[00:00:11] Luke Sonnen: Hi, I’m Luke Sonnen. Welcome to The COO Roundtable powered by PFI Advisors. Here’s your host, Matt Sonnen.
[00:00:24] Matt Sonnen: Welcome, everyone, to a special episode of The COO Roundtable podcast. Today is our third-year anniversary. We have produced one episode a month since December of 2018. I know 36 episodes doesn’t sound very impressive. I always laugh when Michael Kitces welcomes listeners to Episode 4,952 of the Advisor Success Podcast. Michael is an absolute animal, and I am not but, we are very proud of our number 36. Let me just take a quick second here and thank all of you for tuning in each month for the positive feedback we’ve received.
Just last week, someone reached out randomly and emailed me and said, “I just wanted to drop you a line and say that the podcast is really awesome. Your guests and you do a great job personifying the director of operations. Please keep up the great work.” This was just the latest note that I’ve received. You all have been so positive and encouraging over these past couple of years. I can’t thank you all enough. Moving forward, if there’s any interview candidates you’d like us to interview or any particular topic areas you want us to bring up during our conversations, please let me know.
You can email me at
[email protected]. My email address is also on my bio on our website. You can find it there as well. Just shoot me a note. For this anniversary episode, we wanted to do something a little different. As you all know, when we launched the podcast, it was very important to me that we speak with operations folks that were in these roles. I wanted to hear from people that were in the trenches. We called it a roundtable because I thought it would be fun to interview multiple guests on each episode. For this anniversary episode, I’m breaking both of my rules.
This is our first, and maybe it’ll be our last, I don’t know, but it’s our first episode with only one single guest. Our solo guest today does not hold an operations position at an RIA. As we’ve discussed on previous episodes, once in a while, I think it’s really helpful to take a step back and talk about the role of operations in our industry rather than talking to people who are performing the tasks on a daily basis.
Without further ado, let me introduce Karl Heckenberg. Karl is the CEO and President of Emigrant Partners. He’s a friend of mine. He has a very unique perspective on the industry as Emigrant is investing in RIAs. Karl does deep due diligence on the efficiency and ultimately the profitability of these firms before making an investment. I think we have a really great conversation lined up for today. Karl, that was a long introduction. I apologize, but welcome to The COO Roundtable.
[00:02:52] Karl Heckenberg: Thanks, Matt. It’s a lot of pressure.
[00:02:54] Matt Sonnen: Yes. I think most of our listeners are very familiar with Emigrant Partners. You guys are in the press all the time. I saw another headline today even. Why don’t you give us a background of the firm in your own words?
[00:03:07] Karl Heckenberg: Yes, sure. Fiduciary Network, which is part of Emigrant Partners, was started in 2006 by my predecessor, Mark Hurley and Emigrant Bank. The idea really was pretty simple to provide minority capital in a non-voting fashion, provide advice and capital, and really help firms maintain their independence. I think at the time, the capital options for founder liquidity were either they took a note, did an internal deal, or you sold to a bank. Around the same time, obviously, your previous firm Focus launched, Fiduciary Network launched. They were pioneers in the space in the sense that they gave a new capital option to growing firms that really wanted to remain independent.
The firm has been around for 15 years. I’ve been in charge of it, actually, it’ll be three years next week. Currently, we’re invested in 19 firms as of the end of this week that have close to $90 billion in assets cumulatively. The average is about $4.5 billion. They range in size from about $1.3 billion up to, say, $21 billion. All different business models, multifamily office, mass affluent, high net worth. The biggest thing is we’re minority, we’re not on the board. We do provide, I think, equally important to us, advice. I would say the upside that I always tell sellers and next-gen team is, “Good news is you don’t have to take it, but we’ll certainly give it.”
I think we believe and certainly, I believe strongly that RIAs are, I think, generally better off as an independent firm, gives them a lot more options. We’ve certainly seen that play out in the last few years.
[00:04:44] Matt Sonnen: Our listeners know that I love to stalk people on LinkedIn before they come on the podcast. I have to give you a hard time because your LinkedIn bio sucks. You do not provide any history at all. It only lists what you’re currently doing. I know that you’ve been at Schwab. I know you were at Wells Fargo. I know you were at Merrill Lynch. When you and I met, you were at Lyons Capital Partners. There is a history there whether you want to share it on LinkedIn or not. Can you walk our listeners through your career path and what led you to joining Fiduciary Network, which then became Emigrant Partners?
[00:05:21] Karl Heckenberg: I was a finance major in college. I think my dad gave me the choice of economics or finance. It’s a pretty broad spectrum. Honestly, I got lucky. A friend of his worked at Merrill Lynch. When I graduated, I got a job. It was nice because back then firms actually had training programs. I wasn’t on the adviser side. I was actually on the credit side. I got to do rotations through leveraged finance, residential, commercial, different areas, capital markets, and ended up somehow convincing myself I did want to become a financial advisor. While I was finishing up that program, which took a couple of years to get my Series 7, I ended up joining an advisor at firm, you probably remember, A.G. Edwards & Sons, which was headquartered in St. Louis.
After building a nice book, ended up in management and spent actually 13 years there. Ultimately, I think Wachovia owned them for all of five minutes and then Wells Fargo ended up buying Wachovia. Then after that, I ended up at Schwab, which was a great experience. It was really my introduction to the independent wealth management space. Basically, Schwab is mostly known for their retail and in our circles obviously, they’re known as currently the largest RIA custodian, but that was fairly new to me. Then I ended up with a family office in Kentucky, which owned Hilliard Lyons. That’s actually how I met Howard.
Somewhat serendipitously, that family office was shown the investment opportunity that was being marketed at the time by Silverline for a business that was then known as HPM Partners. Now, it’s known as Cerity which obviously, it’s a fantastic organization run by a good friend Kurt Miscinski. I actually got to know Howard and his partner Barry Friedberg at Emigrant Bank. The timing just ended up working out nicely with what was going on with Fiduciary Network. I got to know Howard over a long period of time. He owned another business and still does, New York Private Trust, which does private label business for RIAs banks, broker-dealers, and whatnot. I started working for the family in the fall of 2017. That’s almost been four years into anyway.
[00:07:34] Matt Sonnen: See, it’s a fantastic history. You shouldn’t be ashamed of it, Karl. I’m going to hack into your LinkedIn and update it for you.
[00:07:41] Karl Heckenberg: Honestly, I really only got into LinkedIn, it’s interesting I would say, once I really got into this job, and as all things with the Milsteins, you end up taking on about five different roles. As you probably noticed, I’m on four different trust company boards. I’ve got a role with the bank and the role here. I figured as opposed to people constantly having to hit the “show more” button at the bottom of LinkedIn on experience, I would try and keep it short and sweet.
[00:08:10] Matt Sonnen: Yes, that’s good. I’m just giving you a hard time. As I said, at the top of the episode, this is an operations-focused podcast, but you are the “M&A guy.” We’re going to jump back and forth from M&A to operations topics as we talk here. I think one great place to start, I think, is to simply ask you, when you’re evaluating a firm for a possible investment, what is the biggest sign in your mind that that firm needs operations help?
[00:08:36] Karl Heckenberg: It’s interesting when you start the diligence process because, as you know from certainly your work now, by your work at Focus, the tempo is typically the firm will provide some financials that actually gives you a pretty good glimpse into how organized the firm is. Looking at the quality of information, the quality of data, and the financials, how they’re organized, how they think about things, you get through that. You get through the LOI, and then you open up the data room, and you put in your document request list. It’s interesting because, one, you always get an immediate bird’s eye view, and two, who gets delegated on the other side with populating the data room.
It’s usually one person, which is fascinating. The documents range in a variety of areas, investment, operations, compliance, certainly financial, marketing, different areas. You really do get a glimpse at, A, how efficiently they move through that, how organized they are in collecting these documents. We set up interviews and so on. I would say finance and operations are probably the two areas that we really try and spend the most time on. Mainly because we’ve generally found most firms have spent the least amount of time on those two areas. Marketing, the investment platform, compliance, just because it’s obviously a gating issue to doing business they spend a lot more time in.
Finance and operations is an area that I think immediately distinguishes a firm into, “Is this scalable?” When I say, “Is it scalable?”, I don’t mean just for M&A purposes. Is it really scaled? Obviously, this is an operations-focused podcast. If you don’t have that part of the business pulled together, and same with the finance side, I’d say you might be able to hit $2 billion, but you’re probably not going much past that. The diligence process really is eye-opening. I think a lot of firms that obviously we invest in have done a great job focusing on that. Another thing that we really focus on is the cap table and making sure that the equity owners are not just the folks that are client-facing.
That’s important to us as well. You really get to know a firm in diligence, good, bad or indifferent where we make the investments. We like to think the good part, but there are always areas that you do identify coming out of it, even when you still make the investment that you want to spend time with the firm making sure that they understand they probably need to reinvest in some of those.
[00:10:59] Matt Sonnen: Exactly. We’ve spoken a lot on this podcast over the past three years about the evolution of an advisor’s value proposition to their clients. I think you and I have actually talked about this on a couple of different occasions. When I joined the wealth management space in 1997, the story that advisors were telling their clients and prospects was, “I have a proprietary model that spits out 26 stocks, and those 26 stocks have performed really well in up and down markets. You should hire me because I’m going to make you rich.” With the introduction of low-cost ETFs and robo-advisors, the asset management side of the business has been commoditized.
We’ve had to work harder to show our value to clients and we’ve had to add services to our wealth management offering in order to keep our fees from getting compressed. If fees are staying the same, but we’re adding services, which in turn means we have to add more people to the RIAs, I assume, and you’re the perfect person to ask this to, I assume margins must be coming down then, is that right, Karl?
[00:12:00] Karl Heckenberg: It’s been interesting. Margins have not been coming down but for one reason, equity markets have been going up faster than expenses have been going up. When we model out an investment, we actually assume that fixed expenses actually accelerate some because typically it’s interesting, I never know what “scale” means to people. Having seen $50 billion and a $100 billion dollar organizations and certainly larger, by default, you could take someone like LPOL, their margins are actually probably half of what most RIA margins are. The idea that you’re going to get bigger and therefore, your margins are going to widen I think is a falsehood.
We spend most of the time assuming that the equity markets and the fixed-income markets don’t cooperate as much as they have and your expense base, as you were alluding to, is going to have to grow at the same pace regardless of how the equity markets grow.
I think a lot of sins have gotten covered up in the last few years. I think people haven’t focused a lot on compressing margins because of revenue. This is a great year, an example, the S&P is up 20%-some-odd. I was looking at our firms recently through Q3. Average revenue growth was 16% for the year, which is remarkable. I can tell you that if you took the market away for the vast majority of RIAs, they will see margin compression. They just haven’t seen it because the federal reserve has been overly accommodative, and we’ve gotten in this issue where if it’s an asset, it’s growing. I do see margins coming down.
I think one of the things that we focus on when we talk to firms is $10 billion to a lot of RIAs seems like that’s big, and I’ll use the term scale. I’ve worked at firms that have trillions of dollars. I would say their margins aren’t any better. I think the opportunity for RIAs is really focusing on what the larger add scale the Vanguard, the Fidelity, the Schwab providers don’t want to focus on or can’t afford to focus on. I think client experience to me is something that, look, it’s a gating issue. I think you and I talked about baby boomers are fine logging into Orion or Tamarac and seeing a static view of their assets.
That’s what they’re used to seeing at Merrill Lynch or UBS or so on. They don’t mind going in and seeing the static pie chart and seeing weekly or nightly updates. I think if you’re in gen X, let alone millennial, that just doesn’t cut it. I think the backbone of the RIA industry right now is still built on baby boomers. That’s not always going to be the case. It’s going to be that case for a while. We see massive under-investment in client experience. That includes operations, onboarding. I’m always amazed. We still meet a ton of firms that haven’t implemented DocuSign.
It’s just all these things that you and I both know I can go on to Betterment or a Titan or some online asset management firm, open up an account, take a photo of my ID, connect it, apply to my bank account, open fund it due to KYC in four to five minutes and be investing. I just don’t think that RIAs have really spent enough time in this area because they haven’t had to. I always use my mom as the typical boomer client. She’s 75. She doesn’t want to open an account that way. I’m 47, for me, honestly, it would be a gating issue to having a relationship with a wealth manager if they didn’t have a mobile app that was good or could do a lot of things.
Again, to bring it back to your area of expertise, and a number of our firms have obviously used you guys with great success, I think we are reminding them, “You need to make hay while the sun’s out.” That means you need to start reinvesting back into your infrastructure, not just maximizing your distribution policy because the markets are out. I think that’s where you’re seeing a lot of firms opt to just hit the register and sell. We talked to a lot of people who end up selling to acquirers and these aggregators. I think a lot of it is there is a deep recognition that the market is changing, their clients are changing, interactions with clients’ kids are changing. I think they see a lot more headwinds.
I think the firms that are excited about it, and I would use from out west, Parallel, great example, they’re running headlong into it. Younger advisor base, younger ownership, very broad distribution, phenomenal on the Salesforce side, great on the operation side, good client experience. They’re running headlong into it and embracing it. I think a lot of other firms that we’re seeing who are just opting to sell to an aggregator are acknowledging that they don’t want to do the work. They don’t want to reinvest and recognizing the fact that reinvestment is not what they want to do, and we have this market environment that is incredibly compelling to sell.
[00:16:53] Matt Sonnen: I think that’s exactly right. Very well said. Peter Thiel’s got this famous question that he asked people. He says, “What do you believe that very few people agree with you on?” We founded PFI Advisors on the unpopular belief that at some point in the future, RIA owners at scale will begin to run their firms like true businesses and not just sales organizations. Of course, there are pockets of RIAs out there that have institutionalized their firms. Even north of $1 billion of AUM, the vast majority of RIAs are simply two or three or maybe four advisors really just running in different directions.
They’re telling different stories about their firms. They’re using different marketing materials, et cetera. PFI Advisors believes that over time, as more and more private equity keeps piling into this industry, RIAs are going to be forced to start running their firms as true businesses. I started the firm on that belief. I will say, I do lay awake at night sometimes wondering, “When is this day actually going to come?” Since I have you today, I want to ask you, Karl, what are your thoughts on this? Where is our industry today with respect to RIAs being run as true businesses? Do you think there is a trend going in that direction?
[00:18:04] Karl Heckenberg: I would say to your point, what do I believe that most other people don’t, I would agree with you. I would believe the vast majority, and it’s often irrespective of size, are not run as true businesses. They’re really, I would say large lifestyle practices even in the multi-billion-dollar category. Sometimes even up to $10 billion or $15 billion. People are surprised by that. I’ve had the good fortune to invest in businesses outside of wealth and asset, to really see how those businesses are organized, their focus on how they’re growing their metrics or KPIs, how they’re building out their staffing, how they’re thinking about competitive threats, they’re really run to maximize shareholder value and creation through the equity.
RIAs don’t. I think even large, and we see a lot of them, $5 billion, $10 billion RIAs, they’ve been around for 20 or 30 years. They’ve gotten some great tailwinds really. They’ve invested, I would say, the bare minimum of what they’ve needed to. Technology has helped them build out the business. I think we need less people to do some of the things that we used to. We’ve had this incredibly cooperative equity market for 20-plus years and equally on the fixed income side. I think private equity, it’s always interesting talking to sponsors and partners at these firms because I think they still have a huge, fundamental misunderstanding of what these businesses are and are not, and they’re human capital businesses.
It’s fascinating to me because the only reason they will invest in an RIA over, say, a law firm, which nobody invests in law firms is they say, “Its AUM fees. It’s changing client demographics. Its wealth transfer.” It’s all these things. Honestly, I would argue that’s BS. Typically, wealth managers are not capturing wealth that transitions from one generation to another, no matter what they say, it almost never happens. I’m not sure if it was you or someone else years ago that told me, “Have you ever met anybody that uses their father’s CPA?” The answer is no.
That I think is knocked out. I think most boomers because they’re living longer will probably outlive their own wealth. I think that gets distributed back into the economy. I don’t think private equity has really figured that out. I think that they think that you buy out a founder and his top three people, and you buy the “assets,” and I use that loosely because there are no assets. You’re buying the book of relationships. We spent a lot of time in diligence really understanding, “How many advisors are servicing a relationship? Are they multi-generational? If one gets hit by a pie truck tomorrow, would the client leave?” We do client diligence calls as part of that.
Private equity doesn’t take that in. I think they’re working from a hypothesis that it’s this generational wealth transfer. I’ve even heard a few of them refer to it as, “It’s a lot like software, high margins, high client retention, great businesses.” I would argue they’re nothing alike other than their high margin, and they probably shouldn’t be as high margin as they are. That’s a really long answer. I will tell you, I couldn’t imagine being in a role where I was running a consolidator. I just can’t because honestly, I don’t think I would sleep well knowing that I’m probably buying essentially books of business from people that have built it.
Now, they’re on a beach. The clients are getting older, and they’re dying. God forbid, the equity markets don’t go up at 20% a year, most of these businesses, as you and I know, are melting ice cubes. It’s just that you can’t see it because we’re getting this incredibly favorable environment. I think once that environment shifts, and I don’t know when it will happen, it could be 10 years, it could be 20 years, it could be 2, it could be never, my job to invest money is to assume that the worst does happen. I have a credit background, so I’m naturally biased to believe the worst could happen. That’s, again, the incredibly long answer to what I believe most other people don’t believe.
It’s interesting because, not to get off on a further tangent, I think the role of private equity and what private equity does now has so dramatically changed in the last 20 years that the game has changed so differently in how private equity firms make money relative to the way they used to make money. I think that once you understand that, it’s like taking the red pill versus the blue pill in The Matrix, and you understand what these guys are really trying to accomplish. It isn’t returns, its capital out the door on ever-increasing funds, I think you become very cynical. I think that, like I said, the average age of the founder that I’ve invested in over the last 3 years is 51.
That is materially lower than anybody else in this space, which typically is mid to high 60s. Again, we’re always a minority because we want them to have more skin in the game. I’ll be anxious to see how the market environment shapes. What happens over the next few years? We’re seeing multiples that are unprecedented by any industry, not just our own.
[00:23:16] Matt Sonnen: Yes. You were joking, saying, “Oh, Jesus, it’s a really long answer,” but it’s an extremely important question. I appreciate you going through all of that. To tie it in now to our operations podcast, as firms are looking to institutionalize their business, we hope that means that more COOs and operations professionals will be brought into these firms, which is a big driver, obviously, behind this podcast. It’s why we’ve recently created The COO Society as a training ground for these folks that we’re hoping our industry is going to have this big demand for this role now.
You’ve got a really interesting take on how our RIA owners go about looking for a COO and how they define the role. The term COO, those three letters can mean different things to different people. Many people, many RIA owners shy away from the COO title altogether because they think, “Geez, if I call him chief something, that’s going to be a really expensive hire. I’ll call them anything but the COO.” Talk to us about some of the conversations you’ve had with RIA owners around the role of the COO.
[00:24:16] Karl Heckenberg: Yes. You and I were talking recently, and I said, “It’s interesting to me because there’s so much nuance between chief operating officer and chief operations officer.” It’s interesting because from the hires’ perspective, they, I would say, not generally don’t care, but generally they don’t distinguish. They hear COO, and I think they make assumptions based on what they want the role to be, what they think the role should be. As part of our diligence, we always do individual interviews with key management, advisors, and so on, we always ask, “Look, if you can do whatever you want in the organization, what would you do?”
Then we ask, “How do you see other people in the organization?” and succession plan and so on. The founders, very interestingly, I would say most of the management team is on the same page. The founders are almost never on the same page. I would say they’re more prone to say, “Oh, it’s a chief operations officer,” and probably a lot of our firms have had what I would call a COO like an operating officer, what I would consider a number two. To use the previous analogy, you get hit by a pie truck, who takes over in terms of succession? I have one myself, we’re a regulated bank. I actually have to submit mine in writing every year.
Mine is my COO, Alex Mostovoi, who you know. I think it’s important when you drill down on that with different people because I think really understanding, “Is this role really about managing the operations team?” Technology always gets chucked in those areas. Is it about really managing the organization more from an administrative and operation side? That ties into HR, it certainly could tie into finance. We spent a lot of time picking those apart because I think RIA owners do sometimes love to use titles in lieu of actual money. You get my least favorite title in the industry, I think I’ve shared with you is “managing partner.”
If you’ve ever worked with a law firm, you know what a managing partner is, which I always say is the person whose job it is to manage the feral cats and doesn’t get paid for it. RIAs, sometimes you’ll bump into a managing partner, but he’s not an equity owner, and he really has no authority. Going back to your point, but I think RIAs really need to start operating like a business. I’d love to see more higher executive coaches spend more time in business groups and networking groups and serving on the boards of other companies because I think it gives you a much better insight into how companies are actually organized.
I think around the operation side, again, I think obviously, not to sound like I’m pandering to your audience, it really is a differentiator to firms that really want to grow and having the right person in that seat. It’s a hard role, as you know, to fill. You’ve sent us a number of people that a few of them, we’ve gotten our firms to hire, a few, we’ve looked at hiring ourselves. A few, I’ve sent to someone and said, “Look, I know you don’t have the work now, but when a person like this comes on the market, you need to hire them because there aren’t a lot of people in our industry that have experience managing large RIAs because the phenomenon of large RIAs is less than 10 years old.”
I think we’re all learning on the job. Conversely, I would say we’ve seen a few people brought in from outside industries that have failed. That’s an interesting conversation as well because most people don’t go into the financial advice business because they want to manage other people. They go into it because they really don’t want to be managed.
[00:27:43] Matt Sonnen: It’s outside of our industry. It really is. There are books written about it, there’s Harvard Business Review articles written about it, the COO is second in command. This is the whole reason why we started this podcast, our industry, it’s any advisor, the hunter advisor is chief, any service advisor while they’re not going out and getting their hands– but they’re servicing the clients, and they’re keeping their clients, and hopefully, they’re servicing them, whether they’re getting us referrals, they’re ahead of the COO. At many, many firms, the client service associates that are just ordering the checks and journaling the money and sending out the wives, they’re ahead of the COO.
Because hey, they’re client-facing. You’re just the crazy operations person in the dungeon. The joke I always make, “I stole you from the Geek Squad at Best Buy because you’re the guy or girl that comes in plugs in my router, so that we have Wi-Fi in the office.” It’s frustrating to me. We’re three years in, we’re going to keep plugging away. We’ll never get to second in command, but we’re trying to at least elevate the COO role higher in our industry.
[00:28:53] Karl Heckenberg: Yes. It’s a really good point. I think it even goes beyond the COO in the sense that when we go back to talking about running businesses like businesses, I would say the vast majority of RIA founders have major control issues. Major. I think that if things are organized that way, everybody’s in their own little pot. A lot of RIAs, it’s funny when you ask them for minutes from board meetings, they don’t have them because they don’t convene as a group. I think you and I both know the way most RIAs are run, it’s one person, the founder, the CEO, running from office to office managing individual egos. Then collectively massaging things into an outcome.
Again, that’s got to change in the industry. It’s funny because you’ve seen a couple of people notably take massive valuations, close to billion-dollar, if not, billion-dollar valuations for businesses recently. Talking to a few of them post transaction, it’s this “Oh, shit,” moment. Like, “I suddenly realize I now need to build a $4 billion organization,” and they’re used to making all the decisions down to approving individual expense reports. You can’t run a $4 billion business and still do that, and it’s going to be letting go of control, letting other people come in and make decisions, giving them the authority to make those decisions, being comfortable with them.
I think we’re still in the awkward teenage years in this industry. I think the verdict is largely still out, and we’re really not going to know. Most of the really notable RIAs, maybe they were established in the ’80s, but most of these guys are just getting liquidity now. It’s funny because when you look at the consolidators and some of these really big $4 billion or $5 billion, $7 billion RIAs that are trading in the last, honestly, two years, I think we’re going to find out in the next five years what these firms look like because a lot of these guys are on the beach now. It wasn’t the case before. You had a lot of guys who said they were retiring, but they were still chairman emeritus.
At these valuations, we’ve seen a lot of really big firms where suddenly guys are on the beach. They’ve just left. We’ve never experienced that, and it’ll be interesting to see because another thing that we spend a lot of time on is the personality of the people that the founders hire to run the organization is usually 180 degrees from the founder. Once you take that founder out of the equation, you give them liquidity, they don’t really have a huge incentive. What does that organization look like? I would tell you, we really don’t know. There were a few early examples where people gave a ton of liquidity to people, and I would use Wealth Trust, an example, that didn’t really work out well.
That’s why I think we’re absolutely committed to being minority investors, but we still don’t know what it’s going to look like, and there’s that generational thing that comes up in wealth a lot, which is it’s the first one who pioneers the idea. It’s the second one who grows it, and the third one who blows it. It’s hard to tell if we’re in the second or the third phase yet. Hopefully, we’re in the second phase. I think that’s the thesis that most of us have, which is we’re going to build on these foundations and build these billion-dollar businesses in terms of AUM. We could find out in five to seven years, we’re actually in the blow it phase. We’re all going to get to find out together.
[00:32:27] Matt Sonnen: Exactly. That leads me to another very common topic that we discussed on the podcast, and that’s how does COO’s define and prove their worth at the RIAs they’re working at? You and I have defined the problem in that last conversation. Now, what can COOs do? It’s not always easy for all the reasons that we’ve discussed. Obviously, near and dear to your heart, one area that I think it’s very easy to prove their value is in the M&A arena. You even said this a little bit earlier, if an RIA is trying to attract advisors to their firm, I’ve made the argument on this podcast many, many times that it will be impossible to make a successful presentation to an advisor that you’re trying to woo to your organization without having a competent COO in place.
As we’ve discussed, you’re deeply entrenched in the M&A game in our industry. What are your thoughts around that advisor pitch that RIAs are making when they’re trying to convince other advisors to join their firm, and what do you think the role of the COO is in that pitch?
[00:33:30] Karl Heckenberg: It is such a crowded field that I absolutely agree that if a COO is not part of the first conversation, and they should be, I think it shows the advisor, this person is really dedicated to ensuring the transition because the economics are going to probably shake out to be the economics. Then the question that really determines who goes where is, “What is the transition going to be like? Are my clients going to get the attention and service that they need? Is the transition going to go well? Am I going to lose clients? Do I have a good chance of the earnout?”
A lot of RIAs get into those conversations. They talk about how they all have wonderful synergies and they’re going to work together, and then when the advisor has that gating issue of, “Hey, how is this going to work terms of the transition?” The buying firm says, “We’ll figure it out.” We’ve seen that literally knocked firms out of contention. We do an M&A prep with them and say, “Look, what are your marketing materials look like? What does your pitch look like?” Try and remember when you get into these conversations that you are selling them on your firm, it’s not the other way around.
I think we always encourage them, if they have a COO, that person should be there. If not, someone that will actually be handling the transition. If they don’t really even have that resource, and again, not to pitch your firm, but we’ve had PFI act in that function where we’ve gone into pitches with our firm as the buyer saying, “Hey, at least we’ve got PFI teed up to make sure that this does,” and we’ve used you guys before to our firms very successfully. I think you have to address it out of the gate. Because what I’ll tell you is Mercer, WAG, CAPTRUST, all these guys, Mariner, they’re all going to talk about the transition because frankly, they do it well.
It’s a gating issue. I think most small RIAs because they don’t get in the reps as much, they don’t think about it as much. They spend a lot of time talking about the culture and the investment platform, and the economics and all those things. But everybody’s talking about those things. What ultimately, in my mind, gets an advisor over the hump is the transition. I think if you don’t include that person in, or to your point, you drag them out of the dungeon and the bottom of the ninth and say, “Oh, by the way, this guy who you’ve never met before on the Zoom is going to be working with you and your team on the transition.” It doesn’t give you a fighting chance to be able to do M&A.
[00:36:02] Matt Sonnen: I think it was last weekend, I was going back and forth with Mike Thrasher, from RIA Intel on Twitter, we were going back and forth. I was saying, “I can’t believe how bad many of the buyers are at articulating their value proposition.” Poor Mike was saying, “I don’t understand what you’re talking about. Our buyers are fantastic.” It’s a public forum and everything, but I’m thinking to myself, “Mike, you’re in the press, you have survivor’s bias. You’re only reporting on the successful ones. You have no idea how many unsuccessful buyers are out there trying to court advisors to their firms, and they are horrible.”
[00:36:39] Karl Heckenberg: To that point, when we sit down with any of our firms or any prospects that we’re meeting with, it’s an area that we really try and get firms to make a decision on. I always say, “Look, you don’t have to do M&A.” Generally, I talk more people out of doing M&A than actually doing it. It’s for the exact reason. Unless you’re prepared to put the resources into it, the time, the money, the energy, and the reps– I do it every day. We may talk to a hundred people to get a couple of deals that we feel comfortable with, and they want to transact with us.
You have to get in. A lot of people just don’t have that inside of them. They don’t like getting told no that often. They get really excited about the deal, and then it goes the other way, and I think your point about survivorship bias is absolutely right. When you’re just hearing about Hightower or Mercer, Mariner or so on, yes, they’re great at it. That’s why they’re winning 90% of the deals out there. What’s amazing is for every seller that gets into a process they may see 12 offers, and half of those will be from aggregators, half will not. Those deals are much harder. We just went through it. Today, it was announced with Pure Financial in San Diego.
They acquired a fantastic firm up in Mercer Island. It was their first for them, but it was a great effort. Jason Carver, who used to work with is there, and he helped get them ready. We worked with them on the financing. The guys that we equity worked with them. It was all hands on deck. I think it’s going to be a fantastic addition, but it’s a lot of work. I think most people are just not geared up for it. As I always remind them when we’re sitting down, everybody thinks their firm is great. The question is, if you’re in a bake-off with those firms that I just mentioned, what really differentiates you? Don’t say investment platform or that you use Orion. It’s going to have to be a lot more than that.
[00:38:34] Matt Sonnen: Karl, thank you so much. This has been a fun one. I was a little worried with only one guest where we can have full 40 minutes. This week, we’ve gone on and on. This has been great. Thank you for being here and being our only, to this date, solo interviewee after three years.
[00:38:49] Karl Heckenberg: Can I get a plaque?
[00:38:50] Matt Sonnen: Yes, I will get you one.
[00:38:52] Karl Heckenberg: At least a toy or something.
[00:38:54] Matt Sonnen: Right. Thanks a lot, Karl.
[00:38:57] Karl Heckeneberg: Thanks, Matt.
[00:38:58] Matt Sonnen: All of you, thank you for a fun three years. It’s a Monday as we’re recording this. I don’t know if I’m going to pop champagne tonight. Reese and I are going to split a nice bottle of wine to celebrate the three-year anniversary of the podcast. We’ll talk to everybody soon. Thanks a lot.
