Originally published in Financial Advisor
By Mark Hurley
Editor’s note: This is the first in a series of interviews with thought leaders on the future of the wealth management industry.
“Visionary Entrepreneur” aptly describes Jeff Thomasson. Right after graduate school in 1981, he launched Oxford Financial Group Ltd. at 21 years old. Today, it is one of the country’s most successful firms with more than 130 employees advising on $24 billion of assets, of which $14 billion is under management. Thomasson avoids the spotlight and rarely publicly discusses strategy. For this issue, however, he agreed to share his thoughts on the future of wealth management.
Hurley: What do you see for the future of this industry?
Thomasson: Winners and losers: Brokers and banks will continue to gather assets but ultimately will be losers in the ultra-high-net-worth space.
Initially, our industry began as a bunch of barbershops with owners who hung out shingles as financial planners and are now trying to become wealth managers or multifamily offices. Going forward, you will only be a winner if you can scale to at least $100 billion or even $200 billion over the next decade, while differentiating yourself.
Hurley: For firms that target the $10 million to $50 million client?
Thomasson: Exactly. Or above $50 million.
Hurley: Will firms that target $1 million to $2 million clients and have $20 billion to $40 billion of assets also be winners?
Thomasson: If they’re lucky. It is unclear whether they will be able to sufficiently scale in technology and people.
There are going to be three buckets of winners: high-net-worth-firms, ultra-high-net-worth firms and robos. All will have to figure out how to scale. Robos will be massive by capturing those folks who can’t afford to pay for the first or second bucket. The second bucket’s challenge will be to differentiate themselves from the robos.
Hurley: Even Oxford will need an astounding number of additional clients to get to these levels.
Thomasson: It is staggering.
Hurley: How are you going to be able to do it?
Thomasson: Acquisitions of talented people. Never in the history of America has an industry scaled without acquisitions. Like other industries, you just can’t do it mathematically without acquisitions.
Hurley: That still means a lot of deals.
Thomasson: They will be strategic and, believe it or not, a majority of them (the people) are going to come to us.
Acquisitions are a people-gathering exercise, attracting folks that have a similar culture to yours. By working hard in the geographic markets that you want to target, teams of folks—at a bank, a brokerage, a group of advisors with a 60-year-old senior partner and no currency—will come to you.
It’s not going to happen from a target list. For example, if I was to assemble a Midwest target list, it would probably have only four and a half names because I lack the optics to see inside a bank or brokerage and find the advisor who has $3 million of revenue at an organization that they’re tired of representing and who I could bring over to Oxford.
Hurley: You’re describing lift-outs?
Thomasson: They are non-cash acquisitions with someone interested in being a part of our culture and platform.
Hurley: So you are targeting employees of businesses, as opposed to acquiring other firms?
Thomasson: Yes. With so few Midwest targets, that type of acquisition strategy will not allow us to scale and continue to be a winner.
Hurley: Why limit yourself to the Midwest? How can anybody achieve scale by limiting themselves to a geographic region?
Thomasson: Geographical limitations allow you to grow without sacrificing being home at night, seeing the kids’ soccer game, going to the lake on the weekend. Management can easily get to our multiple offices and advisors can come into Indianapolis or travel to other markets without connecting flights or perhaps even drive.
We also can focus solely on the Midwest because of the demographics [of prospective clients] in this region. We’ll get plenty of other clients in other markets by accident, as we have in the past, to get us to our current 43 states.
Hurley: But won’t five times’ growth require a big number of acquisitions?
Thomasson: Yes. However, over the last two decades, 95% of our very best decisions have been “no” and 3% have been by accident. So we have grown to $24 billion on 2% by saying “yes.” We will say yes to thoughtful people acquisitions.
Hurley: Where are firms going to get the people that they need in the future?
Thomasson: From other wealth managers.
Hurley: You don’t believe in developing homegrown talent?
Thomasson: We’re not in the training business. We mentor, we coach, we help them get better, but for us it’s helping an “A” player get better, not a “B+” player getting better.
We try to only hire people who are “A” players. After we interview someone, we look at each other and say, “Is this person an ‘A’ player?” If not, let’s encourage them to go someplace else. Certainly, we have not been 100% accurate.
We don’t think it’s possible to successfully take a junior partner to a senior partner because it takes too long. The present value calculation is horrible.
Hurley: So the upcoming war in the industry is not going to be for clients?
Thomasson: It totally will be for people. It has already started, and the unrest of people at their current employers is going to get nuclear.
Hurley: And they will come from other wealth managers?
Thomasson: Absolutely. One hundred percent.
Hurley: How do you not change your culture while vastly increasing the numbers of employees?
Thomasson: It starts at the top and must be reinforced daily by every action and the firm’s cultural integrity.
Hurley: What will firms need to do to get these bodies?
Thomasson: Of course it is first culture, but also compensation and wealth creation. Compensation enhances culture. Senior relationship people need to have the opportunity to build wealth comparable to their clients’. They will also have to want to be an owner and participate in the governance of the organization.
Hurley: You will have to offer an opportunity to build $20 million of wealth?
Thomasson: Yes. That opportunity is essential, because if I’m a 62-year-old client worth $20 million, do I want to get my advice from somebody who’s got an IRA, a $50,000 savings account, and makes $150K to $200K? That’s probably not working for me. But right now this wealth gap is massive, industrywide.
Hurley: This suggests a labor stratification between firms.
Thomasson: The labor stratification will be dramatic.
Hurley: And won’t the cost of getting talent force margins down?
Thomasson: I don’t think margins are going to go down for ultra-high-net-worth firms if they get better at delivering their value proposition and the rationale for their fees while scaling their businesses properly.
Hurley: This suggests more à la carte pricing as opposed to prix fixe.
Thomasson: Some project fee, some fixed fee, some asset-based. However, more is going to drop to the bottom line because your people will be better at articulating and communicating your value proposition.
Hurley: Obviously, your value proposition has evolved from when you first started.
Thomasson: Given that I didn’t have one initially, yes, but we now spend a lot of time discussing it.
Ours starts with our brand. People have to be convinced that your brand is something that they’re willing to pay for annually. Brand is tied to the quality of your people.
We approach branding using the letter “Y.” On its left side there are hundreds of touch points that we have with advisors, vendors, clients, potential clients, charitable organizations—maybe even competitors. The right side involves what we want to look like and how we touch these people from the grain of our wood paneling down to our wallpaper down to our Council Craftsman conference tables.
We study great brands like Aston Martin, Ferrari, St. Regis, Cartier—ones that are incredibly successful but not pretentious—and try to emulate them. For example, how does the Four Seasons touch me when I check in? How do they communicate with me prior to getting there and after I leave?
Hurley: So brand is the client experience?
Thomasson: It includes the advisor experience, the competitor experience, the vendor experience, the prospective client experience, the actual client experience. An organization’s reputation has to extend well beyond the client experience, because in many cases, before you were a client, you were a prospective client and before you were a prospective client you were a friend of an advisor.
Hurley: Let’s shift to what will firms have to do in the future for clients that they do not do today?
Thomasson: Ten years from now, any investment recommendations that do not involve alternative investments will be completely commoditized.
Hurley: Aren’t they already?
Thomasson: There are still a lot of people trying to justify active over passive, and at some point in time, clients are going to say “It’s just not worth it for me to chase 0.50% for 0.50%.”
Also, ultra-high-net-worth firms are going to offer aspirational investing using high-alpha products that probably don’t even exist in this space now.
Successful firms are going to say, “It’s OK to have a part of your portfolio that’s diversified, but the rest we don’t want to diversify. We want to try to create wealth. Just because you’re 60 does not mean that you’re going to die tomorrow. You still have another 30 years to live or 50% more of your life to live.
You’re worth $50 million and you only need twenty. Let’s grow your family portfolio aspirationally.”
This suggests alternative plus passive. And that fees for anybody targeting $1 million or $2 million clients are headed south. Their value proposition is very modest.
Hurley: But won’t future technology make it very cost efficient for them to substantially expand their value proposition?
Thomasson: I hope you’re right, or they are going to go the way of a buggy whip.
Hurley: How big a role will the Internet play in the recruitment of clients?
Thomasson: It’s already significant and will become exponential. Nobody comes to a meeting without visiting our website first. When they come in, I can tell by the look on their face or their handshake how much time they spent on our website. This is just the beginning.
We are all still in the early phase of using search engines and websites. Quite frankly, at some point firms will have two websites: one that anybody can see and access, while the other potential clients will have first gone through a sort of underwriting process to see if they fit our model or value proposition.
Hurley: I’ve argued that successful firms will be confederations of multiple specialties wrapped in one brand.
Thomasson: Intellectually, I agree. Our brand is made up of probably six or seven sub-brands that make up the entire Oxford client experience.
Hurley: What trait will be the hardest thing to find in advisors that you recruit?
Thomasson: Common sense. You know, the heart surgeon that has no bedside manner; the mechanic that can’t explain a carburetor. Every industry has intellectually capable professionals, but when it comes to giving you the short version, explaining how it fits in as a potential financial solution, that’s everything. But how do you interview for common sense?
Hurley: Returning to the industry as a whole, what’s the shape of this industry in 10 years?
Thomasson: In terms of big firms, it can’t be more than 20 or 25. Look at law firms, CPA firms, employee benefit consultants. Look at any kind of service or quasi-service industry. There’s 20 or 25.
Hurley: And specialists?
Thomasson: Yes, then you’ve got some specialists. Then you’ve got everybody else.
Hurley: Lastly, what keeps you up at night? What do you worry about?
Thomasson: A big one involves expanding the circle of leadership at Oxford. These are GET words, with the strength of truthfulness, fair remarks, objective comments and an intentional culture. The truthfulness is really important because it’s really painful, and most people are not willing to be truthful with their peers inside their firms. Their ability to be objective on my behavior, on my views, objective on their behavior, their views, it’s OK to be wrong, GET.
Then the intentional culture. The first 20 years of our organization, we didn’t have a culture. Our culture was a non-culture.
The last 15 years, we’ve had a culture, and now I want it to be an intentional culture. I’ve seen what it’s done for our growth and what it’s done for the quality and transformation of our firm and the resulting benefits to clients and friends.
Hurley: Thank you very much.
Thomasson: Thank you.
Mark Hurley is founder and chief executive of Fiduciary Network, a private bank specializing in the wealth management industry.
Effie Guo contributed to this article.