How To Go Independent

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Chad Atkins on best practices in converting from brokerage to advisory

InterviewsSean KernanComment

This is a transcript of HTGI podcast episode 20 (click HERE to check out that show) I did with Chad Atkins. It has not been edited to a final draft quality, so please excuse any hard-to-follow passages. You can also listen to the show using the media player to the right. 

Sean: Today I’m with Chad Atkins, one of my business partners. Chad had quite a remarkable move from wholesaler to advisor as we documented in Episode 2 of the podcast. So if you want to hear the whole story, go back and listen to that one. Great discussion about how he got here. Chad, thanks for joining me.

Chad: Thanks for having me today.

Sean: I thought Chad would be a great person to talk about how, why, when, to migrate your practice or grow your practice from scratch into advisory fashion versus more brokerage-focused. You know, with the recent rolling, the trend that has been in place for at least 20 years of migration from more transactional revenue model to and relationships to advisory and fee-based relationships. That  has only appeared to be accelerating and become almost necessary to peers from a regulatory standpoint so I thought Chad would be a great person to discuss that with. So Chad why don’t you start by giving us a summary, for those who haven’t listened to Episode 2 yet. Give your background and how you got here as an advisor at this particular moment in time.

Chad: Okay, I was an internal trainer in a couple different capacities whether it was HD Vest or wholesaling with Transamerica or mainstay for, gosh, 18 years or so of my first part of my career. And then 7 years ago, almost somewhere in that range, decided I really wanted to be an advisor, wanted to be on this side of the desk. And best way for me to do something like that was to buy some books of business advisors that wanted to retire. So I started with one and I have been able to do a couple smaller ones since then but the first one was Kaye, who I just worked with and then a friend with for quite a while but being independent was really the way we wanted to go and she was on the wirehouse side. I guess the way you just introduce it on how the DOL was moving things more and more towards advisory, I would probably say I was lucky instead of smart. And I think you normally want to be the opposite but I was just lucky.

I had a mentor early in my career who was slowly moving his commission-based business, his brokerage-based business over two advisories so he could continue to pay his bills but long term wanted it all advisory for both his benefit but more importantly his clients’ benefits. But he had a 5-year plan where 20% was gonna go towards the advisory, 40% year two, 60% year three. Obviously I’m talking of new business that was coming on and then slowly converting the old business but that way he could continue paying his bills while he was still highly converting everything towards advisory. The lady that I mentioned that was in the wirehouse industry that we wanted to take independent. We did that she had about 17 million assets and only about 1 million of that was actually in fee-based at the time. Therefore her rose production was only in the 125-130 thousand dollar range. After we got her book over here and after we got to convert it, which I know you’re gonna ask me how we did that. We ended up having about 20-21 million of total assets and about 250 thousand dollar gross after things have been converted. So again I think it was nice to be lucky rather than smart.

If I did one thing wrong in my mind it was that I went 100% fee-based on every single thing that somebody would listen to me with which really made that first 12-18 months pretty hard on my checkbook going from a corporate job making pretty decent money to a complete sales role and trying to do at a hundred percent fee-based probably was not the smartest thing I did. After 2 years in it I was very happy that I did it that way.

Sean: Gotcha. And how long ago did you make this jump and I believe you jumped at the same time Kaye did when you guys made the move. Correct?

Chad: Correct. I cheated, I had some vacation time so she moved in, I believe it was mid 09 and I quit my job a month later and moved over here but that month of vacation I was working with her everyday, helping her bring the assets over. We did the ACATS system and the transition of having all the paperwork ready. And the day she turned in a resignation we literally dropped it all in the mail. Her A clients were overnighted with an overnight return, the second B clients were overnighted with a regular return and the C clients we weren’t really sure if they were coming or not, or if we wanted them or not, we just mailed them stuff and let them mail it back. And then she got on the phone and just find a way telling people why independence was so much better than the wirehouse environment that there wasn’t any conflicts of interest, that LPL doesn’t own a mutual fund or annuity company, basically just started telling the story. And then on the book purchased side I’m joining a team, I’m gonna have a younger person that does the majority of the work that I didn’t enjoy doing and I get to do the things that I do enjoy doing. But really her biggest thing was “let's go independent” so we looked at multiple firms and then decided on one but independence was the model that we really wanted go with.

Sean: Very good. And so you obviously, I guess, had to go. We’ll talk about probably in a different episode, maybe the how to buy practice ‘cause I think we have some experience especially there but you had negotiate how you and Kaye were gonna work out your arrangement for the buyout but really, what you’re gonna buy out, there was nothing on there yet because it was gonna be on this side of the wirehouse, right?

Chad: Correct. On the independent side we didn’t know what all was coming, what all wasn’t. And we had basically set up 12-18 months in when we see what’s there, that’s where I will end up buying her out over the next 3, 5, 10, 15 years.

Sean: Gotcha. Okay. Interesting. It sounds like in her case she wasn’t probably able to position very well. She was making two transitions. One is the going independent, two is adding you and being part of the team. But it sounds like you all did that pretty successfully.

Chad: Correct. Part of the reason she was leaving the wirehouse was to be on a bigger team that would allow her to do the things she enjoys and not have to do the things she doesn’t enjoy. So having two or three heads versus one was a real easy transition for her to pitch and the idea of independence versus the wirehouse were all that kind of tells you what to do. And then in her mind, which clients don’t care about this at all, going from a 30% payout to a 90% payout in the independent world, splitting that and in a sense both of us were getting raises. I should say she was getting a raise and I was trying to get a raise.

Sean: Right. You were trying to get something. But there’s a lot more to split up when you have that kind of margin versus trying to split them in the wirehouse, that’s kind of difficult to split up 30%.

Chad: Team at a 30% level versus team at a 90% level. I mean if it’s just 50/50 we’re both at 45% payouts versus 30 where she was over there, or 15 if we tried to team over there.

Sean: Yeah it's amazing how those are just a lot easy to deal with. So let me start from the beginning in terms of, especially ‘cause you had kind of a fresh clean slate when you’re moving. If we’re talking to someone that’s more like “hey let’s spend business while.” In her case a long while but has never really taken the move to advisory, hasn’t really dove in so to speak. Why advisory versus brokerage just conceptually?

Chad: Well, from an advisor side or a client side we felt like we had to be able to have bullet points that made it a win-win on both sides. In my mind and I think Kaye agreed and said the same thing to her clients is there starts to become a conflict of interest on the commission side and I think that’s what the DOL is talking about. As a wholesaler behind closed doors in 08, I absolutely had big teams telling me their business strategy. And their business strategy was we were gonna do reviews twice a year and try and move 25% of the portfolio while in a commission-based moving 25% commissions on the sell and another 25% of the book moving commissions on the buy so in a sense they were flipping 50% of the book once to twice a year. And if the average commission is 3-6% on stocks or closed-ins, even if you’re doing a discount, that was some pretty good money. If they were gonna get in a sense a 100% flip within a year at 3-6% in a sense they have a book of 3-6% a year on any client that would listen to.

We are on the other side at one and a quarter, one and a half percent in my mind taking a paycut, which if you explain that to the client properly upfront, they like that they’re paying less but we also don’t have that conflict anymore. And the conflict that I’m talking about of course is “am I selling something and buying something else because I truly believe it’s the best thing that’s gonna grow your portfolio?” or “am i doing it because I have a mortgage payment or a car payment?” And when we explain that to clients they kind of always said “at the back of my head I wondered if this was the best thing.” But on a fee basis if I’m charging one and a quarter, one and a half percent on the account, I can tell the client we’re now sitting on your side of the table, we’re now looking you in the eyes and knowing that in a sense we believe making a move is in your very best interest because now our benefits in a sense align. I want your account to go up because my 1.25 or 1.5% is higher if your account goes higher. But on top of that, if I make a move just to protect you because I don’t want us to lose money, again our interest are aligned. I don’t want you to lose money because if your account goes down, my fee on your account makes what I take home to my family less.

So I can truly look a client in the eye and say I’m finally on the same side of the desk with you. If your account goes up, I get to do more things with my family. If your account goes down, I gotta tighten my bills also. In that instance, you know that the reason I’m buying or selling something in your portfolio is I have a vested interest. I must believe it’s the right thing. And that’s kinda what we talk to clients about when we were bringing them over that “yes our team has a new philosophy. Yes our team is doing things a little different. Yes our team thinks it’s for the benefit of the client.” But behind closed doors I personally like fee-based planning for advisors as well. If I have a base book of clients I don’t have to spend all my time going out and looking for new people or going out and trying to flip their account and justify why I’m doing it. I can truly service the people that I already have if I’m happy with the income level on that. I don’t have to grow as long as I don’t start losing stuff.

Sean: Yeah, I sometimes position that with client benefits because if that will affect them. They might not see that or understand it all the time but like you said some would feel that because I would tell people I get paid to take care of your money and try to grow it or protect it, depending on what’s going on versus moving it around or getting more of it or getting new people’s money. And eventually, we all kind of do what we get paid for, right? To some degree.

Chad: Absolutely, and again don’t hold it against me that I was a wholesaler for a long time.

Sean: Of course not.

Chad: But behind closed doors everybody had different business models. If they were the seminar keys, if they were commission-based, they were either doing a lot of new marketing to bring on new clients so they didn’t have to go flip accounts. Or if they just wanted to service the clients they had and tell that story they kind of have to flip the account like I mentioned before. So whatever business model they created, one way or the other, I don’t think it was the best interest of the client. It was the best interest of the advisor, was really have to design their business plan. And what I mean by that is I’m either spending money or spending my time growing my book, looking for the next person, the next kill, so I can eat. Or I’m going in and turning for lack of better terms accounts to make sure that we get to eat. So I don’t think either of those are in the best interest of the clients versus advisory. All I have to do is take care of the clients and make sure that they’re hopefully growing and happy with our service. And then at least we get to pay our bills and eat.

Sean: Yeah if you think about the hypothetical grade advisor who in the commission world picks good stuff and you can hold it for a while. Let’s say you picked the perfect set of stocks or funds or whatever, you don’t have to have any turnover and you just say “hang on to this, it’s good, and it goes up and the client makes lots of money.” Well, how’s the advisor getting compensated? They’re not. Which of course as you’re kind of sane, you don’t see too much of that where people just buy the best stuff and hold it, the clients are happy. And the advisors, what? Goes out of business because they’re not making anything for that good advice over time. I think that you’ve let out a good case. At least it certainly makes sense to very very strongly consider advisory besides all the regulatory pressures. It’s just a more elegant way to help people who are entrusting you with their money.

Chad: I think Zig Ziglar always said that if you help enough other people get what they want you’ll finally get what you want and a different way of creating a win-win. And we’re always trying to say it’s got to be a great deal for the client first. And then it needs to be a pretty decent deal for us as well. I personally have hook, line and sinker, or drank the kool aid, however you wanna say it, I truly believe that advisory is the best thing for my clients.

Sean: So as you were making that move, these clients, obviously, almost all of them didn’t have a direct experience at least recently working with Kaye and advisory counts on how that works. Did you come across many objections, concerns, comments? What was their reaction? I think you said some of them wouldn’t have converted but did you have any particular common objections or people that didn’t want to convert and it was a sticking point? And were there any surprising, I guess positive comments or thoughts that, you know, before you went through this the first time you hadn’t really had in your mind?

Chad: I think to back up one step, we had a little bit of a business plan on how we were gonna slowly introduce it, follow up, and talk about it again more in depth the next time, and then finally make the recommendation the third or the fourth visit. And so we had decided we’re bringing everything over. We didn’t make any changes on the transition, unfortunately. I say unfortunately because I had to do paperwork twice whenever we did convert. But we have planned on doing quarterly reviews to really show the value of a team instead of one person that we could sit down and spend the time. We also tried to implement some planning for the other things that we’re concerned about and we do some rough numbers to help you feel comfortable that one, either know your number, or two, you’re headed on the right direction towards achieving that number. We had a plan that really we weren’t gonna even recommend that a switch to advisory until the third or fourth meeting, which obviously would’ve been three quarters or four quarters later. The nice thing and the surprise like you mentioned or asked about is in the first meeting when we were talking about it there were absolutely some people who said, “I’ve heard about that. I’ve actually been wanting to ask you about that” or “wow that sounds like it’s better than what we’re currently doing, if you think that’s the right thing let’s do it now.” And it was almost hard to say let's wait until next quarter. Or let’s wait until the third meeting. So we did convert some stuff much quicker than we thought we would just because again I think we had a business plan in mind. We had a plan of attack and we actually had bullet points on how we were gonna talk about fee-based versus commission. The advantages we felt like there might be and then that there could be some disadvantages. So kind of stepping from math to know we had a plan, what were the objections of the concerns? I think it’s really what the advisor had made and painted a picture in the past is if we buy and hold a year's scenario we may be paying 1.5% year two, year three, year four and we didn’t make any moves. It seems like it is pretty expensive if we don’t ever make any moves.

Sean: Now had Kaye positioned, had she kind of sold the buy and hold idea much or is that just hypothetically you’re talking about?

Chad: I think that’s the hypothetical. I think advisors, Kaye included, would say, “brokerage, commission-based, you only pay me for my knowledge, for my work. So whenever I come to you with a new idea and we sell or buy, that’s when you pay me.” If we buy and hold for 10 or 15 years, then that’s gonna be pretty cheap. Well again you either better be out hunting new people or you better come in and make lots of changes in their account. And then in the back of the client’s mind “    is this in my best interest or the advisor’s?” So I think the biggest objections we came across were the bias or the tendencies that the advisor has had in the first half of their career. But I’ll also say speaking to other advisors and buying other books ‘cause we bought a book that the guy said he was good on advisory but really psychologically he hated advisory.

Sean: When you say good on it you mean to say he was prepared to make a conversion?

Chad: Yes he knew that that was the way we wanted to do business and what we believed in and he wanted to sell his book to us so bad that he said “Yeah, I can help get stuff converted. I’m ok with that. I will help you convert to advisory.” But the more and more we talked to clients, the more clients we found he had trashed advisory and said negative things in the past. And that really his baseline belief system was buy and hold, set it and forget it, and go look for a new person. I mean he came from a firm that was door knocking and always looking for a new meet.

Sean: And A Share-driven?

Chad: Very much so and it works for him. He was successful in that environment but he really did not see his personal value long term. He only saw it short term, getting them on a short term plan and hoping nothing ever change the rest of their life. Therefore plan was still okay. I have found throughout the years that if there’s one constant, it’s that everything changes. Sometimes small changes, sometimes big changes. Financial planning is not a one time snapchat picture in time. Three months, six months, twelve months later, the picture changes just a little like we do.

Sean: Right. And how would you advice from a mindset standpoint, do you have any particular tricks of the trade to help advisors realize that value that they’re providing if they’re doing the right thing for their clients? Because I think you’re right, we can get these beliefs that we don’t know that much or I think we underestimate how much clients value our opinion and our guidance at times. Any thoughts for people stuck in their own heads so to speak?

Chad: I just think some of those various books. And there was Nick Murray who wrote a couple of very good books early in my career and the Zig Ziglar had some great tapes. But again if you truly believe you help people I think it’s really easy to kind of overcome the thought process because I truly believe the biggest objection, or the biggest concern, the biggest roadblock is the advisor having that switch in his mind believing that this really is good if not best for my clients. Clients, I believe, 99% of the time do what you tell them to do. That’s why they came to you. That’s why they trust you. But yeah, I think you’re right, how do advisors really believe that they do good stuff? Well, one, I think we have to have thick skin in this industry and when the market has its little downturns like the first 45 days of 2016, we’re not idiots. This is a long term investment. If we hold on, things will come back and again 45 days later we’re touching the resistance level, the all-time highs again. So, if it’s a long term, I think we’re all pretty smart. If we got our licenses we’re much smarter than most of the people in the world because those tests aren’t easy. But if we do a little bit of service, a little bit of handholding, and a little bit of long-term planning, I think most of us would’ve been around a while, understand we’re better than 99% of the people in the world. Most clients bury their head in the sand and they focus on what they’re good at, focus on their jobs. And that’s why they have debt. And that’s why they haven’t had savings. And that’s why they’re not really close to the goals that they need. They desperately need us to point them in the right direction and hold them accountable. To me it’s just like working out. If want to get on a workout regime you’re probably gonna be better off having an accountability partner, a friend that makes fun of you if you don’t show up, or whatever it is, or gosh forbid if you really don’t have friends that’ll hold you accountable, go and pay a trainer. I can do that stuff without a trainer, but if I’m spending good money I’m probably gonna show up and I’m probably gonna work a little harder. And I think clients use advisors.

Sean: That’s a great point. Like you said there’s plenty of books. Nick Murray is great. I mean, he wrote either to scare you out of the business or convince you that you can do anything in the world pretty much. The way he kind of writes and speaks and there’s a lot of self-help per sales training material out there or heck talk to your peers that you respect. And I think that’s a big deal for that mindset because if you don’t feel there’s value it’s hard to communicate that to your clients but my experience and observations are the same as yours that the kind of people that we probably should be working with, they don’t hand over their trust and competence easily but once they’ve sort of said “you’re the guy, you’re the gal to help me” they want you on that wall so to speak. They need you on that wall to make the recommendations and they’re happy to pay for the value through an asset-based fee versus the whole song and dance that tend to go with transactional-based activity.

Chad: Correct.

Sean: I know I said one or two people that probably, when I made that conversion to advisory that for whatever reason they like the old way, they did the math and they said “okay it’s more expensive and that was the hangout.” Did you hit that at least once or twice or was it mostly smooth?

Chad: Yeah we absolutely came across that. There are so many articles out there depending if you’re reading, money magazine or whatever that, you know, fee-based can be bad. It can be expensive. Again in our bullet points that we had in our own little pitch book, we had a little piece of paper that says, you know, “to be able to work with me..” and I hate to say this but “you’re gonna have to pay me.” I can’t work for free. And there are three ways that in a sense we get paid in our industry. I’ll tell you what I think is the best. But I just like to lay out all three and you decide which way you wanna pay me. We literally have number one, commissions. Stocks and closed-ins are typically 3-6% upfront commission and that’s what’s on the buy and what’s on the sell. I’ll discount it significantly for you but you’re still gonna pay it. Mutual funds are somewhere in the 5.5% range, with certain amount of money may be lower all the way down to zero if you do T Shares but then there can be a 1% surrender penalty and some higher internal fees. And I just actually had an example written down if you’re 200,000, a 100,000 in stocks and bonds and closed-ins and 100,000 towards mutual funds, A Shares, you know in a sense you are gonna be paying me and I kind of did sell here halfway through year not a third one but at least a second one where we sold a couple things. You’re gonna pay me somewhere around 6% a year which is what I used earlier in the call. If you’re moving things around it could just be for commission. It could be a win-win for the client and the rep. It could be a win-lose, I’m getting paid or you're losing money. I absolutely remember in 08 talking to a very large advisor who behind the closed doors that “we’re selling American Airlines. The market’s crashing. The economy’s bad. Nobody’s gonna travel anymore. So American Airlines is just a dead end we're getting rid off.” And I just nicely said, “what are you buying instead?” “Oh we’re buying Southwest Airlines, it’s never missed the quarterly dividend.” So to me it was a story of why he was selling. It was a story on why he was buying but to me anybody with a brain would go “you just told me nobody’s gonna travel, the airline industry’s crap why would I buy an airline?” “Oh because it’s a good airline.” To me it was a commission sell. So on our little pitch book number two was you can do fee-wrap. Let’s say it’s 1.5% a year, the first generation product kind of like, you were paying the ticket charges, you were paying the confirms, you might get a little nickel and buying some miscellaneous stuff. So I put that stuff down and say “if that was 25 basis points on top of the 1.5 you might be paying 1.75.” Well 1.75 is still cheaper than 6%. The commission is only 6% if you never ever make another trade. So tell me how many years it takes me to break even and in a sense it’s 4 years if we don’t do a single trade in your portfolio either fee-based or commission. That the commission might be the same price and 5 or 6 years in it might be cheaper if you never ever made another change. But remember if you make changes on that commission, it’s another 3-6% on the buy and the sell. So that can add up very quickly if you end up making trades. On our pitch book we had a third one, kind of a newer generation that we typically use which is the all-inclusive model, where we charge 1.5%, we pay the ticket charges, we pay the confirms, we pay any small account fees. We do all that, it’s just the cost of doing business and in that instance it’s easy to say in 4-5 years you may break even. But let’s be realistic, tell me the one and only reason we would still own something 6 years later. Probably because it’s working. If it’s not working we would’ve sold it and try to get into something better because remember we get paid if your account goes up. We get paid better. We make more money. We get a better vacation next year than we got last year if we make your money go up. And oh by the way, on the flip side, if I just watch your account go down, I make less money next year than I made last year by watching your account go down. I may not get a vacation at all. I live and die by the same sword you do which is your account growing or depleting.

Sean: Yeah, as you watch your account go down and don’t do anything you increase the chances of getting fired completely by that client.

Chad: Correct. But I think in the commission in my pitch book, the commission is if we move something, you get charged to commission. It could be a win-win, it could be a lose-lose. But by the way it’s never a lose-win, where the advisor loses and the client wins because they're getting the commission. The same thing on fee-wrap generation one or generation two, if you move money who does benefit? It could be a win-win for both of us. It could be a win-lose. I guess because you’re losing money but we’re trying to protect it. I guess my point is it could never be advisor lose. Let me say that again, it’s never the advisor wins and the client loses. It could be a lose to the advisor by paying ticket charges and things and a win to the client because they get a better product within their portfolio. That was kind of what I was trying to say and I’m sorry I rambled there, I got confused. We had a very defined pitch book that the story was already lined out. I wish I pulled it up to give you that scenario just now but...

Sean: No, I think that’s a great point, the idea of having a planned out. The last interview I did was Brandon Day, same issue, planning his transition. I think that’s a common thread. More time and attention you take. And you know how to spend years doing it but if you can really plan thru what you’re gonna do and how you’re gonna explain things and make sure it makes sense and people think it resonate with it. I think that was very viable in your move.

Chad: I think having a script, having a bullet pointed out, I'm not one to memorize a script but I definitely want to know if they get me off track how I can get back on. And I think there was a professional speaker early that said “what’s the difference between a key-end presentation that everybody hates and the very best presentation you’ve ever heard.” And the comment was both of them are scripted. Both of them are somewhat memorized. The biggest difference between the two is one, you have passion and believe in what you're talking about. And the other one, you’re just memorizing the script and spitting it and kind of puking it all over the plate. So to me scripting and being planned is very very important.

Sean: Right. I agree and I know you’re quite good at that from my observation. So one thing I wanna circle back, probably kind of a final question or angle. You’ve mentioned two different ways about the transition and how it could affect the advisor’s income. How would you elaborate a little bit? You’d mentioned that paying your bills, converting was a little tricky back when you first made the move to go from wholesaling to independence and the transition to advisor with Kace Book. And then you also mentioned that might be hard for 12-18 months going 100% fee-based so that was your experience. Kind of talk about the mechanics of that and why that is and how you got over that hurdle so to speak, how other advisors might do the same.

Chad: I think the thing I did wrong was not cutting my lifestyle bucks and living a little lean as I made the business decision to go fully fee-based as much as I possibly could. In the instance there is if it takes 5000 dollars a month to live but you’re only making 1000 dollars a month, there is a gap. You either make that up by getting more money into the funnel or cutting your lifestyle and unfortunately we didn’t do that. Now, once it’s all converted and it might be making 6000 a month and you only need 5 or heck you can multiply those numbers by five depending on what your lifestyle is but once things are fee-based and in the program and you have enough assets to live your lifestyle, then you don’t have the day to day concern, the month to month concerns that “ooh I gotta get some new business on the books to be able to pay my bills at the end of the month.” The CPA mentor that was so analytic, he knew he would bring in 2-3 millions dollars a year throughout the year and that in his commission schedule call it 3 million dollars at 5%, I think that 150,000 dollar year income if I’m doing the math okay..

Sean: You got it. You’re just used to me questioning every piece of math.

Chad: In the fee-based arrangement if you only bring in 3 million in a year you're gonna make 45,000 a year. So mathematically you're making a third less or a fourth less as we did the commission versus fee a minute ago schedule that I messed up. That was really his idea of new money coming in. So if his lifestyle was a 150,000 in that example, cutting back to only 50,000 or 45,000 of revenue was gonna basically destroy his lifestyle. So in his money he took 20% of the 3 million and put it towards fee-based and took the 80% and left it in commission. Year two, he now had 20% in fee based so he could afford to put 20% of new money there and that’s how he winned over a 5-year period his new sales in the fee-based and think about 5 years getting that much money in fee-based. Really just 2 years of putting almost all of it there. 6 million dollars at 1.5% would be 75,000. He’s pretty close to his old time goal. Especially with the money that was in there from the prior 3 years building that 20% each year.

Sean: I think one other interesting fact if you line that out with new money is, let’s say bringing that 3 million it’s not like it will come out the beginning of the year. So if you're starting from zero with that 3 million, let's say that first year of trying to be less than 45,000 even at 1.5 because the money that came in halfway through the year you only get paid for half the year versus getting that upfront commission business we generate.

Chad: Absolutely now stage two of that thought process which is even better is if you had a bunch of mutual funds from 3-5 years ago when you were primarily a commission-only guy, those may only pay 25 basis point trail. Well if you can go back, start doing reviews. Start having a little more of a plan to slowly convert some of that stuff going from 25 basis points to 125 basis points to you is really not a bad deal either. So all of a sudden it can really escalate the time schedule of you being able to pay your bills again for lack of better terms.

Sean: Right. Agreed. And I found and I think you probably did too with Kaye and with your existing clients that you had over the years if they came as brokerage. You think people might have a hard time if they pay the commission once upon a time and you propose this new approach but I find it flat. In some ways it’s easier because you have a track record, a relationship with someone. They can see what you’ve done. They’ve experienced it, whereas when you’re talking to brand new prospect, they don’t have that direct knowledge of how you treat them and how you do business to rely on.

Chad: And again I think a script and a business plan on prospects versus existing clients, prospects need to know that you want to see them x amount of times a year and that you plan on looking for portfolio x times per year. So I think it’s easier almost with a prospect than it is in existing client. But I agree with you on if they pay the commission way back when, again I think it’s what we said before the advisor has to believe that it’s better and in their best interest to do it cause the clients are probably gonna do what you say. But I know I felt like “wow they paid the commission way back when they’re not gonna want to turn this into fees and I feel like we’re double dipping.” But I can flip that the other way and say “I almost felt like I had to hold onto stuff for 3-4 yrs when I bought a commission-based product to make sure that it was a good deal for the client.” And one of my examples, one of the funds that I started using last year, 6 months in, switched management, switched names, did  some things that whenever I dug under the hood and looked at I go “oh my gosh I don’t like this fund anymore. I don't even wanna own this fund anymore.” If I was in a commission product, I would really feel obligated to hold it for another 3 years to get a total 3-4 year hold out of it to justify that was a fair deal for my client. In advisory I can flip it tomorrow and know that I did the best thing for my client and it didn’t cost them anything extra to do so.

Sean: Yeah that’s a great point. It’s almost like if you realize something’s not working quickly, you can do that, like that example. Or if you buy something and it goes up so fast you wanna take profits a lot more quicker than you expected, it’s the same kind of thing. Yeah, it’s great to double your money if it’s in 6 months or something but you have to sell and buy something else and pay each transaction. It colors your judgement and your decision-making even if you're trying to be logical. It’s a complication that you don’t find the advisory platform and that’s a great point.

Chad: Correct. I don’t know if I answered your question but yeah..

Sean: Yeah I think so. The math, I mean, I think you and I were in a meeting once when someone said well, and he was a little more focused on annuities than you and I tend to be. I don’t know if you notice but we get 7%, we all get 1% on advisory so that takes 7 years. The educations on the math, I know I always find that humorous. But I think the idea is you’ve taken care of your people and you’re getting paid to take care of their money, you're gonna do well over time and you didn’t need to have a plan if your income depends on the certain way you’ve done things. I think that’s true but the good news is you only have to make that transition once if you do it right and then you filled this business then you have more predictability, which is good for you. But it’s also good for clients ‘cause you can reinvest in the business. You can hire staff that, you know, if you have the volatility to commission-based income either if it’s a similar average, you may not have the predictability to add resources that would help your clients.

Chad: Absolutely and I think some people in the commission world have done a lot of C Shares which both the wirehouses and the independent broker dealers have started putting tighter reins on because of the higher internal expenses. And that’s where we've looked at C shares mathematically if they’re 75-80 basis point higher and you charge a one to one on a quarter wrap, how much does it cost to have flexibility to be able to have multiple mutual fund families, to be able to know that if you wanted to put a little off the table or put a little more back in or shift, make a change that it didn’t cost extra? And then again we do that with a service model as well. We’re gonna touch you this many times a year, we’re gonna do some planning free of charge or at a reduced rate, we put in enough other stuff that allows them to see there's true value in  that. And that’s probably why we’re in the 90% range of a new task.

Sean: Just for legal standpoint, let's just make sure you’re careful on how often/how many times you touch these people each year.

Chad: Say that again?

Sean: I said just for legal standpoint, you wanna make sure you’re careful about how often you touch your clients. That’s okay. Actually I said that was the last question but I came up with one more. How would you address some of the conflicts that are probably not as significant in my opinion. Most people, kind of, the advisory model certainly doesn’t have the rise conflicts I don’t think the brokerage models does but some of the things that come up like “hey what if our client wants to take money out of their account to pay after mortgage?” Are we conflicted as an advisor giving an advice? Since obviously they take money out to buy a boat or an airplane or pay after mortgage, or give it to their deadbeat children. We’re gonna make a little less. And then also the issue that’s kind of ironically raising, it said in these ages advisory was better 20 years ago ‘cause you got rid of the turning risks or they basically went away, the conflicts there. But now the opposite we’ve come full circle is for reverse turning idea where if you don’t make any changes then you're charging your client for doing nothing even if the market’s going well, the account’s doing well. Doing nothing sometimes is a very wise thing. Often it might be. So how would you address those particular kinds of conflicts that might pop up?

Chad: Well let’s do the reverse turning first. Cause i think that’s probably the biggest thing that we hear and to me, I guess whoever is the best typically has the biggest target on their bank if one thing is popular and you don’t like it, people normally start throwing darts at you. So I personally think a lot of the commission world are the ones that are throwing those rocks at our windows trying to say “it's not good, it's not good, it’s not good. Now they’re just buying and holding and charging you a fee without bringing in a value.” To me, and we said it before, I think the advisor has to believe this is the best thing for them long term, both the client and hopefully themselves and have a plan of whatever their service and their buying and selling philosophies, have it very well thought out because then to me the fee is not anywhere close to, it’s more of a value versus the fee. But again we mentioned it before why would you own the same thing 10 years from now? Because it’s working. If it’s kicking butt and taking names i'm not gonna sell it. But if I find something that is working better I’m more up to sell it in advisory account that doesn’t cost my client anything extra, then I would in a commission account where they have to pay both leaving and coming back. So the reverse turning to me, I think you need to have a business model on how you run money, how you service client, how you add that value. And then to me the reverse turning is really more the commission-based business making sure you’re not just milking your clients and doing nothing but if you're following your model and following your value add I don’t think the reverse turning is ever an issue. On the flip side, advisory, if you are smart enough to put money and cash in 08, should you get paid a fee to own a whole bunch of cash? Well the market falls 48.6%, cash was key. And yeah you should get paid, you probably should get a bonus for being smart enough to be in cash. And again in commission-based products you don’t have the flexibility to do those things at a reasonable price to the client. Because there is always, we’ve all seen the charge, there's always a reason not to invest. There's not always a reason to invest. But if you look at the last 100 years, the market has gone higher long term if you leave stuff in. So again, I think if you believe in buy and hold, even if you’re somewhat tacked and move some things around, I know that sounds like I’m actually moron, advisory gives  you the opportunity to do both. I could put it in, not move it much, and believe in a long term buy and hold strategy but I could also move things around shorter term if i think things are moving. And I just don’t think you can do that at a reasonable price to the client in commission accounts.

Sean: Yeah I think the bottomline is going to be this age you just have to document. If you’re making a recommendation to hang on and have these conversations I would think I know a firm that certainly does. I would think everywhere, if you have a BD affiliation or even if you just have the RIA, you just have to document your process like you’re outlining your conversations so that there’s evidence if anyone comes asking/looking, regulators, whoever, that maybe you didn’t make changes for a period of time and that was on purpose, here’s why.

Chad: Talking to the clients and telling them why we’re not making changes? As you say the good side is documenting that you're having those discussions, there is no such thing as reverse turning as long as you're touching your clients in the right manner and documenting that you did so.

Sean: Right. And I think I worry about this from a regulatory standpoint, I think the whole point of advisory is that you’re getting paid for the advice, not for the trades. So the buying of trades is irrelevant. I worry that they're forgetting that point but I guess it’s always something. And then what about “hey what if a client wants to take money out, we sort of have a little bit of vested interest that they keep their money with us?” How would you say you deal with that or advice other guys and gals to do that?

Chad: The way I look at cash out is again I think it’s a huge advantage to be in advisory versus in commission. If they’re in commission, especially in stocks or bonds or closed-ins, something that you get a commission when you sell “well hey it's okay that they take their money out, i'm getting paid on the way out, all of the door hit you in the butt.” In advisory it’s almost the opposite, if we have now charged the fee I kind of like to always use the example of car insurance. If you get rid of your car insurance halfway through the period, and you’ve already paid for the full period, by law there's a proration and a refund that you have to give. The advisory is very similar. So again I think it’s in the client’s very best interest in advisory if they need to take some money out they’re gonna get refund so we don’t overcharge for the actual money that was in for the period that we actually charged for. Now as an advisor, I definitely want to talk to people about “should you go buy an airplane? Is that a wise decision? Or is that just a luxury item? Is that a want? Or is that a need?” So to me the cash out, yes I want them to leave their money in because I get a fee in it but there's been many times that I told them to take it out for a downpayment on a house to get the 20% so they don’t have MIP or MPI, whatever the 200 dollar month worthless government-regulated insurances. I’d definitely have people take money out to pay for credit card or help them refinance. Again I think it’s just good advisors do what's very best for the clients and they treat the money the way you would treat your own money or your grandparents’ money. So if it's the right thing, do it. But yeah I’ve absolutely talked people out of buying a brand new car when their car is only 4 years old because they don’t really need it. It’s an I-have-the-new-car-itch and I-want-a-new-car-I-don’t-need-a-new-car. So if it’s a necessity I want them to have their money, I think it’s a better deal for the client as an advisory. It’s the worst deal for me. I'm okay with a win client - lose advisor if it’s really the best thing for them. If they just have money burning a hole in their pocket, that’s again me as an advisor holding a hand saying, you told me the lake house in five years was your most important goal short term. You're now telling me 2 years in you want a new car. Is that okay to now bump the lake house from 5 years to 8 years? If you're okay with that let's just change your plan. Plans change. But if you still want that lake house in 5 years instead of saving 500 a month because you're not gonna deplete it for the new car, you need to start saving a thousand or 1500 a month to get caught back up. Are you also willing to make that step? Let’s be planners. So to me the cash coming out, it’s not a conflict of interest it’s what we do everyday even in commission accounts. You want them to make wise decisions with their money not just let it burn a hole in their pocket for immediate gratification, buy everything they can now. That’s why America's in such heavy debt.

Sean: Yeah, that’s a great way to look at it. I think you would believe as I did it. If you're doing the right things and you kind of do give them the best advice possible, we do better longer anyway so I think most clients over time, they are for us people which is how we grow the business. They're gonna feel like, if we're trying to convince them, no don’t take this money out, and then they feel there’s some “hey they just want to get paid an advisory fee.” That’s gonna come thru and reflect in their behavior or so. I think it comes back to us anyway in our business. But you just do the best that you can. Give the best advice that you can and not every model is gonna tell them little potential conflicts. Just do the best thing. I’m with you, I think this is a much cleaner option in the brokerage world. Any other final thoughts or comments about conversion to advisory? What might be some tips and tricks or final thoughts and how, if people want to quiz you, you’ve got a lot of knowledge and spend some time training other people in this field. I guess any final thoughts and how can people find you?

Chad: I mean again, you know, set up a plan, focus it on your budget. If I could’ve done something differently I might have done partial commission the first 18 months and mostly fee-based instead of cold turkey the way I did it, I built some business debt up the first 18 months doing it the way I did it. The last 3 years, I think the best decision I ever made was going almost all fee-based. Just maybe spend the time thinking through what your individual situation looks like and if it’s gonna bankrupt you or not. If you have other questions I'm a big believer if you give back you get paid back in full. That's why I've been doing these conference calls with you. That’s why I did training in the industry. That’s why I spend quite a bit of time training people within the firm. so yes anybody that would want to is more than welcome to call me. My office line I’ll just give you is 972-421-1362. Again 972-421-1362. If it goes to voicemail that does automatically generate an email that comes to my phone no matter where I am. And I’m typically pretty good at calling somebody back within 24 hours if the sky is not falling.

Sean: Yes. I can testify that, it’s very true. Well Chad, we appreciate your time. I know usually when I start talking and asking questions and want to learn more, have our listeners hear more, it takes longer than I would’ve thought so I appreciate you patient and generous of your time. I appreciate it.

Chad: Thank you I like what you're doing. I think it's some great information with all the people you’ve been interviewing and just putting it up there free for people to listen to, value added if they want to learn certain things, interview people who’ve done it right and wrong and maybe learn the goods and the bads. Keep up the good work.