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United We Grow

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Most interview subjects wait for the questions to be lobbed in by the journalist. Others–usually the Type A CEO type–launch directly from the introductory pleasantries into the talking points du jour. A third type, the rarest in my opinion, first ask questions of the interviewer. Turnabout is fair play, of course, but in Joe Duran’s case, you sense that he’s not trying to take the measure of the man so much as to understand the competitive environment in which this particular interviewer is operating. That’s a pretty good modus operandi for a fellow who runs a company that is a, to use a Moss Adams term, “serial buyer” of advisory practices. Before acquiring a “signature firm,” an advisory firm, or a “tuck-in,” where an advisor looking to exit the business finds a home with the signature firm, or a broker from a full-service firm that’s looking to go independent–United Capital Financial Partners has done 20 acquisitions so far, with an additional six Duran says are done but not yet announced–Duran and his team needs to understand the firm’s business model (each needs a minimum of $1 million in revenue) and its culture. It’s a cooperative of growth-minded advisors that United Capital is building, CEO and founding partner Duran says, into a national network of 50 regional firms with $500 million to $1 billion each in AUM that will one day go public.

“My biggest challenge” in finding new firms to add to United Capital, says Duran, “is finding cowboys who are willing to become part of the cavalry.” Duran spoke to–and asked questions of–Editorial Director Jamie Green in late May.

The challenge for advisors these days seems to be that it’s easier to be a money manager for a client, assessing a fee for managing that money, than to provide a range of services that are certainly needed by that client, but more difficult to be compensated for.

You’re hitting on something that’s a big deal to me–this idea of core competency. We’re on the phone every day with advisors with from $100 million to $800 million [in AUM], doing what we call an opportunity assessment. We benchmark them with other advisors who have from $100 million to $800 million. There are a couple of things that are consistent. The guys who are really focused on stock picking, that business is really, really changing. These are the old fashioned investment counselors: with one advisor who picks individual securities and builds the portfolio and services the client, and maybe there’s another advisor who does the exact same thing. But they do the implementation, they do the servicing. That type of investment counseling firm is really in trouble.

We just signed an LOI [letter of intent to acquire] with a firm that has about $1.5 billion [in AUM] that is structured that way. The reason they wanted to join us was that that they recognize that challenge, but they don’t know how to make the transition to charging for what the clients really want.

The advisory firm doesn’t understand whether the clients are with them for their stock-picking prowess or because of their understanding-of-the-whole-financial-picture prowess. The stock picking guys love to pick stocks, but their value is not that great…

We think there are huge shifts occurring. The first, which has mostly pretty much occurred, is this movement toward clients wanting a complete solution. The people who haven’t done that are like dinosaurs who need to find a way to evolve…The second is clients who want not just a complete investment solution, but want investments to be a subset of a plan…

That’s really important as we go from the [client] guys and gals in their 70s who are incredibly conservative and you have to fight them to spend money, to the baby boomers who are exactly the opposite, who are wildly optimistic, insanely believing that things will just work out with a level of spending that cannot be supported by the savings that they have.

For a baby boomer, having a real wealth manager is a life changer, because they’ll have retirements of 20 to 30 years, and they’re not accustomed to living within their means.

What’s unique about United Capital? You seem to be trying to institute some standardization with these acquired firms, with a group of people that, traditionally, at least, are . . .

Cowboys. The first big wave is people needing real advice in a systematic fashion and paying for it, because the investment business is being commoditized. The second big wave is that the break even point for advisors keeps creeping up. There is huge redundancy in our industry. Every firm with $200 million is doing the same back office, compliance, client reporting, all building the same models. While they’re customized uniquely for each office, the functions have to be done by everyone at the same time.

The reality is that while you need to be able to customize to each local office, the functionality–from technology to payroll, to client reporting, to investment implementation–is all the same at every single firm with $200, $400, or $500 million. Right across the street from each other, they’re both dealing with same operational nightmares. Guess what? None of these advisors likes doing the operational back office.

Our core belief is very simple. We keep the client relationship and the investment ideas in the hands of the advisor at the local level. We pick up the whole back office and we bring in really awesome practice management tools. The only goal is to make sure that whenever we acquire a firm, we’re contributive to the value of that firm.

That’s why I don’t like being called a rollup. A rollup has no regard for what they bring to the table to help a smaller firm. We have huge regard. If we don’t, going in, pre-identify with the advisor who’s joining us–’Here are the ways in which we can help you be better,’ in advance, we’re never going to do the deal.

Not to point fingers, but a firm like an NFP [National Financial Partners] or a Focus [Financial], they have no regard at all for what they bring to the table. They don’t bring anything to the table.

What they say is, ‘Well, we’re buying a portion of your cash flows; you’re going to be part of a bigger group; and as we get bigger, your stock will be worth more.’

I’ve never understood why 100 individual advisors are worth more than 100 individual advisors just because they’re under one umbrella.

I do understand that if you have 100 individual advisors but they’re all operating under common systems, they have a common back office, common compliance, common technology, common payroll, common bill-paying, uniquely applied at each office but from one centralized location. I can see why that would be more valuable.

Two things I can tell you about every single acquisition we’ve done. First, there’s always a cultural fit. Second, at the end of 12 months, that business is fundamentally improved because they joined us. UC-Irvine just did a survey of all of our acquired firms; 90% of all the staff [in those firms] said they spend more time now with their clients than they did prior to joining us.

By removing the really low-level $5/hour work from that local practice and re-energizing everyone’s attention to client service, invariably those businesses grow their revenues and improve their margins. A nice little benefit is that people end up happier. The people who work there are actually doing what they love to do, which is to meet with clients and help them…When we help that practice, service automatically goes up, because they have more time to spend with their clients. That’s the secret to running a successful service business.

Especially one where the connection to the firm is often a personal one.

Of course. Remember, a lot of these are personality-based businesses, with one or two really strong advisors with big personalities. They have not taken the relationship and moved it from a personality-based to a process-based business–make the clients loyal to the business rather than to the individuals. We’re helping them to do that. When you do that, you’re fundamentally improving the underlying value of the business, because the risk is much less. There’s an inverse relationship between the value of the business and the importance of the advisor, which is totally counter-intuitive.


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