Earning Premium Planning Fees By Demonstrating Hard-Dollar Tax Savings For Business Owner Clients: #FASuccess Ep 491 With Patrick Lonergan

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Resources Featured In This Episode:

• Patrick Lonergan: Website | LinkedIn
• "Rich Dad, Poor Dad" by Robert T. Kiyosaki
• Leimberg Information Services
• BELAY
• GoTo
• Simply Paraplanner
• Austin Wealth Management
• BeyondFA

Full Transcript:

Michael: Welcome, Patrick Lonergan, to the "Financial Advisor Success" podcast.

Patrick: Michael, thank you so much for having me. I'm excited to be here. The Advisor Success podcast has meant so much to me in my career.

Michael: I'm now excited to talk to you for today's episode, delving into some of those issues and, to me, a really interesting evolution I'm finding that's happening in how the advisory business is showing up to business owners, to entrepreneurs, that subset of folks who have most of their net worth tied up in a business. And I find, I think, particularly the entrepreneurial types who have a tendency to keep the dollars tied up in the business, "It's growing well. I want to put my money back in the business. It's returning well," to the point that they become a really challenging fit to the traditional advisory firm because there's just very limited investment assets, often a lot of complexity outside of the portfolio that they may want a financial planning advice on, but it's hard to have a small portfolio, toe the line for a lot of financial planning complexity and advice.

And even in the financial planning domain, just the advice I find tends to look different, where it's a lot less, "Can I afford retirement" and a lot more "I'm writing checks to the IRS for hundreds of thousands or millions of dollars. Please help." And so financial planning takes on a much heavier focus on tax strategy and much heavier focus on lifting the value of the business than sort of the traditional retirement planning and lifting the value of the portfolio. And so this phenomenon for business owners of different expertise, different service models, different value proposition, different fee models that fit with it, and I know you've been actively building at this intersection of business owners and tax planning and new fee models and new value propositions, so I'm excited that I get to talk about how you shaped this for business owner clients. What are you doing? What are you building? How does this start scaling up as you serve more and more business owners?

Patrick: Yeah. It's interesting. Because we figured out pretty quickly that it's really hard to serve the entrepreneur with, we'll call it, the traditional AUM model or trying to sell a product, whether that's life insurance or annuities or something along those lines. So much of what they need just doesn't...

Michael: Buy-sell agreement or bust was kind of my prospects in the insurance days.

Patrick: Yes. Yep. Or maybe some large estate planning opportunities. But, yeah, it was somewhat challenging to try to figure that out just from a traditional financial product point of view. And then we got a little bit into financial advisory fees, some planning there. But even that had some challenges around it. And so we started looking for just different ways to serve the entrepreneur, and we figured out there are lots of different ways they're looking for help. And when we started thinking about that, we're like, "I think we can charge a consulting fee, more or less, for this type of work."

Patrick’s Journey From Real Estate To Financial Advice [05:51]

Michael: And so, why entrepreneur? Why business owners, in the first place, as the folks you wanted to go after?

Patrick: Yeah. I think the reason being was I was an entrepreneur. I read a book called "Rich Dad Poor Dad" that really changed my view on just kind of the path. Go to school. Get a good job. You'll be in good shape to maybe consider this entrepreneur route. And so really started looking at real estate. My dad owned some real estate growing up, and I remember the passive income idea. And I'm like, "Okay, yeah, this makes sense."

This was early 2000s. The market was...it was kind of hard not to make money in the real estate world. We were doing... I wasn't an agent or a broker. I was just trying to make money in real estate any way I could, whether that was buy-and-hold or flipping a property. We were just doing all of it. And it was working. We were making some money. I was making some money. And then I eventually recruited my wife into the business, and that's when it really took off. My wife is totally the brains of the operation. And we had some large multifamily property in Texas. And so we decided at that point to move back to Iowa. Our family was there. We wanted to start a family. And so it was working.

But we had some partners that...if we remember, back to late 2000s, the mortgage world, you could get a mortgage if you were alive. They would give you financing for a residential property. It actually wasn't that different for a large commercial property. We had 300-unit apartment buildings, 92%, 95% loan-to-value, and leverage is great. But it cuts both ways. The nice thing is we owned this property in Houston, Texas. And if we remember, late 2000s, oil was for...gas at the pump was about $4 a gallon. Oil was doing well. Houston was an oil city. It was like, "Okay, this is good." The rest of the nation was kind of falling apart. And our partner...the great thing about our financing is it was non-recourse, which is great. But our partner had property. He had industrial and commercial property all over the United States, and it was cross-collateralized.

And so, one day, we basically got a phone call that said, "Hey, these nonperforming assets, we see these performing assets. We're just going to take all of these." And so the good news is we made a lot of money in a pretty short period of time.

Michael: So the lenders foreclosed on your jointly owned performing property to cover down for his other nonperforming ones.

Patrick: Yep, yep. And so it was a little bit of a scary time, but I think, in general, we were in our late 20s, we were sitting well, really well financially, and we're like, "Okay, we can come up with plan B." And so my job on the real estate side was to go find the deal, raise the money. And then my wife was the operator. She ran the management company. And so there wasn't many deals to be had, and there wasn't many people that wanted to put money into real estate at that point in time. So I was kind of out of a job. And we bought our house from the largest money manager in town. I was on a superintendent search committee with an advisor that worked at New York Life.

And so I reached out to both of those guys, and I said, "I want to learn more about what you're doing." And I'm like, "Man, okay, this seems interesting. There's kind of a monthly recurring revenue opportunity here. I don't have to take on millions of dollars of debt to do it. Let's lean into this business a little bit." And so I started vetting my opportunities and got started with that advisor that was at New York Life because I felt like they had the best sort of training ground for me to learn the industry.

Michael: This is an interesting way of framing it, just coming from the background you did, "Oh, a place where I can use my expertise, and I don't need to raise millions of dollars of capital." It's so automatic in our world, I feel like the advisory world is great. Hang your shingle, start serving clients. We kind of forget sometimes the minimal to nothing capital requirements to launch a firm in our industry. That's actually kind of a unique thing.

Patrick: Absolutely. I was looking at...I'm like, "I can generate... I can see a path to hundreds of thousands of dollars of recurring revenue, and I don't have to take on millions of dollars of debt to get it. This seems incredible." So, yeah, I agree with you.

Michael: And so that was the entree to the financial advisor world, it sounds like, and you came in through New York Life. That was your entryway to the profession.

Patrick: Yep, it was. And it was interesting, and I appreciated all of the training that New York Life gave me. And also, it was very... I still have this email to the guy that, I don't want to say recruited me, but recruited me into the business. And in 90 days, I was up to speed and running and knew all things financial advisory. I'm 16 years in, and I still feel like an infant on some of these things. But it's comical that I thought, "Oh, I'm going to figure this out really quickly, and I'm going to start printing money in the business." And it was the exact opposite of that. It was really hard. I was out there, hustling, trying to sell some term life insurance. Man, I’ve got to sell a lot of term life insurance to make any money over here. And I just remember those first three years being humbled from a perspective of, "Man, I'm not as good as I thought I was."

And you look around, and you see people doing well, especially in New York Life. They like to highlight the folks that are really succeeding in a very short period of time. You're like, "Man, what is that person doing that I'm not doing?" But the good news is we stuck with it. If anything, I'm awfully persistent. I will just keep showing up and putting in the work, understanding the belief that it will eventually pay off. And I think that's somewhat necessary in our industry, we can talk more about how to change that. But, yeah, that's... I look at the failure rate, and it's really high in our industry. And I'm like, "Well," whether this is a pride issue or not, but I'm just like, "I believe I'm in that small percentage of people that's going to make it, and I'm just not willing to stop until I do."

I had some success early on because I wasn't afraid to hustle at New York Life. And so they put me in some... I got to go to a career success conference or something along those lines, and we met up with a peer group. And that peer group was from all over the United States, and we were like, "Hey, let's lean into some of these new opportunities." And through that, I got to meet some mentors from New York Life. And one of those was Wes Young. He's still at New York Life. He's a friend of mine, great advisor. And I called Wes up, and I said, "Wes, I have all of these people I don't know what to do with. Can I fly you to Iowa?" And actually, I think I flew him into Minnesota. We had a meeting. I picked him up at the airport. We had meetings. We drove back to Iowa, had meetings. And then I live about two hours straight west of O'Hare Airport in Chicago. So I drove west to Chicago when we were all done, and he flew home.

But my pitch to Wes was, "Wes, I don't need you to split anything with me. I just need to learn what you're doing. I need to learn how you're doing this." Because I've figured out the wisdom was more valuable than the money. And if he could just show me what he was doing, I would be okay. Now, I needed the money to...

Michael: So the idea was you have all these prospects, "Wes, I just literally want to put you in front of my prospects. You can do the wholesale. You can keep all the money from the sale. I just actually want to see what you do successfully with my prospects."

Patrick: Show me, yeah. Absolutely. And Wes was like, "That's really generous, but why don't we just split it?" And I'm like, "Fantastic. Even better." So I flew Wes in, and he was generous enough to just go through the process. And we did some really good work for clients, and we made some really healthy money. And it was like, "Okay, cool. I see this." And so from that point forward...

Michael: What was Wes doing that you hadn't been doing before that, suddenly, you realize you should have been doing differently and better?

Patrick: So Wes did a few things really well that...as an entrepreneur, so I used to have financial advisors come talk to me, and I would be like, "I'm not interested in your portfolio. My business is going to generate more return than anything you can possibly show me. And even if it does do better, I've got control over this thing, and I want to hold it close." But the thing that I found as an entrepreneur myself is I had...and Wes does a great job phrasing this, but it was a problem I had, too. I had more opportunities than I had time and money to execute with. And so with that is entrepreneurs are constantly running themselves out of money.

And so Wes did a great job of positioning liquidity as a super important piece of the entrepreneur's life. And if you look at why businesses go out of business, the number one reason is they run out of cash. They just don't manage cash flow, and they go out of business. And so he did a great job positioning liquidity as a very important part of the equation. "Hey, you have this. Now you can go do your business better." I was like, "Oh, that's really fascinating. I used to have that problem. I get it."

And then we had some estate tax solutions out there, and it was like, "Look, you've got an estate tax problem. So here's all the ways you can pay the estate tax, or we can solve it with some trust setup, and some life insurance will help us get there." And so we were able to solve some of those problems early on. It was like, "Oh, I see how this works, and I see how you can make some money doing this." So it was great for me.

Michael: And so it was particular positionings around business owner, entrepreneur clients. So I guess the estate tax problem ultimately gives opportunities around trusts, life insurance for liquidity, all the things that we do on that end, which is helpful when you're at an insurance company.

Patrick: Yep.

Michael: How did the liquidity part work? Is that ultimately around, "And this, Mr. and Mrs. business owner, is why you should be drawing some cash out of your business, and let me help you invest it. I'm not trying to beat the growth rate on your business. This is your liquid alternative from your hyper-volatile, extremely concentrated business?" Is that the angle?

Patrick: Yeah, it was. Not that...and I appreciate this about New York Life, is we learned all the ways that life insurance was an effective tool. It could do everything from fund college education to help you retire. But one of those things is it was a leveraged liquidity tool, right? If I had money sitting in the bank doing almost nothing for me, I could start to migrate some of those dollars to a whole life policy. If it's designed properly, I've actually got quite a bit of liquidity early. It's got the death benefit. It's got a tax-free nature. So there was an opportunity to use some life insurance as, we'll call it, a leveraged liquidity tool there for people.

Building A Business In The Insurance Channel By Offering Tax-Planning Expertise For Entrepreneurs [17:02]

Michael: So, now, what comes next on the journey? It sounds like Wes has opened the door for new ways to actually get business owner clients engaged. So now you're getting some momentum there.

Patrick: Yep. It was fascinating to see how the tax discussion, "Hey, you've built this incredible business. You're going to give 40% of it to the IRS above this certain threshold." And people's heads were ready to pop off. They just were like, "No way am I giving this much money to the IRS in the form of estate tax." So we started looking for all the angles around tax, and we just continued to seek out mentors and people doing interesting things in the tax space, which can be a really interesting place to wander into. It was a little bit of Wild West and people doing things, and you're like, "You should stop doing that and I can't believe anybody actually trusts you with that strategy," but we'll get into that later in the conversation. But we were just constantly looking for people doing unique things. There was some...

The Michael Kitces blog is incredible. Every time I was searching a topic I was coming up with, I'm like, "How does Michael write all of these articles? It's amazing."

Michael: There's a lot of tax strategies in the 2010s, too.

Patrick: Yeah. It was really, really useful to see what was your take on a lot of these things. And there's just other resources out there. Leimberg Information Services is...you've got a lot of niche, sort of tax, estate planning opportunities out there. Robert Keebler is regularly talking about what's happening with legislation changes and whatnot. And so that was a resource. And there was just a number of things that we were leaning into. We were just trying to learn how to serve the entrepreneur and find opportunities to bring that tax bill down. And that started to pay dividends.

Michael: How so? How are you monetizing that? Because again, I know how you monetize insurance for estate liquidity. I can visualize, start pulling some cash and saving it outside, your business will be liquidity for inside. How do you monetize tax strategies?

Patrick: Yeah. So the interesting thing about the marketplace right now is there's not many people doing tax strategy. There might be some CPAs that will say they will do it, but at the end of the day, the CPA business model... And we love CPAs, so this is not a knock against CPAs. They're a high-volume business. Their job is compliance. "Let's make sure everything you did gets recorded correctly on the tax return. Let's make sure we get the right numbers in the right boxes." Now, we might find some opportunities to get those numbers in the right boxes in a way that saves you more tax versus less, but there was not many people going, "Hey, it's June. Let's forecast your tax liability for the year and design a plan to bring that tax number down."

And so what we just started doing is we would meet with an entrepreneur, we would get their tax returns, and then we would go back to them and say, "Here's all of the things we can do to help you save money." And they'd be like, "Okay, that sounds incredible." But then they needed us to execute. And so we started refining that process. We started adding more tools to the tool belt, so to speak. And the value we could deliver just continued to escalate.

Michael: So, what comes next on the journey of how the business itself is growing and evolving?

Patrick: Yeah. We had a really interesting thing happen. So I live in Clinton, Iowa. Clinton, Iowa has about 25,000 people. I love Clinton, Iowa. My wife and I grew up there. We vowed we would never go back after we left and went off to college. But now that we're there, we've been there for 19 years. We've raised our kids there. We like it there. And one of the main reasons I like it, it's probably the lowest cost of living anywhere in the United States, and I'm two hours from O'Hare Airport, which gets me direct anywhere in the world. So I appreciate those two factors.

But one of the challenges in living in Clinton, Iowa is I would hire staff, and for one reason or another, they would go work on the family farm, or somebody would turn over, and it was so hard every time I had to hire somebody to get them into a place where they were valuable to the organization. There's training and development. Unless I was going to go poach from another, the Edward Jones office or my former mentor, it was hard to go find talent. And so one of the things that happened was I just lost a person, and I was frustrated, and I was talking to... I'm a part of C12. It's a Christian business owner group. And my chairperson was like, "Hey, have you heard of BELAY?" And I was like, "No, never heard of it." And then I was talking to one of the pastors at our church, and he was like, "Hey, have you heard of BELAY?" I'm like, "No, but now I'm definitely looking into it." And this was all in the same week.

And so BELAY has been fantastic for us. It's a virtual assistant, U.S.-based organization. And I'm like, "Well, I don't know how we're going to do this." But it was right when DocuSign was becoming...documents could go out that way. And I was like, "All right, cool, we're just going to test this out, see how it works, because I need a solution."

Michael: Okay. So this is 10-plus years ago. We're in the realm of, "Okay, but if I hire a virtual assistant who does the paperwork..." That was the thing then. We printed things, and people sign them, and we fax them places. And you can't do that with a virtual assistant, because they're not where the paper is. So the firm is going digital, "Okay, maybe I can actually use a virtual assistant now."

Patrick: Yes. And I was still very skeptical. But I'm like, I'm willing to try it. Let's see where this takes me.

Michael: Because you're frustrated with the turnover and the rehiring process.

Patrick: Yeah. And the cool thing is BELAY does a great job helping get somebody plugged into you that understands the way you work. I am very much...I will point somebody in a direction, and then I need them to use their resources to figure it out. I think about the Kolbe assessment, and I figured out early, my first hire was a high fact finder. I'm really high on the quick start. A high fact finder needs every detail before they can take the first step. That was not good for us. I was like, "I don't know what's next. I just need you to go figure this thing out." And so, with that in mind, BELAY got me plugged in with somebody that could just handle that, and they also had ten years of experience at MassMutual. So they knew how to fill out an application. They had...

Michael: Oh, wow.

Patrick: Yeah. So it worked out really, really well for me.

Michael: So they were actually able to source someone that had the industry experience part and just fit you for work style and the business model and all the rest that it takes to get someone on board full-time.

Patrick: Yep. And so I started off with, I believe, ten hours a week with this person, and I was like, "This is working. This is really nice." They're helping me clean out my email. They're able to do all the documents. They're good. And then, yeah.

Michael: Sorry. Just, I'm wondering, quickly, what did that cost you at the time? And where was your revenue? How much of a dent or non-dent was this financially, trying to get someone in?

Patrick: Yep. BELAY, I believe, at the time, charged $30 an hour. And I believe the person got about half of that, as a 1099 contractor.

Michael: So this is costing you $300 a week.

Patrick: Right. Yeah, not a ton of money. Yep. And it was an easy test, because I could... I don't believe, at that time, there was any long-term commitment. And if this person didn't work out, they would get me plugged in with somebody else that was a better fit. But an interesting thing, about two months into my relationship with BELAY, I had a friend that was turning 50, and his wife surprised him with a shark diving trip off the coast of Mexico. We were 20 hours out to sea, and my wife was like, "Yeah, my husband would be down for that. That sounds incredible." So she booked me on the trip. But I was 20 hours out to sea. I was not able to be contacted.

So I have my one brand new virtual employee, or virtual assistant, 1099, I'm like, "Okay, here's all your list of resources. You can't call me. Good luck." And she nailed it. She did a fantastic job. And I was like, "Okay, this is going to work. This is good."

Michael: Wow.

Patrick: Yeah. So it was really good. I got back. And then, at the time, we worked together for a few more months, and then BELAY had a... I think they've moved away from this, but they had a buyout. I could buy my assistant out of the contract, and I was like, "Totally." I just look at this as a hiring fee. This is great. BELAY's model has changed. They're like, "No, we don't let people be bought out of our agreements, because we're a recurring revenue model."

Michael: I'm going to guess, because it was working too well, and they were having too many buyouts.

Patrick: Yes, totally. And they're like, "That's not what we're here for." But it worked great. And she worked for me for a number of years. But the interesting thing was it gave me...we started getting referrals from people all over the United States. And this was also right at the infancy of GoTo video meetings. I could screen-share. And so there was a vision where we could be a virtual firm. I still had the majority of my clients locally, but we started getting referrals from people that we're like, "Hey, can you help my cousin out in Colorado?" I'm like, "Yeah, sure." "My brother in New York." "Yeah, let's do it."

Michael: I want to keep the context here. You started in the 2000s. We're into the 2010s now. You're in a small town in Iowa, building in the local community. That was the deal. You got local clients in your local town that you're building your relationships in. Virtual, distant clients was not a thing.

Patrick: Right, yeah, it was hard. And I still had connections up in the Twin Cities, so I was like, "Okay, I would drive up there." We'd do some meetings over the phone or what have you. But, yeah, technology was starting to open the door to expanding our user base. And this was also allowing me to... I also remember using... You were on a panel with other advisors, and you were very niche in what you... I can't remember how you described yourself, but you were like, "I serve this particular person."

Michael: Oh, yes.

Patrick: And then, afterwards, three or four people came up and talked to you. But when everybody else is like, "Oh, I just serve everybody. Anybody needs help? Do me. Do that for me." And that's kind of how we started at New York Life, and I needed to. I just needed to find a way to generate revenue to keep the lights on. But then I started thinking, "Okay, we can really start to get specific in who we serve. Because if I'm relying on Clinton, Iowa, we're in trouble for the entrepreneur." We're a very blue-collar area. There's some people that do really well. We've got some of the richest farm ground in the nation right around us. But if I want to grow this thought of serving the entrepreneur from a tax and liquidity and all the things they have going on in their lives, I'm going to have to branch out.

Michael: So that's an interesting thing. So, for you, I guess we're mid to late-2010s now, so you're getting good at entrepreneurs, but you are geographically constrained by how many there are in Clinton, given this depth of blue-collar workers for the population that's there. But all of a sudden, virtual is becoming possible. "I got a virtual team member. It went great. I'm doing more GoTo meetings with clients virtually. It's going well. And if I can do things more virtually with clients, I can go deeper into entrepreneurs because I don't have to worry about whether there's enough of them in Clinton." Is that the journey, is that the logic chain here?

Patrick: Yep, it is. It is. And then, because it worked well the first time, hiring an assistant, and I believe I got this resource from you as well, we leveraged Simply Paraplanner to help us find the next advisor. And this was somebody that had a CFP, they'd worked at a large firm. They were looking for a remote position. And so we started interviewing through Simply Paraplanner and found somebody in Dallas, Texas, that was an advisor. And we're like, "All right, great." This frees me up a little bit from some of the advising to go do more business development and, I'll say, grow the firm.

But I think one thing I'd like to highlight through all of these issues is it was really hard growing the firm. I remember my first hire. I'm like, "How am I going to afford to pay this person?" And the good news was I just believed that if I'm doing tasks one through five and one is opening the mail, okay, it's the simplest, easiest task, anybody can do it, and five is only the things that Pat can do, some sort of creative, super cool financial advisory planning, I was like, "I need to get rid of all the twos and threes and spend my time on three, fours, and fives. Or ones and twos, and I'll spend my time at the top." So I was like, "Okay, I believe that's going to work, so I'm going to hire somebody. And then I'm going to be really intentional on the time that I'm spending up there."

And so I just kept that mindset sort of going, "Okay, we're going to keep hiring." But every single time...the first time you hire somebody for $30,000 or $50,000, you're like, "How am I going to pay this? I don't have a free $50,000 flowing into my business that I want to give away to an employee." So you have to have something that's going to work out. And the same thing when you start hiring more expensive advisors, you're like, "Holy smokes, this is challenging to make all the cash flow work." But it does. It does work, and especially when you're intentional on those unique activities that are going to drive revenue into the business. So, yeah, I wanted to stop and highlight that because I think it's important for advisors to acknowledge.

And then have the right mindset. I think having that mindset of, "Okay, I'm going to go do the revenue-generating activities that will help pay for all of these things taking place around here."

Michael: Do you recall, just where was your revenue at the point that you're hiring your first full-time or you're hiring your first advisor?

Patrick: I'm trying to remember. I think we might have been right around $100,000 of revenue. And the nice thing about working at New York Life is they gave me kind of a platform. I didn't have to pay for a whole lot. A lot of that was included. And so the money that was hitting my bank account was sort of net after most expenses, which New York Life was covering a fair amount of those. So that was kind of nice. So I was like, "Okay, if I can spend $30,000," because I think that's about what it was in 2012 or 2013, I think, is when I hired my first person, and it was like, "Okay, if I can spend $30,000 on a part-time kid straight out of college, basically," I think they're full-time, but...

Michael: So $100,000 was your net from New York Life. So you might have been...I don't know what the average payout was. You might have been $150,000 or $200,000 gross in total revenue, but they're covering most of the other expenses already, and you've got a payout of your net. That's your money.

Patrick: Yep, exactly.

Michael: Okay, okay.

Patrick: Yeah. So I wasn't making...and that was, again, part of the problem. I'm three years into this process, and we had moved from the advisor's office I started into. My wife was still in the real estate game. She partnered with a partner and was doing senior housing property. And so we bought a building. And we're in the real estate world. We understood it. So I had my own office space, and I could hire my own staff and go that way. And, yeah, I think I was right around that $100,000 net to me. And then I think we were probably north of $200,000, $250,000, hiring the next advisor that I think was around $60,000 when I hired her. So that was, again, probably fairly early, but I just believed. I'm going to invest back in my business.

And also, a few points that I think matter. I was living in Clinton, Iowa. The cost of living is really low there. I think I mentioned that. And my wife also had a business, and it was generating revenue. And it wasn't...it would be a totally different story, I think, if I was the main breadwinner and needed to take home $100,000 for us to live. That would probably change the dynamics of how we were making decisions inside the business.

Making The Decision To Go Independent [35:28]

Michael: So, then, what comes next on the journey? Because I know, ultimately, you're on the independent side now, didn't ultimately stay in New York Life throughout. So, what's next on this journey and evolution?

Patrick: Yeah. So that advisor we hired through Simply Paraplanner, we hired that person right after we had left New York Life. I had about a 12-month game plan for how we were going to do that, transitioning a lot of our systems, processes, software, sort of getting parallel things up and running, figuring out how we were going to place life insurance and some of those things that we had done and what we were going to do to service our existing client base. And so we had left New York Life. And again, New York Life was a great place for us to learn, but there was just limitations on how we were going to do planning. Compliance would have had a heart attack if they would have seen that we were doing, publicly saying, "Hey, we're going to help you, as an entrepreneur, reduce your income tax liability." They'd be like, "No, you can't say that."

Michael: Oh, because you were leaning into tax, and I know some big firms have shifted this a little over the past few years, but especially back in the 2010s, you couldn't say you were helping people with taxes as a big firm. They would say, "Standard disclaimer, we are not your CPA." You think you can't do that.

Patrick: Yep. And it was a fine line, because Robert Keebler would do a seminar for New York Life, and you'd be like, "Oh, cool. This is really neat. We're talking a lot about tax here." But they're like, "No, you can't be..." You've got to qualify every statement with, "We're not... Go talk to your tax advisor." And there was also other factors. When you think about a broker-dealer being involved, compliance works down to the lowest common denominator. Who is going to do the dumbest thing? Let's imagine that, and then let's create the rules around that. Even though the super dumb person is not going to actually care what the rules are, they're just going to do the thing anyway.

Michael: But the normal good people have to get dragged down to that level of compliance.

Patrick: Yes, yes. So we were...

Michael: It's the unfortunate reality of managing a large firm compliance.

Patrick: Yep. So we were like, "Let's get rid of our broker-dealer, and let's be a fee-only RIA firm." And then we had a consulting firm on top of that. So we could charge consulting fees that would allow us to do projects for entrepreneurs, create tax strategy, do estate planning, help with liquidity, all of those different things. And then, if they had investment dollars, we could do that as well over in the RIA. So we had separate entities that we set up for that.

Michael: So I'm intrigued there for a moment. So help me understand more. So, is this sister companies, A owns B, B owns A? What's the structure here?

Patrick: Yep. So I own... So right now, we have three different entities. The first one is Vital Wealth. Before Vital Wealth, it was called Lonergan Group. And when I was at New York Life, I was doing DBAs to Lonergan Group. And so, when I left, I just started an LLC as the Lonergan Group. And that became the main operating entity. And then, from there, we had Vital LLC, which is the consulting entity. And then we started Vital Capital, which is the RIA. And one of the main reasons...I know so many advisors that do it all in one entity. And that's fine. I don't think there's necessarily a problem with that.

From my point of view, when I started looking at it, I'm like, "Okay, if we are giving advice, helping clients with tax strategy," and let's say the IRS comes and says, "Hey, we no longer like this. We're going to change it. We're going to go back retroactively and adjust some of these things." And we've even seen some of that in conservation easements. And as a disclaimer, we've done zero conservation easements for our clients. But we've seen the IRS come back and sort of unwind some of that work that was done because there was problems with it.

And so we're like, "Okay, if there becomes a problem, it might be a big, big problem. And I like the RIA model, the recurring revenue that comes out of there. I don't want anything to potentially impact that. So let's segregate out the tax strategy and consulting piece to kind of its own entity. There'll be different agreements. And if it somehow blows up, it's not going to do something to the goose that lays the golden eggs."

Michael: Unfortunately, from an asset protection perspective, if my consulting entity gets sued, I just stop taking consulting agreements, and the revenue kind of winds down. There's not a lot else to collect against. If I get a liability against my RIA entity, I'm not shutting down my recurring revenue clients. And unfortunately, recurring revenue and profit is pretty easy to go after for creditors.

Patrick: Yep, exactly.

Michael: So this was risk segregation. So, are Vital LLC and Vital Capital both owned by Vital Wealth? They're subsidiaries under, and Wealth is the operating hold co?

Patrick: Nope, they are all owned by me. And I would say there's management services agreements between///all the revenue flows into those entities, and then Vital Wealth sort of provides the services.

Michael: So the staffing’s at the Vital Wealth and the revenues at the subsidiaries. So, why that level of splitting? I get LLC and Capital to separate the RIA from the consulting business. Why the third entity and the cross-services agreements?

Patrick: I think it happened...so when I left New York Life, the easiest option for us was to not spin up our own RIA right away. I had a friend that had left New York Life previously and had his own RIA. And so I called him, and we worked out an arrangement where I just tucked in under his RIA for a minute because it was easy. I could just go day one from New York Life. I had to repaper everything, but we could move it all to, at the time, TD Ameritrade. And it worked super slick versus having to get state-registered. Because I have to leave and then get registered. And so I was like, "Eh."

Michael: Right. And then sit out while we're waiting for state regulators. Yep.

Patrick: So I did that, and I had...that was under the Vital Wealth umbrella. And then, when I started my own RIA, I just started up a new entity. And I think it happened more...yeah, that's where Vital Capital came.

Michael: Okay. And so there's a period where they overlapped as you're moving from one to the other, and then you just kept the structure as opposed to consolidating them.

Patrick: Yep, exactly.

Michael: Okay. Okay.

Patrick: Yep. You probably don't need the entities.

Michael: Okay. But, yeah. There's a lot of creative tax things here, but I certainly understand. It sounds like the two core, because of where the revenue comes in, is the consulting entity and the RIA entity. And that's a good old-fashioned segregate businesses for asset protection purposes approach.

Patrick: And actually, when you bring up tax strategy, there is a reason why we have the third entity. So all of our insurance commissions, we don't do a lot with insurance commissions. We actually donate 100% of any dollars that come in to charity because we don't like the conflict of interest. But there was an opportunity for QBI [Qualified Business Income] deduction with insurance brokerage that you don't get for the RIA business. And so I think that was another reason we looked at breaking it out as well, that we don't...there's no...

Michael: So the insurance commissions could be paid to Vital Wealth and potentially get a QBI deduction.

Patrick: Yes. I don't think we've taken advantage of that. I don't think it's... There's no real net profit that rolls through because of all the employees that are living there. They soak all that up.

Delivering Hundreds Of Thousands Of Dollars Of Tax Savings To Clients [44:02]

Michael: Oh, right, right, right. So now, as you launch into RIA world, so what was the vision? What was the business model? It sounds like you're leaning further into tax at this point, and so being able to focus there and consult around it is one of the benefits of going on your own and having multiple entity structures. So, what's the business? What's the vision at this point?

Patrick: Yeah. So right now, at this point in the discussion, all new clients are coming in virtually. We hardly meet any of them in person. And we're hiring advisors in…we've got another advisor in Austin, Texas. We've got one in Philadelphia. And so our entire product delivery at this point in time is to the entrepreneur, because we're just starting to spread, and we're getting pretty good at this conversation. And we're not afraid to say that, "We will save you at least 2x what you're paying us, or we'll give you your money back in the form of tax savings."

And so the interesting thing that happens is when you start delivering on the tax side, people start telling their friends. It'll be April 15th. They'll be like, "You won't believe this check I just wrote." And they'll be like, "You got to talk to my friend or my advisor that helped us save a ton of money this year." And so we got to the point in...I think we did the math in 2023 that our average tax savings was $280,000 for our clients. Now, some were higher than that, some were lower than that, but it allowed us to justify a pretty healthy monthly consulting fee.

Michael: So now, help me understand, especially if you're tying a good old guarantee to it or fee refund guarantee, so how are we defining tax savings here? What does that mean?

Patrick: Yeah, yeah, great question. And so it would be tax savings for this year. Now, that doesn't mean we're not deferring it to a point later in the future, but that's tomorrow's problem, not necessarily today's problem. So when we look at the tax bill, here's what the tax bill was without any planning. Call it $1 million. Okay, we're going to send $1 million to the IRS. Here's what the tax bill is with planning. It's only $700k. So we saved you 300k in dollars you'd have to send to the IRS this year. So you can take those dollars and continue to use them in your business and grow and just accelerate your wealth.

Michael: Well, I guess it's an interesting point in the context of business owners, in particular. It's one thing just to do the dynamics of what's tax savings versus what's tax deferral and the analysis that we do there. But business owners that are deploying dollars in and around business have sometimes very, very high opportunity costs to the money. This isn't a "pay taxes now or pay taxes later" thing. This is, "If I pay the taxes later and I have the cash now, I can launch the new service that grows my business."

Patrick: Right.

Michael: So it clicks with me. There's something unique about your clientele that the immediate cash flow of tax deferral just shows up differently for them than the sort of pure, "Well, you're going to pay Uncle Sam someday. Do you want to pay now or in the future? We can look at current rates versus future rates and figure out what the timing is and which one produces the lower aggregate tax bill." All that is still true, but it just feels different when you've got business owners that have very immediate opportunity cost deployment plans for the cash.

Patrick: Yep. Yep. Because if we think about the Forbes list, the people that are on the Forbes list are business owners and real estate people. And so if you've got a company that you can invest in that will allow you...we've had some clients this year with exits that they're trading at 10 to 12 times EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization]. And so you can make some investments that put another $100,000 to the bottom line. That's worth $1 million in enterprise value. And if you've got an exit coming up, those dollars that we're not paying in tax today help that. And so I think that's a key factor, something we can highlight to people.

And I'd also like to just slow down for a second. We started the conversation at New York Life, and now we're saving people $280,000, probably more this year. And I think one thing that is worth acknowledging is...and this is a Wes Young statement when I was in my first year in the business that he said to me that just has stuck and is something that I still think about today, and he said, "You can't go do 100% of the new thing in your business. You'll go broke because you don't know how to do the new thing yet." He was like, "Do 80% of what you know and 20% of the new. And then, eventually, the 20% becomes the thing you know, and you just keep adding in a new thing to what you do." And so we've taken that to heart, and we still think about it that way. We're still adding in, "Oh, here's a new opportunity that we can bring into the mix," or, "What if we try this pricing model or what have you?"

And so I think I combined that along with the fact that I'm just so persistent. I just won't give up. And I think that's so much of...I don't know if I want to say I have had success, but so much of success is just around showing up every day, even when it's hard, and you don't feel like it. You combine those two things together, and I think it can produce some favorable results over the long term.

Michael: So now, bring us forward to present. I think I'm just trying to understand. So, as it stands today, what do you do? Who do you serve? What do you charge? Give us now an understanding of the businesses that exist today.

Patrick: Yeah. So our ideal client has a net income north of $2 million. We can really move the needle for somebody there. And I'm going to give a breakdown of how those dollars generally work for somebody in that category. So interestingly, we found that the entrepreneur...now, this might be a little different if they live in South Beach, but almost anywhere else in the nation, they spend about $30,000 a month and live a pretty comfortable lifestyle. So their lifestyle spends 30k a month. Their tax bill is probably close to, depending on what state they live in, $600,000 or $700,000. And then they save the rest. So they're saving about $1 million, paying about $700,000 to the IRS, and spending about 350k, 360k.

So when we think about that, it's like, okay, that allows us...that million dollars of free cash flow allows us to invest in, I'll say, tax strategies that drive down that tax liability and puts more liquidity back in their pockets. So that's the ideal client. What our process looks like is everybody that comes into us comes into the consulting side. Right now, and this number has migrated up over time, but we charge $10,000 for what we call the roadmap. And we have four areas of planning we work on. It starts with cash flow. Then, once we understand the cash flow, it moves to tax. Once we don't send money to the IRS, then we can go invest those dollars. And then the final piece is protection. Let's just make sure our P&C [Property and Casualty], general liability coverages are in place, our asset protection with entity structure is in place.

So we've got those four areas of planning, and there's levels to all of that that we can dig into if we want to. But it all starts...the roadmap starts with cash flow and tax. And so we get very dialed into the client's cash flow, how much they spend on lifestyle, how much they are sending to the IRS, and then what's their sort of free cash flow that they've got available. Then we can start to design a tax strategy. And then we design that tax strategy. We show them, "Hey, based on your goals..." So we collect all the financial info, and then we understand all the soft things. What's important to you? Where are you going in life?

And again, this is some of the...again, stealing from the good work you've done, George Kinder, and going, "Okay, what's really important to you? Let's make sure our money supports that." And so when I know their financial landscape from a dollars-and-cents where all the assets lie and then I understand their goals, then we can start to design a tax strategy that is going to bring that tax bill down. And we have four levels of tax planning that we like to talk through.

Level one is the IRS gives us guidance, but it doesn't take any investment. This is good administration and bookkeeping. We touched on the QBI deduction. We've seen clients that have a very profitable, low number of employees. Firms save hundreds of thousands of dollars just optimizing the QBI deduction. It could be...we had a client making $2 million a year that was filing on Schedule C, was set up as a pass-through entity, didn't make the S election in their LLC. And I'm like, "Your CPA should be here."

Michael: Can we just pay you a couple of hundred thousand dollars of salary and cut out Medicare taxes on $1 million of income?

Patrick: Yes. Yes. We're just lighting money on fire over here. And it took 15 minutes to solve that problem. But that's a good example of a level one strategy. We think of optimizing the home office deduction. Our clients live in nice homes. We just take all of your expenses for your house, and you have a home office. It's probably going to add up to more than the $1,500 that the IRS gives us. And then, if we're having meetings at our house, the Augusta Rule, just optimizing some of those things. If our kids are doing work for us, let's get them on payroll and do some of those other things. So those are good level one strategies. I call it moving money from the right pocket to the left pocket and just optimizing those deductions.

Level two is the IRS gives us guidance, but now we have to invest dollars. So we think 401(k), IRAs, SEP, cash balance plan, even oil and gas investments. There's a few opportunities out there that we can get a tax deduction for, and it's very clear that we can write those things off, not have to pay tax on.

And then level three is we're combining sections of the code to create tax efficiency. And I can give you an example here that is, I think, easy to understand. We think about the general liability coverage for a business owner that's tax-deductible to the business. The premiums that flow into an insurance company typically aren't taxable because they've got potential claims out there. And so if we look at setting up a micro-captive, okay, now this is also on the IRS dirty dozen list, so it's not something to be taken lightly, but we set up a micro-captive. It's priced by third-party actuaries. There's real insurance. It's pooled. It's managed by a state department of insurance. It's set up by an administrator that is going to run this thing compliantly. And it fits inside of your business needs, right? I can get a deduction for the premiums, and then they come into my micro-captive effectively tax-free. And I do have to...I'll pay out claims for some of those dollars.

Going back to my real estate example, Prudential was our lender that took back all those properties back in the day. And so Prudential was making loans. So at some point, my insurance company can have enough dollars in it that I can loan dollars out to non-insured entities. So I could see a scenario where I could make a loan out to my real estate holding company to go buy a piece of real estate. And so I've used a pre-tax dollar to go buy another asset that might generate more tax strategy. So that's an example of level three.

Michael: Oh, interesting. So the opportunity isn't getting deductions on your insurance, because your liability insurance already is a deductible business expense. It's not navigating sort of the income on the micro-captive side, because you may or may not have a lot, depending on what you have in claims and the dollars that you have to hold for claims. The opportunity is...but your cumulative premiums until paid as claims are essentially reserves in your micro-captive, and you can potentially use the reserves at some point. You can re-loan those back out and have access to capital. I'm presuming you still have to charge some commercial interest rate, but you can make it a relatively favorable one, as long as it's not unduly out of line.

Patrick: Right. And you're paying it back to yourself. And I can go invest in a traditional stock-and-bond allocation as well with my excess proceeds. So, yeah, it is a wealth-building opportunity. Now, we like to be really mindful of the administrative burden. It's just like a tax. So if I'm going to spend the same amount of money administering a tax strategy as I am paying the tax, just pay the tax, because now I don't have all these strings attached to my money. But, yeah. And there's complexity that also is a tax that we have to be mindful of in these scenarios. But that's an example of a level three strategy that works.

Michael: How big do premiums have to be for them to actually math given the administrative burden?

Patrick: If you don't have at least $300,000 in premium, it probably doesn't work. So just because you're paying 30,000, maybe a little more, in administrative costs, so when you start thinking about that, it's like, "Okay, there's a 10% tax, plus all the strings associated with it." And then, when I get it out, I'm going to pay, if I unwind my captive, it's going to be dividend tax rates. So it's like, "Well, there's tax on the back end."

Michael: Okay. But again, if you're working with business owners with 2 million of EBITDA, depending on what their margins are, that could be anywhere from a $5 million to $15 million revenue business. And so you're getting up to business sizes where they could have a decent amount of liability insurance. I guess, at least, if they're in a high-liability area, your generic commercial general liability isn't going to add up to 300k at that size. But I guess, if you've got some more specialized exposures, you can start getting up in premiums.

Patrick: Yeah. We've got some clients that are in an aluminum cladding business. They're putting facades on buildings. Things start going wrong with that. Those claims can be very expensive. And so, again, all priced by third-party actuaries and hard to get some of these coverages in the marketplace. And so, yeah, there's real opportunities out there. If you own a trucking company, you've got all sorts of liability. You can place some of the captive coverages to stack on top of what you currently have commercially available.

And then the fourth thing I want to touch on is level four tax strategy, and level four tax strategy is tax fraud. And the reason we bring it up is there's all these things out there in the world that are positioned as legitimate that are very problematic. And we see them all the time when we operate in this space. And I can even take a good level one strategy. Let's use my kids on payroll, for example. I've got three daughters. The two youngest ones clean the office building. The oldest one, she's 18, she helps me pay some bills, she does some bookkeeping, that type of thing. If I'm paying my kids and they're not doing any actual work, that's fraud. I shouldn't be doing it. I'm getting a tax deduction for not real work. So I can take a good level one strategy and abuse it.

I can also take a level three strategy. The reason the captive insurance companies are on the dirty dozen list is because people have set up an offshore captive, and then they are using it like their personal piggy bank, personal checkbook. They're putting in a pool. They're buying a boat. No, that is not it. Don't do that. And then we see these...they almost seem comical strategies that come across their plate. And these are real examples. We've seen a five-to-one leverage on cantaloupe seeds. You put $100,000 in, you get a $500,000 deduction. It's donated to charity. We haven't dug deep into it because I'm like, "I don't need to know any more." Volcanic ash. We've seen some of the...

Michael: Do you invest in the volcanic ash?

Patrick: So I think most of these have a charitable component. If we look back to the conservation easements, that kind of blew up spectacularly. There was this piece of, "Oh, we're going to buy this land." And the syndication part is why it sort of blew up. Everybody was in cahoots. Everybody's just getting paid. The values were not...they weren't legit. And so it was like, "Okay, I put in 100k. I'm getting a 5x, 6x, 7x return," not return, deduction amount. So if I put $100,000 in, it costs me 100,000. But if I have a $600,000 deduction at 40%, it's like, okay, there's $240,000 of tax savings. That's real money. Okay, I just got a very healthy return on my $100,000 investment. So the IRS came and basically unwound all those back to 3x, which is breakeven. And it's not worth it.

So we see a bunch of things like that that have a charitable component to it that are just...they're ugly. And our perspective is, "Let's build wealth. Let's put dollars into things that will continue to accelerate the wealth of the entrepreneur."

Michael: Thus, why you so directly articulate level one versus level two. Level one, let's claim the deductions under the code. Level two, no, we're actually directing dollars, but we're directing dollars that have some combo of tax benefits and investment growth, wealth-building.

Patrick: Yep, yep, exactly. And then, so to go back, we now have the roadmap complete. We understand the cash flow. We've created a tax strategy using level one, two, three tactics. And then we show the client what the outcome of that is, "Here's what you're paying with no planning. Here's what you would pay with planning. And do you want us to execute on that?" And then we have a 12-month engagement, and they can pay 6k a month, effectively, is the rate upfront, so it'd be $72,000, or they can pay $7,500 a month if they don't want to pay it all upfront over the next 12 months to help execute on those.

And then we also make it a requirement…they've got to start moving some of the dollars to our firm as well as assets under management, and we will offset that fee with those AUM dollars. But we just find it really, really hard to go out into their advisor at Wells Fargo or something and be like, "Hey, we're going to do this thing with this million dollars." They're like, "No, we're not. That's a terrible idea. You shouldn't do that." And they're just like, "You're not going to play in our sandbox," which I totally understand. So we just have found...

Michael: Oh, interesting.

Patrick: Yeah, we need to have them moving money to us so we can help execute on the strategy because the friction is just not worth it. And we've also gotten to the point too where we get down with the roadmap, we show them the solution. They may not like the idea of moving their money, but they really want the solution. And so that...

Michael: That's an interesting framing that we're not trying to move dollars for AUM just sort of for the sake of because you're offsetting the planning and consulting fees with the AUM fees anyways. It just literally to have more direct implementation access to the dollars to do strategies.

Patrick: It's really hard to drive the outcomes if we're not...we've found that we have competing voices, and we have no problem helping vet the strategy and have the client understand it fully. But we've had other advisors just say to our clients, "Just pay the tax. You've done well. Who cares? Just pay the tax." And our clients are like, "That's when I knew. I knew that I needed to go, move on."

Michael: Yeah. I get the sentiment, and when you're actually writing checks for hundreds of thousands of dollars, it really hurts.

Patrick: Absolutely.

Michael: So it's a sizable planning fee now at this point of $70,000 a year for planning, I guess, again, with the asterisk, average clients, $2 million-plus of income. We can easily cover this or more in tax savings. So they're not really balking at the fee because you've already, I guess, anchored it to a dollar amount of tax savings that's much higher than the fee you're talking about.

Patrick: Yep. And we also meet with our clients every month, which is not normal. But there's so many...so we've got cash flow, and we've created this cash flow calendar that is forecasting 12 months into the future. And that's a key part of the tax strategy. Because the worst thing I can do for an entrepreneur is run them out of cash. "Hey, I saved you a bunch of money, but now you don't have any money to spend and grow in your business." So we create these upper and lower limits of cash, and we just make sure that, whether it's the tax strategy, the business acquisition, the real estate purchase, the home remodel, sending the kid to college, that we're staying in this healthy range of cash on hand. And that can be invested in money market or something along those lines. We can optimize a little bit of it. But we're not taking any risk with those dollars.

And then all of the other stuff they have going on. We're looking at their P&C coverages and making sure those are optimized, and their entity setup, and their estate planning. And we've had clients refer to us, and I think this description fits, as a multifamily office. We're doing lots of these things. We're trying to take care of as much of the implementation as possible for the clients so they can stay focused on the main thing.

What Vital Wealth Looks Like Today [1:06:50]

Michael: So now, help us understand, I guess, just the metrics of the business now of assets or, I guess, revenue, because assets probably won't be a good framing if so much of the fees come from the consulting fee side. Revenue assets, staff, clients.

Patrick: Yeah. So we've got revenue right now, we look at our monthly recurring revenue. We're at about $2.5 million of revenue. And that number is just growing nicely.

Michael: Two point five monthly?

Patrick: Excuse me. No.

Michael: Two hundred-something monthly annualizes to $2.5 [million].

Patrick: Yep, yep, exactly.

Michael: Okay. Okay.

Patrick: I had a business partner in 2023. We sort of split up the business, and we were at about a $3 million run rate then. And now we're sort of... I ended up with probably about $1 million in revenue. He ended up with a little bit more. And then we've been growing back into that sort of dollar figure. We're getting back to where we were a few years ago. So we've been growing nicely from a revenue point of view. And we've had...

So right now, we've got two lead advisors, and one of those was that advisor I hired, Carey, back six years ago. And she lived in Dallas at the time. She's been along for the ride, and it's been a lot of fun. She's been instrumental in this, growing the business. Then we hired another lead advisor, Ryan, who lives in Tampa. And then we have two associate advisors that support them. And right now, we've got an offer out to another advisor that we're trying to hire as a lead advisor. And then our goal is to really...it's hard to hire in our industry because the work we do is so niche. You need to understand the business owner. You need to understand tax. We'll ask people in interviews, "Can you tell me what a P&L is?" And they have no idea. Profit and loss statement, right?

Michael: If you're working with business owners, that's going to be challenging.

Patrick: Yep. So we try to find people that have experience in the industry, and then we train them on, we'll call it, the levels of tax strategy, cash flow, and all these other fun things that the entrepreneurs have going on. But I think our goal from here on out is to bring in associate advisors. They can learn underneath a lead advisor, and then they sort of end up in a lead advisory role. And we just keep filling from sort of the bottom up. But, yeah. So right now, we've got four other advisors besides myself. We've hired a...we've got an offer out to a fifth advisor.

And then we outsource, actually, all of the investment management to another firm, Austin Wealth Management, located in Austin, Texas, just because that's not what we do. We are really good at planning. I don't know how to sell investments. I do know how to sell a tax strategy. And so I just let the super smart CFAs when we need to. We align philosophically on how we think portfolios should be designed. I think low-cost asset allocation is kind of the name of the game. There's not a lot of rocket science there from my point of view. But we outsource that. And then they do a great job supporting us from doing everything, from new account paperwork to portfolio design and trading and all of those things. So it kind of allows us to just stay in our lane.

Michael: And what's the asset base?

Patrick: Yep. So I think we're at 90 million right now. And Austin Wealth Management, they've got a pretty healthy base. I think they're getting close to $1 billion. So we've got some...yeah.

Michael: And I guess, to the earlier point, 2.5 million of revenue, 90 million of assets, most of the fees are coming on the consulting side, not on the asset side. That's the point of a viable model with business owners. So when you get the deal with Austin, I'm going to presume then, they're just charging their fee on the assets they help manage. I find that a lot of outsourced investment relationships are percentages of revenue shares. That doesn't work when most of your revenue is not AUM.

Patrick: Right. Yeah. So we pay them...so we charge our fee, and then we pay Austin Wealth Management a percentage of our revenue that we collect on the investment management piece.

Michael: Okay. Okay.

Patrick: Because that's really the only thing they're touching.

Michael: Okay. And then, from your end, the whole AUM fee is offset against the consulting fee per your arrangement. So the difference between what you collect in AUM and what you pay Austin, that just really is a net cost, too.

Patrick: Yep. And when we have both the consulting and the AUM business, that business is so sticky that I'm okay making a little less money for every $1,000 that comes in on the AUM side than I am the consulting side, because it's just not going anywhere.

Michael: Well, so, can I ask? What's your AUM fee, and what's the rev share that you have to pay to Austin to have this outsourced?

Patrick: So we pay Austin...we don't pay them on a basis point percentage. We pay them a percentage of our revenue. So we start at 1.25 [percent] for the first million, and then, by 3 million, we're at 50 basis points for our fee. And so, yeah, pretty quickly, the fee is dialing down. Yeah.

Michael: So it's a pretty aggressive break-pointing, I guess, for you. You're as high as 1.25 to start, but you come down to 50 bps pretty quickly.

Patrick: Yep, yep. And we've got some clients that are bumping up on...we're thinking about instituting a cap on the top end of our AUM at $125,000 a year, because we've got some clients that are exiting businesses, and there's $30 million, $40 million that are getting deposited with us. And we're like, "Oh, okay, we should..." We don't like... And a lot of this was shaped through listening to the podcast. I think there should be some caps on our fees based on if the complexity isn't expanding dramatically.

Michael: And total... I guess, notably, even if you cap their fees on the AUM side, if their complexity is actually rising, can you charge a consulting fee higher than 6k a month if their lives are more complex?

Patrick: Yeah, we've charged $12,000 a month. We've had some partners that have come to us that we've charged 15,000 a month to the business just because there was lots of work to do.

Michael: So, at worst, in your model, if there's a high-dollar liquidity event and AUM fees are capped where they are, but you've got a lot of complexity and there's a lot of work to do because it's a really high-dollar client now, you can simply make it up as it were with the consulting fee that's more directly tied to the dollars they're saving anyways in taxes. So everybody's kind of lined up here, but you've... I'm just struck. You've got more than one bucket. It's not, "I capped my fee, but the client is getting more complex now. I've got a problem." It's, "I capped my fee. The client is getting more complex, so I'm just going to adjust the consulting fee."

Patrick: Yep, yep, exactly. And a really cool thing, we had a client last year exit their business, and between the capital gains, tax savings, and income tax savings, I think they were at $9 million of money they didn't have to send to the IRS. And I just had breakfast with that client today, and they were like, "You don't charge enough money." I'm like, "Okay, good to know." And he's in TIGER 21, and he's like, "I get to see different things." On one hand, I think back to Patrick Lonergan starting at New York Life and thinking about charging clients over $100,000 a year. It's like, "Wow, I can't imagine a scenario where that would be real." And now it's like, "Yeah, we saved you $9 million. We should be...yeah, no problem charging you over $100,000 to get that work done."

Michael: So, on the staffing end, if Austin is covering this much on the investment operations end, are there any other team members at the Vitals level besides the advisors?

Patrick: Victoria is my personal assistant, and I just need a fair amount of adult supervision.

Michael: I understand.

Patrick: And she helps with a lot of that. But, yeah, we don't have, I would say, an administrative person that is filling out new account paperwork and whatnot. Our advisors are handling...

Michael: And I guess there's just not a lot of operational overhead and paperwork and other stuff to do in the consulting fee world. You have an agreement, you bill them, and the advisors do the work.

Patrick: Yep. Yep, that's true. And we do have some outsourced operations people that are helping us just, I'll say, refine and run the business more efficiently and effectively.

Michael: So, where or how do you do that?

Patrick: So right now, we're working with BeyondFA, Natalie Bergsma, and she's just consulting with us. And Carey is actually going to be moving more into an operations role. We're figuring out we need to be... We've got systems and processes, but as the team grows, we need to make sure that we're standardizing those and everybody's following those. And so she's going to be in client relationships. She knows how to run a client relationship really well and deliver value, and so she can help sort of train and develop the team. But she doesn't have her own relationship she's responsible for.

Michael: And so, then, how many clients is it? It sounds like you're in a very high-dollar, limited number, high-service level clientele.

Patrick: Yeah. So we think, and we're still testing this out as we grow, we think an advisor can handle about 30 clients. Now, an advisor with an associate, we sort of cap out there. And not all of those clients. They'll start out, and they may move to a more maintenance mode if they're not as complex. And we might start to meet quarterly. We've got a few clients that have flipped to...they've got a few million dollars of assets under management, and that's all they really need. They've got a cash balance plan, and there's not a whole lot of complexity going on. And so we might meet with them two or three times a year. And so we're not charging the same consulting fees there. So we think about 30 is the threshold. And we've actually...

Michael: If you're doing anywhere from 40 to 80, I guess, $72,000 annual fee base, maybe a little lower for some simpler clients, higher for complex ones, you're up in $1.5 million to $2 million of revenue per advisory team, which is...

Patrick: Yep. And that's where we're...

Michael: That math is great.

Patrick: Yep, yep. And, yeah, we're working on getting there and just filling out that team and having it…because we find there's two capacities. There's an onboarding capacity. We can probably only onboard two clients a month. And if we do that two or three months in a row, we are going to burn somebody out just because it's a lot of work. And then there's that 30 capacity number. So we're trying to spread out how many clients we're onboarding at one time for an advisor team and then how many total they handle.

Michael: And just how many clients are there total with the firm now?

Patrick: Yeah. I think we're north of 100, but we have some of those legacy clients that...we've actually been selling off some of those clients. They've been great. They were wonderful. But if a client walks into my office, there's nobody there to help them. I'm on a virtual meeting. We literally don't have any staff besides me in the office. And so we used to have a front desk person and kind of a whole suite of people that would be happy to help.

Michael: Because your legacy clients are your beloved local Clinton, Iowa clients, and there's no one left in Clinton.

Patrick: It's absolutely correct. Yeah, beloved is correct. Love those people, but we're just not positioned to serve them well.

Michael: So I'm genuinely curious in this world where you're living in, in a small-town environment where word gets around quick, so how do you navigate transitioning and selling off clients from the local environment in the local town?

Patrick: That's good. And I think Carl Richards really helped me with this, too. People don't care as much as you think they're going to care. They just want to be taken care of. And so I've got some good relationships here with local advisors, and we do a nice handoff. I'll either get on the phone and say, "Hey, I'm going to make this introduction," or if it's somebody that I just had a long-term relationship with, we'll have them...I'll explain what we're doing. We'll have them into the office. We'll make the connection there, and they can decide if that relationship makes sense for them or not. So, yeah, that's how we've handled it, and it's gone really well. I think people just appreciate us going, "Hey, we want the best for you. We're moving in this direction, and us serving you is not the best for you. So here's something that's better."

What Surprised Patrick The Most Building His Advisory Business [1:21:07]

Michael: So, what surprised you the most on this journey of building and scaling the advisory business?

Patrick: Yeah. I think part of it is if I would have looked at 15 years ago, when I started, some of the revenue and the clients we're working with now, "Wow, that guy's made it." I don't feel like I've necessarily made it. There's new challenges. It's fun. I like growing the business. But, yeah, I think it's somewhat surprising that you see these people that you aspire to, and you sort of get to some of those levels, and you're like, "Wow, okay." This is still a fair amount of work, and I enjoy the hustle, but I think there's some expectation that it would be, "Oh, we're going to get there, and it's going to be easy." And it's not. It's just new opportunities.

Michael: Yeah, I'm struck by that. So the implicit part was when you get to that magic number of revenue clients and you're supposed to have "made" it, that it's supposed to be easier and less work and less time. And that's the part that didn't happen. You got to the number, but it didn't magically turn into time savings.

Patrick: Right, yeah. And I do a pretty good job of, when I'm at work, I work, but I do things. I coach track. My daughter's a good high jumper. So I'm involved in that, and I love that time. I'm gone by 4:00 most days, and I've got a fantastic team that helps. But the thing...the type of work we're doing for our clients and the lives they live, sometimes there's very urgent and very important things, and you can't screw it up. Really, you have to make sure. If you assume something, it can get you into a lot of trouble. So you've got to be dialed in on making sure that we're executing well for people, and that brings a level of challenge. And there's times I sleep well at night, but in general, the thing that's going to keep me up is a client problem that I'm like, "Okay, how are we going to help them solve this and make sure that it's all done well?"

The Low Point On Patrick’s Journey [1:23:29]

Michael: So, what was the low point for you on this journey?

Patrick: Yeah. I think getting started was hard. Again, I think you've pointed me to some of these statistics through the podcast, but the failure rate of our industry is just really high. And that's frustrating to me, because I think there's a lot of great advisors out there that aren't great salespeople, and we miss them as an industry. And so we're trying to change that. You don't have to sell anything when you work for our firm. Please, just come be a great advisor. We would love that. And so when I think about when I got started, it was hard. I went from making really healthy income to hardly making any income. And just grinding through that was surprising to me.

I had my 90-day plan, and 3 years later, I'm still working on my 90-day plan to be successful. But I think the encouraging part through all of that was running into some of these mentors, some of these people that were at the top of, what I call, the financial advisor pyramid and seeing...one, in particular, said, "I'm 30 years into an overnight success." I'm like, "Okay, cool." I kind of like that idea. I can embrace that. I can embrace showing up and just putting the work in.

Patrick’s Advice For His Younger Self And For Newer Advisors [1:24:50]

Michael: So, are there any pearls of wisdom that you know now with your learned years of experience that you wish you could go back and tell you from 15 years ago?

Patrick: Yeah. I do think the faster you can lean into, and this is advice you gave me through the podcast, but the faster you can lean into that niche and just become an expert in that space, I think, the faster you will be fishing in this pond that nobody else is fishing in…they're not willing to or able to get there. And I feel like a little bit of that's happened. Even other advisors that see what we do, it's like, "Oh, that's cool. I want to do some of that." And it's like, "Great, you can. You can definitely start." But it goes back to the Wes Young saying of the 80% of what you know and 20% new. Start with 20%. Just start doing that new thing and get really good at that new thing, and eventually, it becomes what you know. So, yeah, I think that's the key. Be niche.

And then there's also a level of, whether we like this or not, as advisor business owners, we have to drive revenue. There is no business if you don't put money into the system. And so you've got to figure out a way to get good at going out and finding clients and allocating time to that practice to generate revenue. So I think those two are awfully important. Because I could get hung up in solving a really cool problem, but it's like, "Okay, now I got to turn around tomorrow and go find somebody that needs to have me solve this problem."

Michael: So, any other advice you would give younger, newer advisors coming into the profession today?

Patrick: Yeah. I think there's something to...wisdom is really, really valuable. And the faster you can go, plug into people that are doing really cool things that you want to be doing and learn from them. And that's hard. You've got to figure out how to provide value. Because a lot of times, those people, they're not willing to just train you for free. But if you can figure out a way to get plugged into somebody that is doing something that's aspirational that you're trying to get to, I think that is really valuable. And there is something too about your circle and the people you're hanging out with. If you can find folks that are all a level or two ahead of you and you can be focused on getting to that level, I think that accelerates some growth.

What Success Means To Patrick [1:27:29]

Michael: So, as we come to the end here, this is a podcast about success. And one of the things that always comes up is that word success means very different things to different people. It can shift for us as we go through lives and seasons of the business. So you've built what objectively is a very successful business, as you're climbing $2.5 million of revenue and growing quickly. So the business seems in a wonderful place. How do you define success for yourself personally at this point?

Patrick: I think I've defined success, and I think, originally, it started off in different buckets. I would look at... I want to have a successful marriage. And then, when I had kids, I want to be a successful parent. And then I want to run a successful business. And then I want to live out my life in a way that is just God-honoring.

And then the thing that I've come to realize is what truly matters is I get to the end of my life, and I hear, "Well done, good and faithful servant." And I don't think those things fall into different buckets. I think they...how do I live as a God-honoring husband, father, friend, business owner, steward of the resources that I've been blessed with? And sometimes that can look a little different than what the world tells us is success. And I just like to be really mindful of stepping back and going, "Okay, does this align with my values and my goals for my life?" And let's not get real hung up on what social media is telling me success looks like. So I think that's how I would define it.

Michael: I love it. I love it. Well, thank you so much, Patrick, for joining us on the "Financial Advisor Success" podcast.

Patrick: Michael, thank you so much for having me. It's been a pleasure.

Michael: Thank you.