Ray Sclafani: How Advisors Can Gain an Edge Today—and Tomorrow

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 Barron's The Way Forward. I'm Greg Bartolis, and my guest today is Ray Scalfani, the founder and CEO of ClientWise, which is Barron's Advisors' exclusive coaching partner. Ray is a professional certified coach and has been in the industry for more than 35 years. Previously, he spent 20 years at Alliance Bernstein before founding ClientWise 17 years ago. Ray, welcome to the program.

Great to be here with you.

I'm really excited to talk to you because right now there's an awful lot going on in the industry. Volatility in the markets, et cetera. And you've been plugged into the market for— into the industry for a very, very long time. And I want to touch on topics that advisors really need to know in order to get an edge today, because the amount of disruption is definitely high and increasing compared to years and decades in the past. So let's start with what you think is top of mind that advisors need to keep in mind.

Well, let's get into it. There is lots of volatility and lots of uncertainty in the market. Marketplace. It doesn't take much to look around the world at lots of uncertainty, but the best in the business today are really grounded and focused on their client and the value creation in building a multi-generational business. And so I've talked a lot over the last few years, especially about this idea of building an enduring firm and what it really means to do so. So irrespective of this environment, there's such a wonderful way that advisors can be connecting more deeply clients and building that multi-generational business. The needs of the next-gen client are going to look different than the needs of their boomers, their Gen Xers, and advisors want to start really thinking about segmentation of their client roster and who they're really building their firm to serve because the needs of each of those kinds of clients will look different.

And what are the best advisors doing on that level?

The best advisors are actually building a team of next generational professionals that they're recognizing that most don't want to do work with mommy and daddy's broker or advisor or agent. They want to actually work with somebody that looks like them, that is kind of the same age or generation who brings fresh and new ideas. I think it's been true for many, many years, decades, that the advisors who are growing at the most effective rate were the ones who were laser-focused on who their business was built to serve. And in today's landscape, when we start looking at Gen Z, we're looking at the millennial, two segments within Gen Y, we're recognizing that those populations are larger than any population we've seen. And the women and the transition of wealth to women in the US is off the charts. The data is screaming. I remember back in the mid-'90s, you know, we used to say, "The boomers are coming, the boomers are coming, the boomers are coming. Wow, they're here. And what a profound impact they've made for generations." Well, truth of the matter is this next couple of generations coming behind that group is gonna have a wave of impact in the industry. So what are the advisors doing? They're thinking about ways to serve those clients differently right now.

And when advisors are hiring younger team members to serve these people so that the clients look like, if you will, the advisors, are they, once they're seeing success, assuming they do, are they emboldened to dive in even more? Or do a lot of them just stick to a steady trajectory of, well, let's wait and see and see how things flesh out? I mean, what's the conversion or zeal for the buy-in, if you will?

Well, it's clear the clients want that kind of relationship. And at least what we see in the coaching work that we're doing here at ClientWise, and I lead a team of 45 professionals and growing today, 27 of which are coaches, master certified or professional certified. So we feel like we've got a good data set of what we're seeing in kind of patterns. This idea of building something that's enduring, you know, that's part of a vision that advisor has or doesn't have about what they're trying to build. And so when they're thinking about team members, having team that's more diverse by gender, race, and age, by developing those people, and probably the most important thing, if somebody's listening to this podcast and like, okay, I'm all in, we need more women, we need generational, we need somebody in their 50s and 40s and 30s and 20s, I'm all in. The one message I hope everybody walks away with is the support. The support. If you're gonna build a multi-generational, multicultural business, one that's built to serve clients multi-generationally, you have to support those individuals. Those team members need written professional development plans. Those team members need weekly one-on-one meetings. These team members need support in a different way. They need more mentorship. They need more professional development. They need to shadow, you know, the senior advisor or advisors or controlling owners on appointments with clients. They need to figure out how to acquire the technical skills so they can provide advice and guidance. Man, that takes time and investment in capital. So, you know, you gotta have a budget to attract and retain and develop. You've gotta have somebody on the team who's committed to developing those people. There's gotta be weekly communications. There's gotta be monthly and quarterly performance reviews and feedback. So Greg, it isn't just, what I'm seeing among teams, there's buy-in, there's support, there's sustainability and longevity when there's a commitment to developing those people.

And in terms of hiring people to act as support, and I know that can manifest itself in a number of roles, are advisors, or should advisors be looking more out of the industry? Because I mean, there's often been this refrain of, oh, there's not enough young talent, et cetera. But a lot of times the people looking are a little bit, have blinders on and often want certain boxes checked of, oh, they got a degree from here, they studied this or that, but there's so there's so much talent and there's so much ability amongst people from all walks of life that likely could shine at these firms. So I'm just curious to explore that. How does that play out?

Yeah, it's a good question. For sure, broadening the scope and looking for talent wherever you can find talent is critical. The latest data points to the fact for the first time in a long time, we're actually seeing the number of advisors in our industry expand. And I think there's been a shift. The shift, you know, historically was, you know, sort of somebody got into the business back in the '80s and '90s or early 2000s, the emphasis was around sales and focusing on finding new clients. And I think what I've seen is a pretty dramatic shift from just hiring somebody as a sales professional. By the way, 8 to 9 out of 10 of those never make it anyway. And so it's the unicorn, you know, 1 or 2 out of 10 that end up air quote, making it as a quote, sales professional, but the advisor who's gonna succeed today, sure, the business needs to grow. Most businesses are growing through referrals and we can talk about growth in just a bit, but I think the relational skills, the technical skills, and the leadership skills, I think there are 4 buckets of skills. So where an advisor choose to cast the net, whether it's looking at CPA firms, looking at law firms, Looking at all of the universities now that are across the country, many are developing CFP standards and helping graduate young professionals with technical skills and some relational skills and some leadership skills, but maybe not the sales skills. You know, the old days, it was the Lone Ranger that needed to go out and eat what you kill, hunt, find a client, bring it back, you know, to the barn. Great, now we've got a client. But today, teams are hunting in packs. The young professionals are doing it different than I think the, here's a Yellow Pages and a White Pages and smile and dial and bet a bunch on a hunch and two headsets. And, you know, that game's, that ship sailed. And I think the advisors that are modernized their firms and recognizing there's different way to hunt, recognize that there's different way to find talent. And so broadening the scope and looking in those different places And looking for younger professionals and women, you know, who want more flexibility in the workplace, the stickiness, the sustainability of those employees as they come into the organization tend to stick and stay when there's more flexibility and support.

Okay, so what else do advisors need to know today? What's another edge that you recommend?

I think intentional growth has got to be at the top of the list. I was at the Chip Rome Tiburon CEO Summit most recently, and Chip's firm shared some really insightful data about where growth is occurring. And there were two displays that he shared that I thought were all-telling. One was that the bulk of the industry, 70% of growth over the past 9 or 10 years has come from growth in the markets, where only 30%, you know, when you strip out the growth of the market, only 30% of growth came inorganically vis-à-vis finding new clients and generating new revenue. Now that should be a showstopper of an exclamation point for most advisors, but the second display even caught my attention even bigger. And that was that if you look, especially in the RIA channel, the profound nature of who's growing and who's not, only 6% of advisors are generating 78% of the growth, which means that 94% of advisors are only generating 22% of the growth. So everybody's talking about this, like RIA, they're growing, they're growing faster than everybody. Oh my gosh, but they're not. And then you look at the wirehouse channel and you look at the Merrills and the Morgans and the UBSs and the Wells, and you go, okay, how many advisors have brought in 1 or 2 or 3 net new households of $250,000 or more, and it's anemic growth. It's a bunch of advisors who are just now outgrowing their business. They're not finding new relationships. And we're among the most underpenetrated market with over 300 million Americans and give or take 300,000 air quote reps, you know, with CRD numbers. The number I think when you strip out bank tellers and wholesalers and, you know, service professionals, there aren't that many advisors in the country. It's probably only 150,000. So if you look up and you say, man, is there an opportunity for growth in this marketplace and who's really growing and who isn't growing? I think for advisors that are really thinking about building an enduring firm and building something that's multi-generational and building out a whole group of next generation team members, The opportunity for growth in the US has never been better. And yet I don't see many really committed to growth. I mean, our firm, we generally find people, clients who are committed to growth and committed to building enduring firms. So our population size, we're a little warped in that most of the people that come to us come to us 'cause succession matters, endurance matters, growth matters, developing people matters. And so we see most of our clients in intentional growth mode, but most aren't.

I think being committed to growth is arguably far more important now than in the past because in recent years, or at least for a decade or so, we had really rock bottom rates that facilitated easy money, easy financing of deals. So I think through all of that, that M&A frenzy papered over, it obscured the fact that there was a real lack of organic growth. People saw the headlines, deals, deals, deals,, but underneath the surface, again, there wasn't much organic growth. Now with rates much higher, dealmaking more expensive, it's kind of like, oh, what clothes is the emperor wearing, right? It's always been important, but especially now it's far more imperative, I think, to sink or swim.

What we are just beginning to see the early stages here of multiples sort of peaking out, and you see some of the large aggregators in the RIA channel, especially, they're slowing, they're being more intentional about the acquisitions. And to your point, Greg, they're looking for firms that are truly in growth mode and who have demonstrated an ability to bring in new clients. Having said that, especially in the RIA space, many of the advisors are, especially the large firms and aggregators, are gaining the benefit of the custodial relationships and the referral programs these firms bring. And I dare to say that if many of these firms were left to actually focus on growth and build their own institutional model and not be fed a number of referrals, hey, I appreciate somebody's gotta still, you know, build the value proposition, bring them back to the team, you know, get the clients excited about wanting to work with the firm. But I dare say if many of these firms in the wirehouse channel in the independent channel weren't really fed referrals, they might not grow. So if you look at EBITDA and EBITDA expansion, many of the large aggregators are trading at 18, 19, 22 times EBITDA, and they're buying firms at 8 and 10 times EBITDA. So there's an arbitrage. I think most of these firms who are not in growth mode thinking they're worth 8 or 10 are lying to themselves. They're probably worth, 3 to 5 EBITDA at best, and maybe, you know, a couple of times, you know, gross revenues if they're lucky. So yeah, this is going to put a really interesting perspective and help these advisors who are really in growth mode gain the benefit of multiple expansion and growth. And the professionalization over the past 25 years in our business has really exploded. And I don't mean to say that advisors aren't professional, they're totally professional, but But this corporate governance and, you know, really thinking about team and expansion, most advisors in our industry are accidental owners. And so most are waking up here and saying, wait, I've got an asset. If I look at my balance sheet, you know, this business is actually worth something and what do I want to do with it? So I think there's an awakening and then this next generation of advisor is poised to capture growth in maybe a bigger way than, somebody in their 50s thinking about exiting.

For the accidental owner, and let's just for shorthand say this person might be a little bit reluctant or not naturally in their skin as the owner, is there any differentiated advice for them in terms of getting ahead, in terms of maybe needing an extra nudge or what have you?

Yeah, the skills— there was a Michael Gerber quote many, many years ago. He wrote The E-Myth, and the E in E-Myth stands for the entrepreneur myth. I remember many, many years ago reading that book, and the quote that stood out for me was this, that sooner or later the day comes that just because you possess the technical skills for your trade or profession, you're going to need to go out and acquire the business management skills to know how to run a business that does the technical work. And so I think what I'm seeing is a diversion or a split of some kind where advisors are recognizing, okay, I've got to have those skills to acquire and retain and serve clients and then successfully transition them to a next-generation advisor. Okay, I gotta do that well. By the way, I have to run a business that does that work well. So whether it's compliance or technology or it's operations and finance or HR, those 5 functions are critical to thinking about how to run the business effectively. So to anybody out there thinking, okay, so where do I begin as a great CEO, as a great, owner to be less accidental and more intentional. Start thinking about the vision of what you want to build. Start thinking about your strategy to want to grow that kind of firm. We've talked about some strategic initiatives in this, in this podcast, but then start thinking about those 5 business and operation functional areas and whether you've got the skill to lead in those areas or you need to attract and retain talent who can be in that leadership function.

What's materially different now than let's say last year that may not be entirely self-evident because all advisors are reading the news and they're a smart bunch and up to date. So what's something they might be missing that you think is important?

So outside of the capital markets and the volatility and, you know, all of what we're paying attention to there, I think there, I'd be a fool if I didn't say you gotta pay attention to the blockchain. And the digital assets. There is a wave. Just look at the— read the company shareholder reports around how much money these firms, whether it's JPMorgan, Bank of America, Fidelity, Morgan Stanley, pay close attention to what these firms are spending on blockchain technology and what the future is going to look like in the digital asset space. I think that is going to have a big impact. This is not a crypto conversation like, oh, everybody should own crypto. I'm talking about what blockchain technology is going to do for security, for privacy, for cybersecurity. There's a big attention, I think, to play there. And, and while there's a big every whoo, AI, you know, machine learning and what's really going on in the AI space, I think there's going to be a dramatic change over the next 5 and 7 years in the world of AI and how that applies to what advisors can do. And I can give you a silly example. There's a couple of firms that do some social media marketing today where they're using AI technology and they're looking at their clients' patterns. You know, somebody announces that they're pregnant. Well, we know 9 months later they're going to have a baby. Somebody who has some patterns of what they're posting or not posting, and what leads to a retirement or a change of job. I mean, these are basic, really, really basic that we're already experiencing today. And I know of advisors that get weekly reports from their social media partner that says, here's a list of clients that you need to contact and here's what you should probably discuss with them. And in some instances, the advisors go, oh yeah, we've just met with the client, we're aware of that. But in other instances, it's like, whoa. And if you run a bigger business, you may not know all of what the client's going on in each of their lives. And so that's a silly little example on the AI space. I think it's gonna get ridiculously more complex, you know, especially on surveillance and compliance, on CRM system technology. I think many advisors are gonna look up and look at their business 5 and 7 years from now and really think about the pressure on margins and the cost of running the business. And how they're serving clients. So many of the tasks that they do today are gonna be automated, and AI is just gonna produce a lot of work, and it's gonna save advisors a lot of money. And so I think there's gonna be ways that firms apply that. So I'd be, if I were an advisor today, I'd be reading about all of that, both on the digital asset blockchain space and all the AI. This is, we're just in the early innings of what's happening in terms of application to our industry.

Stick with the advisory world. There's some people who think it could be quite disruptive and others who think it'll be a big benefit, 'cause a lot of low-hanging fruit can be automated and whatnot. Do you fall more into one camp or the other longer term, acknowledging we're in the early innings still?

Yeah, that's a great question. So here's my opinion. This is a relationship business. I don't think we're gonna get away from, at least in my lifetime, where the importance of connecting human to human is gonna change. But I can recall a time when I was an attendance pre-COVID, I was at a conference, and I remember walking up to, was a 42-inch monitor that was vertical. And you walk up and there's a question, would you prefer to work with, a man or a woman or other. And so you can check the box. And so I said a woman, and then a person came up and started asking me a bunch of questions. And effectively, Greg, it was a fact finder. It was, well, tell me about your family. Tell me about what your goals are. Tell me a little bit about your net worth and tell me about your income. And all of a sudden,, you know, it was this really easy intake interacting with an online digital person. And what was really funny was the fact finder was collected, and then it was like the next button, and then now it's time to meet with your advisor. And I thought, wow, what an interesting way. I'm not so sure, you know, but it's not too different than when I go to my doctor for a checkup and they give me the, the form that I never really enjoy with the clipboard filling out.

And say, no, no, no, no, no, 842 times.

That's right, yeah, right, 'cause they're protecting themselves. Man, what an interesting way to create a better experience had somebody just asked me those questions and we could have cut to the chase much faster. Now I know that's a really stupid example, right?

But the— Not at all, you get on the phone too, press 1 if you want this, press 2, and you do that, but then, okay, at least you get into the right neighborhood.

Right, yeah, so I just imagine there's gonna be a heck of a great benefit to advisors in the future, but I don't see a time where we're gonna lose the connectivity and relational aspect of what's great about this business.

Okay, we're running low on time. I wanna ask, are there any other points that you wanna touch on that we have not hit yet?

Yeah, I would touch on one point we didn't hit on that comes to mind, especially right now for advisors who are looking for an edge. Is pay attention to your margins. There is going to be an increase over the course of the next 12 and 18 and 24 months in the cost of running the business. We're already beginning to see the early signs of, you know, insurance is on the rise, state registrations is on the rise, compliance and surveillance is on the rise, rent, utilities, maybe, maybe not. We'll see where advisors land on workplace environment. Don't need to get into that here. But the point is that the cost of running a business, I think, is on the rise. And there's a, that's the killer that you can pay attention to and can control. So, you know, typically if you look at your P&L, especially for the independent advisors, use a 40-30-30 model. 40% of gross revenues need to go to professional staff. 30% is operating expenses, including support personnel, and then 30% profits. Really pay attention to your margins, pay attention to your P&L. So you can control that 30% if you're paying attention to it. And you're intentional about it. Here's the silent killer, the client or clients where there's service creep, the client who pays fees per year of, you know, $5,000, $10,000, or $15,000 a year in fees, but consumes, you know, $18,000 worth of team members' hours. You've gotta really pay attention. That's the silent killer here. Advisors who are successful are starting to, charge a fee for service, whether it's episodic or ongoing subscription-wise, like an attorney where, hey, you're changing jobs, you're headed to retirement, updating the plan's gonna require extra work. It might be a retainer fee of $2,500, $3,500, $6,500, you know, whatever that is on top of the fee on AUM. So I'm noticing advisors are gently increasing fees by adding some episodic kind of payment or just saying, hey, basis points on assets is rising, cost of servicing and delivery is rising. But if clients are looking for more service and you're not receiving an increase in fees for the additional service you're providing, you're experiencing margin compression whether you know it or not. So, Greg, the only other thing I'd add is this idea of focusing on profitability.

And in the Barron's tradition, I'm going to ask you for an actionable idea before we wrap up.

Probably the best business book I've read in a long time, and I've mentioned this on a few podcasts, but I think it's important and noteworthy to mention here as well. Is Adam Grant's book, "Think Again." He also has a fabulous podcast. I won't miss an episode. But in Grant's book, he applies a tremendous amount of research to this notion of these belief systems, things that we think we know to be true. And I think for advisors, especially the ones who are intellectually curious, that are looking at the business today and recognizing the rapid change, I mean, we hit on probably 5 or 6, maybe systemic kind of big changes in our industry, now's the time to pause, stop, and think again. And I think Grant does a great job. So I'd recommend that Audible or regular book for sure.

Terrific. Well, thank you for that advice and thanks for joining.

Thanks for allowing me to be here.

It's a lot of fun. Absolutely. My guest has been Ray Sclefani. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartalus.

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.