Bob Oros – RIA Perspective at Hightower (Private Wealth 7, EP.452)

Bob Oros is the outgoing Chairman and CEO of Hightower Advisors, a leading RIA platform with over $165 billion in assets under management. Bob has spent three decades in the wealth management industry, including stints at Charles Schwab, LPL, and Fidelity before joining Hightower in 2019. During the last six years, he oversaw fifty acquisitions of RIAs that he integrated under Hightower's Well-th Rebalanced culture. Our conversation shares a perspective on how RIAs function and allocate capital at scale. We cover the evolution of private wealth from product sales to holistic planning, the founding and transformation of Hightower, and Bob's approach to building a scalable, advisor-focused platform. We discuss Hightower's acquisition strategy and process, advisor retention, and private equity ownership, and then turn to its investment approach that blends centralized oversight with advisor flexibility. We close with Bob's decision to step down as CEO in an exciting time for the business and some leadership lessons he's picked up along the way. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:24Ted Seides?

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• 2:06Ted Seides?

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• 2:47Ted Seides?

  the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:19Ted Seides?

  30 years ago, institutional investors held most of their assets in stocks and bonds. David Swensen led a movement to an approach to portfolio management that broadened the asset mix to alternative investments, including hedge funds, private equity, venture capital, and real assets. These days, almost every institutional portfolio incorporates significant allocations to alternatives to produce better outcomes with similar risk or similar outcomes with lower risk. However, capital in the hands of individuals has not yet followed suit. Private wealth portfolios, particularly the so-called mass affluent, typically hold only 2% to 5% of their assets in alternatives, compared to

• 5:01Ted Seides?

  a range of 20% to 50% for institutions. But that's changing quickly. Innovations and structure have allowed individuals to access alternative strategies at lower minimums with liquidity options not previously available. According to Artos Partners, the six largest private banking and wirehouse platforms committed $110 billion to funds last year, approximately twice the amount invested from the six largest institutional investors in North America. And those flows are just beginning. The potential investment dollars from private wealth to alternatives are staggering. Every 1% asset allocation shift would equate

• 5:44Ted Seides?

  to approximately $500 billion of new investments. The impact of these capital flows will have ramifications for GPs and LPs for decades to come. How will the capital get deployed? What will it do to asset prices? What will it mean for returns and for fees? And who will win and who will lose? This mini-series, Private Wealth, explores the important questions raised by the accelerating convergence of institutional style investing with private wealth. We'll hear from three of the most influential asset owners, one each from the private banking, wirehouse, and RIA channels, and three of the most significant

• 6:27Ted Seides?

  asset managers playing in the space. Just as this channel is in the early innings of changing the investment landscape, so too will this mini-series be just the beginning of our exploration of what it means for you.

• 6:43Ted Seides?

  My guest on the seventh and final episode of Private Wealth is Bob Oros, the outgoing chairman and CEO of Hightower Advisors, a leading RIA platform with over $165 billion in assets under management. Bob has spent three decades in the wealth management industry, including stints at Charles Schwab, LPL, and Fidelity before joining Hightower in 2019. During the last six years, he oversaw 50 acquisitions of RIAs that he integrated under Hightower's wealth rebalanced culture. Our conversation shares a perspective on how RIAs function and allocate capital at scale. We cover the evolution of private wealth from product sales to holistic planning,

• 7:28Ted Seides?

  the founding and transformation of Hightower, and Bob's approach to building a scalable advisor-focused platform. We discuss Hightower's acquisition strategy and process, advisor retention, and private equity ownership, and then turn to its investment approach that blends centralized oversight with advisor flexibility. We close with Bob's decision to step down as CEO in an exciting time for the business, and some leadership lessons he's picked up along the way. Before we get going, with all the announcements Hank has shared right here in our Spread the Word section for our Head of Content role and CAU of late, it seems I've missed sharing a few things in the world.

• 8:10Ted Seides?

  Let's see, there was this Liberation Day tariff thing and its aftermath, my friend Scott Besant stepping up big time, and in the sports world, Paris St. Germain, part-owned by Arc'tos, winning its first football championship, Rory McIlroy winning the Masters, barely, Coco Goff and Carlos Alcaraz winning epic French Opens, and Max Fried, Paul Goldschmidt, and Cody Bellinger letting Yankee fans forget the last name of that guy named Juan. But no need to worry, I'm sure you got just as much excitement from our announcements as you would have any major development in the geopolitical or sports world. And if not, well, that's okay. There's still huge events coming up,

• 8:55Ted Seides?

  like Wimbledon and the Capital Allocators Senior Decision Maker Summit. Six of one, half a dozen of the other. With so much going on, I just wanted to hop back on and say thanks once more for spreading the word. Please enjoy my conversation with Bob Horos.

• 9:14Ted Seides?

  Bob, thanks so much for joining me.

• 9:16Speaker 02

  My pleasure.

• 9:17Ted Seides?

  Why don't you take me back to your background in this long period of time in this space?

• 9:23Speaker 02

  It started for me when my mom took me to meet with her financial advisor when I was like a sophomore in college and we went to the Merrill Lynch branch and it had the big ticker videos going around. It was a different era. There was no internet. There was no free access to information and we sat down with her advisor and he took us through this brown leather financial plan, which in hindsight was a lot of canned material. Just the notion of sitting down with people, looking at them holistically and helping them achieve their goals really hit me. I ended up being a finance major, economics minor in college and decided I wanted to go into financial planning. Back in those days, the people that did financial

• 10:07Speaker 02

  planning were really product organizations that were selling something. I remember going to an interview and my first interview was with an individual and it went fine. And he's like, all right, for your second interview, bring in the names of 50 people you know and we're going to call them together. I realized, well, that's not what I want to do. I wanted to do something technical. I didn't want to call on all my friends and family and try to sell them something. So I sort of got away from it and I went into a different direction. I went into banking for a bit, but ultimately found myself when I was working for Charles Schwab, coming back into the advisor business where they served RIAs. And it really was a little bit of happenstance, but it reconnected me to

• 10:50Speaker 02

  that great admiration that I still have for advisors and the work they do for clients.

• 10:56Ted Seides?

  How do you think about that role then, which sounded like a cold calling boiler room type thing and financial advisory now?

• 11:06Speaker 02

  As much as I dismissed it and said, that's not for me, you do actually need to find new clients. We have an industry that's so sound technically, but sometimes struggles from a standpoint of getting people to use their services. And the industry itself, specifically the wealth industry, registered investment advisors is growing as a whole. The majority of advisors really grow when the market goes up. They struggle to generate net new client growth. As much as I didn't necessarily like being asked to bring in the names of 50 people, you do need to be able to go sell yourself because to be able to do good for someone, they need to know you're there and know how to use you.

• 11:50Ted Seides?

  How did you learn how to do that?

• 11:52Speaker 02

  You have to figure that out, what's comfortable for you in doing it, whether that's being the big personality who's going on TV or doing that approach to it, or something a bit more subtle, where you just like to consult with people and add value to people and do it that way. Everybody has to figure out their style for it, but you have to do it. And we're seeing that in the industry right now where 25 years ago, 30 years ago, advisors were building their businesses. Many of them were doing things like seminars because you had to get in front of people and tell them about you and about what you can do for them. And they had success doing it.

• 12:33Speaker 02

  They built these great businesses that then became self-perpetuating through client referrals. So they no longer had to go do that stuff that felt more cold, collie, more salesy. Now they just delivered great service and their clients rewarded them by referring people to them. Those businesses have now run full circle and their clients are getting older and they're no longer able to just refer business the way they once did. We're in this position as an industry where advisors, I believe, need to go back to some of those tried and true tactics. We've started doing that. We don't call them seminars now. We call them turnkey events because people don't like seminar. But what's old is new again.

• 13:15Speaker 02

  What really matters here is you have to be out there and tell people what it is you can do for them and how you can add value.

• 13:23Ted Seides?

  What did you see on your path and the evolution of private wealth from those days when you re-engaged with it in Schwab, all the way through to when you came to Hightower?

• 13:34Speaker 02

  The industry has changed significantly. 25 years ago was all about investments. If you really looked at any client meeting, that was predominantly what the conversation was. We didn't have these things like cable news channels where you can have them on all day and get information. The advisor was really the source of information. I sometimes use the example of realtors. It used to be realtors, you needed them to get access to the multiple listing service. Well, you needed advisors to get access to market information and market perspective because it just wasn't as available. We all know now it's available 24/7. Just like in real estate, any one of us can go on Realtor.com and look for homes.

• 14:16Speaker 02

  Value had to be created in different ways. As the industry has evolved and advisors have evolved, it then went to more planning-based. Then you saw more advisors incorporating real planning, not just a little bit of cash flow projections, but real financial plans. We've gone even further and we believe estate advisory is a big area of opportunity. When you can sit down with somebody and talk about their legacy, how they want to not just create a tax-efficient estate, but also how they want to treat their kids and their grandkids, how they think about philanthropy, you're starting to get into these deeper emotional connections, which we think is where real loyalty is engendered.

• 15:00Speaker 02

  Investments are always going to be important because investments are the means to the end. And having a properly allocated portfolio with the amount of risk you're comfortable with matters a ton. But if that's all the relationship is... You're depending on performance to be the arbiter of is it a good relationship or not? And we all know, performance can come and go. We at Hightower created a new tagline in 2020 called Wealth Rebalanced, W E L L hyphen T H. We do know how to spell. We did get that question a few times, but it's really meant to signify real wealth to most people is not their portfolio. It's family. It's health.

• 15:44Speaker 02

  It's experiences. We're trying to engage our clients in broader and broader ways because we know we can create value in a more emotional way.

• 15:54Ted Seides?

  If you turn and look at the business of RIAs and maybe go back to the six or seven years when you first came into Hightower, how did you think about the evolution of the business model and what you wanted to do when you took over?

• 16:08Speaker 02

  For Hightower, go back even further than me. The firm was started in 2008, coming out of the crisis. The whole idea from the founders was there's these great advisors sitting in these big firms and these are brokerage businesses operating in a brokerage model, but they're really fiduciary minded, meaning they're fee based, they think like a fiduciary. And there's an opportunity to give them a different way to serve their clients. We sometimes refer to that as Hightower 1.0 or the first chapter. It was all about flexibility and choice. Come to Hightower and we're going to give you a platform that's got national scale, but allows you to choose where you want to custody assets,

• 16:51Speaker 02

  what type of portfolio accounting system you want to use, how you want to invest money. So a lot of flexibility. When I got here six and a half years ago, we started to evolve in a couple of different ways. One, we wanted to create much more of a holistic firm where we could create a little bit more consistency and conformity and commonality of how we do business. Always giving the advisor flexibility where we think it matters most. But having unlimited choice of where you custody assets doesn't necessarily create value. We decided to tighten that up a little bit and we also shifted our focus from lifting

• 17:32Speaker 02

  out advisors from the full-service firms to doing registered investment advisor business acquisitions. And that was really playing off of a trend, which is the RIA industry highly fragmented, meaning more than 16,000 individual RIA firms, most small to midsize. We saw a big opportunity to do a couple of things. One, offer advisors an opportunity to become part of a big firm and still maintain some optionality and flexibility in how they did business. But also what it gave them was a clear succession plan. So if their clients are asking them like, well, what are you going to do as you get older? They've now answered the question because they have the leverage of a bigger firm that

• 18:17Speaker 02

  they can rely on. The other thing was access to more and more capabilities. 25 years ago was good enough to focus just on the investment piece. Now you really need to have solutions across the spectrum, ranging from trust services, deep estate planning expertise, tax preparation. And we've built out all those capabilities that give our advisors the opportunity to work with their clients even more holistically.

• 18:46Ted Seides?

  As you went through the process of acquiring RIAs, you think about the top of the funnel. How did you think about who would be attractive to bring onto the platform?

• 18:56Speaker 02

  When you set off to do anything for the first time, your first couple of attempts probably aren't your best because you need to learn. We learned a lot from our first few deals and then really implemented discipline on what we thought was a fit for Hightower. I'm a big believer, there's a buyer for everybody. So if you're an advisor thinking about selling, there is somebody out there who will be the right buyer for you. It may not be Hightower. That's not a reflection on you. It's really just, we have a very specific mold we're looking for. One, it starts with advisors who still want to continue to work in their business. We're not the place to come if you just want to sell and go. There are others who would be okay with that. We want you to continue to run your office in most cases.

• 19:42Speaker 02

  We just want you to do it with a partner who can free up your time to run it even better. We gotta love the talent, starting with the leader. We're looking for a next generation that's been identified. So hopefully they've been investing in their talent. Most of all, and it may sound cliche, but we're looking for consistent same-store sales growth. And that's the part that really separates ones that we'll lean into versus ones that we'll normally pass on. Because these businesses are so tied to the markets, in many ways, you can think of them like index funds that index off the S and P. And if the S and P is up 23%, like we saw last year, they're all going to tell you, oh my God, I'm growing record revenues.

• 20:27Speaker 02

  And that's okay, but that's not what we're looking for. We're looking for those businesses that have created a clear ability to go out and win the next new client. And they've got a process for doing it. Now, do they have to be growing top quartile? No, because we know if there's growth, we can improve it. But what we don't try to do is convince ourselves we can take someone who's not growing and turn them into a grower.

• 20:52Ted Seides?

  What does your diligence process look like with a potential acquisition from the sourcing through getting to know them and making an offer?

• 21:01Speaker 02

  People come to us in a variety of different ways. Sometimes it's relationships some of us have had personally. We have a lot of different bankers and consultants who bring opportunities. We also have a self sourcing team. So that's top of the funnel, how things get to us. It's all about understanding objectives. So if you're a seller, we want to know why and why now? What's really important to you? If we're not aligned on basic things like that, we're just not going to spend time. It's just too valuable. What I really encourage sellers to do is get really, really specific. Give me the one or two non-negotiables in something that would be a good outcome for you.

• 21:44Speaker 02

  And I really mean it when I say one or two, because if you have five non-negotiables, I promise you they're negotiable. Come up with one or two things that no matter what I do, this has to be part of the outcome. Then we get into a lot of data exchange because data doesn't lie. So it's nice to have the narrative, but we look at a lot of data. We go through that process. It's usually pretty iterative. If we think there's alignment there is when we'll provide indicative value. So we'll give them an idea of what we think the value of their business is. Maybe they agree, maybe they disagree.

• 22:15Ted Seides?

  How flexible are the deal terms?

• 22:19Speaker 02

  To be acute, they're flexibly inflexible. There is some flexibility there, but we have a standard type of deal structure we do. There's not that much variability to that. Where we can be quite bespoke is the way we structure the deal from an economic standpoint, meaning we do typically asset purchases. So we're buying a hundred percent of the assets, which in these businesses are mainly the client relationships. Where we can be flexible is how much of the economics do you want to sell us today versus maybe down the road? And that's different than some buyers. For example, maybe we agree we'll buy 50% of the economics today. We're still buying 100% of the asset,

• 23:01Speaker 02

  but you keep 50% of the economics as the advisor business, which still gives you skin in the game. And that can be exciting to someone who still wants to work in the business and still wants to bet on themselves. Cause we may agree to buy another 10 or 20% down the road. Also quite common. So if you think about that example, we buy 50% today. We buy another 20% in year five. Hopefully that 20% in year five is worth infinitely more than it is today. So that's where we introduce flexibility is how much we buy upfront. Do we put future step up purchases into the deal? How do we split cash versus equity? How do we allocate that split between partners?

• 23:46Speaker 02

  So that's where we have quite a bit of flex that we can employ on behalf of the seller.

• 23:51Ted Seides?

  Once you strike a deal, how does the onboarding process work?

• 23:55Speaker 02

  Once we agree on value and sort of key terms, we get the signed LOI. And at that point, we're really going to do the last 60 days of real deep due diligence. We're going to go from looking at compliance, operations, investments. We don't make everybody conform to one investing philosophy, but we do have a framework for what we're comfortable with. And are there managers that we just don't have? That maybe we can go out and add to our platform? Or are they managers we just aren't willing to add for some reason? So we're doing all that really, really detailed stuff. Once we get to definitive documents signed and closing, and we've already by that point brought our integration team into this as well, because these are not stark handoffs.

• 24:39Speaker 02

  Think of it more like a relay race of a baton being passed. So our integration team has been getting up to speed during the due diligence process, running a lot of that detail. And then they will pick it up and really think about it as a 12 month activity. Now, the heavy lifting is happening in the first 90 days, but we like 12 months because that really takes you through every cycle of the business. And we recognize change is hard. And anybody who says change isn't hard clearly has never changed because I think it's hard for us as humans. And it's hard in a business. Think about you've been around 30 years doing things a certain way. And now you join another firm and those things change.

• 25:20Speaker 02

  So your cheese has been moved and you need to sort of get comfortable with where it's gone and how you get to it. So we spent a lot of time on change management. And making sure they've got lots of support during that because the worst thing that can happen is they get distracted from the business of the business. We recognize the quicker we can get them back to normal. Out of what I sometimes will refer to as the valley of doom. Because there's this valley when you go through change where it just feels overwhelming and hard and you're focused on that. We want you focused on serving your clients and getting new clients. Typically, those 90 days are really key. We find by the end of the first year. If this is done well, the advisor is now

• 26:04Speaker 02

  completely stable and can now be accelerating their growth.

• 26:08Ted Seides?

  With the number of acquisitions you've done, you mentioned a few at the onset that maybe didn't go as well as you would have liked when you hadn't fine tuned your lens. I'd love you to think about one that you thought was going to work out. And then didn't. What happens when something doesn't go as according to plan?

• 26:24Speaker 02

  So I'll take the ones from early on out of it and I'll take one not by name. It was a deal, very prestigious firm, been around a long time. But very centered in the principle. That's the risk in these businesses. The founders in many cases have their name on the door. They are such a big part of these businesses. The founder ultimately woke up and decided I'm ready to move on with life. It wasn't 10 years post deal. It was three years post deal. So it forced us into a much more rapid transition of the business.

• 26:58Speaker 02

  That we weren't prepared for going into it. We would have hoped to have gotten at least five years from that leader. But also, we understand sometimes things change in people's lives. And the individual had just gotten to a point where he didn't have his joy in this anymore. We're actually just live in motion on this as we speak, which is why it's so front of mind. So then we look at it and say, does the business team have the ability to sustain from within? Or do we need to think about combining it? So in this case, we've actually chose to combine it. And we're going to be merging it into another one of our advisor practices. Who's really well suited just from a demographic, a type of client they serve, how they serve them.

• 27:40Speaker 02

  So the ending hasn't been written yet, Ted, on this one, but it did force us into some rapid planning, which rarely is good, and we certainly will expect we'll have some client loss as a result. Because the individual departing is such a visible part of the team.

• 27:55Ted Seides?

  Across investment management, you have a lot of situations that have that key man issue. I'm wondering if you learned anything from that example about how you might try to tease out that possibility in a future acquisition?

• 28:08Speaker 02

  We try to always go back and do after action review. What can we learn from this? There's no guarantee. Everybody's got the right intentions when you're doing the deal and they're telling you what they think is, how they view things. Better understanding the team underneath that person. And what their capacity was to step up and take more on is one learning. It's almost like you're in an investment. Many investment managers, when they're buying an investment, they'll create a sales thesis at the same time. Here's the reason I'm going to buy this investment. And here's the thesis for when I sell it. And it sort of helps them take the emotion out of it. For us, one of the learnings is, hey, we're doing this acquisition.

• 28:51Speaker 02

  But what's our thesis for if it doesn't go well? What's the playbook here? And do we step in and have to think merger? Or is there a next generation that's already there that we can have confidence can step up? It's forcing us to think more about a future occasion that may or may not happen because of the learning.

• 29:09Ted Seides?

  Once you have an advisor that you bring into the platform and it's working, just like you're able to buy someone and bring them onto the platform, there's a big market for a successful advisor getting poached away. I'm curious how you've thought about retaining the successful advisors on the platform.

• 29:27Speaker 02

  In our deals, because we're doing true acquisitions and the principals are receiving material proceeds, there are restrictive covenants that come with these. Non-compete, non-solicit, non-accept, where it's enforceable. You don't want to have to depend on those to be your strategy for defense. We have the occasional advisor who departs and tests those things. And we always protect them because we need to protect the business. What we really do is we want to capture hearts and minds. We want advisors to feel so well-served here and to feel so connected as part of the community that they would never want to go anywhere else because why do it?

• 30:12Speaker 02

  It's not going to be better. So we put a lot of effort into culture. We put a lot of effort into creating a community of collaboration. We just hosted our annual senior principals event. Had over 300 people together in Dallas, Texas. Record number of advisors in attendance. Those are really important for us because that creates that connectivity, not just with the leadership team, but also with each other. So we put a lot of work into trying to foster that so that advisors just never feel the need.

• 30:48Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 31:25Speaker 03

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 31:31Ted Seides?

  And now, back to the show.

• 31:35Ted Seides?

  What's been the impact of having private equity ownership of Hightower?

• 31:40Speaker 02

  You might suspect I'll be positively biased, and I actually think for the industry, private equity has been overall very good because it forced an industry that was very cottage, very subscale to run in a much more rigorous way, which I for one think is good long-term for clients because if you're running businesses as lifestyle businesses, it sort of implies at some point there's an end to that because the lifestyle ends and the lifestyle may end with the advisor's departure. When you think of the good of clients, you want these advisors and their practices to continue to persist. Private equity has given that fuel to really grow the industry up.

• 32:23Speaker 02

  Specifically, our investor, Thomas H. Lee Partners, completely respects we are a fiduciary business and it starts and ends with the client. This isn't about what the spreadsheet says and how we can drive maximum benefit for the firm. This is all about how do you drive maximum value to the client, knowing if you do that, wins accrue to the business. So I love the fact we have an investor that gets that, who's been willing to make sizable investments in the business on behalf of the client. That's across the board. When I got here six and a half years ago, we didn't have a national trust company. We didn't have an estate and financial planning team. We didn't have a tax preparation capability.

• 33:06Speaker 02

  We didn't even have an industrial strength accounting system. We now have Oracle. I can promise you a multimillion dollar investment like Oracle, it's hard to directly see the ROI. You're not going to get another client because of it, but it's going to help us run the business a heck of a lot more efficient. Private equity has been good for the business. I don't think it's for every advisor. I'll be clear about that. If you're running a multi-billion dollar RIA and you're thinking you want to take professional money, you need to be ready for what that means because that means you are going to have to run it as a professional business. For me, coming out of big institutions, it was a very comfortable shift because I expect to do those things. I expect to like have

• 33:49Speaker 02

  a business case for a decision to invest in something. If you've been running your own thing for a number of years, 25 or 30, and you all of a sudden have somebody else at your boardroom table, you better be ready for it.

• 34:02Ted Seides?

  I'd love to turn to the investment part of the proposition. At the onset, before you got to high tower, you said that the advisors all just kind of did what they wanted. How have you brought that together?

• 34:16Speaker 02

  In many ways, we still are pretty diverse across our advisor teams, how they invest money. What we've tried to do is make sure, especially on the risk framework, that we've got tight processes around things like that. And that could be like concentration risk in a single investment, things that are pretty basic. In terms of the client experience, we've tried to create a best in class experience, especially through technology. We made the decision, we wanted to invest in our own client experience. We're not just licensing someone else's, which allows us to really use all the data we have to create that experience.

• 35:00Speaker 02

  Around the investment side specifically, we've started to lean into the private market area as an area we think we can create top down value creation. So instead of having an advisor out there coming up with a great idea for a private investment and then putting a subscale position on the platform, we're now curating these investments from the top and making them available to our advisors to invest behind. And that's really an investment committee made up of advisors and our corporate investment experts. That's growing in success and arguably has been very successful.

• 35:41Speaker 02

  We also just made an acquisition of a business called NEPC, one of the largest institutional consultants in the US. And we made that acquisition and wanted to have NEPC part of Hightower specifically so we could start to centralize more of the investment operation. So we don't see value in having 140 versions of asset allocation, but I now have one of the largest institutional consultants who does it for the largest institutions, who can now do it for all of Hightower. They also have a very scaled OCIO. So as more and more advisors decide, I don't even want to build portfolios anymore. That's not my highest and best use.

• 36:24Speaker 02

  We're now going to leverage NEPC for that. And then of course, going to my comments on private markets, we now get access to NEPC's private markets expertise, where they have 22 analysts who do nothing but work in the private market space. And we are going to gather, curate access vehicles that Hightower advisors and clients can then leverage.

• 36:49Ted Seides?

  If you look at it today, looking through the advisors to the client portfolios, what does the rough asset allocation look like?

• 36:58Speaker 02

  It still historically looked a lot like the 60-40 portfolio, but we think we're going to start to see some shift there and especially around a growing allocation to private markets. Today, on average, across all of Hightower, think of us as 5% to 6% allocated to privates. We think that number is going to be 12% to 15% over the next three to five years. We're seeing the demand and it was part of the rationale for doing the deal we did with NEPC.

• 37:29Ted Seides?

  How do you think you get there?

• 37:31Speaker 02

  Like many things, you get there one step at a time, but you get there by the unique ability to give them access where they couldn't get it on their own. One of the benefits of NEPC is representing large institutions, they can get access to virtually any manager. And those managers typically don't want to play in the retail wealth side because they don't want to deal with a bunch of small clients. We can now give them access to that channel, but in a scaled way. So we'll create these vehicles that retail wealth clients can invest into. But to the manager, it just looks like a big position. So we're going to roll our first one out in the first half of this year with NEPC.

• 38:13Speaker 02

  Our expectation is we're going to get at least $100 million of capital raised with each one of these.

• 38:19Ted Seides?

  Where do you start across the breadth of alternatives that are available?

• 38:23Speaker 02

  In this case, there's plenty of debate on where we should start. Where we're choosing to start is likely something around private credit. So we think we need some tried and true things like private credit, private equity, real estate. We've also had good success on the high tower client side with thematic investing into the privates. For example, last year we rolled out a cybersecurity offering. And we think cyber is going to be a big theme here for years to come. That investment raised a good amount of capital and has performed very well. So continuing to like to find some interesting things like that, that are a little bit outside just your normal private credit, private equity.

• 39:07Speaker 02

  We'll continue to look for those types of thematic investments as well.

• 39:11Ted Seides?

  As you look at high towers of the organization, how do the investment decisions get made?

• 39:17Speaker 02

  Short answer is it depends. Cause today advisors may maintain their own investment committees and they're making their own investment decisions. If they're outsourcing it to our investment solutions team led by Stephanie Link, then Stephanie and her team maintain the committee and are making those investment decisions. We've grown that from $300 million when I got here to over $6 billion today. Advisors are increasingly showing a desire to let go of the investment side of it. Probably a little slower than the industry expected, but it is happening. On the NEPC side, obviously they maintain their own investment committees. It's a little bit flexible still. That will tighten up over time.

• 40:02Speaker 02

  So it just really depends on whether the advisor is managing all the investments themselves or not.

• 40:07Ted Seides?

  If you're a manager on the outside seeing, wow, this is a large and growing organization with an increasing institutional looking investment presence, what advice would you give to a manager who's trying to figure out how do I navigate telling my story to Hightower?

• 40:24Speaker 02

  I would tell you, come to the center, meaning come to the corporate teams, the home office, as opposed to trying to go out to 1,000 advisors individually, which we still have managers trying to do that. That's just a hard road. If you want to have a strategic relationship with Hightower, work with us from the corporate enterprise and then we can help you navigate where would you best fit, whether it's in a centrally managed program or if it's with direct to our advisors, we can help you understand which ones are best suited to work with someone like you.

• 41:02Ted Seides?

  As you take a step back and look at the trends in the wealth channel with RIAs, what do you think are the most important things we'll see over the next couple of years?

• 41:11Speaker 02

  We're going to continue to see consolidation through acquisitions. And we've seen record numbers of transactions over the last few years. But honestly, we've still seen little consolidation because you continue to have more new RIAs being created. You're going to see more meaningful consolidation, including big firms that come together. Because think about if you're a $20 billion, $30 billion AUM RIA. That's a big RIA, but you're still a long ways from a $200 billion, $300 billion firm with real institutional scale. Firms are going to have to ask themselves, can I get there? Or do I have to get there through combining?

• 41:53Speaker 02

  So I think you're going to start to see some platforms coming together. As I alluded to on the investment side, we think private markets is going to be big, which is why we're investing not only in the front of office, the investment side of it, but also in the back office in terms of having a platform that can support the growth. And then not to be cliche, but AI, not in the form of alternative investments, but artificial intelligence. Ted, I've seen more real applications starting to come to market are really interesting and they have value in the last three months than I'd seen in the last three years. So I think you're going to start to see AI really start to transform these businesses. Some advisors are going to choose to ignore it.

• 42:38Speaker 02

  If you ignore it, you ignore it at your peril. I'll give you one example, the concept of digital workers that you can think of just like physical workers and you're now balancing between when do I hire a physical worker and when do I hire a digital worker? And that digital worker will know exactly what your systems are, how your processes work within that, and they'll do the work. And they'll work 24 by seven and they'll never complain. I may not be doing it justice, but what's really interesting about that is it's not us having to like make a bet on some new application. It actually comes and sits over the things we already do. The tough thing in a big firm is if you come in and say, yeah, I've got this new artificial

• 43:22Speaker 02

  intelligence portfolio accounting system, but to use it, you have to get rid of all your other portfolio accounting. That's got huge execution risk to us. But if you come in and say, I've got this digital thing that sits over your systems just allows you to use them more efficiently. That's really interesting. Or another application that came my way was take something like a performance report. Very common, most advisors use them. They're usually long and very technical. This application will take a performance report, turn it into a two-minute YouTube video. If you're the client, would you rather have 40 pages of charts and graphs or a two-minute

• 44:02Speaker 02

  YouTube video that tells you all the salient points about your performance for the quarter? Just does it in a format that's much more interesting. And guess what? They can also synthesize the advisor's voice so you feel like it's your advisor telling it to you.

• 44:18Ted Seides?

  As you look at this trend of more investment in the private markets in this channel, what are the things that you think could derail what seems to be common knowledge that more and more capital is coming?

• 44:32Speaker 02

  The big watch out would be we have some blowups. These investments come with risk. For most of us, if we've been around long enough, we've experienced one of those things blowing up on us and usually not because of any fault of our own. The big gotcha will be if we have some really visible blow up of a manager that we've put a broader set of retail investors into. That could create a pretty significant headwind. Also, you have a lot of these alternative managers coming up with interesting new models for doing this that try to solve the liquidity need that most retail investors have, but can you do that and still retain the performance you want

• 45:16Speaker 02

  to see from these private market investments is still a question mark. Those are the types of things that could slow it down, but I don't see something that will stop it. I just think the momentum is too great there. In terms of asset class growth, if you think of privates as an asset class, it's the fastest growing.

• 45:35Ted Seides?

  You look across the different subsegments, private credit clearly has gotten traction in this interval fund structure. What's your sense of the interest of adoption of private equity? If it doesn't work in that structure and has to acquire what's existed for a long time in the drawdown structures?

• 45:54Speaker 02

  TBD until we start to take these out. Does the complexity of getting a retail client to understand how they work is very different than an institutional client? We haven't tested that enough now to have a formed view, but that is going to be another layer of complexity in terms of driving adoption.

• 46:16Ted Seides?

  So with all of this growth, and particularly in the bunch of years you've been at the helm, you've recently decided that it's time to move on. And I'd love to hear about your decision process. Most of what you hear is just excitement about this space. It was super interesting to see someone at the other side of that.

• 46:35Speaker 02

  I'll say move on, but not move out. So I agree. And it's funny you said it that way, Ted, because I've told people the next few years are just going to be way too interesting to not be involved. But I also recognize running a firm day to day is not a job. It's a lifestyle. It's a 24 by seven activity. You don't get vacations. I don't say any of this begrudgingly. I embraced it. I accepted it. My family accepted every vacation. I'd be sitting in the hotel room for a few hours a day. But there also becomes a point where you know it's time to let someone else come in and bring their fresh ideas and thinking. I tend to be a believer in shelf

• 47:15Speaker 02

  life of leaders and roles. This is year seven for me, and it's been a privilege of my career to do it. I knew it was the right time for me to help foster succession here, because you also have an obligation as a leader to make sure someone can step in and keep it going. We talked about the baton earlier. Really true here. What you don't want to have happen is, oh, I decide I'm going to leave and we don't have a CEO and now you're interming it. And that's really disruptive. So always wanted to be really thoughtful about it. And I don't think it could have worked out any better in terms of how we handled the transition and the individual we've selected

• 47:56Speaker 02

  to come in to be the next CEO of Hightower. I'm excited for him to join us here in a few short days. I will continue to stay on the Hightower board and continue to enjoy the fun. And then also it gives me the opportunity to do some other things. I've recently become a grandfather, which is kind of a cool new chapter of life. And yes, if anyone thinks I don't look old enough, I am 59, so I'm appropriately old.

• 48:24Speaker 02

  And then I'm actually going back to school and gonna take part in a fellowship program at the University of Chicago around leadership in society, which is a small cohort of individuals from around the world, working on their next chapter of purpose. So the thing I can promise you is I don't use the R word, retire. It just seems like not the right word. And I couldn't be more excited, most of all because people need great advice, whether it's an institution or a client. People deserve great advice. I love being part of an industry that participates in that and helps people achieve their outcomes. So I expect to still have a lot of fun, be involved, just in a slightly different way.

• 49:07Ted Seides?

  As you look back at the 30 years you've been involved in, and particularly these last six, what have been the most important lessons that you've taken away from success as a leader in this organization?

• 49:18Speaker 02

  If I learned anything over the last six and a half years, it's adaptability. I didn't come into this ever expecting to navigate a pandemic. We all know there was no playbook for any of us on how to do that. We went from Friday being in the office to Monday telling everybody to stay home. It taught me adaptability that never get too ingrained in how you do things because you may be forced to change. It also taught me always think about scenario planning, always understand how your business, to the best of your ability, is going to behave in different conditions. Fortunately, that was something I had learned years ago from coming out of bigger companies, where scenario planning was part of the muscle. And we were doing that here. Now, what I learned

• 50:02Speaker 02

  during the pandemic is we didn't scenario plan bad enough. So plan for the really bad stuff. So you understand, like, if the S and P loses 40%, what happens to your business and how do you react to it? Adaptability and having a planning mindset have been two big things that I probably always believed, but after living it the way we did, that's ingrained in how I think about leadership. The last one is transparency and availability as leaders. What I've learned as I'm leaving is people aren't coming up to me and saying, thank you for all the growth. You'd like to think, I mean, my private equity firm may be thanking me for the growth. But where I'm getting people who want to say something to me reflective, it was around

• 50:46Speaker 02

  The support they got, the mentorship they got, the friendship they got, the transparency. And so it was just a humbling reminder as leaders, we have so much impact on people. It gets easy to underestimate the way we act, what the words we choose, whether we smile or don't smile, leaves people in a certain way. I've really been humbly reminded of that and appreciate it.

• 51:10Ted Seides?

  As you take in those comments and try to take that to heart, what are the little things that you would coach someone else on how you bring out those types of responses through your leadership?

• 51:24Speaker 02

  The big one is vulnerability. People connect to people. They don't connect to CEOs. They connect to the CEO, the person. So be vulnerable. I will say earlier in my career, I wasn't vulnerable. I learned, no, no, you don't let people see you sweat. You don't show emotion, you know, always be cool. And there's certainly times that's needed, but letting people see you're human, acknowledging where you whiffed on something, that's on me, I got that wrong. Letting people know my life is not perfect. And let me tell you things about my life. I've openly shared, I have a daughter who suffers from severe anxiety. Once I became open about things like that, I connected to people in a very different way.

• 52:09Speaker 02

  Cause all of a sudden they're coming up to you like, oh my God, me too. We have this commonality that doesn't matter what our titles are, what we do in the organization. We have this commonality that we could connect on. I've learned the more vulnerable I can be, the better. Now, don't get me wrong. I don't show up and cry like a baby in front of people. I'm not a big crier, but short of that, I've learned the more open I can be, the better.

• 52:33Ted Seides?

  All right, Bob, I want to ask you a couple of fun closing questions. What's your favorite hobby or activity outside of work and family?

• 52:40Speaker 02

  I've had to think a lot more about that now, Ted, because I used to say my hobby was work, which is just a lame excuse. I love spending time at our house on a lake. Where I've found it's just my happy place because it represents all the things that are really important to me in life now, which is just slowing down, family, great times together. And then I also love to ski, so snow ski. And I didn't get on skis till I was 35. So anyone listening to this who started skiing later in life will appreciate it. It's a lot easier to learn when you're five and you have no fear than when you're 35 and have plenty of fear. I've become a decent skier where I can ski blacks out west.

• 53:24Speaker 02

  And so really enjoy doing that and do some annual trips with my brothers around skiing. So those are a few of the activities and then I'll probably start to pick up my golf clubs a little more frequently.

• 53:35Ted Seides?

  What was your first paid job and what'd you learn from it?

• 53:38Speaker 02

  My first paid job was delivering newspapers at 5:30 in the morning, the Detroit Free Press. So I would lay on my couch, waiting to hear the stacks hit the front porch. And then I knew it was time to get up and roll the papers and put them in the front of my bike and then ride around my paper route, delivering papers. Those were in the days to get paid, you had to go collect. There was no online. So I then had to go in the afternoon and knock on doors and collect money. I've always valued work because anything that you do that someone's willing to pay you for is special. Even delivering a newspaper because to the people receiving that paper at 5:30 in the morning, I'm part of their daily routine. If they didn't get that newspaper, I've set their day off in the wrong direction.

• 54:22Ted Seides?

  How's your life turned out differently from how you expected it to?

• 54:26Speaker 02

  I will tell you, I have more appreciation now because I'm in reflective mode. I've received more out of this life than I ever could have imagined. And feel blessed as a result. I was raised the right way. I give my parents all the credit. They raised me to work hard and earn everything you got. Nothing was given. And if you do a good job, keep your nose to the grindstone and add value, then you'll be taken care of. I never could have imagined how this has turned out, but internally grateful for it.

• 54:59Ted Seides?

  What's a mystery that you wonder about?

• 55:01Speaker 02

  I think the mystery I wonder about is what I'm going to do with the rest of my life now. And I'm going to try to unravel that because I'm such a believer in you need to maximize every minute. So that's sort of my great mystery in front of me. Part of going back to school, what I'm looking forward to is actually taking history classes and philosophy classes to try to learn from people of the past. Because very few things in life we haven't seen before, just in a different way. So I'm looking forward to sort of connecting some of those things from the past to things we're dealing with today.

• 55:38Ted Seides?

  All right, Bob, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

• 55:43Speaker 02

  As I've spent time with college students, I'm quite involved with my alma mater. And I look at how these kids are involved and how engaged they are. And they're showing up to things on Saturday mornings. They're showing up to things at 8:00 AM on Friday morning. It reminded me something I wished I would have been more studious about then was get involved. Look for any opportunity to be involved and get engaged. And whether that's in your company or while you're in school or in nonprofits. I just think there's so much goodness that comes from getting involved and the connectivity that happens between people and the impacts that can be made as a result.

• 56:26Speaker 02

  I was meeting with one of our younger associates earlier today. One of the things we started talking about was being purposeful with your networks and really recognizing your network and the people you connect with over time. It may be the most valuable asset you have, if you think of it that way. So nurture it, grow it, but be purposeful about it. Really think about those people who add value to you and you can add value to them and make sure you're staying connected. I don't think enough people think of it that way. I was reminded as going through a transition and I started thinking about who do I want to reach out to and have a conversation? And I just started writing down names, not people that I'd met once, people I had real relationships with.

• 57:08Speaker 02

  And I was pleasantly surprised how long the list was. Then I was blown away by how eager they were to have a conversation and, well, what are you thinking about next? Then I would tell them, I'm not looking to go work, but I'm looking to get involved here and there. And they're like, let me introduce you to this person. That would be, I guess, the wisdom I would leave people with.

• 57:29Ted Seides?

  Well, Bob, I want to thank you so much for sharing this story. Congrats on the incredible success and excitement about what's coming next.

• 57:37Speaker 02

  Ted, real pleasure. Thanks for having me.

• 57:41Ted Seides?

  Listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.