This morning Matt Middleton and I welcomed 500+ financial advisors and wealth management industry executives to the first ever Future Proof Retreat. Everyone here is a CEO or a high-level executive at a firm serving our industry. There is no press. No TV cameras. No media presence at all. The idea behind the Retreat was to facilitate peer-to-peer discussions and sessions for smaller breakout groups located throughout the beautiful and historic Broadmoor Resort in Colorado Springs. We’re here to learn from each other with the sole purpose of getting better at what we do for our clients and employees.

The first session on stage was a talk by industry firebrand Mark Hurley, who delivered a rundown of the most important insights from his 88-page white paper Welcome to the Jungle, which made quite a stir when he released it late last year. Mark’s premise is that the RIA business has been on easy street over the last fifteen years thanks to rising markets, impotent competition, a clubby and collegial atmosphere and reasonable client expectations.

That’s over now.

Welcome to the Jungle

The Fed raising rates starting in 2022 has kicked off an era of more difficult funding for the private equity-backed aggregators who’ve had such smooth sailing as they’ve rolled up billions and billions of dollars worth of assets via M&A. The referral programs whereby Schwab, TD Ameritrade and Fidelity have introduced millions of customers to RIAs are also going to get more exclusive to be a part of and more expensive to remain a part of. This means firms are going to have to learn how to start marketing themselves and working harder to get initial meetings with potential clients. Most won’t have the slightest idea where to begin.

Mark also explained why the specialist advisory firm at $5 billion plus is probably in a great spot competitively versus the generalist RIAs that don’t particularly address any specific client population. If you know how to solve the very specific problems of a narrow population of potential clients, you won’t have to market so hard - the people who have this problem will come to you. Just saying “We work with doctors” isn’t going to be enough. There is a world of difference between working with a dermatologist, for example than working with a neurosurgeon. Different practices, different concerns and issues. Mark’s take is that RIAs are going to have to do a lot more for their clients for the same fees, therefore specializing and bringing in experts to the practice who address these narrower populations will be an obvious move. The RIA firm of the future is not only going to be involved in the management of wealth once it’s earned - the firm will also be involved in the creation of wealth from an earlier stage. An example of this would be an RIA that specialized in catering to corporate executives bringing in a professional headhunter to consult on career moves and helping executives market themselves to potential new employers while maxing out their opportunities for income.

First Rule of the Jungle: Don’t Get Eaten

Mark also thinks the jungle is going to get a little meaner with respect to how large firms learn to flex a bit more. Right now, a small firm managing $50 million is able to tell its clients that it provides A, B, C and D for a cost of X. Then there’s a firm managing $5 billion and they too say “We can provide A, B, C and D for a cost of X.” That makes no sense. What’s more likely is that the larger firms will now say “The cost is still X, but for that X we will do A, B, C, D, E, F, G.” The smaller firms will not have the wherewithal to scale up and provide all of those additional services. So they better decide now if they’re going to scale or they’re going to sell to someone who can. This is fee compression but the fee is not coming down, the client expectation of what they get for that fee is going up.

Protecting Client Data

There were some other interesting things discussed during the session that had the audience rapt, cell phones down. One of those topics was cybersecurity, which the SEC is now considering as a part of our fiduciary responsibility. The new rules will mean that at RIA that gets breached by a hacker and has material information stolen from clients will have to report this breach within 48 hours. Not only that, they’ll be forced to report this breach to all clients of the firm in writing. Good luck building and maintaining trust if your firm is the site of a massive security breach. Cyber is one of those areas where the price of not keeping up is actually existential to the firm.

The Compound and Friends

Later today, Michael Batnick and I will be talking with Jason Hsu of Rayliant. Jason has been a guest on the podcast before and we’ll be bringing you that conversation as a special episode later on.

We’re also talking to Dave Albrycht of Newfleet Asset Management for The Compound and Friends pod tomorrow. Dave is a multi-decade veteran fixed income portfolio manager who has just been recognized by Barron’s as one of the best fund managers in his category. He is also the recent recipient of a Lipper award. We’ll be talking to Dave about the opportunities in corporate bonds and taxable fixed income in general.

If you register your email address and become a Compound Insider, you’re going to get the first notifications when these episodes become available. Sign up here.

Road Trip

Here’s some shots from the trip so far, including Michael, Kris Venne and I making our way from Denver to the Broadmoor Resort yesterday in our rented Volkswagen Atlas.

Yes, we found great tacos at Ochoa’s.

Jay Tini, our firm’s president, made the trip out here too and is meeting with lots of financial advisors who are interested in applying to RWM. We’re having fun and getting a lot done. Stay tuned!

That’s it from me today, talk soon! - Josh