#FASuccess Ep 036: Turning A Utilities Niche And A Radio Show Into A National Advisory Firm with Scott Hanson

Executive Summary

Welcome back to the thirty-sixth episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Scott Hanson. Scott is a co-founder in Hanson McClain, an independent RIA based in the Sacramento area that manages nearly $2.5 billion of assets under management for nearly 4,500 clients, most of which are telecom and utility workers.

What’s fascinating about Scott’s firm, though, is not merely that they managed to turn a niche in working with Pacific Bell retirees into a mega-RIA, but how their steady focus on reinvesting into marketing has allowed Hanson McClain to build an advisory firm where none of the advisors are responsible for their own marketing and business development, and instead can focus entirely on serving their clients – which in turn has led Hanson McClain to achieve a stunningly high Net Promoter Score of 85 with its clients!

In this episode, we talk about how Hanson McClain markets itself, what it took to get established in their initial niche working with Pac Bell employees, how they expanded successfully into marketing with a call-in radio show (although Scott isn’t very upbeat on the potential of marketing through radio today!), why direct mail for seminars and other marketing events still works for business development, and the depth of the marketing team that Hanson McClain maintains to sustain its growth.

In addition, Scott shares his own journey as an advisor, from starting out at a financial-planning-centric life insurance firm, to transitioning to work at an independent broker-dealer while building his hybrid RIA, why he eventually decided to let go of his FINRA licenses to focus solely on the RIA, and the challenges in managing and maintaining growth in an ever-larger advisory firm.

And be certain to listen to the end, where Scott shares why he decided with his partner to sell 70% of Hanson McClain to a private equity firm – despite the fact that he thinks the firm can grow to double or even quadruple its size in the coming years – because ultimately, the reality is that growth requires cash, and in the end it can still be a better deal to own a smaller slice of an ever-growing pie… and have the benefit of taking a few chips off the table as well!

And so whether you’ve ever been curious to know how a startup RIA ultimately grows to become $2.5B under management, are looking for marketing ideas and perspective on the benefits of having a radio show, or simply want to understand why an experienced and successful advisory firm would decide to sell to private equity (even when there’s no desire to retire), I hope you enjoy this episode of the Financial Advisor Success podcast!

What You’ll Learn In This Podcast Episode

  • Why and how Scott’s firm simply requires its advisors to be advisors, and handles all the marketing and business development on their behalf. [3:44]
  • The massive marketing effort – which includes radio, digital marketing, and direct marketing – that keeps bringing new clients to Hanson McClain advisors. [10:55]
  • How Scott first landed a radio show, and how he has used it to build trust and bring in future/new clients. [21:52]
  • What happens when smaller clients are transferred to different advisors within the firm, and why it’s not as controversial as one might expect. [44:41]
  • Scott’s view on the differences between “ensembles” and other advisory firms. [49:24]
  • What a “Net Promoter Score” is, and how it has played into Hanson McClain’s success as a firm. [51:46]
  • Why Scott encourages other advisors who work with retirees to consider working with a specific niche – such as a company in town that has a lot of employees nearing retirement – like he did with Pacific Bell and other utility workers in Sacramento. [1:07:55]
  • What it was like building a reverse mortgage business “on the side”, and selling it right before the 2008 financial downturn. [1:10:48]
  • Why Scott and his partner decided to sell 70% of their ownership of the firm to a private equity firm, even though they have no plans to retire. [1:18:43]

Resources Featured In This Episode:

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Full Transcript: Turning A Utilities Niche And A Radio Show Into A National Advisory Firm with Scott Hanson

Michael: Welcome, everyone. Welcome to the 36th episode of the Financial Advisor Success Podcast. My guest on today’s podcast is Scott Hanson. Scott is a co-founder of Hanson McClain, an independent RIA based in the Sacramento area that manages nearly $2.5 billion of assets under management for almost 4,500 clients, most of which are telecom and utility workers.

What’s fascinating about Scott’s firm, though, is not merely that they managed to turn a niche in working with Pacific Bell retirees into a mega-RIA, but how their steady focus on re-investing into marketing has allowed Hanson McClain to build an advisory firm where none of the advisors are responsible for their own marketing and business development, and instead can focus entirely on serving their clients. Which has allowed Hanson McClain to reach a stunningly high net promoter score of 85.

In this episode, we talk about how Hanson McClain markets itself, what it took to get established in their initial niche, working with Pac Bell employees, how they expanded successfully into marketing with a radio show, though Scott is not actually very upbeat on the potential of marketing through radio today, and why direct mail for seminars and other marketing events still works in today’s business development environment, as well as the depth of the marketing team that Hanson McClain maintains to sustain its growth. In addition, Scott shares his own journey as an advisor, from starting out a financial planning-centric life insurance firm, to transitioning to working at an independent broker dealer, while building his hybrid RIA, why he ultimately decided to let go of his FINRA licenses to focus solely on the RIA, and the challenges in managing and maintaining growth in an ever larger advisory firm.

And be certain to listen till the end, where Scott shares why he decided with his partner to sell 70% of Hanson McClain to a private equity firm, despite the fact that he thinks the firm can grow to double or even quadruple its size in the coming years. Because ultimately, the reality is that growth requires cash, and in the end it can still be a better deal to own a smaller slice of an ever-growing pie. And, have the benefit of taking a few chips off the table as well.

And so, with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast with Scott Hanson.

Welcome, Scott Hanson, to the Financial Advisor Success Podcast.

Scott: Thanks, Michael! It’s nice to be here today.

Michael: I’ve been looking forward to this episode, because you’ve had, I think, just a fascinating journey as a serial entrepreneur through the advisor industry. Like, I don’t know what else to call it, because I feel like I’ve watched your firm reinvent itself several times over the years, in how you’ve built and grown, and as we’ll talk about, you know, off to the side you made a little reverse mortgage company that Genworth ended out buying for tens of millions of dollars, because that’s a fun side hobby to building an advisory firm. And now, you were in the news recently because your firm sold a rather substantial stake to a private equity firm, which, as you guys put it, was “an opportunity for bigger growth.” And I find that a fascinating thought process, when what most advisors, kind of, they sell most of the equity because they’re done, not sell most of the equity because now they want to make it bigger.

Scott: Well, you know, it’s funny Michael. I actually feel like I’m just getting started. I’m 50 years old, and I see my days ahead of me much larger than my days behind me. So I’m actually pretty excited about the future and what that holds.

Why And How Scott’s Firm Simply Requires Advisors To Be Advisors [3:44]

Michael: Wow. Very cool. So, I guess, to start off, like can you just tell us a little bit about Hanson McClain as it exists today, and the advisory business that you have now?

Scott: Yeah, yeah! So, at Hanson McClain, we are an investment advisory firm that really, we specialize working with hardworking savers. So, the…you know, the mass affluent I think is what our industry likes to call them. But our kind of sweet spot is working with people that have somewhere between $500,000 and a couple million dollars in their retirement savings. We tend to target people at or near retirement. That what our specialty is, helping people through that transition and trying to figure out what makes sense for them. And we’ve got a team of roughly 20 or so advisors with a overall staff, total headcount, of around 70. And we manage just shy of $2.5 billion. So that’s kind of who we are as a firm.

Hey, but we’re also very marketing focused. So, our organization is one that, our advisors, their role is to be a financial advisor and to talk with clients and help them with their planning process and whatnot. And the firm’s responsibility is to find the clients. So…which it makes us quite a bit different than I think a lot of firms. So…

Michael: Well, it’s the industry is still an eat-what-you-kill environment.

Scott: Well, which is a…our industry needs to figure this out, because…you know, when I started 25 years ago, you were able to sell B share mutual funds, variable annuities, and all that kind of stuff. So, you have these up-front commissions that help really finance the growth of the business. That doesn’t exist today! At least, if you’re going to be a fiduciary, it doesn’t exist. So, it’s really challenging for someone to start a business. And, there’s no cold-calling like there was in the past. It’s just very different, and I think it’s a real challenge.

So, you know, our model is one that we get advisors who want to be great advisors, maybe aren’t the best marketers or that’s just not what they enjoy doing, and we supply the clients. And I actually think that’s the wave of the future for advisory firms. I think…I mean, if you look at for example, Charles Schwab, they have quite a few certified financial planners working for them. Schwab does all the marketing, etc. So there’s…now obviously, they’re in lots of different businesses, but I think this might…this is also a wave for the future of the advisory business.

Michael: Yeah. I mean, it’s an interesting phenomenon. You know, you have such a good point that, in a world of up front commissions, it was much more viable to kind of self-finance and bootstrap the growth of your firm, because you didn’t need that many clients in the first few years to make the math work, when all the compensation for the first five years is front-loaded into Year One every time you do business with a new client. You know? And back 20 years ago, $100,000 rollover was like, a $4,000 or $5,000 check into a B share. Now, $100,000 rollover is like, “Hey, awesome news. Three months from now, you’ll get a $250 check for your first quarterly billing.”

Scott: That’s right! And you spent hours and hours getting the client into place, too. So, yeah…

Michael: Yeah.

Scott: …it’s a different…it’s very different today.

Michael: But I mean, the flip side is, that means there’s a heck of a burden on the firm to actually figure out how to do the marketing to bring in the clients for an ever-growing number of mouths to feed, if there are more and more advisors who are great, service-minded advisors, but not inclined or built for doing business development. So…

Scott: Well, there’s no question. I mean, and our marketing department continues to grow, and it’s challenging, and you know, the things that moved away, traditional media, it doesn’t pull like it used to pull. And so things are rapidly changing in that space. But on the flip side, our advisors don’t have this pressure of, “Where am I going to get my next piece of business from?” And they don’t have to think, “Uh oh, it’s Thursday night. Maybe I should be going to some networking event so I can meet somebody and buy them lunch and hope to sell them something,” you know what I mean?

Michael: Yeah.

Scott: And so, they’re just free to have their own lives.

Michael: So, how does compensation, then, to advisors work in an environment like that? I mean, I’m going to presume if they’re…well obviously, if they’re not responsible for business development, I’m going to guess a huge portion of their compensation is not for business development, as it is for a lot of other advisory firms.

Scott: That’s…yeah. So I mean…

Michael: How does someone get compensated?

Scott: I mean, look. The people in our industry that have the most financial success tend to be those that are the best at rainmaking or marketing…

Michael: Mm-hmm.

Scott: Developing clients. So if you look at the top advisors of whatever list you’re looking at, they tend to be the ones that have figure out the marketing game.

Michael: Yep.

Scott: Right? It’s marketing and branding and how to get the, you know, clients to come through the front door. But there’s a lot of great advisors out there that want to be great advisors. So our advisors – we got great advisors – their pay is…you know, their end of…at the end of the day, they’re not going to make as much as the person who is not on the Top Ten advisory list at some firm.

Michael: Sure.

Scott: But they understand that. But when they join us, they also know that they’ll give up some potential upside in exchange for some quality of life, and not have to worry about where the client is. So, in that differential, that’s the dollars we use for the marketing.

Michael: Well, and I mean, I’ve always found, there’s…there really are a lot of advisors out there that just, they’re not inclined towards business development. They just want to give people advice and get paid reasonable compensation for a job well done servicing clients, and up until a few years ago, those were basically the people that large firms weeded out.

Scott: Yeah. If they ever got hired!

Michael: Yeah. Because like, the goal of the screening process was to screen out non-business developers and if we accidentally hired one, we’ll make sure that they fail in the first couple of years, because you get paid for what you hunt down and bring in, and all we want is business developers. And so, there was no place for people to land if their sole goal was like, “I just actually want to get paid to be a good advisor.”

Scott: But there’s still not many places for people to land.

Michael: Unfortunately.

Scott: There’s really not.

Michael: Yeah.

Scott: You know, I mean, that’s just the sad thing. There’s not.

Michael: Because I guess, what that dynamic means, the only places you can go to land, you have to find firms that have actually built and institutionalized their own marketing process so that they’re not reliant on their advisors for the business development. Like, that’s kind of the trade-off.

Scott: That’s exactly right.

Michael: So like, an interesting interview question for advisors looking for a firm, like, asking the firm, “What is your marketing process?” And if the firm answers, “The marketing process is you, the advisor,” then this may not work out for you if you’re not business-development inclined.

Scott: Yeah, and I think some of us don’t know if we’re business-development inclined or not…

Michael: Yeah.

Scott: …until we’re actually doing it, right? But yeah, essentially, you know, 10 years ago if I’d have talked to someone, and they wanted…let’s say a college student was thinking about becoming a financial planner, I’d say, “Why don’t you do a summer job selling something?” Whatever it is. Figure out…learn some sales skills. And I don’t know if I’d give that same advice today, because I think it’s changed…things are starting to change.

Michael: So what would you tell that person today to do with their summer time, to try to prepare themselves for success in the advisory industry?

Scott: I would say, look for an independent advisory firm to be an intern for. A fee-based advisory firm. Even if it wasn’t paid.

Michael: Just to start learning the business and getting exposed to it.

Scott: Yeah, and every town’s got…you know, our industry’s interesting, because it’s mostly “Mom and Pop” still, the RIA space. But every city’s got, you know, some decent size ones that are some larger firms. You still can learn something about the business, and find somewhere where you can add some value.

The Massive Marketing Effort Hanson McClain Uses [10:55]

Michael: So, how does a $2.5 billion advisory firm market itself to feed new clients to 20 advisors and growing? Like, what does that marketing process actually look like from the firm’s end? So, I’m going to presume it’s not, “Hey, go to networking meetings, and, you know, try to build referral relationships with centers of influence,” and all that. So, I mean, what does marketing look like at a firm like yours?

Scott: Well, so…well, things are changing. But historically, we’ve done a lot of radio. I’ve done a weekly radio program for 22 years. On a live station.

Michael: And that’s…like, that’s local to your market?

Scott: Yeah. We’re in Sacramento, San Francisco Bay area, and Denver. And we’ve done that for 20, some-odd years, which has been a…and the thing about long-format radio that has been powerful in the past, it gives people the chance to get to know you a bit. So, they listen to you long enough, they feel like they know you, and that trust level is built up, and whatnot.

Michael: So the key to the radio side really is like, it’s not radio ads, it’s long term radio programs that you can actually start getting regular listeners?

Scott: Long-form radio, plus we do some ads. But, I think the radio business…the radio game is changing, and we can talk about that some during the program as well, but…so, we do that. We’ve also…we do some direct mail, and I actually think direct mail is a medium that’s overlooked a lot these days, because…

Michael: Direct mail? Like, good old-fashioned, get some addresses and send them like, an actual, physical piece of mail?

Scott: So let me ask you a question, Michael. When you go to get your mail at home, is there more or less mail today than there were 10 years ago?

Michael: Yeah…it’s similar or more. Like, it’s not less. It’s not falling off.

Scott: No, it’s not less, right? I mean, I hate getting the mail, because there’s so much there. But…

Michael: I mean, the challenge is like, I feel like there’s less and less that’s actually for me, and more and more that’s marketing related. But I guess that’s kind of the point, that there’s still a lot of direct mail marketing happening.

Scott: Yeah. These companies don’t…you know, these backyard furniture companies don’t send me these catalogs every three weeks because they want to waste their money, right? I guess, you know, every once in a while, I might buy something, so…

Michael: Yeah. I can’t remember where it was, but I had heard once, like one of these, you know, marketing tidbits of wisdom. Like, if you ever see a piece of marketing that just keeps bugging you and nagging you and annoying you and you really don’t like it, pause for a moment, and pay attention. Because the only reason it’s happening repeatedly is that someone on the other end of that is getting a return on investment. Otherwise, it would just happen once and it would go away.

Scott: That’s right.

Michael: So any time you see marketing that keeps repeating like that, even if it’s not connecting with you, like, take a moment and pay attention to what’s working there, because something is working. Someone’s getting an ROI, even if maybe you weren’t the intended audience.

Scott: No question about it. We do more and more digital marketing these days, especially our radio program. We have through podcasts…we actually have more subscribers now on a weekly basis through our podcast than we do on Celestial radio. But also, we do a number of other things, and we’ve tried a bunch of stuff. Digital advertising… a lot that hasn’t worked, but some things that we still find work. We’re finding actually Facebook is probably one of our better pull-throughs right now. And those are the primaries that we…it allows us to do some…even some old school stuff with some ads and some smaller newspapers. You know, the kind of the, community newspapers that are around, the small newspapers. We…some of those markets, we’ll do some small ads that seem to work. So…

Michael: So I’d love to understand these a little bit more, about what it looks like. Like, how this works from the advisor marketing perspectives. Like, starting with the weekly radio program. You said you’d been doing this for 20 plus years now, so I mean, what’s the radio program? Like, what do you do? How long is it? When is it on? Like, what’s the show?

Scott: Anyone can listen to it, if you go to MoneyMatters.com or HansonMcClain.com. Either one, you’ll be able to listen to the program. But…

Michael: And we’ll include the link out to it in the show notes, as well.

Scott: My partner and I do it together, and there’s a little bit of banter back and forth. We’ve been working together for…I mean, we sound like brothers because we’ve been working together so long. So we complete each others’ sentences and whatnot. And, we have a call-in format, so we have…people call. And I think the interesting thing about the call-in format is that it gives the audience a chance to see us practice in action. So, they see us working. Oftentimes, someone calls with a question, and that’s not really their question. They think that’s their question, but it’s not really their question. Just like with advice, right? You sit there with a client and they think they have this problem. It’s like, “Well, you have these other issues, too. Let’s…” So it’s the same sort of thing on the radio.

Michael: The person asks a question about 401(k) loans and the real question is like, “Well, why do you…”

Scott: Yeah, yeah, yeah.

Michael: “Why do you need to borrow money, and what spending issue is going on that you need…”

Scott: Right, right, right.

Michael: “…  a 401(k) loan?” It’s not actually about what are the rules for a 401(k) loan.

Scott: That’s exactly right. So people get a chance to see us do those sort of things. And then, we’ll have guests on periodically, where…on, whatever. A variety of different things. But it’s not every week. So the guests tend to be more infrequent.

Michael: So do you ever get fearful that someone’s going to call in and stump you and you get to be stumped on live radio with a whole bunch of listeners?

Scott: No, when we’ve been…no, we’ve been stumped before, but usually, if you’re stumped, it’s some obscure thing, some obscure tax. You know, someone had lumber property that the exchange is something else, and then they died and it was in this trust…I mean, it’s like, something super obscure. Like, no one would expect you to know that. But it does force you to keep on top of what’s going on in the marketplace.

Michael: Yeah.

Scott: But we don’t do it live anymore. We did it live for 19 years, and about two years ago we switched to recording it during the week and we  record a couple programs at a time, and we line up the calls ahead of time. So…

Michael: Okay.

Scott: …basically, the calls are scheduled. The same way that, say, a television show.

Michael: So, what led you to make that change?

Scott: Personal freedom.

Michael: Of, just…of not needing to physically go to a radio station to do your sessions?

Scott: On a Saturday! Yes. They’re Saturday mid-day. So I always said, if it was Tuesdays at 10, I’d love it.

Michael: Yeah.

Scott: But it was…and it was…over the years, it was Saturdays and Sundays, mid-day. And so, you’d end up missing family life, and missing other things. And so…

Michael: And so, is that…I mean, is that still what you were doing up until two years ago? So for 19 years, like, you were driving to a radio station every Saturday, mid-day, to do a recording?

Scott: Correct. But I also would say, it was the only two hours of the week, or hour of the week, that it was scheduled. Everything else had some flexibility with, so…

Michael: And you did it weekly?

Scott: Correct.

Michael: And how long does the show run?

Scott: These days, it’s an hour. We had years where it was two years. We had a year or so where we had three hours. I don’t think more is always better. I don’t think it’s always necessary. Because the main…so, the goal of the radio program is obviously to drive listenership, but it’s to get the right kind of person…right kind of prospective client interested in what you have to offer, and have them reach out to you and schedule an appointment. That’s the overall objective.

Michael: And so, that’s how it worked? Like, at some point in the show, you get to mention like, “Hey, we’re Pat and Scott from Hanson McClain, and if you ever need help, we’re here. We’re obviously giving you all this radio advice for free, but if you ever need to go deeper, we’re here to help. Give us a call, and every now and then the phone rings.”

Scott: Yeah, but we’ve…we’ve always…correct. But we’ve always been really low key about that. So for many years, we would never state that. We would put an ad in the middle of the program that would state that, but we would never state that in the middle of the program. Of if someone would say, “Boy, how do I come and find you guys? Love to meet with you,” we’d say, “You know, the show’s really not about us. It’s about you. So we don’t want to promote ourselves.” We always found that was a better way to promote yourself, right? Because…

Michael: Mmmm… the whole kind of…the whole negative selling dynamic. You’d say like, “No, no, no! I can’t talk about that.” Then they’re just like, “Well, now I want to know!”

Scott: The takeaway close, I think is what…

Michael: Yeah.

Scott: …you know, sales people try…but, these days, with, you know, with our website and whatnot, our digital properties, oftentimes we’re driving…we try to drive people to somewhere else, and then to get them to respond in that way.

Michael: Like what? Like, you send them to the website for some kind of mailing list, and then the mailing list later is going to ask them to do business? That kind of sequence?

Scott: Yes and no. I mean, we might mention a certain article that we have on our blog that particular week, so visit us at our website there. We did for a while, where we had…you talked about sequence, where we mapped everything out with the campaign, where someone would…they’d ask, you know, they were interested in a certain article, so we would gate it, so they’d provide their email address. Then we’d send them an article on this. That…you know, a lot of products do that, and you see they follow you around you know they want you to…

Michael: Yep, yep. And yeah, you get all the re-targeting ads once you hit once.

Scott: Yeah, yeah. And we still do some re-targeting, but we were very campaign-focused, and it didn’t yield the results of what we were…of all the work that went into it. So we basically said, “You know what? Let’s just ungate this stuff. And if people want to poke around on our site for months or years before they want to reach out to us and give us their email or whatever, then so be it.” But we do have a weekly newsletter that we ask people to subscribe to, and once they’re on the site, they can go to certain places where we clearly have a bit of a sales pitch for our firm, so to speak.

Michael: Yeah, it’s…I’ve seen a similar phenomenon, as well, in some of our business development, even in the digital context. Like, you need some way to make a connection with people so that they can come back regularly. You know, we do it…I ask them to sign up for a mailing list. But, it takes so long for someone to get comfortable and build trust, that they’re willing to work with you, that it’s really hard to force them into a linear campaign process. I mean, the most common inquiry that we still get, or I still get, online from people that are interested, I mean, it’s almost like a form letter that people send, “Found your stuff a bunch of months ago. Heard about one of the articles. Read it, thought it was really interesting, signed up for your list. Been following your stuff for six months. Now I have a problem, and…”

Scott: That’s right! That’s right.

Michael: “…and I’m wondering if you can help me out with this.”

Scott: Yeah.

Michael: And like, it’s entirely on their own terms, it’s triggered by when they had an issue that spawned them to actually take action. But they always kind of know. Like, “I’ve been following your stuff for a long time. I just wasn’t actually ready back then. I wasn’t going to be ready until something happened in life to make me ready, and now here I am.”

Scott: Michael, I couldn’t agree with you more. It’s when the pain is great enough in someone’s life that they’re ready to act, right? So when you’re marketing, it’s being out there, being top of mind, adding some value. But, more times than not, it’s waiting for the time is right for them, not the time right for you. So like, you were talking about, we have a newsletter, but I mean, we’ve all gone to sites where, “Oh, this is kind of interesting,” and they immediately want your email address. And, oftentimes like, “Well, I’m not quite there in this relationship yet.”

Michael: Yeah.

Scott: You know?

Michael: Yeah.

Scott: So, boom! I’m going to go somewhere else and get the information elsewhere. And I think we’ve all done that before. And we certainly don’t want to be that firm that people say, “Well, I’m going to go to Kitces’ site instead of Hanson McClain’s because Hanson McClain wanted my email first.”

How Scott First Landed A Radio Show [21:52]

Michael: And so what does it take…like, how do you actually get a radio show? I mean, if someone is listening to this, and they’re like, “Yeah, that sounds kind of neat. I like talking to people…”

Scott: Well, so…

Michael: “…and interviewing people.” Like, how do you get a radio show?

Scott: I don’t if I’d bother these days. And here…so, things have changed a lot. What’s happening in the radio today, first of all, these companies are dying.

Michael: Like, the radio companies. The radio stations?

Scott: Correct. iHeartMedia, you know, they were bought by a private equity firm 10 years ago, and you know, there’s talk of them about to hit bankruptcy and restructuring. They did that and everything else. Some of the other big ones, I can’t remember…their names are escaping me right now, but they are struggling. Because terrestrial radio listenership is declining every quarter. So their…and the revenues are declining. I mean, they are struggling. So what’s happened is a lot of these radio stations have opened up their weekend programming to the highest bidder, whoever wants to pay to be on there.

Michael: Oh, so they’re…

Scott: Listen…

Michael: Why sell advertising when you can just sell the time slot?

Scott: That’s exactly what’s happening! So, I actually looked at a report this morning that a firm did for us on looking at some different markets, and we’re looking at these different markets, then who are the top talk radio stations in town? How many financial shows are on, and who they are. One station had 10 financial shows on the weekend.

Michael: Wow. Because the reality in our industry is, financial services pays well, especially the subset that are still doing commission based products. Like, I can pay for a pretty hefty radio show when I literally only need one listener per show to do business with me in a decent commission…

Scott: That’s right.

Michael: …product, and I make an ROI.

Scott: You’re selling a…you’re selling an equity index annuity, or a non-traded REIT. Matter of fact, there is a guy in the Sacramento region, who’s on the same radio program…or, same radio station as we’re on. He was kicked out of the industry for five years. Lost his license for five years. So he’s not FINRA licensed. He’s just pure RIA. And he talks about fiduciary and etc., etc. And we had this retired doctor come and saw us. He said that he needed some help, and he had been working with this so-called advisor. The guy had sold him 11 equity index annuity products.

Michael: Because they’re not FINRA licensed products. You can sell them when you’re barred from FINRA.

Scott: $3 million, and was about to sell him another one. And this guy finally is like, “Yeah, I don’t know if this feels good,” you know? And of course, all his money is locked up for the rest of his life in these equity index annuities. But that’s exactly what’s happening right now. So you get some…there’s a firm out there that sells life insurance. It’s…you know, life insurance is going to solve every problem or whatever. So, you’re out there being a fiduciary, you’re offering a 1% a year fee or whatever you’re charging, and you’re competing against someone who’s going to make a 10-point…

Michael: Right.

Scott: …commission.

Michael: And they can literally outbid you on radio show time. I mean, what does it cost to get a time slot?

Scott: So what it’s…secondly, but it’s also doing it though, it’s degrading the value of the radio brand.

Michael: Right.

Scott: So, you know, tradition media…of course, Trump bashes them every day. But, traditional media is not…doesn’t have the same trust level and respect as it used to have.

Michael: Right.

Scott: So just because someone’s on the radio or on TV, 20 years ago or 30 years ago, it was a big deal. Today it’s less and less so.

Michael: Right. Because in the past, they…you know, the prime…well, when the model is advertising, you can’t get advertising unless you’ve got listeners. You can’t get listeners unless you’ve got actual good people appearing on your media channels…

Scott: Real talent. Yeah.

Michael: Yeah, real talent that does real quality, where your brand is trusted. Now, when you’re selling to the highest bidder who buys the slot directly, all…you know, the economics change and the incentives change.

Scott: That’s exactly right. So…and, whereas…if you…and you also want to take a look at radio is where we’re spending our time. I mean, you go buy a car today, and your phone’s going to pair with the radio, for Pandora or whatever, you know?

Michael: Right.

Scott: Mine, I think, tries to open up Pandora every time I start my car. And we all listen to podcasts and everything else. So it’s changing. So, one of the things I talk about with our marketing team about, is I often will hold up my iPhone and say, “We need to appear in people’s lives here the same way that we appeared in people’s lives on their drive time on the radio for years.”

Michael: Right.

Scott: Because we always would advertise during the week. It was kind of more, tombstone type advertising, but as brand awareness and to get them to our weekly radio program.

Michael: So, for someone that is interested, can you just give some context? Like, what does it cost if someone wants to get like, an hour on a radio show? I mean, I just don’t even know if this is like, $1,000 a week, $10,000 a week?

Scott: It depends. So, as an example, we were in conversations with a very large station in Los Angeles, the largest station in Los Angeles, big powerhouse, been around forever. They said, “Unless you want to talk about a million dollars plus a year, we’re not having a conversation with you.”

Michael: Like, a million…at least you get a year’s worth of shows. But like, that’s…

Scott: Yeah. So there’s…and it’d probably be a package of show and advertising.

Michael: Right.

Scott: For that station, the…you know, the starting point was a million bucks. And they said, “By the way, we’re not interested in anything for this year. It’d have to be for the following year.” So…

Michael: So, I mean, that’s like, $20,000 a week for the show and the advertising, and you have to buy a year’s worth.

Scott: Yeah.

Michael: Okay. And that’s on the high end, though. Not everybody’s quite that bad.

Scott: If you’re Ditchwater, U.S.A., you know, then it’s $500 a week or $2,000

Michael: Okay.

Scott: …a month. So it’s all based upon the size of the market, and they just sell whatever they can get away with.

Michael: Right.

Scott: I mean, that’s a market.

Michael: Well, yeah it’s…it’s a market, so the price is whatever the market will bear.

Scott: Yeah! A hundred percent.

Michael: So as you commented, you know, with this shift of like, “Now I get in my car and my smartphone pairs with my car and cues up Pandora or something.” So I’m presuming that’s why you’ve been shifting to doing more digital marketing with the podcast as opposed to the radio version?

Scott: Yeah. But it’s more than that, because here’s the challenge. Our best clients are not the ones that are following the financial news, right?

Michael: Right.

Scott: Our best clients are the ones that hire us that know enough to know…you know, they’re wise enough to know something about the financial markets, so they have some degree of education there, but they want to hire you and they want you to take care of it. And they want to go on with their own lives, whether they’re really highly educated in the financial markets or not at all. But they want to hire you, and they say, “Look, let me know if there’s an issue. Otherwise, I’m going to live my life, and let’s get together twice a year. Whatever you agree to.” Those are our best clients. Those tend not to be the ones that are on the financial blogs. They’re not reading…they’re not watching CNBC all day long, or Fox Business, and…

Michael: Right.

Scott: You know, they’re not on Yahoo Finance or whatever they’re going to these days. So the challenge that we’re finding with this change with the digital marketing is, how do we still appear in those people’s lives, talking to things that are relevant to them, but still getting that awareness in their minds so that, “Hey, these are the financial guys and gals we need to go to if we have a problem.” That is one of the challenges I see. If you’re driving…you know, if you’re driving to work, and there’s two news stations in town, and you’re kind of stuck…this is years ago. Now, you’ve got a myriad of choices.

Michael: Right. Right. Is there still a dynamic though that, to the extent advisors are working with, you know, classically baby boomers, retirees, or people close to retirement…like, do prospective retirees still listen to radio more than podcasts, because that was the medium you grew up with?

Scott: Correct. Yeah. A hundred percent. Yes. No question. But, you know, that’s going to change.

Michael: Yep.

Scott: Another five years from now, you know, everyone’s five years older, that’s changing. That is the thing that’s changing. So today, terrestrial radio still works. I doubt 10 years from now we’ll still be doing a terrestrial radio program. And I’ll still be working. I never want to retire. So…

Michael: Would you still…like, do you expect, because by then you’ll be doing a podcast? Or because you expect by then you’ll just be on to entirely different marketing strategies?

Scott: Probably different marketing strategies.

Michael: Okay. So you’re not necessarily that upbeat on advisors doing podcasting for the audience either?

Scott: Well, I think…now, I think podcasts can be powerful because…and it might just be as little as, someone’s got a client. Client say, “You know, I’ve got this financial advisor. She’s pretty good. Why don’t you listen to her podcast to get to know her a bit?”

Michael: Yeah, yeah.

Scott: That’s where I think a podcast, for the typical advisor – there’s, you know, a couple advisors and a couple assistants or whatever – that’s where I think a podcast can be powerful.

Michael: Because it gives clients a way to refer you without sort of the high stakes, “Hey, call John.” And everybody knows if you call John, then John’s going to keep calling you back. And they’re kind of afraid that like, you’ve unleashed the sales hound on your friend, so it’s a much lower stakes thing to just say, “Hey, John did this podcast. It’s kind of neat. I think it’d be relevant for you. You want to give it a listen.” And then my friend can make their own decision about whether they find it interesting enough they want to follow up and pursue it.

Scott: Yeah. I mean, I think that could be…I think that could be a powerful marketing technique. I think that would be more powerful than someone spending a fortune trying to redo their website once again.

Michael: Yeah.

Scott: And yeah, videos are obviously…things are moving…a lot more’s going to video. Some people just clam up on video. They just…

Michael: So…

Scott: I think the podcast’s going to be a great medium for a lot of it.

Michael: And I’ve got to ask as well, you know, you mentioned it earlier, but direct mail. So…I mean, when I started in the business, I started 17 years ago, and the second firm I worked with did lots of direct mail, because we did basically a seminar marketing process. Send out direct mail, direct mail brought people to the seminar, seminar we did our thing, and talked…back then it was about revocable living trusts, and estate planning was kind of the focus of the seminar. And then, a subset of them want to come in and do business, and then you do business with them, and wash, rinse, repeat. So, what are you direct mailing for? Like, is this attached to…

Scott: Annuity salesmen are doing the same thing today. Are they not? Every week I get an invite to a seminar.

Michael: Yeah. I actually get some of the invites every now and then. That’s always fun.

Scott: Yeah. I do too. Yeah.

Michael: So what does your direct mail process look like? So obviously you’re not queuing up for product sales in your business?

Scott: No. But, like, we’re doing a retirement symposium. What do we call it? “The Art of Retirement”, and we’re doing it at the Sacramento…so we’ve got a couple of things that we’re doing right now this Fall of 2017. One is “The Art of Retirement” that we’re doing at a large museum in Sacramento.

Michael: Okay.

Scott: So we’re using direct mail there to get people there, and it’s going to be very little on financial issues, and mostly on just kind of the changing face of retirement. You know, come hear from someone’s who has been doing this for an X amount of years, etcetera. We’re also doing an event in Denver, Colorado, with Terrell Davis, football player, and we’re doing direct mail to get people to that event there.

Michael: Okay.

Scott: So those are a couple of examples where we’ve done…

Michael: So it’s not necessarily direct mail, like, hey, I’m going to open up my mailbox and hand someone a clean…put a mailer in there that says, “Hey, we’d love to work with you for our life savings. Here’s where to call us.” It’s not a..?

Scott: Well, we’re testing.

Michael: Are you testing that too?

Scott: We’re testing that. If we can figure that out–

Michael: Well, it would be a lot easier if you could do it that way.

Scott: Well, you know, years ago we did…you know, funny, direct mail works for awhile and then it doesn’t work anymore, and you’ve got to keep kind of changing. But we called it the anti-dinner campaign. We literally sent people letters saying, “Hey, we’re not going to buy you dinner.” Right? So we’re not with these firms that says, “Come to the steakhouse. We’re going to give you free steak.” We figure you can buy your own dinner. But if you’d like to come and talk to a financial advisor about your financial issues…something along those lines.

Michael: I love it.

Scott: Come see us. We had great response to that.

Michael: I can imagine like, “Our competitor wastes money on food. We invest in you, our client. want to come talk to us?”

Scott: Something like that. Yeah. It was something along those things, yeah.

Michael: So a lot of the direct mail is still driven towards getting people to events, and then events is ultimately the…

Scott: Something.

Michael: …The funnel to get them through. But I guess the point, like, people are still responding. You can still get turnout at events by spending money on direct mail.

Scott: Yeah. I mean, you can waste a lot of money in direct mail, but you can waste a lot of money in digital marketing too. So I just think the people that think everything’s, the future is digital, I think there’s still room for old fashioned direct mail.

Michael: So when you’re doing all these different things…you’ve got the radio program, you’re doing direct mail and then the events that are attached to direct mail, you’re experimenting with digital marketing…you look at the industry benchmarking studies, and the number, basically, hasn’t moved for 10 plus years. The average advisory firm spends around 1.5% of its revenue on marketing, give or take a bit. It even holds pretty consistent as firms grow.

So can I ask, I mean, I don’t even know how you budget around this if it’s percentage of revenue, or something else. Like, how much money does a firm like yours spend on marketing to drive this kind of machine?

Scott: A lot. So I think part of the challenge…I mean, one of the challenges that we’ve faced the last few years, just to be real frank here, is as we kind of capped out in Sacramento, where our main office is — we have three offices, actually, in Sacramento — particularly with the way that we know how to market.

Michael: Right.

Scott: So we went into a couple of other markets. It has taken us longer to have success than we would have thought otherwise, to be real frank. So when you look at how much money you need to invest to get the return, it can be kind of staggering. It just takes a long time. If you think about what we sell, no one can come test drive us, like you can a car. You can’t touch it or smell it.

I mean, it’s a really interesting business. You’re talking about someone’s life savings, and so much of this comes down to trust. Can I trust this individual? Can I trust this firm? Does it feel right to me, right? I mean, that’s a lot of it for people. It’s this kind of, I feel good about these…so it takes a long time to attract new clients. I mean, one of our largest source of new business is referrals, just like…

Michael: Sure.

Scott: …I mean, most advisers, that’s all their business. Referrals. I mean, it’s still the best place to get clients. But all these other marketing channels is other avenues where it helps for your referrals as well, because someone says, “Oh, I’m with that firm that does such-and-such. Why don’t you check them out here?”

Michael: Well, and I presume you mean at $2.5 billion of AUM, how many clients of that, in just terms of..?

Scott: We have about 4500 household.

Michael: Okay. I mean, there’s a very sizable base there that can at least do some of, call it the traditional just clients referring clients kind of thing?

Scott: Yeah, and we do events for our platinum clients, where we’ll have…actually, well, we’ve done quite a few events on just kind of the new retirement, and some things to have a successful retirement. We call it our future framework. You know, we’re living longer lives, living healthier lives. What does retirement meant to us today? It’s not our parents’ retirement.

So we’ll do some things like that, where we’ll have some of our larger clients. We’ll ask them to bring a friend, and those sort of events.

Michael: The whole phenomenon of spending on marketing, to me, is fascinating, because you know, I was spending some time last year looking at just a lot of research on how the business models work in a lot of the tech industry, where they run their own version of reoccurring revenue models, very similar to advisory firms, in many ways. You know, our reoccurring revenue is annual AUM or retainer fees. Theirs is, you know, $49 a month on your software.

So the way the tech industry looks at it is they might say something like, okay, the tech industry version advisory client. Okay, your average revenue per client is, you know, call it $10,000, 1% on a million dollar client, just to make the math easy. An advisory firm typically runs a 25% profit margin. So a single client is worth $2500 a year in profits, and most of us have, you know, 95% to 98% retention rates. So that client is probably going to stick around for 20 years, which means you can make a $2500 a year profit for the next 20 years.

So, like, a single client over their lifetime is worth upwards of $50,000, of hard dollar profits, plus growth as their portfolio grows over time. So when you say this client is worth $50,000, a one million dollar client is worth $50,000 of net profits after all expenses, how much money would you spend to get one?

Scott: Exactly.

Michael: If you spend $40,000 to get one client, you’re making a 25% ROI, except most of us don’t have the capital to do that, because it takes you, like, 20 years just to get profitable on that.

Scott: One way to look at it also is, you know, what are firms trading at these days, right? So what’s the enterprise value? So if you look at a $2500 profit, let’s say, on a client, well, what’s…

Michael: …Seven times the value, give or take a little.

Scott: Whatever, depending on your…yeah. So, I mean, that’s one way to certainty look at it. So then the question is, how much are you willing to spend to bring on that client?

We typically think of about 18 months worth of revenue. If we can do 18 months worth of revenue, we’ll do that all day long.

Michael: That’s a fascinating thing. That’s every million dollar client that pays 1%, you’re willing to spend $15,000 just to get the client in?

Scott: Yeah. As a matter of fact, if you want to line up enough of them, I’m happy to just give you the check.

Michael: Yeah. Again, that’s such a contrast to me from what most advisory firms do, where we’re spending 1% to 1.5% of our revenue on marketing. If you’ve got a marketing system that works, that gets clients to pay $10 grand a year for $15,000, yeah. I mean, I’m kind of the same way. if I got a thing that works, like, back up the truck. I’ll pour as much money onto that until it stops working, because at some point marketing gets diminishing returns.

Scott: There’s the challenge though, am I right? So it’s not like…

Michael: Right.

Scott: …It’s not like, oh, you know, I’ve go tan extra $5000 this month. So why don’t…oh, I’ll go put it with this one market strategy that’s going to yield me X. That doesn’t really exist, right? So you can try lots of different things, and I think that’s where the challenge is. It’s not that advisers wouldn’t be willing to spend the money. It’s just that they don’t really know where to spend the money.

Michael: Right. What’s going to work, and how long do you have to spend on it just to figure out if it’s working? Right? At best, it’s kind of lumpy for so much of our marketing, right? When one client is a half million or a million dollar client, is a $5,000 to $10,000 a year annually reoccurring client. They’re really valuable, but you might spend lots of money and not get one, and then spend a bunch and get two, and it averages out. But if you got the wrong sequence, you’re trying to spend $10,000 to get a $10,000 client. You could be out $18,000, and you haven’t gotten one yet.

Scott: It takes time too. It’s not like you just write some check. You know that for every dollar worth you spend you get a certain number of clients back. If that existed, it’d be easy. We’d all be doing it. But it doesn’t exist. So it’s a challenge.

Michael: So you’ve mentioned as well that you do some events for platinum clients. I presume that means, more broadly, you segment clients in the firm. So what does that segmentation process look like in a firm like yours?

Scott: Well, we look at anyone’s who has got a million dollars or more with us as platinum clients. $500,000 to a million is A clients, $300,000 to $500,000 is B clients, and then below $300,000, for the most part, are known as our select clients. They have the same kind of portfolios, but a different service level than the other clients we have.

Michael: And so how do you differentiate amongst them? So, I guess, select clients get fewer meetings, platinum clients get access…

Scott: Yeah.

Michael: …To some of your events. What else do you do, or do you do other things that differentiate amongst those segmented tiers more?

Scott: We spent a lot of time with our whole team about the value of a platinum client, and we’ve got several hundred clients that are over a million dollars, with the firm. We still have great size of these, but we have a lot of smaller clients, these select clients…our account minimums are $100,000. But we still have a lot of people in that space.

So our select clients, most of the reviews and stuff are over the phone. They tend to be more junior advisors. You know, we’ve hired a few people out of college the last couple years. They tend to work on those teams to help. So it gives it a great training ground for some of those younger advisors, and then the seasoned advisors are those that work with the larger platinum clients.

You know, one of the things that we’re big on is looking for little ways to show that we’re listening, and little tokens of appreciation. We call them just because gifts. Actually, I was talking with our marketing team. I said, “We need a better name than this.” But we empower, and we track this. We empower everyone to listen for an opportunity when you can send someone some token gift.

I was at the UPS store, my hometown, a couple of weeks ago. This acquaintance of mine comes up. Says, “Scott, your advisor Dave, I love…he is a the nicest guy. My son’s taking this class over in London. We’re going to go visit. We were telling him about it. The next thing you know, I get this book in the mail from Dave on London such-and-such. Now, it’s just the nicest thing.”


I kind of chuckle to myself, because it’s a process that he was following. That’s all. We send a lot of books. You listen for something that someone has an interest in, or if they’re going somewhere, and we send them a little book from Amazon. It shows the person, not only that you care about them, but that you were actually listening to their conversation. You cared about them as a person. You know, we don’t send a lot of cookies and that sort of stuff.

We look for things that show that…well, we actually do quite a few books. We look for opportunities to send a book to people.

Michael: I think it’s interesting that–

Scott: And I think any advisor practice, it’s amazing. Again, this is a trust business, right? Our best clients are the ones that really trust us, don’t second guess…”Why is this in my portfolio, Scott?” You know, the SMP is this and you’ve got this in here. The best clients are the ones that don’t second guess us. Those are the ones that trust us the most, and sometimes it’s just these little things that just show people that, wow, my advisor cares about me as a person. Not just as a number.

What Happens When Smaller Clients Are Transferred To Different Advisors [44:41]

Michael: I find it interesting, though, just that a piece of your segmentation is simply the seniority of the advisor. I feel like that’s a way to segment clients that not a lot of firms do. Like, we tend to take an experience advisor, they get a whole chunk of clients with a wide range, and they might say, like, “Well, I’ll see my A clients more and I’ll see my C clients less,” as opposed to saying, “No, no, no. If you’re a senior advisor, you just focus your time on A or A and B clients. Your C clients need to be shifted to a younger advisor.”

Scott: That is exactly what we did. We shifted a bunch of clients, and I think I learned…I personally have another 20 clients right now. When I say I have another Certified Financial Planner that actually does all the heavy lifting.

Michael: Right.

Scott: I’m just, once a year, that relationship guy. Just to kind of say hi and I’m still around here. It’s just to make sure I’m…

Michael: Make sure you don’t forget what it’s like sitting across from a client.

Scott: Yeah, yeah, yeah. Of course. Absolutely. But I found how it really wasn’t much of a challenge, transferring these clients. None of them really liked it, right? No one wants to get transferred off. But they still stuck around, and they’re still happy clients.

Michael: I feel like that’s one of the biggest challenges most advisors go through in those transitions, is it’s scary to transition the client, because you’re worried the client’s going to get upset and not stay. Like, “What do you mean I’m being shifted to Johnny? I know what this means. I’m not important anymore,” and then clients are going to get upset.

So does that just not happen? Is that just a fear that’s not a realistic fear?

Scott: We didn’t experience it. So we first did this with my own clients 10 years ago, and we hardly lost any. Then we went through a process where our senior advisors, a big chunk of their senior clients…look, a lot of advisors, they just aren’t servicing their small clients very well.

Michael: Right.

Scott: Some of them, they’re just downright neglecting them, and particularly if they’re not in portfolios that are part of models that are getting rebalanced properly, and then they’re really not doing a very good service. So if you can push those to somebody else who’s got the time and the desire to work on these, then they’re going to be better off…better service there. When I did the transition, I just told the clients, I said, “Look, my role has changed over the years, and I’m afraid I’m not able to provide you the same level of service that you deserve. I’m not as here as much as I need to be, you need me to be…so in fairness to you, we’ve brought in so-and-so to help work this. I’m still here. If you ever have any other issues or questions, feel free to call. I’m not going anywhere, but, you know, Bill Smith or Judy Smith, she’s the one who is going to be taking care of your issues on a daily basis.”

Michael: Well, and I find there, you made a good point there that often gets missed, which is, you don’t want to move the smaller clients out of your client base because you feel bad that you’re sending them off to another advisor in the firm that’s less senior. But we all seem to forget or ignore, like, but it’s not like you’re meeting with them that much anyways. Like, let’s not kid ourselves. Often those are the most neglected clients, because you know deep down that…

Scott: Yeah, right?

Michael: …You lose money every time you answer the phone when they contact you. So you don’t contact them much for meetings, and you try to shift their inbound calls to some other staff member in the firm anyways. If they’re working with a more junior advisor in the firm where that’s actually a good client for that advisor, the client ends up getting better served anyways. Yes, from a slightly less experienced advisor, but one who is actually excitedly, enthusiastically servicing them, which you’re often not at that point, either deliberately or just subconsciously.

Scott: And I think you’re providing them a good service. I mean, particularly you talk to someone who is…I’m proud of the fact that we’ve got a number of clients who are smaller, because if they weren’t here, where are they going to go? They’re going to get sold. They’re going to go to the bank. They’re going to get sold. The bank broker is going to sell them. I’m not throwing all bank brokers under the bus. The model of the bank brokers is not a good model. It’s rife for conflicts, and they get sold something that they don’t need, and all that kind of stuff.

Michael: Yeah. So this overall structure, you said you have 70 employees. About 20 of them are advisors. So what’s the other 50? That’s a lot of other people.

Scott: Well, we’ve got about 10 or so in our marketing department.

Michael: Okay. Well, I guess that’s a big thing in and of itself. You’re a nearly $2.5 billion advisory firm with 10 people in your marketing department?

Scott: Yeah. Well, we just hired a couple more. We hired someone who is a digital specialist.

Scott’s View On The Differences Between “Ensembles” And Other Advisory Firms [49:24]

Michael: Whereas, for a number of firms I know, they’d have two, maybe three at that size. So I guess that’s part of your point. If the mothership is going to provide the clients, then you have to invest heavily into the marketing.

Scott: Well, and I think we’ve always operated, I mean, as a business. So when McClain and I first started, it was the two of us and one assistant. You know, most of us started…but from day one, it wasn’t, “Well, this is my client, that’s your client. Let’s share expenses.” You see a lot of firms are just clusters. They’re not really firms. They share space together. They throw money on the technology. But…

Michael: Yeah. They’re kind of independent advisors who share overhead.

Scott: There’s a lot of firms like that, right? So very challenging to have any sort of marketing strategy when you’re just sharing expenses. So back to your point, a lot of firms, maybe they’ll have one or two people. I think often you’ll see that in some of these clusters.

Michael: So what else? So there’s–

Scott: Ensembles, I think, is a more appropriate term.

Michael: So you’ve got 10 over in marketing. What else? What’s the rest of that, organizational infrastructure look like?

Scott: We’ve got five, or five in our IT department. We’ve got a pretty good sized operational

Michael: I feel like five in the IT department, that’s just all the people it takes to make sure that computers are working and software is working, and things like that. Or are you, like, home growing…

Scott: Yeah, that no one’s getting in.

Michael: …Technology tools?

Scott: No, no. I don’t want to homegrown any tech. I don’t want to build anything. One of the thing we always say to the IT team, if we can buy or rent it, we’re going to buy or rent it. We are not creating stuff here.

Now, there’s still things you have to do, because it’s–

Michael: Levels of customization. Right.

Scott: Yeah, but for the most part, I mean, we want to just buy stuff off the shelf. So I think, yeah, five people in marketing…our investment department, a couple of people, full time people there, and then we’ve got, you know, operations and customer service.

Michael: Okay.

Scott: Client service.

Michael: What is the technology infrastructure for you guys?

Scott: And by the way, on our customer service, even though we’re a large firm, we just went through a process, an outside firm research on us…interviewed a bunch of different clients. We have a net promoter score…was 85. Which is…

Michael: Wow.

Yeah. That’s the monstrous number of…

Scott: I know. Yeah. We’ll start throwing that out there.

What A “Net Promoter Score” Is [51:46]

Michael: Yeah. So can you explain really fast net promoter score, maybe for folks that aren’t familiar?

Scott: Yeah. Actually, there’s a great book on it. It was really kind of big about 10 years ago, I think. But a lot of firms, bigger firms, still rely upon this. It’s just, essentially, how likely someone is to refer a customer to your firm, regardless of what businesses they…how likely are you to refer somebody to this firm? If you’re very likely to refer somebody, it is the number one indicator of long term, you know, client loyalty, if you’re willing to refer someone.

It really comes down to…a lot of it is customer service and level of trust, and those sorts of things.

Michael: Do you recall, what was the book on it? I don’t think I’ve seen the…I’m familiar with NPS, but I hadn’t seen the book before.

Scott: I don’t remember. Was it “The Question” or..?

Michael: Oh. Like, “The Ultimate Question”?

Scott: Yeah, it might have been that. Yeah, that might have been it.

Michael: It was all about the one net promoter score question, because the whole point of this, like, you ask people one question about how willing they’d be to refer you to a friend. Not even just in our industry, where we talk a lot about referrals. But how likely would you be to recommend us to your friends? Like, you want everybody. On a 1 to 10 scale, you want everybody to score you 9s and 10s. If you get a 7 or 8, you don’t get any credit for it. If you get a 6 or below, then it’s a negative detractor.

Scott: A detractor, yeah.

Michael: You want your 9s and 10s to grossly outweigh everything else.

Scott: Yeah, yeah,

Michael: All right. We’ll put a link to “The Ultimate Question” book in the show notes. So for those who are listening, this is episode 36 of the podcast. So if you go to kitces.com/36 and scroll down to the section on resources from this episode, we’ll have a link out there to the book, if you want to check out net promoter score a little bit more.

So you guys actually did the whole process of surveying clients to ask them the question, the ultimate question?

Scott: Yeah. We’ve done a number of surveys over the years. We use outside firms to do it.

Michael: Folks in the industry or, like…

Scott: No.

Michael: …Just entirely outside of the industry?

Scott: Correct, outside of the industry.

Michael: So anyone you care to recommend that you’ve actually thought does a good job working with an advisory firm like yours for doing this?

Scott: Oh, man. I’m trying to remember the name of the company that we used. I found them online, and they had the best…the one we used a few different years in a row, I found them online and they had the best user experience online. I thought, “If this is your user experience online…”

It’s funny, I remember I talked to some expensive firm. They wanted to have this conference call. One guy was in Chicago. One guy was somewhere else, you know. Like, well, just to kind of get started, it’s going to be a $40,000 project to do this.

This other firm was just, like, phenomenal user experience online. It was $6000 or $8000 or something. It wasn’t expensive.

Michael: It’s funny to me. I feel like we still underestimate…almost everybody checks us out online, even if they’re going to meet with us ultimately in person, decide to do business with us, like, people check you out online. If your website doesn’t hold up sort of the core brand promise, the rest of it doesn’t go so well. They’re never going to call. They’re never going to follow-through.

Scott: We all go online for everything.

Michael: Yeah. I mean, I still laugh at how many firms have things on their website, like, “We value transparency, but you can’t find our fees anywhere on our website.”

Scott: Well, they say transparency and fees…for people understanding what they’re paying is the number one thing for building trust.

Michael: Yeah.

Scott: Yeah, and a website also needs to do well on mobile devices, because the majority of people are searching on a mobile device.

Michael: So what was your path into being an advisor in the first place? Was your family in the industry? Did you come in straight out of college? What was the path for you to become an advisor?

Scott: Well, first of all, it took me awhile to get through college. I went to junior college for four years. So I was one of those kids in high school that didn’t quite see the connection between my studies and my future life for whatever reason.

Michael: And there were some other things that were more fun and interesting to do.

Scott: I guess, yeah. I get dragged not the counselor’s office every year saying, “You score well on these annual tests, but your grades are this. What’s going on?” I actually had a little tree trim business in junior college. I had bought this small business. I had almost no money, but I finagled a deal I bought on a percentage of revenue. I ran that for a couple of years, and then sold it for cash upfront to help finance my last couple of years of college.

In the tree trimming business, I was making decent money. But it was one of those things where I was going to have to really take some big leaps to grow it, and I thought, “This is not the industry I want to stick in” I always enjoyed numbers. I enjoyed people, and the tree trimming business was actually a great lesson for me. It was down in the Palos Verdes area of Los Angeles, where a lot of wealthy people…so I got to know, first of all, some very wealthy people, and I realized they were just like everybody else. Put their pants on one leg at a time.

I also learned some things about customer service, that price isn’t the number one concern, a lot of people, particularly people with money. If you show up on time, that was half the game. So if you’re supposed to be there at 8:00 and you’re there at 8:00, they’re blown away. Wow, someone showed up. A contractor showed up.

So I learned some good lessons through there. Then I studied finance in school. I remember I interviewed with the wire houses. I thought, “I don’t know if I want to…” I didn’t really like their model. I was just talking to some brokers. They never even met their clients. Just talked to them over the phone, selling product.

Michael: So when were you searching?

Scott: 1998.

Michael: Okay. So kind of in the heyday of, wirehouses cold calling for brokerage business?

Scott: That’s exactly it. Their training was, we’ll send you back to New York for eight weeks, or whatever it was, and teach you how to cold call. That was their training. Instead I went to work for a life insurance company that had a big financial planing push at the time. They were taught CFP courses and whatnot. I actually took CFP courses in college.

Michael: So which was that? Connecticut General, or one of those?

Scott: Lincoln National.

Michael: Okay. Lincoln National.

Scott: It was a good agency out in the Bay Area that I went to work for, and it was very much financial planning focused. I was there for three years. But I actually…the challenge — I’m not throwing Lincoln under the bus — but the challenge with the insurance industry, it’s insurance is the answer for everything.

Michael: Yeah.

Scott: Right? Whatever ails you–

Michael: Oh, and when that’s your business model…I guess you were right on the cusp of, UL was declining. VUL hadn’t quite become the thing yet, but was starting to. Yeah.

Scott: I didn’t always buy into the stuff the insurance company thought about their products, so I didn’t last there too long. So Pat McClain was working there at the same time, and we left not because we had this great desire to build this great firm. But we just didn’t really like the environment there, and the way it was so product focused. We said, “Why don’t we just go out on our own and figure out another way to do this?”

Michael: Okay. So where did you go from there?

Scott: Well, I set up an RIA back in 1993, but was also registered — so I guess they would call them hybrid these days — registered with Securities America. A broker dealer. We were with them for 10 years. Maybe longer than that. yeah.

Michael: So they were willing, I guess, to let you have a…you weren’t using a corporate RIA? Like, you were your…

Scott: No.

Michael: …Own separate RIA, but you kept brokerage business through Securities America?

Scott: That’s exactly right.

Michael: What led you to do that, as opposed to just cutting the cord entirely from the FINRA side and staying on the RIA side of the business?

Scott: Back in 1993, I don’t think I knew anyone who did that.

Michael: Yeah. Well, I guess.

Scott: That’s part of it. I mean, we still sold variable annuities back in those days.

Michael: Right.

Scott: I don’t even think we ever thought of that. It was pretty rare back then.

Michael: So it more came down to, like, “Hey, we want to do some asset management business, and that wouldn’t be good to do in our broker dealer. So we’re going to do that over here. But then the rest of our business we’re still doing on Securities America, because still got to have a broker dealer to do your business.”

Scott: That’s exactly right. That’s exactly how it worked.

Michael: Okay, except the RIA side outgrew the other side, I take it?

Scott: Oh yeah. Of course. Yeah.

Michael: So how long did you stay with Securities America, and yeah. I guess, how long did you stay with Securities America?

Scott: We were with Securities America, I believe, until 2007. Is that right? 2006. Somewhere in there.

Michael: What ultimately led you to cutting the cord? Like, if it was working well, what led you to make the shift?

Scott: I have a lot of respect for a lot of those folks at Securities America. They’re a good outfit. We were just getting to the size where we had our own kind of business processes that we thought were best for us, and it was a challenge when you’re underneath someone else’s highly regulated FINRA…it just got complicated for us.

Michael: So not having control over your compliance processes, basically.

Scott: That was a big thing. That, and the economies. When you get to a certain size, I mean, you’re doing hardly any transaction business anymore.

Michael: How big was the RIA at that point, do you remember? Like, did you cut the cord at $500 million, or, like, a billion?

Scott: No, were about a billion, I think.

Michael: So what was driving the growth at that point? I mean, to go out on your own with an RIA and start kind of from scratch with just a couple of years of experience in Lincoln National..?

Scott: So we kind of stumbled in. Of course, stumbled in…I guess where hard work and opportunity meet, right?

Michael: Yes. It’s a wonderful, blessed intersection. Yes.

Scott: Yeah. Not necessarily luck, but when you’re out there enough, eventually something is going to come your way.

Pat McClain and I started working with Pacific Bell, which is now part of AT&T, and Pacific Bell was going through this just massive deregulation in the telecommunication space, big change from the way telecommunications work. So there was tremendous downsizing, and they had done a lot of hiring 30 years prior. So you had a lot of these employees in their mid 50s that were getting these, essentially, retirement offers. Pretty much, here’s a retirement offer you could take today, or you might get fired tomorrow. Right?

So we became experts at their pension plans and got to understand all of the nuances there better than most of the people in their HR department. We did a lot of educational workshops. So we got to be known as the people to go to.

Michael: So you kind of had this niche around, you know, tenured Pac Bell employees that were at risk for downsizing?

Scott: Exactly right.

Michael: Was that actually geographically local to you as well? Like, is Pac Bell there in the area, or just you heard about this and went after them regardless of where they were?

Scott: They’re everywhere. Utility employees are everywhere, right? So telecommunication employees were in every town in every city. So what ended up happening, actually, is we created the Hanson McClain Retirement Network back in the ’90s to help other advisors, teach other advisors how to service retirees from what was then the regional Bells, the baby Bells. Now most of it’s all part of AT&T to help them figure out how to help clients transition through these retirement offers.

We ended up with a network of a couple hundred advisors and about, you know, 40 that were doing a lot of business, and I think $5 billion would have rolled out into that advisory, to that network.

Michael: So you took what you figured out about how to advise retirees coming out of some of the baby Bells, and then just literally made that a training program for other advisors? Join the network, we’ll teach you how to do this turnkey system to work with the retiring employees, and then you all can go off and do your own thing, because we can’t reach all of them in every city anyways.

Scott: That’s exactly right.

Michael: What was the business model to that? Was this like a tamp, and they did the rollouts and then you would you manage the money? Was this a franchise licensing kind of arrangement?

Scott: This was a marketing arrangement. It was a percentage of revenue, and we still have a number of advisors that are part of our retirement network.

Michael: Okay.

Scott: …Work with utility company. So it’s still an active part of our business. But back, I think when we were at kind of our zenith there, when AT&T, what was then the regional Bell operating companies were doing a lot of these downsizing.

Michael: Okay. Interesting. So you just had a whole turnkey platform for doing the planning. I guess if people are still looking for a way to get trained and find their way into a niche, this is still on the table for them? Like, you can still join the..?

Scott: Yeah, and we specialize…yeah. I actually think the electric utility markets is a few years off. I think we’ll see some disruption there, and I think you’ll see the same kind of thing.

Michael: I guess a few more years of solar pricing getting compounding cheaper, and then suddenly all the downsizing from the electric utilities will begin?

Scott: These power companies don’t know what their future is, and the average age of employees is extremely old. actually, they’re great kind of clients. They tend to be good savers. You got to work for the utility company not to get rich, right?

Michael: You take the utility company job because you like the stability and incidentally save. So you get those, as you put it, those good, hardworking, long term savers.

Scott: And the utility companies, they set their rates based upon, not what the market…

Michael: Right.

Scott: …Sets, but based upon what your costs are. So you tend to have these nice fat pensions and great retirement, medical, everything else.

Michael: Interesting. Interesting. So, like, the whole focus of the firm early on was basically building around this niche in Pac Bell annuities?

Scott: Yes. We were doing that before we did the radio program, and the reason we started doing the radio program is we realized that there’s a finite number of these people that are retiring. Eventually we’re going to run out of them. So we wanted to diversify and have some other sources of clients.

Michael: Oh, interesting. So you started with the niche focus, and then broadened later as, I guess, you just got worried there’s only so many sizable pensions to roll out in large 401k plans before you just literally run out of long tenure retiring utility workers?

Scott: That was exactly our thought at the time.

Michael: Interesting.

Scott: Whether it was the right thought or not, I don’t know. But that’s the decision we made then.

Michael: So are you still working in the Pac…well, I guess it’s not Pac Bell anymore, but are you still working in the utility space in…

Scott: Oh yeah.

Michael: …McClain as well?I mean, I know you said the retirement network is still there, but that’s…

Scott: Oh, yeah.

Michael: …Focus for you guys too.

Scott: We have about a 70% market share. I’m not exaggerating either. A 70% market share in the Sacramento region of retiree Pac Bell.

Michael: Wow.

Scott: Well, AT&T employee.

Michael: So how does that get going? I mean I get it now. Once almost everybody there eventually realizes that they all work with the same firm and it’s you guys, so you’re just kind of the ones to call, and they all call.

Scott: Now it’s a little easier. I’ve got to admit.

Michael: Yeah. I mean, how do you get that door open in the first place to get that kind of traction in a niche like a utility company?

Scott: All right. I’ve heard before that people say that successful people do those things that unsuccessful people are not willing to do. Right? We probably all heard that statement before. We’ve done things as simple as showing up at a yard where the trucks are in the morning with a box of donuts and a bunch of fliers for an upcoming workshop, and chatting people up and saying, “Hey, you got to come to our educational workshop about our pension plan” Get someone to bring you in where you can shove fliers in everyone’s mailboxes. Talk your way into doing a lunch and learn at lunchtime for some manager for the team.

It’s just all a bunch of…

Michael: Just kind of raw hustle work, basically?

Scott: Yes. Guerrilla marketing. I hate to say it. It’s just, yeah. Raw hustle.

Michael: I guess the flip side to it, like, it’s all raw hustle in a focused direction.

Scott: 100%.

Why Scott Encourages Other Advisors Working With Retirees To Work With A Specific Niche [1:07:55]

Michael: It’s not like you’re trying to do lunch and learns at any possible business you can get your foot in the door. You’re just hitting every possible angle to go after one sizable business that you know has a giant pocket of opportunity.

Scott: You know Michael, I think that is such a great opportunity for people around the country and advisors looking to grow their business. If there’s some employer in town that’s got, you know, sort of an older workforce, they’re all going to be retiring at some point in time, right? If you kind of understand the pay structure there and whatnot, it’s a great way for someone to do some marketing just to get to know those people.

Michael: So what would you say to the advisor that says, “Yeah, but I don’t want to bet my business on one company, on one employer? I’m afraid if I make my whole business around the one big employer in town, like, what happens if they fail or they go out of business?”

Scott: I don’t know. If they pick the right employer, I mean…then pick two.

Michael: Yeah.

Scott: I mean, presumably they’re going to have some business already and some business coming in from referrals and stuff. So if they’re thinking about spending some money on marketing before they spend a fortune on anything else, I’d do workplace marketing. I think it can target a market workplace.

Michael: Well, I mean, at worse, as you guys evolved, you moved beyond the niches you grew and did the radio program, the rest. But I’m going to presume it was a little easier to launch into other…the radio program and other marketing opportunities after you already had a couple hundred million dollars from your niche.

Scott: Yeah, because you have a little bit of revenue. Yeah. That’s helpful.

Michael: Yeah.

Scott: There’s no question.

Michael: Yeah. So what came next for you in the growth cycle? So you started with the niche in Pac Bell and utility companies. Then you did the radio program. At some point along the way, you moved away from Securities America and just focused on the RIA. So what were the other milestones in that kind of growth path for you?

Scott: You know, if I started in the business in 1990, the year 2000, I look back and I was working like a dog, right? Most people when you start, you’re working a lot. I kind of realized that, you know, this isn’t…number one, it’s probably not sustainable. Number two, there’s probably a lot of things that I find valuable in life, and signed up for the strategic coach. Dan Sullivan’s strategic coach…what my business partner and I did, and did his program for a year.

We were with Dan Sullivan himself in Chicago. It taught me a couple of things. One, delegate everything. Unless I’m excellent at it and love doing it, delegate it away. That, and then taking time off. Taking free days.

So I really focused on those things. It freed me up enough to…you mentioned the reverse mortgage company earlier.

Michael: Yeah.

Scott: That’s what gave me the bandwidth to see this opportunity in this reverse mortgage industry, and to create another company. So–

What It Was Like Building A Reverse Mortgage Business “On The Side” [1:10:48]

Michael: So what did you do? Most of us just have enough trouble figuring out how to grow our advisory firms. How did you end up in the reverse mortgage world?

Scott: Okay. Good question. So I’m not necessarily the brightest guy in the world. I mean, I got to tell you. I just look for opportunity. If you’re stealing from me, you’re stealing twice. Okay? So I get a lot of ideas from others.

So here’s literally how we got started in the reverse mortgage company, and we grew it from scratch, and three and a half years later it was acquired by Genworth Financial. We were the third largest in the country. Three and a half years. But there was an article in the Sacramento Bee newspaper about reverse mortgages, and up until this time I always thought they were garbage. Why would anyone ever want to use them?

There’s probably some advisors listening today that think that way.

Michael: Yeah.

Scott: There are enough stories. I’ve talked to enough people who have literally changed their life, if not saved their life. One of our first customers at the reverse mortgage company was one of our employees. Their mother in law came to them and said, “Can you tell me about this?” Their mother in law was in her 80s. She had been losing weight. They thought maybe she was just getting old, or whatever.

What it turned out, she had $46,000 in credit card debt that she had wracked up to try to make her bills…you know, figure out how to live. She got to the point she couldn’t get anymore credit, and she was literally starving herself, because when she ran out of money she quit eating, and she didn’t want to be a burden to any of her family members. Okay? She did not want to sell her house. She lived in the house for 48 years. You know, she went to the local supermarket and everything else.

So reverse mortgage changed her life. There are thousands of stories like that. So there was an article in the Sacramento Bee that highlighted how reverse mortgages worked. I read this article. I thought, you know, if this is really true, this is a great product for the rest of society that doesn’t have anything saved. I mean, they don’t have any other options, right?

So they highlighted this California reverse mortgage company. I called them up and I said, “Hey, I’m a local advisor in town. I’m kind of curious about this.” I said, “It sounds like an intriguing business.” I took this couple to lunch. They had this one article…they had received, like, 50 some odd phone calls, and had 30 some odd appointments off this. I thought…I looked at…I had been writing a column every week for the Sacramento Bee for, like, seven years, and I had not that many in seven years, right?

Michael: Yeah.

Scott: So I’m, like, “Holy smokes!” I just kind of look at the demand out there. So actually I tried to buy them. I made an offer to try to buy this little business. It didn’t work out. So McClain and I started from scratch. We said, “This is an educational process here, because people don’t understand how they work.” We said, “If enough people understand how they work, these things are going to really take off.”

So we started with just a couple of employees, and threw a couple f dollars in that we had saved from our investment advisory firm. It was fun, because most of us, when we started, if you start like me, you went kind of from scratch, you’re scrapping the whole way along…with this, we funded it with some money, and let’s build the org chart from day one, and who…do the people we need? Primarily back then we were doing direct mail, radio and a little bit of television. I think by the time we sold them we were doing two million pieces of direct mail a month. We got really good at direct mail.

Michael: Two million pieces of direct mail a month?

Scott: That’s right, and I think we were in 14 or 15 states. We built it to sell. So from day one we said, “This is going to be a very common retirement income product for many Americans.” We said, “There’s going to be a large company that’s going to want to enter the space and they’re going to find it easier to buy than to build, and let’s be that.” So that’s what we created, and three and a half years later, Genworth financial bought it right before the financial crisis.

Michael: That was well timed for you, because most of the…well, I mean, the proprietary reverse mortgage space basically vanished in the financial crisis. Everything is just the HECM loans now. So it was very well timed.

Scott: It was luck. Luck counts too though, right? So we had originally…we signed earlier in the year. By the time we went from…no, we did an initial letter of intent, or LOI, whatever, earlier in the year. By the time we signed in the middle of the year, we didn’t close until October 31st of that year, 2007. The wheels were coming off the mortgage industry.

Michael: Oh man. So you’re just praying that deal gets to close before they have second thoughts?

Scott: We were quite profitable when they first met us. We weren’t when they bought us, and I think had they known–

Michael: Oh, so you could already see the falloff happening in your volume activity in ’07?

Scott: Our response rates suddenly dropped, because mortgage industries…the mortgage industry went from being your friend who is going to help you unleash the equity in your house…

Michael: Right.

Scott: …To being the bad guys who just help…are the ones responsible for your foreclosures, and all this. People were starting to learn about…

Michael: Oh. As soon as foreclosures started hitting the media, all of a sudden the idea of taking out a reverse mortgage was way less appealing?

Scott: All of a sudden the mortgage industry, they were bad people. They went from being good people to bad people. So our response rates just suddenly just dropped. To be frank, I don’t know if we would have survived the financial crisis had Genworth not come and bought us. But today they’re the largest one.

Michael: Yeah, I was going to say, they’re still going. This worked out for everyone.

Scott: Yeah, yeah. It did. I think there’s 500 employees there, or something like that.

Michael: So as you look at the business today, where does it stand? I mean, the greatest challenge for marketing driven firms in general is just the larger you get, the harder it gets, because growth rates are a fraction, right? It’s a percentage. The bigger the firm, the larger that denominator gets, the more dollars you need to bring in on the top to make the growth rates hold. So…

Scott: Well, there’s a certain amount of dollars you need just to sustain. So if you really get good at analyzing your data and seeing what’s leaving the firm every year…and we might all talk about, oh, we all have 98% or 99% client retention, which is all great and fine and dandy, but sometimes the clients actually like spending their money, right? So when you factor in monthly withdrawals and money that comes out, and then the beneficiary things periodically, I mean, suddenly you’ve got 7%, 8% drag on your portfolio, maybe, on your book.

So now you need to have some assets coming in every year just to stay flat. So there’s no question–

Michael: Yeah. You lose 1% to 2% to attrition and 1% or 2% to death, and 3% or 4% withdrawal rate for retiree centric practice, and all of a sudden it adds up.

Scott: That’s exactly right. So it’s a real challenge just to even stay. So the struggle we’ve had the last couple of years is, how do we grow beyond a 6% or 7% annual growth rate? It’s been a challenge

Michael: Yeah. Just, the numbers get large. It’s one of those things. We’ve been through similar struggles at Pinnacle at as we close in on $2 billion dollars under management, and just, you know, 15 years ago we were a $200 million firm. So a 10% growth rate meant we needed $20 million. The average client was probably half a million dollars back then. Like, we needed 40 clients. So it was, like, okay, so two or three a month all year long. Like, three a month and we’ll be okay.

Scott: Right.

Michael: Then, you know, years later we were a million dollars. It’s, like, okay. Now if we want 10% growth, we need $100 million, and our average client is about a million, so now we need two millionaires a week, every week, all year long. Then as we closed in on $2 billion, you just start doing the math of, like, just how many actual human being new clients do you need to sustain growth rate at the asset levels?
Scott: Yeah.

Michael: The numbers get really big. So most firms I find just the growth rate starts to slow down, because that denominator gets so large.

Scott: That’s exactly right.

Michael: So then you guys had a big transaction recently.

Scott: Yeah. Well, we signed it. We’re waiting for regulatory approval to close it, but yeah.

Why Scott And His Partner Decided To Sell 70% Of Their Ownership To A Private Equity Firm [1:18:43]

Michael: So can you talk about that a little, kind of what you’ve done and what you’re thinking?

Scott: Yeah. It’s interesting, Mike. The last couple of years we’ve talked to a variety of different firms. Firms have approached us. You know, why don’t you become be part of us, and here’s where we’re going, and we’d like you to join our team. Franky, I don’t think we’ve found the quite right fit for us. We talked to a variety of different PE firms. Then there’s some other roll-ups out there that, the structure didn’t seem terribly exciting to us.

We just signed a deal with Parthenon Capital Partners to…they’re essentially acquiring 70% of Hanson McClain with the plan of, to infuse some capital, both to increase our marketing spend, as well as some acquisitions. So we’re about $2.5 billion, roughly. They want to help us grow to $5, $10 billion and see where we can take it from there.

I think what was exciting to us about this was, like, I said early on, I’m 50 years old…I think I’m just getting started, in a lot of ways, in life. You’re also at a point, when your firm gets to a certain size, and Michael, I think you understand this, it’s like, there’s the margin. You’ve got payroll. You’ve got all these expenses you’ve got to make. If we really put the pedal down on our marketing and bring our margins way down, just to really invest in the future, and we go through another downturn, we’re going to have to cut way back on marketing and we’re probably going to have to downsize some.

Michael: Yeah. I mean, as much as we talk about the profit margins of advisory firms as profits, like, it’s not a coincidence we tend to run 25% profit margins, because that’s the 25% buffer if the market goes down so that you don’t have to blow up your firm. It’s the buffer zone.

Scott: That’s exactly right. You know, I’m also at a point where I’ve got some personal savings and stuff. It’s, like, how much do I want to bet the farm? I don’t need some fancy car. I don’t need anything else. I have no material needs, essentially…

Michael: Yeah.

Scott: …Right? So more money’s not going to necessarily take my life any better, but you take it all away and it’s–

Michael: That’ll probably still make it worse, yes.

Scott: Yes, correct. I mean, that’s realistic. Being frank, that’s quite a bit of it. McClain and I would often talk about doing some growths. Like, well, how much do our profits we want to bring down? Any time we got to a certain number we started to get a little queasiness, and we lived through the financial crisis and the dot com era. We know what it’s like, leading firms through those times. I don’t think any one of us had the risk tolerance.

Michael: So selling a 70% stake is just basically a way to take some of the chips off the table? Obviously, you didn’t sell completely. You’re not out. But selling a big chunk was basically just taking chips off the table?

Scott: That’s exactly right, and now I’ve got, you know, essentially my own personal financial planning. Those needs are fully met, and now it gives us the opportunity to help grow the organization with a deep pocket partner behind us that can help us through both increased marketing and through some acquisitions. Obviously, I think, you need at our industry, I think you look 10 years out, there’s going to be some larger regionals, some large national firms. There will still be some mom and pops, but it’s going to be tougher and tougher for, say, a mid-sized firm. I think the mom and pops…I think it’s going to look a lot more about the accounting industry.

Michael: I call it the deadly middle, that, you know, when I look out 5 to 10 years, I mean, I see larger regional and national firms that, you know, a couple billion dollars and you’re very dominant in your city or area, firms that, by then, are going to be $10 or $20 plus billion that are building into national brands, a giant slew of small solo advisors that I think are actually going to be fine…I’m way more upbeat on the potential for solo advisors in the future…

Scott: Yeah.

Michael: …Because the technology is making us insanely efficient. But I think the only way the solo advisor survives in that environment is, you have to have some kind of niche focus to differentiate yourself. You can’t be a small solo generalist when you’re competing head to head with mega national firms who have droves and droves of generalists to do generalist stuff. Like, if you want to be small and differentiate yourself, you can do that. But you have to actually differentiate yourself with some kind of specialization.

Then you get left in the middle with this thing that I’m starting to just call the deadly middle, that is a really wide zone. I think it’s anything from a couple hundred million dollars up to a few billion. You know, maybe a $250 million to a $250 billion range, where you’re too big to sit still and to kind of rest on your laurels, right? If you’re under $200 million, you can make some amazing money and have one to three staff members and a lot of organizational flexibility. When you get larger and the infrastructure builds out, you can’t go backwards. Your people want raises and job promotions. You have to keep moving forward, and career tracks…

Scott: Career tracks

Michael: …And all the rest. But the only way you keep moving forward is you have to keep plowing more and more dollars into the business to get bigger and get bigger, and you don’t get to take home any more. You just have this bigger thing that demands more cash. So you try to get out on the other end with some scale that you can start growing again, but for a lot of firms that I see, that scalability doesn’t come back until literally several billion dollars. Like, $3 to $5 billion dollars. I see a lot of firms…at that point you fully institutionalize your marketing. If you haven’t, you fully institutionalize your investments. You fully institutionalize your planning processes, and the things start scaling again.

But it’s this horrifically long zone in the middle that just seems to be getting wider, where you’re too small to be big and too big to be small.

Scott: I totally agree with you on those things, Michael. I also…here’s my passion. I’d like to see a client that, regardless of what town or city they’re in, they’re going to have the same process and same kind of service regardless of where they are. So whether they’re in Sacramento or Syracuse or Saratoga, they’re going to go through the same process and have the same kind of service. That doesn’t exist today.

So, you know, you look at these national firms. I’m not going to call any names out. It doesn’t matter. Just think of the names yourself. If your mother went to the local office, who knows what the process she’s going to get through, right? She might have a great certified financial planner that acts as a fiduciary. But she might also get sold a bunch of garbage. The same firm.

So I’d love to see a national fiduciary firm, where it’s the same process…just like if you have a large consulting firm or a large tax firm, accounting firm or whatnot, large law firm, you know what the process is going to be. I’d like to see the same sort of thing happen in the investment advisory space. So our bet is that there’s going to be other advisors that feel the same, that are also looking at this. You know, maybe what Hanson McClain is doing is not a bad idea. Maybe we should look at partnering up with them, and let’s see what we can create together.

When I was young, you know, I thought I had a lot of good gifts and talents, and relied upon myself for a lot of things. I think the longer I’m in this industry, the older I get, I realize more and more that I have few gifts and few talents, and I really need to rely upon others. The more I really learn that, the more I enjoy working with teams of people. That’s why I think I’m excited about this opportunity for us. Let’s find some other people who would like to join us, and see where we can take this.

Michael: So help me understand the mentality, though, of just this…I know you said you wanted to take some chips off the table, and I get it. But I don’t know. I still feel like most people struggle with this idea of, hey, we’re $2.5 billion. Let’s sell 70% of it and then grow to $50 to $10 million. It kind of feels like a lot of money gets left on the table when you sell a big chunk, and then power forward on growth.

How do you reconcile that in your head? How do you look at this?

Scott: But I think the only way for us to really…I don’t know how it’s going to get to $10 billion in, like, the time, without a huge infusion of capital.I certainly didn’t want to go borrow a bunch of…I know there’s banks that lend for certain things. But they’re all with the personal guarantees, right? It’s always fine when things go well. But the banks come knocking when they don’t, right? So I didn’t want there to be any personal guarantees out there for anything. So I’ve got…it was a risk tolerance. I don’t want to bet my lifestyle on this.

Michael: And just the recognition that growth takes cash, which means if you want to accelerate the growth, you have to put in more cash, and that’s what starts to create the business risk / lifestyle risk.

Scott: Exactly. Otherwise you’ve got that, you know, you’re talking about the 25% margin or the 35%, whatever that number is…if you’re going to start spending to grow through marketing, you’re bringing that margin down. The next downturn, suddenly there’s a capital call. Well, I don’t want any capital calls.

Michael: Parthenon can deal with the capital calls. They’ve got the pockets for it.

Scott: Yeah.

Michael: Any thought as to…why 70% I know the one that jumps out to me is, why not 49.9%?

Scott: Well, there’s certain private equity firms that are comfortable with that sort of thing, and there’s certain private equity firms that aren’t. So Parthenon, they like to take a majority position. They like to do a lot of research and provide a lot of intellectual capital. Not just financial capital. That’s kind of their model. We were attracted to that kind of model. I mean, that’s kind of…

Michael: Because I was going to ask as well, why not some of the various roll-ups that are out there, or other folks? When you’re in that position, when you are a large firm and some folks are calling, how do you decide which calls to take and which of those deals?

Scott: One of the roll-offs…I remember meeting with one of the roll-offs, I’m not going to mention the name. But after then I said, “Why in the world would anyone do this deal? I’m going to give up my first 50 cents of earnings you guys keep, and the last 50 cents I keep. What happens if the..?”

Michael: If the market goes down, you keep your 50 cents, and mine goes to zero.

Scott: Yes. When the market goes down, yeah. Then what incentive am I going to have, and what happens if we’re all on the same..? Anyway, I just wasn’t attracted to that model. Some of the other firms, they just didn’t seem like…it wasn’t a national brand. It wasn’t a national planning process. They felt more like clusters. Like roll-ups. It was just a financial thing.

Michael: Conglomerations of roll-ups, as opposed to actually building towards a national firm. That’s your aspiration for Hanson McClain at this point. You want to use the Parthenon capital…

Scott: That’s correct.

Michael: …To actually grow national.

Scott: Yeah, and I don’t care if it’s called Hanson McClain or Acme, frankly. Whatever’s going to work best for the consumer, and for other advisors joining us.

Michael: And you don’t worry that, at some point, they’re going to fire you from the company you made when they own 70%?

Scott: Well, every day our clients can fire us, right? So we all serve somebody. I don’t care who you are. You’re serving somebody. I serve my wife, I serve my kids, I serve my clients. You know what I mean? I’m not afraid of that. They don’t own 70% of Scott Hanson.

Michael: Right.

Scott: Right?

Michael: You’ll find things to do if they choose to free up your time.

Scott: Yeah.

Michael: So as you look back–

Scott: That’s obviously not the plan. I don’t think it’s the plan.

Michael: Hopefully not. If that was their plan, I imagine they would have just asked for 100% and be done with it. So as you look back, you’ve had lots of changes and turning points as the business has evolved. I’m curious as you look at it, because, I mean, you’ve been in the industry for a long time. You’ve seen other firms that succeed and struggle. Are there differences from your end? Why do things seem to be working well in Hanson McClain when a lot of other firms have struggles? What is it that you guys do differently?

Scott: I like to think it’s our great humility, but it’s probably not. But we always question everything. We’re always questioning our processes. Is this the right thing? We’re always looking at what’s out…frankly, I’m always looking at what other people are doing, because I don’t think we have all of the answers. I said earlier, almost everything we do I’ve copied from somebody else.

Business success is not about ideas. It’s about implementation. It’s about execution of those ideas. Not about the ideas. So I think we are highly process driven. Anything we’re going to do more than once, we have a process behind it, built procedures behind that, and monitor everything.

Michael: So as we wrap up here, this is a show about success. One of the things we always observe on every episode is just the word itself, success, means different things to different people, and often even different things to us in our lives as we evolve over time. So for where things stand today as you’ve built this business, you’ve had at least I’m going to call it a partial liquidity event, but you’re also really excited to stay in it, and double it or quadruple it from here, I’m curious at this point, how do you define success?

Scott: That’s a good question, because if you look at it from a business standpoint, I have tremendous respect and admiration for a number of different advisors, and they’re not just the ones that have the biggest firms or are making the most amount of money. As a matter of fact, sometimes I see a small operator who has such great care for their client that I think they’re extremely successful advisors. But I think success is being able to achieve everything that not only you want, but I think what’s also good for those that are around you in every area of your life. Not just your business life, but your family life and other circles of life that you’re in. I think, if you can be in an area where you are providing value to others and enjoying the journey, that’s success. I have a lot of interest in life besides work, too. I’m not working 70 hours a week by any means. So I do lots of different things, and I find lots of value, and I try to be successful in lots of different areas, and I have a lot of room to grow in most areas of my life.

Michael: Well, thank you for taking the time and sharing some of that growth story with us here today on the Financial Advisor Success podcast.

Scott: Thanks, Michael. I enjoyed talking with you.

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