Larry Miles joined AdvicePeriod in 2015, attracted by the firm's founders mission to reinvent wealth management. Lead with technology, charge flat fees and integrate services like tax and estate planning. Prior to AdvicePeriod, Miles was a partner with the $12 billion Convergent Wealth Advisors; he’s a graduate of Amherst College and the London School of Economics. Miles, who won the 2018 Wealthmanagement.com Industry Award for RIA Innovator of the Year, spoke with us shortly after the recent publication of his book It’s That Simple; How to Build the Professional Service Firm of the Future.
WealthManagement.com: You wrote this book for service organizations in general, but clearly you include financial advisory firms in that group. Not all advisors see themselves that way. Can you talk a little bit more about how your book relates to RIAs specifically?
Larry Miles: AdvicePeriod started with a question of what a wealth management company would look like today if it were started from scratch. Not burdened by the way things have always been done, with legacy policies or technologies. And one of the dynamics we saw is this convergence of services underneath RIAs. Fifteen or 20 years ago, most advisors were really just offering investment management, us included. These days, most every advisor offers planning, whether that’s financial planning or complex estate planning. You see more and more RIAs affiliated with, or have as subsidiaries, trust companies, law firms, CPA firms. We believe that the wealth management firm of the future is an integrated professional services firm.
WM: You talked a lot about how “culture” drives that in terms of building an integrated professional services firm. That’s a spongy word to a lot of people. What do you mean by “culture,” and particularly for a smaller RIA firm, how does that manifest itself?
LM: Every firm has a culture. It’s either something that you work on purposely and build the culture that you want or you just get the culture that you get. Some of the best advisors get into this business because they love helping clients. That’s their passion and that’s their mission. They’re not necessarily great business people. We think that’s a missed opportunity. When you look at some of the more successful firms, not just measured by size but by their effectiveness to help clients, you see, not necessarily a cult of personality around one person, but a truly built-out firm with operations and people and culture and a business that’s larger than the one name. We think culture is the glue that holds that together.
I’ll give you one quick example. Every time a firm is bought, it gets a lot of headlines. XYZ firm is bought by somebody else for X millions of dollars at a Y multiple. But when you’re acquiring talent and clients by just buying them, that’s not a recipe for long-term success. You’re hiring mercenaries that are working for you because you’re buying them. It’s different than attracting missionaries, those who believe in your vision and your desire to help clients and have a shared common goal. We think the most successful firms were brought together by a common mission, not just by dollars.
WM: A lot of firms in the RIA space are very small, right? One- or two-person shops, maybe an administrator, maybe a junior planner. Do these same rules still apply there? How should those advisors think about an integrated services offering?
LM: It’s more important. In some ways, smaller practices have an advantage. If you’ve got more folks, it can be harder to be more innovative, perhaps. It becomes harder to be flexible. There’s certainly challenges with smaller firms, but in some ways the newer, smaller firms actually have a leg-up on the larger incumbents. It’s much harder to change course in an oil tanker than it is in a smaller, nimble vessel.
WM: You speak about how the gig economy can help small businesses. Does the same applies to small RIAs?
LM: No question. I think the opportunity to acquire the expertise you need on an as-needed basis, whether you’re a small company or a large company, is greater now than it’s ever been before. Whether you need help with your CRM, whether you want help building out your client experience or your operational infrastructure, you can acquire the resources you need. We’re a midsize firm, we’re pushing 60 people now, and we’re still finding opportunities every day to acquire a fractional interest in people that have the expertise that we need.
When you’re a smaller firm, it’s even more important. Your resources are so precious and so finite. It’s rent versus buy. I’d much rather rent that expertise because things change so quickly, with technology and what we do for clients, that you have to be really careful when you lock yourself into hiring people or entering into long-term contracts. It can cause you problems down the road. Our perspective is, if we’re going to do something ourselves, if we’re going to in-source it and we’re going to have full-time employees doing it, then we need to be the best at it. It needs to be something that we think only we can do. For us, that’s our client experience. But we’re going to outsource our technology, research, marketing, design … all these things that we have opinions on, and are incredibly important, but we just don’t think we can be the best at them. Why would we hire design and marketing experts that would want to work for a wealth management firm, when instead we can go to a design studio here in Los Angeles where all these folks create amazingly sharp and visually interesting material every day? Then, if we want to go for a different look, a different feel, it’s much easier to change than it would be if the folks worked for us.
WM: Should firms be outsourcing their investment management?
LM: Ten, 15 years ago we had our own research group at our prior firm. These folks were scouring the universe looking for the best investment managers. They were tweaking the asset allocation. As we went around the country and met other firms that looked a lot like us, everybody had the same research group researching the same managers; everyone’s asset allocation, plus or minus, looked the same. So, yeah, in our opinion it’s become largely commoditized. I don’t want to own things that are commodities. I want to own differentiators. Whether you’re a small firm or a large firm, don’t invest your precious resources in commodities.
WM: A lot of advisors won’t give up that idea of being the best stock picker in town.
LM: Yeah. That idea to us is completely archaic. Trying to convince someone that you’re smarter than somebody else. That you have a better asset allocation. That you know what’s going to happen in the market. That’s ridiculous. We think that the best advisors are focused on truly adding value. Oftentimes a stock-picking mentality goes along with a “healthy” ego and it’s much more about the advisor than it is about the client.
WM: One of the things you write about in your book is how client segmentation, which is the way a lot of advisors approach the market, is a bad idea.
LM: It’s a myth and something that advisors use to fool themselves into thinking that they can work with anyone and everyone, instead of having the discipline to work with the clients for whom they’re really best suited. Client segmentation is something that looks really good on paper, but in practice most firms don’t have the discipline. As I mentioned in the book, we didn’t have the discipline to do it either. I don’t think it makes sense to have one firm have different client segments, so much as it makes sense to have separate business entities for those segments. It’s because of services creep. It would be unfair to ask (the advisor) to service ultra-high-net worth clients and deliver 10 things to them, and at the same time also serve high-net-worth clients with only five things. Chances are you’re going to wind up over-servicing everybody.
WM: You talk about the mistake a lot of advisors make in overly socializing with clients—dinner, wine tastings, social outings, sporting events. I think a lot of advisors maybe approach that as a referral opportunity. But you think advisors do too much of it.
LM: If you're spending your time, and you’re spending your resources, wining and dining your clients, ultimately that doesn’t improve your client’s financial situation. Spend that time coaching clients on what really matters to them. Spend your resources not on Super Bowl tickets but on improving technology, adding to your team, and giving back to the clients—because ultimately that’s what matters.
Clients probably enjoy a nice round of golf at Pebble Beach or a nice ball game. But that’s not what clients are hiring us for. Savvy clients are going to know that and understand that if you’re taking them to some special event and spending hundreds of dollars on them, ultimately, they’re the ones paying for that.
Going forward clients are going to be focused on results. They’re going to say, “prove to me that I’m getting a return on the fees I’m paying you.” If you say, “well, I took you to this game. I took you out to dinner,” clients are going to say, “go jump in a lake. That’s not what I’m paying you for. I’m paying you to be my advisor.” Much like the stock pickers, I think the gross socialization with clients will go the way of the dinosaur.
WM: You also speak about the need, but the reluctance, for advisors to get rid of troublesome clients, or clients that don’t fit with the services offering. Hard to do when you are focused on growth.
LM: Yeah, but it’s the right kind of growth. The key to having great clients, or a business with great clients, is saying no. You’ve got to say no to bad clients that don’t appreciate what you do for them or the clients that don’t pay you a fair fee for the value that you’re offering.
WM: For a lot of advisor it’s tough to have that conversation with clients, right?
LM: Being an advisor is all about having tough conversations with clients: Telling clients that they’re spending too much; Telling clients that they can’t afford something; Telling clients what they need to do. The best advisors aren’t yes men or women. They have the backbone, the spine and the discipline to help their clients where their clients don’t have that discipline. So, if an advisor doesn’t have the gumption to have those difficult conversations, I’d suggest they’re not a very good advisor.
WM: The robos came and advisors said: “No way, robos won’t take over my investment management. That’s my turf.” Then there’s the concession, and advisors say let’s focus on what we do better, which is financial planning. Now, technology’s coming for financial planning as well.
LM: Core elements of what an advisor has historically done is being automated. And whether you think of that as artificial intelligence or machine learning, it helps take a lot of the emotion out of making decisions, and therefore helps clients make better decisions. And first, advisors need to acknowledge that that’s happening. A lot of advisors don’t acknowledge that. And even if they do acknowledge maybe trading can be automated, they’re not yet willing yet to say, “technology can help my clients plan. But there’s a human element, and I have to be there.” I think that arrogance is going to lead a lot of advisors to miss opportunities and not invest in technology and not focus on it the way that they should. Ultimately, that’s going to hurt their clients and a longer-term lead to their business shrinking.
And so, I think the best advisors have to acknowledge technology is an ally. Ultimately, so much of what an advisor does is decision tree-based. If you want this, then here are the questions. You answer these questions, that leads to that answer. All of that can be easily digitized, so that the role for the advisor is going to change significantly. It’s going to happen much more quickly than most advisors think. Unfortunately for them, and by the time they realize it, it’s probably going to be too late.
And then when does a big multibillion-dollar technology firm say, “I’m going to take over financial services.” When’s Amazon going to do that? When’s Google going to do that?, or Apple? Not just in payment processing, but true wealth management. When’s that going to happen and who’s going to compete with them? That’s going to be a fascinating study.
WM: And you have no doubt that it’s going to happen.
LM: It has to. It’s just too big of a market. Depending on how you look at the GDP and what percentage of it is financial services, it’s massive. If Amazon can get into the grocery business, why wouldn’t it get into financial services? I think they’re starting with the really big ones in payment processing. But at some point, they’re going to turn their lens to what we’re doing, and it’s going to be game over for a lot of the old-school firms.
WM: Where does that leave the advisors in the future, then? What will be required from human advisors?
LM: To us, it goes back to the continued integration and convergence of the professional services world. If an advisor was only offering investment management, in theory, they have been put out of business. Their clients get that somewhere else works more effectively, and at less cost, today. They’re still in business the same way buggy-whip manufacturers didn’t go out of business the day the Model T rolled off the assembly line. It took a while.
What the advisors have to do to stay ahead is offer more, and differentiated, services, like legal work. And that’s not just saying, “hey, I got a trust and estate attorney that can help you.“ More and more wealth management firms are either partnering with, or starting, their own law firms. They’re partnering with, or starting, their own trust companies. They’re offering not just tax advice, but they’re partnering with, or they’re starting, a CPA firm. They’re offering business management, bill pay, financial statements … all things that will eventually be automated by technology, but the most savvy firms we think are trying to stay ahead of that curve by offering more of the services under one umbrella.
Peter Mallouk, of Creative Planning, is a great example of that, partnering a wealth management firm with a robust legal offering. We think that that’s the trend that, again, a lot of the most innovative and interesting firms are embracing. We see more and more advisors starting trust companies. In the next 12 months we’ll be rolling out our own trust company.
WM: Why bring the trust company under the roof? Is that only to keep the assets inside the firm?
LM: Well, historically, the trust business is one where trust companies would give away the administration and their trustee services in exchange for managing the money. We think it should be the opposite. The commodity service is managing the money. The more customized offering is the trustee services.
There are three challenges that we hear from our clients when they think about who’s going to succeed them as a trustee of their estate. The first problem they see is mortality. “My friends are my age, so if we all go our natural course, they’re going to die the same time I am.” So they’re not going to be good successor trustees. The second challenge is: “My brother’s an idiot. Love my brother, love my family, but I don’t want them responsible for this.” The third challenge is: “I don't want to be just a number at a massive trust company.” This has been a trend for years, where these boutique trust companies have started to fill that gap. So for us, it’s an accommodation to make the lives of our clients simple. We have the main relationship with these families. How do you make their life easy? That’s the trend we see, whether it’s trustee services, legal work or tax work. Our clients just want their lives made simple, and trying to manage a loose collection of disparate advisors is a lot of work. Usually, it’s the wealth manager who does that. It would just be so much easier if they all worked together.
There are firms that have moved in that direction, but no one has integrated them across the board at a foundational level. They’ve always been add-ons. So we think it’ll be interesting who’s going to be able to nail that, from start to finish—all technologically, digitally integrated. The true professional firm of the future where that client can go to one stop and get everything from their investment needs to their planning, their legal work, their taxes, and the trustee services that they need. Just everything done together, and simply for them. We think someone’s going to crack that code. We’re going to try.
This interview has been edited for clarity and length.