How To Go Independent

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Talking Independence with Joshua Sheats on the Radical Personal Finance Podcast

InterviewsSean KernanComment

This is a transcript of my talk with Joshua Sheats on his Radical Personal Finance podcast (click HERE to check out his podcast). Joshua and I discussed the independent model and the different ways to start a financial advisor practice.  FYI....this transcript 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. 

Joshua Sheats: We're going to have financial advisor coffee today, a virtual cup of coffee together, and try to record it for the world. When I started Radical Personal Finance, I thought what I’ll do is I’ll just build being in the financial advisor industry to the public but I didn’t expect a lot of people who are interested in the business of being financial advisor, really to listen to the show but somehow I’ve attracted that type of audience of many people who are financial advisors listen and many people who are in other careers who are interested in becoming financial advisors. A lot of people have found the show, as a simple example I got three emails last week from people saying, “Hey, I'm in another career. I'm thinking about switching to become a financial advisor, what do you think?” And so I want to serve this segment of the audience with some information which is why I decided to go ahead and invite you on the show. We’ll talk about your experience in the financial advice business and also a little bit of your new project of helping advisors go independent. So let's start, however, with give us your resume, so to speak. Where did you start in the financial advisor business and what was your pathway through this landscape that we all exist in?

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Sean: Sure. I'm happy to. So I started, I was an army officer at college. I went to West Point in a five-year service commitment but I always kind of knew that long-term career army officer was probably not what I was going to do so I spend a lot of that time, lot of that five-year commitment kind of sorting through different potential career paths. I think one thing I love about listening to you, Joshua, was your sort of strategic thinking long term and I like to think I’ve tried to do that and so that five years, there wasn’t much flexibility compared to an average twenty-two to twenty-seven year old but I did have the opportunity to spend that time thinking about what I want to be when I grow up and most jobs that I talked to people about honestly bored me to tears. They just didn't sound interesting to me. And I always had an interest in personal finance. I’d read a lot, studied a lot, found it interesting and so I kind of settled on that first and then, I think I described in the recent episode, the entrepreneurial nature, even when you're an employee advisor or agent you really are. No one is usually paying you much to just show up at some point.

Joshua Sheats: If they were, I never found them.

Sean: It’s like it's just too good to be true. Well, the catch is, it’s hard. We'll get into that and you touched on it pretty well in that recent episode. So I looked at different options. I interviewed with, what then was called American Express Financial Advisors. One thing that appealed to me is they said, “After a few years you can basically have your own kind of franchise.” They have obviously a brand name that people knew. I was living in Denver at the time, serving in a small air force base. I was a personnel guy for an army intelligence unit on an air force base. I can do live in Denver. It’s not a bad gig for an army officer.

Joshua Sheats: No.

Sean: Especially someone not going to transition in this world. I went to West Point and serviced academy grads, networking group, almost every Tuesday morning. So anyways, I heard about them, I think from a fellow West Point grad and that appealed to me so I interviewed, they said, “We'll hire you.” Of course I thought that was a big deal, as you all know, to some degree, if you can talk and shoot gun at least back then you could probably get an offer.

Joshua Sheats: A chewing gum was optional. You just have to be able to talk.

Sean: Exactly. And so I was about to accept, my wife wisely said, “Hey, shouldn’t you at least talk to another company?” She doesn’t have a huge interest in what I do all the time but man, when she weighs in, it’s gold like that was. So I thought it’s probably a good idea. So I was telling the story to another guy and he said, “I think Edward Jones or A.G. Edwards, one of those, they did this give your own office right away.” So I looked it up and sure enough, Edward Jones did so that was better than waiting two or three years. So anyhow, I got hired by them and not moving back to the Dallas Fort Worth area, where I'm from and got into it in the spring of 2002. So fourteen years ago now.

Joshua Sheats: So you started with Edward Jones in Dallas.

Sean: Yes. You bet.

Joshua Sheats: Okay. So I want to probe on next ‘cause I’m always fascinated with the Edward Jones model. They cut their teeth on kind of serving this small town rural community. Is that accurate?

Sean: Yeah. Very much, that was the business model for sure.

Joshua Sheats: And then they moved into the large metro areas but as I understood, they had started serving that underserved demographic out in the country.

Sean: Yeah it was very much what would you call the blue ocean strategy strategy back in, I think it was, you know, the story that I remember from being there inculcated in the culture and the stories, they had about three hundred brokerage, as they would call, the advisors, and there was a managing partner that came in and said that was a big debate, I think internally was, do we try this at least in suburbs or in the big cities? But in Texas, which is a big place I want to say the first two offices or two of the ones that have been around along us where in places called Greenville, which is about an hour east to Dallas, and then Big Spring, west Texas -- so not very big places. So I was in suburb at Dallas, actually where I grew up or went to high school or middle school. It was an interesting thing ‘cause when I started I was like a lot of West Point types -- like you are very analytical, detailed. I think the nature of being new at something, you probably want to do your preparation in some ways compared to what this business calls for in terms of getting out there in front of people and ask them to meet with you.

You did a good job describing, when you're new you don’t know anything, especially I was twenty-six or twenty-seven and I knew what I didn’t know to some degree but it's still a challenge. So I knocked on doors and talked to a lot of people and it worked better than I thought it would and I think that’s one lesson I take from what I hear in other venues in other forms. If you just take action and make towards something you can always adjust cores and shift fire, so to speak, but just go somewhere and then you’ll figure out if you're going the right direction, hopefully. So I spent three years building the core of my practice there, tried to do a good job always looking out for the long term interest of my clients even when it was not necessarily lucrative in the short run but I could tell from talking to some mentors and just sort of common sense that that would be a good thing in the long run anyways plus it was the right thing to do. About three years in, I actually started probably from the day one -- I will be knocking on doors meeting people and sure enough I come across other advisors or managers or people who have been in the business or recruiters for other firms. So I started to get curious and just kind of talked to them and said, “Ha! That’s interesting. There's another way to do this business.”

I was fully sold that the firm I was with was the best. It did a great job for me but I didn’t want to be overly close minded so I make some contacts with people in the industry, just kind of network and learn more. So I continue to do that and one of the things that was a bit limiting for my perspective that time was Edward Jones didn’t have any what we would call advisory platforms or fee based where you charge them under assets in the management instead of more of a commission based, transaction based compensation. So this was in 2005. I thought of leaving to go to Morgan Stanley in the middle of 2005 largely because of that lack of capability.

Joshua Sheats: Why did you want the ability to charge fees as an advisor?

Sean: A couple of reasons. One, it just seemed simpler to me from being on the same side of the table as the client. There’s definitely a case to be made where purely cost wise a commission-based model, if you have a longer holding period you can do the math and say it definitely can be cheaper for the client. But in terms of where the incentives, we all know people respond to incentives whether they want to admit it or not, it’s just human nature over time. And I tell clients now, “Look, I get paid to help you take care of the money not to move it around or to go get new money from you or other people.” So in the hypothetical commission based world, if you stay in that, the only times you get compensated or when there's a transaction and that’s either moving around some place existing stuff, which certainly there are times you have to move things around. It’s not that that doesn’t happen, it’s just there's all kinds of ways to get paid and ways to justify transaction business so it’s kind of a tricky place to be as an advisor is trying to do the right thing. It can be done.

I know a lot of people who do it well and serve their clients extremely well so I don’t think it makes you bad to be in that kind of model but it was just a little tricky. And then the bringing in new clients, so if you're getting paid when people invest money with you you and you’ve got a new client you kind of allocate their investments according to the plan you've put together then sort of the next collation is define the next one -- especially when you're new and you need to do that regardless of your compensation model.

So that was a big part of it, just being in the same side of the table as the client even more. And then the other thing, it’s a better business model in my opinion. At some point you can continue to increase the quality of the relationships you have and deepen those relationships versus having to go find new ones. When you do that you naturally get more referrals and so the business grows. It's just more predictable. It allows you to hire staff or get other resources because market crashes like we saw not too long ago, your revenue’s going to be fairly stable whereas the transaction based model might be more fist or famine. Part of it is just the solid business model and then I looked at also the data. I mean, I’m a little bit older than you but I looked at the data looking down the road, in fact I did this one when I was about probably where you are now age wise.

If I ever want to retire someday and sell my practice advisory fee based recurring revenue was more profitable so that was part of it. But also just more of the simplicity you talk about cost, what the client wants is what we charge, this is why and it doesn't really come up again, very rarely whereas the transaction, ideally you’re kind of mentioning it every time ‘cause it’s going to come up. It’s going to be charged every time.

Joshua Sheats: Absolutely. So you went to Morgan Stanley 2005.

Sean: Yeah, so that was very successful. I was able to retain a lot of my relationships and sort of their assets. The clients that came with me brought their accounts over. I kind of made that transition over the next several years just in time for the market to have a slight dip of about 55%.

Joshua Sheats: A moderate correction.

Sean: Yeah. Past performance is no guarantee of future results. So that was kind of interesting ‘cause I thought, “Oh wow. This overlong run is probably good for me to be having more asset based compensation” ‘cause overtime you expect markets to go up more than down but it also can go the other way, which is the point. My income was at risk. One of the greatest compliments I think I’ve had a client pay me was, some time later she said something like (we were talking about the 2008 fall of await), “I think you are more worried about our accounts than we were ‘cause you have that pressure and you want to do the right thing for people.”

It was the first time I've seen that and I don’t know that I’ll do much better next time but at least I’ll be able to say I've seen it. I’ve been there, done that. That was kind of an interesting time. So, anyway, I spent that time converting to more recurring revenue. Morgan Stanley is a great place, great name -- not as great maybe after ‘08 or ’09, things that kind of all those firms went through but lot of resources. When you say, “Hey, I’m going to Morgan Stanley,” most people have heard of it.

But I kind of always knew, even before I made that change, I had the idea of independence in the back of my head and the terms of my arrangement with Morgan Stanley when I moved there was basically I had a five-year deal and I thought well I finally like it and I've been there with the army commitments so I can stand on my head for five years if I need to. And I don’t want to make my clients move often either, it can be painful or at least an annoying process for them to move their accounts and new account numbers, new statements, new online stuff, new instructions moving money in or taking money out. But after four years of that five years I was kind of ready, the market had recovered off the bottom in 2009 and I was kind of ready to do my own thing and have the flexibility and freedom of crafting the practice the way I wanted to and at the larger firm that’s just harder to do, a lot harder. So in 2009 I made the move to what you would call an independent broker dealer -- basically a firm that looks and smells a lot like those other two. It’s just I own the practice, don’t really have a boss, so to speak, you have compliance requirements for sure, the same similar requirements but you own the practice, you decide if and when to hire people, you decide if and when to get office space, what color your logo is, what you call yourself, those sorts of things within the sandbox of the compliance world that I'm sure as we talk about continues to shrink.

It's been phenomenal. I've enjoyed it. September third is the day -- my anniversary. I kind of think of that as my July fourth. It’s my independence day, so to speak. It’s been great for me and my family and I think I kind of get fired up about that so that’s why I started this other project to kind of talk more about it.

Joshua Sheats: So we’ll talk about that in a second. Describe to me the nature of your firm -- the type of clients you work with, the number of clients. What demographic do you serve with your firm?

Sean: Sure. I think my best clients, I’d describe them as people who have done a good job saving. They’ve already figured out that you should spend less than you have coming in so I’m not doing real hardcore budget coaching. They’ve got that down and they probably had it down for many years. In our business, often the shortest route to build a business is to work with people near retirement or maybe early in retirement who've already accumulated a lot of what they’re going to accumulate.

I worked with a lot of people who have worked for someone else, not all business owners. I know a lot of my colleagues, that’s the focus but I have I have a lot of former employees or employees that very relatively straightforward financial planning needs retirement planning, insurance protection, college planning. So they’ve accumulated some money but not always millions, maybe at least one but not always. And between that, their investments and security from maybe two spouses (in a lot of cases) they can get what they need and be relatively comfortable sometime after they turn sixty, I know a lot of cases. So it’s not that they don’t want to follow their investments but a lot of my best clients, they’ve kind of developed the trust over time, after ten or twelve or fourteen years like, “We’ve done a hard work of describing to Sean what we want to happen and we trust him to guide us. We ask questions and these things change, we make sure we're adjusting fire.” It’s always about what are they trying to accomplish? In the industry we might call that the mass affluent so I don’t do a lot of the hourly consulting or xy, generation y. We’re on the old type consulting just yet but sort of the baby boomer retiree who's got enough money but not so much they're still worried about their number one goal is not running out of money.

Joshua Sheats: Right. I was just going to categorize it, you’re working with the mass affluent ages forty to seventy, lot of married couples who have anywhere from half or three quarters of million dollars up to two, three, four million dollars, retired executives, retired school teacher, put a lot of money in a 401(k), a couple blue color business owners, this kind of just mass affluent approach, right?

Sean: Yes, exactly. And in your background it’s a pretty plain vanilla. There are a lot of us who do that. That was a good news, I think, ‘cause there’s a lot of help out there sorting out who’s who and finding that fit but as I like to say it’s not rocket surgery.

Joshua Sheats: Right. That was exactly your 336 of my financial advisor worth, that was the target. That was exactly the business model. The way I saw it, those were the people that I could effectively serve. You get to a point in time of an amount of wealth -- I don’t know what the number. Is five million? Probably. Is it ten million? Most definitely. Is it thirty? Absolutely. You get to a level at which the amount of client service, the sophistication of the need, all these things get to a point where you need to have a firm that’s oriented in that direction.

Sean: Exactly.

Joshua Sheats: You get to a point, I mean if you’re working with a client who has $300,000, unless that client is quite young and they’re aggressive savers, it’s going to be difficult for somebody to track and be able to retire on small amounts of money and so you need a certain level of wealth for the type of practice that you’re running or that I was pursuing. You need to have a certain level of wealth that you can actually make meaningful impacts and influences in the client's life in excess of the cost, in excess of your fees, but you can't have clients, you can’t effectively serve somebody who has the expectations and the needs of someone with $30,000,000 in the bank. They need a different type of practice structure so I always I felt like that. What I just described was a place that I enjoyed working with those people. There was enough diversity. I could really be a subject matter expert in areas that were impactful to that and enjoy a good working relationship with that type of client.

Sean: And a lot of them -- as you I'm sure you experienced it -- they appreciate your help in most cases, right?

Joshua Sheats: Right.

Sean: There’s competition for the folks with a million or half in their accounts but a lot of them are regular folk million next door and I love that interview you did with your former boss. But sort of they don’t picture some of us as wealthy and they appreciate it and they value your input, which is nice to have in the job.

Joshua Sheats: And the situation of financial planning situation, this type of mass affluent client faces is, it's challenging. It's complex. When you're digging through all of the different things that influence them it is challenging and complex for a layperson to figure out and I believe a good advisor can add a tremendous amount of value with social security consulting and just all the different areas of financial planning but it doesn’t require highly intent specialized knowledge like billion dollar estates does when you have to basically spend three years working on one financial planning for trying do a statement plan.

Sean: Exactly.

Joshua Sheats: So we can effectively tool up through some credentialization and five or ten years of study. We can effectively tool up to be able to really effectively serve that client with experience and that we doubt the vast majority of brand new financial advisors from our competition because a brand new someone who just got their license, they can't effectively do that type of planning without bringing in a whole team. So I think it’s a really beautiful type of practice model that has a lot of value for the client and a lot of value for the advisor.

Sean: Yeah it really is fun. I mean, I get fired up about retiring and complaining and like you said, I mean I have a lot fewer letters behind my name – I’ve got CFP and that’s the main one but doing retiring income plan, for me, ‘cause I've done it a bunch, it's a blast and we can show someone, “Here’s where we’re going to pull your income from, here’s what I recommend anyways, here’s how social security fits into that, here’s some claiming strategies and they go, “Okay, good.” They feel that sense of relief and it’s great for people to have that relief, they saved some money but it’s like, “Now, I got this money but how do I turn this into an income?” as one example. And that’s a common planning need. To you and me, who have done it a bunch, it’s not complicated but that course of knowledge is pretty real like, “Oh, yeah this is obvious” and they’re like blown away.

Joshua Sheats: Right. You can’t get it from Money magazine. It needs somebody who’s able to look at it and the impact is so huge because this is the type of client who wants that confidence that, “Hey at sixty-five years old I can leave my corporate job and I'm going to be okay or I can get rid of this business or I can get the RV and travel.” It’s the image that’s on the front page of the brochures of most of the financial planning firm.

Sean: Yes. People are obnoxious to marketing brochures.

Joshua Sheats: They are.

Sean: There's no do-over

Joshua Sheats: Exactly. There's no do over and it’s not like you're working with someone who doesn't question like, “Of course, I've got enough money. I'm paying you to get me maximum performance. I’m paying you to save me the most money” like you get when you get into ultra high net worth market place. So where did this How To Go Independent project come from?

Sean: Well, that’s a great question. So I spent a lot of the seven years before I went independent at those two employee firms. I spent a lot of that time kind of kicking around the idea so there was a couple years when I moved from one to the other. I was focused more on the mechanics of the transition. That’s pretty intense when you go through that and then the market didn’t help but I was kind of with the idea of once I’d heard about the business model, which is pretty early on, again from knocking on doors I met some of the best contacts for business, actually doing that as much as I met potential clients actually. So I started kind of talking to other advisors that already had the independent model setup and I randomly call someone or drop in her office down here and there. And so I built this almost ongoing research project and once I was ready to pull the trigger I accelerated that and kind of double-checked a lot. It was very much a trust but verified situation so I think recruiters and anybody that’s helping you has a financial setup too. That’s great but get me a random sample as well to backup the data.

So I did a lot of that. I think I probably talked to fifteen to eighteen advisors that were affiliated with the firm I'm now affiliated with, which is one of the biggest independent broker dealer and so I kind of verified, it seems like everything that I’m hearing kind of work for me. So I pull the trigger in like 2009 September third and I kind of felt like it was a let down after I moved over my clients successfully. I was able to retain about 80% of my revenue stream and then I realized most people were not digging in quite as much in terms of that research or they weren’t as far down the road. So long story short or shorter, I ended up building a network of advisors in the next year and a half or so, either that were already at this firm and are kind of on their own and I went or did I knew from other places (the other two places) or from networking and sort of helped them move over. So I had this supervisory license like a lot of us do that are independent ‘cause the old model, like two or three years ago, at this place, this firm I’m affiliated with that’s kind of the clearing house almost like Fidelity or Schwab would be.

The model was a solo advisor having a supervisory license and then they would kind of do the oversight once a year. So a lot of people had these solo individual shops but I found that some sense of community will be valuable and a lot of people said that but someone had to pull it together. So I did some of that and it was successful and then a couple years after, got some momentum part with two other guys and continue to recruit people and kind of share the gospel of independence if you will and really enjoyed it and we’ve had some great success and we’re proud of that and then I got to this another point where I was kind of like, “Well, that was fun but now what?” Because growing it is more of a grind to me than starting it and so I realized I love the idea of, “Hey if you can get out of xyz Firm and setup your own shop I get to fire up the idea for you even if you're not going to be with us (my network of advisors) or even with our firm (the broader firm).” So I thought this would be a good way to scratch that itch and just write about it. The podcast kind of came and I realized, I think like you said, audio is easier for me.

My problem is streamline and probably the amount of content, just like you’ve talked about, but I think in your case it works well. So you're my hero in that respect. So anyways, it was out of the passion of talking about independence and sharing the different ideas and all the little ins and outs of it. I started to interview some of my fellow advisors ‘cause that’s easy to do. We all have our own story about how we got here. I enjoy that as well so I'm still kind of exploring where this will go but it’s a blast.

Joshua Sheats: Have you talked through the different models in the financial advisory business ‘cause you've been in (I would count) two of them -- you’ve been in the wirehouse model, you’ve been in the independent model (‘cause both Edward Jones and Morgan Stanley would fall more into that wirehouse classification).

Sean: Right.

Joshua Sheats: I came from the insurance company model, I know insurance companies hate it when they call them insurance companies but that’s a good/accurate thing where insurance is a cornerstone and I was moving in the direction, I’d file the paperwork to start a pure registered investment advisory firm. So explain the background of these words -- wirehouse, insurance company, independent, registered investment advisory firm -- what do those mean? Explain it for a layperson.

Sean: Sure. I’m happy to and I would say feel free to correct me if I stray and talk about the insurance-based universe ‘cause I’m not as well versed certainly as you are or like I have a business partner who came from that world -- he’s my expert when I need to know something specific. So what I look at the world is there's a couple different ways you can classify an organization in our business. The simplest is that I kind of came to understand first was employee or not employee, right. So there's probably some in-between like some, if I'm not mistaken, some parts of the Northwestern mutual model and others, they're kind of in-between, they’re semi or more like an independent but there's some employee type franchising arrangements but my first goal was let me learn about this independent thing and then on the employee side there's all kinds of firm.

The wirehouse term is kind of reserved for the biggest national firms that most people heard of. I was just reading something before we started this, about there’s only four wirehouse firms left so for whatever reason Edward Jones doesn’t get called a wirehouse even though it’s right up there, it’s size wise, it’s probably third or fourth in size, it was always called regional probably ‘cause thirty years ago it was. So the wirehouses Merrill Lynch, Morgan Stanley, UBS, Wells Fargo -- those are the remaining four standing firms. Smith Barney was acquired by Morgan Stanley not too long ago and there were others on the past but those are big name firms that are I guess now owned by banks. So that’s the big brand name firm.

Joshua Sheats: Pause a second and explain what the compensation model is.

Sean: Sure.

Joshua Sheats: Pick one of those firms that you know and let's say someone wanted to get in as a financial advisor, how do the initial contracts work? What is the compensation model in the early years when working with the wirehouse?

Sean: Gotcha. You have some sort of salary for -- it’s been awhile for me -- probably let's call it two years, maybe shorter, maybe slightly longer. If you can find a particular deal, those are evolving a little bit but generally I think they’re still around two years of salary. Sometimes as the clients as you get a little bit more intimate, (again, I'm also talking about like you talked about in the episode about the young physician’s question) this is assuming you’re kind of building your practice on your own, there’s an increasing team approach but this is assuming you’re kind of a standalone “I’m going to build my practice for me within the confines of this big firm.” So you get a salary of some sort, usually not substantial especially if you’re a mid career professional. I was twenty-six when I signed on. It was fine. I was coming out of the army. My wife was a teacher. It was fine for me to have at least some steady income.

Joshua Sheats: And by substantial, I’ll say around here, my guess with friends that have gone through this, I would guess that depending on your qualifications, depending on your experience because these are usually individually negotiated within a range but I'd say you can negotiate anywhere from fifty to call it ninety gram of salary. I had some friends that have started at seventy-five with some of the wirehouses, things like that. Does that seem about like in the Dallas area?

Sean: Yup. I think that’s very reasonable. Probably that’s a little bit of an inflation when I started but forget time flies and prices do go up and so that’s a very reasonable range and then depending on the situation, like you would expect the higher salary you may or may not get as much but there's always going to be some. Just do it nature of the beast.

Joshua Sheats: And to clarify also, that salary range, this is not maybe recruited as a financial advisor with $100,000,000 of assets on the management and three hundred clients. This is me coming in and I'm saying, “Hey please I'd like a job. You're going to send me to school, maybe get my Series 7 and basically I need to look on paper. I need to look sharp. I’ve got a good academic ability. I need to demonstrate some proficiency with people skills. I need to convince you that I'm going to be effective with sales. I’m going to take some personality tests” and things like that and then assuming that I’ve checked the boxes and you’ve checked the boxes then with no clients and possibly even with no experience (although experience is always helpful in some regard), we can negotiate something where you're going to put me on a salary for the first couple of years to help me pay my rent while I go and build the actual business by bringing in new clients.

Sean: Exactly, starting pretty much from scratch. It’s not a bad gig when you consider all that in terms of the training depending on the firm and the potentials, the brand name you’ve got behind you and the resources so it sounds pretty attractive. You got me sold with that description.

Joshua Sheats: It’s a big benefit.

Sean: Yeah.

Joshua Sheats: And let me also talk a little bit about the team versus employee model, excuse me, versus individual model. In the example I illustrated, I come to the wirehouse and I say, “Hey, listen. I want you guys to hire me. I’m attractive on paper and now you're putting behind me, we negotiate $60,000 starting salary for the first year and the second year I’m going to start to pick up income from my accounts and so that’s going to go down and the third year it’s going to be all based upon my practice.” The benefit of this model is I can begin with a high degree of independence with regard in what I do in my time.

There's no independence as far as not being able to work but I'm going to be held accountable more for my results than being managed on minute by minute basis. And the reason why the wirehouses need to provide a salary and a base to get started is because the sales cycle of bringing in investment accounts and investment clients is much longer than the sales cycle, for example where I started with the insurance, it would be an unusual situation where I go out I meet somebody, “Hey I'm a financial advisor. We do financial planning over the course of a few weeks, a month or two” and then all of us sudden just boom! They're ready to hand over and transfer $2,000,000 of assets. Does it happen? It can happen but it's much more usual that in the nurturing of the relationship, which is the primary way that many people search for financial advisors is that it’s based upon the selling of the relationship. It’ll be much more usual for that process to take some time.

So it’s going to take a couple of years, a lot of prospecting work, a lot of knocking on doors, both literally if you’re working with Edward jones or proverbially speaking, metaphorically speaking, a lot of knocking on doors to start to build those relationships. Benefit is it’s my business and so if I can figure out how to make the connections to the people with a million dollar accounts and if I can figure out how to nurture those relationships, this will be an extremely valuable lucrative business for me but during those first establishment period I need to get a salary. Now, to contrast that with the team model, in the team model, I came in and I have no experience as a financial advisor. I don’t have any licenses. I would agree to come and let’s pretend Sean is here with the team. Sean has twenty years of experience. He’s a senior advisor. He’s got a business partner with thirty years of experience. So both of these guys are working together. You have a junior partner with five years of experience and you’re bringing me on and my primary work is going to be largely administrative but there's going to be a component of technical financial work associated with it. So I'm going to begin in this model by calling and setting appointments for an annual review or a quarterly review for my advisors/clients. I’m going to take care of filling out the wire tickets or whatever the modern equivalent transforms to be over the coming years and I'm going to take securities/trades.

I’m going to basically be in the office for a regular work week most of the time so that my advisor can be out playing golf with the prospective clients. So I'm going to be in the office which limit some of my independence but then the opportunity is much more stable. I'm just responsible for doing administrative work and it’s technical work at some degree I need to be licensed and the opportunity is if I go on Tuesday night and Thursday night to some networking event, the chamber of commerce and I can start to develop some clients then I can start to move up or if I can demonstrate my expertise and my ability to work with the firm's existing client base, then I can start the transition into that more out of the administrative function and more into the advisory function. So that would be an example of the team approach -- little bit less risky with regards to the entrepreneurial requirement but a little bit less autonomy because the firm is taking on the risk, not you the advisor. Do you agree, Sean?

Sean: Amen. Yeah. The one thing about the wirehouse model is they have historically been notorious for that team approach and this new younger person usually comes in with some sort of natural network of knowing people there – parents, friends and family, whatever -- and the team will let this person add all these clients to the team and they’re usually getting their top line revenue and then lo and behold if that runs out, “We don’t need you anymore.” And if that person leaves and doesn't stick around in the business guess who keeps the clients? So there’s sort of that, you have to be really careful but that was a very good description and sort of the pros and cons of each approach within those systems.

Joshua Sheats: Yeah, that is definitely an allegation that can be lobbied. Sometimes, fairly, I think there have been very unethical advisors who have done that. They hire somebody simply because of their access to a market and they know they're not going to make it but, “Hey, if they don’t make it then we’ll keep all their clients.” And then sometimes it’s unfairly lobbied but it’s something to be aware of.

Sean: Sure. It gives the hiring team the value and incentive to bring someone on and give them a chance so not everyone maybe is cutout for or there's not a fit or whatever reason. It’s a tough business to get into so that might be a consolation prize, so to speak.

Joshua Sheats: Right. And if you’re starting as a new advisor or as an employee with the salary, there's going to be some specific, very clear financial benchmarks of a number certain of new accounts, a certain number of assets to the firm and if you don’t hit those then either you have to renegotiate your contract or you're going to be fired and out the door. Say you’ve got about a two-year runway where you’ve got to demonstrate your capability and your capacity with actual data because the job that you are being hired for is to bring in new clients. It’s new business in that situation. If you're going to get hired as a technical consultant then you're going to need to be hired either by the home office as some sort of technical consultant or you would need to be hired by a large team specifically as a back office technical expert to work with the existing client base of that team.

Sean: Exactly. You want to be really clear on what the responsibilities are because those of us that have been around awhile, we kind of know instinctively, there's business development responsibilities for most advisors but someone new, looking to come into the business, I know from seeing your audience, questions and comments, I was this way. A lot of us are interested in the technical work and that’s important and it certainly helps you grow the business but that’s not -- most of the wirehouse firms in particular -- they’re not looking for expert CFPs when they come in. They want someone who can help grow their franchise.

Joshua Sheats: Right. And I see two comparisons to draw: first, the same thing happens in my observation I'm not a lawyer nor have ever worked in a firm but I've worked with a number of clients and this seems to be the same exact business practice that happens in the legal field is most people will be hired out of law school as an associate attorney of some kind but if you want to be on the partnership track, the way that you’re going to prove your real value to the firm is partly through your legal knowledge and your legal expertise but largely through your ability to bring in new revenue -- your business development activities and so the transition up from that staff attorney position into a partnership track, you need to be able to sell and bring in new clients.

Now, that may be because if you're international notoriety of practicing in a certain area where you’re the technical expert or it may be simply because you built the connections in your town but in that sense it’s exactly like the financial advisory business that the most valuable skill is always the business development because you can hire the technical expertise at a much lower rate than you can hire the business development. Now, the thing I see changing is the industry was largely influenced and a large lack of formal technical planning preparation. So I didn’t have a degree in financial planning.

I didn’t have a financial certification. Sean, you had a degree from West Point but you but you didn’t have any experience in financial planning. That's changing now because as many colleges are having financial planning degree courses, as college students are coming out in the same way that the accounting schools are expecting their students to sit for the CPA exam even if they can't technically use the license, they still need to be sitting for the exam very closely connected to their graduation. The same thing is happening and that’s one of the things I see is the model that we’ve described thus far isn’t a very comfortable model for somebody who’s already invested four years of their life into studying and developing some financial planning knowledge. That person who's studied for four years is not going to be comfortable with some senior partner who cut their teeth just pounding the phone on a thousand cold calls a day saying, “Listen I don’t care what you want. I don’t care what you’ve got. You need to pick up the phone and do a thousand cold calls a day ‘cause that’s what I did and it still works.” It leads to a very uncomfortable employment situation and that’s why many people are leaving.

Sean: Definitely a culture shift. I mean, I'm chuckling because obviously, as you know, that’s exactly what happens or can happen even if you're not necessarily four-year degree like you or me in the field, if you’re a little more analytically focused early on you can certainly get some prospect. I could be careful ‘cause I’m an old-timer, a little bit more numb but “This is what works so this is what we’re doing.” “Okay.”

Joshua Sheats: So, let's switch and I’ll do the insurance model. I think this is the valuable information and then you will talk about and I’ll get over panted to you on the independent broker dealer and investment advisory firm so you could talk about how these entry plans in the business can work in different functions. So in the insurance model the difference is, for example, I joined Northwestern mutual, I was not paid a salary. Now, to make a distinction, technically, under the Northwestern mutual model and under some other insurance companies as well, for tax purposes you’re labeled as what’s called the statutory employee. So this is a unique little wrinkle where you are not paid a guaranteed salary rather you're paid on commission but you're classified as a statutory employee. You don’t get over time. You don't get anything else.

You just get a statutory employee and what that permits the insurance company to do is to offer group benefits, it permits the insurance company to pay half the employer portion of your employment taxes but you still file your taxes on a schedule C. So the unique little function, unique little wrinkle and it has benefit for both that’s only with regard to insurance business. If you are building an investment practice that will come to you separately under an independent contractor 1099 relationship as well and then for example, when I was with Northwestern mutual, I would file three schedule Cs every year. I’d file a schedule C for my insurance business with Northwestern mutual because that was where the bulk of my compensation was and I was a statutory employee there. I would also file a separate schedule C for all of my 1099 income from all the other companies that I sold insurance for. So I registered with fifteen other companies depending on which company had a better product for a situation. And then I would file a third schedule C for my investment business and that was all as a separate relationship.

You wind up with this weird construct of different entities with the insurance companies. The benefit that the big insurance companies have is by starting with insurance you can get paid upfront commissions and so the sales cycle for an insurance company/business is much shorter than investment business. You might not buy from me. On the third time we visited together, I’m a fresh faced twenty-three year old kid when I started, you might not immediately transfer over a million dollar of assets into my stewardship within a couple months of knowing me but you might very well buy a million dollars of life insurance from me because the confidence that you're placing in that situation is not necessarily into my investment acumen or my professional experience. You're placing your confidence into an insurance company as to what it is they’re going to deliver on their contract and you simply need to be confident that I'm knowledgeable enough to give good accurate advice. But in terms of giving good insurance advice give me a few weeks training just about anybody and I can train just about anybody to give good, competent, useful insurance advice to the general public.

It takes a little more work to give good, competent investment advice. So depending on the company, some companies will have a draw, some companies will have an enhanced commission. So for example, the company that I was with in the beginning, what they do is the first few years they help you make that transition. They give you an enhanced commission schedule which phases out after three, four, five years, something like that -- I think four years maybe, where the enhanced commissions disappear -- that allows your initial business to allow you to pay your rent while you're getting things established and then after a few years you should have been prospecting sufficiently to the point where you’ve got a large inflow of business and revenue coming in to where you can then transition and you can handle it just on the normal commission schedule ‘cause you've got enough, your pipeline is full of enough prospective clients who need insurance work. And so the model that I thought was really valuable was while I'm out prospecting for big fish investment clients, I can also be doing valuable insurance planning work for normal everyday people. And it’s profitable enough if you're an expert with life insurance, disability insurance, long term care insurance, I used to sell health insurance here and there, it’s valuable enough for me to sit at a kitchen table with a teacher and an electrician who have a household income of a $100,000 and she's got a $100,000 and her 43B and he’s got $100,000 and 401(k) at work, well there's no big investment client. You're not going to become a client at a Morgan Stanley or Merrill Lynch under that model but if you need a couple million dollars at term life insurance and some disability insurance for the electrician, then there’s enough.

I can make a thousand dollars commissions there which is enough for me to keep my rent going and I can provide a really valuable service for you and then where you have the business grow over time is if I do a good job from time to time servicing your insurance work then when, fast forward twenty years, your 43B balance has grown from a hundred thousand to half a million and the 401(k) balance has grown and you're getting ready to retire, then I’ll be on your radar screen and by that time I’ll also have studied and learned the most of what I want of how to effectively serve these prospective clients. I’ll already have a relationship established there where I can also help you from the investment perspective. So that was the basic business model that I began in where having insurance first focused and I also bought into the idea that you generally should always do insurance planning first. And I still think that makes a lot of sense.

You start with risk management planning. If you are trying to figure out should I re-allocate my portfolio from a 60/40 to an 80/20-asset allocation? That’ll have some impact on your life but the impact is likely to be small and is likely to be long. It’ll take many years, many decades to experience that impact but if you don't have any life insurance and you die, we can save the life insurance problem with a $50 check to bind the coverage and to put the insurance enforced on a conditional basis. So you should start with the insurance planning ‘cause it’s simple, it’s relatively straightforward and then that leads into the investment business. It worked really well for me and the benefits of that model was from the beginning, although I was statutory employee, I was independent in the sense that I didn’t have to report for where I am at 11:32 on Thursday morning.

If I wanted to be out at lunch for the prospective client at 11:32 or if I wanted to be doing something else at 11:32, I wasn’t accountable for the day-to-day, hour-to-hour tracking of my time. I didn’t have to be there to answer the phone for the senior partner. I was just simply responsible to produce at a certain level and because I didn’t have a salary, that I was just simply paid on commission, I was highly motivated to be busy working to make income and my managing directors didn’t have to worry with beating me over the head because they just didn’t pay me any money if I didn’t make any money. But it worked really nicely where I learned the process of working with people, doing good fact-finding, which is a skill, learning how to get people to articulate their goals, which is a skill. Those things can be built and developed within the insurance context and then along the way I studied, I’ve got my CFP, got credential, etcetera, to where I could go ahead and give that valuable advice. So that was why, when I chose while I was doing my research in the business, that was why I chose the insurance company prospective ‘cause I believe that I could be successful on that model. I didn’t believe that Joshua Sheats -- no experience in financial planning, baby-faced twenty-three year old -- I didn’t believe that I could be successful in the million dollars of account. I didn’t have the network. I didn’t have experience. I just didn’t believe I could be successful in that model so I chose something different. I know others could be successful in that. I didn’t believe it so I didn’t pursue that model.

Sean: I think one thing that appealed to me about Edward Jones at the time was they didn’t really have any account minimums and for the similar range you just described, the repetitions of helping people and getting to understand them and understanding when they tell you one thing what do they really mean or what is the follow up question, all these things ingrained to me now, ingrained in you now. The repetitions of learning that and in life insurance sales is a great way to do that and by the way help a lot of people and sidebar, everyone listen and half of this or more probably knew life insurance. If something happens to you and people are depending on you for income, it takes a lot of money to replace it. If you're like Joshua or me and have a lot of years earning in front of you and some little people that depend on you at home. So that’s a commercial for getting more somewhere.

Joshua Sheats: Absolutely, get life insurance get, disability insurance. The dollar outlay is so small, it’s so insignificant as compared to the potential impact and when you compare, we drag our feet, we drag our feet, we drag our feet, but one of my biggest frustrations, Sean, is because the world of investments is so much more seductive, it’s so flashy, it’s so attractive, majority of people who are older, life insurance agents joke that they never knew they were in life insurance, they get recruited and then all of a sudden they figure out, “Wait a second, I was hired to sell life insurance. Well, okay. You pay me, I’ll do it.” This was a joke but it was funny because it was based in truth. People didn’t even realize, “Oh I'm selling life insurance” but since the integration of the business models for now, we all do everything. If you work for Morgan Stanley today, you’re an employee of a bank. That’s effectively what you are -- you're owned by a bank. If you’re working for a large company that is owned by a bank -- I won't say anything about Morgan Stanley -- but if you're working for this type of company, while you're out collecting your million dollar accounts which is the goal, you're also expected to prospect for credit card referrals, for banking relationships, for mortgages, you’re expected to report a certain number of those up your chain of management so the banking specialist can call.

And oh, by the way, you also need to be taking attention to the insurance and so you're expected to be paying attention to all these things. No different with me in the insurance model, the only difference was with the insurance company I didn’t have any banking incentives but you're out prospecting for insurance clients and simultaneously you're prospecting for investing clients, you're prospecting for group benefits clients and you’re keeping your ears open to solve the problem. And same thing, your banker sells insurance and investment products.

They got the investment specialist right there. Now, is there any problem with this? There's not fundamentally a problem. People usually like if you’ve been treated well at an institution or with a provider. You’re going to want and if that person is competent enough in the areas, to simplify your life you would just be doing business with the people that know you. So it is a big benefit to the customer to have things consolidated as long as good professional competent advice and quality well-designed products are being offered. So it’s not a bad thing but the bad thing from the perspective of the provider is who I think gets short shrift in the whole thing is the insurance agent and my observation is that many people who come (you’ve come, Sean) who are financial advisors, number one, they never develop an expertise in insurance. For example, I had a friend of mine who was with a large wirehouse for many years, started independent, went to a wirehouse and is now back independent but he said, “You know I never could sell disability insurance. I became an expert at selling disability insurance ‘cause I had to.”

And when I look at the impact, again, of adjusting the portfolio or switching form this fun company in terms of impact, oh it might be an impact. But you compare that to the impact of having disability insurance when you get to save versus not, I’ll maintain everyday that the insurance is more important. So because insurance tends to be more of a sale, where you have to convince somebody to do it, you don’t really have to convince somebody it’s a good idea to invest but you have to convince somebody that it’s a good idea to buy insurance and you have to convince somebody they should start spending money out of their pocket, that they will likely never recoup -- that's a sale, it’s not a consultative thing. And most of us, we don’t love to do strong selling like that; we'd rather be perceived as the expert. We don’t love to do the same repetitive thing over and over again and I just get really concerned about the laws of great insurance agents because hey, if you're a financial advisor and you recommend you need some twenty-year level term insurance, fine, that works. But when you get in a more sophisticated insurance planning situations, you need somebody who’s an expert insurance agent.

So, sorry for the rant but it’s just, I get really concerned about the decline of the value of an insurance and I have often thought I couldn’t do this at twenty-three ‘cause I wasn't confident enough and I wanted to be on the sexy side of the business. I wanted to be doing the investments. Now, with what I know, I could happily go back and I could set up a very effective, successful business where I only did insurance work and I could be confident about the value of it. Now, there would be disadvantages because insurance practices tend to fall apart, tend to age out because you buy insurance at the early course of your career and in the back end of your career you tend to become more self-insured. That’s why there's a natural growth, I think, between starting with insurance, moving into investments because that’s what happening with your clients -- they’re insuring the stuff they can't afford to lose (their income, their life, etcetera) but then once they build money, they don’t need so much insurance. So that's the downside to it but there is a huge value for just insurance agents who are competent, who are knowledgeable, and who are experienced. Rant over but I get concerned about the laws.

Sean: Sure. I think it’s hard enough selling retirement planning sometimes -- something you hope happens far off in the future for some people but selling something you hope never happens, and this terrible think about, includes you being dead, that’s not always the easiest. Our brains are not necessarily built to understand risk management and by law we’re forced to have auto insurance and pretty much forced if you have a mortgage and even if you don’t, most people still have other insurance but life insurance is a lot more in the table really than either of those. So, yeah, I'm with you. And what's interesting about the life insurance agent per se is if you're a financial planner or financial advisor and you work and then somebody get that twenty-year term more than someone a lot of times has to be the accountability for that client or prospect to make sure it gets done, right? And when you have a commission instead of compensation, that’s a good pay. You’re more likely to help them do what they know is right so that’s, I think, the whole trend where commissions are bad thing. I'm summarizing and asterisks disclaim where there but that’s a little bit slippery ‘cause a lot of fee-only advisors, they don’t take commissions including for life insurance so therefore, they don’t have the incentive and sometimes incentives are a very good thing. I’m with you.

Joshua Sheats: So let's talk about that after you go ahead and explain RIA and independent model like you're involved with.

Sean: Sure. So the independent world, so to speak, if you're looking as I was (for six or seven years) at the different options, there are two main channels that I’m kind of really familiar with and I'll speak on. One would be what you would call the independent broker dealer space. So, again, like the firm I'm affiliated with right now, looks and smells in terms of what we can offer a lot like the other two firms I worked for -- same/similar compliance, same regulators, same SIPC coverage, these different space save their own place, same regulatory environment. And where broker dealer comes from, I think, back they still do it but the one I'm affiliated with really doesn’t do this so it’s kind of misnomer but the big wirehouse firms also have an investment banking division and trading arm so that’s what got them in trouble in 2008 crash trading on their own account, so to speak, so the firms are gone now. Leverage is not their balance sheet thirty to one or more. It doesn’t take much to go wrong at thirty to one leverage to go to zero. So that’s what I would call and I’m familiar with, the traditional firm. You can offer both advisory or fee-based options and charge assets but under management basis.

So if your account goes up, we get paid more. If it goes down, we don’t make quite as much so we’re kind of on the same side of the table. You pay somewhere in the neighborhood of usually one to one and a half percent of assets under management, that's probably the 80% range there for most people. And then you also have what some people would call a more pure form of independence -- the RIA (Registered Investment Advisor) form. So the difference there is on the broker dealer side, you can do and again, this gets (Joshua, you know this) more complicated than you’d think is possible but I’ll come back to that part.

The RIA is only the advisory model. You only have the assets under management management. You do not have any commissions involved. So it’s very simple, very clean from that perspective. If you were to start from scratch, I think most people will grab a take at this model because the regulatory environment is a little bit simpler not necessarily because there's less going on, but I think because these laws were written in 1934 - 1940 -- have the most current laws really that for the most part the framework of these entities are regulated by. So keep that in mind. The Registered Investment Advisors (RIA), it’s just a little bit simpler -- you’re regulated by the SCC; whereas the broker dealer world is regulated by something called FINRA (Financial Industry Regulatory Authority) but also there’s some oversight from SCC so there's a lot of cops on the beat. Interesting. The RIA has a high standard of care in terms of legality, which is often something that folks say that’s the only way to go or point to, interestingly from exception to prove the rule burning made of for example, all the best stuff he did was on the RIA side ‘cause the regulators obviously weren't doing what they were supposed to. He had both kinds of business but all this basically stealing of money was happening on the RIA side. So that said, you have a fiduciary responsibility on the RIA side while there's a more cryptic suitability requirement on the broker dealer side, although they're both quite cryptic when it comes down to it. I'm not sure, that’ll probably be on the scope of our conversation but when you complicate things you can also have what I'm involved with -- a hybrid model. In other words, I have a broker dealer affiliation and I, along with two partners have our own RIA.

So we have the ability to do life insurance is an example through the broker dealer or other outside investment insurance companies. We can do a college planning through a 529, for whatever reason typically or not they’re harder to deal on the advisory accounts. There’s one off situations where an account is not going to be traded months, something that’s owned -- grandma stocks for a long time, they're not really going to trade it so we are probably going to charge an asset-based fee so we might have a brokerage account and even someone who’s really about the fee-based advisory world being the best way to go, sometimes there are times when it’s just more convenient if you're going to serve the needs of your clients to have both the options. So those are the big channels. Now, the RIA space has grown extremely quickly lately. I think that’s where most of the new business goes to. Again, like a lot of industries, if you have legacy cost and structures and just pure inertia involved, you're going to have the old way but new entrants are going to look that way and go, “Why would I do it that way? That’s crazy.” So there's a lot more flexibility if you’re going to have a media presence like Joshua, you talked about recently. It’s a lot easier to do in the RIA side for whatever reason, there’s less regulation. Regulations is may be the wrong way to say it but as long as you don’t talk about specific products..

Joshua Sheats: More common sense regulation. Put it that way.

Sean: Yeah. For now.

Joshua Sheats: Yeah, which I’ll ask you about the fiduciary stuff at the end.

Sean: So those are the main channels. And then within those models, I have a couple employees that work for me so in the independent world, each owner of the firm or owners, obviously is going to develop their practice. There are plenty of solos with no assistant. There's lots of what you would call a sample practice with four or five or ten partners that have built an empire and have a nice team of people that deserve their clients and help them achieve their goals. Within those, you various firm structures but the main difference is in those models, I or people in my kind of model can create those structures how they see fit. We can setup the compensation, we can develop partnership agreements, we develop the vision for the business -- very little of that in the wirehouse. Yeah, you can create a team but there’s not a lot of elbow rims. Same thing, I think, goes for insurance companies based on what you said, Joshua, what I understand otherwise, just not a lot of movement. So the independent world in general, there are different ways to go about it, if you're starting from scratch or starting a side business, the RIA, if you just want to get pay fee for service (more of a consulting arrangements), an RIA is a very straightforward way to do that whereas the broker dealer is not. It’s a harder way to get there but you can offer more stuff. I guess it’s the best way to simplify it.

Joshua Sheats: And these words by the way, if any listener is confused about the words, you have good reason to be. Those of us who are advisors are often confused about the words. I was a financial advisor for a very -- I don’t remember how long -- before I finally understood that fee-only was not referring to the fact that somebody only charge hourly fees. For whatever reason and this is to my own shame, I was in the business for a couple of years and finally I said, “Wait a second, fee only, like they're actually charging fees on investments. I thought fee only was only fees.”

Sean: I wondered why at that first I worked with/for, the title at the time was investment representative and I thought, “How can these other guys have fun as financial advisors? That sounds cooler, sexier.” Like you say, investment representative sounds like I’m selling concrete or something, which is a good business I'm sure. But I was looking for financial advice where it turns out I didn’t have the right licenses and like you said about no one would explain -- these licenses you have here, they’re really just security sales people license, you’re not legally supposed to give advice. “Huh, wait a minute, what?”

Joshua Sheats: Right.

Sean: So that was the beginning of my exploring the world. That’s interesting that I didn’t know that.

Joshua Sheats: Mine was the same. My first business card said financial representative and then later more licensing I said financial advisor and then I was intending to moving to the third different model, different practice model, different entity, etcetera that was going to be called Wealth Management Advisor under the firm I was with but we used to have this ridiculous language. Maybe you had, too but we had the two hats language where we would have to say, “Okay, now I’m going to put on my financial advisor hat and I'm going to give you this financial plan and we're going to talk about this” and “Okay, now at this point/time I’m going to put on my salesperson hat and I'm going to sell you this insurance policy but I’m doing this under the context of being a salesperson and selling you an insurance policy as financial advisor.” It’s just stupid. It’s absolutely stupid.

Sean: It’s insanity. It really is.

Joshua Sheats: And the problem is, I can’t fault the president of xyz Major Corporation or the CEO because it’s their dealing with the industry legislation as it is. I just think it’s absurd and if I were in their shoes I would have to do it exactly what they're doing because you have to protect the interest of your stockholders or your policy owners depending on how your company is structured. You’ve got to protect their interests but being out on the street, it’s so..

Sean: It’s a tough place to be and as you know the only well-rounded is just to always act like you're doing what's right for people and explain why you're recommending things but then you sort of, getting compliance approval, if you were tried for, “Yeah, I'm doing this life insurance policy or this brokerage account that involves transaction cost but I'm only recommending stuff that’s in your best interest.” You think that’s pretty the course and it should be and I think you and I would have gone about business that way but unfortunately, the legal background, I guess when worse get involved and if things get.. I don’t know.

Joshua Sheats: The only way to succeed long-term is what you said, just try to do your own best interest. Just simply try to treat every situation and act what's in the best interest of that situation ‘cause otherwise you get so lost and I came to the conclusion that I’ll do my best to follow the law but the only thing I can do is just simply say, “Just do what you would do if it were you” and that’s the only stand that that can be based on because sometimes you're going to abuse any system but then sometimes things that look like abused aren’t and it's actually a really important idea. Sometimes, funneling money out of an investment account and funneling it into an insurance policy is absolutely what somebody should do and sometimes that’s an abuse and so it’s very difficult to know what to do. I know from me, coming on the practices, and then we’ll wrap up here, Sean, but on the different models. So when I left the insurance world, I filed the paperwork for an RIA, it never got to the point of being fully approved because I pulled it before that was the case but I was in the process of filing the RIA.

I wasn't particularly happy about it. I didn't want to be necessarily under the fee-only umbrella ‘cause I don’t believe that if you're only fee-only, I think you lose out on the ability to serve clients with some very important things simply because of the regulation but the reason I was pursuing the RIA model was I had the most liberal media restriction. I had the ability to control which things I did or didn’t do and to allow myself to still do the podcast and then I figured, “Well I'll jump on the marketing of the fee-only” and that’s what's happening is because of the problems of the financial advisor business, then now, people are latching on to the marketing of fee-only as being the go-to thing and they don’t realize some of the disadvantages of being fee-only. And I said, “Well, I’ll at least ride the marketing for this. I’ll take some of the media articles. I’ll get some people who are looking for a fee-only advisor and I can still do the media and I’ll deal with the backside.”

Now, if I hadn’t at that time been trying to build Radical Personal Finance the media, I would never just wanted to be a financial advisor, never wanted to stay where I was ‘cause I had enough independence and autonomy and I could deal with most of the things that I didn’t like except for the media. I could deal with those things in a straightforward way or I would've gone independent because I think you need to have the ability to serve the clients in all of their situations very specifically and there are times at which you need to be able to sell insurance to solve that client's need and you need to be able to have both of those things to really be the most well-rounded, appropriate prospective. So I would’ve gone the independent model with a hybrid approach. I would’ve probably established an RIA and I would’ve gone ahead and had the brokerage relationship with independent broker of some kind because I feel like you need to have the capacity for both of those things. That was where I came to.

Sean: Yeah, I think a lot of times we minimize if it’s a 90/10 split between someone's practice. That 10% doesn’t sound important and it may not be from a revenue standpoint but that’s not really the point. That 10% might be a big inconvenience for your clients and again that’s a balance you have to figure out from a business model standpoint and client service. Your client understands, in most cases, if we say, “Hey, we’re not doing this line of business” but you hate to send them away even if it’s to a hand selected third party because not everybody's built the practice this way but a lot of people, it’s simplicity like, “I go to Sean for my question something about money.” That’s a lot of trust and confidence and you hate the formality even if it’s on the doctrine. I'm just prescribing that you go to the different firm to see. People get used to the, “Hey take care of it for me. I don’t have to spend the energy to say if you're trying to host me or not.” I take that and I know you did. It’s a badge of honor to have that.

Joshua Sheats: Yeah, absolutely. It’s so valuable. If you only have the hammer, everything looks like a nail and that’s been applied in the insurance world. If you only sell insurance, then everything looks like a whole life insurance sale. But it also have been applied in the investment world, if you only have a mutual fund to sell, then everything looks like a mutual fund sale. And I feel the strength is to have a full tool belt and yes, you might only use this specialized tool, you might only use a tap and die set once or twice a year but when you need to tap a hole, that’s what you need and as financial advisors, if we can arrange something where we have access to all the tools, that’s going to be really valuable. And then I think if people are looking for practice model, I would say you gotta get very clear on what you want. It’s very different if I want to be a solo practitioner or just a solo practitioner with a virtual assistant. I want to do all my work virtually. That was the other thing for me is insurance paperwork was very time-consuming to do and I decided I didn’t want any longer take care of that process and I didn't want to hire it done. So I was s willing to walk away from the insurance business because I didn’t want to do the time-consuming work myself nor did I want to hire it done. So that was another thing in favor while I was willing to go to the RIA but if you want to just do a solo thing, you can do a solo thing.

If you want to build the next (what’s the name of the guy, that big financial advisor?) Ric Edelman financial, that’s going to point you on a very different direction. If you want to build the next Sean Kernan practice, that’s going to be very different. You’ve got to build these things. You’ve got to first get clear on the vision and then the appropriate structure will reveal itself. If you just want to do hourly-based planning where people pay you strict hourly fee for advice, you don't sell any products, you need an RIA. It’s very simple so once you get clear as with anything on the outcome, then it means, we’ll get there. So, Sean, you got the website, you’re writing some on this, trying to help advisors have some knowledge, doing the podcast there, anything else that you’d like to share as we start to wrap up before I ask you the final question for today?

Sean: No, I think you and I could probably fill up many hours of technical discussion if we were inclined to but we should probably wrap it up. One thing I will say kind of as a plug for what you do, Joshua, I’ve used a couple of your episodes as technical explanations for clients. I think any advisors listening or want to be advisors, when I started listening to Joshua Sheats I thought, “Man this is great. This is like another resource. I can send the link to a particular episode on these technical topics.” And Joshua spend a lot of time digging in and explaining it thoroughly, a lot better than I ever could, and again, you always have to have the disclaimer that stuff changes but I would say leverage is his content. It’s a great resource and support them if you can with the patron program if you do that. What you've done is a great thing for advisors and for end-users but I think for the final incline a lot of us, they’re still going to want someone to help them get it done because a lot of this stuff is not intuitive.

Joshua Sheats: It’s not. You need that application. I appreciate the compliment, it’s been one of my biggest frustrations over past months as I haven't been able to create as much technical content as I’ve wanted and what my dream in the future is I’d like to be able to number one, create technical content but I almost want to create the layperson’s guide and then the deeply-interested guide. I don’t ever want to create the advisor guide -- someone else can do that. There are a lot of great people out there creating CFP education stuff but I want to create the simple ten-minute presentation on a topic and then create the hour-long presentation on the topic as tools for advisors. It’s a really daunting project to figure out how to do it but I'm getting better at it. But that was always one of my major things as I create the show that I wish existed when I was an advisor because as an advisor, client asks you for details on this type of strategy or this type of product -- ETS versus mutual fund, stocks versus bonds, etcetera -- and to start, you've got an hour on your schedule to meet with this prospective client, this is one of the twelve meetings this week that you're going to have plus all the other prep work and what not to fill up your fifty-hour a week. You can’t start with the basics of, “Okay, let's talk about a paper asset versus a real asset. Let's talk about stocks. A stock is a discount and value and the future income from the company.” You can't start there. And so it’s really frustrating because you’ve got to give a ten-minute explanation but you know the person’s interested and they need something more. So, I appreciate the compliment.

Sean: Yeah, I’ll just say keep it up, we appreciate it.

Joshua Sheats: Final question, Sean. A bunch of people have been asking my thoughts on the proposed fiduciary legislation coming out of the regulators and I haven’t particularly talked about it yet but I'm interested if I ask you, again, we're sitting here over a cup of coffee. So, Sean, what do you think about this new proposed fiduciary rule coming out of the regulators? How would you respond to that?

Sean: Well, I think it’s like a lot of laws. It’s well intended in a lot of ways. It hasn’t quite been finalized, I keep hearing that maybe this month but I'm getting a little skeptical since as we record this there's not much time left. It sounds great as a headline that your advisor should be required to put your interest first. I think we agree with that. How do you define that though? You do a great job, Joshua, you know the second and third questions -- what about this? What about that? And then sort of one of the assumptions that seem to be built in this regulation is that cheaper is always better. And I understand that and if there are two things that are exactly the same -- should there be some legal requirement to pick the less expensive form? Probably. But that’s really the case so I reserve judgment till I hear the final thing. I have some recurring revenue on the brokerage side that I found that people don’t really care as long as they understand how they're paying. They don’t care so much about if it’s a commission to an agent or if it's a flat fee or if it’s a combination of the two. Like when I go to the auto mechanic, I’m not like a physically handy guy, like when you said something after hammer, you lost me whatever you were talking about. I wouldn’t use that once or twice a year, that’s for sure.

So I get a little nervous of “Hey, commissions are bad.” I think it’s cleaner or at least simpler. Cleaner is probably the wrong word. Simpler model to have more, “Hey, it’s assets or management but again, I saw this highly respected firm on a webinar recently and they said, “Well, we don’t do commission stuff just because we’re worried about even if it’s the right thing, we’re referred out.” So if we do it ourselves, there might be a temptation to use it more often than to justify it. And I’m thinking, yeah, but instead of doing this way, if you're getting a pay on assets under management and you have the opportunity to refer to some product that’s, like you said, the media and fixed annuity can never be the right thing. Sometimes people want security and there's reason something like that would fit and if you don’t refer it out, you could be accused of having instead of to keep the money in house, right? It’s hard to get rid of conflicts of interest completely. We’re all human so I think you have to be very careful about these proclamations that this particular approach is the answer. That makes me nervous.

I think it’s probably a good thing in the end because it weeds out some of the stuff that’s (from my perspective) pretty clearly used because it pays a high commission. And so, in fact, I’ve thought about some of these vehicles that I’ve used from time to time. It might be a competitive advantage if some of those people get weeded out. In other words, they don’t use them as often and so they don’t think they’re great. The idea of levelized compensation makes sense, “Hey, I get paid 1% a year regardless of what you do or where.” But nothing’s perfect. There's no perfect model. The only unconflicted advice would be to give it for free – and that doesn't work very well, that business model.

Joshua Sheats: I’ll attest to that. Giving all your advice away for free is a way to dramatically underperform your capacity.

Sean: At least people don’t complain about that, right, Joshua?

Joshua Sheats: You’d be surprised about what your email inbox looks like.

Sean: I was shocked when I’ve read your email about, “I’ve set all these disclaimers but what about this and this?” That’s why I said, simplifying assumptions, people. So I commend you for taking all that. It makes sense. I mean, in other phases it's very simple. We're going to get rid of this conflicted advice but it’s funny when you say people are losing all this money in their retirement account to that conflicted advice. It’s like you're missing the point, people. The point is you need to save more money. That’s usually the point. So great advice, like you said about allocation, it doesn't work if you don’t suck away enough money. So my clients are not well off, the ones are not really well off not ‘cause of me, I’m helping them stay that way and hopefully I’m improving their life but they saved money, they spent less than they earned or they had a business, they created a wealth, I’m helping them take care of it and helping them worry less. But it’s just funny to me that we're going to worry about a few basic points here and there is going to be the solving all our retirement problems in this country and one of the world for that matter. That’s just not the problem so I understand, again, to me it’s a little bit like a solution in search of a problem but again I also understand the spirit of the law. It’s just the details are going to be, you know, more and more rules don’t necessarily make things better. Having seatbelts doesn't prevent people from driving like morons. That’s the way it goes.

Joshua Sheats: It's certainly challenging and exposed as many times even just the challenge of applying rules across a population. It’s a difficult complicated scenario. We’re still speculating simply because there's no final version of regulation that I have seen so we’re just kind of speculating. We’ll stop it here but I would say the biggest thing is for advisors to just do the right thing. Treat every client like your dad, your mom, your brother, your sister. Ask if this were my brother or sister, what would I tell them to do? And do your best to follow that and it’s going to help you to make the right decision.

Sean: Assuming you have good family relationships.

Joshua Sheats: Exactly. You're exactly right. The other thing I would say for listeners, for consumers, for people who are hiring advisors, number one, you gotta test the mettle of the advisor. You're never going to get a perfect. We’re not infallible judges of human character. I don’t know anyone who has that capacity but I think you can sense the warning signs sometimes and just look for somebody’s heart and then ask lots of questions and the reality is there's no question that you can’t ask a financial advisor. Sean, in your career, how many times have you been asked by somebody how much money you're going to make on a particular transaction?

Sean: Sure.

Joshua Sheats: How many times has it happened?

Sean: Not very many, for sure.

Joshua Sheats: I would say a handful or a few handful.

Sean: Yeah.

Joshua Sheats: And so, like a simple thing like that, if you're worried about that, ask an advisor. How much will you make with option A? How much will you make in option B? I often did this with investment recommendations. On this scenario, my compensation is structured like this -- here’s how much with it will be. On this scenario, my compensation is structured like this -- here’s how it works. You can ask these questions. Ask questions and take charge. I mean, Sean, would you rather work with somebody who asks you the hard questions? Would you rather work with somebody who says, “No, Sean, I trust you.”?

Sean: You need to do the hard work upfront and really build that trust. So you need to ask questions and if you don’t know questions to ask, well, either way, pay very close attention to the questions a potential advisor asks you. That would be my advice and you can ask what you think are dumb questions or you're not sure but just like the how much money will you make? It’s not so much what the answer is, that’s’ good to know but read the body language, read the response. Does it make you feel comfortable? If you do it right, it’s a lot like -- for a lack of better term -- getting married. You hope to have a lifetime relationship with this person, hopefully if you do a good job. If that's what you're looking for because it's such a personal thing and personal finance is personal. So yeah, I'm with you, ask a lot of questions. If someone makes you feel uncomfortable, politely excuse yourself and move on to the next one because there are a lot of people out there that would do a good job for you. You just have to find them. It’s not easy. I think, Joshua, you’ve talked about that challenge. You could start a show called How To Find A Financial Advisor. I’ve debated that myself

Joshua Sheats: Somebody should do it. I always found the best working relationships as an advisor where often with my clients who are the most knowledgeable and who I asked the hardest questions. And now, as a layperson, if I’m going out and hiring a financial advisor, I would actually rather hire somebody who I disagree with on something but who I could trust, but who I ask difficult questions, who could defend their reasons. I’d rather hire somebody that has different opinions of the best product to use or the best fit as long as I could trust their character versus somebody who professes all the right answers but I couldn't get that sense of a straight answer.

Sean: Agreed.

Joshua Sheats: So it’s a challenging situation. Well, Sean, thanks so much for coming on. Tell us about Do you care to share any information on your firm here publicly?

Sean: If anybody is interested in talking to me about specifics or how to double check a question, you can find me at 360 Wealth Management We’re based in Dallas area but the broader firm I’m affiliated with is everywhere. So, again, I’m happy to help if anybody/any listeners have any questions with, “Hey, this person I’m talking to said this or that.” I want to help double check and I’m sure to some degree, maybe on lesser scale, Joshua didn’t probably have the capacity that I do this everyday. In this podcast, I've got about twelve or thirteen episodes up as we record this. So I’m going to continue to record advisors so if you're an advisor and want to hear how people have gone about setting up their own practice and what it looks like on the other end, this is just kind of people that I know and continue to reach out to, various sizes and scale -- the smallest individual solo person to talk to or guy on the most recent episode who helps billion dollar teams escape the wirehouse. So I try to hit it from all angles of the spectrum. I really appreciate you having me on, Joshua. I enjoyed it.