How To Go Independent

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A former wholesaler talks about his path to independence

Sean KernanComment

I talked to Chad Atkins, a former wholesaler who became a financial advisor in 2009, not too long after the bottom of the market. He has had a lot of success with his own practice, building it up with two co-acquisitions in the past few years.

Sean: If you don't mind, give us a little bit of your background. Tell us what you did before you became an advisor, and how you reached the point of wanting to switch over from the wholesaling world to the financial advisor world.

Chad: I grew up watching my father be an independent advisor, more on the straight insurance side. He got an insurance degree coming out of college thinking he’d play a lot of golf, have his feet on a desk, and wouldn't work very hard while making a pretty good living.

I went into the insurance side straight out of college and absolutely hated it. So a year of "go hit your friends and family" and oh by the way your father had already done that. So there wasn't really much marketing out there.

I found a fraternity brother, a good friend from college, who was working at a place called HD Vest that trained CPAs and tax professionals. It was more of a home office job opportunity and he said it was doing good things, so I looked into it.

I went to HD Vest as the insurance trainer in a small department. It then turned into more of a financial planning unit where we were teaching the concepts of holistic financial planning.

I trained the mutual fund/annuity people on insurance, they trained me on their products, and we became a big holistic unit. I stayed there for 6 years, moving into management, and then going on to train the other advisors and staff.

I traveled around the country for chapter meetings and to train the advisors, and became somewhat of a national speaker for HD Vest. A lot of the people there ended up going into wholesaling. That was the natural progression.

HD Vest was kind of famous for overworking, underpaying, and hiring a lot of young people. However, they crammed a lot of education down their throats with the thought process of, if you're going to train a highly educated CPA, you better be a step or two ahead of them.

They pushed me for all the licenses, the CFP, and the training. It’s the kind of teacher mentality you needed as both a wholesaler and, more importantly, as an advisor.

I finally got into wholesaling and did that for 10 to 12 years before I decided becoming an advisor made more sense for me and my family.

Sean: What led you to that conclusion and why was it of interest to you at a pretty scary time from a market standpoint?

Chad: Well, it was two-fold. From an ethics side, I was tired of seeing some advisors take advantage of clients. Behind closed doors, they would almost laugh at how much money they were making and how little their clients were making. The advisors were doing what was best for their pocketbooks and they were making a great living.

My thought process was, “Wow, if you did the right thing for clients, how much better would your salary be and how many more blessings would you end up with?”

The second side was where I thought the wholesaling industry was going. I tied it back to the pharmaceutical industry, which seemed like it was taking the old, ugly, very educated reps, getting rid of them, and hiring three or four young pretty things in their place. I felt like wholesaling was going the same way.

They didn't care about the relationships, they didn't care about the knowledge, they didn't care about the research - all things I prided myself on. The straw that broke the camel's back was 3 years in a row at our national sales conference, they cut my compensation in half.

The first year they made me choose which territory I wanted: wires or independents. I was 50/50, so it cut my income in half. I worked very hard over the next 12 months to get within $5,000 of my previous year's paycheck.

The second year, they told me, "Pick a product. Do you want annuities or do you want funds?" Again, I was doing about 50/50. I picked the funds in the asset management, worked really hard for another 12 months, and got within another $5,000 of the prior year's earnings.

The third year they said, "We're just cutting you bps in half." That was the straw that broke the camel's back. They were making it very apparent hard work wasn’t going to be rewarded with money, it was going to be a little trophy. At the end of the day, my family needed more than a trophy.

I got very serious about figuring out how to become an advisor to control my own destiny. If I'm willing to work hard, I'm willing to be rewarded. If I'm willing to be lazy, I’ll starve to death.

Sean: Yeah. Fool me three times then really shame on me, right?

Chad: Absolutely. It was funny because my wife was there at the conference. She said, "You think they'll do it again?" I said, "No way. How could they?" And I came back to the room and said, "Yeah, we have to find something else to do." She agreed with me completely.

Sean: I can see how she would be on board with that one.

Chad: We ended up talking to some advisors we knew well and trusted, and asked, "How do you get into it?" We weren’t interested in cold calling and everything else. All of them said, "Why don't you tuck in or buy a book, or somehow merge into a bigger practice?" That's what we went and tried to do.

For maybe 6 months I went around and with 12 years of wholesaling relationships, started asking some of the senior advisors, "Do you know anybody looking for an exit strategy?"

Then I found my first book, and probably should have had two because it was smaller in hindsight than it should have been but…

Sean: How many people do you think you talked to before you found that connection?

Chad: I'd say I was real lucky. I only spoke to about 25 people and found somebody relatively quickly. I was organized - I was thinking, “Who is the ideal market for exiting?” I knew to target the older advisors that had been there a long time, who had had some success, but weren’t rockstars. I think I got lucky with only talking to about 25 people.

Sean: Yeah, I think so, too. You can get into it a little more, but at some point, someone builds a big enough business and they're going to have people on their team, or a family member or junior partner that's already in place.

It's kind of interesting… you want someone who has enough to make it worth your while, but not so big they already have their own infrastructure. Is that accurate?

Chad: Absolutely, and especially in hindsight, that made more and more sense. The bigger and better teams you knew and respected, where you felt like you could make enough money to at least support your family, they absolutely had their infrastructure already built.

The smaller ones that didn’t seem like they were as organized - you almost want to say what in the heck are you doing? It's why you're not successful. Those were the ones more willing to talk to me in the first place.

Sean: Got ya. Okay, so you talk about how you found someone. What did that process look like - the initial discussions, coming to the conclusion, and deciding to move forward?

Chad: We felt like ours was almost a divine intervention in that her one and only child was going through an ugly divorce and he traveled for a living. The only grandchild was going to flounder and she wanted to be more of an active grandmother.

She was looking for a partner that would give her the freedom to do that. Of course, I was looking to get in with some great relationships; maybe a little mentoring and training and be able to buy a book. That's why we felt like it was just meant to be.

We moved very, very quickly, we talked about what it would look like, and there was a lot of trust. Now the nice thing for us is we were going from 20-25% wirehouse payout to the independent model where we were going to get an 85 to 90% payout. Taking a pay cut for her wasn’t something we were worried about as we felt like there was 3 times more to try and split between two people.

Sean: Sure, that's great.

Chad: Not to drop names, but she was with Wells Fargo at the time. They had an independent side called FiNet and I knew the recruiter very well as I had went to college with him. Going from the wirehouse to the independent model only required a negative consent letter.

99.9% of your clients would come with you unless they decided they wanted to go to somebody they didn't know to stay in a wirehouse they didn't understand.

We looked at a regional firm with good presence in the Metroplex, and then we looked at what I thought was one of the biggest and best independent firms. I also knew we would have to do a lot of the work in the transition and there would be some things left behind, versus the FiNet where there was a negative consent letter.

Because it was her book, I made it her decision. We went and interviewed all 3 firms and I was pleased to see when she went to the large independent we ultimately chose, she felt like they had three generations better technology.

It was also about half as expensive on the internal fees when we really dug into it. It was a better long-term decision. She even said maybe we go FiNet that for 3 to 5 years and then we switch to that big independent. But we decided to bite the bullet and go to the big independent first.

Sean: You learn a lot just with those interviews and looking at an apple to apple to figure out what the best fit is, right?

Chad: I think that was a huge advantage for me being a wholesaler for so long. I had seen the wirehouses on the inside and the outside from the back office, and some of the things they asked me to do as a wholesaler might not have been completely up and up.

I've also seen a lot of the small independents. You feel like you're a bigger fish in a tiny pond with some of the really small ones, but with some of their back office operations, you were left wondering whether or not they were even going to be open 12 months from now.

I think I was very, very lucky to have been a wholesaler as I was able to see the inside and the outside of a lot of these firms.

Sean: Yeah. You couldn't ask for a better background to have a well-rounded view of the industry. Especially if you're going into it with that kind of life changing decision, you have to get it right. What was the transition process like in terms of the move? I assume you did a lot of the work by yourselves.

Chad: Yes. I've always joked I feel like I don't have a ton of ego so call me president, call me janitor, just send me a paycheck. All I really wanted to do was support my family.

Our whole marketing plan was using the 30 years of relationships and love that everybody had for her and transfer it to me as quick as possible. We went in saying, “She's the senior, she would like to slow down and quit doing the grunt work, so I'm the junior. I'm going to be doing 99% of the grunt work. Every time I call you, I'm calling because she told me to. She'll be sitting in on interviews, but eventually she may slow down a little, or she'll be a hunter instead of a gatherer.”

We pitched that story to every single person as an explanation of why we were teaming up. We wanted to give twice the service, twice the manpower, and two heads are better than one. That resonated with all the clients.

We had already researched how we wanted to run the practice. We wanted to be a lot more fee-based than she had been in the past, so we were going to change our story a little to give better money management after the debacle of '08.

We had even decided we were going to get in front of them and offer a service model for more than she had prior. We wanted to say, “Every single quarter, we want to offer you a review to really make sure that long-term, we're getting you where you need to go.”

For the first quarter review, she did 90% of the talking, and then she turned it over to me for about 10% of the talking. Every step of the way she built me up and said how smart I was and how my background was better than her background. It made for a smooth transition.

For the second quarterly interview, she talked about 50% of the time, I talked about 50% of the time, and by the third interview, it was about 90% me, 10% her.

It was really funny watching clients in the first interview. They were looking at her and when I spoke, they looked back at her to see if I was lying. On the second interview, they did the same thing. By the third interview, whenever she spoke, they'd look back at me to see if I thought she was lying.

Sean: Wow!

Chad: Just the build up of how she handed it off was our whole success. We decided upfront that every chance she got, she was going to give me the benefit of the doubt. She was going to build me up, she was going to make me sound like the resident expert and say she was lucky to have me.

On the flip side, I was lucky to have her, but the way she acted and the way her ego was, it worked out better than we had planned.

Sean: That's great. That's pretty funny. So 6 months in between those first and third meetings - somewhere around there, right?

Chad: Yeah, time is a healer of a lot of things, and really builds up trust quickly, especially when you have the other person there longer than the average transition.

Sean: Right. If you don't mind, give us a sense of what the terms were roughly like, or specifically if you want to talk in detail. How has that progressed since starting 6 years ago?

Chad: Sure, I’m a pretty open book, and I think that's why you asked me to do this versus some others. I joked I should have looked for two firms instead of one as she only had about $17 million in assets, with only about a million annuitized.

She was very transactional in the past as a chartist kind of stock jockey. Her rolling gross was only about $125,000. She was literally in the penalty box and fearful Wells Fargo was going to fire her.

We moved that book over and we did some planning while we were bringing assets over. The service model we had planned on doing was trying to capture more assets. We began with just her $17 million book that was doing 125 referrals. Twleve months later, we had $23 million that was doing 250,000 gross.

We had some great success. I joke a lot and say if I made a mistake, it's that I went annuitized, annuitized and annuitized. We moved everything to fee-based. That might have been a mistake because the first 12 to 18 months, I literally starved to death. I had to dip into savings, I had to take a 401K loan, and I probably should have cut my family's lifestyle back more, but I didn't.

In hindsight, I probably would have done some commission work as well. We really just went annuitized. Now, three years later, I’m so glad I did that because we always said work hard, play hard. If you work really hard, you can make a lot of money; if you're lazy, you're going to starve to death.

That's what we came to work every day thinking and working with. Three years later, because it's all annuitized, we really didn't have to think that way anymore. It was “Give great service, do the right thing for the client, and everything else is already taking care of itself.”

That was the first deal. After those 12 months, we were going to look at the rolling gross, and I was going to pay her because she wanted it over 15 years. Instead of the 150% that was typical in our industry at the time, I told her I'd pay her 200%, but it was stretched out over 15 years. If I have to pay her 15 to 20% a year, for 15 years, that still means I was making 80 to 85% on the book. That's why our economics worked very well.

Again, a big part of that was going from a 20% penalty box to a 90% independent pay out. It was a lot more money to split.

Sean: Right. She got a benefit from the growth that you helped to propel that first year?

Chad: Correct. It was 250K instead of the 125K that we left. The other thing I felt like I was nice on is we actually pushed it back 18 months instead of 12 months. We had some cases settling that we knew we were going to get annuitized, and I wanted it to be a win-win.

I've almost felt guilty I was making $8,000 per month when she was making $2,000 a month, or whatever the numbers were, because of the way we structured the deal. She's been happy and I've been happy, so it was a win-win, but I did push that back to make it more fair than it was initially.

I could've tightened it down and taken a bit more money out of her pocket by sticking with the 12 months instead of moving it back to 18 months.

Sean: Gotcha. That makes sense. Given the nature of setting up the advisory stuff, it takes at least a few months to get rolling, so I could see why you want her to be incentivized along with you. It sounds like you guys were perfectly aligned and it worked out exceedingly well.

Chad: Absolutely. The second book you mentioned was, I guess it was 3 years ago as well now. It was a Merrill Lynch guy I had known from wholesaling and he had a much smaller book. He had gone from Edward Jones to Merrill Lynch and was talked into the wirehouse dream when they were recruiting Edward Jones people, and it didn't end up working out.

He wasn’t a Merrill Lynch guy, he was more of an independent, Edward Jones kind of guy. When he wanted to leave, he ended up only having about $100,000 gross. He came and joined us for a year to introduce us as the team, and then he left completely.

The terms of that deal was 150% over a three year period. That wasn’t as fat for us on cash flow, but by month 37, whenever the deal was done, the cash flow was even stronger.

My comment there is out of 100%, we were only keeping 50% and he was getting 50%, but we were paying him with his own money. It was a win-win.

Sean: I was going to say, I know there’s so much more margin in helping someone get out of that low pattern environment like you described. It's great to help someone very independent, but already at the higher payout.

It’s almost like you want to find someone that needs your help the most, if possible, and then create a great scenario for both of you. I know you have some other things to comment on with the second deal, related to the “talking you up” that that the first seller did versus the second.

Chad: Yeah. The second one was struggling with his own identity. He sold a lot of the Edward Jones and initial training - this was years and years ago - and when he got in, it was all one fund family.

They allowed you to be in 1 of 7 fund families, and you took a 15% pay cut if you went outside those fund families. You hit break points, did A shares, and everything was a “get it as cheap as possible” and “go look for your next kill” mentality.

Edward Jones has been very successful with that old philosophy. I think they've changed it to focus more on relationships, even being a little more fee-based. He never moved from that old mentality, and that's why he didn’t do well at Merrill Lynch.

He didn’t know what his own value was. He wasn’t a financial planner, he wasn’t a relationship guy, he literally thought a Vanguard or whatever the cheapest was, was probably the best thing. He really fought us on trying to switch things towards annuitized.

He wanted to act like he was super analytic; that he was the smartest guy in the room. When you showed him studies stating multiple fund families bring value and one fund family isn’t good at everything - that diversification is a good thing - he would go back to 20 years prior training and say, “Well, cheap still wins."

We had to fight him every single step of the way, and that's why it made more sense for when he left, he left. We didn’t ask him to sit in on appointments anymore.

I did this deal with a junior partner. He’s a CFP as well, but he was newer in the business and didn’t have much of a book on his own.

In 2 years, he took that $100,000 book and turned it into $200,000. The economics of that one - I mentioned it was a 50/50 payout - but between the junior partner and I, we were both getting 50% of the 50%, so 25% each. But I was using my 25% to basically pay the guys note - the 150%.

In essence, of the $100,000, I was paying him $50,000 and not making a penny. My junior partner was making $50,000 because he was doing 99% of the work. I was just mentoring him, sitting in on the first couple of rounds of appointments acting like the senior, the way I had done with my original partner.

Sean: More of a long-term play kind of investing not taking cash flow, but you were leveraging your time. In other words, you're not spending a lot of time or haven't the last couple years, but starting at month 37, you had some cash flow. Is that accurate?

Chad: That was how I originally designed the deal, and that's why I was willing to take the long-term perspective. My second comment would be the junior did a great job of doubling the practice in 18 months or less.

All of a sudden, I’m getting a nice little paycheck, and it's going to get nicer on month 37 like you mentioned. It ended up being a better deal than I had initially put on a piece of paper.

Sean: That's great. Why don't you comment on, from my perspective and probably yours, the independent model in general. On the room that's allowed in the margins to do those two deals as you describe them. Compare it to being an employee when you basically have half or less as much to work with. Why don't you touch on that and how that's affected your family and your life?

Chad: You already said it well. Going from a 30% to 50% payout in most places, to a 90% payout, there's more money to split up. Many older advisors who are worn out or burned out, they either need a second person to revitalize them, to get them fired up again, or they need somebody they can work with. They want to make sure they trust you enough before they walk away because clients are typically friends and family.

When there's that much extra money on the table, you can afford to mentor somebody, or see if they can revitalize you, but not take a major pay cut while you're doing it.

Yes, going from the lower payouts to the higher payouts was a no-brainer. That's where we have tried to target mergers or buyouts, or to create teams or whatever we do, because there's just more money on the table.

Sean: Right, and a lot more ways to do it. It's fun when you figure out what people are looking for, and to structure a setup that should benefit everybody. One thing I will comment on is when we talk about payoffs, we're talking about at the gross end.

The skeptics out there say, "Oh you have to pay for your own office, your own staff, your own coffee, your own paper, and your own printer toner." I'll probably do another conversation about that at some point on how the payout works, but I guess the comment is those are all fixed expenses mostly.

They're a little variable when you have more business; you probably need more help and more toner. But in general, you can buy a lot of coffee and a lot of phone systems with 30% or 40% more off a couple of $100,000 right? Wouldn't you say that's accurate?

Chad: Oh, that's absolutely a no-brainer. Normally I'd say it's 50 to 60% more than what you're getting.

Sean: On a net basis right? So 50% to 60% more net. I think that's a great estimate.

Chad: Yeah, I flip it around the other way - the 40%, 50%, 70% your firm is keeping from you. We're supposed to be math people, we're supposed to be really technical - do the math.

You can get an executive suite for $500 to $1,000 per month depending on where you want to be. I can bring coffee from home if I'm really trying to pinch pennies. I can take people to lunch, I can do all that stuff, and let's say it's a $300,000 producer. I can spend a heck of a lot less than the $200,000 per year they're keeping out of my family's pocket right now.

Sean: If you don't want to do the math, do you know anyone that might help? Is there anybody out there that knows the math and can show it to you?

Chad: Yeah, I think all of us will be more than happy because we've done it multiple times.

Sean: Yeah, it's pretty exciting when you see the light bulb go on.

Chad: I think that's one of the reasons you and I have done some of the things we've done. As a wholesaler for 12 years, I almost felt like some of my passion coming out as an independent is now going back to friends that are still advisors in maybe the more restrictive smaller payout areas. I’m trying to help them see the light and stop drinking the Kool-Aid because I care about those people.

I've now gone back and said, “Hey, independents aren't idiots. Independents do have brains and resources. Independents do make money, and it's not as bad as what you've been told for 10, 20, 30 years." It’s been a personal vendetta to go back and help people see the light.

Sean: Yeah, and it's not going to be for everybody. Obviously, there are times when it doesn’t make sense for some reason. I think most people owe it to themselves to at least examine the numbers and the factors.

It’s an interesting set of circumstances and maybe 30 years ago, the technology difference between what Merrill Lynch or Morgan Stanley had compared to an independent might have been so dramatic you couldn't really do the job the same way. As technology becomes more ubiquitous and cheaper, that's been blown out of the water.

Chad: I think originally it was the technology. I think second it was training, and nowadays, especially if you're talking to an advisor that has already been in the industry, they don't need much training because they found out the wirehouses didn't give them much training.

Then the third one is the name recognition. It really helped in some of the prospecting for a while. Now most of those people are telling me it’s a disadvantage - name recognition is hurting and not helping the way it might have 10 years ago.

I think the world has changed. I don't think independence is for everybody, but I think if you give it an honest look, it helps a lot more people than some realize.

Sean: Not surprisingly, I agree. I appreciate the time, Chad. Anything else you want to share or thoughts? I think we've pretty much covered it.

Chad: I think we covered it all. Thanks for doing this and call me if you have any other questions.

Sean: All right. Thanks Chad.

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