Financial Advisor Success Podcast Summary
Episode 188: Leading With Directly-Held Real Estate Advice To Differentiate Traditional Wealth Management with Rich Arzaga
Host: Michael Kitces
Guest: Rich Arzaga, Founder of Cornerstone Wealth Management
Release Date: August 4, 2020

1. Introduction

In Episode 188 of the Financial Advisor Success podcast, host Michael Kitces welcomes Rich Arzaga, the founder of Cornerstone Wealth Management. Rich distinguishes himself in the financial advisory landscape by integrating directly-held real estate advice into traditional wealth management, leveraging his dual certifications as a Certified Financial Planner (CFP) and a Certified Commercial Investment Member (CCIM).

Notable Quote:

• Rich Arzaga [00:27]: "Rich is one of just a handful of advisors across the country who holds the CCIM designation to advise clients on commercial real estate."

2. The Importance of Directly-Held Real Estate in Financial Planning

Rich emphasizes that directly-held real estate constitutes approximately 30% of total wealth in America. Despite its significance, many financial advisors lack the expertise to provide comprehensive advice in this asset class, presenting a substantial opportunity for specialization.

Notable Quote:

• Michael Kitces [05:00]: "Real estate is a very big asset class. It represents maybe 30% of this country's wealth."

3. Rich Arzaga’s Journey into Real Estate-Focused Financial Advising

Rich recounts his transition from the technology sector to financial planning in the early 2000s. Dissatisfied with the generic real estate advice he received from other planners—either being encouraged to sell properties or merely adding their values to financial plans without deeper analysis—Rich saw an unmet need for specialized real estate financial planning.

Notable Quote:

• Rich Arzaga [00:16]: "I became the person that I was looking for back in the early 2000s."

4. Integrating Real Estate Analysis into Financial Plans

Rich utilizes an Annual Property Operating Data Analysis (APOD) as part of his clients' financial plans. This comprehensive analysis goes beyond basic asset valuation, examining cash flows, taxes, and the performance of each property to provide actionable insights.

Notable Quote:

• Michael Kitces [08:13]: "I just wanted somebody who is smarter than me to say, you know, here's a few things that I see and what you're doing."

5. Fee Structure for Real Estate Analysis

Rich explains his fee model, where initial financial planning fees include real estate analysis add-ons. For instance, a standard comprehensive plan starts at $4,900, with an additional $500 per property evaluated. Complex cases may require higher fees, but the structure remains scalable based on the number of properties.

Notable Quote:

• Michael Kitces [21:57]: "Our base planning fee is $4,900... we add about $500 if they have one rental property, another $500 for two, and so on."

6. Tools and Methodologies for Real Estate Analysis

Rich employs APOD spreadsheets to pro forma property cash flows, integrating these analyses into financial planning software like E Money Advisor. These tools account for various expenses, tax implications, and projection scenarios to assess the viability and performance of real estate investments.

Notable Quote:

• Michael Kitces [24:34]: "APOD stands for Annual Property Operating Data. We use it to pro forma the cash flow for the property that the client owns."

7. Building and Growing a Real Estate-Focused Advisory Firm

Rich details his strategic approach to growing Cornerstone Wealth Management by embedding himself within the real estate community—attending CCIM chapter meetings, partnering with realtors, brokers, and attorneys, and conducting real estate advice workshops. This niche-focused strategy fostered referrals and led to steady business growth.

Notable Quote:

• Michael Kitces [50:29]: "Most of my relationships in the beginning were from that community. Then they broadened when clients had their advisors and I contacted."

8. Impact of the 2008 Financial Crisis on the Business Model

The financial crisis of 2008 posed significant challenges, particularly for Rich's directly-held real estate clients facing declining property values and increased risks. This period led to a temporary stagnation in business growth, highlighting the vulnerability of specializing in a single asset class during economic downturns.

Notable Quote:

• Michael Kitces [61:00]: "The Crisis was dated 2008 and 9. What happened to us is that we were flat for a while. It did have an impact."

9. Current Practice Structure and Revenue Streams

Today, Cornerstone Wealth Management oversees nearly $70 million in assets for 65 affluent clients. Approximately 40% of these clients have directly-held real estate investments. The firm's revenue streams include upfront planning fees, ongoing Assets Under Management (AUM) fees, and insurance products. Rich also discusses his ventures into insurance through a separate brand, Insurance Whisperer, to complement financial planning services.

Notable Quote:

• Michael Kitces [66:18]: "We charge a classic 1% fee on AUM from $500,000 to $2 million, with slight variations for larger portfolios."

10. Insurance Whisperer: Expanding Services

Rich introduces Insurance Whisperer, a brand he developed to provide fiduciary-based insurance services to Registered Investment Advisors (RIAs). This initiative aims to fill the gap in insurance product offerings, ensuring clients receive tailored and trustworthy insurance solutions alongside their financial plans.

Notable Quote:

• Michael Kitces [68:19]: "Insurance Whisperer helps RIAs who want an insurance partner or who might have an insurance license, but they don't want to do it themselves."

11. Advice for Advisors Specializing in Real Estate

Rich offers valuable guidance for advisors interested in integrating directly-held real estate into their services:

• Passion and Interest: Ensure genuine interest in serving clients with real estate investments.
• Credentialing: Pursue certifications like CCIM to build expertise and credibility.
• Community Engagement: Actively participate in real estate-focused communities and networks.
• Tools and Processes: Develop or utilize reliable tools for property analysis to streamline the advisory process.

Notable Quote:

• Michael Kitces [80:56]: "Make sure that you have an interest in serving that community... Become credentialed, take the best education."

12. Defining Success in Financial Advising

When discussing success, Rich emphasizes its multifaceted nature, encompassing family, client relationships, and business growth. He highlights that success is dynamic, with metrics evolving as one achieves various milestones.

Notable Quote:

• Michael Kitces [87:16]: "It's all different... When you get to those, the metrics move. They just... So I don't have a definition for that."

13. Conclusion

In wrapping up, Rich shares his aspirations to further integrate real estate advice and expand Insurance Whisperer, aiming to blend fiduciary-based insurance solutions with comprehensive financial planning. He underscores the importance of continuous growth and adaptation in achieving sustained success.

Notable Quote:

• Rich Arzaga [88:27]: "The growth journey in and of itself is the point."

Key Takeaways

• Niche Specialization: Focusing on directly-held real estate can differentiate an advisory firm in a crowded market.
• Comprehensive Analysis: Utilizing tools like APOD and integrating real estate into financial planning provides deeper insights for clients.
• Strategic Networking: Building relationships within specialized communities (e.g., CCIM) fosters referrals and business growth.
• Resilience: Specialized business models may face challenges during economic downturns, underscoring the need for adaptability.
• Diversified Revenue Streams: Combining upfront fees, AUM fees, and insurance products ensures multiple income sources.
• Continuous Learning: Pursuing advanced credentials and expanding service offerings (e.g., Insurance Whisperer) can enhance credibility and service quality.

Resources Mentioned:

• APOD (Annual Property Operating Data) Analysis: A tool for pro forma real estate cash flow analysis.
• CCIM Designation: Certification for professionals specializing in commercial real estate investment.
• E Money Advisor: Financial planning software used for integrating real estate data into comprehensive plans.
• Insurance Whisperer: Rich Arzaga’s brand offering fiduciary-based insurance services to RIAs.

For more insights and resources on building a successful financial advisory practice, visit Nerd’s Eye View.