Financial advising with a

S2 EP06: Creating Value for Your Financial Advice Practice with Josh Patrick

10.21.19 | 0 Launch Scale Transform

My guest today is Josh Patrick. Josh is a Certified Financial Planner®, a Certified Financial Transitionist®, a Chartered Financial Consultant®, a Chartered Life Underwriter®, a serial entrepreneur, a writer, reader, and a thinker.  Josh Patrick is a contributor to The New York Times’ You’re the Boss blog, as well as the author of Stage 2 blog Creating Value

Josh’s main focus in life is helping private business owners create extraordinary value with their businesses and their lives. He draws on rich life experiences during his almost forty years of working with his favorite people, private business owners, to help them create great outcomes. On his podcast (called “The Sustainable Business”), Josh Patrick interviews thought leaders from many industries to help you think about your business twenty, thirty, or even more years into the future.

In this conversation, we discuss how your firm fits into the future of the financial services industry. I have enjoyed this conversation. The wealth management industry is about as dysfunctional as an industry could be, and without its ridiculous margins most people in this business would fail. Josh Patrick makes a case for niche marketing, and looks forward into the future with ideas on how to make your business sustainable in an industry that’s likely to become even more regulated.  

Don’t miss one of our favorite moments, when Josh breaks down the importance of mind-mapping to define the kinds of clients you should be working with. It’s a simple exercise that you can do on a piece of paper right as you listen to the podcast, and it might turn out to be the most valuable thing you’ve done for your business this year.  Do you have the mindset that you can’t afford to not service somebody? Or do you have the mindset that you can’t afford to service somebody? How would your capacity grow if you were able to know which clients you should be serving? I hope you will find many practical ideas to try.

Looking for more ideas about video blogging for financial advisors? Join the Model FA advisor community, where you will find expert advice on how to launch, grow, scale, and transform your firm.

Resource Links
The Sustainable Business
Stage2 Planning
Connect with Josh

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FULL TRANSCRIPT

Patrick Brewer: 00:05 What's your opinion on, I guess for the advisor who isn't in their 50s, and they haven't built a practice full of retired clients on an assets under management fee schedule? When you say niche, how are you thinking about that?

Josh Patrick: 00:19 You better become an expert in a market segment and/or a niche. For example, if you're working with Intel executives and you happen to like working with engineers, you would want to learn everything you could possibly learn about how Intel works, and to help the people working there to learn how to maximize the value of the benefits and the pay, and even the job that they have.

Josh Patrick: 00:45 You might want to be learning about coaching, about working with headhunters. When is it time for your client to find a new job?

Josh Patrick: 00:52 Because the value we bring to the party is not the investments. It's the advice, it's the financial advice and the financial coaching that we give folks.

Patrick Brewer: 01:06 Josh Patrick, welcome to the Model FA podcast. How's your week going so far, sir?

Josh Patrick: 01:11 It is going great. We're having wonderful weather up here. I'm going to get out and bike ride this afternoon.

Patrick Brewer: 01:16 Nice. You're in Vermont, right?

Josh Patrick: 01:19 I am.

Patrick Brewer: 01:19 Good deal. You and I met in a very nontraditional way. We were both at the Baby Bathwater Institute mastermind up in Utah. I think we were the only two people even remotely affiliated with the financial services industry that went to that event, 200 entrepreneurs skiing for a couple days.

Josh Patrick: 01:38 Yeah. There was actually an attorney there who probably understood the industry a bit. But other than that, it was just you and I.

Patrick Brewer: 01:45 Good stuff, man. I enjoyed our conversation. When we were there, I know we talked about a lot of things that we'll probably cover in the podcast today.

Patrick Brewer: 01:52 I think one of the big things is just the state of the industry and where you see the financial services industry going, some of the trends that you're liking, some of the trends that you're not liking. Maybe we start there.

Patrick Brewer: 02:04 What are your thoughts on the financial services industry generally? Then we can dive in maybe a little bit more specific.

Josh Patrick: 02:10 Well, I think the financial services industry is in a great space right now. I also think that's going to change dramatically in the future, just because firms are making too much money.

Josh Patrick: 02:24 When the average profit in a well-run financial services fund is 30 to 40%, that is so much higher than the rest of the world, that's ridiculous. In fact, I really can't think of a business that's better than the wealth management business, specifically the investment management side.

Josh Patrick: 02:47 How many businesses do you know that you get to bill your client, and your client doesn't really realize how much money they're paying? On top of that, on an average year, you get somewhere between a 5 and a 10% price increase without having to do anything.

Patrick Brewer: 03:03 It's pretty incredible that it's lasted this long. I mean, it's been what, about 20, 30 years that this has been going on?

Josh Patrick: 03:09 Well, the move to AUM really started when I got in about 20 years ago. I would say in the last 5 to 10 years is when it's really taken off. You're seeing a lot more people giving up their securities licenses and forming RIA-only firms.

Josh Patrick: 03:32 In my opinion, that's a good thing to do, because it actually makes you a little bit cleaner than the folks who are selling commission products. Although, just because someone sells commission products doesn't mean they're not working in the clients' best interests.

Patrick Brewer: 03:46 Agreed.

Josh Patrick: 03:46 It just makes it a little bit more difficult. You still have to have morality and you still have to have a moral compass and all that kind of good stuff, no matter where you are in business, if you're going to do a good job for your customers.

Patrick Brewer: 04:00 Where do you think the margin compression is going to come in? I mean, we've made it this far. Like you said, since the early '90s people have been using assets under management as their primary way for collecting fees from clients. It seems like that trend has accelerated if anything.

Patrick Brewer: 04:13 Do you think it's going to reverse? Do you think it's going to slow down? Do you think there's going to be price pressure from technology? What do you think is going to cause that trend to reverse or slow?

Josh Patrick: 04:22 I keep reading about price compression in the industry, and I haven't seen it yet. I keep reading that the gurus are saying it's there. Have you seen price compression at all in the industry

Patrick Brewer: 04:36 No. I mean, I really haven't. Obviously we've seen the release of the robo-advisors and the hybrid advisor. I would say there's probably more people that are either doing it themselves, or just not doing it at all.

Patrick Brewer: 04:50 I'm a big believer that there's so much noise in the marketplace that people think they're making good decisions related to their finances, but they're probably just downloading an app like a Robin Hood and saving $10 and being like, yeah, I'll check this off the box for now until I'm in more pain.

Patrick Brewer: 05:05 I think it's giving people an option to take vitamins instead of fixing their broken arm, and they're taking enough vitamins to where they're kind of forgetting about it. But I'm worried most of the American public is going to wake up in 20 to 30 years and recognize that they missed out on 20 to 30 years of compounded earnings and then be like, "Oh, crap. What do we do?"

Patrick Brewer: 05:25 I don't think there's been a lot of price compression, I just think there's been more fake solutions to the problem.

Josh Patrick: 05:33 Yeah. That would make sense to me also. The truth is, what we call wealth management, which is servicing people with significant wealth, is a really small percent of the population, maybe 10% if that. 90% of the population robo-advisors are probably okay for, and 50% of the population is to save it all anyhow.

Patrick Brewer: 05:57 Yeah. That's the truth.

Josh Patrick: 05:59 That's a completely different issue altogether. To answer your question, I think price compression is going to be legislated. I don't think it's going to come from the marketplace.

Josh Patrick: 06:07 If you look at what's going on around the world, look at what's going on in England, what's going on in Australia, you're seeing that there's blind pricing, the AUM pricing model we have has been outlawed in those countries. It's only going to be a matter of time before Congress starts taking a look at this and wants to do something about it.

Josh Patrick: 06:31 I mean, they tried to do it with the fiduciary standard and retirement plans, and that got killed. At some point there's going to be some people come into power who have enough clout in Congress that they'll actually get something passed.

Patrick Brewer: 06:49 Yeah. Do you think there's any risk that the government could get into the asset management business instead of causing price compression and let's say outlawing AUM or putting restrictions around what advisors are able to charge? That they just starting out either state-sponsored or federally-sponsored essentially asset management programs for retirement and other things?

Josh Patrick: 07:11 Potentially, but I'd be surprised if that happens.

Patrick Brewer: 07:13 Okay.

Josh Patrick: 07:15 Anything can happen, but that's not what I... I don't look at that as the future. What I look at is, if you're not figuring out a way of adding value to a niche, 20 years from now you're toast. Now, I don't care because I'm too old. But you should care, because you're at the right age, where 20 years from now you'll probably still be involved in the business world.

Patrick Brewer: 07:37 Yeah. For sure. I guess there's a lot of different groups of advisors, you have advisors that have built professional practices primarily through AUM, let's say they're in their 50s, early 60s. Is your advice to someone like that to sell now while the selling is good and to capture the enterprise value in the practice?

Patrick Brewer: 07:59 Is it to develop a niche expertise so that they can start to build their practice in a more sustainable way in the event that Congress comes in and starts to pass some legislation and cause price compression? What's your advice based on where the advisor's at in their business?

Josh Patrick: 08:15 Well, if I'm 50 years or older, I'm likely not going to recommend you make a major change to how you run your business.

Josh Patrick: 08:26 Because over the next 10, 15 years, probably nothing is going to really happen. I mean, you're going to see artificial intelligence go into robo-advising. If your business is based on investment management, you've got a problem. And you're going to have a problem within 10 years I think.

Josh Patrick: 08:45 You're going to really have a problem 20 years from now when Gen Z comes into being in the investing world. The reason is, what is the definition of a digital native?

Josh Patrick: 08:58 We keep hearing that millennials are digital natives. Well, they're not, because millennials didn't... I mean, the Internet never really came into being until many of the millennials were in middle school or high school. They've not really grown up with the tools of robo-advising and AI.

Josh Patrick: 09:20 But the kids growing up now will, because you're going to see the cost of big data plummet, and you're going to see the cost of putting together artificial intelligence plummet. But the people willing to use that won't be around. They're not going to be there for another 10 or 15 years.

Josh Patrick: 09:41 If you're dealing with older folks, you're probably not going to have much of a big risk anyhow, at least, in my opinion. What you are going to do is you're probably going to replace your investment advice with buying some sort of a robo-advisor access, so they'll give you better decisions about what you should do for investing than you're going to come up with on your own.

Patrick Brewer: 10:02 Mm-hmm (affirmative). We've already started to see that trend to a fair degree I think in the past couple of years.

Josh Patrick: 10:08 Yeah. It's already there. I mean, there's some startups going on, and some of the stuff they're doing is just... you're going to see high-frequency trading being brought to mainstream eventually.

Patrick Brewer: 10:19 Mm-hmm (affirmative). What's your opinion on, I guess for the advisor who isn't in their 50s and they haven't built a practice full of retired clients on an assets under management fee schedule? When you say niche, how are you thinking about that? What's your opinion of niches-

Josh Patrick: 10:36 You better become an expert in a market segment and/or a niche. For example, if you're working with Intel executives and you happen to like working with engineers, you would want to learn everything that you could possibly learn about how Intel works, and to help the people working there to learn how to maximize the value of the benefits and the pay, and even the job that they have.

Josh Patrick: 11:03 You might want to be learning about coaching, about working with headhunters. When is it time for your client to find a new job?

Josh Patrick: 11:10 Because the value we bring to the party is not the investments. It's the advice, it's the financial advice and the financial coaching that we give folks. I mean, all the research shows that's where the value is seen. That's not where the money is earned.

Josh Patrick: 11:28 At some point, the value and the money payment are going to be aligned, and it's going to be based on the financial advice you give, not the investment advice you provide.

Patrick Brewer: 11:40 Why not just accelerate that trend if you're an adviser right now? Because one of the beliefs I hold strongly to is very similar to that. It's, people pay us for behavior modification and financial advice, and the decisions we can make to help them achieve better financial outcomes.

Patrick Brewer: 11:55 Now, obviously most people aren't going to write a check for behavior modification, but that's obviously one of the things that we provide folks as financial advisors. That's a tangential benefit to them by engaging us in a relationship.

Patrick Brewer: 12:08 Why not just accelerate the trend and disconnect from the system that right now is very highly regulated because you need to maintain a securities license? Instead of being a financial advisor and not being able to run testimonial ads, not being able to have your clients share their story, why not just disconnect, drop your registration, and become a financial coach? What are your thoughts on that?

Josh Patrick: 12:32 I think it's a great thing to do.

Patrick Brewer: 12:34 Okay.

Josh Patrick: 12:35 Yeah. To me, that eventually is where the industry is going to end up, I think. I also think, and this is the challenging part of this, is that for many people, this financial coaching can be done on a one-to-many basis.

Josh Patrick: 12:57 My belief is that 10% or the 5% or the top 1%, those folks are always going to want to have face-to-face advice. I don't think they're ever going to want to go to automated advice. But for the bottom 50%, there is no reason for them not to just use online services that help them go through the process by using artificial intelligence.

Josh Patrick: 13:26 If I'm a young advisor, I'm starting to think about what can I do to set up one-to-many programs. Meaning, I'm not working with you as an individual, but I might be working with 20, 30, 40, 50 people at one time, or even 1000 people at one time. And provide advice that's basically generic based on whatever niche they happen to come from. Because the truth is, 90%+ of the advice you give to people in the niche will all be the same.

Patrick Brewer: 13:58 Do you think financial advice, the actual technical information as far as like, hey, this is how you need to optimize your 401k and your stock options and those types of things, do you think that's the real value?

Patrick Brewer: 14:08 Or do you think it's getting in the trenches with people and learning about how they make decisions, how they process information, learning their stories so that they can improve their decision-making framework just generally?

Patrick Brewer: 14:19 Or do you think we move to this leveraged model where it's like, we distribute our technical knowledge more broadly to more people through maybe a course environment or something like that?

Patrick Brewer: 14:30 Can you comment on your belief around let's say more one-on-one intensive type advice versus a leveraged environment? And obviously taking into account that 90% probably can't afford to pay an advisor for that type of advice. But I'm curious to get your feedback on that.

Josh Patrick: 14:48 Right. Well, that was about what I was going to say. I said it's not whether they should get it it, it's what they can afford to get.

Josh Patrick: 14:56 I go to a meeting every year called the Purposeful Planning Institute. It's in Denver in July. It's a great meeting. It's basically aimed towards family offices, which are the large, large people with over $50 million in net worth. Many billionaires, people who serve that group are there.

Josh Patrick: 15:18 I go not because I'm going to apply what they're teaching, because my clientele can't afford it. I go and say, what can I strip out of this, the essence, and make it affordable for the people I serve?

Patrick Brewer: 15:32 That's a good idea. I think more advisors should do that as well. Right now, if an advisor's in a regulated environment and they want to engage let's call it 1000 consumers in a leveraged model where they're distributing their advice and coaching to that group of people... They're at a disadvantage, because marketers or media companies can do that without the regulations.

Patrick Brewer: 15:55 Are we going to be in a position 10 years from now where all these advisors are... Right now they're registered with the state or they're SEC regulated, and they're trying to build audiences, they're trying to help people in a leveraged way, but they really can't due to compliance.

Patrick Brewer: 16:08 Then you've all these marketing companies that are sprouting up and people that aren't licensed, and they're building the audiences and they're helping the 90%.

Patrick Brewer: 16:16 Are advisors just going to be completely out of the mix because they're not doing that and they can't do that due to regulation, and we're going to see the industry move away from today's advisor? What are your thoughts on where media and marketing is right now versus where an advisor is?

Patrick Brewer: 16:31 Because what you're basically asking advisors to do is to build a marketing company, because they need to engage 1000 people. In order to engage 1000 people, they need a strategy to get in front of 1000 people.

Patrick Brewer: 16:41 What are your thoughts on that?

Josh Patrick: 16:43 Well, I think if you decide that's a strategy you want to pursue, you're going to drop your licenses. What you're going to do is you're going to set up a joint venture where you're going to go to some robo-advisor or some artificial intelligence investment advice organization and say, "You're going to handle the investments. We're going to handle everything else. We're going to get a good result for this group of people."

Patrick Brewer: 17:08 Got it. Yeah, I love that model. That's the model that I advocate for as well.

Patrick Brewer: 17:12 I think part of the issue right now is you've got all these younger advisors who have started these practices, and they can't market, they can't do anything. They're selling lower lifetime value services, as we talked about, the retainer fee for service hourly planning, and then they're dealing with these huge organizations that can obviously afford the lobbying and can cross-sell products and services. It sounds like we're speaking the same language here.

Josh Patrick: 17:36 Yeah. Well, the truth is, it's not that they can't market. It's that they can't use testimonials. Which is huge, but it's not a killer. What it does do is it makes them say, I mean, if I'm a marketer and I'm going to go out there and I've done this, I will often put my marketing stuff, say, "I'd love to give you testimonials, but I legally can't do it."

Patrick Brewer: 17:59 Yeah. If I could spend $100000 on marketing, I would spend $100000 on testimonials and client stories.

Josh Patrick: 18:06 Yes. You can do client stories, you just can't do testimonials.

Patrick Brewer: 18:13 Yeah. You're right. I feel like it's more important at the testimonials though. Because there's always that gray line where it's like, what can they say on the video, right, when does it become a testimonial. There's always that gray area where the advisor feels uncomfortable and you don't know what to tell the client to say. But I agree. Yeah. You can do the client stories.

Josh Patrick: 18:32 I mean, the worst that happens is the SEC comes in or the state regulators and say, "We don't like this ad. Take it down."

Patrick Brewer: 18:39 Pardon the interruption friends, but I got some cool stuff to share with you. It's available on ModelFA.com. It's a podcast, a blog, videos, resources, and all this really cool stuff that you don't even know about because you're not there.

Patrick Brewer: 18:51 It's available at ModelFA.com. Make sure that you check it out, watch some stuff, you're going to learn how to grow your practice, scale it, and just generate more profit so that you can do whatever you want with your time. We'll see you there.

Patrick Brewer: 19:06 What are your thoughts on the advisors that want to do more of the hand-to-hand combat? So they don't really have an interest in building the leverage practice with thousands of people, and building that marketing engine. What type of experience are they delivering for their clients in 10 years or so?

Josh Patrick: 19:23 Again, they really want to become a nicheholic. The reason you want to become a nicheholic is that one of the good things about niches is that everybody knows you in that niche. So you become known as the guy who you go to to solve your problem from this particular industry or this particular group of people.

Josh Patrick: 19:49 Again, because if you're doing one-to-one work, you can only work with X amount of people, maybe 100 people, so you don't need a big group. You need a very, very, very small tight group who will keep introducing you to other people in the group. And everybody in the group knows that you're the person to go to solve this particular problem.

Patrick Brewer: 20:10 What is your focus? I know you obviously run a financial services practice. I believe that you also have a coaching business as well.

Josh Patrick: 20:18 Right.

Patrick Brewer: 20:19 What type of orientation do you have with your practice? What have you seen be successful with some of the advisors you've talked to as far as niching in general?

Josh Patrick: 20:27 Well, you have to say, I use my example for Intel. There's a person out in Portland, Oregon who does nothing but work with Intel employees. That person is an expert of everything Intel. When a senior executive needs advice, they know to call him, because he's integrated into Intel.

Patrick Brewer: 20:51 Yeah.

Josh Patrick: 20:52 He doesn't work there, but all the senior people say, "That's who I work with," and it's not hard for him to get more people, or to prove that he has legitimacy about what Intel employees need to be doing.

Josh Patrick: 21:06 There was a guy when I first got in the business, I forgot who he was, but he only dealt with United Airlines pilots. That was his whole base. He was a pilot himself, he retired, went into the financial services business, and only worked with United pilots. He knew everything there was to know that a United pilot would need to be thinking about when it came to financial and the premise of financial freedom. That's an example why a niche is so powerful.

Josh Patrick: 21:36 The truth is, you're actually making it easier for people to say yes to you. And if you're known as an expert in a niche, you can charge more money.

Patrick Brewer: 21:46 Yeah. Yeah. There's definitely a lot of proven evidence to suggest that. What are your thoughts on niching outside of just professions? I'm a big believer in niching more towards a mindset or personality characteristics and things of that nature. Have you seen that be successful? Is that something that you advocate for? Are you mostly thinking, find technical-

Josh Patrick: 22:04 I actually like that a lot. Most people when they think about niches think about demographics. I also think it's really important to think about psychographics. In other words, what type of person are you successful with?

Josh Patrick: 22:19 If somebody works with me and they have an engineering mentality, they are going to hate working with me. Absolutely hate it. Because I'm not going to give them nearly enough detail, I just won't do it. I think it's ridiculous and stupid. If they want to, go someplace else. You're not going to get it from me.

Josh Patrick: 22:36 I'm going to work with mind maps, because I know that's the most effective way to communicate with a client. Put everything on one page and make it so you don't have to read.

Patrick Brewer: 22:45 I've seen that, and that's one of the areas I've struggled when it comes to sales and I've done a lot of research. I've realized that there's actually four primary buying mindsets.

Patrick Brewer: 22:55 You've got the analytical thinkers. These are the ones that have the calculators running in their brains, the engineers.

Patrick Brewer: 23:00 Then you've got the experimental thinkers, probably you and me. We're more about the why, the strategic value behind what we're selling and the strategic benefits of the solution.

Patrick Brewer: 23:09 Then you've got your practical thinkers, which are more step-by-step process driven. Probably like the millionaire next-door retiree that just wants to make sure that you have a proven process.

Patrick Brewer: 23:19 Then the last one is the relational thinker. This is this person who's touching you on the arm, they're giving you a hug. They're worried about all the other stakeholders and making sure that everyone's okay.

Patrick Brewer: 23:29 What I've realized is, I ask questions during the sales meeting to figure out what type of a primary thinking mode am I dealing with, and then I just position my process to who I'm talking to.

Patrick Brewer: 23:41 But I agree, if I had to work with all engineers, I think I'd have to find a new career. I can understand why advisors would want to niche towards... And what I recommend, similar to you, it's like, find your primary thinking mode. For me, I'm that why strategic thinker, which pushes pretty firmly into the entrepreneur camp, or the senior executive camp.

Patrick Brewer: 24:02 Because if I'm dealing with a retiree, I'm like, "Hey, let's maximize the value of your life. Let's do a wealth vision. Let's do a mind map." And they're like, "Dude, I'm not interested. I just want to know there's a proven process so I don't have to go back to work and I'm not a Walmart greeter." To me, that's boring.

Patrick Brewer: 24:18 I think it's just acknowledging who you are and who you were meant to serve, and then just aligning your communication with people who think the same way as you. Because then you're going to gain energy from those conversations. If you're working with people who have different types of thinking modes, then you're going to lose energy and you're going to get frustrated.

Josh Patrick: 24:36 There's a whole huge financial services group called Kingdom Advisors. Kingdom Advisors is based on religion. Everybody that they service has the same belief that they do around religion. You're now talking the same language.

Josh Patrick: 24:57 Now, I'm not going to be especially successful with that group, because it's not my world. But if you're a fundamentalist and you're in the financial services world, associating yourself with Kingdom Advisors might be a really good thing to do.

Patrick Brewer: 25:14 Yeah. Gives you a foundational belief system that you can use to connect with people.

Patrick Brewer: 25:18 I think sometimes advisors are a little bit hesitant to align their personal beliefs with the way they've organized themselves professionally, because they feel... I don't know if they feel like that's salesy or they just feel uncomfortable with it. But I've definitely seen a little bit of, let's call it a rebellion to that idea when I suggest it in our coaching calls and things with advisors.

Patrick Brewer: 25:38 Have you seen a similar thing? Would you say that more advisors are leaning into that, let's call it cultural or religious affiliation?

Josh Patrick: 25:46 I think advisors are leaning away from it. I find advisors, this is one of my issues with the industry, is that they say, "Well, I can't afford not to service somebody." My attitude is, well, you can't afford to service some people, because if everything you do is a one-off, you spend all your time learning about what it is, the issues that person has.

Josh Patrick: 26:10 If instead I'm staying within a psychographic and demographic group, I don't have to learn. I know what the issue is before I even walk in. Now, I may not tell them that. But I know what the problem is.

Patrick Brewer: 26:22 Yeah.

Josh Patrick: 26:25 One of the things I do a lot of is I help people create excess cash in their businesses.

Josh Patrick: 26:30 Now, I know before I even get on the phone with somebody, it's only going to be one of five things that we're going to talk about. I'm not going to tell them that, but I know within five minutes what the big pain is they have, and how they can solve it.

Josh Patrick: 26:48 It's not because I'm the brightest guy in the room. It's because I work with the same group of people over and over and over again, and they all have the same problem.

Patrick Brewer: 26:58 Yeah. You notice a pattern.

Josh Patrick: 26:59 Yeah. I was on the phone with a guy right before we started recording this, and in five minutes, I knew that he grew his business too fast and ran out of cash.

Josh Patrick: 27:13 I asked him one question, I said, "Who's your bank," and he said, "Chase." No, he said, "Citigroup," excuse me. I said, "Well, that's your problem. You've got the wrong bank." I said, "You need a community bank."

Josh Patrick: 27:22 Now, I knew that's one of the five roads we would go down, is bad banking relationships. I can't tell you how many small businesses decide they're going to bank with a money center bank and they think that that's the right thing to do. It's the absolute wrong thing to do, and it's even idiotic.

Patrick Brewer: 27:39 Hmm. What are the other four? Just out of curiosity for anyone who's thinking about serving business owners. Is there any other pain points or questions that you help with?

Josh Patrick: 27:48 Yeah. They don't have a recurring revenue stream, or they can't make one look like a recurring revenue stream. They have no marketing in place. They have no sales process in place. The cost of operation for their business is too high, haven't systematized their business. They are hiring the wrong people and they can't get good people to come to work. It's somewhere in those levels. It's really pretty easy to come across.

Josh Patrick: 28:19 Essentially, almost all small businesses have either hit a cash wall where they don't have enough cash to run the business, or there's not enough capacity because the owner doesn't know how to delegate and they become the bottleneck in the business.

Patrick Brewer: 28:39 Mm-hmm (affirmative). The E-Myth style.

Josh Patrick: 28:41 It's actually, I mean, if you do the E-Myth, you're going to kill yourself, because it's way too detailed. The E-Myth is designed for engineers in my opinion. I'm a bigger fan of using traction if I'm going to use a system.

Patrick Brewer: 28:55 Yeah. I love that book.

Josh Patrick: 28:56 Yeah.

Patrick Brewer: 28:58 I think you had a manufacturing background before you got into financial services. Is that right, Josh?

Josh Patrick: 29:03 No. I actually have a food service background. I used to own a food service company where we fed people in factories.

Patrick Brewer: 29:11 I'm sure that a lot of your knowledge as it relates to growing and scaling and cashflow in businesses is related to your experience in food service, because you had success there.

Patrick Brewer: 29:21 How does an advisor who maybe wants to service business owners or entrepreneurs who doesn't have that skillset or that background, do you think that's mandatory? Do you think it can be taught? How do they develop that expertise? Because you're not going to learn that in the CFP curriculum.

Josh Patrick: 29:36 No. No. You're not going to learn much in the CFP curriculum.

Patrick Brewer: 29:40 I knew I liked you, Josh.

Josh Patrick: 29:41 And I'm a CFP, by the way.

Patrick Brewer: 29:44 Nice.

Josh Patrick: 29:46 Well, one way you can learn, you can join my mastermind program.

Patrick Brewer: 29:49 Oh, nice. Tell me about that.

Josh Patrick: 29:52 Well, I was on another podcast, another financial service podcast, and I had several people call me afterward who say, "Can I shadow you? Will you mentor me?" I knew none of these folks could afford my one-on-one fee. So I said, "I'll tell you what. If I get six people, we'll start a mastermind program, and I'll cap it at 14."

Josh Patrick: 30:13 So I'm putting together a program and it's pretty much done now for advisors who want to learn how to work with private business owners. I'm going to take you through the steps of how you recognize what they need to do. And we're going to have a monthly long call where we'll do hot seats, and we'll basically do case studies.

Patrick Brewer: 30:34 Nice.

Josh Patrick: 30:35 Yeah. It's going to be sort of like a business school, a Harvard Business School case study methodology, for how you're going to learn to work the important things, the simple things that private businesses can do to help make themselves more successful, or what I call economically sustainable.

Josh Patrick: 30:55 By the way, economically sustainable for a business is true for any business that exists, including financial advisors. The four areas are having a great lifestyle, having an emergency fund in place in case you have a downturn, and it isn't if, it's when. The third thing is having enough capital available for a fully-funded growth program, which is both sales and marketing.

Josh Patrick: 31:21 The fourth area is to have enough money to fully fund a retirement plan to fill the gap that your business is not going to provide when you try to sell it. Because business owners think that their business is going to ride them off into the future. It's only 1 or 2% of the businesses in the country that ever have a chance of doing that.

Josh Patrick: 31:41 One of the interesting little factoids is, is that of highly sellable businesses, only 50% at the go-to-market ever sell.

Patrick Brewer: 31:50 Hmm. Interesting. I believe it. When you think about the term business owner, how are you defining that?

Patrick Brewer: 31:55 I kind of separate it between business owners and entrepreneurs. I find that most business owners, they do one thing, they grow the business, they do that for a really long time. Whereas, entrepreneurs tend to have multiple businesses that they have exits, and they raise cash, and go after larger opportunities.

Patrick Brewer: 32:15 Are you differentiating between the entrepreneur and the business owner in your group, and when you talk to advisors and train them how to do that? Who are you focused on when you say business owners?

Josh Patrick: 32:24 I'm focused on what I call blue-collar businesses or mainstream businesses. Businesses where someone will own a business for a relatively long period of time and then ride off into the sunset.

Patrick Brewer: 32:37 Got it. Okay.

Josh Patrick: 32:39 The fast growth businesses you're talking about, those guys are trying to become unicorns. That's a whole different ballgame altogether. Once you move into the venture capital world, I have little or no interest of working with you just because I don't like the model. I think it's a terrible model.

Patrick Brewer: 32:59 Yeah. I would agree with you. Lots of vultures in there.

Josh Patrick: 33:03 Well, it's not so much the vultures. It's that the failure rate is incredibly high.

Patrick Brewer: 33:07 That too.

Josh Patrick: 33:09 When you're building a business just on sales and you're not paying attention to profit, your chance of your business surviving really isn't all that good. You've got to get lucky.

Patrick Brewer: 33:21 Mm-hmm (affirmative). I think most of them are just building for an exit with a larger company at this point. It seems like most of the apps and websites and products that are spinning up are just trying to get sold to-

Josh Patrick: 33:32 Well, yeah. In the tech world what you're seeing is people are building businesses, and then acquirers are buying the business not for the business, but for the talent.

Josh Patrick: 33:45 I just read a book about Facebook, I forgot who the guy wrote it. But it was about, he was one of the people developing the Facebook ad platform. He built a startup and Facebook bought his business so they got him and the three other engineers.

Patrick Brewer: 34:02 Makes sense. It's hard to get that type of talent unless you're going to write a big check.

Josh Patrick: 34:07 That's what they're doing. They're writing big checks. These guys are walking with a bunch of money. I guess the VCs make their money too.

Patrick Brewer: 34:14 Yeah. Everybody wins.

Josh Patrick: 34:16 Yeah.

Patrick Brewer: 34:17 What do the characteristics look like for the advisors who are in your mastermind group? Is it usually later career advisors? Early career advisors? Mid-career? What's the breakout?

Josh Patrick: 34:26 It's early mid mostly. The late career advisor is not likely going to want to make the changes I'm probably going to recommend.

Patrick Brewer: 34:34 Yeah. That's true. We talked a little bit about this when we were in Utah, succession planning. We share a lot of similar opinions.

Josh Patrick: 34:45 I don't know if that's a good or bad thing.

Patrick Brewer: 34:50 I don't know, man. Usually there's some points of disagreement. But I've pretty much agreed with everything you've said on the podcast and all of our conversations in Utah. Maybe great minds think alike, maybe we're both wrong.

Patrick Brewer: 35:01 One of the points that we were talking about was succession planning and continuity. I'm the byproduct of a failed succession plan. I purchased a practice up on Sacramento a number of years ago with some partners who put up the capital, and it was a complete disaster. I mean, topic for another day.

Patrick Brewer: 35:19 One of the things that I learned from that experience was it's probably better to just have somebody in a continuity situation, and free them up to work with their clients for as long as they can. Instead of trying to transfer those relationships prematurely, and transfer the owner's identity, which is usually what happens in those businesses, on to somebody else, and create all those issues with succession.

Patrick Brewer: 35:43 What are your thoughts on succession, continuity? Where do you think we're at as an industry? What are some things that you would advocate for if you could or you do in regards to that topic?

Josh Patrick: 35:54 Well, I have coached a couple of financial service firms, so I actually can speak about this with knowledge. And I had my own firm.

Josh Patrick: 36:02 The key here is, if you're going to create a business to sell, you have to make your clients the clients of the business, not the clients of the advisor. That's the biggest challenge that financial service firms have, for two reasons.

Josh Patrick: 36:20 One is, the advisors like the ego of being the client's advisor. The second is, to make the client a client of a firm, that means you have to have several people touching the client. So somebody leaves, you just move someone into that slot.

Josh Patrick: 36:41 When you look at what Goldman Sachs does, Goldman, you're not a client of Joe Smith who works at Goldman. You're a client of Goldman Sachs. If Joe Smith leaves, there's another person that comes in and takes Joe Smith's place, and the relationship keeps going like nothing happened.

Josh Patrick: 37:02 But if you're working for ABC financial services company, and you're the company, or you're the advisor, and you're the only person they ever talk to at that firm, you basically have made your business not transferrable.

Patrick Brewer: 37:17 Yeah.

Josh Patrick: 37:19 Now, you can sell your business. The way people sell businesses in this industry is completely idiotic, things like they take 35% down and do owner financing for 65%. Anybody who spends any time in the mergers and acquisition world is going to tell you, the only money you can count on is the money you get at closing. You're really selling your business for 1/3rd of what you think it's worth.

Josh Patrick: 37:45 I used to blog for the New York Times, and I had several blog posts I wrote about financial service firms where the sales just went completely upside down and terribly wrong.

Josh Patrick: 37:58 There was one case where the person I was writing about, not only she did not get her payout, she ended up getting fined by the state and had to write a big check herself to the state, because of inappropriate sales practices the new owner was doing, but she was still on the hook somehow.

Patrick Brewer: 38:17 Geeze, that's brutal.

Josh Patrick: 38:20 Well, it's like the same people who sell businesses and they stay as an officer of the company, and the buyer doesn't pay the payroll taxes. Guess who's on the hook for the payroll taxes? The selling idiot who stayed as an officer.

Patrick Brewer: 38:34 I've got my fair share of war stories, man. I mean, we were getting crushed with phantom income just through the way we had structured the deal. Back then, I had very little experience in M&A and valuation and deal structure. Since then, I've definitely sharpened up on that. It was an interesting time, interesting... basically everything you just explained was a big issue.

Josh Patrick: 38:57 Yeah. In my opinion, the way to get out of the wealth management business is what I call the wind-down strategy. Are you familiar with the 80/20 rule?

Patrick Brewer: 39:07 Oh, yeah.

Josh Patrick: 39:07 Okay. Well, if you take your book of business and you 80/20 it, meaning you take that top 20% of your clients and you keep them, and you jettison the bottom 80%, you're going to end up making more money and working part-time.

Josh Patrick: 39:25 If you 80/20 it again, and you 80/20 it again, and 80/20 it again, eventually you end up with no clients, and you just close your doors and walk away. But you're going to be having gotten a whole lot more money than you ever would have if you sold it, much safer.

Josh Patrick: 39:42 One of the biggest problems that people have when they get out of their business is seller's remorse, and the reason they have seller's remorse is they lose all their relationships with the people they used to work with. When you 80/20 your business, you don't lose any of those relationships, so you're not going to have seller's remorse.

Patrick Brewer: 39:58 Yeah. I think it's a great way to do it.

Patrick Brewer: 40:00 I mean, we're basically doing the same model inside of SurePath for advisors that join that are a little bit later stage in their business. We're just providing a little bit more infrastructure just in the event that something happens to them, because that's the challenge, right? If you're 80/20ing it, obviously you're cutting the clients, but you still have some liability and exposure if it's just you.

Patrick Brewer: 40:20 What we've decided to do is instead of forcing advisors to sell, they just kind of merge in, it's a cashless transaction, and we just help them manage the lower end of the book and whatever clients they don't really want to service anymore, and then just free them up to do what they like to do. Which is generally, if they're a successful advisor, just spend time with their clients.

Patrick Brewer: 40:38 But 100% agree with that 80/20 principle of cutting the lower end and just cashflowing it out. You'll definitely make more money that way.

Josh Patrick: 40:47 Yeah. It's a great model to do. You providing that type of service is a really good service for people who are my age and want to slow down, but don't want to stop.

Patrick Brewer: 40:59 Mm-hmm (affirmative). Had to learn it the hard way, because we was really pushing during that sale to get the advisor when I had the failed succession plan to sell the business. Just battle scars from that I guess led to some creative thought around how we would handle continuity.

Patrick Brewer: 41:15 I'm excited to, we should have another talk about a different topic at some point. I think we're pretty much at time, Josh, but I really enjoyed our conversation.

Josh Patrick: 41:26 Cool. This is always fun. I really enjoyed it, Patrick.

Patrick Brewer: 41:28 Absolutely. We'll be sure to include some links for everyone who's listening to Josh's mastermind, his business, so you can check him out. Josh, I look forward to having you on the podcast again at some point.

Josh Patrick: 41:41 I'd be happy to do it.

Patrick Brewer: 41:42 All right. Take care.

Josh Patrick: 41:44 Thank you.