Restructuring Compensation And Roles To Align For Growth

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, Cean Kenefick-Rogers, to the Financial Advisor Success Podcast.

Cean: Thanks, Michael.

Michael: I’m really looking forward to today’s episode and talking about just some of the challenges that come in advisory firms as we really start growing and scaling up.

I find there’s this path for most firms. At first, we get started and you’re just trying to get any clients to survive and pay the bills and make enough money to cover yourself. And it grows a little more, you hire a team member or two, it grows a little more, maybe you’ve got a partner or you take on a partner, or you can start reinvesting a little bit more in a team. But there comes this point once firms hit kind of a couple hundred million dollars in assets under management, or usually in practice somewhere around $2 to $3 million of revenue of the business, where it just starts getting a lot more complex and messier. You really have to start crystalizing an org chart and who does what, and clarifying roles and responsibilities. And all of a sudden you have to really pay attention to exactly how many staff do we have and how many clients are they servicing. Because the economics of profitability start showing up particularly when you’re starting to hire other advisors and staff and team.

And the reality is just no one really trains us to do this. Because usually when you start as an advisor, you just train to get clients and serve clients. That’s the only part they really focus on, not the business stuff about how to have a multi-advisor, multi-owner business. And just it gets messy. And I find for a lot of advisory firms eventually you hit this point after a couple of million dollars of revenue where you almost have to sit down like it’s a new business and redesign the business the way that you want it to work going forward because it’s just big enough and complex enough now that what we did at the beginning just isn’t working anymore. Clients are served, it’s growing, it’s making some money, but the “businessy” stuff gets really messy.

And I know you’ve lived some of that journey over the past couple of years, as well.

Cean: Absolutely.

Where Ironwood Wealth Management Stands Today [05:56]

Michael: And so, just looking forward to talking a little about what happens when you hit that crossroads. What changes in the business that gets to the point where all the stuff you were doing that was working so well just suddenly isn’t working so well anymore?

Michael: So, I think to kick us off, tell us a little bit about your advisory firm as it exists today just so we have some understanding of the business. And then I really want to talk about just how this has evolved over the past several years as your firm has hit this crossroads.

Cean: So, the firm is owned by three of us owners. We actually all met at an insurance agency back in the day. And we went through the progression of an independent broker-dealer. And then eventually 100% RIA, to where we sit now, which is just fee only. And we currently sit serving about 500 households and just under $550 million of assets under management.

Michael: And how big is the team? You mention there’s three of you as owners, but how many folks are sitting behind you to help make all this happen?

Cean: Yeah. So, the team has really grown over the past couple of years. And we’ve got 19…including the owners, we’ve got a 19-person team. And we’ve got six client-facing advisors, two associate advisors, three client service associates, an office manager, an operations person, a receptionist, and we’ve got our tax division which has two folks in it. So, and then we’ve got our portfolio team, which also has two folks in it.

So, it’s grown over the years. And like you said in your early commentary, there definitely comes a point where it is very difficult to manage all of these folks, especially if you have three owners where all the responsibility lies but none of the responsibility lies.

Michael: Yep. So, I’m intrigued by just team structure. So, you said six client-facing advisors. I’m presuming that that includes the three of you as partners, as owners, in that six?

Cean: That’s correct, yeah.

Michael: So, three owners who have…who are client-facing advisors, three additional advisors who are client-facing, two associate advisors, as well. So, how do they fit in? Are they teamed up to a particular lead advisor or is that a central planning department that supports all the advisors? What’s the positioning for those associate advisors?

Cean: So, we’ve decided to do service teams.

Michael: Okay.

Cean: So, each advisor has an associate advisor and a client-service associate working with the households that they are responsible for.

Michael: Okay.

Cean: And we kind of have gone from a department to more of a service team. Because the clients…in our opinion, the clients just build relationships with those folks on the service team, and it’s been our thought that the service team model will end up working better for us in the long run. So, we’ve really just built these service teams, and then that’s a really good spot for both CSAs and associate advisors to really progress through their career.

And one of the things that has happened over the past couple of years is you understand when you start looking at these things that if you don’t have a path for growth for some of these younger folks, they just…you can’t…you won’t be able to hire them. You’ve got to have a very defined pathway for them to get to where they want to get in order to even hire them at the entry-level positions.

Michael: So, I’m curious for this setting up as service team structure. It sounds like did you start as a department structure, and then choose to assign them more directly because that’s how clients were connecting and positioning themselves? Or just you had always built it as a service team with the expectation that clients would connect more directly to a dedicated team?

Cean: We started off more departments, with a lead advisor and maybe a secondary advisor. And then all of the back-office work would go into departments. And we found that that just…it was just not as smooth as I would have liked it to be. And so, we pivoted to more of a service team. And as we grew, it just became more apparent that, hey, you’re going to need a certain amount of CSAs for every client. You do the math and you’re like, “Okay, well, an advisor can handle about 100 clients, an associate advisor can help with some of those clients, you can leverage maybe an associate advisor with a couple of advisors, but there’s a capacity limit for each of the roles.” And so, it just fit very easily and we’ve really embraced the service team model.

Michael: So, what wasn’t working in the department structure? I’m just curious, what was breaking or not cooperating for you?

Cean: It was a lot of the workflow stuff. It’s almost like you had a couple people in a division. And also, turnover and staff experience levels. It just wasn’t as smooth from a client experience standpoint as we wanted it to be.

Michael: Because of the handoffs?

Cean: Yeah. There was too many handoffs, too many e-mails.

Michael: You send something to a central department and today Bob responds to it, but then tomorrow Betty is picking up the follow-up. And now, the client is getting e-mails from different people across the department.

Cean: Yeah, the ownership wasn’t there. And now that we’ve really embraced the service teams, you get even CSAs to embrace the ownership of their job and the clients that they’re assigned to and the advisors that they’re assigned to.

Michael: Okay. So, when you’ve got dedicated CSA…or advisors saying, “You support this advisor,” or “these advisors,” “This is the base of clients that you’re supporting,” now just everyone is clear if this client calls it goes to you because that’s part of your client base with your advisor that you support and your job is to see that through to the end?

Cean: Correct, yeah. And then the advisors can interact, and then it builds a relationship with the CSA and the advisor and the associate advisor. So, one of the things that we also learn as we go through this process, every advisor does things just a little bit differently. And the operations folks don’t like that and they want everything to go the exact same way. And no matter how many times I tell my advisors, “Hey, you have to follow these certain steps,” advisors are creatures that make exceptions and move all over the place. Whereas back office wants everything standardized.

And I see both because I have about 50 households that I’m responsible for as an advisor, so I see that. But then also, I’m working with the back office. And so I see both sides of the coin. And one of the benefits of the service teams was also the advisor can order whatever needs to be done with their CSA, and their CSA then can go and put it into the workflow system the correct way to make sure that it flows through the workflow the way the back office really wants to see it flow through the workflow.

Michael: Oh. So, the advantage of having the CSA assigned directly to the advisor, in essence, is when not every advisor is, shall we say, always the best at perfectly following system and process. When they’ve got a dedicated CSA who knows them and knows how they work and knows maybe the spots where they don’t always do the follow-through they’re supposed to do, your CSAs can help make sure that the stuff gets done the way it’s supposed to get done. Because they can fill in those gaps in translating whatever the advisor wanted or needed done to the clients, too, and, “Here’s how it gets put in the workflow system the right way, because I’m just going to do it for you.”

Cean: Yep. Yep. Essentially. And, man, we’ve gone back and forth on that so many times. And I think we’re finally at a point where having the CSAs and the associate advisors really manage their workflows is a much better route to go than having the advisors trying to remember how to manage I don’t even know how many workflows we have at this point, but we’ve got a lot of them.

Michael: I was going to ask, because I certainly know there are firms out there that say, “You’re an advisor, you get paid really well. Learn the freaking system and do it the right way. Come on people.” But I’m struck that it sounds like you’ve gone a little bit the other way of, “Okay, we’ve tried it, but humans are human beings and some of them it is just not how they’re wired, they’re not getting it well. We have people who get it really, really well who are right there and dedicated to that advisor on the team. So, let’s just have the CSAs make sure that the stuff gets done the way that it needs to get done and stop trying to push the rock up the hill.”

Cean: Yeah. The way we’ve always looked at the business, Michael, is… This is from day one, and I think this is actually one of the reasons that we’re so successful. Back in, I don’t know, it was before the financial crisis, so I think it was 2006 or 2007 I went to one of the advisor “build your practice” events, I don’t even remember who, I think it was AssetMark or something, that they put on. And one of the things that really struck me at that conference was, “Hey, advisors need to be in front of clients.”

And so, I literally came home and told Rydan and Alex, my two business partners, “Hey, we need to make sure that advisors are in front of clients as much as we possibly can have advisors in front of clients.” And that…to me, that…when I look at the workflows and when I’m ultimately trying to make a decision on, “Should I really have the advisors spend time putting these workflows in correctly? Or should I have the advisors not worry about the workflows, communicate with their CSA the way that they prefer to communicate with the CSA, and then have the CSA spend the time putting the workflow together, and then let the advisor go on to the next client and give that very high-level customer service that are clients are very used to having?”

Michael: So, out of curiosity, just what are you using for workflows, just to manage and track and actually do all of that?

Cean: So, we use Tamarac for our CRM, for our reporting, for our rebalancer. We’ve really embraced Tamarac. Now, I will say that the workflow system, our operations person, they changed some things around. And she used to be able to do it on her own, but now they’ve made it…they’ve changed to a service ticket type of arrangements. And you basically have to have a coding degree, I think, in order to get some of these workflows to move the way you want them to.

But she’s really embraced it. I’ve told her, “Hey, I need you to make visuals of these workflows and really walk through it with advisors and CSAs and associate advisors so that we’re not missing anything from compliance, we’re giving the client experience that we want to be giving.” And we’re making tweaks to these workflows all the time based on certain things.

But she’s done a great job of putting together these workflows using Tamarac. And I know she gets some support from Tamarac, but that’s been our main driver of the workflows.

Michael: So, how do you think about staffing ratios and capacity. So, six client-facing advisors, two associate advisors. Is that literally one associate can support three advisors, is that the intended structure, or are you still in the midst of hiring and structuring and staffing up more?

Cean: We’re still trying to figure out the ratios. We…our firm, all of our advisors prep on Monday, they meet with clients Tuesday, Wednesday, Thursday, and then we catch up on Friday. And in the perfect vacuum world, that’s how it is. But we all know clients want to meet on Mondays, clients want to meet on Fridays. And so, there’s always exceptions that happen. But we really…just like the back office wants everything done correctly, advisors also want everyone on the front end to manage the calendar in a way that’s going to keep them in front of clients 60% of the time. Which, in order to do it correctly, you’ve got to have time to prep on Monday, you’ve got to have time to follow up on Friday, and then you meet with three or four clients on Tuesday, Wednesday, Thursday.

So, still trying to figure out. And it’s a…I’m having constant discussions with my associate advisors, with my advisors, “What’s working, what’s not working? Are you able to get all your prep stuff done?” The associate advisors, if they’re going to have all of the stuff done for Monday, they’ve got to prep for the following week by Friday so that the advisors can come in on Monday. And then all the meetings are prepped and advisors can go through quickly, getting ready, making notes for their meetings that are happening throughout the week.

So, it’s an ongoing figuring out what that ratio is. I’ll bet it ends up more like, instead of three advisors to every one associate, it probably ends up something like two advisors per associate.

Utilizing A Pre-Scheduled Yearly Calendar To Predict Advisor Capacity [20:09]

Michael: So, I’d love to hear more about this, I guess, firm-wide calendar cadence that you’ve got of prep on Monday, meetings Tuesday, Wednesday, Thursday. And you kind of mention meeting three to four clients a day on Tuesday, Wednesday, Thursday. Is that actually typical for you guys? Call that 9 to 12 client meetings a week. Is that a standard for you?

Cean: Not for me because I’m also doing the CEO role. So, my client base is 50 instead of 100. So, I probably do about half of that. But the other five advisors are all pretty close to 80 to 100 clients. And at that same conference where I came away and said, “We’ve got to have advisors in front of clients 60% of the time,” one of the suggestions at that conference that I took with and ran with was pre-scheduling all of your meetings, every single one of them.

Our clients either meet with us once a year, twice a year, or four times a year. I guess there are some clients that are three times a year, too, by request. And so, we’ll build the entire schedule for 2023 sometime between October and December of 2022. And we’ll send agendas out to each of our clients saying, “Hey, these are the two or three or four times that we want to meet.

Every single client, the very first meeting of the year, whether that’s January through April, usually we try and meet before tax time, we’re going to go, we’re going to completely update your financial plan. That’s our main goal. And we’re going to talk about what’s going on in the markets, briefly talk about the portfolio. But really the main driver in that first meeting is, “Hey, we’ve got to update the financial plan. Did things change significantly since we updated the plan?,” look at the Monte Carlo simulations, look at what is the hurdle rate. These are some of the things that we talk to clients about in that first meeting of the year, which then help us outline the rest of what we’re going to do throughout the year.

Michael: Is there a structure for the subsequent meetings in the year or just whatever comes up based on the financial plan meeting we did at the beginning of the year?

Cean: No, we usually want to make sure that we’re hitting on risk management, so we look at insurances. We want to also hit on estate planning, so we look at when was the last time they had their trust done, who are their beneficiaries on there, have they changed. So, we have a couple of things each meeting that we want to make sure we get done. If it’s four meetings, we spread those over four meetings. Generally, those four-meeting clients are a lot more complicated, so we need more time. Versus the clients that are two meetings, we’ll just jam those into…the same stuff, but into two meetings versus four meetings, because it just doesn’t take as long.

Michael: Okay. And when you say “pre-scheduling the meetings,” I guess I’m wondering how pre-scheduled. If I’m a four-times-a-year client for you, does that mean sometime this fall I’m literally going to get four dates in 2023 now on my calendar of, “Here are the four times you’re going to come in to meet with Cean in the coming year”?

Cean: Yep. You get an agenda with four dates picked and the topics that we’ll go over in each. The general topics, we don’t always stay on topic. But you’ll get four dates, they’ll be on the calendar. And we always let our clients know, “Look, these are pre-scheduled dates. We all know that we have trips and things that come up, and we’ll be flexible.” And our staff confirms appointments two weeks out. And if folks are on vacation or whatever they need, they can reschedule. But we want it on the calendar so that we keep clients and ourselves accountable so that we make sure that those meetings actually do happen.

Michael: So, it’s not even you reach out to clients to say, “Hey, let’s find four meeting times,” or, “Here’s a Calendly link, please select four of them.” You literally just pick four dates and tell them, “Here are the dates. And, hey, if some of these don’t work, you can totally change them.” But you just tell them what the four dates and times are going to be?

Cean: Yep, that’s what we do. And we’ve been doing it long enough, we’ve been doing that since 2007. And it works really well. Because you get clients who are in stages of their lives where they can’t meet until 4:00. Or you get somebody who’s retired now, and they want to meet at 10:00 because they don’t want to deal with traffic. And so, they want to meet on Wednesdays at 10:00 because they have doctors’ appointments on Thursdays and Tuesdays.

Michael: Right.

Cean: And so, you get creatures of habit.

Michael: Yeah.

Cean: And so, we just start with, “Okay, well, we’ll just pre-schedule them with the same meetings that they had the year before.” And it’s funny, when I’m doing my meeting prep, it’s very…I’m very surprised, when I do my meeting prep, to see…because you can see the date and time that we did the meeting last year and very often we are staying on the cadence that was originally set.

Michael: So, how often do clients reschedule? My calendar is overly busy, so I’m envisioning someone sends me this and I’m just replying, “Yeah, none of these four work for me,” we’ll be rescheduling. But, granted, I have an overly crowded calendar. And just I’m thinking practically speaking for a lot of our retired clients, they don’t have a lot going on on their calendars in general. So, some of them would drive…ask us to send paperwork so they could sign it by hand and drive it to the office because they really just needed something to do for the day.

Cean: Yeah.

Michael: So, I’m going to envision the rescheduling is probably not actually as frequent as we would, I don’t know, assume or think it might be. Most clients are actually just fine with this because their calendars aren’t that crowded?

Cean: Yeah. We work with a lot of retirees. And retirees are the creatures of habit.

Michael: Yeah.

Cean: If they’re scheduled and they come in for their March meeting and they tell us, “Hey, I’m going to be on a month-long vacation in October when we’re supposed to meet next time, so I can’t meet on October 17th. So, let’s figure out another day.” And so, that’s six months in advance, it’s very easy to find another time for them.

The folks that reschedule more often are the ones that are actually still working. And I would say we have some folks who reschedule. And try and keep the advisors as busy as possible, but we also want them to have capacity. Because if they’re just going from meeting to meeting to meeting and they don’t have capacity, then service levels are not going to be…they’re not going to be able to respond to people as quickly.

So, we try and be mindful of the workload that we’re putting on each staff member.

Michael: Yeah.

Cean: And then that leaves some gaps. But there are definitely times when… My business partner Rydan, he likes to have five meetings a day sometimes. And he’ll just block a whole bunch of meetings in one week and just power through it. So, if you’re trying to reschedule for that week, it’s not going to happen. Because he’s just solidly booked. But other advisors are a little bit more available for reschedules. But it’s worked up until this point.

And if it starts…if we start to find that my staff says, “Hey, Cean, so-and-so,” we try and reschedule clients and we’re a month, two months out, well, then we need to have a conversation with that advisor about, “Hey, maybe we need to reduce your client list, maybe we should be transferring some client relationships to other advisors and/or maybe we shouldn’t be putting new clients,” just a combination of things.

Michael: And so, I’m struck that, as well, you said as you queue this up, clients get an agenda. I guess not just, “Hey, we have a meeting next week, here’s the agenda for the next meeting.” But when you’re at the end of the year and you’re doing your pre-scheduling process, they get essentially an agenda of the upcoming year that is, “Here are your meetings, here’s the,” I guess, “service calendar discussion, the topics or the focus we’re going to have in each of the meetings, here’s what we’re going to be doing for you in the upcoming year”?

Cean: Yep. That’s basically what it is. And the four pillars are the financial plan, risk management, so just checking all their what-if scenarios that something…a husband dies, wife dies, long-term care, disability. And then we look at estate planning. And then in the fall, we look at tax planning.

Michael: And I’m going to imagine, just because you have to do this across 500-odd clients, there’s just a standard template of what it looks like. And you drop in the meeting dates for each client and most of the rest is just kind of, “Here are the standard things we cover,” you just have to pair it up to the meetings?

Cean: Yeah. Yeah. And we keep it real general. And to be honest, I haven’t looked at one of those agendas in years. I used to follow them. And now you get…I’m sure you’re the same way, you get a cadence with your clients.

Michael: Oh, yeah.

Cean: Yes. The first meeting of the year, I want to make sure that I put every effort, when I’m reviewing their stuff, to look at the financial plan, and look at it with them, “Hey, has anything changed? Is this still… Are these expenses still in line? Do we need to increase with inflation? Do we need to”… And then every year, in eMoney, my portfolio team and I, we run new expected returns and we update eMoney, is the financial planning software we use. We update our model portfolio expected returns inside of eMoney. We update the expected return and the expected risk inside of eMoney.

So, last year, valuations were high, interest rates were low. We lowered our expected returns significantly, to the point where advisors were kind of upset with me. And I said, “Look, you’ve got to look at where we are with valuations, and you have to look at where the 10-year Treasury is at. Is it at 1.5%?” And so, when they go over that financial plan with somebody and we’re using a lot lower expected returns, some of the Monte Carlos don’t look as good. But then on the flip side, the portfolio is up a ton to mitigate some of that.

So, we’re always trying to stay a little bit ahead. Instead of looking backwards, we’re trying to look forwards. And so, at the end of this year, I’m going to be able to increase those expected returns. And the portfolio is going to be down, our portfolio is down, call it, 10% for the year across the board. We’re going to be able to increase those expected returns. And so, we spend a lot of time with that financial plan in that first meeting.

Michael: Interesting. But I’m struck. The plan update process for you, it’s not just that the numbers move because a year has gone by and the markets did what they did and you saved what you saved, you withdrew whatever you were going to withdraw. A big piece of what makes the plan update more dynamic for you is you’re changing capital market assumptions to the current environment every year. And so, that can move the numbers, as well. I would imagine sometimes that can even move the numbers more than the market volatility move the numbers when you’re projecting out over multiple decades.

Cean: Yep. Yep. And that…I struggle with that sometimes because advisors, rightfully so for somebody who’s younger, when we’re using these rates of return that we see over the next 10 or 15 years, they come back and say, “Well, Cean, what about these 45-year-olds that aren’t going to…that the plan is going out 35, 45 years? We’re using these very low interest rates…or return rates.” And I say, “Well, that’s true, but we’re trying to guide them.”

And so, to me, it’s just a more conservative way of planning. And then when they get to retirement, those… You’ve done a lot of research on the sequence of return-risk.

Michael: Yep.

Cean: And it just is such an important time, that five years right before retirement and the first five years of retirement, that I just want to make sure that advisors are giving very sound guidance. No one knows what the next 35 years of returns are going to be. I would argue that the next 10 years of returns, you have a lot better idea of what those are going to be than the next 35 years of returns per se, given the current environment. And those are more important to clients, in my viewpoint, than the ones that are in year 24 and 26 and 27. So, we put more of a focus there.

Michael: And just where do the capital market assumptions come from in the first place? Is this an internal analysis process? Is this like there’s a certain third-party research service we like to use? Where do you derive your numbers from?

Cean: We actually use J.P. Morgan’s Long-Term Capital Assumptions to formulate a big chunk of ours. But that doesn’t mean that we don’t agree with them all the time. So, we will change things if we don’t necessarily agree with some of the stuff, but I’d 9 out of 10 times we’re very close to what those look like.

And it was very nice when we lowered some of our growth rates to 3%, 3.5% last year and the advisors came after me, for lack of a better term. We pulled up Vanguard and looked at their return assumptions for the next 10 years and they were even lower than ours. So, not much lower, but they were pretty much in line with ours. And so, it was nice to have something to go back at and say, “Hey, we’re not the only ones that are doing this.”

The Evolution Of Ironwood Wealth Management [34:52]

Michael: So, I understand the structure now as it exists today for the firm. So, now, help us understand how this evolved and where the challenges had come as this was evolving that got you to the point that you had to do some restructuring to make it this.

Cean: Yeah. So, I think all advisors go through this, especially advisors that have multiple partners. We met at an insurance agency. One of the partners had been there a little bit longer. The other one, he’d been there maybe four years. And I’d been there just over two years. They were more on the relationship side, client-facing, whereas I was getting my CFA charter and was more on the investment side. And so, we just kind of paired up.

We got really fortunate, we did some HR outreach to some clients while we were at the insurance agency. And one of our clients that worked at Medtronic introduced us to the HR person and we were able to go in there and do retirement seminars. So, where a lot of the insurance agency representatives were dealing with younger folks, we really hit it off with retirees. And getting into Medtronic and doing their retiree seminars was really the launching point for our business, really.

Michael: I just want to make sure I understand. So, you were living in insurance agency world and doing the general selling insurance to anybody that is interested in policies you’ve got to sell but had a particular client who was in Medtronic who could give you an introduction to HR, which got you in doing retirement seminars at Medtronic. I’m assuming that’s a company that has a lot of company stock and NUA and a bunch of that stuff that comes to the table, as well. And so, that became where you started focusing from the initial insurance client base into, “This is where we’re going to grow because we’re getting traction here”?

Cean: Yeah. And really, I was so early on that I really didn’t even get into selling the insurance as much as the other two folks, the other two guys. One of the guys, super competitive guy, was doing fantastic at the insurance place, but just didn’t feel very comfortable. They taught us to sell life insurance policies as an accumulation tool.

Michael: Well, when was this?

Cean: This was 2004 and 2005.

Michael: Okay. So, yeah. So, you’re still…this is still the era of variable Universal Life is an accumulation vehicle because we’re growing in the mid-2000s, we’ve gotten past the tech crash.

Cean: Yeah. Yeah. Medtronic is a company that’s based in Minneapolis, but they have a campus here in Tempe. And they were giving their employees, they were matching their employees’ 401(k) contributions with Medtronic stock that they had purchased in the ’70s. And so, like you said, it had low-cost basis.

Many of these employees, they… Medtronic is one of those places where just the employee base is so loyal, they are creatures of habit themselves. We’ve met so many people that worked there 30, 40 years, they had a great pension, they’re matching in 1970 Medtronic shares that have a cost basis of $20 grand and it’s grown to $350 grand or $400 grand inside their 401(k) plan. And so, now you get these advisors, Ironwood advisors, come in and show them how to do net unrealized appreciation. And then we have the 0% cap. gains tax rate where some of these clients are retiring early before they turn pension and Social Security on.

So, you can really leverage all of the tools and you just show how much tremendous value you can add. And that spreads from Medtronic to Intel, to other companies, Honeywell, around the Valley. And all of a sudden, now we’re dealing with all these retirees and our business has really taken off.

Michael: So, at this point, had you left the insurance agency and gone to the broker-dealer world, just as you’re getting this traction with Medtronic and others?

Cean: Yeah. We did one set of seminars at the insurance agency, and we said, “Look, guys, we’re not selling insurance anymore. We’re doing asset management, we’re doing financial planning. Where we are right now is not the place to be.” And so, we decided to…

Michael: Because at the end of the day, just they’re retirees, they have retirement assets, they have portfolios, they need help, they’re willing to pay for it. And VUL for accumulation is not exactly the best sale for someone who’s 62 and rolling out a half a million dollars from their retirement plan for retirement. Just wrong fit, wrong stage here.

Cean: Yep, yep. And so, it was really that opportunity that led us. And actually, the manager at North Star that really hired all three of us, he actually left to go independent himself.

Michael: That’s awkward writing on the wall at that point.

Cean: Yeah. He joined NEXT Financial. And so, we actually followed him. And I can’t remember if he was our OSJ at first. Maybe he was our OSJ at first, I forget, when we first jumped over NEXT. But yeah, we went independent broker-dealer at NEXT Financial. And then we set up our own RIA. That was 2006, April 2006. And then by 2009, we opened our RIA, started custody at Schwab. And then I think 2015 we dropped the broker-dealer, because it was just…our business was RIA. And our attorney came to us and said, “Why the heck are you still with an independent broker-dealer? You’ve got all this risk out here. You’ve got to get rid of it.”

Michael: What was the risk that the attorney was concerned about?

Cean: A conflict of interest. So, why would you sell an annuity in this situation versus rolling over assets? Our comp. breakdown at that point was less than 5% was commission income. And a lot of it was trails that we had done even at the insurance agency that we just…they just built up. And so, he just didn’t like, it was, Stark & Stark, which I’m sure many people who are on the call are familiar with them. He just didn’t like the fact that we had a lot more complexities with our compliance program having the ability to wear the two different hats. So, we agreed with him and we always had a goal of going 100% RIA, getting rid or insurance licenses. And very proud to have gone through that process, and now call ourselves fee-only advisors.

Michael: Well, I’m struck that for a lot of broker-dealers it’s been a compliance challenge for them as advisors have dual registration for BD and RIA because FINRA and a lot of the brokerage regulators are looking and saying, “Well, how are you choosing what’s brokerage and what’s advisory?” And that focus only grew after Department of Labor’s fiduciary role that really focused on rollovers and transitions between brokerage accounts and advisory accounts. But I’m struck to hear that this didn’t come from the broker-dealer side saying, “We’re concerned about the conflicts between the BD and the RIA.” This came from your RIA compliance attorney that said, “You don’t want FINRA brokerage all up in your business in the first place,” that it’s an RIA exposure to keep the BD affiliation, as opposed to the BDs worrying that it’s an exposure for you to have your RIA affiliation.

Cean: Yeah. And it just…for such a small part of our business, it was creating all of this complexity, with the ADV and all these other disclosures that needed to be there because of the two different hats that you can wear. And so, I remember because when we finally stopped…when we finally got rid of NEXT and went 100% RIA, it was like, “Wow, why didn’t we do this years ago?” Because it really did get a lot easier.

Michael: I was going to say what changed that made it that much better for you?

Cean: It was just a lot of little things that we just didn’t have to deal with. We didn’t have to deal with the broker-dealer, we didn’t have to deal with all of the stuff that they required. And it allowed us to focus on truly what we wanted to do, which was RIA, and be laser-focused on it and not have… Just remembering all the rules, not even the differences between the rules, but just remembering all the rules in the first place is a very large task.

So, and then staff. Staff, they dreaded prepping for meetings where we had all these legacy insurance products, and it really streamlined the way we did business.

Michael: What did the staff dread about it?

Cean: Just preparing, calling the old insurance companies where all of the assets were held and preparing our…basically reviewing for our meetings. We still have some of that old stuff. We didn’t even know that you could be a third party, that the client could access…or authorize you to manage their outside account or their annuity or life insurance policy without even being an insurance agent. When you’re deep in it, you think, “Oh, I’ve got to be registered, I’ve got to be licensed in order to help clients out.” But then you start digging through it and you realize, “Oh, you actually don’t.”

Michael: So, how does that work for you now?

Cean: So, we have a bunch of clients who… Well, we have a bunch of clients who have authorized us. We’ve had some of those products that have been liquidated and used to live off of. And so, they’re…just by time, those kind of go…become less and less inside. And then when you focus on 100% RIA stuff, you don’t have the one-off new annuity that has been put out there. And then also, with Charles Schwab, they’ve got some…for non-qualified annuities where there’s tax implications, we were able to move those into a very low-cost annuity with Great West though Charles Schwab and get a little bit better situation for the client.

Michael: Right. Because I know Schwab had that partnership to a Great West fee-based product well before a lot of the other fee-based annuity products that have been rolling out in more recent years.

Cean: Yep, yep. And it just streamlined everything for us. But it doesn’t happen immediately. Over time those, those old products start to just fall off the books.

Michael: So, I understand the old products and the revenue start to fall off the books, but it sounds like it wasn’t gone. It was less than 5% of your revenue, but that’s still a non-trivial amount of money as the firm grows. So, what did you do with old clients, old policies, old trails? Did you just walk away from it?

Cean: So, we just recently dropped our insurance licenses at the beginning of this year and literally we have money that keeps coming into the Ironwood account, and then also to the three partners’ personal accounts. Because we know that they set them up as individual. So, it’s got to go to the individual, you can’t even assign it to the company. And literally, our compliance attorney told us we have to donate that money. So, we have it going to a separate account, basically, and once a quarter we pick a charity, each of the partners picks a charity and Ironwood picks a charity, and we send out a check to those charities of all the old trails that we still are getting that we can’t even… We’ve tried to even tell the insurance, “Just stop paying us,” and they won’t.

Michael: You can’t turn it off.

Cean: We can’t turn it off.

Michael: Interesting. So, why donating it to charity then, just why going that route?

Cean: That was his… Well, he said you can’t take them. Even small dollar amounts, you just can’t keep it and call yourselves a fee-only advisor. And so, his recommendation was to just, once a quarter, send those out to charity so that you can really remove that conflict of interest, any perception of conflict of interest, altogether. You’re not benefitting from those policies one bit.

Michael: And I guess in practice, you dropped licenses. So, you’re not writing new policies either way, this it literally just old trails that you can’t stop.

Cean: Correct, yeah. March was finally when we ripped the Band-Aid off, or whatever you want to call it, and called ourselves fee only and started donating all of the old trails that still hit. And at that point, when I said 5%, 5% was back in 2015.

Michael: Okay. So, by now, it’s even smaller.

Cean: Yeah. Probably less than half a percent.

Michael: Okay.

Cean: You’re talking like $40 grand a year probably, something like that. And now that… We were able to stop some of the commissions. And so, we’re probably talking about giving to charity somewhere around $10 grand, until those companies stop paying us. $10 grand a year.

Michael: Okay. So, I get kind of the progression of the business model. Started insurance, went IBD in 2006, added the IRA in 2009, dropped the BD side in 2015, ultimately dropped the insurance end 2021, heading into 2022. So, I get it on how the regulatory structures of the business evolved as it grew. When did the dynamics start changing from just the staffing management end that it started getting complex and more difficult?

Cean: I think I can remember back to when we had to make some investments in some software. And really it was Tamarac. Before we joined and signed on with Tamarac, we were literally…I was the portfolio manager and we were doing trades manually through Schwab. We were using the Schwab trading, they had a trading tool. But it was literally lots of spreadsheets.

Michael: Yeah. When was this and how big was the firm at this point?

Cean: This was 2011-ish.

Michael: Okay.

Cean: We were probably getting close to $100 million under management, maybe less. I don’t remember the exact specifics, but I do remember telling my two partners, “Look, we cannot do this anymore. We can’t have customized portfolios.” We can have customized portfolios to an extent, but we… If somebody comes in and they have the same risk appetite and the same risk ability as the next person that comes in, why wouldn’t they have the exact same portfolio?

Michael: Yeah.

Cean: And so, I told them, “Look, we’ve got to spend some money on some software.” So, the first thing that we got was the rebalancer, Tamarac rebalancer. And it was like, I don’t, $12, $14 grand. And back then, that was a lot of money to spend.

Michael: Yeah.

Cean: I jumped in, I said, “Guys, we have to do this in order to scale this.” And so, we did that. And it was right around when we joined Charles Schwab. So, it was 2009, is when we did that. And we stopped using the Charles Schwab tool shortly after we jumped onto the Charles Schwab side of things and we started using the rebalancer. And it made my life so much easier.

One of the things that we do for clients is, if they’ve got the suggested asset allocation, the model that we have, one of the things we do is look at, “Okay, they’ve got a trust account that’s taxable, they’ve got an IRA that’s tax-deferred, and they’ve got a Roth IRA that’s tax-free.” And so we, with the software, with the rebalancer, we can prioritize which of the holdings go into which account for asset location.

And that’s something that we’ve done for clients from the beginning. That in and of itself makes portfolio management way more difficult to do from a logistics standpoint, but it’s the right thing to do for clients. And you can see it in the…you can see it when you look at the tax implications, you can see the benefit. And it’s a huge benefit. And so, it’s very important that we do that.

And that’s why we ended up with two or, if you count me, three people in the portfolio division who are basically doing the day-to-day trades inside the rebalancer. But we didn’t get to that point until we started scaling.

I can pinpoint that that was the turning point, because then it streamlined everything. And once we were able to manage portfolios in a very easy, structured way, then it was, “Okay, now we’re going to build everything kind of around that.” And we just started putting in more and more technology. I talked the guys into wanting to make sure we had a robust CRM, we were using Redtail at the time. And their workflows didn’t…at the time, their workflows didn’t really…weren’t really cutting it.

And so, we decided to move to Tamarac, we started adding the workflows in. We needed to post performance reports and we needed portals for clients, so we decided, “Okay, well, we’re using Tamarac for all these other things, we might as well use them for billing and reporting.” And we basically went all in with Tamarac. And now we’re paying Tamarac $30,000 a quarter, something like that.

Michael: For all the different functionalities.

Cean: For all the different functionalities, yes. And my two business partners are not thrilled that we’re paying $30,000 a quarter to Tamarac, but me being able to see both advisor and back office, the back-office’s job is much easier. We would have to hire five more people, six more people to do all the things that the Tamarac software does for us.

So, that was one of the turning points there. And all of this brings complexity. And then you’ve got three advisors that are all very competitive, we’ve got egos involved. And from day one, we’ve all… Well, I shouldn’t say from day one. We started off kind of “eat what you kill,” because that’s exactly what the insurance agency taught us.

Michael: Right.

Cean: And so, the three of us, we had, I don’t know, 10 different codes at the broker-dealer on how to split things.

Michael: Right, all the different split code combinations of…

Cean: Yes. 25-75.

Michael: …you and Rydan, and you and Alex, and all three of you, and a 50-50 case, and a 25-75 case, and a 75-25 case.

Cean: Yes, yes. And so, you could imagine. And we…at some point when we were still at NEXT and before we had started the IRA, we really decided, “Hey, in order for this to work, we need to get rid of these codes. And we need to all work together and we just need to pay ourselves a third, a third, a third on everything. Because there’s too many conflicts going.”

And so anyway, we went to a third, a third, a third. And that worked for a long time.

How And Why Cean And His Partners Restructured Roles And Compensation [56:07]

Michael: Well, wait. Pause there. How do you get to a third, a third, a third? Because I’m going to assume that out of sheer random coincidence your “eat what you kill” allocations did not happen to be almost exactly a third, a third, a third already when you made this decision.

Cean: They were not. And you bring up a good point that I just brushed over completely.

Michael: How do you equalize this?

Cean: Right. So, Alex had been in the business the longest, he had the biggest book of business. I had the next largest business, and Rydan had the third largest business. So, basically, Rydan and myself wrote Alex checks, two checks, to equalize everything. I forget exactly how we came up with the numbers, but we all thought it was fair at the time.

Michael: So, basically, it was as though you put all of your revenue into one pot based on the percentages that it was. And then to the extent that Alex had a larger pie, you essentially bought his share down.

Cean: Correct. Yeah, that’s exactly what we did. I think I wrote him a check for $40 grand, and I think Rydan wrote him a check for $80 grand, something like that.

Michael: And how big was the business? When were you doing this, how big was the business back then?

Cean: It was…it had to have been 2007 or 2008.

Michael: Okay. So, how big was the business then? You’re $50 million, $75 million between the three of you?

Cean: No. No. We probably had $15 million at the time.

Michael: Oh, okay.

Cean: Of AUM. We were just… We basically had said, “Look, we’ve got to focus on this AUM business,” what ended up being the RIA side of things. “And we need to make sure that everybody has a role. And so, Alex and Rydan, you’re going to meet with clients. Cean, you’re going to manage the portfolio, you’re going to be in meetings where the client is more analytical and wants more information on the portfolio.” So, that’s kind of how it got to that point.

Michael: Okay. Okay. So, this was pretty early for you guys, actually, to have the realization of, “Hey, we need to equalize this and put us all together.” So, were you…

Cean: The Medtronic thing, Michael, really forced it. We were so successful with the Medtronic thing and what percolated from that that it was like, “We’ve got to streamline some of these processes, we each have a different assistant,” or me and Rydan were splitting one assistant and Alex was splitting another assistant. So, we’re just all over the place. And in order for it to really work and for us to take that opportunity and really take off with it, we had to do something.

Michael: Okay. And so, coming out of it, was it literally like, “There’s an entity and we each own a third of it, and that’s the deal,” just you straight up equalized it?

Cean: We did. That’s exactly what we decided to do. We wrote Alex checks, and then we split everything. We split income a third, a third, a third and we split ownership a third, a third, a third.

Michael: Okay. So, I’m just envisioning the size then. I’m presuming you weren’t really paying yourselves salary at that point, it was just the business makes money, the business after expenses has some profit, and that went three ways.

Cean: You got it. Yeah.

Michael: Okay. So, I think you said, “That held us for a while.” Which I’m presuming means, “But that didn’t hold indefinitely.”

Cean: No, it did not. And one of the turning points… There are certain things that happen in your career that you can kind of go back and point to. So, somewhere around when we dropped the broker-dealer, it was right around that time, we started having some grumblings amongst the partners. And in hindsight, rightfully so.

Michael: So, what were the grumblings?

Cean: The grumblings were, “Hey, I’m bringing this value to the firm and I’m getting paid a third,” and, “I’m bringing this value to the firm and I’m getting paid a third.” So, it was basically people were not happy with what they were making for their perception of what they were bringing to the firm.

Michael: And I’m presuming this is the wonderful scenario where there are three partners who each believe that their value is more than a third, which doesn’t add up from that. Right?

Cean: Yeah.

Michael: Not everybody can contribute 50% to the growth of the business because the pie is not 150% big. But we all perceive our relative roles from our lenses.

Cean: Yeah. And I think it was more one of us was unhappy. Myself, I didn’t think it was fair, but I didn’t want to upset the apple cart. For my own personal… I felt like I was one of the ones that was bringing in a lot of value. I also agreed with my other business partner that he was bringing in a lot of value. But I also didn’t want my third business partner to be harmed in any way. So, I was kind of in the middle, kind of.

Michael: Okay. So, what was the split that was creating the distinction? Is this one person is contributing more to growth in new clients than the other and that was putting the pressure on it?

Cean: Yeah. And really, where it was really difficult for me was every advisor has their strengths and weaknesses. Alex and myself, any time a big client would come into the firm, Alex and I would do it together. And that’s just how we did it. Whereas if it was somebody maybe with lower AUM, Rydan would run with it. And Rydan would run with way more client meetings than Alex or I, but we were kind of already separating the business based on that.

And so, from my perspective, it was that when I tried to see everything that Alex was bringing to us about, “Hey, we’re doing this and we’re doing that and pay shouldn’t be equal, responsibilities need to be defined,” it was part of me was like, “Well, the reason that it’s like this is because we haven’t given Rydan the opportunity to work with some of those bigger clients.” It’s not his fault that Alex and I would just take those big clients and make sure that we landed them for the company. And ultimately, when you land them, then you end up working with them. And that’s where you start to have the unequal… I don’t want to say “work,” because Rydan was working his butt off. But it’s the unequal value.

Michael: Well, you get an unequal revenue.

Cean: Yeah, yeah.

Michael: So, then your client base and Alex’s client base end out having faster growth because it’s getting the bigger clients and may end out having a larger percentage of the revenue because it’s getting concentrated with the bigger clients.

Cean: Correct. Yeah. And so, this went on for probably two years. And it got to the point where literally I was kind of put in the middle and I kind of had to choose. And Rydan and I kind of said, “Okay, Alex, you’re the squeaky wheel. We’re going to move on without you.” And that was a very low point in our partnership.

Michael: Well, that’s like, “We think the business may need to break up.”

Cean: Yes. Yes. We got to that, we got to those types of conversations. And I talked to our Charles Schwab reps about it, and they suggested that, “Hey, every firm goes through this, it’s not just you guys. You really need to talk to these consultants.” And I think it was Rich Kerr at the time was our Charles Schwab relationship manager. And I think he connected me with John Furey at AGS.

Michael: Advisor Growth Strategies?

Cean: Yeah, yeah.

Michael: Okay.

Cean: And I had a first call with John and I’m explaining to him what’s going on, he’s like, “We do this, this is the exact thing that we do. We can help you out. This is what everybody goes through.” And I said, “I’m just really curious how much is it going to cost?” And he said, “Well”… And this is 2018-ish. Late 2018, early 2019. And he said, “Well, you have three partners.” At the time I think we had like six staff members, maybe seven staff members, aside of us. So, a total of, let’s say, 10. And he said, “Okay, well, our fee to come in and help you build a compensation structure and interview every team member and assign roles, we can do it for $27,000 bucks.” And I thought, “Oh my gosh, $27,000 bucks.” I’m like, “I don’t know if my partners are going to go for that.” That’s what I’m thinking, I didn’t tell him that.

Michael: Yeah. So, just size this for me relative to the business. What was your AUM or your revenue at this point?

Cean: So, at the beginning of 2019, we were at about $240 million.

Michael: Okay. Okay. So, $2 million-ish of revenue or so, give or take a bit. So, that’s a big number, inside of the firm.

Cean: In hindsight, yes, at the time it was a big number. We had just gone through the end of 2018, we had a bunch of market turbulence and the portfolios were down. And to spend… And then you’ve got each partner saying, “I’m not making enough money.”

Michael: Each partner. Yeah, right.

Cean: Yeah. Right. So, to take $27,000 out of the pot to fix this problem, you’re thinking, “Gosh.” But anyway, we hired them. And I’ll tell you what, in hindsight, I would have paid them triple. Because they came in, they interviewed every single one of our staff members, they interviewed us. They were the independent voice of reasoning. And really, it helped me, being the one that… And this is just my perception, maybe Rydan and Alex felt this way, too, that they were in the middle. But I felt like I was in the middle of Alex and Rydan. And the type of person I am, it was very difficult for me to hear the things that Alex was saying and think logically. When we had these discussions…

Michael: It’s hard not to get defensive of the business or prior decisions, maybe even with the best of intentions. Just it’s hard in the moment.

Cean: Yeah. And these conversations, we had many of them. And they always were emotionally-driven, very difficult conversations to have, and would run all of us to the ground. To the point where it was our business was suffering because we were having these conversations. But I remember we went. Advisor Growth Solutions, they’re here in Phoenix.

Michael: Well, that’s convenient.

Cean: Yeah, yeah.

Michael: Nice touch, that he’s literally local.

Cean: Yeah. And so all three of us went to their office. And they had this spreadsheet that they created, and they basically showed us all the clients that Alex had brought in, all the clients that I had brought in, all the clients that Rydan had brought in, that we all had agreed on, “Here is what it is.” And it was an emotional meeting, but we had the spreadsheet. And we left that meeting not on good terms. And it was a Friday. And I think AGS was kind of like, “Well,” they’re kind of trying to be the independent arbitrator there.

Michael: Yeah.

Cean: But as I went away from that meeting and was able to actually look at the spreadsheet and try and just work with AGS, instead of work with Rydan and Alex, and be as independent as I could be, looking at the data that they had put together for us, I realized that some of the things Alex was saying had merit. And some of the things I was saying from the beginning, like, “Hey, we need…everyone needs a role and responsibility. And you guys have to commit to that role and responsibility, and we need to get paid for the role and responsibility as a salary.”

And so, anyway, what came out of this was we ended up with a compensation plan where we valued each activity. So, you bring in a client, you get a bonus for that. You get a bonus that’s ongoing and you get a bonus that lasts for two years. You work with a client, so you service the client, you get a different bonus for that that’s ongoing. And so, it aligned the activities that are valuable for Ironwood with what people were doing.

Michael: Which, I guess notably, for a business that you had run for 10-plus years as, “We did the transactions with each other to equalize this business, so we’re a third, a third, a third ownership and a third, a third, a third on income,” this made it not equal income.

Cean: Correct. Not equal income.

Michael: Were you still equal ownership?

Cean: They did not find a business reason to change our ownership. So, they did believe that we should still be a third, a third, a third.

Michael: Interesting. So, the deviation here was you all can be one-third owners for essentially how you split the profits of the business off the bottom line, but you need to start paying yourselves a salary or compensation for your roles in the business. And those may…and that may not be the same compensation if you’ve got different roles or a different amount of growth you bring in or a different client base. You’re taking more from the middle of the P&L before you get to the one-third split at the bottom of the P&L.

Cean: Yeah, yeah. And it’s really it’s three components. It’s the base salary. And their base salaries are based on wealth advisor…or senior wealth advisor. And then my salary is based on CEO. And I actually have a CEO bonus that they don’t. They don’t have that ability to have that bonus. And it’s based on firm revenue growth and profitability. And then all of us, all three of us, have the ability to get the lead source bonus and the onboarding bonus and the servicing bonus. And so, depending on which clients I work with and which clients I’m bringing on is going to change my bonus structure.

Michael: So, just break those out for me a little bit more. So, I understand a lead source bonus. You brought a prospect to the firm, you get a bonus. I understand the servicing bonus, that’s essentially how much revenue you manage, you get compensation tied to that.

Cean: Yeah.

Michael: But I think you said there’s a third bonus, as well, in between for onboarding. So, what is that?

Cean: We kind of changed this over the years, we tweaked it a little bit. So, when an advisor brings on a new client… And that could be, let’s say, Cean gets a referral from one of his existing clients. Well, I’m not taking on any new clients unless they’re over $3, $4 million bucks. So, let’s say one of my clients refers me to their friend, they’ve got a million dollars. I’m going to do that client with one of the wealth advisors, because I just can’t, I don’t have capacity to take on any new clients.

Michael: Okay.

Cean: And so, I’ll work with them. And now when I work with the wealth advisor, because I brought that client to the firm, I am the lead source. And then the person, the wealth advisor that I close that business with, if we’re successful and we’re able to land that client, that client’s revenue, 25% of it for the first two years will be split with the wealth advisor and the lead source that was able to onboard that client. Now, if I decided I wanted to do that client solo by myself, then I would get the entire 25% and would not split it.

Michael: Okay. And that… So, 25% of revenue for the first two years that a client comes on board is a bonus pool that is half allocatable to whoever brought it and half allocatable to whoever takes it.

Cean: Yeah.

Michael: And if you bring it and take it, you get both pieces.

Cean: Yeah. And the impetus with that was because we used to have it just it would just be the lead source advisor would get 35%, 10% plus 25%, for the first two years. And then after two years, the 25% falls off. And what we were finding is that we started doing some business development things, SmartAsset, digital marketing, where we’re started to get leads come that really were Ironwood was the lead source. So, we weren’t paying that out. And it became very apparent that the wealth advisor, going through our process, the wealth advisor is a very important cog on whether that client becomes a client or not.

And so, it was very important for me to reward those wealth advisors for success when they land clients. They go through our process, we do a financial plan for them. I don’t care what anybody says, a lot of our advisors say they’re not salespeople. But when they go through that financial plan and they’re trying to sell somebody on our AUM model, they’re trying to show the value.

Michael: Yeah. Well, you still have to sell yourself and your services. It is different than selling a third-party product.

Cean: Yeah, absolutely.

Michael: So, in these scenarios where you started doing more centralized marketing, which means there is no advisor who’s the lead source bonus, Ironwood is the lead source bonus. If the advisor closes the sale and onboards the client, does that mean they still get the whole 25% bonus or they get 12.5%, they split it with the firm since the firm sourced it?

Cean: No. In those situations, I just give the 25%, 100%, to the advisor who walked the prospect. Because those are a lot more difficult. And usually… And we’ve added so much over the past couple years, this is how we started. We now have a business development person, full-time business development person. So, any lead that comes in, our business development person is the first contact. And so, then he brings that to whoever is the best-fit advisor, and then those two would split the 25%.

Michael: So, the business development person participates in it?

Cean: Yeah.

Michael: Okay. Interesting. So, why the business…what’s the business development person’s role then? How does that separate for… Why not just send leads to advisors? Where does this business development person fit in?

Cean: So, we signed up with SmartAsset a couple years ago and two of my advisors were taking all the SmartAsset calls. Or not calls, but the e-mails in and speed to lead. And they were just getting… It’s a ton of work. Ton of work. And so, we made the decision to hire a business development person. We get…I think we get 15 leads or 20 leads a month. Those go straight to our business development person. He’s making sure that they’re followed up with, that speed to lead, and he’s making all of the outreach so that it saves our advisors time. Our advisors can then spend time with current clients. In my opinion, the most important thing.

Once our business development person has somebody who has been vetted, qualified, then they can figure out, “Okay, X, Y, Z advisor is going to be a really good fit in this situation.” They can position that advisor. And then they do a meeting together, the advisor kind of takes over. Well, there’s a lot that goes into that for our business development person. So, they have to be able to share in that bonus. Because if they have success, I want them to share in that.

Michael: Right. And so, this business development person, this isn’t necessarily a, “Your job is to go out to networking meetings and develop centers of influence.” It’s not necessarily an external “go source the business,” it’s a, “We’re running centralized marketing that’s bringing in prospects, but someone has got to vet and screen and qualify the prospects, and just do the chase for you still have to be diligent in following up with people who reached out to you.” And so, this person is doing all of that work to make sure that you get a…that you close the business that you’re marketing to?

Cean: So, yes, that’s the main reason that we hired this person, that we actively looked for this person, was all the digital marketing that we ramped up. One of the things that… It’s kind of a side note here, but I think it’s important for advisors to know. If you’re custodied with Schwab, they’ve got some outstanding programs that you can be involved in. One of those programs that we were involved in was a marketing, basically, 101, where one of their consultants came out with our lead person at Schwab, they came out, I think it was, eight times and did this eight-meeting program with us to bolster our marketing.

And so, one thing that came out of that was we hired a digital agency and started doing digital marketing and started doing Google clicks, all of that stuff. That’s been pretty successful. And then we started doing SmartAsset, and we’ve been pretty successful there, as well.

And so, the immediate need for this business development person was, yes, everything you just said, do all the dirty work. But that’s still…even with our ramped up digital marketing and our ramped up SmartAsset, that’s still probably 50% to 60% of his time.

Michael: Okay.

Cean: The other 40% of his time, he comes from an old trust company, and so he’s meeting with a bunch of attorneys just to let those attorneys know, “Hey, if you run into a situation, we’re here for you.” So, he’s probably having three or four lunches a week on top of taking care of the SmartAsset and the incoming digital leads that come in.

Michael: Okay. And so, how much growth is driving off of all these new digital marketing initiatives?

Cean: So, we had really, really powerful success with Google early on.

Michael: Doing what?

Cean: So, we redid our…we hired a marketing firm. The first thing they did was revamp our website. And so, I had just gone through the marketing program with Schwab. So, I spent a considerable amount of time with them creating a client persona, creating our client value add. Really spent a lot of time with them. They built us a wonderful website. And like clockwork, all of a sudden, even just…we started getting lead forms filled out. I can count on one hand how many lead forms we had filled out on our old website in 15 years. And they switch it over to their website, done much better than our old website that we did. I think we did it with a little bit of consulting, but we basically tried to do it ourselves. And the product was reflective of that.

Michael: Understood.

Cean: Yeah. Which I’m sure every advisor goes through that, too. We had to pay this firm a good amount of money to take us through this website process. And then we started doing blogs and we started doing cornerstone pages. And they told us, “Hey, we’re going to do a Google ad campaign.” So, they researched the keywords to use and we started to spend some money on Google clicks. And we got a $3.5 million-dollar client in the first three or four months of doing the Google clicks. And we’ve probably gotten, I’d say, somewhere between five and seven clients in two years. Which doesn’t sound like a lot, but you start to add it up. And all of a sudden, now you’ve got $50,000 of recurring revenue that’s coming from those clients that now you just paid for your whole entire marketing in one or two years.

The Surprises And Low Points Cean Encountered On His Journey [1:21:03]

Michael: So, as you’ve gone down this journey, what’s surprised you the most about trying to build your advisor business?

Cean: What’s surprised me the most? Oh, man. How difficult it’s been. When we left the insurance agency, I’d only been there two years. And it just so happened… It’s kind of a funny story, but I’ll leave it for another day. We were trying to be sly about leaving the insurance agency. And long story short, an e-mail was intercepted and we ended up being asked to leave. But it just happened to be when the owner of the company was there. And he brought me in for an exit interview and he said, “Hey, I just want to tell you one thing.” And I said, “Okay.” And he said, “Running your own business is hard. There’s a lot of stuff.” And he was very right. But it’s also very fun.

And so, I think one of the big surprises for me is the amount of work, but also how much I actually enjoy the work.

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

Cean: Absolutely 100% when all three of the partners were… When I was having to have conversations with my wife about, “Hey, we might have to disband the company, I might have to start over,” that was definitely the low point. And it’s funny, going through that process with AGS literally…we were at about $240 million of AUM and they just put us in the right seats. And we’ve just…it’s been…my staff is happier, they’re like, “Well, instead of having three bosses, we now have one. Because now you’re the CEO and we can make decisions faster.” There’s no infighting because with 95% of the decisions I’ve got authority to make the decision and I deal with the ramifications.

Now, one of the things that came with that responsibility was me feeling like…you mentioned this, I don’t know if it was early on or when we were talking before, about each advisor has this where they feel like they’re out over their skis or they’re doing something that’s over their head. When they told me I was going to be the CEO, I was like, “Whoa, whoa. I don’t know how to. What am I getting myself into?”

So, the first thing I did was you talk to your friends. And I’m a runner and I’ve got a bunch of running friends. And one of my running friends said, “Cean, you talk to us all the time about your business running. Why don’t you just have a couple of us be your advisory board?” And I’m like, “That’s the best idea ever.” So, I put together an advisory board.

And that’s also something I really enjoy now, I’ve got friends and business partners who are now on that advisory board who have helped Ironwood. I don’t compensate them. I take them to dinner once a quarter and basically have an agenda that we always go way off agenda and always talk about awesome things. But going through COVID, these kind of things, that I’ve never had an experience being a CEO or having that kind of responsibility, if that advisory board wasn’t there to help get me through that, it would have been very difficult.

Michael: So, was there tension from Alex or Rydan about just going this path of, “Okay, Cean is going to be the CEO and makes the decisions now”?

Cean: There actually was not. John got us all into the conference room and he said, “Hey, guys, I have some good news.” And we’re like, “Okay.” And he said, “You guys are really in alignment on a lot of things. And so, Alex and Rydan both think that Cean should be running the company and should be CEO.”

Michael: “How do you feel about that, Cean?”

Cean: Well, I…

Michael: I’m just envisioning he says that and all the heads at the table turn to look at you.

Cean: I was ready for it. Because he asked me the same thing and I said I should probably be the one that is managing the company. But when he actually said it, one, I was surprised that both Alex and Rydan were on the same page there. But two, it literally felt like a ton of bricks on my shoulders, like, “Oh my gosh.” Now, instead of three people that have all the responsibility but none of the responsibility, now it’s one person with all the responsibility and there’s no…I can’t say, “Oh, well, I thought that was Alex’s,” or, “I thought that was Rydan’s.” There’s no getting around it.

Michael: Yeah.

Cean: But it’s also made me better. I feel that I do very well under pressure and I’m a very competitive guy, I wanted to make sure I did well. And that forced me to reach out of my comfort zone per se and talk to my friends, and then all of a sudden create this advisory board, look at the business in a completely different way as a CEO, not as an advisor. And we made a bunch of changes right out of the gate. We didn’t have a minimum and we implemented a minimum quarterly fee of $1,250, so $5,000.

As part of that rollout, we partnered with FeeX, which is now Pontera, because we had a lot of clients that had assets outside of us at the 401(k). We were giving them guidance on that, but we weren’t getting compensated for it. And so what an awesome thing to package together, “Hey, client, you’re at $300,000, but you have an $800,000-dollar 401(k). We have this new minimum. We have this new software program that allows us to help manage your 401(k).” We have this one, basically, reset conversation with every single one of our clients about our minimum, about FeeX and Pontera.

And just basically, we made clients tell us if they were going to allow us to manage their money or not all at once. Versus working with somebody, and I’m sure everyone’s done it, you work with somebody and they’ve got $200 grand with you and they’ve got a million-and-a-half-dollar 401(k), you helped them with it for 10-plus years, they retire, and then they say, “Oh, I’m not going to let you manage the 401(k).” It’s a difficult thing for AUM advisors to go through that conversation.

And so, we didn’t have to wait 10 years, we have that conversation with every single client. We moved over about $40 million in assets under management to Pontera in about a year and our client count went down, we got rid of some clients that just were never going to roll over their 401(k)’s to begin with. And so that allowed us more capacity to do some of these growth type things and to add the marketing. So, our client count went down, our expenses basically went down, and our AUM went up.

All of our ratios improved tremendously over that period of time, and it was based on one change in the business. And it was a yearlong project that every advisor had to…in those pre-scheduled meetings that we have with clients, they had to bring it up. And for some clients, bring it up again, and then bring it up a third time, and then say, “Hey, next meeting you’ve got to have a decision on this because we’re not going to work with anybody that doesn’t pay us $1,250 a quarter.”

Michael: And so, how did it feel rolling that out and having clients who you’re going to lose in that process?

Cean: It felt…it was scary at first. But then once we had some of those conversations and most of the clients are like, “Wow, you can manage our 401(k) now? And I don’t have to send you the lineup and I don’t have to send you changes?” They were almost relieved.

Michael: Because Pontera just makes all that happen to do the trading on the held-away accounts?

Cean: Yeah. And also, it also is a very good tool to really analyze the 401(k). It will tell you if there’s a self-directed brokerage window inside the 401(k), it will tell you if there’s loan features, it will tell you what the expenses of the funds are. It is a very useful tool. And above and beyond that, our clients, it might have been scary to roll all of this out. And I asked the board and they said, “No, we would love the fact that you could manage our 401(k),” and their response was the same. And all of them except for one board member are clients. So, when they gave me that response, I was like, “Okay, this is perfect. People want this.” It’s not… They don’t like the disjointed, “Hey, I have to send you these recommendations and you have to go make them, you have to go into your 401(k) plan and change them.”

And so that definitely…once you kind of see the reaction, you start to feel good about the decision. And then take it a step further, you start to see the people who don’t allow you to do it and you’re like, “Oh.” I could have almost picked out the people who weren’t going to do it in the first place. And they’re the same people who just they want the full-service advice, they want all of the guidance, and they want to pay half the price.

The Advice That Cean Would Give His Former Self [1:30:38]

Michael: Yeah. So, what do you know now you wish you could go back and tell you from 10 years ago, 15 years ago as you were going down this road?

Cean: I wish we would have dropped our insurance licenses, I wish we would have dropped the broker-dealer much sooner than we did. It just makes you laser-focused on what you provide for clients. And now for… We still believe in insurance, but we have a resource, a company here in the Valley, that does all kinds of insurance, and they have agents for the different types of insurances. And so, if our clients need to pick up a 20-year term of 30-year term policy, we have a resource that we can send clients to to make sure that they fill that gap.

Michael: And so, who do you work with to do that?

Cean: It’s a company called Arizona Group here in town.

Michael: Okay. And so, just I’ve got to ask, as a firm that wrote insurance and did this business for so long, does it bother you, is it a challenge to send the implementation out the door knowing what they’re going to get compensated for a client you basically lobbed up to them?

Cean: Maybe initially it was. And we had some stuff that was in the hopper, so we sent them a lot of business right when we turned our stuff off. And it was…some of them were…we probably sent $40,000 to them right away in commissions. And I would be lying if I didn’t say that I didn’t think about that. But what a lot of advisors don’t understand is the amount of work. And I can appreciate it a lot more because I’m dealing with our back office all the time. Our back office hated filling out applications, they hated following up with clients about insurance. It was not worth the amount of commissions that we would receive for the amount of work that the…and just how much extra work it would throw on their plates.

And so, once we got rid of that, and then they could really focus on the wealth management stuff, you’ve got a happier back office, also. And in hindsight now, I have no problem with it, Michael. I don’t even care that we’re lobbing it up there and they’re… Because they’re still…

Michael: Because they’re doing all the work to make it happen…

Cean: They’re doing all the work.

Michael: …that you really don’t want to do.

Cean: We all know when you deal with clients and you tell them to go purchase a long-term care policy or a term policy, even a term policy, to get them to actually do it you’ve got to hound most people.

Michael: Yeah.

Cean: And that’s not fun.

The Advice Cean Would Give Younger, Newer Advisors [1:33:17]

Michael: So, what advice would you give younger, newer advisors looking to get started today?

Cean: I would give newer advisors, I would give them the advice to really look into what drives value for an advisor firm. When I was starting off, and we didn’t discuss this, but part of the whole AGS thing was, “What is it worth that Cean manages the Ironwood portfolios, that he’s the portfolio manager?” And a lot of…I think a lot of young advisors might think that that’s a really valuable piece. When you actually talk to industry professionals who deal with this stuff on a day-to-day basis, it’s not as important as you might think.

And so, you really want…if you’re younger, you want to, one, financial planning and following Michael, that’s probably the smartest thing you could do. Because his team provides such great resources for advisors. I can’t tell you how many times I’ve forwarded one of your LinkedIn posts to all of my advisors and said, “Hey, you guys need to read this.” Many times I’ve done that.

So, younger advisors, you need to follow Michael, first and foremost. And that financial planning is much more than… more important to get clients to realize that they’ve got to focus on the financial planning aspects, the things they can control, and not worry so much about the portfolio and what’s happening in the markets. You’ve got to know how to be empathetic, and you have to know how to help them get through those volatile times emotionally and try and drive them back to the financial plan, and using the financial plan to really dictate the decisions that we’re all making.

What Success Means To Cean [1:35:05]

Michael: So, as we wrap up, this is a podcast around success. And one of the things that always comes up is just literally that word “success” means very different things to different people. And so you’re on this wonderful path of successful growth with the firm, as you’re now crossing half a billion dollars and continuing to grow. And so, the business is doing well. How do you define success for yourself at this point?

Cean: That’s tough. One of the things that I really… And it’s changed over my career. And it probably will continue to change. But one of the things lately, or over the last couple of years, that’s been really instrumental in my looking at Ironwood and to quantify how successful or how well we’re doing is to see the employees that we have and the strides that they’ve made, the career growth that they’ve had inside of our company, and looking at where they’ve come from to where they are now. To me, that’s much more important than what I personally do, is looking and seeing their growth. That, to me, is the definition of, “Were you able to help other people attain their definition of success?” And as we go through this, I find myself building my personal goals around making some of my team members, putting them in position to be successful themselves.

Michael: I love it. I love it. Well, thank you so much, Cean, for joining us on the Financial Advisor Success Podcast.

Cean: Absolutely. This was actually a lot of fun. Thanks for having me.

Michael: Awesome. Thank you, thank you.