Brooke Southall: Roll-ups can look as different as Great Danes and lhasa apsos, but we can all agree that these two breeds are both very much dogs.

Why the term 'roll-up' should stay in the RIA vocabulary

It's a short term packed with tall meaning

October 16, 2012 — 2:05 AM UTC by Brooke Southall (with big help from Mark Tibergien)

42 Comments

Brooke’s Note: There has been a spirited conversation, both online and off, in the wake of this article run last week: We’re better than this: The 10 words and expressions that should be expunged from the RIA business. PR expert Joe Anthony rightfully raised the question of whether “roll-up” should be added to the banned list based on my own assertions. In this article — with the intellectual heavy lifting done by Mark Tibergien — I argue why the term deserves to stay in the RIA lexicon.

Often when I’m speaking to a reader or source on the phone, he or she refers offhandedly to RIABiz as a blog. Though no rash appears on my skin, I do experience a palpable allergic reaction.

My typical reactionary spiel is to say that I associate blogs with a form of writing that consists largely of the views of a single person and that there is a very loose adherence to the principles and rules of journalism. I remind the person that we solicit multiple views from experts on the different sides of an issue and that the article is overseen and worked on by professional editors.

Where I get wrong-footed is when the miscreant asks me what general term of classification should be applied to RIABiz if it’s not a blog. I have been heard to say, “online publication or online trade newspaper.” Yes, I know; not too good.

Feeling your pain

So to the founders, executives and investors in roll-ups — and the PR people charged with promoting roll-ups — who hate it when roll-ups are called roll-ups, I feel some of your pain. See: What exactly the CEOs of HighTower, Focus Financial and Dynasty Financial revealed when they shared a stage in Las Vegas.

But the term is not going to go away entirely — nor should it.

Roll-ups can look as different Great Danes and lhasa apsos, but we can all agree that these two breeds are both very much dogs — based not only on their DNA but also on their essential canine predilections. (My 120-pound black lab greets a dachshund with the same ritualistic approach as he would a rottweiler or husky) Roll-up is not a term — like '“end-to-end solution’”— that confuses as much as it clarifies. Dogs greeting each other use an end-to-end method.

“Roll-up” conveys more information more efficiently than ugly-on-the-page words such as aggregator, consolidator or national-wealth-manager-that-happens-to-grow-by-acquisition-every-time you-turn-around.

Mark Tibergien: Consolidators typically target fragmented industries comprising many small yet mature firms that have no apparent continuity plan. [Marie Swift photo]
Mark Tibergien: Consolidators typically target fragmented
industries comprising many small yet mature
firms that have no apparent continuity
plan. [Marie Swift photo]

Here is a series of thoughts, mostly verbatim, contributed by Mark Tibergien, chief executive of Pershing Advisor Solutions LLC, that may help people in the advisory business to better come to grips with the DNA and essence of roll-ups:

(I consider Mark a foremost authority. Not only does he have the perspicacity in the RIA business to opine but he also did research on the topic for a report he wrote when at Moss Adams.)

1.) Whether the goal is to have a liquidity event such as an IPO or to aggregate earnings doesn’t matter, any organization that acquires an equity interest in an advisor’s practice whether for cash or stock would be considered a roll-up or consolidator, if it is doing so on a systematic basis.

2.) If you look at other industries — accounting firms, medical practices, funeral homes or muffler shops — as a model, you will find that roll-ups typically target fragmented industries comprising many small yet mature firms that have no apparent continuity plan. The goal is to achieve economies of scale in buying products or services, branding and marketing, technology and operating support as well as having professional management.

3.) There are indeed companies associated with this roll-up milieu that are not usefully called roll-ups. Affiliated Managers Group Inc., Fiduciary Network LLC and other firms that primarily provide funding in exchange for equity should be excluded. The holding is temporary (long- term but not permanent) and is a vehicle for allowing your partners to buy in later. See: AMG makes a dramatic entry into wealth management arena, buying majority stake in $10B Veritable.

4.) This line of thought, in my opinion, would also partially exclude a firm such as HighTower Advisors LLC, which is primarily a recruiting organization using the branch and home-office structure of a broker-dealer but the platform of a registered investment adviser to recruit employees away from wirehouses and banks. Since HighTower has not focused on buying books of business per se but on recruiting, I’d put it in the same category as Raymond James Financial Inc. or Benjamin F. Edwards but with a strong advisory-firm flavor (although it also has a B-D). But if HighTower starts buying up independent businesses, it would fall into the roll-up category. See: HighTower adds an existing RIA and two big UBS producers to a burgeoning Silicon Valley office.

5.) Consolidators always have an endgame, so they are not roll-ups forever. Some cash out with an IPO, others evolve into larger enterprises with a common brand, as Waste Management did with trash haulers and dumps, or Service Corporation International did for death-related services. Some companies are now just viewed as big public operating entities servicing a big market. This would appear to be the argument that United Capital Financial Advisers LLC is making. A big part of its proposition is focused on leveraging its back office to support advisors who want to grow but don’t want to manage the functionary part of their business — perhaps that’s why it is targeting independent-broker-dealer reps.

6.) There are other consolidators, such as Aspiriant — which has rolled in comparable-size firms — that could be considered roll-ups. But it’s harder to put them in this category because they are not making a passive investment but taking an active interest in building capacity and brand for their business. The goal is not to defragment the communities they are in, but to build market presence in those communities.

7.) Serial acquirers eschew labels such as roll-up because they convey a focus on economics and not on business models. But frankly, when you look at what’s happening in this industry, it might be a better idea to present yourself as a buyer of first resort instead of a buyer of last resort, so that you get the cream.

Brooke’s Final Note: So what do I finally do when people call RIABiz a blog? I get over it.


Mentioned in this article:

Pershing Advisor Solutions
Asset Custodian
Top Executive: Mark Tibergien

United Capital Financial Advisers
Consolidator/Roll-up Firm, RIA Welcoming Breakaways
Top Executive: Joe Duran



Share your thoughts and opinions with the author or other readers.

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Stephen Winks said:

October 29, 2012 — 6:29 PM UTC

Elmer,

Everyone is interested in professional discourse, and well reasoned voices. by your inability to engage in such when the following question was raised, does that not mean you concede the point. When it comes to professional discourse you might examine this tread, and reassess the absurd assertions you make with no factual back up. so, the umbrage you take is without merit as the facts support my position that you disagree to be disagreable. An often shared opinion not just here.

If you are actually interested in professional discourse, you might rely to the previously directed question by a well reasoned voice..

“If you would like to continue, please explain as a 20 year fiduciary advocate, “why there is no substance behind fiduciary,” when an act of Congress requires it, when it is based on statute, case law and regulatory opinion letters, when the trust and institutional markets require it and it is the rule of law. It is the right thing top do ethically and professionally in ther consumer’s best interest.”

I am not giving you any wiggle room, it is time to set straight “misrepresented fiduciary discussions.” How do you deem it so? Surely it is not you that misrepresent fiduciary discussions?

The one thing I do not like, particularly in fiduciary discussions is bullies that assert feigned support fiduciary standing and do every thing in their power to denigrate it.

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Elmer Rich III said:

October 29, 2012 — 3:54 PM UTC

It is unbalanced commentators like the above that embarrass the advisor industry and misrepresent the fiduciary discussion. It is a shame that a few extreme voices drown out professional discourse and exchange but that is human nature and the nature of social media.

The online bullies drive the reasoned voices away. Too bad.

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Stephen Winks said:

October 29, 2012 — 3:17 PM UTC

Elmer,

We all know from your comments here you are not a 20 year fiduciary advocate, nor do you even have a passing understanding of advisory services. This is based on your own narrative. The phrase often used when one cites position as the source of their expertise rather than
knowledge and experience is “empty suit” except in this case you do not have position.

The character flaw here is there is no substance to back up your outsized ego. Absolutely none of your polemic arguements are backed up by substantive counter points, confirming the absence of substance. If your tact is to simply disagree without making a point, it is not a polemic as a polemic requires reasoning why there is disagreement otherwise, you are just disagreeable as there is no debate. A point voiced by many as I am sure you know.

Yes, I think you are an empty suit, as you have demonstrated, until you prove otherwise.

If you would like to continue, please explain as a 20 fiduciary advocate, “why there is no substance behind fiduciary,” when an act of Congress requires it, when it is based on statute, case law and regulatory opinion letters, when the trust and institutional markets require it and it is the rule of law. It is the right thing top do ethically and professionally in ther consumer’s best interest.

I am calling you out. Put up your arguement, or shut up.

If you can not make a rational arguement—why waist any more time on this discussion.

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Elmer Rich III said:

October 26, 2012 — 9:22 PM UTC

So the response to legitimate and sensible questions about the idea of fiduciary business practices is personal insults and attacks. This reveals a real lack of substance behind the idea of fiduciary.

“Abusive ad hominem (also called personal abuse or personal attacks) usually involves insulting or belittling one’s opponents in order to attack their claims or invalidate their arguments, but can also involve pointing out true character flaws or actions that are irrelevant to the opponent’s argument. This is logically fallacious because it relates to the opponent’s personal character, which has nothing to do with the logical merit of the opponent’s argument, whereas mere verbal abuse in the absence of an argument is not ad hominem nor any kind of logical fallacy.”

Insults are truly empty as is apparently the proposed idea of fiduciary practices for advisors.

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Stephen Winks said:

October 26, 2012 — 4:34 PM UTC

Emler,

Good thing you decided not to go into law.

The courts deem law ans being totally object because it is. Not negotiable.

Are we going back to your not knowing water is hot when you put your hand in it? Absurd.

If you think Nobel Laureates who are celebrated in advancing intellectual capital based on rigorous peer review and universal acclaim are immoral—you must either be making a joke or you are the joke.

Elmer, a small number of people created the Salk Vaccine, as is the case with literally every innovation, except here fiduciary standing and counsel is widely accepted and is required in the institutional market world wide where trust is imperative. A point you apparently missed as a 20 year fiduciary advocate. So, you think because you personally don’t quite get it, that it is not valid, despite global use?

You have some disturbing issues that you need to work out.

The epitome of an empty suit.

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Elmer Rich III said:

October 25, 2012 — 7:56 PM UTC

Who decides on what constitutes “objective?” Do all advisors have to cite spefific case law to every client for each situation? Should there be a written record of that case law used in making decisions?

Is DFA immoral for not supporting fiduciary standards, like brokers?

So the best interests of the client are defined by procedures created by a small segment of the financial services industry, legislators and a few “skilled” RIAs? Those sources decide what is morally right?

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Stephen Wnks said:

October 25, 2012 — 6:21 PM UTC

Elmer,

Are you trying to be dense?

Yes there are very specific requirements that constitute fiduciary standing. Professional standing usually requires objective, non-negotiable criteria such as statutes, case law, regulatory opiniuion letters and best practices for excellance..

Skill is required in crafting and delivering investment counsel, seperate and distinct from fulfilling fiduciary duties, which is easy if you are properly resourced. Active/Passive or none of the above is at the descretion of every advisor with some advisors being better informed than others. DFA advisors would be a good illustration of this.Yet DFA does not pretend it supports fiduciary standing, as it is a different consideration.

Yes these standards are minimal, but far exceed anything possible in a brokerage format as thay are designed to support assets held in trust that the investing public can have confidence in.

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Elmer Rich III said:

October 25, 2012 — 4:55 PM UTC

So the client’s best interest is defined as: “... a minimum expectation of service. “?

So there are procedures for investment policy and portfolio construction that assure behavior in the client’s best interest?

Where does the research evidence suggesting active management does not add value come into play?

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Stephen Winks said:

October 25, 2012 — 3:57 PM UTC

Elmer,

There is a professional protocol of most professions which establish a minimum expectation of service. Such has washing your hands before surgury. These are threshold fiduciary standards. Of course, like in medecine, a heart surgeon does a diagnosic, or in our case does and asset liability study and creates investment policy. Are you sure you have been a 20 year fiduciary advocate?

The reason why there is an authenticated investment process is quality assurance back to statutory requirements..

As for making and loosing money, investment policy and portfolio construction are the determinants. These are very sophisticated topics with which I am very familiar and am engaged but it should be noted that fiduciary issues of trust are a distinct consideration from investment methodology, strategy and tactics.

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Elmer Rich III said:

October 25, 2012 — 3:41 PM UTC

So the client’s best interest is defined as following procedures independent of the client’s wishes.

What are the requirements for proof or independent evidence that these procedures are followed correctly or they result in financially advantageous results for the client — they make and don’t lose money?

Who independently audit the professionals behaviors? When, how often? Who bers this costs?

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Stephen Winks said:

October 24, 2012 — 8:19 PM UTC

Elmer,

A fiduciary relationship is forever and never ending. You are responsible for your reommendations into perpetuity of multiple generations, as assets are managed under trust. Any changes that would cause you to change your opinion on a recommendation are required in the best interest of the client. You are literally providing continus comprehensive counsel which makes you the value added, not a product. This is why you are compensated on a ongoing basis beause of your ongoing duties. And is why advisors are so highly compensated for the extraordinary ongoing value they provide.

You are addressing and managing investment and administrative values rather than selling investment products with no accountability or ongoing responsibility.

Totally different business, requiring totally different support infrastructure. In brokerage there is no accountability or professional standing.

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Stephen Winks said:

October 24, 2012 — 8:05 PM UTC

Elmer,

As a 20 year fiduciary advocate you should know this.

The consumer’s best interests are based on statute, case law, regulatory opinion letters, best practices and 800 years of common law.

To simplify its execution, there is a prudent investment process comprised of an asset/liability study, investment policy and portfolio construction, monitoring and management. Think of each of these four financial services as being comprised of 60 fiduciary duties which have a direct audit path to statute further refined by best practices.

The result is an authenticated expert prudent investment process which support expert fiduciary standing.

There is supporting technology and associated work flow management which makes advice safe, scalable, easy to execute and manage as a high margin business, depending upon how one approaches portfolio construction.

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Elmer Rich III said:

October 24, 2012 — 2:34 PM UTC

Let’s focus on one issue. How is an investor’s best interest defined? Who does it? Over what period of time? How is it measured objectively?

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Stephen Winks said:

October 23, 2012 — 9:03 PM UTC

Elmer,

There are no finger pointing, unsupported claims or extreme views, only clarity comming from my side of the arguement, as everything I cite is substantiated by statue as in my last posting. By you characterizing this as “extreme” tells us you discount statutory authority and relevence to professional standing which is indeed extreme or as you say trash on your part. A total lack of professional probity.

To remediate brokers not being able to act in a fiduciary capacity, requires the industry, not the broker, to advance modernity in process, technology, work flow and conflict management.

There is the moral and ethical imperative that begs the industry to do the right thing by advancing the necessarty enabling resources so scale can be achieved and the consumer’s best interest be served based on objective fiduciary criteria.

Any advisor or consumer looking from the outside in, would have not problem with this assessment. It boils down to as you observe to right or wrong, perhap not initially on purpose, but now totally culpable behavior. It is the appoligist for status quo that see it differently and characterize those that advance fiduciary and professional standing as somehow having an unbalanced view that sullies the industry. I can assure you that 100% of the investing public prefers their best interest to be placed before that of their broker’s broker/dealer.

Your dispassionate, balanced discussion of issues which is open to all points of view does not change the fact that 100% of consumer’s expect their broker to act in their best interest. Your suggestion of being open to ideas not in the client’s best interest is troubling. Where is your fiduciary advocacy?

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Elmer Rich III said:

October 23, 2012 — 8:12 PM UTC

This is very simple, for the level-headed professionals following this dialog. We have two very different points of view.

Our experience is that personal attacks, moral condemnations, us vs. them polemics, blaming, finger-pointing, simple answers and claims, unsupported claims and extreme views, all of this kind of behavior, blocks real problem-solving. Angry and argumentative attacks on others just hurts investors interests and tarnishes the reputation of all advisors.

Politicians can “trash” the opponent because once the election is over it ends. But for advisors to constantly be attacking brokers, unfairly and for sales purposes, is corrosive of advisors — not brokers

Also, “The internet is forever” So imprudent and extreme statements will stay attached to someones web identity — even after they are dead.

Let’s do some soul searching and admit that most of the statements about the fiduciary topics by advisors have been vitriolic, intemperate and attacking brokers. Fiduciary principals also suggest professional probity, dispassionate and balanced discussion of issues and openness to all points of view.

Moralizing, global harangues against brokers as “evil” because you compete against brokers for business is transparently self-serving and conflicted and thus violates the first principal of fiduciary practices.

Plus, it just makes advisor’s behavior on this important matter look unbalanced. One extremist sullies the image of the industry.

We don’t talk to extremists. That is pointless. But we can look at anger-drive, extreme behavior as an example of what not to do and learn.

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Stephen Winks said:

October 23, 2012 — 4:06 PM UTC

Elmer,

As a 20 year fiduciary advocate you profess to be, do you think it is important that an advisor be able to make and manage recommendations in the context of all a client’s holdings so it is possible to determine where value is added, risk is reduced, cost structure is minimized, tax efficiency is achieved, etc. all of which are fiduciary duties. This is not an overbown claim,or an exaggeration, it is required by statue and is not possible in a brokerage format because it triggers fiduciary liability. As advice is facilitated which is a violation of the internal conpliance protocol of every brokerage firm in the US asthe industry is structured to asure no advice is rendered.

Professional expert services is different from product sales which you consistently fall back to as your base point understanding of advisory services. In that context, fiduciary standing is an over blown claim because it is not possible in a brokerage format—your point of reference with product sales and distribution.

THis is as obvious as it gets. The brokerage industry simply can not handle data in dynamic forms. This is why XBRLis being embraced around the world and is what the cloud is set up to manage.The US brokerage industry is a laggard in this respect largely due to its push back of the fiduciary standing of brokers, which is not the case in the UK,Hong Kong, Singapore, Australia, ect.which acknowledge and support the fiduciary standing of the broker based in the same 800 years of common law we recognize here.

Your point of reference of product is your blind spot when thinking about fiduciary standing. It is what you know but is in no way an accurate understanding of fiduciary duty. I agree with the disconnect you cite as you espouse fiduciary principles in a very generic way without actually understanding fiduciary duty and have no underastanding as to how to actually act in a fiduciary capacity

The point here is you can not be kind-of a fiduciary, either you are fulfilling your fiduciary duties or you are not. This is why objective fiduciarycriteria of statute, case law and regulatory opinion letters are important, and why the brokerage insustry is afraid of fiduciary standing for its brokers. The industry has simply not developed large scale institutionalized support for fiduciary standing which makes advice safe, scalable, easy to execute and manage as a high margin business at the advisor level.

This is not demonizing the brokerage model. it simply recognizes the absence of accountability and responsibility for recommendations in the brokerage format which is in no way the equivalent of fidiciary standing. Sale companies are different from professional services companies that require standards. This is why onbective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters is so important—as very clear differentiating points like that make above can be made.

There is no demonization—just a statement of facts that make brokers very uncomfortable, as in practice they are not able in fact to act in a fiduciary capacity, not because they do not want to, but because their supporting broker/dealer will not acknowledge or support advice. Until this is acknowledged and accepted—none of the necessary professional services support necessary to facilitate fiduciary standing will be advanced.

There is nothing self serving in these statements as I have nothing to sell other than how we can restore the trust and confidence of the investing public and exponentially increase the productivity of advisors at the expense of those selling high cost advice products for which the value added can not be determined as they are neither accountable nor have ongoing responsibilities to protect the best interest of their clients. This may be an overstatement or exaggeration to brokers but not to advisors.

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Elmer Rich III said:

October 23, 2012 — 1:02 PM UTC

Attack dog sales tactics and overblown claims are neither truthful nor professional. They also contradict the very fiduciary principals being promoted.

Making overblown claims, with no evidence and making claims that clearly serve only one’s own monetary interests are counter to fiduciary principals and practices. Personal attacks are also counter to fiduciary principals.

Being a fiduciary promoter while not practicing basic fiduciary principals is exactly the kind of disconnect that have dominated this whole debate from the advisor side.

Advisors spend most of there “ink” demonizing brokers, morally attacking them and wildly claiming fiduciary requirements will save investors. Such claims violate fiduciary standards of evidence and independence of conflict of interest.

Why should the public and policy makers therefore trust rabid advisor claims in this debate?

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Stephen Winks said:

October 22, 2012 — 12:25 PM UTC

Elmer,

If it is “difficult to understand what anyone is proposing”—then perhaps you should simply draw upon your extensive “20 years of fiduciary advocacy” to discern the implications of being accountable and responsible for recommendations which is inherent in fiduciary standing—which you surely understand.

It is a pretty simple consideration—do you want your advisor to be accountable and have ongoing responsibility for their recommendations in your best interests.. Yes, or No.

As for your “unprofessional” comment on asserting fiduciary standing perhaps as a “sales tactic”, Elmer, we are literally talking about professional standing—how on earth is that unprofessional. Quite the contrary, it is you who are making unprofessional, not factual, irrelevant and claims of the moral superiority of a transactions business model which assures no advice is rendered.

You are mistaken in just about every polemic you advace here. Your counter assertions are unimformed opinion, neither credible or provable, most especially utilizing your high burden of proof.

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Elmer Rich III said:

October 22, 2012 — 3:56 AM UTC

“There is absolutely no question advisors are operating on a higher moral and ethical plane than brokers.” This ideological, and polemical, belief seems common among the most vocal advisors promoting fiduciary “everything” — it’s hard to know what anyone is proposing.

Claims of moral superiority are unprofessional, not factual, irrelevant and self-serving. Nothing more. Be suspicious when anyone in a sales situation claims moral superiority. I believe Madoff was aggressive in doing this.really

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Stephen Winks said:

October 22, 2012 — 1:42 AM UTC

Elmer,

I continue to be surprised by you questions, it is as if you are new to the advisory services business.

1. Statute, case law, regulatory opinion letters, 800 years of common law and best practices determines fiduciary duty which is recognizedby the courts as the consumer’s best interest.
2. The professional standing of trust the advisor held to in acting in a fiduciary capacity is the highest profession standard existant—as literally stated by statute. So, fiduciary standing implies nothing defamatory about doctors, it is a compliment to doctors in achieving such high professional standing of trust presuming they were to act in a fiduciary capacity placing their client’s interests before their own and even before that of the government when Obama Care is part of the equation.
3. Importantly, there is an ethical component of fiduciary standing of a broker knowingly acting counter to the consumer’s best interest as Goldman Sachs has found in Congressional hearings.
4. There is absolutely no question advisors are operating on a higher moral and ethical plane than brokers. Even broker/dealers would agree. Internal brokerage compliance protocol assures the consumer, that there is absolutely no advice being renderd and there is no obligation on the part of the broker to act in the consumer’s best interest, thus eliminating the triggering of fiduciary liability. The proof is an untold number of artitration proceedings managing client disputed between consumers and brokers which has established this legal precedent.

In your 20 years of fiduciary advocacy you cite, it is prettyy clear your fundamental understanding of fiduciary duty has long been misinformed.

Are you sure you are not just feining interest in advisory services, to solicit business?

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Elmer Rich III said:

October 21, 2012 — 10:54 PM UTC

We just try to follow the data and evidence. There are way too many opinions to spend time with otherwise.

But in the whole fiduciary discussion there are ideas which just don’t make common sense. For example, who defines what is the best interests of the client? How is it measured? Over what time frame?

Implying brokers are like witch doctors is just self-serving defamation that adds nothing.

It further makes no common sense that one kind of professional is more “ethical”/moral/whatever.

We have been advocates of fiduciary standards for over 20 years, long before it was fashionable, but find the current discussions generating a lot of heat and zero light. But the industry is slowly maturing.

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Stephen Winks said:

October 21, 2012 — 5:05 PM UTC

Your polemic is easy to disprove.

Your suggestion that there is no difference between brokers and advisors based on professional fiduciary standing , is like saying there is no difference between a witch doctor and a physician, as long as the consumer does not know any difference.

Your summary assessment suggesting it boils down to a sales pitch is a gross misunderstanding of advisory services.

I agree, there are plenty of planners and brokers selling advice products that think they are advisors acting ina fiduciary capacity but that in no way dismisses advisors who actually are accountable and responsible and are fulfilling their fiduciary duties, I’ll bet the client’s of those advisors see the material difference between the service and counsel they receive than that of brokers, who can not acknowledge they render advice as required by their broker/dealer’s compliance protocol designed to assure no advice is rendered.

The larger financial services industry has a problem that brokers will not accept fiduciary duty or eliminate conflicts of interest, yet the consumer deserves a clearer delineation of advisors who are acting in a fiduciary capacity. Our trade associationa are designed to protect their memberhip constituencies thus will not support fiduciary standing bases on statute, case law, regulatory opinion letters because professional services of fiduciary standing would preclude most of their members whose businesses are sales focused with out expert professional services support.

This leadership vacuum is presently being filled by very high skill individuals but can only be filled in general by large scale institutionalized support for fiduciary standing. THere is a big difference between professional services and sdales. The future of the larger industry hinges on the trust and confidence of the investing public which can only be achieved by fiduciary standing of the advisor which assures the consumer’s best interest is being served. You polemic argumentsdo not recognize the value of the necessary enabling resources required to bring fiduciary standing within the reach of every beroker and advisor as a profession. You are correct that large scale institutionalized support for fiduciary standing does not exist today in a brokerage, planning, custodial or roll-up formats—but it does exist because of the incredible effort of now thousands of advisors who out of sheer persistence insisting on acting in their client’s best interest. The tangible quantifiable value they provide is manifest in exponential increases in advisor productivity (multi-billion dollar practices), a preemptive advisor value proposition at lower cost than expensive retail packaged products, that by design can not be personalized necessary to add value.

Your polemic arguement should be is there any value in a brokerage relationship as a compelling case exists for an extraordinary level of value added in a advisory relationship.

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Elmer Rich III said:

October 21, 2012 — 3:03 PM UTC

We don’t know if any or what percentage of acceptance of RIAs is due to the use of the idea of fiduciary, let alone client’s comprehension.

Prudence suggests we not make any attribution about how causal anything is without proof and evidence.

It would be interesting to see how many consumers even hear, let alone understand, the word fiduciary. Likely it is very low. The term is mainly flung about in us vs. them marketing polemics, like the above.

Whether it has an business accounting implications is also doubtful. It seems to be the only way some RIAs want to distinguish themselves in sales pitches. That’s all we see,

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Stephen Winks said:

October 21, 2012 — 1:32 AM UTC

Earlier comment should have read as follows:

How about a consumer who likes their broker to be accountable for their recommendations and to have ongoing accountability for recommendations once they are made? Is that sufficient proof?

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Stephen Winks said:

October 21, 2012 — 1:29 AM UTC

Elmer the only possible way your assertion that “little or not proof to support the vaslue of Fiduciary counsel” is only true if the depth and bresdth of counsel rendered, the price of services rendered, the satisfaction of the consumer, and the skill and professional standing of the advisor is totally ignored and raw sales ability of the advisor is the only consideration. This is only because the consumer who is the determinant of value is excluded from consideration.

This is were your thesis breaks down.

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Stephen Winks said:

October 21, 2012 — 1:19 AM UTC

Elmer,

When you put your hand in very hot water, do you think it is hot?

What proof do you offer?

How about a consumer who likes their broker to be accountable for their recommendations and to have ongoing recommendations once they are made? Is that sufficient proof?

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Brian Lauzon said:

October 20, 2012 — 11:54 PM UTC

I was thinking about registered investment advisers…that by definition are fiduciaries. Not brokerage reps that are named fiduciaries for specific clients.

And on your point about “fiduciary” becoming a sales term: that is only true among those that have misappropriated the word.

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Elmer Rich III said:

October 20, 2012 — 9:26 PM UTC

Let’s see the data. And then how do we attribute cause? Assume the reference is to firms being named fiduciaries. If so, we would need to see the growth rate of non-fiduciaries.

So is an increase in named fiduciaries more or less than non-named firms during the same period? Also, if these firms are new, we would need to track the economics and longevity.

Selling something is only proof it can be sold, not that it will work or is sustainable as a product, service or business model.

Ultimately, it all comes down to data, numbers and accounting. Millions of magic copper bracelets are sold — it’s not proof they work. “Passion” is also no proof that something is needed or works — often to the contrary.

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Brian Lauzon said:

October 20, 2012 — 8:19 PM UTC

How about the relative growth rate of fiduciary vs. non-fiduciary business models? That’s empirical.

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Elmer Rich III said:

October 20, 2012 — 7:09 PM UTC

“Strong minds discuss ideas, weak minds people.” Ad hominem comments contain no information and thus, nothing to respond to.

It is am empirical question whether fiduciary claims will prove out. Right now, there is no way to know or predict. It will likely take many years or decades to see.

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Stephen Winks said:

October 20, 2012 — 2:22 PM UTC

Elmer,

You may be the only person in the industry who sees” little actual business validation” for fiduciary standing, being accountable and responsible for recommendations and acting in the consumers best interests based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters.

The body of statutory law, is pretty compelling proof.

You are approaching this as an accountant not as a entrapreneur/hands-on operator/businessman.

Investment bankers are not well known for their management consulting skills because they are not managers. Understandably as a banker your hands-on operating perspective may not be on target as your focus is valuation which capitalizes net operating income—you do not have to be adept in the processes, technology, work flow management, conflict management necessary to advance fiduciary standing your interest is the income from which you derrive a valuation, not services rendered. This explains your odd statement—“little actual business validation” for fiduciary counsel.

The professional arguement has everything to do with the expert authenticated prudent processes, advanced technology, work flow management tied to a functional division of labor, essential for fiduciary standing, not accounting measures used to manage information.

Your fellow polemist would have to agree.

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Elmer Rich III said:

October 19, 2012 — 7:53 PM UTC

Look, polemic and sales ideology are the bulk of beliefs and statements by most people. Fair enough. But grandiose promises and claims are also used to obscure tough questions and lack of evidence and actual facts. Waving the flag and citing “wisdom” from the covers of business magazines and airport business books is not a professional argument.

Professionals demand proof, data and evidence and critical thinking. Beyond the promise of the word fiduciary solving all ills for RIAs competing against brokers, we have seen little actual business validation nor interest by clients.

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Stephen Winks said:

October 19, 2012 — 12:38 AM UTC

Elmer,

At that rate, Steve Jobs would fail with the MAC, I-phone, i-pad, Edison would fail with the electric light bulb, Edwards Deming’s observations on process (if you can’t describe what you are doing in terms of proces, you don’t know what you are doing) would not be accepted around the world. You are too vested in the past, waiting for someone to empiraclly tell you the sky is blue. So be it. Fortune rewards the prepared—you are waiting for empirical data that tells us to be prepared yet offer no insight as to what specifically is required inorder to be prepared, This says you have no first hand understanding of the subject upon which you opine and it will take a very long time before you will, when then everyone will have that common understanding as well, to your empiracle satisfaction.

Are you aware you are repeatedly making this fatal error in your reasoning/discussions/assessments ? American Ingenuity is why the US is a global leader in so many fields. There is no empiracle thunderbolt that makes this so, but simply first hand indepth understanding of the free market at work.

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Elmer Rich III said:

October 18, 2012 — 11:39 PM UTC

We look at a lot of balance sheets and income statements of TPAs and RIAs. The above claims are polemical not business data or accounting based.

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Stephen Winks said:

October 18, 2012 — 11:14 PM UTC

Elmer,

You haven’t seen value in “fiduciary” because you come from the product side of the equation that is largely rendered obsolete by the (authenticated expert prudent) process side of the equation that facilitates highly personalized advice in both retail and insitutional applications. This is essential for fiduciary standing and for it to be possible for the advisor to literally add value, and not possible by limitation of prospectus which limits applications to a very specific and narrow investment mandates. Brokerage advice products have the same limitation as there is no context which incorporates all a client’s holdings as they are. That iswhy XBRL is so important.

We can delve into the technical and technological considerations of a advisory formate which can not be accomodated in a brokerage format where brokers are neither accountable or responsible for their recommendations or subject to a fiduciary standard based on objective, non-negotiable fiducisry criteria of statute, case law and regulatory opinion letters. Nor are best practices and a higher level of grainularity in advisory services and professional standing conducive to a product management/distribution organizational structure.

You understanding of products, brokerage and distribution have no relevency to advisory services and fiduciary counsel which is a different business.

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Elmer Rich III said:

October 18, 2012 — 7:19 PM UTC

OK, let’s take each of these in order.

On roll-ups: – We don’t know if what has worked in the past will work now, eg asset management firms. I come from that world know portfolio mangers acquired and the results were not good. Which is normal.

- Certainly, the RIA market is growing, with demographics (more clients) if nothing else

- Demographics is also pushing many Boomer owners to seek liquidity for retirement — and much longer retirement periods to fund.

Our experience includes the following: – The maximum value for buyer and seller comes from a growing firm with solid EDITDA for at least 3-5 years following the transition. Everyone is on the same side of the table.

- There are trade offs in parties’ discount rates, time frames, etc. Generally, the multiple/valuation is set and common knowledge. Although, we have started to see valuations and do see owners undervaluing. An undervaluation just hurts everyone.

The fact is this is all new territory and so we all need to learn. Some things on the consolidation side were tried and consistently failed and harmed everyone. There was both over selling and over excited buying. That’s normal – but no need to go through that again.

Business Value of the word Fiduciary — We just haven’t seen it. To the contrary, fiduciary is a burden. Now the few “loudest voices” who are true believers and claim “fiduciary” will cure “cancer.” are normal for a changing market but we need data, not metaphors, claims and polemic.

We just haven’t seen data supporting the claims and promises. That doesn’t mean fiduciary business practices won’t deliver results on the balance sheet and income statement but the promises need to have some accounting evidence.

We also don’t know yet if fiduciary services offered via a buying service or consolidated platform will prove out. Some will claim they should and will and can — but we need real experience.

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Stephen Winks said:

October 17, 2012 — 2:23 PM UTC

Elmer,

The balance sheet and income value of “fidiciary” is quite profound as it literally manifests a level of continuous comprehensive counsel not possible in a brokerage format and illustrates the absence of advisory services operating accumen in roll-ups which are not prepared to assume accountability or ongoing responsibility for their advisor’s recommendations—the inconvenient truth of fiduciary status.

Yes there are obvious marketing advantages AND economic advantages of large scale institutionalized support for fiduciary standing which makes advice safe, scalable, easy to execute and manage at a lower cost than a packaged product as a high margin business at the advisor level. The important point here is the commercialization of fiduciary counsel into a high margin professional services business which assumes accountability and responsibility for recommendations that requires enabling support infrastructure. Think of medicine before medical diagnostics and technology. There is a superior result that goes far beyond sales. It is literally an unprecedented level of investment and administrative counsel and professional standing for the advisor..

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Brian Lauzon said:

October 17, 2012 — 12:30 AM UTC

Another great discussion.

You make some great points, Elmer. Bringing together service-/relationship-based firms onto a common platform (or entity, or ownership, or infrastructure) is phenomenally challenging. But not impossible.

The institutional asset management world (where I spent much of my career) saw many approaches come and go throughout the 90’s. AMG is successful because they not only offer an attractive economic value proposition, but also because they get the qualitative side (aka the “soft stuff”) They know which firms would fit and they are in a position to be patient and wait until the time is right to take on a new alliance.

Of course, there’s no one “right way” to accomplish “roll-ups”. Common branding? Equity? Time horizon? Shared resources? Autonomy? Any combination of these variables has the potential to be successful.

Ultimately, the key is to:

- Determine what “your way” is (which has to have both market appeal and alignment with financing sources)

- Identify which aspects of your offering are truly non-negotiable

- Develop a rock-solid, repeatable process to identify candidate firms (a small minority of RIAs would likely be a candidate for any type of “roll-up”)

- Be patient enough to “wait for your pitch”

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Elmer Rich III said:

October 16, 2012 — 4:04 PM UTC

Yes, that is a good question for others to contribute to — What value do/can a roll-up firm offer?

Being a “buying-service” is rarely enough for a business owner and family wanting liquidity and a successful transition.

The false promises of the past have been the consolidator portraying themselves as “strategic buyers” paying a premium prices and having a 10 year plus time horizon. In fact, the “premium” was phantom stock (usually worthless) and the roll-up’s funders wanted their money back with decent returns in 3-5 years. So there was a lot of misrepresentation with predictable losses — for everyone.

We are not convinced of the balance sheet or income value of “fiduciary”- but it is somewhat of a sales term now. Operationally, what are the specific fiduciary services a rolled-up owner and business would get?

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Stephen Winks said:

October 16, 2012 — 3:43 PM UTC

Yet the question remains, do roll-ups afford any value added advisory services support beyond conventional brokerage support ? Isn’t advice just being offered as a product the broker sells rather than an expert prudent process advisors manage in the client’s best interest.

This disconnect with large scale institutionalized support for fiduciary standing is what seperates roll-ups from a new generstion of advisory services firms built around fiduciary standing which make advice safe, scalable easy to execute and manage as a high margin business at the advisor level.

Look to Brent Broadeski of Savant Capital, Fielding Miller of Cap Trust, and others who are serious about fiduciary responsibility to effectively differentiate themselves as fiduciaries from broker roll-ups which are simply an extention of the conventional brokerage business model where brokers are not accountable or responsible for their recommendations based on an objective, non-negotiable fiduciary criteria of statute, case law and regulatory opionion letters..

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Elmer Rich III said:

October 16, 2012 — 3:42 PM UTC

We do a fair amount of M&A work for both RIAs and TPAs. The TPA market has had a consistently disastrous experience with the roll-up business model. It is surprising how much of a uniform failure it has been.

We have helped roll-ups acquire RIA firms. Here are the problems we see:

1. Lack of Operational Experience – Service businesses demand owners who understand the balance sheet and income statement aspects of the business – in detail. That is hard to find. When we vet buyers now, for our selling clients, we look for seasoned operational experience.

2. Financial Transaction Priorities – Most roll-up firms are looking for short-term (3-5 yr) financial, not operational, results. Typically, they have to then disinvest in growth. In most cases they have to because of funding sources and theri own financial pressures, exit strategy promises.

3. Cheap Money Driving the RU Business Model – “There is a lot more money than good ideas to spend it on.” Cheap financing drives the business models of most roll-ups. That’s fine if the acquired firms can return quick savings and EBITDA. Rarely, is that the case.

Bottom line – Generational ownership shifts and cheap money do not make a good business opportunity in these critical businesses that are essentially dealing with people’s life savings and thus are to technical and heavily regulated.

RIAs, and TPAs are the opposite kinds of commodity businesses from muffler shops and funeral homes!

However, as marketers we can say the roll-up folks have been exceptional marketers and sales people and excel at getting owners to take promises rather than money.

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Elmer Rich III said:

October 16, 2012 — 3:41 PM UTC

We do a fair amount of M&A work for both RIAs and TPAs. The TPA market has had a consistently disastrous experience with the roll-up business model. It is surprising how much of a uniform failure it has been.

We have helped roll-ups acquire RIA firms. Here are the problems we see:

1. Lack of Operational Experience – Service businesses demand owners who understand the balance sheet and income statement aspects of the business – in detail. That is hard to find. When we vet buyers now, for our selling clients, we look for seasoned operational experience.

2. Financial Transaction Priorities – Most roll-up firms are looking for short-term (3-5 yr) financial, not operational, results. Typically, they have to then disinvest in growth. In most cases they have to because of funding sources and theri own financial pressures, exit strategy promises.

3. Cheap Money Driving the RU Business Model – “There is a lot more money than good ideas to spend it on.” Cheap financing drives the business models of most roll-ups. That’s fine if the acquired firms can return quick savings and EBITDA. Rarely, is that the case.

Bottom line – Generational ownership shifts and cheap money do not make a good business opportunity in these critical businesses that are essentially dealing with people’s life savings and thus are to technical and heavily regulated.

RIAs, and TPAs are the opposite kinds of commodity businesses from muffler shops and funeral homes!


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