EP 30 – Transcript

[00:00:11] Luke Sonnen: Hi, I’m Luke Sonnen. Welcome to The COO Roundtable, powered by PFI Advisors. Here’s your host, Matt Sonnen.

[00:00:24] Matt Sonnen: Welcome back everyone to Episode 30. Today we have two amazing guests. These are two people I’ve known for many years and I’m excited to sit down with them and discuss some of the initiatives that they’re working on at their firms. Michael Paley is the Chief Operating Officer at Klingman & Associates in New York City. I’ve known Michael back when we both worked at Focus Financial together. He just celebrated his seven-year anniversary at Klingman. Congratulations on that milestone and welcome to the podcast, Michael.

[00:00:51] Michael Paley: Thanks, Matt. Great to be with you as always.

[00:00:53] Matt Sonnen: Great. Joining Michael is Kevin Hrdlicka, the COO of Savant Wealth Management in Rockford, Illinois. Kevin just celebrated his 13th year with Savant. I worked with Kevin on one of the very first– it might have been the very first project that we did as PFI Advisors – over five years ago. I’ve known Kevin for quite a while. Welcome to The COO Roundtable, Kevin.

[00:01:13] Kevin Hrdlicka: Thanks, Matt. Happy to be here.

[00:01:14] Matt Sonnen: Great. Well, Kevin, I’m going to start with you. Most, if not all of our listeners have definitely heard of Savant, but why don’t you give us a little bit of the background of the firm?

[00:01:22] Kevin Hrdlicka: Sure, yes. Savant actually started in the mid-’80s, as a financial planning only firm, and what ended happening was you do these financial plans for people, and people kept coming back saying, “Can you implement it for me?” After a number of years, it became its current iteration in 1993, where it was investment management, a pure registered investment advisor.

Flash forward to today, and we’re just under $11 billion in assets under management. We have 18 offices and typical client size and it really can vary a lot in the early days, it was a smaller average client. We say, we can take on clients ranging from a few $100,000 in assets to above $10 million, but really, our sweet spot is in that $1 to $5 million.

Historically, it was all organic growth. What you mentioned earlier, you’ve helped us build some of our inorganic growth plans. We’ve been a little bit on the inorganic side, but traditionally, it’s been all organic growth. We hope to continue that going forward. Our long-term vision is to grow 10x in 10 years, so really be a $100 billion firm here by the end of the decade. That’s a little bit about Savant.

[00:02:31] Matt Sonnen: It’s just amazing, our industry. I mean I haven’t been in the RIA space for too too long, but $100 billion, come on, that’s absolute insanity. [chuckles] It’s really not anymore. RIAs are doing it. And a lot of RIAs are on that path. That’s fantastic. Michael, why don’t you tell us a little bit about Klingman & Associates?

[00:02:49] Michael: Sure. Happy to do so. Kevin, good to chat with you and hear more about what Savant’s doing. Klingman & Associates in different forms and incarnations has been around since Gerard Klingman graduated college. Gerard is our founder 38 years ago. We were formally founded as an RIA in 2006. Today, according to our latest ADB, we advise on $2.7 billion in client assets for about 375 core families and are closing in on the $3 billion mark.

Couldn’t help noticing that Kevin has 18 offices. We are about to add our 18th person, so I guess we have as many employees as Savant has offices. Then similarly, Kevin, your client, your sweet spots, the $1 – $5 million, our sweet spot client is really the $5 to $15 million in investable assets. We do work with a number of centimillionaires, but our sweet spots been the $5 to $50 in investable assets.

In that category, there are several niches I guess you would say where we have a pretty high, not concentration, but a large number of clients, including corporate and financial executives, business owners, attorneys, and professional athletes. I’d say the unifying characteristics of our clients is that they are all busy or have been busy at some point in their lives and have amassed a significant amount of wealth to really warrant the comprehensive approach that we take to wealth management.

In terms of how we’ve gotten from Gerry founding his practice in 1983, to almost $3 billion today, our growth has come really exclusively organically. Not surprisingly, given the industry, the vast, vast majority of what we’ve done has been through referrals, largely clients, and through our own personal networks.

When we look towards the future, I suspect, again, the vast, vast majority of our growth will continue to come through referral networks. We’ve been fortunate to be on a number of the industry’s lists. We are seeing an increase in the number of incoming inquiries and we’re going to continue to think about how can we be more proactive in driving that organic growth? How can we engage with our clients and our personal networks, whether it’s through content, through events, through other initiatives, such as that?

Despite my background, and Matt, you and I worked for quite a while together at Focus, we have not pursued the inorganic growth, the acquisition fueled growth. Certainly, it’s something I’ve got the background and we could do, we’ve just had enough opportunity organically to grow the business. It’s certainly something we might pursue in the future. I don’t think it’ll be the driving force of our strategy for some time, so it’ll be interesting to see how that evolves.

[00:05:02] Matt: We talked about your time at Focus, you’re one of the early employees there. I know even before Focus, you did some cool things. Walk us through your career path and how you wound up as the COO at Klingman.

[00:05:13] Michael: Career path. If you look at my career, it follows a nice linear path. I guess I wish I could tell you that it’s been some master plan. Really, I figured out as I went along, and things just naturally built on each other. I’ll skip through the early days where I was a strategy consultant right out of college, and then worked at internal consulting effectively for Pepsi. After getting an MBA, I had the opportunity to join a private equity firm just outside New York City.

That was really my first introduction into the “deal world” and really got a lot of my foundational knowledge, had a great experience there. I learned a lot about not just the mechanics of inorganic growth and acquisitions, but a lot of the soft stuff behind it. What’s going on in the minds of an entrepreneur? How do you navigate the process? I was fortunate, as you mentioned, in the very early days of Focus to get recruited. I was the then fourth employee of the firm to really co-head business development.

I was there almost eight years, had a really wonderful experience together with you for a good bit of it, driving a large part of the growth of the business. Through that, when I first spoke to Rudy and the team at Focus, I honestly had never heard of the RIA industry. Then obviously, quickly learned about it through the work there and just became amazed at just this under-the-radar screen industry, and what RIAs got to do for their clients, and how the industry was growing and stealing market share. I think it played a big role in Focus’s success.

While I was successful there, I guess you could say I ended up at Klingman, because I was unsuccessful in my role at Focus, at least as it relates to Gerry and the team at Klingman. Candidly I tried to bring them into the Focus partnership for seven years. Gerry and I would have the same conversation every six months and say, “Hey, Gerry, you built a great business, but it’s not built to last for 20, 30 years beyond you. You need our help, come join Focus.”

He’d said, “That’s great. I certainly could use your help, but I don’t want to sell.” Then after having that conversation, probably 10, 12 times over a seven-year period, he said, “No, really, I decided, I’ve come to the conclusion, I do want to build this business beyond really what we have and make it sustainable. I want your help. I’m not going to sell. Why don’t you come, help me run the business?” That’s how I found my way to Klingman.

[00:07:21] Matt Sonnen: That’s perfect. It’s funny to talk about the career path and how it wasn’t by design. This is why this is always my favorite question on the podcast, hearing everybody’s stories. A couple of weeks ago, I did a mock interview for a UCLA master’s program. This woman that I was interviewing, she was, as you would expect in an interview, she was kissing my butt a little bit.

She was talking about, “Wow your career has been so great, and you’re such a genius for thinking through all of this stuff.” I had to tell her, as an undergrad at UCLA, the whole reason I got into this industry in the first place— there was a sandwich shop that I liked in Westwood that I would go to probably three times a week. They always had CNBC on. This was in the ’90s. The ticker interested me. I had no idea what all those numbers mean. It’s all fractions.

I didn’t know what any of that meant, an eighth, a sixteenth were scrolling by. I thought “I think I’ll get into that industry.” [chuckles] That was the grand plan. She fell out of her chair. I said that’s how, you fast forward 20 something years later, here I am. I love the career path that everybody has. Kevin, you have not job hopped. You joined Savant right out of school and have held a number of positions on your way up. You’ve positioned hopped up the ladder to the COO position. Tell us about your career progression to where you are today.

[00:08:38] Kevin Hrdlicka: It’s funny that you mentioned, Matt, CNBC. As a kid, I always was interested in the stock market. Growing up in one of my math classes, we did a stock market challenge, and it was actually in 1998 when you had all the volatility there. Made a ton of fake money, thought “This is the coolest thing ever.” That was new. I wanted to be somehow in the investment-related industry and then in college as you starting to learn more, what’s a broker, what’s a fiduciary, it was pretty clear to me I wanted to do something in the fiduciary side.

I was looking for an internship and found Savant was pretty close to where I grew up. Fortunate enough, I actually started as an intern on my 21st birthday. Pretty exciting 21st there. The company has always had a strong internship program. Four of the five people that I interned with are still with the firm today. Back then we were just approaching a billion-dollars, so it’s pretty strong, kind of hire people who have been there as interns or prior experience and promote from within.

I started out in an operations role bringing in the downloads into our portfolio management system and worked to get my CFA, CFP and just slowly took on more. I moved over to the investment research side, and I had the opportunity to be a first-time manager, which is such a great transition. You learn so much stepping in there, and then they just kept throwing more at me. Managing more and more departments over time.

I know that the COO role can cover a lot of different things, but at Savant, the way that we view it is obviously investment operations and trading and research, but we also include compliance as part of that and then inorganic growth, due diligence, integration, and onboarding. Then, in recent years, we’ve done a big push on our business intelligence initiatives and then incorporated strategic planning.

It’s really firm-wide operations. Our CEO Brent Brodeski, he’s often said “You got to constantly hire and fire yourself over the roles as your career evolves, as the company evolves”, and I think that’s true of all of us. We just need to keep learning and evolving and that’s what I’ve tried to do here in my career.

[00:10:59] Matt Sonnen: That’s great. Michael told the story of talking to Gerry Klingman, and him saying, “I need you to come here and help me run the firm.” Our listeners have heard me say many times over two-plus years of this podcast that the COO really acts as an internal business consultant. They sit at the right hand of the CEO, and they really focus on freeing up the advisors to go do what they do best, which is focusing their time and energy on client service and business development, and not getting caught up in the day-to-day minutia of running a business.

We started this podcast because I kept hearing from RIA owners who believed that the COO was merely the “tech guy,” or the “tech girl”, but as we’ve discussed so often here, the role encompasses so much more than that. Many RIA owners will say, “I can’t afford a COO because they aren’t a revenue-producing role at my firm,” but I think you both are perfect to combat that type of thinking. Kevin, I’m going to go to you first, how in your role as COO do you think you’re supporting Savant’s growth?

[00:11:56] Kevin Hrdlicka: Yes, I think one of the big changes as you grow is this idea of specialization. When you’re a small firm, you’re doing everything, right? You have no choice, and as you grow, you put yourself in each employee and do what they do best every day. To me, operations always has directly supported growth. First off based on specialization and know the example that I always like to give is just investments. This industry grew up managing money, so a lot of the founders and the next-gen, they were investment managers first and foremost.

It’s still mind-boggling when you go to industry conferences and talk to people, how many successful financial advisors are still heavily involved in day-to-day trading decisions. The last thing that I would want, someone who is really good at bringing in business or managing client relationships, figuring out how to allocate a $25,000 deposit. Really by specialization, we push the work to the appropriate people which naturally creates efficiencies and allows our advisors to have time with their clients and find new ones.

I mentioned, one of our big pushes the last couple of years is on data and business intelligence. Right there, we work directly with advisory leadership to really help measure and track activities that drive success. Whether that’s ensuring we know where clients are coming from, whether that’s in a certain location, or what’s working and what’s not? How are we getting business, or could be revamping a process? For example, we really want our advisors tracking their sales progress.

Having a robust pipeline, making sure they’re updating it. We’ll take a look the operations team, how can we make that as easy as possible so it takes as little time so we have access to the data. One of the powerful pieces of data we’ve looked at the history of Savant is if an advisor meets with a client at least once a year, does a planning case so that we can document it in the CRM, and we do their taxes, annual client retention is 99.8%. Which I mean that’s the thing that’s hard to argue with and it gets away from that anecdotal.

I mean, who’s going to argue, yes, we need to do planning for all our clients. The more hooks we have in a client, the more sticky they are, right? The other one that’s a little bit different is inorganic growth. You mentioned that you think of operations or the stereotype is operations are a cost center, but in the M&A world, it’s really the advisory team supporting the operations team. What Savant does for inorganic growth is we actually do a full integration. We act as one single operating company.

It’s really all of the operations teams and IT that brings everybody together. Historically, that’s actually supported the overall organic growth because we’ve had the firms that we bring on grow a lot faster than the rest of the firm. And I think it’s again, because of that cycle of the other firm, they’re not wearing as many hats. They now have additional capabilities that they can use and they have a succession plan in place. All of those are just a few examples that come to mind for me.

[00:15:04] Matt Sonnen: I love the “what’s working and what’s not working, and how you’re tracking that and able to articulate it to the firm so that everybody can focus on the right areas.” That’s great. Michael, in your day-to-day responsibilities as the COO, how are you driving growth at Klingman & Associates?

[00:15:20] Michael Paley: Let me start by addressing the point that you asked, the prelude to your question to Kevin and I, which is the trend in the industry or the founding principle or principles say “I can’t afford this role.” Certainly, that’s something you and I saw a lot of in our days at Focus when we were traveling the country talking to potential partners, and I think it’s still out there quite a bit and they characterize a lot of the historical thinking.

Then as firms started hiring COO, I still think the initial trend was to hire someone more administrative than someone who could really drive the business. While that seems to be changing, I think there’s more room as an industry we can do. In that regard whether it’s a COO or otherwise, one of the key piece of advice that Gerry and Iwill give people who reach out to us for advice about growing their business or their practice is to try to think five years ahead of the perceived need.

When we did a couple of press interviews when Gerry hired me and one of the things he articulated was the role when he hired me was too small for me then, but it was going to be the right role for me five years from now. I was very fortunate that he had that mindset of hiring ahead of what you actually need because if you’re doing the right things and you’re growth-oriented, you’ll grow into that role. I think that’s a real opportunity for us as an industry.

In terms of my responsibilities, I think you really hit the nail on the head that the COO role is a great point of leverage. There’s really two dimensions I think that a good COO can be a point of leverage. The first is on the day-to-day managing the firm, and then the second is managing and driving for the future. A good bit about what Kevin talked about. In terms of the day-to-day, candidly before I was there, I would say Gerry is the founder and the chief bottleneck.

He’d go on vacation and never really worried about clients being served because our team was so oriented around client service and the client experience, but he’s often said, if he’d be away on vacation he’d be still be working, but the business wouldn’t move forward. Now, today, with me in that role on a day-to-day basis I’m responsible for basically all the non-investing and direct client engagement stuff.

Thinking about, in many ways, what is the client experience? I view myself as the keeper of the client experience, whether it’s in human capital, technology, operations, compliance, all of that stuff that is involved in making sure the trains run on the track, that the tracks are being realigned for the future is under my purview. That’s really how I support the growth of the business if you will on a day-to-day basis.

Beyond that, I personally am deeply involved in driving the growth or helping to drive the growth of our business and involved in much of our business development activity. I’ve been fortunate to bring in a number of clients from my personal network for most of our new prospective clients on the first point of contacts, having a screening interview to determine what the right fit within our advisor set is. Then for many of our larger clients, I’m engaged in our discovery and proposal meeting. For me, it’s been a great running and managing the business, helping see the future and helping drive towards the future.

[00:18:12] Matt Sonnen: I love the “keeper of the client experience”. I’m imagining like a superman ripping the suit open and it’s “The COO, Keeper of the Client Experience.” I love that.

[00:18:26] Michael Paley: As Kevin will tell you, certainly we’re not Superman, the real keepers of the client experience are our teams. We’re just making sure they have the right tools, guidance, and structure to do the things they do which is really deliver the client experience.

[00:18:41] Matt Sonnen: Yes, exactly. I love it. You led into the next question perfectly. Talk about the team. Let’s talk about employees and employee development. I’ll go to Michael, first. What are you doing to drive employee productivity and growth?

[00:18:55] Michael Paley: Two very different parts of that question. There’s the “how do you improve the productivity of the team?” and then “how do you develop the team?” Maybe let me start with the productivity side. From that perspective, I think there are two key components. One is, and I’m sure Kevin’s done a tremendous amount in this regard, is “institutionalizing the client experience.”

I never liked the word institutional especially in a small boutique firm like ourselves, but that’s really what a good firm can and should do. What that means to me is having a client experience so that it can be delivered consistently over time to all your clients regardless of how big you are, and regardless of who’s delivering it. You could have someone who’s been at the firm 25 years in a client relationship associate role delivering that, or you can have someone who’s been in the client relationship associate for 25 days delivering that.

You could do it for a client that’s been a client for 20 years, or for a client that’s been 20 months. Those are the kind of things that as you grow and as you have more clients and you’re adding more team becomes hard, and it’s really important to institutionalize it to really build that client experience into your technology, your workflows, your operations. The second thing we’ve done from a productivity perspective is dramatically improve how we leverage technology. Technology is a great thing, not because it’s cool and sexy, but because ultimately it frees up our team time to focus on the things that really impact clients. There’s obviously been a lot written over the last decade or so about the impact of robo-advisors and other technology-based solutions.

I remember I think Joe Duran was the first person I heard articulate it. His view of the future of industry is very much resonant with Gerry, I believe, which is the best advisory firms are going to be so-called “bionic advisors”. The premise in which we’re building our firm which is how do we use technology, not to replace people, but to support people so that people can do the things that really matter and impact our clients? How are we doing these? I think we’re doing the things that you’d expect a successful growing RIA to do.

We’ve made a significant investment in technology, we’re building out in our mind what the key business workflows are. I think we may be a little bit different. In my Focus days, I remember one firm had 542 workflows built into its CRM. We’re certainly not that extreme. We’ve really tried to focus on what are the 10 or 15 core workflows that make up the vast majority of what they do, and then really empower our team around that to deliver things beyond that.

Then, the last part from a productivity perspective is training and retraining the team. That really segues into let’s say the team development component. This could be not only another podcast but probably a whole series of podcasts that is so essential to our business. As we think about it, a couple of years ago, we actually revisited our mission or our “why”.

Our mission is “We have a passion to help our clients, their families and our associates achieve their life’s goals and dreams.” It was a couple of years ago that we made sure to add our associates explicitly to our “why.” It’s a very key part of what we do. When we recruit people, we’re telling them, our objective is to help them be the best versions of themselves. I look at my role and Gerry’s role as creating an environment where motivated people can flourish.

What have we done? What do we do to help them grow and develop? I think first you have to have a pretty solid human capital model. When I joined, we built out our human capital model. We create a job scorecard. We don’t call it a job description, we call the job scorecard, for every role. Twice a year I sit down with every member of the team and have a coaching discussion. Again, coaching against the job scorecard. Scorecard says, “What does success look like for your role?”

I sit down and say formally twice a year, how are you doing against those objectives? And then we very directly tie compensation towards the scorecard which is aligned towards the coaching which is aligned towards the scorecard. That human capital model has created tremendous transparency, not just on compensation, but on what people are doing well and need to develop to be successful in their roles.

We’re fortunate in our size as we then can have also very informal coaching discussions. I have a very open-door policy, open Zoom, or Microsoft Teams model. The last 15 months, my team is constantly calling me asking me for advice and asking all of our team members. There are other things we do as a firm.

Firm-wide, we have financial planning committee that meets once a month to share best practices, case studies that they’ve worked on so we can make sure as we continue to grow so if Sam is working on something, he’s sharing that with Michelle, and we can apply best practices both to new and existing clients.

We obviously have formalized investment committees, typically two or three times a month, and we’re very diligent about meeting together as a team, sharing key learnings, key observations, cool things we’ve done for clients recently to make sure that everybody knows. “Cynthia did this. Gloria, maybe you should think about that and another client’s situation.”

Then, the last thing I do is I have formalized, in addition to the twice a year with a number of our team members I’m meeting on a weekly or bi-weekly basis to have very specific coaching sessions. Whether it be on technology, operations, investments, or on business development.

[00:23:47] Matt Sonnen: In the employee productivity part of your answer, I loved everything you said, you could have written the article for us. Not too long ago, we wrote an article “RIAs That Excel at Technology Do Not Look Like Tech Firms” and I’ve been waving this flag very strongly lately. I feel that a lot of RIAs are misguided. They say, “We want to be the Amazon of wealth management.” No, you don’t. [chuckles] I think too many RIAs are putting technology between the advisor and the client.

Everything you said was perfect. You want to use technology in the background to deliver a human experience. You mentioned Joe Duran talked about this years ago. I loved everything you said there, that was great.

[00:24:24] Michael Paley: Two of our last three new clients came from Betterman. Largely because they’ve outgrown them, they need more sophistication so that human overlay, that human-delivered advice, that human-delivered psychology or psychologist, is so core to what any of our firms do is critical.

[00:24:42] Matt Sonnen: Yes. I love it. Kevin, we all say that we’re only as strong as our employees. What are you working on at Savant to make employees as successful as possible?

[00:24:52] Kevin Hrdlicka: Yes. First off, Michael, that was a great answer on the productivity. I took notes on some of that stuff. [laughs] I think it’s in some ways, it’s really instead of being a top-down, especially as you add people, it’s natural to want to be there, you really need to encourage the bottoms-up communication and ideas.

Like Michael mentioned, we have a lot of internal committees, they’re ad hoc, there’s no “you must do this”, but we’re going to have a group get together on such and such. We call our mix of technology process and people the “ideal futures platform.” We have a cross-functional group of staff that get together and similar to Michael’s, share best practices, what’s working, and really get that throughout the firm.

One of the pieces of feedback we’ve gotten over the years was, “Stop doing the annual performance review.” That was one that I think we all have hated overtime where once a year you get your feedback. A couple of years ago, we went to quarterly performance check-ins and that’s really helped us as a firm because you get that real-time feedback. It’s quick, timely, and it’s more meaningful because it’s really more of what you’re working on here and now.

The other piece that that naturally lends itself to is, “Where do I want to go in the next 3 months, 12 months, 3 years?” We’ve actually had a lot of staff just transition across the firm, whether that’s becoming an advisor, or going into client service, or going into investments. I think just having that constant feedback loop has really helped the employees be successful. Growing allows you to do that. If you aren’t growing, there’s not going to be opportunities to put people in new spots as they’ve mastered certain skills and are ready for new challenges.

We always try to take that growth culture and then constantly talk to our staff. Another initiative that we did a couple of years ago was we adopted the OKR framework, that’s Objectives and Key Results. What I really liked about that is it helps when you’ve got 18 offices, you’ve got people doing all sorts of different things really focused on singular objectives, what do you want to do, and then, actually measurable key results.

We have always, at least in school, you’re taught to do smart goals – which are great. However, the key results are, you may change your tactics with your smart goals to get to the objective that you want. So it makes you a little bit more nimble. Then, when you’ve got people doing a lot of activities, we found that it really helps get everyone rowing in the same direction.

Those are a couple of things, and Michael, you touched on a lot of what I had as well, but similar approaches. You need to have a financial planning committee, you need to have an investment committee, we have an encouragement and recognition team, which has been particularly important, I think, in the COVID world where we’re still finding ways to get people together, even if it’s more remote than in the past. Just ways for people to bring their best ideas forward and then celebrate and encourage them.

[00:27:53] Matt Sonnen: That’s great. I had a conversation this morning with somebody talking about career paths. I think the RIA industry is doing a great job of evolving and offering career paths within their firms, but I think as an industry, we have a long way to go there. I love you’re really thinking through and making sure people have growth opportunities. You are a perfect example with how’ve you moved up at the firm. That’s fantastic. Let’s talk organizational structure.

I mentioned it earlier, one of the primary roles of the COO is to free up advisors and get the administrative tasks off their plate so that they can best serve their clients. Michael, what have you done at your firm to support the advisors and allow them to be as productive as possible? We’ve talked about employee productivity, now let’s talk about advisor productivity.

[00:28:36] Michael Paley: Yes. I think we’ve touched on a good bit of it, so I don’t want to restate a lot. I think there are a few things from an organizational perspective. One is, I don’t want to call it the administrative, but taking the day-to-day management responsibilities off the advisors plate. I play a key role in that for sure. I think it’s also important to highlight what we’ve done from an organizational perspective is empower our client service and operations team to play a key role in that.

We look at our client relationship associates and our operations team, not as our first line of defense, but our first line of offense. We don’t have a receptionist. When the phones ring, one of our client relations associates answers the phone and are armed as best as possible to address the client’s questions. They build really deep meaningful relationships with our clients and our clients then know they can call Cynthia, or Gloria, or Porscha or Jordan for this, and they don’t need to call the advisor.

In fact, I think it’s pretty fascinating. The most feedback we got when we sent out our semiannual client letter was we talked about two of our long-term client relations associates celebrating their 20 year anniversary with us. Our client feedback was extraordinary because they built such meaningful relationships. I think that’s a key part. Then, obviously, looking at, before I was here, Gerry managed technology and compliance and all of this, and he doesn’t have to do that anymore.

The second thing is, and this goes back to something Kevin, I talked about earlier, is how do you leverage technology? I think, Matt, certainly when you and I were traveling the country talking to firms in the Focus days, advisors would have spent a lot of time thinking about things they need to think about in the future. Whereas we’ve really leveraged technology in recent years and set up our technology in a very prudent way so that it’s reminding our advisors when they need to do things.

We have a series of dashboards that tells our investment team when they need to rebalance, they tell advisors when we haven’t met with a client in the four months or six months, depending on what their meeting frequency should be. All these things that are reminding people, so they don’t have to go look at a list to think about what they need to think about to then go do.

I think we underestimate the impact of that entropy if you will, of brains and productivity. Then the third thing, which is probably the most impactful really, from advisors through that technology, and through changes to our organization, we’ve centralized most of our trading so as Kevin mentioned this, what he called the specialization.

Yes, I would say seven years ago, our advisors were spending 30% of their time on actually determining what trades to make and making the trades. Now, if it’s 5% of their time, that’s a lot so we’re not all the way down the spectrum to where I think Kevin and the team at Savant is but we’ve dramatically changed our team. If you just think about that, if an advisor now is 25% to 30% of their time back, their capacity increases pretty dramatically.

[00:31:19] Matt Sonnen: Absolutely, yes. Kevin with Savant, we talked about 11 billion in assets, 18 offices, it must feel like steering an ocean liner sometimes. [laughs] From an organizational structure point of view, how have you built out the back office in a way that allows advisors to remain in that relationship manager role, and not in that administrative role?

[00:31:39] Kevin Hrdlicka: More broadly speaking, we’ve really borrowed a lot from the Mayo Clinic model, and for people who maybe aren’t familiar, if you think of traditional medicine, you go see your primary care doctor, and they’ll take a look, and then they may refer you to a specialist who has their own view, and so on. But really, with the Mayo Clinic model, you’ve got all the experts in the same room working together. The way that we think about the RIA world has got the advisor at the center, and then the specialist and the various support departments help serve the client.

Again the advisor is not the expert on the nuances of an investment portfolio, if there’s some weird investment they can call our investment research team, and they will help them. They’ll jump on a call or get in a meeting with a client if they need to. Let’s say you have a client that’s looking to sell their business, even though we’ve got very smart people, tax laws and strategies are extremely complex so in that case, we’ll bring in someone from our wealth strategy team to help talk them through the best options for them.

Similar to Michael, our client service team is really the unsung heroes of the firm, and they’re the front line of defense for a lot of phone calls, and they can handle a lot of it, so advisors don’t have to be bogged down in certain things. Then with our workflows, our technology, and our CRM, the client service team drives a lot of that. And it allows the adviser just as much time as possible, again, just to hop on it, to find new clients, because it’s really hard to develop new business, and then maintain relationships, because nothing’s worse than wanting to get a client, but you want to keep them for a long time.

We feel that the more focused they are on those things, and relationship management and have everybody else doing their part and doing it at a very high level that really gets the most out of them to be as productive as possible.

[00:33:31] Matt Sonnen: With your size, there’s a lot of challenges there, what kind of KPIs do you rely on to monitor the health of the organization?

[00:33:39] Kevin Hrdlicka: Yes, so I think the big one is what we would call “net new assets”, which we then have been working to convert to “net new revenue.” If you think about what as net new assets, it’s really inflows from new clients and inflows from existing clients, then you’ve got consumption, so clients who are going to stay with you for a long time, but they’re going to spend money, they’re going to buy a house, go on vacation. Then you’ve got lost clients, which hurt the most, because it’s really hard to get a client, you want to keep them for a long time.

We break each of those out and look very closely at the drivers of those. If you’re just looking at inflows only, if you think of inflows from existing clients to an extent that that just happens, if you provide great service, they’re going to continue to do business with you. We expect high service and we’ve seen nothing to change that so we generally get a lot of wallet share from existing clients.

The other one , as far as new clients, we look at initial consultations. So new meetings that we have, and we can see it in the data with COVID, our initial consultations plummeted as everything went remote and it reflects in that in new assets and then conversely, as things have been opening up this year, our initial consultations per advisor are the highest they’ve ever been. That’s a very forward-looking indicator.

Another one that we’ve put a lot on is the net promoter score, so it’s something that we actually will send out after a client meeting. Net promoter score is a 1 to 10 “how likely are you to recommend Savant” or whatever it is Costco or Amazon. It really reflects if clients are raving fans. Are they okay, or not so much? Again, as I mentioned earlier, it’s just meeting with clients and providing a great experience.

Our net promoter score it’s in the 90 plus percentile, which is, I haven’t found any large company anywhere close to that, and so we look at that across advisors, across offices, and if anything is slipping, were going to dig into that right away. One more than I think that we’ve pushed on as we’ve expanded our capabilities as a firm is what is our average new client size? Historically in the early days, we had a lot of sub-million dollar clients, we’ve added a lot of capabilities over the years and so as a result, we want to see new clients AUM and revenue pick up over time.

That’s one that we track closely because it’s one thing to add all the capabilities, but if you get the same clients, you always got, it may not be having the effect that you want. Those are just a handful that we’re constantly looking at and talking about as a management team.

[00:36:42] Matt Sonnen: Kevin, I’m curious, you mentioned you send out the Net Promoter Score after each meeting, is that an individual survey that then sort of tallies up? How are you doing that?

[00:36:52] Kevin Hrdlicka: We use, GetFeedback. We use Salesforce for CRM and so after a client meeting, it gets automatically sent out and then if they complete it, it gets sent back and tracked and logged in. Then we take that into our business intelligence software, and because it’s all in our CRM, we can look at the client, the AUM, the revenue they pay, what score they gave.

We’ve actually been starting to use that as a good referral opportunity, so if someone’s given you high marks, a Net Promoter Score, for example, they’re probably pretty happy with you. We’re trying to use that to actually encourage more client referrals. I mean that is the bulk of our business, but we think we can do more given that the clients are giving us such just high scores. We feel that’s an opportunity that we’re actually just starting to implement this year.

[00:37:47] Matt Sonnen: That’s super smart, everybody knows, “Oh, ask for referrals, ask for referrals,” but to have the data to tell you exactly who to be asking the referrals from. That’s fantastic.

[00:37:57] Kevin Hrdlicka: Yes. What it’s done is it gives some of the advisors confidence. If they scored you at 10 out of 10, they’re probably pretty happy, it’s not a big ask to say, “Hey, do you know anybody?” And you go through that process. I think it’s helped just increase confidence amongst the group to seek those out more.

[00:38:14] Matt Sonnen: Yes, Michael, what metrics do you keep an eye on to know if the firm is headed in the right direction?

[00:38:19] Michael Paley: Listening to Kevin, maybe not enough. But I think when we look at KPIs, we try to remember that at the end of the day, we have a fairly simple business. The business is people serving people. The first dimension is our clients, its the people we’re serving, and Kevin touched on a couple of the key ones. It’s really about do we have enough of the right clients and are we bringing in enough of the right clients?

The first thing that Kevin mentioned, is totally paramount. If you’re not measuring retention, you’re probably not being honest with yourself, and we, like Kevin, are very fortunate to have extremely high retention rates, and if not, it’s probably a sign of more fundamental issues with the client experience. Again, we’re fortunate with that so far so good. Then the second part, as Kevin said, is are we adding enough clients? Again, are we adding enough of the right clients? With that, where are they coming from?

We all anecdotally say they’re coming from referrals, but are you measuring that? Are you measuring what the sources are, what your conversion rates are based on the source? I think certainly as we continue to grow and evolve and try different marketing strategies, what we’re seeing is we may get more introductions with certain sources, but those yields may be a little bit different, and being aware of that so you can spend your time appropriately is going to be really important.

Kevin, I love the idea of net new revenue. We look at it at the end of the year, but there’s no reason why we can’t pretty easily look at it as net new assets which we look at on a monthly basis. Then, the last thing– Sorry?

[00:40:05] Kevin Hrdlicka: Oh, sorry to interrupt. I was going to say one of the really interesting things is that we can get bigger clients, but if you’re discounting your fees, it can tell a different story. Net new assets, it’s easier to measure, but net new revenue is the right answer if you’re charging full fees or you’re having to discount. That’s something that we’ve really pushed to get away from culturally because we’ve been in that net new assets for a number of years.

[00:40:30] Michael Paley: Not only whether you’re discounting, just the fact that I think many of us are using tiered fee schedules that $10 million clients effected billing rates different than a $3 million client. Again, I encourage everyone, like Kevin said, to look at what the net contributions from your existing clients are.

This was pretty eye opening for us when we started looking at it a number of years ago in terms of the amount of assets that flow out just in the normal course of our clients living their lives, whether it’s buying second homes or paying bills or paying taxes. Understanding that not just in a given year, but how it changes over time. I think one of the things we’re very mindful of is trying to maintain the appropriate demographic as our older clients age and are we bringing enough new clients that are net contributors to their accounts? That’s the first side, that’s the client-side.

The second side, which is do we have enough of the right people in the right seats to serve our clients and support the growing business? I think one of the challenges with KPIs is many people usually think of them just with a quantitative lens. I think when you talk about your team, it’s pretty important to think about it qualitatively as well.

For us, with 18 people in a single office, it’s going to be a little bit easier than Kevin who’s got, I don’t know how many people, but in 18 offices. Is the team engaged? How’s the morale? What’s the energy level? Particularly around those calendar-driven deadlines even though we’re not doing tax work like Savant does.

Tax season is pretty busy because clients are doing their taxes and we work very closely with them and their accountants. Same thing with end of year. End-of-year planning and tax planning is a critical part of what we do. How is our team doing in and around this? Quantitatively, we’re valuing things such as revenue per employee and per advisor, what the client load is at the advisor and employee level.

I wouldn’t say we’re looking at it on a monthly basis. We look at it periodically. We have a pretty good sense of it. Youwant to be aware of that, so when you intend to hire, intend to hire in advance of the need.

[00:42:39] Matt Sonnen: I love it. I can hear the podcast listeners scribbling. You guys both gave some fantastic answers there. Thank you. That was really good.

[00:42:46] Michael Paley: Matt, sorry. One thing I’d add is, obviously economics is a big part of it, but neither Kevin nor I mentioned it as a KPI per se, other than the net new revenue. It’s really a lagging indicator of how the business is doing. You can look at 2020 where many of us were fortunate. Very good years are measured by client retention and new client flows, but because of the way that markets move, billing was down in Q2 and it took some time to build back up.

Then also, from an economic perspective, the reality is– Again, I don’t know what it is for Savant, but for us and certainly the businesses we looked at when we were at Focus, just people cost and rent are minimum 70%. For us, it’s 80% plus of our total expenses. You’re not going to change that too much within a year. If your business is keeping clients, bringing in new clients and the markets are doing fine, economics are going to flow from that.

[00:43:43] Matt Sonnen: Super important. That’s great. Our last question, I’m going to hit on a topic that never seems to go away in the industry press, and that is fee compression. The stats that I seem to always come across peg the average AUM fee in the RIA industry at 77 basis points. I always seem to see that number, 77.

Despite all the headlines around fee compression and robo-advisors and Amazon coming into the space and a whole slew of other doomsday devices that are going to blow the whole industry up, despite all of that, that 77 basis point number has remained relatively stable for over a decade. That’s the good thing. The bad side of that, the untold story in the 77 is all of us have had to add more services to warrant our fees.

Somebody said to me the other day, ”It’s fee justification.” Kevin, I know Savant has always been looking at services outside of just the traditional asset allocation. In fact, there were recent headlines that you have partnered with a law firm to provide estate planning services. Tell us about the services that Savant has added over time.

[00:44:49] Kevin Hrdlicka: Right. Like you said it well, back in the day, if you did investment management, you could justify your fee. Then it was yellow pad financial planning, and now having retirement or software  are table stakes. We’ve all seen that service expansion to maintain the fee. Our goal is really to be a one-stop shop for all aspects of a client’s financial life, beyond just the investment management, the financial planning.

One of the things that clients had asked us to do was, “Can you help us with our taxes?” We obviously had the advisors looking at tax returns, but a number of years ago, we actually jumped into preparing taxes and filing taxes for clients. You wouldn’t think that’d be the most exciting thing, but clients love it and demand just skyrockets every single year. It makes it easy for them. That’s been huge growth there.

We actually have had estate planning attorneys for a number of years to be able to go deep on wealth transfer. A little similar story there where it’s like, “That’s great. I love this, but I still need to go somewhere else to draft the documents.” We launched an affiliated law firm this year to actually draft the client estate documents.

It’s the same thing, we’re thinking it’s going to be a slow launch and the pipeline was full instantly because you’re making it easy for people. A couple more of maybe different areas that complement our core wealth management offering is we do have a big retirement plan business, and we do own an accounting and payroll firm that does all of our income tax prep and then accounting and payroll.

We do feel that this is not going away and we’ll continue to add services and new offerings over time as it makes sense. I think there’s no way around it otherwise. You mentioned Betterment earlier. They do it really low costs, but they can’t do everything. We think, with our people, we can do a lot more leveraging technology. More to come for sure.

[00:46:51] Matt Sonnen: Michael, you and I have talked about this in the past, clients are demanding more services from their RIAs every single year. How have you guys addressed this?

[00:47:02] Michael Paley: Certainly from our Focus days where we helped our firms think through pricing, the trend in the industry is fascinating because for many years, there was virtually no correlation between where a firm was, the services it offered, the clients it was working with and what their fees look like. I think the reality is it’s still pretty much the case.

It’s changing, as you mentioned with the service expansion. In that regard, to some degree, we’re fortunate to be a little bit ahead of the curve because for forever and a day, we’ve really focused on that comprehensive approach. Different than what Kevin said, what Savant’s building is the one-stop-shop.

Historically we’ve done it through what we call a Virtual Family Office, where we coordinate really closely with the clients, existing third parties, or third parties that we introduce to draft estate documents, to do the tax return work, to do insurance, and things like that. That historically has been our approach.

We have very broad, relatively deep experience, deep knowledge. We don’t have the depth of expertise of an estate planning attorney nor of a tax preparer. As we think about that, I think we’ll need to go deeper in certain of those areas. Whether it’s hiring someone with a JD or hiring someone who has a CPA background, I think that’s likely how we’ll build that expertise within our team.

Candidly, Gerry and I sit down seemingly every year and think through whether we should take a similar approach at Savant, “Should we get directly into the tax business? Should we have attorneys on staff, not just to help architect, but to do drafting?” Historically, the answer has been no. Interestingly, we don’t send out client surveys as frequently as Savant does, but we did a couple of years ago.

One of the questions we asked was around this, did our clients want us to do tax prep? I think the answer was, some said, “Sure. I would do it if you had it.” Some said, “No, I’m not going to switch.” We took it be for them. It wasn’t a burning issue. Certainly, at the scale we’re at, again a business like Savant just has broader resources from a personnel perspective.

In my days at Focus, we had a number of firms, some excellent firms who did tax work in particular, and I’ve seen the challenges it create on organizations. Certainly, with a team of 18 people, it’s not something we’re going to do tomorrow.

[00:49:36] Matt Sonnen: I said it at the beginning of the episode here, you both are two people that I admire greatly in this industry. It was a ton of fun and a big honor to have both of you on the podcast. Michael and Kevin, thank you so much.

[00:49:49] Michael Paley: It’s been a pleasure.

[00:49:51] Kevin Hrdlicka: Thanks for having us.

[00:49:53] Matt Sonnen: Great. That is a wrap on episode 30, everyone. We will talk to you soon.