Episode Transcript
[00:00:01] Speaker A: Hello and welcome, everyone. I'm Taylor Pankratz and this is behind the Breakaway. Together with my co host, Jason Barber, this show takes you behind the scenes of leaving your captive broker dealer firm and explores the world of RIA independence.
[00:00:20] Speaker B: All opinions expressed on the podcast by the hosts and guests are solely their own opinions and do not reflect the opinion of Uptick Partners. This podcast is for educational purposes only and is not legal advice and should not be relied upon as a basis for any decisions.
[00:00:41] Speaker A: Okay, episode 19 of behind the Breakaway podcast. It's myself, Taylor, and we got Jason here in the studio.
And today we're going to be talking about. I would consider it a myth, which is. I'm looking at transitioning. I need a big back office. I need to join a place that has a huge back office. I need that support.
And I'm here to tell you that is just. I don't know what that is. It's a myth, it's a lie that salespeople try to tell you. But the reality is, and we'll try to explain it today, you don't need a big back office support. And I think the problem is a lot of people are coming from the captive broker dealer. Maybe it's captive at Raymond James or captive at Edward Jones. And you equate the custodian with back office support. And so when you go and leave and now you custody at Schwab or Pershing or Fidelity, they're going to do a lot of that stuff that you consider back office.
They're doing a lot of that stuff. So you don't need this huge back office that you think you do with the firm that you're joining.
[00:01:55] Speaker C: Yeah. Because at the end of the day, there are two separate. Now, if you have a back office and a custodian, you have two separate entities now, whereas before it was just one entity, which was the custodian and the back office, now you have a custodian and a separate back office. Rather than just going straight to the custodian and picking up the phone and calling Schwab, or picking up the phone and calling Pershing and saying, hey, I need to get XYZ done. I need to get this money moved. I need to make sure this trade gets placed, whatever the thing may be, you're now picking up the phone and calling these other people and you're saying, hey, back office, can you help me do this? And guess what they do? They pick up the phone and they call the custodian. Okay. Which all you've done there is you've just outsourced this thing. But it doesn't change. Nothing is. It's not like the person in the back office can move the money for you because they're not the custodian.
[00:02:49] Speaker A: Right. They can't move the money, and they don't even know what they're. What you want to happen. You're just. You're having. It's okay. I'm going to have my staff explain the situation and what I'm trying to get done. Oh, do this Roth conversion or do this send. Wire this money out or do this trade correction or whatever it is. You're having to explain that to the. To this back office. They're picking up the phone. They don't even know what's actually happening. So they're trying to explain it to the custodian. The custodian is asking questions. They're calling you back. You got this middleman telephone game. You want to talk about getting something screwed up or taking much longer to get something done when your client's sitting there going, I thought you were going to send me the money or do this and do that. And I would have done it had I been able to do it. I would have just done it for you, or my staff would have just done it for you. But because we're paying these people 20 or 30% override to have this huge back office, we're going to leverage them because I'm not going to have a staff in my office.
I'm going to use the back office staff to do all these things. And unfortunately, because you don't want to be paying for your own staff and 20 or 30% override for somebody else to have staff that you want to leverage that if you're paying for it. So then you're like, I'm not going to open up the account because I'm going to have somebody in some cubicle somewhere do that for me. And all of a sudden, it's a couple days before it happens, and you're kind of like, man, I would have just done this today. This is a big deal. How do you light a fire under those people that, oh, this is a big client. Yeah, I want this done today?
[00:04:30] Speaker C: Yeah.
[00:04:30] Speaker A: If the person was in your office, your. The staff person that was going to open that account was in your office, you could tell them this is a priority. How are you communicating that to this person at headquarters that's doing this for 30 other firms?
[00:04:45] Speaker C: Yeah, exactly. It's just really. At the end of the day, it just boils down to it's an unnecessary thing. And it gives this perception that you feel like these people are going to help make my life easier. They're going to. I actually candidly think that it could very well potentially make your life more difficult, because, again, it's a middleman. It's just, what are they doing that you couldn't do? Or what are they doing that somebody that you hired in your office couldn't do? And the answer is nothing.
[00:05:14] Speaker A: It's basically the equivalent. Jay. This is. I don't know. I just thought about this. It's basically the equivalent. If you're an Edward Jones advisor right now, and you're thinking, you pick up the phone and you call. You're calling the custodian. Right. You're not calling the back office. You're calling the custodian that happens to be also the back office. Think about it like this. If you were at Edward Jones right now, you would pick up the phone and you would call somebody else. Okay. Then they would call the person that you're actually calling today. They would call the custodian. So can you imagine the scenario where every time you wanted to get something done, you have to call this other firm that can't actually do it. You're not talking to the person that can move the money. Yeah.
[00:05:58] Speaker C: Worship. You're actually paying for this, too.
[00:06:00] Speaker A: Yeah.
[00:06:01] Speaker C: So it's not even something that you're like, I have to call this other person and whatever, and it just happens to be free or whatever. It's. No, I'm. I'm paying for this. A lot of money because those people make salaries. Those people that are doing this, they make salaries. And I just. I just question whether that's the best use of money or if it's just what a lot of these firms, the mistake that. The thing that we ultimately didn't like about a lot of these firms and a lot of these offerings is that they offer all of this stuff, but you're paying for it, or you are, or your clients are somehow indirectly paying for all of these things when it's. Is this really necessary?
[00:06:40] Speaker A: Yeah, this is the. This is one of a handful of things that you genuinely don't need because there's the custodian that will answer your call because that's their job. So it is actually their job to be your back office. You don't have to have an arbitrary middleman being the quote, unquote, back office. So you pick up the phone and actually just talk. Get it straight from the horse's mouth. What's wrong with this. What to do this and get it done.
So there's some things you can just strip out, and there's other things like compliance and different things you can't. That cost money. And it's hard to strip those out. So you should be thinking, where are the way. Where can I save money?
Because if you're saving money and not paying. Let's just pick a number. If you're not. If you're paying a 10 or a 5% override instead of a 30% override, that net, you either pocket or you reinvest in your business and you drive growth. And so you're saying, okay, I could either have somebody that's supposedly trying to make my life easier, but really it just makes it tremendously inefficient.
And I'm paying them the money that I could be doing to try to go. We'd bring in 50 or 100 million more dollars that year. That's going to add that much more money to my actual enterprise value of my business.
It becomes this. I just. It blows my mind. I just think it's a. I genuinely think it's a sales technique by these RIA aggregator firms that they throw out this. Oh, you need a big back office. It's because they're salespeople. They don't actually even know what they're talking about because they're not advisors, they're salespeople. And they're sitting here going.
[00:08:29] Speaker C: And they're talking to you in a moment where you are scared out of your mind, most likely, because you just genuinely. It's like you don't know what you don't know. That's the biggest problem. Nobody knows anything. But this is how I've done it. And I'm used to calling an 800 number and somebody answers the phone and I tell them what I need to do, and it magically happens. Okay.
[00:08:51] Speaker A: Yeah. And that 1-800 number is the custodian.
[00:08:53] Speaker C: Yeah.
[00:08:54] Speaker A: So I'm encouraging you to keep that same feeling. And arrangement is calling a 100 number and getting the custodian not pick up.
[00:09:02] Speaker C: The phone and call Charles Schwab directly.
[00:09:05] Speaker A: Yeah.
[00:09:05] Speaker C: And say, schwab, help me get this Roth conversion done. And they do it if you have a problem or they tell you what's wrong, or we need to get this paperwork signed or whatever it is, and you get it done. But that's the difference is you're just going straight to the custodian. The difference being that you don't work for the custodian anymore. You're not employed by the custodian. You just use their services. They're a vendor of yours.
[00:09:30] Speaker A: Yeah. So if you imagine, imagine how much it costs for these aggregator firms to build out these quote unquote back offices with people that actually do the work. Managers to oversee the people that do the work. The directors that are overseeing the managers that are overseeing the people that are doing the work. You're talking about layers and layers of inefficiency and waste that somebody is paying for. And that somebody are these advisors and firms that are joining it with their 30 or 40% overrides. And you're just thinking, why do they have all that? It's because it's like this chicken or the egg. They feel like they have to have that to get these people to bite, to get these people to join. It's like this weird. You have to have it because you're recruiting from these captive places that are used to having a large back office.
And what I'm trying to get people to understand is that cycle won't break unless you just have advisors start to realize we don't want to pay for that. And then all of a sudden they'll go, oh, okay, yeah, we don't need to offer that. Unless advisors aren't demanding it. And why. And advisors are only demanding it because they're being told that they have to have it or you're not even going to get any work done. So it's. I don't know, it's a very strange thing. But I encourage you to, if you're shopping or you're kind of looking over the fence at different options, ask the salespeople to give you a legitimate reason why you would want to talk to their back office people instead of the custodian. And the answer is going to be, oh, we're going to save you time. We're going to be more efficient. And every advisor knows that you would rather talk to the custodian than having to explain the particular situation to somebody that doesn't know for them to go explain it to the custodian for the custodian to respond. And then they have to call you. It's. Or they'll be like, oh, we'll save you. You won't have to wait on hold. We'll wait on hold for you. You're not going to wait on hold. All these, like these, these custodians, you're not waiting on hold. There's all these things that people try to.
[00:11:47] Speaker C: They're salespeople. Yeah, yeah, they're salespeople they're not actual advisors. Therefore their opinion doesn't matter, in my opinion. You know, one thing I was thinking about as we were just sitting here talking, do you think, is there a correlation between the size of the back office and the crappiness of the compliance department? Would you agree that the bigger the back office is, the worse the compliance program is going to be?
[00:12:07] Speaker A: It's going to have to be, yeah.
[00:12:09] Speaker C: Because there's also this correlation with the bigger the back offices. There's also more advisors. Most likely the more advisors there are, the worse the compliance program is too, because they're going to say, if in doubt, the answer is no.
[00:12:22] Speaker A: A hundred percent.
[00:12:23] Speaker C: Yeah. So I think. Or another thing I would also say is maybe you could also state it as not just from a compliance standpoint, but also just from a, I don't know what you would want to call it, like, corporate feeling. Right. I think that's a big question that a lot of people should ask themselves is how important is that? Do you value that or do you actually think that makes it worse? Like that something feels corporate. I'm not sure how to describe that in a different way, but to me, I value a feeling of, like, the opposite of whatever that feeling is. Right. When something feels corporate and you feel like, I can't get this done because this is the policy and the policy can't be changed because that's just what the policy is. And you're kind of thinking like, how many people do we have to go through to make a decision and get something done? Oh, this is the compliance program. Like, how flexible is this? Are we basing this off of the SEC rules? Are we basing this off of our attorneys over here at the corporation? They said, this is our, this is what our policy is going to be. And is that the rule or is that just our policy? Can we change that at all? Like, the more corporate you get, the more rigid the rules are going to be, the less freedom that you're going to have. It's just a. It's a spectrum of freedom. And I would argue that, sure, you can get more freedom than what you have today and still be in some kind of a corporate world. You can go to Raymond James, Independent broker, Dealer, or you can go to Commonwealth, or you can go to all of these places. And yeah, you'll probably be more free than you are in Edward Jones or at Merrill lynch or at one of these other places, but you're not going to have the same freedom as if you're a fee only Ria, you're just not. And so ultimately I think that is. And look, in all fairness, even in the fee only RIA world, right, there's some very large, very large aggregator firms that I'm sure probably have similar problems too with their compliance program and things of that sort. I do think though that the bigger it is, kind of just one of those things, the bigger the firm gets, the bigger the back office gets, the worse the compliance gets, the more corporate it's going to feel. And I think at the end of the day, if you're looking for maximum freedom, you should be thinking that way.
[00:14:41] Speaker A: Yeah, you've got. So I would, I would encourage people to think about when we say maximum freedom. There's two different ways I would think about that. There's the freedom to market yourself, invest your clients money, do kind of doing the actual business, business part of it, the way you think it needs to be, running your business the way you think it needs to be run.
And then there's this other idea of do I have the freedom of owning my book, moving it wherever I want, it's mine. Right. And we're seeing this kind of, this strange push in the industry now is these aggregator firms that are now giving out like golden handcuffs and going, oh, you're free, we got some, we're independent. And then all of a sudden they're going, yeah, you're independent to kind of run your business the way you want in a weird way. And you got this compliance thing over here and it might be good, it might be bad, but they've got you with these golden handcuffs and they've said we're going to take 30, 40% of your revenue and we're going to own you because we're going to give you equity in the business. And at some point this will be valuable. Maybe a decade from now, maybe, who knows. But you've got these advisors that are trading real dollars today. And for the Next, let's say five years, you're giving 30% of your revenue away for five years and then you're not going to leave then because you've given away five years of revenue away. So you're not, I'm only five years out from a liquidity event. I'm going to stay there. Right, so you're not. And then you're not going to leave on the sixth year because you're only four years away and you've given away 30% of your revenue for six years. That's a tremendous amount of money that you're just get like they're not going to let you take your equity and leave. Right? So you're given it. You're basically giving it all back.
So I would encourage advisors, when they're looking out there going, which firms do we want to join?
First of all, you need to join a firm that you would want to join without this dangling this golden handcuff carrot, Right. Because it could be a long time before there's a liquidity event or never. And you are basically going to be. If they say, oh, you know what? Now the override's 40%, what are you going to do?
[00:17:13] Speaker C: You.
[00:17:14] Speaker A: You are. You can't do anything. You're you. They own you because they've got you. Because you've spent five or six years giving them money that you're not going to. They're not going to hand that back to you when they, when you exchange your equity, right?
[00:17:29] Speaker C: Yeah.
[00:17:29] Speaker A: When, if you ever tried to leave, you're not free. You know, it's this very strange thing where there's this push to go. Let's just make it slightly better than where these people came from. Oh, you were getting, call it 50% payout. We're going to take 30% or 40% of your revenue, and we're going to give you equity and all this stuff. And you're kind of going, look, why don't they just give you.
Why don't they give you more of your revenue? Why are they taking 30 or 40% of it? Why don't they give it, why don't they give you 90% of your revenue? It's because they, one, they gotta pay for this big back office, number one, and number two, they have to figure out the only reason they're giving you equity is because the revenue that they're taking, they're going, I've got this revenue when I go to sell this business. People are gonna value that revenue at a multiple. It's probably gonna be between 10 and 20x. So they're just gonna say, okay, I'm taking 30% of this revenue. Some amount of that is profit times 10 or 20x, and that's how much equity we're going to give you in the mothership, right? And you're kind of going, why don't you just take your business, take home more of your revenue, and that makes your business more valuable, so why are you giving it to somebody else to make their business more valuable? And then they give you a piece of that and you're stuck there. Just take more of your revenue. Your business is more Valuable. And you're not stuck there.
[00:19:01] Speaker C: Yeah.
[00:19:02] Speaker A: It just is a very strange thing. People. It's like people get divorced, like within 10 years of getting married. And you're over here wanting to get effectively married to a company.
[00:19:12] Speaker C: Yeah.
[00:19:13] Speaker A: That people change the rules all the time. And it's like marriages don't even last a decade. And you want to get married to these companies that they can do whatever they want. And then. Oh, by the way, when they go and sell that company, that private equity investor, do you think that guy wants to not put some contracts and golden handcuffs in place? Do you think you. Do you think that private equity firm wants to buy people, wants to buy the equity in your business that you don't have to stay there? You know, they're buying.
[00:19:44] Speaker C: Yeah.
[00:19:44] Speaker A: Into this firm that you own equity in. They're going to make sure that the advisors that are part of that firm can't leave. Or else it'd be like buying a financial advisor firm.
And the advisor, like, doesn't help you transition these clients and feel like these clients are gonna stay. Would you value that at the same value as somebody helps you make sure these clients are gonna stay? Your clients feel good about it. You're gonna give that a higher multiple. Why would a PE firm come in and go, yeah, all these advisors just got a huge liquidity event. They'll probably jump ship now. They've hated life for 10 years. Now they're. Now they have a reason to leave. A liquidity event has happened.
[00:20:22] Speaker C: Yeah. The only reason they were here is maybe they liked somebody before, but that person just sold out. And so now, like, they're gone.
[00:20:29] Speaker A: Yeah. Or they've hated this for five years and now. But they stuck here because of this liquidity event. And I was. But now are they going to stay. I'm just saying there's going to be some tremendous contracts or think of it in another term. There's going to be something that those private equity firms are trying to do to make sure that these advisors don't just up and repaper and leave because they're shrewd business people.
[00:20:56] Speaker C: Yeah.
[00:20:57] Speaker A: They're not just like handing out extraordinary multiples on what they think is going to be reoccurring revenue when that reoccurring revenue isn't going to be guaranteed.
So anyways. But that just comes back to this. You should be thinking, when I'm looking at independence, I want freedom from two perspectives. Freedom to be able to move my book where and when I want to and not be owned by somebody. And to be able to run the business the way you see fit. Right. There's two aspects of independence and I think right now it's feeling like people are just focusing on one, which is I think I want to run my business how I want to run it. And that's great. But you should also be thinking, I don't want to be beholden and stuck somewhere that I'm not happy with because that's where you're at right now. And then you're going to have to repaper again or if. At the very least. Do you own the data? Do you own the data for your clients? Oh, we said, they told me, I own the data. Really?
Have you read it real carefully? Are you able to use the same CRM that you're using now? Are you able to use the same platform that you're using now?
Because the data basically is meaningless unless you can keep it where it's at.
There's a whole lot of things that I think people, because they just don't know the industry there, where we were three years ago, four years ago, trying to. What is an RIA that there. I just feel like there's salespeople that are preying on people's being naive and you can't Google this stuff.
[00:22:36] Speaker C: Exactly. That's what I was going to say. You can't Google it. Which is why this podcast is so important because we need to get the education out same way as we educate our clients about all kinds of investment advice and tax advice and state planning advice and all of that same exact reason. Advisors need to be educated and informed and really understand and not just be sold. Not just be sold. And that's unfortunately just is rare. It's rare today. But I think people's concerns are that they feel like they need to be part of something big. They feel like their clients need to feel like, hey, this is, there's something, there's meat behind this organization, et cetera. And, and that's where really where again, affiliating with something like Uptick Partners is great because you look at it as, hey, you're not on your own, you've got a team of people here. We've got closing hopefully by the end of 2025, north of $1 billion of AUM on the platform, which is great. All of a sudden it's, hey, this is not a nothing burger type platform and regulated by the SEC, etc. And so that's really, I think a very valuable thing for clients to know and for you to be able to Confidently say. But it's kind of like some folks say, they want to be independent and they want to be able to leave whenever they want. They want to be able to run their business, offer their clients investments and private markets, et cetera, and have the freedom to be able to do that. But they just don't want to be alone. Right. They just don't want to be completely alone, but they don't want to be golden handcuffs tied there to where they can't ever leave. And so that's really where we're. We think that we fit that. That niche. Very nice.
[00:24:21] Speaker A: Yeah. We just take a different approach. We want you to take the. We want you to make the most money you possibly can now, like right now, not take 30% or 40% of your revenue and be like, we promise this will be worth more. Just give me the revenue now and let me invest it in my business.
[00:24:39] Speaker C: Exactly. Grow my enterprise value. Because your enterprise value is massive. It can be massive if you build a business and get your revenue up, get your business up, grow from 100 million to 300 million. Because you can now all of a sudden go out and market yourself and promote yourself and start a YouTube channel and do all these kinds of things, do a podcast and have the freedom to put that podcast wherever it needs to go, etc.
[00:25:04] Speaker A: How is that business valued? It's valued off of revenue.
[00:25:09] Speaker C: Yeah.
[00:25:09] Speaker A: It's not valued off of the person buying that business is going to be going, you make this much gross, you make this much net, I'm valuing you off of your net revenue. I'm not valuing off of your gross because you could be giving away 30, 40% of your gross revenue to some entity. And now what you're basically telling them is, you know, like, you're going to have to replace everything that those people were doing, and hopefully those clients come with you if you're trying to repaper those people to something else. So people that are valuing your business are going to go, what are you making net?
[00:25:47] Speaker C: Because.
[00:25:48] Speaker A: Because that's status quo. That's what I don't have to try to upend the apple cart and try to figure out. So that's why it's so important when you're building your business. You want to build it at a place that gives you the most money today, in every year, so that you can either invest it, do whatever you want with it, but that's where it's at and it's not in trading today's revenue for some future liquidity event. That may or may not happen.
And the meanwhile, your business value, the value of your business that you're building isn't growing as much. That's just.
It's terrible.
[00:26:30] Speaker C: It seems common sense. Yeah, it seems common sense. Unless you want to be an employee.
[00:26:35] Speaker A: Yeah, it certainly sounds. That feels a lot like an employee with stock options that vest a decade from now.
[00:26:43] Speaker C: Yeah, basically, that's pretty much what it is. You're basically an employee of this large organization and yeah, you have some stock in it and you hope it goes up in value and someday it goes public. Right. But that's not independence, if you ask me.
[00:27:00] Speaker A: Yeah, you're gonna have to be here when it does.
[00:27:02] Speaker C: Yeah.
[00:27:03] Speaker A: Yeah, it's very strange. But in other news, we were. Michael Kits has had a shout out to us on LinkedIn, which was cool on our uptick transition guarantee. That's been tremendous response from people. We're getting advisors are calling us a lot, trying to figure out, hey, is 2025 filled up? Like, what is this transition guarantee? We're not. We're only doing this three or four times a year. And it looks like 2025 might be filled up and I think we might have a spot in October maybe.
[00:27:37] Speaker C: Yeah, I think it's a high probability by the end of this year, 2025 is likely spoken for.
[00:27:42] Speaker A: Yeah. So we've got a couple advisors right now that are trying to figure out if 2020, October 2025 is going to work for them or they want to push to 2026. But kits had a. What was interesting is I didn't even know that Kitsis kind of followed the transition advisor transition breakaway thing. I thought he was much more financial planning, obviously way in the weeds about how to do a lot of some cool financial planning strategies. I had no idea that he was kind of had some visibility into what's going on in the breakaway space.
[00:28:19] Speaker C: Yeah, the story I came into the office and it was like I had a LinkedIn message like, Saw you on Kitsus. I'm like, what in the world? And so, yeah, yeah, very surprising. But yeah, we had had several advisors reach out and so we'll see. It's me interesting. And they talk about one thing that I think I'm starting to see and I think we'll see continue. The trend to continue is this idea of the. The RIA breakaways too. So you've got a lot of these RA aggregators that have a lot of employees that work for them, and those employees want to break away, start their own RAs. And so I think that's something that you'll probably see continuing to happen as well. So.
[00:28:54] Speaker A: Yeah, it's exciting.
[00:28:56] Speaker C: Yeah. All right. I think we talked about a lot of stuff. Yeah. I'm sure we'll be back soon.
[00:29:02] Speaker A: All right, Take care, guys. Thank you for listening. We hope you enjoyed the podcast. Please subscribe to our channel. You can find more of our episodes on YouTube, Spotify, and Apple Podcasts. And check us out at uptickpartners.com where you can learn more about how we help breakaway advisors just like yourself find independence.
