Podcast | How Financial Advisors Can Grow Beyond a Business Plateau

Mike Langford:

Hey there, it's Mike Langford. Welcome to another episode of the Advisor Financing Forum podcast presented by SkyView Partners. This week on the show, Aaron Hasler and I are joined by performance psychologist John Randall from eXtraordinary Financial Advisors, a coaching and consulting firm that focuses on, you guessed it, helping financial advisors grow their businesses. Aaron invited John to come on the show so that we could explore some strategies that advisors can use to push through the natural plateaus and obstacles that often get in the way of growing your business organically or via acquisitions. This is a fantastic episode. You are absolutely going to love it. Now, before we get started, as always, if you have questions about your specific M&A plans, please feel free to swing by skyview.com or call 866 567 6282, and the SkyView team will be happy to walk through the options that are best for you and your business. Okay, let's get to our conversation with John Randall. Well, John Randall, welcome to the Advisor Financing Forum podcast. So wonderful to have you.

Jon Randall:

Hey, thanks for having me. It's awesome to be on with both of you. It's going to be a great session today.

Mike Langford:

Yeah, I tell you what, it is going to be and it's probably more awesome to be on with Aaron than me, but that's okay. We'll get to it and have a good time. It's going to be fantastic stuff. So I love these types of shows by the way, just so for those who are listening or watching, like we are literally in three very distant parts of the country. We got up there in the upper Midwest, we got East Coast and down here in Austin, Texas. So I love this type of stuff. The miracle of technology. You're getting expertise from all around the country, so you're welcome audience members, this is going to be fantastic.

All right, so we're going to be talking a lot about growth today. We're talking about advisors growing their business and whether that's organic growth or what's near and dear to SkyView's heart and Aaron's going to talk deeply about this, acquisition growth, so using M&A as a means for growing your business. But before we get to that fun stuff, I think it's important to acknowledge the uncomfortable truth that many advisors are stuck at a plateau. John, in our prep call, you mentioned that most financial advisors are not growing their business much, if at all. I wonder if you could shed a little bit of light on the typical growth rate and the plateau levels you're seeing in the industry at the moment.

Jon Randall:

Yeah, a lot of financial advisors live and die by the markets, and you look at growth rates, they're pretty darn low for the average typical advisor. And you look at a lot of the aging of advisors that has occurred, a lot of them are in outflow, so they've got money going out for living expenses in retirement, things like that. And they're not bringing in the assets they used to maybe when they were younger and trying to really grow the business. So the growth rates are kind of blah. And my role is working with some of the fastest growing practices who are looking to grow, who are looking to break barriers, who are looking to acquire, which is what makes SkyView such a great partner with us.

And a lot of them just get stuck. They get stuck as individuals around this million to 1.5 million in production. So they built up a really great business and they sort of hit a ceiling there. Some of them hit another ceiling around 2.5 to 3 million if they've got maybe an advisor or two on their team. And a lot of it just has to do with too many clients. They've done a great job acquiring, they built this thing up and it just kind of gets clogged up and they don't really have the time to do the rainmaking and the growth activities that built the firm. They kind of get stuck in just drowning in clients and it leads to a lot of these firms just not growing at double-digit 20% growth rates, what they really should be.

Mike Langford:

That's really fascinating and I want to dig into why they're plateaued and what causes that type of ... you kind of hinted at one of them, too many clients, so they reach a client service capacity at some point in time, but I want to hear more about some of the other stats. I mean, I had this guest Kiran Bowl [inaudible 00:04:18] on another podcast last year, and he's from McKinsey. They have this wing of McKinsey called Price Metrics and they have direct data feeds from 70,000 financial advisors so they can actually see what's really happening in their business. And they found that 75% of all growth for the industry has been market driven growth and that most financial advisors are not growing their business at all.

And to one of the points you made, John, you said that they found that 40% of advisors are actually a negative growth, meaning their businesses are shrinking, they have outflows, assets are actually shrinking. So that really tells you that there's a bit of a bell curve there. Advisors grow, they get through this plateau and at some point in time, they're on the other side of it there. Now Aaron, I imagine you and the SkyView team also see some trends in terms of advisors who reach a certain level where their business isn't growing and yet they're looking to explore an M&A growth path. So how do you handle it when you see a plateau?

Aaron Hasler:

Yeah, I mean that's why we're so interested in this topic and wanted to bring John into the conversation because as we're seeing rates in this kind of rising rate environment, practice acquisition has gotten a little bit more expensive. Rates aren't outrageous, but they're still up there. But what we're finding is that if you have a solid organic growth foundation in addition to your practice acquisition strategy, you make for a tremendous enterprise. And that has huge dividends for you both in the short term in terms of how much you can borrow and how quickly you can continue to grow and acquire these practices. But then of course, I think it also is super meaningful for long-term enterprise value. I mean, if we look at it from an investment banking perspective in the valuations, obviously, if you can show a track record of strong, organic, consistent repeatable growth that makes your practice that much more valuable in my opinion and that much more attractive on the open marketplace. So those are all factors for us that really make our advisors, I think, better borrowers if they can achieve more organic growth.

Mike Langford:

I love it. And John, to build on that, you had some interesting anecdotal stuff or maybe it was actually data driven stuff. You were talking about, when you look at advisors businesses, the average one that you talked to is bringing on two or three, I think you said two or three clients a year, so they're not bringing on dozens, and that kind of feeds into the narrative here that they're not growing, but what are you seeing? So I guess let's dive in. What is happening here? Why are they hitting these plateaus?

Jon Randall:

I think a big part of it here is that financial advisors start out as a job. They start out as a financial advisor. If anyone's in the business of acquiring other businesses, I mean this is real business, you're an entrepreneur and it's a whole nother level to be an entrepreneur and an owner than to just be a financial advisor. So it's graduating from the financial advisor role, which we all knew for so many years and making that shift, it's very, very difficult. And I lived it. I was an advisor, I've purchased, I've sold, I've done those things, and it's bizarro world. It's almost the opposite of a lot of what you're thinking and you have to get out of the day-to-day roles if you're really going to grow a business at another level.

So I mentioned earlier that so many practices just do a good job with clients. They pick up new clients over the years and they get filled up and they get so caught up with these clients, they're overloaded, they probably have too many of the wrong clients, and then there's no time to do any of the growth activities. But if you want to be a business that's profitable, now we're talking, SkyView likes profitable businesses. It's a lot easier to get lending if you're really profitable. So there's a lot more you could do with existing clients to drive profits. If you're constantly bringing in new assets, lots of inflows, way more than the outflows. So inflows minus outflows equals net flows. If your net flows are really strong, that kind of organic growth of just new assets from clients, referrals from clients, that is like pure profit man, it just pads the bottom line.

So businesses that get those fundamentals down and are really great at helping clients and really great at acquiring new clients, now we've got a really profitable business. Now you're ready in a position to do the inorganic growth or exponential growth of buying another business, whether it's bigger or a similar size to yours out there. That's the mindset shift and that enlies the keys to going to the next level of really being a great buyer and going to the higher levels of growth in this industry.

Aaron Hasler:

John, what is the big choke point? Advisors, like you said, they grow their business and they've built up that client base. What are those kind of big first steps that they get paralyzed on in terms of achieving that better organic growth? Where do you see them typically getting stuck?

Jon Randall:

It's hard because a lot of great financial advisors, they have the, I've heard this, I didn't make this up but I heard this. They have the heart of a social worker and the mind of a capitalist, so they generally want to help people. So they kind of have a similar service model for everybody. So the client with multiple millions producing maybe in the five figures of revenue per year, they're getting the same as something that's producing in the three digits of revenue per year. And so it really dilutes the advisor's ability to generate higher levels of revenue and higher levels of profit because they're caught up with so much time with so many clients that they're actually losing money in. So that's really the biggest clog that I see is really the revenue or profitability per client. Just over the years, they just build up practices, they just build up a lot of people, and they're spending so much time and that is the biggest clog right there. And so finding ways to unclog that bottleneck that every practice faces, that's really some of the keys to unlock the next level of growth.

Mike Langford:

And it's interesting, I think it goes back to that route you said, you touched on it when you started describing some of the challenges that advisors face and why they face those challenges. You mentioned that they start off as a job, as a financial advisor. I'm pseudo famous, at least in my own mind for saying that many financial advisors got their start when they were called stockbrokers, right? I mean if the average age of a financial advisor is like 60-ish now, and they started their career 30 years ago or a little bit more, they were called stockbrokers back then, they just were, they were not called financial advisors and that was a job. They entered the call to come be a stockbroker.

And when you have a job that you effectively own because you own your book of business, your book of clients, your client roster there and you go about it that way, you don't think in business terms or you don't think about efficiency, you don't think about profit margin, you don't think about okay, capacity issues and so forth. You just think about serving your clients. And so it stands to reason why many advisors, they hit a, I guess a pain point of, this is uncomfortable for me. I don't know what I'm doing here. I never said out to be a business owner.

In fact, I had one guest on the show that said many financial advisors are accidental business owners. That wasn't what they were thinking of doing and now here they are. How do you start ... and I guess this is a question for both of you. When you see that in an advisor who is looking to grow either organically in the things that you're doing there at XFA, John or Aaron, when an advisor comes to you and they want to grow, how do you start to help them get through this process of thinking more like a business owner?

Jon Randall:

Yeah. So it starts with what's going on in between the years. It's a big shift to go from the job of an advisor to a true business owner. And so look, not everyone has to be a business owner advisor. There's many awesome practices out there that aren't buying others and that's great, but we're talking to the ones that are looking to grow a lot, they're looking to borrow and buy a nice business and have a great arrangement here. So it's learning those entrepreneurial skills. No one ever taught us that stuff when we learned how to be advisors. You have to go out and learn it from your own, from another source or a coach or consultant like our firm does. And so it's learning those skills and thinking differently.

So you have to get out of the financial advisor thinking, you have to be thinking like a business owner and then you start to realize that oh my, that client I've had for 20 years that was just really nice and came to me my first year and I only make $600, but she's so nice. When we work with those people, we've got to realize that you know what? We're hurting that person. If you're working with them, they're much better off with somebody else because you probably don't have time for them. And as an entrepreneur, you're pretty much losing money working with somebody that produces a low amount of revenue. It's going to be a lot more fun to take a pile of money and light it on fire in the parking lot than waste tons of time working with smaller clients that you shouldn't be working with. So it's a different kind of thinking.

And we have to leverage other people differently. So maybe that's why people bring in an advisor on their team or maybe you work with another practice that has advisors that you could work out some arrangement with or maybe even sell off some clients to work with somebody else. It's really, the quality is really key when it comes to growth and it is cleaning up what's going on in between our years and cleaning up the business. And there are some steps to leap and we've seen practices double in six to 12 months really quickly just by thinking differently and implementing some of these things, cleaning up some of the smaller clients, doing more for their best clients and by accident without even intending it, they start to get referrals from some of their best clients because the experience is better.

So I mean the practices that are doing that, again, going back to being a great buyer and being ready to buy, you've got to be thinking more like an owner. You've got to clean up your own book before you're ready for it because whatever you're buying, they're going to have the same problems. It's highly likely they're going to have a whole lot of clients that are probably clogged up and you got to have the capacity to take them on, and you're probably going to have to do some cleaning up of that book eventually. But it's really, capacity management I'd say is a big component of the entrepreneurial thinking and it leads advisors to realize that I can't work with 500 clients. I can probably work with about a hundred realistically.

Aaron Hasler:

Yeah. And that's interesting because we talk John all the time about buyer preparedness and what we're seeing at SkyView is that people come to us and say, well, I want to grow. My growth has plateaued, I want to go acquire a practice. But to your point, they don't have the infrastructure. They haven't either hired that second generation advisor or they haven't taken some of those steps and started to think like an enterprise owner. Right. Well, what do you see as the most common ways that an advisor can start to take that next step? Do they typically hire a junior advisor first or do they have to set up more infrastructure within their business of a more defined client service philosophy? What are the kind of steps one, step two to get an advisor out of the gate?

Jon Randall:

Yeah, it really depends on the size. So if somebody's, let's say producing like half million to a million in production, there's probably not a huge team. There's probably not a ton of systems and processes in place, which is okay, it's a growth level. That firm should be in growth mode and acquiring clients should be the case. So this to me is where the foundation of client segmentation is really important and allocating time more in the percentage of the revenue, so more time where more revenue is coming from, less time where less revenue is coming from. So that can really free up a lot of time then to grow to the next level to get over a million or to be able to acquire. I think once we hit that million to 1.5 million, that's like the sound barrier for an individual. So another advisor on the team is required whether they're on your team or you work out some arrangement with, there's a lot of teams out there with lots of practices. If you don't want to hire someone, train them, lead them, that's okay. There's others that really enjoy that.

So it is bringing in someone around that point to really break through and get past the 1.5 barrier, get the two, two and half, 3 million, 5 million. It just requires other advisors on the team. And so you've either got to make that shift to say, you know what? I've got to bring in others and I've got to develop them and lead them, or I need to partner with another firm that has advisors or is passionate about developing advisors and leading them because a mistake we see too is, oh, I'll bring in an advisor, I'll dump all my small clients on them, then they're miserable. That's not a profitable arrangement for anybody and the advisor wants to leave and you kind of got the same problem.

Advisors should be working with higher quality clients, and if we're wearing our entrepreneurial hat, we should be thinking of each advisor we invest in on our team. What's the return on that investment? What's the profit margin for either seeding this advisor with a bunch of clients in revenue for them to service? There's probably some kind of margin between the revenue created and what they're paying them. So it's a whole nother labyrinth of what to pay them. We certainly get into that with our clients, but that's really the formula.

And you look at the biggest like, some of the Barron's top 100 Hall of Fame practices we work with, they've just figured out this formula that, you know what, I can go out and buy a million in revenue. I can pay someone a couple hundred thousand to work it and I can duplicate that 50 times. And it's really just more of capacity management, it's more of an entrepreneurial structure than it is the traditional just I'm going to work with 350 clients and clog myself up and then I'll clog up the next advisor. It's more about quality. So it's moving up market, it's about quality. Yes, every break point of we see, think about that million break point. If you're doing a million out there, you want to go to 2 million, you're going to need another advisor and don't dump the small clients on them, get them working with better clients. That can get you to 2 million really easily, and there's probably a third advisor need to go to 3 million.

So it's capable of each advisor to produce a million. It's not typical, but it's something to look towards and work towards, but it's the capacity per advisor you really got to look at and what's the revenue per hour in segmentation of the level of client that they're working with? Those are some of the things that come into play of what's next to add to the team to really make that next leap. But it really does come down to advisors servicing clients. It's the most time-consuming thing we do. So that's really where the intention needs to be in a growing practice.

Aaron Hasler:

John, we hear the stats all the time, but what does the average advisor work with in terms of the total number of households and then what's their time per week spent client facing, especially some of your clients? So they're in these kind of executive roles who are saying, I'm making decisions here, but I'm also seeing clients. How much time do they spend on client work versus infrastructure management and the business?

Jon Randall:

That's an awesome question, Aaron. We get this one a lot and I've done a lot of industry research, a lot of research on the people we're working with who are growing. There's an old Moss Adams study that said that the typical financial advisor can handle about 250 clients, but there was a wide range of quality in the clients in those studies. So there might be a handful of good ones, there might be a handful that are just totally disengaged. When you really look at a high level of client experience, whether it's a quarterly quality contacts or you're running, my friend Rob Knapp has an excellent book called Supernova Advisor. They have a system called 12/4/2, which is actually monthly contact. Most of it is just quick five minute phone calls, four of the interactions are financial planning topics, and then two are a little bit longer in-person interactions.

So if you're running either kind of model, which both take about the same amount of time, if you're doing a quarterly meeting or you're running like a 12/4/2, they both take about four hours per year of sitting with the client to execute. So you just add that up and the amount of time we looked at even how many weeks per year is the advisor working? They got conferences, there's holidays, they might have a vacation. We tend to see a quality advisor sees about 20 client interactions per week. So you just add that up. The amount of time it takes to service it. We're seeing about 160 is kind of the full-time advisor, max capacity for all quality clients. Now again, if there's a mix of clients or a blend, I think that old Moss Adams study still holds true that they can handle about 250 clients. But if we're talking all quality clients, they're producing 5,000 plus, 10,000 plus in revenue. If we've really got a great business there, it's about 160 clients is max. I read another study it was 164. Any way you slice it just comes down to time.

Now, if you're an owner out there listening and if you've ever acquired or you've explored acquiring a business, it takes a lot of time. It's a lot of time to get the done deal done-

Aaron Hasler:

Right. It's a lot of time.

Jon Randall:

So you're not staying up all night multiple nights to do that. If you're an owner having other duties like acquiring, rainmaking, leading on the team, you probably might be like a hundred clients might be your max. I got to visit a great fast-growing practice we worked with down in Houston not too far from Mike. They went from literally 1.5 million to 15 million in revenue in the last four years. And they've gotten really good at capacity management, they've gotten really good at acquiring, bringing in advisors, leading them, they're doing all the things right.

But it's been quite a journey to get to that point. But I tell you a key fundamental in all these different levels is making sure that there is that number of capacity for client. Now the owner has had to get down to 30 clients because there's so much time doing all these deals and getting them done, they just can't handle anymore. So they're loading up their advisors with a good amount, 150, 160, we're finding for the really high quality advisors producing multiple millions in revenue that are really working with the better end of their book and that's really how they're running it. So really look in the mirror, what is your role? If you're going to have any buying, any rainmaking, any leading others, you've got to get down to even less and you've got to leverage other people to do most of the financial advisor work with clients.

Mike Langford:

I love this conversation and I want to pick at a couple of little points you made there that I think they're so important to hammer home. I mean the fact that A) if you're a business leader and you're looking to grow and you would kind of fancy yourself in the CEO's seat, well, a CEO can't be also the chief cook and bottle washer, can't be doing everything. You are going to have to leverage the efforts of other people and you're going to have to have people who specialize in serving certain types of clients and you may not, even though you love it and this is why you do what you do and get up in the morning, you're not going to be able to serve every client.

But one of the other things I think is so worth noting here is we've been hearing in this industry for the last decade or so that hey, with technology you can serve more clients. And that is true that there are some tools, whether they're robo-advisory tools you can bring into your practice to service lower end clients that don't have as much AUM to manage or whatever.

The challenge here is what sets your business apart and what we're actually owning here is a book of business of relationships. This is a relationship based business and lot of the things that I think you hammered home there, John, are you have to touch the client relationship. You have to interact with the client. They have to feel like they're loved, right? That you're paying attention to them. That they are in good hands. There's a reason why they chose you, Mr. or Mrs. Financial advisor to run their stuff. And so if you've chosen those 30 or 50 clients that these are my most important clients, you're still going to need to talk to them. And if you have a whole bunch of other ones, somebody else is going to have to talk to them.

Aaron Hasler:

Mike, you bring up a point that we see all the time too, which is as we're taking clients through the financing phase or over here on the investment bank as we're working with advisors is M&A is a time-consuming project. So you're talking about John's concept of 30 to 50, 60 clients for that lead advisor, but then you have to factor in the idea that they're going to spend X amount of hours courting that seller, working through that process, communicating. And it's almost like that onboarding a client, but it takes eight times as long and there's 20 more things to discuss. And we talked about this all the time of it takes little drip calls to that seller to help them understand, Hey, you're letting go of your practice and you're letting me, and so we've got to get to know each other and we've got to have little touch points.

And so advisors that are really successful at that M&A strategy really prioritize their time and I think prepare themselves in advance to say, okay, I'm going to court five or six of these sellers at a time, therefore I do have to focus on only these core clients and then be able to have the capacity and the ones that have that capacity and are able to execute on all those little touch points with the sellers are the ones that get in front of I think the best deals and have the best success because they do their homework and they kind of spend the intangible time that we think is so important in getting the trust of that seller.

Jon Randall:

It is well said. It's like courting a prospect but exponentially more. It does require way more touches and time to do it. And I think a lot of buyers who have missed out on deals, if they really look back in the mirror, they probably didn't do all those things. They're probably filled up with too many things, but the best buyers have really gotten themselves freer and now they can really invest the time and they're landing the deals. So that may not be everyone listening is there. It may be something to look forward to down the road that you get yourself freer, you leverage others to get to a point that you can be an even better buyer year after year after year. But it really comes down to your just individual capacity as an owner to land these deals and to get it done. It's probably the biggest reason we see people not growing, which is the whole topic here, but also not landing deals because they're not investing the time, it's turning off sellers and there's a lot of options out there, they can easily go somewhere else.

Mike Langford:

Yeah. You know what's interesting, Aaron, and you and I have talked about this in the past and you've jogged my memory on this, is it's not just courting the seller like, Hey, I want to buy your business, I think we're a match made in heaven. At some point in time in the process, you are going to need to talk to the seller's top clients before the deal is inked and they're going to have to feel like you and your team are the team that they're going to be in good hands with. Otherwise, they're going to, Hey, if this is changing ownership, maybe I should explore other financial advisor options. And they're going to have to feel like, okay, Aaron is going to be a good steward of my financial future just the way as John was. So awesome, he's got the capacity to serve me. I'm a top client at John's firm, now I'm going to be a top client at Aaron's firm. Aaron doesn't have a full client roster where he doesn't have time for me. So I think that's a really important part to be thinking about here.

Aaron Hasler:

Well, and I think the question that a lot of these sellers ask is where are my top clients going to go? And so they do want to get to know as they're kind of going through that process, who are the people that are going to take over these clients because that's where their security is, that's where their retention is, is in those top clients. And so they want to start to be able to envision who am I going to pass these clients over to and being able to outline that strategy. Plus I think, and maybe John could back me up on this is I feel like the bulk of the growth from these acquisitions comes in that first two or three years as you're meeting with these clients and you're setting that kind of new standard of service and you're getting to know all of the intricacies of their business and you're adding a lot of value.

And so that's the time where you need to be poised for the referrals. You need to be poised for all the little ancillary details that come out of those new onboarding relationships. And we certainly love to see it as to be able to go back and look at the statistics and see somebody who's done an acquisition strategy and then look at their financials and see the growth they have on those. Obviously it makes them great candidates for future acquisitions. It makes them almost kind of called upon by sellers.

And then when we're looking at it from a borrowing capacity, it makes it very easy to see if somebody has really grown organically from that last acquisition, Hey, you can never time these acquisitions. And one of the challenges we always get from a financing perspective is somebody's trying to acquire a business and then another deal comes along and they've been courting that seller for 18, 24 months. And so now the bank is funding two deals almost in maybe consecutive months. And so that's where we really like to see that kind of best borrower practice of, Hey, I am tracking my organic growth on a year-over-year basis. I'm doing these activities, these are my client segmentations and if we can prove all of this, it makes these from a bank financing perspective and absolute slam dunk to be able to see that type of data.

Jon Randall:

Yeah. It does, it drives those things, drive more profits and it makes it a lot easier to have the firepower to buy the next one. It really does. It is interesting to see the growth that happens. I think there's two things that contribute to that big growth in that first or second year that there's looking at the average age of advisor, which has been around 60, meaning that half are younger than that and half are older than that technically. So when you get somebody who's been in the business in the long time, they're sort of on an off ramp, they may not have been doing a lot with clients, they're not as full throttle as someone that's maybe on the younger end of the advisor spectrum that's really trying to max out everything they're doing. So that right there is, there's a growth opportunity if somebody gets in there and does more.

I think there's a psychological aspect too with the clients in the older advisor that, oh my goodness, what happens here if something happens to my advisor? True story. Last year acquiring practice with a bunch of very high quality younger advisors, purchased an older advisor who was selling, literally in one of the meetings with new young advisor, older advisor, the first transition meeting, the client says, thank goodness there's younger people around here. We've been wondering when this is going to happen. We've got another 3 million over here we didn't tell old advisor about, but we're ready to roll that over because there's young advisors around here that will be with us for the rest of our lives and help our kids.

So there's a lot of growth opportunity in these acquisitions and I love the market. I mean, it really can be a big return on investment. We've seen people double the production or revenue for practices that are purchased just because there's a lot of opportunities from within. There's a lot of assets these clients have that the older advisor never got. There's more business that can be done. There's referral potentials, all kinds of things that can go well, but that's really where these things pay for themselves very, very quickly when you can generate a lot more revenue, pay down the debt, or have a whole lot of profit margin firepower to go after the next acquisition.

Aaron Hasler:

That's my favorite story to tell too, John. And the reason because when I'm working with a seller, that allows me to tweak that price up just a little bit with all that opportunity that's out there.

Mike Langford:

Well, that's true. We've talked about that a lot, Aaron, that it's very common after an acquisition for the business to see a lot of growth because I always make a parallel to real estate investing. If you're buying a rental property, you're not buying it necessarily for the rents that it's generated before. That's great. That's a baseline. But I'm looking at like, can I do some improvements and then can I charge higher rents and so forth. I'm looking for the growth potential here because chances are if somebody's selling it, they have not been aggressively growing and keeping it up to date and making it, because if they were, they would be like, I'm just going to keep running this. Right.

Aaron Hasler:

John, any sense, this would just be a wild question, but any sense of what's the cost of acquiring a practice or clients through a practice? So if you just took one client and you said, what's the cost of acquiring that client by acquisition versus organic growth? Where organic growth, you've still set up an infrastructure, you've hired some other advisors, so I know it's not cheap, but any sense of how close or how similar are they or what's the delta between the two types of client acquisition strategies?

Jon Randall:

Yeah. You look at the typical metrics on acquisition these days. We talked to a lot of the valuation companies out there, and deals seem to be going for around three times. A lot of appraisals might be 2.7, 2.8. There's some situations where it's much higher or there's kind of like an auction service that runs up the price to three and a half times, but let's just say it's about three times the revenue level per client is acquired. So you acquire that. I've done the math on a 10-year note. The current interest rates, it's probably about 37, 38% of that revenue is going towards debt service. So you're paying that for 10 years. So there's a cost there and it should pay for itself. That's what's great about acquiring, these deals cash flow themselves, and if you grow it, then it's really a nice profit margin, but you said it best, acquiring a client organically is free.

One of my best practice we've worked with just got extremely good at the fundamentals of the client experience, working with less of the best clients. They did more business per client, they got high quality referrals per client and their mindset, they literally said, I would never go buy a hundred million in assets because I get it every two and a half years based on my flows of new assets, based what's coming in, what's going out. They're getting so many referrals because the high quality work they're doing, and they're not doing a lot of events or seminars to get them. It's just happening because the quality is so high and it's creating this demand. People are just coming in, it's free, it's all profit margin there. So for a lot of people, they haven't built up that kind of business and they go out and buy just because that's their main client acquisition method.

But if you combine the two, holy cow, now we're really talking where you've got massive growth, massive profits for your business. And I think these fundamentals of the client experience doing more with clients, getting referrals from your top people, if you really have those down in your business, then you add on this inorganic exponential growth of mergers and acquisitions, you can really build a massive, massive business. But to just buy without having some of these fundamentals down, you're just kind of adding to your problems. It kind of makes it worse, so it is a lot of cost to buy. It's fine. It can be very, very profitable. It really can be if you do it right. But the practices that I see get the biggest bang for the buck, they've got organic growth happening systematically, consistently, and when they have acquisitions, they're able to create more growth on the acquisition because they have the fundamentals down.

Mike Langford:

And that's a great point to make. It's not mutually exclusive. I mean, going back to the story that you mentioned where the selling advisor was an older advisor and they're like, Hey, I've been running a great business, but the business wasn't growing as much as it could because clients, at least one was holding assets back and potentially holding back referrals of their heirs, their younger family members. Because I think in that age discussion, we think about it all the time, is this person too old to run that company? Is this person too old to hold that government office or whatever that thing is, you start to think to yourself, okay, there might be, I don't know, that doesn't work with my timeline here.

Heck in sports, basketball, we talked about it in the prep call yesterday. I think about it all the time. What is the timeline of all these players line up for a potential championship window? Well, the same is true in your business. Some of these clients are thinking, well, John's a little too old here for my kids' stuff, and so my dad's-

Aaron Hasler:

[Inaudible 00:38:24] that championship window.

Mike Langford:

Right, exactly. So the business can be firing on all cylinders, but there may be a lot of benefit for acquiring or entering in some sort of M&A deal to merge the business and to put it back on track to grow as fast as possible.

I guess a lot of this has created a segue here and almost like a pit stop that we should actually make sure we cover because we're going to get into some prescriptive stuff, some call to actions in the next few conversation points. Why should advisors want to grow? I mean, we've talked about this before. This could be an amazing lifestyle business. Where like, if you're generating a million dollars of revenue a year and your profit margin should be pretty darn high, and you're maybe operating a small team of an assistant and maybe a junior advisor, doesn't stink, why is growth so important? Let's make that point. Hammer it home a little bit.

Jon Randall:

Well, that's really the two paths that you bring up, Mike. I mean, there's nothing wrong with that lifestyle practice. Probably running a 70 some percent profit margin of I'm doing a million. I got one person helping me out. I play a lot of golf, I travel a lot. It's kind of an easy business. There's nothing wrong with that. That's an awesome business. But there really is this convergence and really choice that you'll have to make that you've either got to be more of that lifestyle or I like to say boutique where it is smaller number of clients, higher quality, or you've got to go in more of the ensemble in more of a scaling method where it's, we can help a lot of people, but now we need other advisors to help it. That's really the convergence in our industry. And you see a lot of the biggest have just chosen, Hey, this is a scalable business because there's such a need in America.

There's a massive need for investment management, more so financial planning help and the practices that can do a good job for clients there, they're going to just magnetically attract other people because the number of advisors in the industry is dwindling. It's the greatest business to be in where it's, the need in America is drastically increasing, and the number of people that can help is decreasing. It's pretty darn good. So nothing wrong with that lifestyle business, boutiques awesome, you can make a whole lot of money that way. But just looking at the opportunity in our industry to be in position to scale, to be great at clients, to acquire clients from referrals, and to be able to buy other practices, oh my goodness, the sky is really the limit. And there's not a lot of industries that have this wonderful opportunity, but I mean, again, not too many that acquisitions can pay for themselves, we're in a pretty good industry.

Aaron Hasler:

It is pretty incredible, isn't it? Well, and realistically, how long can somebody have that lifestyle practice? Because it does feel like at some point either you're kind of doing a little bit of a disservice to your clients because you're just kind of standing still on it and if you're doing a really good job, you're getting referrals and you're growing without intentionally meaning to. So the idea of that lifestyle practice is probably a short window of time where you can probably do that, whereas we see advisors say, okay, maybe you won't have the fastest paced growth out there, but we'll continue to improve on the business and then add people in as we need to. You can still, I think, have a great lifestyle within this business and be active. I think there are very few ... to your point, John, there are very few industries that you can operate a really profitable business and then still be at a kid's soccer game by 5:30, 6 o'clock, right? I mean, that's just a huge opportunity we have. I think it's really fun to watch.

Jon Randall:

Yeah, that's awesome.

Mike Langford:

Great point, Aaron. It doesn't have to stop being a lifestyle business in terms of enjoying your lifestyle and not grow. So if you've got other advisors on your team or you've acquired another business or whatever, that should free up some of your time or maintain that, Hey, I only want to work a 40-hour week and I want to take six weeks of vacation a year, that's the lifestyle I want. Well, I'm going to have to leverage my time and efforts and have other advisors and other staff members doing certain things if I want to maintain that, and by the way, my lifestyle gets better because we're making more money. This is awesome. That's fantastic.

Aaron Hasler:

They can actually go on vacation. I mean, we do hear that a lot. We sometimes hear sellers come to us because they have said, I've been running that lifestyle business, but it isn't a lifestyle business. When I want to go on vacation, there isn't anybody backstopping me, right?

Mike Langford:

That's right.

Jon Randall:

I'm not really on vacation.

Aaron Hasler:

It's all of a sudden, I'm checking my phone and my wife's saying, Hey, we got to get out to the amusement park by 09:00, Mike. Mike, the recovering Disney vacation guy here. So I think that's an interesting avenue, and we're seeing even advisors in their forties and fifties sell up into an enterprise to say, Hey, I still want some of that quality of life aspects, but I know that I need that infrastructure behind me. And I like that concept. I like the strategy of being able to still continue to improve upon your service, but control. And then they have that kind of infrastructure to say, okay, if I've grown too much, now I can push off some of these clients over to this other advisor and stay in the family.

Mike Langford:

Love it. Love it. Well, glad we hit those points. Let's shift gears into how advisors structure their business for growth. Because we talked a little bit about this in the prep call yesterday, and it was pretty fascinating to me, and I think you might have some stats for us, John, in terms of what you see as an ideal structure, maybe even an ideal client roster size. We hit upon this a little bit. We mentioned earlier that advisors tend to top out, hit that max capacity at 160 clients, that they're really starting to run out of room to do anything other than service that client roster. So in your mind, what's the ideal number of clients an advisor should strive to have for it to translate into growth?

Jon Randall:

If we're looking at just pure, one advisor working with a client kind of relationship, keep in mind, high quality clients is about 160. Now, what's neat with some of the larger firms we're working with, they're getting out of the singular client advisor relationship, and they're thinking more of a team working with the clients. So there's a great concept out there called the diamond team approach, where basically four people surround the client. Then you've got a structure that's more like a dentist office. So if anyone's ... hopefully everyone listening goes to the dentist regularly and think about how much time you interact with the dentist, it's usually really, really short. They come in and tinker around and say, things look good. We'll see you next time. Or they get involved if there's something big that, oh my gosh, we have to do a root canal, then the dentist is personally involved because it's big time, it's a much higher dollar per hour task that they're doing.

But you think about, you deal with the dental hygienist who's wonderful, they clean your teeth wonderfully. They can kind of see what's going on. You deal with all these people and the dentist spends the least amount of time. So we're seeing the owner, the one that's very overwhelmed, can still be involved with clients and not alienate them, but leverage other advisors more in this team setting. So we're finding in that team setting that they can handle about 500 clients and about 3.5 million in revenue by having this diamond team structure. So we help practices implement that and kind of shift. It's not a lot are big enough to just appear there now, but it's just think a little bit differently about how, because the singular advisor client relationship, it is going to be limited, it's a little bit more difficult to develop people and move them up.

Whereas in a diamond team, it's not only as structured to help with capacity, but there's some development too. Others can help other people on the diamond that may be less tenured or maybe an up and coming advisor. Up and coming advisor, even if they're just a couple years in the business, they can talk about stuff with clients. There's more things that they know than the client. They can give some value and keep the more veteran advisors freer. But the veteran advisors should be helping to develop and train that person and teach them the more advanced things so one day they move up and maybe one day they're even leading a diamond team of their own. So some of the largest practices we work with, they've kind of got multiple diamond team structures going. So they're able to handle a high volume of clients, very high quality of client experience, but whoever's at the top of that Diamond team is not overwhelmed.

So little things like that help but about 160 clients, if you're an individual, and I'm talking to high quality clients who everyone should be working with, who's in buying mode. And that team structure, about 500 clients, 3.5 million in revenue. Those are some nice metrics we've really found to work and can help be a good barometer of when you need the next advisor and how to structure your business or multiple teams within your business.

Aaron Hasler:

That's an interesting concept too, because I love that. I feel like one of the biggest challenges we've got in our industry that's maybe even preventing some M&A or preventing some of this growth is the fact that we don't have a good pipeline and we don't have good training programs like we used to anymore. So that development I think is so critically important. I mean, that was kind of one of the inspirations to talk more practice management from the SkyView perspective is that is the choke point in growth for a lot of people. It's backfilling and finding those next generation advisors that they can train up and develop and have different talents and skill sets of, whether it just be a servicing advisor or whether it be that kind of rainmaker that can do that organic growth and close those clients and be in front of clients all the time.

Jon Randall:

Yeah, it's a huge gap that we see. I mean, I've been going to conferences in the financial industry for 25 years since I started as a brand new advisor right out of college. For 25 years in a row I felt like the youngest person at every conference that I've been to still, I'm still pretty young at these conferences.

Aaron Hasler:

I'm glad you feel that way. I'm starting to lose that. Yeah.

Jon Randall:

But I was at the end of the late nineties where if you could fog a mirror and pass a series seven, you were an advisor and there was a 98, 99% fail rate, most didn't make it, but the firm stopped doing that 'cause they realize we're losing so much money training they stopped putting resources out there. And the individual firms, it's hard for them to have the resources to really train people. So not a lot of it out there, but you're right, a structure like this can help people come into the business. Maybe even as an intern, maybe as in a support role in the beginning, maybe to move up as a very junior advisor who can do some basics with clients, then move up to maybe a full on advisor one day, maybe one day even move up and be a partner in the firm.

But the developing of advisors is a massive gap. There's not a lot of resources out there. But if you really want to grow and scale, that should be a big part of what you look ahead to and look at how can your firm gain some resources to really get other advisors trained up to deliver lots of value to your clients.

Mike Langford:

Such an important point because as you mentioned, when you came into the industry, John, when I came into the industry, that's the way business was. You joined a big firm. There weren't RIAs, that explosion hadn't happened yet. You were going to go join a big company that had a structured training program. Now it did look kind of like the movies. You sit here, you start dialing these numbers, your senior advisor is going to be talking to those people. You are also going to be studying for your series seven, if you pass those clients you brought in can be your clients or whatever. But there was a training program, right?

Jon Randall:

There was, but what's interesting, Mike, there was a lot of time we spent in training, right? I remember many hours per week I was learning in classes, learning a closing funnel, learning scripts to help lead people to make a decision. And then I'd talk to practices that say, well, my advisors aren't any good. And I ask them, well, what are you doing for them? Well, we have a weekly 30-minute one-on-one, but I skipped the last three because I was busy. And well look at what you had when you got trained and look at what you're providing. That's the gap. You've got to recreate some of these things or partner with another firm that has some of this stuff because if you're going to grow with scale and have capacity and leverage others to be servicing these clients, they've got to be good. They've got to keep clients. They've got to get more business with clients. They got to get referrals. So investing not only money into them, but investing time on top of the investment to get them proficient, that's the path. Huge, huge gap, but great opportunity though.

Mike Langford:

Yeah. So train your people, people. Well, we're really up against the end of our time together, and I think we could talk for, I don't know, another couple of hours here. And I think we've also teed up some topics for future podcasts featuring you, John, have you back on this show. So real quick, how can people follow up with you? I'm sure lots of folks are intrigued and are excited to get started growing their business or exploring what they can do to change their business to grow. What's the best way for people to follow up?

Jon Randall:

We have the easy website, xfa.coach, short for eXtraordinary Financial Advisors. So xfa.coach, just go on our website, we have lots of info there. We help practices grow. We help practices become better buyers, and with a great partnership with SkyView. A lot of the people we work with are just in acquisition mode, buying, and it's awesome to see. So we just add a little rocket fuel to help these rocket ships grow even faster.

Aaron Hasler:

Yeah, that's right.

Mike Langford:

Perfect. Well, thank you very much for coming on the show. Appreciate it.

Jon Randall:

Thanks guys.

Aaron Hasler:

Thanks Mike.

Jon Randall:

Awesome.

Aaron Hasler:

Thanks John.

Mike Langford:

Thank you very much for listening to and or watching this episode of the Advisor Financing Forum podcast. It's always fantastic to have you with us. Huge thanks to John Randall from eXtraordinary Financial Advisors for coming on the show to share some of his wisdom on pushing through those all too common roadblocks that advisors face in their businesses. Absolutely great stuff.

Now, before we let you go, if you haven't done so already, please do make sure you subscribe to the podcast on Apple Podcasts, Spotify, Google, the YouTubes, or wherever you like to get your podcast jam on. We are working on a ton of great content and you don't want to miss any of it, so click that subscribe button. Lastly, please make sure you swing by skyview.com to learn more about your options for financing, to facilitate your plans to buy or sell an RIA or independent advisory firm. Or if you just need to use the money to restructure debt or just expand your business, the SkyView team is there to help. Okay. All right. That's it for us today. We'll see you next time on the Advisor Financing Forum Podcast. See you. Bye.