Champions of Independence, IMPACT® 2016
BARRY NICHOLSON: So I'll make some quick introductions as to who they are. We'll start here on my immediate left I have Gil Baumgarten with Segment Wealth Management out of Houston, Texas. So Gil is President and CEO there. He's a 30-year veteran of the firm. He started at E.F. Hutton, if some of you remember that name from way back in the 80s, and then became a producer for both UBS and Smith Barney. Segment Wealth was established in 2010, has seven employees. They manage about 500 million in traditional private client business, but then have one large family of about $200 million, so about $700 million, in total. He's an avid outdoorsman and fisherman, and even the name Segment Wealth, as I've gotten to know Gil, comes from a type of woodworking that combines these really intricate and artistic pieces of woodworking. And, Gil, even in his benevolence, went back a couple years ago, as his woodworking was such a big part of his life, that he found his woodshop teacher from high school, asked this guy if he could do anything what would he want to do. And Gil, out of the goodness of his heart in talking to this retired woodshop teacher, he said, I'd always wanted to take my wife on a trip.' And so Gil sent his woodworking teacher on a two-week cruise to Greece. So kind of a unique story there.
And then in the middle, we've got Tony Christensen with ACCESS Wealth Management out of Louisville, Kentucky. He's the President there. He has 19 years of experience in the business. He started as a broker with Morgan Stanley and then also Hilliard Lyons. He opened his firm, ACCESS Wealth Management, in 2004, initially, with Wells Fargo Financial Network, and then later launched his independent RIA just last year in 2015. He does also maintain a relationship with a friendly broker-dealer, PKS. So if some of you have specific questions about what does it look like to be dually registered, he can speak to that. His firm manages about 325 million, total, split about two-thirds on the commission side versus the advisor side, so, again, does have that perspective. He sits on some unique boards there in Louisville, with some hospitals and some charity foundations, even with Nick Lachey and the NASCAR racer, Jimmie Johnson, he's raised… raised a million dollars to give back to charity. So interesting to hear his background.
And then, finally, Lantz Bell with Bell and Brown Wealth Advisors, just up the coast in Newport Beach. He's a Managing Partner there, has been in the business 30 years, started with Sutro and Company, and then moved to RBC. But he's had some broad experience as a complex director, as a branch manager, also as an advisor. They were founded in 2015, have two partners. His partner Jeff Brown's here with us as well. And then have one administrative staff at the home office. They manage about $200 million. And what I've enjoyed as I've talked to Lantz is he's in this lifestyle practice, in kind of the second stage of life, and some of the things that have really cropped up to address his inquisitive nature about, you know, where he's going to be and what his legacy will be. So appreciate all of them joining us here today.
Lantz, let's start with you, and I kind of harken back to Admiral Stockdale right here in this backyard, when he was in the vice presidential debate years ago he said, 'Who am I? Why am I here?' And I kind of say the same thing to the three of you. Why are you here? Given all the choices that you have out in the marketplace today, and you've heard many of them, what drove your decision to become an independent RIA today?
LANTZ BELL: You know, I spent…I wish it was 30 years. I'm actually now 33 years in the business, and I look a lot younger than my years of experience, but I got to travel the business, I fell in love with the business, it's the only business that I know—from a bond broker cold-calling back in the mid-to early 80s, got into the management part of the business, and always loved the asset management bonds and stocks. And as I evolved I ended up as a complex director in seven, eight branches, and it's like Jiminy Christmas, what am I doing? But I still love managing money. And as I retired from business and I did a lot of recruiting throughout my management, so I saw how Merrill Lynch is run, and Morgan Stanley, and so many different firms who I was competing in recruiting. But I kept bringing in great recruits and great teams of people that kept the discretionary fee-based business, the fiduciary relationship with the client. So I really started to see the quality of the people that were turning to that business. Like the DOL says, that appears to be the future of the business, and I believe it is.
But I will say coming independent, also, as I retire from management and I just went back into practice, it was about myself, and I wanted to grow and be better as a person but also professionally. And I just believed that instead of being RBC Lantz Bell, or Morgan Stanley Lantz Bell, I just wanted to…I always envied entrepreneurs. And so I thought to myself, I can't sing, I can't dance, I'm too fat to fly, but I know this business.' And I thought, 'I want to be an entrepreneur. I want to build my own brand, and I want to build a partnership, and I want to build a small firm because this is what I know.'
And so it just…through this learning and understanding…like the previous hour, the trend is there, but actually maybe Gil and I and Tony can actually maybe touch a core on the people that are really interested in possibly doing that. And mine started on a personal thing. I've got four children, they're all watching dad, I've got my mom is proud of this, and the logo, and building, where do we want to sit? Where do we want our office space? What do we want it to look like? Whom do I want to be my partner? Whom do I want to employ? How do we want to build this thing? Where do we want the printer to go? What do we want our furniture to look like? That was exciting to me, and putting together, we'll call it, just a true firm for the benefit of the client.
BARRY NICHOLSON: So the economics is a big piece there. And I think it's important…it's probably a question that all of you ask: what does it look like kind of before and after? And I'd ask, you know, each one of them to really share, you know, what that before and after looks like? Can you tell us more specifically, you know, the transition that you made from the economic side of being a commissioned broker at a wire house versus being an independent advisor?
GIL BAUMGARTEN: I had always run a relatively fee-based business running discretionary business under the P&P system at UBS and the PM system at Smith Barney before that. And I had transitioned my business to fee-based years ago and away from the wrap account model of using out-of-house money managers, specifically, to discretion in order to specifically make the client dependent upon me for decision-making and ultimately make the business more transitionable into this model. So that was a 15-year process by which I ultimately queued my business up to make the easiest departure. And at that point in time I determined that the economics would argue for it, and sooner rather than later, and as the video had said, I had realized in 2010 that that time was now.
And so the long and short of it is that I started my business with $100,000 in my business checking account, and when I spent $62,000 of it I had pretty much set up my business. I had $38,000 left over in the checking account when the revenue started to come in. I did $1.45 million in production my last year at UBS on about $409 million in assets.1 And I did $56,000 in revenue my first month in my new firm, I did $100,000 my second month, and I did $140,000 my third month.2 And the margin metrics essentially in my first year with one employee, I was at about a 62% profit margin.3 We've now since hired five more employees so there's six of them, plus me, and I have about $750,000 of total annual expenses and about $2.6 million worth of topline revenue. So my earnings last year were exactly $1 million more than I made at UBS in my last year at UBS…and I paid more in taxes last year than I earned at UBS my last year.
BARRY NICHOLSON: Good story.
LANTZ BELL: That's to the core of it.
TONY: That's a lot of tax.
LANTZ BELL: I didn't even get to that part yet.
BARRY NICHOLSON: Tony, how about you, how was the economics kind of before and after?
TONY: Yeah, for us it was a little different because, you know, at FiNet we already had a very high payout. You know, when I left Morgan Stanley we thought we were going independent in 2004 to FiNet, and we were really close. You know, when Wachovia ran FiNet, Barry, we were…you know, if you've got the wire house over here and total independence here, we were pretty far over to independent. When Wells Fargo came in and purchased FiNet that pendulum really started to swing back, we really started to feel like a wire house again, which wasn't good for us. So for us the economics weren't as important. The piece of the economics that were important were how we…for us, we really efficiently reinvest into the practice, because now we control the reinvestment into the practice, as opposed to hoping that, you know, Morgan Stanley, you know, did something in some big way that helped us. You know, that would have just been, you know, almost dumb luck for that to happen. So for us now, we're able to very strategically reinvest into the business in the most effective ways, and that's been very helpful.
BARRY NICHOLSON: Yeah, we really hear those consistent themes of paying yourself more, reinvesting, investing in yourself, into your own business, and then having the equity of that ownership after the fact.
So, Lantz, let's talk about the transition, and what was it like to make this shift over? It's like hip surgery, it's a pretty fundamental thing to go through. So what was that transition like for you?
LANTZ BELL: The transition actually, I think going from RBC, Merrill Lynch, to Morgan Stanley, you know, hopping around wirehouses, I think that's a lot more difficult. When you make this choice and you've done your homework, which my partner and I, it took us a couple of years to really make this choice, we interviewed Fidelity and T.D. and Charles Schwab and went through…there's Dynasty and Hightower and all those different choices of getting away from the big wirehouse. But when you make your choice, and when we had gotten to the point, you know, about three or four months before D-Day, before we were ready to do it, the excitement gets going and the passion gets going, and you've got your new logo and you're so excited in your new emails, and you've got your email letter and you're so fired up, that when you do get there, and you start picking up that phone, it is so exciting, and the response from the clients blow you away in how excited they are for you, because there's a bravery thing, there's a thing of taking ownership, there's a…you know, Mr. Johnson's like, 'Lantz, I remember when I started my own engineering firm,' and 'I remember I started my own law practice,' and 'I remember when I went out on my own.' 'I'm so excited for you.'
And the reason you really did it was for you, but also for them, because…and we'll get into a whole thing… otherwise. I'll take this whole thing, I apologize, but it is, it's that exciting, and you are so shocked how excited people are. And one of our themes was… and, again, I'm here just invitee…I don't work for Schwab…but we told them we chose the best custodian in the world for an RIA practice. That was our theme. 'We're so excited. This is a true fiduciary relationship we have with you, Mr. Jones, Mrs. Johnson. And it was so exciting, but the response from the clients were so exciting. We actually…my partner and I had just about $250 million in assets, and we thought when we get rid of all the broker-dealer, and we get rid of all the brokerage business, we should have about $150 million in RIA fee-based assets. Our first year we hit $200 million. We were picking up the phone and telling people how excited we were. So many people were involved already with Schwab. 'Would you take this Schwab account?' 'I already have somebody at Schwab.' All that kind of excitement.
We looked at commission accounts that we thought would never come with us and just came and said, 'This is our practice, we want to be fiduciaries. I understand your…'No, no, you're not leaving, we're coming with you.' And then you can negotiate with people on how you think is fair for the client, and you don't have to call up a regional or a branch manager and ask, 'You know, can I get an exception for this?' There is no exceptions. It's your business and the benefit of the client.
So I think I got a little bit off the question, I apologize, but the transition blew us away on the success that we had and the excitement, not only for us, because our excitement for our clients.
BARRY NICHOLSON: Tony, how about your, from the transition standpoint?
TONY CHRISTENSEN: Yeah, I think one thought for me, as I was listening to Lantz, a lot of that rings true for me, as well. One thing that surprised me was…and I know, you know, some of our friends at Charles Schwab are in the room…but Charles Schwab provided so much in-office support. We had essentially a couple of extra employees for a few weeks, literally in our office, in our city, in hotels, you know, helping us work the transition. That was a big, big help. And what that allowed us to do, as we looked back on it, we actually grew during the transition—new accounts, net new money. And that was very surprising to me. I thought we would really be in kind of preservation mode, trying to bring our assets over, but Schwab provided so much, you know, like I said, physical in-office support for us during the transition, that I was able to continue to build my business during the transition, and I think that, you know, speaks volumes.
BARRY NICHOLSON: Yeah, and that's one of the things that we want to emphasize, that you're not alone in making this transition. I know many of you are obviously working with your business development officer here, who really are the navigators of the firm, and they garner the right resources, then, to execute on this transition. You know, we've got an army of transition consultants that really guide you through that whole process of the paperwork and the technology and the product and all the other pieces that go along with that. Again, in institutionalizing this process, just in the last decade, alone, you think about we've done over 2,000 transitions, brought over 400,000 client accounts that translates into $180 billion for advisors. So we understand this process. You even look downstairs at IMPACT and the Exchange and all the resources that are at your disposal as an independent RIA. So I encourage you, again, to lean into those.
BARRY NICHOLSON: Tony, what has becoming an independent advisor allowed you to do differently?
TONY CHRISTENSEN: Yeah, I would totally agree with Gil. Our average account size, it's not just, you know, that you're excited or the exuberance of the new firm, I mean, it's in the numbers. Our average account size is up fairly drastically, as well. I wish I had a lot of $20- and $30 million accounts. We don't have a lot of those, I need to talk to Gil. We're going to have a beer tonight.
But for us, I remember when we were at FiNet we would do some, you know, goal planning and whatnot, and over $5 million…we wanted to get two new accounts for the year over $5 million. And now our average account size probably sits right in that $5- to $7 million range, almost every single account we open is in that range. And, you know, there's probably various factors that play into that, but I absolutely believe that the model that we're in, the fiduciary model, the independence, the transparency, that certainly plays into it. And for us I don't think I did a good job really understanding…I don't know if anybody else feels this way…the joke's obviously on me…but never in a million years when I was at Morgan Stanley or at FiNet did I not think I was required to be a fiduciary for my clients. We work with a lot of entertainers, Barry mentioned an entertainer and an athlete that we work with, but we work in that space quite a bit. And we had a very large entertainer who reached out to us, was referred to us, and said, 'Hey, we'd like to meet with you.' And her father kind of runs her business affairs. And we had a nice meeting set up, again, unsolicited. And he called me a couple days before the meeting, and this is just pretty recently, a couple years ago, and said, 'We're actually going to cancel the meeting.' And I said, 'Well, you know, can I ask why? I was really excited to meet with you guys.' And he said, 'Well, we found out that you're part of Wells Fargo, and you're not a fiduciary to your clients. You know, I'm only going to hire somebody that will be a fiduciary for my daughter.' And I said, 'Well, that's not right. Of course I'm a fiduciary for my clients. That's you know…And he said, 'Okay, well, get me something in writing that'll prove that.' I said, 'No problem.' So I called Wells Fargo and said, 'Hey, I know this is kind of weird but he says I'm not a fiduciary for my clients. Obviously, I am, every day of my life I'm a fiduciary for these folks, trying to help them with everything in their life.' And they said, 'No, you're not.' And I said, 'Well, if I'm not a fiduciary to my clients who am I a fiduciary to?'
So that was…like I said, I never…never knew that I wasn't required to be a fiduciary. And so, as Gil said, when I first made the move that was my first phone call, to get that meeting and get back to that piece of the business. And I think that, you know, as the clients are learning…you know, this DOL, a lot of this talk, clients understand now more about the different business models than I think they ever have before. They understand some of the differences between the Merrill Lynches and the independent providers. And I think as they start to understand those details, you know, again, the numbers are very clear where the money is moving, and I think you want to make sure…you know, my recommendation would be that you're on the side that the money is moving to, not from, that seems pretty simple to me.
BARRY NICHOLSON: So you've all got long-standing relationships with your clients, and these are deep, you know, multigenerational relationships that you have with them, and so the client trust is a big piece of it. Talk to us about the due diligence process you went through to even choose Schwab as a custodian and what that meant. Lantz, let's start with you.
LANTZ BELL: Well, I had mentioned before we had…my partner and I and…had spent a couple of years on talking to other custodians, other independent-type firm situations, but when it came to Schwab, and I think Gil mentioned it, they just made it really easy for us. We work with Adam Schwartz, and he had like a dinner menu…here's, you know, compliance, here's technology, and he basically just scripted it out for you. In my previous years in management, a complex director, I had opened up some offices, so I had some knowledge, and my partners and I's assistant helped me build part of the complex, so she had some knowledge, also. So there was some advantage to it, but I just felt like Schwab made it so easy. And I felt like if I came from…you know, because we all have that little scareness, that little like, 'Is this thing really going to work?' So I felt like coming from an RBC or a big wirehouse, and what we thought was so important, what we thought was our security blanket ends up like Gil says, ends up being just the opposite. We just looked at it and we thought, you know, let's go with what we felt was the best custodian for our practice. And we drank the Kool-Aid. We do all the reporting, we used all of their services, and we just thought let's make it simple and easy.
And for us, for Charles Schwab, was not only did the likes of Adam Schwartz make it easy for us with all the choices, but also with Kimberly Sanders, I mean, she just helped me with the P&L, and kind of the business plan, and she was just absolutely terrific. And you get there and Gray shows up and will do anything for you, and Matt returns your emails through sometimes. So they were just so responsive, and they were just so helpful. But I got to tell you, the name, the custodian name, these are where the assets are, they have a trillion dollars in an RIA platform…for us, just kind of took that away from us about worrying about, you know…no, I shouldn't say other names but, 'I never heard of them,,' or, 'Are you sure? Who are they? And, 'Now, this is great for you guys, but how does that work again?' So once we just started with the Schwab, a couple of the bullet points, it just made it so much easier for us. So that's really where we get our due diligence.
BARRY NICHOLSON: And, Gil, same question, you know, how was your due diligence process? How could you add on to what Lantz said and ultimately, you know, why Schwab?
GIL BAUMGARTEN: Well, back to my woodworking. I build these intricate little pieces. What you could gather from that is I'm an engineer at my core. So that means I need a lot of information. And so I first interviewed Schwab in 1994, and went through this process of, 'Oh, my book of business isn't big enough.' So I had about $50 million in AUM in '94. And then I looked at it a little more in '97, and, 'Oh, yeah, this was a good business model for me, but my book of business isn't big enough.' I had $100 million at the time. Then I thought I needed 200. Then I thought I needed 300. And, basically, I just talked myself out of it because fear of the unknown, I didn't want to step out and because I went straight broker-dealer model to straight RIA model. I didn't do the blended model, and for me, I'm glad I didn't. I just didn't really know how to do it.
And so I ultimately used a transition firm, so a firm that would act as an advocate for me on the outside that would partner also with Schwab and bring me out of the brokerage firm in a safe place to land, where compliance was already done for me, payroll was already done, computers were already set up, the phones were already set up, everything was already set up for me. And I spent a lot of money doing that, and, in retrospect I would do it again in a heartbeat. I wasted a lot of money, I think, and my margins weren't as good in the first year as they could have been, but I soon rid myself of that firm and set up my own parallel systems behind the scene and ultimately transitioned on my own platform. But that firm provided something very valuable to me, and that was that they provided me a safe place to land and they were a catalyst for the move that I should have made years and years before, if not clearly more than a decade before the economics argued for the transition, in my case, but it gave me a safe place to land where the engineer in me could be comfortable that it was going to be a safe spot. And so that's how I made my transition.
BARRY NICHOLSON: And that's where there's really no one path to Rome. I think, again, we talk about the relationships that you have with your business development officers, I encourage you to really utilize them. We see a lot of different scenarios where advisors are lifting out, and there's no one-size-fits-all approach, that there's specifics as far as technology and compliance and whether you need a broker-dealer or don't need a broker-dealer. You can see it based on their varied scenarios here, so develop that relationship with your BDO and let them coach you through some of these navigational decisions.
Let's take a couple minutes, instead of the conversation here, what questions might you have for the panelists here?
ON-SCREEN QUESTION: How different is the independent RIA model compared to other models you've transitioned to?
TONY CHRISTENSEN: I think that's a great question. And, you know, for me, our transition, we spent about 15 months doing some very deep due diligence. We flew around all the home offices, had the firms come to us And, for us, as Lantz said earlier, Charles Schwab was the most experienced in that space. They did have a brand, everything that we wanted to do—there were some specific services we do, a lot of bookkeeping, bill payment, you know, family office services for athletes and some high-net-worth families. And all of the firms in the RIA space, you can do that at any of them, but there was one who said, 'Oh, yeah, we do that a bunch, we've been doing that for decades. So I think, for us, the experience that Charles Schwab had was second to none. And, you know, their whole business model is built around the independence and, you know, doing what's right for clients, and, obviously, they've succeeded really well. So, for me, you know, when you truly do make a full move, totally different. I mean, you know, every aspect of it reflects pure independence, there's no doubt about that.
LANTZ BELL: Can I pile onto that a little bit? Let me jump on Gil's bandwagon, because Gil is to the point. It's the fiduciary, the relationship, all the stuff that we want to create, but it all boils down to that one thing. If your revenues are a million dollars, if your revenues are a million-five, or two million dollars, those are your revenues. You created them with the relationship to your client. Out of that you get 100% payout. You get to spend the money you want—trading costs, how much you want your rent, how many people you want to put, that's your revenues. Don't ever forget that.
ON-SCREEN QUESTION: Is there anything you would have done differently during your transition that might have been better for you and your clients?
GIL BAUMGARTEN: I would have done it sooner.
TONY CHRISTENSEN: Yeah. No.
GIL BAUMGARTEN: Like a decade sooner.
TONY CHRISTENSEN: I have to agree with Gil. That's the only thing for me, as well, do it a little earlier than we did. But it was, you know, so much work. Certainly, transition is work. It's not a lot of fun. But Schwab was a big help, as I said earlier, and the benefits that we receive where we currently sit make any, you know, paperwork, you know, well worth the time.
LANTZ BELL: Well, one thing I would say about the transition is make sure everybody knows exactly how trust paperwork works, how things…'cause I will say that with Schwab as a custodian, remember their relationship with you—you don't work for them. They are your custodian. They're your partner. Technically, you're their client. So it's really a change. How many wirehouses do you go in in the morning and you feel like you're the client? Well, at Schwab, you are the client.
But one of the things is you have to make sure the people that are part of the process, and part of the operations and the transferring understand exactly what Schwab will want, because you don't…your assistants and your operations people can't go into the system. There are ways that, you know, Merrill Lynch or Morgan Stanley or RBC assistants can go into the system and kind of go, 'I'm going to change a cell phone,' or 'I'm going to do this,' and 'I'm going to do that.' Schwab will not play that game. They are very, very strict about you following the custodian rules. And I don't blame them. They want to make sure that everything is signed-off. When you're householding the wife can't see the husband's IRA. They have to sign-off and make sure, so the household can view. And you think to yourself, 'Well, that's ridiculous. I can do that here.' It doesn't matter. They are very, very efficient.
Now, I spin it around the other way and say to my clients, 'These people won't let me change your cell phone number without you signing off on it.' There's no gains, there's no moving assets around, there is nothing that I can do that would put me in a bad situation. And, also, on the compliance part, everything is signed-off, all the t's are dotted and the i's are…or the i's are dotted, the t's are crossed. But it's a good thing. So but make sure your team knows it, make sure your team understands the forms they're looking at, how it's going to be done, so you don't get frustrated or your team doesn't get frustrated, and your operational side doesn't get frustrated during the transition. But, trust me, it's good for the client and it's good for you.
TONY CHRISTENSEN: I'll make a comment on Lantz' comments. We use a lot of…we use DocuSign quite a bit, eSignature… Schwab has a good eSignature program and it's growing, and so we do…our clients love that—turn their iPhones sideways and scribble their name on the screen. So we do a lot of eSignature work and Schwab is, you know, fairly ahead of the curve on that.
BARRY NICHOLSON: So we've run out of time today. Join me in a round of applause for the panelists and thank them. Thank you, gentlemen, very much.
With Barry Nicholson, Business Development Officer, Charles Schwab & Co.; Lantz Bell, Managing Partner, Bell & Brown Wealth Advisors; Gil Baumgarten, President, Chief Investment Officer, Segment Wealth Management; Tony Christensen, President, Managing Partner, ACCESS Wealth Management