This Economist’s Proposal Won’t Solve the Social Security Crisis

Plus, how financial advisors can enhance organic growth

Ric Edelman: It's Friday, August 23rd. On today's show, where is the opportunity for organic growth for advisors? How do they grow their business and recruit new clients? And a big conversation that I'm hoping we're going to be hearing an awful lot about in this election season is Social Security.  

So far, it's not getting a whole lot of attention, but it really needs to. And you know why, if you've been a long-time listener to this podcast or on my prior radio show, Social Security is one of the leading crises of the day. We are facing a shortfall in funding to support the outlays that Social Security is making on an annual basis. Social Security is elegant in its simplicity. It collects money from workers in the form of a payroll tax, and it redistributes that money to retirees who enjoy it for the benefit of their retirement income. The system has worked pretty flawlessly for the bulk of the last century, but we are now running into a demographic problem.  

We now have far more retirees than the system ever anticipated having, because people are living so much longer than ever, and we have fewer workers. Comparatively speaking, paying into the system. When Social Security was invented in 1935, there were 135 workers for every retiree. Today, there are three. And this means too little money is going into the system compared to how much money is coming out of the system. Now we've had over the decades so much more money going in than was needed to pay out. It allowed the Social Security administration to throw the excess revenues into a trust fund. And now we are dipping into that trust fund to make up the shortfall because Social Security isn't collecting enough in tax revenue to pay out the benefits. It's using money in the trust fund to make up the difference. Not a problem, right?  

Well, it is, starting around 2032, because around then, according to the Social Security trustees, the trust fund will be depleted, and that means the only money that Social Security will have to pay out benefits to its retirees is the money it collects from workers.  And that's only enough to generate about 76% of the income that retirees are currently receiving. In other words, all Social Security retirees, starting in about eight years, are going to see about a 25% reduction in their Social Security benefits. This is a crisis, especially considering that more than half of us retirees depend on Social Security for more than half of their total income. 

Can you tolerate a 25% reduction in income? I don't think very many people could afford to do that. This is going to force a lot of retirees into having to choose between buying food or paying for medicine. Many are going to flat out become homeless, unable to make their rent or mortgage payments. This is going to be a crisis of huge magnitude because of the tens of millions of Americans who are receiving and are dependent on our Social Security benefits. And we all see this train wreck coming. This crisis has been well documented, well anticipated for more than a decade. It's still eight years away. And I don't know if I've ever heard anybody on Capitol Hill or in the White House discussing it. Let alone offering a solution to it.  

This is why I'm hopeful that in this year's election season it is a topic of conversation. I certainly hope that in the debates that are going to be held between Trump and Harris over the next couple of months, that the moderators ask them questions about Social Security. What is it they're going to do about it?  

Well now we have one proposal. that is now on the table. An economist. She has been in the Social Security game for most of her career. She is a left leaning Democrat, and while she has really strong credentials in the Social Security world, her political views clearly color her viewpoint.  She has now published a solution to the Social Security crisis. And it's a simple and elegant solution. And I'll tell you what her proposed solution is... stay with us for more here on The Truth About Your Future.  

Her proposal, simply increase the Social Security payroll tax by 3.5%. That one small change, she says, will solve the entire crisis. It'll give Social Security the income it needs to pay out benefits in full to all retirees. Nobody's Social Security check will have to be cut at all. Now, I'm not going to challenge her math. She is, after all, a quite accomplished economist. I'm sure her math is probably right. But I do challenge her spin on this. When she says this is just one small tax increase to solve the problem, she's clearly showing her political bias. A 3.5% increase? It's not really 3.5%. It's really 3.5 percentage points. The Social Security payroll tax, right now, is 12.4% of your pay. So, an increase of 3.5 percentage points, that's actually a 28% increase in the Social Security tax. 

She also says that employers will pay for half of that tax increase, because, after all, employers already pay half of the Social Security payroll tax. But that's a canard. Sure, you pay 6.2% of your pay, and employers pay the other 6.2%, but think about it. The fact that your boss is paying 6.2% of your salary into Social Security, well that's 6.2% that you're not getting in salary. You see, there's no such thing as a corporate tax, there's no such thing as a tax your boss pays. Any tax your boss pays, any tax a corporation pays, is paid by the consumers who buy the products. Or it's paid by the workers who are getting those salaries.  

This is why I'm always laughing whenever I hear people talking about raising the corporate income tax. By the way, Kamala Harris has endorsed that idea. She did that last week. There's no such thing as a corporate income tax. If a corporation incurs a higher cost, it's simply going to pass that cost along to its customers in the form of higher prices. This is the way it's always been done. This is the way it's always going to be done. Do you really think the corporation is going to let its own profits suffer because of higher taxes? No way!  

And this is why this economist's proposal for solving the social security crisis is a strictly one-sided proposal. Raise taxes, she says. She flatly rules out the idea of cutting or delaying benefits in any way, shape, or form. And that is precisely the problem. Congress is going to be eventually forced to confront this issue. The sooner it confronts it, the easier it will be to solve it. But if they don't deal with it until 2032, then they're going to have to make massive changes. 

And it will have no choice but to find a middle ground. If it tries to do nothing but raise taxes, there's going to be a huge level of objection from the right, and if they are simply going to cut benefits, there's going to be a huge level of objection from the left. Anybody who argues for doing just one or the other is an extremist, and extremists deserve no place in serious policy conversations. 

So pay attention during this election season. Watch the debates. Will Trump and Harris even be asked any questions about Social Security? Until we all start talking openly and honestly and fairly, we really have no hope of saving Social Security. So pay attention to what the candidates are saying. The better candidate will be the one who has a policy that Congress might actually support. And that means no extremism. 

Coming up next, a conversation with Marty Bicknell, Josh Gross, and Rick Frick. We will discuss where is the opportunity for organic growth for advisors? How do they grow their business and recruit new clients? We will discuss this and more, so stay tuned. 

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Ric Edelman: Welcome back to The Truth About Your Future, I'm Ric Edelman. The following interview is from my Wealth Management Convergence back in March.   

Ric Edelman: Please welcome to the stage Rick Frick, Josh Gross, and Marty Bicknell. Gentlemen, how are you? The industry is evolving in really, profound ways. When I started in 1986, and founded our firm, at Edelman Financial, our growth was strictly organic and for 30 years, that's how we built the business, generating new clients, one at a time. Marty, is that still the way advisors can grow organically? Is that still possible?  

Marty Bicknell: They still can grow organically. Yes. I think there's very few that do. You see any of the industry publications, they talk about the lack of growth among RIAs specifically, but I think it's more widespread than that. And we do a lot of, acquisitions, and as we visit with firms. I think it's the statistics are like 80, 85% of registered investment advisors are not growing, with the exception of market returns. 

Ric Edelman: So,I would think that when we all started, we invented this industry, right? We were the first gen of the financial planning field, and the independent advisory field, showing our age here, at least I am, we were the first financial planner a client had hired. And that was true for every client who came into our firm over the decades. They, for the first time in their lives, realized that they needed to hire someone and so they did. But today, I get the sense that everyone in America who wants an advisor has one at this point. So, if I'm going to win a new client, odds are pretty good I'm taking that client from someone else. And it's becoming a zero-sum game. Where is the opportunity for organic growth for advisors? How do they grow their business from recruiting new clients? Josh, you got any thoughts on that?  

Joshua Gross: So at Mill Creek, actually that's all we've done, from 2006, when my partner and I started it. We were just talking with the guys about organic versus inorganic growth. And the good news is that the market price is really high. The bad news is, so is it on acquisition. So, while people call us to acquire or use this as a platform. But we've just done, and it is, I think, very rare.  We're now at $10 billion. And it's very rare to have no outside capital, no partnership. I don't know if it's right or wrong because you could certainly, probably the combo would have, propelled us to the largest, but it's something you have to really do and believe in. Once you find the right partner to help you with your inorganic growth and sifting through the process, you can find the right, acquisitions to tuck in and ones that don't cause indigestion. So far, we've just been growing organically enough that we haven't gone that route, but it certainly is something that you have to consider. 

Ric Edelman: There's a big article in the Financial Advisor Magazine this week, I'm sure you guys have seen it, that a lot of advisors who have done deals, now have regrets over it. It didn't turn out the way that they expected, for one reason, or another, the magazine article cites a whole bunch of reasons why they feel that way. It's one thing to bring on a bunch of clients, one at a time, create a culture with them. It's quite another to acquire a practice filled with clients who have a given culture and may not match yours, either yours or theirs expectations and managing a big practice overnight is a whole lot different than solely evolving one, right? So isn't that really the challenge? Are advisors really focusing on that element of it when they contemplate this?  

Joshua Gross: It is because you become so close with your clients as well that finding the right chemistry, from both sides creates a symmetry and also, I knew a couple of my friends that, were acquired seven, eight years ago. The valuations are radically different and they feel, boy, I left something on the table. Should I leave and go start this again? And you have that tension. But it's really about finding the right people, and then one of the things I think that where there have been regrets is I call it the Rome model. One of the reasons that Rome was so strong for so long is when they would go in and conquer a land. They would look at the best people, make them complete full citizens of Rome with voting rights and powers and say, geez, you were so good that you controlled this country. How are we peers? And not look at them as a subordinate, but to say, there's gonna be great people in those firms. You have to elevate them possibly ahead of your own staff that have been there for a long time. It’s just, you have to have the right motives.  

Ric Edelman: So, you're saying that Rome was the early version of the Borg? 

Joshua Gross: Exactly. Exactly.  

Ric Edelman: And that that's the key to success in an integration, assimilation along those lines?  

Joshua Gross: I think assimilation integration and having people feel like that's where they belong. And this is now where they want to be.  

Ric Edelman: So, we still have most of this industry in the major institutions, insurance companies and the wire houses. And then just look at the wire houses themselves, there's what, 300,000 in the wire houses. And Rick, you've got some pretty strong opinions about the fact that these days, the way the industry is today, the technology, the regulatory environment, certainly the market environment and consumer demand, that there's really no reason for anybody to be working at a wire house anymore. 

Richard Frick: I agree 100% with that.   

Ric Edelman: I know, you're the one who said it.  

Richard Frick: Yeah. And comes from me being a 25 year wire house executive. So the way I look at it and what's beautiful about the three of us here is each one of us have a different type of business. So it's all independent, but family office runs his business different than the way I run my business. So when we talk about organic growth, just to chime into that for a second, we looked at it a different way. You can grow one client at a time or one advisor at a time. So we build our organization, bringing in advisors, With the clients and supporting our advisors to add new organic clients. But I found that as a CEO, it's easier to grow 100 million by bringing on a new advisor than an advisor bringing in a new 100 million of fresh clients. So, there's different ways to grow your organizations and different valuations. So it's just a interesting concept. But yeah in 2018, I joined Gladstone as the CEO. I was at Morgan Stanley-New York, most of my entire career. It took me a while to realize that if everyone at the wire was smart, they would leave tomorrow because you don't need the office scale anymore. COVID totally changed that for all of us. The technology platforms that we can build when you're independent are just as good, if not better than what Morgana and Merrill give you. So, you don't own your business at the wire. If you left and ran your own P and L for three years, established your business, created an EBITDA (earnings before interest, taxes, depreciation, and amortization), you then can monetize it for a heck of a lot more than retiring from a Morgan or a Merrill where they're going to give you two or three times of ordinary income for the next five years. So, anyone in a wire house, back in the day used to look down on going independent and the time is completely shifted. 

Ric Edelman: Well, what I'm noticing is that folks in the wires aren't even carrying a wire house business card anymore. If it doesn't say Morgan Stanley or Merill Lynch. That's in the fine print to satisfy the regulator. But it's the Johnson group, oh by the way, at Morgan Stanley. They don't even like the branding association with the wire house because of the consumer reaction to it in today's environment. That is so radically different. When I was young, entering this business, if you were a Merrill Lynch broker, you were at the top of the food chain, you were prestigious to be a Merrill broker. Today, they don't even want to acknowledge it on their business cards. So, what a radical difference. Rick mentioned the technology platform. That's as much of what you're providing your advisors is anything else these days, talk about the core of what really takes to run a firm at scale: the technology issues, the compliance issues, the branding issues.  

Marty Bicknell: Yeah, when you really stop and think about all those different components you just mentioned, they are the things that we stack up as one of our value propositions, both from a recruiting standpoint and an acquisition standpoint. We refer to it as just removing the noise, right? Cause most advisors in doing they got into the business to do, and not dealing with all that stuff. Creating that platform of which advisors can utilize and then do that was a key component that we focused on really early on when we founded in 2006 as well. And the way I think about it is, I appreciate Rick saying that he thinks that it's on a level playing field. I spent 16 years at A. G. Edwards and have now done this for 17 years. From a technology standpoint, the Registered Investment Advisory business is still behind. And it's behind from the aspect that every tool we use is its own tool. And so you're in one tool, you gotta stop and get into another tool, you gotta stop and get into another tool. The cool thing about what's happening in our space live right now is all the wealth tech that's coming in, and it's changing live right in front of our eyes, and five years from now, I do think we'll be able to say what Rick said. 

Ric Edelman: Elaborate on WealthTech. Are you distinguishing that from FinTech?  

Marty Bicknell: I am distinguishing that from FinTech, specifically targeting wealth firms, the technology to do that. Whether it's a Vanilla, which we all know, whether it's an Eaglebrook, which we all know, there's, just looked at something the other day called iCloud. They're all specifically targeting us, as a fresh group to innovate.  

Ric Edelman: And that's creating scale for you. And is that table stakes for you to be able to operate? Or are you using that as a value proposition to entice advisors to join you?  

Marty Bicknell: Today it's a value proposition. There's gonna be a day. It's table stakes, but today it's a value proposition.  

Ric Edelman: I guess the whole big conversation is all about M and A from your perspectives. And you're on the buy side, generally, recruiting advisors into your firm, either individually or an entire practice. What is, the enticement, what is the pitch that you're giving to advisors to get them to join you? I'm just going down the line.  

Richard Frick: Well, it depends where they're coming from, right? If you're already independent, there's a value prop. If you're at a wire, there's a value prop. If you're at a bank or an insurance agency, there's a different value prop.  

Ric Edelman: But I'm willing to recruit from all three of those sectors,  

Richard Frick: Correct. Kind of an omni channel approach. Let everyone affiliate with us either way, we have a fee-only RIA. We have my legacy business, which is hybrid RIA and then we have our own corporate RIABD. But the difference, I think, is each person can pick where they want to go. But to Marty's point, if you go independent on your own, who's gonna become your head of compliance, right? Do you just make your assistant now your new CCO and then the SEC comes in and it's game over. Or who's going to give you your technology stack and platform because it's going to be so expensive if you have $500 million and you just launch your RIA to get on SS&C and Black Diamond and everything that you need to compete against what he's built or what you build or what I've built that we're going to give to you basically for free or part of our platform. So, the value prop is we have the scale to have marketing, to have compliance, to have technology, but you still own your own firm. You still brand your own name, your own self, but why take on all the risk of launching your own firm? Why take on the audits? Why take on the cost? Why go away from the best thing you do is get new clients and new client assets to become a business manager? Because most advisors aren't great business managers.  

Ric Edelman: Well, isn't that an argument for them to stay where they are and just keep doing what they're doing? 

Richard Frick: If they're already independent, different, but if you're at a wire house, you could say, okay, your payout's 40%, you're going to go independent, it's going to be X, you'll double your income, you'll be 1099, you'll own your own business, why would you ever stay? 

Joshua Gross: Part of our, discussions with, when we were running into people that, first of all, it's differentiating. There are many people that we talk to that I regard them as, they're a chef, but they want to be paid like a hunter. And it's amazing how many people believe they're hunter killers. They were a part of a team that brought in a ton of assets. But, when the rubber hits the road, they're not sure if they can really get out and sell and create up to BATS (Better Alternative Trading System). Creating up to BATS is really, really difficult. For the people who are very good at up to BATS, or are extremely good chefs, they can handle a large practice. That might be said to them. One of the advantages that we have, from our perspective, because we haven't sold off our equity, we're 100% internal, that there's the opportunity for people to have equity inside the firm and capture that multiple and reward them. And they have a voice inside the firm. Our firm is only 50 people, so it's still efficient. And if someone is really good, you still have the ability to have a fingerprint. I joined the Navy when I was 17, and the best advice I got from my Lieutenant JG when I was an E3 on a carrier was don't say anything for 10 years, then we'll ask your opinion. And that's not, that isn't really, whereas as a firm of 50, one of the advantages at a boutique is, we need you. We need you to be a line officer now, and if you're good, it's a meritocracy within that meritocracy and you have the opportunity to have equity, to have a fingerprint. There was a lady that we hired, Katie Poole, that originally came in to work with another partner, myself, and after 90 days, we told her that working for us wasn't working out, that she had to work with us and that by the end of the year, she would be a partner and she's just spectacular. I don't know that that's possible when you're at too large of a firm. So, for us, we've tried to create it more as a family. That's different than, but it's harder. You have to explain what a Mill Creek is and where the heck Conshohocken is, if you can even spell it. 

Ric Edelman: It sounds like Philly, by the way.  

Joshua Gross: As I was saying earlier, Conshohocken is an Indian term for just outside the Philly wage tax. But you're just, grabbing it from a different perspective and seeing, and sometimes just like clients, sometimes having a boutique as a fit, sometimes they want the big mega name. And the good news is there's enough business for everybody. And frankly, some of our best referral sources have been what appeared to be our arch enemies, which is have as few enemies as possible. And our friends are people, the three of us all sit on boards. We all have to recuse ourselves when we sit on those boards. I would much rather send business to people that I respect and my friends, than to send it to somebody who we don't know. So, we have the Philadelphia Eagles charitable foundation. The Eagles were sent to us by ostensibly an arch competitor because we're good friends. There's no reason to, we will never, go and poach their employees. We try to stay away from their clients. And you play nicely in the sandbox and develop relationships. It's a small world. 

Marty Bicknell: So recruiting and acquisition value prop. So I'll try to do this quickly, but you just pulled the string. You do realize that, right? I think from our perspective, we like to position it just, we talk about it as a three-legged stool. So, leg number one is we believe in feeding our advisors. So, we think client acquisition strategies should be at the enterprise level. The most difficult component of business development is filling the funnel, so we believe in filling the funnel for our advisors. In 2023, we brought on 4,000 households and $7 billion in new assets organically. The second leg of the stool we refer to is surround our advisors with tools and resources that elevate the value prop and the client experience. So, think taxes, trust company, insurance, boutique investment bank, dedicated investment team and a practice management team for training and development. So, surrounding advisors to fill in the gaps so that their value prop is elevated. And the third and last I already mentioned, which is removing the back-office noise. 

Ric Edelman: So none of you really raised the issue of, finding new clients. In fact, a couple of you even mentioned if you're a good hunter, or if you are capable of generating the business, for a lot of advisors, that's the Holy Grail. They want help in finding clients. You may be interested in recruiting advisors and therefore their books and growing your business proportionately. But these folks, I would think for the most part, want the next client. They need help with that huntering. So to what degree, do any of you assist advisors in recruiting clients? 

Richard Frick: So what's interesting, it's all this conference, but everything's going towards a technology base, right? You have to touch more people to get one client than back in the day where you just opened up Dun and Bradstreet or a phone book and started calling people, right? No one's taking your call. So, it's more of a digital strategy and the organization we partnered with, we're a little different, so there's three private equity firms that are invested, but it's still owned 64% by the partners. But that investment and that technology expense let it accelerate and get to somewhere where I couldn't do it for 15 years probably. I didn't have the capital. So, part of what we do is when you join, say, Wells Fargo Bank, back in the day, they promised you leads. You'd walk in, you'd sit at your desk, every time someone deposited money, they'd put it over there. It was a great opportunity for people to build a business and lead generation. So, part of our company is insurance, and we collect data points. So, we have over 300 billion data points on the American consumer. We own four lead generation companies. So our advisors and our agents can come in, and any day of the week, go to lead center, put in a couple of specifics, demographics, dollar amount and then generate leads directly to them. So, we're one of the only organizations that are helping organic growth by generating leads to our advisors across all the demographics and the data that we own. So, it's becoming a data driven business. 

Ric Edelman: Got it. Marty?  

Marty Bicknell: So that 4,000 households and $7 billion in assets was us driving those to are advisors, enterprise level driven to our advisors. And so we have one business development professional for every four senior wealth advisors. And then we also believe in the strategic aspect of the partnership. So whether it be Fidelity and Schwab's referral programs, one of the largest, property casualty insurance brokers in the country, CPA Alliance it’s different avenues that give our advisors the chance to be in front of other professionals, that they wouldn't be able to get in front of that then refer the client, sitting next to somebody whose job is business development. So, we want our advisors to be strong point of sale, but again, we don't want them filling the funnel. It's time consuming. 

Joshua Gross: I think not dissimilarly the firm never competes. We don't have house accounts, so we're never competing with our different teams that we have. And, in fact, the people who are not the dedicated, relationship managers and, that as we come across various referrals, we want to send those into teams. When the team gets to be at a reasonable capacity where, as what we call it, if we give you a dollar, I hope you'll make it into three. You'll get a referral, you might get wallet expansion within that client relationship as maybe the family then sells a business and it might expand and it's much quicker. If they're just dialing for dollars, that’s old style. That's a five-to-ten-year proposition to see if someone's successful. You've got to accelerate that much more quickly to get somebody who's really gonna be on a much faster track. And so, we fill up each team with a decent amount of referrals and then they will continue to grow from there. And at that point when they get to half capacity, we’ll hire and start another team and another team. And that's how and then we've found groups that are just out. So, we're based outside of Philadelphia, but that's how we have a group in Aspen or in Pittsburgh or in Naples, Florida, because we also want to expand geographically as well.  

Ric Edelman: So it seems that we're going through a metamorphosis in our industry. In the beginning, we're all individual practitioners. Then we became ensemble practices where two or three of us would get together and basically just share expenses, but keeping our clients separate and our books separate and profits separate. Then we kind of built a business, of it started as the firm grew and you added employees, you then had to hire infrastructure activities like HR and compliance and trading and operations and such like that. And now at the point where you're really running major corporations, and you're dealing with all of the issues that major companies engage in, not the least of which, two of you have mentioned it, is capital, the ability to raise the capital needed so you can, grow, in a successful way, and that means, for us, private equity. You have minority interests of private equity in your practice. You said Josh that you are still not receiving any. Marty, what degree? You're still privately funded at this point?  

Marty Bicknell: No, no, we have a private equity partner.  

Ric Edelman: Majority or minority?  

Marty Bicknell: 35.  

Ric Edelman: 35%. So, talk about the impact you two, Rick and Marty, about life with PE firms. What has surprised you, what have you benefitted from and what just pisses you off?   (laughter) 

Marty Bicknell: Rick, I'll go first because mine's short. It's been fantastic. It's been everything that was sold to us it was going to be. I don't know if that's because we were blessed to choose the right partner or not, but June will be our third-year anniversary and it's been fantastic. 

Ric Edelman: What has it enabled you to do that you weren't able to do before?  

Marty Bicknell: The most interesting thing about the Intra Green Partners, our private equities sponsor, is they back founder led firms and let them operate. And if I have a question or need, they'll be at the table, they'll come with ideas. If I don't like the idea, they leave. We raised public debt for the first time two and a half years ago. I didn't know how to navigate that. And so having them at my side to navigate that was very valuable.  

Richard Frick: A similar experience, ours is great. So, we've raised money in 16, 19 and 21...three different firms combined, they own 40%. So still minority. But we've had specific firms like the last firm that came in is one of the best technology investors in the world, right? So they own a minority stake, but you get their brightest and smartest people working with you hand in hand to help you evolve and help you grow faster. So, I find that very beneficial. Some of the negatives are maybe by three different firms and the board meetings and you got to get some things approved and they take a little longer than running your own firm.  

Ric Edelman: You got a little bit of politics going on.  

Richard Frick: Yeah. Yeah. Every quarter you’ve got to stop business for two weeks and get ready for the board meeting. 

Ric Edelman: And you had a three-year interval from the first PE to the most recent PE. They have different clocks for the liquidity of their investment.  

Richard Frick: Correct. The 16 firm has been in the whole time. All three of them have not turned over. Call it that way.  

Ric Edelman: So what's the negative Marty that you've experienced with PE? 

Marty Bicknell: Truly haven't experienced it yet, but  

Ric Edelman: Give it time. (laughter) 

Marty Bicknell: As you know, the pioneer of this, back in the day, we're on the carousel, and the carousel's spinning, when do they want off?  

Ric Edelman: Is PE ownership inevitable? Josh, are you going to get to PE one day?  

Joshua Gross: Probably eventually because it's not a business that really transitions through generations that well. It's a service business and the relationships, and unfortunately, you could go through a management led buyout, but they would need PE as their partner, just because of the valuations of the firm. So it's probable that that is, unless you get large enough, where you really can think about an IPO yourself. And that's a, just a completely different equation. And in order to get that big, you're probably taking on PE or other investors because people will simply age out and they will say, look, I'm happy with X dollars. And in which case to buy them out, if you have a partner that's worth $20 or $30 million of their own, we don't just keep $50 million sitting on the side. And we've tried to manage that where if somebody does put their stock, we have three years in order to gather the capital where we don't have, to have a sitting war chest or we don't have to have a bank relationship that it gives us three-year notice. We pay them interest and we just had our founding chief investment officer retire and it ended up working really well because we got a three-year notice. The good news is you are gathering the capital and you are, actually the firm's valuation was growing, and we were able to do it organically, internally, and through some of the younger partners saying, I'm in, this is what I want.  

Ric Edelman: So, an organization the size of yours, all three of you, puts your goals and objectives potentially different from those of advisors in the practice. They are ultimately looking at their retirement. And they wanna serve their client. They want to maintain the assets and then ultimately retire. You have a longer time horizon than that, and a bigger one than just that. So, it can create a dichotomy of goals and objectives. You layer in the private equity on top of that, who are the exact opposite. They may have a very short clock. Anywhere from three to five years typically for PE. So, talk about the juggling priorities and dealing with the needs of all three parties: you as the firm, the advisors in the firm, your PE partners, and making long term investments, significant decisions that may or not be felt by the advisor or of value to the advisor. Talk about how you balance all that. 

Richard Frick: Part of the reason we, in 2021, decided to do something, and it took a long time for the market, in 2022 was down, part of our recruiting pitch to advisors is, if you go independent and launch your own organization, there's not a built in succession plan either. You then have to figure it out, what you're going to do with your organization when mom or dad decides to retire, and the kids don't want to be in the business anymore, and it's a relationship business, and the clients walk out the door. So, part of our pitch is, come in, join us, own your own firm. Come to the meetings, be part of the network, build relationships with other advisors, and then have a natural succession plan for your business where you can monetize it to the other person within the organization. So that's really worked. The PE money for us was a little different as we were talking before, is in 2021, 2022, everyone was putting their firm up for sale. So, you'd come in and if I'm bidding against a large PE firm, I had to put our own capital in. So five partners owned Gladstone. Every time I buy a firm, I lose more money, right? Cashflow, right? So cashflow keeps going down. So you needed the economic partner. So that's where you can get positive from the PE side. And what was your third part? Succession.  

Ric Edelman: And, what you're doing to build your business, which may not be of particular value or interest to the client.  

Richard Frick: So, there's multiple ways. I don't know how everyone on the stage would give equity, but there's a couple of ways to make sure the advisors are involved. The way we did it is if you joined, we let you participate in the equity of the company by selling a piece of your business when we did it. 

Ric Edelman: So, they're trading equity from their business for your business. 

Richard Frick: Yeah. So, what we thought is always bring the advisor along with you, give them the opportunity, because then they'll be just as happy to take some chips off the table when we decided to do it.  

Ric Edelman: Got it. And you give equity to your people.  

Joshua Gross: We do. We've done it as profit sharing units, which is, we're an LLC, so we have a given valuation in a year and then most of the profit-sharing units have come off of me. One of the things that was a fortuitous advantage that we have is the fellow that I started the business with, Rich Stevens. He was 15 years my senior and a decade ago he had some family changes. He decided he wanted to spend more time in Driggs, Idaho. And at this point I was 42. And you're doubling down. What often happens is you have two people that are the same age, just a couple of years apart. Someone at 63 wants out. It forces the other person to kind of get out or stay until you're 73 or older. So, our age stagger, was something that really was helpful. And there's one other person who is my age, he and I are the two oldest shareholders. So, we have a relatively young firm. We've tried to manage where people don't have to put up millions of dollars to buy equity from somebody that most of it are LLC units that have come off of me at a given valuation. So, if the firm sells for X, my equity until they are awarded the equity, the first hundred million it would distribute, they don't participate, but if the firm sells for 150 and they own 3%, they would get 3% times the 50 million in excess of a hundred or something that's like that. Where it prevents them, many young people who are emerging, to just getting equity, they don't have a million dollars to go and buy someone's equity and put that down. Or have a banking relationship where they now have debt. So, you just give them the participation in the upside, which then motivates them to grow, which helps everyone else. 

Ric Edelman: Was that something you had from the beginning? I know at one point, Mill Creek had to pivot from your original business plan.  

Joshua Gross: We did. We actually did have an outside shareholder who, be careful of your partners. He was a potato head, and that was, it's very difficult, became quite adversarial and, it caused a major issue. Rich and I took the entire brunt, in order to exit that person. We thought it'd be a great collaborative partnership. Well, it just didn't. And so it created a large pivot in how we did things. It's hasn't made us fearful. In fact, I'm really close with several private equity firms. You want to keep building yourself. If you remain independent as we did, you want to pretend as though you're getting ready so that you don't have to have consultants come in and completely rework what you're doing. So we've stayed in a model. And thought about it as though we're ready to sell. We just have chosen not to because we've continued to grow organically enough and we just have decided not to quite go that path yet. But it's great to hear, both of these firms, where it's about a third, they still retain control. It can be done. You can have your cake and eat it too on those things. We've remained close and you just have to make a decision. Are you going to take it as growth acquisition capital or is it put some capital in your pocket? You're right that in the long-term, one of the things that I think all three of us, if you ask independently, it's really important that we do look at our employees as we don't have the right to risk their futures. And I've seen a couple of the money managers, not the RIAs, but the money managers, that blew up in the Philadelphia area. The lead person got enough money out, but their employees who had five or $10 million of equity, that just went away and vaporized. And that was because the firm wasn't thinking about them as one of their constituents. And that the leaders need to really be thinking about them as it's much harder for them. Entrepreneurs can reload and redo. But honestly, most people can't and that's why they aren't the entrepreneur.  

Ric Edelman: And that's the real challenge for advisors isn't it? That if you're going to join a firm and part of the promise is you get equity in the new firm, you're betting that firm, which you are not in control of, or even perhaps being influential in, is going to be a good steward of the economics that you are betting this transition on. and that isn't always gonna work out.  

Joshua Gross: It's your family, it's your clients, your relationship, and you want to, for the most part you want to find a benevolent dictatorship because usually it's not one person, one vote. There is a base and a nexus of power. True democracy doesn't really work that well. 

Marty Bicknell: Benevolent dictatorship. Yeah, I agree.  

Ric Edelman: You're a fan of that, being the dictator? (laughter) 

Joshua Gross: He prefers Il Duce.  

Ric Edelman: I think all of us on stage would say that. What are the big challenges today, in running a practice the way that you're running it, you've got a lot of mouths to feed? You've got a huge internal staff, on salary or depending on you career-wise, you've got the advisors who are, expecting and demanding that you are facilitating their ability to serve their clients and you've got ultimately the clients, as well. So, name one big challenge that you're experiencing today, Marty.  

Marty Bicknell: Yeah. I think for us, as we think about the business on the whole the way you mentioned it, I'll say attracting advisors. It's the biggest challenge, but I want to make that bigger than just attracting advisors in the form of recruiting them or acquiring them. The number of advisors in the industry, is no secret, is going down, right? And it's actually going to increase. The speed is even going to increase. So, the challenge that we've decided to undertake is how do we train the next generation? We do a decent job at it, we have internship programs, we'll have 50 kids in the advisor program, on an annual basis, but we're adding 7 or 10. Being a fiduciary is a noble profession. We as a profession have to get that out. 

Ric Edelman: What are you doing to tackle that, to overcome or resolve that?  

Marty Bicknell: We've partnered with, 12 to 15. I can't remember the exact number of universities in cities where we have, significant presence, and partnering with them to do education among the students, but more importantly, among their parents, so that their parents are encouraging it. So that's not the perspective and the conversation in the very beginning about the perception of Merrill and all of that. We're trying to remove that perception from what we do.  

Ric Edelman: So are you doing this to get the kids to enter the field, and become advisors so you can ultimately hire them? Or to get their parents to recognize that this is a firm they should hire as clients?  

Marty Bicknell: No, no, it's to get the kids to intern during college with us and then come to work for us right out of college  

Ric Edelman: And what majors are these kids in? Do you care what their majors are?  

Marty Bicknell: We do. Business for sure, but a lot of these universities now are offering financial planning, as part of the curriculum. 

Ric Edelman: Seeking their CFP.  

Marty Bicknell: Yes.  

Ric Edelman: While in school. And you're doing as many of these programs in cities as you can around the country, where you want to have a presence.  

Marty Bicknell: Yeah, we either have 12 or 15 today, I'd take 30 if I could. Yes, but seven to 10 kids a year is all we're getting to come to work. They're doing our internship program. But we've got to ramp that up is all I'm trying to say.  

Ric Edelman: Is that the ideal number? Would you want more if you could get higher?  

Marty Bicknell: A hundred.  

Ric Edelman: We just look at Merrill, which last year announced that they're hiring 2,000 advisors. And we know that half of them will drop out in a year and by the end of three years, 90% are gone. You're not interested in trying to do that.  

Marty Bicknell: No, I hope not. (laughter) 

Joshua Gross: That's the bulge bracket model.  

Ric Edelman: So, Josh, what's the big challenge for you today?  

Joshua Gross: We just got through an SEC audit and that was just so enjoyable, and they asked the same questions, it was 1,100 questions total, and I don't think that they're used to RIAs. They keep thinking in a wire house model and asking questions in a wire house model and it just required quite a bit of our attention but you get through it. There were things that were useful that we learned as part of the process. So making sure compliance is something that is radically different than 15 years ago and how much you have to spend on that. You see all of the, would you ever have dreamed that texting with your client? Well, we just saw a $50 million fine that was levied, and these are capricious. You have no idea why the fine is coming. And so you have to be really cautious as you get bigger and bigger, you're going to be a bigger target, and, make sure that you know what your growth is, what do you want to be? Do you want to be a regional? Do you want to be a big firm? Do you want to have who your partners are? We've had to go, the cost of great hunters has always been high, but it's that even that next tier has gone much higher where it's not a hundred and $200,000, it's multi hundred thousand. If you have somebody who you believe is ready, they're in their mid-thirties, they have a decade of experience. They're ready to get out of the nest and see if they can fly. And that changes the equation when you have people, if you're paying 250 to 400 and you have three or four of them, and if they succeed, it's great. And if not, it's an expensive proposition and it's an investment. So, it's just curating your business and no, we don't want to do the hire 2000 and 75% fail rate, it isn't a model that we want at our firm. I think there's a lot of casualties and it would spread not goodwill. Keep leaving happy residue and keep hiring people and keep enculturating your name and having great interns when if they go somewhere else, you're like, that's a great place and you'll have an open door. You have no, it's just the first two letters and not yet. Keep the door open. 

Ric Edelman: What's bugging you?  

Richard Frick: What I see is the bigger you get, and the more educated our space gets in the independent space, we're racing to zero a little bit again. So, the bigger firms, you can pick a bunch of names, big broker dealers out there that have their own sales force recruiting people to go independent, whether it's an LPL, a Kestra, anybody, whether you do $200,000 or 2 million, you get a 90% payout. So, as we grow organizations, what's the value proposition to be able to have economics where you can have an advisor with a 70, 75 or an 80% payout, you can still make money to support your firm and grow your firm. And what's keeping them there compared to just going across the street for the 90? Because advisors down deep, they're always going to want that next stage, right? And in our business, unless you sign them to a contract, which we don't, they have the ability to pick up and go anytime they want, so that's a little bit different, what I worry about.  

Ric Edelman: So we've only got a minute left and I want to ask you all to name one piece of advice that you would give this group. These are almost entirely independent advisors here. Almost all of whom have been in this business a long time, very successful, lots of happy clients, lots of AUM. What is the one thing you want them to be thinking about or doing that you suspect they may not be? Marty?  

Marty Bicknell: So mine goes a little bit back to one of the conversations you were having earlier, Ric. And, I see advisors, focusing on high net worth clients, million dollars or above, whatever the number is, and only doing that. And, I think about for two reasons, really thinking about serving the mass affluent market. Number one, people who want or need our help, it's our responsibility to give it to them. But secondarily, if there's $30 trillion being inherited in the next decade, those are the people that are going to inherit it. So, if they're already your client, it's a client acquisition strategy on top of a client acquisition strategy.  

Joshua Gross: Treat your clients like gold, go through walls, raise your hand if they ask you about trust and estate planning or insurance or anything, raise your hand and keep them close. Cause that is the lifeblood and spend 20% of your time thinking about your practice, where if you're not paying attention to a client, send them to a friend inside your firm where it may be much more meaningful to them, so that you're constantly culling that your practice is exactly who you'd build it if you could build it today because you'll pay the best attention to them and let someone else be served by someone else, 

Richard Frick: Don't wait until you're ready to do something with your business to plan for that. So even if you think you have a 15-year runway building your RIA, your practice, whatever you have, think about the end and then plan for it that way. Keep your clients, keep them straight. That's the most important, It's a relationship business, but the year before you're ready to do something, don't think you're going to be able to snap your fingers and get ready to do it. So, think like a business, plan like a business, invest in your business, but don't over invest in stupid things. Use technology wisely, and build on a scalable platform that's easy for someone to come in and partner with you. 

Ric Edelman: Alright, I have to ask one more question then. Name a stupid thing. You said don't invest in stupid things. Name a stupid thing.  

Richard Frick: When you're independent, just don't sign too many different financial contracts. That's what I'd look at. Like as far as technology platform. Partner with the right person. And, you can go from a small organization, at a 90% payout and spend all your money and net 30%. Like it's no good for anyone. So just build your business smart, I guess is what I'm saying.  

Ric Edelman: Name a stupid thing you've seen advisors do in running a practice.  

Joshua Gross: Not really thinking about where their segmentation is. If you are in the one to 10 million practice thinking, oh my goodness, I should go whale hunting. Most whale hunters were really agricultural people and they just paint the great paintings of when they caught the one whale in their life and just, stay in the segment and whether you are one to 10, if you're 10 to 50, if you're 50 and up, because you don't really appeal one to 10, you don't quite have the skills to think about the 200 and up and don't whale hunt. On the other hand, if you are in that very large, the hundred million and up categories, taking on the one to 10, you might not pay enough attention and that's where that segmentations and keep building a practice where it's a uniform group of people because you'll always be in tune with them. 

Ric Edelman: Name something stupid, Marty.  

Marty Bicknell: Mine would just be not being client first. You see all the advisors in the industry doing things for their own benefit versus the clients. Be client first.  

Ric Edelman: Marty Bicknell, Josh Gross, Rick Frick. Say thanks to them. 

Ric Edelman: Coming up next on the show a question that I got from one of our listeners. 

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Ric Edelman: Thanks for sticking around with us here on The Truth About Your Future. Got a question from Jim in Illinois. Here it is: 

“I will probably never need the money in my Roth account, however, I would still like to grow it as aggressively as possible, but safely. Any suggestions?” 

I loved the first sentence. I have money. I'm never going to need. That gives you great flexibility to do whatever the heck you want to do with it. Wonderful. That's great. But then you said you'd like to grow it aggressively. Love that makes sense. If you don't have the need for the money and you can therefore treat it as frivolous and you can lose it and who cares? Great. But then you said, I want to grow it as aggressively as possible, but safely. 

Come on, we can't have it both ways. That doesn't work. You want to have a grow aggressively fine. That means high risk you might lose money. If you want it to be safe, you're not going to be investing it aggressively. So you got to choose. I mean, I can't tell you how many times people would walk up to me after a seminar and say, Ric, what's the best investment? The best? You mean, best return? Highest return? Or do you mean best as in lowest risk? Or do you mean best as in lowest tax? Or do you mean best as in lowest cost? Or do you mean best in lowest volatility? I mean, how do you define best? We have to choose. If there was one single investment that delivered on all of those, well then we would all be buying that one investment. It doesn't exist. The investment that will allow it to grow aggressively isn't safe, and the investment that is safe is going to be low in return.  

So, Jim, my friend, you got to choose. You can't have it both ways, and this is why people end up diversifying. You choose some investments that have the potential to grow aggressively, and other investments that are designed for safety, and other investments that are low in tax, and with all of it, they should be low in cost. 

So, you need to decide how you want to go about this, because otherwise, I question your entire premise that you'll probably never need the money. If you really felt that way, you wouldn't be focusing on aggressive or safe, you would be focusing instead on results. 

You can send me your question as well, just send it to AskRic@TheTruthAYF.com. The link is in the show notes.      

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Ric Edelman: I’m glad you’re with me here on The Truth About Your Future. If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube – and remember leave a review on Apple podcasts. I read them all! Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app. I'll see you tomorrow. 

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Links from today’s show: 

Wealth Management Convergence (March 2024): https://www.thetayf.com/pages/convergence 

Edelman Financial Engines: https://www.edelmanfinancialengines.com/ 

Mariner Wealth Advisors: https://www.marinerwealthadvisors.com/ 

Gladstone Wealth Partners: https://gladstonewealth.com/ 

Mill Creek Capital Advisors: https://www.millcreekcap.com/ 

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