MC – Charles, you have had three major roles in the past 8 years, including running Schwab Advisor Services and Fidelity IWS. Now you have founded Advizent and working to change the landscape of our industry. Can you explain your last 10 years and how the industry has evolved over that time?
CG – Our industry has changed a great deal in some ways and not at all in others. The big changes have to do with the way many firms have become significant businesses. They are using their scale to improve client outcomes and business results. Although there has been great change, still, most consumers do not know why an RIA is a better choice than a broker. Consumers simply do not know that some advisors are true fiduciaries while most, the vast majority, are not.
MC – When you say bigger firms will use their scale to improve client outcomes and business results, do you feel this will put additional pressures on smaller firms to maintain margins and compete in the market for clients going forward?
CG – I believe so, but it depends on how well service providers help advisors outsource key functions. Ten years ago, even five years ago, very few RIAs outsourced much of anything. Today, we are witnessing a change that has the potential to bring scale to much smaller firms. For example, today and advisor can outsource portfolio accounting and rebalancing, and can “rent” software, instead of buy and install it, for many other functions. Custodians are competing by integrating third-party software into their platforms. TAMPs (Turnkey Asset Management Programs) can provide a full technology platform as well as asset allocation and manager selection capabilities. What cannot be outsourced is client acquisition and relationship management. If firms choose the right partners, they can run their businesses with very low fixed costs yet still deliver excellent capabilities.
MC – We hear a lot about the importance and benefits of scale in the RIA space. Can you briefly share your thoughts on why scale may or may not be important for an RIA business going forward?
CG – Scale is always important. It allows RIAs to spread the cost of investment across a greater revenue stream. Scale also creates the opportunity to hire and train the next generation of advisors. Smaller firms just cannot do that. However, financial advice is a person-to-person business. Clients need and want to know their advisor (although that may change with the next generation of clients who are much more comfortable with technology). Even with all the technology in the world, good advisors can only work with so many clients. So, while scale is critical to the bottom line, and new technologies are making communication easier, scale is still hard to find at the client level.
MC – How do you think the competitive landscape over the coming 10 years may differ from the previous 10 years? Who is the biggest threat to the average $100 million – $500 million RIA/Advisor?
CG – I believe that the market is becoming more competitive. Ten years ago only RIAs were talking about fees as a form of compensation, low cost investing and fiduciary duty. Today everyone talks about fee (based) compensation, access to lower cost solutions are becoming more relevant even in the brokerage world, and if the brokers and FINRA have their way, they will usurp the “fiduciary” term but not true fiduciary duties.
So, the biggest threats to most RIA firms are brokers and brokerage firms who look and act like RIAs but are not RIAs.
MC – As the former head of two of the largest asset custodians, you may have some thoughts regarding the competitive threat of one or more of these large firms. Specifically, Schwab has their new franchise initiative. Some are concerned this is a step toward direct competition with their RIA clients. Thoughts regarding Schwab or others developing into competitors?
CG – I think the best way to think about competition is to be paranoid. Most potential competitors are looking for growth because they are facing headwinds in their traditional businesses lines.
- For asset managers, the shift to lower cost solutions.
- For custodians, lower cost trade pricing, lower spread on cash and margin products, and a shift away from mutual funds that generate revenue for them.
- For broker-dealers, the power shift away from the broker-dealer to the advisor.
- Etc, etc, etc,…
MC – There is this whole conversation about creating “enterprise value” that seems to be front and center. If you could give all the advisors out there running RIA practices 3 or 4 pieces of advice in terms of creating a valuable enterprise that a 3rd party buyer would be willing pay a premium for, what might you say?
CG – I believe firms that create real enterprise value do the following:
- Hire, train and compensate the next generation. It is very difficult to create enterprise value if the principals are the only people that create value for the company. Buyers want to see a next generation who can grow the business.
- Apply the “ensemble” approach. Buyers want to know that when the principles leave the clients won’t leave with them.
- Generate high returns. To do this, firms must implement repeatable processes and good technology solutions.
- Grow. Buyers want to see a track record of growth.
MC – These are some significant investments for RIAs to make in their businesses when you start putting numbers to it. Do you have any thoughts on the smaller (sub $250 million) RIA and whether they should consider trying to make these investments solo or consider joining a larger partner and leverage the larger partner’s existing scale?
CG – One of the things I love about the RIA industry is that there are so many ways to succeed. Small firms that want to remain small can do so. However, remaining small probably means that the owners will not create any real enterprise value. If creating enterprise value is important, smaller firms have to find ways to grow and become mid-sized and then large(r). While there are no perfect answers, there are several paths:
- As you suggest, join a larger partner that can provide scale. Joining a partner means finding the right partner. Investment style, technology, and most of all, culture, are critical success factors.
- Outsourcing, as I mentioned before, can be very effective.
- Organic growth is still a viable option. This approach takes time and money but for the right firm this can be a great way to go.
MC – Do you believe that there will be a handful of regional and national firms that dominate the marketplace over the next 20 years? Is the RIA industry similar to that of the brokerage firms of last century when Charlie Merrill first founded Merrill Lynch?
CG – No. There will be larger firms but the market is huge and their simply isn’t enough scale to capture a dominant share of the market.
MC – If the RIA industry is a 9 inning game, what inning do think we are in today? Is it still early or have we seen the brightest days?
CG – I think we are in the bottom of the third inning (I love to be specific even though there is no way to really know!!). The wirehouses still dominate the marketplace and it will take many years for that to change. Other brokerage channels, when combined with the wirehouses, control close to 80% of the advised assets in the US. Additionally, technology is changing rapidly. The outsourcing trend is going to grow dramatically over time. Lastly, consumers are changing. They are looking for more honest relationships, better answers and new ways to interact with their advisor (and investments). All of these changes are in the early stages in my opinion.
MC – Tell us a little bit about Advizent and why you and Steve have chosen this mission? How does this help shape the future of our Industry?
CG – Steve and I are both at an age and at a point in our careers where we looked at each other and said, ‘Let’s do something that’s going to have a real impact, that has real meaning and real benefit to people.’ If we can give back and make something positive happen for people in a very broad way, that’s very rewarding, and it’s what we got into this business to do. By extension it is our goal to have an impact on the industry, moving it toward greater investor focus, transparency, and accountability. However, the most important part of our mission is to begin to improve how investors plan for the future and how they make financial decisions and contribute to a more successful outcome for all. We sincerely believe that our mission is relevant for investors, the financial services industry, and the country.
~Interview conducted by Matt Cooper, President – Beacon Pointe Wealth Advisors
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