“I have less than zero interest in that", was the response from Creative Planning founder Peter Mallouk when I asked him about the aggregation model that’s become a rising force within the wealth management industry. And I nodded because I feel the exact same way. It’s an attractive shortcut if you want to tell your private equity backers about AUM growth but it’s also a culture-killing compromise that prioritizes the wrong metric for long-term success. Which is fine for the aggregators - if something in our industry is controlled by a private equity fund, its most likely exit strategy is to sell at a higher multiple at a later date to a different private equity fund. In that context, growth at any cultural cost makes sense.

There is no public market avenue for most wealth management businesses because Wall Street fixates on quarterly earnings reports and annual profit growth while a great financial advisory firm is more concerned with serving clients over decades. Eventually there is a friction between the two and you know who wins. That’s right, the shareholders will eventually get what they want and what they want is lower costs, higher revenue, no matter what it takes to conjure it up. The clients may or may not benefit. Witness the take-private of Focus Financial last summer by CDR for $7 billion.

Focus was the original aggregator and is still among the largest. For the uninitiated, when we say “aggregator” we are referring to a gigantic financial advisory business that looks and acts more like a platform than a cohesive firm. They buy out the founders of independent financial advisory firms who are then able to operate exactly as they had before (at first) while kicking up a percentage of their profits in exchange for the lump sum they sold their stock for. The founders being absorbed by the aggregator firm go about as though they still “run my own shop” and they can even retain their own DBA (doing business as) name. The aggregator gets to tell its investors that “AUM growth is up 80% this year” but they’ve simply made a financial transaction. They didn’t earn that growth, they bought it.

So now you’ve got a firm with $100 or $200 billion “under management” but it doesn’t actually manage any of it, it merely administrates it. There are hundreds of separate decision makers, multiple CIOs, financial advisors telling clients whatever story they have always told them and a culture comprised of seller-founders who most likely came for the largest check and are counting down the days til their deal is up.

The executives who run these aggregation things are the ones who buy the tables at the all the industry awards dinners and win CEO of the year or whatever. And it makes sense; they are highly plugged in with the investment bankers and PE funds and law firms and accountants and consultants who sponsor, nominate and vote. It’s very political, and nobody’s asking the end clients anything. Like “how do you feel watching the advisor you work with being acquired three times in ten years?”

Anyway, Peter is playing a different game. He attempted the aggregation platform model once but when the executive he hired to build it informed him of all the cultural compromises necessary to onboard firms he said “forget it” and shut the whole thing down. He couldn’t have people operating under his banner doing whatever they wanted, regardless of how lucrative it would have been. He built a brand and a culture and those things were more important. I loved hearing him tell this story because it confirmed for me the difference between the painstaking work of building something special versus the transactional alchemy of using other people’s money to acquire scale, regardless of fit or integration.

And spoiler alert - the “bring your own firm name” acquisitions are not going to look as good three years later, when the selling founders start openly regretting having taken the cash and the PE funds start wondering why the growth via acquisition plan is becoming more and more expensive. We have fifteen or twenty aggregators in our space now, which means most of them aren’t making great deals anymore.

Part of the rationale for the Focus take-private was that the business model had to undergo radical surgery in order to correct this platform approach and that it would be painful to do so under the auspices of a publicly-traded, quarterly-reporting company. Focus is now working to put the entire firm under the control of its largest, most successful platform firm (The Colony Group) and reshape each of these individual firms or cut them loose. Some of the seller-founders will bend the knee and integrate and some will break away. There’s no reason for Focus to be running fifty different versions of the same RIA. The profitability in our industry comes from synergy, scale, fixed costs, interchangeable back office components, shared marketing expense, etc.

So here you have Buckingham and Colony Group - both sitting on the Focus aggregation platform - merging to become the dominant RIA, with the CEOs agreeing to be Co-CEOs of something much larger and more integrated. Here you have another Focus RIA based in Atlanta bending the knee and agreeing to become part of the Colony monolith this past July. And then in August another, this time a Focus firm in San Diego, becoming a Colony, ummm, colony. Eventually, Colony’s Michael Nathanson will take control (colonize?) enough of the aggregated RIAs across Focus that the aggregation model itself will disappear and what will be left in its wake is a more focused (pun intended) RIA business with a more coherent purpose for existing.

And this is the end game - the only end game that ever could have played out. So if this is how it logically ends, with a forced reconciliation of dozens of acquired firms-within-a-firm, then why would anyone set out to build an aggregator in the first place? I guess, cynically, because you can sell PE on the idea of compounding capital by rolling up the industry, which is a model they’re very comfortable with from their experience with dentists and bowling alleys. Okay, but other than that - if you weren’t in it just for the money - why would you pursue this strategy? The answer is that you wouldn’t.

I’ve been offered money to go out and buy a bunch of firms several times in recent years. My response is always the same - why would I buy someone who isn’t as good as we are and then let them DBA using my firm as a resource? That’s backwards. If I’m going to buy someone (and I’m probably not), they’re either better than us already (LOL) or they want to become part of what we’re doing because they love it. I’m not giving someone capital to carry on as they were.

Young entrepreneurs in our industry, and I spent this past week with thousands of them, dream of growing up to be like Peter Mallouk and building the next Creative Planning. They don’t dream of building General Amalgamated Advisors, LP and offloading it to a Canadian pension fund in three years.

So, Peter’s instinct is part of what makes him one of the most inspiring entrepreneurs in our space. Despite his “less than zero” level of interest in growth for the sake of growth, he’s still been able to do this:

Which is pretty baller, when you consider that he’s done it without compromising the brand in any way. This is the example most of the young advisors who are starting firms would rather follow. Easier said than done. When Peter started the field was less crowded and had significantly fewer talented executives. Peter’s abilities were rarer twenty years ago than they are today. The good news is, we’re in a business of “compounding advantages” and he’s got the biggest advantages out there.

When Michael asked him whether or not he’d be the first trillion-dollar RIA, he wasn’t shy about it. “I would hope so.”

Secrets of a $300 Billion Investment Advisor

Peter joined us in front of an audience of thousands this past week at the third annual Future Proof Festival for a live taping of The Compound and Friends.

You can watch it here or listen on your favorite podcast app at the link below. I think this is among the finest interviews we’ve ever done on this show and I’m really proud of how it came out. Regardless of what industry you’re in, you can learn a lot about how Peter thinks.

Don’t miss the part where I check off a bucket list item by firing a t-shirt cannon at the end 🙂 

Listen on Apple, Spotify or your favorite podcast app now.

Remember, you can subscribe to The Compound Insider to get the heads up on our forthcoming guests and lots of other cool insider information about what we’re up to. It’s free and takes two seconds.

Odd Lots appearance with Joe and Tracy

My old friends Joe and Tracy had me on their massive podcast, Odd Lots, this past week to discuss my new book “You Weren’t Supposed To See That” and to reminisce over the early days of blogging, Finance Twitter and the post-financial crisis “Cambrian Explosion” we were a part of it.

I had them howling at some of the things from that era they hadn’t thought about in years. There was a time when Fox Business used to put on a daily happy hour TV show at the Bull & Bear bar at the Waldorf-Astoria Hotel in New York City. There was a guy who used to do a recurring segment on CNBC where he would curse out the financial bloggers who had been sniping at him on Twitter. As I jogged their memories, they were rolling. Good times.

Listen here…

Apple:

Spotify:

I bumped into Joe Weisenthal at John Wayne Airport in Santa Ana as everyone was leaving the festival. He and Sam Ro were sitting at the gate live-tweeting the FOMC interest rate decision as it happened. it reminded me of the old days, I used to live-tweet all this stuff too. It’s nice to see it still being done by the best to ever do it.

That’s all from me today! Talk soon! - Josh