Episode Transcript
Matt Sonnen [00:00:24]Welcome back everyone to The COO Roundtable. As Luke said, I am your host Matt Sonnen and we have a little bit different episode today, for the first time in our podcast series we have a CEO of a firm joining us to provide his take on the importance of the COO role within his organization and how professional management has alleviated many of his day to day responsibilities. We also have two professionals who report to him and split the traditional COO duties. So, I think we’re going to name this one the Stratos Wealth Partners edition of The COO Roundtable. We have a Founder and CEO Jeff Concepcion. We also have the COO and CFO, Nancy Andrefsky and Lou Camacho is also joining us. He is the President of Stratos Wealth Alliance. The Stratos story is a bit more complicated than the RIA. There is a side of the business focused on end clients and another side of the business focused on attracting advisors to the organization. And I’m going to hand it over to Jeff here in just a second to give us a brief overview of the firm. But first I just wanted to rattle off some of the stats there on your website. They are incredibly impressive. 87 offices around the country in 24 states 287 advisors servicing over 13,000 clients. I’m guessing 13,000 clients probably equates to about 75,000 account numbers is my guess. There are 60 staff members at the home office in Beachwood, Ohio and I believe the firm turned 10 years old this year. So, Jeff can you tell us how you found yourself today running such a large enterprise? This is incredible, this story here.
Jeff Concepcion [00:02:14]Yes thank you Matt. Thanks for the opportunity to let us join you and chat a little bit about our model. 2009, you’re correct with our launch so, we just had our 10th anniversary a couple months ago and I’m glad that our staff are out data that means we’re making progress every month as we plan to because I believe the number of offices advisors and assets are more than what they were a few months back. I think the total of brokerage and advisory assets under advisement is something north of $13 billion today. And the way that we launched the firm was kind of acknowledging what we felt was a gap between the full service world where advisors gave up on average two thirds of their revenue for a brand and support and kind of a turnkey experience; versus the opposite end of the spectrum where advisors got the lion’s share of the revenue but also the obligation or burden of wearing a couple dozen hats that really detracted from that advisor client experience; and thinking that we might be able to find a solve that would be more effective for them than them trying to sort of operate on an island; the whole notion of supported or collaborative independence versus financial independence.
Matt Sonnen [00:03:28]Fantastic. And then Nancy and Lou I always love hearing people’s backstories. I always joke on every one of these episodes no one grows up thinking they’re going to be the Chief Operating Officer of a registered investment advisor. So, Nancy I’m going to throw it to you first. Can you tell us what you were doing before joining Stratos – how did you wind up here today?
Nancy Andrefsky [00:03:54]Yeah, I think maybe I’m unusual. I actually from the age of 8 knew that I wanted to be a COO of an RIA. Actually, I had no idea what a COO was; probably still many years after graduating college. I did start out in the CPA world with Ernst and Young and moved on to be a controller at other organizations after that. So, my background up until joining Stratos really was always completely in the finance world as a controller accountant and a little bit other thing but always related to the finance department of an organization. So, when my kids were younger, I’d taken a step back and decided to spend some time with them and then also work at some non-profits as treasurers, controllers, and whatnot. So, it was a it was a big departure from what I had done up until that point and when I was ready to get back in. Jeff’s family and my family had been longtime friends and he had said to me “hey you know why don’t you come in and work with me?” At that time, he was at a very large national financial services firm and I just thought at this point I’d gotten away from that and I really don’t want to get back into it. And not long after that is when he started Stratos and he approached me about being the CFO. And I had told Jeff for years….I said you were just such an entrepreneur but are you doing in this suit job? So, he finally had the opportunity I guess to take that entrepreneurial spirit and parlay it into his own business that was in an industry he had been in his whole career. So, I thought this was something that I really wanted to be a part of and was pretty excited and was confident that he would be successful. So, I joined him in that role and as a startup company I mean, we came in here with zero advisors zero anything and it was a big learning experience I think for all of us. I wore many hats, being here from the beginning I was drawn into a whole lot of things outside of the finance department. I think Jeff still thinks that I’m an attorney. I was the in-house counsel, sole in-house counsel for a long time, until our Chief Compliance Officer joined, and we now are both internal lawyers. But we’ve grown up to the point where we actually have outside counsel as well. But anyway, just drawn into a whole lot of other things and he approached me, I guess a few years in, asking for me to take on more of a COO role in addition to my finance duties. And just I think by the nature of me having been involved in a lot of different things and understanding how things have been built up to that point. But my children were still young, and I was not ready to commit to what I knew would be a really big role and a big learning experience for me because it’s not something that I had been involved in up until that point. So, fast forward a few more years and it’s 2015. We had a lean evaluation of our firm. It was the second year in a row that we had outside consultants come in and do the evaluation. I was working very closely with the person coordinating that and I knew there was going to be a lot of initiatives coming out of that evaluation. And we just really didn’t have a Core person to execute on them. So, we talked a lot about it and then when we were doing the debrief on the evaluation, I offered to be the interim COO at that point and it just so that we could get things off the ground. I didn’t want to lose the momentum and we really needed to put some structure in the company. We had operated as a pretty flat organization up until that point and it worked for us. It was pretty loose, and you worked across departments, but we realized communication was lacking at that point we really needed to establish some structure and that was going to be a big takeaway from that. And the question was well who’s going to do that? Jeff’s out growing the company by leaps and bounds and we really needed to do that. So, I offered to step in as an interim. We talked about it and that’s where it started. And then somehow along the way unbeknownst to me I became the permanent COO and here I am. It’s been a great ride. It’s been really enjoyable. But yeah certainly not something I aspired to do. I enjoy it now and adding Lou to the mix, there’s things that he brings to the table having been in the custodial world that I just don’t have the experience, nor did really anyone here have that the breadth of experience that he has had. And we’re at the point now where to get to the next $13,14 billion we need a higher level of expertise I believe, and we keep trying to add the necessary human capital and investments in the company so that we can stay ahead of that. But so that’s how I got here, and it’s been a big learning curve but certainly a fun ride.
Matt Sonnen[00:08:45]That is the most common, I ask it on every episode “hey I want to hear your backstory, tell me your backstory” and it’s the one common thread. Well, my first job the formal description really was just can you do the stuff around here that needs to get done. So, yes, I can totally relate. I love it. So, Lou compared to Nancy you’ve been, you’re brand new to Stratos compared to Nancy has been there since the beginning. So, tell us how and when you arrived at Stratos and a little bit of your backstory.
Lou Camacho [00:09:18]Thanks for giving us the opportunity to join the podcast. So, yeah, I am a relative newbie here at Stratos certainly on sitting an executive committee that is made up of folks that have for the most part been here since day one. So, I’m rounding out one year at the firm. Previously I spent the vast majority of my career with the two major custodians Schwab and Fidelity. It’s funny, I often joke that Stratos is the oldest new job that I’ve ever had. I spent almost four years kind of in a consulting capacity as a senior relationship manager at Fidelity covering the Stratos relationship. And it’s interesting similar I think to Nancy and that you kind of have this dialogue and why you joined an organization. One of things I think that makes us unique is that they’re really the entrepreneurial spirit really is weaved into the organization and I think working with the firm getting to know the people, the infrastructure, the processes, where the skeletons are hidden if you will. The firm was incredibly attractive to me at a stage in my career where I thought I had learned a great deal from my time at the custodians. You get the opportunity to work with really successful RIAs, gain insight and perspective to the challenges that they’re facing with whether it be growth, technology, operations, service, support you name it. The day to day – that experience has been invaluable ss I’ve kind of you know gotten my footing underneath me here at Stratos. So yeah, I was just at a stage in my career where I was certainly looking to do something more entrepreneurial and having the opportunity to build something and kind of leverage the past 15 years of experience that I’ve had in the RIA space and a much more impactful way. And just conversations with Jeff, Nancy, and others in the firm they’ve been really grow organically I don’t think that either one of us really had my role in mind and I’m not sure that I completely understood what the role would be on day one. But I think we both felt pretty good that I could have an impact in some way or somewhere in the firm and I think just in that alone I think is very telling about the culture here. Stratos was comfortable not necessarily having a role completely baked out for me and I was comfortable with that as well. And I think in retrospect it’s been a really good situation for us because I’ve been able to contribute really anywhere where we had gaps that I felt my background and experience would be able to add value. Jeff and Nancy and the team have been really incredible and given me the autonomy to dig into many areas where I could have an impact, so it’s been great.
Matt Sonnen [00:12:24]Were you – it seems to be a common career path into the COO role – were you the custodial rep covering Stratos and then flipped sides?
Lou Camacho [00:12:39]Exactly right. Yes, that’s exactly right. I covered them for about three and a half steps.
Matt Sonnen [00:12:43]Yep that that is definitely a common career path. OK. So…
Lou Camacho [00:12:51]I was just going to joke that I’m fairly certain that Fidelity wrote Jeff a check just to have him take me off their hands. That worked out for Jeff.
Nancy Andrefsky [00:13:01]And now we’re trying to write them a check to get him back there.
Lou Camacho [00:13:03]The good news is that Jeff has to write a check for twice as much just to get me out.
Nancy Andrefsky [00:13:13]Totally kidding! We’re so thrilled to have Lou here.
Matt Sonnen [00:13:18]So, moving on. I wanted to go a little bit deeper. That’s your backstory. So, now in our work and PFI’s work with COOs we’ve sort of defined three high level functions of as of a COO. One is just the day to day administration of the firm. The owner, by definition, the owner should be out of the office 90% of the time meeting with prospects and clients. So, it’s the COO that’s the person that’s in the office on a regular basis executing that owner’s vision through people and technology and because they are the one in the office they’re the one most responsible for the firm’s culture, in my opinion, because it’s the employees that are interacting with this person on a regular basis and looking to them for guidance. So, that’s sort of number one. Two is driving workflow improvements and this is the most common area that people think of when they hear Chief Operating Officer. This is overseeing the technology stack, managing the various vendor relationships, et cetera. And then three, and in my mind the most important, is the human resources function. So, we believe it’s the COO most of the time at an RIA who is responsible for recruiting and hiring, training, and retaining the employees as the firm grows and continues to try to provide that high touch service to more and more clients as they grow and need scale. So, it is a long winded intro to this question but Lou how does Stratos divide these three functions among the c suite and what high level tasks are you covering on a day to day basis for the firm?
Lou Camacho [00:15:00]It’s a great question and I think the way that we’ve approached it, and I alluded to it earlier, is really just taking a look at where could each of us have an impact. So, broadly right when we think about operations, right now I oversee the firm’s advisory operations and technology along with the firms M&A strategy. But part of that strategy is the operational infrastructure, the technology stack, and what we ultimately deliver to advisors. So, early in my career, and you never know kind of where your past experience is going to come into play, but when I first started at Schwab, I was on a service team. I was answering phone calls from advisors very early in the game that kind of evolved into conversion services, bringing on new business, and ultimately ever-evolving relationship management and sales roles within the organization. So, early on in my tenure with Stratos, we were kind of thinking through operationally one, and how do we better support the advisors that are already on the platform? The blocking and tackling the day to day and protecting the core which is incredibly important but also how do we build a valuable operational support model for the firms that affiliate with us through partnership or that we acquire. We want to make sure that we execute it really well on that. And my past experience with the major custodians came into play there and it’s funny we were actually thinking about a new hire to fill that role and Nancy and I were sitting down one afternoon and kind of said “hey look, I think I can add some value here” and I kind of took it on from there. And technology was the same. Stratos is interesting in that a lot of folks are challenged operationally to go out and kind of do their due diligence and acquire various software components and try to figure it out. Well, we have best of breed technology on the platform today. Our challenge is really how do we bring those things together and deliver solutions to our advisors that are going to continue to add value and help them grow, compete, and succeed in the marketplace. How do we put these things together in a way that will differentiate us from our competitors? As far as you know Nancy goes, you think about kind of the CFO, HR, Marketing and she also oversees our Business Services Group and that’s essentially our practice management arm. And all those things are more to her skill set. Nancy is probably the best I have ever seen with the numbers and we trust her implicitly. When we’re sitting down and negotiating transactions and making sure that the economics work. There’s no one better than Nancy to oversee those things. But yet she’s diverse enough. A lot of times when you have the number crunchers, they don’t necessarily have the skill set to get involved in other aspects of the operations. But Nancy does she does an excellent job on the HR and the marketing and the business services side of things. So, I think at this stage of the firm’s evolution we’re still in a place where we all have to wear multiple hats. And I think we’re honest with each other we sit down around the table and we simply decide; hey look you know who’s best equipped to execute on this and who can take this the furthest. And we do that until we get to a point where we feel we may need to bring in outside talent to take it to the next level or someone takes on or gives up additional responsibilities.
Matt Sonnen [00:18:33]Perfect. So, Nancy he stole some of your thunder but I wanted to hear from you directly. What part of the COO functions are you handling on a day to day basis?
Nancy Andrefsky [00:18:44]I think that that Lou covered it well. But yes, the CFO responsibilities I have a really strong controller under me, Karen Milner. That makes my job so much easier to handle and then I’m also responsible for HR and business services, which is run by Jan Isaacs and also just does a great job of it. We try and make that seamless, so that..it used to be we really build out our transitions department because advisors when they joined us that was really important to them that they knew that they’re transitioning was going to be in good hands. And then we built out a relationship management department for once they’re here, how do we help them with practice management and basically how to be a new business owner. Some of these advisors when they join, us they’ve never run a business before. They really don’t even know how do you set up an LLC, how do you develop the right team. So, that was that was kind of set up separately and then in talking about it really it should be one more seamless. Once they’re coming in with us and they’re transitioning, let’s not hand them off to somebody else. They get comfortable and they’re happy with how that’s going. So, we merged those departments. And so, it’s now integrated the transition into the relationship management. And that’s what’s under business services which rolls up to me as well as the HR. And that I think we’ve found over time that HR is just crucial. And I always thought of HR is okay, you hire people and you deal with personnel problems. But hiring the right people is I think one of the most important things you can do with a firm because the worst thing you can do is get a mediocre person in. You get the superstar and that’s great. You’re going to set up a career path and whatnot. You get somebody who’s really bad, hopefully you don’t. But you know that identifies itself pretty quickly and hopefully you know slow to hire quick to fire, you can move that person out. The worst person you could get is somebody who’s in the middle, where they’re never going to be your superstar but they’re doing their job ok. So, you want to identify who are those great people before you bring them in the firm. And we have seen now, I mean I think for me, one of the biggest learning curves for me has been to see how crucial that role is. So, that’s really exciting to me because I think that we’ve improved upon that dramatically. And then also marketing. They laugh because you have a bean counter who’s now responsible, the director of marketing. Kevin Elvington rolls up to me and that was something that we grew our firm, if you look at how rapidly we grew despite doing absolutely no marketing and no PR. I mean none. We didn’t even have a marketing person until almost a year and a half ago. Somebody on her advisory board said Stratos is the fastest growing largest company that nobody’s ever heard of. We’re trying to change that now because we realize all right, we’re the state and maybe we’re a little bit more grown up and we should focus on that. So, we brought Kevin in and so now we’re trying to come up with more of a strategic plan with that. At first, we had to have him work on all the things that we just couldn’t pay attention to because we were just chasing our tail trying to keep up with the growth. And so, we did start with having him help with our website and marketing collateral and content marketing and the things that we just hadn’t done at all. And now we have to go to the next level and start having a PR focus and all of that. And then also from a firm security. Jacob Stewart runs our technology department. And he rolls up to me as well and that’s the key, especially in our industry with all of the hacking and the phishing and we’ve been fortunate enough that we’ve been able to expand that team and we have a full time person who just does security and so all of that stuff. It’s kind of crazy cause I’m drawn into all these different directions but it’s also really exciting to me because I think I would get bored just doing one thing and I never realized how exciting that would be until I got into this role. So, I actually am grateful. I thank Jeff constantly for giving me the opportunity because I don’t even think that I would have known how much I would’ve enjoyed doing these different areas had I not been given the opportunity.
Matt Sonnen [00:22:58]Fantastic. So, Jeff not to put too much pressure on you but your answer to this next question will be the highlight of this episode.
Jeff Concepcion [00:23:09]I’m ready for you buddy.
Matt Sonnen [00:23:13]So, I’ve said it many times the goal for me behind this podcast has been to try to change the view within the already community of the COO role. I think that most business owners inside and outside the RIA industry say well that COO, that is an expense line on the P&L, that isn’t revenue generating, that isn’t helping us grow the firm, that is just a cost that I have to incur as the owner. But that’s why I’m so excited to have you here from your viewpoint. Can you talk to us how having the combination of Nancy and Lou has alleviated you of many of the day to day tasks of running the business and allowed you to focus on what you do best?
Jeff Concepcion [00:24:00]Absolutely and that’s teed up well. And I’m going to politely challenge you Matt on semantics about most business owners because I’m going to argue with you that 75 percent of the people in our industry are not business owners. They’re self-employed and they may think of themselves as business owners but they’re really self-employed. And I think that’s sort of that mental paradigm shift that you’re talking about. The difference between someone who’s self-employed, and someone who in fact, is a business owner is they think about reinvestment and they think about growth and they think about infrastructure and they think about the redeployment of capital to create the ability for them to actually grow and build a business which the self-employed advisor, that well-known term the lifestyle practice, they don’t think that way. They see clients, they generate revenue, and they end up with a paycheck at the end of the day. So, I think even just beginning mentally to accept the notion that I’m running a business if I was running any business I’d have a salary, I’d have some retained earnings, I’d have a business plan, I’d think about what that next strategic hire is. Be it a COO or someone to drive acquisitions or technology or HR and granted in our world I don’t want to make a direct comparison to a private practice. I still have one today but it’s very different right. We’re running an enterprise. But even as someone who’s running a private practice, who has that business owner mentality I did a little program with Mark Tibergien and Pershing a year ago and it was that notion of evolution from an advisor to a CEO. And I think it’s exactly what you’re touching on. At many levels, advisors hit feelings of complexity. So, you can only do so much on your own and then you make that first huge leap of faith and you hire what sales assistant, some type of administrative support. And then and then you take the practice to the next level and then whatever that level happens to be for you hit another ceiling of complexity that the two of you can only do so much and then you make that next hire. It could be a director of operations; it could be a head of planning. So, as that business grows and as you hit various feelings there are certain not necessarily sequential but logical positions that you might add to your team one of which could be someone to run operations. It could be financial planning, it could be asset management and that that sort of evolution of that talk with this panel that I sat on with Mark that ended up going to multiple cities is you need to fire yourself from responsibilities that someone else can do at least as well and in many cases better than you can do because that’s what they’re wired to do and go from 25 hats down to one or two or maybe at tops three. And it’s when you find out what those three hats are that you’re just so naturally and uniquely skilled to wear that you really reach your full potential clearly operations, what Nancy does is one. In our case, it’s acquisitions with Lou and even some of the more strategic value he’s brought to our tech platform. If you’re running a private practice it might be business development that you hire someone to handle. It could be relationship management, client reviews, financial planning. So, not every practice looks the same. But to your point, I think you’re spot on, to move from self-employed to a business owner. You’ve got to challenge yourself. You have to make decisions that may pull your income back a little bit in order to create capacity to grow a bigger more valuable business that ultimately creates more income. And it’s only through reinvestment that you can do that.
Matt Sonnen [00:27:27]You did not let me down, thank you. That was perfect. Thanks.
Jeff Concepcion [00:27:31]Yeah a lot of pressure.. a lot of pressure with that lead up. You got to remember three years ago I was still back in Cuba rolling cigars. With English as a second language for me. When you posit the question with such emphasis, you’re putting a lot of stress on a little guy like me.
Lou Camacho [00:27:49]That’s right. I knew it was only a matter of time before the rails came off this thing.
Matt Sonnen [00:27:53]Yes.
Jeff Concepcion [00:27:54]I’m telling you buddy we’re heading there.
Matt Sonnen [00:27:58]So, we have made the argument that one of the biggest benefits of having a COO or just professional management in general. Whatever title you want to put on it but I always gravitate towards the COO title. But one of the biggest benefits is having someone in the C Suite that’s focused on bottom line profitability as opposed to just top line revenue. Many advisors I see this all the time many advisors get very excited over a $150 million cash management account. Holy cow that’s a lot of assets and everybody gets very excited. It’s paying 2 basis points to the firm and you need the COO or professional management to, again whatever title you want to give it. But you need somebody within the organization that’s going to do the analysis and figure out, oh my goodness this relationship is actually costing us 4 basis points in the customized reporting that it requires, in the human capital cost to service this relationship. So, I wanted to throw this one Nancy because Nancy obviously you have a unique take here because you have the CFO hat in addition to the COO hat, but can you talk a little bit about this profit versus growth dilemma that firms face.
Nancy Andrefsky [00:29:08]Oh absolutely. As a matter of fact, do you have an hour? Because this is something, I talk about all day long and it’s something that I have preached, I think since probably day one. That growth for growth sake without dropping to the bottom line, it just creates needless complexity and keeps you running on a hamster wheel. So, I think when you’re new and you’re young you kind of will chase any revenue because you’re just trying to grow. And that’s understandable. You know you’ll make exceptions and you’ll maybe go down a path you didn’t think and stick to your core but I’m just saying that in the very beginning we didn’t have really good metrics and insight into what was profitable. And I think it’s crucial, absolutely crucial to have a good understanding of the profitable business versus business that’s neutral or negative to the bottom line. And I think you gave a great example in that if you don’t have good insight into that you could be taking on business that in the end costs you money. We’ve struggled with and tried to come up with the best way possible to analyzing indirect costs because indirect costs can have just as much if not more of an impact to your bottom line, if you’re not aware of what’s going on. I’ll give an example if I may that we did have a group, a team with us that had over $4 million dollars in GDC top line revenue. And when we did a real analysis in the end, we realized we were losing money on that group. The quantifiable numbers we were not. But they were using up so much time of our IT staff that it was probably taking up a half of an FTE person in IT to service that team. If you look at it that way and you take a fully loaded cost for an IT staff and allocate that to one team as a direct expense I mean that’s something you really need to do to have insight into that because it’s opportunity cost. What could you be doing with that person’s time otherwise and whatnot. So, and it’s also analyzing what are your most profitable streams of business. There might be something that’s minimally profitable but if you took the people that we’re working on that and allocated them to somewhere that was more effective and efficient, that’s a better way of running the company and I’ll tell you we did not have this information at first. It took us a long time. As I said earlier on, in the beginning there was a department of one which was department of two. You gradually add people and then you gradually add the ability to do better, have better analytics into those things. So, it took us a while, but I think that now we’re in a much better position to analyze those things and to really just I think the most important thing we’ve learned is to try and stay focused. The things that you do now versus a startup when you’re really willing to take on a lot of things. Now you have to kind of tear that back and decide what is our focus, what is our what are our core strategic initiatives and just got a lot more strategic about that because it all comes back to that opportunity cost. And you can have something that is minimally profitable, but should we be doing that? And we’re doing a much better job of being strategic in that respect. And I will say that a lot of OSJs who are similar to us they really struggle with this. They struggle with profitability despite the fact that they might have a big headline grabbing AUM or GDC number. And being that we’re involved in acquisitions now, I’ve been on a few due diligence trips where I’ve been able to see inside those firms and see that it’s tough it’s really tough. There’s a fine balance between trying to give a relatively high payout and still maintaining the margins such that you can reinvest in both straight up capital and human capital and to do it right. And you know what we’ve seen in doing that is that these firms that…. We don’t pay the highest. Jeff says that to everyone. We have a relatively very high payout given the back-office support and value add that we believe that we give. So, that each practice can be run at its peak efficiency and effectiveness and that’s what we try and help them with. But you know you can go to another OSJ that’s going to give you a higher payout and but if you think about that, logic would tell you that if you’re getting that higher payout there is not enough profitability to reinvest in the company and maybe you know stay ahead of the curve with technology platforms and the compliance and all of that. And so it’s as I said, it’s just crucially important to not just focus on that top line but to make sure and I will say that the margin that I look at the most is the EBITDA to net revenue number because just looking at even other to your GDC or what not, that doesn’t tell you what you’re doing with the funds you keep. So, I try and look at what’s our net revenue after payout and what’s our EBITDA margin relative to that. And that’s something that we’re really proud of because we’re well above industry norm for that. And it’s tough. I mean it’s a tough thing. And we’ve had to you change as an organization to get there. When we…I guess first, you’re just worried about making money. Jeff and I as I said we’re friends, but it stressed our friendship. I say tongue in cheek because he didn’t want to see me in the beginning. It was because it was always bad news. It was always we’re not making money yet and we kind of need, I need more money to keep the doors open. So, I think he started hiding from me and then we got to the point where we’re making money and we’re going along and we’re doing pretty well and then you know a few years ago we kind of hit a stall pattern so to speak where on the profitability side we were still growing with leaps and bounds and the top line but our profitability was staying relatively flat. And he wasn’t hiding from me anymore as much as saying what’s going on? Why am I flying all over the country like a mad man? And it’s not creating anything in the bottom line and so we really had to take it a big step back and see where we were as a company because there were a few things going on. And first of all, when, you’re kind of a loose organization and you start out and you don’t have as many people. We didn’t have as many guidelines and structure around the expenses. And there is something actually Mark Tibergien, to quote him, talks about creep and when you start getting bigger all of these little expenses add up to big expenses. And when you try and keep it kind of loose and without all those guidelines all of a sudden you realize that when you had a staff of 10 and now you have a staff of 60 and you’re supporting almost a thousand people. Those expenses might not seem a lot to each individual person but in aggregate they really are and that impacts when you have a small margin to begin with, that can erode that bottom line. So, we did a lot of communication with people saying we’re not trying to be big brother but we do need to put some guidelines around that. And I think that that was the first step and the other thing is that we were reinvesting in the company and we were having to make some really important hires to be in advance of when that growth was coming. So, those years we were we were kind of flat and it was disturbing but just in the last couple of years now we’re seeing we’ve had really big jumps in our profitability the last couple of years and we’re seeing the fruits of that labor of really clamping down on things and focusing more on the analytics around what streams of business we should be doing as well as the scale that we’ve achieved and we hired in advance of that. So, we’re really benefiting from that now and that allows us to reinvest, having that profitability allows us to reinvest in the business which will take us to the next level and keep us and keep us relevant. The other thing that I would say along those lines is that concept applies to acquisitions as well. I know we’re going to talk a little bit with Lou about that. And actually, I think it’s probably just as important if not more with acquisitions. Anybody can write a check and acquire a firm. That’s the easy part. Making sure that you acquire the right firm. That in the long run your culture and fit is clearly your most important aspect of the acquisition. But once you realize that’s there looking at the financials and making sure that in the long run it’s going to be a net contributor to the bottom line is is super important because acquiring debt or using your own capital to take on a firm that’s not going to add in the long run is going to make that splashy headline. But we’ve seen companies do that where they’ve bought something and then they’ve realized uh oh we’re kind of getting into a hornet’s nest here and that we didn’t realize what we were getting into and then that can detract from your core as well. So, like I said sorry, I could go on all day about this but I think that’s crucial.
Matt Sonnen [00:38:26]Yep, there’s a book called The Messy Middle, we’ve written about it on our blog. Just talking about the messy middle of the entrepreneurial journey. And while you were talking there’s one of my favorite quotes from the book. I have it saved in my email drafts I pulled it up while you were talking. But one of the quotes is “it usually takes at least two years before you have any reasonable traction to show that your business might be working. Then another few years of driving growth to create something that appears to be a moat then you can afford to breathe but only a little bit. So yes, it’s a constant, like you said a hamster wheel. Just always….it’s a nice circle of the profit versus growth conundrum. I love it. So yes, you brought up M&A. So, that is another concept that we have talked about a lot in our articles and white papers and in a lot of the podcast interviews. The idea that in order for an RIA to be successful in the M&A game, a buyer must be able to highlight the firm’s infrastructure. They need to convince the seller that, should they join the larger firm, the buyer has technology, workflows, compliance, HR, etc. all of this is in place so that the selling adviser won’t have to worry about any of that. They’re going to be able to grow much faster as part of the larger organization than if they were to keep going at it alone. And we’ve made the argument many times that there’s no one better at the buyer organization than the COO to make this presentation to that to the seller. So, Lou I know this is a big part of your core responsibilities. Can you speak a little bit too to how you handle this?
Lou Camacho [00:40:11]Yeah. I think it’s a great question and aligns well with kind of Nancy’s previous comments. Look at the end of the day, when you’ve got five potential buyers, which is not unusual in today’s environment, everyone can write a check. So, you start looking to that cultural fit and the softer side of things of know doing business with someone you like all other things being equal. But to Nancy’s point earlier, Stratos is never going be the low-cost provider and that’s not what we’re trying to be. So, we are often challenged to highlight the infrastructure and the value that we provide above and beyond just the basics or the purchase price of the transaction. So, we spend a lot of time highlighting the fact that we have real infrastructure which is different than our competitors and other large OSJs and firms that are looking to be acquired. We challenge them. They’ve got to really think about what they’re really getting when they partner with a firm like Stratos. We have over 60 plus home office employees. We have true infrastructure and support around real estate. We’ve got 24-hour tech support. We help with marketing, practice management, compliance. Firms that affiliate with us or partner with us from an M&A perspective, we want to help on that front as well. While our partners can continue to own the fit and feel of a transaction leveraging the team, leveraging Nancy, Jeff, and others within the firm we can help with the financing aspect of things like deal structure and all the complexity that comes with handling the transactions. We spend a lot of time really emphasizing the factors that there’s to infrastructure. And when you peel back the layers on a lot of our competitors and firms out there, that’s missing. They live and breathe by the highest payout and certainly that can attract some folks to your platform. But it’s really hard to run a business and it’s really hard to reinvest when your pay outs are so high that there’s not a lot left to build out an infrastructure. And so we pride ourselves on the financial discipline that it takes to have real infrastructure, when you peel back the layers. So, we focus a lot of our time stress in that. Anyone that affiliates with Stratos or we partner with acquisitions we invite them out to Beachwood. So, they can come out and see it and we think that’s where we really shine. It’s very rare that we’ll have a firm come out to visit our headquarters meet the people and see what’s behind the scenes. Rarely do they walk away and not ultimately decide to affiliate with us in some capacity we’re incredibly proud of that.
Matt Sonnen [00:42:57]That’s great. So, Jeff I wanted to throw the final question to you. It’s a little bit left field for a COO podcast but I didn’t want to lose the opportunity to ask you this given your status in the industry and the nature of Stratos’ business plan. I’d love to get your opinion on the liquidity events that we’ve seen recently with the three large aggregators in our space. So, we obviously saw Focus Financial went public, Hightower was bought by a larger private equity firm, and then just recently we had the big announcement that United Capital recently sold to Goldman. So, wanted to get your opinion on the monetization opportunities in the wealth management space. Do you think that outside capital will continue to flow into our industry?
Jeff Concepcion [00:43:50]That’s a great question and it’s also very interesting because those few transactions that you mentioned and then a number of others that I’m aware of through various circles that I sit in have been pretty mind blowing. I think they’ve sort of redefined what a peaked market and massive flows of capital from the various institutional buyers and PE firms what that can mean in the way of multiples. What’s interesting is to the bulk of our industry, I don’t think it means much. Multiples really haven’t changed for the bread and butter, $.5m, $1m, probably even $2m revenue practice. But for those with size and scale and far smaller than the ones that you referenced, a lot of those firms are seeing massive multiple expansion and I’m frankly blown away by what I’ve seen. And I think though I think these things are cyclical, Matt. I think we’re at the absolute tail end. I’d be shocked by the end of the year, beginning of next year if we’re in the same environment that we’re in. Everybody throws around that term frothy when prices are high, and capital is abundant and the markets have had a decade tailwind just driving up asset values. So, in my opinion I think we’re coming to the tail end of just a highly unusual period. Not unusual for the bread and butter world. I think the multiples of EBITDA in that four and a half to five and a half times range have been reasonably consistent. I think there are things that will change those as well. But when you take a look at larger firms not the size of the ones you referenced, but still meaningful, two, three, four, five, six, eight, ten billion. There have been even some mind blowing stuff taking place in that space as well. So, it’s interesting times.
Matt Sonnen [00:45:33]Absolutely. Well I cannot think all of you enough Jeff, Nancy, and Lou you’ve been very articulate in your answers, gave a lot of details here for people to chew on. Thank you for allowing us to look under the hood of the c suite at Stratos. We’ve all benefited from your knowledge today. I think our next episode we’re going back to our standard 2 COO guests from two different firms. This one’s been fun to sort of mix up are our standard guest profile so thank you again. We’ve got a few other interesting ideas for future podcasts to get RIA best practice tips from a variety of different sources. So, thank you Jeff, Nancy, and Lou. I really appreciate it.
Lou Camacho [00:46:25]Thanks for the opportunity.
Jeff Concepcion [00:46:25]Thanks for having us, Matt
Nancy Andrefsky [00:46:26]Thank you so much.
Matt Sonnen [00:46:28]Yes, thank you. And we will talk to everybody next time. Thanks.
