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Join Stuart McLeod as he interviews the world's top accounting leaders to understand their story, how they operate, their goals, mission, and top advice to help you run your accounting firm.
Stuart: 00:00:06.258 [music] Hi, I'm Stuart McLeod, co-founder of Karbon. Welcome to the Accounting Leaders Podcast, the show where I go behind the scenes with the world's top accounting leaders. [music] Today, I'm joined by Rob Santos and Rory Henry of Arrowroot Family Office, a boutique wealth management firm working with international and domestic clients to provide personalized investment and family office services. Besides managing Arrowroot Family Office together, Rob and Rory also developed AFO Wealth Management Forward, an educational program that helps accounting firms integrate wealth management services into their practice, and they co-host the program's namesake podcast, AFO Wealth Management Forward. It's my pleasure to welcome to the Accounting Leaders Podcast, Rob and Rory. Rory and Rob, of Arrowroot, welcome to the Accounting Leaders Podcast.
Rory: 00:01:04.542 Thank you for having us on, Stuart.
Rob: 00:01:06.430 Yeah, great to be here.
Stuart: 00:01:08.443 My pleasure. Now, [laughter] this is a little bit different to what we normally do. So I'm fascinated to dive in a bit. Well, let's start at the start. Tell me what Arrowroot does and how it came to be.
Rob: 00:01:21.346 Arrowroot Family Office is an SEC registered investment advisory firm. We have to say that our registration status doesn't mean anything other than the fact that we're just registered. There's some compliance [laughter] for you there.
Stuart: 00:01:33.113 Why? Is there a thing? Is somebody going to-- is there a registration police?
Rory: 00:01:37.322 Yep. [laughter]
Rob: 00:01:38.479 Oh, yeah. No, no. They're very keen on the facts of our disclosure about that.
Rory: 00:01:43.846 They're not looking after FTX, they're worried about this stuff. [laughter]
Stuart: 00:01:48.290 Yeah, yeah, yeah, as long as a couple of dudes in Marina del Rey. [laughter]
Rob: 00:01:53.894 So we've got four offices, kind of across the United States, Northern California, Southern California, Michigan, and Virginia, and we're managing capital from some ultra high net worth folks, but through the power of enterprise software, we've been able to open up our services to really anybody of any kind of net worth. And Rory and I have been working to kind of roll out this family office holistic model and start incorporating accounting professionals from various sizes, small to large, to start incorporating this kind of holistic family office model, and I'm sure we're going to talk about it a little bit later, not only to provide better service to their clients, but also to provide a better solution for their own businesses as accounting professionals. And so that's a little bit about us. We're big believers in enterprise software and we love our customers and our fiduciaries and are trying to leverage that enterprise software to provide better service and better business for everybody.
Stuart: 00:02:53.408 All right. So let me try and break it down a bit, Rob. So there's a level of service that Arrowroot provides that incorporates things like wealth management that accountants can use as part of their service offering to their clients to broaden their services, to add intellectual property to their array of services, so that their clients get a more holistic service. So how did I go?
Rob: 00:03:16.664 I think that's really good.
Rory: 00:03:17.982 Spot on. [laughter] We're looking for an SDR here, Stuart, if you want to come on board. [laughter]
Stuart: 00:03:22.957 Oh, fuck, I'm not very good on the phones. [laughter]
Rob: 00:03:26.306 I think you nailed it. I think advisory is a buzz term that is in the accounting profession right now. And so what Arrowroot Family Office provides to those accounting professionals is a few different ways to incorporate that advisory model with less friction, easier use, right? And that can equate into higher recurring revenue, higher gross margin, more freedom for them to work. And there's a few ways that we work with accounting professionals, or we look to work with accounting professionals. One was kind of traditionally called a solicitor. Now it's being called a finder under the new marketing rule. And that essentially means a referral basis and being compensated for that. But increasingly, what we're seeing are a lot of accounting professionals start to become actually registered themselves and registered investment advisers with RIAs and things like that. And then last but not least, there's a lot of folks out there with ambitions of starting their own RIA. And so we look to partner with those accounting professionals in whatever path that they might want to go to try to guide them to the best solution for them and their firm and their clients.
Stuart: 00:04:35.055 Yep. So for the dumb idiots amongst me, an RIA stands for?
Rob: 00:04:39.525 A registered investment adviser.
Stuart: 00:04:41.703 Right. Okay. And so not all accountants are RIAs, but if you want to have these services, then one way to do it is you can refer. You can say, "Okay, Mr. Client, Mrs. Client, go and talk to these guys and girls," obviously, and you pay a commission on that or a lead fee or something. Or that as an accountant, can become an RIA in conjunction or-- I don't know what the term-- but facilitated by Arrowroot, and they can start offering these broader array of services, wealth management, share trading, 501 stuff. [laughter]
Rob: 00:05:18.317 Yeah. It's all kinds of stuff. It could be life insurance. It could be financial planning. It could be an investment advisory. It could be assistance in trying to give kind of family office service, so that could be governance or reporting or technology. There's a whole vast array of services that folks can be able to incorporate into this model, and what we try to get folks to focus on is, what's the lowest hanging fruit? That might be 401(k) advisement or financial planning alongside their tax advisement. So there's a whole lot of different things, and their degree of involvement in their client's advice is really kind of determined by those different steps. So either referral, right? They're being paid as part of the-- and disclosed to the client before that they're being paid a portion of the investment advisory fee, or they're actually an adviser themselves, and they might be doing some of that advisement, or they may be the firm. [laughter] Right? They actually may have their own RIA as part of their practice, maybe an affiliated firm or things like that. So there's degrees of involvement that accounting professionals can have. And obviously, that degree of involvement, the more you have, the more you're going to be able to share in those fees and incorporate into your own practice.
Stuart: 00:06:34.420 Yeah. As a software guy, I would relate it to being [inaudible] in payments, right? When you start building payments, you pay Stripe an enormous amount of money, but as you move up the-- and they do everything, but as you move up the payment stack, your margins become better, but you take on more responsibility. How's that for an analogy?
Rob: 00:06:56.678 You nailed it. [laughter] You nailed it.
Stuart: 00:06:58.658 Excellent. All right. I'm not as dumb as I look. Okay. And how did Arrowroot get started then?
Rob: 00:07:04.457 That's a great question. So my background, I started my career in the early 2000s straight out of college, and I worked at Bear Stearns.
Stuart: 00:07:12.520 Oh. How did that go?
Rob: 00:07:14.121 Well, it was wonderful until the very end. [laughter] I didn't have anything to do with mortgage-backed securities. I've got one here in the office.
Stuart: 00:07:21.992 Well, I was going to say you should frame that. It is already framed. [laughter]
Rob: 00:07:25.680 I did. Yeah, I did. But while I was there, until the bitter end, which I didn't have anything to do with, I was working with a group that was working with high net worth individuals, institutions, but it was also working in conjunction with the investment bank. And 2008 happened, I went to JPMorgan, I didn't find that a very great place to work. And I looked around, and I said-- all of my good friends and my colleagues in finance, a lot of them were getting out of finance and getting into software, and I was kind of sick and tired of preaching the power of enterprise software to older folks at these large institutions to say, "Why do we have six analysts doing this work? We could get this software and it's going to do even better. We're going to have a better--" and people would say, "No, that's insane. That's crazy. What? Oh, $10,000 a year?" "Yeah, but you're spending--" So the vision behind Arrowroot was, "Let's create a firm that is really leveraging the power of enterprise software." I also really didn't like the taste of, "We only deal with people with $10 million or $20 million." I really didn't like that. And through the power of enterprise software, I saw there was a path to be able to provide these services, maybe not all of them, but to people, regardless of their net worth.
Stuart: 00:08:43.819 Democratize it a little bit more. [laughter]
Rob: 00:08:46.135 Exactly. And so we started Arrowroot Family Office, and the name Family Office really means two things. One, we eat our own cooking. So it's our own money, our friends, our family. This is the firm that we all pull our capital in. We invest in a very similar way that our clients do. The second really meant broader services. A lot of investment advisers at the time said, "Look, I'm only going to talk to you about your asset allocation, maybe your financial plan, and I'm going to charge you a lot [laughter] for both of those things. But if you want to talk to me about your mortgage or college planning or state planning or your umbrella insurance, that's not my world. I'm not going to talk to you about that." And again, through the power of partnership and enterprise software, we saw a better way to be able to do it. And so the name Family Office had its origins with Rockefellers and things like that. But in today's technological age, everybody should be able to have that kind of experience, that unique, customizable, personalized financial advice experience, and that was the roots of Arrowroot. And we started that in 2013, and here we are today.
Stuart: 00:09:53.566 The reason I bring up Ridgeline is because I can basically see one of their offices from here. Let's call it that the family office group of enterprise software is not a big industry, right? Did you go out and develop some of your own stuff? Did you conglomerate a whole lot of things that were available? What was the path like to building this vision? [laughter]
Rob: 00:10:19.746 When we started in 2013, and Rory can talk a little bit about his software experience as well, we did see the opportunity to develop our own stuff, because there were voids in the market. And so we started to develop our kind of own robo-advisor. We started looking at toying with some of these technologies and software that we could bridge some of this. What we quickly learned is what we're good at and what we're not. And what we are not are software developers. And so after stubbing our toe at the kind of onset, we took a look across the industry and said, "Okay, well, let's look at these different software providers and partners, and let's talk to our clients. The really ultra high net worth and our regular clients, what are they looking for? What's their user experience that we're looking to try to be able to do?" And so we went out and we were very, very early in vetting a lot of these enterprise software wealth management, various different partners around that circle of services to try to figure out, A, who fit the model best? And for different segments of our clients, and B was, who are we hitching our wagon to for commitment of future development, right? That was really, really important to us. And so over the last almost 10 years now, we've built those relationships who are now really long-term partnership arrangements, which gives us a wonderful competitive advantage to go out and offer some of these services. There's some things that we bridge and we try to make better, but we have totally got out of the software game.
Stuart: 00:11:52.451 The software development game. [laughter]
Rory: 00:11:54.856 Yeah. I mean, that's how Rob and I came together because, Stuart, I was building a practice management software to rival Canopy and Karbon back in 2017. I remember sitting across from Rob in our Santa Monica office that we moved out of, and him saying, "Rory, Canopy just blew through $77 million of sales and marketing money. [laughter] We're not going to be able to fund this. Here's some numbers to some other VCs in town, you may want to go to them." And I remember that feeling, that punch feeling in my stomach of getting hit, and my dream of building a practice management software, it went away.
Stuart: 00:12:35.021 You could have just rung and I tell you what a fucking stupid idea-- [laughter]
Rory: 00:12:38.369 Actually could've talked, right? [laughter]
Stuart: 00:12:41.388 Would've saved you a whole lot of heartache.
Rory: 00:12:42.648 Yeah, I lost a little bit of money. [laughter] I had a lot of heartache [inaudible], Stuart. And it's great to see you do so well and really capture the space. So that was around 2017. And so I did some consulting and I saw so much opportunity in this accounting space. It's evolving here with technology, what you're doing at Karbon. But I saw a pain pointer or something that was missing-- I'm always asking questions, like, for instance, when I was going to build that Tax Tech technology practice management software, I asked myself, "Why doesn't Intuit have a CRM? How is this possible?" These professional service providers, they don't have a CRM, and I just heard that you guys had a partnership. And so when I was speaking with Rob and I was understanding more the family office model, I asked the question, "Why don't CPAs and wealth managers work together? Why are they working in silos?" Taxes affect investments, investments affect taxes. Most people need an estate plan, guardianship for their kids. So I saw a pain point, I saw what Rob was doing with the Family Office and I said, "This is a great opportunity for accountants out there to really diversify their business, provide more value to clients, and work holistically and proactively to provide better advice." And that's the way he came up with our AFO Wealth Management Forward program where we're educating and partnering firms to offer this. We're calling, our modern family office model. It's not just for the Rockefellers or the Bezos of the world, but every accounting firm can technically-- they are de facto family offices, in essence. They just have to memorialize and systematize the process.
Stuart: 00:14:11.869 Well, I mean, I'm not going to try and answer that question. I mean, I have my own answers as to why accountants don't traditionally do this and why it's an education. I'm sure it's a frustrating education process for you guys. So in Aussie, there are-- and I bring it up just to try and triangulate my own head. But there are similar models and there are sort of these licenses that accountants buy, and there's buyer groups they call them there, and some are listed on the ASX, some not so much. But the point of that is, in Aussie, wealth management and accounting is not traditionally sort of integrated either. Tax is a little bit more, but the tax legislation in Australia is only three inches thick. It's not fucking [laughter] 6 feet big. So that's why accountants can sort of manage the tax process a bit easier. But as you've sort of gone down this wealth management-- and let's call it integrated services. Is that okay to call?
Rory: 00:15:09.043 Yeah.
Stuart: 00:15:09.974 What's the take up in the accounting space? And what are the objections? When accountants sort of turn up and say, "Oh, this looks like a good idea," what sort of stops them from doing anything?
Rob: 00:15:20.648 There's a few things. One, which is really unfortunate, is that the accounting professionals that have wanted to get into this advisory space, and maybe did it 10 or 5 years ago, had an awful experience, right? So there was a lot of big companies out there that were offering kind of a similar model. Look, you send us a client, we'll give you a commission. If you sell this product, we're going to give you a commission. We're going to give investment advice. And they had an awful experience. A lot of those were run through a broker dealer model, which is commission-based. We don't really believe aligns your interest as a fiduciary with your clients. We are trying to sell something.
Stuart: 00:15:59.374 Hey, I've got some great condos [laughter] in Costa Rica for you. [laughter] And just the fact that I'm picking up 10% on the backend, don't worry about that bit, right?
Rob: 00:16:10.136 Right. [laughter] I think a lot of folks had really bad experiences with that, and rightfully so. The second, I think, is a lack of education. Accounting professionals have spent a tremendous amount of time, effort, and money to become very good at what they are doing, and a lot of them are still very much focused on compliance work. And so a lot of them are still very much stuck in a mindset of, "I just need to do more of that. I need to hire more people so I can get more clients, I can do more of this, I can do more of this, and do more of this." And so when we sit down and we tell them, "Look, if you incorporate this model, there's not a significant amount of AUM that you need to be able to advise or be a part of to eclipse what you're doing on this compliance side. And you get some more free time with your family. It's going to give you better gross margins, can make your practice more valuable." I mean, we tell people all this stuff, and I'm not joking, half the time, we go through this conversation, and they look at us and they go, "I just need to have a better bookkeeping software. I just need to be able to do that more efficiently." They didn't hear anything we just said. And so a lot of it is educational.
Rob: 00:17:15.650 And then the third would be, denial is not a business strategy. Commoditization is coming for every industry through enterprise software. It's just a fact. And I think hit the accounting profession harder than a lot. And so when we show to say, "Well, what's your future for your firm? What do you want to do? You want to sell it? Do you want to give it to one of your children? Do you have a partner you want to pass it on to? Well, if you don't do something, there is a very high likelihood that's not going to be worth really anything in 10 years, right? That's just my view. So what are you trying to do about it?" And again, they say, "Well, I'm going to get this software. I'm going to maybe do tax advising, or I'm going to be a better bookkeeper. I'm going to use these other things." And we say, "Accounting professionals are potentially some of the best investment advisers." Investment advisory profession is very old. We have a problem with getting new investment advisers in this industry, and there's a potential solution for both the accounting profession and the investment advisory solution by saying, "Let's make these accounting professionals into the investment advisers of the future. They're going to be better for the clients. It's going to be better for them for their business." And so this is a great solution. I think we're still in the first or second inning of this, but it's a tremendous opportunity for these industries to start to collaborate more, both for the clients and for the business owners.
Rory: 00:18:38.075 And for those accounting professionals out there, Stuart-- and I always say, "How involved is that Goldman Sachs financial adviser in your ecommerce business for a client?" That's where we're combining these two worlds, where the intimacy that an accounting professional has of a business who, many times, that's their net worth, is in their business. So working hand in hand with each other to make sure that you understand the needs of a business as well as the investment needs of a client is important. That's why I believe this integrated world is really the future of advice, making sure that you cover all bases on both the business side as well as the personal side. Yeah.
Stuart: 00:19:12.958 If it's anything like us, then status quo is usually the biggest competitor. [laughter]
Rob: 00:19:17.777 It really is. If we tell them these things and they're like, "That all sounds great. We could make six figures or even, some instances, seven figures recurring with not a tremendous amount more effort. But what I really need is I need to hire three junior bookkeepers and one junior accountant. Can you help me with that?" And so, like a lot of things, it's not necessarily the answer that's the most important. It's really about the questions that these accounting professionals are asking themselves and asking us. In our opinion, if they can ask the appropriate question of, where is this practice going to be? And where do I want to be in 5 years or 10 years or 15 years? And really, what's the most efficient, best use of my time for me and my clients? That's the question, I think, a lot of folks need to ask. And frankly, they're not. They're not asking that question of themselves right now from what we find.
Stuart: 00:20:09.665 There's an emerging fact in the whole industry, right, where essentially, what we're seeing is the number of people in the industry is basically flat over the last 10 years and is projected to be so over the next 10 years. So it's one in, one out. And one goes to the golf course, one comes out of college, university, whatever you want to call it. But there is a doubling of revenue in the accounting industry over the next 10 years, right? So in the US, is about 500 billion of fees that the accounting industry makes up, and that's going to double over the next 10 years. And so what you've got, therefore, is the same number of people to do twice the amount of work, which is a bit fucked, really, because [laughter] there's only one way you can do that, right? Is with software and working smarter, not harder.
Rory: 00:21:05.162 Yeah. So what are you working on on there, Stuart, over at Karbon [laughter] to solve the issue? [laughter]
Rob: 00:21:09.956 Somebody's got to capture that.
Stuart: 00:21:11.240 That's it. [laughter] Somebody's got to help the industry do-- and the funny thing is, the industry doesn't want to be told what to do by software people, and rightly so. What the fuck do we know? And we're not accountants and we never pretend to be accountants. We hire a lot of accountants because they're great at working with accounting firms. But I'm a software guy and not an accountant. And so we never preach, we never sort of try and tell people what to do, but we're just here to help and enable. And I think that's what I'm hearing, Rory, Rob, is kind of the same place that you're coming from, is trying to help the industry do more with less.
Rob: 00:21:52.878 Yeah, it really is. I mean, we can't speak to other parts of the accounting profession like audit. You look at the backlog of when we had the SPAC explosion that just happened.
Stuart: 00:22:06.466 And the subsequent implosion. [laughter]
Rob: 00:22:09.370 And subsequent implosion, is the big firms can't hire people fast enough to actually provide the services that a lot of these larger accounting profession tasks require, just that. But if you look on the flip side of this, is we've got something like $16 trillion of cash on the sidelines. It's something outlandish, right? And so you look at that opportunity as well and say-- I can't tell you how many number of accounting professionals we say, "You do the tax returns of your clients, do you notice that they have investment accounts or that they have a considerable amount of cash just sitting there that they don't know what to do with?" The consumer in the United States, I think the consumer abroad as well, UK, Australia, developed world, has a considerable amount of cash, which is now being eaten away by inflation, and these folks need advice. And the first place a lot of clients will go to is their accounting professional to say, "What should I do here?" And if they're not, and they don't want to ask the question, we really think the first professional that maybe should ask the client, "What are you guys doing about this? Or how are you all thinking about this?" Is the accountant, right?
Rob: 00:23:21.631 I think the other barrier is a lot of accounting professionals want to be perfect. They don't want to give advice unless they know everything about all of it. And what we try to tell them is, look, due diligence on the people that you're working with or that you're referring to. That's what you should really focus on. Get your grasp around them so that you can then be able to delegate. We see accounting professionals have a-- like a lot of folks, human beings, we have a very difficult time delegating, and I think accounting professionals more so than other professions because they have to be perfect on that tax return. They have to be perfect on all of these things. And so it's a mindset shift that we really have to kind of work on to say, "Yes, do your fiduciary duty, do your ethical duty, diligence on what these services are, and then have a clear understanding so you can then be able to give advice confidently." But you don't have to be the person between saying, "Is Pepsi or Coke better? How do I figure that out?" Well, you don't have to figure that out, right? You just have to be able to have the resources to be able to assist your client.
Stuart: 00:24:27.369 So what you were saying is, in the industry, particularly as it relates to tax-- tax prep is one thing, but there's so much else that can go with it, right? Like tax planning, estate planning, insurances, democratizing the family office. I reckon that's a reasonably interesting concept.
Rob: 00:24:43.534 We think it's exceptionally exciting. And what we think is really exciting is that in each one of these silos, there's some really incredible companies that are doing some fantastic things with the data. We've got artificial intelligence that can be able to do tax planning advice just by scanning the tax return. We've got financial planning software that's becoming user-friendly and much more visual and transparent. You've got investment management tools, which are making them more efficient, democratizing, and giving more choice to the clients in how they want to do. So we see these silos that are really, really getting fantastic. What we don't see, though I think we're in the very early innings of this, is somebody that's bringing all of those together. And one software provider that we use is Orion, and Orion has been gobbling up these different companies. They've got HiddenLevers, which is for risk management. They've got Redtail, which is a CRM. They've been trying to put these things all together, and that's wonderful in the wealth management space.
Rob: 00:25:46.023 The next frontier is going to be somebody that's on the accounting side that comes and looks at the wealth management side and says, "Let's try to put these worlds together and integrate that data in a user-friendly way." It will happen, right? It'll happen. It may happen sooner rather than later. There's going to be a lot of bumps and scrapes, and it's not going to be working perfect and everything else, but that's where we're headed. And just like any industry disruption, if you're talking about agriculture, is talked about all the time. Transportation with the train or farming techniques, cars versus horses. The people that are going to make out the best are the people that get ahead of that technology and become experts, or know how to use that technology efficiently. And so we want folks to say, "Look, you can still focus on being a great practitioner, but if you can get a good understanding of how this data flows and how to utilize this enterprise software--" and maybe it's not even you, maybe this is a wonderful way to recruit a junior.
Rob: 00:26:47.945 Someone from a college doesn't want to come in and say, "I'm going to sit down with this giant stack of tax returns, thousand--" "You're going to sit down with the partner with a pen and a highlighter and we're going to talk about all these things." No, the folks that are coming into both of our professions, they want to say, "Look, we've got this really wonderful software." "Go to this conference, learn this, come back, become our expert. And you know what? You're going to be rewarded for being our core person that understands how to be able to use this." It's a recruitment tool, and the folks coming into the industry want that. They don't want giant file organizing cabinets that they have to do paper or print out to do stuff. They want to say, "Here's this solution, and it's point-and-click and efficient. Make us more efficient." So it's a tremendous opportunity, but again, delegation, training. It's a lot of these softer skills that we see as being a tremendous opportunity as well, and you're seeing stuff pop up. Human capital management softwares popping up after COVID. These are the softer things that, aside from just business practice and enterprise software, a lot of firm owners need to get their hands around to become better managers and owners of businesses. It's going to be really interesting to see where that all goes.
Stuart: 00:28:03.728 How big are you at the moment? How many staff and offices and things?
Rob: 00:28:06.824 So we've got about 20 staff across four offices. We've got discretionary capital under management, a little under $300 million, but we also advise a lot of our ultra high net worth clients through financial planning or consulting kind of arrangement. So again, this family office model isn't just tied to AUM or traditional financial planning. You can incorporate into a consulting type of agreement. A lot of the ultra high net worth families don't necessarily want to hire someone just to manage their capital. They might say, "We need help with this software. We need help understanding how to make better investment processes or decision making processes." So it's bigger than just that. We also advise entrepreneurs on selling their practice through sell-side M&A, and that's another added service. So there's a lot of different ways to go about implementing this model. There's no one size fits all, but starting with one, 401(k) advisory, a lot of accountants work with entrepreneurs that are not happy with paychecks. I'm sorry if there's any paychecks executive on here, but a lot of folks are not happy with their 401(k). A CPA that says, "Look, I can help you with introducing you to betterment or fidelity or--" whatever that might be. Low hanging fruit where an account can really add value and be compensated for that value. There's a lot of ways to do it.
Stuart: 00:29:31.419 No, that makes sense. And you're involved in M&As, would you look to buy accounting firms or software developers, software providers that might be beneficial to the service line that you provide?
Rob: 00:29:44.351 That's an excellent question. So in our history as a firm, we've learned a lot of things, and some of the things that we are good at and some of the things we are not good at. We are not good software developers. We are not accountants. It's part of why we rolled out this program, is to partner with accountants. We tried to start a CPA practice and that ultimately didn't work. And so we are involved in M&A, and private equity has moved into the RIA wealth management space in a really big way in the last few years. We're talking KKR, CI. Most people have never heard of CI. They're about to go public. They acquired something like 20 or 30 billion dollars of AUM in the last three years. I mean, they're just massive. And so what we are doing and we're focused on is acquiring, through M&A, other boutique wealth management firms that fit with us culturally, philosophically, and regionally, to be an alternative to a private equity gobble up [laughter] acquirer aggregator. So we're going to continue to do that, and we've been successful. Our four offices have been from the union of four RIAs so far, and we've been highlighted as a very successful firm by our custodians, Schwab, in that space, and we think that is very, very exciting. We're seeing it on the accounting side as well, and we don't want to be on the M&A side of the accounting side. We want to partner with that industry. But you never say never. We think there's still a tremendous amount of opportunity in the RIA space for offering a different solution than a private equity backed aggregator.
Stuart: 00:31:20.993 Yeah. Well, there's a lot of M&A happening post COVID. I mean, I think that-- well, not I think, I know that a lot of accountants came out of that reassessing their purpose in life and the efforts that they'd put in so far, and some are tired, some are reinvigorated, some need a change. Some are like, "Fuck it, I'm going on a boat for two years," which [laughter] I can relate to. And I get it. COVID affected everybody differently, and some of those firms that are-- people that have been growing their own firm for 10 years or 20 years or something, that they really need something else. They're understandably tired of carrying the weight of firm ownership, and I get it. I really do. It's not necessarily a difficult life, but it's a different life. If you want something a little bit-- the next period of your life to be something that's less stressful or less weighty, absolutely. There are plenty of options out there for accountants to sell into, to merge into, to retire, but one thing I can fucking guarantee you is that those that are providing an array of services, that have a recurring revenue, that are well organized in their tech stack, that aren't a shit show, that are producing good work at good margins for great clients can sell for 4X, 5X earnings. Those that are a shit show sell for 1 or less. And I know which side of the stick that I'd want. [laughter]
Rob: 00:32:52.512 Yeah. I mean, we see it. We toyed with the idea of acquiring accounting firms, and the multiples you just talked about, in the wealth management space, especially with the buying spree, there's quoted transactions of 10 to 20 times EBITDA for an RIA. And you're not seeing that in the accounting space, right?
Stuart: 00:33:12.821 Nah, nah, nah. You barely say that in the software space, or [crosstalk]--
Rob: 00:33:15.760 You barely see that in the software space. And so if you're looking at enterprise value from an accounting professional ownership perspective, we're seeing some folks that have incorporated this model that are giving the compliance work away for free. If you're a family office or [inaudible]--
Stuart: 00:33:32.518 It's just a loss leader into wealth management and tax planning, insurances, and estate planning, and bill payment, and democratized family office services. There you go. There's my SDR application. [laughter]
Rob: 00:33:44.649 Yeah. So we tell that to folks and they're blank, and you say-- and we're not saying, "Shut it down today," but we're saying, "Take a look at reality and where the value is." Just like in enterprise software where you've got a on-prem perpetual license model versus a SaaS recurring high gross margin model.
Stuart: 00:34:04.684 Oh, I haven't had those words together in a while. They were golden words at Oracle, mate. [laughter]
Rob: 00:34:10.884 Yeah. And every private equity buyer out there says, "Shhh, okay, either just keep that on-prem perpetual license, just keep it there, or start shutting it down and get your enterprise software recurring revenue and put all your growth into that, because that's valuable." Right? And the folks that heard that and did it in the last 10 years have been enormously successful. The ones that said, "We've always done a perpetual license, our clients are really happy," they're selling it for nothing. A lot of them gone out of business, right? And so we try to illuminate those things for folks. I think the accounting profession is its lack of education in what's going on, and it's going to take a lot of time, it's going to take a lot of effort, and unfortunately, I think it's going to take a lot of pain. Colleagues seeing other colleagues to say, "Well, I've got this accounting profession, I thought I was going to sell it for 2X or 3X, and I'm only getting 1, right? I'm not even going to sell it for 1. I'm just going to work for another two years, and then I'm going to just put it down." Right? [laughter] I think it's going to take a lot of that experience, tough experience for people to start to really latch on to this strategy.
Stuart: 00:35:23.654 I get it. I get it. To wind up or flip it over, do you have anything for me? What can we leave our audience with?
Rob: 00:35:31.170 Well, first is to reach out to us with any questions. We don't charge people for time. We are good partners. Of the accounting professionals that we speak with, a vast majority of them, we are not doing business with. [laughter] Right? So if anyone has an interest-- and Rory has been tremendous [laughter] in his team in creating a lot of content, instructional or otherwise, for folks to learn on their own pace. We have our own podcast, give that a listen. It's kind of fun. We should have you on ours next.
Stuart: 00:36:00.347 Yeah, let's do it. Let's do it. [laughter]
Rob: 00:36:02.699 And to reach out if they have any questions around this. We think just being an educational resource for the industry helps everyone. And so we don't want folks to be shy.
Stuart: 00:36:13.128 Sounds good. Well, Rob, Rory, from Arrowroot Family Office Services, thank you for coming on the Accounting Leaders Podcast.
Rob: 00:36:19.948 Thank you so much for having us. [music]
Stuart: 00:36:27.659 Thanks for listening to this episode. If you found this discussion interesting, fun, you'll find lots more to help you run a successful accounting firm at Karbon Magazine. There are more than 1000 free resources there, including guides, articles, templates, webinars, and more. Just head to karbonhq.com/resources. [music] I'd also love it if you could leave us a 5-star review wherever you listen to this podcast. Let us know you liked this session, we'll be able to keep bringing you more guests for you to learn from and get inspired by. Thanks for joining and see you on the next episode of the Accounting Leaders Podcast.