Moneta CEO Eric Kittner appeared as the featured guest on The InvestmentNews Podcast to discuss the recent trend of wirehouses trying to make inroads in the RIA space. The conversation also touched on what the influx of money is doing to the RIA marketplace and if Moneta is pricing itself out of the market for their own next-gen Partners.
You can listen to the full podcast here.
Below is a transcript of the conversation.
HOST: Got a lot on the docket today, kicking it off with Eric Kittner, Chairman and CEO of Moneta, a $27.4 billion RIA. We’re going to talk about some movement in the wealth management space, looking at how they’ll move the wirehouse industry or the some of the wirehouse firms. Primarily, JP Morgan is trying to nudge its way into the RIA space. Eric’s going to enlighten us a little bit on that. We were talking about JP Morgan trying to establish an RIA type of call center remote business. They revealed that in a filing on a new Form ADV as of November 1, so a couple of weeks ago. That comes on the heels of Goldman Sachs a couple of years ago buying United Capital. We’re interested in talking to guys who are true RIA industry people and their impressions of Wall Street kind of making inroads in this business – these big Wall Street banks. But first, if you can tell us a little bit about yourself and Moneta and I know you guys are making acquisitions too, of course.
ERIC: Happy to give a little bit of background. I have been in the industry for now approaching 19 years. I actually came out of the accounting world. I spent four years in public accounting. Started with Arthur Andersen on the East Coast and we ran into the Enron issue and caused a lot of disruption. So, I found myself moving to the Midwest with my wife and went to work for a regional firm and really kind of stumbled I would say across the RIA space. As I discovered what I wanted to be when I grew up, I found I wanted to be in the RIA space. I found Moneta in 2003. I joined the firm and for the first really 14 years of my career, I was solely focused on building a client business. I had a partner at the time, and we focused on providing comprehensive – what we call Family CFO services to successful high-net-worth, ultra-high-net-worth families and really spent my first 14 years doing that in a fee-only capacity.
HOST: So, you were an advisor in other words?
ERIC: So, I was an advisor, correct. I’ve seen a lot of change, obviously, in the industry. One of the things that our firm, Moneta, is focused on is having a succession plan and building a sustainable business. In true to form, the Partners of the firm felt that in 2018 I was the right next person to lead the firm and I have been leading the strategic direction of Moneta since January of 2018. At that time, we were solely focused on the organic growth model – hiring, training, developing next gen talents. Now we’ve looked at the world and said we have to continue that organic growth engine, but we’ve also looked at M&A activity and expansion beyond St. Louis and we’ve been doing that now for the last four to five years.
HOST: Amazing how much the world has changed in three years, four years or so. Right?
ERIC: It’s pretty amazing. As we get into the discussion on the RIA landscape, it’s pretty remarkable what we’re seeing in this space at this point with the activity, the transactions and, you know, I’ve heard a lot of experts in this area talk about how this is really the beginning of the ballgame. You know, people have referenced the first or second inning of a baseball game, and the only thing I would say is it’s maybe the first or sending second inning of a game that could be a doubleheader. I think we’re very early on and we’re starting to see significant momentum in the era of space. We obviously have our thoughts and opinions as to why that is, but I think we’re really just getting started.
HOST: So, before we talk about Moneta’s expansion strategy a little bit and how that’s altered under you, when you take over as CEO in 2018, there’s no – Goldman Sachs hasn’t bought United capital yet, right? I think right at that time, UBS and Morgan Stanley said we’re stepping out of the broker protocol for recruiting. So, that had just happened, which was to slow down the exit of their advisors into firms like yours or setting up their own RIAs, which would eventually become a part of a larger RIA like Moneta. And JP Morgan hadn’t opened its own RIA call center, remote advisor group, which is opening up right now. And I count private equity money as being part of Wall Street. So, the flood of private equity money hadn’t reached its heights as it is now or maybe in the future. Just speak about your perception of this, all this attention and all this money from Wall Street and what is it doing to the RIA marketplace and if you care to comment specifically on Goldman Sachs and JP Morgan or anybody else.
ERIC: Well, I would say if I looked at what we believe the RIA model – it’s winning, is what all this is telling you.
HOST: What do you mean by that?
ERIC: It’s winning in the fact that the consumer, at the end of the day I believe, is fundamentally being drawn to the RIA model, which is the fiduciary model. You know, I started 19 years ago in the industry, and we had people that would walk in our door and they’d say, I’m not paying my broker anything. And to a knowledge base, there were people that just didn’t know. It wasn’t transparent. It wasn’t clear. It wasn’t described to them. And as crazy as that would seem to me sitting in the space and sitting in an office having that conversation, I realized that that was more still the norm in the industry. So, fast forward 19 years and I think the fiduciary standard – actually acting in a fiduciary capacity as an advisor is the model that resonates best with the consumer at the end client.
HOST: So, Wall Street is interested in RIAs because it’s siphoning clients? They’re losing their large clients to RIAs?
ERIC: I believe that the consumer understands the differences – is learning more about what it means to be a true fiduciary rather than to act in a suitability standard but truly act as an advocate. I believe that there are plenty of advisors that say I want to be a true fiduciary for my clients. The intersection of those two things is really the RIA marketplace.
HOST: Do you think the Goldman Sachs’s and the JP Morgan’s, can they be successful here?
ERIC: From a general perspective? Yes. I think the reality is there’s going to be multiple flavors of RIAs in the world. So, at the end of the day, the RIA is the model, but we’re going to have lots of different flavors of RIAs that are going to exist to meet various consumer demands. So, when you look at the JP Morgan model, what I’ve read on it is that it’s going to be the more – I’ll call it the mass affluent, if I read it correctly, though, I think you have to have an account of $25,000 or above. That’s a very different model than a firm like Moneta, who’s focused on high-net-worth, ultra-high-net-worth and a very low client-to-advisor ratio – less than 50 clients per advisor. That model is different than JP Morgan. It doesn’t mean that JP Morgan won’t be successful. They’ve got a machine. They’ve got tremendous infrastructure to build out that RIA. What they’re shooting for, at least in the initial onset, is a little bit different than the client that we serve.
HOST: I hear this a lot from the RIA space about consumers – the fiduciary standard resonating with consumers. I guess, I think this “best interest” and “fiduciary standard,” I just believe that that is noise to most consumers. I mean, you might have some really sophisticated consumers that are in touch in reading the fine print and all their statements and everything and they know what they’re paying their advisor, but I think it’s a lot more popular to talk about within the wealth management space than it is among consumers. Consumers get “best interest” and it’s explained and they think, oh, my guy is looking out for my best interest and my guy, you know, he’s operating under fiduciary standard. I don’t know if you if you’ve actually surveyed consumers, Eric, or if you’ve actually talked to each of your clients. I’m not saying that your clients don’t completely get it 100%. I know it’s explained to them, but I guess I still believe that it’s too much of a mishmash. I’m asking if you see the potential for confusion out there among consumers.
ERIC: There’s a tremendous amount of confusion from a consumer perspective. But, anecdotally, we work with 6,000 high-net-worth, ultra-high net worth families across the country. I will tell you more and more as we’re interviewed in in working with those families, the question comes up, “Are you a fiduciary?” So, I’m not saying that the general population of consumer understands the difference between best interests or a true fiduciary, but I’m going to tell you from a high-net-worth or ultra-high-net-worth consumer base, it’s different. So you can’t take every potential client out there and say the level of education or knowledge in the industry is the same. And that’s not a that’s not a knock on anyone. That’s just the facts that more of our clients that have a significant asset base are well aware of the difference between a traditional wirehouse and broker versus a true fiduciary in an RIA space.
HOST: Well, we’ll see how that continues to morph with operations like JP Morgan coming out with their own RIAs and then they’re going to be fiduciaries. I’m not saying anybody’s not making a real effort. I just feel like I’m kind of buried in this stuff all day long and I still can’t imagine how consumers can figure it out because half the time I can’t figure it out and it’s my job to figure it out. Anyway, do you guys have private equity backers?
ERIC: We don’t. You’ve seen a flood of capital to the space. So, I talked about the business model working and winning as I believe that’s kind of the vehicle that makes the most sense as you build out your wealth management business. We have avoided outside capital. We’ve been operating as a partner owned firm. We have 50 equity partners in the firm. We’re the owners of the firm and we really believe fundamentally that puts us in a position where the only people we have to answer to are our clients and our talent. What we have avoided is outside influence of capital. Frankly, approaching $30 billion of assets under management at this point, we’ve got capital internally. We’ve got enough scale and size that if we need to invest in the business, we could do that. Fundamentally, we’re focused on transitioning our generation of owners internally, meaning that we fundamentally believe to be a fiduciary and to serve our clients for generations to come – we’re focused on building sustainable businesses, which means our underlying client relationships get transferred from one generation to the next to the next. The business owners get paid for that and there’s an internal transaction. What we believe is that’s fundamentally the best answer for our clients and we don’t need outside capital in that model.
HOST: You know, it’s funny, I was reading something the other day about the challenge that’s facing some of the more traditional succession plans, especially when it’s ownership inside the firm buying the senior people out because of all these valuations spiking so much and you got to get private equity some of the credit for driving up those valuations. Are you worried at all about that – about pricing yourself out of the market for your next generation advisors to be able to buy your firm?
ERIC: Obviously, it’s a really relevant topic right now given where valuations are. You’re seeing a bank like CI come in and scoop up – not $200 million or $300 million firms, but $5 billion and $7 billion and $9 billion firms at what appear to be incredibly rich valuations from our perspective. At the end of the day, yeah, we have to be conscious of what’s happening in the outside market, but I think that speaks to a bit of the culture of our firm in the commitment to our clients. There’s two things. One is this is a snapshot in time. This is the current valuation, but things can change in the in the future. They may not always be as frothy. You may not have firms that have a near-zero cost of capital forever. So, valuations can change and this is a snapshot in time. But the other the other piece is if you look at our model and you look at our next-gen advisors who come in and help build the business and then own the business, this sum total of the transaction of our teams that go from first-gen to second-gen, it’s not a one-to-one, one partner to the next. It’s often one or multi partners to multi partners and that wealth transfer happens over 10 to 15 years in aggregate. It’s not necessarily all that different than a transaction externally. And fundamentally, our belief is it allows us to look our clients in the face or continue to travel with them or play golf with them or hunt and fish when we’re retired and know the team who’s taking care of them and loving them and providing the services because our commitment to them was we’re going to have that team in place and we’re not going to sell it to an outside party.
HOST: When is the last acquisition you guys made?
ERIC: So, we had the Berry Group in Worcester, Mass join us really earlier this year. Our model in that transaction is – Mike and Sarah, the partners of the firm, they had spun onto the Wells RIA platform. They left the traditional wirehouse model of Wells to go on to the Wells RIA platform. They realized pretty quickly that they needed scale and size to help them grow the business and run the business. So, here’s our story. Advisors got into business to provide advice. We’re passionate about sitting across from clients and helping them accomplish the goals and objectives they have. As we grow, you have all kinds of other needs – from a technology solution, from an investment planning perspective, from recruiting and anything in between. As a firm that had about $700 million in assets under management, Mike and Sarah are spending most of their time running the business rather than focused on their clients and growing the business. They partnered with Moneta, they partner with us, they come on board, they take the Moneta brand. We at Moneta have 425 folks across the firm, but 110 of those folks are specifically there to provide the back and middle office services for Mike and Sarah to recommend business. So, compliance goes off their plate – fee billing, onboarding of new clients.
HOST: My question is really about the competition out there to buy firms and especially the larger firms and you guys are certainly in that space. I don’t know maybe people are asking you questions as a target. But, what do you think of CI financial in Toronto coming down here and just buying big giant firms and buying like crazy? They announced their 26th deal in two years just this morning. They got $96 billion in US RIA assets from zero just two years ago. That’s, to me, the best example of somebody pushing up valuations.
ERIC: I think I think their argument is that’s the way that they’re going to create real scale – not talking about 2 or 5 billion, but talking about 100 or 200 or 300 billion in the RIA space. What I think about that is, at the end of the day, there’s firms that are getting paid a significant multiple to sell their client relationships to a large bank building an RIA. I think the inherent challenges that will come along with that are the integrations of culture, the integration of the technology stack, that support I get as an advisor on that platform – all the things that it takes to integrate $96 billion coming together in a couple of short years and to do it in a strategic in way that ultimately works for the end clients. So, what we see in the M&A space is a lot of the rhetoric about how it’s multiples in the ownership and the second gen can’t afford and all the other aspects. What we don’t see as much about is how it affects the end client. What’s the impact on the end client? The firm in Boston merged in with us. They become a partner on our platform as part of our brand, but we didn’t write him a check and they weren’t forced to sell us their clients. So, our model is a bit different. I’m not sure that every acquisition is going to prove to be a good acquisition, and if you’re paying that multiple, you better have a really good internal model for kicking up organic growth. For it to make sense from a return perspective, you better have a good organic growth engine and have a really good way to support those firms coming on the platform to help them grow.
HOST: I think the big question I’m left with end of the interview for the future as we keep an eye on Moneta is how are you going to stave off these giant private equity firms? You’re going to need a big stick to beat these guys back. A firm like yours must be very – you must be getting calls every day or every week from potential buyers.
ERIC: Yeah, you can imagine we get we get pinged every now and again. It doesn’t really take a stick, it really takes a commitment from the partner base to focus on, you know, let’s not get caught up in the noise. I think we’ll be just fine staying steady, having partner capital and finding good firms that want to join and see the benefit of transitioning our clients internally from generation to generation. It’s not for everybody, but I think we’re big enough where we can compete in the space where we are.
© 2021 Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The opinions expressed by Mr. Kittner during the podcast episode do not represent any specific recommendation, nor is the content an offer to buy or sell securities.
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