E225: Inside the $324B Playbook: How Hightower Is Reshaping Wealth Management

0:00When you look at all the companies in the United States today that generate more than$100 million in revenues, 91 % of those companies are still private. I mean, that's crazy numbers. Only 9 % are public. Historically, just to give you an idea, they're very famous private equity firms, growth managers. The minimum investment size used to be$25 million. Today, the same investment access can be acquired for investments as small as$10 ,000. So there have been a huge evolution or change in technology, which has made it more accessible, that now enable what I refer to as the democratization and miniaturization of private markets.

0:31Now we're entering into this artificial intelligence cycle, which is a 10-year cycle. Lovable basically created five websites for me in about a period of 20 minutes. And I went to bed, I couldn't sleep that night. I was so upset. And I was upset because my brain couldn't process the transformational change that's occurring, not only in our economy, but in everything we do as investors. The reality of AI and the reality of the information that's coming and the volume of information is that I will be disrupted. Robert, I've been so excited to chat. Welcome to the How to Invest podcast. Thank you, David, for having me.

1:04I've been waiting a long time. Really excited to be here today. So give me a sense for where Hightower is today as a business. So Hightower Advisors is currently owning north of over 100 separate wealth management firms across over 34 states and currently managing over$320 billion in wealth management assets. And you recently merged with NEPC. So tell me about the strategic rationale for that acquisition and how are you integrating that into your business? So great question. So, you know, Hightower is this wealth management platform where we've been convincing and acquiring wealth managers all around the country with the purpose of sort of presenting them this concept of you get the best of both worlds, where you maintain that white glove service of a local wealth manager who knows their clients, who are very close to their clients.

2:08And then you get the benefit of this national behemoth such as Hightower, where we have, and this is where I get back to the NAPC question, value-added services, or we refer to as VAS. And we have to demonstrate to all those wealth managers that we add value to their business. And that was really a lot of the purpose behind the acquisition of NAPC, also known as New England Pension Consultants. And I'd like to say that we're probably one of the first wealth managers or RIAs to deepen our bench on the research side, where we can not only bring value-added services in the form of research, but also in the form of model portfolios across both public markets, private markets, and bring basically all of that expertise that NEPC has built over their long history, managing money for institutional clients, insurance companies, endowments, foundations, and pension funds, bringing that knowledge and adapting it for the growth of high net worth and wealth management in general.

3:11So that's really become a significant benefit to our teams to have that value-added service of research from NEPC. On one side of the coin, you have NEPC, which has advised the very leading endowments, pension funds, foundations, very large family offices. And on the other end, you have Hightower that's been advising high net worth, ultra high net worth. If you're building a portfolio for these two different customers, how does that differ and should it differ? Should you have a different portfolio as a high net worth individual versus, say, an endowment? So I would say they're slightly different animals, the high net worth individual versus the institutional investor.

3:56Part of that has to do with their liquidity structure, meaning that a large pension fund or endowment very often have many years ahead or a long runway for an investment. and they have the freedom to invest with 5, 10, if not 20-year investment horizons, where the high net worth investor, not only do they often have more requirement for liquidity, but they also need to really understand and be able to touch, feel their portfolio. And just to give an example, today, the average endowment, the average university endowment has more than 50 % allocated to private markets. The average billionaire have more than 50%.

4:38The average pension fund approximately 25%. But that said, there's a huge gap because the average individual investor or high net worth investor has less than 5%. So we've really been working to close that gap through education, through research. But I still think that the way we approach wealth management is still quite different than the way institutional pension fund would look at it, where our clients need to understand and need to have that feeling, you know, they feel the portfolio. You know, we look at private markets. And obviously, I oversee private markets on the investment solutions team, which is led by Stephanie Link at Hightower.

5:15And she's a paid contributor on CNBC on a weekly basis. But, you know, our effort is, you know, we have public markets and then we look at private markets as simply complementing those public markets. So the average investor, when they're, you know, invested in, let's say, NVIDIA or the main, you know, certain technology companies, Palo Alto Networks and others, they can understand what those companies do. They have they have to a certain degree all that research that's available publicly on their iPhones, but also from our team here at Hightower. But then add to that the private markets, which should complement and provide them with access to investments that are typically not available in the public markets.

5:55I mean, just as a framework, and I'm going off on a tangent, but I just want to frame it. You know, public markets, when you look at all the companies in the United States today that generate more than$100 million in revenues, 91 % of those companies are still private. I mean, that's a crazy number. So only 9 % are public. So those 9 % that are public, we have research. We have information that's available about them. But the 91 % that are private really are this opportunity to generate real revenue and investment returns or risk-adjusted returns by investing in private markets. So pension funds are much more used to now.

6:34The institutional investors have been well-educated over the past 20 or 30 years on private markets investing. That's why they have a higher allocation. But the individual investors are less exposed. They have less than 5%, mainly because a few years ago, a lot of products that are available today for them to gain access were not available. So there've been huge evolution or change in technology, which has made it more accessible. But most importantly, new products that have been developed by some of the leading private equity firms and other asset management firms that now enable what I refer to as the democratization and miniaturization of private markets, where Historically, just to give you an idea, they're very famous private equity firms, growth managers.

7:16The minimum investment size used to be$25 million. That's way above the threshold for the average investor. And today, thanks to more flexibility on regulation and new products that have developed, the same investment access can be acquired for high net worth investors for investments as small as$10 ,000. So that's really exciting. And I think that's a big benefit that we're going to be leveraging both with the acquisition of NEPC, but most importantly, with also this increased focus within Hightower and our wealth management firms on including and adding private markets to the model portfolios that we have.

7:57I said another way, at the very maximum, you wouldn't want to put more than two and a half percent of your net worth into any one manager. That'd be at the very high end. So at twenty five million, you need a billion dollars in net worth to write that kind of check without going over your skis. And now with ten thousand now, you know, you need half a million or a couple of million dollars. So, David, I'm already evaluating you as a potential client and you clearly have the right approach for investments. I will argue, and unfortunately, not all of our clients are as well-versed as you are and your listeners, in the sense that we still have a lot of investors who are much more concentrated, much more focused on putting a lot of their money in individual stocks or higher allocations.

8:41Where I actually applaud you, we take the similar approach that you just suggested, which is proper diversification, not only on the public portfolio, but most importantly, on the private market side. We also like to be well diversified across both managers and positions. On one side, you have an endowment that might be 50 % in alternatives, mostly private assets. And you have an individual that mostly is under 5%. An individual high net worth investor, let's define them as having$5 to$20 million net worth. What percentage of their money should be in private assets? Oh, wait, I need to pull out my calculator now because now you're giving me actual numbers that I'll have to evaluate and calculate off the cuff.

9:23No, kidding aside. So we approach this. And again, this is one of the benefits of Hightower's ecosystem where we own these hundred plus private wealth management firms. Each client is different. Each client is different because it depends where they are in their multi-generational wealth, where they are with their liquidity, where they are with their age demographic. You know, a 26 year old who just had an exit from a Silicon Valley based software company might have a very different view on how they want to invest and allocate more to private markets than to a certain degree, a 70 or 80 year old gentleman who really has a history of investing with GE and or more traditional stocks.

10:12So there's a lot of education involved and there's a lot of handholding and most importantly, you know, making sure that our wealth managers know their client and do what's best for the client. So with that caveat that there's this wide spectrum of client type, you know, we really look at it as conservative, balanced and growth. So just as similar as you look at a traditional public portfolio in the same way, where is the client, depending on where they are in their age and what they want to do with their earnings and how much, if they want to be more income generating versus growth and have the patience and the risk appetite for significant growth.

10:52Meaning traditionally people have talked about a 60-40 portfolio. So 60 % allocated to equities, 40 % into fixed income. That would be a growth portfolio, at least at Hightower, or in some cases defined as aggressive. And we'd apply the same doctrine to the private markets piece. So let's say conservative approach would be having a 10 % allocation to private markets, balanced would be a 20 % allocation to private markets, and then 30 % allocation to private markets would be considered to be growthy. And then within each one of those allocations, conservative would be basically almost a 20-80 portfolio.

11:31So 20%, if you're looking for a conservative approach to private markets, 20%, as an example, would be in private equity, venture capital, and secondary private equity. And then the remaining 80 % would be allocated across both real estate and private credit to generate income, whether it be owning multifamily homes, certain public storage or single family rental facilities, and then private credit, owning income and lending or acting as a bank almost within this private fund. So 20-80, let's say on the conservative side. Balanced, it's 50-50. So you'd have to a certain degree, 50 % allocated to a combination of private equity venture and secondary private equity.

12:13And then the remaining 50%, let's say 25-25 would be real estate and credit. And then on a growth side, it would be 60-40. So 60 % now allocated to those different private equity or equity-like investments on the private side. And then the remaining 40 % 2020. So 20 in real estate and 20 in private credit. So that's really how we approach it. And once you take that notion, it's funny, we were talking to a large private equity firm recently that everyone's trying to figure out how to approach high net worth in a rational, thoughtful way. And we were really excited because we've been struggling with this, I'd say over the past several years, on how best to handle asset allocation within the private markets bucket.

12:54And to quote this private equity manager, my colleague, Frank Cordio and I, they literally said, you guys have cracked the code. And Hightower has figured out how to present and allocate. And then we went through all the historical research on a 16-year basis on how those returns would translate with those type of allocations. And pretty much in all cases, it generates better risk adjusted returns with all of those allocations compared to a traditional 60-40 or 40-60 public portfolio. Boy, that's a lot to download, David. I hope that wasn't too much, but that'll give you an idea of kind of how we approach really just conservative, balanced growth.

13:35I have a very paradoxical belief in the virtue of illiquidity and that illiquidity can be very useful in just the right times during market downturns can keep people from committing unforced errors, like liquidating at the bottom of markets. What do you think about this? And could illiquidity be a feature? Interesting take. And I love the fact that you take that approach. So I've lived through, I've been doing this for 35 years. And historically, before really there was significant investments in private equity, everyone was investing in hedge funds. And I come from a very liquid background. I come from a trading and global equity divertive background where my mantra was always liquidity, liquidity, liquidity.

14:21And my frustration at times in the 1990s and most importantly during the global financial crisis was I was always acutely aware and our clients were always acutely aware of the illiquidity of private markets. Yet many clients would get very frustrated and angered when they would have, let's say, a suspension of redemptions, meaning that when they look to actually exit, the manager would be like, hey, you know, this would have a negative impact on not only your investment, but all the remaining investors in the fund. And it's probably not prudent to sell. And what's interesting is that's actually a very fair argument because the same argument is true for your own personal house.

15:03Most Americans, at least on the high net worth side, own their home. And clearly, just because there's a bit of a, you know, either noise or some sort of a economic downturn, everyone should not rush to liquidate their home because your home price would drop almost instantly, especially if it's a forced sale. And you can see it today with, you know, divorce and other effects that occur in a marriage that will often have a negative result on your pricing. So the same is true for private markets. And what we've now discovered, to close out in my agreement with your position on liquidity, is that investors have become much more aware of illiquidity, much more understanding, and much better educated.

15:45And I really applaud our wealth management teams within Hightower have done a great job at just educating clients to understand the importance, how illiquidity can be your friend in market downturns. But at the same time, only if your clients are well informed and understand what they own. and the fact that just because it's a short-term blip, by simply holding on to the investment, keeping your wits about you, ultimately will rebound. This has happened both in the global financial crisis. This was true most recently during the pandemic in 2022, where there were moments, or actually, no, excuse me, in 2020, at the beginning of the pandemic, where there were moments where private credit funds had a significant mark-to-market change in March of 2020 and subsequently rebounded almost immediately.

16:34So anyone who would have sold at that time had a significant impact or loss where those that held on actually benefited in that thing. And I'll just give one last anecdote, which is my late father who passed away, Kurt Picard, who had a bit of a German accent. He was a great example of what not to do with markets. And he was an example where whenever he would call me and say, Rob, it is time. I think I need to sell the market. I could literally call my brothers and I'd literally reach out to my colleagues and say, guys, time to buy the market because he was always either the top tick or the bottom tick on the market and was always on the wrong side.

17:15And unfortunately, now he's passed away. So I've lost my best indicator for when to buy and when to sell. But that's exactly very true. I think liquidity is something to be understood. And the best thing we can do is to simply educate clients to understand what they own and the fact that being patient, often you're rewarded for that patience. I had the CIO of CalSTRS, Scott Chan on the podcast, and they had a best idea comp test within CalSTRS. And the idea of that one best idea is how to prepare for the next downturn. Essentially this war games of the market's down 20%. What do we do? What's our step-by-step playbook?

17:50And they created this playbook in CalSTRS. This was ahead of the 2022 and they executed the playbook and they had great returns. So they not only realized the value of that playbook, but they were able to have this prepared mind to do this market sell off. A well-known institutional investor that'll go nameless, he said, the number one thing you could do in a market downturn is to cancel your IC. That is the one degree of freedom you could do to preserve your, to keep from exasperating your losses. Because you go to that IC, you have that one person on your eight person IC that yells fire. Nobody stands up to them and then you end up making the wrong decision.

18:25So that's probably the most extreme action, but potentially a very good action to take if faced with that and if your organization is not well prepared for the downturn. It's really interesting because you bring up a whole point of, you know, we're not perfect, meaning investment managers and anyone, you know, traders, whether it be day traders, long term investors and others, you know, we only know our most recent history and our own real life experience. And I think what I've found fascinating is we spend a lot of time focusing on not only what can go wrong, but what will go right and how do we get there, like from a long-term perspective.

19:08And I'm half Swiss. I was in the Swiss military, very process-driven in the way we operate. And, you know, the Swiss would be building tunnels through the mountains that go on for 20 or 30 years. And I kind of look at, you know, doing the same thing on the investment side, which is how do we position the portfolio in a way that it's robust, that it'll be able to survive? Like, look at all the risks that could happen currently, whether it be war, you know, recent war in the Middle East, whether it be, you know, U.S. currency devaluation and or loss of U.S. dollar supremacy. see, we try to always focus on what are the different elements that can impact our portfolio and how do we position that portfolio, not only for those impacts, but most importantly, regardless of what may happen, that we're basically on riding a wave within that portfolio that will generate revenue for years to come.

20:02And for instance, we've been investors in cybersecurity now for a number of years, both on the public side with Stephanie Link, where she He owns Palo Alto Networks. We've been invested in a cybersecurity fund that recently had one of our portfolio companies taken out by Palo Alto. So it was very beneficial to our investors. But we really look at areas where we know for the next 10 years, there's going to be significant investment in that space required by at the board level. It's a fiduciary for every U.S. corporation to have someone reviewing and managing the cybersecurity risk. And that's one area where we've rode that wave probably a year before certain well-known private equity firms decided that was their top theme in 2024.

20:48We were already investing in 2023 in that concept. Same with AI, though we are getting at times concerned with the growth and the expansion of AI, but it's extraordinary. And I think it's extremely disruptive in the sense that, and we'll probably talk briefly about the transformational moment, both on the wealth management side, financial technology, but also the transformational moment in the way we operate as businesses due to artificial intelligence and to a certain degree, healthcare. So those transformational moments are really what we worry about. And we spend a lot of time thinking about to make sure that we basically planted seeds that reward us for those moments.

21:31And I think Stefan Meister from Partners Group, I don't know if you had him on your show, but He has a brilliant discussion about sort of the history of finance. And he talks about, you know, the period of time we went through industrialization, service economy. And then he talks about sort of the Internet 1.0 from 1990, which is a 25 year cycle and went on to mobile. And now we're entering into this artificial intelligence cycle, which is a 10 year cycle. And we're probably in the second or third inning of that 10 year cycle. And right now is the time we have to be planting seeds to basically leverage and reap the rewards just a few years from now.

22:12And it's exciting, though, at times concerning because I was I was playing with a with an app called Lovable earlier this year in March. And I created five websites watching it code. It was a bit like War Games in the States, the movie War Games with Matthew Broderick. Lovable basically created five websites for me in about a period of 20 minutes. And I went to bed. I couldn't sleep that night. I was so upset. And I was upset because my brain couldn't process the transformational change that's occurring, not only in our economy, but in everything we do as investors, because we're investing in companies that are going to be impacted by this change.

22:51We're investing in people that are going to be impacted by this change. And it's hard for myself even to comprehend the enormity of this change that's coming. So just one of the changes. But on that happy note, I'll turn back to you. But I just wanted to share kind of that position. On that note, we're in 2025. In 2030, 2035, what do you think your role will be as an asset manager? What's going to be streamlined? What's going to stay the same? What's going to evolve? And what does the future of asset management look like? Great question. and break out the violins, I'll probably be disrupted, meaning that my role today, my value add, and I've built my career always trying to add value, whether it being global equity derivatives, volatility, convertible bond trading, structured products, and investment management.

23:40How do we add value? I want to always be in a situation where a computer can't do what I'm doing. And one of the benefits of those 91 % of companies that are still privately owned is there's really very limited research on them. And, you know, you need seasoned professionals such as myself and several others in the industry to evaluate what the best investments are for our clients. The reality of AI and the reality of the information that's coming and the volume of information is that I will be disrupted in my role as a research analyst and as someone who diligences funds because the information will be much more readily available in the future.

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25:20So your best customers keep coming back. And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. I talked about Lovable a second ago. One of the specs I gave was I basically created that night in five minutes, I said, the specifications I said is I basically just defined my role as a private markets investor. I said, please create a website that will provide research on individual fund investments all around the world in private credit, private real estate, and private equity, provide investment memos using publicly available information from the SEC and other platforms and make this website compatible with U.S.

26:19securities law for accredited investor, qualified client, and qualified purchaser thresholds. So that was the specs I gave, right? And there's a lot of information there. This thing in five minutes starts coding, And in five minutes, it delivered a dummy platform that provided all of what I just described. Obviously, it didn't have all 5 ,000 or 10 ,000 fund investment opportunities that are out there. And it didn't necessarily have in-person evaluation of those. But it actually provided really good investment memos with basic characteristics, basic descriptions, and basic, you know, different than Claude and a number of other systems.

26:59And it was quite upsetting. And that's another reason why I didn't sleep that night is because I will be disrupted. So that's one answer, which is I think I'll be disrupted, at least my role. That's one. The second one is I believe the market capitalization of private markets due to the fact that it's only now we're in the early innings of it being embraced by the average investor. We're at$12 to$13 trillion, let's say, based on the most recent evaluation of market capitalization for private markets. that's going to grow over the next six to eight years to 30 to 35 trillion dollars. Bain Capital says north of 50 trillion.

27:37Some of our fund managers think it's going to be 80 trillion. So I think there is a significant bifurcation and transformation occurring on the investment side where many wealth management firms, one of the reasons you join Hightower is to get access to the private markets information. But wealth management firms, banks, insurance companies, pensions and others are going to be building much more significant, efforts and platforms. Some of the well-known platforms that are out there today that are well-capitalized will also be solving for that solution of providing the miniaturization democracy, making these solutions for private markets available to investors with that growth.