It's my real pleasure to introduce our next speaker, someone I've been privileged to get to know over the past several years, Tim Cochise. Tim is a leader in our profession. Here it says a leader in wealth management worldwide, but I'll go off script a little bit. Formerly chair of the CFP board, as well as many other organizations that are not written here, nor have I written down. But he confers, or he has been conferred just about every leadership award this profession confers over a 50-year career, which I don't believe, because he started when he was five. Tim led planning services at Bank of America, Deloitte, Cochise FITS, and as CEO and chair at Experian. Please welcome Tim. Thank you. Thank you, David, and good afternoon, everyone. I realize that I'm following lunch, so there may be a few sleepy eyes out there. I'll try to do the best I can in the next hour to share some observations and insights that I have gained over those 50 years, and particularly in the last decade, where I have done a lot of consulting work with RIA firms around the country on issues having to do with developing strategy, making improvements in governance structures, coming to grips with succession issues. So I focus on this a lot. I've seen many, many, I don't think I can count how many situations that I've had an opportunity to become involved in, and hopefully through that have gathered some wisdom that I can share with you over the next hour. We've got a lot of ground to cover in only an hour, so I'm going to probably zoom, sorry for that word, I'm going to go quickly through a number of things. I'm going to pause from time to time and ask if there are questions. There should be a few minutes left at the end where we can also do some Q&A, but along the way I'm going to pause and see if any questions or comments or disputes have developed, because I expect to say some things that won't necessarily be comfortable for you. In fact, if I don't do something like that, I probably will have failed in my objective here. So I was told by NAPFA that I have to identify what the learning objectives are. There they are, and the main thing is number two, five key imperatives for success, and they fall into these categories. The thoughts I'm going to share with you are going to be how you can do a better job of taking what already exists in your firm and tuning it up, or making some quite specific improvements in it, or in maybe a few cases, turning 180 degrees and doing something different. I don't think there'll be much of that. I know this audience pretty well, and I don't think that there are going to be many 180-degree turns required, but there may be some important changes that I'm going to encourage you to make. So we're going to talk about identity. What is firm identity? Most firms in our industry haven't done a very good job of establishing and then communicating what their identity is. We're going to talk a lot about growth. That'll probably be the largest segment of my conversation with you. We'll talk about staffing, we'll talk about governance, and we'll talk ultimately about coming to grips with succession, succession of management and of the ownership of firms. The five fundamental themes, and if you already understand what I mean within all these words, you can leave now because you've already grasped what I'm going to try to convey over the next hour, and the words in italic are there for a purpose. The first subject we're going to talk about is distinctive brand, distinctive identity, and then we'll talk about intentional growth, not just waiting for it to happen but going out and seeking it. And then the third item, staff are supreme. So you might be surprised for me to say that because those of you who know me and have heard me speak before know that, in my view, clients come first, and that is the guiding principle of the fiduciary standard that the people in this room hold dear. Clients' interests do come first, but staff are, I'm going to say something maybe controversial, are equally important. Analogize it to a restaurant. You cannot have a restaurant where you only have patrons but there's no one in the kitchen or no one serving the food, and you can't have a restaurant that survives more than a day if all you have are people in the kitchen and people serving the food. You need both patrons and you need staff. The same thing is true in our businesses. We need clients and we need staff to serve them. Hierarchy and division is the theme of the comments that I will make about governance. I do a lot of work in helping firms improve on their governance structure, and my remarks are going to be, I hope, helpful to you. In a few cases, I suspect you are already going to have the full gamut of the governance structure I'm going to propose. Most of you, I'm sure, do not, but I think you can see what I'm going to suggest to you as a pathway toward what you might ultimately either need to have or want to have. Then finally, management and ownership are not the same thing. This is the crucial insight about having successful plans for succession. Let's go from there and talk about brand. The combination of vision, mission, values together are what your brand is, but each of those elements are distinct from each other. This is an area where I see a lot of people making mistakes. I've read thousands of vision, mission, value statements. I've seen at least 1,000 websites, and guess what? They all say the same thing. I'm sure if I could paraphrase what yours says, something like, we provide holistic financial planning and investment management to provide our clients with peace of mind and help them accomplish their objectives. Is that sentence about what your website says? Guess what? Everybody says the same thing. To understand the distinction between vision for your firm, what your firm's mission is, and what the values are, and to have that combination of things be as distinctive as possible, be as unlike everybody else as possible, is what you should strive to do. Vision is about the future status that you desire for your firm. There should be something in there about time frame. There should be something in there about size. There should be something in there about geography. A good vision statement would be, we seek to be the most frequently quoted wealth management firm in San Diego within five years. That's a vision statement. Why is that helpful? It's for internal purposes. Clients and prospects and centers of influence never see that. The vision statement is for your internal audience because this is measurable. You can see if you're making progress toward it, five years, San Diego being the most frequently quoted firm. Can you measure that? Sure, you can count up the quotes. Five years is a particular period of time. Two years in, you can see how you're doing. Four years in, you can see how you're doing. This is the kind of vision statement you should attempt to achieve for yourself. Oops, sorry, I'm going the wrong way. It's distinct from your mission statement. Most people put mission and vision together in one statement and get very confused. The mission statement is an external message. It can also be an internal audience, but the main audience for the mission statement is an external one. It's the distinctive purpose for your business, the distinctive clientele. If you have a niche specialization, some of you I'm sure do, whether you recognize it or not, you probably have one. If you do have one, that belongs in your mission statement. We are the most relied upon wealth management firm for physicians in this community. That's a mission statement. It's distinctive. It tells people on the outside of the firm what you're all about. And then finally, values. That's all the elements of your culture, priorities, how you focus, what you strive to do, what you say you're never going to do. It has an internal articulation. Those are the words that you put down on paper to describe your values, but this is the most important part. It's observed externally. It's your behaviors. Your behaviors speak much, much more loudly than words do. And I urge you to think of your values in those terms. It's not what you put down on paper, but it's what you in fact do, how you behave. So together, vision, mission, values are your brand. The what you are is your vision. The why you are is your mission. The how you operate is your values. And together, those three things are your brand. And being intentional about this brand is what is going, and you'll see it come up in other contexts as we continue this conversation, you'll see how important that is to have something that you can look to and your people can look to and the people outside your firm can look to and say, yeah, that's us. And guess what? That's only us. No one else fits that. I'm going to pause there for a moment and see if there are any questions before we move on to the topic of growth. Okay, no problem. So, the next element of these five elements is intentional growth. Emphasis on the word intention. Everybody, it's human nature, everyone would like to take a breather now and then. And you can say to yourself, markets are behaving a little bit better this year, clients are feeling pretty good, we're happy, we're making money. The staff feels like they're already full up, they don't have any more capacity. Can't we just stop? Can't we just sort of stand still and enjoy how good the present is? It's natural human desire, but it doesn't work. You cannot stand still because you are working with flesh and blood individuals who age. They are not standing still. They are getting older. They are going to be depleting their resources, eventually they're going to die and give those resources away to charity or to family, people who aren't necessarily your clients. So if you do not grow, what happens? Your business is withering. Your business is beginning to die. Growth is an imperative. You can't not grow. As much as you would like to just sort of, can't we just stand still for a while? No. The answer is no, you can't. And maybe some people will want to challenge me on that, we'll see. I'm going to give you an opportunity to challenge me. So you have to intend to grow. You don't just wait for it to happen, you have to intend to grow. And this is important at a manageable pace to accomplish your objectives, whatever those business objectives are. But as we tell our clients, it's important to articulate what tangible, measurable, time-bound objectives are, so you can tell if you're accomplishing them. How do you keep yourself accountable to accomplishing your clients' objectives if they haven't put them in terms that are somehow measurable and have a time frame around them? So the same thing is true about your firm's objectives. How fast do we want to grow? How big do we want to be? How many people do we want to have? How many offices do we want to have in five years or ten years or whatever it is? And notice how that dovetails with this notion of vision. If the vision for your firm also then translates into the business objectives, that will be the motivating factor and the measuring factor for the intentional growth. So I'm going to offer a few strategic suggestions about that intentional growth. First of all, marketing and sales. I'm not going to ask for a show of hands, but I suspect that if I did and asked you how much of your budget you devote to marketing and sales as a percentage of your revenue, I suspect it's going to be a small number. The average from a recent Schwab survey that was published just last week suggests that most RIA firms spend not very much on that, and it's actually gone down. And the average is now about 1.7% of revenue is spent on marketing and sales. I'm not talking about personnel. I'm talking about hard dollar costs on things like website, events, social media presence. All of those things that cost some kind of money, 1.7% is the average that is spent by wealth management firms. I'm going to propose to you that you target 2%. It's not much more than the average does now, but I suspect it's a lot more than many of you are doing that are waiting for the growth to happen as opposed to being intentional about that growth. When you think about other industries, other kinds of businesses, 5% of revenue is peanuts. Most businesses spend vastly more than that on developing new business. The wealth management business has been lulled into complacency about growth and can't really afford to do that going forward. The rate of growth of wealth management firms is, this may be shocking to you, if you strip out market performance, it's about 3%. That is not a recipe for long-term success. So spending a lot more than you already do on the hard dollar costs is probably going to be essential. And the payoff is big. Now I'm going to switch gears a little bit and talk about the personnel costs involved. That same survey that I just referred to indicated that the average firm spends about $4,000 to acquire $1,000,000 of AUM. So one-time cost, cost of acquisition, $1,000,000 of AUM costs about $4,000 in staff time. Sounds like a lot of money, but think about what $1,000,000 of AUM does over time. If your rate of revenue is about 80 basis points, some are, I'm sure, higher and some are lower, but if it's about 80 basis points, $1,000,000 of AUM is $8,000 a year. And if your margin is 25%-ish, that's $2,000 of profit a year. That's the lifetime value of that $1,000,000 of AUM, 25 years worth, 30 years worth, 40 years worth. Even if you apply a huge discount rate to all of those profits, the payoff for developing business is enormous. I'm roughly calculating it as 10 to 1. You get paid back 10 to 1 in terms of present value for what you spend on developing new business. Referrals. We could spend an entire afternoon talking about that. I won't say too much about that other than to acknowledge what you probably already know, is this is where most of your new business does come from. Referrals from clients, referrals from centers of influence, but the more you have a distinctive brand and the more you spend on marketing and sales, in other words, the more impressions that the community of potential clients, prospects, the more times they see your name in the press. The more times they see it in some kind of social media context, the more your referrals will be because you become familiar. Oh yeah, I know those people, that's my wealth management firm. You should come and see them, they're really good. So referrals are going to continue to be probably your most important source, but they probably shouldn't be expected to be your only source. You need to feed the environment in which that occurs. Specialization, again, we talked before about vision and mission and how your firm's mission should involve whatever specialization or niche identity you can do, and that is going to put you in a position to be able to attract more new business within that niche because you will become known to being very good at serving people who are within that niche. And in fact, it's not a false expectation. The more work you do within that niche, the better at it you get. And so the more people who are going to want to be your clients who belong to that niche. So what about incentive compensation? Another element of potential strategy. I won't ask for a show of hands, but I think if I did, probably half of you have some kind of new business incentive compensation system already in place. The reason why perhaps not all of you do is because these things are very tricky. They can diminish, they can either support or they can diminish the values of your firm. You have to be very careful about not turning your organization into a competitive environment where there is a great deal of money at stake in terms of bringing in new business. It's tricky to share the incentive because it's often the case, given what I understand about the nature of your businesses, it's very rare that a new piece of business is attributable to only one person. Usually there's more than one person involved in that, so sharing the incentives are sometimes very difficult. So I don't want to suggest that you not think about incentive compensation for new business development as part of your strategy for intentional growth, but be careful. It's got some really tricky elements to it. And then a business development person. Not someone who's going to close the business, but someone who's going to keep track of all of the efforts to develop a new business opportunity. Someone who's going to set up the meetings. Someone who's going to follow up and make sure that the memos are being written to the file so that the next time that prospect is touched, everyone knows what's happened before. That kind of coordination function is something that some firms actually hire someone to do. The data that, again, from the same Schwab survey, indicated that only about one-third of firms have such a person. And of those, in most cases, it's a part-time person. Yes? Just a quick question. Any thoughts on balancing the incentive compensation versus the client services of existing clients? Well that's part of the trickiness of them, but let me repeat the question about the balance between compensation for servicing existing clients and an incentive reward for bringing in a new client. And I don't mean to be flip about this, but you've touched on one of its big problems, which is having an appropriate balance, rewarding people for taking very good care of existing clients and not having that be eclipsed by the rewards you provide to people for bringing in new clients, who someone is going to have to serve. So that balance is part of the trickiness of it. Sorry, I don't have a simple answer for you about that. So again, only a third of firms have such a person, and in most cases, it's a part-time person. It's not a full-time situation. But what I'm going to propose to you, and I realize we have firms of all sizes here, that when you get to be about 500 million of AUM, it's time to bring someone like this full-time into the firm. It's no longer a part-time job. It's no longer what someone does on Thursday afternoons after they've done everything else they've done. This is a person who devotes his or her full-time attention to this kind of activity. So you have to acknowledge the cost. None of this stuff is free. Hard costs, personnel, training, new, more efficient systems, technology, more powerful technology. It's not free. The events cost money, occupancy. Eventually you hire more people, and even in a post-COVID remote work environment, at some point you need more space to rent. And then those incentives that we talked about before, those are hard dollar costs. And then there are soft costs. Management complexity. If you have six people in your firm, this is very easy to see, how many individual relationships are there? 30. Six times five. If you have 60 people in your firm, it's not quite the same arithmetic, and it's quasi-exponential, but it's measured in the thousands. So the management complexity, as you add staff, becomes a significant burden on the people whose job it is to manage. So you may have to hire more managers. And then the pace. I suggest you maintain your existing or your target margins as the measure of whether the growth that you're achieving is the growth you want. So if you are currently at 25% margins, that's sort of your bogey. Let's spend this money, but let's make sure we're staying at 25% margins. But remember, J-curve. You're making an investment. So your margin is going to necessarily decline at first, before it can increase. And if your target is to, well, we're at 25 now, but we'd really like to be at 30% margin, well, that's your bogey. So you want to grow, and with scale, it's a very appropriate expectation that your margins would increase with greater scale, because some of your costs are going to remain fixed or will not increase at the same rate as all of the other costs. So that's your bogey. What is your target margin? And recognize that at the outset, it is going to decline. And you need to monitor staff capacity along the way. Your staff probably already feel, listen, I'm already full up. I don't have any space for taking on any more clients. That may be true. There's benchmarking you can do to determine whether your staff is more or less fully occupied relative to peer organizations. But at some point, you may simply have to bite the bullet and hire more staff to respond to the growth that you're seeking. And with regard to the client satisfaction part of it, here's where the clients come back into play. As you continue to grow, you have to make sure that you're not diminishing the service to your existing clients. I remember one time I had a conversation with a very important client. He and I were having lunch. And as lunch conversation, I was telling him about some great recent successes that the firm had had in bringing on new clients. And he said, be careful, Tim. Don't let that growth diminish the service you give to your existing clients. And he was saying to me. And I took that very much to heart, that you have to make sure that the client service doesn't deteriorate, in fact, because of the additional scales that you can achieve with the growth that the client service, in fact, is enhanced. And one way to make sure that you're sort of on track about that is to conduct client surveys from time to time. Not all clients are going to respond. If you've done this before, you know it's only a small fraction who bothered to respond. And usually, they're halo writers. They'll tell you how much they love you. But a few of them, and you should cherish this, a few of them will actually complain about something. And that is a real gift to you, because hey, there's something we have to pay attention to here. This person would not have told us this if there weren't some truth to it. So let's pay attention to that. And I encourage you also, last point on this, is to cultivate a few canaries, the canary in the coal mine. And you don't need many, but two or three or maybe four clients that you trust to be very frank with you, that you know are very loyal to the success of the firm. Cultivate them. Enlist them as people who will tell you when you're screwing up. You need to know this. And those clients, those really loyal clients who really like what you're doing for them will want to do this as a favor to you. So cultivate them. You don't need many. Just a handful. Or actually, less than a handful. So on the topic of, I'm sorry, I think I skipped one here, yeah, I'm sorry. On the issue of costs, what about inorganic growth? America spends a lot of time on this. We could spend an entire afternoon on this. But one of the ways that many firms think about their growth opportunities is through some kind of inorganic growth, mergers, acquisitions. And for that, I just urge you to set a firm criteria. The size has to be within a certain range. If it's too small, it's just too much trouble. There's too much brain damage to go through. You don't want to do that for something that's too small. Geography. Is the geography complementary? Is the geography redundant? In other words, are they down the street? Do you gain any geographic benefit from this transaction? Is the service offering complementary or is it compatible with your service offering? Do we have good talent? And then about culture. Everyone says, and they're right to say this, that culture is the most important thing. If the culture isn't right, then you don't want to engage in a merger or acquisition transaction. But culture is very seductive and you can fall in love with the opportunity because all these people are so much like us. They're cut from the same cloth. They have the same values that we have. Oh, this is going to be so great. Careful of that seduction. It has to make sense otherwise. Culture is necessary, but it's not sufficient. Very important. Not sufficient. So establish some kind of minimum value accretion. How much additional value to the firm would be created by this? And if it doesn't fit that minimum, if we aren't going to grow our value by at least this much, you know what, it's just not worth doing. And finally here, assemble some kind of a team to manage the transaction, manage all the brain damage that's going to be incurred. Make sure that it's not everyone's brain that gets damaged. That you have a few people who have the right kind of skills, the right kind of appetite to do this and have them respond to that. And if you can hold for just one moment, I will get you, because I'm going to pause in just a moment. So be careful about the use of inorganic growth as the way you intentionally grow. Because the costs come early. The costs come early in the form of time, effort, the disruption to clients and staff, hard dollar expenses. You have to pay for valuations and you have to pay for lawyers and accountants. This is not free and the benefits, if they happen at all, come later. So talk about a steep J-curve. This is something that you don't just say, hey, the solution to our growth problem is we'll just merge with somebody or we'll acquire somebody. Careful. It's the costs come early and the benefits, if they're there, come late. So now I'll pause and ask if there are any questions on this. You had a question. So our firm has, in the last five years, successfully brought in five mergers to the firm. My question is, I agree with you, the importance of assessing talent of a merging team with the discretion that is needed inside of a due diligence process to make sure that this is a good fit on all of the parameters that you outlined. Do you have any recommendations for how to do so sooner, faster, managing that discretion? I'm afraid I don't. I'm not sure everyone heard the question, but it's, how do you do this due diligence and integration effort faster? And I'm afraid I don't have much of an answer other than you get better at it and it becomes faster and easier the more you do it. I suspect that fifth one was a lot faster and easier than the first one was. And it's because that team that's devoted to doing that work has gotten better at it. OK, so let's talk about staffing, the third element. And there are five elements. And believe it or not, I have a half an hour thereabouts. So I think we'll get through all of it. So another aspect of moving your firm to the next level and beyond is regarding staffing, attracting and retaining them. And here your brand comes into play. The more articulate your brand is and the more attractive your brand is, the easier it will be for people to come, want to come to work for you, and then to stay. You've got to pay them competitively, market-based compensation for the work that they're going to do. And then in terms of retaining them, the most talented people, the most ambitious people, the people who have the ability to drive the success of your firm into the future are going to want to see a genuine career opportunity for themselves. And if you don't provide it for them, they'll look for it someplace else. Or someplace else that has that career opportunity for them is going to come looking for them. So it's not just attracting them to begin with, but it's also holding on to them. So for every job, and I suspect here there'll be a lot, again, not asking for a show of hands, but my sense is that very few of you have written job descriptions for every job in your firm. You should. Every job, including the job of the CEO, including the job of the people who may have founded the firm. If they have a job to do, it should have a written description. And everyone should, as they enter the firm, should have a sense of what their career path is. How do I go from where I am, walking in the door, to someplace that is at the highest end of opportunity for me? And for many of the positions you would hire for the end of their career path might be being an owner of the firm, being ultimately a partner of the firm. That's not universal, but it's actually quite common. Many firms establish as one of their criteria for hiring someone. Could this person one day be an owner of this firm? If the answer is clearly no, no way. Don't hire them. Or at least those firms wouldn't hire them. If the answer is yeah, probably, with time and development, sure, why not? So know what the career path is, articulate it, and publish it so that people know. There shouldn't be any mystery about what the career path is. It should be something that everyone can point to and say, yeah, that's the path I'm on, and here's where I'm going. And here's how I expect to take on the next position. And now here is an area where I suspect you are very good with some of your people and not so good with others. Performance evaluations. Everybody in your firm should have performance objectives. And I mean everybody. That includes the CEO. That includes the founder. That includes the people at the whatever you define the top of your organizational structure to be. They need to have performance evaluations. And those performance evaluations need to be against the performance objectives that have been established for them at the beginning of the year or whatever the appropriate measurement period is. So if you aren't doing these things now, job descriptions for every position, career paths for every position, and performance evaluations for everybody in the firm, I urge you to do that. So let's talk about incentives. One of the most important, first of all, we're all human. We all respond to all kinds of recognition. And the recognition, even without money, is an important incentive. So you can make a big deal about getting a new client. So-and-so just brought in this really great new client. Congratulations. Let's really celebrate that. So even without money, recognition is an important part of the incentive structure for intentionally growing. And then beyond that, there can be bonuses. We talked a little bit about that earlier. Individual team bonuses, profit sharing. Careful about the profit sharing, though. The profit sharing is coming out of the owner's pockets because the profits otherwise belong to the owners. So you have to evaluate how much of those profits you want to share with the other non-owner members of the firm. And what is it about? Is it about new business? Or is it about being good guys? Or is it about just doing their normal job well? So be careful about how you define what that profit sharing is. But once you elevate someone from being a staff member to being an owner of the firm, the profit sharing here should shut off. There shouldn't be a double dipping of, well, I'm a potent employee of the firm, and so I share in the profit sharing. Oh, by the way, I'm also an owner, so I also get my share of those profits. It's one or the other. It's not both. And a pathway to genuine equity in the firm, not just a share of the profits, but actually being an owner, this is an important part of retaining the most ambitious, the most talented talent that you will have is showing them what it takes to become an owner of the firm. And again, publish that. There's no reason why everyone in the firm shouldn't know what the pathway to partnership is. If you have one, well, if you don't have one, you should have one. So develop it, develop what the criteria for that is, and publish it. Make sure everyone knows. How do you become an owner of this firm? Let's see. I now want to move on to the topic of mentoring. One of my favorite topics, because I do a lot of it and I really enjoy it, but be careful about this. It needs to be a voluntary organic proposition. It should not be mandatory. It should not have time frames around it. It should not have accountability around it. That's too much like a staff training program or a performance evaluation. Mentoring is voluntary, and it lasts as long as it lasts. Maybe it lasts a week. Maybe it lasts many, many years. So you can support it within your firm by developing some budget for people to spend on events that they may enjoy together. Send them to training programs. There are training programs about how to be a mentor, how to be a mentee. So don't be afraid to actually invest some money in this. But whatever you do, at least my strong point of view, don't make it mandatory. OK, I'm going to pause again and ask if there are any questions. Yes, there is. Please, go ahead. What are some of the training programs on how to be a mentor? I don't have the names of them off the top of my head, but I can find them for you and let you know. There are a couple of books. Again, the titles of them, I should have been prepared for this. But there are a couple of books about how to be a mentor. And they also speak to the relationship between mentor and mentee. And I'll do a little research. And if you give me a business card or something, I'll get back to you. So governance, who makes the decisions, when, and how? And the right answer is not everyone, all the time, and by throwing the weight around. This is not a governance system. So the proper answer to these questions begins by understanding that you should try to overcome the blunt force property law. He who owns 50% plus of the firm gets to call all of the shots. That's property law. With contract law, and I'm sure every one of your firms is actually, when you think about it, governed by some kind of contract, an operating agreement, a shareholder's agreement, some kind of agreement among the people who are going to be bound by it that identifies who gets to make decisions, when they make those decisions, and how they make those decisions. And contract law, because it is so much more nimble than property law, is what you should put your mindset around. Don't think of this in terms of, I can't relinquish more than 50% of the ownership of my firm, because then I lose all my power. Well, if you're only relying on property law, that would be true. But you're not, or you don't have to. You rely instead on contract law. So the answer to the question of who, and when, and how is driven by the notion of dividing the responsibilities and creating a hierarchy of decision making. In other words, there are agreed upon rules about who gets to make what decisions, when, and how, at anticipatable intervals. The picture of it, and again, most of the firms in this room, I suspect, are not at a state of size or development that what I'm going to describe here would describe what you already have in place. Don't worry. It's not that you have to install this tomorrow. But this is the direction in which large, successful RIA firms evolve toward your firm. If you want to move your firm to the next level of opportunity and success, should intend to move in these directions, where the owners at the highest level make strategic decisions and typically elect a board of directors. The next level of board of directors or an executive committee makes the next tier of decisions. And very typically, their main job is to manage the CEO. And then the CEO or the managing committee makes the day-to-day decisions. So let's talk about what the owners do. The owners establish the identity, going back to the very first thing we talked about. What is the brand of the firm? That's the province of the people who own the firm. If they're not taking charge of that activity, they haven't even begun to exercise their power as owners. They approve mergers, acquisitions, maybe if the office is going to be relocated, any substantial change to the client service offering, like, well, we never did taxes before, but now we're going to do income taxes for our clients. That's a pretty significant change that would typically be made at the level of the owners of the firm. Any amendments to the governing documents. Very importantly, electing the board of directors or the executive committee. That would be the role of the owners, to elect those people who are going to make the next tier of decisions. Usually, the voting at the owner level is by ownership weight, but it doesn't have to be. Some of the decisions might, or even all of the decisions, might be made per capita. And the example of a good subject matter for per capita voting is new owners of the firm. So that every owner of the firm, whether they're a big owner or a small owner, gets to equally influence the decision about who the next owner or owners will be. I see that often, where it's all by ownership weight, except admitting new owners. That's per capita. There can be supermajorities, so that it's not just 50% plus. It could be 65% or 70%. For some kinds of decisions, maybe not all, but to make sure that there is a really strong point of view among the owners of the firm. And the meetings are infrequent. This is about why the frequency is so important. The owners don't get together and decide these really important issues every day or every week. Maybe they meet once a quarter. That's about the typical frequency. And I would discourage anything more frequent than that. So what about the next tier, the board of directors or an executive committee? Well, it's the next level, whatever those decisions are. Could be leases, any substantial debt, the vetting of new owners for the owner's decision. Sometimes the board of directors does that decision itself. And most important, the most important function is the supervision of management, the hiring, firing, performance review of the CEO. And because this only works if it's per capita, this does not work if people on the board of directors vote ownership. They only vote per capita. You need an odd number, three or five or seven. Three is the minimum you could get away with. Beyond seven, it becomes a little cumbersome. So your choices are three, five, or seven. And the meetings are pretty infrequent, at most, once a month. Because how often do these kinds of decisions come up? They don't come up every day. And even once a month may be too frequent. Maybe once a quarter is frequent enough. And then finally, this is where the rubber meets the road, sorry for that cliche, is the management, the CEO, and managing committee. It's all the residual day-to-day stuff that is necessary to achieve the firm's objectives, whatever those things are. Hiring, firing of staff, taking on debt to perhaps a certain ceiling. And the CEO very often delegates authority to subsidiary managers, the head of HR, the chief investment officer, the compliance officer. All of these people have their own responsibilities. But they all report to the CEO. So the CEO is ultimately responsible for all of those kinds of activities. Usually, the CEO serves an indefinite term at the will of the board of directors. I've seen a few cases where there are specific terms, but they tend to be long. And they need to be long, because the CEO needs to be in place long enough to actually have an impact on the success of the business. So maybe eight years, 10 years. But even those that I have seen are quite rare. Usually, it's until you're no longer doing your job. And I'll get to that in a moment. And the CEO needs to be the effective leader of the rest of the staff, usually is the chief public spokesperson, and must be the cultural champion. There cannot be anyone in the firm who does a better job of being an example of the performance of the firm's culture and the adherence to the firm's values than the CEO. If the CEO isn't the champion of these things, you've got the wrong person in that job. So just to repeat quickly, owners control the really important stuff. But they do it on an infrequent basis. And their main job is to elect a board of directors who do the next tier of decisions within the hierarchy. And the board's main job is to hire, fire, and evaluate the performance of the CEO. And the CEO has all the rest of the responsibility for achieving the firm's objectives. And, as I said earlier, how important vision was. If the vision for your firm is to remain an independent firm indefinitely into the future, or if your objective is, well, we'd like to really tee ourselves up to be acquired, or to be an acquirer, either way, having this kind of robust governance structure is helpful. If you are an independent firm and you're going to get larger and more successful, this is the kind of governance structure you're going to want to have. And the more your governance structure looks like this, the more attractive an acquirer or an acquiree you will be. Your price will be higher. You will have more negotiating power with the acquiree, and you'll command a better price from an acquirer the more your governance structure looks like this. So, I'll pause there before we move on. Any other, any questions? Okay, so let's move on. Yes. So, if you don't have all this structure in place, how do you have an operating agreement that's very basic? How do you get from having very little to, how do you go from that, so you have some tips? Well, yeah, you have to decide where you want to be. The question is, how do you go from having something really basic, maybe simple, to something more complex like this? Well, you decide what you want along those lines, and be as elaborate as you are comfortable in being, and then call your lawyer and say, make a document that makes that happen. And that's what you do. Eventually, it's going to appear in some kind of an agreement that all the parties are going to agree to, or if they don't, then you don't have it. So, you have to cultivate people's agreement about these things, and when you have people's agreement about these things, then you call your lawyer and say, make it happen. Yes, and then I'll get to you. What size, typically, do you see for hiring a professional CEO? Well, I didn't use that term. The question is, at what size would you expect a firm to hire a, quote, professional CEO? I'm not sure that I have observed, in the real world, any particular size where, quote, the professional CEO is appropriate. I know a lot of very large firms whose current and very successful CEOs grew up as from the advisor ranks. They needed to have the talent for it and the appetite. I'm gonna talk about that in just a moment. But if they don't have the talent or the appetite for it, they're not the right person. But if you haven't attempted to cultivate people, if you don't hire people who have that kind of ambition, well, you may be forced, ultimately, to look outside to find a CEO. Yes? Does that rule still apply to non-advisor CEOs, maybe not bringing in an outside CEO? You're basically saying, in your experience, it's only advisors that are ultimately CEOs of companies. No, I didn't say that only. I just said that I don't think there's any particular size that says, oh, well, now we have to look for a professional CEO from, read into that, from the outside. Yes? Yes, and I think you had a question, too. I think yours was next. Basically, my question, a lot of us have small businesses and we've got one or two employees. When does the, this, to me, seems like overkill for? Oh, for a three-person business, this is great. This is vast overkill. I said, I realize that this does not apply to a lot of the firms in this space. But to some of you, are big enough that you ought to be thinking about this right now. I'm sorry? What is that size in terms of your experience? Well, I think yesterday at a panel, I was asked, what's the difference between a small, medium, and large firm? Large firm, I'd say, is north of one and a half billion. A firm that's one and a half billion ought to have something that looks like what I just described. You had a question, yes? I guess, particularly as you mentioned growing, but the owners, can they also be afforded directors? Are they also gonna be the executives? Like, there's probably a problem, right? A large firm, what do you mean by that? Yeah, no, the important, very important question, thank you for asking it, and that is, can you have some people who sit in all three of those tiers, and the answer is yes, but in each of those tiers, they have different roles to play, they have different power, and the expectations around them are different. I'm gonna make the point in just 30 seconds, that managers can be fired. Managers must be fireable. They have to have performance expectations, and there has to be performance evaluations around them. Remember we talked earlier about how to manage staff? Performance evaluations for everybody? So the CEO has to be fired, fireable, from that job, but he may also, or she, sorry, he or she may also be an owner. Well, you aren't fired from being an owner, unless you are fired for cause or something and have to forfeit your shares. We're not talking about that. You're not doing the job. We have to take you out of this job, but you stay being an owner, and so it's very often the case. By definition, the ownership group, they're all owners. Board of directors usually are drawn from the ownership group, but they don't have to be. I know firms that have not only non-owners on the board of directors, but non-employees, people from the outside, and if you're gonna bring people from the outside into the firm, that's where you would put them. You'd put them on the board of directors. Does that answer your question? That's great. Okay, thank you. Thank you for the question. So now it's time to talk. We only have, well, by my watch, we are at the end of our time. I don't know how comfortable people are with going a little over. I realize that we're now at the end of the hour. Those of you who wanna stick around and listen to a few things I wanna say about this are welcome to do that. Those of you who feel you need to leave, I won't be offended if you get up and leave. So succession is, I think I, yeah, there we go. I went one step too far. Succession has two features. It's the succession of management, two transitions, the succession of management and the succession of ownership. Management is about control. Ownership is about value. And these are distinct propositions. They can differ in terms of the people involved, the timing involved, and they do differ in terms of the purpose. And this is an area where the biggest mistake I see first-generation founder CEOs make is in confusing these two things. Oh, I can't relinquish ownership because that means I'm relinquishing power. That is what? A property law mentality. Remember, your firms are governed by contract, not by property law. So you can, in fact, transition ownership of the firm without in any way transitioning the control. The control is governed by the agreements that you're engaged in. The ownership is about value opportunities. And so once you make that, once that light bulb goes on, oh, those are different things, then people start to get comfortable in making the first of those two transitions. And the first one in terms of time, the easiest one to make, believe it or not, is the equity transition. Because at some point, and this is probably true for most of the people in this room who are founders of their firms, you're making a lot of money. You have been making a lot of money for a long time. You're probably already rich. And consequently, you can afford, from a personal financial standpoint, to begin to share some of that wealth with other people who will create the ongoing success of your firm. So at some point, do a financial plan for yourself or have a trusted member of your staff. Do a financial plan for you to determine whether you have, quote, enough, whether you've already achieved all of your financial objectives so you are in a position to transition some of that value to other people who will eventually make you even richer than you are now. So distinguish between control and value. So the management transition is about achieving the business objectives. It's about power. Where does the power flow? And it's about talent and appetite. Not everyone has got the skills to manage the business. And even if they have the skills, not everyone has the appetite to take on the headaches of management. Some people have a lot of appetite for it but don't have skills. You have to have both. You have to have the skills and the appetite. Look for those people, develop those people within your firm, and then the opportunity for transitioning management can happen gradually. It doesn't have to happen overnight. The only transition of management that happens or has to happen overnight is the CEO role. On Friday afternoon, one person is the boss. On Monday morning, another person is the boss. That's the only management transition that must be crisp. All the other management transitions can be gradual and can be partial. They can be experimental over time. And importantly, I've made the point already but I'll emphasize it, management transitions does not require ownership. You could have, it's pretty rare, but you could have a senior manager of a firm who is not an owner. You could have a CEO of a firm who is not an owner of the firm. It's quite rare but it's conceptually possible. And the converse notion is the really important one. Ownership does not by itself confirm management authority. I hate it when I hear people say, oh, I can't wait to become an owner and I'll have a seat at the table. To do what? What are you gonna do with that seat at the table? The only thing that ownership conveys is a piece of the pie, a piece of the profits and a piece of the value of the firm if and when that value is ever liquidated. That's what ownership is about. Ownership is not about power. And the mistake again that people make in the RIA world is to equate those two things, separate them. All right. So I made the point, I made the, whoops. Did they cut me off? No, no. You're over time, Tim. You're cut off. I made this point earlier and I'll repeat it. Accountability is key. About management, it's all about getting the job done. And so if managers have the responsibility for getting the job done and they're not doing it, they can be fired and they should be fired if they're not doing the job. And so think about that as you're putting people into these positions of management responsibility. Could you conceive of firing that person if they failed? Could they conceive of being fired if they failed? If you can't answer yes to both of those questions, you haven't gotten to this point in understanding that it's about power and about accountability. It's not about value. Okay. So I've already made the point about ownership successions being about value. It's about current value and future economic rewards. If we had more time, I'd love to talk some more about the various criteria, about the pathway to ownership. Mentioned yesterday in the panel I was part of that usually the criteria for ownership is some combination of competence and contribution and commitment to the firm commitment being this is my lifelong home. But tenure is often used, and I hate to see that because tenure is problematic. They say, well, once you've been here five, or you have to be here at least five years or 10 years or sometimes even longer before you can be considered for ownership. Or once you've been here five years, then we'll consider you for ownership. I hate that. And the reason why I hate that is because it establishes false expectations that may not be able to be achieved. Once someone gets to five years, they say, hey, it's my turn. Bring me on, it's my turn to be an owner, right? So don't talk about tenure. You have better ways to determine whether the person that you're considering has the right stuff to be an owner. Years on the job has almost nothing to do with that. If you can't tell whether you've got the right person after six months or a year, you're never gonna know. It does not take five years to learn that. So please, I urge you, don't use tenure in your pathway to partnership. I've already talked about this. Start early to maximize the incentive and to enhance the affordability. The sooner you start the equity transition, the less expensive it is to buy in. Consequently, the more affordable it is for the person who is going to become a new owner and the more motivated they are going to be to grow the business so that the ongoing value of the firm will be even greater. So the person who starts to transfer ownership is going to be rewarded very handsomely by the future growth of the firm that they are now incenting by having other people have an ownership stake in the firm. Okay, and facilitating financing, the last bullet there is really important. Even at an early stage of transfer, the cost of buying in can be pretty high. And so some kind of facilitated financing is very typically the case. Some kind of discount of what might be a third-party value. And the discounts make sense because it's a small business, it's illiquid, there's no transferability typically other than back to the firm or to other people. So for all of those reasons, there are big discounts that are appropriate. 25%, maybe even 30% is pretty typical. But even with those discounts, are we crowding someone else? Is someone else about to use this room? There's another session in here. Okay, what time do they start? Five minutes. Oh, okay, all right, well, all right. I will finish in less than five minutes. And promise, promise. So the last point I want to make, I wish we had more time because this stuff is so much fun for me. But the facilitated financing, I urge you not to look to seller financing as your first and only choice because the seller is going to want to have his or her money probably a lot sooner than the seller financing framework would involve, usually four or five something years, something like that. And that's a long time for the seller to wait to be rewarded. But it also creates an additional problem. You've laid over the existing relationship of manager, managed staff member with the relationship of creditor and debtor. You don't really want that complication on top of all the other complications of managing staff. So you want to look, if you can, to third-party financing. And there are several banks now that are in the business of making appropriately priced, appropriately long-term financing available to transactions in this business. I've gone way over. Thank you very much for your time. Thank you.

wealth management

consulting

strategy development

succession planning

brand identity

intentional growth

marketing

staffing

incentives

governance hierarchy

ownership transitions