In August, Folsom, Calif.-based RIA Allworth Financial announced that its long-time co-CEOs, Scott Hanson and Pat McClain, would step down from those roles “as part of a natural succession plan.”
Allworth just recently announced the hiring of John Bunch, a former Edelman Financial Engines and The Mutual Fund Store executive, to serve as the new CEO. Hanson and McClain will stay with the company, serving as vice chairman and head of mergers and partnerships, respectively.
Under their leadership, the RIA has grown to roughly $18 billion in assets under management; it has completed 29 deals; and it has expanded from 60 employees five years ago to 400 today.
Hanson tells WealthManagement.com the decision to step down was his, but that he didn’t get any pushback from the firm’s owners, private equity firm Lightyear Capital and Ontario Teachers’ Pension Plan.
Now, with Bunch set to take over on Nov. 6, Hanson discusses the future of the firm, the custodial landscape and why it was important to find a CEO who was not only well-liked, but who had experience creating value.
The following has been edited for length and clarity.
WealthManagement.com: What was behind that decision for you and Pat to step down?
Scott Hanson: I started out as a financial advisor because I really enjoyed the space. I enjoyed working with clients. And then as we grew, I really liked working with advisors. And then I found that the last couple of years, I was spending the majority of my time managing the business and dealing with things like technology and cybersecurity and HR issues and all that other stuff.
And I was doing some personal reflection and thought, this isn't really what I love to do, number one. And number two, I thought the firm could probably be better led by someone who is more experienced as a CEO and someone who had some of those passions and skillset.
WM: Was that driven at all by the private equity owners? Just this year, there have been several private equity-backed firms bringing in new CEOs that are more operators.
SH: No, I came to them with the idea, but there wasn't any pushback.
Our decision-making process has always been very collaborative, and when we were small, it worked really well. And now that we've got a leadership team of roughly 10 folks on it, I found that making some decisions became more complicated, and I wasn't being as decisive as I think the company needed. I'm not very good at confrontation, and sometimes we just need somebody to say, "We've talked about paths A, B and C. We're going to go down path B, no more discussions about path A and C."
I think if I was honest with myself, for the company to continue to grow and the trajectory we've been on, having some fresh leadership in place would be better for the organization, for our advisors, our people and our clients.
WM: What was behind the decision to hire John Bunch as the new CEO?
SH: He has a lot of experience in this space, a lot of experience of really showing that he's created value. And sometimes there are people in leadership roles at large organizations that got there because everyone loves them, but they're not necessarily great at delivering results. But they somehow seem to get promoted.
So one of the challenges when we're doing the search was making sure we had someone who can truly create value and not just a really friendly person who everyone loves. John is a friendly person who everyone loves, but he also has a history of creating value in organizations.
When he was at the Mutual Fund Store, it was a founder-led firm. He stepped in, worked alongside the founder for a few years before they merged it in with Financial Engines. So he knows how to balance working with founders, and I think that was important for me and for [Pat] McClain as well as for the organization.
WM: How do you hope John’s experience merging two large organizations together will translate to Allworth?
SH: We've done 29 transactions thus far and integrated all these firms. Some go extremely well and some are quite challenging, and I think we've learned a lot over the years, and we continue to improve upon our integration. But John has tremendous experience in M&A. When he was at TD, he led some M&A mergers they had there. And then of course when he was with Mutual Fund Store, he had merged them in with Edelman. And then he just spent the last few years in London leading one of the top wealth management firms there and was involved in four different transactions while there.
WM: Is there anything that you can say about his vision for the future of Allworth?
SH: He's very client focused. I think one of the reasons he's passionate about this business, he sees the need for folks to have good quality advice. And our focus is really on the middle-class millionaire—the single-digit millionaire. The right kind of planning can really have add a tremendous value to their lives, and he's passionate about helping those folks.
WM: What is Allworth’s M&A strategy?
SH: When we first started doing some M&A roughly six years ago, I thought it was going to really be about succession planning and retirement. And that has been some of it, but the majority of the deals that we've been doing are for advisors that still have a few chapters left in them, and they're just kind of bogged down with running a small business and want to get back to doing what they love. So our focus now is really on those advisors that have built up nice little businesses that want to get back to just focusing on their clients or on maybe on business development if that's what they enjoy doing. They're firms with anywhere from four or five to a dozen people. Those are our typical ones, although we've done a couple larger transactions in the past, and we will probably do a couple larger ones in the future as well.
WM: When bringing on firms, do they come under the Allworth brand and become employees?
They become employees day one. We typically rebrand day one, although sometimes there's some exceptions. We might wait a year or so if the brand is particularly strong in a region, but they all become part of Allworth.
WM: When you’re acquiring folks, do you have different affiliation models they can choose from?
SH: We have a couple different career paths for advisors. So our business has changed quite a bit from what it was years ago. I think the days of hiring someone and expecting them to go out and generate a bunch of business, that's a lot tougher than it was 20 or 30 years ago, or even 10 years ago.
So we really look at it as the firm's responsibility to help with that client development and generating new business. So we've got 28 people on our marketing team, and we spend millions every year on our marketing to generate business. And so for us, it's about finding great financial planners.
We've got some advisors that are great at servicing clients. They get excited when they see a client scheduled for that day, but they don't necessarily love the onboarding process. They don't like having to talk to someone who's suspect of our firm and convince them on our value proposition and convert them to be a client. And then we've got other advisors that really love that. To the other extreme, just love bringing on new clients, and that's what they get excited about. They don't get so excited about servicing existing clients. We've got career paths for both those type of advisors.
A lot of our advisors are shareholders in the firm; we've got 90 or so equity partners. And then we have basically kind of a synthetic stock plan for rank and file employees that want to participate in our growth, with another 50 or 60 folks in that program.
WM: You also have your own broker/dealer. When did you launch that?
SH: We launched that in 2008 or 2009.
I started by working with the retirees from the phone company. What was then Pac Bell, now AT&T, and they were doing a ton of downsizing back then. We created a network of advisors where we had advisors around the country that we taught how to target their phone company retirees in their area. And we had a broker/dealer primarily to help share revenue. That was how it originally started.
But the reason we still have it is, we don't sell any product at all. It's for legacy business. So there might've been a client who was sold a variable annuity 20 years ago that had great living benefits, and it makes sense for the client to be keeping that product.
WM: Why not just use an outside broker/dealer?
We have more control of our policies and procedures internally and make sure it lines up with our overall client delivery.
WM: Which firms do you currently custody with, and are you looking at changing any of those relationships?
SH: We're primarily with Fidelity and Schwab. I have a lot of respect for the people there; they're great organizations. In a perfect world, we would custody with firms that didn't compete against us. So when I see a Fidelity commercial or a Schwab commercial, that sounds like it could be an Allworth commercial. I'm thinking, ‘We are competing for the same exact client,’ and I don't love that.
Whether or not they deliver the same product and service and Allworth does, or another independent advisor, I would question, but their advertising certainly makes it sound like they're the same service.
They're good about having Chinese walls where they don't prospect into our clients. But I think the industry could certainly use an independent custodian, one that's truly independent. And I think there are a couple newer ones that are starting—Axos in San Diego, for one.
WM: What do you think of Goldman Sachs custody business?
SH: Goldman has stepped out of their core business model in the last few years and tried to go more retail and mainstream, and it's been a disaster for them. So I don't know how they're going to do with the custodian, but we're not going to be one of the early adopters there. If they emerge and seems like they actually have a good value prop, then we'll certainly have a conversation with them. But I don't want to be the first player.
Someone like a Raymond James, we would love to custody there, but they're not open to having us custody.
WM: Why is that?
SH: I think they're concerned that if we're on their platform, other firms will want to sell to us. And it would squeeze out their economics.
Even LPL, we would like to custody with them, but they're not interested in us.
WM: What makes you interested in those firms?
SH: It's the advisors that are already there that are joining us; some would prefer to use them. The whole process would be easier, and it would be easier communication to the client as well, instead of having to repaper them.
WM: Would you tell me about the firm’s model around client engagement? You have a little bit of a different model, using a lot of data science and algorithms for bringing in new clients.
SH: We’ve got eight people on our data team, analytics and insights, a couple of data scientists in there. So we analyze everything to death, but we learn a lot.
WM: Is that analyzing your own clients or in trying to market to new clients?
SH: Both. For example, our distributions were a little higher this year than normal, so why are they higher? So looking at data to kind of say, ‘are clients taking more money out because things are more expensive? Are they taking money out because loans are too expensive? Are they taking money out because it's going to some CD somewhere that they're not telling us about?’ So I mean, that's where data really helps.
We did a big project to help with some client segmentation because as far as marketing, if we just marketed to where clients read financial stuff, all we're going to attract are the do-it-yourselfers. We wanted to make sure that we had a message that would reach those that were not interested in doing it themselves and that are willing to hire an advisor. Every quarter we get smarter at who to target.
WM: In 2020, private equity firm Lightyear Capital and Ontario Teachers’ Pension Plan acquired Allworth. There has been a lot of debate about private equity investment in the wealth management space. What’s been your experience with it?
SH: My personal experience has been great. We're on our second private equity partner.
We've just learned a lot from our private equity partners. I've often joked that I feel like we've got a team of smart consultants that have a checkbook. They all have junior analysts that can help when there’s something beyond our ability or if we're swamped somewhere. They have access to lots of different individuals.
And then of course, the access to capital. Pat McClain and myself have been working together for 30 years, and six years ago we sold a majority stake in the company. But we had hit a point, and we really focused on growing the RIA about 10 years ago. We dabbled in a couple of other things. We had a reverse mortgage company that we'd sold to Genworth, and we said, "Why don't we focus on building out the advisory business?" And we were primarily in the Sacramento region at that time. So we launched into the Bay Area and into Denver, both with our radio program as well as offices and folks. And while we were having some success, we realized it would just take us forever to get any real size and scale. And we were both at the stage in our lives where we just didn't have the same risk tolerance we did when we were in our 20s or 30s. And neither one of us had the appetite of reaching into our savings to invest in the business to help grow it.
So we said, ‘We can either inch along or we can bring in some capital to help us grow.’ And what I found is when I personally took some chips off the table and had some other capital, my risk tolerance changed dramatically. And it was kind of pedal to the metal; we're off to the races, let's see what we can build here.
I feel like it's kind of the best of all worlds because we've got a big chunk still owned by management and our advisors, but when Lightyear wants to exit, that'll provide a liquidity event. But Ontario Teachers' Pension Plan may choose to hold us for a long time. We've got a long-term kind of permanent capital partner along with someone who would need liquidity every several years or so.
I think one dynamic I was a little concerned about when we first did the deal is, these private equity firms, they raise a lot of their capital from pension plans. And Ontario is an investor with Lightyear funds. So I'm like, "How's this going to be when I've got a private equity partner and one of their biggest clients sitting at the same table all the time?" But it's worked out great.
WM: Do you see Allworth going public eventually?
SH: I hope not. Well, look, we are certainly preparing ourselves for that in the way we operate the organization, the way we present all our financials, the reporting that we do. We want to be prepared for whatever comes next.
WM: What’s your take on what’s happening with Goldman Sachs Personal Financial Management and its sale to Creative Planning?
SH: This does not look well for Goldman. And I think Goldman was preferring a nice, clean exit. And it's been a disaster. I don't think it's healthy for our industry. If you see some of these firms that are kind of rolling up and then blowing apart later, where's the value creation?
It is a bit of a mess when you've got, there's been over with 50 advisors now that are bolting, and I think some of these advisors sold their business and received exchange for selling their business, and they think that maybe they have the business to sell again. And I think that's going to be kind of interesting to see how that all plays out.