Faster Pace of Consolidation

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Hello and welcome to The Way Forward. I'm Scott Winger, editorial director of Barron's Advisor. Today we welcome James Poore, CEO of Kestra Financial, one of the nation's top independent broker-dealers with more than $125 billion in assets under advisement. James and I are going to discuss M&A, advisor retention, federal regulation of the wealth management industry, and how some advisors have become as skilled at, at finance as psychology. James, thank you very much for joining us.

It's great to be with you, Scott.

James, you made several industry predictions 3.5 years ago, foreseeing a faster pace for M&A activity and fintech, among other thoughts. Given current conditions, those forecasts still seem relevant for the foreseeable future. Do you agree and do you have any other forecasts?

Yes, I do. I totally agree. You know, it's always a little risky putting predictions out there and then having someone kind enough to bring them up 3 years later. So I guess I got lucky that a lot of those things have come to fruition. In fact, I would say the last really 18 months, especially given the impact that COVID has had on our industry, a lot of those predictions have accelerated even more around M&A consolidation and so on. I really think that the industry is continuing to really become reactive based on what's demographic changes in our country. The advisors predominantly in our industry are the boomers that they serve. So, that is driving a lot of that consolidation. That's driving a lot of the acceleration around it. And I also think that what's becoming abundantly clear, it's going to become increasingly difficult for smaller advisors to compete. You're going to see larger regional sort of investment advisory and wealth management firms become really powerful in their regions because they're going to be able to deliver more value, stronger, consistent cadence of communication, and overall more ease of doing business for consumers.

To a certain extent, that's actually good news for the smaller advisors. I'd like to get your take on that because it means there's opportunities for them to either get acquired or affiliate, if they haven't already, with some of the leading IBDs. How do you think that'll play out?

I would say it's a great opportunity for some advisors. One of the great things about our industry is it's built on independence. It's built on entrepreneurs and all of that spirit. So, for those that are willing to grab the mantle of the future and recognize that they're probably better off not only as business leaders but as providers of service to consumers joining something larger than themselves, I think they'll be quite successful. I also think you'll see a lot of folks that are very resistant to that change. They became entrepreneurs for the very fact that they didn't want other people and listen to other people's rules. That's not bad or good or indifferent. It's just the reality of people who are becoming, you know, have become entrepreneurs for a clear reason. Regardless, they're going to need to find ways to compete. Firms like ours will helpfully give, will certainly give them strong platforms to do so, but there's still going to be real clear value in large regional businesses.

Let's talk about that value prop for, for a few moments. Kestra has 2,400 financial advisors and the firm's professional retention rate since 2007 is 90%, a very high number, especially given all the poaching and, and moving and opportunities that advisors who have built successful businesses are seizing. How do you make that high retention rate stick?

Yeah, well, I tell you what, it's quite intentional. What we focus on in our organization is culture first, because we think culture is everything and it's what creates real stickiness to organizations such as ours. We always have to have an eye towards making sure we're serving the entrepreneur. You have to respect the fact that they are the business owner. They've worked very hard to build their client base and they want to execute and serve, execute on their business and serve that client in the way that they envision. And you have to respect that and make sure you're serving through that standpoint. And you have to keep advancing the value. It's that simple to me. And when we focus, we keep it simple. We focus on our mission, which is 3 words: empower advisor success. When we have everyone at this organization focused on that every day, we are able to maintain really high retention. And continue to attract some of the best advisors in the industry.

How do you distinguish the way you've articulated that vision from the many competitors that Kestra has? They, a lot of them try to talk about respecting the entrepreneur, entrepreneur, and understanding that it's an affiliation more than it's an employee under an owner's thumb. What do you think makes your value prop different than the competitors that you're vying with to get the best advisors and teams?

Well, I think the proof is in the pudding. And one of the things that our sales team and our business development leaders do extremely well is bring the culture into the process of telling our story. And we often do that by having other advisors engaged in expressing what they have, how they've grown by being a part of Kestra, the value that they have evolved by being part of that community and that culture. And, you know, we just make sure that we're telling that whole story. Culture is so important to us and what we do that we lead with it. And then there's the wonderful fact that goes along with that cultural sell, if you will, in that, you know, we have one of the highest average production per advisors in the business. In terms of average production per. And so what that does is that shows that we have very successfully built an organization that attracts more upstream wealth management firms that are fee-oriented, predominantly fee-leaning, and people want to be a part of a culture like that.

I got it. As you look to grow via acquisition, something Kestrel has done over the years. How do you define what makes a worthy target for the firm?

You know, it's— this is an unbelievably important thing. So again, I'm going to go back to a word that I've used a lot so far, and that is culture. Culture is absolutely everything in a transaction. Now, business mix, you know, how do they serve their clients? What are their history? All of those things are incredibly important. But really, we want to understand if someone is a cultural fit.

Sorry to interrupt, but it's as much for your due diligence as for theirs. Do they understand your culture and can you—

Absolutely.

—get to the depth of theirs to make sure that ultimately they'll mesh?

And that's where we spend a lot of time. So there's a quantitative and a qualitative part of due diligence. And when you're doing the quantitative side, a lot of that is really clear. It's numbers. What percentage of the revenue is fee-based? All those things that are really important to an acquirer. But the qualitative part are relationships. How do they get along with their employees? How long have they held their clients? What's the retention rate and the longevity of the client base? All those sorts of things, turnover, that we really focus in on to really understand the people that we're getting involved with. And this involves a lot of face-to-face meetings, dinners and so on so that we can really get to know who we're going to be partnered with.

It seems that it's been not just weeks or months, but even a few years now that when you look in the headlines online and investing coverage, that more than I think— well, not everyone, of course, but many people would have predicted— are about cryptocurrency and about the opportunities in Bitcoin and the perils in investing in crypto. Um, many of your competitors have made crypto investments, uh, easier to include in client portfolios. What, what do you think of, uh, uh, building out asset allocations with a crypto allocation? And is it something that, uh, you want advisors affiliated with Kestra to be, uh, talking to clients about?

We have intentionally been be more cautious here. I don't, for one, view crypto as something to lean into. Our organization, as a wealth management leader, is— we're a stay-rich organization, not a get-rich organization. There's a lot of really productive ways to diversify a portfolio without leaning into what some may view as still sort of a fringe sort of concept. And I recognize the traction that it has, but I still think it's really early to start placing too many bets. So what we've done is we've basically allowed advisors to use crypto-related registered funds, but there's very low adoption. And again, this is just about maintaining and thoughtfully growing the wealth of clients, not leaning into aggressive strategies.

[Speaker:TREY_LOCKERBIE] So a very cautious approach. Certainly, the volatility, we've seen periods where there's been enormous gains and then enormous pullbacks, and that can be disconcerting, maybe to say the least, for many clients who are now looking for that kind of solution for their money. For sure.

But if there's one thing that I've learned from almost 3 decades in this industry, it's that risk is only viewed through the downside of risk through a lot of clients. The fun of watching and excitement of watching something go up and getting to mention that you were a part of it is fantastic for an investor. But the downside risk is very real. And just because if something's going up as rapidly as some cryptos have, as we've also seen, they can fall just as fast. So we exercise an approach there that's focused on abundance of caution.

Appreciate those thoughts. Certainly some enormous changes on the political front in this country. And with the change in leadership in Washington this year, there very well could be changes on the fiduciary front, starting with the fate of Regulation Best Interest. What do you expect to happen this year?

Well, I certainly hope there aren't any changes in Reg BI, but Time will certainly tell. I think that regulators, I would hope, would consider that we've got to quit moving the rule book around and we need to let some dust settle and see how the new approach works. Largely, I think the community has accepted and is an advocate for the framework of Reg BI. And I think it's a really good way to help protect investors. Before we go change the landscape, let's actually give it a little time and see how it works. Our concern at the DOL is actually around the independent contractor rule. I do believe there are businesses and models that are probably abusing that approach and that rule, but our industry is certainly not one of them. We need to empower entrepreneurs to be able to take independent-minded advice out to investors. We all need to work to educate lawmakers and regulators on the differences between our business models and some that they may be trying to target and make sure that we're not the baby that's going to be tossed out with the bathwater.

Among your clients, among your firm's clients, what fiduciary expectations do you think they have?

Again, I like to keep things in simplicity of twos and threes. I think the expectation of a client is sound advice, that the client is put first in a relationship, and that the advisor is going to do what's right. It really is just that simple. Our industry has a way of really overcomplicating that with different regulatory structures and so on that loses track of the fact that consumers don't know the difference between a broker-dealer and an RIA and Who's a fiduciary legally? Who's not? And all these different structures. We as an organization are really focused on just making sure that we affiliate with the advisors that do view clients through a fiduciary lens. And I think that our industry will be better off if we can all continue to evolve in that direction.

Can I interpret that as your support for a fiduciary standard?

Well, I do believe there are fiduciary standards. We're fiduciaries through RIAs in the the vast majority of our business is RIA-based. And then Reg BI certainly has best interest standards in it. It's, you know, it's in my eyes, just 6 one way, half a dozen the other. We are responsible for what we suggest clients do.

I appreciate your parsing it that way. It can be complicated given, as you say, it's regulations and that the landscape has been shifting the past few years. And sometimes the definitions can be difficult to draw the fine line between what's fiduciary, what's Reg BI, and what actually best serves the client's needs. So I think the debate has been a meritorious one, and we'll watch for more on that. Something you've said I wanted to get into with you. You once said that the best professionals in our industry are as much psychologists as they are financial advisors. Can you elaborate on that for our listeners?

Oh, I would love to. Those thoughts of mine are really rooted in from time to time, new business models pop up such as robo or do-it-yourself platforms, and the people rush to predict the end of advisor-based sort of context in our business. This is what I know, again, from 3 decades of being in this industry. When a pandemic hits or a mortgage meltdown causes the market to get crushed, advisors are often the only thing that stands between their clients and really bad decisions. WebMD didn't put my doctors out of business because I can't really go on and figure out what's going on with me or the health situation. And while I think that those sorts of platforms have a really important place in, in the industry, and I really do feel that way, I think that once investors have substantive wealth, and I would peg that at maybe $250,000, where you have to start thinking beyond Hey, I'm saving for a house or I'm saving for a car. And you have to think about retirement and funding your kids' education and what's the future of your parents' financial needs, all of the things that thoughtful financial planning and wealth management advice can bring to the table. I just am a huge believer that advice matters. And that's why these great people that do this work are, you know, psychiatrists or psychologists just as much as financial experts because they spend time working to keep people in the market. And the second quarter of 2020 is proof that that is the longer-term right solution.

Just last week, I read that Kestra announced a new head of cybersecurity and technology risk. The threats are growing really fast, more sophisticated, more perilous. How can financial firms and their clients feel sufficiently protected?

Yeah, you know, Scott, this is real, and I don't know of a CEO in our space that this isn't one of the things that keeps you up at night. I think that what's important for advisors and clients to think about is it is a serious and growing threat. They should partner with firms that are making investments in this space and are really focused on it. And I would also say that this is an area where both industry regulators and the government needs to come in and do more to help set standards and build defenses against it. And then the final thought I would throw out is this, and we preach this a lot up and down our organization. One of the key— one of the biggest challenges is that allows these perpetrators to do this is social engineering. It's not that they've been spectacular at finding a way into your system. It's that somebody opened the door unknowingly. And so we really spend a lot of time focusing on educating employees and advisors and their staff on making sure they don't open those doors, the getting tricked into clicking on an attachment or, you know, giving a password out are the vast majority of the problems that we see in our space.

It's also got to be frightening just thinking about— you're right, there are open doors and there are so many doors, and not everyone is as attentive in every moment as they could be or should be. And then there are just determined efforts, as we saw in another industry, Colonial Pipeline, where determined hackers got in, stole source code, and merely even just by shutting off a system created enormous havoc. You were suggesting a moment ago that it's partly company and industry responsibility and government as well. I guess you're saying that on every front, we need to ensure that intruders can't find their way in. For sure.

And most of them are foreign. And so that's why I actually do believe it's a state and to some degree, not only a financial security issue for this country, but it's a national security issue for this country.

Certainly a big issue for this industry and for the country as a whole is diversity and inclusion. And diversity, the lack of it, afflicts so many American workplaces and industries, particularly personal finance and wealth management. Tell me about the thinking at Kestra on addressing this.

Yeah, we've really attacked this in a lot of ways. And I would also say that we're nowhere near being done. So we have multiple initiatives. So by way of example, before walking into this podcast, I got a report. We're about a third of the way through our teams where we're doing almost a full day of unconscious bias training. People are really walking away from this training learning a lot about themselves and how easy it is to, you know, be a part of the challenge rather than the solution. So I've been really inspired by the feedback that we've gotten from employees. We're also working to find, and we have several paths we're exploring this, what can we do that is more community-based? You know, we have Across, we have 650-some-odd employees, multiple locations, and probably 4 or 5 larger employment hubs across the country. We make sure that we're getting far more involved in the communities, particularly through education because time has really shown us that understanding personal finance from a young age, learning how to make long-term deferred gratification sort of decisions, is always what tends to create better financial lives for all people. And so that's something that we're really looking to get involved in. We've also been taking a hard look at sort of our hiring practices and making sure that we have diversity candidates in that process. And then finally, we started an intern program at one of our businesses as a proof of concept that is really focused on diversity candidates and bringing young candidates in out of colleges into the financial services business for summers so that they can learn the industry and see how they like it. And that way we can start building relationships.

I'm curious, did you— have you had a chance yet to take that diversity training yourself?

I have not. I'm scheduled to do it the, I think, the second week of June.

So you're making it where everyone from the top to the bottom of the company will take part in—

Every single employee will do it. Has anyone—

I'm just, again, curious. Has anyone shared any particular insights yet about what they discovered about themselves in ways that even with the best intentions, they might find themselves making decisions or having thoughts that can hinder someone else's progress or advancement in a way that isn't fair?

Yeah, I think what we found is that there are some percentage of our team that never really understood what unconscious bias was and that we all have them. It doesn't matter what race or sex or creed you are. Everyone grows up with certain perceptions and bias. And it's really sort of opening people's eyes to that, that you could be the best, most well-intended person, but you might not realize that we all tend to lean in intentionally towards people who are more like us. And, you know, that has an impact on your environment and those around you. So people have enjoyed sort of having their eyes open to that a little bit and helping fine-tune the view, if you will, into that situation.

Yeah, no, I think that's a great way of defining it, that we tend to, as you put it, we tend to lean into people who have had similar experiences. And I think being open-minded that there are so many ways to successfully make it to the finish line or to accomplish a lot in our society and embracing those other paths, ones that we ourselves didn't choose, can really help enable many more people to be on those paths. For sure. Don't want to sound too preachy here, but I think you're right that it's exploring what's in our minds and our hearts that helps us broaden opportunity. Yeah, I noted that in the past many months, you've made some key executive hires. And I've wondered, how has it been harder, or has it been harder, and then in what ways to integrate these new executives during the COVID pandemic?

It has been really interesting. We have— we've hired a lot of executive talent into this business over the last 15 months, and including one that we hired last week that we'll announce very soon. I'll tell you what, it was a big concern. It was a very big concern. But what's been really interesting is the things I was concerned about really have not come to fruition. And I'll tell you why. When you hire great talent at our company, in this industry, any industry, great talent really understands that it's not just about IQ, but it's about EQ and making sure that you're touching people. And so we had the good fortune to hire executives that understood that they had additional sort of onboarding hurdles in front of them. To be an effective leader in this company. And they have all rung the bell. We hired a great new chief information officer. He's done an amazing job onboarding into this company and building out in very fast sort of suit a phenomenal sort of tech infrastructure. And then we hired a new president for Kestrel Financial. He's done an amazing job at onboarding and building relationships. And both look forward to that more interactive, personal sort of touch that we're all looking forward to getting back into.

But I imagine for the latter hire that, you know, just a few years ago and hopefully a year or two from now, that person very much would have been on the road, you know, meeting people, getting to know for sure local culture, local preferences, how things were going, really seeing specifics. Of course, you can do that on Zoom. You could do, you know, 8 meetings a day in different cities. You could do 1 or 2 if you had to do them in person. But sometimes it could be, you know, you could have the volume of meetings, which is an advancement, but at times it could be harder to absorb the nuance when it's over video. Yeah.

And look, so he, you know, he attacked it via video at first. And what we found, though, especially especially over maybe the last 6 weeks as things are just opening back up in the country thanks to vaccines and just, you know, economies are bouncing back, people are getting back together. And so, we're on the road. In fact, I'm heading to Denver with him next week to sort of do an official sort of introduction to a bunch of great advisors in that town. He actually is in Long Island this week meeting with a lot of our advisors. So, he's doing exactly that. This is a relationship business. And the fact that we've gone 15, 18 months without being able to really nurture and continue and evolve those relationships has been a challenge. But we are really leaning in and being aggressive about it, including that new leadership.

You mentioned hiring a new CIO a few minutes ago, and it made me recall a quote that you had given a few years ago that technology will help advisors become more efficient. And add scale to their practices. How significant, you know, really at the core of it, is technology in the battle to attract and retain the top advisors and practices that you want at your firm?

You know, our industry has become one of the haves and the have-nots, and the have-nots in our industry continue to lose quality advisors and assets and value in their businesses. And those such as us and some of our competitors who have leaned in, made substantive investments, ongoing investments in technology, are the ones that are continuing to grow and recruit and retain really effectively. So I always see it through the lens of tech and culture. Technology and culture are keys to value. And it's less about the specific components of technology It's more about the promise of technology. It's more about creating an ease of doing business for the advisors and for the clients. It's about that advisor and client experience that you're helping to create, making sure it's end-to-end digital, which is where we and several of our other competitors are going. And ultimately what that does is it should create and does create more revenue-generating time for an independent financial advisor. So, I'll remind you that the advisor base in this country is shrinking, not growing. It's another reason that I really believe, as we mentioned at the top of the broadcast, that the consolidation is real and that smaller firms are going to need to consolidate into some of the larger ones in their communities to be effective and competitive, is that there's going to be fewer advisors and there's going to be more clients who need advice. And so you have these, these numbers going opposite directions. The only way to solve to that is making sure that you have great technology, great communication, great ability to lever that talent within your organization. And that's what at Kestrel we're working really hard to help build for the people we serve.

I appreciate your sharing that thought, uh, and I appreciate your thoughts today. And As a final question, I'd like to conclude with our Barron's tradition of asking our guests for one final actionable idea that listeners can start using right away. Can you tackle that for us?

You know, let me, let me stick to one of my more simple ones. And this is, it's going to be advice instead of a practical idea, but I think it's really important. And this is something I plan to share with my oldest son who's graduating from high school on Saturday.

Congratulations, by the way.

Yeah, thank you. Thank you. Quite a big deal for our family, sending our first kid off to college. So, um, this is what I will tell my son, is that there is a quick and easy solution to almost every challenging problem, and it is almost always the wrong one to pursue. Um, you know, I've built a life and a business that focuses on perseverance and deferring gratification. And so, as advisors build their businesses, I recommend and I suggest that they build them in a way that is just more— it has to be more than advice and sales. You have to think about an operating model. You have to think about long-term value of your business because it's probably going to be the biggest asset that you ever own as an entrepreneur and you need to make it the best that it can be. So there's my actionable item slash advice.

Oh, I love that. And I love that it's, uh, family values that you're sharing with us. Well, James, thank you very much for your time and sharing your perspective. And thanks to everyone for listening. Tune in next week for our Barron's Advisor Podcast, Actionable Intelligence with Steve Sandusky. I'll be back in 2 weeks with another edition of The Way Forward.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.