Episode 10: Partnering for Success with David Haintz of Merchant Investment Management

In this insightful episode, Rob Pyne welcomes David Haintz, a seasoned wealth management expert and representative of Merchant Investment Management. With 35 years of experience in financial advice and business coaching, David shares his expertise on critical topics such as profitability and productivity ratios, client selection strategies, and Merchant’s role in helping advisory firms grow through acquisitions.

Discover actionable insights for building high-performing financial planning firms, leveraging AI, and navigating industry trends. David also delves into the unique approach Merchant takes as an equity partner, fostering long-term growth and alignment with their partner firms.

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SHOW NOTES

Profitability ratios:

  • Understanding the ideal income statement.
  • Key metrics: direct expenses (≤40%), overheads (≤35%), and target EBIT margins (≥25%).
  • Strategies to improve financial efficiency and reduce costs.

Productivity metrics:

  • Revenue per full-time equivalent (FTE) as a key efficiency indicator.
  • Benchmarking revenue per advisor and optimizing client loads.
  • How pricing and productivity are interconnected.

Client selection and segmentation:

  • The importance of targeting high-value clients.
  • Lessons from the airline industry’s segmentation strategies (first class vs. economy analogy).
  • How narrowing client focus can drive profitability and operational efficiency.

Merchant investment management’s approach:

  • David explains Merchant’s “significant minority” equity model (20-25% stakes).
  • The emphasis on long-term, patient capital with a 15+ year horizon.
  • Merchant’s support for growth through acquisition and operational improvements.

Trends in the financial planning industry:

  • Consolidation in the industry and the role of external capital.
  • The importance of professionally managed financial advice firms.
  • Key differences between Merchant and traditional private equity models.

The impact of artificial intelligence:

  • How AI can enhance advisor efficiency and client capacity.
  • The balance between human interaction and machine support in financial advice.

David’s reflections on leadership and growth:

  • Key lessons from his career, including insights from the book Good to Great.
  • The importance of focusing on key metrics and having a clear vision.
  • Observations on the “rule of 40” and its relevance to high-performing firms.

Quotes

  • “We need to think of financial advice businesses as a three-legged stool: serving clients, supporting teams, and ensuring owners achieve a fair return on their investment.”
  • “It’s not man versus machine but man plus machine, making financial advice more efficient and scalable.”
  • “Less is more when it comes to client segmentation. Focus on a niche and go deep.”

Resources

TRANSCRIPT

Welcome to The Trusted Adviser Podcast where you get a deep dive into the world of financial planning with industry leaders who shared their stories of winning and learning as they chartered their path to success. This podcast is for the curious, those of you that like to dig into the detail, if that sounds like you get ready to listen and learn.

Rob Pyne:

Welcome to The Trusted Adviser, the podcast where we explore the strategies, insights, and experiences shaping the financial planning profession. Today I’m pleased to be joined by David Haintz, a highly respected figure in the wealth management industry, with over 35 years of experience, David’s background as a successful advisor business owner, and over the past 10 years, a forward-thinking business coach has put him right at the forefront of advising financial planning businesses on effective growth strategies. In today’s episode, we discuss the key financial metrics in professionally managing a financial planning business, focusing on profitability ratios, productivity ratios, and client selection strategies. David emphasises the importance of balancing the needs of clients, team members, and business owners to ensure sustainable growth. He discusses effective client segmentation and the role of coaching in enhancing an advisory firm’s performance. And the conversation also covers David’s current role with merchant investment management and their unique approach to investing in advisory firms, prioritising, alignment and incentivisation of key personnel.

David shares insights on the criteria for selecting firms to partner with the significance of the rule of 40 in wealth management and the role of collaborative capital in driving growth. We also explore current trends in financial planning, consolidation, the impact of AI on the industry, and key lessons learned over the years from managing and coaching advisory businesses. Whether you’re a financial advisor, business owner, or someone with an interest in the evolving dynamics of the advice industry, this episode offers practical insights and valuable perspectives. Let’s get started with my conversation with David Haintz. Welcome David Haintz to The Trusted Adviser podcast.

David Haintz:

Good to see you. Nice to be here.

Rob Pyne:

Nice to chat to you again, David. I’m looking forward to our chat today because when we speak, I always feel smarter after the fact, so hopefully I’ll feel that again today. I’m no doubt that I will. So today I want to dig into your vast experience of working with advisory businesses in your own advisory business, but I want to begin actually by taking you back to an article you wrote for Professional Planner Magazine back in May, 2017. You titled that the Ideal Income Statement and How to Use It, and in that article you talk about converting the financial information of business into key ratios to gain greater insight into form to that business. You talk about the profitability ratio, productivity ratios and client selection ratios. So I want to dig into that with you a bit because it’s always worth recapping, and I want to begin with profitability ratios and just look at those metrics that you shared in that article, and I’ll share it in the show notes, but breaking down direct expenses, other overhead expenses and profit, and just to get a sense of anything’s changed in that space around the actual right ratios.

I’ll just recap quickly, you said 40% no more than for your direct expenses. You said no more than 35 for other overhead expenses leaving you with a 25% net profit. Those were kind of the no less than situations that you were referring to. So enough from me. Let’s get your perspective, David, from where you sit today, given that was seven years ago.

David Haintz:

Sure, Rob, look, let’s dig into those in just a second. But I guess the big picture view 35 years in management industry and I have a very strong view that the overwhelming majority of financial advisors are absolutely trying to and doing the right thing by their client and giving them a great experience. The overwhelming majority of advice firms deeply care about their team members in relation to give them great careers opportunities within the firms, et cetera. But I do feel that that third stakeholders sometimes gets forgotten by the very people who are running the businesses and that’s the owners of the businesses themselves. They can be so busy doing great stuff for clients, doing great stuff for team members that sometimes they put themselves last. And so yes, let’s dig into some of those profitability ratios, but business owners are taking risk. They are entitled to return on that risk, and if they didn’t get a decent return on the money they’ve got invested within their firms, then they could sell out, take the cash off the table, pay off for mortgage pay for school fees, buy beach house, whatever might be important to that particular shareholder or advisor.

And so it’s a great place to start. I’m not suggesting that clients should come last by any stretch with our clients. We don’t have businesses without great people in our teams. We haven’t got anybody to run the great client relationships, but like a three-legged stool, we need to make sure that the third leg of the stool is not broken. And so the profitability ratios broadly, I guess the starting point is what even what type of profit would you like to achieve? Now some people might say 20 percent’s. Okay, others might say 40 is okay. And those that jump into the show notes and have a read of the article, the figure you just mentioned there, Rob was 25%. And all I’m saying on the 25% is unless you can get those direct expenses to 40% or less, that’s the cost of making the sale, the cost of the advisor bringing that particular client on board.

And unless you can get the other overheads to 35% or less, the 40% plus the 35% equals 75, you get left with your EBIT margin of 25. So if you want to make a 30 or a 35% EBIT margin, you’ve got to find a way to get the direct expenses down and to get the other overheads down through some form of efficiency. So to your question, are those numbers still right today? I’m going to suspect those numbers will be right 50 years ago, 100 years ago, and in 50 years time, I mean really comes back to what the individual shareholders owners are trying to achieve.

Rob Pyne:

So can I just click into this idea of how much direct expenses, what goes into that direct expenses of 40%? Because when we talk about the cost of direct sale, if you like, the advisor obviously goes in there, natural advisor remuneration, but many businesses would be running with an associate supporting that advisor and the associate’s often sitting in the room with that advisor and their client. So this is probably just from a personal perspective, I’m curious as to whether you would associate the advisor and the associate as that direct expense cost because many people, and I’ve just had a chat last week with a bunch of CEOs that run businesses around the country and there’s a variety of opinions about what’s the right rate to pay advisors as a function of the revenue they manage. And there was a spectrum from mid twenties through to low thirties in terms of what the advisors should expect to receive. So when we talk about 40, are we talking about the associate sitting in the room along with the advisor as well as part of that direct expense cost?

David Haintz:

Well, broadly the answer is yes, it’s any cost associated with bringing that new client on. So it might not be the full salary of that associate, but it might be an apportionment depending on how much time they’re spending and bringing new clients in other expenses, like if there are any referrals being paid to referrers to accounting firms, et cetera, et cetera, they’re the types of costs that would go into the direct expenses. So Rob, I think the short answer is it’s not an either or. It’s a combination that needs to be apportioned to say what portion of the time is that associate or whoever else in the firm spending in onboarding clients, which would come off your direct expenses, giving you your gross profit.

Rob Pyne:

Sure. I just had a chat to Phil Little from Slipstream group and we were speaking about this exact issue in talking about pricing and pricing being obviously a lever that people can work to improve the profitability of their business. And he suggested if anyone’s running below 30 or certainly even close to 20 in an EBIT margin, he said there’s possibly a pricing issue there or there could be a number of issues but could be a pricing issue. So that was an interesting take and one that certainly we always review EBIT margin to see how we are performing. So speaking of margins, a lot of it comes down to not just pricing and your staffing costs, but really the productivity of the people you have and those productivity ratios you refer to in this article as well. There’s a few there that you mentioned talking about revenue per FTE revenue per advisor, clients per FTE clients, per advisor, net profit and so on. So is there one or two particularly strong indicators from your standpoint that point to of an advice business under those ratios?

David Haintz:

Yeah, productivity could be a broad word. You could use that to be efficiency or inefficiency. I mean for me, I guess the first one I jumped to is revenue per FTE, which broadly speaking in Australia, if you look at any financial advice firm’s website or you get a sense for how many people they’ve got working in their firm and you multiply that by as a rough rule of thumb, $200,000 of revenue per full-time equivalent, that should give you a reasonable guide as to what that firm’s turning over. Now there are many firms in Australia that are at 1 90, 180, 1 60, 1 50, just like there are many firms at two 50 and some firms at 300. So there’s a broad spectrum, but that would be the first that I would look at to say are we as efficient as we should be? Do we have the right clarity of client value proposition? And Phil’s comment around the pricing, that could be another one as well. There might be a sign there that you’re squeezing every little bit of the lemon from a productivity perspective, but you’ve got the wrong pricing. So I don’t think any of these ratios, Rob, are definitive, but they’re giving you a dashboard to make some decisions on.

Rob Pyne:

Yeah, for sure. So just talking about that spectrum of productivity ratio and the particular ratio we’re speaking of which is that revenue per FTE pricing could be one point you make there. And I want to perhaps dig into this around the client selection ratio, which is the third type of ratio you mentioned in your article because is it fair to say that firms that have a typically higher value client and perhaps have a higher fee per client on that client selection approach would be those firms that typically are higher on that revenue per FT up around they’ll be the 2 50, 2 80 because they are able to generate more revenue per person in their team than perhaps a firm that’s out there charging 3, 4, 5, $6,000 a year. They would find it harder to get their revenue per FTE number up around the 200 or north of 200, and perhaps they are lower on that. Is that a fair assumption there David?

David Haintz:

I think Rob broadly, that’s a very fair assumption. There’s a certain cost to deliver advice to run an advice relationship to onboard a client and to run that relationship every year. Now, if you’re an average firm in Australia with average revenue per client, which all the different surveys suggest that that’s around four and a half or $5,000 as an average fee per client in Australia, your cost to deliver on that, I mean each firm’s going to be different, but it’s probably going to cost you at least three to three and half thousand dollars to deliver advice per client. Now, just like I mentioned that revenue per FTE is one of the guides. Another guide would be revenue per advisor. Now I think average in Australia today would be in the order of 550,000 of revenue per advisor. Clearly if you are running at 800,000 or a million or 1.2 million of revenue per advisor, there’s only a certain number of clients that each advisor can look after. It might be 60 if you’re over high net worth, it might be 80 to 120 in mass affluent space, or it might be 150. I dunno, there’s a lot of firms out there that are trying to get to 200 and 250 clients per advisor using ai. A number of clients per advisor is one of the measures, but revenue per advisor as well. So broadly, I’m agreeing with your point Rob, that if the revenue per client is higher and the revenue per advisor is higher, you’ve got more levers to try and drive your productivity for sure. 

Rob Pyne:

And to go one step further, is it reasonable to say that you don’t work twice as hard for a client paying twice the fee typically? So it’s not a linear relationship if you’re charging a client 6,000 or a 12,000 or 18,000, the time investment in that client doesn’t go up by the same quantum as the dollar amount. So you can potentially get some improved productivity there if you like, in terms of being able to serve a group of clients with a higher fee per client, that revenue per client without necessarily having the same level of commitment time-wise as the fee attached to it would suggest.

David Haintz:

Yeah, absolutely. So when we look at these client selection measures, again, jump on the article, have read of the article, but I would also measure ratios such as gross profit per client, which is taking your total revenue minus your direct expenses and divide that per client and your net profit per client. So work out what your rebate is and divide by the client numbers. And broadly what you are saying is that if your revenue per client is higher, then it’s a fair assumption that your GP per client and your net profit per client should be higher as well because you’ve got more levers and perhaps more efficiency there.

Rob Pyne:

Okay. So with that as the background in your role, you’ve been obviously a successful business owner, you are part of the Shad force rollup and a highly successful and well-publicized bringing together of high quality firms to form well, what was the largest independently owned until Insignia bought it out, but it’s still an impressive business. And I checked the financial statements when Insignias came out to see how it’s tracking. It’s obviously still performing at a very high level and the new CEO Scott Hartley seems to be pretty pleased with how it’s performing and made comment of his address. So in your experience post your advisor work, you stepped into the business coaching space and in that role, what were some of the client segmentation strategies that you were recommending people take to get that client selection piece right for financial planning firms that were aiming to enhance their profitability? How do you think about client segmentation and trying to drive profitability?

David Haintz:

So firstly, and I’m sure we’ll come onto this during the conversation, Rob, but 35 years in wealth management, 25 years on the tools running at advice firm, both sort of small medium and involved in a large rollup, which started off at 80 million revenue finished up six years later at 160 million revenue. And so I guess the short answer in that 25 years is I’ve seen different types of client segmentation, which I’ll talk about in a moment. And then the last 10 years I’ve been advising financial advice firms in different countries, mainly Australia but many other countries as well. And so the answer to this segmentation piece is the airlines have got it right in the sense of I talk about SSP segmentation services and pricing, the interrelationship between the three. If we think about the airlines for a moment, you’ve got first class business class, premium economy, economy, and I think it would be fair to say all things being equal that there is a clear delineation between the price of each of those services and the service of each of those services.

If you are at the back of the bus, like many of us sit, you’re probably not going to have a great choice in meals or wine selection and not as much leg room and your seat won’t go back too fast. So the reason I mentioned the airlines is I think the consumer can self-select as to whether they’d like first class business, class premium or economy. When it comes to wealth management, I think a lot of the segmentation that I see is done more for internal purposes than external purposes. We talk about the aas as the bs, we talk about the platinums, the golds, the silvers. And the question that I would ask was if a client knew that they were a platinum or a gold or a silver, and if they knew that there was a different pricing option for the services that they were getting, would they select to be a AA or a platinum or would they self-select to be a B or a C?

And so I think we’re heading in the right direction on this concept of the SSP, but I don’t think we’ve completely nailed it. For me, it would only be at a point where externally prospective clients knew what the segmentation range was and they could choose to be in one of those segments proactively. I think broadly the mistake that many advice firms make is they overcomplicate things by having so many different types of clients that as a result of that they have many segments. The best advice that I could give anybody listening in today would be that less is more, less segments is better than more segments. The best businesses that I see have got a very clear focus. They’ve sold off their B’s or C’s or even their A’s, and they’re only keeping their double As. There’s a very narrow and deep focus on a niche client. It might be dentist, it might be in the us. I heard of a firm that’s specialising in professional bass fishermen, and so McDonald’s franchises would be another great one where when you get to understand the type of client you’re looking after, there’s almost this community that you become a part of through magazines, through clubs, et cetera. But I think the short answer here on segmentation is that less is more in my experience.

Rob Pyne:

For sure, know who you’re trying to serve and then go deep on that, basically become an expert in a chosen area. So you do become a part of that community, not just serving every person that might be looking for advice out there. And that can tend to not just improve your reputation in terms of your experience in a certain field, but obviously improve the return for your time as well because you’re actually becoming very good at a particular type of client, so you’re better at it and also more effective at it.

David Haintz:

That’s absolutely right. But I would say that the highest and best paid people in wealth management are problem solvers. We’re all problem solvers. And the clearer that you can be on what that problem is, the more of an expert that you can be on solving those problems. So if the niche was looking after senior executives in technology companies around their employee share and option plans and that all you did was looked after Apple execs or Microsoft execs or whatever it might be, you become a real expert in that space and known really well in that community. Now, that’s not to say that you can’t run a great broad-based mass affluent firm, and clearly if you’re going to be specialising in senior tech execs, you’re probably going to be based in Sydney or Singapore or San Francisco, and that’s more difficult if you’re running a regional firm. So we need to play to our strengths, but on the topic of segmentation, I would think that less is more broadly.

Rob Pyne:

Okay, so we did a quick recap there of your history in the advice space, space as an advisor, business owner and also in a coaching capacity around the world, and particularly in Australia, but certainly in other countries as well. More recently though, you’ve actually taken on a new role where you are part of the merchant investment management team and you are out in Australia and perhaps other parts of the world as well, meeting with firms that you’re thinking are potentially a good fit for merchants. Can you just elaborate a little bit about your current role, the merchant expansion into the Australian market and what it’s looking to achieve?

David Haintz:

Sure, Rob, so broadly, I’ll talk about 25 years on the tools working in an advice firm and 10 years where my clients have been financial advice firms, helping them to achieve what was important to them, which was typically growing or typically improving their profitability, helping them with their client value proposition, their pricing, et cetera, et cetera. And what I witnessed in the last 10 years of doing that was firstly that great firms still recognise that they need a coach. If we take some of our best athletes that Australia might’ve seen him, Ian thought comes to mind in swimming when he won his last gold medal, he still had a coach. We know that Djokovic has just announced that even though he’s arguably the best tennis player in the world, he’s just announced that he’s got a new coach in Andy Murray. And so great firms recognise they have hubris, they recognise they don’t know it all.

And so whether it was me or whether it was somebody else to be engaging someone to help them, to give them some discipline, some focus I think was really important. And in that time we helped a number of firms to have great successes. I mean one firm, I was on the advisory board in 2015 at 14 million is now north of 100 million. Another firm in 2020 was 2 million revenue that today is on a run rate of 12 million revenue. And that’s not all down to me and what I’m doing, you’re partnering with great people that have got a growth focus. And so part of bringing merchant to Australia was to be bringing some capital where people have done a whole lot of acquisition, they might be running out of dry powder. And so we’re able to offer some expansion capital. We’ll talk more about what merchant does in a moment in taking a significant minority stake typically in that sort of 20 to 25% range.

But I also witnessed that the capital partners in Australia were not only but typically majority controlling partners. In other words, they were buying 51% or buying 100% and having had 35 years experience in professional services, it’s certainly my view that whether you are in engineering, accounting, legal, wealth management, any professional service, I believe that you’ve got to keep the incentivization with the people that are doing the work, the people that are going up and down the elevator, because I think the minute that you are not incentivizing key people, it’s hard to get that same engagement and that same alignment. So rather than seeing these majority controlling models, we brought a significant minority model where we’re acquiring or issuing new shares 20 to 25%. So they’re getting all of the value that we’ve been helping them with over the last 10 years, but there’s another 45 on the team in the US that are super experienced in wealth management. And so we’re able to expand out the experience, expand out the services, and get some alignment with the firms that we’re working with. So we’re aligned in trying to gain some growth and some upside with that particular firm. Whereas in the past, I guess I could or couldn’t have negotiated an equity position, but I didn’t. But now with the capital partner being merchant, we must certainly doing that.

Rob Pyne:

A quick shout out to you, Dan Brown. It was episode seven of the Trusted Advisor podcast and he gave you a shout out on that particular episode, said that you were instrumental in, he started by calling you a mentor and he said, but maybe more than that. So he didn’t know quite how to describe you David, but certainly very impactful is what he was saying was that what Coastal Advice Group had been able to achieve was largely a part of Dan’s Drive, but your guidance and direction as well as part of that journey. So check out episode seven for those that haven’t listened to it yet.

David Haintz:

And Rob, it’s probably timely and I’m going to jump in, but Dan and I have been working together now since 2020, and it’s just like you and your team, Rob, working with a new client, you go through this discovery process, what’s important to them, what are they trying to achieve? And that’s what we would do logically with any of our coaching clients to say, how can we help you? What does success look like? And Dan wanted to grow, so he’s grown quite dramatically and I’m delighted to say that yesterday merchant closed out a partnership with Coastal. We won’t be making any press releases until the new year, but that’s gone official as of yesterday. And so I’m delighted to say that I’m now in partnership with Dan along with the rest of the merchant team.

Rob Pyne:

Congratulations to you at Merchant and to Dan in particular for what he’s been able to achieve thus far. And no doubt with your assistance now with additional capital, he’ll continue and you only have to listen to that episode to realise that he’s certainly still got very big ambitions and he’s achieved a lot already. So no doubt with your support, he’ll continue to soldier on in a pretty impressive fashion. Can I take a second then to look at that question that naturally comes from that, David, is what criteria does Merchant consider when you’re looking to partner with the financial planning firms?

David Haintz:

Sure. I’ve coined this phrase Rob. Everyone’s heard of Pareto’s principle, better known as the 80 20 rule, and I talk about this concept of double Pareto. So we are targeting, broadly speaking 20% of the 20%. So it’s not a precise science, insane 4%, it might be three or four or 5% of the market. But the people that we are looking to partner with first and foremost, they’ve got to have the right character, they’ve got to want to grow, they’ve got to really have a growth mindset. It’s not illegal to be playing golf three times a week or going home at three or four o’clock in the afternoon, not illegal at all. Hats off to the people that are able to achieve that, but the people that we’re typically partnering with have got a really strong growth profile. They’re typically highly entrepreneurial. And so they’ve set some aspirational and lofty goals and we want to help them to get there quicker.

Rob Pyne:

So in trying to get them to where they want to be quicker, what are those key attributes or benefits that you bring to the table with merchant apart from capital initially, particularly in terms of that growth through acquisition?

David Haintz:

So these firms can grow through acquisition or organic growth I’m sure will come on to issues and challenges with the industry shortly, but organic growth is better than organic growth. It’s much cheaper. But if we can take Daniel and Coastal as an example, they’ve made something like 24 acquisitions in the last four years. And so perhaps it’s time just to introduce this concept. I call it the rule of 40. Rob, the rule of 40 initially came in where SAS burns or software as a service firms thought, what does success look like? And typically they were going through cash burn typically weren’t profitable. And so if they could achieve 40% year on year growth, that was typically a benchmark that a SaaS burn might look at. And I’ve taken the rule of 40 and adapted that to wealth management saying I think the same rule applies.

It doesn’t really matter whether you’re getting 40% EBIT and 0% growth or 30% EBIT and 10% growth or 20% EBIT and 20% growth. I think that aspirationally that rule of 40 is something to shoot for. And so typically the firms that we’re looking to partner with are absolutely trying to hit the rule of 40 if not more. I can say that merchant has 101 partner firms in six countries, and on average they are growing at 20% per annum. In Australia, our partnerships are growing north of 45% per annum. Now, I don’t say that lightly, I say that because of course you could do that organically, but to do that inorganically is much easier through making more and more acquisitions. So how are we helping the firms? It’s identifying opportunities, Rob, it’s looking at their operating models to see whether there’s any more efficiencies, any more margin gain.

It might be pricing. It doesn’t really matter whether the firm’s turning over 3 million or $30 million, you’re going through exactly the same process to look at the financials, look at the value proposition, look at the pricing and see how we can make that boat go faster. And look, I would add to that of the 45 staff, there’s only two of us in Australia. We rely very heavily on our US team. So we’re on video conference Tuesday through Friday, try and avoid Saturdays. And so there’s some very experienced people there. They’ve taken four different companies to successful IPO. And so we don’t profess to know anything about hanging paintings on walls or putting nails in walls. We’re really good at wealth management and I’m not sure if we’re good at anything else beyond that, but that’s our niche and that’s our expertise and that’s what we stick to.

Rob Pyne:

And so just taking a second there to have a look at the inorganic work that you’re doing with businesses like Coastal and obviously doing more of that in the future now as well, not just in a coaching role, but as a partner, being an investor in that business, what does that look like in practise where you say you’re identifying opportunities, you’re helping to work through and determine where the opportunity is in terms of what you can do to help improve the business that you’re looking at acquiring? So are you heavily involved with the practise principal and their team in navigating the questions around what is this worth? How much do we pay for this business? What can we see in terms of opportunity here? Are you doing all of that work as part of the process of working alongside firms?

David Haintz:

Absolutely. I mean, we would describe ourselves as operators or another word that we use is collaborative capital. We’re not writing a checkout and attending a board meeting in three months time. I mean, the firms that we partner with, we want our phone numbers to be on speed dial. We are talking to them, not necessarily daily, but certainly weekly. We’re helping to identify organic opportunities for them. We’re not solely responsible for that. Obviously they keep growing the boat themselves and operating the business as usual. But we’re obviously out there talking to a lot of firms and different people have got different aspirations. And so where it’s appropriate, we’re able to marry up different firms to have a conversation. We have a number of incredibly talented and experienced chartered financial analysts that just happen to be based in Florida or New York or somewhere else. And so we work closely with them to help ’em structure and look, notwithstanding I’ve got 35 years on the clock, one of the many things that I enjoy about what I’m doing now is I’m not too old to learn. I’m learning so much from these guys and girls over in the US around structuring. There is no cookie cutter approach. There is no one size fits all. We don’t believe in problems. We only believe in solutions. And so you’re able to learn and structure and look, I don’t know whether they’ve done 500 or 600 or 700 transactions m and a transactions between them, but there’s a hell of a lot. And so you’re constantly looting around a way to get around issues and challenges and to solve problems.

Rob Pyne:

Anyone that tunes into any of the podcasts that are coming out of the states, the theme has clearly been over the recent years very much about merger and acquisition activity. And there’s some very big names that have built amazingly successful and large enterprises now. And we get a few visitors out here from time to time including people from merchant, obviously talking to an audience of advisors here. And so you talked about there’s other players in the market that are doing private equity, but it’s not done the same way as you are doing it. So just speak to that point around the trend in financial planning presently around this consolidation and the capital that’s coming in for businesses that are growing. What trends are you talking to people about that firms should be aware of and positioning themselves for?

David Haintz:

Well, the concept of external capital or offshore capital coming to Australia is not new. You look at Ians and Creststone or immigrant and coder, obviously focus and others have been here for quite some time. So it’s not new. I think some people drive a Mercedes and some people drive A BMW. It’s not to say that A BM BMW’s wrong, everyone’s looking for something different. So be clear on what you are looking for. I think it’s important. Firstly, key points of difference. We are operators, but also this term private equity gets thrown around a little bit easily. Rob, our money is private and yes, we take equity positions, but the differentiator that we talk to is that our money is not going into a fund. It’s not going into the merchant fund number one or the InvestTech fund number two, or the Macquarie fund. Number three, we are an operating company.

And so anybody that puts money into support merchant must agree to a minimum 15 year duration. And so it’s long-term patient capital. And so I think that’s a key point of differentiation. But to your question, why is this external money coming in wealth management firms when they’re run? Well, coming back to where we started on the ratios, when they’re run well, they should be running on 30% EBIT margins. There is typically very little CapEx upfront to get the businesses up and running. There’s a tailwind whether you’re investing in 60, 40, 70 30, 90 10 type portfolios that there’s a natural tailwind of markets. There’s a natural tailwind of superannuation increasing each year, not only in percentage but in real dollars. You’ve got high profitability margins, high dividend payout ratio margins. And so what you’re looking at here is when run well, if you’ve got a million dollars to advance Rob and say, okay, I can go and put this into some BHP shares, some bonds, a term deposit, all things being equal, wealth management firms are great to invest in. And so people shouldn’t be surprised to see these external capital looking for a home. They just need to understand that there are some key differences between the offers from some of these firms. And so ours with long-term patient capital and coming in with a minority position, not a majority position to help partner with them and be aligned is I think a key point of differentiation.

Rob Pyne:

And speaking of being operators, you, you’re currently a privately held company and I saw recently, did I not that you’ve just attracted some medicinal equity capital into merchant to actually provide more capacity to continue this journey that merchants on to acquire the best businesses that are growing. Do you want to speak to that for a second? I saw it in the press and it was worth perhaps just recapping for those that didn’t see it, that merchant is and has been so active that they’re now looking at it having had additional capital come into merchant to continue that process.

David Haintz:

Merchants done a number of rounds, Robert, it started off with internal partner money when merchants started off in 2017, the next round was passing their head around to family and friends. Again, agreeing on that sort of long-term patient capital minimum 15 year duration terms. More recently we’ve just closed out a 600 million US dollar capital raise. I don’t think it’s any secret that that’s gone through the firm that has backed merchant with that money is yet to make a release. So I won’t sort of talk through exactly who that is right now. I’ll wait for them to make the formal announcement. But it’s been done because merchants growing so quickly, in fact, at 60% per annum that all of the money that came in the first few rounds has been exhausted and we need more capital. And so that’s why we’ve locked away the 600 million US dollars and that should be enough dry powder Rob to get us through the next sort two, two and a half years. Again, that money’s come in with a minimum 15 year duration and a long-term view so that we can be aligned with our partner firms and not put them under pressure to get an outcome in three years or five years or seven years because we need to refinance.

Rob Pyne:

And so it’s long-term patient capital, which is always music to the ears of advice firms that actually are seeking external investors because the last thing they want to be doing is having a private equity investor, even a professional partner who’s very collaborative as you guys clearly are wanting to exit within a short period of time, as was typical of the way people got concerned about private equity being a sort of buy-in, ramp it up and get the money out. That’s not the merchant model clearly. Do you want to speak to what merchant’s intention is longer term? Is it to list the business at some point to create some liquidity for the investors who’ve put money in? So can you speak to that point?

David Haintz:

Sure, Rob. Firstly, I’m not sure if they’re good examples or not, but sometimes I cite the examples of Warren Buffet or perhaps in Australia WH. So Patterson’s and their philosophy is the best duration to hold a great investment is forever. And so merchants investing in entrepreneurial growth wealth management firms, and we believe the best time to hold those investments is forever. Now, something might change with some of our partners. In fact, three out of the 101 have exited in the last couple of years for different reasons, but we worked with them and helped them to get a great outcome. So the capital raise that we’ve just closed out will give us enough capital for the next two, two and a half, maybe three years. The company’s growing at 60% per annum. Guess what, if we keep doing that, we’re going to need more capital in two, two and a half or three years time, we expect that we’ll be an IPO.

And as a lot of people talk about that, a lot of people throw around, I’m going to list this firm, I’m going to list that firm. The experience of the partners of Merchant is that they’ve done that on many occasions in previous lives. And so that’s one of the options available to us right now. But that doesn’t mean we need to sell. That doesn’t mean we need to exit the fact that we’re taking a 20 to 25% position with our partner firms. We would offer them a tag along which would be their right, but not their obligation to tag into some form of liquidity event that could be an IPO and based on our principle that we want to keep as much of the equity as possible in the people that are doing the work and going up and down the elevator, we would allow them to tag into a 50, 51% position, but no more than that.

And one of the beauties of that is it provides some liquidity to people that may have been running businesses for a long time, Rob, but also for the Australian listeners. Our Australian multiples could be anywhere from four times EBIT to eight times EBIT on a wealth management firm depending on a whole range of factors. And the US multiples happen to be quite dramatically higher than that. And so you’re seeing many transactions in America north of 15 times, north of 18 times, north of 20 times EBIT based on a whole range of factors. So there’s a real arbitrage opportunity there as well. If some of our partners or some of our prospective partners would like to have some liquidity, but from a merchant perspective, I come back to the buffet scenario or the salt pat scenario. If you’ve got a great investment that’s growing at 60% per annum and spitting out great dividends, you could sell that pay capital gains tax, get the money in the bank, and then what do you do? You sit down and say, Hey, I’d like to go and invest in a great investment. And our view is we’ve already got that. So this is not an exit or a liquidity that merchant’s looking for, but something we’re looking to help our partners with.

Rob Pyne:

Yeah, clearly those sorts of returns, no wonder there’s money that’s flowing into this space and looking to take a stake in professionally managed financial advice businesses that are growing at a good rate and helping those businesses to supercharge their growth. So looking forward, clearly there’s a lot of attractive features of financial planning businesses, and this is why this capital is coming in. But looking forward, just want to speak to a second, and I’m sure you’ve had conversations with people in recent times about the rapid advancement in artificial intelligence and the increasing integration into the financial services sector. You mentioned there at the early stages there about businesses trying to drive more clients per advisor using ai. How do you foresee AI impacting the financial planning industry? Because it’s not a leap to say that’s potentially AI could deliver the technical element of advice in some form in the future. So how do you think AI will impact the industry over the next, say three to five years? I mean, no one’s got a crystal ball, but just based on your experience and all the conversations you are having, where do you see that sitting

David Haintz:

Look, in summary? My view would be, I don’t see it as being man versus machine. I see it being man plus machine to be more efficient to help more clients. I think those ratios, a typical advisor might be looking after 80 to 120 clients. I think AI might be able to help them move to 150 or 180 or 200, or some firms are talking about 250. I think there are certain roles within advice that may be under pressure, that might be more of the repetitious type roles, whether that be onshore admin or offshore admin as an example. But when you think about the value of advice and what people are paying for, one of the biggest areas in the value of advice is helping people to make smart decisions and stopping them from making stupid decisions. And so yes, there might be various elements that AI help with in the process, but I don’t see how that’s ever going to help smart people making stupid decisions. So that human element, that face-to-face, belly to belly element, I have zero concern about the future of professional continuing to run great firms. I think they will be way more efficient and AI will help way more with that. But there are elements and aspects of the CVP that I don’t believe can be delivered by a machine.

Rob Pyne:

I agree with you entirely and I hope we’re both right and I’m sure that’s something we’ll learn in time. But certainly the assistance of AI will undoubtedly help us and a bit of reform in the advice space too, which is pending. That’ll hopefully make it a little bit easier to deliver advice to many more people and just deliver the good work we do to more people because that’s got to be good for the community and ultimately the economy. So very much on the same page there David. So just then as I wrap up here, final question for you. Reflecting on your career, what key lessons, if you can sort of summarise one or two that you hang on to that you’ve learned about managing and growing financial planning firms. You’ve got a lot of experience in space, so what are the key lessons you’ve picked up over the years that you really like to share?

David Haintz:

Look, probably the first one, Rob. Many of us would’ve read the book Good To Great by Jim Collins. For me, that’s just a great read that continues to resonate, getting business with great people. Collins talks about getting the right people on the bus, the wrong people off the bus, but getting the right people sitting in the right seats. And that book was almost written for the Shad Forth merger of 13 firms coming together and 26 egotistical principles that sit around a table to say, Hey, we’ve got some amazing people here, some incredible people, some incredible partners. Not everybody wanted to be on the journey. Some jumped off the bus, the vast majority stayed on the bus. It enabled us to specialise in certain roles. And so that whole forth experience to me was all about working with great people. And again, come back to the Paretos principle or double Pareto and mean really, really, really, really great people don’t grow on trees.

I mean, we need to seek out and find them. So that would be one, I think the three-legged stall that I mentioned earlier, we all focus on clients, we all focus on team members, but do we focus enough on ourselves and key ratios and key outcomes, really measuring business metrics, which is where we started focusing on growth. Looking at that rule of 40, and I would say that there would be 10 to 15% of firms in Australia that would be hitting the rule of 40. Just my gut feel having done this for a few decades. So the need to grow, if you’re not growing, you’re probably going to be letting down your team members. You’re probably going to be letting down some of the resources you can be throwing to clients and prospective clients and centres of influence, but you’re also letting yourself down on the money that you’ve got invested within that firm. And look, finally, I guess the point would be focus, and that is really focus like a laser beam on what the key metrics are. You’re looking at what you’re trying to achieve on an annual half yearly and quarterly basis. The firms that I see that are successful have got a really clear vision and a laser-like focus on achieving that vision, breaking it down into implementable chunks. So probably nothing new there rock, but observations that I’d share and help some of the listeners with.

Rob Pyne:

Always good to hear, even if it’s recapping. But I think they’ll be gold for anyone to listen to this episode and think, just remind themselves about what’s important and what they should be paying attention to. And I do love Good to Great that book, and it’s a Hall of famer, if you were listing one of the top 10 books of all time that you’ve read, that was one for me. It was one of those ones you sort of never put down and kept going back to a Bible. And it still is a great book to read. So another episode, at some point I’ll ask for other hall of fame suggestions other people have got but Good to Great. Totally resonates with me too. It was a brilliant book. So David, I really appreciate your time today. Thanks for joining us on The Trusted Adviser podcast.

David Haintz:

Rob, great to be here. I hope that helped in some way with some of the listeners. So thanks for having me.

Rob Pyne:

Brilliant, David. Thank you.

Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts, and more, go to thetrustedadviser.com.au.

 

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