It's All About Growth

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Hello and welcome to The Way Forward. I'm Jack Otter, and my guest this week is Ben Harrison, Head of Advisor Solutions at BNY Mellon Pershing. We were seeing a lot of changes in the custodian space even before the pandemic turned the world upside down. So we've got a lot to talk about, Ben. Thanks for joining us. We'll just jump right in if that's okay with you.

Great. Thanks for having me, Jack. And thanks. Congrats on your new expanded role at Barron's as well.

Wow, thanks. I appreciate it, Ben. Um, by the way, um, I'm calling you from Westchester, New York. Where are you?

I'm in Westfield, New Jersey today.

Oh, okay, not, not far away, other side of the river. Uh, so it's been almost a year since you began transitioning into your new role, about 6 months I think before you formally became head of the RIA custody business at Pershing. So tell us what the past year has been like. Um, you know, we went into lockdown, what, about 2 weeks after your new role was announced?

Yeah, it's been a very interesting year, to say the least, Jack. But I think as we think about it, there's this great reset happening, and that's happening for us, it's happening for our clients, it's happening in the industry. And as I look back on this year that we just really culminated, it's amazing that this is going to be a point in time where we look back and we say, I would say everything changed in 2020 and, uh, you know, kind of back to your question, uh, about, you know, my, uh, taking on this leadership role during a pandemic, looking back on that now, I really reflect, uh, and think that it's actually ideal, uh, timing in many respects. It was an immersion into the business. Um, really, uh, you know, really we kicked it off right as the pandemic was in the lockdown, uh, started. So it was kind of headfirst. And right into it. But at the same time, it really provided a laser focus on focusing on our people, on our clients, and on our strategy of what we needed to do to really focus on the needs of our business and not only take care of the current situation, but also look to the future. So, there was many key lessons during that time that really, at the end of the day, it validated our business model and our focus and was, you know, very, very instructive in terms of how we think about the future.

Let's take two of those. One, maybe that was, as you said, validating something you were already doing and you realized, wow, I'm glad we were doing that. And then something else maybe that was more challenging than you expected and you had to tack your, you know, change your approach a little bit to make that work?

You know, the things that we learned in the pandemic and really validated our strategy was really the fact that technology is a business imperative. It's no longer a nice-to-have, and really the importance of a strategy that aligns technology and people was something that was already underway. But as we think about it, greatly was accelerated in the midst of, of the pandemic. So that was really important. And we saw this accelerated shift, uh, towards, uh, the digitization of our business. Uh, and really, um, anybody that wasn't already full speed ahead on engaging from a digital standpoint, whether that was client onboarding or, uh, engaging on a regular basis via video conference or, uh, the way in which clients and advisors were going to touch and feel feel the experience of whether it be their custodian or their investment professional, their financial advisor that was just greatly influenced by this time. And as we said, it accelerated. So if you think about everything that was happening in our lives, whether that be our work life, our children's school lives, our personal lives, entertainment, everything, this great move towards digitization was really, really important. I would say the one area that we didn't know how to grapple with or was something that we were all really struggling with at first was the fact that we were no longer in person with one another. It was completely virtual first. So running a business and making sure that you're close to your people, that you're supporting your people, that you are doing everything that you can to support clients in a world where you can't walk into the office and see everybody every day was really, really difficult. I would say we adapted really quickly to it. And probably the biggest lesson there was a people-first strategy was really very, very simple, but so important. If we could put our people in a position where they were safe, had the tools necessary, to serve their clients and do it effectively, then everything else really kind of takes care of itself. So we had a lot of disaster planning in advance of a pandemic. We never really thought it would come to this, but falling back on all those redundancies that we had was just critical. And what we've seen is the advisory space has done a great job in terms of continuing to meet clients' needs and moving the industry forward despite the fact that most people are still remote.

The people thing is really interesting. It's if you had a solid team already and the culture was good, then I feel like the transition was okay, but onboarding new people, starting a relationship virtually without any, you know, person-to-person contact has certainly been tough. So going forward, what are the key priorities now that that might not have been January of 2021 if we weren't in a pandemic, or maybe they're just the same?

So a lot is the same and a lot has changed. I would say as we took an inventory of our business model, again, we were extraordinarily fortunate to be in this business, to have such strong clients. This business is growing. There's a movement that is propelling the fiduciary advice business. And, uh, and we've been, uh, very, uh, very lucky and fortunate to be in a, in a portion of the industry that's, uh, seeing this expansion. So what hasn't changed is really our focus, uh, on the business. And at the end of the day, uh, our, uh, our mission is to, uh, really, uh, be the most trusted and strategic partner to wealth and advisory firms. So, uh, We want to be the engine, the brand behind the brand, to help wealth and advisory firms innovate, scale, and grow. So that's— that hasn't changed. That's critically important, uh, to what, uh, what we're focused on. Um, what has changed is this, uh, incredibly disruptive environment in the marketplace. And, uh, with disruption comes opportunity. Um, so that's the way that we've been, uh, orienting our business. And we took some very specific measures in 2020 to capitalize upon that and to set up our business for success. The first thing that we did was we did launch a new pricing strategy, and this was in the backdrop. If you recall, pre-pandemic, there was this movement towards zero commissions in the marketplace moving in that dynamic, and it was kind of a one-size-fits-all type of model. What we did is we came to the market with optionality., and we, we not only have a zero, uh, commission strategy, but we also have, uh, the traditional asset-based or transaction-based model with open architecture cash, as well as an innovative subscription model. So that was really important. Another thing that we did was we expanded our addressable market. So, uh, you have heard us through the years, uh, talk about the fact that we serve growth-minded, professionally managed firms that serve clients with complex financial lives. That's a big sentence, but we were— a lot of words there. Yeah, we were very focused on that and we remain focused on that. However, we're expanding on either side of that. So we're focused in addition to this emerging RIA segment. This is a really important growing part of the industry, and this is the segment of advisory firms that have $100 million to $250 million in our definition of that. And that adds to our addressable market. There's about 2,300 RIAs that are in that category. And that was really important for us to take our core offering and expand upon that. On the other side of that, we're expanding towards serving enterprise wealth firms. And as you know, there's a tremendous amount of consolidation happening in the marketplace right now. And that's creating this new category of firms that are large and complex and multi-business line and multi-location. And we've got unique capabilities at BNY Mellon Pershing to serve those firms. So a lot of the same in terms of our focus, but, you know, really capitalizing on market disruption and what we're seeing in the marketplace, which we believe is going to set us up for success over the next 3 to 5 years.

That's a tall goal to be expanding in two kind of opposite directions, frankly, working on two things. I want to find out if you can sort of pivot to the advisor's perspective and ask you what you think the winning strategies for firms will be this year and going forward. That may be a different answer, I guess, for the $150 million firm as opposed to the, you know, a $10, $20, $30 billion firm that's seen huge growth organically and through mergers and acquisitions?

Yeah, it's interesting, Jack. You know, what we see is actually there is a lot of similarity, even though those are different business models and different clientele. The top challenge and the number one issue that we see for advisory firms is driving growth. And every meeting that we go to, it's the same type of narrative, how they can continue to grow, whether that's organically or inorganically, particularly with the backdrop of this remote virtual-first world that we're living on. So what we've seen is the reliance on market performance referrals really throughout the life cycle, at least for the last decade, for financial advisory businesses is just so dependent upon market performance and referrals. In fact, we've seen recent studies that suggest that advisory firms get 70% of their new business from existing clients. And that's great. It's really important to have a great referral strategy and those are the the best warm leads that you can get. But in order to be successful in this environment, you really need to have a more systematic market-led, business development-led approach in order to, in order to differentiate and to add. So growth is the number one challenge that we see regardless of shape or size.

You know, you've always spoken a lot about growth, and it may seem obvious, but I also know advisors who are where they are and happy where they are. Explain why growth is so important, especially now. I mean, I think a lot of it has to do with technology.

No, absolutely. Growth is extraordinarily important because we're in a very competitive environment, and that competitive environment is getting even more competitive. Uh, everybody wants to be in this space. Uh, so we see this convergence happening in the marketplace. We see the major, uh, wirehouses moving towards a goal-based fiduciary advice model. We see obviously the boutique RIA, uh, business, uh, in that market already. We see private equity coming in. They want to bite at the apple. So this, uh, competitive environment is just getting extraordinarily tough. And, uh, really in terms of, uh, organizing your business so that you have the capacity for growth. So, uh, that's really where we see, uh, this need for scale, this need for the ability to grow and to onboard, uh, new accounts and new advisors and, uh, expand the the set of services and solutions that you're providing to, to end clients. So much of that, as you, as you mentioned, is technology driven and leveraging the technology coupled with the people in order to set yourself up for that capacity to grow is one of the major things that is so important in this environment.

So, so you said something about capacity for growth. How do you define that? I mean, obviously, you need to provide a good enough service so that if 70% of your business comes through referrals, you better have people who want to refer your business. But, but what are the other things that, that distinguish a firm that has that capacity for growth from one that doesn't?

Yeah, that's, that's a terrific question. We talk a lot about that. We talk about what separates a growth-oriented type of firm and what do they do differently than, than others. And number one, they are built for scale. They have that organizational design. In order to structure and capture business. So, you also have heard us talk a lot about professional management, and the idea there is being very purposeful with your human capital and letting advisors be advisors and work with clients and develop new business, but have professional managers really lead the business of financial advice and have a CEO and a CFO and a director of human resources, you know, really focused on those types of things. Another attribute of a growth-oriented firm is really a tech-forward and creative architecture. So really taking full advantage, and this is so crucial right now in what we're seeing, taking full advantage of the digital solutions as well as a communication cadence. So think about our business in the way that we leverage digital tools and we create a list of target firms that we want to work with and we reach out to them on either email or social or omnichannel type of marketing way. And then we continue to nurture those leads through time. And as events happen in the marketplace, maybe there's something that happened in the custodial space and we have the opportunity to market to them. We're going to set that in place. Advisors need to think of the same type of nurture campaigns and really utilize tools and resources and social and digital tools in order to, to focus on, on those. And then, and then finally, it's really around shifting to meet the clients where they are and really knowing your client segment extraordinarily well. What their goals are, what it takes in order to make sure that you've got the right pricing mix, the right product mix, the right focus on that end client, so that when a need arises in the marketplace, you're there to help, uh, with whatever challenge those clients have.

So let me ask you about the, the pricing model. Um, do you think fees are holding steady? Are they going down? Um, do— if they're not going down, I assume an RA has to do more to earn that fee.

Well, you're exactly right about that, uh, Jack. Um, and what we've seen— we do a, uh, we do a study, annual study, with Investment News, and, uh, it's, uh, we do a fee, uh, and, uh, and relationship survey each year. And what we've found is, uh, we've found that over the last decade, the advisory fee has stayed very, very consistent and steady. So in the segment of firms traditionally, you know, high net worth type of pricing, we see a 75 to 85, 80 basis point fee, and that hasn't compressed over the last decade. Every time I think it's going to, it hasn't compressed. But what we have said and what we have seen, to your illustration, is we see that advisory firms, while they maintain that fee margin, they're doing more for that fee than they ever have before. It used to be solely investment-related performance, and, uh, now we've seen that they've obviously expanded to financial planning, to a variety of other services, and, uh, are being pushed to do more and more in order to retain that fee.

When you say the 70 to 80 bps at high net worth, where is that cutoff? And below that, is it around 1%?

Yeah. So the mass affluent type of pricing, we would see a 1% type of fee. That would be really in the research that we have, anything up to about a $2 million portfolio would be in that 1% area.

Gotcha. So I had Josh Brown on this podcast a while ago at Ritholtz. Sure. About a billion dollars, but their social media presence swings way above that weight class. And one thing that they do is I believe it's after 3 or 36 months, they send clients a note and say, congratulations, we're lowering your fee. And the logic is sort of threefold. One, you mentioned referrals and growth. Clients who just got a price break tend to tell their friends. But also, the logic in terms of hours worked makes sense, right? After 3 years, you might have settled into a groove. Sure, there'll be life changes, but a lot of the work has been done already. So, I thought that was an interesting model, and I wondered if you're seeing that elsewhere, or is that a Ritholtz specialty?

So, I love that. I love that thinking, and I love Josh's book right now. I'm actually reading it, uh, in terms of how I invest my money. It's really cool to hear, uh, or to read the stories of financial professionals and what they're doing.

Yeah, it's a great concept.

Yeah, it really is. Um, so, um, so I love the creativity and the thinking around the evolution of the experience. So that's one of the fundamental, uh, issues, uh, that we're seeing right now in this AUM model. The AUM model, while it is, you know, what the attributes of it that investors really like is there's complete alignment, uh, with the investor and the advisor. If you do well, I do well type of mindset, uh, in, in a lot, uh, of, of good things, uh, with that concept. But there are definite inefficiencies there. There is Number one, the Ritholtz, you know, the Josh Brown methodology there, which is you do a ton of work at the onset of a relationship. You do all of the planning, you do all of the collection of data and paperwork, and it's very intense at the beginning of a relationship. And then, you know, it's a check-in and a rebalance. And, you know, as things happen ongoing, there is definitely a a trail-off in terms of the human capital required to look after relationships. So I think they're on to something there. There's also other inefficiencies. It doesn't work well in a bear market. So at the beginning, at the beginning of the pandemic, when we saw the market just collapse, and luckily that was, you know, very quick recovery, but advisors were working tremendously hard. They were firefighting, they were talking to clients, they were doing everything, and their billable fees were obviously on the decline. Sure. And, and we recovered quickly, and, and everybody kind of forgot about that. And then finally, um, there's a major problem with the AUM model when it, when it, uh, takes into account gathering new emerging wealth. So, you know, taking a bet on a high earner that, uh, is, uh, doesn't have a significant amount of assets yet to build but will in in 5 years, 10 years, 15 years. Advisors, uh, need to really think about that. So there's a lot of creativity, uh, that needs to happen, and I think that we're in the early stages of a revolution happening in terms of how, uh, we see, uh, advisory fees build in the future.

Interesting. Any hint as to what that creative solution looks like?

Are you seeing more hourly fees, or We, we absolutely see, um, in our business, we see advisors utilizing flat fees, we see advisors using, um, uh, project-related fees, we see advisors beginning to think about subscription. I mentioned it, that we have a subscription offering. Advisory firms haven't yet truly adopted a subscription type of offering, but we— all of our other Services that we're consuming, uh, in the, in the world these days seem to come with a subscription. So that's nascent right now, but I think that, uh, we could see that, uh, see that evolve. Uh, but it's going to be interesting.

Yeah, I mean, private equity's got to love that, right? If, if you have a public company and you change it to subscription or software as a service, uh, your stock price triples.

Yeah, absolutely.

That is the revenue model that investors want right now.

I think one of the key shifts that we're going to see, um, is this— historically, financial services has been built on product fees, and, and now that's shifted to an advice fee. But I really believe that in the not-too-distant future, it's going to turn into an experience fee. And, um, that's something that, uh, advisors have an opportunity to, to focus on.

Wow, that, that is interesting. And that sounds like it might make a lot of sense in terms of the wealth transfer that's coming. Uh, you make that experience good for the next generation, and, um, and you won't face that problem that many advisors will, which is, uh, the, the kid— when the kids take over, they're going to say sayonara.

And listen, 87% of, uh, kids, when they get the wealth, they fire that current advisor. So that's a major problem.

Yeah, it's a big problem. Um, alrighty, uh, so just briefly, um, before we get to the, the final question here, There's obviously some serious competition going on in your business for the independent advisor's business, and it's gotten really interesting with all the consolidation that's going on, the pandemic as well. I'm hearing from advisors who were TD advisors and thinking, okay, am I gonna stick with Schwab? Am I gonna look elsewhere? Is there any insight you can give us as to your business strategy for taking advantage of this?

Sure. So the first thing, Jack, is we're tremendously respectful of our competition, and we know that this is an environment that there's plenty of business for all of us. As I mentioned, there is this very much a movement towards the fiduciary advice business. However, when there is disruption, we view that as a great opportunity for us to, to grow our business. And we have invested significantly into the RA custody business at BNY Mellon Pershing. It is a growth business for us, and it's something that we aspire to capture market share in. So that's very purposeful from the senior leadership team in order to serve this, serve this market. Place. And what we're focusing on is really what we do best. And what we do best is help advisory firms scale and grow and compete in the marketplace. And that competition, to your point, is, is absolutely heated and encroaching on their businesses today. We're the only business-to-business provider. And we have a deep alignment with those firms that are on our platform. Because at the end of the day, uh, it's very simple. When their business grows, our business grows, and this is the only business that we're in. So we've got a laser focus on client experience, uh, a high-touch, uh, service model. We know that that's an imperative for advisory firms, and they don't want a call center type of, of environment. They want dedicated, teams that they contact and know that person that's picking up the phone every, every time or, or engaging with them digitally. And, uh, we also are, are uber-focused on the technology, uh, experience and making sure that we've got an integrated strategy to, uh, work with the top fintechs and, and, and make sure that we've got a, uh, very robust, uh, API, uh, integration strategy with them. So, uh, disruption creates opportunity.

Uh, you, you said B2B, and that obviously is something that differentiates you a bit from the others in that there isn't really a retail-facing Pershing site where somebody can go trade. Uh, does that help you, uh, in making the case to advisors?

Well, it absolutely helps from an alignment perspective, um, and there is no firm that has greater alignment with their clients than BNY Mellon Pershing. And the fact that we are the brand behind the brand and really come to work every day with the, with the focus of serving the firms on our platform as our core, uh, as our core revenue model is absolutely attractive. And one of the other things that's really interesting about the pandemic environment was the significant volumes we saw on all of the technology players in the space in terms of record trading volume and account opening volume and all of the other, uh, volume-related items that come along in a very volatile market. In our website and, uh, and trading infrastructure remained up and consistent and stable throughout an incredibly high volume and volatility environment. We're proud of that. So their strength, stability, and resiliency, while they may seem boring in an everyday type of landscape, they're really, really important when it comes to being able to be in the market when you need to be.

Yeah, when you need it, you need it. Uh, all right, well, thank you, uh, Ben. So in Barron's tradition, of course, we cannot let you go without asking you for at least one piece of actionable advice so, uh, listeners can put down their iPhone and just go right and execute it.

What do you got for us? Sure. So I would say change is everywhere in our industry, and that can be, uh, scary and cause trepidation. But what I consistently talk to my team about and our employees about is we need to embrace that change because just what we were talking about, with change comes opportunity. And I also talk about with my team to be very deliberate about what this means for our business. You mentioned this earlier. You can't— there are finite resources. You have to be very specific about where you're going to allocate those resources. And what we do is we encourage our team to be very deliberate, to envision where we want this business to be in the next 5, 10, 20 years, and to make the very strategic prioritization to put that, put the motion and put those pieces in place, to get us there. So, uh, that's what I would share with the listeners.

I think whatever business anyone's in, uh, the sentence, but that's the way we've always done it, is probably not going to be a formula for success, uh, in the coming years. We would agree. Uh, Ben, thanks so much for your time. I really appreciate it.

I hope our listeners enjoyed it.

Great.

Thanks, Jack. And thanks to everyone for tuning in. Come back next week for an episode hosted by Steve Sandusky. Steve will be talking to Annette Simmons, who explains how improving your storytelling skills can boost your business.

Thanks again for listening to 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.