Hank Multala, President of Adviser First Partners, Jerry Michael President of Smartleaf Asset Management
Hank Multala 00:00
I'm here with Jerry Michael, Jerry, thanks again for your time today and taking some time out to chat.
Jerry Michael 00:05
Hank thank you. It's a pleasure to be here.
Hank Multala 00:08
Obviously, you know, the benefits of a podcast are that it really delivers a clear understanding about a company that one may not garner from, let's say, a website, but lots of delivers or timely illustration within the industry. So I'm looking forward to sharing your message with our listeners. So let's, let's kind of jump right into this. So just so we're all on the same page, and your listeners have a common reference point, what prompted you to develop SAM, and give us a brief overview of what SAM does and how it works?
Jerry Michael 00:43
Well, SAM can be thought of almost as a new category, I call it a robo sub advisor, it takes advantage of the technology of our parent, which is a smart leaf. And the goal is to let every advisor to outsource tax, optimize customized portfolio management, and do it for all accounts. The we want, there is no minimum. And we want to enable advisors to manage every account as if it was their only account. And here's something which is different, which is the advisor stays in control of asset allocation and product choice. So that from the advisor’s perspective, this isn't a choice to hand over sort of investment strategy to somebody else, it's just handing over the task of rebalancing portfolios. So they can spend their time doing something which is more valuable, which is usually spending time with clients and prospects.
Hank Multala 01:39
Okay? So when you say there's no minimums are the minimum, the no minimum obviously is set by you. But the firms will implement a minimum some of them may or some advisors will, of course, right?
Jerry Michael 01:50
They may, that's entirely up to them. But this is a system which really you It enables advisors to outsource all their accounts, some may choose to give us their smaller accounts, because you know, they find them unprofitable. But most I think the typical is it would be all accounts just show the firm can free themselves up and offer also offer higher levels of tax management and higher levels of customization. Oh, that's fantastic.
Hank Multala 02:15
Because I know a lot of a lot of the FinTech, that you know, have, you know, they'll have requirements for minimums. And I know, I know, it can be kind of upsetting for advisors. So initially, I was going to break down our discussion and the benefits of advisors and firms, but there just seem to be so much overlap and in the services and content, and I just probably thought that this podcast will would become less informative, and probably more confusing. So looking at the other FinTech solutions. How does SAM differ from let's say other sub advisory services and rebalancing solutions that are that are available to, you know, advisors and firms or RIAs, asset managers and the alike?
Jerry Michael 02:56
Or it's several things. First, it is industry leading tax management. It is exceptional customization, including risk customization and ESG, social screens. I think it is unique, perhaps unique in its ability for the advisor to retain control over the asset allocation and product choice. So this is not our asset allocation, our products, you get to tell us which ones you want, we do have a model hub. So if you would prefer an open architecture approach and select someone else's asset allocation, or in someone else's, you know, equity models, you can do so. But it's like you have a central rebalancing group, but you've just outsourced that central rebalancing group, you stay in control. It also has, as I mentioned, no minimums, and the price is competitive.
Hank Multala 03:43
Right. So you know, I know one area that I as I went through all the material in the conversations you and I've had, and I just I'd like for you to address in that there's it seems like they there could be a misunderstanding that as an advisor outsources the rebalancing, and, and the trading, that they lose control of the asset allocation and product choice for their clients. Can you...Can you clear up that misconception?
Jerry Michael 04:10
Well, I think it's the interesting thing is up to now, I think that was largely true that if you outsourced you were sort of making a choice to follow someone else's approach to investing which may be good or bad. What makes this different is in a very real sense and even counter intuitively, you have more control. Because you are you there is no limit to sort of the level of customization that you can ask us to implement, you can go down to the account level, literally, literally, every single account that we manage can have a separate asset allocation, a separate product mix, which most firms simply would not be able to implement on their own if they have you know every client with a different asset allocation and every client with a different product mix And then they wanted to implement a tactical asset allocation change, they'd be frozen, may be confusing, and you know, they just couldn't do it. But now they can't. So in a very real sense, you would have more control by outsourcing to SAM, than doing it on your own. Which I agree is rather counterintuitive.
Hank Multala 05:20
Yeah. So simple question, what if someone comes to your platform, and they don't have a model portfolio?
Jerry Michael 05:27
There are two answers. One, we do have a model home. So if you would like to choose someone else's asset allocation, and you know, you, your product, if you have a 50-stock list, choose someone else's 50 stock model, you can. But also, it turns out most firms that say they don't have a model do. Because what all we model is for us is what would you buy for the client? If they came in with all cash, and no restrictions? Now that may happen. Rarely, it may have never happened in the entire history of the firm. Right? Right. Theoretically, if someone came in, well, whatever answer you would give to that question, that's your model. And every firm does have an answer to that question. So in a sense, every firm does have a model, even if they don't realize it.
Hank Multala 06:14
Okay. So it's i models based. And so I have two questions for that. Since it is models based, how does SAM really increase alpha? Because that's the most important aspect, I would think and how do you prevent churn or excess trading within the model portfolios?
Jerry Michael 06:33
Well, interestingly, we ourselves don’t claim to generate alpha in the normal sense. We're not claiming to help you beat the market on a pretax basis, we do generate tax alpha an increase in the after-tax returns through tax management. And we increase alpha, I suppose, indirectly, simply because we let you be in control. There are simply no barriers, whatever, you don't have to think, well, I'd like to do something else. But I can't because I have no way to transition my accounts, or if there would be too, too great attacks impact. So I'll just sort of stick with good enough. You never have to think that way. Since we removed all the barriers to managing each account, you're always free to have your absolute best thinking front and center. Now, that's not our alpha, we're just removing the barriers for you to sort of uncover your own alpha. Okay. All right. And I'm sorry, I apologize. You also mentioned Sure, yes, yes.
Hank Multala 07:33
And excess trading or
Jerry Michael 07:34
and excess trading. So that's built into the system in two different ways. First, we are sensitive to costs. The system itself is aware, the system, the technology we use, that underlies SAM is aware of trading costs, and implements that in its algorithm. So it has an aversion to churn or excess trading simply because that's costly. And then secondly, it has built in sort of sensitivity to noise, every trade must get through a gauntlet really have three levels of turn control for it to be traded. So there is this deep sense of good enough. When it comes to our more accurately, I should phrase not trading on noise, it's built right in.
Hank Multala 08:21
Okay, so let's discuss a likely scenario based on two questions we just went through. So let's suppose an advisor utilizes their own models or their own asset allocation strategy and their products, which I think would result in many hard to manage, you know, custom models in these instances, how can customization still be outsourced, as I'm sure practices will not want to change their investment strategy, take advantage of solutions that SAM offers?
Jerry Michael 08:59
Well, the short answer is automation, it's possible because it is automated. There's a particular detail, which is for us, if you have a client with a custom asset allocation, you know, suppose the Smith family, you know, they're aggressive growth, but they don't want real estate because they have outside holdings in real estate. The way this is stored in the technology we use, it's just an extra instruction, which is, hey, this is the Smith family, they want aggressive growth, but no real estate. So if you can change the aggressive growth allocation all you want. Yeah, you can change it every week with a tactical asset allocation change. But it's still the Smith family will still have this instruction of but no real estate. So what we'll do is as we're analyzing the account, we'll grab the latest version of aggressive growth, which you may have updated yesterday. And just as we're sort of sitting down to analyze the Smith account will strip off real estate and rescale. So it really is the automation Have this that enables literally every single account to have its own asset allocation. And it doesn't get bogged down.
Hank Multala 10:08
Right. Well, it seems like this is the great benefit of technology is you can bring this down to every single advisor, you can deliver this to every single advisor across the industry. And it doesn't require really any additional, work, I would think.
Jerry Michael 10:26
I think that's right, and in a very real sense, and, you know, we get back to the beginning of why we did this, it is to enable an advisor to manage every account, as if it were their only account. I mean, advisors, you know, they often look, they know what they want to do, but there's only 24 hours in a day. And so they can't manage, at least they find they usually unless you're maybe a family office, you can't manage every account the way you want to. That's we break through that, you know, every account can have a custom asset allocation, every account can be expertly tax managed, every account can have ESG. And its technology that makes that possible.
Hank Multala 11:08
Wow, that's just I mean, the power of that it's just incredible. So just for a moment, I want to go down a slightly different path of how some investment strategies have changed recently. As you know, BlackRock had recently purchased the direct Index Provider, I think it's a period of Morgan Stanley bought Eaton Vance , which I believe was a parent company of a Parametric Portfolios, which is a direct Index provider, just so everyone knows, direct indexes are like an index ETF, but the investor directly owns some or all the securities in the index, I think I got that, right. A couple of questions here how do direct indices compared to, say, SMAs, UMAs, and what's been, from your perspective, the driving growth of these direct indices, and, you know, maybe why now?
Jerry Michael 12:01
Alright, let's take these one at a time. So a direct index, just as you said, it's really sort of unbundling a mutual fund, or ETF, it's kind of in some ways a Back to the Future, where the investor directly owns the shares, right, the you own a share of an ETF or a mutual fund, you might indirectly own 100 stocks, but with the direct index, you actually own the shares of IBM, the shares of Walmart, etc. and a direct index, you know, there's some confusion, people use the term in different ways. But really, it's a form of a separately managed account, because the whole idea of, you know, separately managed account is, you know, you are owning the individual securities, as well. So technically, the direct index is sort of following an index. But that usage is a little bit sloppy. So, direct index and separately managed accounts often are sort of mixed together, you have a sort of have acronym salad here, unified managed account, right. And it's the idea that, you know, direct indexes resume as well, they probably great for the Air Corps, you want them for your major asset classes, large cap, maybe mid cap, and small cap and foreign, but you're not going to have them for everything, you're certainly not going to have them for emerging market debt, or you know, usually not for real estate, right. So you still, they really should be part of the core of a larger portfolio. And they should be managed holistically the whole thing together, you want to manage asset allocation, you want to manage the risk of individual securities. And that's a unified managed account. And then lastly, you mentioned the unified managed household, well, you know, you have a 401k, you have an IRA, you have a taxable account. And you want to manage those three accounts jointly to a single risk objective, again, say aggressive growth. Well, that precisely because you know, you have some non-taxable accounts and tax deferred accounts like 401k, and Ira, you have some extra sort of tax levers that you can, you can pull, you can, for instance, use the IRA, as your tax-free rebalancing center. And you don't necessarily need each of those accounts to be a mini me copy of the asset allocation. Okay, you can, you know, you can spread assets around and if they add up to the whole, then you're good. So that's a, you know, the unified managed household, and I think you know, which deed is underneath that is each account, which is unified managed account, and underneath that are direct indexes, and separately managed accounts.
Hank Multala 14:31
So what do you think's been driving the growth of these?
Jerry Michael 14:34
So direct index? I think it's several things. First, they are more tax efficient, right? If you have 100 stocks and you know, like tax loss harvesting, you have like 100 shots at tax loss harvesting rather than adjust one. They are more customizable, and social screens. ESG becomes a possibility. You can't call up your mutual fund company and say, hey, great job, but could you know, make some changes for me,
Hank Multala 15:00
yeah. Can you get rid of Exxon Mobil? Can you get rid of, you know, things that I don't agree with?
Jerry Michael 15:05
Exactly, you know, yeah, the mutual fund company, you know, they can't do that. If you own a direct index, you can't. And you know, you mentioned, you know, you might want to get rid of Exxon Mobil, maybe for social reasons, but maybe it's just because you work there, right? Yeah, just as a matter of risk customization, you've already got enough exposure in your life, because you work for Exxon, to the fortunes of Exxon Corporation. And really, as a matter of prudence, you probably shouldn't have more exposure in your investment portfolio. All of that becomes possible with a direct index. The fact that the tax, you know, he probably, you know, you've probably heard, I think, index funds outperform over the long term 80 to 90%. Of all actively managed strategies, which is kind of extraordinary,
Hank Multala 15:49
Jerry Michael 15:50
The direct index version of an ETF will outperform the ETF on an expected after-tax basis, which is, you know, it's a stunning statement. So I think direct indexes are simply a superior form of investment if they are, you know, reasonably priced. And if they are, well, tax managed, there is something, which is why now, I think it is a little bit that people are paying more attention to tax and ESG and customization, right, there's reasons for that. But then there's some other things that are making this possible. All the major custodians have announced that they will be supporting fractional shares. That's the idea that you can buy 1000 service share of IBM, they're all announcing that they will support $0 commissions. And those two are big changes, because it means that basically, anybody can have a direct index. I mean, some of the major companies that you mentioned, like parametric and Aperio, you know, they advertise minimums of you know, something like 250,000 per, you know, asset class or 750,000, well, with fractional shares go down to $250, and $0 commissions, so those are important innovations, they're still sort of in development. But I think when those become mainstream, I think you'll see direct indexes replace ETFs, and mutual funds, you know, at scale, they will simply become the default product for everyone.
Hank Multala 17:16
So if you're not Morgan Stanley or BlackRock, I'm just assuming with fractional shares, and with $0 commission's, it doesn't leave the advisor or the investors out of the game, so to speak, does it?
Jerry Michael 17:29
It really doesn't. So as you know, you mentioned earlier, you know, BlackRock bought Aperio. And Morgan Stanley bought Eaton Vance, which owns Parametric, which are the two sort of dominant asset managers right now in direct indexing. But I think not only are you not left out in the cold, I think you get to leapfrog existing solutions. Those are good solutions, but they're old tech. I think the analogy here is like those who skipped landlines and went right to adopting cell phones, you get to leapfrog the big boys, right? with direct indexing,
Hank Multala 17:59
right? Yeah, I invest through Schwab, and I saw fractional shares. So that's nice, because you can kind of build your own portfolio, if you want to, or even, you know, teach your kids how to do this stuff. So which is cool. To continue along the path of investment strategies. There's been a substantial rise of ESG and religious based investing, you know, both are becoming increasingly important for advisors to offer these focused disciplines to their clients. What's been from your experience, and what you've seen the driver in these investment strategies and I'm curious, how are these two disciplines driven, you know, new and upcoming strategies of investing that you're seeing presently?
Jerry Michael 18:43
I think there's two things here. Some people will say that, you know, this is a way you know, there's higher, there may be higher returns in this approach. And, in recent years, that's been a true statement, we don't have an opinion on whether ESG is a better way to invest in the sense that it will lead to better investment returns, it may, but we don't have an opinion on that. Our view is that everyone should have a choice. So you know, our focus is that if you want ESG, or religious based investing, you should. And so there is a drive for it, which is independent of whether it's going to have a positive negative or neutral effect on your investment returns. It's just an objective. And I think there is sort of a greater focus on Well, this is important to me, I want to have a diversified portfolio, you know, it's all those good things, but I want it also to express my values. I think sort of why there's a really a larger story here, which is, I think, the whole notion in wealth management that your wealth advisor is there to help you beat the market by 40% or whatever even that is sort of declining. And I think there's sort of this rise we know we sometimes call it the New Wealth Management where advisors are there to be sort of a lifetime financial coach, that's a that's a phrase we hear from our clients or, you know, overall guardian of the client's well-being. It's a much more holistic view of what investing is all about. It's not just, you know, chasing, the ticker, it’s about, you know, is this serving my life? Well, is it serving an end, and I think more and more advisors are taking that perspective? And when you do take that perspective, it becomes far more natural to incorporate ESG and religious based investing criteria and I think we're seeing that now.
Hank Multala 20:35
Okay. So I appreciate your insights on the new strategy. So let's go back-to-back to SAM. So let's say a practice is considering SAM, besides eliminating the workflow process, how does SAM benefit the firm's and most importantly, the firm's clients?
Jerry Michael 20:56
Well, as I've mentioned, some you will end up with higher after-tax returns for your clients. We have seen, you know, with the underlying technology, we add that technology generates a report, which summarizes how much you save your clients through active tax management, and the users of that technology, the average last year was 2.44% of portfolio value, which is higher than most advisors, fees. Right. So you know, there is a real possibility that with active tax management, you can start all your conversations with your clients with, you know, hey, last year, I saved you more in taxes than I charged in fees. Now, let's get down to business. So that's already kind of a nice start. You can offer more customization, you know, everything, there's no compromise, you don't have to say, Well, you know, maybe for my very largest clients, but everyone else I'm going to have to well, you know, take some shortcuts, you don't have to take any shortcuts, every client can have the customization that you would like to give them mentioned earlier, you know, counter intuitively by outsourcing, you increase your control, yeah, it's related to this notion that you don't have compromises, you can always implement your best thinking you want a tactical asset allocation change implemented, you know, there's no, there's no sort of operational barrier to doing so.
Hank Multala 22:15
Firm can become an open architecture firm.
Jerry Michael 22:19
Yeah, you can be open architecture, you know, you can, you can access to the absolute best thinking out there. That includes, you know, the best actively active models, there are special ESG models, green models that you can access, you can sort of push to sort of certain with the outsourced CIO role, if you like, or not, you can retain that CIO function completely, but nevertheless, choose best of breed product. Really, it is simply eliminating barriers. But you asked, you know, what's the benefit to the firm? And there is one answer that just stands out, and it is more time, you will have more time to spend with clients and prospects. Because this is what matters. Most firms, you know, frankly, are not adding value through rebalancing portfolios, that may be a slightly controversial statement. But we have the data that most firms simply really aren't that good at rebalancing. But they are good at understanding their clients and acting as a lifetime financial coach. So the biggest value of all is just more time.
Hank Multala 23:29
More time. Yeah, it's the same thing that we all have the same amount of, and nobody gets any more any less. And, if you if you can add, if you can free up the workflow process and all this, and that's where you're gonna get it from. So is a practice, you know, as practices, embrace, you know, new FinTech and new outsource solutions, there's always a question of, how do we as the practice, best employ the solution, for our clients, so how does an existing practice, incorporate SAM into their business?
Jerry Michael 24:04
There are two answers there. The first is, if you like, you can of course keep, as we've mentioned, you can keep your asset allocation and control of your asset allocation as you did before. And you can keep you know, the product that you currently use, you can say all that, let's keep using that. And do so in a way that you have more time. But there's a second answer, which is we start removing barriers. So as you know, you asked earlier about open architecture, if you want, you now can incorporate, you know, you can become open architecture, you can start maybe you really weren't doing much tax management, maybe you weren't doing much customization. Now you can. One of the things that happens is when we sit down with firms, we ask, well, you know, how would you like your assets manage what is the client experience you want? And part of what we do is help people sort of work around, you know, invisible barriers, they imagine. Well, I must do thinks this way because well, you know, that's the only practical solution. And part of our job is to sort of, you know, eliminate those imaginary barriers. It's a No, . What would you do? Really, if you could do anything? What's, what's your ideal? And so there the answer one is keep doing things, the way you have done now, just with, you know, more time on your hands, more options to do tax management, and customization. And the other answer is to step back and say, well, maybe you want to reimagine how you're doing things, we can support that, too.
Hank Multala 25:32
So, you know, from your perspective and experience, and obviously, you've met and seen or met a lot of advisors and practices and how they do things. So how can advisors continue to provide top, let's call it topflight service to their clients, grow their businesses, while still ensuring that clients with lower assets are not ignored or forgotten?
Jerry Michael 25:56
Well, I think, you know, the, this is the notion that we want to put front and center is that you are, you know, your clients are not being ignored, every single client, even the smallest, can get high levels of tax management, and customization, in a very real sense, you know, the very small, your very smallest client can have access to levels of portfolio management, that really, right now are the exclusive preserve of ultra-high net worth clients. That's the promise of technology. It's, it's democratization in an extraordinary, extraordinary way. And I think there's something else, which is, you know, this does a lot give you more time, it's, you know, it's, it's, it's the key, I think it's the most important thing of all is just more time with might
Hank Multala 26:49
Spend more time with the clients and, spend time where, you know, you generate revenues, because, you know, managing workflows generates no revenues. So, I know, advisors, you know, clients and prospective clients are always concerned about cost and the value that they can receive for the fee that they're paying. Advisors want to keep their costs low but must also demonstrate their value. How does how does SAM help advisors show value to the to the clients?
Jerry Michael 27:22
There's two ways we do provide a report, which I mentioned earlier, called cleverly called the Taxes Saved Report, which lets you document how much your clients have saved in taxes. But there is something else, I've also, of course, you know, emphasize the time, which is also a show of value. And I'll tell a story, if I can, which is, you know, back in March 2020, when sort of the world went crazy, and markets became very volatile, and the market sort of went down a lot, you know, a client of the Smartleaf technology, so that's the user of that technology. They said, well, here's what we did in back in March 2020. We contacted every single client five times, that's in March, in one month, they contacted every single client five times
Hank Multala 28:08
Five times wow,
Jerry Michael 28:10
At the same time, you know, the markets did go down. Now, you know, the first best solution is never to lose money. But if you know, the second best solution is that if you know the markets do go down, you might as well do some tax loss harvesting, you know, selling loss things at a loss just to rack up to save them so they can be used to offset gains later, well, this firm also in March, well, contacting every client five times, since you traded every single taxable account loss harvesting every single taxable account. At the end of the month, the loss harvesting was enough such that if their clients were able to use them to offset future gains, it would increase their portfolio value by three and a half percent. So they were able to do two things, rebalance every single portfolio and call every client reach out to every client five times. So that's itself a demonstration of value. They weren't hiding, they could do that because well, they had the time to do it. Because, you know, the front-end advisors were rebalancing the portfolio. And this firm, again, it's a user of the this was a user of the Smartleaf incorporated technology reported that their increase in wallet share in the first half of 2020 and sort of the world is going crazy, was greater than the previous 18 months combined. And the reason was you know, here it was, you know, when the markets are just steadily going up everyone looks like it here.
Hank Multala 29:34
Everybody looks great. Yeah, rising tide raises all boats.
Jerry Michael 29:38
It does but here was what happened when things you know, the storm hit Well, this firm was able to, you know, say look, you know, we are not hiding under our desk, we are completely in control. And you know, I mentioned that they last harvested they not only last harvested to increase the value of their client’s portfolio by three and a half percent. They were able to reduce dispersion in March of last year, and it's just because when your loss harvest, you can fill in, you know, the valleys of under invested assets, etc. So I think that's the, you know, the deeper answer, you know, yes, we have a Taxes Saved Document, but the deeper answer to your question is you show value by showing up, especially when times are rough.
Hank Multala 30:17
Right. It seems like, you know, hey, that storm, you know, the rising tide raises all boats, I think of all of a sudden, you know, you're Forrest Gump and, you know, all these boats are destroyed, and then you have one boat that comes back and seems like the, you know, the practices, in that analogy, the practices who were very engaging with their clients, were the advisors that were you know, they did, they did very well and benefit, obviously, in the long term. So, I know on your site, you've written that a models-based approach allows better customization and tax management, not less and perhaps we've talked around it a little bit, and I'm thinking most advisors would think that it's not possible. So can you just clarify why models based makes it possible to provide greater customization and tax management?
Jerry Michael 31:07
Well Hank, you're absolutely correct. There is when people hear the word models based, they automatically think cookie cutter. You know, that's what it means, we know, hey, that's efficient. That's great, maybe good thinking, but it's cookie cutter. And so there is this deeply, deeply held belief that models based means no customization, and yes, we are here, you know, I won't stand on a table and wave a red flag. But to say, it's the reverse, models based allows you to do more customization and more tax management. And the reason is, because customization, and tax management become automated, and therefore, there's simply no barrier to providing it to anyone who wants it. That, you know, the older approaches, the non-models-based approaches, well, they, you know, they seem like, well, look, I, you know, it's trade by trade, I can make this as customized as I want. But you can’t because there is there aren't enough hours in the day, right? But if you can fully automate tax management and customization, it becomes incrementally, you know, free in the sense that there's no incremental effort to do it. And, you know, like almost anything else in the world, if you make something, you know, sort of incrementally free there no more effort, people will consume more of it. Sure. And so, you know, we go from firms where, you know, customization and tax management was a thing that was done. Well, when you had to, sometimes off to the side occasionally, to, it's simply built into everything they do, the assumption is every account will get it. And that is because it's automated. And the only way to you know, you can automate it, because its models based. So that's the real answer. But you're absolutely right. It's most people just automatically think models based, less customization, and we are here to sort of propelled the very counterintuitive statement. That's exactly backwards. You know, I mentioned in that story I was telling earlier about March 2020. You know, they were able to loss harvest every single account in March. And any firm that was not models based, they would be challenged to trade their entire book of business in, say, a single week, I just don't think it would be possible. And especially, it would be difficult for them to both trade every single account in a single week in order to tax manage it, and simultaneously reach out to all clients five times.
Hank Multala 33:44
Right. Right. Yeah, well, I got to disagree on something that you said. I think you should stand up on a table and wave a flag. Because if it is understood that models based is does not do that for you, it doesn't offer greater customization, tax management. I think it would be extremely helpful for the industry and advisors just to hear that and better understanding and educated, you know, create greater awareness and I think you should do that. So I don't mean to disagree with you, but I think you'd be a good you'd be a good person to do that. So, with the continued growth of the of the RIA space and investment advisors, embracing, you know, obviously fiduciary business model for the clients, you'll find numerous firms they've, they have grown, but simultaneously some firms have remained stable or not seen the growth, I guess what they expected. What do you see that's a kind of a common denominator amongst the fastest growing RIAs in the industry?
Jerry Michael 34:52
The ones that we see there is a common denominator and that is well they don't waste time, the advisors time rebalancing It's not a competitive advantage. The fastest growing firms are noticeably clear and extremely focused on what their advisors are for and what their value is, they want their advisors to spend 100% of their time and 100% of their effort with clients and prospects. I've mentioned, you know, this idea which we hear from, you know, the firms we speak with, about the goal of the advisors to be a lifetime financial coach. And it's the firms that embrace that, that are the fastest growing, the ones that, you know, are still sort of doing trade by trade, and, they'll sit there and talk to the client about whatever Kramer said on TV last night, and you know, should we buy IBM, and should we not sell IBM and every single trade to conversation, I think that is a dying business model. And I think those, those firms are not going to do well. But the ones that embrace their larger function to be the lifetime financial coach, and realize that it is not a useful, useful for their client facing advisors just to spend time rebalancing. Those are the ones that are the fastest growing. At the same time, I do think, you know, customization and tax management and documentation of value, those are also key ingredients, you simply can't sort of just mumbled nice words about yes, tax management is important. You must do it, and you must document that you're doing it. We have, you know, seen another firm that, you know, one of the measures their wallet shares versus their competitors, and they can see that it's going up. And one of the things that they do is they show their clients, well, hey, this is, you know, this is how much I saved you in through tax management. It's not the only thing I do, it may not even be the most important thing I do. In fact, it probably isn’t. But I did say I would do tax management and here's how well I did, you know, do ask the competitor, how much they're saving you in taxes. Which of course is a trap because they know their competitors can't do it. They can't. And so you know, they're progressively getting more and more wallets share and their clients tell them it's because well, you know, that's just one component, that ability to sort of be so buttoned up that you can document what you say you will do.
Hank Multala 37:18
Right. So I wanted to finish our discussion on what seems to be a never-ending consolidation in our industry through M&A and RIA consolidators, and private equity. So kind of a two-part question for you. What do you see happening in the next, say 5 to 10 years and how do you think it will further necessitate the need for, say, breakaway RIAs to utilize the services that SAM is so competent and skilled at?
Jerry Michael 37:53
I think the interesting trend is that one of the reasons why there was consolidation is that the tech you needed to really be at the top level of service was expensive. And only big firms really had access to that level of tech. And if you didn't have it, well, you I just don't think you were in the first tier. That is changing. That tech that, you know, top tier tech is becoming available to all, I mean, the smallest, even the one-person RIA, I think now can compete on technology and capability with the very largest firms out there. In fact, you know, you could possibly be approaching a time when there's a reversal, where, you know, the old, the largest firms, you know, their, their tech stack is sort of old and sort of brittle and clumsy and we'll just start to fall behind. And it's the smaller players who can be nimbler and being at the cutting edge of technology. So, I could imagine, even seeing a reversal here, in the consolidation, that it just becomes easier and easier to be a breakaway RIA and remain competitive, possibly even surpassing, you know, if you're a breakaway, and you go on your own, you may end up with tech that surpasses the tech you left behind in your old firm. So I think this is, you know, in the next 5 to 10 years are going to be interesting.
Hank Multala 39:24
Yeah, I think it allows boutique or mid-size to be much more nimble. I mean, there's a lot less red tape and analysis and you can implement things a lot quicker. So well, Jerry, I really want to thank you again for your time today. I know with the continued interest and growth in the breakaway RIA side that we just discussed; I wouldn't imagine why anyone would really want to try to go this alone without a without a true partner like SAM to steer them down the most efficient path to success. For those of you who are interested in learning more about SAM you can visit them as smartleafam.com I know on their website, you can visit the Our Resources tab and you'll find blogs and some great information regarding case studies and client stories. So you'll also find their link on our Outside Resources page at advisorfirstpartners.com. Please don't forget to subscribe to our podcast "A Chat with Hank" on Stitcher, Google podcasts, Spotify or wherever you may listen to the programs. So, Jerry, thanks once again for your time today the overview of SAM and sharing your thoughts and insights regarding our industry.
Jerry Michael 40:37
Hank, it has been a pleasure. Thank you so much for having me
Hank Multala 40:41
No problem. My pleasure. Take care.
By Hank Multala, Founder, Adviser First Partners L.L.C. on 07/12/2021 2:47 PM