Michael Kitces on Fees, M&A, and the RIA Model's 'Compounding Growth'

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Hello and welcome to Barron's Advisor Unplugged. I'm Jack Otter, head of the Barron's Wealth and Asset Management Group. Running the show with me today is Barron's exclusive coaching partner, Ray Scalfani, the CEO of ClientWise. And we are joined by Michael Kitces, whose many titles include Chief Financial Planning Nerd at XYP. That, of course, is everyone's favorite title. We're going to be thinking about this as a virtual version of a breakout session at a Barron's conference where, where Ray and I kind of go up and we mob Michael on the stage like everyone else does and throw a bunch of questions at him. I want to spend as much time on the subject at hand, but I do want to invite Michael to give us a quick summary of the 60 million things he does before we launch.

Sure, I appreciate that, Jack. Thank you so much. As you mentioned, I wear a lot of different hats. I'm Chief Financial Planning Nerd at Kitces.com. That's where a lot of people find me these days. But I'm also Head of Planning Strategy at Buckingham Wealth Partners, so wealth management and TAMP services for other advisors. Uh, co-founder of XY Planning Network, AdvisePay, uh, New Planner Recruiting, and FP Pathfinder. So lots of stuff to keep me busy in the advisor world these days.

Indeed. Uh, so that— take it away, Ray.

All right. Hey, thanks, Jack. Uh, Michael, it's always fun to get together and we always have a good banter. We're going to move hot and fast and we're going to try to cover as many topics as possible because I know your time's valuable and it's always great to get you fast and furious. From fees to crypto and maybe a little on the SEC and XY Planning Network. So let's jump into growth. Um, uh, you wrote in your Weekend reading for financial advisors, fee-only RIAs are experiencing double-digit growth in 2021. By the way, we're seeing the same in 2021, both in terms of number of firms and total amount of assets under management, higher than any other channel of advisors. So what's your take? Is the trend going to continue? What are you seeing from your perspective on intentional growth and growth among these RIAs?

So I'm certainly seeing the, the trend continue. To me, the irony from the RIA model perspective is that the growth trend's almost kind of inevitable. You just— most advisory firms have pretty good retention rates once you go into a sort of a classic RIA assets under management model, where just like your incentive is to do good things to retain your clients. Most of us figure out pretty quickly, like, probably clients are sticky, they stay. Yeah, do good stuff, try to help clients on an ongoing basis, retain them. So you look out there at industry numbers and, you know, bad, air quotes, bad firms often still have 90% to 92% retention rates. Great firms, you see 97% to 98% retention rates. When you only lose a client on average once every 20 years, because that's what the math comes out even at a 95% retention rate, if you're just out there doing useful things for clients and occasionally they tell some people they know, the odds are pretty good you're going to add more clients than you subtract in any particular year. Markets tend to go up more than they go down. And so to me, there's almost this inevitable reality of just the compounding juggernaut of the RIA movement. It's just a function of the business model alone because it's so different than commission-based world where I started, where every January 1st, you wake up, your income is zero.

Zero.

Right?

So you go over.

Yeah.

I mean, maybe it's a little bit with trails, but it basically goes back to zero until you go find new people to work with. And so in that world, You only can ever grow so big because your biggest income is the biggest one year of new clients you can get, because then every year you go back to zero. There's no compounding. You rarely ever invest much in a staff and team because who would want to take on a bunch of payroll when your income goes back to zero every year? And so the model is just much more fixed in that commission-based transactional world, even aside from all the discussions of fiduciary conflicts of interest and the rest. Like, just at the most basic level, If, if option 1 is a model where every year you start out at zero and you're limited to the biggest clients you can get in one year, and the second model keeps clients on board, defaults them to stick with you, they have to go out of their way to fire you, and you have all the incentives to, to keep them on board and retain them and grow them— allow that to happen writ large for 10 or 20 years and you get basically what you've seen in the whole industry, which is compounding growth of the IRA model and, and BDs and the BD model really struggling to grow.

Yeah, the, uh, the, the acquisitive growth in the RIA space, uh, has really impacted growth, uh, from our perspective. Are you seeing the same?

I very much so. I, you know, the, you know, I was saying the comments just made around sort of the, the inevitable compounding of, of growth in that, in that AUM kind of model, it, it's a very inevitable, uh, solid growth. Uh, it also tends to be a really slow growth rate. Just clients do only refer so many. We do have a couple of percent that, uh, that attrition. So, you know, one out of every time 10 clients brings someone in, you get 10% growth, but you lose a couple percent for attrition, you lose a couple percent for withdrawals, markets give you a little bit on top of that. Just, you see a lot of firms that end out in this very steady kind of 5 to 15% growth rate. About half of that's markets and half of that's, uh, uh, organic growth from clients, obviously with some variability on the market part from year to year.

What's a good benchmark for growth, uh, for a firm?

When I think about professional services firms and like what should growth look like, I look at numbers. I look at 15 at the low end. I would be aiming for a number like 20, and I'm not plucking that out of thin air. It's just 15 to 20% growth rates, if you pull out your good old rule of 72, yeah, means you double in about 4 to 5 years.

Yeah.

And when, when you run a professional services firm where you're going to bring in people and they expect upside, growth, career paths. My ops team wants to move up, my investment folks want to move up, my associate advisors want to get into the lead chair. You need enough growth that your company gets bigger and there are more seats higher up on the organizational charts that people have upward mobility over time. And just the growth rate that it takes to do that, I think in practice, is something in that neighborhood of 15% to 20%. It means you double every 4 or 5 years, And if your company doubles every 4 or 5 years, you're creating enough seats on the bus fast enough that your good people who want upward mobility can get upward mobility. If you grow a lot slower than that, your income will probably go up as the founder, the business does grow over time, but your best people are going to get impatient.

Yeah.

Yeah.

So talk about this 15% to 20% growth in terms of managing capacity. I get asked all the time, how many clients can one advisor manage? And the service model the segmentation strategy, the revenue per client really makes a big difference. So how does an advisor go about, if growing at that rate, managing their capacity effectively?

Well, the first thing I'd, I'd answer to that is we have to really get clear and honest about the services that we're offering and what we're doing for clients. We use financial advisor very broadly, so you see financial advisors at, you know, like large retail financial services firms where 300 to 400 clients per advisor is not uncommon. You see family offices that do financial advisors where an advisor who's really full is like, "Oh man, I'm so exhausted. I got my 8th client and it's drowning me on the top of the other 7 because they all have $100 million each and crazy complex situations." And there's a wide range in between. When I look at baseline financial advisors who are working with kind of like the mass affluent and the mere millionaires, which is where most of us are— call this like $200,000 to $2 million is where the bulk of us as financial advisors are. When I look at the mass affluent and the mere millionaires, if you are a firm that's very planning-focused, like we're really doing plans, we're going deeper, we're having the conversations, the number I tend to see firms start topping out at is 60 to 80 clients per advisor. Okay, now that, that includes anybody who is client-facing, so that could be An advisor with 60 to 80, that could be an advisor with an associate sitting as a 2-person team who can now maybe get to 125, 140, maybe 150. That's going to start feeling a little heavy. That's where I find firms start topping out. 3-person teams get to 200. If I talk to an advisor and they say, like, I'm the only one, I'm the lead on all my clients, and I got, you know, 150+ clients myself, I can pretty much guarantee you that the majority of them you probably don't see more than once a year. It would be difficult for you to pick most of them out of a lineup because you just don't see them and don't know them very well. Now, I'm sure someone out there is the exception who is just like the, like the name and person savant who can do this with like 500 people in their head. If you're that good, you should probably be in politics, not this, because that is a gifted skill. But most people just like we are, even aside from time in the day and capacity and the rest, although that's a constraint, You're like, your brain runs out of space. I mean, this is actually a research phenomenon. It's called the Dunbar number after Robin Dunbar, who was the researcher who found this. There's a particular part of your brain that does like associations to other human beings. It's how we kept track of each other in the herd. And just that part of our brain, when you compare to other species, would predict an average herd size of about 150 people. And if you look throughout human history, like military units have historically topped out at 150 to 160 people. Anthropologists have found tribes in, like, tribes uninteracted with the rest of the world who figured out on their own, when the village gets to 150 people, it gets too big, we need to split it off. And there was a study a few years ago, the average person on Facebook has 152 friends. So even in the virtual world—

Dumbbell effect is holding true.

It holds. And at some point, just you get an hours limitation as well.

That's fair. That's fair.

I mean, to 2,000 working hours in a year. You can't do all that client-facing. At best, you probably get 40 to 60% of it if you're lucky. It's 800 to 1,000 hours in a year. I mean, if you got 150+ clients, you're down to 5 or 6 hours per year per client for everything you do with them, which means like meeting prep, meeting follow-up for one meeting, and a couple of emails. And you're blown out and just, you're only gonna know your clients so well with one meeting a year.

And—

Okay, great insight. Let me move this forward and talk M&A activity for a moment. 'Cause it is hot. I know we touched on it briefly. Hey, it's been 6, coming up now, this will be the 7th year in a row, record number of M&A transactions, deal size, both in the advisor space, but also in the investment management, asset management space. When I talk to PE firms, they say, "Man, it's never going to end." I recently this year have interviewed Dave DeVoe, Dan Sievert, Liz Nesvold, and the bankers even think, "Oh my gosh, this thing is getting a little frothy, but it's only going to continue." I'm wondering what your take is. Is this PE money good for the private equity money, VC money good for the RIA channel? Is it going to continue? And what do deals look like moving forward in the future?

David Sherman: Lots of good questions there. Let's start with the ongoing continuation part. I don't see the continuation slowing down anytime soon. There is still Frankly, not only a lot of money, but from every measure we can track and see as well, there's still more money to buy firms than there are firms that are ready to be sold. In fact, in the classic case, more money chasing fewer goods is literally causing—

Driving multiple expansion.

Lifting of valuations of firms. And we're seeing valuations of advisory firms lift very noticeably in the past 2 years in particular. They were super solid for a lot of years. People kept saying, oh, it's really high. I don't know if it could stay this high. And then it wouldn't go down.

And it was like 7, 8 times EBITDA, and people were feeling, whoa, it won't continue. And now we're seeing 12, 13, 14. Yeah.

And the past 2 years it has lifted up further. Now, a lot of this is following what I think is for a lot of industries kind of the classic way that PE dollars flow, which is PE valuations are getting bid up in part because there are only so many firms out there on the market at all. There are only so many to be bought. If you look at— I'll give a shout out to Dave DeVeaux. I think they do great research and data on tracking this space. DeVos companies tracked almost $200 billion-plus RIA deals in the past 2 years. There are only about 800 firms in total larger than a billion.

The market size for those opportunities—

a quarter of them have turned over in the past 2 years, which means I don't know if it can get a lot more than this because we're, we're going to run out. Now, we won't entirely run out because, uh, PE firms tend to change their— change hands about every 5 years, so By 3 or 4 years now, we'll probably have turned over the majority, but then like the ones that were bought first will get sold to someone new and we'll cycle again. And so I do think you're going to see some of that start to play out. We've had a little bit of it already where some of the early PE acquisitions have now been exited to another PE firm that's doing the next cycle.

The turn is also shrunk a little bit, right? They're not hanging on as long. We're seeing some of that beginning to begin.

But here's the thing, like, you know, all well and good for those that play in the mega RIA space that do a lot of those large deal acquisitions. I mean, we live some of that at Buckhead at Buckingham. We acquire a number of firms at Buckingham as well. But I'll just say, for us mere mortals who are just going about our day running our advisory firms, helping our clients, doing our thing while people who write large checks write large checks to other people who write large checks and do their thing, I don't know how much impact it really actually has for a lot of us as the average advisor beyond— it does frame up a couple of interesting things. Number one, just for anyone who's wondering, like, is it worth, you know, all the work it takes to go and build a firm? Like, yeah, I mean, just enterprise value is being rewarded in the marketplace. I think it's at least indirectly supportive of the ongoing shift to independent RIAs because these deals are only happening for RIAs and not BDs. And not to knock advisors who built some great practices at BDs, but when you sit down to sign a contract that says someone's going to write you whatever it is, a 7-figure check, an 8-figure check for your lifetime work, and then they read the legal language and say, "Oh, you don't actually own your clients. Your clients are your clients, your broker-dealer, not your firm." When you get to that legal contract language, because someone's going to write you an 8-figure check, the technicalities of those relationships suddenly really, really matter. And just the reality, it says registered representative on the business card for a reason. You're legally a representative of your brokerage firm. Seeing their clients as their rep, and it is different than actually owning your enterprise the way it happens for someone in an RIA. And so I, I do see this continuing to kind of pull towards the RIA model for those that care about building and selling enterprise value. To me, the most interesting part of it, uh, you know, there's all this discussion out there, particularly in the independent advisor world, about the, the dearth of succession planning How little succession planning is. I know, Ray, you and I have even had some discussions about that.

Yeah, I've got a question for you about, about this as well.

But here's the interesting thing that comes from this much buying power and buying demands for firms. I think it actually takes a lot of pressure off of the need for firms building their own internal succession plans for the simple reason that, look, at the end of the day, if you just decide, hey, I've been doing this for wherever, 20 years, 30 years, 40 years sometimes, and just, I'm ready to be done. I didn't go build a succession plan. I don't really know who to sell to. I don't have a thing. You're like, well, I guess I'm going to go to one of those places like— this becomes an option for somebody— and list my firm and see if maybe someone else will come and take over. Like, you get like 50 buyers for every seller right now out there in the market.

Yeah, go ahead.

You want to exit, you're not going to lack people who are willing to come in. You're gonna have to do the work to vet them and make sure you get one that fits you and aligns to your philosophy and is gonna take good care of your clients. But, but there are a lot of those out there. That was very different than 10 years ago where if you didn't have a succession plan, you were going to go away.

Like, there were no options.

There was no one to take over except maybe like your buddy across town where you had an across-town deal. Like, you take my clients, something happens to me, I'll take your clients, something happens to you. And, and those deals always blow up because you don't actually have the capacity to take someone else's full client base overnight. But, but larger firms that acquire do. And so I, I see this growth of— I sort of distinguish succession planning from exit planning, right? Succession is an internal process. Yeah. Exit is just like, I need some continuity to make sure that my clients are cared for and I'm not here anymore. And just all of this M&A activity and the amount of capital that's flowing in just starts at PE and ripples all the way down the system. Like big firms buy medium firms, medium firms buy small-medium, small-medium buy smaller ones, like all the way down the line. It creates a really interesting backstop. I mean, we're seeing this at Buckingham of advisors come and say, like, I didn't have a succession plan. I'm a planning-focused firm. I do a lot of tax. That's kind of our focus as well. Like, we have a similar investment philosophy. We have a similar planning philosophy. We have a similar tax philosophy. Like, I don't have a succession plan. I need someone to take care of this. Like, can I do a deal with you guys?

And it's like, yes, do it for us.

Michael, I know you've got a good question.

Michael, I want to ask a question about this from the other perspective. Ray mentioned 13, 14 times multiples.

It strikes me— yeah, so that's big firms, not small firms.

Yeah, big firms, much bigger firms, which is fine. But my question is this: if the private equity firm is putting that kind of evaluation on a practice, they are looking for a return that to me may not align with the fiduciary responsibility to the client. That would concern me as a client if I knew that, you know, this, this firm I'm with is going to have to produce the kind of return that private equity firm wants. What do you think about that? Should we be concerned about that?

So I do think it's a concern. I mean, just, yeah, like, right, money has strings attached. And so for any firm that you're getting involved with, particularly if they're anywhere in this chain where money is flowing from some big check place, you got to understand where the check's coming from and what their motivations are. That being said, like, it's worth noting there are a lot— so very true, like Firms put money in because they want a return on their investment. There are a lot of ways to skin that cat in the advisor space though. At the most basic level, there's what has been the classic roll-up consolidation strategy that's existed in multiple industries. So most basic context, Jack, smaller firms might still sell for anywhere from 6 to 9 times EBITDA. Midsize firms, sometimes you see, I think, are 8 to 12. The really big firms, you can get to these We've seen 11 to 14s. But if I look at a publicly traded financial services firm, if I literally go to the stock market, start pulling up PE ratios, you can see 18s, you can see 20s, at least sometimes at good market peaks, you see numbers over 20. And so for a subset of PE firms, they're going to say, let me get this straight. I can buy a bunch of firms at 12, make them large enough in the aggregate that they could be the size of a publicly traded company, issue that into public markets at maybe just, air quotes, just 15 times or 18 times. And that means even if I bulk all these firms together and we had no value, we find no economies of scale, we find no cost savings, we find no synergies at all, we don't even do any of that stuff, and usually there's some of that, but if we do none of that, I could buy these firms at 12 times, I could sell them at 15 to 18 times in the aggregate, and my value goes up by 25% just because I mashed firms together. There is a size premium that exists in the marketplace and there is a certain multiple that the street gives just for companies that have a certain size and level of mass that it creates a greater level of stability.

[Speaker:BRAD_STONE] So Michael, let me intrude because there's a conflict that's playing for me in my mind and a juxtaposition, and I want to hear from you. In one respect, I've got you on record as saying this is the golden age for solo advisor practices. [Speaker:MICHAEL_SCHMIDT] Yes. [Speaker:BRAD_STONE] Okay. And then the other side of you, I know you spell fiduciary with a big F, Yes, they do. In all caps, in bold. I love that about you, by the way. And so I've got this juxtaposition. We've got this PE multiple expansion, M&A coming in. We've got these golden age for solo practices, but if they don't have a real exit strategy and a plan in place, and we know the data tells us that whatever the RIA is filing with the SEC, the majority of those advisors, large majority of those advisors say if they had to pull the ripcord and command that plan, it's not likely to work well. What should advisors be doing here? What's the fiduciary in you guide these other fiduciaries to do? Do you wake up and pay attention to PE, or do you do something different?

[Speaker:BRAD_STONE] So again, so it sort of distinguishes that what big firms with big dollars do and what us mere mortals do. Again, I don't think for most of us mere mortals, the PE stuff doesn't play into it. We're not getting bought at those multiples. We're not looking to do that ride. I'm not looking to like mash into a thing where the bigger gets bigger gets bigger and we bulk up and do the financially engineered deal. I mean, it might be good economically, but as you said, like so many of us, the end of the day, like, I did this to serve clients and give them value and give them advice. Like, not advising and planning, not to be part of the financial engineering exercise, even though it may be profitable. So yeah, again, so here's how I think about it from, from the average firm's perspective. You're probably not playing the, the PE game much or at all. At best, just the PE dollars may or may not be attached to the thing you finally sell to if you decide to sell externally. The reason it does matter though, again, is— so from the fiduciary end, to me, the thing that matters at the end of the day is client continuity. Continuity of client service is what matters. It is not acceptable that like something happens to you and you get hit by the bus and the clients literally don't even realize the captain is no longer on the ship and there's no one at the helm. And you've got like fiduciary discretionary management of their accounts, and you're literally not there anymore because you're in the hospital. So continuity of client service to me is the absolute paramount number one thing that matters from that just ultra level of the duty that we owe, that we owe clients. The only distinction I make here is that, uh, you know, therefore hire junior advisor and train them and develop them up in the firm in order to, to fulfill that. Is not the only way to go, is not the only way to go about that. Now, uh, because there are a lot of firms out there these days, there's enough money moving around that if you say, hey, I'm not able to serve my clients anymore, uh, in incapacity, accident, death, and your spouse unfortunately needs to make that call, like, there are firms that will buy, and there are firms that will buy pretty, pretty quickly. I mean, just even Buckingham, like, we've had some emergency takeover situations, right, where we've gotten involved and had to do it. The thing that I do think is missing in the industry though, kind of getting back to your question, Ray, is These should be written in agreements. What we're missing is a giant swath of, call it buy-sell agreements, maybe that's too binding, so contingent optional buy-sell agreement. You don't have to bind yourself into, here's the person who I'm going to sell no matter what for the rest of my life and I don't get any other choices. But if you don't have an agreement with someone that says, this is the firm who's going to step in to make sure my clients are served if something happens to me and I can't come back again, You, you need that agreement and you need to find a firm that can do that. And just from a practical perspective, that tends to be larger firms that does this for smaller firms because, because just they have the capacity, right? Most advisors I know that even have these, they're— we mentioned they're like, they're the crosstown agreement. Like, I got a buddy, I've known him for 27 years, but they're informal. And, and yeah, if, if something happens to me, you take mine. If something happens to you, I'll take yours. But the reality is I'm already really comfortable in my practice with my 82 great clients. If something happens to you and I have to handle your 60 clients overnight, I mean, I know some advisors that have been through that. They blew up their, they blew up their business because they had to handle 60 other clients in an emergency situation, right? They had to completely neglect their clients, and they had to put the other person's clients first because they signed an agreement with them, which means they had a debt obligation to a spouse that said, I'm buying your clients, so I have to not screw up that revenue.

It's a huge problem in our industry.

I totally agree just that I do think we have an obligation to our clients at a very fundamental level to ensure our continuity of service, which means I think it's a wonderful way for solo advisors, but just hanging out with no plan in place if something happens to you is not cool. It's not cool at all. But I got to bring my successor in and train them up and spend the 3, 5, 7-year process of developing them, wonderful path. I am all for internal session development plans. Like, you know, I championed this with NextGen going back 17 years, but it's not the only way to get it done. It's not the only way to skin that cat. Uh, and I think the amount of dollars out there now and just the size of firms that can do acquisitions means there's more opportunity than ever to start creating— I'll call them like formalized exit plans.

Got it.

That says, you know, I am going to stay here, are you? I am going to die at my desk in the boots on. But there is like a button that gets pressed. I die at my desk with the boots on, so people come drop in right away and make sure my clients are cared for if I like actually manage.

So are you suggesting that should show up in the ADV?

I, you know, I think it probably should. Okay. All right. I don't know that it's out there, so like my, my non-legal, non-compliance— yeah, yeah, yeah, no, no, that's fine. Um, perspective. But I, I think it should. Like, it's, it's either in the ADV or in a business continuity plan that you should be willing to share with your clients to say like, look, I just want you to know, full disclosure, here it is. Put it like, if something happens to me This is what happens. And like, it should be a positive conversation, right? I'm so excited to serve you as long as I can, but if something ever happens—

part of the value proposition—

like, there's a firm here that can make sure that you're taken care of as well, so nothing bad will happen and you will have continuity.

Okay, so I— look, Jack and I have like 5 or 6 minutes left with you, and I want to rapid-fire a couple of questions.

Jack? Okay, great. Yeah, sure.

We're going to start— you want to start with fees?

Yeah, let me go fees. Uh, uh, so, so we're seeing big trends where advisors are not necessarily lowering their fee on AUM, but we're seeing a pickup on retainer-based fees, planning fees. What's your, uh, take on the future of fees?

So future fees is up. I'm gonna say it right here, future, future fees is up. Future fees though is only up for the people that are moving into the planning and advice business.

Okay, good.

You only get the higher fees if you move up the value proposition. Okay. And I'm not saying that to be harsh on some people, like, you're not valuable now, but just like the industry has moved, right? 40 years ago, I sold stocks, and then, you know, discount brokers came. So then I sold mutual funds, and then online internet supermarkets came. So I sold diversified portfolios, and now technology diversifies your portfolio in like 2 clicks of a mouse button. So pressure's on us again to move up the value chain. But, you know, we've seen this very clearly in our Kitas research studies on pricing that we do through, through Kitas.com. Uh, planning fees have been up 15 to 25% over the past 2 years, and those were up from the, from the prior studies that we've done. We're seeing planning fees lift. The AUM fees are flat or even possibly slightly down, but only slightly down because we're substituting in planning fees for the AUM fees. So, you know, if the, if the old model on a million-dollar client was 1%, the new model might end up being 75 $2,500 planning fee or 50 bps plus a $5,000 planning fee or, or 50 bps plus a $6,000 planning fee because our planning is actually so awesome now, we price it up a little. And, and what I'm, and what I'm seeing more and more is the more firms build their financial planning value proposition and really get good at it and start charging for it and realize how much the clients value it, it's giving them pricing confidence and fee confidence And we're actually seeing the fees pick up. So if it's just like, how many basis points can I get to manage a diversified portfolio? Not, not terribly bullish on fees there. You're going to feel the pressure. But, and we've written about this for, for years, the industry keeps talking about this as a fee compression issue. And the truth is, it's not a fee compression issue. And if you look 10 years since the robo-advisors showed up, the average revenue yield of an advisory firm has basically not moved a basis point in 10 years of the robo-advisors that were supposed to squeeze us. But what you did see was a multi-year sequence where margins came down and now have started to come back up again because what happened, we didn't have fee compression, we did have margin compression because it was a value-add game on. I used to hire random— well, not random. I used to hire folks who are very personable. Now I have to go get them CFPs. And then if I get them CFPs so that they do more planning stuff, I have to pay them more because they demand more of that. And then my clients—

[Speaker:BRAD_STONE] But the capacity increased in the value-add.

I need more CSAs to handle my clients to make sure I've got that white glove, higher touch service. And all of that pressure on add more value, add more value, add more value meant our margins got squeezed while we were doing the value reinvestment. So we have had a margin squeeze, but we're recovering from it now. Okay.

Let me go— I got one last quick question because I'm dying to ask you this question, then Jack wants to probably wrap us up. On crypto and digital assets, I saw a quote. And I'm only bringing this up because Rick Edelman and I have worked a little bit together and his leadership in our industry on the Digital Asset Council for financial advisors has been pretty good. But you're on record as saying cryptocurrencies present more problems and perhaps less upside. So my question isn't Bitcoin, right? Blockchain, right? It's really this: taking all those digital assets, Bitcoin, blockchain, what's your take on how financial professionals need to stay abreast of the latest innovations to really be in value to the client?

So I, I will say, um, so when you sit in the advisor chair, like, clients come at us with all sorts of stuff, right? They're like, hey, I heard about this thing from my, my, my, my, uh, brother-in-law's cousin who says like this is the hot thing, but I'm not really sure, can you check it out? And, and, and we like, we just, we get these advisors, a lot of it's just like, yeah, let me save you some time, no. Like, the answer, no, just the answer. I'm not even gonna analyzed that much, your brother-in-law's cousin did not find a magical thing that gives 11% returns guaranteed. Like, no. It's just not flying. We have this sort of gut response a lot for these new things that sound like they're crazy and harebrained of like, just no, there's no magical returns that give you that much money. The answer is no. I'm not even going to research it. And just, we have this pressure, advisors. It takes 2 minutes for someone to pitch a crazy thing to our clients and 2 to 20 hours for us to vet it properly to figure whether it's legit or not. It's a horrible unfairness about the business. And it means, like, I literally can't evaluate everything that gets pitched. We just tend to have certain gut responses. And then I think a lot of the advisor community has, right or wrong, had that mentality around crypto. I think we're at least shifting that perspective. As you mentioned, I was on an event recently talking about crypto. And, you know, there's a lot of dynamics around just the fundamental investment thesis. I'll admit, like, I'm not entirely sold. I mean, if crypto went up as much in the next 6 years as it did in the past 6 years, crypto would be larger than the entire aggregate market cap of every stock in the world combined. And I don't think that's going to happen. So, like, you're on record. Yes, I'll go on record here. It can't do in the future what it did in the past. And then I don't know quite what it does in the future, and I have trouble with you know, just the investment thesis, because I don't know how to evaluate, uh, intrinsic value on it, and I'm a stodgy conservative investor. But I do think we've reached a point where we are past the 'sounds crazy, let's just sort of dismiss this' the way that I sometimes have to do with my, you know, clients' brothers, brother-in-laws, cousins thing. And I think we're at least in the realm now where you do have— you do have an obligation, I think, as a professional to start getting a little more educated in the crypto space. Like, It is clearly here to stay. Now, whether that's because it's more about blockchain transforming the world and how we interact with it and not necessarily the crypto assets in particular, we'll see. But I do think we've got an obligation that it's time to at least start getting more educated. I'm willing to ring that bell.

Michael, I wish we had more time. This has been awesome. Jack, it was like hanging on for a fast ride.

So thanks for—

I love the fact that, Michael, your camera literally can't keep up with your movement. You're coming in and out of focus.

Yes, I'm a hand talker. Hand talking is not good for autofocus cameras.

Yeah.

I know that was funny. We literally don't have time for the actionable ideas, which are Baron's hallmark. So, Michael, we're going to have you back. We're going to do this again.

Awesome.

Ray and I have a lot more questions for you. I do want to endorse, you said 2 to 20 hours. It's time now for any advisor who hasn't put that time in to do so on digital assets. You got to have an answer for that question. Even if you come down where Michael did, there's no intrinsic value. Do it, but you got to put in that time. I'm going to take the, the seat here to, to offer two actionable ideas. One is we've got an ALTS conference in just two days on October 28th. If you are interested in attending that to learn a little bit more about alternative investments, send us an email, conferenceinfo@barons.com. And if you have not yet gone to barons.com/advisor, you got to do that. We hope you enjoy that. To close, I need to give a nod to our sponsor Capital Group, without who— without whom this thing just would not have been possible. Uh, Cap Group knows there's a hunger among advisors for great practice management content. Recently launched something called Practice Lab. A lot of the stuff we've just been discussing, you can find it there. A particular note, I just read a good piece on why setting up an advisory board, or as Ray calls them, advisory groups, uh, might be a good idea for your practice. So check that out. Um, that is all for us. I got a few throw a huge, uh, thanks to Michael Kitsis. You are great. Uh, Ray, as always, you were wonderful. I know people learned a lot. Um, if you have any feedback, send it to me. We'd love to hear from you. Uh, jack.ottar@barons.com. I will be hosting these events periodically again, I hope with Michael, uh, over the coming months. So keep an eye out for an email on that. Uh, once again, Ray, Michael, thank you so much.

You got it, Jack. Thanks, Michael. Good to see you.

Peace. Good to see you, Ray. Thank you for bringing the blue glasses. I appreciate it, man. You got it. Fantastic. All right.

And we'll see you viewers soon.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.