Bob Oros – RIA Perspective at Hightower (Private Wealth 7, EP.452)

27:31It's almost like you're in an investment. Many investment managers, when they're buying an investment, they'll create a sales thesis at the same time. Here's the reason I'm going to buy this investment. And here's the thesis for when I sell it. And it sort of helps them take the emotion out of it. For us, one of the learnings is, hey, we're doing this acquisition, but what's our thesis for if it doesn't go well? What's the playbook here? And do we step in and have to think merger or is there a next generation that's already there that we can have confidence can step up? It's forcing us to think more about a future occasion that may or may not happen because of the learning.

28:09Once you have an advisor that you bring into the platform and it's working, Just like you're able to buy someone and bring them onto the platform, there's a big market for a successful advisor getting poached away. I'm curious how you've thought about retaining the successful advisors on the platform. In our deals, because we're doing true acquisitions and the principals are receiving material proceeds, there are restrictive covenants that come with these non-compete, non-solicit, non-accept where it's enforceable. You don't want to have to depend on those to be your strategy for defense. events.

28:50We have the occasional advisor who departs and tests those things, and we always protect them because we need to protect the business. What we really do is we want to capture hearts and minds. We want advisors to feel so well-served here and to feel so connected as part of the community that they would never want to go anywhere else because why do it? It's not going to be better. So we put a lot of effort into culture. We put a lot of effort into creating a community of collaboration. We just hosted our annual senior principals event, had over 300 people together in Dallas, Texas, a record number of advisors in attendance.

29:32Those are really important for us because that creates that connectivity, not just with the leadership team, but also with each other. So we put a lot of work into trying to foster that so that advisors just never feel the made? We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past? Partner with a company that's been defining the future of dealmaking for nearly two decades instead. When it comes to M &A innovation, SRS Aquium has reshaped the way that deals get done, streamlining processes for maximum efficiency and minimum headaches.

30:14Professional shareholder representation, online M &A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now back to the show. What's been the impact of having private equity ownership of Hightower? 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.

31:16Because 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.

31:54This 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 strength accounting system. We now have Oracle. I can promise you a multimillion dollar investment like Oracle, it's hard to directly see the ROI.

32:31You're not going to get another client because of it, but it's going to help us run the business a heck of a lot more efficient. Private equity has been good for the business. I don't think it's for every advisor. I'll be clear about that. If you're running a multi-billion dollar RIA and you're thinking you want to take professional money, you need to be ready for what that means, because that means you are going to have to run it as a professional business. For me, coming out of big institutions, it was a very comfortable shift because I expect to do those things. I expect to have a business case for a decision to invest in something.

33:08If you've been running your own thing for a number of years, 25 or 30, and you all of a sudden have somebody else at your boardroom table, you better be ready for it. 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? 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.

33:55In 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.

34:44And 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 so we could start to centralize more of the investment operation. So we don't see value in having 140 versions of asset allocation. But I now have one of the largest institutional consultants who does it for the largest institutions who can now do it for all of Hightower.

35:29They also have a very scaled OCIO. So as more and more advisors decide, I don't even want to build portfolios anymore, that's not my highest and best use. We're now going to leverage NEPC for that. And then, of course, going to my comments on private markets, we now get access to NEPC's private markets expertise, where they have 22 analysts who do nothing but work in the private market space. and we're going to gather, curate access vehicles that Hightower advisors and clients can then leverage. If you look at it today, looking through the advisors to the client portfolios, what does the rough asset allocation look like?

36:14It's still historically looked a lot like the 60-40 portfolio, but we think we're going to start to see some shift there and especially around a growing allocation to private markets. Today, on average, across all of Hightower, think of us as 5 % to 6 % allocated to privates. We think that number is going to be 12 % to 15 % over the next three to five years. We're seeing the demand, and it was part of the rationale for doing the deal we did with NEPC. How do you think you get there? Like many things, you get there one step at a time, but you get there by the unique ability to give them access where they couldn't get it on their own.

36:55One of the benefits of NEPC is representing large institutions, they can get access to virtually any manager. And those managers typically don't want to play in the retail wealth side because they don't want to deal with a bunch of small clients. We can now give them access to that channel, but in a scaled way. So we'll create these vehicles that retail wealth clients can invest into, but to the manager, it just looks like a big position. So we're going to roll our first one out in the first half of this year with NEPC. Our expectation is we're going to get at least$100 million of capital raised with each one of these.

37:34Where do you start across the breadth of alternatives that are available? 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.

38:13So continuing to 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. As you look at Hightower as the organization, how do the investment decisions get made? Short answer is it depends. Because today, A, advisors may maintain their own investment committees and they're making their own investment decisions. If they're outsourcing it to our investment solutions team led by Stephanie Link, then Stephanie and her team maintain the committee and are making those investment decisions.

38:52We've grown that from$300 million when I got here to over$6 billion today. Advisors are increasingly showing a desire to let go of the investment side of it. Probably a little slower than the industry expected, but it is happening. On the NEPC side, obviously they maintain their own investment committees. It's a little bit flexible still. That will tighten up over time. So it just really depends on whether the advisor is managing all the investments themselves or not. If you're a manager on the outside seeing, wow, this is a large and growing organization with an increasing institutional looking investment presence.

39:32What advice would you give to a manager who's trying to figure out how do I navigate telling my story to Hightower? I would tell you come to the center, meaning come to the corporate teams, the home office, as opposed to trying to go out to a thousand advisors individually, which we still have managers trying to do that. That's just a hard road. If you want to have a strategic relationship with Hightower, work with us from the corporate enterprise, and then we can help you navigate where would you best fit, whether it's in a centrally managed program or if it's with direct to our advisors, we can help you understand which ones are best suited to work with someone like you.

40:17As 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? 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 billion,$30 billion AUM RIA, that's a big RIA, but you're still a long ways from a$200 billion,$300 billion firm with real institutional scale.

41:04Firms 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 have value in the last three months than I'd seen in the last three years.

41:45So 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, you ignore it at your peril. I'll give you one example, the concept of digital workers that you can think of just like physical workers. And you're now balancing between when do I hire a physical worker and when do I hire a digital worker? And that digital worker will know exactly what your systems are, how your processes work within that, and they'll do the work. And they'll work 24 by 7 and they'll never complain. I may not be doing it justice, but what's really interesting about that is it's not us having to make a bet on some new application.

42:30It actually comes and sits over the things we already do. The tough thing in a big firm is if you come in and say, yeah, I've got this new artificial intelligence portfolio accounting system, but to use it, you have to get rid of all your other portfolio accounting. That's got huge execution risk to us. But if you come in and say, I've got this digital thing that sits over your systems, just allows you to use them more efficiently, that's really interesting. Or another application that came my way was take something like a performance report. Very common. Most advisors use them. They're usually long and very technical.

43:07This application will take a performance report, turn it into a two-minute YouTube video. If you're the client, would you rather have 40 pages of charts and graphs or a two-minute YouTube video that tells you all the salient points about your performance for the quarter? Just does it in a format that's much more interesting. And guess what? They can also synthesize the advisor's voice so you feel like it's your advisor telling it to you. 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?

43:47The 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 blow up 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?

44:33It'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. You look across the different subsegments. Private credit clearly has gotten traction in this interval fund structure. What's your sense of the interest of adoption of private equity if it doesn't work in that structure and has to require what's existed for a long time in the drawdown structures? TBD, until we start to take these out, does the complexity of getting a retail client to understand how they work is very different than an institutional client?

45:23We haven't tested that enough now to have a formed view, but that is going to be another layer of complexity in terms of driving adoption. So with all of this growth, and particularly in the bunch of years you've been at the helm, you've recently decided that it's time to move on. And we'd love to hear about your decision process. Most of what you hear is just excitement about this space. So super interesting to see someone at the other side of that. I'll say move on, but not move out. So I agree. And it's funny you said it that way, Ted, because I've told people the next few years are just going to be way too interesting to not be involved.

46:02But I also recognize running a firm day-to-day is not a job. It's a lifestyle. It's a 24 by seven activity. You don't get vacations. I don't say any of this begrudgingly. I embraced it. I accepted it. My family accepted every vacation. I'd be sitting in the hotel room for a few hours a day. But there also becomes a point where you know, it's time to let someone else come in and bring their fresh ideas and thinking. I tend to be a believer in shelf life of leaders and roles. This is year seven for me, and it's been a privilege of my career to do it. I knew it was the right time for me to help foster succession here, because you also have an obligation as a leader to make sure someone can step in and keep it going.

46:49We talked about the baton earlier. Really true here. What you don't want to have happen is, oh, I decide I'm going to leave and we don't have a CEO and now you're interming it and that's really disruptive. So I always wanted to be really thoughtful about it. And I don't think it could have worked out any better in terms of how we handled the transition and the individual we've selected to come in to be the next CEO of Hightower. I'm excited for him to join us here in a few short days. I will continue to stay on the Hightower board and continue to enjoy the fun. And then And also it gives me the opportunity to do some other things.

47:28I've recently become a grandfather, which is kind of a cool new chapter of life. And yes, if anyone thinks I don't look old enough, I am 59, so I'm appropriately old. And then I'm actually going back to school and going to take part in a fellowship program at the University of Chicago around leadership and society, which is a small cohort of individuals from around the world working on their next chapter of purpose. So the thing I can promise you is I don't use the R word, retire. It just seems like not the right word. And I couldn't be more excited, most of all, because people need great advice.

48:06Whether it's an institution or a client, people deserve great advice. I love being part of an industry that participates in that and helps people achieve their outcomes. So I expect to still have a lot of fun, be involved, just in a slightly different way. As you look back at the 30 years you've been involved in, particularly these last six, what have been the most important lessons that you've taken away from success as a leader in this organization? If I learned anything over the last six and a half years, it's adaptability. I didn't come into this ever expecting to navigate a pandemic. We all know there was no playbook for any of us on how to do that.

48:44We went from Friday being in the office to Monday telling everybody to stay home. It taught me adaptability that never get too ingrained in how you do things because you may be forced to change. It also taught me always think about scenario planning, always understand how your business to the best of your ability is going to behave in different conditions. Fortunately, that was something I had learned years ago from coming out of bigger companies where scenario planning was part of the muscle. And we were doing that here. Now, what I learned during the pandemic is we didn't scenario plan bad enough.

49:21So plan for the really bad stuff. So you understand, like if the S &P loses 40%, what happens to your business and how do you react to it? Adaptability and having a planning mindset have been two big things that I probably always believe, but after living it the way we did, that's ingrained in how I think about leadership. The last one is transparency and availability as leaders. What I've learned as I'm leaving is people aren't coming up to me and saying, thank you for all the growth. You'd like to think, I mean, my private equity firm may be thanking me for the growth, but where I'm getting people who want to say something to me reflective, it was around the support they got, the mentorship they got, the friendship they got, the transparency.

50:07And so it was just a humbling reminder as leaders, we have so much impact on people. It gets easy to underestimate the way we act, the words we choose, whether we smile or don't smile, leaves people in a certain way. I've really been humbly reminded of that and appreciate it. 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? 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.

50:50I 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.

51:28We 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. Bob, I want to ask you a couple of fun closing questions. What's your favorite hobby or activity outside of work and family? I've had to think a lot more about that now, Ted. because I used to say my hobby was work, which is just a lame excuse.

52:02I love spending time at our house on a lake where I found it's just my happy place because it represents all the things that are really important to me in life now, which is just slowing down, family, great times together. And then I also love to ski. So snow ski, and I didn't get on skis until I was 35. So anyone listening to this who started skiing later in life will appreciate it. It's a lot easier to learn when you're five and you have no fear than when you're 35 and have plenty of fear. I've become a decent skier where I can ski blacks out west. And so really enjoy doing that and do some annual trips with my brothers around skiing.

52:45So those are a few of the activities. And then I'll probably start to pick up my golf clubs a little more frequently. What was your first paid job and what'd you learn from it? 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.

53:19I'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 530 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. How's your life turned out differently from how you expected it to? I will tell you, I have more appreciation now because I'm in reflective mode. I've received more out of this life than I ever could have imagined. and feel blessed as a result. I was raised the right way. I give my parents all the credit.

53:57They raised me to work hard and earn everything you got. Nothing was given. And if you do a good job, keep your nose to the grindstone and add value, then you'll be taken care of. I never could have imagined how this has turned out, but I'm internally grateful for it. What's a mystery that you wonder about? I think the mystery I wonder about is what I'm going to do with the rest of my life now. And I'm going to try to unravel that because I'm such a believer and you need to maximize every minute. So that's sort of my great mystery in front of me. Part of going back to school, what I'm looking forward to is actually taking history classes and philosophy classes to try to learn from people of the past because very few things in life we haven't seen before, just in a different way.

54:47So I'm looking forward to sort of connecting some of those things from the past to things we're dealing with today. All right, Bob, last one. What life lesson have you learned that you wish you knew a lot earlier in life? As I've spent time with college students, I'm quite involved with my alma mater. And I look at how these kids are involved and how engaged they are. And they're showing up to things on Saturday mornings or showing up to things at 8 a.m. on Friday morning, it reminded me something I wished I would have been more studious about then was get involved. Look for any opportunity to be involved and get engaged.

55:25And whether that's in your company or while you're in school or in nonprofits, I just think there's so much goodness that comes from getting involved and the connectivity that happens between people and the impacts that can be made as a result. I was meeting with one of our younger associates earlier today. One of the things we started talking about was being purposeful with your networks and really recognizing your network and the people you connect with over time. It may be the most valuable asset you have if you think of it that way. So nurture it, grow it, but be purposeful about it. Really think about those people who add value to you and you can add value to them and make sure you're staying connected.

56:09I don't think enough people think of it that way. I was reminded as going through a transition and I started thinking about who do I want to reach out to and have a conversation? And I just started writing down names, not people that I'd met once, people I had real relationships with. And I was pleasantly surprised how long the list was. Then I was blown away by how eager they were to have a conversation. And, well, what are you thinking about next? Then I would tell them, I'm not looking to go work, but I'm looking to get involved here and there. And they're like, let me introduce you to this person.

56:41That would be, I guess, the wisdom I would leave people with. Well, Bob, I want to thank you so much for sharing this story. Congrats on the incredible success and excitement about what's coming next. Ted, real pleasure. Thanks for having me. Thanks for listening to the show. To learn more, hop on our website at CapitalAllocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.