Articles | September 13, 2023

The Advisor's Edge: Navigating Wealth Management with the Advisor Solutions Group

This is the podcast that all financial intermediaries should be listening to.

In our kickoff episode, we introduce you to Segal Marco Advisors’ Advisor Solutions Group. We’ll share background about our unique qualifications and experience, describe the services we provide, and talk about the types of clients we work with — and how we work with them. We’ll also discuss the reasons why clients engage us: from helping them differentiate themselves in a competitive market, to showing them how to attract and retain clients. Listen now.

The Advisors Edge: Navigating Wealth Management with the Advisor Solutions Group

Podcast Transcript


David Pappalardo, Senior Vice President, Advisor Solutions Group
Peter Sullivan, Vice President


The Advisor’s Edge Podcast

A podcast for financial intermediaries, designed to keep you abreast of what’s new and what’s next in modern wealth management. In each episode, top experts in the field will share the latest intelligence on market trends. Asset allocation. Due diligence insights. And more. It’s part of our SMART series, highlighting new thinking from Segal Marco Advisors’ Research and Trends, helping you make more informed decisions


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Podcast transcript


David Pappalardo: Hi everyone, this is David Pappalardo from the Advisor Solutions Group at Segal Marco Consulting. Thanks for joining us on our first podcast. We're very excited to get started and share information with you about who we are and what we do. So just briefly, the Advisor Solutions Group is Segal Marco Advisors financial intermediary consulting practice. We've been doing this as a firm for a little over 20 years. I've been involved almost 11 years as the leader of the team. And just a little bit about me before you meet my colleague Peter Sullivan. I've been in the business since 1995. I spent six years on the wealth advisory side before transitioning to the institutional consulting practice in 2001 where I worked both with financial intermediaries and institutional clients. After about six years of doing that, I transitioned to the asset management industry, leading the client relationship management group globally for a large asset manager before finally coming back to what had been RogersCasey is was now Segal Marco Advisors in 2012 to lead the Advisor Solutions Group. So with that, I'll turn it over to Peter Sullivan to give you a little of his background.

Peter Sullivan: Thanks Dave. I joined RogersCasey in 2008, so I've been an investment consultant for 15 years now. Prior to that, I tend to describe my background as being a refugee of Wall Street. I was involved in equity research and economic research really from 1998. Primary focus right now for me has historically been a mix of traditional institutional investment consulting with a concentration in endowments and foundations and nonprofits. But I've also had over this 15 years a fair amount of experience with financial intermediaries, really with a focus on family office and multi-family office. Right now I do a lot of work in collaboration with Dave as part of the team and supporting our ASG clients, and I generally appreciate the opportunity to engage people on.

David Pappalardo: Thanks Peter. And I think Peter brings up something that is our next topic, which is really give all of the listeners a little bit better understanding of what we do and the types of clients that we work with in the Advisor Solutions Group. So as some of you may know, Segal Marco Advisors is a large institutional consultant that's been in business over 50 years. Within the institutional practice working with large pension plans, both public and private, as Peter mentioned, endowments and foundations, and really across the entire institutional client spectrum. Within the Advisor Solutions Group, we're narrowly focused just to what we broadly described as financial intermediaries. And so the way that we think about that from a client type standpoint are registered investment advisors, private banks, as Peter mentioned, family office and multifamily office broker dealers, insurance companies. And our clients are typically in the US but we also have clients in Asia and in Australia as well.

So when you think about the types of services that a consultant provides, typically on the institutional level, it's very similar with some very important differences with what we do on the advisor solutions side of the equation. So it's really about three primary services. Manager due diligence, asset allocation, and then what we broadly call market intelligence. And so briefly as it relates to due diligence, we have a 30 plus person team doing research on managers across the globe across every asset class. And depending on our client needs, we have a solution and in many cases multiple solutions in those asset classes. So for instance, if a pension plan were to come to one of our institutional consultants looking for a private equity manager, we have folks that are dedicated to just be researching private equity solutions. And so we can provide a list of strategies across different approaches.

It works exactly the same way for our advisory clients. The difference obviously is Advisor Solutions Group clients tend to be smaller than your typical institution, but we curate and customize the solutions that we provide to our Advisor Solutions Group. So that same private equity question can still be solved where we're taking an institutional quality manager and because of our relationship at the firm level, we usually have great success in negotiating favorable terms and minimums that can make these types of great strategies accessible to our advisors and they can obviously pass those on to their end clients as well. Briefly, asset allocation in working with these different types of clients, there's essentially two very broad approaches. For some of our smaller advisory clients, we do a lot of work with model portfolios from either building them from scratch or reviewing existing models and providing some constructive feedback and monitoring on an ongoing basis.

For a lot of the work that Peter does in the multifamily office and family office space, those relationships are significantly larger in most cases. And it's really asset allocation done on a client by client or family by family basis. And then last but not least, I'll just briefly touch on market intelligence. And that really is a bit of a catchall phrase that covers all of the intellectual content that we produce across the firm that we can share with our clients. And that ranges from white papers to a monthly summary of what happened in the market that is just one page, to a 20-page quarterly market summary to a very detailed market outlook, a forward-looking view of the market and really everything in between.

There's lots of content coming out. We have a blog that gets shared with our clients. And really the feedback particularly from advisors is that we can serve as a point of leverage across all of the things we do. But really on the market intelligence side, if they're able to take what we produce and either use it themselves, share it with clients, it really is a point of leverage. Because if we're creating it's something that they don't have to spend time and valuable resources creating as well. And there are opportunities with that information to either co-brand or private label depending on the client's interest.

And Peter, I want to have you jump in here. One of the things that we talk about when we're describing our services to a financial intermediary is the first question is usually how do we work with clients? And a big part of that is the decision, which is, is it going to be partially an outsourced solution, a fully outsourced solution in how we work with the existing staff. And wanted to turn it over to you to talk a little bit about our extension of staff rationale and how we talk to clients about it.

Peter Sullivan: Yeah, Dave, I think it's a really important point and I think it distinguishes the ASG team and our solution here. Ultimately we're aiming to embed ourselves in your organization. And generally what we're doing as a point of leverage is using our resources, our talent, our investments in systems and software and databases and all sorts of intellectual property to fill a gap or fill a need at our financial intermediary organizations. It generally means that we get to know your business, we get to know your clients, we get to know their portfolios, we know what existing investments that you're using on a regular basement basis. We have a basis for recommending and employing strategies that are highly recommended by our research group and compliment your existing workflow and processes and portfolio management skills. So being embedded, being essentially part of your organization is really our ultimate goal. It really leads to the best service, but we also think it ultimately leads to the best investment outcomes for your clients and the best business and outcome for your organization.

David Pappalardo: Thanks Peter. And I think just to underline something Peter said, really when you step back from the approach that we take with clients, it really boils down to flexibility. So we have examples of client relationships where I mentioned a few minutes ago that we have a 30 person research team. There are large organizations that have their own internal research team that's just as large at a number of either broker dealers or private banks. And so we're able to come in and compliment what they're doing. If they need help in certain areas, we're able to do that. And in other cases, by contrast, it might be a smaller RIA or other financial organization that might have two or three people that are doing research and they're at that decision point where they know they need more capabilities. And it really comes down to do they want to hire three or four or five experienced people to build out that capability or do they want to partner with a firm like ours and plug into our 30 person research team.

So we are indifferent with how it proceeds. It's really about taking a flexible approach and asking clients what they need and designing a suite of services around that. So thanks for that, Peter.

Peter Sullivan: Yeah, no problem. Dave, I would say that generally a lot of our conversations with our existing clients and potential clients really does focus around this buy versus build decision. So building out a office of the CIO, the CIO, it's the him or her and the supporting cast of talented and in demand people is one approach versus employing and leveraging our existing resources. Quite often our extension of staff could be, we can be the entire investment office, the office of the chief investment officer in an organization. Other times we're filling in maybe the role of maybe one person, for example, alternative research. We also do provide a sounding board and another source of recommendations around portfolio implementation. So it really is a valuable process and function, this idea of extension of staff. And I'm always very happy and pleased when we do have these types of relationships with clients because they tend to be long-lasting and they tend to result in really good investment outcomes.

David Pappalardo: Yeah, completely agree. And I think that actually opens up another question which is, what are some examples of when advisory type clients we're looking to engage a consultant? And frankly it's a curious question because as anyone listening knows, depending on what part of the financial landscape you're part of, I think it's fair to say that it's a very fragmented and segmented business. So knowing what everyone else is doing is of great interest from a competitive standpoint. But getting that information tends to be very difficult because there are firms of all sizes and shapes and specialties that are in the marketplace. And really when we think about it from both talking to our clients and a lot of prospective clients across the country, competition is really an important question that comes up all the time. There's something that we like to call healthy paranoia, which is our clients are always asking us, "What are your other clients doing?"

And when we talk to prospective clients, it's similar, "What are your clients doing? What are you seeing in the marketplace?" Because no one wants to be out flanked by what the competition is doing. And I think that's a common thread that runs through a lot of the conversations that we have. And frankly, what we observe in the industry, which is the competition continues to... The bar gets raised almost every day. And we see that because years ago, even across our ASG businesses, it was much more segmented. We had an RIA practice and we had a family office practice and a private bank practice, and they were in some ways almost siloed because they all had their own competitive landscape. Things were different, the services they offered were similar but not the same. And I think those walls of those silos have come down is what we've seen. And really it's become much more competitive.

And how that has transformed the business is actually fascinating from where we sit, which is it's a competition in services arms race where some of the ultra-high net worth RIAs have really in the last I would say five to six years started to significantly up their game as far as the services they offer, the quality and quantity of staff that they have, and they've become much more competitive versus some private banks and even some multifamily offices. We've had clients reach out to us and say, "We've got a big client opportunity in a few weeks and we need some help. We're going up against this private bank." And it might be a four or $5 billion RIA that 10 years ago was a one or $2 billion RIA. So there's been explosive growth.

And I think when you think about that, clients are always looking for, how do we differentiate our practice, how can we be different? It used to be, we would be different by offering alternatives. And now that's table stakes for people in this competitive business. But it really changes depending on the firm, depending on their areas of expertise. But when you step back and look at it from basically a 30,000-foot view, the competitive landscape is driving a lot of this, and that really shapes the conversations that we have with our clients and prospective clients.

And I think really where we go from here is perhaps what might be helpful is to give everyone listening one concrete example of how we work with clients. Something that has come up more and more in the last few years, I mentioned it a moment ago, which is alternative investments. And as I mentioned, there's really been a huge increase in the demand for alternatives. And I guess we could step back and say, "Well, why has there been such an explosion in demand for alternatives?" And from our perspective, it really is driven by a couple of notable things. One is the generational transfer of wealth, probably a term that you're sick of hearing as it's been talked about for the last decade or so. But it is real and it does have material impact.

So what we're finding is through our clients, they have many longstanding relationships, and what's happening is their 80-year-old clients are now transferring wealth to their 40 or 50 year old children. And now their children want to do something very different than what the parents have done. And that takes a variety of different shapes. It could be they're more interested in ESG type investing, or they really want to get into alternatives because now their time horizon is now several decades, whereas their parents, it was a very different set of circumstances. So that's one impact.

Also market appreciation. We've seen client assets grow the size of the relationships that our clients who the advisors are getting exposed to and are winning are significantly larger than they used to be. And I think through market appreciation is certainly one of the reasons. And as you have larger pools of assets, you have the flexibility now to deploy those assets in much more creative ways. So perhaps a portfolio that five or 10 years ago wasn't large enough to really consider true illiquid alternatives. Now it's open season for really being creative in how you deploy that capital.

And last but not least, a lot of these clients that have significant client pools of assets are, it's driven from business owners. And at the end of sometimes a business cycle or really as someone's getting towards retirement, they decide they're going to sell their business, monetize what they've built, and there's a significant liquidity event. So we had a situation last year where a client called and said, "We have someone selling their business, it's going to be for several hundred million dollars. They're now going to have all this in cash. They previously had a portfolio that was about 25 million. So now they have a huge influx. They really want to be creative in what they do next." So pretty unusual situation that is becoming less and less unusual as time goes on.

But when you think of alternatives, it really has become in many ways a must have for advisors in winning and retaining significant relationships. And this is definitely a change from where we were say five or seven years ago where having an exposure to alternatives to be able to offer alternatives was a differentiator. And now it's a differentiator if you're not able to do that. So it really has changed completely. If we want to jump in here into, to give some concrete examples, I think one of the things that we come up against and really it's driven completely by what's happening at our clients, which I just mentioned, is they will either inherit a client from an advisor that the client's decided to transition away from, or they've won it through a competitive process, but essentially they now have this enormous portfolio that they have to get their arms around.

And what's happening much more often than in the past is it's a portfolio that has a significant amount of alternatives. And a lot of these advisors that we work with have been in the business for decades. So they know many of the managers on the traditional side, they know them well, they know them well enough to recognize them when they see it on the client statement, to have an understanding broadly of who these managers are and what their approach is to the marketplace. Alternatives is a completely different animal in that way in that there are so many different choices. Obviously the information about many of these managers is not nearly what it is on the traditional side. So they need help getting their arms around who these managers are. And so that's one of the top questions that we get from clients is, "We've got this portfolio, they've got five private equity managers, we've heard of one of them, but we don't know anything about the other four. Can you help us?"

And that's something that Peter and I spend a good chunk of our time on periodically where we're working with our research team, if we don't know them ourselves, working with our research team to really get an understanding of have we met with them. What do we know about the firm, what type of information can we gather to help this advisor get up to speed before they have a meeting so that they feel comfortable understanding who these managers are. And if we have a view obviously, good, bad or indifferent, we can share that with our clients to give them some context and perspective. So Peter, I know that you've had a similar situation, you've been very instructive in working with a number of our clients in that way. What can you share that that might be interesting in this topic?

Peter Sullivan: What I find here is that advisors find themselves in a position where they inherit a private equity portfolio that quite often has some of the very large names in the private equity world that tended to be derived from some of the bigger wirehouses and their appetite for selling deals to their clients. A lot of these investments tend to be orphaned. The client doesn't know much about them. The information that's available to those that aren't really active in illiquid alternative asset classes and don't made the investments in the systems and databases. There is not a lot of information to really gleam into individual funds, but also how they work together. And so when you inherit this portfolio that you don't know much about, ultimately there's this decision, do we continue the client's investment in private equity? And if the answer is yes, how do we cover the private equity asset class opportunity set? And that really is a process of finding complimentary managers that fit the specific needs of that portfolio and that client.

So quite often the best way to manage that transition is to add strategies to the portfolio and to continue that program with that client. Otherwise it's seen as a reduction in the quality of service and the diversification in the portfolio. And so good ideas using a deal flow that's curated for our financial intermediary clients and leveraging our experience with advisors and their clients' challenges with these illiquid alternative asset classes is vital and very important.

The other aspect, Dave, that I think is really important is linking the illiquid alternative strategies themselves to the platform that the advisor has, the RIA has. And what I mean by platform is a curated set of investment managers and funds that are used. The same care and diligence for matching those funds and investment managers with the needs of not only your clients but the organization that you work for, the RIA itself is very vital. And so when you're looking at alternative asset classes, curating and finding the specific number of strategies that fit the unique circumstances of your client base, wherever the center of gravity your organization is in terms of client size, targeted private equity or targeted illiquid alternatives, the right time horizon, the right open-end versus closed-end versus interval. Those types of considerations really need to reflect a customized view of what your business needs and demands. And usually we're adding a ton of value.

David Pappalardo: Peter, those are excellent points. I'm glad you brought them up. And it actually reminds me of a similar topic, but if you take a step back, I mentioned that a lot of advisors are very comfortable on the traditional side, they know a lot of the managers, less so on the alternative side. And I think one thing that we observe is that I mentioned that the first call is always, "Who are these managers that we've inherited? How do we get up to speed on these?" And that's a legitimate question. I think what we've found and what's worth sharing is that there's a big piece behind the scenes that if this is something an advisor wants to do, and many advisors have chosen to go down this path to offer alternatives on an ongoing basis, is that there's a completely different cadence and operating rhythm on the alternative side than there is on the traditional side.

And again, many of our clients have been in the business for multiple decades, so they certainly understand how the business works on the traditional side and given that they're giving advice in many cases to taxable clients, obviously if they're holding investments for a number of years, taxes are a big consideration. If they like the manager and the client's comfortable, there's a lot of scenarios where they're holding a strategy on the traditional side for many, many, many years and there's no need to change from where they sit. And that's fine. On the alternative side, if that's how they've grown up in their business, the alternative side is a bit of a stark contrast. So getting their arms around those initial managers is certainly one thing. But then understanding the process on an ongoing basis I think is another where, to your point, Peter, understanding where these managers fit in the greater ecosystem of strategies and solutions from an investment standpoint that a firm is offering is critical. And knowing the timing.

Most of these alternatives that are being offered are closed ends, meaning that they're open for a finite amount of time. It could be 12 months, it could be 18 months, it could be something in between where they're fundraising. And then that's your opportunity if you're an advisor to get your clients access to that strategy. And once it's closed, that firm might not be offering a similar strategy for several years. And so if you're building a portfolio, an offering, let's say it's a handful of private equity managers just to pick one sleeve, you really have to have the forethought to understand, okay, we're offering these types of managers a variety diverse set of managers that approach the world with a different viewpoint. But then also when are these going to be rolling off and how do you replace them? Because if you always want to offer five managers, let's just say in a given area, you've got to find out when they're closing and make sure that you have something to backfill so that there's always five or whatever number the client is interested in offering and managing that.

And Peter, you've done this a lot, helping clients understand how they operate behind the scenes as far as capital calls and how to invest, it's a very different world if you're not used to it, and it's something that I know you've spent a lot of time doing with clients.

Peter Sullivan: Yeah. For our clients that have really been in the traditional asset classes, the liquid market based asset classes and from equity to fixed income, they may have dipped their toes into hedge funds 10 years ago, maybe moved into some real estate and have inherited some illiquid alternatives. So when they do go into the illiquid alternative world, it is a much different world than the traditional public asset classes. Dave, you mentioned a couple things. One, commitments represent almost a quasi liability. If you have a benchmark and you make commitments to private equity or real estate, you have some risk until that capital is called and deployed, you have to manage that risk relative to a benchmark. So that means being in an overweight position in public equity and really educating clients on how to think about committed capital that has not been called yet. Some clients view it as leverage and want to put it in cash. Some advisors have real challenges with overweighting equity and managing that risk.

But one of the challenges that we see is you do your normal processes, investment reporting, you have to report an IRR, you cannot really report with a time weighted rate of return. The client may not understand that, hey, these private equity funds release evaluation three months in arrear, if you're lucky, or a fund of funds, maybe six months. It's a little bit of time shifting that's required. It's almost a time machine is the way we describe it. But when it comes to RIAs and our intermediary clients, it's really the operational aspect of it. It's the people and processes that are essentially under the hood and that support the advisor that are largely impacted by the pace and tempo of capital calls and distributions, rebalancing, raising money for those capital calls, managing cash, which is always a challenge to manage need for income and withdrawals from the portfolio and cash drag.

If you think about one fund having four capital calls throughout the year, I would argue it may take one person 20 to 30 minutes to execute and facilitate and implement and get that capital call fulfilled through all sorts of different processes. Calling the client, talking to your operational staff, moving money around, making sure the wires occur on time. So for one client four times a year, I would argue that's two hours for one person. Now add scale to that by having more than one fund, and then multiply that by the number of clients invested in private equity. We have found that some clients are saying, "We need to hire one or two people just to handle the operational aspects of this new asset class." So it really is an impactful change for this select group of our clients that are just starting to make that leap into these liquid alternative asset classes.

David Pappalardo: Those are great points, Peter, and ones that, as you know, that tends to be the second or third conversation that we have with a lot of these clients as they're trying to get their arms around what this entails. And there's two other points I want to make about this topic that I think are germane to a lot of the clients that are considering this, which is the access to alternatives and then fees and more importantly, fee negotiations. So you probably have heard anyone listening, you've seen the studies, when you look at the performance of alternative managers, there's really a huge dispersion in performance between the top performing managers and really any of their peers. So essentially what that translates to is how critical it is in the alternative space to get access to the best managers because there is such a performance dispersion. And so that is a huge challenge for a lot of financial intermediaries.

If you're a mid-size RIA and you don't have the contacts within the business, reaching out to a manager in the alternative space to get access is very difficult unless you have a track record of putting significant client dollars to work with them. That's something that we facilitate for a lot of our clients because we've been doing this for so long at the scale that we operate within. And so that's I think a key differentiator, if you're an advisor and you're thinking about offering alternatives is that you need to make sure that you have a way to access a lot of these managers through relationships.

Obviously it's something that our firm can do, we're certainly not the only firm that can do that. But the point is it's something to consider is that you want to make sure that you're doing it in a way that's thoughtful, that's going to have a good outcome for your client. But then also from a business standpoint, you have to think of it a slightly different way, which is what you offer in this space is either going to be a competitive advantage or a competitive disadvantage. If you're able to offer the manager that is available to everyone, including your competition, that's not really a differentiated business practice offering. So being able to offer something that's different that your competitors can't offer for the most part is something that is very important and something we would tell you to explore as you'll go down this path.

And then last but not least as it relates to fees, I mentioned this earlier in our discussion, is that a big part of what we do in talking to these managers is obviously our research team is vetting them. They're telling us who they think are best in class. And if you're a $200 billion pension plan, investing 10 or $20 million in a closed end alternative strategy is not really a significant commitment. However, if you're a client that has, let's say $5 million portfolio, that's not going to happen. So a big part of what Peter and I do working closely with our research colleagues is talking to these managers about our advisor solutions intermediary practice and working with them on minimums.

And it certainly doesn't work a hundred percent of the time, but we do have a very high level of success of talking to managers that say, "Look, we understand your minimum is 10 million. That's not really viable. There's a very small percentage of our advisors that would be a good solution and price point for." And so working with them, and in many cases that $10 million minimum will come down to 1 million. Or if there's a 5 million minimum, maybe it comes down to 250K or 500K. And that really is a bit of a sweet spot in a lot of ways for many of our clients because at that price point, an advisor can build a diversified portfolio. Because certainly what you don't want is the client has a budget for a $250,000 allocation and great, you have one manager that can fulfill that. Well, you certainly are not building an alternatives allocation by having one mandate. So we like to try to negotiate as aggressively as we can with these managers. And they've been very accommodating to us and our clients, so that what you can put forward is something that the advisors can actually use and deploy with their clients in a favorable way for good outcomes with the client. And also from a competitive standpoint, it allows them to offer something that their competitor down the street probably cannot.

Peter, any additional thoughts you want to share before we wrap this up for today?

Peter Sullivan: Dave, I think we could talk for hours and I don't think anybody would like that. But I would just say one of the benefits of working with us in alternatives to close the loop on that topic is we do have a significant amount of scale. We represent a meaningful source of funds for the private equity industry. Our business is very, and our clients are very attracted to the asset management industry. And we do garner that access. We have that special access and that comes with our scale, comes with the billions of dollars in private equity commitments that we've made on behalf of our clients. And really the benefits are really significant to our financial intermediary and ASG clients. And I'm very happy when we get to have a positive impact like that.

David Pappalardo: Yeah, thanks Peter. So this is where we'll [inaudible 00:39:15] one for listening in. As I said, this is our first of many, so we'll be back with additional topics to discuss amongst Peter and myself and also be looping in folks from our research team and across our organization to provide you topics that we think will be timely and useful to you. So thanks again for joining us and have a good day.

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