From Potomac Fund Management, this is the Conquer Risk Podcast. Join us as we discuss the business of running an RIA firm, and the practice of investment management, and now our hosts. So welcome to Conquer Risk Podcast. Today we're going to actually do a little extra before we start the real podcast.
And I think part of this is because last week my podcast intro sucked so bad. I had to do it twice. So we're going to do a little extra piece in front here. That little extra piece is one of the most common questions I get is about, how do we find content?
And this particular podcast is going to be a perfect example. You read an article, I read an article, you called me the next morning and laughed and said, have you seen this thing? And I had and I laughed and basically both called bullshit on it right away. So you and I talked through and that's the whole point of these podcasts is you and I are having these discussions anyway.
And we talked through and found a little research to bolster our thought, our initial thoughts, and that's what we're going to talk about and help educate you along the process. That makes sense? Yes, sir. You go to that nation?
All right, rock and roll. So on that note, let's dive in. What is the article? What is the point of what we're talking about today?
And that is a recent article from RA Intel that discussed the Cerulean Associates Report on how many advisors are retiring. And essentially you and I both had the same thought which is wait a second. Keep saying the same thing over and over which is and I'm going to quote this article. Over the next 10 years, it really estimates more than 111,500 advisors will retire representing more than one third of the workforce and assets.
Well, if that is true, that is a monumental, it will have a monumental effect on all kinds of things. I just don't think it's true. How about you? Yeah, well, shout out to RA Intel and Mike Thrasher.
I really dig this new site they got and they do some fantastic reporting on our community. So if anyone, let's put that in the show notes to get to the study on that site. So, I know you have some stats. I had some anecdotal thoughts when I talked to you about the fact that I feel like I've heard this for 10 years.
Boomer advisors are retiring. It's going to change the industry. Yada, yada, yada, and here we are 10 years later, saying the same stats over and over again. What did you dig up on the historical stats that people released?
Yeah, absolutely. So we just started with the quote from that article, right? And so I did some digging and I'm going to give you two other pieces. There's a report I found in that reference and again, we'll put this stuff in the show notes.
So you can go read this boring information if you want. But in 2010, Cerulee referenced 320,000, just rounding 320,000 advisors, right? Another report I found in May of 2013 from Financial Advisor Magazine discussing the Cerulee report, which by the way, I actually do like this early report, but I'm going to read this sentence. Let's see if this sounds at all familiar.
Over the next decade, 12 to 16,000 of the nations, 315,000 advisors and brokers will retire each year. Okay, so if 12 to 16, excuse me, are retiring each year for 10 years, that puts you in that 120 to 160,000 range, which is what they just said is 111,000 retiring. I'm going to simplify this here. We just throw out a bunch of numbers.
I'm going to make this real clear. In 2010, Cerulee said 320,000 advisors. In 2013, they said they're 315,000 advisors. In the report that just came out in 2019, they said there's 310,000 advisors.
However, each time they're saying that we're going to lose 100,000 plus a year. Listen, listen, listen, this is what I hate the media because this is why people hate the media because no one back tests. I know people don't like that word, but no one back tests their bullshit. If you're reporting a data and you have a headline clickbait and we did a podcast on this where they drag you in and if you go back and look at it, they've said the same shit for years.
To me, and we talked about this, retiring is one of those things where you work at a power plant or you work at something that involves your hard labor and after 40, 50 years of work, you just don't want to do it anymore. But an advisor or service-related business with technology, you're not a manufacturer and plant worker. You can work anywhere, you can do your job at any location. And so the concept of retirement just is not the same.
Don't mention your rig at all in this conversation. What is retirement in this case anyway? Yeah, so here's to me, this is one of the most simple examples that I've had in my career. I see this all the time, but my former role, I had one of my advisors call me and he said, I just want to run this by you because he was, let's just say between 70 and 75, lived in a beautiful community.
He golfed three, four times a week, traveled wherever he wanted. Sometimes in a rig, notice I didn't say my rig. He said I couldn't say my rig. He also went on vacations around the world.
And basically, at that point in his career, his book, he's a little over $100,000 a year in revenue to him. And it was 85% advisory using third party managers. I mean, this is such a simple book. He could do whatever he wanted and his practice was built with decade old clients.
People that he'd been working with for 10, 20, 30 years. So at some point, he calls me and he says, I just had an advisor offer me 400 grand for my book and I'd have to stay on for basically two years to make sure everything kind of got moved over. And there's no problem. Should I do it?
Why the hell would you do it? I mean, you know, okay, so you get a $200,000 pop, I guess. You don't have to work the last two years of that period. But there are there are ancillary things like, you know, if you get a help and well, not just that.
I mean, the business running the business is still, you know, I have to do things every week that I find myself asking why the fuck am I still in this business when you're dealing with technology that doesn't work or payroll or state issues. And there's things that pop up. So it's not, I don't think it's a strictly a numbers game. But yes, to your point, if you are outsourcing everything and running a really efficient and lean practice, why would you take 400,000 when that's four years of revenue?
Right. Well, and this is where I think our conversation sort of makes another move. And that is away from just those numbers to the concept of the merger, acquisition, succession, planning, stuff. And I think, in my opinion, is we need to draw a line in the sand.
And that line in the sand is the difference between what I'm going to call a sole practitioner and the bigger multi-person firms. Now, I'm not talking about an entire broker dealer. You might be an advisor who works, you know, who is a maybe associate with a broker dealer and does most duly advisory business through that corporate RA. That's fine.
But how many people do you have in your office? And I think there's a big difference between the person who either is by themselves has one or two staff people, maybe a maybe one other advisor, but primarily their own, right? I said a sole practitioner. And the group that has multiple advisors, the person who has multiple advisors underneath them, they've created this entire structure, those are two different animals.
And the TDA conference, I talked about that in one of our recent podcasts, right? They did all kinds of stuff on merger and acquisition. But it was all for the 400, 500,000, $500,000, $500,000, $500 million AUM practices. Well, those are multiple advisors, typically, and large staff.
And I totally get that there's a place for that merger acquisition and for the top dog to retire because that business moves on. There are people there to support it, the sole practitioner. It's just not the same. And that's why I cry bullshit on this.
There's a business, right? It's not a business, right? And there's nothing wrong with that. It's a lifestyle business or creating a situation where you're a self-employed.
And it's not necessarily a business that's going to last 40, 50, 60 years. It's something that you created for yourself to run a good practice and enjoy your clients. And to your point, I think those aren't good acquisition targets, right? You have the person that never wants to leave or never wants to give up.
You have a financial situation where there's no reason why that person should give up or leave. And so it makes, and this is why these numbers don't change because most advisors, and I'm just, this might be totally not true, but I'm just, I think most advisors are sole practitioners. I don't have data to back that up, but that's something we should look into. But I think most advisors out there are also practitioners.
And so that's why the numbers aren't changing, because they're just simply not retiring because they don't want to. And to your point, I don't think anyone really wants to buy them. Yeah, it's an interesting dynamic. If you think about it, like this, the book is a depreciating asset.
And what I mean by that is if you had the two equal books, one is again, one is by a 55 year old advisor and one is a 75 year old advisor. If they're the same size, use the same solutions, and they both mirror image themselves, which I don't know about you, but mostly advisors, I know, if you look at the people who are their clients, they are a lot like themselves demographically. So wait a sec, the revenue is exactly the same. I'm going to pay more for that younger advisor's book than I am the older advisor's book, because people are more likely to die off the assets go away.
There's all kinds of reasons for that. And let's face it. Who wants to go buy that older? That there's just not as many people out there, or it's going to be a much, much smaller multiple.
So the advisor who has the book wants the bigger multiple. And I just don't think you see as many deals in that scenario for that reason. Right? Anyway, so I mean, that's that's one step.
It's just a different, it's just a different take. And I think we're going down that same, same path together. We like to say we both on the phone, we were laughing at the fact that we both had the same thoughts. So what about junior advisors?
Do you have any thoughts about junior advisors in this spot of well, why don't everybody talk about junior advisors coming up and buying the practice? Well, so all right, let's let's take a personal example. I started at Potomac out of school. So this is the only real job that I've ever had.
And I sort of grew in the ranks and I had talks with former owners about buying into it and how to go about doing that. And in the early years, you don't have the money. So you are doing two things. You are approaching your senior advisor to say, let me buy a portion of the book and also please finance it for me.
Right? So the person in that position is like, hold up. I'm selling you a piece of revenue. In addition, I'm also going to finance it for you.
Why don't I just keep that piece of the book? You know, it's and so it's a difficult position to not only get someone to agree to sell you that, and then also sell financing. And I think a lot of senior advisors use it as a carrot to say, yeah, you know, another five years for sure, you know, you can buy a piece. Five years go by, you know, they're busting their ass, working hard, the junior advisor.
And it's you just keep moving the goalposts further away. And so I just don't think it's just a difficult situation unless the senior advisor truly wants to shut the door and walk away. Yeah, I'll give some credit to David Grau, one of the folks at FP Transitions, you know, responsible for that business. And you know, he referenced the five-year rolling period, you know, almost like a performance measure.
And that's basically, you know, like you talk about the senior advisor tells the junior advisor that in five years, why we'll do this buyout, we'll get this done. And then suddenly five years rolls around and it's, yeah, it's going to be another five years, you know, I'm not quite ready yet. Right? And then that one ends and it just becomes this recurring thing where they're just, they're not quite done, not quite ready to stop yet.
And it never happens. So I think as a junior advisor, you need to get something very solid in place at the beginning of your business business. I mean, listen, I had nothing solid in place, you know, I just sort of thought, I mean, that's why it took so damn long. Well, I mean, yes and no, because I brought into a small percentage and then another one and maybe it was a carrot, maybe it was, you know, so there was some transactions that were being done, but there was nothing formal about maybe, you know, the eventual takeover.
And so, yeah, I mean, to your point, I think you have to get some solid, but if you put yourself in a senior advisor's shoes, that's a hard decision to make. You know, maybe their kids are, you know, young or, you know, they still have to go through school or there's still things they want to do. I mean, it's hard to say, you know, in five years from now, I'm going to hand this business over. So I think both people are in a tough spot.
Yeah, they are. And there's, I mean, you mentioned self-financing. Can you speak to more of the bank loan? I think we're starting to see just like more venture capitals coming in for the large merger acquisition stuff.
I think we're seeing more bank opportunity for the junior advisor. So, yeah, and so once again, let's use my personal example. The first 10% I purchased was financed by one of the former owners, right? The second 10%, luckily, I was able to pay cash.
And when I bought out the 80%, we were looking at financing again and or just doing a, you know, a promissory note and then, you know, it got introduced to the bank financing part of it. So I think in the past five years, there's been a huge influx of bank financing, whether it's through SBA loans or even these companies that focus in on RIA's. And that does open a whole new opportunity for people because you can pay cash, you know, you get the bank financing, you hand that advisor a check to buy out of shares. He's not on the hook for necessarily making sure revenue sticks around for 10 years or doing financing.
So, I think with that, I would have thought that more of these deals would have been done because I think it is valuable if you can hand someone a check and say, look, you know, you built a great business leave on for both sides, right? And but it hasn't changed much, you know, so but but the bank financing is definitely more available than it ever was in the past. Probably because it's so fucking well. Yeah, there you go.
Well, and that's that's really, I think my takeaway is number one, the premise itself is just we've debunked it. But also if you're a junior advisor, if you're a senior advisor talks about this sort of move but isn't willing to sell you bits of ownership over time, that's probably a clue that they're not really that serious about getting out of the game, right? I mean, I mean, I love it when other people other employees are owners because their skin is in the game. But you know, it's not everybody's in that position or wants to do that, I get it.
So, I think the concept, this is my conclusion is that the concept of retirement has changed. So the entire study is just bunk, right? If you're an advisor, you start party money managers, you outsource your tech, you outsource everything, you're just meeting with your clients and making sure that they're on their path for retirement, you can do that anywhere and you can, it doesn't take, you know, hours on hours to do that. So just the concept of retirement makes this whole thing sort of a dumb statistic to begin with probably.
Yeah, and you know, the reality is we shouldn't be, nobody listening or watching this should be surprised that this is the conclusion because let's face it, for regular people, your clients, retirement is changing, right? It's oh, I retire from my career, and now I start that career that I always wanted to, you know, or whatever. There's just, it's a totally different gig than it was five years ago. Okay.
So anyway, on that note, what's a, we got any recommendations or other conclusions, other things? No, no, we got, I got some good recommendations actually. We'll see, I just got a yesterday. So if you can see, I got these new Jabra Elite headset things in.
So, so here's the backstory. Shout out to Justin Castelli with the advisor growth community. He invited me on to do a presentation, and it's a zoom presentation where you are on camera, and my current headset, yeah, looks like this for zoom and explain why that's your headset, even though we need these podcasts. So, later not, AirPods don't actually work on computer, unified communications.
It doesn't work on your laptop. Take those things back off, man. No, I like them. They don't work on laptops.
And so, you know, if you're doing a zoom presentation, you actually can't use AirPods. So Jabra actually is the only earbud company that makes the USB dongle that you can put in. So they work on your laptop or desktop. And so when I do this presentation, or webinar, I didn't want to wear these big-ass headsets.
So I just got them yesterday. They seem to be working okay. They're about 200 bucks. Hopefully I can test them some more and maybe have the staff I'll get them to.
Yeah, sweet. Now, just for clarity, they work both with, because of the dongle, they work with the computer, as well as you can hook them to your phone and use them like any other headset. Correct. Yeah.
So, I, this is what I'm being able to do them both. It's weird that you would think that this technology would work on laptops, but apparently they don't unless you get that dongle. And so, that's why you see these big old headsets when you're giving these presentations, and they look horrendous. Cool.
All right. Well, mine's a little different. It's really simple. And that is, I'm down at Lake Okeechobee, Florida, and I love the bassfish.
And, you know, I've gone out a couple of times on my kayak on my own, and that's all fine and dandy around some of the edge water and so forth. But look, when you travel around and you're, especially if you're going to a place where you're at new water and you don't, I mean, I don't get to fish a lot because I'm busy working, right? But when you do, go, just go pay for a guide. I mean, die twice.
Yeah, there you go. That would be great. I think I shall. Give me a few years.
You know, but hire a guide, let them put you on the fish, and then you just knock them out right and left. I mean, look, sometimes you're going to go get scound. I've done that before. But overall, I think if you're going to new water or you want to learn the new water to start with, not that you're going to steal the guide spots, don't be that guy or that gal.
But, you know, again, pay the guide, let them take you out, let them explain what kind of grass that is, what all that stuff. And you'll be smarter for it. It'll be worth your money. And then if you do go out by yourself, at least you're more prepared for that water to go fishing.
So there you go. It's not a specific recommendation. It's a generic one, general one. But I think it's worth it.
And I got my personal best twice from my best fishing, and I'm happy camper. And I go kick it up another notch in a few weeks. Cool. So anything else?
That's it. All right. Rock and roll. Like, subscribe.
We appreciate you listening. That's two rock and rolls in one goddamn podcast. Hey, I do what I do. You know what I haven't mentioned my rig one.
See you. All opinions expressed by podcast guests are solely their own and do not reflect the opinions of Potomac Fund management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Potomac Fund management may maintain positions and securities discussed in this podcast.