Episode Transcript
[00:00:01] Speaker A: Hello and welcome, everyone. I'm Taylor Pancratz, 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.
[00:00:42] Speaker A: Let's talk about succession planning in the RAA world and how that is different, or maybe different than succession planning in the captive broker dealer world. So what does it mean to when you're in the captive broker dealer world, what is your retirement options? What's your transition or succession planning options?
What are those in the captive broker dealer space?
[00:01:11] Speaker C: Well, you're limited, number one, right? And I think ultimately what it boils down to, and we all know this, but I think it's just important to remember, is that you don't own that book of business. It's not actually an asset of yours. You don't own it. You're just babysitting it. You're just watching it for the big broker dealer.
And every once in a while, we have to be reminded of that by seeing evidence of that reality. Whether that be, somebody is terminated from their job for no particular reason or whether it's a legitimate reason or not, they're terminated from this job where basically they lose this asset that they think that they have or they think that they own. And it turns out it's a stark reminder that they don't.
Or another common, again, unfortunate scenario is you see folks that suddenly pass away unexpectedly.
And it's a very keen, quick, sharp reminder that you don't own that book. And that book of business is split up amongst a variety of oftentimes newer, less experienced advisors that take over your business and your family is oftentimes left in the cold because of that. And so that's another kind of a quick reminder, oftentimes of, hey, we don't own this book.
But beyond that, you think about for a second, okay, let's say that things go according to plan, how that typically is going to work. And of course, a lot has changed over time. But the main thing that I think is important to understand is that doesn't change. The main thing that doesn't change over time in these retire, I think they generally call these retire in place plans, but is that you don't run the show, you don't make the decisions, oftentimes of how you're going to do this, when you're going to do it, what the time frame is for you to make that exit. Oftentimes you don't have control over who the person is. That's your successor. Okay. We've seen plenty of examples, even from people that we know personally, that had a successor identified and they were pretty much told like, no, that person, you're not allowed to have that person be your successor, which is wild. Wild. It's a wild idea, even though you're ready to retire. And it's just like, I'm sorry, that's not going to work.
I think that you don't have a lot of control over what that process looks like.
It used to be, and it's not so much, I think, that way, really anymore, but it used to be really bad in that they would incentivize you to split your book up amongst a variety of people and incentivize based on the color of someone's skin or their gender, that you would get paid more or paid less depending on those types of things. And I don't think that that's as common as it used to be.
But either way, at the end of the day, the main point that I'm trying to make is you don't control how that goes. Okay. You don't control how that goes.
The other thing that is, I think, a really important point to point out, or a couple of really important points to point out about kind of how they work in the captive broker dealer space is that you're not actually selling your book. Right? You're not actually selling your book. Why? Because you don't own it.
[00:05:09] Speaker A: Right.
[00:05:10] Speaker C: So what does that mean for taxes? All right. I mean, ultimately what that means is that this payout, this payment that you're receiving is going to be taxed as ordinary income, which you could be talking about possibly a 15 or 20% difference in tax on the value of that asset. So that's a pretty significant difference. If you're a large broker, you also are kind of setting yourself up to put yourself in this position of, well, what if I don't want to fully retire? What if I just wanted to partially retire?
What if I just want to slow down? What does that look like? And unfortunately, in the captive broker dealer world, there is really not a great solution for that.
It's kind of like you're either in or you're out. And if you're out, you're out on this particular day because it's too hard.
[00:06:09] Speaker A: You can't scale that.
[00:06:11] Speaker C: Exactly.
[00:06:12] Speaker A: You can't have these white glove boutique solutions that are custom for each advisor and their unique situation.
You can't do that against the thousands of people that want to do that.
How could you possibly manage that?
[00:06:29] Speaker C: Exactly.
[00:06:32] Speaker A: But what about the person that's buying that book? If you don't own it, are you really buying it?
[00:06:37] Speaker C: What are you doing?
[00:06:38] Speaker A: Yeah, if what they're selling is not even the book, it's just like they're getting paid out for the. What are they even getting paid out for? To help you transition this book?
[00:06:49] Speaker C: Pretty much, yeah. I mean, I remember having that thought personally about you and I buying air quotations, Steve's business. And just the thought kind of being like, well, so wait a second. So if Steve wants to retire, Steve's going to do this retire in place plan. And so for the next four years, Taylor and Jason are going to take a 50% pay cut on the revenue that they generate on this business. Because we got to pay Steve, right? I mean, we got to pay Steve, for example.
And you look at that and you're like, so basically I'm quote unquote buying this business. I'm buying it because I'm working for half price. Right? I mean, that's any other business that you find like that. Like I think about my local dentist who bought out, but for real, bought out his business partner. And I'm pretty sure that I had heard from him that they had an arrangement like this where it was like, okay, for so many years he's working for half price, okay. And then that's his buyout. That's his way of buying out the business because he may not have $2 million to pay upfront. The difference being that in his case, at the end of the day, once he's done buying out that business, he owns that asset.
Right? That's an asset that he can put that on his balance sheet as part of his personal net worth is the value of this asset. Whereas in the captive broker dealer world, it's not an asset. It's not, you don't own that asset. And that's just a really, I think when you think about that, just fundamentally, I'm buying something that I don't even own.
[00:08:47] Speaker A: So think about it like this.
If you're an advisor and wants to bring their kid into the business, yeah.
Basically what's happening is you're selling, quote unquote, you're selling your book of business to your kid and he's buying it because that's how they're getting the money to pay you to sell it, but your kid isn't even effectively going to own it.
And so what you're basically doing is you're having your kid buy something. They don't even own it.
And who knows? 510 years down the road, you're sitting there retired because you've sold your book of business, but your kid gets terminated for whatever reason. It could be something so innocuous as something whatever.
At the end of the day, the problem is your kid could be fired from the firm and lose this thing that they quote unquote, bought from you.
What trajectory that these captive brokers, the captive broker dealers that they're on, this trajectory of hitting numbers, hitting metrics, all these different initiatives, what would make you think that they're not because they view their brand as bigger than any one advisor.
[00:10:13] Speaker C: Yeah.
[00:10:15] Speaker A: What would make you think, truly think that they wouldn't just fire somebody, fire your kid because they did something that they're like, oh, look, we just so happen to now we can split this book up into ten other advisors and we can go and create our number.
[00:10:32] Speaker C: Like we can hit our numbers on that subject that you bring that up. Isn't it also true that it would be more profitable for a firm who bases their compensation on the firm profitability and based on an individual branch's profitability, paying out profitability bonuses, for example, based on that, if you had ten businesses that were each $50 million versus having 1500 million dollar office, isn't it true that that 500 million dollar office has a lower profit margin and also more risk, candidly, because they could leave. Because they could leave, right. As compared to having ten $50 million offices.
The firm, for example, would much prefer to have ten $50 million firm would.
[00:11:24] Speaker A: Of course want smaller offices, more advisors with smaller books of business.
Of course they would. It's a business risk that they're mitigating. And if they can so happen to hit certain metrics and numbers that they're trying to hit to cast this growth initiative and things like that, would they not do that? And you're like, well, they probably wouldn't.
[00:11:48] Speaker C: I'm definitely not saying that they would go out of their way. It's just saying you can't.
[00:11:54] Speaker A: But would you be willing to bet six, seven figures on that?
[00:11:58] Speaker C: Yeah.
[00:11:58] Speaker A: Right. Of your kids asset that they just a generational asset. A generational asset.
[00:12:05] Speaker C: Right. A generational asset that could go on forever and ever practically. That you would risk all of that and put all of that on the line. That's crazy. Nobody would do that. When you think about it that way, when you think about it that way, nobody would do that.
[00:12:18] Speaker A: And yet they want their kid to buy that. They'd go, if it wasn't their book that the kid was buying, they'd go, if the kid was buying a McDonald's franchise that worked that same way, they'd go, I think you probably hesitate and look at this because you're not actually buying this, you just think you are and that can be ripped from you. And it's like if you didn't have such myopic view of it, of just kind of like, oh, well, this is how it works. Of course they're going to buy my book and then someday their kids, my grandkids will buy this book of business from them and.
[00:12:56] Speaker C: Exactly.
[00:12:56] Speaker A: This will be a perpetual thing. What, in these captive broker dealer, the trajectory that they're on would give you any inclination that's got 0% something that.
[00:13:10] Speaker C: You can genuinely place your trust in, right. And say, hey, this is for sure.
[00:13:16] Speaker A: Thing, move your book to the RAA world and leverage the strong relationships that you've got. So instead of you passing this book of business off to your kid and be like, oh, well, he'll move it at some point he's going to have to wait ten years until he has the relationships.
[00:13:35] Speaker C: Exactly.
[00:13:36] Speaker A: To move this book. And so you could say, look, I'm about to retire in a year or two years.
Move this book now and have it part of the story of why you're moving.
[00:13:50] Speaker C: Exactly.
[00:13:50] Speaker A: We're moving so that I can slowly retire. Hey, Mrs. Client, I want to be able to slow down, but I can't at my captor broker do it. They want me to hang it up immediately and just shut the lights off. I don't want to do that to you. I love you. I want to be able to transition this book and then slowly retire over the next few years.
[00:14:13] Speaker C: Or maybe never.
[00:14:14] Speaker A: Or maybe never. It's whatever you want it to be, right. Because you own the book, you make those decisions. You're in charge of how you transition that book. And so to me, it's almost an abomination, quite frankly, to sell your book of business to your kid when they aren't actually buying it.
[00:14:37] Speaker C: Yeah, it is.
[00:14:38] Speaker A: It's almost like, is that something that you would even do to your own?
[00:14:42] Speaker C: Exactly.
It is wild. It's tragic.
[00:14:46] Speaker A: The more you think about it, it really is.
[00:14:50] Speaker C: And it's just a misunderstanding. Right. People just don't know that there's an alternative and what that alternative is and why it's better.
[00:14:58] Speaker A: What was that story about that advisor that got fired because his client brought in a replica civil war weapon? Like replica civil war doesn't even work, like, replica gun, a thing that's an artifact from a museum. He brought it into the office, and he got fired because.
[00:15:20] Speaker C: Who knows?
Brought a firearm in the office.
[00:15:23] Speaker A: Firearm in the office, yeah.
[00:15:25] Speaker C: Or a disagreement with your staff. Right. Because you got to remember, your staff doesn't work for you. Right, right. They don't work for you. They work for the firm. You have a disagreement with them somehow, there's an HR issue, and next thing you know, you're out. Right.
And these things happen, and they happen every day.
Right. Yeah.
It's just to think that in many cases, you could have a business.
How many million dollar producers are there out there? And that business is genuinely worth probably three x, right. And so you say, hey, for all you people out there that are a million dollar producer, you realize that you've got an asset that's worth in the free market, probably $3 million, and you're just, like, haphazardly risking that every day.
[00:16:17] Speaker A: Right?
[00:16:19] Speaker C: It's unbelievable. Like, in what other universe would you operate in a place where you're like, I live in a $3 million house, but the bank could just take it away from me tomorrow.
[00:16:30] Speaker A: Right.
[00:16:30] Speaker C: And kick you out and be like, sorry, that's not your house anymore.
[00:16:35] Speaker A: So what ends up happening is to everybody that's listening, that's even thinking about breaking away, you owe it to yourself. I mean, you are playing with fire by even because you're no longer drinking the Kool Aid. If you're thinking about breaking away, you're no longer drinking the Kool Aid. And so you are playing with fire from the point that you are thinking about breaking away to when you actually do that is like a period of time that you need to make as short period of time as you can, because every day that goes by that you're sending emails that you're doing things that can make somebody believe that, or you're telling a client that you're leaving. I mean, like, definitely don't leave any of these things that are happening.
These are things that are adding concern.
[00:17:30] Speaker C: Right.
[00:17:31] Speaker A: They're just incrementally causing you added risk into your plan.
And so that's why you've got to be so careful, because all it takes is for them to get us a whiff of it, and then they can fire you. And then your whole plan is wrecked. And so you've got to be extremely careful about who you tell, who you let in, how you're even doing any of your research and due diligence and any of that stuff. Got to be so careful all about protecting the business. Of course it is.
[00:18:09] Speaker C: Yeah, exactly.
[00:18:10] Speaker A: Protecting their business. Which is why you should be all about protecting your business.
[00:18:15] Speaker C: Exactly.
It's so true.
[00:18:18] Speaker A: So you've got to drink the koolaid, or if you're not, you've got to be very careful and you have got to figure out where you're going to land and do it quickly.
[00:18:29] Speaker C: And you need good partners. You need good partners that can be on your team, like uptick partners that can really, truly understand very clearly the seriousness of the situation and the seriousness of the confidentiality of it and all of that. Because at the end of the day, that's all you have. How do you balance that risk? And really what it boils down to is that you've got to have a team of people that are rock solid, right.
[00:19:01] Speaker A: That are doing it for you, that.
[00:19:03] Speaker C: Are doing it for you.
[00:19:04] Speaker A: You try to stand that up by yourself.
[00:19:07] Speaker C: The risk is high.
[00:19:08] Speaker A: The risk is high because you're having to talk to ten or 15 different tech vendors that are going to know your name, because you want to do a demo, because you want to look at it, because that's just the tech stack, much less the compliance to getting the compliance in order, getting your attorney in place, getting your marketing in place, your pr in place. At the end of the day, how else do you try to figure all this out ahead of time?
[00:19:36] Speaker C: Exactly.
[00:19:37] Speaker A: You're like, oh, my name's Bill Smith and it's like, you can't keep all that stuff straight.
[00:19:42] Speaker C: Exactly.
[00:19:43] Speaker A: And so the reality is you leverage us, leverage a firm that's already done it, that already has all of this groundworks already been laid so that you can just plug in. You don't have to reinvent the wheel. The wheel has been invented. Just plug into it and leverage our.
[00:20:07] Speaker C: You end up with a scenario where you've only got two people that know, right.
[00:20:12] Speaker A: Instead of 20 people, but everything's in place.
[00:20:15] Speaker C: Exactly.
[00:20:15] Speaker A: So the PR team doesn't know your name. Nobody knows your name until they need to. Up until that, everything's being built out and all they know is that uptick wants a new website.
[00:20:30] Speaker C: Exactly. Right.
[00:20:31] Speaker A: That uptick is about to need a PR campaign. Uptick is going to need a new website. We're going to need a new office location over here. We're going to need new computers over here. All of this stuff, it doesn't need to be as complicated as people that try to do it themselves have to make it. There's no way to do it yourself and make it simple. Which is why uptick exists. Back to what we've always said. If uptick existed when we broke away, sign me up for that. Because what we ended up doing was a complete hostage, Cris, because there wasn't another way. Because every other solution was either the halfway house or didn't understand where we were coming from and the technology solutions that we needed.
And so I would encourage you, if you're listening to this on a podcast, as you're going to bed or driving in your car, just take a second and think, where am I at in this whole process? Because if you're just kind of dipping your toe into the water, you need to figure out very quickly whether this is something for you or it's not for you. Just from a business risk perspective.
Because remember what we had happened to us? We did a due diligence trip in Colorado and had the hotel call our office and was like, oh, Jason. And like, they didn't pay the hotel bill at the Sheraton when we went to go do due diligence on Pershing. And so we had, literally, the hotel is calling the office because there was a bill that we.
[00:22:23] Speaker C: It's like she went dog the bounty hunter and figured out my office phone number or something.
[00:22:28] Speaker A: So she calls the office and is like, Taylor and Jason were here on this date, and we need them to pay for the room.
And had we lied to the staff that we weren't in Colorado, that would have been a huge red flag. The staff's going, well, that's weird. He told me that he was sick that day, or XYZ. And in fact, I'm being told he was in Colorado.
That's going to raise suspicion from your staff.
[00:22:58] Speaker C: Right.
[00:22:58] Speaker A: So it's these things that you're kind of like, well, Taylor, that would never happen. Like, there's no way that this could possibly be found out. I'm so careful. I can tell you it can. Because of things that you would be like, that would never happen. I can tell you right now that there's a hotel desk clerk that called the Edward Jones office and was asking for me, demanding that I pay a bill that my boa is like, what is she talking about?
[00:23:29] Speaker C: Yeah.
[00:23:29] Speaker A: And I'm having to be like, I was there. I was there. Thank God I told you I was going to Colorado and not to Dallas or know, because that would have been. Well, well, okay, well, let me explain exactly.
[00:23:41] Speaker C: I took a last minute trip to Denver.
I just felt like I wanted to go to.
[00:23:49] Speaker A: Just that kind of stuff you can't plan for. So if you're dipping your toe into the water, you need to figure out very quickly, if you like.
[00:24:00] Speaker C: Yeah, you either got to drink the Kool aid or not drink the Kool aid exactly like there needs to be, because I think it's just you can't.
[00:24:06] Speaker A: Spend a lot of time in this ether.
In both camps, you really can't afford to, because as time happens, it just more and more things. It's like a lie that you're having to keep up because you're not allowed to tell anybody, but you have things that you need to be doing.
[00:24:23] Speaker C: So unfortunately, you just increase. The longer it goes, the higher the probability that something bad happens.
[00:24:30] Speaker A: Somebody finds out something.
[00:24:32] Speaker C: That's the problem, right? Is that there's a higher probability of something bad happening, which is the advantage.
[00:24:38] Speaker A: Of uptick, is we want to take a lot of that off your plate so that you're not having to sign a lease in your hometown where you might know other people, and you're having to sign a lease through this made up llc because you don't want the real estate agent to know that you're taking out a lease down the street. Just random things like that that we can help you with that makes it so much safer and smoother and turnkey than what it unfortunately needs to be, or normally, oftentimes is exactly.
[00:25:15] Speaker C: We just know. I think ultimately, at the end of the day, what it boils down to when it comes to that is we can relate, right? Probably better than just about anybody else can relate to this concept of whether it be the multigenerational aspect, whether it be the business succession aspect, whether it be having family in the business, whether it be trying to break away and keep it a secret, whatever it may be. We can relate better than just about anybody else can. And that's the type of person and organization that you should want to be in your corner if you're thinking about doing this. And so you need somebody that truly can relate on a very deep, very personal level. And that's what we want to be for you.
Bye.
