The Exchanges

Q If you turn and look at the business of RIAs, and maybe go back the six or seven years when you first came into Hightower, how did you think about the evolution of the business model and what you wanted to do when you took over?

A I think for Hightower go back even further than me. The firm was started in 2008 coming out of the crisis. The whole idea from the founders was there's these great advisors sitting in these big firms and these are brokerage businesses operating in a brokerage model, but they're really fiduciary minded, meaning they're fee based. They think like a fiduciary and there's an opportunity to give them a different way to serve their clients. We sometimes refer to that as Hightower one dot O or the first chapter. It was all about flexibility and choice. Come to Hightower and we're going to give you a platform that's got national scale, but allows you to choose where you want to custody assets, what type of portfolio accounting system you want to use, how you want to invest money. So a lot of flexibility. When I got here six and a half years ago, we started to evolve in a couple of different ways. One, we wanted to create much more of a holistic firm where we could create a little bit more consistency and conformity and commonality of how we do business. Always giving the advisor flexibility where we think it matters most, but having unlimited choice of where you custody assets doesn't necessarily create value. We decided to tighten that up a little bit, and we also shifted our focus from Lifting out advisors from the full service firms to doing registered investment advisor business ac…

AI assessment note: “When I got here six and a half years ago, we started to evolve”

Q What was your first paid job and what'd you learn from it?

A My first paid job was delivering newspapers at 5:30 in the morning, the Detroit Free Press. So I would lay on my couch waiting to hear the stacks hit the front porch. And then I knew it was time to get up and roll the papers and put them in the front of my bike and then ride around my paper route delivering papers. Those were in the days to get paid, you had to go collect. There was no online. So I then had to go in the afternoon and knock on doors and collect money. I've always valued work, because anything that you do that someone's willing to pay you for is special. Even delivering a newspaper, because to the people receiving that paper at 5:30 in the morning, I'm part of their daily routine. If they didn't get that newspaper, I've set their day off in the wrong direction.

AI assessment note: “My first paid job was delivering newspapers at 5:30 in the morning”

Q from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at Ridgeline.ai. And now, back to the show. What's been the impact of having private equity ownership of Hightower?

A You might suspect I'll be positively biased, and I actually think for the industry, private equity has been overall very good, because it forced an industry that was very cottage, very subscale to run in a much more rigorous way, which I, for one, think is good long-term for clients, because if you're running businesses as lifestyle businesses, It sort of implies at some point there's an end to that because the lifestyle ends and the lifestyle may end with the advisor's departure. When you think of the good of clients, you want these advisors and their practices to continue to persist. Private equity is given that fuel to really grow the industry up. Specifically, our investor, Thomas H. Lee Partners, completely respects we are a fiduciary business and it starts and ends with the client. This isn't about what the spreadsheet says and how we can drive the maximum benefit for the firm. This is all about how do you drive maximum value to the client? Knowing if you do that, wins accrue to the business. So I love the fact we have an investor that gets that, who's been willing to make sizable investments in the business on behalf of the client. That's across the board. When I got here six and a half years ago, we didn't have a national trust company. We didn't have an estate and financial planning team. We didn't have a tax preparation capability. We didn't even have an industrial st…

AI assessment note: “our investor, Thomas H. Lee Partners... willing to make sizable investments in the business”

Q Why don't you take me back to your background in this long period of time in this space?

A It started for me when my mom took me to meet with her financial advisor when I was like a sophomore in college. And we went to the Merrill Lynch branch and it had the big ticker videos going around. It was a different era. There was no internet. There was no free access to information. And we sat down with her advisor and he took us through this brown leather financial plan, which in hindsight was a lot of canned material. Just the notion of sitting down with people Looking at them holistically and helping them achieve their goals really hit me. I ended up being a finance major economics minor in college and decided I wanted to go into financial planning. Back in those days, the people that did financial planning were really product organizations that were selling something. I remember going to an interview and my first interview was with an individual and it went fine. And he's like, all right, for your second interview, Bring in the names of 50 people you know, and we're going to call them together. I realized, well, that's not what I want to do. I wanted to do something technical. I didn't want to call on all my friends and family and try to sell them something. So I sort of got away from it, and I went into a different direction. I went into banking for a bit, but ultimately found myself, when I was working for Charles Schwab, coming back into the advisor business where th…

AI assessment note: “It started for me when my mom took me to meet with her financial advisor”

Q Once you strike a deal, how does the onboarding process work?

A Once we agree on value and sort of key terms, we get to signed LOI, and at that point, we're really going to do the last 60 days of real deep due diligence. We're going to go from looking at compliance, operations, investments. We don't make everybody conform to one investing philosophy, but we do have a framework for what we're comfortable with, and are there managers that we just don't have that maybe we can go out and add to our platform, or are they managers we just Aren't willing to add for some reason. So we're doing all that really, really detailed stuff. Once we get to definitive documents signed and closing, and we've already, by that point, brought our integration team into this as well, because these are not stark handoffs. Think of it more like a relay race of a baton being passed. So our integration team has been getting up to speed during the due diligence process, running a lot of that detail. And then they will pick it up and really think about it as a 12 month activity. Now the heavy lifting is happening in the first 90 days, but we like 12 months because that really takes you through every cycle of the business. And we recognize change is hard. And anybody who says change isn't hard clearly has never changed because I think it's hard for us as humans. And it's hard in a business. Think about it. You've been around 30 years doing things a certain way. And now y…

AI assessment note: “our integration team has been getting up to speed during the due diligence process”

Q I'd love to turn to the investment part of the proposition. At the onset, before you got to Hightower, you said that the advisors all just kind of did what they wanted. How have you brought that together?

A In many ways, we still are pretty diverse across our advisor teams, how they invest money. What we've tried to do is make sure, especially on the risk framework, that we've got tight processes around things like that, and that could be like concentration risk in a single investment, things that are pretty basic. In terms of the client experience, we've tried to Create a best-in-class experience, especially through technology. We made the decision we wanted to invest in our own client experience, so we're not just licensing someone else's, which allows us to really use all the data we have to create that experience. Around the investment side specifically, we've started to lean into the private market area as an area we think we can create top-down value creation. So instead of Having an advisor out there coming up with a great idea for a private investment and then putting a subscale position on the platform. We're now curating these investments from the top and making them available to our advisors to invest behind. And that's really an investment committee made up of advisors and our corporate investment experts. That's growing in success. And arguably has been very successful. We also just made an acquisition of a business called NEPC, one of the largest institutional consultants in the U.S. And we made that acquisition and wanted to have NEPC part of Hightower specifically …

AI assessment note: “wanted to have NEPC part of Hightower specifically so we could start to centralize”

Q What is your diligence process look like with a potential acquisition from the sourcing through getting to know them and making an offer?

A People come to us in a variety of different ways. Sometimes it's relationships some of us have had personally. We have a lot of different bankers and consultants who bring opportunities. We also have a self-sourcing team. So that's top of the funnel, how things get to us. It's all about understanding objectives. So if you're a seller, we want to know why and why now? What's really important to you? If we're not aligned on basic things like that, we're just not going to spend time. It's just too valuable. What I really encourage sellers to do is get really, really specific. Give me the one or two non-negotiables in something that would be a good outcome for you. And I really mean it when I say one or two, because if you have five non-negotiables, I promise you they're negotiable. Come up with one or two things that no matter what I do, this has to be part of the outcome. Then we get into a lot of data exchange because data doesn't lie. So it's nice to have the narrative, but we look at a lot of data. We go through that process. It's usually pretty iterative. If we think there's alignment, there is when we'll provide indicative value. So we'll give them an idea of what we think the value of their businesses. Maybe they agree. Maybe they disagree.

AI assessment note: “So that's top of the funnel... If we think there's alignment... we'll provide indicative value.”

Q With the number of acquisitions you've done, you mentioned a few at the onset that maybe didn't go as well as you would have liked when you hadn't fine-tuned your lens. I'd love you to think about one that you thought was going to work out and then didn't. What happens when something doesn't go as according to planned?

A So I'll take the ones from early on out of it, and I'll take one not by name. It was a deal, very prestigious, firm, been around a long time, but very centered in the principle. That's the risk in these businesses. The founders, in many cases, have their name on the door. They are such a big part of these businesses. The founder ultimately woke up and decided, I'm ready to move on with life. It wasn't 10 years post-deal. It was three years post-deal. So it forced us into a much more rapid transition of the business. That we weren't prepared for going into it. We would have hoped to have gotten at least five years from that leader, but also we understand sometimes things change in people's lives. And the individual had just gotten to a point where he didn't have his joy in this anymore. We're actually just live in motion on this as we speak, which is why it's so front of mind. So then we look at it and say, does the business team have the ability to sustain from within? Or do we need to think about combining it? So in this case, we've actually chose to combine it, and we're going to be merging it into another one of our advisor practices, who's really well suited just from a demographic, a type of client they serve, how they serve them. So the ending hasn't been written yet, Ted, on this one, but it did force us into some rapid planning, which rarely is good, and we certainly wi…

AI assessment note: “So it forced us into a much more rapid transition of the business.”

Q Where do you start across the breadth of alternatives that are available?

A In this case, there's plenty of debate on where we should start. Where we're choosing to start is likely something around private credit. So we think we need some tried and true things like private credit, private equity, real estate. We've also had good success on the Hightower client side with thematic investing into the privates. For example, last year we rolled out a cybersecurity offering, and we think cyber is going to be a big theme here for years to come. That investment raised a good amount of capital and it's performed very well. So continuing to like define some interesting things like that, that are a little bit outside just your normal private credit, private equity, we'll continue to look for those types of thematic investments as well.

AI assessment note: “Where we're choosing to start is likely something around private credit.”

Q As you take a step back and look at the trends in the wealth channel with RIAs, what do you think are the most important things we'll see over the next couple of years?

A We're going to continue to see consolidation through acquisitions. And we've seen record numbers of transactions over the last few years, but honestly, we've still seen little consolidation because you continue to have more new RIAs being created. You're going to see more meaningful consolidation, including big firms that come together. Because think about if you're a 20,000,000,030 billion dollar AUM RIA, That's a big RIA, but you're still a long ways from a 200,000,000,300 billion dollar firm with real institutional scale. Firms are going to have to ask themselves, can I get there or do I have to get there through combining? So I think you're going to start to see some platforms coming together. As I alluded to on the investment side, we think private markets is going to be big, which is why we're investing not only in the front of office, the investment side of it, but also in the back office. In terms of having a platform that can support the growth. And then not to be cliche, but AI, not in the form of alternative investments, but artificial intelligence. Ted, I've seen more real applications starting to come to market are really interesting and they have value in the last three months. And I'd seen in the last three years. So I think you're going to start to see AI really start to transform these businesses. Some advisors are going to choose to ignore it. If you ignore it…

AI assessment note: “We're going to continue to see consolidation through acquisitions.”

Q As you take in those comments and try to take that to heart, what are the little things that you would coach someone else on how you bring out those types of responses through your leadership?

A The big one is vulnerability. People connect to people. They don't connect to CEOs. They connect to the CEO, the person. So be vulnerable. I will say earlier in my career, I wasn't vulnerable. I learned, no, no, you don't let people see you sweat. You don't show emotion, you know, always be cool. And there's certainly times that's needed, but letting people see you're human, acknowledging where you whiffed on something. That's on me. I got that wrong. Letting people know my life is not perfect. And let me tell you things about my life. I've openly shared, I have a daughter who suffers from severe anxiety. Once I became open about things like that, I connected to people in a very different way because all of a sudden they're coming up to you like, oh my God, me too. We have this commonality that doesn't matter what our titles are, what we do in the organization. We have this commonality that we could connect on. I've learned the more vulnerable I can be, the better. Now, don't get me wrong. I don't show up and cry like a baby in front of people. I'm not a big crier, but short of that, I've learned the more open I can be, the better.

AI assessment note: “The big one is vulnerability. People connect to people.”

Q What did you see on your path and the evolution of private wealth from those days when you re-engaged with it in Schwab all the way through to when you came to Hightower?

A The industry has changed significantly. 25 years ago, it was all about investments. If you really looked at any client meeting, that was predominantly what the conversation was. We didn't have these things like cable news channels where you can have them on all day and get information. The advisor was really the source of information. I sometimes use the example of realtors. It used to be realtors, you needed them to get Access to the multiple listing service. Well, you needed advisors to get access to market information and market perspective because it just wasn't as available. We all know now it's available 24 seven. Just like in real estate, any one of us can go on realtor.com and look for homes. Value had to be created in different ways. As the industry has evolved and advisors have evolved, but then went to more planning based, and you saw more advisors incorporating real planning, not just A little bit of cash flow projections, but real financial plans. We've gone even further, and we believe estate advisory is a big area of opportunity. When you can sit down with somebody and talk about their legacy, how they want to not just create a tax-efficient estate, but also how they want to treat their kids and their grandkids, how they think about philanthropy, you're starting to get into these deeper emotional connections. Which we think is where real loyalty is engendered. In…

AI assessment note: “25 years ago, it was all about investments... went to more planning based”

Q As you look at this trend of more investment in the private markets in this channel, what are the things that you think could derail what seems to be common knowledge that more and more capital is coming?

A The big watch out would be we have some blowups. These investments come with risk. For most of us, if we've been around long enough, we've experienced one of those things blowing up on us, and usually not because of any fault of our own. The big gotcha will be if we have some really visible blowup of a manager that we've put a broader set of retail investors into, that could create a pretty significant headwind. Also, you have a lot of these alternative managers coming up with interesting new models for doing this that try to solve the liquidity need that most retail investors have, but can you do that and still retain the performance you want to see from these private market investments? It's still a question mark. Those are the types of things that could slow it down, but I don't See something that will stop it. I just think the momentum is too great there. In terms of asset class growth, if you think of privates as an asset class, it's the fastest growing.

AI assessment note: “The big watch out would be we have some blowups.”

Q How do you think about that role then, which sounded like a cold calling boiler room type thing, and financial advisory now?

A As much as I dismissed it and said, that's not for me, you do actually need to find new clients. We have an industry that's so sound technically, but sometimes struggles from a standpoint of getting people to use their services. In the industry itself, specifically the wealth industry registered investment advisors is growing as a whole. The majority of advisors really grow when the market goes up. They struggle to generate net new client growth. As much as I didn't necessarily like being asked to bring in the names of You do need to be able to go sell yourself, because to be able to do good for someone, they need to know you're there and know how to use you.

AI assessment note: “As much as I dismissed it... you do actually need to find new clients.”