#98 - Mark Sear: Industry Evolution

22:45And then Damien, who's hyper smart and a great investor, but he's also one of the most client-centric persons I know. The four of us coming together got really fun and I think great idea. And then of course, as you know, we saw it take off. You guys had always focused on a little bit different part of the business than we had. While we had some overlap accounts, it was like a little bit of a different post. It was great to start introducing my clients to you and Damien to do some of the stuff on the endowments and foundation size. And I think, as you know, we have some big successes early. So yes, this was one of those things that you do in life.

23:16There's never was a point along the continuum that didn't feel right. And of course, First Republic went out of business. And that was a few years later. So when you look at that outcome, it certainly was the right move. I've told people that I just think I'm living a charmed life in some way. The fact that I went to First Republic and said, look, our business models changed why we've been here. there's things that are now happening that aren't in my client's best interest. I'd like to see if we can resolve them together. And I'll commit to staying here for the rest of my career. And I'll take a lot of my comp and stock.

23:49I believe in this mission that much. And it didn't happen. That's not the road they wanted to take. And I left and it was lost. I didn't want to leave. We wanted to come up with a solution. And yet in defeat, I leave and it turns out to be a win. And if I had stayed and taken my comp and stock, it would have been a bad outcome. I'm the kind of personality, I go down with the ship. Yeah, I would have gone down with that ship. I'm glad that worked out. So you've worked in both brokerage firms and RIAs. And throughout your career, you've witnessed the evolution of the investment advisory industry over the past 30 plus years.

24:25How do you view the industry today? And how would you characterize its changes since you started? it. You and I, as you know, run the intern program together. My favorite day is I think the first day when I try to give them an overview of the industry and I play the EF Hutton ad. And you know, I played it for you before, which is this whole ad where these people are in a crowded restaurant and the broker who works for EF Hutton says, well, I'm with EF Hutton and EF Hutton thinks, and then everybody stops talking and listens carefully. Somehow EF Hutton has the right answer. And so when I started my career, there was this whole belief set that my broker is smarter than your broker and I have better ideas with my guy than your guy.

25:03And if you really analyzed it, it's just not true. It's just not true. The idea that somehow one person has got all the smart ideas and none of the bad ideas, it's just not true. And it's really more of a sales organization. So the industry started in the stock brokerage world and people got commissions for doing activities. So the more ideas you came up with, the more successful you were. If you can convince people you got all the good ideas and none of the bad ideas, you get lots of clients and then you can convince those clients to do things instead of not doing things you got more commissions and so that was the business that i entered into in the early 90s and then really two things happened one is some bad actors started trading too much and this whole concept of churning came around and this whole thing of unauthorized discretion which was bad and that needed to be curtailed married the same time that the brokerage business was very cyclical when times are good i buy a stock at 20 and it goes to four it's easy to get you sell it when i buy it at 20 it goes to 10 it's very hard to make you sell it so it's a very cyclical industry and the idea suddenly came up that we could do away with the churning stuff and we could smooth out earnings for these corporations if we just charged a fee for advice and so the brokerage business went away from the transactional business and it migrated over to a fee-based environment which had some benefits but i believe over time it's also had some costs which we can talk about another time but the point is that that's where it started but while the pricing model changed The sales DNA didn't change.

26:25These big firms that have these big research departments are coming out with ideas. That's how they market themselves. And so for the 90s and the 2000s, that was the prevailing way the business worked. And then all of a sudden the RA world pops up and these start to get populated with the most successful brokerage people. They're leaving because they understand the model's better on the other side of the fence when I'm a fiduciary. And as people migrate over, you now have this RA business. which is less salesy, in my opinion, because there's less products. No one's creating products in the back room and getting you to sell them.

26:59And so the industry is changing for the better, in my opinion. But a lot of the firms, a lot of the bulge bracket firms, still are run by the people that 20 years ago were salespeople. The DNA and the culture of these large firms is still sales-oriented. What is the sales plan? What products do we have coming out? What should we be having research-focused energy on so we can get more great ideas? and less to do with great advice. And one of the things that has been really apparent to me, and I'm glad to see my firms doing great things about it, is the idea that the investment piece is only a cog, one part of the leg of the stool, if you will.

27:37That great advice is also tax planning. Great advice is also estate planning. Great is also the ability to do estate planning for people. It's also a myriad of other things that do with financial modeling and helping people do things that make their lives either easier, better, or safer. And that's where the puck's going. So the industry has changed a lot. I still feel like there is an undercurrent of salesmanship in the industry, and I wish we could get further away from that. But we're making good progress, and I think firms like ours and many others will, I think, lead the way to what I believe is a better way to help clients.

28:13So it sounds like, in general, it's improving in terms of what's best for the client. is your feeling that it's going too slow or are you satisfied with the speed of the improvements i don't have numbers to back up my argument but i guess i would tell you if i could do this and i probably could get on chat gpt and figure it out later but if you look at total assets that resided inside the brokerage firms in 90 and then in 2000 and then in 2010 and 2020 you have to take out market appreciation the sense of because the market's gone up a lot over that period of time. But I don't think enough assets have migrated over the RA side to make me feel like the sales argument.

28:55I still hear too many say, oh, my guy had this great idea. He got me into NVIDIA. Oh my gosh, I'm making all this money. In my sense, that's not what it's about. Because yes, there's one NVIDIA for every two or three things that went down a lot. And then you've got tax friction, a lot of fees. And so I think there's an academic argument that can be made to create well-balanced portfolios that withstand the test of time, low fee, low tax. I'm not suggesting for a minute, it's not fun to invest. We started this first race and why do you love to invest? I love to invest, but that should be sort of the backbone of your portfolio.

29:25And then if you on your own, the client wants to own to make a bet on something, go for it. I love that. I do it myself. But at the same time, there are other investments that are out there that are very high returning, very interesting, that don't need the stock market to do well. So I think that the changes happen. It's probably not fast enough for me. I don't want a career loss. I've been at it 30 years. I'd like to see it get better in my career and I'm running out of, you know, I got maybe 10 years left. If you were to build the ideal wealth management firm from the ground up, what key features and priorities would define its structure and client experience?

29:58Let me think through the structure first. I think you need a really robust investment platform and you need to have alternative investments around that. I just think that the more tools you have in the toolbox for creating a return stream that withstands whatever happens in the world. You know, we're in the wealth management business here. We're protecting wealth. In order to do that, you need a very strong research effort and an investment effort. So I don't want to poo-poo that. You need that. I think then you need to be able to, you know, we're a big fan of doing people's taxes. We think that that's a way to integrate.

30:27Because think about it. If we have an investment in this firm, it's in a hundred portfolios. We know it on the tax side. People doing taxes here know that way better than anybody that would know it outside. You may have a good tax guy away, but he's going to see it one time. We're going to see it a hundred times. So understanding these alternative investments that can be tricky, better to have an integrated serve, in my opinion. So that's an area. Another big area, being able to do effective tax planning is very important. I think you need to have an estate planning arm, even a trust company would be helpful.

30:54But I think that's a very important piece of the perfect model. and then I think there's ancillary things. I think the team that helps you has to be good at modeling and thinking financially. For example, how do I make decisions? We had a question the other day. Somebody's like, I want to help my three kids buy homes. How is the best way to do that? And there are different ways to do that. So understanding it, modeling it financially, helping the client make that decision, I think is very important. So the perfect firm would be able to do all those things and then the client experience, I think it needs to be much more where we're getting an understanding what they want to accomplish.

31:28And we give them great information on how they're doing relative to the other choices they could have made. A lot of people don't realize today, the risk-free rate is 4%. You can go buy a 30-day T-bill and get 4%. You don't pay state income tax on it. So it's like, I get that for free. So really all we're fighting for is how much better I do than four. And when people need to understand when you show up with your performance results, what you're really paying for is the benefit you gave them, not the number. and I don't think that gets talked about enough in our industry. And so we want to help people really understand what they're getting and what they're paying for it.

32:01And that has to be part of the experience at the perfect firm. For a long time, that four was zero. Yeah. And so that made life a lot easier because you were competing as nothing and it made returns higher, but that's not the case. Historically speaking, that's rare. And I would imagine you're a better historian than I am, but I bet you that number looks closer to five over a hundred years than zero. We've talked about client centricity. What does genuine client centricity mean in practice? And importantly, how should clients recognize it? A client centric firm will put the client at the front.

32:34And then once you've understand their needs, have a large amount of different solutions for them that come out of what the client needs, not what you're trying to sell to them. You meet somebody, they're saying, hey, like your firm, I want to come work with you. I think you can help me. Think about when you go to the doctor. Hey, I've got these challenges, doc. What do you think I should do? That's client-centric. If I picked up a person on the street and said, hey, you don't look like you're walking very well. I got these two great things that make you walk better. That's the way the industry is built.

33:03And so client-centric is when you meet somebody, you really get a deep understanding of what they're trying to accomplish. You have a bunch of tools to deliver it, but you don't have a dog in the race. You don't care which one they choose. You want to have them get an honest understanding of how they work and how they fit into their overall portfolio, how they fit in from tax standpoint, how they fit in from estate planning program, how they fit in from a risk standpoint. Maybe they have leverage in them. There's a lot of things. Look at a couple of iterations and help them pick the right way to go as opposed to always selling them an idea or something.

33:32If you think about the things that have gone wrong in our industry, credit default swaps and the CDO problem and all that stuff that came out, it was always somebody was selling something. and it doesn't tend to end well. Reflecting on your decades of experience, how has your philosophy toward advising clients evolved and what shifts in mindset or approach have shaped your practice over time? A lot. When I started my career, I was picking stocks and picking bonds. Now think about me. I wanted to play professional golf. That didn't work out. So I was in a food company for a year. Then I do get the benefit of going to business school and getting to work for Goldman Sachs for a year.

34:08And somehow I'm picking stocks and bonds. Now, to give a goal of credit, they were off a recommended list. It wasn't just whimsically picking things, but that's how the model was. So I started with that model. And then over time, I went from picking stocks and bonds to picking funds. So I went from smartly, let's not pick a stock or a couple of stocks. Let's pick a fund that has lots of stuff in it, much safer. But I'm still getting my advice from the mothership. Shift to the right, buy more stocks, buy more bonds, do this. And there was this pricing challenge that risky assets, you get to charge more than lower risk assets.

34:39So there was always this, what we used to call risk creep, that you'd always be pushing a riskier idea because you got paid more. And so that's where I started my career and it's migrated to where today I still love to invest. And if somebody's got a good stock idea or I've figured something else, I might love to learn about it and read about it. I'm really learning as much as I can about artificial intelligence now. AI is really interesting and it's going to be, I think, obviously impactful in so many ways. So I love that pursuit. But in terms of investing, it's changed completely today. Now we're using ETFs.

35:08They're low cost. They're low tax. They're a much better way to go forward. I have not heard it. I mean, I hear the extremists say, well, because of ETFs, the market's going to crash or something. I don't know why an ETF helps the market crash anything more than a mutual fund does. No one's explained that to me yet. But at the end of the day, the ability to do good work is much better today. We couldn't diversify like we used to, even five or six years ago. The ability to construct great portfolios for people today that participate in all parts of the economic cycle and give people reasonable returns with relatively low risk.

35:40That is so much easier to do today than it was when I started my career. So yeah, the investment process changed, the tools have changed, and it's shocking to think how my thinking has involved. I started my career trained by Goldman to go out and sell ideas. And now I'm much more interested in creating diversified balanced portfolios without having an argument. I do believe the markets are efficient and the best way to game the system is to create a relatively low volatility portfolio that captures the risk premium in the market as efficiently as possible from a tax and an economic standpoint.

36:12And then if I want to go and invest in an alternative fund because I really want to take advantage of energy, I really want to take advantage of the secondaries market, or I want to be in apartment buildings, like there's great ways to do that that have high returns. But my core of what I do is very efficient, very relatively low risk, very low fee, very low tax. And that's how you build wealth over time. It goes back to the core principles of investing. And it's very simple. Invest, you benefit from compounding, diversify so that you don't happen to be in the wrong thing at the wrong time and be patient.

36:46And then if you think about it, those rules existed a hundred years ago, they still exist today. They'll exist a hundred years from now. And they're hard to do, which is fascinating. If you think about this craft that we're every day trying to master, you boil it down to its simplest elements. Those three items that I just described, those are very simple to understand. They're very compelling. They prove true over time, but they're really hard to do. Isn't that fascinating? One of the things they did teach me at Golem was to always do the hard things first. And if you think about it, the hardest thing to do sometimes is to do what you know is right.

37:20It gets so hard to not get swept up into the MAG7 race right now. It's so hard not to do it, but you know that if you just are disciplined, back to your earlier questions about listening to golf and anything like that, stay disciplined and you are patient and you construct a well-diversified portfolio, over time you will come out, the tortoise wins the race. That's right. So we've talked about what it was like to be a financial advisor 30 years ago. We've talked a little bit about what an exceptional advisor might look like today. What does an exceptional advisor look like 10 years from now? Well, obviously AI is going to change everything in my opinion, because throughout recorded history, intelligence and knowledge tend to push you ahead.

38:08So if you had more intelligence and you had more knowledge, you tended to do better than people on aggregate that didn't have as much intelligence and knowledge. And our system is built that way. is ai going to make intelligence and knowledge free i don't know but when you think about it of investing it is my belief that over time a lot of what we do every day can be done using artificial intelligence to have it done better so i think the thing that can't improve or that ai can't make a big dent in is the connection between the client and the advisor let me put it this way If I went back 30 years ago and said, I've got an unbelievably high IQ person with no EQ, do you want him?

38:47I'm like, absolutely, I want that person. But I think the model for the future in 10 years, you're going to need these individuals that are super high in emotional quotient, people that can really ask the questions in gender trust, glean out the really bits of data that are helpful in helping people make decisions. because the modeling piece that's been important for so many years and the research piece that's been important for so many years, those are getting marginalized every day. Yet people still need great advice. People are going to want to go. And I liken this career path I've taken a lot to the medical world because there's so much I don't know when I go in to see the doctor.

39:24Just like when somebody comes into my office and says, I need your help investing my money. There's a lot they don't know. And artificial intelligence is going to help people know more in either facet. but I still need the connection with the guy that's my physician, I think people are still going to need that connection with their advisor. And that's not going to go away. I know people say that the younger generation doesn't need that. I know that the internet, the access to the internet, people on their screens all the time, there's a lot of things I've read that say that the humanity of everything we do is being diminished over time.

39:56And maybe I'll be wrong on that. But when it comes to your money, having somebody who is tried and true and has good results and has an ability to be patient when you're not, has an ability to have a background of knowledge of history that can say, I know you feel this way, you got to see it through. Those are really important things in getting a successful plan, helping people not spend so much money like with the interns. If you build a model that says you're here today and you'll be somewhere in the future and where it takes you in the future isn't where you want to be because you didn't have enough economic reward.

40:26I always say to the class, how do you get there? And the first answer is we got to make more money. I'm like, well, every dollar you make, the government takes half. That's a lot of work. Why don't you invest better? Then what happens? What if you just invested what you have better? Take your marginal time, don't work, but work on your investments. Well, then you're only keeping two thirds unless you don't sell it. But the best way to do it is don't spend so much because then you get dollar for dollar. And so I think having somebody help you with things like thinking through your portfolio on how do we get you, where do you want to be?

40:55How do you want to get there? What are the tools? And then artificial intelligence is going to make 10 years from now. It's a long time. I mean, I think I've seen how much things have changed in my career up until now. It'll be very interesting to see what the tools look like and how the markets react to the high levels of intelligence that are available to make decisions. And with investing, there is art and science. So the science, maybe AI can help you with. The art is more challenging. That's what we're talking about. I mean, you may say, if we look backwards, science was a lot of important.

41:23The art's not so much. Maybe today it's 50-50. In the future, the art's going to be the piece that matters. Yeah. And then also with dealing with clients and you're dealing with their money, either individuals or institutions, it's money and it incites emotion and you have to be able to manage that process. And a computer is emotionless. I don't know how well it can manage the emotions of an individual with time. It can't. That's going to be the one thing that changes. You say, how is it going to change? that's going to be the big change. The investment process will be certainly different, but the outcome won't be too different.

41:58There'll always be a risk-free rate. There'll always be a risk premium to making risk. And so I'm not sure how AI is going to change that, but the idea of a connection with another human being and having somebody really feel they can trust you and that you have their best interests at heart and you know the questions to ask to help them understand themselves, that's where it's all going to be. And I guess ultimately an advisor who knows how to use AI to supplement the insight that they have, an advisor plus AI is probably better than just an advisor on its own and probably better than just AI on its own.

42:34I mean, we're using it all the time to help solve puzzles. It just saves a lot of time. I mean, a lot of work time in terms of if you wanted to get data on things, you're looking to make a decision, trying to figure out what's really the market capital, what's all these different things that can help you do it very efficiently, obviously. So yeah. For those thinking about entering this field, this is the decade to do it. Because if you think about what we just talked about today, from EF Hutton, when they say something, everything in the investment world was what somebody in New York said about a certain thing.

43:03And it's going to migrate all the way over that that has no value anymore at all. And yet the industry will go on and there'll be something else that replaces that great idea. And I think it's going to be this ability to help people not only feel good about the connection they have with you, but understand themselves so they can make more effective decisions. And the truth will be told. One of the other thing that's interesting is we keep saying this whole idea of if you're just balanced and stay the course and are patient, that's the most effective way. And limit taxes, limit fees, all those kinds of things, that's the most effective way to invest.

43:37I think that's going to become more and more clear as you have a competitor making investments. It's a machine and it's very smart and very fast. And so a lot of these great ideas are going to get weeded out. Well, it's an industry that doesn't offer as much transparency as it probably should. And it's getting better, but it probably has a long way to go. So I appreciate you taking the time, sharing your journey and the insights that you've learned. I hope our listeners have found it helpful as they navigate through potentially turbulent waters ahead. Thank you, Mark. My pleasure. Enjoyed it, Alex.

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