On this episode Josh speaks with John Cadigan, the National Sales Manager for Trust Advisory Group. They discuss common mistakes wealth advisors make when transitioning their business, and some of the ways the method Trust Advisory Group employs may be beneficial in that.

John has more than 30 years of sales and sales management experience in a variety of roles. He is a recognized leader in the industry, specializing in building distribution strategy and successfully building teams for financial industry start-ups.

He has more than 25 years in the financial services industry building businesses by creating and implementing a variety of strategic initiatives and leading effective sales distribution teams for both traditional, alternative investment products as well as ETF’s.



In today’s episode you will learn about:

  • The crisis facing the industry over the next 5-10 years as 30-40% of advisors are expected to age out of the business
  • The lack of younger generations joining the industry
  • Options for advisors who wish to transition their practice
  • How to value your practice


Narrator:             Welcome to “Cracking the Cash Flow Code”, where you’ll learn what it takes to create enough cash to fill the four buckets of profit. You’ll learn what it takes to have enough cash for a great lifestyle, have enough cash for when an emergency strikes, fully fund a growth program and fund your retirement program. When you do this, you’ll have a sale ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want in the way you want.

In Cracking the Cash Flow code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh:                      Hey, how are you today? This is Josh Patrick. You’re at Cracking the Cash Flow Code. Today, my guest is John Cadigan. John is the CEO of Trust Advisor Group who used to think he’s the CEO of Trust Advisor Group. I’ve been told that. I’m going to assume that’s true.

We’re going to talk about a different way of leaving your business. Now, John works with wealth advisors. That’s the industry he’s in which is an investment management, financial planning, wealth advisory. I’m also in that industry.

The reason we’re talking to John is I talked to one of his associates a couple months ago, and he happened to be hitting on one of my favorite strategies for small businesses to leave their business. It’s something we call the wind down strategy. Instead of me just yammering on which I have this really bad habit of doing, we’re going to bring John on and we’ll start the conversation.

Hey, John, how are you today?

John:                     Good morning, Josh. Great to be here.

Josh:                      It’s great to have you here. You have a kind of an interesting company. I kind of call you an aggregator which is you’re sort of a master group is working within a broker dealer in an IRA. You have a whole bunch of people that work on deals. Is that correct?

John:                     It is correct. For the record, I’m the National Sales Manager. I work with Will McCance, who’s the CEO of Trust Advisory Group.

Josh:                      Okay, cool. I got that wrong as usual. So here we go.

John:                     It’s just a title.

Josh:                      Yeah, I understand how they go. When I talked to most people about transition strategies, they either say, “Okay, I’m going to sell my business or liquidate my business.” If I’m going to sell my business, I’m going to sell it to my managers, my kids are going to sell to an outside party, which is called a third party sale. In the wealth advisory business, there seems to be especially with smaller firms that you are working with.

There seems to be this Holy Grail that you should find a person to buy your practice from. I’ve been saying for years, I’m not sure that’s the best method to do that with. What’s your thoughts about that?

John:                     Well, it’s interesting. If you go back to the genesis of our platform, our CEO Will McCance really stepped back and legalized his business. We have grown organically from 11 advisors in 2007 to over 120, 33 referrals not recruiting. The average advisor is 63 years of age and a lot of the assets are actually oriented around 70 plus year old advisors which is not dissimilar to the industry and if Will didn’t come up with a succession planning platform which is what we consider ourselves.

He’d be out of business in five to 10 years. Statistically, you have more advisors in their 70s than you do under 30 years of age. I you believe truly in associates is correct, you’re going to have 30 or 40% of advisors age out over the next five to 10 years. That’s very problematic because for a younger person coming into the market, or to become a wealth advisor, it’s incredibly difficult to do so because [inaudible 00:04:09] and things of that nature.

Our platform affords an advisor to craft, if you will, a mentor program to bring somebody on who is younger, who can go next generation, technically more sophisticated on a technology standpoint which as you and I are on this podcast. This is happening a lot right now with our clients and other advisors. We think that there’s a dire need in the industry for platforms to bring younger people into the business simply because we have to do it. It’s a [inaudible 00:04:43] is right. You’re talking about over 110,000 advisors aging out over the next five to 10 years.

Josh:                      That’s a lot. The thing that I like to think about, even if advisors are in their late 60s and early 70s which is a large portion of the population that provides financial advice to people, they actually like what they’re doing. If given the druthers, they would really rather not completely get out of the business. They would rather slow down.

One of the things I’ve been using which I call the wind down strategy which is actually a subset of what’s called 80/20 principle. 80% of your revenue comes from 20% of your customers. If you’ve been in business for 30 years or more, there’s a really, really good chance. That’s what your book of business looks like. Is that what you’re finding with the guys that you’re talking to and the woman you’re talking to?

John:                     Absolutely the case, I believe it’s called Pareto, principle of 80/20. It’s an interesting dynamic. You had a bull market, but we were actually in the Boston Globe a number of weeks ago. They asked the question, “How are you managing your clients in this type of a market?” I said, “You’re 11 years into a bull market, statistically they last 12 years since the late 1800s.” If you haven’t prepared your client for some type of pullback not knowing what that catalyst was going to be you weren’t doing your job. But you had a lot of advisors over a decade ago that has aged into a bull market and suddenly, they’re older, their clients are older and Armageddon is happening in the marketplace.

They actually have to pick up the phone and manage their client’s behavior, make adjustments to portfolios, and make sure right risk management’s in place. That’s exactly what our platform does. We allow on a generalized standpoint, several levels of engagement. The first is I’ve spent years building my practice. If I get hit by the proverbial bus tomorrow, the valuation goes to zero readily, and equally important, my clients don’t have room to call.

We call level one engagement is you simply sign a legal document with us. We agree upon a stated price and a duration of payments to whomever the heirs are. We back with your clients on our server so that we can reach out to them proactively if the advisor becomes debilitating any fashion.

Level two is Pareto’s Principle and we’re seeing a lot more interest in this. We spoke with an advisor several days ago. He’s 74 years of age. He’s got over 400 clients. He’s completely overwhelmed in trying to manage those. He’s a sole practitioner. By the way, 73% of sole proprietors do not have a written succession plan, which fascinates me given that you’ve built your business over a number of years and the thought of it going to zero because you haven’t done any planning.

The cobbler’s sons don’t have any shoes. I mean, if we were in the planning business, you should be planning for the protection of your own practice. We are actively engaged with streamlining advisors practices and helping them through discovery of comprehensive financial planning, find additional assets, going to next generation, making sure that life health disability is attended to. Then our third level of engagement is a full Mentor Program.

I’ve built a platform with a diverse group of individuals and backgrounds. They’re duly registered because the advisors that we’re speaking with, we don’t dictate, or we don’t come in and say, “Yeah, great. We want to take these clients. We’re completely changing the model in the client experience which a lot of platforms are doing.” We adopted the existing platform and the methodology to offer as little disruption to the client experience as possible.

Our third level of engagement, as I mentioned, is full integration with the book of business. We partnered with one of our people with a 74 year old advisor. He’s being introduced to all of the clients. It’s been a really successful program. That advisor basically said, “You know, what I want to age out over the next five years.” We don’t care if it’s six months, three years, five years.

However you want to get out of the business up to you. I think the other issue and I actually read an article in investment news a month or so ago, there’s a level of complexity to our business. A lot of advisors as they’re aging later into their 70s they just don’t have the fast ball that they used to. There’s a level of liability that’s being assumed by the sole practitioners.

Recently, we’ve seen the ownership being changed improperly. We’ve seen trades executed improperly, paperwork not being completed properly. All of this is a liability on the advisor and quite frankly, the regulators are starting to pay attention to this. I mentioned before 73% of advisors don’t have a succession plan. There are 12 states nationally that do mandate that you have a succession plan written in place.

Vermont being the only one in the New England states. Galvin is paying attention to that. We’re national in scope of our home offices in Massachusetts. Bill Galvin, who’s the secretary of the Commonwealth, his people when they’re doing an audit are actually writing advisors up as being deficient if they don’t have a written succession plan, which in my view and I’ve stated this in other media, the industry mandates continuity or backing up of your data if something happens. They’re not mandating succession planning. I have a hard time dislocating the two of those because, again, something happens to the advisor and increasingly advisors are being asked the question, what happens to us? It’s something happens to you.

Josh:                      Yeah, that’s true. Here’s something that I want to be just talking about a little bit because although you’re in the wealth management business, our listeners are in many industries. We have to go across different industries that we’re doing. The reason that I think this 80/20 principle of basically how to get out of your business in a way besides selling your book is so important is that the way Wealth Management businesses are typically bought is that if you go out and do the way the deal is typically bought with a one or two person office which is maybe a company’s got three or four or five people. There’s tons of companies like that in the world. What happens is a buyer is going to come in and give you about 35% of your sales price down. You’re going to be the bank for the other 65%. Now, I can tell you from being in this side of the world for 40 years now that if you have 65% of the value of your business is dependent on the actions of a buyer because once you sell your business, you have no control anymore. You’ve got this 65% out of there hanging out. The chance of you getting paid out in full is relatively small.

So if you want to lower your risk and increase your cash flow in retirement, this 80/20 stuff that you guys are doing is a perfect mix. Let’s take your guy whose working. Let’s say we go to a typical wealth manager, not 400 clients, but it has 100 clients. That’s probably a more typical sort of business and they move 80 of those clients. The bottom 80 to one of your younger people and they keep that 20 clients themselves.

They’re able to close their offices basically down.  Use your back office one day a week, maybe one week a month. Keeping their clients informed and happy. By the way, that keeps him involved in the business which is going to lower the chance of him having a really bad case of seller’s remorse. Because they’re still going to be involved with their friends and the way things work. It’s a really much better way to get up a business and way more profitable. When I do this with people, what I find is if I 80/20 of their business and they get rid of all the overhead with that 80%, they’re likely going to make more money, working less time and having more fun while they’re doing it. That’s why I’m so enthused about a platform like you guys have. Does that make sense?

John:                     You’ve touched on so many correct points in the business. First and foremost, coming into this market environment everyone has an expectation of the valuation of their practice. In conversations with a lot of advisors, they don’t really understand the inputs that go into proper valuation of a practice. There’s non reoccurring revenue. There’s reoccurring revenue. There’s expenses, how many states you’re licensed in, what’s your insurance, age banding of clients. I don’t want to pay full price for an 80 year old client versus a 50 year old client. It just doesn’t make any sense.

So what we do as a point of initial engagement is we offer advisors access to a company called [inaudible 00:13:28]. They’re not a partner. They’re simply a third party independent organization that has a very sophisticated means of inputting your practice into their system and their algorithm will actually grade various aspects of your business profitability, sustainability, and so on.

It gives a physical grade to each of those categories. It provides a baseline output of what the expected valuation of that practice is. That’s an initial point of engagement that we have with an advisor. The other reason why I’m enamored with the 80/20 is the economics is a big part of the discussion, but the hardest decision for an advisor is, am I partnering with somebody that has the right chemistry?

Because it’s probably the most important business decision they’re going to make in the waning hours of their practice is, who am I going to bring on? Are they philosophically aligned with what I’m doing? That’s why I like our platform. A lot of the other platforms that are out there will come in and essentially say, “Thanks, we’re going to buy the book of business. We want you out in a finite period of time. Oh, by the way, we’re going to sell all the clients out of the existing models that you have and move them into our models because we’re systematizing our business and we don’t want all these different types of models and portfolio analytics going on.”

We come in and the early the engagement, the better because it’s a process, not an event to be introduced to the client to earn the client trust, to get the client to understand that this is an enhancement in resources that I’m bringing on to my practice. I’m not fully leaving you, but here’s a key point person for you to have engagement with. A lot of it is we do full bore financial planning to discover additional assets and things of that nature. It’s really comes down to the chemistry, not math and the valuation of the practice.

Josh:                      Yeah, the other issue which is not completely unique to the wealth management business, but relatively unique is that a lot of people wealth management business value the business based on their gross sales, not on cash flow. As we sell it on top of that, one of the main valuators in the industry overvalues businesses by about 30%. It makes it very difficult for A) a buyer to actually buy the business and get economic science using that model and B) which is true with almost all business owners, they all overvalue their business. I don’t have time to go into my 10 minutes explanation why today, but I don’t care what industry is.

They overvalue their business usually by three or four times of what a fair market price for a business would be for a real buyer. One of the things I always ask people to do is say, “Well, my business is worth x.” I know that is pure baloney what they think their business is worth. I turn around and say, “Okay, if it’s worth x, would you be willing to write a check to a potential seller for what you want?” Of course, they say, “Oh, absolutely not. I couldn’t pay that much for that business.” They say, “Well, why would someone pay you that much for your business?”

John: We’ve had conversations with advisors that have been actively looking to sell their practices for well over three years. Their anticipated purchase price is just not founded in any level of rational thought as a business person.

Josh:                      So the thing I would always encourage you when you’re listening to this podcast, is that whatever you think your business is worth flip it around and say, “If I was the buyer, would I pay this much for my business?” Then if the answer is yes, then the answer to your question is, how would I pay for it? If your cash flow is more than 40 or 50% of what it would take to pay for it, it’s probably not a doable sales price. The reason is businesses go up and go down. We’re recording this on April 22.

We’re in the middle of the Coronavirus. Business values have just plummeted. The reason they’ve plummeted is because, well in the wealth management business, 20% of your revenue just went away yesterday because most people get paid a percent of the assets they manage and if your average account is down 20% then your revenue just went down 20%. So John, what’s the biggest challenge that you see when you’re talking to people about joining your organization?

John:                     It gets down to right now, I mean before the Corona’s environment, nothing replaces a kneecap to kneecap conversation. You’ve got to be able to look somebody in the eye and have a conversation and really find out if again you’re philosophically aligned and it makes sense to partner with that particular individual. I had a conversation with one advisor, she was a staunch DFA person.

Josh:                      DFA is a mutual fund company just to let people know who have no idea with DFA.

John:                     Right, right. It’s a very specific rules based methodology. She didn’t believe in risk management and risk management for those of you that aren’t in the business is code for insurance. Particularly in this time these statistics are going to go up, but 48% of bankruptcies by small businesses occurs because of a medical issue. The question I posed to her was, you’re doing all of this work on the investment management side of your business and with your clients, but you’re not doing anything to attend to risk management and the protection of those assets. If I as an individual have a severe medical issue, the chances are, you’re going to have a significant amount of your capital go towards for a medical expense. That’s what insurance is designed to attend to, is to protect against the erosion of your investment portfolio by having that risk management or that insurance to protect you and your family.

She simply didn’t agree with us because she stated, “I’m a purist. I don’t believe in commission based product.” I said, “That’s all in well, but you’re doing a disservice to your clients by not providing reverse management. No, by the way, somebody else is going to sell it. So you either control the relationship or you don’t.” It’s those types of conversations and really just coming down to are you philosophically aligned. Now the issue is, I can’t have kneecap to kneecap conversations with folks which is really where the deal gets done because you really get to understand somebody or the other thing, Josh that I think is critical with the 80/20 approach.

The advisor gets to look over our shoulder for an indefinite period of time, however, they want that partnership to exist. They can see if our actions live up to our words. That’s a very important aspect of a proper transition of a practice is, I get to verify that I actually brought in somebody who thinks like I do, acts like I do. I have been in retail. I’ve been on the asset management side of redistribution for a number of investment management firms. Anybody that I’ve ever hired, I start with a first line of questioning which is to discern whether somebody is empathetic or not. If they can’t prove to me that they have that gene, there is no second line of questioning.

Josh:                      Yeah, that speaks to values. John, I wish we had more time to go over that and why values are so important when it comes to selling your business to somebody or merging your business or partnering with somebody. If you don’t have the same values and belief system, it just isn’t going to work no matter what. That’s true with employees.

It’s true with acquisitions and it’s even true with your customers. John, unfortunately, we are out of time, and I’m going bet. I know there’s a bunch of wealth managers who actually listen to this podcast. I’m going to bet some of them when you want to have a conversation with you. How would they go about finding you if they wanted to do so?

John:                     https://trustadvisorygroup.com/ is our web page that will fully outline our platform. It’ll provide our biographies, but you can also pick up the phone and call 7819336100 and ask for me.

Josh:                      Cool. I have a favor to ask everybody. I’ve been doing this podcast for five and a half years now. We’re on all the major podcast platforms. We’ve been doing pretty well. The one thing we’re not getting enough of is reviews. If you could do me a huge favor for whoever is listening to his podcast, whether it’s on iTunes, or Spotify or SoundCloud, if you could just go and leave an honest review about what you think about this podcast. I would really appreciate it and I thank you. This is Josh Patrick. We’re with John Cadigan. You’re at Cracking the Cash Flow Code. Thanks a lot for stopping by, I hope to see you back here really soon.

Narrator:             You’ve been listening to the “Cracking the Cash Flow Code” where we ask the question, “What would it take for your business to still be around a hundred years from now?”

If you’ve liked what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102. Or visit us on our website at www.sustainablebusiness.co. Or you can send Josh an email at jpatrick@stage2solution.com. Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

Topics: john cadigan, advisors, trust advisory group, advisory practice, business transition, sustainable business podcast, Sustainable Business, sale ready business

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