The Compound and Friends - Josh Brown and Joe Duran: On Financial Advice, Living Well and Building a Billion Dollar Business

Episode Date: September 16, 2019

Josh here - it was my honor and pleasure to interview Joe Duran, founder of United Capital, on stage earlier this week at the inaugural Wealth/Stack Conference in Scottsdale, Arizona. Joe made headlines earlier this year when he sold the firm to Goldman Sachs - a deal that was the largest Goldman has done in 20 years. Joe and I spoke about the need to advise clients on different aspects of their lives, beyond just what's happening in their portfolios. We also talked about what motivated him to make a deal and what types of capabilities he'll have now as a part of one of the largest financial services giants in the world. Joe also relayed plenty of advice for young advisors who are just beginning their careers , and what he would love to go back and tell his younger self about having patience. Joe arrived in America with just $200 in his pocket from Zimbabwe, earned an MBA and then sold two companies to Fortune 500 acquirers. His story is hugely inspirational, you can read more about him here: https://www.unitedcp.com/meet-joe-duran/joe-s-story 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Josh Brown. My guest this week on the Compound Mini podcast is Joe Duran, founder of United Capital, who joined me at Wealthstack in Scottsdale, Arizona last week to talk about his impending sale to Goldman Sachs, his career, what it means to be happy, what it means to retire, and how financial advisors should be thinking about building their businesses today. I hope you enjoy it. Where do you see the state of the industry going over the next 10 years? What are the major things that advisors in this room should be thinking about as they continue to build and grow their own businesses? So I wrote a couple of years ago that I thought we were at the end of the golden era for the

independent firm. And that didn't mean that I thought it was going to end. It just meant that the easy picking was done. If you were an independent firm four or five years ago, ten years ago, the competition was so awful from the big brokerage firms that you could deliver at 1%, you were charging half as much as the competition. You could be open architecture, the competition was all proprietary product. And you could do planning and none of the competition was doing planning. And there were hardly any independent firms. So you had a massive advantage

that really from the time I entered the business in the early 90s until about 2016, 2017, you had Greenfield. The biggest dilemma now is that's no longer true. There are a lot of independent firms. You type in wealth management in your neighborhood, you will be flooded with alternatives. When you go to those websites, they all look the same. Every client is getting the same thing. Some form of financial plan, an open architecture portfolio, VTS and mutual funds, and the only real difference is the people who are delivering it. In that world, your biggest competition is going to be how do you grow? How do you choose to grow?

I would suggest, Cheryl mentioned earlier, that the pricing frothiness we're seeing is in large part because nobody has a clue. Once you get beyond your own friends and your friends' friends, what I call two steps of deviation from your own relationships, two degrees of separation, you stop growing. And we see this all the time. Advisors say-

Or you acquire. Or you acquire. Right. And that's option B, right? Because you have no distinct offering that makes people want to come to you. We started our second firm. Our first firm we sold to General Electric.

This one we sold to Goldman Sachs. I seem to like to sell firms that start with G and have two names. So General Mills will be next. And our view was very simple. From the very beginning, although we were acquiring, we wanted to create a client experience that would be memorable. And let me share with you the biggest gap that most of you have today, that you are the asset.

Not what your firm does, not the people who are working there, you are its biggest single asset. If that is true, then it is going to be difficult to grow. That's the truth. I am a pretty good salesman. And in both businesses, I wanted to build a halo effect where I wasn't the reason it was growing. So I want to ask you about client experience. So I had written on my blog yesterday, having been through half the sessions, the term that kept coming up was CX. Yeah. And client experience seems to be I don't want to call it a buzzword because that's somewhat derogatory. In fact, it's actually great that so many of the conversations centered around the client.

I mean, it's what we should be talking about. How do you think about client experience? about how do you think about client experience how does what you've built and what you will build differ from what a lot of other advisory is considered to be client experience you know I think we were one of the real pioneers in client experience and here's the very simple question you should ask yourself what problem are we solving what problem are we getting paid to solve I'm staggered how often i'll ask an advisory firm that question they don't know how to answer it let me tell you how our industry has evolved when i first joined the problem we were all solving is how do we make the most of our investments and we were mostly dealing and investing then many of us became planners and the problem we

were solving is how do i make sure i don't run out of money. I would suggest that 99.9% of the industry is answering those two problems and no others and yet technology can do both of those things better than you can. So the third and most important question that we believe is really valuable to answer is not how do I not run out of money but how do I make the most of my money that in fact tackling that problem that is the next 20 years of our industry certainly the next 10 that the advisory firms that understand that you're not in the business of helping people die rich you're in the business of helping people live richly and that is a very different

problem to solve because it means understanding what's the purpose of money in your life? What is the intention behind this money? And if that's the problem you're solving, then how you serve and deal with that problem is the client experience. Could you give us some examples of that? And when you say financial life management, what are some of the things that are in your client experience that directly address that premise first and foremost we understand that what people say they want is not what they do they all want to have lots of money take lots of vacation have a great marriage be healthy have great friendships no one in this room has a ten and all of those areas if you do you

wouldn't be here you'd be with your family probably. The truth is, our job as humans and as advisors is to narrow the gap between the life people say they want and the one they're living. That in fact, living richly is not about helping people be happy. It's about showing them how to be satisfied. We're doing some great research right now. And I'm speaking with, we've got some researchers from Chicago and work that Daniel Kahneman has done on this particular subject, that we all sacrifice

happiness every day to get to satisfaction. And satisfaction is when we narrow the gap between the life we said we wanted and the one we live. So before any client comes in, they do something called a money mine exercise to tell us whether they're driven by money to protect, to enjoy life, or to take care of the people they love. Because that's all that money can do for you. When we know that, we know that if they are driven to protect, they're obsessing on fees, they work too hard, they don't take vacations, they probably get annoyed at their spouse for spending money, that gives us insight into how to communicate with them. Number two, once we know how they think and feel about money, we ask them what they work for. What is the reason you work? And let me tell you, it's not to get a new house.

It's so that they can have a place where their kids can grow up happy. It's to ensure that they can take great vacations where they make memories. It is not the money. We obsess about the money. And it's really about life. So client experience in our industry, specific to us, should be about creating tools that help us understand our clients better than anyone else. Are there answers to those questions that would dissuade an advisor from wanting to take that client? Like, is there a client fit filter inherent in those questions?

Yes, if you're doing it with a yellow pad and pen. Because here's the second big thing you've got to do is create scale and repeatability. In the next 10 years, you're going to have to get a lot more clients to stay as profitable. You're going to have to do it with fewer people. And it is absolutely true what Shul said. Most advisory firms have way too many clients. So you need to have a repeatable process. We built something called Honest Conversations. It's a card exercise you can do with your mobile phone, with the advisor, located anywhere in the world dynamically and gamification is really powerful gamification means that instead of using a yellow pad and pen I'm actually giving you the tools to do the

exercise yourself when you're using uber no one's calling you're doing anything you are programming on your phone when you want to get picked up what kind of car and even what what tip you want to leave afterwards under rating, giving them instant feedback. Automatically adjusting whether that driver is going to get fares or not in the future. That is where our industry is going. People are designing their own lives, which means that you have to have a dynamic experience that brings them into the decision making. And for us, gamification is a huge element of doing that.

Gamification basically means creating a methodology that brings people into the process that is engaging and fun. And yes, I said the word fun in our industry. One of the things that Dan Egan from Betterment talked about yesterday was exactly that. about yesterday was exactly that. When, excuse me, Patrick O'Shaughnessy first was talking about when the client is involved in the process of putting together a portfolio. And this is more on the investment side, but I think it's true on the planning side as well. When the client's fully participating, not just listening to you explain, they have more buy-in and they're less apt to walk away from a plan or a portfolio. Yeah, This has been proven in medical profession and the legal profession. If any of you have been with anyone who has cancer and goes to a doctor, what you will find is they don't tell you what you need to do.

The same with the legal profession. You're not going to go to a lawyer and he's going to tell you we're going to win. He's going to tell you all the things that could go wrong. Why? win, he's going to tell you all the things that could go wrong. Why? In both professions, they've found that empowering the consumer on their ultimate decision has higher efficacy. If you're not using your expertise to solve the problem, but empower them to make better decisions, you will become more valuable, and they will appreciate it more. The challenge is we, it's not you younger folks here, and it's a pretty young young audience when I grew into the business I was told I was paid

to have the answers and it's very hard for an established advisor to understand your clients aren't with you because you're so smart and have all the answers it's that you can help them find the right one so what I want to change gears one of the one of the biggest topics in our industry recently is the pricing of advice and whether or not the planning and the investment side will continue to be bundled together and whether or not certain clients are better served with a monthly retainer or an hourly rate. I would just love for you to, in as broad or as specific as you want, weigh in on this conversation. This is a subject I'm actually writing about right now.

because you want to weigh in on this. This is a subject I'm actually writing about right now. And I don't think it's escapable, unfortunately, where I think we're headed, which is planning is going to be a subscription fee fixed price model. And why do I think that investment implementation won't be? Because there's so much inertia on the other side to keep it the way it is. It's kind of like gun control or health insurance. There are a thousand different ways that a

thousand different people might do it differently, but there's such an entrenched power to keep it how it is that it's unlikely to change. On the investing side. On the investing side. Right. However, on the planning side, there's no one making money on the planning side of it. We are, each individually, and we have very round heels. And by meanwhile round heels, when we get pushed, we fall backwards. The reality is we're all going to price ourselves into fee-based, into a solid subscription pricing model.

And I fear that that number's going to go down to something like $1,500. If that's true... A day though, right? A client. Now, what does that mean? It means you're going to have to have much more refined client segmentation. It means that you're going to have to do something more for somebody you're charging $15,000

than somebody you're charging $15,000 than somebody you're charging $1,500. Advisors are very bad at client segmentation work. Second, it also means that you're going to have to think about how I deliver these services at scale in a repeatable way and still have margin. But here's the toughest part, that we are still going to see constant pressure on just the investment side of the house. You had

Betterment here, they charge 25 base points. You can't charge 1% extra if the client's getting a plan for $2,000. What in the world are you charging, if they have a million dollars, an extra $8,000 for when the underlying investment implementation costs $2,500? What are you doing that's any different than anyone else? And the best gauge of whether what you're doing is engaging is how many new clients are you bringing in that are not referrals from existing clients? Even with referrals, you probably have seen it getting harder because people trust Google more than they trust their own friends.

That's the truth. You have to have something that sticks out, that is profitable, that you can scale and that is predictable and repeatable. You have to be a Starbucks of wealth management. If you were starting your career, if you were in one of the seats out here and were within the first five or 10 years of beginning, what would you be building now? Would it look like what you've already built or would it be something very radically different given your take on where pricing is going? I would do two things differently today.

Number one, acquisitions couldn't be a function today. The pricing is so out of this world that it's going to be almost impossible for anyone today coming into the market to make the math work. I've seen things trafficking at 12 times for a business that has adjusted EBITDA of 8 million, and it's not even real because the real EBITDA is 4 or 5, and that's going at 120 million. Is this just an extension of the interest rate picture for everyone?

There's so much leverage. the interest rate picture for everyone? There's so much leverage. European banks are offering six and seven times leverage with no covenant light. Like, there's so much money flowing around. Ultimately, that always ends badly. It doesn't ever end well. The problem is it's debt,

and it might look cheap until you have to pay it off. And the business that you're investing in is variable. The person selling might wake up with a bad hair day. The economy, the stock market could just take a 20% dive and all of a sudden, all the free cash flow is gone. If you don't know how to get clients, then acquisitions look cheap, but they're never cheap. I promise you that.

So, you know, we did 100 acquisitions at United Capital. We did dozens of them at Centurion, my prior firm, that now is called AssetMark. And the reality is that you have to know what you're doing, and you better know how you're going to get a return on equity up front. And if you haven't institutionalized the relationships, it's very hard to make the math work. And I'm not looking to talk you out of it.

I'm just saying there's a time to be a buyer and a time to be a seller and so you might consider which side of that equation you want to be on so I want to talk about leadership in general and Cheryl did a really great presentation on being a great leader obviously this audience is filled with people who have started companies or our executives with with with businesses and and everyone wants to be a leader in some respect. So reflecting on your journey of building and selling firms, hiring people, growing from zero to billions, what would you tell your 30-year-old self, and I think that's

very apropos, again, for this audience, just general things about leadership that you've learned? Well, first and foremost, I'll talk about the four pillars that have worked for me, but first and foremost is be patient. I found most of the mistakes I've made in my life are due to a lack of patience, and that is true whether it's working with employees, working with my kids. In any aspect, it's usually entrepreneurs are driven by raging insecurity and impatience. Both of them need to be understood because you're not going to get rid of those insecurities,

but you better know how they're going to hurt you. So the two big lessons I would give anyone is, first, learn patience. And number two, know your weaknesses. And your weaknesses are not things you're going to be proud of, so're going to want to run from them the thing that wakes you up at 3 in the morning or the thing that gets you angry about someone else ask yourself why does this piss me off so much and you're not going to like the answer after you've asked yourself three times because you're going to lie to yourself the first time because they did this of this then it's because this and

this usually Twitter related and then ultimately you'll get to the truth oh my god i don't like how i feel about what this says it's got a ring of truth to it and this is that first piece of truth so those are two big things patience and know your weaknesses there are four pillars for me that have worked really well as any ceo any leader in any capacity i think that they ring pillars for me that have worked really well. As any CEO, any leader, in any capacity, I think that they ring true for me at least. Fortunately, they spell the word cash, so it's easy to remember. Cash. First is clarity. People need to know that you have moral clarity, that you have clarity about where you're going, that you openly share everything, weaknesses and strengths. We tend to be very opaque as leaders. When you have chaos is when

you have a lack of clarity. Explaining to people, this is why I'm making this tough decision. Having people trust that you're not doing it for self-serving reasons. There is a reason. I am guilty of not spending enough time explaining why. But clarity is what gets people to fight really hard for you and to bring value to the enterprise and to bring clients to you. So clarity is job one. Number two is adaptability. Both businesses started completely differently than they ended. I had no idea that we were going to sell to Goldman. It is, you have to be willing to change with the times. Still have a goal, still be clear about where you're going,

but understand, well, that didn't work in the way I thought. We need to change. So third is sustainability I don't mean that in the eco in the environmental sense I mean that to be a leader deal with a stress and anxiety you have to learn about balance and it means that you're able to be persistent but flexible I do yoga and I also swim a mile three times a week and I also play beach volleyball, and I know that I've got to do the yoga to be healthy, but I need to do the swimming to be

strong. All of it is this yin and yang of strength and flexibility. You need to practice both. If you're going to work hard, you've got to play hard. If you're going to be a really hard worker, you've got to pour a lot of love into your personal life as well. I know that's not the kind of thing you expect an entrepreneur to say. I can tell you that none of it matters at the end of the day. So the fourth and most important is humility. I ask myself this question all the time, what if I'm wrong? The fact that I'm willing to be wrong is what allows for really

brilliant people to work with me because I am an incredibly opinionated ass at times but they all know that if I'm wrong they can come and challenge me at any time and say Joe this is why you're wrong. And I'll say, you're right. I apologize. It costs me nothing. It attracts the most brilliant people to do the most brilliant work if you just add an element of humility. I know that's not very popular in this day and age, but I didn't have the good fortune of having anything. I had 200 bucks and I kissed the ground every day I wake up and get to do what I love take care of yourself and be kind so many entrepreneurs think that you get successful by being an asshole and having all the answers and I've not found that to be true in my life I've

not found it to be true of any entrepreneur that I admire. They tend to be incredibly human first. They don't lose sight of why they work.