Going From Robo Investment Management To Financial Planning

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

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Full Transcript:

Michael: Welcome, Louis van der Merwe, to the “Financial Advisor Success” podcast.

Louis: Michael, thank you so much for having me.

Michael: I’m really looking forward to the discussion on today’s episode and what I think will be a really interesting, unique perspective. The “Financial Advisor Success” podcast, as we’ve grown it over the years, has attracted a pretty broad international listenership.

We are, I’ll admit, primarily focused in the U.S. Our guests, historically, have been almost all from the U.S. or Canada, but I know there’s a much broader global financial planning movement. We have folks that listen from Australia, from New Zealand, a little bit from India and Japan, we have some groups in Europe, in the UK, and the Netherlands, and a fairly sizable growing listenership in South Africa, which I know has had a very growing, active financial advisor community and now CFP financial planning movement there.

And I know you are based in South Africa, have grown a business in the South African world of financial planning. And so, I’m really excited both just to hear another journey of financial planning. We all carve our own paths as we build firms but, particularly, to understand just what is financial advice and financial planning look like in South Africa? How is this evolving in another country?

Because in the U.S., we’ve got all of our own weird rules and dynamics and regulatory challenges that we’re dealing with, and every country has its own version of this. So, I’m excited just to hear and learn more about what is the evolution of financial advice and financial planning look like in South Africa these days.

How Financial Advice Differs In South Africa [05:27]

Louis: Yeah, Michael, it might surprise you that it’s probably not that dissimilar from what’s happening across the globe. It’s kind of this increase in regulation. It’s our clients being worried about inflation, worried about what’s going on in the markets. Will they have enough to retire?

What has happened, though, is kind of this evolution of compliance and adding the cost to advice. So, independent financial advice in South Africa has gotten more expensive. The group of advisors has grown and, specifically, certified financial planners have grown. I think we’re close to the 5000th mark in South Africa. Yet, it’s still a fairly small part of advisors in total because part of the regulation includes people that sell funeral policies and car insurance.

So that move to professional advice, I think, has been something we’ve seen over the last 10 years, very excited for us to possibly even get to a place where the term financial advisor is regulated. And so that means that someone that maybe works for an insurance agent wouldn’t be able to call themselves a financial planner. They would have to say, “Well, I’m a product agent or product-specific agent.” So that’s quite interesting.

Yet the consumer is still very confused. They don’t always know when should they reach out. Is it only when they need a product? What happens if they actually need advice or guidance? How do you work with someone when the best solution is you to pay down debt? So, I think very similar challenges with what you see across Australia, across the UK, across America, this kind of identification or a branding issue, I guess.

Michael: Yeah, that whole phenomenon of just people that are in the financial advice business that want to distinguish themselves from the folks that are in the product business, to me, is something that has just been rippling around the world for, I guess, the past 20 years, but particularly the past 10 years. And I feel like it was just basically the 2000s where the internet showed up and all of a sudden, people could buy a lot of financial products without necessarily going through an advisor. Before that, you literally couldn’t buy it without someone to sell it to you.

And the rise of the internet and all these different ways to start buying financial products directly from companies by going online has been pushing advisors in most countries to sort of shift and redefine their value proposition like, “Well, yeah, anybody can buy you the stock or bond or mutual fund or insurance policy or whatever it is. I’m going to actually give you a comprehensive financial advice, and my value is in the advice.” And, yeah, ultimately, the advice may mean that there are some things that you need to get. I go to see my doctor and then he prescribes me drugs sometimes and I don’t need to go get my drug prescription, but I don’t see the doctor to buy the drug, I see the doctor to get the medical advice.

And that shift from products to advice around so many countries around the world all seems to be creating the same dynamic where regulators are trying to figure out where do you draw the line between product sales and advice. Both are necessary. Sometimes, I really just want to buy a thing and I just need someone to sell it to me in a reasonably responsible, prudent way. Other times, I really want advice.

But the product side of the industry really likes to hold out as advisors because it tends to make people buy more. The advisor side of the industry really wants to distinguish themselves from the product side of the industry. And so, that just seems to be playing out all over the place.

The UK did its Retail Distribution Review, its RDR reforms, about 10 years ago to try to separate products and advice. India has done a version of this. Australia had their future financial advice reforms, their FOFA reforms, to try to begin doing this. We’ve debated it here in the U.S. for more than a decade now about separating products from advice and should titles be regulated. XYPN filed a petition last year for the SEC to regulate financial planner. The FPA just came out and they said they think financial planners should be regulated as a title as well.

So where is that regulatory evolution in South Africa at this point? Is there a separation of people that sell products from people that are giving advice? In the U.S., we have insurance companies and brokerage firms and RIAs on the advice side. Do you have similar structures there in South Africa?

Louis: Yes, Michael, we do. And I think what most clients would refer to as either are you independent or are you linked to an insurer? And so, what happened in the old days is that you have only a few large insurers. There’s three in South Africa, they each have their own color, so people would distinguish them between the blue or the green or the red one, and everyone knows who that was. And yet, people that bought products with those insurers were very disappointed with the outcome.

And so, when you engage with someone and you maybe tell them you’re financial advisor or financial planner, they’re saying, “Well, which insurer are you working for?” So, there’s been the shift to people saying, “Well, maybe I should try independent advice.” And maybe 10 years ago, that was the main thing, people would seek out independent advice. But yet, that also is not a guarantee for good quality advice. I think the regulation has brought or raised the level of advice that you can receive from these insurance companies because they are not forced to comply.

We have something called TCF as well, which stands for treat the customer fairly. Some might say, “They don’t stipulate fairly well or fairly bad, but the intention is to treat them well.” And for the client to actually know how much are they paying? What are they expected? Is the product fit for the consumer? And that obligations that’s on the insurer or the product house level. So, I think that definitely has made a massive difference.

Michael: So TCF was a newer, more recent standard that came into place?

Louis: Yes, absolutely. So, we had FAIS, so Financial Advisory and Intermediary Services Act, which governs advice. And now we’re on the cusp of going into something called Twin Peaks, where there’s a whole new reform of regulation, but it’s really just shifting things around and very similar.

They expected for commission to be banned, but the regulator came back and said, “You know what? We can’t kill this big life force for a lot of clients or people working in this industry.” So, commission was definitely not banned. And they figured out a way to rather label it so that a client is aware of what type of arrangement they’re getting into.

Michael: So, I understand, if you’re on the insurance company side of the business, you’re linked to the insurance company, you had a TCF standard, Treat Customers Fairly standard, which frankly, sounds pretty similar to… In the U.S., historically, we had what was known as a suitability standard, which was similarly kind of a fair sales standard. You have to sell things that are suitable for the person that you’re selling them to, or don’t sell things that are blatantly unsuitable for them.

So, you need to have some level of knowing your customer and what their goals and circumstances are so that someone else could look at this and at least say, “That was a reasonable thing for the customer to have considered buying.” They may make different choices and you can make some level of not ideal choice, but things that were just clearly unsuitable and inappropriate and not sufficiently explained and disclosed was a banned practice or had legal consequences associated with it. So, it sounds like you’ve had a similar evolution to the sales on the insurance side in South Africa as well.

Louis: Yes, there’s actually just recourse for someone. If an advisor sold a 30-year fixed investment to a 90-year-old, there would be recourse. It’s clearly not fit for their client and there’s a process that they can follow. We also have an ombudsman, which really is a free legal resource to clients to actually protect them and to assist them from claiming from advisors that were negligent or maybe stole some of the money or invested in fraudulent transactions.

Michael: Okay. So, you frame this primarily in the insurance context. In the U.S., at least, we kind of had these as separate channels. They were insurance companies, historically, that increasingly moved towards advice and eventually started selling investments as well. Then there were also just the investments product companies. In our world, it’s mutual fund companies and brokerage firms that sell and distribute investment products. And so, advisors essentially can be linked to an insurance company or linked to an investment company or can be out on the fully independent side as investment advisors.

So, I guess I’m curious, is there such a thing as linked to investment companies there as well as linked to insurance companies there? Or were insurance companies kind of the drivers and, ultimately, they sell everything under their insurance company roots?

Louis: Yeah, you’re spot on. So, what these insurers, some of them are more than 100 years old, they started saying, “Well, the market is shifting into investments, let’s start selling investment products but inside of an insurance wrapper. So, we can still pay insurance commission to the advisor selling it, yet the client can invest in mutual funds or shares.” And so, they’re getting that benefit.

We have a very strong financial system. So, there’s quite a few independent, and when I say independent, it’s asset managers that have built from the ground up, very few of them have their own sales force. So, it’s mainly insurance companies that would have the sales force. The asset managers rely on the insurance companies and independent advisors to distribute and invest in their funds. And once again, there’s a handful that’s taken the bulk of the market.

Michael: Interesting. So, I guess, in your environment, the investment firms didn’t necessarily build their own advisor distribution forces, their own captive groups, the way that existed for some mutual funds and brokerage firms here. The insurance companies already had the advisors, the agents, the distribution force. And so, as mutual funds and asset management grew up, it either got packaged into insurance products or it got sold through insurance agents because that’s just literally were the people were that work out to the public selling.

Louis: Correct. And they make it so lucrative for those people, those agents working for them, by paying them additional commissions and bonuses. And so, we also had, I think it was about 11 years ago, where they brought in the conflict-of-interest policy to say that, in U.S. dollar equivalents, no one can spend more than $100 on people selling their products in terms of incentivizing them.

And so, what happened is, all these overseas trips and bonuses disappeared overnight because the asset managers couldn’t pay for them anymore, unless you are an employee of that insurance business. So, if you’re an employee, those conflict-of-interest policies didn’t matter. So, you could still incentivize people. So, it had this strange effect where it probably did more damage than good.

Michael: Oh, interesting. So, asset managers would try to incentivize sales with bonuses, trips, other classic sales incentives. The regulation came through and limited the conflicts of interests. So, independents then couldn’t get any more because it would be conflicted. But insurance companies could still do it for their own employees, which just means, I guess, they get the dollars from the asset manager and then they do it for their own employees. And ironically, that remains because it’s technically not an incentive from the asset manager anymore. It’s just the insurance company that happens to be compensating their own people in a coincidentally sales incentive manner.

Louis: Correct. It’s part of the sales perks of being part of that company.

How Independent Advice And Its Regulations Are Structured In South Africa [17:28]

Michael: So, how does it work in your version of the independent channel, the independent advice? How does that structure work? How do those regulations work? In the U.S., RIAs are subject to a different set of licensing exams and different set of regulatory standards than the brokerage firms or the insurance companies. So how does it work there for the advisors who are independent and not linked to an insurance company?

Louis: So, here we have one set of license requirements with different types of licenses. So, you would see whenever someone promotes their products, they say, “We’re an authorized financial services provider.” So, every person delivering advice has to have a license and have a license number linked to that. And then you have specific codes. One to give advice on shares, one to give advice on debentures, and I think there’s 22 different ones, one for insurance.

Most advisors cover quite a few of those areas. It might even include things like short-term insurance or medical insurance. Most advisors would cover investments through the form of mutual funds, which in South Africa we call unit trusts or collective investment schemes, and the long-term insurance, which would be kind of your traditional life covers and those kinds of insurance products.

Then you get a second category, which is a Category 2 license, which becomes a discretionary management license. So there, you would be able to make changes to a client’s investment portfolio without their signature. It’s essentially a mandate that you have discretion to manage. And then there’s additional categories for hedge funds, for administrators that would manage this. But it all falls under the same financial services provider category, and you can look up what someone’s license category is.

And so, then they brought in this idea of a compliance officer, either internally or externally. So, what we’re seeing in most businesses, if you’re independent, you would either have an internal or an external compliance officer that would look at those specific license requirements and guide you in terms of how regulation requires you to act. Whereas if you’re in a larger group or working for an insurer, they would do that in-house and so they would apply those regulations quite strictly.

Where with independent practices, you’re almost left on your own, and they say, “Well, we hope that you comply. And every now and again, we’ll come and do an audit.” It’s not structured. You have to report to the authorities, but they come and do a spot check just to see, “Hey, are you doing the things that you say you are doing?”

Michael: Okay. And so, if you’re going to structure this way as an independent, does that mean you can literally just open up your own firm as standalone one-person firm? You may need an external compliance officer to guide you on some of your own licenses. But can you actually build and run a firm down to just opening on your own? Or do you have to affiliate or be part of some other kind of platform to be able to actually run the business?

Louis: No. So, you can be a one-man band as long as you have what’s called a key individual license. In South Africa, it’s basically, are you able to manage, oversee, and run a financial services business? And how they look at that is to say, “Do you have at least one year’s worth of experience?” So that’s the bar. And then you apply to the regulator with a stack of forms, and then maybe four or five months later, you’ll have your license.

And at that point, you will then need to contract with a product house, so an insurance company or an asset manager. In South Africa, there’s quite a few. So, it tends to mean that you have to have licenses and product agreements with each of these companies so that you can assist your client if they have products with that insurance company. There’s a lot of…

Michael: You’re not necessarily selling the products. Well, I guess, there’s, would that a contract back to a product house mean now you may also still be selling their products and charging fees and also getting paid commissions for their products? Or is this more of a, “No, no, I’m giving advice separately, but just I have to be able to literally implement products, so I need some kind of platform just to hold these things.”?

Louis: Yeah. So, when you’re meeting with clients, they tend to almost always have some kind of product. And what we’ve seen at the…it just makes it easier to say, “Well, you know what? We have a code with this company.” It means that, number one, they’ll give us information. They’ll force us to be up to date with what the product entails. And we can link that client to our practice so that we’re included in communication. Sometimes there’s random commission that they pay, but only the product owner would know how they come up with those structures. Yeah, so it’s really allowing you to operate and help that client.

What we’re seeing more and more are these standalone products that don’t intermediate, so they don’t really want to give advisor information. They only want to deal with through the client. That brings a whole new set of complexities because you have to rely on your client to forward you the information, to make any changes, we have to rely on them. So, in the strange space where a lot of clients have legacy products, and then the newer products tend to be either directly with an asset manager, where the fees are much lower, there’s a lot more transparency. And the client can then choose, do they want an advisor linked to that product or not?

Michael: But can the advisor still get linked to a product that was originally standalone and sold direct?

Louis: Yes, so you can…

Michael: Can you get connected to get the information and be able to operate on their behalf?

Louis: You can get connected as long as you have a contract with that insurance company or that product house. Some of them require you to place new business. And so, the regulator really has frowned upon that to say, “Well, you can’t be conditional. You can’t enforce someone to give you new business if that advisor purely works on looking after his existing client base.”

Michael: To me, it sounds kind of similar to the independent channel here in the U.S. Well, most investment products are more rooted in brokerage firms here than in insurance firms, but there’s a subset of platforms that were historically brokerage firms that have become essentially custodial platforms on which all of a client’s investment products are held. So here, it’s companies like Schwab, Fidelity, and Pershing.

So, the independent advisors can get linked to these companies, the clients hold all their investment products on those platforms, the platforms actually arrange all of the relationships and connections to the various asset managers and investment products behind the scenes. So as long as we can get linked to one of those platforms, one of those custodial platforms, and we’re able to see all of the client’s investment stuff in one central place, including even managing it with discretion, if that’s the model that we use.

Louis: Yeah, that financial organization is a very big piece for clients because they tend to not know what they have and where it is because there’s a long list of different products. We have a central place called Strate. This is due to which most advisors have a license to which you type in someone’s ID number, which is similar to their social security number, and it shows you a list of their products that they have with their permission. And so, now you can use that as a starting point to kind of bring in information and start at least knowing what you’re dealing with.

Michael: Interesting. But it sounds like just that centralization and those kind of pipes to connect everything together as it were is not quite as established in South Africa as it is here in the U.S. It’s harder for you just to get linked and connected to all the different investment accounts and holdings out there because either you’ve got to contract with companies one at a time, you may be too small for them to contract with you, they don’t necessarily want to contract with the product houses because the product houses are insurance companies will probably ask for additional fees and cuts to be on their platform.

So, it sounds like your industry is kind of fighting it out between being lower costs and going direct, which is sort of what companies like Vanguard did here in the U.S., and going through intermediated fashions with captive salespeople. Except if you’re an independent, that kind of leaves you in the cold because you’re not linked into a large product company that has the manpower, but you still need to be able to see what’s going on with your clients’ financial lives.

Louis: Michael, I think part of this comes from how the regulator also defines advice in South Africa. So, it’s anything that could lead to the change of an existing financial product or to the sale of a new financial product. So, they still very much see advice and product in the same boat, which I think means that clients also expect you to all also deal with the financial products. There’s very few advisors, if any, that don’t deal with financial products yet to give advice in South Africa.

Michael: Okay. So, do you have the distinction that’s been evolving here in the U.S. between advisors that operate on fees and don’t get product compensation versus the ones that do still operate either primarily or at least partially with product commission compensation? Is that fees versus commission split been a factor in South Africa?

Louis: It has, I think that evolution was similar from commission to assets under management. So, most of the bigger independent practices operate on an asset under management basis because they found that it’s scalable, their clients feel comfortable with it, the clients might not always know how much they’re paying. There is a smaller community of fee-only where people are saying, “I want to charge a fixed fee or monthly retainer.” But in reality, most of them still cover both areas. So well, we have a smaller group of assets under management. We have a smaller client base that pay me commission, and then I have this growing part that pays a fixed fee. Yeah, so it’s in the minority for now.

Michael: Okay. Interesting. So, it sounds similar to just where the U.S. was a number of years ago, where it started that evolution. And well, still, in many advisory firms, they have roots of commission-based work that they’ve done with clients, and continue to receive trails, and may occasionally do new business. But the bulk of what they’re doing now is assets under management fees or subscription fees, or something in that that direction. They’re building more towards advice fee models, but they still have all the commission-based work because they did it historically, and that’s where a lot of their clients were and still are.

Even in the U.S., the folks that are truly standalone, on a fee-only basis, is still a very small minority of the overall number of advisors. Most of us are still affiliated, I guess, linked, in your context, to a brokerage firm or an insurance company. And we may be what here in the U.S. is called dually registered, so we have a brokerage or insurance license and an advisory license. But that means, I think, similar to what you’re describing. You’re doing some of both, you may be growing more in the advisory context, but you haven’t necessarily eliminated the commission-based side of the business that you grew and built and for the first 10, 20, 30 years, depending on how long you’ve been doing it.

Louis: Yeah, we’re very fortunate I think that we are probably five to six years behind in terms of regulation, in terms of advisor technology, in terms of market readiness. So, we can look at developed markets and we can say, “What’s working in Australia? What’s working in the UK? What’s working in the US?” And our regulator does the same. They kind of try and take inspiration from those countries and say, “Okay. This didn’t work there. So, let’s try a slightly different route.”

I think the bottom line is financial services industry and financial advice is very healthy. And it’s evolving in South Africa, probably on par with most other countries and ahead, in fact.

How Developing A Robo-Style Advice Technology Inspired Louis To Launch WealthUp [29:29]

Michael: So, now tell us a bit about your advisory firm. What is your business and what do you do?

Louis: So, Michael, January next year will be the 10-year anniversary of WealthUp. And we’re based in Cape Town in South Africa. And it came about after me and the person that employed me straight out of university, my first boss, brainstormed how we’re going to deliver advice 10 years, 20 years, 30 years from now. And the theme that came up very much was the use of technology, servicing a younger client base.

And so, we thought, at that point, we were a little bit ahead of the curve, robo-advice was going to take over the world. Our clients were going to disintermediate. And we were part of a large auditing firm at that time, and we could see the younger clients of the practice and the younger audit trainees want to do their own thing, yet they got 90%, and then they came to us and said, “Well, which funds do I select? Or how do I structure this investment portfolio?” So, they think that they were doing their own thing, but they weren’t really.

Fast forward a few years, we built a prototype of a kind of robo-advice structure, so their clients could invest directly. And yet, we saw that very few of them took that last step. And interestingly enough, it was mainly older clients, people that were burned with life insurance, that had a very disappointing experience, but they just couldn’t take that last step in terms of investing their retirement funds or making a change.

And so, we use that as a mechanism to bring in clients. And we actually went out and we went to go and see them, and we would meet at their house, maybe even late afternoon, evening. And we’d used to have discussions around, how did they not take those last steps and how can we help them with their financial planning?

And as you build the trust, they slowly but surely start saying, “Actually, and now I understand, I have someone guiding me and someone that can take a little bit more accountability.” And so, that was the early stages of WealthUp. We are now almost 10 years into this business, and we have a team of 6 that serve a relatively small group of families.

Michael: So, I want to make sure I understand the roots and early days of this. Because, again, if we go back 10 years ago, it’s, I guess, literally, it would be 2012, Wealthfront and Betterment have just arrived on the scene, the big buzz is as you put it, Robo-advisor is going to take over the world.

So, if I’m understanding correctly, the original version of your firm was essentially going to be a Robo-advisor in South Africa, “We’re going to build a version of this technology so consumers can leverage the technology to get their own advice and have their own portfolios managed. We want to bring this to South Africa. And that was going to be the model.”

Louis: Absolutely. It was allowing someone to go onto the website, create a very basic profile, do a risk profile to determine how aggressive they want to invest and see if someone will actually take the steps to complete an online application form. That was essentially it. And so, we wanted to create a very low-cost prototype to see if this would work, and very much was not what we expected.

We didn’t get massive volumes, which I think was maybe a marketing problem. We didn’t get young clients of small recurring payments. It was older clients wanting something different. And we had to, even in those early stages, change direction and say, “Well, actually, there’s an opportunity here.” What we set out to build, maybe the markets not ready for it. And maybe advice would mean that we use technology in our business to make our back office more efficient, which, 10 years later, actually, is what most of these Robo-advisors are doing.

Michael: Yeah. Interesting. So, you were aiming to do the South African version of a Robo-advisor and I guess, people just weren’t showing up, not interested to say, “Neat solution. I’m just going to open my account, here’s my life savings as it were.” So, what was the gap? Just what didn’t work, do you think, between what you were expecting, envisioning originally and how it played out in practice? What happened?

Louis: I think the gap was the cost of attracting traffic to a website. Even 10 years ago, it is that typical thing of, you think you build it, and they will come, and yet, crickets, no one showed up. And building a funnel into a financial planning practice and building a financial planning practice that can scale is very different from building one that serve your customer first and create a transformational relationship.

And so, I think that the models were just too far removed from what we were doing day to day. We thought that “Hey, we can build a tech company.” But fortunately, I think we realize that very early that, number one, it’s expensive. And probably your marketing is going to cost a lot, and maybe even your market is not ready for that.

Michael: And I feel like that’s similar to a lot of how it played out here in the U.S. as well. The vision 10 years ago was very similar, if you build it, they will come. Hence, we’re going to make this easy to buy, low-friction version of a low-cost investment platform and expect consumers will just flock to it. And that just didn’t really happen.

To be fair, the companies like Wealthfront and Betterment, they got some very accelerating movement in the mid-2000s as they got to a billion and 2 billion, 3 billion, or 5 billion, and closed it on 10 billion under management. But relative to the U.S. marketplace, which we measure in the tens of trillions of dollars, their market share was just miniscule, tiny. They were getting small fractions of a percent of market share.

I used to joke for most of the time that they weren’t growing like Ric Edelman, who’s just a fairly well-known high-profile advisor here in the U.S. who started his firm 30-plus years ago, and just ran a radio show, attracted clients and built a planning firm for them. Ric Edelman personally grew a planning business with more revenue than Betterment and Wealthfront combined. And he just bootstrapped it with a radio show, not like hundreds of millions of dollars of venture capital or whatever all the Robo-advisors had raised.

And it was this similar sort of realization. The numbers looked big in absolute dollars, but A, they were charging a quarter of the fees of everyone else. So, by actual revenue, their businesses were much, much smaller. And relative to the amount of money that they were raising, these were really small firms and slow growth rates. Because there were advisors that were just bootstrapping with no money that were building bigger businesses than Robo-advisors.

Louis: Yeah, Michael, I think if we had more money at that time, we would probably only learn that later on. So, we would probably have thrown it at, “Oh, let’s spend on advertising and let’s spend on hiring some engineers.” And yeah, maybe it would have looked different. But at that point, we said, “Actually, here’s another opportunity to really just to grow an independent practice.”

We took this business because we created the initial model while we were still employed at this auditing firm, and we pitched it back to the business. They were very interested. But they, unfortunately, didn’t want to pay anything for it. Yeah, so that was kind of a, I’ve found myself at a crossroads where either you give away this thing that we’ve been building or playing around with, or I resign at the age of 24 and start a financial planning practice on my own.

And so, the thinking was, what’s the worst can happen? I go back and live with my parents and find another job. Because when you read biographies and anything that successful entrepreneurs say is that they wish they would have done it earlier. That’s the kind of thing that stuck with me. And it was easy to fail at that point. The odds were stacked against me, but I also had time and the risk was probably the lowest it would ever be in my life.

Michael: So how long did you continue down this to robo-style path before ultimately deciding, “This is not working. This isn’t going to do it.”

Louis: It was quite short. We probably had the website up and running for about four months. And we had a developer that we paid. It was very basic. It was some HTML forms. It would actually just go and populate the PDF documents. Yet, like I said, the traffic that came in was not what we expected. It was actually type of clients that we would want for normal financial planning practice. I guess we just discovered the power of Google at that point.

Michael: On the flip side, to me, there’s something interesting there around the dynamic of building. I’m thinking of the Eric Ries’ Lean Startup-style mentality, which is you build what’s known as the minimum viable product. What is the most basic version of this thing that we can build just to figure out whether how many consumers actually care about it, if they care to pay for it? And look, if a whole bunch of people like it and want to pay for it, it’s pretty straightforward to reinvest or get more dollars or raise capital to get more. But that’s a lot cheaper than raising a bunch of capital building the thing and then finding out, after you spend all the money, that not a lot of people are actually interested in it.

So, it strikes me in that context of you were young in your career and trying to take an entrepreneurial path and saying, “I don’t have a lot of risk here, let’s just go for it.” You did, what to me, is a very positive, low-stakes manner of, “Let’s just get an initial thing out there and see how much interest and momentum there is. If there’s more, we can reinvest and do more.” Instead, what you found out pretty quickly and without spending a huge, huge amount of money was, “Oh, this just doesn’t look the way we expected.”

Louis: Yeah, testing those assumptions, almost treating it as an experiment, which I think now it very much was. I was reading those lean startups and really enjoyed technology. I think in the back of my mind, it was like, “Wow, I’d love to have a tech business,” yet we had to make a decision. Are we a financial planning business or are we a technology business? We definitely can’t be both.

How Louis Launched And Evolved His Practice [39:56]

Michael: So, what comes next? You do this, you decide that model is not working, obviously, still here 10 years later with the business. So, what comes next? What did you pivot to that you started building instead?

Louis: So, at that point, when we started the business, I owned 50%. I still do. And my business partner, Marius, who hired me out of university, he’s turning 64 this year. He owned the other 50%. So, the combo worked quite well. He could fund some of this new business while I try and make a go at it to just see, do we attract older clients? And can we build a financial planning practice from scratch?

So, the business we worked at, at this auditing firm, the shareholders extracted most of the value for them, so they didn’t really want to reinvest in the business. It meant that we had very old computers, still those CRT screens. We didn’t really have a long-term plan because, like they say, “In the long run, we’re all dead.” So, these investors and shareholders had a very short timeframe. And so, when you’re 24, and you can think 30 years ahead, even 20 years, it makes a difference to what you want to take on and what you want to build.

And so, I was fortunate to actually then say, “Okay. Well, how do we turn this into a practice where we can attract clients?” And for the first three years, we had no support staff. So, we use technology to automate as much as possible on the back end. So, we used voice over IP phones, so that actually, you can be anywhere, and the client thinks that they’re phoning an office line, and it’s coming through to your cell phone and vice versa. I remember being on the road one day and a client phoning, thinking that they now through to the office, and I’m sitting somewhere in my office and having a discussion with them. And that turned out to be one of our biggest clients just because I was the only one of three advisors that picked up the phone.

So, the bar was very low to get clients. And so, for the first three years, it was myself and no assistants. And then that auditing firm had a buyout. So, an asset manager actually bought out the shareholding. And my business partner said, “You know what? Actually, this is not for me. I don’t want to work for an asset manager. I’m going to come and join you.” And so, he joined me in the business, still having shareholding and still being actively involved that he was very much committed to the financial planning practice at the auditing firm.

And so, when he joined, I think it boosted that growth rate, where we now have an established advisor, a shareholder, clients are saying, “Well, we actually were drawn towards this newer way of financial advice. We want things to happen quickly.” And so, that meant that most of the clients that you had a very good relationship with followed him. And as you know, it’s a business of relationships.

And so, when he joined, we started adding on staff members as well, purely because the volumes got to a point where it’s necessary to have someone to help you move pieces of paper around. Because in the beginning, I thought, “Well, I’m going to pay someone and half of the day they’re going to be on social media.” So, it’s not going to be necessary to have someone, so we probably hired way too late. But that forced us to invest in the systems and use technology as far as possible to automate things and to run virtually.

Michael: So, help me understand just what the value proposition was. What were you doing for clients who were going to hire the firm for financial advice?

Louis: So, at that point, Michael, it was very much around, “We can build a better investment portfolio than your previous advisor. We’ll drill down into the fees. We’ll help you select a better asset manager. We’ll help you build a better portfolio.” And now, I know that there’s a lot more to financial planning.

And so, that came about when a client asked us, “Who can I speak to for financial planning?” And so, my initial response was, “Well, that’s what we do. How do you not know this?” And actually, just spending a bit of time unpacking why she asked that question made me realize that we actually spend all our time on the clients’ money in the investment portfolio, and they don’t even experience the financial planning piece of it.

So, even though we might think we’re doing financial planning, we’re not labeling it correctly. Clients are not experiencing it as financial planning. They identify us as their money guys, helping them to pick a better portfolio.

And even at that point, I knew that was not a place that, in the longer term, we can compete on. Because, ultimately, if you believe in an efficient market, at some point, you’re going to lose that game, right, picking the best fund manager. Strangely, in South Africa, we have four very large fund managers, in terms of the size of assets that they manage, that have dominated the top quartile of the market. So, you could throw a dart at these fund managers, and your clients could think you’ve done a really good job.

And so, intentionally, we started expanding from that, saying, “Well, what other areas do we need to look at in terms of financial planning so that our clients can actually experience this and say, ‘Well, you were actually helping me plan and not just look after my money.'”?

And that made a shift from kind of rearview mirror, “This is the past performance. This is the asset allocation” to “What’s coming up in your life. What do we need to plan for? What are the life-changing moments? What are the life transitions that’s coming up for you?” And so, that’s kind of forced our conversation to be a little bit more balanced, not just historically and what do we think the market is going to do, more to that kind of locus of control to say, “Well, what do you have control over?” as opposed to, “What’s interesting?”

Michael: So, what was your business model at this point? Are you charging assets under management fees on these portfolios?

Louis: Correct. We had a sliding scale, and we still do, based on the size of your investment, ranging from 100 basis points, so 1%, down to 0.25%. And we apply that to our clients. So, a lot of them were used to paying 1% flat. That was the model that most advisors used. And so, we could compete on fees because we didn’t have large overheads. We could compete with the technology that we used. We employed companies like similar to Morningstar and FE Analytics to almost wow them a little bit with the tools that we have. And it was very valuable because the clients didn’t have this, right?

Only now, looking back, I can say, “Well, what we were doing was not enough.” And that’s part of this evolution and this process of moving forward. So, we weren’t charging for financial planning. We didn’t have the planning fees. We were charging a percentage of assets under management to look after their money. And I think we did a reasonably good job.

Michael: So, what was it that changed in practice to try to make you more financial planning focused or make the conversations more financial planning focused? Was that a change in a fee model, you started charging for the financial planning in the hopes that they would focus on the more and value it more? Was it something else in your process or delivery? How did you make yourself less focused on the portfolios and more focused on the financial planning conversations? How did that actually happen?

Louis: I think it was three things, Michael, over the last five years that have led us down this path. Number one, was that client saying, “Who can I speak to for financial advice or who can help me with a financial plan?” So that will always stick with me.

Number two was getting more involved with the Financial Planning Institute. And so, they govern the CFP designation in South Africa. So, when you apply to become a certified financial planner, you apply through them. They work on all the continuous professional development. They had these awards that you can enter. And so, part of it was to become an approved practice, where they’d put their stamp of approval to say, “You guys do financial planning the way we think it should be done.”

And they came back to us, and they said, “Well, yes, you’re doing financial planning. But number one is not in line with the six steps that we would want you to follow. And there’s some pieces that we want you to demonstrate your value on a little bit more.” And so, that set us down the path to improve the way we deliver estate planning, for instance, improve the way we visually show our clients what the impact is of their decisions. Because those early days of building a business, I think we’re so focused on building the business that the client experience and ultimately what the client needed, I don’t want to say came second, but the focus on building a sustainable income was more important.

Because I wanted to know that “Hey, next year, I’m still going to be able to do this.” And so, that meant spending time on building, I guess, working on the business instead of working in the business. And so, five years in, it allowed me time to now work in the business and say, “Well, actually, if our clients need advice, how do we create something where we can actually compete on as opposed to finding the best investment manager?”

Because, ultimately, we can be replaced. And so, if a client comes to us thinking that we have the secret sauce or secret formula to find the best manager, I think we’re setting ourselves up for success. And we’ve been very lucky that that wasn’t the case.

So, we employed a discretionary fund manager to handle those investment decisions. And that forced us to say, “Well, actually, we’re not going to be those experts anymore.” We’ll take off the expert hat and say, “Let’s help you figure out and visualize the impact of your financial decisions.” And we started using Asset-Map, which was a game changer in our business. It forced us to not think of…

Michael: Asset-Map, the company here, based in the U.S.

Louis: Yeah, I think we were the second South African practice to actually incorporate it. So, Adam Holt and the team, they’re working with the South African group that distributes Asset-Map in South Africa, and it translated so beautifully, and clients loved it.

For the first time, they could actually see everything on one page. We were engaging in financial planning conversations where previously, we just got stuck in that default mode of, “Let’s unpack your investment. Let’s help you understand what’s going on in the markets and what the impact is” that we never got to these future-thinking conversations, not as concrete as what we wanted to be able to deliver that experience that someone says, “Oh, actually, I have gone through financial planning, and I see the benefit of it.”

Michael: All right. So, I’ve got a couple of questions here. I want to actually go back for a moment to just, you were talking about Financial Planning Institute and that part of the shift for you was that they have a way to, I guess, come in and look at your practice or audit your practice, evaluate the quality of your financial planning, and tell you whether you meet their standards to be a “approved practice.”

And that going through that process with them was actually part of what pushed you to say, “Okay. We need to get a little better here, we need to invest a little bit more here,” because they reflected back to here are the areas where you’re a little weak and need to come up further to become an approved practice.

So, am I understanding right? That’s part of, I guess, a service that the institute offers there that helps you get up to speed on what it really means to be a strong financial planning firm.

Louis: Correct. It’s a paid service. So, you have to apply for this. And where that came about was actually to try and change the way the large insurers are working to say, “Well, if they can have the stamp of approval on the way they deliver advice, at least they know that it meets a certain standard, a standard of delivering advice.

And so, when we got the back the first report saying, “Well, actually you a little bit lacking.” The initial response was, “Ah, you guys don’t know what it’s about, you come and deliver advice.” But actually, maybe a week later, we realized that, “Hey, there’s some truth to this.” And sometimes it’s hard just getting outside information and having to say, “Well, actually, there’s some truth and maybe there’s some work here for us still to do.”

Michael: And so, I was going to ask, what do you paid for that? I guess, we have to translate currency-wise, but what do you pay for that? How does that work?

Louis: So, it worked out to about US$2000 a year as part of this approved practice, where they would come in and do the auditing. And so, I think the process…

Michael: So, they come upfront to evaluate you and then they come in annually to reassess you?

Louis: Correct. If I remember correctly, it was three stages. So, you have to do the initial screening stage, then you do the kind of virtual, where they look at your website and look at some of your cases that you present to them. And then, the third one is an onsite where they come and do the onsite inspection.

They also have a Financial Planner of the Year competition, which is a very similar process where they come and kick the tires. And I would urge anyone to enter these competitions, not to promote what you’re doing but actually to put your practice a test and to get them to help you identify the areas that need work. It’s really easy to get stuck in the details and miss the big obvious things. Like, our clients didn’t know that we were doing financial planning or the way we were doing it was not obvious enough, which seems like an obvious thing, but we just never realized it until someone told us, this is actually like our clients told us, the approved practice process told us. We got these external feedbacks.

Now, I think we could easily have missed it and just carried on and said, “No, this is the way we’ve always done it.” Even as a young firm, I’m very scared of those words because I think that means you need to pay attention there.

Michael: And so, once you go through it and you get approved, what is it? What does it mean to be an approved practice at that point? Do you get on a special list? Do you get a fancy badge that you get to put out? Is it merely pride and joy and the refinements of just having reinvested in yourself? What does it ultimately mean to be approved practice where you go through the trouble and effort and the cost of having this review?

Louis: So, Michael, I think we expected it to mean clients will come running through the door. Once again, let’s build it and they will come. Yet…

Michael: How did that go?

Louis: In reality, we said this process was very helpful and it helped us to get to where we are, but maybe it’s not worthwhile for us to do this every year. And so, we actually stopped doing that FPI-approved practice. At the moment, I think there’s five or six FPI-approved practices. And they’re busy changing that structure as well.

So, it is very valuable. It’s a sign to clients to say, “We’ve gone through this test, and we’ve been approved.” The way we now delivering advice, I don’t think clients care as much about those awards and those things than what we think they mean. But it was the process similar to planning, right? The plan is probably not that important. But the process of planning is very important.

And so, going through that helped us identify the areas that we need to work on. And so now, I’m trying to identify, “Well, what else is there that can help us identify these blind spots and these are areas that we can just constantly evolve and deliver better advice to our clients?”

Why Louis Chose To Outsource Investment Management [55:52]

Michael: So, the second thing that struck me, as you were describing this, is that you said part of the evolution for the firm in going down this road was that actually, if I heard correctly, you outsourced to a discretionary asset manager, so someone else can start managing the client portfolios so that your team and your advisors get to focus fully on the financial planning work. Did I follow that correctly?

Louis: Correct.

Michael: So, how is that transition when the firm was originally founded to be doing investment portfolios for clients and now you, I guess, you do it by outsourced contract? The thing you were founded to do is now a thing you outsource yourself.

Louis: It’s been a very interesting evolution, Michael. And so, the company we use is called PortfolioMetrix. And they now have a global presence, predominantly in the UK and in South Africa, but they have an American office as well and a few other jurisdictions. And so, why that resonated with us and what was so important is that, if we rely on one individual to make those calls, and tomorrow that person’s not there, what does that do to our recipe and the way we deliver advice? Well, it fails immediately.

And so, in my mind, that means clients run for the doors or they find the next person that can deliver that if that is what they were there or that is what they expected. So, engaging with PortfolioMetrix has meant that we had to conform to the portfolios we use, we had to conform to the process of getting to a portfolio, we had to conform the asset allocation, the fund managers that consists of those portfolios.

And you know what, Michael? It’s meant that I can now work on the things that are important and not just interesting. Because you can spend so much time listening to asset managers about the market and how they’re positioned, but a lot of that is really just their marketing to you so that you can invest client funds into those portfolios. And although that might be very interesting, it’s probably not the important piece we need to spend our time and attention on. That time is probably better spent in front of clients, answering their questions, holding their hands, navigating through life and the complex decisions they have to make.

And so, by outsourcing that, I know that we have a company that does a lot of work way better work than what we can. They have a team of CFAs and even they get it wrong at some point. So, why do we think we had a competitive advantage to do a much better job?

Yeah, so it’s been a very interesting evolution. I’m glad we did that because it now means that we have a more sustainable business, that’s not just reliant on one or two people making big financial decisions regarding their portfolios, at least.

Michael: And how do you pick a company like PortfolioMetrix? How did you choose who are going to work with as a partner on this?

Louis: Yeah, that was quite a long process. And so, in South Africa, there’s quite a few discretionary fund managers. And it’s really gained momentum over the last, probably the last eight years, where you can find a discretionary fund manager around every corner. But the quality of work they do differs vastly. The fees they charge differ vastly.

So, an important piece for us was the team and their track record. And so, PortfolioMetrix had a big tick around the team and their capability. And then actually looking at what they do. How do they do a fund due diligence? Would they be able to do it better than what we can?

And that was the interesting part where a lot of the discretionary fund managers asked us, “Which funds would you want to include?” And that was a warning sign because if you’re relying on us to do your job, then what are you doing? Why are our clients paying you so that we can make that decision, then we might as well just do that ourselves?

And so, we took the approach to use PortfolioMetrix because they had that one list of fund managers, they have a global asset allocation, they have technology that allows you to build a custom portfolio, but still using those same fund managers within the process that you deliver. And they’ve built this community of like-minded advisors, advisors that are saying, “Investment management is important. We want someone independent. It’s so important that we actually have to outsource it.”

And so that really resonated with us. And I think the culture of the business, it’s an entrepreneurial firm, they hire high performers, and they’ve delivered. So, we’re very grateful for that.

Michael: And just how do you get comfortable with the shift and the transition? You had said, “But then we had to conform on the asset managers and the allocations and the choices and the approved list,” which I’m presuming is not necessarily how all of these assets were organized going in, so that requires a whole bunch of changes. Just talk to us about how do you actually handle and navigate that change?

Louis: It’s still ongoing.

Michael: What’s that like when you’re rolling out to clients and saying, “Hey, you’ve been working with us for a year. We really believed in these portfolios, but now we believe in these new different portfolios.”

Lois: We found another religion and now we’re moving into that.

Michael: Yeah. How do you navigate that conversation?

Lois: I think we’ve looked at the risk per client. And so, obviously, with newer clients that come in, we would look at what does their existing portfolio look like? What is the cost to move over to this discretionary manager? And the question should always be, is this in the client’s best interest?

A lot of the clients now, the investment management piece is maybe not the most urgent component. If you’ve just lost your spouse, we’re definitely not going to spend all our time moving over your assets to this new manager. And so, we’re looking at, in a way, other urgent areas we need to address in a client’s portfolio. If it’s new cash money that’s coming in, it’s much easier. We can allocate it to this discretionary manager. The process is easier.

And so, we are identifying that shift to say, “Well, let’s not do everything at once, but over a period of time, we’re going to do the sensible approach to try and move more of the assets to this discretionary manager.” There might still be some exceptions, right? And that’s the benefit of having a smaller firm. We can have clients that maybe want something different. And we can accommodate that.

Could we accommodate that if we were 10 times bigger, maybe not with as much ease? Because we get to make those decisions as business owners, right? What do we want to deliver for this client? Not saying that every portfolio should be unique, but they can be some exceptions.

So, we’ve been having conversations with clients around, “What are the risks in your portfolios? How concentrated are the managers? What does the cost look like? What are the alternatives?” And it’s very similar to a change in a portfolio before we had the discretionary manager. It’s now just replaced with another name.

For most clients, they rely on us to make those decisions, and so, “Well, please guide me. Show me which route is the best. We went through the process to understand why I needed this portfolio, what it should look like, now help me pick the best way to execute them.”

And I think that’s also where technology plays such a huge role is actually in that account execution and the actual transactions because that we can automate. It might be a passive solution, or it might be discretionarily managed, or it might be someone that is still managing that portfolio that we don’t necessarily have a problem with if there’s no additional risks. So, it’s maybe a long answer to say it’s an evolution and it’s a process that we have on an individual client conversation.

So, at the moment, we’re probably about 60% of assets that are sitting with the discretionary fund manager. There’s some exceptions in terms of the pension funds that we can’t move, some clients where the tax bill would just be too big to do that. And some clients where it just hasn’t been a priority. There’s been other more pressing important things to address.

Michael: So, Louis, you’re doing this transition to the discretionary fund manager. It sounds like, sort of functionally, this is similar to, we call TAMPSs, or turnkey asset management platforms in the U.S., similar kind of you outsource discretionary management, they manage your client portfolios on your behalf so you can focus elsewhere in the business. How does the pricing work for you in this model? What does PortfolioMetrix cost? And then, who pays that? And how does it get paid?

Louis: This was one that we grappled with a bit, Michael, and we actually ended up passing on the cost to the client. And the reason for that was, the client paid the same fee they would have before implementing the discretionary manager because PortfolioMetrix managed to negotiate a wholesale pricing with the fund managers. And they charge 35 basis points, so not cheap, an expensive asset manager. We think that they’ve delivered the alpha and they add the value in terms of what you’re paying for.

And we’ve had to reposition our pricing to say, “Well, part of our job is to oversee this, and we might need to change at some point to a different discretion fund manager, and we’re still holding them accountable alongside you. We’re working for you, Mr. Client. You are the only one paying us. We’re not receiving income from a third party. And we’re going to spend the money that you’re paying us to spend more time on financial planning, maybe some transitional planning, focusing on your estate, expanding the work that we’re doing. We still think the investment management is critical and we’re not outsourcing all of the decision making, yet we have this additional partner, and it’s costing you the same.”

And so, for a lot of clients, they agreed with that. They think it made sense. Some said, “Well, this is too expensive. I want to have a very low-cost, passive implementation.” And we were able to facilitate that, and we would explore and see, “Okay, what’s the cheapest way to just buy the market?” In South Africa, we tend to have a fairly inefficient market still. So, a lot of hedgers have added alpha, and we’ve been able to position that. I’m not sure if that’ll carry on forever. But so far, it’s worth it.

Michael: So, I’m struck by that that I guess, in the U.S., there’s been an evolution of different versions of fund classes, mutual fund share classes that have a lower cost structure for advisors who aren’t necessarily getting the brokerage commissions and the brokerage compensation, as well as the rise of ETFs, or exchange traded funds that tend to have a lot of that stripped out. It sounds like there in South Africa, those versions of mutual funds are still the dominant, the primary ones that you get access to even as an independent.

So, a large provider like PortfolioMetrix can come in and say, “We’re negotiating a lower class or a lower cost share class that has some of those costs removed, since they don’t have to pay us for distributions, we’re already bringing advisors and assets.” And so, on the one hand, they can then pass that savings on to you, on the other hand, that that gives them room to charge their fee because they can charge their fee and say, “Well, our platform is 35 basis points, but we’re saving you 35 basis points on the underlying costs.”

And then you can go to clients and say, “Look, here’s how much you used to pay for the funds that you were getting. Here’s how much you’re going to pay now for PortfolioMetrix plus the funds you’re getting. The total fee is the same. So, it hasn’t changed for you. It just comes from slightly different buckets.” But now you get to shift out some of the outsourcing of just the raw portfolio design, management, and implementation and you get to focus on due diligencing PortfolioMetrix, instead of due diligencing every single fund that you’re using for clients.

Louis: Absolutely. There was this evolution of what they called clean pricing. And so, previously, a lot of the mutual funds would have built-in rebates or money that they would pay back to the platforms or built-in commissions. And so, advisors would be able to use clean priced funds, which didn’t have that in.

So, what PortfolioMetrix did was one step further to actually go and negotiate with those asset managers based on bulk. And so, it brings in a bit more complexity because you don’t always just want to buy the cheapest manager. You don’t always want to invest money with a manager that’s willing to give you the biggest rebate. But in this scenario, it worked out that the total cost of the client’s existing portfolio was round about the same, in some cases cheaper. And for clients it made sense. It’s an extra layer of people that can go and kick the tires.

Michael: But then you have to re-explain and reposition your fee with the client because, at some point, they’re going to say, “Louis, I used to pay you to literally make the portfolio, and now PortfolioMetrix is making the portfolio. That’s great. They’re doing and they get their deal. But why am I still paying you the same fee when you’re not doing the same stuff anymore?”

Louis: A 100% right, and we were very scared that that conversation will come up. It didn’t happen once.

Michael: So, did it? It didn’t happen once.

Louis: Not even once.

Michael: So, we’re terrified of it, and in practice, no one asked.

Louis: No one asked. They said, “Well, this is great. I have another team working for me and someone to kick the tires.”

Michael: And it doesn’t cost me more.

Louis: And they didn’t say you can play golf now. It doesn’t cost more. I think part of the expectation was that what worked in the past isn’t necessarily going to work in the future. And so that’s also how we positioned it. We might have been lucky, but a lot of it’s worked out fairly well. Do we think it’s going to work on well over the next decade?

We probably, at that point, the way we positioned it was to say that a lot of these larger managers had the excess returns when they were smaller managers. How do we find the smaller managers? Well, actually, we don’t have the skills to go and make sure what these guys say they’re doing and what they’re actually doing matches. And I think any small practice would, probably, if they were speaking the truth, would say the same thing, right? We don’t have the skills.

And even if we did, would we be able to act on it on the same time and treat all of our clients in the same way? So, it was very much a client decision. But it was also very much a business decision to say, “Are we building a sustainable business that makes sense?”

How Utilizing Asset-Map Evolved WealthUp’s Financial Planning [1:10:13]

Michael: So, now talk to us, how did the financial planning side of the business evolve and change once you outsourced the investment side?

Louis: I think the short answer is we had time. So, we didn’t have to spend all our time kicking the tires and listening, not even kicking the tires, listening to someone else’s marketing presentation about how great they’re going to be. And they were all compelling. And we would walk away from these sessions and say, “Wow, this is great. What do we do? Well, let’s split our money between these managers.” And that’s maybe not the most elegant way of treating customer funds.

Michael: Wholesalers come out and they make a compelling pitch, because usually pretty good at that. That’s what they do. And then, you’re caught up in all the buy-in of, do I really want to add them in? It’s changed. It takes time. But that sounded really good. Is my client losing out if I don’t include this in? And you don’t do all of that.

Louis: Exactly. And it’s 9 out of 10 times, you end up not doing anything and saying, “Well, actually, now we know, and we can have the conversation.” And Michael, that became a crutch, that became a crutch, because our conversations would default to what the portfolio is doing and what the market is doing, and what the asset manager is doing, and an expectation of what the market is going to do. And yes, it was very interesting.

But we didn’t get to the crux of what are our clients afraid of. What’s coming up that they need to plan for? What’s keeping them up at night? We thought we did that. Because we were reading, we were listening to the Kitces podcast, we were listening to all these guys. But yet, in practice, I don’t think we actually did that.

Michael: So, you had mentioned that Asset-Map came in your process as well. I’m really just curious to hear how do you use Asset-Map in practice.

Louis: So, Asset-Map had to change their solution a little bit for the South African market, so terminology and Rand-based structures as opposed to U.S. dollar. But when they did that, and I went through the process myself, going through the onboarding, information capturing, and that worked fairly okay. We’re not using their digital onboarding for clients. Because I think that piece is so valuable, that I wouldn’t want clients to do that on their own. Just the financial organization is a piece that is extremely valuable because you can bring in all the information that’s necessary. So, we use that very much as presentation.

Michael: I want to understand that more so. So, kind of that digital onboarding, it seems like the data gathering process. You don’t want to send clients a tool like Asset-Map to you put all their own information in, to do that onboarding, because you actually want to do it with them directly in person.

Louis: You know what, Michael, with a lot of clients, they’re so scared of this financial planning meeting because there’s some guilt that’s coming with their money, or there’s some emotion coming up for them, that if you are requiring them to put this in on an online process, for me, it feels like you’re taking the easy route out, and you’re expecting them to do a lot of hard work. They’re sitting there scratching their head not knowing, is this an asset? Is this a liability? Where does this fit in?

And the type of clients we’re attracting are not the ones that should know these things, right? It’s people that want to have a thinking partner want to make these decisions and don’t really need to think about the complexities of which field do I put this, this number in? Where do I get this number?

So, for us, that is part of the value-add. We’ll find out where your financial products are, we’ll help you organize it, we’ll help explain to you what you have. And so, hopefully, for the first time that you actually see on one page, how much money you’ve accumulated.

And for a lot of clients, just reflecting back that number is a very emotional experience. When they look at the hard work that they’ve put into to build this amount of assets, because now you’re seeing it though, the figure stares at you. It shows you the value of your properties. It shows you the value of your investment. If you have a partner, you could look at your combined values and just taking stock of where you are. It’s not just a number. It’s all the hard work that led to that number.

And so, as you help building this picture, you get the opportunity to explain to a client in the terminology that they would use. And it fits into a piece that makes sense in their minds. And so, now Asset-Map is that presentation layer. It’s the piece where we organize everything. It doesn’t matter how complex your financial life is, Asset-Map can cater for it. It might not get you to the third decimal or bring in a very nuanced tax calculation, but that’s okay. It doesn’t need to do that. Just figuring out where all these pieces fit in your mind.

And that organization immediately relieves anxiety. It means that someone feels, “Oh, you’re looking at everything and not just one piece.” And I think that was also the trap that we fell in, where if a client said, “Well, I want to discuss this portfolio.” We would never challenge that. We would say, “Okay. Let’s discuss this portfolio.” Where now we could say, “You know what, Mr. Client, this makes up 1% of your portfolio. Is this most important thing for us to discuss today? Is it the best use of our time together?”

And so many times it’s, “Well, actually, maybe not. Let’s talk about this thing that makes up 60% of my portfolio that I really need to make a decision on that was not as interesting, but it’s a lot more impactful.” And so now Asset-Map is, number one, it’s the tool that any advisor can pick up, and they can have a conversation with a client. So, everyone’s on the same page. It’s the place that clients can refer back to, they can write on it. Sometimes, we print it out on an A3 page, and clients can actually write on it, and it becomes a little bit it becomes more of an experience.

And now, the financial planning becomes real, that process of engaging in financial planning is actually something they can look forward to. It’s a creative outlet, yet it’s worth their money. They don’t have to feel guilty if they don’t know where this insurance policy fits in, or if it’s retirement funds, or if it’s not. Because it actually doesn’t matter. That’s our job.

Michael: Do you still use some kind of financial planning software for kind of additional analysis and projections as well? Or does it all come out of or through Asset-Map?

Louis: The bulk of the work sits in Asset-Map because what Asset-Map does really well, it also allows you to tie in Target-Maps, which is really just financial expectations, things we need to plan for in the future, cash flows or expenses we need to plan for.

Sometimes it needs to be a little bit more technical, and we need to link it to your actual investment portfolio. And the PortfolioMetrix has a brilliant software called WealthExplorer that allows us to almost tie that required return that a client needs to get to a realistic return that their portfolio would be able to achieve.

And so, we use that almost as the last step to say, “Mr. and Mrs. Client, we’ve created this plan. We know we need to target a 9% return. This is how it fits into your portfolio. And this is how we want to implement this portfolio.”

But that becomes the easy part. Most of your time is now spent on. What does your life look like in retirement? How do we get, instead of retiring at 60 to maybe at 55? What does that change? What do I need to give up? Or what does that actually do to my life?

And so, that would be a client that’s maybe not going through a major life transition, which is fewer clients these days. It would be a normal planning process, where we get people excited about what the future holds. And I’m very much influenced by George Kinder’s work in this. And I love the way that he says, “If we work together, how can we help you achieve your goals and your dreams in a shorter amount of time?” And so, that’s what we’re trying to do is to say, “Well, what trade-offs do we need to make that you are comfortable to achieve this in a shorter amount of time?”

Michael: And so, Asset-Maps, Target-Maps, and sort of that goals-based module lets you target a lot of the goal, just, I guess, the straightforward goal projections for clients. More complex folks, you can come back to some of the PortfolioMetrix tools. But for a lot of your clients, just the organizing, the wholistic look of Asset Plan, and then being able to do the Target-Maps covers the core of what’s actually needed for most of the clients.

Louis: Michael, I would even say, the more complex someone’s finances are, the more we need to lean into using Asset-Map because there we can show the impact of making a small change in terms of their outcomes, whereas it doesn’t necessarily have to be more complex to tie it to a portfolio. But if we can see the impact of the trade-offs, and that’s what Asset-Map is allowing us to do. We can see what this extra year of working do, what this extra gifting do in terms of the legacy planning.

So now we can walk through those scenarios. And in a client meeting, we might have 20 or 30 different scenarios that we can show them. And they can say, “Oh, this is an employee that I’m not comfortable with” or “I didn’t know that.”

And now they start thinking about what the impact is of the decisions. And for me, that’s one of the only things we can control. We can control if our clients understand the potential impact of their decisions and if they’re happy with those outcomes, “Hey, that’s something I can live with.”

Michael: So, what does this add up to in terms of the firm at this point? Just how big is the firm? I don’t know if you measure by clients or assets under management or revenue but help us understand and further just where the firm stands today.

Louis: Yeah, so we’re servicing 115 households, so you could say 115 families, and 2 larger corporate clients, where we will look after the retirement funds. And so, that brings in a slightly different model where we help the employees. If you equate that to U.S. dollars, it’s close to 60 million in assets under management, which brings healthy revenue, and it allows us to grow our business.

It’s probably not at the profit margins we would want it to be. A lot of people say you need to target kind of low 30s. We’re moving towards that 20% target, so that we can still reinvest in the business and draw out some profits from the business as well. But I think we’ve found this one sweet spot of having a team of six people manage a relatively small group of clients, and we want to hold their hands during times when financial and life decisions can get really complex.

The Surprises And The Low Point Louis Encountered On His Journey [1:20:49]

Michael: So, what surprised you the most about building an advisory business, and going down this road over the past 10-plus years?

Louis: I think I expected it to be a lot bigger 10 years down the line. I think what surprised me is how challenging and rewarding and fun it can be at a very small scale. That it doesn’t have to be a national basis or hundreds of employees. And now, as family becomes more important, because I have a one-and-a-half-year-old, I’m grateful that it didn’t grow into a business of that size because the trade-offs I would have had to make at that point I don’t think I would have been able to.

And so, probably what surprised me is the flexibility that I now have 10 years in to determine where I want to spend my time with who I want to spend my time. And that includes clients and family, and still have a financially rewarding business from that as well.

Michael: So, what was the low point on this journey for you?

Louis: I think the low point was the amount of time that it took. When starting out to build a business, you hear these stories that it takes 10 years to become an overnight success. And it still feels like, yes, we’ve come a long way, but it’s only just the beginning. There’s still so much more to tackle and to grow into. And as soon as you discover a new area, a new field, it’s like, “Oh, here’s this whole new area.” And so yes, that’s challenging. And it can be a low point.

There was many times where, to give up the flexibility, it would have been much easier to be employed, right, and to work for an income. Because as a financial advisor, you can earn a really decent salary working for another company, but you give up so much. And now having the benefit of…I think freedom of time is a double-edged sword. You get the benefit in the long run, but in the short term, you give up a lot.

The paycheck one was one very early to try and figure out how to create a recurring income that’s not dependent on someone else delivering that paycheck. But it takes a long time. And it really does. And I’m thankful for having to sit through that because now we’re at a point where we can reinvest in the business. And we can actually build new skills and say, “Well, what is financial planning look like if it’s maybe not just the planning side, if it’s transformational?” So, I think we’ve had this shift from transactions to relations. And now it’s from relations to transforming someone and the lives that they live.

The Advice Louis Would Give His Former Self And Newer, Younger Advisors [1:23:21]

Michael: So, what do you know now that you wish you could go back and tell you from 10-plus years ago as you were getting started?

Louis: Sure, Michael, that it’ll probably pan out very different from what you expect. And that the fun is in the journey, the people you meet, the things you learn, the things you experience, and you still make a difference in your clients’ lives, even if it doesn’t feel like in that interaction where you may be just explaining a base concept to a client. It’s those small things that come back with clients, where, “Oh, I really appreciated the fact that you took time to explain this to me. No one ever did that.”

And so, that’s where it seems like people value your time and your attention and care. And I think if I could tell myself that 10 years ago, that that is enough, that just giving someone your care and your energy and your time, it doesn’t have to be more than that. That is already a very rare commodity. And we’re in this financial planning profession to help people, the people that’s been guests on your shows. That’s the one thing that stands out for me. It’s a helping profession. And we get to do that every day.

Michael: So, what advice would you give younger, new advisors that are looking to become a planner and get started today?

Louis: I think its spending time understanding where your strengths are. So, for me, it was going through the Gallup StrengthsFinder and helping bring up some of that to determine what are the things that actually excite you and that you can do all day and it feels like it was a couple of minutes that went by. And so, for me, that’s learning, and it’s a creative outlet. And it’s helping people. And then leaning into that and figuring out how to build a practice or how to be employed, or how to help people where you get to live out those strengths.

And it will definitely not be the same as my strengths because we are all unique. It might have similar themes but figure out that thing for that phase of your life that is rewarding for you and that someone is also willing to pay you for and to pay you well for because I think we discount the value that we bring through the work that we do. It’s difficult work, but at the same time, you’re making a much bigger impact than what you realize at that point because you are literally changing the trajectory of that person’s life through their financial decisions. So don’t take it too seriously. But also do the things that that you enjoy and play to your strengths.

Michael: I’ll give a shout out as well just for StrengthsFinder. I’ve long been a fan of it. We actually use it just on the kitces.com platform for all of our team and hiring. So, for folks that are listening, this is Episode 303. So, if you go to kitces.com/303, we’ll have a link out for the StrengthsFinder book and tools, if you want to check it out. It is a very interesting self-reflective exercise of where really are your strengths and skill sets.

Louis: Yeah, Michael, it’s for me. I’m working with a Gallup Strengths Coach that’s trained in the StrengthsFinder. But they also have a ton of work around wellbeing. And it’s even work that we’ve started doing with clients.

I’ve had a client go through a StrengthsFinder assessment. And this is a client that she recently lost her husband, and it felt like she had no strengths. And she said to me, “What am I going to do with the rest of my life?”

And so, this was one of the tools, it’s not something we would normally do, but we went through, we paid for the StrengthsFinder assessment, and she did it. And it came back. She was highly skilled in relationships. And so now, we can use that piece as an external piece of information to refer back to say, “Well, it’s not what I’m saying you’re good at, it’s not what you’re saying you’re good at, it’s what this independent assessment is telling us about you.”

And you know how valuable that’s been? She has a new sense of confidence. She can refer back to it and say, “Well, actually, this is where my strengths are.” And that might not be other people’s strengths. And so, it becomes this independent, almost like independent research report on your client that you can use and you can position. And it just takes away that thing of, “Oh, this is my opinion, or this is what you think about yourself,” and to say, “This is something structured.” So, it has been very valuable.

Michael: I like the power of that and just the point of it can be really reaffirming when it’s not just what is a friend or a family say is your strength and sometimes you have to figure out, “Is that really my strength? Or you just tried to make me feel better because, apparently, I’m down a little right now.”

It is different when you say, “No, no, this is a third-party assessment tool. This is what they do. And like this is the assessment and the feedback from the tool. You got to pay attention that they do this for a living.”

Louis: Yeah. And so, how much of our work is not just helping someone have the confidence to make decisions? And so, this has helped her have a bit more confidence. In other areas of her life, we can say, “Okay, how do you play to your strengths here?” And what are the areas that are low on in your strengths that you might find a little bit more challenging? Maybe we need to get experts in there.

And when we compare that StrengthsFinder report to my StrengthsFinder, I have a lot of the areas that rank lower. And so, it means that we work really well together because she can outsource the strategic thinking to someone else that doesn’t have to sit on her plate.

The Next Steps On Louis’ Journey [1:28:37]

Michael: So, what comes next for you?

Louis: So, Michael, where I am now is predominantly working with widowed clients. So, I’m studying to understand the process of administering a deceased estate in South Africa. So that I can have this kind of three legs of support, so the Certified Financial Planner, the Certified Financial Transitionist, and then, in South Africa, we have a fiduciary standard. So, it’s becoming a fiduciary practitioner to help people that have recently lost their partners or their spouses to rebuild their lives.

And so, it would probably be people that have slightly more complex financial decisions to make, and then we’ll hold their hands through rebuilding their life and help them weigh up what those decisions look like to ultimately work with a small group of people that we can build a new community with, who can say, “Well, this is part of your tribe. These are the people that you can connect with to help you through this stage of your life.” And it might mean that you’re not a client for life, forever. And at some point, you can be that sounding board or that guide to clients that have maybe more recently lost their spouses.

But then we can actually create that purpose through our business for someone to give back to a community and to find, at least a little bit of relief, to say, “Well, these people, they care about what I’m going through, they care about me, and they care about my finances, and they’ll help me make a decision.”

And I’m comfortable to leave it at that. It doesn’t have to be a 100-person firm that has a national footprint. If we can make an impact in 100 or 200 clients’ lives at that level, I think that would then mean that those people can go out and make a difference in their friends and their communities through going through that transition with a little bit more ease. We can’t take away the pain and suffering, but we can make those complex decisions feel as if it’s not as heavy.

What Success Means To Louis [1:30:31]

Michael: So, as we wrap up, this is a podcast about success. And one of the themes is just the word success means very different things to different people. And so, you built this successful, growing advisory firm there in South Africa over the next 10 years. And you’re now setting the next stage of the journey and with focusing further on widowed clients. But I’m wondering, how do you define success for yourself at this point?

Louis: Someone once said, “The freedom to do the things I want and the funds to achieve that.” And so, for me, it’s maybe that but maybe even on a smaller scale. So, success right now is being able to work with a small amount of clients and have enough time to experience and see my daughter grow up and have some money to have fun in between that. It doesn’t have to be millions of dollars, but it has to be a decent income.

And then have a powerful team that we can also have people, once again, play to the strengths and have fun when they work. I think we’re very fortunate to have a great team of people, and we enjoy coming to work on it. Or maybe if I’m speaking on their behalf, you should ask them. But we all have a lot of fun. This is a very serious profession, but we can still have fun.

Often, I have people say to me, “You don’t look like a financial advisor.” “Do I need to be more serious?” I don’t think so. I think there’s a lot of serious things going out there. So, it’s having fun and spending time with my family and having a decent income. Through that, I’m making a difference in the lives of my clients and my team.

Michael: I love it. I love it. Well, thank you so much, Louis, for joining us on the “Financial Advisors Success” podcast.

Louis: Thank you, Michael. It’s been an honor. I’m glad to be part of the list as a longtime listener. Thank you for the great work you do and thanks for having me.

Michael: Awesome. Thank you.