How To Go Independent

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Matt Sonnen - Helping BILLION dollar teams go independent

InterviewsSean KernanComment

This is a transcript of HTGI podcast episode 14 (click HERE to check out that show) I did with Matt Sonnen. 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 or below if on mobile. 

Sean: Why don't we dive right in and kind of get into talking about your background and how you got to where you are in terms of your family, your business background, whatever it is that you'd like to share with the audience.

Matt: Sure. My wife and I are both California natives. We spent two and a half years in New York City recently when I was working for Focus Financial Partners. While we were there we had two kids. We’re living in a shoebox in Manhattan. So back in July (last year) I resigned from Focus, we moved back to Southern California, and we started PFI Advisors together. Our son, Luke, is just about to turn three. He's on our website as our Director of Transition Amusement. He travelled with us from Focus, who's on-site as a couple different breakaways and he's great during that stressful weekend to bring on-site and calm everybody down -- gets a little tensed, so we've got him on the website. And then we've got a daughter Layla, who is going to turn one in a couple of weeks.

Sean: Great. And then what did you guys do -- you kind of mentioned Focus but what did you do before you broke away on your own, so to speak, and started the business?

Matt: My claim to fame is always going to be Luminous Capital, that was a large breakaway in Southern California. We left Merrill Lynch in 2008 with a billion seven and I’d worked with those guys at Merrill from ‘97 to ‘05. They had just joined Merrill from Goldman Sachs and at the time those four advisors were doing more business than the entire Beverly Hills branch. So from an operation's perspective, the branch had doubled in size overnight and so they hired me right out of school to be their operations point person just to help them navigate mother Merrill.

So who do you call for an options trade? How do you put some mutual fund trade? That sort of thing. So that was my first job and then I kind of zig and zag'd my way/career path with those guys. Up through ‘05 I was partner in the business but I didn’t have any business development responsibilities. My job was to service the existing clients so they knew all the other guys were out prospecting or doing client meetings, that sort of thing. I could help them with their portfolio and that sort of thing.

And so I left in ‘05 to try my hand at selling insurance, which I did not enjoy so I stayed in close contact with them. So then in ‘07, they contacted me and said "Hey we're finally going to start our own firm but we have no idea how the RIA biz works. Can you go work it out while we keep our head down and just focus on our clients?" I built out a San Francisco office and Los Angeles office with technology and furniture and all of that stuff and then just sort of figured out how the RIA biz works -- custodian and compliance and sort of thing. I spent about seven months doing that and then in May of ‘08, they snuck out with a billion seven. We grew it very quickly. I stayed on as the COO and CCO for the four and a half year run up to six billion of assets and then they sold it to a bank. I really enjoyed the independent side.

I wanted to stay in the independent space so literally the day that Luminous sells, my resume was at Focus Financial saying “You’re one of the largest players in the independent space. Can you rescue me? So we moved to New York and I was in charge of breakaway teams trying to set up their own firms and then when there wasn't a breakaway going on I would do various operations in technology projects for the existing firms in their portfolio.

Sean: Excellent. And backing up a little bit to when they called you -- I guess in ‘07 -- was that a surprise to you about the fact that they will be starting their own firm? You used the word "finally" but was that something that surprised you or were you kind of like “Oh yeah, it's about time.” What was your reaction from knowing those guys?

Matt: I thought everybody has that mentality in the wirehouse. They always knew they were going to start their own firm at some point -- it was just a matter of when. For me it was kind of, finally! “Oh finally you're going to do this. Great! Let's get going!”

Sean: Right. That’s interesting. Obviously I could see the benefits and I've read about that. I mean, it’s well documented, it’s pretty big deal -- both when they left and when the transaction was pretty significant to that bank. I assume you weren't necessarily an equity partner and nothing to make you sail off from the sunset completely, huh?

Matt: Exactly. I didn't get to go live on the beach but I did have .000000001% so it was a nice handshake.

Sean: Well, that helps. I think we’ll switch again to your current business. The fact that obviously, they knew and trusted you, I’m continually surprised -- you're not surprised anymore but no matter how big these businesses are, these guys that you worked with and that you helped build a business, they didn’t rely on anybody that at the time had already done this for the large billion dollars or billion seven teams to start something from scratch or at least none they trusted or found. So it’s interesting that that was sort of your throw by fire from whatever it i'm sure we'll talk about but it's interesting to hear that "hey if they trusted you to figure stuff out -- long story short -- you got it done

Matt: Yeah. Exactly.

Sean: So then, what prompted you to start PFI Advisors? Tell me a little bit more about that decision-making.

Matt: At Focus, we're meeting with large teams and it just felt over and over again especially on the larger end. These advisors would hear the presentation and they would say “Oh this sounds fantastic! I thought you would setup my office space for me.” So I’m going to have to think about that -- I resign and come in and everything's going to work. So I'm confident that's going to happen. I’m confident they're going to advise me on the best technology solutions and how do I offer the same products and services I always had within the wirehouse. I think you’ll get me set up there. I think you'll help me transition the clients and the clients are going to come over and I’m very confident with that and you're just going to educate me on how to run the business.

So all of that sounds great but what I don't like about the Focus model is you're asking me to sell likely on day one. Even if you had a twenty-five year career at Merrill Lynch, everybody thinks of independence day as their rebirth and it's day one. In my mind it was kind of a flaw in the model and so I kept hearing it over and over again. We just really need help getting setup. Once you get over that billion dollar mark, I feel (and again I thought first hand at Luminous) you have the scale to do design your own, you can pick up the phone and call any asset manager you need and say "Hi! I represent two billion dollars. I'd love to work with you.” And they will be in your office the next day. You know, talking to technology vendors without a whole lot of negotiating, you’re going to say “I have two billion dollars”, you're going to hit the low price point of their tear, right?

Sean: Right.

Matt: So you don't really need all this leverage from these national platforms. I kept googling it, thinking someone must be offering just transition services and I couldn't find it. There’s a lot of breakaway solutions, a lot out there, but a lot are W-2 models -- just join us and open up a branch office for xyz, we’re either a large RIA or a large platform of some kind. So it's a W-2 model. There's others like Focus that are saying “You need to sell equity on day one” and people don't like that. And then there's others that are charging on AUM basis. They lock you into a multi-year contract and that doesn't work for some of the large teams ‘cause they may have institutional clients that got a lot of assets but it’s not that many clients. And so the charge based on AUM is tough so I thought “Let’s just build a consulting firm for a flat fee (just a consulting fee).

We’ll just do transition services. We're not going to offer an investment platform, all the stuff that I don’t think these guys really need. They just need the transition services.” That was sort of an "aha moment" for PFI Advisors. I think on the high end, that’s all they need and I didn't seem like anyone who’s offering that to these guys.

Sean: That makes sense because I have dealt with a billion dollar plus teams/multi-billion dollar teams but generally speaking, I noticed that as you move up this production business scale, its advisors/teams are able to build that kind of business. They can run a business. I mean, they can figure that stuff out. They can figure how to create relationships, with what kind of size. They obviously can either figure it out or find the right people to figure it out. They know what they're doing for the most part so they need a guide more than someone to babysit them indefinitely.

Matt: Correct. Exactly that's the way to put it.

Matt Sonnen

Matt Sonnen

Sean: Very interesting. I would assume someone that's looking at that kind of transition, it’s a pretty significant decision, it's going to be well-thought-out, it’s not the "hey that ticked me off on Monday, I'm going to quit on Friday" kind of thing. What kind of cycle do you see in terms of people making that planning to start their own thing? And especially the kind of people you would want to work with.

Matt: So the real estate is going to be the biggest question mark depending on if you find a completely raw space that you actually have to tell them where to put the walls and put the plugs and everything -- that build out could really throw a wrench. Hopefully you can find a law office and most of the stuff there you just have "Hey we want our conference room a little bigger or a little smaller" so you’re just moving a couple interior walls. So that's the biggest thing/component of the timeline pre-resignation. But I would say three months pre-resignation is about what it takes. You want to interview a few custodians, you want to talk to a few reporting providers and I think we do a good job of narrowing those choices down.

When I did this in ‘08 for Luminous, there weren't that many choices -- it was  a little bit easier. Now, because independence has been so successful and so many advisors are making this move, there's a lot of vendors now offering services and it's a little bit overwhelming for these guys to look at the number of choices. So we’ll talk to them about they type of business they have, the type of clients they have, and we can narrow down a lot of the choices. We try to just show them two of everything and help them make that decision so this doesn't wind up being a nine months to twelve months pre-resignation process ‘cause they have a day job. They're trying to manage a business so they don't want to spend too much time making all these decisions. I would say three months on the short end and then just the big question mark is the real estate.

Sean: Gotcha. That's very interesting. I would've thought it would've been longer but then I guess you have a lot of resources on this kind of thing. And engaging consultant like you guys can get a lot done in a fairly short amount of time if someone on the team and you guys are focused on that process.

Matt: Exactly.

Sean: What is it about independence you think attract your advisors and why has there been the movements out of the wirehouses? And I’ll carry out that or add to it I always kind of chuckle at the stories about some independent advisors somewhere going back to a wirehouse if they did the math on the flow, it's generally a one-way street, right? How would you explain that trend?

Matt: It is nerve-racking and difficult to run your own firm, for sure. There is something to be said for showing up everyday at Wells Fargo or Morgan Stanley or whatever it is and your computer works and there is a compliance department and everything is sort of taken care of for you and there's a constant stream of products that you can show your clients and there’s research and things -- so I get it why people would say “Oh, I'm just going to stay here. I'm not going to rock the boat.”

But I think for a lot of advisors, there just comes a breaking point where they say “Enough is enough.” They think “Well, I'm going to create a few headaches by running my own firm but that far outweighs the headaches I'm going to avoid. So I'm no longer going to be placed in this tight compliance box where these people are saying ‘you can't offer that to your clients because we don’t allow all of our advisors to offer that to clients’” and that's very frustrating. That was one of the big things for the Luminous guys -- is they had certain small managers that they wanted to show their clients and they were just told by management “No they're not on our co-platform.” So that's frustrating.

Sean: Kind of the lowest common denominator.

Matt: Exactly, yes. Most of these firms are public companies so they’ve got quarterly earnings announcements. There’s always headline risk especially, obviously in ‘08, there was all these investment banking stuff and the products. It used to be that long ago, it helped you and it’s just over the last several years it goes like that. Sometimes it's hurting you so they always have to worry about the headline risk of their firm. The compensation is always huge, right? It seems every year they’re revamping the production grid and it never seems to be in favor of the advisors. So that’s just finally they had a breaking point. They don't get any operating leverage. You're caught up in independent contract, you’re within the wirehouses but you're on that fixed payout so every new dollar you bring in, as you get economies of scale, your profit margin should go up but they're just set. I get 42% payout and I charge people and they say “Geez!” As I grow from five hundred million to a billion, my profit margin should be increasing but you don't get that within the wirehouses.

Sean: So you don't see any difference because at the lower end it’s kind of life-changing at a very basic income level but it's interesting to hear that you see that from the larger teams that they’re probably making a pretty good income but still as business person it sound like a drive, seem a little crazy.

Matt: Absolutely. The technology has improved so much on the independent side that you can really, relatively speaking, for the size of your firm, for pretty cheap, you can offer the same client experience that they can in the wirehouses. So it's not that expensive to set this stuff up. And then again to get that the economies of scale on the operating leverage and then to have this asset that you can sell or pass on to your family or whatever is very valuable.

Sean: Gotcha. Okay, any other pieces that you think would be important to that?

Matt: I think the technology improvements have really been the game changer. It used to be you-can't-go-independent-cause-you're-not-going to-be-able-to-offer-the-same-stuff but now you get the client portal and the custodians are great with the online banking and your clients can take pictures of their checks and deposit it so as an independent RIA, you can offer the same client experience that they're getting from Merrill Lynch or Morgan Stanley or whatever.

Sean: Yeah, I’m sure not too long ago, I've been independent since ‘09 and in the business since ‘02 and even since ‘09 you could see that the ease of use of some of the tools that I use and fifteen or twenty years ago, Merrill Lynch or Morgan Stanley or Smith Barney did have better technology. You had to have a huge investment but that's continually going down so that makes sense. One thing that I found as I start to poke around learning there is this independent model at all when I started the industry, I could tell there was a perception that at least among some people that sort of going independent is only for the people who kind of fell down the wirehouse, what's your perspective on that?

Matt: I didn't know that was the thought until we launched Luminous and open my eyes as RIABiz had run a big three-part series on the founding of Luminous Capital and they mentioned it in that article. It’s not the first time I’ve heard of it but they said this is a game-changer, you have a billion seven breakaway is now proving that independence is really a legitimate landing spot. So that was in ‘08 but now there are so many large firms leading this industry now.

The Colony Group is in Boston, they just had their thirtieth anniversary. They’re managing over five billion dollars. Savant Capital Management in Chicago, they manage over four billion. In Southern California they broke away like five hundred million and they've doubled if not more than that. They’re tied up with Tony Robbins now so they're growing rapidly. Halbert Hargrove is another Southern California firm, thirty years history and managed over four billion. So I think it's proven itself that these are real businesses now, not just practices. And then the just the M&A transactions that have taken over the last couple of years, you can see that real money can be made -- dollar advisors sold to a Canadian bank, Baker Street sold to AMG, Constellation Wealth sold to First Republic, and they keep saying this M&A activity and the private equity just going to keep filing in the industry, so that's in a more legitimization of the industry. And then the breakaways are just the sides, the breakaways are becoming incredible. Last year alone, there was two really big on Summit Trail with muti-offices, multi-billion. Colony Capital here in Orange County, they're multi-billion, came out of Merrill Lynch. So the size of breakaways are getting larger, the size of the transactions are getting larger and it's become  a legitimate place for money management.

Sean: Yeah, it's interesting with those the M&A stuff that, you know, I think some advisors that have built a nice business that if they were to make a change, they’re going to get paid handsomely and stay in the wirehouse channel. It's good for them to hear that all the people do have money besides Merrill Lynch, Morgan Stanley, Wells Fargo, UBS, other people can -- First Republic is an example. They can make significant investments if they see the right opportunity.

Matt: Absolutely.

Sean: There's still a lot of debate, especially there's an article recently in investment news and then I think a rebuttal to that same article by Danny Sarch about retention rates. This was specifically about Merrill talking about how they keep -- actually I think we talked about that off air, so to speak. What's your experience and what kind of retention do you see people keeping both from what you've seen directly and then kind of the other people you've talked to?

Matt: The article you're referencing, it was saying Merrill Lynch claimed that they held as much as 50% on average -- the average breakaway, we keep 50% of the assets when they go. Like you said, Danny Sarch had to do a rebuttal because there was a lot of speculation. There’s numbers that’s just not accurate. So that was the first the first article I’ve seen the numbers that low. Most often I hear 80% thrown out -- I still think that's too low. I think that 80% number includes wirehouse to wirehouse changes. It's not just people going independent but it's a Morgan Stanley move over to UBS or UBS move to Merrill Lynch.

Obviously, I’m totally biased, I wave the independent flag very strongly but as an end client I don’t know why you would move from Morgan Stanley to UBS and have to go through the hassle of repapering and resetting up your bill pay, accounts and everything. It just feels like one feels very similar to the other and I don't quite get it as the end client what I'm picking up. So that 80% probably is accurate if you're counting every movement of an advisor. I think if you're going from the wirehouse world to independence, you're just setting up your own shop or joining an existing RIA, the numbers I usually see are well north of 90% because most of the time, client fees and expenses are going to be reduced. The advisor will have this much much larger universe of investments they can offer because again they’re not putting that compliance box. So you can tell the client I have more ability to show you interesting, diversifying products and services that I ever could show you.

A lot of these clients for these advisors, the client himself are entrepreneurs, they really get excited when the advisor says "I'm starting my own firm" So I think it's well north of 90%. It's 90% of what the advisor wanted to bring. They use going independent as a client segmentation exercise. so they go through their book and they say “Well, these clients just don't make sense in my new model.” So they're going with their more profitable clients and they don't always invite clients to come with them. So I think that throws these retention numbers off a little bit too but I found on deals I've been involved with -- either obviously the Luminous feel or any of the firms where we did it, Focus Financial -- it's well north of 90% of what they actually wanted to bring.

Sean: Yeah, that makes sense. there’s other dynamics of play. Have you seen kind of the consultation effect where “From Luminous stuff I might as well move to this other stuff now that I’ve worked for x number of years”, that sort of discussion with a client?

Matt: As far as picking up more wallet shares, as I was just saying, of the client?

Sean: Yeah, exactly.

Matt: Yeah, especially again for those entrepreneurial clients that have sold a business and that's where they got their wealth. They say “Oh man, I never felt comfortable referring my friends to you at xyz wirehouse (whatever it was) but now that’s in your own firm, these are some referrals I've been sitting on but never sent you.” So that definitely happens. And then it’s “Oh, and by the way, of my own money. I never even told you I had another account/advisor but let me send this to you now.” So I see it every time. Just the fact that they started their own firm, they've done it into the independent channel, the client assets go up.

Sean: I’ve noticed that as well and personally at a very much smaller scale but for every one or two surprises that clients that you don't retain, it seems to me that you pick up a similar amount of assets from your clients who say “Yeah, I'm with you. I’m doubling down on our relationship essentially by adding to it” until you sort of end up with a higher quality relate outcome because you got roughy staying assets and maybe one or two fewer relationships and I figure that's moving the needle in a good way that your average household relationship goes up a little bit.

Matt: Yeah.

Sean: Gotcha. You’ve obviously been there and done that in this part of the industry but how would you describe your firm being different from all the other options that I think you mentioned before we hit record. There's a lot of options, that's one thing i want to bring to the world as not only there are lot of options but a lot of great options. Why don't you touch on some of those and then kind of how you think does your firm set yourself apart from all the other great options out there?

Matt: Sure. As we said as independence has grown and really shown that it can be a legitimate landing spot for advisors, obviously people follow the money and so there are a lot of solutions out there. Some are W-2 models so you’re “I'm just joining their firms.” Others are plug and play solutions, there’s quite a few of those for the advisors that want to be independent but just doesn’t quite have enough revenue to support the real estate cost, the salaries of employees, the compliance cost, the technology cost, etcetera. There's some very good plug and play solutions out there, where we have differences in ourselves. I think we've got a white people actually coming out in another week or so to talk about where the economics of these models break down. I feel above a billion dollars.

It becomes too expensive for the large AUM firms so that’s where we’re swimming as we focus on the billion dollar larger firms. We’re not asking for any equity. We don't charge on an AUM basis. We don't do a multi-year contract. So it's just a consulting fee, a one-time consulting fee paid after resignation and we just offer transition services. Again, this large change -- I think that's all they need. So we will do the business infrastructure which is the office space, and then the hanging of the TVs, and conference room, and the furniture, and the phone systems, and the computer systems. We’ll setup the RIA infrastructure, so again, talking to them, figuring out what their business model is, what services they want to offer and then helping them determine what technology fits that. Everybody get sold an expensive trading system and when you talk to them, many times they don't run models. So they don't really need a stand-alone trading system. So we help them pick technology but a lot of times we're actually telling them “You don't need certain technologies.” If they're just starting mutual fund trades you can end up right through the custodian, you don't need an aggregating trading tool.

Sean: And they don't necessarily know what they don't know.

Matt: Exactly. And they've been brainwashed by their branch manager saying “My God, don't go independent. You're a great investment guy but you've never run a firm. You're going to be stuck under desk trying to get your computer to work while the markets are volatile and you're going to lose all your clients because you're not going to have your eye on the ball.” So we educate them through this whole process and show them that it's not as difficult as they've been told, that the technology is there and that they can do it.

We also go on-site with the custodians during transition. We’ll be there for several weeks (if not months) helping them move the clients and to go through that whole paperwork process. And then we help them on their billing. The advisors, they high five and say “Wow, 95% of our clients have come over with a huge success!” and I say “Congratulations! It's amazing. How are you going to get paid?” and they say “I have no idea. We've been throwing the client agreements in the corner as they’ve been getting sign. We don't know.” And so our team will actually take those clients against, we’ll load up all those fee rates into the billing software and then when they hit submit to the custodian actually debit the client accounts to pay them, that's sort of the end of our project.

Some firms have said “We’re still not ready to cut the cord. We don’t want you to leave. We'll stick around on a retainer basis after that.” But I keep telling them in the beginning of this process, I say “I know you're scared. You don't know what you don't know. I’m telling you as we go through this over the next several months, I'm going to get you educated. You're not going to need me as bad as you think you do” but we definitely offer retainer services to stick around for another quarter or so to help them get setup. So I think that's really what makes us different -- is we're just we're doing it for a consulting fee and it's not equity or AUM-based.

Sean: That's great. So the scale that they've achieved, they don't have to share that with you as a service provider and how valuable you are that they’ve created the scale. So you're not going to ride along sort of like some of these aggregators. The network I run, we get paid on percentage or production over time and that's a great business model for us but I can see why at certain size people say “No, I don't really need. Your compliance value doesn't go up necessarily as my business grows.”

Matt: Correct.

Sean: Gotcha. Kind of couple quick follow up questions on that -- you had mentioned the W-2 option. Can you give me a sense of why would someone, you know, put on your sales hat for that model? What are the pros and cons? Why would someone consider the W-2 model at this size?

Matt: I think they just say, again, “I just don't want to be a business owner” and growing up -- literally growing up, I was twenty-two years old when I met those Luminous Capital guys -- growing up with them, I just thought everybody wanted to be a business owner but as I've met more and more advisors, I get not everybody wants to run their own firms. They say “I like the - I show up, I don't have to think about it, the computers are going to work, I don't want to deal with compliance as much of a hassle that maybe to deal with the compliance department. I just don't want to take that where that has.” So they just say “Let me plug and play. Let me just show up to work and deal with my clients.”

Sean: Gotcha. This is a very simplified version. You can tell me if it’s way off but my take on what I've read and thinking through that is some of those options are great because they're going to have a higher payout and probably some equity in the larger organization but when it comes down they’re going to -- probably to look like kind of a souped-up wirehouse (lack of better term, right?) ‘cause you’re going to have some of the organizational challenges of not being able to do it your way sooner or later, right?

Matt: Yeah. I think they will reach that breaking point at some point. Absolutely.

Sean: But I can see an improvement over the existing wirehouse model. I guess it takes all kinds. That's another benefit of the scenario or place we live. There's always someone who’s going to create a model to kind of suit whatever need there is (or perceived need).

Matt: Yep.

Sean: The other question I have for you is about your timeline and then I guess there’s two more questions. One about timeline, sounds like that’s not a really super long period of time that you worked with these people to get up and running, which is great to hear. They’re much smaller than a billion but maybe this is going to take so much downtime as their business -- so that's one question. And the other one is -- what's the custodians involved when you're setting up an RIA? Clearly they have problem of providing close to what you do, that's why the business opportunity is there. But and what do they do, what’s helpful and where do you overlap with them and how does that work?

Matt: Sure. On the timeline, I think it's give or take around three months-- if they’re really getting creative with their real estate. It may be a little bit longer than that pre-resignation and then were probably engaged for another three months post-resignation. So you’ve got that client transition time and then to get them through that first quarterly billing and everything. It's probably about six to seven months that we're working with these guys to get their firm up and running. The custodians, they do an amazing job during transition so they will send people on-site and help with the paperwork and getting things open as quickly as possible.

Obviously, you’ll always compare it to the big Jerry Maguire moment when they fired him at a restaurant and then they ran across all the clients. Everybody has to go through that when they start their own RIA and so the custodians are there to make that client transition as quickly as possible. But then also getting it done correctly the first time, there’s lot of paperwork, wirehouse advisors get frustrated even on the good transition -- they do get frustrated with the custodian just because it's very different. The custodian is a completely different company. You don't have the same business card so you need a signature for everything. You want to add checks to an account many times in the wirehouse, that's just a phone call, right? “Oh, sure. No problem, we'll add that.” In the independent space of the independent custodian, you're going to need clients to sign something to add checks to an account, to get third-party wires and all that, it always requires a signature. So there's definitely some changes to how you interact with your custodian in the independence space versus your back office in the wirehouse world. One of the values that I think we add is we do a good job of setting everybody's expectations and kind of playing marriage counselor during that stressful time.

But they will get all of that paperwork filled out with protocols/data -- so just names/addresses. They can't put social security numbers on there. They can’t have date of birth, anything like that, but they will get that paperwork filled out almost overnight. When you resign, you give them just contact information (your clients) and they will fill in all that helpful data and get it packaged for you and get it shipped off to the clients very quickly so that they can get returned and get the accounts open and the asset starts moving as quickly as possible. So they’ve got this button down really well to moving those assets very quickly.

Sean: Gotcha. That makes sense. You’ve written some about the challenges that breakaway from space when they’re trying to figure out the office space -- like you said that's the biggest moving part -- do you have any advice about people that are looking to their own RIA and how to handle that?

Matt: The biggest challenge everybody has with office space is you're worried that clients are going to think of you as a startup, right? They're worried of “I've never heard of *whatever you’ve named this firm ten minutes ago*. Are my assets going to be safe?” So you can tell them about the custodian and how the assets are not with your RIA, etcetera. But then on office space, they're competing with the branch office -- everything's mahogany and everything’s very nice when you walk into Wells Fargo branch. And so there are two kinds of thought processes: one is “Let's just get this started as quickly as possible. Let’s throw a couple of desk in the middle of the room and get up and started.” That’s just actually what we did at Luminous. We literally forgot to paint the walls for the first six months.

Somebody came in and said “This place looks awful!” and we said “Oh my God we forgot to get some paint on the walls!” We kept thinking about the clients and assets, etcetera. We didn’t really think of it. Other advisors during this breakaway transition, they say “Look, on day one, when I bring clients in here to sign their paperwork, this has to look competitive to a branch office.” And they want statues, you know, they want it to look really nice. I’ve actually built a fireplace in somebody's lobby for them. So I’ve seen it every way and I get that mentality -- I totally get it why they think that way. So there are two ways you can do it. The biggest mistake we made with Luminous is, again, trying to sort of compete with that thought process of “I don't want to look like a startup.” We thought “Well, let's put our office in the same building as the Merrill Lynch office” just so client can come to the same building and I don't get it but that just made build out -- those pre-resignation months -- a complete nightmare. I do not recommend putting your office in the same building as wherever you're leaving.

Sean: I guess nothing bad happened in terms of the prep but that was (I guess) stressful for you in particular, I would think.

Matt: We pulled it off but it was added stress. You don't need pre-resignation. Find another building somewhere close and you can tell people “I’m just right down the street from the old office” but it was undue stress we didn't need.

Sean: Gotcha. So as your business has kind of evolved in the last years, how have you organized it and what kind of team do you have in place to help people go through this process?

Matt: We struggle the same thing every entrepreneur does. Do you scale first? Do you need the clients first? Do you want to scale up? And figuring out how best to spend the money and everything. We’re lean and mean right now. My wife and I are the owners of the firm. My wife was an actual advisor so she knows the industry very well. She has some great operations  experience as well.

She’s the COO of PFI and she really runs the firm so I just deal with the clients and I don't have to think about the running of our firm at all. She has some great knowledge that she passes on to the firms that are setting up their business from a technology perspective, etcetera. And then our analyst, Anna Maria Garcia, came with me from Focus. We met at Focus. She'd worked there. Her and I did a couple breakaways together and we'd done several projects at the existing Focus firm. She's been great. She did the office. My wife and I are born and raised in California and moved to New York for the Focus job. Anna’s from the East Coast and has come to California for this job but we work  very well together and she saved many many months of setting up the firm ‘cause we speak the same language and we had that history together. And then I've got a couple transition specialists that I can hire very quickly as we start to scale this thing. They bring on us with means of “Look I'm not an entrepreneur. I want a paycheck two weeks after I start. We’re still building this thing. Let me get a few more deals under our belt and get a little more cash flow and then we can hire you as an employee.” So we will scale this thing in the right way.

Sean: That’s one of the things that you see more as you're on your own -- that you have to get the right people but you have to make sure that you can keep them engaged, typically want to be slightly ahead of the curve. So it's good to know where you’re going to get them.

Matt: The chicken and the egg problem, yes. Do I hire first or do I get the clients first?

Sean: And you want the people that you have in mind, hopefully they haven't gone on to some other opportunity, they don't want to leave, hopefully they're ready when you're ready, but it's always good to be talking to quality people.

Matt: Absolutely.

Sean. Great. I think we said PFI, can you tell me what PFI stands for and how you came up with the name?

Matt: Yeah, sorry, I should’ve brought it up right off the bat. So, again, when you are looking at the flavors of independence -- the W-2 model, the platform, the plug and play model, etcetera, our model is very sort of figuring this out. We say we're really pure independent so we came up with PFI (Pure Financial Independence) ‘cause that's sort of what we represent -- somebody that really wants to be their 100% owner of their firm isn't thrown off by “Jesus! It’s a pain to run my own firm.” So Pure Financial Independence is what PFI stands for ‘cause if you get that that describes our section of the independence model.

Sean: I think that's a great name -- really kind of distills -- ‘cause if people don't get that right off “What does that mean?” and that's a great conversation start, I would think.

Matt: Yeah. Absolutely.

Sean: How much time and how do you go about helping people with all the different technology options and tools available I think a lot of advisors and entrepreneurs in general that are doing this, they want to have control and look at all the different choices but how do you streamline that and how is that received by your prospects and clients?

Matt: That really runs the game. Based on their personality, some say “Just set me up. Get me the best stuff. I don't want to deal with this again. I'm dealing with my clients. I'm running a business within Wells Fargo (whatever it is). Just get the thing set up.” And others are more kind of tech savvy. They really want to see everything that's out there. So we'll do both but we try to make it as less stressful as possible and not overwhelm them with choices. There are so many psychology reports about, you know, if you're in the cereal aisle, there are just so many boxes, you end up not buying anything.

You can’t make a choice at all and you just leave the aisle completely. So we try to limit the number of choices and we really get to know their business and how they would want the new business to look like. And so if they're working with certain products or services, some technologies are better than others so we will tell them “Look, based on your business model these don’t even make sense. Let's just look at these choices over here” or “You really need to look at this” or “You just need a very basic trading system” or “You need a very robust system” depending on how they run their business. So we work with both, we'll show them everything if they want but most of the time it’s “Can you just limit the number of choices that we have to look at?” and get the set up correctly.

Sean: That seems like that would be wise ‘cause there’s always, of course, a switching cost but these firms can always redeploy separate tool or technology they want to, it’s a lot easier to change that down the road than if you're changing everything, creating from scratch.

Matt: Right.

Sean. Very good. Let's see. You've touched on a lot of things that people should focus on, any other specific advice for, you know, if people kind of go on from being an employee to the entrepreneur/business owner, advice for those that are having a hard time balancing working on the business versus in the business and the implications of that change?

Matt: I think, especially the firms on the large end, they’re just the same thing I was just talking about of -- you don't want to spend too much money right off the bat, you want to make sure you get your clients and the assets moved over, etcetera. So they will name one of their existing partners, the CLL CCO, during transition which is fine. But these large firms, by twelve months out, they're going to want to hire a stand-alone person not in charge of business development. You want your business development to be able to focus on what they do best and they should be out gathering new assets. You need somebody that's going to run the business for you. Even with my tiny firm, again, I have my wife too and for me I don't want to deal with that stuff. So they are going to need to hire a CCO and COO -- that was my role at Luminous. I'm somewhat biased but I think that role is very very critical for this large change. Let them deal with the clients and business development and have somebody else just dealing with HR, and technology, compliance etcetera.

Sean: I think it speaks out that you're walking the walk now, probably that’s the scale that Luminous was, for example, but you're building it from the ground up with that structure instead of even though you’ve done it, you’re not putting yourself in that drag. You’re playing to see overall, which is different.

Matt: Correct.

Sean: Very good. Any other major costs, issues, or risks that you think people should think about that we haven't covered so far?

Matt: The three biggest cost for any RIA is going to be your real estate, your human capital, and your technology. All three are going to be dependent on the number of employees you have. Obviously, the more employees, you'll need a larger real estate/space -- and that’s going to obviously be a higher cost. And then you're going to probably sign to get the best rate on your list. You're going to want to sign a five to seven year list so you’re going to want to leave some room for growth, hopefully you’ve got some pretty aggressive growth plans and so you're going to have more offices than you need to begin with.

But your number of employees will determine obviously. Salaries will depend on the number of employees. And then technology, a lot of the technology is charged based on the number of accounts you have. Others are build on an AUM basis and then others are just on a pro license basis. So more employees means more cost, like a CRM system, etcetera. So it's all dependent on the number of employees but those are your three big cost you gotta keep in mind.

Sean: Gotcha that sounds pretty straightforward. Like you said, on any size you’re in -- that goes from smallest hybrid RIA, independent broker dealer -- the size and the scale of these businesses that you're talking about helping, it's just a matter of making sure it’s set. As I like to say, it's not rocket surgery in some ways. What would you say is the biggest challenge advisors tell you that they face as they’re going independent and setting up the firm and kind of remaining independent?

Matt: We’ve talked about a lot of them. In the running of the firm, you're dealing with things you've never even thought of before -- HR issues, you’ve got to offer benefit for your employees, you’ve got to have a 401(k) plan to offer to your employees. These are things you never had to think about before. I obviously feel the benefits far outweigh the negatives in running your own firm and I think a lot of advisors do agree. As we’ve been talking about, there's a lot of people making this change. But every single breakaway that I've been a part of has always said the same thing -- “I wish I‘d done this sooner.” It is a lot of work but I wish I'd done this sooner. I'm having the time of my life and it’s been so much fun and I’m reinvigorated and I love going to work everyday.

Sean: Cool. It's awesome to hear that. I hear that as well. It kind of almost doesn't matter about your size, if you made the decision and pulled off and you can work only for your clients with no one else in the way, really, there's always headaches -- that's in the business (or just life) but when you have control of your destiny, it’s a big deal.

Matt: Yup.

Sean: Very good. Do you have any do-overs in your career or personally? I think in particular you think you would do differently or you would recommend people to keep an eye out for or lessons learned, so to speak?

Matt: I've been reading a lot of entrepreneurial books and self-help books and everything and I’m very strong right now on the life's-a-journey-and-there-are-no-mistakes. My initial reaction’s like “Oh my God! I’m going to sell insurance!” In 2005 I didn't want to be on insurance sales. I don’t know what I was thinking but if you look at where it got me in my career, that got me outside of Merrill Lynch. That allowed the Luminous guys to call me and say "Hey you're on the other side of the wall. You go figure this out.” So that actually the was the pinpoint of my career -- the big turning point. I definitely wouldn't be where I am today today if I hadn't done that so I can't really say that leaving Merrill to go sell insurance in ‘05 was a regret but I probably have the same answer all the advisors have -- I wish I'd done PFI sooner. I'm definitely having the time of my life and sometimes we don’t get a lot of sleep at night but I haven't had one morning where  I can't get up and couldn’t get into the office. I run in the air everyday and I just think that this independent movement has so much further to go, it's exciting to be a part of.

Sean: Great. It’s kind of the same way I feel. It’s great to hear all the people say the similar -- always a different story and how you get to that point but it’s neat to hear the same sentiment. People are fired up about what they’re doing in trying to help others do the same thing. I would assume one of the reasons why you want to sell insurance -- maybe if there’s more of the story you can share but I would think one of the allures of being in the financial services business is having the control of your destiny and independence. There's always that hey- -you're-going to-work-for-yourself allure. That way, I would think going to try it at least you kind of get, you know, I like to tell advisors “Hey even if you're not a billion dollar team yet, it's hard to get where you are.” Even if you’re what people would call modest producer, in the big scheme of things, not everyone makes it. Insurance is a tough racket. Investment sales is a tough racket.

Matt: One of our clients at Merrill Lynch -- a very successful guy -- we had lunch one day and said “Everyone in their career should have to be on commission at some point just to learn what it's like to work all day long.” It's a great trial by fire and it really helps shape you.

Sean: Exactly. I have two young kids, a little older than yours, I start to think about things and try to tell my story. Hopefully they don't have to go knock on doors like I did and all that but I don't want it to be too easy, right?

Matt: Right.

Sean: Because then they don't appreciate it. I could see why -- you read about it over and over -- families with tremendous wealth, it's not that easy to enjoy the fruits of your labor but you usually do it with your kids around and so try to inculcate them with the values and the hard work. So I admire families that are able to to pull that off. Matt, I sure appreciate your time. How can people, if they want to learn more about what you guys do or pick your brain, how do they find you guys?

Matt: Yeah, and I'll just give you my phone number as well 424 336 9751.

Sean: Cool. I really appreciate the time and I'm sure we’ll get a lot of value from this.

Matt: Thanks so much, I really appreciate it.

There you have it! Hope you enjoyed that conversation with Matt. I took one major theme, at least which is -- a lot of the mindset issues that we face before we go independent are the same. No matter what size and scale you are, whether it’s just you working from a home office with thirty million assets or at a large team with several billion assets (former Goldman Sachs, Merrill Lynch guys) -- similar challenges trying to run the business and set up the foundation of their own independent firm.

It’s really nice to hear Matt's experience and he (I think) will be a great resource for us here at How To Go Independent as we fill in the pieces of the market place especially at the higher end that I don’t have direct experience in. So it's great to make contact with him and look for his new venture grow. Matt also has offered to be a resource to our listeners so if you have a successful practice but maybe, so far it's only a couple hundred million of assets and looking to make a change, putting Matt's experience at Merrill, at Focus, and his current venture, he's got a very wide range of expertise and insights to the different options out there.

I encourage you to reach out to him directly if you want to learn more and I'm sure he would respect your privacy and confidentiality as we all do when we're looking at career options. So, with that, I will say goodbye, till next time but let me know if you have any questions, or concerns, complaints at

Thanks, see you next time!