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♪ Got to sort of tell 'em ♪ Two destinations, one loyalty card. Visit yamava.com/palms to discover more. - Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My guest today is Sean Kernan. Sean is a financial advisor who grew up in the wire house and brokerage world and then went independent. And today he works to help other financial advisors make that same transition. On today's show, we discuss the details of how to get your start in the financial advice business and also some of the different practice models that you might choose to pursue.

Sean, welcome to Radical Personal Finance. - Thanks, Josh, we're glad to be here. It's a pleasure. - We're gonna have financial advisor coffee today, a virtual cup of coffee together, and try to record it for the world. You know, when I started Radical Personal Finance, I thought, well, what I'll do is I'll just spill the beans on the financial advisor industry to the public.

But I didn't expect a lot of people who were interested in the business of being financial advisor really to listen to the show. But somehow I've attracted that type of audience of many people who are financial advisors listen and many people who are in other careers who are interested in becoming financial advisors.

A lot of people have found the show. As a simple example, I got three emails last week from people saying, hey, I'm in another career. I'm thinking about switching to become a financial advisor. What do you think? And so I wanna serve this segment of the audience with some information, which is why I decided to go ahead and invite you on the show.

And we'll talk about your experience in the financial advice business and also a little bit of your new project of helping advisors go independent. So let's start, however, with give us your resume, so to speak. Where did you start in the financial advisor business and what was your pathway through this landscape that we all exist in?

- Sure, yeah, I'm happy to. So I started, I was an army officer out of college. I went to West Point, had a five-year service commitment, but I always kind of knew that a long-term career army officer was probably not what I was going to do. So I spent a lot of that time, a lot of that five-year commitment, kind of sorting through different potential career paths.

I think one thing I love about listening to you, Joshua, is you're sort of strategic thinking long-term. And I like to think I've tried to do that. And so that five years, there wasn't much flexibility compared to the average 22 to 27-year-old, but I did have the opportunity to spend that time thinking about what I wanted to be when I grew up.

And most of the jobs that I talked to people about honestly bored me to tears. They just didn't sound interesting to me. And I always had an interest in personal finance, had read a lot, studied a lot, found it interesting. And so I kind of settled on that, between that interest and then the, as you, I think, described in a recent episode, the entrepreneurial nature, even when you're an employee advisor or agent, you really are, no one is usually paying you much to just show up at some point.

If they were, I never found them. I always had to produce to get paid. It's like, is this too good to be true? Well, no, the catch is it's hard. And that's, you know, we'll get into that, and you touched on it pretty well in that recent episode. So I looked at different options.

I interviewed with what then was called American Express Financial Advisors. One thing that appealed to me is they said after a few years, you can basically have your own kind of franchise. And they had obviously a brand name that people knew. And I was living in Denver at the time, serving at a small Air Force base.

I was a personnel guy for an Army intelligence unit on an Air Force base. So I got to live in Denver. So that's not a bad gig for an Army officer. Especially someone looking to transition to the civilian world. So I went to West Point in a service academy grad's networking group almost every Tuesday morning.

So anyways, I heard about them I think from a fellow West Point grad. And that appealed to me. So I interviewed, and they said, yeah, we'll hire you. Of course I thought that was a big deal. And as you all know, it's to some degree if you can talk and chew gum, at least back then, you could probably get an offer.

Chewing gum was optional. You just had to be able to talk. Exactly. And so I was about to accept. And my wife wisely said, hey, shouldn't you at least talk to one other company? And she doesn't have a huge interest in what I do all the time. But man, when she weighs in, it's gold like that was.

So I said, yeah, it's probably a good idea. So I was telling this story to another guy. And he said, you know, I think Edward Jones or A.G. Edwards, one of those, they do this give your own office right away. So I looked it up, and sure enough, Edward Jones did.

So that was even better than waiting two or three years. So anyhow, I got hired by them and ended up moving back to the Dallas-Fort Worth area where I'm from and got into it in the spring of 2002, so 14 years ago now. So you started with Edward Jones in Dallas.

Yes, you bet. Okay. So I want to probe on that because I'm always fascinated with the Edward Jones model. They cut their teeth on kind of serving the small-town rural community. Is that accurate? Yeah, very much how they grew. That was the business model for sure. And then they moved into the large metro areas.

But they had, as I understood it, they had started serving that underserved demographic out in the country. Yeah, it was very much what we call the blue ocean strategy back in the – I think it was the story that I remember from being there and inculcated in the culture and the stories.

In the early '80s, they only had about 300 brokers as they would have called them, and their advisors. And there was a managing partner that came in and said that was a big debate I think internally. It was do we try this in at least the suburbs of the big cities.

But in Texas, which is a big place, I want to say the first two offices or two of the ones that have been around the longest were in places called Greenville, which is about an hour east of Dallas, and then Big Spring out in west Texas, so not very big places.

And so I was in a suburb of Dallas actually where I grew up or where I went to high school and middle school. And yeah, it was an interesting thing because when I started, I was like a lot of West Point types. Like you are very analytical, detailed. I think the nature of being new at something, you want to over probably do your preparation in some ways compared to what this business kind of calls for in terms of getting out there in front of people and kind of ask them to meet with you.

And you did a good job describing when you're new, you don't know anything, especially when you're – I was 26, 27. And I knew that was – I knew what I didn't know to some degree, but it's still a challenge. So I knocked on doors and talked to a lot of people and it worked better than I thought it would, and I think that's one lesson I take from that.

I hear in other venues in other forums is if you just take action and make – towards something, you can always adjust course and shift fire so to speak. But just go somewhere and then you will figure out if you're going in the right direction hopefully. So I spent three years doing – building kind of the core of my practice there, tried to do a good job, always looking out for the long-term interest of my clients even when that – when it was not necessarily lucrative in the short run.

But I could kind of tell from talking to some mentors and just sort of common sense that that would be a good thing in the long run anyways. Plus it was the right thing to do. So that worked well and about three years in, I – actually it started probably from the day one.

I would be knocking on doors, meeting people and sure enough I would come across other advisors or managers or people who had been in the business or recruiters for other firms. So I started to get curious and just kind of talk to them and it's like, huh, that's interesting.

There's other ways to do this business. I was fully sold that the firm I was with was the best there was and it did a great job for me. But I was – didn't want to be overly closed-minded. So I would make some contacts with people in the industry, just kind of network and learn more.

So I continued to do that and one of the things that was a bit limiting from my perspective at the time was Edward Jones didn't have any what we would call advisory platforms or fee-based where you charge under assets under management instead of more of a commission-based, transaction-based compensation.

So this was in 2005. So I ended up leaving to go to Morgan Stanley in the middle of 2005 largely because of that kind of lack of capability. Now, why did you want the ability to charge fees as an advisor? Well, a couple of different reasons. One, it just seemed simpler to me from being on the same side of the table as the client.

There's definitely a case to be made where purely cost-wise, a commission-based model, if you have a longer holding period, you can do the math and say it's definitely – it can be cheaper for the client. But in terms of where the incentives and we all know people respond to incentives whether they want to admit it or not.

It's just human nature over time. Being able to – as I tell clients now, look, I get paid to help you take care of the money, not to move it around or to go get new money from you or other people. So in the hypothetical commission-based world, if you stay in that, the only ways – only times you get compensated are when there's a transaction and that's either moving around somebody's existing stuff, which there are always times – certainly there are times you need to move things around.

So it's not that that doesn't happen. It's just there's all kinds of – as you well know, there's all kinds of ways to get paid and ways to justify transaction business. So it's kind of a tricky place to be as an advisor who's trying to do the right thing.

It can be done. I know a lot of people who do it well and serve their clients extremely well. So I don't think it makes you bad to be in that kind of model. But it just was a little trickier. And then the – bringing a new client. So if you're getting paid when people invest money with you and you've got a new client and you kind of allocate their investments according to the plan you've put together, then sort of the natural inclination is to find the next one, especially when you're new.

And you need to do that regardless of your compensation model. But – so that was a big part of it, just being on the same side of the table as the client even more. And then the other thing is just it's a better business model in my opinion. It's – at some point you can continue to increase the quality of the relationships you have and deepen those relationships versus having to go find new ones.

Now – and when you do that, you naturally get more referrals and so the business grows. But it's just more predictable. It allows you to hire staff or get other resources because barring market crashes like we saw not too long ago, your revenue is going to be fairly stable, whereas the transaction-based model might be more feast or famine.

So part of it is just it's a solid business model and then I looked at also the data. I mean I'm a little bit older than you, but I looked at the data looking down the road. In fact, I did this when I was about probably where you are now age-wise.

If I was to ever want to retire someday and sell my practice, advisory, fee-based, recurring revenue was more profitable. So that was part of it. But also just more of the simplicity. You talk about cost. Well, the client wants this. This is what we charge and this is why.

And then it doesn't really come up again very, very rarely, whereas a transaction, ideally you're kind of mentioning it every time because it's going to come up. It's going to be charged every time. Aaron Powell: Absolutely. So you went to Morgan Stanley 2005. Yeah, so that was very successful.

I was able to retain a lot of my relationships and sort of their – the clients that came with me brought their accounts over. I kind of just made that transition over the next several years just in time for the market to have a slight dip of about 55 percent from the draw.

A moderate correction. Yeah, yeah. So markets can – past performance is no guarantee of future results to say the least. So that was kind of interesting because I thought, oh, wow, these – over the long run, it's probably good for me to be – having more asset-based compensation because over time you expect markets to go up more than down.

But it also can go the other way, which is sort of the point. I was – my income was at risk. One of the greatest compliments I think I've had a client pay me was sometime later she said something like – we were talking about the 2008, kind of the fall of '08.

She said, "I think you were more worried about it than – about our accounts than we were," something to that effect because you have that pressure and you want to do the right thing for people. But that was the first go-around I've seen that, and I don't know that I'll do much better next time, but at least I'll have – I'll be able to say I've seen it.

I've been there, done that. That was kind of an interesting time. So anyways, I spent that time kind of converting to more recurring revenue. Morgan Stanley is a great place, great name, not as great maybe after '08, '09 with things that kind of all those firms went through. But a lot of resources – when you say, hey, I'm going to Morgan Stanley, most people have heard of it.

But I kind of always knew even before I made that change I had the idea of independence in the back of my head. And the – in terms of my arrangement with Morgan Stanley when I moved there was basically I had a five-year deal. I thought, well, if I don't like it – and I've been there with the Army commitment, so I can stand on my head for five years if I need to.

I don't want to make my clients move very often either. It's a painful – or can be a painful or at least an annoying process for them to move their accounts and new account numbers, new statements, new online stuff, new instructions, moving money in or taking money out. But after four years of that five years, I was kind of ready.

The market had recovered off the bottom in 2009, and I was kind of ready to do my own thing and have the flexibility and freedom of kind of crafting the practice the way I wanted to. And at a larger firm, that's just harder to do, a lot harder to say the least.

So in 2009, I made the move to an independent – what you would call an independent broker-dealer, basically a firm that looks and smells a lot like those other two. It's just I own the practice. You don't really have a boss, so to speak. You have compliance requirements for sure, the same – similar requirements.

But you own the practice. You decide if and when to hire people. You decide if and when to get office space, what color your logo is, what you call yourself, those sorts of things within the sandbox of the compliance world that, as I'm sure we'll talk about, continues to shrink.

But it's been phenomenal. I've enjoyed it. It's just been – I kind of – September 3rd is the day of my anniversary. I kind of think of that as my – that's my July 4th. It's my independence day, so to speak. So it's been great for me and my family, and I think I kind of get fired up about that.

So that's why I started this other project to kind of talk more about it. So we'll talk about that in a second. Describe to me the nature of your firm, the type of clients you work with, the number of clients, that type. Just what demographic do you serve with your firm?

I think my best clients, I would describe them as people who have done a good job saving and they've already figured out that you should spend less than you have coming in. So I'm not doing real hardcore budget coaching. They've got that down and they've probably had it down for many years.

In our business, it's often the shortest route to build a business is to work with people near retirement or maybe early in retirement who have already accumulated a lot of what they're going to accumulate. So I work with a lot of people who have worked for someone else, not all business owners.

I know a lot of my colleagues, that's the focus. But I have a lot of former employees or employees that have very relatively straightforward financial planning needs, retirement planning, insurance protection, college planning. So they've accumulated some money but not always millions, maybe at least one but not always. And between that, their investments and social security from maybe two spouses in a lot of cases, they can get what they need and be relatively comfortable sometime after they turn 60 in a lot of cases.

So it's not that they don't want to follow their investments but a lot of my best clients, they've kind of developed the trust over time after 10 or 12 or 14 years that we've done the hard work of describing to Sean what we want to happen. And we trust him to guide us and we'll ask questions and as things change, we'll make sure we're adjusting fire.

But it's always about what are they trying to accomplish. So in the industry, we might call that the mass affluent. So it's – I don't do a lot of the hourly consulting or XY, Generation Y, millennial-type consulting just yet. But sort of the baby boomer, retiree who has got enough money but not so much that they're still worried about their number one goal is not running out of money.

So I was just going to categorize it. You're working with the mass affluent, ages 40 to 70, a lot of married couples who have anywhere from half or three-quarters of a million dollars up to two, three, four million dollars, retired executives, retired school teacher, put a lot of money in a 401(k), a couple – some blue-collar business owners, this kind of just mass affluent approach, right?

Yeah, exactly, and from your background, that's a pretty plain vanilla. There's lots of us that do that, right? So the good news is there's lots of us – that is the good news I think because there's a lot of help out there. It's just sorting out who's who and finding that fit.

But yeah, it's – as I like to say, it's not rocket surgery. Right, right. Yeah, it's a great – I mean that was exactly the third – the years three through six of my financial advisor work. That was the target. That was exactly the business model. There's a high – and the way I saw it is that was the – those were the people that I could effectively serve.

You get to a point in time of an amount of wealth. I don't know what the number is. Is it five million? Probably. Is it 10 million? Most definitely. Is it 30? Absolutely. … at which the amount of client service, the sophistication of the need, all of these things get to a point where you need to have a firm that's oriented in that direction.

Exactly. You get to a point. I mean if you're working with a client who has $300,000, unless that client is quite young and they're aggressive savers, it's going to be difficult for somebody to practically be able to retire on small amounts of money. And so you need a certain level of wealth for the type of practice that you're running or that I was pursuing.

You need a certain level of wealth that you can actually make meaningful impacts and influences in the client's life in excess of the cost, in excess of your fees. But you need to – you can't have clients – you can't effectively serve somebody who has the expectations and the needs of someone with $30 million in the bank.

They need a different type of practice structure. So I always – I felt like that – what I just described was a place that I enjoyed working with those people. There was enough diversity. I could really be a subject matter expert in the areas that were impactful to that and enjoy a good working relationship with that type of client.

Yeah, and a lot of them, as you I'm sure experienced, they appreciate your help in most cases, right? Right, right. So they're not being – there's plenty of competition for the folks with a million and a half in their accounts that – but a lot of them are regular folk.

Millionaire next door and I love that interview you did with your former boss. He might have grown out of that but sort of the – they don't picture themselves as wealthy and they appreciate it and they value your input, which is nice to have in a job. But in the situation, the financial planning situation that this type of mass affluent client faces is – it's challenging.

It's complex. When you're digging through all of the different things that influence them, it is challenging and complex for a layperson to figure out. I believe a good advisor can add a tremendous amount of value in this area with social security consulting and just all the different areas of financial planning.

But it doesn't require highly intense specialized knowledge like doing billion-dollar estates does when you have to basically spend three years working on one financial plan if you're trying to do an estate plan. Exactly. We can effectively tool up through some credentialization and five, ten years of study. We can effectively tool up to be able to really effectively serve that client with experience, and that weeds out the vast majority of brand-new financial advisors from our competition.

Because a brand-new – someone who just got their license, they can't effectively do that type of planning without bringing in a whole team. So I think it's a really beautiful type of practice model that has a lot of value for the client and a lot of value for the advisor.

Yeah, it really is fun. I mean I get fired up about retirement income planning and like you said, I mean I have a lot fewer letters behind my name. I've got CFP and that's the main one. But doing a retirement income plan for me because I've done it a bunch, it's a blast.

And when you can show someone, "Here's where we're going to pull your income from," or "Here's what I recommend anyways. Here's how social security fits into that. Here are some claiming strategies," and they go, "Okay, good." They feel kind of that sense of relief and it's great. People have that relief.

They've saved some money but it's like now what? I've got this pile of money but how do I turn it into income as one example? And that's a common planning need. And to you and me who have done it a bunch, it's not complicated but that curse of knowledge is pretty real.

I'm like, "Oh, yeah. This is obvious," and they're like blown away. Right. It's not – you can't get it from Money Magazine. You need somebody who is able to look at it and the impact is so huge because this is the type of client who wants that confidence that, hey, it's 65 years old.

I can leave my corporate job and I'm going to be okay or I can get rid of this business and I can get the RV and travel. This is the – it's the image that's on the front page of the brochures of most of the financial planning firms. Yes, the obnoxious – I mean the people aren't obnoxious.

The marketing brochures are. They are. They are. So let's talk – There's no do-over. That's one of the – Exactly. There's no do-over and you're not – it's not like you're working with someone who doesn't question. No, of course I've got enough money. I'm paying you to get me maximum performance.

I'm paying you to save me the most money like you get when you get into ultra-high net worth marketplace. Exactly. So where did this How to Go independent project come from? Well, that's a great question. So I spent a lot of the seven years before I went independent at those two employee firms.

I spent a lot of that time kind of kicking around the idea. So there was a couple of years when I moved from one to the other. I was focused more on the mechanics of the transition. That's pretty intense when you go through that and then the market didn't help.

But absent that, I was always kind of torn with the idea of once I had heard about the business model, which is pretty early on, again, from knocking on doors. I met some of the best contacts for business actually doing that as much as I met potential clients actually.

So I started kind of talking to other advisors that were already had the independent model set up. And I'd randomly call someone or drop in on their office unannounced here and there. And so I built this. It was almost this ongoing research project. And once I was ready to pull the trigger, I accelerated that and kind of double-checked a lot of the – it was very much a trust but verify situation.

So I think recruiters and anybody that's helping you and has a financial incentive to, that's great. But give me a random sample as well to back up the data. So I did a lot of that. I think I probably talked to 15 to 18 advisors that were affiliated with a firm I'm now affiliated with, which is one of the biggest – the biggest independent broker-dealer.

And so I kind of verified. It seems like everything I'm hearing is going to work for me. So I pulled the trigger in late 2009, September 3rd. And I kind of felt like it was a letdown after I got everybody moved over on my clients. It was successful again, about – retained about 80 percent of my – kind of my revenue stream.

And then I realized there was no one else. Most people were not digging in quite as much in terms of their research or they weren't as far down the road. So long story short or shorter, I ended up kind of building a network of advisors in the next year and a half or so, either that were already at this firm and were kind of on their own in an island or that I knew from other places, the other two places, or from networking and sort of helped them move over.

So I had the supervisory license like a lot of us do that are independent because the old model, like two years, three years ago at this place, this firm I'm affiliated with, that's kind of the clearinghouse, almost like Fidelity or Schwab would be. The model was a solo advisor having a supervisory license and then they would come kind of do the oversight once a year.

So a lot of people had these solo individual shops, but I found that there was some sense of community would be valuable and a lot of people said that, but someone had to kind of pull it together. So I did some of that and it was successful and then a couple of years after, got some momentum, partnered with two other guys and continued to kind of recruit and add people and kind of share the gospel of independence, if you will, and really enjoyed it.

And we've had some great success and we're proud of that. And then I got to this – another point where I was kind of like, well, that was fun, but now what? Because growing it is more of a grind to me than starting it. And so I realized I love the idea of, hey, if you can get out of XYZ firm and set up your own shop, I get fired up the idea for you even if you're not going to be with us, my network of advisors or even with our firm, the broader firm.

So I thought this would be a good way to scratch that itch and just write about it and the podcast kind of came as I realized – I think like you said, audio is easier for me. My problem is streamlining probably the amount of content just like you've talked about, but I think in your case, it works well.

So you're my hero in that respect. So anyways, it was out of a passion of talking about independence and sharing the different ideas and all the little ins and outs of it. I started to interview some of my fellow advisors because that's easy to do. We all have our own story about how we got here and I enjoy that as well.

So I'm still kind of exploring where this will go. But it's a blast. I want to have you talk through the different models in the financial advisory business because you've been in – I would count two of them. You've been in the wirehouse model. You've been in the independent model because both Edward Jones and Morgan Stanley would fall more into that wirehouse classification.

I came from the insurance company model. I know all the insurance companies hate it when they call it insurance companies, but that's a good, accurate thing where insurance is the cornerstone. And then I guess – and I was moving in the direction. I had filed the paperwork to start a pure registered investment advisory firm.

So explain the background of these words, wirehouse, insurance company, independent, registered investment advisory firm. What do those mean? Explain it for a layperson. Sure. I'm happy to and I would say when I get to the – feel free to correct me if I stray and talk about the insurance-based universe because I'm not as well-versed certainly as you are or as – like I have a business partner who came from that world.

He's my expert when I need to go know something specific. So when I look at the world is – there's a couple of different ways you can classify an organization in our business. The simplest is that I kind of came to understand first was employee or not employee, right?

So – and there's probably some in-betweens like some – if I'm not mistaken, some parts of the Northwestern mutual model and others, they're kind of in-between there, right? They're semi – they're more like an independent, but there's some employee type franchising arrangements. But – so my first goal was, all right, let me learn about this independent thing.

And then on the employee side, there's all kinds of firms. But the wire house term is kind of reserved for the biggest national firms that most people have heard of. In fact, I was just reading something. It might have been before we started this about – there's only four wire house firms left.

So for whatever reason, Edward Jones doesn't get called a wire house even though it's as big as – it's right up there size-wise. It's probably third or fourth in size. It was always called a regional probably because 30 years ago it was. So that's – the wire house is Merrill Lynch, Morgan Stanley, UBS, Wells Fargo.

Those are sort of the remaining four standing firms. There was – Smith Barney was acquired by Morgan Stanley not too long ago and there was others in the past. But that's the big-name firms that are I guess all now banks really. They're owned by banks. So that's the big brand-name firm.

Then – So pause a second and explain what the compensation model is. Pick one of those firms that you know. And let's say someone wanted to get in as a financial advisor. How did the initial contracts work? What is the compensation model in the early years when working with wire house?

Trevor Burrus: Gotcha. The gist of it is you're going to have some sort of salary for – it's been a while for me. But probably let's call it two years, maybe shorter, maybe slightly longer if you can find a particular deal or a brand. Those are evolving a little bit.

But generally I think they're still around two years of salary. Sometimes that declines as you get a little bit more into it. I'm also talking about – like you talked about in the episode about answering the young physicians question. This is assuming you're kind of building your practice on your own.

There's an increasing move to the team approach. But this is assuming you're kind of a standalone. I'm going to build my practice for me within the confines of this big firm. So you get a salary of some sort, usually not substantial, especially if you're a mid-career professional. I was 26 when I signed on the dotted line.

It was fine. I was coming out of the army. My wife was a teacher. So it was fine for me to have at least some steady income. And by substantial, I'll say around here my guess for friends that have gone through this, I would guess that depending on your qualifications, depending on your experience, because these are usually individually negotiated within a range.

But I would say you could negotiate anywhere from 50 to call it 90 grand of salary. I had some friends that have started at 75 with some of the wire houses, things like that. Does that seem about – like it is in Dallas area? Yep. I think that's very reasonable.

Probably that's a little bit of an inflation adjustment from when I started. But forget time flies and prices do go up. And so, yeah, that's a very reasonable range. And then depending on the situation, the higher – like you would expect, the higher salary, you may or may not get as much incentive comp, although there's always going to be some, just the nature of the beast.

And to clarify also, that salary range, this is not me being recruited as a financial advisor with $100 million of assets under management and 300 clients. This is me coming in and I'm saying, hey, please, I'd like a job. You're going to send me to school. Allow me to get my series seven.

And basically I need to look on paper. I need to look sharp. I've got a good academic ability. I need to demonstrate some proficiency with people skills. I need to convince you that I'm going to be effective with sales. I'm going to take some personality tests and things like that.

And then assuming that I've checked the boxes and you've checked the boxes, then with no clients and possibly even with no experience, although experience is always helpful in some regard, we can negotiate something where you're going to put me on a salary for the first couple of years to help me pay my rent.

While I go and build the actual business by bringing in new clients. Exactly, yeah, starting pretty much from scratch. So it's not a bad gig when you consider all that in terms of the training depending on the firm and the potential brand name you've got behind you and the resources.

So it sounds pretty attractive. You've got me sold with that description. Well, it's a big benefit. And let me also talk a little bit about the team versus employee model – excuse me, versus individual model. In the example I illustrated, I come to the wire house and I say, "Hey, listen.

I want you guys to hire me. I'm attractive on paper. And now you're putting behind me – we negotiate $60,000 starting salary for the first year. In the second year, I'm going to start to pick up income from my accounts. And so that's going to go down. And in the third year, it's going to be all based upon my practice." Well, the benefits of this model is I can begin with a high degree of independence with regard in what I do and my time.

There's no independence as far as not being able to work. But I'm going to be held accountable more for my results than being managed on a minute-by-minute basis. And the reason why the wire houses need to provide a salary and a base to get started is because the sales cycle of bringing in investment accounts and investment clients is much longer than the sales cycle, for example, where I started with insurance.

It would be an unusual situation where I go out. I meet somebody. Hey, I'm a financial advisor. We do financial planning over the course of a few weeks, a month or two. And then all of a sudden, just boom, they're ready to hand over and transfer in $2 million of assets.

Does it happen? It can happen. But it's much more usual that in the nurturing of the relationship, which is the primary way that many people search for financial advisors is that it's based upon the selling of the relationship. It would be much more usual for that process to take some time.

So it's going to take a couple of years, a lot of prospecting work, a lot of knocking on doors, both literally if you were working with Edward Jones or proverbially speaking, metaphorically speaking, a lot of knocking on doors to build – to start to build those relationships. Benefit is it's my business.

And so if I can figure out how to make the connections to the people with the million-dollar accounts and if I can figure out how to nurture those relationships, this will be an extremely valuable, lucrative business for me. But during those first establishment period, I need to get a salary.

Now, to contrast that with the team model, in the team model, I came in and I have no experience as a financial advisor. I don't have any licenses. I would agree to come and let's pretend Sean is here with the team. Sean has 20 years of experience. He's a senior advisor.

He's got a business partner with 30 years of experience. So both of these guys are working together. You have a junior partner with five years of experience, and you bring me on. And my primary work is going to be largely administrative, but there's going to be a component of technical financial work associated with it.

So I'm going to begin in this model by calling and setting appointments for an annual review or a quarterly review for my advisor's clients. I'm going to take care of filling out the wire tickets or whatever the modern equivalent transforms to be over the coming years, and I'm going to take securities trades.

I'm going to basically be in the office for a regular work week most of the time so that my advisor can be out playing golf with the prospective clients. So I'm going to be in the office, which limits some of my independence, but then the opportunity is it's much more stable.

I'm just responsible for doing administrative work. It is technical work. At some degree, I need to be licensed. And the opportunity is if I go on Tuesday night and Thursday night to some networking events at the Chamber of Commerce and I can start to develop some clients, then I can start to move up.

Or if I can demonstrate my expertise and my ability to work with the firm's existing client base, then I can start to transition into that more out of the administrative function and more into the advisory function. So that would be an example of the team approach, a little bit less risky with regard to the entrepreneurial requirement, but a little bit less autonomy because the firm is taking on the risk, not you, the advisor.

Do you agree, Sean? Amen. Yeah. The one thing about the Wirehouse model is they have historically been notorious for that team approach. And it's this new, younger person usually comes in with some sort of natural network of knowing people, their parents, friends, and family, whatever. And the Wirehouse will – the team will let this person add all these clients to the team, and they're usually getting their top-line revenue.

And then lo and behold, if that runs out, it's sort of, "Well, we don't need you anymore," and if that person leaves and doesn't stick around or in the business, guess who keeps the clients. So there's sort of that – you have to be real careful. But that was a very good description and sort of the pros and cons of each approach within those systems.

Yeah, that is definitely an allegation that can be lobbied sometimes fairly. I think there have been very unethical advisors who have done that. They hire somebody just simply because of their access to a market, and they know they're not going to make it. But, hey, if they don't make it, then we'll keep all their clients.

And then sometimes it's unfairly lobbied, but it's something to be aware of. Sure. It does give the hiring team a – they're getting value. It's kind of – it gives them an incentive to bring someone on and give them a chance, right? So not everyone maybe is cut out for it or there's not a fit or whatever reason.

It's a tough business to get into. So that might be a consolation prize so to speak. And if you're starting as a new advisor, as an employee with a salary, there's going to be some specific, very clear financial benchmarks of a certain number of new accounts, a certain number of assets brought into the firm.

And if you don't hit those, then there's going to be – you're likely to either have to renegotiate your contract or you're going to be fired and out the door. So you've got about a two-year runway-ish where you've got to demonstrate your capability and your capacity with actual data because the job that you're being hired for is to bring in new clients.

It's new business in that situation. If you're going to get hired as a technical consultant, then you're going to need to be hired either by the home office as some sort of technical consultant or you would need to be hired by a large team specifically as a back office technical expert to work with the existing client base of that team.

Trevor Burrus: Exactly. Yeah, you want to be real clear on what the responsibilities are because those of us that have been around a while, we have – we kind of know instinctively there's business development responsibilities for most advisors. But someone new – looking new to come into the business, I know from seeing your audience questions and comments, I was this way.

A lot of us are interested in the technical work and that's important and it certainly helps you grow the business. But that's not – most of the wirehouse firms in particular, they're not looking for expert CFPs when they come in. They want someone who can help grow their franchise.

Michael O'Brien, PhD, PhD, Law School of Law: Right, and I see two comparisons to draw. First, this same thing happens in my observation. I'm not a lawyer nor have I ever worked in a firm, but I've worked with a number of attorneys as clients. And this seems to be the same exact business practice that happens in the legal field is most people will be hired out of – most people will be hired out of law school as an associate attorney of some kind.

But if you want to be on the partnership track, the way that you're going to prove your real value to the firm is partly through your legal knowledge and your legal expertise but largely through your ability to bring in new revenue, your business development activities. And so to transition up from that staff attorney position into a partnership track, you need to be able to sell and bring in new clients.

Now, that may be because of your international notoriety of practicing in a certain area where you're the technical expert or it may be simply because you've built the connections in your town. But in that sense, it's exactly like the financial advisory business that the most valuable skill is always business development because you can hire the technical expertise done at a much lower rate than you can hire the business development.

Now, the thing I see changing is the industry was largely influenced – has had a large – a lack of formal technical planning preparation. So I didn't have a degree in financial planning. I didn't have a financial certification. Sean, you had a degree from West Point, but you didn't have any experience in financial planning.

That's changing now because as many colleges are having financial planning degree courses, as college students are coming out in the same way that the accounting schools are expecting their students to sit for the CPA exam, even if they can't technically use the license, they still need to be sitting for the exam very closely connected to their graduation.

The same thing is happening, and that's one of the things I see is the model that we've described thus far isn't a very comfortable model for somebody who's already invested four years of their life into studying and developing some financial planning knowledge. They're not – that person who's studied for four years is not going to be comfortable with some senior partner who cut their teeth just pounding the phone on a thousand cold calls a day saying, "Listen, I don't care what you want.

I don't care what you've got. You need to pick up the phone and do a thousand cold calls a day because that's what I did, and it still works." It leads to a very uncomfortable employment situation, and that's why many people are leaving. Definitely a culture shift, and that – I mean I'm chuckling because obviously, as you know, that's exactly what happens or can happen even if you're not necessarily a four-year degree like you or me in the field.

If you're a little more analytically focused early on, you can certainly get some pushback from – I got to be careful because I'm getting an old timer a little bit more now, but this is what works. This is what we're doing. So let's switch and I'll do the insurance model quickly because I think this is the valuable information, and then you will talk about – and I'll hand it over to you on the independent broker-dealer and the registered investment advisory firm.

So you could talk about how these entry points into the business can work in different functions. So in the insurance model, the difference is with – for example, when I joined and I joined Northwestern Mutual, I was not paid a salary. Now, to make a distinction, technically under the Northwestern Mutual model and under some other insurance companies as well, for tax purposes, you're labeled as what's called a statutory employee.

So this is a unique little wrinkle where you're not paid a guaranteed salary. Rather, you're paid on commission, but you're classified as a statutory employee. You don't get overtime. You don't get anything else. You just get a statutory employee, and what that permits the insurance company to do is to offer group benefits.

It offers – it permits the insurance company to pay – they pay half of your – they pay the employer portion of your employment taxes, but you still file your taxes on a Schedule C. So it's a unique little function, a unique little wrinkle, and it has benefits for both.

That's only with regard to insurance business. If you are building an investment practice, that will be – come to you separately under an independent contractor 1099 relationship as well. And then if you're – so for example, when I was with Northwestern Mutual, I would receive – actually would file three Schedule Cs every year.

I would file a Schedule C for my insurance business with Northwestern Mutual because that was where my – that was where my – the bulk of my compensation was and I was a statutory employee there. I would also file a separate Schedule C for all of my 1099 income from all of the other companies that I sold insurance for.

So I was licensed and registered with 15 other companies depending on which company had a better product for a situation. And then I would file a third Schedule C for my investment business, and that was all as a separate relationship. So you wind up with this weird construct of different entities with the insurance companies.

The benefit that the big insurance companies have is by starting with insurance, you can get paid upfront commissions. And so the sales cycle for an insurance company is much shorter – for insurance business is much shorter than investment business. You might not buy from me on a – you might not on the third time we visited together where I'm a fresh-faced 23-year-old kid when I started.

You might not immediately transfer over a million dollars of assets into my stewardship within a couple months of knowing me. But you might very well buy a million dollars of life insurance from me because the confidence that you're placing is not – in that situation is not necessarily into my investment acumen or my professional experience.

You're placing your confidence into an insurance company as to whether they're going to deliver on their contract. And you simply need to be confident that I'm knowledgeable enough to give good, accurate advice. But in terms of giving good insurance advice, giving a few weeks training just about anybody – and I can train just about anybody to give good, competent, useful insurance advice to the general public.

It takes a little more work to give good, competent investment advice. So depending on the company, different companies, some companies will have a draw. Some companies will have an enhanced commission. So for example, the company that I was with in the beginning, what they do is the first few years to help you make that transition, they give you an enhanced commission schedule which phases out after three, four, five years, something like that, I think four years maybe, where the enhanced commissions disappear.

That allows your initial business to be – to allow you to pay your rent while you're getting things established. And then after a few years, you should have been prospecting sufficiently to the point where you've got a large inflow of business and revenue coming in to where you can then transition and you can handle it just on the normal commission schedule because you've got enough.

Your pipeline is full of enough prospective clients who need insurance work. And so the model that I thought was really valuable was while I'm out prospecting for big fish investment clients, I can also be doing valuable insurance planning work for normal everyday people. And it's profitable enough if you're an expert with life insurance, disability insurance, long-term care insurance.

I used to sell a little health insurance here and there. It's valuable enough for me to sit at a kitchen table with a teacher and an electrician who have a household income of $100,000. And they have – she's got $100,000 in her 403(b) and he's got $100,000 in a 401(k) at work.

Well, there's no big investment client. You're not going to become a client out of Morgan Stanley or Merrill Lynch under that model. But if you need a couple million dollars of term life insurance and some supplemental disability insurance for the electrician, then there's enough – I can make – I can make $1,000 of commissions there, which is enough for me to keep my rent going and I can provide a really valuable service for you.

And then where – how the business grows over time is if I do a good job from time to time servicing your insurance work, then when – fast forward 20 years, your 403(b) balance has grown from 100,000 to half a million and the 401(k) balance has grown and you're getting ready to retire, then I'll be on your radar screen.

And by that time, I'll also have studied and learned the most of what I want – of how to effectively serve this prospective client. I'll already have a relationship established there where I can also help you from the investment perspective. So that was the basic business model that I began in where having an insurance-first focus.

And I also bought into the idea that you generally should always do insurance planning first. And I still think that makes a lot of sense. You start with risk management planning. If you are trying to figure out, should I reallocate my portfolio from a 60/40 to an 80/20 asset allocation, that will have some impact on your life.

But the impact is likely to be small and it's likely to be long. It will take many years, many decades to experience that impact. But if you don't have any life insurance and you die, we can solve the life insurance problem with a $50 check to bind the coverage.

So – and to put the insurance in force on a conditional basis. So you should start with the insurance planning because it's simple. It's relatively straightforward. And then that leads into the investment business and that – it worked really well for me. And the benefits of that model was from the beginning, although I was a statutory employee, I was independent in the sense that I didn't have to report for where I am at 11.32 on Thursday morning.

If I wanted to be out at lunch with a prospective client at 11.32 or if I wanted to be doing something else at 11.32, I wasn't accountable for the day-to-day, hour-to-hour tracking of my time. I didn't have to be there to answer the phone for the senior partner. I was just simply responsible to produce at a certain level.

And because I wasn't – because I didn't have a salary that I was just simply paid on commission, I had a high – I was highly motivated to be busy working to make income. And my managing directors didn't have to worry with beating me over the head because they just didn't pay me any money if I didn't make any money.

But it worked really nicely where I learned the process of working with people, doing good fact-finding, which is a skill, learning how to get people to articulate their goals, which is a skill. Those things can be built and developed within the insurance context. And then along the way, I studied up, got my CFP, got credentialed, et cetera, to where I could go ahead and give that valuable advice.

So that was why when I chose – when I was doing my research in the business, that was why I chose the insurance company perspective because I believed I could be successful in that model. I didn't believe that Joshua Sheets, no experience in financial planning, baby face, 23-year-old. I didn't believe I could be successful in the million dollars of account.

I didn't have the network. I didn't have the experience. I just didn't believe I could be successful in that model. So I chose something different. I know others could be successful in that. I didn't believe it, so I didn't pursue that model. I think one thing that appealed to me about Edward Jones at the time was they did not really have any account minimums and for a similar reason you just described, the repetitions of helping people and getting to understand them and understanding when they tell you one thing, what do they really mean or what is the follow-up question?

All these things that are sort of ingrained in me now, ingrained in you now, kind of just the repetitions of learning that and that's – in life insurance sales, it's a great way to do that. And by the way, help a lot of people and sidebar, everyone listening to this, half of us or more probably need more life insurance.

It's just if something happens to you and people are depending on you for income, it takes a lot of money to replace it if you're like Joshua or me and have a lot of years of earning in front of you and some little people that depend on you at home.

So that's a commercial for get some more somewhere. Absolutely. Get life insurance and get disability insurance. I mean the dollar outlay is so small. It's so insignificant as compared to the potential impact. And when you compare – I mean we drag our feet, we drag our feet, we drag our feet, we drag our feet.

But – and it's one of my biggest frustrations, Sean, is because the world of investments is so much more seductive. It's so flashy. It's so attractive. I never – the majority of people who are older life insurance agents joke that they never knew they were in life insurance. They got recruited and then all of a sudden they figured out, wait a second.

I was hired to sell life insurance? Well, OK. If you'll pay me, I'll do it. Like this was a joke but it was a joke because – it was funny because it was based in truth because people didn't even realize, oh, I'm selling life insurance. But since the integration of the business models where now we all do everything.

If you work for Morgan Stanley today, you're an employee of a bank. That's effectively what you are. You're owned by a bank. So now you're both prospecting for – let me rephrase it. If you're working for a large company that is owned by a bank, I won't say anything about Morgan Stanley.

But if you're working for this type of company, while you're out collecting your million-dollar accounts, which is the goal, you're also expected to prospect for credit card referrals, for banking relationships, for mortgages. You're expected to report a certain number of those up your chain of management so that the banker – banking specialist can call.

And oh, by the way, you also need to be taking attention to the insurance. And so you're expected to be paying attention to all of these things. Now, no different with me and the insurance model. The only difference was with the insurance company. I didn't have any banking incentives.

So you're out prospecting for insurance clients and simultaneously you're prospecting for investment clients. You're prospecting for group benefits clients and you're keeping your ears open to solve the problem. And same thing, your banker sells insurance and investment products. They've got the investment specialist right there. Now, is there any problem with this?

There's not fundamentally a problem. People usually like – if you've been treated well at an institution or with a provider, you're going to want to – and if that person is competent in other areas, to simplify your life, you would just as soon do business with the people that know you.

So it is a big benefit to the customer to have things consolidated as long as good professional, competent advice and quality, well-designed products are being offered. So it's not a bad thing. But the bad thing from the perspective of the provider is who I think gets short shrift in the whole thing is the insurance agent.

And my observation is that many people who come the route you've come, Sean, who are financial advisors, they lose – number one, they never developed an expertise in insurance. For example, I had a friend of mine who was with a large wire house for many years, started independent, went to a wire house and is now back independent.

But he said, "I never could sell disability insurance." Well, I became an expert at selling disability insurance because I had to. And when I look at the impact, again, of adjusting a portfolio or switching from this fund company to that fund company in terms of impact, oh, it might be an impact.

But you compare that to the impact of having disability insurance when you get disabled versus not, I'll maintain every day that the insurance is more important. So because insurance tends to be more of a sale where you have to convince somebody to do it, you don't generally have to convince somebody that it's a good idea to invest.

But you have to convince somebody that it's a good idea to buy insurance and you have to convince somebody that they should start spending money out of their pocket that they will likely never recoup. That's a sale. It's not a consultative thing. And most of us, we don't love to do strong selling like that.

We'd rather be perceived as the expert. We don't love to do the same repetitive thing over and over again. And I just get really concerned about the loss of great insurance agents. Because, hey, if you're a financial advisor and you recommend you need some 20-year level term insurance, fine, that works.

But when you get into more sophisticated insurance planning situations, you need somebody who's an expert insurance agent. So rant – I mean, sorry for the rant. But it's just I get really concerned about the decline of the value of an insurance. And I have often thought – I couldn't do this at 23 because I wasn't confident enough and I wanted to be on the sexy side of the business.

I wanted to be doing the investments. Today, with now what I know, I could happily go back and I could set up a very effective, successful business where I only did insurance work and I could be confident about the value of it. Now, there would be disadvantage because insurance practices tend to fall apart, tend to age out because you buy insurance at the early course of your career.

And at the back end of your career, you tend to become more self-insured. So there's a natural growth I think between starting with insurance, moving into investments because that's what's happening with your clients. They're insuring the stuff they can't afford to lose but then their income, their life, et cetera.

But then once they build money, they don't need so much insurance. So that's the downside to it. But there is a huge value for just insurance agents who are competent, who are knowledgeable, who are experienced and rant over. But I get concerned about the loss. Trevor Burrus: Sure. No, I think it's hard enough selling retirement planning sometimes, something you hope happens far off in the future for some people.

But selling something you hope never happens and is terrible to think about and includes you being dead, that's not always the easiest. We're not built – our brains aren't necessarily built to understand risk management and we're – by law, we're forced to have auto insurance and pretty much forced if you have a mortgage or even if you don't.

Most people still have a homeowner's insurance. But life insurance is a lot more on the table really than either of those. So I'm with you. And what's interesting about the life insurance agent per se is if you're a financial planner, financial advisor and you recommend somebody get that 20-year term, well, then someone a lot of times has to be the accountability for that client or prospect to make sure it gets done.

When you have a commission, incentive compensation, that's how you get paid. You're more likely to help them do what they know is right. So that's where I think this whole trend where commissions are a bad thing, I'm summarizing an asterisk disclaimer there. But that's a little bit slippery because a lot of fee-only advisors, they don't do life – they don't take commissions including for life insurance.

So therefore, they don't have the incentive and sometimes incentives are a very good thing. So I'm with you on that. So let's talk about that after you go ahead and explain RAA and independent model like you're involved with. Sure. So the independent world so to speak, if you're looking as I was for six or seven years at the different options, there are two main channels that I'm kind of really familiar with and I will speak on.

One would be what you would call the independent broker-dealer space. So again, like the firm I'm affiliated with right now, looks and smells in terms of what we can offer a lot like the other two firms I worked for. Same compliance or similar compliance, same regulators, same SIPC coverage, these different fail-safes that are in place, a lot of the same regulatory environment.

And the word broker-dealer comes from I think back – they still do, but the one I'm affiliated with really doesn't do this. So it's kind of a misnomer, but the big wire house firms also have an investment banking division and trading arm. So that's what got them in trouble in the 2008 crash, trading on their own account so to speak.

So the firms who are gone now, leveraged up their balance sheet 30 to one or more and it doesn't take much to go wrong at 30 to one leverage to go to zero. So that's the – kind of what I would call – and I'm familiar with the more traditional firm.

You can offer both advisory or fee-based options. In other words, we charge assets on an assets under management basis. So if your account goes up, we get paid more. If it goes down, we don't make quite as much. So we're kind of on the same side of the table.

You're going to pay somewhere in the neighborhood of usually one to one and a half percent of assets under management. That's usually – that's probably the 80 percent range there for most people. And then you also have what some people will call a more pure form of independence, the RIA, the registered investment advisor firm.

So the difference there is on the broker-dealer side, you can do – and again, this gets – Joshua, you know this more complicated than you'd think is possible. But the – well, I'll come back to that part of it. The RIA is – you only have the advisory model.

You only have the assets under management. You do not have any commissions involved. So it's very simple, very clean from that perspective. A lot of the – if you were to start from scratch, I think most people would gravitate toward this model because of that. The regulatory environment is a little bit simpler, not necessarily because there's less going on.

But I think because – now, these laws were written in 1934 and 1940 are the most current laws really that – for the most part, the framework that these entities are regulated by. So keep that in mind. The registered investment advisor, the RIA, it's just a little bit simpler.

You're regulated by the SEC, whereas the broker-dealer world is regulated by something called FINRA, financial industry regulatory authority. But also there's some oversight from the SEC. So there's a lot of cops on the beat. Interesting, there's – the RIA has a higher standard of care in terms of legality, which is often something that folks that say that's the only way to go would point to.

Interestingly, from an exception to prove the rule, Bernie Madoff for example, all the bad stuff he did was on the RIA side because no one was – the regulators obviously weren't doing well. The regulators obviously weren't doing what they were supposed to. He did have – he had both kinds of business, but all the – basically stealing of money was happening on the RIA side.

So you have – that said, you have a fiduciary responsibility on the RIA side where there's a more cryptic suitability requirement on the broker-dealer side, although they're both quite cryptic when it comes down to it. So I'm not sure that's probably beyond the scope of our conversation. Then to complicate things, you can also have what I am involved in is a hybrid model.

In other words, you have a – I have a broker-dealer affiliation and I along with two partners have our own RIA. So we have the ability to do life insurance as an example through the broker-dealer or other outside investment or insurance companies. We can do college planning through a 529, which for whatever reason, typically or not, they're harder to do on the advisory accounts.

There's one-off situations where an account is not going to be traded much. Somebody that's owned grandma's stock for a long time, they're not really going to trade it. So we probably aren't going to charge an asset-based fee. So we might have a brokerage account and that's where even someone who's really adamant about the fee-based advisory world being the best way to go.

Sometimes there are times when it's just more convenient if you're going to serve the needs of your clients to have both options. So those are the big, big channels. Now, the RIA space has grown extremely quickly lately. I think that's where most of the new business goes to. Again, like a lot of industries, if you have legacy costs and structures and just pure inertia involved, you're going to have the old way.

But new entrants are going to look at that way and go, "Why would I do it that way? That's crazy." So there's a lot more flexibility if you were going to have a media presence like, Joshua, you talked about recently. It's a lot easier to do on the RIA side.

For whatever reason, there's less regulation in terms of – less regulation is maybe the wrong way to say it. But as long as you don't talk about specific products – Aaron Ross Powell: More common sense regulation. Put it that way. Yeah. Trevor Burrus: For now. For now. Aaron Ross Powell: Yeah, which I'll ask you about the fiduciary stuff at the end.

But – So those are the main channels. And then within these – within those models, you can have a – I have a couple of employees that work for me. So in the independent world, each firm then, each owner of the firm or owners obviously is going to develop their practice.

There's plenty of solos with no assistant. There's lots of what you would call an ensemble practice with four or five or ten partners that have built an empire and have a nice team of people to serve their clients and help them achieve their goals. So within those, then you have the various firm structures.

But the main difference is in those models, I or people in my kind of model can create those structures how they see fit. We can set up the compensation. We can develop the partnership agreements. We develop the vision for the business. Very little of that in the wire house.

Yeah, you can create a team, but I mean you're not – there's not a lot of elbow room. Same thing I think goes for insurance companies based on what you said, Joshua, and what I understand otherwise. Just not a lot of movement. So the independent world in general, there are different ways to go about it.

If you're starting from scratch or you're starting a side business, the RIA, if you just want to get – pay fee for service, more of a consulting arrangement, an RIA is a very straightforward way to do that. Whereas the broker-dealer is not. It's a harder way to get there, but you can offer more stuff I guess is the best way to simplify it.

Yeah, and these words, by the way, if any listener is confused about the words, you have a good reason to be. Those of us who are advisors are often confused about the word. I was a financial advisor for a very – I don't remember how long before I finally understood that fee only was not referring to the fact that somebody only charged hourly fees.

For whatever reason, and this is to my own shame, I was in the business for a couple of years and finally I said, "Wait a second. Fee only – like they're actually charging fees on investments. I thought fee only was hourly fees." I learned – Yeah, it's mind-numbing. I mean I wondered why that first firm I worked for, our title at the time was investment representative.

I thought, "Well, how come all these other guys can call – have financial advisor? That sounds cooler, sexier like you say. Investment representative sounds like I'm selling concrete or something," which is a good business I'm sure, but I was looking for financial advisor. It turns out I didn't have the right licenses and I – like you said about no one can explain.

You're only – these licenses you have here, they're really just security salespeople license. You're not legally supposed to give advice. Wait a minute. What? So that was the beginning of my exploring the world. That's interesting that I did not know that. We used to have this absurd – so mine was the same.

My first business card said financial representative and then later more licensing. It said financial advisor. Then I was intending to move into the third different model, different practice model, different entity, et cetera, that was going to be called wealth management advisor under the firm I was with. But we used to have this ridiculous language.

I don't know if maybe you had it too, but we had the two hats language where we would have to say, "OK. Now I'm going to pull off – I'm going to put on my financial – first we're going to have my financial advisor hat and I'm going to give you this financial plan and we're going to talk about this." And, OK, now at this point in time, I'm going to put on my salesperson hat and I'm going to sell you this insurance policy.

But I'm doing this under the context of being a salesperson and selling you an insurance policy as a financial advisor. It's just stupid. It's absolutely stupid. It's insanity. It really is. And the problem is I can't fault the president of XYZ major corporation or the CEO because it's – they're dealing with the industry legislation as it is.

I just think it's absurd and if I were in their shoes, I would have to do exactly what they're doing because you have to protect the interests of your stockholders or your policy owners depending on how your company is structured. You've got to protect their interests. But being out on the street, it's so – it's so – It's a tough place to be.

Yeah, and as you know, the only real way around it is just to always act like you're doing what's right for people and explain why you're recommending things. But then you sort of – getting compliance approval to – if you were to try to for – yeah, I'm doing this life insurance policy or this brokerage account that involves transaction costs.

But I'm only going to recommend stuff that's in your best interest. You'd think that's pretty par for the course. It should be. I think you and I would – have gone about our businesses that way. But unfortunately, the legal background – I guess it's when lawyers get involved and things get – I don't know.

The only way to succeed long-term is what you said, just try to do your own best interest. Excuse me. Try to do your own best interest. Somebody will accuse me of that one of a Freudian slip. Just simply try to treat every situation and act with what's in the best interest of that situation because otherwise you get so lost.

And I came to the conclusion that I will do my best to follow the law. But the only thing I can do is just simply say just do what you would do if it were you. And that's the only standard that it can be based on because sometimes the most important – you can abuse any system.

But then sometimes things that look like abuse aren't and it's actually a really important idea. Sometimes funneling money out of an investment account and funneling it into an insurance policy is absolutely what somebody should do. And sometimes that's an abuse. And so it's very difficult to know what to do.

I know for me – final comment on the practices and then we'll wrap up here, Sean. But on the different models, I – so when I left the insurance world, I filed the paperwork for an RIA. It never got to the point of being fully approved because I pulled it before that was the case.

But I was in the process of filing the RIA. I wasn't particularly happy about it. I did not want to be necessarily under the fee-only umbrella because I don't believe that if you're only fee-only, I think you lose out on the ability to serve clients with some very important things simply because of the regulation.

But the reason I was pursuing the RIA model was I had the most liberal media restrictions. I had the ability to control what I – I had the ability to control which things I did or didn't do and to allow myself more to still do the podcast. And then I figured, well, I'll jump on the marketing of the fee-only and that's what's happening is because of the problems of the financial advisor business, then now people are latching on to the marketing of fee-only as being the go-to thing.

And they don't realize some of the disadvantages of being fee-only. And I said, well, I'll at least ride the marketing for this. I'll take some of the media articles. I'll get some people who are looking for a fee-only advisor and I can still do the media and I'll deal with the backside.

Now, if I were – if I wasn't – if I hadn't at that time been trying to build radical personal finance, the media, I would never – I would – I would just wanting to be a financial advisor. Number one, I would have stayed where I was because I had enough independence and autonomy and I could deal with most of the things that I didn't like except for the media.

I could deal with those things in a straightforward way or I would have gone independent because I think you need to have the ability to serve the clients in all of their situations very specifically. And there are times at which – I mean you need to be able to sell insurance to solve that client's need and you need to be able to have both of those things to really be the most well-rounded appropriate perspective.

So I would have gone the independent model with a hybrid approach. I would have probably established an RIA and I would have gone ahead and had the brokerage relationship with an independent broker of some kind because I feel like you need to have the capacity for both of those things.

That was where I came to. Trevor Burrus: Yeah, I tend to think a lot of times we minimize if it's a 90/10 split between someone's practice. That 10 percent doesn't sound important and it might not be from a revenue standpoint but that's not really the point. It's – that 10 percent might be a big inconvenience for your clients and again, that's a balance you have to figure out from a business model standpoint and client service.

And your clients will understand in most cases if we said, hey, we're not doing this line of business. But you hate to send them away even if it's to a hand-selected third party because again, not everybody is built to practice this way. But a lot of people, it's simplicity and I go to Sean when I have a question about something about money and that's a lot of trust and confidence and you hate to refer them out even if it's to – even if it's – I'm the doctor and I'm just prescribing.

They go to a different pharmacy. People get used to the, hey, he'll take care of it for me and I don't have to expend the energy to say if he's trying to hose me or not. That's – and I take that and I know you did. It's a high badge of honor to have that.

Yeah, absolutely. It's so valuable and to be able to use – if you only have the hammer, everything looks like a nail and that's been applied in the insurance world. If you only sell insurance, then everything looks like a whole life insurance sale. But it also has been applied in the investment world.

If you only have a mutual fund to sell, then everything looks like a mutual fund sale. And I feel the strength is to have a full tool belt and, yes, you might only use this specialized tool. You might only use a tap-and-die set once or twice a year. But when you need to tap a hole, that's what you need.

And as financial advisors, if we can arrange something where we have access to all the tools, that's going to be really valuable. And then I think if people are looking for a practice model, I would say you got to get very clear on what you want. It's very different if I want to be a solo practitioner or just a solo practitioner with a virtual assistant.

I want to do all my work virtually. That was the other thing for me is insurance paperwork was very time-consuming to do, and I decided I didn't want to any longer take care of that process and I didn't want to hire it done. So I was willing to walk away from the insurance business because I didn't want to do the time-consuming work myself, nor did I want to hire it done.

So that was another thing in favor where I was willing to go to the RIA. But if you want to just do a solo thing, you can do a solo thing. If you want to build the next – what's the name of the guy, the big financial advisor, Rick Edelman?

If you want to build the next Edelman Financial, that's going to point you in a very different direction. If you want to build the next Sean Kernan practice, that's going to be very different. You've got to build these things. You've got to first get clear on the vision, and then the appropriate structure will reveal itself.

If you want to just do hourly-based planning where people pay you a strict hourly fee for advice, you don't sell any products, you need an RIA. It's very simple. So once you get clear on – as with anything, on the outcome, then the means will get there. So, Sean, you've got the website, howtogoindependent.com.

You're writing some on this, trying to help advisors have some knowledge. You're doing a podcast there. Anything else that you'd like to share as we start to wrap up before I ask you the final question for today? SEAN MCPHERSON, PROFESSOR OF INDEPENDENT ENTREPRENEURSHIP AND INDUSTRY, COLUMBUS UNIVERSITY: No, I think you and I could probably fill up many hours of technical discussion if we were inclined to, but we should probably – yeah, Todd, wrap it up.

One thing I will say kind of as a plug for what you do, Joshua, I've used a couple of your episodes as technical explanations for clients. So I think if any advisors listening or want to be advisors, when I started listening to Joshua's show, I thought, man, this is a great – this is like another resource.

I can send a link to a particular episode on these technical topics and Joshua has spent a lot of time digging in and explaining it thoroughly, a lot better than I ever could. And again, you always have to have the disclaimer that stuff changes, but I would say leverage his content.

It's a great resource and support him if you can with the Patreon program if you do do that. But that's just a – what you've done is a great thing for advisors and for end users, but I think for the final end client, a lot of us, they're still going to want someone to help them get it done because a lot of this stuff is not intuitive.

So – I appreciate the compliment. It's been one of my biggest frustrations over past months is I haven't been able to create as much technical content as I've wanted. And what my dream in the future is I'd like to be able to, number one, create technical content. But I almost want to create the layperson's guide and then the deeply interested guide.

I don't want to ever create the advisor guide. Someone else can do that. There's lots of great people out there creating CFP education stuff. But I want to create the simple 10-minute presentation on a topic and then create the hour-long presentation on the topic as tools for advisors. It's a really daunting project to figure out how to do it, but I'm getting better at it.

But that was always one of my major things. I said I'll create the show that I wish existed when I was an advisor because as an advisor, a client asks you for details on this type of strategy or this type of product or ETFs versus mutual funds. Stocks versus bonds, et cetera.

And to start – you've got an hour on your schedule to meet with this prospective client. This is one of 12 meetings this week that you're going to have plus all the other prep work and whatnot to fill up your 50-hour week. You can't start with the basics of, OK, let's talk about a paper asset versus a real asset.

Let's talk about stocks. A stock is a discounted value of the future income stream of the company. You can't start there. And so it's really frustrating because you've got to give a 10-minute explanation, but you know the person is interested and they need something more. But – so I appreciate the compliment.

Yeah, I just like keep it up. We appreciate it out here. Final question, Sean. A bunch of people have been asking me my thoughts on the proposed fiduciary legislation coming out of the regulators, and I haven't particularly talked about it yet. But I'm interested. If I asked you – again, we're sitting here over a cup of coffee.

So, Sean, what do you think about this new proposed fiduciary rule coming out of the regulators? What would you – how would you respond to that? Well, I think it's like a lot of laws. It's well intended in a lot of ways. It hasn't quite been finalized. I keep hearing that maybe this month, but I'm getting a little skeptical since as we record this, there's not much time left for that.

It sounds great as a headline that your advisor should be required to put your interest first. Well, yeah, I think we agree with that. How do you define that though? That's – and you do a great job, Joshua, of asking those second and third questions. Well, what about this?

What about that? And then sort of one of the assumptions that seems to be built into this regulation is that cheaper is always better. And I understand that. If there's two things that are exactly the same, should there be some legal requirement to pick the less expensive one? Probably.

But that's rarely the case. So I'll reserve judgment until I hear the final thing. I have some recurring revenue on the brokerage side that is – I found that people don't really care. As long as they understand how they're paying, they don't care so much about if it's a commission to an agent or if it's a flat fee or if it's a combination of the two.

They just want to make sure they're not – like when I go to the auto mechanic, I'm not a very physically handy guy. You said something after hammer. You lost me, whatever you were talking about. I wouldn't use it once or twice a year. That's for sure. So I get a little nervous of, hey, commissions are bad.

I think it's a cleaner – cleaner or at least simpler. Cleaner is probably the wrong word. Simpler model to have more, hey, it's assets are managed. But again, I was listening to a highly respected firm on a webinar recently and they said, well, we don't do commissions. We don't do commission stuff just because we're worried about – even if it's the right thing, we'll refer it out.

So if we did it ourselves, there might be a temptation to use it more often than to justify it. I'm thinking, well, yeah, but look at this incentive this way. If you're getting paid on assets under management and you have the opportunity to refer to some product that's – like you said, the media say, oh, gosh, a fixed annuity could never be the right thing.

Well, sometimes people want security and there's reasons something like that would fit. And if you don't refer it out, you could be accused of having the incentive to keep the money in-house, right? So you don't – it's hard to get rid of conflicts of interest completely. We're all human.

So I think you just have to be very careful about these proclamations that this particular approach is the answer. That – it's what makes me nervous. I think it's probably a good thing in the end because it will weed out some of the stuff that's, from my perspective, pretty clearly used because it pays a high commission.

And so in fact I've thought about some of those vehicles that I've used from time to time. There might be a competitive advantage if some of those people get weeded out. In other words, they don't use them as often. All of a sudden, they don't think they're as great.

The idea of levelized compensation makes sense. Hey, I get paid 1 percent a year regardless of what you do or where. But nothing is perfect. There's no perfect model. The only unconflicted advice would be to give it for free and that doesn't work very well. That business model doesn't go over very well.

Aaron Ross Powell: I'll attest to that. Giving all your advice away for free is a way to dramatically underperform your capacity. At least people don't complain about that, right, Joshua? Joshua Bernstein: You'd be surprised. You'd be surprised at what my email inbox looks like. Aaron Ross Powell: I was chuckling at your email about – I've said all these disclaimers but yet – well, what about this and this?

Well, that's why I said simplifying assumptions, people. No, I – so I commend you for taking all the arrows and slings. So, yeah, that's – it makes sense. I mean it's – on the face of it, it's very simple. We're going to get rid of this conflicted advice. But it's funny when you say people are losing all this money in their retirement accounts to bad advice and conflicted advice.

When that's – it's like you're missing the point, people. The point is you need to save more money. That's usually the point. So great advice, like you said about allocation, it doesn't work if you don't sock away enough money. So my clients are not well off, the ones that are really well off, not because of me.

I'm helping them stay that way and hopefully I'm improving their life. But they save money. They spent less than they earned or they had a business. They created the wealth. I'm helping them take care of it and helping them worry less. But it's just funny to me that we're going to worry about a few basis points here and there is going to be the solving – going to solve all our retirement problems in this country and – or in the world for that matter.

And that's just not the problem. So I understand. Again, to me, it's a little bit like a problem in search of a – a solution in search of a problem. But again, I also understand the spirit of the law that's about to – I understand the spirit of it.

It's just the details are going to be – more and more rules don't necessarily make things better. So that's kind of – having seatbelts doesn't prevent people from driving like morons. That's the way it goes. Yeah. It's certainly challenging and exposes many times even just the challenge of applying rules across a population.

It's a difficult, complicated scenario. We're still speculating simply because there's no final version of regulation that I have seen. So we're just kind of speculating. So we'll stop it here. But I would say the biggest thing is for advisors, just do the right thing. Treat every client like your dad, your mom, your brother, your sister and ask, "If this were my brother or sister, what would I tell them to do?" And do your best to follow that and you're going to – it's going to help you to make the right decision.

Assuming you have good family relationships. There we go. OK. So you're exactly right. Good catch. Yeah. The other thing I would say for listeners, for consumers, for people who are hiring advisors, number one, you've got to test the mettle of the advisor. Now, you're never going to get it perfect.

We're not infallible judges of human character. I don't know anyone who has that capacity. But I think you can sense the warning signs sometimes and just look for the heart, look for somebody's heart and then ask lots of questions. And the reality is there's no question that you can't ask a financial advisor.

Sean, have you in your career – how many times have you been asked by somebody how much money you're going to make on a particular transaction? Sure. How many times has it happened? Not very many for sure. I would say a handful or a few handfuls. Yeah. And so like a simple thing like that, if you're worried about that, ask an advisor.

How much will you make with option A? How much will you make with option B? And I often did this with investment recommendations. On this scenario, my compensation is structured like this. Here's how much it will be. On this scenario, my compensation is structured like this. Here's how it works.

And you can ask those questions. So ask questions and take charge and good advisors. I think – I mean, Sean, would you rather work with somebody who asks you the hard questions or would you rather work with someone who says, "No, Sean. I trust you. I trust you"? You need to do that hard work up front and really build that trust.

And so, yeah, you need to ask questions. And if you don't know what questions to ask, then pay very close – well, either way, pay very close attention to the questions a potential advisor asks you. That would be my advice. And you can ask what you think are dumb questions or you're not sure.

But just like the how much money will you make, it's not so much what the answer is. That's good to know. But how does the – read the body language. Read the response. Does it make you feel comfortable? If you do it right, it's a lot like, for lack of a better term, getting married.

You hope to have a lifetime relationship with this person hopefully if you do a good job, if that's what you're looking for because it's such a personal thing. And personal finance is personal. So, yeah, I'm with you. Ask a lot of questions. If someone makes you feel uncomfortable, politely excuse yourself and move on to the next one because there's a lot of people out there that will do a good job.

You just have to find them and it's not easy. I think, Joshua, you've talked about that challenge. That's – I think you could start a show called How to Find a Financial Advisor. I've debated that myself. Somebody should do it. Yeah, I always found the best working relationships as an advisor were often with my clients who were the most knowledgeable and who asked the hardest questions.

And now as a layperson, if I'm going out and hiring a financial advisor, I would actually rather hire somebody who I disagreed with on something but who I could trust their – but who I ask difficult questions and who could defend their reasons. I'd rather hire somebody that had a difference of opinion of the best product to use or the best fit as long as I could trust their character versus somebody who professed all the right answers but I couldn't get that sense of a straight answer.

So it's a challenging situation. Well, Sean, thanks so much for coming on. Tell us about – OK. So howtogoindependent.com, do you care to share any information on your firm here publicly? If anybody is interested in talking to me about specifics or how to vet someone or double-check a question, you can find me at 360WealthManagement.

We're at www.360wm.net. We're based down in the Dallas area but the broader firm I'm affiliated with is everywhere. So again, I'm happy to help if anybody – any listeners have any questions with, "Hey, this person I'm talking to said this or that," I'd be willing to help double-check and I'm sure to some degree, maybe on a lesser scale, Joshua is.

He probably doesn't have the capacity that I do to do this every day. But the podcast is – I've got about 12 or 13 episodes up as we record this. So I'm going to continue to record advisors. So if you're an advisor and want to hear how people have gone about setting up their own practice and the different – what it looks like on the other end, this is just kind of people that I know and continue to reach out to, various sizes and scale.

I'm the smallest individual solo person to talk to a guy on the most recent episode who helps billion-dollar teams escape the wire houses. So I'm trying to hit it from all angles of the spectrum. So I really appreciate you having me on, Joshua. I enjoyed it. Thank you for listening to this episode of Radical Personal Finance.

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