working through our shareholders’ agreements on what that means, but that will be the reality. When people are ready, yeah. We’re going to put it on the block and say it’s for sale and this is how it should be broken up.
Michael: So at this point, you’re basically tendering shares to the next generation over time?
Michael: And is there a reason that you decided to do it gradually as opposed to all at once?
Marty: Well, we have done one traunch that was fairly substantial with me, and so there are things in action. I think we’re just now trying, we’ve been working with the mergers, with upper line merging in, and a year ago it was Blunk Financial in Anchorage purchased that organization. We’ve been really focused on trying to get everything in and kind of get the mobile to quit shaking. Have you ever heard that story about systems theory? It’s like family systems theory, like if you imagine a mobile, over time it kind of hangs there and it finds its own equilibrium. Well, then if you go up and hang another element on it or take one off, it shakes like crazy for a while until it finds its equilibrium again. I think that’s exactly what we’re doing with the mergers that we’ve had and the growth we’ve had. We’re very happy with where we are, and now we’re waiting for the mobile to settle in again. And then we’ll see some exchange of stock values.
Michael: Okay, it’s just the fact that you did multiple acquisitions of smaller firms merging or tucking in over the past few years means you want to let that stabilize a little before you firm up valuation. I guess even from the buyer’s perspective you’re concerned about that as well. Like, I’d like to make sure this practice we bought and merged in actually works out before I pay you for it.
Marty: Yeah, and I think it’s well under control. Aligning what the value of that stock was really set the objectives for what the growth rates need to be and the profit margins need to be, and I think that’s very healthy. I mean, we understand it, we can put benchmarks together that say, “This is what we’re going to hit every quarter,” and make it a very stable company.
Michael: So it’s striking to me that you’re executing on a succession plan of the ownership of the firm. It sounds like you already transitioned a lot of management of the firm. I guess you kind of had to at the point that you got scooped up into FPA National Leadership and Executive Committee because you just end up traveling a whole lot. So you need to rely on the team to keep everything running while you’re gone.
Marty: Well, and the reality that really, you know, there are better people to run the company than me. I am very comfortable as CEO and I love what I do. I think I’m a very great asset for the company, but the daily running of the company probably is not my forte, and I think we have people doing that that are a lot better.
Michael: So you’re making this transition, there are lots of advisors out there that don’t succeed in making this transition. Even in XY Planning Network early on, I know a lot of our founding members, in particular, were basically folks that tried to do this kind of succession plan, and it didn’t go well. They came into a firm to do a succession plan, the owner said, “I want to sell the firm in five years.” Three years in the firm owner said, “Well, you know, now it’s five years. It was going to be five years before, and we’re three years in, but now it’s going to be five years.” So the person waits a few more years, and then in three more years they say, “No, now it’s really going to be five years.” And they say, “It was supposed to be a five-year plan. We’re already in the sixth year, and now you’re telling me five more years. Forget it, I’m done. I’m out of here. I’m going to start my own firm.” And I’ve watched that pattern play out a lot amongst advisory firms. So somehow you guys have been able to make a transition that a lot of other firms struggle with. I mean you’ve been out there in the industry for a long time, you know lots of our fellow advisors as well through FPA circles and the like. So what is it that you guys have managed to figure out that’s making this work that seems to be breaking down at other firms?
Marty: I’ve talked to people in the past where it’s not working, they’re very upset about it, or it hasn’t worked and they’ve called it off. I really believe there’s something lacking in their conversation. They’re not having the right conversations, and when I ask questions about, “Did you say this or what does he feel about this or what does she feel about this or how did this conversation go?” a lot of times I get this blank stare and a shrug of the shoulders. And it’s like, oh, you didn’t talk about it, and if they did talk about it, it was in a controlled, heated way, somebody dominating or riling up their anger to suppress the conversation. It’s like, there’s no reason for that. We’re in this together. And I think we’ve done a great job, we’ve met quarterly for years in circle as a management team and as compatriots working together, and the care and concern for each other. I know one time when we were looking at a valuation, somebody said, “Boy, if that went through, that could really be hard on friendships,” and I think that’s true. That’s a true statement, and I listened to it and it’s like, yeah, I get it. So it’s then that point of, use the term again, vulnerability, that fear that we have, we have to share with each other and say, “Somehow we’re going to go through this together, and I don’t know what the answers are, but let’s figure out what works for you and what works for me, and we’ll go from there.” And I think we’ve done that.
Michael: Do we need more of these conversations to be facilitated? Is this something that someone needs to have a business that facilitates succession planning conversations? Not necessarily the valuation side, but to actually figure this out.
Marty: Oh, I think so. EJ and I put together a company called Turning Point to sponsor conversations from C level people in financial planning organizations. That’s one big gap we see that’s out there.
Michael: So what does Turning Point do?
Marty: Turning Point has been a series of weekend retreats where we get together with C level people in financial planning firms and we talk about succession planning and how it works for them and what their fears are-
Michael: So if I’m a firm owner and I’m struggling with this, I know I said to my junior person we were going to sell in five years, and then three years later I said five years more, and I’m not trying to string them along. I’ve just got my own challenges of figuring out this transition. Turning Point is for me then to figure out this transition so I can go back and actually work it out with my next generation advisor?
Marty: Yeah, and what it really was about was getting some tools that you could take back that would help work through it. That has to do with how do we have a deeper conversation. How do we have one where we don’t all get mad and stomp out of the room? Because talking about the end of your life and money, can you think of anything more threatening? The end of your working career, which really leads into the end of your life.
Michael: Plus selling your baby. Let’s not forget that part.
Marty: Your baby that you’ve grown up with. Exactly, Michael. So it’s a hot spot, and it’s not easy. People think it’s just coming up with a number and walking away. That’s not true. These organizations, it’s real interesting. The Planning Center that is in Moline, kind of at least a number of years ago was kind of representative of who I wanted to work with and who I related to, and now with new guys coming in, they’re bringing in a whole different set of clients, people I would have never brought in, just because I wouldn’t have met them. They weren’t in my circle. So not only are we transitioning people, we’re transitioning what types of clients we’re bringing in, how they get them and who they are, and what their issues are. So everything is up for grabs. I mean the whole world is transitioning as we’re trying to figure out how this works.
The Dynamics That Emerge Between A Founder And Their Next Generation Successor [1:30:47]
Michael: So advisors that are in that firm owner/founder position, trying to figure out how to navigate this, Turning Point is to help facilitate just some of those conversations so you can sort out your own path and figure out what you want to go back with?
Marty: Yeah, what steps do I need to take to get this conversation in a productive manner? Because I know I need to do it. Every planner I’ve ever talked to wants to take care of their clients, and leaving to attrition, you die and they all go find their next planner is not acceptable. That is, I think, a total waste of energy that someone could have taken that and nurtured it and brought those people to the end of their term, and then they would help them bring on their own clientele that they wanted. So when I hear people talk about that method of, “Well, I’ll just own it until I die,” I just can’t fathom that.
Michael: So we’ll make sure we put a link out to Turning Point in the show notes as well, if people are interested in checking it out and doing it more. I don’t think you guys have any upcoming Turning Point retreats scheduled right now, but in case folks are interested, they can contact you through the Turning Point website, and if there are enough of them, then we’ll get the next one scheduled. So for anyone who’s listening, this is episode 43. So Kitces.com/43, if you scroll down past the executive summary and the podcast recording, we have a list of resources mentioned in this episode, and we’ll have a link out to Turning Point there if you want to take a look and check it out. It strikes me as well, there’s a funny dynamic that I’ve seen at a lot of advisor firms trying to do these transitions that it’s not about the valuation and the money, but it still kind of comes down to the valuation and the money, and not because somebody’s trying to be greedy or maximize their value to the cost of everyone else, but as Dick Wagner used to say, money exerts powerful forces in our lives. I think there are a lot of misalignments that sometimes come up in advisory firms that advisors don’t even realize that end up creating or amplifying these problems. It’s not actually about the valuation, it’s about the fact that the founder didn’t save enough for retirement.
So they can’t actually live the lifestyle they want unless they get a certain number for the firm. So then they become anchored on the number, and everything else starts folding to the number, and it’s not really about the number, per se. It was basically a personal financial planning issue of the founder that spills over into the succession plan of the business. And I’ve seen other ones where the challenge was, if you’re an experienced firm owner, these businesses tend to get pretty profitable in the long run, especially if you run them efficiently. And you get to a point where if you’re a founder, it’s a pretty sweet dividend check. If your firm has 25% profit margins and sells for two times revenue, if you do the math, it’s a stock that pays a 12.5% dividend. And if you sell it, you can reinvest in the S&P 500 and get a 2.5% dividend.
Michael: So you get accustomed to the cashflow that comes off the firm, which is a fine and good thing if you’re approaching retirement and want to generate cashflow, but really frustrating for a next generation owner that says, “No, I’m looking at my future 30 years from now, I want to grow this thing so that it gives me the cashflow I want when I get to where you are in 30 years.” It’s the same problem that any fiduciary of a trust with multiple beneficiaries has ever dealt with. An income beneficiary that wants current income and a remainder beneficiary that wants to grow principle for the future, and a lot of those money conflicts I see crop up in firms as well, and it’s not actually about the valuation and the money, per se, it’s about the role that the income plays in the lifestyle of the founding owner, and it’s about the growth potential that the next generation owner sees for their path to their long-term retirement future, and that those become the breakdowns. It’s kind of Rick Kahler’s version of, this is why every financial planner needs their own financial planner. It’s not about all the technical stuff that you already know if you’ve got your own CFP. It’s these messy issues that we don’t tend to self-diagnose for ourselves very well.
Marty: That’s right. And this is all new. I mean the whole financial planning world is less than a life expectancy old, and we need to build systems that work right so we are the profession of the future like our good friend, Dick Wagner, envisioned, the most powerful profession of the next millennium, dealing with life and money. And if we can’t take our own advice, which we’ve struggled with as an industry in the past, yeah, we’re going to have trouble.
Marty’s Advice To Those Who Want To Be Successors In A Firm [1:36:20]
Michael: So let me shift this slightly. Having been through the successor’s side, you have a unique perspective on what it’s like going through this journey, because you’ve lived it and you are living it. So what would you say to all of the G2’s, the next generation of advisors out there that are trying to get a succession plan done in their own firm, they want to buy in, they can’t seem to get to the finish line, the firm owner that doesn’t want to sell, they keep saying they will, but then the time horizon keeps changing, or maybe the math just doesn’t work, so like, “I’ll sell it to you, but here’s the price,” and you’re looking at the buyer and saying, “This price just doesn’t work,” and you’re at an impasse. So what advice would you give to next generation owners that are stuck at these blocking points about what they need to do to move forward or maybe what they need to understand that they’re not realizing from their perspective?
Marty: You know, my general thought when you first asked that question is that they need to figure out if they can have the conversations that are going to bring them to a successful conclusion or not. Just like we talked about, you have to be a great conversationalist with our clients, I think we need to be great conversationalists with each other, too. And somehow somebody’s got to be the leader to have that discussion in that organization that says, “Are we going to do this or not?” And it isn’t just, “Are we going to do this or not?” Maybe it’s putting together some kind of plan for succession that you think might work and presenting it to them, and if they get threatened and protective and invulnerable trying to protect themselves, learn how to talk to them about it. How do we disarm them? How do we become friends and people that want to have a relationship for the next 20 years together? Because just because I quit working, I’m not done at The Planning Center.
They still owe me a lot of money. I want them to do well. I want to be involved in it somehow, but maybe I want to show up once a month and have them tell me how it’s going and I leave after a cup of coffee. I don’t know what that looks like yet, but I do know that for the health of the organization and for any organization out there, you’ve got a guy my age, 66, you’ve got somebody 70, 75. They need to be thinking about leaving. I’ve told these guys all the time, when I am not holding up my end of the bargain, you’ve got to let me know. They haven’t told me that yet, but I can feel it’s different than when I was 40. So G2 out there, how do you start the conversation? How do you help them work through it? They are all of a sudden going to become like your client. Help them. If they’re not going to do it, you’re sitting on a china egg and it’s never going to hatch. Go someplace else. Start your own, do something.
Michael: It’s a gentle line. On the one end, I do think there are a lot of advisors that stay in these bad relationships too long when it’s just not going to happen, and if that’s really your dream, you’ve got to go somewhere else. But I think you make a good point that, you know, it’s easy sometimes as the next generation advisor to say, “I just wish they’d put the deal on the table. I just wish they’d sign something. I just wish they’d finally make the move and start the transition.” And we don’t always take it upon ourselves if it’s not happening or not happening the way we want to say, “All right, then we’re going to go out and we’re going to sit down in the conference room or over dinner or drinks or whatever it takes,” I guess drinks may or may not be a good idea depending on your context. But just talk through why this isn’t working. You want to get the money out of the firm, I want to buy the firm. You want the firm to survive, I’d like the firm to survive. So we seem to have high general level agreement, and this isn’t working. If the conversation isn’t coming to you, sometimes you have to bring the conversation to them.
Marty: Absolutely, and even offering up, “Let me help put this together. This is what I see. This is where I’d like to go.” If they won’t sit down and talk about it, it’s like, well, maybe they need therapy.
Michael: I will admit there’s a dynamic to it as well. I lived a version of this in my career that, I mean those conversations are stressful as a next generation advisor as well, because you want to push a conversation that at best you know is a little bit uncomfortable and awkward. At that point you haven’t bought yet, so you’re still an employee. You always have to live with a little bit of that visceral fear about, what if this doesn’t go well and I basically get fired and I blow the whole deal up for myself? I’ll admit, for me, I was saving money just to be prudent, frankly, for my own nest egg and emergency reserve. But I built enough reserves that I got to the point that when I actually had to have that conversation with our founders for the first time, I wasn’t trying to be cavalier about it, but I was kind of able to go into the room with a blank. I really hope this goes well, and if it doesn’t, I’m okay. I’ve got a skill set, I know I can find another job. I’ve got enough reserves to make the transition. And just the fact that I didn’t have to be stressed and wrapped up about my own ability to afford my own lifestyle, because I had something to fall back on, made it a lot easier to have that conversation confidently, and I think in retrospect for myself, probably helped to set some terms and get it done in a manner that I was comfortable with.
Marty: You know, in dealing with an owner, I’ve got a quote I love from Peter Block. He says, “When you’re in these types of situations,” any situation, really, what he’s writing about is, advice kills conversation. If you go in and try to give the owner advice, I think you’re barking up the wrong tree. What you want to do is, how do you make him curious on how it might work? How do you bring up the subject that says, “What if? What if we did this?” It’s something that could play out pretty well.
Michael: I like that, how do you bring up the “what if” conversation? I feel like that’s probably equally relevant for what we do with our clients as well as the founder we’re trying to buy out.
Marty: Yeah, if you start going in and telling somebody what to do, they’re going to turn you off immediately. But if you can say, “I was thinking about this and I got curious what you would think about this,” see what they say.
Michael: So as we come to the end here, this is a show about success, and one of the things that we always talk about is that success means different things to different people, sometimes different things to the same person at different stages of our lives. So I feel like you were very humble about blowing by the fact that you built a $700 million AUM firm over the past 20 years. We like to talk a lot about the philosophical intersections of life and money, which I love to discuss, but that’s a heck of a firm that you built along the way as well, and in an area that doesn’t just have the sheer density of dollars and wealth of building in metropolitan areas, which is where we see a lot of the really big RIA’s. So as someone who’s built what I think most people would objectively call a successful business, and now you’re making this transition for yourself, I’m curious as you look forward from here, how do you define success for yourself?
Marty: Good question. The interesting thing about success is it draws a line on the sand and says, “We’re judging it here.” I feel like I want to be successful in the future, I want to still work at being successful. I’m not afraid to stay on the journey of whatever it is. It might be financial planning, it might be something else, might be Turning Point, might be teaching people to use First Step. I don’t know what those things mean, but having an impact on the world we live in, making it a place where more people can find more safety and security and happiness in the future. So it is real interesting this succession thing. It’s like, “Well, what do I do now? I think I can be here to help this group of people that have banded together and call themselves The Planning Center today.” I want to be there if they want me there, and to do that, but I also have got my eyes open saying, “What else would be good?” What else would fulfill that mission of saying, “We’re all in this together,” how do I help somebody else row the boat?
Michael: Well, I hope your opportunity to share your story here helps a few people who are listening row their own boat forward.
Marty: I appreciate it, Michael. It’s been a very fun conversation, and I do want to say, I think the documentation and the record keeping you’re doing here is so wonderful, because we do lose friends, like Genie Robinson and Dick Wagner and many others that have passed in the years gone by, and we need to hear their voices. So thank you for recording these for posterity.
Michael: Well, thank you. I hope we have your voice for many, many years yet to come. But thank you, thank you for joining us.
Marty: You bet. Thanks, Michael.