Some years ago, Jeff Montgomery, president of Austin, Texas-based TCG Group Holdings, worked for an RIA firm that was heavily into acquiring other RIA firms across the nation.
As a key member of the team evaluating potential acquisition targets, he often chose to attend the open client meetings these firms hosted by masquerading as a client. Wandering around and chatting with advisors and other staff members in this incognito way gave Montgomery a clearer insight into how these RIA firms worked, the way in which they managed their people and cultivated a culture, and whether these would gel with those of his rollup firm.
“Saying I was a client helped me get a sense of how the employees of a particular RIA firm felt about their firm,” Montgomery said. “It gave me an idea of that firm’s client base, its key employees and, most importantly, I got a view into its culture.”
That was valuable since in most M&A deals, company culture and personnel tend to play a secondary role to the financials, Montgomery said. While there’s no taking away from the importance of those numbers, of course, deals that look great on paper can ultimately fail because of a lack of attention to human capital.
Human capital is critical to a business’s success, and can contribute to its failure if not managed properly — if companies are not able to figure out how to make a difference with the human beings that constitute their business and how to make a difference for those human beings.
In today’s world, where so many businesses operate globally and demographics are changing rapidly, these parameters have become even more important for companies, financial planning firms included.
Get the Right People on the Bus
Today, businesses have to make every effort to recruit and retain the right kind of talent, said Max Blumberg, founder of London-based Blumberg Partnership, a global salesforce effectiveness and analytical talent management company. Further, making sure that this human capital can contribute value to an organization means hitting the right notes with respect to diversity.
By diversity, Blumberg means successful firms must go beyond the traditional gender, race, ethnicity and sexual orientation metrics to include diverse skill sets, educational backgrounds and life experiences. That broad level of diversity helps create a culture in which employees of a business can reach their full potential.
A business must foster an atmosphere that allows talent to thrive at the individual level and both incentivize and compensate that talent in such a way as to ensure that it contributes toward the success of the enterprise as a whole.
Unfortunately, the financial advisory business still lacks both experience and foresight in this area.
That’s normal, to a certain extent, said Michael Roch, global practice leader at Internal Consulting Group in London, since the nature of the RIA business is such that individual clients are tied to individual advisors. This naturally lends itself to a business model that’s centered on what each advisor-client relationship generates, as opposed to the outcomes of a business as a whole.
Yet digitization and margin pressure have changed this reality, according to Roch, and are forcing many RIA firms to set up business models that serve clients collectively with the understanding that this approach does not take away the autonomy that independent advisors prize and fear losing as a firm grows. (See the December 2016 cover story for more on how margin pressure is affecting financial services firms.)
In fact, Roch says that more firms are realizing that bringing their advisory force together in a cohesive manner encourages collaboration and harnesses their full potential as a collective. It also encourages autonomy, mastery and organizational purpose as important factors in not just serving clients, but in maximizing their own potential as advisors.
“The idea is to create communities where people can become better at what they do but still operate autonomously,” Roch said. “In advisory firms, the objective is to make advisors understand that while they don’t need to share their relationships, sharing client strategies is beneficial overall; if a firm can institutionalize this, it goes a long way toward future performance.”
The more that advisory firms can devote resources toward creating more collaborative business models, he argued, the more they will add value by harnessing the full potential of their human capital.
“Automation, the addition of new products, service innovation, among [other things], take place behind the scenes. The more a firm puts resources toward these measures, the better the outcome for the business, for its advisors and, ultimately, for the clients,” Roch said.
Ultimately, though, the pressure to innovate and transform will come from an ever-changing world, one driven largely by demographics and shifting demands from society regarding financial planning and planners (See “Discerning Different Needs” sidebar, page 26).
Connect, Not Collect
How to capture the best that diversity has to offer varies from business to business, but it is a key priority for many RIAs and asset management firms, including Chicago-based Ariel Investments.
For her part, Rupal Bhansali, chief investment officer and portfolio manager of Ariel’s international and global equity strategies in New York, looks for individuals who can “connect” rather than “collect” information.
Ariel invests in companies all over the world and Bhansali’s team comprises analysts who have both fundamental equity research experience and deep domain expertise in various industries.
But as both a “portfolio and talent” manager, Bhansali has increasingly placed a great deal of importance on a more esoteric quality: acumen, which adds alpha and is crucial, she said, to “connecting information.”
In today’s world, where information flows 24/7 and is accessible to anyone, from any device, anywhere, collecting it is almost a moot endeavor.
“Information is everywhere and readily available, and I believe that information that is readily available has no value,” Bhansali said. “Our job is to generate value and we do that by interpreting readily available information.”
Bhansali and her team have been operating this way for close to 20 years.
Back in 1999, for example, when they saw a full-page ad taken out in the newspaper by AT&T announcing nationwide free roaming, “we read that as the death of just about every single long-distance phone company. Being able to interpret information and to connect it means that as investors, we can avoid businesses that will suffer.”
Making the right connections to go beyond the information itself also comes from intellectual curiosity and experiential wisdom, Bhansali said.
“Too many analysts go with the ‘Me, too’ research that complements the status quo,” she said. “I need people who are not afraid to stand alone. That’s what makes for good analysts.”
Because portfolio managers and financial advisors spend a lot of time thinking, Rick Schmidt says that “what we need in people is cognitive diversity.” Schmidt is portfolio manager of Bridgewater, New Jersey-based Harding Loevner’s global equity and emerging markets and frontier emerging markets funds, and winner of Investment Advisor‘s 2016 SMA Manager of the Year.
“There is traditional diversity — gender, age, ethnicity and so on — and having a group that represents these differences does add value. But what you really want is people who, in addition to having a certain curiosity and a global outlook, can think differently; people who look at the same piece of data and think of it differently,” Schmidt said. “That means having in a group everyone from the guy who sees the forest to the woman who sees the trees, because there’s evidence that stock markets break down when diversity breaks down.”
Global Opportunities, Local Presence
For Schmidt, the best way to harness the individual and collective abilities of a diverse group is to have everyone in the same place.
The proverbial water cooler, he said, encourages conversation and the sharing of ideas and outlook. It spurs creative thought, curiosity and new views.
“I do think the importance of the boots-on-the-ground idea has faded with the progress in technology.” Schmidt said. “While there may be some location advantage to being close to an exchange in any particular country, I really think it’s hard for anyone to claim an informational advantage these days.”
The free flow of ideas happens best when everyone is in one location, Bhansali agreed, and it’s optimized within the context of a flat, organizational structure.
In her team, there is no hierarchy and Bhansali believes this creates the right framework for people to come forward with their ideas and be confident about sticking out with different viewpoints. It also removes what may well be the biggest challenge in the asset management industry: the prevailing bilateral relationships between portfolio managers and analysts.
“When we’re debating a stock proposition in a three-member equity team, our motto is ‘may the best idea win’ as opposed to ‘may the most senior person on the team win,’” she said. “That would just accrue power and privilege to me, and it’s not what it takes to succeed in investing. What matters is the best idea because ideas should compete, not people.”
Case in point: Bhansali once had an intern with no investing experience who proposed a great idea that he knew would gel with Ariel’s investment approach. After hearing him out, Bhansali included his idea in the portfolio.
Compensation, Incentives a Challenge
Those companies with a flat organizational structure and that have all their employees in one place may also have an edge with respect to performance management, in particular compensation and incentives, two important determinants for optimally harnessing the best from human capital.
There are some broad rules for modern performance management that both large and small companies can apply to varying degrees, but regardless of company size, human resource professionals like Dante Nuno, HR director at San Francisco-based entertainment technology firm Avegant, advocate for systems that are built for cooperation and collaboration among employees of a firm; systems that will ultimately result in staff that is more involved because they can understand the value that they add to the business.
For most RIAs, the sole metric for performance management is still the annual review, said Montgomery, a metric more or less obsolete by HR standards.
While quarterly or six-month reviews would be more appropriate for optimizing human talent, in Montgomery’s view, one of the most critical mistakes many financial advisory and investment management firms make is evaluating their employees solely on quantitative factors. That just doesn’t work anymore, he said; qualitative factors must be a part of the evaluation process. (See “Performance Reviews Aren’t Just for Employees,” page 48, for more on the benefits of regular reviews to all stakeholders.)
Bhansali evaluates her team on the quality of the research they produce.
“I like them to focus on things they can control rather than what they can’t,” she said. “A lot of people in this industry measure [individual] performance on the performance of a stock, but I judge on the quality of the effort — how effective [analysts] are in their efforts, the outcome of their efforts as measured by the validation or invalidation of information. If they can invalidate something the guys on the street have said, great.”
Two years ago, TCG Holdings made a move to qualitatively measure employee performance by linking it to the firm’s core values: diversity, fiduciary responsibility and client satisfaction.
“We look at impact, which we measure in terms of both new revenue and client satisfaction,” Montgomery said. “We ask our clients to take a survey and then ask them to come in and visit with us and ask them how they feel about the business. We also look at client turnover and retention. We want the lowest turnover and highest retention, and if we see negative trends in the latter, we can go back to the source and figure out how to reverse that.”
But TCG Holdings doesn’t claim to hold the key to the optimal link between core values and compensation, between business culture and incentives. Nor can any firm, said Montgomery, “as we’re talking about an art form, a science that keeps evolving.”
As well it should because no culture can or should be static. Rather, it should keep changing in a way that both mirrors and stays ahead of changes in society, Blumberg believes. This, he said, will allow businesses to remain current in terms of the people they employ and the stakeholders they serve.
In the RIA world, firms that view human capital as an integral part of culture will be well-placed to stand out in the M&A landscape as it develops. According to the latest report from Devoe & Company, RIA M&A is booming and is likely to continue at a strong pace for the next decade.
In that context, people like Roch will increasingly look at such factors as company culture and human capital management as they evaluate potential deals.
“If I see a management team that has been in place for 25 years and has not changed anything in terms of how they harness their talent, then that is definitely going to factor into my evaluation,” he said. “The reality is that smaller and mid-size advisory firms are less diligent on this front, but properly harnessing intellectual capital is a key driver of long-term earnings and the financial future of a business.”
— Read Advisor M&A Surging to Record Year; Should Be ‘New Normal’: DeVoe on ThinkAdvisor.