Welcome back to the 125th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Sabrina Lowell. Sabrina is an advisor and principal with Private Ocean, an independent RIA in the San Francisco area that oversees $2.2 billion of assets under management for nearly 1,000 affluent clients.
What’s unique about Sabrina, though, is the path that she took to becoming a partner with Private Ocean, when it was decided last year that the firm she had worked at for the preceding 16 years was going to be sold to an external buyer, and they began the collaborative process of trying to identify what buyer would both be ready and willing to buy out the firm’s original founder and give Sabrina and other next-generation leaders at the firm an opportunity to move up and grow in the new firm.
In this episode, we talk in depth about what the process was like of putting Sabrina’s prior firm, Mosaic Financial Partners, up for sale. How their management team worked with an investment banker not only to find potential buyers who could afford the acquisition, but who would also be a cultural fit for the firm. The key filters that the firm used to vet its prospective buyers beyond just what buyers were willing to offer financially, including their core values alignment, their compensation philosophy with clients, their investment and financial planning philosophies in serving clients, and the career growth opportunities for staff. And what it’s like to actually try to vet a potential buyer to figure out if they’re really a good fit or if the firm is just making the mistake of thinking the grass must be greener on the other side.
We also talk about the challenges of trying to execute internal succession plans and why Mosaic ultimately decided to go with an external buyer instead. How Sabrina broke the news to her clients that a transition was going to happen, the way her own role has restructured in a positive way once she had the opportunity to work in a larger firm that had more dedicated resources so she didn’t have to wear as many hats, and why next-generation advisors sometimes can find more upside opportunity in having their firm sold to a larger one than becoming the successor themselves.
And be certain to listen to the end, where Sabrina talks about her own challenges in evolution and learning to do business development when she started out as an employee advisor in her early 20s. The structured center of influence strategy her firm uses to cultivate referral relationships that she learned through the Schwab Executive Leadership Program, how her own career path and even what she thought she wanted from her career has changed over time, and Sabrina’s key tip for finding out whether a potential advisory firm is really open to adapting and changing as the business grows.
What You’ll Learn In This Podcast Episode
- What The Process Of Selling A Firm Looks Like [05:51]
- How The Buyer Vetting Process Worked [14:10]
- Sabina’s Own Criteria For Settling On A Buyer [27:20]
- The Role Of Investment Bankers In Selling A Firm [33:38]
- How Sabrina Broke The Transition News To Her Clients [45:22]
- The Challenges Of Trying To Execute Internal Succession Plans [54:01]
- How Her Role Was Restructured In A Positive Way [1:07:17]
- Private Ocean’s COI Initiative [1:13:32]
- How Sabrina’s Business Development Process Has Evolved Over The Years [1:23:21]
- What Surprised Sabrina As She Navigated Her Career Path [1:34:31]
- How Sabrina Defines Success [1:44:35]
Resources Featured In This Episode:
- Sabrina Lowell
- Private Ocean
- Schwab Executive Leadership Program
- Money Quotient
- Susan Bradley’s Sudden Money Institute
- DeVoe & Company
- Financial Advisor Success podcast with David DeVoe
Michael: Welcome, Sabrina Lowell, to the “Financial Advisor Success” podcast.
Sabrina: Thank you for having me on the show today.
Michael: I’m excited for today’s discussion. There’s been so much activity these days in the industry around mergers and acquisitions and big firm…well, huge firms buying big firms and big firms buying medium firms and medium firms buying small firms. Like, wherever you are up and down the line, it seems like someone is larger and willing and interested to buy you if your firm is for sale. And for a lot of advisory firm owners, I know that’s kind of a point of excitement. It’s like, the penultimate moment of building a firm is when you finally get to the point where you’re selling it and you get your liquidity event, and you’ve hopefully made some good money that you can retire on.
But I know you come at it from the other perspective, which is an employee who is in a firm that got acquired. And there’s been so much bad media discussion around what happens to people when their firms are acquired. And there’s synergies that result in cost cuts where lots of people get fired and your culture gets radically changed, and all these negative things happen that I find for so many advisory firms, whenever they hear, “Oh, the firm is getting sold,” it’s like a moment of immediate fear and panic and everyone starts getting really nervous and worried. And so, I know you have recently gone through this experience, having your firm getting acquired, ending out at a new firm that’s actually a positive environment. And so I thought just this would be a good opportunity to talk about like, what’s it like when you’re in an advisory firm and you get the news the firm is being sold and you’re hopefully going along for the ride?
Sabrina: Yeah. Well, I think that that’s the key there is that last sentence when you said that when you get the news that your firm is being acquired. And I would say that the process that we went through was actually quite different. And I’m sure we’ll get into some of the logistics there, but just internally at Mosaic, we had a real value around transparency. And Norm Boone being founder and CEO, I think that one of the things that he did really well early on was involve other people. So specifically, it was really, I think a lot of the decision-making was driven by the management team. So there were four of us that were involved in that process. And by getting people on board and having that as a collaborative discussion that was pretty transparent meant that we as a team were able to roll that out to staff. And even along the way were pretty transparent with staff as well.
What The Process Of Selling A Firm Looks Like [05:51]
Michael: So help me understand what that means from a practical perspective. Like, your management team was involved in shopping the firm, involved in working with the buyer? Like, usually at some point the seller has to decide which of the buyers’ offers you’re going to take. So was that a management team decision and not necessarily an ownership decision about who we’re going to sell to? What level of decision-making actually comes down to the management team in that environment?
Sabrina: Yeah, and I would suspect that that would obviously vary from firm to firm. So just backing up a little bit, we had been in discussion… I’d say 10 years ago if we were having this conversation, I probably wouldn’t have ever predicted the outcome of selling to an outside buyer. Five years ago, I think it was probably not much…it wasn’t as much of a surprise sort of where we ended up. And what I mean by that is we were having really active conversations internally around succession planning, trying to have a runway that was long enough to be able to execute a plan and talking about, were we going to do something internal or external. And that conversation began and we were pretty engrossed in that, and we can get into that, but ultimately, fast-forward a few years at the point that we had decided, “This looks like it will be an external sale,” the management team worked together on that process.
And so one of the things that was really enlightening, well, one is we hired an investment banker and a firm to help in that process. And we had gone through a few valuations over a series of years. And ultimately, I think using an outside facilitator within the process. That also really helped. And what we decided was, so we had developed, probably it was back in 20, I think it was 2015, it was an outgrowth actually of the Schwab Executive Leadership Program that I had participated in as someone that was in the G2 management role. And part of one of the projects that I worked on was helping to develop our firm core values. And ultimately, we used the core values as part of the process as a filtering function in looking at other firms, was it going to be a good fit?
So specifically, we had four core values: commitment to service, it’s our passion, not just a job, intellectual curiosity, and responsible stewardship. And when you use a filtering function like that, all of a sudden the criteria makes it actually really clear, at least on that first cut, who’s going to be a good fit. How will our firms work together? Are we aligned on some of these points? So we used that I would say in conjunction with, our management team had come up with, we wanted a firm that was going to be really aligned on firm values, non-negotiables. It had to be another RIA, had to be fee-only, that our clients were going to be well-served, leading with financial planning. Also that it met Norm’s criteria as a 95% owner in terms of what he needed on his end. And I think the other piece that was really important was opportunity for staff, both career growth as well as potential ownership.
And so when we used those two filtering pieces and in working with an outside broker, then the process became much easier to address as a team, putting in the inputs, filtering through, and then having discussion about where we wanted to go.
Michael: So you highlighted to me a couple of really interesting pieces there. One is just that phenomenon of how important it is that things like core values and culture and investment and planning philosophies of firms match when an acquisition happens. I feel like that’s something that gets, I don’t know, at best probably lip service sometimes. Like, “Hey, make sure you find a firm that’s a good fit.” But I think for some owners, they get more focused on the check they get when they leave than necessarily the culture that gets behind. And just, that’s a tough thing sometimes because there can be a lot of money at stake if you build a sizable firm.
But it matters to, just from a practical perspective, if the firms don’t line up well then eventually staff doesn’t stick around because it’s not enjoyable to go through a giant culture shock into a new firm. And if staff doesn’t stick around, particularly in the advisory business, clients usually don’t stick around because they tend to follow the advisors and staff they’ve worked with and have some loyalty to. And if they don’t stick around, you don’t actually get the same check as the owner who’s selling anyways.
And so to me, the significance of that phenomenon of trying to find a good fit is, I think, still understated a lot in the current discussions, at least that I see, around mergers and acquisitions for advisory firms. And it’s not just about, either as the buyer or the seller, like, “Are they writing us a good-sized check or does the firm we’re buying have a good amount of revenue and healthy profit margins to make this an economically strong transaction for all parties involved?” If you don’t line up on the other stuff around philosophically like how clients are served, how you do planning for them, how you manage portfolios if you’re investment-oriented, revenue model when you’re charging assets under management; if you don’t figure that stuff out, the clients don’t stay and then the rest of the stuff falls apart anyways.
Sabrina: I think that’s exactly right. Just as you were saying, the economics are not enough, and that I think over time, the wheels are likely to fall off.
You hit on one that I’ve been pretty fascinated about. You talked about clients are loyal to staff that they’ve worked with and the way that they’ve been served. And I would even take that a step further, which is that I don’t think I was maybe as in tune with previously, clients, assuming that there’s a base level of technical proficiency and your firm’s been around for a while and that is, I would say considered to be table stakes, clients choose advisors who are like them or who emulate, I think, characteristics that attract them. And part of that is going to be culture, right? It’s, how do we interact with clients? What does the office feel like when they walk in? When they call, how are questions answered?
And when I say how are questions answered, just going back to this idea around one of our core values being commitment to service, a follow on to that is it’s…we operated with the ethos of, “How do you create client delight?” And in looking at partner firms, if that wasn’t one of the driving factors about how they interacted with clients, I think clients would be able to tell in a new environment that something has shifted very significantly. As we’ve gotten into obviously rolling out some of the new initiatives with clients and some of the transition in combining the firms, we’ve gotten pretty good feedback from clients. It’s almost like no news is good news. I think that there are some changes, but for the most part, there hasn’t been a significant change in terms of how they’re feeling cared for. And that was really important to us.
How The Buyer Vetting Process Worked [14:10]
Michael: So help me understand a little more of just how this sort of, just like, buyer vetting evaluation process worked for you guys. It sounds like as a management team, you’d sort of sat down at the beginning and said, “Okay, we’ve got a couple of checkboxes that just we have to meet in order for this to work. Like, they have to align reasonably to our core values. They have to be a fee-only RIA because we are, and that’s important to us. They have to be deep on financial planning because that’s our style as well. They have to bring some career growth for staff. And yes, they do have to meet the founder’s financial needs reasonably as well. Like, clearly, this is a factor, since at the end of the day there is some legal voting share rights that at some point have to get sorted out.”
But I guess you came to the table saying, “We’re going to work with an investment banker. They can start bringing some firms to us, and then we’re going to use all of these things as filters as a management team to try to figure out, ‘How do we narrow what inevitably is going to be a fairly large field?'” because there’s a lot of buyers for every seller right now. “We’re going to use this to narrow a large field into a smaller one?”
Sabrina: Yeah, that’s exactly right. And obviously, there’s a much more in-depth process that I think some of the investment banking firms use in terms of getting really clear about your criteria. But at the high level, those were some of the initial pieces.
And I think the other part there, of course, is can you see yourself working with this team? How do the teams gel? So you have your hard criteria, as you described. In the dating world what are called “must haves and can’t stands.” So you develop that particular list. We went through that process both as a management team, and then Norm as a founder and CEO, he also went through that in-depth process for himself. What would he want in a firm that we partnered with? And I think the clearer that teams and individuals who have decision-making power can get, the easier it’s going to be to find a good match, both from the standpoint of if you have a firm looking on your behalf, i.e. investment banker, but also, as you get into the discussions on the back end with that, as you called it, the filtered list. So here we are. We went through that process. And that probably took us I’d say somewhere in the neighborhood of, call it 6 to 12 months just getting the process really clear.
Michael: Just setting the process on your end, like, “How are we going to vet all these people?” before you even got 2 names coming in or 6 to 12 months including going through the initial pass of names to try to get to a short list?
Sabrina: Correct. Correct. I’d say that the first six months is pretty front-loaded with updating any valuation information, getting clear on your criteria, and then beginning to get names in. Then the back six months is around beginning to actually go and visit those firms. And it’s not just a one-time go visit onsite, you want multiple touchpoints with multiple people within the firm to really understand, again, what is it going to be like day-to-day working with this team? How can we envision our teams collaborating? What will life be like? How close to what we’re doing now versus totally different might it be? And coming up with essentially what I would call a consistent process to be able to evaluate those options side by side so that as a team then we were able to compare that.
And so we spent, yeah, I would say probably the back six months, right, a shorter time just in that vetting, maybe the first half of that, and then the final three months solidifying everything before the deal closed. So start to finish with the investment banker, yeah, I’d call it about a year.
Michael: Interesting. And so in this second six-month phase, management team as a whole is going out and doing like onsite visits with potential acquirers and meeting with them and trying to say, “Hey. do we really want to work with you?” Did you have even more team involved? How involved was this process of you vetting your buyers while obviously, the buyer is trying to vet you as well and make sure like, “Is this a good team? Are these good people? Will the revenues stay? Will the clients stay? Do they do what we think they do?” Right? There’s a two-way process for this obviously for the buyer as well.
Sabrina: That’s exactly right. So it starts, I think, at the very highest level, probably CEO to CEO, then management team to management team, then beginning to get into onsite visits, both, again, with the management team, but also with other people within the firm, again, to understand just what you said, do they do what they say they’re going to do? When you lift up the hood on the car, what does the engine really look like? What condition is it in? Really understanding all of the moving parts there.
And then depending on how serious it might be in looking at that firm as the ultimate partner then we did get additional people on the team involved. So that’s where you were opening with, “Gosh, what is it like when it’s announced that your firm is being sold?” It’s a balance between, you want to be transparent but in a cautionary way that makes people feel comfortable, i.e., that their jobs are secure and that they’ll be part of whatever transpires so that you don’t have people, as you described, panicking. And so when we would invite other companies to come onsite, we let the team know, “Here’s who’s coming in.” And the team was aware that we were beginning that process and at the point where we were narrowing in on potential partners.
And then also, the other advantage depending on the size of the firm and the firms that we were looking at had all done deals previously, one, two, or more. And so that was also great because we were able to, our management team was able to go and talk with other firms that had integrated in… in Private Ocean’s case, there was a firm that came on out of Seattle. So we have a Seattle office now, which is great. I grew up there, so it’s kind of neat to be able to go up and work out of that office. And so we were able to talk to that team. What was the experience like? What were the surprises? What’s been a real benefit? And talk through that, their experience to have a better understanding of what our experience might be in the process. And we did that across a number of firms.
Michael: Interesting. And so, what did this sort of filtering process look like for you? How many names came in in the first six months? How many did you try to get it down to, to do this sort of final three to six-month in-depth process?
Sabrina: I’d say on the serious side, we probably had about six names, and then that got filtered down to three that we were exploring much more diligently.
Michael: Okay. So like, lots of names come in initially, your core values, philosophy, deep planning, career growth for staff, etc. kind of got you down to a shorter list of six, and then the six got down to three that you went the deepest level of vetting with?
Sabrina: That’s right. That’s right. And so that was a manageable…it was a manageable number and those firms were firms that we would feel really good about partnering with.
Michael: Interesting. And so, as you got down to the final list, how did you distinguish amongst them? Obviously, they had to be fairly similar because they checked all your boxes to get to the finalist list in the first place. So what becomes the criteria at the end as you’re trying to decide which firm would you want to do a deal with when they’re all reasonably close and checking virtually all the boxes to have gotten to that point on list in the first place?
Sabrina: I would say that it’s probably a very similar process or feel that clients go through when they’re hiring advisors. Once you’ve established, again, that minimum criteria or the table stakes, you know that the all of the quantitative metrics have been met, now it’s looking at the qualitative pieces: understanding culture alignment, understanding how client work gets done, understanding what employees will be doing on a day-to-day basis. All the way from, is it the same type of work, to how much work might they have? How might their job be similar or different than it currently is? I.e. is there travel involved or not? That was one that was kind of interesting, where some firms are meeting clients maybe at their home or offsite, whereas traditionally, our clients are meeting in the office. Now, that’s not a deal-breaker, but it was an interesting difference in thinking about, “How would that look?”
Michael: Right, you just start getting really real, like, “Okay, I’m used to the fact that clients come to me. So if I’m going to go out to clients if that’s the culture in the new firm, my clients are scattered all over the Bay Area, we have lots of bridges, they’re very time-consuming to cross, like, this is a material life impact on my day-to-day work habits and experience if I’m not going to be in an environment where clients come to me anymore, I’m going to be in a firm that’s expected to go to them.” And not that it’s necessarily right or wrong. And I know advisors who have strong views about both. But if you’re used to one, the other one is a rather material change in just your day-to-day experience in the firm.
Sabrina: That’s right. And thinking about the reason that most employees chose to come and work at the firm in the first place also brings to bear just exactly what you described, how would their life change? And would that be a deal-breaker for current employees? So balancing that as well. So as we began to get into some of those nuances, that helped shape the discussion. And ultimately, it also comes down to again, can you see yourself working with this team? How do the teams gel? What does that feel like on a day-to-day basis? And going back to, we had four core values and Private Ocean has what they called their guiding or what we call our guiding principles. And there is a really strong alignment there. And I think that that was one of the pieces as we got into it that really spoke to us in knowing that the teams would work well together.
Michael: Interesting. And so, how does this decision ultimately get made at the end? Is it kind of like, “Hey, all these firms are checking the box quantitatively?” I’m presuming that means like, they were all putting offers on the table that were at least in reasonably similar neighborhoods to each other. There wasn’t a monstrous financial gap between them. And so, once the quantitative boxes are checked, as you said, then the qualitative becomes the decision-making criteria?
Sabrina: I think that’s right. But also, there are additional quantitative components once you get into that final negotiation that could be needle movers. How the deal gets structured, flexibility versus not, etc. For the current owners, what does that look like? Does it continue to be compelling? And there’s still a period of time where some of those details need to get hammered out. And so in going through that particular process, again, at each point, Private Ocean continued to meet all of the criteria that we had outlined.
You were asking, what were those discussions like? We were meeting internally as a management team and having a lot of in-depth conversation and each person weighing in on the criteria that we had set and giving opinion and feedback about which firm we would go with. And ultimately, we were well aligned in choosing Private Ocean, which actually, that makes it also, I think, a win in terms of having a good alignment with your management team.
Michael: So were there particular, as you put it, as a G2 manager, as a next-generation manager who came up through the firm, and remind me, you were at Mosaic for like 15 or 16 years as an employee climbing the ranks before ultimately getting to this point where the sale was happening?
Sabina’s Own Criteria For Settling On A Buyer [27:20]
Michael: So what were the driving factors for you being on the employee end of looking at this and trying to decide like, “So who do I want to do the next stage of my career with, since I at least get a little bit of influence into who my firm’s buyer is going to be?”
Sabrina: I would say that actually, my own personal criteria, if I’m putting on my employee hat, is actually pretty similar. Most financial planners are in this business because we value the work that we do in helping clients with their financials and wanting to keep that, I think, first and foremost. So being able to continue to have that client-first approach. I’ve also been a big advocate around sort of the comprehensive financial planning and integrating things like coaching skills. We had done a lot of work with Money Quotient, also going through Susan Bradley’s training. So there were a number of pieces there that just from my own personal professional development standpoint but also our employees internally where wanting to be with a firm that continued to value that side of client work, both employee growth and then being able to implement that with clients. So that was important.
And I think that the other really compelling part that Greg did early on, which is to open up opportunities for partnership for employees. So that was important to me personally, as you asked, as an employee. But also, I know how important that is for other staff members. I think over the years, hindsight, one of the things that I would say was a real challenge was retaining talent without a clear path to ownership. So I think there were people potentially over the years that unfortunately left that would have been great to retain. And had we had the opportunity with ownership, I think that could have been different.
Michael: Interesting. Because, as I think you mentioned, Norm, as the original founder, still had, I think you said 95% of the ownership share. So the management had been distributed through the firm, but you hadn’t done as much of a broadening around ownership and partnership?
Sabrina: Correct. And something that we had done that I think was a real strength, though, was, regardless of ownership, the notion that…thinking about the firm and really running it as a business just from a responsibility and decision-making standpoint, having managers and employees within the firm that were empowered to make decisions on a day-to-day basis. So that worked well, but you’re right, there wasn’t an ownership transition.
What Mosaic Looked Like At The Beginning Of The Process [30:47]
Michael: And I just realized I hadn’t set this up well for folks who are listening about just the background of the size of the firm of Mosaic itself at the point that you were going out to market as a firm to be sold with this ownership and management structure. What did Mosaic look like as you were going to the table to start that process?
Sabrina: Yeah, you had mentioned, so I’d been at Mosaic for 16 years. And so, over that period of time, I think when I joined, we were 7 employees and had grown to, I think we were 19 at the point that we were out and shopping the firm. So a good size but not necessarily with full dedicated management, so a lot of hybrid roles. Thinking about, I think as many firms do, “What does the org chart look like not just today, but what do you want it to look like in the future if we were a really large company?” And beginning to understand, “What are all those different roles and responsibilities?” and then beginning to have employees move into those job functions, but maybe they’re doing that 40% or 50% of their time.
Michael: So the infamous like, I’m an advisor but I also chair our investment committee. And I’m an advisor but I also oversee HR and operations for the firm. And I’m an advisor but I’ve got this other hat as well. Just all those dual roles that you have to take on in leadership as the firm is growing to the point where you can have dedicated folks in those roles.
Sabrina: Correct. And so, we were at just over $600 million, and so I was serving in the role of advisor but also COO. We had hired a dedicated operations person who I think really was also key in helping streamline the process as we moved into the sale of the firm just in terms of making sure that all of the t’s were crossed and i’s were dotted. But we had a number of other people who were, just as you described, sort of in that hybrid role maybe serving in multiple functions.
Michael: And how many clients were at the firm, at least roughly?
Sabrina: Yeah, we had about 250, 250 families.
Michael: Okay. So 250 clients, $600 million of AUM, so you had or I guess continue to have a fairly affluent client base. That’s a literally multimillion-dollar average client that the firm is working with.
Sabrina: Yeah, that’s right. And obviously, we have a number of long-standing clients who have been with us for many, many years who are at the lower end of that spectrum all the way up to newer clients coming on that span up into high or ultra-high-net-worth.
The Role Of Investment Bankers In Selling A Firm [33:38]
Michael: So what was the role of the investment banker in this process? I feel like that whole role and the existence of investment bankers is something that I think 99.9% of advisory firms will never see or touch or interact with until the moment that they’re getting ready to sell and then suddenly they want someone to either consult on the deal or actually help to find them a buyer and broker the deal. So what was the role of the investment banker in the process for you? What did they do?
Sabrina: Well, I’d say that there were a number of pieces. So, one is just level setting around valuation. That was really helpful to have obviously a…
Michael: What’s a realistic number?
Sabrina: Exactly. What’s a realistic number? How do you think about that? And also, what do you need to have prepared in order to go through that process to get to an accurate number. So we’re not just talking about, “What are the financials this year or last year,” pulling financials and information about your client base over the last five years. And frankly, we had looked back as long as 10 years, but really you’re focusing on the last 5, and being able to accurately or with some certainty project out as well what’s going to happen going forward in terms of trends around additions, withdraws, etc.
Michael: Right. And that’s a good point. It’s not even just how many new assets did you add or how much revenue did you add or even just how many clients did you add, but drilling down further like, “Well, how old are your clients?” “Oh, most of them are retired.” “Well, do you have clients who take 1% or 2% a year or do you have clients who take 4% or 5% a year?” Because you drag 2% or 3% difference in withdrawals every year for 10 years of your future earners and that’s a 20%-plus swing. That can be $100 million AUM swing over the next couple of years in net outflows, so kind of helps to know up front, which means you have to actually start digging for that information yourself as the advisory firm to say like, “Oh, I guess we probably should get up to date on those numbers.” Because, unfortunately, I don’t think most of us are. Our reporting tools are still not very good at actually giving us real business intelligence, I think.
Sabrina: Yeah. And I think that’s right. The industry has a ways to go in terms of having that be much more automated. We had been reporting on a number of those items that you just mentioned, so we had a pretty good handle on either what that data was or how to collect that data. I think if the first time that you’re compiling that data is when you’re talking to an investment banker, that’s going to be a pretty lengthy process. So that would be one thing. If there’s a consideration around getting a valuation or really understanding what it will take to sell a business, starting that process early, or just using that to calibrate around what type of metrics or KPIs are you tracking on an ongoing basis to begin to think about, “How do you move the needle in some of those areas?” if that’s something that’s important. So they certainly helped in the process of valuation.
And the other piece is around that criteria that I talked about. So while that seems like it might be an easy task, there’s a lot of nuanced conversation it needs to unfold around, “What are the expectations about the criteria and about what people will be doing once the transition has taken place.” And the investment banker can really help in that process. I think good investment bankers have resources to bear there, i.e., they don’t just have people who are running the numbers. There are advisors who will work with your team to have those conversations in a very real, transparent way. And to be able to hold you accountable, “Gosh, you said this last month. That sounds like it’s changed. What’s the difference here?” And so really to be able to reflect back what it is that you’re saying that you want, and are your actions that you’re taking within the process in alignment with what you said that you wanted or do you need to recalibrate on the criteria? So that I think in and of itself was a really helpful piece.
The third part was obviously being a matchmaker, right? So going out to their network and shopping the firm. And then the fourth is around final negotiation and deal close.
Michael: Okay. And again, and this is something that your leadership team was involved with, I guess with the investment bankers throughout. Like, for your process, it wasn’t just the people who owned the equity were in these conversations, it was effectively your management team, including owners and non-owners who were in leadership positions who were part of these conversations, since obviously some of them get their check and exit and some of them have to stick around, so they kind of hope it’s a deal that they like, too?
Sabrina: Yeah. And I think that’s also an important piece, right? So an acquiring firm, depending on what their criteria is, but at least what we found and it was something that was important to us is that next generation that’s coming into or that was helping to manage the firm, are they going to be around? And I think in each of the cases, the firms that we got serious in talking to, all of them, I think that the client base and the asset base, that was important, but I would say that the talent piece was almost just as important. And we heard that pretty much across the board, wanting to make sure that the talent that we had attracted would be staying throughout the transition and for the long term.
Michael: Yeah, I think that’s one of the other things that tends to get lost in just the environment of mergers and acquisitions today in advisory firms in particular. I know for a lot of industries, M&A really is sort of about cost synergies, which is basically a nice way of saying, “Some of your staff is redundant for our staff. So when we buy you we’ll fire some of your staff and then the firm will be more profitable because we’ll “trim the fat from the firm.” And for large-scale firms, when they merge, there often are some of those redundancies and cost savings. And people either lose their jobs or at least have to find a new opportunity within the firm.
But when you’re in advisory world, there’s such a shortage of talent. We say it and throw it around, but really, if you’re a large firm that’s trying to grow, the shortage of talent is a very acute problem right now. Just like finding good advisors in their 30s and 40s, and even finding good mid-level management in firms, directors of operations and marketing and investments and planning and all those departmental areas where there also aren’t very many people with experience in management roles leading teams. Firms that are acquiring today, most of them really want the talent. Like, it’s not a, “Oh God, if they buy us, I hope I still have a job,” it’s like, “No, they’re buying you because they want you to have a job with them. They’re trying to acquire some of the “you as the talent” is actually part of the deal.”
Sabrina: Yeah, I think that that’s right. It’ll be interesting to see just industry-wide how some of the deals unfold. I think that there’s a lot of M&A around smaller practices that might have a solo practitioner who is looking to retire. So clearly, in that particular deal, that’s going to be more of just a financial transaction.
Michael: Yeah, if your goal is literally to leave then they will exit you and find another advisor.
Sabrina: Right. Whereas some of these other, I think coming together as firms are around…a real benefit is around, just as you said, talent in an environment where there’s a talent shortage, and also frankly, geographic representation. So I think a great example is here in the Bay Area, clients kind of stick to their own geographic area. There are bridges to cross. And while Private Ocean…
Michael: Literally, you’re in San Francisco, there are bridges to cross and they’re far, and they get a lot of traffic, and they get fogged in occasionally.
Sabrina: Right. And so being up in San Rafael is a very different, I think, experience than being in San Francisco. So that’s another piece that I get the question about a lot, “Oh Gosh, are you guys still in the same office? What is that like?” And that was, I think, a really compelling piece for Private Ocean was they previously had clients in San Francisco but didn’t necessarily have an office space or presence here. And so we’ve kept our office space. And it’s great because we have…the San Francisco office and Walnut Creek office had clients that were over in Marin. So if we have a client that’s up in that area, now we can go and meet out of that office or vice versa. And so the office sharing is a benefit, not a downside there.
Same thing in Seattle. I was mentioning, I grew up in Seattle and so I have clients that are up there, and so to be able to go and work out of that office. I saw a client in the fall that I hadn’t seen in person in three years. And so she got really excited about the fact that I’d be up there and that we’d get together for lunch. And now I’m getting the call like, “Oh, when are you coming up next?” So that can be a benefit looking at, “What are the resources that the firm being acquired can bring to bear in continuing to build out a firm?”
Michael: And out of curiosity, who did you work with as the investment banker? At least if it was someone you’re willing to recommend because you were happy with the outcome.
Sabrina: Yeah, we worked with DeVoe.
Michael: Okay, so David DeVoe?
Michael: Okay. And so, he was with you I guess all the way through, I think you said valuation to setting your criteria, to the shopping matchmaking process, and then the final negotiation and the close.
Sabrina: Yeah, that’s right. And we had looked at a couple different options and ultimately decided to go with DeVoe. And again, going back to one of the pieces that I think was absolutely key is he’s got a whole team, including advisors, who come in and really partner with your firm to have those conversations, not just about the numbers, but around values and criteria. And those are individuals that have been through transitions themselves and so can really speak to that piece. I would say that that’s one that, I think especially where a firm can really be someone’s identity. Even for me being at a firm for 16 years…
Michael: Yeah, you were Sabrina from Mosaic. That was, “Here’s Sabrina from Mosaic,” and now you’re not.
Sabrina: Yeah, there’s a real emotional piece that gets attached to that transition, for sure. And having an advisor in that process that can also help in navigating that component can, I think, be the difference in getting over the finish line versus a deal falling apart.
How Sabrina Broke The Transition News To Her Clients [45:22]
Michael: So how did you announce and break the news to clients?
Sabrina: So you do a lot of the front-end work. And once everything is finalized then there is obviously a notification period where you are bringing clients into the fold with this new firm. And without going into all the details, but I think this was insightful for us in understanding investment agreements can be written up in different ways. Is that something where you have to have clients opt into versus not? And our agreement did have that particular piece, which I think was important for us that clients got to choose. And so we reached out to clients…it’s a 90-day notification period to get clients on board. And one thing that I think our team is a real strong suit is around being very process-driven. So we were able to get clients through that particular process, talked to all clients about the transition within 30 days. And we had just about all of our clients move over with us.
Michael: Did clients come? Did everyone come? Like, who didn’t come? Obviously, not their names, but like, who didn’t come? Because I want to get some clients in the San Francisco area. Were there any common threads for who didn’t come or…?
Sabrina: No, we had like 99.9% of clients came along with us. There were just a few that I think ultimately decided not to. And oftentimes those are the clients that may not have really aligned well with the firm in general. And so, yeah, that was, I think, a real testament both to the relationships that we had developed with clients, but also to the process that we used in rolling out that announcement. So every client got a phone call. We walked through what this meant, why we were doing it. And just, it sounds kind of like a broken record, but it has been so grounding to be able to say, “Here was our criteria. We wanted to find a firm that was aligned with our values. We wanted clients to be well-served. We wanted an opportunity for staff. And in thinking about what’s next for our firm, being able to continue to serve clients long into the future.”
And talking also about some of the pieces that were specific to why we had chosen Private Ocean. Interestingly, one of the predecessor firms, Salient, which was Richard Stone’s firm, Norm had worked with Richard Stone at the beginning of his career 35 years ago. So there was this long-standing relationship and history with the partners and staff at their firm. And a number of people in the Mosaic office knew a number of people in the Private Ocean office. So it was a natural fit from that standpoint as well, being a Bay Area, homegrown, long-standing company where there are real synergies.
So as we talked to clients about that, for the most part, the feedback was actually really positive. It was interesting too because it was kind of surprising. Some of the clients that you thought might be just a, “Oh, okay, great” may have had more questions. And they were questions that were really important. “What does this mean for me? How will this work? Talk to me about… what are you not telling me?” Right?
Michael: Yeah. Like, “No, no, really, why do you sell? What’s going on? We’ve been working together for a long time, give me the inside scoop, Sabrina.”
Sabrina: Well, I think most clients wanted to know like, “Are you going to be around?” And I think it made it a lot easier to articulate not just verbally but to say, “We have four people coming in from Mosaic that will become partners right out of the gate. This isn’t just a sale, it’s a long-term fit. And we expect that there will be other people within the firm that will ultimately join as shareholders down the road as well.” And so that I think was reassuring for clients because they wanted to know, “Well, are you going to be there?” Relationships are so one-to-one. It is a team approach, but clients want to know is the advisor that they’re familiar with going to be there? And so that was I think positive, but then the surprising part was some of the clients who asked, “Well, what does this mean for you, and are you happy?” And I think that was the real human element, too.
Michael: Yeah. And we get in these relationships with our clients, so they really are bi-directional, right? We’re worried about them and they get worried about us.
Sabrina: Yeah. And so, I think in a lot of ways it’s even deepened the relationship that we have with some of our clients, being able to have those conversations.
Michael: But I think you make a good point as well that…to me, kind of my takeaway of sort of what do clients want to know at the end of the day, what’s in it for me as the client, right? Bully for you, you got sold, why do I care? How does this change or impact me personally as a client of the firm? And are you, my advisor, are you still going to be around? And that’s most of what it comes down to for the clients, not necessarily all the corporatey stuff that we like to talk about sometimes?
Sabrina: Yeah. And that was something we wanted the messaging to be consistent and transparent with clients. And so we came up with those important talking points, and as we went through the conversations I think recalibrated around, what do you lead with, right? It’s like, “I have some news to share.” And I realized you don’t bury the headline. “What does this mean for me?” and started putting that right up front. “I want to share some news with you. This is going to be a positive change.” Because where that positive change got buried at the back end, I think clients were kind of holding their breath throughout the call.
Michael: Because they can read between the line. They know you’re building up to something. So like, “Just tell me what it is already.”
Sabrina: Yeah, it’s like, “This is going to be a positive change and here’s why we think that…here’s why we made the decision, here’s what we think the impact to you will be, and what questions do you have?” And in rolling that out consistently, it meant that clients felt like they knew what was going on and what to expect with the next step. And I think a lot of clients gave good feedback because this was in the fall. So this was in September and leading up to year end. Obviously, there’s a component to it. You have to say, “While these things will stay the same, inevitably, some things will change, right? We picked a firm that is well aligned with philosophy, but some things will change. There may be investment decisions that are different. The software will be different. Those are going to be positives. The name on the door, of course, will be different.” But talking about the reality that things will change.
And I think that also gives clients the heads up or expectation that there will be…it’s that signposting, right? If can signpost for clients, then as we’re moving through that transition, they don’t exactly know what it is that they’re going to be expecting, but then they know that there will be change on the horizon. So as we’ve moved clients onto our new investment platform, and we’re using Tamarac, that process in realigning portfolios and getting clients loaded in there has been, I think, a relatively smooth process so far. Fingers crossed, right? We’re still in the thick of it, but yeah.
The Challenges Of Trying To Execute Internal Succession Plans [54:01]
Michael: Interesting. So take us back for a moment that, you said earlier like, if I’d asked you about this 10 years ago, you would have said that the goal or the anticipated endpoint was to queue up for an internal succession plan. And obviously, now that’s not where you’ve ended out. So what changed? Like, I know for a lot of firms, they sell externally because they get to a point where the owner is ready to sell, they look at doing an internal transition, there’s just not enough time to put the structure and the depth of people in place that’s necessary. So kind of compressed time horizon and no choice. But as you said, you did start this conversation 10 years ago. You even, it sounds like, had some intention or expectation or idea that this was going to culminate in an internal succession plan. It’s not where it ended out. So what changed?
Sabrina: Yeah, I would say 10 years ago we were sort of informally having conversations and building out the firm in a way that there would be continuity and that the firm could operate without relying on one or two individual people, i.e., having a structure where an internal succession could be a very natural fit. And then as we continued those discussions, that’s why I was saying five years ago that’s probably when it got more serious and began to really delve into the details. And that was the first time that we had gone through a firm valuation. And there’s a piece around the economics that at a certain size, depending on what that internal succession looks like, it can become really difficult to make that work internally unless you’re discounting heavily or unless you start early enough to have a long enough runway to have that play out.
Michael: So just the economics of, “What does it take to buy the firm, what would the payments be for a note, and then how much profit or free cash flow comes out of the firm in the first place to help finance that?” The math just wasn’t working for you?
Sabrina: Yeah, I think that that was a big driver. And obviously, with an outside buyer, you get some real economies of scale around centralized functions, whereas if you’re doing an internal sale, you’re still carrying a lot of those expenses. And so, do the numbers pencil out in a way that works both for the exiting generation as well as the incoming generation?
Michael: Yeah, it’s one of those things around sort of internal successions and valuations. Well, I guess really any purchase and valuations. Our industry has a tendency to talk about valuations in terms of multiples of revenue. It’s sort of an easy standard metric. And since assets are public and fee schedules are public, it’s not actually that hard to sort of back into what a valuation is based on a multiple of revenue. But at the end of the day, buyers don’t make decisions based on multiples of revenue, they make decisions based on free cash flow. Like, does the cash show up to get some profits and return on my purchasing this stock, right? Effectively, our profit distributions from firms is a dividend to the person who buys the stock. And if you’re in an acquiring context, particularly internal succession plans, the profits from the firm is the money that pays the loan you have to take in order to buy the firm.
And so part of the reason why historically firms got sold for two times revenue, is firms historically sold for…well, firms historically ran at about 25% to 30% profit margins, which means 2 times revenue is really 7 or 8 times free cash flow. And it’s pretty common that advisory firms will get financed over seven years when you purchase them. And so it’s really not rocket science. Like, if you buy for seven times cash flow and you finance the purchase over seven years, the money basically funds the purchase over seven years. That’s how you make the math work.
If you adjust for interest and tax drag and a few other things, usually there’s a tiny bit of skin in the game early on. But if you get a little bit of growth, usually within just a year or two, the free cash flow profits from the business finances the note for the business. And so you basically get no profits for seven years while you’re paying it off, but then eventually you get to the end of the payoff or the purchase and all of a sudden you’re the new owner and you’re taking home these sizable profits for what you bought.
But it all revolves around purchases that are multiples of cash flow, not just multiples of revenue. Because if you make the decision like, “Hey, I make enough money as a firm owner. I don’t need more out. I’m not trying to run this firm to maximize the profit margins. I also want to compensate our people well. And I’m going to do some experimental projects because I’m willing to try it because I’ve got enough money coming out for me. Or we’re just going to do more extra things for our clients because I don’t need to run 25% profit margins, 15% is fine with me,” that may all be well and good as the founder and owner to get your free cash flow that pays your bills and allows your lifestyle, but then when you queue up for a sale, if your firm only generates 15 cents on the dollar of revenue instead of 30 cents on the dollar of revenue and you try to still use traditional industry valuations, the math just doesn’t work for the next generation of buyers, or really for any buyer, unless, as you said, it’s a much larger firm that just has lots of cash flow that it can make the long-term investment and maybe try to save a little cost along the way, duplicative software and other things that become cost savings.
Sabrina: That’s right. And then what that does is then it’s a decision around cutting costs, which depending on how you built out a firm may or may not be an option, or around raising revenue on the growth side, which can become, depending on what that differential there is or how the firm has been run, can put a lot of pressure on, “What is the growth need in order to do an internal succession?”
Michael: Right. If you’re willing as the successor buyer to have a little more skin in the game and you say, “Hey, we’re going to buy this, and I know it’s not going to cash flow very well in the first year or two, but I’ve got a little savings built up to do this and I’m super confident I can grow this,” look, if you can grow it fast enough, you can grow your way through the debt payments and then you own the equity and the cash flow on the other end, like, this will go fine if you can grow it fast enough and just bring a little bit of money to the table early on until the growth shows up. But then it’s either reliant, “Congratulations, you’re the new owner. You know all that stuff we’ve been talking about about grow, grow, grow and manage costs, manage costs, manage costs, well, now you own it and have a giant debt payment. So how do you really feel about managing costs and trying to create more growth around here? Because now it’s your name on the debt note if you can’t make that happen.”
Sabrina: Exactly. Exactly. And looking at, what’s the team that you have in place, and being able to, again, going back to that forecasting function, having good mastery over your numbers and KPIs. And while past performance may not be indicative of future performance, I think that there are some trends there that you can begin to… We looked at scenario planning around best-case scenario, middle-of-the-road, and worst-case scenario. And when you look at that and the economics I think that’s where an outside buyer becomes really compelling.
Michael: Yeah. Well, it’s just, we all have different capacities for risk and willingness to take risk, right? We talked about that in terms of clients and how they get invested and what their portfolios are, but it’s equally or truer when you talk about in the context of buying an advisory firm, taking on what, for a $600 million firm is a 7-figure debt. Even split across multiple partners, everybody is going to be in for $1 million or few of debt. And how much risk capacity really do you have and you want to take, and how do you feel about that? If a huge firm buys even a medium-sized firm, if they’re running tens of millions of dollars of revenue then it’d take a couple million dollars of debt on may be a fine business decision for them. When it’s you and you’re looking at your personal balance sheet, that’s like your house and an IRA and $1 million loan, it can get a little freakier really fast.
Sabrina: Yeah, I think that’s right.
Michael: To me, part of what gets missed in that, though, is, I do still hear a lot of discussion around firms that get so large that next-generation buyers literally mechanically can’t buy out the firm. And to me, that always kind of misses the point. Like, if the business is valued reasonably as a multiple of its cash flow, the next generation can always buy it out. Because the way the math typically works in the deals is they’re structured so that the cash from the deal finances the note payments to do the purchase and you just make no money for 7 to 10 years while you’re waiting to pay off the note. And now there’s a bunch of banks that will lend that.
But you do get another question of, is the firm being valued reasonably relative to its free cash flow and do the people who would buy actually just want to take the risk of that much debt? If you buy the firm and there’s just a giant bear market outside of your control and your business is assets under management and you watch your revenue drop 10%, 20%, 30%, most of that drops straight to your profits because you’ve still got to pay your staff and overhead. And it’s one thing if you just own the firm and say, “Hey, tough year, I’m not going to take any profits out this year,” but when you’ve got $1 million loan, you have to come to the table with the cash. And that becomes a risk discussion of, “Do you really want to take the risk that’s entailed in buying a firm and taking on the debt in order to acquire it?”
Sabrina: Yeah, it’s a risk discussion. It’s also, I do think that there is something around having a long enough runway or how that gets financed, because depending on what type of financing that you’re using, as you talked about, a lot of those notes are seven years, which, just as you said, puts a lot of pressure on. If there’s more flexibility on what that funding might look like and you can stretch out that window or at the point of transition you’re buying a smaller portion of the overall business because shares have already been purchased or transferred, then that becomes much more manageable.
Michael: David Grau at FP Transitions and I think a few others as well, he’s just been more prominent on it, likes to talk about succession plans being done as multiple tranches over time. So your next-generation buyer buys a few percent now and then a few percent more in a couple of years and a few percent more in a couple of years and then does the whole big transaction at the end. And it drags out the timeline even further. But part of what makes that work so well is you can make the first purchase manageable enough that even if they’re maybe not the most risk inclined, they’re willing to take a little bit of the risk, and they go through the financing and they do the thing and then hopefully the firm grows a little, they get some free cash flow, and eventually the note pays off.
And so now when they go to do the second tranche, they have the profits from the first one because they’ve now bought that segment. So they literally have more free cash flow that they can use to do the second purchase. And then if they do two, they’ve got even more free cash flow to do the third. And I know, as David puts it, like, look, by the time they’ve done the first one or two and it’s gone well and they’re seeing their free cash flow lift, you’ll be amazed how much more willing they are to take on the debt for the third one, because now they’ve actually experienced it going well. There’s probably a little bit of behavioral bias and overconfidence there that comes through. But by the time some of those tranches have gone well, people suddenly become a lot more willing to buy the subsequent ones in bigger pieces because they both have more free cash flow, and it seems a little less risky when they’ve confidently done a few.
Sabrina: Yeah, it’s like swimming around in the shallow end before you dive into the deep end, right? You build that confidence as well, right? What does that process look and feel like? Who’s involved in it? How well did it go? And then you’re going all-in into the deep end. Yeah. And so part of that is just I think that there is a time element there.
How Her Role Was Restructured In A Positive Way [1:07:17]
Michael: So how do you look at this from your own career path? It feels like it’s a lot of change just for you that you were at the firm for 16 years. There were challenges around paths to partnership, but you did have a growing role. You had clients. You’d taken on a COO role. Now suddenly you’re sold, you’re at a new firm. They actually offered partnership, but it looks like you’re not wearing a COO hat anymore. So your career has sort of shifted again. How do you look at all of this from a career progression end in a way all these roles of partner and COO and advisor and wealth manager and the different firms that you have to do this in?
Sabrina: Yeah. And that’s probably one of the questions that I get the most as I’m talking with advisors around the country is, “Gosh, what does this mean and how has it been?” So I’m spending my time really client-focused. Something that is cool about a multi-office firm is that there are different ways to get involved. Obviously, yeah, we have a full-time COO who’s great, Susan Dickson, and there is full-time dedicated management to running the firm on a day-to-day basis. So advisors are really freed up to be working with clients. So that’s been a shift, but also actively participating. We have a number of initiatives going on right now around integration and meeting some objectives on project work there, along with continuing to grow the firm. So that’s a real focus from a business development standpoint.
So right now, I’m spending my days probably, gosh, I’m like, “What would the breakout be?” It’s like, maybe like a third of the day is spent on integration components. Although I suspect…we just had our six-month mark, and we’ve been able to tackle a lot of those big pieces. We’re fully integrated now on the same CRM. Still working out some of the processes, but we’re all on the same CRM. We’re all on the same portfolio management software. Next step we’ll be tackling virtual document filing and integrating those systems. So that’s just been taking up a big piece.
And again, I think going back to this idea around, “How do teams manage through that?” And it’s a whole lot easier when you’ve been operating under process ABC and now you’re doing DEF, or maybe it’s CDE, right? There’s some overlap and some differences. But it’s a lot easier to switch from the first process to the second process, versus if you had no process at all initially. And so there’s a lot of time and effort right now just spent on that and making sure that those pieces go smoothly. That’s me and all of the people here in our San Francisco and Walnut Creek offices on the integration piece.
Michael: So if one-third of your day is integration, what’s the rest now?
Sabrina: Yeah. Well, and when I say integration, a lot of that also has to do with reaching out to clients and talking with them. Communication is so key. I’d say that that’s the piece that just can’t be undervalued, it’s communicating. People need to hear something like seven times before it really sinks in. And it feels like, when you’re in the midst of it, gosh, everyone knows what we’re doing. Everyone kind of knows what the end game is here. But you realize as you’re in that thick of it just that recalibration around consistent communication, both internally and externally, is so important.
Michael: And particularly in the advisor role where we have so many clients. Like, if each client needs to hear it 7 times in various ways and you’ve got to carry this message to 50 to 100-plus clients, you’re going to say this literally hundreds of times over and over again and will be saying things you are insanely bored with having repeated so many times, and then you’ll say it to a client, they’re like, “Oh, thanks for telling me. I didn’t know that.” You’re like, “Really? Because I said like 500 times in the past 6 months.” But you just have to do that sometimes. That, I think sometimes we still misjudge how many times we can repeat something because we say it over and over again to so many different clients and it still might be the first time the next client is hearing it.
Sabrina: That’s right. Or it’s the first time that it really lands, or for whatever reason, it landed in a different way. That’s true on everything from saving to spending to looking at, “What does it mean to be work optional?” And we know what we’re talking about as advisors because we are in the thick of it and we spend…we spend time probably thinking about clients a lot more than clients think about us.
Michael: That’s painful. That hurts. It’s true but it hurts.
Sabrina: But it’s true. It is true. And this process has been insightful from that perspective. I think a lot about my clients. How will this impact clients? How will the messaging be received? What will it be like when I get on the phone with them? What will it be like when they come in for a meeting? But their touchpoint is only that end-user experience when I actually reach out and do that. But that might have been hours of preparation on the front end. And again, yeah, we’re thinking about clients a lot and doing things in the background, but clients don’t always know that. So that’s been really insightful there.
Private Ocean’s COI Initiative [1:13:32]
And then the other ways that I’m spending time these days, this has been a real opportunity to circle back to a lot of the professionals that we’re working with in the Bay Area, that we have long-standing relationships with and just talking about Private Ocean, introducing them to Private Ocean as a brand and as a firm.
Michael: So a nice, new, fresh conversation for all your referral sources, potential referral sources, centers of influence, all those folks you’ve…not that there’s anything negative about the old firm, but like, got a bigger, newer firm I can go out and talk about and have all these fresh conversations about our new depth and our new capabilities and all these positives that we want to put forward.
Sabrina: Yeah, that’s right. And we started basically a COI initiative a few years back, also through the Schwab consulting services arm, through their Business Consulting Services, around a COI process that has, I think, changed the game for our advisors. And that’s now an initiative that’s being worked on firm-wide, being headed up by our business development person. And so she partners with advisors in now all four offices. And part of what we’ve been integrating into that process is talking about Private Ocean. And what are the pieces that are staying the same around how we work with clients and what are new pieces that we’re bringing to the table or resources to bear for clients that we’re working with.
Michael: So what is this COI process that you’ve found that worked so well? Because I think for a lot of advisors, we sort of hear like, “Yes, you’re supposed to talk to centers of influence and build relationships with them and then they send you referrals.” I’m like, “I met some, tried to build a relationship, not seeing many referrals.” What’s the secret sauce here?
Sabrina: Yeah, that could be a whole nother podcast. So I think the high-level premise is that lunch isn’t a strategy. We see that a lot in our office. And Sheila, our business development person, she regularly repeats that. So lunch isn’t a strategy. And what I mean by that, well, as you know, the RIA community I think for so long got so far away from this idea of sales or closing business, right? And ultimately, having a client make a choice to work with you, that is a sale. And a lot of the second and third-generation employees coming into firms didn’t necessarily come out of an insurance or brokerage background and so may not actually have any sort of formalized sales training. And so this idea of closing business development and closing business can be, I think, pretty scary.
And so Schwab, through their Business Consulting group, rolled out, and they work with different firms across the nation in doing this, rolled out what…it’s a four-step process. Each meeting has an objective. And it’s how to deepen those relationships, and, again, going back to the theme on communication, being really clear about what is it that you’re looking for, that you’re wanting. So let me give you a specific example here. And learning how to do that. And by the way, not everyone has to do it in the same way. It’s not traditional sales. It really is developing those relationships but being clear about what that relationship is about.
Michael: Right. But knowing like, “Well, as I go into each meeting what exactly is my objective in this meeting if I want to advance the relationship building process?”
Sabrina: That’s right. Yeah. So when we initially embarked on this, one of the pieces is going out and kind of reconnecting with COIs that we might have existing relationships with, let’s just say. So I vividly remember I reach out to this CPA who I share a couple of clients with. And I reached out and I said, “Gosh, it occurs to me that we’ve shared these two clients for quite some time but I’ve never actually met you in person. We are thinking about how we’re working with outside professionals and wanting to really partner with other companies that are also building their business and want to grow their firm, and figuring out ways that we can come up with more opportunities to work together. And I’d love to sit down with you and talk about where you are in your business cycle and how you’re thinking about client work.”
Michael: You’re setting up the, “Hey, we’re looking for opportunities for cross-referrals,” but a much softer way to setting it than, “Hey, we’re looking for opportunities for cross-referrals,” which for most people basically comes across as, “I’m looking for referrals and maybe I’ll send you some too?”
Sabrina: Well, actually, it’s funny that you say that that’s a soft intro. For us, that was a pretty hard intro, right? We used to call people up and say, “Hey, do you want to go to lunch?” And maybe we’d talk about kind of what was going on in their personal lives and their kids and maybe a little bit about the business. And we would never say anything more. So for us, this was a pretty big shift, being clear about, “Gosh, I want to get together and actually talk about growing our businesses. And that’s what we’re going to focus the conversation on.” So for us, it felt like that was kind of a big stretch.
Michael: But it sets the expectations, right? So if they really don’t actually care about that stuff they’ll find a polite way to demure and not take you up on it, which is fine because apparently, it wasn’t a fit anyways. And if they are interested then now you’re starting the process.
Sabrina: Or maybe not such a polite way. So I get this email back and the CPA says, “I’m closer to retirement than not. That’s not really of interest to me, but thanks anyway.”
Michael: All righty then, well, saved that one-hour lunch meeting. That’s an hour of your life that you get back.
Sabrina: It’s not a lunch meeting. Remember, lunch isn’t a strategy.
Michael: Okay. Okay.
Sabrina: It’s going to be a meeting in their office. So yeah, that stung right out of the gate, right? And I was like…
Michael: I was kind of hoping for a better one on the first time out.
Sabrina: And I’m looking at it and luckily, I’ve done a lot of fundraising on the nonprofit side. You have to get a lot of no’s before you get a yes. And so I looked at that and I’m showing it around to other people in the office, like, “How would you respond?” or like, “What am I supposed to do?” or, “Gosh.” And what I realized was, this person had given me a real gift. It was just what you alluded to. One is, I don’t have to…in interacting with this particular CPA, I can do that in a way that serves the client well, but I know that I don’t have to spend any incremental time in trying to develop a relationship where there may be additional opportunities. So they really did me a favor. And I actually ended up writing back, “Gosh, it sounds like you’re getting ready to retire. You’re a solo practice, do you have a succession plan?”
Michael: “Do you have a financial planner? I can serve you in many ways if you don’t want to be in a cross-referral relationship.”
Sabrina: Well, a succession plan for when you’re not there and preparing our mutual clients’ tax returns, like, who’s going to be doing that? And I said, “Are you going to be doing returns in the upcoming years? Since you brought it up, how long will you be around?” And they responded saying, “Well, it should be another year or two.” Super insightful, right? So the next time that the client came in, I said, “Hey, by the way, I’ve been having a conversation with your CPA and it sounds like retirement is on the horizon. As you know, they’re an individual solo practice, and at the point that they announce retirement, we have resources that we can introduce you to.”
Michael: “I’m not going to take away their business because that’s a partner, but just to let you know, when they get around to retiring, we have some other ways we can help, too.”
Sabrina: Exactly. Exactly. So that, I think, put us in the driver’s seat, again, in deepening the relationship with the client. What’s going to be on the horizon, signposting there, “This may be a change in the upcoming couple of years. And don’t worry, we are already anticipating your need before you even know it, and we have a resource at the point that that comes to fruition.” So that was such a gift. And then there are other professionals that we work with who you write that and they go, “Wow, yeah, I love to hear about that. And let’s talk further about how we might partner on more client relationships.” And so it’s been, I think, a real game changer for us.
Michael: So talk to us about business development more broadly as well. Because I know you and I actually started in our respective firms at right around the same time, 16 or 17 years ago when we were both in our early-mid-20s and working with firms that typically work with retirees and fairly affluent retirees. Like, it’s a hard thing for business development when you’re still young and early in your career. Like I remember doing planning work for clients early on where they had grandchildren older than I was. And I knew that because I was doing their plan and their grandchildren were in the plan. Like, I know for a fact I am younger than…not even younger than their kids, I’m younger than their grandchildren, which is really hard when you’re trying to establish professional credibility.
How Sabrina’s Business Development Process Has Evolved Over The Years [1:23:21]
So how has business development, I don’t know, come about or grown or evolved for you. Starting in that similar sort of environment and needing to figure out like, “How do I do business development as a young person that works with fairly affluent folks who also tend to be the age of my parents or grandparents?”
Sabrina: If we were on video right now, you’d see I have a big smile on my face because I am hailing back to those early…when I was in my early 20s and I vividly remember having a client say, “You’re the age of my irresponsible children.” And I went, I was like, “Wow, that…”
Michael: “Can I help you plan for them?”
Sabrina: Yeah. And for a long time I kept saying, “Gosh, I’m almost 30,” and that was when I was in my mid-20s. And then it was like, when I was in my early 30s, I was saying, “Well, I’m almost 40.”
Michael: I’ll be there in seven more years.
Sabrina: And I’m finally at a point where now I’m getting signals that tell me that maybe I’m older than I feel I am.
Michael: So those conversations have started to shift. You’ve realized you’re out of touch with 20-something pop culture?
Sabrina: Yeah, i.e., talking to a 20-something employee and going, “Well, we’re kind of like in the same boat,” and then it just being completely silent and realizing, “Wait, what? I feel like I’m still in my early 20s.”
Michael: No, actually, we’re not. We’re not.
Sabrina: So I think that it’s shifted. Yeah, that’s been an interesting evolution. I think in my 20s, the pieces that I think that you can control or the way that you continue to develop relationships with clients who as you said, maybe your parents’ or grandparents’ age, I think that there’s…the way to do that is you may not attract them right out of the gate, but if there is a relationship, i.e., through your firm or you may be a second advisor sitting in on meetings, once you get in there and you begin to develop a relationship and they understand that you have the technical capability and that you’re consistent in follow-through and providing advice, then I think that there’s the ability to begin getting referrals once you’ve developed that trust.
But I think that the other piece that’s been a real shift for me is, as you probably know, your client base oftentimes is in a bell curve of about 10 years on either side of your own age.
Michael: Yep, we tend to work with clients our age plus or minus 10 almost throughout our careers, at least in terms of who we naturally attract.
Sabrina: Those are the ones that we naturally attract, right? So because I’ve worked at the firm so long and same with other advisors here in working with, for example, Norm’s clients, those are going to be people who are oftentimes in retirement and outside of that 10 years on either side of my own age. So getting experience there. But the new clients that I seem to attract and work with are in a much different age range all the way down into their 20s and, call it up into their early 50s would be more of what I might say is my natural kind of client base. And it’s been interesting, too, because here in the Bay Area, obviously, we have a lot of wealth coming out of the tech side, so they’re just finding us in different ways. And I think that they’re using perhaps even different search criteria to do that first cut, and then coming in and meeting with an advisor.
Michael: Prior generations did this by, I asked my friends and family for referral or maybe I asked my lawyer or an accountant for a referral, and your next-generation clients are like, they’re doing Google searches and using “find an advisor” website portals to find their way to you instead of the friends and family referral approach?
Sabrina: Yeah, I think it’s both, but more and more we are seeing those Google searches. And maybe they’re using like a validation component around asking people and then crosschecking. Like here’s an interesting one. So I had a new client come on who was doing just what you described, doing a Google search, beginning to kind of see…and I think he said he had put in something like “financial planner Bay Area,” and basically began to understand that two great resources were going to be the FPA Find an Advisor as well as the CFP Board and maybe something through NAPFA. And began to look through those databases just to see who might be a good advisor. But in the Bay Area, we have a plethora of people, right? And it’s really difficult to tell or to differentiate maybe one advisor from the next.
Michael: Right. We can look them up. To me, it’s sort of the sad reality that, on so many of those sites, the primary way you screen advisors to filter them down to get to a reasonable list is zip code. Think about that, your most effective way of differentiating the value of your services and why a client should pick you is the zip code of your office.
Sabrina: Right. Right. So here we go.
Michael: Really, what do you want to differentiate on?
Sabrina: So here we go. He’s looking for an advisor. And he had described this after we had connected, because I always ask, “How did you find us?” And his blunt upfront answer was, “Well, I built an algorithm that found you.” And I went…
Michael: Oh, because you’re in the Bay Area, so we’ve got to stereotype Bay Area, Silicon Valley a little bit here. So your prospect built their own algorithm to find you.
Sabrina: So here he is, he’s just…I was like, “Well, tell me more about that.” Right? So he’s describing, he had gone out to these three resources, began to use the filtering functions. It wasn’t quite doing it for him, and so he downloaded all of the information, put it into a spreadsheet, built his own algorithm. There was still too many outputs that came through based on criteria so then he weighted the criteria and it came out with or yielded three advisors. And I’m still asking him for this algorithm, by the way.
Michael: Yes, I’m curious, what does someone who puts that much time and thought and energy into quantitatively evaluating optimal advisors, how does that person actually pick the advisor? I would love to know what the weighted scoring criteria were.
Sabina: Yeah. And I think that there’s probably something around firm size, type of firm, years of experience, technical expertise, potentially something on a gender lens. And when you begin to put those into a Venn diagram, it’s a very small population that will come back. And so then ultimately interviewed three advisors and decided to go with us. But that was definitely a new one for me. And I think more and more, we’re going to see clients finding us as advisors in different ways than traditional means.
Michael: Yeah. Well and certainly puts a whole reinforcement point back on just digital presence and having a website with good search engine optimization and things like that. But yeah, I guess also makes the point, there’s a lot of room for better tools for helping consumers find an advisor that rely on something a little bit more nuanced than just zip code as a differentiator.
Sabrina: Yeah. Yeah. I think a point that is interesting on that front, which is, I have gotten that question, too, “Gosh, how much time do you really spend putting content out there and being on social?” And I think that those pieces are important. I’m not sure how much that really drives traffic, but what I think it does do, especially for that next generation, that they really kind of…they do stalk you. Once they come up with your name, they’ll do sort of these background searches. Who are you? What is your online presence? What have you written about? What can I find about you? So by the time that they come in, again, they already have kind of that third-party validation or know something about you. And so that’s where the online presence I think can be really powerful. Because if I go and I’m looking up a CPA, for example, going back to that, and they don’t have a website or not a good website, it’s really hard for me to then refer that person to a client who I know is going to do that search too.
Michael: Yep, and know that the professional isn’t going to show well as a modern professional.
Sabrina: That’s right.
Michael: So what’s worked for you then in trying to find this path towards doing business development as an advisor who started in your early 20s, aside from mastering the algorithm optimization formula to be the one that comes up in the search? Like, where else have you gone or what have you done that’s worked for you in trying to figure out business development and as a young advisor?
Sabrina: Yeah. And I think that is still one that’s in process. We’re still trying to, I think, optimize what that looks like. Some of the pieces that I talked about are around connecting with COIs directly. I think that there’s real power in the referrals coming from referral partners because those are so often clients that are already ready to make a decision. And if you have a client referral, that person may or may not be qualified and they may or may not be actually ready to take a step forward. So I think it’s about running multiple strategies. So it’s looking at partnering with other COIs.
I think it is about having content that’s out there that can help showcase expertise in a given subject matter and then figuring out where are you placing that and how are you using that content strategically to connect with the type of clients that you want to be working with. And then it’s just, it’s that same thing, people have to see things or hear things at least seven times. I think it’s just being out in the community frankly doing things that you really enjoy doing but also that put you in close proximity to the type of clients that you might want to be working with.
Michael: It’s a world of like, volunteering, doing nonprofit work, trying to get on boards, things of that nature?
Sabrina: Yeah, that’s right. And depending on what organization that is or your target demographic, sometimes that can take years to come to fruition. It’s planting seeds and cultivating that over time in a purposeful way.
What Surprised Sabrina As She Navigated Her Career Path [1:34:31]
Michael: So as you kind of look back on this path of navigating your career path as an advisor, what surprised you the most about just how it’s gone versus how you thought it was going to go in your head when you were starting?
Sabrina: Good question. I think life changes. So it’s like, I always say it’s good to set course and have a purpose and a direction of where you’re going. I would feel pretty aimless if I didn’t have that. But being able to be flexible and not necessarily wedded or tied into that final destination because things do change along the way. So I think that one of the surprising factors along that journey is justice. I think that there has been a change within our industry within, call it the last 5 years on, I don’t want to say it’s a frenzy, but a lot more activity on the M&A side and the attraction of a lot of money coming into the RIA space through VC firms and outside investors that I don’t necessarily think was in play 10 years ago,
Michael: Which just means like, more large firms and very large firms that have…where you have opportunities to build a career path in a big firm rather than, I think as you said, starting in a firm where you were employee number seven when you got there.
Sabrina: That’s right. And the idea of the industry has begun to attract and build out roles that are very viable for non-client-facing staff, operation staff, and having a real expertise in that area. Firms that I think that will grow and excel will be firms that embrace that and seek to build that muscle of having good infrastructure on the operation side to then enable advisors who love to work with clients to really focus there.
Michael: So any anything looking back that you wish you’d done differently in how you navigated the path?
Sabrina: I always say no regrets. No, I think that each of the pieces along the way have…each of the segments I think I’ve been really insightful and I’ve grown a ton. If you do think about your…I think about my career in segments, right? So if this was my first, it was 16 but call it the first 15-year segment, now I’m in segment 2 of my career, and that’ll bring me into my mid-50s. And maybe I only get two segments in my career. Maybe there’s that third segment, but the second segment, really thinking about what is it that I want to accomplish, and my objective would be, as much or more than I accomplished in the first segment.
Michael: Okay. What was the low point for you in your career?
Sabrina: Jeez, Michael, that’s not a very coachy question.
Michael: I’m not a coach.
Sabrina: Like a little low point. Yeah. Truthfully, I don’t…I’m someone who probably focuses more on the positive than the negative. I don’t know if this is a low point, but what I would say that I occasionally think about is the number of people that I’ve come across in my career that kind of came through Mosaic along the way and that I either miss working with now or that I wonder what it might have been, how things might have turned out differently if they would have stayed. And maybe I would highlight that. But I’m also the type of person that I don’t look back very often. For me, it really is about what’s next on the horizon. You can’t change what’s happened in the past, but you do have full control over what’s in the future.
Michael: So any other advice for those who are in a similar position of where you were I guess a year or two ago where the decision is getting made that the firm is going to go up for sale, hopefully at least you’re finding out about it before you’ve actually been sold. As you said, ideally, it’s a little bit more of a participative process for at least the key folks in the firm. But what do you wish someone had told you or given you a heads up about how it was going to go that you didn’t see coming or that kind of blindsided you in the process? Sorry, what do you know now that you wish you’d known then?
Sabrina: Yeah. My advice for maybe younger or newer advisors within a firm is be clear about what you want and articulate that and seek out…I’d say seek out mentors. And if you’re interested in being an owner, understanding upfront, is that going to be an option at your firm? If it’s not currently an option, what might that look like? And starting that process early. And I think firms that have resources, i.e., I’d say outside consultants oftentimes will fare the best in getting those plans implemented early on. So I would say bringing in outside help in that process early on.
Michael: So it’s now like a screening question. If I’m interviewing at the firm I ask like, “So do you use outside coaches and consultants? If you do, you’ll do more of these things that I’m hoping you’ll do.”
Sabrina: Well, here’s a way that that conversation could unfold. “What is the long-term succession like?” And I think that there’s two different pieces, right? So we would get the question a lot, “Oh Gosh, is there a succession plan?” Which is different than a continuity plan. So you can have a firm that has a continuity plan where the firm is not dependent on one person for day-to-day operations. That is, I think, a good starting place.
Secondarily then, what is the succession plan or ultimately, what is the plan for the firm? I think a way to be able to tell that is, “What are the types of…” It could be anything from, “What is the training that you’ve had for employees in the past? So do you bring in like outside speakers or experts and trainers?” Right? So that’s an appetite for not just relying on kind of the echo chamber that exists within your firm, but is the firm open to and committed to, both from a time and money standpoint, leveraging professionals in different focus areas? So that would be, even if they don’t have someone that they’re working with as an investment banker, that current…
Michael: Firms that are willing to engage outside expertise around training for employees is sort of a subtle way to find out if they have the mindset of engaging outside expertise when they need more help, because that probably makes them at least a little bit more likely to be dynamic and make changes in the future as the firm needs to make changes because they recognize that they don’t know everything and that there’s value to outside perspective.
Sabrina: That’s right. That’s right. And I think it’s not the only indicator, but I think that that could be a good indicator. And it’s like, “How do you…?” If there isn’t currently a plan in place, I think it’s fair to ask, “What might your timing be on addressing that? Or is that one of the strategic initiatives that is on the horizon for the firm?” And firms who have plans or have thought about it, they’ll, I would think, be pretty forthright in articulating that. And the answer can be really telling if they don’t currently have something in place how they’re thinking about that. It’s not so much do they have it in place, it’s how are they thinking about that and how might they go about addressing it?
Michael: Well, and the other thing that still strikes me from just hearing the whole sales story from your perspective is just how much it really is a two-way process of yes, there are a bunch of buyers who are trying to decide if you’re the firm they want to buy because you’re available for sale, but that from the seller’s end, you actually have maybe surprising amount of control in the process about picking who you want to be bought by, which either isn’t necessarily solely a financial question of who’s paying the most or just a recognition that, at least in the advisory industry, virtually every deal is at least partially contingent on the clients and the revenue sticking around. So if you have someone who offers you more but it’s a bad fit, the clients aren’t going to stick, and it’s not actually going to be a more valuable deal in the end anyways because usually they get adjusted if there’s not good retention.
Sabrina: Yeah. And I think that that’s something that I really give Norm a lot of credit on, is he involved multiple people in that process. And so it was very transparent and very collaborative. And when you have those pieces in place, it makes for, as you described, a much smoother transition.
How Sabrina Defines Success [1:44:35]
Michael: So as we wrap up, this is a podcast about success, and one of the themes that always comes up is just that the word “success” means different things to different people. And so, you’ve had, as you put it, this first segment of your career that’s gone incredibly well and grew in a firm and got to senior leadership and now are starting the second segment as an advisor and a partner and principal of the firm and building for the next stage, but I’m wondering just for you at a personal level now, how do you define success for yourself?
Sabrina: I’d say success at this point in my career is around being able to spend my time doing things that I really enjoy with the people that I really enjoy. And so that’s everything from being excited to come into work each day at the point where it’s like if that were a dread, that would be a problem. It’s like, well, that would necessitate a change. So success is feeling good about what I get to do every single day. And while that sounds simple, I realize that for a lot of people and even clients who come to us, who want to make a change, we get to help them define what does success look like and how to get there. And so if I can be living the same values that I’m helping clients to work towards and having those be in alignment with one another, that’s also really important to me.
Michael: Well, and again, I just love that you feel you’re in that position after the sale. Right? Again, I think for so many advisors out there, at least that I hear from, there’s a lot of fear, there’s a lot of uncertainty, there’s a lot of worry whenever they find out that there’s going to be a change in ownership. And just, not to be negative about where the firm was, obviously, you were pretty happy and content there, you stayed there for 16 years, but the idea that you can go through one of these big transitions. And when you actually get a firm that’s well aligned, they just happen to be bigger with more resources, this can make the second segment even better than the first.
Sabrina: Yeah. And I give Private Ocean a lot of credit on that front as well. This isn’t a, “Come over to our firm and absorb everything that we’re doing and make a 180-degree shift,” this is, “Here’s what we do really well. Here’s what you do really well. Let’s talk about how we can combine those two components to be even better as a entity together.” And really treating that at each step of the way in looking at the integration components, “What works well here, what do we want to keep, and what do we want to change?” I think for our staff, that’s meant that we’ve felt like that we’re making a contribution in the coming together of these firms. Yeah.
Michael: I love it. Well, when we will have you back again in a couple of years, you can give us the two or three years in debrief, is it turning out as you’d expected? Although it certainly sounds like it’s off to as good of a start as you could hope or expect, which is fantastic.
Sabrina: Yeah. Yeah, I think so. And yeah, it’ll be interesting to see what is next on the horizon and just as we continue to grow and evolve as an even larger team with four offices.
Michael: Well, amen. Well, thank you, Sabrina, for joining us on the “Financial Advisor Success” podcast.
Sabrina: Thanks for having me. You made it a nice conversational piece, and I enjoyed catching up.
Michael: Absolutely. Thank you.